Provident Financial Holdings Inc (PROV) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Provident Financial Holdings' first-quarter earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Craig Blunden. Please go ahead.

Thank you, Paul. 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, 2016, 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, and I hope each of you have had an opportunity to review our earnings release, which describes our first-quarter results. You'll note that our mortgage banking business demonstrated mixed results this quarter, with improving origination volume but a lower loan-sale margin. New applications remain strong in the September 2016 quarter, as a result of low mortgage rates.

The strength in applications resulted in the second largest locked pipeline of the past six quarters, down 11% from the June 2016 quarter, but suggesting a similar volume of loans originated for sale for the foreseeable future, when compared to the volume of the June and September quarters. The loan-sale margin for the quarter ended September 30, 2016 decreased from the prior sequential quarter and has moved to the low end of the range.

Overall, we were disappointed with the loan-sale execution for the quarter, as we experienced volatility in loan servicing premiums and the cash markets. Additionally, product composition was less favorable, with a higher percentage of lower margin product. Refinanced transactions rose as a percentage of total volume, particularly from the wholesale channel, and we originated a higher percentage of conventional high-balance product. We believe the loan-sale margin will improve from these levels, as a result of better pricing for loan servicing premiums as we progress through our fiscal year.

The mortgage banking FTE count on September 30, 2016 increased from the June 30, 2016, and we currently employ 308 FTE in mortgage banking, up from the 303 FTE employed on June 30, 2016. During the quarter, we decreased our origination staff by seven professionals, but increased our fulfillment staff by 12 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 mortgage banking operating environment. In the community banking business, loans originated and purchased for investment decreased to $47 million from $70 million in the prior sequential quarter.

During the quarter, we also experienced $50.2 million of loan principal payments and payoffs, which was up from the $47.1 million in the June 30, 2016 quarter, and still tempering the growth rate of loans held for investment. Nonetheless, for the 12 months ending September 30, 2016, loans held for investment increased by 6%, a moderate pace of growth, but preferred loans, a component of loans held for investment, grew at a 20% rate.

We're pleased with the growth rate of the preferred loan balances, since changing the composition on loans held for investment has been a long-term goal. Preferred loans are now 63% of loans held for investment, and the percentage of single-family loans has declined significantly from historical highs.

We are very pleased with the credit quality, and you will note that the early stage delinquencies declined slightly to $1.4 million at September 30, 2016 from $1.6 million at June 30, 2016, suggesting that meaningful near-term deterioration is unlikely. In fact, total classified assets remained at very low levels and are now at $22.4 million, which is very manageable. All credit quality activity in the quarter resulted in a negative provision of $150,000 for the quarter ended September 30, 2016.

Net recoveries were at $205,000 for the September 2016 quarter, compared to net recoveries of $1.1 million during the June 2016 quarter and net recoveries of $126,000 during the March 2016 quarter. We are pleased with these credit quality results.

Our net interest margin was essentially unchanged in comparison to the June 2016 sequential quarter, just 2 basis points lower, as a result of maintaining lower average cash balances and the increase in our average balance of loans outstanding, which includes held-for-investment and held-for-sale loans. This is more meaningful when you consider June's net interest margin was augmented by $544,000 of loan interest income received from payoffs of non-performing loans, which was not replicated to the same degree in the September 2016 quarter. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that releveraging 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 the regulatory capital ratios of 8% for Tier 1 capital, 9.5% for common equity Tier 1, and 13% total risk basis, is essential, and we are confident we will be able to do so. We currently exceed each of these ratios by a significant margin, demonstrating that we have the capital to execute on our business plan and capital management goals.

Additionally, in the September 2016 quarter we repurchased approximately 60,000 shares of our common stock, and 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, with the distribution scheduled for December 6, 2016.

We encourage everyone to review our September 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 foundations 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 Coffey, FIG Partners.

Thank you, good morning, gentlemen.

Good morning, Tim

Craig, it looks like expenses -- non-interest expenses have been running higher the past two quarters than the recent period. Is there something structural that has changed and this level should -- we expect that to go forward?

Tim, there is really nothing structural, per se. When you look at what our loan origination volume was in the September quarter and the June quarter, it was higher than the origination volume in the essentially prior three quarters from that, and so there is salary and benefits, and employee costs, that are higher related to incentive comp.

