Provident Financial Holdings Inc (PROV) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Provident Financial Holdings First Quarter Earnings Conference Call. (Operator Instructions)

As a reminder, today's conference is being recorded. And I would now like to turn the conference over to your host, Craig Blunden. Please go ahead, sir.

Thank you, Brad. 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, 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 on the 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 your 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 $48 million of loans held for investment, an increase from $44.2 million in the prior sequential quarter. During the quarter, we also experienced $66.3 million of loan principal payments and payoffs, which is up from the $56.5 million in the June 2020 quarter and still tempering the growth rate of loans held for investment.

In the September 2020 quarter, it seems that mortgage markets have normalized to some degree, the competition is elevated for lower-credit risk product.

Additionally, we're still cautious regarding single-family loan purchase packages, particularly seasoned production because it is difficult to complete due diligence on individual loans consistent with our underwriting requirements. For the 3 months ended September 30, 2020, loans held for investment decreased by approximately 2% in comparison to June 30, 2020, with declines in the single-family and multifamily categories, partly offset by growth in the construction and other loan categories.

Current credit quality is holding up well, and you will note that early-stage delinquency balances were just $2,000 at September 30, 2020. In addition, nonperforming assets remain at very low levels and are just $4.5 million, which is down from the $49 million -- $4.9 million at June 30, 2020, and an 8% decline.

However, the situation regarding the pandemic is fluid and we may have negative implications for future credit quality, although it is difficult to discern and quantify the potential implications.

Additionally, we anticipate that some loans currently in forbearance will be downgraded as a result of not being able to resume their monthly payments. I also wish to refer you to Slide 13 of our investor presentation, specifically Footnote 5 of the commercial real estate table. The footnote describes the composition of our commercial real estate secured loan portfolio and the balances that may be considered higher risk in the current environment. We continue to work with our borrowers to provide payment forbearance of up to 6 months. But note that new requests for forbearance have significantly declined from levels experienced in March, April and May 2020. In the event forbearance is granted, the forbearance amount will be due and payable in full as a balloon payment at the end of the loan term or sooner if the loan becomes due and payable in full at an earlier date.

We believe our forbearance plan meets the criteria promulgated by the CARES Act, the interagency regulatory guidance and clarifying statements from the Financial Accounting Standards Board and the Securities and Exchange Commission. As a result, we believe that we qualify for the favorable provision cited in the guidance on the vast majority of forbearance loans.

As of October 20, 2020, there are 22 single-family loans in forbearance with outstanding balances of approximately $7.9 million or 0.90% of gross loans held for investment and one mobile family loan in forbearance with an outstanding balance of approximately $455,000, or 0.05% of gross loans held for investment. You will note the significant decline in the number and balance of loans in forbearance on October 20, in comparison to the September 30, 2020, balances described in the earnings release as a result of those loans that resumed monthly payments in October.

Additionally, as of October 20, just 7 loans scheduled to resume their monthly payments in October or November, with a combined principal balance of approximately $2.6 million, were granted an additional 3 months of forbearance relief. 6 of the 7 loans or approximately $2.2 million will be classified as restructured loans and downgraded to nonperforming status in October. 1 of the 7 loans was previously downgraded and classified.

Also for reference, we updated the information in the forbearance table on Slide 13 of the investor presentation to reflect the October 20, 2020, number and balances of loans in forbearance.

We recorded a $220,000 provision for loan losses in the September 2020 quarter, primarily due to an increase in the qualitative components in our allowance for loan losses methodology in response to the pandemic, which has negatively impacted the current economic environment.

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 11 basis points for the quarter ended September 30, 2020, compared with the June 30 sequential quarter as a result of a 15 basis point decrease in the average yield on total interest-earning assets, partially offset by a 5 basis point decrease in the cost of total interest-bearing liabilities. The decline in the average yield on total interest assets was primarily the result of the sharp rise in liquidity, stemming from the significant increase in total deposits and invested at nominal yields.

Our average cost of deposits decreased by 6 basis points to 24 basis points for the quarter ended September 30, 2020, compared to the June 30 sequential quarter, and we believe that further declines are likely given the current interest rate environment. The 2.84% net interest margin this quarter was also negatively impacted by approximately 5 basis points as a result of the increase in the amortization of the 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 5 quarters.

