Provident Financial Holdings Inc (PROV) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Provident Financial Holdings first quarter earnings release conference call. At this time, all participants are in a listen-only mode and later, we will conduct a question-and-answer session with instructions to be given at that time. If anyone should require assistance during the conference, please depress star, then zero. As a reminder, this conference is being recorded. I would now hike to turn the conference over to our Chairman and CEO, 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 Donavon Ternes, our Chief Financial Officer. Before we begin, I 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, 2004. 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 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 first quarter of our fiscal year ending June 30, 2005.

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.

First, our mortgage banking division originated $436 million of loans this quarter, which is 12% more than the $388 million of loans we originated during the quarter-ended June 30, 2004, but down slightly from the same quarter last year, when we originated $469 million of loan.

Of this total, $145 million, or 33%, was originated for our portfolio during the quarter, up from $74 million originated for our portfolio in the quarter-ended June 30, 2004.

The loan sale margin was 153 basis points in comparison to 154 basis points in the quarter-ended June 30, 2004, and up from that same quarter last year, when the loan sale margin was 119 basis points. Our loan sale margin remains strong as a result of our successful efforts in generating high margin products versus low margin products.

During the quarter, 75% of loans originated for sale were high margin products, up from 60% in the quarter-ended June 30, 2004, and up significantly from the same quarter last year, when only 19% of loans originated for sale were high margin products.

We have increased the FTE count in the mortgage banking division to 142 FTEs from 134 FTEs at June 30, 2004, and 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 the increase in interest rates during the past year, but are confident we can adjust to current market conditions.

We continue to be encouraged by the results of our community banking business and the opportunities we see. The Inland Empire region Southern California remains one of the strongest growth regions in the nation which bodes well for us since our community banking franchise has been headquartered in the region since the 1950s.

During the quarter, we had solid growth in interest earning assets, significant improvement in our net interest income, expansion of our net interest margin, 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 payoffs. These growth efforts will continue in the near-term and we continue to 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 the last year, which is the result of a 13% increase in average interest earning assets, and a 15 basis point increase in the net interest margin.

We continue to change the composition of our earning assets to reflect a higher percentage of loans and 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 will continue to work hard to accelerate those 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 2.22% this quarter from 2.30% in the same quarter last year.

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 well with respect to the growth of our transaction accounts which leads to lower interest expense and higher non-interest income. Transaction account balances have increased by $26 million this past year, or 5%, and now comprise 62% of total deposits, down slightly from 65% last year.

The rapid change that we experienced in the composition of deposit accounts from a high percentage of time deposits to a high percentage of transaction accounts appears to be over. Over the past few years, we have gone from one-third of our deposits in transaction accounts to two-thirds of our deposits in transaction accounts.

The current interest rate environment is such that depositors are once again considering time deposits and are interested in buttoning down interest rate risk which can be partially accomplished with time deposits. Therefore, in the future, the growth rate in transaction accounts may be more consistent with the current quarter rather than recent prior quarters, which reflected a higher growth rate.

Finally, we will continue to deploy sound capital management strategies, for the benefit of all shareholders. Those strategies this quarter included the repurchase of 110,000 shares of the Company's stock and a continuation of the cash dividend policy.

We continue to believe that the favored use of capital is a prudent growth of the company but to the extent that we're unable to grow as quickly or as carefully as we envisioned, sound capital management strategies will continue to be employed.

Now before I open the call to questions, I wish to advise you that we have posted and investor presentation in the Investor Relations section of our Web site which you can review at your convenience.

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

Thank you. Ladies and gentlemen, if you do wish to ask a question, please depress star, then one on your touch-tone phone. You will hear a tone indicating you've been placed in queue. And you may remove yourself from queue at any time by depressing the pound key. If are you using a speaker phone please pick up your handset before pressing any numbers. Again, ladies and gentlemen, if you do wish to ask a question, please depress star, then one on your touch-tone phone. We do have a question from Mr. Ross Haberman with Haberman Fund. Please go ahead.

How are you, Craig?

Good morning.

