PROVIDENT FINANCIAL HOLDINGS INC Q1 FY2026 earnings call

• Originated $29.6 million of loans held for investment in the most recent quarter, a 1% increase from the prior sequential quarter. Loan principal payments and payoffs were $34.5 million, a 18% decrease from the prior quarter.
• Real estate investors are cautious but activity increased as mortgage rates declined; loan pipelines for single-family and multifamily are moderately higher.
• Credit quality holds up well; nonperforming assets increased, but no early delinquencies. Monitored commercial real estate loans, particularly office buildings.
• Net interest margin increased to 3%, with average yield on interest-earning assets up and cost of interest-bearing liabilities up slightly.
• FTE count was 164 on September 30, 2025, vs. 157 a year ago. Operating expenses normalized at $7.6-7.7 million per quarter run rate.
• Short-term strategy is growth-oriented; disciplined loan growth is the focus. Exceed well-capitalized capital ratios; repurchased shares and paid dividends.

In the first quarter of Fiscal 2026, Provident Financial Holdings originated $29.6 million of loans held for investment, a 1% increase from the prior sequential quarter. Loans held for investment decreased by approximately $4 million for the 3 months ended September 30, 2025, with declines in multifamily and commercial real estate loans partly offset by an increase in single-family loans. Nonperforming assets were $1.9 million at September 30, 2025, up from $1.4 million on June 30, 2025, with no loans in early delinquency. The net interest margin increased 6 basis points to 3% for the quarter ended September 30, 2025, compared to 2.94% in the prior quarter. The allowance for credit losses to gross loans held for investment was 56 basis points at September 30, 2025, down from 62 basis points at June 30, 2025. Operating expenses were $7.6 billion in the September 2025 quarter, unchanged from the prior quarter.

• Loan origination volume in the December 2025 quarter is expected to be within the range of recent quarters ($28 million to $36 million).
• Expect net interest margin expansion in the December 2025 quarter due to potential repricing of maturing wholesale funding at lower rates.
• Single-family and multifamily loan pipelines are moderately higher, suggesting consistent origination volume.

• Market uncertainties causing caution among real estate investors.
• Elevated prepayments affecting loan growth.
• Monitoring of commercial real estate loans, especially those secured by office buildings, due to potential performance risks.

Q: 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.

A: Sure. So currently, as we think about multifamily and commercial real estate other than multifamily, there still seems to be some hesitancy by borrowers with respect to new activity as a result of higher mortgage rates than we've seen maybe 3 and 4 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 multifamily 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 4 or 5 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 multifamily 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.

Q: 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?

A: Yes, I think that's a reasonable expectation. 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 6 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 this 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.

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

A: 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, multifamily, 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 there's 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 PMS 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 31, 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.

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

A: 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 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. No loan growth, no deterioration in the portfolio and interest rates coming down significantly.