Q3 2025 Provident Financial Holdings Inc Earnings Call
Yes.
Lacey: Hello, and thank you for standing by my name is Lacey and I'll be your conference facilitator today.
Lacey: At this time I would like to welcome everyone to the Provident Financial Holdings third quarter fiscal 2025 earnings call.
Lacey: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll 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.
Speaker Change: Thank you I would now like to turn the call over to Donovan Panos, President and CEO. Please go ahead.
Speaker Change: Thank you Lacy.
Speaker Change: Good morning. This is Don <unk>, President and CEO of Provident Financial Holdings before we begin I have a brief administrative item to address.
Speaker Change: Presentation today discusses the company's business outlook.
Speaker Change: We will include forward looking statements. Those statements include descriptions of management's plans objectives or goals for future operations products or services forecast of financial or other performance measures and statements about the company's general outlook for economic and business conditions.
Speaker Change: We also may make forward looking statements during the question and answer period following management's presentation.
Speaker Change: These forward looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today [noise].
Speaker Change: 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 32024.
Speaker Change: And from the form 10, Qs and other SEC filings that are filed subsequent to the Form 10-K.
Speaker Change: 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 distributed yesterday, which describes our third quarter fiscal 2025 results.
Speaker Change: I have an update regarding the southern California wildfires in January 2025.
Speaker Change: We have been contacted by two borrowers who were impacted by the Altadena fire.
Speaker Change: One of them had very minor damage to the perimeter fence, which the borrower repaired himself and although insured he did not file an insurance claim.
Speaker Change: The other one.
Speaker Change: Minor damage to the roof mechanicals and smoke damage the borrower filed an insurance claim.
Speaker Change: As received insurance proceeds which are deposited into an account with provident.
Speaker Change: And it's in the process of repairing the damage.
Speaker Change: Insurance proceeds are expected to cover the cost of repairs.
Speaker Change: And the most recent quarter, we originated $27 $9 million of loans held for investment.
Speaker Change: 23%, a decrease from $36 $4 million that were originated in the prior sequential quarter.
Speaker Change: 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.
Speaker Change: Currently it seems that real estate investors have reduced their activity as a result of higher mortgage rates. Although we consider continue to see moderate activity in loans held for investment.
Speaker Change: It should also be noted that economic uncertainty has increased as a result of current fiscal policy, which is also reducing activity.
Speaker Change: 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.
Speaker Change: Additionally, our single family and multifamily 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 range of recent quarter.
Speaker Change: <unk>, which has been between 18 and $36 million.
Speaker Change: For the three months ended March 31, 2025 loans held for investment increased by approximately $5 $4 million when.
Speaker Change: <unk> to the quarter ended December 31, 2024, with an increase in single family loans, partly offset by declines in multifamily commercial real estate construction and commercial business loans.
Speaker Change: Credit quality continues to hold up very well and you.
Speaker Change: You will note that nonperforming assets decreased to 1.1 dollars 4 million on March 31, 2025, which is down from $2 $5 million on December 31, 2024. Additionally.
Speaker Change: Additionally, there were only $199000 of early stage delinquencies at March 31, 2025.
Speaker Change: We continue to monitor commercial real estate loans, particularly loans secured by office buildings, which are but are confident that based on 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 office buildings is $39 9 million or three 8% of loans held for investment.
Speaker Change: You should also note that we have just five CRE loans.
Speaker Change: Totally $2.9 million maturing in calendar 2025.
Speaker Change: We recorded a $391000 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 SF our collateral qualitative factors and a lower.
Speaker Change: Balance of nonperforming loans.
Speaker Change: Partly offset by a longer average life of loan 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.
Speaker Change: 2024.
Speaker Change: 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.
Speaker Change: Our net interest margin increased 11 basis points to 3.02% for the quarter ended March 31, 2025 compared to the $2, 91% for the sequential quarter ended December 31, 2024, the net result of a <unk>.
Speaker Change: One basis point increase in the average yield on total interest, earning assets and a one basis point decrease in the cost of total interest bearing liabilities.
Speaker Change: Our average cost of deposits increased to $1 two 6% up three basis points for the quarter ended March 31 2025.
