PROVIDENT FINANCIAL HOLDINGS INC - Quarter Report: 2004 September (Form 10-Q)

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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 counterparty to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.

In accordance with SFAS No. 133 and interpretations of the Derivative Implementation Group of the Financial Accounting Standards Board ("FASB"), 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 does not apply 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, 2004 and 2003 was a gain of $41,000 and a loss of $428,000, respectively.

In the third quarter of fiscal 2004, the Corporation adopted the SEC guidance regarding loan commitments that are recognized as derivatives pursuant to SFAS No. 133. As a result of implementing the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," the Corporation excluded the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. The Corporation's previous practice had been to recognize, at the inception of the rate lock, the anticipated servicing released premiums on the underlying loans. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1, 2004. This action results in the delay in recognition of servicing released premiums until the underlying loans are funded and sold.

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FIN No. 46R:
In December 2003, the FASB issued FIN No. 46R, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51. FIN No. 46R 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. 46R also requires disclosure about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements must be adopted no later than the beginning of the first fiscal year or interim period beginning after March 15, 2004. The adoption of FIN No. 46R did not have a material impact on the Corporation's results of operations, financial position or cash flows.

SOP 03-3:
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 03-3 ("SOP 03-3"), "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows were subsequently expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. Management does not expect the adoption of this statement to have a material impact on the Corporation's financial position, results of operations, or cash flows.

EITF No. 03-1:
In March 2004, the Emerging Issues Task Force ("EITF") reached consensus on the guidance provided in EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments" ("EITF 03-1") as applicable to debt and equity securities that are within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and equity securities that are accounted for using the cost method specified in Accounting Policy Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock." An investment is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investor's intent. The severity and duration of the impairment should also be considered in determining whether the impairment is other-than-temporary. This new guidance for determining whether impairment is other-than-temporary is effective for reporting periods beginning after June 15, 2004. Adoption of this standard may cause the Corporation to recognize impairment losses in the Consolidated Statements of Operations which would not have been recognized under the current guidance or to recognize such losses in earlier periods. Since fluctuations in the fair value for available-for-sale securities are already recorded in Accumulated Other Comprehensive Income (Loss), adoption of this standard is not expected to have a significant impact on stockholders' equity. In

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September 2004 the FASB staff issued a proposed Board-directed FASB Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1. The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board also issued FSP EITF Issue 03-1-b, which delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature.

On October 28, 2004, the Board of Directors of the Bank declared a cash dividend of $2.8 million to the Corporation, which was paid on October 29, 2004.

On October 29, 2004, the Corporation announced a cash dividend of $0.14 per share on the Corporation's outstanding shares of common stock for shareholders of record at the close of business on November 23, 2004, payable on December 17, 2004.

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, 2004, the Corporation had total assets of $1.4 billion, total deposits of $874.8 million and total stockholders' equity of $112.1 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 a federally chartered stock savings bank 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 and other business banking services, and services 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 price of the stock is lower than its book value and/or the Corporation believes that the current market price is not commensurate with its current and future earnings potential. 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 typically one year. Once the stock repurchase program is authorized, management may repurchase the Corporation's common stock from time to time in the open

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market, depending upon market conditions and the factors described above. On June 28, 2004, the Corporation announced that its Board of Directors authorized the repurchase of up to five percent of its common stock, or approximately 354,585 shares, over a one-year period. Please refer to the Issuer Purchases of Equity Securities table under Part II, Item 2 - "Unregistered Sales of Equity Securities and Use of Proceeds" on page 28.

The Corporation began to distribute quarterly cash dividends in the quarter ended September 30, 2002. On July 22, 2004, 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 17, 2004, which was paid on September 10, 2004. 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 Condensed Consolidated Financial Statements and accompanying Selected Notes to Unaudited Interim Condensed Consolidated Financial Statements.

Certain matters in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among others, expectations of the business environment in which the Corporation operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Corporation's mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. The Corporation'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, the demand for loans, competitive conditions between banks and non-bank financial services providers, regulatory changes, and other risks detailed in the Corporation's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2004. Forward-looking statements are effective only as of the date that they are made and the Corporation assumes no obligation to update this information.

