UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
(Mark One)
[Ö ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ....................................................... March 31, 2004
[ ] 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 000-28304
PROVIDENT FINANCIAL HOLDINGS, INC.(Exact name of registrant as specified in its charter)
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.
Yes Ö . No .Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes Ö. 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.
<PAGE>
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:
ITEM 2 -
Management's Discussion and Analysis of Financial Condition and Results of Operations:
General ...............................................................................................................
12
Critical Accounting Policies .................................................................................
13
Comparison of Financial Condition at March 31, 2004 and June 30, 2003 ..........
14
Comparison of Operating Results for the quarters and nine months ended March 31, 2004 and 2003 ..................
15
Asset Quality .....................................................................................................
25
Loan Volume Activities ......................................................................................
26
Liquidity and Capital Resources .........................................................................
27
Commitments and Derivative Financial Instruments .............................................
28
Stockholders' Equity ..........................................................................................
29
Stock Option Plan and Management Recognition Plan ........................................
Supplemental Information ...................................................................................
30
ITEM 3 -
Quantitative and Qualitative Disclosure about Market Risk ..................................
ITEM 4 -
Controls and Procedures ....................................................................................
31
PART II
OTHER INFORMATION
Legal Proceedings ..............................................................................................
32
Changes in Securities .........................................................................................
Defaults upon Senior Securities ..........................................................................
Submission of Matters to Vote of Shareholders ..................................................
ITEM 5 -
Other Information ..............................................................................................
ITEM 6 -
Exhibits and Reports on Form 8-K ....................................................................
SIGNATURES ............................................................................................................................
33
PROVIDENT FINANCIAL HOLDINGS, INC.Consolidated Statements of Financial Condition(Unaudited)Dollars In Thousands
March 31,2004
June 30,2003
Assets
Cash and cash equivalents
$ 32,367
$ 48,851
Investment securities - held to maturity, at amortized cost (fair value $62,501 and $77,210, respectively)
62,202
76,838
Investment securities - available for sale at fair value
214,970
220,273
Loans held for investment, net of allowance for loan losses of $7,884 and $7,218, respectively
881,418
744,219
Loans held for sale, at lower of cost or market
7,102
4,247
Receivable from sale of loans
117,976
114,902
Accrued interest receivable
4,959
4,934
Real estate held for investment, net
10,320
10,643
Other real estate owned, net
-
523
Federal Home Loan Bank stock
27,635
20,974
Premises and equipment, net
8,009
8,045
Prepaid expenses and other assets
7,129
7,057
Total assets
$ 1,374,087
$ 1,261,506
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits
$ 44,698
$ 43,840
Interest bearing deposits
800,429
710,266
Total deposits
845,127
754,106
Borrowings
385,385
367,938
Accounts payable, accrued interest and other liabilities
33,591
32,584
Total liabilities
1,264,103
1,154,628
Commitments and Contingencies
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 11,896,565 and 11,769,890 shares, respectively; outstanding 7,206,388 and 7,479,671 shares, respectively
119
118
Additional paid-in capital
56,866
54,691
Retained earnings
107,763
98,660
Treasury stock at cost (4,690,177 and 4,290,219 shares, respectively)
(53,950
)
(45,801
Unearned stock compensation
(2,035
(2,450
Accumulated other comprehensive income, net of tax
1,221
1,660
Total stockholders' equity
109,984
106,878
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
1
PROVIDENT FINANCIAL HOLDINGS, INC.Consolidated Statements of Operations(Unaudited)In Thousands, Except Earnings Per Share
Interest income:
Loans receivable, net
$ 13,643
$ 12,450
$ 39,449
$ 36,655
Investment securities
2,204
2,346
6,065
7,503
FHLB stock
237
234
670
627
Interest-earning deposits
11
10
Total interest income
16,085
15,031
46,195
44,795
Interest expense:
Checking and money market deposits
335
367
1,074
1,183
Savings deposits
1,358
1,080
3,989
3,004
Time deposits
1,562
2,447
5,001
8,413
3,188
2,968
9,318
9,120
Total interest expense
6,443
6,862
19,382
21,720
Net interest income
9,642
8,169
26,813
23,075
Provision for loan losses
420
205
689
970
Net interest income after provision for loan losses
9,222
7,964
26,124
22,105
Non-interest income
Loan servicing and other fees
533
363
1,599
1,323
Gain on sale of loans, net
3,604
4,935
9,497
13,954
Real estate operations, net
19
177
222
529
Deposit account fees
507
438
1,491
1,312
Gain on sale of investment securities
428
694
Other
243
359
938
1,185
Total non-interest income
4,906
6,700
13,747
18,997
Non-interest expense
Salaries and employee benefits
4,781
4,557
14,028
13,394
Premises and occupancy
607
606
1,830
1,860
Equipment
430
556
1,279
1,516
Professional expenses
217
157
604
513
Sales and marketing expenses
170
203
707
651
795
901
2,733
2,822
Total non-interest expense
7,000
6,980
21,181
20,756
Income before taxes
7,128
7,684
18,690
20,346
Provision for income taxes
3,014
3,096
7,904
8,175
Net income
$ 4,114
$ 4,588
$ 10,786
$ 12,171
Basic earnings per share
$ 0.61
$ 0.66
$ 1.60
$ 1.69
Diluted earnings per share
$ 0.57
$ 1.49
$ 1.57
Cash dividends per share
$ 0.10
$ 0.03
$ 0.23
2
PROVIDENT FINANCIAL HOLDINGS, INC.Consolidated Statements of Changes in Stockholders' Equity(Unaudited)Dollars In Thousands, Except SharesFor the Quarters Ended March 31, 2004 and 2003
7,226,888
$ 119
$ 56,392
$103,649
$(53,358
$ (2,180
$ 527
$105,149
Comprehensive income:
4,114
Total comprehensive income
4,808
Purchase of treasury stock
(25,000
(592
Exercise of stock options
4,500
44
Amortization of MRP
34
Tax benefit from non-qualified equity compensation
134
Allocations of contribution to ESOP
296
67
Prepayment of ESOP loan
Balance at March 31, 2004
7,206,388
$ 56,866
$107,763
$(53,950
$ ( 2,035
$ 1,221
$ 109,984
Balance at December 31, 2002
7,553,959
$ 117
$ 52,716
$89,855
$(41,115
$ ( 2,686
$ 1,356
$100,243
4,588
Unrealized holding loss on securities available for sale, net of tax
(227,700
(4,234
126,975
886
887
216
68
284
17
Cash dividends
(251
Balance at March 31, 2003
7,453,234
$ 118
$53,818
$94,192
$(45,349
$( 2,568
$ 1,158
$101,369
3
PROVIDENT FINANCIAL HOLDINGS, INC.Consolidated Statements of Changes in Stockholders' Equity(Unaudited)Dollars In Thousands, Except SharesFor the Nine Months Ended March 31, 2004 and 2003
7,479,671
$ 54,691
$98,660
$(45,801
$ (2,450
$1,660
$106,878
10,786
Unrealized holding gain on securities available for sale, net of tax
(439
10,347
(393,958
(8,149
126,675
1,026
1,027
102
348
801
1,004
110
(1,683
Balance at June 30, 2002
8,194,691
$ 52,138
$82,805
$(30,027
$ ( 2,866
$ 864
$103,031
12,171
(912,582
(15,579
152,288
1,090
1,091
Amortization and grants of MRP
18,837
257
41
298
590
202
792
Prepayment of ESOP loans
55
(784
4
PROVIDENT FINANCIAL HOLDINGS, INC.Consolidated Statements of Cash Flows(Unaudited)Dollars In Thousands
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used for) operatingactivities:
Depreciation and amortization
3,052
4,402
Gain on sale of loans
(9,497
(13,954
(694
Tax benefits from nonqualified compensation
- -
Increase in accounts payable and other liabilities
2,415
Increase in prepaid expense and other assets
(97
(1,520
Loans originated for sale
(788,435
(880,107
Proceeds from sale of loans
792,003
873,759
Stock based compensation
1,216
1,145
Net cash provided by (used for) operating activities
11,377
(1,413
Cash flows from investing activities:
Net increase in loans held for investment
(137,275
(109,568
Maturity and call of investment securities held to maturity
84,885
174,353
Maturity and call of investment securities available for sale
49,955
43,395
Principal payments from mortgage backed securities
71,432
42,673
Purchase of investment securities held to maturity
(70,380
(125,944
Purchase of investment securities available for sale
(119,025
(199,944
Proceeds from sales of investment securities available for sale
26,112
Purchase of Federal Home Loan Bank stock
(6,661
(5,352
Net sales of other real estate owned
423
684
Net purchases of premises and equipment
(878
(1,012
Net cash used for investing activities
(127,524
(154,603
Cash flows from financing activities:
Net increase in deposits
91,021
65,385
Proceeds from Federal Home Loan Bank advances, net
17,447
110,479
Treasury stock purchases
Net cash provided by financing activities
99,663
160,592
Net (decrease) increase in cash and cash equivalents
(16,484
4,576
Cash and cash equivalents at beginning of period
48,851
27,700
Cash and cash equivalents at end of period
$ 32,276
Supplemental information:
Cash paid for interest
$ 19,146
$ 22,086
Cash paid for income taxes
6,070
7,810
Real estate acquired in settlement of loans
649
5
PROVIDENT FINANCIAL HOLDINGS, INC.SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2004
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 of operations for the interim periods presented. All such adjustments are of a normal, recurring nature. The balance sheet data at June 30, 2003 is derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. (the "Corporation"). 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 ("SEC") with respect to interim financial reporting. 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 Co rporation's Annual Report on Form 10-K for the year ended June 30, 2003 (SEC File No. 000-28304). On December 19, 2003 the Corporation declared a three-for-two stock split, distributed in the form of a 50 percent stock dividend on February 2, 2004 to shareholders of record on January 15, 2004. All share and per share information in the accompanying consolidated financial statements have been restated to reflect the stock split. Certain amounts in the prior periods' financial statements have been reclassified to conform to the current period's presentation. The results of operations for the interim periods are not indicative of results for the full year.
