Provident Financial Holdings Inc (PROV) 2007 Q2 法說會逐字稿

Welcome to the Provident second-quarter earnings release conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded. I would now like the turn the conference over to your host, Craig Blunden. Please go ahead.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. On the call with me is Donavan Ternes our 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 managements 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 condition. 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 is available from the earnings release that was distributed yesterday and from the annual report on Form 10-K for the year ended June 30, 2006. 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 yesterday's earning release which describes our second quarter results. This morning I will update on you the current trends in our mortgage banking business and community banking business.

First, our mortgage banking division originated $389 million of loans during the second quarter ended December 31, 2006, an increase from the $359 million of loans originated during the quarter ended September 30, 2006. Of this total, $79 million or 20% was originated for our portfolio during the quarter in comparison to $48 million or 13% during the quarter ended September 30, 2006. The loan sale margin for this quarter was 100 basis points, a decrease from 111 basis points in the quarter ended September 30, 2006. The decline in loan sale margin is largely the result of refinance activity which rose to 66% of loan origination volume, up from 58% in the quarter ended September 30, 2006, and 51% in the same quarter last year.

During our conference calls of the last few quarters I have noted that the mortgage banking environment has become much more competitive because of lower funding volumes. It was the same this quarter, and we do not expect this highly competitive environment to change in the short-term. We have responded to the environment by increasing the number of production staff, decreasing the number of support staff, consolidating certain operations, and establishing new loan production offices. Most recently we consolidated our call center with our Riverside retail loan production office. This action was taken to become more efficient in the back office.

As a result of this action and others, the number and mix of employees in mortgage banking continues to change. Currently we have 153 full time employees in the division, 58 are production staff, and 95 are support staff. This compares favorably to December 31, 2006, when we employed 165 full-time employees with 51 production staff and 114 support staff. Lowering the ratio of support staff to production staff creates a more efficient operation and lowers the cost of originating each loan.

My update regarding mortgage banking would not be complete without describing the increase we have experienced in loan repurchases. During the quarter ended December 31, 2006, we repurchased $2.6 million of loans from investors and were unable to sell $940,000 of loans to investors resulting in a specific loan loss provision of approximately $349,000 on these loans compared to $1.3 million repurchased in the quarter ended September 30, 2006, which resulted in a $47,000 specific loan loss provision. This is up significantly from fiscal 2006 where the net impact of loan repurchases resulted in a $41,000 specific loan loss provision. The non-performing assets generated as a result of this activity was described in our earnings release as eight single-family loans and two single-family properties acquired in the settlement of loans which we believe have been fully reserved.

For the calendar year ended December 31, 2006, a total of 17 loans for $5 million were repurchased from investors. This is the largest number of loans repurchased in any calendar year since 1997 when we repurchased a total of 27 loans for $3.3 million. Most of the repurchases this year are the result of early payment default which we believe in many cases is a result of fraud. We have made procedural changes in our underwriting process, but it is too soon to determine if this problem will be significantly curtailed in the near term. You should know that we aggressively pursue the parties involved in the suspected fraud, and many times recover all or a large portion of the specific loan loss provision. In fact, this month we have recovered $91,000 of the $349,000 that we established in the second quarter when one of the loans paid in full.

We continue to be encouraged by the results of our community banking business and the opportunities available in the Inland Empire. Although deposit growth remains challenging and credit quality has become a concern. There has been no relief to the highly competitive deposit market which is further adversely affected by the current shape of the yield curve. Both of these issues has stalled our deposit growth because we have made the business decision to compete less aggressively on deposit rates than many other financial institutions in our market area. Over the long-term we believe this strategy will pay off in the form of a less rate sensitive depositor who uses a higher number of our products and services. In the interim, however, we will continue to see weakness in deposit growth.

I should also mention that our 13th branch, La Sierra opened on January 3, 2007. We're encouraged by the response from the community and look toward to participating in the growth demonstrated by this area of Riverside. Opening de novo branches within our existing geographic footprint helps us solidify our deposit market share in the attractive Inland Empire and is an integral part of our long-term deposit strategy.

