Provident Financial Holdings Inc (PROV) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the second quarter earnings conference call. (Operator Instructions) Also as a reminder, today's conference is being recorded.

I would now like to turn the call over to your host, Mr. 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, 2017, and from the Form 10-Qs that were 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 second quarter results.

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

In the most recent quarter, loans originated and purchased for investment increased to $22 million from $20 million in the prior sequential quarter. And single-family loans originated for portfolio from the mortgage banking division decreased to $12 million in the December 2017 quarter from $25 million in the prior sequential quarter. Although the portfolio loan volume was down on a sequential quarter basis, it's too early to suggest that this is a newly developing trend particularly since the December quarter was heavily influenced by the holidays.

During the quarter, we also experienced $57.4 million of loan principal payments and payoffs which is up from $43.4 million in the September 2017 quarter and still tempering the growth rate of loans held for investment. Additionally, we estimate the increase in acceleration of amortization of net preferred loan costs associated with the loan payoffs in December quarter in comparison to the September quarter reduced our net interest margin by approximately 7 basis points.

For the 12 months ended December 31, 2017, loans held for investment increased by approximately 2%. And preferred loans, a component of loans held for investment grew at a 3% rate. We're somewhat disappointed with this growth rate, but we're unwilling to loosen our underwriting standards which goes against our credit culture. But we're encouraged by the outlook for single-family adjustable rate originations and purchase opportunities as a result of the rise in fixed mortgage interest rates and believe will result in future opportunities to accelerate the growth of our loan portfolio.

We're very pleased with the credit quality and you'll note that early-stage delinquencies are approximately $1.5 million at December 31, 2017, essentially unchanged from September 30, 2017, and very low from an entire cycle perspective. In fact, total criticized and classified assets remained at very low levels and are now just $13.8 million which is down from the $21.2 million at December 31, 2016, a 35% decline over the course of the year.

We experienced a small net recovery of $23,000 during the quarter ended December 31, 2017, compared to a modest net charge-off of $145,000 for the September 2017 quarter and net recoveries of $141,000 during the June '17 quarter.

As a result, we recorded $11,000 negative provisions December of 2017 quarter. We're pleased with these credit quality results.

Our net interest margin expanded by 3 basis points for the 6 months ended December 31, 2017, compared to the same period last year as a result of a 2-basis point increase in average yield of total interest-earning assets and a 2-basis point decrease in the cost of interest-bearing liabilities.

It should be noted that our deposit costs declined by 4 basis points in the 6 months ended December 31, 2017 compared to the same period last year.

Over the course of last year, we've been able to hold the line on the cost of core deposits while increasing the balance of core deposits and decreasing the balance of time deposits.

You'll notice we're still adjusting our mortgage banking business model to respond to a generally poor mortgage banking environment.

We currently employ 212 FTE in mortgage banking, down from the 237 FTE employed on September 30, 2017. During the quarter, we reduced our origination staff by 6 professionals while our fulfillment staff declined by 19 professionals.

The adjustments are more pronounced for the calendar year during which period our origination staff declined by 24% and our fulfillment staff has declined by 34% for a total reduction of 31% in the mortgage banking division.

We, like our competitors, are responding to a less-favorable environment by taking capacity out of our platform. It is unclear today when sufficient capacity will be removed from the industry to allow mortgage banking originators to return to more profitable operations.

New applications decreased in the December 2017 quarter and there is weakness in new applications toward the end of the quarter consistent with prior years while new applications declined during the holidays.

Based on current information, we would expect volumes in the March 2018 quarter to be similar to the volumes at the December 2017 quarter but lower than the volumes of the March 2017 quarter last year.

The loan sale margin for the quarter ended December 31, 2017 improved from the prior sequential quarter and has climbed to the higher end of the range but pricing pressure remains a concern throughout the industry. Market participants are pricing more aggressively in an effort to maintain market share. 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.

During the past 12 years, we have reduced capacity more closely aligned to the current opportunities in the market which reflects uptick in purchase money activity with a significant decline in refinance activity. Additionally, we are in the process of converting to a new loan origination system which will be much more efficient for our mortgage banking operations when fully implemented.

