Q1 2022 Provident Financial Holdings Inc Earnings Call
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Ladies and gentlemen, thank you for standing by.
Welcome to the first quarter earnings call at this time all participants are in listen only mode. Later, we will have a question and answer session and instructions for queuing up will be given at that time.
Should you require operator assistance press star zero on your phone's keypad.
As a reminder, today's conference is being recorded for replay and that replay will be available starting at <unk> today.
Today at 11, a M Pacific.
And through November 3rd at Midnight to access that replay dial 8662071041.
Enter access code 306, 55739 international participants can dial 4029.
Seven eight.
0847 again, the phone numbers for domestic are 8662071049 international four zero to 978.
0847 access code for that replay is 3655739 again replay from today 11, a M Pacific through November 3rd at this time I would now like to turn this conference over to your host Chairman and C. E O. Craig Blunden. Please go ahead Sir.
Thank you John and good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings.
On the call with Stan or internal SAR, 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, which.
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.
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 is available from the earnings release that was distributed yesterday.
From the annual report Form 10-K for the year ended June 32021, 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 date they are made and 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 first quarter results.
And the most recent quarter, we originated and purchased $69 million of loans held for investment.
A decrease from the $93 $3 million in the prior sequential quarter.
The most recent quarter, we also experienced $53 $9 million of loan principal payments and payoffs.
Which is down from the $79 $9 million in the June 2021 quarter.
And still tempering the growth of loans held for investment in the September 2021 quarter competition remains elevated for lower risk.
Loan products, but it seems that many multifamily and commercial real estate borrowers are once again competing completing 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.
Additionally, our single family and multifamily pipelines are similar in size to last quarter, suggesting our originations and purchases in the December 2021 quarter will be similar to the volume will experience this quarter.
For the three months ended September 32021 loans held for investment increased by approximately 1% compared to the June 32021 with.
With increases in the single family and multifamily loan categories, partly offset by declines in the commercial real estate and construction loan categories.
Credit quality is holding up well and you will note that our just $20000 of early stage delinquency balances at September 32021.
Additionally, nonperforming assets decreased to $6 $6 million, which is down from $8 6 million on June 32021. Please note that the nonperforming assets are largely comprised of forbearance loans.
Downgraded to TD are nonaccrual status.
As a rule.
All of not being able to resume their monthly payments at the expiration of the initial forbearance at the time, we extended the four version.
The Barents period beyond six months, we downgrade the loans to nonperforming status.
As of September 32021, there was one single family loan forbearance with an outstanding balance of approximately $308000 or 0.04% of gross loans held for investment.
On March 31, 2021, we ended new requests pursuant to a forbearance program.
Existing forbearance loans will run their course as provided in their individual forbearance agreements and may be eligible for an extension.
We recorded a $339000 negative provision for loan losses in the September 2021 quarter.
The allowance for loan losses to gross loans held for investment decreased to 86 basis points on September 30th from 88 basis points on June 30.
You will note that we remain on the incurred loss model and have not adopted seasonal.
This means that our allowance methodology cannot be reasonably comparable to Cecil adopters.
Our net interest margin expanded by 17 basis points for the quarter ended September 32021, compared to the June 2021 sequential quarter. As a result of a 14 basis point increase in the average yield on total interest, earning assets and a five basis point decrease in the cost of total interest bearing liabilities.
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The increase in the net interest margin was primarily a result of the remixing the balance sheet stemming from the increase in average loans receivable. The decrease in average investment securities. The increase in average deposits and a decrease in average borrowings, notably our average cost of deposits decreased by two basis.
Points to 13 basis points for the quarter ended September 32021, compared to the prior sequential quarter.
Additionally, our borrowing costs decreased by approximately three basis points in the September 2021 quarter compared to the June 2021 quarter, primarily due to a $21000 prepayment fee in June that was not replicated in the September 2021 quarter. In addition to the scheduled maturities.
