Provident Financial Holdings Inc (PROV) 2017 Q2 法說會逐字稿

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

(Operator Instructions)

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

Thank you. 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, forecasts of financial and 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 managements 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 last Friday and the Annual Report on Form 10-K for the year-ended June 30, 2016, and from the Form 10-Qs filed subsequent to the Form 10-K. Forward-looking statements are effective only 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 each of you has had an opportunity to review our earnings release, which describes our second-quarter results. You will note our mortgage banking business demonstrated mixed results this quarter, with improving loan sale margin, but a lower origination volume.

New applications declined in the December 2016 quarter, as a result of higher mortgage rates. Weakness in applications resulted in the lowest pipeline of the past six quarters, down by approximately 50% from the September 2016 quarter, suggesting lower volume of loans originated for sale for the foreseeable future, when compared to the volumes of December 2016 and September 2016 quarters. The loan sale margin for the quarter ended December 31, 2016 increased from the prior sequential quarter, and has moved to the middle of the range.

Overall, we're pleased with the loan sale execution for the quarter, as we experienced less volatility in loan servicing premiums in the cash markets. The mortgage banking FTE count on December 31, 2016 decreased from September 30, 2016, and we currently employ 306 FTE in mortgage banking, down from the 308 FTE employed on September 30, 2016.

During the quarter, we decreased our origination staff by two professionals, while our fulfillment staff was unchanged. We will continue to adjust our business model and FTE count as we have in the past, commensurate with changes in market opportunities, and the mortgage banking operating environment.

In the community banking business, loans originated and purchased for investment increased slightly to $48 million from the $47 million in the prior sequential quarter. During the quarter, we experienced $54.7 million of principal loan payments in payoff, which is up from the $50.5 million from the September 2016 quarter, and still tempering the growth rate of loans held for investment.

Nonetheless, for the 12 months ended December 31, 2016, loans held for investment increased by approximately 7%, a moderate pace of growth, but preferred loans, a component of loans held for investment, grew at a17% range. 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 64% of loans held for investment, and the percentage of single family loans has declined significantly from historical highs. However I'd like to point out that the single family loan balance increased this quarter for the first time in many quarters, because the rise in mortgage interest rates has resulted in an increase in adjustable rate, originations and purchase opportunities. We welcome this change in adjustable rate single family market conditions, and believe it will result in future opportunities to grow our loan portfolio.

We're very pleased with credit quality, and you will note that early stage delinquencies declined slightly to $1.3 million at December 31, 2016 from $1.4 million at September 30, 2016, suggesting that meaningful near-term deterioration is unlikely. In fact, total classified assets remained at very low levels, and are now $21.2 million, which is very manageable.

The credit quality activity resulted in a negative provision of $350,000 for the quarter ended December 31, 2016. Net recoveries were $16,000 for the December 2016 quarter, compared to net recoveries of $205,000 during the September 2016 quarter, and net recoveries of $1.1 million during the June 2016 quarter. We're pleased with these credit quality results.

Our net interest margin was essentially unchanged in comparison to the 2016 sequential quarter, just 1 basis point higher, as a result of very similar average balances and rates for the major components of the balance sheet, in comparison to the prior sequential 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 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're confident we will be able to do so. We currently exceed each of those ratios by a significant margin, demonstrating that we have the capital to execute on our business plan and capital management goals.

Additionally, in the December 2016 quarter, we repurchased approximately 86,000 shares of our common stock, and we continue to believe that executing on stock repurchases is a wise use of capital. Additionally, last week, we announced a quarterly cash dividend of $0.13 per share for distribution scheduled for March 8, 2017.

We encourage everyone to review our December 31 investor presentation posted on our website. You'll find it includes 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)

Our first question comes from the line of Tim Coffey with FIG Partners.

Craig, based on your comments about the mortgage business right now, do you see Q2 rebounding potentially?

I think there's a good chance Q2 will start increasing. It's the time of year when we would expect, once we get past the holidays and through January, that business will start picking up. At least that's what's happened traditionally.

Yes, the one wild card with respect to thinking about where the March quarter or the June quarter may go is where refinance rates go. We would expect a decline in refinance volume, in comparison to what they were at this time last year. However, we also expect that there might be an increase in purchase money volume, as it relates to this time last year, although I'm not certain that the increase in purchase money volume would necessarily offset the decline in refinance volume.

