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......................December 31, 2000 ----------------- [ ] 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 February 9, 2001 ---------------- ---------------------- Common stock, $ 0.01 par value 3,865,409 shares * * Includes 277,282 shares held by the employee stock ownership plan that have not been released, committed to be released, or allocated to participant accounts; and 84,404 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 December 31, 2000 and June 30, 2000....................... 1 Consolidated Statements of Income for the quarter and six months ended December 31, 2000 and 1999. 2 Consolidated Statements of Changes in Stockholders' Equity for the quarter and six months ended December 31, 2000 and 1999. 3 Consolidated Statements of Cash Flows for the quarter and six months ended December 31, 2000 and 1999. 4 Selected Notes to Unaudited Interim 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 December 31, 2000 and June 30, 2000.................................................. 7 Comparison of Operating Results for the quarter and six months ended December 31, 2000 and 1999 8 Loan Volume Activities......................................... 15 Liquidity and Capital Resources................................ 16 Supplemental Information....................................... 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings..................................... 17 Item 2. Changes in Securities................................. 17 Item 3. Defaults upon Senior Securities....................... 17 Item 4. Submission of Matters to Vote of Stockholders......... 17 Item 5. Other Information..................................... 17 Item 6. Exhibits and Reports on Form 8-K...................... 18 SIGNATURES.............................................................. 19
PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Financial Condition (Unaudited) Dollars in Thousands December 31, June 30, 2000 2000 ----------- ----------- ASSETS Cash......................................... $ 19,881 $ 18,965 Overnight deposits........................... 2,000 - Investment securities - held to maturity (market value $173,134 and $166,059, respectively)................................ 175,242 175,234 Investment securities - available for sale at fair market value............................ 29,238 24,382 Loans held for investment, net................ 791,252 824,862 Loans held for sale, net...................... 52,793 52,049 Accrued interest receivable................... 7,618 7,391 Real estate held for investment, net.......... 12,044 12,380 Real estate owned, net........................ 697 1,047 Federal Home Loan Bank stock.................. 18,188 17,287 Premises and equipment, net................... 7,238 7,525 Prepaid expenses and other assets............. 7,308 6,682 ----------- ----------- Total assets................................ $ 1,123,499 $ 1,147,804 =========== =========== Liabilities and Stockholders' Equity Liabilities: Non-interest bearing deposits................. $ 20,917 $ 18,666 Interest bearing deposits..................... 684,950 677,792 ----------- ----------- Total deposits.............................. 705,867 696,458 Borrowings.................................... 303,899 341,668 Accounts payable, accrued interest and other liabilities.................................. 21,007 20,711 ----------- ----------- Total liabilities........................... 1,030,773 1,058,837 Stockholders' equity: Preferred stock, $.01 par value; authorized 2,000,000 shares; none issued and outstanding - - Common stock, $.01 par value; authorized 15,000,000 shares; issued 5,128,215 shares; outstanding 3,865,409 and 3,922,066 shares, respectively................................. 51 51 Additional paid-in capital.................... 51,400 51,249 Retained earnings............................. 68,579 64,811 Treasury stock at cost (1,262,806 and 1,203,149 shares, respectively)........................ (23,931) (22,696) Unearned stock compensation................... (4,129) (4,634) Accumulated other comprehensive income, net of tax.......................................... 756 186 ----------- ----------- Total stockholders' equity.................. 92,726 88,967 ----------- ----------- Total liabilities and stockholders' equity.. $ 1,123,499 $ 1,147,804 =========== =========== The accompanying notes are integral part of these financial statements. 1
PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Income (Unaudited) Dollars in Thousands, Except Earnings Per Share Quarter Ended Six Months Ended December 31, December 31, ------------------ ----------------- 2000 1999 2000 1999 ------------------ ----------------- Interest income : Loans receivable, net....... $ 16,448 $ 15,851 $ 33,128 $ 29,802 Investment securities....... 3,775 3,418 7,314 6,637 -------- -------- -------- -------- Total interest income....... 20,223 19,269 40,442 36,439 Interest expense Savings accounts........... 841 596 1,525 1,144 Demand and NOW accounts.... 914 1,029 1,856 2,051 Certificates of deposit.... 7,006 6,019 13,765 11,416 Federal Home Loan Bank..... advances and other borrowings............... 5,076 4,263 10,360 7,375 -------- -------- -------- -------- Total interest expense.... 13,837 11,907 27,506 21,986 -------- -------- -------- -------- Net interest income......... 6,386 7,362 12,936 14,453 Provision for loan losses... - - - - -------- -------- -------- -------- Net interest income after provision for loan losses.. 6,386 7,362 12,936 14,453 Non-interest income Loan servicing and other fees 478 621 1,073 1,341 Gain on sale of loans, net. 1,531 598 2,840 1,446 Real estate operations, net 184 65 364 101 Other...................... 836 609 1,624 1,223 -------- -------- -------- -------- Total non-interest income.. 3,029 1,893 5,901 4,111 Non-interest expenses Salaries and employee benefits.................. 3,666 3,355 7,652 7,364 Premises and occupancy..... 437 548 946 1,040 Equipment.................. 438 550 910 1,079 Professional expenses...... 122 314 244 483 Sales and marketing expenses 274 358 542 627 Other...................... 961 931 2,027 1,980 -------- -------- -------- -------- Total non-interest expenses 5,898 6,056 12,321 12,573 -------- -------- -------- -------- Income before taxes......... 3,517 3,199 6,516 5,991 Provision for income taxes.. 1,482 1,351 2,748 2,533 -------- -------- -------- -------- Net income................. $ 2,035 $ 1,848 $ 3,768 $ 3,458 ======== ======== ======== ======== Basic earnings per share.. $ 0.58 $ 0.50 $ 1.07 $ 0.92 Diluted earnings per share $ 0.57 $ 0.49 $ 1.05 $ 0.90 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 December 31, 2000 and 1999 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 September 30, 2000............. 3,900,066 $ 51 $ 51,295 $ 66,544 $ (23,094) $ (4,381) $ 521 $90,936 Comprehensive income: Net income.......... 2,035 2,035 Unrealized holding gains on securities available for sale, net of tax......... 235 235 ------- Total comprehensive income............... 2,270 Purchase of treasury stock, net........... (37,657) (837) (837) Issuance of shares under stock-option compensation plans... 