Provident Financial plc

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter earnings call. At this time, all participants are in listen-only mode. Later, we will have a question and answer session, and instructions will be provided for you regarding queuing up for questions at that time. Should you require operator assistance during the call, press star zero on your phone's keypad. As a reminder, this conference is being recorded, and a replay will be available for you to listen to starting at 11 p.m. or 11 o'clock a.m. Pacific time today and running through August 5th at midnight. To access that replay, dial 866- 207-1041. Enter the access code of 106-0286. International callers would use the number of 402-970-0847. And again, that access code is 106-0286. Once again, those phone numbers for domestic, 866-207-1041. International, 402-970-0847. 0847, access code of 1060286. Replay available from 11 a.m. Pacific time today through August 5th. And at this time, I would now like to turn this conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Thank you, John. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Providence Financial Holdings. And on the call with me is Donovan Chernus, 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 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 ACTS results may differ materially from those discussed today. Information on the risk factors that could cause ACTS 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 end of 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 the date that they are made, and the company assumes no obligation to update this information. We begin by thanking you for participating in our call. I hope that each of you has had an opportunity to review our earnings release, which describes our fourth quarter results. In the most recent quarter, we originated and purchased $93.3 million of loans held for investment, an increase from the $61 million in the prior sequential quarter. During the most recent quarter, we also experienced $79.9 million of loan principal and payoffs, which is up $75.7 million in the March 2021 quarter and still tempering the growth of loans held for investment. In the June 21 quarter, competition remains elevated for lower credit risk loan products, but it seems that many multifamily and commercial real estate borrowers are once again considering transactions as a result of better general economic conditions. For the most part, our underwriting requirements have returned to 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 of purchases in the September 2021 quarter will be similar to the volume we experienced this quarter. the three months ended June 30, 2021, loans held for investment increased by approximately 1% compared to March 31, 2021, with increases in the single-family and multifamily loan categories, partly offset by declines in the commercial real estate and construction loan categories. Current credit quality is holding up well, and you will note there are no early-stage delinquency balances at June 30, 2021. Additionally, Non-performing assets decreased to $8.6 million, which is down from $9.8 million on March 31, 2021. 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 expiration of their initial forbearance. At the time we extended the forbearance period Beyond six months, we downgrade the loans to non-performing status. As of June 30, 2021, there were three single-family loans in forbearance with a combined outstanding balance of approximately $897,000, or 0.11% 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 31, 2021, we ended new requests pursuant to our forbearance program. Existing forbearance loans will run the courses provided in their individual forbearance agreements and may be eligible for an extension. We recorded a $767,000 negative provision for loan losses in the June 2021 quarter. The allowance for loan losses to gross loans held for investment decreased to 88 basis points on June 30 from 98 basis points on March 31. You will note that we remain on an incurred loss model and have not adopted CECL. This means that our allowance methodology cannot reasonably be compared to CECL adopters. Our net interest margin compressed by six basis points for the quarter end of June 30, 2021, compared to the March 2021 sequential quarter as a result of a seven basis point decrease in the average yield on total interest-bearing assets, partly offset by a one basis point decrease in the cost of total interest-bearing liabilities. The decline in the average yield on total interest-bearing assets was primarily the result of a sharp rise in liquidity stemming from the significant loan prepayments and increase in total deposits, which were reinvested at lower yields. Our average cost of deposits decreased by two basis points, 15 basis points for the quarter ended June 30, 2021, compared to the prior sequential quarter. Our borrowing costs increased by approximately 16 basis points in the June 2021 quarter compared to the March 2021 quarter, primarily due to a $21,000 prepayment fee on a $10 million borrowing prepaid in June that was scheduled to mature in August 2021. The 2.54% net interest margin this quarter was also negatively impacted by approximately six basis points. As a result, the increase in amortization, the net deferred loan costs associated with the loan payoff in the June quarter in comparison to the average net preferred loan cost amortization of five previous quarters. We continue to look for operating deficiencies throughout the company to lower operating expenses. Notably, our FPE count on June 30, 2021 decreased to 161 compared to 178 FTE on the same date last year, a 10% decline. You will note that we recorded a $2.4 million credit for the employee retention tax credit in the June 2021 quarter consistent with the Consolidated Appropriations Act of 2021 and the American Rescue Act of 2021. Eligible employers can claim a maximum credit equal to 70% of $10,000 of qualified wages paid to employee per calendar quarter. The general requirements to be eligible to claim the credit is a 20 percent or more decline in gross receipts in the calendar 2021 quarter compared to the same quarter in the calendar year 2019 and 500 or fewer full-time employees based on the average of the 2019 calendar year. There are a few irregular operating expenses incurred in the June 2021 quarter. The first was an increase in stock-based compensation expense as described in the earnings relief, resulting from investing and distribution of common stock awards. And the second was a $170,000 settlement of a pre-litigation employment matter. 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 has proven difficult. In the interim, we are redeploying SLS liquidity and government-sponsored mortgage-backed securities with estimated average lives of approximately four years. We exceed the well-capitalized 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 buyback programs is a valid capital management tool, and we repurchased approximately $50,000 shares of common stock in the June 2021 quarter under the April 2020 stock repurchase program. We encourage everyone to review our June 30th investor presentation posted on our website. You will 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. In particular, slide 13 contains a forbearance table as of June 30, 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.

