Provident Financial Holdings Inc (PROV) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Craig Blunden. Please go ahead.

Thank you. Good morning, everyone, this is Craig Blunden, Chairman and CEO of Provident Financial Holdings, and on the call with me is Donavon 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, forecasts 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 yesterday from the Annual Report on Form 10-K for the year ended June 30, 2015, and from the Form 10-Qs that are filed subsequent to the Form 10-K. Forward-looking statements are reflective only as of the date they're made, and the Company assumes no obligation to update this information.

To begin with, thank you for participating in our call, and I hope that each of you has had an opportunity to review our earnings release, which describes our fourth-quarter results. You'll note that our mortgage banking business has improved substantially during the course of the last six months, and current conditions are favorable. New applications were strong in the June 2016 quarter as a result of lower mortgage rates and a respectable buying season, despite the tight supply of homes for sale. The increase in applications had a pronounced favorable impact on our [locked] pipeline, suggesting a similar volume of loans originated for sale for the foreseeable future when compared to the volume of the June 2016 quarter.

The loan sale margin for the quarter ended June 30, 2016 increased from the prior sequential quarter, and has moved to the upper end of the range for the past six quarters. Overall, loan sale execution was favorable for the quarter as we were able to price at better levels, given the decline in mortgage rates during the June 2016 quarter. Mortgage banking FTE count in the June 2016 quarter decreased from the March 2016 quarter, and we currently employ 303 FTE in mortgage banking, down from 306 FTE employed on March 31, 2016. During the quarter, we decreased our origination staff by eight professionals but increased our fulfillment staff by five professionals. We will continue to adjust our business model and FTE count as we have in the past, commensurate with changes in loan origination volumes and the mortgage banking [operated] environment.

In the community banking business, loans originated and purchased for investment increased to $70 million from $35 million in the prior sequential quarter, resulting in a meaningful increase in loans held for investment. During the quarter, we also experienced $47.1 million of loan principal payments and payoffs, which is down from $56.3 million in the March 2016 quarter, but still tempering the growth rate of loans held for investment. For the 12 months ended June 30, 2016, loans held for investment increased by 3%, but preferred loans, a component of loans held for investment, grew at 15% rate.

We're pleased with the growth rate of the preferred loan balances, since changing the composition of loans held for investment has been a long-term goal. Preferred loans are now 61% of loans held for investment, and the percentage of lower yielding legacy single-family loans has declined significantly from historical highs.

Credit quality improved on a sequential quarter basis, and you'll note that the early stage delinquencies rose slightly to $1.6 million at June 30, 2016 from $1.5 million at March 31 2016, suggesting that meaningful near-term deterioration is unlikely. In fact, total classified assets have fallen to their lowest level in many quarters, and are now $21.9 million, which is a very manageable level.

In addition to the more routine delinquent loan activity during the June 2016 quarter, we were paid in full on a large, non-performing multi-family loan, that resulted in the recognition of approximately $367,000 of loan interest income and approximately $864,000 of charge-off recovery to the allowance for loan losses. All credit quality activity in the quarter, included the multi-family loan previously described, resulted in a negative provision of $621,000 for the quarter ended June 30, 2016.

Net recoveries were $1.1 million for the June 2016 quarter, compared to net recoveries of $126,000 during the March 2016 quarter, and net recoveries of $96,000 during the December 2015 quarter. We are pleased with these credit quality results. Our net interest margin increased this quarter in comparison to the March 2016 sequential quarter, as a result of the decrease in our average cash balance and the increase in our average balance of loans outstanding, which includes held-for-investment and held-for-sale loans. Additionally, we describe $544,000 of loan interest income received from the payoffs of non-performing loans in our earnings release, which had an outsized positive impact to our net interest margin for the 2016 quarter.

Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that re-leveraging the balance sheet with prudent loan portfolio growth is the best course of action. For the foreseeable future, we believe that maintaining a significant cushion above regulatory capital ratios of 8% for Tier 1 leverage, 9.5% for common equity Tier 1, and 13 total risk based is essential, and we are confident we will be able to do so. We currently exceed each of those ratios by a wide margin, demonstrating that we have the capital to execute on our business plan and capital management goals.

Additionally, in the June 2016 quarter we repurchased approximately 230,000 shares of our common stock. We continue to believe that executing on stock repurchases is a wise use of capital in the current environment. Additionally, yesterday we announced a quarterly cash dividend of $0.13 per share for the distribution scheduled for September 5, 2016, representing an 8% increase from the most recent cash dividend paid.

We encourage everyone to review our June 30 Investor Presentation, posted on our website. You will find 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)

Tim O'Brien, Sandler O'Neill.

