Provident Financial Holdings Inc (PROV) 2012 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Provident Financial Holdings 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 call is being recorded.

I would now like to turn the conference over to our host Mr. Craig Blunden. Mr. Blunden you may begin.

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 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, 2011 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 first quarter results. The major components influencing our current financial results are unchanged, credit quality and mortgage banking. Credit quality continues to improve. Total nonperforming assets on September 30, 2011 decreased to $44.4 million, a 56% decline from what appears to be the peak of $100.7 million on December 31, 2009. We recorded a $972,000 provision for loan losses during the quarter ended September 30 We recorded a $972,000 provision for loan losses during the quarter ended September 30, 2011. While net charge-offs declined to $2.8 million, which was significantly lower than the net charge-offs of $4.8 million in the June 30, 2011 quarter and the $5.1 million in the March 31, 2011 quarter.

We are pleased that loans in the 30 to 89-days delinquent category remain manageable and have declined substantially from prior-year levels. As we have described in the past, improving quite credit quality will be inconsistent and irregular. 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 slow economic growth may last through much of 2012, keeping our nonperforming assets elevated.

It is important to note though that this quarter marks the seventh consecutive quarter where asset quality has improved and the delinquencies in our multi-family, commercial real estate portfolios have remained very low. We continue to believe that 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 in monitoring 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 9 months of 2011 had required adjustment to new regulatory requirements that has stunned the mortgage market to some degree. We've dealt with the S.A.F.E. Act in January, compensation changes in April, mortgage originator registration, which was required by July and implementation of lower conforming loan limits at the end of September. Each item was difficult for market participants to absorb and we believe resulted in lower origination volume. Additionally, this quarter, we have witnessed a fallout from the quickly changing business environment with the announcements that Bank of America is exiting the correspondent channel and MetLife intends to sell their mortgage banking platform. We believe we can capitalize on this market turmoil by attracting talented personnel and providing consistent, uninterrupted customer service. Once stability returns though, we would expect the mortgage markets became more transparent to market participants resulting in a more stabilized volume and loan sale margin.

The volume of loans originated for sale in the first quarter of fiscal 2012 declined from the same quarter last year but increased significantly from the June 30, 2011 sequential quarter levels. New applications were much stronger in the September 30, 201 quarter, resulting in a robust locked pipeline for the start of our second quarter of fiscal 2012, which suggests that the volume of loans originated for sale in the second quarter of fiscal 2012 may be similar to current quarter levels. The loan sale margin for the quarter ended September 30, 2011 was the lowest of the 5 sequential quarters resulting from very volatile mortgage rates. Over time, lower mortgage rates are favorable for our business, but short-term volatility increases our hedging costs. Additionally we recorded a $1.1 million recourse provision in the current quarter which also reduced our loan sale margin. Overall though, loan sale execution remains favorable 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 loans to augment loans held for investment and allocated additional resources to the commercial real estate loan platform with the goal of increasing loan production per portfolio. Additionally, our operating expenses have increased as a result of hiring additional mortgage banking personnel, but our efficiency ratio remains competitive because revenues generated by mortgage banking remain resilient.

We continue to maintain higher liquidity balances in response to the uncertain operating environment but are less concerned with doing so today than this time last year, which is another reason we're expanding our multi-family, commercial real estate capabilities. Additionally we continue to invest in our retail deposit franchise, resulting in higher core deposit balances. Our net interest margin deteriorated during the last few sequential quarters as a result of higher liquidity balances. But we believe it should improve in December -- in the December 2011 quarter because liquidity is being redeployed into higher average balance of loans held for sale. Nonetheless the key takeaways with respect to our first-quarter results are favorable credit quality trends and capitalizing on the opportunities we see 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 weak and it may be difficult to generate a sufficient volume of loans held for investment to replace payoff. Nonetheless, we are investing our multi-family and commercial real estate loan platform to be able to take it manage of loan opportunities as they arise. For the foreseeable future, we believe that maintaining regulatory capital issues above 9% core and 12% risk base is critical and we're confident we will be able to do so.

