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......................March 31, 2002
--------------
[ ] 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)
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(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 .
----- -----
(2) Yes X . No .
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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 May 10, 2002
---------------- ------------------
Common stock, $ 0.01 par value 3,707,171 shares *
* Includes 243,467 shares held by the employee stock ownership plan that
have not been released, committed to be released, or allocated to
participant accounts; and 51,727 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 March 31, 2002 and June 30, 2001..................... 1
Consolidated Statements of Operations
for the quarter and nine months ended
March 31, 2002 and 2001.................................... 2
Consolidated Statements of Stockholders' Equity
for the quarter and nine months ended
March 31, 2002 and 2001.................................... 3
Consolidated Statements of Cash Flows
for the quarter and nine months ended
March 31, 2002 and 2001.................................... 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...................................................... 10
Critical Accounting Policies................................. 10
Comparison of Financial Condition at
March 31, 2002 and June 30, 2001........................... 11
Comparison of Operating Results
for the quarter and nine months ended
March 31, 2002 and 2001.................................... 12
Asset Quality................................................ 22
Loan Volume Activities....................................... 24
Liquidity and Capital Resources.............................. 24
Commitments and Derivatives.................................. 26
Shareholders' Equity ........................................ 27
Stock Option Plan and Management Recognition Plan............ 27
Supplemental Information..................................... 28
ITEM 3 - Quantitative and Qualitative Disclosure about Market Risk.... 28
PART II -OTHER INFORMATION
Item 1. Legal Proceedings................................... 30
Item 2. Changes in Securities............................... 30
Item 3. Defaults upon Senior Securities .................... 30
Item 4. Submission of Matters to Vote of Stockholders....... 30
Item 5. Other Information .................................. 30
Item 6. Exhibits and Reports on Form 8-K.................... 30
SIGNATURES............................................................ 31
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Financial Condition
(Unaudited)
Dollars In Thousands
March 31, June 30,
2002 2001
==============================================================================
Assets
Cash $ 23,457 $ 23,839
Overnight deposits............................... 90,000 3,000
- ------------------------------------------------------------------------------
Cash and cash equivalents...................... 113,457 26,839
Investment securities - held to maturity,
at amortized cost (fair value $112,227 and
$162,498, respectively)......................... 112,978 163,332
Investment securities - available for sale
at fair value................................... 108,283 41,166
Loans held for investment, net of allowance for
loan losses of $5,746 and $6,068, respectively.. 589,235 697,191
Loans held for sale, at lower of cost or market.. 2,024 2,175
Receivable from sale of loans.................... 67,375 137,286
Accrued interest receivable...................... 6,229 7,001
Real estate held for investment, net............. 11,163 11,543
Real estate owned, net .......................... 1,374 224
Federal Home Loan Bank stock .................... 14,618 16,436
Premises and equipment, net...................... 8,305 7,563
Prepaid expenses and other assets................ 6,574 6,470
- ------------------------------------------------------------------------------
Total assets...................................$1,041,615 $1,117,226
==============================================================================
Liabilities and Stockholders' Equity
Liabilities:
Non-interest-bearing deposits....................$ 29,470 $ 25,031
Interest-bearing deposits........................ 665,489 705,010
- ------------------------------------------------------------------------------
Total deposits................................. 694,959 730,041
Borrowings....................................... 222,472 265,830
Accounts payable, accrued interest
and other liabilities........................... 22,407 24,097
- ------------------------------------------------------------------------------
Total liabilities.............................. 939,838 1,019,968
Stockholders' equity:
Preferred stock, $.01 par value; authorized
2,000,000 shares; none issued and outstanding... - -
Common stock, $.01 par value; authorized 15,000,000
shares; issued 5,141,715 and 5,128,215 shares,
respectively; outstanding 3,707,171 and 3,810,909
shares, respectively)........................... 51 51
Additional paid-in capital....................... 52,054 51,544
Retained earnings ............................... 80,378 73,697
Treasury stock at cost (1,434,544 and 1,317,306
shares, respectively)........................... (27,876) (24,993)
Unearned stock compensation...................... (3,114) (3,766)
Accumulated other comprehensive income, net of tax 284 725
- ------------------------------------------------------------------------------
Total stockholders' equity..................... 101,777 97,258
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity.....$1,041,615 $1,117,226
==============================================================================
The accompanying notes are an integral part of these financial statements.
1
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)
Dollars In Thousands, Except Earnings Per Share
Quarter Ended Nine Months Ended
March 31, March 31,
----------------- --------------------
2002 2001 2002 2001
==============================================================================
Interest income
Loans receivable, net.............$ 12,015 $ 16,688 $ 39,570 $ 49,816
Investment securities............. 2,704 3,200 9,339 9,552
FHLB stock........................ 196 271 579 1,172
Interest-earning deposits......... 408 39 1,220 100
- ------------------------------------------------------------------------------
Total interest income............. 15,323 20,198 50,708 60,640
Interest expense
Savings accounts.................. 750 893 2,330 2,418
Demand and NOW accounts........... 509 923 1,951 2,779
Certificates of deposit .......... 4,096 6,923 14,930 20,688
FHLB advances and other
borrowings....................... 3,506 4,845 11,573 15,205
- ------------------------------------------------------------------------------
Total interest expense............ 8,861 13,584 30,784 41,090
- ------------------------------------------------------------------------------
Net interest income................ 6,462 6,614 19,924 19,550
Provision for loan losses.......... 129 - 375 -
- ------------------------------------------------------------------------------
Net interest income after provision
for loan losses................... 6,333 6,614 19,549 19,550
Non-interest income
Loan servicing and other fees..... 538 485 1,578 1,558
Gain on sale of loans, net........ 2,285 1,928 7,414 4,768
Real estate operations, net....... 181 170 472 534
Deposit account fees.............. 416 354 1,219 971
Other............................. 263 342 1,029 1,349
- ------------------------------------------------------------------------------
Total non-interest income......... 3,683 3,279 11,712 9,180
Non-interest expense
Salaries and employee benefits.... 4,256 3,670 12,408 11,322
Premises and occupancy............ 559 466 1,646 1,412
Equipment......................... 553 411 1,668 1,321
Professional expenses............. 172 135 534 379
Sales and marketing expenses...... 109 234 555 776
Other............................. 942 1,017 2,993 3,044
- ------------------------------------------------------------------------------
Total non-interest expense........ 6,591 5,933 19,804 18,254
- ------------------------------------------------------------------------------
Income before taxes................ 3,425 3,960 11,457 10,476
Provision for income taxes ........ 1,428 1,620 4,776 4,368
- ------------------------------------------------------------------------------
Net income .......................$ 1,997 $ 2,340 $ 6,681 $ 6,108
==============================================================================
Basic earnings per share...........$ 0.58 $ 0.67 $ 1.95 $ 1.74
Diluted earnings per share.........$ 0.56 $ 0.65 $ 1.86 $ 1.70
==============================================================================
The accompanying notes are an integral part of these financial statements.
2
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Dollars In Thousands, Except Shares
For the Quarters Ended March 31, 2002 and 2001
Accumulated
Common Additional Unearned Other
Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Capital Earnings Stock Compensation Income, net of tax Total
============================================================================================================
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Balance at December
31, 2001......... 3,715,871 $ 51 $ 51,756 $ 78,381 $(27,311) $ (3,363) $ 754 $100,268
Comprehensive income:
Net income....... 1,997 1,997
Unrealized hold-
ing losses on
securities
available for
sale, net
of tax......... (470) (470)
Total comprehen-
sive income...... 1,527
Purchase of
treasury stock,
net.............. (20,700) (565) (565)
Issuance of shares
under stock-
option plan...... 12,000 183 183
Release of shares
under stock-based
compensation
plans............ 115 249 364
- ------------------------------------------------------------------------------------------------------------
Balance at March
31, 2002......... 3,707,171 $ 51 $ 52,054 $ 80,378 $(27,876) $(3,114) $ 284 $101,777
============================================================================================================
Accumulated
Common Additional Unearned Other
Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Capital Earnings Stock Compensation Income, net of tax Total
============================================================================================================
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance at December
31, 2000.........3,865,409 $ 51 $ 51,400 $ 68,579 $(23,931) $ (4,129) $ 756 $ 92,726
Comprehensive income:
Net income....... 2,340 2,340
Unrealized holding
gains on securities
available for sale,
net of tax....... 134 134
----------
Total comprehen-
sive income...... 2,474
Purchase of
treasury stock,
net.............. (11,500) (114) (114)
Release of shares
under stock-
based compen-
sation plans.... 66 122 188
- ------------------------------------------------------------------------------------------------------------
Balance at March
31, 2001........ 3,853,909 $ 51 $ 51,466 $ 70,919 $(24,045) $ (4,007) $ 890 $ 95,274
============================================================================================================
The accompanying notes are an integral part of these financial statements.