Now, additionally, we described that we were leasing a new building for our home office branch. We described that in an earlier Form 8-K this year. As we are transitioning employees there, as we built out that branch, and now as we are embarking on remodeling our existing home office to essentially administrative headquarters, we're going to see a little bit higher expenses in occupancy expenses as a result of that activity, until we can get the building finished, put personnel back, and begin collapsing some leases back into our improved space.

Additionally, you saw that in the June quarter in other operating expenses, we revised our expense numbers before we filed our 10-K, indicating a potential reimbursement to borrowers with respect to a loan origination error that we discovered. That carried through to the September quarter.

I think the June quarter, as I recall, the number was about $414,000 of additional expense that we had revised into June. That carried over with a tail into the September quarter of approximately $250,000 more. We do not believe there any additional expenses associated with that error. And so that also increased operating expenses a bit in the September and the June quarter.

Okay. Looking at the mortgage production this quarter, the swing from sequential quarters, the swing from purchase to refi being the dominant portion of the production, does that seem, in your minds, a shift in the marketplace or is that just a one-off?

I think it's a response to what happened to mortgage interest rates in the spring, with respect to Brexit. It was just a continuation of relatively low mortgage rates. If you look at what the 10-year did during that time period, relatively low. I think that increased the refinance activity.

Then, additionally, we were in the traditional buying season, if you will. Spring buying season, summer closes, and the like, so I think both of those items resulted in higher origination volume. Certainly the refinance component of that origination volume was really the result of mortgage interest rates.

Right now, we are seeing that the 10-year is backed up I think to about [1.78%] this morning, [1.77%]. We've seen a backup in mortgage interest rates as well as a result of that, and it will have an impact on refinance activity. We don't know how much, but obviously we think it's going to have an impact, and so we could see some curtailed volume as we move into the December quarter, particularly as we get closer to the holidays.

The refinance market, probably not as many people are looking at that, once you start getting into the Thanksgiving/Christmas season, and it will really come to bear after we get into New Year's. Then perhaps refinance would kick in again.

Okay. All right. Thank you. One last question. The market for loan purchases, has that changed in the last quarter?

No, the market really hasn't changed. There is still a strong appetite with respect to the sale of loans. What we experienced in the September quarter, as it relates to the loan sale margin, was specifically a backup in our servicing release premiums and the cash markets. The pricing simply went down. We executed more poorly in those cash markets for those SRPs.

We think that's not a long-term phenomenon. We think we will see improvement as we go again through the fiscal year. We've experienced this in the past on occasion, and that's one of the risks associated with selling to the cash markets on a current basis, but we freely exchanged that current basis risk, if you will, to-tailed risk associated with capitalizing the servicing, and keeping it on our books, and then potentially experiencing negative marks against that, depending upon what the serving actually does that ends up getting capitalized.

Okay. Gentlemen thank you those are my questions.

Thank you.

Tim O'Brien, Sandler O'Neill and Partners

Good morning, can you hear me?

Yes, Tim.

Hi Craig and Donavon. First question, a little higher tax rate, 44.2% this quarter. What's a reasonable thought on run rate? Is it going to revert back to a 42% range?

Yes, it probably ranges from 42% to 44%, and I think if you look back at every quarter, we probably find ourselves in that range. I think I even remember a 41% tax rate. There's a number of moving parts in that number. So if I were you, I would look back over the past four, five, six quarters, see what the tax rate was in each of those, and average them.

Okay, great. And, Craig, can you run the FTE headcount numbers by us again? That's for Provident [Whole] Financial or is it for just mortgage?

That was just for mortgage, if I can find it. Here we go. Okay, we have 308 FTE in mortgage banking, up from 303 at June 30. We decreased our origination staff by 7 professionals, but increased our fulfillment staff by 12 professionals.

What about for the full Company? Do you have those numbers?

We don't generally prepare them or give them out, but they are relatively flat from where we were at June 30, and if you look at the call report, you will see the FTE count in the call report, and that's a total FTE count for the bank. You can back up the FTE for mortgage banking, and you will get the number.

And then last question, can you talk a little bit about your preferred loan pipeline and outlook there, through the remainder of the year, even qualitatively, Craig?

I'll let Donavon do that.

