Provident Financial plc

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the Provident Financial Holdings Fourth Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. There will be an opportunity for your questions and instructions to be given at that time. If you require any assistance today, please press star followed by the zero, and an AT&T operator will assist you. 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.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donovan Chernus, 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 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 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 investments, a decline from the $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 the $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 just-for-eight mortgage products as a result of higher fixed-rate mortgage interest rates. We've 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 similar 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 and $6 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 by declines in the MOLA family and construction loan categories. Current credit quality is holding up very well, and you will note that non-performing 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 an 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-sparing assets and a 34 basis increase in the cost of total interest-sparing 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 adjustable 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'll 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 execution 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 some, 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 also 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 dividend to shareholders and repurchased approximately $4.6 million worth of common stock. As a result, our capital management activities resulted in 100% distribution of fiscal 2023 net income. We encourage everyone to review our June 30th 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 insights 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?

Thank you, Mr. Blenden. If you wish to ask a question today, please press 1 followed by the 0. Now you hear an acknowledgment that you've been placed in queue. Take yourself out of the queue by simply pressing the 1-0 command again. So again, for questions, go ahead and hit 1 followed by 0 at this time. Place yourself in queue.

began with the line Andrew Leisch with Piper Sandler please go ahead hey good morning guys morning just want to just talk about funding costs right here in your in your outlook on that front yeah I guess where is the I guess your cumulative deposit beta so far and where do you expect that's going to peak out through the cycle

Andrew, it's Donovan. So I think if you look at what our deposit beta has done in comparison to others, we are outperforming. However, that's 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, if you will. And as a result of that, we are using more funding from brokered CDs as well as from FHLB advances primarily. So our overall cost of funds has increased dramatically over the last quarter, if you will, in comparison 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 think there is pressure with respect to 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. So that is adding to the cost of retail deposits as well. I think much of what you will see with respect to funding cost pressure will result from what we see the FOMC doing. Yesterday they raised by 25 basis points. That will apply some pressure with respect to funding costs as well as repricing existing maturities. And then to the extent we populate growth on balance sheet with new loan originations such that it provides growth, we are funding that growth at the margin, which is typically being funded wholesale or, if we're match funding it, through federal home loan bank advances. So the net interest margin coming on or the spread coming on with new growth is below the that 2.88% net interest margin, so that would additionally apply some pressure. So I think there is ongoing pressure with respect to 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. And 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 because of the large amount of loans repricing upward. Got it.

That's really helpful. And 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 paydowns do you see on the horizon? Is stable balance the right way to be thinking about the loan portfolio right now?

So as a result of the turmoil, we obviously carved back origination volume by tightening underwriting criteria as well as increasing loan rates. And in fact, we essentially paused growth during the June quarter. But overall in the fiscal year, 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 with respect to loan products. We could ramp up growth, we think, if we chose to do so. But we're probably, 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. And if we do grow the portfolio, it's probably going to be in the low signal digits as we think about the next quarter. As more visibility develops in the market with respect to liquidity, with respect to cost of funding and the like, we could choose to ramp that growth up, and we think there's adequate demand for us to be able to do so.

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

And let's give a final reminder, one followed by zero for questions at this time, one followed by zero. And gentlemen, nobody else is queuing up.

OK.

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

Ladies and gentlemen, this conference will be available for replay starting at 2 p.m. this afternoon and running through August 3rd at midnight. You may access the AT&T Event Services replay system by dialing 866-207-1041. And one moment as I get the access code. I apologize. I'll give the number again. 866-207-1041. And... I'll give you the access code.

Tom, I believe the access code is 826-5228. Thank you very much.

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

826-5228.

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.