Provident Financial Holdings Inc (PROV) 2015 Q4 法說會逐字稿

Ladies and gentlemen, we would like to thank you for standing by. Welcome to the fourth quarter earnings teleconference call.

(Operator Instructions)

I would now like to turn the conference over to your host and facilitator, Mr. Craig Blunden. Please go ahead, sir.

Yes, good morning everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donavan Ternes, our President, Chief Operating, 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 plans, objectives or goals for future operations, products or services, forecast 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 earlier this morning, from the annual report on Form 10-K for the year ended June 30, 2014, and from the Form 10-Qs that are filed subsequent to the Form 10-K. Forward-looking statements are effective only as of the date 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, which describes the fourth quarter results. We'll note this is the fifth consecutive quarter where community banking and mortgage banking businesses are both profitable, subsequent to the less favorable mortgage banking environment which has developed approximately two years ago. We are pleased that, in comparison to the same quarter last year, net interest income and fee income have both increased, our net interest margin has expanded and our efficiency ratio has improved. Our community banking business is capitalizing on more opportunities regarding loan originations and purchases, and we continue to increase loans held for investment. For the 12 months ended June 30, 2015, loans held for investment grew at a 5% annualized rate and preferred loans, a component of loans held for investment, grew at a 13% annualized rate. However, we're disappointed with our fourth quarter held-for- investment volume which fell short of our expectations and resulted in a sequential quarter decline in the outstanding balance of loans held for investment, the first decline in seven consecutive quarters.

During the quarter, we lost loan origination opportunities of pricing and structure but chose not to compete on those. We lost because the risk versus return did not meet our objective. We are committed to improving the growth rate and will allocate resources necessary to do so. Credit quality deteriorated a bit on a sequential quarter basis, but after reviewing the specific loans, we did not detect a new trend developing, rather the specific loans had been on our radar for some time, a few years in most cases, but just recently deteriorated to the point of nonperforming status. Also you will note that early stage delinquencies fell to $1.3 million at June 30, from $4.4 million at March 31, suggesting that further near-term deterioration is unlikely. We recorded a negative provision of $104,000, from allowance to loan losses during the quarter ended June 30, 2015. Net recoveries were $116,000 for the June 2015 quarter, compared to net recoveries of $130,000 during the March 2015 quarter and net recoveries are $159,000 during the December 2014 quarter. We are pleased with these credit quality results, even though we experienced the June 2014 deterioration.

Mortgage banking FTE count in the June 2015 quarter was essentially unchanged from the March 2015 quarter and we currently employ 315 FTE and mortgage banking, down from the 316 FTE on March 31, 2015 and up from the 312 FTE employed on June 30, 2014. During the quarter, we decreased our origination staff by 11 professionals and increased our fulfillment staff by 10 professionals, largely to improve our efficiency and service levels. We will continue to adjust our business model as we have done in the past commensurate with changes in loan origination volumes. The volume of loans originated for sale in the fourth quarter of FY15 increased from the March 2015 sequential quarter. We carried the large lock pipeline into the June 30 quarter from March 31 and we were successful in converting the bulk of the lock pipeline to funded loan volume. Lock pipeline declined at June 30 compared to March 31, so it would not be surprising to see a decline in loans originated for sale during the September 2015 quarter, although increased purchase volume may blunt to some degree our expectation for lower refinance volume. We believe we are well-positioned to capture our share of mortgage loan origination volume in the markets we serve.

The loan sale margin for the quarter ended June 30, 2015, improved to 139 basis points from the disappointing 125 basis points for the sequential quarter ending March 31, 2015. We experienced a transition to higher percentage of more profitable purchase activity and a lower percentage of less profitable refinance activity in comparison to the March 2015 quarter. Our net interest margin increased this quarter in comparison to the March 2015 sequential quarter, primarily as a result of the special cash dividend received on FHLB stock during the June 2015 quarter. More pronounced was the year-over-year improvement in the net interest margin which increased by 24 basis points and was a result of our efforts to redeploy cash balances to loans held for investment and loans held for sale. These efforts, coupled with the increase in total earning assets, resulted in a 16% increase in net interest income for the June 2015 quarter in comparison to the June 2014 quarter. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that releveraging the balance sheet is essential. For the foreseeable future, we believe that maintaining a significant cushion above the regulatory capital ratios of 8% for tier 1 leverage, 9.5% for common equity tier 1, and 13% total risk-based is critical. We are confident we will be able to do so.

We currently exceed each of these ratios by a wide margin, demonstrating we have the capital to execute on our business plan and capital management goals. Additionally, in the June 2015 quarter, we repurchased approximately 188,000 shares of common stock and we continue to believe that executing on stock repurchases is a wise use of capital in the current environment. Additionally, last week we announced a quarterly cash dividend of $0.12 per share with the distribution scheduled for September 1, 2015. We encourage everyone to review our June 30 investor presentation posted on our website. You will find that we included slides regarding financial metrics, community banking, mortgage banking, asset quality and capital management, which we believe will give you additional insight on our strong financial foundation supporting the future growth of the Company.

