PROV

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Provident Financial Holdings third quarter of fiscal twenty twenty-six earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star and one. I would now like to turn the call over to Donavon Ternes. You may begin.

Thank you, Kayla. Good morning. This is Donavon Ternes, President and CEO of Provident Financial Holdings. On the call with me is Peter Fan, 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 interest rates, 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-K for the year ended June 30, 2025, and from the Form 10-Q 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. 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 that we distributed yesterday, which describes our Q3 fiscal 2026 results. In the most recent quarter, lower mortgage rates that prevailed for most of the quarter supported higher loan originations, but also led to higher loan prepayments.

We originated $44.2 million of loans held for investment, a 5% increase from the $42.1 million that were originated in the prior sequential quarter. We also had $52.1 million of loan principal payments and payoffs, which is an increase of 12% from the $46.7 million in the December 2025 quarter. We are continuing to make prudent adjustments to our underwriting requirements within certain loan segments to promote disciplined, sustainable growth in origination volume. Due to the current market turbulence and recent rise in interest rates, we have seen our loan pipelines, which were rising, stabilize, suggesting our loan origination volume in the June 2026 quarter may be in the mid to upper range of recent quarters, which has been between $28 million and $44 million.

We would also expect to see some moderation in prepayment volume. For the three months ended March 31st, 2026, loans held for investment decreased by approximately $8 million, primarily in our portfolio of single-family loans. Current credit quality continues to hold up very well, and you will note that non-performing assets were just $978,000, or eight basis points of total assets at March 31st, 2026, unchanged from December 31st, 2025. Additionally, there were no loans in the early stages of delinquency at March 31st, 2026, indicating no emerging credit issues. We continue to monitor closely commercial real estate loans, particularly loans secured by office buildings. We believe that based on the 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 $36.1 million or 3.5% of loans held for investment. You should also note that we have just five CRE loans that total $1.9 million maturing in the remainder of calendar 2026. We recorded a $326,000 provision for credit losses in the March 2026 quarter. The provision recorded in the Q3 of fiscal 2026 was primarily attributable to an increase in the expected life of the loan portfolio due to higher mortgage interest rates at the end of the quarter compared to the prior quarter end.

The allowance for credit losses to gross loans held for investment was 58 basis points at March 31st, 2026. An increase from 55 basis points at December 31st, 2025. Compared to the sequential quarter ended December 31st, 2025, our net interest margin increased 10 basis points to 3.13% for the quarter ended March 31st, 2026, the result of a special cash dividend from the Federal Home Loan Bank, which contributed nine basis points to our yield on interest-earning assets and a seven basis points decrease in the total cost of interest-bearing liabilities, offset by an 11 basis point decrease in our loan yield. For the quarter ended March 31st, 2026, our cost of borrowings decreased 28 basis points to 4.11%, while our average cost of deposits increased one basis point to 1.33%.

The net deferred loan cost amortization associated with loan payoffs in the March 2026 quarter compared to the average of the previous five quarters negatively impacted the net interest margin by approximately seven basis points, in contrast to five basis points in the December 2025 quarter. New loan production is being originated at higher mortgage interest rates than the weighted average rate of the existing loan portfolio. The weighted average rate of loans originated in the March 2026 quarter was 6.12% compared to the weighted average rate of 5.20% for loans held for investment at March 31st, 2026. In the June 2026 quarter, our adjustable rate loans are repricing at interest rates that are higher than their current interest rates.

We have approximately $135 million of loans repricing in the June 2026 quarter to an interest rate that we estimate will be 72 basis points higher to a weighted average interest rate of 6.86% from the current interest rate of 6.14%. In the September 2026 quarter, we have approximately $122 million of loans repricing to an interest rate that we estimate will be 51 basis points higher to a weighted average interest rate of 6.67% from 6.16%. Many of these loans are already in the adjustable phase of the loan term with rate resets every six months.

