Ladies and gentlemen, thank you for standing by, welcome to the First Quarter Earnings Call. [Operator Instructions] As a reminder, today’s call is being recorded. I would now turn the call over to your host, Craig Blunden. Please go ahead, sir.

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. 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, 2018, and from the Form 10-Qs that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as of 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 first quarter results. I would like to begin this morning by highlighting the results of our community banking business. Over the course of last year, our net interest margin has expanded, core deposits continue to grow, credit quality remain strong, but our loan growth has been below our expectations as a result of significant prepayments and disciplined underwriting standards, reducing loan origination volume. In the most recent quarter, the community banking staff originated…

Thank you. [Operator Instructions] First question is from the line of Tim O’Brien, Sandler O’Neill. Please go ahead.

This is actually Thomas on for Tim O’Brien today.

Very good.

Good morning.

Good morning. So just looking at the gain on sale margin, it looks like there’s a decent jump, was any of that due to non-reoccurring events? Or was that all just changes in the conditions of the market?

It was changes in the conditions of the market. Much of it is related to a higher percentage of retail production in comparison to wholesale production. But I also have to tell you that we’ve been disciplined in our pricing models. We’ve done some work there to determine whether or not bringing in our loan sale margin would drive enough volume to more than offset compressing that margin. And we don’t think that, that’s the case, so we’re holding pretty firm with respect to loan sale margin because we know we can’t make it up in volume in the event we compress it.

Okay. Got it. And then, just switching pages, given the elevated payoffs this quarter and the previous quarter, what do the prospects for loan growth look like compared to this quarter going forward?

Well loan growth is difficult in this environment. There are many competitors that have a different credit risk model than we do, different credit culture. And as a result of that, what we’ll find is that as we are originating our loan applications, we can compete on price, but in many cases, we won’t necessarily be able to compete on actual loan dollars because we’re stressing our underwriting characteristics with respect to a more difficult environment. And so the borrowers, in many cases, would go to that lender that is giving them higher loan dollars, irrespective of the price, and we’re losing volume as a result of that. But at the end of the day, we’re willing to accept that because we think our credit culture and our credit underwriting is where it should be in today’s environment.

Thank you for that. That’s good detail. And then, just switching to the funding side, do you guys know how much CD funding is set to mature this current quarter and the next? And what the average rate is on those – on that, specifically CD funding?

Yes, I don’t have that at my fingertips. That might be – as I recall, there’s a table in our Form 10-Q, and that’s going to be filed before the deadline with the SEC. So, there will be more information in the Form 10-Q.

Okay. Thanks, that was my last question. I’ll step back from here.

The next question is from the line of Brian Zabora. Please state your company, sir.

It’s Hovde Group. Good morning, guys. Let me just follow up on the mortgage side. It sounds like, to me, that maybe mortgage gain on sale could be on the higher end of that range that we’ve talked about in the past? Given kind of how you’re – it sounds like maybe a bit of a shift as far as how you’re thinking about pricing?

Yes, I think that’s fair. We describe the range in our loan sale margin essentially based upon the last six quarters that we publish in our investor presentation, and the 170 basis points set a new high with respect to that. So it is not inconceivable that, that margin comes in a bit from the 170, as we think about the December quarter. But as we described earlier, I think we’re going to remain disciplined with respect to our pricing model because, again, we find that we’re not making it up in volume if we compress our margins too much.

Understood. Okay. And then, on the buyback, you mentioned you’re kind of delaying it this quarter. So as we think about with the pull back and the industry-wide, I guess, bank group, that you may think about buybacks again in the near-term?

Sure, it’s part of our business plan. We have authorization out there. It is frankly a part of our timing and what our thought process is. Only thing we should add, when we’re thinking about buybacks, essentially, the funding coming for those buybacks is coming out of our cash dividends from the bank to the holding company. We essentially do that once a year after we approve our business plan, and our fiscal year begins July 1. And so that cash dividend was just completed toward the end of September, essentially repopulating the cash proceeds at the holding company to make the available cash significant enough to not only maintain our cash dividend, which is higher priority, if you will, than repurchases, but also funding our sales for repurchase activity.

That’s great, good. And just lastly, on the expense side, you called out in the press release about restrict your stock as far as that expense is declining, so it looks like some positive trends there. Also, just curious on the systems conversion, is there any thoughts on the potential – is there potential cost saves? More efficiency? Or just as that’s completed now, do you have maybe a better outlook on what the potential impact could be for the business going forward?

With respect to operating expenses, it’s already essentially baked in. Most of those operating expenses were – or the duplicative operating expenses were completed earlier this calendar year. But it is now more efficient with respect to our deployment. Everything is electronic now. We can assign underwriting files. We don’t have to ship files around. And it’s also more helpful to our applicants as well because they can now upload directly into their loan applications, things such as tax returns or W2s or things of that nature. So at this point, it’s exploring the efficiencies we will gain with respect to operating on that new system and implementing new processes and procedures to gain those efficiencies.

Great. And thanks for taking my questions.

