Provident Financial Holdings, Inc.
Q1 2009 Earnings Call Transcript

Published: 28 Oct 2008

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Provident First Quarter Earnings Release. [Operator Instructions] I would now like to turn the conference over to Chairman and CEO, Craig Blunden, please go ahead.

[Craig G. Blunden:]

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 Chief Operating and Chief Financial Officer. Before we begin, I have brief administrative items 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, forecast 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 the 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 last week and from the annual report on form 10-K for the year ended June 30, 2008. Forward looking statements are effective only as of the day 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 have had an opportunity to review our earnings release, which describes our first quarter results. The operating environment for the industry remains difficult and the September 30th quarter was the most tumultuous period to date for this particular credit and economic cycle. In fact as we are preparing my remarks for the call, it became evident that we could not prepare remarks addressing the many questions that participants may have, therefore I will spend less time on my prepared comments and encourage each of you to ask those questions that concern you most in the question and answer period. First of all, there were a number of positive components to our first quarter results that I wish to highlight even through they were overshadowed by credit quality, which I will address later. Our net interest margin expanded significantly in comparison to the comparable quarter last year, although it did contract by a modest 4 basis points from the June 30 quarter. The yield curve remains relatively steep, which is a favorable situation for us but liquidity pressures experienced by some of our competitors subside over the next few months resulting in less aggressive retail deposit rates. Operating expenses have been tightly controlled for many quarters now and our disciplined management of operating expenses has been a net positive for the company and we will continue to be so in the current environment. Net interest income demonstrated a nice recovery this quarter as a result of an increase in the gain on sale of loan. Mortgage banking origination volumes have increased from their low in March 2008 quarter and the loan sale margin widened considerably from its low, particularly when it was adjusted by excluding the recourse provision. On an operating basis, excluding legacy costs, the mortgage banking division was profitable during the quarter at the current loan origination volumes and loan sale margins generated. Of course, the legacy cost attributable to the division, such as credit costs on repurchase loans and REO and the operating expenses required to manage these legacy matters still reflect an operating loss on a GAAP basis. Nonetheless, mortgage banking was a net contributor to earnings this quarter on an operating or a pro-forma basis, and we believe it is likely to continue to be unless the current economic environment deteriorates further. Credit quality continues to be a principal reason that earnings remain under pressure and we’ll continue to be so for the foreseeable future. However we are diligent in our efforts to recognize any deterioration on our loan portfolio as early as it is known to specifically reserve for any losses that are identifiable and to liquidate the resultant REO as quickly as possible. During the quarter, we recorded a $5.7 million provision for loan losses while net charge-offs were $3.1 million, thereby improving the loan loss reserve to loans held for investment ratio. During the quarter, 28 new REOs were acquired while 25 existing REOs were sold resulting in a total net loss of $133,000 at their disposition. This is important, because it reveals that we are accurately recording any loss associated with the REO at an early stage of the process resulting in timely recognition and transparency in our financial statements. It also allows us to price the REO at a fair market value that will ultimately result in a quick disposition. By the way, we typically do not provide for financing for the REO transactions. Our goals regarding asset quality are clear, to quickly identify any problem loans within the portfolio, to timely record any losses we may experiment on those problem loans and to quickly dispose of the resultant REO. The outlook for credit quality is unclear, and as I said last quarter, our past six months of credit quality experience on an annualized basis is the best information available to formulate an expectation for credit quality costs during fiscal 2009. In fact our first quarter results are consistent with that statement and appear to us to be a valid indicator for the remainder of fiscal 2009. Before I open the call to questions, I thought I would briefly describe that we are evaluating the benefits and costs of tarp and that no decision has yet been made with respect to our participation in the program. We will now entertain any questions you may have regarding our financial results. Thank you?

[Operator:]

(Operator Instructions). We will go to Tim Coffey with FIG Partners. Please go ahead.

[Tim Coffey:]

Good morning guys. How are you?

[Craig Blunden:]

Good morning Tim.

[Donavon Ternes:]

Good morning Tim.

[Tim Coffey:]

Hey Donavan, how is it going?

[Donavon Ternes:]

Good.

[Tim Coffey:]

Given that the volumes on your loans sales are higher, does that give an indication of the secondary market is starting to clear up for you?

[Donavon Ternes:]

Well, I think there is a couple of things going on Tim; number one, you will see that the number of loans out of mortgage banking that we placed in portfolio was down in comparison to prior quarters third quarters and that’s simply as a result of our managing our capital we are not necessarily interested in growing significantly in this time period. And we chose to sell more of those loans originated then placing them in portfolio. But the broader reason I think is accurate. You will see in our investor presentation material that was posted last week that the purchase money origination volume became the largest driver of the origination volume. So, refinance activity is down significantly from what we’ve seen in the past, say four quarters or so and even longer if you go beyond that, but purchase money activity is coming back, it’s primarily conforming product, it’s FHA or it’s to the other GSCs (Ph), much of it might be REO-related with respect to other lenders disposing of their REO and foreclosures. And we’ve seen some interest, if you will by buyers in this environment which still has relatively low interest rates kind of it on a historical basis, if you will, and they’ve come in and they are -- I believe buying what they believe to be bargains.