I had a question on your loan sales. Are you keeping anything at this point? And what are you doing with the servicing in terms of the loans you're selling? Well, I'll start to answer that, as Donavon gets the specifics, we are keeping, you know, a number of single-family loans, and of course, we're selling, the ones we do sell, we sell servicing release, except for loans that we deliver to the Federal Home Loan Bank MPF program where we do service those loans.

Ross, this is Donovan. Last, or this quarter, the amount that we sold on a retained base to the Federal Home Loan Bank has declined rather significantly in comparison to last year, or even in comparison to last quarter. And the reason is, the types of loans that we're originating are different. In other words, the refinance market is over to a large degree.

Correct.

So the 30-year fixed rate, 15-year fixed rate are a smaller part of what we are originating, and where the MPF program had an advantage in pricing, perhaps, and may still have, we just don't have as many of those loans to sell them.

And could you discuss the margin you're getting on the loans which you are selling compared to a year ago?

Well, you can see our margins with respect to the loan sale margins that we've described, both in our earnings release as well as in the investor presentation that we post on our Web site. But the story is not necessarily the compression. That is occurring in some of the, you know, 30-year fixed, 15-year fixed type product.

The story is that we've been switching out of what we consider to be those lower margin products into higher margin products, which are hybrid ARMs, Alt-As, you know, those types of product lines, and to the extent that we're able to switch out and change that composition, we are seeing great demand for those loans in the secondary markets. And in fact, our margins have held up quite well on a sequential quarter basis, and it's up significantly on a year-over-year basis.

Thank you.

Again, ladies and gentlemen, if you do have a question, please depress star, then one on your touch-tone phone. We do have a question from the line of James Abbott with FBR. Please go ahead.

Good morning for you guys.

Good morning.

Good afternoon for me. I wonder if I could ask on the core deposits, down a little bit linked quarter but the non-interest bearing accounts were up. I wonder if you can give us a flavor for what was developing there?

Yeah, James, we touched on it in the prepared comments. For the last couple, three years, we've had a pretty substantial effort in changing the composition of deposit accounts from, you know, a high percentage of time deposits to a high percentage of transaction accounts. And indeed, the winds were at our back with respect to that because interest rates were so low.

What we're finding now is that with about two-thirds of our deposits in transaction accounts, the growth rates that we're going to see in those transaction accounts are going to be more consistent with the growth rates that we see in the markets that we serve, and the ultimate growth rates that we're able to accomplish from the standpoint of stealing deposits from others. That's going to be at a much slower pace.

I think if you were to look at growth rates in tran accounts under normal circumstance, you're probably looking at 5 to 10% range, you know, annually, and I expect that that's where we will be.

The other thing is, we actually went out and began advertising some certificates of deposits again. And we began to do so with a couple of thoughts in mind.

Number one, we thought there was an opportunity to lock in some three, four, and five-year CD money, which we did before the Fed began raising interest rates. But number two, we saw it was an opportunity because our customers are now looking for time deposits again. And so we felt we could steal some market share from some of our competitors.

Okay. I guess what I'm trying to reconcile in my head is, you know, at least the stories that I read, stuff like that, is that there's a tremendous inflow of population, and I would have expected, not Superman, but something close to that as far as core deposit growth in that situation, where people are just opening accounts left and right, just because of the population growth. Am I, how am I thinking about that?

Well, there's certainly changes in this area, and there's pretty aggressive advertising going on out here. PFF recently had a money market account that was priced significantly higher than the marketplace. And I would expect that they had some pretty significant inflows, although much of it may have shown up after the end of the quarter.

They were paying a guaranteed base of 2-3/4 on money markets with a guarantee going up the next time the Fed raises rates a quarter to 3, and that was guaranteed for a year, and I don't know what it did to that bucket in their firm, but we could see money moving from all over here into-- And then, you know, World's been pretty aggressive on some CD rates and so on.

So we're having some growth. It is not as spectacular as we had and part of the reason is there's some people advertising pretty aggressively here now.

One of the other things to look at, James, if you look at our deposit cost of funds, when you can get your hands on the data, when we file the Q, actually we might even have it in the earnings release, and you compare what our costs are doing in comparison to the 11th District cost of fund, you'll find that our deposit costs are increasing at a slower rate than what the 11th District is doing. And the reason for that is that there are competitors out there who are offering higher rates than we are.

