Provident Financial Holdings Inc (PROV) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Provident's fourth-quarter earnings release. At this time, all phone participants are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) . As a reminder, today's conference is being recorded. I would now like to turn the conference over to Chairman and CEO, 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 Donavan 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, 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 statement 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, 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.

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. The operating environment for the industry remains difficult as a result of the weakening single-family housing market. The single-family housing correction had resulted in deteriorating credit quality and significantly lower mortgage banking volume, which are the principal reasons that our earnings have come under pressure. It is difficult to predict when a more favorable operating environment will return, so today I will describe some of the actions we have taken to mitigate the Company's exposure to the current environment and provide some insight with respect to our fiscal 2009 outlook.

As I look back on fiscal 2008, it's clear to me that much of our focus was on right sizing the mortgage banking business consistent with the current environment and aggressively dealing with credit quality deterioration in our loans held for investment portfolio. We've dealt with mortgage banking issues, primarily in the first half of the fiscal year, and credit quality issues become more pronounced in the second half of the fiscal year. Specifically, in Mortgage Banking, we reduced our origination capacity and operating expenses by closing six loan production offices and reducing the number of employees by 45 in comparison to June 30, 2007, and by 80 employees from our Peak Mortgage Banking employment in November, 2006. Tighter underwriting standards were adopted during the course of the fiscal year, and expertise in FHA - VA products was enhanced since a larger percentage of origination volume is being generated in those products.

Credit quality declined through the fiscal year, but accelerated in the second half. We responded by increasing the loan loss provision each quarter, commensurate with the increase in nonperforming assets. To date, the weakness has primarily been limited to single-family loans within our portfolio held for investment. While the Family and Commercial Real Estate loans are still performing quite well and our limited exposure to Construction loans or Single-Family Offshore loans has mitigated the overall credit deterioration of loans held for investment in comparison to many of our competitors who have Single-Family or Construction loan exposure. Although, we are not satisfied with our fiscal 2008 results, I believe we responded quickly and aggressively to the environment and will continue to do so.

Our allowance for loan losses has increased to 1.4% of gross loans held for investment, which is 2.4 times the fiscal 2008 charge-off rate of 0.58%. Additionally, our Mortgage Banking business has been right sized to current market origination volume expectations, and we have augmented our expertise to respond to a changing product mix. We currently believe that fiscal 2009 will also be challenging and have prepared our business plan to preserve capital and to maintain our strong regulatory capital ratios. We do not anticipate asset growth in the current environment and are prepared to shrink total assets by a modest percentage provided doing so does not hinder our efforts to build a deposit franchise.

Although our fiscal 2009 outlook is guarded, we begin the fiscal year in a better position than the last fiscal year. Much of the heavy lifting regarding operating expense reductions have been completed, and we will realize the full year's benefit of those actions which were primarily implemented during the first six months of the last year. Additionally, we begin the year with a significantly higher net interest margin than last year, and a significantly steeper yield curve, which historically is a favorable yield curve environment for thrift. We expect Mortgage Banking funding volumes to be similar to this past fiscal year, but also believe that the loan loss provisions and recourse provisions for Mortgage Banking will be lower as a result of fewer early payment default claims. Additionally, we believe loan sale margins will improve since many competitors have exited or curtailed their Mortgage Banking operations.

The wild card for fiscal 2009 is credit quality. It's fair to say that southern California real estate market is under significant stress, which will negatively impact many of our borrowers if they experience financial difficulty. I don't believe the real estate market will find its bottom in the near-term, therefore I believe our past six months of credit quality experience is the best information available to formulate an expectation for credit quality cost during fiscal 2009. I believe we have sufficient resources in the form of an allowance for loan losses and capital to withstand the expected credit quality costs, but though costs will depress earnings for the foreseeable future. We will remain diligent in growing our deposit franchise, and will open our newest branch on Irish Avenue in Marina Valley, California, next month. We have enjoyed tremendous support from the Marina Valley Community for over 30 years since opening our first branch there, and are excited that we have the opportunity to grow our deposit market share where we are so well known.

In closing, I want everyone to understand that we recognize the difficulties arising from the current operating environment. And will take the steps necessary to mitigate the impact to Provident's shareholder and customers. In fact, we believe there will be opportunities for Provident as a result of this poor environment, and we intend to capitalize on those opportunities when the outlook improves. We will now entertain any questions that you may have regarding our financial results. Thank you.

(OPERATOR INSTRUCTIONS).

We'll go to Timothy Coffey with Fig Partners. Please go ahead.

Good morning, guys. How are you?

Good morning.

Good morning, Tim.

The first question I have is the -- the pricing on the mortgage sales. What of the cause of -- of the average price being 20 basis points lower?