During the quarter we established a $2.5 million specific loan loss reserve on 23 individual construction loans in a single-family construction project located in Coachella, California. Our investigation of the matter has revealed that significant misrepresentations were made to secure our involvement in the project, and as a result we're vigorously pursuing legal remedies to protect our interest. We have delivered demands to the individual borrowers, mortgage loan broker, and builder who we believe knowingly misled us on certain key aspects of the loans and the project. Although we are pursuing all legal remedies available to us, it is far from certain the amount, if any, that will be recovered. Therefore we establish the specific loan loss reserve consistent with the improved land value based on a recent appraisal. Given the number of parties involved, or soon to be involved, the complexity of the transaction and probable fraud we do not believe this matter will be resolved very quickly.

Also, in our earnings release we described two commercial real estate loans that have been placed on non-performing status. The borrowers are in the process of refinancing or selling the property, and we expect to be paid in full. Additionally, both of the REO's that are denoted in our earnings release have been sold and are scheduled to close escrow in February. A small gain on sale will be realized from the transactions if the escrows close. The final component of non-performing assets not previously discussed is a 16 single-family loans. Just one of the 16 loans required a specific loan loss reserve based upon the fair value analysis that we completed on each suggesting that we will be paid in full on the remaining 15 given the equity in the underlying collateral.

As I expressed in the earnings release, I am concerned with the rise in non-performing assets but have no reason to believe that significant losses other than those already recognized will occur as a result. Nor do I believe that this quarter's experience is indicative of what we should expect in future periods. We're working diligently to resolve our non-performing assets and to prevent more from occurring. We also continue to deploy sound capital management strategy for the benefit of all shareholders. We maintain that the best use of our capital is a prudent growth of the Company but to the extent we're unable to grow as quickly or as carefully as we envision, sound capital management strategy including share repurchases will be employed. During the quarter we repurchased approximately 190,000 shares of common stock at an average cost of $30.09 per share.

Finally, I would like to update on you the current conditions in the Southern California real estate market. According to a January 16, news release from DataQuick Information System, December's median price paid for a Southern California home climbed by 3.3% from December of last year and increased by 1.6% from November of this year. The news release also noted, however, that Southland homes sold at their slowest pace since December of 1995. Marshall Prentice, the President of DataQuick said, and I quote, in any real estate cycle when prices peak, they don't level off at that peak, they come down some. The question is how much? We need to remember that prices have gone up 100% in Southern California in the last four years, most of that increase is here to stay, end quote.

Before I open the call to questions, I wish to advise you we have posted an investor presentation in the investor relations section of our website which you can review at your convenience. We will now entertain any questions you may have regarding our financial results. Thank you.

[OPERATOR INSTRUCTIONS] We'll go to the line of Christopher Marinac with FIG Partners. Please go ahead.

Good afternoon, guys.

Hello.

Wanted to first I guess ask what has changed in the last month or so since you first announced the credit issue to us? Has anything changed either positively or negatively since then?

I don't think anything has changed positive or negatively. I think just that we have more information and that we're continuing to pursue legal action. That's about it.

Okay. That's what I thought. I guess just from a bigger picture perspective, Craig, is there anything on your own internal processes that you're doing differently or we realize these things are going to happen, it is part of the risk business, but just curious on your take on--?

Yes, I think one of the things -- well, we've done a couple things, but we had our internal audit area go through and do a review of the entire transaction to see areas that we could strengthen to make sure that something like this didn't happen again. We also at this point, and in fact, really within the last year or so stepped out of the construction of single-family homes business except on a spot basis, so the large track loans and so on that we were doing in past years we haven't been doing, which of course then changes our exposure.

In terms of finding new opportunities with having just said that in the new year, are there -- what types of things do you envision as your sources of loan growth this year?

I think we're going to focus more on the preferred loans, but on the commercial real estate side that's still continuing to be extremely strong in the California marketplace. We're still hiring business bankers and working on business lending and increasing of course the lower cost deposits that go with those business loans, but I think really -- and we're still doing construction loans on commercial real estate, but I think at this point in time with the risks in track construction lending in Southern California, that's something we're going to back away from for awhile.

Very well. Last question has to do with multi-family production and pricing as well as kind of just a general thought. Is the mortgage market still, I guess, as positive as I think you were starting to see the market turn in December?

I am sorry. I didn't quite understand. It is still positive, did you ask?

