Q1 2021 Provident Financial Holdings Inc Earnings Call
[music].
And ladies and gentlemen, thank you for standing by welcome to the Provident Financial Holdings first quarter earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
He should require assistance during the call. Please press star followed by zero.
As a reminder, today's conference is being recorded.
I would now let's turn the conference over to your host Craig.
Craig Blunden. Please go ahead Sir.
Thank you Brad Good morning, everyone. This is Craig Blunden, Chairman and CEO problem financial Holdings.
And on the call with feels Donovan churn as our president Chief operating and Chief Financial Officer.
Before we begin I have a brief administrative item to address our.
A presentation today discusses the company's business outlook and will include forward looking statements.
Statements include descriptions of management's plans objectives or goals for future operations products or services.
Forecasts of financial or other performance measures and statements about the company's general outlook for economic and business conditions.
We also may make forward looking statements during the question and answer period following management's presentation. These.
These forward looking statements are subject to a number of risks and uncertainties.
Actual results may differ materially from those discussed today.
Information on the risk factors that could cause actual results to differ from any forward looking statement is available from the earnings release.
Lets just attributed yesterday.
From the annual report on the form 10-K for the year ended June 30 2020.
And from the form 10-Q's, and other FCC filings that are filed subsequent to the form 10-K.
Forward looking statements are effective only outsell the date they are made.
And the company assumes no obligation to update this information.
To begin with thank you for your dissipating and our call I hope that each of you has had an opportunity to review our earnings release, which describes our first quarter results.
In the most recent quarter, we originated and purchased $48 million of loans held for investment and increased from $44.2 million in the prior sequential quarter.
During the quarter, we also experienced a $66.3 million of loan principal payments and payoffs, which is up from the $56.5 million in the June 2020 corridor and still tempering the growth rate of loans held for investment.
The September 2020 quarter, it seems that mortgage markets normalize to some degree of competition is elevated for lower credit risk product additions.
Additionally, we're still cautious regarding single family loan purchase packages purchase.
Particularly season production because it is difficult to complete due diligence on individual loans consistent with our underwriting requirements.
For the three months ended September 32020.
Loans held for investment decreased by approximately 2% in comparison to June 32020 with declines in the single family and multifamily categories, partly offset by growth in the construction the other loan categories.
Current credit quality is holding up well and you will note that early stage delinquency balances were just $2000 at September 32.
2020. In addition, nonperforming assets remain at very low levels and are just $4.5 million, which is down from the 49.
$4.9 million at June 32020, an 8% decline.
However, the situation regarding the pandemic is fluid and they have negative implications for future quarter credit quality, although it is difficult to discern and quantify the potential implications.
Additionally, we anticipate that some loans currently in forbearance will be downgraded as a result of not being able to resume their monthly payments.
I also wish to refer you to slide 13 of our Investor presentation, specifically footnote five of the commercial real estate table.
No describes the composition of our commercial real estate secured loan portfolio and the balance was that may be considered higher risk in the current environment.
We continue to work with our borrowers to provide payment for Bayer merits of up to six months, but.
But note that new request for forbearance have significantly declined from levels experienced in March April and May 2020.
In the event forbearance is grounded the forbearance amount will be due and payable in full as a balloon payment at the end of the loan term or sooner if a loan becomes due and payable in full at an earlier date.
We believe our forbearance plan meets the criteria promulgated by the carriers.
In our agency regulatory guidance and clarifying statements from the financial accounting standards Board and the security and Exchange Commission.
As a result, we believe that we qualify for the favorable provisions cited in the guidance on the vast majority of forbearance loans.
As of October 22020, or 22 single family loans in forbearance with outstanding balances of approximately $7.9 million or <unk>, 0.90% of gross loans held for investment and one multifamily loan in forbearance with an outstanding.
Balance of approximately $455000 or <unk> 0.05 per cent of gross loans held for investment.
