Provident Financial Holdings Inc (PROV) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Provident fourth earnings quarter earnings release. 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 CEO of Provident Financial, Craig Blunden. Please go ahead sir.

Thank you David. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings, and 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, 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 the Form 10-K for the year-ended June 30, 2008. 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. Hope that each of you has had an opportunity to review or earnings release, which describes our fourth quarter results. The quarter ended June 30, 2009, did not contain any trend surprises in comparison to our recently completed prior quarters, and it seems that the major components influencing our financial results remain intact. Mortgage banking results continue to improve, and credit quality continues to require outsized loan loss provisions.

We are pleased with our mortgage banking results, and are cautiously optimistic that the loan volume originated in the past six months is sustainable for the foreseeable future, but probably at a level somewhat lower than that of the fourth quarter. The significant increase in loans originated for sale, and the stable loan sale margin in the fourth quarter, is a result of the lower interest rate environment, and fewer competitors in the business. Actions by the US Treasury and Federal Reserve in response to the credit crisis, resulted in an 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. Refinanced volume during the June 30, 2009 quarter was 60% of origination volume, up from 56% of origination volume in the quarter ended March 31, 2009.

While it is true that refinance volume will decline if mortgage interest rates increase from current levels, it does not currently appear likely that the Federal Reserve will change its monetary policy supporting lower interest rates any time soon, which is described in the recently released minutes from their meetings, and public comments and testimony from their Chairman.

As of today, loan origination volume remains strong, but not at the peak levels we experienced in April 2009 or May 2009. The loan sale margin appears sustainable at the current levels, and we continue to believe that the current favorable mortgage banking environment will provide the Company with a tremendous opportunity to improve earnings.

Credit quality declined during the quarter which required an increase in general and specific loan loss reserve, but it is worth noting that the amount of deterioration has declined significantly from prior recent quarters. Loans 30 days or more delinquent increased to $81.4 million on June 30th, 2009, a 4% increase, from the $78 million on March 31, 2009, the smallest increase we have seen in many quarters. Nonetheless, we recorded a $12.9 million provision for loan losses, while net charge-offs were $9.6 million.

The higher provision in comparison to charge-offs strengthened the ratio of loan loss reserves to loans held for investment. During the quarter 54 new REOs were acquired, while 47 REOs were sold, resulting in a net loss of $18,000 at their disposition. The relatively small additional loss at the time of the dispositions support our view that we are identifying potential losses early in the loan loss provisioning process. We remain committed to quickly identifying any problem loans within the portfolio, to timely record any losses we may experience on those problem loans, and to quickly dispose of those 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 conditions, such as higher unemployment rates, and little economic growth, may last through much of 2009. However, it is important to note that the pace of loan deterioration may be slowing from the more rapid pace experienced in the first three quarters of fiscal 2009. In addition to our positive outlook on mortgage banking, and somewhat negative view of credit quality, there have been other positive components to our operating results.

For instance, our net interest margin has widened, as a result of quicker declines in our funding costs, than the decline in the yield of our earning assets, and our efficiency ratio has improved as a result of the significant improvement in noninterest income, which outpaced the increase in noninterest expense. Nonetheless the key take-aways with respect to our fourth quarter results are the favorable mortgage banking environment and the ongoing credit quality concerns, given the elevated nonperforming single family loans.

Our short term strategy for balance sheet management remains unchanged from last quarter, which is consistent with 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 sale 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 June 30th Investor Presentation posted to our website. You will find that we have included a few more slides regarding asset quality and mortgage banking, which we believe will give you additional color on the credit risk in our loan portfolio, and the favorable 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 I cannot answer any question regarding this matter.

We will now entertain any questions you may have regarding our financial results. Thank you. David? If you want, you can open the call to questions.

Ladies and gentlemen, (Operator Instructions).

And we do have a question from Tim Coffey, FIG Partners.

Good morning, gentlemen. How are you doing?

Hey, Tim.

So you talked about the mortgage volumes this quarter, and the past two quarters looks like they have been absolutely extraordinary. What is kind of your outlook? Do you think this is a typical run rate? Do you expect it to decline, and by how much?

Well, if we look at the fourth quarter mortgage volume, it is something in the neighborhood of 16 million to 17 million, I think historically we will find that that is probably one of the best quarters we have ever had, with respect to mortgage banking volume. As a result, it is hard for us to suggest that we can continue at that run rate.

