FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended.................... September 30, 1999
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
Commission File Number 0-28304
PROVIDENT FINANCIAL HOLDINGS, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0704889
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3756 Central Avenue, Riverside, California 92506
------------------------------------------------
(Address of principal executive offices and Zip code)
(909) 686-6060
--------------
(Registrant's telephone number, including area code)
------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X . No .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: As of November 1, 1999
-------------- ----------------------
Common stock, $ 0.01 par value 4,178,566 shares *
* Includes 311,097 shares held by the employee stock ownership
plan that have not been released, committed to be released, or
allocated to participant accounts; and 110,946 shares held by the
management recognition plan which have been committed to be
released and allocated to participant accounts.
<PAGE>
PROVIDENT FINANCIAL HOLDINGS, INC.
Table of Contents
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of
Provident Financial Holdings, Inc. filed as a part of the report
are as follows:
Consolidated Statements of Financial Condition
as of September 30, 1999 and June 30, 1999 .................. 1
Consolidated Statements of Operations
for the quarters ended September 30, 1999 and 1998........... 2
Consolidated Statements of Changes in Stockholders' Equity
for the quarters ended September 30, 1999 and 1998........... 3
Consolidated Statements of Cash Flows
for the quarters ended September 30, 1999 and 1998........... 4
Selected Notes to Consolidated Financial Statements... ...... 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General...................................................... 7
Comparison of Financial Condition at September 30, 1999 and
June 30, 1999................................................ 8
Comparison of Operating Results for the quarters ended
September 30, 1999 and 1998.................................. 8
Loan Volume Activities....................................... 16
Liquidity and Capital Resources.............................. 17
Year 2000 Readiness.......................................... 18
Supplemental Information..................................... 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................... 19
Item 2. Changes in Securities............................... 19
Item 3. Defaults upon Senior Securities..................... 19
Item 4. Submission of Matters to Vote of Stockholders....... 19
Item 5. Other Information................................... 19
Item 6. Exhibits and Reports on Form 8-K.................... 20
SIGNATURES............................................................ 21
EXHIBIT 27 - FINANCIAL DATA SCHEDULE.................................. 22
<PAGE>
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Financial Condition
(Unaudited)
Dollars in Thousands
September 30, June 30,
1999 1999
------------ ----------
ASSETS
Cash $ 15,435 $ 19,729
Overnight deposits - -
Investment securities - held to maturity
(market value $172,764 and $176,033,
respectively) 178,828 179,834
Investment securities - available for sale
at fair market value 26,031 7,344
Loans held for investment, net 768,506 669,386
Loans available for sale, net 34,720 37,667
Accrued interest receivable 6,830 5,984
Real estate available for sale, net 2,303 2,793
Federal Home Loan Bank stock 15,660 10,725
Premises and equipment, net 8,282 8,422
Prepaid expenses and other assets 14,659 15,547
---------- ----------
TOTAL ASSETS $1,071,254 $ 957,431
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits $ 16,076 $ 14,764
Interest bearing deposits 669,885 618,117
---------- ----------
Total deposits 685,961 632,881
Borrowings 281,404 214,506
Accounts payable and other liabilities 16,565 20,358
---------- ----------
TOTAL LIABILITIES 983,930 867,745
Preferred stock, $.01 par value; (2,000,000
shares authorized; none issued and
outstanding) - -
Common stock, $.01 par value; (15,000,000
shares authorized; 5,125,215 shares issued;
4,182,285 and 4,385,785 outstanding at
September 30, 1999 and June 30, 1999,
respectively) 51 51
Additional paid-in capital 51,134 51,069
Retained earnings 59,165 57,555
Treasury stock at cost (942,930 and 739,430
shares, respectively) (18,143) (14,089)
Unearned stock compensation (5,392) (5,644)
Accumulated other comprehensive income 509 744
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 87,324 89,686
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,071,254 $ 957,431
========== ==========
1
<PAGE>
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)
Dollars in Thousands, Except Earnings Per Share
Quarter Ended
September 30,
-------------------
1999 1998
-------- --------
Interest income
Loans receivable, net $ 13,951 $ 12,880
Investment securities 3,213 1,298
Interest bearing deposits 6 50
-------- --------
Total interest income 17,170 14,228
Interest expense
Savings accounts 548 563
Demand and NOW accounts 1,022 980
Certificates of deposit 5,397 5,401
Federal Home Loan Bank advances 3,112 1,789
-------- --------
Total interest expense 10,079 8,733
-------- --------
Net interest income 7,091 5,495
Provision for loan losses - 225
-------- --------
Net interest income after provision for
loan losses 7,091 5,270