3
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Dollars In Thousands, Except Shares
For the Nine Months Ended March 31, 2002 and 2001
Accumulated
Common Additional Unearned Other
Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Capital Earnings Stock Compensation Income, net of tax Total
============================================================================================================
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance at June
30, 2001.........3,810,909 $ 51 $ 51,544 $ 73,697 $(24,993) $ (3,766) $ 725 $ 97,258
Comprehensive income:
Net income 6,681 6,681
Unrealized holding
gains on securities
available for sale,
net of tax...... (441) (441)
---------
Total comprehen-
sive income...... 6,240
Purchase of
treasury stock,
net.............. (117,238) (2,883) (2,883)
Issuance of shares
under stock-
option plan...... 13,500 206 206
Release of shares
under stock-based
compensation
plans............ 304 652 956
- ------------------------------------------------------------------------------------------------------------
Balance at March
31, 2002.........3,707,171 $ 51 $ 52,054 $ 80,378 $(27,876) $ (3,114) $ 284 $101,777
============================================================================================================
Accumulated
Common Additional Unearned Other
Stock Paid-In Retained Treasury Stock Comprehensive
Shares Amount Capital Earnings Stock Compensation Income, net of tax Total
============================================================================================================
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance at June
30, 2000.........3,922,066 $ 51 $ 51,249 $ 64,811 $ (22,696) $ (4,634) $ 186 $ 88,967
Comprehensive income:
Net income ...... 6,108 6,108
Unrealized holding
gains on securities
available for sale,
net of tax....... 704 704
---------
Total comprehen-
sive income...... 6,812
Purchase of
treasury stock,
net.............. (71,157) (1,349) (1,349)
Issuance of shares
under stock-
option plan...... 3,000 46 46
Release of shares
under stock-based
compensation
plans............ 171 627 798
- ------------------------------------------------------------------------------------------------------------
Balance at March
31, 2001........ 3,853,909 $ 51 $ 51,466 $ 70,919 $ (24,045) $ (4,007) $ 890 $ 95,274
============================================================================================================
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 Nine Months Ended
March 31, March 31,
------------------------------------------------
2002 2001 2002 2001
==============================================================================
Cash flows from operating
activities:
Net income................... $ 1,997 $ 2,340 $ 6,681 $ 6,108
Adjustments to reconcile net
income to net cash provided
by (used for) operating
activities:
Depreciation and
amortization.............. 466 453 1,577 1,422
Provision for loan losses.. 129 - 375 -
Provision for real estate
losses.................... - - 58 -
Gain on sale of loans...... (2,285) (1,928) (7,414) (4,768)
Gain on sale of investment
securities................ (21) (21) (154) (234)
(Decrease) increase in
accounts payable and
other liabilities......... (3,200) 2,679 (1,384) 2,580
Decrease (increase) in
prepaid expense and other
assets.................... 642 24 668 (830)
Loans originated for sale.... (269,078) (217,962) (873,431) (458,207)
Proceeds from sale of loans.. 296,121 147,069 950,907 381,343
Stock based compensation..... 364 188 956 798
- ------------------------------------------------------------------------------
Net cash provided by
(used for) operating
activities.............. 25,135 (67,158) 78,839 (71,788)
Cash flows from investing
activities:
Net decrease in loans held
for investment............ 8,271 27,416 106,307 69,387
Proceeds from maturity/calls
of investment securities
held to maturity.......... 26,843 66,500 179,590 69,500
Proceeds from maturity/calls
of investment securities
available for sale........ 19,580 - 80,205 -
Proceeds from MBS principal
payments.................. 3,204 - 3,240 -
Sales of investment securities
available for sale........ 1,454 3,988 21,481 6,253
Purchase of investment
securities held to
maturity.................. (5,025) (7,500) (129,147) (7,500)
Purchase of investment
securities available for
sale...................... (45,141) (53,541) (172,707) (62,482)
Sales (purchase) of Federal
Home Loan Bank stock...... 915 2,030 1,818 1,129
Net (acquisitions) sales
of real estate............ - (674) 149 (517)
Net purchases of premises
and equipment............. (161) (238) (2,004) (693)
- ------------------------------------------------------------------------------
Net cash provided by
investing activities.... 9,940 37,981 88,896 75,077
Cash flows from financing
activities:
Net (decrease) increase
in deposits............... (3,089) 17,511 (35,082) 26,920
Repayment of Federal Home
Loan Bank Advances......... (15,044) (193,402) (45,054) (860,306)
Proceeds of Federal Home
Loan Bank Advances........ - 205,100 1,696 834,500
Repayment of other
borrowings................ - (137) - (403)
Treasury stock purchases... (565) (114) (2,883) (1,349)
Exercise of stock options.. 183 - 206 46
- ------------------------------------------------------------------------------
Net cash (used for)
provided by financing
activities.............. (18,515) 28,958 (81,117) (592)
- ------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents... 16,560 (219) 86,618 2,697
Cash and cash equivalents
at beginning of period...... 96,897 21,881 26,839 18,965
- ------------------------------------------------------------------------------
Cash and cash equivalents at
end of period............... $ 113,457 $ 21,662 $ 113,457 $ 21,662
==============================================================================
Supplemental information:
Cash paid for interest..... $ 7,472 $ 13,186 $ 30,879 $ 39,877
Cash paid for income
taxes..................... 440 1,200 5,440 3,800
Real estate acquired in
settlement of loans....... 942 452 1,348 982
==============================================================================
The accompanying notes are an integral part of these financial statements.
5
PROVIDENT FINANCIAL HOLDINGS, INC.
SELECTED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2002
Note 1: Basis of Presentation
The unaudited interim consolidated financial statements included herein
reflect all adjustments which are, in the opinion of management, necessary to
present a fair statement of the results of operations for the interim periods
presented. All such adjustments are of a normal, recurring nature. The balance
sheet data at June 30, 2001 is from the audited consolidated financial
statements of Provident Financial Holdings, Inc. (the "Corporation"). Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. 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,
2001 (SEC File No. 000-28304) of the Corporation. Certain amounts in the prior
periods' financial statements may have been reclassified to conform to the
current periods' presentations. The results of operations for the interim
periods are not indicative of results for the full year.
Note 2: Earnings Per Share
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that would then share in the earnings of the entity. The following
tables provide the basic and diluted EPS computations for the quarter and the
nine months ended March 31, 2002 and 2001, respectively.
For the Quarter Ended For the Nine Months
March 31, Ended
March 31,
--------------------------------------------------
2002 2001 2002 2001
==============================================================================
Numerator:
Net income - numerator for
basic earnings per share
and diluted earnings per
share-income available
to common stockholders $1,997,241 $2,340,498 $6,681,474 $6,107,826
==============================================================================
Denominator:
Denominator for basic
earnings per share:
Weighted-average
shares............... 3,416,011 3,498,986 3,432,130 3,505,747
Effect of dilutive
securities:
Employee stock benefit
plans................ 180,908 89,521 165,430 83,046
- ------------------------------------------------------------------------------
Denominator for diluted
earnings per share:
Adjusted weighted-
average shares
and assumed
conversions.......... 3,596,919 3,588,507 3,597,560 3,588,793
==============================================================================
Basic earnings per share... $ 0.58 $ 0.67 $ 1.95 $ 1.74
Diluted earnings per share. $ 0.56 $ 0.65 $ 1.86 $ 1.70
==============================================================================
6
Note 3: Operating Segment Reports
The Corporation has determined that its reportable segments are the operations
of Provident Savings Bank, F.S.B. pertaining to traditional banking activities
and the operations pertaining to mortgage banking. The following tables set
forth condensed income statements and total assets for the Corporation's
operating segments for the quarter and nine months ended March 31, 2002 and
2001, respectively.
For the Quarter Ended March 31, 2002
------------------------------------------
Traditional Mortgage Consolidated
Banking Banking Totals
==========================================================================
Net interest income............ $ 5,692 $ 641 $ 6,333
Non-interest income:
Loan servicing and other
fees........................ (248) 786 538
Gain on sale of loans, net... (2) 2,287 2,285
Real estate operations, net.. 192 (11) 181
Deposit account fees......... 416 - 416
Other........................ 263 - 263
- --------------------------------------------------------------------------
Total non-interest income.. 621 3,062 3,683
Non-interest expense:
Salaries and employee
benefits.................... 3,194 1,062 4,256
Premises and occupancy....... 443 116 559
Operating and administrative
expenses.................... 1,180 596 1,776
- --------------------------------------------------------------------------
Total non-interest expense. 4,817 1,774 6,591
- --------------------------------------------------------------------------
Income before taxes............ $ 1,496 $ 1,929 $ 3,425
==========================================================================
Total assets, end of period.... $ 969,369 $ 72,246 $ 1,041,615
==========================================================================
For the Quarter Ended March 31, 2001
------------------------------------------
Traditional Mortgage Consolidated
Banking Banking Totals
==========================================================================
Net interest income............ $ 6,296 $ 318 $ 6,614
Non-interest income:
Loan servicing and other
fees........................ 248 237 485
(Loss) gain on sale of loans,
net......................... (16) 1,944 1,928
Real estate operations, net.. 157 13 170
Deposit account fees......... 354 - 354
Other........................ 340 2 342
- --------------------------------------------------------------------------
Total non-interest income.. 1,083 2,196 3,279
Non-interest expense:
Salaries and employee
benefits.................... 2,839 831 3,670
Premises and occupancy....... 344 122 466
Operating and administrative
expenses.................... 1,154 643 1,797
- --------------------------------------------------------------------------
Total non-interest expense. 4,337 1,596 5,933
- --------------------------------------------------------------------------
Income before taxes............ $ 3,042 $ 918 $ 3,960
==========================================================================
Total assets, end of period.... $ 1,025,360 $ 132,533 $ 1,157,893
==========================================================================
7
For the Nine Months Ended March 31, 2002
------------------------------------------
Traditional Mortgage Consolidated
Banking Banking Totals
==========================================================================
Net interest income............. $ 17,705 $ 1,844 $ 19,549
Non-interest income:
Loan servicing and other fees. (108) 1,686 1,578
Gain on sale of loans, net.... 42 7,372 7,414
Real estate operations, net... 560 (88) 472
Deposit account fees.......... 1,219 - 1,219
Other......................... 1,021 8 1,029
- --------------------------------------------------------------------------
Total non-interest income... 2,734 8,978 11,712
Non-interest expense:
Salaries and employee
benefits..................... 9,444 2,964 12,408
Premises and occupancy........ 1,293 353 1,646
Operating and administrative
expenses..................... 3,791 1,959 5,750
- --------------------------------------------------------------------------
Total non-interest expense.. 14,528 5,276 19,804
- --------------------------------------------------------------------------
Income before taxes............. $ 5,911 $ 5,546 $ 11,457
==========================================================================
Total assets, end of period..... $ 969,369 $ 72,246 $ 1,041,615
==========================================================================
For the Nine Months Ended March 31, 2001
------------------------------------------
Traditional Mortgage Consolidated
Banking Banking Totals
==========================================================================
Net interest income............ $ 18,885 $ 665 $ 19,550
Non-interest income:
Loan servicing and other
fees........................ 602 956 1,558
(Loss) gain on sale of loans,
net......................... (48) 4,816 4,768
Real estate operations, net.. 542 (8) 534
Deposit account fees......... 971 - 971
Other........................ 1,186 163 1,349
- --------------------------------------------------------------------------
Total non-interest income.. 3,253 5,927 9,180
Non-interest expense:
Salaries and employee
benefits.................... 8,507 2,815 11,322
Premises and occupancy....... 1,008 404 1,412
Operating and administrative
expenses.................... 3,522 1,998 5,520
- --------------------------------------------------------------------------
Total non-interest expense. 13,037 5,217 18,254
- --------------------------------------------------------------------------
Income before taxes............ $ 9,101 $ 1,375 $ 10,476
==========================================================================
Total assets, end of period.... $ 1,025,360 $ 132,533 $ 1,157,893
==========================================================================
Note 4: Recent Accounting Pronouncement
Statement of Financial Accounting Standard ("SFAS") No. 133:
- -----------------------------------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133,
as amended and interpreted, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
8
other contracts, and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair-value
hedge, the changes in fair value of the derivative and the hedged item will be
recognized in earnings. If the derivative is designated as a cash flow hedge,
changes in the fair value of the derivative will be recorded in accumulated
other comprehensive income and will be recognized in the income statement when
the hedged item affects earnings. SFAS No. 133 defines new requirements for
designation and documentation of hedging relationships, as well as ongoing
effectiveness assessments, in order to use hedge accounting. For a derivative
that does not qualify as a hedge, changes in fair value will be recognized in
earnings.
