Provident Financial Holdings, Inc. (PROV) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'd now like to turn the call over to our host, Mr. Craig Blunden. Please go ahead, sir.

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 and other performance measures and statements about the company's general outlook for economic and business conditions. We also may make forward-looking statements during the question-and-answer period following management's presentation. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ from any forward-looking statement is available from the earnings release that was distributed yesterday, from the annual report on Form 10-K for the year ended June 30, 2018, and from the Form 10-Qs and other SEC filings 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 third quarter results. I would like to begin this morning by highlighting the results in our community banking business. Over the course of the last year, our net interest margin has expanded, core deposits have been stable, credit quality has been strong, but our loan growth has been below our expectations as a result of the significant prepayments and our disciplined underwriting standards reducing loan origination volume. In the most recent quarter, the community banking staff originated and purchased $40 million of loans held for investment, an increase from $15 million in the prior sequential quarter, and single-family loans originated from portfolio from the mortgage banking division decreased to $4 million in the March 2019 quarter from $24 million in the prior sequential quarter. During the quarter, we also experienced $36.5 million of loan principal payments and pay-offs, which is down from the $42.2 million in the December 2018 quarter, but still tempering growth of rate of loans held for investment. Additionally, we estimate that the decrease in acceleration of amortization of net deferred loan costs associated with the lower loan pay-offs in the March quarter in comparison to the average of previous five quarters improved our net interest margin by approximately 3 basis points this quarter. For the three months ended March 31, 2019, loans held for investment increased by approximately 1% in comparison to December 31, 2018, with growth in single-family, multi-family, commercial real estate and construction loans. However, competition for new loan production remains intense, but we will not chase loan production volume if we must loosen our underwriting standards to do so. I'm very pleased with our credit quality. You will note that early-stage delinquency balances were just $696,000 at March 31, 2019. In addition, nonperforming assets remain very low levels and are now just $6.1 million, which is down from $7.6 million at March 31, 2018, for a 20% decline during the course of the year. We recorded a small $4,000 provision in March 2019 quarter resulting from the loan portfolio growth in the quarter, which was mitigated by the low levels of nonperforming classified assets and the fiscal year-to-date net recoveries. The most recent charge-off experience was $39,000 in the March 2018 quarter. We're very pleased with these credit quality results. Our net interest margin expanded by 30 basis points for the quarter ended March 31, 2019 compared to the same quarter last year as a result of a 31 basis point increase in the average yield of noninterest-earning assets - total interest-earning assets, sorry, partially offset by 1-basis-point increase in the cost of interest-bearing liabilities. It should be noted that our average cost of deposits increased by just 1 basis point for the quarter ended March 31, 2019, compared to the same quarter last year. Over the course of the past 12 months, we've been able to hold the line on the cost of core deposits, highlighting the strength and value of our deposit franchise. The 3.53% net interest margin this quarter was augmented by approximately 3 basis points as a result of the decline in loan pay-offs, which lowered the accelerated amortization of net deferred loan costs. It is also noteworthy that our net interest margin remains at the top range of - top end of its range in comparison to many of our prior quarters. We are well underway to complete the exit from our mortgage banking business by our target date of June 30, 2019. We stopped accepting saleable single-family loan applications at the close of business on April 5, and started to close the mortgage banking loan production offices soon thereafter. As of the close of business yesterday, all but 15 of that 122 full-time equivalent employees mentioned in the February 4, 2019, Form 10-K are no longer employed by the company. Also through March 31, we have incurred approximately $1.6 million of the estimated $3.6 million to $4 million of onetime costs associated with the exit. We encourage everyone to review the February 4th Form 8-K filing to familiarize themselves with the implications, estimates, timing and nuances of exiting the business. In particular, we have estimated revenues from mortgage banking business will decrease more quickly than expenses, but the decline in each cannot be accurately forecasted for the time period the company is executing the exit, resulting in more volatile operating results until the exit is complete. Our short-term strategy for balance sheet management is unchanged from the last quarter. We believe that releveraging the balance sheet with prudent loan portfolio growth is the best course of action. For the foreseeable future, we believe that maintaining a significant cushion above the regulatory cap ratios of 8% for Tier 1 leverage, and 13% for total risk base is wise and are confident that we will be able to do so. We currently exceed each of these ratios by a significant margin, demonstrating that we have the capital to execute on our business plan and capital management goals. Additionally, in the March 2019 quarter, we purchased approximately 24,000 shares of common stock and continue to execute on substantial returns of capital to shareholders in the form of cash dividends and stock repurchases. We encourage everyone to review our March 31 investor presentation posted on our website. You'll find that we've 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. Brad?

