Q3 2021 Provident Financial Holdings Inc Earnings Call

Ladies and gentlemen, thank you very much for standing by welcome to the Provident Financial Holdings third quarter earnings call. At this time all participant lines are in a listen only mode. Later, there will be an opportunity for your questions instructions will be given at that time, if you should require.

For assistance you May Press Star, then zero and we will assist you offline as a reminder, today's conference is being recorded I would now like to turn the conference over to Mr. Blunden, Chairman and CEO. Please go ahead.

Thank you Leah good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings.

And on the call with me is dawns on turn offs 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 include forward looking statements.

Those statements include descriptions of management's plans objectives or goals for future operations products or services forecast 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 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 on to available for on 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 of the date, they're made on the company assumes no obligation to update this information.

To begin with thank you for participating in our call I hope that each of you has had an opportunity to review our earnings release, which describes our third quarter results.

And the most recent quarter, we originated and purchased $61 million of loans held for investment.

An increase from $29 $6 million from the prior sequential quarter.

During the most recent quarter, we also experienced $75 $7 million of loan principal payments and payoffs.

Which was up from the $59 $6 million in the December 2020 quarter and still tempering the growth rate of loans held for investment.

In the March 2021 quarter.

Competition remains elevated for lower credit risk loan products, but it seems that many mobile family and commercial real estate borrowers are once again, considering transactions as a result of better general economic conditions.

Additionally, we have seen growth in our single family on multifamily pipelines, suggesting our originations and purchases in the June 2021 quarter will meet or exceed the volume we experienced this quarter.

For the three months ended March 31, 2021 loans held for investment decreased by approximately 2% compared to December 31, 2020 with declines in single family multifamily commercial real estate and construction loan categories.

Current credit quality is holding up well and you will note. There are no early stage delinquency balances at March 31 2021.

Additionally, nonperforming assets decreased to $9 $8 million.

Which is down from the $10 $3 million on December 31st 'twenty 'twenty. Please.

Please note that the nonperforming assets are largely comprised of forbearance loans downgraded to TD are non accrual status as a result of not being able to resume their monthly payments at the exploration of their initial forbearance.

At the time, we extend the forbearance period beyond six months, we downgrade the loans to nonperforming status.

Yeah.

As of March 31, 2021, five single family loans in forbearance with a combined outstanding balance of approximately $1 $8 million or 0.22% of gross loans held for investment.

One multifamily loans in forbearance with an outstanding balance of approximately $308000 or 0.0 for percent of gross loans held for investment and one commercial real estate loans in forbearance with an outstanding balance of approximately $945000 or zero.

One 1% of gross loans held for investment.

On March 31, 2021, we ended new requests pursuant to our forbearance program.

Existing forbearance loans will run their course as day noted in their individual forbearance agreements and may be eligible for an extension.

We recorded a $200000 negative provision for loan losses in the March 2021 quarter the.

The allowance for loan losses to gross loans held for investment decreased to 98 basis points on March 31 offs from 99 basis points on December 31.

You will note that we remain on the incurred loss model and have not adopted the seasonal this means that our allowance methodology cannot be reasonably compared to <unk> <unk>.

Adopters.

Our net interest margin compressed by six basis points for the quarter ended March 31, 2021 compared to December 2020 sequential quarter. As a result of a 16 basis point decrease from the average yield on total interest, earning assets, partly offset by an 11 basis point decrease from the cost of total.

Interest bearing liabilities.

The decline on the average yield on total interest, earning assets was primarily the result of the sharp rise in liquidity stemming from a significant increase in total deposits and loan prepayments, which were reinvested at lower yields.

Our average cost of deposits decreased by four basis points to 17 basis points for the quarter ended March 31, 2021 compared to the prior sequential quarter and our borrowing cost declined by approximately 28 basis points from the March 2021 quarter in comparison to the December 2020, a quarter.

That put to 6% net interest margin. This quarter was also negatively impacted by approximately seven basis points. As a result of the increase in amortization of net deferred loan costs associated with the loan pay offs in the March quarter in comparison to the average net deferred loan cost amortization of the previous for.

Five quarters.

We continue to look for operating efficiencies throughout the company to lower operating expenses.

