Provident Financial Holdings Inc (PROV) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the 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. 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, Craig Blunden. Please go ahead.

Thank you, Greg. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. And on the call with me is Donavan 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, from the annual report on Form 10-K for the year ended June 30, 2010, and from the Form 10-Qs that are 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 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. The major components influencing our current financial results are unchanged. Credit quality and mortgage banking. Credit quality improved once again this quarter. Total nonperforming assets on March 31, 2011 decreased to $57.3 million, a 43% decline from what appears to be the peak of $100.7 million on December 31, 2009. We recorded a $2.7 million provision for loan losses during the quarter ended March 31, 2011. While net chargeoffs were $5.1 million, which were higher than the net chargeoffs of $3.2 million in the December 31, 2010 quarter, but slightly lower than the $5.3 million in the September 30, 2010 quarter.

We are pleased with the decline in loans that are 30 to 89 days delinquent, particularly since they had increased as of December 31, 2010. As we have described in the past, improving credit quality will be inconsistent and choppy. Performance is closely tied to general economic conditions. And while our outlook regarding credit quality continues to improve, we believe that high unemployment rates and muted economic growth may last through much of 2011, keeping nonperforming assets elevated. It is important to note, though, that this quarter marks the fifth conservative quarter where asset quality has improved, and the delinquencies in our multi-family and commercial real estate portfolio remain very low. We continue to believe the mortgage banking environment remains favorable and provides us an excellent opportunity to enhance earnings.

We have been investing in the business, primarily by hiring additional personnel, but we remain vigilant regarding the operating environment so we can adjust our model, as where have done in the past, commensurate with our lower loan origination volumes. The volume of loans originated for sale in the third quarter of our fiscal year improved from the same quarter last year, and was a result of a low interest rate environment, fewer competitors in the business, and the strategic decision to invest in our mortgage banking operations during the last 24 months or so. New applications were stronger in the March 31, 2011 quarter than the same quarter last year. This resulted in slightly higher locked pipeline for the start of our fourth quarter compared to the same period last year which suggests that the volume of loans originated for sale will be similar to the levels originated during the fourth quarter of fiscal 2010. Additionally, we are well aware of the changing regulatory environment and believe that the highly regulated companies such as Provident have a distinct advantage over less regulated competitors and may translate into improved market share over time. We're well-equipped to bear the potentially higher capital requirements, heightened regulatory scrutiny, and more disciplined reporting requirements.

The loan sale margin for the quarter ended March 31, 2011 was higher than the comparable quarter in the prior fiscal year but deteriorated from the December 31, 2010 quarter. We remain flexible regarding our investor loan sales mix to mitigate liquidity and capital risk by delivering more loans to the GSE when required which settle their loan purchases much more quickly than private investors, much to the detriment of our loan sale margin. In addition to our improving but guarded view of credit quality and our positive outlook on mortgage banking, there have been other developments regarding our operating results. For instance, during the quarter, we purchased a small package of multi-family loans to augment loans held for investment. And we are reallocating resources to originate and purchase multi-family and commercial real estate loans for our portfolio. Additionally, our operating expenses have increased as a result of hiring additional mortgage banking personnel. But our efficiency ratio remains very competitive because revenues generated by mortgage banking are outpacing expenses.

We continue to maintain higher liquidity balances in response to uncertain operating environment. But are less concerned with doing so today than last year at this time, which is another reason we are reengaging our multi-family and commercial real estate capabilities. Additionally, we continue to invest in our retail deposit franchise, resulting in higher core deposit balances. Our net interest margin during the first three quarters of this fiscal year has improved in comparison to the same three quarters period last year as a result of those higher core deposit balances. In addition to the downward repricing of certificates of deposit and Federal Home Loan bank advances.

Nonetheless, the key take away with respect to our third quarter results are the favorable credit quality trends and capitalizing on the opportunities in mortgage banking. Our short-term strategy for balance sheet management is unchanged from last quarter. We do not believe deleveraging of the balance sheet is required, but we recognize that loan demand is tepid and it may be difficult to generate a sufficient volume of loans held for investment to replace payoffs. Nonetheless, we are beginning to invest in our multi-family and commercial real estate loan platform to be able to take advantage of opportunities as they arise. We believe that maintaining capital ratios above 8% core and 12% total risk base is critical, and are confident we will be able to do so for the foreseeable future. I encourage everyone to review our March 31 investor presentation posted to our website. You will find that we included slides regarding asset quality and mortgage banking which we believe will give you additional information on the credit risk embedded in our loan portfolio and favorable mortgage banking fundamental.

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

Tim Coffey.

Good morning, gentlemen. Craig, how big, what was the dollar value on the package of loans that you acquired, that you bought?

It was a $6.6 million package of multi-family. I believe it was spread out through California. We have a slide in our investor presentation that describes the geography and the credit risk characteristics of the loans.

Do you know what slide that is?

No -- well, hang on. I do know. It is slide 29.

Tim O'Brien.

Good morning. Craig, I got on late. I don't know if you spoke to this or not. As far as the regulatory transition to OCC, can you give us any update on that process as far as how it is impacting your strategic thinking and in terms of where Provident goes, how it moves forward once the transition is complete?

