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, 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 February 3, 2000
--------------- ----------------------
Common stock, $ 0.01 par value 3,988,566 shares *
* Includes 304,335 shares held by the employee stock ownership plan that have
not been released, committed to be released, or allocated to participant
accounts; and 110,946 shares held by the management recognition plan which
have been committed to be released and allocated to participant accounts.
PROVIDENT FINANCIAL HOLDINGS, INC.
Table of Contents
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Unaudited Interim Consolidated Financial
Statements of Provident Financial Holdings, Inc. filed as a part of
the report are as follows:
Consolidated Statements of Financial Condition
as of December 31, 1999 and June 30, 1999 ...................... 1
Consolidated Statements of Operations
for the quarter and six months ended December 31, 1999 and 1998. 2
Consolidated Statements of Changes in Stockholders' Equity
for the quarter and six months ended December 31, 1999 and 1998. 3
Consolidated Statements of Cash Flows
for the quarter and six months ended December 31, 1999 and 1998. 5
Selected Notes to Unaudited Interim Consolidated Financial
Statements...................................................... 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General......................................................... 9
Comparison of Financial Condition at December 31, 1999 and
June 30, 1999................................................... 9
Comparison of Operating Results for the quarter and
six months ended December 31, 1999 and 1998..................... 10
Loan Volume Activities.......................................... 19
Liquidity and Capital Resources................................. 20
Year 2000 Readiness............................................. 21
Supplemental Information........................................ 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................... 22
Item 2. Changes in Securities.................................. 22
Item 3. Defaults upon Senior Securities........................ 22
Item 4. Submission of Matters to Vote of Stockholders.......... 22
Item 5. Other Information...................................... 23
Item 6. Exhibits and Reports on Form 8-K....................... 23
SIGNATURES............................................................... 24
EXHIBIT 27 - FINANCIAL DATA SCHEDULE..................................... 25
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Financial Condition
(Unaudited)
Dollars in Thousands
December 31, June 30,
1999 1999
----------- ----------
ASSETS
Cash........................................... $ 28,156 $ 19,729
Overnight deposits............................. - -
Investment securities - held to maturity
(market value $169,179 and $176,033,
respectively)................................. 177,828 179,834
Investment securities - available for sale
at fair market value.......................... 25,503 7,344
Loans held for investment, net................. 847,066 669,386
Loans available for sale, net.................. 66,183 37,667
Accrued interest receivable.................... 6,879 5,984
Real estate available for sale, net............ 14,509 2,793
Federal Home Loan Bank stock................... 20,357 10,725
Premises and equipment, net.................... 8,118 8,422
Prepaid expenses and other assets.............. 7,007 15,547
---------- ----------
TOTAL ASSETS.................................. $1,201,606 $ 957,431
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits................ $ 17,769 $ 14,764
Interest bearing deposits.................... 688,470 618,117
---------- ----------
Total deposits................................. 706,239 632,881
Borrowings..................................... 385,343 214,506
Accounts payable and other liabilities......... 24,348 20,358
---------- ----------
TOTAL LIABILITIES............................. 1,115,930 867,745
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;
3,988,566 and 4,385,785 outstanding at December
31, 1999 and June 30, 1999, respectively)..... 51 51
Additional paid-in capital..................... 51,187 51,069
Retained earnings.............................. 61,013 57,555
Treasury stock at cost (1,136,649 and 739,430
shares, respectively)......................... (21,699) (14,089)
Unearned stock compensation.................... (5,139) (5,644)
Accumulated other comprehensive income......... 263 744
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.................... 85,676 89,686
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $1,201,606 $ 957,431
========== ==========
The accompanying notes are an integral part of these financial statements.
1
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)
Dollars in Thousands, Except Earnings Per Share
Quarter Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
----------------- ------------------
Interest income:
Loans............................. $ 15,851 $ 13,330 $ 29,802 $ 26,209
Investment securities............. 3,418 1,433 6,637 2,782
-------- -------- -------- --------
Total interest income............ 19,269 14,763 36,439 28,991
Interest expense:
Deposits.......................... 7,644 6,933 14,611 13,877
Borrowings........................ 4,263 1,768 7,375 3,557
-------- -------- -------- --------
Total interest expense........... 11,907 8,701 21,986 17,434
-------- -------- -------- --------
Net interest income................ 7,362 6,062 14,453 11,557
Provision for loan losses......... - 150 - 375
-------- -------- -------- --------
Net interest income after provision
for loan losses................... 7,362 5,912 14,453 11,182
Non-interest income:
Loan servicing and other fees..... 621 724 1,341 1,471
Gain on sale of loans, net........ 598 2,066 1,446 3,614
Real estate operations, net....... 65 95 101 362
Other............................. 609 478 1,223 967
-------- -------- -------- --------
Total non-interest income........ 1,893 3,363 4,111 6,414
Non-interest expenses:
Salaries and employee benefits.... 3,355 3,833 7,364 7,249
Premises and occupancy............ 548 522 1,040 1,043
SAIF insurance premiums........... 92 86 174 173
Equipment......................... 550 286 1,079 640
Professional expenses............. 314 316 483 469
Sales and marketing expenses...... 358 175 627 462
Other............................. 839 1,271 1,806 2,030
-------- -------- -------- --------
Total non-interest expense....... 6,056 6,489 12,573 12,066
-------- -------- -------- --------
Income before income taxes......... 3,199 2,786 5,991 5,530
Provision for income taxes......... 1,351 1,180 2,533 2,341
-------- -------- -------- --------
Net income......................... $ 1,848 $ 1,606 $ 3,458 $ 3,189
======== ======== ======== ========
Basic earnings per share........... $ 0.50 $ 0.39 $ 0.92 $ 0.77
Diluted earnings per share......... $ 0.49 $ 0.39 $ 0.90 $ 0.76
The accompanying notes are an integral part of these financial statements.
