Provident Financial Holdings, Inc. (PROV) Q4 2026 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Provident Financial Holdings Fourth Quarter and Fiscal 2026 Earnings Call. Thank you. I'd 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 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 fourth quarter and fiscal 2026 results. In the most recent quarter, loan originations increased while loan prepayments declined, resulting in a 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 and 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 and $46 million. We would also expect to see continued moderation in prepayment activity. Our credit quality remains strong. You will note that nonperforming assets were just $505,000 or 4 basis points of total assets at June 30, 2026, a decrease from $978,000 at March 31, 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, but 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 4 CRE loans that totaled $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 31, 2026. Compared to the sequential quarter ended March 31, 2026, our net interest margin increased 8 basis points to 3.21% for the quarter ended June 30, 2026, comprised of a 7 basis point increase to the yield on interest-earning assets and a 4 basis point decrease in the cost of total interest-bearing liabilities. For the quarter ended June 30, 2026, our cost of borrowings decreased 7 basis points to 4.04%, while our average cost of deposits increased 3 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 5 quarters positively impacted the net interest margin by approximately 3 basis points in contrast to a negative impact of 7 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 1 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 originated -- 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 (sic) [ $1.5 million ], 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 30 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?

Your first question comes from the line of Matthew Clark with Piper Sandler.

This is Nick Branton on for Matthew. 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 of quarters?

Well, I think the trend is pretty much what you've heard from peers. It is a very competitive deposit landscape. And 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, and 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. And as a result of that, we would expect deposit costs and perhaps other wholesale funding to stabilize or slightly increase from these levels. And 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. And 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. And then maybe switching to loan yields, saw a nice uptick there this quarter. Can you kind of similarly kind of walk through the main drivers there for the quarter and kind of see -- kind of let us know where you see the yields trending over the next couple of quarters as well?

Sure. So 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 5/1 hybrids. And because they were originated perhaps 5 years ago, they were originated at much lower yields. And so we described 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. So we would expect loan yields to continue to rise in the September quarter, essentially becoming a tailwind to net interest margin. Now the one caveat with respect to that and 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. And 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. And that difference was probably about a 10 basis point swing in our loan yields just by virtue of that activity. So 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.

Mr. Ternes, there are no more questions at this time.

Very good. I appreciate everybody's participation in the call today, and we look forward to speaking with you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may disconnect.