Additionally in September 2011, the bank paid a $5 million cash dividend to the holding company, which resulted in somewhat lower regulatory capital [ratios] at the bank, which is still significantly higher than the minimum's described earlier. We encourage everyone to review our September 30 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 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. Maria?

(Operator Instructions) Tim Coffey.

Hello, good morning, gentlemen.

Good morning.

We talked a little bit about-- you talked a little bit about the growth of the lost pipeline going into this coming quarter, is there any set correlation between the pipeline and what you end up receiving on gain on sale in the following quarter?

There is no direct link, Tim, with respect to the loan sale margin, there is a direct link with respect to volume. At the September 30 quarter end, we ended up with a locked pipeline of $304 million. $304 million is actually higher than the locked pipeline that we started last year's September quarter from June and last year's December-- or September quarters for December. So when you look at the locked pipeline, it denotes that that's our beginning point for the following quarter and should correlate to funding volume as we go through the quarter. And it's quite robust right now as a result of the decline in mortgage interest rates.

Okay, thanks Donavan. And then looking at the percentage of originations that are for purchase activity, what should we be reading into that? What is that percentage telling us?

1 thing to note about the volume floor provident in comparison to the industry, it is true that refinance activity has been increasing. But refinance activity is much more volatile because it's much more interest rate sensitive. And to the extent ones volume is driven more by purchase money activity than refinance activity, one would expect that it can be replicated in a better way as you go down the timeline. In our particular case, our refinance volume for the quarter was 47%. Our purchase money activity was 53%. While rates went down, refinance volume went up in comparison to what we had been doing in prior quarters.

But when you consider what the industry is doing, about 70% of the industry's volume is coming out of refinance, which if interest rates were to rise and take certain borrowers out of the realm of refinance, you would expect their volumes to go down. So we focused quite carefully on purchase money activity, which is primarily driven out of the retail channel in comparison to the wholesale channel. And that's frankly where we've been investing with respect to hiring mortgage originators.

Okay. And then Craig, you talked about maybe [pressing] being able to pick up some products or services off of some of the other businesses that are getting out of mortgage banking, have you had any success already?

Yes, Tim, we've had quite a bit of success. Some of the top originators in our marketplace that have been working for BofA are moving over to our institution now. I mean if we looked at the top 10 originators in this area, we've very had number 2, number 3, number 4, number 7 and so on moving over to us now and will start soon. So yes we are seeing that kind of success. So what happens with MetLife at this point I'm not sure. Because they haven't shut it down. They were trying to sell the operation, although I'm not so sure they're going to be successful at that. So at this point, we really haven't seen anybody from MetLife.

So 2 follow-up questions. 1, those people that you're adding, are they in your geographic area?

Yes they are, in this Inland Empire, yes. They are not particularly, even though we have offices in the Bay area, they haven't-- from what I understand, we haven't found any up there yet.

Okay. And the second question is how much production do they do?

Tim I don't remember their individual numbers. But they would be a significant addition to our staff. And they would be equaling our best or better originators that we have already on staff.

Okay. Great. Those are all my questions. Thanks.

Okay.

Tim O'Brien from Sandler O'Neill & Partners.

Hello, guys.

Good morning, Tim.

Good morning.

How many FTE did you add this quarter?

I don't know the addition to FTE count. But with respect to mortgage banking, I think we have around 271 FTE now. And I think that is probably up from 256. So you can do the math yes. Craig just handed me the numbers, 271 in September is the FTE count, and that's up from 256 in June.

And that's all mortgage banking or is that throughout the --

No, that's all mortgage banking.

Are you doing anything on the bank side, any hires? You alluded to Craig bringing some teams over to the targeted lending, any increase there?

Yes, we have hired 1 originator, we don't do it with teams, in the multi-family or commercial real estate space. So we picked up an originator in the September, or our current quarter, and we picked up an originator in the June quarter as well. And we're still looking potentially in select markets that we're not currently exposed to for an originator or 2.

