Provident Financial's (PROV) CEO Craig Blunden on Q4 2014 Results - Earnings Call Transcript

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 |  About: Provident Financial Holdings, Inc. (PROV)
by: SA Transcripts

Provident Financial Holdings, Inc. (NASDAQ:PROV)

Q4 2014 Results Earnings Conference Call

July 31, 2014 12:00 PM ET

Executives

Craig Blunden - Chairman and CEO

Donavon Ternes - President, COO and CFO

Analysts

Brian Zabora - KBW

Jason Stewart - Compass Point

Tim O’Brien - Sandler O’Neil & Partners

Brett Villaume - FIG Partners

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). And also as a reminder, today's teleconference is being recorded.

And at this time I will turn the conference call over to our host Chairman and CEO 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 items 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 July 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 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. First, I would like to point out the increased importance place in our community banking business.

We will note that we have been more success on originating loans held for investment during the fiscal year than we were during the same period last. We have essentially doubled our origination volume and doing so as a result of four consecutive quarters of growth in loans held for investment after many quarters of contraction. I simply note that however that principal repayments remain high which have significantly reduced the growth rate of our loans held for investment. Nonetheless I believe we have an ongoing opportunity to increase loan balances and we have been investing in the personnel and systems to capitalize in this opportunity.

The second point I would like to make regarding community banking is that we have intentionally not taken full advantage of our mortgage banking platform to augment loans held for investment. We’re uncomfortable with the loan yields and the interest rate risk characteristics of the single family loan products given the historically low interest rate environment coming out of the recession. Our view is changing consistent with improving economic environment. Recently we launched a single-family held for investment products through our mortgage banking platform. These products include performing in jumbo arm as well as fully occupied one time close construction loan product. As a result, we anticipate that we will originate more single-family loans for the portfolio during the fiscal 2015 and then recent prior fiscal quarter years.

In deed we currently expect the pace of growth in single-family held for investment loans to accelerate from the current levels. The second half of this fiscal year we have originated approximately $18.9 million of single-family loan held for investment portfolio compared to $5.2 million during the first half of this fiscal year.

Credit quality continues to improve and we believe further improvement is likely. Total non-performing assets on June 30, 2014, were $18.4 million, the lowest level in many quarters. We recorded $691,000 recovery from the allowance for loan losses during the quarter ended June 30, 2014, and we realized $411,000 of net recoveries for the quarter compared to net charge-offs of $168,000 during the March 2014 quarter, and net charge-offs of $166,000 during the December 2013.We are very pleased with these credit quality results.

Mortgage banking environment has recently improved from the poor environment earlier this year. As a result, we increased the mortgage banking FTE count. We have employed 312 FTE in mortgage banking on June 30, 2014, up from the 296 FTE on March 31, 2014, but down from the 387 FTE employed on June 30, 2013.

During the quarter, we increased our originations staff by 15 professionals and our fulfillment staff by 1 professional. We will continue to adjust our business model as we have done in the past, commensurate with changes in loan origination volume.

Volume of loans originated for sale in the fourth quarter of fiscal 2014 increased significantly from the March 2014 quarter but declined significantly from the same quarter last year. New application volume grew throughout the June 2014 quarter, resulting in a higher locked pipeline from the start of our fiscal quarter of fiscal 2015 and for the start of our fourth quarter, suggesting a higher volume of loans originated for sale in the September 2014 quarter and then during the June 2014 quarter. It seems that the traditional spring and summer bond season has finally arrived. However, it’s an open question whether the recent volumes spike is sustainable.

On the positive side of that question, our higher inventory levels and by historical standards relatively low mortgage interest rate. On the negative side of that question is that weaker income growth and rising home prices. The California Housing Affordability Index as reported by the California Association of Realtors suggests one-third of California households can afford to purchase a median priced home today which is significantly higher than the one in ten reported during the hike of the housing business but lower than one and two reported in 2012.

Our loan sale margin for the quarter ended June 30, 2014, increased from the prior three sequential quarters to 159 basis points to approximately the midpoint of the recent historical range. Loan sale execution remains difficult as competitors price at unsustainably low levels to keep up their volume. We’re working diligently to optimize our pricing models but we may not see loan sale margins recover to the high-end of the recent historical range because the mortgage banking industry has too much origination capacity for current event 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 fourth quarter, we originated a total of $48 million, primarily multi-family and single-family real-estate loans to augment loans held for investment. And for the fourth consecutive quarter, loans held for investment increased from the prior sequential quarters ending balance. We’re working diligently to fulfill our more aggressive origination goals and I believe the positive momentum is building particularly since we’re now offering more held for investment products through our mortgage banking channel. I should also point out that we've reduced our operating expenses by approximately 19% in the June 2014 quarter in comparison to the same quarter last year primarily by reducing salary and employee benefit expense. We understand our efficiency ratio is currently too high as we transitioned from the outsized fee income derived for mortgage banking activity. The slower growth in net interest income from our community banking activities as we re-lever the balance sheet. We have made good progress reducing operating expenses, the more work remains with respect to growing the balance sheet.

