Q2 2024 Provident Financial Holdings Inc Earnings Call
Thank you for standing by my name is Aaron and I will be your conference operator for today at this time I would like to welcome everyone to the Provident financial Holdings second quarter earnings call.
Aaron: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your teeth on your telephone keypad. If you would like to withdraw your question Press Star followed by the number one.
Speaker Change: Thank you.
Speaker Change: I would now like to turn the call over to Don <unk>, President and CEO. Please go ahead.
Don: Thank you Aaron.
Don: Good morning. This is Don <unk>, President and CEO of Provident Financial Holdings and on the call with me is Tim to win our senior Vice President and Chief Financial Officer.
Speaker Change: Before we begin I have a brief administrative administrative item to address.
Speaker Change: Our presentation today discusses the company's business outlook and will.
Speaker Change: Include forward looking statements.
Speaker Change: Those statements include descriptions of management's plans objectives or goals for future operations products or services.
Speaker Change: Overcast 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.
Speaker Change: Following managements presentation.
These forward looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today.
Speaker Change: 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 32023, and from the Form 10-Q.
Speaker Change: <unk> and other SEC filings that are filed subsequent to the Form 10-K.
Speaker Change: Forward looking statements are effective only as of the date that they are made and the company assumes no obligation to update this information.
Speaker Change: To begin with thank you for participating in our call I.
Speaker Change: I hope that each of you has had an opportunity to review our earnings release, which describes our second quarter results and.
Speaker Change: In the most recent quarter, we originated $22 million of loans held for investment an increase from $18 $5 million in the prior sequential quarter during.
Speaker Change: During the most recent quarter. We also had $17 8 million of loan principal payments and payoffs, which is down from $23 million in September 2023 quarters.
Speaker Change: Still at the lower end of the quarterly range.
Speaker Change: Currently it seems that many real estate investors have reduced their activity as a result of higher mortgage and other interest rate.
Speaker Change: Additionally, we are seeing more consumer demand for single family adjustable rate mortgage products as a result of higher fixed rate mortgage interest rates we.
Speaker Change: 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. Additionally, our single family multifamily loan pipelines are similar and compare.
Speaker Change: Person to last quarter, suggesting our loan originations in the March 2024 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.
For the three months ended December 31, 2023 loans held for investment increased by $3 $6 billion when compared to the September 32023, ending balances.
With small increases in single family multifamily commercial real estate and construction loan categories.
Speaker Change: Credit quality is holding up very well and you will note that nonperforming assets increased to just $1 8 billion.
Speaker Change: Which is up from $1 4 million on September 32023. Additionally.
Speaker Change: Additionally, there is just $340000 of early stage delinquency balances at December 31, 2023.
Speaker Change: We are aware of the mounting concerns regarding commercial real estate loans, but are confident that our the underwriting characteristics of our borrowers and collateral will continue to perform well we have outlined these characteristics on slide 13 of our quarterly investor presentation.
You should also note.
Speaker Change: We have just nine CRE loans for $5 million maturing for the remainder of 2024.
Speaker Change: We recorded a $720000 recovery of credit losses in the December 2023 quarter.
Speaker Change: Recovery was primarily the result of a decrease in the average life of the loan portfolio stemming from the rapid decline in mortgage rates and the December 2023 quarter and higher prepayment estimates.
Speaker Change: The allowance for credit losses to gross loans held for investment decreased to 65 basis points on December 31, 2023 from 72 basis points on September 32023.
Speaker Change: Our net interest margin declined by 10 basis points.
Speaker Change: $2, 7% to 8% for the quarter ended December 31, 2023 compared to the September 32023 sequential quarter as the result of a 13 basis point increase in the average yield on total interest earning assets at a 24 base.
Speaker Change: This point increase in the cost of total interest bearing liabilities.
Speaker Change: Notably our average cost of deposits increased by 19 basis points to 99 basis points for the quarter ended December 31, 2023, compared to 80 basis points in the prior sequential quarter.
Speaker Change: And our cost of borrowing increased by 18 basis points in the December 2023 quarter compared to the September 2023 quarter.