That's great color. And then, the recourse provision that you took, can you-- is that just going to be volatile going forward? Was there anything in that number that reflect -- what drove that number given what's going on in the environment? Was it market volatility that caused that or was it borrower issues? Or what drives that again, just give me a refresher.

Well it's a very volatile number. And if we think about it within our own experience over the course of the last year. There were about 7 or 8 months that we went without any repurchase claims coming into the bank from legacy production, primarily out of the 2004 to 2007 origination timeframe. And for whatever reason, in the September quarter, we ended up getting more claims than we had in the prior 7 or 8 quarters. And as a result, it drove our experience -- loss experience ratio up and that then resulted in the $1.1 million recourse provision that we took to the quarter, or in the quarter, to essentially increase our recourse allowance or recourse reserve.

Color with respect to that? You hear a number of things from the industry publications of how the GSCs are scrubbing more and more of their portfolio et cetera, and as that occurs, we're ultimately going to potentially receive additional claims. Now you should understand that we, in many cases, win our fights with respect to those claims. We do not accept those claims carte blanche. We researched the individual loan files and what we're finding now is that the quality of the claim has gone down to some degree because the easy claims or the no-brainer claims have already been submitted. And so now we're seeing stuff coming back that is not a slam dunk with respect to the claimant, and we're able to fight and win in many cases.

So in this case, as far as this quarter is indicative of, the provision that you set aside is triggered when a claim is made, but was there resolution on the claim or claims that were made this quarter already? And is it rear view mirror or is that process still underway of resolving?

We will on each individual claim make an assessment of the likelihood of paying out on the claim. So the claims that we received for the quarter have not necessarily been resolved. We expect that in some of those claims we will ultimately pay an amount and in others of those claims we will not. And so we will go in and assess the likelihood of whether or not a claim will be paid. And that will drive our historical loss experience, much like a loan loss experience ratio, and dependent upon where those historical loss experiences go with respect to an analysis, it will drive a provision to bolster the reserve.

Just for background information, what is the historical kind of mean loss rate on claims? Is there any rhyme or reason to it as a percentage of the mortgage amount?

Not really, Tim.

Okay good enough.

That would make it easy. But I haven't seen that.

A short answer, no problem. Enough said. 1 other question, is there anything this quarter that would lead to an increase in share count possibly this quarter? Is there any event kind of in process that could ultimately boil down to higher share count reported at quarter end? Is that unlikely? And I'm alluding to the fact that share count grew when you guys announced the share repurchase program. So just a little color on that, kind of how that might play out here in this quarter?

Sure, in the September quarter, our current quarter, there was vesting of the 3-year cliff vesting group of restricted stock. And that occurred in August. So a distribution occurred of approximately 100,000 shares. So even though we repurchased 79,000 shares plus change during the quarter, our actual share count went up for the quarter. We do not -- well there is nothing scheduled to vest in a meaningful way with respect to restricted stock through the rest of this fiscal year really. So we shouldn't see the same impact that we saw this quarter with respect to a rising share count.

Now in addition to that, as you know, diluted earnings per share are calculated as a result of in the money stock options and things of that nature. And in contrast to the last couple of years, where we didn't have any stock options and the money, there was no dilutive effect with respect to EPS. As our share price increases, if it were to increase, there will be stock options that are than in the money that will lead to more outstanding shares for the diluted earnings per share calculation.

What you mean, if it goes up?

Great. Thanks for all the color, thanks for the help.

Thank, Tim.

Don Worthington from Raymond James.

Hello, good morning.

Good morning, Don.

Good morning, Don.

A couple things. Any recoveries in the quarter to offset the charge-offs?

You mean with respect to real estate owned?

Yes just in terms of your net charge-offs number, whether there was any recoveries in that. So you've got the gross charge-offs and then any gross recoveries?

