Provident Financial Holdings Inc (PROV) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter earnings release conference call. [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 Blunden. Please go ahead.

Thank you, and good morning everyone. This is Craig Blunden, Chairman and CEO of Provident Financial Holdings and on the call with me is Donavan 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 statement 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 as amended for the year-ended June 30, 2005. 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. I hope that each of you has had an opportunity to review yesterday's earnings release which describes our fourth quarter results. This morning, I will update you on current trends in our mortgage banking business and community banking business.

First, our mortgage banking division originated $367 million of loans this quarter, an increase of 26% from the the $292 million of loans originated during the quarter ended March 31, 2006. Of this total, $83 million or 23% was originated for our portfolio during the quarter, double the amount in the quarter ended March 31, 2006. The loan sale margin for this quarter was 95 basis points, a decline from 101 basis points at the quarter ended March 31, 2006. We attribute this decline to a more competitive environment and a high percentage of refinance volume which generally is less profitable. Refinance activity was 55% of loan origination volume, up from 53% in the quarter ended March 31, 2006, and significantly higher than the 43% in the same quarter last year.

During our conference call last quarter, I noted that the mortgage banking environment had become much more competitive because of higher interest rates, rising real estate prices resulting in lower affordability and more conservative underwriting standards. These circumstances did not change this quarter. In fact, the slowdown in new and existing home sales has made mortgage banking environment even tougher. Although the current quarter was stronger than the March quarter in terms of volume, we do not expect this highly competitive environment to change in the short term.

As a result of our near term outlook we continue to adjust the mortgage banking business model. For instance, during the quarter, we consolidated the underwriting function of five of our retail offices and on July 1, we combined the operations of our Rancho Mirage office with our La Quinta office. Also we continued to adjust the number and mix of employees, currently we have 140 full time employees in the division. 52 are production staff and 88 are support staff. This compares favorably to June 30, 2005 when we employed 156 full time employees with 43 production staff and 113 support staff. It also compares favorably to March 31, 2006 when we employed 129 full time employees with 42 production staff and 87 support staff. Lowering the ratio of support staff to production staff creates a more efficient operation and lowers the cost of originating each loan.

In summary, although the profitability mortgage banking business improved significantly from March quarter, we will continue to work diligently, making the necessary changes that will lead to sustained profitability in the challenging environment. We continue to be encouraged by the results for our community banking business and the opportunities that are available. For the quarter ended June 30, 2006, we expanded the percentage of loans to total earning assets and the percentage of preferred loans to total loans. During the quarter we originated and purchased $86 million of loans, primarily preferred loans, a strong quarter compared to prior quarters.

We continue to experience a highly competitive deposit market and depositors continue to switch from money-market accounts to certificates of deposits as a result of higher short-term interest rates. During the quarter ended June 30, 2006, we did not compete with the aggressive deposit pricing offered by some of our competitors and as a result, deposits declined by $15 million on a sequential quarter basis. In the near term, given the highly competitive environment and rising short-term interest rates we anticipate that our cost of deposits will increase at a faster rate than we experienced in fiscal 2006. Non-interest expense increased slightly during the current quarter compared to the same quarter last year; however without the contribution to the newly established charitable foundation or the marketing expenses in connection with the bank's 50th anniversary, non-interest expenses would have declined by approximately 7%. We continue to deploy sound capital management strategies for the benefit of all shareholders. We also maintain the favored use of capital as a prudent growth in the Company, but to the extent we're unable to grow as quickly or as carefully as we envision sound capital management strategies including share repurchases will be employed. During the quarter we repurchased approximately 149,000 shares of common stock at an average cost of $29.65 per share.

Finally, I would like to update you on the current conditions in the Southern California real estate market. According to a July 18, news release from DataQuick Information Systems, the median price paid for a Southern California home climbed to a new peak last month, but at a slower -- at slowest pace in more than six years. The news release also noted that prices edged higher even as June sales fell to a seven year low, the result of higher borrowing costs, more inventory and less urgency among buyers. Marshall Prentice, the President of Data Quick said, and I quote, "many view this as a great conundrum, prices continue to rise, even set records as sales continue to slow. It happened for two years in San Diego before prices last month finally fell slightly below year ago levels. We view this as a normal winding down of a real estate cycle where declining demand gradually erodes price growth until it halts or reverses. We expect more markets to see prices flatten or decline a bit in the second half of this year".

The news release went on to say that indicators of market distress are still largely absent and that foreclosure activity is rising but remains low in its historical context. 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] And our first question comes from James Abbott of Friedman Billings. Please go ahead.

