Provident Financial Holdings Reports Fourth Quarter Fiscal 2011 Earnings

Net Income for Fiscal 2011 Increases by $12.1 Million

Non-Performing Assets Decline by 38%

Record Year in Loans Originated for Sale ($2.1 Billion)

RIVERSIDE, Calif., July 28, 2011 (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, 2011.

For the quarter ended June 30, 2011, the Company reported net income of $2.10 million, or $0.18 per diluted share (on 11.48 million average shares outstanding), compared to net income of $3.20 million, or $0.28 per diluted share (on 11.35 million average shares outstanding), in the comparable period a year ago. The decrease in net income for the fourth quarter of fiscal 2011 was primarily attributable to a decrease in net interest income (before provision for loan losses), and increases in the provision for loan losses and compensation expenses, partly offset by an increase in the gain on sale of loans and an improvement in real estate owned operations as compared to the same period last year.

"We are very pleased with our fiscal 2011 financial results and believe there is much opportunity to grow our community banking business in the markets we serve. Of course, stubbornly poor general economic conditions must improve for us to fully capitalize on those opportunities," said Craig G. Blunden, Chairman and Chief Executive Officer of the Company. "Our mortgage banking results were greatly improved in fiscal 2011 and mortgage rates remain very low by historical standards suggesting a favorable mortgage banking outlook as we embark on a new fiscal year."

As of June 30, 2011 the Bank exceeded all regulatory capital requirements with Tangible Capital, Core Capital, Total Risk-Based Capital and Tier 1 Risk-Based Capital ratios of 10.53 percent, 10.53 percent, 17.56 percent and 16.30 percent, respectively. As of June 30, 2010 these ratios were 8.82 percent, 8.82 percent, 13.17 percent and 11.91 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).

Return on average assets for the fourth quarter of fiscal 2011 decreased to 0.63 percent from 0.92 percent for the same period of fiscal 2010. Return on average stockholders' equity for the fourth quarter of fiscal 2011 also decreased to 5.99 percent from 10.16 percent for the comparable period of fiscal 2010.

On a sequential quarter basis, the fourth quarter net income reflects a 10 percent decrease from net income of $2.34 million in the third quarter of fiscal 2011. The decrease in net income in the current quarter was primarily attributable to a decrease in the gain on sale of loans, an increase in incentive compensation expenses and the $1.08 million net gain on sale of the retail banking facility in Temecula, California in the third quarter of fiscal 2011 (not replicated in the fourth quarter of fiscal 2011), partly offset by a decrease in the provision for loan losses. Diluted earnings per share for the fourth quarter of fiscal 2011 decreased to $0.18 per share from $0.20 per share in the third quarter of fiscal 2011. Return on average assets decreased slightly to 0.63 percent for the fourth quarter of fiscal 2011 from 0.69 percent in the third quarter of fiscal 2011; and return on average stockholders' equity for the fourth quarter of fiscal 2011 was 5.99 percent, compared to 6.79 percent for the third quarter of fiscal 2011.

For the fiscal year ended June 30, 2011, net income improved significantly to $13.22 million from $1.12 million for the prior fiscal year; and the diluted earnings per share for fiscal 2011 improved to $1.16 from $0.13 for the prior fiscal year. The return on average assets for the fiscal year ended June 30, 2011 improved to 0.97 percent from 0.08 percent for fiscal 2010. The return on average stockholders' equity for the fiscal year ended June 30, 2011 also improved to 9.74 percent from 0.94 percent for the last fiscal year.                     

Net interest income before the provision for loan losses decreased $1.24 million, or 12 percent, to $9.06 million in the fourth quarter of fiscal 2011 from $10.30 million for the same quarter in fiscal 2010, due to the combination of decreases in average earning assets and the net interest margin. Non-interest income increased $1.57 million, or 28 percent, to $7.26 million in the fourth quarter of fiscal 2011 from $5.69 million in the same quarter of fiscal 2010. Non-interest expenses increased $1.34 million, or 13 percent, to $11.81 million in the fourth quarter of fiscal 2011 from $10.47 million in the same quarter in fiscal 2010.  The increase in both non-interest income and non-interest expenses relate primarily to mortgage banking operations: higher gain on sale of loans ($5.74 million versus $4.53 million) and higher mortgage banking compensation expense ($4.14 million versus $3.20 million), primarily due to higher incentive compensation expense.

The average balance of loans outstanding decreased by $121.5 million, or 10 percent, to $1.06 billion in the fourth quarter of fiscal 2011 from $1.18 billion in the same quarter of fiscal 2010. The managed decline in the loan balance was consistent with the Company's desire to reduce its credit risk profile in response to current economic conditions and providing sufficient balance sheet capacity for its mortgage banking operations.  The average yield on loans receivable decreased by 51 basis points to 5.01 percent in the fourth quarter of fiscal 2011 from an average yield of 5.52 percent in the same quarter of fiscal 2010. 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 repricing to lower interest rates. Loans originated for investment in the fourth quarter of fiscal 2011 totaled $4.6 million (including a $481,000 commercial real estate loan purchased for investment), consisting primarily of single-family and multi-family loans. The outstanding balance of "preferred loans" (multi-family, commercial real estate, construction and commercial business loans) decreased by $47.9 million, or 10 percent, to $413.0 million at June 30, 2011 from $460.9 million at June 30, 2010. There were no construction loans outstanding at June 30, 2011. The percentage of preferred loans to total loans held for investment at June 30, 2011 increased to 45 percent from 44 percent at June 30, 2010. Loan principal payments received in the fourth quarter of fiscal 2011 were $29.3 million, compared to $21.2 million in the same quarter of fiscal 2010.  In addition, real estate acquired in the settlement of loans (real estate owned) in the fourth quarter of fiscal 2011 totaled $11.2 million, compared to $14.0 million in the same quarter of fiscal 2010.

The average balance of investment securities decreased by $9.1 million, or 25 percent, to $26.7 million in the fourth quarter of fiscal 2011 from $35.8 million in the same quarter of fiscal 2010. The decrease was attributable primarily to $3.3 million of agency debt securities, which were called by the issuer in the third quarter of fiscal 2011, and $5.5 million of principal payments on mortgage-backed securities in fiscal 2011.  The average yield on investment securities decreased 75 basis points to 2.32 percent in the fourth quarter of fiscal 2011 from 3.07 percent in the same quarter of fiscal 2010.  The decline in average yield was primarily attributable to the downward repricing of adjustable rate mortgage-backed securities.

In April 2011, the Federal Home Loan Bank ("FHLB") – San Francisco announced a partial redemption of excess capital stock held by member banks and a cash dividend. As a result, a total of $1.2 million of excess capital stock was redeemed and a $22,000 cash dividend was received by the Bank in the fourth quarter of fiscal 2011. 

The average balance of excess liquidity, primarily cash with the Federal Reserve Bank of San Francisco, increased to $166.5 million in the fourth quarter of fiscal 2011 from $82.5 million in the same quarter of fiscal 2010. The Bank maintained high levels of cash and cash equivalents in the fourth quarter of fiscal 2011 in response to the uncertain operating environment and to fund its mortgage banking operations. The average yield earned on interest-earning deposits was 0.25% in the fourth quarter of fiscal 2011, much lower than the yield that could have been earned if the excess liquidity was deployed in loans or investment securities.

Average deposits were $948.2 million in the fourth quarter of fiscal 2011, a slight increase from $940.9 million in the same quarter of fiscal 2010. The average cost of deposits decreased by 30 basis points to 1.02 percent in the fourth quarter of fiscal 2011 from 1.32 percent in the same quarter last year, primarily due to higher costing time deposits repricing to lower interest rates and a reduction in rates paid on transaction account balances ("core deposits"). Core deposits increased by $14.3 million, or three percent, to $472.3 million at June 30, 2011 from $458.0 million at June 30, 2010, consistent with the Bank's strategy to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts. Time deposits decreased by $1.4 million to $473.5 million at June 30, 2011 compared to $474.9 million at June 30, 2010. The decline in time deposits includes $7.5 million of brokered deposits which matured in the fourth quarter of fiscal 2011, partly offset by an increase in retail time deposits. As of June 30, 2011, the remaining outstanding balance of brokered deposits was $12.1 million. 

The average balance of borrowings, which consisted of FHLB – San Francisco advances, decreased $91.9 million, or 30 percent, to $217.8 million in the fourth quarter of fiscal 2011 and the average cost of advances decreased 34 basis points to 3.85 percent in the fourth quarter of fiscal 2011, compared to an average balance of $309.7 million and an average cost of 4.19 percent in the same quarter of fiscal 2010. The decrease in borrowings was primarily attributable to scheduled maturities.

The net interest margin during the fourth quarter of fiscal 2011 decreased 27 basis points to 2.83 percent from 3.10 percent in the same quarter last year. The decrease was primarily due to the declining yield of interest-earning assets outpacing the decline in the average cost of liabilities. The declining yield of interest-earning assets was attributable to the downward repricing of loans and investment securities, a lower average balance of loans which generally have higher yields and a higher level of excess liquidity invested at a nominal yield. The decline in the average cost of liabilities was primarily due to the downward repricing of deposits and a decline in the average cost of borrowings attributable primarily to the scheduled maturities during the period.

During the fourth quarter of fiscal 2011, the Company recorded a provision for loan losses of $847,000, compared to no provision for loan losses during the same period of fiscal 2010 and the $2.69 million provision recorded in the third quarter of fiscal 2011 (sequential quarter). The lower provision for loan losses recorded in the fourth quarter of fiscal 2011, in comparison to the third quarter of fiscal 2011 (sequential quarter), was primarily a result of the greatly improved asset quality from the sequential third quarter of fiscal 2011.

Non-performing assets, with underlying collateral primarily located in Southern California, decreased to $45.5 million, or 3.46 percent of total assets, at June 30, 2011, compared to $57.3 million, or 4.28 percent of total assets, at March 31, 2011 and $73.5 million, or 5.25 percent of total assets, at June 30, 2010. Non-performing loans at June 30, 2011 were primarily comprised of 116 single-family loans ($31.8 million); three commercial real estate loans ($2.2 million); two multi-family loans ($2.0 million); one other mortgage loan ($972,000) and four commercial business loans ($143,000).  Real estate owned acquired in the settlement of loans at June 30, 2011 was comprised of 26 single-family properties ($6.7 million), one multi-family property ($1.0 million), one partially constructed commercial real estate property ($102,000), one developed lot ($399,000) and 25 undeveloped lots ($69,000). Net charge-offs for the quarter ended June 30, 2011 were $4.84 million or 1.83 percent (annualized) of average loans receivable, compared to $7.35 million or 2.49 percent (annualized) of average loans receivable for the quarter ended June 30, 2010 and $5.14 million or 1.94 percent (annualized) of average loans receivable for the quarter ended March 31, 2011 (sequential quarter).

Classified assets at June 30, 2011 were $66.6 million, comprised of $12.9 million in the special mention category, $45.4 million in the substandard category and $8.3 million in real estate owned. 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. 

For the quarter ended June 30, 2011, thirteen loans for $5.4 million were re-underwritten and modified from their original terms, and were identified as restructured loans. As of June 30, 2011, the outstanding balance of restructured loans was $39.2 million ($20.8 million are on accrual status): 34 loans are classified as pass, are not included in the classified asset totals described earlier and remain on accrual status ($15.3 million); five loans are classified as special mention and remain on accrual status ($4.6 million); 53 loans are classified as substandard ($19.3 million total, with 51 of the 53 loans or $18.4 million on non-accrual status); and one loan is classified as a loss, fully reserved and on non-accrual status.  As of June 30, 2011, $31.0 million, or 79 percent, of the restructured loans are current with respect to their payment status.

The allowance for loan losses was $30.5 million at June 30, 2011, or 3.34 percent of gross loans held for investment, compared to $43.5 million, or 4.14 percent of gross loans held for investment at June 30, 2010. The allowance for loan losses at June 30, 2011 includes $14.1 million of specific loan loss reserves and $16.4 million of general loan loss reserves, compared to $17.8 million of specific loan loss reserves and $25.7 million of general loan loss reserves at June 30, 2010. 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 as of June 30, 2011.

Non-interest income increased to $7.26 million in the fourth quarter of fiscal 2011 compared to $5.69 million in the same period of fiscal 2010, primarily the result of a $1.20 million increase in the gain on sale of loans and an improvement in real estate owned operations to a net gain of $257,000 in comparison to a net loss of $(231,000) in the comparable prior period. On a sequential quarter basis, non-interest income declined primarily due to the $1.08 million net gain on sale of the retail banking facility in Temecula, California, not replicated in the current quarter.

The gain on sale of loans increased to $5.73 million for the quarter ended June 30, 2011 from $4.53 million in the comparable quarter last year, reflecting the net impact of a higher average loan sale margin and a lower loan sale volume. The average loan sale margin for mortgage banking was 136 basis points for the quarter ended June 30, 2011, compared to 89 basis points in the comparable quarter last year. The gain on sale of loans includes a favorable fair-value adjustment on loans held for sale and derivative financial instruments (commitments to extend credit, commitments to sell loans, commitments to sell mortgage-backed securities, and put option contracts) that amounted to a net gain of $2.85 million in the fourth quarter of fiscal 2011, as compared to a favorable fair-value adjustment that amounted to a net gain of $2.04 million in the same period last year. The gain on sale of loans for the fourth quarter of fiscal 2011 includes a $402,000 recourse provision for loans sold that are subject to repurchase, compared to a $2.05 million recourse provision in the comparable quarter last year. As of June 30, 2011, the recourse reserve for loans sold that are subject to repurchase was $4.2 million, compared to $6.3 million at June 30, 2010.

In the fourth quarter of fiscal 2011, $449.6 million of loans were originated for sale, a decrease of seven percent from $485.0 million for the same period last year. The loan origination volume remains favorable from a historical perspective as a result of respectable 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, 2011 were $406.5 million, a decrease of 14 percent from $474.7 million for the same quarter last year. Total loan originations (including loans originated and purchased for investment and loans originated for sale) were $454.2 million in the fourth quarter of fiscal 2011, a decrease of seven percent from $486.8 million in the same quarter of fiscal 2010.

The sale and operations of real estate owned acquired in the settlement of loans resulted in a net gain of $257,000 in the fourth quarter of fiscal 2011, as compared to a net loss of $(231,000) in the comparable period last year. Thirty-five real estate owned properties were sold in the quarter ended June 30, 2011 compared to 40 real estate owned properties sold in the same quarter last year. During the fourth quarter of fiscal 2011, twenty-five real estate owned properties were acquired in the settlement of loans, compared to 42 real estate owned properties acquired in the settlement of loans in the comparable period last year. As of June 30, 2011, the real estate owned balance was $8.3 million (54 properties), compared to $14.7 million (77 properties) at June 30, 2010.

Non-interest expenses increased to $11.81 million in the fourth quarter of fiscal 2011 from $10.47 million in the same quarter last year, primarily as a result of an increase in compensation expenses related to mortgage banking operations ($4.14 million versus $3.20 million), primarily due to higher incentive compensation expense.    

The Company's efficiency ratio increased to 72 percent in the fourth quarter of fiscal 2011 from 65 percent in the fourth quarter of fiscal 2010. The increase was the result of an increase in non-interest expense and a decrease in net interest income, partly offset by an increase in non-interest income.

The Company's tax provision was $1.56 million for the fourth quarter of fiscal 2011, down $757,000 from $2.32 million in the same quarter last year. The effective income tax rate for the quarter ended June 30, 2011 was 42.6 percent as compared to 42.0 percent in the same quarter last year. The increase in the effective income tax rate was primarily the result of a higher percentage of permanent tax differences relative to income before taxes. The Company believes that the tax provision recorded in the fourth quarter of fiscal 2011 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, Hermosa Beach, Pleasanton, Rancho Cucamonga and Riverside (3), California.

The Company will host a conference call for institutional investors and bank analysts on Friday, July 29, 2011 at 9:00 a.m. (Pacific) to discuss its financial results. The conference call can be accessed by dialing 1-888-428-4480 and requesting the Provident Financial Holdings Earnings Release Conference Call. An audio replay of the conference call will be available through Friday, August 5, 2011 by dialing 1-800-475-6701 and referencing access code number 211293.

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 tothe 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; results of examinations of us by the Federal Reserve Board and our bank subsidiary by the Office of Comptroller of the Currency 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, 2010.