Provident Financial Holdings Inc (PROV) 2004 Q1 法說會逐字稿

Ladies and gentleman, welcome to the first 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. Instructions will be given at that time. If you should require assistance during the call, please press "star" and then "zero". As a reminder, this conference is being recorded, and I am turning the call over our host, Chairman Craig Blunden, please go ahead.

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 Financial Officer.

Before we begin, we have a brief administrative item to mention. Our presentation today discusses the company's business outlook and will include forward-looking statement. 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 other forward-looking statements in the question and answer period following management's discussion. 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 is available from the earnings release that was distributed earlier this morning and from the Form-10K of the year ended June 30, 2003. 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 dialing in this morning. In my remarks today, I assume that all of you have read this morning's earnings release in which we detail our financial results for the first quarter of our fiscal year ending June 30, 2004. Accordingly, I will not dwell on the specifics of the release. Rather, I have tailored my remarks this morning to address the fact that the extended refinance cycle, which we have enjoyed in recent quarters appears to have come to an end. In this regard, many of our shareholders are no doubt curious as to how this may affect our future financial performance.

Therefore, I will describe the actions we are currently taking to transition from record-breaking mortgage banking volume to more normalized mortgage banking volume. Also, I will describe the improvements in our community banking business, which we believe will offset in some measure the declining mortgage banking business.

First of all, our mortgage banking division originated $469 million of loans this quarter. Only 3% less than the quarter ended June 06/30/2003 when we originated $483 million of loans. On the surface, this does not seem to be an appreciable decline. However, 44% of this quarter's origination volume occurred in July with lower origination volumes in August and September. Therefore, if indeed the refinance cycle has come to an end, July was more likely than our peak months in terms of mortgage banking origination volume during the cycle. Given those few, we have begun to respond accordingly.

As of September 30, the FTB account in our mortgage banking division has been trimmed by 4% from the peak in July, resulting in a 6% decline in our fixed salary expense. Additionally, the mortgage banking overtime and temporary staffing expense has been cut back by 41% from the July peak, which we believe can be reduced even further. These actions are the first in the series of actions we are implementing to adjust our mortgage banking operating expenses to, or origination volumes as they occur.

This is a dynamic process, which we have just begun. We are committed to responding sooner rather than later to these developments. Although we are cautious with respect to our mortgage banking business, we are very encouraged by the fundamental improvements that we continue to make in our community banking business. These efforts will counteract the earnings pressure we face as a result of the anticipated decline in mortgage banking.

We have experienced solid growth and interest earning assets. We have significantly improved our net interest income, we have contained non-interest expenses, and we continue to grow our transaction account base. We have the capacity to grow the balance sheet, and we have demonstrated our ability to do so during the past 12 months despite the significant volume of loan payoff. These loan growth efforts will continue in the near term, and in fact, we believe our balance sheet growth will accelerate when loan payoff declines.

Our net interest income has improved significantly in comparison to last year, the result of a 21% increase in average earning assets. In the near term, we intend to change the compensation of our earning assets to reflect a higher percentage of loans and a lower percentage of investment security.

Also, over time, we intend to change the composition of our loan portfolio to reflect a higher percentage of preferred loans and a lower percentage of single-family loans. We have had modest success to date, but will continue to work hard to accelerate the change in the composition of earning assets and the composition of our loan portfolio. Non-interest expenses have been contained in comparison to last year, if we exclude those variable expenses, resulting from increase mortgage banking origination volume.

I remain confident that our continued efforts will yield the additional opportunities to contain non-interest expenses, which will lead to greater efficiencies. We continue to perform very well with respect to the growth of transaction accounts, which leads to lower interest expense and higher non-interest income. Transaction account balance has increased by $164 million this past year and now comprises of 65% of total deposits, up from 50% last year.

Finally, we will continue to deploy sound capital management strategies for the benefit of all shareholders, those strategies this quarter included the doubling of our cash dividend, and a repurchase of common stock. In the future, the favorite use of capital will be the prudent growth of the company, but to the extent we are unable to grow as quickly or as carefully as we ambition, sound capital management strategy will continue to be employed. We will now entertain any questions you may have regarding our financial results. Thank you.