I would also point out that there is an opportunity to reprice maturing wholesale funding downward as a result of current market conditions where interest rates have moved lower across all terms. Excluding overnight borrowings, we have approximately $84.5 million of Federal Home Loan Bank advances, brokered certificates of deposits, and government certificates of deposits maturing in the June 2026 quarter at a weighted average interest rate of 4.13%. Additionally, we have approximately $81.7 million of Federal Home Loan Bank advances, brokered certificates of deposits, and government certificates of deposits maturing in the September 2026 quarter at a weighted average interest rate of 4.05%. Given the current interest rate outlook, we would expect to reprice these maturities to a lower weighted average cost of funds.

All of this currently suggests that there continues to be an opportunity for net interest margin expansion in the June 2026 quarter. Our FTE count at March 31st, 2026 was 160, compared to 163 one year ago. We continue to look for operating efficiencies throughout the company to lower operating expenses. Operating expenses were $7.6 million in the March 2026 quarter, a decrease from $7.9 million in the December 2025 quarter. Operating expenses for the December 2025 quarter included a $214,000 pre-litigation voluntary mediation settlement expense related to an employment matter. For the June 2026 quarter, we expect operating expenses of approximately $7.5 million-$7.7 million. Our short-term strategy focus on disciplined balance sheet growth by expanding our loan portfolio.

We believe this approach is well-suited to the stable economic environment and the ongoing normalization of the yield curve. During the March 2026 quarter, we were partly successful in the execution of this strategy with higher loan origination volume, but higher prepayments more than offset that growth. As a result, the overall composition of our interest-earning assets and interest-bearing liabilities were similar to the prior quarter. We exceed well-capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications. 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. During the March 2026 quarter, our board of directors authorized a new stock repurchase program for up to 5% of the company's outstanding common stock.

We repurchased approximately 92,000 shares at a total cost of $1.5 million. Together with approximately $892,000 of cash dividends paid to our shareholders, our capital management activities represent a distribution of approximately 175% of the March quarter's net income. We encourage everyone to review our March 31st investor presentation that has been posted on our website. You will find that we included slides regarding financial metrics, asset quality, and capital management, which we believe will provide additional insight on our solid financial foundation supporting the future growth of the company. Kayla, we will now entertain any questions that may come about as a result of this call.

Your first question comes from the line of Tim Coffey with Brean Capital. Your line is open.

Thank you. Morning, Donavon.

Morning.

Question about the prepayment trends that you're seeing. Obviously kind of accelerated the last several quarters. Is this due to competition or is there something else driving that?

Well, I think there are a few things driving it. The predominant theme I would suggest are lower mortgage interest rates overall, in contrast to where they were perhaps a year ago. I think that explains a great deal of elevated prepayment activity. Additionally, we do have some loans that are repricing for their first time out of their fixed rate period. In those cases, the interest rate can rise somewhat dramatically for those borrowers, which I believe triggers the interest of borrowers to go out and look for another refinance loan to potentially lower the interest rate that they would experience in the event the loan were to reprice in our portfolio. Competition of course, is very high. That's largely because everybody is looking for assets. We see pricing competition across the board.

We see competitive pressure with respect to underwriting characteristics. I think a combination of those three things is really driving prepayment volume. What I would also suggest, as I described in my prepared remarks, we have seen interest rates rise at the end of the Q3 or at the end of the March quarter, I should say. In fact, those rates have remained relatively steady through April. They've come down a little bit from where they ended at March thirty-first, but they've held kind of at the upper bound of that range. I would expect prepayments to come down a bit as well, as a result of the rise in interest rates recently.

Okay. Sticking with the mortgage rates and interest rates in general. If the forward curve plays out, the forward, I mean, path for Fed funds rate plays out as no cuts this year, how does that impact your origination activity?

Well, I think we can expect our activity to replicate what we've been able to do. When I look at the first nine months of this year, our origination volume is up 24% in contrast to the origination volume of the first nine months of last year. That largely represents an increase in multifamily and CRE. Multifamily and CRE volume increased by 97% in comparison to the first nine months of last year. Single family volume was up 6% in comparison to last year. Really, that was the result of us becoming more aggressive as a result of what the yield curve did.

