Provident Financial Holdings Inc (PROV) 2005 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. At this time, all participants' lines are in a listen-only mode. Later, we will conduct a question-and-answer session, with instructions being given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to turn the conference over to the Chairman and CEO, Mr. Craig Blunden. Please go ahead, sir.

Good morning everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings. 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 annual report on Form 10-K for the year ended June 30, 2004. 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, it will be helpful if you have read yesterday's earnings release in which we detailed our financial results for the second quarter of our fiscal year ending June 30, 2005, since my comments will not be dwelling on the specifics of the release. Rather, my remarks this morning will update you on our mortgage banking business, community banking business, and discuss our interest rate risk profile.

First, our mortgage banking division originated $465 million of loans this quarter, which is 7 percent more than the $436 million of loans we originated during the quarter ended September 30, 2004. Of this total, $157 million or 34 percent was originated for our portfolio during the quarter, up from the $145 million originated for our portfolio in the quarter ended September 30, 2004. The loan sale margin for this quarter was 151 basis points, in comparison to 153 basis points in the quarter ended September 30, 2004, and down slightly from the same quarter last year when the loan sale margin was 154 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, 68 percent of loans originated for sale were high-margin products, which is a significant increase from the same quarter last year when only 36 percent of loans originated for sale were high-margin products. We have increased the FTE count in the mortgage banking division to 153 FTEs from 134 FTEs at June 30, 2004, and remain committed to adjusting the FTE count sooner rather than later, consistent with mortgage origination volume changes in our mortgage banking division. We have opened a retail mortgage banking and commercial real estate office in Huntington Beach to support recently-hired, high-producing loan production personnel in a geographic area we have not previously covered.

We continue to be encouraged by results of our community banking business and the opportunities that are available. During the quarter, we had a solid growth in interest-earning assets and significant improvement in our net interest income. 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 last year, which is the net result of a 19 percent increase in average interest-earning assets and a 2 basis point decrease in the net interest margin. We continue 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 in this endeavor, but will continue our efforts to accelerate these composition changes in our earning assets and our loan portfolio. Noninterest expenses increased during the current quarter in comparison to last year, but our efficiency ratio improved to 48 percent from 56 percent. Additionally, our G&A average assets ratio declined to 2.18 percent this quarter, from 2.31 percent in the same quarter last year.

We continue to perform well with respect to the growth in deposits, although transaction account growth has slowed in comparison to prior periods as a result of higher interest rates on time deposit products. The current interest rate environment is such that depositors are once again considering time deposits, and we are interested in buttoning down interest rate risk which can partially be accomplished with time deposits.

Now, a few comments regarding our interest rate risk profile from a net interest income perspective. At the quarters ending June 30, 2004, and September 30, 2004, we described the Company as being liability-sensitive in a rising interest rate environment. In fact, our actual results in the first two quarters of fiscal 2005 demonstrated that we were asset-sensitive in a rising and flattening yield curve environment. These results were largely driven by a higher earning assets growth rate in comparison to the growth rate that we forecast in our interest rate risk model.

The other notable difference was the measured pace of rising short-term interest rates and the flattening yield curve in comparison to our model that forecasts an immediate rise to interest rates in a parallel move across the yield curve, which banking regulators refer to as a shock scenario. The model results that we disclosed should be thought of as a risk management tool to compare the trends of our current forecast to our previous forecast over time, within the context of the actual performance of the yield curve. To compare our model results to others is difficult at best, since each institution uses a different set of assumptions to build their models.

For instance, an aggressive growth rate may suggest that an institution is asset-sensitive despite a forecast of margin compression, since the increase in net interest income driven by growth is higher than the decline in net interest income driven by margin compression. Our model, or anyone's model for that matter, might forecast results substantially different than the actual results realized, and should be used to determine interest rate risk trends rather than a means to forecast net interest income.

Finally, we will continue to deploy sound capital management strategies for the benefit of all shareholders. We continue to believe that the favored use of capital is a prudent growth of the Company, but to the extent we are unable to grow as quickly or as carefully as we envision, sound capital management strategies including share repurchases will be employed.