3,000 46 46 Release of shares under stock-based compensation plans... 59 252 311 - --------------------------------------------------------------------------------------------------------- Balance at December 31, 2000............. 3,865,409 $ 51 $ 51,400 $ 68,579 $ (23,931) $ (4,129) $ 756 $92,726 ======================================================================================================== The accompanying notes are an integral part of these financial statements. </TABLE> <TABLE> 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 September 30, 1999............. 4,182,285 $ 51 $ 51,134 $ 59,165 $ (18,143) $ (5,392) $ 509 $87,324 Comprehensive income: Net income.......... 1,848 1,848 Unrealized holding gains on securities available for sale, net of tax......... (246) (246) ------- Total comprehensive income............... 1,602 Purchase of treasury stock................ (193,719) (3,556) (3,556) Release of shares under stock-based compensation plans... 53 253 306 - --------------------------------------------------------------------------------------------------------- Balance at December 31, 1999............. 3,988,566 $ 51 $ 51,187 $ 61,013 $ (21,699) $ (5,139) $ 263 $85,676 ======================================================================================================== The accompanying notes are an integral part of these financial statements. 3 </TABLE>
<TABLE> PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Stockholders' Equity (Unaudited) Dollars in Thousands, Except Shares For the Six Months Ended December 31, 2000 and 1999 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, 2000................. 3,922,066 $ 51 $ 51,249 $ 64,811 $ (22,696) $ (4,634) $ 186 $88,967 Comprehensive income: Net income.......... 3,768 3,768 Unrealized holding gains on securities available for sale, net of tax......... 570 570 ------- Total comprehensive income............... 4,338 Purchase of treasury stock, net.. ........ (59,657) (1,235) (1,235) Issuance of shares under stock-option compensation plan.... 3,000 46 46 Release of shares under stock-based compensation plans... 105 505 610 - --------------------------------------------------------------------------------------------------------- Balance at December 31, 2000............. 3,865,409 $ 51 $ 51,400 $ 68,579 $ (23,931) $ (4,129) $ 756 $92,726 ========================================================================================================= The accompanying notes are an integral part of these financial statements. </TABLE> <TABLE> 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.......... 3,458 3,458 Unrealized holding gains on securities available for sale, net of tax......... (481) (481) ------- Total comprehensive income............... 2,977 Purchase of treasury stock................ (397,219) (7,610) (7,610) Release of shares under stock-based compensation plans... 118 505 623 - --------------------------------------------------------------------------------------------------------- Balance at December 31, 1999............. 3,988,566 $ 51 $ 51,187 $ 61,013 $ (21,699) $ (5,139) $ 263 $85,676 ========================================================================================================= The accompanying notes are an integral part of these financial statements. 4 </TABLE>
PROVIDENT FINANCIAL HOLDINGS, INC. Consolidated Statements of Cash Flow (Unaudited) Dollars in Thousands Quarter Ended Six Months Ended December 31, December 31, 2000 1999 2000 1999 --------------------- ------------------- Cash flows from operating activities: Net Income................... $ 2,035 $ 1,848 $ 3,768 $ 3,458 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 464 433 969 919 Provision for loan losses... - - - - Provision for real estate losses..................... - - - 10 Gain on sale of loans....... (1,531) (598) (2,840) (1,446) Net gains losses on sale of investment securities...... (213) (31) (213) (38) (Decrease) increase in accounts payable and other liabilities................. (485) 7,955 (99) 4,327 (Increase) decrease in prepaid expense and other assets...................... (623) 7,602 (854) 7,645 Loans originated for sale.... (124,351) (85,229) (240,245) (177,723) Proceeds from sale of loans.. 121,537 65,274 234,274 152,100 Stock compensation........... 357 306 656 623 --------- ---------- --------- --------- Net cash used for operating activities................. (2,810) (2,440) (4,584) (10,125) Cash flows from investing activities: Net decrease (increase) in loan receivables........... 20,891 (88,417) 41,971 (178,110) Maturity of investment securities held-to- maturity................... 3,000 3,050 3,000 4,050 Purchases of investment securities available for sale....................... (7,948) (2,063) (8,941) (23,280) Sales of investment securities available for sale....................... 2,265 156 2,265 2,292 Purchase of Federal Home Loan Bank stock............ (563) (4,697) (901) (9,632) Net sales (purchase) of real estate................ 368 (13,229) 157 (12,749) Purchases of premises and equipment................. (132) (300) (455) (604) Placement of overnight Federal Funds............. (2,000) - (2,000) - --------- ---------- --------- --------- Net cash provided by (used for) investing activities. 15,881 (105,500) 35,096 (218,033) Cash flows from financing activities: Net increase in deposits... 12,862 20,278 9,409 73,358 Repayment of Federal Home Loan Bank advances........ (240,602) (4,437,925) (666,904) (7,981,027) Proceeds of Federal Home Loan Bank advances........ 217,500 4,541,864 629,400 8,151,864 Repayment of other borrowings................ (134) - (266) - Treasury stock purchases... (837) (3,556) (1,235) (7,610) --------- ---------- --------- ---------- Net cash (used for) provided by financing activities... (11,211) 120,661 (29,596) 236,585 --------- ---------- --------- ---------- Net increase in cash and cash equivalents.......... 1,860 12,721 916 8,427 Cash and cash equivalents at beginning of period..... 18,021 15,435 18,965 19,729 --------- ---------- --------- ---------- Cash and cash equivalents at end of period........... $ 19,881 $ 28,156 $ 19,881 $ 28,156 ========= ========== ========= ========== Supplemental Information: Cash paid for interest..... $ 14,070 $ 12,433 $ 26,691 $ 23,643 Cash paid for income taxes. 1,610 1,617 2,042 1,984 Real estate acquired in settlement of loans....... 316 1,033 530 1,033 The accompanying notes are an integral part of these financial statements. 5
