PROVIDENT FINANCIAL HOLDINGS INC - Quarter Report: 2003 September (Form 10-Q)

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.

* Includes 304,335 shares held by the employee stock ownership plan ("ESOP") that have not been released, committed to be released, or allocated to participant accounts; and 29,451 shares held by the management recognition plan ("MRP") which have been committed to be released and allocated to participant accounts. 

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The accompanying notes are an integral part of these financial statements.

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The accompanying notes are an integral part of these financial statements.

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The accompanying notes are an integral part of these financial statements.

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The accompanying notes are an integral part of these financial statements.

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The unaudited interim consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented. All such adjustments are of a normal, recurring nature. The balance sheet data at June 30, 2003 is derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. (the "Corporation"). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these unaudited interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended June 30, 2003 (SEC File No. 000-28304) of the Corporation. Certain amounts in the prior periods' financial statements have been reclassified to conform to the current period's presentation. The results of operations for the interim periods are not indicative of results for the full year.

Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the entity. The following table provides the basic and diluted EPS computations for the quarters ended September 30, 2003 and 2002, respectively.

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Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Corporation has been accounting for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Corporation's stock at the date of grant over grant price.

The Corporation has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Corporation's stock-based compensation plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts as follows (dollars in thousands, except earnings per share):

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The Corporation operates in two business segments: community banking (Provident Savings Bank, F.S.B. ("Bank")) and mortgage banking (Provident Bank Mortgage ("PBM")), a division of the Bank. The following tables set forth condensed income statements and total assets for the Corporation's operating segments for the quarters ended September 30, 2003 and 2002, respectively (in thousands).

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The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, and forward loan sale agreements to third parties. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying consolidated statements of financial condition. The Corporation's exposure to credit loss, in the event of non-performance by the counter party to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.

In accordance with SFAS No. 133 and interpretations of the Financial Accounting Standards Board's Derivative Implementation Group, the fair value of the commitments to extend credit on loans to be held for sale, forward loan sale agreements and put option contracts are recorded at fair value on the balance sheet, and are included in other assets or (other liabilities). The Corporation is not applying hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings. The net impact of derivative financial instruments on the consolidated statements of operations during the quarters ended September 30, 2003 and 2002 was a loss of $428,000 and a gain of $286,000, respectively.

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The following table summarizes the Corporation's contractual obligations at September 30, 2003 and the effect such obligations are expected to have on the Corporation's liquidity and cash flows in future periods (in thousands):

SFAS No. 148:
SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosures," amends SFAS No. 123 to provide an alternative method of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years ending after December 15, 2002, and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Corporation has not determined whether it will adopt the fair value based method of accounting for stock-based employee compensation.

SFAS No. 149:
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," is effective for hedging relationships entered into or modified after June 30, 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." The adoption of SFAS No. 149 is not expected to have a significant impact on the Corporation's financial position, cash flows or results of operations.

SFAS No. 150:
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The adoption of SFAS No. 150 is not expected to have a significant impact on the Corporation's financial position, cash flows or results of operations.

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FASB Interpretation ("FIN") No. 45:
In November 2002, the FASB issued FIN No. 45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others," an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of such interpretation on January 1, 2003 did not have a material impact on the Corporation's results of operations, financial position or cash flows.

FIN No. 46:
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. The Corporation adopted the provisions of FIN No. 46 for interim periods beginning after December 31, 2002, and the provisions have not had a material effect on its results of operations or financial position or cash flows.

Cash Dividends. On October 23, 2003, the Board of Directors of the Bank declared a $2.0 million cash dividend to the Corporation, which was paid on October 29, 2003. On October 24, 2003, the Corporation announced a cash dividend of $0.10 per share on the Corporation's outstanding shares of common stock for shareholders of record at the close of business on November 4, 2003, payable on December 5, 2003.

Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company for Provident Savings Bank, F.S.B. upon the Bank's conversion from a federal mutual to a federal stock savings bank ("Conversion"). The Conversion was completed on June 27, 1996. At September 30, 2003, the Corporation had total assets of $1.2 billion, total deposits of $790.9 million and total stockholders' equity of $102.4 million. The Corporation has not engaged in any significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.

The Bank, founded in 1956, is federally chartered and headquartered in Riverside, California. The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits are federally insured up to applicable limits by the FDIC under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1956.

The Bank's business consists of community banking activities and mortgage banking activities. Community banking activities primarily consist of accepting deposits from customers within the communities surrounding the Bank's full service offices and investing these funds in single-family loans, multi-family loans, commercial real estate loans, construction loans, commercial business loans, consumer loans and other real estate loans. In addition, the Bank also offers business checking accounts, other

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business banking services and is a servicer of loans for others. Mortgage banking activities consist of the origination and sale of mortgage and consumer loans secured primarily by single-family residences. The Bank's revenues are derived principally from interest on its loan and investment portfolios and fees generated through its community banking and mortgage banking activities. There are various risks inherent in the Bank's business including, among others, interest rate changes and the prepayment of loans and investments.

