Provident Financial Q4 2024 Earnings Report

Provident Financial EPS Results

• Actual EPS: $0.28
• Consensus EPS: $0.23
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: $0.26

Provident Financial Revenue Results

• Actual Revenue: $15.38 million
• Expected Revenue: $9.57 million
• Beat/Miss: Beat by +$5.81 million
• YoY Revenue Growth: N/A

Provident Financial Announcement Details

• Quarter: Q4 2024
• Date: 7/29/2024
• Time: Before Market Opens
• Conference Call Date: Tuesday, July 30, 2024
• Conference Call Time: 12:00PM ET

Provident Financial (NASDAQ:PROV) Services, Inc. (NASDAQ: PROV) is a bank holding company headquartered in Jersey City, New Jersey, that conducts its operations through its wholly owned subsidiary, Provident Bank. With origins dating back to 1839, the company has grown into a full-service financial institution offering a broad spectrum of products and services to individuals, small businesses and commercial clients.

The company’s principal business activities include retail banking, commercial lending, mortgage finance and wealth management. On the retail side, Provident Bank offers checking and savings accounts, certificates of deposit, consumer loan products and digital banking solutions. Its commercial banking division provides lines of credit, term loans, real estate financing, treasury management and other cash-management services. The wealth management arm delivers trust services, investment advisory, retirement planning and brokerage services.

Provident Bank maintains a network of branches throughout New Jersey and parts of the New York metropolitan area, supplemented by online and mobile banking platforms. The institution’s executive leadership team is headed by President and Chief Executive Officer Roger C. Bohn, who has overseen the company’s strategic growth initiatives for more than two decades. Through its combination of community banking roots and technology-driven services, Provident Financial Services aims to balance personalized customer relationships with digital convenience.

Provident Financial Q4 2024 Earnings Call Transcript

Key Takeaways

• During Q4 the company originated $18.6 million of loans held for investment with payoffs of $30.6 million, and expects similar low‐end quarterly originations in the September 2024 quarter given stable pipeline levels.
• Credit quality remained strong, with nonperforming assets only rising slightly to $2.6 million, no early‐stage delinquencies, and limited exposure to office‐secured CRE loans (3.9% of portfolio).
• The net interest margin held steady at 2.74% despite a 10 bp increase in asset yields and an 11 bp rise in funding costs, and management expects margin pressure to subside as wholesale funding reprices lower.
• Operating expenses were stable at $7.2 million for the quarter (160 FTEs), and are forecasted to trend around $7.4 million per quarter in fiscal 2025 due to higher wages and inflationary costs.
• Capital ratios remain well above regulatory requirements, enabling a maintained cash dividend and share repurchases (48,000 shares in Q4), with 88% of fiscal 2024 net income returned to shareholders.

Presentation

[Operator]

Thank you 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. All lines being placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Donavon Ternes, President and CEO. You may begin.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Good morning. This is Donavon Ternes, President and CEO of Provident Financial Holdings. 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.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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 in loans held for investment, an increase from $18.2 million in the prior sequential quarter.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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 quarterly 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.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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-$54 million. For the three 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 million on March 31, 2024.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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 five CRE loans for $2.5 million maturing during the remainder of calendar 2024, and seven CRE loans for $3.1 million maturing in calendar 2025.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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 in 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.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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 to higher interest rates in comparison to their existing interest rates.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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 twelve-month and longer terms.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Excluding overnight borrowing, we have approximately $60.5 million of Federal Home Loan Bank advances and brokered certificates of deposit 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 maturities 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, decreased to 160, compared to 161 FTE on the same date last year.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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 loan payoffs also at the low end of the quarterly range.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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. We will now begin the question-and-answer session. If you've 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'd like to withdraw your question, simply press star one again. If you're called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. Our first question comes from the line of Andrew Liesch with Piper Sandler. Please go ahead.

