Earnings Call Transcript - PROV Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Earnings Call. As a reminder, this conference is being recorded, and a replay will be available for you to listen to starting at 11:00 a.m. Pacific Time today and running through August 5 at midnight. To access that replay, dial (866) 207-1041, enter the access code of 1060286. International callers will use the number of (402) 970-0847. And again, that access code is 1060286. 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.

Craig Blunden, Chairman and CEO

Thank you, John. 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.

Operator, Operator

And our first question, we will go to Nick Cucharale.

Nick Cucharale, Analyst

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?

Craig Blunden, Chairman and CEO

Don?

Donavon Ternes, President, COO and CFO

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, although it also gives us opportunity with respect to new origination volume.

Nick Cucharale, Analyst

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

Donavon Ternes, President, COO and CFO

The purchase market remains quite challenging, as indicated by various anecdotal reports. There's still a significant amount of activity and very low inventory. However, the limited inventory isn't primarily due to demand; it seems that sellers are not listing their homes as frequently as before. When new listings do become available, they tend to sell quickly, indicating strong demand for single-family homes. The current inventory relative to purchase volume is under 2 months, which is historically low. There is considerable activity in terms of purchase volume, but this is dependent on sellers actually listing their homes.

Nick Cucharale, Analyst

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

Donavon Ternes, President, COO and CFO

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 nontaxable at the state level. And so that provides a bit of a benefit to us in a particular quarter that it's taken.

Operator, Operator

Next, we have Ben Gerlinger with the Hovde Group.

Ben Gerlinger, Analyst

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 and see if the possibility for the next couple of quarters, and 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.

Donavon Ternes, President, COO and CFO

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 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.

Ben Gerlinger, Analyst

And then my last one, I understand that, obviously, the dividend is important, and you've repurchased shares in the past couple of quarters. As you guys continue to operate and produce positive earnings results, the tangible book continues to go up with that respect. Is there kind of a red line in the sand that where repurchased would become a priority? Or is dividend the sole focus?

Donavon Ternes, President, COO and CFO

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 or continues to be a part of our capital management. But frankly, we would prefer loan growth and leveraging the 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.

Operator, Operator

Next, we will go to Tim Coffey with Janney.

Tim Coffey, Analyst

Craig and Donavon, could you share your thoughts on your concerns regarding future loan originations, particularly in light of the recent health warnings in your area, specifically L.A. County and the mask mandate?

Donavon Ternes, President, COO and CFO

As I think about what is occurring with respect to the health conditions and how local governments are responding, I think there might be a minor or a small impact, but 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. We've had mask mandates. We've had advisories or the advice of 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 slowed 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 decline in protocols or fewer protocols, and so perhaps we see something there. But I think as well what we've seen, 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 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, Craig?

Craig Blunden, Chairman and CEO

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

Tim Coffey, Analyst

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

Donavon Ternes, President, COO and CFO

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 to conduct those things on a safe health basis, if you will. So yes, we don't see any of that right now.

Tim Coffey, Analyst

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

Donavon Ternes, President, COO and CFO

The June quarter was quite a standard quarter for us in this regard. Cash and cash equivalents remained mostly unchanged compared to the March quarter. We reduced our investment security balances, which are lower-yielding during that time. Loans held for investment increased, deposits rose, and borrowings decreased. We need to continue this trend for several consecutive quarters to support the net interest margin. It's important to note that our single-family portfolio is mainly adjustable rate. Even though borrowers are receiving adjustment notices and yields are decreasing, many are still choosing to refinance into lower-rate 30-year fixed products. This has implications for our net interest margin as those portfolios tend to adjust downward. As highlighted in our earnings release, the yield on single-family residential loans dropped significantly, while yields on multifamily, commercial real estate, and construction loans, though also decreasing slightly, did not drop nearly as much as single-family loans did.

Tim Coffey, Analyst

And certainly, your loan growth outlook, I think our origination outlook is positive as well to that goal. All right, gentlemen, those are my questions.

Operator, Operator

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

Craig Blunden, Chairman and CEO

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.

Operator, Operator

And 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.