Image source: The Motley Fool.
DATE
Wednesday, January 28, 2026 at 12 p.m. ET
CALL PARTICIPANTS
- President and Chief Executive Officer — Donavon P. Ternes
Need a quote from a Motley Fool analyst? Email [email protected]
TAKEAWAYS
- Loan Originations -- $42.1 million in loans held for investment were originated, representing a 42% increase compared to the prior sequential quarter's $29.6 million.
- Loan Payoffs and Principal Payments -- $46.7 million, up 35% from $34.5 million in the September 2025 quarter, with increased activity attributed to lower mortgage rates.
- Loans Held for Investment -- Decreased by about $4.1 million due to declines in multifamily, commercial business, and commercial real estate loans, offset by gains in single-family and construction loans.
- Nonperforming Assets -- Totaled $990,000, or 0.08% of total assets at December 31, 2025, down from $1.9 million at September 30, 2025.
- Delinquencies -- No loans were reported in the early stages of delinquency as of December 31, 2025.
- Commercial Real Estate (CRE) Office Exposure -- $36.7 million, or 3.5% of loans held for investment, are secured by various types of office buildings.
- Maturing CRE Loans -- Six CRE loans totaling $2.8 million are scheduled to mature in the remainder of fiscal 2026.
- Credit Losses -- Recorded a $158,000 recovery of credit losses, primarily from changes in the expected life of the loan portfolio as mortgage rates declined.
- Allowance for Credit Losses -- Stood at 0.55% of gross loans, a slight decline from 0.56% at the prior quarter-end.
- Net Interest Margin -- Increased by 3 basis points to 3.03%, driven by a 5 basis point decrease in cost of interest-bearing liabilities and a 2 basis point decrease in yield on interest-earning assets.
- Cost of Deposits -- Fell by 2 basis points to 1.32% compared to the prior quarter.
- Cost of Borrowing -- Dropped by 20 basis points to 4.39% from the September 2025 quarter.
- Loan Payoff Impact on Margin -- Net deferred loan cost amortization on loan payoffs negatively impacted net interest margin by 5 basis points, a change from no such impact over the previous five quarters.
- Rates on New Loan Production -- Newly originated loans carried a weighted average rate of 6.15% versus a portfolio-average of 5.22% for loans held as of December 31, 2025.
- Adjustable Rate Loan Repricing (March 2026) -- $112.2 million in loans are expected to reprice 14 basis points lower to a 6.85% weighted average rate.
- Adjustable Rate Loan Repricing (June 2026) -- $125.2 million in loans are projected to reprice 38 basis points higher to a 6.49% weighted average rate.
- Wholesale Funding Maturities (March 2026) -- $109 million in FHLB advances, brokered CDs, and government CDs mature at a 4.12% weighted average rate, with the company expecting to reprice lower.
- Wholesale Funding Maturities (June 2026) -- $79.5 million in similar liabilities mature at a 4.15% weighted average rate, with management anticipating lower repricing.
- Net Interest Margin Outlook -- Management stated, "there continues to be an opportunity for net interest margin expansion in the March 2026 quarter."
- Operating Expenses -- Rose to $7.9 million, up from $7.6 million in the previous quarter, due to a $214,000 pre-litigation voluntary mediation settlement expense for an employment matter.
- Expense Guidance -- Management expects quarterly operating expenses to run at $7.6 million to $7.7 million for the remainder of fiscal 2026.
- Capital Actions -- Repurchased approximately $96,000 of stock and distributed $906,000 in cash dividends, with total capital management activities in the December 2025 quarter representing a 170% distribution of that quarter's net income.
- Capital Ratios -- Management emphasized, "We exceed well-capitalized capital ratios by a significant margin."
SUMMARY
Provident Financial Holdings (PROV +0.41%) reported a significant increase in loan originations, partially offset by higher loan prepayments, which resulted in a modest decline in total loans held for investment. Asset quality appears stable, as indicated by a sequential reduction in nonperforming assets and no reported early-stage delinquencies. The company anticipates further opportunities to improve net interest margin in the near term, driven by the repricing of both assets and wholesale funding at lower interest rates. Operating expenses temporarily rose due to a one-time mediation-related settlement, with management setting a lower run-rate target for the coming quarters. Robust capital ratios enabled the company to pursue aggressive shareholder returns, including an unusually high proportion of capital returned relative to net income.
- Loan pipeline data points to March 2026 origination volumes remaining within recent quarters' range, indicating steady underlying demand.
- Management suggested loan portfolio growth may continue, but acknowledged uncertainty remains around future payoff rates, which could constrain net portfolio expansion.
- The allowance for credit losses declined modestly, reflecting fewer credit concerns in the current environment.
- Exposure to office-based commercial real estate was quantified, providing increased transparency on a sector closely monitored by investors.
INDUSTRY GLOSSARY
- CRE: Commercial Real Estate — Loans secured by commercial properties, including office, retail, industrial, and multifamily buildings.
- FHLB: Federal Home Loan Bank — A system of regional banks from which local lenders can borrow funds, typically used for mortgage and housing-related lending.
- Net Deferred Loan Costs: Capitalized costs associated with the origination of loans, amortized over the life of the loan and recognized as adjustment to interest income upon payoff.
Full Conference Call Transcript
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 3 months ended December 31, 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 nonperforming assets were just $990,000 or 8 basis points of total assets at December 31, 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 six 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 31, 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 31, 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 cost amortization associated with loan payoffs in the December 2025 quarter compared to the average of the previous 5 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 6 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 certificate 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 1 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 to $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 continue -- 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.
Operator: [Operator Instructions] Your first question comes from the line of Timothy Coffey with Janney.
Timothy Coffey: Given the puts and takes that you just described on the loan portfolio, what is the probability that your portfolio is flat with -- the next 4 quarters?
Donavon Ternes: 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 5 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: Do you see the loans repricing in the June quarter as a potential headwind to loan growth?
Donavon Ternes: 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 a negative 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: Right. Okay. And then the government -- federal government has recently discussed -- [ 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: 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. And 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.
Operator: [Operator Instructions] And with no further questions in queue, I'd like to turn the conference back over to Donavon for closing remarks.
Donavon Ternes: Thank you, Colby, and thank you, everyone, for attending our second quarter earnings call, and I look forward to the next call for -- with our third quarter earnings. Have a good day.
Operator: This concludes today's conference call. You may now disconnect.