You will note a significant a lot decline in the number and balance of loans in forbearance on October Twentyth in comparison to the September 32020 balances described in the earnings release as a result of those loans have resumed monthly payments in October.
Additionally, as of October Twentyth, just seven loans scheduled to resume their monthly payments in October or November with a combined principal balance of approximately $2.6 million for granted an additional three months of forbearance relief six of the seven loans or approximately $2.2 million will be.
Classified us restructured loans and downgraded to nonperforming status in October one.
One of the seven loans was previously downgraded and classified also.
Also for reference we updated the information in the forbearance table on slide 13 of the Investor presentation to reflect the October 22020 number and balances of loans in forbearance.
We recorded a $220000 provision for loan losses in the September 2020 quarter, primarily due to an increase in the qualitative components in our allowance for loan losses methodology in response to the pandemic, which has negatively impacted the current economic environment.
I'll note that we remain on the incurred loss model.
Adopted Cecil.
This means that our allowance methodology cannot be reasonably compared to Cecil adopters.
Our net interest margin compressed by 11 basis points for the quarter ended September 32020.
Fair to the June Thirtyth sequential quarter as a result of a 15 basis point decrease in the average yield on total interest, earning assets, partially offset by a five basis point decrease in the cost of total interest bearing liabilities.
The decline in the average yield on total interest assets was primarily the result of the sharp rise and liquidity stemming from the significant increase in total deposits and invested at nominal yields.
Our average cost of deposits decreased by six basis points to 24 basis points for the quarter ended September 32020, compared to the June Thirtyth sequential quarter, and we believe that further declines are likely given the current interest rate environment.
The 2.84% net interest margin. This quarter was also net negatively impacted by approximately five basis points as a result of the increase in the amortization of net deferred loan costs associated with the loan pay offs in the September quarter in comparison to the average net deferred loan costs.
Cost amortization of the previous five quarters.
We continue to look for operating efficiencies throughout the company to lower operating expenses, notably our ft. Count on September 32020 decreased to 163 compared to 188 ft. On the same date last year, a 13% decline.
As a result of fewer employees and other cost savings operating expenses declined to approximately $7 million in the current quarter compared to approximately $7.2 million in the same quarter last year. Please.
Please note, though that operating expenses in the September 2019 quarter last year had benefited from a $296000 revision of our privacy previously recognized loans settlement and lower deposit insurance expense of approximately a $150000, resulting from the FDIC implant.
The integration of the small bank assessment credit neither of which were replicated this quarter.
As a result current operating expenses declined by approximately $700000 or 9% from the adjusted operating expenses in the same quarter last year. Additionally.
A sequential quarter basis operating expenses declined by approximately 3% after adjusting for the 575000 dollar benefit in the June 34 in the June 2020 quarter from the reversal of incentive compensation accruals not replicated in the September 20 Twond quarter.
Our short term strategy for balance sheet management is unchanged from last quarter, we believe that leveraging the balance sheet with prudent loan portfolio growth as the best course of action, but executing on that strategy in the current environment may prove difficult in the interim.
Redeploying excess liquidity and government sponsored mortgage backed securities with an estimated average lives of approximately four years.
We exceed well capitalized well capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications.
We believe that maintaining our cash dividend is very important and doing so takes priority over stock buyback activity.
As a result, we did not repurchase any shares of common stock in the September 2020 quarter and wish him size safeguarding capital has become increasingly important in the current environment and if so why is this course of action until we can get better clarity on the current economic landscape.
We encourage everyone to review our September Thirtyth Investor presentation posted on our website.
You will find we've included slides regarding fengshen financial metrics asset quality and capital management, which we believe will give you additional insight on our strong financial foundation supporting the future growth of the company.
We will now entertain any questions you may have regarding our financial results.
Thank you.
Brad.
And at this time, if there are any questions from the phone lines. Please press one than zero on your telephone keypad you may withdraw your question at any time by pressing the one than zero command again.
Once again, if you have a question. Please press one than zero at this time.
And our first question today comes from the line of Tim Coffey. Please go ahead.