We will now entertain any questions you may have regarding our financial results. Thank you.

(Operator Instructions)

Brian [Zambora], KBW.

Just a question on the competition on the loan side. Are you seeing any abatement of the competition or is it continuing into the calendar third-quarter? And how does the loan pipeline look for the held-for-investment side?

Brian, this is Donavan. The one piece of relief we are seeking today in comparison to the June quarter is in pricing. You'll note that the ten-year is backed up a little bit from where the lows were in the June 2015 quarter. As a result, the pricing has become much better from our perspective as it relates to an absolute low that we'll end up putting a multifamily or commercial real estate loan on our books. So that's improved.

Structure of the loan is still very competitive. We have larger lenders doing interest-only loans in that product type. We have lenders who will forgo personal guarantees from some of the sponsors or all of the sponsors in the particular loan. I think structure remains very competitive. I think pricing has become a bit more favorable to us.

Thanks. And then also you had a gain on other real estate. Was it one credit that was a major contributor or did you have several credits that you ended up selling for gain?

There was one specific commercial real estate property. It was a dental office prior to our taking it back in foreclosure.

In fact, there were junior liens against it. They were wiped out through the foreclosure sales. There's a good piece of equity in there for us when we ended up selling it, essentially to another dentist who is going to be opening an office there.

Thank you for taking my questions.

Lucy Webster, Compass Point.

I wanted to touch base on your loan sale margins. From what we are seeing, they are up for the month of July over the June 30 quarter. I was wondering if that syncs with what you guys are seeing in the market, or any sort of longer-term expectations that you may have?

I think we've always described our loan sale margin in a range. And we typically refer to the loan sale margin of the last six quarters in our investor presentation.

125 basis points in the March quarter was the low of that range. 159 basis points in the Q4 2014 quarter was the high of that range. Our expectation is that we will see our loan sale margin come in in that range for the September quarter as well.

Great, that was all I had. Thank you for taking my question.

Tim Coffey, FIG Partners.

When we look at the portfolio, loans held for investments, did you see any extraordinary paydowns or payoffs out of this quarter?

No, in fact, I think payoffs for the quarter -- this year for the June quarter were actually down from payoffs in the June quarter of last year. It's in our earnings release.

My recollection is it is something like $30 million in the June quarter of this year. It was something like $40 million in the June quarter of last year. We have actually seen payoffs actually come in a bit or decline a bit in comparison to last year.

Okay. This next question, if you look at the mortgage market, your expectations for the mortgage business in the second half of calendar 2015, how do you think it will be different or similar to what you saw in the second half of calendar 2014?

What's your forecast of interest rates? ( Laughter )

That seems to be the prevailing backdrop at this point.

Sure, I think the issue becomes the balance between purchase money activity and refinance activity. We even saw in the June quarter that our refinance activity declined a percentage of total volume, but our total volume actually went up because purchase money activity did increase to some degree.

In fact, just anecdotally, it's not a number that we publish. And, in fact, we don't describe it typically. But the month of June was the highest purchase money month that we had over the past 18 months. And it's probably even longer than that, but that was the information I received from our mortgage banker when we were talking about it. The way we think about the back half is we think refinance volume will decline, but we think purchase money activity will increase.

I think that's very similar to what the MBA has come out with in their most recent revision to forecasts. In fact, they expect volumes in total for 2015 to be above their original forecast and they've increased their volume for calendar 2016 as well. They've chalked it up to an increase in purchase money activity.

Okay. How is home affordability in the (inaudible) mortgage business?

It's not getting better, especially along the Coast, as you are probably aware. It's becoming less affordable.

However, that does help us in some of the other areas that we have mortgage offices because it drives the buyers certainly inland. We can serve them very well. But, boy, the numbers have really turned around from 2008 to now.

Yes, and I think, obviously, interest rates rising will hurt affordability to some degree. And then maybe a larger component of that for us is the fact that home prices have appreciated so much in the California markets, both of which drive affordability down.

However, affordability is still better today than it was in the peak, prior to this credit cycle. So much of it will be dictated by what employment growth looks like and what general economic activity looks like, because I do think there is some pent-up demand with respect to purchase. And frankly, a little blip up in interest rates may actually get people off the dime to purchase homes.

Okay. Thank you. Those are my questions.

Thank you.

The last question in queue at this time comes from the line of Tim O'Brien, of Sandler O'Neill & Partners.

Comp costs, salary and benefit costs were up a little bit here in this last quarter relative to the trailing quarter. Can you give a little color on some of the influences there?

The largest influence was with respect to loan origination volume, held for sale loan origination volume. That was up in comparison to the prior sequential quarter. And as a result, our comp costs were up as well.

Now when I am looking at it from a sequential quarter basis, overall operating expenses were essentially flat for the March quarter, but they were up significantly in comparison to the June quarter and that was more related to the volume as well.

And then occupancy drifted down a bit. Was there anything you guys did either -- did you get some lease relief or did you close an office? Why was that?