2
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity
(Unaudited)
Dollars in Thousands, Except Shares
For the Quarters Ended December 31, 1999 and 1998
Accum-
ulated
Common Addi- Other
Stock tional Unearned Compre-
---------------- Paid-in Retained Treasury Stock hensive
Shares Amount Capital Earnings Stock Compensation Income Total
- ---------------------------------------------------------------------------------------------------------
Balance at September 30,
1999.................... 4,182,285 $ 51 $ 51,134 $ 59,165 $ (18,143) $ (5,392) $ 509 $ 87,324
Comprehensive income:
Net income............... 1,848 1,848
Other comprehensive
income, net of tax:
Unrealized gains (losses)
on securities available
for sale arising during
the quarter........... (215) (215)
Reclassification adjustment
for (gains) losses on
securities available for
sale included in net income (31) (31)
--------
Total comprehensive income 1,602
Purchase of treasury stock (193,719) (3,556) (3,556)
Release of shares under stock-
based compensation plans. 53 253 306
- ---------------------------------------------------------------------------------------------------------
Balance at December 31,
1999..................... 3,988,566 $ 51 $ 51,187 $ 61,013 $ (21,699) $ (5,139) $ 263 $ 85,676
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
Accum-
ulated
Common Addi- Other
Stock tional Unearned Compre-
---------------- Paid-in Retained Treasury Stock hensive
Shares Amount Capital Earnings Stock Compensation Income Total
- ---------------------------------------------------------------------------------------------------------
Balance at September 30,
1998..................... 4,625,414 $ 51 $ 50,931 $ 48,673 $ (9,954) $ (6,586) $ 638 $ 83,753
Comprehensive income:
Net income............... 1,606 1,606
Other comprehensive income,
net of tax:
Unrealized gains (losses)
on securities available
for sale arising during
the six months........ 159 159
Reclassification adjustment
for (gains) losses on
securities available for
sale included in net income 56 56
--------
Total comprehensive income 1,821
Purchase of treasury stock (6,929) (107) (107)
Release of shares under stock-
based compensation plans. 42 67 109
- ---------------------------------------------------------------------------------------------------------
Balance at December 31,
1998..................... 4,618,485 $ 51 $ 50,973 $ 50,279 $ (10,061) $ (6,519) $ 853 $ 85,576
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
3
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Stockholders' Equity
(Unaudited)
Dollars in Thousands, Except Shares
For the Six Months Ended December 31, 1999 and 1998
Accum-
ulated
Common Addi- Other
Stock tional Unearned Compre-
---------------- Paid-in Retained Treasury Stock hensive
Shares Amount Capital Earnings Stock Compensation Income Total
- ---------------------------------------------------------------------------------------------------------
Balance at June 30,
1999..................... 4,385,785 $ 51 $ 51,069 $ 57,555 $ (14,089) $ (5,644) $ 744 $ 89,686
Comprehensive income:
Net income............... 3,458 3,458
Other comprehensive income,
net of tax:
Unrealized gains (losses)
on securities available
for sale arising during
the six months........ (443) (443)
Reclassification adjustment
for (gains) losses on
securities available for
sale included in net income (38) (38)
--------
Total comprehensive income 2,977
Purchase of treasury stock (397,219) (7,610) (7,610)
Release of shares under stock-
based compensation plans. 118 505 623
- ---------------------------------------------------------------------------------------------------------
Balance at December 31,
1999..................... 3,988,566 $ 51 $ 51,187 $ 61,013 $ (21,699) $ (5,139) $ 263 $ 85,676
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
Accum-
ulated
Common Addi- Other
Stock tional Unearned Compre-
---------------- Paid-in Retained Treasury Stock hensive
Shares Amount Capital Earnings Stock Compensation Income Total
- ---------------------------------------------------------------------------------------------------------
Balance at June 30,
1998..................... 4,854,125 $ 51 $ 50,875 $ 47,090 $ (5,305) $ (6,654) $ 593 $ 86,650
Comprehensive income:
Net income............... 3,189 3,189
Other comprehensive income,
net of tax:
Unrealized gains (losses)
on securities available
for sale arising during
the six months........ 224 224
Reclassification adjustment
for (gains) losses on
securities available for
sale included in net income 36 36
-------
Total comprehensive income 3,449
Purchase of treasury stock (235,640) (4,756) (4,756)
Release of shares under stock-
based compensation plans. 98 135 233 ---
- ------------------------------------------------------------------------------------------------------
Balance at December 31,
1998..................... 4,618,485 $ 51 $ 50,973 $ 50,279 $ (10,061) $ (6,519) $ 853 $ 85,576
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
4
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Dollars in Thousands
Quarter Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
----------------- ------------------
Cash flows from operating activities:
Net Income.......................... $ 1,848 $ 1,606 $ 3,458 $ 3,189
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 433 57 919 47
Provision for loan losses.......... - 150 - 375
Provision for losses on real estate - - 10 -
Gain on sale of loans.............. (598) (2,065) (1,446) (3,614)
Net (gains) losses on sale of
investment securities............. (31) 57 (38) 37
Increase in accounts payable and
other liabilities.................. 7,955 7,194 4,327 3,682
Decrease in prepaid expense and
other assets....................... 7,602 13,743 7,645 15,835
Loans originated for sale........... (95,540) (206,693) (177,723) (366,303)
Proceeds from sale of loans......... 64,675 183,867 150,653 329,817
Stock compensation.................. 306 109 623 233
Net cash used for operating -------- -------- -------- --------
activities........................ (13,350) (1,975) (11,572) (16,702)
Cash flows from investing activities:
Net increase in loan receivables... (77,507) (8,206) (176,663) (20,354)
Maturity of investment securities
held-to-maturity.................. 3,050 36,084 4,050 51,667
Purchases of investment securities
held-to-maturity.................. - (46,927) - (64,523)
Purchases of investment securities
available for sale................ (2,063) (657) (23,280) (1,250)
Sales of investment securities
available for sale................ 156 177 2,292 278
Purchase of Federal Home Loan Bank
stock............................. (4,697) (99) (9,632) (724)
Net (purchase) sales of real estate (13,229) 744 (12,749) 3,233
Purchases of premises and equipment,
net............................... (300) (553) (604) (1,644)
Net cash used for investing -------- -------- -------- --------
activities...................... (94,590) (19,437) (216,586) (33,317)
Cash flows from financing activities:
Net increase in deposits........... 20,278 20,906 73,358 39,251
Repayment - Federal Home Loan Bank
advances..........................(4,437,925) (174,602)(7,981,027) (620,204)
Proceeds - Federal Home Loan
Bank advances..................... 4,541,864 174,100 8,151,864 632,200
Treasury stock purchases........... (3,556) (107) (7,610) (4,756)
Net cash provided by financing -------- -------- -------- --------
activities...................... 120,661 20,297 236,585 46,491
-------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents............ 12,721 (1,115) 8,427 (3,528)
Cash and cash equivalents at
beginning of period................ 15,435 21,020 19,729 23,433
-------- -------- -------- --------
Cash and cash equivalents at
end of period...................... $ 28,156 $ 19,905 $ 28,156 $ 19,905
======== ======== ======== ========
Supplemental Information:
Cash paid for interest............. $ 12,433 $ 8,929 $ 23,643 $ 18,167
Cash paid for income taxes......... 1,617 1,691 1,984 2,785
Real estate acquired in
settlement of loans............... 1,033 689 1,033 901
The accompanying notes are an integral part of these financial statements.
