Provident Financial Holdings Inc (PROV) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Provident Financial Holdings second-quarter earnings release conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to our host, Chairman and CEO of Provident Financial Holdings, Mr. 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 Donovan 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 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 may also 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 is available from the earnings release that was distributed yesterday and from the Form 10-K for the year ended June 30, 2003. 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 dialing in this morning. Regarding my remarks today, I assume that you have read yesterday's earnings release in which we detailed our finance results for the second quarter of our fiscal year ending June 30th, 2004. Accordingly, I will not dwell on specifics of the release; rather I have tailored my remarks this morning to update on the actions we have taken to transition from record-breaking Mortgage Banking volumes to more normalized Mortgage Banking volumes. Also I will describe the improvements in our community banking business, which we believe have offset and will continue to offset in some measure the declining Mortgage Banking business.

First of all, our mortgage banking division originated $330 million of loans this quarter, 30 percent less than the quarter ended September 30th, 2003 when we originated $469 million in loans.

Also worth noting, $138 million or 42 percent of those loans originated by the division this quarter were originated for our portfolio, up from $126 million or 27 percent in the quarter ended September 30, 2003. This is important because the income from loans originated for portfolio is recognized over time in the form of loan interest income versus immediate income from loans originated for sale, which is recognized in the form of gain on sale. It can take from five months to 11 months for loan interest income to replicate the gain on sale income, depending upon the funding cost associated withholding the loan in the portfolio and the fluctuating market price for salable loans.

Over time, given our current strategy and current market conditions, we believe that this is a prudent practice. However, we are foregoing a certain amount of current earnings for future earnings.

Given the lower Mortgage Banking volume, we continue to respond appropriately. Currently the FTE count in our mortgage banking division has been trimmed to 123 FTEs, a 14 percent decline from our peak in July when we employed 143 FTEs in the division. The majority of the reductions were made in support staff, which have been reduced to 88 FTEs from 106 FTEs in July. This has resulted in a 12 percent decline in our fixed salary expense, and the division's over time and temporary staffing expense has been cut back by 65 percent from the July peak. This is a dynamic process which we will continue to monitor. We are committed to responding sooner rather than later to lower Mortgage Banking volumes.

Although we remain cautious with respect to our Mortgage Banking business, we continue to be encouraged by the fundamental improvements we are making in our community banking business. We have experienced solid growth in 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 twelve months despite the significant volume of loan payoffs.

These loan growth efforts will continue in the near-term, and in fact, we believe our balance sheet growth will accelerate when loan payouts decline. Our net interest income has improved significantly in comparison to last year, the result of an 11 percent increase in average interest-earning assets and a 2 basis point increase in net interest margin. In the near term, we intend to change the composition of our earning assets to reflect a higher percentage of loans and a lower percentage of investment securities.

Also over time and subject to loan demand, 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 we will continue to work hard to accelerate the change in the composition of earning assets and the composition of our loan portfolio.

Noninterest expenses have been contained in comparison to last year. One measure, G&A to average assets, declined 2.31 percent this quarter from 2.47 percent in the same quarter last year. We remain confident that our continued efforts will yield additional opportunities to contain noninterest expenses, which will lead to greater efficiencies. We continue to perform very well with respect to the growth of the transaction account, which leads to lower interest expense and higher noninterest income.

Transaction account balances increased by $173 million this past year and now comprise 67 percent of total deposits, up from 54 percent last year. Deposit accounts fees increased to $504,000 this quarter, a 17 percent increase from the same quarter last year. Finally, we will continue to deploy sound capital management strategies for the benefit of all shareholders. The strategies this quarter included the announcement of a 3-for-2 stock split and a 50 percent increase of our cash dividend with the additional shares to be distributed on February 2nd and the cash dividend to be distributed on February 6th. 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 carefully as we envision, sound capital management strategies will continue to be deployed.

We will now entertain any questions that you may have regarding our financial results.

(OPERATOR INSTRUCTIONS). James Abbott, FBR.

Good morning. Good quarter. It was nice to see some really strong core deposit growth.

