Provident Financial Holdings Inc (PROV) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter earnings release. At this time all participants are in a listen-only mode. Later there will be an opportunity for questions, with instructions being given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Mr. Craig Blunden. Please go ahead, sir.

Thank you. Good morning, everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings, and on the call with me is Donavan Ternes, our President, 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 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 from the annual report on Form 10-K for the year ended June 30, 2010, and from the Form 10-Q's 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 fourth-quarter results.

The major components influencing our current financial results are unchanged; credit quality and mortgage banking. Credit quality continues to improve. Total non-performing assets on June 30, 2011 decreased to $45.5 million, a 55% decline from what appears to be the peak of $100.7 million on December 31, 2009. We recorded an $847,000 provision for loan losses during the quarter ended June 30, 2011. While net charge-offs were $4.8 million, which were lower than the net charge-offs of $5.1 million in the March 31, 2010 quarter but higher than the $3.2 million in the December 31, 2010 quarter. We are pleased with the decline in loans that are 30 to 89 days delinquent, particularly since they had increased in the December 31, 2010 quarter before falling over the past 6 months.

As we have described in the past, improving credit quality will be inconsistent and irregular. Performance is closely tied to general economic condition, 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 non-performing assets elevated. It is important to note though that this quarter marks the sixth consecutive 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 that 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 will remain vigilant regarding the operating environment so we can adjust our model as we have done in the past commensurate with lower loan origination volume. Additionally, it is worth noting that the first 6 months of 2011 has required implementation of new regulations that has shaken the mortgage market to some degree. We've dealt with the Safe Act in January, compensation changes in April and mortgage originator registration through July. Each matter was difficult for market participants to absorb and I believe resulted in lower loan origination volume.

Additionally, we believe that highly regulated companies such as Provident have a distinct competitive advantage over our less regulated competitors, which may translate into improved market share over time. We are well equipped to bear the potentially higher capital requirements, higher regulatory scrutiny and more disciplined reporting requirements. Once regulatory stability returns though, I would expect mortgage markets become more transparent to market participants resulting in more stabilized volume and loan sale margins.

The volume of loans originated for sale in the fourth quarter of our fiscal year declined from the same quarter last year but was slightly higher than the March 31, 2011 sequential quarter. However, new applications were weaker in the June 30, 2011 quarter than the same quarter last year. This resulted in a lower locked pipeline for the start of our first quarter of fiscal 2012 compared to the same period last year which suggests that the volume of loans originated for sale in the first quarter of fiscal 2012 will be lower than levels originated during the first quarter of fiscal 2011 but similar to levels in the June and March 2011 quarters. The loan sale margin for the quarter ended June 30, 2011 was higher than comparable quarter in the prior fiscal year but deteriorated slightly from the March 31, 2011 quarter. Loan sale execution is respectable with very liquid markets for agency conforming loans.

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 originated and purchased loans to augment loans held for investment and reallocated resources to the commercial real estate loan platform signaling our return to the market. 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 the uncertain operating environment that are less concerned with doing so today than this time last year, which is another reason why we're expanding our multi-family and commercial real estate capabilities.

Additionally, we've continued to invest in our retail deposit franchise resulting in higher core deposit balances. Our net interest margin during the fiscal 2011 has improved in comparison to the same 4 quarter period last year as a result of a higher percentage of core deposit balances in addition to the downward repricing of certificates of deposit and federal home loan bank advances. Nonetheless, the key take away is with respect to our fourth-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 pay offs. Nonetheless, we're investing in our multi-family commercial real estate loan platform to be able to take advantage of loan 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.

In fact, we are so confident in our ability to do so, that we increased our quarterly cash dividend to shareholders and implemented a stock repurchase plan. I encourage everyone to review our June 30 investor presentation posted to our website. You will find that we included slides regarding asset quality and mortgage banking which we believe will help give you additional information on the credit risk embedded in our loan portfolio and favorable mortgage banking fundamentals.

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

(Operator Instructions) Tim O'Brien from Sandler O'Neill Partners.

Good morning, gentlemen.

Good morning, Tim.

Good morning.

First question regarding -- did you guys have any branching plans here for 2012 or second half of 2011? You alluded to kind of building out or looking for opportunities in the retail space, does that include maybe adding another branch or 2?