We continue to look for operating efficiencies throughout the company to lower operating expenses. Notably, our FTE count on September 30, 2020, decreased to 163 compared to 188 FTE on the same date last year, a 13% decline. As a result of fewer employees and other cost savings, operating expenses declined to approximately $7 million in the current quarter compared to approximately $7.2 million in the same quarter last year. Please note, though, that operating expenses in the September 2019 quarter last year had benefited from a $296,000 revision of our previously recognized loan settlement and lower deposit insurance expense of approximately $150,000, resulting from the FDIC implementation of a small bank assessment credit, neither of which were replicated this quarter.

As a result, current operating expenses declined by approximately $700,000 or 9% from the adjusted operating expenses in the same quarter last year. Additionally, on a sequential quarter basis, operating expenses declined by approximately 3% after adjusting for the $575,000 benefit in the June -- in the June 2020 quarter from the reversal of incentive compensation accruals not replicated in the September 2020 quarter.

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 and the current environment may prove difficult.

In the interim, we're redeploying excess liquidity and government-sponsored mortgage-backed securities with an estimated average lives 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.

As a result, we did not repurchase any shares of common stock in the September 2020 quarter and wish to emphasize that safeguarding capital has become increasingly important in the current environment and is the wisest course of action until we can get better clarity on the current economic landscape. We encourage everyone to review our September 30 investor presentation posted on our website. You will find we've 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.

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

(Operator Instructions) Our first question today comes from the line of Tim Coffey.

Kind of a 2-part question here. What is -- I mean, do you anticipate -- what's your outlook for loan growth or loan demand over the next 2 quarters? And how does that influence your appetite for future MBS purchases?

Tim, I'll field that question. First of all, when we think about loan growth, I've been monitoring, of course, many of the results coming out of financial institutions for the quarter. And it seems that everybody is struggling a bit with respect to loan growth. And it seems that, that is really the result of the economic environment that we're currently in. For us, in particular, some of our loan growth has come from purchasing pools of loans from other financial institutions. And that activity is very difficult with single-family product because if we think about trying to underwrite those borrowers, we'd re-underwrite everything. And when we think about trying to re-underwrite those borrowers, it becomes difficult to discern whether or not those borrowers have been impacted by the pandemic with respect to their income.

And so single-family purchases are difficult, and that brings our volume down a bit. We have seen some multifamily and commercial real estate packages. Those packages are a bit easier to underwrite in the current environment because the income is essentially generated from the property, and we can currently see rent rolls or get current rent rolls and the like. But still, because loan growth is so small across the industry, there are fewer packages out there for purchase because everybody is keeping those packages for themselves in their own portfolios. So as we think about where we're at in the cycle and the buildup of liquidity and excess cash that came in from deposits, we obviously move to purchasing mortgage-backed securities, relatively short average lives. We like the product because it is a cash flow product and it spins off cash over time, giving us the opportunity to reinvest it at a later date.

And we're essentially kind of through that process now to the extent that our liquidity balances have normalized from -- and pretty consistent with prepandemic levels such that the impact of moving that liquidity into mortgage-backed securities and ultimately, the impact to our net interest margin has kind of stabilized. So just as we saw the September quarter, our net interest margin compressed by a much smaller amount than in the June quarter and March quarters, we would also expect that on a go-forward basis because the balance sheet is kind of structured where it is without a great amount of excess liquidity that our current net interest margins are somewhat stabilized. And in fact, it could potentially see certainly a little bit of expansion. But if we see contraction, it would be certainly at a lesser rate than we've seen.

So I got into more than just loan growth in MBS, but I hope you appreciate the color on net interest margin.

No, I do. I mean that's kind of where the question was going anyway. What were the yields, the average yields on what you purchased in the MBS market this quarter?

The mortgage-backed securities are yielding anywhere from 60 to 90 basis points, call it, depending upon whether or not it's a 10-year fully amortizing, 15-year fully amortizing, 20-year fully amortizing or 30-year fully amortizing. So call it the high, just under 1%, I guess.

