Q1 2024 Provident Financial Holdings Inc Earnings Call
Okay.
Speaker 1: Ladies and gentlemen, thank you for standing by and welcome to the Provident Financial Holdings First Quarter earnings call.
Ladies and gentlemen, thank you for standing by and welcome to the Provident Financial Holdings first quarter earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time should you require assistance. During the conference. Please press Star then zero and an operator will assist you.
Speaker 1: At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. Should you require assistance during the conference, please press star, then zero, and an operator will assist you offline.
Speaker 1: As a reminder, today's conference has been recorded, and now we now turn the conference over to our host, Chairman and CEO , Mr. Craig Blunden. Please go ahead, sir.
Offline as a reminder, today's conference is being recorded and I will now turn the conference over to our host Chairman and CEO. Mr. Craig Blunden. Please go ahead Sir.
Speaker 2: Thank you. Good morning everyone. This is Craig Blondon, Chairman of the CEO of Problem Financial Holding.
Good morning, everyone. This is Craig Blunden, Chairman and CEO problem financial Holdings.
Speaker 2: And on the call with me is Donovan Ternus, our president, Chief Operating and Chief Financial Officer.
And on the call with me is Don <unk>, our President Chief operating and Chief Financial Officer.
Speaker 2: Before we begin, I have a brief administrative item to address.
Before we begin I have a brief administrative item to address.
Speaker 2: Our presentation today discusses a company's business outlook and will include forward-looking statements.
Our presentation today discusses the company's business outlook and will include forward looking statements.
Speaker 2: 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.
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.
Speaker 2: We also may make forward-looking statements during the question and answer period following management's presentation.
We also may make forward looking statements during the question and answer period following management's presentation.
Speaker 2: or looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today.
These forward looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today.
Speaker 2: 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.
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.
Speaker 2: From the annual report on Form 10K for the year ended June 30, 2023, and from the Form 10Qs and other SEC filings that are filed subsequent to the Form 10K.
From the annual report on Form 10-K for the year ended June 32023, and from the form 10, Qs and other SEC filings that are filed subsequent to the Form 10-K.
Speaker 2: Or looking statements are effective only as the date they are made and the company assumes no obligation to update this information.
Forward looking statements are effective only as of the date. They are made and the company assumes no obligation to update this information.
Speaker 2: 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 first quarter result.
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 first quarter results.
Speaker 2: In the most recent quarter, we originated $18.5 million of loans held for investment. A decline from the $24.3 million in the prior sequential quarter.
And the most recent quarter, we originated $18.5 million of loans held for investment are.
A decline from the $24 $3 million in the prior sequential quarter.
Speaker 2: During the most recent quarter, we also had $23 million of loan principal payments.
During the most recent quarter, we also had $23 million of loan principal payments and payoffs, which is down from the $25 $1 million in the June 20th 23 quarter and still at the lower end of the quarterly range currently seems that many real estate investors.
Speaker 2: and payoffs, which is down from the $25.1 million in the June 2023 quarter, and still at the lower end of the quarterly range.
Speaker 2: Currently, seems that many real estate investors have reduced their activity as a result of rising mortgage and other interest rates.
Have reduced their activity as a result of rising mortgage and other interest rates. Additionally.
Speaker 2: Additionally, we're seeing more consumer demand for single family adjusts to rate mortgage products as a result of higher fixed rate mortgage interest rate.
Additionally, we're seeing more consumer demand for single family adjustable rate mortgage products as a result of higher fixed rate mortgage interest rates.
Speaker 2: We have generally tightened our under-riding requirements and increased our pricing across all of our product lines as a result of higher funding costs.
We have generally tightened our underwriting requirements and increased our pricing across all of our product lines.
As a result of higher funding costs.
Speaker 2: current economic environment and tighter liquidity conditions. Additionally, our single family and mold family loan pipelines are similar in comparison to the last quarter. Suggesting our loan originations in the December 2023 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which has been between $19.85 million.
The current economic environment and tighter liquidity conditions.
<unk> are single family and multifamily loan pipelines are similar in comparison to the last quarter, suggesting our loan originations in the December 2023 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which has been between 19 and $85 million.
Speaker 2: For the three months ended September 30, 2023, loans held for investment declined by $5.5 million when compared to the June 30, 2023 ending balances with declines in multifamily and commercial real estate partly offset by growth in the single family and construction loan category.
For the three months ended September 32023 loans held for investment declined by $5.5 million.
When compared to the June 32023, ending balances with declines in multifamily and commercial real estate, partly offset by growth in our single family and construction loan categories.
Speaker 2: Current credit quality is holding up very well, and you will note that non-performing assets increase to just $1.4 million, which is up slightly from the $1.3 million on June 30th, 2023.
Credit quality is holding up very well and you'll note that nonperforming assets increased to just $1.4 million, which is up slightly from the $1 $3 million on June 32023.
Speaker 2: Additionally, there's just $74,000 of early stage zoning speed balances at September 30th, 2023.
Additionally, there is just $74000 of early stage delinquency balances at September 32023.
Speaker 2: We are aware of the mounting concerns regarding commercial estate loans, but are confident that the underwriting characteristics of our borrowers and collateral will form well.
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.
Speaker 2: We have outlined these characteristics on slide 13 of our quarterly investor presentation.
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 calendar 2023.
Speaker 2: You should also note that we have no CRE loans maturing during the remainder of calendar 2023.
Speaker 2: and have only 9 CRE loans for $5 million maturing in calendar 2024.