Good morning, Donavon and Greg.

Good morning.

Donavon, could you just remind us what the production was, the in-house production this quarter? Not purchased, but just in-house production?

Sure, the total production was $70 million of multi-family commercial real estate and construction, with an additional $12 million of single-family coming out of mortgage banking, for a total of $82 million. Out of that, there was approximately $33 million of purchased multi-family for the quarter.

And how does the pipeline look?

The mortgage pipeline, mortgage banking or the --

No, no, Craig gave pretty good color on that in his remarks, saying that activity looks positive, and similar to what we've just seen for the foreseeable future is what he suggested, so I think that gives us a good sense, but just on the preferred loans pipeline.

Yes, the pipeline is very similar to what it has been over the last six months or so. And if you think about that in the context of what our origination volume has been without the purchase activity for the June quarter -- there's a slide in the investor presentation which would give you some color on what the expectations would be for volume.

But I don't want to discount the potential activity in purchases of [pools] because it seems like we are seeing a bit more opportunity there. We've always looked at purchases in the past, but it has been difficult to find the credit quality at the pricing that we were willing to execute on.

As far as the purchase loans, you guys added this quarter in -- better product out there in the environment. What's the term or structure of those loans, typically? Is there an average life to the pool that you bought, or the pools that you bought, that you're comfortable with, and what are you turning away? What are you interested in and what do you dislike?

With respect to the purchase packages, as it relates to terms, they're generally 30-year terms, but on a 5/1 hybrid ARM structure. The package we purchased this quarter had seasoning from as little as one year to as long as three years. With respect to the credit quality, they fit in the same box as our origination standards. In other words, we're not -- loosened our credit quality with respect to purchases.

Some of the things we don't like, for instance, are interest-only loans; we're not doing anything of that nature. We don't like non-recourse loans, so everything we're doing has a guarantee attached to it unless it's directly to an individual borrower. Our underwriting standards are right where they are with respect to our origination.

And one of the key components, with respect to the purchase activity, is that we are getting a new appraisal on every loan that we are purchasing. So every single one of those loans, we will have another appraisal, so we will understand where the current market is relative to the appraisal that is contained in the file.

Additionally, we have the benefit of not only updated credit history but payment history on the files themselves. The dilemma is that carries some prepayment risk, because most of the packages are coming with a premium. But much of that is offset, because these packages will -- or these individual loans will typically have prepayment penalties as well.

So that premium is going to be amortized over time and that will factor through NII?

Correct.

And be a little bit of a drag, I guess?

Yes, it's a little bit of a drag. We price it with some forecast of prepayment speed, if you will, and our origination's also have prepayment risk, although it doesn't have the premium attached to it. But when we load in the premium relative to the purchase activity and compare it to the origination activity, we are pricing to our portfolio guidelines.

We can get a little tighter than that, because there's less work to do in a purchase package to some degree. Much of the information is already in the file, so there's very little processing, it's straight to underwriting and appraisal, and then credit decision. If I compare the yields, the package that we purchased in June, and I estimate a prepayment speed to them, they are in the low 3[%]s to mid-3[%] yield on a 5/1 hybrid, with probably about 2.5 years of seasoning to it.

And from an LTV standpoint, Donavon, you look at those on an LTV at origination or are you looking at them on a new appraisal origination, based on the new appraisal?

We are doing both. So we look at the underwriting at the time the loan was originated, and then secondarily, because we are getting a new appraisal, we're looking at the current LTVs. But given the strength in the multi-family market of the last few years, I don't think there's a single new appraisal that came in at a higher LTV than at origination. In fact, I think the LTVs in most cases were below what they were at origination.

So the loans you are seeing and evaluating, how much appreciation of these properties seen in the past couple years -- and I'm assuming those properties are in your footprint, is that a fair statement, or they all over California?

Our footprint for multi-family is all over California, so we lend near the urban centers, and that's in Northern and Southern California. So, yes, the footprint is all in California for us. It's really difficult -- I would literally have to go in and look at the files, but I know when we were looking at them in the Credit Committee, the appraisals could come in 5% to 10% higher than what they were.

Okay. Then a quick question for Craig. Craig, I think you -- I didn't catch this, there was some noise in the background in your remarks about -- did you talk about the loan sale margin outlook, and give an indication that it's a little bit stronger here at the -- heading into the calendar year third quarter? That's what I thought I heard, but is that -- am I characterizing your remarks correctly?

