Provident Financial plc

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter earnings call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time. Should you require assistance, please press star, then zero, and we will assist you offline. As a reminder, today's conference call is being recorded. I will now turn the conference over to Craig Blunden. Please go ahead.

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. 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 ended June 30, 2020, 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 they 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 second quarter results. In the most recent quarter, we originated and purchased $29.6 million of loans held for investments. a decrease from the $48 million loans in the prior sequential quarter. During the quarter, we also experienced $59.6 million of loan principal payments and payoffs, which is down from the $66.3 million in the September 2020 quarter, but still tempering the growth rate of loans held for investments. In the December 2020 quarter, competition remains elevated for lower credit risk loan products, and it seems that many multifamily and commercial real estate borrowers have been on the sidelines waiting for better general economic conditions. Additionally, we are still cautious regarding single-family loan purchase packages, particularly season production, because it's difficult to complete due diligence on individual loans consistent with our underwriting requirements. For the three months ended December 31, 2020, loans held for investment decreased by approximately 3% compared to September 30, 2020, with declines in the single-family, commercial real estate, and construction categories, partly offset by growth in the multifamily loan category. Current credit quality is holding up well, and you will note that early-stage delinquency balances were just $350,000 at December 31, 2020. However, non-performing assets increased to $10.3 million, which is up from the $4.9 million at June 30, 2020. The increase in non-performing assets was a result of forbearance loans downgraded to TDR non-accrual status as a result of not being able to resume their monthly payments at the expiration of their initial forbearance. We extended the forbearance period for another three months, triggering the downgrade in non-performing status. Additionally, the non-performing downgrades resulted in a reversal of accrued interest receivable of approximately $126,000 during the December 2020 quarter. We continue to work with our borrowers to provide payment forbearance for up to six months, but note that new requests for forbearance has significantly declined from levels experienced in March, April, May, and June 2020. In the event forbearance is granted, 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. Our forbearance plan criteria were promulgated pursuant to 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 believe that we qualify for favorable provisions cited in the guidance on the vast majority of our forbearance loans. As of December 31, 2020, there were six single-family loans in forbearance under outstanding balances of approximately $1.8 million or 0.21% of gross loans held for investment and two multifamily loans in forbearance with outstanding balances of approximately $763,000 or 0.09% of gross loans held for investment. You will note that the significant decline in number of balance of loans in forbearance on December 31 in comparison to September 30, 2020 balances as a result of these loans that resumed routine monthly payments were migrated to TBR after receiving a forbearance extension. Additionally, as of December 31st, just 17 loans scheduled to resume their monthly payments subsequent to their initial forbearance with a combined principal balance of approximately $6.3 million were granted an additional three months of forbearance relief. Sixteen of the 17 loans, or approximately $5.8 million, were classified as restructured loans and downgraded to non-performing status during the quarter. One of the 17 loans has previously downgraded and classified. We required a $39,000 provision for loan losses in the December 2020 quarter. The allowance for loan losses to gross loans held for investment increased to 99 basis points on December 31st from 95 basis points on September 30th. 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. Our net interest margin compressed by 18 basis points for the quarter ended December 31, 2020 compared to the September 30th sequential quarter as a result of a 21 basis point decrease in the average yield on total interest earning assets, partly offset by a three basis point decrease in the cost of interest bearing liabilities. The decline in average yield on total interest bearing assets was primarily the result of the sharp rise in liquidity stemming from the significant increase in total deposits and loan prepayments and reinvested at lower yields. Our average cost of deposits decreased by three basis points to 21 basis points for the quarter ended December 31, 2020, compared to the September 30th sequential quarter. And we believe that further declines are likely given the current interest rate environment. I would also like to point out that we paid off $20 million of federal home loan bank advances late in December quarter, reducing our borrowing costs by approximately 27 basis points as we begin the March 2021 quarter. The 2.6% net interest margin this quarter was also negatively impacted by approximately five basis points. As a result of the increase in amortization of the net deferred loan costs associated with the loan payoffs in the December quarter, in comparison to the average net deferred loan cost amortization of the five previous quarters and by approximately four basis points stemming from the previously described reversal of accrued interest receivable on the newly classified nonperforming loans. We continue to look for operating efficiencies throughout the company to lower operating expenses. Notably, our FTE count on December 31, 2020 decreased to 166 compared to 184 FTE on the same date last year, a 10% decline. As a result of fewer employees and other cost savings, operating expenses declined to approximately $6.9 million in the current quarter compared to approximately $7.6 million in the same quarter last year, a decline of approximately 9%. Additionally, on a sequential quarter, operating expenses declined by approximately 1%. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that leveraging the balance sheet with prudent loan portfolio growth is the best course of action, but executing on that strategy in the current environment may prove difficult. In the interim, we're redeploying excess liquidity and government-sponsored mortgage-backed securities with estimated average lives of approximately four years. We exceed well-capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications. We believe that maintaining our cash dividend is very important, and doing so takes priority over stock buyback activity. As a result, we did not repurchase any shares of common stock in the December 2020 quarter and wish to emphasize that safeguarding capital has become increasingly important in the current environment. However, we also recognize that prudent capital return to shareholders through stock buyback programs is a valid capital management tool, and we will be reviewing our current position on buybacks in the March 2021 quarter. We encourage everyone to review our December 31st investor presentation posted on our website. You'll 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. In particular, slide 13 contains the forbearance table as of December 31, 2020, and footnote 5 of the commercial real estate table describing the composition of our commercial real estate secured loan portfolio and the balances that may be considered higher risk in the current environment. We will now entertain any questions you may have regarding our financial results. Thank you. Leah?

Ladies and gentlemen, if you would like to ask a question, please press 1 then 0 on your telephone keypad. You will hear acknowledgement that your line has been placed in queue. Once again, if you have a question, please press 1-0 at this time. One moment, please, for the first question. And one moment, please. And we have a question from Tim Coffey. One moment, please. And go ahead, sir.