Tim, we have met in the last month with the Regional Director out at Denver of OCC, face-to-face, for a considerable amount of time to get comfort in what changes there will be to us in that conversion from OTS to OCC. And I think we got a lot of comfort, that at least initially, certainly for the first 12 months after that, there's going to be very little change that will affect us. We're going to see many of the same examiners, including examiners in charge from the OTS side that will transition into OCC. And at this point, strategically, we don't believe that we need to be doing anything like charter changes or anything like that at this point.

And the thrift charter stays intact with the QTL requirements and all of that stuff. That is going to say sacrosanct as far as the OCC is concerned?

That's what they tell us, yes.

That begs my second question which is, that said, beyond your relationship with the OCC, strategically speaking, now that you are looking to grow again, where do you see growth coming primarily? Are you looking back at commercial, is what I want to get at? If so, what kind of commercial, and how do you get there? Do you hire folks? What do you do?

Tim, there are two part to your question. Number one, I think we mentioned that we are really focused on multi-family first and commercial real estate second as far as the CRE piece of that growth. As you can tell, we have been winding down the single family portfolio over time. There is no surprise there. While certainly QTL is not a problem for us to make any time in the near future. And I think we also, in the presentation, mentioned that we have shifted some people around to start originating loans again. And, of course, we also mentioned that we recently bought a package from another institution of multi-family loans. So, we will be doing both tacks as we start trying to originate loans for our held for investment portfolio.

And, Tim, I think the second, or just to add, it may include hiring personnel. We have, again, shifted resources internally with respect to existing personnel. But we are now interested, as well, in looking at originators in our markets, primarily in the multi and CRE sector. And I think it is a critical part of growing that business again with respect to hiring personnel.

And on top of that, again, it appears, without us really probing the market very deeply yet, though, that there is not a lot of demand. But as we start with originators, only hire as we need them, both back office wise to do the actual processing and funding. So you start with the originator side and then move into the back office. So we're going to b e very careful as we do add staff. And that's certainly what we look at every day at mortgage banking and mortgage banking volume and what kind of staffing levels we have there. And I think we've talked, warned everybody, from the last quarter, that the first quarter of this calendar year would be like it has been in many years in the past, and that is pretty quiet after the holidays when things get rolling again. But they do pick up toward the spring. So, we are careful with our staffing, although we were staffed up pretty high toward the end of the last calendar year.

My impression in that regard, correct me if I'm wrong, is that you haven't furloughed anybody due to your outlook for originations in that mortgage lending unit at this point. You are still optimistic about prospects here heading into this quarter and looking out into 2011. Is that correct?

Yes. That is correct. Although, honestly, over the last few months, we always keep that furlough piece in our back pocket, and are looking at it very closely to see where originations are going with new applications and so on. So, it is something that we are ready to do as soon as we feel we have to. But we have gone through these cycles quite a few times, and really pulled the trigger too fast, and then 60 days later hired people back. And wish we hadn't at the time. But again, it's just hard to know exactly what is coming up sometimes in the next 60 to 90 days in new applications.

And the folks that you've redirected internally towards originating, I'm going to assume that is multi that they are focused on, number one priority. Is that correct?

Yes.

Are you guys directly originating or are they working with brokers to bring it in? And also, where's the sales range that they are working in? Is it Southern California, is it the state?

First of all, two questions, again. Both sources -- direct and broker. And it is pretty much statewide, especially when you're using brokers. And we redirected those people, some of them who are handling, basically keeping our loans to be paid. Somewhat of a workout, but then also other servicing aspects of our existing portfolio. Where we moved them originally a number of years ago, because they were originating for us before. So that is where they actually came from.

And I am assuming this is a second quarter phenomenon, and success or results, knock on wood, will start to show up this quarter?

Yes. They started to show up in the March quarter in a very small amount. And that is really the result of beginning the reallocation, redirecting of resources in our December quarter. Toward mid quarter we started going down this path, and so we had some result in March. Not the result we want to see over time. And we would expect that as we reengage that market, redeploy our personnel, we are going to be able to grow in our origination volume from what you see in this March quarter, which is just over $8 million for the quarter. Which is not hitting the cover off the ball, by any means, but you have to start from somewhere. And it is more than zero.

Tim, another point I'd like to make, and that is, one of the reasons why our existing portfolio in multi-family and commercial real estate has performed certainly much better than many of our peers is the underwriting we used back in the mid 2000 range, '04, '05, '06 '07, on those loans we originated. And to be honest, we looked at a lot of deals in the last 90 days and they are crap. They just don't meet our underwriting requirements. So we are also careful we are not going to grow for growth sake. We are going to grow using the underwriting characteristics that have worked for us in the past through tough cycles.

The loans that you bought, was that a third channel for bringing in multi? Or was that through your broker network? I would assume, by definition, it's not through broker, you actually bought those from an independent party that had originated them.

