Provident Financial Holdings Inc (PROV) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter earnings call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now turn the call over to your host, Craig 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, forecast 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, 2018, 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're 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 first quarter results.

I would like to begin this morning by highlighting the results of our community banking business. Over the course of last year, our net interest margin has expanded, core deposits continued to grow, credit quality remained strong, but our loan growth has been below our expectations as a result of significant prepayments and disciplined underwriting standards reducing loan origination volume. In the most recent quarter, the community banking staff originated and purchased $21 million of loans held for investment, a decrease from the $44 million in the prior sequential quarter. And single-family loans originated for the portfolio from the mortgage banking division decreased to $16 million in the September 2018 quarter from $27 million in the prior sequential quarter.

During the quarter, we also experienced $62.9 million of loan principal payments and payoffs, which is down slightly from the $64.6 million in the June 2018 quarter, but still tempering the growth rate of loans held for investment. This is the second consecutive quarter where we experienced elevated payoffs.

Additionally, we estimate that the increase in acceleration of amortization of net deferred loan costs associated with the higher loan payoffs in the September quarter in comparison to the average of 5 previous quarters lowered our net interest margin by approximately 3 basis points this quarter. For the 12 months ended September 30, 2018, loans held for investment declined by approximately 3%, with the largest declines in multi-family and single-family, partially offset by growth in commercial real estate loans.

Competition for new loan production is intense, and we will not chase loan production volume if we must loosen our underwriting standards to do so. Clearly, some lenders have done so, given the competitive environment. And we won't know the true cost of those lenders until the core credit cycle develops and charge-offs begin to mount.

We're very pleased with credit quality. Note that early-stage delinquency balances were 0 at September 30, 2018. In addition, nonperforming assets remain at very low levels and are now just $7.4 million, which is down from $8 million at September 30, 2017, an 8% decline during the course of the year.

We experienced a small net recovery of $7,000 during the quarter ended September 30, 2018, compared with a modest net recovery of $43,000 for the June 2018 quarter and a modest net charge-off of $39,000 during the March 2018 quarter. As a result of the low levels of nonperforming classified assets and the small net recovery for the fiscal year-to-date, we recorded a $237,000 negative provision in the September 2018 quarter. We're very pleased with these credit quality results.

Our net interest margin expanded by 13 basis points for the quarter ended September 30, 2018, compared to the same quarter last year as a result of 14 basis point increase in the average yield on total interest-bearing assets and a 2 basis point increase in the cost of interest-bearing liabilities. It should be noted that our average cost of deposits increased by just 1 basis point for the quarter ended September 30, 2018, compared to the same quarter last year. Over the course of the past 12 months, 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. It's also noteworthy that our net interest margin expanded to 3.3% for the September 2018 quarter, the highest level in many years.

We're still adjusting our mortgage banking business model to respond to a generally more challenging mortgage banking environment. We currently employ 169 FTE in mortgage banking, down from the 173 FTE employed on June 30, 2018. During the quarter, we reduced our origination staff by 2 professionals, while our fulfillment staff also declined by 2 professionals. The adjustments are more pronounced from December 31, 2016, when we first started reducing our origination capacity, commensurate with changes in market opportunities. Since then, our origination staff has declined by 36% and our fulfillment staff has declined by 49%, for a total staff reduction of 45% in mortgage banking division. We, like our competitors, are responding to less favorable environment by taking capacity out of our platform.

New mortgage loan applications decreased in the September 2018 quarter from the prior sequential quarter. And based on current information, we would expect volumes in the December 2018 quarter to be lower than the September 2018 quarter and significantly lower than the December 2017 quarter. The loan sale margin for the current ended September 30, 2018, significantly improved from the prior sequential quarter, establishing a new high for the range. We have resisted the competitive pricing pressure, recognizing that a lower loan sale margin will not necessarily be successfully offset with higher loan origination volumes. We'll continue to adjust our business model and FTE count, as we have done in the past, commensurate with changes in market opportunities and the mortgage banking operating environment.

During the most recent quarter, we have reduced mortgage banking operating expenses by approximately 25% in comparison to the same quarter last year, a combination of fixed cost and variable cost savings after adjusting for litigation settlement expense recorded in last year's quarter. But we're not limiting our efforts to the expense side of the income statement, we're also recruiting origination staff with proven books of business. Our recruiting efforts have become more focused because unreasonable signing bonuses seem to be less prevalent today as a result of the expected shakeout in the industry. It's becoming more important to seasoned loan origination staff to affiliate themselves with more stable employers.

We've also been investing resources in our direct-to-consumer channel and added a few more products to the product lineup. Changes such as these have become more efficient to implement since we have now fully converted to our new loan durations origination system.

