Provident Financial - Earnings Call - Q4 2025

Executive Summary

• Q4 FY2025 diluted EPS was $0.24, down 14% QoQ and 17% YoY, driven by lower non-interest income and higher operating expense; net income was $1.63M.
• Both EPS and revenue missed Wall Street consensus: EPS $0.24 vs $0.285* and revenue $9.69M* vs $10.30M*; prior quarter Q3 EPS beat ($0.28 vs $0.24*) and revenue beat ($10.75M* vs $9.86M*) while Q2 missed on both*.
• Net interest margin (NIM) fell 8 bps QoQ to 2.94% but was +20 bps YoY on better asset yields and lower funding costs; efficiency ratio rose YoY to 78.1%.
• Management guided FY2026 operating expense run-rate to $7.6–$7.8M per quarter (higher vs Q3 guidance), expects NIM expansion in September from loan repricing and lower wholesale funding costs, and maintained the $0.14 quarterly dividend.
• Potential near-term catalysts: anticipated NIM expansion (loan repricing: ~$117M in Sep, ~$98M in Dec; funding maturities ~$71M Sep, ~$105M Dec expected to reprice lower) and continued buybacks (76,104 shares repurchased in Q4).

Values with * are retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• NIM up 20 bps YoY to 2.94% on higher asset yields and lower funding costs, offsetting a modest decline in average interest-earning assets.
• Credit quality strong: non-performing assets down to 0.11% of total assets; no charge-offs; allowance for credit losses at 0.62% of gross loans.
• CEO tone constructive: “net interest margin has improved, deposit balances have stabilized, borrowings have declined for three consecutive quarters, and credit quality remains strong… we are optimistic about the outlook”.

What Went Wrong

• Non-interest income fell 40% YoY to $0.88M, largely due to absence of a prior-year $540K equity gain related to VISA share conversion.
• Efficiency ratio worsened YoY to 78.06% (+~590 bps), reflecting higher operating costs versus revenue generation.
• Elevated prepayments interrupted two quarters of loan growth and contributed to NIM pressure (-8 bps QoQ) and portfolio contraction in June quarter.

Transcript

Speaker 1

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Provident Financial Holdings fourth quarter and fiscal year 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 that time, simply press star and the number one on your telephone keypad. I would now like to turn the call over to Donavon Ternes, President and Chief Executive Officer. Donavon, please go ahead.

Speaker 0

Thank you, Tiffany. Good morning. This is Donavon Ternes, President and CEO of Provident Financial Holdings. On the call with me is Peter Pham, 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 plan, 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 may also 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 statements 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-Q 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 that we distributed yesterday, which describes our fourth quarter and fiscal 2025 results. In the most recent quarter, we originated $29.4 million of loans held for investments, a 5% increase from $27.9 million that were originated in the prior sequential quarter.

During the most recent quarter, we also had $42 million of loan principal payments and payoff, which is an increase of 83% from $23 million in the March 2025 quarter. Real estate investors have been more cautious as a result of the higher mortgage rates and uncertainties in the market, although we continue to see moderate activity in loans held for investments. However, we are seeing consumer demand for single-family adjustable-rate mortgage products stabilize, and we will continue to make prudent adjustments to our underwriting requirements within certain loan segments to encourage higher loan origination volumes.

Additionally, our single-family and multifamily loan pipelines are higher in comparison to last quarter, suggesting our loan origination volumes in the September 2025 quarter will be similar to or higher than when compared to the June 2025 quarter and around the middle to higher end of the range of recent quarters, which has been $19 million and $36 million. For the three months ended June 30, 2025, loans held for investment decreased by approximately $13.2 million, with the decrease mostly coming from multifamily, commercial real estate, and commercial business loans, partly offset by a small increase in single-family loans. Current credit quality continues to hold up very well, and you will note that non-performing assets were $1.4 million at June 30, 2025, unchanged from March 31, 2025. Additionally, there were no loans in the early stages of delinquencies at June 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 $39.5 million, or 3.8% of loans held for investment. You should also note that we have just 10 CRE loans that total $5.1 million, maturing in fiscal 2026. We recorded a $164,000 recovery of credit losses in the June 2025 quarter. The recovery recorded in the fourth quarter of fiscal 2025 was primarily attributable to a decline in the balance of loans held for investment, a decline in historical loss factors, and lower classified assets, partly offset by a slightly longer average life of the loan portfolio.