The reason that the loan sale margin declined to a negative 20 basis points for the quarter is largely the result of the recourse provisions that we recorded during the quarter, which run through that particular line item on our income statement. We recorded 1.27 million worth of recourse provision, and in fact, what we've done, although not in our earnings release but in our investor presentation, we completed our put a slide out there, an investor presentation is now available out on our web site, describing what the actual loan sale margin was on a GAAP basis in the prior six quarters. And then we excluded the recourse provision from that loan sale margin to give the reader an opportunity to understand what perhaps the fundamental loan sale margins look like without the recourse provision being run through that line item. And in fact, for the last quarter, without the recourse provision, our loan sale margin was 92 basis point, and in fact, that increased from roughly 77 basis points without any recourse provision adjustment in the prior sequential quarter or the March quarter. So literally what we did or what occurs is the recourse provision runs through that line item, the fourth-quarter recourse provision was larger than what we've experienced in the prior few quarters. And as a result, the loan sale margin was negative.

Okay. Have you seen any of your competitors in the mortgage sale market starting to get a little more aggressive on their prices?

On the mortgage side itself?

Yes. Yes, what I'm trying to figure out is has IndyMac had any impact on -- on mortgage prices?

Well, we're not seeing necessarily real aggressive pricing in the mortgage banking business. What we've seen is a dramatic shift in the product line. And by and large, the transactions that are being completed today, number one, are purchase money transactions. And interestingly enough, we also have another slide in the investor presentation, 66% of our volume in the fourth quarter was purchased money activity. And then the bulk of that purchase money activity is FHA - VA product lines, simply because they are lower down payment requirements and quite frankly is providing liquidity into the secondary market. Fannie, Freddie are also providing some liquidity, but we've not seen it necessarily through aggressive pricing if you will, through mortgage brokers or some of our other competitors when it comes to pricing to the street. So by and large, we're not seeing huge competitive pressures in pricing of mortgage loans. Everything comes down to liquidity with respect to mortgage loans, and -- and having investors in place to take your loan production.

Okay. You provided some very good color on the loan -- on the nonperforming categories in the class side as you usually do. In light of what Craig has talked about, about the challenges for fiscal '09, can you provide any kind of color on where you see credit quality going in your market?

Well, Craig mentioned in his prepared remarks that one can probably look at the -- at least for us, for Provident, one can look at the last six months of credit quality costs and then extrapolate that out or annualize it if you will, and that is not necessarily be an unrealistic expectation with respect to our next fiscal year. And in fact, if you were to do that because our credit quality costs accelerated through the four quarters, they were relatively benign in the first quarter, and then grew through each of the subsequent quarters. If you analyze those last two quarters, you're going to come up with a number that is larger than all of our costs in this past fiscal year.

So I think the environment is still difficult with respect to real estate market. But we're also seeing public sector, and we're also seeing loan being made and, in fact, our mortgage banking volume of the highest volume albeit by small number of the prior two quarters. So perhaps we ended up seeing the bottom two quarters ago in that volume. And we are seeing activity and volumes increase marginally.

Tim, also that volume is made up when we talked about purchase volume, it's mainly REOs's and short sales from other institutions that's driving the purchase market right now in southern California. So the issue really is the economy for everybody and how long this is going to be drawn out and where unemployment's going because it didn't really matter how good the quality of your loan was, if somebody's lost their job, it's tough it make payment very long into the future because they blow through their reserves very fast. And issues we're seeing have nothing to do with payment amounts which you read about a lot in the newspaper -- well, mainly because of option Arm's and other adjustable loan. It really doesn't have anything to do with that. It's had the effect of a poor economy and lost jobs.

Yes. This is -- this next question might be difficult to answer. But do you have any visibility on the inventory of REOs or short sales in your market?

I've read some statistics, but I would hate to quote them because I'd be stretching my memory to understand. But there is some data out there, either Data Quick or there's another service that describes that. And I -- I think the number is over 50% of all volume is being driven by foreclosure or short sale activity. So the market and the price discovery in market is literally being driven by the lenders, but again I don't want to refute the fact that we're actually seeing some sales. And web see that within the context of our own REOs portfolio. When we get these back, the bulk of them sell relatively quickly if we price them right. And it might be a geography that's a little bit out of the area that ends up, sitting on our books for an extended period of time. So we are seeing activity in that regard. But it's largely driven by short sale and foreclosure. And there are some services that put that in out.

Okay. All right. Those are my only questions, thanks, guys.

And ladies and gentlemen, if there are additional questions, press star, then one at this time. And we have no further questions in the queue at this time. Please continue. And we still have no questions in queue.

Well, if there's no further questions. I'd like thank everyone for joining our conference call. And we look forward to speaking to you at the next conference call next quarter. Thank you.

Ladies and gentlemen, this conference will be available for replay after 11:00 A.M. Pacific time today through August 6 at midnight. You may access the AT&T replay system at any time by dialing 1-800-475-6701 and entering the access code 952139. That number again is 1-800-475-6701, entering the access code 952139. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.