Q4 2021 Provident Financial Holdings Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the fourth quarter earnings call.

At this time all participants are in listen only mode. Later, we will have a question and answer session and instructions will be provided for you regarding queuing up for questions at that time should you require operator assistance during the call Press Star Zero on your phone's keypad. As a reminder, this conference is being recorded and a.

Paul will be available for you to listen to starting at 11 P M or 11 o'clock a M Pacific time today.

And running through August 5th at midnight to access that replay dial 8662071041 enter the access code of 1 zero.

Right.

0286 International callers would use the number of 4 zero to 9700847 and again that access code is 1060286 once again those phone numbers for domestic 8662071041.

No.

<unk> 4 zero to 9700847 access code of 1060286 replay available from 11, a M Pacific time today through August 5th now.

At this time I would now like to turn this conference over to our host Chairman and CEO, Mr. Craig Blunden.

6 sensor.

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

On the call what day it was Donovan churn as our president Chief operating and Chief Financial Officer.

Before we begin I have a brief administrative item to address.

Our presentation today discusses.

Please see the company's business outlook and will include forward looking statements.

Statements include descriptions of management's plans.

Jack says or goals for future operations products or services forecast of financial or other performance measures and statements about the company general outlook for economic.

With this condition.

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.

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 I.

I hope that each of you has had an opportunity to review our earnings release, which describes our fourth quarter results.

In the most recent.

We originated and purchased $93.3 million of loans held for investment an increase from the $61 million in the prior sequential quarter.

During the most recent quarter, we also experienced $79.9 million per loan principal paydowns and payoffs, which is up.

And $45.7 million in the March 2021 quarter and still tempering the growth.

Loans held from investment.

In the June 'twenty 1 quarter.

Competition remains elevated for lower credit risk loan products, but it seems that many multifamily and commercial real estate borrowers are once again.

Southern transactions as a result of better general economic conditions.

For the most part our underwriting requirements have returned to pre pandemic criteria, except for certain loan products, such as retail and office CRE.

Which remain a bit tighter.

Additionally, our single.

Consumer land multifamily pipelines are similar in size to the last quarter of suggesting our originations that purchases in the September 2021 quarter.

Similar to the volume we experienced this quarter.

The 3 months ended June 32021 loans held for investment increased by approximately 1.

And compared to March 31, 2021 with increases in the single family or multifamily loan categories, partly offset by declines in the 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.

<unk> 2021.

Additionally.

Nonperforming assets decreased.

$286 million, which is down from $9.8 million on March 31, 2021. Please note that the nonperforming assets are largely comprised of forbearance loans downgraded.

Jim the TD are non accrual status as a result of not being able to resume their monthly payment tech exploration of their initial or Barents.

At the time, we extended the forbearance period beyond 6 months, we downgrade the loans to nonperforming status.

As of June 30.

32021, there were 3 single family loans in forbearance with a combined outstanding balance of approximately $897000 or 0.11 percentage of gross loans held for investment.

And 1 commercial real estate loans in forbearance from the outstanding balance of our.

<unk> $945000.

Or 0.11 percentage of gross loans held for investment.

Our March 31, 2021, we ended new requests pursuant to a forbearance program.

Existing forbearance loans will run their course as provided in their individual.

Products, the Barents agreements and may be eligible for an extension.

We recorded a $767000 negative provision for loan losses in the June 2021 quarter.

<unk> for loan losses to gross loans held for investment decreased to 88 basis points on June 30.

<unk> 4 from 98 basis points on March 31.

You'll note that we remain on a per loss model and have not adopted seasonal.

This means that our allowance methodology cannot reasonably be compared to see full adopters.

Our net interest.

Thus by 6 basis points for the quarter ended June 32021, compared to the March 2021 sequential quarter as a result of a 7 basis point decrease in the average yield on total interest bearing assets.

Offset by a 1 basis point decrease from the cost of total interest bearing liabilities.