The Corporation adopted SFAS No. 133 on July 1, 2000. There was no material
impact upon adoption (refer to the Derivatives section for details on the SFAS
No. 133 implementation).
SFAS No. 140:
- ------------
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinquishments of Liabilities," was issued in September 2000 and revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over
most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140
is effective for transfers and servicing of financial assets and
extinquishments of liabilities occurring after March 31, 2001. The statement
is effective for recognition and reclassifications of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of the provisions of SFAS
No. 140 did not have a material impact on the results of operations, financial
position or cash flows of the Corporation.
SFAS No. 141:
- ------------
SFAS No. 141, "Business Combinations," requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001; the use of the pooling-of-interest method is no longer allowed. The
adoption of this statement had no material impact on the Corporation's
financial position, results of operations or cash flows.
SFAS No. 142:
- ------------
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that, once
adopted, amortization of goodwill will cease and as an alternative, the
carrying value of goodwill will be evaluated for impairment on an annual
basis. Intangible assets will continue to be amortized over their useful
lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
disposed of." SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001. The adoption of this statement will have no material
impact on the Corporation's financial position, results of operations or cash
flows.
SFAS No. 143:
- ------------
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred, if a reasonable estimate of fair value can
be made. The associated asset retirement cost would be capitalized as part
of the carrying amount of the long-lived asset. The effective date for SFAS
No. 143 will be for fiscal years beginning after June 15, 2002. The adoption
of this statement is not expected to have a material impact on the
Corporation's financial position, results of operations or cash flows.
SFAS No. 144:
- ------------
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," replaces SFAS No. 121. SFAS No. 144 requires that long-lived assets
be measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. It
also expands the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the
rest of the entity and that will be eliminated from the ongoing operations of
the entity in a disposal transaction. SFAS No. 144 is effective for financial
statements issued for fiscal
9
years beginning after December 15, 2001. The adoption of this statement is not
expected to have a material impact on the Corporation's financial position,
results of operations or cash flows.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Provident Financial Holdings, Inc. ("Corporation"), 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 March 31,
2002, the Corporation had total assets of $1.0 billion, total deposits of
$695.0 million and total stockholders' equity of $101.8 million. The
Corporation 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 Corporation, from time to time, may repurchase its common stock as a way
to enhance the Corporation's earnings per share. The Corporation considers the
repurchase of its common stock if the market value of the stock is lower than
its book value and/or the Corporation believes that the current stock price is
under valued as compared to its current and future income projections.
Consideration is also given to the Corporation's liquidity and capital
requirements and its future capital needs based on the Corporation's current
business plans. The Corporation's Board of Directors authorizes each stock
repurchase program, the duration of which is normally one year. Once the
stock repurchase program is authorized, Management may repurchase its common
stock from time to time in the open market, depending upon market conditions
and the factors described above.
The Savings Bank, founded in 1956, is federally chartered and headquartered in
Riverside, California. The Savings Bank is regulated by the Office of Thrift
Supervision ("OTS"), its primary federal regulator, and the Federal Deposit
Insurance Corporation ("FDIC"), the insurer of its deposits. The Savings
Bank's deposits are federally insured up to applicable limits by the FDIC
(under the Savings Association Insurance Fund ("SAIF")). The Savings Bank has
been a member of the Federal Home Loan Bank ("FHLB") system since 1956.
The Savings Bank's business consists of traditional banking activities and
mortgage banking activities. Traditional banking activities primarily consist
of accepting deposits from customers within the communities surrounding the
Savings Bank's full service offices and investing these funds in single-family
loans, multi-family loans, commercial real estate loans, construction loans,
commercial business loans, consumer loans and other real estate loans. In
addition, the Savings Bank also offers business checking accounts, other
business banking services and services loans for others. Mortgage banking
activities consist of the origination and sale of mortgage and consumer loans
secured primarily by single-family residences. The Savings Bank's revenues are
derived principally from interest on its loan and investment portfolios and
fees generated through its traditional banking and mortgage banking
activities. There are various risks inherent in the Savings Bank's business.
The Savings Bank's business is subject to, among other risks, interest rate
changes and the prepayment of loans and investments.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operation of the Corporation. The information contained in this
section should be read in conjunction with the Unaudited Interim Consolidated
Financial Statements and accompanying Selected Notes to Unaudited Interim
Consolidated Financial Statements.
Critical Accounting Policies
The discussion and analysis of the Corporation's financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities at the date of
10
the financial statements. Actual results may differ from these estimates under
different assumptions or conditions.
Accounting for the allowance for loan and lease losses involves significant
judgments and assumptions by management, which have a material impact on the
carrying value of net loans. Management considers this accounting policy to be
a critical accounting policy. The judgments and assumptions used by management
are based on historical data and management's view of the current economic
environment as described in "Provision for Loan and Lease Losses".
Interest is generally not accrued on any loan when its contractual payments
are more than 90 days delinquent. In addition, interest is not recognized on
any loan which management has determined that collection is not reasonably
assured. A non-accrual loan may be restored to accrual status when delinquent
principal and interest payments are brought current, the loan is paying in
accordance with its payment terms for a minimum six-month period, and future
monthly principal and interest payments are expected to be collected.
Properties acquired through foreclosure or deed in lieu of foreclosure, are
transferred to the real estate owned portfolio and carried at the lower of
cost or estimated fair value less the estimated costs to sell the property.
The fair values of the properties are based upon current appraisals. The
difference between the fair value of the real estate collateral and the loan
balance at the time of transfer is recorded as a loan charge-off if fair value
is lower. Subsequent to foreclosure, management periodically performs
additional valuations and the properties are adjusted, if necessary, to the
lower of carrying value or fair value, less estimated selling costs. The
determination of a property's estimated fair value includes revenues projected
to be realized from disposal of the property, construction and renovation
costs.
Comparison of Financial Condition at March 31, 2002 and June 30, 2001
Total assets as of March 31, 2002 decreased by $75.6 million to $1.04 billion
from $1.12 billion at June 30, 2001. This decrease was primarily due to a
decline in loans held for investment and the receivable from sale of loans,
offset partly by the increase in investment securities and overnight deposits.
Total loans held for investment decreased $108.0 million, or 15 percent, to
$589.2 million at March 31, 2002 from $697.2 million at June 30, 2001.
Accelerated loan prepayments driven by the extended refinance market during
the nine months ended March 31, 2002 contributed to most of the decline. Total
loan principal prepayments, including contractual principal amortization,
during the nine months ended March 31, 2002 were $298.2 million while total
loan originations were $193.6 million, including $28.5 million of purchased
loans. During the nine months ended March 31, 2002, participation loans
outstanding increased to $35.3 million or 6 percent of the loans held for
investment from $29.0 million or 4 percent of the loans held for investment at
June 30, 2001.
The receivable from the sale of loans decreased by $69.9 million, or 51
percent, to $67.4 million at March 31, 2002 from $137.3 million at June 30,
2001. The decline in the receivable resulted from a shorter period of time
between the loan funding dates and the loan sale settlement dates.
Total investment securities increased $16.8 million, or 8 percent, to $221.3
million at March 31, 2002 from $204.5 million at June 30, 2001 while overnight
deposits increased $87.0 million to $90.0 million at March 31, 2002 from $3.0
million at June 30, 2001. The increase in overnight deposits was the result of
excess liquidity from loan prepayments, which exceeded the volume of portfolio
loans originated during the period. For the first nine months of fiscal 2002,
$256.8 million of investment securities were called by the issuer. The high
volume of called securities was the result of the significant decline in
interest rates during the period. The types of securities called were
government agency callable bonds and were primarily issued by the FHLB, the
Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation.
Total deposits decreased $35.0 million, or 5 percent, to $695.0 million at
March 31, 2002 from $730.0 million at June 30, 2001. This decrease was
generally attributable to a decrease in certificates of deposit, and was
partially offset by increases in savings and checking accounts. The
Corporation continued its focus on building client relationships through
checking accounts and fee generating products and services.
