Provident Financial - Earnings Call - Q3 2025

Executive Summary

• Q3 FY2025 delivered solid profitability and margin expansion: diluted EPS $0.28 (+115% q/q, +27% y/y) on net income $1.86M; net interest margin rose to 3.02% (+11 bps q/q, +28 bps y/y).
• Wall Street consensus was modestly low: EPS beat by $0.04 and revenue beat by $0.89M, supported by margin expansion, lower wholesale funding costs, and a credit-loss recovery*.
• Management expects further, but slower, NIM expansion in Q4 as ~$100.8M of wholesale funding and ~$110.9M of loans reprice; operating expense run-rate guided to ~$7.5–$7.6M per quarter.
• Credit quality remained strong: NPAs fell to 0.11% of assets; allowance-to-loans declined to 0.62% on improved SFR collateral factors; early-stage delinquencies only $199K.
• Capital return continued: $0.14 quarterly dividend declared (payable June 5) and ~51,869 shares repurchased at $15.30 average; capital ratios remain well above “well-capitalized” thresholds.

What Went Well and What Went Wrong

What Went Well

• Net interest margin expansion persisted: “Our net interest margin has improved each quarter subsequent to June 30, 2024” (3.02% in Q3; +11 bps q/q, +28 bps y/y).
• Credit quality strengthened: NPAs/Assets declined to 0.11% (from 0.20% in June 2024); no charge-offs in the quarter.
• Balance sheet/liquidity improved: deposits up to $901.3M and borrowings down to $215.6M; significant remaining borrowing capacity (~$470.8M).

What Went Wrong

• Operating expenses elevated: non-interest expense rose 10% y/y to $7.86M, including a nonrecurring $239K litigation settlement and $27K executive search costs.
• Classified assets increased to $6.8M vs. $5.8M at June 30, 2024; allowance-to-loans ratio fell to 0.62% due to qualitative improvements (still adequate per management).
• Deposit mix shift toward time/brokered CDs raised deposit costs (avg deposit cost 1.26%, +8 bps y/y), although wholesale funding costs declined slightly.

Transcript

Operator (participant)

Hello, and thank you for standing by. My name is Lacey, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Provident Financial Holdings Third Quarter of Fiscal 2025 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, press star one again. Thank you. I would now like to turn the call over to Donavon Ternes, President and CEO. Please go ahead.

Donavon Ternes (President and CEO)

Thank you, Lacey. Good morning. This is Donavon Ternes, President and CEO of Provident Financial Holdings. 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 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, 2024, 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 distributed yesterday, which describes our third quarter fiscal 2025 results. I have an update regarding the Southern California wildfires in January 2025. We have been contacted by two borrowers who were impacted by the Altadena fire.

One home had very minor damage to the perimeter fence, which the borrower repaired himself, and although insured, he did not file an insurance claim. The other home had minor damage to the roof, mechanicals, and smoke damage. The borrower filed an insurance claim, has received insurance proceeds, which are deposited into an account with Provident, and is in the process of repairing the damage. The insurance proceeds are expected to cover the cost of repairs. In the most recent quarter, we originated $27.9 million of loans held for investment, a 23% decrease from $36.4 million that were originated in the prior sequential quarter. During the most recent quarter, we also had $23 million of loan principal payments and payoffs, which is down 33% from $34.3 million in the December 2024 quarter.

Currently, it seems that real estate investors have reduced their activity as a result of higher mortgage rates, although we continue to see moderate activity in loans held for investment. It should also be noted that economic uncertainty has increased as a result of current fiscal policy, which is also reducing activity. Additionally, we are seeing more consumer demand for single-family adjustable-rate mortgage products as a result of higher fixed-rate mortgage interest rates, and we have loosened a few of our underwriting requirements within certain loan segments to encourage higher loan origination volume. Additionally, our single-family and multifamily loan pipelines are similar in comparison to last quarter, suggesting our loan origination volume in the June 2025 quarter will be similar to the March 2025 quarter and around the middle of the range of recent quarters, which has been between $18 million and $36 million.