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 significant cushion above the regulatory capital ratios of 8% for Tier 1 leverage and 13% total risk base is wise and are confident we'll be able to do so. We currently exceed each of these ratios by a significant margin, demonstrating we have the capital to execute on our business plan and capital management goals.

Additionally, in the September 2018 quarter, we delayed our stock repurchase activity, believing we will have better opportunities to execute on repurchases in future quarters. Nonetheless, over the course of last year, we have executed substantial returns of capital to shareholders in the form of cash dividends and stock repurchases.

We encourage everyone to review our September 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'll now entertain any questions that you may have regarding our financial results. Thank you.

(Operator Instructions) First question is from the line of Tim O'Brien, Sandler O'Neill.

This is actually Thomas on for Tim O'Brien today. So just looking at the gain on sale margin, it looks like there's a decent jump. Was any of that due to non-reoccurring events? Or was that all just changes in the conditions of the market?

It was changes in the conditions of the market. Much of it is related to a higher percentage of retail production in comparison to wholesale production. But I also have to tell you that we've been disciplined in our pricing models. We've done some work there to determine whether or not bringing in our loan sale margin would drive enough volume to more than offset compressing that margin. And we don't think that, that's the case, so we're holding pretty firm with respect to loan sale margin because we know we can't make it up in volume in the event we compress it.

Okay. Got it. And then, just switching pages, given the elevated payoffs this quarter and the previous quarter, what do the prospects for loan growth look like compared to this quarter going forward?

So loan growth is difficult in this environment. There are many competitors that have a different credit risk model than we do, different credit culture. And as a result of that, what we'll find is that as we are originating our loan applications, we can compete on price, but in many cases, we won't necessarily be able to compete on actual loan dollars because we're stressing our underwriting characteristics with respect to a more difficult environment. And so the borrowers, in many cases, would go to that lender that is giving them higher loan dollars, irrespective of the price, and we're losing volume as a result of that. But at the end of the day, we're willing to accept that because we think our credit culture and our credit underwriting is where it should be in today's environment.

That's good detail. And then, just switching to the funding side, do you guys know how much CD funding is set to mature this current quarter and the next and what the average rate is on those -- on specifically CD funding?

Yes, I don't have that at my fingertips. That might be -- as I recall, there's a table in our Form 10-Q, and that's going to be filed before the deadline with the SEC. So there will be more information in the Form 10-Q.

The next question is from the line of Brian Zabora. (Operator Instructions)

It's Hovde Group. Let me just follow up on the mortgage side. It sounds like, to me, that maybe mortgage gain on sale could be on the higher end of that range that we've talked about in the past. Given kind of how you're -- it sounds like maybe a bit of a shift as far as how you're thinking about pricing.

Yes, I think that's fair. We describe the range in our loan sale margin essentially based upon the last 6 quarters that we publish in our investor presentation, and the 170 basis points set a new high with respect to that. So it is not inconceivable that, that margin comes in a bit from the 170, as we think about the December quarter. But as we described earlier, I think we're going to remain disciplined with respect to our pricing model because, again, we find that we're not making it up in volume if we compress our margins too much.

Understood. Okay. And then, on the buyback, you mentioned you're kind of delaying it this quarter. So should we think about, with the pullback in the industry-wide, I guess, bank group, that you may think about buybacks again in the near term?

Sure, it's part of our business plan. We have authorization out there. It is frankly a part of our timing and what our thought process is. Only thing we should add, when we're thinking about buybacks, essentially, the funding coming for those buybacks is coming out of our cash dividends from the bank to the holding company. We essentially do that once a year after we approve our business plan, and our fiscal year begins July 1. And so that cash dividend was just completed toward the end of September, essentially repopulating the cash proceeds at the holding company to make the available cash significant enough to not only maintain our cash dividend, which is higher priority, if you will, than repurchases, but also funding ourselves for repurchase activity.

That's great. And just lastly, on the expense side, you called out in the press release about restricted stock as far as that expense is declining, so it looks like some positive trends there. Also, just curious on the systems conversion. Is there any thoughts on the potential -- is there potential cost saves, more efficiency? Or just as that's completed now, do you have maybe a better outlook on what the potential impact could be for the business going forward?

With respect to operating expenses, it's already essentially baked in. Most of those operating expenses were -- or the duplicative operating expenses were completed earlier this calendar year. But it is now more efficient with respect to our deployment. Everything is electronic now. We can assign underwriting files. We don't have to ship files around. And it's also more helpful to our applicants as well because they can now upload directly into their loan applications things such as tax returns or W2s or things of that nature. So at this point, it's exploring the efficiencies we will gain with respect to operating on that new system and implementing new processes and procedures to gain those efficiencies.

Next question is from the line of Tim Coffey. (Operator Instructions)

Was there anything in -- during the quarter that might have artificially lowered the tax rate?