11
Borrowings, which consist entirely of FHLB advances, declined by $43.3
million, or 16 percent, to $222.5 million at March 31, 2002 from $265.8
million at June 30, 2001. The average maturity of the Corporation's existing
FHLB advances was approximately 47 months (25 months, based on call dates) at
March 31, 2002 as compared to the average maturity of 46 months (27 months,
based on call dates) at June 30, 2001.
Total stockholders' equity increased by $4.5 million, or 5 percent, to $101.8
million during the nine months ended March 31, 2002, from $97.3 million at
June 30, 2001 as a result of net income and the impact of stock based
compensation accruals during the first nine months of fiscal 2002. This
increase was partially reduced by the Corporation's stock repurchases during
the first nine months of fiscal 2002. A total of 111,100 shares, with an
average price of $24.75 per share, were repurchased during the first nine
months of fiscal 2002. This resulted in a total of 154,100 shares repurchased,
or 80 percent, of 193,000 shares authorized pursuant to the March 2001 Stock
Repurchase Plan, at an average cost of $24.00 per share. The March 2001 Stock
Repurchase Plan expired in March of 2002. On March 28, 2002, the Board of
Directors of the Corporation authorized the repurchase of an additional 5
percent of its common stock, or approximately 185,000 shares, over a one-year
period. Shares will be repurchased from time to time in the open market
depending on market conditions and the capital requirements of the
Corporation. During the first nine months of fiscal 2002, the Corporation
also repurchased 10,696 shares relating to the Management Recognition Plan
("MRP") and awarded 4,558 shares pursuant to the MRP.
Comparison of Operating Results for the Quarter and the Nine Months Ended
March 31, 2002 and 2001
The Corporation's net income for the quarter ended March 31, 2002 was $2.0
million, a decrease of $343,000, or 15 percent, from $2.3 million during the
same quarter of fiscal 2001. This decrease was primarily attributable to a
decrease in net interest income and an increase in compensation expense, and
was partly offset by an increase in the gain on sale of loans. For the nine
months ended March 31, 2002, the Corporation's net income was $6.7 million, up
$573,000 or 9 percent from $6.1 million during the same period of fiscal 2001.
This increase was primarily attributable to an increase in the gain on sale of
loans, and was partly offset by a decrease in net interest income and an
increase in compensation expenses.
The Corporation's net interest income before loan loss provision decreased by
$152,000, or 2 percent to $6.5 million for the quarter ended March 31, 2002
from $6.6 million during the comparable period of fiscal 2001. This decrease
resulted mainly from a decrease in the average loan balance, despite a higher
net interest margin. The net interest margin improved to 2.59 percent in the
third quarter of fiscal 2002 from 2.44 percent during the same period of
fiscal 2001. For the nine months ended March 31, 2002, the net interest income
was $19.9 million, up $374,000 or 2 percent, from $19.6 million during the
same period of fiscal 2001; and the net interest margin was 2.59 percent, up
18 basis points, from 2.41 percent. The increase in net interest income during
the first nine months of fiscal 2002 was primarily due to a decline in the
average cost of funds, which outpaced the decline in the average yield of the
earning assets.
The Corporation's efficiency ratio increased to 65 percent in the third
quarter of fiscal 2002 from 60 percent in the same period of fiscal 2001. For
the nine months ended March 31, 2002 and 2001, the efficiency ratio was 63
percent and 64 percent, respectively.
Return on average assets for the quarter ended March 31, 2002 decreased to
0.76 percent from 0.83 percent in the same period last year. For the nine
months ended March 31, 2002 and 2001, the return on average assets was 0.83
percent and 0.72 percent, respectively, an increase of 15 percent.
Return on average equity for the quarter ended March 31, 2002 decreased to
7.88 percent from 10.61 percent in the same period last year. For the nine
months ended March 31, 2002 and 2001, the return on average equity was 8.92
percent and 9.21 percent, respectively.
Diluted earnings per share for the quarter ended March 31, 2002 were $0.56, a
decrease of 14 percent from $0.65 for the quarter ended March 31, 2001. For
the nine months ended March 31, 2002 and 2001, the diluted earnings per share
were $1.86 and $1.70, respectively, an increase of 9 percent. The increase in
the diluted earnings per share reflected the effect of the higher net income
recorded during the nine months ended March 31, 2002 and the Corporation's
stock repurchase program during the last 12 months.
12
Interest Income. Total interest income decreased by $4.9 million, or 24
percent, to $15.3 million for the quarter ended March 31, 2002 from $20.2
million during the same quarter of fiscal 2001. This decrease was primarily
the result of a lower average loan balance and a lower average loan yield. The
average earning assets during the third quarter of fiscal 2002 were $998.0
million, a decrease of $84.9 million or 8 percent, from $1.08 billion during
the same period last year. The average yield on earning assets during the
third quarter of fiscal 2002 was 6.14 percent, 132 basis points lower than the
average yield of 7.46 percent during the same period last year.
Loan interest income decreased $4.7 million, or 28 percent, to $12.0 million
in the quarter ended March 31, 2002 as compared to $16.7 million for the same
quarter of fiscal 2001. This decrease was attributable to a lower average loan
balance and a lower average loan yield. The average balance of loans
outstanding, including the receivable from sale of loans and the loans held
for sale decreased $196.4 million, or 23 percent, to $663.7 million during the
third quarter of fiscal 2002 from $860.1 million during the same quarter of
fiscal 2001. The average loan yield during the third quarter of fiscal 2002
was 7.24 percent as compared to 7.76 percent during the same quarter last
year. The decline of the average loan balance and the average loan yield were
primarily attributable to loan prepayments resulting from the significant
decline in mortgage interest rates.
Interest income from investment securities decreased $496,000, or 16 percent,
to $2.7 million during the quarter ended March 31, 2002 from $3.2 million
during the same quarter of fiscal 2001. This decrease was primarily due to a
decrease in the average yield, which was partly offset by an increase in the
average balance. The yield on the investment securities portfolio decreased
143 basis points from 6.28 percent during the quarter ending March 31, 2001 to
4.85 percent during the quarter ending March 31, 2002. The average balance of
investment securities increased $19.3 million, or 9 percent, to $223.1 million
in the third quarter of fiscal 2002 from $203.8 million in the same quarter of
fiscal 2001.
FHLB stock dividends decreased by $75,000, or 28 percent, to $196,000 in the
third quarter of fiscal 2002 from $271,000 in the same period of fiscal 2001.
This decrease was attributable to a lower average balance and a lower average
yield. The average balance of FHLB stock declined to $14.9 million during the
third quarter of fiscal 2002 from $16.5 million during the same period of
fiscal 2001. The average yield on FHLB stock decreased by 132 basis points to
5.27 percent during the third quarter of fiscal 2002 from 6.59 percent during
the same period last year.
Interest income from interest-bearing deposits increased $369,000 to $408,000
in the third quarter of fiscal 2002 from $39,000 in the same period of fiscal
2001. This increase was due mainly to a higher average balance and was
partially offset by a lower average yield. The average balance of
interest-bearing deposits increased to $96.3 million during the third quarter
of fiscal 2002 from $2.6 million during the same period of fiscal 2001. The
increase in the average balance was primarily attributable to the increase of
overnight federal funds investments, resulting from the excess liquidity
described earlier. The average yield on the interest-bearing deposits
decreased 434 basis points to 1.69 percent during the third quarter of fiscal
2002 from 6.03 percent during the same period last year. The decline in the
average yield was mainly due to the decline in the federal funds rate during
the third quarter of fiscal 2002 as compared to the same period of fiscal
2001.
For the nine months ended March 31, 2002, total interest income decreased $9.9
million, or 16 percent, to $50.7 million as compared to $60.6 million for the
same period of fiscal 2001. This decrease was primarily attributable to a
decrease of the average balance and a decrease of the average yield on earning
assets. The average earning assets decreased $57.9 million, or 5 percent, to
$1.03 billion during the first nine months of fiscal 2002 from $1.08 billion
during the same period of fiscal 2001. The average yield on earning assets
decreased 87 basis points to 6.60 percent during the nine months ended March
31, 2002 from 7.47 percent during the same period of fiscal 2001.
The interest income from loans decreased by $10.2 million, or 21 percent, to
$39.6 million during the first nine months of fiscal 2002 from $49.8 million
during the same period of fiscal 2001. The average loans outstanding decreased
$152.0 million, or 18 percent, to $708.1 million during the nine months ended
March 31, 2002 from $860.1 million during the same period of fiscal 2001. The
average yield on loans decreased
13
27 basis points to 7.45 percent during the first nine months of fiscal 2002 as
compared to 7.72 percent during the same period of fiscal 2001.
Interest income from investment securities decreased $213,000, or 2 percent,
to $9.3 million during the nine months ended March 31, 2002 from $9.6 million
during the same period of fiscal 2001. This decrease was primarily due to a
decrease in the average yield, which was partly offset by an increase in the
average balance. The yield on the investment securities decreased 82 basis
points from 6.26 percent during the nine months ending March 31, 2001 to 5.44
percent during the nine months ending March 31, 2002. The average balance of
investment securities increased $25.8 million to $229.1 million in the first
nine months of fiscal 2002 from $203.3 million in the same period of fiscal
2001.
FHLB stock dividends decreased $593,000, or 51 percent, to $579,000 in the
first nine months of fiscal 2002 from $1.2 million in the same period of
fiscal 2001. The decrease was attributable to a lower average balance, a lower
yield and the FHLB stock dividend accrual of $270,000 recorded in the first
nine months of fiscal 2001, which in prior periods was not recognized until
received. The average balance of FHLB stock declined $1.8 million, or 10
percent, to $15.5 million during the first nine months of fiscal 2002 from
$17.3 million during the same period of fiscal 2001. The average yield on FHLB
stock, excluding the adjustment accrual made in the first nine months of
fiscal 2001, decreased 198 basis points to 4.98 percent during the first nine
months of fiscal 2002 from 6.95 percent during the same period last year.
