Provident Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you 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 with instructions being given at that time. As a reminder, today's conference is being recorded.

Operator

I would now like to turn the conference over to Craig Blunden, Chairman and CEO. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donovan Chernes, 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, forecast, financial or other performance measures and statements about the company's general outlook for economic and business 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 Yesterday, on the annual report on Form 10 ks for the year ended June 30, 2022, And from the Form 10 Qs and other SEC filings that are filed subsequent to the Form 10 ks. Forward looking statements are effective only as of the date they are made, and the company assumes no obligation to update this information.

Speaker 1

To begin with, thank you for participating in our call. Hope that each of you has had an opportunity to review our earnings release, which describes our 3rd quarter results. In the most recent quarter, we originated $53,900,000 of loans held for investment, a decline from the $74,300,000 in the prior During the most recent quarter, we also experienced $17,500,000 of loan principal payments and payoffs, which is down from the $28,000,000 into December 2022 quarter and at the lower end of the quarterly range. Currently, it seems that many real estate investors have reduced their activity as a result of rising mortgage interest rates. Additionally, we are seeing more consumer demand for single family adjustable rate mortgage Products as a result of higher fixed rate mortgage interest rates.

Speaker 1

We have generally tightened our underwriting requirements across all of our product lines As a result of the current economic environment and higher funding costs. Additionally, our single family and multifamily loan pipelines are Smaller in comparison to last quarter suggesting that our loan originations in the June 2023 quarter Will decline from this quarter and may drop below the range of recent quarters, which has been between $54,000,000 $94,000,000 For the 3 months ended March 31, 2023, loans held for investment increased by approximately 4% Compared to the December 31, 2022 ending balances with increases in the single family, multifamily, Commercial Real Estate and Construction Loan Categories. Current credit quality is holding up very well and you will note that non performing assets decreased to just $945,000 which is down from $956,000 on December 31, 2022. Additionally, there are just $962,000 of early stage delinquency balances at March 31, 2023. We're aware of mounting concerns regarding commercial real estate loans, but are confident The underwriting characteristics of our borrowers and collateral will perform well.

Speaker 1

We have outlined these characteristics We recorded a $169,000 It is unchanged to 56 basis points on March 31, 2023 compared to December 31. You will note that we remain on the incurred loss model and will not adopt CECL until July 1, 2023. This means that our allowance methodology cannot be reasonably compared to CECL adopters. Our net interest margin declined by 5 basis points to 3% for the quarter ended March 31, 2023 Compared to the December 2022 sequential quarter, as a result of a 20 basis point increase in the average yield on total interest bearing assets And a 30 basis point increase in the cost of total interest bearing liabilities. Notably, Our average cost of deposits increased by 17 basis points to 37 basis points for the quarter ended December 31, 2023, compared to 20 basis points in the prior sequential quarter.

Speaker 1

And our borrowing costs increased by 59 basis points in the March 2023 quarter compared to the December 2022 quarter. The net margin this quarter was positively impacted 2 basis points as a result of lower net deferred loan costs associated with fewer loan payoffs In the March 2023 quarter in comparison to the average net deferred loan cost amortization of the previous 5 quarters, New loan production is being originated at higher mortgage interest rates than recent prior quarters. Adjust rate loans in our portfolio are now adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $99,300,000 of loans repricing upward in the June 2023 quarter At a currently estimated 84 basis points to a weighted average yield of 6.24 percent from 5.40 percent Approximately $95,300,000 of loans repricing upward in the September 2023 quarter At a current estimate 104 basis points to a weighted average yield of 7.16% from 6.12%. Also, for multifamily and commercial real estate loans, the loans were adjusting above their current interest rate floors.

Speaker 1

However, many adjustable rate loans in all categories are currently limited in their upward adjustment by periodic rate caps. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on March 31, 2023 decreased to 160 compared to 163 FTE on the same date last year. You will note that operating expenses increased to $6,900,000 in the March 2023 quarter, consistent with what we describe as a stable run rate. We expect a similar run rate for the remainder of fiscal 2023, We may experience some pressure on operating expenses as a result of increased wages and inflationary pressures on other operating expenses.

Speaker 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. We were successful in execution this quarter with loan origination volumes at the low End of the quarterly range and loan payoffs also at the low end of the quarterly range. Total interest Earning assets composition improved during the quarter with an increase in the average balance of loans receivable and a decrease in Lower yielding average balance of investment securities. However, the total interest bearing liabilities composition deteriorated a bit A small increase in the average balance of deposit and a larger increase in the average balance of borrowings.

Speaker 1

We exceed well capitalized 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 return to shareholders The stock buyback programs is a valid capital management tool and we repurchased approximately 98,000 shares of common stock in the March 2023 quarter. For the fiscal year to date, we distributed approximately $3,000,000 of cash dividends to shareholders and repurchased approximately $3,600,000 worth As a result, our capital management activities resulted at 97% distribution of year to date fiscal 2023 net income. We encourage everyone to review our March 31 investor presentation posted on our website.