PROVIDENT FINANCIAL HOLDINGS, INC. SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS December 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 periods presented. All such adjustments are of a normal recurring nature. The balance sheet data at June 30, 2000 is derived from audited consolidated financial statements of Provident Financial Holdings, Inc. (the "Company"). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2000 (File No. 000- 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 earnings per share ("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 six months ended December 31, 2000 and 1999, respectively. For the Quarter Ended For the Six Months Ended December 31, December 31, --------------------- -------------------------- 2000 1999 2000 1999 ------ ------ ------- ------- Numerator: Net income - numerator for basic earnings per share and diluted earnings per share- income available to common stockholders.. $ 2,034,665 $ 1,848,386 $ 3,767,329 $ 3,458,205 =========== =========== =========== =========== Denominator: Denominator for basic earnings per share: Weighted-average shares.............. 3,505,180 3,685,091 3,509,701 3,747,135 Effect of dilutive securities: Employee stock benefit plans............... 71,022 57,686 68,751 79,609 ----------- ----------- ----------- ----------- Denominator for diluted earnings per share : Adjusted weighted- average shares and assumed conversions. 3,576,202 3,742,777 3,578,452 3,826,744 =========== =========== =========== =========== Basic earnings per share $ 0.58 $ 0.50 $ 1.07 $ 0.92 Diluted earnings per share $ 0.57 $ 0.49 $ 1.05 $ 0.90 Note 3 : Operating Segment Reports The Company has determined that its reportable segments are the operations pertaining to mortgage banking and the operations of Provident Savings Bank, F.S.B. ("Savings Bank") pertaining to consumer 6
and commercial banking. The following tables set forth condensed income statements and total assets for the Company's operating segments for the quarter and six months ended December 31, 2000 and 1999, respectively. For the Quarter Ended December 31, 2000 ---------------------------------------- Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income.................. $ 6,207 $ 179 $ 6,386 Non-interest income: Loan servicing and other fees...... 204 274 478 (Loss) gain on sale of loans, net.. (17) 1,548 1,531 Real estate operations, net........ 197 (13) 184 Other.............................. 834 2 836 - ----------------------------------------------------------------------------- Total non-interest income........ 1,218 1,811 3,029 Non-interest expense: Salaries and employee benefits..... 2,764 902 3,666 Premises and occupancy............. 321 116 437 Operating and administrative expenses.......................... 1,194 601 1,795 - ----------------------------------------------------------------------------- Total non-interest expense...... 4,279 1,619 5,898 - ----------------------------------------------------------------------------- Operating income before income taxes. $ 3,146 $ 371 $ 3,517 ============================================================================= Total assets, end of period.......... $1,066,800 $ 56,699 $1,123,499 ============================================================================= For the Quarter Ended December 31, 1999 ---------------------------------------- Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income.................. $ 7,266 $ 96 $ 7,362 Non-interest income: Loan servicing and other fees...... (670) 1,291 621 (Loss) gain on sale of loans, net.. (34) 632 598 Real estate operations, net........ 78 (13) 65 Other.............................. 617 (8) 609 - ----------------------------------------------------------------------------- Total non-interest income....... (9) 1,902 1,893 Non-interest expense: Salaries and employee benefits..... 2,465 890 3,355 Premises and occupancy............. 370 178 548 Operating and administrative expenses.......................... 1,467 686 2,153 - ----------------------------------------------------------------------------- Total non-interest expense...... 4,302 1,754 6,056 - ----------------------------------------------------------------------------- Operating income before income taxes. $ 2,955 $ 244 $ 3,199 ============================================================================= Total assets, end of period.......... $1,123,193 $ 78,413 $1,201,606 ============================================================================= 7
For the Six Months Ended December 31, 2000 ------------------------------------------ Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income.................. $ 12,589 $ 347 $ 12,936 Non-interest income: Loan servicing and other fees...... 354 719 1,073 (Loss) gain on sale of loans, net.. (32) 2,872 2,840 Real estate operations, net........ 385 (21) 364 Other.............................. 1,463 161 1,624 - ----------------------------------------------------------------------------- Total non-interest income....... 2,170 3,731 5,901 Non-interest expense: Salaries and employee benefits..... 5,668 1,984 7,652 Premises and occupancy............. 664 282 946 Operating and administrative expenses.......................... 2,368 1,355 3,723 - ----------------------------------------------------------------------------- Total non-interest expense....... 8,700 3,621 12,321 - ----------------------------------------------------------------------------- Operating income before income taxes.. $ 6,059 $ 457 $ 6,516 ============================================================================= Total assets, end of period........... $1,066,800 $ 56,699 $1,123,499 ============================================================================= For the Six Months Ended December 31, 1999 ------------------------------------------ Savings Mortgage Consolidated Bank Banking Total - ----------------------------------------------------------------------------- Net interest income.................. $ 14,174 $ 279 $ 14,453 Non-interest income: Loan servicing and other fees...... (1,532) 2,873 1,341 (Loss) gain on sale of loans, net.. (38) 1,484 1,446 Real estate operations, net........ 96 5 101 Other.............................. 1,223 - 1,223 - ----------------------------------------------------------------------------- Total non-interest income....... (251) 4,362 4,111 Non-interest expense: Salaries and employee benefits..... 5,301 2,063 7,364 Premises and occupancy............. 695 345 1,040 Operating and administrative expenses.......................... 2,598 1,571 4,169 - ----------------------------------------------------------------------------- Total non-interest expense...... 8,594 3,979 12,573 - ----------------------------------------------------------------------------- Operating income before income taxes. $ 5,329 $ 662 $ 5,991 ============================================================================= Total assets, end of period.......... $1,123,193 $ 78,413 $1,201,606 ============================================================================= 8
