Provident Financial Q4 2024 Earnings Call Transcript

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Provided by Quartr
July 30, 2024

There are 4 speakers on the call.

Operator

Thank you for standing by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the Provident Financial Holdings 4th Quarter and Fiscal 20 24 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Donovan Ternes, President and CEO. You may begin.

Speaker 1

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. Our presentation today discusses the company's business outlook and will include forward looking statements.

Speaker 1

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 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 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 4th quarter and fiscal year results. In the most recent quarter, we originated $18,600,000 of loans held for investment, an increase from $18,200,000 in the prior sequential quarter. During the most recent quarter, we also had $30,600,000 of loan principal payments and payoffs, which is up from $28,500,000 in the March 2024 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 rates, although we have been seeing some additional activity recently.

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 rates. 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, but we'll be quick to return to more routine criteria when conditions improve for growth. Additionally, our single family and multifamily loan pipelines are similar in comparison to last quarter, suggesting our loan originations in the September 2024 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which has been between $18,000,000 $54,000,000 For the 3 months ended June 30, 2024, loans held for investment decreased by approximately $12,800,000 when compared to March 31, 2024, with decreases in the multifamily, commercial business and construction loan categories, partly offset by increases in the single family and commercial real estate loan categories. Current credit quality is holding up well and you will note that non performing assets increased to $2,600,000 on June 30, 2024, which is up slightly from $2,200,000 on March 31, 2024. Additionally, there were no early stage delinquencies at June 30, 2024.

Speaker 1

We continue to monitor commercial real estate loans, particularly loans secured by office buildings, but are confident that our underwriting characteristics of our borrowers and collateral will continue to perform well. We have outlined these characteristics on Slide 13 of our quarterly investor presentation, which shows that our exposure to loans secured by various types of offices is $41,500,000 or 3.9 percent of the loans held for investment. You should also note that we have just five CRE loans for $2,500,000 maturing during the remainder of calendar 2024 and seven CRE loans were $3,100,000 maturing in calendar 2025. We recorded a $12,000 recovery for credit losses in the June 2024 quarter. The recovery for credit losses recorded in the Q4 of fiscal 2024 was primarily attributable to a slight decline in the outstanding balance of loans held for investment and a shorter estimated life of the single family loan portfolio resulting from decreased market interest rates and higher loan prepayment estimates.

Speaker 1

The outstanding balance of loans held for investment at June 30, 2024 declined 2% to $1,050,000,000 from 1 $700,000,000 at March 31, 2024. The allowance for credit losses to gross loans held for investment was unchanged at 67 basis points at both June 30, 2024 and March 31, 2024. Our net interest margin was unchanged at 2.74% for the quarter ended June 30, 2024 compared to the March 31, 2024 sequential quarter as the net result of a 10 basis point increase in the average yield on total interest earning assets and then the 11 basis point increase in the cost of total interest bearing liability. Notably, our average cost of deposits increased by 9 basis points to 127 basis points for the quarter ended June 30, 2024 compared to 19 basis points in the prior sequential quarter. In addition, our cost of borrowing increased by 21 basis points in the June 2024 quarter compared to the March 2024 quarter.

Speaker 1

The net interest margin this quarter was negatively impacted by approximately 2 basis points as a result of higher net deferred loan costs associated with loan payoffs in the June 2024 quarter compared 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 and adjustable rate loans in our portfolio are now adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $116,900,000 of loans repricing upward in the September 2024 quarter at a currently estimated 90 basis points to a weighted average of 8.17 percent from 7.27 percent and approximately $79,700,000 of loans repricing upward in the December 2024 quarter at a currently estimated 51 basis points to a weighted average of 8.23 percent from 7.72%. However, many adjustable rate loans in all categories are currently limited in their upward adjustment by their 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 current market conditions where interest rates have moved lower in 12 month and longer terms.

Speaker 1

Excluding overnight borrowing, we have approximately $60,500,000 of Federal Home Loan Bank Advances and brokered certificates of deposits maturing in the September 2024 quarter at a weighted average interest rate of 5.32%. Given current market conditions, we would expect to reprice these maturities to a lower weighted average cost of funds. All of this suggests that the current pressure on the net interest margin may soon subside. We continue to look for operating efficiencies throughout the company, the lower operating expenses. Our FTE count on June 30, 2024 decreased to 160 compared to 161 FTE on the same date last year.

Speaker 1

You will note that operating expenses were 7 $200,000 in the June 2024 quarter, which is consistent with the stable run rate of $7,200,000 per quarter. For fiscal 2025, we expect a run rate of approximately $7,400,000 per quarter as a result of increased wages and inflationary pressures on other operating expenses. Our short term strategy for balance time as a result of tighter liquidity conditions and the inverted yield curve. We were successful in the execution of this strategy this quarter with loan origination volumes at the low end of the quarterly range and low payoffs also at the low end of the quarterly rate. The composition of interest earning assets reflected a decrease in the average balance of loans receivable and then the lower yielding average balance of investment securities.

Speaker 1

Also, the total interest bearing liabilities composition deteriorated somewhat with a larger decrease in the average balance of deposits in contrast to a smaller decrease 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 48,000 shares of common stock in the June 2024 quarter. For fiscal 2024, we distributed approximately $3,900,000 of cash dividends to shareholders and repurchased approximately 2,600,000,000 dollars worth of common stock.

