Provident Financial Holdings, Inc.

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 Providence Financial Holdings second quarter of fiscal 2026 earnings call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star then the number one on your telephone keypad to raise your hand and enter the queue. If you'd like to withdraw your question at any time, Simply press star 1 again. I will now turn the call over to Donovan Ternes, President and CEO. You may begin.

Thank you, Colby. Good morning. This is Donovan Ternes, President and CEO of Provident Financial Holdings, and on the call with me is Peter Phan, 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 and $42 million. For the three months ended December 31st, 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 non-performing assets were just $990,000, or eight 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 emergent 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 three 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 five basis point decrease in the cost of total interest bearing liabilities net of a two basis point decrease in the yield of total interest earning assets. Our average cost of deposits decreased to 1.32%, down two basis points for the quarter ended December 31st, 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 costs amortization associated with loan payoffs in the December 2025 quarter compared to the average of the previous five quarters negatively impacted the net interest margin by approximately five 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 31st, 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 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 $109 million of federal home loan bank advances, brokered certificates of deposit, and government certificates 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 31st, 2025 was 163 compared to 162 one 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% 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 volumes 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 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 quarters net income. We encourage everyone to review our December 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. Colby, we will now entertain any questions that others may have regarding our financial results.

Thank you. We will now begin the question and answer session. If you would like to ask a question, Again, please press star then the number one on your telephone keypad to raise your hand and enter the queue. If you'd like to withdraw your question at any time, simply press star one again. We'll pause just for a moment to compile the roster. Your first question comes from the line of Timothy Coffey with Janie. Your line is open.