PROV - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to the Provident Financial Holdings Third Quarter Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Craig Blunden, Chairman and CEO. Please go ahead.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donavon Ternes, our President, Chief Operating and Chief Financial Officer. Before we begin, I have a brief administrative item to address. Our presentation today discusses the company's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, 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, 2022, and from the Form 10-Qs and other SEC filings that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as the date they are made, and the company assumes no obligation to update this information. To begin with, thank you for participating in our call. I hope that each of you has had an opportunity to review our earnings release, which describes our third quarter results. In the most recent quarter, we originated $53.9 million of loans held for investment, a decline from the $74.3 million in the prior sequential quarter. During the most recent quarter, we also experienced $17.5 million of loan principal payments and payoffs, which is down from the $28 million in the December 2022 quarter and at the lower end of the quarterly range. Currently, it seems that many real estate investors have reduced their activity as a result of rising mortgage 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. We have generally tightened our underwriting requirements across all of our product lines as a result of the current economic environment and higher funding costs. Additionally, our single-family and multifamily loan pipelines are smaller in comparison to last quarter, suggesting that our loan originations in the June 2023 quarter will decline from this quarter and they drop below the range of recent quarters, which has been between $54 million and $94 million. For the 3 months ended March 31, 2023, loans held for investment increased by approximately 4% compared to December 31, 2022, ending balances with increases in the single-family, multifamily, commercial real estate and construction loan categories. Current credit quality is holding up very well, and you will note that nonperforming assets decreased to just $945,000, which was down from $956,000 on December 31, 2022. Additionally, we are just $962,000 of early-stage delinquency balances at March 31, 2023. We're aware of mounting concerns regarding commercial real estate loans, but are confident that the underwriting characteristics of our borrowers and collateral will perform well. We have outlined these characteristics on Slide 13 of our quarterly investor presentation. You should also note that we have just 3 CRE loans for $1.9 million maturing during the remainder of 2023 and just 10 CRE loans for $5.6 million maturing in 2024. We recorded a $169,000 provision for loan losses in the March 2023 quarter. The allowance for loan losses to gross loans held for investment is unchanged at 56 basis points on March 31, 2023 compared to December 31. You'll note that we remain on the incurred loss model and will not adopt CECL until July 1, 2023. This means that our allowance methodology cannot be reasonably compared to CECL adopters. Our net interest margin declined by 5 basis points to 3% for the quarter ended March 31, 2023, compared to the December 2022 sequential quarter as a result of a 20 basis point increase in the average yield on total interest-bearing assets and a 30 basis point increase in the cost of total interest-bearing liabilities. Notably, our average cost of deposits increased by 17 basis points to 37 basis points for the quarter ended December 31, 2023, compared to 20 basis points in the prior sequential quarter. And our borrowing costs increased by 59 basis points in the March 2023 quarter compared to the December 2022 quarter. The net interest margin this quarter was positively impacted by approximately 2 basis points as a result of lower net deferred loan costs associated with newer loan payoffs in the March 2023 quarter in comparison to the average net deferred loan cost amortization of the previous 5 quarters. New loan production is being originated at higher mortgage interest rates than recent prior quarters, and adjusted rate loans in our portfolio are now adjusting to higher interest rates in comparison to their existing interest rates. We have approximately $99.3 million of loans repricing upward in the June 2023 quarter at a currently estimated 84 basis points to a weighted average yield of 6.24% from 5.40% and approximately $95.3 million of loans repricing upward in the September 2023 quarter at a current estimated 104 basis points to a weighted average yield of 7.16% from 6.12%. Also, for multifamily and commercial real estate loans, the loans are adjusting above their current interest rate floors. However, many adjusted rate loans in all categories are currently limited in their upward adjustment by periodic rate counts. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on March 31, 2023, decreased to 160 compared to 163 FTE on the same date last year. You will note that operating expenses increased to $6.9 million in the March 2023 quarter, consistent with what we described as a stable run rate. We expect a similar run rate for the remainder of fiscal 2023, but may experience some pressure on operating expenses as a result of increased wages and inflationary pressures on other operating expenses. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that leveraging the balance sheet with prudent loan portfolio growth is the best course of action. We were successful in execution this quarter with loan origination volumes at the low end of the quarterly range and loan payoffs also at the low end of the quarterly range. The total interest-earning assets composition improved during the quarter with an increase in the average balance of loans receivable and a decrease in lower-yielding average balance of investment securities. However, the total interest-bearing liabilities composition deteriorated a bit with a small increase in the average balance of deposit and a larger increase in the average balance of borrowings. We exceed well-capitalized ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications. We believe that maintaining our cash dividend is very important. We also recognize that prudent capital return to shareholders through stock buyback programs is a valid capital management tool, and we repurchased approximately 98,000 shares of common stock in the March 2023 quarter. For the fiscal year-to-date, we distributed approximately $3 million of cash dividends to shareholders and repurchased approximately $3.6 million worth of common stock. As a result, our capital management activities resulted in a 97% distribution of year-to-date fiscal 2023 net income. We encourage everyone to review our March 31 investor presentation posted on our website. You'll find that we include 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 you may have regarding our financial results. Thank you.

