PROV Q1 2022 Earnings Call

Operator: 00:06 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. 00:26 As a reminder, today's conference is being recorded for replay and that replay will be available starting at today at 11:00 P.M. Pacific and through November 3 at midnight. To access that replay, dial (866) 207-1041, enter access code 3655739. International participants can dial (402) 978-0847. Again, the phone numbers for domestic are (866) 207-1049, International (402) 978-0847, access code for that replay is 3655739, again replay from today 11 A.M. Pacific through November 3. 01:20 And at this time, I would now like to turn this conference over to your host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Craig Blunden: 01:27 Thank you, John. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is, Donavon Ternes, our President, Chief Operating and Chief Financial Officer. 01:38 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. 02:07 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. 02:23 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 30, 2021, 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 date they're made, and the company assumes no obligation to update this information. 02:55 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. In the most recent quarter, we originated and purchased sixty eight point nine million dollars of loans held for an investment, a decrease from the ninety three point three million dollars in the prior sequential quarter. 03:18 During the most recent quarter, we also experienced fifty three point nine million dollars of loan principal payments and payoffs, which is down from seventy nine point nine million dollars in the June twenty twenty one quarter and still tempering the growth of loans held for investment. In the September twenty twenty one 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. 03:55 For the most part, our underwriting requirements have returned a pre-pandemic criteria except for certain loan products such as retail and office CRE, which remain a bit tighter. Additionally, our single family and multifamily pipelines are similar in size to last quarter suggesting our originations and purchase since and the December twenty twenty one quarter, will be similar to the volume we experienced this quarter. 04:23 For the three months ended September thirty, twenty twenty one, loans held for investment increased by approximately one percent, compared to the June thirty, twenty twenty one with increases in the single family and multifamily loan categories, partly offset by declines in the commercial real estate and construction loan categories. 04:43 Current credit quality is holding up well, and you will note that are just twenty thousand dollars of early stage delinquency balances at September thirty, twenty twenty one. Additionally, non-performing assets decreased to six point six million dollars which is down from eight point six million dollars on June thirty, twenty twenty one. Please note that the non-performing assets are largely comprised of forbearance loans downgraded to TDR non-accrual status as a result of not being able to resume their monthly payments at the expiration of their initial forbearance. At the time, we extend the forbearance period beyond six months, we downgrade the loans to non-performing status. 05:34 As of September thirty, twenty twenty one, there was one single family loan in forbearance with an outstanding balance of approximately three hundred eight thousand dollars or zero point zero four percent of gross loans held from investment. On March thirty one, twenty twenty one, we ended new request pursuant to our forbearance program. Existing forbearance loans will run their course as provided in their individual forbearance agreements and may be eligible from extension. 06:05 We reported a three hundred and thirty nine thousand dollars negative provision for low losses in this September twenty twenty one quarter. The allowance for loan losses to gross loans held for investment decreased to eighty six basis points on September thirty from eighty eight basis points on June thirty. You will note that we would remain on the incurred loss model and have not adopted CECL. This means that our allowance methodology cannot be reasonably compared to CECL adopters. 06:36 Our net interest margin expanded by seventeen basis points for the quarter ended September thirty, twenty twenty one compared to the June twenty twenty one sequential quarter, as a result of a fourteen basis point increase in the average yield on total interest-bearing assets, and a five basis point decrease in the cost of total interest-bearing liabilities. The increase in the net interest margin was primarily resolved with the remix since the balance sheet stemming from the increase in average loan sheets receivable, a decrease in average investment securities, increase in average deposits and the decrease in average borrowings. 07:14 Notably, our average cost of deposits decreased by two basis points to thirteen basis points for the quarter ended September thirty, twenty twenty one compared to the prior sequential quarter. Additionally, our borrowing costs decreased by approximately three basis points in the September twenty twenty one quarter compared to the June twenty twenty one quarter primarily due to a twenty one thousand dollars prepayment fee in June that was not replicated in the September twenty twenty one quarter, in addition to the schedule maturities in the September quarter of higher cost borrowings. 07:52 The two point seven one percent net interest margin this quarter was also positively impacted by approximately five basis points, as a result of decrease in amortization and net deferred loan cost associated with the loan payoff in the September quarter in comparison to the average net deferred loan cost amortization of the previous five quarters. Also the net interest margin approved as a result of the one hundred and thirty nine thousand dollars recovery of loan interest income on two partially charged off loans that paid in full in the September twenty twenty one quarter, impacting the net interest margin by approximately five basis points. 08:33 We continue to look for operating efficiencies throughout the company to lower operating expenses. Notably, our FTE count on September thirty, twenty twenty one increased to one hundred and sixty four compared to one hundred and sixty three FTE on the same day last year, a very small increase. We will note that we reported a one point two million dollars of credit for the employee retention tax credit in the September twenty twenty one quarter, consistent with the Consolidated Appropriations Act of 2021 and the American Rescue Act of 2021, where eligible employers can claim a maximum credit equal to seventy percent of ten thousand dollars of qualified wages paid to an employee per calendar quarter. 09:21 The general requirements to be eligible to claim the credit is a twenty percent or more decline in gross receipts in the calendar twenty twenty one quarter compared to the same quarter in calendar year twenty nineteen and five hundred or fewer full-time employees based on the average of the twenty nineteen calendar year. Additionally, we received the one hundred and twenty five thousand dollars litigation settlement in the September twenty twenty one quarter, which was reported as a credit to other non-interest expense, which we consider a one-time item. 09:57 Our short-term strategy for balance sheet management is unchanged 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. 10:11 In the interim, we are redeploying excess liquidity in government-sponsored mortgage-backed securities with an estimated average life of approximately four years. We exceed well 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. However, we also recognize that prudent capital returns to shareholders through stock programs is a valid capital management tool and we repurchased approximately fifty thousand shares of common stock in the September twenty twenty one quarter, under the April twenty twenty stock repurchase program. 11:01 We encourage everyone to review our September thirty, 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 solid financial foundations supporting the future growth for the company. 11:20 We will now entertain any questions you may have regarding our financial results. Thank you. John?