Liquidity balances are higher than we would like which is another reason we're expanding our multifamily commercial real-estate, single family and construction loan capability. Our net interest margin increased this quarter in comparison to the March 2014 sequential quarter and the same quarter last year as we started deploying cash balances to increase loans held for investment, loans held for sale and paying off federal home loan bank advances, exactly what we described in last quarter's call as our ongoing opportunity.

Our short-term strategy for balance sheet management is unchanged from last quarter. We believe that re-leveraging 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 the pay off. Nonetheless we are investing in our multi family commercial real-estate and construction loan platform to take advantage of loan opportunities as they arise or much more open the single family loan products for the portfolio.

For the foreseeable future we believe that maintaining regulatory capitals above 7% for tier 1 leverage and 12% total risk base is critical and we're confident hat we'll be able to do so. Additionally we're introducing an 8.5% minimum goal for the Basel III common equity Tier 1 component. We currently exceed each of these goals by a wide margin demonstrating that we have the capital to execute our business plan and our capital management goals.

Additionally, in the June 2014 quarter, we repurchased approximately 357,000 shares of common stock and we continue to believe that executing on stock repurchases is a wise use of capital in a low growth environment.

To that end, last week we announced the 10% increase in our quarterly cash dividend to $0.11 per share was the first distribution scheduled for September 3rd. We encourage everyone to review our June 30th investor presentation posted on our website. You'll find that we included slides regarding financial metrics, community banking, mortgage banking and asset quality, which we believe, we'll give you additional insight on our strong financial foundation supporting the future growth of the bank.

We'll now entertain any questions you may have regarding our financial results. Thank you. Tony?

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). Question will come from Brian Zabora with KBW. Please go ahead.

Brian Zabora - KBW

Thanks. Good morning.

Craig Blunden

Good morning, Brian.

Donavon Ternes

Good morning.

Brian Zabora - KBW

My question on lock pipeline. Is the mix still about the same or is about 40% or so refi and 60% purchase?

Craig Blunden

The pipeline has changed in July from June 30, it's closer to 50-50 mix today. Refinance activity has bumped up a bit prior to the last couple of days, because interest rates have going down. For most of July the tenure was below the 2.50% handle which had reduced mortgage rates and that bumped up refi activity a bit.

Brian Zabora - KBW

Okay. Just a follow up on that do you think your pretty strong refinance activity is purely rate driven or is it also a function of properties values here you come up and that or you see these are the place for people can refi and therefore maybe refi won’t be as rate sensitive going forward. Does that makes sense?

Craig Blunden

I think overtime, I think you are right both of those make sense. I think initially it’s the drop in interest rate that gets people interested and then they also realized that their property values are up as well. So moving forward I think both of those will operate.

Brian Zabora - KBW

And then just lastly commercial real estate you talked about the increase in originations, balances were down a bit in the quarter did you had a large pay down or anything unusual that results in decrease?

Craig Blunden

Yes I think in our earnings release we described above 48 million of pay downs as I recall the number and indeed that was up a bit in comparison to any other prior quarter the last three quarters. That was number four full fiscal, full four quarters this fiscal.

Brian Zabora - KBW

Thanks for taking my questions.

Craig Blunden

Thank you.

Operator

Thank you very much. Our next question in queue that will come from the line of Jason Stewart with Compass Point. Please go ahead.

Jason Stewart - Compass Point

Thanks good morning.

Craig Blunden

Good morning.

Jason Stewart - Compass Point

There has been a lot written about strength at the higher end of the (inaudible) market in terms of price point. I realize California NGO footprint is probably shifted earlier to that price point, but could you just talk about your plans or updated thoughts on originating those for sale whether you are seeing more demand from investors if there is a program that you could come up with to leverage your platform on that jumbo product.

Craig Blunden

Well, actually we have a couple of things going on in that regard. The first thing we do have a portfolio jumbo program now that the mortgage division has been originating into seriously, I suppose for the last two or three months. But secondarily, we are see investor interest in that space and we have recently executed a couple of new investor agreements with a couple of investors that are specifically targeting that space. And as a result we believe we are going to be more competitive in that jumbo production space. And more competitive relative to the large banks that are actually portfolioing the product and actually charging lower rates than confirming loan rates.