[Andrew Liesch, Analyst at Piper Sandler]

Hey, good morning. So Donavon, 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, President and CEO at Provident Financial Holdings]

Well, Andrew, I think your assessment is accurate. We are interested in a growing loan portfolio again. The difficulty is the inverted yield curve and the extent that the inversion is inverted, which complicates, you know, populating, call it, a five-year hybrid ARM at the five-year part of the curve and funding it at the, you know, call it six-month, one year, 18-month part of the curve, where the inversion essentially brings a lower spread at the margin, when we populate those loans.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

If we see the Fed actually begin to lower interest rates, as they've suggested or as pundits have suggested, you know, 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 wanna see a lower inversion in the yield curve. That would be beneficial to us. But the second part of it is, you know, the fact that we're still in an inverted yield curve environment, there's 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.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

But we are sensitive to that, and obviously, we're not interested in growing loan portfolio in the event we're about to enter a recession.

[Andrew Liesch, Analyst at Piper Sandler]

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 for growth returns, but have you thought about or has the board thought about a special dividend just to return some of this to shareholders, just given where things stand right now?

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Sure. I think a special dividend has been thought of. I think our preferred course of action is cash... Well, growth, cash dividends to shareholders, and then ultimately repurchasing shares when we are trading at, you know, approximately 70% of tangible book value. So I think those three courses of action are preferred to a special cash dividend.

[Andrew Liesch, Analyst at Piper Sandler]

Got it. Very good. You've answered all my other questions. I'll step back. Thank you.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Thank you.

[Operator]

Our next question comes from the line of Timothy Coffey with Janney. Please go ahead.

[Timothy Coffey, Analyst at Janney]

Hi, Donovon.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Hey, good morning.

[Timothy Coffey, Analyst at Janney]

Well, hey, so we get into a down rate environment. What is your best estimate for the payoff and paydown activity on your loan portfolio?

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Well, we would expect payoffs 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, you know, 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, you know, 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.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

So, some of the enticement to refinance those loans would be taken off the table if we were to start seeing those loans adjusting downward because they're 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 conditions I've suggested, which is lower volume of in-the-money loans and adjustable rate loans, perhaps reversing course and adjusting downward.

[Timothy Coffey, Analyst at Janney]

Okay. Regardless of the rate environment, do you typically see 100% of the loans that are scheduled to reprice in a quarter stick around versus being prepaid? Or is it always less than 100%?

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Well, there is some activity with respect to payoff volume, and some of that payoff volume could be those loans that are set to reprice, obviously. And they might choose to pay off into a lower costing loan than sticking around with respect to repricing. Although, the one thing we've seen, and we've 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, you know, 30-year interest rates that are lower in nature, you know, not many of them are necessarily interested in a five-year or seven-year hybrid ARM at these higher rates because they get locked in to the, a new prepayment penalty.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

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've had some payoff before they began their first repricing or their next repricing, it's been a routine or a relatively small number.

[Timothy Coffey, Analyst at Janney]

Okay. That's, that's helpful. Thank you. What 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, President and CEO at Provident Financial Holdings]

Well, I think visibility, we're already seeing it. I think it's visibility-

[Timothy Coffey, Analyst at Janney]

Okay.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

to lower interest rates. But ultimately, with respect to the borrowers, they want to see lower interest rates. If you're talking about investors in bank stocks, I think there's already been-

[Timothy Coffey, Analyst at Janney]

Okay.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

-a return to the market.

[Timothy Coffey, Analyst at Janney]

Yeah, I was talking more about commercial real estate investors.

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Okay, got it.

[Timothy Coffey, Analyst at Janney]

Yeah. Yeah, no, no. Yeah, I've seen, I've seen the movement in bank stocks, and I think that's positive. And then I appreciate the color on your advances and broker deposits that are scheduled to mature. I'm wondering within your deposit portfolio, from your retail customers or your general bank customers, how much of those or what segments of those deposits reprice on day one of a rate cut?

[Donavon Ternes, President and CEO at Provident Financial Holdings]

Very little of them will reprice on day one, Tim. As you know, our, our deposit beta has been very low during this cycle. And that's because we've not done much with respect to increasing interest rates on our transaction accounts. It would only be the retail CDs that would perhaps reprice downward, but they're 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, Analyst at Janney]

Okay. All right. I appreciate that. Those are 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, President and CEO at Provident Financial Holdings]

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.

Participants

Analysts

• Andrew Liesch, Analyst at Piper Sandler
• Donavon Ternes, President and CEO at Provident Financial Holdings
• Timothy Coffey, Analyst at Janney