And I've, only nine CRE loans or $5 million maturing in calendar 'twenty 'twenty four.
Speaker 2: We recorded a $545,000 provision for credit losses in the September 2023 quarter.
We recorded a $545000 provision for credit losses in the September 2023 quarter.
Speaker 2: The provision was primarily the result of an increase in the average life of the low portfolio stemming from the higher highest mortgage rates in approximately 23 years and lower pre-payment
Provision was primarily the result of an increase in the average life of the loan portfolio stemming from the higher highest mortgage rates and approximately 23 years and lower prepayment estimates.
Speaker 2: The allowance for credit losses to gross loans held for investment increased to 72 basis points on September 30, 2023, from 55 basis points on June 30, 2023. You will note that we adopted CECL on July 1, 2023, resulting in a $1.2 million increase in the allowance for credit losses.
Allowance for credit losses to gross loans held for investment increased to 72 basis points on September 30th 2023 from 55 basis points. At June 32023, you will note that we adopted Cecil on July one 2023, resulting in a $1 2 million.
The increase in the allowance for credit losses and.
Speaker 2: An $824,000 decrease in equity.
$824000 decrease in equity.
Speaker 2: $346,000 increase in deferred tax assets, and a $28,000 decrease to the mark-to-market adjustment on loans held at fair value.
$346000 increase in deferred tax asset.
And a $28000 decrease to the mark to market adjustment on loans held at fair value.
Speaker 2: Our net interest margin was unchanged at 2.88% for the quarter ended September 30, 2023, compared to the June 30, 2023 sequential quarter. As the result of a
Our net interest margin was unchanged at 2.88% for the quarter ended September 32023, compared to the June 32023 sequential quarter as a result of.
Speaker 2: 17 basis point increase in the average yield on total interest-earning assets, and an 18 basis point increase in the cost of total interest-earning liability.
17 basis point increase in the average yield on total interest, earning assets and an 18 basis point increase in the cost of total interest bearing liabilities.
Speaker 2: Notably, our average cost of deposits increased by 18 basis points to 80 basis points for the quarter ended September 30, 2023, compared to 62 basis points in the prior sequential quarter.
Notably our average cost of deposits increased by 18 basis points to 80 basis points for the quarter ended September 32023, compared to 62 basis points in the prior sequential quarter.
Speaker 2: and our cost of borrowing increased by seven basis points in the September 2023 quarter compared to the June 2023 quarter.
And our cost of borrowing increased by seven basis points in the September 2023 quarter compared to the June 2023 quarter.
Speaker 2: An interest margin this quarter was favorably impacted by approximately one basis point as a result of lower net deferred loan costs associated with loan payoffs in the September 2023 quarter in comparison to the average net deferred loan cost amortization of the five previous quarters.
The net interest margin this quarter was favorably impacted by approximately one basis point as a result of lower net deferred loan costs associated with loan payoffs in the September 2023 quarter in comparison to the average net deferred loan cost amortization of the five previous quarters.
Speaker 2: 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 the existing interest rates.
New loan production is being originated higher mortgage interest rates in recent prior quarters.
And adjustable rate loans in our portfolio are now adjusting the higher interest rates in comparison to the existing interest rates.
Speaker 2: We have approximately $88.8 million of loans repricing upward in the December 2023 quarter at a currently estimated 82 basis points to a weighted average rate of 7.35%.
Approximately $88 $8 million of loans repricing upward in the December 2023 quarter.
At our currently estimated at 82 basis points tool weighted average rate of 7.35%.
Speaker 2: from 6.53% and approximately $102.8 million of loans repricing upward in the March 2024 quarter at a currently estimated 102 basis points to a weighted average rate of 7.79% from 6.77%.
From 6.53% and approximately $102.8 million of loans repricing upward in the March 2024th quarter and are currently estimated at 102 basis points to a weighted average rate of 7.79% from six point.
Seven 7%.
Speaker 2: Also, for multifamily and commercial real estate loans, the loans are adjusting above their existing floor rate.
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 adjustments by their periodic interest rate caps.
Speaker 2: However, many adjustable rate loans in all categories are currently limited in their upward adjustments by their periodic interest rate cap.
Speaker 2: We continue to look for operating efficiencies throughout the company to lower operating expenses.
We continue to look for operating efficiencies throughout the company to lower operating expenses.
Speaker 2: Our FTE count on September 30, 2023 decreased to 158 compared to 160 FTE on the same date last year.
Our FTE count on September 32023 decreased to 158 compared to 160 FTE on the same date last year.
Speaker 2: You will note that operating expenses decreased to $6.9 million in the September 2023 quarter, somewhat lower than what we described as the stable run rate of $7.2 million per quarter.
You'll note that operating expenses decreased to $6 $9 million in the September 2023 quarter somewhat lower than what we describe as the stable run rate of seven $2 million per quarter.
Speaker 2: The decrease was primarily due to lower salaries and employee benefits expenses resulting from no quarterly or annual bonus expense accruals in the September 2023 quarter since the company missed the threshold bonus targets for the quarter.
The decrease was primarily due to lower salaries and employee benefits expenses, resulting from no quarterly or annual bonus expense accruals in the September 2023 quarter since the company Miss a threshold bonus targets for the quarter.
Speaker 2: 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.
For the fiscal 'twenty 'twenty four we expect a run rate of approximately $7 $2 million FERC quarter. As a result of increased wages and inflationary pressure on other operating expenses.