For the three months ended March 31st, 2025, loans held for investment increased by approximately $5.4 million when compared to the quarter ended December 31st, 2024, with an increase in single-family loans partly offset by declines in multifamily, commercial real estate, construction, and commercial business loans. Current credit quality continues to hold up very well, and you will note that non-performing assets decreased to $1.4 million on March 31st, 2025, which is down from $2.5 million on December 31st, 2024. Additionally, there were only $199,000 of early-stage delinquencies at March 31st, 2025. We continue to monitor commercial real estate loans, particularly loans secured by office buildings, but are confident that based on 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 $39.9 million, or 3.8% of loans held for investment. You should also note that we have just five CRE loans totaling $2.9 million maturing in calendar 2025. We recorded a $391,000 recovery of credit losses in the March 2025 quarter. The recovery recorded in the third quarter of fiscal 2025 was primarily attributable to an improvement in the SFR collateral qualitative factors and a lower balance of non-performing loans, partly offset by a longer average life of the loan portfolio resulting from lower loan prepayment estimates, a higher balance of classified loans, and a small increase in the outstanding balance of loans held for investment at March 31st, 2025, from December 31st, 2024.

The allowance for credit losses to gross loans held for investment decreased four basis points to 62 basis points at March 31st, 2025, as compared to 66 basis points at December 31st, 2024. Our net interest margin increased 11 basis points to 3.02% for the quarter ended March 31st, 2025, compared to the 2.91% for the sequential quarter ended December 31st, 2024, the net result of a seven basis point increase in the average yield on total interest-earning assets and a one basis point decrease in the cost of total interest-bearing liabilities. Our average cost of deposits increased to 1.26%, up three basis points for the quarter ended March 31st, 2025, while our cost of borrowing decreased one basis point to 4.52% in the March 2025 quarter compared to the December 2024 quarter.

The net interest margin this quarter was positively impacted by approximately two basis points as a result of lower net deferred loan costs associated with lower loan payoffs in the March 2025 quarter compared to the average net deferred loan cost amortization of the previous five quarters. Also, we recovered approximately $94,000 of net interest income in the March 2025 quarter, the net result of non-performing loan payoffs, classification upgrades, and classification downgrades, which had a three basis points positive impact to the net interest margin. New loan production is being originated at higher mortgage interest rates than the weighted average of the existing loan portfolio, and our adjustable-rate loans are repricing at interest rates that are higher than their current interest rates.

For example, we have approximately $110.9 million of loans repricing in the June 2025 quarter to an interest rate currently forecast to be 32 basis points higher to a weighted average interest rate of 7.20% from 6.88%. Additionally, we have approximately $112.7 million of loans repricing in the September 2025 quarter to an interest rate currently forecast to be 13 basis points higher to a weighted average interest rate of 7.23% from 7.10%. I would point out that there is a tremendous 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 $100.8 million of Federal Home Loan Bank advances, brokered certificates of deposit, and government certificates of deposit maturing in the June 2025 quarter at a weighted average interest rate of 4.34%.

Additionally, we have approximately $46.3 million of Federal Home Loan Bank advances and brokered certificates of deposit maturing in the September 2025 quarter at a weighted average interest rate of 4.50%. Given current market conditions, we would expect to reprice these maturities to a lower weighted average cost of funds. All of this suggests a continued expansion of the net interest margin in the June 2025 quarter, but at a slower pace than that experienced in the current quarter. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count at March 31st, 2025, increased by one to 162 compared to 161 FTE on the same date last year. You will note that operating expenses were $7.9 million in the March 2025 quarter, an increase from the $7.8 million in the December 2024 quarter.

The increase over the expected run rate of $7.5 million was primarily due to non-recurring or intermittent expenses, particularly $239,000 of litigation settlement expenses and $27,000 of executive search firm costs. For fiscal 2025, we continue to expect a run rate of approximately $7.5-$7.6 million per quarter. Our short-term strategy for balance sheet management is somewhat more growth-oriented than last fiscal year. We believe that disciplined growth of the loan portfolio is the best course of action at this time, as we recognize that the Federal Open Market Committee has recalibrated to looser monetary policy, and the inverted yield curve has begun to reverse back to an upwardly sloping yield curve. We were partly successful in the execution of that strategy this quarter, with loan origination volume at the middle of the quarterly range and loan repayments below the prior sequential quarter.