Note 4: Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities", as amended by SFAS No. 137 and 138, on July 1, 2000. 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. There was no significant impact on the overall financial statements upon adoption. This statement continues to evolve as the Derivatives Implementation Group ("DIG"), a task force formed by the Emerging Issues Task Force ("EITF"), makes additional interpretations. The DIG's interpretations are not considered authoritative until cleared by the Financial Accounting Standards Board ("FASB"). It is possible that the DIG's ongoing efforts to interpret this statement could have an impact on the Company's present accounting treatment. For example, upon adoption of SFAS No. 133, the Company accounted for loan commitments on loans classified as held for sale as outside the scope of SFAS No. 133. The DIG released a tentative conclusion in December 2000 that loan commitments on loans that will be classified as held for sale are derivatives pursuant to SFAS No. 133. Because the FASB has not cleared this interpretation, the Company has not adopted the DIG's tentative conclusion on this issue. In September 2000, SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS Statement No. 125, was issued. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. It is not expected that the adoption of SFAS No. 140 will have a material impact on the Company's results of income, financial position, or cash flows. 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 December 31, 2000, the Company had total assets of $1.1 billion, total deposits of $705.9 million and stockholders' equity of $92.7 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 the 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 commercial real estate, construction, business, consumer loans and, to a lesser extent, one-to-four family, multi-family and other loans. In addition, the Savings Bank also facilitates business checking accounts and other business banking services, including the servicing of loans for others. Mortgage banking activities consist of the origination and sale of mortgage loans secured primarily by one-to-four-family residences. The Savings Bank's revenues are derived principally from interest on its loan and investment portfolio and fees generated through its mortgage banking activities. 9
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 December 31, 2000 and June 30, 2000 In line with the Company's interest rate risk mitigation strategies as mentioned on page five of the Company's 10-K report for the year ended June 30, 2000, total assets as of December 31, 2000 decreased by $24.3 million, or 2 percent, to $1.1 billion as compared to June 30, 2000. This decrease was primarily the result of a decrease of $32.9 million, or 4 percent, in total net loans receivable to $844.0 million at December 31, 2000 from $876.9 million at June 30, 2000. This decrease was partially offset by an increase of $4.9 million in investment securities during the first half of fiscal 2001. The proceeds from sales of the current production of all single family, first trust deed, residential mortgage loans and loan payoffs were used to pay down FHLB advances. Total borrowings, which primarily consist of FHLB advances, declined by $37.8 million to $303.9 million at December 31, 2000 from $341.7 million at June 30, 2000. The average maturity of the Company's existing FHLB advances has been increased from 10.3 months at June 30, 2000 to 15.6 months at December 31, 2000 in line with the Company's mitigation strategies. These strategies, along with others, are intended to raise the Company's current capital position by reducing the amount of leverage and to mitigate the impact of future interest rate increases. Total deposits increased to $705.9 million at December 31, 2000 from $696.5 million at June 30, 2000. This increase was attributable to the increase in transactional accounts. The Company continues its focus on building client relationships through checking accounts and other banking products and services. Total stockholders' equity increased by $3.8 million during the first six months ended December 31, 2000, resulting mainly from net income for the first six months, quarterly ESOP accruals and an increase in unrealized gains on securities available for sale. This increase was partially reduced by a resumption of the Company's stock repurchase program. A total of 57,475 shares, with an average price of $18.46 per share, were repurchased in the first half of fiscal 2001. As of December 31, 2000, 40 percent of the authorized 197,000 shares was repurchased with an average price of $17.46 per share. Comparison of Operating Results for the Quarters and Six Months Ended December 31, 2000 and 1999 The Company's net income for the quarter ended December 31, 2000 was $2.0 million, an increase of $187,000, or 10 percent, from $1.8 million during the same quarter in 1999. This increase was primarily attributable to an increase in the gains on sale of loans, real estate operations and other non-interest income, and partly offset by the decline in net interest income. For the six months ended December 31, 2000 and 1999, the Company's net income was $ 3.8 million and $3.5 million, respectively. The Company's net interest income decreased by $976,000, or 13 percent to $6.4 million for the quarter ended December 31, 2000 from $7.4 million during the comparable period of 1999. This decrease resulted from the increase in the cost of funds, which outpaced the increase in yield on earning assets. The net interest margin narrowed to 2.37 percent in the second quarter of fiscal 2001 from 2.74 percent during the same period of fiscal 2000. For the six months ended December 31, 2000 and 1999, net interest income was $12.9 million and $14.5 million, respectively; and the net interest margin was 2.39 percent and 2.84 percent, respectively. The Company's efficiency ratio improved to 63 percent in the second quarter of fiscal 2001 from 65 percent in the same period of fiscal 2000. For the six months ended December 31, 2000 and 1999, the efficiency ratio was 65 percent and 68 percent, respectively. 10
Return on average assets for the quarters ended December 31, 2000 and 1999 was 0.72 percent and 0.66 percent, respectively. For the six months ended December 31, 2000 and 1999, the return on average assets was 0.67 percent and 0.65 percent, respectively. Return on average equity for the quarters ended December 31, 2000 and 1999 was 9.21 percent and 8.56 percent, respectively. For the six months ended December 31, 2000 and 1999, the return on average equity was 8.51 percent and 7.96 percent, respectively. Diluted earnings per share for the quarter ended December 31, 2000 was $0.57, an increase of 16 percent from $0.49 for the quarter ended December 31, 1999. For the six months ended December 31, 2000 and 1999, the diluted earnings per share were $1.05 and $0.90, respectively. The increase in the net earnings per share reflects the effect of the Company's stock repurchase programs during fiscal years 2000 and 2001 and a $310,000 increase in net income for the six months ended December 31, 2000 as compared to the same period in 1999. Interest Income. Interest income increased by $954,000, or 5 percent, to $20.2 million for the quarter ended December 31, 2000 from $19.3 million during the same quarter in 1999. This increase was primarily the result of higher overall market interest rates. The average earning assets during the second quarter of fiscal 2001 were virtually unchanged at $1.1 billion as compared to the same period last year. The average yield on earning assets during the second quarter of fiscal 2001 was 7.52 percent, 34 basis points higher than the average yield of 7.18 percent during the same period last year. Loan interest income increased by $597,000, or 4 percent, to $16.4 million in the quarter ended December 31, 2000 as compared to $15.9 million for the same period in 1999. This increase was attributable to the increase in average loan yield resulting from the increase in market interest rates. The average loan yield during the second quarter of fiscal 2001 was 7.71 percent as compared to 7.47 percent during the same quarter last year. The average loans outstanding, including those available for sale, increased slightly to $852.9 million during the second quarter of fiscal 2001 from $849.2 million during the same quarter of fiscal 2000. The interest income from investment securities, including Federal Home Loan Bank ("FHLB") stock, increased by $357,000, or 11 percent to $3.8 million during the quarter ended December 31, 2000 from $3.4 million during the same quarter in 1999. This increase was primarily due to an accrual of $270,000 for the quarterly dividend on FHLB stock, which, in prior periods, was not recorded until actually received. The average balance of investment securities remained virtually unchanged at $223.0 million during the second quarter of fiscal 2001 as compared to the same period of fiscal 2000. The average yield on investment securities increased by 66 basis points to 6.77% during the second quarter of fiscal 2001 from 6.11% during the same period last year, due to the change in the income recognition timing of the FHLB stock dividend as described above. For the six months ended December 31, 2000, the interest income increased by $4.0 million, or 11 percent, to $40.4 million as compared to $36.4 million for the same period in 1999. This increase was attributable to an increase of the average earning-asset yield resulting from the increase in market interest rates and the FHLB stock dividend accrual. The average yield on earning assets increased by 31 basis points to 7.47 percent during the six months ended December 31, 2000 from 7.16 percent during the same period in 1999. The average earning assets increased by $65.0 million, or 6 percent, to $1.1 billion during the six months of fiscal 2001 from $1.0 billion during the same period of fiscal 2000. The interest income on loans increased by $3.3 million, or 11 percent, to $33.1 million during the six months of fiscal 2001 from $29.8 million during the same period of fiscal 2000. The average loans outstanding increased by $60.0 million, or 7 percent, to $860.2 million during the six months ended December 31, 2000 from $800.2 million during the same period in 1999. The average yield on loans increased by 25 basis points to 7.70 percent during the six months of fiscal 2001 as compared to 7.45 percent during the same period in fiscal 2000. The interest income on investments also increased by $677,000, or 10 percent, to $7.3 million during the six months of fiscal 2001 from $6.6 million during the same period of fiscal 2000. This increase was 11
primarily due to an increase in investment balances and a change in the income recognition of the FHLB stock dividend as described above. The average balance of investment securities increased to $222.7 million during the first half of fiscal 2001 from $217.7 million during the same period of fiscal 2000. The average yield on investments increased by 47 basis points to 6.57 percent during the six-month period in fiscal 2001 as compared to 6.10 percent during the same period last year. Interest Expense. Interest expense for the quarter ended December 31, 2000 was $13.8 million as compared to $11.9 million for the same period in 1999, an increase of $1.9 million, or 16 percent. This increase was primarily attributable to an increase in average cost of deposits and FHLB advances. The average cost of liabilities was 5.48 percent during the quarter ended December 31, 2000, up 80 basis points as compared to 4.68 percent during the same period in 1999. The average balance of interest-bearing liabilities remained virtually unchanged at $1.0 billion during the second quarter of fiscal 2001 as compared to the same period last year. Interest expense on deposits for the quarter ended December 31, 2000 was $8.8 million as compared to $7.6 million for the same period in 1999, an increase of $1.2 million, or 16 percent. Average deposits remained virtually unchanged at $700.5 million during the quarter ended December 31, 2000 as compared to $699.8 million during the same period in 1999. The average cost of deposits increased to 4.98 percent during the quarter ended December 31, 2000 from 4.33 percent during the same quarter in 1999. The increase in the average rate on deposits was due to higher market rates. Interest expense on borrowings for the quarter ended December 31, 2000 was $5.1 million as compared to $4.3 million for the same period in 1999, an increase of $813,000, or 19 percent. The average borrowings, which are mainly FHLB advances, were $303.4 million during the quarter ended December 31, 2000 as compared to $309.8 million for the same quarter in 1999, a decrease of $6.4 million. The average cost on the borrowings increased to 6.66 percent for the quarter ended December 31, 2000 from 5.46 percent in the same quarter in 1999. This increase resulted from the increase in market interest rates and the replacement of short-term borrowings with long-term borrowings. For the six months ended December 31, 2000, total interest expense increased by $5.5 million, or 25 percent, to $27.5 million as compared to $22.0 million for the same period in 1999. The average cost of interest-bearing liabilities increased by 83 basis points to 5.41 percent during the six months of fiscal 2001 as compared to 4.58 percent during the same period of fiscal 2000. The average interest-bearing liabilities during the six-month period of fiscal 2001 increased by $59.5 million, or 6 percent, to $1.0 billion as compared to $952.6 million during the same period last year. For the six months ended December 31, 2000, total interest expense on deposits increased by $2.5 million, or 17 percent, to $17.1 million as compared to $14.6 million for the same period in 1999. The average deposits increased by $18.0 million, or 3 percent, to $696.5 million as compared to $678.5 million during the same period in 1999. The average cost of deposits increased by 63 basis points to 4.90 percent during the six months of fiscal 2001 as compared to 4.27 percent during the same period in fiscal 2000. For the six months ended December 31, 2000, total interest expense on borrowings increased by $3.0 million, or 40 percent, to $10.4 million as compared to $7.4 million for the same period in 1999. Average borrowings increased by $41.5 million, or 15 percent, to $315.6 million as compared to $274.1 million during the same period of fiscal 2000. The average cost of borrowings increased by 119 basis points to 6.53 percent during the six months of fiscal 2001 as compared to 5.34 percent during the same period of fiscal 2000. 12
