Provident Financial Holdings Inc (PROV) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience and thank you for standing by. Welcome to the Provident third quarter earnings release conference call. At this time, all participants are in a list be only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded. I would like to turn the conference over to Chairman and Chief Executive Officer, Craig Blunden. Please go ahead, sir.

Thank you. Gloria. Good morning. This is Craig Blunden Chairman Chief Executive Officer of Provident Financial Holdings. And on the call 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 or forecasts, financial or other performance measures and statements about the Company's general outlook for economic and business conditions. We may also 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 from the annual report on Form 10-K for the year ended 2009 and from the Form 10-Qs that were filed subsequent to the Form 10-K. Forward-looking statements are effective only as of the date they are made and the Company assumes no only 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. Major components influencing our current financial results remain attacked. Mortgage banking and credit quality.

We are a bit disappointed with the mortgage banking results this quarter but are pleased with credit quality trends. As we discussed last quarter, we expect quarter results to remain choppy as we endure the current credit quality cycle which by the way is also consistent with mortgage banker results which can be unpredictable. Our discomfort with mortgage banker rules stems from the sequential quarter decline in mortgage origination volume at the very time that we have been expanding our loan production capacity and operating expenses to better serve our customers and maintain the strong volumes we experienced during much of calendar 2009. The decline of loan origination volume was not entirely unexpected sense the first quarter of any given year will typically reflect below average low loan original volume as result of transitioning from the calendar year end and locked pipeline gets funded out and does not replenished until after the holidays. Indeed we began our third quarter with the lowest lock pipe line of the prior three sequential quarters and it resulted in the lowest quarterly loan origination volume of the fiscal year to date.

Consistent with past experience, though, we were pleased we ended the third quarter with a larger lock pipeline than the beginning of the quarter and the loan origination volume and month of March was commensurate with the higher volume levels of calendar 2009 suggesting that loan origination volume may improve from current quarter levels. In our last call we described it was unclear whether the normal uptick in volume subsequent to the holidays will be replicated this spring. Judging by the growth in the locked pipeline by quarter end we are cautiously optimistic. And additional concern for mortgage banking stems from the removal of the emergency actions by the US treasury federal reserve and congress in response to the credit crisis which resulted in insulary benefit of mortgage interest rates.

On March 31, 2010, purchases of mortgage backed securities and agency debt instruments were stopped and the federal home tax credit for qualified home purchases will expire on April 30, 2010. To date, we have not seen a significant rise in mortgage interest rates and while some economists are suggesting that home purchase activity may decline when the tax credit expires, it's too soon to determine the longer term impact to the mortgage and housing markets as emergency actions are removed.

Also, the loan sale volume has come under some pressure as we continue to reserve for loan repurchases and intermittently change our investor loan sales mix to mitigate liquidity and capital risk by delivering more loans to the GSEs when required which settled their loan purchases more quickly than private investors but to the detriment of our loan sale margin. Nevertheless, we continue to believe that the mortgage banking environment remains favorable and provides us with an excellent opportunity to augment earning.

However, we must remain vigilant to be able to recognize when the environment begins to change so we a can adjust our operating model commensurate with lower loan origination volume. Credit quality approved during the quarter. Total non performing assets on March 31, 2010 decreased to $91.4 million, a 9% decline from the $100.7 million on December 31, 2009. Recorded a $2.3 million provision for loan losses during the quarter and in March 31, 2010, while net charge offs were $6.8 million, a bit higher than the net charge offs of $5 million in the December 31, 2009. We recorded a $2.3 million provision for loan losses during the quarter ended March 31, 2010. While net charge offs were $6.8 million a bit higher than the net charge offs of $5 million in the December 31, 2009 quarter.