Thank you. Ladies and gentlemen. (Operator instructions).

And our first question comes from the line of James Haddow from FBR. Please go ahead.

Good morning gentlemen.

Good morning James.

Hi, James.

I wondered if you could touch on the loans that you originated for sale. I notice that they obviously declined fairly substantially late quarter, but your loans helped, the portfolio went up. I wonder if you could go over some of the characteristics of the different types of loans that you are seeing that are for sale. In the past, you had talked about originating more all day product or other types of loans that have a higher gain on sale margin, and that you were selling those. Are those types of loans that you are now keeping? Can you give us some color as to what was going on there?

James, generally, we have been increasing those types of loans that we discussed in the past, all A and especially second trustee loans. Those do help increase the returns, however, in the total quarter, when you look at the month of July, there was a substantial number of the 30-year fixed rate type loans where there is a lower gain on sale from those, so what we look for going forward is a lot less because of the reduced refinance activity, a lot less than the 30-year fixed rate, lower gain on sale categories and continuing to increase our performance in those second trustees, and all A products.

Another thing, James, this is Donavon, you did note, and I can add a little bit of color with respect to numbers that we are putting more of the loans out of the mortgage division into our portfolio. If I go back just over the last few quarters, and obviously, you see that number for last year at this time, but just over the last three quarters, the third quarter of last year, $81 million went in the portfolio, the fourth quarter of last year, $93 million went into portfolio, and during this quarter, $126 million went into the portfolio.

And the analysis there is essentially that the net interest income that we will derive over time from these portfolio loans and building our balance sheet, if you will, will outstrip the decrease in gain on sale that we receive as a result of putting them in portfolio versus selling those loans. You did see that our net interest margins are low-sale margin that declined to 119 basis points this quarter from what I believe and have said in the past 143 basis points last year, which I believe is unsustainable over time.

And that is down just a little bit from the fourth quarter where our loan sale margin was 129 basis points. You know, those levels of loan sale margin, I believe are sustainable, dependent upon what we actually do with our product mix. And as Craig reiterated, we are interested in making certain that those are higher loan sale margin products.

OK. And that's sort of exactly what I was getting at, actually, is on the stuff that is going into the portfolio. Is that stuff that -- what types of loans are you adding to your portfolio -- I guess.

Well, mainly, 3-1 and 5-1 hybrids, James.

That's no different from what you were doing in the past.

No - No, we have taken a few seconds, but minuscule number. So, essentially, if I were to characterize it, maybe I' am summing this up correctly, hopefully anyway that you were able to do more 3-1's than 5-1's this quarter than you have in the past, and as a result your portfolio loans went up and the stuff that was sold declined substantially.

Right. Again because of the change in the mix that was coming in from the street as the fixed rates are going away, the adjustables pick up some of the slack.

OK. I just wanted to make sure. -- that's what I thought was happening, but I wanted to make sure. -- One of the other questions that I had was on the gain on sale -- lot of your competitors have had challenges anyway, with the gain on sale spreads. Essentially, it seems to be in some cases that there was just too much volume coming out of the mortgage banking operations across the nation, and the buyers were willing -- or less willing to pay for those loans than they have in the past, and so the gain on sales -- the anticipated gain on sale margin was higher than what was actually realized at the end of the day. Did you see any of that in the quarter?

Well, that's partly to -- true from the standpoint of rates having gone up so dramatically in the quarter versus where they were. I frankly chalk it more up to volatility issues and the cost of hedging that portfolio, if you will. As volatility increases, the hedging of that portfolio, the cost associated with hedging that portfolio will increase this and that essentially trims our margin as well.

OK. And I did notice that you had the adverse impact with (inaudible) 133

Correct. Right, which theoretically, James, over time, is supposed to balance out unfortunately, you know, you -- it does affect income swings over time. And as it attempts, I guess to balance out. At least that's the theory, right, Donovan.

Yes -- .

OK. Well, I'll hop off for now and let anybody else ask questions -- and I'll follow up if nobody else, answers the other questions that I have. Thanks.

Great.

Thank you.

Our next question comes from the line of Chad Nestor from Force Capital (ph). Please go ahead.

