Provident Financial Holdings, Inc.
Q2 2014 Earnings Call Transcript

Published: 3 Feb 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Second Quarter Earnings Release. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (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, Chairman and CEO. Please go ahead.

[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, 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 on January 30th, from the annual report on Form 10-K for the year ended June 30, 2013, 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 are made and the company assumes no obligation to update this information. To begin, well, 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. First, I would like to point out the increased importance we’re placing on our community banking business. On the note, that we have been more success on originating loans held for investment during the first six months of this fiscal year then we were during the same period last. We have essentially doubled our volume and doing so has resulted in two consecutive quarters of growth in loans held for investment after many quarters of contraction. I believe we have an ongoing opportunity to increase loan balances and we have been investing in the personnel and systems to capitalize on this opportunity. The second point I would like to make is regarding community banking as we do not believe that we have taken full advantage of our mortgage banking platform to augment loans held for investment. We have originating approximately $5.2 million of single-family loans held for investment portfolio during the first six months of this fiscal year and a similar amount during the same period last year. This was by design. We did not like the loan yields or interest rate risk characteristics of the loan products, given the historically low interest rate environment coming out of the recession. We certainly have the ability to originate more single-family loans for the portfolio and we are getting more comfortable to current yield environment. Additionally, we believe adjustable rate loans are becoming more popular borrowers. I expect we will originate more single-family loans held for investment portfolio during calendar 2014. Credit quality continues to improve and we believe that further improvement is likely. Total non-performing assets on December 31, 2013, were $20.4 million, an 8% decline from the peak of $107 million on December 31, 2009. We reported $898,000 recoveries from allowance for loan losses during the quarter ending December 31, 2013, while net charge-offs were just $166,000, significantly lower than the net charge-offs during the September 2013, which were $1.9 million and the net charge-offs of $1.6 million in the December 2012 quarter. We believe that the mortgage banking environment has deteriorated because of the recent rise in mortgage rates have significantly reduced refinance activity. We have been transitioning our business model to a more profitable retail production platform for some time we are not immune to the deteriorating market fundamentals. As a result, we continue to reduce the mortgage banking FTE count. We employ 315 FTE in mortgage banking on December 31, 2013, down from the 358 FTE on September 30, 2013, and from 387 FTE at June 30, 2013. 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 second quarter of fiscal 2014 decreased significantly from the same quarter last year and from the September 2013 quarter. New applications were weaker in the December 2013 quarter, resulting in a lower locked pipeline from the start of our third quarter of fiscal 2014, suggesting a lower volume of loans originated for sale in the foreseeable future when compared to the record volumes during fiscal 2015. The loan sale margin for the quarter ended December 31, 2013, increased from the prior sequential quarter that is still at the lower end of recent historical range. Loan sale execution was difficult for the quarter as competitors priced at unsustainably low levels to keep the volumes up. However, interest rate volatility stabilized during the quarter, which reduced hedging costs from the September 2013 quarter, resulting in a higher loan sale margin compared to the sequential quarter. We're working diligently to optimize our pricing models. Let me take an extended period of time to fully recover from irrational pricing, since the mortgage banking industry has too much origination capacity for current demand, given the decline in refinance volume. In addition to our improving view of credit quality and our cautious outlook on mortgage banking, there have been other developments regarding our operating results. For example, during the second quarter, we originated a total of $43 million of primarily multifamily and commercial real estate loans to augment loans held for investment. And for the second consecutive quarter, loans held for investment grew from the prior sequential quarter's ending balance. We are working diligently to fulfill our more aggressive origination goals for fiscal 2014 and I believe a positive momentum is building. Liquidity balances are higher than we would like, which is another reason why we're expanding our multifamily commercial real estate and construction loan capabilities. And while our net interest margin decreased by 8 basis points this quarter in comparison to the September 30, 2013 quarter. We see opportunity in fiscal 2014 to increase our net interest margin. To do so, we plan to use available cash currently invested at nominal yields to increase our portfolio of loans held for investment with newly-originated loans at higher yields. We realized a higher yield on loans held for sale, given the recent rise for mortgage interest rates, and payoff existing FHLB borrowings as they mature. Our short-term strategy for balance sheet management was unchanged from last quarter. We believe that releveraging the balance sheet is essential, but we also recognize that loan demand is weaker than we would like, making it difficult to generate a sufficient volume of loans held for investment to replace payoff. Nonetheless, we're investing in our multifamily, commercial real estate and construction loan platform to take advantage of loan opportunities as they arise and are much more open to portfolio of single-family products. For the foreseeable future, we believe that maintaining regulatory cap ratios above 9% for Tier 1 Leverage and 12.5% total risk-based is critical and we are confident that we'll be able to do so. We have completed more analysis since last quarter regarding Basel III requirements, using an internal model and the OCC’s community bank model. And we're increasingly confident our existing capital base is comprised of the quality and quantity that we will need to fulfill the Basel III requirements, while still being able to execute on our business plan and capital management goals. Additionally in the December 2013 quarter, we repurchased approximately 385,000 shares of common stock, and we continue to believe that executing on stock repurchases is a wise use of capital in the current low-growth environment. We encourage everyone to review our December 31st Investor Presentation posted on our website. You will find that we’ve included slides regarding financial metrics, community banking, mortgage banking and asset quality, which we believe will give you additional insight on our strong financial foundations supporting the future growth of the company. We will now entertain any questions that you may have regarding our financial results. Thank you.