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 and conform to prevailing practices within the banking industry. 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. Management considers the accounting for the allowance for loan losses and accounting for derivatives to be critical accounting policies.

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. 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 require that losses be accrued based on the differences

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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 in the future. The 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 17.

Interest is generally not accrued on any loan when its contractual payments are more than 90 days delinquent. In addition, interest is not recognized on any loan for which management has determined that collection is not reasonably assured. A non-accrual loan may be restored to accrual status when delinquent principal and interest payments are brought current, the loan is paying in accordance with its payment terms for a minimum six-month period, and future monthly principal and interest payments are expected to be collected.

Properties acquired through foreclosure or deed in lieu of foreclosure are transferred to the real estate owned portfolio and carried at the lower of cost or estimated fair value less the estimated costs to sell the property. The fair values of the properties are based upon current appraisals. The difference between the fair value of the real estate collateral and the loan balance at the time of the transfer is recorded as a loan charge-off if fair value is lower. Subsequent to foreclosure, management periodically performs additional valuations and the properties are adjusted, if necessary, to the lower of carrying value or fair value, less estimated selling costs. The determination of a property's estimated fair value includes revenues projected to be realized from disposal of the property, construction and renovation costs.

SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," requires that 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, commitments to sell loans and option contracts to hedge the risk of the commitments. Estimates of the percentage of commitments to extend credit on loans to be held for sale that may 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. In the third quarter of fiscal 2004, the Corporation adopted the SEC guidance regarding loan commitments that are recognized as derivatives pursuant to SFAS No. 133. As a result of implementing the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," the Corporation excluded the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. The Corporation's previous practice had been to recognize, at the inception of the rate lock, the anticipated servicing released premiums on the underlying loans. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1, 2004. This action results in the delay in recognition of servicing released premiums until the underlying loans are funded and sold.

The following table summarizes the Corporation's contractual obligations at September 30, 2004 and the effect these obligations are expected to have on the Corporation's liquidity and cash flows in future periods (in thousands):

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The expected obligation for time deposits and FHLB borrowings include anticipated interest accruals based on respective contractual terms.

Total assets increased $127.4 million, or 10 percent, to $1.4 billion at September 30, 2004 from $1.3 billion at June 30, 2004. This increase was primarily the result of an increase in loans held for investment, investment securities available for sale and receivable from sale of loans.

Total investment securities increased $16.8 million, or seven percent, to $269.4 million at September 30, 2004 from $252.6 million at June 30, 2004. For the first three months of fiscal 2005, $37.8 million of investment securities were purchased, while $5.2 million of investment securities were called by the issuers and $16.6 million of reductions were the result of mortgage-backed securities principal paydowns.

Loans held for investment increased $94.0 million, or 11 percent, to $956.5 million at September 30, 2004 from $862.5 million at June 30, 2004. In the first three months of fiscal 2005, the Bank originated $221.9 million of loans held for investment, of which $71.4 million, or 32 percent, were "preferred loans" (multi-family, commercial real estate, construction and commercial business loans), including the purchase of $22.1 million of preferred loans during the period. The collateral that secures the purchased loans is located primarily in Southern California. Total loan prepayments during the first three months of fiscal 2005 were $129.5 million. The balance of preferred loans increased to $272.0 million, or 28 percent of loans held for investment at September 30, 2004, as compared to $240.6 million, or 28 percent of loans held for investment, at June 30, 2004. Purchased loans serviced by others at September 30, 2004 were $47.9 million or five percent of loans held for investment, compared to $43.6 million, or five percent of loans held for investment at June 30, 2004.

Loans held for sale decreased $7.7 million, or 38 percent, to $12.4 million at September 30, 2004 from $20.1 million at June 30, 2004. The decrease was the result of the timing differences between loan funding and loan sale dates.

Receivable from the sale of loans increased $24.5 million, or 28 percent, to $111.0 million at September 30, 2004 from $86.5 million at June 30, 2004. The increase was the result of the timing differences between loan sale and loan sale settlement dates.

