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