Good morning.

Good morning, James.

Good morning.

Wondered -- a couple of questions, maybe I'll start first with the expense question. You mentioned that there were some more or less non-recurring expenses in the second quarter due to the 50th anniversary celebration. Could you quantify that or perhaps maybe just give us a sense as to what a run rate might be in the upcoming quarter here to look forward to?

Well, we had some additional market expenses, Jim. Mainly, it was about 100,000 extra and then we had the 0,5 million in the charitable foundation.

Okay. Yes. The charitable foundation we had backed that out, but I just wanted to get some color on that so it doesn't sound like it's too much then. And then another question that I had was on the amount of purchased loans and what that dollar amount was, approximately, and then also what -- a little color on what types of loans those are, or maybe the typical loan size and that kind of thing?

Hi, James, it's Donavan.

Hi, Donavan.

Approximately 45% of our volume was in purchased loan activity, that was approximately 39 million of the total 86 million that we ascribe to the preferred loan group, if you will. That compares let's say for the fiscal year, we originated or we purchased $112 million worth of loans in comparison to last fiscal year when we purchased $61 million of loans. This year, 93.6 million of the loans that we purchased were multi-family. Approximately 15 million were commercial real estate, and the remainder were in other categories, so primarily the loans that we are finding today to purchase are in the multi family sector.

The average loan size is probably around the $1 million level for these types of loans. They are located throughout Southern California geography primarily, although we are also purchasing in northern California to a lesser degree in this type of loan. Most recently and in fact you can pick this up on the earnings release, if you look at, I think it's Page 14 of the release, you'll find a line item describing the number of loans that we purchased that are serviced by others. That number on a sequential quarter basis is essentially flat which tells you that of the loan purchase activity in our fourth quarter, it was primarily on a servicing released basis where we are also picking up the servicing. With respect to how we underwrite? We underwrite those loans for a normal underwriting criteria, and for the sake of argument, if we have a one year seasoned multifamily loan in there, we will ask for and obtain current rent rolls to understand what the current income is in the property. We'll ask for updated financial statements. If we don't get them we can estimate those a little bit to some degree, and then we'll look at the current interest rates in those multifamily loans to get an updated debt service coverage ratio and those updated debt service coverage ratios must meet our existing criteria for newly originated loans.

Certainly many of the packages that we look at, James, we end up now throwing a substantial number of loans out of the package if they don't meet our underwriting criteria.

Okay, and are there any loans -- that's a thank you, by the way. That's a great deal of data and very helpful. Are there any loans that were participated out during the quarter that would have adversely affected your loan growth? In other words, you would have had better loan growth had you not done so?

We did sell some loans during the quarter, participated a few out but frankly, those were -- those dollar amounts were less than in some quarters, the first three quarters of our fiscal year. What we find is that we are originating some products that we are not interested in putting in portfolio in this preferred loan group. It's a little bit of a change this fiscal year than in the past. We've suggested to ourselves that we'll go ahead and originate those loans, but we are selling them if they don't meet our criteria.

Okay.

So in fact, I can give you a number. I think of the total loans originated for sale in the fourth quarter, and this includes the PBM activity as well, there were 291.7 million of loans originated for sale during the quarter. Of that, 283.7 million was the mortgage banking operation, so the difference would have been originated for sale out of this preferred loan group.

So maybe 8 million or something in that range?

Right.

And were they participated out simply because of size limitations or?

It can be either. It can be a size limitation. It could be from the standpoint of we just don't want to take that particular risk, if you will, for that particular borrower and total dollar amount or more frequently, it is because the particular loan is not something that we want to put in portfolio.

It might be a property-type, James, like a gas station or a restaurant or something else that our originator has found that we feel uncomfortable with that product on our portfolio, so we sell it off.

Oh, okay. Okay, thank you. And then maybe last question here is on the gain on sale spread. When you normalize for the FAS 133 adjustment, it looked like it went up roughly 13 or I guess 14 basis points sequentially to about 115 basis points is the way I'm calculating it, but that's a very crude number. But definitely up from the previous quarter, and there looks like there might have been a little bit of mix shift in, I'm trying to quickly glance through your presentation to find the slide, but high margin products versus low margin products it looks like there might have been a slight beneficial shift to high margin products, but could you talk about whether there was a -- what may have caused better gross sale margins, if you will, pre accounting adjustments during the quarter?