Hi, Good morning, gentlemen, thank you for hosting the call. This morning.
Morning morning, Tom.
I have a two part question here.
What is your view that you anticipate.
What is your outlook for loan growth or loan demand over the next few quarters and how does that influence your appetite for future MBS purchases.
Hi, Tim I'll I'll field that question.
First of all when we think about loan growth.
Bin monitoring of course, many of the results coming out of financial institutions for the quarter.
It seems that everybody is struggling a bit with respect to loan growth and it seems that that is really the result of the economic environment that we're currently in.
For us in particular some.
Some of our loan growth has come from purchasing.
Cools of loans.
From other financial institutions.
And that activity is very difficult with single family.
Product.
Because if we think about trying to underwrite those borrowers we re underwrite everything and when we think about trying to re underwrite those borrowers it becomes difficult to discern whether or not those borrowers have been impacted by the pandemic.
With respect to their income and so single family originally our purchases are difficult and that brings our volume down a bit.
We have seen some multifamily and commercial real estate packages those packages are a bit easier.
Underwrite in the current environment.
As the income.
Income is essentially.
Generated from the property.
And we can currently see rent rolls are get current rent rolls and the like.
But still because loan growth is so small.
Cross the industry.
There are fewer packages out there for purchase because everybody is keeping those packages for themselves.
In their own portfolios.
So as we think about where we're at in the cycle and the build up of liquidity in excess cash that came in as from deposits.
We obviously move to purchasing mortgage backed securities.
Typically short average lives, we like the product because it is a cash flow product and it spins off cash over time, giving us the opportunity to reinvest it.
At a later date.
And we're essentially kind of through that process now to the extent that are.
Quantity balances have normalized.
From.
And.
Pretty consistent with pre pandemic levels.
Such that the implied impact of moving that liquidity into mortgage backed securities and ultimately the impact to our net interest margin.
Has kind of stabilized so just as we saw the September quarter net interest margin compressed by a much smaller amount.
Then in the June quarter.
And March quarters, we would also expect that on a go forward basis, because the balance sheet is kind of structured where it is without a great amount of excess liquidity that our current net interest margins are somewhat stabilized and in fact could attend.
Actually see.
Certainly a little bit of expansion.
But if we see contraction that would be certainly at a lesser rate than we've seen.
So I got into more than just loan growth in MBS, but I hope you appreciate the color on net interest margin.
No I do I mean, that's kind of where the question was going anyway, what were the yields the average yields on what your purchase and the MBS market this quarter.
The mortgage backed securities are yielding anywhere from 60 to 90 basis points call it depending upon whether or not it's a yeah.
10 year fully amortizing 15 year fully amortizing.
20 year, 30, yammer fully amortizing or 30 year fully amortizing.
So you know call. It the high you know just under 1% I guess.
Okay.
No the deposit costs, you mentioned they could go a bit lower okay in prepared remarks that youre already at historic.
Historic lows for the institution.
You kind of thinking is it at a moderate decline or that you're bouncing along the bottom or do you think you could take a much longer.
Yeah, I don't know that they can go much lower because they were at 24 basis points for the quarter, but certainly they can come lower because there are.
Cds embedded in those deposit costs and as the Cds mature.
They are coming down.
In rate and a allowing us to reduce deposit costs secondarily, we're looking at our transaction <unk> transaction accounts quite closely.
And in many cases, we're in.
The single digits with respect to what we are paying on those deposits but.
But some of them are in the high single digits. So they can come down as well I think quarter over quarter, we reduced.
The deposit costs by about six basis points.
We still have some room to bring those deposit cost down I don't know if it will be as much as six basis points.
It's it's possible.
But to some degree is dependent upon what we're seeing in liquidity.
Liquidity needs and the like and secondarily, we are running a bit higher liquidity than we normally run as a result of the pandemic or.
Just to have a balance is available depending upon what.
Depositors are going to do.
With the deposits that they brought into the bank over the last six months there.
