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, 1997 ----------------- [ ] 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 mark 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 JANUARY 30, 1997 --------------- ---------------------- COMMON STOCK, $.01 PAR VALUE 4,692,715 SHARES * *Includes 358,438 shares held by employee stock ownership plan that have not been released, committed to be released, or allocated to participant accounts.
PROVIDENT FINANCIAL HOLDINGS, INC. Table of Contents PART 1 - FINANCIAL INFORMATION ITEM 1 - Financial Statements. The Consolidated Financial Statements of Provident Financial Holdings, Inc. filed as a part of the report are as follows: Consolidated Statements of Financial Condition as of December 31, 1997 and June 30, 1997............................. 1 Consolidated Statements of Operations for the quarter and six months ended December 31, 1997 and 1996........2 Consolidated Statement of Changes in Stockholder's Equity for the six months ended December 31, 1997 and 1996....................3 Consolidated Statements of Cash Flows for the quarter and six months ended December 31, 1997 and 1996........4 Selected Notes to Consolidated Financial Statements....................5 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation General................................................................6 Comparison of Financial Condition at December 31 and June 30, 1997.....6 Comparison of Operating Results for the Quarter and Six Months ended December 31, 1997 and 1996.............................................7 Asset Quality.........................................................12 Liquidity and Capital Resources.......................................14 PART II - OTHER INFORMATION Item 1 Legal Proceedings.............................................16 Item 2 Changes in Securities.........................................16 Item 3 Defaults upon Senior Securities...............................16 Item 4 Submission of Matters to a Vote of Stockholders...............16 Item 5 Other Information.............................................16 Item 6 Exhibits and Reports on Form 8-K..............................16 SIGNATURES..................................................................17 EXHIBIT 27 - FINANCIAL DATA SCHEDULE........................................18
PROVIDENT FINANCIAL HOLDINGS, INC CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) DOLLARS IN THOUSANDS December 31, June 30, 1997 1997 ASSETS Cash $ 12,965 $ 10,411 Overnight Deposits 9,700 Investment Securities-held to maturity (market value $60,713 and $34,425) 60,426 33,645 Investment securities-available for sale at fair value 919 761 Loans held for investment 589,163 517,147 Loans held for sale 32,386 19,984 Accrued interest receivable 4,229 3,378 Real estate available for sale 6,539 5,676 Federal Home Loan Bank stock - at cost 5,033 4,879 Premises and equipment, net 7,100 6,825 Prepaid expenses and other assets 4,936 3,094 -------- -------- TOTAL ASSETS $723,696 $615,500 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest bearing deposits $ 4,050 $ 2,335 Interest-bearing deposits 529,819 506,424 Borrowings 92,613 6,828 Accounts Payable and Other Liabilities 13,439 14,466 -------- -------- TOTAL LIABILITIES 639,921 530,053 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 5,125,215; outstanding 4,692,715 at December 31, 1997 and 4,920,215 at June 30, 1997 51 51 Additional paid-in capital 49,976 49,842 Retained earnings 44,690 42,070 Treasury stock at cost (7,888) (3,291) Unearned ESOP shares (3,584) (3,720) Unrealized gain on securities, net of tax 530 495 -------- -------- TOTAL STOCKHOLDERS' EQUITY 83,775 85,447 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $723,696 $615,500 ======== ======== 1
PROVIDENT FINANCIAL HOLDINGS, INC CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 Interest Income Loans $11,365 $ 9,509 $22,119 $19,004 Investment Securities 845 1,113 1,511 2,183 ------- ------- ------- ------- Total Interest Income 12,210 10,622 23,630 21,187 Interest Income Deposits 6,456 5,714 12,725 11,271 Borrowings 713 99 911 219 ------- ------- ------- ------- Total Interest Expense 7,169 5,813 13,636 11,490 Net Interest Income 5,041 4,809 9,994 9,697 Provision for Loan Losses 450 450 750 704 Net Interest Income after Provision for Loan Losses 4,591 4,359 9,244 8,993 Non-Interest Income Loan Servicing and Other Fees 807 782 1,607 1,412 Gains from Sales of Loans 1,058 1,127 2,118 2,177 Other 373 273 819 592 ------- ------ ------- ------- Total non-interest income 2,238 2,182 4,544 4,181 Non-interest Expenses Salaries and employee benefits 3,069 3,061 5,926 6,159 Premises and occupancy 525 502 1,058 1,021 SAIF Insurance premiums 0 314 0 3,858 Telephone 90 93 204 200 Other 