Provident Financial Holdings Inc

NASDAQ:PROV

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Operator]

Thanks 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 Fourth Quarter and Fiscal 2024 Earnings Call. [Operator Instructions]

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

[Donavon Ternes, executive]

Good morning. This is Donavon 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. 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, 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 of the date that 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 results. In the most recent quarter, we originated $18.6 million of loans held for investment, an increase from $18.2 million in the prior sequential quarter. During the most recent quarter, we also had $30.6 million of loan principal payments and payoffs, which is up from $28.5 million in the March 2024 quarter and still at the lower end of the quarter of the 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. 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 million and $54 million.

For the 3 months ended June 30, 2024, loans held for investment decreased by approximately $12.8 million 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 nonperforming assets increased to $2.6 million on June 30, 2024, which is up slightly from $2.2 million on March 31, 2024. Additionally, there were no early-stage delinquencies at June 30, 2024.

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 $41.5 million or 3.9% of the loans held for investment. You should also note that we have just 5 CRE loans or $2.5 million maturing during the remainder of calendar 2024, and 7 CRE loans were $3.1 million, 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 fourth quarter 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.

The outstanding balance of loans held for investment at June 30, 2024, declined 2% to $1.05 billion from $1.07 billion 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 the average yield on total interest-earning assets and an 11 basis point increase in the cost of total interest-bearing liabilities.

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. 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 the higher interest rates in comparison to their existing interest rates. We have approximately $116.9 million of loans repricing upward in the September 2024 quarter at a currently estimated 90 basis points to a weighted average of 8.17% from 7.27% and approximately $79.7 million of loans repricing upward in the December 2024 quarter at a currently estimated 51 basis points to a weighted average of 8.23% 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 maturing wholesale funding downward as a result of current market conditions, where interest rates have moved lower in 12 months and longer terms. Excluding overnight borrowing, we have approximately $60.5 million of Federal Home Loan Bank advances and brokered certifies 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 authorities 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 to lower operating expenses. Our FTE count on June 30, 2024, and decreased to 160 compared to 161 FTE on the same date last year. You will note that operating expenses were $7.2 million in the June 2024 quarter, which is consistent with the stable run rate of $7.2 million per quarter. For fiscal 2025, we expect a run rate of approximately $7.4 million per quarter as a result of increased wages and inflationary pressures 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 at this 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 in the lower yielding average balance of investment securities. 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 $3.9 million of cash dividends to shareholders and repurchased approximately $2.6 million worth of common stock. 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]

[Operator Instructions] Our first question comes from the line of Andrew Liesch with Piper Sandler.

[Andrew Liesch, analyst]

So Donavon, 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?

[Donavon Ternes, executive]

Well, Andrew, I think your assessment is accurate. We are interested in 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 fundings 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. But the second part of it is the fact that we're still in an inverted 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.

[Andrew Liesch, analyst]

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 to fund growth returns. But have you thought about or has the Board thought about a special dividend just to return some of this to shareholders is given where things stand right now?

[Donavon Ternes, executive]

Sure. I think a special dividend has been thought of. I think our preferred course of action is cash -- well, cash dividends to shareholders and then ultimately, repurchasing shares when we are trading at approximately 70% of tangible book value. So I think those 3 courses of action are preferred to a special cash dividend.

[Operator]

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

[Timothy Coffey, analyst]

So what is your best estimate for -- so we get into a down rate environment, what is your best estimate or the payoff and paydown activity on your loan portfolio?

[Donavon Ternes, executive]

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. So some of the enticement to refinance those loans would be taken off the table if we would 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 additions I've suggested, which is lower volume of in-the-money loans, and adjustable rate loans, perhaps reversing course and adjusting downward.

[Timothy Coffey, analyst]

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

[Donavon Ternes, executive]

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 interest rates that are lower in nature, not many of them are necessarily interested in a 5-year or a 7-year hybrid arm at these higher rates because they get locked in to 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. And in fact, while we've had some payoff before they began their first repricing or their next repricing, it's been a routine or a relatively small number.

[Timothy Coffey, analyst]

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

[Donavon Ternes, executive]

I think visibility we're already seeing, and 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 the investors in bank stocks, I think there's already been a return to the market.

[Timothy Coffey, analyst]

Yes. I was talking more about commercial real estate investors. I seem you move it 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 general bank customers, how much of those -- or what segments of those deposits reprice on day 1 of a rate cut?

[Donavon Ternes, executive]

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

[Operator]

That concludes our Q&A session. I will now turn the call back over to Donavon Ternes for closing remarks.

[Donavon Ternes, executive]

Thank you, everyone, for attending our fourth quarter and 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, and have a good day.

[Operator]

This concludes today's call. You may now disconnect.