There's some sense that perhaps some of those deposits are not necessarily permanent.
Moving on to a broader question with respect to cost of funds.
We also have maturities coming up in.
In centrally the next four months with respect to federal home loan Bank advances.
I believe 10 million is maturing in December.
And then we have another 10 million maturing in January.
Our anticipation is that the cost of those advances if we were to replace them would be much lower than what their existing costs are in any event, we essentially use excess liquidity to pay those advances off that would also reduce our overall cost of funds as well as.
Our federal home loan bank advance costs.
Okay, well, let's see the alphabet and thank you and then just one last question for me it goes to the buybacks what more do you need to see to.
To you.
To allow you to start.
Using the buyback.
As we look at credit Suisse.
Really good run demand is what it is right now, but you know everything seems like you're going to have a stable source of capital for a while so covering what would it take to reinstate the buyback.
Well, let me start on that one.
No I think we really just need to see.
Where this is headed in the next few months I think we'll know a lot more than.
And I also believe in all the regulators.
Our.
Wondering the same thing and hoping that institutions well protect capital levels when its still uncertain.
As to how this pandemic will all play out in the economy. So.
I think we still need to wait a bit.
And look and see where this is all headed even though youve already mentioned.
I don't.
No one ever remember seeing.
Product quality and delinquency.
Levels quite this good.
Yeah. The only thing I would add we are monitoring that Tim and.
We have routine conversations as you expect with regulators and we see a number of institutions have reinstituted buybacks.
Some have even expanded to the program.
That <unk> or that activity has all has occurred obviously with.
Regulator knowledge and.
As a result of that we would expect that the.
Regulators are somewhat receptive to.
Two institutions going down this path.
And so.
So.
You know as we think about getting through our forbearance loans, which are now down to 23 loans, we're going to be largely through that this quarter.
And we will understand more clearly the near.
Near term implications of credit, but its still uncertain, whether or not there are some you know intermediate implications with respect to credit.
As we think about the cares act expiring on December 31st what that might mean and where.
Multifamily rents may go and where you know some of our commercial real estate.
Rents may go right now it looks very very good and we're very pleased.
But we're just a little bit cautious to understand that and I know our regulators are a little bit cautious with respect to that.
Yes, and I'm starting to wonder to Tim If you look to see if there was a difference in regulator.
And the way they look at it for different institutions, whether they're state or FDIC or whatever.
Or versus those who see.
I'm trying to get a sense of is there a different look.
Depending on which regulator does.
I have not.
<unk>.
It certainly top of mind, Tim and that it's something that we would like to you implement a as soon as we get comfortable doing so obviously given the fact that we think our credit outlook is is relatively good in comparison to others.
And our stock is trading.
At 80% or 75% of tangible book.
Yeah, Yeah, no all mix as well.
Well those are my questions. Thank you very much.
Thank you.
And we do have a question from the line of Brett.
Robbie Please go ahead.
Hey, good morning, guys.
When I 40, Brett.
Wanted to first ask just maybe switching topics for a second and just thinking about expense management actions.
Various banks are looking at branch networks and doing other things and spending money on technology can you maybe give us an update on your thoughts on expense management this year.
You know in any plans you might have to change the dynamic with with the franchise with branches or investing in technology and any thoughts on the expense. Thanks.
Well take that dominant.
Sure. So the first thing I want to point out we did describe and Craig.
Prepared remarks that.
As of September 30, we were down to 163 Ft E.
A 13% decline from the 188 F. T E that we had last year September 30.
A nuanced component of that is from June 30 of 2020 to September 30 of 2020.
15 of those 25 ft E reductions occurred so more than half of that reduction occurred essentially in the September quarter. So we expect to see some cost saves the with respect to salaries and benefits expense.
In the subsequent quarters as a result of that so the $7 million, which is a.
That we had in operating expenses for the quarter.
It was relatively a good baseline from where we are but there's still a little bit of room, a downward on that 7 million dollar base as a result of what we've done just in the September quarter.
