Provident Financial Holdings Reports Fourth Quarter Earnings

Non-Performing Assets Decline 27% from December 31, 2009 Peak Levels

Core Deposits (Transaction Accounts) Increase by 30%

Net Interest Margin Expands 25 Basis Points (Sequential Quarter)

RIVERSIDE, Calif., July 29, 2010 (GLOBE NEWSWIRE) -- Provident Financial Holdings, Inc. ("Company") (Nasdaq:PROV), the holding company for Provident Savings Bank, F.S.B. ("Bank"), today announced fourth quarter earnings for the fiscal year ended June 30, 2010.

For the quarter ended June 30, 2010, the Company reported net income of $3.20 million, or $0.28 per diluted share (on 11.35 million average shares outstanding), compared to net income of $1.31 million, or $0.21 per diluted share (on 6.20 million average shares outstanding), in the comparable period a year ago. The fourth quarter net income was primarily attributable to a decrease in the provision for loan losses, partly offset by a decrease in net interest income (before provision for loan losses), a decrease in non-interest income and an increase in operating expenses.

"We are very pleased with our improving credit quality and believe the improving fundamentals of our businesses will begin to take center stage as we move through this difficult credit cycle. However, it is too soon to suggest the end of the challenging environment and we must remain diligent in aggressively addressing new credit problems if they arise," said Craig G. Blunden, Chairman, President and Chief Executive Officer of the Company. "The current mortgage banking environment is favorable and, to date, recent actions by the U.S. Treasury and Federal Reserve to end their unprecedented support of the mortgage markets has not resulted in rising mortgage interest rates. We continue to capture sizable mortgage banking loan origination volume."

As of June 30, 2010 the Bank exceeded all regulatory capital requirements and was deemed "well-capitalized" with Tangible Capital, Core Capital, Total Risk-Based Capital and Tier 1 Risk-Based Capital ratios of 8.82 percent, 8.82 percent, 13.17 percent and 11.91 percent, respectively. As of June 30, 2009 these ratios were 6.88 percent, 6.88 percent, 13.05 percent and 11.78 percent, respectively. For each period, the Bank's capital ratios exceeded the minimum required ratios to be deemed "well-capitalized" (5.00 percent for Core Capital, 10.00 percent for Total Risk-Based Capital and 6.00 percent for Tier 1 Risk-Based Capital). The Bank's Total Risk-Based Capital and Tier 1 Risk-Based Capital ratios declined on June 30, 2010 to 13.17% and 11.91%, respectively from 15.53% and 14.25%, respectively on March 31, 2010. During the current quarter, the Bank, in consultation with the Office of Thrift Supervision, increased the risk weightings of certain single-family residential mortgage loans that were underwritten to stated income or interest only loan programs.

Return on average assets for the fourth quarter of fiscal 2010 improved to 0.92 percent from 0.33 percent for the same period of fiscal 2009. Return on average stockholders' equity for the fourth quarter of fiscal 2010 improved to 10.16 percent from 4.51 percent for the comparable period of fiscal 2009.

On a sequential quarter basis, fourth quarter results reflect net income of $3.20 million compared to net income of $371,000 in the third quarter of fiscal 2010. The increase was primarily attributable to a $3.10 million increase in the gain on sale of loans and a $2.32 million decrease in the provision for loan losses. Diluted earnings per share for the fourth quarter of fiscal 2010 increased to $0.28 per share from $0.03 per share in the third quarter of fiscal 2010. Return on average assets increased to 0.92 percent for the fourth quarter of fiscal 2010 from 0.10 percent in the third quarter of fiscal 2010; and return on average equity for the fourth quarter of fiscal 2010 was 10.16 percent, compared to 1.20 percent for the third quarter of fiscal 2010.

For the fiscal year ended June 30, 2010, net income was $1.12 million, compared to a net loss of $(7.44) million for the fiscal year ended June 30, 2009; and the diluted earnings per share for the fiscal year ended June 30, 2010 improved to $0.13 from a loss of $(1.20) for the prior fiscal year. Return on average assets for the fiscal year ended June 30, 2010 improved to 0.08 percent from a loss of (0.47) percent for the prior fiscal year. Return on average stockholders' equity for the fiscal year ended June 30, 2010 was 0.94 percent, compared to a loss of (6.20) percent for fiscal 2009.                      

Net interest income before provision for loan losses decreased $1.26 million, or 11 percent, to $10.30 million in the fourth quarter of fiscal 2010 from $11.56 million for the same period in fiscal 2009. Non-interest income decreased $3.33 million, or 37 percent, to $5.69 million in the fourth quarter of fiscal 2010 from $9.02 million in the comparable period of fiscal 2009. Operating expense increased $3.04 million, or 41 percent, to $10.47 million in the fourth quarter of fiscal 2010 from $7.43 million in the comparable period in fiscal 2009. Operating expenses in the fourth quarter of fiscal 2009 includes a $2.63 million net expense recovery attributable to the implementation of the Employee Stock Option Plan voluntary self-correction not replicated in the fourth quarter of fiscal 2010.

The average balance of loans outstanding decreased by $185.3 million, or 14 percent, to $1.18 billion in the fourth quarter of fiscal 2010 from $1.37 billion in the same quarter of fiscal 2009. The managed decline in the loan balance is consistent with the Company's short-term deleveraging strategy of curtailing loan portfolio growth to further its goals of maintaining prudent capital ratios and reducing its credit risk profile in response to unfavorable economic conditions.  The average yield on loans receivable decreased by 22 basis points to 5.52 percent in the fourth quarter of fiscal 2010 from an average yield of 5.74 percent in the same quarter of fiscal 2009. The decrease in the average loan yield was primarily attributable to payoffs of loans which had a higher yield than the average yield of loans held for investment and adjustable rate loans re-pricing to lower interest rates. Total loans originated for investment in the fourth quarter of fiscal 2010 were $1.8 million, consisting of single-family, multi-family and commercial real estate loans. In the fourth quarter of fiscal 2009 total loans originated for investment were $8.7 million, which consisted primarily of commercial real estate loans. The outstanding balance of "preferred loans" (multi-family, commercial real estate, construction and commercial business loans) decreased by $47.8 million, or nine percent, to $460.9 million at June 30, 2010 from $508.7 million at June 30, 2009. Outstanding construction loans, net of undisbursed loan funds, declined $3.8 million, or 90 percent, to $400,000 at June 30, 2010 from $4.2 million at June 30, 2009. The percentage of preferred loans to total loans held for investment at June 30, 2010 increased to 44 percent from 42 percent at June 30, 2009. Loan principal payments received in the fourth quarter of fiscal 2010 were $26.5 million, compared to $40.6 million in the same quarter of fiscal 2009.

The average balance of investment securities decreased by $96.8 million, or 73 percent, to $35.8 million in the fourth quarter of fiscal 2010 from $132.6 million in the same quarter of fiscal 2009. The decrease was attributable primarily to the sale of investment securities, principal paydowns of mortgage-backed securities and investment securities that were called by the issuer.  The average yield decreased 139 basis points to 3.07 percent in the fourth quarter of fiscal 2010 from 4.46 percent in the same quarter of fiscal 2009.  The decline in average yield was primarily attributable to the downward repricing of the adjustable rate mortgage-backed securities, principal paydowns of higher yielding mortgage-backed securities and the sale of higher yielding mortgage-backed securities.

In April 2010, the Federal Home Loan Bank ("FHLB") – San Francisco announced a partial redemption of excess capital stock held by member banks. As a result, a total of $1.2 million of excess capital stock was redeemed in May 2010. Also in April 2010, the FHLB – San Francisco declared a cash dividend for the quarter ended March 31, 2010 at an annualized dividend rate of 0.26%. The $21,000 cash dividend was received in the fourth quarter of fiscal 2010. No cash dividend was received in the comparable quarter last year. 

The average balance of excess liquidity, primarily cash with the Federal Reserve Bank of San Francisco, increased substantially to $82.5 million in the fourth quarter of fiscal 2010 from $15.5 million in the same quarter of fiscal 2009. The Bank maintained higher levels of cash and cash equivalents in the fourth quarter of fiscal 2010 in response to the uncertain operating environment. The average yield earned was 0.25% in the fourth quarter of fiscal 2010, much lower than the yield that could have been earned if the excess liquidity were deployed in loans or investment securities.

Average deposits decreased to $940.9 million in the fourth quarter of fiscal 2010 from $963.4 million in the same quarter of fiscal 2009. The average cost of deposits decreased by 72 basis points to 1.32 percent in the fourth quarter of fiscal 2010 from 2.04 percent in the same quarter last year. Transaction account balances (core deposits) increased by $105.6 million, or 30 percent, to $458.0 million at June 30, 2010 from $352.4 million at June 30, 2009, primarily attributable to an increase in interest-bearing checking and savings account balances. Time deposits decreased by $162.0 million, or 25 percent, to $474.9 million at June 30, 2010 compared to $636.9 million at June 30, 2009.

The average balance of borrowings, which consisted of FHLB – San Francisco advances, decreased $191.8 million, or 38 percent, to $309.7 million in the fourth quarter of fiscal 2010 while the average cost of advances increased 50 basis points to 4.19 percent in the fourth quarter of fiscal 2010, compared to an average balance of $501.5 million and an average cost of 3.69 percent in the same quarter of fiscal 2009. The decrease in borrowings was attributable to the scheduled maturities and $102.0 million of prepayments, with a net prepayment gain of $52,000, one of the results of the Bank's efforts to deleverage its balance sheet during fiscal 2010.

The net interest margin during the fourth quarter of fiscal 2010 improved 11 basis points to 3.10 percent from 2.99 percent during the same quarter last year. On a sequential quarter basis, the net interest margin in the fourth quarter of fiscal 2010 increased 25 basis points from 2.85 percent in the third quarter of fiscal 2010. The increase in the net interest margin was primarily attributable to the decrease in deposit costs, particularly time deposit costs, partly offset by a lower average yield on loans and investment securities, a higher level of excess liquidity invested at a nominal yield and a higher average cost of borrowings.  

During the fourth quarter of fiscal 2010, the Company did not record a provision for loan losses, as compared to the $12.86 million provision for loan losses recorded during the same period of fiscal 2009 and the $2.32 million provision recorded in the third quarter of fiscal 2010 (sequential quarter). Improving asset quality trends accelerated during the fourth quarter of fiscal 2010 resulting in a significantly lower balance of non-performing and 30 to 89 days delinquent loans.

Non-performing assets, with underlying collateral primarily located in Southern California, decreased to $73.5 million, or 5.25 percent of total assets, at June 30, 2010, compared to $88.3 million, or 5.59 percent of total assets, at June 30, 2009 and $91.4 million, or 6.50 percent of total assets, at March 31, 2010 (sequential quarter). The non-performing assets at June 30, 2010 were primarily comprised of 160 single-family loans ($48.8 million); six multi-family loans ($6.5 million); five commercial real estate loans ($1.7 million); one construction loan ($350,000); two commercial business loans ($567,000); one consumer loan ($1,000); six single-family loans repurchased from, or unable to sell to investors ($833,000); and real estate owned was comprised of 49 single-family properties ($13.6 million), one multi-family property ($193,000), one commercial real estate property ($424,000), one developed lot ($399,000) and 25 undeveloped lots acquired in the settlement of loans ($78,000). Net charge-offs for the quarter ended June 30, 2010 were $7.35 million or 2.49 percent (annualized) of average loans receivable, compared to $9.60 million or 2.81 percent (annualized) of average loans receivable for the quarter ended June 30, 2009 and $6.84 million or 2.35 percent (annualized) of average loans receivable in the quarter ended March 31, 2010 (sequential quarter).

Classified assets at June 30, 2010 were $95.6 million, comprised of $20.5 million in the special mention category, $60.4 million in the substandard category and $14.7 million in real estate owned. Classified assets at June 30, 2009 were $116.1 million, consisting of $24.3 million in the special mention category, $75.4 million in the substandard category and $16.4 million in real estate owned. 

For the quarter ended June 30, 2010, 21 loans for $11.0 million were modified from their original terms, were re-underwritten and were identified in our asset quality reports as Restructured Loans. As of June 30, 2010, the outstanding balance of restructured loans was $60.0 million: 71 loans are classified as pass, are not included in the classified asset totals described earlier and remain on accrual status ($32.3 million); six loans are classified as special mention and remain on accrual status ($4.0 million); 63 loans are classified as substandard on non-accrual status ($23.7 million); and two loans are classified as loss, fully reserved and on non-accrual status.  As of June 30, 2010, 81 percent, or $48.7 million of the restructured loans have a current payment status.

The allowance for loan losses was $43.5 million at June 30, 2010, or 4.14 percent of gross loans held for investment, compared to $45.4 million, or 3.75 percent of gross loans held for investment at June 30, 2009. The allowance for loan losses at June 30, 2010 includes $17.8 million of specific loan loss reserves and $25.7 million of general loan loss reserves, compared to $25.3 million of specific loan loss reserves and $20.1 million of general loan loss reserves at June 30, 2009. Management believes that, based on currently available information, the allowance for loan losses is sufficient to absorb potential losses inherent in loans held for investment.

Non-interest income decreased to $5.69 million in the fourth quarter of fiscal 2010 compared to $9.02 million in the same period of fiscal 2009, primarily the result of a $3.75 million decrease in the gain on sale of loans.

The gain on sale of loans decreased to $4.53 million for the quarter ended June 30, 2010 from $8.28 million in the comparable quarter last year, reflecting a lower average loan sale margin and lower loan sale volume. The average loan sale margin for mortgage banking was 89 basis points for the quarter ended June 30, 2010, compared to 133 basis points in the comparable quarter last year. The gain on sale of loans includes a favorable fair-value adjustment on derivative financial instruments (commitments to extend credit, commitments to sell loans, commitments to sell mortgage-backed securities and loans held for sale) pursuant to Accounting Standards Codification 815 and 825, a gain of $2.04 million, in the fourth quarter of fiscal 2010 as compared to a favorable fair-value adjustment, a gain of $1.09 million, in the same period last year. The gain on sale of loans for the fourth quarter of fiscal 2010 was partially reduced by a $2.05 million recourse provision on loans sold that are subject to repurchase, compared to a $735,000 recourse provision in the comparable quarter last year. As of June 30, 2010, the recourse reserve for loans sold that are subject to repurchase was $6.3 million, compared to $3.4 million at June 30, 2009 and $6.1 million at March 31, 2010 (sequential quarter). The mortgage banking environment has shown improvement as a result of relatively low mortgage interest rates but remains volatile.

The volume of loans originated for sale was $485.0 million in the fourth quarter of fiscal 2010, a decrease of 21 percent from $616.6 million for the same period last year. The loan origination volumes were the result of favorable liquidity in the secondary mortgage markets particularly in FHA/VA, Fannie Mae and Freddie Mac loan products and relatively low mortgage interest rates. Total loans sold for the quarter ended June 30, 2010 were $474.7 million, a decrease of 19 percent from $587.9 million for the same quarter last year. Total loan originations (including loans originated for investment and loans originated for sale) were $486.8 million in the fourth quarter of fiscal 2010, a decrease of 22 percent from $625.2 million in the same quarter of fiscal 2009.

The net loss on sale and operations of real estate owned acquired in the settlement of loans improved $400,000 to a net loss of $(231,000) in the fourth quarter of fiscal 2010 from a net loss of $(631,000) in the comparable period last year. Forty real estate owned properties were sold for a net gain of $650,000 in the quarter ended June 30, 2010 compared to 47 real estate owned properties sold for a net loss of $(18,000) in the same quarter last year. During the fourth quarter of fiscal 2010, 42 real estate owned properties were acquired in the settlement of loans, compared to 54 real estate owned properties acquired in the settlement of loans in the comparable period last year. As of June 30, 2010, the real estate owned balance was $14.7 million (77 properties), compared to $16.4 million (80 properties) at June 30, 2009.

Operating expense increased to $10.47 million in the fourth quarter of fiscal 2010 from $7.43 million in the same quarter last year, primarily as a result of an increase in compensation, partly offset by a decrease in the FDIC insurance premium. Additionally, in the fourth quarter of fiscal 2009, the Company recorded a $2.63 million non-recurring and non-taxable expense recovery attributable to the implementation of the Employee Stock Ownership Plan voluntary self-correction approved by the Internal Revenue Service; and also recorded a $734,000 FDIC special assessment expense, neither of which occurred in the fourth quarter of fiscal 2010.    

The Company's efficiency ratio increased to 65 percent in the fourth quarter of fiscal 2010 from 36 percent in the fourth quarter of fiscal 2009. The increase was the result of a decrease in net interest income (before provision for loan losses), a decrease in non-interest income and an increase in non-interest expense.

The Company's tax provision was $2.32 million for the fourth quarter of fiscal 2010 in comparison to a tax benefit of $(1.02) million in the same quarter last year. The Company believes that the tax provision recorded in the fourth quarter of fiscal 2010 reflects its current income tax obligations.

The Bank currently operates 14 retail/business banking offices in Riverside County and San Bernardino County (Inland Empire). Provident Bank Mortgage operates wholesale loan production offices in Pleasanton and Rancho Cucamonga, California and retail loan production offices in City of Industry, Escondido, Glendora, Rancho Cucamonga and Riverside (2), California.

The Company will host a conference call for institutional investors and bank analysts on Friday, July 30, 2010 at 9:00 a.m. (Pacific Time) to discuss its financial results. The conference call can be accessed by dialing (800) 230-1096 and requesting the Provident Financial Holdings Earnings Release Conference Call. An audio replay of the conference call will be available through Friday, August 6, 2010 by dialing (800) 475-6701 and referencing access code number 165776.

For more financial information about the Company please visit the website at www.myprovident.com and click on the "Investor Relations" section.

Safe-Harbor Statement

This press release and the conference call noted above contain statements that the Company believes are "forward-looking statements." These statements relate to the Company's financial condition, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make.  Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially include, but are not limited to the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; the accuracy of the results of our stress test; results of examinations of us by the Office of Thrift Supervision or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; further increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described detailed in the Company's reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2009.