Provident Financial plc

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions. To require assistance, please press star zero. As a reminder, this call is being recorded. And I'd like to turn it over to Mr. Blunden. Please go ahead, sir.

Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donovan Ternus, our President, Chief Operating and Chief Financial Officer. Before we begin, I have a brief administrative item to address. Our presentations 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 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 Farm 10-K for the year ended June 30, 2019, and from the Form 10Qs and other SEC filings that are filed subsequent to the Form 10K. Board 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 first quarter results. The fundamentals of the company continue to improve. our net interest margin has expanded, core deposits have been stable, credit quality has been strong, and loans originated and purchased for portfolio have been increasing over the past year. In the most recent quarter, we originated and purchased $93.4 million of loans held for investment, an increase from the $51.2 million in the prior sequential quarter. During the quarter, we also experienced $58.8 million $50.8 million of loan participation payments and payoffs, which is down from the $54.8 million in the June 2019 quarter, but still tempering the growth rate of loans held for investment. Additionally, we estimate that the decrease in amortization of net deferred loan costs associated with the lower loan payoffs in the September quarter in comparison to the average of the previous five quarters augmented our net interest margin by approximately four basis points this quarter. For the three months ended September 30 of 2019, loans held for investment increased by approximately 5% in comparison to the balance on June 30, 2019, with growth in single family, multifamily, and construction loans, but a small decline in commercial real estate loans. Competition for new loan production remains aggressive, and augmenting our loan originating activity this quarter with single-family and multi-family loan purchases. We're very pleased with credit quality and we'll note that early-stage salinquency balances were just $992,000 at September 30th, 2019. In addition, non-performing assets remain at very low levels and are now just $5.2 million, which is down from $7.4 million at September 30th, 2018, a 30% decline during the course of the year. We recorded a small $181,000 negative provision in September 2019 quarter resulting from the low levels of non-performing and classified assets and no meaningful charge-offs for many quarters. We're very pleased with these credit quality results. Our net interest margin expanded by 34 basis points for the quarter ended September 30th, 2019 compared to the same quarter last year as a result of a 33 basis point increase in the average yield and total interest earning assets and a one basis point decrease in the cost of interest bearing liabilities. Our average cost of deposits decreased by two basis points for the quarter ended September 30, 2019 compared to the same quarter last year. Over the course of the past 12 months, we've been able to hold the line on the cost of core deposits, highlighting the strength and value of our deposit franchise. The net interest margin this quarter of 3.64% was augmented by approximately four basis points as a result of decrease in loan payoffs, which decreased the amortization of net deferred loan costs. In addition, our net interest margin remains at the top end of its range in comparison to our recent prior quarters. Our non-interest expenses have declined significantly as a result of scaling back our operations regarding the origination of saleable single-family loans. Notably, our FTE count on September 30, 2019 was 188 compared to 363 FTE on the same date last year, and we have 10 fewer loan production offices and one less retail banking center in comparison to the same time last year. Additionally, we had two unusual items reduce our non-interest expenses for the current quarter. First item was the $296,000 reversion of a previously recognized legal settlement lowering our operating expenses for the quarter. The second item was approximately $150,000 benefit and lower deposit insurance premiums as a result of the FPIC implementation of the small bank assessment credits. We estimate that our small bank assessment credit will be available through March 31, 2020 and provide approximately $75,000 quarterly benefit for each of the next two quarters. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that re-leveraging the balance sheet of prudent loan portfolio growth is the best course of action. With a foreseeable future, we believe that maintaining a significant cushion above the bank's regulatory capital ratios of 8% for Chair 1 leverage and 13% for total risk base is wise. We're confident we'll be able to do so. Currently exceed each of these ratios by a significant margin, demonstrating we have the capital executed on business plan and capital management goals. Additionally, in the September 2019 quarter, we purchased approximately 17,000 shares of common stock and continue to execute on substantial returns of capital of shareholders in the form of cash dividends and stock repurchases. We encourage everyone to review our September 30th investor presentation posted on our website. You'll find that we include 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. Tricia.