<TABLE> The following tables depict the average balance sheets for the quarter and six months ended December 31, 2000 and 1999, respectively: Average Balance Sheets (dollars in thousands) Quarter Ended Quarter Ended December 31, 2000 December 31, 1999 ---------------------------- ---------------------------- Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost --------- -------- ---- ---------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Interest earning assets: Loans (1).................... $ 852,906 $ 16,448 7.71% $ 849,199 $ 15,851 7.47% Investment securities........ 202,374 3,203 6.33 206,165 3,246 6.30 FHLB stock (2)............... 17,900 563 12.58 17,138 166 3.87 Interest-earning deposits.... 2,686 9 1.34 490 6 4.90 ---------- -------- ---- ---------- -------- ---- Total interest earning assets 1,075,866 20,223 7.52% 1,072,992 19,269 7.18% Non-interest earning assets.. 47,098 46,806 ---------- ---------- Total assets................. $1,122,964 $1,119,798 ========== ========== Interest-bearing liabilities: Savings accounts............... $ 93,222 841 3.59% $ 86,323 596 2.74% Demand and NOW accounts........ 150,124 914 2.42 150,377 1,029 2.71 Certificates of deposit........ 457,110 7,006 6.10 463,053 6,019 5.16 ---------- -------- ---- ---------- -------- ---- Total deposits................. 700,456 8,761 4.98% 699,753 7,644 4.33% FHLB advances.................. 300,259 5,012 6.64% 308,833 4,261 5.47% Other borrowings............ 3,153 64 8.08 981 2 0.81 ---------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities................ 1,003,868 13,837 5.48% 1,009,567 11,907 4.68% Non-interest-bearing liabilities................ 30,754 23,878 ---------- ---------- Total liabilities........... 1,034,622 1,033,445 Stockholders' equity........ 88,342 86,353 ---------- ---------- Total liabilities and stock- holders' equity............ $1,122,964 $1,119,798 ========== -------- ========== -------- Net interest income......... $ 6,386 $ 7,362 ========== ========== Interest rate spread (3).... 2.04% 2.50% Net interest margin (4)..... 2.37% 2.74% Ratio of average interest earning assets to average interest-bearing liabilities 107.17% 106.28% Return on average assets.... 0.72% 0.66% Return on average equity... 9.21% 8.56% (1) Includes loans held for sale. (2) The income of FHLB stock in fiscal 2001 includes accruals of FHLB dividends which are expected to be received in January 2001. (3) Represents the difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities. (4) Represents net interest income before provision for loan losses as a percentage of average interest-earning assets. 13 </TABLE>
<TABLE> Average Balance Sheets (dollars in thousands) Six Months Ended Six Months Ended December 31, 2000 December 31, 1999 ---------------------------- ---------------------------- Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost --------- -------- ---- ---------- -------- ---- <S> <C> <C> <C> <C> <C> <C> Interest earning assets: Loans (1).................... $ 860,189 $ 33,128 7.70% $ 800,191 $ 29,802 7.45% Investment securities........ 203,067 6,385 6.29 202,567 6,346 6.27 FHLB stock (2)............... 17,718 901 10.17 14,663 279 3.81 Interest-earning deposits.... 1,942 28 2.88 492 12 4.88 --------- -------- ---- ---------- -------- ---- Total interest earning assets 1,082,916 40,442 7.47% 1,017,913 36,439 7.16% Non-interest earning assets.. 47,439 46,367 ---------- ---------- Total assets................. $1,130,355 $1,064,280 ========== ========== Interest-bearing liabilities: Savings accounts............. $ 88,774 1,525 3.42% $ 84,575 1,144 2.68% Demand and negotiable order of withdrawal ("NOW") accounts. 151,319 1,856 2.44 148,793 2,051 2.73 Certificates of deposit...... 456,408 13,765 6.00 445,164 11,416 5.09 --------- -------- ---- ---------- -------- ---- Total deposits............... 696,501 17,146 4.90% 678,532 14,611 4.27% FHLB advances................ 312,391 10,230 6.51% 273,521 7,371 5.35% Other borrowings............. 3,219 130 8.03 582 4 1.36 --------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities................. 1,012,111 27,506 5.41% 952,635 21,986 4.58% Non-interest-bearing liabilities................. 29,699 24,736 ---------- ---------- Total liabilities............ 1,041,810 977,371 Stockholders' equity......... 88,545 86,909 ---------- ---------- Total liabilities and stock- holders' equity............. $1,130,355 $1,064,280 ========== -------- ========== -------- Net interest income.......... $ 12,936 $ 14,453 ========== ========== Interest rate spread (3)..... 2.06% 2.58% Net interest margin (4)...... 2.39% 2.84% Ratio of average interest earning assets to average interest-bearing liabilities 107.00% 106.85% Return on average assets..... 0.67% 0.65% Return on average equity.... 8.51% 7.96% (1) Includes loans held for sale. (2) The income of FHLB stock in fiscal 2001 includes accruals of FHLB dividends which are expected to be received in January 2001. (3) Represents the difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities. (4) Represents net interest income before provision for loan losses as a percentage of average interest-earning assets. 14 </TABLE>
The following table provides the rate/volume variances for the quarter and six months ended December 31, 2000 and 1999, respectively: Rate/Volume Variance (dollars in thousands) Quarter Ended December 31, 2000 Compared to Quarter Ended December 31, 1999 Increase (Decrease) Due to - ------------------------------------------------------------------------------ Rate/ Rate Volume Volume Net ---- ------ ------ --- Interest income Loans receivable (1)............... $ 526 $ 69 $ 2 $ 597 Investment securities.............. 17 (60) - (43) FHLB stock (2)..................... 373 7 17 397 Interest-bearing deposits.......... (4) 27 (20) 3 ------- -------- ------ -------- Total net change in income on interest-earning assets......... 912 43 (1) 954 Interest-bearing liabilities : Savings accounts.................. 182 48 15 245 Demand and NOW accounts........... (113) (2) - (115) Certificates of deposit........... 1,078 (77) (14) 987 FHLB advances..................... 894 (118) (25) 751 Other borrowings.................. 18 4 40 62 ------- -------- ------ -------- Total net change in expense on interest-bearing liabilities....... 2,059 (145) 16 1,930 ------- -------- ------ -------- Net change in net interest income............................. $(1,147) $ 188 $ (17) $ (976) ======= ======== ====== ======== (1) Includes loans held for sale. For purposes of calculating volume, rate and rate/volume variances, non-accrual loans were included in the weighted average balance outstanding. (2) Includes the $270,000 change in income recognition of the FHLB stock dividend. 15
