Provident Financial Holdings, Inc.

Hello and thank you for standing by. My name is Bella and I will be your conference operator today. At this time, I would like to welcome everyone to the provident financial holdings. Second quarter of fiscal 20, 25 earnings call. All lines have been placed on mute. 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. Then the number one on your telephone keypad. To withdraw your question. Press star one again. I would now like to turn the conference over to Donovan turners. President and chief executive officer. Please go ahead.

Thank you, Bella. Good morning. Good morning. This is Donovan turners. President and CEO of provident financial holdings. And on the call with me. Is Tam new in. 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 we'll 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 earlier this morning. From the annual report on form 10 K. For the year ended June 30, 2020. And from the form 10 Q's 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. Distributed earlier this morning. And the report that we have received. Which describes our second quarter fiscal 2025 results. As a Southern California bank. I wanted to take a moment during our call this morning. To thank the firefighters and first responders. Fighting the fires in Los Angeles. Our thoughts are with those affected by the fires. We are actively monitoring the situation. And have identified. We are aware of two homes. With a combined loan balance. Of $658,000. With minor damage. We believe both homes are fully insured. We will continue to monitor the fluid situation. And we will work with these borrowers during this challenging time. In the most recent quarter. We originated $36.4 million of loans held for investment. An increase from $28.9 million in the prior sequential quarter. During the most recent quarter. We also had $34.3 million of loan principal payments and payoffs. Which is up slightly from $34 million in the September 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. In loans held for investment. 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 certain loan segments. To encourage higher loan origination volume. Additionally. Our single family and multifamily loan pipelines. Are similar in comparison to last quarter. Suggesting our loan originations in the March. 2025 quarter. Will be similar to the December 2024 quarter. And around the high end of the range of recent quarters. Which has been between 19 and $36 million. For the three months ended December 31st, 2024. Loans held for investment increased by approximately $5 million. When compared to the quarter ended September 30, 2024. With increases in the single family and commercial business loans. Partly offset by decreases in the multifamily. Commercial real estate and construction loans. Current credit quality. Continues to hold up very well. And you will note that non-performing assets. Increased to just $2.5 million. On December 31st, 2024. Which is up from $2.1 million. On September 30, 2024. Additionally. There were no early stage delinquencies. At December 31st, 2024. We continue to monitor commercial real estate loans. Particularly loans secured by office office buildings. But are confident that based on our. 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 office buildings. Is approximately $40.4 million. Or .8% of loans held for investment. You should also note. That we have just six. CRE loans. For $3.2 million. And we have also recorded a $5.8 million. Maturing in calendar 2025. We recorded a $586,000. Provision for credit losses. In the December 2024 quarter. The provision for credit losses recorded in the second quarter. Was primarily attributable. To a longer estimated life. Of the loan portfolio. Resulting from increased market interest rates. And lower loan prepayment estimates. A slightly higher balance of non-performing and classified loans. And a small increase in the outstanding balance. Of loans held for investment. The allowance for credit losses to gross loans held for investment. Increased five basis points. To 66 basis points at December 31st, 2024. As compared to 61 basis points. At September 30, 2024. Our net interest margin. Increased to 2.91%. For the quarter ended December 31st, 2024. Compared to 2.84%. For the sequential quarter ended September 30, 2024. The net result of a three basis point increase. In the average yield on total interest earning assets. And a five basis point decrease. In the total interest bearing liabilities. Notably. Our average cost of deposits. Declined to 123 basis points. Down by four basis points. For the quarter ended December 31st, 2024. Compared to no change in the prior sequential quarter. In addition. Our cost of borrowing. In the quarter ended December 31st, 2024. Decreased by 21 basis points in the December, 2024. Quarter compared to the September, 2024. Quarter. The net interest margin this quarter. Was negatively impacted. By approximately two basis points. As a result of higher net deferred loan costs. Associated with loan payoffs. In the December, 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 the weighted average of the existing loan portfolio. But some of our adjustable rate loans. May be repricing at interest rates. That are lower than their current interest rates. For example. We have approximately. $124.3 million. Of loans repricing. In the March, 2025 quarter. To an interest rate currently forecast to be. Five basis points lower. To a weighted average interest rate of 7.5. 1%. From 7.56%. Conversely. We also have approximately. $96.3 million of loans. Repricing in the June, 2025 quarter. To an interest rate currently forecast to be. 57 basis points higher. To a weighted average interest rate. Of 7.35%. From 6.78%. I would point out. That there is 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. $85.5 million. Of federal home loan bank advances. And brokered certificates of deposits. Maturing in the March, 2025 quarter. At a weighted average interest rate. Of 4.50%. Given market conditions. We would expect to reprice these maturities. To a lower weighted average cost of funds. All of this suggests a continued expansion. Of the net interest margin in the March, 2025 quarter. But 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 at December 31st, 2024. Increased to 162. Compared to 160. In the same date last year. You will note that operating expenses. Were $7.8 million in the December, 2025 quarter. An increase from the $7.5 million. In the September, 2024 quarter. The increase over the expected run rate. Of $7.5 million. Was due to nonrecurring. Or intermittent expenses. We will be looking at. Particularly. $100,000 of executive search agency costs. And $167,000. Of retirement plan benefit expenses. That are not anticipated. In future periods. As a result. Of the $7.5 million. For fiscal 2025. We continue to expect a run rate of approximately. $7.5 million per quarter. 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. Has recalibrated to looser monetary policy. And the inverted yield curve has begun to reverse back. To an upwardly sloping yield curve. We were partly successful in the execution of the strategy. This quarter. With loan origination volume at the high end of the quarterly range. And loan prepayments similar to the prior sequential quarter. The composition. Of total interest earning assets. Improved. With a higher percentage of loans receivable. To total interest earning assets. And a lower percentage of interest of investment securities. To total interest earning assets. Although the composition of total interest bearing liabilities. Deteriorated. 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 to shareholders. Through stock buyback programs. And we have distributed approximately $1.9 million. Of cash dividends to shareholders. And repurchased approximately $2.4 million. Worth of common stock. Through our stock repurchase plan. Accordingly. With the increase in capital management activity. Our capital management activities. Have resulted in a 154%. Distribution. Of fiscal 2025 net income. To date. You should also note that the board of directors approved. A new stock repurchase plan. Last week. We encourage everyone to review our December 31st investor. In the 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. Bella. We will now entertain any questions. That participants may have. Regarding our financial results.

