PROV - NASDAQ

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Holdings Second Quarter of Fiscal 2025 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 Instructions]. I would now like to turn the conference over to Donavon Ternes, President and Chief Executive Officer. Please go ahead.

Thank you, Bella. 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 earlier this morning, 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 distributed earlier this morning, which describes our second quarter fiscal 2025 results. As a Southern California bank, I wanted to take a moment during our call this morning to thank the firefighters and first responders fighting the fires in Los Angeles. Our thoughts are with those affected by the fires. We are actively monitoring the situation and have identified $23.7 million or 2.2% of our loans held for investment portfolio, located in

[Operator Instructions]. Your first question comes from the line of Andrew Liesch of Piper Sandler. Your line is now open. Please go ahead.

Thanks. Good morning.

Good morning.

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?

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.

Got it. That makes sense. 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?

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.

Got it. Yep. Make sense. All right. Thanks for taking the question. I'll step back.

[Operator Instructions]. I will now turn the call back over to Donavon Ternes for closing remarks.

Well, I'd like to thank everybody for joining our call this quarter. And I look forward to our call next quarter. Thank you very much.