Provident Financial Holdings Inc (PROV) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Provident Financial Holdings fourth quarter earnings release conference call. At this time all lines are in a listen-only mode. Later there will be a Q&A session. [OPERATOR INSTRUCTIONS] As a reminder, today's call is being recorded.

At this time I would like to turn the conference over to Mr. Craig Blunden, please go ahead, sir.

Good morning, it's 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 managements 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. I hope that each of you have reviewed yesterday's earning release, which describes a strong fourth quarter reflecting a 13% increase in net income, and record financial results for our fiscal year ended June 30, 2005. This morning I will update you on current trends in our mortgage banking business and community banking business.

First, our mortgage banking division originated $438 million in loans this quarter, which is effectively unchanged from the $439 million in loans we originated during the quarter ended March 31, 2005. Of this total $103 million, or 24%, was originated for our portfolio during the quarter, down slightly from $109 million originated for our portfolio in the quarter ended March 31, 2005. We continue to see strong demand for mortgage products, and it does not appear that continued tightening by the Federal Reserve's Open Market Committee has had much impact on the demand for housing in our markets.

The loan sale margin for this quarter was 140 basis points, an improvement when compared to the 115 basis points in the quarter ended March 31, 2005. We believe that our loan sale margin recovered from last quarter as a result of a less volatile market, resulting in better execution on loan packages sole. We also experienced a more profitable product mix during the quarter in a smaller, unfavorable SFAS-133 adjustment. We have increased the FTE count in mortgage banking division to 156 FTEs from 134 FTEs at June 30, 2004, and remain committed adjusting the FTE count sooner than later, consistent with loan origination volume changes in our mortgage banking division.

Recently we opened loan production offices in San Diego and Temecula, and relocated an office from the City of Industry to Diamond Bar. The San Diego office was opened to accommodate a small group of wholesale mortgage bankers that were hired from another firm who exited the business. The Temecula office, which is housed in an existing branch was opened to increase our retail penetration in the fast-growing communities of North San Diego and SW Riverside counties, along the I-15 corridor.

Breakeven hurdle rates for these loan production offices are relatively small, and we expect them to make an earnings contribution in the quarter ending September 30, 2005. We continue to be encouraged by results of our community banking business and the opportunities that are available.

During the quarter we had solid growth in interest earning assets and significant improvement in our net interest income through deposits, although deposit gathering has become more competitive. Our net interest income improved in comparison to last year, the net result, a 21% increase in average interest earning assets, and a 5 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 a lower percentage of investment securities. This includes continued change in the comp position of our loan portfolio, to reflect a high percentage of preferred loans and a 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.

This quarter, we experienced increased competition in deposit pricing and chose not to compete with those in the market, that we feel are pricing their deposit products irrationally. As a result total deposits declined by $24.8 million, particularly in money market accounts, we remain committed to growing deposits with a focus on transaction accounts, and believe that over time tremendous opportunity lies in the growth of the inland Empire.

In the near term we face the highly competitive market which will likely result in an increase to our cost of deposits, and at a faster rate than we experienced in fiscal 2005. Non-interest expenses increased during the current quarter in comparison to last year, primarily the result of an increase in the variable expenses related to loan production volume.

The expense associated with the accelerated vesting of certain stock options and the expenses associated with Sarbanes-Oxley compliance requirements. Although we have not determined the amount of recurring expenses for Sarbanes-Oxley compliance, it is clear that the majority incurred will become an ongoing cost of doing business.

Finally we continue to deploy sounds 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 that we are enable to grow as quickly or as carefully as we envision, sounds capital management strategies, including share repurchases will be employed. To that end, we announced a new stock repurchase program in June.

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] Chris Marinac, FIG Partners.

Craig, Donavon, hello. I wanted to ask you about the margin, and from your perspective how much is related to the flattening yield curve, versus some of your own decisions on funding and funding costs, and types of deposits used?

Hi, Chris, it's Donovan. As we look at what our margin has done overt course of this fiscal year, even though it's compressed a little bit this last quarter, if I look at the 12 months, our net interest margin was 2.96%. That's against last year, fiscal year, of 2.97. So for that period of time, that 12 months, we compressed by 1 basis point. That's at a time when the Fed began essentially began their tightening, through the course of that year. So we are not displeased with how our margin has responded.

The dilemma, of course, is the flattening cycle and the longer this flattening cycle continues, it will become harder and harder to respond because we don't see the loan side of the balance sheet or asset side of the balance sheet, which is typically generated by longer term deposits, respond in kind. So as I look at or speak to your question, the bulk of this compression I believe is because of the flattening of the yield curve.

