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 March 31, 2000 [ X ] 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 May 8, 2000 -------------- ----------------- Common stock, $ 0.01 par value 3,943,066 shares * * Includes 297,571 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.
PROVIDENT FINANCIAL HOLDINGS, INC. Table of Contents PART 1 FINANCIAL INFORMATION ITEM 1 Financial Statements. The Unaudited Interim 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 March 31, 2000 and June 30, 1999......................... 1 Consolidated Statements of Operations for the quarter and nine months ended March 31, 2000 and 1999.. 2 Consolidated Statements of Changes in Stockholders' Equity for the quarter and nine months ended March 31, 2000 and 1999.. 3 Consolidated Statements of Cash Flows for the quarter and nine months ended March 31, 2000 and 1999.. 5 Selected Notes to Unaudited Interim Consolidated Financial Statements..................................................... 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations General......................................................... 9 Comparison of Financial Condition at March 31, 2000 and June 30, 1999................................................... 9 Comparison of Operating Results for the quarter and nine months ended March 31, 2000 and 1999....................... 10 Loan Volume Activities.......................................... 19 Liquidity and Capital Resources................................. 20 Year 2000 Project............................................... 21 Supplemental Information........................................ 22 PART II OTHER INFORMATION Item 1. Legal Proceedings...................................... 22 Item 2. Changes in Securities.................................. 22 Item 3. Defaults upon Senior Securities........................ 22 Item 4. Submission of Matters to Vote of Stockholders.......... 22 Item 5. Other Information...................................... 23 Item 6. Exhibits and Reports on Form 8-K....................... 23 SIGNATURES............................................................. 24 EXHIBIT 27 FINANCIAL DATA SCHEDULE................................... 25
PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Financial Condition (Unaudited) Dollars in Thousands March 31, June 30, 2000 1999 -------- -------- ASSETS Cash............................................ $ 14,195 $ 19,729 Overnight deposits.............................. 3,000 -- Investment securities - held to maturity (market value $166,788 and $176,033, respectively)..... 175,230 179,834 Investment securities - available for sale at fair market value.............................. 25,250 7,344 Loans held for investment, net................. 840,461 669,386 Loans available for sale, net.................. 51,275 37,667 Accrued interest receivable.................... 7,364 5,984 Real estate available for sale, net............ 1,734 1,775 Real estate held for investment, net........... 12,516 1,018 Federal Home Loan Bank stock................... 20,595 10,725 Premises and equipment, net.................... 7,770 8,422 Prepaid expenses and other assets.............. 6,436 15,547 ---------- --------- TOTAL ASSETS................................... $1,165,826 $ 957,431 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing deposits................ $ 18,763 $ 14,764 Interest bearing deposits.................. 689,730 618,117 ----------- --------- Total deposits ................................. 708,493 632,881 Borrowings .................................... 351,800 214,506 Accounts payable and other liabilities......... 18,807 20,358 ----------- ------- TOTAL LIABILITIES........................... 1,079,100 867,745 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; 3,943,066 and 4,385,785 outstanding at March 31, 2000 and June 30, 1999, respectively)............. 51 51 Additional paid-in capital..................... 51,220 51,069 Retained earnings.............................. 62,595 57,555 Treasury stock at cost (1,182,149 and 739,430 shares, respectively)... (22,387) (14,089) Unearned stock compensation ................... (4,886) (5,644) Accumulated other comprehensive income......... 133 744 ----------- --------- TOTAL STOCKHOLDERS' EQUITY..................... 86,726 89,686 ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,165,826 $ 957,431 ========== ========= The accompanying notes are an integral part of these financial statements. 1
PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Operations (Unaudited) Dollars in Thousands, Except Earnings Per Share Quarter Ended Nine Months Ended March 31, March 31, 2000 1999 2000 1999 ------------------ ----------------- Interest income : Loans....................... $ 17,266 $ 13,106 $ 47,068 $ 39,315 Investment securities....... 3,437 1,772 10,073 4,553 -------- -------- -------- -------- Total interest income...... 20,703 14,878 57,141 43,868 Interest expense : Deposits................... 7,784 6,663 22,395 20,540 Borrowings................. 5,579 1,632 12,975 5,189 -------- -------- -------- -------- Total interest expense... 13,363 8,295 35,370 25,729 -------- -------- -------- -------- Net interest income.......... 7,340 6,583 21,771 18,139 Provision for loan losses.... 175 75 175 450 -------- -------- -------- -------- Net interest income after provision for loan losses ............... 7,165 6,508 21,596 17,689 Non-interest income : Loan servicing and other fees...................... 588 648 1,928 2,119 Gain on sale of loans, net.. 268 1,495 1,714 5,109 Real estate operations, net. 192 285 253 641 Other ...................... 521 542 1,744 1,510 --------- -------- --------- ------- Total non-interest income.. 1,569 2,970 5,639 9,379 Non-interest expenses : Salaries and employee benefits.................. 3,580 4,026 10,944 11,276 Premises and occupancy...... 524 452 1,524 1,489 SAIF insurance premiums..... 37 92 211 265 Equipment................... 596 424 1,674 1,064 Professional expenses....... 107 214 589 683 Sales and marketing expenses.................. 237 130 863 608 Other....................... 943 749 2,729 2,762 -------- -------- --------- ------- Total non-interest expense. 6,024 6,087 18,534 18,147 -------- -------- --------- ------- Income before income taxes... 2,710 3,391 8,701 8,921 Provision for income taxes... 1,128 1,431 3,661 3,772 -------- -------- ---------- ------- Net income................... $ 1,582 $ 1,960 $ 5,040 $ 5,149 ======== ======== ========== ======= Basic earnings per share..... $ 0.45 $ 0.48 $ 1.37 $ 1.25 Diluted earnings per share... $ 0.45 $ 0.48 $ 1.35 $ 1.23 The accompanying notes are an integral part of these financial statements. 2
