Provident Financial Holdings Inc (PROV) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Welcome to the Provident Financial Holdings third quarter earnings call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Mr. Blunden, the Chairman and CEO. Please go ahead.

Thank you, Leya. 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.

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 state 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 on Form 10-K for the year ended June 30, 2020, 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 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 third quarter results. In the most recent quarter, we originated and purchased $61 million of loans held for investment, an increase from $29.6 million in the prior sequential quarter. During the most recent quarter, we also experienced $75.7 million of loan principal payments and payoffs, which is 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 multi-family and commercial real estate borrowers are once again considering transactions as a result of better general economic conditions. Additionally, we've seen growth in our single-family and multi-family pipelines, suggesting our originations and purchases in the June 2021 quarter will meet or exceed the volume we experienced this quarter.

For the 3 months ended March 31, 2021, loans held for investment decreased by approximately 2% compared to December 31, 2020, with declines in single-family, multi-family, commercial real estate and construction loan categories. 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 31, 2020. Please note that the nonperforming assets are largely comprised of forbearance loans downgraded to TDR nonaccrual 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 6 months, we downgrade the loans to nonperforming status.

As of March 31, 2021, there are 5 single-family loans in forbearance with the combined outstanding balance of approximately $1.8 million or 0.22% of gross loans held for investment, one multi-family loan in forbearance with an outstanding balance of approximately $308,000 or 0.04% of gross loans held for investment and 1 commercial real estate loan in forbearance with an outstanding balance of approximately $945,000 or 0.11% 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 denoted in their individual forbearance agreements and may be eligible for an extension.

We recorded a $200,000 negative provision for loan losses in the March 2021 quarter. The allowance for loan losses to gross loans held for investment decreased to 98 basis points on March 31st from 99 basis points on December 31st. You will note that we remain on the incurred loss model and have not adopted CECL. This means that our allowance methodology cannot be reasonably compared to CECL adopters.

Our net interest margin compressed by 6 basis point for the quarter ended March 31, 2021, compared to December 2020 sequential quarter as a result of a 16 basis point decrease in the average yield on total interest earning assets partly offset by 11 basis point decrease in the cost of total interest-bearing liabilities. The decline in the average yield on total interest earning assets was primarily the result of the sharp rise in liquidity stemming from the significant increase in total deposits and loan prepayments, which were reinvested at lower yields. Our average cost of deposits decreased by 4 basis points to 17 basis point for the quarter ended March 31, 2021, compared to the prior sequential quarter, and our borrowing cost declined by approximately 28 basis points for the March 2021 quarter in comparison to the December 2020 quarter.

The 2.6% net interest margin this quarter was also negatively impacted by approximately 7 basis points as a result of the increase in amortization of net deferred loan cost associated with the loan payoffs in the March quarter in comparison to the average net deferred loan cost amortization of the previous 5 quarters. We continue to look for operating efficiencies throughout the company to lower operating expenses. Notably, our FTE count on March 31, 2021, decreased to 162 compared to 183 FTE on the same date last year, an 11% decline. As a result of fewer employees and other cost savings, operating expenses declined to approximately $6.9 million in the current quarter compared to approximately $7.5 million in the same quarter last year, a decline of approximately 8%.

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 may prove difficult. In the interim, we are redeploying excess liquidity in government-sponsored mortgage-backed securities with an estimated average life of approximately 4 years.

We exceed well-capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications.

We believe that maintaining our cash dividend is very important and doing so takes priority over stock buyback activity. However, we also recognize that prudent capital return to shareholders through stock buyback programs is a valid capital management tool, and we began repurchasing shares in the March 2021 quarter under the April 2020 stock repurchase program. Approximately 55,000 shares of common stock were repurchased in the quarter.

We encourage everyone to review our March 31 Investor Presentation posted on our website. You will find we've 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 of the company. In particular, Slide 13 contains the forbearance table as of March 31, 2021, and Footnote 5 of the commercial real estate table describing the composition of our commercial real estate's 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. Leya?

(Operator Instructions) And our first question is from Tim Coffey with Janney Montgomery.