Speaker 1

As a result, our capital management activities resulted in an 88% distribution of fiscal 2024 net income. We encourage everyone to review our June 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 that you may have regarding our financial results. Thank you.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.

Speaker 2

Hi, good morning. So Donovan, it sounds like you're becoming increasingly willing to look at adding loans to the portfolio and opening up growth, I guess, what sort of specific things do we need to see for that to happen?

Speaker 1

Well, Andrew, I think your assessment is accurate. We are interested in a growing loan portfolio again. The difficulty is the inverted yield curve and the extent that the inversion is inverted, which complicates populating call it a 5 year hybrid arm at the 5 year part of the curve and funding it at the call it 6 month, 1 year, 18 month part of the curve, where the inversion essentially brings a lower spread at the margin when we populate those loans. If we see the Fed actually begin to lower interest rates as they've suggested or as pundits have suggested, we can see the short end part of the curve in fact reduce in cost and that would allow us to populate loans at a better spread than we are currently. So, the first thing is we want to see a lower inversion in the yield curve that would be beneficial to us.

Speaker 1

But the second part of it is the fact that we're still in an divergent yield curve environment. There's still a risk of recession, although I would argue that the risk is lower today than it was 6 months ago or a year ago. But we are sensitive to that. And obviously, we're not interested in growing loan portfolio in the event we're about to enter a recession.

Speaker 2

Got it. Very helpful. Turning to capital, the book value and equity continue to rise even with the buyback and the dividend. And I know you want to retain some capital for growth returns. But have you thought about or has the Board thought about a special dividend just to return some of this to shareholders, just given where things stand right now?

Speaker 1

Sure. I think a special dividend has been thought of. I think our preferred course of action is cash well, growth, cash dividends to shareholders and then ultimately repurchasing shares when we are trading at approximately 70% of tangible book value. So, I think those three courses of action are preferred to a special cash dividend.

Speaker 2

Got it. Very good. You've answered all my other questions. I'll step back. Thank you.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Timothy Coffey with Janney. Please go ahead.

Speaker 3

Hi, Donovan.

Speaker 1

Hey, good morning.

Operator

Good morning.

Speaker 3

Good morning. Hi. So what is your best estimate for so we get into a down rate environment, what is your best estimate for the payoff and pay down activity on your loan portfolio?

Speaker 1

Well, we would expect payoffs to potentially increase if we see interest rates decline. Although the thing to think about there, our in the money coupons at that point would probably be the origination volume that was originated over the past couple of years at higher interest rates. And that volume is or has been lower than what we routinely originate in a better environment. And then secondarily, those loans that have adjusted or fully indexed and are now fully adjustable, perhaps those loans as well would consider refi. Although, if we see the short end of the curve come down, the indices will come down and those loans would actually begin to adjust downward.

Speaker 1

So some of the enticement to refinance those loans would be taken off the table if we would to start seeing those loans adjusting downward because they're already in the fully indexed and fully adjustable period. So, generally speaking, we would think that prepayment estimates should go up as a result of a decline in interest rates, but it's uncertain how much would really or how much it would really go up because of the 2 conditions I've suggested, which is lower volume of in the money loans and adjustable rate loans, perhaps reversing course and adjusting downward.

Speaker 3

Okay. Regardless of the rate environment, do you typically see 100% of the loans that are scheduled to reprice in a quarter stick around versus being prepaid? Or is it always less than

Speaker 1

100%? Well, there is some activity with respect to payoff volume and some of that payoff volume could be those loans that are set to reprice, obviously, and they might choose to pay off into a lower costing loan than sticking around with respect to repricing. Although the one thing we've seen and we've heard anecdotally from some of our originators, Because multifamily and commercial real estate rates are still a little bit higher and most firms are not originating 30 interest rates that are lower in nature. Not many of them are necessarily a new a new prepayment penalty. And so, there might be some lag for some of these borrowers to look for lower interest rates before they refinance.

Speaker 1

And in fact, while we've had some payoff before they began their first re pricing or their next re pricing, it's been a routine or relatively small number.

Speaker 3

Okay. That's helpful. Thank you. In your mind, to get investors back in the market, they need a material decline in interest rates or visibility to lower interest rates?

Speaker 1

Well, I think visibility we're already seeing it. I think it's visibility to lower interest rates. But ultimately, with respect to the borrowers, they want to see lower interest rates. If you're talking about investors in bank stocks, I think there's already been a return to the market.

Speaker 3

Yes. I was talking more about commercial real estate investors.

Speaker 1

Okay. Got it.

Speaker 3

Yes. I've seen the movement in bank stocks and I think that's positive. And then I appreciate the color on your advances and broker deposits that are scheduled to mature. I'm wondering within your deposit portfolio, from your retail customers or your general bank customers, how much of those or what segments of those deposits reprice on day 1 of a rate

Speaker 1

cut? Very little of them will reprice on day 1, Tim. As you know, our deposit beta has been very low during this cycle and that's because we've not done much with respect to increasing interest rates on our transaction accounts. It would only be the retail CDs that would perhaps reprice downward, but they're in a locked term. So, it wouldn't be a day 1 phenomenon.

Speaker 1

It would be over the course of time as that CD were to mature very similarly to brokered CDs.

Operator

I will now turn the call back over to Donovan Ternes for closing remarks.

Speaker 1

Thank you everyone for attending our Q4 fiscal year end call. In the event you have any follow-up questions, we are open to follow-up questions in a follow-up call. Just give us a ring

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Provident Financial Q4 2024
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