Provident Financial Holdings Inc (PROV) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Provident first 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, instructions will be given to you at that time. (Operator Instructions) And also as a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Chairman and CEO Craig Blunden, please go ahead.

Good morning, everyone. 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, 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 was distributed yesterday and from the annual report on the form 10-K for the year-ended June 30, 2009. 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 that each of you has had an opportunity to review our earnings release, which describes our first quarter results. For the most part, the September 30th quarter results did not reflect changes from the trends established in recently completed prior quarters. And it seems that the major components influencing our financial results remain intact. Mortgage banking results continue to improve over last year and credit quality continues to require outsized loan loss provision.

Overall, we're pleased with our mortgage banking results and are cautiously optimistic that the loan volume originated in the past nine months is sustainable for the foreseeable future. The significant increase in loans originated for sale in the first quarter was a result of a lower interest rate environment and fewer competitors in the business. Actions by the US Treasury, Federal Reserve, and congress in response to credit crisis resulted in ancillary benefit of significantly lower mortgage interest rates. Many first time home buyers are taking advantage of the situation and are purchasing homes because of Federal and state tax credits. Purchase volume during September 30, 2009 quarter was 61% of origination volume, up from 40% of origination volume in the quarter ended June 30, 2009.

Additionally, refinanced volume held up pretty well and it does not currently appear likely the Federal Reserve will change its current monetary policy of supporting lower interest rates anytime soon, which is described in their recently released minutes from their meetings and public comments and testimony from Chairman Bernanke. Currently, loan origination volume remains strong, but not at the peak levels we experienced in April, 2009 or May, 2009. The loan sale margin has come under some pressure, as we continue to reserve for loan repurchases and change our investor sales mix to mitigate liquidity and capital risk, by delivering more loans to the GSE's, which settle their loan purchases much more quickly than private investors but at a cost to the loan sale margin. Credit quality declined during the quarter, but is worth noting that the pace of non-performing asset deterioration has slowed considerably for the second consecutive quarter.

Total nonperforming assets on September 30, 2009 increased to $98.2 million, an 11% increase from the $88.3 million on June 30, 2009 and similar to the 9% increase in the June 30, 2009 quarter, but significantly lower than the 42% increase in the March 31, 2009 quarter and the 28% increase in the December 31, 2008 quarter. Nonetheless, we recorded a $17.2 million provision for loan losses, while net charge-offs declined to $4.6 million from net charge-offs of $9.6 million in the June 30, 2009 quarter. The higher provision in comparison to charge-offs strengthened the ratio of loan loss reserves to loans held for investment and was primarily the result of a refinement in the general loan loss allowance methodology to include specific loan loss allowances in the loss experienced analysis resulting in an increase to the general loan loss allowance factors and ultimately a $9.2 million net increase in the general loan loss allowance.

During the quarter, 32 new REOs were acquired, while 48 REOs were sold, resulting in a net gain of $634,000 at their disposition. The net gain at the time of disposition supports our view that we are identifying any losses early in the loan deterioration process. One nuance that everyone should understand regarding the decline in new REOs relates to a California moratorium on new foreclosures until certain borrower notice requirements have been met, which lowered the number of new REOs in the September 30, 2009 quarter and kept the loans affected in the 90 days or more delinquency category until the delayed foreclosure proceedings can be completed. The moratorium has simply led to a onetime delay, which impacted the September 30, 2009 quarter, but will not have an significant impact on future quarters since we are complying with the new requirements and the foreclosures in process will occur in due course.

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 the 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's important to note that the pace of loan deterioration has slowed in the past six months 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 developments regarding our operating results.

For instance, our net interest margin has declined as a result of our decision to increase the average balance of cash and cash equivalents to strengthen our liquidity position given the challenging operating environment. Additionally, we sold $55 million of investment securities for a gain of apointly -- approximately $1.9 million as a part of the Company's short-term deleveraging strategy to improve capital ratios. The proceeds generated from declining assets were used to paydown FHLB advances and public fund deposits, which require collateral support. Nonetheless, the key takeaways with respect to our first quarter results are the favorable mortgage banking environment and the ongoing credit quality concerns given the generally poor economic conditions resulting in elevated nonperforming single family loans.