The new system will allow us to move more quickly to a paperless environment and to streamline the application process and underwriting and funding functions for customers, third-party service providers and employees. We have converted all of our retail branches to the new system and will be converting our wholesale branches over the next few months. As a result, we expect to decommission our legacy system by June 30 and will no longer be absorbing the cost of operating both systems.

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 the regulatory capital is 8% for Tier 1 leverage and 13% total risk-based is essential and are confident we will be able to do so. We currently exceed each of those ratios by a significant margin, demonstrating we have the capital to execute on our business plan and capital management goals.

Additionally, in the December 2017 quarter, we repurchased approximately 141,000 shares of our common stock and continue to believe that executing on our 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.

Furthermore, we're generally pleased with the new reenacted tax legislation as it relates to lower corporate tax rates which will lower future tax obligations of the company, thereby improving net income and supporting our ability to return capital to shareholders in the form of cash dividends and stock repurchases.

We encourage everyone to review our December 31 investor presentation posted on our website. You will 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.

(Operator Instructions) And we do have a question from the line of Tim O'Brien with Sandler O'Neill + Partners.

Craig, could you explain again? You said the margin was down sequentially by 7 basis points due to lower amortization of -- was it deferred costs or -- can you give that detail again?

Yes. Jim, it's Donavon. So the amortization of net deferred loan costs were accelerated or are accelerated anytime a loan pays off. And in the December quarter, the particular set or subset of loans that paid off had net deferred loan costs associated with them that were approximately $200,000 more than the December quarter in comparison to the September quarter. And you annualize that $200,000 number to $800,000, that's about a 7-basis point decline in our net interest margin. We don't have control over which ones pay off, obviously, but both of our loans have net deferred costs associated with them in contrast to net deferred income. And so depending upon which loans pay off and how much pays off in a given quarter, it can have an impact like it did this quarter with respect to the net interest margin.

And then getting back, you gave some detail about -- so held for investment loan balances were down sequentially. Can you talk about the payoffs being elevated at $57.4 million? Can you give a little bit more color on what precipitated that? Or it seems a bit unusual or that it's a volatile extreme, I guess? Can you give a little bit of color on what happened exactly there?

Sure. The largest difference with respect to our origination volume in the first 6 months of this fiscal year in contrast to the last fiscal year is a decline in the number of purchases that we've had. In the first 6 months of last year, we purchased $49.3 million of loans held for investment. In the first 6 months of this year, we purchased $3.1 million. That $46 million difference in the amount of loans we purchased for investment really impacted the growth that we saw in our portfolio, of course, coupled with the larger amount of payoffs in the December quarter in contrast to the December quarter last year.

Was there anything you can generalize or characterize -- any reason for the decline in purchases in those periods? Was it pricing-driven? Was it structure-driven? Was it credit-driven? Was it -- or any -- or maybe it was a combination really, I don't know. Or maybe there were fewer offerings? Was there just less on the shelf to look at out there? What's that all about?

Well, I think it's a combination of a number of factors. I think you probably found, generally, that the industry is posting lower growth with respect to their held for investment loan portfolios. And as a result, I think that has taken some capacity out of the industry as it relates to purchase activity for those of us who purchase some loans. But on top of that, we are seeing packages. Most recently, we've not been able to get together on the price of those loans. So we've not gotten into the underwriting per se because we've not even obtained the loans file or the packages loan files to underwrite. We haven't been able to get together on price. And I think that's a matter of price transparency as a result of rising mortgage interest rates in the CRE sector. We've seen that those rates have gone up some. So I think that's kind of a temporary matter. And then historically as well, our credit box might be a bit tighter than others. I think it's probably the fact that it is. And sometimes, when you see those packages and the individual loans associated with those packages, we're not necessarily [getting] together with respect to the credit quality of the portfolio.

And then is there a -- what's the outlook for the purchase for loan offerings here on the market right now? Has there been any improvement at the start of the year or this far into the year? At the end of the first month of the calendar year, are you seeing any better flow there? Or is it pretty much static with what you experienced in the fourth quarter?

It's similar to what we experienced in the fourth quarter. We've looked at a couple of packages already in January. And the stumbling block has been price. We've not been able to get together in price with respect to the packages we've looked at calendar year-to-date for 2018 or in January.

