Provident Financial Holdings Inc (PROV) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Provident Financial Holdings' 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; 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 your host, Mr. Craig Blunden, Chairman and CEO. Please go ahead, sir.

Thank you, Barbara. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. 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 Form 10-K for the year ended June 30, 2009. 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 second-quarter results.

Our December 31, 2009, quarterly results were similar to recently completed prior quarters and the major components influencing our current financial results remain in tact. Mortgage banking results continue to improve over last year and the pace of credit quality deterioration has slowed considerably. Nevertheless, we expect quarterly results to remain choppy as we endure the current credit cycle.

Overall, we are pleased with our mortgage banking results. The increase in loans originated for sale in the second quarter was the 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 the credit crisis resulted in the ancillary benefit of significantly lower mortgage interest rates.

Many first-time homebuyers are taking advantage of the situation and are purchasing homes because of federal and state tax credits. Additionally, refinance volume held up pretty well and it does not currently appear likely that 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.

While pleased, we do note that loan origination volume has fallen from the peak levels we experienced in April and May 2009 and we do not know yet if a normal uptick in volume subsequent to the holidays will be replicated this spring.

Also, the loan sale margin has come under some pressure as we continue to reserve for loan repurchases and intermittently change our investors loan sales mix to mitigate liquidity and capital risk by delivering more loans to the GSEs, which settle their loan purchases much more quickly than private investors but to the detriment of our loan sale margin.

Credit quality declined during the quarter, but it's worth noting that the pace of non-performing asset deterioration has slowed considerably for the third consecutive quarter. Total non-performing assets on December 31, 2009, increased to $100.7 million, a 3% increase from the $98.2 million on September 30, 2009, but lower than the 11% increase in the September 30, 2009, quarter. The increase was also significantly lower than the 28% increase in the December 31, 2008, quarter.

We recorded a $2.3 million provision for loan losses during the quarter ended December 31, 2009, while net charge-offs were $5 million, similar to the net charge-offs of $4.6 million in the September 30, 2009, quarter. During the quarter 33 new ROEs were acquired while 42 REOs were sold resulting in a net gain of $938,000 at their disposition.

The net gain at 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 the California legislation delaying new foreclosures until certain borrower notice requirements have been met, which lowered the number of new REOs in the December 31 and September 30 quarters and kept the loans affected in the 90 days or more delinquent category until the delayed foreclosure proceedings can be completed.

The legislation has simply led to delays, but will not have significant impact on the total number of foreclosures since we are complying with the new requirements and the foreclosures in process will occur in due course. The legislation remains in effect until December 31, 2010.

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 result in REO. 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 2010.

However, it is important to note that the pace of loan deterioration has slowed in the past nine 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 operating expenses have increased as a result of hiring additional mortgage banking personnel to accommodate the increase in origination volume.

We monitor operating expenses very closely and are quick to make adjustments in personnel if necessary and believe that an efficiency ratio of 60% or less is very competitive.

Additionally, we sold $10 million of investment securities for a gain of approximately $341,000 as part of the Company's short-term deleveraging strategy to improve capital ratios and reduce our credit risk profile. The proceeds generated from declining assets have been used to pay down Federal Home Loan Bank advances and wholesale deposits so we do not harm our retail deposit franchise which has demonstrated a solid increase in transaction accounts as depositors seek alternatives to lower yielding time deposits.

Nonetheless, the key takeaways with respect to our second-quarter results are the somewhat favorable mortgage banking environment and that ongoing credit quality concerns, given the generally poor economic conditions, resulting in elevated non-performing loans.

Our short-term strategy for balance sheet management is unchanged from the last quarter. We believe that maintaining capital ratios at 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 maintain the core capital and total risk-based capital ratios above 8% and 13%, respectively.

I encourage everyone to review our December 31 investor presentation posted to our website. You will find that we have included slides regarding asset quality and mortgage banking, which we believe will give you additional color on the credit risks embedded in our loan portfolio and the favorable mortgage banking fundamentals.

