Provident Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 4 speakers on the call.

Operator

Thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Provident Financial Holdings Second Quarter Earnings Call. Followed by the number one again. Thank you.

Operator

I would now like to turn the call over to Donovan Turnus, President and CEO. Please go ahead.

Speaker 1

Thank you, Aaron. Good morning. This is Donovan Ternes, President and CEO of Provident Financial Holdings. And on the call with me is Tam Nguyen, our Senior Vice President and Chief Financial Officer. Before we begin, I have a brief administrative item to address.

Speaker 1

Our presentation today This 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 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 that 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. I hope that each of you has had an opportunity to review our earnings release, which describes our 2nd quarter results. In the most recent quarter, we originated $20,200,000 of loans held for investment, an increase from $18,500,000 in the prior sequential quarter. During the most recent quarter, we also had $17,800,000 of loan principal payments and payoffs, which is down from $23,000,000 in September 2023 quarter and still at the lower end of the quarterly range. Currently, it seems that many real estate investors have reduced their activity as a result of higher mortgage and other interest rate.

Speaker 1

Additionally, we are seeing more consumer demand for single family adjustable rate mortgage products as a result of higher fixed rate mortgage interest rate. 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. Additionally, our single family and multifamily loan pipelines Are similar in comparison to last quarter suggesting our loan originations in the March 2024 quarter will be similar to this quarter and 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 December 31, 2023, loans held for investment increased by $3,600,000,000 When compared to the September 30, 2023 ending balances, with small increases in 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 increased to just $1,800,000 which is up from 1 point $4,000,000 on September 30, 2023. Additionally, there is just $340,000 Real estate loans, but are confident that the underwriting characteristics of our borrowers and collateral We will continue to perform well.

Speaker 1

We have outlined these characteristics on Slide 13 of our quarterly investor presentation. You should also note that we have just 9 CRE loans for $5,000,000 maturing for the remainder of 2024. We recorded a $720,000 recovery of credit losses In the December 2023 quarter, the recovery was primarily the result of a decrease in the average life of the loan portfolio Stemming from the rapid decline in mortgage rates in the December 2023 quarter and higher prepayment estimates, The allowance for credit losses to gross loans held for investment decreased to 65 basis points on December 31, 2023 from 72 basis points on September 30, 2023. Our net interest margin declined by 10 basis points to 2.78 percent for the quarter ended December 31, 2023 compared to the September 30, 2023 sequential quarter as the result of a 13 basis point increase in the average yield on total interest earning assets and a 24 basis point increase And the cost of total interest bearing liabilities, notably, our average cost of deposits Increased by 19 basis points to 99 basis points for the quarter ended December 31, 2023 compared to 80 basis points in the prior sequential quarter and our Cost of borrowing increased by 18 basis points in the December 2023 quarter compared to the September 2023 The net interest margin this quarter was not impacted by the net deferred loan costs associated with loan payoffs In the December 2023 quarter, in comparison to the average net deferred loan cost amortization of the previous 5 quarters.

Speaker 1

New loan production is being originated at higher mortgage interest rates than recent prior quarters And adjustable rate loans in our portfolio are adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $116,800,000 of loans repricing upward In the March 2024 quarter, at a currently estimated 87 basis points to a weighted average rate 7.71 percent from 6.84 percent and approximately $86,200,000 of loans repricing upward in the June 2024 quarter At a currently estimated 90 basis points to a weighted average rate of 7.82% From 6.92 percent. Also, for multifamily and commercial real estate loans, The loans are adjusting above their existing floors. However, many adjustable rate loans in all categories Are currently limited in their upward adjustment by the periodic interest rate caps. I would also point out That there is an opportunity to reprice the touring wholesale funding downward as a result of market conditions Where current interest rates have moved lower in 6 months and longer terms, all of this suggests That the current pressure on the net interest margin may soon subside.

