Provident Financial Holdings, Inc.
Q1 2016 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Welcome to the First Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, the conference is being recorded. And I will now turn the conference over to our host, Mr. Craig Blunden, Chairman and CEO. Please go ahead, sir.

[Craig Blunden:]

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, objective 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, 2015 and from the Form 10-Q to the -- subsequent to the Form 10K. 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. We hope that each of you has had an opportunity to review our earnings release which describes our first quarter results. You will note that our community banking and mortgage banking businesses are both profitable, subsequent to the less favorable mortgage banking environment which developed approximately two years ago. We're pleased that, in comparison to the same quarter last year, net interest income and fee income have both increased and our efficiency ratio has improved, but the current environment is not without its challenges. For instance, we've been attempting to capitalize on opportunities regarding loan originations and purchases to increase the balance of loans held for investment. We have had some success, but are disappointed with our first quarter held-for-investment volume which fell short of our expectations and contributed to the sequential quarter decline in the outstanding balance of loans held for investment. During the quarter, we also experienced $45.8 million of loan principal payments and payoffs which is almost double the amount experienced during the same quarter last year. For the 12 months ended September 30, 2015, loans held for investment grew at a 2% annualized rate and preferred loans, a component of loans held for investment, grew to 9% annually. Not as robust as we'd like, but nevertheless, we're committed to improving the growth rate and will allocate the resources necessary to do so. Credit quality deteriorated a bit on a sequential quarter basis, but you will note that early-stage delinquencies fell to $1.2 million at September 30 from $1.3 million at June 30 and from $4.4 million at March 31, suggesting that meaningful, nurturing deterioration is unlikely. In fact, total classified assets have fallen to their lowest level in many quarters and are now $29.2 million which is a very manageable level. We recorded a negative provision of $38,000 from the allowance for loan losses during the quarter ended September 30, 2015. Net recoveries were $348,000 for the September 2015 quarter, compared to net recoveries of $116,000 during the June 2015 quarter and net recoveries of $130,000 during the March 2015 quarter. We're pleased with these credit quality results. The mortgage banking FTE count in September 2015 quarter increased from the June 2015 quarter and we're currently employing 320 FTE in mortgage banking, up from the 315 FTE on June 30, 2015 and up from the 307 FTE employed on September 30, 2014. During the quarter, we increased our origination staff by seven professionals and decreased our fulfillment staff by two professionals. We will continue to adjust our business model as we have done in the past, commensurate with changes in loan origination volume. The volume of loans originated for sale in the first quarter of FY16 increased from the June 2015 sequential quarter. The locked pipeline declined June 30 compared to March 31, so it's not surprising to see a decline in loans originated for sale in the September 2015 quarter However, we believe we're well positioned to capture our share of mortgage loan volume in the markets we serve. And judging by the locked pipeline at September 30, 2015 which is comparable in size to the beginning of the quarter, we believe loans originated for sale in the December 31 quarter will be similar to the September 30 quarterly volume. The loan sale margin for the quarter ended September 30, 2015, improved to 165 basis points from 139 basis points for the sequential quarter ended June 30, 2015. We experienced a transition to a higher percentage of more profitable purchase activity and a lower percentage of less profitable refinance activity in comparison to the June 2015 quarter. Additionally, we originated a higher percentage of loans from the retail channel during the September 2015 quarter which also contributed to the improved loan sale margin. Our net interest margin decreased this quarter in comparison to the June 2015 sequential quarter, primarily as a result of the increase in our average cash balance and the decrease in our average balance of loans held for sale. This change in composition resulted from a compressed net interest margin and is directly correlated to mortgage banking loan origination volume which declined from last quarter and can be very volatile from one period to the next. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that releveraging the balance sheet is essential. For the foreseeable future, we believe that maintaining a significant cushion of our regulatory capital ratios of 8% for Tier 1 leverage, 9.5% for common equity Tier 1 and 13% total risk-based is critical and we're confident we will be able to do so. We currently exceed each of those ratios by a wide margin, demonstrating that we have the capital to execute on our business plan and capital management goals. Additionally, in the September 2015 quarter, we repurchased approximately 216,000 shares of common stock and we continue to believe that executing on stock repurchases is a wise use of capital in the current environment. Additionally, last week we announced a quarterly cash dividend of $0.12 per share, with the distribution scheduled for December 3, 2015. Our Board of Directors also approved a new 5% stock repurchase plan which will be implemented when the existing plan is completed. 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 foundation supporting the future growth of the company. We will now entertain any questions you have regarding our financial results. Thank you. Lori?

[Operator:]

[Operator Instructions]. We have a question from the line of Brian Zabora with KBW. Please go ahead.

[Brian Zabora:]

Thank you for the detail on the locked pipeline coming into the quarter or the beginning of the quarter. I wanted to see if the pipeline has got a similar structure where it is more purchase heavy, maybe more retail origination, so could we expect a gain on sale to be closer to the high end of the range that you have seen recently?