The outstanding balance of loans held for investment at June 30, 2025, decreased by $13.2 million from March 31, 2025. The allowance for credit losses to gross loans held for investment was 62 basis points at June 30, 2025, unchanged from March 31, 2025. Our net interest margin decreased 8 basis points to 2.94% for the quarter ended June 30, 2025, compared to the 3.02% for the sequential quarter ended March 31, 2025. The net results of a six basis point decline in the average yield on total interest earning assets and no change in the cost of total interest earning liabilities. Our average cost of deposits increased to 1.33%, up seven basis points for the quarter ended June 30, 2025, while our cost of borrowing increased six basis points to 4.58% in the June 2025 quarter compared to the March 2025 quarter.

The net interest margin was negatively impacted by approximately four basis points as a result of higher net deferred loan costs associated with loan payoff in the June 2025 quarter compared to the net average, net deferred loan cost amortization of the previous five quarters, in contrast to a two basis point positive impact in the March 2025 quarter. Also, the March 2025 quarter had a benefit of three basis points from approximately $94,000 of loan interest recovery that was not replicated this quarter as a result of non-performing loan payoff and loan classification upgrades. New loan production is being originated at higher mortgage interest rates than the weighted average of the existing portfolio. The weighted average rate of loans originated in the June 2025 quarter was 6.69% compared to the weighted average rate of 5.16% for our loans held for investment as of June 30, 2025.

In addition, our adjustable-rate loans are re-pricing at interest rates that are higher than their current interest rates. For example, we have approximately $117 million of loans re-pricing in the September 2025 quarter to an interest rate currently forecast to be 15 basis points higher to a weighted average interest rate of 7.23% from 7.08%. Additionally, we have approximately $98 million of loans re-pricing in the December 2025 quarter to an interest rate currently forecast to be 15 basis points higher, similar to the September quarter, to a weighted average interest rate of 6.88% from 6.73%. I would point out that there is an opportunity to re-price the term wholesale funding downwards as a result of current market conditions, where interest rates have moved lower across all terms.

Excluding overnight borrowing, we have approximately $71 million of Federal Home Loan Bank advances, brokered certificates of deposit, and government certificates of deposit maturing in the September 2025 quarter at a weighted average interest rate of 4.43%. Additionally, we have approximately $105 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%. Given current market conditions, we would expect to re-price these maturities to a lower weighted average cost of funds. All of this suggests there is an opportunity for expansion of the net interest margin in the September 2025 quarter. We continue to look for operating efficiencies throughout the company to lower operating expenses. Our FTE count on June 30, 2025, was 163 compared to 160 one year ago.

You will note that operating expenses were $7.6 million in the June 2025 quarter, a decrease from $7.9 million in the March 2025 quarter. Operating expenses for the June 2025 quarter represented a more normalized run rate. In the March 2025 quarter, operating expenses included $239,000 of litigation settlement expenses and $27,000 of executive search firm costs. For fiscal 2026, we expect a run rate of approximately $7.6 to $7.8 million per quarter. Our short-term strategy for balance sheet management is more growth-oriented than last fiscal year. We believe that disciplined growth of the loan portfolio remains the best course of action at this time, as we recognize that the Federal Open Market Committee has recalibrated to looser monetary policies, and the inverted yield curve has begun to reverse back to an upwardly sloping curve.

We were successful in the execution of the strategy in the June 2025 quarter, with loan origination volume at the higher end of the quarterly range. However, loan prepayments were higher than the prior sequential quarters, offsetting the higher loan production volume. The composition of total interest earning assets improves with a higher percentage of loan receivable and interest earning deposits to total interest earning assets and a lower percentage of investment security to total interest earning assets. Additionally, the composition of total interest earning liabilities improves with an increase in the average balance of deposits and a decrease in the average balance of borrowing. 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 76,000 shares of common stock in the June 2025 quarter. For the fiscal year, we distributed approximately $3.8 million of cash dividends to shareholders and repurchased approximately $4.3 million worth of common stock. Accordingly, our capital management activities have resulted in a 129% distribution of fiscal 2025 net income. We encourage everyone to review our June 30th 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 insights 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. Tiffany, please proceed.

Speaker 1

At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. We will pause for just a moment to compile the Q&A roster. Your first question comes from Frank Williams with Piper Sandler. Please go ahead.

Hi everyone. Thank you for the 2026 outlook and the outlook on the back half of the year as well. I just have one question. Has the recent uptick in prepayments shifted your view on portfolio mix or origination? Basically, are you leaning more into certain segments to offset the runoff?