Yes we have a line item in the income statement that is the sale and operation of real estate owned, and it was the net gain for the quarter. I think the numbers $32,000 for $34,000. And that line item attracts all of the disposition of REO, including any recoveries or losses as well as all REO expenses. And so the fact that it was a net gain for the quarter suggests that we had more recoveries then we had in the form of additional losses.

Okay. And then in terms of FHLB advances, it looks like you've got about $70 million maturing over the next 12 months. Would you expect that those would roll off at maturity?

I would expect so at this point with the way the cash levels have been yes.

Okay. And then do you see any further room to push down the costs of deposits?

Well I think we have some room with respect to the cost of deposits. But to some degree, we're kind of getting down to the point where you can't really decrease deposits any longer at least with respect to core deposit cost such as that checking accounts, money market accounts and the like. Now to the extent we have maturing time deposits, those costs we would expect to decline, because current interest rates and CDs are lower than I suspect any of those maturing time deposits CDs are currently earning.

Okay. Good. And then in terms of the REO, is there any concentration in any particular geographic location?

The single-family is primarily concentrated in Southern California. But within the context of Southern California, there's no concentration per se all in the Inland Empire. It's pretty much spread out through Southern California. And REO in general is concentrated in single-family.

Okay. And then I guess my last question, you mentioned there was a FDIC insurance accrual adjustment in the quarter, how much was that?

I believe that number was about $450,000. And that related to an improvement in our risk category. Secondarily, as you know, the FDIC changed their methodology for calculating the premium moving it from a deposit number to a total asset number minus equity with some adjustors in there. And all of that worked to the adjustment in that line item.

Okay. All right, thank you.

Thanks, Don.

Adam Stars from the Gulfside Assets.

Can you just expand on the $5 million dividend to the parent? What are the annual cash requirement to the parent? Does this imply a dividend increase or a buyback or is this just to meet expenses in the existing dividend?

The parent has very little in the way of expense obligations in that it is primarily a [shell]. We do not have any debt instruments issued from the parent so there are no interest payments to be made. The only obligation out of the parent is the cash dividend that we have recently increased to $0.03 a share, which is roughly $1.2 million obligation per year.

So you've taken enough up to the parent Company to pay 4 years worth of dividends?

Well, we also announced a stock repurchase program.

I missed that okay.

Yes, in July. And obviously any cash sitting at the parent would be used to repurchase shares.

Okay. Thank you very much.

Thank you.

Jason Stewart from Compass Point.

Hi, good morning. Most of my questions have been answered, on the-- the only 1 I have is on the loans originated for investment. If you could just give me a little color on what the yields look like there?

Okay. Primarily for the quarter, there were multi-family. I think we had a commercial loan or 2 in there. If they're multi-family, those yields are in the high 4s, very high 4s, or low 5% range. In commercial, we are probably in the high 5s, very low 6% range.

Okay. And then 1 follow up on the recourse provision. Now we've heard comments consistent with yours that the agencies have started to broaden their review of files until less definitive issues. But they've been pretty confined to maybe a 1 or 2 quarter period. Is it something that you've already seen taper off in the December quarter or has that activity been pretty consistent to date?

Well I'll talk about it from a historical perspective and what the agencies have done. I alluded to the fact that over the course of the last year, we went for about 7 or 8 months was essentially nothing occurring or very little in the way of claims. And prior to that, we were seeing claims and they were coming out of the agencies. And so now, we get back to a position where we're seeing some claims and they're coming out of the agencies. It suggests to us that the agencies have looked at again, how it is they're going to address some of their losses and have maybe come up with a methodical way of looking at particular files through a hierarchy of some nature and they're coming back. Now with respect to what that means or how long that takes, I really don't know.

Okay. Thanks for taking the questions.

Thank you.

And I'm not showing any more questions at this time.

Well if there's no more questions, I'd like to thank everyone for joining our quarterly conference call and look forward to speaking with you at our next call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participating and for using AT&T Executive Teleconference. You may now disconnect. Good day.