Speaker 1

You'll find that we include slides regarding financial metrics, asset quality and capital management, which we believe will give you additional insight

Operator

You will hear tone acknowledging your request. You may remove yourself from the queue at any time by repeating the one zero command. And our first question is from Tim Coffey with Janney. Please go ahead.

Speaker 2

Thank you. Good morning, Craig. Good morning, Donovan.

Speaker 1

Good morning, Tim.

Speaker 2

Yes, good morning. I'll start with my first question. Just looking at the loan to deposit ratio, how you feel about that ratio going forward?

Speaker 3

So Tim, historically, as a Thrift balance sheet, The balance sheet typically has a higher loan to deposit ratio than a typical commercial bank balance For instance, nonetheless, its loan to deposit ratio is about 110% right now, which is at the upper end of our range. So we're managing that loan to deposit ratio Given the current economic environment in such a way that it doesn't go up too much further, While still not competing too aggressively on deposits as it relates to the current environment, As you understand, deposits have been called into question as a result of the Earlier bank failures in March and competition has heated up quite significantly With respect to deposit gathering, and frankly, we don't want to get caught up in that to the extent we're not required to. And so that does perhaps scale back a little bit our growth forecast or Our growth ability with respect to new loan production and the like. But 110 Percent loan to deposit ratio, we've run that ratio in that way in the past, and it is Not of significant concern right now other than the fact that we are cognizant of it and Don't want to be out there too far on the bleeding edge.

Speaker 2

Okay, great. Thank you for the color. I think I'll switch to deposits. Now The profile of your depositor seems like it would tend to be sticky, stickier than others that we've seen across the industry at least. I'm wondering what kind of discussions have you been having with depositors about maintaining balances there, about rates, things of that nature?

Speaker 3

So you're right with respect to the nature of our deposits. They are primarily retail deposits. They're small business deposits. We don't have any large businesses Deposits per se. In fact, the average deposit balance or average size of our deposit Per account is $34,000 So it's very, very granular and That's primarily retail or consumer that has been generated through The branch system.

Speaker 3

With respect to our depositors, in particular, we are In a defensive strategy mode as it relates to depositors that may have maturing certificates of deposit To the extent that they're interested in leaving the institution for a higher rate, we will defend and we will match those rates, But we're not out there advertising as others are with respect to aggressive certificates of deposit Because frankly, we don't want to jeopardize the stickiness or the longevity of that depositor. So we have had some defection in deposits, not necessarily in accounts, but some depositors have left for Higher rates, that's the more rate sensitive depositor. But on the whole, We haven't had the issue that others have had with respect to depositors being nervous As it relates to our depositor profile In comparison to others that might have tech deposits, venture capital deposits or crypto deposits or things of that nature. So there wasn't really any concern from our depositors with respect to That type of activity, but there is inquiries from depositors with respect to The interest rates we are paying and we are matching on a core deposit basis.

Speaker 2

Okay, great. Thank you. And then one last question before I step back has to do with capital and your capital kind of outlook going forward. If Profitability continues to be steady. Is your focus going to be on perhaps growing capital or continuing to pay out a certain portion of relatively stable earnings as capital returns to shareholders.

Speaker 3

So we mentioned in the prepared comments that We think the cash dividend is very, very important and we foresee Being in a position of maintaining the cash dividend, as it relates to the repurchase We also, even through the banking turmoil that has occurred, Continued to repurchase stock similar to what was done in the December quarter. And right now, our capital ratios are still very, very strong relative to industry standards. And as you point out, profitability metrics are still very good. So we foresee the ability to continue to repurchase stock perhaps, But we won't forecast what those amounts may or may not be. Ultimately, that will be dictated by The industry turmoil, what regulators may be thinking with respect to capital.

Speaker 3

As you know, there's been some discussion that perhaps certain capital requirements Maybe modified as a result of the banking turmoil.

Speaker 2

Great. Thank you. Those are my questions. I very much appreciate your time.

Operator

And we have no other questions. You may continue.

Speaker 3

Well, if there are no other questions, we will wrap up the quarter. And we appreciate everybody's participation with respect to the call and look forward to the next call in July. Thank you very much.

Speaker 1

Thank

Operator

you. Ladies and gentlemen, this conference is available for replay after 11 am Eastern Time today through May 4 at midnight. You may access the replay service at any time by calling 1-eight 66-two zero seven-ten forty one and enter the access code of 9,361,268. And that does conclude your conference for today. Thank you for your participation.

Operator

You may now disconnect.

Powered by Quartr
Earnings Conference Call
Provident Financial Q3 2023
00:00 / 00:00