[Operator Instructions] And our first question is from Tim Coffey with Janney.

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

Tim, historically, as a thrift balance sheet, the balance sheet typically has a higher loan-to-deposit ratio than a typical commercial bank balance sheet, for instance. Nonetheless, its loan-to-deposit ratio is about 110% right now, which is at the upper end of our range. So we're managing that loan-to-deposit ratio given the current economic environment in such a way that it doesn't go up too much further while still not competing too aggressively on deposits as it relates to the current environment. As you understand, deposits have been called into question as a result of the earlier bank failures in March. And competition has heated up quite significantly with respect to deposit gathering. And frankly, we don't want to get caught up in that to the extent we're not required to, and so that does perhaps scale back a little bit our growth forecast or our growth ability with respect to new loan production and the like. But 110% loan-to-deposit ratio, we've run that ratio in that way in the past, and it is not of significant concern right now other than the fact that we are cognizant of it and don't want to be out there too far on the bleeding edge.

Okay. Great. I think I'll switch to deposits. The profile of your depositor, it seems like you would -- it would tend to be stickier than others that we've seen across the industry at least. I'm wondering, what kind of discussions have you been having with depositors about maintaining balances there, about rates, things of that nature?

So you're right with respect to the nature of our deposits. They are primarily retail deposits. They're small business deposits. We don't have any large businesses deposits per se. In fact, the average deposit balance or average size of our deposit per account is $34,000. So it's very, very granular. And that's primarily retail or consumer that has been generated through the branch system. With respect to our depositors in particular, we are in a defensive strategy mode as it relates to depositors that may have the touring certificates of deposit. To the extent that they're interested in leaving the institution for a higher rate, we will defend and we will match those rates, but we're not out there advertising as others are with respect to aggressive certificates of deposit because, frankly, we don't want to jeopardize the stickiness or the longevity of that depositor. So we have had some defection in deposits, not necessarily in accounts, but some depositors have left for higher rates. That's the more rate-sensitive depositor. But on the whole, we haven't had the issue that others have had with respect to depositors being nervous as it relates to our depositor profile in comparison to others that might have tech deposits, venture capital deposits or crypto deposits or things of that nature. So there wasn't really any concern from our depositors with respect to that type of activity, but there is inquiries from depositors with respect to the interest rates we are paying, and we are matching on a core deposit basis.

Okay. Great. And then one last question before I step back has to do with capital and your capital kind of outlook going forward. Profitability continues to be steady. Is your focus going to be on perhaps growing capital or continuing to pay out a certain portion of relatively stable earnings as capital returns to shareholders?

So we mentioned in the prepared comments that we think the cash dividend is very, very important, and we foresee being in a position of maintaining the cash dividend. As it relates to the repurchase of stock, we also, even through the banking turmoil that has occurred, continued to repurchase stock similar to what was done in the December quarter. And right now, our capital ratios are still very, very strong relative to industry standards. And as you point out, profitability metrics are still very good. So we foresee the ability to continue to repurchase stock perhaps, but we won't forecast what those amounts may or may not be. Ultimately, that will be dictated by the industry turmoil, what regulators may be thinking with respect to capital. As you know, there's been some discussion that perhaps certain capital requirements may be modified as a result of the banking turmoil.

[Operator Instructions] And we have no other questions. You may continue.

Well, if there are no other questions, we will wrap up the quarter. And we appreciate everybody's participation with respect to the call and look forward to the next call in July. Thank you very much.

Thank you.