Provident Financial NASDAQ: PROV executives pointed to steadier loan pipeline trends, solid credit metrics, and signs of further net interest margin improvement as the company discussed third-quarter fiscal 2026 results, while noting that lower mortgage rates earlier in the quarter boosted originations but also drove higher prepayments.
Loan growth pressured by elevated prepayments
President and CEO Donavon Ternes said lower mortgage rates for most of the quarter supported higher loan production, but also increased payoff activity. Provident originated $44.2 million of loans held for investment, up 5% from $42.1 million in the prior sequential quarter. At the same time, the company recorded $52.1 million of loan principal payments and payoffs, up 12% from $46.7 million in the December 2025 quarter.
As a result, loans held for investment decreased by about $8 million for the three months ended March 31, 2026, “primarily in our portfolio of single-family loans,” Ternes said.
Looking ahead, management said recent market volatility and a rise in interest rates have caused pipelines that were previously increasing to stabilize. Based on those conditions, the company suggested loan originations in the June 2026 quarter may land “in the mid to upper range of recent quarters,” which Ternes described as between $28 million and $44 million, and he said the company would also expect some moderation in prepayment volume.
Credit quality remains stable; office exposure monitored
Ternes said credit quality “continues to hold up very well.” Non-performing assets were $978,000, or 8 basis points of total assets at March 31, 2026, unchanged from December 31, 2025. He also noted there were no loans in the early stages of delinquency at quarter-end, which he said indicated no emerging credit issues.
Management said it is continuing to monitor commercial real estate loans, “particularly loans secured by office buildings,” but added it believes those credits will continue to perform well based on borrower and collateral characteristics. Ternes said the company’s exposure to loans secured by various types of office buildings totals $36.1 million, representing 3.5% of loans held for investment. He also noted Provident has five CRE loans totaling $1.9 million maturing during the remainder of calendar 2026.
The company recorded a $326,000 provision for credit losses in the March 2026 quarter. Ternes attributed the provision primarily to an increase in the expected life of the loan portfolio, driven by higher mortgage interest rates at the end of the quarter compared with the prior quarter-end. The allowance for credit losses stood at 58 basis points of gross loans held for investment at March 31, 2026, up from 55 basis points at December 31, 2025.
Net interest margin expands; management sees further opportunity
Provident reported a 10-basis-point sequential increase in net interest margin to 3.13% for the quarter ended March 31, 2026. Ternes said the increase was aided by a special cash dividend from the Federal Home Loan Bank, which contributed 9 basis points to yield on interest-earning assets. The margin benefit also reflected a 7-basis-point decrease in the total cost of interest-bearing liabilities, partially offset by an 11-basis-point decline in loan yield.
For the quarter, the cost of borrowings fell 28 basis points to 4.11%, while the average cost of deposits increased 1 basis point to 1.33%, management said. Ternes also noted that net deferred loan cost amortization tied to loan payoffs was a headwind to margin, negatively impacting net interest margin by about 7 basis points versus the average of the prior five quarters.
On pricing, management highlighted that new loan production is coming on at higher rates than the existing portfolio. The weighted average rate of loans originated in the March 2026 quarter was 6.12%, compared with a weighted average rate of 5.20% for loans held for investment at March 31, 2026.
Provident also outlined upcoming adjustable-rate loan repricing. The company has about $135 million of loans repricing in the June 2026 quarter, which it estimates will reprice 72 basis points higher to a weighted average rate of 6.86% from 6.14%. In the September 2026 quarter, about $122 million of loans are expected to reprice 51 basis points higher to a weighted average rate of 6.67% from 6.16%. Ternes said many of the loans are already in their adjustable phase with resets every six months.
On funding costs, Ternes said there is an opportunity to reprice maturing wholesale funding lower due to recent declines in market rates across terms. Excluding overnight borrowings, Provident has approximately $84.5 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 rate of 4.13%. Another $81.7 million of those wholesale and certificate balances mature in the September 2026 quarter at a weighted average rate of 4.05%.
“All of this currently suggests that there continues to be an opportunity for net interest margin expansion in the June 2026 quarter,” Ternes said.
Expense trends and capital actions
Provident reported full-time equivalent headcount of 160 at March 31, 2026, compared with 163 a year earlier. Operating expenses were $7.6 million in the March 2026 quarter, down from $7.9 million in the December 2025 quarter. Management said the prior quarter’s expenses included a $214,000 pre-litigation voluntary mediation settlement expense related to an employment matter. For the June 2026 quarter, Ternes said the company expects operating expenses of approximately $7.5 million to $7.7 million.
Ternes reiterated a short-term strategy focused on “disciplined balance sheet growth by expanding our loan portfolio,” while noting that higher prepayments offset improved origination volume in the March quarter. He also said Provident exceeds well-capitalized ratios “by a significant margin,” which management said supports its business plan and capital management goals.
On shareholder returns, Ternes said the company views maintaining its cash dividend as important and described share repurchases as a capital management tool. During the March 2026 quarter, the board authorized a new stock repurchase program for up to 5% of outstanding common stock. The company repurchased about 92,000 shares for $1.5 million and paid approximately $892,000 in cash dividends. Ternes said the combined capital management activities represented a distribution of about 175% of the quarter’s net income.
Q&A: Prepayments, yield curve normalization, and provision drivers
During the question-and-answer session, Tim Coffey of Brean Capital asked about the drivers of elevated prepayment trends. Ternes cited several factors, led by lower mortgage rates compared with a year earlier. He also pointed to some loans repricing out of their fixed-rate period for the first time, which can raise borrower rates and prompt refinancing activity. Competition for assets is also intense, he said, including pressure on pricing and underwriting characteristics. Ternes added that because rates rose toward the end of the March quarter and remained relatively steady in April, he would expect prepayments to decline somewhat.
Asked how origination activity might look if Fed funds rate cuts do not materialize this year, Ternes said origination volume in the first nine months of the fiscal year was up 24% from the first nine months of the prior year, driven largely by multifamily and CRE production. He said multifamily and CRE volume increased 97% over that period, while single-family volume rose 6%. Ternes attributed the change in posture to yield curve normalization, describing a shift from conditions that penalized originating loans in the “belly” of the curve while funding at the short end, to a more favorable positive spread environment.
On margin expectations, Ternes said the Federal Home Loan Bank special cash dividend was a key contributor to the quarter’s reported expansion, and he suggested looking at a normalized margin trend after backing out that benefit. He said the margin expanded about two to three basis points on a normalized basis in the March quarter, and he indicated the setup for the June quarter may be more favorable given the expected loan repricing upward and wholesale funding repricing downward.
Finally, responding to a question on the provision for credit losses, Ternes said allowance levels are influenced by portfolio size, credit performance, and changes in estimated life tied to prepayment assumptions. He emphasized that interest rates and their impact on estimated portfolio life have been the most significant factor in recent years, with credit risk changes representing a smaller component of the quarter’s provision.
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.
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