Well, Tim, yes, we're starting to look back in our region again. There were some offices that we targeted back right before the economy fell apart and in fact there was 1 lease that we were supposed to open a branch in that we got out of and then the-- mainly because the shopping center never got built. So we're back out there again looking for those opportunities and possibly for any branch purchase opportunities from any of the other players in our marketplace that are consolidating branches or shrinking their balance sheets.

And would you be looking-- is it more of a density play or do you think there are kind of outlying areas that are attractive that you'd like to serve? I know you know the greater market beyond even your footprint pretty well, so what's preferable?

Well I think really filling in our footprint is preferable which is Riverside County for retail banking offices. It's a huge county and even though we have an office in Corona and one in Blythe which is at opposite ends of the county, it's a huge area in between and there's certainly areas that are under served for us in these other areas.

And historically, what's the most aggressive you've been in terms of adding branches in the past? What was kind of the biggest bite you ever took and are you looking at it similarly now or is it something you're just going to chip away at?

Well, in the biggest year, we opened 2 brand new de novo offices and I would think within the next year we'll be starting with 1, so I think we'll chip away with that.

Okay, great. And then one other question. As far as your CD deposit strategy is concerned, can you give us an update on how you're looking to take advantage of market opportunities with regard to offering CDs here in the second half of this year and heading into 2012?

Our CD strategy in the current situation, because we are so very liquid, is one that we're not really pushing. In other words, we're not very aggressive with our CD rates because frankly, we don't need the funding. We continue to be aggressive in core or transaction accounts, primarily checking accounts, and indeed, there might be some opportunity with the repeal of Reg Q to look at business checking accounts that we wouldn't have too big of cannibalization problem with if we were to offer interest checking for business products for instance. So I think as we think about things over the course of the next year or so, becoming more aggressive in CD pricing would require us to be using up what we believe to be somewhat excess cash on our balance sheet before we would do that. But we'll always look at being aggressive in checking products, and in fact now there might be some opportunity there with respect to the Reg Q repeal.

And last question, with regard to the reallocation or realignment of human resources at Provident, do you expect that to translate or are you hopeful that that'll translate here in third quarter into some loan growth, some originations, or is that something second half or 2012, or how long does it take do you think for those guys to kind of move over? I know you guys are fast movers generally speaking on when you allocate resources, production is soon to follow. How are you viewing that reallocation?

Tim, that usually, once they get here, there's of course a lag time when they leave the other place and come here, but it takes them about 60 days before we start seeing the production, but that's all. It's not longer than that, and then they gear up after that. And in fact right now, again with Bank of America's problems, we're just seeing all sorts of really high volume originators wanting to work for us.

And those are commercial real estate originators and multi-guys?

No, these are mortgage banking guys.

Mortgage banking guys.

And on the commercial real estate front, when we were essentially deleveraging the balance sheet, we weren't making any of those types of loans. And many of the resources we had in that area were dedicated toward asset quality issues. Those are now less than they were, so we're transitioning resources back into the origination platform. Indeed, we've hired 1 new originator as well since our last call and I anticipate we would be looking for an additional producer or 2 as we go down the first 6 months or so of this new fiscal. The real problem though is what the market will give us with respect to quality transactions. We're seeing deals out there. In many cases, they're not the quality that we would like and so we refer to the opportunities in that regard as tepid. And I think that's what others, other banks and thrifts are suggesting as well. There's a lot of competition for the good deals and as a result, it's hard to make meaningful amounts of volume very quickly.

And then last follow up, with regard to the mortgage banking opportunities in the BofA situation, would you be looking to add staff across your platform including Northern California?

We look-- yes, where ever we find the best originators, Tim, that's where we'd add them, whether it's southern or northern.

Statewide, okay.

Yes.

That's it for me, thanks.

And they just plug into the offices we already have.

That's all for me.

Okay, thank you.

Don Worthington of Raymond James.

Thank you. Good morning, Craig and Donavan.

Good morning.

A couple things. Any color in terms of what your outlook is for the margin going forward?

The loan sale margin or net interest margin?

Sorry, the net interest margin.

It's probably stable in this area. I think we came in at 2.83% for the quarter, it was 2.90% for the fiscal year. Again, the largest issue there is how much of our cash position is being used to support the mortgage banking arena where it is deployed in loans held for sale in contrast to sitting in cash. And literally, we can have swings of $50 million, $75 million from one quarter to the next with respect to that component. And so obviously, $50 million, $75 million swing from one area to the other yielding in the low fours down to 25 basis points is a large contrast. So there's some volatility in that net interest margin, but describing that, I think this 2.83%, 2.85% area is probably consistent with what we can do in the future.

