Provident Financial Holdings Inc (PROV) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions and comments. Instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Chairman and CEO, Mr. Craig Blunder. Please go ahead.

Thank you, Tom. 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 annual report on Form 10-K for the year ended June 30th, 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 third quarter of our fiscal year ending June 30th, 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 and Community Banking business.

First, our Mortgage Banking division originated $439 million of loans this quarter, which is 6% less than the $465 million of loans we originated during the quarter ended December 31, 2004. Of this total, $109 million or 25% was originated for our portfolio during the quarter, down from $157 million originated for our portfolio in the quarter ended December 31, 2004.

The loan sale margin for this quarter was 115 basis points, compared to 151 basis points in the quarter ended December 31, 2004, and down slightly from the same quarter last year, when the loan sale margin was 117 basis points. Our loan sale margin declined as a result of the fair value adjustment required by FAS 133, the product mix, and competitive pricing pressures. Since we described the impact of that SFAS 133 adjustment in our earnings release, I won't spend additional time discussing it now.

However, I do want to discuss the product mix and competitive pricing pressure. During the quarter our salable loan production reflected and increase in the percentage of less profitable refinance loans, an increase in the percentage of less profitable fixed rate loans, and a decrease in the percentage of more profitable second trustee loans. Ultimately, this product mix, which we believe was a function of lower mortgage rates during the quarter, resulted in a lower loan sale margin.

Also, during the quarter, we experienced lower bids of 10 to 15 basis points on many of our loan packages, which we describe as competitive pricing pressure. Although the reason for these lower bids in unclear, we do note that during the quarter, mortgage interest rates moved to their lowest level in many months and then rose quickly toward the end of the quarter. As a result, we believe we received poorer execution because of the uncertainty and volatility in the markets. Currently, we're receiving better execution on loan packages that we are selling.

We have increased the FTE count in the Mortgage Banking division to 155 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. Our recently opened loan production office in Huntington Beach is fully operational and is beginning to originate volumes consistent with levels generated from our more established location.

We continue to be encouraged by the results of our Community Banking business and the opportunities that are available. During the quarter we had solid growth and interest earning assets, significant improvement in our net interest income, and outstanding credit quality. Our net interest income improved in comparison to last year, the net result of a 19% increase in average interest earning assets and 11 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. This includes continued change in the composition of our loan portfolio, to reflect the higher percentage of preferred loans and lower percentage of single-family loans. We will continue our efforts to accelerate these composition changes in our earning assets and in our loan portfolio.

Non-interest expenses increased during the current quarter in comparison to last year. Our efficiently ratio remained unchanged at 48%. Additionally, our G&A to average assets ratio improved to 2.07% this quarter from 2.12% in the same quarter last year.

We continue to perform well with respect to the growth of deposits, although transaction account growth has slowed in comparison to prior periods as a result of the decline in money market deposits, which have been moving into time deposit products. However, monitoring checking accounts can provide a truer reflection of transaction account growth and how well a bank is executing in their market.

In our case, checking account balances have been rising steadily for some time. This quarter, for instance, checking account balances have grown to 182 million, an increase of 9% from $167.7 million at March 31, 2004. On a sequential quarter basis, checking account balances have increased by 12.1 million or 7% from 169.9 million. We remain committed to growing our transaction accounts and believe that tremendous opportunity lies in the growth of the Inland Empire.

Finally, we continue to poise sound capital management strategies for the benefit of all shareholders. We continue to believe that the favored use of capital is the 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.

[OPERATOR INSTRUCTIONS] Our first question today comes from the line of Christopher Marinac with Fig Partners. Please go ahead.

Hi, Craig and Donavon, good afternoon.

Hello.

Good afternoon.

Or I guess, good morning. Can we talk a little bit about the change in spreads on the mortgage servicings, or the mortgage sales, and I'm curious on -- to what extent do you think that's permanent or is there typically a delay in the channels that you sell through? Because you simply were seeing the -- are seeing the compression later than some of the other institutions were last year.

Yes, I can describe it a little bit. You're going to note that we describe an unfavorable 133 mark in our earnings release. That unfavorable mark was a $436,000. When we compare the mark in our second quarter, which was a positive $132,000, we essentially experienced a $568,000 swing. If we take that number and look at our loan volume, that actually equates to about 17 basis points of that margin compression.

Additionally then, the product mix, which we described, also changed our loan sale margin and brought it down. Probably the more difficult to explain is the reason we were getting 10 to 15 basis points less in some of the loan packages that we were selling, when essentially the rates relative to the market were about the same in comparable periods in the last quarter. We think ultimately, it was a result of volatility in the market.

