Q2 2021 Provident Financial Holdings Inc Earnings Call
Yeah.
[laughter].
And gentlemen, thank you for standing by welcome to the second quarter earnings call.
All participant lines are in a listen only mode. Later, there will be an opportunity for your questions and instructions will be given at that time should you require assistance. Please press Star then zero and.
And we will assist you offline as a reminder, today's conference call is being recorded I will now turn the conference over to Craig Blunden. Please go ahead.
Good morning, everyone. This is Craig Blunden, Chairman and CEO of problem Financial Holdings, Inc.
On the call with me at the start of a turn of our President Chief operating and Chief Financial Officer.
Before we begin I have a brief administrative item to address.
Our presentation today discusses the company's business outlook and will.
They include forward looking statements.
Those 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.
Forward looking statements are subject to a number of risks and uncertainties and 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 that was distributed yesterday.
From the annual report on form 10-K for the year ended June 32020.
And from the form 10, Qs and other SEC filings that are filed subsequent to the form 10-K.
Forward looking statements are effective only as the day. They are made and the company assumes no obligation to update this information.
To begin with thank you for participating in our call hope to each of you has had an opportunity to review our earnings release, which describes our second quarter results.
And the most recent quarter, we originated and purchased $29 6 million of loans held for investment.
Decrease from the $48 million loans in the prior sequential quarter.
During the quarter, we also experienced $59 $6 million of loan principal payments and payoffs, which is down from the $66 $3 million in the September 2020 quarter, but still tempering the growth rate of loans held for investment.
In the December 2020 quarter competition remains elevated for lower credit risk loan products and it seems that many multifamily and commercial real estate borrowers have been on the sidelines waiting for better it'll better general economic conditions.
Additionally, we are still cautious regarding single family loans purchase packages, particularly season production because it is difficult to complete due diligence on individual loans consistent with our underwriting requirements.
The four months free I'm, sorry for the three months ended December 31, 2020 loans held for investment decreased by approximately 3% compared to September 32020 with declines in the single family from.
Commercial real estate and construction categories.
Partly offset by growth in the multifamily loan category.
Current credit quality is holding up well and you'll note that early stage delinquency balances were just $350000 at December 31 2020.
However, non performing assets increased to $10 3 million.
Which was up from the $4 9 million at June 32020.
The increase in non performing assets was a result of forbearance loans downgraded to TD are non accrual status as a result of not being able to resume their monthly payments.
Exploration of the initial forbearance.
We extended the force.
Yes.
Okay.
We extended the forbearance period for another three months triggering the downgrade in nonperforming status. Additionally, nonperforming downgrades resulted in a reversal of accrued interest receivable of approximately $126000. During the December 2020 quarter.
We continue to work with our borrowers to provide paint.
Payment forbearance for up to six months, but note that new requests for forbearance and significantly declined from levels experienced in March April may and June 2020.
In the event forbearance is granted forbearance amount will be due and payable in full as a balloon payment at the end of the loans term or sooner if the loan becomes due and payable in full at an earlier date.
Our forbearance plan criteria were promulgated pursuant to the cares Act.
Our agency regulatory guidance and clarifying statements from the financial accounting standards Board and the Securities and Exchange Commission.
As a result, we believe that we qualify for favorable provision sided in the guidance on the vast majority of our forbearance loans.
December 31, 2020, there were six single family loans in forbearance of outstanding balances of approximately $1 8 million.
Or 0.0% to 1% of gross loans held for investment and two multifamily loans.
In forbearance with outstanding balances of approximately $763000.
Or 0.09% of gross loans held for investment.
You will note that the significant decline in a number of balance of loans in forbearance on December 31, and <unk> two <unk>.
Parison to September 32020 balances as a result of these loans that resumed routine monthly payments were migrated to <unk> after receiving a forbearance extension.
Additionally, as of December 31, just 17 loans scheduled to resume their monthly payments subsequent to their initial forbearance with a combined principal balance of approximately $6 $3 million were granted an additional three months of forbearance relief.
16 of the 17 loans or approximately $5 $8 million were classified as restructured loans downgraded to non performing status during the quarter.
One of the 17 loans has previously downgraded in classified.
We required a $39000 provision for loan losses in the December 2020 quarter, the allowance for loan losses to gross loans held for investment increased to 99 basis points on December 31.
From 95 basis points on September 30th.
Note that we may even on the incurred loss model and have not adopted seasonal.
This means that our allowance methodology cannot be reasonably compared to seasonal adopters.
Our net interest margin compressed by 18 basis points for the quarter ended December 31, 2020 compared to the September 30, a sequential quarter.
As a result of our 21 basis point decrease in the average yield on total interest, earning assets, partly offset by a three basis point decrease in the cost of interest bearing liabilities Dick.
A decline in average yield on total interest bearing assets was primarily the result of the sharp rise in liquidity stemming from the significant increase in total deposits and loan prepayments and reinvested at lower yields.
Our average cost of deposits decreased by three basis points to 21 basis points for the quarter ended December 31, 2020 compared to the September 30th sequential quarter.
And we believe that FERC clients are likely given the current interest rate environment.
