Provident Financial Hldgs 2027 Q1 Earnings Call

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, 2026, and from 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 first quarter of fiscal 2027 results. In the most recent quarter, we achieved modest loan growth of approximately $4 million, primarily in our portfolio of single-family loans.

We originated $45.4 million of loans held for investment, a slight decrease from the $46.4 million originated in the prior sequential quarter. Loan principal payments and payoffs declined to $40.8 million, a decrease of 6% from the $43.5 million in the June 2026 quarter. Loan prepayment activity declined in the current interest rate environment as refinancing opportunities are less favorable. 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 December 2026 quarter will remain within the range of recent quarters, which has been between $29 million and $46 million. We would also expect to see continued moderation in loan prepayment activity. Our credit quality remains strong.

You will note that non-performing assets were just $504,000, or 4 basis points of total assets at September 30, 2026, essentially unchanged from $505,000 at June 30, 2026. Additionally, there were no loans in the early stages of delinquency at September 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 only three CRE loans that total $424,000 maturing in the remainder of fiscal 2027.

We recorded a $777,000 provision for credit losses in the September 2026 quarter. The provision recorded in the first quarter of fiscal 2027 was primarily attributable to an increase in the expected life of the loan portfolio resulting from higher market interest rates, which reduces the incentive for borrowers to prepay. The allowance for credit losses to gross loans held for investment was 64 basis points at September 30, 2026, an increase of 7 basis points from 57 basis points at June 30, 2026. Compared to the sequential quarter ended June 30, 2026, our net interest margin increased 11 basis points to 3.32% for the quarter ended September 30, 2026, comprised of a 20 basis point increase in asset yields, partially offset by a 9 basis points increase in funding costs.

For the quarter ended September 30, 2026, our average cost of deposits increased 11 basis points to 1.47%, while our cost of borrowings decreased 3 basis points to 4.01%. The September 2026 quarter net interest margin was augmented by approximately 10 basis points as the result of a Federal Home Loan Bank special cash dividend. The net deferred loan cost amortization associated with loan payoffs in the September 2026 quarter compared to the average of the previous five quarters positively impacted the net interest margin by 1 basis point compared to a positive impact of 3 basis points in the June 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 September 2026 quarter was 6.19%, compared to the weighted average rate of 5.43% for loans held for investment as of September 30, 2026. In the December 2026 quarter, our adjustable rate loans are repricing at interest rates that are higher than their current interest rates. We have approximately $116 million of loans repricing to an interest rate that we anticipate will be approximately 65 basis points higher to a weighted average interest rate of 7.21% from the current interest rate of 6.56%. I would note that the opportunity to reprice maturing wholesale funding downward is largely behind us. We have approximately $104.9 million of Federal Home Loan Bank advances, brokered certificates of deposit, and government certificates of deposit maturing in the December 2026 quarter at a weighted average interest rate of 3.94%.

Given the current interest rate environment, we expect to reprice these maturities somewhat higher. All of this suggests that any net interest margin expansion, adjusted for the Federal Home Loan Bank special cash dividend in the September 2026 quarter, will be something less than recent prior quarters. Our FTE count at September 30, 2026 was 160, compared to 164 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 September 2026 quarter, a slight decline from $7.7 million in the June 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 September 2026 quarter, we made progress on the execution of this strategy, maintaining our loan origination volume while benefiting from a more moderate level of loan prepayments. We exceed well-capitalized capital ratios by a significant margin, providing flexibility to execute on our business plan and capital management goals. 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. To that end, we approved a new 5% stock buyback plan on October 22, 2026. During the September 2026 quarter, we repurchased approximately 86,000 shares at a total cost of $1.6 million. Combined with approximately $880,000 of cash dividends paid to our shareholders, total capital returned to shareholders represented approximately 158% of the September quarter's net income.

We encourage everyone to review our September 30 investor presentation that has been posted to 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.