In the September quarter of higher cost borrowings.
The $2, 71% net interest margin. This quarter was also positively impacted by approximately five basis points.
As a result of a decrease in amortization of net deferred loan costs associated with the loan payoffs in the September quarter in comparison to the average net deferred loan cost amortization of the previous five quarters also the net interest margin improved as a result of the $139000 recovery.
Loan interest income on two partially charged off loans that paid in full in the September 2021 quarter impacting the net interest margin by approximately five basis points.
We continue to look for operating efficiencies throughout the company to lower operating expenses, notably our FTE count on September 32021 increased to 164 compared to 163 FTE on the same date last year, a very small increase you will note that we recorded a one.
$2 million credit toward the employee retention tax credit in the September 2021 quarter.
Assistant with a consolidated Appropriations Act of 2021, and the American Rescue Plan Act of 2021 were eligible employers.
Claim a maximum credit equal to 70% of $10000 of qualified wages paid to an employee per calendar quarter that.
The general requirements to be eligible to claim the credit as a 20% or more decline in gross receipts in the calendar 2021 quarter compared to the same quarter in calendar year, 2019, and 500 or fewer fulltime employees based on the average of the 2019 calendar year.
Additionally, we received $125000 litigation settlement in the September 2021 quarter, which was recorded as a credit to other noninterest expense, which we consider a onetime items.
Our short term strategy for balance sheet management unchanged from last quarter, we believe that leveraging the balance sheet with prudent loan portfolio grew 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 excess liquidity and government sponsored mortgage backed securities.
With an estimated average lives of approximately four years.
We exceed well capital ratios.
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 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 September 2021 quarter under the April 2020 stock repurchase program.
Encourage everyone to review our September 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 other solid financial foundation supporting the future growth of the company.
We will now entertain any questions you may have regarding our financial results. Thank you.
John.
Ladies and gentlemen, if you would like to ask a question. Please press one zero on the phone's keypad, you will hear an acknowledgment that you've been placed in Q and you can remove yourself intuitive anytime by repeating the ones you will command once.
Once again for questions press, one zero at this time and our first question comes from Nick a church rail with Piper Sandler go ahead. Please your line is open.
Good day, Craig It down I mean, how are you.
Well thank you.
Good. Thank you. So first I wanted to start with loan production I appreciate the commentary in the prepared remarks.
Can you provide some color on the environment, you're seeing and how that May unfold now do you see production accelerating as we head into calendar 'twenty two.
Donovan Guy Yeah, I think what we see.
She is.
A highly competitive market so a.
A few things with respect to multifamily and commercial real estate.
It seems like activity is improving and our borrowers are returning to the market purchasers.
We are completing transactions.
And so there's more confidence out there and additionally, there are many borrowers that may have the ability to lower their interest rate if they were to refinance.
So we think that that activity is improving and that's a good thing for the market. However, there's a great deal of competition with respect to that product and so we do see.
Competitive pressure as it relates to funding volume there.
But generally speaking.
Our outlook has much improved with respect to funding volume there.
Then certainly what it was a year ago.
Or even perhaps nine months six months ago, it's better today with respect to single family a couple of things are occurring.
Mortgage rates have.
Began to decline.
With respect to 30 year fixed.
That may slow some production with respect to refinance activity, although the purchase money market.
Bill very strong.
Uh huh.
But if we think about where interest rates are today, and we take out the refinance market.
That could ultimately be a net negative if you will with respect to the opportunity.
Our future funding volume.
But that's largely dependent upon where mortgage interest rates are going I think the Freddie Mac survey came out this morning, and the average 30 year fixed has gone up.
Over the course of the last month or so.
And that certainly has an impact with respect to refinance activity.
But that also may mean that our Uh huh.
Payoff volume.
May also begin to decline such that we're still able to gin up loan production growth.
Even in a more competitive environment and even in perhaps a higher interest rate environment for single family loans.