1,155 1,132 2,174 2,400 ------- ------ ------- ------- Total Operating and 4,839 5,102 9,362 13,638 Administrative Expenses Real Estate Operations, net (20) 102 (108) 83 ------- ------ ------- ------- Total non-interest expenses 4,819 5,204 9,254 13,721 Income (Loss) Before Taxes 2,010 1,337 4,534 (547) Provision (Benefit) for Income Taxes 857 559 1,914 (208) ------- ------ ------- ------- Net Income (Loss) $ 1,153 $ 778 $ 2,620 $ (339) ======= ====== ======= ======= Earnings (Loss) Per Share $ 0.26 $ 0.16 $ 0.59 $ (0.07) ======= ====== ======= ======= Weighted Average Shares Outstanding 4,387,305 4,737,021 4,435,957 4,733,520 ========= ========= ========= ========= Earnings (Loss) Per Share $ 0.25 $ 0.16 $ 0.58 $ 0.07 Assuming Dilution ======= ====== ======= ======= Weighted Average Diluted Shares 4,475,997 4,737,021 4,596,323 4,733,520 ========= ========= ========= ========= Return on Assets 0.68% 0.53% 0.80% (0.11%) Return on Equity 5.47% 3.64% 6.19% (0.79%) 2
<TABLE> PROVIDENT FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) DOLLARS IN THOUSANDS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 Unrealized Gain on Additional Unearned Securities Common Paid-in Retained ESOP Available Shares Stock Capital Earnings Shares For Sale Total <S> <C> <C> <C> <C> <C> <C> <C> --------------------------------------------------------------------------------- Balance at June 30, 1996 5,125,215 $51 $49,742 $40,130 $(3,952) $85,971 Release of ESOP shares 17 105 122 Unrealized gain on securities available for sale, net of taxes $404 404 Net loss (339) (339) --------------------------------------------------------------------------------- Balance at December 31, 1996 5,125,215 $51 $49,759 $39,791 $(3,847) $404 $86,158 ================================================================================= </TABLE> <TABLE> Unrealized Gain on Additional Unearned Securities Common Paid-in Retained Treasury ESOP Available Shares Stock Capital Earnings Stock Shares For Sale Total <S> <C> <C> <C> <C> <C> <C> <C> <C> ---------------------------------------------------------------------------------- Balance at June 30, 1997 4,920,215 $51 $49,842 $42,070 $(3,291) $(3,720) $495 $85,447 Net Income 2,620 2,620 Treasury Stock (227,500) (4,597) (4,597) Release of ESOP shares 134 136 270 Unrealized gain on securities available for sale, net of taxes 35 35 --------------------------------------------------------------------------------- Balance at December 31, 1997 4,692,715 $51 $49,976 $44,690 $(7,888) $(3,584) $530 $83,775 ================================================================================= 3 </TABLE>
PROVIDENT FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) DOLLARS IN THOUSANDS FOR THE QUARTER AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 DOLLARS IN THOUSANDS THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 Cash flows from operating activities: Net income (loss) $ 1,153 $ 778 $2,620 ($339) Adjustments to reconcile net income (loss) to Net cash provided by operating activities: Depreciation and amortization 257 264 510 548 Amortization of loan fees (189) 16 (282) 5 Amortization of Unearned ESOP Shares 140 0 270 0 Provision for loan losses 450 450 750 704 Provision for losses on real estate 0 162 18 208 Gain on sale of loans (1,058) (1,127) (2,118) (2,177) Increase in accounts payable and other liabilities 77 (1,263) (1,027) 594 Increase in prepaid expenses and other assets (3,052) (605) (2,847) (1,219) Loans originated for sale (103,711) (86,709) (210,503) (169,561) Proceeds from sale of loans 99,698 79,018 200,219 187,845 -------- ------- -------- -------- Net cash provided by operating (6,235) (9,016) (12,390) 16,608 Activities Cash flows from financing activities: Net increase (decrease) in NOW, passbook and money market deposits (25,482) 15,672 3,185 15,811 Net increase (decrease) in term deposits 36,314 (4,609) 21,925 (8,497) Repayment of Federal Home Loan Bank advances 0 0 0 (1,750) Proceeds from Federal Home Loan Bank Advances 73,785 0 85,785 0 Net cash provided by -------- ------- -------- -------- financing activities 84,617 11,063 110,895 5,564 Cash flows from investing activities: Net (increase) decrease in loans receivable (47,915) (11,385) (76,068) (13,365) Maturity of investment securities held-to-maturity 8,836 66,832 30,526 143,445 Purchases of investment securities held-to-maturity (34,867) (59,666) (57,465) (172,917) Proceeds from disposal of real estate 469 2,334 2,711 3,996 Purchases of premises and equipment, net of proceeds from sales (364) (250) (793) (449) Treasury stock purchases (2,960) 0 (4,597) 0 Other 35 451 35 529 -------- ------- -------- ------- Net cash provided by investing activities (76,766) (1,684) (105,651) (38,761) -------- ------- -------- ------- Net (decrease) increase in cash and cash equivalents 1,616 363 (7,146) (16,589) Cash and cash equivalents at beginning of period 11,349 13,879 20,111 30,831 -------- ------- -------- ------- Cash and cash equivalents at end of period $ 12,965 $14,242 $12,965 $14,242 ======== ======= ======= ======= Supplemental information: Cash paid for interest $ 7,118 $ 5,662 $13,980 $11,303 Cash paid for income taxes 1,555 0 2,478 0 Real estate acquired in settlement of loans 1,067 2,148 3,592 4,261 4
