Provident Financial Holdings Inc (PROV) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Provident second 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 with instructions being 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 our host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Thank you Kerry. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. On the call with me is Donavan Ternes.

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 this morning and from the annual report on Form 10-K for the year ended June 30, 2008. 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 each of you has had an opportunity to review our earnings release which describes our second quarter results. The operating environment for financial services industry remains difficult. One only has to read the recent earnings releases from financial institutions for confirmation. Many have described goodwill impairment charges, other than temporary impairment charges on investment portfolios, illiquidity in all but the most fundamental financial markets, and the ongoing real estate slump spreading throughout much of the economy. We are not immune to this environment and our operating results reflect the headwinds we face, primarily with respect to credit costs.

During the quarter ended December 31st, 2008, the significant downturn in the economy was confirmed by deteriorating economic indicators such as rising unemployment rates and significantly lower retail sales. As a result, we completed a review of our loan loss provision methodology and determined that the general loan loss reserves should be increased to reflect the deteriorating general economic condition. Additionally, non-performing assets decreased during the quarter which required a increase in specific evaluation allowances. These steps, while painful, were prudent and necessary.

Credit quality continues to be the principal reason that earnings remain under pressure and will continue to be an issue for the foreseeable future. However, we are diligent in our efforts to recognize any deterioration in our loan portfolio as early as it is known, to augment general loan loss reserves when appropriate, to specifically reserve for losses that are identifiable and to liquidate the resultant REO as quickly as possible.

During the quarter, we recorded a $16.5 million provision for loan losses while net charge-offs of $4.1 million thereby improving the loan loss reserves to loans held for investment ratio.

During the quarter 35 new REOs were acquired while 22 existing REOs were sold resulting in in a net gain of $572,000 at their disposition. This is important because it reveals we're accurately recording any loss associated with the REO at an early stage of the process resulting in timely recognition and transparency in our financial statements. It also allows us to price the REO at a fair market value that will ultimately result in a quick disposition. Our goals regarding asset quality are clear. To quickly identify any problem loans within the portfolio, to timely record any losses we may experience on those problem loans, and to quickly dispose of the resultant REO.

The outlook for credit quality is unclear but our bias remains negative, as it has for the past year. It appears the recession will deepen during the first part of 2009 resulting in more job losses, higher unemployment rates and very little economic growth. This is likely to result in additional credit quality concerns.

While our view of credit quality is negative, there have been positive components to our operating results noted in our first quarter conference call which have continued during the second quarter. Our net interest margin has widened, non-interest income, primarily gain on sale of loans, has increased, and operating expenses have declined when compared to the same quarter last year. Mortgage banking is gaining traction and the very low mortgage loan rates are beginning to spark refinance activity.

However, the improving fundamentals of our business could not overcome the credit quality issues which are the result of a deepening recession and loss of jobs. As I consider our short-term strategy for balance sheet management given the difficult environment we face, I believe capital ratios are critical. Therefore, shrinking the balance sheet, if necessary, to maintain the core capital and total risk based capital ratios above 7% and 12%, respectively, becomes an overriding goal.

I encourage everyone to review our December 31st investor presentation posted to our website. You will find we included a few more slides regarding asset quality and mortgage banking which we believe will give you additional color on the credit risks in the single family loan portfolio and the improving mortgage banking prospects.

Before I open the call to questions, I thought I would briefly describe that we are still evaluating the benefits and costs of TARP and that no decisions have yet been made with respect to our participation in the program.

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

(Operator Instructions) And our first question comes from Tim Coffey. Please go ahead.

Good morning, Craig, how are you doing?

Good morning, good.

I was wondering what your outlook was on the mortgage market. You look in the press release and the spreads are down year-over-year but the volume is up. What do you see going forward?

Well, Tim, clearly at this point in time, both the sales volumes have increased and refinance volumes have increased, as well. So, the short-term outlook is we're going to continue seeing increased fundings in single-family loans that (inaudible) 100% of all those loans. The biggest problem today is, with everybody cutting back, the third-parties cutting back in employment at title companies and escrow companies and appraisers, it is getting difficult to get a timely closing of a loan today. So the volumes are going up, but they're not closing as fast as we would like because of the slow-down in the third-party responses to get these deals done.