Speaker 1

We continue to look for operating efficiencies throughout the company To lower operating expenses, our FTE count on December 31, 2023 decreased to 160 $3,000,000 in the December 2023 quarter, somewhat higher than what we described as the stable run rate $7,200,000 per quarter. The increase was primarily due to higher salaries and employee benefits expenses, Resulting from higher expense accrual adjustments for the supplemental executive retirement plan. For fiscal 2024, We continue to expect a run rate of approximately $7,200,000 per quarter as a result of increased wages And inflationary pressure on other operating expenses. In fact, the actual run rate for the fiscal year to date Has been $7,100,000 per quarter. Our short term strategy for balance sheet management Is somewhat more conservative than last fiscal year.

Speaker 1

We believe that slowing the loan portfolio growth is the best course of action at this time as a result of tighter liquidity conditions. We were successful in execution of this strategy this With loan origination volumes at the low end of the quarterly range and loan payoffs also at the low end of the quarterly range. The total interest earning assets composition improved from last quarter with a small increase in the average balance of loans receivable And a decrease in the 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 an increase in the average balance of borrowing. We exceed well capitalized capital ratios by significant margin, allowing us to execute on our business plan and capital management goals without complications.

Speaker 1

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 63,000 shares of common stock In the December 2023 quarter, for the fiscal year to date, we distributed approximately $2,000,000 of cash dividends to shareholders and repurchased approximately $1,200,000 worth of common stock. As a result, Our capital management activities resulted in an 82% distribution of fiscal year to date Net income. We encourage everyone to review our December 31 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.

Speaker 1

We will now entertain any questions that you may have regarding our financial results. Thank you. Aaron?

Operator

Thank you. And our first question comes from the line of Andrew Liesch with Piper Sandler. Go ahead.

Speaker 2

Hi, good morning. Question on the margin outlook here. If we get a series of Fed break cuts, I guess what sort of effect do you think that could have on the margin going forward? It sounds like you're already seeing some relief on the funding side, at least on the wholesale accounts.

Speaker 1

Yes. I think, Andrew, as we think about the balance sheet, we probably have a longer tail than many On our assets or our loans repricing upward, because they are hybrid arms tied to SFR or multifamily Or even commercial. And so, as the indices have moved upward, In many cases, that upward repricing loan has been capped by the periodic cap Or there is also the situation where the loan is in its fixed period and will not adjust until it moves out of the fixed period. So I think there is tremendous opportunity with respect to The loan portfolio to continue to adjust upward with a longer tail on that Than others may have with C and I lending, for instance. So even if we see The Fed beginning to move interest rates downward, I think our earning assets, particularly the loan portfolio can reprice upward.

Speaker 1

Conversely, as you point out, the funding side of the balance sheet Probably is toward the higher end of the range And we can see some relief there. You'll note in our earnings release that we describe The amount of brokered CDs that we have in portfolio and that brokered CD balance is 122 $700,000 The weighted average cost of those brokered CDs was 5.26%. This is at December 31. We have recently seen a decline in brokerage CD rates. And in fact, the most recent CD that we put on the books to replace a maturing CD Came on at 4.70%.

Speaker 1

So there's about 56 basis points of relief Between the weighted average and the portfolio of those funds and what the current funding costs So, I think as you point out, calendar 2024 Looks to be a little bit better with outlook as it relates to net interest margin, Certainly, then where we began in calendar 2023.

Speaker 2

Got it. That's very helpful. Thanks for that detail. And then you mentioned in the release 2024 maybe having Possibility that more a better opportunity, more favorable environment for growth. Are you seeing anything right now or are you still just waiting to see on how The Fed's reaction and their monetary policy plays out.