That's very helpful commentary, just given the excess liquidity position is there opportunity to restructure some borrowings and further drive down funding costs.
There are opportunities with respect to that we'd consider that on an ongoing basis.
We look at what the earn back period might look like with respect to the prepayment penalty incurred in the event we were to prepay.
The advance and in some cases, it doesn't necessarily make sense.
And just.
Just to kind of Uh huh.
Library, a bit I guess on the prepayment penalty.
It's obviously set with respect to where current interest rates are in comparison with the borrowing.
Great with respect to the target advance.
We're looking to prepay.
And the lower the current interest rate the larger the prepayment penalty to the extent interest rates back up a bit.
Arise the prepayment penalty also goes down a bit so.
It's not a clear cut decision because if rates were to rise you could have ended up paying.
Back in advance you know a month or two too early relative to where those current interest rates are and relative to what that prepayment penalty would look like a month or two later so it's.
It's not an easy decision.
There's a bit of forecasting involved with respect to that prepayments, but there is opportunity and we've done so in the past and we could potentially do so in the future.
Although the other alternative with respect to that liquidity is a.
To go out and put on a relatively short term.
Mortgage backed securities or the like and then we're flipping from a 15 basis point yield call. It 200 basis point yield.
And that would also show improvement with respect to the use of liquidity.
As it relates to our net interest margin.
Okay, and then lastly, I know the tax rate.
This quarter's level, it's still below where you've historically run what you pointed out was in part due to the employee retention tax credit what's your expectation for the go forward tax rate.
So our statutory tax rate on a go.
Solar dated basis is 29.56% without any permanent or temporary adjustments.
As you point out the employee retention tax credit.
Is non taxable at the state level, so to the extent it is recorded which it was in June and September.
The combined tax rate is something less than the 20, 956% so.
We always describe 29.56% as our statutory tax rate.
But in any given quarter there can be.
Vacations on that tax rate with respect to temporary or permanent differences between book and tax.
Thank you for taking my questions.
Our next question is coming from Ben Garlinger with Husky Group go ahead. Please hey, good morning, guys.
Good morning.
I was wondering just to quickly follow up on that.
Retention tax credit.
No.
Having conversations with all of it and that it was a potential to see a continuation I was curious if you had any more clarity on that I know.
Pat's conversation I said I believe it would've been one more additional quarter.
I'm, just I'm, just saying that first questions.
Yeah, so a little bit of color on that in the current.
The administration's proposal.
For there build back better plan.
The employee retention tax credit would end at September 30.
Hum.
Rather than it's currently scheduled and at December 31st.
They are doing so to help pay for.
The plan.
So that's a complication, we don't necessarily understand where that will go so there's a risk there.
With respect to December being in play.
And then secondarily.
As it relates to the general criteria that we mentioned earlier, our that Craig mentioned in his prepared remarks.
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The 20% decline in revenue is the general test from the current quarter to the base year quarter.
But there's also a provision that described if you have qualified in the previous quarter you automatically qualify in the subsequent quarter.
As it relates to that 20% revenue test in <unk>.
Our case, we qualified.
On that test in June so we automatically qualified in September irrespective of what the revenue test looked like in September of 'twenty, one versus the base year of September 29, 2019, if we do that test.
We did not qualify in September on that test. So we qualified on the basis of having qualified in the prior sequential quarter.
As a result December we will have to stand on its own with respect to the 20% revenue test.
And we cannot qualify based upon the sequential quarter.
Because we didn't qualify in September.
And therefore, it is Uh huh.
I don't I wouldn't say unlikely.
But is it is quite possible that we will not qualify in the December quarter.
And that would then suggest that.
We are through so there's a couple of reasons, we may not qualify in December and the September quarter will be the end of the credits that we record.
Got you. Okay. That's helpful color and then my follow up kind of had to dovetail off in the next previous questioner about.
The the longer mix and how it relates potentially to.