PROVIDENT FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1: BASIS OF PRESENTATION The unaudited consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The balance sheet data at June 30, 1997 is derived from audited financial statements of Provident Financial Holdings, Inc. (The Company). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended June 30, 1997 (File No. 0-28304) of the Company. Certain amounts in the prior period's financial statements may have been reclassified to conform to the current period's presentation. NOTE 2: EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary restated, to conform to the Statement 128 requirements. The following table sets forth the computation of basic and diluted earnings per share: For the Three Months ended For the Six Months ended December 31, December 31, -------------------------- ------------------------ 1997 1996 1997 1996 -------------------------- ------------------------ Numerator: Net income - Numerator for basic earnings per share and diluted earnings per share- income available to common stockholders $1,153,000 $ 778,00 $2,620,000 $ (339,000) ========== ========== ========== ========== Denominator: Denominator for basic earnings per share- weighted-average shares 4,387,305 4,737,021 4,435,957 4,733,520 Effect of dilutive securities: Employee stock benefit plans 88,692 0 160,366 0 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share- adjusted weighted- average shares and assumed conversions 4,475,997 4,737,021 4,596,323 4,733,520 ========== ========== ========== ========== Basic earnings per share $ 0.26 $ 0.16 $ 0.59 $ (0.07) Diluted earnings per share $ 0.25 $ 0.16 $ 0.58 $ (0.07) 5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Provident Financial Holdings, Inc. (the Company) is a Delaware corporation which was organized in January, 1996 for the purpose of becoming the holding company for Provident Savings Bank, F.S.B. (the Savings Bank) upon the latter's conversion from a federal mutual to a federal stock savings bank (the "Conversion"). The conversion was completed on June 27, 1996. The Company operates primarily in one business segment attracting customer deposits to originate loans secured primarily by mortgages on residential real estate. The segment includes ancillary activities related to real estate lending such as mortgage banking and real estate development. The Savings Bank is a federally chartered savings bank founded in 1956 whose deposits are insured by the FDIC under the Savings Association Insurance Fund (SAIF). The Savings Bank conducts business from its main office in Riverside, California and its nine branch offices. Through the operations of its Profed Mortgage Division (Profed), the Savings Bank has expanded its retail lending market to include a larger portion of Southern California and Southern Nevada. Profed operates three offices within the Savings Bank's retail branch facilities and seven free-standing loan production offices, one of which includes a wholesale loan department. Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to Consolidated Financial Statements. The operating results of the Company depend primarily on its net interest income, its non-interest income (principally from mortgage banking activities) and its non-interest expense. Net interest income is the difference between the income the Company receives on its loan and investment portfolio and its cost of funds, which consist of interest paid on deposits and borrowings. Non-interest income is comprised of income from mortgage banking activities, gain on the occasional sale of assets and miscellaneous fees and income. The contribution of mortgage banking activities to the Company's results of operations is highly dependent on the demand for loans by borrowers and investors, and therefore the amount of gain on sale of loans may vary significantly from period to period as a result of changes in market interest rates and the local and national economy. The Company's profitability is also affected by the level of non-interest expense. Non-interest expenses include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums, data servicing expenses, and other operating costs. The Savings Bank incurred a one-time assessment to recapitalize the Savings Association Insurance Fund ("SAIF") during the quarter ended September 30, 1996. Non-interest expenses related to mortgage banking activities include compensation and benefits, occupancy and equipment expenses, telephone and other operating costs, all of which are related to the volume of loans originated. The Company's results of operations may be adversely affected during periods of reduced loan demand to the extent that non-interest expenses associated with mortgage banking activities are not reduced commensurate with the decrease in loan originations. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31 AND JUNE 30, 1997 Total assets increased by $108.2 million, or 17.6% from $615.5 million at June 30, 1997 to $723.7 million at December 31, 1997. This increase was chiefly the result of an $84.4 million, or 15.7% increase in Loans Receivable-net, from $537.1 at June 30, 1997 to $621.5 at December 31, 1997 as the company leveraged its net worth by directing a larger percentage of loan originations to its portfolio. This expansion was funded by an increase in deposits, which rose by $25.1 million, 4.9%, to $533.9 million at December 31, 1997 from $508.8 million at June 30, 1997. Federal Home Loan Bank (FHLB) advances provided the remaining financing with an increase of $85.8 million (1256.4%) from June 30, 1997. The company plans to continue utilizing borrowing from FHLB to fund its loan growth objectives. Investment Securities-held to maturity increased $26.8 million, or 79.6%, to $60.4 million at December 31, 1997 from $33.6 million at June 30, 1997. Loans Receivable-held for sale increased $12.4 million, 62.1%, from $20.0 million at June 30, 1997, to $32.4 million at December 31, 1997. This increase was the result of increased loan demand in the Company's lending territory and management's decision to retain a higher percentage of new loans generated. 6
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 The company's net earnings for the three months ended December 31, 1997 and 1996 were $1.2 million and $778,000, respectively, while for the six months ended December 31, 1997 and 1996 the Company recorded net earnings of $2.6 million and a net loss of $339,000, respectively. The six month period in 1996 included a charge of $3.2 million ($1.9 million after tax) for the assessment resulting from the recapitalization of the Savings Association Insurance Fund (SAIF). Without this special one-time assessment, the Company would have reported net earnings of $1.6 million for the six months ended December 31, 1996. Earnings per share were $0.26 per share for the quarter ended December 31, 1997 and $0.59 per share for the six months ended December 31, 1997. Year-to-year operating results were primarily affected by an increase in net interest income tempered in part by decreases in other operating and administrative expenses. The Company's net interest margin decreased to 3.09% for the quarter ended December 31, 1997 compared to 3.42% for the quarter ended December 31, 1996 due to interest rate compression. Net interest income increased $232,000 for the 1997 quarter, or 4.8%, and $251,000 for the 1997 six month period, or 2.8%, compared to the same periods in 1996 due to the increase in interest earning assets. INTEREST INCOME. Interest income increased by $1.6 million (15.0%) to $12.2 million for the quarter ended December 31, 1997 from $10.6 million for the similar quarter last year. However, the average yield on interest earning assets declined to 7.49% for the quarter ended December 31, 1997 from 7.55% for the similar period last year. The average balance of investment securities, interest-bearing deposits and FHLB stock decreased $26.4 million, or 33.1%, for the quarter ended December 31, 1997 and interest income from these investments decreased by $268,000 compared to the same period last year. The average rate on investment securities rose by 54 basis points to 6.33% for the 1997 quarter compared to 5.79% for the 1996 quarter. Loan interest income increased by $1.9 million or 19.5%, to $11.4 million in the quarter ended December 31, 1997 compared to $9.5 million for the quarter ended December 31, 1996. The majority of this decline is attributable to an increase in the level of loans receivable-net, including loans held for sale. Beginning in the quarter ended December 31, 1996, management has undertaken a program to increase the level of portfolio loans. The recent softening of long-term interest rates is reflected in the 28 basis point decline in yield to 7.59% for the quarter ended December 31, 1997 from 7.87% in the same period last year. For the six months ended December 31, 1997, interest income rose by $2.4 million, or 11.5%, to $23.6 million from $21.2 million for the six months ended December 31, 1996. Average loans