Total deposits increased $23.8 million, or three percent, to $874.8 million at September 30, 2004 from $851.0 million at June 30, 2004. This increase was primarily attributable to an increase of $41.1 million in time deposits, partly offset by a decrease of $17.4 million in transaction accounts. The increase in time deposits and the decrease in transaction accounts were attributable primarily to the increase in interest rates and the Bank's advertising campaign for time deposits during the first quarter of fiscal 2005.

Borrowings, which consisted entirely of FHLB advances, increased $101.5 million, or 31 percent, to $426.4 million at September 30, 2004 from $324.9 million at June 30, 2004. The increase in borrowings was used to augment the funding needs, in addition to deposits, for the increases in loans held for investments and receivable from the sale of loans. The weighted-average maturity of the Bank's existing FHLB advances was approximately 39 months (30 months, based on put dates) at September 30, 2004 as compared to the weighted-average maturity of 45 months (33 months, based on put dates) at June 30, 2004.

Total stockholders' equity increased $2.1 million, or two percent, to $112.1 million at September 30, 2004, from $110.0 million at June 30, 2004, primarily as a result of the net income during the first three months of fiscal 2005, which was partly offset by common stock repurchases. During the first three months of fiscal 2005, a total of 110,000 shares were repurchased under the existing stock repurchase program at an average price of $23.23 per share. As of September 30, 2004, 31 percent of the authorized shares of the June 2004 stock repurchase plan were purchased, leaving approximately 244,585 shares available for future repurchase.

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The Corporation's net income for the first quarter ended September 30, 2004 was $4.3 million, an increase of $674,000, or 19 percent, from $3.6 million during the same quarter of fiscal 2004. This increase was primarily attributable to increases in net interest income and the gain on sale of loans, partly offset by an increase in non-interest expense.

The Corporation's net interest income before loan loss provisions increased by $1.6 million, or 19 percent, to $10.0 million for the quarter ended September 30, 2004 from $8.4 million during the comparable period of fiscal 2004. This increase was the result of higher average earning assets and a higher net interest margin. The average balance of earning assets increased $152.8 million, or 13 percent, to $1.3 billion in the first quarter of fiscal 2005 from $1.2 billion in the comparable period of fiscal 2004. The net interest margin increased to 3.03 percent in the first quarter of fiscal 2005, up 15 basis points from 2.88 percent during the same period of fiscal 2004. The increase in the net interest margin during the first quarter of fiscal 2005 was primarily attributable to an increase in the average yield of earning assets and a decline in the average cost of funds.

The Corporation's efficiency ratio improved to 47 percent in the first quarter of fiscal 2005 from 53 percent in the same period of fiscal 2004. Return on average assets for the quarter ended September 30, 2004 increased 6 basis points to 1.24 percent from 1.18 percent in the same period last year; while return on average equity for the quarter ended September 30, 2004 increased to 15.35 percent from 13.84 percent in the same period last year. Diluted earnings per share for the quarter ended September 30, 2004 were $0.60, an increase of 22 percent from $0.49 for the quarter ended September 30, 2003.

Interest Income. Total interest income increased by $2.2 million, or 15 percent, to $17.1 million for the first quarter of fiscal 2005 from $14.9 million in the same quarter of fiscal 2004. This increase was primarily the result of a higher average balance of earning assets and a higher average earning asset yield. The average yield on earning assets during the first quarter of fiscal 2005 was 5.20 percent, 9 basis points higher than the average yield of 5.11 percent during the same period of fiscal 2004. Increases in the average yield on investment securities and FHLB stock were partly offset by a decrease in the average yield on loans.