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

(Operator Instructions) David Rochester, FBR Capital Markets.

Good morning, guys. Just a quick housekeeping question. Could you quantify the interest income reversals in the quarter? I think you had mentioned that in the press release.

I don't have that number available to me now.

Okay.

It's similar to what it has been in the prior quarters. It has not been a significant upkeep and that is in keeping with what NPAs are doing. If we see a relatively flat NPA, we will see a relatively flat interest income reversal.

Fair enough, that makes sense. You talked about the pace of deterioration slowing and there is definitely evidence of that, but then you go on to talk about your view the economy is more negative in California.

Are you guys generally saying that you expect to see NPA formation pick up at some point over the next couple of quarters or you are just letting us know that there is a risk there that it's going to accelerate?

David, I think that there is just a risk in general that we don't particularly think that this is a permanent trend. It's just hard to know with unemployment levels where they still are in our region.

So I would like to be more optimistic. I can't say that they will increase but they certainly could and there certainly could be more weakness in the multi-family and commercial real estate part of the business as well. We have seen a little of that, but really not much at this point even though you keep reading that commercial real estate is the next shoe to drop.

Now we do describe in the earnings release our loans that are 30 to 89 days delinquent and it is a positive number at December 31, 2009, essentially dropping in about half from where it was at September 30, 2009. Obviously NPAs come out of the 30- to 89-day delinquent category.

And I think part of that is because we are kind of long in the tooth with respect to the credit cycle, I suppose, at least as it relates to single-family lending. And so perhaps we are seeing some burnout with respect to our single-family portfolio. Those that were fraudulent loans or investor loans or the like they were pretty quick to default through the cycle and now, frankly, we are dealing with those that are impacted by poor economic conditions which would suggest a lower pace.

But I think Craig said it well with we are a little bit cautious with respect to multi-family and commercial real estate, even though we think we underwrote it pretty well at the time that we were originating it. We do believe that there is a reason to be cautious there, particularly when you read everything that is being written about it.

Yes. Thank you for that. And just one last one, can you update us on the troubled condition status? With your return to profitability this quarter and the further deceleration in the growth of problem assets, do you get the sense that you could potentially have that designation lifted, especially based on the regulatory exam, the full scope exam that you just had last quarter?

I don't how to answer that question. Number one, it's not our decision, as you know. It's hard for me to comment on because these days you just don't know where the regulators are headed in general.

I think because of the problems in Southern California for our particular regulator they have probably an even more negative bias to economic conditions looking forward than we do. So I just don't know. I wish I did know that.

That is a great question. Maybe it's one I ought to ask the regulator.

All right. Well, thank you very much, guys. Appreciate the time.

Tim Coffey, FLG (sic) Partners.

The first question I have is the drop in the reserve, especially the general portion of the reserve, is that more or less likely to be permanent now at lower levels?

Well, I think if you could tell me what our actual experience will be with respect to NPAs I could answer that question pretty specifically. The dilemma, Tim, as you know, specific valuation allowances are established for specific loans that have deteriorated and they are populated out of general loan loss reserves.

Additionally, as that specific loan deteriorates and goes into a loss experience historical analysis that we complete, and that historical loss experience analysis that we complete will dictate what we view our general reserves or how we view our general reserves and what those reserves need to be. I do think that what you have seen, particularly over the last few quarters, is that our NPA deterioration has slowed considerably.

As a result, our loss experience ratio should come in less than what we had been experiencing previously such that my quantitative and qualitative factors in my general loss reserve models would suggest we don't have to, for instance, do what we did in the third quarter by boosting them significantly when we started including specific valuation allowances as a historical loss experience.

So that is I guess a long-winded way of suggesting I don't really know. It's really going to be dictated by our actual experience as it relates to NPAs and then ultimately as it relates to what the loan portfolio is doing.