Okay. And that makes sense. Is it, are they doing it because they need the liquidity from a loan perspective? I mean is the loan demand -- or is it --

You'd have to ask them. I don't know what their rationale is. When we see some of those rates, we scratch our heads, and we kind of kick it around in our pricing committee and we determine, well, you know, we really don't need to compete at this stage.

And in fact, one of the benefits of having a large percentage of our deposits in transaction accounts, is that we can react more slowly, I hope, to raising interest rates, and ultimately, you've seen that we have expanded our interest margin this quarter. One of the reasons we were able to do so, is because we held the line pretty much on our funding costs.

Yeah, no, that was, it was very nice to see. That basically covered the main questions that I had. It looked like the construction loan growth was very good as well. It is sort of a common theme in your neck of the woods there.

Yeah, it's true. We're still seeing construction business be very strong especially out in the low desert, out East of where Riverside is, but still in Riverside County, mainly because of affordable prices out there.

Uh-huh.

It's just, it's just amazing to me how strong it still is, to be honest with you. We have seen slower growth in Orange County and other areas though on the construction side, but a lot of that has to do not with just prices but the fact that a limited supply of land to develop.

Okay. Yeah, no, that's absolutely true. And then I guess the final question before I run, the interest rate scenario analysis, or sensitivity position at this point, maybe you talked about that at the very beginning, I was trying to get off of another conference call and get on to yours so --

No, we didn't, James, but yeah, as you suggest, we began putting in a net interest income forecast for the first time, it was in our Q, or our K for June 30, and in fact, it will be in our Q for September 30. Generally what you're going to find in that forecast is that in comparison to June 30, I think we've buttoned down some interest rate risk.

And that's really a result of two things. Interest rates have come down a little bit from June 30. But additionally, if you look at what we've done in longer-term Federal Home Loan Bank advances, in the earnings release we show you a table on a year-over-year basis, and compare that to June 30 earnings release, you'll get a sense that we've been taking down some, you know, three, five, and seven-year advances to button down some of our interest rate risk.

Okay. Great. But still liability sensitive to some small degree, I guess?

Still liability sensitive, although less sensitive at September 30 than at June 30.

Okay. Fantastic. All right. Thanks, guys. Appreciate your time.

Thank you.

We do have a question from the line of Rob Houston with Endicott. Please go ahead.

Hi, gentlemen. How are you today?

Good, thanks.

A couple of questions. One on the multi-family growth. It seems like that is another area of strength. Geographically can you talk about where that's taking place?

Much of that was through participation purchases that we did in Southern California. San Diego area was quite a few of the loans. Do you remember, Donavon, where else?

Yeah, we had some in Orange County, some in L.A. County, fewer of them in Riverside County. But literally, it's primarily Southern California.

Southern California. And how much are participations in total in the whole portfolio now?

We describe that, I think that loan serviced by others is $48 million.

48 million. Okay.

Now, that's not to say that we haven't purchased some on a servicing released basis, that we service. You know, it's 48 million that is serviced by others.

Okay. And you've done a nice job, you know, managing the capital down, obviously, as you kind of come to the end of the mortgage banking boom. You guys have in mind or does your board have any target capital ratios of where they'd like to see the Company from, you know, purely an equity asset basis?

I mean we discuss those things all the time, they're in our business plan, we don't necessarily describe them publicly. I would suggest that, you know, last year, they were higher than we would like. We've been able to bring them in this year, through repurchases, as well as growth on the balance sheet.

You know, you get into the mid six's on a core basis, low six's on a core basis, I think we have to, you know, consider whether or not that's about as low as we should go.

Okay. And if I would just do the calculation now, you end up, you know, 7-3/4. Is that right?

Right in there, yeah.

Okay. So you still have room there to grow the balance sheet. Okay. Thank you very much.

Thank you.

Again, ladies and gentlemen, if you do have a question, please press star, then one on your touch-tone phone. There are no further questions at this time. Please continue.

All right. Well at this time, then, I want to thank everyone for participating in the conference call. We look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, this conference will be available for replay after 1:30 p.m. Pacific time today, through Friday, October 29, at 12 midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701, and entering the access code of 749900. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701, and 320-365-3844, with access code of 749900. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.