Q3 2023 Provident Financial Holdings Inc Earnings Call

Yeah.

Ladies and gentlemen, thank you for standing by welcome to the Provident Financial Holdings third quarter earnings call. At this time all participant lines are in a listen only mode. Later, there will be an opportunity for your questions with instructions being given at that time as a reminder, today's conference.

<unk> is being recorded I would now like to turn the conference over to Craig Blunden, Chairman and C. E. O. Please go ahead.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings.

On the call with me is Don <unk>, 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 forecast 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.

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.

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.

Subsequent to the Form 10-K.

We're looking statements are effective only as of the date they are made and.

The company assumes no obligation to update such 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.

And the most recent quarter, we originated $53 $9 million of loans held for investment.

The decline from the $74.3 million in the prior sequential quarter.

During the most recent quarter, we also experienced $17 $5 million of loan principal payments and payoffs.

Which is down from the $28 million in December 2022 quarter and at the lower end of the quarterly range.

Currently it seems that many real estate investors have reduced our activity as a result of rising mortgage interest rates. Additionally, we're seeing more consumer demand for single family adjustable.

Mortgage products as a result of higher fixed rate mortgage interest rates we.

We have generally tightened our underwriting requirements across all of our product lines as a result of the current economic environment and higher funding costs.

Additionally, our single family and multifamily loan pipelines are smaller in comparison to last quarter, suggesting that our loan originations in the June 2023 quarter will decline from this quarter and they dropped below the range of recent quarters, which has been between 54.

And $94 million.

For the three months ended March 31.

2023 loans held for investment increased by approximately 4% compared to December 31, 2022 ending balances.

Increases in the single family multifamily commercial real estate and construction loan categories.

Current credit quality is holding up very well and you will note that nonperforming assets decreased to just $945000, which was down from $956000 on December 31 2022.

Additionally.

Just $962000 of early stage delinquency balances at March 31, 2023.

We're aware of mounting concerns regarding commercial real estate loans that are confident.

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 just three CRE loans for $1 $9 million maturing during the remainder of 2023.

And just 10 CRE loans for $5 $6 million maturing in 2024.

We recorded a $169000 provision for loan losses in the March 2023 quarter.

Allowance for loan losses to gross loans held for investment is unchanged at 56 basis points.

On March 31, 2023 compared to December 31.

You'll note that we remain on the incurred loss model and we will not adopt Cecil until July one 2023.

This means that our allowance methodology cannot be reasonably compared the Cecil adopters.

Our net interest margin declined by five basis points to 3%.

For the quarter ended March 31, 2023, compared to December 2022 sequential quarter as well.

You saw a 20 basis point increase in the average yield on total interest bearing assets.

30 basis point increase in the cost of total interest bearing liabilities.

Notably our average cost of deposits increased by 17 basis points to 37 basis points for the quarter ended December 31, 2023, compared to 20 basis points in the prior sequential quarter.

And our borrowing costs increased by 59 basis points in the March 2023 quarter compared to the December 2022 quarters.

The Netherlands margin this quarter was positively impacted by approximately two basis points as a result of lower net deferred loan costs associated with fewer loan payoffs in the March 2023 quarter in comparison to the average net deferred loan cost amortization of the previous five.

Five 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 their existing interest rates.

We have approximately $99 $3 million of loans repricing upward.

In the June 2023 quarter that currently estimated at 84 basis points to a weighted average yield of 6.24% from 5.41% and approximately $95 $3 million of loans repricing upward.

Timber 2023 quarter at.

At our current estimate of 104 basis points to a weighted average yield of 716% from six 1%.

Also.

For multifamily and commercial real estate loans, the loans are adjusting above their current interest rate floors.

However, many adjustable rate loans in all categories are currently limited in their upward adjustment by periodic rate counts.

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

Our FTE count on March 31, 2023 decreased to 160 compared to 163 FTE on the same date last year.

You'll note that operating expenses increased to $6 $9 million in the March 2023 quarter.

System, what we describe as a stable run rate.

We expect a similar run rate for the remainder of fiscal 'twenty to 'twenty three.

They experienced some pressure on operating expenses as a result of increased wages and inflationary pressures 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 successful 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.

The total interest, earning assets composition improved during the quarter the increase in the average balance of loans receivable and a decrease in lower yielding average balance of investment securities.

Over the total interest bearing liabilities composition deteriorated a bit with a small increase in the average balance of deposits.

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 Atlanta capital management goals without complications.

We believe that maintaining our cash dividend is very important we also recognize that prudent capital returned to shareholders through stock buyback programs is a valid capital management tool and we repurchased approximately 98000 shares of common stock in the March 2023 quarter.

For the fiscal year to date, we distributed approximately $3 million of cash dividends to shareholders.

And repurchase approximately $3 $6 million worth of common stock.