Operator: 11:29 And our first question comes from Nick Cucharale with Piper Sandler. Go ahead please. Your line is open.

Nick Cucharale: 11:54 Good day, Craig and Donavon. How are you?

Donavon Ternes: 11:56 I’m well. Thank you.

Craig Blunden: 11:57 Thank you.

Nick Cucharale: 11:59 Good. Thank you. So first, I wanted to start with loan production. I appreciate the commentary in the prepared remarks, but can you provide some color on the environment you're seeing and how that may unfold? Do you see production accelerating as we head into calendar twenty two?

Craig Blunden: 12:16 Donavon?

Donavon Ternes: 12:17 Yeah. I think what we see is a highly competitive market. So few things with respect to multifamily and commercial real estate, it seems like activity is improving and borrowers are returning to the market, purchasers 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 is much improved with respect to funding volume there. Then certainly it was a year ago or even perhaps nine months, six months ago. It's better today. 13:38 With respect to single-family, a couple of things are occurring, mortgage rates have begun to climb with respect to thirty year fixed. That may slow some production with respect to refinance activity. Although, the purchase money market is still very strong, but if we think about where interest rates are today and we take out the refinance market that could ultimately be net negative, if you will with respect to the opportunity of 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 thirty year fixed has gone up over the course of last month or so. And that certainly is an impact with respect to refinance activity. But that also may mean that our 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.

Nick Cucharale: 15:10 That's very helpful commentary. Just given the excess liquidity position, is there opportunity to restructure some borrowings and further drive down funding costs?

Donavon Ternes: 15:21 There are opportunities with respect to that. We 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 to kind of elaborate 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 rate 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 or rise a bit 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 a month or two, too early relative to where those current rates are and relative to what that been prepayment penalty would look like a month or two later. So, it's not an easy decision and there's a bit of forecasting involved with respect to that prepayment. But there is opportunity and we've done so in the past and we could potentially do so in the future. 17:01 Although, the other alternative with respect to that liquidity is to go out and put on relatively short-term mortgage backed securities or the like and then we're flipping from fifteen basis point yield call it, two hundred basis point yield. And that would also show improvement with respect to the use of liquidity as it relates to our net interest margin.

Nick Cucharale: 17:28 Okay. And then lastly, on the tax rate, this quarter's level is still below where you've historically run, what you pointed out was in part at least due to the employee retention tax credit. What's your expectation for the go forward tax rate?

