Provident Financial Holdings, Inc.
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Ladies and gentleman I would like to thank you for standing by and welcome to the Fourth Quarter Earnings Tele Conference Call. [Operator Instructions] I would now like to turn the conference over to your host and facilitator, Mr. Craig Blunden. 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, 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 in the earnings release that was distributed earlier this morning, from the annual report on Form 10-K for the year ended June 30, 2014 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'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 fourth quarter results. You will note that this is the fifth consecutive quarter where our community banking and mortgage banking businesses are both profitable, subsequent to a 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 are both increased. Our net interest margin has expanded and our efficiency ratio has improved. Our community banking business is capitalizing on more opportunities regarding loan originations and purchases, and we continue to increase loans held for investment. For the 12 months ended June 30, 2015, loans held for investment grew at a 5% annualized rate and preferred loans, a component of loans held for investment grew at a 13% annualized rate. However, we're disappointed with our fourth quarter held for investment volume which fell short of our expectations and resulted in a sequential quarter decline in the outstanding balance loans held for investment first decline in seven consecutive quarters. During the quarter we lost loan origination opportunities of pricing and structure that chose not to complete on those we lost because the risk versus return did not meet our objective. We are committed to improving the growth rate and will allocate resources necessary to do so. Credit quality deteriorated a bit on a sequential quarter basis but after reviewing the specific loans, we did not detect a new trend developing, rather the specific loans have been on our radar for some time, a few years in most cases but just recently deteriorated to the point of non performing status. Also you will note that early stage delinquencies fell to $1.3 million at June 30th from $4.4 million at March 31st, suggesting that further near term deterioration is unlikely. We recorded a negative provision of $104,000 from allowance to loan losses during the quarter ended June 13, 2015. Net recoveries were $116,000 for the June 2015 quarter compared to net recoveries of a $113,000 during the March 2015 quarter. Net recoveries are $159,000 during this December 2014 quarter. We're pleased with this credit quality results, even though we experienced the June 2014 deterioration. Mortgage banking FTE count in the June 2015 quarter was essentially unchanged in the March 2015 quarter. We currently employ 315 FTE in mortgage banking, down from the 316 FTE on March 31, 2015 and up from 312 FTE employment in June 30, 2014. During the quarter we decreased our origination staff by 11 professionals and increased our fulfillment staff by 10 professionals, largely to improve our efficiency and service levels. We'll continue to adjust our business model as we have done in the past commensurate with changes in loan origination base in volume. The volume of loans originated for sale in the fourth quarter of fiscal 2015 increased from the March 2015 sequential quarter. We carried the large locked pipeline into the June 30th quarter from March 31st and we were successful in routing the bulk of the locked pipeline to funded loan volume. Lock pipeline declined at June 30th compared to March 31st that would not be surprising to see a decline in loans originated for sale during the September 2015 quarter, although increased purchase volume may blunt to some degree our expectation for lower refinance volume. We believe we are well-positioned to capture our share of mortgage loan origination volume in the market we serve. The loan sale margins for the quarter ended June 30, 2015 improved to 139 basis points from the disappointing 125 basis points from the sequential quarter ending March 31, 2015. We experienced the transition to higher percentage of more profitable purchase activity and the lower percentage of less profitable refinance activity in comparison to the March 2015 quarter. Our net interest margin increased this quarter in comparison to the March 2015 sequential quarter primarily as a result of the special cash dividend received on FHLB stock during the June 2015 quarter. More pronounced was the year-over-year improvement and the net interest margin was increased by 24 basis points and was a result of our efforts to redeploy cash balances to loans held for investment and loans held for sale. These efforts coupled with the increase in total earning assets resulted in a 16% increase in net interest income from the June 2015 quarter in comparison to the June 2014 quarter. Our search-in strategy for balance sheet management is unchanged from the last quarter. We believe that releveraging the balance sheet is essential. For this foreseeable future we believe that maintaining a significant cushion above the 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 these ratios by a wide margin demonstrating that we have the capital to execute on our business plan and capital management goals. Additionally in the June 2015 quarter, we repurchased approximately 188,000 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 the quarterly cash dividend of $0.12 per share, but the distribution is scheduled for September 1, 2015. We encourage everyone to review our June 30, Investor Presentation posted on our website. You will find we have 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:]

Ladies and gentlemen, we'll begin the question and answer sessions of today's conference. [Operator Instructions] Our first question will come from the line of Brian Zabora of KBW. Please go ahead.

[Brian Zabora:]

Just a question on the competition on the loan side. Are you seeing any abatement of the competition or are you continuing into the third quarter or calendar third quarter. And how's does the loan pipeline look for the held for investment?

[Donavon Ternes:]

Hi, Brian. This is Donavon. The one piece of relief we're seeing today in comparison to the June quarter is in pricing. You'll note that the tenure's backed up a little bit from where the lows were in the June 2015 quarter. And as a result pricing has become much better from our perspective as it relates to kind of an absolute low that we'll end up putting the multi-family and commercial real estate loan on our books. So that has improved, structures of the loan is still very competitive, we have larger lenders doing interest only loans in that product type. We have lenders who will forgo personal guarantees from some of the sponsors or all of the sponsors in the particular loan. So, and I think structure remains very competitive, I think pricing has become a bit more favorable to us.

