Provident Financial Holdings Inc. Reports Third Quarter Earnings

    Business Editors/Financial Analysts

    RIVERSIDE, Calif.--(BUSINESS WIRE)--April 21, 2005--

Third Quarter Net Income Increases 11 Percent Third Quarter EPS of $0.64, Up 12 Percent Net Interest Margin Expands (Sequential Quarter)
    Provident Financial Holdings Inc. ("Company")(Nasdaq:PROV), the holding company for Provident Savings Bank F.S.B. ("Bank"), today announced strong earnings for the third quarter of its fiscal year ending June 30, 2005.
    For the quarter ended March 31, 2005, the Company reported net income of $4.58 million, or 64 cents per diluted share (on 7.12 million weighted-average shares outstanding), compared to net income of $4.11 million, or 57 cents per diluted share (on 7.21 million weighted-average shares outstanding), in the comparable period a year ago. The decrease in weighted-average shares outstanding reflects the activity in the Company's stock buyback program.
    "I am pleased that we continue to improve on the fundamentals of our business. We continue to generate strong internal growth in both loans and deposits, our net interest margin remains steady in the face of rising interest rates and our credit quality is outstanding," said Craig G. Blunden, chairman, president and chief executive officer of the Company. "Moreover, mortgage banking volume remains strong despite competitive pressures."
    Return on average assets for the third quarter of fiscal 2005 was 1.20 percent, compared to 1.25 percent for the same period of fiscal 2004. Return on average stockholders' equity for the third quarter of fiscal 2005 was 15.48 percent, compared to 15.33 percent for the comparable period of fiscal 2004.
    On a sequential quarter basis, net income for the third quarter of fiscal 2005 decreased by $454,000 to $4.58 million, or 9 percent, from $5.03 million in the second quarter of fiscal 2005; and diluted earnings per share decreased 7 cents to 64 cents, or 10 percent, from 71 cents in the second quarter of fiscal 2005. Return on average assets decreased 17 basis points to 1.20 percent for the third quarter of fiscal 2005 from 1.37 percent in the second quarter of fiscal 2005, and return on average equity decreased to 15.48 percent for the third quarter of fiscal 2005 from 17.60 percent in the second quarter of fiscal 2005.
    For the nine months ended March 31, 2005, net income was $13.87 million, an increase of 29 percent from net income of $10.79 million for the comparable period ended March 31, 2004; and diluted earnings per share for the nine months ended March 31, 2005, increased $0.46, or 31 percent, to $1.95 from $1.49 for the comparable period last year. Return on average assets for the nine months ended March 31, 2005, was 1.27 percent, compared to 1.13 percent for the nine-month period a year earlier. Return on average stockholders' equity for the nine months ended March 31, 2005, was 16.16 percent, compared to 13.65 percent for the nine-month period a year earlier.
    Net interest income before provision for loan losses increased $1.39 million, or 14 percent, to $11.03 million in the third quarter of fiscal 2005 from $9.64 million for the same period in fiscal 2004. Non-interest income increased $464,000, or 9 percent, to $5.37 million in the third quarter of fiscal 2005 from $4.91 million in the comparable period of fiscal 2004. Non-interest expense increased $947,000, or 14 percent, to $7.95 million in the third quarter of fiscal 2005 from $7.00 million in the comparable period in fiscal 2004.
    The average balance of loans outstanding increased by $242.2 million to $1.19 billion in the third quarter of fiscal 2005 from $945.3 million in the same quarter of fiscal 2004, while the average yield decreased by 2 basis points to 5.75 percent in the third quarter of fiscal 2005 from an average yield of 5.77 percent in the same quarter of fiscal 2004. Total portfolio loan originations (including purchased loans) in the third quarter of fiscal 2005 were $177.3 million, which consisted primarily of single-family, multi-family, commercial real estate and construction loans. This compares to total portfolio loan originations (including purchased loans) of $133.0 million in the third quarter of fiscal 2004. The outstanding balance of "preferred loans" (multi-family, commercial real estate, construction and commercial business loans) increased by $77.8 million, or 34 percent, to $307.4 million at March 31, 2005, from $229.6 million at March 31, 2004. The ratio of preferred loans to total portfolio loans increased to 28 percent at March 31, 2005, from 26 percent at March 31, 2004. Loan prepayments in the third quarter of fiscal 2005 were $101.2 million, compared to $112.2 million in the same quarter of fiscal 2004.
    The average balance of deposits increased by $103.4 million to $931.7 million and the average cost of deposits increased by 22 basis points to 1.80 percent in the third quarter of fiscal 2005, compared to an average balance of $828.3 million and an average cost of 1.58 percent in the same quarter last year. Transaction account balances (core deposits) decreased by $45.2 million, or 8 percent, to $518.4 million at March 31, 2005, from $563.6 million at March 31, 2004. The decrease is attributable to a decline in money market accounts partially offset by an increase in checking accounts. Time deposits increased by $143.6 million at March 31, 2005, to $425.1 million as compared to $281.5 million at March 31, 2004. The increase is primarily attributable to the Company's successful time deposit marketing campaigns designed to lock-in fixed rate deposits during a rising interest rate environment.