[Operator Instructions] And we'll go to the line of Tim O'Brien of Sandler O'Neill. Please go ahead.

Good morning, guys. Are you still anticipating, I know that the you're expecting to finish, will there be any tail cost into the third - calendar year third quarter from the closure, the exit of mortgage banking? Or should it all wrap up here in the second quarter?

It's really dependent, Tim, on what our pipeline looks like as we bring the pipeline down and actually fund it out. We would like to think that by June 30, we're going to be out of the mortgage banking business. It is conceivable, that's something holds over into the first part of the new fiscal year, but it would be very small, we believe, with respect to operations. And as you saw, we took $1.6 million so far of the $3.6 million to $4 million of one-time costs in the March quarter in comparison to what we've estimated. And as we roll that down in the June quarter, we would expect that - the bulk of that $2 million to $2.4 million remaining amount that we've estimated would be incurred in the June quarter.

Okay. Great. And then I don't know if you can share those or not, but I'll give it a try. Do you have a sense of coming out the other side of all this what the kind of the baseline core comp expense number is going to be on a quarterly basis in the range of? Obviously, it's contingent on fluctuations or seasonality in the business. But maybe there is kind of a budget or targeted or forecast number that you might be able to steer us towards?

What I would steer you towards is the market segment reporting that we will have in the March 31 Form 10-Q. You could also look at the December 31 Form 10-Q for market segment reporting. And you'll see what is attributable to Provident Bank Mortgage, which is going away and in large part that salary and comp expense for Provident Bank Mortgage will be going away. We describe in the Form 8-K with respect to the personnel that will be remaining in - from Provident Bank Mortgage moving into the community bank operations. So you can get a sense from those publications, but yes, we won't forecast a baseline in a call at this time because we don't forecast results.

Okay. Fair enough. Thought I'd try. Lastly, gain on sale from loans, will there be any residual loans generated for sale that you expect recurring revenue from as the source here going forward, a small amount or something? Or is that effectively going to be gone?

Well, for the June quarter, we would expect obviously the tail pieces in the loan-origination pipeline, and essentially funding those out and selling those - and settling those. And there'll be adjustments with respect to our marks on both the pipeline as well as the coverage. And so yes, there will be something with respect to the June quarter. But with respect to July 1 and thereafter for fiscal 2020, we do not expect a great deal of gain on sale of loans. It's very possible that there could be some, but that would be really from a balance sheet management standpoint, if we were, for instance, wanting to reduce some of the risk in our multi-family portfolio to sell some. We could experience a gain on that basis. If for instance there were some single-family fixed rate loans, which we generally don't portfolio that we brokered out or satisfied on a white-label basis to an originator to get a fee from. So there could be something of that nature but it will be insignificant beginning July 1.

And then one more question, loan servicing and other fees, is that line item going to be affected by the restructuring and the exit from mortgage banking?

Not generally, in that we do service loans for others, and we will continue to service loans for others on a go-forward basis with respect to our existing portfolio. I think that's also described in the Q, it's around $100 million or $105 million, $110 million, something of that nature. So yes, there will still be some revenue associated with servicing those loans. But again, those are relatively immaterial numbers.

All right. Thanks for the help.

And our next question will come from the line Tim Coffey of FIG Partners. Please go ahead.

Thank you. Good morning, gentlemen. Hey, as we look for - as we look at your forward tax rate, is there any material difference between what you're paying in taxes from the mortgage bank versus the community bank?

No. Because the mortgage bank is essentially a division of the bank that we simply market segment report. So it's a consolidated tax rate that we simply apply to the division for comparability purposes. So the statutory blended tax rate that we describe is 29.56%, which obviously accounts for the tax deduction of the state or franchise taxes on the federal rate. So on a blended basis, we describe 29.56%.

29.56%?

29.56%.

Okay. Great. And Craig, in your prepared remarks, did you say that of the, I guess, the FTE cuts in the mortgage bank, 15 have been completed so far?

No.

No. Yes, when we described in our Form 8-K on February 4 announcing the change in strategy, we described 122 full-time equivalent employees in the mortgage division would be impacted. All of those employees, but 15 who are on the transition team have been eliminated as of yesterday.

Okay. All right. That was my mistake. I just wanted to make sure I had that correct. And then if you can kind of talk about the preferential methods of returning capital to shareholders. What's superior to the other one? And has anything changed as you make this shift in strategy?