John? Ladies and gentlemen, to ask a question, press 1-0 on your phone's keypad. You will hear an audio tone acknowledging that you've been placed in the queue. If you repeat the 1-0 command, that will remove you from the queue. And our first question, we will go to Nick Couturier. You're open. Please go ahead.

How are you? Good morning.

Fine.

Good morning. So first I wanted to start with loan growth. I appreciate the commentary on the pipeline and the production outlook. I know it's early, but have you seen refinance activity slowing at this point in the quarter, or is it still elevated?

Donald? Nick, I think refinance activity began to slow in the June quarter as a result of the bump up in the 10-year Treasury yield and ultimately mortgage rates. But since that time, refinance activity has reversed in that it's grown a bit since the 10-year yield and mortgage rates have come down. For us, that puts a little bit of pressure perhaps on prepayments. We've seen the bulk of that prepayment activity occur in the single-family loan portfolio and although it also gives us opportunity with respect to new origination volume.

Okay. Can you help us think about the overall lending environment? Has the purchase market continued to normalize back to pre-pandemic times?

The purchase market is, you know, you read all the anecdotal data, very difficult. I mean, there's still a lot of activity, and there's very low inventory. but the low inventory isn't there because of the demand side of the equation per se. It's because the sellers aren't listing their homes as they once were, or so it seems. So to the extent that new listings come on, they are sold quite quickly, and so demand for single-family product is very robust. I think some of the numbers with respect to inventory on hand relative to purchase volume is something less than two months, which is at very low levels from a historical perspective. So a great deal of activity with respect to purchase volume to the extent sellers are actually putting their homes in listings.

Okay, that's great color. And just lastly, on the tax rate, this quarter's level is still below where you historically run. Was that partly attributable to the employee retention tax credit? And where do you see that fleshing out in future periods?

You know, our statutory tax rate on a consolidated basis, I think, is 29.56%. And so that's what we described to ourselves. And that's how we build our own business plan. Some of the other things that come into play is obviously the employee retention credit, as you described, which is taxable at the federal level but non-taxable at the state level. And so that provides a bit of a benefit to us in a particular quarter that it's taken.

Thank you for taking my questions.

Next, we have Ben Gerlinger with the HUBD group. Please go ahead.

Hey, good morning, guys. Morning. I was wondering if you guys could kind of expand a little bit more on the expense base in general. I understand that there's obviously the big retention tax credit this quarter. I was looking to see if you could kind of expand to see if the possibility for the next couple of quarters, obviously that will affect the tax rate. given the federal versus state level. And then from there, on the previous call, we talked about the branch network and if there's a potential for consolidation. I know you guys were reviewing that. I was wondering if you could just kind of expand on just those two aspects.

First of all, I'll address the branch network. As we described on the last call, We review our branch network primarily as leases become due, and we determine whether or not consolidation of branches should occur at that time. The second part of that is, to the extent we have a single branch in a single city in the county, it's probably unlikely that that we would consolidate that branch. On the other hand, to the extent that we have multiple branches in a particular city such as Riverside, which is the city in question, that's where consolidation would take place. With respect to the other components of the expense base, Craig mentioned in his prepared comments that we had a couple of things occur in the June quarter the pre-litigation settlement expense, as well as the investing and distribution of stock awards, which occurs infrequently every two years or so, where there are true-op expenses potentially as a result of that distribution in contrast to our forfeiture estimates. So those I would exclude in any forecasting activity. certainly over the next couple of quarters. And then other than that, you know, we described that we've decreased or have taken out about 10% of the FTE count over the course of the year. I would expect less activity as I look down, you know, to future quarters, definitely. because we've already done a great deal with respect to that FTE count. So I think in the past many of the estimates have come in between 6.9 and 7 million per quarter on kind of a normalized basis, and that seems reasonable given what we know has occurred over the last couple of quarters.

