Provident Financial Holdings Inc (PROV) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Blunden. Please go ahead, sir.

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 may also 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 this morning, from the annual report on Form 10-K for the year June 30, 2016, and from 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 our fourth quarter results.

I'd like to begin this morning by highlighting the strength in our community banking business. Over the course of the last year, our net interest margin has expanded, our loan growth has accelerated, core deposits continue to grow and credit quality remained strong.

In the most recent quarter, loans originated and purchased for investment increased to $43 million from $39 million in the prior sequential quarter, and single-family loans originated by portfolio from the mortgage banking division increased to $31 million in the June 2017 quarter from $19 million in the prior sequential quarter.

During the quarter, we also experienced $45.5 million of loan principal payments and payoffs, which is down from the $46.2 million in the March 2017 quarter and still tempering the growth rate of loans held for investment.

Nonetheless, for the 12 months ended June 30, 2017, loans held for investment increased by approximately 8%, a reasonable pace of growth. But preferred loans, a component of loans held for investment, grew at a more robust 13% rate.

We're pleased with the growth rate of preferred loan balances since changing the composition of loans for investment has been a long-term goal. Preferred loans remain at approximately 64% of loans held for investment, and the percentage of single-family loans has declined significantly from historical highs. However, I would like to point out that the single-family portfolio balance increased for the third consecutive quarter 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; you will note that early-stage delinquencies are very low at approximately $1 million at June 30, 2017, similar to the balance at March 31, 2017, suggesting that meaningful non -- loan -- near-term deterioration is unlikely. In fact, total criticized and classified assets remain at very low levels and are just $13.3 million, which is down from $21.9 million at June 30, 2016, a 39% decline over the course of the year.

The credit quality improvement resulted in a negative provision of $377,000 for the quarter ended June 30, 2017. Net recoveries were $141,000 for the June 2017 quarter compared to net recoveries of $49,000 from the March '17 quarter and net recoveries of $16,000 during the December 2016 quarter. We're pleased with these credit quality results.

Our net interest margin expanded by 9 basis points in comparison to the March 2017 sequential quarter as a result of lower interest-earning deposit balances during the quarter in comparison to the prior quarter sequential quarter. The decrease in interest-earning deposit balances was a result of redeployment of excess cash to fund loans held for investment and purchases of investment securities.

You will note that our mortgage banking business demonstrated mixed results this quarter with an improving origination volume but somewhat lower loan sale margin. New applications increased in the June 2017 quarter as a result of the traditional home buying season but were reduced by lower refinance activity. Additionally, there was a weakness in new applications toward the end of the quarter resulting in a lower locked pipeline at June 30, 2017, when compared to the March 31, 2017 quarter end.

Nonetheless, based on current information, we expect volumes in the September 2017 quarter to be similar to the volumes in the June 2017 quarter, but not to the level of the September 2016 quarter last year.

Loan sale margin for the quarter ended June 30, 2017 decreased from the prior sequential quarter but is still near the top of the range. Overall, we were pleased with the loan sale execution for the quarter, since our loan sale margin held up pretty well against increased competitive pressures.

We will continue to adjust the mortgage banking FTE count as a result of the core mortgage banking environment. On June 30, 2017, the FTE count decreased from March 31, 2017, and we currently employ 253 FTE in mortgage banking, down from a 282 FTE employed on March 31, 2017. During the quarter, we've increased our origination staff by 19 professionals while fulfillment staff declined by 10 professionals. We will continue to adjust our business model and FTE count as we have in the past, commensurate with changes in market opportunities and mortgage banking operating environment.

During the past 6 months, we've reduced capacity to more closely align to the current opportunities in the market, which reflect an uptick in purchase money activity but a significant decline in refinance activity.

Additionally, we're in the process of promoting to a new loan origination system that will be much more efficient for our mortgage banking operations when fully up and running. The new system will allow us to move more quickly to a paperless environment and to streamline the application, processing, underwriting and funding function for our customers, third-party service providers and employees.

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 capitals of 8% for Tier 1 leverage, 9.5% for common equity Tier 1 and 13% total risk base is essential and we're confident we will be able to do so.

We currently exceed each of those ratios by a significant margin, demonstrated with the capital to execute on our business plan and capital management goals. Additionally, in the June 2017 quarter, we repurchased approximately 190,000 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. Over the course of the past year, we've executed substantial returns of capital to shareholders in the form of cash dividends and stock repurchases.

