Provident Financial Holdings Inc (PROV) 2004 Q3 法說會逐字稿

Ladies and gentlemen, good afternoon, thank you for standing by. Welcome to the Provident Financial Holdings third quarter earnings release. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session. Instructions will be given at that time. If you need assistance during the conference, please press star followed by zero. As a reminder this conference call is being recorded. I will now turn the conference call over to your host, Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

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 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 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 is available from the earnings release that was distributed yesterday and from the Form 10-K for the year ended June 30th, 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. Regarding my remarks today I assume that you have read yesterday's earnings release in which we have detailed our financial results for the third quarter of our fiscal year ended June 30th, 2004. Accordingly, I will not dwell on the specifics of the release. Rather, I have tailored my remarks this morning to update you on our mortgage banking business activities and to describe the improvements in our community banking business, which we believe had offset and will continue to offset in some measure the declining mortgage banking business. First of all, our mortgage banking division originated $318 million of loans this quarter, which is 3% less than the $328 million in loans we originated during the quarter ended December 31, 2003. Of these loans, $71 million, or 22%, were originated from our portfolio during our quarter, down from $138 million or 42% originated for our portfolio in the quarter ended December 31, 2003.

This is important because the income from loans originated for our 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. Also during the quarter we implemented the SEC guidance described in the SEC staff accounting bulletin number 105, which does not allow for the recognition of servicing release premiums on commitments to extend credit on loans to be held for sale. Consequently, $837,000 of estimated servicing release premiums were excluded from income by the company. This income will be realized in future periods when the underlying loans are funded and sold. The loan sale margin also was impacted by the implementation of this guidance, and would have been 146 basis points rather than the 117 basis points described in in yesterday's earnings release. Despite the decline in mortgage banking volume from last year's third quarter, we're pleased that the volume is stabilized on a sequential quarter basis.

In addition, since the volume has stabilized we have not made further downward adjustments to the FTE count in the mortgage banking division, but remain committed to responding to changes in volumes sooner rather than later. We remain cautious with respect to our mortgage banking business, but we continue to be encouraged by the fundamental improvements that we're making in our community banking business. These advances are reflected in our solid growth in interest earning assets, significant improvement in our net interest income, containment of our non-interest expenses and continued growth in 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 significant volume of loan payoff. These growth efforts will continue in the near-term and we believe that our balance sheet growth will accelerate when loan payoffs decline.

Our net interest income has improved significantly during the current quarter in comparison to last year which is the result of a 13% increase in average interest earning assets and a 13 basis point increase in the 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've had a lot of success to date but will continue to work hard to accelerate these composition changes in our earning assets and in our loan portfolio. Non-interest expenses have been contained during the current quarter in comparison to last year. One measure, G & A to average assets, declined to 2.12% this quarter from 2.37% in the same quarter last year and from 2.31% for the quarter ended December 21st, 2003.

We remain confident that our continued efforts will yield additional opportunities to contain non-interest expenses, which will lead to greater efficiencies. We continue to perform very well with respect to growth of transaction accounts, which leads to lower interest expense and higher non-interest income. Transaction account balances have increased by $132 million this past year, and now comprise 67% of total deposits, up from 58% last year. Deposit account fees increased to $507,000 this quarter, a 16% increase from the same quarter last year. Finally, we will continue to deploy sound capital management strategies for the benefit of all shareholders. Those strategies this quarter included the repurchase of 25,000 shares of the company's stock and a continuation of the cash dividend policy. In the future, a favored use of capital with be the prudent growth of the company, but to the extent we're unable to grow as quickly or as carefully as we envision, sound capital management strategies will continue to be employed. I will now entertain any questions you may have regarding our financial results. Thank you. Barb?

Very good. [Caller Instructions] We have a question from the line of James Abbott from Friedman, Billings, Ramsey. Please go ahead.

Good morning.

Good morning, James.

I wanted to touch on a couple of things, one the expenses were a little bit better than I expected, in my model anyway, and I was wondering if that's a good run rate to go forward or if there's still-- I know that you just mentioned that there were no real staff reductions but, are there any other expenses that might go away that we should be aware of for modeling purposes? Is that a good run rate to go forward.