Well, if you recall, the third quarter or the first calendar quarter this year, we spoke about it a little bit in our call last month or last quarter, execution to the Street was a little bit poorer than what we had experienced in the fourth calendar quarter, our second quarter of last year, and so the third quarter was kind of an anomaly with respect to Street execution. What we found this quarter is that liquidity came back in and Street execution was better than it was the first calendar quarter or our third quarter. That's primarily what drove that, although as you point out, we did shift to some degree the mix of high margin products, not really shift. It's just that more volume of high margin products came in during the quarter that were ultimately sold and those two things coupled together created better execution, although the way -- I will say that the way you look at that number by backing out 133, I don't look at it that way. I still look at the quarter as having 95 basis points of loan sale margin compressing by 6 basis points, but that 6 basis point compression on a sequential quarter basis is the slowest compression pace that we've experienced in a year which suggests to me that perhaps we're close to the bottom of that compression pace but all bets are off depending upon what ultimately happens with the Street and their appetite for these products.

Okay. I appreciate the insight. Thank you very much.

Thank you. Our next question comes from Christopher Marinac of FIG Partners. Please go ahead.

Hi, guys, good afternoon.

Good morning.

Or good morning.

Oh, yes

Sorry. Craig and Donavan, I wanted to explore a little bit about sort of your deposit base and I guess some of the core categories. I'm just looking at the period end balances from March to June and I was curious of what is your take on the trends here and more importantly, are there any initiatives you'll have in place to drive funds in, particularly funds that are not just CD related?

Well, when we look at those deposit balances and we look at the shift of deposits out of our savings deposit lines or essentially money-markets into CD's, we have made a decision that given the amount of dollars we had in our money-market product lines that we weren't going to be competing aggressively with the rate payers who were or are paying up for money-market accounts because of the costs of repricing our existing buckets. And when we make that decision, we think about the fact that, yes, we could offer a new money-market product at a higher rate and essentially suggest in the advertising that it is for new money only, but the minute that you do so, you run the risk of disenfranchising your current money-market customer base who looks at that as kind of a slight to them with respect to not increasing those current buckets. So the way we've dealt with it is said, we're going to have to go out with a CD product line that is more competitive to the rates being offered in the market, and have done so and what that has done is cannibalized some of our existing money-markets as well as bring in new money.

Now, when we consider it on a year-over-year basis, we're essentially flat with respect to our deposits from this point last year. Obviously we made a decision that we're not going to grow at any cost, if you will, and we do believe that there are better times than others to grow core deposits. We all, just like we believe that there are better times than others to grow the loan portfolio. So when I look at what we accomplished this past fiscal year, I look at the fact that we've essentially shifted our balance sheet on the loan side into a higher yielding loan product. We've reduced the amount of investment securities outstanding, and then we've demonstrated through our capital management with about 10.5 million of stock repurchases through the year plus an additional 4 million or so cash dividends, we've distributed let's say for the sake of argument 14.5 million of of the 20.5 million worth of earnings, and so we've used this year to more profit about structure our balance sheet than to aggressively go out and compete for deposit products that in our view may not necessarily be core deposit products in the first place.

Christopher, let me follow-up on that question especially on deposit products. We, as you may know that our head of retail banking retired as of June 30, and as we've been interviewing candidates for that senior level position, one of the questions has been from all of us is how do we drive more transaction accounts into the bank. So we've been looking at some pretty interesting proposals and individuals as they've come before us with -- and actually asked them to specifically talk about some of the ways that they drive or have driven transaction accounts into the institutions they've worked at. I think that we have an opportunity now with that new position or with that position opening again to really focus this coming fiscal year on transaction accounts, and certainly in our Management retreat about three or four weeks ago, we spent a tremendous amount of time again talking about the need to really drive more transaction accounts and to help better control the costs that we have on the deposit side.

Great. That's helpful. I guess my just concern is that the core funds are closer to a quarter of the balance sheet or a quarter of the funding instead of being a third, not too long ago and I was just curious at what point your threshold shifts, or perhaps we're there now?

We're there now.

Okay, fair enough and then I guess just to dovetail the comments earlier as well as in the press release yesterday, on sort of the changing of the risk, is there anything out there that could or historically has changed to where the multifamily market would not look as attractive to you or maybe the quality of the multifamily loan asset that would cause you to sort of rethink the changes to the Risk Factors that you just made this quarter?

I think that if you look all the way back to the early 90s, there was some real issues with multifamily quality and the value of those and the cash flows on multifamily loans back then, but I think it was a combination of a number of factors, Christopher, that some of which we don't see, certainly in the economic factors that we have today and one of which was major employment shifts out of California and major industries and air bases and so on closing, aerospace going away, we depend very little on most of those and have a much broader and stronger economy today. So at this point, I don't, but certainly we've been through cycles, well, over the 30 odd years that I've been here, that have impacted multifamily to some degree, but even then we found it was mainly in the outlying areas like even out from Riverside into the high desert or out Hemmit and out east of there that actually had impact on what the value per door was on multifamily, but again, we don't see any of that now.