Six Months Ended December 31, 2000 Compared to Quarter Ended December 31, 1999 Increase (Decrease) Due to - ------------------------------------------------------------------------------ Rate/ Rate Volume Volume Net ---- ------ ------ --- Interest income Loans receivable (1)............... $ 1,015 $ 2,235 $ 76 $ 3,326 Investment securities.............. 23 16 - 39 FHLB stock (2)..................... 467 58 97 622 Interest-bearing deposits.......... (5) 35 (14) 16 ------- -------- ------ -------- Total net change in income on interest-earning assets......... 1,500 2,344 159 4,003 Interest-bearing liabilities : Savings accounts................... 309 57 15 381 Demand and NOW accounts............ (226) 35 (4) (195) Certificates of deposit............ 2,009 288 52 2,349 FHLB advances...................... 2,417 386 56 2,859 Other borrowings................... 20 18 88 126 ------- -------- ------ -------- Total net change in expense on interest-bearing liabilities....... 4,529 784 207 5,520 ------- -------- ------ -------- Net change in net interest income............................. $(3,029) $ 1,560 $ (48) $ (1,517) ======= ======== ====== ======== (1) Includes loans held for sale. For purposes of calculating volume, rate and rate/volume variances, non-accrual loans were included in the weighted average balance outstanding. (2) Includes the $270,000 change in income recognition of the FHLB stock dividend. Provision for Loan Losses. No loan loss provisions were added during the second quarter of fiscal 2001 or fiscal 2000. The allowance for loan losses was $6.8 million at December 31, 2000 as compared to $6.7 million for the same period in 1999. The allowance as a percent of gross loans held for investment at December 31, 2000 was 0.85 percent as compared to 0.79 percent at December 31, 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. 16
The following table is provided to disclose additional details on the Company's allowance for loan losses and asset quality: Allowance for Loan Losses (dollars in thousands) For the Quarter For the Six Months Ended December 31, Ended December 31, ------------------ ------------------- 2000 1999 2000 1999 ------ ------ ------ ------ Allowance at beginning of period....................... $ 6,855 $ 6,721 $ 6,850 $ 6,721 Provision for loan losses..... - - - - Recoveries: Mortgage loans: One-to-four family.......... 18 6 24 6 Multi-family................ - - - - Commercial.................. - - - - Construction................ - - - - Consumer loans................ - - - - Commercial business lending... - - - - ------- -------- -------- ------- Total recoveries......... 18 6 24 6 Charge-offs: Mortgage loans: One-to-four family.......... (49) - (49) - Multi-family................ - - - - Commercial.................. - - - - Construction................ - - - - Consumer loans................ (1) - (2) - Commercial business lending... - - - - ------- -------- -------- ------- Total charge-offs......... (50) - (51) - ------- -------- -------- ------- Net (charge-offs) recoveries............... (32) 6 (27) 6 ------- -------- -------- ------- Balance at end of period. $ 6,823 $ 6,727 $ 6,823 $ 6,727 ======= ======== ======== ======= Allowance for loan losses as a percentage of gross loans held for investment........... 0.85% 0.79% 0.85% 0.79% Net charge-offs as a percentage of average loans outstanding during the period............. 0.02% - 0.01% - Allowance for loan losses as a percentage of non-performing loans at the end of the period........................ 506.91% 342.86% 506.91% 342.86% 17
Asset Quality. The following table is provided to disclose additional details on asset quality (dollars in thousands) : At December 31, At December 31, 2000 1999 --------------- -------------- Loans accounted for on a non-accrual basis: Mortgage loans: One-to-four family......................... $ 1,335 $ 1,956 Multi-family............................... - - Commercial................................. - - Construction............................... - - Consumer loans............................... 11 6 Commercial business lending.................. - - Other loans.................................. - - --------------- -------------- Total................................... 1,346 1,962 Accruing loans which are contractually past due 90 days or more: Mortgage loans: One-to-four family......................... - - Multi-family............................... - - Commercial................................. - - Construction............................... - - Consumer loans............................... - - Commercial business lending.................. - - Other loans.................................. - - --------------- -------------- Total................................... - - Total of non-accrual and 90 days past due loans................................... 1,346 1,962 Real estate owned............................ 697 1,862 --------------- -------------- Total non-performing assets................. $ 2,043 $ 3,824 =============== ============== Restructured loans.......................... $ 1,471 $ 1,495 Non-accrual and 90 days or more past due loans as a percentage of loans held for investment, net............................ 0.17% 0.23% Non-accrual and 90 days or more past due loans as a percentage of total assets...... 0.12% 0.16% Non-performing assets as a percentage of total assets............................... 0.18% 0.32% The Company reviews significant 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. 18
Non-Interest Income. Non-interest income increased by $1.1 million, or 58 percent, to $3.0 million during the quarter ended December 31, 2000 from $1.9 million during the same period in 2000. The increase in non- interest income was primarily attributable to an increase in gains from the sale of loans and the gains on sale of investment securities. The gains on sale of loans increased by $933,000, or 156 percent, to $1.5 million for the quarter ended December 31, 2000 from $598,000 during the same quarter in 1999. This increase was primarily due to higher loan sale volume and higher loan sale margin in the second quarter of fiscal 2001 compared to the same quarter of fiscal 2000. Total loans sold during the second quarter of fiscal 2001 increased by $55.3 million, or 86 percent, to $120.0 million as compared to $64.7 million in the same period in fiscal 2000. The average loan sale margin during the second quarter of fiscal 2001 was approximately 1.28 percent as compared to 0.92 percent during the same period of fiscal 2000. The gains on sale of investment securities during the second quarter of fiscal 2001 was $213,000, resulting mainly from the sale of 2,000 shares of Freddie Mac common stock and 1,000 shares of Fannie Mae common stock. For the six months ended December 31, 2000, the non-interest income increased by $1.8 million, or 44 percent, to $5.9 million from $4.1 million during the same period in 1999. The increase in non-interest income was primarily attributable to an increase in the gains on sale of loans and the gains on sale of investment securities. Non-Interest Expenses. Non-interest expense decreased by $158,000 to $5.9 million during the quarter ended December 31, 2000 from $6.1 million in the same period in 1999. This decrease was primarily attributable to: a decrease in premises and occupancy expense resulting from mortgage lending offices which were closed, sold or consolidated during the first quarter; a decrease in equipment and professional expenses associated with last year's Y2K equipment depreciation and consultant costs; and a decrease in marketing costs. These cost savings were partially offset by an increase of salaries and compensation costs resulting from lower FASB 91 deferred cost. Non-interest expenses as a percentage of average assets improved to 2.10 percent during the second quarter of fiscal 2001 from 2.16 percent during the same period of fiscal 2000. Income taxes. Income tax expense was $1.5 million for the quarter ended December 31, 2000 as compared to $1.4 million during the same period in 1999. The effective tax rate for the second quarter ended December 31, 2000 and 1999 was 42 percent. For the six months ended December 31, 2000, income tax expense was $2.7 million as compared to $2.5 million during the same period in 1999. The effective tax rate for the six months ended December 31, 2000 and 1999 was 42 percent. 19
