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Provident Financial Holdings, Inc. (NASDAQ:PROV) Q3 2024 Earnings Call Transcript

Provident Financial Holdings, Inc. (NASDAQ:PROV) Q3 2024 Earnings Call Transcript April 30, 2024

Provident Financial Holdings, Inc.  isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Holdings Third Quarter for Year 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Donavon Ternes, President and CEO. Please go ahead.

Donavon Ternes: 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.

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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 ending 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 third quarter results.

In the most recent quarter, we originated $18.2 million of loans held for investment, a decrease from $20.2 million in the prior sequential quarter. During the most recent quarter, we also had $28.5 million of loan principal payments and payoffs, which is up from $17.8 million in the December 2023 quarter and 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 higher mortgage and other interest rates. 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 condition.

Additionally, our single-family and multifamily loan pipelines are similar in comparison to last quarter, suggesting our loan originations in the June 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 $75 million. For the 3 months ended March 31, 2024, loans held for investment decreased by approximately $10 million when compared to the December 31, 2023, ending balances with decreases in single-family, multifamily, and commercial real estate loan categories partly offset by increases in commercial business and construction loans. Credit quality is holding up very well, and you will note that nonperforming assets increased to $2.2 million at March 31, 2024, which is up from $1.8 million on December 31, 2023.

Additionally, there is just $388,000 of early-stage delinquency balances at March 31, 2024. We are aware of the mounting concerns regarding commercial real estate loans, particularly office, but are confident that the 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 office of various types is $41.8 million or 3.9% of loans held for investment portfolio. You should also note that we have just 6 CRE loans for $3.4 million maturing for the remainder of 2024. We recorded a $124,000 provision for credit losses in the March 2024 quarter. The provision for credit losses recorded in the third quarter of fiscal '24 was primarily attributable to a longer estimated life of the single-family loan portfolio resulting from increased market interest rates and lower loan prepayment estimates, while the outstanding balance of loans held for investment at March 31, 2024, declined 1% to $1.07 billion from $1.08 billion at December 31, 2023.

A close up view of an ATM interface with the company logo displayed prominently.
A close up view of an ATM interface with the company logo displayed prominently.

The allowance for credit losses to gross loans held for investment increased to 67 basis points at March 31, 2024, from 65 basis points on December 31, 2023. Our net interest margin declined by 4 basis points to 2.74% for the quarter ended March 31, 2024, compared to the December 31, 2023, sequential quarter as the net result of an 8 basis point increase in the average yield on total interest-earning assets, and a 17 basis point increase in the cost of total interest-bearing liabilities. Notably, our average cost of deposits increased by 19 basis points to 118 basis points for the quarter ended March 31, 2024, compared to 99 basis points in the prior sequential quarter. And our cost of borrowing increased by 12 basis points in the March 2024 quarter compared to the December 2023 quarter.

The net interest margin this quarter was negatively impacted by approximately 1 basis point as a result of higher net deferred loan costs associated with loan payoffs in the March 2024 quarter in comparison 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 adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $98.2 million of loans repricing upward in the June 2024 quarter at a currently estimated 89 basis points to a weighted average rate of 7.88% from 6.98%, and approximately $108.4 million of loans repricing upward in the September 2024 quarter at a currently estimated 89 basis points to a weighted average rate of 8.06% from 7.71%.

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 current interest rates have moved lower in 12-month-and-longer terms. 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 at March 31, 2024, increased to 161 compared to 160 FTE on the same date last year. You will note that operating expenses decreased to $7.2 million in the March 2024 quarter, which is consistent with the stable run rate of approximately $7.2 million per quarter.

For fiscal 2024, we continue to expect a run rate of approximately $7.2 million per quarter. In fact, though, the actual run rate for the fiscal year-to-date first 3 quarters has been somewhat lower at $7.1 million per quarter. 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 loan payoffs also at the low end of the quarterly range. The total interest-earning assets composition reflected a small decrease in the average balance of loans receivable and a decrease in the lower-yielding average balance of investment securities.

In addition, the total interest-bearing liabilities composition improved somewhat with a decrease in the average balance of deposits but a larger 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 50,000 shares of common stock in the March 2024 quarter. For the fiscal year-to-date, we distributed approximately $2.9 million of cash dividends to shareholders and repurchased approximately $2 million worth of common stock.

As a result, our capital management activities resulted in a 91% distribution of fiscal year-to-date net income. We encourage everyone to review our March 31 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. Kathleen?

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