Q1 2025 Provident Financial Holdings Inc Earnings Call
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 Providence and Education for the Order of Cisco 2025 earnings call. I'll always have been placed on me to present any technical calls.
After the fecal'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 Donavon Ternes, President and CEO.
President and CEO of Providence Financial Holdings.
Donavon Ternes: And on the call with me is Tam New End, our Senior Vice President and Chief Financial Officer.
Donavon Ternes: Before we begin, I have a brief administrative item to address.
Donavon Ternes: Our presentation today discusses the company's business outlook and will include forward-looking statements.
Donavon Ternes: Those statements include descriptions of management's plans, objectives or goals for future operations, products or services,
Donavon Ternes: forecasts of financial or other performance measures, and statements about the company's general outlook for economic and business conditions.
Donavon Ternes: We also may make forward-looking statements during the question and answer period following management's presentation.
Donavon Ternes: 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: information on the risk factors that could cause actual results to differ from any forward-looking statement.
Donavon Ternes: 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.
Donavon Ternes: and from the Form 10-Q's and other SEC filings that are filed subsequent to the Form 10-K.
Donavon Ternes: Forward-looking statements are effective only as of the date that they are made and the company assumes no obligation to update this information.
Speaker Change: 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.
Speaker Change: In the most recent quarter, we originated $28.9 million of loans held for investment.
Speaker Change: An increase from $18.6 million in the prior sequential quarter.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Additionally, we are seeing more consumer demand for single-family adjustable rate mortgage products.
Speaker Change: as a result of higher fixed rate mortgage interest rates.
Speaker Change: 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.
Speaker Change: Additionally, our single-family and multi-family loan pipelines are higher in comparison to last quarter.
Speaker Change: with decreases in multifamily and commercial real estate loan categories.
Speaker Change: Partly offset by increases in the single-family construction and commercial business loan categories.
Speaker Change: 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 went down from $2.6 million on June 30.
Speaker Change: Additionally, there were no early-stage delinquencies at September 30, 2024.
Speaker Change: We continue to monitor commercial real estate loans.
Speaker Change: particularly loans secured by office buildings.
Speaker Change: but are confident that based on the underwriting characteristics of our borrowers and collateral, that these loans will continue to perform well.
Speaker Change: 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.
Speaker Change: You should also note that we have just two CRE loans for $345,000 maturing during the remainder of calendar 2024.
Speaker Change: We recorded a $697,000 recovery of credit losses in the September 2024 quarter.
Speaker Change: 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.
Speaker Change: a lower balance of non-performing and classified loans, and a slight decline in the outstanding balance of loans held for investment.
Speaker Change: The outstanding balance of loans held for investment at September 30, 2024 was virtually unchanged at $1.05 billion from June 30, 2024.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: In addition, our cost of borrowing decreased by 10 basis points in the September 2024 quarter compared to the June 2024 quarter.
Speaker Change: The net interest margin this quarter was negatively impacted by approximately three basis points.
Speaker Change: associated with loan payoffs in the September 2024 quarter compared to the average net deferred loan cost amortization of the previous five quarters.
Speaker Change: New loan production is being originated at higher mortgage interest rates than the weighted average of the existing loan portfolio.
Speaker Change: 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.
Speaker Change: We have approximately $92 million of loans repricing in the December 2024 quarter.
Speaker Change: at a rate currently estimated to be 50 basis points lower to a weighted average rate of 7.26% from 7.76%.
Speaker Change: We also have approximately $113.3 million of loans repricing in the March 2025 quarter.
Speaker Change: at a rate currently estimated to be 99 basis points lower to a weighted average rate of 6.60% from 7.58%.
Speaker Change: 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.
Speaker Change: excluding overnight borrowings.
Speaker Change: Given current market conditions, we would expect to reprice these maturities to a much lower weighted average cost of funds.
Speaker Change: 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.
Speaker Change: decreased to 157 compared to 158 FTE on the same date last year.
Speaker Change: You will note that operating expenses were $7.5 million in the September 2024 quarter.
Speaker Change: an increase from the $7.2 million per quarter stable run rate in the prior fiscal year.
Speaker Change: as a result of increased wages and inflationary pressure on other operating expenses.
Speaker Change: Our short-term strategy for balance sheet management is somewhat more growth-oriented than last fiscal year.
Speaker Change: We believe that disciplined growth of the loan portfolio is the best course of action at this time.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We exceed well-capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications.
Speaker Change: We believe that maintaining our cash dividend is very important.
Speaker Change: We also recognize that prudent capital returns through shareholders, through stock buyback programs, is a responsible capital management tool. We repurchased approximately 94,000 shares of common stock in the September 2024 quarter.
Speaker Change: 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.
Speaker Change: As a result, our capital management activities resulted in a 119 percent distribution of fiscal 2025 year-to-date net income.
Speaker Change: We encourage everyone to review our September 30th investor presentation posted on our website.
Speaker Change: 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.
Speaker Change: We will now entertain any questions that you may have regarding our financial results. Thank you.
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
Speaker Change: Thank you.
Speaker Change: Your first question...
Speaker Change: comes from the line of Andrew Leash with Piper Sandler.
Andrew Leash: Please go ahead. Hey, hey, good morning.
Andrew Leash: Donavon, you sound a little more constructive on originating loans. How do you feel about your lender base? Are 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?
Speaker Change: for the past 18 months, call it, two years since the inversion of the curve, and really haven't been growing portfolio. We've been wanting to maintain portfolio.
Donavon Ternes: 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.
Donavon Ternes: with respect to how aggressive some lenders have become with respect to pricing mortgage, multifamily mortgage and commercial real estate mortgage products.
