Provident Financial plc

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter earnings call. At this time, all participants are in the listen-only mode, and later we will conduct the question and answer session. Instructions will be given to you at that time. If you should require assistance from an operator offline, you may press a star then zero. As a reminder, this conference is being recorded today. It's now my pleasure to turn the conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donovan Turnis, our President, Chief Operating and Chief Financial Officer. We do hope that all of you and your families are doing well, staying safe during this health and economic crisis. 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 and 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 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. From the annual report on Form 10-K for the year ended June 30, 2019, and from the Form 10Qs and other SEC filings that are filed subsequent to the Form 10K. Forelooking statements are effective only as the dates are made, and the company assumes no obligation to update this information. To begin with, thank you for participating in our call. I hope that each of you has had an opportunity to review our earnings release, which describes our third quarter results. In the most recent quarter, we originated and purchased $28.8 million of loans, health, or investment, a decrease from the $81.6 million in the prior sequential quarter. During the quarter, we also experienced $55.7 million of loan principal prepayments and payoffs, which is down from the $65.2 million in the December 2019 quarter, but still tempering the growth rate of loans, health, and investment. In the March 2020 quarter, there were two loan purchase packages from different sellers that we did not settle. Unfortunately, we could not complete our due diligence on individual loans consistent with our underwriting requirements, and we could not obtain satisfactory protections in the whole loan sale and servicing agreement. Additionally, we canceled another loan purchase package scheduled for an April settlement for the same reason. It's very difficult to get comfortable purchasing loans from others in the current environment. For the three months ended March 31, 2020, loan shelter investment decreased by approximately 3% in comparison to December 31, 2019, with declines in all loan categories. New loan production is uncertain for California lenders because of the sheltered home constraints and the difficulty in obtaining certain underwriting documents, such as verifications of employment, and IRS tax transcripts, among others. We are very pleased with the current credit quality, and you will note that early-stage delinquency balances were $2.8 million at March 31, 2020. In addition, non-performing assets remain at very low levels and are just $3.6 million, which is down from the $6.1 million at March 31, 2019, a 41 percent crime during the course of the year. However, the recent situation regarding the pandemic will certainly have negative implications for future loan credit quality, although it's far from certain what those implications may be. We are currently working with our borrowers to provide payment forbearance of up to six The forbearance amount will be due and payable in full as a balloon payment at the end of the loan term or sooner if the loan becomes due and payable in full at an earlier date. We believe our forbearance plan will meet the broad criteria accommodated by the CARES Act, the interagency regulatory guidance, and clarifying statements from the Financial Accounting Standards Board and the Securities and Exchange Commission. As a result, we anticipate we will qualify for the favorable provision cited in the guidance. Although to close the business on April 24th, we have yielded approximately 99 single-family forbearance requests by number, or $46.2 million by dollar amount, and approximately 89 multifamily commercial real estate and business loan requests by number, or $64.9 million by dollar amount. For single-family, we have processed approximately 13 eligible requests, three ineligible requests, and two withdrawn requests. Additionally, for mobile family, commercial, real estate, and business loans, we have processed approximately two eligible requests, ten ineligible requests, and nine withdrawn requests. You can tell from the numbers that we saw many requests are processed, but we anticipate we will be completed by mid-May. We recorded an $874,000 loan loss provision in the March 2020 quarter, primarily due to a qualitative component established in our allowance for loan loss methodology in response to the pandemic, which has negatively impacted the current economic environment. You will note we remain on the incurred loss model and have not adopted CECL. This means that our allowance methodology cannot be reasonably compared to CECL adopters. I also wish to refer you to slide 13 of our investment presentation, specifically footnote five of the commercial real estate table. The footnote describes the composition of our commercial real estate secured loan portfolio and the balances that may be considered higher risk in the current environment. Our net interest margin compressed by 23 basis points for the quarter ended March 31, 2020, compared to the same quarter last year. As we recall, about 22 basis points decreased in the average yield on total interest earning assets and a one basis point increase in the cost of total interest earning liability. Our average cost of deposit decreased by three basis points to 36 basis points for the quarter ended March 31, 2020 compared to the same quarter last year, highlighting the strength and value of our deposit franchise. The 3.3% net interest margin this quarter was negatively impacted by approximately eight basis points as a result of the increase in average of the net preferred loan costs associated with the loan payoffs in the March quarter in comparison to the average net deferred low-cost amortization of previous five quarters. Our non-interest expenses have declined significantly as a result of scaling back our operations regarding the origination of saleable single-family mortgage loans. Notably, our FTE count on March 31, 2020, was 183 compared to 298 FTE on the same date last year, And we have 10 fewer loan production offices and one less retail banking center in comparison to the same time last year. As a result, operating expenses declined approximately $7.5 million in the current quarter compared to approximately $13 million in the same quarter last year. However, it should be noted that we incurred approximately $1.6 million of one-time costs in the March 2019 quarter last year associated with the scaling back of the origination of saleable single-family loans. Additionally, on a sequential quarter basis, operating expenses declined by approximately one basis point as a result of the declines in salaries and employee benefits and occupancy expenses, partially offset by increases in equipment and professional expenses. A short-term strategy of balance sheet management is unchanged from last quarter. We believe that re-leveraging the balance sheet with crude oil portfolio growth is the best course of action, but executing on that strategy in the current environment may prove very difficult. We exceed well-capitalized capital ratios by a significant margin, allowing for us to execute on our business plan and capital management goals without complications. We believe that maintaining our cash dividend is very important to shareholders, and doing so takes priority over buyback activity. Nonetheless, we repurchased approximately 47,000 shares of common stock in the March 2020 quarter, but wish to emphasize that safeguarding capital is becoming increasingly important in the current environment and is the wisest course of action until we can get better clarity on the current economic landscape. We encourage everyone to review our March 31 investor presentation posted on our website. You will find that we included 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. We will now entertain any questions you may have regarding our financial results. Thank you.

Ladies and gentlemen, if you would like to ask a question, please press 1 then 0 on your touch tone keypad. You may withdraw your question at any time by pressing the 1 and 0 a second time. If you are on a speaker phone, we ask that you please pick up the handset before pressing any numbers. So once again, if you have a question, you may press 1 and 0 at this time. And our first question comes from the line of Tim Coffey with Jenny. Your line is now open, sir. Please go ahead.