Interest income from interest-earning deposits increased $1.1 million to $1.2
million in the first nine months of fiscal 2002 from $100,000 in the same
period of fiscal 2001. This increase was due mainly to a higher average
balance, which was partially offset by a lower average yield. The average
balance of interest-bearing deposits increased to $72.4 million during the
first nine months of fiscal 2002 from $2.2 million during the same period of
fiscal 2001. The increase in the average balance was primarily attributable to
the increase of federal funds investments, resulting from the excess
liquidity. The average yield on the interest-bearing deposits decreased 393
basis points to 2.25 percent during the first nine months of fiscal 2002 from
6.18 percent during the same period last year.
Interest Expense. Total interest expense for the quarter ended March 31, 2002
was $8.9 million as compared to $13.6 million for the same period of fiscal
2001, a decrease of $4.7 million, or 35 percent. This decrease was primarily
attributable to a decrease in both the average balance and the average cost.
The average cost of liabilities was 3.88 percent during the quarter ended
March 31, 2002, down 156 basis points compared to 5.44 percent during the same
period of fiscal 2001. The average balance of interest-bearing liabilities
declined $87.8 million, or 9 percent, to $925.1 million during the third
quarter of fiscal 2002 from $1.01 billion during the same period last year.
Interest expense on deposits for the quarter ended March 31, 2002 was $5.4
million as compared to $8.7 million for the same period of fiscal 2001, a
decrease of $3.3 million, or 39 percent. Average deposits decreased $14.5
million, or 2 percent, to $696.3 million during the quarter ended March 31,
2002 from $710.8 million during the same period of fiscal 2001. The average
cost of deposits decreased to 3.12 percent during the quarter ended March 31,
2002 from 4.99 percent during the same quarter of fiscal 2001, a decline of
187 basis points.
Interest expense on borrowings for the quarter ended March 31, 2002 was $3.5
million as compared to $4.8 million for the same period of fiscal 2001, a
decrease of $1.3 million, or 28 percent. The average balance of borrowings,
which are primarily FHLB advances, were $228.7 million during the quarter
ended March 31, 2002 as compared to $302.0 million for the same quarter of
fiscal 2001, a decrease of $73.3 million, or 24 percent. The average cost of
borrowings decreased to 6.22 percent for the quarter ended March 31, 2002 from
6.51 percent in the same quarter of fiscal 2001, a decline of 29 basis points.
For the nine months ended March 31, 2002, total interest expense decreased
$10.3 million, or 25 percent, to $30.8 million as compared to $41.1 million
for the same period of fiscal 2001. The average cost of interest-bearing
liabilities decreased 111 basis points to 4.31 percent during the first nine
months of fiscal 2002 as compared to 5.42 percent during the same period of
fiscal 2001. The average balance of interest-bearing liabilities during the
nine-month period of fiscal 2002 decreased $60.2 million, or 6 percent, to
$952.2 million as compared to $1.01 billion during the same period last year.
14
For the nine months ended March 31, 2002, interest expense on deposits
decreased $6.7 million, or 26 percent, to $19.2 million as compared to $25.9
million for the same period of fiscal 2001. The average deposits increased
$5.8 million, or 1 percent, to $707.1 million as compared to $701.3 million
during the same period of fiscal 2001. The average cost of deposits decreased
131 basis points to 3.62 percent during the first nine months of fiscal 2002
as compared to 4.93 percent during the same period of fiscal 2001.
For the nine months ended March 31, 2002, total interest expense on borrowings
decreased $3.6 million, or 24 percent, to $11.6 million as compared to $15.2
million for the same period of fiscal 2001. The average balance of borrowings
decreased $66.0 million, or 21 percent, to $245.1 million as compared to
$311.1 million during the same period of fiscal 2001. The average cost of
borrowings decreased 23 basis points to 6.29 percent during the first nine
months of fiscal 2002 as compared to 6.52 percent during the same period of
fiscal 2001.
15
The following tables depict the average balance sheets for the quarter and
nine months ended March 31, 2002 and 2001, respectively:
AVERAGE BALANCE SHEETS
(dollars in thousands)
Quarter Ended Quarter Ended
March 31, 2002 March 31, 2001
-------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
==============================================================================
Interest-earning assets:
Loans receivable,
net (1)............ $ 663,655 $12,015 7.24% $ 860,059 $16,688 7.76%
Investment
securities......... 223,135 2,704 4.85% 203,840 3,200 6.28%
FHLB stock.......... 14,873 196 5.27% 16,453 271 6.59%
Interest-earning
deposits........... 96,330 408 1.69% 2,587 39 6.03%
- ------------------------------------------------------------------------------
Total interest-
earning assets .... 997,993 15,323 6.14% 1,082,939 20,198 7.46%
Non-interest
earning assets..... 48,222 49,902
- ------------------------------------------------------------------------------
Total assets........ $1,046,215 $1,132,841
==============================================================================
Interest-bearing
liabilities:
Savings accounts.... 139,967 750 2.17% 101,236 893 3.58%
Demand and NOW
accounts............ 175,806 509 1.17% 151,779 923 2.47%
Certificates of
deposit ........... 380,548 4,096 4.37% 457,830 6,923 6.13%
- ------------------------------------------------------------------------------
Total deposits...... 696,321 5,355 3.12% 710,845 8,739 4.99%
FHLB advances ...... 228,736 3,506 6.22% 299,015 4,784 6.49%
Other borrowings ... - - - 3,018 61 8.20%
- ------------------------------------------------------------------------------
Total borrowings.... 228,736 3,506 6.22% 302,033 4,845 6.51%
- ------------------------------------------------------------------------------
Total interest-bearing
liabilities........ 925,057 8,861 3.88% 1,012,878 13,584 5.44%
Non-interest-bearing
liabilities........ 19,814 31,774
- ------------------------------------------------------------------------------
Total liabilities... 944,871 1,044,652
Stockholders'
equity............. 101,344 88,189
- ------------------------------------------------------------------------------
Total liabilities
and stockholders'
equity ............$ 1,046,215 $ 1,132,841
==============================================================================
Net interest income. $ 6,462 $ 6,614
==============================================================================
Interest rate
spread (2)......... 2.26% 2.02%
Net interest
margin (3)......... 2.59% 2.44%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........ 107.88% 106.92%
Return on average
assets............. 0.76% 0.83%
Return of average
equity............. 7.88% 10.61%
==============================================================================
(1) Includes loans held for sale, net, and receivable from sale of loans
(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 and lease losses
as a percentage of average interest-earning assets
16
Average Balance Sheets
(Dollars in thousands)
Nine Months Ended Nine Months Ended
March 31, 2002 March 31, 2001
-------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
==============================================================================
Interest-earning assets:
Loans receivable,
net (1)............ $ 708,053 $39,570 7.45% $ 860,146 $49,816 7.72%
Investment
securities......... 229,074 9,339 5.44% 203,324 9,552 6.26%
FHLB stock (2)...... 15,516 579 4.98% 17,297 1,172 9.03%
Interest-earning
deposits........... 72,391 1,220 2.25% 2,157 100 6.18%
- ------------------------------------------------------------------------------
Total interest-
earning assets..... 1,025,034 50,708 6.60% 1,082,924 60,640 7.47%
Non-interest
earning assets..... 51,725 48,405
- ------------------------------------------------------------------------------
Total assets........ $1,076,759 $1,131,329
==============================================================================
Interest-bearing
liabilities:
Savings accounts.... 129,556 2,330 2.40% 92,928 2,418 3.47%
Demand and NOW
accounts........... 169,581 1,951 1.53% 151,473 2,779 2.45%
Certificates of
deposit ........... 407,986 14,930 4.87% 456,881 20,688 6.04%
- ------------------------------------------------------------------------------
Total deposits...... 707,123 19,211 3.62% 701,282 25,885 4.93%
FHLB advances ...... 245,060 11,573 6.29% 307,932 15,013 6.51%
Other borrowings.... - - - 3,152 192 8.13%
- ------------------------------------------------------------------------------
Total borrowings.... 245,060 11,573 6.29% 311,084 15,205 6.52%
- ------------------------------------------------------------------------------
Total interest-
bearing
liabilities........ 952,183 30,784 4.31% 1,012,366 41,090 5.42%
Non-interest- bearing
liabilities ....... 24,749 30,536
- ------------------------------------------------------------------------------
Total liabilities... 976,932 1,042,902
Stockholders'
equity............. 99,827 88,427
- ------------------------------------------------------------------------------
Total liabilities
and stockholders'
equity............. $1,076,759 $1,131,329
==============================================================================
Net interest income. $19,924 $19,550
==============================================================================
Interest rate
spread (3)......... 2.29% 2.05%
Net interest
margin (4)......... 2.59% 2.41%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........ 107.65% 106.97%
Return on average
assets ............ 0.83% 0.72%
Return of average
equity............. 8.92% 9.21%
==============================================================================
(1) Includes loans held for sale, net, and receivable from sale of loans
(2) Income of FHLB stock in fiscal 2001 includes accrual of FHLB dividends,
totaling $270,000, which in prior periods were not recognized until
received.
