Provident Financial Holdings Inc (PROV) 2008 Q1 法說會逐字稿

Welcome to the Provident first quarter earnings release conference call. 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, this conference is being recorded. I would now like to turn the conference over to our host, Mr.Craig Blunden. Please go ahead.

Thank you, Kathleen, good morning, everyone, this is Craig Blunden, Chairman and CEO of Provident Financial Holdings. On the call with me is Donavon 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 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 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, 2007. Forward-looking statements are effective only as of the date that 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 earnings release, which describes our first quarter results. This morning I will update you on current trends in our mortgage banking business and community banks business. First of all, this quarter is the third consecutive quarter for our mortgage banking business was unprofitable. The combination of lower loan origination volumes, Illiquidity in the secondary market, dismal loan sale margins, and continued weakness in the housing market could not be overcome. In fact, it is more apparent today that a quick correction for the business is unlikely. As a result of our outlook last week we announced a significant reorganization in our mortgage banking operation. We intend to close five loan production offices during the December 31, quarter in addition to the five offices we have previously closed. Additionally, we have reduced our staffing levels in the mortgage banking division to 86 full-time equivalent employees with 46 production staff and 40 support staff. This is down 48% from our peak employment in the division in November 2006 when we employed 164 full-time equivalent employees. Our future mortgage banking operations will be conducted from two wholesale loan production offices, Pleasanton and Rancho Cucamonga and two retail loan production offices, Glendora and Riverside. We will continue to monitor the mortgage banking correction and are prepared to make additional changes that may become necessary. Those changes may be in the form of a different product mix, further tightening of our underwriting standards, a further reduction in our operating expenses or a combination of these and other changes.

One bit of good news for the quarter is the fewer number of loans repurchased from investors. During the quarter ended September 30, 2007, we repurchased $1.7 million of loans and REO from investors, resulting in a specific loan-loss provision or charge-off of approximately $164,000. This is a significant decrease from the two prior sequential quarters. In the quarter ended June 30, 2007, we repurchased $6.2 million of loans and REO from investors resulting in a specific loan loss provision or charge-off of approximately $230,000 and in the quarter ended March 31, 2007 we repurchased $4.5 million of loans resulting in a $260, 000 specific loan loss provision.

A cynic would point out that the volume alone sold declined significantly and, therefore, repurchase volumes should decline significantly as well. To some degree this may be correct, however the more accurate picture to paint is that underwriting standards have tightened considerably during the past eight months and as a result, loan repurchases have and should continue to fall. We continue to invest in our community banking business, and you are excited by the long-term opportunities that are available Inland Empire. In fact, according to the most recent deposit data released by the FDIC, our deposit market share as of June 30, 2007 jump to fifth from seventh in the Riverside San Bernardino RMA, behind only Bank of America, Washington Mutual, Wells Fargo, and Citigroup. For those of you who don't know RMA or Renali Metro Area is Rand McNally's definition of a metropolitan area which is not restricted to following county boundaries. More information about our deposit market share can be found on our Website in the investor relations section. I should also mention that we announced the location of our 15th branch in Beaumont, California, was expected to open in approximately one year.

For the quarter ended September 30, 2007, deposit growth was approximately $11 million. The sequential quarter growth occurred in time deposits which grew by approximately $27 million, partially offset by declining core deposits. We continue to compete a bit more aggressively with interest rates on our time deposits, but the recent FOMC action has generally resulted in lower time deposit rates by competitors except for the large mortgage bankers who have thrift charters. The proceeds from sequential quarter deposit growth and the decline in receivable from sale of loans was used to reduce borrowings which declined by approximately $50 million between June 30, 2007 and September 30, 2007.

