Q3 2024 Provident Financial Holdings Inc Earnings Call
Donavon P. Ternes: New loan production is being originated at higher mortgage interest rates than recent prior quarters, and adjustable rate loans in our portfolio are adjusting to higher interest rates in comparison to their existing interest rates. We have approximately 98.2 million dollars of loans repricing upward in the June 2024 Quarter at a currently estimated 89 basis points to a weighted average rate of 7.88% from 6.98%, and approximately $108.4 million of loans repricing upward in the September 2024 quarter at a currently estimated 89 basis points to a weighted average rate of 8.06% from 7.71%. However, many adjustable-rate loans in all categories are currently limited in their upward adjustment by their periodic interest rate cap.
Donavon P. Ternes: I would also point out that there is an opportunity to reprice the touring wholesale funding downward as a result of current market conditions, where current interest rates have moved lower in 12-month and longer terms. All of this suggests that the current pressure on the net interest margin may soon subside. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count at March 31st, 2024 increased to 161 compared to 160 FTE on the same date last year.
Donavon P. Ternes: You will note that operating expenses decreased to $7.2 million in the March 2024 quarter, which is consistent with the stable run rate of approximately $7.2 million per quarter. For fiscal 2024, we continue to expect a run rate of approximately $7.2 million per quarter. In fact, though, the actual run rate for the fiscal year to date, first three quarters, has been somewhat lower at $7.1 million per quarter. Consequently, our short-term strategy for balance sheet management is somewhat more conservative than last fiscal year.
Donavon P. Ternes: We believe that slowing the loan portfolio growth is the best course of action at this time as a result of tighter liquidity conditions and the inverted yield curve. We were successful in the execution of this strategy this quarter, with loan origination volumes at the low end of the quarterly range, and loan payoffs also at the low end of the quarterly range. The total interest-earning assets composition reflected a small decrease in the average balance of loans receivable and a decrease in the lower yielding average balance of investment securities. In addition, the total interest-bearing liabilities composition improved somewhat, with a decrease in the average balance of deposits, but a larger decrease in the average balance of borrowing.
Donavon P. Ternes: 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 programs is a responsible capital management tool, and we repurchased approximately 50,000 shares of common stock in the March 2024 quarter. For the fiscal year to date, we distributed approximately $2.9 million of cash dividends to shareholders and repurchased approximately $2 million worth of common stock.
Donavon P. Ternes: As a result, our capital management activities resulted in a 91% distribution of fiscal year-to-date net income. We encourage everyone to review our March 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.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. And if you are called upon to ask your question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star 1 to join the queue, and your first question comes from the line of Andrew Liesch of Piper Sandler. Please go ahead.
Andrew Brian Liesch: Thanks. Good morning.
Andrew Brian Liesch: Thanks for taking the questions. Donovan, just on the margin trend here, it sounds like you said the pressure will subside soon. Does that mean... I guess, trying to triangulate everything, it seems like maybe a little bit more pressure in this current quarter and then maybe it could stabilize in the first fiscal quarter of 2017. Is that the right way of looking at it?
Donavon P. Ternes: So, Andrew. We describe in the prepared remarks what we have repriced with respect to our loan portfolio, which obviously doesn't account for any payoffs that might occur or new production volume which is coming in at higher rates. But additionally, you'll see that in the earnings release. We describe our FHLB advances that are maturing in the current quarter.
Donavon P. Ternes: It's approximately $59.5 million, and the weighted average interest rate of those advances is 5.28%. So we think today, given where the current FHLB advance rates are, if we were to replace those advances, we could do so at approximately the same rate, maybe a little bit lower, depending upon the term we choose with respect to replacing those advances. Additionally, while we don't have it in the prepared remarks, we have approximately $10 million of brokered CDs that are maturing this quarter.
Donavon P. Ternes: And those brokered CDs are maturing at a weighted average cost of 5.38%. We think we can reprice those brokered CDs downward, again, depending upon the term we choose for replacement, below 5.38%. So, in addition to thinking about the balance sheet repricing upward with respect to adjustable rate loans, we also have the opportunity to reprice downward or remain downward. Close to neutral with respect to our wholesale funding costs. So, we think as we go through this fiscal quarter, or the fourth quarter, we have an opportunity to claw back the decline in net interest margin, which again went down from last quarter; it was four basis points this quarter.
Donavon P. Ternes: We have a very good shot, it seems to me, at being flat net interest margin for the June quarter, maybe even picking up one or two basis points in the June quarter, but certainly we don't get the full impact of the repricing balance sheet until the September quarter, because all of this occurs in the June quarter, in the months April, May, and June, and it just kind of depends on when everything reprices.
Donavon P. Ternes: Got it. All right. That's helpful. The $59.5 million in FHLB, the pricing is pretty similar. Just replace those with brokered TDs if you get a lower rate on them.
Donavon P. Ternes: Well, we could, and that is an option. But we also measure our wholesale funding, both in the form of federal home loan banks, advances, brokered CDs, and the like. And we're sensitive to that.
Donavon P. Ternes: And we don't want to be dependent on any particular form, if you will, on a go-forward basis. We ladder out what it is we do with FHLB advances and brokered CDs. So we can, you know, game plan for when that repricing may occur down the timeline. And so the answer is yes, we could. We've chosen not to do so at this point because we think the current composition of that wholesale funding is about right from a risk standpoint with respect to the balance sheet.