Speaker 2: Our short-term strategy for balance sheet management is somewhat more conservative than the last fiscal year.
Our short term strategy for balance sheet management is somewhat more conservative than last fiscal year.
Speaker 2: We believe that slowing the loan portfolio growth is the best course of action as a result of tighter liquidity conditions.
We believe that slowing the loan portfolio growth is the best course of action as a result of tighter liquidity conditions.
Speaker 2: We were successful in execution this quarter with loan arregistration volumes at the lower end of the quarterly range, and loan payoffs also at the lower end of the quarterly range.
We were successful in execution this quarter with loan origination volumes at the lower end of the quarterly range.
And loan pay offs also at the lower end of the <unk> range.
Speaker 2: The total interest earning assets composition was very similar to last quarter with a decrease in the average balance of loans receivable and a similar decrease in lower yielding average balance of investment security.
Total interest, earning assets composition was very similar to last quarter with a decrease in the average balance of loans receivable and a similar decrease in lower yielding average balance of investment securities.
Speaker 2: However, the total interest-earning liabilities composition deteriorated some with a decrease in the average balance of deposits and a small increase in the average balance of borrowings.
However, the total interest bearing liabilities composition deteriorated somewhat the decrease the average balance of deposits and a small increase in the average balance of borrowings.
Speaker 2: We exceed well-capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complication.
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.
Speaker 2: We believe that maintaining our cash dividend is very important. We also recognize that prudent capital returns to shareholders through stock buyback programs as a responsible capital management tool. And we repurchased approximately 36,000 shares of common stock in the September 2023 quarter.
Through stock buyback programs as a responsible capital management tool.
And we repurchased approximately 36000 shares of common stock in the September 2023 quarter.
Speaker 2: For the fiscal year to date, we distributed approximately $981,000 of cash dividends to shareholders and repurchased approximately $495,000 worth of common stock.
For the fiscal year to date, we distributed approximately $981000 of cash dividends to shareholders and repurchased approximately $495000 worth of common stock.
Speaker 2: As a result, our capital management activities resulted in an 84% distribution of fiscal year-to-date net income.
As a result, our capital management activities resulted in an 84% distribution of fiscal year to date net income.
Speaker 2: We encourage everyone to review our September 30th investor presentation posted on our website.
We encourage everyone to review our September 30th Investor presentation posted on our website.
Speaker 2: You will find that we included slides regarding financial metrics.
You will find that we included slides regarding financial metrics.
Speaker 2: Asset, quality and capital management, which we believe will give you additional insight on our solid financial foundations supporting the future growth of the company.
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.
Speaker 2: We will now entertain any questions you may have regarding our financial results.
We will now entertain any questions you may have regarding our financial results.
Thank you.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one and then zero on your Touchtone phone you will hear an acknowledgment that you've been placed into and you can't remove yourself from queue at any time by repeating the onesie or command if you're on a speakerphone. Please pick up your handset before pressing the numbers once again for questions. Please.
Speaker 1: Thank you and ladies and gentlemen, if you wish to ask a question, please press one and then zero on your touch home phone. You will hear an acknowledgement that you've been placed into queue and you can remove yourself from queue at any time by repeating the one zero command. If you're on a speaker phone, please pick up your handset before pressing the numbers. Once again, for questions, please press one and then zero at this time.
First one and then zero at this time.
Speaker 1: Our first question will come from the line of Tim coffee with Janie. Please go ahead. All right. Thank you. Morning, Joe.
Our first question will come from the line of Tim Coffey with Janney. Please go ahead.
Great. Thank you Martin gentlemen.
Tim Good morning.
Speaker 3: First Craig, congratulations on your retirement. You know, I've covered the company a long time. You've always been a real pleasure to work with. And even though you're not gonna be an executive anymore just on the board, I hope that we can still catch up from time to time.
First Craig Hey.
Hey, congratulations.
On your retirement.
I've covered the company a long time, you've always been a real pleasure to work with and even though you're not going to be an executive any more to say on the board that I hope that we can still catch up from time to time.
Speaker 2: Well thanks Tim, I appreciate your comments and absolutely, I'll be available whenever.
Well, thanks, Tim I appreciate your comments and absolutely I'll be available whenever.
Speaker 3: Great. If I can ask about the provision and just in general to hire for longer environment, if that does take place, we are hired to search for longer. What impact is that gonna have on the provision going?
Great.
If I could ask you about the provision and just in general the higher for longer environment.
That does take place we are higher and it takes a longer what impact is that going to have on the provision going forward.
Speaker 4: So Tim, this is Donovan. You did see that we increased our provision.
So Tim this is donovan.
You did see that we increased our provision.
Speaker 4: this quarter in comparison to prior quarters. And that was generally a result of the longer estimated live in the loan portfolio. And because we are estimating an allowance for the life of the loan to the extent that the estimated life increases, the provision will increase.
This quarter in comparison to prior quarters.
And that was generally a result of the longer estimated live in the loan portfolio.
And because we are estimating an allowance for the life of the loan to the extent that the estimated life increases the provision will increase.
Speaker 4: I'll note that I think from June 30th to September 30th.
I'll note that I think from June 30th two.
September 30th.
Speaker 4: The MBA mortgage index increased by, for a 30-year fixed, increased by 68 basis points.
The M B, a mortgage index increased by for 30 year fixed increased by 68 basis points.
Speaker 4: during that quarter. It was a significant increase, and as a result of that, we would expect prepayment speeds to come down, and we would expect the average life of the loan portfolio to increase.