<TABLE> PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Stockholders' Equity (Unaudited) Dollars in Thousands, Except Shares For the Quarters Ended March 31, 2000 and 1999 Accumulated Common Additional Unearned Other Stock Paid-in Retained Treasury Stock Comprehensive Shares Amount Capital Earnings Stock Compensation Income Total - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1999...3,988,566 $ 51 $ 51,187 $ 61,013 $ (21,699) $ (5,139) $ 263 $85,676 Comprehensive income: Net income.................... 1,582 1,582 Other comprehensive income, net of tax: Unrealized gains (losses) on securities available for sale arising during the quarter. (130) (130) Reclassification adjustment for (gains) losses on securities available for sale included in net income................. - - ------- Total comprehensive income..... 1,452 Purchase of treasury stock..... (45,500) (688) (688) Release of shares under stock- based compensation plans....... 33 253 286 - --------------------------------------------------------------------------------------------------------- Balance at March 31, 2000 3,943,066 $ 51 $ 51,220 $ 62,595 $ (22,387) $ (4,886) $133 $86,726 ========================================================================================================= The accompanying notes are an integral part of these financial statements. </TABLE> <TABLE> Accumulated Common Additional Unearned Other Stock Paid-in Retained Treasury Stock Comprehensive Shares Amount Capital Earnings Stock Compensation Income Total - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1998...4,618,485 $ 51 $ 50,973 $ 50,279 $ (10,061) $ (6,519) $853 $ 85,576 Comprehensive income: Net income.................... 1,960 1,960 Other comprehensive income, net of tax : Unrealized gains (losses) on securities available for sale arising during the nine months................ (129) (129) Reclassification adjustment for (gains) losses on securities available for sale included in net income..................... (1) (1) ------ Total comprehensive income..... 1,830 Purchase of treasury stock..... (232,700) (4,028) (4,028) Release of shares under stock- based compensation plans....... 43 623 666 - --------------------------------------------------------------------------------------------------------- Balance at March 31, 1999......4,385,785 $ 51 $ 51,016 $ 52,239 $ (14,089) $ (5,896) $723 $ 84,044 ========================================================================================================= The accompanying notes are an integral part of these financial statements. </TABLE> 3
<TABLE> PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Stockholders' Equity (Unaudited) Dollars in Thousands, Except Shares For the Nine Months Ended March 31, 2000 and 1999 Accumulated Common Additional Unearned Other Stock Paid-in Retained Treasury Stock Comprehensive 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.................... 5,040 5,040 Other comprehensive income, net of tax : Unrealized gains (losses) on securities available for sale arising during the nine months................ (589) (589) Reclassification adjustment for (gains) losses on securities available for sale included in net income................. (22) (22) ------- Total comprehensive income..... 4,429 Purchase of treasury stock..... (442,719) (8,298) (8,298) Release of shares under stock- based compensation plans....... 151 758 909 - --------------------------------------------------------------------------------------------------------- Balance at March 31, 2000......3,943,066 $ 51 $ 51,220 $ 62,595 $ (22,387) $ (4,886) $ 133 $ 86,726 ========================================================================================================= The accompanying notes are an integral part of these financial statements. </TABLE> <TABLE> Accumulated Common Additional Unearned Other Stock Paid-in Retained Treasury Stock Comprehensive 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.................. 5,149 5,149 Other comprehensive income, net of tax: Unrealized gains (losses) on securities available for sale arising during the nine months.......... 181 181 Reclassification adjustment for (gains) losses on securities available for sale included in net income................... (51) (51) ------- Total comprehensive income... 5,279 Purchase of treasury stock... (468,340) (8,784) (8,784) Release of shares under stock- based compensation plans..... 141 758 899 - --------------------------------------------------------------------------------------------------------- Balance at March 31, 1999....4,385,785 $ 51 $ 51,016 $ 52,239 $ (14,089) $ (5,896) $723 $84,044 ========================================================================================================= The accompanying notes are an integral part of these financial statements. </TABLE> 4
PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flow (Unaudited) Dollars in Thousands Quarter Ended Nine Months Ended March 31, March 31, 2000 1999 2000 1999 ---------------- ----------------- Cash flows from operating activities: Net Income......................... $ 1,582 $ 1,960 $ 5,040 $ 5,149 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..... 708 98 1,627 145 Provision for loan losses......... - 75 - 450 Provision for losses on real estate.......................... 115 - 125 - Gain on sale of loans............. (334) (1,495) (1,780) (5,109) Net (gains) losses on sale of investment securities............. - (47) (38) (10) Increase in accounts payable and other liabilities................. (5,450) 3,827 (1,123) 7,509 Decrease in prepaid expense and other assets.................. 86 (2,622) 7,731 13,213 Loans originated for sale.......... (92,112)(148,425) (293,138) (514,728) Proceeds from sale of loans........ 130,656 193,936 281,310 523,753 Stock compensation ................ 286 666 909 899 ---------- -------- ----------- -------- Net cash used for operating activities............. 35,537 47,973 663 31,271 Cash flows from investing activities: Net increase in loan receivables.. (16,905) (2,570) (170,266) (22,924) Maturity of investment securities held-to-maturity.................. 2,600 22,765 6,650 70,847 Purchases of investment securities held-to-maturity ...... (3,000) (76,108) (3,000)(140,631) Purchases of investment securities available for sale................ - (204) (23,280) (1,454) Sales of investment securities available for sale................ - 2,801 2,292 6,664 Purchase of Federal Home Loan Bank stock........................ (238) (100) (9,870) (824) Net sales (purchase) of real estate ...................... 148 241 (12,601) 3,474 Purchases of premises and equipment, net.................... (126) (72) (730) (1,716) ---------- -------- ----------- -------- Net cash used for investing activities ........... (17,521) (53,247) (210,805) (86,564) Cash flows from financing activities: Net increase in deposits ......... 2,255 8,006 75,613 47,257 Repayment - Federal Home Loan Bank advances ....................(2,334,102)(184,802) (10,315,129)(805,006) Proceeds - Federal Home Loan Bank advances..................... 2,297,099 188,600 10,448,963 820,800 Proceeds other borrowings....... 3,459 - 3,459 - Treasury stock purchases.......... (688) (4,028) (8,298) (8,784) ---------- -------- ----------- -------- Net cash provided by financing activities........... (31,977) 7,776 204,608 54,267 ---------- -------- ----------- -------- Net increase (decrease) in cash and cash equivalents............. (13,961) 2,502 (5,534) (1,026) Cash and cash equivalents at beginning of period............ 28,156 19,905 19,729 23,433 ---------- -------- ----------- -------- Cash and cash equivalents at end of period................. $ 14,195 $ 22,407 $ 14,195 $ 22,407 ========== ======== =========== ======== Supplemental Information: Cash paid for interest........... $ 13,047 $ 8,317 $ 36,690 $ 26,484 Cash paid for income taxes....... 537 2,334 2,521 5,119 Real estate acquired in settlement of loans................. 111 229 1,144 1,130 The accompanying notes are an integral part of these financial statements. 5