Loan interest income increased $1.9 million, or 15 percent, to $14.7 million in the quarter ended September 30, 2004 from $12.8 million for the same quarter of fiscal 2004. 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 $152.5 million, or 17 percent, to $1.0 billion during the first quarter of fiscal 2005 from $872.9 million during the same quarter of fiscal 2004. The average loan yield during the first quarter of fiscal 2005 decreased to 5.73 percent from 5.88 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 increased $246,000, or 14 percent, to $2.0 million during the quarter ended September 30, 2004 from $1.8 million during the same quarter of fiscal 2004. This increase was primarily a result of an increase in average yield, partly offset by a decrease in average balance. The average balance of investment securities decreased $7.7 million, or three percent, to $259.5 million in the first quarter of fiscal 2005 from $267.2 million in the same quarter of fiscal 2004. The average yield on the investment securities portfolio increased 45 basis points to 3.13 percent during the quarter ended September 30, 2004 from 2.68 percent during the quarter ended September 30, 2003. The increase in the average yield of investment securities was primarily a result of a reduction of the mortgage-backed securities ("MBS") principal paydowns with a corresponding reduction to the MBS premium amortization. The accelerated amortization in the first quarter of fiscal 2005 declined by $492,000 to $193,000 as compared to $685,000 in the same quarter of fiscal 2004. This decline in the accelerated amortization resulted in an increase of 75 basis points in the investment yield.

FHLB stock dividends increased by $140,000, or 61 percent, to $370,000 in the first quarter of fiscal 2005 from $230,000 in the same period of fiscal 2004. This increase was attributable to a higher average balance and a higher average yield. The average balance of FHLB stock increased $7.7 million to $28.8 million

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during the first quarter of fiscal 2005 from $21.1 million during the same period of fiscal 2004. The increase in FHLB stock was in accordance with the borrowing requirements of the FHLB. The average yield on FHLB stock increased 78 basis points to 5.14 percent during the first quarter of fiscal 2005 from 4.36 percent during the same period last year. The increase in the average yield was primarily a result of higher dividend accruals based upon the actual dividends received in the prior periods.

Interest Expense. Total interest expense for the quarter ended September 30, 2004 was $7.1 million as compared to $6.5 million for the same period of fiscal 2004, an increase of $661,000, or 10 percent. This increase was primarily attributable to a higher average balance of interest-bearing liabilities, partially offset by a decrease in the average cost. The average balance of interest-bearing liabilities increased $141.2 million, or 13 percent, to $1.2 billion during the first quarter of fiscal 2005 from $1.1 billion during the same period of fiscal 2004. The average cost of interest-bearing liabilities was 2.31 percent during the quarter ended September 30, 2004, down 6 basis points from 2.37 percent during the same period of fiscal 2004. A decrease in the average cost of deposits was partly offset by an increase in the average cost of borrowings.

Interest expense on deposits for the quarter ended September 30, 2004 was $3.5 million as compared to $3.4 million for the same period of fiscal 2004, an increase of $98,000, or three percent. The increase in interest expense on deposits was primarily attributable to a higher average balance, partially offset by a lower average cost. The average balance of deposits increased $98.8 million, or 13 percent, to $871.2 million during the quarter ended September 30, 2004 from $772.4 million during the same period of fiscal 2004. The average balance of transaction account deposits remained unchanged at 64 percent of total deposits in the first quarter of fiscal 2005, compared to the same period of fiscal 2004. The average cost of deposits decreased to 1.61 percent during the quarter ended September 30, 2004 from 1.76 percent during the same quarter of fiscal 2004, a decline of 15 basis points. The decline in the average cost of deposits was attributable to the general decline in interest rates.

Interest expense on borrowings for the quarter ended September 30, 2004 increased $563,000, or 19 percent, to $3.6 million from $3.0 million for the same period of fiscal 2004. The increase in interest expense on borrowings was primarily a result of a higher average balance and a higher average cost. The average balance of borrowings increased $42.4 million, or 14 percent, to $356.2 million during the quarter ended September 30, 2004 from $313.8 million during the same period of fiscal 2004. The average cost of borrowings increased to 4.02 percent for the quarter ended September 30, 2004 from 3.85 percent in the same quarter of fiscal 2004, an increase of 17 basis points. The increase in the average cost of borrowings was primarily attributable to the borrowing mix with a lower average balance of overnight borrowings, which generally have a lower average cost.

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The following tables depict the average balance sheets for the quarters ended September 30, 2004 and 2003, 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, 2004 and 2003, respectively:

Rate/Volume Variance
(In Thousands)