I don't think anything has changed. I think we still, obviously, have a priority for the cash dividend. Secondary to the cash dividend are stock repurchases. And then perhaps the last consideration is a special cash dividend if we ever got to that point. The thing that has changed a little bit is the calculation associated with the stock repurchase activity. When we were a combined entity or operating the mortgage business, if you will, our price to tangible book was held down in comparison to more pure community bankers, if you will. And we would have an expectation that our price to tangible book would move up as we exit the business and look more like a community bank in operations. And as a result of that, one could argue, should we have a higher top with respect to our internal calculations of when it makes sense from a price to tangible book standpoint. I don't know that we've come to a conclusion, but I think theoretically, yes, it probably makes a little bit more sense to have a higher top with respect to internal thresholds.

You don't have that yet?

Well, we're working to understand that, and we think it would be higher than what we previously used, but we've never described that publicly.

No. Okay. Okay. And then can you kind of comment on what you're seeing from the marketplace in terms of building up that portfolio of loans held for investment? Is pricing still overly competitive? Is it - have people stepped out further on the risk curve?

No, I - Yes, definitely that hasn't changed. It's still extremely competitive. It's not just price so much, that's part of it, it's also underwriting characteristics of what other institutions and even nonbank lenders are doing today on the risk side. So it's certainly hasn't diminished in competition yet.

And when you start thinking about multi-family or commercial, you're seeing more personal guarantees with things of that nature. Price is one thing to overcome, obviously, but it's the covenants, and it's the underwriting characteristics that frankly are more difficult to overcome in some respects, when there are lenders out there doing those types of things. And then in single-family, when we think about what is occurring in single-family, there are a number of programs out there that one would think we learned from the past not to offer. But things such as bank statement loans, where they're not verifying income, they are simply looking at bank statements. There are some interest-only product out there again. There are number of characteristics associated with the single-family environment and the multi-family commercial real estate environment that give us some pause with respect to competing aggressively. We can compete on price, in fact, I think we have a little bit of an advantage on price relative to the anchor that our deposit franchise is giving us. But when it comes to structure and terms, that's a bit more difficult to compete.

Another comment I'd make about single-family businesses is, and we've had to communicate this in our marketplaces, we still make single-family loans, we are just no longer in the mortgage banking business. And we are originating adjustable rates single-family loans for the portfolio and making sure that our marketplace understands, because there was some confusion after our announcement. We've had to go out and talk in the community, and remind both our customers and the real estate industry that we continue to make single-family loans.

And as you talk about - as we transition to the single-family originations for a portfolio, is there a percentage of the book that you think that residential can occupy?

We think there is upside with single-family right now as it relates to a percentage of the book. Multi-family has taken the first place or spot, if you will, that has not always been the case for us. We would like to lessen our concentration to some degree in multi-family, not by bringing absolute dollar amounts down, but by increasing the absolute dollar amounts in single-family, thereby bringing that percentage up as a percentage of the total. So yes, there's opportunity there. We obviously have to execute within the context of our underwriting appetite, risk culture, et cetera.

Good, understood. All right, well thank you, gentlemen, those were my questions.

Thanks, Tim.

[Operator Instructions] Our next question comes from Kevin Swanson with Hovde Group. Please go ahead.

Hey, guys, good morning. Most of my questions are answered, but I was just curious, you guys have been on - it seems like on our defense for a while with the mortgage business, and now that we have kind of two months left from that being completed. How does the focus shift? And kind of what is going on the offense look like for you guys?

Well, the offense really revolves around the portfolio and refocusing our efforts, if you will, and communicating internally that our culture has shifted, that our strategy has shifted a bit with respect to the originate-to-sell model. And frankly, coming out of the defensive position that we have been in, posting pretax losses in mortgage banking is going to be tremendously positive for us. We have described in our Form 8-K that the September 30 quarter, really the first quarter subsequent to the exit of the mortgage banking business or with just a small component remaining in that the quarter. There is significant positive upside with respect to our earnings profile and with respect to net income. And that becomes a huge issue internally with respect to our culture, with respect to how everybody is viewing the company, both internally and externally, because we don't have that drag. And so as a result of that we're pretty excited about making that transition and concentrating our efforts in the held for investment arena as it relates to the loan side and it - we think we'll make that transition very well.

Great, thanks for taking my questions.

And currently no further questions in queue [Operator Instructions].

All right. If there are no further questions I would like to thank everyone for joining us on our quarterly call and we look forward to speaking with all of you again next quarter. Thank you.

Thank you. And that does conclude the call for today. Thanks for your participation and for using AT&T Teleconference. You may now disconnect.