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

Our average cost of deposits decreased by 2 basis points.

Teen basis points for the quarter ended June 32021, compared to the prior sequential quarter.

<unk> costs increased by approximately 16 basis points in the.

June 2021 quarter compared to the March 2021 quarter, primarily due to a $21000 prepayment fee.

On the 10 million dollar borrowing prepaid in June that was scheduled to mature in August 2021.

254% net interest margin. This quarter was also negatively impacted by approximately 6 basis points as a result of the increase in amortization of net deferred loan.

1 cost so lets you weighted with the loan pay off in the June quarter in comparison to the average net deferred loan cost amortization.

<unk> previous quarters.

We continue to look for operating efficiencies throughout the company to lower operating expenses, notably our FTE count on June 30.

2021 decreased 261 compared to 178 FTE on the same day last year, a 10% decline.

You will note that we reported at $2.4 million credit for the employee retention tax credit in the June 2021 quarter.

With the consolidated Appropriations Act of 2021, and the American Rescue Act of 2021 relative.

Eligible employers can claim a maximum credit equal to 70% of $10000 of qualified wages paid to employee.

Per cash.

Third quarter net.

General requirements to be eligible to claim that credit is a 20% or more decline in gross receipts in the calendar 2021 quarter compared to the same quarter.

<unk> per year of 2019, and 500 or fewer full time employees based on the average of 20.

19 calendar year.

There are a few irregular operating expenses incurred.

In the June 2021 quarter. The first was an increase in stock based compensation expense as described in the earnings release, resulting from the vesting and distribution of common stock Awards.

<unk> was $170000 settlement.

Pre litigation employment matter.

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 in the current environment has proven difficult.

In the interim we are redeploying assets liquidity and government sponsored mortgage backed securities with estimated average life of approximately 4 years.

We exceed the well capitalized ratios by a significant margin, allowing us to execute on our business.

As plan and capital management goals without complications.

We believe that maintaining our cash dividend is very important and doing so it takes priority over stock buyback activity.

However, we also recognize that prudent capital returns to shareholders through stock buyback programs is a valid capital management tool.

And we repurchased approximately 50000 shares of common stock in the June 2021 quarter under the April 2020 stock repurchase program.

We encourage everyone to review our June 30, Investor 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 a forbearance table as of June 32021, and footnote.

5 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.

John.

Ladies and gentlemen to ask a question press 1 zero on your phone's keypad.

Here in audio tone acknowledging that you've been placed in the queue. If you repeat the 1 zero command that where we move you from the queue.

And our first question will go to Nick.

Could you all your open. Please go ahead.

How are you.

Good morning fine good morning.

So firstly I wanted to start with loan growth I appreciate the commentary on the pipeline and the production outlook.

It's early but have you seen refinance activity slowing at this point in the quarter or is it still elevated.

Donald Nick.

I think <unk>.

Refinance activity began to slow.

In the June quarter as a result of the bump up in the 10 year treasury yield and ultimately mortgage rates, but since that time, our refinance activity has reversed.

In that it's grown.

A bit since the 10 year yield and mortgage rates have come down.

For us that puts a little bit pressure, perhaps on prepayments that we've.

We've seen the bulk of that prepayment activity occur in the single family.

The loan portfolio.

But also gives us opportunity with respect to new origination volume.

Yeah.

Okay.

Can you help us think about the overall lending environment.

The purchase market continues to normalize back to pre pandemic time.

The purchase market is.

Yeah.

Although he had all the anecdotal data.

Very difficult I mean, theres still a lot of activity and there's very low inventory.

But the low inventory isn't there because of <unk>.

The demand side of the equation per se, it's because our sellers arent listing their.

Their homes.

As they once were or so it seems so to the extent that a new listings come on they.

They are sold quite quickly and so demand for single family product is its very robust I think some of the numbers with respect.

You reported.

Inventory.

