Provident Financial Hldgs Q4 2026 Earnings Call

Hello, and thank you for standing by. My name is Lacey and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Holdings Fourth Quarter and Fiscal 2026 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 would like to ask a question during this time, simply press star followed by 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Donavon Ternes. Please go ahead. Thank you, Lacey.

Good morning. This is Donavon Ternes, President and CEO, 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 description 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. 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. 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 Fourth Quarter and Fiscal 2026 results. In the most recent quarter, loan originations increased while loan prepayments declined, resulting in modest loan growth of approximately $3 million, primarily in our portfolio of single-family loans. We originated $46.4 million of loans held for investment, a 5% increase from the $44.2 million originated in the prior sequential quarter. Loan principal payments and payoffs declined to $43.5 million, a decrease of 16% from the $52.1 million in the March 2026 quarter. We have seen loan prepayment activity decline in the current interest rate environment as refinancing opportunities are less attractive. We continue to make adjustments to our underwriting requirements within certain loan segments to support disciplined, sustainable growth in origination volume. Despite the volatility in the market, our loan pipeline has remained stable, suggesting our loan origination volume in the September 2026 quarter will remain at the upper end of the range of recent quarters, which has been between $29 million-$46 million. We would also expect to see continued moderation in prepayment activity. Our credit quality remains strong.

We originated $46.4 million of loans held for investment, a 5% increase from the $44.2 million originated in the prior sequential quarter. Loan principal payments and payoffs declined to $43.5 million, a decrease of 16% from the $52.1 million in the March 2026 quarter. We have seen loan prepayment activity decline in the current interest rate environment as refinancing opportunities are less attractive. We continue to make adjustments to our underwriting requirements within certain loan segments to support disciplined, sustainable growth in origination volume. Despite the volatility in the market, our loan pipeline has remained stable, suggesting our loan origination volume in the September 2026 quarter will remain at the upper end of the range of recent quarters, which has been between $29 and $46 million. We would also expect to see continued moderation in prepayment activity. Our credit quality remains strong.

You will note that non-performing assets were just $505,000, or four basis points of total assets at June 30, 2026, a decrease from $978,000 at March 31st, 2026. Additionally, there were no loans in the early stages of delinquency at June 30, 2026, indicating no emerging credit issues. We continue to closely monitor commercial real estate loans, particularly loans secured by office buildings, we believe, based on our borrower profiles and collateral characteristics, that these loans will continue to perform in accordance with their terms. 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 limited to $33.3 million or 3.2% of loans held for investment. You should also note that we have just four CRE loans that total $818,000 maturing in fiscal 2027.

We recorded a $95,000 recovery of credit losses in the June 2026 quarter. The recovery recorded in the fourth quarter of fiscal 2026 was primarily attributable to a decrease in the expected life of the loan portfolio, resulting from loans repricing higher during the quarter, resulting in a larger incentive for the borrower to prepay. The allowance for credit losses to gross loans held for investment was 57 basis points at June 30, 2026, a slight decrease from 58 basis points at March 31st, 2026. Compared to the sequential quarter ended March 31st, 2026, our net interest margin increased eight basis points to 3.21% for the quarter ended June 30, 2026, comprised of a seven basis point increase to the yield on interest-earning assets and a four basis points decrease in the cost of total interest-bearing liabilities.

For the quarter ended June 30, 2026, our cost of borrowings decreased seven basis points to 4.04%, while our average cost of deposits increased three basis points to 1.36%. The net deferred loan cost amortization associated with loan payoffs in the June 2026 quarter compared to the average of the previous five quarters positively impacted the net interest margin by approximately three basis points, in contrast to a negative impact of seven basis points in the March 2026 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 June 2026 quarter was 6.03%, compared to the weighted average rate of 5.31% for loans held for investment as of June 30, 2026.

In the September 2026 quarter, our adjustable rate loans are repricing at interest rates that are higher than their current interest rates. We have approximately $133 million of loans repricing in the September 2026 quarter to an interest rate that we forecast will be 79 basis points higher to a weighted average interest rate of 7.10% from the current interest rate of 6.31%. I would note that the opportunity to reprice maturing wholesale funding downward is largely behind us in the current interest rate environment. We have approximately $81.7 million of Federal Home Loan Bank advances, brokered certificates of deposits, and government certificates of deposit maturing in the September 2026 quarter at a weighted average interest rate of 4.05%. Given the current interest rate environment, we expect to reprice these maturities at comparable cost of funds, perhaps somewhat higher.