Just as a follow-up too, when we looked at the factors we used in our loan loss matrix, some of the sources of data that we used, in particular in the multifamily and commercial real estate sector came from the University of Southern California, Lusk Center for Real Estate. It came from quarterly publications and information from Grubb & Ellis and it came from information from DataQuick Information Services. Grubb & Ellis has a great degree of information broken out by particular regions within Southern California, central and northern California. It was very helpful, and when we look to that data, much of the data suggested not only the employment piece that Craig spoke of, but also with respect to housing affordability, i.e. single family housing affordability or lack thereof so that's a component of a metric that could change that would sour our view on multifamily. But additionally on net influx of people into the area as Craig spoke about the early 90s, we actually had population shift or more population shift out of our area than new population coming in or a net outflow of people. That's not the case today and in fact existing pressure on existing multifamily remains pretty strong with respect to finding enough doors to house these people.

Good Donavan. Thank you, Craig. Thank you, Donavan.

Thank you. [OPERATOR INSTRUCTIONS] And we do have a question from James Abbott of Friedman Billings. Please go ahead.

Thanks again for the follow-up question. Just a couple of quick ones. Looking forward, you have a building sale coming up or maybe it's already taken place.

Actually, it's a land.

A land sale?

Yes, on some property we own here in Riverside. It's in escrow and of course, the only good escrow is a closed escrow. At this point it has not closed.

Okay. I think in the press release it was estimated about $2.3 million or something in that range.

Right.

Without getting into specifics, and maybe it doesn't close, who knows, but if it were to close and I guess the price is agreed upon at this point, what would you do with the proceeds in the third quarter?

Well, obviously, we've stated that our preferred use of capital is the growth of the bank but to the extent that we're unable to grow the way we choose to grow, we are absolutely interested in stock repurchases to manage the financial leverage on our balance sheet and I think we've demonstrated that this most recent quarter when we picked up approximately 149,000 shares of our stock.

Is there anything in the data that you have access to that would suggest that loan growth would be significantly stronger or weaker in the upcoming quarter? In other words, or should I just try to think about it in terms of you'd like to manage the capital down and we'll assume some sort of reasonable rate of growth, et cetera? We'll use that extra capital to buyback stock in the third quarter or would you delay the repurchase of the stock?

Well, obviously, we have to see what materializes with respect to the growth that we're anticipating and whether or not it does materialize, but it's not necessarily a function of what we're able to originate because those numbers and what we've been able to accomplish suggest to me that they are attainable or sustainable as we go through the next fiscal year. The real key is what our prepayments look like and interestingly enough as we look to our prepayment activity and what has occurred, we had 101 million of prepayments in the fourth quarter and that's down from the third quarter, but for the 12 months ending June 30, '06 we had 476 million in prepayments and that compares to 483 million of prepayments last fiscal year. I would have anticipated fewer prepayments given what the yield curve did during this last fiscal year. That didn't materialize, largely I believe because of alternative mortgage products that borrowers were taking and so to some degree, the ability to grow is not going to be dictated by what we can originate but it will be dictated by what our prepayments do.

Okay. That's helpful. And then last question for me today is do you have the margin progression during the quarter on a monthly basis? It's definitely weaker than I was originally anticipating and I was wondering if it had stabilized near the end of the quarter or?

With respect to our net interest margin?

The net interest margin sorry, yes, the net interest margin monthly numbers if you have them?

Well, I'm not going to give them to you monthly, but I would suggest that margin was stronger at the beginning of the quarter than at the end of the quarter and as we've said before, the longer the flat yield curve environment remains with us over a particular future timeline, the more difficult it becomes to manage our net interest margin either from the standpoint of keeping it flat or growing it, but also from the standpoint of having it compress even more.

Okay.

Which is certainly a problem for our entire industry as you know, James.

Sure, sure, absolutely.

Remember we call it a yield line now.

Yes. I'm using that actually. Okay, well, I appreciate the time again and thanks again.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] And we have no questions in queue. Please continue.

Well, if there are no further questions I'd like to thank everyone for participating in our quarterly conference call and we look forward to presenting at our next quarter. Thank you.

Thank you. Ladies and gentlemen, this conference will be available for replay after 12:30 p.m. Pacific time today through August 1, 2006, at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 834743. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 834743. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.