[Operator:]

Thank you. (Operator Instructions) And we will go to the line of Brett Villaume with FIG Partners. Please go ahead.

[Brett Villaume:]

Good morning, gentlemen. How are you?

[Craig Blunden:]

Brett, good morning.

[Brett Villaume:]

Could you talk a little bit more about the number of new hires that you’ve made? I know you mentioned that you are seeing the decrease in mortgage origination folks, but you mentioned in the press release about making hires for further loans. Could you talk about that first?

[Craig Blunden:]

Primarily, Brett, we probably sense coming out of the recession double the origination staff in that area. And that’s a result we added a couple of sport personnel underwriter, processor, cash flow adolescence in the like. And as a result of that, you’ll see or have seen that we’ve been able to essentially double our origination volume this fiscal year during the first six months in comparison to last fiscal year. We don’t describe the actual number of FTE there for competitive reasons but it’s essentially doubled in the last year and half or so.

[Brett Villaume:]

Okay. Sounds good. And Craig mentioned that the locked pipeline in product output, what is it now? Do you mind sharing?

[Craig Blunden:]

No. In fact, there is a slide in the investor presentation for December 31st with respect to the mortgage banking lock pipeline. It’s $98 million net of those locks which we believe will fall out. We don’t describe our net pipeline with respect to commercial and multi-family again for competitive reason.

[Brett Villaume:]

Okay. My apologies there. I’ll also get out on the slide. And I just want to ask about the share repurchases, do you guys anticipate stepping them up beyond the level that we saw last quarter. Should the stock price remain down here at current levels?

[Donavon Ternes:]

No. Brett, that’s hard to say and we will continue buying back stock. And we have authorized another program recently and we’ll buyback probably -- it's hard to say, at least it’s okay we think.

[Brett Villaume:]

Okay. So not necessarily I understand. And I think that’s it for now. Thank you gentlemen, I’ll step back.

[Donavon Ternes:]

Thank you.

[Craig Blunden:]

Thanks.

[Operator:]

Thank you. We’ll go to the line of Don Worthington with Raymond James. Please go ahead.

[Don Worthington:]

Hi. Good morning.

[Craig Blunden:]

Hi Don.

[Donavon Ternes:]

Good morning Don.

[Don Worthington:]

In the quarter, were there any loan purchases of the preferred loan variety?

[Craig Blunden:]

No. There was none actually in the first six months of this fiscal and that’s the same that occurred into the first six months of the last fiscal. We looked at packages Don. Sometime we are necessarily comfortable with the credit quality. Other times where we’re comfortable with the credit quality, we can’t get together on price.

[Don Worthington:]

Okay. And then in terms of the tax rate going forward, where would you place that, it was, I think over 43% this quarter?

[Craig Blunden:]

Yeah. I think that’s probably true-up adjustments in the like. I think it’s historically around 42%.

[Don Worthington:]

Okay. All right. Thank you.

[Craig Blunden:]

Thanks Don.

[Operator:]

(Operator Instructions) We’ll go to the line of Tim O’Brien with Sandler O’Neil & Partners. Please go ahead.

[Tim O’Brien:]

Good morning. This is a question for Mr. Ternes.

[Donavon Ternes:]

Okay.

[Tim O’Brien:]

Hey Donavon, so the reserve ratio came down quite a bit and you guys are transitioning into B to adding more preferred loans that might have different credit quality profiles than single-family residential loans do? Can you give some color on what your thinking is there as far as where that ratio might go, where your reserve level might go? Just give us an indication what you guys are thinking strategically as far as setting aside reserves for this new -- these loans that you are adding?

