Provident Financial Holdings Inc (PROV) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and 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, with instructions being given at that time.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Chairman and CEO, 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 Donavon 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 and 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.

To begin with, thank you for participating in our call. We hope that each of you has had an opportunity to review our earnings release, which describes our third-quarter results. Major components influencing our current financial results are unchanged, credit quality and mortgage banking. Credit quality continues to improve, but at a slower pace. Total nonperforming assets on March 31, 2012 decreased to $38.2 million, a 62% decline from what appears to be the peak of $100.7 million on December 31, 2009.

We recorded a $1.6 million provision for loan losses during the quarter ended March 31, 2012, while net charge-offs were $4.3 million, which was higher than the $2.9 million in the December 2011 quarter, but lower than the net charge-offs of $5.1 million in the March 2011 quarter. We're pleased that loans in the 30 days 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 going forward will be inconsistent and irregular. Performance is closely tied to general economic conditions. While 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's important to note, though, that this quarter marks the ninth consecutive quarter where asset quality has improved. Also noteworthy, the delinquencies in our multi-family and commercial real estate portfolios have remained very low throughout the poor credit cycle of the last few years.

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 316 FTE in mortgage banking on March 31, 2012, 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.

The highlight of the quarter was our acquisition of a three-office retail mortgage banking group in Northern California in February 2012. Recruiting these highly successful mortgage bankers will accelerate our strategy to build a retail channel of loans originated for sale, where we have more control over loan sale margin and loan quality, and where a larger percentage of a loan origination volume is purchase-money activity, which is less interest rate sensitive than refinance activity.

The first few months of their employment has been spent on logistics, familiarizing them with our systems and procedures, and building their loan pipeline. We believe that they will hit their stride in the June 2012 quarter and become a meaningful component of our retail mortgage banking channel.

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

The loan sale margin for the quarter ended March 31, 2012 improved significantly from the prior sequential quarter to the higher end of the range that we've come to expect. Overall, loan sale execution remains favorable, with very liquid markets for agency-conforming loans, and we are working very hard to maintain our loan sale margins at these more profitable levels.

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 a total of $11 million of multi-family commercial real estate loans to augment loans held for investment and allocated additional resources to the commercial real estate loan platform with a 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're 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 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 and commercial real estate capabilities. Additionally, we continue to invest in a retail deposit franchise, resulting in higher core deposit balances, as demonstrated by our announcement to open our fifteenth full-service branch.

Our net interest margin increased by 6 basis points this quarter in comparison to the same quarter last year, but declined by 11 basis points on a sequential quarter basis, because liquidity was accumulated as a result of lower average balance of loans held for sale. Nonetheless, the key takeaways with respect to our third-quarter results are favorable credit quality trends and the investment we're making in mortgage banking, which has been a near-term drag to profitability.

The 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're investing in our multi-family commercial real estate loan platform to take advantage of loan opportunities as they arise.

For the foreseeable future, we believe that maintaining regulatory capital ratios above 9% for Tier 1 leverage and 12% total risk-based is critical, and we're confident we will be able to do so. Additionally, in the March 2012 quarter, we repurchased approximately 181,000 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 March 31 investor presentation posted to our website. You will find that we've concluded slides regarding asset quality in mortgage banking, which we believe will give you additional information on the credit risk embedded in our portfolio and favorable mortgage banking fundamentals. We will now entertain any questions you may have regarding our financial results. Thank you.

(Operator Instructions)

Tim Coffey, FIG Partners.

You were talking about the loan sale margin at the higher range during the quarter. Coming off the two recent quarters when it's declining, do you see it starting to expand again?

I think we're pretty confident, Tim, that we're going to hold these higher levels in this range that we've talked about. It looks like we'll be able to do that.

Okay.

As far as seeing it further, hard to say.

Okay. What's that a function of? Is it just a normalized market now?

I think the market, Tim, has stabilized to some degree with respect to the exit of a couple of players in the fourth calendar quarter of 2011. And those that are committed to the business, the large aggregators and correspondents I think have probably increased their staffing to be able to take advantage of the volume and to fill the vacuum of -- left by the exit of the large players. And as a result, I think we have a bit more pricing power than we did last year while that turmoil was going on.

Okay. And then the follow-up on mortgage banking. If I heard you right, the production that you saw this quarter came from -- you talked about legacy platform?

If you're referring to the new group that we hired in Northern California, they contributed very little to our volume in the March quarter, because literally, they came on in February. They were building pipelines. And while they did fund some loans, they really didn't fund the volume that we would expect from them. And the total amount that they funded was insignificant, really, in comparison to the total.

And in fact, Tim, they were coming on over about a three-month period from February through this month, into April. So some of the loans we did get were actually being processed by our own legacy branches that were already in existence.

And the [not restrained] deposit growth in the quarter, you touched on that a little bit, Craig. Could you let me know what that came from, what that was a result of?