While there are discrete items that everybody has in their tax rate in comparison to the statutory rate, in our case, there were nonqualified dispositions of stock options and the like, which reduced the tax rate. We've essentially gotten tax recovery on those items. BOLI is an item that many institutions have, and that's a discrete item. So that tax rate will fluctuate from the statutory rate of, I think, 29.86% or 29.8%, depending upon what actually occurs in the quarter with respect to these discrete items.

And then, just switching gears to talk about funding. You've done a pretty good job of bringing down deposits over the last -- I'm sorry, CDs, time deposits over the last several quarters. You still have $230 million-ish outstanding. Is that something you can continue to bring down while still growing total deposits?

The farther that number declines, the more difficult that equation becomes. And we're not necessarily uncomfortable with time deposits per se. In fact, in the rising interest rate market, if you can fix some of your deposit costs over a longer period of time, that's actually helpful with respect to your NIM or net interest margin. So it is something that, strategically, we've been doing for a long period of time and we would continue to do so. But for instance, if we were to have better loan growth than what we've been able to demonstrate or what we've been able to accomplish and we needed to fund that growth, time deposits would become a more important component of deposit gathering to help fund that loan growth. We also have an extensive amount of wholesale funding capacity to fund ourselves, quite a bit of capacity at the Federal Home Loan Bank of San Francisco. We have very little in the way of broker deposits on balance sheet. So we could legitimately increase broker deposits without it becoming a regulatory issue, if you will. And so there are a number of funding sources to fund ourselves, wholesale as well as retail CDs.

It would -- the cost of your funding base has been exceptionally stable over the last year, 2 years or so, and I'm sure it's hard work to keep it that way. Did it get much harder to do it this quarter? Or is it about the same as it's been in previous quarters?

It's been about the same as in previous quarters. Although, yes, the loan grew, we go down the path of the FLMC (sic) [FHLMC] raising the federal fund's target rate. And the more we see short-term rates increase and the additional pressure we see in our markets relative to those institutions that have to fund themselves and raising their deposits quite significantly, yes, it becomes more difficult. But again, it's a matter of discipline as well as, essentially, what we need to do with respect to balance sheet growth if we're essentially moving out of it. One of the things that has occurred, loans held for sale has gone down, and that creates cash, which can be redeployed elsewhere. So yes, the longer we go with -- in the rising rate market, the more difficult it becomes to keep those retail deposit cost stable.

And in that same vein, your credit quality has been steadily improving over the last 2 years as well. Are you seeing anything from on-the-ground economic standpoint that would suggest that, although we are at the end, the long -- very long credit cycle here, that we're nearing the end of it?

I don't know that we see anything that would suggest that the credit cycle is going to turn on a -- over the next quarter or 2 quarters, but we're seeing things such as single-family home sales have declined significantly in California, based upon the most recent data that has come out with respect to the September month. And so that puts pressure on housing price appreciation. We're also seeing decline in the ability for landlords to increase rents. Rents are still increasing, but not at the pace that they were a year ago. So that could put a little bit of pressure with respect to those stretched multi-family deals. But yes, there's really nothing that we see fundamentally that suggests we should get a credit quality turn per se.

Okay. And then, you touched on the buybacks a little earlier in the Q&A. And I'm sorry, I apologize if I missed this point, but would you be more inclined to be a bit more aggressive on the buybacks in, say, the next calendar quarter, given: one, where valuation is; and two, the amount of shares that you still have available under the April repurchase plan?

Yes, I think all of those are positive factors with respect to our ability to repurchase shares. We're trading, I don't know, 105% of book value now, when we were trading 115%, 120% of book value 6 months ago. That obviously presents, in our view, a better opportunity with respect to franchise value. And we watch and monitor those things and consider that within the context of our entire business plan and what we want to do with respect to capital ratios. Repurchasing stock is a secondary component. We would prefer to grow balance sheet, for instance. There are a number of characteristics or things that can determine what we do with stock repurchases.

Yes, I don't think the multiple has been this low in about 3 years, so as an aside. And then, we're going into a couple of seasonally weak quarters for mortgage origination activity. Would you expect to see a bit of shakeout among the non-bank mortgage lenders in your market?

Well, we've been expecting to see a shakeout before now, Tim. In fact, a little surprised that we haven't seen more than we've seen. But yes, I would think it would really accelerate as we get into those holiday real slow times, especially since we had practically no spring or summer buying seasons this year.

And that lack of decline in competition would directly help your gain on sale margins, right?

Well, not...

Volume first.

Volume. All right.

But again, we're a little surprised that we haven't seen more at this point. So let's wait and see.

(Operator Instructions) And we have no further questions in queue at this time.

All right. If there's no further questions, I'd like to thank everyone for joining us on our quarterly conference call. And we look forward to speaking with you next quarter. Thank you.

Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.