[Donavon Ternes:]

I think the largest single factor is going to be meaningful growth in the held-for-investment portfolio. And while we’re pleased, we’ve been able to grow the portfolio for the last two consecutive quarters. I wouldn’t suggest that the amount of that growth is meaningful. So that takes or relieves some pressure with respect to the allowance. That’s essentially what is occurring to the legacy portfolio of single family for instance that have higher allowances against them as they get cleaned up, those allowance are at reserve is released for future growth, to the extent that growth isn’t fair it obviously works its way through the net income statement in the form of -- not only reserve release but reserve recovery. I think our absolute number is 144 basis points are around there at December 31st, probably down from 158 or 159 or somewhere in there at September 30. There is probably a little bit more room there, but the closer we get to 100 and 125 basis points, the less room there will be. But, again, the largest single drive is going to be the actual performance of the legacy portfolio and then secondarily, maybe even more importantly today, the absolute growth with respect to loans held for investment.

[Tim O’Brien:]

Have you guys, has your regulator kind of waving with you guys, as far as, what their folks are on, was there as relative to loans given kind of the changing nature of the loan portfolio with slow runoff of single-family and additions in commercial real estate multi?

[Donavon Ternes:]

Yeah. I don’t think, okay, I’ll shoot on that one, Tim. Clearly, if you read about OCC in general not just as specifically as their concerned about the amount of recovery allowance for loan losses, but they don’t give us a number, per say and we are not going to certainly release more that will effect our ability to grow the institution. And but, again, when you look at our improving numbers in all categories quantitatively and qualitatively, that’s why we've done the release so far.

[Craig Blunden:]

The other point to make, the poorest performer category over the course of the last credit cycle is single-family and our legacy single-family have more allowances against them then the commercial and multi-family real estate portfolios because they held up quite well during the cycle. So, as those portfolios decline in single-family, the new portfolios and multi and commercial or growth in those portfolios frankly don’t require the same allowance reserve that the legacy single-family does. And by the way, we talk a little bit about growth in single family and how we’re more incline to do so in the current rate environment then we have been inclined to do. We expect that the newly originated single-family given the underwriting standards deploy today in comparison to the legacy single-family portfolio will hold up much further and so new single-family will not require the same allowances that legacy single-family have. So, there is many moving parts with respect to our allowance. Certainly, the ratios are coming down from where they were and more they come down the less room there is if you will with respect to recovery, particularly if we're growing the held for investment portfolio.

[Tim O’Brien:]

Thanks for the answer. I've two and a half more questions. The first half is for Mr. Blunden. Did you say 12% total risk base capital is kind of the threshold in it -- along with the 9% Tier 1, that’s kind of where your comfort zone lies now today, did that go over 12.5%?

[Craig Blunden:]

12.5% actually.

[Donavon P. Ternes:]

Yeah. 12.5%...

[Tim O’Brien:]

12.5%. That’s okay. That’s only half a question. And then my next question is, do you have an idea of the listings there out there in your Inland Empire market and other Southern California and Northern California, do you guys track that relative to historic to kind of gauge what your I guess resource production or resource needs are going to be in the mortgage banking unit and do you have that for kind of the current this year's sales season coming into this year's sales season relative to prior year's, recent prior year's?

[Craig Blunden:]

We don't track it specifically other than canvassing our retail originators on an ongoing basis. They work very closely with the realtor community. And I think to a person, the originators will tell you that the listings are still very, very tight, with respect to demand of new homes or those wanting to purchase homes. But I think we've seen that throughout the last 18, 24 months and I don't know that it has changed materially over that period of time. But I do believe that listings are holding back to some degree or lack of listings, are holding back to some degree origination volume. I think more could be had if there were more listings out there.

[Tim O’Brien:]

So no sense of, the Super Bowl was yesterday, the season is on, game on, time to sell a house in California, I guess. I mean, I'm generalizing a little bit. But you guys don't have a sense, what's the level of optimism that folks are going to list because prices have improved to a point where the market is attractive for potential sellers again, relative to 2013?

[Craig Blunden:]

I think the market has improved substantially and we've seen that in even some DataQuick Information. They're pretty good provider of teleporting information with respect to actual year-over-year increases in home values. And that will obviously allow more to list their homes that they choose to do so, as well as potentially bring some refi product into the market to the extent that the LTVs are now at an area where they can refinance. So, I would suggest that the absolute metrics of the environment is better today than it was a year ago, but that doesn't mean that you'll see better volumes, or we'll see the same type of selling season this year as we did last year. There is a number of factors that go into that.

[Tim O’Brien:]

And then last question, that $98 million in net locks that you had at year end.

[Craig Blunden:]

Yes.

[Tim O’Brien:]

How far back do you have to go to hit a number that's less than that?