We began the quarter at relatively low rates and kind of went through the quarter with low rates and then at the very end, or toward the end of the quarter, the ten-year spiked to as high as 462. And I think the conduits got a little bit nervous with respect to all of that. And so we were just seeing less competitive bids.

If I were to consider all of this, and put it within the context of this quarter, I don't know that those three circumstances would also be in the current quarter. It's very difficult to suggest what our 133 mark will be, because that's based upon a quarter-end interest rate and what our pipeline looks like at the end of the quarter. What I can say is that we're seeing a more orderly series of executions on our loan packages and we don't seem to have the same type of nervousness in the market when we're seeing the bids come back.

Having said that, is there a reasonable way to predict what it might be next quarter?

Well, we have said in the past that the 150 basis points that we have been describing seems to be unsustainably high. Now, having said that, we were successful in changing our product mix, and that resulted a great deal in that large spread. But we have seen competitors answer this alt-A market now, and I think that's the reason you are seeing our compression occur a little bit slower than others. We were very early into the alt-A market and spreads were wider. If I were to venture a guess, I would say 10 to 15 basis points, perhaps, against those 150s that you have been seeing in our prior quarters.

And, again, Chris, if you can tell us, you know, whether or not we'll have another blip down like we did in interest rates, that really does affect our product mix. There's definitely less profits on these fixed-rate loans. And we actually like to see this steady progression, very slow progression, up in interest rates, because it allows us to sell a more profitable product.

So if we just look at the last couple of weeks, per -- incrementally in April, for example, that's not a positive, what's going on, even though that may not stick.

Well, it -- it depends upon what ultimately flows through to the product mix. You know, a week or two weeks of a 425-10 year doesn't necessarily mean that we are going to get a bunch of refinance activity. On the other hand, the positive aspect of that is it's kind of settled the markets and the packages that we are putting together and ultimately selling, we are receiving better execution on than we saw last quarter, toward of the end of the quarter.

Okay. That's helpful. And then just one final - question. Can you describe, I guess, the health of multi-family versus, you know, single-family in your territory, in the Inland Empire, and any sort signs of concern that you have on either.

Well, it's extremely healthy right now. There still hasn't been a tremendous increase in new construction in multi-family. And, in fact, there was an article in the local paper a couple of days ago showing that rents are increasing steadily and in fact, percentage-wise, pretty substantially in the last year and a half here in our area, which to me means that if they are able to continue to raise rates, they can see levels are extremely low. There's still demand at even higher rent levels. So I have seen no weakness in that market.

Great. Thanks very much, guys.

Thanks, Christopher.

Our next question is from the line of James Abbott with FBR. Please go ahead.

Good morning.

Hello, James.

Just to, I think -- Chris covered the questions on the spread that I had and then, of course you did a great job of describing it in the comments so far.

Maybe if we can turn on to -- or turn to the net interest margin outlook. I noticed that the cost of deposits I guess was up from 158 to 180 on a link quarter basis. Am I reading that correctly? Or have I --

I'd have to refer to my notes on link quarter. I've got them relative to year-over-year. Hang on a moment.

Okay. But I guess -- I guess my question is: Assuming that the 180 is the average for the March quarter, I wondered if you have color on where that number might be near the end of March, or where we might be today and where that might head during the quarters.

Do you see -- I understand that several banks have been pushing their rates at -- at an excessively high level, across southern California, across the board, in anticipation of the rising fed funds rate, and so forth, and would you expect that it will stabilize at this level? Or wherever it might have been at the end of March or whether we would expect continued pressure on that?

Okay. First of all, to clarify the -- the margin, the 158 was last year's quarter against this year's quarter of 180. On a link quarter basis our cost of deposits went from 172 to 180. So they went up by eight, not the large increase noted.

Okay.

Now, relative to competition, we are seeing relatively high competition for deposits right now. We see a great deal of advertising. We're not certain what's driving it from the standpoint of our competitors, whether or not they are thinking about it within the context of buttoning down interest rate risk, whether they are thinking about it within the context of loan demand, or what they are doing, because we are also seeing not only relatively high rates with CDs, but we're seeing relatively high rates with money market accounts as well, which wouldn't necessarily give them better interest rate risk management capability. It is very competitive. I don't know that it's going to become less so any time soon. And we're responding accordingly, relative to our balance sheet, and in the face of it, we're able to increase our margin.

