Provident Financial Holdings Inc (PROV) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and 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).

I would now like to the conference over to our host, CEO, Mr. Craig Blunden. Please go ahead.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holding. On 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' 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, 2008. 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 third quarter results. Quarter ended March 31, 2009 turned out to be an encouraging quarter for the Company, because our mortgage banking business returned to profitability. We experienced a significant increase in loans originated for sale and the loan-sale margin held up quite well as a result of fewer competitors in the business and the lower interest rate environment.

Origination volume gained strength as we progressed through the quarter and we closed the quarter with the largest lock pipeline that we have seen in many years. Actions by the US Treasury and the Federal Reserve in response to the credit crisis resulted in the ancillary benefit of significantly lower mortgage interest rates.

Many homeowners are taking advantage of the situation and are refinancing their existing mortgages to very low rates by historical standards. The underwriting characteristics of the current loan production are very different than a few years ago. The overwhelming majority is agency-conforming 30-year fixed rate and underwritten to full documentation standards.

We continue to sell our production to large investors, who in turn package loans for securitization to be guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. We're approved to deal directly with each of the agencies and are prepared to do so if we find meaningful price discrepancies between our investors and the agencies, or if the investors were to choose to exit the market.

Earlier, I described that loan origination binds gained strength as we progress through the quarter. As of today, that trend remains intact. Loan origination volumes and loan sale margins remain strong. We have not seen any signs of deterioration and continue to believe that for the foreseeable future the favorable mortgage banking environment will provide the Company with a tremendous opportunity to improve earnings.

Conversely, credit quality declined during the quarter, which required an increase in general and specific loan loss reserves. We recorded a $13.5 million provision for loan losses, while net charge-offs were $6.3 million. The significantly higher provision in comparison to charge-off strengthened the ratio of loan loss reserves to loan's health for investment.

During the quarter, 40 new REOs required while 28 REOs were sold, resulting in a net loss of $606,000 after disposition. Although the disposition the individual REOs resulted in a relatively small additional losses, we do not believe we're missing the mark with respect to the loan loss provisioning process on specifically identified loans.

We remain committed to quickly identifying any problem loans within the portfolio to timely record any losses that we may experience on those problem loans and to quickly dispose of the resultant REO. Doing so results in appropriate transparency of our financial statements. Our bias remains negative regarding credit quality consistent with our view that poor economic condition, such as higher unemployment rates and little economic growth may last through much of 2009.

In addition to our positive outlook on mortgage banking and negative view of credit quality, there have been other positive components for operating results, which may continue for the foreseeable future. For instance, our net interest margin has widened as a result of a quicker decline in our funding cost than the decline in the yield of our earning assets. And our efficiency ratio has improved as a result of the significant improvement in non-interest income, which outpaced the increase in non-interest expense.

Nonetheless, the key takeaways with respect to our third quarter results are the significantly improving mortgage banking environment and the ongoing credit quality concerns given the elevated single family non-performing loan. Our short-term strategy for balance sheet management has changed a bit from last quarter as a result of the improving mortgage banking environment. We continue to believe that maintaining capital ratios close to their current levels is critical.

However, we will allow an increase in loans held for sales to accommodate mortgage banking while we shrink other balance sheet components if necessary to maintain the core capital and total risk-based capital ratios very near our goal of 7% and 12% respectively. I encourage everyone to review our March 31 investor presentation posted to our website. You'll find we have included a few more slides regarding asset quality and mortgage banking, which we believe will give you additional color on the credit risks in our loan portfolio and improving mortgage banking fundamentals.

Before I open the call to questions, I thought I would briefly describe that no decision has been made with respect to our participation in the TARP program and cannot answer any questions regarding this matter. We will now entertain any questions that you may have regarding our results. Thank you.

Thank you. (Operator Instructions).

Our first question is from Tim Coffey. Please go ahead.

Hey, morning, gentlemen.

Morning, Tim.

Morning, Tim.

I was wondering if you could kind of give me a breakdown by geography of your mortgage originations in this last calendar quarter?

I don't have a specific dollar amount for you, Tim. The way I would answer it is that we originate throughout California. We have wholesale production office in Northern California in Pleasanton. We have a wholesale production office in Southern California in Rancho Cucamonga, and we have two retail mortgage banking origination offices, one in Riverside, one in Glendora and of course we originate loans out of our branch system in the Inland Empire.

If I were to estimate or approximate the geography, I would suggest it's probably a 65, 35 split, with 65% of the origination volume coming from Southern California and 35% of the origination volume coming from Northern California. We don't really have any origination volume to speak of coming from the Central Valley of California; say Bakersfield, the Fresno, for instance.

Yes.

When we talk about Northern California, we're really talking about the Bay area and the surrounding communities up there, the bedroom communities, and then Southern California is essentially the five counties down here -- San Diego, L.A., Orange, Riverside, Ventura.

Okay. Craig, you mentioned that you have -- for the foreseeable future, you see mortgage banking operations holding up. Do you have any kind of expectations in terms of volume or average loan sale margins?

I think, Tim, you'll see that the volumes will have increased over the end of the last quarter and again, it's hard for me to forecast how long that will last. Loan sale margins are also holding up very well and it is really because of so many of our competitors have disappeared from the marketplace and as long as these interest rates stay down there, there are certainly still plenty of borrowers available in the marketplace where the values are still sufficient for them to re-fi.

Probably not those that borrowed or bought in 2005 through early 2007, but think about all those individuals that got loans before that and that's what we're finding now, so the re-fi business has really taken off. However, the sale of our purchase business is also strong.

Okay. Do you have any exposure to the Freddie or Fannie moratorium foreclosing?

Well, I guess, within what context? I mean, we service a few loans with respect to that Freddie and Fannie moratorium on foreclosures and that may impact our servicing operation, but from an origination perspective, I don't think it applies.

Okay.

No, and honestly we have so few left that are serviced for Freddie and Fannie because it's been years since we actually sold direct to them and kept servicing.

Okay. If we look at mortgage originations throughout the quarter, did you see volumes pick up in any particular month? Was, for instance, was March heavier than February?

There's been a steady increase since mid-January every month.

Okay. And then if I could, I'd move over to credit quality. If you look at the next quarter, would you think the growth in NPAs would be similar to this past quarter or perhaps previous quarters where the growth in NPAs is actually lower?

It's hard to get a read on whether or not growth in NPAs will accelerate or decelerate. So much is dependent upon current economic circumstances and I think tied to California unemployment rates specifically. And I think that's why we've seen an acceleration, essentially since the second quarter of our fiscal. The September quarter wasn't too bad, but it accelerated a bit in December, as I recall, and it accelerated of course in March.

And if you track that against what unemployment rates have done, I think it tracks and explains the degree of acceleration. So, tell me where unemployment rates in the economy are going and I guess I can describe whether or not we expect NPAs to increase or decrease. Ultimately though, as we said in the prepared remarks, our bias is negative.

Yes. And how much of the total reserves, or what percent of the total reserves was kind of the -- a general reserve?

We put up $13.5 million in the quarter and just over $2 million of the $13.5 million was the result of an increase in general reserves.

Okay. Well, I appreciate it. Those are all my questions.

Thank you.

Thank you. (Operator Instructions). And we have no further questions. Please continue.

Well, if we have no more questions, I appreciate everyone participating in the conference call and look forward to speaking with you again next quarter. Thank you.

Thank you. Ladies and gentlemen, this conference will be available for replay after 10.30 am Pacific Time today until May 7th at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 996190. The number again is 1-800-475-6701 and the access code 996190. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.