Note 2: Earnings Per Share and Stock-Based Compensation
Earnings Per Share:Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders 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 table provides the basic and diluted EPS computations for the quarters and nine months ended March 31, 2004 and 2003, respectively.
For the QuarterEndedMarch 31,
For the Nine MonthsEndedMarch 31,
2004
2003
Numerator for basic earnings per share and diluted earnings per share:
Net income available to common stockholders
$ 4,113,878
$ 4,588,022
$ 10,785,559
$ 12,171,318
Denominator for basic earnings per share:
Weighted-average shares
6,740,983
6,936,031
6,741,098
7,183,840
Effect of dilutive securities:
Stock option dilution
457,879
520,400
457,076
513,492
Restricted stock award dilution
14,751
16,509
16,253
44,871
Denominator for diluted earnings per share:
Adjusted weighted-average shares and assumed conversions
7,213,613
7,472,940
7,214,427
7,742,203
6
Stock-Based Compensation:Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Corporation has been accounting for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Corporation's common stock at the date of grant over the grant (exercise) price.
The Corporation has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Corporation's stock-based compensation plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts as follows (dollars in thousands, except earnings per share):
For the Quarter
For the Nine Months
Ended March 31,
Net income, as reported
Deduct:
Stock-based compensation expense, net of tax
( 57
( 36
( 155
( 127
Pro forma net income
$ 4,057
$ 4,552
$ 10,631
$ 12,044
Earnings per share:
Basic - as reported
Basic - pro forma
$ 0.60
$ 1.58
$ 1.68
Diluted - as reported
Diluted - pro forma
$ 0.56
$ 1.47
$ 1.56
7
Note 3: Operating Segment Reports
The Corporation operates in two business segments: community banking (Provident Savings Bank, F.S.B. ("Bank")) and mortgage banking (Provident Bank Mortgage ("PBM")), a division of the Bank. The following tables set forth condensed income statements and total assets for the Corporation's operating segments for the quarters and nine months ended March 31, 2004 and 2003, respectively (in thousands).
For the Quarter Ended March 31, 2004
Provident
Bank
Consolidated
Mortgage
Totals
$ 8,608
$ 614
$ 9,222
Non-interest income:
Loan servicing and other fees (1)
(453
986
Gain on sale of loans, net (2)
151
3,453
241
465
4,441
Non-interest expense:
3,181
1,600
454
153
Operating and administrative expenses
963
1,612
4,598
2,402
$ 4,475
$ 2,653
$ 7,128
Total assets, end of period
$ 1,248,688
$ 125,399
For the Quarter Ended March 31, 2003
$ 7,212
$ 752
$ 7,964
(645
1,008
(15
4,950
186
(9
751
5,949
2,961
1,596
459
147
1,109
708
1,817
4,529
2,451
$ 3,434
$ 4,250
$ 7,684
$ 1,111,453
$ 70,686
$ 1,182,139
8
For the Nine Months Ended March 31, 2004
$ 24,209
$ 1,915
$ 26,124
(2,669
4,268
(3
9,500
149
73
918
20
(114
13,861
9,343
4,685
1,365
3,174
2,149
5,323
13,882
7,299
$ 10,213
$ 8,477
$ 18,690
For the Nine Months Ended March 31, 2003
$ 19,840
$ 2,265
$ 22,105
(2,109
3,432
13,940
560
(31
1,656
17,341
8,716
4,678
1,426
434
3,384
2,118
5,502
13,526
7,230
$ 7,970
$ 12,376
$ 20,346
9
Note 4: Commitments and Derivative Financial Instruments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, forward loan sale agreements to third parties, and commitments to purchase investment securities. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying consolidated statements of financial condition. The Corporation's exposure to credit loss, in the event of non-performance by the counterparty to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.
March 31,
June 30,
Commitments
(In Thousands)
Undisbursed loan funds - Construction loans
$ 77,428
$ 67,868
Undisbursed lines of credit - Commercial business loans
9,849
8,527
Undisbursed lines of credit - Consumer loans
9,152
9,020
Commitments to extend credit on loans held for investment
25,174
35,820
Total
$ 121,603
$ 121,235
In accordance with SFAS No. 133 and interpretations of the Derivative Implementation Group of the Financial Accounting Standards Board ("FASB"), the fair value of the commitments to extend credit on loans to be held for sale, forward loan sale agreements and put option contracts are recorded at fair value on the balance sheet, and are included in other assets or other liabilities. The Corporation is not applying hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. The net impact of derivative financial instruments on the consolidated statements of operations during the quarters ended March 31, 2004 and 2003 was a loss of $379,000 and a gain of $208,000, respectively.
March 31, 2004
June 30, 2003
March 31, 2003
Fair
Derivative Financial Instruments
Amount
Value
Commitments to extend credit
on loans to be held for sale,
including servicing released
premiums (1)
$ 70,674
$ (99
$ 121,422
$ 1,099
$ 102,363
$ 1,746
Forward loan sale agreements
59,000
47
109,734
306
92,636
(594
Put option contracts ...
19,000
45,000
235
21,000
57
$ 148,674
$ 58
$ 276,156
$ 1,640
$ 215,999
$ 1,209
During the third quarter of fiscal 2004, the Corporation adopted the SEC guidance regarding loan commitments that are recognized as derivatives pursuant to SFAS No. 133. As a result of implementing the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," the Corporation excluded the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. The Corporation's previous practice had been to recognize, at the inception of the rate lock, the anticipated servicing released premiums on the underlying loans. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1, 2004. This action resulted
in the delay in recognition of approximately $837,000 of estimated servicing released premiums for the quarter and nine months ended March 31, 2004, which will instead be recognized in future periods when the underlying loans are funded and sold.
Note 5: Off-Balance Sheet Financing Arrangements and Contractual Obligations
The following table summarizes the Corporation's contractual obligations at March 31, 2004 and the effect these obligations are expected to have on the Corporation's liquidity and cash flows in future periods (in thousands):
Payments Due by Period
1 year
Over 1 to
Over 3 to
Over
Or less
3 years
5 years
Operating lease obligations
$ 606
$ 933
$ 664
$ 349
$ 2,552
136,538
105,922
39,006
281,483
FHLB borrowings
124,500
47,000
102,000
111,885
$ 261,644
$ 153,855
$ 141,670
$ 112,251
$ 669,420
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, forward loan sale agreements to third parties and commitments to purchase investment securities. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying consolidated balance sheet. The Corporation's exposure to credit loss, in the event of non-performance by the other party to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments. As of March 31, 2004 and June 30, 2003, these commitments were $95.8 million and $157.2 million, respec tively.