Non-interest income
Loan servicing and other fees 719 745
Gain on sale of loans 848 1,549
Real estate operations, net 35 267
Other 614 490
-------- --------
Total non-interest income 2,216 3,051
Non-interest expenses
Salaries and employee benefits 4,009 3,417
Premises and occupancy 492 520
Equipment 528 354
Professional expenses 168 153
Sales and marketing expenses 269 287
Other 1,049 846
-------- --------
Total non-interest expenses 6,515 5,577
-------- --------
Income before taxes 2,792 2,744
Provision for income taxes 1,182 1,161
-------- --------
Net income $ 1,610 $ 1,583
======== ========
Basic earnings per share $ 0.42 $ 0.38
Diluted earnings per share $ 0.41 $ 0.37
2
<PAGE>
<TABLE>
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity
(Unaudited)
Dollars in Thousands, Except Shares
For the Quarters Ended September 30, 1999 and 1998
Accumu-
lated
Common Other
Stock Additional Unearned Compre-
------------------ Paid-in Retained Treasury Stock hensive
Shares Amount Capital Earnings Stock Compensation Income Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1999 4,385,785 $ 51 $ 51,069 $ 57,555 $ (14,089) $ (5,644) $ 744 $ 89,686
Comprehensive income:
Net income 1,610 1,610
Accumulated other
comprehensive
income, net of tax (235) (235)
--------
Total comprehensive
income 1,375
Purchase of treasury
stock (203,500) (4,054) (4,054)
Release of shares
under stock-based
compensation plans 65 252 317
- ---------------------------------------------------------------------------------------------------------
Balance at September
30, 1999 4,182,285 $ 51 $ 51,134 $ 59,165 $ (18,143) $ (5,392) $ 509 $ 87,324
=========================================================================================================
</TABLE>
<TABLE>
Accumu-
lated
Common Other
Stock Additional Unearned Compre-
------------------ Paid-in Retained Treasury Stock hensive
Shares Amount Capital Earnings Stock Compensation Income Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1998 4,854,125 $ 51 $ 50,875 $ 47,090 $ (5,305) $ (6,654) $ 593 $ 86,650
Comprehensive income:
Net income 1,583 1,583
Accumulated other
comprehensive
income, net of
tax 45 45
-------
Total comprehensive
income 1,628
Purchase of treasury
stock (228,711) (4,649) (4,649)
Release of shares
under stock-based
compensation plans 56 68 124
- ---------------------------------------------------------------------------------------------------------
Balance at September
30, 1998 4,625,414 $ 51 $ 50,931 $ 48,673 $ (9,954) $ (6,586) $ 638 $ 83,753
=========================================================================================================
3
</TABLE>
<PAGE>
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flow
(Unaudited)
Dollars in Thousands
Quarter Ended
September 30,
-----------------------
1999 1998
---------- ---------
Cash flows from operating activities:
Net Income $ 1,610 $ 1,583
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 486 (10)
Provision for loan losses - 225
Provision for losses on real estate 10 -
Gain on sale of loans (848) (1,549)
Net gain on sale of investment securities (7) (20)
Decrease in accounts payable and other liabilities (3,628) (3,512)
Decrease in prepaid expense and other assets 43 2,092
Loans originated for sale (82,183) (159,610)
Proceeds from sale of loans 85,978 145,950
Stock compensation 317 124
----------- ---------
Net cash used for operating activities 1,778 (14,727)
Cash flows from investing activities:
Net increase in loans receivables (99,156) (12,148)
Maturity of investment securities held-to-maturity 1,000 15,583
Purchases of investment securities held-to-maturity - (17,596)
Purchases of investment securities available for sale (21,217) (593)
Sales of investment securities available for sale 2,136 101
Purchase of Federal Home Loan Bank stock (4,935) (625)
Proceeds from disposal of real estate 480 2,489
Purchases of premises and equipment, net (304) (1,091)
----------- ---------
Net cash used for investing activities (121,996) (13,880)
Cash flows from financing activities:
Net increase in deposits 53,080 18,345
Repayment - Federal Home Loan Bank advances (3,543,102) (445,602)
Proceeds - Federal Home Loan Bank advances 3,610,000 458,100
Treasury stock purchases (4,054) (4,649)
----------- ---------
Net cash provided by financing activities 115,924 26,194
----------- ---------
Net decrease in cash and cash equivalents (4,294) (2,413)
Cash and cash equivalents at beginning of period 19,729 23,433
----------- ---------
Cash and cash equivalents at end of period $ 15,435 $ 21,020
=========== =========
Supplemental Information:
Cash paid for interest $ 11,210 $ 9,238
Cash paid for income taxes 367 1,094
Real estate acquired in settlement of loans - 212
4
<PAGE>
PROVIDENT FINANCIAL HOLDINGS, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
Note 1 : Basis of Presentation
The unaudited consolidated financial statements included herein reflect all
adjustments which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period presented. All such
adjustments are of a normal recurring nature. The balance sheet data at June
30, 1999 is derived from audited financial statements of Provident Financial
Holdings, Inc. (the "Company"). Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the year ended June 30, 1999 (File No. 0-28304) of the
Company. Certain amounts in the prior period's financial statements may have
been reclassified to conform to the current period's presentation.