So overall, we think we have an opportunity here, but it's also possible that we would see origination volume decline.

And if we do see that change in mix within the origination business activity, what would that mean for your margin? The loan sale margin, could that strengthen?

Well, generally when there's a great deal of competition for fewer loans, there will be those that are pricing down their loan sale margins, to keep their origination activity higher. And so I think that one could expect the loan sale margins well to come under pressure.

However for us, when you think about what has occurred with our loan sale margin, primarily as a result of selling our servicing release in the cash markets, the servicing release premium declined in the September 2016 quarter, so July, August, September. And that SRP margin or component actually increased in the October, November, December quarter, which improved our loan sale margin. And it increased because the value of servicing went up as a result of a rise in interest rates.

So, depending upon how you execute on your servicing, we execute by selling it into the cash markets. In comparison to those who execute on servicing by retaining it in the portfolio, where they're modeling their mark, that could be one favorable component in the loan sale margin, as we think about where we are in the business cycle for mortgage banking. So I think that's a positive component, but I also think that market pressures and the competitive nature of the market was a negative component.

So do you think it's too early to tell, or do you think that it could fluctuate just within a tight range?

I think it's too early to tell, because ultimately, it will be determined by loan sale margin -- or by loan sale volume. And if we see volume come down significantly, I would expect some compression in the loan sale margin for the industry, as a result of what the competitive pressures are. But that may or may not affect us in the same way, because at the same time, if that origination volume was declining as a result of rising interest rates, the value of the servicing released premiums, or the SRPs, are going to go up.

Okay, understood. And then if you look at your net interest margin, because your loans held for sale are part of kind of the average loan balance calculation every quarter. Would you anticipate your margin could come under a little bit of pressure, if the average loan balances decline due to lower mortgage banking activity?

Yes, if you think about loans held for sale, being on our books at call it the high 3%s, and if that balance is declining as a result of lower loan origination volume, it's going to turn into cash. And as a result of it turning into cash, we will be redeploying it either into our own held for investment activity, or investment securities, or cash balances. And if it's in investment securities and cash balances, it will be at lower absolute rates, than if it were in loans held for sale.

And then the opposite side of that is, what are you seeing in the market in terms of opportunities to purchase some of the preferred loans?

We're seeing about the same opportunity with respect to preferred loans. I think there's some originators in the market that are selling their portfolios as a result of concentration, and so we're seeing those packages. Whether or not we can execute on them is a function of price.

Some we can execute on, others we can't. But I do want to point out another thing that has occurred. We purchased, for the first time in many quarters, about a $9.5 million single family portfolio, adjustable rate, with seasoning.

They were 5-1 ARMs originally, and now with seasoning, they are something less to their repricing stage, or repricing characteristic. And what we're seeing there, as interest rates rise, we think that adjustable rate product will come more into favor for some of the borrowers or applicants, and as a result, ARM production may increase, and that ultimately means more opportunity by us, or from the market, with respect to putting single family on our books. Which we've been doing, but not at a tremendous amount, because we sell fixed rate and we only keep adjustable rate.

So for the quarter we originated about $18 million of single family ARMs and we purchased another $9.5 million of seasoned single-family ARMs. And those two components together actually resulted in a higher single family portfolio at the end of the quarter, in contrast to the September 30 balance.

Well, those are all my questions. Thank you very much for the color.

Our next question comes from the line of Fred Cannon, KBW.

Thanks for the color on the mortgage business. I wanted to ask you about your deposit sensitivity as rates begin to rise, and what you're seeing in terms of your need to raise deposit rates since the second Fed rate hike, and also your expectations for deposit betas moving forward?

We haven't seen tremendous pressure in our markets, with respect to deposit rates. There are a few players in our markets that seem to have more need than others, and so we seen their rates increase a little bit. But by and large, I think there's been relatively good deposit rate discipline by our competitors in our markets.