Deposit growth and lower average borrowings during the quarter in conjunction with preferred loan growth upwardly repricing adjustable rate mortgage loans, and our loans held for investment portfolio and a decline in investment securities resulted in the sequential quarter net interest margin expansion. A steeper yield curve and lower short-term rates resulted from the FOMC action September should work to our advantage since our balance sheet is slightly liability sensitive. If the FOMC continues to cut interest rates our net interest margin expansion may accelerate.

There's little progress to report regarding the 23 individual construction loans located in Coachella, California except to advise you we're continuing with the discovery phase of the litigation and have had a few settlement discussions with individual borrowers. Currently, nothing meaningful has come from these discussions. We're pursuing all legal remedies available to us and have filed criminal complaints with law enforcement agencies, but it's far from certain the amount, if any, that will be recovered. Additionally, given the number of parties involved, the complexity of the transaction and probable fraud, we do not believe this matter will be resolved very quickly.

In yesterday's earnings release we disclosed that we had a loan-loss provision for the quarter of approximately $1.5 million. There were three primary factors contributing to the provision. The first was a $3.4 million sequential quarter increase in loans classified in the substandard and doubtful categories, the second was $16.1 million sequential quarter growth of loans held for investment, and the third was additional provisions required on previously classified loans as a result of the continued deterioration in real estate collateral values. We continue to deploy sound capital management strategies and maintain that the best use for our capital is the prudent growth of the Company but to the extent we're unable to grow as quickly or carefully as we envision, share repurchases will be employed.

During the quarter, we repurchased approximately 150,000 shares of our common stock at an average cost of $22.40 per share. Finally, I would like to update you on the current conditions in the Southern California real estate market. According to an October 16, news release from DataQuick Information Systems, the median price paid for a Southern California home in September declined by 7.6% from August of this year, and declined by 4% from September of last year. More significantly, real estate sales plunged to their lowest level in more than two decades. Marshall Prentice, DataQuick President said, and I quote, some of last month's sales drop was part of longer-term slowing trend but most of it was due to the mortgage market turbulence and difficulties in getting jumbo financing, end quote. He went on to say, quote, we can expect the market -- we can't expect the market to rebalance itself until sometime in 2008. 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. Kathleen?

(OPERATOR INSTRUCTIONS) We do have a question from the line of Brett Vilaume from FIG Partners, your line is open. Please go ahead.

Good morning, gentlemen.

Good morning.

I wanted to ask you, it's been a big head-on nationally about the fires in the area. Do you anticipate any impact from that?

Well, there's a couple different types of impact. Number one, it's pretty tough to close loans in a number of different areas, so what we have to do is actually go out and inspect the property the same day the loan's supposed to close to make sure it actually still exists. That's a huge issue. Also we're getting calls from borrowers that have evacuated their homes, and I'm sure that will add a little more stress to our loan service department in addition to working with troubled borrowers. These fires are a huge issue right now, of course I'm not speaking real well because of all the smoke and ash in the air. There's 15 major fires in Southern California right now, San Diego county's the worst impacted with five major fires in some pretty high-rent neighborhoods.

And there's been, I think, over about 1200 homes that have burned so far in San Diego county. Riverside county hasn't been impacted, but we're surrounded by the fires in San Bernardino county, of course LA county and Orange county. This, again, just makes a slow real estate market, I think even slower at this point. So, yes, we do see some impact. There's still a number of fires still burning. Until all of them are out and people get settled down, because there's about a 1 million people right now in Southern California that have been evacuated that are living in hotels and other places. You can't find a hotel room today in Southern California.

Okay. Thank you. Good color on that. So generally, you would characterize it as it's surrounding you but isn't directly affecting your market in Riverside?

But we loan all over Southern California, so it does affect us. What I'm saying is it hasn't affected us directly where our retail banking offices are located.

Okay.

We also don't know the impact, if any, of the number of borrowers that may be affected by this with respect to their homes having gone up. Most borrowers and most of these areas are still evacuated and people don't know whether or not their homes have been consumed. So we have no direct knowledge at this point. The calls we are receiving from borrowers are more cautionary, suggesting that they've been evacuated, et cetera.