Note 2: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
For the Quarter Ended
September 30,
--------------------------
1999 1998
----------- -----------
Numerator:
Net income numerator for basic earnings
per share and diluted earnings per share-
income available to common stockholders $ 1,609,819 $ 1,582,991
=========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted-average shares 3,809,179 4,195,643
Effect of dilutive securities:
Employee stock benefit plans 128,860 79,965
----------- -----------
Denominator for diluted earnings per share:
Adjusted weighted-average shares
and assumed conversions 3,938,039 4,275,608
=========== ===========
Basic earnings per share $ 0.42 $ 0.38
Diluted earnings per share $ 0.41 $ 0.37
Note 3 : SFAS No. 131, "Segments of an Enterprise and Related Information"
This statement requires public companies to report certain information about
operating segments as well as certain information about products, services and
major customers in their financial statements. The Company adopted this
statement in the year ended June 30, 1999.
The Company has determined that its reportable segments are the operations
pertaining to mortgage banking and the operations pertaining to consumer and
commercial banking ("Savings Bank Operations").
5
<PAGE>
The following tables set forth condensed income statements and total assets
for the Company's operating segments for the quarters ended September 30, 1999
and 1998, respectively.
For the Quarter Ended September 30, 1999
------------------------------------------
Savings Bank Mortgage Consolidated
Operations Banking Total
- ------------------------------------------------------------------------------
Net interest income $ 6,908 $ 183 $ 7,091
Non-interest income:
Loan servicing and other fees (863) 1,582 719
Gain on sale of loans, net (4) 852 848
Real estate operations, net 17 18 35
Other 606 8 614
- ------------------------------------------------------------------------------
Total non-interest income (244) 2,460 2,216
Non-interest expense:
Salaries and employee benefits 2,836 1,173 4,009
Premises and occupancy 325 167 492
Operating and administrative
expenses 1,296 718 2,014
- ------------------------------------------------------------------------------
Total non-interest expense 4,457 2,058 6,515
- ------------------------------------------------------------------------------
Operating income before income
taxes $ 2,207 $ 585 $ 2,792
==============================================================================
Total assets, end of period $1,026,231 $ 45,023 $1,071,254
==============================================================================
6
<PAGE>
For the Quarter Ended September 30, 1998
------------------------------------------
Savings Bank Mortgage Consolidated
Operations Banking Total
- ------------------------------------------------------------------------------
Net interest income $ 5,058 $ 212 $ 5,270
Non-interest income:
Loan servicing and other fees (343) 1,088 745
Gain on sale of loans, net - 1,549 1,549
Real estate operations, net 258 9 267
Other 477 13 490
- ------------------------------------------------------------------------------
Total non-interest income 392 2,659 3,051
Non-interest expense:
Salaries and employee benefits 2,431 986 3,417
Premises and occupancy 349 171 520
Operating and administrative
expenses 1,169 471 1,640
- ------------------------------------------------------------------------------
Total non-interest expense 3,949 1,628 5,577
- ------------------------------------------------------------------------------
Operating income before income
taxes $ 1,501 $ 1,243 $ 2,744
==============================================================================
Total assets, end of period $ 757,054 $ 83,584 $ 840,638
==============================================================================
Note 4: SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities"
This statement establishes new accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. This Statement of Financial Accounting Standards ("SFAS") No. 133
was amended by SFAS No. 137 to extend the implementation date for one year.
SFAS No. 133 will become effective for fiscal quarters beginning after June
15, 2000. Management is assessing the impact of SFAS No. 133, if any, and will
adopt this statement in the year ended June 30, 2001.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is a Delaware corporation which was organized in January 1996 for
the purpose of becoming the holding company for Provident Savings Bank, F.S.B.
(the "Savings Bank") upon the latter's conversion from a federal mutual to a
federal stock savings bank (the "Conversion"). The Conversion was completed on
June 27, 1996. The Company operates primarily in the business of attracting
customer deposits to originate loans secured primarily by mortgages on
residential real estate. Business operations also include ancillary activities
related to real estate lending such as mortgage banking and real estate
development. The Savings Bank is a federally chartered savings bank founded in
1956 whose deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Savings
Bank conducts business from its main office in Riverside, California and nine
branch offices. Through the operations of its mortgage banking division,
Profed Mortgage ("Profed"), the Savings Bank has expanded its retail lending
market to include a larger portion of Southern California and Southern Nevada.