PROVIDENT FINANCIAL HOLDINGS, INC. SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 Note 1 : Basis of Presentation The unaudited interim 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 unaudited interim consolidated financial statements be read in conjunction with the audited 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 Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity. The following tables provide the basic and diluted EPS computations for the quarter and nine months ended March 31, 2000 and 1999, respectively. For the Quarter Ended For the Nine Months Ended March 31, March 31, --------------------- -------------------------- 2000 1999 2000 1999 ------ ------ ------- ------- Numerator: Net income - numerator for basic earnings per share and diluted earnings per share- income available to common stockholders.... $ 1,582,107 $ 1,960,169 $ 5,040,312 $ 5,149,347 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted-average shares................ 3,551,289 4,084,949 3,682,328 4,135,502 Effect of dilutive securities: Employee stock benefit plans.................. - 23,847 62,168 51,281 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share : Adjusted weighted- average shares and assumed conversions............ 3,551,289 4,108,796 3,744,496 4,186,783 ============ =========== =========== =========== Basic earnings per share. $ 0.45 $ 0.48 $ 1.37 $ 1.25 Diluted earnings per share................. $ 0.45 $ 0.48 $ 1.35 $ 1.23 Note 3 : Operating Segment Reports 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"). The 6
following tables set forth condensed income statements and total assets for the Company's operating segments for the quarter and nine months ended March 31, 2000 and 1999, respectively. For the Quarter Ended March 31, 2000 ------------------------------------ Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income .................$ 6,958 $ 207 $ 7,165 Non-interest income: Loan servicing and other fees...... (116) 704 588 Gain on sale of loans, net......... 84 184 268 Real estate operations, net........ 188 4 192 Other.............................. 519 2 521 - ----------------------------------------------------------------------------- Total non-interest income......... 675 894 1,569 Non-interest expense: Salaries and employee benefits..... 2,806 774 3,580 Premises and occupancy............. 337 187 524 Operating and administrative expenses......................... 1,464 456 1,920 - ----------------------------------------------------------------------------- Total non-interest expense........ 4,607 1,417 6,024 - ----------------------------------------------------------------------------- Operating income before income taxes.$ 3,026 $ (316) $ 2,710 ============================================================================= Total assets, end of period ........ $1,094,638 $ 71,188 $1,165,826 ============================================================================= For the Quarter Ended March 31, 1999 ------------------------------------ Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income .............. $ 6,163 $ 345 $ 6,508 Non-interest income: Loan servicing and other fees.... (36) 684 648 Gain on sale of loans, net....... (158) 1,653 1,495 Real estate operations, net...... 255 30 285 Other ........................... 528 14 542 - ----------------------------------------------------------------------------- Total non-interest income....... 589 2,381 2,970 Non-interest expense: Salaries and employee benefits... 2,887 1,139 4,026 Premises and occupancy .......... 298 154 452 Operating and administrative expenses ........................ 1,347 262 1,609 - ----------------------------------------------------------------------------- Total non-interest expense...... 4,532 1,555 6,087 - ----------------------------------------------------------------------------- Operating income before income taxes ..................... $ 2,220 $ 1,171 $ 3,391 ============================================================================= Total assets, end of period..... $ 832,672 $ 51,487 $ 884,159 ============================================================================= 7
For the Nine Months Ended March 31, 2000 ---------------------------------------- Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income................ $ 21,110 $ 486 $ 21,596 Non-interest income: Loan servicing and other fees.... (1,649) 3,577 1,928 Gain on sale of loans, net....... 46 1,668 1,714 Real estate operations, net...... 244 9 253 Other ........................... 1,742 2 1,744 - ----------------------------------------------------------------------------- Total non-interest income....... 383 5,256 5,639 Non-interest expense: Salaries and employee benefits... 8,107 2,837 10,944 Premises and occupancy .......... 992 532 1,524 Operating and administrative expenses....................... 4,039 2,027 6,066 - ----------------------------------------------------------------------------- Total non-interest expense...... 13,138 5,396 18,534 - ----------------------------------------------------------------------------- Operating income before income taxes........................... $ 8,355 $ 346 $ 8,701 ============================================================================= Total assets, end of period........ $1,094,638 $ 71,188 $1,165,826 ============================================================================= For the Nine Months Ended March 31, 1999 ---------------------------------------- Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income................. $ 16,881 $ 808 $ 17,689 Non-interest income: Loan servicing and other fees..... (636) 2,755 2,119 Gain on sale of loans, net ....... (158) 5,267 5,109 Real estate operations, net....... 552 89 641 Other............................. 1,471 39 1,510 - ----------------------------------------------------------------------------- Total non-interest income........ 1,229 8,150 9,379 Non-interest expense: Salaries and employee benefits.... 7,929 3,347 11,276 Premises and occupancy............ 1,006 483 1,489 Operating and administrative expenses ....................... 3,686 1,696 5,382 - ----------------------------------------------------------------------------- Total non-interest expense....... 12,621 5,526 18,147 - ----------------------------------------------------------------------------- Operating income before income taxes............................. $ 5,489 $ 3,432 $ 8,921 ============================================================================= Total assets, end of period......... $ 832,672 $ 51,487 $ 884,159 ============================================================================= 8