We encourage everyone to review our June 30 investor presentation posted on our website. You'll find that we've 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. Roxanne?

(Operator Instructions) Our first question comes from the line of Brian Zabora with Hovde Group.

So first, a question on the new -- the group of new owners you added at Central Coast, the mortgage originators. Are -- were they fully up and running kind of in the quarter? Or could we see some benefit of that (inaudible) line there this current quarter?

No, I believe they were fully employed, ready to go and they actually started out pretty quickly and surprisingly even better than we expected.

There might have been a little bit less activity in April since we brought them on in February, but when we think about May and certainly June, they were running essentially at full bore with respect to their opportunities. And we would expect maybe a little bit of lift in the September quarter from the June quarter from that branch but not significantly so.

And is that branch, does that -- do they provide you any kind of different types of originations that are maybe more portfolio-able or (inaudible) or are they just kind of -- they're just like the rest of the group?

Well, the loan sizes are lower, it seems, in the Central Coast than what we see in Northern and Southern California. So there's really no distinction with respect to the programs that they originate into or whether it's portfolio or not because we have our portfolio requirements across the bank, if you will. But we do see a little bit of difference in the loan sizes, which were -- frankly helps out a bit in loan sale execution. They're a little bit smaller than Northern and Southern California.

Okay, okay. And then, just highlighting that, it sounds like a new [system] (inaudible) for your [paper survivor] for your mortgage operations. When could we expect this to be kind of online? And how do I think about expenses, maybe what would be front-end expenses and then potential savings down the road?

Really, we're not looking to see those efficiencies until the back half of fiscal '18. The system won't be fully implemented until perhaps 6 months from now and then there's going to be a ramp-up period after that with respect to the operating efficiencies. So really, this -- you can [attend] a fiscal '18 project for us.

Our next question comes from the line of Tim Coffey, FIG Partners.

I haven't seen your presentation yet for the end of the quarter. Do you have the balance of closed loans for the June 30 quarter?

Yes, the...

I'm sorry, not closed, but I mean the locked pipeline. I'm sorry.

Oh, yes. The locked pipeline at June 30 was down a bit from where we were at March 31. Gross locked pipeline is $125 million. The net locked pipeline was approximately $93 million and the fallout ratio was down to 26%.

That was actually going to be my next question, Donavon, is on the fallout ratio, on the fallout trends. Are you seeing anything -- was there anything that occurred late in the quarter that would make you -- or give you pause heading into the -- kind of the September 30 quarter?

Well, the -- just that the locked pipeline was down a bit from where we were in the March quarter and down a bit from where we were -- well, actually down a lot from where we were in the June 30 quarter from last year. With respect to fallout ratio, that's actually declining because there's a higher percentage of purchase money activity in contrast to refinance activity, and so fallout ratio will naturally come down as a result of that. But really, the big question as it relates to mortgage origination volume is not really even driven by interest rates per se as much as it is the sale of [new] inventory. There just aren't as many purchase money transactions being done as there once were. In a relatively good environment as it relates to interest rates, a relatively good economic environment as it relates to employment, as it relates to wages, it just seems like there's some pent-up demand that just isn't being met, and we're seeing [haven't totally] that. Perhaps that's because the inventory just isn't there. There are fewer people selling their homes today.

[Anyway,] we've been hearing that from other mortgage lenders on the West Coast this quarter. That -- so as it relates to Prov, that -- relative imbalance between purchase money and refi loans, is that creating headwinds to the -- your gain on sale margin?

No. Purchase money activity can actually be a little bit stronger than refinance activity as it relates to loan sale margins. So that can actually help loan sale margin a bit. Probably the more striking issue as it relates to loan sale margin is what competitors are doing with respect to their mortgage pricing to keep pipelines up, right, to keep funding volume up. In today's environment, there's too much capacity in the industry. The industry will have to adjust, I think, to lower origination volumes. And as that -- as the industry adjusts, I think pressure on the margin, loan sale margin can increase.

Okay. And speaking of excess pipeline capacity, obviously you made some changes to the origination and the fulfillment staff this past quarter. Would you just say that you'd be -- you would be looking at those numbers in future quarters?