Hi gentlemen. A quick question -- on the gain of sale on the mortgage securities. I know that you said that the loan sale margin was only down about 10 basis points. You also said that the origination volume was down by a very small amount, too, but notice that your gain on sale was down by I think it is about 40% in the quarter sequentially. Can you sort of reconcile that for me, given the sort of more tempered drop-offs in the margin and in the origination volume?

Well, two things. Last quarter, the loan sale margin was 129 basis points. This quarter it was 119 basis points. Last quarter, we essentially originated $390 million for sale. This quarter, we originated $342 million for sale. The combination of those two factors plus the fact that the volatility increased by such a large degree made our hedges a little less perfect, if you will, and the cost of them went up, driving that number down.

OK. On a different note, when do you guys did you notice that the niche margin was down, I think 3 basis points sequentially. When do you think that will stabilize and even trend upwards?

I would argue that it's pretty stable right now. If we look at it year-over-year right now, we are down 6 basis points, we are down 3 basis points sequentially. That to me, is a pretty small change over time, given what we have seen some of our competitors realize with respect to that number. I would say, however, that the net interest margin as a percentage is low relative to our competitors, and we're going to have to work on that over time largely through the composition of the balance sheet.

Right. All right. Great guys. Thanks --and also-- encouraged by continued capital management decisions over there. It's great to see. Thanks very much.

Thank you.

Our next question is from the line of Jessica Jones from Endicott Group. Please go ahead.

Good morning. I just have one quick question for up. You mentioned in the text of the release here it mentions that the average balance of your FHLB advances increased during the quarter. But then, when I'm looking -- or it increased from last year, but then when I'm looking on the balance sheet, it appears that the borrowings went down. I -- just wondered if could you talk about what you are doing with your borrowings?

Yes. What essentially happens for the quarter, and particularly look at -- if you look at the quarter end, the quarter end number has declined significantly in comparison to last year, but last year at this time, we had $63 million of overnight advances on the balance sheet. At quarter end, this year, we had zero overnight advances on the balance sheet. During the quarter, we went essentially from being a net borrower overnight -- to essentially being at flat.

I mean, we would sell a little bit of fed funds, 2-$3 million a night versus borrowing 2 or $3 million of advances overnight. That's largely a function of what has occurred with respect to what we call our warehouse line or essentially our loans held for sale or loans receivable number. You will note that in the release, if we look at the balance sheet, you're going to find that just from June, the receivable from sale of loans went down to $55 million at the end of September from $115 million essentially at the end of June, and our loans held for sale were roughly flat.

So, until we get back in a position of being a net borrower, essentially the safety valve was the federal home loan bank advances. Additionally though, look at our deposits. We have been increasing our deposits line primarily in the form of transaction accounts that is generating more funding sources as well. Did that clear up your comment?

Yes. It does. Thank you very much.

Good.

Our next question comes from the line of Martin Gee (ph) from FTN, Midwest Research. Please go ahead.

Good morning.

Good morning.

I just wonder, because I'm late on the call if you guys mentioned anything about the share repurchase program?

Well, we mentioned it in our text, our prepared text. Essentially where we're at is our preferred use of capital is the growth of the bank, the growth of the balance sheet. However, we're not doing so in a fashion that we believe is taking undue risks.

And so to the extent that we are unable to grow that balance sheet or use our capital, in what we believe to be an efficient manner. We will obviously continue to look at repurchasing our shares of stock. In practice, last quarter, we doubled our cash dividends, so we are concerned with that capital ratio and those excess funds, if you will, and are looking at ways -- and we'll continue to do so, to turn them back to shareholders.

You probably noticed that we had authorized a new share buy-back program in August, and through September had already repurchased over $247,000 shares.

OK. And my next question is you mentioned in your release of the total originations for this quarter is $176 million. I wonder how much of that is originated versus purchased.

We don't break out the number with respect to the purchase, but we do at the end of our press release, our earnings release describe the composition of the balance sheet, if you will, including loans held for investment. Loans held for investment at the end of the period were roughly $788 million. $48 million of that was purchased from others, and those others are still -- servicing, if you will. That's up a little bit about $12 million from last year.

That's a year-to-year number there.