The Corporation, from time to time, may repurchase its common stock as a way to enhance the Corporation's earnings per share. The Corporation considers the repurchase of its common stock if the market value of the stock is lower than its book value and/or the Corporation believes that the current stock price is under valued when compared to its current and future income projections. Consideration is also given to the Corporation's liquidity, regulatory capital requirements and future capital needs based on the Corporation's current business plan. The Corporation's Board of Directors authorizes each stock repurchase program, the duration of which is normally one year. Once the stock repurchase program is authorized, Management may repurchase the Corporation's common stock from time to time in the open market, depending upon market conditions and the factors described above. On August 5, 2003, the Corporation announced that its Board of Directors authorized the repurchase of up to 5 percent of its common stock, or approximately 246,046 shares, over a one-year period.

The Corporation began to distribute quarterly cash dividends in the quarter ended September 2002. On August 1, 2003, the Corporation announced a quarterly cash dividend of $0.10 per share for the Corporation's shareholders of record at the close of the business day on August 20, 2003, which was paid on September 12, 2003. Subsequently, a quarterly cash dividend was also approved by the Corporation's Board of Directors as described in Note 7 - "Subsequent Events" on page 10. Future declarations or payments of dividends will be subject to the consideration of the Corporation's Board of Directors, which will take into account the Corporation's financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

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 Corporation. The information contained in this section should be read in conjunction with the Unaudited Interim Consolidated Financial Statements and accompanying Selected Notes to Unaudited Interim Consolidated Financial Statements.

The discussion and analysis of the Corporation's financial condition and results of operations are based upon the Corporation's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for the allowance for loan losses involves significant judgments and assumptions by Management, which have a material impact on the carrying value of net loans. Management considers this accounting policy to be a critical accounting policy. The allowance is based on two principles of accounting:  (i) SFAS No. 5, "Accounting for Contingencies," which requires that losses be accrued when they are probable of occurring and can be estimated; and (ii) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance has three components: (i) a formula allowance for groups of homogeneous loans, (ii) a specific allowance for identified problem loans and (iii) an unallocated allowance. Each of these components is based upon estimates that can change over time. The formula allowance is based primarily on historical experience and as a result can differ from actual losses incurred

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in the future. This history is reviewed at least quarterly and adjustments are made as needed. Various techniques are used to arrive at specific loss estimates, including historical loss information, discounted cash flows and fair market value of collateral. The use of these values is inherently subjective and the actual losses could be greater or less than the estimates. For further details, see the "Provision for Loan Losses" narrative on page 16.

SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities" requires that off-balance sheet derivatives of the Corporation be recorded in the Consolidated Financial Statements at fair value. The Bank's derivatives are primarily the result of its mortgage banking activities in the form of commitments to extend credit (including servicing released premiums), commitments to sell loans and option contracts to hedge the risk of the commitments. Management considers this accounting policy to be a critical accounting policy. Estimates of the percentage of commitments to extend credit on loans to be held for sale that will not fund are based upon historical data and current market trends. The fair value adjustments of the derivatives are recorded in the Consolidated Statements of Operations with offsets to other assets or other liabilities in the Consolidated Statements of Financial Condition.

Total assets decreased $99.4 million to $1.2 billion at September 30, 2003 from $1.3 billion at June 30, 2003. This decrease was primarily a result of decreases in investment securities and receivable from sale of loans, which were partially offset by an increase in loans held for investment.

Total investment securities decreased $61.0 million, or 21 percent, to $236.1 million at September 30, 2003 from $297.1 million at June 30, 2003. For the first three months of fiscal 2004, $49.2 million of investment securities were called by the issuers, $36.3 million of reductions were the result of mortgage-backed securities principal paydowns, while $27.8 million of investment securities were purchased. The high volume of called securities was primarily the result of a high volume of callable bonds purchased with coupon rates higher than market interest rates with short call dates during a period. The securities called were government agency callable bonds and were primarily issued by the FHLB, the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").

Total loans held for investment increased $43.8 million, or 6 percent, to $788.0 million at September 30, 2003 from $744.2 million at June 30, 2003. Despite a large number of loan prepayments during the first three months of fiscal 2004 ($119.0 million), the Bank originated $167.1 million of loans held for investment, of which $39.8 million, or 24 percent, were "preferred" loans (multi-family, commercial real estate, construction and commercial business loans). In addition, the Bank purchased $9.5 million of "preferred" loans during the period. The market area of the collateral that secures the purchased loans is primarily in Southern California. The balance of "preferred" loans decreased slightly to $211.5 million, or 27 percent of loans held for investment at September 30, 2003, as compared to $212.8 million, or 29 percent of the loans held for investment, at June 30, 2003. Purchased loans serviced by others at September 30, 2003 were $48.3 million or 6 percent of the loans held for investment, compared to $45.2 million, or 6 percent of the loans held for investment at June 30, 2003.