Okay. Switch over to the OREO increases in the quarter; was that in anyway related to a hangover effect from the foreclosure moratorium California had through a part of the quarter?

When you say the increase in the quarter, do you mean the number sold or the number that we took back?

Number that you took back.

Yes, it may have been with respect to implementation of the new California laws with respect to the notice requirements. But I don't know that or I can't recall that it was a hugely significant number quarter over quarter.

Okay. Do you guys (inaudible) at some point there will be a catch-up?

No, I don't think there is a catch up. I just think there is a permanent delay in. With the way it kind of acts within the context of our NPAs, it just stays in a 90-day NPA category longer before reverting into the REO category. So I don't see it as an impact, per se, with respect to the NPA in general.

Although I will say the longer that it takes for us to get our hands on the property, ultimately rehab them, and sell them it suggests that NPAs would hang around a bit longer as we go down the timeline than what they would have had the new legislation not gone into effect.

Jim, that is definitely true. I think in a way that lag overstates the NPAs because of that group that would have moved right out into REO and we would have disposed of them.

We are having very good success disposing of REO. It's a question of getting our hands on them, rehabbing them, and then once we do that they are literally not on our books very long.

And, by the way, there is another delay with getting the owners and/or tenants out of the property, again, because of some California law. It's taking us now about four months to get people out, which means it's another four months until we can rehab and sell.

Okay. Thanks, I appreciate that. It's good color. What is your expectations for the loans held for investment through this next year? Do you expect that to decline?

Yes.

Okay. Any level you would feel comfortable with?

It's really a function of where our capital ratios are.

Okay.

We are interested and we have said that we will keep or try to keep our core and risk base above 8% and 13%, respectively. Depending upon how quickly prepayments come in with respect to loans held for investment that will obviously decrease total assets such that our capital ratios should improve, particularly if we are not losing money on a quarterly basis and in fact chinning up a bit of earnings on a quarterly basis.

If we see that reverse as we go through this calendar 2010, that will free us up potentially to look at lending again and populating loans held for investment. But it's really a function of where capital ratios are.

And it's really core capital because our risk base, if you noticed, at the end of the quarter was over 15%.

Yes, okay. And then finally, mortgage banking volumes. Took a little bit of a decline this last quarter but the margin was much better. What do you see happening as we go through the winter months now? Do you expect volume to come in a little bit?

Well, generally volume would. And of course, traditionally December is a very slow origination month with the holidays and January is usually one of our worst funding months. Then it starts picking up and you start locking loans in January and then in February and then March is better. So we would expect it to pick up some.

There is a wrinkle in the market right now and that are the new RESPA rules. These RESPA rules have really impacted especially the wholesale side of the business in confusing lenders and the wholesale originators as well trying to work through those new rules, because the penalties are pretty tough in that if you screw up on your disclosures the borrower doesn't make up the difference, the lender does.

We have noticed a significant decline in the wholesale originations just as people try to figure out how to submit a package properly today.

Okay. What are your expectations for margin on the loan sales?

Well, we always price and we think our margins can probably be in the 110 to 125 basis point range pretty similar to where they had been.

The wildcard sometimes is dealing with loan repurchase requests and what that may mean with respect to muting or decreasing our margin because we run loan repurchase requests and the recourse provision through that line item. It was favorable this quarter.

We had fewer loan sales to the agencies, which are at lower margin for the quarter, just because of the way the quarter worked out. So that improved margin as well. And so we were able to absorb those recourse provisions satisfactorily such that we came up with 127 basis point margin. But, literally, we try to maintain our margins in that 110 to 125 range.

Okay. Gentlemen, that was all my questions. Thank you very much.

(Operator Instructions) There are no further questions. You may continue.

All right. If there is no further questions, I want to thank everyone for joining our quarterly conference call and look forward to speaking with you at our next call. Thank you.

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Once again it's 1-800-475-6701 and access code 143332. That does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference service. You may now disconnect. Have a nice weekend.