During that quarter. It was a significant increase and as a result of that we would expect prepayment speeds to come down and we would expect the average life of the loan portfolio to increase.
Speaker 4: The second component of that for us.
The second component of that.
For us.
Speaker 4: is the fact that we primarily make 30-year-term mortgage loans in single family and multi-family. So any decline in prepayment speed...
Is the fact that we primarily make.
30 year term mortgage loans in single family and multifamily.
So any decline in prepayment speeds are.
Speaker 4: in those two categories which probably makes up about 90% of our loan portfolio is going to have
In those two categories, which probably makes up about 90% of our loan portfolio.
Is going to have.
Speaker 4: an impact with respect to our provision.
An impact with respect to our provision.
Speaker 4: As we go down the timeline, it's very difficult to forecast what those prepayment speeds are going to do from one period to the next.
As we go down the timeline, it's very difficult to forecast with those prepayment speeds are going to do from one period to the next although you can get somewhat of a sense of it I suppose by understanding that the M. B a mortgage index went up by 68 basis points for the current quarter.
Speaker 4: Although you can get somewhat of a sense of it, I suppose, by understanding that the MBA mortgage index went up by 68 basis points for the current quarter, and that resulted in the provision that we populated for this quarter on a relatively flat balance sheet with respect to the amount of loans outstanding.
Order and that resulted in.
The provision that we populated for this quarter.
On a relatively flat.
Balance sheet with respect to the amount of loans outstanding. So that gives you some guide I suppose.
Speaker 4: So that gives you some guide, I suppose, to assume what could happen if mortgage interest rates increase so substantially during a given period.
To assume what could happen if mortgage interest rates increase those substantially during a given period.
Speaker 3: And then also higher for longer the impact on the servicing revenues. Because this is going to slow as you mentioned prepayment speeds.
Okay.
And then also higher for longer the impact on the servicing revenues because this is going to slow as you mentioned prepayment speeds as.
As well correct.
Speaker 4: It will, but the servicing that we have right now is down significantly from what we once had. So I forget the exact balances, but we're talking in the small hundreds of thousands of dollars of servicing asset. So there's going to be limited impact with the slowdown in prepayments on that asset.
It will but the servicing that we have right now is down significantly from from what we once had so.
I forget the exact balances, but we're talking in the <unk>.
Small hundreds of thousands of dollars of servicing.
Servicing asset so there's going to be limited impact with the slowdown in prepayments on that asset.
Okay.
Speaker 3: And then the positive cost increases look like they slowed this quarter. Is that it? Is that it? Is one quarter a trend or is it too early to tell?
And then.
Deposit cost increases look like they've slowed this quarter is that it is that it is one quarter a trend or is it too early to tell.
Speaker 4: Well, I think it's too early to tell. I've been hearing from many others in reading many analyst reports with respect to earning seas.
Well I think it's too early to tell.
I've been.
Hearing from many others in reading many analyst reports with respect to earning season.
Speaker 4: that other banks are experiencing a slower rise in deposit costs.
That other banks are experiencing a slower rise in deposit costs.
Speaker 4: We're also experiencing probably a slower rise in deposit costs.
We're also experiencing a probably a slower rise in deposit costs.
Speaker 4: But really for us, it gets down to what the balance sheet is doing, both on the asset side and the reliability side. And what occurred this quarter, our earning asset yields went up about the same as our interest-bearing liability costs. And that kept our net interest margin flat. We would expect the same type of behavior
But really for us it gets down to what the balance sheet is doing.
Both on the asset side and the <unk> are and the liability side and what occurred this quarter, our earning asset yields went up.
About the same as our interest bearing liability costs.
And that kept our net interest margin flat.
We would expect the same type of behavior.
Speaker 4: as we look out the timeline for this fiscal year because we have approximately the same amount of assets and liabilities repricing in any given period where relatively neutral positioned, maybe a little bit liability sensitive.
As we look out the timeline for this fiscal year.
Because we have approximately the same amount of assets and liabilities repricing in any given period.
We're relatively neutral positioned maybe a little bit liability sensitive.
Speaker 4: with respect to balance sheet. And so there's certainly pressure on deposits and the cost of deposits.
With respect to balance sheet, and so there's certainly pressure on deposits.
And their cost of deposits there is certainly pressure on the cost of borrowings.
Speaker 4: There's certainly pressure on the cost of borrowings with respect to where current interest rates are. And it gets down to higher for longer for us means what is the balance sheet doing repricing wise? And it looks like it's repricing very similar.
With respect to where current interest rates are.
And it gets down to higher for longer for US means what is the balance sheet doing repricing wise.
And it looks like it's repricing very similar.
Okay.
Speaker 3: And then this one question on kind of emerging credit quality trends. There was another institution that reported a couple of non accrual loans in the Southern California marketplace. There are office loans. The problem wasn't that there were office loans. The problem was they were in lease up and they couldn't get the new tenants in the building. I'm wondering are you seeing any lease up issues across your commercial real estate portfolio?
And then just one question on kind of emerging credit quality trends. There was another institution that reported a couple of non accrual loans in the southern California marketplace. Other office loans. The problem wasn't that they were office loans. The problem was they were in lease up and they couldn't get the new new tenants in the building I'm wondering are.
<unk> seen any any issues across your commercial real estate portfolio.
Speaker 4: Too late we're not seeing that really, but
To date, we're not seeing that Oh really but.