Before I open the call to questions, I wish to advise you that we have posted an investor presentation in the investor relations section of our website, which you can review at your convenience. We will now entertain any questions that you may have regarding our financial results. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Richard Briery (ph) from Delphi Management.

Good morning or good afternoon, wherever we all are. I was just looking at the income statement. I know I've asked you guys about this in the past, but the gains on sale of loan actually account for about 60 percent of pre-tax income if you look at it that way. And the increase in it accounts for a good deal of the increase in pre-tax income for the quarter as well. I am wondering if there is a base level for gains on sale of loan, or could that number actually go to zero in a given quarter?

This is Donavon. I suppose it could go to zero in the right series of circumstances, but I believe it to be highly unlikely. In that we are a mortgage banker, we derive (indiscernible) volume through the organization. We are in a good market with respect to our ability to drive that volume, at least at the current point in time. Interest rates, even though they are up, it has been a flattening environment such that there is a great deal of volume activity. Because really when one looks at historical rates on mortgages, they're still relatively low.

Again, we have been expanding the producers and expanding the higher-margin products over the last year or so. We are actually, even though volumes are down in the marketplace, we are actually taking a bigger share of the market than we have had in the past. We believe that if we continue to hire the right high-producers that certainly it won't go to zero.

All right. You guys, I know I've talked to you a couple times. You run a great bank, but it is a big number and it is a concern. Is there any base level that you're comfortable with for those gains on sale, though? Do you think it will always be a couple million dollars a quarter?

I mean, we really don't forecast those numbers. It's all predicated on what volumes are doing, what interest rates are doing, in the markets that we serve. I don't want to suggest a baseline number. Interestingly enough, many organizations talk about their increases to fee income. We have terrific fee income, albeit from mortgage banking, and yet there seems to be this underlying concern out there that somehow we won't be able to replicate it over time.

I see.

I think if you look at our margins, even though competition has been intense, we have not seen the crazy pricing that we saw through other cycles, and volume started to slow down. It is pretty amazing when you think about it that we are able to hold the margin levels that we have when years past, you saw margins drop below 50 basis points.

All right, thanks for that. Just one other thing. You were talking about the interest rate sensitivity earlier. I am wondering, is that expanded on in the investor presentation on your website? I don't want to take up any more time, but there will be more detail about that in there?

There really isn't any expansion in that particular document. A few things I would like to say about interest rate risk, and maybe this is the time to discuss it. We are suggesting that we are slightly liability sensitive, and I believe that to be the case, given the model assumptions that we are using. If we were to change those assumptions by placing an unreasonably high growth rate in the model, we can change ourselves to being asset-sensitive, even in a margin compression environment. It seems to me that we are in one of the more difficult environments for a thrift, which is a flattening curve, although we kind of have a nice offset in our mortgage banking operation with the fee income aspect of it from a net interest -- or from a net income perspective. But it is not going to change perhaps our view that we are still a little bit liability sensitive. Because I think if short-term rates were to go up precipitously rather than the moderate base that they are currently going up, the margin compression will catch up to us to some degree and overtake any growth that we are able to accomplish to offset that margin compression.

So I continue to suggest that we are a little bit liability sensitive, yet our actual performance -- and we have been suggesting this for about 18 months. The published information that we have put out goes back to June 30 of '03, where we were a little bit liability sensitive. Yet, in actuality, we have been asset-sensitive through this entire period of time, but it's largely driven by growth. Our margins have been relatively stable.

Okay. Thank you very much.

Christopher Marinac from FIG Partners.

Good afternoon. Craig and Donavon, can you talk about the deposit pricing and what you are seeing, both new markets and CDs, and any pressure on you to have to respond to those from competitors?

Sure, Chris. We are seeing pressure from a number of sources on both money-market pricing and CD pricing, mainly in the 6-month to 1-year time period. So there are a couple of competitors. World Savings recently came out with a 6-month account that is very aggressive. PFB had a money-market account that was priced way higher than the rest of the marketplace. What we're doing basically is we are offering some CDs that are longer-term, 36 months, with a call provision in them that we think will offset some of the pressure on our branches of losing deposits.