Thanks, James.

I guess my questions are on a couple of items, and then I will jump off and let others ask and then maybe circle back if nobody else asks them.

The first one was the gain on sale margin increased pretty nicely, and I was wondering if you could give us a sense as to if the types of loans that were sold, the mix changed there a little bit which would have helped that if you sold more multi (ph) or jumbos or whether the case may have been, if you could give us some color on that? And then a follow-up on that.

This is Donovan. A couple of things happened, and I think you are describing the gain on sale margin increasing on a sequential quarter basis because it has actually declined a little bit from last year's quarter.

Whenever there is a great deal of volatility in the market, which we experienced in the first quarter of this year, because rates were jumping all over the place, our hedging costs essentially go up and the market is less efficient as it relates to those loans that we are generating for sale or even with respect to the loan commitments that we get up to be able to sell those loans. That is a large reason that the gain on sale margin increased this quarter in comparison to last quarter on a sequential basis.

Additionally, we are seeing a greater percentage of our high profit margins loans this quarter in comparison to last quarter. And, indeed, July, I believe, of 2003, the first month of the quarter, there was a slug (ph) of single-family fixed-rate conforming type product as kind of a last breath of the refinance market, which is our lowest margin product. That is essentially what you are seeing between the two.

James, really what happens is as refis wound down quickly, one of the biggest components of our loan sale products were thirty-year fixed-rate loans, which is the lowest profitable product. Those have wound down considerably as the total percentage of the loans that we are selling.

Okay. I guess as the follow-up question, and that is true on the conforming margins, did you -- a lot of lenders or lot of mortgage bankers have seen a lot of pressure on their conforming product margins. Did you see much of that, or -- I am trying to get a sense of whether it is a market issue or if it is an operational issue or what?

Yes, we have seen pressures on that. Fortunately, though, we have less of that as a total of what we are originating. Number two and number three -- I am sorry -- number two, we are actually getting more of the alternate products that have better margins, especially second trustees. And we have been focused on advertising and originating more second trustee loans because of the increased value on that product.

Okay. Then also if you could -- I do not know if you would like to comment on what you are conforming wholesale margin was for the quarter or roughly, was it less than 25 basis points?

No. We did not experience less than 25 basis points in that conforming fixed-rate margin. I guess the way I would comment is that it is less than 100 basis points, but for competitive reasons, I really don't want to describe what the margin is.

Okay. Well, I am sure you will when one of the big players out there announced they are less than 10 basis points.

Honestly we were shocked at that number.

Yes. Yes, many people were. The other question is -- I have forgotten and maybe you can remind us -- what percentage of wholesale conforming you do as opposed to retail conforming on an average maybe over the last two or three months? Can you give us a sense?

I can give you some color on total wholesale versus retail. I do not have it broken down by conforming. Wholesale has been running about 60 or 65 percent of our total production volume. Retail then obviously is the difference.

Okay. All right. Well, I am going to jump off for a second and let somebody else ask.

(OPERATOR INSTRUCTIONS). Jessica Jones, Endicott Group.

I just wanted to ask quickly about the borrowings. Those looked like those jumped around quite a bit from the last quarter, and I was wondering if you could talk about what caused that?

Jessica, the Federal Home Loan Bank advances?

Yes.

Okay, I am going to try to a wide number out. I think we increased our advances in comparison on a sequential quarter basis. A large part of that is overnight advances, and essentially we were just getting ourselves back into a position of funding our short-term assets. Actually we set out some targets for ourselves with respect to what percentage of our assets should be funded by advancements versus retail deposits, if you will, or deposits in general. But those aren't hard and fast, and to the extent that our deposit growth exceeds our business plan that is the preferred avenue for funding. And so our advances will move up and down relative to what our needs are.

Were you asking also about the cost or just the amount?

I was just interested in the amount, but you can talk about the cost, too. Are you locking in any low-term funding? Is that part of it as well? (inaudible)

Yes. In fact, you can see that on the earnings release. It is on the last page of the earnings release. We describe our borrowings schedule from one period to the next. In this case, December 31st of '03 versus December 31st of '02 on an ending balance basis if you will.