Correct, it's a third channel. So on the origination side, we have retail originators that will generate production on a retail basis. We have a broker community that we work with where we will originate the loan, but it is essentially sourced from the broker. And then we have purchase activity which will occur primarily with our contacts in other banks and thrifts, or other financial institutions.

Jason Stewart.

Good morning. Thanks for taking the question. I was wondering if you could discuss a little about your thoughts on the single family market right now in terms of prices and the direction and what impact that might be having on volume, or the spring selling season, if you are seeing any impacts at all there?

I think the price levels certainly vary tremendously around the state. On the low end, fairly firm. We have really focused. Certainly if you look at the amount of government loans we do, we prefer to do the lower end in the market. We think there is more stability there. We are still a little concerned on high end because there is so little activity that you can't get a sense of the true value on the few deals that are being done. And that may be because there is so little secondary marketing activity for the upper end product. And as that activity increases over time, I think it will give everybody more comfort on where values are really going on the higher end. So, I don't know if I answered your question. Donavan?

Yes. I think the other thing to think about, as well, is where mortgage interest rates are. Mortgage interest rates are still very favorable from a historical perspective. And as a result, I think there is demand, certainly on the lower end product, that come about as a result of pent-up demand where people couldn't buy. Prices are down by, call it, 30%, 35%, whatever you want to call it, from the peak in the market. And you have favorable interest rates. So it doesn't surprise me that there is some legs with respect to this mortgage market. It seems to me that there should be. Now, if we shift gears and we actually see liquidity coming into the higher end market or the jumbo market, it seems to me that that can only help origination volume, as well. And ultimately I think it provides stability with respect to the real estate markets in California. So, I think there is some upside here with respect to volumes as we go down the time line, because there is another market that is really untapped right now, that isn't moving. It is locked up because there is no liquidity. The minute that liquidity returns, I think we are well positioned to take advantage of that.

Okay. So it's fair to say that the lower end price range buyers don't seem concerned about a double dip, and there is a lot of activity there. But the higher end values, it's being driven more by liquidity, not necessarily by concerns over where prices may go.

Yes, I think that is fair. I think the real estate market is local, right? So, I can't speak to the Midwest or the East Coast. But if I think about California and where prices have come from over the last 3, 3.5 years, I don't know that prices can drop another 20% from where they are. Can they drop 5%? Can they drop 10%? Perhaps they can drop 5%, they can drop 10%. And maybe the higher end market has more room to drop than the lower end market, just given the activity we are seeing and the stability differences. But, are we going to see a double dip where we see 20% decline? I view that as unlikely.

That is great color, thank you. And then on the multi-family side, there has been a lot of talk from other bank executives about increasing volume in that arena. Have you seen it in your markets yet? Are you seeing any competitors coming back a little more aggressively than they had been in the past?

Yes, absolutely. I think any bank or thrift executive you speak to, in their calls, that are not delevering their balance sheet for particular reasons are in the market and are trying to capture some component of that volume, which makes the conditions very competitive. We are seeing a little in the way of loosened underwriting standards, but that is not the primary thing that we are seeing. What we are seeing is very aggressive pricing by some competitors. And that is a little bit troublesome to me, because I don't know that interest rates are going to be staying as low as they currently are for a long period of time. And if you are competing on price, you may end up setting yourself up for poorer future earnings. So we are a little bit cautious there, as well. But ultimately we think it is a good market. There is liquidity in that market. And as the economic conditions strengthen, we think there will be refinance volume that comes back, and we think that there will be purchase money volume that comes back.

Tim Coffey.

Continuation of my original line of questions. Donavan and Craig, what can we read into the amount of purchase activity in the mortgage originations going from 40% to 55% in the quarter?

A couple of things there. The first thing we described in our January conference call was that the March quarter is typically the quarter with the lowest origination volume. In other words, there is cyclicality to it and that is the quarter. But, when you look at the amount of volume that dropped off in our case, in comparison to many of our competitors, we had a lower volume dropoff from the December quarter than most of our competitors. And the reason for that is that we had a higher percentage than most of our competitors of purchase money activity. Like the Mortgage Bankers Association in December quarter suggested that maybe 75% of the volume was refinance activity. I think in our case, during the December quarter, 61% of our volume was refinance activity. So, as the refinance activity went away a bit during the quarter because of interest rates rising, it did not impact us as greatly. So, the thing I would like to point out is, if you look at our specific production, in particular our retail production in comparison to wholesale production, retail production is the production that has increased the most for us over the last year because that is where we have invested with respect to the originators we are hiring. And the bulk of that production is more purchase money driven than it is refinance driven. So, I would argue, for us, that our volume should hold up better than others over time, and I think we saw that this quarter.

Of your local competitors, do any of them have the scale and the retail operations that Provident does?

Not in the Riverside area, no. Not unless you want to talk about BofA.

Certainly, they have a lot of reach. But nobody of your size in your market, though?

No, not in this market area here. But, again, we have originators scattered out over the state and we only have a small piece of those other markets.

(Operator Instructions) And at this time there are no further questions.

If there are no further questions, I would like to thank everyone for joining us on our quarterly conference call. And look forward to speaking to you again at our next call. Thank you.

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