Note 6: Recent Accounting Pronouncements
SFAS No. 149:SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," is effective for hedging relationships entered into or modified after June 30, 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of SFAS No. 149 did not have a significant impact on the Corporation's financial position, cash flows or results of operations.
SFAS No. 150:SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The adoption of SFAS No. 150 did not have a significant impact on the Corporation's financial position, cash flows or results of operations.
FASB Interpretation ("FIN") No. 45:In November 2002, the FASB issued FIN No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this Interpretation on January 1, 2003 did not have a material impact on the Corporation's results of operations, financial position or cash flows.
FIN No. 46R:In December 2003, the FASB issued FIN No. 46R, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51. FIN No. 46R requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN 46R also requires disclosure about variable interest entities that companies are not required to consolidate but which a company has a significant variable interest. The consolidation requirements must be adopted no later than the beginning of the first fiscal year or interim period beginning after March 15, 2004. The adoption of FIN No. 46R is not expected to have a material impact on the Corporation's results of operations, financial position or cash flows.
Note 7: Subsequent Events
On April 21, 2004, the Board of Directors of the Bank declared a cash dividend of $2.0 million to the Corporation, which was paid on April 28, 2004.
On April 22, 2004, the Corporation announced a cash dividend of $0.10 per share on the Corporation's outstanding shares of common stock for shareholders of record at the close of business on May 20, 2004, payable on June 16, 2004.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company for Provident Savings Bank, F.S.B. upon the 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, 2004, the Corporation had total assets of $1.4 billion, total deposits of $845.1 million and total stockholders' equity of $110.0 million. The Corporation has not engaged in any significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.
The Bank, founded in 1956, is federally chartered and headquartered in Riverside, California. The 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 Bank's deposits are federally insured up to applicable limits by the FDIC under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1956.
The Bank's business consists of community banking activities and mortgage banking activities. Community banking activities primarily consist of accepting deposits from customers within the communities surrounding the Bank's full service offices and investing these funds in single-family loans, multi-family loans, commercial real estate loans, construction loans, commercial business loans, consumer loans and other real estate loans. In addition, the Bank also offers business checking accounts, other business banking services and is a servicer of loans for others. Mortgage banking activities consist of the origination and sale of mortgage and consumer loans secured primarily by single-family residences. The Bank's revenues are derived principally from interest on its loan and investment portfolios and fees generated through its community banking and mortgage banking activities. There are various risks inherent in the Bank's business including, among others, interest rate changes and the prepayment of loans and investments.
The Corporation, from time to time, may repurchase its common stock as a way to enhance the Corporation's earnings per share. The Corporation considers the repurchase of its common stock if the market price of the stock is lower than its book value and/or the Corporation believes that the current market price is not commensurate with its current and future earnings potential. Consideration is also given to the Corporation's liquidity, regulatory capital requirements and future capital needs based on the Corporation's current business plan. The Corporation's Board of Directors authorizes each stock repurchase program, the duration of which is typically one year. Once the stock repurchase program is authorized, management may repurchase the Corporation's common stock from time to time in the open market, depending upon market conditions and the factors described above. On August 5, 2003, the Corporation announced that its Board of Directors authorized the repurchase of up to 5 percent o f its common stock, or approximately 369,069 shares, over a one-year period. Please refer to the Issuer Purchases of Equity Securities table under Part II, Item 2 - "Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities" on page 32.
The Corporation began to distribute quarterly cash dividends in the quarter ended September 2002. On December 19, 2003, the Corporation announced a quarterly cash dividend of $0.15 per share ($0.10 per share on a post-split basis) for the Corporation's shareholders of record at the close of the business day on January 20, 2004, which was paid on February 6, 2004. Future declarations or payments of dividends will be subject to the consideration of the Corporation's Board of Directors, which will take into account the Corporation's financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
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 Corporation. 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.
Critical Accounting Policies
The discussion and analysis of the Corporation's financial condition and results of operations are based upon the Corporation's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans. Management considers this accounting policy to be a critical accounting policy. The allowance is based on two principles of accounting: (i) SFAS No. 5, "Accounting for Contingencies," which requires that losses be accrued when they are probable of occurring and can be estimated; and (ii) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," which require that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance has three components: (i) a formula allowance for groups of homogeneous loans, (ii) a specific valuation allowance for identified problem loans and (iii) an unallocated allowance. Each of these components is based upon estimates that can change over time. The formula allowance is based primarily on historical experience and as a result can differ from actual losses incurred in the future. The history is reviewed at least quarterly and adjustments are made as needed. Various techniques are used to arrive at specific loss estimates, including historical loss information, discounted cash flows and fair market value of collateral. The use of these values is inherently subjective and the actual losses could be greater or less than the estimates. For further details, see the "Provision for Loan Losses" narrative on page 22.
SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," requires that off-balance sheet derivatives of the Corporation be recorded in the Consolidated Financial Statements at fair value. Management considers this accounting policy to be a critical accounting policy. The Bank's derivatives are primarily the result of its mortgage banking activities in the form of commitments to extend credit, commitments to sell loans and option contracts to hedge the risk of the commitments. Estimates of the percentage of commitments to extend credit on loans to be held for sale that may not fund are based upon historical data and current market trends. The fair value adjustments of the derivatives are recorded in the Consolidated Statements of Operations with offsets to other assets or other liabilities in the Consolidated Statements of Financial Condition. During the third quarter of fiscal 2004, the Corporation adopted the SEC guidance regarding loan commit ments that are recognized as derivatives pursuant to SFAS No. 133. As a result of implementing the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," the Corporation excluded the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. The Corporation's previous practice had been to recognize, at the inception of the rate lock, the anticipated servicing released premiums on the underlying loans. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1, 2004. This action resulted in the delay in recognition of approximately $837,000 of estimated servicing released premiums for the quarter and nine months ended March 31, 2004, which will instead be recognized in future periods when the underlying loans are funded and sold.
Comparison of Financial Condition at March 31, 2004 and June 30, 2003
Total assets increased $112.6 million, or 9 percent, to $1.4 billion at March 31, 2004 from $1.3 billion at June 30, 2003. This increase was primarily the result of an increase in loans held for investment, partially offset by a decrease in cash and investment securities.
Total investment securities decreased $19.9 million, or 7 percent, to $277.2 million at March 31, 2004 from $297.1 million at June 30, 2003. For the first nine months of fiscal 2004, $134.8 million of investment securities were called by the issuers and $70.8 million of reductions were the result of mortgage-backed securities principal paydowns, while $188.1 million of investment securities were purchased. The high volume of called securities was primarily the result of a high volume of callable bonds purchased with coupon rates higher than market interest rates and short call dates during the period. The securities called were government agency callable bonds and were primarily issued by the FHLB, the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Loans held for investment increased $137.2 million, or 18 percent, to $881.4 million at March 31, 2004 from $744.2 million at June 30, 2003. In the first nine months of fiscal 2004, the Bank originated $500.1 million of loans held for investment, of which $160.4 million, or 32 percent, were "preferred loans" (multi-family, commercial real estate, construction and commercial business loans), including the purchase of $21.5 million of "preferred loans" during the period. The collateral that secures the purchased loans is located primarily in Southern California. Total loan prepayments during the first nine months of fiscal 2004 were $334.3 million. The balance of "preferred loans" increased to $229.6 million, or 26 percent of loans held for investment at March 31, 2004, as compared to $212.8 million, or 29 percent of loans held for investment, at June 30, 2003. Purchased loans serviced by others at March 31, 2004 were $36.3 million or 4 percent of loans hel d for investment, compared to $45.2 million, or 6 percent of loans held for investment at June 30, 2003.