Okay, thank you. And then any color in terms of on the NPAs, I mean clearly the direction is down, but in terms of flows, any additions this quarter versus things like upgrades and pay-offs, charge-offs on the other side?

Well, the one key thing that I look at to understand what the next quarter may hold is the 30 to 89 day category. And the 30 to 89 day delinquents at June 30 drop down to just over $2 million. That would suggest to me that we have fewer NPAs that will come on in the September quarter than we would probably be able to resolve in the September quarter. With respect to future upgrades for the quarter, there may be 1 or 2 of our loans, maybe 3 that can be upgraded this quarter. Of course the timing is always situated with respect to their paying capacity what they've been doing over the last 6 or 12 months depending upon if they're single family or CRE product before they're eligible for upgrade. And so there will be some of that, but really the biggest indicator is the 30 to 89 day delinquents being down as far as they are which suggests that new non-performers will be down from what they were.

Okay, great. Thank you.

Jason Stewart of Compass Point.

Hi, good morning, thank you. The one question I have is on the portfolio, the investment portfolio. You owned agency MBS and some GSE sponsored-- government sponsored MBS. If the government debt was downgraded, would you do anything in terms of selling those securities or anything that you would change there?

No, I don't think we would sell the securities. They're still as securities go probably the most highly rated even if we get a down grade and we don't know what the length of time of that down grade will be. They're adjustable MBS, they've been in our portfolio for an extended period of time, I would expect repayment would continue. I haven't looked, but its potentially if some of them are in the 20% bucket for risk weighting, they might have to get moved into a 50% or 100% bucket, I'm not certain. But the total dollar amount is only about $25 million of securities, so it wouldn't be a significant hit even if they had to be moved by risk bucket to our capital ratios.

Okay, thanks. And then I know there is some talk about keeping the jumbo conforming limit that's status quo, if it is lowered at the I think it's in October, would you be expect to see any pull forward of the banking pipeline into the third quarter or do you think that mortgage brokers are talking about that and bringing any potential production forward?

Well that always seems to happen whenever there's a rule change. I mean we've seen it with other rule changes in the past where they loaded up the month before the rule is effective. So I would expect there to be a little of that, but all that does is move stuff up maybe 30 days at best and then you're 30 days late the month after. So there's real no-- not much effect.

Okay. Thanks. Those were the only 2 questions, appreciate it.

David Welch of River Oaks Capital.

Yes, hi, it's actually Matt Johnson. I just had a couple questions. One is you've got a $20 million federal home loan bank advance that's coming due I believe this quarter, and I was just wondering if you have a-- if you'd be able to just pay that off rather than refinance given the liquidity on the balance sheet?

That's what we have been doing.

Okay.

And in fact that's the intent. I think over the course of the last fiscal year, we've repaid $90 million of federal home loan bank advances either through prepayment or natural maturity.

Okay, and then my other question was on the salaries and employee benefits line, and I apologize if you discussed this and I missed it. With your Company, I usually think of that line as being pretty correlated with the mortgage banking. But in the most recent quarter compared to the previous one, you had gain on sale of loans declining and salaries going up, so I was just kind of curious of the dynamic there and hoping to understand how that works.

Well there was a true up accrual that occurred in the fourth quarter of approximately $500,000 bore incentive compensation for the fiscal year.

Okay.

And that's the largest component of the deviation that you see.

Okay, so that's not necessarily an every quarter kind of thing. My other question is you filed the 8-K the other day about the Board deciding to award call it $1 million of cash to the Officers and Directors, is that then a first fiscal quarter lump or is that baked into the fourth quarter numbers?

It's in the fourth quarter.

Okay, so that won't be hitting next quarter.

No, no, and that's that same number that Donovan already discussed.

Okay, okay, well thank you very much.

Tim Coffey of FIG Partners.

Good morning, gentlemen.

Good morning.

Good morning.

Craig and Donovan, I wonder if you can kind of talk about the credit quality, kind of following on to Don's question. What you're seeing right now especially in the early stage delinquencies, is that a head fake or do you see that as more of a continuing trend through the rest of the year?

What's the economy going to do for the rest of the year? It's irregular, it's choppy, it's tough to forecast. I know that when we look at NPAs and when we look at new delinquents coming on, they are lower than when they were-- or than a year ago or 2 years ago or 3 years ago. And I think it's partly a result of burn out in the portfolio, we're getting through those that we're predisposed at default by and large. But secondarily, it's tied to the economy and we still have relatively high unemployment rates. I think we have some borrowers who have been struggling and just hanging on. And at some point, it will change and they'll let that property come back to us, so it's tough to forecast. I think the best tool to forecast is what we're doing with REOs, we've been disposing of them. We've disposed of more this year than we took back.