Profed operates three offices within the Savings Bank's retail branch
facilities and seven free-standing loan production offices, one of which
includes a wholesale loan department.
7
<PAGE>
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Selected Notes to Consolidated Financial
Statements.
The operating results of the Company depend primarily on its net interest
income, its non-interest income (principally from mortgage banking activities)
and its non-interest expense. Net interest income is the difference between
the income the Company receives on its loan and investment portfolios and its
cost of funds, which consists of interest paid on deposits and borrowings.
Non-interest income is comprised of income from mortgage banking activities,
gains on the occasional sale of assets and miscellaneous fees and income. The
contribution of mortgage banking activities to the Company's results of
operations is highly dependent on the demand for loans by borrowers and
investors, and therefore, the amount of gain on sale of loans may vary
significantly from period to period as a result of changes in the market
interest rates and the local and national economy. The Company's profitability
is also affected by the level of non-interest expense. Non-interest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data processing expenses and other operating costs. Non-
interest expenses related to Profed include compensation and benefits,
occupancy and equipment expenses, telephone and other operating costs, all of
which are related to the volume of loans originated. The Company's results of
operations may be adversely affected during periods of reduced loan demand to
the extent that non-interest expenses associated with Profed are not reduced
commensurate with the decrease in loan originations.
Comparison of Financial Condition at September 30, 1999 and June 30, 1999
Total assets increased by $113.8 million, or 11.9 percent, to $1.1 billion at
September 30, 1999 from $957.4 million at June 30, 1999. This increase was
primarily the result of an increase of $96.2 million, or 14 percent, in total
loans receivable (including loans held for sale) to $803.2 million at
September 30, 1999 from $707.0 million at June 30, 1999; and an increase of
$17.7 million, or 9 percent, in total investment securities to $204.9 million
at September 30, 1999 from $187.2 million at June 30, 1999. Funding for this
growth was accomplished through an increase of $53.1 million in deposits and
an increase of $66.9 million in Federal Home Loan Bank advances.
Total stockholders' equity decreased by $2.3 million during this period, which
was mainly the result of the combined effects of $1.6 million in net income
for the first quarter and the repurchase of 203,500 shares of the Company's
common stock that totaled $4.1 million. Through September 30, 1999, the
Company completed 46 percent of a stock repurchase program announced in July
1999 covering 439,000 shares, or 10 percent of the outstanding shares.
Comparison of Operating Results for the Quarters Ended September 30, 1999 and
1998
Net interest income increased by 29 percent to $7.1 million for the quarter
ended September 30, 1999 from $5.5 million during the comparable period of
1998. The increase in net interest income reflects growth in average earning
assets and a widening of the Bank's net interest margin. Average earning
assets increased by $171.3 million, or 22 percent, during the current quarter
and the net interest margin improved to 2.95 percent from 2.78 percent during
the same period of 1998.
Improvement in net interest income was largely offset by a decrease in
non-interest income and higher operating expenses. Non-interest income fell
$835,000 to $2.2 million during the current quarter from $3.1 million during
the same period of 1998. This decrease was primarily the result of lower gains
from the sale of loans. Loans sold during the quarter totaled $86.0 million,
a 41 percent decrease from $146.0 million sold during the same period of 1998.
Operating expenses increased by $938,000 during the quarter ended September ,
1999 to $6.5 million from $5.6 million in the same period of 1998. This
increase was primarily attributable to higher
8
<PAGE>
compensation and equipment expenses. As a result of these higher operating
expenses, the Company's efficiency ratio rose to 70 percent in the current
quarter from 67 percent in the same period of 1998.
The Company's return on average assets for the quarter ended September 30,
1999 and 1998 was 0.64 percent and 0.77 percent, respectively. Return on
average equity for each of the quarters was 7.36 percent and 7.47 percent,
respectively.
Diluted earnings per share for the quarter ended September 30, 1999 was $0.41,
an increase of 11 percent from $0.37 in the quarter ended September 30, 1998.
The increase in the net earnings per share was mainly attributable to the
Company's stock repurchase programs during fiscal years 1999 and 2000.
Interest Income. Interest income increased by $2.9 million, or 21 percent, to
$17.2 million for the quarter ended September 30, 1999 from $14.2 million
during the same quarter last year. This was the result of an increased in
average interest earning assets from $791.5 million to $962.8 million.
Loan interest income increased by $1.1 million, or 8 percent, to $14.0 million
in the quarter ended September 30, 1999 as compared to $12.9 million for the
same period last year. This increase was attributable to a higher level of
average loans, including those held for sale, from $703.9 million in the first
quarter of fiscal 1999 to $751.2 million in the same quarter of fiscal 2000,
which was partially offset by a 11 basis-point reduction of the loan yield.