Speaker Change: While our cost of borrowing decreased one basis point to 452% in the March 2025 quarter compared to the December 2024 quarter.
Speaker Change: 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.
Speaker Change: The previous five quarters.
Speaker Change: Also we recovered approximately $94000 of net interest income in the March 2025 quarter. The net result of nonperforming loan payoffs.
Speaker Change: Suffocation 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 100.
Speaker Change: $10 $9 million of loans re pricing in the June 2025 quarter to an interest rate currently forecast to be 32 basis points higher to a weighted average interest rate of 720%.
Speaker Change: <unk>, 6.88%.
Speaker Change: 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 723% from <unk>.
Speaker Change: 710%.
Speaker Change: I would point out that there is a tremendous opportunity to reach price 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: We have approximately.
Speaker Change: $108 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 434%.
Speaker Change: Additionally, we have approximately $46 $3 million of federal home loan bank advances and brokered certificates of deposits maturing in the September 2025 quarter at a weighted average interest rate of 450%.
Speaker Change: Given current market conditions, we would expect to reprice these maturities to a lower weighted average cost of funds.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: The same date last year.
Speaker Change: You will note that operating expenses were $7 $9 million in the March 2025 quarter, an increase from the seven $8 million in the in the December 2024 quarter.
Speaker Change: The increase over the expected run rate of seven $5 million was primarily due to nonrecurring or it intermittent expenses, particularly $239000 of litigation settlement expenses and $27000 of executive search firm.
Speaker Change: Costs.
Speaker Change: For fiscal 2025, we continue to expect a run rate of approximately seven five to seven $6 billion per quarter.
Speaker Change: Our short term strategy for balance sheet management.
Speaker Change: It 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 recognized that the federal open market Committee has recalibrated to looser monetary policy and the inverted yield curve has begun to reverse back to them.
Speaker Change: Upwardly sloping yield curve.
Speaker Change: 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 prepayments below the prior sequential quarter.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We exceed well capitalized capital ratios by a significant margin.
Speaker Change: 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 as a responsible capital management.
Speaker Change: Tool and we repurchased approximately 52000 shares of common stock in the March 2025 quarter.
Speaker Change: 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.
Speaker Change: <unk> our capital management activities has resulted in a 129% distribution of fiscal 2025 net income to date.
Speaker Change: 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.
Speaker Change: 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 and I wanted to ask a question. Please press Star then the number one on your telephone keypad.
Speaker Change: We will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Andrew Liesch with Piper Sandler You May go ahead.
Speaker Change: Thanks, Good morning Donovan.
Speaker Change: More question on the CD growth in the quarter just curious.
Speaker Change: If there is anything behind that and do that borrowings were down but.
Speaker Change: It is also to bring on some some client funds in advance of expected loan growth just curious on what drove that.
Speaker Change: We remixed the liability.
Speaker Change: Profiled in the March quarter.
Speaker Change: And for the first time in a while we opened up our government deposits desk again, and so we accumulated some government deposits in the March quarter. As a result of that we had available liquidity to pay down federal home loan Bank advances I think we paid down a little bit of brokered.
Speaker Change: Cds as well.
Speaker Change: Got it.
Speaker Change: These are these new Cds at a better rate a better rate than what you get in the wholesale market and as there are opportunities for more of this.
Speaker Change: As time goes on.
Speaker Change: So the rate was very similar to the wholesale market.
Speaker Change: The reason that we.
Speaker Change: Changed up the strategy is that short term rates had finally come down and these deposits are typically short term in nature and so that allowed for us to.
Speaker Change: To bring those deposits on at very similar cost to other wholesale funding.
Speaker Change: Got it okay. That's helpful.
Speaker Change: And then the margins it seems like there were maybe what did you say if you add up.
Speaker Change: Maybe five basis points, maybe some nonrecurring benefit to the margin so.
Speaker Change: So if you kind of take that out you're at.
Speaker Change: 297.
Speaker Change: But based on what you are saying for the repricing. It seems like you could get some expansion from that level youre going into.
Speaker Change: The fourth quarter, so certainly not not as fast as the pace of what you saw in the last one.