And you are going to see in there that for instance in the over five-year category on that schedule we have increased our borrowings a debt. The four to five-year category, we have increased our borrowings a bit in comparison to last year. Three to four years we have increased in comparison to last year, two years to three -- so we are cognizant of where interest rates are, and we are using the advances essentially as our hedge, if you will, for rising interest rates.

We also had some higher rate advances that we -- finally came due when we paid off in December.

Yes. There were 14 million, a bit over 14 million of advances in December that were paid off at maturity. And then in January, the $4 million that you see in the six months or less category at December 31st of '03, that $4 million has come due and has been repaid.

Great. Thank you.

James Abbott, FBR.

Actually on the 14 million payoff in December, that is probably not part of the numbers as far as the margin and so forth. Do you recall what the coupon was on that?

They were north of 550, south of 6 percent. And you are right, the impact was very little this quarter because they came up in December, and so they were with us for the bulk of the quarter. We will realize that benefit on a go forward basis.

Okay. Great. The other follow-up question I had was related to the staff cuts that you mentioned, and I do appreciate the breakdown, especially of the support staff so we can see where that trend is. It is good to see that depth. Were there any cuts that were in December that were not baked into the expense number too much?

No. In fact, we executed this the first part of January, the bulk of that activity. We had a few attrition issues in the first six months of this year if you will, and we did a few things, but the bulk of what we did occurred the first part of January.

Okay -- I don't know -- are we going to see some severance cost, so maybe expenses are flat. I am trying to get a sense as to what your near-term expenses might do? I do not know if they will go down as a result of the cuts, or if they are going to go up because of the severance cost near-term and then go down over the long-term. Do you have color on that?

I had not quantified it, but we do have a standard severance program obviously whenever we organize a business if you will, and those costs will be realized in January essentially or this current quarter. And, frankly, I don't know what those costs are relative to what we will be saving for the quarter as a result of those declines in staffing.

One thing I would note, we did break down in the earnings release that our compensation costs in Mortgage Banking went down this quarter in comparison to last year's quarter. That was largely a result of the reduced funding volumes. But on a go forward basis, depending upon what our funding volumes are, I would expect that we are going to have some savings in compensation expense.

One thing we are seeing right now, starting really in the second week of this month, is a strong increase in applications again because of the dip in mortgage rates. It may be very temporary, but we are seeing a significant increase in mortgage applications.

Okay. Mortgage bankers took a nice little run when the Wednesday number came out. And then finally on the commercial side of the balance sheet, obviously you have done very well on the commercial or core grow deposit growth. I was wondering if you could touch on how many commercial lenders do you have and how many have you added within the last six months maybe, and maybe how many you expect to add or how many you would like to add -- let's put it that way -- over the next year maybe?

We have got a couple of groups that would kind of be classified there. We have what we call our business banking unit. That unit is in transition right now. We are doing a few things there, and we do expect that we will look for opportunities to expand the unit. But we are doing so carefully, and that is really a small part of the entire balance sheet. I think outstandings in that unit is $18 million. So that is something that we will address over time.

But another group of the bank is the group we call our major loan group, which essentially generates commercial real estate, multi-family real estate, construction loans and the like. We have increased originators in that area, but I have to tell you it is very difficult to find originators in that arena in Southern California since it is a very competitive business.

We have increased a few. We would like to increase perhaps a few more. On the other hand, we want to make certain that the people we have put on board are really producers, and it does not seem like producers are leaving the companies that they are currently with.

Okay. Thanks for the color, and I think that does it for me.

(OPERATOR INSTRUCTIONS). Gentlemen, there are no further questions. Please continue.

All right. Well, I appreciate everyone joining us on this conference call, and if they are no more questions, then we will be adjourned. Thank you again.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 1:30 PM today Pacific time through Friday, January 30th at 12 midnight. You may access the AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 and entering the access code of 716650. (Repeats number).

That does conclude our conference for today. You may hang up now at this time. Thank you.