Our short-t -- our short-term strategy for balance sheet management has changed from last quarter with respect to capital ratios, but remains consistent with the improving mortgage banking environment. We believe that improving capital ratios from their current levels is critical, but we will allow an increase in loans held for sale to accommodate mortgage banking, while we reduce other balance sheet components, if necessary, to increase the core capital and total risk base capitals to 8% and 13% respectively during the course of fiscal 2010. I encourage everyone to review our September 30th investor presentation posted to our website. You will find that we've 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 the favorable mortgage banking fundamentals.

Before I open the call to questions, I thought I would briefly describe that we will not discuss any matter that appears in the preliminary form S-1, which we filed on October 9, 2009. We will now entertain any questions that you may have regarding our financial results. Thank you.

(Operator Instructions) And our first question comes from Timothy Coffey with FIG Partners, please go ahead.

Thank you, good morning, Craig, how are you.

Good morning. Good, Tim.

I was wondering if you (inaudible) tell me a little bit about the -- the rational behind in changing the formulas for the general value allowance.

Good morning Tim, this is Donovan.

Hi, Donovan.

The general valuation allowance is calculated internally by using a model and one of the components of the model is to look at our actual loan loss experience over a given period of time. The loan loss experience historically in our model has been calculated or populated with net charge-offs over that particular or relevant period of time. We updated our model to also consider in that -- or in those totals of loan loss experience, specific valuation allowances that have been taken against specific loans, again, within that same model or same window of time that we're modeling that are not yet net charge-offs, but may likely become net charge-offs in the foreseeable future. So as a result, our net charge-off experience or loan loss experience increased by including on a onetime or for the first time SBAs in that calculation and it then drove our particular components in our model, both for quantitative and qualitative loss factor purposes, higher.

As a result, the factors increased and we, on a onetime basis, recorded an additional GVA to satisfy the change in methodology. On a go forward basis, while the factors have been permanent -- well, I don't want to say permanently, but for the foreseeable future, they've been increased because some point they can come down or they could go up again, but for the foreseeable future because the factors typically don't change very often, this can be viewed as somewhat of a onetime event, although the factors will remain as they are, which are higher than what they were, and to the extent as the changes occur in the portfolio, we will use those updated factors, but we're not making up for anything previously, if you will.

Okay. Okay. So if I understand you correctly, they will be going forward from this quarter on, there will be lower volatility and the fact -- and that kind of GBA compared to what -- when you compare this quarter to the previous quarter right?

Yes.

Okay. Then the -- you need to tell me about the net charge-offs (inaudible) valuations, were you fine that net charge-off were an unreliable indicator.

Well, the net charge-offs, remember, are driven by, in our case, are largely foreclosure action and up until we foreclose, we carry a specific valuation allowance against these loans, because generally speaking we will charge them off within a less than one year time period. In fact, in many cases, it could be six months or less. Unfortunately, as a result of California legislation in this quarter, which required us to comply with additional notice requirements, we were unable to foreclose at the same pace until such time that those notice requirements were actually implemented by us, which they were. And so the 32 loans that we foreclosed on this quarter is perhaps understated relative to our normal pace as a result of implementing the new legislation.

As a result of that, fewer foreclosures, the charge-off piece on those foreclosures declined. So I would say that for this period in particular, the net charge-off number is unreliable on a go forward basis to consider what future loan losses might be. What I would do is point you to a slide in our investor presentation and perhaps a more reliable piece of information in that slide. It's on slide 26 where we describe the breakdown in our provision for loan losses between general valuation allowances and specific valuation allowances. If you look at specific valuation allowances, that kind of gives you some color with respect to what our loan loss or loan deterioration has been in the quarter.

Okay.

Tim, I might also add that one additional issue that the state has done to us and that is that they also extended the amount of time that either a tenant or owner can remain in the property after the foreclosure sale, which means -- and then we have people file DK and then we have to go to court to get them out and we're finding delays of significant amounts of time anywhere between 30 to 90 plus days before we can actually get control of the property, rehab it, and then sell it. And once we have control and once it's been re-habed, we're finding these properties sell quite quickly with multiple offers. So it's just getting it to that point where you can sell it that's a bit frustrating and one of the reason why you haven't seen these things come off quite as fast as they would.

Okay. Okay. Given that the properties are the result of the number of foreclosures that you have as a result of the foreclosure moratorium are understated this quarter, do you anticipate a catch up occurring next quarter or the next two quarters?

Not really a catch up. It's a new pace of rolling inventory, if you will, that we will be foreclosing on. So we've complied with what we needed, which slowed everything down for this quarter. But now for future quarters and thereafter, by complying with you will a the notice requirements, we've just -- all of the notice requirements we've just built up a rolling stock that will on an ongoing basis get foreclosed on.

