Earnings Call Transcript - PROV Q3 2021

Operator, Operator

Ladies and gentlemen, thank you very much for standing by. Welcome to the Provident Financial Holdings Third Quarter Earnings Call. 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.

Craig Blunden, Chairman and CEO

Thank you, Leya. 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.

Operator, Operator

And our first question is from Tim Coffey with Janney Montgomery.

Tim Coffey, Analyst

Tim, 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, 7 basis points last quarter.

Donavon Ternes, President, COO, and CFO

Tim, it's Donavon. Payoffs are very difficult to forecast, but again, the rise in interest rates seems to have reduced the refinance activity at least from the anecdotal evidence that we're reading and that would suggest that payoff volume goes down, but then depending upon which specific loans pay off, they may contain higher or lower net deferred loan cost amortization. But all-in, if payoffs come down, which seems to be something we could anticipate, we would expect net deferred loan cost amortization to decline, which would then ultimately reduce the impact to our net interest margin.

Tim Coffey, Analyst

Right, okay. And then on the buyback, I saw you extended it this morning. Wondering, if you are considering making any other changes to assign the range of prices that you would be willing to buy back stock at or even the size of purchases?

Donavon Ternes, President, COO, and CFO

Well, yes, I don't think we would excuse me describe that. We are simply executing on our plan.

Tim Coffey, Analyst

No, no. I wasn't asking you, perhaps I was asking kind of more general or is it something you mean, do you plan to be more aggressive than you have been in previous quarters, given where the stock trades right now?

Donavon Ternes, President, COO, and CFO

Well, certainly, the stock is trading below book value right now and that suggests an opportunity, but that's also dictated by the shares available and the liquidity in the stock during any given quarter.

Operator, Operator

Next, we go to the line of Nicholas Cucharale with Piper Sandler.

Nicholas Cucharale, Analyst

Can you just 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?

Donavon Ternes, President, COO, and CFO

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 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 about 5 branches in Riverside property. 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 furniture, fixtures and equipment costs as well as potentially in personnel costs. So yes, it's something we look at all the time, particularly as new contractual relationships come due, we're looking to reduce costs wherever we can.

Nicholas Cucharale, Analyst

It's very helpful and thanks for pointing out the impact of the stock-based compensation on the tax rate this quarter. Do you expect the tax rate to revert back to prior periods in the June quarter?

Donavon Ternes, President, COO, and CFO

Yes, so I think our statutory tax rate on a combined basis is 29.6% and that's very close to what we've been running except for extraordinary circumstances such as the stock-based compensation this quarter.

Operator, Operator

And next, we have a question from Ben Gerlinger with Hovde Group.

Ben Gerlinger, Analyst

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 2 months. I think something around 8 deals have been announced in the past 8 weeks. Just given that changing dynamics and the disruption for those not involved, there are usually opportunities. So I was wondering how you guys are approaching the changing landscape that you might have? I get the last question, you just addressed the branches, but from a lender opportunity here to that extent?

Donavon Ternes, President, COO, and CFO

Well, as we think about the changing landscape, I think any time that there is consolidation occurring, particularly in the primary geography that the institution or the bank might serve, there is 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 are fewer opportunities there than one might think. Again, because 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 competitively, I don't know that it makes a lot of difference, as California is still well covered with banks, but there is opportunity to dislodge both customers as well as potentially personnel.

Operator, Operator

And we go back to the line of Tim Coffey with Janney Montgomery.

Tim Coffey, Analyst

I have another question. I want to follow up on what Craig mentioned regarding production and your outlook. It sounds quite positive, considering the production this quarter was significantly better compared to last year. However, I'm curious about payoffs. Based on the earlier comments you made, Donavon, about margins, what is your outlook or hope for payoffs and how that's trending as we enter this quarter?

Donavon Ternes, President, COO, and CFO

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. As a result of mortgage interest rates rising recently, 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 standards. So we could absolutely see payoffs replicate the March quarter, but that's not our expectation.

Tim Coffey, Analyst

Do you expect to see loan growth this quarter?

Donavon Ternes, President, COO, and CFO

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 more educated forecast.

Craig Blunden, Chairman and CEO

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

Tim Coffey, Analyst

I don't know if I have one of those right now, but I do know that if your payoff activity drops or is 80% of what you saw this last quarter, you probably do a positive loan growth this next quarter. So that's kind of what I was trying to look at.

Craig Blunden, Chairman and CEO

Sure.

Operator, Operator

And we have no other questions. You may continue.

Craig Blunden, Chairman and CEO

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.

Operator, Operator

Ladies and gentlemen, this conference is available for digitized replay after 11:00 a.m. Pacific Time today through midnight on May 5th. You may access the AT&T replay service at any time by dialing 1(866) 207-1041 and entering the access code 7861926. International participants may dial 402-970-0847 and use the same access code 7861926. And that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.