Provident Financial plc

Ladies and gentlemen, thank you for standing by, and welcome to the Providence Financial Holdings Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during today's call, please press start and zero. And as a reminder, this conference is being recorded. I would now like 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 Providence Financial Holdings. And on the call with me is Donovan Turnis, 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, 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 end of June 30, 2019, and from the Form 10-Qs and other SEC filings that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as the date that they're 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 fourth quarter and fiscal year results. In the most recent quarter, we originated and purchased $44.2 million of loans held for investment. an increase from the $28.8 million in the prior sequential quarter. During the quarter, we also experienced $56.5 million of loan principal payments and payoffs, which is up slightly from the $55.7 million in the March 2020 quarter and still tempering the growth rate of loans held for investment. In the June 2020 quarter, We found it a bit easier to originate purchase loans as the quarter progressed as mortgage markets normalized to some degree. However, we're still cautious regarding single family loan purchase taxes, particularly season production, because it is difficult to complete due diligence on individual loans consistent with our underwriting requirements. For the three months ended June 30, 2020, Loan tell for investment decreased by 1% in comparison to March 31, 2020 with declines in single family and commercial real estate categories. Partly offset by growth in the mobile family construction and other loan categories. New loan production seems to improve for California lenders from the March quarter because of many of the pandemic operating constraints have been resolved. Current credit quality is holding up well. You will note that early stage delinquency balances were just $219,000 at June 30, 2020. In addition, non-performing assets remain at very low levels and were just $4.9 million, which was down from the $6.2 million at June 30, 2019, a 21% decline during the course of the year. However, the situation regarding the pandemic is fluid and may have negative implications for future credit quality, although it is far from certain what those implications will be. We continue to work with our borrowers to provide payment forbearance of up to six months. The forbearance amount will be doing payable in full as a balloon payment at the end of the loan term or sooner if the loan becomes doing payable in full at an earlier date. We believe our forbearance plan will meet the broad criteria promulgated by the CARES Act interagency regulatory guidance and clarifying statements from the Financial Accounting Standards Board and the Securities and Exchange Commission. As a result, we believe that we qualify for favorable provisions cited in the guidance on the vast majority of forbearance loans. As of June 30, 2020, there were 48 single-family loans in forbearance with outstanding balances of approximately $19.9 million or 2.2% of gross loans held for investment and five mobile family and commercial real estate loans in forbearance with outstanding balances of approximately $2.7 million or 0.29% of gross loans held for investment. Monthly payments on the majority of loans in forbearance will not be required to resume until October or November of 2020. Additionally, New requests for forbearance have significantly declined from levels experienced in March and April and May. We recorded a $448,000 provision for loan losses in the June 2020 quarter, primarily due to an increase in the qualitative components in our allowance for loan losses methodology in response to the pandemic, which has negatively impacted the current economic environment. You will note that 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 investor presentation, specifically footnote five of the commercial and 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. Additionally, we populated a new table on slide 13 describing certain characteristics of loans and forbearance. Our net interest margin compressed by 35 basis points for the quarter ended June 30, 2020, compared to the March 31 sequential quarter as a result of a 41 basis point decrease in the average yield on total interest-bearing assets. partly offset by a seven basis point decrease in the cost of total interest-bearing liabilities. The decline in the average yield on total interest-bearing assets was primarily the result of a sharp rise in liquidity stemming from the significant increase in total deposits and invested at nominal yields. Our average cost of deposits decreased by six basis points to 30 basis points for the quarter end of June 30, 2020, compared to the March 31st sequential quarter, and we believe further declines are likely given the current interest rate environment. The 2.9% net interest margin this quarter was also negatively impacted by approximately seven basis points as a result of the increase in the amortization of the net deferred loan costs associated with the loan payoffs in the June quarter in comparison to the average net deferred loan cost amortization of the five previous quarters. We continue to look for operating efficiencies throughout the company to lower operating expenses. Notably, our FTE count on June 30, 2020, was 178 compared to 187 FTE on the same date last year, a 5% decline. As a result of fewer employees and other cost savings, operating expenses declined to approximately $6.6 million in the current quarter compared to approximately $9.7 million in the same quarter last year. Please note, though, that the June 2020 quarter benefited from a $575,000 reversal of incentive compensation accruals previously expensed in the first three quarters of fiscal 2020. Likewise, it should be noted that we incurred approximately $1.2 million of one-time costs in the June 2019 quarter last year associated with scaling back the origination of saleable single-family mortgage homes. Additionally, on a sequential quarter basis, operating expenses declined by approximately 4%, primarily as a result of declines in salaries, employee benefits, equipment, and other expenses, partially offset by increases in sales and marketing expenses and deposit insurance premiums. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that leveraging the balance sheet with prudent loan 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 us to execute Our business plan and capital management goals without complications. We believe that maintaining our cash given in is very important to shareholders and doing so takes priority over stock buyback activity. As a result, we did not repurchase any shares of common stock in the June 2020 quarter and wish to emphasize that safeguarding capital is becoming increasingly important in the current environment. And it's the wisest course of action until we get better clarity on the current economic landscape. We encourage everyone to review our June 30th investor presentation posted on our website. We'll find that we've 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.

Thank you, ladies and gentlemen. If you wish to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. Once again, for questions today, please press 1 and 0 at this time. We do have a question from the line of Matthew Clark. Please go ahead.