Provident Financial plc

Ladies and gentlemen, thank you very much for standing by. Welcome to the Provident Financial Holdings third quarter earnings call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. If you should require assistance, you may press star, then zero, and we will assist you offline. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Blunden, the chairman and CEO. Please go ahead.

Thank you, Leah. 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 ended June 30, 2020, and from the Form 10-Qs and other SEC filings that are filed subsequent to Form 10-K. Forward-looking statements are effective only as the date 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 third quarter results. In the most recent quarter, we originated and purchased $61 million of loans held for investment, an increase from $29.6 million in the prior sequential quarter. During the most recent quarter, we also experienced $75.7 million of loan principal payments and payoffs, which is up from the $59.6 million in the December 2020 quarter and still tempering the growth rate of loans held for investment. In the March 2021 quarter, competition remains elevated for lower credit risk loan products, but it seems that many mobile family and commercial real estate borrowers are once again considering transactions as a result of better general economic conditions. Additionally, we have seen growth in our single-family and mobile family pipelines, suggesting our originations and purchases in the June 2021 quarter will meet or exceed the volume we experienced this quarter. For the three months ended March 31, 2021, loans held for investment decreased by approximately 2% compared to December 31, 2020, with declines in single-family, multi-family, commercial estate, and construction loan categories. Current credit quality is holding up well, and you will note there are no early-stage delinquency balances at March 31, 2021. Additionally, non-performing assets decreased to $9.8 million per which is down from the $10.3 million on December 31, 2020. Please note that the nonperforming assets are largely comprised of forbearance loans downgraded to TDR nonaccrual status as a result of not being able to resume their monthly payments at the expiration of their initial forbearance. At the time we extend the forbearance period beyond six months, we downgrade the loans to nonperforming status Out of March 31, 2021, there are five single-family loans in forbearance with a combined outstanding balance of approximately $1.8 million or 0.22% of gross loans held for investment. One multifamily loan in forbearance with an outstanding balance of approximately $308,000 or 0.04% of gross loans held for investment. and one commercial real estate loan in forbearance with an outstanding balance of approximately $945,000 or 0.11% of gross loans held for investment. On March 31st, 2021, we ended new requests pursuant to our forbearance program. Existing forbearance loans will run their course as denoted in their individual forbearance agreements and may be eligible for an extension. We recorded a $200,000 negative provision for loan losses in the March 2021 quarter. The allowance for loan losses to gross loans held for investment decreased to 98 basis points on March 31st from 99 basis points on December 31st. 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 six basis points for the quarter ended March 31, 2021, compared to December 2020 sequential quarter as a result of a 16 basis point decrease in the average yield on total interest earning assets, partly offset by an 11 basis point decrease in the cost of total interest-bearing liabilities. The decline in the average yield on total interest earning assets was primarily the result of the sharp rise in liquidity stemming from the significant increase in total deposits and loan prepayments, which were reinvested at lower yields. Our average cost of deposits decreased by four basis points to 17 basis points from the quarter ended March 31, 2021, compared to the prior sequential quarter, And our borrowing costs declined by approximately 28 basis points in the March 2021 quarter in comparison to the December 2020 quarter. The 2.6% net interest margin this quarter was also negatively impacted by approximately seven basis points. As a result, the increase in amortization and net deferred loan costs associated with the loan payoffs in the March quarter in comparison to the average net deferred loan cost amortization of the previous five quarters. We continue to look for operating efficiencies throughout the company to lower operating expenses. Notably, our FTE count on March 31, 2021, decreased to 162 compared to 183 FTE on the same date last year, an 11% decline. As a result, fewer employees and other cost savings operating expenses declined to approximately $6.9 million in the current quarter, compared to approximately $7.5 million in the same quarter last year, a decline of approximately 8%. 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 are redeploying excess liquidity in government-sponsored mortgage-backed securities with an 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 divot is very important, and doing so takes priority over stock buyback activity However, we also recognize that prudent capital returns to shareholders through stock buyback programs is a valid capital management tool, and we began repurchasing shares in the March 2021 quarter under the April 2020 stock repurchase program. Approximately 55,000 shares of common stock were repurchased in the quarter. We encourage everyone to review our March 31st investor presentation posted on our website. You will find we've included the slides regarding financial metrics, asset quality, and capital management, which we believe will give you additional insight on our strong financial foundations supporting the future growth of the company. In particular, slide 13 contains the forbearance table as of March 31, 2021, 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 high risk in the current environment. We will now entertain any questions you may have regarding our financial results. Thank you. Leah.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press 1 then 0 on your telephone keypad. You will hear acknowledgment that your line has been placed in queue. Once again, if you would like to ask a question, please press 1, then 0 on your telephone keypad. And one moment, please, for the first questions. And our first question is from Tim Coffey with Jannie Montgomery. Please go ahead.