We are seeing normalization in the yield curve where we are no longer being penalized for originating loans in the belly of the curve while funding ourselves at the short end of the curve and essentially having a negative spread in that yield curve. Right now, there's a positive spread in that yield curve. It is beneficial to us to become more aggressive and originate more loans against that yield curve today in contrast to where we were a year ago.

Okay, great. If I can transition to margin. Given that backdrop, I think coming into the quarter, I would've, you know, I think it might have been reasonable to think that margin might expand at, you know, two to three basis points a quarter. With the yield curve the way it is right now, is that still a reasonable estimate?

Well, we saw a nice expansion in the March quarter, but a large part of that was the Federal Home Loan Bank special cash dividend. The way I would think about it is to back out that special cash dividend, to see what kind of a normalized margin looked like with respect to the March quarter, and then do a look-back comparison. I think you will see that the margin expanded about two or three basis points in the March quarter. What is more important as I look out into the June quarter in comparison to March, in the March quarter, we began the quarter expecting that the repricing of our loan portfolio for those loans that were repricing, were actually going to contract.

Indeed, they did contract, but they only contracted by one basis point in contrast to what we had forecast at the beginning of the quarter. That was because of what the yield curve did during the quarter, which elevated that repricing of those loans in contrast where we started the quarter. We see that now when we're forecasting out our June quarter repricing. I described that in the June quarter, we have $135 million of loans repricing, which we currently estimate upwards of 72 basis points. While at the same time, we have $85 million approximately of wholesale funding that we would expect to reprice downward.

I think those characteristics are better than they were to begin our March quarter, to begin our June quarter, and therefore I think net interest margin expansion could be a little bit better in the June quarter than the normalized activity in March if we were to back out the FHLB special cash dividend and what we saw in the December and September quarter.

Okay, great. That's super helpful. Thank you. Just kind of understanding the provision expense in the quarter. Obviously, you know, it's a function of rates. Is it also a function of the size of the loan portfolio and not necessarily the increase in origination activity?

It is the result of the size as well as the deterioration or improvement in the portfolio. All three of those conditions exist with respect to estimating our allowance. Although the most important factor has been probably the last couple of years, what mortgage interest rates have done and then what that means relative to our estimates of prepayment volume. As prepayment volume goes up, our estimated life goes down, so the ACL can come down. As mortgage interest rates go up, the estimated life goes up. What we saw this quarter with mortgage rates rising from December 31st to March 31st, we had a provision because our estimated life of the portfolio went up.

A very smaller or minor component relative to that provision is related to what the quality of the portfolio looks like from a credit risk standpoint, and then similarly, whether or not the portfolio expanded or declined.

Okay. All right. Great. Those are my questions. Thank you very much.

Again, if you'd like to ask a question, please press star then the number one on your telephone keypad. We'll pause for a moment to see if any additional questions enter the queue. There are no further questions at this time. Mr. Donavon Ternes, I'll turn the call back over to you.

Thank you very much, Kayla. I wish to thank everybody for attending the call. We are available always as well in the event there are further questions with respect to our earnings release. Have a good week, everyone. Thank you.

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

Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I'd like to welcome you to the Provident Financial Holdings' Second Quarter of Fiscal 2026 Earnings Call. [Operator Instructions] I will now turn the call over to Donavon Ternes, President and CEO. You may begin.