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 first quarter of the fiscal year ending June 30, 2001. ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations General Provident Financial Holdings, Inc. ("Provident Financial" or the "Company"), a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company for Provident Savings Bank, F.S.B. ("Savings Bank") upon the Savings Bank's conversion from a federal mutual to a federal stock savings bank ("Conversion"). The Conversion was completed on June 27, 1996. At March 31, 2000, the Company had total assets of $1.2 billion, total deposits of $708.5 million and stockholders' equity of $86.7 million. Provident Financial has not engaged in any significant activity other than holding the stock of the Savings Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Savings Bank and its subsidiaries. The Savings Bank, founded in 1956, is a federally chartered savings bank headquartered in Riverside, California. The Savings Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Savings Bank's deposits are federally insured up to applicable limits by FDIC (under the Savings Association Insurance Fund ("SAIF")). The Savings Bank has been a member of the Federal Home Loan Bank ("FHLB") system since 1956. The Savings Bank's business consists of traditional savings and loan operations and mortgage banking activities. The savings and loan operations primarily consist of accepting deposits from customers within the communities surrounding the Savings Bank's full service offices and investing these funds in one-to-four-family mortgage loans and, to a lesser extent, in multi-family, commercial real estate, construction, business, consumer and other loans. Mortgage banking activities consist of the origination and sale of mortgage loans secured by one-to-four-family residences and the servicing of such loans for others. In addition, the Savings Bank also facilitates business loans, business checking accounts and other business banking services. The Savings Bank's revenues are derived principally from interest on its loan and investment portfolio and fees generated through its mortgage banking activities. 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 Unaudited Interim Consolidated Financial Statements and accompanying Selected Notes to Unaudited Interim Consolidated Financial Statements. Comparison of Financial Condition at March 31, 2000 and June 30, 1999 Total assets increased by $208.4 million, or 22 percent, to $1.2 billion at March 31, 2000 from $957.4 million at June 30, 1999. This increase was primarily the result of an increase of $184.6 million, or 26 percent, in total net loans receivable to $891.7 million at March 31, 2000 from $707.1 million at June 30, 1999. The rapid growth in portfolio loans was primarily attributable to a shift in borrower preference toward adjustable rate loans, which are typically held in portfolio, from fixed rate mortgages, which are typically sold; and the economic characteristics of the Company's market area. Funding for this growth was provided by an increase of $75.6 million in deposits and an increase of $137.3 million in Federal Home Loan Bank advances. 9
With the current interest rate environment, the Company adopted measures to control its exposure to interest rate risk. One such measure is the sale of the current production of all single family, first trust deed, residential mortgage loans. As a result of this strategy, total loans decreased by $21.5 million to $891.7 million from $913.2 million at the end of the second quarter. The proceeds of the loan sales were used to pay down FHLB advances. In addition, the Company began in January 2000 to lengthen the average maturity of its existing FHLB advances in anticipation of additional rate increases. These measures, along with others, are intended to raise the Company's current capital position through reducing the amount of leverage and thus seeking to mitigate the impact of future interest rate hikes. Total stockholders' equity decreased by $3.0 million during the period ended March 31, 2000, which resulted from the completion of the Company's 10 percent common stock repurchase program announced in July 1999, totaling 439,000 shares or $8.2 million. On March 8, 2000, the Company announced another 5 percent stock repurchase program. No shares have been repurchased under this program. Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2000 and 1999 The Company's net income for the quarter ended March 31, 2000 was $1.6 million, a decrease of $378,000, or 19 percent, from $2.0 million during the same quarter in 1999. This decrease was primarily attributable to a decrease in the gain on sale of loans, which was due to the recent increase in interest rates and lower loan production and sales (please refer to the discussion below on Non-interest income). For the nine months ended March 31, 2000 and 1999, the Company's net income was $5.0 million and $5.1 million, respectively. The Company's net interest income increased by 11 percent to $7.3 million for the quarter ended March 31, 2000 from $6.6 million during the comparable period of 1999. The increase in net interest income reflects growth in average earning assets. The average earning assets during the third quarter 2000 were $1.1 billion, an increase of $307.4 million, or 37 percent, as compared to $835.0 million during the same quarter last year. The effect of earning asset growth was partially offset by a lower net interest margin. The net interest margin narrowed to 2.57 percent in the third quarter from 3.15 percent during the same period of 1999. For the nine months ended March 31, 2000 and 1999, net interest income was $21.8 million and $18.1 million, respectively. The Company's efficiency ratio increased to 69 percent in the third quarter from 64 percent in the same period of 1999. This increase was attributable to the decrease in mortgage banking revenue. For the nine months ended March 31, 2000 and 1999, the efficiency ratio was 68 percent and 67 percent, respectively. Return on average assets for the quarter ended March 31, 2000 and 1999 was 0.53 percent and 0.90 percent, respectively. For the nine months ended March 31, 2000 and 1999, the return on average assets was 0.61 percent and 0.81 percent, respectively. Return on average equity for the quarter