On hand relative to purchase volume or something less than 2 months, which is at very low levels from a historical perspective, so a great deal of Oh.

The activity with respect to purchase volume.

Spect extent sellers are actually putting their homes and listings.

Okay, that's great color and just lastly on the tax rate. This quarter's level, it's still below where you've historically run you know was that part of it partly attributable to the employee retention tax credit and where do you see that fleshing out in future periods.

<unk> you know our statutory tax rate on a consolidated basis I think is 29.56% and so that's what we described ourselves and that's how we build our own business plan some.

Some of the other things that come into play is obviously the.

Our employee.

Retention credit as you describe which is taxable at the federal level, but non taxable at the state level and.

And so that provides a bit of a benefit to us in a particular quarter that it's taken.

Thank you for taking my questions.

Yeah.

We have been Garlinger with hub the hub the group. Please go ahead.

Hey, good morning, guys.

Good morning, good morning I.

I was wondering if you guys could kind of expand a little bit more on the expense base in general I understand that there's obviously the big retention tax credit this quarter.

Net working to see if you can kind of expand it cheap Inc.

Possibility for the next couple of quarters, obviously that will affect the tax rate given the federal versus state level and then from there.

On the previous call, we talked about the branch network and if theres a potential for consolidation.

Are you guys.

Oh doing that I was wondering if you could just kind of expand on just the those 2 aspects.

Well first of all I'll address the branch network.

As we described on the last call.

We review our branch network.

Merrily.

We were at leases become due.

And we determine whether or not a canoe.

Solid Asian of branches should occur.

At that time, the second part of that is to the extent, we have a single branch in a single.

City in the county.

As it's probably unlikely.

That we would consolidate that branch.

On the other hand to the extent that we have multiple branches in a particular city such as Riverside, which is the city in question.

That's where consolidation would take place.

So with respect.

Respect to the other components of the expense.

The expense base Craig mentioned in his prepared comments that we had a couple of things occur in the June quarter the per.

Pre litigation settlement expenses.

Expenses well as the.

And distribution of.

Stock Awards, which occurs infrequently every 2 years or so.

They are true up expenses potentially as a result of that distribution in contrast to our forfeiture estimates.

So those are I would exclude any.

Vesta forecasting.

Certainly over the next couple of quarters.

And then other than that.

You know, we described that we've decreased or or have taken out about 10% of the FTE count over the course of the year.

I would expenses less activity.

As I look down you know to future quarters.

Because we've already done a great deal with respect to that FTE count.

So I think in.

In the past many of the estimates have.

Come in between 6.9, and 7 million per quarter on kind of a normalized basis.

And that seems reasonable.

Given what we know has occurred over the last couple of quarters.

Okay, Great that's really helpful.

And then my last 1 I understand that obviously the dividend is important and you repurchase shares in the past couple of quarters as.

As you guys continue to operate and produce positive earning results for tangible book continues to go up.

With that respect is there.

Kind of a red line in the sand that we're repurchase will become a priority or is dividend.

Sole focus.

Well I don't think we have our sole focus as demonstrated by our actual activity you know if I think about the hierarchy.

We prefer Oh, we wished to support the cash dividend obviously.

But then as I think about stock repurchase activity.

That's something that we've done historically and it continues to take.

You know.

Ore continues to be a part of our capital management, but frankly, we would prefer a loan growth and leveraging balance sheet overstock repurchase activity so that.

That becomes a capital management strategy within the context of generating earnings.

And increasing total.

Woody.

And our capital ratios and kind of bringing that down into a better levels. Yeah. So that's how we think about it.

Okay, Yeah that makes sense I appreciate the color I'll step back.

Thank you.

Once again, ladies and gentlemen for questions.

It'll X 1 zero on your phone's Keypad next we will go to Tim Coffey with Janney. Please thanks, good morning, gentlemen, good.

Morning, Tim Hey, Craig Donovan.