[Donavan Ternes:]

This is Donavan. I believe the pipeline is more heavily swayed toward retail activity as well as purchase activity. As a result, we would expect our loan sale margin to be at the higher end of that range. If you look at our investor presentation, I think the range that we have over the last six quarters is 125 basis points to 165 basis points, the 165 being the September 2015 quarter. So whether or not we can replicate the high of the past six quarters in the December quarter is difficult to say, but we feel comfortable that will be at the higher end of that 125 to165 range.

[Brian Zabora:]

Also last quarter you talked about potentially adding your origination staff on the commercial side. I just wanted to see if you were able to add anyone in the most recent quarter?

[Craig Blunden:]

Yes. In fact, we hired two original origination staff since June 30. We have one applicant being background right now that we anticipate we will be extending an offer to.

[Brian Zabora:]

Is that on any product that they're focused on? Maybe multifamily or CRE?

[Donavan Ternes:]

Yes, these are CRE multifamily personnel.

[Operator:]

We have a question from the line of Tim O'Brien with Sandler O'Neill. Please go ahead.

[Tim O'Brien:]

Could you guys characterize -- talk a little bit about -- that's great color on the FTE hires and such. Can you talk a little bit about the held-for- investment pipeline and how that looked at quarter end relative to the beginning of the quarter?

[Donavan Ternes:]

We don't generally disclose our pipeline with respect to multi and CRE, but --

[Tim O'Brien:]

Hope springs eternal, Donavan.

[Donavan Ternes:]

But it is as strong or stronger than we began the quarter. In fact, I would characterize it as a little bit stronger, particularly with respect to the new hires. The other thing that we have seen, frankly over about the last month, we have seen more loan packages being offered in commercial real estate and multifamily. I think that's partly because there is some concentration issues in the industry with respect to those product lines, but I think it's also because we're getting close to December 31 when many companies have their period end. And as a result they're tidying up their balance sheet. We expect that we will be participating with respect to purchasing mortgages from others, primarily multifamily and CRE.

[Tim O'Brien:]

Can you give a little color on why the payoffs were elevated this quarter? And if that's the new norm that you are going to experience more higher payoffs like everybody else in the industry or if there was anything exceptional this quarter that spiked payoffs?

[Donavan Ternes:]

I didn't see anything exceptional, per se with respect to the payoff numbers. I think one of the things that may have occurred with respect to the September payoffs and with respect to what actually happened in our portfolio and others, perhaps, is that there is this thinking that the Fed was going to begin to raise interest rates. And as a result, I think some multifamily CRE borrowers and even some single-family borrowers were starting to think, hey, maybe now is the time to do that refinance activity. As a result, I think we saw just about a doubling of payoffs this year -- or the September quarter this year versus the September quarter last year.

[Operator:]

Our next question from the line of Tim Coffey with FIG Partners. Please go ahead.

[Tim Coffey:]

As you prepared for the new trade regulations for mortgages, how do you anticipate that's going to impact your operations?

[Craig Blunden:]

[Indiscernible] was a huge project for all companies and many, many months of building the programs and testing. I'd say we're pretty much largely complete. There's still a few little wrinkles to iron out, especially on the non-single-family area, but we made it. I think everybody needed that extra time, though.

[Tim Coffey:]

You don't just say it's going to slow down your closing loans this next quarter?

[Donavan Ternes:]

I think there might have been a little bit of a hiccup, but that was kind of related to everybody getting applications in before the Trib disclosure was required at October 3, such that the following couple weeks after October 3, it seemed like new applications were down a bit. But, frankly, they had spiked a bit prior to that October 3 deadline.

[Tim Coffey:]

On the preferred loans this quarter, how much of the multi-family was purchased?

[Donavan Ternes:]

None of the multi-family was purchased. In fact, I think we may have purchased one single-family loan of a couple hundred thousand in the September quarter is it. Everything else was originated

[Tim Coffey:]

And then going back to your earlier comments to a question about potentially purchasing some of these loan packages that you're seeing, what makes these packages more attractive than the ones you've been shown before?

[Donavan Ternes:]

I'm sorry, could you repeat that?

[Tim Coffey:]

Sure. As you go to look at some of these loan packages that you're seeing, what makes them more attractive now than the ones you have seen in the past?

[Donavan Ternes:]

Frankly, we have been able to come closer with respect to pricing. So the sellers have come in and the bid ask spread has come down such that we're finally, probably in the ballpark with respect to pricing. And then additionally, with respect to the packages that we're seeing, many of the credit quality characteristics are similar to our own requirements and I think that's partly, you know, everybody coming through the cycle. The examiners being out at many institutions, really ratcheting up the requirements with respect to global cash flow underwriting and the like and so I think the packages we're seeing are generated subsequent to those new underwriting restrictions such that we can actually look at them from a credit quality standpoint.

[Operator:]

[Operator Instructions]. We have no additional questions. I will turn it back to our speakers.

[Craig Blunden:]

I appreciate everyone dialing into our conference call and we look forward to talking to everybody next quarter. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this conference call will be made available for replay that begins today at 11 AM Pacific, running through November 4 at Midnight Pacific. You can access the AT&T teleconference replay system by dialing 1-800-475-6701 and entering the access code 371989. Again that number 1-800-475-6701, the replay access code 371989. That will conclude our teleconference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.