Provident Financial (NASDAQ:PROV) executives said lower mortgage rates helped lift loan originations during the company’s fiscal second quarter, but also contributed to higher prepayment activity that more than offset the production gains, leaving the loan portfolio modestly lower sequentially.
Loan production rose, but payoffs also accelerated
President and CEO Donavon Ternes said the company originated $42.1 million of loans held for investment in the quarter ended December 31, 2025, up 42% from $29.6 million in the prior sequential quarter. Over the same period, the bank recorded $46.7 million of loan principal payments and payoffs, a 35% increase from $34.5 million in the September 2025 quarter.
Management said loan pipelines were “moderately higher” than last quarter and suggested the March 2026 quarter’s origination volume would likely fall within the recent quarterly range of $28 million to $42 million.
Despite the higher originations, loans held for investment decreased by about $4.1 million during the December 2025 quarter, with declines in multifamily, commercial business, and commercial real estate loans partly offset by increases in single-family and construction loans.
Asset quality improved; office CRE exposure discussed
Ternes said credit quality “continues to hold up very well.” Non-performing assets were approximately $999,000 at December 31, 2025—about 8 basis points of total assets—down from $1.9 million at September 30, 2025. He also noted there were no loans in the early stages of delinquency at quarter-end, which he said indicated an absence of emerging credit issues.
While the company continues to monitor commercial real estate loans—particularly those secured by office buildings—management said it remains confident in performance given the underwriting characteristics of borrowers and collateral. Ternes cited the company’s investor presentation, noting exposure to office-related loans totaled $36.7 million, or 3.5% of loans held for investment. He also said the company had six commercial real estate loans totaling $2.8 million maturing during the remainder of fiscal 2026.
The company recorded a $158,000 recovery of credit losses during the quarter, which management said 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, compared to 56 basis points at September 30, 2025.
Margin ticked higher; repricing dynamics highlighted
Provident Financial’s net interest margin increased 3 basis points sequentially to 3.03% for the December 2025 quarter, compared to 3.00% for the quarter ended September 30, 2025. Management said the improvement reflected a 5-basis-point decrease in the cost of total interest-bearing liabilities, partly offset by a 2-basis-point decrease in the yield on interest-earning assets.
The average cost of deposits fell to 1.32%, down 2 basis points sequentially, while the cost of borrowings declined 20 basis points to 4.39%.
Ternes noted that amortization of deferred loan costs tied to payoffs weighed on the margin in the quarter. He said accelerated amortization associated with loan payoffs negatively impacted the net interest margin by about 5 basis points compared to the average of the prior five quarters, whereas it had no impact in the September 2025 quarter.
Management also pointed to new production pricing relative to the existing book. The weighted average rate of loans originated in the December 2025 quarter was 6.15%, compared with a weighted average rate of 5.22% for loans held for investment as of December 31, 2025.
Looking ahead, Ternes said adjustable-rate loans repricing in the March 2026 quarter are expected to reset slightly lower. The company has about $112.2 million of loans repricing in March that it currently believes will reprice 14 basis points lower, to a weighted average rate of 6.85% from 6.99%. In the June 2026 quarter, management expects repricing to move higher, with roughly $125.2 million repricing 38 basis points higher to a weighted average rate of 6.49% from 6.11%.
On the funding side, management said there is an opportunity to reprice maturing wholesale funding at lower rates given market conditions. Excluding overnight borrowings, Provident Financial has about $109 million of Federal Home Loan Bank advances, brokered CDs, and government CDs maturing in the March 2026 quarter at a weighted average rate of 4.12%, and about $79.5 million maturing in the June 2026 quarter at a weighted average rate of 4.15%. Given the interest rate outlook, management said it expects to reprice those maturities to a lower cost and said the current setup “suggests that there continues to be an opportunity for net interest margin expansion in the March 2026 quarter.”
Expenses and capital management
The company reported 163 full-time equivalent employees at December 31, 2025, compared with 162 a year earlier. Management said it continues to look for operating efficiencies to lower expenses.
Operating expenses were $7.9 million in the December 2025 quarter, up from $7.6 million in the September 2025 quarter. The quarter included a $214,000 pre-litigation, voluntary mediation settlement expense related to an employment matter. For the remainder of fiscal 2026, management expects a quarterly run rate of approximately $7.6 million to $7.7 million.
Ternes said the company’s short-term strategy is centered on disciplined balance-sheet growth by expanding the loan portfolio, which he said fits with a stable economic environment and a normalization of the yield curve. However, he said that while origination volume increased in the quarter, “higher loan prepayments more than offset that growth,” leaving the overall mix of earning assets and funding “essentially consistent” with the prior quarter.
He also emphasized capital strength, stating that the company exceeds well-capitalized ratios “by a significant margin.” Management reiterated the importance of maintaining the cash dividend and described stock buybacks as a capital management tool.
- The company repurchased approximately $96,000 of common stock in the December 2025 quarter.
- For the fiscal second quarter, it distributed $906,000 in cash dividends and repurchased about $1.5 million of common stock.
- Management said these capital management activities represented a 170% distribution of the December 2025 quarter’s net income.
Q&A: portfolio growth uncertainty and housing affordability
In response to a question from Janney’s Timothy Coffey about the likelihood the loan portfolio stays flat over the next four quarters, Ternes said it is difficult to predict because payoffs are hard to forecast. He said management’s focus is on increasing origination volume “each and every quarter,” adding that pipelines suggest March 2026 will also be a higher origination quarter.
Asked whether the June repricing wave could be a headwind to loan growth, Ternes said he did not necessarily expect repricing alone to drive accelerated payoffs, noting repricing levels are not “substantially higher” than current new-loan market rates. He also reiterated that payoffs present a “double-edged sword” by complicating loan growth and pressuring net interest margin through accelerated deferred cost amortization.
On potential government initiatives aimed at improving housing affordability, Ternes said California has more demand than available inventory, and that any local, state, or federal actions that expand housing availability or lower construction costs “would be helpful” and could drive more buyers.
About Provident Financial (NASDAQ:PROV)
Provident Financial Services, Inc (NASDAQ: PROV) is a bank holding company headquartered in Jersey City, New Jersey, that conducts its operations through its wholly owned subsidiary, Provident Bank. With origins dating back to 1839, the company has grown into a full-service financial institution offering a broad spectrum of products and services to individuals, small businesses and commercial clients.
The company’s principal business activities include retail banking, commercial lending, mortgage finance and wealth management.