First, I was starting to make a comment on your last question, that in addition, on these packages we're also stressing these cap rates, and in fact many times that's something that will throw a loan out, if it doesn't meet our criteria, because it drives the loan-to-value up too far for us. So that's one more thing that we're doing on these -- the analysis of each loan within the purchase packages.

And back to margins, I didn't give an outlook for the margin per se, what I said is that we've been in the upper range of the margins looking back historically, so they have been strong so far.

Thanks for all the color.

Fred Cannon, KBW.

Thanks for taking my question, and you've already provided some great color. I just had a few more narrow questions and I hope I'm not repeating something. On slide 8 of your package, when you showed the loans held for investment, the single-family loans had a pretty good jump year-over-year in the interest rate from 3.28% to 3.66%, while -- during a period when rates generally have come down. So I was wondering if you could give us little bit of color on what the makeup of that single-family piece of portfolio is to get that increase in the yield?

Sure. The bulk of our single-family portfolio is legacy, if you will, and they were all hybrid ARMs, so they are all in their fully-indexed period at this stage. So the result of short-term interest rates rising, and the repricing of the indices upward relative to short-term rates rising, gave us the better yield in the single-family.

Perfect. That makes total sense, and it's more or less in line with the one rate rise we've seen, what's gone on at the short end of the curve.

One question on the -- we also saw a fairly large increase in the held-to-maturity portfolio this quarter, and I apologize if you already went over that, but was there anything in particular, in terms of the package that you guys put into held-[for]-maturity that was especially appealing with what you saw, to drive that increase?

You're talking about investment securities?

Yes, investment securities, sorry, yes.

Nothing out of the ordinary with respect to appealing. What we're doing with respect to the investment securities portfolio is looking for opportunity relative to the environment, and relative to the cash flows of our balance sheet. So to the extent you were to see -- or if you were to see loans held for sale decline, creating cash, and we make some determination that maybe we are at these lower levels for an intermediate term, if you will, we will reinvest that cash into mortgage-backed securities.

Given the new requirements, we made the strategic decision to put them to held-to-maturity, and the cash flow characteristics of the mortgage backs that we're doing, they are either seasoned hybrids that are currently in their fully-adjustable period, giving us interest rate risk protection, or they are seasoned, 10-year, fully-amortizing MBS that are also spinning off significant cash flows over the next couple of years.

Okay. Got it. So to some degree it was -- you have a lot of cash on the balance sheet, and it looked like an opportune time to make some investments that didn't take a lot of great risk with it?

Right.

Right. And then one other on slide 15, and again I hope I'm not repeating something you already said, we did see the recourse reserve drop fairly meaningfully. I was wondering if you could provide a bit of color on that drop on that chart on slide 15?

Yes. During the fiscal year, there was a particular legacy investor that we had been negotiating with as it relates to legacy origination volume pre-crisis. We came to terms with that investor, but toward the end of the March quarter we fully reserved for what we felt was going to be the litigation payment, if you will, and we made that payment in the June quarter.

Okay. And so this level that the recourse reserve is currently at, there's no reason to think it would go back up to its previous, because you took care of the issue that was causing the reserve to be that high?

Correct. And indeed, if we start thinking about some of the components of litigation and perhaps the statute of limitations, we have very little with respect to current origination volume that is coming back to us on a recourse basis, given the underwriting characteristics today. And we are eight years into, seven years into, post-crisis and post-origination of those earlier volumes, so in many respects we do not anticipate any legacy claims coming back to us.

Great. Finally, I know -- I think Tim asked the question already about the gain on sale. My -- what I'm modeling, my impression of what happened during the first half of the year is that the 10-year bond yields fell meaningfully, mortgage rates came down, but not to that same extent, and so to some extent we are in a period of relatively healthy margins. So -- but if we start to see the competition heat up again on the front end, we could potentially see some downward pressure in the future quarters, as you were alluding to, that these current margins are at the high-end -- not -- the high-ish end of where they currently -- they have been. I wanted to see if my understanding is roughly correct with what you were saying, and two, if you have yet to see that front-end competition for the loans start to show any signs of squeezing margins yet?

I think your thought process there is right on, I would agree with that. And at this point, I don't believe we have -- we haven't -- Don is shaking his head, no, we haven't seen that happen at this point.

It's a competitive pressure thing, and we -- everybody in the industry is originating healthy volumes now, so there's very little pricing pressure per se to have full pipelines. But the minute you see rates tick up a bit and pipelines perhaps falling a bit, you will get competitive pressure with respect to the pricing of the product.

Very helpful. I appreciate the time. Thanks so much.

(Operator Instructions)

At this time, there are no further questions.

I want to thank everyone for being on our call today, and look forward to speaking to you all next quarter. Thank you.

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