5
PROVIDENT FINANCIAL HOLDINGS, INC.
SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 1: Basis of Presentation
The unaudited interim consolidated financial statements included herein
reflect all adjustments which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period presented. All
such adjustments are of a normal recurring nature. The balance sheet data at
June 30, 1999 is derived from audited financial statements of Provident
Financial Holdings, Inc. (the "Company"). Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested that
these unaudited interim consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Annual Report on Form 10-K for the year ended June 30,
1999 (File No. 0-28304) of the Company. Certain amounts in the prior period's
financial statements may have been reclassified to conform to the current
period's presentation.
Note 2: Earnings Per Share
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the entity. The following tables provide
the basic and diluted EPS computations for the quarter and six months ended
December 31, 1999 and 1998, respectively.
For the Quarter Ended For the Six Months Ended
December 31, December 31,
--------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Net income - numerator for
basic earnings per share
and diluted earnings per
share-income available
to common stockholders.. $ 1,848,386 $ 1,606,187 $ 3,458,205 $ 3,189,177
=========== =========== =========== ===========
Denominator:
Denominator for basic
earnings per share:
Weighted-average shares. 3,685,091 4,124,816 3,747,135 4,160,229
Effect of dilutive
securities:
Employee stock benefit
plans................... 57,686 25,454 79,609 56,170
----------- ----------- ----------- -----------
Denominator for diluted
earnings per share:
Adjusted weighted-average
shares and assumed
conversions............. 3,742,777 4,150,270 3,826,744 4,216,399
=========== =========== =========== ===========
Basic earnings per share.. $ 0.50 $ 0.39 $ 0.92 $ 0.77
Diluted earnings per share $ 0.49 $ 0.39 $ 0.90 $ 0.76
Note 3: Operating Segment Reports
The Company has determined that its reportable segments are the operations
pertaining to mortgage banking and the operations pertaining to consumer and
commercial banking ("Savings Bank"). The
6
following tables set forth condensed income statements and total assets for
the Company's operating segments for the quarter and six months ended December
31, 1999 and 1998, respectively.
For the Quarter Ended December 31, 1999
------------------------------------------
Savings Mortgage Consolidated
Bank Banking Total
- ------------------------------------------------------------------------------
Net interest income............... $ 7,266 $ 96 $ 7,362
Non-interest income:
Loan servicing and other fees.... (670) 1,291 621
Gain on sale of loans, net....... (34) 632 598
Real estate operations, net...... 78 (13) 65
Other............................ 617 (8) 609
- ------------------------------------------------------------------------------
Total non-interest income...... (9) 1,902 1,893
Non-interest expense:
Salaries and employee benefits... 2,465 890 3,355
Premises and occupancy........... 370 178 548
Operating and administrative
expenses........................ 1,467 686 2,153
- ------------------------------------------------------------------------------
Total non-interest expense..... 4,302 1,754 6,056
- ------------------------------------------------------------------------------
Operating income before income
taxes............................ $ 2,955 $ 244 $ 3,199
==============================================================================
Total assets, end of period....... $1,123,193 $ 78,413 $1,201,606
==============================================================================
For the Quarter Ended December 31, 1998
------------------------------------------
Savings Mortgage Consolidated
Bank Banking Total
- ------------------------------------------------------------------------------
Net interest income............... $ 5,660 $ 252 $ 5,912
Non-interest income:
Loan servicing and other fees.... (258) 982 724
Gain on sale of loans, net....... 1 2,065 2,066
Real estate operations, net...... 45 50 95
Other............................ 466 12 478
- ------------------------------------------------------------------------------
Total non-interest income...... 254 3,109 3,363
Non-interest expense:
Salaries and employee benefits... 2,610 1,223 3,833
Premises and occupancy........... 364 158 522
Operating and administrative
expenses........................ 1,343 791 2,134
- ------------------------------------------------------------------------------
Total non-interest expense..... 4,317 2,172 6,489
- ------------------------------------------------------------------------------
Operating income before income
taxes............................ $ 1,597 $ 1,189 $ 2,786
==============================================================================
Total assets, end of period....... $ 771,083 $ 99,158 $ 870,241
==============================================================================
7
For the Six Months Ended December 31, 1999
------------------------------------------
Savings Mortgage Consolidated
Bank Banking Total
- ------------------------------------------------------------------------------
Net interest income............... $ 14,174 $ 279 $ 14,453
Non-interest income:
Loan servicing and other fees.... (1,532) 2,873 1,341
Gain on sale of loans, net....... (38) 1,484 1,446
Real estate operations, net...... 96 5 101
Other............................ 1,223 - 1,223
- ------------------------------------------------------------------------------
Total non-interest income...... (251) 4,362 4,111
Non-interest expense:
Salaries and employee benefits... 5,301 2,063 7,364
Premises and occupancy........... 695 345 1,040
Operating and administrative
expenses........................ 2,598 1,571 4,169
- ------------------------------------------------------------------------------
Total non-interest expense..... 8,594 3,979 12,573
- ------------------------------------------------------------------------------
Operating income before income
taxes............................ $ 5,329 $ 662 $ 5,991
==============================================================================
Total assets, end of period....... $1,123,193 $ 78,413 $1,201,606
==============================================================================
For the Six Months Ended December 31, 1998
------------------------------------------
Savings Mortgage Consolidated
Bank Banking Total
- ------------------------------------------------------------------------------
Net interest income............... $ 10,719 $ 463 $ 11,182
Non-interest income:
Loan servicing and other fees.... (600) 2,071 1,471
Gain on sale of loans, net....... - 3,614 3,614
Real estate operations, net...... 303 59 362
Other............................ 942 25 967
- ------------------------------------------------------------------------------
Total non-interest income...... 645 5,769 6,414
Non-interest expense:
Salaries and employee benefits... 5,041 2,208 7,249
Premises and occupancy........... 714 329 1,043
Operating and administrative
expenses........................ 2,340 1,434 3,774
- ------------------------------------------------------------------------------
Total non-interest expense..... 8,095 3,971 12,066
- ------------------------------------------------------------------------------
Operating income before income
taxes............................ $ 3,269 $ 2,261 $ 5,530
==============================================================================
Total assets, end of period....... $ 771,083 $ 99,158 $ 870,241
==============================================================================
8
Note 4: SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities"
This statement establishes new accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. This Statement of Financial Accounting Standards ("SFAS") No. 133
was amended by SFAS No. 137 to extend the implementation date for one year.