Total loans held for sale increased $1.5 million, or 36 percent, to $5.7 million at September 30, 2003 from $4.2 million at June 30, 2003, while the receivable from the sale of loans decreased $59.6 million, or 52 percent, to $55.3 million at September 30, 2003 from $114.9 million at June 30, 2003. The increase in loans held for sale and the decrease in the receivable from the sale of loans were the result of the timing differences between loan funding, loan sale and loan sale settlement dates.

Total deposits increased $36.8 million, or 5 percent, to $790.9 million at September 30, 2003 from $754.1 million at June 30, 2003. This increase was primarily attributable to an increase of $54.2 million in transaction accounts and a decrease of $17.4 million in time deposits. The Corporation continued to focus on increasing transaction accounts and fee generating products and services by building client relationships.

Borrowings, which consist entirely of FHLB advances, decreased $124.0 million, or 34 percent, to $243.9 million at September 30, 2003 from $367.9 million at June 30, 2003. The average maturity of the Corporation's existing FHLB advances was approximately 53 months (35 months, based on put dates) at

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September 30, 2003 as compared to the average maturity of 36 months (24 months, based on put dates) at June 30, 2003.

Total stockholders' equity decreased $4.5 million, or 4 percent, to $102.4 million at September 30, 2003, from $106.9 million at June 30, 2003 primarily as a result of the stock repurchases and the impact of stock based compensation accruals, partly offset by the net income during the first three months of fiscal 2004. A total of 247,934 shares, at an average price of $30.23 per share, were repurchased during the first three months of fiscal 2004. As of September 30, 2003, 62% of the existing authorized shares were repurchased; leaving approximately 94,446 shares available for future repurchases.

The Corporation's net income for the first quarter ended September 30, 2003 was $3.6 million, a decrease of $113,000, or 3 percent, from $3.7 million during the same quarter of fiscal 2003. This decrease was primarily attributable to decreases in the gain on sale of loans, the gain on sale of investment securities and other income, along with increases in compensation expenses related to higher loan origination volumes.

The Corporation's net interest income before loan loss provisions increased by $1.3 million, or 18 percent to $8.4 million for the quarter ended September 30, 2003 from $7.1 million during the comparable period of fiscal 2003. This increase was the result of higher average earning assets, which were partially offset by a lower net interest margin. The net interest margin decreased to 2.88 percent in the first quarter of fiscal 2004, down 6 basis points from 2.94 percent during the same period of fiscal 2003. The decrease in the net interest margin during the first quarter of fiscal 2004 was primarily a result of loan prepayments during the preceding 12-month period.

The Corporation's efficiency ratio increased to 53 percent in the first quarter of fiscal 2004 from 51 percent in the same period of fiscal 2003. Return on average assets for the quarter ended September 30, 2003 decreased 28 basis points to 1.18 percent from 1.46 percent in the same period last year. Return on average equity for the quarter ended September 30, 2003 decreased 41 basis points to 13.84 percent from 14.25 percent in the same period last year.

Diluted earnings per share for the quarter ended September 30, 2003 were $0.74, an increase of 7 percent from $0.69 for the quarter ended September 30, 2002. The increase in diluted earnings per share was primarily the result of the shares purchased in connection with the Corporation's stock repurchase programs during the preceding 12 months.

Interest Income. Total interest income increased by $250,000, or 2 percent, to $14.9 million for the first quarter of fiscal 2004 from $14.6 million during the same quarter of fiscal 2003. This increase was primarily the result of higher average earning assets, partly offset by a lower average earning asset yield. Average earning assets during the first quarter of fiscal 2004 were $1.16 billion, an increase of $200.3 million or 21 percent, from $962.1 million during the same period of fiscal 2003. The average yield on earning assets during the first quarter of fiscal 2004 was 5.11 percent, 96 basis points lower than the average yield of 6.07 percent during the same period of fiscal 2003.

Loan interest income increased $1.1 million, or 9 percent, to $12.8 million in the quarter ended September 30, 2003 as compared to $11.7 million for the same quarter of fiscal 2003. This increase was attributable to a higher average loan balance, partially offset by a lower average loan yield. The average balance of loans outstanding, including the loans held for sale, increased $200.2 million, or 30 percent, to $872.9 million during the first quarter of fiscal 2004 from $672.7 million during the same quarter of fiscal 2003. The average loan yield during the first quarter of fiscal 2004 decreased to 5.88 percent from 6.98 percent during the same quarter last year. The decline in the average loan yield was primarily attributable to the prepayment of higher yielding loans, adjustable portfolio loans adjusting to lower interest rates and new mortgage loans originated with lower interest rates.