Yes, I mean, is the market -- do you sense the mortgage business is turning which was I think something I inferred a month ago from you?

Yes, I think the answer is -- and let's break it out into two components. Let's first of all talk about mortgage banking briefly in the single-family market. You did see on a sequential quarter basis that we originated more loans in mortgage banking this most recent quarter than the September quarter. It is up 30 million. I'd have to look again, but it wasn't a significant decline from the prior year's quarter. The dilemma with that is the cost of that production has gone up a little bit because in order to generate production we've had to increase the number of originators or grab a larger share of the market if you will, and then additionally the loan sale margin has been pressured as a result of the environment that we're in, so profitability is ultimately down in that line of business although if we were to have just pulled in our horns I don't know that we would have performed any better, and in fact we could have potentially posted a loss in comparison to the slight profit that we did post in the business for the quarter.

Now, with respect to the community banking side and preferred loans in particular, we believe there is still a great deal of opportunity in the Southern California market in those loans, and as a result we are continuing to see good production. The dilemma becomes it is a highly competitive environment, and we're not the only ones that have looked to that production to essentially grow the organization. So I think it remains competitive, and I think we have to be disciplined with respect to the pricing models that we use in producing those loans, but ultimately I think there is production that can be had.

Chris, you were asking about multi-family as well?

Correct, exactly.

I think -- the only thing I have seen that's changed in the last few months is it appears that rent increases in apartments for the most part have slowed and started to flatten out. It was really a tremendous increase in the cost of an apartment over the last three to four years, and I think that may -- partially due to the fact that the -- there was actually finally a lot of construction of multi-family. That increased the number of units, and I think it has kind of reached a level now that we see that we don't think is going to keep increasing, so we're very careful when we look now at underwriting multi-family at both vacancy rates and cap rates, and how does that market rent for that particular project compare in the marketplace. I think you have to be a lot more careful today in what you look at than you did certainly over the last four years in multi-family.

Great. That's helpful. I will come back if I have other questions.

Thank you.

[OPERATOR INSTRUCTIONS] We have a follow-up question from Christopher Marinac. Please go ahead.

Thanks. I guess just one more thought I had was do you feel Craig or Donavan that there is a sustainable growth rate on a core basis that you can have this year, either whether it be loans or just kind of on core operations, just whether that's an internal goal or something that you can share with the audience?

Yes. I think that there is a core rate of growth that we can have, but I think the dynamics have changed a little bit because of the yield curve environment that we're in, and as a result, for instance, when we're talking single-family loan production to grow our loans held for investment portfolio, I don't know that that makes as much sense as it would in a different yield curve environment, and one could perhaps argue that perhaps we shouldn't grow with that type of production and to the extent that we were unable to grow the multi-family or commercial real estate loans such that it meets our financial leverage requirements, that perhaps we should step up stock repurchases, and that's something that we debate internally all the time, so I think when we look at growth of the Company in today's environment, we're more interested in growing the Company in the preferred loan group. We're less interested in growing the Company in the single-family loan group, and that will also, by the way alleviate some pressure with respect to the funding side and the deposit side.

It is still highly competitive for deposits, and at some point you reach a fundamental in your business model that says, you know what, we don't want to fund our growth any longer with wholesale funding, if you will, Federal Home Loan Bank advances, we really want to fund our growth with deposits whether or not they're core or transaction based or CD based, it is still a customer because at the end of the day we are in the business of growing our customer relationships over time. So I think there is some growth to be had for the Company, but I would also suggest that we're going to be very cautious with respect to what products it is that we do grow with because ultimately if I look at the yield curve today and what that yield curve gives us from a single-family portfolio perspective, it is really not quite there. It is not what we would like to see.

Understood. Understood. Okay. Great. Thank you.

Thank you.

At this time I show no questions in queue. Please continue.

All right. If there are no more questions, I want to thank everyone for joining us on our quarterly conference call, and I look forward to our presentation next quarter. Thank you.

Ladies and gentlemen, that does conclude our conference call for today. The conference will be available for replay starting today at 1:30 p.m. going through February -- I am sorry, January 31, at midnight. If you would like to access the AT&T replay system at any time, you may dial 1-800-75-6701 and enter the access code 857973. Again, that number to call is 1-800-475-6701 and enter the access today 857973. You may now disconnect.