The interest income from investment securities, including FHLB stock,
increased by $1.9 million, or 148 percent to $3.2 million for the quarter
ended September 30, 1999 from $1.3 million for the same quarter last year.
This was mainly a result of an increase in the amount of average investment
securities from $76.8 million during the first quarter 1999 to $199.0 million
in the same quarter of fiscal 2000.
Interest Expense. Interest expense for the quarter ended September 30, 1999
was $10.1 million as compared to $8.7 million for the same period last year,
an increase of $1.4 million, or 16 percent. This increase was primarily
attributable to increases in average FHLB advances and deposits. Average
deposits increased by $63.9 million, or 11 percent, during the quarter as
compared to the same period in the prior year; and the average rate paid on
deposits decreased to 4.21 percent during the quarter ended September 30, 1999
from 4.64 percent during the same quarter last year. FHLB advances averaged
$238.2 million during the quarter ended September 30, 1999 compared to $125.2
million for the same quarter last year. The average rate paid on FHLB advances
decreased to 5.18 percent for the quarter ended September 30, 1999 from 5.66
percent in the same quarter last year.
9
<PAGE>
The following table depicts the average balance sheets for the quarters ended
September 30, 1999 and 1998:
Average Balance Sheets
(dollars in thousands)
Quarter Ended Quarter Ended
September 30, 1999 September 30, 1998
---------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------- -------- ---- --------- -------- ----
Interest earning
assets:
Loans receivable,
net (1) $ 751,182 $ 13,951 7.43% $ 703,908 $ 12,880 7.32%
Investment
securities 198,969 3,101 6.23% 76,816 1,211 6.31%
FHLB stock 12,188 112 3.68% 6,702 87 5.19%
Interest earning
deposits 494 6 4.86% 4,119 50 4.86%
---------- -------- ---- --------- -------- ----
Total interest
earning assets 962,833 17,170 7.13% 791,545 14,228 7.19%
Non-interest
earning assets 45,930 33,608
---------- ---------
Total assets $1,008,763 $ 825,153
========== =========
Interest-bearing
liabilities:
Savings accounts $ 82,827 548 2.63% $ 78,787 563 2.84%
Demand and NOW
accounts 147,210 1,022 2.75% 120,564 980 3.23%
Certificate
accounts 427,274 5,397 5.01% 394,028 5,401 5.44%
---------- -------- ---- --------- -------- ----
Total deposits 657,311 6,967 4.21% 593,379 6,944 4.64%
FHLB advances 238,210 3,110 5. 18% 125,194 1,786 5.66%
Other borrowings 184 2 4.32% 196 3 5.38%
---------- -------- ---- --------- -------- ----
Total interest-
bearing
liabilities 895,705 10,079 4.46% 718,769 8,733 4.82%
Non-interest-
bearing
liabilities 25,593 21,635
---------- ---------
Total liabilities 921,298 740,404
Retained earnings 87,465 84,749
---------- ---------
Total liabilities
and retained
earnings $1,008,763 $ 825,153
========== -------- ========= --------
Net interest
income $ 7,091 $ 5,495
======== ========
Interest rate
spread (2) 2.67% 2.37%
Net interest
margin (3) 2.95% 2.78%
Ratio of average
interest earning
assets to average
interest-bearing
liabilities 107.49% 110.13%
Return on average
assets 0.64% 0.77%
Return on average
equity 7.36% 7.47%
(1) Includes loans available for sale.
(2) Represents the difference between weighted average yield on all interest-
earning assets and weighted average rate on all interest-bearing
liabilities.
(3) Represents net interest income before provision for loan losses as a
percentage of average interest-earning assets.
10
<PAGE>
The following table provides the rate/volume variances for the quarter ended
September 30, 1999 and 1998:
Rate/Volume Variance
(dollars in thousands)
Quarter Ended September 30,1999
Compared to Quarter Ended September 30, 1998
Increase (Decrease) Due to
- ------------------------------------------------------------------------------
Rate/
Rate Volume Volume Net
------- ------- -------- --------
Interest income
Loans receivable (1) $ 193 $ 865 $ 13 $ 1,071
Investment securities (14) 1,926 (22) 1,890
FHLB stock (25) 71 (21) 25
Interest-bearing deposits - (44) - (44)
------- ------- -------- --------
Total net change in income
on interest-earning assets 154 2,818 (30) 2,942
Interest-bearing liabilities:
Savings accounts (10) 29 (1) 18
Demand and NOW accounts (143) 217 (32) 42
Certificate accounts (454) 456 (38) (36)
FHLB advances (152) 1,612 (137) 1,323
Other borrowings (1) - - (1)
------- ------- -------- --------
Total net change in expense on
interest-bearing liabilities (760) 2,314 (208) 1,346
------- ------- -------- --------
Net change in net interest
income $ 914 $ 504 $ 178 $ 1,596
======= ======= ======== ========
(1) Includes loans available for sale. For purposes of calculating volume,
rate and rate/volume variances, non-accrual loans were included in the
weighted average balance outstanding.