Speaker 4: You know, when we think about our portfolio, we don't have downtown office high rise or urban center locations on the collateral. It's typically suburban markets and those markets seem to be doing better than some of the urban.
You know when we think about our portfolio Yeah, we don't have downtown office high rise or or urban center.
Locations are on the collateral.
It's typically suburban markets and those markets seem to be.
Doing better than some of the urban centers seemed.
Speaker 4: seem to be just on kind of an ancillary note. This quarter, one of our non-performing loans at September 30.
Seem to be.
Just on kind of an ancillary note.
This quarter, one of our nonperforming loans.
At September 30.
Speaker 4: went into foreclosure and we were bid out for a full recovery at the foreclosure sale. So there still seems to be a great deal of equity in some of these properties. Not so much commercial real estate. The market is not very good there, but for a single fact, we've not had a foreclosure in quite a few years and the one we just resolved, we had a full recovery at the foreclosure sale.
I went into foreclosure.
And we were bid out for a full recovery at the foreclosure sale. So there still seems to be a great deal of equity in some of these properties.
So much commercial real estate the market is not very good there, but for single that we've not had a foreclosure in quite a few years and the one we just resolved a we had a full recovery at the foreclosure sale.
Okay, Yeah yeah.
Speaker 3: Yeah, the investor deck has really good information on your loan of values. So those are really well, so that's good to hear. And then one final question for you, Donovan. Now that Craig is retiring, what's the member one thing you plan to change?
The investor deck has really good information on your loan to values. So those are really low so that's good to hear.
And then one final question for you Don event now that Craig is retiring what's the number one thing that you plan to change.
[laughter] well.
Speaker 4: Well, I don't know that there's a dramatic or drastic change coming to him. The one thing that is true about Provident is that we are a community bank. We are serving a customer base in the inland empire.
I don't know that there's a dramatic or drastic change.
Coming to him.
The one thing that is true about Provident is that we are a community bank.
We are serving a customer base in the inland Empire.
Speaker 4: for a number of years. And I don't see that.
For a number of years.
And I don't see that change.
Speaker 4: changing in a radical way. We always have challenges and opportunities with respect to how we operate the company. There's new technologies that one can potentially...
Changing in a radical way.
We always have challenges and opportunities with respect to how we operate the company.
There's new technologies that one can potentially.
Speaker 4: adopt to improve efficiencies. There are things with respect to our loan portfolios and underwriting standards that
Adopt to improve efficiencies.
They're things with respect to our loan portfolios.
And underwriting standards that we.
Speaker 4: We can potentially determine to make some changes given market environment. But by and large, I don't see dramatic change.
We can potentially.
Determined to make some changes given market environment.
But by and large I don't see dramatic changed him.
Speaker 3: Okay, sounds good. Those are my questions. Thank you very much for your time.
Okay sounds great. Those are my questions. Thank you very much for your time.
Thank you we'll go next to Andrew Liesch with Piper Sandler.
Speaker 5: Hey good morning guys and congratulations to you both Gregory retirement and Donovan to the CEO promotion. Great to see.
Hey, good morning, guys.
And congratulations to you both cracker in your retirement and Donovan CEO promotion great to see.
Speaker 5: Thank you. Thank you. Of course. The commentary and expense run rate, 7.2 million quarter for this year. Is that going forward or could there be a step up so the full year average is 7.2 million? Yes.
Thank you.
Of course.
Commentary on the expense run rate $7 2 million a quarter for this year.
Is that going forward or could there be a step up so the full year average at seven 2 million.
Yeah, I don't believe there's going to be a step up that's about what we believe our run rate is going to be although this quarter. It was a little bit better than that but.
Speaker 4: That's about what we believe our run rate is going to be. Although this quarter, it was a little bit better than that. But as Craig mentioned in his comments, we didn't meet some of our bonus targets for the quarter. And as a result of that,
Unknown Attendee: Ladies and gentlemen, thank you for standing by and welcome to the Provident Financial Holdings First Quarter earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. Should you require assistance during the conference, please press star, then zero, and an operator will assist you offline. As a reminder, today's conference has been recorded.
But as Craig mentioned in his comments, we didn't meet some of our bonus targets for the quarter and as a result of that there weren't a salary and benefits expenses related to those bonus accruals. So.
Speaker 4: There weren't salary and benefit expenses related to those bonus accruals. We came in at 6.9 rather than the 7.2.
So we came in at 6.9, rather than the 7.2.
Unknown Attendee: And now we'll turn the conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir. Thank you. Good morning, everyone.
Speaker 4: And if we just contrast it to what occurred in the June quarter, June was elevated as well from bonus accruals, as well as the investing of restricted stock and stock options that...
And if we just contrast, it to what occurred in the June quarter June was elevated as well.
Craig Blunden: This is Craig Blunden, Chairman and CEO of Problem Financial Holdings.
From bonus accruals as well as the vesting of restricted stock and stock options that.
Donavon Ternes: And on the call with me is Donavon Ternes, our President, Chief Operating and Chief Financial Officer.
Speaker 4: carry some income statement ramifications on investing, which were all trueed up in that quarter. So a significant decline from the June quarter, of course, because of unusual items. And this quarter is closer to a standard run rate except for the bonus accrual.
Carry some income statement ramifications upon vesting.
Craig Blunden: Before we begin, I have a brief administrative item to address. Our presentation today discusses a 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.
Which were all true up in that quarter. So.
A significant decline from the June quarter of course because of unusual items.
And this quarter is closer to a standard run rate.
Except for the bonus accruals.