    The average balance of FHLB advances increased by $112.9 million to $452.1 million, and the average cost of advances increased 13 basis points to 3.90 percent in the third quarter of fiscal 2005, compared to an average balance of $339.2 million and an average cost of 3.77 percent in the same quarter of fiscal 2004. The increase in the average cost of FHLB advances was primarily attributable to recent interest rate increases.
    The net interest margin during the third quarter of fiscal 2005 decreased 11 basis points to 2.98 percent, compared to 3.09 percent during the same quarter last year. For the nine months ended March 31, 2005, the net interest margin remained unchanged at 2.98 percent, compared to the same period last year. On a sequential quarter basis, the net interest margin in the third quarter of fiscal 2005 increased by 5 basis points from 2.93 percent in the second quarter of fiscal 2005.
    During the third quarter of fiscal 2005, the provision for loan losses was $404,000 compared to $420,000 during the same period of fiscal 2004. The decrease in the provision was attributable to specific valuation allowance recoveries on five classified commercial business loans, partially offset by new provisions for loan losses as a result of loan portfolio growth.
    The increase in non-interest income in the third quarter of fiscal 2005 compared to the same period of fiscal 2004 was primarily the result of an increase in the gain on sale of loans. The gain on sale of loans increased by $583,000, or 16 percent, to $4.19 million, which was primarily attributable to a higher volume of loans originated for sale. The mortgage banking loan sale margin was 115 basis points in the third quarter of fiscal 2005, down from 117 basis points in the prior year. On a sequential quarter basis, the mortgage banking loan sale margin in the third quarter of fiscal 2005 decreased by 36 basis points from 151 basis points in the prior quarter; largely the result of the fair value adjustment required by Statement of Financial Accounting Standards ("SFAS") No. 133, the product mix and competitive pricing pressures. The volume of loans originated for sale remained strong: $333.5 million in the third quarter of fiscal 2005 as compared to $252.1 million during the same period last year, the result of relatively low mortgage interest rates and continued strength in the Southern California real estate market. Total loan originations (including purchased loans) were $510.9 million in the third quarter of fiscal 2005, up from $385.1 million in the same quarter of fiscal 2004.
    In the third quarter of fiscal 2005, the fair-value adjustment of derivative financial instruments pursuant to SFAS No. 133 on the consolidated statement of operations was an unfavorable $436,000 compared to an unfavorable adjustment of $379,000 in the same period last year. The fair-value adjustment for SFAS No. 133 is derived from changes in the market value of commitments to extend credit on loans to be held for sale, forward loan sale agreements and option contracts. The SFAS No. 133 adjustment is relatively volatile and results in timing differences in the recognition of income, which may have an adverse impact on future earnings.
    Non-interest expense for the third quarter of fiscal 2005 increased $947,000, or 14 percent, to $7.95 million from $7.00 million in the same quarter in fiscal 2004. The increase in non-interest expense was primarily the result of an increase in variable expenses related to loan production volume in the community banking business and the mortgage banking business. Although non-interest expense increased for the third quarter of fiscal 2005, the Company's efficiency ratio remained unchanged at 48 percent as compared to the third quarter of fiscal 2004. For the nine months ended March 31, 2005, the efficiency ratio improved to 48 percent from 52 percent in the same period in fiscal 2004.
    Non-performing assets decreased to $584,000, or 0.04 percent of total assets, at March 31, 2005, compared to $1.5 million, or 0.11 percent of total assets, at March 31, 2004. The allowance for loan losses was $8.9 million at March 31, 2005, or 0.80 percent of gross loans held for investment, compared to $7.9 million, or 0.89 percent of gross loans held for investment, at March 31, 2004.
    The effective income tax rate for the third quarter of fiscal 2005 was 43.1 percent as compared to 42.3 percent for the same quarter last year. The Company believes that the effective income tax rate applied in the third quarter of fiscal 2005 reflects its current income tax obligations and anticipates the effective income tax rate for the remainder of the fiscal year to be approximately 43.2 percent.
    The Company repurchased 28,470 shares of its common stock during the quarter ended March 31, 2005, at an average cost of $27.94 per share. As of March 31, 2005, the Company has repurchased 39 percent of the shares authorized by the June 2004 Stock Repurchase Program, leaving 216,115 shares available for future repurchase activity.
    The Bank currently operates 12 retail/business banking offices in Riverside County and San Bernardino County (Inland Empire) along with 11 Provident Bank Mortgage loan production offices located throughout Southern California.
    The Company will host a conference call for institutional investors and bank analysts on Friday, April 22, 2005, at 10 a.m. (Pacific Time Zone) to discuss its financial results. Access to the conference call can be gained by dialing 800-533-5275 and requesting the Provident Financial Holdings Earnings Release Conference Call. An audio replay of the conference call will be available through Friday, April 29, 2005, by dialing 800-475-6701 and referencing access code number 777882.
    For more financial information about the Company please visit the Web site at www.myprovident.com and click on the Investor Relations section.

