Provident Financial Holdings, Inc.

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 Providence Financial Holdings third quarter of fiscal 2026 earnings call. All lines 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 1. I would now like to turn the call over to Donovan Turnis. You may begin.

Thank you, Kayla. Good morning. This is Donovan Turnis, 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 and 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 discipline, sustainable growth, and 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 and $44 million. We would also expect to see some moderation in prepayment volume. For the three 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 non-performing assets were just $978,000, or eight 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 and 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 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 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 31, 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 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 in of federal home loan bank advances, brokered certificates of deposits, and government certificates of deposits, the Turing in the June 2026 quarter had 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 notorieties 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 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 to $7.7 million. Our short-term strategy focus on discipline 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 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.

At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Tim Coffey with Brand Capital. Your line is open.