Now there's -- Chris -- I mean, James, I've got to tell you there are, you know, about three or four really active players in the marketplace, as you've mentioned. Certainly World's probably the most aggressive with the 5-month account. Countrywide Bank is very aggressive in our marketplace, although we don't have branches in our area. But they're advertising in the L.A. Times, that strikes our area here. And a few others. And then, as Donovan mentioned, some that have significantly increased their money market rates.

The question is: How long are they going to continue this? And are they really going to continue to raise the stakes, so to speak, as we go forward? So we're fortunate in this area is growing so fast. We still have the opportunity to get new deposits without paying the top rates. And our plan is to hold out as long as we can, certainly, without overly react -- being reactive to some of these players.

Okay.

Now, we have other sources of funding as well. I mean, we are looking at federal home loan bank advances all the time. We've, in the past, done a relatively good job of laddering out that portfolio of advances. And, again, in the face of 175 basis points of Fed move, we've actually held our margin pretty steady. It's blipped up a little bit. It's come down a little bit. But all in, first nine months of this year versus first nine months of last year, it's 298. So we're relatively pleased with that.

Quite obviously, we're going to have to be somewhat concerned with competitive pressures, but as Craig mentioned, we're holding out, and we're designing products that don't necessarily cannibalize our existing customer base.

Okay. I mean that's -- I guess the essence of my questions.

Were there any developments as far as funding goes that would alter that 180 to be materially higher or for the trend to change dramatically for one quarter to the upcoming quarter here? Such as a big CD campaign in the end of March or something like that?

No. In fact, we have been out of the market probably the last month and a half or so. We've found traditionally that tax time isn't necessarily the greatest time to advertise and generate deposits. So it's kind of a waste of advertising dollars.

With respect to the trends, I mean, if you look back at cost of deposits, going, you know, up 8 basis points on the link quarter basis, I suspect that it's going to be close to that, maybe even a little bit quicker paced, depending upon the competitive pressures that we face. The trick is, we're hopefully putting on loans, repricing loans. On the other side of the balance sheet that maintains that margin.

Okay.

But since you asked, there's no big campaign planned at this time.

Okay. And then last question, obviously, ran down the securities portfolio on a sequential quarter basis and increased the loans. I wonder if you could give us a sense as to where the -- what the incremental yield is on the loans. I don't know if you have a sense of that. You probably don't have the exact number right offhand, I would imagine, but if you have a rough idea.

And then, roughly, what types of securities are rolling off. I'm trying to get a sense as to what the benefit is, coming from that remixing of the balance sheet.

Sure. The securities, you can see the yields on the earnings release. I think it is on the last page that we describe those yields, or the second-to-the-last page.

And are those reflective of the ones that are rolling off? Or is it pretty --

Yes. I mean, the bulk that you see rolling off are amortization of mortgage backs, either prepayments or normal amortization. Beginning in '06 we're going to start having some of our agency callables roll off. So the yields, I would suggest on the mortgage backs, are in the 380s, low 390s, that are rolling off.

With respect to new loan production that's going on, it's in the high 5s right now, so we've got a nice incremental pickup with respect to that.

One of the other things -- coupled with this, we're also seeing our own loans prepay, and this quarter, I think all three months of the quarter -- I would have to look for certain, but all three months of the quarter, new loans originated were at yields above the old loans paying off. And that's just a recent phenomenon within the last four or five months or so, where the loans that are prepaying are actually at yields below what we're currently originating at.

This isn't the same customer churning their own loan to get a higher rate?

Well, in many cases, it could be. I mean, I can't suggest that it's a great deal of that activity, but as you know, southern California, there's -- what's the average life cycle of a loan in souther California any more? And I'm telling you, even the quarterly blip down in rates that we have seen, customers are very sensitive any more because mortgage brokers make them sensitive. You see a quarter, three eighths, half of a point move, and guess what? Refinance activity starts moving.

You probably also noticed as you're talking about things rolling off, James, that those high rate FHLB advances that have been rolling off the last couple of years, they are about gone.

Right. I noticed that.

Yes. So we've got a few left coming up in the next few months and after that, you -- we'll miss that.

Well, you got penalized for it for quite a while, so I guess there's an offset for that.

That's true.

Okay. Really appreciate -- would you expect share repurchase activity to remain relatively stable going forward or -- or -- it was somewhat soft during the quarter, but --

It's all dependent upon what we are able to do with respect to our internal growth. We've stated that we're interesting in growing the Company. We're interested in doing so on a prudent basis. And to the extent that we're unable to do so, it's probably more attractive to repurchase shares rather than to leverage the balance sheet, for instance, with investment securities.

And as far as the pipeline goes, as far as loan production goes, it's still relatively stable with the last quarter?