So month by month, Tim, it will really be a -- probably the number it should have been if you -- if you step back before that rule came in. So, so no, it won't actually increase the number within the first month.

It just creates a new rolling stop.

Right.

Yes. Yes. So what you are saying, basically, there's going to be no -- you anticipate no real change in the pace of foreclosures, but just the stock is just going -- it's going to take longer to -- to recognize and unwind.

Yes.

Okay. All right. What -- what is kind of your outlook on the refinancing activity as we go forward, because this is -- traditionally, the (inaudible) is the time that it actually starts to slowdown our purchase money too. But this seems a little bit different, this cycle. What is your expectations going forward?

Well, I -- it really depends on interest rates. Again, refinances over the last few months have increased and decreased based on the interest rate level of whether it's under 5% or over 5%. And we certainly see refinances pick up quickly as rates drop below 5% on 30-year fixed and slows down to a slower level when they're 5% and over. So I -- if you want to forecast interest rates, you can do that, but it's been bouncing in that range and certainly the -- it hasn't effected the sales volume for us, but it does effect the number of re-fis month to month.

Now, we are reading where the expiration of the Federal tax credit, which I I believe is slated for November 30, may slow down purchase activity. However, it's looking quite likely that congress is working pretty hard to extend the Federal tax credit and I suspect that chances are better than not that they will do so. In fact, I think there's been a couple of pieces of legislation, one piece in the house, one piece in the Senate, that have been attached to bills already and we might see something in the next 30 days on that.

Yes. Although they are going to tighten up the rules a bit, because there are a number of loans apparently that were made to unqualified parties that weren't caught in this first program.

Sure. Oh, yes. I read about those a lot. What is -- you mentioned selling more through GSE, selling more of your mortgages through GSE. What is the -- is there something -- what's happening with the private investors that they can't close the loan purchases as fast as the GSE's.

Well, it's not -- it is not that we can't sell them as fast, it's the settlement and the receipt back of the cash itself when the loans are sold to an investor. A private investor versus a GSE, the GSE gives you cash within a couple of days and it's not as easy to track an exact schedule with the private investors and it's definitely a longer period of time and certainly when you're coming up to the end of a quarterly period, and we're very careful about where our assets finish because we're building capital at this point.

Yes, and the other thing to consider as well with respect to going to the GSE's, we believe we are mitigating liquidity risk, which Craig just spoke of, as well as credit risk to some degree. And a recent example of the credit risk component would be the Taylor, Bean situation that unfolded in July, where a private investor that you had committed to, suddenly was no longer able to fund their commitments as a result of their own financial deterioration. I think and -- so that -- that's a concern and so we qualify the private investors that we're selling to and we try to make certain that they're not those that may experience problems, but one never knows. So we limit the risk a little bit by limiting the amount that we're actually delivering to them.

The other component with respect to the timing of the non-GSE's, the industry or the players in the industry have contracted significantly. So ultimately the number of the aggregators, the number of large servicers that are out there that are accumulating servicing and ultimately packaging and selling the loan have declined. And that, quite frankly, has slowed down their back office, so they're just not able to execute as quickly as we would like. Even though they price somewhat better than the GSE's, we have to balance all of those risks in those components as we go down the time line.

Okay. Okay. Do you have a -- we'll be looking at CDs over the next four quarters. Do you have any set maturity schedule for them?

We don't publish them as maturity schedule per se for the reader of our financial statements, except in the 10-K. I think we describe those CDs that mature within one year. So I guess for model purposes, it would not be unreasonable to maybe breakout those buckets in or that amount in fourths and consider that that's the amount that will be maturing in any given quarter.

Okay. Do you expect to have some margin benefit from them?

Yes. Our existing CDs are generally at higher interest rates than what current market interest rates are and we would be expecting to reprice those CDs downward as we go down the time line given current interest rates.

Okay. All right. Those are my questions, thank a lot.

Thanks, Tim.

(Operator Instructions) And allowing a few moments, there are no further questions. If you have any closing comments?

Thank you for participating in our first quarter conference call. We look forward to speaking with you next quarter. Thank you.

Thank you, ladies and gentlemen. This conference will be available for replay starting today at 11:00 a.m. and will run until November 6th at midnight. You may access the replay service by dialing 1-800-475-6701 and entering the access code of 120863. That number again is 1-800-475-6701 with the access code of 120863. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T Executive Teleconference, you may now disconnect.