(3) Represents the difference between weighted average yield on all interest-
earning assets and weighted average rate on all interest-bearing
liabilities
(4) Represents net interest income before provision for loan and lease losses
as a percentage of average interest-earning assets
17
The following table provides the rate/volume variances for the quarter and
nine months ended March 31, 2002 and 2001, respectively:
Rate/Volume Variance
(Dollars in thousands)
Quarter Ended March 31, 2002 Compared
to Quarter Ended March 31, 2001
Increase (Decrease) Due to
---------------------------------------------
Rate/
Rate Volume Volume Net
==============================================================================
Interest income:
Loans receivable (1)........... $(1,117) $ (3,811) $ 255 $(4,673)
Investment securities.......... (730) 303 (69) (496)
FHLB stock .................... (54) (26) 5 (75)
Interest-bearing deposits ..... (28) 1,413 (1,016) 369
- ------------------------------------------------------------------------------
Total net change in income
on interest-earning assets..... (1,929) (2,121) (825) (4,875)
Interest-bearing liabilities:
Savings accounts............... (351) 342 (134) (143)
Demand and NOW accounts........ (483) 146 (77) (414)
Certificates of deposit........ (1,995) (1,169) 337 (2,827)
FHLB advances.................. (201) (1,124) 47 (1,278)
Other borrowings............... (61) (61) 61 (61)
- ------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities... (3,091) (1,866) 234 (4,723)
- ------------------------------------------------------------------------------
Net change in net interest
(loss) income.................. $ 1,162 $ (255) $(1,059) $ (152)
==============================================================================
(1) Includes loans held for sale and receivable from sale of loans. For
purposes of calculating volume, rate and rate/volume variances,
non-accrual loans were included in the weighted average balance
outstanding.
18
Rate/Volume Variance
(Dollars in thousands)
Nine Months Ended March 31, 2002 Compared
To Nine Months Ended March 31, 2001
Increase (Decrease) Due to
---------------------------------------------
Rate/
Rate Volume Volume Net
==============================================================================
Interest income:
Loans receivable (1)........... $(1,746) $ (8,809) $ 309 $(10,246)
Investment securities.......... (1,260) 1,209 (160) (211)
FHLB stock (2)................. (526) (121) 54 (593)
Interest-bearing deposits...... (65) 3,321 (2,138) 1,118
- ------------------------------------------------------------------------------
Total net change in income
on interest-earning assets..... (3,597) (4,400) (1,935) (9,932)
Interest-bearing liabilities:
Savings accounts............... (747) 955 (296) (88)
Demand and NOW accounts ....... (1,037) 333 (124) (828)
Certificates of deposit........ (3,969) (2,218) 429 (5,758)
FHLB advances ................. (471) (3,071) 102 (3,440)
Other borrowings............... (192) (192) 192 (192)
- ------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities... (6,416) (4,193) 303 (10,306)
- ------------------------------------------------------------------------------
Net change in net interest
(loss) income.................. $ 2,819 $ (207) $(2,238) $ 374
==============================================================================
(1) Includes loans held for sale and receivable from sale of loans. For
purposes of calculating volume, rate and rate/volume variances, non-
accrual loans were included in the weighted average balance outstanding.
(2) Income of FHLB stock in fiscal 2001 includes accrual of FHLB dividends,
totaling $270,000, which in prior periods were not recognized until
received.
Provision for Loan and Lease Losses. A total of $129,000 of loan loss
provisions were added during the third quarter of fiscal 2002, as compared to
zero during the same period of fiscal 2001. For the nine months ended March
31, 2002, a total of $375,000 of loan loss provisions were added as compared
to zero during the same period last year. The allowance for loan and lease
losses was $5.7 million at March 31, 2002 as compared to $6.7 million for the
same period of fiscal 2001. The decline in the allowance during the quarter
was mainly attributable to the charge-off or partial charge-off recorded on
four commercial business loans, totaling $388,000; which was partially offset
by recoveries on five commercial business loans, totaling $203,000.
Non-performing assets, including real estate owned, as a percentage of total
assets increased to 0.29 percent at March 31, 2002 from 0.27 percent last
year. The allowance for loan and lease losses as a percentage of gross loans
held for investment improved to 0.97 percent at March 31, 2002 from 0.86
percent at March 31, 2001. The allowance for loan and lease losses declined by
slightly less than $1.0 million during the prior twelve-month period,
resulting mainly from higher loan charge-offs, net of recoveries. The
charge-offs occurred primarily in the commercial loan portfolio. Of the
$388,000 charged-off during the third quarter of fiscal 2002, a total of
$354,000 was linked to one business borrower. The borrower has had a
significant cash flow problem causing the Corporation to re-evaluate the
borrowers ability to repay its loans. The Corporation negotiated a repayment
plan with the borrower that appears to facilitate the full repayment of
principal and interest.
The allowance for loan and lease 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
19
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 and lease loss experience, current economic conditions, detailed
analysis of individual loans for which full collectibility may not be assured,
and determination of the realizable value of the collateral securing the
loans. Provisions for losses are charged against operations on a monthly basis
as necessary to maintain the allowance at appropriate levels. Management
believes that the amount maintained in the allowance will be adequate to
absorb losses inherent in the portfolio. Although management believes it uses
the best information available to make such determinations, there can be no
assurance that regulators, in reviewing the Corporation's loan portfolio, will
not request the Corporation to increase significantly its allowance for loan
and lease losses. Future adjustments to the allowance for loan and lease
losses may be necessary and results of operations could be significantly and
adversely affected due to economic, operating, regulatory, and other
conditions beyond the control of the Corporation.
20
The following table is provided to disclose additional details on the
Corporation's allowance for loan and lease losses and asset quality:
Allowance for Loan and Lease Losses
(Dollars in thousands)
For the For
Quarter Ended Nine Months Ended
March 31, March 31,
----------------------------------
2002 2001 2002 2001
=============================================================================
Allowance at beginning of period........ $ 5,820 $ 6,823 $ 6,068 $ 6,850
Provision for loan and lease losses..... 129 - 375 -
Recoveries:
Mortgage loans:
Single-family ........................ 9 - 28 24
Multi-family.......................... - - 67 -
Commercial............................ - - 2 -
Construction.......................... - - - -
Consumer loans ......................... - - - -
Commercial business loans .............. 203 - 203 -
- -----------------------------------------------------------------------------
Total recoveries...................... 212 - 300 24
Charge-offs:
Mortgage loans:
Single-family......................... - (106) (9) (155)
Multi-family.......................... - - - -
Commercial............................ - - - -
Construction ......................... - - - -
Consumer loans ......................... (27) (1) (30) (3)
Commercial business loans............... (388) - (958) -
- -----------------------------------------------------------------------------
Total charge-offs..................... (415) (107) (997) (158)
- -----------------------------------------------------------------------------
Net (charge-offs) recoveries ......... (203) (107) (697) (134)
- -----------------------------------------------------------------------------
Balance at end of period ...........$ 5,746 $ 6,716 $ 5,746 $ 6,716
=============================================================================
Allowance for loan and lease losses
as a percentage of gross loans held
for investment......................... 0.97% 0.86% 0.97% 0.86%
Net charge-offs as a percentage of
average loans outstanding during
the period ............................ 0.12% 0.05% 0.13% 0.02%
Allowance for loan and lease losses
as a percentage of non-performing
loans at the end of the period......... 358.68% 332.31% 358.68% 332.31%
=============================================================================
Non-Interest Income. Total non-interest income increased $404,000, or 12
percent, to $3.7 million during the quarter ended March 31, 2002 from $3.3
million during the same period of fiscal 2001. The increase in non-interest
income was primarily attributable to an increase in gains on sale of loans.
The gain on sale of loans increased $357,000, or 19 percent, to $2.3 million
for the quarter ended March 31, 2002 from $1.9 million during the same quarter
of fiscal 2001. This increase was primarily due to a higher volume of loans
originated for sale and a higher average loan sale margin in the third quarter
of
21
fiscal 2002 compared to the same quarter of fiscal 2001. Total loans
originated for sale during the third quarter of fiscal 2002 increased $51.1
million, or 23 percent, to $269.1 million as compared to $218.0 million in the
same period of fiscal 2001. The increase in the loans originated for sale was
a result of the declines in mortgage rates, which created a refinance market.
The average loan sale margin during the third quarter of fiscal 2002 (which
has been adjusted to include a $142,000 favorable change in the unrealized
fair value of derivatives outstanding) was 0.89 percent as compared to 0.88
percent during the same period of fiscal 2001.
For the nine months ended March 31, 2002, total non-interest income increased
$2.5 million, or 28 percent, to $11.7 million from $9.2 million during the
same period of fiscal 2001. The increase in non-interest income was primarily
attributable to an increase in the gain on sale of loans.
For the nine months ended March 31, 2002, the gain on sale of loans increased
$2.6 million, or 55 percent, to $7.4 million from $4.8 million during the same
period of fiscal 2001. This increase was primarily due to a higher volume of
loans originated for sale, which was partially offset by a lower average loan
sale margin. Total loans originated for sale during the first nine months of
fiscal 2002 increased $415.2 million, or 91 percent, to $873.4 million as
compared to $458.2 million in the same period of fiscal 2001. The average loan
sale margin during the first nine months of fiscal 2002 (which has been
adjusted to include a $97,000 unfavorable change in the unrealized fair value
of derivatives outstanding) was 0.84 percent as compared to 1.04 percent
during the same period of fiscal 2001.
Non-Interest Expense. Total non-interest expense increased $658,000, or 11
percent, to $6.6 million during the quarter ended March 31, 2002 from $5.9
million in the same period of fiscal 2001. This increase was primarily
attributable to an increase in compensation, premises, equipment and
professional expenses related to higher loan production volume and the
operating costs of the new branches in Corona and Temecula, California. These
increases were partially offset by a decrease in marketing and other operating
expenses. The efficiency ratio in the third quarter of fiscal 2002 was 65
percent as compared to 60 percent during the same period last year.
For the nine months ended March 31, 2002, total non-interest expense increased
$1.5 million, or 8 percent, to $19.8 million from $18.3 million during the
same period last year. This increase was primarily attributable to an increase
in compensation, premises, equipment and professional expenses related to
higher loan production volume and the operating costs of the new branches in
Corona and Temecula, California. For the nine months ended March 31, 2002, the
efficiency ratio improved to 63 percent from 64 percent during the same period
last year.
Income taxes. Income tax expense was $1.4 million for the quarter ended March
31, 2002 as compared to $1.6 million during the same period of fiscal 2001.