Donavon Ternes: So we obviously survey the market and we have a service that also does this for us.
Donavon Ternes: And while our rates are about average to what the market is offering...
Donavon Ternes: we are still 80 basis points higher than the best rate in the market with respect to multifamily production.
Donavon Ternes: higher
Donavon Ternes: than the best rate in the market based upon last week's survey results.
Donavon Ternes: So, there's a striking contrast in the market right now.
Donavon Ternes: with respect to how aggressive some agencies relate to their interest rates. We still think, however, that we can grow origination volume as we think about the December quarter.
Speaker Change: Got it. Very helpful. And then I'm curious if you have handy what the net interest margin was in September?
Speaker Change: September, it was 274, or net interest margin for September was 284 basis points. It was 10 points higher than the June quarter at 274.
Speaker Change: Okay, but then still kind of flat with the full quarter average spend.
Speaker Change: Yes. Oh, you meant for September. Oh, I meant for the month. I'm sorry. Yeah, just for the month. Yeah, yeah, yeah. For the month, it was 286, I believe, month of September. Great. Okay.
Speaker Change: All right, that makes that makes a little bit more sense there and then just on on the buyback
Speaker Change: with the stock where it is and kind of the growth plans, I guess, how do you expect, how are you looking to manage that right now at a pace similar to this quarter? It was faster than what it was all of last year. Just how are you looking at the pace of share repurchases?
Speaker Change: Well, as you know, we begin our business plan each year with moving a cash dividend from the bank to the holding company.
Speaker Change: That cash dividend at the holding company level is earmarked for stock repurchase and cash dividend activity.
Speaker Change: For at the end of September, we moved $9 million cash dividend from the bank.
Speaker Change: to the holding company.
Speaker Change: of the fiscal year through June 30. And again, we're not in complete control of that in that we have a 10B51 plan where an agent really controls the activity as it relates to day-to-day repurchase.
Speaker Change: Got it. Very helpful. Thank you for taking the questions. I'll step back.
Speaker Change: Your next question comes from the line of Timothy Coffey with Jannie Montgomery Scott. Please go ahead.
Speaker Change: Good morning.
Speaker Change: So, in your prepared comments, you talked about being able to toggle pricing to produce more growth. Are you talking about the multifamily and commercial real estate aspects, given that you are so much higher than the markets?
Speaker Change: Well, I'm talking about all three of the major categories, including single family.
Speaker Change: And in fact, if you look at the earnings release from yesterday and you look at the tables with respect to production volume.
Speaker Change: You'll see that single-family production volume was actually stronger this quarter.
Speaker Change: and has been stronger the last few quarters.
Speaker Change: with respect to multifamily or in comparison to multifamily and commercial.
Speaker Change: So, we're really interested in all three of those verticals, you know, multifamily, commercial, and single-family, to increase our loan origination volume.
Speaker Change: and we'll take opportunity where we see fit as it relates to the best opportunity for us with respect to populating the portfolio.
Speaker Change: Okay. And then just looking at mortgage rates since quarter end, the increase in those rates, how much of a headwind is that to your growth expectations?
Speaker Change: Well, good.
Speaker Change: 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.
Speaker Change: across the board in multifamily, commercial real estate, and single family.
Speaker Change: And so we think there is demand out there with respect to refinance activity, and we can capitalize on that.
Speaker Change: 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.
Speaker Change: Deposit betas for the company were exceptionally low, credit to the really loyal deposit base you have. If there is opportunity to lower rates going forward, would you expect those rates to be low in the beginning of the rate cycle and higher towards the end, or how should I think about that?
Speaker Change: So, as it relates to our retail depositors, there's really no opportunity to reprice those deposits lower.
Speaker Change: Because as you mentioned, our deposit beta was very low through the entire cycle. We really didn't match market rates in those retail deposit bases.
Speaker Change: Our opportunity with respect to repricing liabilities, both FHLB advances and brokered CDs, are
Speaker Change: Very
Speaker Change: opportunistic right now, and I'll give you an example. Today, we have 18 million of brokered CDs but touring.
Speaker Change: We are replacing them with a like amount of balance.
Speaker Change: and we are replacing them at 4.10 percent. So we are repricing those brokered CDs down by 120 basis points.
Speaker Change: And as I described on the call, in the, or in my prepared remarks, in the December quarter,
Speaker Change: both FHLB advances and brokered CEDs.
Speaker Change: Currently we have about 69.6 call it 70 million dollars repricing in the December quarter.
Speaker Change: The current weighted average cost is 5.20%. We expect that we're going to reprice those down, you know, call it 100 basis points since rates have backed up a little bit.
Speaker Change: Additionally, in the March 2025 quarter,
Speaker Change: We have $85.5 million.
Speaker Change: of FHLB advances and brokered CDs that will be repricing.
Speaker Change: And the current weighted average interest rate of that bucket of $85.5 billion.
Speaker Change: is 4.50%, so we expect we will also be repricing those interest-bearing liabilities down in the March quarter.
Speaker Change: So we still think we have a bit of a tailwind behind us.
Speaker Change: or a bit of a tailwind as it relates to the repricing of our balance sheet both on the loan side and the debt side.
Speaker Change: interest-bearing liability side such that we can improve our net interest margin but maybe not at quite the pace that we saw in the September quarter which was 10 basis points on a sequential quarter basis.
Speaker Change: Right. Okay, great. Thank you. Those are my questions.
Speaker Change: Since we seem to have no more questions, I will now turn the call back over to Donovan Ternes for closing remarks.
Donovan Ternes: Thank you very much for joining the call this quarter and we look forward to our conversations in future quarters.
Donovan Ternes: Have a good week.