Provident Financial Holdings, Inc. (PROV) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter earnings call. [Operator Instructions] And as a reminder, today's conference call is being recorded.I would now like to turn the conference over to Mr. Craig Blunden. Please go ahead.

Thank you, Cynthia. 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 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, and the annual report on Form 10-K for the year ended June 30, 2018 and from the Form 10-Qs and other SEC filings that are 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, and I hope that each of you has had an opportunity to review our earnings release, which describes our fourth quarter results.Over the course of the fiscal year, our net interest margin has expanded, core deposits have been stable, credit quality has been strong, but our loan growth has been below our expectations as (inaudible) significant prepayments and our disciplined underwriting standards which have reduced loan origination opportunities.In the most recent quarter, we originated and purchased $51 million of loans held for investment, an increase from the $41 million in the prior sequential quarter. During the quarter, we also experienced $54.8 million of loan principal payments and payoffs, which is up from the $36.5 million in the March 2019 quarter, and still tempering the growth rate of loans held for investment.Additionally, we estimate that the increase and the acceleration to amortization of net deferred loan costs associated with the higher loan payoffs in the June quarter in comparison to the average of the previous 5 quarters compressed our net interest margin by approximately three basis points this quarter.For the three months ended June 30, 2019, loans held for investment decreased by approximately 0.5% in comparison to the balance on March 31, 2019, with growth in single-family and construction loans, a decline in multi-family and commercial real estate loans. Competition for new loan production remains heated, but we will not chase loan production volume if we must lose more underwriting standards to do so.We're very pleased with credit quality, and you'll note that early-stage delinquency balances were just $665,000 at June 30, 2019. In addition, nonperforming assets remained at very low levels and are now just $6.2 million, which is down from $7 million at June 30, 2018, an 11% decline during the course of the fiscal year. We recorded a small $25,000 negative provision in the June 2019 quarter resulting from the low levels of nonperforming classified assets in the fiscal year net recoveries. We're very pleased with these credit quality results.Our net interest margin expanded by 24 basis points for the quarter ended June 30, 2019 compared to the same quarter last year as a result of a 22 basis point increase in the average yield on total interest-bearing earning assets and a 3 basis point decrease in the cost of interest-bearing liabilities. It should be noted that our average cost of deposits decreased by 2 basis points for the quarter ended June 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. 8.52% net interest margin this quarter was compressed by approximately 3 basis points as a result of increase in loan payoffs, which increased acceleration -- accelerated amortization of net deferred loan costs.It's also noteworthy that our net interest margin remains at the top end of its range in comparison to many of our prior quarters. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that leveraging the balance sheet with (inaudible) loan portfolio growth is the best course of action. For the foreseeable future, we believe that maintaining a significant cushion above the regulatory capital ratios of 8% for Tier 1 leverage and 13% for total risk base is wise and a comp that we will be able to do so. We currently exceed each of these ratios by a significant margin, demonstrating we have the capital to execute on our business plan and capital management goals.Additionally, in the June '19 -- 2019 quarter, we purchased approximately 28,000 shares of common stock and continued to execute on substantial returns of capital to shareholders in the form of cash dividends and stock repurchases. We have largely completed the process of scaling back our operations regarding the origination of salable single-family mortgage loans, but we still have some work to do in improving on our efforts to increase the borrowing of portfolio single-family mortgage loan originations.As we described in the February 4, 2019 Form 8-K, we are committed to single-family lending and single-family mortgage loans made a large and growing component of our loan portfolio.As of June 30, 2019, single-family mortgage loans have grown to approximately 37% of our loan portfolio from approximately 35% on June 30, 2018. Over time, we will work toward increasing the percentage of single-family homes and reducing the percentage in mobile family homes in the loan portfolio while still growing both portfolios, resulting in a more balanced composition between these components which we believe will reduce our credit risk profile.Single-family loans will be originated and purchased, consistent with our past portfolio activity where underwrite the qualified mortgage standards and emphasize adjustable rate loan products. We encourage everyone to review our June 30 investor presentation posted on our website. You will find that we have included 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.We will now entertain any questions you may have regarding our financial results. Thank you. Cynthia?

[Operator Instructions]We do have a question from the line of Tim O'Brien from Sandler and O'Neill. Please go ahead.

Good morning, guys. First question. With the restructuring mostly completed, can you talk -- and also with the start of the new fiscal year for you, can you talk a little bit about strategic profitability goals for the year? Or maybe efficiency -- core efficiency goals for the New Year, what you'd like to try to get to?