Okay, great. That's really helpful. And then my last one, I understand that obviously the dividend is important. And you've repurchased shares the past couple quarters. As you guys continue to operate and produce positive earning results, the tangible book continues to go up. With that respect, is there kind of a red line in the sand that where repurchase would become a priority or is dividend the sole focus?

Well, I don't think we have a sole focus as demonstrated by our actual activity. If I think about the hierarchy, we wish to support the cash dividend, obviously. But then as I think about stock repurchase activity, that's something that we've done historically, and it continues to take place. or continues to be a part of our capital management. But frankly, we would prefer loan growth and leveraging balance sheet over stock repurchase activity. So that becomes a capital management strategy within the context of generating earnings and increasing total equity. and our capital ratios and kind of bringing them down into better levels. So that's how we think about it. Okay.

Yeah, that makes sense.

I appreciate the call. I'll step back.

Thank you. Once again, ladies and gentlemen, for questions, press 1-0 on your phone's keypad. Next we will go to Tim Coffey with Janie. Go ahead, please.

Thanks. Morning, gentlemen. Morning, Tim. Craig Donovan, can you describe your concern level about future loan originations given the increased health warnings that we're seeing from your area, specifically LA County and the mask mandate?

As I think about what is occurring with respect to the health conditions and how local governments are responding. You know, I think there might be a minor or a small impact, but, you know, some of the things that we're seeing with respect to the new protocols or requirements in many ways are kind of old hat to everybody. You know, we've had mask mandates. We've had, you know, advisories or the advice of, you know, not gathering and social distancing and things of that nature. And guess what? It really didn't slow down the refinance activity that we've seen over the past year. And so I don't know that it would have a significant impact. Now, potentially it could have more of an impact with respect to multifamily and commercial and maybe slow some of that activity down because I think we did see an impact with owners and investors in those categories during the course of the pandemic, which seems to have improved now as a result of the pandemic. decline in protocols or fewer protocols and so perhaps we see something there but I think as well what we've seen you know I've kind of looked at everybody's numbers certainly competitors that we deal with and everybody's volume seems to have been pretty good this June quarter so you know there could be a limited impact I don't know that it would be a large impact. I don't know if you have any comments, Greg.

Well, it's just, you know, this is such a moving target, uh, Tim, you know, it's like, it's like a rollercoaster, you know, going up and down and up and down. And you don't, you don't really know where we're going to be from week to week. And in fact, you know, trying to run a company and, and, uh, figure out what your employees should be doing week to week. Um, is difficult as well. I don't know where all this is going, but I think I'd agree in general what Donovan has been saying on the market itself.

I remember a year ago we were having discussions about it being really difficult to do on-site inspection because of the restrictions. You don't see the same thing occurring again?

No, we've not seen that. We've seen that the protocols that had been established, all of that was overcome. And new procedures and activity has gone in that allow both lender and borrower documents you know, to conduct those things on a safe health basis, if you will. So, yeah, we don't see any of that right now.

Okay. And then you've done a great job year over year bringing down or reinvesting the excess liquidity that has found its way onto your balance sheet. Do you still feel that you have more levers to pull to support margin? Well, yeah.

I mean, the June quarter was kind of a textbook quarter for us as it relates to that. I mean, the cash and cash equivalents were essentially flat in comparison to the March quarter. We brought investment security balances down, which are obviously lower yielding instruments during that quarter. Loans held for investment increased during the quarter. Deposits increased during the quarter and borrowings came down during the quarter. We simply need to do more of that for consecutive quarters as we go down the timeline. And what that will then do, as you suggest, is support the net interest margin. Remember, one of the things to think about, our single-family family, portfolio is primarily adjustable rate. And even though borrowers are getting their adjustment notices and those yields are going down, they're still inclined to refinance those balances into lower rate 30-year fixed product. And so that has an implication for us as well as we think about the net interest margin because those portfolios are generally adjusting downward. In fact, if you look at some of the tables in the earnings release, you'll see that the yield on SFR loans came down significantly, but the yields on multifamily commercial real estate and construction, while coming down a little bit, those yields did not come down anywhere near what single family did.

Okay. Yeah, and certainly your loan growth outlook, I think our origination outlook was positive as well to that goal. All right, gentlemen, those are my questions. Thank you. Thank you.

And, sir, at this time, we have no additional questions in queue.

All right. Well, I'd like to thank everyone. for participating in our conference call and look forward to speaking with all of you again next quarter.

Thank you. 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.