With the change in rates during the quarter and heading into this current quarter, what would be your expectations for changes in the amortization, that cost of NIM, 7 basis points last quarter?

Tim, it's Donavon. Payoffs are very, very difficult to forecast, but again, rising interest rates seem to have reduced to 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 payoff, they may contain higher or lower net deferred loan cost amortization. But all-in, if payoffs come 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 -- let's say in the range of prices that you'd be willing to buy back stock at, or even the size of purchases?

Well, yes, I don't think we would describe that. We're simply executing on our plan.

No, no, no. I wasn't asking you perhaps -- I was asking kind of more general. Was it something -- I mean, do you plan to be more aggressive than you have been in previous quarters 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 in the stock during any given quarter.

Next, we go to the line of Nicholas Cucharale with Piper Sandler.

Can you just 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?

Well, we're always looking at operating costs. And in fact, we're looking to reduce those or become more efficient as a result of the -- 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 the City of Riverside.

We have 5 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 that saves both in FF&E costs as well as, potentially, in personnel costs. So yes, it's something we look at all the time, particularly as new -- or as contractual relationships come due, we're looking to reduce costs wherever we can.

It'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?

Yes. I think our statutory tax rate on a combined basis is 29.6%, and that's very close to what we've been running, except for extraordinary circumstances, such as the stock-based compensation this quarter.

And next, we have a question from Ben Gerlinger with Hovde Group.

I was wondering if you guys could just take a step back and look at the broader market in general. I know that the California banking landscape has changed quite a bit over the past 2 months. I think something around 8 deals have been announced in the past 8 weeks. Given that changing dynamics and the disruption, for those not involved, there's usually opportunities. So I was wondering kind of how you guys are approaching kind of the changing landscape that you might have. I get that in the last question, you just addressed the branches, but from a lender opportunity or anything to that extent?

Well, as we think about the changing landscape, I think, any time that there is consolidation occurring, particularly in the primary geography that the institution or that the bank might serve, there is going to be opportunity for either deposit activity or loan activity. 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 is less opportunities there than one might think, again, because the environment we're in where loan growth is very difficult to come by and many of these acquiring institutions are looking for the acquired to help flip their growth plans. So competitively, I don't know that it makes a lot of difference. California is still well covered with banks, but there is opportunity to dislodge both customers as well as potentially personnel.

And we go back to the line of Tim Coffey with Janney Montgomery.

I want to -- I guess, I did have another question. I want to follow up on what Craig was -- had in his prepared comments regarding production and your outlook. It sounds pretty positive given the production in the quarter was very good relative to a year ago. The flip side of that is on payoffs, and I'm wondering, based on kind of the comments you provided a little earlier, Donavon, on kind of the margin, what your outlook is or your hope is for payoffs, how that's trending coming into this quarter?

Well, the March quarter was a very high payoff quarter. We had something like just over $75 million payoff. And I think, if you go back to quarterly payoffs, 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 payoffs -- or most of those payoffs 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 payoffs. 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 payoffs 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, we are more positive in origination volume based upon our pipelines today. Additionally, the origination volume that we saw in the March quarter 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's more activity. And that would then give us another opportunity to put on loan production. But right now, given what we see in our pipelines and given what we did in the March quarter, we would expect our origination and 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 of perhaps ginning up loan growth rather than the decline in loan portfolios that we've seen.

Right. Do you think you'll -- do you expect to see loan growth this quarter?

Very difficult to say that. Tell me what payoffs are going to do and what interest rates are going to do and maybe I can be -- give you a better-educated forecast.

Tim, this is Craig. If you know of a model to estimate payoffs, that's been the toughest thing for us to forecast for about as long as I can remember. It just seems extremely difficult to come up with the right number for payoffs. So let me know, Tim, if you see a model. Let me have a look at it.

I don't know if I have one of those right now, but I do know that if your payoff activity drops -- or is 80% of what you saw this last quarter, you probably do have positive loan growth this next quarter. So that's kind of what I was trying to look at.

Sure.

(Operator Instructions) And we have no other questions. You may continue.

All right. Well, since we have no other questions, I want to 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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