I think the 30 to 89 day delinquent category is a good line item to look at to forecast at least one quarter out. And then ultimately, you can look at our schedule on asset quality, the very last page of the earnings release, and those that we describe as restructured loans on accrual status, they will essentially be moving off of that table entirely because their payments have satisfied the status. And then additionally, we have restructured loans on non-accrual status that will move to the table below as we go down the timeline, and you can kind of see those migrations on that page of asset quality. So is a head fake? No, I think it is meaningful improvement and it has been occurring for a couple 3 years and I think we can buy into that. But does that mean we won't have $5 million of 30 to 89 day delinquents at September 30? No, we could. It kind of depends upon what occurs.

Okay, so there have been no substantial changes to your collection methods or anything like that that's driving those things down?

No.

No.

Okay. And then just kind of-- just in I don't know, the most you feel comfortable with, how profitable is the retail channel versus the wholesale channel?

With respect to mortgage banking?

Right, yes.

Well, it is more profitable. I think it's probably something we don't want to discuss from a competitive perspective. But as we think about what we've done with respect to increasing our originators, hiring staff, it has been in the retail channel, it has not been in the wholesale channel. And it's in the retail channel primarily because it's a more profitable channel. But secondarily because the wholesale channel vis-a-vis the new regulations is under some pressure, and so it is difficult to expand that channel meaningfully over the course of time because you're also fighting the headwind of regulation. So we believe retail is the direction that we should be going and that's what we've been doing.

Okay, great. Those are all my questions.

Tim O'Brien of Sandler O'Neill Partners.

Hi. Just a follow-up question, guys, on the comments that you guys made regarding capital levels and capital deployment. I guess you said kind of the minimum capital levels you guys would consider maintaining would be 8% core, 12% total risk base. Now I'm going to assume that what you're talking about is those would be the levels in a normalized environment, or are those levels you'd be comfortable with now? I'm assuming it's normalized.

And then the other question is kind of as far as, say you have a canvas and you're going to paint it with regard to capital use and deployment over some period of time, how much do you have to work with not from a ratio standpoint, but from an absolute dollar amount standpoint, how much in excess total risk-based capital do you have dollar wise to get-- that puts you at that 12% number and at the 8% core number? What do we got to work with here and what's the timeframe for working with it?

Well first of all, the answer to your first question is yes clearly, the 8% and 12% is in normalized times.

Got you.

There's just no doubt about it.

I'm sure you're going to be very cautious.

Oh, yes. And again, we just ended up with the new regulator within the last week. I still haven't seen anything official come out from our regulators changing capital rules but we know that over the last 3 years, they've been saying more capital, more capital. So I'm still slightly uncomfortable with what the rules are actually going to be when they write them down other than to say you need sufficient levels of capital for the levels of risk that you undertake in your business plan. But we're very comfortable at capital levels today to do the things that we're doing, which is try to grow the institution right now in a tough environment when there's not a lot of growth available. But certainly through our actions in announcing a repurchase plan and increasing our dividend, also shows that we're very comfortable with the capital levels that we have. And in fact if you can't grow the institution much, what you do is you continue to increase those capital levels, and that's something that actually becomes an issue as they get higher from the levels that they're at now.

From an absolute dollar amount, you can do the calculation as well as I, I don't have it in front of me. But 8% and 12% is normalized. You see the regulatory orders that go out there and that get filed. It seems like everything is 9% and 13% or 10% and 14%. That suggests to me as kind of the absolute minimums in this environment, so if you look at 10% and 14% or 9.75% and 13.75% or something like that, you can determine the amount of excess capital we may have at June 30, which obviously would be used to support growth as well as the cash dividend and the stock repurchase.

We're talking about $20 million, $30 million, $40 million, right?

I would have-- like I said, I didn't do the calculation, it's an easy one to do obviously and you can do it just as easy as I. Probably easier, Tim.

All right, thanks. Good luck in the second half.

Thank you.

Thank you. At this time, there are no further questions coming from the phone lines.

All right, well I want to thank everyone for joining us in our conference call and look forward to speaking with all of you at the next quarterly call.

That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconferencing services. You may now disconnect.