Thank you, Colby. Good morning. This is Donavon Ternes, President and CEO of Provident Financial Holdings. And on the call with me is Peter Fan, 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 interest rates, 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-K for the year ended June 30, 2025, 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 that we distributed yesterday, which describes our second quarter fiscal 2026 results. In the most recent quarter, we originated $42.1 million of loans held for investment, a 42% increase from the $29.6 million that were originated in the prior sequential quarter. During the most recent quarter, we also had $46.7 million of loan principal payments and payoffs, which is an increase of 35% from the $34.5 million in the September 2025 quarter. Lower mortgage rates have driven stronger loan origination activity but also has led to higher prepayment activity. We are continuing to make prudent adjustments to our underwriting requirements within certain loan segments to promote disciplined, sustainable growth in origination volume. Our loan pipelines are moderately higher than last quarter, suggesting our loan origination volume in the March 2026 quarter will be within the range of recent quarters which has been between $28 million and $42 million. For the 3 months ended December 31, 2025, loans held for investment decreased by approximately $4.1 million with a decline in multifamily, commercial business and commercial real estate loans, partly offset by an increase in single-family and construction loans. Current credit quality continues to hold up very well. And you will note that nonperforming assets were just $990,000 or 8 basis points of total assets at December 31, 2025, a decrease from $1.9 million at September 30, 2025. Additionally, there were no loans in the early stages of delinquency at December 31, 2025, indicating an absence of emerging credit issues. We continue to monitor commercial real estate loans, particularly loans secured by office buildings, but are confident that based on the 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 $36.7 million or 3.5% of loans held for investment. You should also note that we have just six CRE loans, that total $2.8 million, maturing in the remainder of fiscal 2026. We recorded a $158,000 recovery of credit losses in the December 2025 quarter. The recovery recorded in the second quarter of fiscal 2026 was primarily attributable to a decline in the expected life of the loan portfolio due to lower mortgage interest rates. The allowance for credit losses to gross loans held for investment was 55 basis points at December 31, 2025, a slight decrease from 56 basis points at September 30, 2025. Our net interest margin increased 3 basis points to 3.03% for the quarter ended December 31, 2025, compared to the 3% for the sequential quarter ended September 30, 2025, the net result of a 5 basis point decrease in the cost of total interest-bearing liabilities net of a 2 basis point decrease in the yield of total interest-earning assets. Our average cost of deposits decreased to 1.32%, down 2 basis points for the quarter ended December 31, 2025, while our cost of borrowing decreased 20 basis points to 4.39% in December 2025 quarter compared to the September 2025 quarter. The net deferred loan cost amortization associated with loan payoffs in the December 2025 quarter compared to the average of the previous 5 quarters negatively impacted the net interest margin by approximately 5 basis points in contrast to no impact in the September 2025 quarter. New loan production is being originated at higher mortgage interest rates than the weighted average rate of the existing loan portfolio. The weighted average rate of loans originated in the December 2025 quarter was 6.15% compared to the weighted average rate of 5.22% for loans held for investment as of December 31, 2025. In the March 2026 quarter, our adjustable rate loans are repricing at interest rates that are slightly lower than their current interest rates. We have approximately $112.2 million of loans repricing in the March 2026 quarter to an interest rate that we currently believe will be 14 basis points lower to a weighted average interest rate of 6.85% from the current interest rate of 6.99%. However, in the June 2026 quarter, we have approximately $125.2 million of loans repricing to an interest rate that we currently believe will be 38 basis points higher to a weighted average interest rate of 6.49% from 6.11%. Many of these loans are already in their adjustable phase of the loan term with rate resets every 6 months. I would also point out that there is an opportunity to reprice maturing wholesale funding downward as a result of current market conditions, where interest rates have moved lower across all terms. Excluding overnight borrowings, we have approximately $109 million of Federal Home Loan Bank advances, brokered certificates of deposit and government certificate of deposit maturing in the March 2026 quarter at a weighted average interest rate of 4.12%. Additionally, we have approximately $79.5 million of Federal Home Loan Bank advances, brokered certificates of deposit and government certificates of deposit maturing in the June 2026 quarter at a weighted average interest rate of 4.15%. Given the current interest rate outlook, we would expect to reprice these maturities to a lower weighted average cost of funds. All of this currently suggests that there continues to be an opportunity for net interest margin expansion in the March 2026 quarter. Our FTE count at December 31, 2025, was 163 compared to 162 1 year ago. We continue to look for operating efficiencies throughout the company to lower operating expenses. Operating expenses were $7.9 million in the December 2025 quarter, an increase from $7.6 million in the September 2025 quarter. Operating expenses for the December 2025 quarter included a $214,000 pre-litigation voluntary mediation settlement expense related to an employment matter. For the remainder of fiscal 2026, we expect a run rate of approximately $7.6 million to $7.7 million per quarter. Our short-term strategy focuses on disciplined balance sheet growth by expanding our loan portfolio. We believe this approach is well suited to the stable economic environment and the ongoing normalization of the yield curve. During the December 2025 quarter, we were partly successful in the execution of this strategy with higher loan origination volume, but higher loan prepayments more than offset that growth. As a result, the overall composition of our interest-earning assets and interest-bearing liabilities were essentially consistent with the prior quarter. We exceed well-capitalized capital ratios by a significant margin, allowing us to execute on our business plan and capital management goals without complications. We continue -- 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 $96,000 of common stock in the December 2025 quarter. For the second quarter of our fiscal year, we distributed $906,000 of cash dividends to shareholders and repurchased approximately $1.5 million worth of common stock. Accordingly, our capital management activities represent a 170% distribution of the December 2025 quarter's net income. We encourage everyone to review our December 31 investor presentation that has been posted on our website. You will find that we included slides regarding financial metrics, asset quality and capital management, which we believe will provide additional insight on our solid financial foundation supporting the future growth of the company. Colby, we will now entertain any questions that others may have regarding our financial results.