Speaker 5: Thank you. And then the commentary on the, what you have, what you have, maturing on the loan side or with the recent paydowns and production of the pipeline, still safe to assume that the portfolio is going to hold relatively steady. He's muted growth.
Got it alright, that's helpful. There.
Thank you and then the just the commentary on that but.
What you have.
Maturing and on the loan side and the recent pay downs in production and the pipeline still safe to assume that the portfolio is going to hold relatively steady with muted growth.
Speaker 4: It's going to be muted growth, I think, as we get down into our current fiscal year, we might populate with some growth, because I think the environment has certainly stabilized from the March quarter, the June quarter.
It's gonna be muted growth I think as we get down.
Into our current.
Current fiscal year, we might populate with some growth because I think the environment has.
Craig Blunden: 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 10K for the year-end at June 30, 2023 and from the Form 10Qs and other SEC filings that are filed subsequent to the Form 10K. Forward-looking statements are effective only as the date they are made, and the company assumes no obligation to update this information.
Has certainly stabilized from the March quarter the June quarter.
Better environment than the March quarter, I think September quarter was a better environment.
Speaker 4: better environment than the March quarter. I think the September quarter was a better environment than either of those two quarters. And if we continue to see that, we would be more interested in perhaps populating some loan growth. I think loan growth is out there. You know, we've tightened our underwriting standards.
Neither of those two quarters and if we continue to see that we would be more interested in perhaps populating some loan growth I think loan growth is out there.
We've tightened our underwriting standards.
Speaker 4: from where we were and we've raised our interest rates on the loan products that
From where we were in.
We've raised our interest rates on the loan products that are.
Craig Blunden: 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 first quarter result. In the most recent quarter, we originated $18.5 million of loans held for investment, a decline from the $24.3 million in the prior sequential quarter. During the most recent quarter, we also had $23 million of loan principal payments and payoffs, which is down from the $25.1 million in the June 20-23 quarter, and still at the lower end of the quarterly range.
Speaker 4: we're offering. And as a result of that, origination volume has come down. I'm hearing from our origination staff that we could do more if we chose to do so. So I think it's really a question of what we see the environment doing and primarily liquidity environment.
We're offering.
And as a result of that origination volume has come down.
I'm hearing from our origination staff that we could do more.
If we chose to do so so I think it's really a question of what we see the environment doing and primarily liquidity.
Environment.
You know it doesn't make much sense I suppose to.
Speaker 4: put a loan on with a 200 basis point spread or 175 basis point spread if we're funding that growth at the margin. So that's essentially how we view it. So it would be I think slow growth but it not necessarily flat.
Put a loan on with a 200 basis points spread or 175 basis point spread if were funding that growth at the margin.
So that's essentially how we view it so it would be I think slow growth, but not necessarily flat.
Craig Blunden: Currently, seems that many real estate investors have reduced their activity as a result of rising mortgage and other interest rates. Additionally, we're seeing more consumer demand for single-family adjust 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.
Speaker 5: All right, that's very helpful. Thanks for kicking the question.
Got it.
Alright, that's very helpful. Thanks for taking the question.
Yeah.
Speaker 1: Thank you. Once again for questions from the phones, please press one and then zero at this.
Thank you once again for questions from the phones. Please press one and then zero at this time.
Speaker 1: and gentlemen, allowing a few moments, there are no further questions from the...
And gentlemen, allowing a few moments there are no further questions from the phones.
Yeah.
Craig Blunden: Additionally, our single-family and mull-of-family loan pipelines are similar in comparison to the last quarter, suggesting our loan originations in the December 20-23 quarter will be similar to this quarter, and at the lower end of the range of recent quarters, which has been between $19.85 million. For the three months ended, September 30, 2023, Lone's Health for Investment, declined by $5.5 million when compared to the June 30, 2023 ending balances with declines in Mola family and commercial real estate partly offset by growth in the single family and construction loan categories.
Speaker 2: All right, well, if there are no further questions, I appreciate everyone's participation and look forward to speaking with you again next quarter.
Alright, well if there are no further questions I appreciate everyone's participation and look forward to speaking with you again next quarter.
Thank you.
Speaker 1: Thank you. And ladies and gentlemen, today's conference is available for replay beginning at 11 a.m. Pacific time today, running through November 2 at midnight. You may access AIT and T Replace System by dialing 866.
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Craig Blunden: Current credit quality is holding up very well and you will note that non-performing assets increase to just $1.4 million, which is up slightly from the $1.3 million on June 30, 2023. Additionally, there's just $74,000 of early stage loan fee balances at September 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 work far and well. We have outlined these characteristics on slide 13 of our quarterly investor presentation.
Speaker 1: Those numbers again are 1-866-207-1041 or 4029-700-0847 with the access code of 788-6283. That does conclude your conference for today. Thank you for your participation and for using AT&T event conferencing. You may now disconnect.
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Craig Blunden: You should also note that we have knows the RE loans maturing during the remainder of calendar, 2023, and have only $9.0 million for $5 million maturing in calendar, 2024. We recorded a $545,000 per vision for credit losses in the September 2023 quarter. The provision was primarily the result of an increase in the average life of the loan portfolio stemming from the higher highest mortgage rates in approximately 23 years and lower pre-payment estimates.
We're sorry youre.
Speaker 6: We're sorry, your conference is ending now. Please hang up.
Conferences, ending now please hang up.