Speaker Change: The net interest margin this quarter was not impacted by the net deferred loan costs associated with loan payoffs in the December 2023 quarter in comparison to the average net deferred loan cost amortization of the previous five quarters.
Speaker Change: New loan production is being originated at higher mortgage interest rates than recent.
Speaker Change: Prior quarters and adjustable rate loans in our portfolio are adjusting to higher interest rates in comparison to their existing interest rates.
Speaker Change: We have approximately $116 $8 million of loans.
Speaker Change: Icing upward in the March 2024 quarter at a currently estimated 87 basis points to a weighted average rate of 771% from 684% and approximately.
Speaker Change: <unk> $86 $2 million of loans repricing upward in the June 2024 quarter at a currently estimated 90 basis points to a weighted average rate of 782% from 692%.
Speaker Change: Also for multifamily and commercial real estate loans, the loans are adjusting above their existing floors. However, many adjustable rate loans in all categories are currently limited in their upward adjustment by the periodic interest rate caps I would also point out that there is an.
Speaker Change: <unk> to reprice maturing wholesale funding downward as a result of market conditions, where current interest rates have moved lower in six months and longer terms.
Speaker Change: All of this suggests that the current pressure on the net interest margin may soon subside.
Speaker Change: We continue to look for operating efficiencies throughout the company to lower operating expenses, our FTE count on December 31, 2023 increased to 160 compared to 161 FTE on the same date last year.
Speaker Change: You will note that operating expenses increased to $7 3 million.
Speaker Change: In the December 2023 quarter somewhat higher than what we described as the stable run rate of $7 $2 million per quarter.
Increase was primarily due to higher salaries and employee benefits expenses, resulting from higher expense accrual adjustments for the supplemental executive retirement plan.
Speaker Change: For fiscal 2024, we continue to expect a run rate of approximately $7 $2 million per quarter. As a result of increased wages and inflationary pressure on other operating expenses.
Speaker Change: In fact, the actual run rate for the fiscal year to date has been $7 $1 million per quarter.
Our short term strategy for balance sheet management.
Speaker Change: Somewhat more conservative than last fiscal year we.
Speaker Change: We believe that slowing the loan portfolio growth is the best course of action at this time as a result of tighter liquidity conditions. We were successful in execution of this strategy this quarter with loan origination volumes at the low end of the quarterly range and loan payoffs also at.
Speaker Change: The low end of the quarterly range.
Speaker Change: Total interest, earning assets composition improved from last quarter with a small increase in the average balance of loans receivable.
And a decrease in the lower yielding average balance of investment securities.
However, the total interest bearing liabilities composition deteriorated some with a decrease in the average balance of deposits and an increase in the average balance of borrowings.
Speaker Change: We exceed well capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications.
We believe that maintaining our cash dividend is very important we also recognize that prudent capital returns to shareholders through stock buyback programs as a responsible capital management tool and we repurchased approximately 63000 shares of common stock.
In the December 2023 quarter.
For the fiscal year to date, we distributed approximately $2 million of cash dividends to shareholders and repurchased approximately $1 $2 million worth of common stock.
Speaker Change: As a result, our capital management activities resulted in an 82% distribution a fiscal year to date net income.
Speaker Change: We encourage everyone to review our December 31, invest investor presentation posted on our website you will find that we included slides regarding financial metrics asset quality and capital management, which.
Speaker Change: Which we believe will give you additional insight on our solid financial foundation supporting the future growth of the company.
Speaker Change: We will now entertain any questions that you may have regarding our financial results. Thank you Erin.
Erin: Thank you.
Speaker Change: At this time I would like to remind everyone that in order to ask a question Press Star then the number one on your telephone telephone keypad, we will pause for just a moment to compile the roster.
Speaker Change: And our first question comes from the line of Andrew Leisch with Piper Sandler go ahead.
Andrew Brian Liesch: Hi, good morning.
Andrew Leisch: Question.
Andrew Brian Liesch: On the margin outlook here.
Andrew Brian Liesch: We had a series of fed rate cut I guess, what sort of effect do you think that could have on the margin going forward. It sounds like you're already seeing some relief on the funding side at least on the wholesale accounts.