Yes.

Yes.

We're still seeing very good volumes. Mortgage banking volume dipped a bit from the second quarter, about 30 million or so, I think is what we described. That's not a huge dip. And frankly, the first quarter -- calendar quarter of every year is probably the lowest volume quarter, generally speaking.

Right.

So we are now moving into the season where we would expect more production, just as a result of the summer months.

Okay. Fantastic. Thanks again for your time.

Thank you.

And we'll go to the line of Ross Haberman with Haberman Funds. Please go ahead.

How are you gentlemen?

Good.

Good.

Nice quarter. I wanted to ask you if -- if you have any new offices planned for '05. Let me start off with that question.

No, we're looking at some sites now, and because of the development time of the new, say, shopping centers that they are tied to, they won't open during the '05 calendar year. But we would expect to open at least one in '06.

And are you fully compliant now with Sarbanes-Oxley or are you going to take the added six to nine months?

Well, we're in the process now of going through the 404 review, and, of course, you know, we're a June 30 company, so our external auditors will be testing our 404 work and we'll -- we'll know when they finish that.

So, all the expenses related to that we saw this quarter, or much of it.

No, it's probably going to also impact our fourth quarter as well. We saw some expenses in the third quarter because much of our work -- you know, a lot of the expense side actually began in the second quarter of our fiscal. We expensed some in the third quarter. And we'll get more in the fourth quarter.

Now, with respect to our external work, we actually -- our independent audit work, we actually accrue for that. So we won't see a blip up in expenses related to them, but the consultants that we have working with us, with respect to our internal compliance, I would expect this quarter to be about as expensive -- maybe even a little more -- than last quarter, and the second quarter.

Okay. Any opportunities to buy any branches? Or that, for the moment, is out of the question.

I think at the moment that's out of the question. People are aggressively adding branches, not releasing them. Even with some of the acquisitions that have happened in our marketplace, those firms have just kept the deposits and merged them into another location in the area and there's been no opportunity to purchase any that I've seen.

And just one final question, do you guys do much in non-conforming?

You mean in loan size?

Yes.

Essentially, Southern California market is all non-conforming. So there's a great deal of activity in non-conforming.

And the spreads in terms of selling those loans, how does that compare to, you know, a conforming loan?

Those have really -- at one time, there was a -- you know, a larger difference, but those spreads have really compressed of -- not just of late, but maybe within the last two or three years. And while there is a little bit of a pickup in a non-conforming dollar amount, there's not a great deal of pickup.

You know, the real issue is, is on fixed rate loans, whether those are conforming or non-conforming, and on -- neither of them are there great spreads. Only slightly better spreads on the jumbos, but that's the part of the market we're trying not to be in, and we only do those loans when rates blip down and there's a flurry of refis because they are certainly less profitable. So basically what we are doing are the ARM type products and other varieties, like interest-only and so on. So we just don't see much difference in pricing when you get away from the fixed-rate products of conforming and non-conforming.

Got you. Okay. Thank you.

You're welcome.

Next we'll go to the line of Richard Freire with Delphi Management. Please go ahead.

Yes. This is Richard Freire with Delphi Management. I think most of my questions have been answered. I've probably posed this to you in one way or another, maybe many times before. But, are you going to make any effort to -- to rely less on gain on sale of loans as a percent of your earnings mix?

Well, in fact, if you were to go into our last couple of years, you would find that indeed that is happening.

I have seen that, but it's still about half of your pretax earnings in the latest quarter.

Actually, the last quarter, I think it is 39 -- our mortgage banking is 39% of pretax earnings. I think for the first -- for the nine months ending, it's about a 50/50 split.

Mm-Yes..

But literally, if you go back a couple of years, you might find that it was 65% or 70%.

Okay. Are you going to continue to try to shrink that as a percent of the earnings, though?

Well, we're not trying to shrink the income on a global -- or out of mortgage banking, per se.

Right.

We'll take as much income as we can get out of them. But we are growing our balance sheet. We are growing our Community Banking business such that that is generating more income. For instance, in this quarter, where we saw our loan sale margin come in by a substantial amount, we missed the earnings estimate, I think by $0.02. In the past, that could have been a $0.10 blip.

Right. All right.

From the earnings estimates that had been out there.

Sounds like you are heading in the right direction. Listen, thanks for your time.

Thank you.

[OPERATOR INSTRUCTIONS] And, gentlemen, there are no other participants queueing up.

All right, I think we can close the call then.

All right. I want to thank everyone for joining us on our call and look forward to speaking to you at our next quarterly conference call. Thank you.

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