The effective tax rate for the third quarters ended March 31, 2002 and 2001
was approximately 42 percent and 41 percent, respectively.
For the nine months ended March 31, 2002, income tax expense was $4.8 million
as compared to $4.4 million during the same period of fiscal 2001. The
effective tax rate for the nine months ended March 31, 2002 and 2001 was
approximately 42 percent.
Asset Quality. Non-accrual loans, which primarily consisted of single-family
loans, declined $419,000 to $1.6 million at March 31, 2002 from $2.0 million
at March 31, 2001. No interest accruals were made for loans, which were past
due 90 days or more. Primarily due to the declines in the loan portfolio
outstanding, the non-accrual and 90 days or more past due loans as a
percentage of net loans held for investment increased to 0.27 percent at March
31, 2002 from 0.26 percent at March 31, 2001.
The Corporation reviews significant loans individually and identifies
impairment when the accrual of interest has been discontinued, loans have been
restructured or management has serious doubts about the future collectibility
of principal and interest, even though the loans are currently performing.
Factors considered in determining impairment include, but are not limited to,
expected future cash flows, financial condition of the borrower and the
current economic conditions. The Corporation measures each impaired
22
loan based on the fair value of its collateral and charges off those loans or
portions of loans deemed uncollectible.
The following table is provided to disclose details on asset quality (dollars
in thousands):
At March 31, At March 31,
------------ ------------
2002 2001
==============================================================================
Loans accounted for on a non-accrual basis:
Mortgage loans:
Single-family.............................. $ 1,361 $ 1,628
Multi-family............................... - -
Commercial................................. - 302
Construction............................... - -
Consumer loans............................... 121 91
Commercial business loans.................... 120 -
Other loans.................................. - -
- ------------------------------------------------------------------------------
Total...................................... 1,602 2,021
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
Single-family ............................. - -
Multi-family .............................. - -
Commercial ................................ - -
Construction .............................. - -
Consumer loans .............................. - -
Commercial business loans ................... - -
Other loans ................................. - -
- ------------------------------------------------------------------------------
Total ..................................... - -
Total of non-accrual and 90 days
past due loans............................. 1,602 2,021
Real estate owned............................ 1,374 1,075
- ------------------------------------------------------------------------------
Total non-performing assets................ $ 2,976 $ 3,096
==============================================================================
Restructured loans........................... $ 1,412 $ 1,467
Non-accrual and 90 days or more past due loans
as a percentage of loans held for
investment, net ........................... 0.27% 0.26%
Non-accrual and 90 days or more past due loans
as a percentage of total assets ........... 0.15% 0.17%
Non-performing assets as a percentage of
total assets .............................. 0.29% 0.27%
==============================================================================
23
The following table is provided to disclose details related to the volume of
loans originated, purchased and sold:
Loan Volume Activities
(Dollars in thousands)
For the Quarter Ended For Nine Months Ended
March 31, March 31,
------------------------ -----------------------
2002 2001 2002 2001
==============================================================================
Loans originated for sale:
Retail originations........$ 60,960 $ 81,794 $ 265,907 $ 200,495
Wholesale originations..... 208,118 136,168 607,524 257,712
- ------------------------------------------------------------------------------
Total loans originated
for sale............... 269,078 217,962 873,431 458,207
Loans sold:
Servicing released......... (293,451) (145,141) (941,037) (376,575)
Servicing retained......... (385) - (2,456) -
- ------------------------------------------------------------------------------
Total loans sold......... (293,836) (145,141 (943,493) (376,575)
Loans originated for
portfolio:
Mortgage loans:
Single-family............ 57,920 - 100,859 -
Multi-family............. - - 2,994 -
Commercial............... 9,924 - 16,894 1,250
Construction ............ 11,026 13,070 39,065 35,367
Consumer loans............. - 120 30 120
Commercial business loans.. 878 2,977 2,842 5,036
Other loans................ 583 205 2,450 205
- ------------------------------------------------------------------------------
Total loans originated
for portfolio.......... 80,331 16,372 165,134 41,978
Loans purchased for portfolio:
Mortgage loans:
Single-family............ - - - -
Multi-family............. - 3,212 1,590 3,212
Commercial............... 3,300 1,825 4,100 5,315
Construction ............ 5,258 10,520 22,269 11,755
Other loans ............... 543 - 543 -
- ------------------------------------------------------------------------------
Total loans purchased.... 9,101 15,557 28,502 20,282
Mortgage loan principal
repayments................. (98,710) (54,682) (298,218) (128,208)
Real estate acquired in
settlement of loans........ (942) (452) (1,381) (982)
Decrease (increase) in
receivable from
sale of loans ............. 26,463 (67,351) 69,911 (69,832)
Increase (decrease) in
other items, net (1)....... 978 (3,491) (1,993) (1,352)
- ------------------------------------------------------------------------------
Net decrease in loans
held for investment
and loans held for sale....$ (7,537) $ (21,226) $(108,107) $ (56,482)
==============================================================================
(1) Includes changes in loans in process, discounts, deferred fees and costs
and loan loss reserves.
Liquidity and Capital Resources. The Corporation'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 equal to 40 percent of its total assets, collateralized by loans and
securities, which at March 31, 2002 permitted additional advances of $127.1
million. In addition, the Savings Bank has an unsecured line of credit of
$45.0 million 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 interest rates,
economic conditions, and competition.
24
The Savings Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. The Savings Bank generally maintains sufficient cash
to meet short-term liquidity needs. At March 31, 2002, cash and cash
equivalents totaled $113.5 million, or 11 percent of total assets. Depending
on market conditions and the pricing of deposit products and FHLB borrowings,
the Savings Bank may rely on FHLB borrowings or unsecured lines for its
liquidity needs.
Based on the OTS Transmittal (TR-259) of October 11, 2001, the OTS repealed
the liquidity regulation. Even though the liquidity requirement of 4 percent
has been eliminated, the rule still requires thrifts to maintain adequate
liquidity to assure safe and sound operation. The Savings Bank's average
liquidity ratio for the quarter ended March 31, 2002 increased to 39 percent
from 21 percent during the same period ending March 31, 2001. This increase
was primarily due to the unexpected volume of loan prepayments during recent
quarters and the deployment of the cash flows into qualifying liquid
investments.
The Corporation has been experiencing a large volume of loan prepayments in
its loan portfolio; and it has become increasingly difficult to reinvest these
cash flows in assets that carry similar or better interest rate risk
characteristics. The recent refinance market has been dominated by fixed rate
loans and the Corporation has not added long-term fixed rate loans to its
portfolio at a time when interest rates are at or near historical lows.
Therefore, while the Corporation has taken steps to address the issue of
rising liquidity levels, the Corporation finds that a larger percentage of its
earning assets are invested at significantly lower rates than the Corporation
would like. The Corporation has mitigated the impact of this in several ways.
The Corporation has increased the balance of the investment securities
portfolio, generated more loans for portfolio from its mortgage banking,
business banking and major loan divisions, and purchased commercial real
estate and construction participation loans from other financial institutions.
The Corporation also reduced the balance of certificates of deposit and
reduced the balance of Federal Home Loan Bank advances. This has been
accomplished with prudent interest-rate-risk management practices.
The Corporation is committed to increase the loan portfolio mix with more
emphasis on commercial real estate, construction, multi-family, commercial
business and consumer loans. These loans generally have higher yields as
compared to single-family loans. During the first nine months of fiscal 2002,
the volume of loans generated for portfolio increased by 211%, to $193.6
million, in comparison to the same period last year; and the average balance
of the investment securities portfolio grew by 13% or $25.8 million. These are
significant improvements but are insufficient in and of themselves to offset
the prepayment volumes that the Corporation has experienced. The Corporation
will continue to seek increased activity in these areas but must also have a
slowdown in loan prepayments to have the desired impact on the balance sheet
and income statement. Recently, loan prepayments have declined and the number
of portfolio loans generated by the mortgage division has increased.
The Savings Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum requirements
can initiate certain mandatory actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Savings Bank must meet certain specific capital
guidelines that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk-weightings, and other factors.
25
The Savings Bank's actual and required capital amounts and ratios as of March
31, 2002 are as follows (dollars in thousands):
Amount Percent
===============================================================
Tangible capital.........................$ 87,052 8.46%
Requirement.............................. 20,571 2.00%
---------------------------------------------------------------
Excess over requirement..................$ 66,481 6.46%
===============================================================
Tier 1 (core) capital....................$ 87,052 8.46%
Requirement to be "Well Capitalized".....$ 51,426 5.00%
---------------------------------------------------------------
Excess over requirement..................$ 35,626 3.46%
===============================================================
Total risk-based capital.................$ 93,318 17.32%
Requirement to be "Well Capitalized".....$ 53,871 10.00%
---------------------------------------------------------------
Excess over requirement..................$ 39,447 7.32%
===============================================================
Tier 1 risk-based capital................$ 87,052 16.16%
Requirement to be "Well Capitalized".....$ 32,322 6.00%
---------------------------------------------------------------
Excess over requirement..................$ 54,730 10.16%
===============================================================
Commitments and Derivatives. The Corporation is a party to financial
instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit, in the form of originating loans or providing
funds under existing lines of credit, and forward sale agreements to sell
loans to third parties. These instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized
in the accompanying consolidated balance sheet. The Corporation's exposure to
credit loss, in the event of nonperformance by the other party to these
financial instruments, is represented by the contractual amount of these
instruments. The Corporation uses the same credit policies in making
commitments to extend credit as it does for on-balance sheet instruments.
March 31, June 30,
Commitments (dollars in thousands) 2002 2001
=========================================================================
Construction loans in process $ 30,458 $ 27,252
Undisbursed lines of credit - Consumer loans 12,011 13,071
Undisbursed lines of credit - Commercial
business loans 8,948 10,638
- -------------------------------------------------------------------------
$ 51,417 $ 50,961
=========================================================================
Commitments to extend credit are agreements to lend money to a customer at
some future date as long as all conditions have been met in the agreement.