Speaker Change: Third quarter, but from that 297, and it seems like there's some pretty good optimism there am I reading that the right way.
Speaker Change: Yes, and in fact, we did have a few items in the March quarter for instance, the $94000 net recovery with respect to Hum.
Speaker Change: Nonperforming loans and then we always have.
Speaker Change: Volatility with respect to net deferred loan costs, depending upon what the.
Speaker Change: Payoff volume is and which loans pay off at any given point.
Speaker Change: So that's really an uncontrollable while both of those are uncontrollable to some degree.
Speaker Change: So that's why I called it out and pointed out.
Speaker Change: On the call this morning.
Speaker Change: But.
Speaker Change: Beside that activity in the March quarter, we did spell out where we think our adjustable rate loans will be repricing both by dollar amount.
Speaker Change: As well as by.
Speaker Change: The net interest margin or increase in interest rate over the course of the next two quarters and.
Speaker Change: And the same thing with respect to wholesale funding as it relates to dollar amount and what their current costs are.
Speaker Change: Yes got it.
Speaker Change: And that pickup should be nice good to see that great you've covered everything else in your prepared comments that I have some I'll step back. Thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Tim Coffey with Janney You May go ahead.
Martin Donovan: Alright, Thank you Martin Donovan.
Speaker Change: Good morning, Tim.
Speaker Change: Okay.
Speaker Change: I don't want to pick your brain on what your thoughts are for prepayment activity over the next 12 months.
Speaker Change: Well.
Speaker Change: It's very difficult to really determine that.
Speaker Change: We had lower prepays in the March quarter than the December quarter, I expect that was because of the volatility we saw in mortgage rates in the March quarter.
Speaker Change: It seems like.
Speaker Change: 7% handle on mortgage rates.
Speaker Change: Those activity.
Speaker Change: Bye.
Speaker Change: A good amount.
And it seems when mortgage rates can be offered below 7% or with a 6% handle.
Speaker Change: There is more activity and that then suggests what may occur with respect to prepayments so very difficult to describe that's one of the reasons. We essentially described the prior five quarters, when we speak of net deferred loan costs.
Speaker Change: Amortization or acceleration.
Speaker Change: To get a wider view or a wider picture of what occurs because any single quarter can have outsized impact with respect to prepayments.
Speaker Change: Okay, if prepayment activity were to slow and the average life of the portfolio length how.
Speaker Change: How much would we will have to.
Stuart: Stuart lengthened.
To see a repeat of court.
Stuart: <unk> when you saw our provision expense because of it.
Stuart: Well.
Stuart: Internally, we have some of those numbers, Tim and Tom nails, but.
Stuart: If you were to look back at.
Stuart: What we have done over the course of call. It the last four quarters.
Stuart: And you can kind of track what prepayments have done.
Stuart: Over those quarters, and what mortgage interest rates have done over those quarters and when mortgage interest rates go up from one quarter to the next.
Stuart: Prepayment slowdown and that typically requires a provision because the average life of the portfolio of course lengthens.
Stuart: And the reverse is true as you note with respect to rates going down prepayments accelerating the average life of the portfolio declines.
Stuart: And then we recover.
Stuart: With respect to what the provision is so volatility.
Stuart: In mortgage rates has an outside outsized impact in our loan portfolio because they are primarily 30 year mortgages 15 year mortgages.
Stuart: And thats much different than a C&I lender for instance that might have one year business loans on their books.
Stuart: Okay.
Stuart: Yes.
Stuart: And then turning to capital allocation and capital returns.
Stuart: We are solid.
Stuart: Long standing strategy.
Stuart: How much capital you want to return to shareholders.
Stuart: And just looking at the TCE ratio for example, fairly solid loss stable last four quarters.
Stuart: If the volatility in the market or to increase in value of the shares declined unexpectedly.
Stuart: Would you enhanced the buyback to return more capital to shareholders or do you feel given the uncertainty out there having more capital on hand is better.
Stuart: Well at anytime there is uncertainty I think having more capital is better but.
Stuart: But with respect to our particular capital plans, we typically.