ended March 31, 2000 and 1999 was 7.38 percent and 9.24 percent, respectively. For the nine months ended March 31, 2000 and 1999, the return on average equity was 7.77 percent and 8.14 percent, respectively. Diluted earnings per share for the quarter ended March 31, 2000 was $0.45, a decrease of 6 percent from $0.48 in the quarter ended March 31, 1999. For nine months ended March 31, 2000 and 1999, the diluted earnings per share were $1.35 and $1.23, respectively. The increase in the net earnings per share reflects the Company's stock repurchase programs during fiscal years 1999 and 2000. Interest Income. Interest income increased by $5.8 million, or 39 percent, to $20.7 million for the quarter ended March 31, 2000 from $14.9 million during the same quarter in 1999. This increase was the result of growth in average earning assets and higher overall market rates. The average earnings assets during the third quarter 2000 were $1.1 billion as compared to $835.0 million during the same period last year. The average yield on earning assets during the third quarter of fiscal 2000 was 7.25%, 12 basis points higher than the average yield of 7.13 percent during the same period last year. 10
Loan interest income increased by $4.2 million, or 32 percent, to $17.3 million in the quarter ended March 31, 2000 as compared to $13.1 million for the same period in 1999. This increase was attributable to growth in average loans, including those available for sale, from $716.0 million during the third quarter of fiscal 1999 to $916.8 million during the same quarter of fiscal 2000. The average loan yield during the third quarter of fiscal 2000 was 7.53 percent as compared to 7.32 percent during the same quarter last year. The interest income from investment securities, including Federal Home Loan Bank ("FHLB") stock, increased by $1.7 million, or 94 percent to $3.4 million during the quarter ended March 31, 2000 from $1.8 million during the same quarter in 1999. This increase was primarily a result of an increase in the amount of average investment securities and an increase in the average yield. The average investment securities increased by $106.6 million, or 90 percent, to $225.6 million during the third quarter of 2000 from $119.0 million in the same quarter last year. The average yield on investment securities increased by 13 basis points to 6.09% during the third quarter fiscal 2000 from 5.96% during the same period last year. For the nine months ended March 31, 2000, the interest income increased by $13.3 million, or 30 percent, to $57.1 million as compared to $43.8 million for the same period in 1999. This increase was attributable to an increase in average earnings assets from $816.4 million during the nine months of fiscal 1999 to $1.1 billion during the same period of fiscal 2000. The interest income on loans increased by $7.8 million, or 20 percent, to $47.1 million during the nine months of fiscal 2000 from $39.3 million during the same period of fiscal 1999. The average loans increased from $715.0 million to $838.8 million during the nine months in fiscal 1999 and 2000, respectively. The average yield on loans increased by 15 basis points to 7.48 percent during the nine months of fiscal 2000 as compared to 7.33 percent during the same period in fiscal 1999. The interest income on investments also increased by $5.5 million, or 121 percent, to $10.0 million during the nine months of fiscal 2000 from $4.6 million during the same period of fiscal 1999. The average investments increased from $101.4 million to $220.3 million during the nine months in fiscal 1999 and 2000, respectively. The average yield on investments increased by 11 basis points to 6.10 percent during the nine-month period in fiscal 2000 as compared to 5.99 percent during the same period last year. As a result, the overall average yield on earning assets increased by 3 basis points to 7.19 percent during the nine months of fiscal 2000 as compared 7.16 percent during to the same period in fiscal 1999. Interest Expense. Interest expense for the quarter ended March 31, 2000 was $13.4 million as compared to $8.3 million for the same period in 1999, an increase of $5.1 million, or 61 percent. This increase was primarily attributable to increases in average FHLB advances and deposits as well as the cost of both. The average cost of liabilities was 4.98 percent during the quarter ended March 31, 2000, up 54 basis points as compared to 4.44 percent from the same period in 1999. Average deposits increased by $76.9 million, or 13 percent, to $702.9 million during the quarter ended March 31, 2000 as compared to $626.0 million during the same period in 1999. The average rate paid on deposits increased to 4.45 percent during the quarter ended March 31, 2000 from 4.32 percent during the same quarter in 1999. The increase in the average rate on deposits was due to higher market rates and the Company's efforts to extend the deposit maturities. Borrowings, which are mainly FHLB advances, averaged $375.7 million during the quarter ended March 31, 2000 as compared to $132.0 million for the same quarter in 1999. The average rate paid on the borrowings increased to 5.97 percent for the quarter ended March 31, 2000 from 5.01 percent in the same quarter in 1999. This increase resulted from the lengthening of short-term borrowings to mitigate the future impact of rising rates. For the nine months ended March 31, 2000, total interest expense increased by $9.7 million, or 38 percent, to $35.4 million as compared to $25.7 million for the same period in 1999. The average cost of liabilities increased by 9 basis points to 4.72 percent during the nine months of fiscal 2000 as compared to 4.63 percent during the same period in fiscal 1999. Average deposits increased by $75.7 million, or 12 percent, to $686.6 million as compared to $610.9 million during the same period in fiscal 1999. The average cost of deposits decreased by 15 basis points to 4.33 percent during the nine months of fiscal 2000 as compared to 4.48 percent during the same period in fiscal 1999. Average borrowings increased by $178.1 million, or 137 percent, to $307.7 million as compared to $129.6 million during the same period in fiscal 1999. The average cost of borrowings increased by 28 basis points to 5.61 percent during the nine months of fiscal 2000 as compared to 5.33 percent during the same period in fiscal 1999. 11
