Earnings Call Transcript - PROV Q4 2023

Operator, Operator

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the Provident Financial Holdings Fourth Quarter Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead.

Craig Blunden, Chairman and CEO

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. On the call with me is Donavon Ternes, our President, Chief Operating Officer 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 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-K 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-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 fourth quarter and fiscal year-end results. In the most recent quarter, we originated $24.3 million of loans held for investment, a decline from $53.9 million in the prior sequential quarter. During the most recent quarter, we also experienced $25.1 million of loan principal payments and payoffs, which is up from $17.5 million in the March 2023 quarter but 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 rising mortgage 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 product lines as a result of the current economic environment, higher funding costs and tighter liquidity conditions. Additionally, our single-family and multifamily loan pipelines are smaller in comparison to last quarter, suggesting our loan originations in the September 2023 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which has been between $24 million and $86 million. For the three months ended June 30, 2023, loans held for investment were essentially unchanged when compared to the March 31, 2023 ending balances with increases in single-family and commercial real estate, offset by declines in the multifamily and construction loan categories. Current credit quality is holding up very well, and you will note that nonperforming assets increased to just $1.3 million, which is up slightly from the $945,000 on March 31, 2023. Additionally, there is just $1,000 of early-stage delinquent loan balances at June 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 2023 and have only nine CRE loans for $5.1 million maturing in 2024. We recorded a $56,000 recovery from the allowance for loan losses in the June 2023 quarter. The allowance for loan losses to gross loans held for investment decreased slightly to 55 basis points on June 30, 2023, from 56 basis points on March 31, 2023. You will note that we remain on the incurred loss model and we did 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 12 basis points to 2.88% for the quarter ended June 30, 2023, compared to the March 31, 2023 sequential quarter as a net result of a 20 basis point increase in the average yield on total interest-bearing assets and a 34 basis point increase in the cost of total interest-bearing liabilities. Notably, our average cost of deposits increased by 25 basis points to 62 basis points for the quarter ended June 30, 2023, compared to 37 basis points in the prior sequential quarter, and our borrowing costs increased by 29 basis points in the June 2023 quarter compared to the March 2023 quarter. The net interest margin was not impacted by the deferred loan costs associated with loan payoffs in the June 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 interest rate loans in our portfolio are now adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $107.1 million of loans repricing upward in the September 2023 quarter at a currently estimated 87 basis points to a weighted average rate of 7.01% from 6.14%, and approximately $78.4 million of loans repricing upward in the December 2023 quarter at a currently estimated 98 basis points to a weighted average rate of 7.38% from 6.40%. Also for multifamily and commercial real estate loans, the loans are adjusting above their existing floor rates. However, many adjusted rate loans in all categories are currently limited in their upward adjustment by their periodic interest rate caps. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on June 30, 2023, decreased to 161 compared to 162 FTE on the same date last year. You will note that operating expenses increased to $7.6 million in the June 2023 quarter, somewhat higher than we described as the stable run rate of $7.0 million per quarter. The increase was primarily due to higher salaries and employee benefit expenses resulting from the $303,000 true-up expenses associated with the May 30, 2023 vesting of stock options and distribution of restricted stock and a $280,000 lower recovery of loan origination costs consistent with lower origination volume. 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 quarter. 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 executing 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 the lower-yielding average balance of investment securities. However, the total interest-bearing liabilities composition deteriorated somewhat, with a small decrease in the average balance of deposits and a larger increase in the average balance of borrowings. 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 all recognize that prudent capital returns to shareholders through stock buyback programs is a valid capital management tool and we repurchased approximately 51,000 shares of common stock in the June 2023 quarter. For the fiscal year, we distributed approximately $4 million of cash dividends to shareholders and repurchased approximately $4.6 million worth of common stock. As a result, our capital management activities resulted in a 100% distribution of fiscal 2023 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 you may have regarding our financial results. Thank you. Tom?

