Provident Financial Holdings, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter earnings release conference call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Craig Blunden. Please go ahead.

[Craig G. Blunden:]

Thank you, Tricia. 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 on October 29, from the annual report on Form 10-K for the year ended June 30, 2014 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. You will note that this is the second consecutive quarter where our community banking and mortgage banking businesses are both profitable. Subsequent to the unfavorable mortgage banking environment which developed a little more than a year ago, we're pleased that the actions we have taken to overcome the poor environment have resulted in our improving financial results. In fact, in comparison to the same quarter last year, fee income has increased, operating expenses have declined and our net interest expense has expanded. Our community banking business is capitalizing on more opportunities regarding loan originations, and the pace of growth in loans held for investment is accelerating. Loans held for investment grew at a 9% annualized rate and preferred loans, a component of loans held for investment, grew at a 16% annualized rate. Additionally, we originated single-family, multifamily, commercial real estate and construction loans during the quarter, demonstrating the improved capabilities of our origination channels and the new product offerings for our mortgage banking platform. For the fifth consecutive quarter, loans held for investment increased from the prior sequential quarter's ending balance. We've established more aggressive origination goals for fiscal 2015 and are pleased that the pace of growth is accelerating. Credit quality continues to improve, and we believe further improvement is likely. Total nonperforming assets on September 30, 2014, were $15.5 million, the lowest level in many quarters. We recorded $818,000 recovery from the allowance for loan losses during the quarter ended September 30, 2014, and net charge-offs were just $38,000 for the quarter compared with the net recoveries of $411,000 during the June 2014 quarter and the net charge-offs of $168,000 during the March 2014 quarter. We're very pleased with these credit quality results. We decreased the mortgage banking FTE account for the September 2014 quarter and currently employ 307 FTE in mortgage banking on September 30, 2014, down from the 312 FTE on June 30, 2014 and down from the 358 FTE employed on September 30, 2013. During the quarter, we decreased origination staff by 1 professional and our fulfillment staff by 4 professionals. We will continue to adjust our business model as we have done in the past, commensurate with changes in loan origination volumes. The volumes of loans originated for sale in the first quarter of fiscal 2015 increased from the June 2014 sequential quarter. New applications volume grew throughout the September 2014 quarter. And with the very recent decline in mortgage interest rates, we are optimistic about the volume of loans originated for sale in the December 2014 quarter as a result of increasing refinance applications. We've seen a growing volume of loans originated for sale since the March 2014 quarter, and some forecasters are beginning to revise upward their estimates for calendar 2015 loan origination volume. We believe we are well positioned to capture our share of improving loan origination volume, should it develop. The loan sale margin for the quarter ended September 30, 2014, was relatively stable at 152 basis points compared to 159 basis points for the sequential quarter ending June 30, 2014. However, execution's still difficult because the mortgage banking industry still has too much origination capacity for current demand given the decline in total volume in comparison to 2013 or 2012. Nonetheless, our business is profitable at these lower volume levels because we have made the necessary changes. I should also point out that we have reduced operating expenses by approximately 5% in the September 2014 quarter in comparison to the same quarter last year, primarily by reducing salaries and employee benefits expense. We understand our efficiency ratio is currently too high as we transition from the outsized fee income derived from mortgage banking activities to the slower growth in net interest income from our community banking activities as we relever the balance sheet. We have made good progress reducing operating expenses, but more work remains with respect to growing the balance sheet. Our net interest margin increased this quarter in comparison to the June 2014 sequential quarter as a result of deploying cash balances to increase loans held-for-investment and loans held-for-sale, which we see as an ongoing opportunity. Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that releveraging the balance sheet is essential, and we are investing in our in multifamily, commercial real estate and construction loan platform to take care of loan opportunities as they arise and are much more open to single-family loan products for the portfolio. For the foreseeable future, we believe that maintaining regulatory capital ratios above 7% for Tier 1 Leverage, 8.5% for common equity Tier 1 and 12% total risk base is critical, and we're confident we'll be able to do so. We currently exceed each of these minimums by a wide margin, demonstrating that we have capital -- executing on our business plan and our capital management goals. Additionally, in the September 2014 quarter, we repurchased approximately 162,000 shares of common stock, and we continue to believe that executing on stock repurchases is a wise use of capital in the current environment. 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 may have regarding our financial results. Thank you. Tricia?

[Operator:]

[Operator Instructions] And our first question is from the line of Brian Zabora with KBW.

[Brian James Zabora:]

Question on the pay down from the quarter. You saw a nice decline from last quarter from, I think, $48 million down to $24 million. I know -- I'm sure it's hard to predict, but do you have any sense what it may look going forward and if maybe the $48 million last quarter was a bit of an anomaly?