11
<PAGE>
Provision for Loan Losses. There were no additional provisions for loan
losses during the first quarter ended September 30, 1999 as compared to
$225,000 during the same period last year. The allowance for loan losses at
September 30, 1999 was $6.7 million as compared to $6.4 million at the same
period last year. The allowance as a percent of gross loans held for
investment at September 30, 1999 were 0.87 percent as compared to 1.00 percent
at September 30, 1998. Net recoveries were $19,000 during the first quarter of
fiscal 2000 as compared to net charge offs of $58,000 during the same period
of the prior year.
The allowance for loan losses is maintained at a level sufficient to provide
for estimated losses based on evaluating known and inherent risks in the loan
portfolio and upon management's continuing analysis of the factors underlying
the quality of the loan portfolio. These factors include changes in the size
and composition of the loan portfolio, actual loan loss experience, current
and anticipated economic conditions, detailed analysis of individual loans for
which full collectibility may not be assured, and determination of the
realizable value of the collateral securing the loans. Provisions for losses
are charged against operations on a monthly basis as necessary to maintain the
allowance at appropriate levels. Management believes that the amount
maintained in the allowance will be adequate to absorb losses inherent in the
portfolio. Although management believes it uses the best information available
to make such determinations, there can be no assurance that regulators, in
reviewing the Company's loan portfolio, will not request the Company to
increase significantly its allowance for loan losses. Future adjustments to
the allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected due to economic, operating,
regulatory, and other conditions beyond the control of the Company.
12
<PAGE>
The following table is provided to disclose additional details on the
Company's allowance for loan losses and asset quality (dollars in thousands):
Allowance for Loan Losses
For the Quarters Ended
-----------------------------------------
September 30, 1999 September 30, 1998
------------------ -------------------
Allowance at beginning of period $ 6,702 $ 6,186
Provision for loan losses - 225
Recoveries:
Mortgage loans:
One-to-four family 11 17
Multifamily - -
Commercial - -
Construction - -
Consumer loans 14 31
Commercial business lending - -
-------- --------
Total recoveries 25 48
Charge-offs:
Mortgage loans:
One-to-four family - (81)
Multifamily (6) -
Commercial - -
Construction - -
Consumer loans - (25)
Commercial business lending - -
-------- --------
Total charge-offs (6) (106)
-------- --------
Net recoveries (charge-offs) 19 (58)
-------- --------
Balance at end of period $ 6,721 $ 6,353
======== ========
Allowance for loan losses as a
percentage of gross loans held
for investment 0.87% 1.00%
Net recovery (charge offs) as a
percentage of average loans
outstanding during the period 0.01% (0.03%)
Allowance for loan losses as a
percentage of non-performing
loans at the end of the period 459.71% 328.66%
13
<PAGE>
Asset Quality. The following table is provided to disclose additional details
on asset quality (dollars in thousands):
At September 30, At September 30,
1999 1998
------------------ -------------------
Loans accounted for on a non-
accrual basis:
Mortgage loans:
One-to-four family $ 1,426 $ 1,670
Multifamily - -
Commercial - 245
Construction - -
Consumer loans 36 18
Commercial business lending - -
Other loans - -
-------- --------
Total 1,462 1,933
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One-to-four family - -
Multifamily - -
Commercial - -
Construction - -
Consumer loans - -
Commercial business lending - -
Other loans - -
-------- --------
Total - -
Total of non-accrual and 90 days past
due loans 1,462 1,933
Real estate owned 1,291 2,170
-------- --------
Total non-performing assets $ 2,753 $ 4,103
======== ========
Restructured loans $ 1,502 $ 1,569
Non-accrual and 90 days or more past
due loans as a percentage of loans
held for investment, net 0.19% 0.31%
Non-accrual and 90 days or more past
due loans as a percentage of total
assets 0.14% 0.23%
Non-performing assets as a percentage
of total assets 0.26% 0.49%
The Company addresses loans individually and identifies impairment when the
accrual of interest has been discontinued, loans have been restructured or
management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered
in determining impairment include, but are not limited to, expected future
cash flows, financial condition of the borrower and the current economic
conditions. The Company measures each impaired loan based on the fair value of
its collateral and charges off those loans or portions of loans deemed
uncollectible.
