Provident Financial Holdings Inc (PROV) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the second-quarter earnings release. 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, today's call is being recorded.

Now, starting off, we have your host, Craig Blunden. Please go ahead.

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 that they are made, and the Company assumes no obligation to update this information.

Thank you for participating in our call. I hope that each of you has had an opportunity to review our earnings release, which describes our second-quarter results. The major components influencing our current financial results are unchanged, credit quality and mortgage banking.

Credit quality continues to improve. Total nonperforming assets on December 31, 2011 decreased to $39.3 million, a 61% decline from what appears to be the peak of $100.7 million on December 31, 2009. We recorded a $1.1 million provision for loan losses during the quarter ended December 31, 2011, while net charge-offs were $2.9 million, which was similar to the $2.8 million in the September 2011 quarter, but significantly lower than the net charge-offs of $4.8 million in the June 2011 quarter and the $5.1 million in the March 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 credit quality will be inconsistent and irregular. Performance is 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 eighth consecutive quarter where asset quality has improved and the delinquencies in our multifamily and our commercial real estate loan portfolios have remained 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. We employ 290 FTE in Mortgage Banking on December 31, 2011, but remain vigilant in monitoring the operating environment so we can adjust our model, as we have done in the past, commensurate with changes in loan origination volumes.

Additionally, it is worth noting that 2011 has required an adjustment to new regulatory requirements that shocked the mortgage market to some degree. We have dealt with the Safe Act in January 2011, compensation changes in April, mortgage origination registration, which was required by July, and the 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 loan origination volume.

Additionally, we have witnessed the fallout from a quickly changing business environment with the announcements that Bank of America exited the correspondent channel and MetLife ceased operations in its mortgage banking unit. The disruption caused the remaining market participants who purchase our loans to reevaluate their pricing models, which compressed our loan sale margin.

Over time, we believe we can capitalize on this market turmoil by attracting talented personnel and providing consistent, uninterrupted customer service. Once stability returns, we would expect the mortgage market to become more transparent to market participants, resulting in more stabilized volume and loan sale margins.

The volume of loans originated for sale in the second quarter of fiscal 2012 increased slightly from the same quarter last year, but increased significantly from the September 2012 sequential quarter levels. New applications remained elevated in December 2011 quarter, resulting in a robust pipeline for the start of our third quarter of fiscal 2012, which suggests that the volume of loans originated for sale in the third quarter of fiscal 2012 may be similar to current quarter levels.

The loan sale margin for the quarter ended December 31, 2011 remained at the lower end of the range we have come to expect and similar to the September 2011 quarter. Over time, lower mortgage rates are favorable for our business, but short-term volatility increases our hedging cost and generates market turmoil. And the exit of major mortgage purchasers reduces our pricing power.

Overall, though, loan sale execution remains favorable, with very liquid markets for agency-conforming loans, and we are working very hard to increase our loan sale margins to more profitable levels.

In addition to improving the 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 a total of $19 million of multifamily and commercial real estate 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 for our portfolio.

Additionally, our operating expenses have increased as a result of hiring additional Mortgage Banking personnel, but we expect the investment we are making in the retail mortgage banking channel to pay off in the near term as we increase the percentage of retail originations to total originations.

We continue to maintain higher liquidity balances in response to the uncertain operating environment. We are less concerned with doing so today than this time last year, which is another reason we are expanding our multifamily and commercial real estate capabilities.

Additionally, we continue to invest in our retail deposit franchise, resulting in higher core deposit balances, as demonstrated by our announcement to open our 15th full-service branch. Our net interest margin improved this quarter because liquidity was redeployed into a higher average balance of loans held for sale.

Nonetheless, the key takeaways with respect to our second-quarter results were the favorable credit quality trends and the investment we are making in Mortgage Banking, which has been a near-term drag to profitability.

Our short-term strategy for balance sheet management is unchanged from last quarter. We do not believe deleveraging 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 in our multifamily and commercial real estate platform to be able to take advantage of loan opportunities as they arise.

For the foreseeable future, we believe that maintaining regulatory capital ratios above 9% core and 12% in total risk-based is critical, and we are confident we will be able to do so.

Additionally, in the December 2011 quarter, we repurchased approximately 263,000 shares of common stock and continue to believe that executing on our stock repurchase plan is a wise use of capital in the current low-growth environment. We encourage everyone to review our December 31 Investor Presentation posted at 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 fundamentals.

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

(Operator Instructions) Don Worthington, Raymond James.