    Safe Harbor Statement

    Certain matters in this news release and the conference call noted above may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to, among others, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, 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 as a result of a wide range of factors including, but not limited to, the general business environment, interest rates, the California real estate market, competitive conditions between banks and non-bank financial services providers, regulatory changes, and other risks detailed in the 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, 2004.

PROVIDENT FINANCIAL HOLDINGS INC. Consolidated Statements of Financial Condition (Unaudited - In Thousands)

March 31, June 30, 2005 2004 Assets Cash and cash equivalents $25,903 $38,349 Investment securities - held to maturity (fair value $53,987 and $61,250, respectively) 55,227 62,200 Investment securities - available for sale at fair value 193,621 190,380 Loans held for investment, net of allowance for loan losses of $8,879 and $7,614, respectively 1,098,414 862,535 Loans held for sale, at lower of cost or market 7,260 20,127 Receivable from sale of loans 173,981 86,480 Accrued interest receivable 5,689 4,961 Real estate held for investment, net 9,975 10,176 Federal Home Loan Bank stock 36,229 27,883 Premises and equipment, net 7,570 7,912 Prepaid expenses and other assets 8,813 8,032

Total assets $1,622,682 $1,319,035

Liabilities and Stockholders' Equity Liabilities: Non-interest bearing deposits $49,635 $41,551 Interest bearing deposits 893,845 809,488 Total deposits 943,480 851,039

Borrowings 530,353 324,877 Accounts payable, accrued interest and other liabilities 29,321 33,137 Total liabilities 1,503,154 1,209,053