Andrew Brian Liesch: Got it. All right, that's helpful.
Andrew Brian Liesch: Um, they're just on expenses. I hear you on the $7.2 million run rate. Does that then imply a step up here in the fourth quarter? I'm just trying to figure out what line item that would go into. Your costs continue to be pretty well controlled.
Donavon P. Ternes: Yeah, I wouldn't expect a great deal of deviation from what that run rate looks like. We've done a little bit better than what we've described through the first three quarters at 7.1 versus 7.2, but we're also entering the fourth quarter. There are many true-up items that come in at the end of the fiscal year and analysis that gets completed at the end of the fiscal year. So I wouldn't expect a large deviation one way or another from the 7.2.
Andrew Brian Liesch: Got it. All right. Very helpful. I'll step back. Thanks for taking the question.
Operator: Again, if you would like to ask a question, please press star 1 on your telephone keypad. And your next question comes from the line of Timothy Coffey from Cheney. Please go ahead.
Timothy Norton Coffey: Thank you. Good morning, Donovan. Good morning. Hey, I have a question. So I appreciate the color on the broker, or on the borrowings over the next 12 months that's on the slide deck. I'm wondering, of the broker deposits that you have on your balance sheet, how much of that matures in the next 12 months?
Donavon P. Ternes: So a significant portion of that balance matures over the next 12 months. As I've described, we ladder out, and we look at given maturities in given months. Historically, what we've been looking at is kind of the 13-month, 14-month terms with respect to new CDs replacing maturing CDs, and that effectively ladders everything out. So those collateralized CDs, which are also, I think, called out in the earnings release as far as balance and weighted average costs, will be coming due primarily over the next 12 months.
Timothy Norton Coffey: And so, let's say, you know, there are rate cuts, and your funding costs are coming down. I would imagine that it would like to be a little bit more competitive on the loan side. But do you get the sense that there is any kind of pent-up demand from real estate investors?
Donavon P. Ternes: So with respect to what we're doing, Tim, we're relatively conservative with the inverted yield curve. And essentially, the loans that we're making, which are hybrid arms, you know, call them at the five-year part of the curve. And if we're funding at the margin, at the short end of the curve. You know, that pure spread at the margin coming on board is negatively impacted by the shape of the curve, and we're uncomfortable with that with respect to growth and the balance sheet.
Donavon P. Ternes: So what we've been doing over the course of the last year is essentially replacing, to the extent we can, what is maturing to keep the total portfolio essentially flat. And, you know, there's bumpiness to that. For instance, it shrunk by about 10 million bucks this most recent quarter. But.
Donavon P. Ternes: What we believe is, if we determined that we wanted to become more aggressive... with respect to generating a loan portfolio, we could do so, but for the fact that we're uncomfortable doing so with an inverted yield. We have, I don't know how much pent-up demand, generally speaking, there is in the market, but I think it's very sensitive to interest rates. But with respect to what we could produce for our own balance sheet, we believe we could grow our balance sheet and loan portfolio when the time is right for us to do so, based on current conditions.
Timothy Norton Coffey: Okay. I appreciate that.
Timothy Norton Coffey: And then you mentioned that your capital returns are close to 90% of earnings. Is that a reason why you're not getting more aggressive on the buyback, just in general? Because I know you obviously have liquidity and volume constraints, but is that kind of why you're not getting more aggressive on the buyback?
Donavon P. Ternes: Well, I don't know that it's a matter of aggressiveness per se. When we build out our business plan each year, and we share that business plan with the regulatory authorities, which are, by the way, the Federal Reserve Bank at the holding company level and the OCC at the bank level. There is a notice provision contained in those documents with respect to what goes to the Federal Reserve and the OCC, where we lay the foundation or expectation as it relates to what we may do in the form of a cash dividend from the bank to the holding company.
Donavon P. Ternes: And then what we might do with the cash that resides at the holding company as it relates to the cash dividend to shareholders as well as our repurchase activity. And generally speaking, and one of the things we have pointed out, If you look back at our Form 10-Q's, I believe that get filed on September 30 of every year. We describe what the cash dividend has been from bank to holding company, and it has generally been about the same amount as the earnings at the bank level of the prior fiscal year.
Donavon P. Ternes: And so, we're always in a position of moving money up from the bank to the holding company and then using that money at the holding company level for that repurchase activity for that cash dividend in a way that is transparent to regulators and consistent with our business plan, which we look at each year.
Timothy Norton Coffey: Those are my questions. Thank you.
Operator: There are no further questions at this time. I will turn the conference back over to Donovan Ternes for closing remarks.
Donavon P. Ternes: Well, thank you everyone for joining the call today. We look forward to speaking with you next quarter. Ladies and gentlemen, that concludes today's call. Thank you all for joining.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining us. You may now disconnect.
Operator: Donovan Ternes, Timothy Coffey, Donavon Ternes, Craig Blunden, Unknown Attendee, Provident Financial Holdings Inc Donovan Ternes, Timothy Coffey, Donovan Ternes, Craig Blunden, Unknown Attendee, Provident Financial Holdings Inc