Speaker 0

Yeah, our mix is primarily, you know, what we would prefer, I suppose, is 50% single-family, 50% multifamily. To the extent we're not meeting our goals with either of those buckets, we'll increase the mix of one type over the other as it occurs. Single-family has been outperforming on the volume perspective over the last few quarters, although this quarter we did realize more volume in multifamily and commercial real estate than the recent prior quarters. Nonetheless, we're not married to a straight mix in the portfolio as long as we're generating the volume out of those two types.

Awesome, awesome. Just one other, I guess on expenses. That's very helpful, the outlook. Is there an efficiency ratio, though, that you guys target? I know earlier in like 2025-ish, you guys bounced under that 70% efficiency. Sorry, 2024 rather, you bounced under that 70% efficiency. Is that something that you guys think you'll be able to get back to?

It depends on portfolio growth, right? What I would describe is that our current operating expense baseline will be able to fund future growth of the loan portfolio into the balance sheet. Ultimately, as we grow the loan portfolio and grow total interest earning assets and ultimately grow total assets, we will be able to reduce that efficiency ratio over time into a better ratio for a smaller company such as ours from where we currently are.

Awesome. Yeah, that's definitely, so thank you so much. I appreciate it.

Speaker 1

Your next question comes from Tim Coffey with D.A. Davidson. Please go ahead.

Good, thank you. Morning, gentlemen.

Speaker 0

Morning.

Donavon, the increased payoff this quarter, a function of, I'm assuming case competition. Is it primarily on price that's the friction, or is it also pressure?

I think it's probably both, Tim. If we were to look at our pricing, we're priced relatively competitively in both single-family and multifamily. Our underwriting characteristics are perhaps a little bit tighter than some of the others in the market. That speaks to the credit quality we've had over time. I would argue it is probably more structure than it is price. Although in both single-family and multifamily, we have been loosening underwriting restrictions. With single-family and multifamily, we're probably back to underwriting to pre-COVID criteria, when we tightened up during COVID. In commercial real estate, other than multifamily, we're still a little bit tighter, particularly in the office segment or some of the other out of favor segments.

Thanks, Tiff. That's helpful. Just double-checking my notes here, on the loans that are re-pricing in the next two quarters, what was the dollar value of that for the September quarter?

In September, we have approximately $117 million re-pricing upward by approximately 15 basis points.

Okay. For the December quarter, what that 15 basis point improvement was to, what?

It's approximately $98 million.

Okay, what was it re-pricing to?

6.88%.

Okay. Perfect. That's a good report. The expense outlook is helpful. Can you remind us what the seasonality is to that, given that you do operate on a fiscal year?

The March quarter of every year, you'll see higher operating expenses primarily in the salary and benefits line, because of employer taxes being paid until some of the higher wage earners max out, if you will, on some of those tax obligations. The March quarter is really the one quarter out of the four that have a little bit of seasonality to it.

Okay. No intermediate impact from, you know, salary adjustments?

July 1st, we obviously seem to have increases to merit. That's why we guided higher in that $7.6 to $7.8 million range per quarter in the September and thereafter quarters, in contrast to our prior guides, which was, I think, $7.6 to $7.7 million per quarter.

Okay. That's super helpful. Just a question on the loan-to-deposit ratio. Obviously, it's elevated relative to peers, but as you can tell in your earnings release, you have ample liquidity. What is the range of the loan-to-deposit ratio that you prefer for loans?

In our business model, Tim, lends itself to a higher loan-to-deposit ratio. Since we're essentially mortgage lenders for the bulk of our mortgage or the bulk of our loan portfolio, there are no drawdowns that come out of borrower requests on an ongoing basis, such as a commercial and industrial portfolio. There's no dry powder that the borrower can draw from with respect to our portfolio. As we're forecasting out cash flow, it's a bit more stable for us than many. As a result of that, we can run higher loan-to-deposit ratios, and we have historically done so. Recently, we've brought that down, probably about five basis points. I think we were in the 120s and now we're in the mid 120s. We will continue to work that down as deposit liquidity improves, as deposit competition improves in our market. Nonetheless, we are more comfortable with higher loan-to-deposit ratios.

All right. That's great to know, Donavon. Thank you. Those are my questions.

Speaker 1

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

Speaker 0

I appreciate everyone's participation today on the call. As always, you can follow up with us if you wish. We are always open to having individual conversations. With that, I look forward to next quarter's call. Thank you.

Speaker 1

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.