[Brian Zabora:]

And then also you had gain on other real estate loan, was that multi-year, was it one credit as, was it major contributor all of these several credit that you've enough target for gain.

[Donavon Ternes:]

There was one specific commercial real estate property that was a dental office prior to our taking it back in foreclosure and in fact there were junior liens against it so. They were wiped out through the foreclosure sales those are good piece of equity in there for us when we ended up selling essentially to another dentist who was going to be opening an office there.

[Operator:]

Our next question will come from the line of Lucy Webster of Compass Point. Please go ahead.

[Lucy Webster:]

I wanted to touch base on your loan sale margins. From what we're seeing they are up for the month of July, over the sort of June 30 quarter and I was wondering if that syncs with what you guys are seeing in the market -- I mean sort of longer term expectations that you may have?

[Craig Blunden:]

I think we've always described our loan sale margin in a range and we typically referred to the loan sale margin of the last six quarters in our Investor Presentation 125 basis points in the March quarter was the low of that range and a 159 basis points in the Q4 of ’14 quarter was the high of that range. Our expectation is that we will see our loan sale margin coming in that range for the September quarter as well.

[Operator:]

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

[Tim Coffey:]

When we look at portfolio of loan comp or investment, do you see any extraordinary pay-down or pay-off this quarter?

[Donavon Ternes:]

I think pay offs for the quarter this year for the June quarter were actually down from pay offs in the June quarter of last year, it's in our earnings release, but my recollection is it's something like 30 million in the June quarter of this year and it was something like 40 million in the June quarter of last year. So we’ve actually seen pay offs actually come in a bit or decline a bit in comparison to last year.

[Tim Coffey:]

And a quick question, if you look at the [indiscernible], your expectations for the mortgage business in the second half of calendar 2015, how you think it'd be different or similar to what you saw in the second half of calendar ’14?

[Donavon Ternes:]

That’s your forecast of interest rates.

[Tim Coffey:]

I think that will be [indiscernible] back to at this point?

[Donavon Ternes:]

Sure, I think the issue becomes the balance between purchase money activity and refinance activity. And we even saw in the June quarter that our refinance activity declined a percentage of total volume, but our total volume actually went up because purchase money activity did increase to some degree. In fact just anecdotally it's not a number that we publish and in fact, we don’t describe it typically, but the June -- the month of June was the highest purchase money month that we had over the past 18 months and it's probably even more, even longer than that, but that was the information I received from our mortgage banker when we were talking about it. So the way we think about the back half is we think refinance volume will decline, but we think purchase money activity will increase and I think that’s very similar to what the MBA has come out with in their most recent revision to forecast and in fact they expect volume in total for ’15 to be above their original forecast and they have increased their volume for calendar ’16 as well and they talk to that to an increase and purchase money activity.

[Tim Coffey:]

And how is home affordability in the [indiscernible] mortgage business?

[Craig Blunden:]

That is not getting better especially along the cost as you're probably aware. It's becoming less affordable. However, it does help us in some of the areas that we have mortgage losses because it drives the buyers certainly inland and we can serve them very well. But the numbers have really turned around from 2008.

[Donavon Ternes:]

And I think obviously interest rates rising will afford affordability to some degree and then maybe a larger component of that for us is the fact that home prices have appreciated so much in the California markets both of which drive affordability down. However affordability is still better today that it was in the peak, prior to this credit cycle. And so much that it will dictated by what employment growth looks like and what general economic activity looks like because I do think there is some pent-up demand with respect to purchase and frankly little blip up in interest rates may actually get people off the dime to purchase homes.

[Operator:]

And the last question in queue at this time comes from the line of Tim O'Brien of Sandler O'Neill Partners. Please go ahead.

[Tim O'Brien:]

So comp cost, salary and benefit costs were up a little bit here in this last quarter relative to the trailing quarter, can you give a little color on some of the influences there?

[Craig Blunden:]

The largest influence was with respect to loan origination volume, held for sale loan origination volume. That was up in comparison to the prior sequential quarter and as a result our comp cost were up as well. Now when I am looking at it from a sequential quarter basis, overall operating expenses were essentially flat in the March quarter, but they were up significantly in comparison to the June quarter and that was more related to the volume as well.

[Tim O'Brien:]

And then occupancy drifted down a bit, was there anything you guys did either, did you get some lease relief or did you close an office or why was that?

[Craig Blunden:]

I would have to look specifically but I don't recall an office closing or anything of that nature. We could have had leasehold improvements being fully depreciated in a particular office or something of that nature which could have allowed that cost to drift down a bit. But I think it was a relative small number.

[Tim O'Brien:]

And then also, it looked like from a credit standpoint, there was a meaningful uptick in nonperforming loans in your single family residential, is that right?