As a result, our capital management activities resulted at 97% in distribution of year to date fiscal 2023 net income.

I encourage everyone to review our March 31, Investor presentation posted on our website, you'll find that we included slides regarding financial metrics asset quality and capital management, which we believe will give you additional insight site into 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.

Okay.

Ladies and gentlemen, if you would like to ask a question you May press. One then zero on your telephone keypad, you will hear tone acknowledging your request you may remove yourself from the queue at any time by repeating the one zero command.

And our first question is from Tim Coffey with Janney. Please go ahead.

Thank you I'm wondering Craig Martin Donovan.

Tim.

Yeah, Good morning, guys.

Right.

I'll start with my first question just looking at the loan to deposit ratio, how you feel about that ratio going forward.

So.

Historically as a thrift balance sheet.

The balance sheet typically has a higher loan to deposit ratio than a typical commercial bank balance sheet.

For instance, nonetheless, it's a loan to deposit ratio is about 110% right now which is.

At the upper end of our range. So we're managing.

That loan to deposit ratio given the current economic environment.

In such a way that it doesn't go up too.

Too much further.

While still not competing too aggressively on deposits as it relates to the current environment.

As you understand.

Deposits have been called into question Oh, as a result of the earlier bank failures in March.

And.

Tissue has heated up quite significantly with respect to deposit gathering.

And frankly, we don't want to get caught up in that to the extent we.

We're not required to.

And so that does perhaps.

Scaled back a little bit our growth forecast or our growth ability.

With respect to new loan production and the like but 110% loan to deposit ratio, we've run that ratio isn't.

In that way in the past.

And it is not a significant concern right now other than the fact that we are cognizant of it and.

Don't want to be out there too far on the bleeding edge.

Okay, great. Thank you for the color I can switch to deposits I know the profile of your deposit or it seems like you would it would tend to be sticky stickier than others that we've seen across the industry at least I'm wondering what kind of discussions have you been having with depositors about.

Maintain balances, they're about rates things of that nature.

So youre right with respect to the nature of our deposits are they are primarily retail deposits.

They're small business deposits.

We don't have any large businesses.

Deposits per se.

In fact, the average deposit balance or average size of our deposit.

Per account is $34000. So it's a very very granular.

And that's primarily retail or consumer.

That has been generated through the branch system.

With respect to our depositors in particular.

We are in a defensive strategy mode as it relates to.

Depositors that may have maturing certificates of deposit.

To the extent that they're interested in leaving the institution for a higher rate we will defend it we will match those rates.

But we're not out there advertising as others are.

With respect to aggressive certificates of deposit because frankly, we don't want to jeopardize the stickiness or the longevity of that depositor.

So we have had some detection and deposits are not necessarily in accounts.

Some depositors have left for higher rates.

That's the more rate sensitive deposit or but on the whole.

We haven't had the issue that others have had.

With respect to depositors being nervous.

As it relates to Uh huh.

Our depositor.

Depositor profile in comparison to others that might have tech deposits, a venture capital deposits or crypto deposits or things of that nature. So there.

There wasn't really any.

Concern for Bard depositors with respect to that.

That type of activity.

But there is a inquiries from depositors with respect to the.

The interest rates, we are paying and we are matching on a core deposit basis.

Okay, great. Thank you and then one last question before I step back has to do with capital and capital kind of outlook going forward if.

Our profitability continues to be steady or is your focus going to be on perhaps growing capital or continuing to pay out a certain portion of relatively stable earnings as cat as capital returns to shareholders.

So we mentioned in the prepared comments that Oh.

We think the cash dividend is very very important and.

We foresee.

Being in a position of maintaining the cash dividend.

As it relates to the repurchase of stock.

We also even through the.

The banking turmoil turmoil that has occurred continued to repurchase stock similar to what was done in the.

December quarter.

Hum.

And right now our capital ratios are still very very strong relative to industry standards and as you point out our profitability metrics are still very good. So we foresee the ability to continue to repurchase stock perhaps but.

We won't forecast.

What those amounts may or may not be ultimately that will be dictated by the industry turmoil, what regulators may be thinking with respect to our.

Capital.

As you know there's been some discussion that perhaps.

Certain capital requirements may be modified as a result of the banking turmoil.

Great Alright. Thank you those are my questions I very much appreciate your time.

And ladies and gentlemen, if you do have any additional questions. You May press one zero at this time.

Yeah.

And we have no other questions you may continue.

Well if there are no other questions, we will wrap up the quarter.

And we appreciate everybody's participation with respect to the call.

And look forward to the next call in July thank.

Thank you very much.

Thank you Blake.

Ladies and gentlemen, this conference is available for replay after 11 a M. Eastern time today through May four at Midnight you may access the replay service at any time by calling 18662071041 and enter the access code of 9361 to six eight and that.

It does conclude your conference for today. Thank you for your participation you may now disconnect.

Yeah.

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