Stockholders' equity: Preferred stock, $.01 par value; authorized 2,000,000 shares; none issued and outstanding - - Common stock, $.01 par value; authorized 15,000,000 shares; issued 11,943,215 and 11,898,565 shares, respectively; outstanding 6,993,590 and 7,091,719 shares, respectively. 119 119 Additional paid-in capital 58,695 57,186 Retained earnings 122,528 111,329 Treasury stock at cost (4,949,625 and 4,806,846 shares, respectively) (60,222) (56,753) Unearned stock compensation (1,426) (1,889) Accumulated other comprehensive loss, net of tax (166) (10)

Total stockholders' equity 119,528 109,982

Total liabilities and stockholders' equity $1,622,682 $1,319,035

PROVIDENT FINANCIAL HOLDINGS INC. Consolidated Statement of Operations (Unaudited - In Thousands, Except Earnings Per Share)

Quarter Ended Nine Months Ended March 31, March 31, 2005 2004 2005 2004 Interest income: Loans receivable, net $17,057 $13,643 $47,506 $39,449 Investment securities 2,089 2,204 6,293 6,065 Federal Home Loan Bank stock 367 237 1,040 670 Interest earning deposits 7 1 18 11 Total interest income 19,520 16,085 54,857 46,195

Interest expense: Checking and money market deposits 290 335 879 1,074 Savings deposits 1,076 1,358 3,483 3,989 Time deposits 2,777 1,562 7,264 5,001 Borrowings 4,346 3,188 11,873 9,318 Total interest expense 8,489 6,443 23,499 19,382

Net interest income 11,031 9,642 31,358 26,813 Provision for loan losses 404 420 1,306 689 Net interest income after provision for loan losses 10,627 9,222 30,052 26,124

Non-interest income: Loan servicing and other fees 326 533 1,175 1,599 Gain on sale of loans, net 4,187 3,604 13,648 9,497 Real estate operations, net 101 19 372 222 Deposit account fees 455 507 1,330 1,491 Gain on sale of investment securities - - 384 - Other 301 243 1,051 938 Total non-interest income 5,370 4,906 17,960 13,747

Non-interest expense: Salaries and employee benefits 5,289 4,781 15,680 14,028 Premises and occupancy 661 607 1,965 1,830 Equipment 364 430 1,155 1,279 Professional expenses 270 217 775 604 Sales and marketing expenses 227 170 678 707 Other 1,136 795 3,343 2,733 Total non-interest expense 7,947 7,000 23,596 21,181

Income before taxes 8,050 7,128 24,416 18,690 Provision for income taxes 3,470 3,014 10,547 7,904 Net income $4,580 $4,114 $13,869 $10,786

Basic earnings per share $0.69 $0.61 $2.10 $1.60 Diluted earnings per share $0.64 $0.57 $1.95 $1.49 Cash dividends per share $0.14 $0.10 $0.38 $0.23

PROVIDENT FINANCIAL HOLDINGS INC. Consolidated Statement of Operations - Sequential Quarter (Dollars in Thousands, Except Earnings Per Share) (Unaudited)

Quarter Ended March 31, Dec. 31, 2005 2004 Interest income: Loans receivable, net $17,057 $15,766 Investment securities 2,089 2,171 Federal Home Loan Bank stock 367 303 Interest-earning deposits 7 6 Total interest income 19,520 18,246

Interest expense: Checking and money market deposits 290 294 Savings deposits 1,076 1,172 Time deposits 2,777 2,483 Borrowings 4,346 3,922 Total interest expense 8,489 7,871

Net interest income 11,031 10,375 Provision for loan losses 404 260 Net interest income after provision for loan losses 10,627 10,115

Non-interest income: Loan servicing and other fees 326 450 Gain on sale of loans, net 4,187 5,085 Real estate operations, net 101 151 Deposit account fees 455 420 Gain on sale of investment securities - - Other 301 391 Total non-interest income 5,370 6,497