Loans held for sale increased $2.9 million, or 69 percent, to $7.1 million at March 31, 2004 from $4.2 million at June 30, 2003. The increase was the result of the timing differences between loan funding and loan sale dates.
Receivable from the sale of loans increased $3.1 million, or 3 percent, to $118.0 million at March 31, 2004 from $114.9 million at June 30, 2003. The increase was the result of the timing differences between loan sale and loan sale settlement dates.
Total deposits increased $91.0 million, or 12 percent, to $845.1 million at March 31, 2004 from $754.1 million at June 30, 2003. This increase was primarily attributable to an increase of $100.2 million in transaction accounts and a decrease of $9.3 million in time deposits. The Corporation continues to emphasize transaction accounts and fee generating products by building client relationships.
Borrowings, which consisted entirely of FHLB advances, increased $17.5 million, or 5 percent, to $385.4 million at March 31, 2004 from $367.9 million at June 30, 2003. The weighted-average maturity of the Corporation's existing FHLB advances was approximately 40 months (30 months, based on put dates) at March 31, 2004 as compared to the weighted-average maturity of 36 months (24 months, based on put dates) at June 30, 2003.
Total stockholders' equity increased $3.1 million, or 3 percent, to $110.0 million at March 31, 2004, from $106.9 million at June 30, 2003, primarily as a result of the net income during the first nine months of fiscal 2004, which was partly offset by stock repurchases. A total of 399,958 shares, at an average price of $20.38 per share, were repurchased during the first nine months of fiscal 2004. As of March 31, 2004, 68 percent of the existing authorized shares were repurchased; leaving approximately 116,669 shares available for future repurchases.
Comparison of Operating Results for the Quarters and Nine Months Ended March 31, 2004 and 2003
The Corporation's net income for the third quarter ended March 31, 2004 was $4.1 million, a decrease of $474,000, or 10 percent, from $4.6 million during the same quarter of fiscal 2003. This decrease was primarily attributable to a decrease in the gain on sale of loans and partly offset by an increase in net interest income. For the nine months ended March 31, 2004, the Corporation's net income was $10.8 million, down $1.4 million, or 11 percent, from $12.2 million during the same period of fiscal 2003. This decrease was primarily attributable to decreases in the gain on sale of loans and gain on sale of investment securities, partially offset by an increase in net interest income.
The Corporation's net interest income before loan loss provisions increased by $1.4 million, or 17 percent, to $9.6 million for the quarter ended March 31, 2004 from $8.2 million during the comparable period of fiscal 2003. This increase was the result of higher average earning assets and a higher net interest margin. The average balance of earning assets increased $145.2 million, or 13 percent, to $1.2 billion in the third quarter of fiscal 2004 from $1.1 billion in the comparable period of fiscal 2003. The net interest margin increased to 3.09 percent in the third quarter of fiscal 2004, up 13 basis points from 2.96 percent during the same period of fiscal 2003. The increase in the net interest margin during the third quarter of fiscal 2004 was primarily attributable to a decline in the average cost of funds, which outpaced the decline in the average yield of earning assets. For the nine months ended March 31, 2004, net interest income before loan loss provisions was $26.8 million, up $3.7 million, or 16 percent, from $23.1 million during the same period of fiscal 2003. This increase was the result of higher average earning assets and a higher net interest margin. The average balance of earning assets increased $153.9 million, or 15 percent, to $1.2 billion in the first nine months of fiscal 2004 from $1.0 billion in the comparable period of fiscal 2003. The net interest margin increased to 2.98 percent in the first nine months of fiscal 2004, up 4 basis points from 2.94 percent during the same period of fiscal 2003.
The Corporation's efficiency ratio increased to 48 percent in the third quarter of fiscal 2004 from 47 percent in the same period of fiscal 2003. For the nine months ended March 31, 2004 and 2003, the efficiency ratio was 52 percent and 49 percent, respectively.
Return on average assets for the quarter ended March 31, 2004 decreased 31 basis points to 1.25 percent from 1.56 percent in the same period last year. For the nine months ended March 31, 2004 and 2003, the return on average assets was 1.13 percent and 1.46 percent, respectively, a decrease of 33 basis points.
Return on average equity for the quarter ended March 31, 2004 decreased to 15.33 percent from 18.34 percent in the same period last year. For the nine months ended March 31, 2004 and 2003, the return on average equity was 13.65 percent and 15.94 percent, respectively.
Diluted earnings per share for the quarter ended March 31, 2004 were $0.57, a decrease of 7 percent from $0.61 for the quarter ended March 31, 2003. For the nine months ended March 31, 2004 and 2003, diluted earnings per share were $1.49 and $1.57, respectively, a decrease of 5 percent.
Interest Income. Total interest income increased by $1.1 million, or 7 percent, to $16.1 million for the third quarter of fiscal 2004 from $15.0 million in the same quarter of fiscal 2003. This increase was primarily the result of a higher average balance of earning assets, partially offset by a lower average earning asset yield. The average yield on earning assets during the third quarter of fiscal 2004 was 5.16 percent, 29 basis points lower than the average yield of 5.45 percent during the same period of fiscal 2003.
Loan interest income increased $1.1 million, or 9 percent, to $13.6 million in the quarter ended March 31, 2004 from $12.5 million for the same quarter of fiscal 2003. This increase was attributable to a higher average loan balance, partially offset by a lower average loan yield. The average balance of loans outstanding, including the loans held for sale, increased $177.7 million, or 23 percent, to $945.3 million during the third quarter of fiscal 2004 from $767.6 million during the same quarter of fiscal 2003. The average loan yield during the third quarter of fiscal 2004 decreased to 5.77 percent from 6.49 percent during the same quarter last year. The decline in the average loan yield was primarily attributable to the prepayment of higher yielding loans, adjustable portfolio loans adjusting to lower interest rates and new mortgage loans originated with lower interest rates.
Interest income from investment securities decreased $142,000, or 6 percent, to $2.2 million during the quarter ended March 31, 2004 from $2.3 million during the same quarter of fiscal 2003. This decrease was primarily a result of a decrease in average balance, partly offset by an increase in average yield. The average balance of investment securities decreased $39.8 million, or 13 percent, to $276.8 million in the third quarter of fiscal 2004 from $316.6 million in the same quarter of fiscal 2003. The average yield on the investment securities portfolio increased 22 basis points to 3.18 percent during the quarter ended March 31, 2004 from 2.96 percent during the quarter ended March 31, 2003. The increase in the average yield of investment securities was primarily a result of a reduction of the mortgage-backed securities ("MBS") principal paydowns with a corresponding reduction to the MBS premium amortization. Larger than anticipated MBS principal paydowns causes an accelerat ed amortization of MBS purchase premiums. The accelerated amortization in the third quarter of fiscal 2004 declined by $194,000 to $213,000 as compared to $407,000 in the same quarter of fiscal 2003. This decline in the accelerated amortization resulted in an increase of 28 basis points in the investment yield.
FHLB stock dividends increased by $3,000, or 1 percent, to $237,000 in the third quarter of fiscal 2004 from $234,000 in the same period of fiscal 2003. This increase was attributable to a higher average balance, partially offset by a lower average yield. The average balance of FHLB stock increased $7.1 million to $25.2 million during the third quarter of fiscal 2004 from $18.1 million during the same period of fiscal 2003. The increase in FHLB stock was in accordance with the borrowing requirements of the FHLB. The average yield on FHLB stock decreased 140 basis points to 3.76 percent during the third quarter of fiscal 2004 from 5.16 percent during the same period last year. The decrease in the average yield was primarily a result of lower dividend accruals based upon the actual dividends received in the prior periods.
For the nine months ended March 31, 2004, total interest income increased $1.4 million, or 3 percent, to $46.2 million as compared to $44.8 million for the same period of fiscal 2003. This increase was primarily attributable to an increase in the average balance, partly offset by a decrease in the average yield on earning assets. The average yield on earning assets decreased 57 basis points to 5.14 percent during the nine months ended March 31, 2004 from 5.71 percent during the same period of fiscal 2003.