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. Is from the line of Andrew. Leash of Piper's handler. Your line is now open. Please go ahead.

Thanks. Good morning. Morning. Donovan. Question on the long growth commentary here. It seems like production is going to be. Again, towards the higher end. I guess if you look out. Is this going to be like. The 50 to 60 basis points a quarter. When do you think growth can accelerate from this path? What needs to happen for that to occur?

Ultimately. Mortgage interest rates need to decline from current levels. To see. Large acceleration with respect to growth in the loan portfolio. Although. The flip side of that. If we do see. Lower mortgage interest rates. We would also expect. More loan prepayments. With respect to refinance activity. So I think this quarter. It was approximately a 1.9%. Annual growth rate. With respect to the loan portfolio. We would like to see that percentage. Increase. As we look down. The second half of our fiscal year. And as we look toward. Our new fiscal year beginning July 1st. Certainly we think there's more opportunity. In calendar. 2025 with respect to growth. And what we've seen. In the past. And part of that is as well. A flattening. And upward. Upwardly sloping yield curve. Where it makes more sense for us. To be more aggressive with respect to what it is we are doing. In populating loan growth. Then when the curve was inverted. And it didn't make as much sense for us to be populating loan growth.

Got it. That makes sense. And then on the margin. Now that. We're looking at the yield curve. It seems like there's still quite a bit of opportunities on the, on the funding side. And you have some fixed rate assets that might be adjusting higher or reaching their adjust period. Should that trend continue? I mean, maybe we don't see. Seven basis points of expansion, but should the margin be in an uptrend here from now on unless. We see something different from the Fed.

Yes, I think we've reached that inflection point. In the September quarter, we expanded margin by 10 basis points. In the December quarter, we expanded margin by seven basis points. We would anticipate that margin will expand in future quarters as well. The interesting component that is a little bit different today. Than it was in the September. And the December quarters. Those loans that we are expecting to reprice in the March quarter. Are being forecast to reprice downward by five basis points. In the smart or in the December and the September quarters, the loans that were repricing. We're actually repricing up. From their current interest rates. So. That's a flat or a little bit of a headwind with respect to margin. But on the flip side of that, our interest bearing liabilities. As we described. 85 and a half million of wholesale funding. Should be repricing downward in the March quarter. It's currently or those liabilities are currently priced at four and a half percent. And we think we can reprice those liabilities into the high threes or low fours. So there's still a tailwind with respect to our funding costs. As it relates to net interest margin. But there's not as much of a tailwind as it relates to the loan portfolio. And what is going on with repricing there. Although again, as we described the June quarter. We actually see and can forecast the loan portfolio adjusting upward. So perhaps it swings to a tailwind again in the June quarter.

Got it. Yep. Makes sense. All right. Thanks for taking the questions. I'll step back.

At this time, if you would like to ask a question, press star one on your telephone keypad. I will now turn the call back over to Joan of Anturnist for closing remarks.

I'd like to thank everybody for joining our call this quarter. And I look forward to our call next quarter. Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.