Earnings Call Transcript - PROV Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. As a reminder, today’s conference call is being recorded. I will now turn the conference over to Craig Blunden. Please go ahead.

Craig Blunden, Chairman and CEO

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

We have a question from Tim Coffey. Go ahead, sir.

Timothy Coffey, Analyst

Good morning, gentlemen.

Craig Blunden, Chairman and CEO

Good morning.

Donavon Ternes, President, COO, and CFO

Good morning.

Timothy Coffey, Analyst

Can you real quick just go over the nonrecurring or the extraordinary items that flowed through the interest income this quarter?

Craig Blunden, Chairman and CEO

Yes, I'll take that, Tim. So first of all, we had about a 5 basis point net interest margin impact as a result of the accelerated net deferred loan costs coming from the particular loans that prepaid during the quarter. And then secondarily, we had approximately 4 basis point negative impact to net interest margin as a result of downgrading the forbearance loans that we extended, migrating them out of the forbearance category, which is acceptable accrued interest into the non-performing status where we had to reverse the accrued interest receivable on those. That was about $126,000 for the quarter and the impact was about 4 basis points compression to our net interest margin.

Timothy Coffey, Analyst

In the 5 basis points, how much was that in dollars?

Craig Blunden, Chairman and CEO

In dollars, I don't have that readily available or handy. Actually, you know what, I just grabbed it. It's about $132,000 for the quarter. So on an annualized basis, it's about 5 basis points on the net interest margin.

Timothy Coffey, Analyst

Okay, that's helpful. Is that just a function of the way the rates moved during the quarter, obviously, not the 4 basis points one, right? That's totally different. But the 5 basis points, is that just a function of the way the interest rates moved during the quarter?

Craig Blunden, Chairman and CEO

No. It's specifically tied to the prepayment of loans during the quarter. The specific loans either have net deferred loan fees or net deferred loan costs attached to them that are either accreted over the life of the loan or amortized over the life of the loan. With the loan paid off, the net deferred costs or net deferred fees, which in total were net deferred costs, had to be accelerated in the quarter of paid off. And that occurred in the December quarter. And that can deviate from one quarter to the next; number one, depending upon the absolute dollar amount of payoffs. As payoffs accelerate, there are more opportunities for net deferred costs to be accelerated. But secondarily, net deferred fees or net deferred costs are attached to individual loans. And depending upon which loans pay off, it will determine what occurs with respect to net deferred loan costs or net deferred loan fees that come into the income statement.

Timothy Coffey, Analyst

It's certainly not a new phenomenon, because we’ve seen this before in previous downgrade cycles. And also not a new phenomenon is kind of the pace of payoffs. Is it your expectation that, again, where you sit right now, reasonable to expect that there's going to be headwinds to net loan growth because of the payoffs? And so I guess to a certain extent, the challenges of finding new loans.

Craig Blunden, Chairman and CEO

Yes, I think that's fair, but I kind of want to put it in context. If we think about the payoffs that have been occurring, and you look at the starting and ending balances by loan category, you will see in the December quarter, single-family payoffs accelerated to such a degree that the single-family loan portfolio came down. The multi-family loan portfolio actually increased during the quarter. And the commercial real estate and construction loan portfolios came down just a bit during the quarter. So the phenomenon with respect to payoffs in the December quarter was primarily in the single-family area. And because we are in the fixed-rate market, we are with respect to where rates are with single-family, I would expect those payoffs to remain elevated. We did not see the same elevation in multi-family and commercial real estate during the December quarter, although that could occur as well. And then secondarily, with respect to generating or originating loans in any given quarter, that's a function obviously of competition as well as what we're looking to do as it relates to our underwriting. The key component there is to think about COVID-19 and how we responded with our underwriting criteria through COVID-19. In fact, we tightened underwriting standards in March of last year. We loosened them a bit in May of last year. We loosened them a bit more in November of last year, but still a bit tighter than where we were pre-COVID. And we are looking to perhaps loosen them again in the March quarter to probably get back to pre-COVID type underwriting as the impact of COVID becomes more transparent, if you will. And frankly, our portfolio has held up pretty well, except for that single-family category where we downgraded 16 or 17 loans.

Timothy Coffey, Analyst

Okay. Is it kind of your expectation that, again, where you sit right now that if you look at kind of provision expenses, it could be much closer going forward to the calendar second half of 2020 relative to the first half of calendar 2020?