Although we are still interested in protecting ourselves and are still entertaining longer-term advances, which you will see in our earning release, on the schedule of the earnings release. So I won't forecast a percentage of what the greater impact is other than to suggest I think it's a flattening yield curve.

Donovan, do you still feel there's reasonable visibility on growing overall top line revenues, even though margin may stay here, or perhaps come lower given the growth of the balance sheet?

Current demand for loans is still very high, and I do believe that we can grow and in fact what has occurred this past year, and interestingly enough this past quarter, despite an 8 basis point compression in margin on the sequential quarter basis, we are able grow our interest earning assets such that we still increased our net interest income. I still think that that is possible but the longer that this flattened yield curve environment lasts, the more difficult that will become and then ultimately if the Fed is successful in pushing up longer-term interest rates, we may see demand fall with respect to loans.

And then that will be a transition period I expect into a different type of environment.

Great. That's helpful. And one last question, Craig, I notice in the presentation materials that there was a slight increase to the sort of gain on your secondary mortgage sales. Do you have any I guess thoughts about it, that it is sustainable here in this next quarter or two?

It appears that it is, Chris. Again it's affected by adjustments in 133. And that's really hard to plan. But obviously long-term it all flattens out. But at this point in time, we are not seeing significant pressures on margins. What's changing ours are the mix and the 133 adjustment.

The other thing we see, if interest rates in a given period of time, move quickly in one direction or another, it creates uncertainty and volatility, and we see poorer execution in our bulk loan sale packages.

For instance, in the first quarter we kind of went down, or I'm sorry, the third quarter, first calendar quarter, we went down in interest rates and then went up very quickly toward the end of March, and we saw very poor execution in our view on those bulks. This quarter has been more orderly, and we've gotten better execution on those sales.

Another issue that is the mix that changes when rates fall as they did, because then we are originating more 15-year, 30-year, Freddie/Fanny type product, and the margins are significantly less on those, which then affects our overall margins that we are getting on gain on sale. As rates move up again then we are back to doing more of the adjustable and second trustee loans, and our margins jump up again.

Great. Thanks guys, very much.

Thanks. We do have a question then from the line of Richard [Firie] with Delphi Management.

Good afternoon. I was looking at the fourth quarter, and I know that you had the options expense and there were a few other things going on there, but the profit before-tax only grew about 3.5%, and I'm wondering if some of these expenses are going to go away, and that will continue to grow at a higher rate going forward, or are you kind of stuck in the single-digit PBT growth rate?

You are talking on a sequential quarter basis.

No, I'm talking fourth quarter-over-fourth quarter.

Obviously the 320,000 that we detailed in the earnings release regarding the option expense will go away.

Sure.

Not entirely in that there is an ongoing adjustment to that based upon our actual forfeiture experience, versus what we estimated to calculate that number. But ultimately it goes away.

Additionally in the fourth quarter this year, in comparison to last year, we had a good deal of Sarbanes-Oxley compliance costs. I also detailed that in the earnings release.

I read that.

That is not going to go away in our estimation, and in fact the bulk of that expense occurs in the fourth quarter of any given year, in that that is when our accountants come in to begin their Sarbanes-Oxley 404 process, that is when we do the bulk of our internal process. So the third and fourth quarter of any given year, we will be experiencing the bulk of those costs. I don't look for that to go away.

So I think the short answer is, we are interested in those expense lines. We try to control those expenses as best we can, I believe that we can grow at a better rate than what you have seen, and hopefully we are essentially seeing this 8.9 million, more like 8.6 million, as kind of becoming our baseline number now on a quarterly operating expense basis.

If that's your base do you think you can get the growth down into the single digits, or will that, too , a challenge, growth in expenses overall, that is?

I think our growth in expenses can decline into the single digits.

Okay. I know I've asked you about this before but just refresh my memory, deposit pricing is pretty competitive, but what else can you guys do that you haven't discussed that might help deposit growth along a little bit?

We could choose to compete, which we, the fourth quarter we saw such pricing impact, I wanted somebody to ask that question. I brought in some examples. We have a credit union out here, March Community Credit Union. They had been advertising in the local paper a 9-month CD account at a 4.35% APY. That's 25,000 to open, which is really not a big stumbling block anymore, and we are not going to compete with that.

We have many money market accounts out here, Countrywide Bank, while they don't have a specific branch, they open accounts over the phone or on-line, and they advertise in our market so we get the pressure, they are at a 3.20 APY on their money market account. And then World Savings for the longest period this quarter, ended up doing a five-month CD with a $10,000 minimum at 3.51% APY.