<TABLE> The following table depicts the average balance sheets for the quarter and nine months ended March 31, 2000 and 1999, respectively: Average Balance Sheets (dollars in thousands) Quarter Ended Quarter Ended March 31, 2000 March 31, 1999 -------------------------- ---------------------------- Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- -------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Interest earning assets: Loans (1).................... $ 916,825 $ 17,266 7.53% $ 716,010 $ 13,106 7.32% Investment securities........ 225,629 3,437 6.09% 119,017 1,772 5.96% ---------- -------- ---- --------- -------- ---- Total interest earning assets..................... 1,142,454 20,703 7.25% 835,027 14,878 7.13% Non-interest earning assets.. 47,424 35,297 ---------- --------- Total assets................. $1,189,878 $ 870,324 ========== ========= Interest-bearing liabilities: Deposits .................... $ 702,926 7,784 4.45% $ 625,991 6,663 4.32% Borrowings................... 375,678 5,579 5.97% 132,003 1,632 5.01% ---------- -------- ---- --------- -------- ---- Total interest-bearing liabilities................ 1,078,604 13,363 4.98% 757,994 8,295 4.44% Non-interest-bearing liabilities ............... 25,572 27,507 ---------- --------- Total liabilities............ 1,104,176 785,501 Retained earnings............ 85,702 84,823 ---------- --------- Total liabilities and retained earnings................... $1,189,878 $ 870,324 ========== ========= -------- -------- Net interest income.......... $ 7,340 $ 6,583 ======== ======== Interest rate spread (2)...... 2.27% 2.69% Net interest margin (3)....... 2.57% 3.15% Ratio of average interest earning assets to average interest-bearing liabilities................. 105.92% 110.16% Return on average assets...... 0.53% 0.90% Return on average equity...... 7.38% 9.24% (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. </TABLE> 12
<TABLE> Average Balance Sheets (dollars in thousands) Nine Months Ended Nine Months Ended March 31, 2000 March 31, 1999 -------------------------- ---------------------------- Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ------- -------- ---- -------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Interest earning assets: Loans (1)....................$ 838,786 $ 47,068 7.48% $ 715,018 $ 39,315 7.33% Investment securities ....... 220,338 10,073 6.10% 101,421 4,553 5.99% ---------- -------- ---- --------- -------- ---- Total interest earning assets..................... 1,059,124 57,141 7.19% 816,439 43,868 7.16% Non-interest earning assets.. 46,715 34,355 ---------- --------- Total assets.................$1,105,839 $ 850,794 ========== ========= Interest-bearing liabilities: Deposits.....................$ 686,604 22,395 4.33% $ 610,889 20,540 4.48% Borrowings................... 307,716 12,975 5.61% 129,618 5,189 5.33% ---------- -------- ---- --------- -------- ---- Total interest-bearing liabilities................ 994,320 35,370 4.72% 740,507 25,729 4.63% Non-interest-bearing liabilities................ 25,010 26,960 ---------- --------- Total liabilities............ 1,019,330 766,467 Retained earnings............ 86,509 84,327 ---------- --------- Total liabilities and retained earnings..........$1,105,839 $ 850,794 ========== -------- ========= -------- Net interest income.......... $ 21,771 $ 18,139 ======== ======== Interest rate spread (2)..... 2.47% 2.54% Net interest margin (3)...... 2.74% 2.96% Ratio of average interest earning assets to average interest- bearing liabilities ....... 106.52% 110.25% Return on average assets..... 0.61% 0.81% Return on average equity..... 7.77% 8.14% (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. </TABLE> 13
The following table provides the rate/volume variances for the quarter and nine months ended March 31, 2000 and 1999, respectively: Rate/Volume Variance (dollars in thousands) Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999 Increase (Decrease) Due to - ------------------------------------------------------------------------------ Rate/ Rate Volume Volume Net ---- ------ ------ --- Interest income Loans (1).......................... $ 378 $ 3,676 $ 106 $ 4,160 Investment securities.............. 48 1,600 17 1,665 ------ -------- ------ -------- Total net change in income on interest-earning assets........ 426 5,276 123 5,825 Interest-bearing liabilities: Deposits........................... 159 943 19 1,121 Borrowings......................... 311 3,047 589 3,947 ------ -------- ------ -------- Total net change in expense on interest-bearing liabilities...... 470 3,990 608 5,068 ------ -------- ------ -------- Net change in net interest income... $ (44) $ 1,286 $ (485) $ 757 ====== ======== ====== ======= (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. 14
Rate/Volume Variance (dollars in thousands) Nine months Ended March 31, 2000 Compared to Nine months Ended March 31, 1999 Increase (Decrease) Due to - ------------------------------------------------------------------------------ Rate/ Rate Volume Volume Net ---- ------ ------ --- Interest income Loans (1).......................... $ 808 $ 6,805 $ 140 $ 7,753 Investment securities.............. 35 5,494 (9) 5,520 ------ -------- ------ -------- Total net change in income on interest-earning assets......... 843 12,299 131 13,273 Interest-bearing liabilities: Deposits........................... (690) 2,644 (99) 1,855 Borrowings ........................ 258 7,156 372 7,786 ------ -------- ------ -------- Total net change in expense on interest-bearing liabilities....... (432) 9,800 273 9,641 ------ -------- ------ -------- Net change in net interest income .. $1,275 $ 2,499 $ (142) $ 3,632 ====== ======== ====== ======== (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. Provision for Loan Losses. The Company increased its provision for loan losses by $100,000 during the third quarter of fiscal 2000 to $175,000 as compared to $75,000 for the same period in fiscal 1999. This measure was taken because of substantial growth in the loan portfolio during the prior two quarters. The allowance for loan losses was $6.9 million at March 31, 2000, an increase from $6.4 million a year earlier. The allowance as a percent of gross loans held for investment at March 31, 2000 was 0.81 percent as compared to 1.00 percent at March 31, 1999. Net charge offs were $10,000 during the nine months of fiscal 2000 as compared to net charge offs of $205,000 during the same period of fiscal 1999. 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. 15
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 Nine Months Ended --------------------------------- March 31, 2000 March 31, 1999 -------------- -------------- Allowance at beginning of period ........ $ 6,727 $ 6,186 Provision for loan losses................ 175 450 Recoveries: Mortgage loans: One-to-four family...................... - 17 Multifamily............................. - - Commercial.............................. - - Construction............................ - - Consumer loans.......................... - 35 Commercial business lending............. - - -------- -------- Total recoveries.................... - 52 Charge-offs: Mortgage loans: One-to-four family...................... - (201) Multifamily............................. (5) - Commercial.............................. - - Construction............................ - - Consumer loans.......................... - (56) Commercial business lending............. (5) - -------- -------- Total charge-offs................... (10) (257) -------- -------- Net recoveries (charge-offs)........ - (205) -------- -------- Balance at end of period.......... $ 6,892 $ 6,431 ======== ======== Allowance for loan losses as a percentage of gross loans held for investment...... 0.81% 0.96% Net recovery (charge offs) as a percentage of average loans outstanding during the period.............................. - (0.04%) Allowance for loan losses as a percentage of non-performing loans at the end of the period........................... 357.47% 233.35% 16
