Ladies and gentlemen, thank you very much for standing by. And welcome to the Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given to you at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Craig Blunden. Please go ahead.

Thank you, Greg. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donavon Ternes, our President, Chief Operating 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 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 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 earlier this morning, from the annual report on Form 10-K for the year ended June 30, 2017, and from the Form 10-Qs that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as of the date they are made, and the Company assumes no obligation to update this information. To begin with, thank you for participating on our call. I hope that each of you has had an opportunity to review our earnings release, which describes our third quarter results. I'd like to begin this morning by highlighting the results in our community banking business. Over the course of the last year, our net interest margin expanded. Our loan growth has been consistent. Core deposits continue to grow, and credit quality remains strong. In the most recent quarter, the community banking staff originated $29 million of loans held for investment, an increase of $22 million…

[Operator Instructions] Your first question comes from the line of Tim O'Brien from Sandler O'Neill.

First question. So it looks like on a sequential quarter basis, funding costs were relatively stable. Is that correct?

Yes, that's correct.

And then you had some pretty nice expansion in your loan yields sequentially. Can you give a little color on that?

The color is that a large part of our portfolio adjusts in a year or less. And with short-term rates, particularly LIBOR moving up, which is the largest single index that we have with respect to our adjustable rate loans. With that moving up significantly, our loans were re-pricing upward. Additionally, we are finding that current interest rates are above where they were last quarter, so new origination is also additive to the loan yields. Depending, of course, on what the prepayments look like in any given period and what deferred loan costs may be attached to those prepayments.

And was there any prepayment income this quarter? Or can you compare this quarter relative to the last quarter? Or I don't know, interest recoveries or anything atypical that's not contractual?

Yes. The deferred loan costs are -- the acceleration of those deferred loan costs attached to the prepayments were down in Q3 or the March quarter. There were approximately $120,000 for the quarter, which is a little bit below average in comparison to, for instance, the prior 5 quarters. And that contrasts with the December 31 quarter, where we had larger deferred loan costs accelerated as a result of payoffs to the tune of about $400,000 for that quarter. So we estimate that the swing in yield on loans, about 3 basis points more than average this quarter as a result of lower deferred costs. But last quarter, as a result of higher deferred costs, loan yields or actually net interest margin was down by approximately 7 basis points.

And you mentioned the trailing 5-quarter average. What was that average?

We don't give it out, although you'd be able to see it in the average balance sheets when the Q comes out. There's a footnote, so it's going to be out in the next week or so. For the 9 months ending March 31, we had approximately $736,000 accelerated with respect to the loan fee or loan cost amortization. And that compares to $609,000 for the 9 months ending March 31 of '17, so over the course of a longer period of time such as 9 months that I'd just described, it all kind of smooths out. But it can be a little bit bumpy from 1 quarter to the next.

That's -- I can work with that. And then are you -- that cost to deposit situation was a real positive this quarter. Do you -- are you seeing signs of pressure like other banks are seeing on deposit costs here looking forward qualitatively? Can you give us some qualitative color on that?

Sure, there's no doubt about it. There's a number of institutions in our marketplace that have been aggressive in chasing deposits, even with some large ads in the local newspaper. They are paying significantly higher rates than we are for the same terms or money market. So yes, there is additional pressure. One or two of them, although have done very aggressive for quite a while, so this isn't exactly new. And for the most part, we've been able to hold in our customers here, but with very few closings because of other competitors' rates. But it's going to continue to put pressure on our raising rates eventually.

The other thing to think about, if you look at what our capacity is with respect to noncore funding sources, we had very little in the way of broker deposits. So that's an avenue we could use if we don't wish to sensitize our current deposit base. We also have a great deal of capacity with Federal Home Loan Bank of San Francisco from a wholesale borrowing perspective. We like those advances to -- for interest rate risk purposes anyway, so that's another source of wholesale funding that won't sensitize our deposit base. And so we have some levers we can pull strategically, because I do think there will be continued deposit pressure, as Craig mentioned, and we are seeing it keyed up a bit more. While there have been 2 or 3 that had been high paying for some time, there are now more that are high paying in our markets.

Great color. Would you guys lock in any rates maybe through some term funding? Like you kind of alluded to? Is that...

Yes. That's absolutely on the table, but that's a function of what our growth rates are with respect to the loan portfolios. And that's obviously something we're going to be using from the standpoint of interest rate risk management.

And then last question, just shifting gears over to mortgage, real quickly. It looked like if I'm seeing it correct, your gain on sale margin was surprisingly strong, remarkably strong. Can you give a little color on why -- how you were -- we see -- we saw other data points in the marketplace that weren't so favorable, and management talked about more aggressive pricing pressure and -- which caused pressure on gain on sale margins. How are you guys able to maybe buck some market trends there?

Well, it's not easy. It's a function of disciplined pricing. I suppose a fair question would be, are we giving up some volume as a result of holding our loan sale margins where they are. And a fair answer is probably some, but it's very difficult when you start playing the pricing game and reducing margins far below where they absolutely, where they should be, to make up in volume. And so we are disciplined relatively about that practice, although clearly, loan sale margins are going to continue to be under pressure as we think about calendar '18.

[Operator Instructions] And at this time, there are no further questions.

All right. If there's no further questions, I'd like to thank everyone for joining our conference call. And we look forward to speaking to you next quarter. Thank you.

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