Q1 2023 Provident Financial Holdings Inc Earnings Call

Thank you for standing by and welcome to the first quarter earnings call. At this time all participants are in a listen only mode and later, we will conduct a question and answer session instructions will be given at that time should require assistance. During the conference. Please press Star then zero and an operator will assist you offline as a reminder, today's conference.

Is being recorded I would now like to turn the conference over to our host Mr. Craig Blunden. Please go ahead Sir.

Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident financial Holdings and on.

On the call with me is Don <unk>, our President Chief operating and Chief Financial Officer.

We began high of a brief administrative item to address.

Our presentation today discusses the company's business outlook and will include forward looking statements those.

Those statements include descriptions of management's plans objectives or goals for future operations products or services forecast of financial or other performance measures and statements about the company's general outlook for economic conditions 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 32022, 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 and I hope that each of you has had an opportunity to review our earnings release, which describes our first quarter results.

The most recent quarter.

We originated $84 $6 million of loans held for investment.

A small decline from the $85 million.

In the prior sequential quarter.

During the most recent quarter. We also experienced 31 $7 million of loan principal payments and payoffs, which is down from $41 $3 million in the June 2022 quarter and at the lower end with a quarterly range.

Currently competition remains elevated for loan originations and it seems that many borrowers have reduced their new activity.

As a result of rising mortgage interest rates.

Additionally, we are seeing more demand for single family adjustable rate mortgage products as a result of higher fixed rate mortgage interest rates.

For the most part our underwriting requirements have not changed but certain loan products, such as retail and office CRE remains somewhat tighter and other CRM products. Additionally.

Additionally, our single family or multifamily pipelines are modestly smaller in comparison to last quarter, suggesting our originations in the December 2022 quarter.

Will decline from this quarter, but still remain within the range of recent prior quarters, which has been between 60 and $95 million.

For the three months ended September 32022 loans held for investment increased by approximately 6%.

As compared to June 32022, ending balances with increases in single family and multi family loans more than offsetting small declines in the commercial real estate and construction loan categories.

Current credit quality is holding up very well and you will note that there are just $10000.

Dollars worth of early stage delinquency balances as of September 32022. Additionally, nonperforming assets decreased to just $964000.

This was down from $1.4 million on June 32022.

We recorded a $70000 provision for loan losses in the September 2022 quarter.

The allowance for loan losses to gross loans held for investment decreased to 57 basis points on September 30 of 2022 from 59 basis points on June 30.

You will note that we remain on the incurred loss model and have not adopted <unk>.

It means that our allowance methodology cannot be reasonably compared to Cecil adopters.

Our net interest margin expanded by 12 basis points for the quarter ended September 32022, compared to the June 22nd sequential quarter as.

The net result of an 18 basis point increase in the average yield on total interest, earning assets and an eight basis point increase in the cost of total interest bearing liabilities.

Notably our average cost of deposits increased by just two basis points to 13 basis points for the quarter ended September 32022, compared to 11 basis points in the prior sequential quarter.

Additionally, our borrowing costs increased 13 basis points in the September 'twenty, two quarter compared to the June 2022 quarter.

The 3.15% net interest margin this quarter was positively impacted by approximately four basis points.

He has all of lowered net deferred loan costs associated with fewer loan payoffs in the September 'twenty two quarter in comparison to the average net deferred loan cost amortization of the five previous five quarters.

We expect that near term future quarters will also benefit from fewer loan payoffs as.

As a result of higher mortgage interest rates.

In addition, new loan production is being originated at higher mortgage interest rates and prior recent quarters and adjustable rate loans.

Loans in our portfolio are now adjusting the higher interest rates in comparison to their existing interest rates.

Also for multifamily and commercial real estate loans.

Loans are adjusting above there's existing floor rates.

These factors suggest that our net interest margin will continue its near term expansion.

We continue to look for operating efficiencies throughout the company to lower operating expenses are.

Our FTE count on September 32020 to decrease to 160 compared to 164 FTE on the same date last year.

You will note that operating expenses increased to $6 $9 million in the September 2022 quarter, consistent with a stable run rate.

Ultimately $6 $9 million per quarter.

We expect a similar run rate for the remainder of fiscal 2023.

