Provident Financial Holdings Inc (PROV) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings release conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Chairman and CEO of Provident Financial Holdings, 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 mention. 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 earnings release that was distributed yesterday and from the annual report on Form 10-K for the year ended June 30, 2005. Forward-looking statements are effective only as of the date they are made and this 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 earnings release, which describes the solid first quarter, reflecting a 16% increase in net income. This morning, I will update you on current trends in our mortgage banking business and community banking business. First, our mortgage banking division, originated $472 million of loans this quarter. An increase of 8% from the $438 million of loans originated during the quarter ended June 30, 2005. Of this total, $103 million or 22% was originated for our portfolio during the quarter, unchanged from the quarter ended June 30, 2005. The loan sale margin for this quarter was 123 basis points. A decline from 140 basis points earlier in the quarter ended June 30, 2005.

We believe that our loan sale margin decline from the last quarter as a result of a more competitive environment and a higher percentage of refinance volume, which generally is less profitable. Refinance activity rose to 55% of loan origination volume, from 43% in the quarter ended June 30, 2005. We have increased the FTE count in the mortgage banking division to 165 FTE's from 156 FTE's at June 30, 2005. And remain committed to adjusting the FTE count sooner than later, consistent with loan origination value changes in our mortgage banking division.

Recently, we opened a retail loan production office in Carlsbad, California, to accommodate a small group of high producing mortgage bankers. The break even hurdle rate for this loan production office is relatively small. And we expect to contribute to earnings in the quarter ending December 31, 2005. We continue to be encouraged by the results of our community banking business and the opportunities that are available. For the quarter ended September 30, 2005, community banking grew to 63% of pretax income. A significant achievement in our effort to reduce the percentage of income derived from mortgage banking. These efforts stem from our belief that community banking income is rewarded with a higher priced earnings multiple than mortgage banking income. Therefore, we've continued to focus on growing community banking income at a faster rate than mortgage banking income. Although, we continue to believe that both operating segments provide long term opportunities for our Company.

During the quarter, we reclassified $18.5 million of loans held for investment with certain higher risk characteristics to loans held for sale and then sold the loans. Also during the quarter, we tightened our underwriting criteria for ALT A eligible for our portfolio. And developed an "A" loan program designed to provide sufficient volume to replace the volume lost in the ALT A program. These actions were taken to reduce the credit risk exposure of loans held for investment. We continue to experience a highly competitive deposit market and many depositors are switching from money market accounts to certificates of deposit. Nonetheless, deposits grew by $44 million on a sequential quarter basis. And $10 million of that growth came from increases in checking accounts.

In the near term, given the highly competitive environment and rising short term interest rates, our costed deposits will likely increase at a faster rate than we experienced in fiscal 2005. Noninterest expenses increased during the current quarter in comparison to last quarter. Primarily as a result of increase in variable expenses related to loan production volume, the expense associated with stock option expensing, lease expense on new loan production offices, and the expenses associated with Sarbanes-Oxley compliance requirements. We continue to deploy sound capital 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 envisioned, sound capital management strategies, including share repurchases, will be employed.

Finally, I would like to update you on the current conditions in the Southern California real estate market. According to a recent Los Angeles Times article, which quoted statistics from Data Quick Information Systems, sales volumes in September 2005, rose 6% over the year ago level. And the median price paid for a Southern California home in September increased by 16% from the year ago level. The article notes the strongest markets are in the Inland Empire and the weakest markets are in San Diego County. Describing the year over year increase in the median price as 33% for San Bernardino County and 4% for San Diego County. The article cautions that pricier homes need more time to sell and in some cases, a drop in their prices.

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 have regarding our financial results.

[OPERATOR INSTRUCTIONS] Our first question today comes from the line of James Abbott, with FBR. Please go ahead.

Hi, Dave Rochester here. How are you guys?

Dave, good morning.

Good morning. Just a couple quick things. First of all, in the - - in terms of deposit growth, could you just give a little color on steps that you guys are taking? Or things maybe that you will be doing sometime over the next year to boost core deposit growth? And my second question is, again, on sales spreads, where you see those going?

With respect to - - this is Donavon. With respect to deposit growth and with respect to core deposit growth, in particular. The difficulty we face is many money market depositors or one who are considered core depositors were really CD depositors prior to the decline in rates. And now that rates are going up, they are turning back into CD depositors. So to the extent on a core deposit basis, you are describing money market account holders in that roof, I suspect that you won't necessarily see growth in core deposits. However, if you look at - - and we provide this on page 12 of our news release, checking account growth, both noninterest bearing and interest bearing, that's where you can get a true sense of what's happening with respect to core deposit growth. And if you look at that on a year-over-year basis, we're up 17% in non-interest bearing checking accounts. And we're up 10% in interest bearing checking accounts. On a sequential quarter basis, we're up 9% in noninterest bearing and we're up 4% in interest bearing checking accounts. That's a way I think you can determine what's really happening with respect to core deposit growth.

That and the fact that I think that if you look at our rates versus a number of the aggressive competitors we have; we're able to move and keep our customers in the CD accounts at a lower cost of funds than some of the high rate players. So in a way, I don't see our relationship really changing as they move from money market to a CD account.

Okay. And just in terms, again on sales spreads, do you see those rebounding at all? I know you guys had cited execution and then potentially there was some kind of a mix shift in the types of loans being sold.

Well, certainly when refinances increase, it means there's more fixed rate products, 30 or 15 year. And the gain on sale on those types of products always less than, say, our ALT A products or a second trustee. So when the percentage pops up on refi, we would expect that our gain on sale averages will decrease. The question is; how fast does it move back? As refinances lessen, I would think cause them to tend to get back close to the levels that we had in our prior quarter.

Okay.

It is still highly competitive and as you mentioned execution, we are seeing poorer execution than we saw a year ago. So to suggest that our margins in mortgage banking are going to return to 150 basis point levels, is probably unrealistic. On the other hand, the 123 basis points seems to us to be maintained and, in fact, maybe even expanded upon depending upon how the mix changes. It really is critical about the mix.

Right.

And we see it every quarter as we look back at how many second trustees, how many ALT A's and so on, versus the fixed rate products. And then that drives the gain on sale.

Okay. Great. Thanks, guys.

[OPERATOR INSTRUCTIONS]

Okay, well, thank you. If there's no more questions, I appreciate everyone joining the call. And we look forward to our conference call next quarter. Thank you.

Ladies and gentlemen, this conference will be available for replay after 1:30 p.m. today, until October 28 at 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 798717. International participants may dial 1-320-365-3844. Those numbers once again are 1-800-475-6701, international participants 1-320-365-3844 and please enter the access code of 798717. That does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.