Yes, I think Andrew as we think about the balance sheet.
Andrew Brian Liesch: We probably have a longer tail than many.
Andrew Brian Liesch: On our assets or our loans repricing upward.
Andrew Brian Liesch: Because they are hybrid arms tied to SSR or multifamily or even commercial.
And so.
Andrew Brian Liesch: As the indices have moved upward.
Andrew Brian Liesch: In many cases.
Andrew Brian Liesch: The upward repricing loan has been capped by the periodic cash.
Or there is also the situation where the loan is in its fixed period.
Andrew Brian Liesch: And we will not adjust upward and it <unk> until it moves out of the fixed period. So I think there's tremendous opportunity with respect to the.
Andrew Brian Liesch: The loan portfolio to continue to adjust upward.
Andrew Brian Liesch: With a longer tail on that.
Andrew Brian Liesch: That others may have with C&I lending for instance, so even if we see.
Andrew Brian Liesch: The fed beginning to move interest rates downward.
Andrew Brian Liesch: I think our.
Andrew Brian Liesch: Earning assets, particularly the loan portfolio can reprice upward.
Andrew Brian Liesch: Conversely, as you pointed out.
Andrew Brian Liesch: The funding side of the balance sheet.
Andrew Brian Liesch: Probably.
Andrew Brian Liesch: As toward the higher end of the range and we can see some relief there.
Andrew Brian Liesch: Youll note in our earnings release that we describe the amount of brokered Cds that we have in the portfolio.
And that brokered CD balances of $122 7 million and the weighted average cost of those brokerage Cds was 5% to 6%.
Andrew Brian Liesch: As at December 31.
We have recently seen a decline.
Andrew Brian Liesch: And brokerage CD rates and in fact, the most recent CE.
Andrew Brian Liesch: Net.
We put on the books to replace the maturing CD came on at 470%.
Andrew Brian Liesch: So there is about 56 basis points of relief.
Andrew Brian Liesch: Queen the weighted average in the portfolio of those.
Andrew Brian Liesch: Funds.
Andrew Brian Liesch: And what the current funding costs may look like.
Speaker Change: So I think as you pointed out.
Speaker Change: Calendar 2024.
Speaker Change: Looks to be a little bit better with outlook.
As it relates to net interest margin certainly than where we began in calendar 2023.
Got it that's very helpful. Thanks for that detail.
Speaker Change: And then you mentioned in the release.
Speaker Change: 2024 may be having.
Speaker Change: Possibility that more about our opportunity more favorable environment for growth are you seeing anything right now or are we still just waiting to see how the feds reaction there.
Speaker Change: Monetary policy plays out.
Speaker Change: Sure.
Speaker Change: The thing that we think about with respect to opportunity for growth.
Speaker Change: Is what the liquidity environment looks like in the industry.
Speaker Change: Thankfully as a result of the fed comments in the subsequent to the December meeting.
Speaker Change: They essentially confirmed that they are thinking about lowering rates.
Speaker Change: In calendar 2024, and as a result of that we did see interest rates move down.
Essentially across the curve, except for the very short end of the curve.
Operator: Thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Provident Financial Holdings second quarter earnings call. All lines have been placed on mute to prevent any background noise.
And that I think will provide some relief.
To deposit gathering or.
Speaker Change: Gathering funding from other sources in contrast to what we saw.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star, followed by the number one again.
Speaker Change: In 2023, and if we see that there is some relief and we have the ability to.
Speaker Change: To gather deposits and funding.
At more reasonable prices because liquidity is as.
Operator: Thank you. I would now like to turn the call over to Donovan Ternes, President and CEO. Please go ahead.
Speaker Change: In a better situation in the banking environment.
That will trigger our thinking.
Speaker Change: To populate drove onto the balance sheet.
Thank you, Aaron. Good morning. This is Donovan Ternus, President and CEO of Provident Financial Holdings. And on the call with me is Tam Nguyen, our Senior Vice President and Chief Financial Officer. Before we begin, I have a brief administrative item to address.
Speaker Change: We run a relatively high.
Speaker Change: Loan to deposit ratio.
