Provident Financial Q3 2025 Earnings Call Transcript

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Provided by Quartr
April 29, 2025

There are 4 speakers on the call.

Operator

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 twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Donovan Tarnas, President and CEO. Please go ahead.

Speaker 1

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.

Speaker 1

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 or 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 ks for the year ended 06/30/2024 and from the Form 10 Qs and other SEC filings that are filed subsequent to the Form 10 ks. 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 1

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 twenty twenty five 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.

Speaker 1

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 $27,900,000 of loans held for investment, a 23 percent decrease from $36,400,000 that were originated in the prior sequential quarter. During the most recent quarter, we also had $23,000,000 of loan principal payments and payoffs, which is down 33% from $34,300,000 in the December.

Speaker 1

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 multifamily loan pipelines are similar in comparison to last quarter suggesting our loan origination volume in the June will be similar to the March and around the middle of the range of recent quarters which has been between 18,000,000 and $36,000,000 For the three months ended 03/31/2025, loans held for investment increased by approximately $5,400,000 when compared to the quarter ended 12/31/2024, with an increase in single family loans, partly offset by declines in multifamily, 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 $1,400,000 on 03/31/2025, which is down from $2,500,000 on 12/31/2024.

Speaker 1

Additionally, there were only $199,000 of early stage delinquencies at 03/31/2025. We continue to monitor commercial real estate loans, particularly loans secured by office buildings, 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 39,900,000 or 3.8% of loans held for investment. You should also note that we have just five CRE loans totaling $2,900,000 maturing in calendar twenty twenty five. We recorded a $391,000 recovery of credit losses in the March.

Speaker 1

The recovery recorded in the third quarter of fiscal twenty twenty five 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 03/31/2025 from 12/31/2024. The allowance for credit losses to gross loans held for investment decreased four basis points to 62 basis points at 03/31/2025, as compared to 66 basis points at 12/31/2024. Our net interest margin increased 11 basis points to 3.02% for the quarter ended 03/31/2025 compared to the 2.91% for the sequential quarter ended 12/31/2024, the net result of a seven 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. Our average cost of deposits increased to 1.26%, up three basis points for the quarter ended 03/31/2025, while our cost of borrowing decreased one basis point to 4.52% in the March 2025 quarter compared to the December. 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 compared to the average net deferred loan cost amortization of the previous five quarters.

Speaker 1

Also, we recovered approximately $94,000 of net interest income in the March, 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 110,900,000 of loans repricing in the June to an interest rate currently forecast to be 32 basis points higher to a weighted average interest rate of 7.2% from 6.88%. Additionally, we have approximately $112,700,000 of loans repricing in the September to an interest rate currently forecast to be 13 basis points higher to a weighted average interest rate of 7.23% from 7.1%. 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 1

Excluding overnight borrowings, we have approximately $100,800,000 of Federal Home Loan Bank advances, brokered certificates of deposits and government certificates of deposit maturing in the June at a weighted average interest rate of 4.34%. Additionally, we have approximately $46,300,000 of Federal Home Loan Bank advances and brokered certificates of deposit maturing in the September at a weighted average interest rate of 4.5%. 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.

Speaker 1

Our FTE count at 03/31/2025 increased by one to 162 compared to 161 FTE on the same date last year. You will note that operating expenses were $7,900,000 in the March, an increase from the $7,800,000 in December. The increase over the expected run rate of $7,500,000 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 twenty twenty five, we continue to expect a run rate of approximately 7,500,000,000.0 to $7,600,000,000 per quarter. Our short term strategy for balance sheet management is somewhat more growth oriented than last fiscal year.

Speaker 1

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 prepayments 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 significant margin, allowing us to execute on our business plan and capital management goals without complications.

Speaker 1

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. For the fiscal year to date, we have distributed approximately $2,800,000 of cash dividends to shareholders and repurchased approximately $3,100,000 worth of common stock. Accordingly, our capital management activities has resulted in a 129% distribution of fiscal twenty twenty five net income to date. We encourage everyone to review our March 31 investor presentation posted on our website.

Speaker 1

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

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

Speaker 2

Thanks. Good morning, Donovan. Question on the CD growth in the quarter. Just curious if there's anything behind that. I knew that borrowings were down, but was this also to bring on some client funds in advance of expected loan growth?

Speaker 2

Just curious on what drove that?

Speaker 1

We remixed the liability profile in the March. For the first time in a while, we opened up our government deposit deposits desk again. And so we accumulated some government deposits in the March. 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 CDs as well.

Speaker 2

Got it. Were these new CDs at a better rate than what you get in the wholesale market? And is there opportunities for more of this as time goes on?

Speaker 1

So the rate was very similar to the wholesale The reason that we changed up the strategy is that short term rates have finally come down and these deposits are typically short term in nature. And so that allowed for us to bring those deposits on at very similar costs to other wholesale funding.

Speaker 3

Got it. Okay, that's helpful.

Speaker 2

And then the margin, it seems like there were maybe what did you say? If you add up the maybe five basis points of maybe some nonrecurring benefit to the margin. So if you kind of take that out, you're at 2.97 But based on what you're saying for the repricing, it seems like you could get some expansion from that level here going into the fourth quarter. So certainly not as fast as a pace as what you saw in the last in your third quarter. But from that two ninety seven, it seems like there's some pretty good optimism there.

Speaker 2

Am I reading that the right way?