I'd also like to point out that we paid off $20 million of federal home loan bank advances.
Late in December quarter, reducing our borrowing costs by approximately 27 basis points sales, we begin the March 2021 quarter.
Two six per cent.
Net interest margin. This quarter was also 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 payoffs in the December quarter in comparison to the average net deferred loan cost amortization of five previous <unk>.
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By approximately four basis points stemming from the previously described reversal of accrued interest receivable on the newly classified nonperforming loans.
We continue to look for operating efficiencies throughout the company to lower operating expenses.
Notably, notably our FTE count on December 31, 2020 decreased to 166 compared to 184 FTE on the same date last year, a 10% decline.
And as a result of fewer employees and other cost savings operating expenses declined to approximately $6 $9 million in the current quarter compared to approximately $7 $6 million in the same quarter last year.
Decline of approximately 9%.
Additionally, on a sequential quarter operating expenses declined by approximately 1%.
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 is best course of action, but executing on that strategy in the current environment.
Proved difficult.
The interim redeploying excess liquidity and government sponsored mortgage backed securities without estimated average lives of approximately four years.
We exceed 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 in doing so it takes priority over stock buyback activity.
As a result, we did not repurchase any shares of common stock as of December 2020 quarter.
Stay emphasized safeguarding capital has become increasingly important in the current environment. However, we also recognize that prudent capital returned to shareholders through stock buyback programs is a valid capital management tool and we are reviewing our current position on buybacks in the March 2021 quarter.
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We encourage everyone to review our December 31, industrial presentation posted on our website you will find that we included slides regarding 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.
In particular slide 13 contains the forbearance table as of December 31, 2020.
Flip note five of the commercial real estate table, describing the composition of our commercial real estate secured loan portfolio and the balances that may be considered higher risk in the current environment.
We will now entertain any questions you may have regarding our financial results. Thank you Lee.
Yeah.
Ladies and gentlemen, if you would like to ask a question. Please press. One then zero on your telephone keypad, you will hear acknowledgment that your line has been placed in Q. Once again, if you have a question. Please press one zero at this time.
One moment please for the first question.
Yes.
Okay.
And one moment please.
Okay.
Yeah.
Yeah.
Okay.
And we have a question from Tim Coffey one moment please.
And go ahead, Sir thank.
Morning, gentlemen.
Good morning.
Craig can we just real quick just go over the nonrecurring extraordinary items that flow through the interest income this quarter.
Okay.
Yep.
Yeah, I'll take that Tim so.
First of all we had about a five basis point net interest in the net interest margin impact as a result of the accelerated deferred net deferred loan costs coming from the particular loans that prepaid during the quarter.
And then secondarily, we had approximately.
Four basis point negative impact to net interest margin as a result of downgrading the forbearance loans that we extended migrating them out of the forbearance category, which is acceptable.
Acceptable accrue interest.
Into the non performing status, where we had to reverse the accrued interest receivable on those that was about $126000 for the quarter and the impact was about four basis points compression to our net interest margin.
And that five basis points, how much was that.
And dollars.
In dollars I don't have that readily handle are.
Handy.
I can work out.
Yeah actually you know what I just grabbed it.
It's about $132000 for the quarter, so on an annualized basis its about five basis points on the net interest margin.
Okay. That's helpful is that just a function of the way the rates move during the quarter, obviously, not the four basis points, one rate that that's totally different but the five basis points.
Is that just a function of the way the interest rates move during the quarter.
No, it's specifically tied to the prepayment of loans during the quarter.
Specific loans are either have net deferred loan fees, our net deferred loan costs attached to them.
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Accreted over the life of the loan or amortized over the life of the loan when the loan paid off.
The net deferred costs or net deferred fees, which in total was net deferred costs.
Had to be accelerated in the quarter, a pay off and that occurred in the December quarter and that can.
D V eight from one quarter to the next number one depending upon the absolute dollar amount of payoffs and payoffs accelerate there's more opportunity for net deferred costs to be accelerated but secondarily net deferred fees or net deferred costs are attached to India.
Dual loans and depending upon which loans pay off we'll determine oh.
What occurs with respect to net deferred loan costs or net deferred loan fees that come in through the income statement.
It's certainly not a new phenomenon and it can be seen this before in previous down rate cycles.
Also non new from them as kind of the pace of pay offs.
Is it your kind of where you sit right now reasonable to expect that theres going to be headwinds to net loan growth because of the payoff and you know I guess it day to certain extent the challenges of finding new loans.
Yeah, I think that's fair, but I kind of want to put it in context.
If we think about the pay offs that have been occurring.
And you look at the starting and ending balances by loan category you will see in the December quarter.
Single family payoffs accelerated to such a degree that single family loan portfolio came down.
<unk> multifamily loan portfolio actually increased during the quarter.
The commercial real estate and construction loan portfolios came down just a bit.
During the quarter so.
The phenomenon with respect the payoffs in the December quarter was.
Primarily in the single family area.
And because we are in the fixed rate market. We are with respect to where rates are with single family I would expect those payoffs to remain.
Elevated.
We did not see the same elevation in multifamily and commercial real estate during the December quarter, although that that could occur as well.
