Provident Financial Holdings Inc (PROV) 2024 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Provident Financial Holdings first quarter earnings call. (Operator Instructions) 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.

Thank you, good morning, everyone. This is Craig Blunden, Chairman and CEO 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, 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 and 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-K for the year ended June 30, 2023, and from the Form 10-Q's 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 first quarter results. In the most recent quarter, we originated $18.5 million of loans held for investment, a decline from the $24.3 million in the prior sequential quarter.

During the most recent quarter, we also had $23 million of loan principal payments and payoffs, which is down from the $25.1 million 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 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. 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 origination 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 $19million and $85 million.

For the three months ended September 30, 2023, loans held for investment declined by $5.5 million when compared to the June 30, 2023, ending balances with declines in multi-family and commercial real estate, partly offset by growth in the single-family and construction loan category. Current credit quality is holding up very well. And you will note that nonperforming assets increased to just $1.4 million, which is up slightly from the $1.3 million on June 30, 2023.

Additionally, there's $74,000 of early stage delinquency 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 nine CRE loans or $5 million maturing in calendar 2024. We recorded a $545,000 provision for credit losses in the September 2023 quarter. Provision was primarily the result of an increase in the average life of the loan portfolio stemming from the highest mortgage rates in approximately 23 years and lower prepayment estimates. The allowance for credit losses to 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 first, 2023, resulting in a $1.2 million increase in the allowance for credit losses and $824,000 decrease in equity, a $346,000 increase in deferred tax assets and a $28,000 decrease to the mark-to-market adjustment on loans held at fair value. Our net interest margin was unchanged at 2.88% 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 in 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 payoff in the September 2023 quarter in comparison to the average net deferred loan cost amortization of the five 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, we approximately $88.8 million of loans repricing upward in the December 2023 quarter at a currently estimated 82 basis points to a weighted average rate of 7.35% from 6.53% and approximately $102.8 million of loans repricing upward in the March 2020 fourth quarter at a currently estimated 102 basis points to a weighted average rate of 7.79% from 6.77%.

Also for multifamily and commercial real estate loans. The loans are adjusting above their existing floor rates However, many adjustable-rate loans in all categories are currently limited in their upward adjustments by their periodic interest rate caps. We continue to look for operating efficiencies throughout the company to lower operating expenses.

Our FTE count on September 30, 2023 decreased to 158 compared to 160 FTE on the same date last year, you will note that operating expenses decreased to $6.9 million in the September 2023 quarter, somewhat lower than what we describe as the stable run rate of $7.2 million per quarter. The decrease was primarily due to lower salaries and employee benefits expenses resulting from no quarterly or annual bonus expense accruals in the September 2023 quarter since the company missed a threshold bonus targets for the quarter.

For the fiscal 2024, we expect a run rate of approximately $7.2 million per quarter as a result of increased wages and inflationary pressure on other operating expenses, our short-term strategy for balance sheet management is somewhat more conservative than last fiscal year. We believe that slowing the loan portfolio growth is the best course of action as a result of tighter liquidity conditions.

We were successful at an 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 coloring range. 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 somewhat the decrease 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.

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. Thank you.

Thank you. (Operator Instructions)

Tim Coffey, Janney.

Thank you morning ladies and gentlemen. First Craig, congratulations on your retirement. We cover 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 Florida, I hope that we can still catch up from time to time.

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

Great. If I could ask about the Provision. And just in general, the higher for longer environment. If that does, it will taper -- as we are higher. And so it's a longer What impact is that going to 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 life 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.

And I'll note that I think go 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. 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 it 30-year term mortgage loans in single-family and multi-family. 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 time line, it's very difficult to forecast what those prepayment speeds are going to do for 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 substantially during a given period.

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

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 -- it's small hundreds of thousands of dollars of servicing assets. So there's going to be limited impact with the slowdown in prepayments on that asset.

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

Well, I think it's too early to tell. I've been hearing from many others in reading many analysts' reports with respect to earning season of 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 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 time line for this fiscal year because we have approximately the same amount of assets and liabilities repricing in any given period.

We're relatively neutral position, maybe a little bit liability-sensitive with respect to balance sheet. And so there's certainly pressure on deposits and their cost of deposits. There's certainly pressure on the cost of borrowings. And 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.

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 Southern California marketplace, other office loans. The problem was is that their office loans, the problem was they are in lease and I could get the new tenants in the building. I'm wondering, are you seeing any lease-up issues across your commercial real estate of portfolio?

To date, we're not seeing that really. But we think about our portfolio. We don't have downtown office high-rise or urban center locations on the collateral. It's typically sub-urban markets and those markets seem to be of the doing better than some of the urban centers seem to be.

And just on kind of an ancillary note this quarter, one of our non-performing loans at September 30, it 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. It's not so much commercial real estate. The market is not very good there. First think about 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.

Yeah. No, the investor deck has really good information on your loan to values. So those are those are really well. So that's good to hear on. And then one final question for you, Donavon now that Craig is so retiring was the number one thing you plan to change?

Well, I don't know that there's a dramatic or drastic change coming, Tim. 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. Things with respect to our loan portfolios and underwriting standards that we can potentially determined to make some changes given market environment. But by and large, I don't see dramatic change.

Okay. Sounds good. Those were my questions. Thank you very much for your time.

Thank you. Andrew Liesch, Piper Sandler.

Hey, good morning, guys, and congratulations to you both Craig and your retirement and Donovan to the CEO. promotion. Great to see. The commentary on the expense run rate, $7.2 million a quarter for this year. Is that going forward or could there be a step-up? So the full year average at $7.2 million?

Yeah, 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 did meet some of our bonus targets for the quarter and as a result of that, and there were salary and benefits expenses related to those bonus accruals.

So we came in at $6.9 million rather than the $7.2 million. 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.

Got it. That's helpful there and thank you. And then the just the commentary on the -- what you have maturing and on the loan side and or with the three can pay-downs and production and the pipeline still safe to assume that the portfolio is going to hold relatively steady is muted growth?

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 and September quarter was a better environment than either 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.

Yes, we've tightened our underwriting standards from where we were. We've raised our interest rates on the loan products that we're offering. 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 environment.

Yeah, 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.

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

Thank you. (Operator Instructions)

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.

Thank you. And ladies and gentlemen, today's conference is available for replay beginning at 11AM Pacific Time today running through November second at midnight. You may access this by dailing 866-207-1041 entering the access code of 7886283. International dialers may call at 402-970-0847. Those numbers again are 1866 207-1041 or 402-970-0847 with the access code of 7886283. That does conclude your conference for today. Thank you for your participation and for using ATT event conferencing. You may now disconnect.