Provident Financial Holdings Inc (PROV) 2004 Q4 法說會逐字稿

Welcome to the fourth quarter earnings release Provident conference call -- I apologize, Provident Financial Holdings fourth quarter earnings release call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chairman and CEO, Mr. Blunden, Please go ahead, sir.

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 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 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 they are made, and the Company assumes no obligation to update this information.

To begin with, thank you for participating in our call this morning. Regarding my remarks today, I assume that you have read yesterday's earnings release in which we detailed our financial results for the fourth quarter of our fiscal year ended June 30, 2004. Accordingly, I will not dwell on the specifics of the release, rather my remarks this morning will update you on our mortgage banking business activities and describe the improvements in our community banking business, which we believe have offset and will continue to offset in some measure a declining mortgage banking business.

First, our mortgage banking division originated $388 million of loans this quarter, which is 22 percent more than the $318 million of loans we originated during the quarter ended March 31, 2004, but down significantly from the same quarter last year when we originated $483 million in loans.

Of this total, $74 million or 19 percent were originated for our portfolio during the quarter, up slightly from the $71 million originated for our portfolio in the quarter ended March 31, 2004.

Also during the quarter our loan sale margin returned to normalized levels in comparison to the quarter ended March 31, 2004 when we implemented the SEC Staff Accounting Bulletin No. 105 which resulted in a one time adjustment. The loan sale margin was 154 basis points, up from 117 basis points in the quarter ended March 31, 2004, and up from the same quarter last year when the loan sale margin was 129 basis points. Our loan sale margin remains strong as a result of our successful efforts in generating high margin products versus slow margin products.

During the quarter 60 percent of loans originated for sale were high margin product, up from 49 percent in the quarter ended March 31, 2004, and up significantly from the same quarter last year when only 19 percent of loans originated for sale were high margin product. We have increased the FTE count in the mortgage banking division to 134 FTE's from 129 FTEs at March 31, 2004. Although the FTE count remains below the June 30, 2003 level when we employed 142 FTEs in the division. We remain committed to adjusting the FTE count sooner rather than later, consistent with loan origination volume changes in our mortgage banking division.

We remain cautious with respect to our mortgage banking business as a result of recent increases in interest rates, but we continue to be encouraged by the fundamental improvements that we're making in our community banking business. These advances are reflected in the solid growth for our interest earning assets, significant improvement in our net interest income, containment of our noninterest 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 the 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 an 11 percent increase in average interest earning assets and a 4 basis point increase in the net interest margin.

In the near term we intend to change the composition of our earning assets to reflect the higher percentage of loans at a lower percentage of investment securities. Also over time, 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 these composition changes in our earning assets and in our loan portfolio.

Noninterest expenses have been contained during the current quarter in comparison to last year. One measure, G&A to average assets declined to 2.28 percent this quarter from 2.34 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 transaction accounts which leads to lower interest expense at higher noninterest income. Transaction accounts have increased by $98 million this past year and now comprise 66 percent of total deposits, up from 61 percent last year. Deposit account fees increased to 454,000 this quarter, an 8 percent 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 116,669 shares of the Company's stock and the continuation of the cash dividend policy.

Also this quarter our Board of Directors approved a new 5 percent stock repurchase plan as a result of the early completion of the previous repurchase plan. We continue to believe that the favored use of capital is the prudent growth of the Company, but to the extent that we're unable to grow as quickly or as carefully as we envision, sound capital management strategies will continue to be employed.

Before I open the call to questions, I wish to advice you that we have posted a financial highlights presentation on our website this morning, which you can review at your convenience. We will now entertain any questions that you may have regarding our financial results. Thank you.

(OPERATOR INSTRUCTIONS). James Abbott with Friedman, Billings, Ramsey.

I was wondering if you could give us a sense as far as the loans that are coming on -- as far as the margin goes? I am looking for a little color as to what the direction there is. It was a little bit shorter than what I was expecting. Are the loan yields coming on at similar rates as to what the portfolio exists at? Was that the primary source of the problem, or at least of the linked quarter compression? Or is the funding cost increasing or a combination of the two I suppose is the answer. But if you could give us a little color as to where the biggest sensitivity is right now?

James, I will let Donovan answer that.

There are a couple of things with respect to the decline on a sequential quarter basis of our net interest margin. First and foremost, when we consider the new loans coming on our books this past quarter, those new loans were coming on at a lower rate than the average portfolio rate that are on our books.

Additionally, we had an acceleration again in loan prepayments; one of the reasons we saw mortgage banking volumes increase. But that also impacted our portfolio, so we had higher yielding loans pay off being replaced by lower yielding loans.

The second piece of the acceleration of loan prepayments are deferred costs -- deferred FAS 91 costs associated with loans that are paying off. And to the extent that a deferred cost is on the books and associated with a particular loan that pays off, it is accelerated through the income statement to take it off the book.

Deposit costs, I'm sure those numbers are in there. They're relatively flat. I would say, however though that in the month of June we did go out and advertise three-year, four-year and five-year CE rates, and actually had a good bit of activity in that area. Our thought process there is to lengthen the average lives of our deposits prior to any Fed action. And that also had a little impact. In fact, on a linked quarter basis I think our transaction account balances went to 66 percent of deposits from 67 percent of deposits at the March 31 quarter end.