receivable, including those held for sale, increased to $579.6 million for the six months ended December 31, 1997 compared to $485.4 million for the six months ended December 31,1996, while the yield declined to 7.63% from 7.83%, respectively. The average balance of investment securities, interest-bearing deposits, and FHLB stock decreased by $29.8 million, or 37.5%, to $49.7 million in order to grow the loan portfolio. The interest income from those investments decreased $672,000,or 30.8%, to $1.5 million in the six months ended December 31, 1997. The average yield on investment securities held to maturity increased 52 basis points to 6.16% in the six months ended December 31, 1997 compared to 5.64% for the six months ended December 31, 1996, due to a lengthening of the term of new investments. 7
INTEREST EXPENSE. Interest expense for the quarter ended December 31, 1997 was $7.2 million compared to $5.8 million for the comparable period in 1996, an increase of $1.4 million, or 23.3%. Interest expense for the six months ended December 31, 1997 totaled $13.6 million compared to $11.5 for the similar period one year ago, an increase of $2.1 million, or 18.7%. These increases are attributable to an increase in average interest-bearing liabilities, particularly FHLB advances. Average deposits increased $50.4 million, or 10.5%, during the quarter compared to the prior year and $42.7 million, or 8.9%, for the semi-annual period while the rate paid on deposits increased from 4.77% during the quarter ended December 31, 1996 to 4.83% during the similar quarter in 1997 and from 4.70% to 4.83% during the two semi-annual periods. FHLB advances averaged $7.0 million during the quarter ended December 31, 1996 compared to $48.5 million for the quarter ended December 31, 1997 and $7.4 million compared to $31.1 million during the respective six month periods. The volume increase on FHLB advances resulted in a $608,000, or 614.1%, increase in related interest expense for the quarter compared to the prior year and a $686,000, or 314.2%, increase for the six month period. The average rate paid on these advances increased from 5.65% for the quarter ended December 31, 1996 to 5.78% in the same quarter in 1997 and declined from 5.96% for the six months ended December 31, 1996 to 5.77% for the same period in 1997. 8
<TABLE> Three Months Ended Three Months Ended 12/31/97 12/31/96 Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- ------- --------- ------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans receivable, net(1)....... $598,667 $11,365 7.59% $483,268 $9,509 7.87% Investment securities.......... 46,510 736 6.33 61,166 885 5.79 FHLB Stock..................... 5,011 80 6.38 4,696 74 6.29 Interest-bearing deposits...... 1,875 29 6.15 13,969 154 4.41 -------- ------- ----- -------- ------ ----- Total interest-earning assets.. 652,063 12,210 7.49 563,099 10,622 7.55 Non-interest earning assets.... 28,312 26,927 -------- -------- Total Assets $680,375 $590,026 ======== ======== Interest-bearing liabilities: Passbook accounts.............. $ 45,341 361 3.16 $53,554 351 2.62 Demand and NOW accounts........ 111,908 879 3.11 111,228 969 3.48 Certificate accounts........... 373,053 5,216 5.54 315,169 4,394 5.58 -------- ------- ----- -------- ------ ----- Total Deposits 530,302 6,456 4.83 479,951 5,714 4.76 FHLB Advances.................. 48,498 707 5.78 7,007 99 5.65 Other borrowings............... 217 6 10.71 0 0 0 -------- ------- ----- -------- ------ ----- Total interest-bearing liabilities 579,017 7,169 4.91 486,958 5,813 4.77 Non-interest bearing liabilities 17,020 17,659 -------- -------- Total liabilities 596,037 504,617 -------- -------- Retained Earnings.............. 84,338 85,409 -------- -------- Total liabilities and retained earnings.. $680,375 $590,026 ======== ======== Net interest income............ $5,041 $4,809 ====== ====== Interest rate spread(2)........ 2.58% 2.78% Net interest margin(3)......... 3.09% 3.42% Ratio of average interest-earning assets to average interest- bearing liabilities........... 112.62% 115.64% Return on Assets............... 0.68% 0.53% Return on Equity............... 5.47% 3.64% </TABLE>