SFAS No. 133 will become effective for fiscal quarters beginning after June
15, 2000. Management is assessing the impact of SFAS No. 133, if any, and will
adopt this statement in the first quarter of the fiscal year ending June 30,
2001.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Provident Financial Holdings, Inc. ("Provident Financial" or the "Company"), a
Delaware corporation, was organized in January 1996 for the purpose of
becoming the holding company for Provident Savings Bank, F.S.B. ("Savings
Bank") upon the Savings Bank's conversion from a federal mutual to a federal
stock savings bank ("Conversion"). The Conversion was completed on June 27,
1996. At December 31, 1999, the Company had total assets of $1.2 billion,
total deposits of $706.2 million and stockholders' equity of $85.7 million.
Provident Financial has not engaged in any significant activity other than
holding the stock of the Savings Bank. Accordingly, the information set forth
in this report, including financial statements and related data, relates
primarily to the Savings Bank and its subsidiaries.
The Savings Bank, founded in 1956, is federally chartered savings bank
headquartered in Riverside, California. The Savings Bank is regulated by the
Office of Thrift Supervision ("OTS"), its primary federal regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits.
The Savings Bank's deposits are federally insured up to applicable limits by
FDIC (under the Savings Association Insurance Fund ("SAIF")). The Savings Bank
has been a member of the Federal Home Loan Bank ("FHLB") system since 1956.
The Savings Bank's business consists of both traditional savings and loan and
mortgage banking operations. The savings and loan operations primarily consist
of accepting deposits from customers within the communities surrounding its
full service offices and investing these funds in one-to-four-family mortgage
loans and, to a lesser extent, in multi-family, commercial real estate,
construction, business, consumer and other loans. Mortgage banking activities
consist of the origination and sale of mortgage loans secured by one-to-four-
family residences and the servicing of such loans for others. In addition, the
Savings Bank also facilitates business loans, business checking accounts and
other business banking services. The Savings Bank's revenue are derived
principally from interest on its loan and investment portfolio and fees
generated through its mortgage banking activities.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Unaudited Interim Consolidated
Financial Statements and accompanying Selected Notes to Unaudited Interim
Consolidated Financial Statements.
Comparison of Financial Condition at December 31, 1999 and June 30, 1999
Total assets increased by $244.2 million, or 26 percent, to $1.2 billion at
December 31, 1999 from $957.4 million at June 30, 1999. This increase was
primarily the result of an increase of $206.1 million, or 29 percent, in total
loans receivable, net (including loans held for sale) to $913.2 million at
December 31, 1999 from $707.1 million at June 30, 1999; and, to a lesser
extent, an increase of $16.1 million, or 9 percent, in total investment
securities to $203.3 million at December 31, 1999 from $187.2 million at June
30, 1999. The rapid growth in portfolio loans was primarily attributable to a
shift in borrower preference toward adjustable rate loans, which are typically
held in portfolio, from fixed rate mortgages, which are typically sold; and
the economic characteristics of the Company's market area. Funding for this
growth was provided by an increase of $73.4 million in deposits and an
increase of $170.8 million in Federal Home Loan Bank advances.
9
Total stockholders' equity decreased by $4.0 million during the period ended
December 31, 1999, which was mainly the result of the repurchase of 393,500
shares of the Company's common stock that totaled $7.5 million. Through
December 31, 1999, the Company completed 90 percent of its 10 percent stock
repurchase program announced in July 1999.
Comparison of Operating Results for the Quarter and Six Months Ended December
31, 1999 and 1998
The Company's net income for the quarter ended December 31, 1999 was $1.8
million, an increase of $242,000, or 15 percent, from $1.6 million during the
same quarter in 1998. This increase was due to an increase in net interest
income and a decrease in operating expenses. For the six months ended December
31, 1999 and 1998, the Company's net income was $3.5 million and $3.2 million,
respectively.
The Company's net interest income increased by 21 percent to $7.4 million for
the quarter ended December 31, 1999 from $6.1 million during the comparable
period of 1998. The increase in net interest income reflects growth in average
earning assets, which increased by $252.1 million, or 31 percent, during the
current quarter. The effect of earning asset growth was partially offset by a
lower net interest margin. The net interest margin narrowed to 2.74 percent
from 2.95 percent during the same period of 1998. For the six months ended
December 31, 1999 and 1998, net interest income was $14.5 million and $11.6
million, respectively.
The Company's efficiency ratio improved to 65 percent in the current quarter
from 70 percent in the same period of 1998. For the six months ended December
31, 1999 and 1998, the efficiency ratio was 68 percent and 69 percent,
respectively.
Return on average assets for the quarter ended December 31, 1999 and 1998 was
0.66 percent and 0.75 percent, respectively. For the six months ended December
31, 1999 and 1998, the return on average assets was 0.65 percent and 0.76
percent, respectively.
Return on average equity for the quarter ended December 31, 1999 and 1998 was
8.56 percent and 7.61 percent, respectively. For the six months ended December
31, 1999 and 1998, the return on average equity was 7.96 percent and 7.51
percent, respectively.
Diluted earnings per share for the quarter ended December 31, 1999 was $0.49,
an increase of 26 percent from $0.39 in the quarter ended December 31, 1998.
For six months ended December 31, 1999 and 1998, the diluted earnings per
share were $0.90 and $0.76, respectively. The increase in the net earnings per
share was attributable to the growth in earning assets and the Company's stock
repurchase programs during fiscal years 1999 and 2000.
Interest Income. Interest income increased by $4.5 million, or 31 percent, to
$19.3 million for the quarter ended December 31, 1999 from $14.8 million
during the same quarter in 1998. This was the result of an increase in average
interest earning assets from $820.9 million to $1.1 billion.
Loan interest income increased by $2.5 million, or 19 percent, to $15.8
million in the quarter ended December 31, 1999 as compared to $13.3 million
for the same period in 1998. This increase was attributable to growth in
average loans, including those held for sale, from $723.8 million in the
second quarter of fiscal 1999 to$849.2 million in the same quarter of fiscal
2000 and a higher average loan yield, 7.37 percent versus 7.47 percent,
respectively.
The interest income from investment securities, including Federal Home Loan
Bank ("FHLB") stock, increased by $2.0 million, or 139 percent to $3.4 million
for the quarter ended December 31, 1999 from $1.4 million for the same quarter
in 1998. This was mainly a result of an increase in the amount of average
investment securities from $97.0 million during the second quarter of 1999 to
$223.8 million in the same quarter of fiscal 2000.
10
For the six months ended December 31, 1999, the interest income increased by
$7.4 million, or 26 percent, to $36.4 million as compared to the same period
in 1998. This increase was attributable to an increase in average earnings
assets from $806.2 million during the first half of fiscal 1999 to $1.0
billion during the first half of fiscal 2000. The interest income on loans
increased by $3.6 million, or 14 percent, to $29.8 million as average loans
increased from $713.9 million to $800.2 million during the same period in
fiscal 1999 and 2000, respectively. The average yield on loans increased by 11
basis points to 7.45 percent during the first half of fiscal 2000 as compared
to the same period in fiscal 1999. The interest income on investments also
increased by $4.1 million, or 158 percent, to $6.6 million as average
investments increased from $92.4 million to $217.7 million during the same
period in fiscal 1999 and 2000, respectively. The average yield on
investments, however, increased only by 8 basis points to 6.10 percent while
investment represented the majority of earning asset growth. As a result, the
overall average yield on earning assets declined by 3 basis points to 7.16
percent during the first half of fiscal 2000 as compared to the same period in
fiscal 1999.
Interest Expense. Interest expense for the quarter ended December 31, 1999
was $11.9 million as compared to $8.7 million for the same period in 1998, an
increase of $3.2 million, or 37 percent. This increase was primarily
attributable to increases in average FHLB advances and deposits. The average
cost of liabilities was 4.68 percent during the quarter ended December 31,
1999, up 5 basis points as compared from the same period in 1998. Average
deposits increased by $85.6 million, or 14 percent, during the quarter ended
December 31, 1999 as compared to the same period in 1998, and the average rate
paid on deposits decreased to 4.33 percent during the quarter ended December
31, 1999 from 4.48 percent during the same quarter in 1998. The decrease in
the deposit average rate was due to the fact that maturing deposits were
replaced with lower rates. Borrowings, which are mainly FHLB advances,
averaged $309.8 million during the quarter ended December 31, 1999 as compared
to $131.5 million for the same quarter in 1998. The average rate paid on the
borrowings increased to 5.46 percent for the quarter ended December 31, 1999
from 5.33 percent in the same quarter in 1998.
For the six months ended December 31, 1999, total interest expense increased
by $4.6 million, or 26 percent, to $22.0 million as compared to the same
period in 1998. The average cost of liabilities decreased by 14 basis points
to 4.58 percent during the first half of fiscal 2000 as compared to the same
period in fiscal 1999. Average deposits increased by $74.8 million, or 12
percent, to $678.5 million while the average cost decreased by 29 basis points
to 4.27 percent during the first half of fiscal 2000 as compared to the same
period in fiscal 1999. Average borrowings increased by $145.6 million, or 113
percent, to $274.1 million while the average cost decreased by 15 basis points
to 5.34 percent during the first half of fiscal 2000 as compared to the same
period in fiscal 1999.
11
The following table depicts the average balance sheets for the quarter and six
months ended December 31, 1999 and 1998, respectively:
Average Balance Sheets
(dollars in thousands)
Quarter Ended Quarter Ended
December 31, 1999 December 31, 1998
------------------------- -------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ----- ------- -------- -----
Interest earning assets:
Loans (1)............. $ 849,199 $15,851 7.47% $723,814 $13,330 7.37%
Investment securities. 223,793 3,418 6.11% 97,048 1,433 5.91%
---------- ------- ---- -------- ------- ----
Total interest earning
assets............... 1,072,992 19,269 7.18% 820,862 14,763 7.19%
Non-interest earning
assets............... 46,806 35,791
---------- --------
Total assets.......... $1,119,798 $856,653
========== ========
Interest-bearing
liabilities:
Deposits.............. 699,753 7,644 4.33% 614,108 6,933 4.48%
Borrowings............ 309,814 4,263 5.46% 131,523 1,768 5.33%
---------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities.......... 1,009,567 11,907 4.68% 745,631 8,701 4.63%
Non-interest-bearing
liabilities.......... 23,878 26,576
---------- --------
Total liabilities..... 1,033,445 772,207
Retained earnings..... 86,353 84,446
---------- --------
Total liabilities and
retained earnings.... $1,119,798 $856,653
========== ------- ======== -------
Net interest income... $ 7,362 $ 6,062
======= =======
Interest rate spread (2) 2.50% 2.56%
Net interest margin (3) 2.74% 2.95%
Ratio of average
interest earning
assets to average
interest-bearing
liabilities.......... 106.28% 110.09%
Return on average assets 0.66% 0.75%
Return on average equity 8.56% 7.61%
(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.
