Provident Financial Holdings Inc (PROV) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Provident third 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 and, instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded May 19th, 2008. I would now like to turn the call over to Mr. Craig Blunden, Chairman and CEO. Please go ahead sir.

Thank you. Good afternoon everyone. This is Craig Blunden Chairman, CEO of Provident Financial Holdings and the call with me is Donavon Ternes our 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 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 from any forward-looking statement is available from the earnings release that distributed today and from the annual report on form 10K for the year ended June 30th, 2007 as amended. Forward-looking statements are effective only as of the date they are made and the company assumes no obligation to update this information.

Again, 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 thir quarter results. The operating environment for the industry remains difficult as a result of the deteriorating single family housing market. Single family housing correction has resulted in deteriorating credit quality and significantly lower mortgage banking volume.

Which are the principal reasons that the earnings have come under pressure. It's difficult to predict when a more favorable operating environment will return, so today I will describe the actions we have taken to mitigate the company's exposure to the current environment. First, it is very clear that prudent levels must be maintained throughout this unfavorable cycle. We recognize this early in the fiscal year and made the decision to reduce our stock repurchase activity even though a strong argument can be made that our stock is made at very reasonable levels within the context of historical tangible book value multiples.

Most recently our Board of Directors determined that it was in our sharers long term best interest to reduce our quarterly cash dividend to adjust the dividend pay out ratio to better match the earnings profile. Board of directors and management are aware of costs and challenges associated with raising additional capital in the current environment and by taking these actions have attempted to reduce the exposure of being required to do so. We've taken several steps during the course of this year to reduce operating expenses and have made significant progress. Our efforts were concentrated in the mortgage banking business, where we made a number of changes in the operating expense structure by closing and consolidating offices and reducing the number of employees commensurate with the lower origination volumes.

We have not made significant changes to the operating expense structure in our community banking business, as we believe that investing in this business over time, adjustments the franchise value of the company. We are still planning on opening two retail offices during fiscal 2009, one in Reno Valley and the other in Beaumont, California. Both of these offices are within our existing geographic footprint and will help grow and consolidate deposit market share in the communities we server.

Although we are experiencing deteriorating credit quality as a result of the current environment, the deteriorations has been primarily limited to single family loans within our portfolio of loans held for investment. Family and commercial loans are performing quite well and our limited exposure to construction loans or single family option arm loans, has mitigated the overall credit deterioration of loans held for investment.

Additionally, by implementing tighter underwriting standards on loans originated for sale consistent with tighter secondary market standards, we have reduced the number of loan repurchase requests received from our investors. As a result, one source of our non-performing loans has been reduced. That it's not to say however that we will not see further credit quality deterioration our loans held for investment, hence the portfolios comprised of loans collateralized by real estate located in southern California.

The decline in real estate values in the primary markets, will limit the number of choices that our borrowers may have if they experience financial difficulty. Therefore, we expect to see increased activity and requests for short sale transactions and borrower failing to cure their loan defaults, resulting in an increase in foreclosures. In each case we will work to mitigate the losses that may result while balancing our goal of quick and permanent resolution to the particular problem. We are hopeful that the future pace of our credit quality deterioration will be consistent with recent experience, which is better than competitors. We have recently noted a reduction in loan modification requests from our borrowers. We believe that this is a result of fewer payment shock situations and short term interest rates have declined significantly from 2007 and early 2008.

Not rates on loans that are currently adjusting are similar to the start rates when the loans were originally made, reducing we believe, the need for borrowers to seek relief through loan remodification. Lower short-term interest rates had a positive affect on the company's net interest margin which has improved significantly on both the sequential quarter and prior year basis. Additionally the steep real curve made many of the lending products we offer profitable then in past few years, which should improve our fundamental performance over time, as our balance sheet changes.

Finally, I would like to say we are not pleased with the prior period reinstatement to correct a accounting error in administration of our employee stock ownership plan. As we take pride in accurate financial reporting, however the steps we took once we discovered the error demonstrates our commitment to transparency and accuracy. The accounting ramifications of the restatement are now behind us. We are simply awaiting IRS approval of the voluntary self correction that we filed. Although we cannot give any assurance that they will agree with our self correction plan.

We will now entertain any questions that you may have regarding our financial results. Thank you. Nicole?

Yes, sir. Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Timothy Coffey with FIG Partners. Please go ahead.

Good morning guys, how are you doing? Or afternoon, I guess I should say. I have a couple of questions. First one, what is -- have you already started an optimal payout ratio for the dividend.

I think on a quarter basis, our board determines what that dividend payout ratio should be. I think clearly when we look at current earnings and we compare that to what our dividend payout ratio was given the environment that we are operating in, it was excessive. I think our board recognized that this last quarterly meeting or this last meeting we had with respect to that issue and they made a change. That is not to say that won't change, either up or down as we go forward.

Okay. And then you talked abut briefly on the call, but can you give me your interpretation of what the single family market is looking like given what happened with the resales and also edit quality?

Sure. We just see continuing deterioration in values in many areas of both northern and southern California. But their location specific. In other words I couldn't give you a flat percentage of how things are changing statewide because it varies tremendously certainly from along the coast versus inland areas and specific communities that are impacted that got overbuilt with new track. So the only thing I can say is at this point in time we haven't seen any relief.

We are still seeing sales but many of the sales we are seeing is because of foreclosures and short sales, that's what our originators are actually originating right now. As well as of course these are FHA, VA loans, which we used to rarely see, because the market type has changed from all the Alt-A and other traditional programs to FHA,VA and Freddie and Fannie loans. It will be interesting to see whether the recent announcement that down payment changes with the agencies, in other words lessening those, will help the marketplace moving forward. But it's too soon to rate right now.

And the other thing that throws a monkey wrench in originations is the appraisal issue. Appraisers today don't know what the true value is other than on a specific day. That's really slowed down a lot of applications for refinance loans.

One other thing I would like to add, we talked a little bit, or Craig spoke a little of the agencies. Fannie May, releasing information two or three weeks ago, suggesting that the price that they will be charging for this higher quote unquote "conforming loan limit" that went from the traditional number to the 729,500 number or about to that number, will be reduced to about being on top of the regular conforming number, and that was not the case up until they made that announcement.

If we see that indeed Fannie May and Freddie Mac for that matter, begin to price that higher loan limit like a regular conforming loan, I expect that we will see more activity outside of the FHA/VA arena at this point into the traditional agency arena. The second thing I would like to hit on, we are seeing sales occurring in our marketplace. But the values are being driven as Craig pointed out by short sales, and REO sales.

In fact, in our earnings release, we described that we sold 12 properties during the quarter and so while our REO is increasing as a result of the deterioration of credit quality, in our loan portfolio as it goes through the process, we are also able to liquidate those properties, in a relatively orderly fashion. In other words, there is activity, the issue becomes price point.

Remembering that there is a lag point which we will be looking forward to because it takes about five to six months before a delinquent loan become as REO property. Okay. Alright well those are the only questions. Thanks a lot. Thank you.

Thank you sir. (OPERATOR INSTRUCTIONS). Okay gentlemen, it looks as if we have no further questions. Please continue with any closing remarks.

Well, I appreciate everyone listening in and look forward to our next quarter earnings release and until then, we will talk to you again. Thank you.

Ladies and gentlemen, this concludes the Provident third quarter earnings release conference call. Thank you for your participation. You may now disconnect.