Okay. Now the deposit costs, you mentioned they could get a little bit lower, Craig, in your prepared remarks, but you're already at kind of historic lows for the institution. Are you kind of -- you think it's a moderate decline? Or that you'd bounce along the bottom? Or do you think you could take it to much lower?

Yes, I don't know that they can go much lower because they were at 24 basis points for the quarter. But certainly, they can come lower because there are CDs embedded in those deposit costs. And as the CDs mature, they are coming down in rate and allowing us to reduce deposit costs.

Secondarily, we're looking at our transaction accounts quite closely. And in many cases, we're in the single digits with respect to what we are paying on those deposits. But some of them are in the high single digits, so they can come down as well. I think quarter-over-quarter, we reduced the deposit costs by about 6 basis points. We still have some room to bring those deposit costs down. I don't know if it will be as much as 6 basis points. It's possible. But to some degree, it's dependent upon what we're seeing in liquidity needs and the like.

Secondarily, we're running a bit higher liquidity than we normally run as a result of the pandemic, just to have balances available depending upon what depositors are going to do with the deposits that they brought into the bank over the last 6 months. There's some sense that, perhaps, some of those deposits are not necessarily permanent.

Moving on to a broader question with respect to cost of funds, we also have maturities coming up in essentially the next 4 months with respect to Federal Home Loan Bank advances. I believe $10 million is maturing in December. And then we have another $10 million maturing in January. Our anticipation is that the cost of those advances, if we were to replace them, would be much lower than what their existing costs are. And in the event that we essentially use excess liquidity to pay those advances off, that would also reduce our overall cost of funds as well as our Federal Home Loan Bank advance costs.

Okay. That should be helpful, Don. And then just one last question from me, and it goes to the buybacks. What more do you need to see to allow you to start using the buyback? As we look at credit, it looks really good. Loan demand is what it is right now. But everything seems like you're going to have a stable [source of] capital for a while. So kind of what would it take to kind of reinstitute the buyback.

Well, let me start on that one. I think we really just need to see where this is headed in the next few months. I think we'll know a lot more then. And I also believe the regulators are wondering the same thing and hoping that institutions will protect capital levels when it's still uncertain as to how this pandemic will all play out in the economy. So I think we still need to wait a bit and look and see where this is all headed, even though, as you've already mentioned, I don't remember we've ever seen credit quality and delinquency levels quite this good.

Yes. The only thing I would add, we are monitoring that, Tim. And we have routine conversations as you expect with regulators. And we see a number of institutions have reinstituted buybacks. Some have even expanded the program. That -- or that activity has occurred, obviously, with regulator knowledge. And as a result of that, we would expect that the regulators are somewhat receptive to institutions going down this path. And so as we think about getting through our forbearance loans, which are now down to 23 loans, we're going to be largely through that this quarter, and we will understand more clearly, the near-term implications of credit. But it's still uncertain whether or not there's some intermediate implications with respect to credit.

As we think about the CARES Act expiring on December 31, what that might mean, and where multifamily rents may go and where some of our commercial real estate rents may go. Right now, it looks very, very good, and we're very pleased. But we're just a little bit cautious to understand that. I know our regulators are a little bit cautious with respect to that.

And I'm starting to wonder too. Tim, have you looked to see if there's a difference in regulator and the way they look at it for different institutions, whether they're state or the FDIC or whatever or versus OCC, I'm trying to get a sense of there's sort of different look depending on which regulator it is.

I had not.

It's certainly top of mind, Tim, and it's something that we would like to implement as soon as we get comfortable doing so, obviously, given the fact that we think our credit outlook is relatively good in comparison to others, and our stock is trading at 80% or 75% of tangible book.

And we do have a question from the line of Brett Rabatin.

I wanted to first ask, just maybe switching topics for a second, just thinking about expense management and various banks are looking at branch networks and doing other things and spending money on technology. Can you maybe give us an update on your thoughts on expense management this year, and any plans you might have to change the dynamic with the franchise with branches or investing in technology? And any thoughts on the expense base?

Do you want to take that, Donavon?

