Ladies and gentlemen, thank you for standing by, and welcome to the Provident Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded.I'd now like to turn the call over to your host, Mr. Blunden. Please go ahead, sir.

Thank you, Kevin. 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 managements' presentation. These forward-looking statements are subject to a number of risk 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 on 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 10-Qs and other SEC filings that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as of 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 $81.6 million of loans held for investment, a decrease from the $93.4 million in the prior sequential quarter. During the quarter, we also experienced $65.2 million of loan principal payments and payoffs, which is up from the $50.8 million in the September 2019 quarter and still tempering the growth rate of loans held for investment. For the three…

[Operator Instructions] We do have a question from the line of Kevin Swanson. Please state your Company name, sir.

Hovde Group. Hi, guys.

Hi, Kevin. Good morning.

It looks like you guys kind of nailed kind of the rough guidance on expenses for the quarter. Just kind of curious how you see that moving throughout the year in light of some of the movements that you talked about. Thanks.

I think, the $7.5 million number per quarter is a relatively safe forecast. I do think we have some opportunity there, as we adjust our business lines and as we adjust what we're doing on origination side of the business for portfolio. There's probably not much room as it relates to the deposit side of the business, branch activity and the like. We don't have any plans to close a branch or anything of that nature. So, the deposit side of the business is probably pretty set. But, I think there's a little bit of opportunity. But, it's not going to be a significant number, if you will. We think the way we are structured on an FTE count and in the business model, we can grow assets without increasing expenses as a result of that and increasing net interest income creates some positive operating leverage on that basis.

And then, question on the margin. I think, you guys are maybe up 5 bps from the same quarter last year. And then, kind of at least the cost of funds was about steady. And we kind of consider the fed movements as well including in that year. How are you going to see the margin playing out this year under kind of the assumption that maybe the Fed does something later on down the road?

Well, I think the -- for us, with respect to where we are in the margin, it's going to be largely dependent upon what the yield curve does. Recently, we just inverted again, I think from 2 to 10s, or 3 to 10s as a result of flu virus scare. We have come of the reversion later on in the fourth quarter, and we saw steepening of the yield curve. And that ultimately helps us, because we're lending college in the five to seven-year area, and we're probably funding ourselves in the six-month to two-year area. And anything new coming on the balance sheet is essentially at a lower spread than what our existing balance sheet looks like. So, that's going to give us some margin compression, probably. But that's all mitigated to some degree by the adjustable nature of the portfolio to the extent that there are floors in many of our loans. So many of our loans are multifamily and commercial real estate, they all have floors. Right now, there's about $370 million of that portfolio that is floored. And irrespective of what rates do, those rates will remain the same if rates were to come down from where they currently are. So, I think there's a little bit more pressure in net interest margin as we look out into calendar 2020. And I think that's reflective of where the industry is at. But, in our particular case, we think we have some floors that are in place that will mitigate to some degree, that pressure. And if the shape of the yield curve ends up steepening again, that will help us, as well as the industry.

And then, maybe just finally, you guys have put up some nice loan growth in the past couple of quarters, the provisioning was still on the negative side. Just kind of curious, how you see credit cost going forward? Thanks.

Well, credit quality is very good right now for the industry in general. And for us specifically, credit quality is excellent. And it's very difficult to see continued improvement from these very good levels. But, we’ve seen here, because non-performers have come down. I suppose non-performers could go to zero, and that would help. But we also have migration out of higher risk or higher factor loans into lower factor loans.So, to the extent that we have growth in the balance sheet, and loan growth would suggest that we would be provisioning for that growth. That's not necessarily the case because we have migration within the different portfolios in our loans. And as a result of that, we might be freeing up provisions or allowance in one category that works to the advantage of growth in another category. And then additionally, we keep recovering each and every quarter it seems a small amount, which is also providing an increase to the allowance without running through the income statement. So, we think credit quality is very good. Our outlook for credit quality remains very good. I think, as we think about 2020, the higher the growth rate in the portfolio, yes, potentially, we could be providing, but maybe not in an amount that one would think, because we also have rotation in our portfolios from higher factor or higher risk to lower risk.

Great. Thanks, guys. I appreciate the time.

Thank you.

Thank you. Next question is from the line of Tim Coffey of Janney. Please go ahead. Mr. Coffey, your line is open, sir.

Can you hear me now?

Yes.

Okay, great. Good morning, gentlemen.

Good morning, Tim.

Good morning.

I appreciate the commentary on forward-looking expenses. The expenses as a percentage of earning asset -- or rather average assets were in the 4% range when you have a mortgage business. These last two quarters, they've been in the high 2% range. Given your expectations for balance sheet growth, would you -- could you see that ratio coming below 2.5% in the next four quarters?

Well, it depends upon the rate of growth. And the limit that you saw in the December quarter, for instance, even though we have very good origination purchase numbers, at the same time we have loan payoffs the highest in quite a few quarters, it was $65.2 million. So, the growth rate was tempered significantly as a result of those payoffs. And because of that, it's very difficult to understand, even though we're ginning up pretty nice growth rate. If those payoffs continue to be elevated, we're not going to see the growth rate that we would like to see. And frankly, we're churning a little bit with respect to portfolio growth. So, the answer is, yes. We can see operating expenses come in from where they currently are as a percentage of total assets. But, that's going to be dictated by the growth rate that we can gin up in our loan portfolios.

Okay. I understand. Thank you. Given that rates have started to come down again, understanding that that has some impact on payoffs. But does this provide you an opportunity to remix your deposit book?

I'm not sure that it gives us that opportunity, because all the way through the rising rate cycle, we essentially didn't change our deposit rates. And our deposit costs held very steady through the cycle. So, now as rates come down on the short end, our deposit costs aren’t really going to come down. Now, the opportunity that is there for us is funding earning asset growth. So, one of the things that was occurring when rates were rising were CD specials and the like by competitors who needed to fund their balance sheets. We weren't in that position at that time. We may be in that position now, because we want to grow balance sheet. And so, we would have an opportunity perhaps to put CDs on our books, a little bit higher rate than what our existing deposit costs are, but in a lower rate environment, so that the absolute cost probably doesn't go up like we saw when rates were rising.

Okay. And then, as the competition -- your view of the competition for loans in the current rate environment, is that kind of where it's been in previous cycles where we have seen loan rates, you have seen that increased competition?

Yes. This has been -- competitively speaking, this has been very difficult, both on the loan side and the deposit side. It's -- this extended cycle, economic cycle has put pressure on both sides of the balance sheet. We don't see that that changes anytime soon. In fact, it could get a little bit worse as we think about lower interest rates and lower mortgage rates. So, we're kind of in that environment again right now. And I think as a result of that, there are many borrowers who are looking to refinance. And our book of business is not going to be immune to that refinance activity, which I think generally speaking is kind of an industry dynamic.

[Operator Instructions] All right. We have no further questions in queue at this time.

All right. Well, in that case, I want to thank everyone for being on our call. We look forward to speaking with you next quarter. Thank you.

Thank you. And ladies and gentlemen, this conference will be available for replay and that’s starting today at noon Pacific Time, and will run through February 4th midnight. You may dial the AT&T Replay System by dialing 1-866-207-1041 and entering the access code 2689092. International participants may dial 402-970-0847 and again that access code, 2689092. And that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.