Provident Financial Holdings, Inc.

Hello and thank you for standing by. My name is Lacey and I will be your conference facilitator today. At this time I would like to welcome everyone to the Provident Financial Holdings third quarter of fiscal 2025 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 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 Tarnas, President and CEO. Please go ahead.

Thank you Lacey. Good morning. This is Donovan Tarnas, President and CEO of Provident Financial Holdings. 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 10k for the year ended June 30, 2024 and from the form 10qs and other SEC filings that are filed subsequent to the form 10k. 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 yesterday, which describes our third quarter fiscal 2025 results. I have an update regarding the Southern California wildfires in January 2025. We have been contacted by two borrowers who were impacted by the Altadena fire. One home had very minor damage to the perimeter fence, which the borrower repaired himself and although insured, he did not file an insurance claim. The other home had minor damage to the roof, mechanicals, and smoke damage. The borrower filed an insurance claim, has received insurance proceeds which are deposited into an account with Provident, and is in the process of repairing the damage. The insurance proceeds are expected to cover the cost of repairs. In the most recent quarter, we originated $27.9 million of loans held for investment, a 23% decrease from $36.4 million that were originated in the prior sequential quarter. During the most recent quarter, we also had $23 million of loan principal payments and payoffs, which is down 33% from $34.3 million in the December 2024 quarter. Currently, it seems that real estate investors have reduced their activity as a result of higher mortgage rates, although we continue to see moderate activity in loans held for investment. It should also be noted that economic uncertainty has increased as a result of current fiscal policy, which is also reducing 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, and we have loosened a few of our underwriting requirements within certain loan segments to encourage higher loan origination volume. Additionally, our single-family and multi-family loan pipelines are similar in comparison to last quarter, suggesting our loan origination volume in the June 2025 quarter will be similar to the March 2025 quarter and around the middle of the quarter. For the three months ended March 31, 2025, loans held for investment increased by approximately $5.4 million when compared to the quarter ended December 31, 2024, with an increase in single-family loans partly offset by declines in multi-family, commercial real estate, construction, and commercial business loans. Current credit quality continues to hold up very well, and you will note that non-performing assets decreased to $1.4 million on March 31, 2025, which is down from $2.5 million on December 31, 2024. Additionally, there were only $199,000 of early-stage delinquencies at March 31, 2025. We continue to monitor commercial real estate loans, particularly loans secured by office buildings, but are confident that based on 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 $39.9 million or .8% of loans held for investment. You should also note that we have just five CRE loans totaling $2.9 million maturing in calendar 2025. We recorded a $391,000 recovery of credit losses in the March 2025 quarter. The recovery recorded in the third quarter of fiscal 2025 was primarily attributable to an improvement in the SFR collateral qualitative factors and a lower balance of non-performing loans, partly offset by a longer average life of the loan portfolio, resulting from lower loan prepayment estimates, a higher balance of classified loans, and a small increase in the outstanding balance of loans held for investment at March 31, 2025 from December 31, 2024. The allowance for credit losses to gross loans held for investment decreased four basis points to 62 basis points at March 31, 2025, as compared to 66 basis points at December 31, 2024. Our net interest margin increased 11 basis points to .02% for the quarter ended March 31, 2025, compared to the .91% for the sequential quarter ended December 31, 2024, the net result of a seven basis point increase in the average yield on total interest earning assets at a one basis point decrease in the cost of total interest bearing liabilities. Our average cost of deposits increased to 1.26%, up three basis points for the ended March 31, 2025, while our cost of borrowing decreased one basis point to .52% in the March 2025 quarter compared to the December 2024 quarter. The net interest margin this quarter was positively impacted by approximately two basis points as a result of lower net deferred loan costs associated with lower loan payoffs in the March 2025 quarter compared to the average net deferred loan cost amortization of the previous five quarters. Also, we recovered approximately $94,000 of net interest income in the March 2025 quarter, the net result of non-performing loan payoffs, classification upgrades, and classification downgrades, which had a three basis points positive impact to the net interest margin. New loan production is being originated at higher mortgage interest rates than the weighted average of the existing loan portfolio, and our adjustable rate loans are repricing at interest rates that are higher than their current interest rates. For example, we have approximately $110.9 million of loans repricing in the June 2025 quarter to an interest rate currently forecast to be 32 basis points higher to a weighted average interest rate of .20% from 6.88%. Additionally, we have approximately $112.7 million of loans repricing in the September 2025 quarter to an interest rate currently forecast to be 13 basis points higher to a weighted average interest rate of .23% from 7.10%. 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 $100.8 million of federal home loan bank advances, brokered certificates of deposits, and government certificates of deposit maturing in the June 2025 quarter at a weighted average interest rate of 4.34%. Additionally, we have approximately $46.3 million of federal home loan bank advances and brokered certificates of deposit maturing in the September 2025 quarter at a weighted average interest rate of 4.50%. Given current 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 June 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 March 31, 2025, increased by one to 162 compared to 161 FTE on the same date last year. You will note that operating expenses were $7.9 million in the March 2025 quarter, an increase from the $7.8 million in the December 2024 quarter. The increase over the expected run rate of $7.5 million was primarily due to non-recurring or intermittent expenses, particularly $239,000 of litigation settlement expenses and $27,000 of executive search firm costs. For fiscal 2025, we continue to expect a run rate of approximately $7.5 to $7.6 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 that strategy this quarter, with loan origination volume at the middle of the quarterly range and loan repayments below the prior sequential quarter. The composition of total interest earning assets improved with a higher percentage of loans receivable and interest earning deposits to total interest earning assets and a lower percentage of investment securities to total interest earning assets. Additionally, composition of total interest bearing liabilities improved with an increase in the average balance of deposits and a 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 52,000 shares of common stock in the March 2025 quarter. For the fiscal year to date, we have distributed approximately $2.8 million of cash dividends to shareholders and repurchased approximately $3.1 million worth of common stock. Accordingly, our capital management activities has resulted in a 129% distribution of fiscal 2025 net income to date. We encourage everyone to review our March 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.

At this time, I would like to remind everyone, in order to ask a question, please 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 Leish with Piper Sandler. You may go ahead.