Donavon Ternes: 17:43 So our statutory tax rate on a consolidated basis is twenty nine point five six percent 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 twenty nine point five six percent. So we always describe twenty nine point five six percent as their statutory tax rate, but in any given quarter, there can be implications on that tax rate with respect to temporary or permanent differences between book and tax.

Nick Cucharale: 18:36 Thank you for taking my questions.

Operator: 18:41 Our next question is coming from Ben Gerlinger with Hovde Group. Go ahead, please.

Ben Gerlinger: 18:46. Hey. Good morning, guys.

Donavon Ternes: 18:48 Good morning.

Ben Gerlinger: 18:49 I was wondering just too quickly follow-up on the retention tax credit. I know having conversations with on than that, it was a potential to see the continuation. I was curious if you had anymore clarity on that. I know from my past conversation, I believe there would have been one more additional quarter. So just that would be first question.

Donavon Ternes: 19:14 Yes. So a little bit of color on that. In the current administration's proposal for their build back better plan, the employee retention tax credit would end at September thirty rather than it's currently scheduled at December thirty one. They're 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. 20:04 And then secondarily, as it relates to the general criteria that we mentioned earlier or that Craig mentioned in his prepared remarks, the twenty percent decline in revenue is the general task from the current quarter to the base year quarter, but there's also a provision that describes if you have qualified in the previous quarter, you automatically qualify in the subsequent quarter as it relates to that twenty percent revenue test. 20:43 In 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 twenty nine or twenty nineteen. 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. 21:17 As a result, December will have to stand on its own with respect to the twenty percent revenue test. And we cannot qualify based upon the sequential quarter because we didn't qualify in September. And therefore, it is -- I wouldn't say unlikely, but 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.

Ben Gerlinger: 22:03 Got you. Okay. That's helpful color. And then my follow-up kind of had to talk to off the next previous question about the loan growth mix and how it relates potentially to the margins. Are you seeing sustainability within the mix of sale? I know that the current margin was a little elevated due to some kind of non-core events that more so kind of truing up. So anything about the margin for the next couple of quarters, do you think we'll have a little bit lower or do you think they're kind of sustainable in this two seventy area of given the momentum in the shift?

Donavon Ternes: 22:45 So, if I think about the two seventy one margin for the September quarter, we've described about ten basis points out of two particular components. Number one component was the decline in the net deferred loan costs in September quarter from the June quarter that is purely a function of which loans payoff and how much volume pays off. And the fact that we declined to about fifty three million dollars or fifty four million dollars if 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 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 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 two seventy one. 24:14 The second component was with respect to two specific charge-offs loans that paid in full during the September quarter. There was approximately in addition to the charge-off that we recovered, which was including those two loans about one hundred and sixty five thousand dollars for the quarter. There's about one hundred and thirty nine thousand dollars 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 two seventy one margin, so there's ten basis points on that two seventy one 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 in the December quarter depending upon the outcome of those two areas. 25:38 But I do think it's quite possible that we should be above our net interest margin relative to the low point path we hit in the June quarter, which was two fifty four. So that's the color I have, I guess if you can forecast payoffs and what that means to net deferred loan costs and which the our charged-off loans pay us back in full, it becomes more meaningful on your forecast with the margin.

Ben Gerlinger: 26:12 Right. Yeah. I know. I get that there's a lot of moving parts and a lot of unknowns, the color commentary is really helpful. I think that's all I have. I appreciate the time, guys. Solid quarter, I'll step back.

Donavon Ternes: 26:28 Thank you.

Operator: 26:30 At this time, we will go to Tim Coffey with Janney. Your line is open. Go ahead, please.

Tim Coffey: 26:37 Thank you. Good morning, gentlemen.

Donavon Ternes: 26:40 Good morning, Tim.

Craig Blunden: 26:41 Good morning, Tim.

Tim Coffey: 26:41 Hey, Don. If you can say that the question on the margin, looking at your period and balances of cash and equivalents, they were greater than the average balances during the quarter. What is the appetite for you to start really kind of allocating that and in this next quarter or two because it seems like that would have a big impact on your margin too, if that were sit there or grow?

