Ladies and gentlemen, thank you for standing by, and welcome to the Provident Financial Holdings First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. And I will now turn the conference over to our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donavon Ternes, our President, Chief Operating 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 statements is available from the earnings release that was distributed yesterday from the annual report on Form 10-K for the year ended June 30, 2023, 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 the date 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, which describes our first quarter results. In the most recent quarter, we originated $18.5 million of loans held for investment, a decline from the $24.3 million in the prior sequential quarter. During the most recent quarter, we also had $23 million of loan principal payments and payoffs, which is down from the $25.1 million in the June 2023 quarter and still at the lower end of the quarterly range. Currently,…

Thank you. [Operator Instructions] Our first question will come from the line of Tim Coffey with Janney. Please go ahead.

Great. Thank you. Good morning, gentlemen.

Good morning, Tim.

Good morning.

First, Craig, congratulations on your retirement. I’ve covered the company a long time. You’ve always been a real pleasure to work with, and even though you’re not going to be an executive anymore, just on the Board, I hope that we can still catch up from time to time.

Well, thanks, Tim, I appreciate your comments. And absolutely I’ll be available whenever.

Great. If I can ask about the provision and just in general, the higher for longer environment, if that does take place, we are higher interest rates for longer. What impact is that going to have on the provision going forward?

So, Tim, this is Donavon. You did see that we increased our provision this quarter in comparison to prior quarters. And that was generally a result of the longer estimated live in the loan portfolio. And because we are estimating an allowance for the life of the loan, to the extent that the estimated life increases, the provision will increase. I’ll note that I think from June 30 to September 30, the MBA Mortgage Index increased by – for a 30 year fixed increased by 68 basis points during that quarter. It was a significant increase and as a result of that, we would expect prepayment speeds to come down and we would expect the average life of the loan portfolio to increase. The second component of that for us is the fact that we primarily make 30-year term mortgage loans in single-family and multifamily. So any decline in prepayment speeds in those two categories, which probably makes up about 90% of our loan portfolio is going to have an impact with respect to our provision. As we go down the timeline, it’s very difficult to forecast what those prepayment speeds are going to do from one period to the next, although you can get somewhat of a sense of it, I suppose, by understanding that the MBA mortgage index went up by 68 basis points for the current quarter, and that resulted in the provision that we populated for this quarter on a relatively flat balance sheet with respect to the amount of loans outstanding. So that gives you some guide, I suppose, to assume what could happen if mortgage interest rates increase so substantially during a given period.

Okay. And then also higher for longer, the impact on the servicing part of revenues because this is going to slow, as you mentioned, prepayment speeds as well, correct?

It will. But the servicing that we have right now is down significantly from what we once had. So I forget the exact balances, but we’re talking in the small hundreds of thousands of dollars of servicing asset. So there’s going to be limited impact with the slowdown in prepayments on that asset.

Okay. And then deposit cost increases look like they slowed this quarter. Is that – is one quarter a trend? Or is it too early to tell?

Well, I think it’s too early to tell. I’ve been hearing from many others and reading many analyst reports with respect to earnings season that other banks are experiencing a slower rise in deposit costs. We’re also experiencing probably a slower rise in deposit costs. But really for us, it gets down to what the balance sheet is doing, both on the asset side and the liability side and what occurred this quarter. Our earning asset yields went up about the same as our interest-bearing liability costs and that kept our net interest margin flat. We would expect the same type of behavior as we look out the timeline for this fiscal year because we have approximately the same amount of assets and liabilities repricing in any given period, we’re relatively neutral-positioned, maybe a little bit liability sensitive with respect to balance sheet. And so there’s certainly pressure on deposits and the cost of deposits. There’s certainly pressure on the cost of borrowings with respect to where current interest rates are and it gets down to higher for longer for us means what is the balance sheet doing repricing-wise, and it looks like it’s repricing very similar.

Okay. And then just one question on kind of emerging credit quality trends. There was another institution that reported a couple of nonaccrual loans in the Southern California marketplace, other office loans. The problem wasn’t that they were office loans. The problem was they were in lease-up and they couldn’t get the new tenants in the building. I’m wondering, are you seeing any lease-up issues across your commercial real estate portfolio?

