Provident Financial plc

Ladies and gentlemen, thank you very much for standing by. Welcome to the Provident Financial Holdings third quarter earnings call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. If you should require assistance, you may press star, then zero, and we will assist you offline. 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, Leah. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Providence Financial Holdings. And on the call with me is Donovan Turnis, 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 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 Form 10-K. Forward-looking statements are effective only as the date they're 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 mobile family and commercial real estate borrowers are once again considering transactions as a result of better general economic conditions. Additionally, we have seen growth in our single-family and mobile family pipelines, suggesting our originations and purchases in the June 2021 quarter will meet or exceed the volume we experienced this quarter. For the three 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 estate, and construction loan categories. Current credit quality is holding up well, and you will note there are no early-stage delinquency balances at March 31, 2021. Additionally, non-performing assets decreased to $9.8 million per 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 six months, we downgrade the loans to nonperforming status Out of March 31, 2021, there are five single-family loans in forbearance with a combined outstanding balance of approximately $1.8 million or 0.22% of gross loans held for investment. One multifamily loan in forbearance with an outstanding balance of approximately $308,000 or 0.04% of gross loans held for investment. and one 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 31st, 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 six basis points 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 an 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 four basis points to 17 basis points from the quarter ended March 31, 2021, compared to the prior sequential quarter, And our borrowing costs declined by approximately 28 basis points in 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 seven basis points. As a result, the increase in amortization and net deferred loan costs associated with the loan payoffs in the March quarter in comparison to the average net deferred loan cost amortization of the previous five 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, 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 lives of approximately four 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 divot is very important, and doing so takes priority over stock buyback activity However, we also recognize that prudent capital returns to shareholders through stock buyback programs is a valid capital management tool, and we 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 31st 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 foundations 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 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. Leah.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press 1 then 0 on your telephone keypad. You will hear acknowledgment that your line has been placed in queue. Once again, if you would like to ask a question, please press 1, then 0 on your telephone keypad. And one moment, please, for the first questions. And our first question is from Tim Coffey with Jannie Montgomery. Please go ahead.

Hey, thanks. Morning, gentlemen.

Morning.

Morning, Tim.

Hey, 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 NIM seven basis points last quarter?

Hi, Tim. It's Donovan. You know, payoffs are very, very difficult to forecast, but again, a rise in interest rates seem to have reduced 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 pay off, they may contain higher or lower net deferred loan cost amortizations. But all in, if payoffs come down, which seems to be something we could anticipate, we would expect net deferred low-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. I'm wondering if you're considering making any other changes to it, saying the range of prices that you'd be willing to buy back stock at or even the size of purchases.

Well, yeah, I don't think we would, excuse me, describe that. You know, we're simply executing on our plan.

Right. No, no, I was going to ask, you know, perhaps I was, I was asking kind of more general. 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. Okay.

Okay. I understand. All right. Those are my questions.

Thanks, Tim. Next, we go to the line of Nick Coucherelle with Piper Sandler. Please go ahead.

Hi, Craig and Donovan. How are you? Well, thank you. Can you 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 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 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 five 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, yeah, it's something we look at all the time, particularly as contractual relationships come due. We're looking to reduce costs wherever we can.

That'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%. That's very close to what we've been running except for extraordinary circumstances such as the stock-based compensation this quarter.

Thank you for taking my questions.

And next we have a question from Ben Gerlinger with the Hovde Group. Please go ahead.

Hey, good morning, gentlemen. Good morning. 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 two months. I think something around eight deals have been announced in the past eight weeks. Just given that changing dynamic and disruption, for those not involved, these are 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 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 anytime that there is consolidation occurring, particularly in the primary geography that the institution or that the bank might serve, there's 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 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's less opportunity there than one might think, again, because of 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, you know, competitively, I don't know that it makes a lot of difference where California is still well covered with banks, but there is opportunity to dislodge both customers as well as potentially personnel.

Okay, that's really helpful. Most of my other questions I've been asked and answered, so I'll take a step back.

And we go back to the line of Tim Coffey with Jenny Montgomery. Please go ahead.

Thanks. I want to follow up on what Craig had in his 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 the comments you provided a little earlier, Donovan, on 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 significantly, 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, you know, payoffs, uh, uh, 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 volume 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 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 give you a better educated forecast.

Tim, this is Craig. If you know the 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, you know, extremely difficult to come up with the right number for payoff. So let me know if you see a model we ought to look at. Go ahead.

I don't know if I have one of those right now, but I do know that if your productivity drops or is 80% of what you saw this last quarter, you probably do have positive lung growth this next quarter. So that's kind of what I was trying to look at. Sure. All right. That was my last question. Thanks. Thanks, Tim.

And, ladies and gentlemen, once again, if you have any other questions, please press 1, then 0 at this time. 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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