During the quarter, 45 new REOs were acquired while 25 REOs were sold resulting in a net gain of $470,000 at their disposition. The net gain at the time of disposition supports our view that we are identifying any losses early at the loan deterioration process. One nuance that everyone should understand regarding the foreclosure process relates to the California legislation delaying foreclosure until certain borrower notice requirements have been met, which lowered the number of new REOs of December 31 and September 30 quarters and increased the number of foreclosures in the March 31 quarter as a result of our compliance with the new requirement. The legislation has simply led to delays but will not have a significant impact on the total number of foreclosures since we are complying with the new requirements and the foreclosures in the 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 we may experience on those problem loans and to quickly dispose of the result in ROE. Our bias remains cautious regarding credit quality, consistent with our view that poor economic environment economic conditions such as the higher unemployment rate and muted economic growth may last through much of 2010. However, it is important to note that this quarter marks first time in many prior sequential quarters where asset quality improve. In addition to our positive outlook on mortgage banking and cautious 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 opportunity we see in mortgage banking. We monitor operating expenses very closely and will be quick to make adjustments if necessary should loan origination volume begin to decline. We prepaid $25 million of FHLV advances during the quarter using the cash generated from deleveraging the balance sheet and growth in deposits.

We continue to maintain higher liquidity balances and response to uncertain operating environment although doing so has reduced our net interest income. We continue to invest in our retail bank retail deposit franchise resulting in an increasing core deposit on interest margins has expanded for the second consecutive quarter. Nonetheless, the key takeaways with respect to our third quarter results are the somewhat favorable credit quality trends in the opportunities we see in mortgage banking.

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 capital ratios above 8% and 13% respectively. I encourage everyone to review our March 31 investor presentation posted to our website. We will find that we have included slides regarding asset quality and mortgage banking which we believe will give you additional information on the credit risks imbedded in our portfolio and the favorable mortgage banking fundamentals. We will now entertain any questions you may have regarding our financial results. Thank you. Gloria.

(Operator Instructions). We will go to the line of Tim Coffey. Please go ahead.

Thank you. Good morning Craig, good morning Donavon.

Good morning. I had a question. How many FTEs do you have in the mortgage banking right now versus the December quarter?

We have 183 now. And we had 166 FTEs.

I might add also Tim, that in March of 2009, we had 127 FTEs in mortgage banking. So over the course of the 12 months, we've added 56 FTEs in mortgage banking. Additionally, when the cycle changed the last time in mortgage banking, we got down I think to a low of around 75 FTEs to 80 FTEs in mortgage banking at the bottom of the origination volume cycle the last time. And at the top of the cycle, the FTE count was approximately the same as the 183 we have currently.

Tim, the trends in mortgage banking have changed quite a bit. And in that wholesale is not nearly as big a player as it was in the past. And what we have been doing is expanding our retail branch operations which do drive up operating costs a little quicker.

Of course. Do you feel comfort with your FTE count right now or do you see it going higher?

Well, I think there are two things to discuss there. I think number one, everything is a function of loan origination volume and the opportunity with respect to loan origination volume. To the extent that we still see favorable environment that suggests that we could add origination staff to capture that volume.

Secondarily, I think it is a function of the mix between retail and wholesale. And when we think about the retail side of the business, what we are really looking at are originators who have developed themselves and origination volume in a particular market. And when those originators become available because of whatever reason but primarily because their current employer may no longer be interested in mortgage banking. For instance, we seen a local player who has exited. If they become available, they sometimes don't become available but every five, six, seven, ten years. That's how long they are remaining with their prior companies. To the extent we see opportunity there, we may end up picking up a retail group or originator such that we build a branch location retailer origination location around them.

Okay. So opportunistic highers then.

Correct.

And we were completely comfortable with the FTE count we have now to keep the volumes that we have been seeing over calendar 2009. We don't have to add to that count to see those type of volumes.

Okay. Okay. Craig, what are your thoughts on the government (inaudible) it's involvement in the mortgage market? Is that going to have any near term impacts on your business?

Tim, I mentioned that in the prepared remarks a bit. At this point we haven't seen any indication that it will impact the business volumes. But I don't know that we can look too far out in the future. It does look like things are loosening up though in the market. Certainly with that recent jumbo issue that it was Redwood Trust, which were five-one jumbo arms that was really a first that we've seen jumbos actually become available other than institutions like the large ones B of A or Wells putting them on their portfolio.

And there was tremendous interest in that issue. In fact, the pricing actually went down because there was so much of a over subscription for it. I feel pretty good about indicators like that.