On the other hand, if we look at the third quarter mortgage volume, indeed the third quarter ending March 31st, it was [inaudible-background noise] million. In a fixed sense, that might be a little light, given what we see, but I think if we were to average the last two quarters, and annualize it and divide by four, that is probably a pretty fair run rate, and that is probably in the neighborhood of 475 million, or 450 million a quarter, something of that nature.

Okay. Okay. Do you see the pace of interest in refinancing, is the purchasing of new homes slowing, is the demand slowing at all?

What we see is that the refinance activity is very sensitive to interest rates. In fact, the closer to [inaudible-background noise] fixed on a conforming loan rate, the more refinanced volume. If we move under 5%, a tremendous amount of refinance applications that we see, as we move north of 5.5% or so, we do see that there are appreciably smaller refinance volume coming in.

Okay.

With respect to purchase money activity, it is less interest rate sensitive, and we don't see the large swings in volume, or rates moving 50 basis points. So I would expect purchase money activity, which is relatively strong in our markets, will continue, where we have seen plenty of activity. The wildcard becomes the finance activity, and when you are originating 600 million a quarter, the large part of it being refinance, you can see where volume could shrink by 100 million or 150 million quite easily.

Okay. Could you talk a little bit about the deposits. It looks like the liability side has started to change a little bit. What is kind of the outlook of some of the maturity schedules for the CDs?

Roughly 50 million a month is maturing in CDs in the very near term. Let's call it over the next six months or so, and the weighted average interest rate of those deposits are in the low 3% range. So that allows us to essentially lower our deposit costs by rolling those deposits into the lower interest rate, for purposes [inaudible-background noise]. A 6-month CD product right now without a checking account relationship is 0.85%, and that seems to be a relatively popular term. So we are potentially moving our depositors from the low 3% range to the 1.85% range, as we go down the timeline.

Okay.

Additionally, we are seeing less pressure on rates, because there have been some firms in our neighborhood that have recently been taken over, and indeed we are seeing they are no longer paying up in rate. As a result, it takes pressure off of every other institution in our area.

Okay.

The latest being Guarantee Bank.

So it sounds almost like we could see some margin expansion in the near term?

Well, margin expansion is complicated, because we also have loans that are repricing, and when we have loans repricing, we are typically at 275 margin over six month LIBOR. You have got loans repricing now in the 3% range, which is favorable from a credit quality perspective, because there is no payment shock. Nonetheless it puts pressure on the asset side of the balance sheet.

Additionally, we are carrying higher liquidity given the current banking environment, and the higher liquidity that we are carrying is being invested in fed funds, and that is 25 basis points. On the flip side of that, however, on the asset side, as we originate loans held for sale, those loans held for sale are being funded as [inaudible-background noise] short, and so we can pick up spreads on our loans held for sale volume of 400 basis points or so, depending upon what current interest rates are that we are originating mortgages, and where we are actually funding it. So yes, I agree there could be some margin expansion, although it may not be as much as you would think, as a result of the competing pressures on the assets.

Okay, thank you. Craig, you mentioned that the bias is still negative regarding credit quality. In terms of local economic conditions, what are you seeing?

Well, Tim, we are still seeing not only of course in our region, but statewide, that unemployment rates are still rising. Certainly compounded recently by what is happening on the state level, that is affecting counties and cities employment as well. So it is hard to be real positive at this point, and see that there is any kind of actual turnaround, where unemployment has reached a plateau, and until we see that happen, it has hard to be pretty bullish on credit quality.

I would only add that our bias is negative, but we have seen recent signs, as we have described in our prepared comments, that the pace of deterioration has slowed significantly from the recent prior quarters. I think that may be attributable to the portfolio maturing a little bit, cycled if you will, where the preponderance of those borrowers who are going to default and walk away from their properties, have already done so, where the current experience we may have, is probably more linked to the general economic conditions, and perhaps less linked to those borrowers who may have been speculating, with respect to the loans that they were obtaining, and the properties they were purchasing.

Okay. All right. Well, gentlemen, those are all of my questions. I appreciate your time.

Thanks, Tim.

(Operator Instructions). And there are no further questions in queue at this time. Please go ahead.

If there are no further questions, I would like to thank everyone for joining our conference call, and I look forward to speaking with all of you again next quarter. Thank you. David?

Ladies and gentlemen, that does conclude our conference for today. You may access the AT&T Conference replay system at any time, by dialing 1-800-475-6701, entering the access code 107040, international participants may dial 320-365-3844. These numbers again are 1-800-475-6701 and 320-365-3844, enter the access code 107040. That does conclude our conference for today. You may now disconnect.