Good morning. Just a couple things. I noticed you have got, I think, $60 million of FHLB advances maturing over the next six months. Do you expect those to roll off at maturity?

Don, this is Donavan. Our current plans, depending upon what loan demand may be with respect to multifamily and commercial, would be to let them roll off and not replace them. On the other hand, if we were able to gin up some growth with respect to our loan portfolio, some of them may be replaced with longer-term advances in this pretty low interest rate environment.

Okay. And then, any outlook on the margin? It was up pretty good this quarter. Do you expect further expansion over the next couple of quarters?

I think the margin this quarter is at the top end of the range. What you saw during the quarter was redeployment of cash into the loans held for sale line. Loans held for sale increased substantially in the quarter in comparison to the sequential quarter in September. And that was really the result of the market disruption because of the exit of BofA and the beginning of the exit of MetLife in the correspondent channels. As well as the fact that the rates really came down in the December quarter, and a great deal of new origination volume occurred, and it just slowed everything down. And so it increased our held for sale, and as a result, we redeployed that cash and got a better margin. So I expect that to be the top of the range.

Okay, great. Thanks. Then in terms of the properties taken into REO in the quarter, were those primarily single-family homes?

Yes, they were.

Okay. And I guess my last question is have you had an examination by the OCC yet?

No, we have not. We would expect possibly spring, but we have had no notification at this time.

Okay, great. Thank you.

Jason Stewart, Compass Point.

Good morning, guys. My question is high-level, and we have seen on a national level a pretty broad increase in sentiment around builders and construction. And as it relates to your footprint and your localities, are you seeing any improvement from September to today? Is there any market change in the way people are viewing things on the construction side of things?

I don't think so from our region. We are seeing some construction along the coast in Orange County and in San Diego County. But even so, it is at pretty low levels. And there has been a bit of commercial construction starting up near Ontario Airport on one or two small warehouses. But that is about it, as far as I have seen.

Okay, thanks.

Tim Coffey, FIG Partners.

Thanks. Good morning, gentlemen. So the first question I have is kind of on the differences we are seeing in the loan sale margin and the origination activity. It seems that origination activity has been growing the past four quarters pretty well, but the margin on the loan sale seems to be coming down. Is that a new trend or do you think it is a function of the exit of BofA and MetLife from the market that caused disruption?

I think it is a difficult question to answer right now, with respect to it being a permanent trend or not. Certainly I believe the disruption that occurred as a result of the exit of a couple of large players in the market caused our pricing power to diminish at the same time that volumes increased. But that is not to suggest that the existing or remaining players in the market aren't committed to the market and won't be gearing up to increase their market share relative to that volume, which would then suggest that margins would improve again.

From our perspective, we look at the margin we have had the last two quarters at the lower end of the range. And perhaps the range is that 110 basis point level to maybe the 150 basis point level, so it is close to the bottom. But I think as everything settles down, as transparency kind of comes back in, as market participants -- large market participants gear up to essentially take greater market share because of the exit of others, I think margins could improve.

If they don't, we obviously will have to make some changes to try to make certain we increase the profitability in that particular business unit. But on the other hand, it is still ginning up very nice earnings for us, and we anticipate that the low rate environment will continue to provide us that opportunity.

Okay. As a follow-on question with the low rate environment, the difference that we saw among mortgage originations in terms of refinancing versus purchase activity, would you anticipate seeing more refinancing going forward?

I think so, Tim, at these levels. Refinances, as you saw in our numbers, are certainly up some. Although when you compare us to the MBA numbers, we are still consistently below on refinances and higher on purchases, which again, I think is a function of that strong retail network that we have today.

Forgot about that. When it comes to loan purchases, has your wish list changed at all or do you still anticipate doing some more of the income-producing commercial real estate properties?

When we look at originating for our portfolio, our preferred loans to originate are multifamily and commercial real estate. And that is not going to change, I believe, anytime soon. It is simply a very competitive market. And part of competing in that market is putting the right talent on board.

We recently hired an originator in Northern California, where we had a much smaller presence in the past, and we think he is going to open up some markets and some opportunities for us with respect to those loan types.

Okay. And then my final question, as you look at the market for buyers of your OREO, has that market changed in the most recent quarter compared to recent quarters?

I don't think so, Tim. I mean, once we get control of the property, get it cleaned up and get it on the market, they are turning pretty quickly. There is lags some months, or depending on where the month is in the quarter, we will pretty well sell out of what we have available. And when we are getting more in, it does take time to get those people out of the property. So you will see some variation there, but once they are available, they are moving pretty quickly.