Operator, Operator

Let's begin with Andrew Liesch with Piper Sandler. Please go ahead.

Andrew Liesch, Analyst

Hi. Good morning, guys. I'd like to discuss funding costs here in your outlook on that front. Where is your cumulative deposit beta so far, and where do you expect it to peak out through the cycle?

Donavon Ternes, President, COO, CFO

Andrew, it's Donavon. If you look at what our deposit beta has done in comparison to others, we are outperforming. However, that has been complicated recently because of the liquidity conditions and the turmoil that occurred earlier this year with respect to retail deposits where there was a flight to the Too Big To Fail institutions. As a result of that, we are using more funding from brokered CDs as well as from FHLB advances. Primarily, our overall cost of funds has increased dramatically over the last quarter compared to where we were previously, even though the retail deposits in our book are still relatively low with respect to their costs. As we think about where we will go in the future, we do anticipate pressure regarding deposit costs still in the environment. We are not advertising CD specials or the like. However, we're pretty aggressive with respect to defending existing deposits on the balance sheet, and we will match fund CD specials with specific customers who have a significant or long-term relationship with us. That is adding to the cost of retail deposits as well. Much of what you will see regarding funding cost pressure will result from what we see the FOMC doing. Yesterday, they raised by 25 basis points, which will apply some pressure regarding funding costs as well as repricing of existing maturities. To the extent we grow the balance sheet with new loan originations that provide growth, we are funding that growth at the margin, which is typically being funded wholesale or through Federal Home Loan Bank advances. The net interest margin or the spread coming on with new growth is below that 2.88% net interest margin, which would additionally apply some pressure. So, I think there is ongoing pressure regarding funding costs, but we did point out in the call the number of loans that we have repricing upward over the next couple of quarters. As a result of that, we think the net interest margin will be defended to some degree, even if we see a little bit of compression due to the large amount of loans repricing upward.

Andrew Liesch, Analyst

Got it. That's really helpful. Just on the loan growth and the outlook there, it sounds like net growth is going to remain rather muted. But how is the pipeline stacking up for this quarter? And what paydown do you see on the horizon? Is a stable balance the right way to think about the loan portfolio right now?

Donavon Ternes, President, COO, CFO

As a result of the turmoil, we carved back origination volume by tightening underwriting criteria and increasing loan rates. In fact, we essentially paused growth during the June quarter. However, in the fiscal year from July 1 to June 30, we grew the loan portfolio by approximately 15%, which is pretty robust growth. What we're finding in the market is that there is decent demand for loan products. We could ramp up growth, and we think if we chose to do so, we would be able to do that. However, at least in the foreseeable future, the next quarter or so, we're probably not going to return to a 15% growth rate in the loan portfolio. If we do grow the portfolio, it will probably be in the low single digits as we think about the next quarter. As more visibility develops in the market concerning liquidity and cost of funding, we could choose to ramp that growth up as we think there is adequate demand for us to be able to do so.

Andrew Liesch, Analyst

Got it. That's very helpful. Thanks for taking the questions. I'll step back.

Operator, Operator

And gentlemen, nobody else is queuing up.

Craig Blunden, Chairman and CEO

Okay. If nobody has any further questions, I look forward to speaking with all of you again next quarter. So thank you for your participation.

Operator, Operator

Ladies and gentlemen, this conference will be available for replay starting at 2:00 p.m. this afternoon and running through August 03 at midnight. You may access the AT&T Event Services replay system by dialing (866) 207-1041. One moment, if I get the access code, I apologize. I will give the number again (866) 207-1041.

Donavon Ternes, President, COO, CFO

Tom, I believe the access code is 8265228.

Operator, Operator

Thank you very much. I appreciate that. My screen is running a little slow. Do you want to give that one more time?

Donavon Ternes, President, COO, CFO

8265228.

Operator, Operator

Thank you very much, and I apologize for not having that ready, and that does conclude our conference for today. Thank you for your participation and using the AT&T Event Services. You may now disconnect.