Yes, we'll be tracking this very closely and making any adjustments that need -- we need to do in the future.

Okay. And then, just, Craig, a follow-up on your comments about capital. Obviously, you're above the ratios you were talking about based on the press release. Does -- do you feel -- I mean, do you feel comfortable enough with the capital levels that the board will be able to execute on that recently announced buyback authorization, if they wanted to?

Yes, yes.

Our next question is from the line of Tim O'Brien, Sandler O'Neill + Partners.

Donavon, do you have the purchased -- the percentage of loans purchased relative to refi on a total dollar funded basis for this quarter versus last quarter versus the year-ago quarter?

It's going to be in the investor presentation, which will be posted this morning, if it's not already posted.

Didn't see it. Yes -- but it's coming -- okay.

Yes. But Q4, it was -- 37% was refinanced, 63% was purchase activity. A year ago, the refinance was 48% and purchase activity was 52%.

And what about last quarter, do you happen to have that or I'll get it from the...

The -- I do. The 38% refinanced in the March quarter, 62% purchased, very similar to this quarter.

Okay, great. And is there -- as far as the upgrade of your underwriting software and platform, that initiative, do you -- have you isolated or can you kind of describe what kind of additional cost might be accrued over the next 12 months as a result of that before the benefits kick in?

We obviously have some internal estimates that -- but we don't release them. At some point, we will be switching over to the new origination software or new operating system, and we'll be switching from our existing loan operating system. So all of those costs associated with the existing system will essentially go away. The new system will replace those costs but probably for -- maybe up to 6 months, we'll be having duplicate costs associated with that.

And again, those duplicate costs will start to materialize -- well, in the next quarter, I guess, 3 months out from when you go live? Or is it already -- is it going to start this quarter?

While we -- yes, essentially it'll start in the September quarter. We saw a little bit of it in the June quarter, but very little, an immaterial number, but it will be a little bit higher in the September and December quarters.

And then did you -- I caught the FTE numbers that you gave, Craig, with regard to the mortgage division. But you said originators were up 19 and fulfillment staff was down 10?

No, the originators were down 19 and fulfillment was down by 10 for a total decline of 29...

So 1 word can make a difference. Yes, because I -- it was not jiving with me and -- all right, I got it now. Did you guys -- can you give me again the held for investment, kind of preferred loan originations, the dollar amount that occurred this quarter?

Sure. The impact, net what we're seeing with respect to our originated (inaudible) so single-family number was $30 million -- or $31 million. Multifamily for the quarter, $31 million. Commercial real estate for the quarter was $4 million and construction loans were $5.8 million, now for a total of $71.5 million for the quarter. Additionally, (inaudible) $2.4 million of multifamily in the quarter.

Did you say $0.4 million?

$2.4 million, yes. So in aggregate, $73.9 million, $74 million of loans originated for investment. And that was the strongest quarter this fiscal year. And it was largely because single-family moved up to $31 million from $19 million, $18 million and $12 million in the prior sequential quarters.

And then payoffs were $45.5 million this quarter?

Correct, yes.

Got it. And the single-family that you originated for investment, to hold for investment, that was -- those were ARMs typically. What was the most popular product type there?

5-1 hybrid ARM.

5-1 hybrid ARM?

Yes.

And then, Donavon, you talked about, I don't know, weakness in the market due to fewer home listings. There's good demand but fewer listings. Can you characterize that relative to a -- the year-ago season? Kind of what are trends -- how fewer listings are there this year relative to last year? Is there a way to compare the numbers there? And then beyond that, can you give some clarity as far as the different primary markets that you guys underwrite into in California, maybe some -- I don't know, Inland Empire, Greater L.A./Orange County and then Northern California, something like that. Could you talk a little bit about that?