The composition of total interest-earning assets improved, with a higher percentage of loans receivable and interest-earning deposits to total interest-earning assets and a lower percentage of investment securities to total interest-earning assets. Additionally, composition of total interest-bearing liabilities improved, with an increase in the average balance of deposits and a decrease in the average balance of borrowings. 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 52,000 shares of common stock in the March 2025 quarter. For the fiscal year to date, we have distributed approximately $2.8 million of cash dividends to shareholders and repurchased approximately $3.1 million worth of common stock.

Accordingly, our capital management activities have resulted in a 129% distribution of fiscal 2025 net income to date. We encourage everyone to review our March 31st 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 give you 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.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Andrew Liesch with Piper Sandler. You may go ahead.

Andrew Liesch (Senior Equity Research Analyst)

Thanks. Good morning, Donavon. Question on the CD growth in the quarter.

Just curious if there's anything behind that. I knew that borrowings were down, but was this also to bring on some client funds in advance of expected loan growth? Just curious on what drove that.

Donavon Ternes (President and CEO)

We remixed the liability profile in the March quarter. For the first time in a while, we opened up our government deposits desk again, and so we accumulated some government deposits in the March quarter. As a result of that, we had available liquidity to pay down Federal Home Loan Bank advances, and I think we paid down a little bit of brokered CDs as well.

Andrew Liesch (Senior Equity Research Analyst)

Got it. Were these new CDs at a better rate than what you get in the wholesale market? Is there opportunities for more of this as time goes on?

Donavon Ternes (President and CEO)

The rate was very similar to the wholesale market.

The reason that we changed up the strategy is that short-term rates had finally come down, and these deposits are typically short-term in nature, and so that allowed for us to bring those deposits on at very similar costs to other wholesale funding.

Andrew Liesch (Senior Equity Research Analyst)

Got it. Okay. That's helpful. The margin seems like there were maybe—well, what did you say? If you add up the maybe five basis points of maybe some non-recurring benefit to the margin. If you kind of take that out, you're at 297. Based on what you're saying for the repricing, it seems like you could get some expansion from that level here going into the fourth quarter. Certainly not as fast as the pace of what you saw in your third quarter. From that 297, it seems like there's some pretty good optimism there.

Am I reading that the right way?

Donavon Ternes (President and CEO)

Yes. In fact, we did have a few items in the March quarter, for instance, the $94,000 net recovery with respect to non-performing loans. We always have volatility with respect to net deferred loan costs, depending upon what the payoff volume is and which loans pay off at any given point. That is really an uncontrollable—well, both of those are uncontrollable to some degree. That is why I called it out and pointed it out in the call this morning. Beside that activity in the March quarter, we did spell out where we think our adjustable-rate loans will be repricing, both by dollar amount as well as by net interest margin or increase in interest rate over the course of the next two quarters.

The same thing with respect to wholesale funding as it relates to dollar amount and what their current costs are.

Andrew Liesch (Senior Equity Research Analyst)

Yep. Got it. Yeah. That pickup should be nice. Good to see you there. Great. You have covered everything else in your prepared comments that I had, so I will step back. Thank you.

Donavon Ternes (President and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Tim Coffey with Janney. You may go ahead.

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

Thank you. Morning, Donavon.

Donavon Ternes (President and CEO)

Good morning, Tim.

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

Hey. Kind of want to pick your brain on what your thoughts are for prepayment activity over the next 12 months.

Donavon Ternes (President and CEO)

It is very difficult to really determine that. We had lower prepays in the March quarter than the December quarter. I expect that was because of the volatility we saw in mortgage rates in the March quarter.

It seems like a 7% handle on mortgage rates slows activity by a good amount. It seems when mortgage rates can be offered below 7% or with a 6% handle, there's more activity, and that then suggests what may occur with respect to prepayments. Very difficult to describe. That's one of the reasons we essentially describe the prior five quarters when we speak of net deferred loan costs, amortization, or acceleration, to get a wider view or a wider picture of what occurs, because any single quarter can have outsized impact with respect to prepayments.

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

Okay. If prepayment activity were to slow and the average life of the portfolio lengthens, how much would it have to—I guess you used the word lengthen—to see a repeat of calendar 4Q when you saw a provision expense because of it?

Donavon Ternes (President and CEO)

Internally, we have some of those numbers, Tim, and thumbnails, but if you were to look back at what we have done over the course of, call it, the last four quarters, you can kind of track what prepayments have done over those quarters and what mortgage interest rates have done over those quarters. When mortgage interest rates go up from one quarter to the next, prepayments slow down, and that typically requires a provision because the average life of the portfolio, of course, lengthens. The reverse is true, as you know, with respect to rates going down, prepayments accelerating, the average life of the portfolio declines, and then we recover with respect to what the provision is.