Well, we did have some reductions, staff expenses early in the quarter, in January; but then as volume increased, those expenses picked up. Certainly, the variable that always enters in is the amount of commission in mortgage banking and as that declines somewhat, you will certainly see those expenses decline.

You know, just a little further James, this is Donavon. I've looked at operating expenses and, in fact, have a slide on a presentation we'll be putting to our website at some point, probably next week, and operating expenses have been between $7 million and $7.2 million per quarter each of the last six quarters. So I expect that that's a pretty good run rate.

Okay. And I guess -- I would guess that the staff reductions helped to offset some of the normal FICA taxes and other seasonal expenses that come in, in the January, February, March months.

That's true; although, also what negatively impacts us in this quarter are the recurrence of some of the employment taxes that run through the company as a result of our higher income people, beginning a new calendar year. And so where they have maxed out on certain of those employment taxes, they then begin again January 1st.

Right. Exactly. That's what I was getting at is that's why -- that's why I think your results were a little bit better than expected but the staff reductions would have offset the -- you've got lower staff fees so you have--even though you have FICA taxes and 401k matching maybe and things like that, that come through, you don't have the same number of employees. So a little offset there.

That's correct; although, I would like to add one thing, and that is relative to mortgage banking, we did have, in January, a general reduction in that staffing. But recently, toward the end of March, we actually increased that staffing by 5 FTEs. Two of them were originators and are largely commission based, but whenever one adds originators, support staff also needs to increase and so three support staff were added as a result of those originators.

Okay.

I don't expect it to have a significant impact on our salary expense on a go-forward basis.

Okay. Maybe a one to two cent per share expense base or something like that, maybe? And then the other question I had was related to your interest rate sensitivity. In a rising rate environment, I don't know if you can comment on that, as to -- I know the GAAP analysis is not the most accurate, but, I don't know if you have some thoughts on how net interest income performs when we see 100 basis points of increase in rates?

Yeah, I can -- I can shed some color on that. I'm not going to give you exact numbers, because we essentially don't release them, but we are liability sensitive; although not by a big number, if you will. It is something that we're very cognizant of and, in fact, on the last page of the earnings release, you're going to see a breakdown of our federal home loan bank advances by maturity buckets.

Mm-hmm.

One thing to note with respect to that, in comparison to March 31st of last year, the over three years and out categories has increased by 54% to $213 million plus change in comparison to $139 million and change at March 31st of '03. And so it is something that we monitor on a monthly basis. We use an internal model as well as the OTS, or Office of Thrift Supervision, model which results we get on a quarterly basis. We compare them, and, know essentially we're cognizant of that. One other thing I want to point out with respect to federal home loan bank advances, this fiscal year, for the three quarters through March 31st, we have increased FHLB advances of a long-term nature by $70 million; $10 million in the first quarter, $25 million in the second quarter, and $35 million this past quarter. Each of those advances are either three, five, or seven years in term. And it's something that we used to essentially offset our interest rate risk.

Okay. Okay. I think that basically answers a lot of the questions that I had. What percentage, again, did you say the adjustable rate -- or the alt-A loans, for lack of a better term I guess, were as a percentage of originations? I think you provided that in your powerpoint presentation.

Yeah, we provide that. That has gone up significantly this last quarter in comparison to prior quarters, because it's something we focus on. Right now, it's running about 50/50. About 50% low margin product, and about 50% high margin product, which is the seconds and the alt-A product line. And that's about, at least in volume terms, just about double what we were running last sequential quarter and the quarter prior to that.

Great! Great job. All right, thanks very much.

Thanks, James.

Thank you. Any additional questions or comments, press star one at this time. And there are no further questions at this time. Please continue.

Well, I'm going to turn it back to Craig to bid you all farewell. Last chance for questions.

All right. Well, that ends our conference call. I appreciate all of your participation and look forward to speaking with you again in the next quarter.

Ladies and gentlemen, this conference is available for replay. It begins today at 1:30 p.m. Pacific time through April 30th at midnight, by dialing 1-800-475-6701 and the access code 727411. The number again is 1-800-475-6701, and the access code 727411. That concludes your conference for today. We thank you for your participation and using AT&T Executive Teleconference. You may now disconnect.