Asset Quality. The following table is provided to disclose additional details on asset quality (dollars in thousands) : At March 31, At March 31, 2000 1999 ---- ---- Loans accounted for on a non-accrual basis: Mortgage loans: One-to-four family........................... $ 1,759 $ 2,337 Multifamily.................................. - 413 Commercial................................... 63 - Construction................................. - - Consumer loans............................... 104 - Commercial business lending.................. - - Other loans.................................. - - -------- -------- Total..................................... 1,926 2,750 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................................. 1,926 2,750 Real estate owned.............................. 1,734 1,801 -------- -------- Total non-performing assets............... $ 3,660 $ 4,551 ======== ======== Restructured loans............................. $ 1,487 $ 1,564 Non-accrual and 90 days or more past due loans as a percentage of loans held for investment, net............................... 0.23% 0.43% Non-accrual and 90 days or more past due loans as a percentage of total assets............... 0.17% 0.31% Non-performing assets as a percentage of total assets.................................. 0.31% 0.51% 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. 17
Non-Interest Income. Non-interest income decreased by $1.4 million, or 47 percent, to $1.6 million during the quarter ended March 31, 2000 from $3.0 million during the same period in 1999. The decrease in non-interest income was primarily attributable to a decrease in gains from the sale of loans. Total loans sold during the third quarter of fiscal 2000 decreased by $63.3 million, or 33 percent, to $130.7 million as compared to $193.9 million in the same period in fiscal 1999. The ratio of gains to loans sold was 0.21 percent in the third quarter 2000, down from 1.0 percent a year earlier. For the nine months ended March 31, 2000, the non-interest income decreased by $3.5 million, or 37 percent, to $5.6 million as compared to $9.4 million for the same period in 1999. Total loans sold during the nine months of fiscal 2000 decreased by $242.4 million, or 46 percent, to $281.3 million as compared to $523.8 million in the same period in fiscal 1999. The ratio of gains to loans sold was 0.61 percent during the nine months ended March 31, 2000, down from 1.0 percent a year earlier. Non-Interest Expenses. Non-interest expenses decreased by $63,000 to $6.0 million during the quarter ended March 31, 2000 from $6.1 million in the same period in 1999. This decrease was primarily attributable to (a) a decrease in the incentive based compensation related to the loan production/mortgage banking division and (b) a decrease in professional expenses associated with last year's Y2K consultant costs. These decreases were partially offset by (a) an increase in equipment expenses as a result of the computer system renovation/ Y2K project, (b) an increase in depreciation and office rentals as a result of additional offices for the banking and mortgage operations, and (c) an increase in sales and marketing expenses as a result of the Company's general image advertising and deposit campaigns. Non-interest expenses as percentage of average assets improved to 2.03 percent during the third quarter of fiscal 2000 from 2.80 percent during the same period in fiscal 1999. For the nine months ended March 31, 2000, the non-interest expenses increased by $387,000 to $18.5 million as compared to $18.1 million for the same period in 1999. This increase was due primarily because the increases in equipment and marketing expenses were greater than the decrease in the incentive based compensation. Non-interest expenses as percentage of average assets also improved to 2.23 percent during the nine months of fiscal 2000 from 2.84 percent during the same period in fiscal 1999. Income taxes. Income tax expense was $1.1 million for the quarter ended March 31, 2000 as compared to $1.4 million during the same period in 1999. For the nine months ended March 31, 2000, the income tax expense was $3.7 million as compared to $3.8 million during the same period in 1999. The effective tax rate for the third quarter and for nine months ended March 31, 2000 and 1999 was 42 percent. 18
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 For the Nine Quarter Ended Months Ended March 31, March 31, -------------- --------------- 2000 1999 2000 1999 ---- ---- ---- ---- Loans originated for sale : Retail originations............... $ 49,874 $ 65,055 $173,590 $229,518 Wholesale originations............ 42,238 83,370 119,548 285,212 -------- -------- -------- -------- Total loans originated for sale.. 92,112 148,425 293,138 514,730 Loans sold: Servicing released................ 130,656 193,501 280,035 522,328 Servicing retained................ - 435 1,275 1,425 -------- -------- -------- -------- Total loans sold................. 130,656 193,936 281,310 523,753 Loans originated for portfolio: Mortgage loans: One-to-four family.............. 17,947 40,872 193,873 123,730 Multifamily..................... - - 2,100 - Commercial...................... 450 2,093 3,063 4,168 Construction loans.............. 11,477 5,526 38,292 20,275 Consumer........................ 4,791 8,164 13,209 21,009 Commercial business lending..... 624 1,887 6,441 10,172 Other loans..................... 203 59 875 169 -------- -------- -------- -------- Total loans originated for portfolio...................... 35,492 58,601 257,853 179,523 Loans purchased: Mortgage loans: One-to-four family.............. 703 - 703 - Commercial...................... 789 - 5,915 1,010 -------- -------- -------- -------- Total loans purchased............ 1,492 - 6,618 1,010 Mortgage loan principal repayments........................ 22,663 55,055 95,618 170,571 Real estate acquired in settlement of loans............... 111 229 1,144 1,130 Increase in other items, net (1)... 3,271 2,630 5,596 4,314 -------- -------- -------- -------- Net increase in loans receivable, net............................... $(21,063) $(39,564) $185,133 $ 4,123 ======== ======== ======== ======== (1) Includes changes in loans in process, discounts, deferred fees and costs and loan loss reserves. 19