And it’s primarily in our view hybrid arm driven at least with respect to our portfolio; with respect to the investor activity, it can be both fixed and hybrid arm driven.

Jason Stewart - Compass Point

Okay. And do you have any sense for how big that could get or could you give us an idea of how much has been in the last couple of months in the portfolio program coming on balance sheet?

Craig Blunden

Well, for the June quarter. We originated $13 million of SFR from the mortgage division into the portfolio programs. But that’s in combination of confirming jumbo, in fact I think there is a couple of construction loans in that loan total as well.

So that's the color that I could give you with respect to our own portfolio program. We believe that that will accelerate as we go through the timeline in fiscal ‘15. And with respect to the newer investment program we have there is really to new the rate we’ve just essentially gotten on board with those investors within the last month or so. But the program is very competitive relative to what we’re seeing in the market from the larger lenders there putting it into their portfolio.

Jason Stewart - Compass Point

Okay, thanks. And could you just give us an update on incremental loan yields for some of the major categories that you’re originating for the balance sheet?

Craig Blunden

Sure. The single-family product that’s coming into the balance sheet is in the low 3s primarily. The second trust deed program that we have single-family that’s coming into the balance sheet is in the low 5s. Multi-family right now is in the high to low 3s, I am sorry high 3s to low 4s. And then CRE coming into the portfolio is in the mid 4s.

Jason Stewart - Compass Point

Great. Thanks for taking the questions.

Operator

Thank you. (Operator Instructions). Next in queue is Tim O’Brien with Sandler O’Neil & Partners. Please go ahead.

Tim O’Brien - Sandler O’Neil & Partners

Good morning.

Craig Blunden

Good morning.

Tim O’Brien - Sandler O’Neil & Partners

So one question that I have for you is as far as structure of those loans that you’re willing to portfolio, can you give a little bit of color on how far out you’ve gone the fixed rate component of loans that you keep on the books?

Donavon Ternes

With respect to the single family product that’s coming in the portfolio, it's primarily 5/1 ARM product. It's a Second Trust Deed program, it could be 10 year fixed, fully amortizing, could be 15 year fixed amortizing. With respect to the construction loans, there is a construction to term program where they move into confirming loan product with a 30 year amortization, 30 year term. Multifamily is primarily 5/1 ARM product with 30 year fully amortizing terms. And then CRE product is primarily 25 year amortizing but 10 year balloons in that product.

Tim O’Brien - Sandler O’Neil & Partners

And then changing gears but kind of moving further with Brian's question. As far as the pay downs, the 48 million in pay downs that you experienced this quarter, can you give a -- can you comment on why pay downs came in higher this quarter relative -- characterize relative to other pay down results in the past couple of quarters and what might have happened, is it were the higher pay downs reflective of more aggressive activity from competitors or was it part and parcel due to general rate environment and lower rates in general or give some color on that.

Donavon Ternes

I think it's probably all of the above. If I look at our principal repayments on the quarterly basis, 46, 47, 48 million in the fourth quarter, the third quarter was 25 million, second quarter was 35 million, first quarter was 41.7 million. I don't know that there is any line or reason with respect to that. I don't breakdown the mix between single-family and multi-family, I probably do in the K, or the upcoming K, but I don't have that today. But at the end of the day, when we look at what occurred in the June quarter with interest rates coming down, I think there was probably an uptake in single-family payoffs. And then secondarily, I think there is more activity in multi-family, in commercial real estate with respect to refinance activity.

Tim O’Brien - Sandler O’Neil & Partners

Thanks for that color. And then last question, with the new fiscal year starting, can you give some comments on your outlook as far as funding needs and pricing and funding availability that as you move through the year? What your thoughts there?

Donavon Ternes

The first thing I want to say about beginning the fiscal, the new fiscal year, at July 1st, I would argue that we're in a much better position today than we were a year ago at this time with respect to our mortgage banking business, because we essentially took three quarters of fiscal ‘14 right rightsizing that business and getting it to a point of a return to profitability from those higher loan levels, the prior year.

So we're relatively comfortable where we are today with respect to that business and with respect to the origination volume that appears to be out there given the current environment. And so, I think number one that's a large positive. Now…

Tim O’Brien - Sandler O’Neil & Partners

Is that the same, Donavon, that your expectations that the funding requirements forward to drive that business, to support that business or have moderated from -- they must have given where we were last year and what was happening in the market last year. But looking at 2015 relative to where you were in 2014, the needs there going to be more modest?