<TABLE> Six Months Ended Six Months Ended 12/31/97 12/31/96 Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- ------- --------- ------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans receivable, net(1)....... $579,648 $22,119 7.63% $485,423 $19,004 7.83% Investment securities.......... 38,935 1,200 6.16 57,076 1,609 5.64 FHLB Stock..................... 4,972 154 6.20 4,677 143 6.10 Interest-bearing deposits...... 5,751 157 5.46 17,731 431 4.86 -------- ------- ----- -------- ------ ----- Total interest-earning assets.. 629,306 23,630 7.51 564,907 21,187 7.50 Non-interest earning assets.... 25,922 24,686 -------- -------- Total Assets $655,228 $589,593 ======== ======== Interest-bearing liabilities: Passbook accounts.............. $45,460 672 2.93 $52,327 737 2.82 Demand and NOW accounts........ 113,515 1793 3.13 110,012 1,937 3.52 Certificate accounts........... 363,249 10,260 5.60 317,222 8,597 5.42 -------- ------- ----- -------- ------ ----- Total Deposits 522,224 12,725 4.83 479,561 11,271 4.70 FHLB Advances.................. 31,128 905 5.76 7,365 219 5.96 Other borrowings............... 222 6 5.24 0 0 0 -------- ------- ----- -------- ------ ----- Total interest-bearing liabilities 553,574 13,636 4.88 486,926 11,490 4.72 Non-interest bearing liabilities 16,952 16,924 -------- -------- Total liabilities 570,526 503,850 -------- -------- Retained Earnings.............. 84,702 85,743 -------- -------- Total liabilities and retained earnings.. $655,228 $589,593 ======== ======== Net interest income............ $9,994 $9,697 ====== ====== Interest rate spread(2)........ 2.63% 2.78% Net interest margin(3)......... 3.18% 3.43% Ratio of average interest-earning assets to average interest- bearing liabilities........... 113.68% 116.02% Return on Assets............... 0.80% (0.11%) Return on Equity............... 6.19% (0.79%) (1) Includes loans available for sale (2) Represents difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities (3) Represents net interest income before provision for loan losses as a percentage of average interest-earning assets. 9 </TABLE>
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31, 1996 Increase (Decrease) Due to: -------------------------- Rate/ Rate Volume Volume Net Interest income: Loans receivable (1) $ 90 $(561) $ 6) $ (477) Investment securities 2 486 3 491 FHLB stock 11 3 1 15 Interest-bearing deposits 10 29 3 42 ---- ----- ----- ------ Total net change in change on interest-earning assets 113 (43) 1 71 Interest-bearing liabilities: Passbook accounts (166) 12 (4) (158) Demand and NOW accounts (158) (20) 3 (175) Certificate accounts 14 (238) (1) (225) FHLB advances (27) (204) 18 (213) Other borrowings 0 0 0 0 Total net change in expense ----- ----- ----- ------ on interest-bearing liabilities (337) (450) 16 (771) ----- ----- ----- ------ Net change in net interest income $ 450 $ 407 $ (15) $ 842 ===== ===== ===== ====== (1) Includes loans available for sale. For purposes of calculating volume, rate and rate/volume variances, non-accrual loans were included in the weighted average balance outstanding. Six Months Ended December 31, 1997 Compared to Six Months Ended December 31, 1996 Increase (Decrease) Due to -------------------------- Rate/ Rate Volume Volume Net Interest income: Loans receivable (1) $ (58) $(438) $ 3 $(493) Investment securities (77) 636 (130) 429 FHLB stock 13 3 0 16 Interest-bearing deposits 40 51 19 110 ----- ----- ----- ----- Total net change in change on interest-earning assets (82) 252 (108) 62 Interest-bearing liabilities: Passbook accounts (110) 8 (2) (104) Demand and NOW accounts (138) (32) 4 (166) Certificate accounts (102) (144) 3 (243) FHLB advances (10) (244) 7 (247) Other borrowings (10) (10) 10 (10) ----- ----- ----- ----- Total net change in expense on interest-bearing liabilities (370) (422) 22 (770) ----- ----- ----- ----- Net change in net interest income $ 288 $ 674 $(130) $ 832 ===== ===== ===== ===== (1) Includes loans available for sale. For purposes of calculating volume, rate and rate/volume variances, non-accrual loans were included in the weighted average balance outstanding. 10
PROVISION FOR LOAN LOSSES. For the six months ended December 31, 1997, the Company's provision for loan losses was $750,000 compared to $704,000 for the quarter ended December 31, 1997. At December 31, 1997, loan loss reserves as a percentage of gross loans receivable was 1.00% compared to 1.18% at December 31, 1996. With the recent improvement in the Southern California economy and its housing market, the Company intends to allow its loan loss reserve to decrease below 1% of gross loans. Net charge-offs fell to 6 basis points of average loans during the six months, down from 12 basis points in the same period last year. The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the realizable value of the collateral securing the loans. Provisions for losses are charged against operations on a monthly basis as necessary to maintain the allowance at appropriate levels. Management believes that the amount maintained in the allowance will be adequate to absorb losses inherent in the portfolio. Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses. Future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected due to economic, operating, regulatory, and other conditions beyond the control of the Company. The following tables are provided to disclose additional detail on the Company's allowance for loan losses and asset quality (dollars in thousands): For the Six Months Ended December 31, 1997 December 31, 1996 ----------------- ----------------- Allowance at beginning of period $5,465 $5,452 Provision for loan losses 750 704 Recoveries: Mortgage Loans: One-to-four family 11 1 Multi-family 191 14 Commercial - 38 Construction - - Consumer loans 14 - Commercial Business Lending - - Other loans - - --------- --------- Total recoveries 216 53 Charge-offs: Mortgage Loans: One-to-four family 59 236 Multi-family 2 102 Commercial 253 309 Construction - - Consumer loans 64 0 Commercial business lending - - Other loans - - -------- ------- Total charge-offs 378 647 Net charge-offs 162 594 -------- ------- Balance at end of period $6,053 $5,562 Allowance for loan losses as a percentage of gross loans outstanding at the end of the period 1.00% 1.18% Net charge-offs as a percentage of average loans Outstanding during the period .06% 0.12% Allowance for loan losses as a percentage of non-performing loans at the end of the period 127.59% 142.21% 11
ASSET QUALITY. The following tables are provided to disclose additional details on asset quality (dollars in thousands): At December 31, 1997 At June 30, 1997 -------------------- ---------------- Loans accounted for on a non-accrual basis: Mortgage Loans: One-to-four family $2,720 $3,667 Multi-family 0 1,176 Commercial 1,405 979 Construction 0 0 Consumer Loans 69 150 Commercial business lending 0 0 Other loans 0 0 --------- ---------- Total 4,194 5,972 Accruing loans which are contractually past due 90 days or more: Mortgage Loans: One-to-four family 122 268 Multi-family 0 0 Commercial 0 0 Construction 0 0 Consumer Loans 0 9 Commercial Business Lending 428 0 Other Loans 0 0 ---------- ---------- Total 550 277 Total of nonaccrual and 90 days past due loans 4,744 6,249 Real estate owned 3,511 2,636 ---------- ---------- Total non-performing assets $8,255 $8,885 ========== ========== Restructured loans $2,506 $4,910 ========== ========== Non-accrual and 90 days or more past due loans as a percentage of portfolio loans receivable, net 0.81% 1.21% Non-accrual and 90 days or more past due loans as a percentage of total assets 0.66% 1.02% total assets Non-performing assets as a percentage of total assets 1.14% 1.44% The Company addresses loans individually and identifies impairment when the accrual of interest has been discontinued, loans have been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans are currently performing. Factors considered in determining impairment include, but are not limited to, expected future cash flows, the financial condition of the borrower and 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. 12
NON-INTEREST INCOME. Non-interest income remained a constant $2.2 million in the second fiscal quarter of 1997 compared to the second fiscal quarter of 1996. For the semi-annual period ending December 31, 1997, non-interest income increased $363,000, or 8.7%, to $4.5 million, compared to the same period in 1996. The majority of this increase in the quarterly and six month period was a result of increases in Loan Servicing and Other Fees. A portion of this increase is attributable to broker loan fees as a result of the acquisition of Pacific Sunbelt Mortgage in October of 1996. Gains from the sales of loans declined by $69,000, or 6.1%, to $1.1 million in the quarter ended December 31, 1997. This decline was in spite of an increase of $19.0 million in the aggregate amount of loans sold in the quarter ended December 31, 1997 compared to the same quarter one year earlier, and is an indication of the recent compression of interest rates. NON-INTEREST EXPENSES. Non-interest expenses decreased by $385,000 during the quarter to $4.8 million from $5.2 million in the same period last year. As previously discussed, the one-time special assessment to recapitalize the SAIF increased deposit insurance premiums by $3.2 million in the six months ended December 31, 1996. INCOME TAXES. Income tax expense was $857,000 for the quarter versus $559,000 for the same quarter of 1996, while the six month numbers were $1.9 million for fiscal 1998 and a benefit of $208,000 for fiscal 1997. The resulting effective tax rates for the quarters ended December 31, 1997 and 1996 were 42.6% and 41.8% and the six month ratios were 42.2% and (38.0%) respectively. LOAN ORIGINATION VOLUMES. The following table is provided to disclose additional detail related to the volume of loans originated (dollars in thousands): For the Quarter Ended For the Six Months Ended December 31, December 31, 1997 1996 1997 1996 ---- ---- ---- ---- Loans originated for sale Retail originations $ 72,279 $37,285 $131,407 $ 71,216 Wholesale