Provident Financial Holdings, Inc. (PROV) Earnings

Management highlights

Overall Financial Performance - Delivered Q2 2026 net earnings of $78 million ($0.60 per diluted share), and core net earnings of $80 million ($0.61 per diluted share). - Annualized adjusted return on average assets was 1.27%, and adjusted return on average tangible common equity exceeded 16%. - Total record revenue for the quarter was $235 million, driven by record net interest income and record non-interest income. Loan Growth - Funded $700 million in new commercial loans in Q2 2026, bringing year-to-date commercial loan fundings to over $1.1 billion. - Net total commercial loans grew 10% annualized, led by 20% annualized growth in the C&I segment. - Ended the quarter with a record total loan pipeline of $3.2 billion, marking the second consecutive quarter that both CRE and C&I pipelines exceeded $1 billion. Deposit Growth - Core deposits (adjusted for municipal portfolio seasonality) grew $67 million in Q2 2026, a 2% annualized growth rate, driven by growth in commercial deposits including the treasury management group. - Total period-end deposits increased $445 million (9% annualized), driven primarily by higher broker deposit balances and growing commercial deposits. - As of June 30, 2026, newly hired senior deposit-focused bankers had built a nearly $150 million deposit pipeline. Asset Quality - Asset quality metrics improved sequentially from the prior quarter, a trend management expects to continue in H2 2026. - The $82 million senior housing non-accrual relationship is progressing through bankruptcy as expected; management expects full settlement by year-end with no material loss to the bank. Excluding this relationship, non-performing loans equal just 27 basis points of total loans. - Non-performing assets represented 54 basis points of total assets, and net charge-offs were $1.9 million (4 basis points annualized of average loans). Operational and Strategic Initiatives - The previously announced core banking system conversion remains on track for a Labor Day 2026 launch. - An internal AI agent for employees to quickly answer customer inquiries post-conversion is in development, to improve operational efficiency and customer experience. - The bank continues to invest in digital, small business, and municipal banking initiatives to drive sustainable deposit growth.

Guidance

- Full-year 2026 loan and deposit growth is now expected to land at the high end of the initial guidance range, updated to 5% to 6% full-year growth. - Non-interest income guidance for Q3 and Q4 2026 was raised to $29 million per quarter, up from the prior guidance of $28.5 million per quarter. - Full-year 2026 effective tax rate is expected to be between 28% and 28.25%. - Core return on assets (ROA) target is maintained at 1.2% to 1.3%, with a maintained target of mid-teens return on average tangible common equity. - Reported net interest margin (NIM) inclusive of purchase accounting accretion is projected to be between 3.45% and 3.50% for the remainder of 2026, with approximately 1 to 2 basis points of core NIM expansion expected in Q3 and Q4. - Quarterly operating expenses are projected to remain between $117 million and $119 million, with an additional $4.5 million in non-recurring core system conversion charges expected over the remainder of 2026. - The loan-to-deposit ratio target range is maintained at 97% to 103%, and the ratio improved slightly to 102.6% in Q2 2026. - Purchase accounting accretion for 2027 is expected to be approximately $36 million, down from an estimated $48 million for full-year 2026.

Segment performance

Provident Financial Services reported the following segment performance for Q2 2026: - Core Banking: Generated net interest income of $203 million (record), representing 86.4% of total revenue. Core pre-provision net revenue hit a record $118 million, an 18% increase year-over-year. Adjusted pre-provision net revenue return on average assets was 1.87% annualized. - Insurance (Provident Protection Plus): Top line revenues grew 18% year-over-year in the first half of 2026, with strong customer retention and new client acquisition. This segment is a key driver of non-interest income growth. - Wealth Management (Beacon Trust): First half 2026 revenues grew 5% year-over-year. Assets under management increased to $4.5 billion, driven by market appreciation and improved client retention. - SBA Lending: Gain on sale revenues from SBA loan originations and sales grew 16% year-over-year in the first half of 2026, marking another solid quarter of performance. Overall total non-interest income hit a record $32 million in Q2 2026, representing 13.6% of total revenue. Year-to-date non-interest income reached $64 million, 14% of total revenue, up from 12.5% in H1 2025.

Risks & headwinds

- The operating environment for incremental deposit growth is highly competitive, particularly in the consumer and municipal segments, creating upward pressure on deposit costs. - Prepayment levels on existing loans are unpredictable, which creates uncertainty around actual full-year loan growth outperformance relative to guidance. - M&A activity requires strict alignment on culture, financial performance, and strategic objectives, and misalignment could lead to value destruction if pursued haphazardly. - There remains ongoing uncertainty around future Federal Reserve interest rate actions, which can impact net interest margin trajectory. - While the $82 million senior housing non-accrual credit is expected to be resolved with no material loss, unexpected delays or adverse bankruptcy outcomes could result in unexpected losses.

Analyst Q&A

• Q: After recent deposit cost relief, will deposit costs continue to fall or tick up going forward, and what is driving further NIM expansion? /

  A: Management expects total deposit costs to rise 1 to 2 basis points over the next two quarters, due to competitive pressure on certificate of deposit (CD) pricing in the current market. Further NIM expansion will be driven primarily by back book loan repricing and cash flow impacts from the investment securities portfolio, rather than lower deposit costs.

• Q: What is the competitive landscape for commercial lending in your market, and what is your current stance on M&A activity? /

  A: Management notes there is normal competition for loans, but has not observed irrational underwriting or pricing that would disrupt portfolio discipline. Organic growth remains the company's top priority, particularly growing the deposit base. M&A is still part of the company's strategy, but will remain highly selective, requiring strict checks for cultural alignment and strategic value before any transaction is pursued.

• Q: Why is guidance only raised to the high end of the existing range, rather than increased above the current high end, and what is your approach to chasing deposit growth with promotional CD rates? /

  A: Management notes that unpredictable prepayment levels make higher guidance uncertain, and the bank intentionally prioritizes loans that bring accompanying low-cost deposit relationships, turning away less desirable high-yield, low-deposit opportunities. The bank is not chasing 'hot money' with high promotional rates; current deposit growth is focused on lower-cost commercial, small business, and municipal deposits, with promotional rates only used selectively to balance funding needs.

• Q: What is the sensitivity of the bank's net interest margin to a 25 basis point short-end rate hike, and how much non-interest bearing deposit growth can be expected from the new deposit pipeline? /

  A: A 25 basis point hike to the short end of the yield curve (holding longer-term rates steady) would compress NIM by approximately 2 basis points. Management does not give a specific breakdown of non-interest bearing share in the new deposit pipeline, but notes that low-cost commercial and non-interest bearing deposits are a top priority, and new treasury management business developers already hold a $150 million pipeline of low-cost deposit opportunities.