The margins are.
Are you seeing sustainability within the mix itself.
The current margin.
I was a little elevated due to some kind of noncore events that Marcel kind of Truing up.
So when you think about the margin for the next couple of quarters. Do you think will have Sims for version a little bit lower or do you think they're kind of sustainable and is 270 area given the momentum in the chest.
So if I think about the $2 71 margin for the September quarter.
We've described about 10 basis points out of two particular components.
Number one component was the decline in the.
Net deferred loan costs.
From in September quarter from the June quarter that is purely a function of which loans pay off and how much volume pays off and the fact that we decline to about 53 million or 50 formulary I forget the exact number of.
Loan payoffs in the September quarter, that's the lowest payoff number that we've had in many and in fact, that's the first quarter in many quarters, where this.
The.
Decline in net deferred loan cost amortization actually was a positive contributor to our margin.
So.
Depending upon where payoffs go and which specific loans pay off.
Yeah that five basis points.
Could be around five basis points, plus again or.
It could flip to a slight negative.
So that would then potentially put pressure on that $2 71.
The second component was with respect to two specific charge off loans that paid in full during the September quarter. There was approximately in addition to the charge off that we recovered which rose.
Including those two loans about $165000 for the quarter, there was about $139000 of recovered loan interest.
That we recorded in the September quarter related to those two loans that paid in full so.
It is possible that we have other charge off loans pay us in full in the December quarter, but that event is less frequent if you will on an ongoing basis. So there's about five basis points as well that could potentially be meaningful.
With respect to a negative.
Implication in the December quarter relative to the $2 71 margin. So there's 10 basis points on that 271.
That is potentially at risk with respect to the December quarter. So it wouldn't surprise me, if we dropped a bit in the margin.
The December quarter, depending upon the outcome of those two areas, but I do think it's quite possible that we should be.
The above our net interest margin relative to the low point that we hit in the June quarter, which was $2 54.
So yeah.
That's the color I have I guess, if you can forecast payoffs and what that means to net deferred loan costs, and which are charged off loans pay us back in full it becomes more meaningful on your forecast with the margin.
Right, Yeah, no I get that there's a lot of moving parts and a lot of unknowns.
The color commentary was really helpful.
I think that's all I have I appreciate the time guys.
I'll cut backs.
Thank you.
And once again, ladies and gentlemen for questions Press one zero at this time, we will go to Tim Coffey with Janney. Your line is open go ahead. Please thank.
Hey, good morning, gentlemen.
Good morning, Tim.
Donovan if he can save me the question on the margin I'm looking at your period end balances of cash and equivalents they were greater than the average.
Balances during the quarter what is the appetite for you to to start really kind of allocating that in this next cut next quarter or two because it seems like that would have a big impact on your margin two of our I sit there our growth.
AH Yes. Your observation is correct in that we.
We don't like to see our cash and equivalents.
Cash and cash equivalents.
Probably above the $70 million level or so.
And our ending balance is larger than that so we can redeploy that.
Either preferably into loans.
And new loan origination and purchase production.
Or secondarily into investment securities. So we get more bang for the Buck if.
Its loan production.
Obviously, and we have loan growth that.
Net loan growth that absorbs that cash.
Versus investment securities, but even in investment Securities you know, we'd pick up 85 basis points or so and that's that's meaningful.
So we look at that all the time and and so to the extent that it gets elevated.
We put it to work in one place or the other the default position as investment securities.
Okay.
In the past in a quarter, where we're starting to see.
I guess, you know business has become more active and as far as the pay offs across the industry right now the level that you saw this quarter does that was that greater than your expectations.
Well no I mean, the payoffs we saw this quarter were down substantially from where they were in the June quarter in the.
The March quarter in fact, I think it's the lowest level that we've seen in some time I havent gone back and looked at each quarter, but you know the $53 9 million as is.
A lower number just generally speaking.
To the extent, we continue to see that number fall I would expect that.
