Provident Financial - Earnings Call - Q1 2026

Executive Summary

• Q1 FY2026 delivered mixed results: revenue beat consensus while EPS missed. Revenue of $10.37M beat S&P Global consensus of $10.20M; EPS of $0.25 missed $0.29 consensus. Management flagged a higher effective tax rate (38.5%) due to a deferred tax asset write-off as a driver of the EPS shortfall. Values retrieved from S&P Global.
• Net interest margin expanded six bps sequentially to 3.00% (from 2.94%), with average asset yields up and funding costs modestly lower, supported by recovery of credit losses and stable credit quality.
• Management expects modest NIM expansion next quarter, citing $104.7M of wholesale funding maturing in December at 4.61% and $109M in March at 4.15% that can be repriced lower; loan repricing dynamics are mixed (December +18 bps on ~$107M, March −32 bps on ~$104M).
• Capital return remained robust: $0.14 dividend declared for payment on December 4 and ~66.7K shares repurchased, with total capital distributions equaling ~117% of quarterly net income.
• Near-term stock reaction catalysts: visible NIM expansion from repricing, disciplined OpEx run-rate (~$7.6–$7.7M/quarter), and continued buybacks; watch prepayments that are offsetting originations and a slight uptick in NPAs.

What Went Well and What Went Wrong

What Went Well

• Net interest margin resumed its upward trajectory to 3.00% (up 6 bps QoQ; up 16 bps YoY), driven by higher asset yields and slightly lower funding costs.
• Strong credit performance with zero charge-offs and recovery of credit losses ($626K), aided by shortened expected loan life from lower mortgage rates.
• Management discipline in capital returns: repurchased ~66.7K shares at $15.75 and maintained the $0.14 dividend; total capital distributions equaled ~117% of net income. “We believe that maintaining our cash dividend is very important… prudent capital returns to shareholders through stock buyback programs is a responsible capital management tool”.
• Quote: “We anticipate improving fundamentals as the yield curve becomes more favorable and general economic conditions remain stable, though we recognize that balance sheet growth may remain a challenge”.

What Went Wrong

• EPS missed consensus due to a higher tax provision ($1.05M; effective tax rate 38.5%), including a $251K write-off of deferred tax assets tied to expired non-qualified stock options.
• Non-interest income declined 10% YoY to $813K, mainly on unrealized losses in other equity investments and lower deposit/card fees.
• Non-performing assets rose to 0.15% of assets (from 0.11% QoQ), and classified assets increased to $7.1M; NPAs consisted of five single-family and two multi-family loans, with no 90+ day accruing loans.
• Loan growth remained difficult as steady origination was offset by elevated prepayments; management loosened certain multifamily underwriting back to pre-COVID standards to support pipeline.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Holdings First Quarter of 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 the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to turn the call over to Donavon Ternes, President and Chief Executive Officer. Please go ahead.

Donavon Ternes (President and CEO)

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. 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 fiscal 2026 results. In the most recent quarter, we originated $29.6 million of loans held for investment, a 1% increase from $29.4 million that were originated in the prior sequential quarter.

During the most recent quarter, we also had $34.5 million of loan principal payments and payoffs, which is a decrease of 18% from $42 million in the June 2025 quarter. Real estate investors have been cautious as uncertainties remain in the market, although we have seen an increase in activity as mortgage interest rates have declined. We will continue to make prudent adjustments to our underwriting requirements within certain loan segments to encourage higher loan origination volume. Additionally, our single-family and multi-family loan pipelines are moderately higher in comparison to last quarter, suggesting our loan origination volume in the December 2025 quarter will be within the range of recent quarters, which has been between $28 million and $36 million.

For the three months ended September 30, 2025, loans held for investment decreased by approximately $4 million, with a decline in multi-family and commercial real estate loans partly offset by an increase in single-family loans. Current credit quality continues to hold up very well, and you will note that non-performing assets were $1.9 million at September 30, 2025, an increase from $1.4 million from June 30, 2025. Additionally, there were no loans in the early stages of delinquency at September 30, 2025. 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, 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 $36.9 million, or 3.5% of loans held for investment. You should also note that we have just nine CRE loans that totaled $3.8 million maturing in the remainder of fiscal 2026. We recorded a $626,000 recovery of credit losses in the September 2025 quarter. The recovery recorded in the first 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 56 basis points at September 30, 2025, a decrease from 62 basis points at June 30, 2025.

