Interpublic Group of Companies Q1 2024 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Provident Financial Holdings First 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. Then 0 and an operator will assist you offline.

Operator

As a reminder, today's conference is being recorded. And I will now turn the conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provlett Financial Holdings. And on the call with me is Donovan Chernis, our President, Chief Operating and Chief Financial Officer. Before we begin, I have a brief administrative item to address.

Speaker 1

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 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 ks for the year ended June 30, 2023, and 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.

Speaker 2

I hope that each of

Speaker 1

you has had an opportunity to review our earnings release, which describes our Q1 results. In the most recent quarter, we originated $18,500,000 of loans held for investment, A decline from the $24,300,000 in the prior sequential quarter. During the most recent quarter, we also had $23,000,000 of loan principal payments and payoffs, which is down from the $25,100,000 In the June 2023 quarter and still at the lower end of the quarterly range. Currently, Seems that many real estate investors have reduced their activity as a result of rising mortgage and other interest rates. Additionally, we're seeing more consumer demand for single family adjusted rate mortgage products as a result of higher fixed We have generally tightened our underwriting requirements and increased our pricing across all of our product lines As a result of higher funding costs, the current economic environment and tighter liquidity conditions.

Speaker 1

Additionally, our single family and multifamily loan pipelines are similar in comparison to last quarter, suggesting our loan originations in the December 2023 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which has been between $19,000,000 $85,000,000 For the 3 months ended September 30, 2023, loans held for investment declined by $5,500,000 When compared to the June 30, 2023 ending balances with declines in multifamily and commercial real estate, partly offset By growth in the single family and construction loan categories, current credit quality is holding up very well, And you will note that non performing assets increased to just $1,400,000 which is up slightly from the 1 point $3,000,000 on June 30, 2023. Additionally, there is just $74,000 of early stage delinquency See balances at September 30, 2023. We are aware of the mounting concerns regarding commercial real estate loans, but are confident that the underwriting characteristics of our borrowers and collateral will perform well. We have outlined these characteristics on Slide 13 of our quarterly investor presentation. You should also note that we have no CRE loans maturing during the remainder of calendar 2023 And have only 9 CRE loans for $5,000,000 maturing in calendar 2024.

Speaker 1

We recorded a $545,000 provision for credit losses in the September 2023 quarter. The provision was primarily the result of an increase in the average life of the loan portfolio stemming from the higher highest mortgage rates In approximately 23 years and lower prepayment estimates, the allowance for credit losses Gross loans held for investment increased to 72 basis points on September 30, 2023 From 55 basis points on June 30, 2023, you will note that we adopted CECL on July 1, 2023, Resulting in a $1,200,000 increase in the allowance for credit losses, an $824,000 decrease in equity, A $346,000 increase in deferred tax assets and a $28,000 Our net interest margin was unchanged 2.88 percent for the quarter ended September 30, 2023 compared to the June 30, 2023 sequential quarter As the result of a 17 basis point increase in the average yield on total interest earning assets and an 18 basis point increase and the cost of total interest bearing liabilities. Notably, our average cost of deposits Increased by 18 basis points to 80 basis points for the quarter ended September 30, 2023, compared to 62 basis points in the prior sequential quarter. And our cost of borrowing increased by 7 basis points In the September 2023 quarter compared to the June 2023 quarter, the net interest margin this quarter was Favorably impacted by approximately 1 basis point as a result of lower net deferred loan costs associated with loan payoffs In the September 2023 quarter, in comparison to the average net deferred loan cost amortization of the 5 previous quarters, New loan production is being originated at higher mortgage interest rates than recent prior quarters and adjustable rate loans in our Portfolio are now adjusting to higher interest rates in comparison to the existing interest rates.

Speaker 1

We have approximately 88.8 $1,000,000 of loans repricing upward in the December 2023 quarter at a currently estimated 82 basis weighted average rate of 7.35 percent from 6.53% and approximately $102,800,000 of loans repricing upward in the March 2024 quarter At a currently estimated 102 basis points to a weighted average rate of 7.79 percent from 6 adjustments by their periodic interest rate caps. We continue to look for operating efficiencies Our FTE count on September 30, 2023 decreased Expenses decreased to $6,900,000 in the September 2023 quarter, somewhat lower than what we described That's the stable run rate of $7,200,000 per quarter. The decrease was primarily due to lower salaries and employee Expenses resulting from no quarterly or annual bonus expense accruals in the September 2023 quarter Since the company missed the threshold bonus targets for the quarter. For the fiscal 2024, We expect a run rate of approximately $7,200,000 per quarter as a result of increased wages Our short term strategy for balance sheet management is somewhat more conservative than last We believe that slowing the loan portfolio growth is the best course of action as a result of tighter liquidity conditions. We were successful in execution this quarter with loan origination volumes at the lower end of the quarterly range and loan payoffs also at the lower end of the quarter range.