Notably our FTE count on March 30, <unk> 2021 decreased to 162 compared to 183 FTE on the same day last year on 11% decline as a result of fewer employees from other cost savings operating expenses declined to approximately $6 $9 million in the <unk>.

Current quarter.

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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 the best course of action, but executing on that strategy on the current environment may prove difficult in the interim we're redeploying excess liquidity and government sponsored mortgage backed.

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We exceed well capitalized capital ratios by a significant margin, allowing us to execute on our business plan on 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. However, we also recognize that prudent capital returns to shareholders through stock buyback programs is the valid capital management tool and we began repurchasing shares in the March 2021 quarter under the April.

For 2020 stock repurchase program.

Approximately 55000 shares of common stock were repurchased in the quarter.

We encourage everyone to review on March 31, Investor presentation posted on our website you will find we have included the 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 for the company and.

In particular slide 13 contained for forbearance table as of March 31, 2021 in footnote 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 high risk in the current environment.

We will now entertain any questions you may have regarding our financial results. Thank you Lia.

Thank you, 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 would like to ask a question. Please press. One then zero on your telephone keypad and one moment. Please for the first question.

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Okay.

Okay.

And our first question is from Tim Coffey with Janney Montgomery. Please go ahead.

Hey, Thanks morning, gentlemen.

Good morning, Tim.

With the with the tier.

Gains in rates during the quarter.

And head into this current quarter, what would be your expectations for changes in the amortization that cost NIM seven basis points last quarter.

Hi, Tim It's Donovan.

Payoffs are very very difficult to forecast, but again a rise in interest rates seem to have reduced refinance activity at least from the anecdotal evidence that I'm reading and that would suggest that payoff volume goes down.

But then dependent upon which specific loans pay off they may contain higher or lower net.

Net deferred loan cost amortization, but all in if pay offs coming down.

Which seems to be.

Something we could anticipate we would expect net deferred loan cost amortization to decline, which would then ultimately.

Reduce the impact to our net interest margin.

Right Okay.

And then on the buyback I saw you extended it.

This morning wondering if you are you considering making any other changes to is saying the day the range of prices that either COVID-19.

Other than to buy back stock at or even the size of purchases.

Well, Yeah, I don't think we would.

Excuse me describe that.

We're simply executing on our plan.

Right.

We don't ask me on perhaps.

I was actually kind of on general or is it something you mean do you plan to be.

More aggressive than you have been in previous quarters give.

Given where the stock trades right now.

Well certainly the stock is trading below book value right now and that suggests an opportunity.

But that's also dictated by the shares that are available and the liquidity on the stock during any given quarter.

Right, Okay alright.

Alright, I think those are my questions.

Thanks, Tim.

Next we go to the line of Nick <unk> with Piper Sandler. Please go ahead.

Hi, Craig and data on how are you.

Well thank you.

Can you share with us how you're thinking about the expense base and if you have any open initiatives that may reduce operating expenses in the near term.

Yeah.

Well, we're always looking at our operating costs and in.

In fact, we're looking to reduce those or.

Become more efficient as a result of the ore.

As a result of changing those costs to some degree.

But again, we've done a significant reduction over the course of the last couple of years.

And obviously the pace of that decline will slow.

As we go.

As we look to the future since much of the heavy lifting has been done.

Nonetheless, we're looking at our branch structure, particularly in.

In the city of Riverside.

We have five branches or so in Riverside proper, we want to understand if we really need to have that many branches as leases come due we make those decisions and think about what we might wish to do in that area, but.

That saves both did.

For the <unk> costs, as well as potentially and personnel costs. So yeah. It's something we look at all the time, particularly as new consumer.

As contractual relationships are key.

Do you know, we're looking to reduce costs wherever we can.

That's very helpful and thanks for pointing out the impact of the stock based comp on the tax rate. This quarter do you expect the tax rate to revert back to prior periods in the June quarter.

Yeah, So I think our statutory tax rate on a combined basis is 29, 6%.

That's very close to what we've been running except for extraordinary circumstances, such as stock based compensation this quarter.

Thank you for taking my questions.

And next we have a question from bad Garlinger with a whole day group. Please go ahead.

Hey, good morning, gentlemen.

Good morning.

I'm wondering if you guys can just take a step back and look at it.