Our net interest margin increased six basis points to 3% for the quarter ended September 30, 2025, compared to 2.94% for the sequential quarter ended June 30, 2025. The net result of an eight basis point increase in the average yield on total interest-earning assets met a one basis point increase in the cost of total interest-bearing liabilities. Our average cost of deposits increased to 1.34%, up one basis point for the quarter ended September 30, 2025, while our cost of borrowing also increased one basis point to 4.59% in the September 2025 quarter compared to the June 2025 quarter.

The net interest margin was not impacted as a result of net deferred loan costs associated with loan payoffs in the September 2025 quarter compared to the average net deferred loan cost amortization of the previous five quarters, in contrast to a four basis point negative impact in the June 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 September 2025 quarter was 6.62%, compared to the weighted average rate of 5.20% of our loans held for investment as of September 30, 2025. In addition, our adjustable-rate loans are repricing at interest rates that are higher than their current interest rates.

We have approximately $107 million of loans repricing in the December 2025 quarter to an interest rate that we currently believe will be 18 basis points higher to a weighted average interest rate of 6.89% from the current interest rate of 6.71%. However, in the March 2026 quarter, we have approximately $104 million of loans repricing to an interest rate that we currently believe will be 32 basis points lower to a weighted average interest rate of 6.70% from 7.02%. Many of these loans are already in their adjustable phase of the loan term with rate resets every six months. I would 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 $104.7 million of Federal Home Loan Bank advances, brokered certificates of deposit, and government certificates of deposit maturing in the December 2025 quarter at a weighted average interest rate of 4.61%. Additionally, 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 4.15%. 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 December 2025 quarter. Our FTE count on September 30, 2025, was 164, compared to 157 one year ago. We continue to look for operating efficiencies throughout the company to lower operating expenses.

You will note that operating expenses were $7.6 billion in the September 2025 quarter, unchanged from the June 2025 quarter, and represent a normalized run rate. For the remainder of fiscal 2026, we expect a run rate of approximately $7.6-$7.7 million per quarter. Our short-term strategy for balance sheet management is more growth-oriented than last fiscal year. We believe that disciplined loan growth of the loan portfolio remains the best course of action at this time, as we recognize that the Federal Reserve's Federal Open Market Committee has adopted a looser monetary policy, and the inverted yield curve has begun to reverse back to an upwardly sloping curve. We were partly successful in execution of this growth strategy in September 2025 quarter with consistent loan origination volume, but the originations were offset by loan prepayments.

As a result, the composition of total interest-earning assets and interest-bearing liabilities were 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 67,000 shares of common stock in the September 2025 quarter. For the first quarter of our fiscal year, we distributed $921,000 of cash dividends to shareholders and repurchased approximately $1.1 million worth of common stock. Accordingly, our capital management activities represented a 117% distribution of the September 2025 quarter's net income. We encourage everyone to review our September 30 investor presentation 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. Thank you. Kelvin?

Operator (participant)

Ladies and gentlemen, we will now begin the question-and-answer session. I would like to remind everyone to ask a question. Please press the star button followed by the number one on the telephone keypad. If you would like to withdraw your question, please press star one again. One moment, please, for your first question. Your first question comes from the line of Frank Williams of Piper Sandler. Please go ahead.

Frank Williams (Research Analyst)

Hi everyone. Thank you for taking my question. So you guys mentioned that balance sheet growth is going to be a short-term area of focus.

And I just kind of wanted to walk through some of the challenges that you guys may be seeing and maybe discuss the loan growth trajectory going into calendar year 2026.

Donavon Ternes (President and CEO)

Sure. So, you know, currently, as we think about multi-family and commercial real estate other than multi-family, there still seems to be some hesitancy by borrowers with respect to new activity as a result of, you know, higher mortgage rates than we've seen maybe three and four years ago. Although I would also describe that mortgage interest rates are coming down a bit, which should present more opportunity for potential purchasers of multi-family and commercial real estate. Additionally, there's some opportunity with respect to refinance activity that we see as a result of mortgage interest rates coming down.

But one of the things we also see as a result of what is going on in the market is an elevated amount of prepayments that we are experiencing in our loan portfolio. And even though our origination volume has been relatively steady over the course of the last four or five quarters, we're also seeing refinance volume prepaying out of our loan portfolio at about the same amount, such that loan growth has been difficult to come by. Now, one of the things that we have been doing over the course really of the last year or so, we have been loosening some of our underwriting standards, particularly in multi-family, back to what we would consider pre-COVID underwriting characteristics. And that seems to have opened up the pipeline a bit more with respect to activity.