Okay, great. Thanks. Those are all my questions.

Tim O'Brien, Sandler O'Neill.

Good morning, gentlemen. Has the TDR opportunity universe run its course fairly well? Is there much left to do there?

I think we -- I have to remember, but I think there were four in the December quarter that we restructured, which is a very small number in comparison to a year ago or two years ago. And so to some degree, I would suggest that you are accurate -- much of our portfolio has already run its course with respect to TDR opportunity.

But I also think much of it is tied to economic conditions, and if we were to see deterioration in general economic conditions, I think there would be others that would be contacting us for potential restructure. So right now, it looks like it has run its course, in large part, but that doesn't mean it won't change a quarter or two down the road.

What we have seen, too, is as modification requests continue to lessen significantly, we have had some increases in short sale requests. So that is obviously, again, as Donavan was mentioning, a function of the economic environment.

Speaking to the economic environment or about that, there is discussion about housing price pressure again. I know that the area that you guys have your existing portfolio located in and the kind of loans that are made there, are you concerned about housing price pressure here affecting your book in 2012? I'll just leave it at that.

I don't think so. I mean, I have read many of the articles that have come out with respect to the Case-Shiller numbers, and yes, they are suggesting housing price pressure, but they are suggesting it in the low single digits. In other words, 1% or 2% or 3% or 5% decline in prices. Well, that is a very small decline in prices in comparison to where we have been three and two years ago. So I don't know that that will dictate more default activity, because those are pretty small declines in values.

And you have to remember too, our portfolio is pretty well spread out all over the state. It is not just focused right here in the inland area.

Neither is the pressure on housing markets; actually, it is focused all over the state.

Well, yes, I guess you are right. It depends, though. We see a lot less pressure along the coast still than we do inland.

It seems like some of the higher-end markets are suffering a bit more than they were before, and there are higher default rates and stuff, at least we are seeing up here in NorCal.

That could be the case. But if you look at the average loan size of our single-family portfolio, I think it is around $350,000 or something of that nature. So we don't have a lot of high-end loans in our portfolio.

Switching gears real quickly, with the rate environment where it is, these extraordinary low rates, is it possible you guys would consider portfolioing non-agency -- is there an opportunity to generate some non-agency single-family loans this year that would fit on your portfolio that would make sense? Is there any scenario that might make that work, given the rate environment we are in?

Tim, listening to your prior question --

I know, I know.

-- about prices. So yes, we have been considering this now for probably -- I don't know -- nine months or more. But until we see some stability on the higher end, which is what you mean by non-agency right -- jumbo --?

Yes.

It just -- why would you take the risk if you are not certain of the value?

So you are suspicious there, and rightfully so, probably.

At the moment, yes. But it is something -- you are right -- looking forward, I think there is opportunity there. It is just when is the right time to do it?

I hear you. And then last question, as far as investment -- kind of CapEx investment this year, broad brush, can you just give us some sense of directionally what that might mean for overhead cost? As far as how big are these -- you are just going to chip away at growth. It is not going to have a meaningful impact on overhead cost. I guess, probably going forward, you guys are going to remain cautious there. Is that right?

That is fair. We have announced, for instance, a new branch in La Quinta that we expect to open -- call it late May, mid-June, somewhere in that time frame. And that will obviously gin up a bit more in operating expenses. We have described that we have been adding mortgage bankers. We are up to 290 FTE in that division now. A year ago, we had 250 FTE in that division, so that has increased operating expenses. But there is no major initiative that we see that would increase operating expenses so significantly that it becomes abnormally high, if you will.

Okay. What do you think the cost is to open that branch, to get it up and operational and running?

We don't describe that publicly, for competitive reasons. I will tell you this, it was an existing branch of another institution that failed about three years ago or so. And so most of the tenant improvements, we will use; we are not going to have to put a lot of money into it. And indeed, lease rates today are much less than they were three or four years ago, the last time we opened a branch.

So branch costs today are much less expensive than they were. And this particular location is a bit less than normal because it is an existing facility or bank branch.

Thanks, Craig. Thanks, Donavan.

(Operator Instructions) At this time, we have no further questions in queue.

Well, I appreciate everyone joining our call and I look forward to speaking with you all at our next quarterly conference call. Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining and for using AT&T Executive Teleconference. You may now disconnect. Have a good day.