And remember that there's always a lag time between when you actually collect on insurance and when people stop making payments for a house that's no longer there. So it can affect delinquency ratios for that interim period until the policy actually pays off the loan.

Thank you. I have another question. In looking at your share repurchases and working at tangible capital, first of all, I just -- well, inked to find out from you whether or not you have a comfortable level at which you would consider tangible capital and whether or not -- where it would get too thin?

If you look at our consolidated core capital at the holding company level, it actually increased and I think it's at 7.85%. It's in a graphic in the investor presentation. That actually increased, like I said, the last two quarter, largely as a result of a shrinking balance sheet. We debate this internally all the time, and it's a good question from the standpoint of what are the operations doing with respect to spinning off capital in the form of earnings in comparison to what the balance sheet growth may or may not look like. And then in comparison to whether or not we wish to shrink or we have excess capital for those repurchases. My comfort level is personally in the lower 7% range with respect to a kind of a core capital level at the holding company level. And were above that, suggesting that we still have room for repurchases, but that can change, depending upon what we find with respect to our earnings performance. And then ultimately what we expect with respect to our nonperforming assets, and what we may see as future non-performers.

Great. Thank you. And then I have one other question. Actually, I just wanted to clarify with you, I think you'd said the 15th branch opening or you had announced it, but the expectation for opening was coming in 2008? Is that correct?

Because we're signing leases, we're entering contractual relationships, we'll end up putting it out in a Form 8-K and announcing it even though it's not expected for sometime but we do consider it material.

Okay.

The reason we're suggesting it is the 15th, we have another branch that is on the drawing boards, our second branch in Moreno Valley that we announced as our 14th but that one will not open until April/May area of next year.

The issue is where we signed these leases, the shopping centers were not built and were totally reliant on the developer to complete the project. And in many cases they've been way behind their schedule that they gave us when we originally signed the leases.

So we're operating in 13 branches, we've announced the 14th and 15th branch. The14th in May of '08, let's say, and the 15th, sometime this -- maybe next year about this time.

Okay. And I guess the only other thing, well, I had one other thing, you said something very interesting about the balance sheet being slightly liability-sensitive. I wanted to, you said that further FOMC or Fed rate cuts may accelerate the expansion of NIM further in coming quarters. I wanted to see if you could -- if you had an estimate of how much that would be?

We don't forecast that, per se. We've had a three basis-points expansion on a sequential quarter basis from June. What we'll work to our advantage is a steeper yield curve overall, which we are seeing, and then additionally, if the FOMC continues to cut interest rates, many of our short-term borrowings reprice immediately these borrowings are from the Federal Home Loan Bank, and you can see the schedule we give them in the earnings release on the last page, I believe. But then additionally, we would expect that CD costs will come down. And much of what we've done in the past year or so with respect to CDs is keep them in the relatively short-term bucket. We've advertised four-month specials, five-month specials, seven-month specials, 12-month specials and 18-month specials over the course the last year or so, so shows should reprice downward as well. Although we are experiencing a bit of pressure with respect to deposit costs or CD rates in particular, from some of the large mortgage bankers who have thrift charters and are frankly looking to fund their balance sheets.

Such as Countrywide?

And IndyMac.

Okay. Thank you very much, gentlemen.

If there are any further questions, please press "star 1" at this time. There are no further questions at this time. Please go ahead.

If there's no further questions for us at this time, I'd like to thank everyone for joining our conference call and we look forward to speaking to you again next quarter. Thank you.

Ladies and gentlemen, this conference will be available for replay after 12:30 p.m. today until October 31, 2007 at midnight. You may access the AT&T executive play back service by dialing 1- (800)475-6701 and entering the access code 890105. International participants may dial 1- (320)365-3844. Again, those numbers are 1- (800)475-6701 and entering the access code of 890105. That does conclude our conference for today, thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.