Sure. So the first thing I want to point out, we did describe in Craig's prepared remarks that as of September 30, we were down to 163 FTE, a 13% decline from the 188 FTE that we had last year September 30. A nuanced component of that is from June 30, 2020, to September 30, 2020, 15 of those 25 FTE reductions occurred. So more than half of that reduction occurred essentially in the September quarter. So we expect to see some cost saves with respect to salaries and benefits expense in the subsequent quarters as a result of that. So the $7 million, which is -- that we have had in operating expenses for the quarter, it was relatively a good baseline from where we are. But there's still a little bit of room downward on that $7 million base as a result of what we've done just in the September quarter.

Moving on to the branch system. Last year, we did reduce one of our branches in La Quinta. That followed an analysis as the lease was coming up for renewal. We are embarking on the same process for each of our branches that are coming up for renewal with respect to their leases. And that's really going to be dictated on that lease expiration to understand what it is we might be able to do there. So it's on the table.

But if you think about our branch network, if we're really thinking about branch consolidation or something to occur, we're probably limited to the branches in Riverside proper, if you will. For instance, our branch in Blythe can't be consolidated with another branch per se, and I wouldn't expect anything to occur there. But if we were thinking about doing anything, it would probably be in Riverside proper.

Another thing that's potentially on the table, which we're looking at and considering, we own some of our branches, and we've owned them for a long period of time. They were built in a different environment than today. The branch footprint does not need to be what it was in the past. So there's something that we could potentially do there with respect to selling those locations and relocating very close in either a leased space or a smaller space. So operating expenses are very top of mind for us. And if you look at one of the slides we have in our deck, it's Slide 4, on operating expenses, and you adjust for some of the nonrecurring or onetime items, so I'm going to describe it on an adjusted basis. If we think that last year's Q1 operating expenses were $7.7 million, the next quarter, we dropped to $7.6 million, the next quarter to $7.5 million, the June quarter of 2020 to $7.2 million, and now this quarter, we're at $7 million, and I expect we will drop a little bit in the December quarter as well, given these initiatives. But it's not the size of our network and where we have our branches is not conducive to a wholesale network change, if you will with respect -- because we want to represent ourselves in those cities that we're located.

Okay. That's great color. The other thing I just wanted to go back to was just the comments around, it's obviously an environment where people are looking for very high-quality assets. And so that's led to you having prepays. Any visibility into -- if that might slow as you've kind of had some of the higher-rate stuff be moved away? Or do you feel like that, that, [not at that,] level is probably going to continue at least for the near term?

I think prepays are probably going to be elevated for the near term. Not so much in our multifamily or commercial real estate portfolios necessarily. But we do have -- our second-largest portfolio is single family. And single-family rates are so low today that, essentially, all of our loans are in Blythe. So I would expect to see elevated payoffs for the foreseeable future, given where interest rates are. Now that obviously puts pressure on us with respect to the origination and purchase platform and the fact that we've generally been relatively conservative with our credit culture. And so that may place some growth discipline on us in the near term as we think about growing balance sheet in the loan portfolio.

Okay. And then maybe just one last one from me. Just thinking about credit, and obviously, you're in a really good situation credit-wise. Is the provision from here, just thinking about the reserve levels, does the provision from here continue to dwindle down a little bit, assuming that the charge-offs remain minimal and the growth is challenged?

I think that's fair, Brett. I mean, when you saw what we did with respect to provisioning in the March quarter after understanding what had occurred in that quarter, obviously, that provision was larger than the provision in the June quarter. And the June quarter's provision was larger than what we saw in the September quarter. So given our credit metrics and no significant deterioration from here, one could argue that our reserve is -- our allowance is probably where it should be without provisioning.

