Thank you for standing by. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Provident Financial Holdings Second Quarter 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 call over to Donavon Ternes, President and CEO. Please go ahead.

Thank you, Aaron. 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 that 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 of the date that they are made, and the company assumes no obligated 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 second quarter results. In the most recent quarter, we originated $20.2 million of loans held for investment and earnings from $18.5 million in the prior sequential quarter. During the most recent quarter, we also had $17.8 million of loan principal payments and payoffs, which is down from $23 million in September 2023 quarter and still at the lower end of the quarterly range. Currently,…

[Operator Instructions] And our first question comes from the line of Andrew Liesch with Piper Sandler go ahead.

Hi, good morning. Question on the margin outlook here. If we get a series of Fed rate cuts, I guess, what sort of effect do you think that could have on the margin going forward? It sounds like you're already seeing some relief on the funding side, at least on the wholesale accounts.

Yes. I think, Andrew, as we think about the balance sheet, we probably have a longer tail than many on our assets or our loans repricing upward because they are hybrid arms tied to SFR or multifamily or even commercial. And so as the indices have moved upward in many cases, that upward repricing loan has been capped by the periodic cap or there is also the situation where the loan is in its fixed period and will not adjust upward until it moves out of the fixed period. So I think there's a tremendous opportunity with respect to the loan portfolio to continue to adjust upward with a longer tail on that others may have with C&I lending, for instance. So even if we see the Fed beginning to move interest downward, I think our earning assets, particularly the loan portfolio can reprice upward. Conversely, as you point out, the funding side of the balance sheet probably is towards the higher end of the range, and we can see some relief there. The note in our earnings release that we described the amount of brokered CDs that we have in portfolio. And that group CDs balance is $122.7 million. The weighted average cost of those brokered CDs was 5.26%. This is at December 31. We have recently seen a decline in brokered CD rates. And in fact, the most recent CD that we put on the books to replace a maturing CD came on at 4.70%. So there is about 56 basis points of relief between the weighted average in the portfolio of those funds and what the current funding costs may look like. So I think as you point out, calendar 2024 looks to be a little bit better with outlook as it relates to net interest margin, certainly, where we began in calendar 2023.

Got it. That's very helpful. Thanks for that detail. And then you mentioned in the release 2024, maybe having possibility that more -- a better opportunity, more favorable environment for growth. Are you seeing anything right now? Or are you still just waiting to see on how the Fed's reaction and their monetary policy plays out?

Sure. The thing that we think about with respect to opportunity for growth is what the liquidity environment looks like in the industry. Thankfully, as a result of the Fed comments in the subsequent to their December meeting, they essentially confirmed that they're thinking about lowering rates in calendar 2024. And as a result of that, we did see interest rates move down essentially across the curve except for the very short end of the curve. And that, I think, will provide some relief to deposit gathering or gathering funding from other sources in contrast to what we saw in 2023. And if we see that there is some relief and we have the ability to gather deposits and funding at more reasonable prices because liquidity is in a better situation in the banking environment, that will trigger our thinking to populate growth onto the balance sheet. We run a relatively high loan-to-deposit ratio. Historically, we have done that because of the nature of the loans that we have, 30-year mortgages. And we're sensitive to that, and we don't want to populate even higher loan-to-deposit ratios in a poorer or poor liquidity environment. So that's really what we have to see. We think that there's opportunity right now to grow if that's what we were choosing to do. As we mentioned in the prepared comments, we have tightened our underwriting standards beyond where we normally have them, and we've priced ourselves up with respect to the loan products, essentially to slow production to match what is coming in the form of payoffs, such that we're maintaining our loan portfolio.

Got it. That's very helpful, thank you for the thoughts there, I'll step back.

Thank you for your questions, Andrew. [Operator Instructions] Our next question is from the line of Tim Coffey with Janney. Tim your line is live.

Thank you. Good morning, Dan and good morning, Tam.

Good morning.

As we got to go through this year with the outlook for modest loan growth for all the items you discussed already, I'm wondering, do you have any sense of how much cash you'll start to carry on the balance sheet? Or do you anticipate rolling that back into securities?

Well, I'm not certain that our preference would be to roll it into securities. We would prefer to see an environment where we are populating loan growth on the balance sheet. And only when we get to a position where we're running in loan-to-deposit ratio concern where then we somehow have excess cash on the balance sheet, would we consider investment securities. Another situation that could develop as we roll through calendar 2024. As mortgage rates come down, I expect that there may be more prepayments and payoffs. If you think about some of the mortgages that, not just us, but the industry put on the books in calendar 2023. Some of those mortgages are probably now in the money with respect to refinance activity. So as we think about balance sheet, our preference first is to populate loan growth to the extent that we accumulate more than too much cash on the balance sheet. There are other things we could do perhaps paying down brokered CDs, wholesale advisor borrowings or even, I suppose, look to investment securities to take care of that excess cash. But that's not something we see in our immediate future.

Right. Okay. And you kind of led into my sent question, which was look at demand for mortgages or even the payouts, as you mentioned, how much do rates need to come down to really start to ignite that activity?

Well, I think totally, we're starting to hear that activity has increased certainly from where we were in the December quarter. Now part of that could be entering a new fiscal year, the holiday calendar year, the holidays are over. And just generally, activity picks up in the March quarter historically. But I think as well, interest rates have come down 70, 80 basis points maybe from where they kind of peaked out before the Fed's comments in middle of December, and they started reversing. So I think activity has already picked up. But certainly, if we see it's begin to move down with their first rate movement, even though the market is kind of already forecasting that, I think that wakes up the consumer a little bit more than where they're currently at and perhaps that denotes more refi activity and then ultimately, more loan activity.

Okay great those are my questions. Thank you very much.

Thanks for your questions, Tim.

[Operator Instructions]. I am not seeing any other questions. So Mr. Ternes, I'll turn it back over to you for any closing remarks.

Well, thank you very much, Aaron. I appreciate the help on the call, and thank you to the participants, and I look forward to speaking with you all next quarter. Thank you.

Thank you. And ladies and gentlemen, that does conclude today's call. Thank you all for joining. You may now disconnect. Have a great day.