Speaker 1

Yes. And in fact, we did have a few items in the March, for instance, the $94,000 net recovery with respect to non performing loans. And then we always have volatility with respect to net deferred loan costs depending upon what the payoff volume is and which loans pay off at any given point. So that's really an uncontrollable, well both of those are uncontrollable to some degree. So that's why I called it out and pointed it out in the call this morning.

Speaker 1

But beside that activity in the March, we did spell out where we think our adjustable rate loans will be repricing both by dollar amount as well as by the net interest margin or increase in interest rate over the course of the next two quarters. And the same thing with respect to wholesale funding as it relates to dollar amount and what their current costs are.

Speaker 2

It. Net pickup should be nice. Good to see there. Great, you've covered everything else in your prepared comments I'll step back.

Speaker 2

Thank you.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Tim Coffey with Janney. You may go ahead.

Speaker 3

Great. Thank you. Good morning, Donovan.

Speaker 1

Good morning, Tim.

Speaker 3

I kind want to pick your brain on what your thoughts are for prepayment activity over the next twelve months?

Speaker 1

Well, it's very difficult to really determine that. We had lower prepays in the March than the December. I expect that was because of the volatility we saw in mortgage rates in the March. It seems like 7% handle on mortgage rates slows activity by a good amount. And it seems when mortgage rates can be offered below 7% or with a 6% handle, there's more activity and that then suggests what may occur with respect to prepayments.

Speaker 1

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, amortization or acceleration 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 3

Okay. If prepayment activity were to slow and the average life portfolio lengthens, how much would it have to, I guess, use the word lengthen to see a repeat of calendar 4Q when you saw provision expense because of it?

Speaker 1

Internally we have some of those numbers Tim and thumbnails. But if you were to look back at what we have done over the course of, call it the last four quarters. And you can kind of track what prepayments have done 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, prepayments slow down and that typically requires a provision because the average life of the portfolio of course lengthens. And the reverse is true as you know with respect to rates going down, prepayments accelerating, the average life of the portfolio declines and then we recover with respect to what the provision is.

Speaker 1

So volatility in mortgage rates has an outsized impact in our loan portfolio because they are primarily thirty year mortgages, fifteen year mortgages and that's much different than a C and I lender for instance that might have one year business loans on their books.

Speaker 3

Okay, I understand. And then just turn to capital allocation, capital returns. Obviously, solid long standing strategy on how much capital you want to return to shareholders. And just looking at the TCE ratio, right, for example, it's fairly solid last stable last four quarters. If the volatility in the market were to increase and the value of the shares declined unexpectedly, would you enhance the buyback and return more capital to shareholders?

Speaker 3

Or do you feel given the uncertainty out there having more capital on hand is better?

Speaker 1

Well, anytime there is uncertainty, think having more capital is better. But with respect to our particular capital plans, we typically take a look at our business plan once a year and we describe 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 activity. That was accomplished when we adopted our fiscal twenty twenty five business plan. So I wouldn't suggest that there would be significant nuance difference with respect to what you'll see in the June 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 business plan. But we are in the process of developing our fiscal twenty twenty six business plan and the same thing will occur.

Speaker 1

We will determine what the cash dividend should look like from bank to holding company and based upon the approval of that business plan which typically occurs in July of each year, we will then have established the amount of the cash dividend and the amount that we allocate toward stock repurchases. 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 in the allocation for that activity.

Speaker 3

Okay. And then one final question for me is, as you compete for loans with the different groups out there, have you seen any change in your behavior or willingness to engage in new loans, etcetera, given what's happened so far this month?

Speaker 1

So if you're referring to the in market transaction between Columbia and Pacific Premier, we've not really seen anything at this point. And frankly Pacific Premier had actually been shrinking their loan portfolio and been out of some of the markets that were in primarily multifamily and commercial real estate loans. So we've not seen a great deal of difference there. Although what I will say with respect to multifamily, there are some relatively aggressive pricers out there on multifamily loans. And even though we might be priced toward the middle of the market as it relates to multifamily loans and competitors, there are some that might be priced 50 basis points, 75 basis points below the middle of the market.

Speaker 1

And I expect that they're gathering a great bit of activity given what their pricing looks like. We're not sure why that is occurring. You would have to ask those specific lenders I suppose. But at the end of the day that does dictate to some degree what we are seeing in multifamily in particular.

Speaker 3

Okay. Well, I wasn't referencing that transaction, maybe a follow-up question on the overall market for multifamily. The last ten years, the number of companies originating multi tenant loans in the California market, which again is the second largest housing market rental market in the country has declined substantially. I hear what you're saying about the aggressive lenders. Do you get the sense, are you optimistic that more of the market could start moving to you and where your pricing is sooner rather than later?

Speaker 1

Difficult to understand what that timing may look like. What I know about our pricing and how we look at things, 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. If we find that pricing becomes too aggressive, we'll look at other lending products, single family for instance. It makes no sense to me to originate multifamily at a yield or a rate lower than single family and we see that sometimes. So we would simply increase our production of single family with respect to our needs as it relates to single digit growth of the overall loan portfolio in comparison to where we need it to be relative to payoffs.

Operator

Okay. That concludes our question and answer session. I'll now turn the call back over to Donovan Ernest for closing remarks.

Speaker 1

I'd like to thank everybody for attending this quarter's call, and I look forward to next quarter's call. Thank you very much.

Operator

That concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Provident Financial Q3 2025
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