Non-interest expense: Salaries and employee benefits 5,289 5,314 Premises and occupancy 661 633 Equipment 364 387 Professional expenses 270 285 Sales and marketing expenses 227 269 Other 1,136 1,151 Total non-interest expense 7,947 8,039

Income before taxes 8,050 8,573 Provision for income taxes 3,470 3,539 Net income $4,580 $5,034

Basic earnings per share $0.69 $0.77 Diluted earnings per share $0.64 $0.71 Cash dividends per share $0.14 $0.14

PROVIDENT FINANCIAL HOLDINGS INC. Financial Highlights (Unaudited)

Quarter Ended Nine Months Ended March 31, March 31, 2005 2004 2005 2004 SELECTED FINANCIAL RATIOS: Return on average assets 1.20% 1.25% 1.27% 1.13% Return on average stockholders' equity 15.48% 15.33% 16.16% 13.65% Stockholders' equity to total assets 7.37% 8.00% 7.37% 8.00% Net interest spread 2.79% 2.95% 2.82% 2.84% Net interest margin 2.98% 3.09% 2.98% 2.98% Efficiency ratio 48.45% 48.12% 47.84% 52.22% Average interest earning assets to average interest bearing liabilities 106.95% 106.89% 107.02% 106.97%

SELECTED FINANCIAL DATA: Basic earnings per share $0.69 $0.61 $2.10 $1.60 Diluted earnings per share $0.64 $0.57 $1.95 $1.49 Book value per share $17.09 $15.26 $17.09 $15.26 Shares used for basic EPS computation 6,604,160 6,740,983 6,594,077 6,741,098 Shares used for diluted EPS computation 7,120,025 7,213,613 7,100,598 7,214,427 Total shares issued and outstanding 6,993,590 7,206,388 6,993,590 7,206,388

ASSET QUALITY RATIOS: Non-performing loans to loans held for investment, net 0.05% 0.17% Non-performing assets to total assets 0.04% 0.11% Allowance for loan losses to non-performing loans 1,520.38% 522.47% Allowance for loan losses to gross loans held for investment 0.80% 0.89%

REGULATORY CAPITAL RATIOS: Tangible equity ratio 6.05% 6.43% Tier 1 (core) capital ratio 6.05% 6.43% Total risk-based capital ratio 10.48% 11.68% Tier 1 risk-based capital ratio 9.57% 10.75%

LOANS ORIGINATED FOR SALE (In Thousands): Retail originations $100,065 $110,316 $275,476 $355,331 Wholesale originations 233,474 141,772 668,230 433,104 Total loans originated for sale $333,539 $252,088 $943,706 $788,435

LOANS SOLD (In Thousands): Servicing released $315,428 $211,469 $900,802 $640,419 Servicing retained 26,685 45,887 65,891 166,493 Total loans sold $342,113 $257,356 $966,693 $806,912

PROVIDENT FINANCIAL HOLDINGS INC. Financial Highlights (Unaudited - Dollars In Thousands)

As of March 31, 2005 2004 Balance Rate Balance Rate INVESTMENT SECURITIES: Held to maturity: U.S. government sponsored enterprise debt securities $54,029 2.78% $59,204 2.93% U.S. government MBS 4 10.42 6 12.66 Corporate bonds 994 6.80 2,792 7.04 Certificates of deposit 200 1.88 200 1.00 Total investment securities held to maturity 55,227 2.85 62,202 3.11

Available for sale (at fair value): U.S. government sponsored enterprise debt securities 24,226 2.86 22,871 2.85 U.S. government MBS 59,871 3.95 18,336 3.66 U.S. government sponsored enterprise MBS 101,300 3.73 159,210 3.76 Private issue CMO 7,824 3.65 13,815 3.67 Freddie Mac common stock 379 709 Fannie Mae common stock 21 29 Total investment securities available for sale 193,621 3.68 214,970 3.64 Total investment securities $248,848 3.49% $277,172 3.52%