Speaker Change: Historically, we have done that because of the nature of the loans.
Speaker Change: That we have.
Speaker Change: 30 year mortgages.
Speaker Change: And we're sensitive to that and we don't want to.
Our presentation today discusses the company's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives, or goals for future operations, products, or services, forecasts of financial or other performance measures, and statements about the company's general outlook for economic and business conditions. We also may make forward-looking statements during the question and answer period following management's presentation. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ from any forward-looking statement is available from the earnings release that was distributed yesterday, from the annual report on Form 10-K for the year ended June 30, 2023, and from the Form 10-Q Forward-looking statements are effective only as of the date that they are made, and the company assumes no obligation to update this information. To begin with, I thank you for participating in our call.
Populate even higher loan to deposit ratios in a core or core liquidity environment.
Speaker Change: So that's really what we have to see we think with owners opportunity right now to grow if thats, what we were choosing to do.
As we mentioned in the prepared comments.
Speaker Change: We have tightened our underwriting standards.
Beyond where we normally have them.
And we've.
Speaker Change: Priced ourselves up.
Speaker Change: With respect to the loan products essentially to slow production to match what is coming in the form of payoffs such that we're maintaining our loan portfolios.
Got it.
Speaker Change: That's very helpful.
Speaker Change: For the time I'll step back.
Thank you for your questions Andrew.
Speaker Change: Once again, ladies and gentlemen, if you would like to ask a question. It is star one on your touch tone keypad, and we will take questions in the order that we received them. Our next question is from the line of Tim Coffey with Janney Tim.
Timothy Norton Coffey: Tim Your line is live.
Timothy Norton Coffey: Okay.
Timothy Norton Coffey: Good morning, Tim.
Timothy Norton Coffey: Good morning.
Part of Aussie dollar growth through this year with the outlook for modest loan growth.
I hope that each of you has had an opportunity to review our earnings release, which describes our second quarter results. In the most recent quarter, we originated $20.2 million of loans held for investment, an increase from $18.5 million in the prior sequential quarter. During the most recent quarter, we also had $17.8 million of loan principal payments and payoffs, which is down from $23 million in the September 2023 quarter and still at the lower end of the quarterly range. Currently, it seems that many real estate investors have reduced their activity as a result of higher mortgage and other interest rates. Additionally, we are seeing more consumer demand for single-family, adjustable-rate mortgage products as a result of higher fixed-rate mortgage interest rates.
Speaker Change: Adam discussed already I'm wondering do you have any sense of how much cash you will start to carry on the balance sheet or do you anticipate rolling that pit back into securities.
Speaker Change: Well.
Speaker Change: Im not certain that our preference would be to roll it in suite to securities.
We would prefer to see an environment, where we are populating.
Loan growth on the balance sheet.
Speaker Change: And only when we get to a position where were running into loan to deposit ratio concern.
Speaker Change: We're then we somehow have excess cash on the balance sheet would we consider.
Speaker Change: Investment Securities.
Another situation that could develop as we roll through calendar 2024.
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. Additionally, our single-family and multi-family loan pipelines are similar in comparison to last quarter, suggesting our loan originations in the March 2024 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which have been between $19 and $85 billion. For the three months ended December 31, 2023, loans held for investment increased by $3.6 billion when compared to the September 30, 2023 ending balance, with small increases in single-family, multifamily, commercial real estate, and construction loan categories. The current credit quality is holding up very well, and you will note that non-performing assets increased to just $1.8 billion, which is up from $1.4 million on September 30, 2023. Additionally, there will be just $340,000 in early stage delinquency balances at December 31st, 2023. We are aware of the mounting concerns regarding commercial real estate loans but are confident that the underwriting characteristics of our borrowers and collateral will continue to perform well. We have outlined these characteristics on slide 13 of our quarterly investor presentation.
Speaker Change: As mortgage rates come down I expect that there may be more prepayments and payoffs. If you think about some of the mortgages that.
Speaker Change: Not just us, but the industry put on the books.
In calendar 2023.
Speaker Change: Some of those mortgages are probably now in the money with respect to refinance activity.