Craig Blunden: The allowance for credit losses to gross loans help invest an increase to 72 basis points on September 30, 2023 from 55 basis points on June 30, 2023. You will note that we adopted C-SOL on July 1, 2023, resulting in a $1.2 million increase in the allowance for credit losses, an $824,000 decrease in equity, a $346,000 increase in deferred tax assets, and a $28,000 decrease to the market adjustment on loans held at fair value.
Craig Blunden: Our net interest margin was unchanged at 2.88 percent for the quarter and the September 30, 2023 compared to the June 30, 2023 sequential quarter. As the result of a 17 basis point increase in the average yield on total interest earning assets in an 18 basis point increase in the cost of total interest-burning liabilities. Notably, our average cost deposits increased by 18 basis points to September 30, 2023 compared to 62 basis points in the prior sequential quarter and our cost of borrowing increased by seven basis points in the September 2023 quarter compared to the June 2023 quarter.
Craig Blunden: An interest margin this quarter was favorably impacted by approximately 1 basis point as a result of a lower net deferred loan cost associated with loan payoffs in the September 2023 quarter. In comparison to the average net deferred loan cost amortization of the five previous quarter.
Craig Blunden: Awards. New loan production is being originated at higher mortgage interest rates than recent prior quarters, and adjustable rate loans that are portfolio are now adjusting to higher interest rates in comparison to the existing interest rates. We have approximately $88.8 million of loans reprising upward in the December 2023 quarter at a currently estimated 82 basis points to a weighted average rate of 7.35 percent from 6.53 percent and approximately $102.8 million of loans reprising upward in the March 2024 quarter at a currently estimated 102 basis points to a weighted average rate of 7.79 percent from 6.77 percent. Also, for multi-family 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 adjustments by their periodic interest rate caps.
Craig Blunden: We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on September 30, 2023 decreased to 158 compared to 160 FTE on the same date last year. You will note that operating expenses decreased to $6.9 million in the September 2023 quarter somewhat lower than what we described as the stable run rate of $7.2 million for quarter. The decrease was primarily due to lower salaries and employee benefits expenses resulting from no quarterly or annual bonus expense accruals in the September 2023 quarter since the company missed the threshold bonus targets for the quarter.
Craig Blunden: 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 fiscal year. We believe that slowing the loan portfolio growth is the best course of action as a result of tighter liquidity conditions. We were successful at an executionless quarter with loan registration volumes at the lower end of the quarter range and loan payoffs also at the lower end of the quarter range.
Craig Blunden: The total interest earning assets composition was very similar to last quarter with a decrease in the average balance of loans receivable and a similar decrease in the lower yielding average balance of investment securities. However, the total interest of spending liabilities composition deteriorated from with a decrease, the average balance of deposits, and a small increase 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 We believe that maintaining our cash dividends is very important.
Craig Blunden: We also recognize that prudent capital returns to shareholders through stock buyback programs is a responsible capital management school. And we repurchased approximately 36,000 shares of common stock in the September 2023 quarter. For the fiscal year to date, we distributed approximately $981,000 of cash dividends to shareholders and repurchased approximately $495,000 worth of common stock. As a result, our capital management activities resulted in an 84% just of additional fiscal year to date net income.
Craig Blunden: We encourage everyone to review our September 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 insight on our solid financial foundations supporting the future growth of the company.
Craig Blunden: We will now entertain any questions you may have regarding our financial results. Thank you.
Unknown Attendee: And ladies and gentlemen, if you wish to ask a question, please press one and then zero on your touch home phone. You can remove yourself from queue at any time by repeating the 1-0 command. If you want to speak your phone, please pick up your handset before pressing the numbers. Once again, for questions, please press one and then zero at this time.
Timothy Coffey: Our first question will come from the line of Tim Coffee with Janie. Please go ahead. Great. Thank you. Morning, gentlemen. Morning, Tim. Good morning.
Timothy Coffey: First, Craig, congratulations on your retirement. You know, I've covered the company a long time. You've always been a real pleasure to work with. And even though you're not going to be an executive anymore just on the board, I hope that we can still catch up from time to time. Well, thanks, Tim. I appreciate your comments. And absolutely, I'll be available whenever. Great. If I can ask about the provision and just in general, to hire for longer environment, if we, you know, if that does take place, we are higher interests of longer. What impact is that going to have on the provision going forward?
Donavon Ternes: So, Tim, this is Donovan. You did see that we increased our provision this quarter in comparison to prior quarters. And that was generally a result of the longer estimated life in the loan portfolio. And because we are estimating an allowance for the life of the loan to the extent that the estimated life increases, the provision will increase. I'll note that I think from June 30th to September 30th, the MBA mortgage index increased by, for a 30 year fixed, increased by 68 basis points during that quarter.
Donavon Ternes: It was a significant increase. And as a result of that, we would expect prepayment speeds to come down, and we would expect the average life of the loan portfolio to increase. The second component of that for us is the fact that we primarily make 30 year term mortgage loans in single family and multifamily. So, any decline in prepayment speeds in those two categories, which probably makes up about 90% of our loan portfolio, is going to have an impact with respect to our provision.
Donavon Ternes: As we go down the timeline, it's very difficult to forecast what those prepayment speeds are going to do from one period to the next. Although you can get somewhat of a sense of it, I suppose, by understanding that the MBA mortgage index went up by 68 basis points for the current quarter, and that resulted in the provision that we populated for this quarter on a relatively flat balance sheet with respect to the amount of loans outstanding. So, that gives you some guide, I suppose, to assume what could happen if mortgage interest rates increase so substantially during a given period.
