PROVIDENT FINANCIAL HOLDINGS INC Q2 FY2025 earnings call

• Thanked firefighters and first responders fighting fires in Los Angeles and mentioned $23.7 million or 2.2% of loans held for investment portfolio in fire zones.
• Originated $36.4 million in loans held for investment in the most recent quarter, up from $28.9 million prior sequential quarter; $34.3 million loan principal payments and payoffs, slightly up from $34 million in September 2024 quarter.
• Real estate investors' activity reduced due to higher interest rates, but consumer demand for single-family adjustable rate mortgage products increased; loosened underwriting requirements in certain loan segments.
• Single-family and multifamily loan pipelines similar to last quarter, suggesting loan originations in March 2025 quarter will be similar to December 2024 quarter.
• Credit quality holds up well, nonperforming assets increased but no early-stage delinquencies; monitoring commercial real estate loans, particularly office building-secured loans.
• Net interest margin expanded, deposit average cost declined, borrowing cost reduced; new loan production at higher rates than existing portfolio's weighted average, but some adjustable rate loans may reprice lower or higher.
• Operating expenses increased due to non-recurring expenses, but expects run rate of approximately $7.5 million per quarter in 2025.
• Short-term balance sheet management strategy more growth oriented; loan portfolio growth disciplined; total interest-earning assets composition improved, while total interest-bearing liabilities composition deteriorated; well-capitalized capital ratios allow execution of business plan.
• Maintains cash dividend important, repurchased shares and distributed dividends, and Board approved new stock repurchase plan.

For the three months ended December 31, 2024, loans held for investment increased by approximately $5 million compared to the quarter ended September 30, 2024, with increases in single-family and commercial business loans, partly offset by decreases in multifamily commercial real estate and construction loans. The net interest margin increased to 2.91% for the quarter ended December 31, 2024 compared to 2.84% for the sequential quarter ended September 30, 2024, due to a 3 basis point increase in the average yield on total interest-earning assets and a 5 basis point decrease in the cost of total interest-bearing liabilities. Notably, the average cost of deposits declined to 123 basis points, and the cost of borrowing decreased by 21 basis points. The company originated $36.4 million as loans held for investment in the most recent quarter, an increase from $28.9 million in the prior sequential quarter. There were $34.3 million of loan principal payments and payoffs, slightly up from $34 million in the September 2024 quarter. Nonperforming assets increased to $2.5 million on December 31, 2024, from $2.1 million on September 30, 2024, with no early-stage delinquencies at December 31, 2024. The provision for credit losses in the December 2024 quarter was $586,000. The FTE count at December 31, 2024, was 162, up from 160 on the same date last year. Operating expenses were $7.8 million in the December 2025 quarter, an increase from $7.5 million in the September 2024 quarter, due to non-recurring expenses. The company repurchased approximately 64,000 shares of common stock in the December 2024 quarter, and for the fiscal year-to-date, has distributed approximately $1.9 million of cash dividends and repurchased approximately $2.4 million worth of common stock.

• Loan portfolio annual growth rate was approximately 1.9% this quarter, and expects growth to increase in the second half of fiscal year and new fiscal year beginning July 1st, with more opportunity in 2025 calendar year due to yield curve flattening and upward slope.
• Anticipates net interest margin to continue expanding in future quarters; $124.3 million of loans repricing in March 2025 quarter forecasted to reprice 5 basis points lower, while $96.3 million of loans repricing in June 2025 quarter forecasted to reprice 57 basis points higher; $85.5 million of wholesale funding maturing in March 2025 quarter expected to reprice downward.
• Expects operating expenses run rate of approximately $7.5 million per quarter in 2025.

• Forward-looking statements subject to number of risks and uncertainties, actual results may differ materially from those discussed; risk factors available from earnings release, Form 10-K, Form 10-Qs and other SEC filings.

Q: Donavon, a question on the loan growth commentary here. It seems like production is going to be again towards the higher end. I guess if you look out, I mean, is this going to be like this maybe 50 to 60 basis points a quarter? How do you think -- or when do you think growth can accelerate from this path? What needs to happen for that to occur?

A: Well, 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 grow 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 than what we've seen in the past. And part of that is as well a flattening and 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.

Q: And then on the margin, now that in the yield curve, it seems like there's still quite a bit of opportunities 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 7 basis points of expansion, but should the margin be in an uptrend here from now on, unless we see something different from that?

A: Yes. So 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 7 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 5 basis points. In the December and the September quarters, the loans that we're repricing were 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, $85.5 million of wholesale funding should be repricing downward in the March quarter, it's currently -- those liabilities are currently priced at 4.5%, and we think we can reprice those liabilities into the high 3s or low 4s. 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.