But also anticipate some pressure on operating expenses as a result of increased wages and inflationary pressure on other operating expenses.

Our short term strategy for balance sheet management is unchanged from last quarter, we believe that leveraging the balance sheet with prudent loan portfolio growth is the best course of action.

We were very successful execution this quarter as loan origination volumes at the higher end of the quarterly range and loan payoffs at the lower end of the quarterly range.

Total interest, earning asset composition improved during the quarter with an increase in the average balance of loans receivable and decreases in lower yielding average balances of investment securities and interest earning deposits.

However, the total lynch bearing liabilities composition deteriorated a bit.

A small decline in the average balance of deposits and an 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 program to do that.

Allied capital management tool and we repurchased approximately 50000 shares of common stock in mid September 2022 quarter.

For the fiscal year to date, we distributed approximately $1 million of cash dividends to shareholders and repurchase shares of common stock cost of approximately $723000.

As a result, our capital management activities resulted in an 83% distribution of year to date fiscal 2023 net income.

We encourage everyone to review our September 30, Investor presentation posted on our web site.

You will find that we included slides regarding financial metrics asset.

That 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.

Thank you and ladies and gentlemen, if you would like to ask a question. Please press one and then zero on your Touchtone phone.

You will hear the acknowledgment that she had been placed into Q and you can't remove yourself from the queue at any time by repeating the one zero command.

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First question will come from the line of Nick could trolley of Piper Sandler. Please go ahead.

Good day, you're correct it down again, how are you.

Good morning.

I wanted to start with loan pricing what are you putting single family and multifamily production on the books at.

So right now Nick New originations remember theres pipelines involved and they could be coming in at lower rates than I'm going to describe now, but the new applications new loan originations are coming in in the high fives to the low sixes.

Yeah.

Across all of our products.

Okay.

The commercial real estate portfolio has been relatively consistent over the past several quarters and you mentioned the tighter retail and office markets can you provide some additional color on your appetite for adding CRE credits.

Is it your expectation that the current trend continues in future periods or does it inflect and we see a pickup in activity.

You know the.

CRE is kind of interesting for us in that.

You know what we're doing in <unk>.

That category.

<unk> is essentially augmenting our main business lines of single family and multifamily and so we're not looking to grow that category significantly above where it is we'd like to see some growth there, but overall when we think about CRE were.

Particularly with respect to retail.

Anchored by Big box for instance.

Or office, you know the big box or online capabilities of purchasing products. These days.

<unk> suggests that we need to be cautious and that type of retail and office is the rebuild work situations.

There are some data out there, suggesting that far fewer workers are back in the office space.

And there's difficulty bringing them back into office space. So we're cautious there as well yeah. So overall, we're interested in commercial real estate, but probably staying away from those categories. We describe our in one of our slides in.

In our Investor presentation.

The type of off it or see our review that we have in portfolio.

You know the highest category happens to be office Ah Theres also some mixed use are in that space Theres. Some retail there's warehouse Ah Theres mobile home parks medical and dental office very little in the way of restaurant or fast food or a non gasoline.

So.

It's an area of interest for us, but it's not the main driver of our loan portfolios.

Okay.

Very helpful. And then lastly is it your expectation that you adopt Cecil in September 2023 quarter.

No our Cecil adoption will be July 1st of 2023.

And you will see it for the first time in the September 'twenty, two 'twenty three quarter, but essentially we're in the process now of.

Putting all of that.

Legwork in to getting us to the point of being able to adopt Cecil on July 1st right. Thanks for that clarification. Thank you for taking my questions I appreciate the color.

Thank you and our next question comes from the line of Tim Coffey of Janney. Please go ahead.

Thank you good morning, gentlemen.

Morning.

Morning.

Yeah, I have questions about kind of how you're managing deposit costs going forward.

You know obviously the competition is starting to increase on rates competitors are moving their rates up, especially kind of in your markets. What are your plans to kind of you know.

Troll deposit costs near term.

So Tim you pointed out.

Heightened competition and that in fact is the case that we're beginning to see that.

When we think about our deposit costs, we entered this cycle.

With none in the way of wholesale deposits. So our thinking is and the way that we're managing that is our retail deposit base is.