But nonetheless, when you look at what our origination volume has been, what our payoff volume has been, it has been difficult to grow the portfolio in a meaningful way over the past year or so.

Frank Williams (Research Analyst)

Perfect. Perfect. Thank you for the comprehensive answer. And that's it for me. Thank you, guys.

Operator (participant)

Again, if you would like to ask a question, please press star one on your telephone keypad. And your next question comes from the line of Timothy Coffey of Janney. Please go ahead.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Hey. Morning, Donavon.

Donavon Ternes (President and CEO)

Good morning.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Yeah. So based on your commentary, is it a reasonable expectation to think that margin might expand this next quarter at a similar level to the calendar 3Q?

Donavon Ternes (President and CEO)

Yeah, I think that's a reasonable expectation.

You know, if I go back to the low of our net interest margin, the low was June 30, 2024, and our net interest margin was 2.74%, and fast forward now to September 30, 2025, our net interest margin is 3%, so over the course of that window, we've grown net interest margin 26 basis points, and then considering what occurred in the September quarter in contrast to the June quarter, we were up by six basis points from June 30 at 2.94% to September 30 at 3%, and all of the factors are relatively similar today as they were at June 30. I'd have to go into my conference call text for June 30, but my recollection is when we were describing what our expectations were with respect to loan that would be repricing upward, it was very similar to what we're expecting in the December quarter.

I guess one of the major differences between that June quarter and the September quarter, we would expect to see our interest-bearing cost of liabilities declining a bit more perhaps than what they did because of what has occurred with the Fed and their action of a 25 basis point reduction in September and what is probably going to be another 25 basis point reduction today. So, all of this in our mind adds up to a conclusion that we expect modest or moderate net interest margin expansion as we look down certainly in the December quarter and as we move through our fiscal 2026 fiscal year.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay.

And then I wonder if we can unpack something that you talked about pretty early on in your prepared remarks in terms of the impact lower interest rates have on the average life of the loan portfolio and how that might correlate with changes in the allowance?

Donavon Ternes (President and CEO)

Sure. So if you think about what our loan portfolio is comprised of, it's essentially 30-year mortgage loans, whether they're single-family, multi-family. I guess commercial real estate, we have 25-year mortgage loans, but they're essentially relatively long mortgage loans. And when interest rates either increase, mortgage interest rates either increase or decrease, we can see a material impact with respect to the average life of that loan portfolio because they're such a long-duration loan in the first place.

And so as a result of that, when we see interest rates this past quarter come down in the Freddie Mac PMMS 30-year fixed rate, I think from June 30 to September 30, that interest rate moved down by 47 basis points. Well, that 47 basis point move downward increased the proposition of refinance activity and shortened the average life of that loan portfolio to such a degree that the recovery from credit losses was pretty significant. And by the way, we see the reverse of that occurring as well. I think the most recent quarter that we saw that occur was the September 2024 quarter to the December 31st, 2024 quarter. I don't recall specifically how mortgage interest rate rose during that period, but my recollection is they rose.

And as a result of that, we actually put in a provision for loan losses in that quarter, again, primarily because of what the weighted average life of that loan portfolio looks like.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay. So all else equal, if mortgage rates continue to come down, are you, is the allowance too big right now?

Donavon Ternes (President and CEO)

Well, all else being equal and no deterioration in the credit quality of the loan portfolio or no significant growth in the loan portfolio where a provision would be necessary. Yes, we would argue as interest rates come down, loan prepayments will increase, refinance activity will increase, and that will shorten the estimated life of our loan portfolio. And it could have an outsized impact in a recovery of credit losses in contrast to a provision.

But those are a number of caveats, Tim. You know, no loan growth, no deterioration in the portfolio, and interest rates coming down significantly.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay. All right. I understand. Yeah. And then the rest of my questions were pretty much answered in your prepared remarks. Thank you.

Operator (participant)

There are no further questions at this time. With that, I will turn the call back to Donavon Ternes, President and CEO, for final closing remarks. Please go ahead.

Donavon Ternes (President and CEO)

Thank you, Kelvin. I appreciate everybody's attendance on the call this morning, and we look forward to our call in January. Goodbye.

Operator (participant)

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect.