Provident Financial Holdings Q2 FY2026 Earnings Call - Originations Rise; Prepayments Offset Growth, NIM Poised to Benefit from Cheaper Funding

Colby, Conference Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I’ll be your conference operator today. At this time, I would like to welcome you to the Provident Financial Holdings second quarter of fiscal 2026 earnings call. All lines have been placed on mute to prevent any background noise, and after the speaker’s remarks, there will be a question-and-answer session. If you’d like to ask a question at that time, please press star, then the number 1 on your telephone keypad to raise your hand and enter the queue. If you’d like to withdraw your question at any time, simply press star 1 again. I’ll now turn the call over to Donavon Ternes, President and CEO. You may begin.

Donavon Ternes, President and CEO, Provident Financial Holdings: Thank you, Colby. 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 second quarter fiscal 2026 results.

In the most recent quarter, we originated $42.1 million of loans held for investment, a 42% increase from the $29.6 million that were originated in the prior sequential quarter. During the most recent quarter, we also had $46.7 million of loan principal payments and payoffs, which is an increase of 35% from the $34.5 million in the September 2025 quarter. Lower mortgage rates have driven stronger loan origination activity, but also has led to higher prepayment activity. We are continuing to make prudent adjustments to our underwriting requirements within certain loan segments to promote disciplined, sustainable growth in origination volume.

Our loan pipelines are moderately higher than last quarter, suggesting our loan origination volume in the March 2026 quarter will be within the range of recent quarters, which has been between $28 million and $42 million. For the three months ended December 31st, 2025, loans held for investment decreased by approximately $4.1 million, with a decline in multifamily, commercial business, and commercial real estate loans, partly offset by an increase in single-family and construction loans. Current credit quality continues to hold up very well, and you will note that non-performing assets were just $999,000—or $990,000, or 8 basis points of total assets at December 31st, 2025, a decrease from $1.9 million at September 30, 2025.

Additionally, there were no loans in the early stages of delinquency at December 31, 2025, indicating an absence of emerging credit issues. We continue to monitor commercial real estate loans, particularly loans secured by office buildings, but are confident 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 $36.7 million or 3.5% of loans held for investment. You should also note that we have just 6 CRE loans that total $2.8 million maturing in the remainder of fiscal 2026. We recorded a $158,000 recovery of credit losses in the December 2025 quarter.

The recovery recorded in the second quarter of fiscal 2026 was primarily attributable to a decline in the expected life of the loan portfolio due to lower mortgage interest rates. The allowance for credit losses to gross loans held for investment was 55 basis points at December 31st, 2025, a slight decrease from 56 basis points at September 30, 2025.... Our net interest margin increased 3 basis points to 3.03% for the quarter ended December 31st, 2025, compared to the 3% for the sequential quarter ended September 30, 2025. The net result of a 5 basis point decrease in the cost of total interest-bearing liabilities, net of a 2 basis point decrease in the yield of total interest-earning assets.

Our average cost of deposits decreased to 1.32%, down 2 basis points for the quarter ended December 31, 2025, while our cost of borrowing decreased 20 basis points to 4.39% in December 2025 quarter compared to the September 2025 quarter. The Net Deferred Loan Costs amortization associated with loan payoffs in the December 2025 quarter, compared to the average of the previous five quarters, negatively impacted the Net Interest Margin by approximately 5 basis points, in contrast to no impact in the September 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 December 2025 quarter was 6.15%, compared to the weighted average rate of 5.22% for loans held for investment as of December 31, 2025. In the March 2026 quarter, our adjustable rate loans are repricing at interest rates that are slightly lower than their current interest rates. We have approximately $112.2 million of loans repricing in the March 2026 quarter to an interest rate that we currently believe will be 14 basis points lower, to a weighted average interest rate of 6.85% from the current interest rate of 6.99%.

However, in the June 2026 quarter, we have approximately $125.2 million of loans repricing to an interest rate that we currently believe will be 38 basis points higher to a weighted average interest rate of 6.49% from 6.11%. Many of these loans are already in their adjustable phase of the loan term, with rate resets every six months. I would also point out that there is an opportunity to reprice maturing 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 $109 million of Federal Home Loan Bank advances, Brokered Certificates of Deposit, and Government Certificates of Deposit maturing in the March 2026 quarter at a weighted average interest rate of 4.12%. Additionally, we have approximately $79.5 million of Federal Home Loan Bank advances, Brokered Certificates of Deposit, and Government Certificates of Deposit maturing in the June 2026 quarter at a weighted average interest rate of 4.15%. Given the current interest rate outlook, we would expect to reprice these maturities 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 March 2026 quarter.