I think each March quarter of every year you may see deposit growth look pretty favorable across the industry, or at least for those banks located in California, because income taxes are due and real estate property taxes are due in April. So we have seen historically that transaction account balances increase during the latter half of the March quarter, and then perhaps they cycle out to some degree in the very first part of April as people are paying income taxes and California real estate taxes.

Okay. Great, thanks. Those are all my questions.

Tim O'Brien, Sandler O'Neill.

You said that -- pardon me, I got into the call a little bit late, so I might have missed something. But you said that you expect all things considered where we are in the quarter, and looking forward, that volumes, if things hold up, could be similar and production could be similar in the fourth quarter to third-quarter levels. Is that what I heard you say, Craig?

Yes.

Does that include this production that's coming on from the new group, or is that -- because that would indicate that production in the rest of the team would be down this quarter relative to what they did in the third quarter. Can you clarify a little bit there?

Yes, I think I can add. If we look back historically over the last 18 months or so, I think our best origination quarter was $649 million. And I think that might have been September of 2010 or something like that. I can't recall the specific quarter, but it was $649 million.

Well, we just ended with, what was it, $560 million or so, this quarter. And I think volumes overall are down a bit from when we did that really big quarter. If I were to suggest our range of volume for June, it would be at this level to maybe as high as our best quarter ever, but it's always difficult to forecast that you're going to do better than your best quarter ever.

I got you.

Tim, I think I know what you're getting to, but as I look, as you fund out certain office pipelines, and you have other new offices producing more volume, it's really hard to say. I don't think that necessarily means that everybody else is down when we have three new originating branches to hit the same --

Yes, I think you guys see I'm trying to understand. I'm really interested in trying to get at what the potential is of this new group, additive potential here in this quarter that you said is going to come online and be a meaningful contributor. I'm trying to get at that number so that I can be accurate in my modeling.

Yes, I understand what you're getting to.

I think one thing that you could expect with respect to the addition of the new group is that our composition or mix between retail and wholesale origination volume will swing more toward retail volume, which is part of the entire strategy of building up that channel, because profit margins are better. Credit quality is more controllable. There's just advantages for that to occur.

And if we think about what has occurred just through this fiscal year, in Q1 we did $208 million of retail. In Q2, we did $220 million. In Q3, we did $233 million. And in Q3, retail volume was 40% of total volume in comparison to last year, when retail was only 30% of total volume.

So our goals with respect to bringing on a retail group is that our retail volume, as a percentage to total volume, is going to increase closer to 50% over time and maybe even go over 50% at some particular point in the future, because it is beneficial for that to occur from a profitability perspective.

So that gets to my other question. As far as contribution or strength of margin, how wide are the margins? What's the margin for retail production versus wholesale production?

Yes, we're not going to describe that for competitive --

Could you describe it without giving a hard number? Just give us a sense of how much more profitable is retail? That's a different way to put it. Typically, you're --

It's a lot more profitable really, because when you consider wholesale, you're essentially going out with a rate sheet to mortgage brokers who are looking at your rates in comparison to 100 other lenders, and if you don't have those rates set at very competitive levels, you're simply not going to drive any origination volume in the wholesale channel. So it's very competitive.

And the difference with retail is, you really have more control over the production volume, because the relationships are embedded with the realtors who are driving the volume and the retail originators who are on board. And as a result, it is less about rate and less about refinance activity and more about service and can we get this deal closed by the time their escrow is scheduled to close.

That makes perfect sense. I totally understand.

So that's why we're going that direction, and it's a meaningful difference with respect to profitability.

And the other thing, Tim, is that it's really harder for us to estimate where our margins will be on wholesale than it is on retail, because as Donavon went through that, and we've seen them swing all over the place. So to give you a spread number between the two, it's really been varying tremendously over the last year.

In order to achieve that idea of a 50% contribution from retail, does that -- do you envision -- does additional retail outlets and hiring fit into that strategy, or is that a necessity of that strategy to get to that number? Will you be opening more offices in other parts of California?

I think the 14 retail production offices that we now have will be sufficient to get to that 50% level during the course of the next couple of quarters, and we don't have to necessarily add new offices in order to accomplish that goal.

There could be additional FTE hired in those existing offices, in that if we find an originator that has particular volume and relationships near an existing office, we would certainly look to add him to our payroll. But I don't know that, unless a tremendous opportunity presents itself, that we would necessarily be opening more brick-and-mortar offices.

Yes, we would like to really swallow that pig that we took in the last few months and get it profitable before we add a lot more expense.

Just out of curiosity, and you alluded to this in saying that really the first calendar-year quarter was a ramping process for that group. How much actual dollar amount contribution did that group provide to that $10 million mortgage sale income number?

