Provident Financial Holdings, Inc. ($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 2026 Earnings Call. [Operator Instructions] 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. 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 third quarter 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 range of the -- or 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 3 months ended March 31, 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 nonperforming assets were just $978,000 or 8 basis points of total assets at March 31, 2026, unchanged from December 31, 2025. Additionally, there were no loans in the early stages of delinquency at March 31, 2026, indicating no emerging credit issues. We continue to monitor closely commercial real estate loans, particularly loans secured by office buildings, but 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 5 CRE loans that totaled $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 third quarter 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 31, 2026, an increase from 55 basis points at December 31, 2025. Compared to the sequential quarter ended December 31, 2025, our net interest margin increased 10 basis points to 3.13% for the quarter ended March 31, 2026, the result of a special cash dividend from the Federal Home Loan Bank, which contributed 9 basis points to our yield on interest-earning assets and a 7 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 31, 2026, our cost of borrowings decreased 28 basis points to 4.11%, while our average cost of deposits increased 1 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 5 quarters negatively impacted the net interest margin by approximately 7 basis points in contrast to 5 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 31, 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 6 months. I would also point out that there is an opportunity to reprice the touring 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 31, 2026, was 160 compared to 163 1 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 to $7.7 million. Our short-term strategy focused 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 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. Kayla, we will now entertain any questions that may come about as a result of this call.

[Operator Instructions] Your first question comes from the line of Tim Coffey with Brean Capital.

Question about the prepayment trends that you're seeing, obviously kind of accelerated over 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. And so I think that explains a great deal of elevated repayment activity. Additionally, we do have some loans that are repricing for their first time out of their fixed rate period. And 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, and 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. And so I think a combination of those 3 things is really driving prepayment volume. Now what I would also suggest, as I described in my prepared remarks, we have seen interest rates rise at the end of the third quarter or at the end of the March quarter I should say. And in fact, those rates have remained relatively steady through April. They've come down a little bit from where they ended at March 31, but they've held kind of at the upper bound of that range. And so I would expect prepayments to come down a bit as well as a result of the rise in interest rates recently.

Okay. And then sticking with the mortgage rates and interest rates in general. If we don't -- if the forward curve plays out, the forward 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 9 months of this year, our origination volume is up 24% in contrast to the origination volume of the first 9 months of last year. And that largely represents an increase in multifamily and CRE. Multifamily and CRE volume increased by 97% in comparison to the first 9 months of last year and single-family volume was up 6% in comparison to last year. And 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. And then if I can transition to margin. Given that backdrop, I think coming into the quarter, I would -- I think it might have been reasonable to think that margin might expand 2 to 3 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. So 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. And I think you will see that the margin expanded about 2 or 3 basis points in the March quarter. I think 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 was -- for those loans that were repricing were actually going to contract. And indeed, they did contract, but they only contracted by 1 basis point in contrast to what we had forecast at the beginning of the quarter. And 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. And 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. And then just kind of understanding the provision expense in the quarter. Obviously, it's a function of rates. But 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 3 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. And 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 and what we saw this quarter with mortgage rates rising from December 31 to March 31, 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.

[Operator Instructions] And 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. Thanks everybody for attending the call, and 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.