Donavon Ternes

Yes, I would expect absolutely as it relates to fiscal ‘13 which is a record volume year for us. Fiscal ‘14, we came up -- we did $3.5 billion in fiscal ‘13, we did $2 billion in mortgage in fiscal ‘14. That $2 billion number doesn’t seem out of the question with respect to fiscal ‘15, given what we just did in the June quarter and given that the current environment seems to have stabilized. That being said, we certainly have the liquidity in place to manage that business.

The larger context that I think you’re trying to hit to, as we grow balance sheet, what are the levers that we’re going to pull with respect to growing either deposits or where else are we going to get funding. Well, as we think about growing balance sheet, one of the primary considerations is interest rate risk management. We are down to $41 million of FHLB advances today. FHLB advances are tremendous tool with respect to interest rate risk management. And we have a great deal of availability on our lines with the Federal Home Loan Bank in San Francisco as we look down the fiscal and levering up the balance sheet.

Secondarily, I think deposit rates may become more competitive. We've kind of been stuck at the very lows of the deposit rate range for two years is it, for an extended period of time they can't go any lower and I think that's going to be dictated by what the Fed may or may not do or the FOMC may or may not do with respect to increase in the Fed funds rate and when that may actually occur. There been a great deal written recently about banks having absorbed a great deal of additional liquidity as a result of monitory policy coming out of the Fed.

I suspect that some of that is probably true. I don't know that it's true with respect to our deposits, I think it's probably more centered in money centered banks and Wall Street banks. And they may have some issues with respect to deposit. But at the end of the day, I think it's got to get more competitive its interest rates rise. And that will ultimately become problematic with respect to at least on a short-term basis, net interest margin. Depending upon how quickly those rates rise in contrast to what our assets reprice to.

Tim O’Brien - Sandler O’Neil & Partners

Thanks a lot of Donavon.

Operator

Thank you. (Operator Instructions). And next in queue is Brett Villaume with FIG Partners. Please go ahead.

Brett Villaume - FIG Partners

Good morning gentlemen.

Donavon Ternes

Hi.

Craig Blunden

Good morning.

Brett Villaume - FIG Partners

On the comment you had recovery this quarter, but this was your sixth consecutive quarter of reserve to capital or negative provision for loan losses. And you don’t think you are down for 1 for reserve ratio against the loan sale for investment 1.25%. Do you have any guidance for us on what should expect for provision, so we’re kind of a level is normalized level for reserves I guess loans held for investments?

Donavon Ternes

Yes. I think at the end of the day as we think about a normalized level I think last quarter we described that the range is 100 basis points to 125 basis points, I think that’s still probably the range relative to our current composition and relative to our current mix. But we’ve also described for instance that we’re interested in growing construction lending for instance. Construction lending will probably take a larger allowance because it’s a riskier product and so if those balances grow that’s going to change the loan composition in such a way that perhaps the allowance doesn’t have much room to fall.

On the flip side if single-family or multi-family come in, in a big way and start taking a larger composition of the total portfolio those are probably lower reserve levels which may allow for that 125 to move down a bit. But anyway you slice it, we’re at the top end of what we think is a normalized range of 1 to 125 so there is no longer a lot of room with respect to recovered from the allowance.

Brett Villaume - FIG Partners

Okay. That’s very helpful. Thank you. And then my other question I wanted to ask was about you mentioned that you would hire 15 people in originations and then 1 additional person so 15 people hired, that was during the quarter up until June 30th correct?

Donavon Ternes

Yes.

Brett Villaume - FIG Partners

And can you share with us if you have continued to do so or since then over the last month or were those (inaudible) towards the latter half of the quarter?

Donavon Ternes

I can't recall when they came in, in particular but if you look at our investor presentation and you look at the number of retail branches we've described on that page and you compare to March, you will see that I think we consolidated a couple of offices and then we opened a new office as well.

And the new hires were primarily related to that new office that we picked up and they were transitioned by another large lender to us. And with respect to current color we just don't provide current color.

Brett Villaume - FIG Partners

Okay. Thank you very much.

Craig Blunden

Thank you.

Operator

Thank you. At this time we have no additional questions in queue. Please continue.

Craig Blunden

Right I believe that we want to thank you all participating. Look forward to talking to you again at our next quarter earnings conference call. Thank you.

Operator

Thank you very much and ladies and gentlemen this conference will be available for replay after 11 AM Pacific Time today running through August 7th at Midnight. You may access the AT&T Playback Service at any time by dialing 800-475-6701 and entering the access code of 332459. Once again the telephone number is 800-475-6701 using the access code 332459. That does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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