Provident Financial Holdings, Inc. (NASDAQ:PROV) Q2 2024 Earnings Call Transcript January 30, 2024
Provident Financial Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Donavon Ternes, President and CEO. Please go ahead.
Donavon Ternes: Thank you, Aaron. Good morning. This is Donavon Ternes, 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. 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 that 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 statements 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-Qs and other SEC filings that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as of the date that they are made, and the company assumes no obligated 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 second quarter results.
In the most recent quarter, we originated $20.2 million of loans held for investment and earnings 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 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 rate. 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 multifamily 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 has been between $19 million and $85 million. For the three months ended December 30, 2023, loans held for investment increased by $3.6 million when compared to the September 30, 2023 ending balance sheet with small increases in single-family, multifamily, commercial real estate and construction loan categories. Current credit quality is holding up very well, and you will note that non-performing assets increased to just $1.8 million, which is up from $1.4 million on September 30, 2023. Additionally, there is just $340,000 of early-stage delinquency balances at December 31, 2023.
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 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 5 basis points on December 31, 2023, from 72 basis points on September 30, 2023.
A close up view of an ATM interface with the company logo displayed prominently.
Our net interest margin declined by 10 basis points to 2.78% for the quarter ended December 31, 2023, compared to the September 30, 2023, sequential quarter as the result of a 13 basis point increase in the average yield on total interest-earning assets at 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 31, 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.
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 or 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 caps.
I would also point out that there is an opportunity to reprice maturing wholesale funding downward as a result of market conditions, where current interest rates have moved lower in 6 months 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 on December 31, 2023, increased 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 described 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. Our short-term strategy for balance sheet management is somewhat more conservative than last fiscal year. We believe that slowing the loan portfolio 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 the low end of the quarterly rate. The total interest earning assets composition improved from last quarter with a small increase in the average balance of wounds 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 borrowing. 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 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 31 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 foundation supporting the future growth of the company. We will now entertain any questions that you may have regarding our financial results. Thank you. Aaron?