<unk> market in general, but I know that the California banking landscape has changed quite a bit over the past two months I think something around eight deals have been announced in the past eight weeks.

Just given that changing dynamics and disruption for those not involved because they usually opportunities. So I was wondering kind of how you guys are approaching that kind of the changing landscape that you might have and get that.

For the last question you just address the branches, but from a lender opportunity here and you can do that expense.

Okay.

Okay.

Well as we think about P O.

The changing landscape I think anytime.

That there is consolidation occurring.

Particularly in the.

Primary geography that.

On the institution or the debate right sure.

There's going to be opportunity for either deposit activity or load activity.

Uh huh.

The other thing that might occur as a result of a combination.

Is that originators loan originators might come up although in many cases, when we see these combinations, particularly in the current environment. The loan origination teams are the teams that the acquiring institution is very interested in keeping.

With the consolidated entity, so I think there's less opportunity there.

Than one might think again because of the environment, we're in where our loan growth is very difficult to come by.

And many of these acquiring institutions are looking for the acquired <unk> to help flip their growth plans. So.

<unk> I I don't know that it makes a lot of bid a lot of difference for you.

California is still well covered with banks.

But there is opportunity to dislodge.

Both customers as well as potentially personnel.

Okay. That's that's really helpful. On most of my other questions have been asked and answered so I'll tell you so bad.

Yeah.

And if we go back from the line of Tim Coffey with Janney Montgomery. Please go ahead.

Thanks.

I guess I did have another question I wanted to follow up on what Craig was had in his prepared comments regarding production and your outlook. It sounds pretty positive given the production on the quarter was very good relative to a year ago. The flip side of that is on pay offs and I'm wondering based on kind of a common theme.

Provide a little earlier Donovan on kind of for the margin what are your what are your outlook is on your hope is for pay offs and how that's trending coming into this quarter.

Okay.

Well the.

On the March quarter was a very high payoff quarter, we had something like.

Just over 75 million pay off and I think if you go back.

Two quarterly pay offs.

That's a higher level than we generally see.

We do have an expectation that that payoff volume will come down to some degree and I think it's important to note that many of those pay offs.

Or most of those pay offs were in the single family space, which is much more sensitive to mortgage interest rates and as a result of mortgage interest rates rising.

Recently, we would expect to see a decline in single family.

Pay offs, but that being said, it's difficult to understand what motivates the individual customer and rates are still very very low by historical standard. So we could absolutely see you know pay offs Oh.

Replicate the March quarter, but that's not our expectation, we think they'll come down from the March quarter, and then Conversely, when we think about origination volume, but we are more positive in origination volume based upon our pipelines are today Oh.

Additionally.

The origination volume that we saw in the March quarter.

It was all originations there were no purchases in that volume.

We think the purchase market might break out a bit as well as we think about the June or September quarters. As there is more activity and that would then give us another opportunity.

To put on loan production, but right now yeah.

Given what we see in our pipelines and given what we did in the March quarter, we would expect our origination in purchase volume to meet or exceed what we did in March and if payoffs come down as we also expect to some degree.

We're getting to a turning point or perhaps ginning up loan growth rather.

Rather than the decline in loan portfolios that we've seen.

Right.

Very difficult to say that.

[laughter], Okay tell me what tell me well pay offs are gonna do on what interest rates are going to do and maybe I can be.

Give you a better educated forecast.

Hey, Tim This is Craig you know if you know our model to estimate pay offs.

That's been the toughest thing for us.

To forecast.

For bad as long as I can remember.

It just.

Themes.

No.

Extremely difficult.

To come up with the right number.

For pay offs, so let me know.

We have a look at.

[laughter] I don't know if I have one of those right now, but I do know that if you know your your payoff activity drops or is 80% of what you saw this last quarter you probably do a positive volume growth. This next quarter.

So that's kind of thought it was kind of trying to look at.

Sure.

Alright.

That was my last question. Thanks.

Thanks, Tim.

And ladies and gentlemen, once again, if you have any other questions. Please press one then zero at this time.

And we have no other questions you may continue.

Alright, well since we have no other questions on one of those thank everyone for joining us on our quarterly conference call.

And look forward to speaking with all of you again next quarter.

Thank you.

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