So far, it is working. So far, we are resisting that pressure to raise our money-market rates as some have in the marketplace. But the pressure is definitely there, and the question is how long can we hold out and still gather deposits and not lose money -- much money anyway -- to customers; although some hot money accounts that came in here maybe a few years ago when we were aggressive say opening a new branch or something, some of that will leave, I would expect, but then that is okay. We will let it leave.

I don't know if that covers everything. There are -- but you're right, there are a number of competitors in the marketplace who are getting pretty aggressive.

Gentlemen, we did lose Mr. Marinac for a brief moment. Mr. Marinac, if you are back on, please press star one at this time.

Thanks, Craig. That answers my question. I guess one other points is, can you give us any color on sort of the spread on the gain on sale that just changed only slightly this last quarter; is that going to be a lot more volatile? Is there a catch-up with other companies who have seen much weaker results on those spreads?

It is a function of our product mix, and we have made a concerted effort and we were early in the game to develop some high-margin products, all days (ph), second trust deeds, both equity as well as dispersed or fully-dispersed lines. And so to the extent that we are able to execute on the high-margin product, we are not seeing as much pricing pressure on those product lines as on the traditional mortgage banking product lines like 30-year fixed-rate loans, conventional size.

Chris, I think the only pressure we will have if somehow 15-year, 30-year fixed-rate loans become more attractive again. If that happens, and it sure doesn't look like it today, then that would put pressure on us to be able to originate the higher-margin products. But at this point in time, those have for the most part pretty much disappeared. People are looking for the 3 or 5-year adjustable-rate type loans and the second trust deeds to protect their low-rate, long-term first trust deed mortgages that they took out within the last few years.

Great. So you still feel good about the volume of that type of product at this moment. Craig, you still feel good about the volume for that -- for your traditional product this year?

At this point, the volumes are holding in there.

Great. Thanks, guys, appreciate it.

Jed Gore (ph) from Synova Capital.

Good quarter, thank you for taking my question. Just a question on -- I'm reading the maturity schedule of your borrowings here, and you had some (indiscernible) advances that repriced in the quarter. I'm trying to get a sense of, is more of that to come?

Well, we have repricing occurring each year. I think in the news release, the very last page, we describe what occurs, 6 months -- well, actually 6 to 12 months, and less than 6 months. There's only 10 million coming due of a fixed-rate nature. The overnight of 137.5 million is essentially funding our receivable from sale of loans, which will be turned to cash relatively quickly or in a short period of time. And then we just -- it's essentially laddered out through the period, 1 to 2, 2 to 3, 3 to 4, etc.

I might mention some of the borrowings that we have taken down over the past year. If you were to look at our balance sheet from 12-31-03 to 12-31-04, you will note that we have grown by approximate 218, 219 million. During that period of time, we have taken down 100 million of fixed-rate long-term advances in the 3, 5, and 7-year term. You can kind of see that occurring with respect to that schedule that we have provided in comparison to the prior period. We think that that is a natural offset to the loans that we are putting on our books, along with the CD deposits that we have grown. So we don't feel that there is a great deal of interest rate risk associated with that growth in the balance sheet.

Jed, also, as far as repricing some of these old advances down, you're not going to see much more of that. We pretty well run through most of those in the last 1 to 2 years. There's just a couple left out there that we will be repricing down.

So that portion of your funding will remain fixed. What is the average life on your CDs? I'm looking at the time deposits, 380 million. Are these typically 18-month CDs?

Yes, we don't describe. I will tell you the promotional campaigns that we have had have been an 18-month CD account and a 36-month CD account. In fact, those promotional campaigns began about this time last year. So the growth that you have seen in the CD category year-over-year is primarily 18 months and 36 months.

Okay, so I think it is safe to say you guys feel pretty good about the repricing on the right hand side of the balance sheet anyway?

Correct.

Thank you.

+++ presentation (OPERATOR INSTRUCTIONS) Gentlemen, we have no further questions. You may continue.

Well, if there is no further questions, I would like to thank everyone for participating in our conference call, and we look forward to speaking with you again at the end of our next quarter. Thank you.

Ladies and gentlemen, this conference is available for replay after 1:30 PM Pacific Time today through January 28 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and enter the access code of 764991. That number again is 1-800-475-6701, with the access code of 764991. That does conclude your conference for today. Thank you for your participation and for using AT&T executive conference. You may now disconnect.