Provident Financial Holdings (NASDAQ: NASDAQ:PROV) held its Fourth Quarter and Fiscal 2024 Earnings Call, with President and CEO Donavon Ternes discussing the company's performance and future outlook. Amidst higher interest rates, the company saw a reduction in real estate investor activity, prompting tighter underwriting and increased pricing across all products. Loan originations for the quarter stood at $18.6 million, with loan principal payments and payoffs at $30.6 million. The company's loan portfolio decreased by $12.8 million due to lower multifamily and construction loans, while credit quality remained stable with a slight increase in nonperforming assets. Provident Financial is focusing on operational efficiencies and maintaining its cash dividend, with potential stock buybacks under consideration.
Key Takeaways
- Provident Financial originated $18.6 million in loans held for investment, with $30.6 million in loan principal payments and payoffs.
- Real estate investor activity has decreased due to higher interest rates, though some recent activity was noted.
- The company has tightened underwriting and increased pricing to manage higher funding costs and economic uncertainty.
- Loan portfolio decreased by $12.8 million, mainly in multifamily and construction loans.
- Credit quality remains strong with a marginal increase in nonperforming assets.
- Net interest margin was stable; the company seeks operational efficiencies to reduce expenses.
- Provident Financial aims to maintain cash dividends and is considering stock buyback programs.
- The company is cautious about portfolio growth due to recession risks and the inverted yield curve.
- Interest rate declines may lead to increased loan pay-offs; however, the impact is uncertain.
Company Outlook
- Provident Financial is cautious about growing its loan portfolio due to concerns about an inverted yield curve and recession risks.
- The company is focused on maintaining cash dividends and is considering stock buybacks as a priority over special dividends.
Bearish Highlights
- Higher interest rates have dampened real estate investor activity, impacting loan originations.
- The loan portfolio has seen a decrease, particularly in multifamily and construction loans.
- The economic environment has necessitated tighter underwriting and increased product pricing.
Bullish Highlights
- Despite market challenges, credit quality remains robust.
- The company is actively seeking ways to improve operational efficiencies and lower costs.
- Interest in growing cash dividends and repurchasing shares reflects confidence in the company's financial health.
Misses
- Loan originations did not keep pace with loan principal payments and payoffs, leading to a net decrease in the loan portfolio.
Q&A Highlights
- Ternes expressed that a decline in interest rates might increase loan pay-offs, but the exact impact on prepayment estimates is uncertain.
- Commercial real estate investors may need a significant drop in interest rates to reenter the market.
- Retail deposits and transaction accounts have shown low deposit beta, suggesting minimal immediate re-pricing if rates are cut.
- Ternes highlighted the importance of visibility to lower interest rates for investors and borrowers, noting a resurgence of investor interest in bank stocks.
Provident Financial Holdings continues to navigate a challenging economic landscape, balancing the need for prudent risk management with shareholder value propositions. The company's ability to adapt to interest rate fluctuations and maintain a stable credit quality will be critical for its performance in the coming quarters.
InvestingPro Insights
Provident Financial Holdings (NASDAQ: PROV) has demonstrated resilience in a fluctuating economic environment, as evidenced by its commitment to maintaining dividend payments for 23 consecutive years, a testament to its financial stability and shareholder commitment. Moreover, analysts remain optimistic about the company's profitability in the current fiscal year, which aligns with the company's focus on operational efficiencies and maintaining a strong balance sheet.
InvestingPro Data highlights the company's market capitalization at $89.83 million and a price-to-earnings (P/E) ratio of 12.35, indicating a potentially reasonable valuation in the current market. The adjusted P/E ratio for the last twelve months as of Q4 2024 stands at 12.72. This is complemented by a solid operating income margin of 28.69% for the same period, suggesting that the company is effectively managing its expenses relative to its revenues.
InvestingPro Tips reveal that despite the challenges, Provident Financial has a track record of profitability over the last twelve months and a dividend yield of 4.4% as of the end of 2024, which may be attractive to income-focused investors. However, it is important to note that two analysts have revised their earnings estimates downwards for the upcoming period, which could be a sign to watch closely.
For investors seeking a deeper dive into Provident Financial's financials and future prospects, more InvestingPro Tips can be found at https://www.investing.com/pro/PROV. Additionally, using the coupon code PRONEWS24, readers can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, unlocking access to a total of five InvestingPro Tips that could further inform investment decisions.
Full transcript - Provident Financial Holdings (PROV) Q4 2024:
Operator: Thanks for standing by. My name is Mandeep, and I’ll be your operator today. At this time, I’d like to welcome everyone to the Provident Financial Holdings Fourth Quarter and Fiscal 2024 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Donavon Ternes, President and CEO. You may begin.