Kipp you love.

How can you talk.

This rate can you describe your concern level about.

<unk> pressured loan originations given the increased health warnings that we're seeing from your area, specifically kind of L. A county in the mass mandate.

Okay.

You know as I think about.

What is occurring.

With respect to the health conditions and how local governments are responding.

I think there might be.

A minor or small impact.

But.

Some of the things that we're seeing with respect to the new protocols or requirement.

It's.

In many ways are kind of old hat to the day everybody.

You know we've had masked mandates.

We've had.

[noise] advisories or are the advice of you know not gathering.

And social distancing.

Sensing and things of that nature and guess what it it really didn't slow down the refinance activity that we've seen over the past year.

Uh Huh and so I don't know that it would have a significant impact now potentially it could have more of an impact with respect to multifamily and.

In commercial.

And maybe slow some of that activity down because I think we did see.

An impact with our owners and investors in those categories. During the course of the pandemic, which.

Seems to have improved now as a result of that.

The decline in protocols or or fewer protocols and.

And so perhaps we see something there.

But I think as well what we've seen you know I've kind of looked at everybody's numbers are certainly competitors that.

We deal with and.

Everybody's volume seems to have.

Been pretty good this June quarter.

So you know there could be a limited impact I don't know that it would be a large impact I don't know if you have any comments Craig.

Well, it's just Oh this is such a moving target.

You know what.

Like a roller coaster, you haven't gone up and down and up and down and you don't.

Don't really know what we're gonna be from week to week and in fact.

You know trying to run a company in.

Figure out what your employees should be doing week to week.

Difficult as well so.

I don't know where all this is going.

I think I'd agree.

General what what honestly none of that.

It's been saying.

On the market itself.

So I remember a year ago, we were having discussions about a and b.

It would be really difficult to do onsite and.

Again, because of kind of the restrictions you don't see the same thing occurring again.

No we've not seen that we've we've seen that the protocols that are had.

It had been established and all of that was overcome and.

Spec procedures and activity has gone in that'll.

That allow both lender and borrower.

You know to conduct those things on a on a safe health basis. If you will so yeah, we don't see any of that right now.

Okay.

And then you've done a great job year over year, bringing down our reinvesting the excess liquidity that has found its way out of your balance sheet.

Do you still feel that you have more levers to pull to support margin.

Well, yeah, I mean in the June quarter was kind of a.

Texas.

<unk> quarter for us as it relates to that I mean, our cash and cash equivalents were essentially flat in comparison to the March quarter.

We brought investment security balances down.

Which are obviously lower yielding instruments during that quarter.

Loans held for investment increased.

Greased during the quarter our.

Deposits increased during the quarter and borrowings came down during the quarter.

We simply need to do more of those are active or more of that.

4 consecutive quarters as it will go down with time.

And what that will then do as you suggest is support.

The net interest margin.

Remember 1 of.

The things to think about our single family portfolio is primarily adjustable rate.

And.

And even though borrowers are getting their adjustment notices and those yields are going down there's still inclined to refinance those balances into lower rate a 30 year fixed product.

And so that hasnt.

It has an implication for us as well as we think about the net interest margin.

Because those portfolios are generally adjusting downward in fact, if you look at some of the tables in the earnings release Youll see that the yield on a S. F. Our loans came down significantly.

The yields on multifamily commercial real estate income.

Arjun direction are welcome.

While coming down a little bit those yields did not come down anywhere near Oh, what single family did.

Okay, Yeah, and certainly your your loan growth outlook I think our origination outlook is positive as off to that goal.

Alright, gentlemen this.

Construction. Thank you.

Q.

Yeah.

And I'm sorry at this time, we have no additional questions in queue.

Alright.

Well I'd like to thank everyone for participating in our conference call and look forward to speaking with all.

This is Michael again next quarter.

Thank you.

And ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T event conferencing you.

You may now disconnect.

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