Ladies and gentlemen, if you would like to ask a question, please press star then 1. You'll hear a tone indicating you've been placed in queue. Once again, if you have a question, please press star 1 at this time. We'll go to the line of Tim O'Brien with Sandler, O'Neill, and Partners. Please go ahead.

Good morning. Thanks, guys. Just a question on non-interest expense. So, you know, taking out the one-timers, the run, your non-interest expense for the quarter was around $7.7 million. Is that a baseline? Does that reflect, you know, everything out of it and, you know, Is it going to kind of grow with inflation beyond this, or do you have other initiatives that you're working on that might drive a little higher costs here going forward from that number?

Good morning, Tim. It's Donovan. That $7.7 million you described is a little bit higher than what we would suggest is our baseline. We suggest our baseline is around $7.5 million. as we think about the go forward quarters. And that does not include any additional activity we may have with respect to operating expense reduction initiatives. And secondarily, with respect to that number, we believe as we go forward and grow balance sheet, we will not have to meaningfully add to our operating expense base. I think a $7.5 million run rate on a go-forward quarterly basis is probably in the ballpark with respect to estimates.

And the $7.5 million excludes the FDIC credit?

Correct. And the FDIC credit runs about $75,000 per quarter is what to think about there, and we think we'll have that benefit provided the FDIC approves it. for the December quarter and the March quarter as well.

And now that, you know, your big changes and restructuring are settled out, looking out, you know, beyond the first quarter of your new fiscal year, do you have a sense of or can you share a little bit of detail about what your strategic goals might be with regard to efficiency? You know, what's a reasonable – What would be an acceptable efficiency rate that the board would like to see achieved for shareholders for this fiscal year?

You know, I think as you think about how we're going to achieve lower efficiency ratio, you have to think about us being able to grow total interest earning assets. And because this is largely going to come from increasing our net interest income as we go down the timeline. And the one thing to think about there, if you look at total interest earning assets for the September 30th quarter, it was a billion, 51 million call it, 52 million call it for the September quarter. We think that is the low point with respect to the activity that we've had over the course of the last year. Because our loans held for sale, which were adding to total interest earning assets in the September quarter last year, December quarter, March quarter, really didn't turn to zero until the June quarter of 19, and now the September quarter of 19. And we can now then grow from here, we believe. total interest earning assets of 1,052,000,000 at the September 30, 2019 quarter end, we believe is the low point as we think about going forward. So we think we can grow net interest income as we go down the timeline. And that will be the largest driver of lowering our efficiency ratio, because we've just suggested that our operating expenses are going to be where they're going to be and we won't have to increase them as we increase total assets.

And then changing gears regarding the margin, and Donovan, you've talked a little bit about this. Through balance sheet changes, you have moderated the asset sensitivity of the balance sheet. Can you give us any color on, you know, 25 basis point rate cut changes You know, all things considered, expected impact to your margin. A lot of guys are, you know, saying six to eight basis points. Some are saying five to ten, whatever. But do you have a sense of, you know, what the potential impact is to your margin from a, you know, an incremental 25 basis point cut?

It's going to have an impact, but we're not going to forecast the amount of that impact. The larger impact with respect to our margin is, is how aggressively we grow balance sheet. Because as we grow balance sheet, we're putting loans on college in the belly of the curve, you know, five, six, seven year weighted average for 40s, if you will, or weighted average months to roll. And we're funding that on the short end, we're funding it on the short end, because we do want to bring asset sensitivity down on the in the balance sheet. which we've been successfully doing, more towards neutral. We don't want to be liability sensitive per se, but we don't want to be as asset sensitive as we were, say, six months ago. And we've been successful bringing that down. So as growth rate increases, as we go down the timeline, that's going to contribute potentially to a smaller growth rate with respect to our net interest margin. But I wouldn't necessarily forecast compression for the December quarter with respect to net interest margin. But, you know, the 14 basis points sequential quarter increase that we received in September, that we demonstrated in September, is going to go down, I believe, from 14 basis points. Thanks, guys. I'll step back. Thanks, Tim.