These commitments generally have expiration dates within 60 days of the
commitment date and may require the payment of a fee. Since some of these
commitments are expected to expire, the total commitment amount outstanding
does not necessarily represent future cash requirements. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis prior to
issuing a commitment. At March 31, 2002 and June 30, 2001, interest rates on
commitments to extend credit ranged from 5.75% to 15.38% and 5.50% to 8.75%,
respectively.
In an effort to minimize its exposure to interest rate fluctuations on
commitments to extend credit where the underlying loan will be sold, the
Corporation enters into forward sale agreements to sell certain dollar amounts
of fixed rate and adjustable rate loans to third parties. These agreements
specify the minimum
26
maturity of the loans, the yield to the purchaser, the servicing spread to the
Corporation (if servicing is retained), the maximum principal amount of all
loans to be delivered and the maximum principal amount of individual loans to
be delivered. The Corporation typically satisfies these forward sale
agreements with its current loan production; at March 31, 2002 and June 30,
2001 the aggregate amount of loans held for sale and of commitments to extend
credit were closely matched to the Corporation's forward sale agreements to
sell loans. At March 31, 2002 and June 30, 2001, interest rates on forward
sale agreements to sell loans ranged from 5.50% to 7.00% and 5.50% to 7.50%,
respectively.
In addition to the instruments described above, the Corporation also purchases
over-the-counter put option contracts (with expiration dates that generally
coincide with the terms of the commitments to extend credit) which mitigates
the interest rate risk inherent in commitments to extend credit. The contract
amounts of these instruments reflect the extent of involvement the Corporation
has in this particular class of financial instruments. The Savings Bank's
exposure to loss on these financial instruments is limited to the premiums
paid for the put option contracts. Put options are adjusted to market in
accordance with SFAS No. 133.
In accordance with SFAS No. 133 and interpretations of the Derivative
Implementation Group, the fair value of the commitments to extend credit
(including servicing released premiums), forward sale agreements and put
option contracts recorded on the balance sheet at March 31, 2002 have been
presented in the table below. As of June 30, 2001, commitments to extend
credit were not interpreted to be derivatives. As such, these amounts were
not included on the balance sheet for the period ending June 30, 2001 and are
not included in the table below.
March 31, 2002 June 30, 2001
--------------- --------------
Fair Fair
Derivatives (dollars in thousands) Amount Value Amount Value
==============================================================================
Commitments to extend credit, including
servicing released premiums........... $ 39,655 $ 277 $ - $ -
Forward sale agreements................. 32,432 76 60,322 437
Put option contracts ................... 5,000 15 5,000 33
- ------------------------------------------------------------------------------
Total................................... $116,742 $ 368 $65,322 $ 470
==============================================================================
Shareholders' Equity. The ability of the Corporation to pay dividends depends
primarily on the ability of the Savings Bank to pay dividends to the
Corporation. The Savings Bank may not declare or pay a cash dividend if the
effect thereof would cause its net worth to be reduced below either the
amounts required for its liquidation account or the regulatory capital
requirements imposed by federal and state regulation. In January 2002, the
Savings Bank paid a dividend of $1.2 million to the Corporation for the
primary purpose of funding the March 2001 Stock Repurchase Plan. For the nine
months ended March 31, 2002, cash dividends of $3.6 million ($1.2 million in
August 2001, $1.2 million in October 2001 and $1.2 million in January 2002)
were declared and paid by the Savings Bank to the Corporation to fund the
stock repurchase plan.
Stock Option Plan and Management Recognition Plan. Pursuant to the terms of
the Corporation's 1996 Stock Option Plan ("Plan"), the Corporation granted
options for 85,500 shares of common stock on October 30, 2001 to certain
officers, directors and employees. Pursuant to the Plan, the options vest at
a rate of 20 percent per year over a five-year period. Pursuant to the terms
of the Corporation's MRP, the Corporation awarded 4,558 restricted shares of
common stock on October 30, 2001 to certain officers and directors. Pursuant
to the MRP, the restricted shares vest over a period ranging from one to five
years and on a yearly pro-rata vesting schedule.
27
Supplemental Information
March 31, 2002 June 30, March 31, 2001
2001
==============================================================================
Loans serviced for
others (in thousands)........... $ 150,126 $ 203,813 $ 223,271
Book value per share.............. $ 27.45 $ 25.52 $ 24.72
==============================================================================
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The principal financial objective of the Corporation's interest rate risk
management function is to achieve long-term profitability while limiting its
exposure to the fluctuation of interest rates. The Savings Bank, through its
Asset and Liability Committee (ALCO), has sought to reduce the exposure of its
earnings to changes in market interest rates by managing the mismatch between
asset and liability maturities. The principal element in achieving this
objective is to manage the interest-rate sensitivity of the Savings Bank's
assets by holding loans with interest rates subject to periodic market
adjustments. In addition, the Savings Bank maintains a liquid investment
portfolio comprised of government agency securities, including mortgage backed
securities, and investment grade securities. The Savings Bank relies on retail
deposits as its primary source of funding while utilizing FHLB advances as a
secondary source of funding. As part of its interest rate risk management
strategy, the Savings Bank promotes transaction accounts and certificates of
deposit with terms up to five years.
Through the use of an internal interest rate risk model, the Savings Bank is
able to analyze its interest rate risk exposure by measuring the change in Net
Portfolio Value ("NPV") over a variety of interest rate scenarios. NPV is the
net present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The calculation is intended to illustrate the
change in NPV that would occur in the event of an immediate change in interest
rates of at least 100 basis points with no effect given to any steps which
management might take to counter the effect of that interest rate movement.
The following table represents the estimated NPV based on the indicated
changes in interest rates as of March 31, 2002 (dollars in thousands).
NPV as percentage
Net NPV Portfolio Of Portfolio Value Sensitivity
Basis Points ("bp") Portfolio Change Value Assets Measure
Change in Rates Value (1) Assets (2) (3)
===================================================================================================
<s> <c> <c> <c> <c> <c>
+300 bp. $ 88,786 $(49,457) $ 976,374 9.09% -396
+200 bp. 110,487 (27,756) 1,008,123 10.96% -209
+100 bp. 126,141 (12,102) 1,033,806 12.20% -85
0 bp. 138,243 - 1,059,675 13.05% 0
-100 bp. 142,753 4,510 1,071,891 13.32% 27
-200 bp. 140,100 1,858 1,082,229 12.95% -10
-300 bp. 125,698 (12,545) 1,080,442 11.63% -142
===================================================================================================
(1) Represents the increase (decrease) of the estimated NPV at the indicated interest rate change in
comparison to the NPV estimated at March 31, 2002 ("base case").
(2) Calculated as the estimated NPV divided by the Portfolio Value ("PV") of assets.
(3) Calculated as the change in the NPV ratio from the base case amount assuming the indicated change in
interest rates (expressed in basis points).
28
The following table represents the change in the NPV at a +200 basis point
rate shock at March 31, 2002 and June 30, 2001.
Risk measure:
+200 basis point rate shock At March 31, 2002 At June 30, 2001*
==============================================================================
Pre-shock NPV ratio: NPV as a %
of PV assets 13.05 % 11.71 %
Post-shock NPV ratio: NPV as a %
of PV assets 10.96 % 10.33 %
Sensitivity measure: Change in
NPV ratio 209 bps. 138 bps.
==============================================================================
(*) Based on IRR analysis provided by the OTS.
The results of the internal IRR model are reconciled with the results provided
by the OTS on a quarterly basis. Any significant deviations are researched and
adjusted where applicable. Historically, the internal model has generally
reflected a more conservative position with the sensitivity measure higher
than those of the OTS.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Additionally, certain assets, such as
adjustable rate mortgage ("ARM") loans, have features, which restrict changes
in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
likely deviate significantly from those assumed when calculating the tables
above. It is also possible that, as a result of an interest rate increase, the
increased mortgage payments required of ARM borrowers could result in an
increase in delinquencies and defaults. Changes in market interest rates may
also affect the volume and profitability of the Corporation's mortgage banking
operations. Accordingly, the data presented in the tables above should not be
relied upon as indicative of actual results in the event of changes in
interest rates. Furthermore, the NPV presented in the foregoing tables is not
intended to present the fair market value of the Savings Bank, nor does it
represent amounts that would be available for distribution to stockholders in
the event of the liquidation of the Corporation.
Forward-Looking Statements
Certain matters in this quarterly report on Form 10-Q for the quarterly period
ended March 31, 2002 constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to, among others, expectations of the business environment
in which the Corporation operates, projections of future performance,
perceived opportunities in the market, potential future credit experience, and
statements regarding the Corporation's mission and vision. These
forward-looking statements are based upon current management expectations, and
may, therefore, involve risks and uncertainties. The Corporation's actual
results, performance, or achievements may differ materially from those
suggested, expressed, or implied by forward-looking statements due to a wide
range of factors including, but not limited to, the general business
environment, interest rates, the California real estate market, competitive
conditions between banks and non-bank financial services providers, regulatory
changes, and other risks detailed in the Corporation's reports filed with the
Securities and Exchange Commission, including the Annual Report on Form 10-K
for the fiscal year ended June 30, 2001. Forward-looking statements are
effective only as of the date that they are made and the Corporation assumes
no obligation to update this information.
29
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
From time to time the Corporation or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are currently
considered to have a material impact on the Corporation's financial position
or results of operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Shareholders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits :
None.
b) Reports on Form 8-K
None.
30
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.
May 10, 2002 /s/ Craig G. Blunden
--------------------
Craig G. Blunden
President and Chief Executive Officer
(Principal Executive Officer)
May 10, 2002 /s/ Donavon P. Ternes
---------------------
Donavon P. Ternes
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
31