So as we think about balance sheet, our preference first is to populate loan growth.
Speaker Change: To the extent that we accumulate quote unquote too much cash on the balance sheet.
Speaker Change: There are other things, we can do perhaps paying down.
Speaker Change: Brokered Cds.
Speaker Change: Wholesale advances our borrowings.
Or even I suppose look to investment securities to take care of that excess cash, but that's not something we see in our immediate future.
Right, Okay, and you kind of led into my second question, which was.
Speaker Change: Look at demand for mortgages or even in the past as you mentioned, how much do rates need to come down to really start to ignite that activity.
Speaker Change: Well I think yes, I think totally we're starting to hear that.
Speaker Change: Activity has increased certainly from where we were.
Speaker Change: In the December quarter, now part of that could be entering a new fiscal year. The holidays are calendar year. The holidays are over.
You should also know that we have just nine CRE loans for $5 million maturing for the remainder of 2024. We recorded a $720,000 recovery of credit losses in the December 2023 quarter. The recovery was primarily the result of a decrease in the average life of the loan portfolio stemming from the rapid decline in mortgage rates in the December 2023 quarter and higher prepayment estimates. The allowance for credit losses to gross loans held for investment decreased to 65 basis points on December 31st, 2023, from 72 basis points on September 30th, 2023; margin declined by 10 basis points, and the other two. The quarter ended December 31, 2023.
And just generally activity picks up in.
In the March quarter.
Speaker Change: Historically, but.
Speaker Change: But I think as well interest rates have come down.
Speaker Change: 70, 80 basis points may be from where they kind of peaked out.
Speaker Change: Before the fed's comments in middle of December and they started reversing.
Speaker Change: So I think activity has already picked up.
Speaker Change: But certainly if we see the fed began.
Speaker Change: To move down with their first rate movement, even though the market is kind of already forecasting that I think that wakes up the consumer a little bit more than that where they're currently at.
And perhaps that.
Speaker Change: The notes more refi activity.
Speaker Change: And then ultimately more loan activity.
Speaker Change: Okay.
Those are my questions. Thank you very much.
Speaker Change: Thanks for your questions Tim.
Speaker Change: Ladies and gentlemen, once again, if you do have a question Thats star one on your Touchtone phone will go ahead, and just wait a couple more seconds here to see if we have any other additional questions.
Speaker Change: Okay.
Compared to the September 30, 2023 sequential quarter, as a result of a 13 basis point increase in the average yield on total interest earning assets and a 24 basis point increase in the cost of total interest bearing liabilities. Notably, our average cost of deposits increased by 19 basis points to 99 basis points for the quarter ended December 31st, 2023, compared to 80 basis points in the prior sequential quarter, and our cost of borrowing increased by 18 basis points in the December 2023 quarter compared to the September 2023 quarter. The net interest margin this quarter was not impacted by the net deferred loan costs associated with loan payoffs in the December 2023 quarter in comparison to the average net deferred loan cost amortization of the previous five quarters.
Speaker Change: I am not seeing any other questions. So Mr. Turn this I will turn it back over to you for any closing remarks.
Speaker Change: Well. Thank you very much Aaron I appreciate the help on the call and thank you to the participants.
Speaker Change: And I look forward to speaking with you all next quarter.
Speaker Change: Thank you.
Speaker Change: Thank you and ladies and gentlemen that does conclude today's call. Thank you all for joining you may now disconnect have a great day.
Speaker Change: [music].
Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
[music].
New loan production is being originated at higher mortgage interest rates than recent prior quarters, and adjustable rate loans in our portfolio are adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $116.8 million of loans repricing upward in the March 2024 quarter at a currently estimated 87 basis points to a weighted average rate of 7.71% from 6.84%, and approximately $86.2 million of loans repricing upward in the June 2024 quarter at a currently estimated 90 basis points to a weighted average rate of 7.82% from 6.92%. Also, for multifamily and commercial real estate loans, the loans are adjusting above their existing floors. However, many adjustable-rate loans in all categories are currently limited in their upward adjustment by the periodic interest rate cap.
Okay.
[music].
Speaker Change: Okay.