I would have to look (multiple speakers) specifically but I don't recall an office closing or anything of that nature. We could have had leasehold improvements being fully depreciated in a particular office or something of that nature, which could have allowed that cost to drift down a bit. But I think those are a relatively small number.

And then also it looked like, from a credit standpoint, there was a meaningful uptick in nonperforming loans in your single-family residential, is that right?

Yes, when we look at the MTAs and we drill down specifically to understand why MTAs increased, it was all in the loan portfolio. I think there were five new net SFRs that went to nonperforming status. We drilled down. We looked at each of those. There was no specific trend with respect to the reasons. One was a relatively recent production, I think within the last 18 months or so. In that particular case, it was a divorce. They are selling the home.

The others were all relatively older from an origination standpoint and it ran the gamut. We had one that was a TDR that had gone back to note status that got into trouble and is going to end up walking from the property.

We had another instance where the borrower was essentially fully leveraged with the first second on the property. He had a job offer elsewhere. He simply vacated the property and moved and we are going through the foreclosure on that.

In each case though, we don't expect large losses to occur relative to those five new SFR's that became nonperforming during the quarter.

Are those properties in California?

Yes.

Near Riverside?

Not necessarily. There was one in northern California in the Bay area. That was the divorce situation. The others, I don't specifically recall what the geography was. Even by geography, I didn't notice a trend.

And then last question, I think you alluded to this in the press release, Craig, about reinvigorating -- you didn't use that word -- on the commercial banking, within your commercial banking business, maybe doing some hiring or something. Revitalizing that or taking a run at it here in the -- out the gate in the first year.

Can you give a little bit of color, Craig, about prospects for generating preferred loans here on a go-forward basis and what you guys want to try to accomplish here in the new year?

We've been looking for new commercial loan officers and have been interviewing and starting to hire some more, which will give us, again, some increased presence in our marketplaces to add more portfolio loans in the preferred loan area.

At the end of the day, it gets down to the success of your originators with respect to how successful you may be in origination volume. It is relatively competitive out there. One of the things we are going to end up doing is putting on new hires in that area to originate more volume for us.

Can you give us footings on that? At the end of the fiscal year, what were your production -- what was the size of your production staff for preferred lending, so that next quarter we can see how things settled out, how successful you were on the hiring process. Would that be all right to get from you?

You are looking for a net number of how many more network originators? Is that what you're looking for?

Yes. Did you add any originators this quarter? How many originators did you end the year with?

I don't have a specific number for you but we ended the June quarter with the same number of originators that we ended the March quarter with. Since the end of the June quarter, we have hired one new originator, primarily in the construction loan area. He started, in fact, Monday last week, was his first day.

But we've had many more interviews with respect to others and we anticipate that finding that right person might be a bit difficult. Nonetheless, throughout the remainder of this fiscal year, FY16, we are interested in putting more originators on board.

One last question, you mentioned this in the narrative. Interest-only loans on -- you talked about walking away from some deals where the competition was offering interest-only loans on. Was it commercial real estate or multi or both, Craig?

Yes, it was both.

Can you talk a little bit about -- and whoever is doing that, they are not an incidental participant? Are they a major competitor and market shareholder in those spaces in Southern California? Is it meaningful or is this kind of --

These are meaningful. These are large lenders. They are not Community Banks necessarily. But some of the larger lenders are able to do that. The dilemma with that is these larger lenders have come down market.

Prior to the credit cycle, we didn't see these lenders in the $1 million to $5 million loan space. But those lenders are active in that space now and because the loan size is so small relative to what they generally do, they have been able to loosen underwriting a bit.

What kind of rate can you get? Generalize there. What kind of rate can you get on a multi interest-only loan? What is the lock? What is the fixed period on that loan? What is the structure of a loan that you have seen out there that you think is attractive to a borrower and when they are getting traction?

They will price up for the interest-only nature. In fact, they'll price up as well for the release of guarantors. They'll price up 25 to 50 basis points. But we have seen 10 year interest-only structures where it will balloon in 10 years.

And are they advertising pricing on that? Like you can get this at 4%, something like that?

We see the pricing typically on their rate sheets, but they are not advertising that in the Los Angeles Times, if you will.

So it is not being actively marketed, but it is a viable product that their production staff is making headway with?

Correct. That's the way to think about it. Their production staff has the ability to generate that type of production.

Is this new? Is this a recent kind of occurrence or has it been around for a few quarters?

The interest-only is newer, although we've heard about it in other markets. But that's kind of a newer thing that we have been seeing.

Thanks for that. Thanks for the color, guys.

Thanks.

There are no further questions in queue at this time.

I want to thank everyone for joining us on our conference call and look forward to speaking to all of you again at our next quarter call. Thank you.

Ladies and gentlemen, this does conclude our conference call for today. On behalf of today's panel, we would like to thank you for your participation in today's fourth quarter earnings teleconference call. Thank you for using AT&T. Have a wonderful day. You may now disconnect.