Craig Blunden, Chairman and CEO

Yes. I think that as we look at our loan portfolio, the increase in non-performing loans came directly from the forbearance loans where we extended the forbearance beyond six months. But we're starting the March quarter with just eight loans in that grouping six single-family and two multi-family, so the source of those non-performing loans is far smaller than they were in the September quarter. And then additionally, if you look at how our allowance actually grew during the period, calendar 2020, as you suggest, March was the largest provision, June was the second largest provision, and then the September and December quarters declined in provision, even though the allowance had gone up. And lo and behold, we obviously saw then the deterioration in non-performing with respect to those forbearance loans, following what we had actually done in the provision. So if I think about the future provision, it again would be determinant or dependent upon what we see in non-performing loans as we go forward. And based upon what we see at the current portfolio level at December 31, it does not appear as if we would see a significant rise in non-performing given the position of the portfolio at December 31, and frankly, somewhat improving general economic conditions.

Timothy Coffey, Analyst

Okay. All right. I’ll stop there. Thank you very much, gentlemen.

Operator, Operator

And our next question is from Bob Shone. Please go ahead.

Unidentified Analyst, Analyst

Hi. Good morning. It’s Bob Shone for Matthew Clark. Maybe if we could just start with the downgrades and restructuring classified. Can you maybe give some color around what went into those restructuring of those loans? Maybe kind of weighted average LTVs and debt service coverage ratios? Just trying to get a better understanding of those 16 loans? Thanks.

Craig Blunden, Chairman and CEO

Sure. So with respect to the restructuring terms, none of the terms were changed as it relates to the notes other than the extending payment forbearance for another three months, and then the three months were tacked on to the back end with respect to repayment in a balloon. I don't have the specifics with respect to the weighted average LTVs of that portfolio. You can get a sense of where they were by looking at the September 30 investor presentation on Slide 13. You'll see the weighted average LTVs of the SFR loans at that time and a portion of that, or the 16 or 17 that were extended. Overall, we don't believe there is significant loss content, ultimately associated with those loans because you will see their lower LTV or well protected by the LTVs. And then secondarily, the California real estate markets are very, very strong, such that if those loans further deteriorated where we took them down the foreclosure path, because the borrowers were unable to begin making monthly payments again, we just don't see significant loss content, if you will. With respect to the specific provisions associated with that, while I don't know that we have it in our earnings release, you'll see it in the Form 10-Q. I believe the individually evaluated allowances associated with those loans were $570,000. And I think that $570,000 moved up from around $50,000 previously, so about $520,000 was specifically earmarked in the form of allowance against those loans.

Unidentified Analyst, Analyst

Awesome. That's great color. And then maybe if I can just sneak one more in regarding share repurchases. I know in your prepared remarks, you talked about that it's something that's going to be reevaluated. Maybe can you just talk about any change in willingness to start those repurchases? I know that the full authorization is still available and we've got kind of a run up in the price towards tangible book value. So maybe any color on that would be great. Thank you.

Craig Blunden, Chairman and CEO

Sure. So, we obviously understand where our capital positions are, where our opportunity lies, where we've been a little bit constrained with respect to growth in the fact that origination volume has not exceeded payoff volume. And so capital returns in the form of repurchases from our perspective is something we should be thinking about now. And secondarily, because we’re not through the COVID economy, if you will, or our economic situation, but because the vaccine has been rolled out and people are getting inoculated, it does appear to be something that should improve as we go through calendar '21. So it is back on the table for our consideration. That consideration, obviously involves discussions with our regulators. Those discussions are ongoing. And I guess that's the color I could provide at this time. The price to tangible book being near 100% or right around the same level or maybe a little bit above tangible book is not a hindrance per se because we think franchise value is obviously greater than that. Although, yes, it sure would have been nice to repurchase six months ago I suppose.

Unidentified Analyst, Analyst

Thank you for that. I'll step back.

Operator, Operator

And we have no other questions at this time. You may continue.

Craig Blunden, Chairman and CEO

Well, if there are no other questions, I want to thank everyone for attending 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 AM Pacific Standard Time today through February 4 at midnight. You may access the replay service at any time by calling 1-866-207-1041 and enter the access code of 8567286. Again, the phone number is 1-866-207-1041 with the access code of 8567286. And that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.