[Craig Blunden:]

I haven't looked at that specifically, but I would venture that it's more than 24 months ago.

[Tim O’Brien:]

2009 and 2008 type stuff.

[Craig Blunden:]

Yeah, I don't know about '9. '9 was a pretty dismal year and mortgage banking really started coming on in 2010. So probably in the 2010 -- fiscal 2010 year would be the year where those locks would be similar.

[Tim O’Brien:]

Do you recall back then when -- what your -- how many folks were working in your mortgage banking unit approximately?

[Craig Blunden:]

Off the top of my head, I don't. We have the data.

[Tim O’Brien:]

Obviously, it's apples to oranges too, I mean this is not 2010 but --

[Craig Blunden:]

Yeah, it was less. We centrally have been building since 2009 that division up until June of 2013. And then beginning with the September quarter and obviously the December quarter, we've been reversing our position. So there was a long period of time where there has been growth or a build in FTE cabin in that area, and now we're essentially trying to right-size that business timely enough as we go down the timeline here.

[Tim O’Brien:]

Actually, one other question for you, in the investor presentation slide there's a pretax income on operating segments chart and you guys show mortgage banking lost $0.8 million in the quarter. The revenue contribution from that is essentially just the gain on sale or are there any other components of contribution besides that line item from fee income?

[Donavon Ternes:]

Essentially gain on sale or fees due at origination of loans.

[Tim O’Brien:]

That’s it. So it’s all encapsulated in that line.

[Donavon Ternes:]

Yeah.

[Tim O’Brien:]

Okay.

[Craig Blunden:]

There is no MSR right up…

[Tim O’Brien:]

Not pronounced?

[Craig Blunden:]

Yeah.

[Tim O’Brien:]

Okay. Great. So if I can pack up what your segment cost are?

[Craig Blunden:]

Correct.

[Tim O’Brien:]

Thanks gentlemen.

[Craig Blunden:]

Hey, Jim.

[Operator:]

Thank you. We have got at the line of Jason Stewart with Compass Point. Please go ahead.

[Jason Stewart:]

Hi, good morning. Thank you. If you guys could give us a little bit of color with regard to have a recent rate movement of respected activity in the mortgage banking business, whether increased refi activity, pull-through rates, profitability, just kind of any sort of incremental color. Does it seem to be changing things a little bit right now?

[Craig Blunden:]

Yeah. I mean, I look at the Fed essentially strengthening their taper or increasing their taper and interest rates essentially even moved down from that I expect because of the equity markets. Now there’s been a slight quality there. But certainly we’ve seen more reg rates stabilize from kind of the short that occurred in our fiscal first quarter was 10 per quarter. Beginning that quarter, we really saw 10 year move up in mortgage rates, move up significantly. And since that period, rates, 10 years kind of settled in, call it, lower range around 275 or so, little lower than that. We’ve seen an increased volume as a result of that. But it’s very -- over that complicated factors that was occurring during the holiday season and typically volume declines with respect to new originations during the holiday season. And in January, everybody spending first couple of three weeks building pipelines to get back to where as far as they can be after essentially funding out the pipeline. So I think there’s a bit more activity, but I don’t know how significant it is in contrast to the fundamental change with respect to refinanced while we go along the way.

[Jason Stewart:]

As long as, once you’ve seen competitors, are they reluctant to lower price or are they pretty quick. I’m looking at current coupon mortgages are down around 30 basis points year-to-date. But it doesn’t feel like everybody has lowered rate by that much yet?

[Craig Blunden:]

I don’t know that everybody has because I think margins tightened so significantly in the -- in the September quarter because volume fell off so quickly. I think people thought of the December quarter as a way to get back some of that margin compression. Certainly we did as we thought about December in contrast to September. But the reality is, in our view there is still too much capacity to originate in mortgage banking business in contrast to look at the fundamental side. And as a result, there is going to be continued pressure on absolute volume because people will compete on price and that’s just one other things that we have to deal with.

[Jason Stewart:]

Okay. Thanks for the color.

[Operator:]

Thank you. We have no further questions. Thank you. Please continue.

[Craig Blunden:]

As there are no further questions, I’d like to thank everyone for joining us in our quarterly conference call and look forward to speaking to all of you again next quarter. Thank you.

[Operator:]

Thank you. And ladies and gentlemen, this conference will be made available for replay after 11 a.m. Pacific Time today until February 10th at midnight. You may access the AT&T playback service at any time by dialing 1 [phone] and entering the access code 317600. Those numbers once again are 1 [phone], enter in the access code 317600. That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.