The other thing that for us, specifically, as we think about where our cash balances are, and where our cash balances may go as a result of lower loans held for sale balances, we aren't necessarily going to see the same need that others in our markets may see, with respect to deposit balances. So our view is that we can essentially lag the market to some degree, with respect to increasing our deposit rates. And so I think there could be some pressure, depending upon how quickly our competitors move, but I think there's less pressure on us specifically, in comparison to other competitors, as it relates to what our balance sheet looks like, and what it may look like if held for sale balances go down.

Right, that makes a lot of sense. And then regarding -- related to that, you just discussed about how in a rising rate environment, we tend to see consumer demand pick up for variable rate and hybrid loans, relative to fixed rate loans. If we do see that, and you can see some reasonable growth in that, would we -- should we think that we would just see the cash balances redeploy to support those loans, or would we see the balance sheet actually grow?

Initially, you would see redeployment of growing cash balances, to the extent held for sale generated those cash balances. But over time, that loans held for sale balance is going to become stable, relative to the market opportunity we have, and then we'll no longer be spinning off cash balances. As a result of that, you could see total assets increase as a result of redeployment into held for investment loans.

And then you don't have any constraint on growing your balance sheet, if you did see that type of environment, do you?

There's no constraint other than our own internal goals, credit quality, capital ratio goals, et cetera.

Great and then I know you guys have purchased the variable rate production. Is there a lot of competition for those loans in the marketplace, or do you feel like there's a pretty good opportunity, if we see demand pick up for hybrids?

Well I think there's an opportunity, as the origination market changes. I would expect that there would be more hybrid ARMs available, and whether or not then those hybrid ARMs come to market in secondary sales is a different question, but certainly, we've seen hybrid ARM packages, and as a result of that, that's something we're going to continue to look at.

Great. Well this is very helpful. I think that's all my questions.

(Operator Instructions)

Our next question is from Tim O'Brien, Sandler O'Neill.

It's actually Alex Morris on for Tim. Appreciate the color you provided on the single family purchase during the quarter. If I missed it, I apologize, did you provide the dollar amount of the other loan purchases during the quarter in the mix?

I didn't, but we purchased $16.9 million of multifamily, as well.

Got it, and heading into the New Year, is there any qualitative or even quantitative color you could provide on how the preferred loan pipeline has changed over, call it the past three or six or 12 months?

Well I don't think its changed, per se. I think the competition with respect to multi-family and commercial real estate loans is still very significant, and as a result of that, there's significant competitive pressure. I would, however describe and it [changed] maybe the last six months more than the last 12 months, it seems there are more competitors that are describing that their multi-family and commercial real estate balances are getting concentrated, to the point where they are inclined to slow the growth rates in those portfolios.

And to the extent that they are interested in slowing the growth rate in those portfolios, it creates more opportunity for us, if we think about the entire origination environment. So still very competitive.

There's good demand with respect to that product. The secondary market with respect to that product still demonstrates fairly good demand, and as a result it's really competitive.

Sure, that's helpful. You mentioned earlier regarding the pricing has been appropriate, or at least you're seeking out purchases for pools where the pricing makes sense. Are you also seeing credit standards that are up to what you would like to put on the balance sheet, or is it harder to find opportunities where the credit matches the profile of what you want?

People always have difficulty with respect to credit profile. We look at a number of packages. We are very quick to throw loans out in specific packages that we may have negotiated.

And so the packages themselves, in our view, with respect to credit quality are probably the same than they were, say 12 months ago. And it gets down to discipline in our review and re-underwriting of the loans themselves, with respect to what we are willing to put in the portfolio. And we don't deviate from our own origination standards.

And if these individual loans don't meet those standards, whether it's single family or multi-family, we are not reluctant to throw a loan out of a particular pool.

Sure, appreciate that color. And just lastly for me, given the rise in rates that we saw in the back half of the quarter, has there been any change in pay off and pay down activity so far in this calendar first quarter of the year, relative to the uptick in principal payments you saw in the December quarter?

I think that it's too new to rate. The December quarter was pretty healthy. We had about $55 million come back, or roughly $55 million approximately. And I think that it's too new to rank with respect to the March quarter, although I think there is an expectation by us and others that as mortgage interest rates rise, refinance activity will decline, and as a result, prepayment will come down.

Very helpful. Thanks for answering all my questions.

At this time, there are no other questions in queue.

If there are no other questions for us at this time, we look forward to speaking with all of you at our next quarterly conference call. Thank you.

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