Our FTE count at December 31, 2025, was 163, compared to 162 one year ago. We continue to look for operating efficiencies throughout the company to lower operating expenses. Operating expenses were $7.9 million in the December 2025 quarter, an increase from $7.6 million in the September 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 remainder of fiscal 2026, we expect a run rate of approximately $7.6 million-$7.7 million per 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 stable economic environment and the ongoing normalization of the yield curve. During the December 2025 quarter, we were partly successful in the execution of this strategy with higher loan origination volume, but higher loan prepayments more than offset that growth. As a result, the overall composition of our interest earning assets and interest-bearing liabilities were essentially consistent with 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 prudent capital returns to shareholders through stock buyback programs is a responsible capital management tool, and we repurchased approximately $96,000 of common stock in the December 2025 quarter.

For the second quarter of our fiscal year, we distributed $906,000 of cash dividends to shareholders and repurchased approximately $1.5 million worth of common stock. Accordingly, our capital management activities represent a 170% distribution of the December 2025 quarter’s net income. We encourage everyone to review our December 31 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. Colby, we will now entertain any questions that others may have regarding our financial results.

Colby, Conference Operator: Thank you. We will now begin the question-and-answer session. If you would like to ask a question, again, please press star, then the number one on your telephone keypad to raise your hand and enter the queue. If you’d like to withdraw your question at any time, simply press star one again. We’ll pause just for a moment to compile the roster. Your first question comes from the line of Timothy Coffey with Janney. Your line is open.

Timothy Coffey, Analyst, Janney: Thank you. Morning, Donavon.

Donavon Ternes, President and CEO, Provident Financial Holdings: Good morning.

Timothy Coffey, Analyst, Janney: Given the puts and takes that you just described on the loan portfolio, what is the probability that your portfolio is flat this, the next four quarters?

Donavon Ternes, President and CEO, Provident Financial Holdings: Well, it’s kind of a loaded question, that I could answer if I knew what loan payoffs looked like for the next few quarters. What we’ve been focusing on is increasing our origination volume, each and every quarter. We’ve been able to do so essentially for the last five quarters or so. We have pipelines that are built that suggest the March 2026 quarter will also be a higher origination volume quarter. But it’s very difficult to discern what loan payoffs look like, which will ultimately then drive what the loan balances look like at the end of the quarter, and whether or not we grew those balances, or essentially were, somewhat flat.

Timothy Coffey, Analyst, Janney: Yeah. Do you see the loans repricing in the June quarter as a potential headwind to loan growth?

Donavon Ternes, President and CEO, Provident Financial Holdings: Not necessarily, Tim. When we think about where those loans are repricing, and we compare to current market conditions with respect to new loan production, it looks like they’re a bit higher than new loan production, but they’re not substantially higher from where new loan production is coming in. So that could have an impact. There could be implications with respect to that, but ultimately, if they are not repricing substantially higher than current market conditions, I would not expect that driver alone to be the driver of accelerated loan payoffs. The other thing to think about, Tim, with respect to accelerated loan payoffs, it’s kind of a double-edged sword.

On the one hand, we obviously have trouble growing the loan portfolio, to a large degree, if those payoffs are higher or those payoff volumes are higher. But secondarily, those payoffs generally carry net deferred loan costs that get accelerated in as a debit or a decline to net interest income over the quarter. And the most recent quarter, those payoffs essentially impacted our net interest margin by -5 basis points, in contrast to no implications or no impact in the September quarter, if we look at those net deferred loan costs on average for the prior 5 quarters. So the implications of loan payoffs are twofold: difficulty in growing loan portfolio, and secondarily, there are implications to our net interest margin.

Timothy Coffey, Analyst, Janney: Right. Okay. And then the government, the federal government has recently discussed, you know, those floated ideas on how to make housing more affordable. If some of those plans come through, would that be a net positive for your business?

Donavon Ternes, President and CEO, Provident Financial Holdings: Well, I think, ultimately, if you look at, particularly in California, where we lend, if you look at housing stock or available inventory, you find that there is much more demand than available inventory, over time. I think that has exhausted, many would-be purchasers, particularly as it relates to affordability. And what that housing stock pricing has done, even though pricing has slowed, it is still advancing a bit, in the state of California. Not at the rate that it was advancing. Nonetheless, it’s still advancing. Interest rates are a bit favorable, with respect to affordability. As those rates come down, affordability goes up.

But ultimately, in the state of California, available housing is far outstripped by demand, and so anything that is done, I guess, by local, state, or federal governments that would expand available housing, lowering new construction costs and the like, would be helpful, and that would ultimately drive more buyers, I believe.

Timothy Coffey, Analyst, Janney: All right. Great. Thank you. Those are my questions. Appreciate it.

Colby, Conference Operator: Again, if you’d like to ask a question, please press star, then the number one on your telephone keypad. With no further questions in queue, I’d like to turn the conference back over to Donavon for closing remarks.

Donavon Ternes, President and CEO, Provident Financial Holdings: Thank you, Colby, and thank you everyone for attending our second quarter earnings call, and I look forward to the next call, with our third quarter earnings. Have a good day.

Colby, Conference Operator: This concludes today’s conference call. You may now disconnect.