Speaker 1

Sure. The thing that We think about with respect to opportunity for growth is what the liquidity environment looks like Thankfully, as a result of the Fed comments in the subsequent to their December meeting, They essentially confirmed that they're thinking about lowering rates in calendar 2024. And as a result of that, we did see interest rates move down Essentially across the curve except for the very short end of the curve. And that I think will provide some relief To deposit gathering or gathering funding from other sources in contrast to what we saw in 2023. And if we see that there is some relief and we have the ability To gather deposits and funding at more reasonable prices because liquidity is In a better situation in the banking environment, that will trigger our thinking to populate growth On to the balance sheet, we run a relatively high loan to deposit ratio.

Speaker 1

Historically, we have done that because of the nature of the loans that we have 30 year mortgages and we're sensitive to that and we don't want You'll populate even higher loan deposit ratios in a poorer or poor liquidity environment. So that's really what we have to see. We think that there is opportunity right now to grow if that's what we were choosing to do. As we mentioned in the prepared comments, we have tightened our underwriting standards Beyond where we normally have them and we've priced ourselves up with respect To the loan products essentially to slow production to match what is coming in the form of payoffs Such that we're maintaining our loan portfolio.

Speaker 2

Got it. That's very helpful. Thank you for the thoughts there. I will step back.

Operator

Thank you for your questions, Andrew. Our next question is from the line of Tim Coffey with Janney. Tim, your line is live.

Speaker 3

Thank you. Good morning, Jonathan. Good morning, Tim.

Speaker 1

Good morning.

Speaker 3

Calvin, as we kind of go through this year with the outlook for modest loan growth, for all the items you've discussed already, I'm wondering do you have any sense of how much cash you'll start to carry on the balance sheet or do you anticipate rolling that back into securities?

Speaker 1

Well, I'm not certain that our preference would be to roll it into securities. We would prefer to see an environment where we are populating loan growth on the balance sheet. And only when we get to a position where we're running into loan to deposit ratio concern Where then we somehow have excess cash on the balance sheet, would we consider Investment Securities. Another situation that could develop as we roll through Calendar 2024, as mortgage rates come down, I expect that there may be more prepayments and payoffs. If you think about some of the mortgages that not just us, but the industry put on the books In calendar 2023, some of those mortgages are probably now in the money with respect to refinance activity.

Speaker 1

So as we think about balance sheet, our preference first is to populate loan growth To the extent that we accumulate too much cash On the balance sheet, there are other things we can do perhaps paying down brokered CDs, Wholesale advances or borrowings or even I suppose look to investment securities to Take care of that excess cash, but that's not something we see in our immediate future.

Speaker 3

Right. Okay. You kind of led into my second question, which was, if you look at demand for mortgages or even the payoffs as you mentioned, How much do rates need

Speaker 2

to come down to really start to ignite that activity?

Speaker 1

Well, I think anecdotally we're starting to hear that activity has increased Certainly, from where we were in the December quarter, now part of that could be Entering the new fiscal year, the holidays are or calendar year, the holidays are over and just generally activity picks up In the March quarter, historically. But I think as well, interest rates have come down 70, 80 basis points maybe from where they kind of peaked out Before the Fed's comments in middle December and they started reversing. So, I think activity has already picked up. But certainly, if we see the Fed begin to move down with their 1st rate movement, even though the market is kind of Already forecasting that. I think that wakes up the consumer a little bit more than where they're currently at and perhaps that denotes More refi activity and then ultimately more loan activity.

Speaker 2

Okay. Great. Those are my questions. Thank you very much.

Operator

Thanks for your questions, Tim. Phone, we'll go ahead and just wait a couple more seconds here to see if we have any other additional questions. I am not seeing any other questions. So, Mr. Ternus, I'll turn it back over to you for any closing remarks.

Speaker 1

Well, thank you very much, Aaron. I appreciate the help on the call. And thank you to the participants. And I look forward to speaking with you all next quarter. Thank you.

Operator

Thank you. And ladies and gentlemen, that does conclude today's call. Thank you all for joining. You may now disconnect. Have a great day.

Powered by Quartr
Earnings Conference Call
Provident Financial Q2 2024
00:00 / 00:00