12
Average Balance Sheets
(dollars in thousands)
Six Months Ended Six Months Ended
December 31, 1999 December 31, 1998
------------------------- -------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ----- ------- -------- -----
Interest earning assets:
Loans (1)............. $ 800,191 $29,802 7.45% $713,861 $26,209 7.34%
Investment securities. 217,722 6,637 6.10% 92,365 2,782 6.02%
---------- ------- ---- -------- ------- ----
Total interest earning
assets............... 1,017,913 36,439 7.16% 806,226 28,991 7.19%
Non-interest earning
assets............... 46,367 34,997
---------- --------
Total assets.......... $1,064,280 $841,223
========== ========
Interest-bearing
liabilities:
Deposits.............. 678,532 14,611 4.27% 603,743 13,877 4.56%
Borrowings............ 274,103 7,375 5.34% 128,463 3,557 5.49%
---------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities.......... 952,635 21,986 4.58% 732,206 17,434 4.72%
Non-interest-bearing
liabilities.......... 24,736 24,115
---------- --------
Total liabilities..... 977,371 756,321
Retained earnings..... 86,909 84,902
---------- --------
Total liabilities
and retained
earnings............. $1,064,280 $841,223
========== ------- ======== -------
Net interest income... $14,453 $11,557
======= =======
Interest rate spread (2) 2.58% 2.47%
Net interest margin (3) 2.84% 2.87%
Ratio of average
interest earning
assets to average
interest-bearing
liabilities.......... 106.85% 110.11%
Return on average assets 0.65% 0.76%
Return on average equity 7.96% 7.51%
(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.
13
The following table provides the rate/volume variances for the quarter and six
months ended December 31, 1999 and 1998, respectively:
Rate/Volume Variance
(dollars in thousands)
Quarter Ended December 31, 1999
Compared to Quarter Ended December 31, 1998
Increase (Decrease) Due to
- ------------------------------------------------------------------------------
Rate/
Rate Volume Volume Net
------ ------- ------ -------
Interest income
Loans (1)................... $ 181 $ 2,309 $ 31 $ 2,521
Investment securities....... 3 1,977 5 1,985
------ ------- ------ -------
Total net change in income
on interest-earning assets... 184 4,286 36 4,506
Interest-bearing liabilities
Deposits.................... (246) 1,001 (43) 712
Borrowings.................. 44 2,395 55 2,494
------ ------- ------ -------
Total net change in expense on
interest-bearing liabilities. (202) 3,396 12 3,206
------ ------- ------ -------
Net change in net interest
income....................... $ 386 $ 890 $ 24 $ 1,300
====== ======= ====== =======
(1) Includes loans available for sale. For purposes of calculating volume,
rate and rate/volume variances, non-accrual loans were included in the
weighted average balance outstanding.
14
Rate/Volume Variance
(dollars in thousands)
Six Months Ended December 31, 1999
Compared to Quarter Ended December 31, 1998
Increase (Decrease) Due to
- ------------------------------------------------------------------------------
Rate/
Rate Volume Volume Net
------ ------- ------ -------
Interest income
Loans (1)................... $ 379 $ 3,168 $ 46 $ 3,593
Investment securities....... (36) 3,933 (42) 3,855
------ ------- ------ -------
Total net change in income
on interest-earning assets... 343 7,101 4 7,448
Interest-bearing liabilities:
Deposits.................... (836) 1,692 (122) 734
Borrowings.................. (99) 4,032 (115) 3,818
------ ------- ------ -------
Total net change in expense on
interest-bearing liabilities. (935) 5,724 (237) 4,552
------ ------- ------ -------
Net change in net interest
income....................... $1,278 $ 1,377 $ 241 $ 2,896
====== ======= ====== =======
(1) Includes loans available for sale. For purposes of calculating volume,
rate and rate/volume variances, non-accrual loans were included in the
weighted average balance outstanding.
Provision for Loan Losses. There were no provisions for loan losses during
the quarter ended December 31, 1999. This compares to $150,000 during the same
period in 1998. The allowance for loan losses at December 31, 1999 was $6.7
million as compared to $6.5 million at the same period in 1998. The allowance
as a percent of gross loans held for investment at December 31, 1999 was 0.79
percent as compared to 0.98 percent at December 31, 1998. Net recoveries were
$6,000 during the first half of fiscal 2000 as compared to net charge offs of
$80,000 during the same period of fiscal 1999.
The allowance for loan losses is maintained at a level sufficient to provide
for estimated losses based on evaluating known and inherent risks in the loan
portfolio and upon management's continuing analysis of the factors underlying
the quality of the loan portfolio. These factors include changes in the size
and composition of the loan portfolio, actual loan loss experience, current
and anticipated economic conditions, detailed analysis of individual loans for
which full collectibility may not be assured, and determination of the
realizable value of the collateral securing the loans. Provisions for losses
are charged against operations on a monthly basis as necessary to maintain the
allowance at appropriate levels. Management believes that the amount
maintained in the allowance will be adequate to absorb losses inherent in the
portfolio. Although management believes it uses the best information available
to make such determinations, there can be no assurance that regulators, in
reviewing the Company's loan portfolio, will not request the Company to
increase significantly its allowance for loan losses. Future adjustments to
the allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected due to economic, operating,
regulatory, and other conditions beyond the control of the Company.
15
The following table is provided to disclose additional details on the
Company's allowance for loan losses and asset quality (dollars in thousands):
Allowance for Loan Losses
For the Six Months Ended
------------------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
Allowance at beginning of period $ 6,721 $ 6,186
Provision for loan losses - 375
Recoveries:
Mortgage loans:
One-to-four family............ 6 17
Multifamily................... - -
Commercial.................... - -
Construction.................. - -
Consumer loans.................. - 35
Commercial business lending..... - -
------- -------
Total recoveries............ 6 52
Charge-offs:
Mortgage loans:
One-to-four family............ - (88)
Multifamily................... - -
Commercial.................... - -
Construction.................. - -
Consumer loans.................. - (44)
Commercial business lending..... - -
------- -------
Total charge-offs........... - (132)
------- -------
Net recoveries (charge-offs) 6 (80)
------- -------
Balance at end of period.. $ 6,727 $ 6,481
======= =======
Allowance for loan losses as a
percentage of gross loans held
for investment................. 0.79% 0.98%
Net recovery (charge offs) as a
percentage of average loans
outstanding during the period.. 0.00% (0.02%)
Allowance for loan losses as a
percentage of non-performing
loans at the end of the period. 342.86% 256.27%
16
Asset Quality. The following table is provided to disclose additional details
on asset quality (dollars in thousands):
At December 31, At December 31,
1999 1998
--------------- ---------------
Loans accounted for on a non-
accrual basis:
Mortgage loans:
One-to-four family............... $ 1,956 $ 2,076
Multifamily...................... - 413
Commercial....................... - -
Construction..................... - -
Consumer loans.................... 6 -
Commercial business lending....... - -
Other loans....................... - -
--------- ---------
Total......................... 1,962 2,489
Accruing loans which are
contractually past due 90
days or more:
Mortgage loans:
One-to-four family............... - -
Multifamily...................... - -
Commercial....................... - -
Construction..................... - -
Consumer loans.................... - 40
Commercial business lending....... - -
Other loans....................... - -
--------- ---------
Total......................... - 40
Total of non-accrual and 90 days
past due loans................... 1,962 2,529
Real estate owned................. 1,862 1,807
--------- ---------
Total non-performing assets... $ 3,824 $ 4,336
========= =========
Restructured loans................ $ 1,495 $ 1,566
Non-accrual and 90 days or more
past due loans as a percentage
of loans held for investment, net 0.23% 0.40%
Non-accrual and 90 days or more
past due loans as a percentage
of total assets.................. 0.16% 0.29%
Non-performing assets as a
percentage of total assets....... 0.32% 0.50%
The Company addresses loans individually and identifies impairment when the
accrual of interest has been discontinued, loans have been restructured or
management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered
in determining impairment include, but are not limited to, expected future
cash flows, financial condition of the borrower and the current economic
conditions. The Company measures each impaired loan based on the fair value of
its collateral and charges off those loans or portions of loans deemed
uncollectible.
17
Non-interest Income. Non-interest income decreased by $1.5 million, or 44
percent, to $1.9 million during the quarter ended December 31, 1999 from $3.4
million during the same period in 1998. The decrease in non-interest income
was primarily attributable to a decrease in gains from the sale of loans.
Total loans sold during the second quarter of fiscal 2000 decreased by $119.2
million, or 65 percent, to $64.7 million as compared to $183.9 million in the
same period in fiscal 1999.
For the six months ended December 31, 1999, the non-interest income decreased
by $2.3 million, or 36 percent, to $4.1 million as compared to the same period
in 1998. Total loans sold during the first half of fiscal 2000 decreased by
$179.2 million, or 54 percent, to $150.7 million as compared to $329.8 million
in the same period in fiscal 1999.
Non-interest Expenses. Non-interest expenses decreased by $433,000 during the
quarter ended December 31, 1999 to $6.1 million from $6.5 million in the same
period in 1998. This decrease was primarily attributable to lower compensation
costs. Non-interest expenses as percentage of average assets improved to 2.16
percent during the second quarter of fiscal 2000 from 3.03 percent during the
same period in fiscal 1999.
For the six months ended December 31, 1999, the non-interest expenses
increased by $507,000 to $12.6 million as compared to the same period in 1998.
This increase was due mainly to an increase in equipment expense related to
the Company's recent computer system conversion. Non-interest expenses as
percentage of average assets also improved to 2.36 percent during the first
half of fiscal 2000 from 2.87 percent during the same period in fiscal 1999.
Income taxes. Income tax expense was $1.4 million for the quarters ended
December 31, 1999 as compared to $1.2 million during the same period in 1998.
For the six months ended December 31, 1999, the income tax expense was $2.5
million as compared to $2.3 million during the same period in 1998. The
effective tax rate for the second quarter and for six months ended December
31, 1999 and 1998 was 42 percent.
18
The following table is provided to disclose additional details related to the
volume of loans originated, purchased and sold (dollars in thousands):
Loan Volume Activities
For the Quarter Ended For the Six Months Ended
December 31, December 31,
--------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Loans originated for sale:
Retail originations..... $ 38,353 $ 83,876 $100,413 $151,551
Wholesale originations.. 46,876 122,818 77,310 214,754
-------- -------- -------- --------
Total loans originated
for sale.............. 85,229 206,694 177,723 366,305
Loans sold:
Servicing released...... 64,436 166,170 149,379 311,899
Servicing retained...... 240 17,698 1,275 17,919
-------- -------- -------- --------
Total loans sold....... 64,676 183,868 150,654 329,818
Loans originated for
portfolio:
Mortgage loans:
One-to-four family.... 89,084 38,125 188,972 82,858
Multifamily........... - - 2,100 -
Commercial............ - 444 2,613 2,075
Construction loans.... 11,592 7,230 26,815 14,749
Consumer................ 7,849 6,761 18,675 12,845
Commercial business
lending................ 3,242 4,737 5,817 8,285
Other loans............. 161 42 672 110
-------- -------- -------- --------
Total loans originated
for portfolio......... 111,928 57,339 245,664 120,922
Loans purchased:
Mortgage loans:
One-to-four family...... - - - -
Commercial.............. 1,517 1,010 5,126 1,010
Total loans purchased... 1,517 1,010 5,126 1,010
-------- -------- -------- --------
Mortgage loan principal
repayments.............. 27,905 66,160 72,955 115,516
Real estate acquired in
settlement of loans..... 1,033 689 1,033 901
Increase in other items,
net (1)................. 4,963 4,607 2,325 1,685
-------- -------- -------- --------
Net increase in loans
receivable, net......... $110,023 $ 18,933 $206,196 $ 43,687
======== ======== ======== ========
(1) Includes changes in loans in process, discounts, deferred fees and costs
and loan loss reserves.