And that's just a reflection, again, in part to the general situation in the market which is slower velocity. There's just less production going on so these loans [are more dear] so they are getting priced up by sellers and -- who want more for them. Is that a fair assessment?

Yes, I think that's a fair assessment. It really plays against what our own [retail business looks] like. And while we may be willing to give up a bit of yield because we're not originating the product, we're not going to end up putting on such lower-yielding product that it becomes a concern a year from now or 2 years from now. Again, because the bulk of these mortgages are probably 5-year fixed. And if it's newly originated production, there is about 5 years with respect to interest rate risk management volume.

And then shifting gears really quickly. The legacy underwriting system that you guys are going to switch offline by June 30, what's the cost, the quarterly dollar cost of operating it? Do you have some -- can you characterize that? I know that it probably varies but what's the range been quarter-to-quarter through a typical year? Can you characterize that at all? And how much in -- by extension, I just want to get the -- how much is going to come out of overhead cost when that gets shut down.

Right. So we're not prepared to talk about the specific cost because we're still implementing. Here's what I will say, however. We are carrying the key loan origination systems, our 2 loan operating systems on our books right now. And we are paying costs associated with both of those systems as we've been deploying the new system. Beginning in January of this year, the maintenance costs associated with the legacy system will come down by approximately $40,000 per month depending upon what we have to do between January 1 and June 30, with respect to the loans on that system. In other words, we still have to keep that system maintained with respect to all the regulatory requirements and we'll continue to do so. But right now, we are paying for 2 systems. That one system is going to decline the price by about $40,000 a month beginning in January 1 with respect to its maintenance because essentially we're originating -- our new applications are moving on to the new system and not the old system. So that's one bit of cost that comes out relatively soon. As it relates to July 1, we're really not prepared to talk about it. If we think about it from a pre-conversion perspective, I think the actual costs associated with the new system won't be substantially different from what the costs were with respect to the old system when we were simply on the old system. But it will be different because we're not going to be paying for both of those as we will have fully converted by June 30 or so.

So the benefit of the new system versus the old system is probably -- there's probably a compliance element to it? And it's probably less cumbersome to operate so it's a little bit more efficient there, but other than that, the cost is going to be the same?

Approximately from a hard cost perspective but that's before deploying the new system capabilities which is essentially paperless applications from application to funding stage. Right now, there is still a lot a paper being driven on our legacy system. So there will be some benefits with respect to that. That also suggests efficiencies with respect to processing and underwriting loan files, it would be more easily deployed as it relates to the particular office may be having some capacity to process our fund where another office doesn't. Right now, it's very cumbersome for those efficiencies to work out. Once we deploy the new system, it will be much less cumbersome. So there are a number of benefits with the new system both from a compliance, a regulatory perspective. And it's simply a new better system than what our old legacy system was, which by the way, was pretty much an in-house system. We had a core solution provider with respect to that system but we also own the code. So we were programming that system for regulatory changes and the like, and we had a staff on board that was able to do that. That will no longer be required on the new system since it's a hosted system rather than an in-house system.

And then a quickie. Craig, you said that mortgage unit staff was down 31%. What were the periods you were comparing?

January 1 through December 31.

Right.

So calendar 2017.

2017 versus 2016?

Yes.

Okay, and then last question, just one more follow-up, back to the loan side. What was the driver behind the 57 point -- can you give color on the $57.4 million, that elevation in principle pay-downs, payoffs, what was atypical about that versus what we would normally expect to see? Was it just that there was a lull in the 10-year and rates were attractive, and there was a bunch of refi pricing away that these guys moved away or maybe some transactions that the properties got sold or what-have-you or that was elevated there? What was it?

We really don't know, Tim. I can't call that. I mean you have lots of ideas there. Okay, maybe some of them are true. There's really no way to guess on prepayments on a subset.

(Operator Instructions) And there are no further questions in queue. Please continue.

Well, if there are no further questions, we appreciate everyone joining us on our quarterly conference call and look forward to speaking with you next quarter. Thank you.

Thank you, ladies and gentlemen. This conference call will be available for replay starting today at 11 a.m. and will run until February 6 at midnight. You may access the replay service by dialing 1 (800) 475-6701 and entering the access code of 443110. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T Executive TeleConference. You may now disconnect.