The dilemma that we have we believe we can grow the asset side of the balance sheet. The funding side becomes the difficult side to manage, and at some point we are going to have to compete. We just hope that it's at a point when there are more rational rate payers in the market.

Any opportunities to grow noninterest bearing deposits, or is that going to remain where it is?

Well, we are going noninterest bearing but at a very slow rate.

It was just a small part of overall deposits.

I really is and it is certainly one of the key objectives for our new head of retail banking, who we just hired about nine months ago. We hired him out of Hawthorne Savings, which was acquired by CCBI. And that's a program he was very successful with at his last institution and we are, he's focused now, this is the start of our new fiscal year on growing those accounts. All right. Fair enough. Thank you very much.

We do have a question now from the line of James Abbott with FBR.

Good morning to you. A quick question on the pipeline. And your sense as to whether it's building towards the end of the quarter, or basically what you are seeing on the sense of the pipeline, more predominantly I guess interested in the, your preferred loans, and so if you can give us a sense on that, but I would also be interested in the pipeline of residential real estate?

Starting with residential real estate, our pipeline is all-time historical highs right now, James. Business is as good as it's ever been, and it's mainly in what we call the preferred loans for mortgage banking, which are 3/1, 5/1 and second trustee.

On the other side of the business our preferred loans for commercial real estate and construction, again our pipeline is very strong at this point in time. We expect that to continue, certainly into the near future. Donovan?

One of the things that if you were to go back, and once we put our K out, it will be easier to see, but if we look at our loan originations table, the interesting thing with respect to single-family over the course of this past fiscal year, if I look at first quarter, second, third, and fourth quarter, and I look at our total loans originated for sale, we've gone from 299 million, to 311 million, to 334 million, to 342 million.

We've actually been growing that number in the face, I believe, of the declining, albeit slightly declining, market overall. So we are picking up market share.

With respect to the preferred loan group, yeah, we see better origination pipeline right now, than we've been seeing. We've been running at 70 to 75 million a quarter in that type of origination volume. But even there we see a good deal of competition, particularly in multi-family loans.

And so in some cases we've chosen not to compete on that rate. And so if that pricing becomes a bit more rational, we can see bigger origination volumes there as well.

But then the other part of that, is that we think, and what we've seen is our yields on the all pay loans are as good or better than the yields, that market place is now offering for multi-family loans.

Okay. Okay. Excellent. I appreciate that. The other question that I had is on, and it was related to the noninterest bearing deposits so hopefully we are not beating the dead horse here, but are there, maybe if you could touch on incentive programs or whatever might be in place to get that, because it strikes me that the growth of your area is extremely strong, and I would expect, just by the nature of having branches in that area, that would you see some strong growth in that category.

Maybe if you could give us some color as to what's happening there? Is there something you can do with the salesforce, or with the branch employees to juice that up, or maybe you are already doing that?

A couple of things. When you have high rate specials, even if they are on CDs, people are doing this because, or firms are doing this ultimately, because they believe they can cross-sell them into their primary checking accounts, and the like. So while some of the deposit specials that I described earlier aren't directly in core bank products if you will or transaction accounts, they do have an impact on us, because that customer is going to the bank down the street, not necessarily to us, and so we don't get the opportunity for cross sale.

With respect to compensation schemes and the like, certainly two years ago maybe as early as three years ago, what we ended up doing was rationalizing some of our incentive plans in the branches for the senior people in the branches, where we effectively froze base salary at particular market levels. And then since that time we've been growing our incentive pools, which are directly tied to transaction account deposit gathering.

But not to shortchange the efforts of our branch employees, we are in a highly competitive market for all types of deposit products, and if we don't have a loss leader per se in the marketplace, it becomes difficult for them to respond. And to generate those transaction accounts.

Long-term I would agree, this is a very good market to be in. We believe that our long-term growth in deposits are going to be very good, relative to many other banks and thrifts. But we have to pick and choose when it is we are wanting to do that, relative to the competitive nature of rates.

Fair enough. I appreciate it. Thank you very much.

Again, [OPERATOR INSTRUCTIONS] Gentlemen, at this time I'm showing no further questions in queue.

All right. Well, thank you all. We appreciate your participation today and we look forward to our next conference call at the end of next quarter. Thank you.

Thank you. And ladies and gentlemen this conference will be available for replay starting today, Friday, July 22, at 1:30 PM Pacific time, and will be available through next Friday, July 29, at midnight Pacific time. You may access the AT&T Executive Playback Service by dialing 1(800)475-6701, enter the access code, 788669.

That does conclude our conference for today. Thanks for your participation and for using AT&T's Executive teleconference. You may now disconnect.