19
Liquidity and Capital Resources. The Company's primary sources of funding
include deposits, proceeds from loan principal and interest payments, sales of
loans, the maturity of and interest income on investment securities, and FHLB
advances. The Savings Bank has a credit line available with the FHLB of San
Francisco of 40 percent of total assets, which, on December 31, 1999 permitted
additional advances of $70.9 million, in addition to having unsecured lines
with its correspondent banks. While maturities and scheduled amortization of
loans are predictable sources of funds, deposit flows, loan sales, and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition.
The primary investing activity of the Company is the origination of mortgage
loans through the Savings Bank. For the quarter ended December 31, 1999, the
Savings Bank originated $197.2 million of loans as compared to $264.0 million
during the same period in 1998. For six months ended December 31, 1999, the
Bank originated $423.4 million of loans as compared to $487.2 million during
the same period in 1998. This activity was funded primarily by loan sales,
loan principal payments, deposits and FHLB advances. For the quarter ended
December 31, 1999, loan sales aggregated $64.7 million and loan principal
payments totaled $27.9 million. For six months ended December 31, 1999, loans
sales aggregated $150.7 million and loan principal payments totaled $73.0
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 second quarter of fiscal 2000 and 1999 were 12.3
percent and 13.9 percent, respectively.
The Savings Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum requirements
can initiate certain mandatory actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective actions, the Savings Bank must meet certain specific capital
guidelines that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors. The Savings Bank's
actual and required capital amounts and ratios as of December 31, 1999 are as
follows (dollars in thousands):
Amount Percent
------ -------
Tangible capital.................... $ 70,215 5.92%
Requirement to be "Well Capitalized" 23,734 2.00%
-------- -----
Excess over requirement............. $ 46,481 3.92%
======== =====
Tier 1 (core) capital............... $ 70,215 5.92%
Requirement to be "Well Capitalized" 59,335 5.00%
-------- -----
Excess over requirement............. $ 10,880 0.92%
======== =====
Total risk-based capital............ $ 77,230 11.13%
Requirement to be "Well Capitalized" 69,417 10.00%
-------- -----
Excess over requirement............. $ 7,813 1.13%
======== =====
Tier 1 risk-based capital........... $ 70,215 10.12%
Requirement to be "Well Capitalized" 41,650 6.00%
-------- -----
Excess over requirement............. $ 28,565 4.12%
======== =====
20
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
was not corrected, some, if not all, systems used by the Company would have
been at risk of not being able to function properly. To prevent this from
happening, the Company undertook a major project to ensure that its internal
operating systems, as well as those of its customers and suppliers, would be
fully capable of processing transactions in the Year 2000 and beyond. The
Company 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 consisted of the
Chief Information Officer and senior management staff from all levels. The
committee reported the progress of Year 2000 progress 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 also reviewed its critical non-information technology systems to
assess the risk of Year 2000 failure. Critical systems that posed risk of
Year 2000 failure were supported by detailed contingency plans, which were
developed to ensure uninterrupted services.
The Company, as part of its Year 2000 remediation plan, monitored the progress
of critical third party vendors as they implemented corrective actions to
ensure an uninterrupted flow of goods and services. For both systems and
vendors that were classified as critical, contingency plans were developed
which included, among other things, alternate processing methods, steps for
transitioning to manual processes, and alternate vendors or sources of goods
and services.
The Company 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 successfully rolled over into year 2000 and continues
to monitor the overall systems and critical vendors.
Costs
- -----
The cost of the project was originally estimated at $3.5 million, which
included 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. The total cost of the project was within
budget with a total of $3.4 million, or 96 percent, of the total cost spent as
of December 31, 1999. The replacement equipment and software was 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 have resulted in an interruption of normal business
activities or operations, which may have materially and adversely affected the
Company's results of operations. As a participant in domestic payment systems,
the Company's Year 2000 preparedness was 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 significantly reduced
the risk inherent in the Year 2000 problem.
21
Supplemental Information
December 31, 1999 June 30, 1999 December 31, 1998
----------------- ------------- -----------------
Loans serviced for
others (in thousands).. $ 284,909 $ 315,028 $ 400,984
Book value per share.... $ 21.48 $ 20.45 $ 18.53
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
The only item submitted in the Annual Meeting of Shareholders which was held
on October 28, 1999 at the Riverside Art Museum at 3425 Mission Inn Avenue,
Riverside, California was the election of two directors.
There were two nominees:
- ------------------------
1. Craig G. Blunden has been associated with the Savings Bank since 1974 and
has served as President and Chief Executive Officer of the Savings Bank
since 1991 and as President and Chief Executive Officer of the Company
since its formation in 1996. Mr. Blunden also serves on the FHLB of San
Francisco Board of Directors, the Western League of Savings Institutions
Board of Directors and America's Community Bankers Mortgage Finance
Committee.
22
2. Roy H. Taylor is the Executive Vice President of the Pacific Region for
Talbot Insurance and Financial Services, Inc., an insurance brokerage
firm, with which he has been associated since 1972. Mr. Taylor currently
serves as chairman of the Personnel/ Compensation Committee.
The result of the votes were 99.8% for Craig G. Blunden and 99.8% for Roy H.
Taylor; accordingly, Craig G. Blunden and Roy H. Taylor were declared to be
duly elected as directors of the Company for three year terms.
Item 5. Other Information
The Company completed the purchase of a five-story office complex in
Riverside, California during December 1999. This transaction completed a
tax-free reinvestment of proceeds from the sale of property in Los Angeles
which was announced last fiscal year.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None.
b) Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Financial Holdings, Inc.
February 3, 2000 /s/ Craig G. Blunden
----------------------------------
Craig G. Blunden
President and Chief Executive Officer
(Principal Executive Officer)
February 3, 2000 /s/ Brian M. Riley
----------------------------------
Brian M. Riley
Chief Financial Officer
(Principal Financial and Accounting Officer)
24