Earnings Call Transcript - PROV Q1 2025

Operator, Operator

Thank you for your patience. My name is Novi, and I will be your conference operator today. I would like to welcome everyone to the Provident Financial Holdings First Quarter and Fiscal 2025 earnings call. I will now turn the call over to Donavon Ternes, President and CEO.

Donavon Ternes, President and CEO

Thank you. 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, 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 the 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 million and $29 million. For the 3 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 nonperforming assets decreased to $2.1 million on September 30, which is 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 are confident 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 2 CRE loans or $345,000 maturing during the remainder of calendar 2024 and 7 CRE loans or $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 nonperforming 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 6 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 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 9 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 3 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 5 quarters. New loan production is being originated at higher mortgage interest rates 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 million 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 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 shareholder stock buyback programs are 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 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, Operator

Your first question comes from the line of Andrew Liesch with Piper Sandler.

Andrew Liesch, Analyst

Donavon, you sound a little more constructive on originating loans. I guess how do you feel about your lender base, is there any plans to hire more folks as you look to become more constructive? Or do you think you have a great team set up already?

Donavon Ternes, President and CEO

Well, currently, we have a good team set up. In fact, we've been holding our teams back a bit for the past 18 months, call it, 2 years since the inversion of the curve and really haven't been growing portfolio. We've been wanting to maintain portfolio. And so, I don't think we're going to have a problem with execution with respect to the team of personnel we have in place. Although it is interesting right now, when we think about the current environment with respect to how aggressive some lenders have become with respect to pricing, mortgage, multifamily mortgage, and commercial real estate mortgage products. We obviously survey the market, and we have a service that also does this for us. While our rates are about average to what the market is offering, we are still 80 basis points higher than the best rate in the market with respect to multifamily production. With respect to commercial real estate mortgage production, again, our mortgage rates are about average to the market, but we are 150 basis points higher than the best rate in the market based upon last week survey results. So there's a striking contrast in the market right now with respect to how aggressive some participants have gotten regarding their interest rates. We still think, however, that we can grow origination volume as we think about the December quarter.

Andrew Liesch, Analyst

Got it. Very helpful. And then I'm curious if you have handy what the net interest margin was in September?

Donavon Ternes, President and CEO

September, it was 2.84%. It was 10 points higher than the June quarter at 2.74%.

Andrew Liesch, Analyst

Okay. But then still kind of flat with the full quarter average spend?

Donavon Ternes, President and CEO

Yes, you missed for September.

Andrew Liesch, Analyst

Sorry for the month. I'm sorry. Yes, just for the month.

Donavon Ternes, President and CEO

Yes, for the month of September, it was 2.86%.

Andrew Liesch, Analyst

That makes a bit more sense. Regarding the buyback, given the current stock price and growth plans, how are you managing that? Are you maintaining the same pace as this quarter, or is it faster than last year? What is your perspective on the pace of share repurchases?

Donavon Ternes, President and CEO

Well, as you know, we begin our business plan each year with moving a cash dividend from the bank to the holding company. That cash dividend at the holding company level is earmarked for stock repurchase and cash dividend activity. For the end of September, we moved $9 million cash dividend from the bank to the holding company and that will support repurchase and cash dividend activity for the remainder of the fiscal year through June 30. Again, we're not in complete control of that in that we have a 10b5-1 plan where an agent really controls the activity as it relates to day-to-day repurchase.

Operator, Operator

Your next question comes from the line of Timothy Coffey with Janney Montgomery Scott.

Timothy Coffey, Analyst

In your prepared comments, you mentioned the ability to adjust pricing to drive more growth. Are you referring to the multifamily and commercial real estate sectors since your prices are significantly above the market?

Donavon Ternes, President and CEO

I'm discussing all three major categories, including single-family. If you review the earnings release from yesterday and check the tables regarding production volume, you'll notice that single-family production volume was actually stronger this quarter and has performed better than multifamily and commercial over the past few quarters. We are focused on all three of these segments: multifamily, commercial, and single-family to boost our loan origination volume, and we will seize opportunities that align with our goals for enhancing the portfolio.

Timothy Coffey, Analyst

Okay. And then just looking at mortgage rates since quarter end, how the increase in those rates, how much of a headwind is that to your growth expectations?

Donavon Ternes, President and CEO

Well, it is a headwind in that mortgage rates are not as low as they were, call it, a month ago, they backed up a bit, but they are still lower than where they were a year ago. In fact, we're still seeing increased refinance activity across the board in multifamily, commercial real estate, and single-family. We think there is demand out there with respect to refinance activity, and we can capitalize on that. But you're right, they backed up a bit from where they were a month ago, but they're still more favorable than where they were a year ago.

Timothy Coffey, Analyst

Understood. Regarding the trend in deposit pricing, the deposit betas for the company have been exceptionally low, thanks to your loyal deposit base. If there is a chance to lower rates in the future, would you anticipate those rates to be lower at the start of the rate cycle and increase towards the end? How should I consider this?

Donavon Ternes, President and CEO

Regarding our retail depositors, we do not have the opportunity to lower those deposit rates because our deposit beta has been very low throughout the entire cycle. We did not align with market rates for those retail deposits. However, we are currently able to take advantage of repricing liabilities, particularly with growth in FHLB advances and brokered CDs. For instance, today we have $18 million of brokered CDs maturing at a rate of 5.30%. We are replacing them with the same amount at 4.10%, resulting in a decrease of 120 basis points. As I mentioned earlier, we expect to reprice approximately $70 million in FHLB advances and brokered CDs in the December quarter, with a current average cost of 5.20%. We anticipate reducing these by about 100 basis points due to the recent trend in rates. Additionally, in the March 2025 quarter, we have $85.5 million worth of FHLB advances and brokered CDs that will also be repriced, currently averaging an interest rate of 4.50%. We plan to lower these rates in the March quarter as well. We believe there remains some tailwind for repricing our balance sheet, both in loans and interest-bearing liabilities, which should help improve our net interest margin, though perhaps not as rapidly as in the September quarter, which saw a 10 basis point sequential increase.

Operator, Operator

Since there are no more questions, I will now hand the call back to Donavon Ternes for closing remarks.

Donavon Ternes, President and CEO

Thank you very much for joining the call this quarter, and we look forward to our conversations in future quarters. Have a good week. Goodbye.

Operator, Operator

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