Okay.
Sure.
I would also point out that there is an opportunity to reprice the touring wholesale funding downward as a result of market conditions where current interest rates have moved lower in six-month and longer terms. All of this suggests that the current pressure on the net interest margin may soon subside. We continue to look for operating efficiencies throughout the company to lower operating expenses.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Our FTE count on December 31st, 2023 decreased to 160 compared to 161 FTE on the same date last year. You will note that operating expenses increased to $7.3 million in the December 2023 quarter, somewhat higher than what we describe as the stable run rate of $7.2 million per quarter. The increase was primarily due to higher salaries and employee benefits expenses resulting from higher expense accrual adjustments for the Supplemental Executive Retirement Plan.
For fiscal 2024, we continue to expect a run rate of approximately $7.2 million per quarter as a result of increased wages and inflationary pressure on other operating expenses. In fact, the actual run rate for the fiscal year to date has been $7.1 million per quarter, which for balance sheet management, is somewhat more conservative than last fiscal year. We believe that slowing the loan portfolio growth is the best course of action at this time as a result of tighter liquidity conditions.
We were successful in the execution of this strategy this quarter with loan origination volumes at the low end of the quarterly range and loan payoffs also at the low end of the quarterly range. The total interest-earning assets composition improved from last quarter with a small increase in the average balance of loans receivable, and a decrease in the lower-yielding average balance of investment security. However, the total interest-bearing liabilities composition deteriorated somewhat with a decrease in the average balance of deposits and an increase in the average balance of borrowing.
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 believe that maintaining our cash dividend is very important. We also recognize that prudent capital returns to shareholders, through stock buyback growth, is a responsible capital management tool, and we repurchased approximately 63,000 shares of common stock in the December 2023 quarter. For the fiscal year to date, we distributed approximately $2 million of cash dividends to shareholders and repurchased approximately $1.2 million worth of common stock.
As a result, our capital management activities resulted in an 82% distribution of fiscal year-to-date net income. We encourage everyone to review our December 31st 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 into our solid financial foundation supporting the future growth of the company. We will now entertain any questions that you may have regarding our financial results. Thank you. Thank you. At this time, I would like to remind everyone that in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the roster, and our first question comes from the line of Andrew Liesch with Piper Sandler. Go ahead. Hi, good morning.
Question on the margin outlook here. If we get a series of Fed break cuts, you know, I guess what sort of effect do you think that could have on the margin going forward? It sounds like you're already seeing some relief on the funding side, at least on the wholesale account. Yeah, I think, Andrew, as we think about the balance sheet, we probably have a longer tail than many on our assets or our loans repricing upward because they are hybrid arms tied to SFR or multifamily or even commercial. And so, as the indices have moved upward, in many cases, that upward repricing loan has been capped by the periodic cap, or there is also the situation where the loan is in its fixed period and will not adjust upward until it moves out of the fixed period.
So I think there's a tremendous opportunity with respect to the loan portfolio to continue to adjust upward with a longer tail on that than others may have with C&I lending, for instance. Even if we see the Fed beginning to move interest rates downward, I think our earning assets, particularly the loan portfolio, can reprice upward. Conversely, as you point out, the funding side of the balance sheet is probably toward the higher end of the range, and we can see some relief there. You'll note in our earnings release that we describe the amount of brokered CDs that we have in our portfolio, and that brokered CD balance is $122.7 million, and the weighted average cost of those brokered CDs was 5.26%.
This is at December 31st. We have recently seen a decline in the brokered CD rate. And in fact, the most recent CD that we put on the books to replace a maturing CD came on at 4.70%. So there are about 56 basis points of relief between the weighted average in the portfolio of those funds and what the current funding costs may look like. So I think, as you point out, calendar 2024 looks to be a little bit better with Outlook as it relates to net interest margin, certainly than where we began in calendar 2020. I think that's very helpful, thanks for that detail.
And then, you know, you mentioned in the release that 2024 may be having the possibility of a better opportunity, a more favorable environment for growth. Are you seeing anything right now, or are you still just waiting to see how the Fed's reaction and their monetary policy plays out? Sure.