14
<PAGE>
Non-interest Income. Non-interest income decreased by $835,000, or 27 percent,
to $2.2 million during the quarter ended September 30, 1999 from $3.1 million
during the same period last year. The decrease in non-interest income was
mainly attributable to a $701,000 decrease in gains of the sale of loans and a
$232,000 decrease in real estate owned ("REO") net income. Although the total
loan production during the first quarter of fiscal 2000 was similar to last
year ($226.2 million compared to $223.2 million, respectively), the loans
originated for sale were only $86.0 million during the first quarter as
compared to $146.0 million during the same period of the prior year. The
decrease in REO income was attributable to fewer gains from the sale of REO
properties and less rental income subsequent to the sale of leasehold property
toward the end of fiscal 1999.
Non-interest Expenses. Non-interest expenses increased by $938,000 during the
quarter ended September 30, 1999 to $6.5 million from $5.6 million in the same
period of 1998. This increase was primarily attributable to higher
compensation and equipment expenses. Compensation expense increased as a
result of staffing levels during the Bank's recent data system conversion and
expansion within its mortgage banking operations.
Income taxes. Income tax expense was $1.2 million for the quarters ended
September 30, 1999 and 1998. The effective tax rate for both quarters ended
September 30, 1999 and 1998 was 42 percent.
15
<PAGE>
Loan Volume Activities. The following table is provided to disclose additional
details related to the volume of loans originated, purchased and sold (dollars
in thousands):
Loan Volume Activities
For the Quarter Ended
September 30,
--------------------------
1999 1998
---------- ----------
Loans originated for sale:
Retail originations $ 38,135 $ 67,675
Wholesale originations 54,359 91,936
--------- ---------
Total loans originated for sale 92,494 159,611
Loans sold:
Servicing released 84,943 145,729
Servicing retained 1,035 221
--------- ---------
Total loans sold 85,978 145,950
Loans originated for portfolio:
Mortgage loans:
One-to-four family 99,888 44,733
Multifamily 2,100 -
Commercial 2,613 1,631
Construction loans 15,223 7,519
Consumer 10,826 6,084
Commercial business lending 2,575 3,548
Other loans 511 68
--------- ---------
Total loans originated for portfolio 133,736 63,583
Loans purchased:
Mortgage loans:
One-to-four family - -
Commercial 3,609 -
--------- ---------
Total loans purchased 3,609 -
Mortgage loan principal repayments 45,050 49,356
Real estate acquired in
settlement of loans - 212
Decrease in other items, net (1) (2,638) (2,922)
--------- ---------
Net increase in loans receivable, net $ 96,173 $ 24,754
========= =========
(1) Includes changes in accrued interest, loans in process, discounts and loan
loss reserves.
16
<PAGE>
Liquidity and Capital Resources. The Company's primary sources of funding
include deposits, proceeds from loan principal and interest payments, sales of
loans, the maturity of and interest income on investment securities, and FHLB
advances. The Savings Bank has a credit line available with FHLB of San
Francisco of 40 percent of total assets, which, on September 30, 1999
permitted additional advances of $127.9 million, in addition to having
unsecured lines with its correspondent bank. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows, loan
sales, and mortgage prepayments are greatly influenced by general interest
rates, economic conditions, and competition.
The primary investing activity of the Company is the origination of mortgage
loans through the Savings Bank. For the quarter ended September 30, 1999, the
Savings Bank originated $226.2 million of mortgage loans as compared to $223.2
million during the same period last year. This activity was funded primarily
by loan sales, loan principal payments, deposits and FHLB advances. For the
quarter ended September 30, 1999, loan sales aggregated $86.0 million and loan
principal payments totaled $45.1 million.
By regulation, the Savings Bank must maintain a minimum liquidity equal to 4
percent of deposits and short- term borrowings. Liquidity is measured by cash
and readily marketable securities which are not committed, pledged, or
required as collateral for specific liabilities. The Savings Bank's average
liquidity ratios for the first quarter 2000 and 1999 were 25 percent and 12
percent, respectively.
The Savings Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum requirements
can initiate certain mandatory actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective actions, the Savings Bank must meet certain specific capital
guidelines that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors. The Savings Bank's
actual and required capital amounts and ratios as of September 30, 1999 are as
follows (dollars in thousands):
Amount Percent
Tangible capital $ 65,191 6.15%
Requirement to be "Well Capitalized" 21,184 2.00%
-------- ----
Excess over requirement $ 44,007 4.15%
======== ====
Tier 1 (core) capital $ 65,191 6.15%
Requirement to be "Well Capitalized" 52,960 5.00%
-------- ----
Excess over requirement $ 12,231 1.15%
======== ====
Total risk-based capital $ 72,359 13.67%
Requirement to be "Well Capitalized" 52,932 10.00%
-------- ----
Excess over requirement $ 19,427 3.67%
======== ====
Tier 1 risk-based capital $ 65,191 12.32%
Requirement to be "Well Capitalized" 31,759 6.00%
-------- ----
Excess over requirement $ 33,432 6.32%
======== ====
17
<PAGE>
Year 2000 Readiness
General
- -------
Year 2000 issues relate to the possibility of computer programs and hardware
not being able to distinguish between the year 1900 and the year 2000. If it
is not corrected, some, if not all, systems used by the Company might be at
risk of not being able to function properly. To prevent this from happening
during the turn of the century and beyond, the Company has undertaken a major
project to ensure that its internal operating systems, as well as those of its
customers and suppliers, will be fully capable of processing transactions in
the Year 2000 and beyond. The Company has completed testing on all internal
mission critical components and the project is on schedule according to the
Year 2000 milestones established by Federal Financial Institutions Examination
Council ("FFIEC").