I'm not going to describe it that way, Tim, but I --

All right, Donavon. I was hoping you would just bust it out, but --

But I have a number for you. There was a pre-tax drag to earnings of approximately $550,000 for the March quarter as a result of the net impact of the revenue they generated and the expenses that we absorbed as a result of bringing them on board. We would expect that $550,000 would get close to $0, perhaps even profitable, for the June quarter, so it would no longer be a drag for the quarter. But that's about what the number was, without describing the total volume that they did.

Given all of the changes in the market dynamics that have occurred and continue to occur, are there other levers that you feel like -- obviously, you had a great improvement in margin this quarter. Are there other levers you can pull or other opportunities that the market is presenting to you guys now that you're looking at for channel routing and such to improve that margin additionally beyond where it stands now?

I think the key driver is going to be the composition mix between retail and wholesale.

Okay.

Wholesale is a thinner loan sale margin than retail, and to the extent that we can increase the percentage of retail origination volume, that margin in the environment, or in the secondary marketplace, should improve in comparison to what it would have been without that volume.

Tim, there's also some technology improvements that are going to happen, too, because we're working pretty hard on our mortgage banking software right now to improve efficiencies with these higher volumes, which will really help us on the expense side in the future.

That's great. And speaking of expenses, last question, and this should be a quickie, I did not see any increase in occupancy costs. In fact, if anything, it came down this quarter relative sequentially, and yet you did all this hiring. Is there going to be a hit on that line item as a result of the offices that you guys are taking on in Northern California, or are those people being absorbed into existing space up here?

No, we did pick up three new offices in Northern California. We subleased them from the organization that we picked up the employees from on market terms. But it's a very small number, in its own right, relative to total operating expenses. So occupancy will go up a bit, but it's not a huge number. Think about renting or leasing a 4,000-square-foot space. It's really not that much, comparatively speaking.

Given how tight-fisted you guys are on leasing office space, that is?

I don't know about that, but --

That's good. Hey, thanks very much for taking the time, and congratulations on a nice quarter.

Jason Stewart, Compass Point.

I have two questions. One relates to loan size and if there's any expectation for it to differ in Northern California versus Southern California?

I don't know if it will dip. I guess it will depend upon where we originate the bulk of our loans in the Northern California group. But generally speaking, some parts of Northern California are more expensive than Southern California, but then if you go inland or east, it seems some of the areas are less expensive. Right now, I think our average loan size on originated for-sale loans through the nine months of fiscal 2012 is approximately $273,000. If it were to go up to $300,000, I don't know that would be meaningfully different from $273,000.

I guess the simple answer is yes, but not significantly. But definitely they do originate a bit larger loans, but still within conforming loan sizes.

Right, and then in terms of margin on a larger loan size, I'm hearing not material. But if you went from $273,000 to $400,000, I'm guessing the margin would be, on a percentage terms, maybe a touch higher?

I have to be honest. I don't know that I've looked at it in that way to be able to give you a good answer. I really don't look -- I look at it in the context of conforming versus nonconforming, but I don't look at it within the context of the conforming size itself and the strata that might be in the conforming size in and of itself.

Okay, fair enough. And then the second question was related to builder activity and then footprint. I don't recall any relationships that -- and this is a good thing, I guess, recently, that you've had with builders in terms of financing new homes purchased. But is that something that you do have? Are you looking at it, or is that a significant portion of the volume on the purchase side?

You're right. At this point, you won't see anything on the new side. Although we have developed builder relationships in our mortgage banking area, because a number of builders in the last year or two have been picking up homes, rehabbing them, and selling them. And we have built relationships with a number of builders to take that type of business. But you're right. As far as new construction, not this point, no.

Okay. Thank you.

Don Worthington, Raymond James.

I may have missed this because I got on a little late as well. If you commented on this, I apologize. But in terms of the organic loan growth and the opportunity you might see for what you're determining to be preferred loans, do you see that picking up at some point this year?

We hope it's going to pick up. We are investing in that platform by hiring loan originators. But it is very competitive in multi-family and commercial real estate. And it is so competitive that we're uncomfortable sometimes with some of the deals we're looking at, either as a result of the conditions that our competitors are willing to live with, such as no personal guarantees, or the rates that are being quoted by some of our competitors make us take a step back.

So, it's something we want to do. It's something we have to do. We don't want to see our loans held for investment portfolio continually decline. But it has been very difficult to put origination capacity on board, such that it's enough to stem the tide of payoffs.

Okay, great. Thanks. And then any update in terms of -- have you had your OCC exam, or what's the status of that?

No, we haven't, but it's scheduled for to start at the end of May.

Okay.

We're in the midst of preparing for that exam at this point, but that's when it starts.

Okay. All right. Thank you.

(Operator Instructions)

And I have no more questions in queue. Please continue.

All right. If there are no more questions, I would like to thank everyone for joining our quarterly conference call and look forward to meeting with you again next quarter. Thank you.

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