OK. And my last question is, the loan provision as a percentage, to the NPL ratio is slightly decreased. Just wondering going forward if you guys will -- if at all if you will pack that ratio to a certain level or because for this past quarter, you don't have any provisions.

Well, there was no reason I guess to provide. When you look at what our non-accrual or non-performings are, it is a negligible number, in spite of the fact that our loan portfolio on a year-over-year basis increased significantly, we still believe that given the performance of the portfolio, our -- old provision is adequate, relative to that credit risk associated.

Yes. I don't think that we have a number in mind. We don't. We just go through an analysis of the portfolio and look at all of the other variable factors to make sure that we have an adequate reserve. And as you may be aware, certainly, our external audit firms would not be pleased to see us just pick a number without being able to prove it.

All right. Thank you very much.

Thank you.

Thank you.

Once again, ladies and gentlemen, if do you wish to ask a question, please press "star" and then "one" at this time. And we have a question from the line of James Haddow from FBR. Please go ahead.

Let me circle back. Couple of other things, I wonder if could you talk about the pipeline of loans basically looking for some information on the loans that you anticipate originating next quarter, whether that's stronger or Walker. It ---- know that you talked about the fact that July was very strong and the other months were weaker. Do we anticipate that the loans sold next quarter will be a substantial decline again, or can you give us any help on that?

James, are you looking specifically at single family, or you're looking overall?

Looking at just the mortgage -- actually, specifically the line item of loans originated for sale.

OK.

Well, I think I would -- it would be foolhardy of me to suggest that our loans originated for sale this quarter in comparison to last quarter will increase. It seems to me that the recent psyche -- the refinance cycle has come to an end and we will experience a decline in the mortgage banking origination volume. From their very elevated levels. I think it's one thing to determine whether or not those levels are going to go down on an absolute basis, which I believe they, are and quite another to determine whether or not those levels on a historical basis are very low.

What we are finding is there's still a great deal of activity. The purchase money market in southern California is very good. The purchase money market in the inland empire specifically is even better. Those are our markets. We would anticipate that we would still have on a historical basis relatively strong funding volumes without getting too specific, we are seeing that our loan applications are declining, applications ultimately result in fundings, and therefore, I expect our funding volumes will go down, but, you know it's unclear yet how far they will go down.

James, it appears to me at this point that in the past two months and probably through this month that it comes down and has leveled out to a level that we were doing, you know, about a year ago. When business was still considered pretty good. So, in other words, sure, they have fallen off the absolute highs that we have had, but we would consider the volumes that we did in August, September and looking at what we'll do this month to be good, strong volumes.

It's just, you know -- you cannot -- you cannot replicate the absolute highs that we have had a quarter ago. So, we're spending a lot of time right now streamlining what we do, looking for, you know, effective ways to create efficiencies, because guess what our people haven't had time to breathe hardly in the past year or so. We're -- you know, we're pressing on realtors and builders, and I think that Donovan made a comment before in prior talks that we have had that we always had a lower percentage of Refi's to the total loan origination business than the industry in general, the numbers that we see from MDA (ph). That's because even during this Refi boom we focused our targets onto the realtors and builders.

OK.

If that helps.

It does. Quick math off numbers that you gave earlier tells me that around $260 million of the originations during the quarter occurred during August and September. Is that a stable rate, then? I mean as far as obviously the July was an anomaly, and you mentioned that. Is that -- well, would that be more of a -- if I sort of annualized that number, is that something that you would target as a goal?

I think that might be still a little high, but I think north of $100 million is doable numbers from the numbers we're seeing today. That could change next week, given what interest rates do, and so it's very hard to -- you know, essentially take those numbers, but you're right, given the math that we describe with 40%, 44% of the volume occurring in July, that leaves about $130 million a month on about $130 million a month on average for August and September and that means -- that might be a little bit higher, but not too much higher than what we would expect.

The other issue, I think this is because the real estate market is so strong, certainly, the ARM. market is taking off again, we know -- we're known as an ARM. lender. We used to be known as an ARM. lender before the Refi boom, maybe not to the extent of a world Savings, but our customers know that we do ARM.'s and we have either some places in the portfolio for them and we also have a range -- we have arranged a secondary market conduit to sell those at a reasonable profit margin.

OK.