[Operator Instructions] Your first question comes from the line of Timothy Coffey with Janney.

Given the puts and takes that you just described on the loan portfolio, what is the probability that your portfolio is flat with -- the next 4 quarters?

Well, it's kind of a loaded question that I could answer if I knew what loan payoffs looked like for the next few quarters. What we've been focusing on is increasing our origination volume each and every quarter. We've been able to do so essentially for the last 5 quarters or so. We have pipelines that are built that suggest the March 2026 quarter will also be a higher origination-volume quarter, but it's very difficult to discern what loan payoffs look like, which will ultimately then drive what the loan balances look like at the end of the quarter and whether or not we grew those balances or essentially were somewhat flat.

Do you see the loans repricing in the June quarter as a potential headwind to loan growth?

Not necessarily, Tim. When we think about where those loans are repricing, and we compare to current market conditions with respect to new loan production, it looks like they're a bit higher than new loan production, but they're not substantially higher from where new loan production is coming in. So that could have an impact, there could be implications with respect to that. But ultimately, if they are not repricing substantially higher than current market conditions, I would not expect that driver alone to be the driver of accelerated loan payoffs. The other thing to think about, Tim, with respect to accelerated loan payoffs, it's kind of a double-edged sword. On the one hand, we obviously have trouble growing the loan portfolio to a large degree if those payoffs are higher or those payoff volumes are higher. But secondarily, those payoffs generally carry net deferred loan costs that get accelerated in as a debit or a decline to net interest income over the quarter. And the most recent quarter, those payoffs essentially impacted our net interest margin by a negative 5 basis points, in contrast to no implications or no impact in the September quarter, if we look at those net deferred loan costs on average for the prior 5 quarters. So the implications of loan payoffs are twofold, difficulty in growing loan portfolio and secondarily, there are implications to our net interest margin.

Right. Okay. And then the government -- federal government has recently discussed -- [ floated ] ideas on how to make housing more affordable. If some of those plans come through, would that be a net positive for your business?

Well, I think ultimately, if you look at -- particularly in California, where we lend, if you look at housing stock or available inventory, you find that there is much more demand than available inventory over time. And I think that has exhausted many would-be purchasers particularly as it relates to affordability. And what that housing stock pricing has done, even though pricing has slowed, it is still advancing a bit in the state of California, not at the rate that it was advancing, nonetheless, it's still advancing. Interest rates are a bit favorable with respect to affordability. As those rates come down, affordability goes up. But ultimately, in the state of California, available housing is far outstripped by demand. And so anything that is done, I guess, by local, state or federal governments that would expand available housing, lowering new construction costs and the like would be helpful. And that would ultimately drive more buyers, I believe.

[Operator Instructions] And with no further questions in queue, I'd like to turn the conference back over to Donavon for closing remarks.

Thank you, Colby, and thank you, everyone, for attending our second quarter earnings call, and I look forward to the next call for -- with our third quarter earnings. Have a good day.

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