Interest income from loans increased by $2.7 million, or 7 percent, to $39.4 million during the first nine months of fiscal 2004 from $36.7 million during the same period of fiscal 2003. This increase was primarily attributable to an increase in the average balance, partly offset by a decrease in the average yield on earning assets. The average loans outstanding increased $164.2 million, or 22 percent, to $894.7 million during the nine months ended March 31, 2004 from $730.5 million during the same period of fiscal 2003. The average yield on loans decreased 81 basis points to 5.88 percent during the first nine months of fiscal 2004 as compared to 6.69 percent during the same period of fiscal 2003. The decline in the average loan yield was primarily attributable to loan prepayments and portfolio loans adjusting to lower interest rates as a result of the significant decline in mortgage interest rates, in addition to new mortgage loans originated with lower interest rates.
Interest income from investment securities decreased $1.4 million, or 19 percent, to $6.1 million during the nine months ended March 31, 2004 from $7.5 million during the same period of fiscal 2003. This decrease
16
was primarily a result of decreases in the average balance and the average yield. The average balance of investment securities decreased $17.9 million to $280.3 million in the first nine months of fiscal 2004 from $298.2 million in the same period of fiscal 2003. The yield on the investment securities decreased 47 basis points to 2.88 percent during the nine months ending March 31, 2004 from 3.35 percent during the nine months ending March 31, 2003. The decrease in the average yield of investment securities was primarily due to an increase of the MBS principal paydowns which accelerated the MBS premium amortization. The accelerated amortization in the first nine months of fiscal 2004 increased by $553,000 to $1.2 million from $695,000 in the same period of fiscal 2003. The increase in the accelerated amortization resulted in a decrease to the investment yield of 26 basis points.
FHLB stock dividends increased $43,000, or 7 percent, to $670,000 in the first nine months of fiscal 2004 from $627,000 in the same period of fiscal 2003. The increase was attributable to a higher average balance, partly offset by a lower average yield. The average balance of FHLB stock increased $7.3 million, or 47 percent, to $22.8 million during the first nine months of fiscal 2004 from $15.5 million during the same period of fiscal 2003. The average yield on FHLB stock decreased 146 basis points to 3.92 percent during the first nine months of fiscal 2004 from 5.38 percent during the same period of fiscal 2003.
Interest income from interest-earning deposits increased $1,000, or 10 percent, to $11,000 in the first nine months of fiscal 2004 from $10,000 in the same period of fiscal 2003. This increase was primarily a result of a higher average balance, partly offset by a lower average yield. The average balance of interest-bearing deposits increased to $1.3 million during the first nine months of fiscal 2004 from $929,000 during the same period of fiscal 2003. The increase in the average balance was primarily attributable to an increase of federal funds investments. The average yield on the interest-bearing deposits decreased 29 basis points to 1.15 percent during the first nine months of fiscal 2004 from 1.44 percent during the same period of fiscal 2003.
Interest Expense. Total interest expense for the quarter ended March 31, 2004 was $6.4 million as compared to $6.9 million for the same period of fiscal 2003, a decrease of $419,000, or 6 percent. This decrease was primarily attributable to a decrease in the average cost, partially offset by a higher average balance. The average cost of liabilities was 2.21 percent during the quarter ended March 31, 2004, down 49 basis points from 2.70 percent during the same period of fiscal 2003. The average balance of interest-bearing liabilities increased $135.3 million, or 13 percent, to $1.2 billion during the third quarter of fiscal 2004 from $1.0 billion during the same period of fiscal 2003.
Interest expense on deposits for the quarter ended March 31, 2004 was $3.3 million as compared to $3.9 million for the same period of fiscal 2003, a decrease of $639,000, or 16 percent. The decrease in interest expense on deposits was primarily attributable to a lower average cost, partially offset by a higher average balance. The average cost of deposits decreased to 1.58 percent during the quarter ended March 31, 2004 from 2.17 percent during the same quarter of fiscal 2003, a decline of 59 basis points. The decline in the average cost of deposits was attributable to the general decline in interest rates and the change in the composition of the deposits. The average balance of deposits increased $101.6 million, or 14 percent, to $828.3 million during the quarter ended March 31, 2004 from $726.7 million during the same period of fiscal 2003. The average balance of transaction account deposits increased to 68 percent of total deposits in the third quarter of fiscal 2004, compared to 5 6 percent of total deposits in the same period of fiscal 2003.
Interest expense on borrowings for the quarter ended March 31, 2004 increased $220,000, or 7 percent, to $3.2 million from $3.0 million for the same period of fiscal 2003. The increase in interest expense on borrowings was primarily a result of a higher average balance, partially offset by a lower average cost. The average balance of borrowings increased $33.7 million, or 11 percent, to $339.2 million during the quarter ended March 31, 2004 from $305.5 million during the same period of fiscal 2003. The average cost of borrowings decreased to 3.77 percent for the quarter ended March 31, 2004 from 3.94 percent in the same quarter of fiscal 2003, a decline of 17 basis points. The decline in the average cost of borrowings was primarily attributable to maturing higher cost borrowings replaced with new borrowings at lower costs.
For the nine months ended March 31, 2004, total interest expense decreased $2.3 million, or 11 percent, to $19.4 million as compared to $21.7 million for the same period of fiscal 2003. The decrease in total interest expense was primarily attributable to a lower average cost, partially offset by a higher average balance. The average cost of interest-bearing liabilities decreased 68 basis points to 2.30 percent during the first nine months of fiscal 2004 as compared to 2.98 percent during the same period of fiscal 2003. The
average balance of interest-bearing liabilities during the nine-month period of fiscal 2004 increased $148.9 million, or 15 percent, to $1.1 billion as compared to $972.0 million during the same period of fiscal 2003.
For the nine months ended March 31, 2004, interest expense on deposits decreased $2.5 million, or 20 percent, to $10.1 million as compared to $12.6 million for the same period of fiscal 2003. The decrease in interest expense on deposits was primarily a result of a lower average cost, partially offset by a higher average balance. The average cost of deposits decreased 71 basis points to 1.66 percent during the first nine months of fiscal 2004 as compared to 2.37 percent during the same period of fiscal 2003. The decline in the average cost was attributable to the general decline in interest rates and the change in the composition of deposits. The average balance of deposits increased $96.1 million, or 14 percent, to $803.2 million during the first nine months of fiscal 2004 from $707.1 million during the same period of fiscal 2003. The average balance of transaction account deposits increased to 66 percent of total deposits in the first nine months of fiscal 2004, compared to 53 percen t of total deposits in the same period of fiscal 2003.
For the nine months ended March 31, 2004, interest expense on borrowings increased $198,000, or 2 percent, to $9.3 million as compared to $9.1 million for the same period of fiscal 2003. The increase in interest expense on borrowings was primarily attributable to a higher average balance, partially offset by a lower average cost. The average balance of borrowings increased $52.7 million, or 20 percent, to $317.7 million in the first nine months of fiscal 2004 as compared to $265.0 million during the same period of fiscal 2003. The average cost of borrowings decreased 69 basis points to 3.89 percent during the first nine months of fiscal 2004 as compared to 4.58 percent during the same period of fiscal 2003. The decline in the average cost of borrowings was primarily attributable to maturing higher cost borrowings replaced with new borrowings at lower costs.