Once again, if you have a question, please press star 1. Now to the line of Tim Coffey with Jannie. Please go ahead.

Thanks. Morning, gentlemen. Morning. The loan growth that we saw for the quarter, where is that in terms of a run rate going forward?

Well, the growth was about 5% for the quarter, so that's 20% annualized. I would not argue that we're going to be having a 20% annualized run rate or growth rate for the entire quarter, although I will say that we've seen more loan packages, and we've been able to successfully execute on those packages. to augment our internal originations. And by way of example, in the September quarter, we purchased approximately 63 million of the 93 million of loan growth. And we already have commitments out with respect to the fourth quarter or the December quarter in loan purchases but are not quite of the same size, but would suggest that we're going to grow loans in the December quarter as well, maybe not at that 5% rate.

Okay. Is the activity you've seen and the opportunity to buy loans, is that a result of the market unlocking or you being able to be more optimistic or rather creative in how you price these things?

I think it's a combination of both, but certainly one of the things we saw, particularly with respect to the single-family pool purchases that we completed in the September quarter, many of those loans in the packages were seasoned loans, and they might have been seasoned a couple of years. So as interest rates have come down over the last six months or so, We're now seeing that some seasoned loans that were once probably going to get priced at a discount because of where the rates were in comparison to current market, they're now being priced at a premium because those rates have come down significantly since the Fed action has occurred. So I think that unlocked some of our activities. And then secondarily, I think as a result of the changes we made with respect to single family. Change in focus. It's a change in our focus. And, you know, we have a pretty good single family group that we're using and we're able to tap the resources that we have developed in selling loans to certain counterparties to now being able to buy loans from those counterparties.

Okay. That's interesting. And when you look at kind of the geographic location of the collateral loan that you're buying, have you changed your parameters or does it continue to be in market?

No, it's statewide California still.

Okay. And then the loan yields were a bit stronger than I guess I anticipated this quarter. Obviously, there was some help in there, as you mentioned at the beginning of your prepared remarks, Craig. Was there anything else in there, or is this a relatively stable range?

Well, the other thing you have to note is that we have many loans repricing on an ongoing basis, and the margin to the index with respect to how they're repricing may actually be above the start rate at the time that we put those loans on, in portfolio. And that's particularly true with respect to multifamily and commercial real estate loans. Now that's counterbalanced by the new loan production that we're bringing on because the new loan production is obviously priced probably lower than the existing portfolio. And that's bringing some pressure on those loan yields. And then there's the other factor, which is the fact that even as the indices are coming down and the margin to the indices may suggest a drop in the loan rate at the time it reprices, some of these loans will reprice down to a floor so we won't get the full impact of them repricing downward because they're going to hit their floor. And again, that's in multifamily and commercial real estate production. When we think about our loan yields, even though rates have come down, we don't expect as much pressure to our net interest margin in those repricing characteristics of those loans. But we do acknowledge that as new loan production goes up, it's coming on at thinner spreads and that will have some compression effect on us.

Okay. And then kind of switching to the other side of the balance sheet on your CD balances, I think those are about 20% of total deposits. How much of that is going to be coming up for renewal in the next two quarters?

Well, for the next four quarters, so the next year, we have about $101 million, $102 million coming up for renewal. I don't have it broken down by quarter, but it's about $102 million, I believe, over the course of the next 12 months from September 30. Okay. And that may be productive. It may be counterproductive. It obviously depends upon where those yields are. Obviously, with interest rates coming down, that's helpful with respect to repricing our liabilities.

Right. Okay. Well, thank you. Those are all my questions.

Once again, any questions, press star 1. And there are no further questions in queue at this time.

All right. If there are no further questions, I want to thank everyone for participating in our conference call and look forward to speaking with you next quarter. Thank you.

Ladies and gentlemen, this conference will be available for replay after 11 a.m. today through November 6th. You may access the replay at any time by dialing 1-800-475-6701 and enter code 473332. International participants may dial 320-365-3844 and code 473332. That does conclude the call today. Thank you for your participation. You may now disconnect.