The following table is provided to disclose additional details related to the volume of loans originated, purchased and sold: Loan Volume Activities (dollars in thousands) For the For the Six Quarter Ended Months Ended December 31, December 31, -------------- --------------- 2000 1999 2000 1999 ---- ---- ---- ---- Loans originated for sale : Retail originations............... $ 55,084 $ 38,353 $ 118,701 $100,413 Wholesale originations............ 69,267 46,876 121,544 77,310 -------- -------- --------- -------- Total loans originated for sale......................... 124,351 85,229 240,245 177,723 Loans sold: Servicing released............... 120,006 64,436 231,434 149,379 Servicing retained.............. - 240 - 1,275 -------- -------- --------- -------- Total loans sold............. 120,006 64,676 231,434 150,654 Loans originated for portfolio: Mortgage loans: One-to-four family............. - 89,084 - 188,972 Multi-family................... - - - 2,100 Commercial..................... 800 - 1,250 2,613 Construction loans............. 7,521 11,592 22,297 26,815 Consumer.......................... - 7,849 - 18,675 Commercial business lending....... 369 3,242 2,059 5,817 Other loans....................... - 161 - 672 -------- -------- --------- -------- Total loans originated for portfolio................... 8,690 111,928 25,606 245,664 Loans purchased: Mortgage loans: One-to-four family............. - - 384 - Commercial..................... 2,496 1,517 4,341 5,126 -------- -------- --------- -------- Total loans purchased........ 2,496 1,517 4,725 5,126 Mortgage loan principal repayments 36,628 27,905 71,558 72,955 Real estate acquired in settlement of loans.............. 530 1,033 744 1,033 Increase (decrease) in other items, net (1)................... 4,241 4,963 (1,194) 2,325 -------- -------- --------- -------- Net (decrease) increase in loans receivable, net.................. $(16,326) $110,023 $ (32,866) $206,196 ======== ======== ========= ======== (1) Includes changes in loans in process, discounts, deferred fees and costs and loan loss reserves. 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 20
Francisco equal to 40 percent of total assets, which, on December 31, 2000 permitted additional advances of $129.6 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 December 31, 2000, the Savings Bank originated $133.0 million of loans as compared to $197.2 million during the same period in 1999. For the quarter ended December 31, 2000, loan sales aggregated $120.0 million, compared to $64.7 million for the same period in 1999, and loan principal payments totaled $36.6 million, compared to $27.9 million for the same period in 1999. By regulation, the Savings Bank must maintain 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 second quarter of fiscal 2001 and 2000 were 10 percent and 25 percent, respectively. A reduction of the Savings Bank's quarterly average liquidity was attributable mainly to: investment securities, totaling $100.0 million, which were pledged to the FHLB to collateralize the Security Backed Credit facility; and investment securities, totaling $15.0 million, which were pledged to the Federal Reserve Bank of San Francisco to collateralize future borrowings from the Discount Window. 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 action, 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 December 31, 2000 are as follows (dollars in thousands): Amount Percent ------ ------- Tangible capital...................... $ 78,747 7.10% Requirement to be "Well Capitalized".. 22,186 2.00 --------- ----- Excess over requirement $ 56,561 5.10% ========= ===== Tier 1 (core) capital $ 78,747 7.10% Requirement to be "Well Capitalized" 55,466 5.00 --------- ----- Excess over requirement $ 23,281 2.10% ========= ===== Total risk-based capital $ 86,136 14.33% Requirement to be "Well Capitalized" 60,088 10.00 --------- ----- Excess over requirement $ 26,048 4.33% ========= ===== Tier 1 risk-based capital $ 78,747 13.11% Requirement to be "Well Capitalized" 36,053 6.00 --------- ----- Excess over requirement $ 42,694 7.11% ========= ===== 21
Supplemental Information December 31, 2000 June 30, 2000 December 31, 1999 ----------------- ------------- ----------------- Loans serviced for others (in thousands) $ 238,140 $ 261,183 $ 284,909 Book value per share.... $ 23.99 $ 22.68 $ 21.48 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, potential future credit experience, 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, the general business environment, interest rates, competitive conditions between banks and non-bank financial services providers, local and national economic conditions, regulatory changes 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, 2000. 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 The only item submitted in the Annual Meeting of Shareholders which was held on October 26, 2000 at the Riverside Art Museum at 3425 Mission Inn Avenue, Riverside, California was the election of two directors. There were two nominees: - ----------------------- 1. Robert G. Schrader has been associated with the Savings Bank since 1963 and has served as Executive Vice President of the Savings Bank since January 1995. From 1990 through 1994, Mr. Schrader served as Senior Vice President of the Savings Bank. Mr. Schrader has also served as Corporate Secretary of the Company since its formation in 1996. 22
2. William E. Thomas is the Executive Vice President and General Counsel of KPC Global Care, Inc., a medical management company based in Riverside, California. Prior to joining KPC Global Care, Inc., Mr. Thomas was engaged in the private practice of law in Riverside, California. He currently serves on the Company's Personnel/Compensation Committee. The result of the votes were 88.3% for Robert G. Schrader and 88.2% for William E. Thomas; accordingly, Robert G. Schrader and William E. Thomas were declared to be duly elected as directors of the Company for three year terms. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K a) Exhibits : None. b) Reports on Form 8-K A Form 8-K was filed with the Securities and Exchange Commission on December 19, 2000 regarding changes in the registrant's certifying accountants. 23
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. February 9, 2001 /s/ Craig G. Blunden --------------------- Craig G. Blunden President and Chief Executive Officer (Principal Executive Officer) February 9, 2001 /s/ Donavon P. Ternes --------------------- Donavon P. Ternes Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 24