All of this suggests that any net interest margin expansion in the September 2026 quarter will likely be driven by higher loan yields. Our FTE count at June 30, 2026 was 158 compared to 163 one year ago. We continue to look for operating efficiencies throughout the company to lower operating expenses. Operating expenses were $7.7 million in the June 2026 quarter, a slight increase from $7.6 million in the March 2026 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 current economic environment and the normalized yield curve. During the June 2026 quarter, we were somewhat successful in the execution of this strategy with higher loan origination volume and more moderate level of loan prepayments. As a result, the composition of our interest-earning assets and interest-bearing liabilities remain consistent with the prior quarter.

We exceed well-capitalized capital ratios by a significant margin, providing flexibility 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 and effective capital management tool. During the June 2026 quarter, we repurchased approximately 90,000 shares at a total cost of $1.5 billion, combined with approximately $874,000 of cash dividends paid to our shareholders. Total capital return to shareholders represented approximately 110% of the June quarter's net income. We encourage everyone to review our June 30th 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.

We will now entertain any questions that you may have regarding our financial results. Lacey? Again, I would like to remind everyone, if you would like to ask a question, please press star one on your telephone keypad.

Your first question comes from the line of Matthew Clark with Piper Sandler. You may go ahead. Hey, good morning, everyone.

This is Nicholas Branton on for Matthew. Thanks for taking my questions today.

Of course. Thanks. Maybe just starting on deposit costs.

Can you kind of just provide some more color on the trends you see and kind of where you see the total cost of deposits heading over the next couple quarters?

Well, I think the trend is pretty much what you've heard from peers. It is a very competitive deposit landscape. As a result of that competitive pressure, there are many institutions that are offering specials with respect to their money market accounts, with respect to their certificates of deposit. That, coupled with a pause by the Fed with respect to lowering of interest rates, suggests that deposit costs have probably reached their low this cycle unless the Fed were to reverse course. As a result of that, we would expect deposit costs, and perhaps other wholesale funding, to stabilize or slightly increase from these levels. As that works through our balance sheet and our liabilities, we would expect our deposit costs and perhaps our wholesale funding to go up a bit. Although, to forecast that specifically is pretty difficult.

As I described, we have, I think it was $81.7 million of wholesale funding that is coming up for repricing in the September quarter. The weighted average cost of that wholesale funding coming up for repricing is 4.05%, and we don't see an ability to meaningfully reprice that wholesale funding at lower rates. In fact, it will probably reprice up by a bit given the current economic environment.

Got it. That's helpful. Maybe switching to loan yields. Saw a nice uptick there this quarter. Can you similarly walk through the main drivers there for the quarter and let us know where you see the yields trending over the next couple of quarters as well?

Sure. As we described in the prepared remarks, we have approximately $133 million of loans repricing in the September 2026 quarter. Many of those loans are repricing for the first time, which suggests that they were probably originated in the September 2021 quarter, since many of our loans are five-one hybrids. Because they were originated perhaps five years ago, they were originated at much lower yields. We describe that our expectation for that $133 million is going to reprice upward by approximately 79 basis points to 7.10% in the September quarter. Additionally, any new loan production coming on is coming on at higher interest rates than the existing portfolio weighted average interest rate. We would expect loan yields to continue to rise in the September quarter, essentially becoming a tailwind to net interest margin.

The one caveat with respect to that can swing loan yields dramatically from one period to the next, is what the payoff activity looks like and what that may mean for the accelerated net deferred loan cost amortization. That can best be illustrated, I suppose, by comparing the March 2026 quarter, when we had approximately $650,000 of accelerated net deferred loan cost amortization, in contrast to approximately $400,000 in the June quarter. That difference was probably about a 10 basis point swing in our loan yields just by virtue of that activity.

We think it is a favorable tailwind with respect to loan yields, and we think overall, as a result of that, we still have some wind at our back with respect to what we believe net interest margin may do in the coming quarter, but probably at a slower pace than what we've realized over the past few quarters.

Great. That's everything for me.