And then secondarily with respect to <unk>.
<unk> generated or originating loans.
In any given quarter.
Quarter, that's a function obviously of competition as well as what we're.
We're looking to do as it relates to our underwriting.
And the key component there is to think about COVID-19.
COVID-19.
And how we responded with our underwriting criteria through COVID-19.
In fact, we tightened underwriting standards in March of last year, we loosen them a bit in.
In may of last year, we loosen them a bit more.
In November of last year, but still a bit tighter than where we were pre.
Pre COVID-19.
And we are looking to perhaps loosen them again in the March quarter to.
To probably get back to a pre.
Pre COVID-19 type underwriting.
As the impact of Covid.
Comes more.
Transparent if you will and you know frankly, our portfolio has held up pretty well except for that single family category, where we downgraded.
You know 16 or 17 loans.
Okay.
Hum.
If is it kind of your expectations that you know again, where you sit right now that if you look at kind of provision expenses it could be much closer going forward to calendar second half of 2020 relative to the first half of calendar 2020.
Yeah.
Yes.
I think that.
As we look at our loan portfolio the incur.
The increase in nonperforming loans came directly from the forbearance loans, where we extended the forbearance beyond six months.
But we're starting the March quarter with just eight loans in that grouping six single family and two multifamily. So the source of those nonperforming loans are far smaller than they were in the September quarter and then.
Additionally, if you look at.
How our allowance actually grew during the period our calendar 2020 as you suggest March was the largest provision June was the second largest provision.
And then the September and December quarters declined in provision, even though the allowance had gone up and Lo and Behold. We obviously saw then the.
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So if I think about the future provision.
It again would be determinant are dependent upon what we see in nonperforming loans.
As we go forward and based upon what we see at the current portfolio level at December 31st It does not appear as if we would see a significant rise in non performing.
Given the position of the portfolio at December 31st and frankly somewhat improving.
General economic conditions.
Okay, all right I'll stop there. Thank you very much Jonathan.
And our next question is from Bob Shone. Please go ahead.
Hey, good morning, it's Bob Schalow from Matthew Clark.
Maybe if we could I just.
Just start with the.
Downgrades.
And restructuring classified could you maybe give some color around what went into those.
Restructuring of those loans, maybe kind of weighted average ltvs and debt service coverage ratios I'm, just trying to get a better understanding of.
That was 16 months thanks.
Sure so with respect to.
The restructuring terms, none of the terms were changed as it relates to.
The notes are other than extending payment forbearance for another three months and then Oh the three months.
Were tacked onto the back end with respect to repayment.
In a balloon.
I don't have the specifics with respect to the weighted average ltvs.
<unk> of that portfolio, you can get a sense of where they were.
By looking at the September 30, Investor presentation on Slide 13, you'll see the weighted average ltvs of the S F. Our loans at that time.
And a portion of that or the 16 or 17 that were extended.
Overall, we don't believe there is significant loss content.
Ultimately associated with those loans, because you will see there are lower LTV are well protected.
By the Ltvs.
And then secondarily, the California real estate markets are very very strong.
Such that if those loans further deteriorated, where we took them down to foreclosure path.
Because the borrowers were unable to begin making monthly payments again.
We just don't see the loss content of any significance if you will.
With respect to the specific provisions associated with that.
Well I don't know that we have it in our earnings release, you'll see it in the form 10-Q, I believe the individually evaluated allowances associated.
With those loans were $570000 and I think that 570 moved up from around $50000. Previously so about $520000 was specifically earmarked in the form of allowance against those loans.
Awesome, that's great color and then maybe if I can just sneak one more in regarding share repurchases I know in your prepared remarks, you talked about that it's something that's going to be reevaluated, maybe can you just talk about.
Any change in willingness to.
To start those repurchases I know that day.
The fall.
<unk> is still available and when.
When you've got kind of a run up in the price charged tangible book value. So maybe any color around that would be great. Thank you.
Sure so.
We are obviously understand where our capital positions are where our opportunity lies.
No.
We've been a little bit constrained with respect to growth.
And the fact that origination volume is not it.
Ceded pay off volume.
And so capital returns in the form of repurchases from our perspective.
Is something we should be thinking about now and secondarily because we've.
You know, we're not through the Covid the economy, if you will or our economic situation, but because the vaccine has been rolled out and people are getting inoculated.
You know it does appear to be.
Something that should improve as we go through a calendar.
'twenty one so it is back on the table for our consideration.
That consideration obviously involves discussions with our regulators are those discussions are ongoing.
And Uh huh.
I guess, that's the color I could provide at this time.
The <unk>.
Price to tangible book being near.
100 per cent or right around the same level or maybe a little bit above tangible.
Tangible book is not a hindrance per se because we you know think franchise values obviously greater.
That although yeah true would've been nice to repurchase six months ago I suppose.
Thank you for that I'll step back.
Yeah.
And we have no other questions at this time you may continue.
Yeah.
Okay.
Well if there are no other questions I want to thank everyone for attending our quarterly conference call and look forward to speaking with all of you again next quarter.
Thank you.
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Leah.
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