We would see better loan growth right now for the last two quarters run essentially a 4% annualized loan growth rate.
And and that's hampered to some degree by pay offs.
But.
Now if we think about payoffs I think single family payoffs might decline as a result of refinance activity declining.
And interest rates going up.
But it's quite possible that we see an increase in multifamily and commercial real estate pay offs, because we see more activity in that sector. Because I think everybody is getting a bit more confidence with respect to the economic environment.
So the two may be offsetting.
Yes, the way I would describe it if.
You look at the 50.
$53 9 million.
This quarter in comparison to the $79 9 million in the June quarter.
That's probably a range of pay offs in the December quarter.
Okay.
Alright, that's helpful. Thank you.
And then Craig I'm, just looking at the cash dividend.
Haven't you haven't increased it since two.
2017, and your capital levels are about the same if not a little bit higher.
You seem to be on a good trajectory right now with earnings is there any thought towards increasing it this.
This year.
You know Tim we had that's a question that hasn't come up to be honest, we haven't discussed that at this time.
Certainly its always a possibility.
But.
I think we're at a I think we're in a pretty good level, where we are and again we.
But of course like to continue the stock buyback.
Yeah I would.
You know I would argue the same point that that Craig is making you know I think the cash dividend yield is around three it's over 3%.
Right now that's a pretty decent yield.
With respect to the cash dividend.
And to the extent that you pointed out there's other capital available.
I think given our stock price and.
Given our thoughts with respect to stock purchases, that's probably the way to redeploy that excess capital.
And we continue to do both.
Okay.
All right great. Thanks, those are my questions.
I once again for additional questions. Please press, one zero, we're going out or Rob Cook with P. R V.
Hi, there I was just wondering do you have any kind of internal.
ROE and ROA targets that.
You set forth or that the board sets forth for this institution.
Okay.
Well, we obviously develop a business plan in each year and contained in our business plan.
Our various targets, including net income ROA Roe and efficiency ratio.
And the like so the answer is yes, but that's internal we don't publish.
Publicize our or describe those numbers publicly.
Okay.
It just seems to me where you are.
Underperforming quite a bit.
Yeah.
Is all that that's just a I guess a little bit of the frustration probably from shareholders that have been involved in this story. It's just you know it's one thing when the market doesn't.
Value your company your deposits, but there's a compounding effect you can sit there and you can be patient you can and you can wait but it just gets very frustrating when we don't have any compounding Roe.
To the story, so just thought I'd share that because I know analysts sometimes.
Don't necessarily want to dictate that part of the story.
So thank you for your time.
I've heard shock.
Yeah go ahead.
I was just kind of say Rob I appreciate your frustration.
And then I have to agree with your son and.
As far as the value of deposits today.
That's always been what we thought.
Overtime was our franchise value and an area that has lost most of the institutions like us.
However today.
The institutions I talked to all of Washington cash.
Hum.
Future values, there, but the current value I don't think.
Is that strong today Unfortunately.
I think I think people understand that.
Yeah, sure and that it takes two to make a market, that's just where I differ a little bit because I do think there are some forward thinking bank bankers in the state of California, and other states that happened to have growth engines to them and I'm not suggesting we should start taking on an asset class that we don't know anything.
[noise] about that that would be the last thing I would suggest but.
There, there's still an appreciation for deposits out there there still are good bankers. There still are people that believe that rates will go higher at some point. So I guess I I do view that there are people out there that would value. These deposits just the current market.
And again I think that's just because of our underperforming lack of compounding ROA.
Could be.
I'm sure they're probably are.
To be honest I haven't heard from them.
Okay. Thanks, guys.
Alright, thank you.
And once again for additional questions. Please press one zero.
And after that property, we have no additional questions in queue.
Alright, if theres no further questions I'd like to thank everybody for participating in our quarterly conference call. We look forward to speaking with all of you next quarter.
Thank you.
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