Okay. You also mentioned, discussed some of the economic indicators that you have seen, unemployment, has become a bigger issue. How much of that do you think is going to, in fact, impact rather delinquency or non-performers within the residential portfolio?

Oh, I think significantly. When we look at our especially the single-family loan portfolio, our issues have not been with payment shock, with option ARMs, because we don't have those on our books, issues like that. Our issues with delinquencies have been purely loss of job. And as more jobs are lost, it's definitely going to impact our customers' ability to pay in the future. So, until there's some stabilization of that, it can only make those delinquencies go up.

Tim, the other things that you saw in the quarter is that we increased our general loan loss reserve by $5.94 million. And that was directly related to our analysis of the methodology that goes into that number, or how we derive that number. And one of the largest components of that is job loss and unemployment rates. What you saw, I think, that came out toward the end of January maybe a week ago, California unemployment rate in general jumped to 9.3% in December. The Inland Empire jobless rate jumped to 10.1%. And these rates of unemployment we have not seen in 15 years, in some cases. I think the last recession, I was reading somewhere that the Inland Empire peaked out at a 12.4% unemployment rate, and that was related to the loss of jobs and the closing of the major military bases.

Yes. No doubt this cycle is different than the one that occurred in the early '90's, that was primarily sector related, and also expansive commercial construction. Given that you see these headlines coming, but also your marks on what goes into the REO are spot-on, are you inclined to increase the marks now?

Well, we go through a process. In other words, we have a general reserve process, and that general reserve process is being impacted by general economic conditions, or the deterioration of general economic conditions. So the first thing is, with respect to our general loss reserves, if we continue to see economic conditions deteriorate, it may suggest that we have to increase general loan loss reserves. I'm not suggesting that we have to. I'm suggesting that that's some of the components that go in to analyzing that mark.

With respect to deteriorating loans, or when those loans become impaired, we're spot-on with respect to when we ultimately dispose of them, because we do a really good job of updating our values as we go down the timeline as those loans remain on our books and ultimately go through the REO process. We are getting BPOs to determine value. We are getting updated appraisals to determine value. And, quite frankly, if it is an REO and we've listed the REO, we have a list price and estimated disposition costs to sell that, so we can ultimately absolutely establish its value. So we wouldn't expect, necessarily, that we have to increase the losses on REOs specifically, because, quite frankly, our process captures that right now, and we would expect that to continue.

Okay. Okay. That's great color , I appreciate that. And then would you say, while maintaining price discipline, it is easier to dispose of foreclosed properties now than it was three months ago?

Depends on the location and the property. It's a little easier in that va..lues are less than they were, so that is number one. And number two, interest rates are lower than they were. So with those two components, yes in some cases. Occasionally, though, we'll find a property that's a little more difficult because of either location or type of property, like a condo, let's say, is more difficult these days to get rid of, than a single-family home. And especially if the project itself may be impacted by multiple foreclosures and issues with the homeowner's association dues, and those kinds of things. But, in general, yes, I think it is, because prices are less. And many of the buyers today think that prices may be approaching the bottom, whatever that is.

And mortgage rates, again, are very low comparatively speaking, if we look back over time.

Absolutely. All right. Well those are all my questions. I appreciate it. Thanks a lot.

Thank you.

(Operator Instructions) And we have no more questions in queue. Please continue.

Well, if there are no more questions I would like to thank everyone for joining us on our quarterly earnings conference call and look forward to speaking to all of you next quarter. Thank you.

Thank you. And ladies and gentlemen this conference will be available for replay after 12:00 pm Pacific time today, through midnight February 5, 2009. And you may access the AT&T replay system at any time by dialing 1-800-475-6701, and entering the access code 981070. International participants may dial 320-365-3844. Again those numbers are 1-800-475-6701 and 320-365-3844, access code 981070. And that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.