[Tim Coffey:]

Okay. Can we then read into that home prices or start to stabilize?

[Craig Blunden:]

I don’t know, that’s too soon to rate. I think that certainly the buyers today thinks they are stabilizing. At this point though, I can’t say that we’ve seen any bottom in the home prices other than maybe in certain areas along the coast. And of course, our REO activities are pretty scattered across the state and our originations are scattered all over the state as well. So, I can’t say that, I agree totally with that statement.

[Donavon Ternes:]

I would only add that -- and agree with Craig, I don’t know that prices have hit the bottom. I do know, however that price visibility is evident. In other words, when we get a brokers opinion of value or we give an appraisal on a pending foreclosure soon to be REO and we end up with the property and then we go in and do what we need to do to make it insurable shape to sell it, we are not experiencing a large loss ultimately on the disposition of that REO. In fact, I think during the quarter we sold 25 REO and the loss experienced on all 25 was 133,000. So it suggests to me that price visibility is there, we know where the prices are, and that suggests that it is declining at a much slower pace than what we’ve seen because we’re able to price this stuff and move it out. And I think that’s also what buyers are seeing.

[Tim Coffey:]

Okay, that’s good color, thanks. And then can you talk about the classified loans? You had some big increases in substandard and also – just substandard. I was wondering what that was a result of.

[Craig Blunden:]

Well, a couple of things. If we talk about classifieds, that’s our broadest category and it includes what the regulators call criticized or special mention. It actually declined on a sequential quarter basis to 63 million. It primarily declined as the result of a construction loan participation of 7.7 million, which was paid in full in September. When we drill down off of the classified list and go into our non-performance, essentially where we’re seeing the non-performers is in the single-family portfolio, single-family category. That generated the largest increase on a sequential quarter basis. In fact, we saw construction loans go down on a sequential quarter basis with respect to non-performers. And I would like to add with respect to that construction, there is only one project, if you will, in the total volume of 10 that we’ve described. There are nine that are the construction lot loans tied up in litigation on our La Colonia or call it shallow project which we described two years ago. And in fact, in the REO category, the 14 undeveloped lots are also that La Colonia or call it shallow project that we described or took back a couple of years ago and put into litigation a couple of years ago. So, we have one single-family track, it’s an in-fill in the construction category, 17 total lots, 9 of those lots or homes have been sold and closed, 5 have been sold, I’m sorry, 3 are sold and in escrow with a remaining of 5 lot homes still to be sold and they are selling about one per month. So, we don’t expect that we’ll have any losses with respect to that construction loan. The multi-family, the three that I’ve just described in the news release, it is largely comprised of one large multi-family project of 3.9 million, we have been working with the courts and in fact we got the receiver in there probably about six weeks ago, four weeks ago, something of that nature, so the receiver is now collecting rents and we’re in the process for closing on that, we don’t expect that we’ll necessarily experience a loss on its disposition at least relative to the values that we currently have although ultimately the verdict is out until we actually dispose off it. And, then, literally, the remainder are single-family loans that are the result largely of the economic environment – real estate environment we find ourselves in.

[Donavon Ternes:]

Well, in additional economic environment. If you look at your single-family loans, it’s mainly loss of job by a number of our borrowers in this very soft economy.

[Tim Coffey:]

What was your outlook for loan growth next five quarters?

[Donavon Ternes:]

Next five quarters? Tim Coffey Well, whatever (inaudible) we’ll advertise that incidentally.

[Craig Blunden:]

Okay. Yeah. I think we suggested in the last couple of calls that we’re interested in maintaining our capital ratios, we’re interested in providing the provisions we need to deal with our non-performing loans and I think growth in this environment is not necessarily at the top of our list given the larger goal of making certain that we have sufficient capital to survive the economic environment for you. We believe we do, we believe that’s the case, we believe that we can do everything we need to with respect to our loan portfolio and providing those loss reserves we need, while still being marginally possible which is not a preferred place to be. But, on the other hand, we get through the environment. We see weaker players moved out of the environment. We come out stronger, where someone encourage with respect to our mortgage banking this quarter, I think it’s too soon to rate with respect to whether or not we can count on it quarter-in and quarter-out on a forward-looking basis, but having them as a net contributor to earnings is a positive thing for us. So, I don’t know that I would expect a great deal of growth over the next four quarters. Tim Coffey Okay, great. Those are all my questions. Thanks a lot.

[Craig Blunden:]

Thanks Tim. Operator (Operator Instructions). And we have no further questions in queue at this time. Please continue.

[Craig Blunden:]

Well, if there is no more questions, I’d like to thank everyone for joining us on our first quarter conference call and we look forward to talking to you next quarter. Thank you. Operator Ladies and gentlemen, today’s conference will be available for replay after 11 a.m. Pacific Time today through Tuesday November 4th at midnight. You may access the AT&T replay at any time by dialing 1-800-475-6701 and entering the access code 963505. That number again is 1-800-475-6701 entering the access code 963505. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.