Okay, I appreciate that. Since prepayments speed are slowing and we would expect, or at least they had been for the majority -- at least May and June anyway -- should we look forward to a margin somewhere closer to the -- last quarter it was close to 310. Is it that sensitive that we see that type of a rebound where it gets back to the 305 range perhaps? I know that you said that there is some dilution to the yield on the loans that is coming on. I just don't know how sensitive those deferred costs are?

We would expect to move above the 3 percent margin level. Whether or not we get to 309 again in the immediate future seems to me to be reaching a little bit, but I think certainly we can move above 3 percent.

The other component here are mortgage-backed securities that we have on our books. And indeed those prepayments speeds in April, May and June, although to a little lesser extent in June than April and May, were also running at a quicker pace than in the prior sequential quarter, or the March 31 quarter. And that also impacted us because we accelerated the premiums off the books to the extent that the prepayments were there. We would expect that those prepayments speeds would slow down as well, meaning our investment securities yield will also go up. So there's some sensitivity on the asset side with respect to that.

Great. And can you also update -- actually I haven't gone through your presentation on the Web site yet, so I apologize if it is in there, and it may be. But the interest rate sensitivity as rates rise, what is your outlook, or how sensitive are you to that as far as increase or decrease in net interest income or --?

We don't have that as part of the presentation on the Web site. That will be included in the 10-K filing. We are still a little bit liability sensitive. Our model suggest that if interest rates go up by 100 basis points, 200 basis point, or a rising rate market, if you will, that noninterest income will decline, albeit, at relatively low percentage levels. And again, that is provided management isn't doing anything in the interim.

To some degree it is going to be dependent upon what the Fed action is. We do expect that there is going to be a flattening of the yield curve. We have already seen it since the Fed's move in June. If they move again in August I expect that that will flatten again. But if they do this at a moderate pace, we have a much better chance of reacting. And it seems to me that the only reason the Fed would change its view of a moderate pace is if inflation get out of hand, or their view of inflation is that it has gotten out of hand.

(OPERATOR INSTRUCTIONS). Ross Haberman with Haberman Fund.

Craig, I'm sorry, I got on a little late. Excuse me if you addressed this question. Could you give us some color on the loan demand and your pipeline today and what is your expectation are over the next quarter or so in terms of loan demand?

Yes. At this point in time our loan demand is still very strong. I think we're fortunate in the area that we're located in, Ross. This area is still blooming. Sales are still high. Construction is still very strong and tracts are selling out quickly. And it is amazing even with this rising interest rate environment that we've had recently it hasn't seems to have affected anything except the refi business.

So now certainly volumes are down from the peaks that we had last year because of refi's, but loan demand is still very strong. And the margins are holding as well. Part of that is because the mix we're getting -- the loans we're looking for like all A (ph) in the first trust deed area, second trust deeds, those have kept, and in fact even increased, our margins on these products. So we're very pleased. And I guess the confusing part is when you look at some large lenders in the Company -- Washington Mutual's release makes you wonder about the profitability of mortgage banking. But I can tell you that --.

Yes, at least for them it was lousy.

It was terrible.

Horrible.

We can't really understand that because that is not what we're experiencing.

As an aside, in your opinion was it they just took some interest rate bet and just -- which went awry?

It appears from what we have read that what really is that they had too many systems from all of their acquisitions that weren't consolidated, number one. And that I don't think they knew what they were hedging. So I think that was a big problem. They just -- it was out of control it looks like. Because it just doesn't make sense to us because the margins are there. And if you're not making money now, it is kind of scary. So they've got -- and it looks like they're going to make some substantial changes from what I have read, which they need to do.

Have you made any sort of streamlining or overhead cuts -- cost cuts in anticipation of an eventual slowdown, or you would be premature to do that yet?

Actually we did early this year, and guess what, we were premature. And we've had to add back some individuals back in the mortgage banking. And in fact we did go over that in the first part of our conference call. We're very aware that when volume changes we will react quickly, but at this point we think it is premature.

And just one final question. What is the mix today in your volume of business between refi's and new purchase, and compare that to, say, a year ago at this time?

In the most recent period that we have, the refi's were about 42 percent. On the high side, say, a year before they were 61, 62 percent. But they have fallen off clearly.

Sure. But 42 is still a reasonable amount?

Yes. Where is that volume going to go six months from now difficult to tell one would think if interest rates are going up that some of the refi business continues to go away. On the other hand, it always seems like 20 or 30 percent of our production coming out of refinance, given the location that our loans are in, the propensity for borrowers to move or sell or prepay or do whatever.

And you know all the different loan products, Ross, that have been sold over the last couple of years, some of these deals were two year fixed rolling to adjustable, three year fixed rolling to adjustable, and some of those deals the people be nervous about going into a straight adjustable after that initial fixed interest period. And some of those will still refi, even though interest rates are not at the historical lows they were a year ago.

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

Well, if there are no further questions we would like to thank everyone for joining us today on our conference call. And we look forward to speaking with you again at the end of our next quarter. Thank you.

Thank you.

Ladies and gentlemen, this conference will be available for replay today after 1:30 PM Pacific through July 30th at midnight. You may access the AT&T Executive Replay Service at anytime by dialing 800-4 75-6701 and entering access code 737981. (OPERATOR INSTRUCTIONS).

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.