Tim, you know we don't forecast any of our metrics. We would believe or we do believe that we'll be able to obviously reduce our efficiency ratio significantly from what we were running prior to getting out from under salable loan originations. And so we would look more like a traditional community bank, if you will, from the standpoint of those ratios. So we should see significant improvement there.The same thing is true with respect to profitability metrics. If you look at our investor presentation from the March 31 quarter, you'll see the component in there with respect to the losses that were occurring as a result of that salable mortgage loan origination and production. We would expect those losses obviously to be eliminated beginning in the July 1 quarter.Just to give you some color. When we look at our call report, in the call report, we described a number of FTE or full-time equivalent employees. At July -- or at December 31, we had 349 FTE. At March 31, we had 298 FTE. And at June 30, we had 187 FTE as a result of the actions we've taken. So we are beginning the September quarter or our Q1 quarter in fiscal '20 as a much more efficient company because balance sheet or the size of the balance sheet really hasn't changed significantly, although employment has.So because we don't provide guidance or provide a forecast with respect to our earnings and we can't give you specifics, although we did describe some of the nonrecurring or onetime costs associated with reducing employment. And in the June quarter, it was $1.2 million that we would expect not to be there in the September quarter.And additionally, the fact that we started the quarter with 298 FTE and we ended the quarter with 187 FTE, which suggests that there were also operating expenses in the fourth quarter that dropped into the adjusted number that will not be there in the September quarter. So that adjusted number is going to go down as well from an operating expense perspective.So there's still a lot of moving parts with respect to the actions that we've taken, and we really view the September quarter as our first clean quarter subsequent to those actions. And without forecasting or providing guidance, we think we'll be doing much better for obvious reasons than we (inaudible) up in the prior 4 quarters of fiscal '19.

Moving on, a lot of banks with the onset likelihood of a rate cut today, a lot of banks have been asked and talked about the profile of assets or earning assets or specifically loans that would immediately reset with a rate cut today. Do you happen to know that number? Can you give a sense of what the impact on your loan yield might be from this rate cut that is likely will occur today?

There are a couple of things for us specifically. First of all, I'll just point you to the March 31 10-Q, where we described a net interest income shock associated with a various -- or various rate shocks, instantaneous rate shocks of plus or minus 100, 200, 300 basis points. Let's focus on the minus 100 basis point shock at March 31. We forecast that the subsequent 4 quarters or the subsequent year after an instantaneous shock of minus 100 basis points would reduce our net interest income by approximately 5.86%.At June 30, we will also be publishing those numbers. And I'm not going to disclose them today per se because they'll be in our Form 10-K, but we were able to cut our exposure with respect to that negative 5.86% by about 38%, 39%, 40% in our modeling. So we believe we are in a better position at June 30 with respect to a potential downward move in interest rates than we were at March 31. However, we are still asset-sensitive, but less so than we were at March 31.And ultimately, as we go through the time line, because we described this as a minus 100 basis point shock on an instantaneous basis, we would obviously not expect a decline in net interest income by that amount because those declines will not occur instantaneously.There's one other complicating factor in our balance sheet with respect to this. So if you look at our balance sheet at June 30, you'll notice that we had 0 loans held for sale. And previously, we had loans held for sale. Those loans held for sale were essentially repricing into cash, if you will, within 30 to 45 days. Well, with 0 balance at June 30, we automatically extend the duration of our assets and take some of that interest-rate risk off the table in a downward scenario because of that.Secondarily, our cash position at June 30 is a little bit higher than we would like to see, generally speaking. And because that cash is earning effectively Fed funds rate, we have the ability to redeploy that cash into a portfolio of loan or loans which would yield a higher rate, and that actually creates a positive movement to our net interest margin to the extent we're redeploying that cash out of cash in the loans.So for our balance sheet, it's a little bit complicated because of the transition out of loans held for sale having a little bit more cash than we would like to see and being able to redeploy it. So if we're growing total assets subsequent to redeploying that cash, the belly of the curve, which is typically where we're getting our loans from, are at very low rates and we're funding on the short side. So like every other institution, that's essentially a decompression to net interest margin as growth occurs, but we have a little bit of time before that will occur in our balance sheet.

And that 38% to 40% potential adjustment that is going to be reflective in a sim for the calendar year second quarter. Does that take into account the reduction in held for sale loans? That factors that in, correct?

Yes. It not only factors that in, our model has all of the repricing characteristics of our loan portfolios. So as they adjust and as we are modeling or forecasting those numbers, all of our balance sheet, both on the asset side and the liability side, is repricing against that forecasted interest rates.