Volatility in mortgage rates has an outsized impact in our loan portfolio because they are primarily 30-year mortgages, 15-year mortgages, and that's much different than a C&I lender, for instance, that might have one-year business loans on their books.

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

Okay. I understand. It turns to capital allocation, capital returns. Obviously, solid, long-standing strategy on how much capital you want to return to shareholders and just looking at the TC ratio, right, for example. Fairly solid, stable, last four quarters. If the volatility in the market were to increase and the value of the shares decline unexpectedly, would you enhance the buyback and return more capital to shareholders, or do you feel, given the uncertainty out there, having more capital on hand is better?

Donavon Ternes (President and CEO)

Anytime there's uncertainty, I think having more capital is better.

With respect to our particular capital plans, we typically take a look at our business plan once a year, and we describe in that business plan the cash dividend that will move from the bank to the holding company. That cash dividend that is then moved up to the holding company will provide for future cash dividends as well as stock repurchase activity. That was accomplished when we adopted our fiscal 2025 business plan. I wouldn't suggest that there would be significant nuance difference with respect to what you'll see in the June quarter in comparison to what we've done over the last three quarters of our fiscal year, simply because we've already set those standards with respect to our business plan. We are in the process of developing our fiscal 2026 business plan, and the same thing will occur.

We will determine what the cash dividend should look like from bank to holding company. Based upon the approval of that business plan, which typically occurs in July of each year, we will then have established the amount of the cash dividend and the amount that we allocate toward stock repurchases. Naturally, if the stock price goes down, we will repurchase more shares, even given that we have a standard amount or a set amount sitting in the allocation for that activity.

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

Okay. One final question for me is, as you compete for loans with the different groups out there, have you seen any change in their behavior or willingness to engage in new loans, etc., given what's happened so far this month?

Donavon Ternes (President and CEO)

If you're referring to the in-market transaction between Columbia and Pacific Premier, we've not really seen anything at this point.

Frankly, Pacific Premier had actually been shrinking their loan portfolio and been out of some of the markets that were in primarily multifamily and commercial real estate loans. We have not seen a great deal of difference there. What I will say with respect to multifamily, there are some relatively aggressive pricers out there on multifamily loans. Even though we might be priced toward the middle of the market as it relates to multifamily loans and competitors, there are some that might be priced 50 basis points, 75 basis points below the middle of the market. I expect that they are gathering a great bit of activity given what their pricing looks like. We are not sure why that is occurring. You would have to ask those specific lenders, I suppose.

At the end of the day, that does dictate to some degree what we are seeing in multifamily in particular.

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

Okay. I was not specifically referencing that transaction, but maybe that followed your follow-up question on the overall market for multifamily. Over the last two years, the number of companies originating multifamily loans in the Southern California market, which again is the second largest housing market, rental market in the country, has declined substantially. I hear what you are saying about the aggressive lenders. Do you get the sense—are you optimistic that more of the market could start moving to you and where your pricing is sooner rather than later?

Donavon Ternes (President and CEO)

Difficult to understand what that timing may look like.

What I know about our pricing and how we look at things, we're looking at yield curve, we're looking to competitors in the market, and ultimately, we're interested in populating spread at the margin that is sustainable over time. If we find that pricing becomes too aggressive, we'll look at other lending products, single-family, for instance. It makes no sense to me to originate multifamily at a yield or a rate lower than single-family, and we see that sometimes. We would simply increase our production of single-family with respect to our needs as it relates to single-digit growth of the overall loan portfolio in comparison to where we need it to be relative to payoffs.

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

Right. Okay. Okay. That's helpful, Donavon. Those are my questions. Thank you.

Operator (participant)

Once again, if you would like to ask a question, please press star one on your telephone keypad. Okay.

That concludes our question-and-answer session. I'll now turn the call back over to Donavon Ternes for closing remarks.

Donavon Ternes (President and CEO)

I'd like to thank everybody for attending this quarter's call, and I look forward to next quarter's call. Thank you very much.

Operator (participant)

That concludes today's conference call. You may now disconnect.