He is relatively stable over various interest rate cycles.

And we don't have to compete aggressively on our transaction accounts to keep that base in place.

The one area of retail where we do have to respond to the market is the C. DS our certificates of deposit.

And right now we are responding by having our rack rates are higher than what they were but additionally, we're responding on a case by case basis with our customers who have maturing deposits that are looking for are high.

Here right and can demonstrate that there are competitors out there willing to give them that higher rate. We will generally match that rate to keep that relationship in place as a result of that our deposit costs.

Because our base deposits are relatively stable will be well controlled although they will be increasing them, where we will see more increase in our deposit cost is with respect to wholesale funding.

So for the first time in quite a few years, we have put on $30 million of brokered Cds are towards the end of August Oh, this quarter and to the extent that our growth rate with respect to the loan portfolio.

Increase.

Increases to such an extent that are core deposits are not keeping up we will be funding ourselves more wholesale and that will bring deposit costs up as well to the extent that brokerage Cds are coming in.

But that's only at the margin because again the base is stable.

Call it $950 million of of a stable base, which will rise very slowly and cost in comparison to growth of the balance sheet, which will be funded at the margin with respect to wholesale deposits federal home loan bank advances.

Or other types of funding. So that you know you can see that for the quarter I think our deposit costs went up by two basis points in comparison to the June quarter that was driven by the $30 million of brokerage Cds.

Our other costs or our base costs stayed relatively the same in comparison to last quarter.

Okay, Great that's great color, Don and thank you.

And then just kind of if you could talk about the secondary market for mortgage loans if.

If you had to sell alone.

Out of the portfolio for whatever reason.

Is there is there a a active secondary market for it and so and if there is you know what do you how do you see that market evolving over the next couple of quarters.

Well its interesting there there is an active secondary market and in fact, we've been in that market often on purchasing loan packages by others.

That were originated by others, we still see those packages.

But the rise in interest rates the places those packages at a discount if one were to purchase them and so there is some price discovery going on with respect to what a seller who may be interested in selling that package at in contrast to <unk>.

What we would be willing to pay so there is a widening gap in that price discovery in comparison to what it was and that's a function of.

Rising interest rates. So the market is active we're still seeing it Freddie and Fannie are still in the market with respect to our single family production. So it's there. It's it's it's just different in that you know a loan package originated a two months ago.

So is selling at a discount today and often times. The seller is unwilling to accept the discount that we might be willing to pay.

Okay.

And as interest rates decline in calendar 'twenty two 'twenty three based on forward yield curve would you expect that market to cure itself.

See some dislocation a little bit longer.

Well, it's all it's all dependent upon how quickly the the fed is moving or how quickly the fed tops out with respect to what they're doing with the targeted fed funds rate you know I expect that.

Even after the fed starts or stops raising interest rates at some point in the future there will be a little bit of lag with respect to more liquidity coming into that market because again those loans are being originated.

Probably at something less or two or three months.

Prior to that last stop it.

Rising interest rates.

Okay.

And then my last question was on the non US non interest expense growth I think you said mentioned being pregnant she doesn't come with kind of an inflation growth rate attached to it.

Is that in the mid single digits or do you think it could be higher than that.

Yeah.

Well I think it's you know I think we described as stable run rate of about $6.9 million and I think if you look back a quarter over quarter year over year, you're going to see that its about $6 $9 million with some adjustments.

<unk> for items kind of coming in you know last quarter I think we were at $6 $4 million, but that's because we had some recoveries on some things that came in as a credit to expense and lowered our operating expenses by about 500000 from.

The $6 9 million dollar run rate.

So you know, we think $6 $9 million as a stable run rate, but there is some pressure out there with respect to wages with respect.

The inflation on other products and services that we use so there could be a bit of pressure, but I would keep that probably in the low single digits based upon what we're seeing currently.

Okay, Great. That's great color those are my questions. Thank you very much for the time.

Thanks.

Thank you once again for questions from the phones, that's one and then Seattle.

Okay.

And speakers there are no further questions in queue from the phones at this time.

Alright, thank you.

Well I, thank everyone for joining us we look forward to speaking with you next quarter.

Thank you.

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