Next question is from the line of Tim Coffey. Please state your corporation, sir.

Thank you. Good morning, gentlemen. Was there anything in – during the quarter that might have artificially lowered the tax rate?

While they’re discrete items that everybody has in their tax rate in comparison to the statutory rate, in our case, there were non-qualified dispositions of stock options and the like, which reduced the tax rate essentially regarding tax recovery on those items. BOLI is an item that many institutions have, and that’s a discrete item. So that tax rate will fluctuate from the statutory rate of, I think, 29.86%, or 29.8%, depending upon what actually occurs in the quarter with respect to these discrete items.

And then, just switching gears to talk about funding. You’ve done a pretty good job of bringing down deposits over the last – I’m sorry, CDs, time deposits over the last several quarters. You still have $230 million-ish outstanding. Is that something you can continue to bring down while still growing total deposits?

The farther that number declines, the more difficult that equation becomes. And we’re not necessarily uncomfortable with time deposits per se. In fact, in the rising interest rate market, if you can fix some of your deposit costs over a longer period of time, that’s actually helpful with respect to your NIM or net interest margin. So it is something that, strategically, we’ve been doing for a long period of time and we would continue to do so. But for instance, if we were to have better loan growth than what we’ve been able to demonstrate or what we’ve been able to accomplish and we needed to fund that growth, time deposits would become a more important component of deposit gathering to help fund that loan growth. We also have an extensive amount of wholesale funding capacity to fund ourselves quite a bit of capacity at the Federal Home Loan Bank of San Francisco. We have very little in the way of broker deposits on balance sheet. So we could legitimately increase broker deposits without it becoming a regulatory issue, if you will. And so there are a number of funding sources to fund ourselves, wholesale as well as retail CDs.

It would – the cost of your funding base has been exceptionally stable over the last year, two years or so, and I’m sure it’s hard work to keep it that way. Did it get much harder to do it this quarter? Or is it about the same as it’s been in previous quarters?

It’s been about the same as in previous quarters. Although, yes, the loan grew, we go down the path of the FHLMC raising the federal funds target rate. And the more we see short-term rates increase, and the additional pressure we see in our markets relative to those institutions that have to fund themselves and are raising their deposits quite significantly, yes, it becomes more difficult. But again, it’s a matter of discipline as well as, essentially, what we need to do with respect to balance sheet growth if we’re essentially moving out of it, one of the things that has occurred, loans held-for-sale has gone down, and that creates cash, which can be redeployed elsewhere. So yes, the longer we go with it in the rising rate market, the more difficult it becomes to keep those retail deposit cost stable.

And in that same vein, your credit quality has been steadily improving over the last two years as well. Are you seeing anything from on-the-ground economic standpoint that would suggest that, although we are at the end, the long – very long credit cycle here, that we’re nearing the end of it?

I don’t know that we see anything that would suggest that the credit cycle is going to turn on a – over the next quarter or two quarters, but we’re seeing things such as single-family home sales have declined significantly in California, based upon the most recent data that has come out with respect to the September month. And so that puts pressure on housing price appreciation. We’re also seeing decline in the ability for landlords to increase rents. Rents are still increasing, but not at the pace that they were a year ago. So that could put a little bit of pressure with respect to those stretched multi-family deals. But yes, there’s really nothing that we see fundamentally that suggests we should get a credit quality term per se.

Okay. And then, you touched on the buybacks a little earlier in the Q&A, and I’m sorry, I apologize if I missed this point, but would you be more inclined to be a bit more aggressive on the buybacks in, say, the next calendar quarter, given: one, where valuation is; and two, the amount of shares that you still have available under the April repurchase plan?

Yes, I think all of those are positive factors with respect to our ability to repurchase shares. We’re trading, I don’t know, 105% of book value now, when we were trading 115% or 120% of book value six months ago. That obviously presents, in our view, a better opportunity with respect to franchise value. And we watch and monitor those things and consider that within the context of our entire business plan, what we want to do with respect to capital ratios. Repurchasing stock is a secondary component, we would prefer to grow balance sheet for instance. There are a number of characteristics or things that can determine what we do with stock repurchases.

Yes, I don’t think the multiple has been this low in about three years, so as an aside. And then, we’re going into a couple of seasonally weak quarters for mortgage origination activity, would you expect to see a bit of shakeout among the non-bank mortgage lenders in your market?

Well, we’ve been expecting to see a stakeout before now, Tim. In fact, a little surprised that we haven’t seen more than we’ve seen. But yes, I would think it would really accelerate as we get into those holiday real slow times, especially since we had practically no spring or summer buying seasons this year.

And that lack of decline in competition would directly help your gain on sale margins, right?

Well, volume first.

Volume. All right.

But again, we’re a little surprised that we haven’t seen more at this point. So let’s wait and see.

Okay, all right. Great, well rest of my question have been answered. Thank you very much.

[Operator Instructions] And we have no further questions in queue at this time.

All right. If there’s no further questions, I’d like to thank everyone for joining us on our quarterly conference call. And we look forward to speaking with you next quarter. Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.