originations 36,167 49,424 85,114 98,345 -------- ------- -------- -------- Total loans originated for sale 108,446 86,709 216,521 169,561 Loans sold: Servicing released 100,758 81,757 200,220 186,972 Servicing retained 0 0 0 1,539 -------- ------- -------- -------- Total loans sold 100,758 81,757 200,220 188,511 Loans originated for portfolio; Mortgage loans: One-to-four family 52,734 23,372 97,492 33,454 Multi-family 420 422 420 714 Commercial 0 0 250 0 Construction loans 4,176 90 8,150 499 Consumer 631 1,583 2,641 3,074 Commercial business lending 348 0 1,040 0 Other loans 78 232 78 232 -------- ------- -------- -------- Total loans originated for portfolio 58,387 25,699 110,071 37,973 Loans purchased: Mortgage loans: One-to-four family 18,410 1,201 18,838 1,420 Commercial 0 0 0 0 ------- ------- -------- -------- Total loans purchased 18,410 1,201 18,838 1,420 Mortgage loan principal repayments 30,256 14,724 55,917 25,494 Real estate acquired in settlement of loans 2,220 2,148 4,867 4,261 Increase (decrease) in other items, net (1) (634) 2,739 (9) 1,805 -------- ------- -------- -------- Net (decrease) increase in loans receivable, net $ 51,375 $17,719 $ 84,417 $ (7,507) ======== ======= ======== ======== - ---------------------- (1) Includes changes in accrued interest, loans in process, discounts and loan loss reserves. 13
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary source of funds are deposits, proceeds from loan principal and interest payments and 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 Federal Home Loan Bank of San Francisco of 30% of total assets, which, on December 31, 1997 permitted additional advances up to $95.7 million. While maturities and scheduled amortization of loans are a predictable source 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, 1997, the Savings Bank originated a total of $185 million in loans. This activity was funded primarily by loan sales, retail deposits and FHLB advances. For the quarter ended December 31, 1997 loans sales aggregated $100.8 million and loan principal repayments totaled $30.3 million along with $200.2 million in loan sales and $55.9 million in repayments in the fiscal period to date. FHLB advances increased by $41.5 million. By regulation, the Savings Bank must maintain liquidity of 4% of deposits and short-term borrowings. Liquidity is measured by cash and readily marketable securities which are not committed, pledged, or required to liquidate specific liabilities. The Savings Bank's average liquidity ratios for December 31, 1997 and 1996 were 10.6% and 11.6%, respectively. The Savings Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Savings Bank must meet certain specific capital guidelines that involve quantitative measures of the Savings Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Savings Bank's capital amounts and classifications are also subject to qualitative judgements 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, 199 are as follows: Amount Percent Tangible capital $60,858 8.63% Requirement 10,576 1.50% ------- ------ Excess over requirement 50,282 7.13% Core capital 60,858 8.63% Requirement 21,152 3.00% ------- ------ Excess over requirement 39,706 5.63% Risk based capital 66,682 14.32% Requirement to be "Well Capitalized" 37,257 8.00% ------- ------ Excess over requirement $29,425 6.32% Management believes that under current regulations, the Company will continue to meet its minimum capital requirements in the foreseeable future. YEAR 2000 ISSUES. In preparation for the information system issues in Year 2000, management has recently engaged a consulting firm to assess the Company's Year 2000 compliance and recommend corrective actions. The total cost of making the Company's information systems Year 2000 compliant cannot be estimated at this time. Management believes, at minimum, the Company will need to make a capital investment in additional software and equipment to address Year 2000 concerns. 14
SUPPLEMENTAL INFORMATION December 31, 1997 June 30, 1997 December 31, 1996 ----------------- ------------- ----------------- Loans serviced for others $504,018 $530,318 $568,561 Book value per share $17.85 $17.37 $16.81 15
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 STOCKHOLDERS Not Applicable. ITEM 5. OTHER INFORMATION Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27 - Financial data schedule b) Reports on form 8-k None. 16
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 11, 1998 /s/ Craig G. Blunden -------------------------------------- Craig G. Blunden President and Chief Executive Officer (Principal Executive Officer) February 11, 1998 /s/ Brian M. Riley ------------------------------------- Brian M. Riley Chief Financial Officer (Principal Financial and Accounting Officer) 17