You know, the thing that we think about with respect to opportunity for growth is what the liquidity environment looks like in the industry. Thankfully, as a result of the Fed comments on that subsequent to their December meeting. They essentially confirmed that they're thinking about lowering rates in calendar 2024, and as a result of that, we did see interest rates move down, you know, essentially across the curve except for the very short end of the curve, and that I think will provide some relief to deposit gathering or gathering funding from other sources in contrast to what we saw in 2023. And if we see that there is some relief, and we have the ability to gather deposits and funding That will trigger our thinking to populate growth onto the balance sheet. We run a relatively high, Historically, we have done that because of the nature of the loans that we have and the 30-year mortgages. And we're sensitive to that, and we don't want to, you know, populate even higher loan deposit ratios in a poorer or poor liquidity environment.
So that's really what we have to see. We think there's opportunity right now to grow if that's what we were choosing to do. As we mentioned in the prepared comments, we have tightened our underwriting standards beyond where we normally have them, and we've priced ourselves up, with respect to the loan products, essentially to slow production, to match what is coming in the form of payoffs, such that we're maintaining our loan portfolio. That's very helpful.
Andrew Brian Liesch: Thank you for your thoughts there. I will step back. Thank you for your questions, Andrew. Once again, ladies and gentlemen, if you would like to ask a question, it is star one on your touch-tone keypad, and we'll take questions in the order that we receive them. Our next question is from the line of Tim Coffey with Jani. Tim, your line is live.
Operator: Thank you. Good morning, Donovan. Good morning, Tam. Good morning.
Timothy Norton Coffey: As we go through this year with the outlook for modest loan growth, for all the items you've discussed already, I'm wondering, do you have any sense of how much cash you'll start to carry on the balance sheet, or do you anticipate rolling that back into securities? Well, I'm not certain that our preference would be to roll it into security, uh... we would prefer to see an environment where we are populating, uh... loan growth on the balance sheet. And only when we get to a position where we're running into loan-to-deposit ratio concerns, where then we somehow have excess cash on the balance sheet, would we consider investment security, another situation that could develop as we roll through calendar 2024. As mortgage rates come down, I expect that there may be more prepayments and payoffs.
Timothy Norton Coffey: If you think about some of the mortgages that the industry put on the board in calendar 2023, some of those mortgages are probably now in the money with respect to the refinance act. So as we think about the balance sheet, our preference first is to populate loan growth, to the extent that we accumulate, quote unquote, too much cash on the balance sheet. There are other things we can do, perhaps paying down brokered CDs, wholesale advances, or borrowings, or even, I suppose, looking to investment securities to take care of that excess cash. But that's not something we see in our immediate view.
Right, okay, you kind of led into my second question, which was, you know, if we look at demand for mortgages or even the payoffs, as you mentioned. How much do rates need to come down to really start to ignite that activity? Well, I think anecdotally, we're starting to hear that activity has increased, certainly from where we were in the December quarter. Now, part of that could be, you know, entering a new fiscal year; the holidays are over, or calendar year; the holidays are over. And just generally, activity picks up in the March quarter, historically. But I think, you know, interest rates have come down, 70, 80 basis points maybe from where they kind of peaked out before the Fed's comments in the middle of December, and they have started to reverse.
So I think activity has already picked up. But certainly, if we see the Fed begin to move down with their first rate movement, even though the market is kind of already forecasting that, I think that wakes up the consumer a little bit more than where they're currently at, and perhaps that denotes more refi activity and then ultimately more loan activity.
Great. Those are my questions. Thank you very much. Thanks for your questions, Tim. Ladies and gentlemen, once again, if you do have a question, it's star one on your touchtone phone. We'll go ahead and just wait a couple more seconds here to see if we have any other additional questions. I don't see any other questions.
Operator: So, Mr. Ternes, I'll turn it back over to you for any closing remarks. Thank you very much, Aaron. I appreciate the help on the call. And thank you to the participants. And I look forward to speaking with you all next quarter. Thank you. Thank you. And, ladies and gentlemen, that does conclude today's call. Thank you all for joining me. You may now disconnect. Have a great day!