LOANS HELD FOR INVESTMENT: Single-family (1 to 4 units) $785,246 5.50% $651,123 5.40% Multi-family (5 or more units) 107,220 5.57 62,023 5.89 Commercial real estate 121,406 6.46 94,929 6.59 Construction 154,652 6.63 133,400 5.49 Commercial business 15,557 7.26 16,693 6.75 Consumer 651 9.29 681 8.74 Other 11,489 7.18 6,373 6.79 Total loans held for investment 1,196,221 5.79% 965,222 5.60%

Undisbursed loan funds (91,401) (77,428) Deferred loan costs 2,473 1,508 Allowance for loan losses (8,879) (7,884) Total loans held for investment, net $1,098,414 $881,418

Purchased loans serviced by others included above $54,939 6.12% $36,324 6.21%

DEPOSITS: Checking accounts - non-interest bearing $49,635 -% $44,698 -% Checking accounts - interest bearing 132,334 0.53 123,007 0.58 Savings accounts 291,885 1.44 348,640 1.48 Money market accounts 44,502 1.10 47,299 1.22 Time deposits 425,124 2.90 281,483 2.38 Total deposits $943,480 1.88% $845,127 1.56%

Note: The interest rate described in the rate column is the weighted-average interest rate of all instruments, which are included in the balance of the respective line item.

PROVIDENT FINANCIAL HOLDINGS INC. Financial Highlights (Unaudited - Dollars In Thousands)

As of March 31, 2005 2004 Balance Rate Balance Rate BORROWINGS: Overnight $159,500 2.82% $99,500 1.10% Six month or less 5,000 6.50 15,000 6.01 Over six to twelve months 22,000 3.83 10,000 5.79 Over one to two years 20,000 2.48 27,000 4.33 Over two to three years 82,000 3.72 20,000 2.48 Over three to four years 50,000 3.52 52,000 3.81 Over four to five years 52,000 3.98 50,000 3.52 Over five years 139,853 4.91 111,885 5.00 Total borrowings $530,353 3.75% $385,385 3.52%

Quarter Ended Nine Months Ended March 31, March 31, 2005 2004 2005 2004 Balance Balance Balance Balance SELECTED AVERAGE BALANCE SHEETS:

Loans receivable, net (a) $1,187,529 $945,349 $1,109,641 $894,690 Investment securities 256,916 276,845 262,077 280,330 FHLB stock 34,271 25,191 31,478 22,766 Interest earning deposits 1,267 502 1,354 1,277 Total interest earning assets $1,479,983 $1,247,887 $1,404,550 $1,199,063

Deposits $931,685 $828,267 $905,020 $803,229 Borrowings 452,090 339,186 407,386 317,659 Total interest bearing liabilities $1,383,775 $1,167,453 $1,312,406 $1,120,888

Quarter Ended Nine Months Ended March 31, March 31, 2005 2004 2005 2004 Yield/Cost Yield/Cost Yield/Cost Yield/Cost

Loans receivable, net (a) 5.75% 5.77% 5.71% 5.88% Investment securities 3.25% 3.18% 3.20% 2.88% FHLB stock 4.28% 3.76% 4.41% 3.92% Interest earning deposits 2.21% 0.72% 1.77% 1.15% Total interest earning assets 5.28% 5.16% 5.21% 5.14%

Deposits 1.80% 1.58% 1.71% 1.66% Borrowings 3.90% 3.77% 3.88% 3.89% Total interest bearing liabilities 2.49% 2.21% 2.39% 2.30%

(a) Includes loans held for investment, loans held for sale and receivable from sale of loans.

Note: The interest rate or yield/cost described in the rate or yield/cost column is the weighted-average interest rate or yield/cost of all instruments, which are included in the balance of the respective line item.

--30--SE/np*

CONTACT: Provident Financial Holdings Inc. Craig G. Blunden or Donavon P. Ternes, 951-686-6060

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: BANKING EARNINGS CONFERENCE CALLS SOURCE: Provident Financial Holdings Inc.

Copyright Business Wire 2005