Adjustable-Rate Loans And Refinancing Will Secure Future Success

Key Takeaways

• Expansion of net interest margin due to strategic refinancing and cost-reduction initiatives could boost future earnings and profitability.
  
• Loan portfolio expansion and capital management efforts may enhance shareholder returns and increase earnings despite economic and market challenges.
  
• Economic challenges and competitive pressures could impact Provident Financial Holdings' revenue growth, earnings, and risk profile, requiring careful management of expenses and underwriting practices.

Catalysts

Operates as the holding company for Provident Savings Bank, F.S.B.

• The company anticipates an expansion of its net interest margin due to higher interest rates on new and repricing adjustable-rate loans, which could lead to increased earnings in future quarters.
  
• The maturing of Federal Home Loan Bank advances and brokered certificates of deposit at a high rate, combined with current market conditions allowing for refinancing at lower rates, could lower costs and further enhance net interest margins.
  
• Provident Financial has taken steps to improve operating efficiencies, such as maintaining an almost stable FTE count and focusing on lowering operating expenses, which may improve net margins and overall profitability.
  
• The company's disciplined growth strategy focuses on loan portfolio expansion, indicating potential future revenue growth despite current economic uncertainties and market volatility.
  
• Provident Financial's commitment to capital management strategies, including maintaining cash dividends and executing stock buybacks, could improve shareholder returns and lead to higher earnings per share (EPS).

Provident Financial Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Provident Financial Holdings's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.6% today to 20.9% in 3 years time.
• Analysts expect earnings to reach $10.1 million (and earnings per share of $1.64) by about May 2028, up from $6.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 15.3x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 3.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Provident Financial Holdings Future Earnings Per Share Growth

Risks

• The company has experienced a 23% decrease in loan origination for investment between sequential quarters, which could impact future revenue growth as loan origination is a key source of income.
  
• Economic uncertainty due to fiscal policy and higher mortgage rates has resulted in reduced investor activity in real estate, potentially affecting loan demand and revenue.
  
• The company has loosened underwriting requirements in response to demand for adjustable-rate mortgages, increasing potential risk exposure and potentially affecting net margins if default rates rise.
  
• There is notable competition in the multifamily loan sector with aggressive pricing by competitors, which could compress loan margins and affect overall earnings.
  
• Litigation settlement expenses and increased operating expenses are over the expected run rate, potentially impacting net earnings if such expenses recur or increase.

Valuation

• The analysts have a consensus price target of $15.75 for Provident Financial Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $48.3 million, earnings will come to $10.1 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $15.1, the analyst price target of $15.75 is 4.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.