[Donavon P. Ternes:]

No, I think if I recall our last 4 quarters prior to this quarter, it seemed like we were averaging around $40 million a quarter of payoffs, or something around that level, and then this quarter dropped down to $24 million. As you suggest, it's very difficult to get a sense of the reasons for the prepayments. I would simply argue that with respect to the legacy loan portfolio, many of those individuals have already had the opportunity to refinance and pay us off. And if they've not already done so, perhaps there's a bit of burnout with respect to that prepayment speed. So we're hopeful that the payoff rates are declining because, quite frankly, that helps us out with respect to relevering the balance sheet.

[Brian James Zabora:]

Okay. And second question, on the efficiency ratio, is there a long-term target that you're trying to manage to?

[Donavon P. Ternes:]

No. It's difficult for a mortgage banker to describe a long-term target in the efficiency ratio because so much of mortgage banking is driven by loan origination volume and the fee income driven off of it. And quite frankly, you have to have the personnel and operations in place to be able to handle that volume. So as we compare ourselves to a more traditional community banking franchise, I think our franchise has a bumpier or more volatile efficiency ratio, and it's largely dependent upon the mortgage banking component of our business. And so we don't -- internally, we obviously have targets with respect to our business plan as we go forward. We don't share that publicly for competitive reasons. We would argue, as we've suggested in our comments, we don't like where we're at in that target, and we need to bring it down to the current environment with respect to what mortgage banking will give us and ultimately what community banking will give us.

[Operator:]

And we will go to the line of Jason Stewart with Compass Point.

[Jason Stewart:]

On the mortgage banking side, I have a question about new business opportunities. There's been discussions that the GSEs will reintroduce greater than 95% LTV loans and potentially adding some deeper insurance coverage on GA loans. When you think about those kind of changes at the margin, is it -- would they -- should we think about them adding meaningfully to the volume numbers, or is that a pretty small part of the pie?

[Craig G. Blunden:]

I think it can add to the numbers. And it -- I think it will stimulate activity. And certainly, the type of business that we like to do, I mean, we love government loans, number one. They're more profitable for us. So we think it can only make things better.

[Donavon P. Ternes:]

The one thing I would add is, in addition, then, to loosening LTV requirements and the like, we also need to see the GSEs somehow revise their repurchase criteria. So I think those 2 things go hand in hand. If they're going to loosen the underwriting in some cases, they must recognize that they're taking on that additional risk, and somehow, they can't transfer that risk back to the originator. So we would want to see both of those things go hand in hand.

[Jason Stewart:]

Understood. Now the second part of my question is, when you look at what would make you more comfortable or drive volume, clarity on rep and warrant risk, lower loan level price adjustments, change in the overall GC, and it sounds like you would put clarity on rep and warrant at the top, but just curious how you would rank order those that would help volume out?

[Donavon P. Ternes:]

I think there's such a -- at the present time, there's so many questions regarding rep and warranties. I think that's probably at the top of the list with respect to the clarity. Everything else we can appraise price for, but that's a large unknown and there's frankly a lot of discussion at the GSEs. As you know, Mel Watt spoke recently at the Mortgage Bankers Association national convention. He suggested that there's going to be more clarity around that and that they're working on rules, making it clearer for all of us. And frankly, any mortgage banker will tell you that they would welcome that clarity because at the end of the day, we can then determine what those risks may or may not be, and then either how to price for them or reserve for them, or a combination of both.

[Operator:]

[Operator Instructions] We'll go to the line of Brett Villaume with FIG Partners.

[Brett Villaume:]

I wanted to ask, you mentioned some "aggressive origination goals" for 2015. Do you mind elaborating on that?

[Donavon P. Ternes:]

We are not going to describe the actual numbers, but I think the way anybody looking at our company should think about it is to look at what we've been originating historically and the amounts and the growth rates that we've seen over the past couple of years. And quite frankly, we want to add to those numbers. I think there is some clarity in the investor presentation or in our 10-Qs that would obviously give you the appropriate information. I think last year, for the fiscal year ending 2014, it was around $167 million of originations between single-family, multifamily, commercial real estate and construction. We want to be higher than that in our current fiscal year.

[Brett Villaume:]

Okay. And then I wanted to ask about the -- obviously, the recovery that you had from ALLL this quarter is dependent upon what kind of charge-off and recovery activity takes place. But is there a point at which you think that, that might -- you start to reserve considering you had good loan growth that -- which are actually seeing a positive provision expense?

[Donavon P. Ternes:]

Yes, I think it's dependent on loan growth and the actual credit experience that we have. Historically, in the last few quarters, we've described a range of 100 to 125 basis points in the allowance. And I think that's probably still good guidance, although we're kind of in the middle of that range right now at 111 or 112, depending upon how you calculate it. So we're kind of midrange right now. And at some point, we would expect that loan growth will be a tipping point in that loan growth will need to be supported with more provision in comparison to the improvement in credit quality where there would be a recovery of provision, such that we will be providing again. But ultimately, I think there's more room for credit improvement. And so even if we do turn the corner where we are providing or putting a provision up, I think it doesn't have to be a large number, necessarily, because there will be some offset with respect to the credit metrics.