Moving on to the branch system last year, we did reduce one of our branches in the keen to.
That followed and analysis.
As the lease was coming up for renewal.
We are embarking on the same process for each of our branches that are coming up for renewal with respect to their leases and and that's really going to be dictated you know on that lease expiration to understand what.
It is we might be able to do there so its on the table but.
But if you think about our branch network.
If we're really thinking about branch consolidation or something to occur, we're probably limited to the branches and Riverside proper if you will.
For instance, our branch and blight.
You know can't be consolidated with another branch per se.
And I wouldn't expect anything to occur there.
But if we were thinking about doing anything that would probably be in riverside a prop.
Proper.
The other thing that's potentially on the table, which we're looking at and considering.
We own some of our branches and we've owned them for a long period of time they were built in a different environment them today.
The branch footprint does not need to be what it was in the past.
So there is something that we could potentially do there with respect to selling those locations.
And relocating a very close and either leased space or a.
Smaller space so the.
Operating expenses are very top of mind for us and if you.
Look at one of the slides we have in our deck at slide four on operating expenses and you adjust for some of the non recurring or one time items. So I'm going to describe it on an adjusted basis. If we think that last years Q1 operating expenses.
Were 7.7 million to next quarter, we dropped to 7.6, the next quarter to 7.5, the June quarter of 2020 to 7.2 and now this quarter. We're at $7 million I expect we will drop a little bit in the December quarter as well, giving the.
These initiatives.
But it's not.
You know the size of our network and where we have our branches.
It is not conducive to a wholesale network change if you will with respect because we want to represent ourselves in those cities that were located.
Okay. That's that's great color the other the other thing I just wanted to go back to exist.
The comments around its obviously a.
Environment, where people are looking for very high quality assets and so that's that's led to you you haven't prepays.
Do you have any visibility into.
If that might slow as you kind of had some of the higher rate stuff.
He moved away or do you feel like that that not that that level is probably going to continue at least for the near term.
You know I think prepays are probably going to be elevated for the near term.
Not so much in our multifamily or commercial real estate portfolios necessarily.
But we do have also our second largest portfolio single family.
And single family rates are so low today that you know essentially all of our loans are in play.
So I would expect to see elevated.
Pay offs for the foreseeable future given where interest rates are now.
That obviously puts pressure on us with respect to the origination and purchase platform.
And the fact that Weve.
Generally been.
Relatively conservative with our credit culture.
And.
So that may place some growth.
Disciplined on us in the near term as we think about growing balance sheet in the loan portfolio.
HM Okay.
And then maybe just one last one for me just.
Thinking about credit I mean, obviously, you're in a really good really good situation credit wise.
There's the provision from here just thinking about the reserve levels. There is a provision from here continue to.
Glendale down a little bit assuming net charge off from a minimum on on the gross challenge.
I think that's fair Brett I mean, when you saw what we did with respect to provisioning.
In the March quarter.
After understanding or.
What had occurred in that quarter.
Obviously that provision was larger than the.
The provision in the June quarter, and the June quarter's provision was larger than what we saw in the September quarter.
So given our credit metrics and no significant deterioration from here.
One could argue that you know our reserve is our allowance is probably where it should be without provisioning now I will.
Caution.
With one comment for instance in our prepared text, we describe that seven loans that were scheduled for repayment or.
Or to begin payments out of forbearance.
We're unable to begin making those payments and we extended them again and the minute we did that they became downgraded credits.
And nonperforming loans and that will show up in the December quarter. Because this occurred in October well, that's $2.2 million, so all else being equal.
Our nonperforming loans will go from four and a half million to 6.7 million at December 31st with respect to the activity, where we already know about.
Now.
While that suggests a higher nonperforming loan we don't believe the loss content in those seven loans that will increase nonperformers is significant.
Because the ltvs.
Our relatively low and the housing or per single family markets in California are very very strong. So if they were to deteriorate further and they would move off of discounted cash flows.