Donavon Ternes: 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 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-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 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 fourth quarter and fiscal year results. In the most recent quarter, we originated $18.6 million of loans held for investment, an increase from $18.2 million in the prior sequential quarter. During the most recent quarter, we also had $30.6 million of loan principal payments and payoffs, which is up from $28.5 million in the March 2024 quarter and still at the lower end of the quarter of the range. Currently, it seems that many real estate investors have reduced their activity as a result of higher mortgage and other interest rates, although we have been seeing some additional activity recently. 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 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, but we’ll be quick to return to more routine criteria when conditions improve for growth. Additionally, our single-family and multifamily loan pipelines are similar in comparison to last quarter, suggesting our loan originations in the September 2024 quarter will be similar to this quarter and at the lower end of the range of recent quarters, which has been between $18 million and $54 million. For the 3 months ended June 30, 2024, loans held for investment decreased by approximately $12.8 million when compared to March 31, 2024, with decreases in the multifamily commercial business and construction loan categories, partly offset by increases in the single-family and commercial real estate loan categories. Current credit quality is holding up well, and you will note that nonperforming assets increased to $2.6 million on June 30, 2024, which is up slightly from $2.2 billion on March 31, 2024. Additionally, there were no early-stage delinquencies at June 30, 2024. We continue to monitor commercial real estate loans particularly loans secured by office buildings, but are confident that our 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, which shows that our exposure to loans secured by various types of offices is $41.5 million or 3.9% of the loans held for investment. You should also note that we have just 5 CRE loans or $2.5 million maturing during the remainder of calendar 2024 and 7 CRE loans were $3.1 million, maturing in calendar 2025. We recorded a $12,000 recovery for credit losses in the June 2024 quarter. The recovery for credit losses recorded in the fourth quarter of fiscal 2024 was primarily attributable to a slight decline in the outstanding balance of loans held for investment and a shorter estimated life of the single-family loan portfolio resulting from decreased market interest rates and higher loan prepayment estimates. The outstanding balance of loans held for investment at June 30, 2024, declined 2% to $1.05 billion from $1.07 billion at March 31, 2024. The allowance for credit losses to gross loans held for investment was unchanged at 67 basis points at both June 30, 2024, and March 31, 2024. Our net interest margin was unchanged at 2.74% for the quarter ended June 30, 2024, compared to the March 31, 2024 sequential quarter as the net result of a 10 basis point increase the average yield on total interest-earning assets and an 11 basis point increase in the cost of total interest-bearing liabilities. Notably, our average cost of deposits increased by 9 basis points to 127 basis points for the quarter ended June 30, 2024, compared to 19 basis points in the prior sequential quarter. In addition, our cost of borrowing increased by 21 basis points in the June 2024 quarter compared to the March 2024 quarter. The net interest margin this quarter was negatively impacted by approximately 2 basis points as a result of higher net deferred loan costs associated with loan payoffs in the June 2024 quarter compared 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 now adjusting the higher interest rates in comparison to their existing interest rates. We have approximately $116.9 million of loans repricing upward in the September 2024 quarter at a currently estimated 90 basis points to a weighted average of 8.17% from 7.27% and approximately $79.7 million of loans repricing upward in the December 2024 quarter at a currently estimated 51 basis points to a weighted average of 8.23% from 7.72%. However, many adjustable rate loans in all categories are currently limited in their upward adjustment by their periodic interest rate caps. I would also point out that there is an opportunity to reprice maturing wholesale funding downward as a result of current market conditions, where interest rates have moved lower in 12 months and longer terms. Excluding overnight borrowing, we have approximately $60.5 million of Federal Home Loan Bank advances and brokered certifies of deposits maturing in the September 2024 quarter at a weighted average interest rate of 5.32%. Given current market conditions, we would expect to reprice these authorities to a lower weighted average cost of funds. 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 June 30, 2024, and decreased to 160 compared to 161 FTE on the same date last year. You will note that operating expenses were $7.2 million in the June 2024 quarter, which is consistent with the stable run rate of $7.2 million per quarter. For fiscal 2025, we expect a run rate of approximately $7.4 million per quarter as a result of increased wages and inflationary pressures 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 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 low payoffs also at the low end of the quarterly rate. The composition of interest-earning assets reflected a decrease in the average balance of loans receivable and in the lower yielding average balance of investment securities. Also, the total interest-bearing liabilities composition deteriorated somewhat with a larger decrease in the average balance of deposits in contrast to a smaller decrease 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 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 48,000 shares of common stock in the June 2024 quarter. For fiscal 2024, we distributed approximately $3.9 million of cash dividends to shareholders and repurchased approximately $2.6 million worth of common stock. As a result, our capital management activities resulted in an 88% distribution of fiscal 2024 net income. We encourage everyone to review our June 30 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.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.
Andrew Liesch: Hi, good morning. So Donovan, it sounds like you’re becoming increasingly willing to look at adding loans to the portfolio and opening up growth. I guess what sort of specific things do we need to see for that to happen?