[Brett Villaume:]

And then finally, I wanted to ask, with approximately 88,000 shares left in your authorization, I believe, is there a chance you're going to have a reauthorization or new authorization issued sometime soon?

[Craig G. Blunden:]

I think if you look at our past history, our board has been very supportive of share repurchases, especially, at the levels we've been trading at. So I would say that -- I'm sure they will look at it favorably as we get closer to finishing the share repurchase plan that we have in effect right now.

[Operator:]

And we will open the line of Tim O'Brien with Sandler O'Neill.

[Timothy O'Brien:]

This is a question for Mr. Blunden. The $167 million in originations in fiscal year 2014, do you happen to have an idea of how much of that was purchased, as opposed to originated in-house?

[Craig G. Blunden:]

Yes, very little, about $700,000.

[Timothy O'Brien:]

Great. And then my next question is, did you guys see any growth in commitments for construction this quarter that didn't -- haven't funded yet?

[Donavon P. Ternes:]

I think the total construction loans outstanding is up from a sequential quarter basis. And I think the LIP account as well is up on a sequential quarter basis. So yes, there's been some growth, but these numbers are still relatively small as a total part. Construction went to $4.4 million, but there was $3.6 million of that, that was in LIP or undisbursed.

[Timothy O'Brien:]

And is it predominantly kind of a one-off, single-family residential, or what kind of buildings are going up in those projects?

[Donavon P. Ternes:]

It's single-family and it's multifamily. We're also looking at commercial. There are some industrial buildings, for instance. So we'll consider a wide range of products. What we're not doing a lot of right now are large track construction single-family products. So if a builder comes in and wants to build out 60 lots, we would only consider that on a phasing basis such that maybe we'd put up 3 models and fund the first 15 lots or something like that. And so we're not into the construction lending like we once were or like others were precycle.

[Timothy O'Brien:]

And kind of more broadly looking out in the market, you guys have pretty good sense of what's happening out there. Are you seeing any scale, large-scale projects, getting underway, housing track projects get underway in Riverside County?

[Craig G. Blunden:]

There's been some, but a pretty small volume. But there's been some large ones both here in Riverside and out toward the low desert. But the bigger projects have been down in Orange County and San Diego Counties.

[Timothy O'Brien:]

And those are with the big national builders and probably are financed by bigger banks and such, rather than just local players?

[Craig G. Blunden:]

Yes, that's correct. The bigger institutions have been financing those.

[Timothy O'Brien:]

And then, last question. With the Fed comments and this trend in quantitative easing fading away, do you anticipate that as far as sales on the secondary market, that can impact your business in fiscal year 2015? What's your outlook there?

[Donavon P. Ternes:]

I think mortgage banking is interest rate dependent in that if we see mortgage rates rise as a result of the 10-year treasury rising, that could create some affordability issues. But I think the offset to rising mortgage interest rates, that would typically suggest that we're in a better economic environment, with better GDP growth such as we saw the number released today, a relatively good number. Such that employment is coming back. Such that people are looking to either buy their first home or move up to a different home. So I think it is not as easy as to suggest that mortgage rates are rising, therefore, volume is going to go down. That's not necessarily true. Now, if mortgage interest rates rise substantially from where we currently are, I do think that there will be substantial impact. But I don't know that that's what everybody is suggesting. And frankly, even after Fed did what they did yesterday by moving out of quantitative easing, we've not seen a spike in the 10-year for instance. So I think the verdict is out with respect to how high rates may or may not go.

[Timothy O'Brien:]

And then if you don't mind, I'd ask one more question for Mr. Ternes. Would you happen to have the loan yield out of your -- on your preferred book segmented out? Do you know what that is?

[Donavon P. Ternes:]

Well, we do provide a table in the earnings release segregating out multifamily, commercial real estate, construction. And so for instance, multifamily were on our books at a 4.66% yield at September 30, commercial real estate were on our books at 5.71% and construction were on our books at 5.28%.

[Timothy O'Brien:]

And do you anticipate that -- is pricing in the marketplace well below the yield on your existing loans at this point?

[Donavon P. Ternes:]

Yes. So new loan production in the multifamily area are in the high 3s, commercial real estate new loan production is in the mid-4s and construction is in the low to mid-5s.

[Operator:]

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

[Craig G. Blunden:]

All right. If there are no more questions, I want to thank everyone for joining us in our quarterly conference call and look forward to speaking with you at the end of our next quarter. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.