Great.

Great.

Couple of other quick housekeeping ticks. Premium amortization increased this quarter at all? That's a topic --with respect to the mortgage mortgage-backed securities?

Yes. Yes. The answer is yes, although in September, it came down a little bit and we are anticipating in October that it will come down more.

I don't know if you are able to disclose it or not, but do you have the increase in the quarter which would have impacted your margin?

No, I don't have it, and we frankly don't disclose it.

OK. Then, I guess one of the other questions on another topic was the share repurchases -- was close to $7.5 million spent there during the quarter. Net income was $3.6 million. Obviously, you dipped into the capital level a little bit there which is understandable given the equity asset ratio. Do you have a sense, or can you give us a sense as to where the -- where you'd like to have that equity assess ratio fall to?

Now that the liquidity needs of the mortgage banking seem to be going away?

Are you looking at the gross number?

On the balance sheet, the equity tangible asset ratios, it's higher than we would like to see it, James, in the order that we talked about earlier, we would certainly like to grow in it, but as we're not, we'll certainly could the other management techniques, certainly more share repurchases. We have them authorized even though we have doing a big slug with the last one, they're not hard to get approved.

OK.

Of course, dividend, we have been increasing the dividend payment, which seems to be certainly more popular today than it was if you talked about it a year ago.

Sure. But I'm just -- I guess what I'm getting at is it probably would be aggressive to model the same repurchase level in the next several quarter as what you did this quarter. I didn't know if you had a sense as to how strong that repurchase activity would be going forward.

I agree it might be aggressive to model the same level, but on the other hand, I think that we're convinced that capital management is something that we need to be cognizant of, and we'll continue to be aggressive in that regard. You know, we're -- it's going in the right direction. I look at last year quarter end. We were at 9.2% on a pure capital to assets at the holding company.

This quarter we're at 8.8%. So, the direction of that ratio is going in the right direction. You know, we prefer to grow into it versus repurchasing. I think that adds more -- well, we know that adds more to earnings per share, but that --you know, this quarter, actually the reverse was true. Our capital repurchase actually allowed us to show an increase in our earnings per share.

Sure.

You know, James, the other thing is that the difficult thing is we kept thinking that low prepayments would slow down, and guess what, they didn't, this past year, which affected the amount of growth that we had because we certainly were putting on substantially increased volumes in loans.

Yes.

So, there's always that --you know, that aspect to the capital level.

Yes.

The answer to your question, we would like to see it lower than it is.

Right. OK.

(inaudible) a number. Yes, we'd like to see it under 8, certainly.

OK. And then also, I'm sorry, I have so many questions. The core deposits were a very strong number. I was just wondering on that front, was there some marketing activity during the quarter that prompted that, just absolutely phenomenal growth in savings accounts. Anything that took place there, or is it maybe a premium rate of the market that would have attracted that, and are you lowering that? Can you give us a sense there?

We have had a couple of things happen. We have had some marketing specials for that accounts Donovan talked about. We opened a new office and ran some specials in that area for that new orange crest office. And honestly, that office in the short time it's been open far surpassed our performance in both Temecula and Corona, which surprised us. But, we did run a rate special for that office, and I think that helps quite a bit, and I don't know if there's -- and of course we have had a good money market rate, although I can't say it's higher than others in our market place.

It's not hugely higher. And in fact, what we're finding with respect to the money market activities and specials that we're running, we are not only gaining the money market account but we have a relatively strong cross-sell ratio in picking up typically a checking account or the like with respect to those depositors. I guess if you're asking whether or not we can drive our cost of funds lower or the cost of deposits which make it more specific it's going to be very difficult to do, because we're kind of at the point where I think we'll get depositor uprising if we lower the rates anymore.

I wonder -- I have depositors asking me when they're going to have to pay to keep money.

James Haddow That's what I feel like with my money, actually.

I'm sure you did.

It's going to be difficult to lower the cost of funding, if you will, from the standpoint of lower costs of deposits.

OK. All right. Thanks very much.

Thank you.

Thank you. And at this time, I'm showing no further questions in the phone participants.

All right. Well, I want to thank everyone for participating in our conference call today. And at that, I guess we'll adjourn our call. Thank you.

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