Speaker 1

The total interest earning assets composition was very similar to last quarter With a decrease in the average balance of loans receivable and a similar decrease in lower yielding average balance of investment securities. However, the total interest bearing liabilities composition deteriorated some with a decrease in the average balance of deposits And a small increase in the average balance of borrowings. 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. We also recognize that prudent capital returns to shareholders Through stock buyback programs is a responsible capital management tool, and we repurchased approximately 36,000 shares of common stock in the September 2023 quarter.

Speaker 1

For the fiscal year to date, we distributed approximately $981,000 of cash dividends to shareholders and repurchased approximately $495,000 worth of common stock. As a result, our capital management activities resulted in an 84% distribution of fiscal year to date net income. We encourage everyone to review our September 30 investor presentation posted on our website. You will find that we included slides regarding Financial metrics, asset quality and capital management, which we believe will give you additional insight on our solid financial foundation Supporting the future growth of the company. We will now entertain any questions you may have regarding our financial results.

Speaker 1

Thank you.

Operator

Thank You will hear an acknowledgment that you've been placed into queue and you can remove yourself from queue at any time by repeating the 10 command. Our first question will come from the line of Tim Coffey with Janney. Please go ahead.

Speaker 3

Great. Thank you. Good morning, gentlemen.

Speaker 1

Good morning, Tim. Good morning.

Speaker 3

First, Craig, congratulations on your retirement. I've covered the company a long time. You've always been a real pleasure to work with. And even though you're not going to be an executive anymore just on the Board, I hope that we can still catch up from time to time.

Speaker 1

Well, thanks, Tim. I appreciate your comments and absolutely, I'll be available whenever.

Speaker 3

Great. If I can ask about the provision and just in general the higher for longer environment. If that does We are higher and it's still longer. What impact is that going to

Speaker 2

have on the provision going forward? So Tim, this is Donovan. You did see that we increased our provision This quarter in comparison to prior quarters, and that was generally a result of the longer estimated live In the loan portfolio, and because we are estimating an allowance For the life of the loan to the extent that the estimated life increases, the provision will increase. I'll note that I think From June 30 to September 30, the MBA Mortgage Index Increased by for a 30 year fixed, increased by 68 basis points during that quarter. It was a significant increase.

Speaker 2

And as a result of that, we would expect prepayment speeds to come down And we would expect the average life of the loan portfolio to increase. The second component of that for us Is the fact that we primarily make 30 year term mortgage loans in single family and multifamily. So any decline in prepayment speeds in those two categories, which Probably makes up about 90% of our loan portfolio, is going to have an impact with respect to our provision. As we go down the timeline, it's very difficult to forecast what those prepayment speeds are going to do from one period To the next, although you can get somewhat of a sense of it, I suppose, by understanding that the MBA mortgage index went up by 60 basis points for the current quarter and that resulted in the provision that we populated for this quarter On a relatively flat balance sheet with respect to the amount of loans outstanding. So that gives you some guide, I suppose, to assume what could happen if mortgage interest rates increase so

Speaker 3

Okay. And then also higher for longer, the impact on the servicing Revenues because this is going to slow, as you mentioned, prepayment speeds as well, correct?

Speaker 2

It will. But The servicing that we have right now is down significantly from what we once had. So I forget the exact balances, but we're talking in the small 100 of 1,000 of dollars of Servicing asset, so there's going to be limited impact with the slowdown in prepayments on that asset.

Speaker 3

Okay. And then the deposit cost increases look like they slowed this quarter. Is that a is 1 quarter a trend Or is it too early to tell?

Speaker 2

Well, I think it's too early to tell. I've been hearing from many others in reading many analyst reports with respect to earnings season That other banks are experiencing a slower rise in deposit costs, We're also experiencing probably a slower rise in deposit costs. But really for us, It gets down to what the balance sheet is doing, both on the asset side and the deposit or and the liability side. And what occurred this quarter, our earning asset yields went up about the same as our interest bearing liability costs And that kept our net interest margin flat. We would expect the same type of behavior As we look out the timeline for this fiscal year, because we have approximately the same amount of assets liabilities repricing in any given period.

Speaker 2

We're relatively neutral positioned, maybe a little bit liability sensitive With respect to balance sheet, and so there's certainly pressure on deposits And the cost of deposits, there's certainly pressure on the cost of borrowings with respect to where current interest rates are. And it gets down to higher for longer for us means what is the balance sheet doing repricing wise And it looks like it's repricing very similar.