[Craig Blunden:]

Yes, there when we look at the MTAs and we'll drill down specifically to understand why MTA has increased. It was all in the loan portfolio and I think there were five new net SFRs that went to non performing status. We drilled down and we looked at each of those -- there was no specific trend with respect to the reasons, one was a relatively recent production I think within the last 18 months or so. In that particular case, it was a divorce and so they're selling the home and then the others were are all relatively older from an origination standpoint and it ran the gamut. We had one that was a TBR that had gone back to note status that got into trouble and is going to end up walking from the property. We had another instance, where the borrower was essentially fully leveraged with the first, second on the properties he had a job offer elsewhere so he simply -- vacated the property and moved and we're going through the foreclosure on that. In each case though, we don't expect large losses to occur relative to those five new SFRs that became non performing during the quarter.

[Tim O'Brien:]

Are those properties in California?

[Craig Blunden:]

Yes.

[Tim O'Brien:]

Near river side?

[Craig Blunden:]

Not necessarily, there was one in Northern California in the Bay area that was a divorce situation, the others I don't specifically recall what the geography was. But even by geography I didn’t notice a trend.

[Tim O'Brien:]

And then last question. I think you alluded to this in the press release Craig about reinvigorating -- you didn't use that word but on the commercial banking, within your commercial banking business maybe doing some hiring or something or revitalizing that or taking in a run out at here in out the gate in the first year. Can you give a little bit of color Craig about prospects for generating preferred loans here on a go forward basis and what you guys want to try to accomplish here in the New Year?

[Craig Blunden:]

We've been looking for new commercial loan officers and have been interviewing and starting to hire some more which will give us again some increased presence in our market places to add more portfolio of loans in the preferred loan area.

[Donavon Ternes:]

Yes, at the end of the day, it gets down to success of your originators with respect to how successful you may be in origination volume and it is relatively competitive out there and one of the things we're going to end up doing is putting on new hires in that area to originate more volume for us.

[Tim O'Brien:]

Can you give us kind of footings on that like at the end of the fiscal year what were your productions -- how big were -- what was the size of your production staff for preferred lending, so that next quarter we can see how things sell about -- How successful you were in that -- from the hiring process? Would that be all right to get from you?

[Craig Blunden:]

We are looking for net number of how many more originators. Is that you're looking at?

[Tim O'Brien:]

Did you add any originators this quarter? And -- how many originators did you end the year with?

[Craig Blunden:]

I don't have a specific number for you but we ended the June quarter with the same number of originators that we ended the March quarter with. Since the end of the June quarter, we have hired one new originator primarily in the construction loan area and he started in fact Monday of last week was his first day. But we've had many more interviews with respect to others and we anticipate that finding that right person may be a bit difficult. Nonetheless throughout the remainder of our this fiscal year, fiscal ’16 we’re interested in putting more originators onboard.

[Tim O'Brien:]

And one last question and you mentioned this in the narrative. Interest only loans -- you talked about walking away from some deals where the competition was offering interest only loans. Was it commercial real estate or multi or both Craig?

[Craig Blunden:]

Yes, it was both.

[Tim O'Brien:]

So can you talk a little bit about and whoever is doing that they are not kind of an incidental participant or they are major competitor and market shareholder in those spaces in Southern California is it meaningful or is this kind of?

[Craig Blunden:]

These are meaningful player, these are large lenders. They are not Community Banks necessarily, but some of the larger lenders are able to do that and the dilemma with that is, these larger lenders have come down market and prior to the credit cycle we didn’t see these lenders in $1 million to $5 million loan space. But those lenders are active in that space now and because their loan size is so small relative to what they generally do, they have been able to loosen underwriting a bit.

[Tim O'Brien:]

So what kind of rate can you get just generalize there, what kind of rate can you get on a multi interest only loan? What’s the fix period of that loan, what’s the structure of a loan that you’ve seen out there that you think is attractive to a borrower and where they are getting traction?

[Craig Blunden:]

They will price up for the interest only nature there -- in fact they will price up as well for release of guarantors and they will price up 25 to 50 basis points. But we have seen 10 year interest only structures where it will balloon in 10 years.

[Tim O'Brien:]

And there are the advertising pricing on that like you can get this at 12% something like that?

[Craig Blunden:]

Yes, I mean we see the pricing typically on their rate sheets, but they are not advertising that on the Los Angeles Times if you will.

[Tim O'Brien:]

It's not being actively marketed, but it's a viable product that their production staff is used making headway with.

[Craig Blunden:]

Correct, that’s the way to think about it, their production staff has the ability to generate that type of production.

[Tim O'Brien:]

Is this new, is this a recent kind of occurrence or has it been around for a few quarters?

[Craig Blunden:]

The interest only is newer, although we’ve heard about it in other markets but that’s kind of a new we’re getting that we’ve been seeing.

[Operator:]

There are no further questions in queue at this time.

[Craig Blunden:]

I want to thank everyone for joining us on our conference call and look forward to speaking to all of you again at our next quarter call. Thank you.

[Operator:]

Ladies and gentlemen that does conclude our conference call for the day. On behalf of today’s panel, we like to thank you for your participation in today’s fourth quarter earnings teleconference call. And thank you for using AT&T. Have a wonderful day. You may now disconnect.