To establish the reserve into collateral dependency.
I don't expect that there would be that much in the way of charge off with respect to those so.
We could be in a situation, where we see a bit of deterioration in the December quarter.
As a result of moving these loans out of forbearance into.
Perhaps a troubled debt restructuring.
But we.
We only have 23 loans left with which to do that.
And so I wouldn't expect a great deal of.
Deterioration or provisioning around that activity and provided we don't see deterioration either in our multifamily or are the smaller commercial real estate portfolio. I think your point is probably valid with respect to our provisioning and where our current.
Allowances.
Okay. That's great color. Thank you so much.
And we do have a question for the line of Matthew Clark.
Please go ahead.
Hey, good morning.
Good morning.
Oh.
On the.
The net loan growth the single family residential and multifamily it sounds like.
To potential there's potential there for resuming purchase activity.
Given your maybe increased comfort level there.
Knowing prepays are going to remain elevated is there a you know is there an expectation that you might be able to kind of mitigate that run off in those portfolios with with presuming some purchases or should we continue to expect those balances maybe decline a little bit further here.
You know I think in the single family portfolio that or the portfolio may be the more difficult.
To maintain at current levels.
Given that the mortgage you know single family mortgage rates are are so low and given the fact that it is difficult to.
Purchase any season portfolios in single family.
At this time, given that the pandemic and trying to understand borrower employment and the like so if you if I think about one of the portfolios is being more risk than others I would argue that it's the single family portfolio perhaps.
We have seen a packages in multifamily in fact, we did a little bit of multifamily purchase in the September quarter down from.
Other quarters, but it was about $9 million a.
We have a package we're going.
Going we're underwriting right now for the December quarter in multifamily so.
So that seems to be the area that we could perhaps see.
See loosening in the credit markets within the context of packages being available.
For purchases.
So that's something that could potentially help us.
To alleviate the pressure we have a yeah.
Portfolio's, a retraction and hopefully getting it into a position where we stabilize it and begin growing it again.
Okay.
And then on the production this quarter do you happen to have a weighted average rate on that.
And as originations so they can get a sense for where loan yields might be headed.
Yes, they were in the high threes with respect to the production volume.
Okay.
Okay.
And then just the last last one from me criticized classified I think you talked about you know yeah 2.2 million.
Moving on non accrual this kind of this coming quarter, but can you speak to the kind of level or the amount in criticized classified this quarter versus last.
Sure I mean, we actually had nonperformers move down at the September quarter in comparison to.
The June quarter in fact, our total classified also move down.
During that period of time.
And you know we've hit very very low levels from a historic perspective.
Uh-huh secondarily as of September 30.
We did not see a in fact I think our delinquent loans were zero I don't think we had any delinquent loans. It was about 2000 Bucks I think in that was a concern some consumer stuff.
But probably checking probably checking accounts that were overdrawn. So there really wasn't a <unk>.
Yeah.
30 to 89 day delinquencies, which is where your classified and non performers come from our zero now.
Some of those loans in forbearance, which we've already described.
There are others at September 30 that are in for parents that work scheduled for October payments that may not be able to make their payments in November or December.
They're not delinquent as of September 30, because they're in or for parents program meeting the criteria of the cares act or the interagency guidance.
So potentially there are some that can come out of those but again as of October 20th its 23 loans and if our experience on those 23 is similar to our experience on the others that have already resumed monthly payments, we would not expect a large percentage of those.
You get reclassified a.
Downward or into TDR categories, although it's it's possible that some percentage of that 23 wells. So.
You know, we don't expect a significant deterioration based upon what we see today.
In either nonperforming.
Or classified ads, except for the fact that I've already described the 2.2 million.
Great. Thank you.
And if there are any additional questions at this time. Please press one then zero on your telephone keypad.
Once again, if there are any additional questions at this time. Please press one than zero at this time.
All right well I want to thank everyone for participating in our quarterly earnings call and look forward to speaking with all of you again next quarter.
Thank you.
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