Interest income from investment securities decreased $892,000, or 33 percent, to $1.8 million during the quarter ended September 30, 2003 from $2.7 million during the same quarter of fiscal 2003. This decrease was primarily a result of decreases in average yield and average balance. The average yield on the investment securities portfolio decreased 121 basis points to 2.68 percent during the quarter ended

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September 30, 2003 from 3.89 percent during the quarter ended September 30, 2002. The average balance of investment securities decreased $8.2 million, or 3 percent, to $267.2 million in the first quarter of fiscal 2004 from $275.4 million in the same quarter of fiscal 2003. The decrease in the average yield of investment securities was primarily as a result of the higher yielding investment securities which were called during the preceding 12-month period and replaced with short-term and lower yielding investments.

FHLB stock dividends increased by $38,000, or 20 percent, to $230,000 in the first quarter of fiscal 2004 from $192,000 in the same period of fiscal 2003. This increase was attributable to a higher average balance, partially offset by a lower average yield. The average balance of FHLB stock increased $8.7 million to $21.1 million during the first quarter of fiscal 2004 from $12.4 million during the same period of fiscal 2003. The average yield on FHLB stock decreased 182 basis points to 4.36 percent during the first quarter of fiscal 2004 from 6.18 percent during the same period last year. The decrease in the average yield was primarily a result of lower dividends paid by the FHLB.

Interest Expense. Total interest expense for the quarter ended September 30, 2003 was $6.5 million as compared to $7.5 million for the same period of fiscal 2003, a decrease of $1.0 million, or 13 percent. This decrease was primarily attributable to a decrease in the average cost, partially offset by a higher average balance. The average cost of liabilities was 2.37 percent during the quarter ended September 30, 2003, down 101 basis points from 3.38 percent during the same period of fiscal 2003. The average balance of interest-bearing liabilities increased $201.5 million, or 23 percent, to $1.09 billion during the first quarter of fiscal 2004 from $884.7 million during the same period of fiscal 2003.

Interest expense on deposits for the quarter ended September 30, 2003 was $3.4 million as compared to $4.5 million for the same period of fiscal 2003, a decrease of $1.1 million, or 24 percent. The decrease in interest expense on deposits was primarily attributable to a lower average cost, partially offset by a higher average balance. The average cost of deposits decreased to 1.76 percent during the quarter ended September 30, 2003 from 2.62 percent during the same quarter of fiscal 2003, a decline of 86 basis points. The decline in the average cost of deposits was attributable to the general decline in interest rates and the change in the composition of the deposits. The average balance of transaction accounts increased to 64 percent of total deposits in the first quarter of fiscal 2004, compared to 51 percent of the total deposits in the same period of fiscal 2003. Average outstanding deposits increased $87.3 million, or 13 percent, to $772.4 million during the quarter ended September 30, 2003 from $685.1 million during the same period of fiscal 2003.

Interest expense on borrowings for the quarter ended September 30, 2003 remained unchanged at $3.0 million as compared to the same period of fiscal 2003. A higher average balance offset a decrease in the average cost of the borrowings. The average cost of borrowings decreased to 3.85 percent for the quarter ended September 30, 2003 from 6.00 percent in the same quarter of fiscal 2003, a decline of 215 basis points. The decline in the average cost of borrowings was primarily attributable to maturing higher cost borrowings replaced with new borrowings at lower costs. Also, the Bank had an increase in the utilization of overnight borrowings at lower costs. The average balance of borrowings was $313.8 million during the quarter ended September 30, 2003 as compared to $199.6 million for the same quarter of fiscal 2003, an increase of $114.2 million, or 57 percent.

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The following tables depict the average balance sheets for the quarters ended September 30, 2003 and 2002, respectively:

Average Balance Sheets
(Dollars in Thousands)

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The following tables provide the rate/volume variances for the quarters ended September 30, 2003 and 2002, respectively:

(In Thousands)

Provision for Loan Losses. No loan loss provision was recorded during the first quarter of fiscal 2004, as compared to $200,000 during the same period of fiscal 2003. At September 30, 2003, the allowance for loan losses remained unchanged at $7.2 million as compared to the allowance for loan losses at June 30, 2003. The allowance for loan losses as a percentage of gross loans held for investment was 0.91 percent at September 30, 2003 as compared to 1.07 percent at June 30, 2003.

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 the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the realizable value of the collateral securing the loans. Provisions for losses are charged against operations on a monthly basis as necessary to maintain the allowance at appropriate levels. Management believes that the amount maintained in the allowance will be adequate to absorb losses inherent in the portfolio. Although Management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Corporation's loan portfolio, will not request the Corporation to significantly increase 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 Corporation.

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The following table is provided to disclose additional details on the Corporation's allowance for loan losses and asset quality: