FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended.....................September 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number 0-28304
PROVIDENT FINANCIAL HOLDINGS, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0704889
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3756 Central Avenue, Riverside, California 92506
------------------------------------------------
(Address of principal executive offices and Zip code)
(909) 686-6060
--------------
(Registrant's telephone number, including area code)
-----------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X . No .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class : As of October 30, 1998
---------------- ----------------------
Common stock, $ 0.01 par value 4,625,414 shares *
* Includes 338,149 shares held by employee stock ownership plan that
have not been released, committed to be released, or allocated to
participant accounts; and 147,928 shares held by management recognition
plan which have been committed to be released and allocated to
participant accounts.
PROVIDENT FINANCIAL HOLDINGS, INC.
Table of Contents
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of
Provident Financial Holdings, Inc. filed as a part of the report are
as follows:
Consolidated Statements of Financial Condition
as of September 30, 1998 and June 30, 1998.....................1
Consolidated Statements of Operations
for the quarters ended September 30, 1998 and 1997.............2
Consolidated Statement of Changes in Stockholders' Equity
for the quarters ended September 30, 1998 and 1997.............3
Consolidated Statements of Cash Flows
for the quarters ended September 1998 and 1997.................4
Selected Notes to Consolidated Financial Statements............5-6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General........................................................6
Comparison of Financial Condition at September 30, 1998 and
June 30, 1998..................................................6-7
Comparison of Operating Results for the quarters ended
September 30, 1998 and 1997....................................7-12
Loan Origination...............................................12-13
Liquidity and Capital Resources................................13-14
Year 2000 issues...............................................14-15
Supplemental Information.......................................15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................16
Item 2. Changes in Securities.................................16
Item 3. Defaults upon Senior Securities.......................16
Item 4. Submission of Matters to vote of Stockholders.........16
Item 5. Other Information.....................................16
Item 6. Exhibits and Reports on Form 8-K......................16
SIGNATURES...............................................................17
EXHIBIT 27 - FINANCIAL DATA SCHEDULE.....................................18-19
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Balance Sheet and Financial Highlights
(Unaudited)
Dollars in Thousands
September 30, June 30,
1998 1998
ASSETS
Cash $ 17,020 $ 20,933
Overnight deposits 4,000 2,500
Investment securities-held to maturity
(market value $76,430 and $73,948,
respectively) 76,102 74,028
Investment securities -available for
sale at fair market value 2,071 1,526
Loans held for investment, net 632,124 620,128
Loans available for sale, net 80,006 67,248
Accrued interest receivable 4,783 4,940
Real estate available for sale, net 4,644 6,922
Federal Home Loan Bank stock 7,231 6,606
Premises and equipment, net 8,196 7,429
Prepaid expenses and other assets 4,462 3,945
--------- ---------
TOTAL ASSETS $ 840,639 $ 816,205
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits :
Non-interest bearing deposits $ 10,209 $ 10,768
Interest bearing deposits 591,161 572,257
--------- ---------
Total deposits 601,370 583,025
Borrowings 144,612 132,114
Accounts payable and other liabilities 10,904 14,416
--------- ---------
TOTAL LIABILITIES 756,886 729,555
Preferred stock, $.01 par value;
(2,000,000 shares authorized; none
issued and outstanding)
Common stock, $.01 par value; (15,000,000
shares authorized; 5,125,215 shares
issued; 4,625,414 and 4,854,125
outstanding at September 30, 1998
and June 30, 1998 respectively) 51 51
Additional paid-in capital 50,931 50,875
Retained earnings 48,673 47,090
Treasury stock at cost (479,711 and
251,000 shares, respectively) (9,954) (5,305)
Unearned stock compensation (6,586) (6,654)
Accumulated other comprehensive income,
net of tax 638 593
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 83,753 86,650
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 840,639 $ 816,205
========= =========
1
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statements of Operations
(Unaudited)
Dollars in Thousands, Except Earnings Per Share
Quarter ended
September 30,
1998 1997
Interest income
Loans receivable, net $ 12,880 $ 10,755
Investment securities 1,211 463
FHLB & FHLMC stocks 87 74
Interest-bearing deposits 50 128
--------- --------
Total interest income 14,228 11,420
Interest expense
Savings accounts 563 311
Demand and NOW accounts 980 914
Certificates of deposit 5,401 5,044
FHLB advances 1,789 198
--------- --------
Total interest expense 8,733 6,467
--------- --------
Net interest income 5,495 4,953
Provision for loan losses 225 300
--------- --------
Net interest income after provision for
loan losses 5,270 4,653
Non-interest income
Loan servicing and other fees 745 800
Gain on sale of loans 1,549 1,060
Other 490 446
--------- --------
Total non-interest income 2,784 2,306
Non-interest expenses
Salaries and employee benefits 3,417 2,857
Premises and occupancy 520 533
Telephone 110 114
Other 1,263 931
--------- --------
Total non-interest expense 5,310 4,435
Income before taxes 2,744 2,524
Provision for income taxes 1,161 1,057
--------- --------
Net income $ 1,583 $ 1,467
========= ========
Basic earnings per share $0.38 $0.32
========= ========
Diluted earnings per share $0.37 $0.32
========= ========
2
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statement of Stockholders' Equity
(Unaudited)
Dollars in Thousands, Except Shares
For the Quarters ended September 30, 1998 and 1997
Unrealized
Gain on
Common Securities
Stock Additional Unearned Available
---------------- Paid-in Retained Treasury Stock For
Shares Amount Capital Earnings Stock Compensation Sale Total
- ---------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 4,920,215 $ 51 $ 49,842 $ 42,070 $ (3,291) $ (3,720) $ 495 $ 85,447
Comprehensive income:
Net income 1,467 1,467
Accumulated other compre-
hensive Income:
Unrealized gain on securities
available for sale, net
of tax of $ 3. 5 5
Purchase of treasury stock (84,000) (1,637) (1,637)
Release of shares under stock-
based compensation plans 62 68 130
- --------------------------------------------------------------------------------------------------------
Balance at September 30,
1997 4,836,215 $ 51 $ 49,904 $ 43,537 $ (4,928) $ (3,652) $ 500 $ 85,412
========================================================================================================
Unrealized
Gain on
Common Securities
Stock Additional Unearned Available
---------------- Paid-in Retained Treasury Stock For
Shares Amount Capital Earnings Stock Compensation Sale Total
- ---------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 4,854,125 $ 51 $ 50,875 $ 47,090 $ (5,305) $ (6,654) $ 593 $ 86,650
Comprehensive income:
Net income 1,583 1,583
Accumulated other compre-
hensive Income:
Unrealized gain on securities
available for sale, net
of tax of $ 31. 45 45
Purchase of treasury stock (228,711) (4,649) (4,649)
Release of shares under stock-
based compensation plans 56 68 124
- --------------------------------------------------------------------------------------------------------
Balance at September 30,
1998 4,625,414 $ 51 $ 50,931 $ 48,673 $ (9,954) $ (6,586) $ 638 $ 83,753
========================================================================================================
3
PROVIDENT FINANCIAL HOLDINGS, INC.
Consolidated Statement of Cash Flows
(Unaudited)
Dollars in Thousands
Quarter ended
September 30,
1998 1997
Cash flows from operating activities
Net Income $ 1,583 $ 1,467
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 300 253
Amortization of loan fees (318) (93)
Provision for losses 225 300
Provision for losses on real estate 0 18
Gain on sale of loans (1,549) (1,060)
Decrease in accounts payable and other
liabilities (3,512) (1,104)
Decrease in prepaid expenses and other
assets 2,092 205
Loans originated for sale (159,610) (106,792)
Proceeds from sale of loans 145,950 100,521
Stock compensation 124 130
--------- ---------
Net cash used for operating activities (14,715) (6,155)
Cash flows from financing activities:
Net increase in deposits 18,345 14,278
Repayment of Federal Home Loan Bank
Advances (445,602) 0
Proceeds from Federal Home Loan Bank
Advances 458,100 12,000
Treasury stock purchases (4,649) (1,637)
--------- ---------
Net cash provided by financing
activities 26,194 24,641
Cash flows from investing activities:
Net increase in loans receivable (12,148) (28,153)
Maturity of investment securities
held-to-maturity 15,034 21,690
Purchases of investment securities
held-to-maturity (17,596) (22,598)
Purchase of Federal Home Loan Bank Stock (625) 0
Proceeds from disposal of real estate 2,489 2,242
Purchases of premises and equipment, net (1,091) (429)
Other 45 0
--------- ---------
Net cash used for investing activities (13,892) (27,248)
--------- ---------
Net decrease in cash and cash equivalents (2,413) (8,762)
Cash and cash equivalents at beginning of
period 23,433 20,111
--------- ---------
Cash and cash equivalents at end of period $ 21,020 $ 11,349
========= =========
Supplemental Information:
Cash paid for interest $ 9,238 $ 6,862
Cash paid for income taxes 1,094 923
Real estate acquired in settlement
of loans 212 2,525
4
PROVIDENT FINANCIAL HOLDINGS, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
Note 1 : Basis of Presentation
The unaudited consolidated financial statements included herein reflect all
adjustments which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period presented. All such
adjustments are of a normal recurring nature. The balance sheet data at June
30, 1998 is derived from audited financial statements of Provident Financial
Holdings, Inc. (The Company). Certain information and note disclosures
normally included in financial statements prepared in accordance with
generally accepted principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the year ended June 30, 1998 (File No. 0-28304) of the
Company. Certain amounts in the prior period's financial statements may have
been reclassified to conform to the current period's presentation.
Note 2 : Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary restated, to conform to the SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share :
For the Quarter ended
September 30,
-----------------------------
1998 1997
Numerator: -----------------------------
Net income numerator for basic earnings
per share and diluted earnings per share-
income available to common stockholders $ 1,582,991 $ 1,466,997
=========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted-average shares 4,195,643 4,522,520
Effect of dilutive securities:
Employee stock benefit plans 79,965 71,674
----------- -----------
Denominator for diluted earnings per share:
Adjusted weighted-average shares
and assumed conversions 4,275,608 4,594,194
=========== ===========
Basic earnings per share $ 0.38 $ 0.32
Diluted earnings per share $ 0.37 $ 0.32
5
Note 3: SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information"
This statement requires public companies to report certain information about
operating segments as well as certain information about products, services and
major customers in their financial statements. The Company will adopt this
statement in the year ended June 30, 1999. Management does not believe that
the adoption of this statement will have material impact on the financial
position or results of operations of the Company.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Provident Financial Holdings, Inc. (the Company) is a Delaware corporation
which was organized in January 1996 for the purpose of becoming the holding
company for Provident Savings Bank, F.S.B. (the Savings Bank) upon the
latter's conversion from a federal mutual to a federal stock savings bank
("the Conversion"). The Conversion was completed on June 27, 1996. The Company
operates primarily in the business of attracting customer deposits to
originate loans secured primarily by mortgages on residential real estate.
Business operations also include ancillary activities related to real estate
lending such as mortgage banking and real estate development. The Savings Bank
is a federally chartered savings bank founded in 1956 whose deposits are
insured by the FDIC under the Savings Association Insurance Fund (SAIF). The
Savings Bank conducts business from its main office in Riverside, California
and its nine branch offices. Through the operations of its Mortgage Banking
Division (Profed), the Savings Bank has expanded its retail lending market to
include a larger portion of Southern California and Southern Nevada. Profed
operates three offices within the Savings Bank's retail branch facilities and
seven free-standing loan production offices, one of which includes a wholesale
loan department.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Selected Notes to Consolidated Financial
Statements.
The operating results of the Company depend primarily on its net interest
income, its non-interest income (principally from mortgage banking activities)
and its non-interest expense. Net interest income is the difference between
the income the Company receives on its loan and investment portfolios and its
cost of funds, which consists of interest paid on deposits and borrowings.
Non-interest income is comprised of income from mortgage banking activities,
gains on the occasional sale of assets and miscellaneous fees and income. The
contribution of mortgage banking activities to the Company's results of
operations is highly dependent on the demand for loans by borrowers and
investors, and therefore the amount of gain on sale of loans may vary
significantly from period to period as a result of changes in the market
interest rates and the local and national economy. The Company's profitability
is also affected by the level of non-interest expense. Non-interest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs.
Non-interest expenses related to mortgage banking activities include
compensation and benefits, occupancy and equipment expenses, telephone and
other operating costs, all of which are related to the volume of loans
originated. The Company's results of operations may be adversely affected
during periods of reduced loan demand to the extent that non-interest expenses
associated with mortgage banking activities are not reduced commensurate with
the decrease in loan origination.
Comparison of Financial Condition at September 30, 1998 and June 30, 1998
Total assets increased by $24.4 million, or 3.0% to $840.6 million at
September 30, 1998 from $816.2 million at June 30, 1998. This increase was
mainly the result of a $12.0 million, or 1.9% increase in loans held for
investment to $632.1 million at September 1998 from $620.1 million at June 30,
1998 and a $12.8 million, or 19.0% increase in loans held for sale to $80.0
million at September 30, 1998 from $67.2 million
6
at June 30, 1998. This growth was funded primarily by an increase in deposits,
which rose $18.3 million, or 3.1% from $583.0 million at June 30, 1998 as a
result of certificate of deposits and checking account promotions held in the
first quarter. Federal Home Loan Bank (FHLB) advances funded the remaining
increase.
Investment securities held to maturity increased by $2.1 million and Overnight
deposits increased by $1.5 million whereas cash balances were reduced by $3.9
million as the result of the Company's continued improvements in cash
management.
The total equity decreased by $2.9 million which was mainly due to the
combined effects of $1.5 million in net income for the first quarter and the
repurchase of 5% of the Company's stock in early August 1998 at a cost of
$4.7 million.
Comparison of Operating Results for the Quarter ended September 30, 1998 and
1997
The Company's net income for the quarters ended September 30, 1998 and 1997
were $1.58 million and $1.47 million, respectively. An increase of $0.5
million on net interest income plus an increase of $0.5 million in gain on
sale of loans was offset by an increase in overhead expenses. This increase
was attributable mainly to expenses recorded in relation to the Company's
stock-based compensation programs and higher mortgage production related
expenses.
The Company's net interest margin decreased to 2.78% for the quarter ended
September 30, 1998 as compared to 3.27% for the quarter ended September 30,
1997 due to lower loan yield and interest rate compression. Interest rate
compression occurs when the spread between the rates paid on deposits and
borrowings and the rates received on loans and investments begins to narrow.
Net interest income increased $0.5 million for the first quarter, or 10.9% due
to the increase in volume of interest earning assets.
Interest Income. Interest income increased by $2.8 million, or 24.6%, to $14.2
million for the quarter ended September 30, 1998 from $11.4 million for the
same quarter last year. This was the combined result of a lower average yield
on interest earning assets, from 7.53% to 7.19%, and a higher average
interest-earning-asset base, from $606.5 million to $791.5 million.
Loan interest income increased by $2.1 million, or 19.8% to $12.9 million in
the quarter ended September 1998 as compared to $10.8 million for the same
period last year. The majority of this increase was attributable to an
increase in the level of loans held for investment and loans held for sale.
The interest income derived from investment securities increased by $0.7
million, or 161.6% to $1.2 million for the quarter ended September 30, 1998
from $0.5 million for the same quarter last year. This was a result of a
higher level of investment securities from $75.5 million at September 30, 1997
to $78.1 million at September 30, 1998.
Interest Expense. Interest expense for the quarter ended September 30, 1998
was $8.7 million as compared to $6.5 million for the same period last year, an
increase of $2.2 million or 35.0%. This increase was attributable to an
increase in average interest bearing liabilities, particularly FHLB advances
and deposits. Average deposits increased by $76.9 million, or 14.9%, during
the quarter compared to the same period in the prior year; and the rate paid
on deposits decreased to 4.64% during the quarter ended September 30, 1998
from 4.82% during the same quarter in 1997. FHLB advances averaged $125.2
million during the quarter ended September 30, 1998 compared to $13.7 million
for the 1997 quarter. The volume increase on FHLB advances resulted in a $ 1.6
million or 802.0% increase in related interest expense for the quarter
compared to the prior year. The average rate paid on these advances decreased
to 5.66% for the quarter ended September 30, 1998 from 5.74% in the same
quarter in 1997, in accordance with decreasing investment yield in the market.
7
Average balance sheets
(dollars in thousands)
Quarter Ended Quarter Ended
9/30/98 9/30/97
-------------------------- -------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans receivable, net
(1) $703,908 $12,880 7.32% $560,544 $10,755 7.67%
Investment securities 76,816 1,211 6.31% 31,347 463 5.91%
FHLB stock 6,702 87 5.19% 4,934 74 6.00%
Interest-earning deposits 4,119 50 4.86% 9,627 128 5.32%
-------- ------- ---- -------- ------- ----
Total interest-earning
assets 791,545 14,228 7.19% 606,452 11,420 7.53%
Non-interest earning
assets 33,608 25,756
-------- --------
Total assets $825,153 $632,208
======== ========
Interest-bearing liabilities:
Savings accounts $ 78,787 563 2.84% $ 45,579 311 2.71%
Demand and NOW accounts 120,564 980 3.22% 114,478 914 3.17%
Certificate accounts 394,028 5,401 5.44% 356,464 5,044 5.61%
-------- ------- ---- -------- ------- ----
Total deposits 593,379 6,944 4.64% 516,521 6,269 4.82%
FHLB advances 125,194 1,786 5.66% 13,687 198 5.74%
Other borrowings 196 3 6.07% 0 0 0.00%
Total Interest-bearing -------- ------- ---- -------- ------- ----
liabilities 718,769 8,733 4.82% 530,208 6,467 4.84%
Non-interest-bearing
liabilities 21,635 16,911
-------- --------
Total liabilities 740,404 547,119
Retained earnings 84,749 85,089
-------- --------
Total liabilities and
retained earnings $825,153 $632,208
======== ------- ======== -------
Net interest income $ 5,495 $ 4,953
======= =======
Interest rate spread (2) 2.37% 2.69%
Net interest margin (3) 2.78% 3.27%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities 110.13% 114.38%
Return on Assets 0.77% 0.93%
Return on Equity 7.47% 6.90%
(1) Includes loans available for sale
(2) Represents the difference between weighted average yield on all interest-
earning assets and weighted average rate on all interest-bearing
liabilities
(3) Represents net interest income before provision for loan losses as a
percentage of average interest-earning assets.
8
Rate/Volume Variance
(dollars in thousands)
Quarter Ended September 30,1998 compared to Quarter Ended September 30, 1997
Increase (Decrease) Due to
- -----------------------------------------------------------------------------
Rate/
Rate Volume Volume Net
------- -------- ------- --------
Interest income
Loans receivable (1) $ (498) $ 2,750 $ (127) $ 2,125
Investment securities 32 672 46 750
FHLB stock (11) 26 (4) 11
Interest-bearing deposits (11) (73) 6 (78)
------- -------- ------- --------
Total net change in income
on interest-earning assets (488) 3,375 (79) 2,808
Interest-bearing liabilities:
Savings accounts 15 226 11 252
Demand and NOW accounts 17 48 1 66
Certificate accounts (158) 532 (17) 357
FHLB advances (3) 1,613 (22) 1,588
Other borrowings 0 0 3 3
------- -------- ------- --------
Total net change in expense on
interest-bearing liabilities (129) 2,419 (24) 2,266
------- -------- ------- --------
Net change in net interest
income $ (359) $ 956 $ (55) $ 542
======= ======== ======= ========
(1) Includes loans available for sale. For purposes of calculating volume,
rate and rate/volume variances, non-accrual loans were included in the
weighted average balance outstanding.
Provision for Loan Losses. The provision for loan losses was $225,000 for the
quarter ended September 30, 1998 as compared to $300,000 for the same period
last year. At September 30, 1998, loan loss reserves as a percentage of net
loans receivable were 1.01% as compared to 1.04% at September 30, 1997.
The allowance for loan losses is maintained at a level sufficient to provide
for estimated losses based on evaluating known and inherent risks in the loan
portfolio and upon management's continuing analysis of the factors underlying
the quality of loan portfolio. These factors include changes in the size and
composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for
which full collectibility may not be assured, and determination of the
realizable value of the collateral securing the loans. Provision for losses
are charged against operations on a monthly basis as necessary to maintain the
allowance at appropriate levels. Management believes that the amount
maintained in the allowance will be adequate to absorb losses inherent in the
portfolio. Although management believes it uses the best information available
to make such determinations, there can be no assurance that regulators, in
reviewing the Company's loan portfolio, will not request the Company to
increase significantly its allowance for loan losses. Future adjustments to
the allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected due to economic, operating,
regulatory, and other conditions beyond the control of the Company.
9
PAGE
The following tables are provided to disclose additional details on the
Company's allowance for loan losses and asset quality (dollars in thousands):
Allowance for loan losses
For the Quarter Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Allowance at beginning of period $ 6,186 $ 5,465
Provision for loan losses 225 300
Recoveries:
Mortgage loans:
One-to-four family 17 11
Multifamily 0 39
Commercial 0 0
Construction 0 0
Consumer loans 31 14
Commercial business lending 0 0
Other loans 0 0
--------- ---------
Total recoveries 48 64
Charge-offs:
Mortgage loans:
One-to-four family (81) (25)
Multifamily 0 (2)
Commercial 0 (102)
Construction 0 0
Consumer loans (25) (46)
Commercial business lending 0 0
Other loans 0 0
--------- ---------
Total charge-offs (106) (175)
--------- ---------
Net charge-offs (58) (111)
--------- ---------
Balance at end of period $ 6,353 $ 5,654
========= =========
Allowance for loan losses as a
percentage of gross loan
receivable 1.00% 1.02%
Net charge-offs as a percentage
of average loans outstanding
during the period -0.03% -0.08%
Allowance for loan losses as a
percentage of Non-performing
loans at the end of the period 328.66% 158.33%
10
Asset Quality. The following tables are provided to disclose additional
details on asset quality (dollars in thousands):
At September 30, At September 30,
1998 1997
------------------ ------------------
Loans accounted for on
a non-accrual basis:
Mortgage loans:
One-to-four family $ 1,670 $ 3,369
Multifamily 0 0
Commercial 245 0
Construction 0 0
Consumer loans 18 65
Commercial business lending 0 0
Other loans 0 0
--------- ---------
Total 1,933 3,434
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One-to-four family 0 137
Multifamily 0 0
Commercial 0 0
Construction 0 0
Consumer loans 0 0
Commercial business lending 0 0
Other loans 0 0
--------- ---------
Total 0 137
Total of non-accrual and 90 days
past due loans 1,933 3,571
Real estate owned 2,170 2,607
--------- ---------
Total non-performing assets $ 4,103 $ 6,178
========= =========
Restructured loans $ 1,569 $ 3,955
Non-accrual and 90 days or more past
due loans as a percentage of
portfolio loans receivable, net 0.31% 0.66%
Non-accrual and 90 days or more past
due loans as a percentage of total
assets 0.23% 0.56%
Non-performing assets as a percentage of 0.49% 0.96%
total assets
The Company addresses loans individually and identifies impairment when the
accrual of interest has been discontinued, loans have been restructured or
Management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered
in determining impairment include, but are not limited to, expected future
cash flows, financial condition of the borrower and the current economic
conditions. The Company measures each impaired loan based on the fair value of
its collateral and charges off those loans or portions of loans deemed
uncollectible.
11
Non-interest Income. Non-interest income increased by $0.5 million or 20.7% to
$2.8 million during the quarter ended September 30, 1998 from $2.3 million
during the same period last year. The major contributor to this increase was
the gain on sale of loans which increased by $0.5 million or 46.1% to $1.5
million during the quarter ended September 30, 1998. This was due to an
increase of $46.5 million in the aggregate amount of loans sold during the
period as compared to that of the same period in the prior year.
Non-interest Expenses. Non-interest expenses increased by $0.9 million during
the quarter to $5.3 million from $4.4 million in the same period last year.
This increase was attributable mainly to expenses recorded in relation to the
Company's stock-based compensation programs and higher production related
expenses.
Income taxes. Income tax expense was $1.16 million for the quarter versus
$1.06 million for the same quarter last year. The resulting effective tax rate
for the quarter ended September 30, 1998 was 42.3% compared to 41.9% for the
same period last year.
Loan Origination Volumes. The following table is provided to disclose
additional details related to the volume of loans originated (dollars in
thousands):
12
Loan Origination Volumes
For the Quarter Ended
September 30,
--------------------------
1998 1997
Loans originated for sale: --------- ---------
Retail originations $ 67,675 $ 38,518
Wholesale originations 91,936 69,557
--------- ---------
Total loans originated for sale 159,611 108,075
Loans sold:
Servicing released 145,729 99,462
Servicing retained 221 0
--------- ---------
Total loans sold 145,950 99,462
Loans originated for portfolio:
Mortgage loans:
One-to-four family 44,733 44,758
Multifamily 0 0
Commercial 1,631 250
Construction loans 7,519 3,974
Consumer 6,084 2,010
Commercial business lending 3,548 692
Other loans 68 0
--------- ---------
Total loans originated for portfolio 63,583 51,684
Loans purchased:
Mortgage loans:
One-to-four family 0 428
Commercial 0 0
--------- ---------
Total loans purchased 0 428
Mortgage loan principal repayments 49,356 25,661
Real estate acquired in
settlement of loans 212 2,647
(Decrease) increase in other items, net (1) (2,922) 625
--------- ---------
Net increase in loans receivable, net $ 24,754 $ 33,042
========= =========
(1) Includes changes in accrued interest, loans in process, discounts and loan
loss reserves.
Liquidity and Capital Resources. The Company's primary source of funds are
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 Federal Home Loan
Bank of San Francisco of 30% of total assets, which, on September 30, 1998
permitted additional advances up to $104.9 million. While maturities and
scheduled amortization of loans are predictable sources of
13
funds, deposit flows, loan sales, and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and competition.
The primary investing activity of the Company is the origination of mortgage
loans through the Savings Bank. For the quarter ended September 30, 1998, the
Savings Bank originated a total of $223.2 million. This activity was funded
primarily by loan sales, loan principal payments, retail deposits and FHLB
advances. For the quarter ended September 30, 1998, loan sales aggregated
$146.0 million and loan principal payments totaled $46.1 million.
By regulation, the Savings Bank must maintain liquidity of 4% of deposits and
short-term borrowings. Liquidity is measured by cash and readily marketable
securities which are not committed, pledged, or required to liquidate specific
liabilities. The Savings Bank's average liquidity ratios for the first quarter
1999 and 1998 were 12.39% and 6.37%, respectively.
The Savings Bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum requirements
can initiate certain mandatory actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective actions, the Savings Bank must meet certain specific capital
guidelines that involve quantitative measures of the Savings Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Savings Bank's capital amounts and
classifications are also subject to qualitative judgements by the regulators
about components, risk-weightings, and other factors. The Savings Bank's
actual and required capital amounts and ratios as of September 30, 1998 are as
follows:
Amount Percent
-------- -------
Tangible capital $ 66,278 7.98%
Requirement 12,453 1.50%
-------- ----
Excess over requirement $ 53,825 6.48%
======== ====
Core capital $ 66,278 7.98%
Requirement 24,906 3.00%
-------- ----
Excess over requirement $ 41,372 4.98%
======== ====
Risk based capital $ 72,631 13.73%
Requirement to be "Well
Capitalized" 42,326 8.00%
-------- ----
Excess over requirement $ 30,305 5.73%
======== ====
Management believes that under current regulations, the Company will continue
to meet its minimum capital requirements in the foreseeable future.
Year 2000 issues.
General
- -------
Year 2000 issues relate to the possibility of computer programs and hardware
not being able to distinguish between the year 1900 and the year 2000. If it
is not corrected, some, if not all, systems used by the Company might be at
risk of not being able to function properly. To prevent this from happening
during the turn of the century and beyond, the Company has undertaken a major
project to ensure that its internal operating systems, as well as those of its
customers and suppliers, will be fully capable of processing transactions in
the Year 2000 and beyond. Testing and implementation is planned to be
completed during the first half of 1999.
Project
- -------
The Company formed a Year 2000 Committee in July 1997 which consists of the
Chief Information Officer and senior management staff from all levels. The
committee reports the progress of the Year 2000 project to the Board of
Directors on a monthly basis. Regular review is also done by the Internal
Audit department. In addition, the Company engaged an IT consultant to
strengthen the Year 2000 project team.
14
The initial phase of the project was to assess and identify all internal
business processes requiring modification and to develop comprehensive
renovation plans as needed. This phase was completed in late 1997. The second
phase, expected to be accomplished by the end of 1998, will be to execute
those renovation plans and begin testing systems by simulating Year 2000 data
conditions. The third phase is Validation followed by Implementation as the
fourth/final phase. Validation and implementation are planned to be completed
during the first half of 1999. The contingency plan is also being revised and
is expected to be completed by the end of November 1998. The Company is
confident that the overall project will be completed as planned.
Costs
- -----
The estimated cost of the project is $3.5 million, which includes
approximately $2.5 million in replacement equipment and software, $400,000 in
equipment write-down, and $200,000 in external project management expenses. In
addition, the estimated value of internal resources allocated to the Year 2000
project is $400,000. Implementation of the new loan and deposit system which
is already year 2000 compliant will be able to enhance the overall banking
system. A total of $1.5 million or 42.9% of the total costs has been spent for
the project as of September 30, 1998. The replacement equipment and software
will be capitalized and depreciated in accordance with the Company's normal
accounting policies.
Risks
- -----
The failure of not being able to completely detect potential problems related
to Year 2000 could result in an interruption of normal business
activities/operations, which may materially and adversely affect the Company's
results of operations. As a participant in domestic payment systems, the
Company's Year 2000 preparedness is largely dependent upon the readiness of
other participants in the system including the United States government. The
Company relies largely on third-party software vendors and service providers
for many critical functions in the conduct of its businesses. The focus of the
Company has been to monitor and test the Year 2000 compliance progress of its
critical vendors. The year 2000 project is expected to significantly reduce
the risk inherent in the year 2000 problem.
Supplemental Information
September 30, 1998 June 30, 1998 September 30, 1997
------------------ ------------- ------------------
Loans serviced for
others (in thousands) $ 406,600 $ 434,710 $ 523,613
Book value per share $ 18.11 $ 17.85 $ 17.66
The Company completed the repurchase of 5% of its outstanding shares in August
1998, following approval by the Office of Thrift Supervision in July 1998. A
total of 228,711 shares were purchased at an average price of $20.32.
Forward-looking Statement
Certain matters discussed in this Form 10-Q may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward looking statements relate to, among other things,
expectations of the business environment in which the Company operates,
projections of future performance, perceived opportunities in the market, and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may therefore
involve risks and uncertainties. The Company's actual results, performance, or
achievements may differ materially from those suggested, expressed, or implied
by forward looking statements due to a wide range of factors including, but
not limited to, non-bank financial services providers, regulatory changes,
Year 2000 issues and other risks detailed in the Company's reports filed with
the Securities and Exchange Commission, including the Annual Report on Form
10-K for the fiscal year ended June 30, 1998.
15
PART II OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
From time to time the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are considered
to have a material impact on the Company's financial position or results of
operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Shareholders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None.
b) Reports on form 8-K
None.
16
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident Financial Holdings, Inc.
October 30, 1998 /s/ Craig G. Blunden
----------------------------------------
Craig G. Blunden
President and Chief Executive Officer
(Principal Executive Officer)
October 30, 1998 /s/ Brian M. Riley
----------------------------------------
Brian M. Riley
Chief Financial Officer
(Principal Financial and Accounting Officer)
17