Provident Financial plc

Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Network's first quarter of fiscal 2025 earnings call. All links have been placed on me to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star star. followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Donovan Turnis, President and CEO.

Thank you. Good morning. This is Donovan Turnis, 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, 2024, 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 first quarter fiscal 2025 results. In the most recent quarter, we originated $28.9 million of loans held for investment, an increase from $18.6 million in the prior sequential quarter. During the most recent quarter, We also had $34 million of loan principal payments and payoffs, which is up from $30.6 million in the June 2024 quarter. Currently, it seems that real estate investors have reduced their activity as a result of higher mortgage and other interest rates, although we continue to see moderate activity. 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 loosened a few of our underwriting requirements within particular loan segments to encourage higher loan origination volume and decreased our pricing across our product lines as a result of lower current interest rate environment. Additionally, our single family and multifamily loan pipelines are higher in comparison to last quarter, suggesting our loan originations in the December 2024 quarter will be higher compared to the September 2024 quarter and at or above the high end of the range of recent quarters, which has been between 19 and $29 million. For the three months ended September 30, 2024, Loans held for investment decreased by approximately $4.3 million when compared to the quarter ended June 30, 2024, with decreases in multifamily and commercial real estate loan categories, partly offset by increases in the single family construction and commercial business loan categories. Current credit quality is holding up very well. And you will note that non-performing assets decreased to $2.1 million on September 30, which down from $2.6 million on June 30. Additionally, there were no early stage delinquencies at September 30, 2024. We continue to monitor commercial real estate loans, particularly loans secured by office buildings, but our confidence that based on the underwriting characteristics of our borrowers and collateral, that these loans 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 $41.3 million, or 3.9% of loans held for investment. You should also note that we have just two CRE loans for $345,000 maturing during the remainder of calendar 2024, and seven CRE loans for $3 million maturing in calendar 2025. We recorded a $697,000 recovery of credit losses in the September 2024 quarter. The recovery of credit losses recorded in the first quarter of fiscal 2025 was primarily attributable to a shorter estimated life of the loan portfolio, resulting from decreased market interest rates and higher loan prepayment estimates, a lower balance of non-performing and classified loans, and a slight decline in the outstanding balance of loans held for investment. The outstanding balance of loans held for investment at September 30, 2024 was virtually unchanged at $1.05 billion from June 30, 2024. The allowance for credit losses to gross loans held for investment declined six basis points to 61 basis points at September 30, 2024, as compared to 67 basis points at June 30, 2024. Our net interest margin increased to 2.84% for the quarter ended September 30, 2024, compared to the 2.74% for the sequential quarter ended June 30, 2024. The net result of a 12 basis point increase in the average yield on total interest earning assets and no change in the cost of total interest bearing liabilities. Notably, our average cost of deposits was unchanged at 127 basis points for the quarter ended September 30, 2024, compared to the nine basis points increase in the prior sequential quarter. In addition, our cost of borrowing decreased by 10 basis points in the September 2024 quarter, compared to the June 2024 quarter. The net interest margin this quarter was negatively impacted by approximately three basis points as a result of higher net deferred loan costs associated with loan payoffs in the September 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 weighted average than the weighted average of the existing loan portfolio. But adjustable rate loans in our portfolio subject to repricing are now adjusting to lower interest rates in comparison to their current or existing interest rates. We have approximately $92 million of loans repricing in the December 2024 quarter at a rate currently estimated to be 50 basis points lower to a weighted average rate of 7.26% from 7.76%. We also have approximately $113.3 million of loans repricing in the March 2025 quarter at a rate currently estimated to be 99 basis points lower to a weighted average rate of 6.60% from 7.58%. I would point out that there is a tremendous opportunity to reprice maturing wholesale funding downward as a result of current market conditions where interest rates have moved lower across all terms, excluding overnight borrowings. We have approximately $69.6 million of federal home loan bank advances and brokered certificates of deposits maturing in the December 2024 quarter. at a weighted average interest rate of 5.20%. Given current market conditions, we would expect to reprice these maturities to a much lower weighted average cost of funds. All of this suggests a continued expansion of the net interest margin in the December 2024 quarter, but possibly at a slower pace than that experienced in the current quarter. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on September 30, 2024 decreased to 157 compared to 158 FTE on the same date last year. You will note that operating expenses were $7.5 million in the September 2024 quarter. an increase from the $7.2 million per quarter stable run rate in the prior fiscal year. For fiscal 2025, we expect a run rate of approximately $7.4 to $7.5 million per quarter as a result of increased wages and inflationary pressure on other operating expenses. Our short-term strategy for balance sheet management is somewhat more growth-oriented than last fiscal year. We believe that disciplined growth of the loan portfolio is the best course of action at this time, as we recognize that the Federal Open Market Committee is recalibrating to looser monetary policy and the inverted yield curve has begun to reverse course. We were partly successful in the execution of the strategy this quarter, with loan origination volume at the high end of the quarterly range, although the higher volume was offset by loan payoffs also at the high end of the quarterly range. The composition of total 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 composition of total interest-bearing liabilities deteriorated slightly with a decrease in the average balance of deposits and an increase 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 through shareholders, through stock buyback programs, is a responsible capital management tool. And we repurchased approximately 94,000 shares of common stock in the September 2024 quarter. For the fiscal year to date, we have distributed approximately $1 million of cash dividends to shareholders and repurchased approximately $1.3 million worth of common stock. As a result, our capital management activities resulted in a 119% distribution of fiscal 2025 year-to-date net income. We encourage everyone to review our September 30th 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.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Andrew Leash with Piper Sandler. Please go ahead.