Now I will caution with one comment, for instance, in our prepared text, we described that 7 loans that were scheduled for repayment or to begin payments out of forbearance were unable to begin making those payments, and we extended them again. And the minute we did that, they became downgraded credits and nonperforming loans, and that will show up in the December quarter because this occurred in October. That's $2.2 million. So all else being equal, our nonperforming loans will go from $4.50 million to $6.7 million at December 31 with respect to the activity we already know about. Now while that suggests a higher nonperforming loan, we don't believe the lost content in those 7 loans that will increase nonperformers is significant because the LTVs are relatively low and the housing or single-family markets in California are very, very strong. So if they were to deteriorate further, and they would move off of discounted cash flows to establish the reserve into collateral dependency, I don't expect that there would be much in the way of charge-off with respect to those. So we could be in a situation where we see a bit of deterioration in the December quarter as a result of moving these loans out of forbearance into perhaps a troubled debt restructuring. But we only have 23 loans left with which to do that. And so I wouldn't expect a great deal of deterioration or provisioning around that activity. And provided we don't see deterioration either in our multifamily or the smaller commercial real estate portfolio, I think your point is probably valid with respect to our provisioning and where our current allowance is.

And we do have a question from the line of Matthew Clark.

On the -- the net loan growth, the single-family resi and multifamily, it sounds like there's potential there for resuming purchase activity, given your maybe increased comfort level there. Knowing prepays are going to remain elevated, is there an expectation that you might be able to kind of mitigate that runoff in those portfolios with resuming some purchases? Or should we continue to expect those balances maybe decline a little bit further here?

I think in the single-family portfolio, that or the portfolio may be the more difficult to maintain at current levels, given that mortgage -- single-family mortgage rates are so low and given the fact that it is difficult to purchase any seasoned portfolios in single-family at this time given the pandemic and trying to understand borrower employment and the like. So if I think about one of the portfolios as being more at risk than others, I would argue that it's the single-family portfolio, perhaps.

We have seen packages in multifamily. In fact, we did a little bit of multifamily purchase in the September quarter, down from other quarters, but it was about $9 million. We have a package we're going -- we're underwriting right now for the December quarter in multifamily. So that seems to be the area that we could perhaps see loosening in the credit markets within the context of packages being available for purchases. So that's something that could potentially help us to alleviate the pressure we have on portfolio's retraction and hopefully, getting it into a position where we stabilize it and begin growing it again.

Okay. And then on the production this quarter, do you happen to have the weighted average rate on that -- on those originations? So we can get a sense for where loan yields might be headed.

Yes, they were in the high 3s with respect to the production volume.

Okay. Okay. And then just the last one from me. Criticized, classified, I think you talked about $2.2 million moving to nonaccrual this coming quarter. But can you speak to the kind of the level or the amount in criticized, classified this quarter versus last?

Sure. I mean we actually had nonperformers move down at the September quarter in comparison to the June quarter. In fact, our total classified also moved down during that period of time. And we've hit very, very low levels from a historic perspective.

Secondarily, as of September 30, we did not see -- in fact, I think our delinquent loans were 0. I don't think we had any delinquent loans. It was about $2,000, I think, and that was some consumer stuff by probably checking accounts that were overdrawn. So there really wasn't 30-89 day delinquents, which is where you're classified and nonperformers come from, are 0. Now some of those loans in forbearance, which we've already described, there are others at September 30 that are in forbearance that were scheduled for October payments that may not be able to make their payments in November or December. They're not delinquent as of September 30 because they're in our forbearance program, meeting the criteria of the CARES Act or the interagency guidance. So potentially, there's some that can come out of those. But again, as of October 20, it's 23 loans. And if our experience on those 23 is similar to our experience on the others that have already resumed monthly payments, we would not expect a large percentage of those to get reclassified downward or into the TDR categories. Although it's possible that some percentage of that 23 will.

So we don't expect significant deterioration based upon what we see today in either nonperforming or classifieds, except for the fact that I've already described the $2.2 million.

(Operator Instructions)

All right. Well, I want to thank everyone for participating in our quarterly earnings call and look forward to speaking with all of you again next quarter. Thank you.

And ladies and gentlemen, today's conference will be available for replay today after 11:00 a.m. Pacific through November 5 at midnight. You may access the AT&T replay system at any time by dialing 1 (866) 207-1041, entering the access code 4191012. International participants may dial (402) 970-0847. And those numbers, again, are 1 (866) 207-1041 and (402) 970-0847, again, entering the access code 4191012. That does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.