Provident Financial Holdings Inc

NASDAQ:PROV

Earnings Call Transcript 2024-Q1

[Operator]

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.

[Craig Blunden, executive]

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of 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 on the risk factors that could cause actual results to differ from any forward-looking statements 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-Qs and other SEC filings that are filed subsequent to the Form 10-K.

Forward-looking statements are effective only as 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 adjust 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.

Additionally, our single-family and multifamily loan pipelines are similar in comparison to last quarter, suggesting our loan originations 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 $19 million and $85 million.

For the 3 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 multifamily and commercial real estate, partly offset by growth in the single-family and construction loan categories.

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 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 9 CRE loans for $5 million maturing in calendar 2024. We recorded a $545,000 provision for credit losses in the September 2023 quarter. The provision was primarily the result of an increase in the average life of the loan portfolio, stemming from the higher -- 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 1, 2023, resulting in a $1.2 million increase in the allowance for credit losses, an $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 a 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. 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 payoffs in the September 2023 quarter in comparison to the average net deferred loan cost amortization of the 5 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 have 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 2024 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 adjusted 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 described 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 the 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 in 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 quarterly range. 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 some with a decrease in 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 as 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.

[Operator]

[Operator Instructions]

Our first question will come from the line of Tim Coffey with Janney.

[Timothy Coffey, analyst]

First, Craig, congratulations on your retirement. I've covered 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 board, I hope that we can still catch up from time to time.

[Craig Blunden, executive]

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

[Timothy Coffey, analyst]

Great. If I could ask about the provision and just in general, the higher for longer environment. If we -- if that does take place, we are at higher interest rates than longer, what impact is that going to have on the provision going forward.

[Donavon Ternes, executive]

So Tim, this is Donavon. 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 live 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.

I'll note that I think 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 30-year term mortgage loans in single-family and multifamily. So any decline in prepayment speeds in those 2 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 timeline, it's very difficult to forecast what those prepayment speeds are going to do from 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 68 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.

[Timothy Coffey, analyst]

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

[Donavon Ternes, executive]

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

[Timothy Coffey, analyst]

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

[Donavon Ternes, executive]

Well, I think it's too early to tell. I've been hearing from many others and reading many analyst reports with respect to earnings season 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 timeline for this fiscal year because we have approximately the same amount of assets and liabilities repricing in any given period, we're relatively neutral-positioned, maybe a little bit liability sensitive with respect to balance sheet. And so there's certainly pressure on deposits and the cost of deposits.

There's certainly pressure on the cost of borrowings 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.

[Timothy Coffey, analyst]

Okay. And then just one question on kind of emerging credit quality trends. There was another institution that reported a couple of nonaccrual loans in the Southern California marketplace, other office loans. The problem wasn't that they were office loans. The problem was they were in lease-up and they couldn't get the new tenants in the building. I'm wondering, are you seeing any lease-up issues across your commercial real estate portfolio?

[Donavon Ternes, executive]

To date, we're not seeing that really. But when we think about our portfolio, we don't have downtown office high-rise or urban center locations on the collateral. It's typically suburban markets, and those markets seem to be doing better than some of the urban centers seem to be. Just on kind of an ancillary note, this quarter, one of our nonperforming loans at September 30, 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, not so much commercial real estate. The market is not very good there. But for a single day, 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.

[Timothy Coffey, analyst]

Okay. The investor deck has really good information on your loan to values. So those are really low, so that's good to hear. And then one final question for you, Donavon. Now that Craig is retiring, what's the #1 thing you plan to change?

[Donavon Ternes, executive]

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

[Operator]

We'll go next to Andrew Liesch with Piper Sandler.

[Andrew Liesch, analyst]

Congratulations to you both, Craig on your retirement and Donavon to the CEO promotion. 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 of $7.2 million.

[Donavon Ternes, executive]

Yes. 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 didn't meet some of our bonus targets for the quarter. And as a result of that, there weren't salary and benefit 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.

[Andrew Liesch, analyst]

And then the -- just a commentary on the -- would you have maturing on the loan side or with the recent paydowns and production in the pipeline, still safe to assume that the portfolio is going to hold relatively steady, just muted growth?

[Donavon Ternes, executive]

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. I think September quarter was a better environment than either of those 2 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. We've tightened our underwriting standards from where we were, and 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. 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 it's not necessarily flat.

[Operator]

[Operator Instructions]

There are no further questions from the phones.

[Craig Blunden, executive]

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.

[Operator]

Thank you. And ladies and gentlemen, today's conference is available for replay beginning at 11:00 a.m. Pacific Time today, running through November 2nd at midnight. You may access the AT&T replay system by dialing [phone] and entering the access code of 7886283. International dialers may call [phone]. Those numbers, again, are 1 [phone] or [phone] with the access code of 7886283.

That does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.