Project
- -------
The Company formed a Year 2000 Committee in July 1997 which consists of the
Chief Information Officer and senior management staff from all levels. The
committee reports the progress of the Year 2000 project to the Board of
Directors on a monthly basis. Regular review is also done by the Internal
Audit department. In addition, the Company engaged an information technology
consultant to strengthen the Year 2000 project team.
The Company completed the replacement of its core processing systems in March
1999 and has completed Year 2000 testing subsequent to its installation. The
Company has also reviewed its critical non-information technology systems to
assess the risk of Year 2000 failure. Critical systems that pose risk of Year
2000 failure have detailed contingency plans, which were developed to ensure
uninterrupted services.
The Company, as part of its Year 2000 remediation plan, continues to monitor
the progress of critical third party vendors as they implement corrective
actions to ensure an uninterrupted flow of goods and services. For both
systems and vendors that are classified as critical, contingency plans have
been developed which include, among other things, alternate processing
methods, steps for transitioning to manual processes, and alternate vendors or
sources of goods and services.
The Company has contacted its commercial borrowers to assess their Year 2000
exposure and continues to monitor their remediation progress. The Company has
also distributed a Year 2000 Readiness Statement to all depositors, borrowers,
and vendors. The Company continues to monitor the overall systems and critical
vendors until the turn of the century and beyond.
Costs
- -----
The estimated cost of the project is $3.5 million, which includes
approximately $2.5 million in replacement equipment and software, $400,000 in
equipment write-down, and $200,000 in external project management expenses. In
addition, the estimated value of internal resources allocated to the Year 2000
project is $400,000. Implementation of the new loan and deposit system which
is already Year 2000 compliant will be able to enhance the overall banking
system. The total cost of the project has been within budget with a total of
$3.4 million, or 96 percent, of the total cost spent as of September 30, 1999.
The replacement equipment and software has been capitalized and depreciated in
accordance with the Company's normal accounting policies.
Risks
- -----
The failure of not being able to completely detect potential problems related
to Year 2000 could result in an interruption of normal business activities or
operations, which may materially and adversely affect the Company's results of
operations. As a participant in domestic payment systems, the Company's Year
2000 preparedness is largely dependent upon the readiness of other
participants in the system including the United States government. The Company
relies largely on third-party software vendors and service providers for many
critical functions in the conduct of its businesses. The focus of the Company
has been to monitor and test the Year 2000 compliance progress of its critical
vendors. The Year 2000 project is expected to significantly reduce the risk
inherent in the Year 2000 problem.
18
<PAGE>
Supplemental Information
September 30, 1999 June 30, 1999 September 30, 1998
------------------ ------------- ------------------
Loans serviced for
others (in thousands) $ 296,555 $ 315,028 $ 406,600
Book value per share $ 20.88 $ 20.45 $ 18.11
Forward-looking Statement
Certain matters discussed in this Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market, and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may therefore
involve risks and uncertainties. The Company's actual results, performance, or
achievements may differ materially from those suggested, expressed, or implied
by forward looking statements due to a wide range of factors including, but
not limited to, non-bank financial services providers, regulatory changes,
Year 2000 issues and other risks detailed in the Company's reports filed with
the Securities and Exchange Commission, including the Annual Report on Form
10-K for the fiscal year ended June 30, 1999.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
From time to time the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are considered
to have a material impact on the Company's financial position or results of
operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Shareholders
Not applicable.
Item 5. Other Information
a) Status on Branch Expansion to Corona, California:
- -----------------------------------------------------
As a result of construction delays where the Savings Bank's new Corona office
will be located, the branch is scheduled to open during the quarter ended June
30, 2000.
19
<PAGE>
b) Status on Branch Expansion to Temecula, California:
- -------------------------------------------------------
The new branch in Temecula is expected to open during the quarter ended
December 31, 2000.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None.
b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Financial Holdings, Inc.
November 1, 1999 /s/ Craig G. Blunden
----------------------------------
Craig G. Blunden
President and Chief Executive Officer
(Principal Executive Officer)
November 1, 1999 /s/ Brian M. Riley
----------------------------------
Brian M. Riley
Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE>
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