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 the FHLB of San Francisco equal to 40 percent of total assets, which, on March 31, 2000 permitted additional advances of $131.8 million, in addition to having unsecured lines of $74 million with its correspondent banks. 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 March 31, 2000, the Savings Bank originated $127.6 million of loans as compared to $207.0 million during the same period in 1999. For nine months ended March 31, 2000, the Bank originated $551.0 million of loans as compared to $694.3 million during the same period in 1999. This activity was funded primarily by loan sales, loan principal payments, deposits and FHLB advances. For the quarter ended March 31, 2000, loan sales aggregated $130.7 million and loan principal payments totaled $22.7 million. For nine months ended March 31, 2000, loans sales aggregated $281.3 million and loan principal payments totaled $95.6 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 third quarter of fiscal 2000 and 1999 were 9.5 percent and 16.9 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 March 31, 2000 are as follows (dollars in thousands): Amount Percent ------ ------- Tangible capital...................... $ 72,020 6.26% Requirement to be "Well Capitalized".. 23,027 2.00% --------- ----- Excess over requirement............... $ 48,993 4.26% ========= ===== Tier 1 (core) capital.................. $ 72,020 6.26% Requirement to be "Well Capitalized"... 57,568 5.00% --------- ----- Excess over requirement................ $ 14,452 1.26% ========= ===== Total risk-based capital............... $ 79,180 12.66% Requirement to be "Well Capitalized"... 62,533 10.00% --------- ----- Excess over requirement................ $ 16,647 2.66% ========= ===== Tier 1 risk-based capital.............. $ 72,020 11.52% Requirement to be "Well Capitalized"... 37,520 6.00% --------- ----- Excess over requirement................ $ 34,500 5.52% ========= ===== Year 2000 Project Conclusion: - ----------- The Company successfully managed to pass through the critical rollover date for the year 2000 and continues to monitor the overall systems and critical vendors. The overall Year 2000 project is within the 20
budget of $3.5 million, which was allocated at the beginning of the project. As of the end of the third quarter, the Year 2000 project is in compliance with FFIEC dates. Supplemental Information March 31, 2000 June 30, 1999 March 31, 1999 -------------- ------------- -------------- Loans serviced for others (in thousands)... $ 286,708 $ 315,028 $ 353,139 Book value per share...... $ 21.99 $ 20.45 $ 19.16 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. 21
Item 5. Other Information a) Stock repurchase programs: - ---------------------------- On March 8, 2000, the Company announced the completion of the 10 percent of the stock repurchased program of which 439,000 shares had been repurchased with an average price of $18.74. The Company also announced another repurchase of up to 5 percent of its common stock, or approximately 197,000 shares, over a one-year period. This repurchase represents the fifth buyback through which the Company has previously retired approximately 1.2 million shares. b) Status on Branch Expansion to Corona, California: - --------------------------------------------------- As a result of continued construction delays by the developer, the Company had decided to seek another suitable site in Corona. The revised expected opening of the Corona branch will be announced later. c) Status on Branch Expansion to Temecula, California: - ----------------------------------------------------- The negotiations with the proposed site owner are in progress and the revised expected opening of the Temecula branch will be announced later. Item 6. Exhibits and Reports on Form 8-K a) Exhibits: None. b) Reports on Form 8-K None. 22
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. May 9, 2000 /s/ Craig G. Blunden -------------------------------------- Craig G. Blunden President and Chief Executive Officer (Principal Executive Officer) May 8, 2000 /s/ Brian M. Riley -------------------------------------- Brian M. Riley Chief Financial Officer (Principal Financial and Accounting Officer) 23
Exhibit 27 Financial Data Schedule This schedule contains financial information extracted from the unaudited interim consolidated financial statements of Provident Financial Holdings for the nine months ended March 31, 2000 and is qualified in its entirety by reference to such financial statements. Financial Data As of or for the Nine Months Item Number Ended March 31, 2000 Item Description - ----------- -------------------- ---------------- 9-03 (1) 14,195 Cash and due from Banks 9-03 (2) 689,957 Interest-bearing deposits 9-03 (3) 3,000 Federal funds sold purchased securities for resale 9-03 (4) - Trading account assets 9-03 (6) 25,250 Investment and mortgage backed securities held for sale. 9-03 (6) 175,230 Investment and mortgage backed securities held to maturity carrying value 9-03 (6) 166,788 Investment and mortgage backed securities held to maturity market value 9-03 (7) 898,628 Loans 9-03 (7) (2) 6,892 Allowance for losses 9-03 (11) 1,165,826 Total assets 9-03 (12) 708,493 Deposits 9-03 (13) 203,000 Short-term borrowings 9-03 (15) 18,807 Other liabilities 9-03 (16) 148,800 Long-term debt 9-03 (19) - Preferred stock - mandatory redemption 9-03 (20) - Preferred stock - no mandatory redemption 9-03 (21) 51 Common stock 9-03 (22) 86,675 Other stockholders' equity 9-03 (23) 1,165,826 Total liabilities and stockholders' equity 9-04 (1) 48,996 Interest and fees on loans 9-04 (2) 10,073 Interest and dividends on investment securities 9-04 (4) - Other interest income 9-04 (5) 57,141 Total interest income 9-04 (6) 22,395 Interest on deposits 9-04 (9) 35,370 Total interest expense 9-04 (10) 21,771 Net interest income 9-04 (11) 175 Provision for loan losses 9-04 (13) (h) 38 Investment securities gains/ (losses) 9-04 (14) 18,534 Other expenses 9-04 (15) 8,701 Income/loss before income tax 9-04 (17) 8,701 Income/loss before extraordinary items 9-04 (18) - Extraordinary items, loss tax 9-04 (19) - Cumulative change in accounting principles 9-04 (20) 5,040 Net income or loss 9-04 (21) 1.37 Earnings per share - basic 9-04 (21) 1.35 Earnings per share - fully diluted I.B.5 2.74 Net yield - interest earning assets actual III.C.1.(a) 1,926 Loans on non-accrual III.C.1.(b) - Accruing loans past due 90 days or more III.C.2.(c) 1,487 Troubled debt restructuring III.C.2 8,576 Potential problem loans IV.A.1 6,727 Allowance for loan losses - beginning of period
(Continued) Financial Data As of or for the Nine Months Item Number Ended March 31, 2000 Item Description - ----------- -------------------- ---------------- IV.A.2 0 Total charge-offs IV.A.3 10 Total recoveries IV.A.4 6,892 Allowance for loan losses - end of period IV.B.1 6,892 Loan loss allowance allocated to domestic loans IV.B.2 - Loan loss allowance allocated to foreign loans IV.B.3 - Loan loss allowance - unallocated