Donavon Ternes: Well, Andrew, I think your assessment is accurate. We are interested in growing loan portfolio again. The difficulty is the inverted yield curve and the extent that the inversion is inverted, which complicates populating, call it, a 5-year hybrid arm at the 5-year part of the curve and funding it at the, call it, 6-month, 1-year, 18-month part of the curve, where the inversion essentially brings a lower spread at the margin when we populate those loans. If we see the Fed actually begin to lower interest rates, as they’ve suggested or as fundings have suggested, we can see the short end part of the curve, in fact, reduce in cost, and that would allow us to populate loans at a better spread than we are currently. So the first thing is we want to see a lower inversion in the yield curve that would be beneficial to us. But the second part of it is the fact that we are still in an inverted yield curve environment. There is still a risk of recession, although I would argue that the risk is lower today than it was six months ago or a year ago. But we are sensitive to that. And obviously, we are not interested in growing loan portfolio in the event we are about to enter a recession.
Andrew Liesch: Got it. Very helpful. Turning to capital, the book value and equity continue to rise even with the buyback and the dividend. And I know you want to retain some capital growth returns. But have you thought about – or has the Board thought about a special dividend just to return some of this to shareholders is given where things stand right now?
Donavon Ternes: Sure. I think a special dividend has been thought of. I think our preferred course of action is cash – well, grow cash dividends to shareholders and then ultimately repurchasing shares when we are trading at approximately 70% of tangible book value. So, I think those three courses of action are preferred to a special cash dividend.
Andrew Liesch: Got it. Very good. You have answered all my other questions. I will step back. Thank you.
Donavon Ternes: Thank you.
Operator: Our next question comes from the line of Timothy Coffey with Janney. Please go ahead.
Timothy Coffey: Hi Donavon.
Donavon Ternes: Hey. Good morning.
Timothy Coffey: So, what is your best estimate for – so we get into a down rate environment, what is your best estimate or the pay-off and pay-down activity on your loan portfolio?
Donavon Ternes: We would expect pay-offs to potentially increase if we see interest rates decline. Although the thing to think about there, our in-the-money coupons at that point would probably be the origination volume that was originated over the past couple of years at higher interest rates. And that volume is or has been lower than what we routinely originate in a better environment. And then secondarily, those loans that have adjusted or fully indexed and are now fully adjustable, perhaps those loans as well would consider refi. Although if we see the short end of the curve come down, the indices will come down, and those loans would actually begin to adjust downward. So, some of the enticement to refinance those loans would be taken off the table if we would start seeing those loans adjusting downward because they are already in the fully indexed and fully adjustable period. So, generally speaking, we would think that prepayment estimates should go up as a result of a decline in interest rates, but it’s uncertain how much would really – or how much it would really go up because of the two additions I have suggested, which is lower volume of in-the-money loans, and adjustable rate loans, perhaps reversing course and adjusting downward.
Timothy Coffey: Okay. Regardless of the rate environment, do you typically see 100% of the loans, the scheduled to re-price in the quarter, stick around versus being prepaid, or is it always less than 100%?
Donavon Ternes: Well, there is some activity with respect to pay-off volume and some of that pay-off volume could be those loans that are set to re-price obviously, and they might choose to pay-off into a lower costing loan than sticking around with respect to re-pricing. Although the one thing we have seen and we have heard anecdotally from some of our originators, because multifamily and commercial real estate rates are still a little bit higher and most firms are not originating 30 – interest rates that are lower in nature. Not many of them are necessarily interested in a 5-year or a 7-year hybrid arm at these higher rates because they get locked in to a new prepayment penalty. And so there might be some lag for some of these borrowers to look for lower interest rates before they refinance. And in fact, while we have had some pay-off before they began their first re-pricing or their next re-pricing, it’s been a routine or a relatively small number.
Timothy Coffey: Okay. That’s helpful. Thank you. In your mind to get investors back in the market, do they need a material decline in interest rates or visibility to lower interest rates?
Donavon Ternes: I think visibility we are already seeing, and I think it’s visibility to lower interest rates. But ultimately, with respect to the borrowers, they want to see lower interest rates. If you are talking about the investors in bank stocks, I think there has already been a return to the market.
Timothy Coffey: Yes. I was talking more about commercial real estate investors.
Donavon Ternes: Okay. Got it.
Timothy Coffey: Yes. I know that. I seem to move it in bank stocks, and I think that’s positive. And then I appreciate the color on your advances and broker deposits that are scheduled too much here. I am wondering within your deposit portfolio, from your retail customers or general bank customers, how much of those or what segments of those deposits re-price on day one of a rate cut?
Donavon Ternes: Very little of them will re-price on day one, Tim. As you know, our deposit beta has been very low during this cycle. And that’s because we have not done much with respect to increasing interest rates on our transaction accounts. It would only be the retail CDs that would perhaps re-price downward, but they are in a locked term, so it wouldn’t be a day one phenomenon, it would be over the course of time as that CD were to mature very similarly to brokered CDs.
Timothy Coffey: Okay. Alright. I appreciate taking my questions. Thank you.
Operator: That concludes our Q&A session. I will now turn the call back over to Donavon Ternes for closing remarks.
Donavon Ternes: Thank you everyone for attending our fourth quarter and fiscal year-end call. In the event you have any follow-up questions, we are open to follow-up questions in a follow-up call, just give us a ring, and have a good day.
Operator: This concludes today’s call. You may now disconnect.
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