Donavon Ternes: 27:05 Yes. Your observation is correct. And that -- we don't like to see our cash equivalents -- cash and cash equivalents probably above the seventy million dollars level or so, and our ending balance is larger than that. So we can redeploy that either preferably into loans, a new loan origination and purchase production, or secondarily into investment securities. So we get more 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 we pick up eighty five basis points or so, and that's meaningful. So, we look at that all the time and to the extent that it gets elevated, we put it to work in one place or the other, the default position is investment securities.

Tim Coffey: 28:12 Okay. In the past, in the quarter, we're starting to see the -- I guess businesses has become more active and starting to pay off across the industry right now. Did the level that you saw this quarter, was that greater than your expectations?

Donavon Ternes: 28:29 Well, no, I mean, the payoffs we saw this quarter were down substantially from where they were in the June quarter and March quarter. In fact, I think it's the lowest level that we’ve seen in some time. I haven't gone back and looked at each quarter, but the fifty three point nine million dollars 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 we’re essentially a four percent annualized loan growth rate and that's hampered to some degree by payoffs. 29:15 But 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 multi-family and commercial real estate payoffs because we see more activity in that sector because I think everybody has gained a bit more confidence with respect to the economic environment. So the two may be offsetting I guess, the way I would describe it, if you look at the fifty three point nine million this quarter in comparison to the seventy nine point nine million dollars in the June quarter, that's probably our range of payoffs in the December quarter.

Tim Coffey: 30:07 Okay. All right. That's helpful. Thank you. And then Craig, just looking at the cash dividend, you haven’t increased it since twenty seventeen, 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 year?

Craig Blunden: 30:28 Tim, that's a question that hasn't come up to be honest, we haven't discussed that this time. Certainly, towards possibility, but I think we're at a – I think we are at pretty good level where we are and again, but of course, we like to continue the stock buyback.

Donavon Ternes: 30:52 Yeah. I would argue the same point that Craig is making. I think the cash dividend yield is around three, it's over three percent right now. That's a pretty decent yield with respect to the cash dividend. And to the extent that you pointed out, there is 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.

Tim Coffey: 31:38 Okay. All right. Great. Thanks. Those are my questions.

Operator: 31:45 And we're going now to Rob Cook (ph) with PRV (ph)? Go ahead, please.

Unidentified Analyst: 31:52 Hi, there. I was just wondering, do you have any kind of internal ROE, ROA targets that you sets forth through that the board sets forth through this institution?

Donavon Ternes: 32:10 Well, we obviously developed a business plan each year and contained in our business plan, our various targets, including net income ROA, ROE efficiency ratio and the like. So the answer is yes, but that's internal we don't publicize or describe those numbers publicly.

Unidentified Analyst: 32:42 It just seems to me, we were underperforming quite a bit, it is all. That's just I guess a little bit of the frustration probably from shareholders that have been involved in the story. It's one thing when the market doesn't value your company, your deposits, but there's a compounding ROE effect, you can sit there, you can be patient, 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.

Donavon Ternes: 33:29 I appreciate. Yeah go ahead.

Craig Blunden: 33:31 Hey, Rob. I appreciate your frustration. And I have to agree with you some and as far as the value of deposits today, that's always been what we thought over time was our franchise value in an area that has lost most of the institutions like us. However, today, the institutions I talked to are all wash in cash. And the future value is there, but the current value, I don't think is that strong today, unfortunately. And I think people understand that.

Unidentified Analyst: 34:19 Yeah, sure. And that it takes two to make a market. That's just where I differ for a little bit, because I do think there is some forward thinking bankers in the state of California and other states that happen 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 about that that would be the last thing I would suggest but there's still an appreciation for deposits out there. There's still are good bankers. There's still are people that believe that rates will go higher at some point. So I guess, 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 ROE.

Craig Blunden: 35:09 Could be, and I'm sure they’re probably are. To be honest, I haven't heard from them.

Unidentified Analyst: 35:18 Okay. Thanks, guys.

Craig Blunden: 35:20 All right. Thank you.

Operator: 35:23 And after that prompt, we have no additional questions in queue.

Craig Blunden: 35:39 All right. If there's no further questions, I'd like to thank everybody for participating in our quarterly conference call. I look forward to speaking with all of you next quarter. Thank you.

Operator: 35:53 Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T event conferencing. You may now disconnect.