And by the same token, could you shed a little light on the near-term repricing characteristics in the deposit base, perhaps for the third quarter -- calendar year third quarter? Something that -- do you have a sense of other deposits -- do you have term deposits that are maturing in the third quarter? And could you characterize what their weighted average rate is? And how much?

You can see those deposit balances in the Investor presentation. And the interesting thing about what we've done during the course of rising interest rates, our deposit costs have not gone up. There's -- we've had no deposit beta or increasing deposit costs as a result of the rise in interest rates over the past couple of years. As a result of that, we also won't have any declining deposit costs probably as the Fed embarks on a (inaudible) path, if that's what they choose to do.The one exception to that is with respect to our retail CDs. So you'll see a balance in the investor presentation of retail CDs. We've been successful in repricing those very similarly to what their current costs are, but you will also note that those balances have been declining. And to the extent we grow balance sheet, we will have to become more aggressive in retail CD deposit pricing to make certain we not only lose deposits in that category, we also grow deposits in that category.So from the deposit side, we could actually experience a little bit more pressure than others even though the Fed is bringing down interest rates because we've had no upward movement in the cost of our deposits while the Fed was increasing interest rates.

That's helpful to note. I appreciate that color. Just getting back to the FTE reduction in the quarter, could you remind us -- 298 to 187. That 111 FTE reduction, when did the bulk of the -- of that take place in the quarter?

It was probably toward the middle of the quarter. So I wouldn't argue or describe it as the -- like the first month of the quarter. I would describe it more as the second month of the quarter.

And the $5.396 million comp line, expense line, that captures the restructuring comp cost of a couple of hundred thousand, but also the continued regular employment of that 111 through half the quarter essentially, correct?

Yes, it does. Although it additionally includes incentive comp with respect to loan origination commissions. And because commissions expense went down dramatically in the quarter as a result of fewer salable loan originations, the $5.396 million and then the $5.196 million, if you adjust out the $200,000 we described as onetime, that $5.196 million is not as impacted by those 111 FTE as you would think because many of those 111 FTE were commission-based employees and really not being compensated per se during much of that quarter because volume was so much lower.

How much of that staff was compensated on a -- primarily -- they all received base, right?

Not our retail originators, but there were employees who were straight commission.

At this time -- we do have another question from Tim O'Brien from Sandler and O'Neill.

So since I've got you, I guess I'll ask you another question or 2. Do you have a sense of what your go forward run rate tax rate, effective tax rate might end up being, Donavon?

Yes. We use the statutory tax rate of 29.56%. There's always discrete items that come in there, but that's the 21% plus the franchise tax with California on a blended basis. So 29.56%.

Great. And then of the $51 million in originations and purchases this quarter, do you happen to know what -- were there loans purchased this quarter? Was that predominantly in-house originations?

Approximately $25 million of that was purchased, and it was single-family that was purchased, and it was purchased and settled primarily in June.

Okay. And then as far as in-house originators, bankers, do you have a headcount there for the community bank where you're starting? And do you anticipate -- do you have plans to grow or build that out beyond -- you described -- you're fully staffed as far as single-family in-house production needs are concerned, right?

The way -- first of all, we don't describe those numbers per se for competitive reasons. But I would not also say -- or I would not suggest that we are fully staffed on an origination basis from a single-family perspective, and this is the reason.While we essentially moved out primarily of the retail channel, we still have some retail distribution occurring, but at a far smaller amount. So our primary channels now, with respect to origination and single-family, is purchase and wholesale. But secondarily, we are exploring correspondent again as a distribution channel. We've been in and out of correspondent channel historically through all of our single-family days, and that may become a new channel. And if that does become a new channel, there could be some new hires associated with that channel.And then our purchase activity, it is an interesting area that is a little bit easier to focus on now from a single-family perspective because it's going into portfolio rather than bifurcated between portfolio and salable. And I could envision a staff member there perhaps coming in to be able to deal in the secondary market and source these packages and work with what used to be our investors that now become loan sellers where we become the investor.

And then one last question. Other fee income was a little bit elevated this quarter. I mean just looking at trailing, can you break that down? Was there anything atypical in that, that we might not see going forward?

No. I think if you look at the slide that has other fees on it, it's Slide 4 in the lower left of our investor presentation, it looks like we average $1.3 million to $1.6 million per quarter, and I think that's a good run rate.End of Q&A

There are no further questions in the question queue.

All right. Well, if there are no further questions, we'd like to thank everyone for joining us on the call today, and we look forward to speaking with you all 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 Executive Teleconference Services. You may now disconnect.