Timothy Coffey: Okay. And then also higher for longer the impact on the servicing revenues because this is going to slow as you mentioned prepayment speeds as well, correct? It will, but the servicing that we have right now is down significantly from what we once had. So I forget the exact balances, but we're talking in the, you know, small hundreds of thousands of dollars of servicing asset. So there's going to be limited impact with the slowdown in prepayments on that asset.
Donavon Ternes: Okay. And then the positive cost increases look like they slowed this quarter. Is that I think it's too early to tell. I've been hearing from many others in reading, many analysts reports with respect to earnings season. That other banks are experiencing a slower rise in deposit costs. We're also experiencing probably a slower rise in deposit costs. But really for us, it gets down to what the balance sheet is doing, both on the asset side and the depot or end the liability side.
Donavon Ternes: And what occurred this quarter, our earning asset yields went up about the same as our interest bearing liability costs. And that kept our net interest margin flat. We would expect the same type of behavior as we look out the timeline for this fiscal year, because we have approximately the same amount of assets and liabilities repricing in any given period. We're relatively neutral positioned, maybe a little bit liability sensitive with respect to balance sheet.
Donavon Ternes: And so there's certainly pressure on deposits and the cost of deposits. There's certainly pressure on the cost of borrowings with respect to where current interest rates are. And it gets down to higher for longer for us means what is the balance sheet doing repricing wise. And it looks like it's repricing very similar.
Timothy Coffey: And then this one question on kind of emerging credit quality trends. There was another institution that reported a couple of non accrual loans in the Southern California marketplace. There are office loans. The problem wasn't that there were office loans. The problem was they were in lease up and they couldn't get the new tenants in the building.
Donavon Ternes: I'm wondering, are you seeing any lease up issues across your commercial real estate portfolio? To date we're not seeing that really. But when we think about our portfolio, we don't have downtown office high rise or urban center locations on the collateral. It's typically suburban markets. And those markets seem to be doing better than some of the urban centers seem to be just on kind of an ancillary note.
Donavon Ternes: This quarter, one of our non performing loans at September 30, went into foreclosure. And we were bid out for a full recovery at the foreclosure sale. So there still seems to be a great deal of equity in some of these properties. Not so much commercial real estate. The market is not very good there. But for a thing of that, we've not had a foreclosure in quite a few years. And the one we just resolved, we had a full recovery at the foreclosure sale.
Timothy Coffey: Bill. Yeah, the investor deck has really good information on your loan of values. So those are really well. So that's good to hear.
Timothy Coffey: And then one final question for you, Donavon.
Donavon Ternes: Now that Craig is retiring, what's the number one thing you plan to change? Well, I don't know that there's a dramatic or drastic change coming to him. The one thing that is true about Provident is that we are a community bank. We are serving a customer base in the inland empire for a number of years. And I don't see that changing in a radical way. We always have challenges and opportunities with respect to how we operate the company.
Donavon Ternes: There's new technologies that one can potentially adopt to improve efficiencies. There are things with respect to our loan portfolios and underwriting standards that we can potentially determine to make some changes given market environment. But by and large, I don't see dramatic change in.
Timothy Coffey: Okay, sounds good.
Timothy Coffey: Those are my questions. Thank you very much for your time. Thank you.
Andrew Liesch: We'll go next to Andrew Leish with Piper Sandler. Hey, good morning, guys.
Andrew Liesch: And congratulations to you both, Craig and your retirement and Donavon to the CEO promotion. Great to see. Thank you. Of course, the commentary expense run rate 7.2 million quarter for this year. Is that going forward or could there be a step up so the employer average is 7.2 million? Yeah, I don't believe there's going to be a step up. That's about what we believe our run rate is going to be. Although this quarter, it was a little bit better than that.
Andrew Liesch: But as Craig mentioned in his comments, we didn't meet some of our bonus targets for the quarter. And as a result of that, there weren't salary and benefit expenses related to those bonus accruals. So we came in at 6.9 rather than the 7.2. And if we just contrast it to what occurred in the June quarter, June was elevated as well from bonus accruals, as well as the investing of restricted stock and stock options that carry some income statement ramifications upon investing, which were all trueed up in that quarter.
Andrew Liesch: So a significant decline from the June quarter, of course, because of unusual items. And this quarter is closer to a standard run rate except for the bonus accruals. Got it. All right, that's helpful there. Thank you.
Andrew Liesch: And then just the commentary on what you have, maturing on the loan side or with the recent paydowns and production and the pipeline, still safe to assume that the portfolio is going to hold relatively steady in some muted growth. It's going to be muted growth. I think as we get down into our current fiscal year, we might populate with some growth because I think the environment has certainly stabilized from the March quarter, the June quarter, better environment than the March quarter.
Andrew Liesch: I think continue to see that we would be more interested in perhaps populating some loan growth. I think loan growth is out there. We've tightened our underwriting standards from where we were, and we've raised our interest rates on the loan products that we're offering. And as a result of that, origination volume has come down. I'm hearing from our origination staff that we could do more if we chose to do so. So I think it's really a question of what we see the environment doing in primarily liquidity environment.
Andrew Liesch: It doesn't make much sense, I suppose, to put a loan on with a 200 basis point spread, or 175 basis point spread, if we're funding that growth at the margin. So that's essentially how we view it, so it would be, I think, slow growth, but it's not necessarily flat. Got it. All right, that's very helpful. Thanks for taking the question. Thank you.
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