The one item that is if you hear or listen to economists, they suggest that the home buyers credit which is set to expire April 30 has essentially pulled in sales that may have naturally occurred subsequent to April 30 into the April 30 time period. And while that may be true, that doesn't necessarily mean that volume will tail off when that credit expires. Because what we are hearing as well in surveys and the like, guess what, that's not the only reason buyers are buying right now. It was helpful and helped them make that decision to do so. But we were hearing from our realtors some of our customers, for instance, they do not have enough supply of inventory of single family residence with respect to their currently qualified borrowers or buyers who are interested in purchasing real estate. So, it's difficult to ascertain what impact.

Now, certainly with respect to mortgage interest rates, the government exiting essentially March 31. Normally mortgage interest rates which are tied to treasury rates are pretty quick to forecast any intervention, if you will. And in fact we didn't see the ten year deteriorate significantly as a result of that up or prior to March 31, and subsequently we've not seen that occur. So, it appears that the government has successfully exited that particular emergency program. But I think there are more fundamental such as the amount of borrowing the government has to take on as a result of current economics situation that will drive those rates.

Okay. Then do you have any forecast on loan sale margins for next quarter?

Well, we don't provide those forecasts. But one of the things we do have is in our investor presentation. And we describe what our locked pipeline is at any given quarter end. And the interesting thing to note there, if we look at the March 2010 locked pipeline on a gross and net basis, it was $177 million and $123 million respectively. At December 31 of 2009, it was $114 million and $76 million respectively between gross and net. That suggests to me that we should see origination volume in the June quarter that exceeds what we just came through in the March quarter because their pipeline is bigger and we are seeing the demand.

Okay. So what would that mean with low sale margins then. Do you expect an increase?

Well, the margin number and the loan sale margin number is driven by a number of things. And there are even accounting factors that drive that loan sale margin. Number, one you have the fundamentals of the business with respect to what you are able to obtain in the marketplace. And we target anywhere between 110 and 125 basis points of loan sale margins on an ongoing basis with respect to our product lines on a blended basis.

But the adjustments that we see each quarter that roll through the gain on sale income statement line item includes the recourse provision that we may be tagging ourselves with as it relates to specific loan request to repurchase. And additionally, it involves the derivative instruments mark which is the value of the locked pipeline and the value of the mandatory commitments to sell that locked pipeline. And those marks are very volatile and their driven by the size of the pipeline, the specific composition of the pipeline. And as those marks flow through the income statement, they could be a favorable adjustment or a gain or they could be a negative adjustment or a loss in any given quarter. And as a result because those numbers are imbedded into the gain on sale income statement line item, they can significantly impact what the loan sale margin is reported at. And indeed, some of that occurred in the March quarter. So, I would expect we can improve our margins from what we recorded out in March, but much of it will be dictated by those other factors which are not necessarily fundamental of the business.

Okay. Great. Appreciate your time.

Thanks, Tim.

(Operator Instructions). And we will go to the line of Tim O'Brien. Please go ahead.

Hi, just a follow-up on the derivative fair value mark.

Okay.

Are you guys able to influence the volatility there positively or negatively anyway shape or form or is it pretty random? Are you able to affect those in a positive way?

The short answer is no. In that, when we are marking our derivatives which are largely comprised of the locked pipeline and the commitment mandatory commitments to sell that locked pipeline, it is market driven. In other words, the loans at March 31 in the locked pipeline have a certain value relative to the locked interest rate in the individual loan and that's where we mark them to current market. The same thing is true with respect to the commitments to sell the locked pipeline. We have mandatory commitments either in the form of whole loan or mortgage backed securities in an assignment of trade format. But in either case those mandatory commitments to sell are at particular interest rates and they are marked to a quarter and interest rate in the market.

So, there is no ability, if you will, to effect what that or where those marks come in because it's a function of the market. Now what does impact us as we go from one period to the next, we may have a smaller or larger locked pipeline. And depending upon whether or not because it's a reversing entry. You reverse one month, the prior month's mark and then you mark the next month's or quarter end if you will pipeline that could have a positive or negative effect and swing those marks into a negative or positive direction.

Fair value mark that you take is not substantial enough that it would influence the kind of products that you offer or it hasn't in the past, has it?

No. And it will never do so because we don't view it as a fundamental part of the business, if you will. It is simply an accounting entry that we are required to account for and take. But it essentially brings in to the particular period the income being driven off of the commitments that we're making.