Speaker 3

Okay. And then just one question on kind of emerging credit quality trends. There was another institution that reported a couple of non accrual loans in the Southern California marketplace. They were office loans. The problem wasn't that they were office loans.

Speaker 3

The problem was they were in lease up and they couldn't get the new tenants in the building. I'm wondering, are you seeing any lease up issues across your commercial real estate portfolio?

Speaker 2

To date, we're not seeing that really. But when we think about our portfolio, We don't have downtown office, high rise or urban center locations on the collateral. It's typically suburban markets and those markets seem to be doing better than some of the urban centers Just on kind of an ancillary note, this quarter, one of our non performing loans At September 30, went into foreclosure and we were bid out For a full recovery at the foreclosure sale. So there still seems to be a great deal of equity in some of these properties, Not so much commercial real estate. The market is not very good there.

Speaker 2

But for SinglePath, we've not had a foreclosure in Quite a few years and the one we just resolved, we had a full recovery at the foreclosure sale.

Speaker 3

Okay. Yes, your investor deck has really good information on your loan to values. So those are really low, so that's good to hear. And then one final question for you, Donovan. Now that Craig is retiring, what's the number one thing you plan to change?

Speaker 2

Well, I don't know that there's a dramatic or drastic change coming, Tim. The one thing that is true about Provident is that we are a community bank. We are serving a customer base In the Inland Empire for a number of years and I don't see that Changing in a radical way, we always have challenges and opportunities with respect to how we operate the company. There's new technologies that one can potentially adopt to improve efficiencies. There are things with respect to our loan portfolios and underwriting standards that We can potentially determine to make some changes given market environment.

Speaker 2

But by and large, I don't see dramatic change,

Operator

Thank you. We'll go next to Andrew Liesch with Piper Sandler.

Speaker 4

Hey, good morning guys and congratulations to you both. Greg on your retirement and Donovan to the CEO promotion. Great to see.

Speaker 3

Thanks. Thank you.

Speaker 4

Of course. The commentary on the expense run rate $7,200,000 quarter for this year. Is that going forward or could there be a step up so that the full year average is

Speaker 2

Yes. I don't believe there's going to be a step up. That's about what We believe our run rate is going to be, although this quarter, it was a little bit better than that. But as Craig mentioned in his comments, we didn't meet some of our bonus targets for the quarter. And as a result of that, There weren't salary and benefits expenses related to those bonus accruals.

Speaker 2

So we came in at 6.9 rather than the 7.2. And if we just contrast it to what occurred in the June quarter, June was elevated as well From bonus accruals as well as the vesting of restricted stock and stock options that Carry some income statement ramifications upon vesting, which were all trued up in that quarter. So A significant decline from the June quarter, of course, because of unusual items. And this quarter is closer to a standard run rate, Except for the bonus accruals.

Speaker 4

Got it. All right. That's helpful there. Thank you. And then The just a commentary on the what you have maturing on the loan side and or with The recent pay downs and production in the pipeline, still safe to assume that the portfolio is going to hold relatively steady, muted growth?

Speaker 2

It's going to be muted growth. I think as we get down into our Current fiscal year, we might populate with some growth because I think the environment has certainly stabilized From the March quarter, the June quarter, better environment than the March quarter, I think September quarter was a better environment Neither of those two quarters. And if we continue to see that, we would be more interested in perhaps populating some loan growth. I think loan growth is out there. We've tightened our underwriting standards from where we were and We've raised our interest rates on the loan products that we're offering.

Speaker 2

And as a result of that, origination volume has come down. I'm hearing from our origination staff that we could do more If we chose to do so. So I think it's really a question of what we see the environment doing and primarily liquidity It doesn't make much sense, I suppose, to put a loan on with A 200 basis point spread or 175 basis point spread if we're funding that growth at the margin. So That's essentially how we view it. So it would be, I think, slow growth, but not necessarily flat.

Speaker 4

Got it. All right. That's very helpful. Thanks for taking the questions.

Operator

Thank you. And gentlemen, allowing a few moments. There are no further questions from the phones.

Speaker 1

All right. Well, if there are no further questions, I appreciate everyone's participation and look forward to speaking with you again next Quarter. Thank you.

Operator

Thank you. And ladies and gentlemen, today's conference is available for replay beginning at 11 am Pacific Time today, running through November 2 at midnight. You may access the AT and T replay system by dialing 866 2071,041 and entering the access code of 7,000,000,000,000,000,000,000,000,000,000,000,000 International dialers may call 4029700847. Those numbers again are 1-eight sixty six-two zero seven-ten forty one or 402970 847 with the access code of 7,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 Thank you for your participation and for using AT and T event conferencing. You may now disconnect.

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Earnings Conference Call
Interpublic Group of Companies Q1 2024
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