To date, we’re not seeing that really. But when we think about our portfolio, we don’t have downtown office high-rise or urban center locations on the collateral. It’s typically suburban markets, and those markets seem to be doing better than some of the urban centers seem to be. Just on kind of an ancillary note, this quarter, one of our nonperforming loans at September 30, went into foreclosure and we were bid-out for a full recovery at the foreclosure sale. So there still seems to be a great deal of equity in some of these properties, not so much commercial real estate. The market is not very good there. But for a single-family, we’ve not had a foreclosure in quite a few years and the one we just resolved, we had a full recovery at the foreclosure sale.

Okay. The investor deck has really good information on your loan to values. So those are really low, so that’s good to hear. And then one final question for you, Donavon. Now that Craig is retiring, what’s the number one thing you plan to change?

Well, I don’t know that there’s a dramatic or drastic change coming, Tim. The one thing that is true about Provident is that we are a community bank. We are serving a customer base in the Inland Empire for a number of years. And I don't see that changing in a radical way. We always have challenges and opportunities with respect to how we operate the company. There's new technologies that one can potentially adopt to improve efficiencies. There are things with respect to our loan portfolios and underwriting standards that we can potentially determine to make some changes given market environment. But by and large, I don't see dramatic change, Tim.

Okay, sounds good. Those are my questions. Thank you very much for your time.

Thank you. We'll go next to Andrew Liesch with Piper Sandler.

Hey, good morning, guys. And congratulations to you both. Craig on your retirement and Donavon to the CEO promotion. Great to see.

Thanks. Thank you.

Of course, the commentary on the expense run rate, $7.2 million a quarter for this year. Is that going forward? Or could there be a step up, so the full year average of $7.2 million.

Yes. I don't believe there's going to be a step up. That's about what we believe our run rate is going to be. Although this quarter, it was a little bit better than that. But as Craig mentioned in his comments, we didn't meet some of our bonus targets for the quarter. And as a result of that, there weren't salary and benefit expenses related to those bonus accruals. So we came in at $6.9 million rather than the $7.2 million. And if we just contrast it to what occurred in the June quarter, June was elevated as well from bonus accruals as well as the vesting of restricted stock and stock options that carry some income statement ramifications upon vesting, which were all trued up in that quarter. So a significant decline from the June quarter, of course, because of unusual items. And this quarter is closer to a standard run rate except for the bonus accruals.

Got it. All right, that's helpful there. Thank you. And then the – just a commentary on the – what you have maturing on the loan side or with the recent paydowns and production in the pipeline, still safe to assume that the portfolio is going to hold relatively steady, just muted growth?

It's going to be muted growth. I think as we get down into our current fiscal year, we might populate with some growth because I think the environment has certainly stabilized from the March quarter, the June quarter, better environment than the March quarter. I think September quarter was a better environment than either of those two quarters. And if we continue to see that, we would be more interested in perhaps populating some loan growth. I think loan growth is out there. We've tightened our underwriting standards from where we were, and we've raised our interest rates on the loan products that we're offering. And as a result of that, origination volume has come down. I'm hearing from our origination staff that we could do more if we chose to do so. So I think it's really a question of what we see the environment doing and primarily liquidity environment. It doesn't make much sense, I suppose, to put a loan on with a 200 basis point spread or 175 basis point spread if we're funding that growth at the margin. So that's essentially how we view it. So it would be, I think, slow growth, but it's not necessarily flat.

Got it. All right, that's very helpful. Thanks for taking the question.

Thank you. [Operator Instructions] And gentlemen, allowing a few moments, there are no further questions from the phones.

All right. Well, if there are no further questions, I appreciate everyone's participation and look forward to speaking with you again next quarter. Thank you.

Thank you. And ladies and gentlemen, today's conference is available for replay beginning at 11:00 a.m. Pacific Time today, running through November 2nd at midnight. You may access the AT&T replay system by dialing (866) 207-1041 and entering the access code of 7886283. International dialers may call (402) 970-0847. Those numbers, again, are 1 (866) 207-1041 or (402) 970-0847 with the access code of 7886283. That does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.