Okay. And then as far as, so I would imagine that volatility is limited by if you originating a lot of agency loans because that's where demand lies and that's where your business is most available to you that is there inherently less volatility from this standpoint from that marking standpoint in an agency portfolio than in a hybrid portfolio?

No. Not inherently. It's all driven by current market interest rates.

All right, I will get off that one. One other count is as far as spreads from that you earned from selling directly to agencies versus private parties, are those spreads at the agencies? Are they fairly consistent or stable? They don't move much? Or is there volatility there comparable to that in the private sector?

I would argue the same amount of volatility because again its interest rate driven. Though it is true that any loans sold to the agencies there is a smaller gain on sale margin to us on a fundamental basis.

Did you say that was 30-something basis points this quarter?

It's probably around that number. I would have to look for certain. But it's probably 30 basis points or so in from our normal execution or private execution if you will.

From an aggregate or blended basis stand point you see 125, 110 to 125 basis points of margin.

Correct.

And then what's the turnover rate? Craig alluded to the fact that Fannie, the agency's move more quickly. How long before you can book a sale to them versus relative to, I know maybe the privates or all over the map, but how quickly do you book a sale to the agencies?

Well, it's really, what we are looking for is the actual remittance of the proceeds and that is what's quicker and within 48 hours. And that differs tremendously from the private investors that we deal with that can like you said be all over the map.

So in other words we fund the loan and it's on our books as a loan held for sale. If we deliver that loan to the agency to sell it, we committed to do so couple of weeks prior, we fund it. We send it to the agency, 48 hours later we have the cash. If we send it to a private investor, it may be as long as 25 days later, we have the cash.

And so what we are managing is the total amount of loans held for sale create on our balance sheet which also then becomes a part of total assets such that we want to maintain total assets at or maybe slightly below where they currently are, such that we can keep capital ratios where we need them to be.

Okay, last question. The FHLB loans that you paid off, what was the rate you were paying on those?

Those were probably in the, right around the 3% range because we booked a gain on the $25 million. There is $155,000 gain that was recorded on the $25 million which suggests to me it was below the weighted average interest rate of the portfolio of advances.

Now, I will also say this, over the course of the fiscal year as we've been deleveraging, the goal has not been necessary three book a gain with respect to the prepayment of those advances. But certainly the goal has been to make it revenue neutral to a large extent. And over the course of the year to date, we prepaid $102 million of FHLB advances. Gain on prepaying the $102 million was $52,000.

Jim, I don't know if you saw the announcement today from the Federal Home and Bank of San Francisco. They are going to finally start letting us return excess stock to them.

I saw you alluded to that. There was some discussion of of that in your press release, too. So what?

Well, the issue there is we have $33 million of capital stock investment with Federal Home Loan Bank. We have approximately $12 million of excess capital stock in contrast to our minimum required based upon our usage of their products and services. So, to the extent we centrally recover some portion of that $12 million of excess, the last yield on their dividend was 27 basis points. Well that allows us to return it to cash, bring down a low yielding investment, if you will, or asset and use the cash more effectively elsewhere.

You anticipate you will be able to or would consider returning that $12 million and do you think you get that done in the second quarter?

We would want to but there are going to be limits based upon the program that the FHLB announced and I suspect we will not be able to redeem all $12 million. I have I not read the particulars or the details yet of the program. I shot it off to our staff who essentially get us in the queue with respect to our ability to redeem.

But it's going to be dictated by all other members and the amounts that they wish to redeem because the total amount that the federal home loan bank is willing to redeem, this quarter is $500 million. So I suspect it will be far short of the entire $12 million. But the point to make with respect to this, in addition to the redemption of capital stock and the dividend that they are paying, it essentially takes the OTTI question off the table with respect to FHLB capital stock.

Which has been sort of hanging out there over us especially when they quit paying dividends and quit repurchasing excess stock. And it appears that the date that they will do this is May 24, is what I read, Tim.

I appreciate the update. Thanks, gentlemen. I will step back.

Mr. Blunden, there are no additional questions at this time. Please continue.

If there are no other questions, I would like to thank everyone for joining our conference call and we look forward to speaking to you next quarter. Thank you.

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.