In the September quarter, we did about $47 million out of the CRE Group. Of that $47 million, approximately $23 million was purchased. The remainder was originated.

In addition to that, we did approximately $11 million, $12 million, out of single-family, or PBM, that went into the held for investment portfolio. We still see pretty good pipelines relative to our historical volume, not necessarily in comparison to others in our market, but relative to our historical volume we think we can hit those numbers that we have been accomplishing historically.

We still see loan packages for sale. It seems like we are hitting more of those bids, from the standpoint of pricing and quality. We will continue to look at those packages that make sense for us.

We use the same underwriting criteria. We underwrite every loan in a loan purchase. In fact, we get 20/20 hindsight in many cases, to the extent there is seasoning involved, with the individual loan that gets purchased.

We reappraise the property, so the credit metrics associated with purchases are not materially or significantly different than originations, although there is a bit of a premium risk associated with purchases in contrast to origination volume, although when you calculate the deferred fees and costs line through the old FAS 91, there is still a deferred cost risk associated with prepayment on originations in contrast to purchase volume, but it's a little bit less significant, if you will. So we are comfortable with respect to the pipeline, and what we see in volumes, and we believe we can still continue our moderate growth pace with respect to what we have been seeing in our loans held for investment growth.

And just to follow on to that, are you seeing any shift in market-related pricing on commercial real estate loans? Are there better opportunities? Is pricing improving there? Are you seeing that and is it tangible? You guys have plenty of regulatory capacity to add loans there and grow those portfolios from a regulatory standpoint, right?

Correct. We do fall through some of the screens associated with the 300% threshold, but we are -- or we do have heightened oversight with respect to our internal asset review policies and practices. We believe the OCC, or our regulator, is comfortable with our activity there, so we don't feel any pressure from our regulatory perspective with respect to the growth that we have been seeing in that area.

With respect to market conditions, it's still a very competitive market. I've been reading probably some of the same articles that you have been reading, and some of the comments from some of the other firms that have released earnings and management teams from those firms suggesting that there appears to be a little bit of a break, because some firms that probably reached the limit in their capacity. I think maybe that's somewhat true, but I don't know how material that is with respect to the competitive pressures that we see in the market. We're seeing a little bit better pricing as a result of the backup in interest rates, but I don't know that we are seeing better pricing as a result of fewer competitors.

All right. Thanks a lot.

Fred Cannon, KBW.

Great, thanks for taking my question. Actually, most of my questions have been answered, thanks for being so thorough. I was wondering if we can go back on the gain on sale margins in the mortgage banking, just so I make sure I understand it better. What you were saying is the service release premium is what is creating a lot of the volatility in gain on sale, and so we shouldn't really compare your gain on sale trends to those banks that have the retained servicing, is that correct?

Well, I think there is a difference, when we choose to sell our servicing essentially on a flow basis in the cash markets. There can be some volatility that others may not experience in the same quarter, particularly, or specifically, if they are retaining the servicing and they are valuing the servicing through a servicing model when they are pricing it and putting it on their books. So I can't speak to how they are developing their models per se, and I'm sure they probably have a cash markets component to that model, but there are other components in valuing servicing that they may be valuing different than others in the cash markets are.

And could you -- I think your gain on sale margin declined 36 basis points linked quarter. How much of that was due to the volatility in the servicing release premium?

There were three major components that contributed to the decline. The SRP component was the largest of those three, and I'm not going to break out individually what those three contributed, because I think for competitive reasons that's not necessarily wise. We had lower SRP premiums, that was the largest single component of the 36 basis point decline.

We additionally had a higher percentage of conventional high balance loans, which is a lower margin product. They will typically go to the agencies, but the agencies don't value those high balance conventionals as highly as they do regular conventionals, and then additionally we have a higher percentage of refinance, which also generates a little bit more by way of wholesale production.

So those are essentially the three components that resulted in the 36 basis point decline. The largest of those is the servicing release premium.

Okay. Got it. That's very helpful. I thought it was the latter, and didn't really appreciate the service releasing premium.

All right. Very helpful. Thanks. That's all I had.

(Operator Instructions)

At this time, there are no further questions in queue. Thank you.

All right, if there are no further questions, I'd like to thank everyone for joining us, and look forward to speaking with all of you again at our next quarterly conference call. Thank you.

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