Stuart: Take a look at our business plan once a year and we described in that business plan. The cash dividend that will move from the bank to the holding company and then that cash dividend that is then moved up to the holding company will provide for future cash dividends as well as stock repurchase.
Stuart: <unk>.
Stuart: That was accomplished when we adopted our fiscal 2025.
Stuart: Business plan, so I wouldn't suggest that there would be significant nuanced difference with respect to what youll see in the June quarter in comparison to what we've done over the last three quarters of our fiscal year simply because we've already set those standards with respect to our base.
Stuart: <unk> plan.
Stuart: But.
Stuart: We are in the process of developing our fiscal 2026 business plan and the same thing will occur.
Stuart: We will determine what the cash dividend should look like from bank to holding company.
Stuart: And.
Stuart: Based upon the approval of that business plan, which typically occurs in July of each year.
Stuart: We will then have established with the amount of the cash dividend and the amount that we allocate toward.
Stuart: Stock repurchases.
Stuart: Now naturally if the stock price goes down we will repurchase more shares even given that we have a standard amount or a set amount sitting.
Stuart: In the allocation for that activity.
Stuart: Okay.
Stuart: And then one final question for me is at.
Stuart: As you compete for loans with the different groups out there have you seen any change in their behavior or willingness to engage with new loans et cetera given.
Stuart: What's happened so far this month.
Speaker Change: So if you're referring to the in market transaction between Columbia Pacific Premier.
Stuart: We've not really seen anything at this point.
And frankly Pacific Premier had.
Stuart: Actually been shrinking their loan portfolio and been out of some of the markets that we're in primarily multifamily and commercial real estate loans.
Stuart: So.
Stuart: We have not seen a great deal of difference there, although what I will say with respect to multifamily.
Stuart: There are some relatively aggressive prices out there.
Stuart: On multifamily loans.
Stuart: And even though we might be priced towards the middle of the market as it relates to multifamily loans and competitors.
Stuart: There are some that might be priced 50 basis points 75 basis points below the middle of the market.
Stuart: And I expect that they're gathering a great bit of activity.
Stuart: Given what their pricing looks like.
Stuart: Not sure why that is occurring.
Stuart: To ask those specific lenders I suppose.
Stuart: But at the end of the day that does dictate to some degree what we're seeing in multifamily in particular.
Stuart: Okay.
Stuart: Yes totally referenced in that transaction.
Stuart: That followed a follow up question on the overall market for multifamily.
Stuart: The last 10 years, they never want the number of of companies originating multifamily loans in the southern California market, which again is the second largest housing market rental market in the country has declined substantially.
Speaker Change: So what you're saying about the aggressive lenders.
Speaker Change: Do you get the sense are you optimistic that more of the market could start moving to you where your pricing is.
Speaker Change: Sooner rather than later.
Speaker Change: Difficult to understand what that timing may look like.
Speaker Change: What I know about our pricing and how.
Speaker Change: How we look at things.
Speaker Change: We're looking at yield curve, we're looking to competitors in the market and ultimately we're interested in populating spread at the margin that is sustainable over time.
Speaker Change: If we find that pricing becomes too aggressive.
Speaker Change: We'll look at other <unk>.
Speaker Change: Lending products single family for instance.
Speaker Change: It makes no sense to me to originate multifamily at a yield or a rate lower than single family.
Speaker Change: And we see that sometimes.
Speaker Change: So we would simply increase our production of single family with respect to our needs as it relates to sing.
Speaker Change: Single digit growth.
Speaker Change: Of the overall loan portfolio in comparison to where we needed to be relative to payoffs.
Speaker Change: Alright.
Martin Donovan: Okay. Okay. That's helpful. Don on those are my questions. Thank you.
Martin Donovan: Once again, if you would like to ask a question. Please press star one on your telephone keypad.
Martin Donovan: Okay.
Speaker Change: That concludes our question and answer session I will now turn the call back over to Donovan fairness for closing remarks.
Speaker Change: I'd like to thank everybody for attending this quarter's call.
Speaker Change: And I look forward to next quarter's call. Thank you very much.
Speaker Change: Okay.
Speaker Change: That concludes today's conference call you may now disconnect.
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