Sure. The biggest issue was -- or the biggest difference when we're comparing ourselves to last year is that refinanced activity was 48% of the volume in the fourth quarter of '16, and it's only 37% of the volume this quarter. So that's the largest single difference or driver with respect to origination volumes being lower this quarter in comparison to last quarter. And I think that's probably true for the industry. It's certainly true for the West Coast or California. As it relates to purchase money activity, it's very difficult to get a handle on that. You could [look to now the] California realtors. [Colacky] has some information as it relates to that. But anecdotally, what we are hearing is that there seems to be pent-up demand, but there's just not enough supply of homes to originate more purchase money activity right now. Generally, interest rates are okay. They're up from where they were, but they're very low by historical standards. And if you're purchasing a home, I think you're less sensitive to that interest rate. And economic activity is pretty solid in California. So if you look at job growth or wage growth in California, it's pretty sound. But we do have the markets that you described. And so if we think about the markets that we're in, in Northern California, particularly in the Bay Area, they are very frothy markets with respect to prices. And we're starting to see a little bit of weakness in price increases year-over-year and month-to-month, which also suggests that those markets are choppy. And frankly, if we come off of 10% housing price increases year-over-year, that's healthy, it seems to me. If it were 1% or 2%, I think that brings more buyers in and that allows for purchase money activity to occur. It's less competitive than that with respect to pricing in Southern California generally. Although many of the markets in Southern California as well are near their record highs of -- late 2006, early 2007, whatever you choose to be the record high time period, so they're kind of back to those levels again. And then Inland Empire is, as always, much more affordable than anything closer to the coast. So we see good demand in the Inland Empire. But ultimately, the purchase money activity just isn't occurring as it once was.

So speaking of the Inland Empire, what about new listings or inventory of homes available for sale that are out there. How -- are those numbers -- has there been a lot of new homes brought to market by the builders? Is that industry kind of up and running and cranking along in the Inland Empire markets? In the affordable markets, do they have plenty of lots? Or what's the status of that? Are they -- or are they constrained like, I don't know, Bay Area markets or L.A. metro markets, by a lack of lots?

I guess, the smart answer is no. We're not seeing a lot of build. We are seeing some building scattered around the Inland Empire, but nothing like you saw years ago in the early to mid-2000s. Nothing like that.

Yes, I think the lenders are much more disciplined when it comes to projects. There are certainly plenty of lots available. We see projects where there were partially or fully developed lots pre-crisis that ended up not being developed. So we're looking at those, but it does seem like construction lenders are much more disciplined, as they probably should be when one thinks back to pre-crisis and what was going on. And certainly, new supply is coming on and at increasing amounts, but again, not like we once saw.

Are there labor constraints this year relative to last year for the builders? Have you heard about that? Is it a -- is the labor market in the building trades a lot tighter this year than last year? And is that keeping construction down at all?

Been tight for the last 3 years or so. I don't know that it's any tighter now. But it certainly -- labor is certainly an issue for any type of construction, not only new homes, but some of the expensive remodels that are along the coast. We hear that -- there's just a long wait to get projects completed.

Okay. One other question, real quick. Donavon, do you have the final dollar amount for that accrual for the litigation?

Yes, I think it was in the earnings release. It was $1.02 million.

(Operator Instructions) We have a question from the line of Fred Cannon, KBW.

Most of my questions have been answered, but I was just wondering if you might provide a little bit of color on the deposits if you're starting to see some pricing pressure on the deposit side and what you're seeing in terms of competition there.

Yes, we're starting to see a little bit of that. It hasn't impacted us. Our deposit costs have been flat year-over-year, and linked quarter versus sequential quarter. So it hasn't really impacted us. But we are beginning to see some lenders, banks that are being more aggressive with respect to their deposit rates. As we think about the Fed and what they might be doing, I think that does put a little bit of pressure on deposit rates. But by and large, everything has been pretty disciplined, but there are a few players that are out there running specials.

And you haven't seen any need to kind of up your CDs to match some of the rates that we're starting to see?

No, not at the present time. There are a number of other levers that can be pulled with respect to that. We don't want to sensitize our existing deposit holders. We have a great deal of capacity as it relates to brokered CDs if we wanted to go down that path. We have a great deal of capacity from the Federal Home Loan Bank of San Francisco, which we use for interest rate management purposes. So I think as you think about Provident and what we might do to respond to deposit pressures, I don't know that it is necessarily an immediate response to raise our retail CD rates.

And at this time, there are no other questions in queue.

All right. Thank you. We thank everyone for joining us, and look forward to having our conference call at the next quarter. So at this point in time, the conference call is over.

And ladies and gentlemen, this conference will be made available for replay after 11:00 a.m. today, running through the 2nd of August 2017 at midnight. You may access the AT&T Executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code 426764. That concludes our conference for today. Thank you for your participation and for using AT&T Executive TeleConferencing Service. You may now disconnect.