18
The following tables depict the average balance sheets for the quarters and nine months ended March 31, 2004 and 2003, respectively:
Average Balance Sheets(Dollars in Thousands)
Quarter Ended
Average
Yield/
Balance
Interest
Cost
Interest-earning assets:
Loans receivable, net (1)
$ 945,349
5.77%
$ 767,646
6.49%
276,845
3.18%
316,573
2.96%
25,191
3.76%
18,139
5.16%
502
0.72%
301
1.33%
Total interest-earning assets
1,247,887
1,102,659
5.45%
Non interest-earning assets
72,346
74,052
$ 1,320,233
$ 1,176,711
Interest-bearing liabilities:
Checking and money market accounts (2)
$ 210,772
0.64%
$ 195,514
0.76%
Savings accounts
354,170
1.54%
212,766
2.06%
263,325
2.38%
318,378
3.12%
828,267
3,255
1.58%
726,658
3,894
2.17%
339,186
3.77%
305,522
3.94%
Total interest-bearing liabilities
1,167,453
2.21%
1,032,180
2.70%
Non interest-bearing liabilities
45,444
44,456
1,212,897
1,076,636
Stockholders' equity
107,336
100,075
$ 9,642
$ 8,169
Interest rate spread (3)
2.95%
2.75%
Net interest margin (4)
3.09%
Ratio of average interest-earning assets to average interest-bearing liabilities
106.89%
106.83%
Return on average assets
1.25%
1.56%
Return on average equity
15.33%
18.34%
Nine Months Ended
$ 894,690
5.88%
$ 730,527
6.69%
280,330
2.88%
298,225
3.35%
22,766
3.92%
15,536
5.38%
1,277
1.15%
929
1.44%
1,199,063
5.14%
1,045,217
5.71%
70,352
69,682
$ 1,269,415
$ 1,114,899
$201,952
0.71%
$188,518
0.84%
332,185
1.59%
188,611
2.12%
269,092
2.47%
329,935
3.40%
803,229
10,064
1.66%
707,064
12,600
2.37%
Borrowings (3)
317,659
3.89%
264,974
4.58%
1,120,888
2.30%
972,038
2.98%
43,207
41,057
1,164,095
1,013,095
105,320
101,804
$ 26,813
$ 23,075
Interest rate spread (4)
2.84%
2.73%
Net interest margin (5)
2.94%
106.97%
107.53%
1.13%
1.46%
13.65%
15.94%
The following tables provide the rate/volume variances for the quarters and nine months ended March 31, 2004 and 2003, respectively:Rate/Volume Variance(In Thousands)
Quarter Ended March 31, 2004 Compared
to Quarter Ended March 31, 2003
Increase (Decrease) Due to
Rate/
Rate
Volume
Net
Loans receivable (1)
$ (1,370
$ 2,883
$ (320
$ 1,193
174
(294
(22
(142
(63
91
(25
Interest-bearing deposits
(1
Total net change in income on interest-earning assets
(1,260
2,681
(367
1,054
Checking and money market accounts
(56
(5
(32
(263
724
(183
278
(559
(427
101
(885
(96
330
(14
220
Total net change in expense on interest-bearing liabilities
(974
656
(101
(419
Net change in net interest income (loss)
$ (286
$ 2,025
$ (266
$ 1,473
Nine Months Ended March 31, 2004 Compared
to Nine Months Ended March 31, 2003
$ (4,446
$ 8,237
$ (997
$ 2,794
(1,051
(450
63
(1,438
(170
292
(79
43
(2
(5,669
8,083
(1,014
1,400
(181
85
(13
(109
(730
2,287
(572
985
(2,283
(1,554
425
(3,412
(1,342
1,813
(273
198
(4,536
2,631
(433
(2,338
$ (1,133
$ 5,452
$ (581
$ 3,738
21
Provision for Loan Losses. A $420,000 loan loss provision was recorded during the third quarter of fiscal 2004, as compared to $205,000 during the same period of fiscal 2003, an increase of $215,000, or 105 percent. The loan loss provision was recorded primarily as a result of the downgrade of six commercial business loans to two borrowers, and in response to loan growth during the third quarter of fiscal 2004, particularly in "preferred" loans which have higher risk than single-family loans. The downgrades of the commercial business loans were primarily attributable to a lowering of the credit quality of the two borrowers during the quarterly loan evaluation. The allowance for loan losses is considered sufficient to absorb potential losses inherent in loans held for investment. For the nine months ended March 31, 2004, a $689,000 loan loss provision was recorded as compared to $970,000 for the same period of fiscal 2003, a decrease of $281,000, or 29 percent.
The allowance for loan losses was $7.9 million at March 31, 2004 as compared to $7.2 million at June 30, 2003. The allowance for loan losses as a percentage of gross loans held for investment was 0.89 percent at March 31, 2004 as compared to 0.96 percent at June 30, 2003.
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 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 Corporati on's loan portfolio, will not request the Corporation to significantly increase 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 Corporation.
22
The following table is provided to disclose additional details on the Corporation's allowance for loan losses and asset quality:
For the Quarter Ended
For Nine Months Ended
Allowance at beginning of period
$ 7,480
$ 7,361
$ 7,218
$ 6,579
Provision for loan and lease losses
Recoveries:
Consumer loans
45
Total recoveries
Charge-offs:
Mortgage loans:
Single-family
(16
Commercial business loans
(219
Other loans
Total charge-offs
(17
(24
(244
Net charge-offs
(216
(23
(199
Balance at end of period
$ 7,884
$ 7,350
Allowance for loan and lease losses as a percentage of gross loans held for investment
0.89%
1.04%
Net charge-offs as a percentage of average loans outstanding during the period
0.01%
0.11%
Allowance for loan and lease losses as a percentage of non-performing loans at the end of the period
522.47%
943.52%
Non-Interest Income. Total non-interest income decreased $1.8 million, or 27 percent, to $4.9 million during the quarter ended March 31, 2004 from $6.7 million during the same period of fiscal 2003. The decrease in non-interest income was primarily attributable to a decrease in the gain on sale of loans.
The gain on sale of loans decreased $1.3 million, or 27 percent, to $3.6 million for the quarter ended March 31, 2004 from $4.9 million during the same quarter of fiscal 2003. This decrease was primarily the result of a lower volume of loans originated for sale and a lower average loan sale margin. Total loans originated for sale during the third quarter of fiscal 2004 decreased $50.1 million, or 17 percent, to $252.1 million as compared to $302.2 million in the same period of fiscal 2003. The average loan sale margin for PBM during the third quarter of fiscal 2004 was 1.17 percent, down from 1.42 percent in the same period of fiscal 2003. Loan sale volume, which is defined as PBM loans originated for sale adjusted for the change in commitments to extend credit on loans to be held for sale, was $294.1 million in the third quarter of fiscal 2004 as compared to $347.6 million in the same quarter of fiscal 2003. The gain on sale of loans in the third quarter of fiscal 2004 includes an un favorable adjustment of $379,000 on derivative financial instruments in connection with the implementation of SFAS No. 133 as compared to a favorable adjustment of $208,000 in the same quarter of fiscal 2003.
23
During the third quarter, the Corporation implemented the SEC guidance described in the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," which does not allow for the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. Consequently, the Corporation excluded from its SFAS No. 133 adjustment $837,000 of estimated servicing released premiums. This income will be realized in future periods when the underlying loans are funded and sold. Had the estimated servicing released premiums of $837,000 been included in the gain on sale of loans this quarter, the loan sale margin would have been 1.46 percent, accounting for a difference of 29 basis points.
The average profit margin for PBM in the third quarter of fiscal 2004 and 2003 was 71 basis points and 98 basis points, respectively. The average profit margin is defined as income before taxes divided by total loans funded during the period (including brokered loans) adjusted for the change in commitments to extend credit. The decrease in the profit margin was primarily attributable to the decline in the gain on sale of loans resulting from the lower volume of loans originated for sale.
For the nine months ended March 31, 2004, total non-interest income decreased $5.3 million, or 28 percent, to $13.7 million from $19.0 million during the same period of fiscal 2003. The decrease in non-interest income for the nine-month period was primarily attributable to a decrease in the gain on sale of loans.
For the nine months ended March 31, 2004, the gain on sale of loans decreased $4.5 million, or 32 percent, to $9.5 million from $14.0 million during the same period of fiscal 2003. This decrease was primarily the result of a lower average loan sale margin, a lower volume of loans originated for sale and an unfavorable SFAS No. 133 adjustment. The average loan sale margin for PBM during the first nine months of fiscal 2004 was 1.28 percent as compared to 1.48 percent during the same period of fiscal 2003. Loan sale volume was $741.7 million in the first nine months of fiscal 2004 as compared to $938.4 million in the same period of fiscal 2003. The gain on sale of loans in the nine months ended March 31, 2004 includes an unfavorable adjustment of $1.1 million on derivative financial instruments in connection with the implementation of SFAS No. 133 as compared to a favorable adjustment of $246,000 in the same period of fiscal 2003. Had the estimated servicing released premiums of $837,00 0 been included in the gain on sale of loans this period, the loan sale margin would have been 1.39 percent, accounting for a difference of 11 basis points.
The average profit margin for PBM in the first nine months of fiscal 2004 and 2003 was 77 basis points and 101 basis points, respectively.
Non-Interest Expense. Total non-interest expense was relatively unchanged at $7.0 million in the quarter ended March 31, 2004 from the same quarter of fiscal 2003. An increase in compensation expense was largely offset by reductions in equipment expense, sales and marketing expenses and other expense. The increase in compensation was related to retail banking (including the new banking center opened in late August 2003), and the construction loan and commercial real estate departments, which were responsible for the growth in deposits and preferred loans. The decrease in equipment expense was primarily the result of completing the depreciation of software licenses related to the year 2000 project. The efficiency ratio in the third quarter of fiscal 2004 increased slightly to 48 percent as compared to 47 percent during the same period of fiscal 2003.
For the nine months ended March 31, 2004, total non-interest expense increased $425,000, or 2 percent, to $21.2 million from $20.8 million during the same period of fiscal 2003. This increase was primarily a result of the increase in compensation and marketing expenses, partially offset by decreases in equipment and other expenses. For the nine months ended March 31, 2004, the efficiency ratio increased to 52 percent from 49 percent during the same period of fiscal 2003.
Income taxes. Income tax expense was $3.0 million for the quarter ended March 31, 2004 as compared to $3.1 million during the same period of fiscal 2003. The effective tax rate for the quarters ended March 31, 2004 and 2003 was approximately 42 percent and 40 percent, respectively.
For the nine months ended March 31, 2004, income tax expense was $7.9 million as compared to $8.2 million during the same period of fiscal 2003. The effective tax rate for the nine months ended March 31, 2004 and 2003 was approximately 42 percent and 40 percent, respectively. The increase in the effective
24
tax rate was primarily a result of the recognition of a $78,000 state tax refund in the third quarter of fiscal 2003.
Asset Quality
Non-accrual loans, which primarily consisted of single-family loans, remained relatively unchanged at $1.5 million at March 31, 2004 and June 30, 2003. Commercial business loans on non-accrual status increased by $205,000 to $237,000 at March 31, 2004 from $32,000 at June 30, 2003. No interest accruals were made for loans that were past due 90 days or more.
The non-accrual and 90 days or more past due loans as a percentage of net loans held for investment decreased to 0.17 percent at March 31, 2004 from 0.20 percent at June 30, 2003. Non-performing assets, including real estate owned, as a percentage of total assets decreased to 0.11 percent at March 31, 2004 from 0.16 percent at June 30, 2003. The decrease in the non-performing assets ratio was due to the growth in assets and the sale of the real estate owned property included in the June 30, 2003 total.
The Bank reviews loans individually to identify when impairment has occurred. Loans are identified as impaired when it is deemed probable that the borrower will be unable to meet the scheduled principal and interest payments under the terms of the loan agreement. Impairment is based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loan's observable market price or the fair value of the collateral if the loan is collateral dependent.
The following table is provided to disclose details on asset quality (dollars in thousands):
At March 31,
At June 30,
Loans accounted for on a non-accrual basis:
$ 1,152
$ 1,309
120
161
1,509
1,502
Accruing loans which are contractually past due 90 days or more
Total of non-accrual and 90 days past due loans
Real estate owned
Total non-performing assets
$ 1,509
Non-accrual and 90 days or more past due loans as a percentage of loans held for investment, net
0.17%
0.20%
Non-accrual and 90 days or more past due loans as a percentage of total assets
0.12%
Non-performing assets as a percentage of total assets
0.16%
The following table is provided to disclose details related to the volume of loans originated, purchased and sold:
Loan Volume Activities(In Thousands)
Loans originated for sale:
Retail originations
$ 110,316
$ 114,824
$355,331
$ 334,441
Wholesale originations
141,772
187,344
433,104
545,666
Total loans originated for sale (1)
252,088
302,168
788,435
880,107
Loans sold:
Servicing released
(149,634
(313,969
(638,411
(851,609
Servicing retained
(42,272
(10,230
(165,427
(19,026
Total loans sold (2)
(191,906
(324,199
(803,838
(870,635
Loans originated for portfolio:
71,407
81,628
335,672
267,685
Multi-family (3)
6,875
3,573
21,977
14,558
Commercial real estate (3)
5,923
6,722
21,692
27,555
Construction
35,781
15,841
92,994
54,969
1,424
2,196
2,224
4,017
832
1,957
4,014
3,407
Total loans originated for portfolio
122,242
111,917
478,573
372,191
Loans purchased for portfolio:
Multi-family
1,200
5,770
Commercial real estate
4,659
1,198
12,251
10,796
20,321
16,130
Total loans purchased for portfolio
5,859
21,519
34,151
Mortgage loan principal repayments
(112,153
(89,042
(334,251
(294,758
(649
(65,450
21,645
(3,074
(15,682
(Decrease) increase in other items, net (4)
(2,094
1,844
(7,310
8,249
Net increase in loans held for investment and loans held for sale
$ 13,523
$ 30,192
$140,054
$ 112,974
Liquidity and Capital Resources
The Corporation's primary sources of funding include deposits, proceeds from loan interest and scheduled principal payments, sales of loans, loan prepayments, interest income on investment securities, the maturity or principal payments on investment securities, and FHLB advances. While maturities and the scheduled amortization of loans and investment securities are predictable sources of funds, deposit flows, loan sales, and mortgage prepayments are greatly influenced by interest rates, economic conditions, and competition.
The Bank has a standard credit facility available from the FHLB of San Francisco equal to 40 percent of its total assets, collateralized by loans and securities. As of March 31, 2004, the Bank's available credit facility from the FHLB was $519.7 million. In addition to the FHLB credit facility, the Bank has an unsecured line of credit in the amount of $45.0 million with its correspondent bank. Additionally, available for sale investment securities, which total $215.0 million as of March 31, 2004, could be sold to generate liquidity.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth, to cover deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. The Bank generally maintains sufficient cash to meet short-term liquidity needs. At March 31, 2004, cash and cash equivalents totaled $32.4 million, or 2 percent of total assets. Depending on market conditions and the pricing of deposit products and FHLB borrowings, the Bank may rely on FHLB borrowings or unsecured lines of credit for its liquidity needs.
Although the OTS eliminated the minimum liquidity requirement for savings institutions in April 2001, regulation still requires thrifts to maintain adequate liquidity to assure safe and sound operation. The Bank's average liquidity ratio for the quarter ended March 31, 2004 decreased to 19 percent from 34 percent during the same period ending March 31, 2003. This decrease was primarily a result of redeployment of available cash flows into loans held for investment.
The Bank continues to experience a large volume of loan prepayments in its loan portfolio and it continues to be a challenge to reinvest these cash flows in assets that carry similar or better interest rate risk characteristics. The recent refinance market has been dominated by fixed rate loans and the Bank does not add long-term fixed rate loans to its portfolio, particularly when interest rates are at or near historical lows. Therefore, although the Bank has taken steps to address the issue of rising liquidity levels, a large percentage of its earning assets are invested at significantly lower rates than desirable. The Bank has mitigated the impact of this in several ways. The Bank has generated more loans for portfolio from its mortgage banking, business banking and commercial real estate divisions and purchased commercial real estate and construction loans from other financial institutions. This has been accomplished with prudent interest-rate-risk management practices.
The Bank is committed to changing the loan portfolio composition with more emphasis on multi-family, commercial real estate, construction and commercial business loans. These loans generally have higher yields than single-family loans. During the third quarter of fiscal 2004, the volume of loans generated for portfolio increased $15.2 million, or 13 percent, to $133.0 million as compared to $117.8 million in the comparable period last year. Of the total loans generated for portfolio in the third quarter of fiscal 2004, $60.8 million, or 46 percent were "preferred loans."
The 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 Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet certain specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
The Bank's actual and required capital amounts and ratios as of March 31, 2004 are as follows (dollars in thousands):
Percent
Tangible capital
$ 87,593
6.43%
Requirement
27,237
2.00
Excess over requirement
$ 60,356
4.43%
Tier 1 (core) capital
Requirement to be "Well Capitalized"
68,093
5.00
19,500
1.43%
Total risk-based capital
$ 92,588
11.68%
79,290
10.00
$ 13,298
1.68%
Tier 1 risk-based capital
$ 85,246
10.75%
47,574
6.00
$ 37,672
4.75%
Commitments and Derivative Financial Instruments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, and forward loan sale agreements to third parties. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying consolidated statements of financial condition. The Corporation's exposure to credit loss, in the event of non-performance by the counter party to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.
In accordance with SFAS No. 133 and interpretations of the FASB's Derivative Implementation Group, the fair value of the commitments to extend credit on loans to be held for sale, forward loan sale agreements and put option contracts are recorded at fair value on the balance sheet, and are included in other assets or other liabilities. The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. The net impact of derivative financial instruments on the consolidated statements of operations during the quarters ended March 31, 2004 and 2003 was a loss of $379,000 and a gain of $208,000, respectively.
$121,422
Put option contracts
$148,674
$276,156
$1,640
$215,999
$1,209
During the third quarter of fiscal 2004, the Corporation adopted the SEC guidance regarding loan commitments that are recognized as derivatives pursuant to SFAS No. 133. As a result of implementing the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," the Corporation excluded the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. The Corporation's previous practice had been to recognize, at the inception of the rate lock, the anticipated servicing released premiums on the underlying loans. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1, 2004. This action resulted in the delay in recognition of approximately $837,000 of estimated servicing released premiums for the quarter and nine months ended March 31, 2004, which will instead be recognized in future periods when the underlying loans are funded and sold.
Stockholders' Equity
The ability of the Corporation to pay dividends depends primarily on the ability of the Bank to pay dividends to the Corporation. The Bank may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced below either the amounts required for its liquidation account or the regulatory capital requirements imposed by federal and state regulation. During the third quarter of fiscal 2004, the Bank paid $2.0 million of cash dividends to the Corporation for the primary purpose of funding stock repurchases and cash dividends declared to shareholders. Year to date, the Bank paid $6.0 million of cash dividends to the Corporation.
The Corporation paid $723,000 of cash dividends to its shareholders in the third quarter of fiscal 2004. For the year-to-date, the Corporation paid cash dividends to its shareholders of $1.7 million or $0.23 per share on a post-split basis.
Based on the existing authorized stock repurchase program, the Corporation repurchased 25,000 shares during the third quarter of fiscal 2004 at an average price of $23.65 per share. Year to date, the Corporation repurchased 399,958 shares at an average price of $20.38 per share. As of March 31, 2004, 68 percent of the authorized shares of the August 2003 stock repurchase plan were purchased, leaving approximately 116,669 shares available for future repurchase.
Stock Option Plan and Management Recognition Plan
Consistent with the Stock Option Plan, options vest at a rate of 20 percent per year over a five-year period. In the third quarter of fiscal 2004, 15,000 stock options were granted, while 4,500 shares of stock options were exercised. As of March 31, 2004, a total of 796,350 shares of stock options were outstanding with an average exercise price of $10.18 per share and an average remaining life of 5.35 years.
Pursuant to the Management Recognition Plan ("MRP"), the restricted shares awarded under the plan vest at a rate of 20 percent per year over a five-year period. As of March 31, 2004, a total of 36,526 shares were allocated and outstanding, pending their respective distribution schedules. No MRP shares are available for future awards.
Supplemental Information
Loans serviced for others (in thousands)
$ 231,464
$ 114,146
$ 105,248
Book value per share
$15.26
$14.29
$13.60
Safe-Harbor Statement
Certain matters in this quarterly report on Form 10-Q for the quarter ended March 31, 2004 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among others, expectations of the business environment in which the Corporation operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Corporation's mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. The Corporation's actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide range of factors including, but not limited to, the general business environment, interest rates, the California real estate market, the demand for loans, competitive conditi ons between banks and non-bank financial services providers, regulatory changes, and other risks detailed in the Corporation's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2003. Forward-looking statements are effective only as of the date that they are made and the Corporation assumes no obligation to update this information.
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The principal financial objective of the Corporation's interest rate risk management function is to achieve long-term profitability while limiting its exposure to the fluctuation of interest rates. The Bank, through its Asset and Liability Committee ("ALCO"), has sought to reduce the exposure of its earnings to changes in market interest rates by managing the mismatch between asset and liability maturities. The principal element in achieving this objective is to manage the interest-rate sensitivity of the Bank's assets by holding loans with interest rates subject to periodic market adjustments. In addition, the Bank maintains a liquid investment portfolio comprised of government agency securities, including mortgage backed securities, and investment grade securities. The Bank relies on retail deposits as its primary source of funding while utilizing FHLB advances as a secondary source of funding. As part of its interest rate risk management strategy, the Bank promotes transa ction accounts and certificates of deposit with terms up to five years.
Through the use of an internal interest rate risk model, the Bank is able to analyze its interest rate risk exposure by measuring the change in net portfolio value ("NPV") over a variety of interest rate scenarios. NPV is the net present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of at least 100 basis points with no effect given to any steps that management might take to counter the effect of the interest rate movement.
The results of the internal interest rate risk model are reconciled with the results provided by the OTS on a quarterly basis. Any significant deviations are researched and adjusted where applicable. Historically, the internal model has generally reflected a more conservative position than the OTS model.
The following table is provided by the OTS and represents the NPV based on the indicated changes in interest rates as of March 31, 2004 (dollars in thousands).
NPV as Percentage
NPV
Portfolio
of Portfolio Value
Sensitivity
Basis Points ("bp")
Change
Value of
Measure
Change in Rates
(1)
(2)
(3)
+300 bp
$ 121,724
(24,925
$ 1,357,574
8.97%
-122 bp
+200 bp
134,683
(11,966
1,388,299
9.70%
-48 bp
+100 bp
143,756
(2,893
1,416,425
10.15%
-4 bp
0 bp
146,649
0
1,439,795
10.19%
-100 bp
143,375
(3,274
1,454,598
9.86%
-33 bp
The following table is provided by the OTS and represents the change in the NPV at a +200 basis point rate shock at March 31, 2004 and a -100 basis point rate shock at June 30, 2003.
Risk measure: +200/-100 basis point rate shock
At March 31, 2004
At June 30, 2003
(+200 bp rate shock)
(-100 bp rate shock)
Pre-shock NPV ratio: NPV as a % of PV Assets
10.19
%
9.17
Post-shock NPV ratio: NPV as a % of PV Assets
9.70
8.96
Sensitivity measure: Change in NPV Ratio
48
bp
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgage ("ARM") loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could likely deviate significantly from those assumed when calculating the tables above. It is also possible that, as a result of an interest rate increase, the higher mortgage payments required from ARM borrowers could result in an increase in delinquencies and defaults. Changes in market interest rates may also affect the volume and profitability of the Corporation's mortgage banking operations. Accordingly, the data presented in the tables above should not be relied upon as indicative of actual results in the event of changes in interest rates. Furthermore, the NPV presented in the foregoing tables is not intended to present the fair market value of the Bank, nor does it represent amounts that would be available for distribution to shareholders in the event of the liquidation of the Corporation.
ITEM 4 - Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Corporation or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Corporation's financial position or results of operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
The table below represents the issuer purchases of equity securities for the third quarter of fiscal 2004.
Period
(a) Total Number of Shares Purchased
(b) Average Price Paid per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plan
(d) Maximum Number of Shares that May Yet Be Purchased Under the Plan
January 2004
227,400
141,669
February 24, 2004
20,000
$ 23.55
247,400
121,669
March 10, 2004
5,000
$ 24.08
252,400
116,669
25,000
$ 23.65
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Stockholders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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.
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Craig G. Blunden, certify that:
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donavon P. Ternes, certify that:
Exhibit 32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying quarterly report on Form 10-Q of Provident Financial Holdings, Inc. (the "Corporation") for the period ending March 31, 2004 (the "Report"), I, Craig G. Blunden, Chairman, President and Chief Executive Officer of the Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying quarterly report on Form 10-Q of Provident Financial Holdings, Inc. (the "Corporation") for the period ending March 31, 2004 (the "Report"), I, Donavon P. Ternes, Chief Financial Officer of the Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: