Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-28304
PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-070489
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) I.D. Number)
3756 Central Avenue, Riverside, California 92506
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 686-6060
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [ ]
As of September 16, 1996, there were issued and outstanding 5,125,215
shares of the Registrant's Common Stock. The Registrant's voting stock is
listed on the Nasdaq National Market under the symbol "PROV." The aggregate
market value of the voting stock held by nonaffiliates of the Registrant,
based on the closing sales price of the Registrant's common stock as quoted
on the Nasdaq National Market on September 16, 1996, was $54,209,719.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Business
General
Provident Financial Holdings, Inc. ("Provident Financial" or the
"Corporation"), a Delaware corporation, was organized in January 1996 for the
purpose of becoming the holding company for Provident Savings Bank, F.S.B.
("Savings Bank") upon the Savings Bank's conversion from a federal mutual to
a federal stock savings bank ("Conversion"). The Conversion was completed on
June 27, 1996. At June 30, 1996, the Corporation had total assets of $584.8
million, total deposits of $479.4 million and stockholders' equity of $86.0
million. Provident Financial has not engaged in any significant activity
other than holding the stock of the Savings Bank. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to the Savings Bank and its subsidiary.
The Savings Bank, founded in 1956, is a federally chartered savings bank
headquartered in Riverside, California. The Savings 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 Savings Bank's deposits are federally insured up to applicable
limits by the FDIC (under the Savings Association Insurance Fund ("SAIF")).
The Savings Bank has been a member of the Federal Home Loan Bank ("FHLB")
System since 1956.
The Savings Bank's business consists of both traditional savings and
loan and mortgage banking operations. The savings and loan operations
primarily consist of accepting deposits from customers within the communities
surrounding its full service offices and investing those funds in one- to
four-family mortgage loans and, to a lesser extent, in multi-family,
commercial real estate, construction and consumer and other loans. The
mortgage banking activities consist of the origination and sale of mortgage
loans secured by one- to four-family residences and the servicing of such
loans for others. The Savings Bank's revenues are derived principally from
interest on its mortgage loan portfolio and fees generated through its
mortgage banking activities.
Recent Developments
Recapitalization of SAIF and Its Impact on SAIF Premiums. Effective
January 1, 1996, the FDIC substantially reduced deposit insurance premiums
for well-capitalized, well-managed financial institutions that are members of
the Bank Insurance Fund ("BIF"). Under the new assessment schedule,
approximately 92% of BIF members pay the statutory minimum annual assessment
of $2,000. With respect to financial institutions that are members of the
SAIF, the FDIC has retained the existing rate schedule of 23 to 31 basis
points. The Savings Bank is a member of the SAIF rather than the BIF. SAIF
premiums may not be reduced for several years because the SAIF has lower
reserves than the BIF. Because deposit insurance premiums are often a
significant component of noninterest expense for insured depository
institutions, the reduction in BIF premiums may place the Savings Bank at a
competitive disadvantage since BIF-insured institutions (such as most
commercial banks) may be able to offer more attractive loan rates, deposit
rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring savings institutions like the Savings
Bank to pay a one-time assessment to increase SAIF's reserves to $1.25 per
$100 of deposits. Under current proposals, such assessment would be based on
assessable deposits at March 31, 1995 and is expected to be approximately 80
basis points on the amount of deposits held by a SAIF- member institution.
The payment of a one-time fee would have the effect of immediately reducing
the capital and pre-tax earnings of SAIF-member institutions by the amount of
the fee. Based in the Savings Bank's assessable deposits of $490.5 million
at March 31, 1995, a one-time assessment of 80 basis points would equal
approximately $3.9 million. Management cannot predict whether any
legislation imposing such a fee will be enacted, or, if enacted, the amount
or timing of any one-time fee or whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums.
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Market Area
The Savings Bank is headquartered in Riverside, California and operates
seven additional full-service offices in Riverside County and one in San
Bernardino County. Management considers Riverside and western San Bernardino
Counties to be the Savings Bank's primary market for deposits. Through the
operations of its Profed Mortgage division, the Savings Bank has expanded its
retail lending market to include a larger portion of southern California and
southern Nevada. Profed Mortgage also operates an office in Northern
California. Profed Mortgage operates four offices within the Savings Bank's
retail branch facilities and five free-standing loan production offices. Two
of Profed Mortgage's loan production offices include wholesale loan
departments through which the Savings Bank maintains a network of loan
correspondents. Most of the Savings Bank's business is conducted in the
communities surrounding the Savings Bank's full-service branches and loan
production offices.
The large geographic area encompassing Riverside and San Bernardino
Counties is referred to as the "Inland Empire" due to a combination of the
large volume of economic activity, the large population and the extremely
rapid economic and demographic growth that occurred during the 1980s.
According to 1995 population estimates, San Bernardino and Riverside Counties
have the fourth and sixth largest county populations in California,
respectively. The Savings Bank's market area consists primarily of suburban
and urban communities. Western Riverside and San Bernardino Counties are
relatively densely populated and are within the greater Los Angeles
metropolitan area. Military spending cuts have had a negative impact on the
economy and the labor force in the market area, as much of Southern
California's economic growth was tied to growth in the aerospace and other
defense-related industries. Though the Inland Empire is widely believed to
be entering a period of slow recovery from the recessionary trends that have
prevailed in Southern California over the past several years, unemployment
remains high. The recession in Southern California has resulted in an
over-supply of commercial, multi-family and residential properties and real
estate values continue to remain weak. The Savings Bank faces intense
competition for deposits and loan originations. See "-- Competition."
Lending Activities
General. The principal lending activity of the Savings Bank is the
origination of conventional, Federal Housing Administration ("FHA") and
Veterans Administration ("VA") mortgage loans secured by one- to four-family
residential properties. To a lesser extent, the Savings Bank also originates
multi-family, commercial real estate, construction, consumer and other loans
for its portfolio. The Savings Bank's net loans receivable totalled
approximately $452.9 million at June 30, 1996, representing approximately
77.4% of consolidated total assets.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio at the dates indicated.
At June 30,
1996 1995 1994
Amount Percent Amount Percent Amount Percent
Mortgage loans:
One- to
four-
family $327,490 70.77% $345,034 71.59% $277,986 64.94%
Multi-
family 54,427 11.76 53,531 11.11 63,719 14.88
Commercial 54,813 11.84 61,518 12.76 63,659 14.87
Construction 10,222 2.21 5,938 1.23 4,324 1.01
------ ----- ------ ---- ------ -----
Total
mortgage
loans 446,952 96.58 466,021 96.69 409,688 95.70
Consumer
loans 15,497 3.35 15,830 3.28 18,177 4.25
Other loans 332 0.07 137 0.03 218 0.05
------ ---- ------ ---- ------ ----
Total loans
receivable 462,781 100.00% 481,988 100.00% 428,083 100.00%
------- ====== ------- ====== ------- ======
Less:
Loans in
process 3,694 4,121 3,324
Deferred
loan fees
and
discounts 690 1,239 1,268
Allowance for
loan losses 5,452 5,085 3,332
----- ------ -----
Total loans
receivable,
net $452,945 $471,543 $420,159
======== ======== ========
Loans held
for sale $ 49,612 $ 34,489 $ 83,049
======== ======== =========
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At June 30,
1993 1992
Amount Percent Amount Percent
Mortgage loans:
One- to four-
family $241,019 57.76% $211,572 53.12%
Multi-family 66,871 16.02 67,065 16.84
Commercial 68,915 16.51 70,885 17.79
Construction 11,817 2.83 13,081 3.28
------- ----- ------- ------
Total mortgage loans 388,622 93.12 362,603 91.03
Consumer loans 28,297 6.78 34,934 8.77
Other loans 402 0.10 786 0.20
------- ------ -------- -----
Total loans receivable 417,321 100.00% 398,323 100.00%
------- ====== ------- ======
Less:
Loans in process 8,183 5,472
Deferred loan fees and
discounts 1,201 1,817
Allowance for loan losses 3,286 1,839
----- ------
Total loans receivable,
net $404,651 $389,195
======== ========
Loans held for sale $104,409 $ 33,294
======== =========
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<TABLE>
Maturity of Loan Portfolio. The following table sets forth certain information at June 30, 1996,
regarding the dollar amount of principal repayments becoming contractually due during the periods indicated
for loans held in the Savings Bank's portfolio. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as becoming due within one year. The table
does not include any estimate of prepayments, which significantly shorten the average life of loan
portfolios and may cause the Savings Bank's actual repayment experience to differ from that shown below.
After After After
One Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
Mortgage
loans:
One- to
<S> <C> <C> <C> <C> <C> <C>
four-family $ 480 $3,875 $5,097 $6,104 $311,934 $327,490
Multi-family 19 287 22 1,209 52,890 54,427
Commercial 17 79 525 4,931 49,261 54,813
Construction 2,455 -- -- -- 7,768 10,222
Consumer loans 2 176 1,463 8,675 5,181 15,497
Other loans -- 194 58 -- 80 332
------- ------- ------- ------- --------- --------
Total loans
receivable $2,972 $4,611 $7,165 $20,919 $427,113 $462,781
====== ====== ====== ======= ======== =========
</TABLE>
The following table sets forth the dollar amount of all loans held in the
Savings Bank's portfolio due after June 30, 1997 which have fixed interest rates
and have floating or adjustable interest rates.
Fixed- Floating- or
Rates Adjustable-Rates
(In Thousands)
Mortgage loans:
One- to four-family $46,649 $280,841
Multi-family 1,312 53,115
Commercial 1,978 52,835
Construction -- 10,222
Consumer loans 5,289 10,208
Other loans -- 332
------- --------
Total loans receivable $55,228 $407,553
======= =========
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition,
due-on-sale clauses on loans generally give the Savings Bank the right to
declare loans immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the
loan is not repaid. The average life of mortgage loans tends to increase,
however, when current mortgage loan market rates are substantially higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
market rates.
One- to Four-Family Residential Real Estate Lending. The Savings Bank's
primary focus in lending is on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences in the
communities where the Savings Bank has established full service branches and
loan production offices. At June 30, 1996, $327.5 million, or 70.8% of the
Savings Bank's loan portfolio consisted of permanent loans on one- to
four-family residences.
Since 1989, the Savings Bank has emphasized its mortgage banking
activities and has sold most of the residential mortgage loans that it has
originated. See "-- Mortgage Banking Activities." A portion of the ARM
loans originated by the Savings Bank are retained in the Savings Bank's loan
portfolio to meet the Savings Bank's asset/liability management objectives.
At June 30, 1996, adjustable-rate loans comprised 87.4% of the Savings Bank's
loan portfolio.
The Savings Bank's residential mortgage loans are generally underwritten
and documented in accordance with the guidelines established by the Federal
Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"). All government insured loans are generally
underwritten and documented in accordance with the guidelines established by
the Department of Housing and Urban Development ("HUD") and the VA. The
Savings Bank's loan underwriters are approved as underwriters under HUD's
delegated underwriter program.
In the loan approval process, the Savings Bank assesses the borrower's
ability to repay the loan, the adequacy of the proposed security, the
employment stability of the borrower and the creditworthiness of the
borrower. As part of the loan application process, qualified independent
appraisers inspect and appraise the property that will secure the loan. All
appraisals are subsequently reviewed by the loan underwriter and if
necessary, by the Savings Bank's senior underwriters.
The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. Substantially all of the ARM loans originated by the
Savings Bank meet the underwriting standards of the secondary markets. The
Savings Bank offers several ARM products which generally adjust semi-annually
or annually after an initial fixed period ranging from six months to seven
years subject to a limitation on the annual increase of 1.0 to 2.0 percentage
points and an overall limitation of 5.0 to 6.0 percentage points. Certain
ARM loans are originated with an option to convert the loan to a 30-year
fixed-rate loan at the then prevailing market interest rate. The ARM loans
in the Savings Bank's portfolio utilize the COFI, London interbank offered
rates ("LIBOR") or the weekly average yield on one-year U.S. Treasury
securities adjusted to a constant maturity of one year ("CMT"), plus a margin
of 2.00% to 3.25%. Loans based on the COFI constitute a majority of the
Savings Bank's loan portfolio. The COFI has become dominated by a few large
California-based savings institutions and, accordingly, movement in the index
is closely tied to the deposit pricing and borrowing cost of these
institutions. Currently, the Savings Bank is emphasizing products based on
the one-year CMT and LIBOR, which adjust more rapidly than the COFI to
changes in interest rates. As of June 30, 1996, the Savings Bank had $133.4
million in mortgage loans that may be subject to negative amortization.
Negative amortization involves a greater risk to the Savings Bank because
during a period of high interest rates the loan principal balance may
increase above the amount of the original loan up to 115% of the loan amount.
However, the Savings Bank believes that the risk of default is reduced by the
stability provided by payment schedules and has historically found that its
origination of negative amortization loans has not resulted in higher amounts
of nonperforming loans. Borrower demand for ARM loans versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectations
of changes in the level of interest rates and the difference
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between the initial interest rates and fees charged for each type of loan.
The relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
given interest rate and competitive environment.
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of
increased interest to be paid by the customer due to increases in interest
rates. It is possible that, during periods of rising interest rates, the
risk of default on ARM loans may increase as a result of repricing and the
increased required payment from the borrower. Furthermore, because the ARM
loans originated by the Savings Bank generally provide, as a marketing
incentive, for initial rates of interest below the rates which would apply
were the adjustment index plus the applicable margin initially used for
pricing, these loans are subject to increased risks of default or
delinquency. Another consideration is that although ARM loans allow the
Savings Bank to increase the sensitivity of its asset base due to changes in
the interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limits. In addition, because
the COFI is a lagging market index, upward adjustments on these loans may
occur more slowly than increases in the Savings Bank's cost of
interest-bearing liabilities, especially during periods of rapidly increasing
interest rates. Because of these considerations, the Savings Bank has no
assurance that yields on ARM loans will be sufficient to offset increases in
the Savings Bank's cost of funds.
It is the Savings Bank's present policy to lend up to 97% of the lesser
of the appraised value of the property or purchase price of the property on
conventional loans. Higher loan-to-value ratios are also available on
certain government insured programs. The Savings Bank generally requires
private mortgage insurance on residential loans with a loan-to-value ratio at
origination exceeding 80% in an amount necessary to reduce the uninsured
principal to not less than 65% of value.
Multi-Family Residential and Commercial Real Estate Lending.
Historically, the Savings Bank has originated loans secured by multi-family
residential and commercial real estate. At June 30, 1996, the Savings Bank's
loan portfolio included $54.4 million in multi-family real estate loans and
$54.8 million in commercial real estate loans, or 11.8% and 11.8%,
respectively, of total loans receivable. Since 1990, the Savings Bank has
de-emphasized this type of lending and does not intend to actively pursue
these loans until the Southern California real estate market improves.
During this period, the Savings Bank has, however, selectively made
multi-family and commercial real estate mortgage loans, including loans to
facilitate the sale of real estate owned. At June 30, 1996, the Savings Bank
had 95 multi-family and 151 commercial real estate loans in its portfolio,
the largest of which was a multi-family real estate loan with a balance of
$3.6 million.
Multi-family real estate loans originated by the Savings Bank are
predominately adjustable rate loans with a term to maturity of 15 years based
on a 30-year amortization schedule. Commercial real estate loans originated
by the Savings Bank are also predominately adjustable rate loans with a term
to maturity of ten years based on a 30-year amortization schedule. Rates on
multi-family and commercial ARM loans generally adjust monthly, semi-annually
or annually to specified spreads over the COFI, subject to annual payment
caps and life-of-loan interest rate caps. At June 30, 1996, $32.4 million,
or 59.5%, of the Savings Bank's multi-family loans were secured by five to 36
unit projects, of which $22.0 million, or 40.5%, were located in Riverside or
San Bernardino Counties. The Savings Bank's commercial real estate loan
portfolio generally consists of loans secured by small office buildings and
small retail centers, substantially all of which are located in Southern
California. The Savings Bank originates multi-family and commercial real
estate loans in amounts ranging from $200,000 to $1.5 million. At June 30,
1996, the Savings Bank had 246 commercial real estate and multi-family loans
with principal balances of over $1 million that totalled $109.2 million.
Appraisals on properties that secure multi-family real estate loans are
performed by an independent appraiser engaged by the Savings Bank before the
loan is made. Underwriting of multi-family and commercial loans includes a
thorough analysis of the cash flows generated by the real estate to support
the debt service and the financial resources, experience, and income level of
the borrowers.
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Multi-family and commercial real estate lending affords the Savings Bank
an opportunity to receive interest at rates higher than those generally
available from one- to four-family residential lending. However, loans
secured by such properties are generally greater in amount, more difficult to
evaluate and monitor and are more susceptible to default as a result of
general economic conditions and, therefore, involve a greater degree of risk
than one- to four- family residential mortgage loans. Because payments on
loans secured by multi-family and commercial properties are often dependent
on the successful operation and management of the properties, repayment of
such loans may be impacted by adverse conditions in the real estate market or
the economy. At June 30, 1996, approximately $44.4 million, or 81.6%, of the
Savings Bank's multi-family loans and approximately $40.6 million, or 74.0%,
of the Savings Bank's commercial real estate loans were secured by properties
located in Riverside or San Bernardino County. As a result of the
recessionary economic conditions that have prevailed in the Savings Bank's
lending area in recent years, the Savings Bank has experienced increased
delinquencies and charge-offs in these categories of loans. The recent
declines in real estate values in the region have been more pronounced with
respect to multi-family and commercial real estate. As a result, even though
the Savings Bank's multi-family and commercial real estate loans are older
and generally are considered by management to be seasoned, there can be no
assurance that the current market value of the properties securing these
loans equals or exceeds the outstanding loan balance. The Savings Bank seeks
to minimize the risks posed by multi-family and commercial real estate
lending by originating such loans on a selective basis. At June 30, 1996,
the Savings Bank had no commercial real estate loans and one multi-family
real estate loan with a balance of $600,000 that were 60 to 89 days past due
and two multi-family real estate loans with a balance of $920,000 and no
commercial real estate loans that were delinquent 90 days or more. See also
"REGULATION -- Federal Regulation of Savings Associations -- Loans to One
Borrower."
Construction Lending. The Savings Bank also originates residential
construction loans to individuals to build owner-occupied single family
homes. At June 30, 1996, the Savings Bank's construction loan portfolio
totalled $10.2 million, or 2.2% of total loans receivable. Occasionally, the
Savings Bank makes loans to builders for the construction of small
subdivisions. Typically, the Savings Bank requires a specific number of
presales prior to the commencement of building in an individual phase of the
planned development. As of June 30, 1996, the Savings Bank had no
subdivision loans outstanding. Individual residential construction loans
that are not made in conjunction with the granting of permanent financing of
the property are for terms of up to 12 months.
Construction lending is generally considered to involve a higher level
of risk as compared to one- to four- family residential lending because of
the inherent difficulty in estimating both a property's value at completion
of the project and the estimated cost of the project. The nature of these
loans is such that they are generally more difficult to evaluate and monitor.
If the estimate of value proves to be inaccurate, the Savings Bank may be
confronted at, or prior to, the maturity of the loan, with a project the
value of which is insufficient to assure full repayment.
Consumer and Other Lending. The Savings Bank originates a variety of
consumer loans, including secured second mortgage loans, loans secured by
deposit accounts and unsecured loans. Consumer and other lending has
traditionally been a small part of the Savings Bank's business. At June 30,
1996, the Savings Bank had $15.8 million, or 3.4% of its total loans
receivable in outstanding consumer and other loans.
Commercial Business Lending. The Savings Bank intends to attempt to
originate Small Business Administration and other small commercial business
loans in order to diversify its credit risk and increase the average yield
and repricing speed of its interest-earning assets. The Savings Bank has
hired personnel and is developing the capabilities for this type of lending,
and as of June 30, 1996 originated one commercial business loan. This loan
is a $200,000 line of credit which, at June 30, 1996, had no outstanding
balance. The Board of Directors has authorized the origination of up to an
aggregate of $3 million of commercial business loans. There can be no
assurances that the Savings Bank will be able to originate commercial
business loans to meet its goal.
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Mortgage Banking Activities
General. Mortgage banking involves the origination and sale of mortgage
loans for the purpose of generating income on the sale of loans and fee
income. The Savings Bank limits its mortgage banking lending activities to
mortgage loans on one- to four-family properties. Mortgage banking generates
income primarily from the sale of loans (which may be sold either
servicing-retained or servicing-released) and from servicing fees from loans
sold on a servicing-retained basis. To a lesser extent, mortgage banking
also generates income from origination and loan fees. Generally, the level
of loan sale activity and, therefore, its contribution to the Savings Bank's
profitability depends on maintaining a sufficient volume of loan
originations. Changes in the level of interest rates and the local economy
affect the amount of loans originated by the Savings Bank and, thus, the
amount of loan sales as well as origination and loan fees earned.
Loan Solicitation and Processing. The Savings Bank's mortgage banking
operations combine both wholesale and retail loan origination. The Savings
Bank's wholesale loan production operation utilizes a network of
approximately 600 loan correspondents approved by the Savings Bank who
originate and submit loans at a mark-up over the Savings Bank's daily
published price. During the years ended June 30, 1996 and 1995, wholesale
loan originations accounted for 65.2% and 69.9%, respectively, of loans
originated for sale. Generally, the mortgage broker takes a loan application
from a prospective borrower and prepares a complete loan package on FNMA and
FHLMC approved forms, including ordering an appraisal. The loan package is
submitted to the Savings Bank, which then underwrites the loan based on
specific investor guidelines. If approved, the loan is funded by the Savings
Bank. At June 30, 1996, the Savings Bank maintained two regional wholesale
lending offices located in Rancho Cucamonga, California and Las Vegas,
Nevada. During the year ended June 30, 1995, in response to reduced loan
demand, the Savings Bank closed wholesale lending offices in San Jose and San
Diego.
The Savings Bank's retail loan production operations, which are
organized in the Profed Mortgage division of the Savings Bank, utilize loan
officers and processors employed by the Savings Bank. The Savings Bank's
loan agents generate retail loan originations through referrals from
realtors, builders and customers. As of June 30, 1996, Profed Mortgage
operated four offices within Savings Bank facilities and five free standing
loan production offices located in Santa Ana, Rancho Cucamonga, and Gardena
in Southern California; Marin County in Northern California; and in Las
Vegas, Nevada. During fiscal 1995, the Savings Bank closed retail lending
offices in Rancho Cucamonga, Las Vegas and Phoenix. A complete loan package
is prepared by the respective Profed Mortgage office, and the loan is
underwritten by the underwriters within the Profed Mortgage division.
Normally, the cost of originations from retail operations exceeds the cost of
wholesale operations due to the burden of additional employees and greater
overhead costs. However, the revenue per mortgage for retail originations is
generally higher since a portion of the origination fee mark-up is retained
by the Savings Bank. In addition, retail loan pricing is typically less
interest rate sensitive than wholesale loan pricing. Because wholesale loan
production tends to decrease more dramatically than retail loan production
during periods of higher interest rates, the Savings Bank is seeking to
originate a greater proportion of its loans through its retail operations.
Further, the Savings Bank believes that it is better able to attract repeat
business and to cross-sell other banking services to borrowers generated from
its retail loan production operations.
One- to four-family loans are underwritten by underwriters approved by
the senior management of the mortgage lending division. An approved staff
underwriter may authorize loans up to $207,000 (which is the current maximum
single family loan amount purchased by FHLMC and FNMA). For saleable loans
over $207,000 where underwriting has been delegated to the Savings Bank by
the investor, the approval authority limits are: loan amounts up to $600,000
must be approved by one senior underwriter and one staff underwriter; loan
amounts of $600,001 to $1 million require the additional approval of the
Chief Executive Officer or Chief Operating Officer. For portfolio loans, the
following approval procedures are required: one senior underwriter or two
staff underwriters may approve loan amounts up to $350,001; loans from
$350,000 to $400,000 require two approvals including one senior underwriter;
loans from $400,001 to $600,000 require a third approval from a Savings Bank
senior manager. Generally, loans may be approved in two to four weeks from
application and may be funded within 30 days of submitting an application.
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The Savings Bank requires evidence of marketable title and lien position
from title insurance and appraisals on all properties. The Savings Bank also
requires evidence of fire and casualty insurance insuring the value of
improvements. As required by federal regulations, the Savings Bank also
requires flood insurance to protect the property securing its interest if
such property is located in a designated flood area.
Loan Commitments and Rate Locks. The Savings Bank issues commitments
for residential mortgage loans conditioned upon the occurrence of certain
events. Such commitments are made in writing on specified terms and
conditions. Interest rate lock-ins are offered to prospective borrowers for
up to a 60 day period. The borrower may lock in the rate at any time from
application until the time they wish to close the loan. Occasionally,
borrowers obtaining financing on new home developments are offered rate
lock-ins up to 120 days from application. The Savings Bank had outstanding
commitments to originate loans totalling $19.9 million at June 30, 1996. See
Note 14 of Notes to Consolidated Financial Statements contained in Item 8
hereof. When the Savings Bank commits to a borrower to lock in an interest
rate there is the risk to the Savings Bank that a rise in market interest
rates will reduce the value of the mortgage before it can be closed and sold.
To control the interest rate risk caused by mortgage banking activities, the
Savings Bank uses forward sales agreements and over-the-counter put options
related to mortgage-backed securities. See "-- Mortgage Banking Activities
- -- Hedging Activities."
Loan Origination and Other Fees. The Savings Bank generally receives
origination points and loan fees. Origination points are a percentage of the
principal amount of the mortgage loan which are charged to the borrower for
funding the loan. The amount of points charged by the Savings Bank is
generally 1% to 2%. Current accounting standards require points and fees
received (net of certain loan origination costs) for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid or
sold are recognized as income at the time of prepayment or sale. The Savings
Bank had $513,000 of net deferred mortgage loan fees at June 30, 1996.
Loan Originations, Sales and Purchases. The Savings Bank's mortgage
originations include loans insured by the FHA and VA, as well as conventional
loans. Except for loans originated for the Savings Bank's portfolio,
loans originated through the mortgage banking operations are originated for
eventual sale into the secondary market. As such, these loans must meet the
origination and underwriting criteria established by the final investors.
The Savings Bank sells a large percentage of the mortgage loans that it
originates as whole loans to private investors. The Savings Bank also sells
conventional whole loans to FNMA and FHLMC through their purchase programs,
as well as pooling loans in exchange for mortgage-backed securities
guaranteed by FNMA or FHLMC. These securities are then sold through various
Wall Street investment firms. In connection with such exchanges, the Savings
Bank pays fees to either FNMA or FHLMC who in return guarantee the payment of
scheduled principal and interest to security holders. It is the guarantee
that enables the Savings Bank to efficiently deliver loans into the secondary
market. Conventional mortgage loans originated by the Savings Bank that do
not meet FNMA or FHLMC guidelines may be sold to private institutional
investors. See "-- Mortgage Banking Activities -- Hedging Activities."
9
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<PAGE>
The following table shows the Savings Bank's loan originations,
repurchases, sales and principal repayments during the periods indicated.
Year Ended June 30,
1996 1995 1994
(In Thousands)
Loans originated for sale:
Retail originations $163,411 $ 48,638 $ 117,279
Wholesale originations 305,756 112,842 906,098
------- --------- ----------
Total loans originated
for sale 469,167 161,480 1,023,377
-------- ------- ---------
Loans sold(1):
Servicing released 437,917 198,463 558,726
Servicing retained 16,127 11,577 486,011
------- ------- ----------
Total loans sold 454,044 210,040 1,044,737
------- ------- -----------
Loans originated for portfolio:
Mortgage loans:
One- to four-family 39,182 78,227 115,247
Multi-family 4,631 3,115 2,792
Commercial -- 3,495 436
Construction 90 6,746 5,205
Consumer loans 3,634 2,052 2,781
Other loans 197 -- --
------- -------- --------
Total loans originated
for portfolio 47,734 93,635 126,461
------- --------- ---------
Loans repurchased:
Mortgage loans:
One- to four-family 1,176 731 933
Commercial -- 849 --
------ ----- -----
Total loans repurchased 1,176 1,580 933
------- ----- ------
Mortgage loan principal
repayments 66,379 39,783 101,197
Real estate acquired in
settlement of loans 3,967 11,546 4,973
Increase (decrease) in other
items, net(2) 2,838 7,498 (5,716)
------ ------- ------
Net increase (decrease)
in loans receivable, net $ 3,475 $ 2,824 $ (5,852)
======= ======== ===========
- -------------------
(1) Includes loans swapped for mortgage-backed securities.
(2) Includes net changes in loans in process, discounts on loans and loss
reserves.
Historically, the Savings Bank had sold a small portion of its mortgage
loans on a servicing-released basis. However, since mid-1994, the Savings
Bank has sold a larger portion of loans servicing-released in order to
increase the sales price of the mortgages and be able to realize a gain on
the sale of mortgages. The Savings Bank has determined that it will sell
loans servicing-released during periods of decreased demand for mortgage
loans and lower originations in order to offset the costs of its mortgage
banking operations. As mortgage loan originations increase, the Savings Bank
anticipates that it will retain a greater amount of the servicing rights on
the loans that it sells.
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<PAGE>
Mortgage loans sold to FHLMC and FNMA are sold on a nonrecourse basis
whereby foreclosure losses are generally the responsibility of the purchasing
agency and not the Savings Bank, except in the case of VA loans used to form
Government National Mortgage Association ("GNMA") pools, which are subject to
limitations on the VA's loan guarantees. Mortgage loans sold to private
investors generally have a limited recourse arrangement varying from three to
12 months after the loan is sold.
Generally, the Savings Bank does not purchase loans. Occasionally, the
Savings Bank is required to repurchase a loan sold by the Savings Bank to
FHLMC, FNMA or private investors if it is determined that the loan does not
meet the credit requirements of the investor, or the borrower or other party
involved in the loan committed fraud in order to close the loan. Such loans
must be repurchased even though they may be performing. During the years
ended June 30, 1996, 1995 and 1994, the Savings Bank repurchased
single-family mortgage loans totalling $1.2 million, $731,000 and $933,000,
respectively. During fiscal 1994, the Savings Bank repurchased $849,000 of
commercial loans, most of which were repurchased from the Resolution Trust
Corporation, which had acquired them from failed institutions.
Loan Servicing. The Savings Bank receives fees from a variety of
institutional mortgage owners in return for performing the traditional
services of collecting individual payments. At June 30, 1996, the Savings
Bank was servicing $601.1 million of loans for others. The Savings Bank's
loan servicing portfolio has decreased in recent years primarily because of a
bulk sale of servicing rights on $184.6 million of loans during fiscal year
1994 and because the Savings Bank has sold a larger portion of loans on a
servicing-released basis. So long as the Savings Bank continues to sell most
mortgage loans with servicing released, the size of the mortgage servicing
portfolio is expected to decrease. Loan servicing includes processing
payments, accounting for loan funds and collecting and paying real estate
taxes, hazard insurance and other loan-related items such as private mortgage
insurance. When the Savings Bank receives the gross mortgage payment from
individual borrowers, it remits to the investor in the mortgage a
predetermined net amount based on the yield on that mortgage. The difference
between the contractual interest rate paid by the borrower on the underlying
mortgage and the predetermined net amount paid to the investor is the gross
loan servicing fee. In addition, the Savings Bank retains certain amounts in
escrow for the benefit of the investor for which the Savings Bank incurs no
interest expense but is able to invest. At June 30, 1996, the Savings Bank
held $877,000 in escrow for its portfolio of loans serviced for others. The
loan servicing portfolio at June 30, 1996 was composed primarily of FNMA
mortgage loans (50.8%) and FHLMC mortgage loans (36.8%). The balance of the
loan servicing portfolio at June 30, 1996 consisted of loans serviced for a
variety of private investors. At June 30, 1996, the portfolio included 4,846
loans secured by property located primarily in California, Arizona and
Nevada. For the year ended June 30, 1996, loan servicing fees totalled $2.4
million.
Hedging Activities. Mortgage banking involves the risk that a rise in
market interest rates will reduce the value of a mortgage before it can be
sold. This type of risk often occurs when the Savings Bank commits to a
borrower to lock in an interest rate during the origination process and
market interest rates increase before the mortgage can be closed and sold.
Such interest rate risk also arises when mortgages are placed in the
warehouse (i.e., held for sale) without locking in an interest rate for their
eventual sale in the secondary market. The Savings Bank seeks to control or
limit the interest rate risk caused by mortgage banking activities. The two
methods used by the Savings Bank to help reduce interest rate risk from its
mortgage banking activities are forward sales agreements and purchases of
over-the-counter put options related to mortgage-backed securities. At
various times, depending on management's assessment of interest rate
movements and other economic conditions, the Savings Bank may reduce or
increase its hedging positions.
Under forward sales agreements, usually with FNMA, FHLMC or private
investors, the Savings Bank is obligated to sell certain dollar amounts of
mortgage loans that meet certain underwriting and legal criteria under
specific terms before the expiration of the commitment period. These terms
include the minimum maturity of loans, the yield to the purchaser, the
servicing spread to the Savings Bank (if servicing is retained) and the
maximum principal amount of the individual loans. Forward sales of mortgages
in the pipeline protect the price of currently processed loans from interest
rate fluctuations that may occur from the time the interest rate of the loan
is fixed to the time of the sale. The amount of and delivery date of the
forward sales commitments is based upon management's estimates as to the
volume of loans that will close and the length of the origination commitment.
Forward sales do not provide complete interest-rate protection, however,
because of the possibility of fallout (i.e.,
11
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<PAGE>
the failure to close) during the origination process. Differences between
volume and timing of actual loan originations and management's estimates can
expose the Savings Bank to significant losses. If the Savings Bank is not
able to deliver the mortgage loans during the appropriate delivery period,
the Savings Bank may be required to pay a non-delivery fee or repurchase the
delivery commitments at current market prices. Similarly, if the Savings
Bank has too many loans to deliver, the Savings Bank must sell additional
cash forward commitments at current market prices. Generally, the Savings
Bank seeks to maintain forward sales agreements equal to the closed loans
held in inventory plus a portion of the loans the Savings Bank has rate
locked and/or committed to close where the interest rate is fixed and which
are projected to close. The ultimate accuracy of such projections will
directly bear upon the amount of interest rate risk incurred by the Savings
Bank. To the extent that this strategy is not effective, the Savings Bank
could have mark-to-market losses in its loans held for sale portfolio. For
the year ended June 30, 1996, the Savings Bank had gains of $4.8 million,
respectively, attributable to sales of loans which included hedging gains or
losses. At June 30, 1996, the Savings Bank had outstanding commitments to
sell loans totalling $31.8 million. See Note 14 of the Notes to Consolidated
Financial Statements contained herein.
In order to reduce the interest rate risk associated with commitments to
originate loans that are in excess of forward sales commitments, the Savings
Bank purchases over-the-counter options on treasury bonds and/or
mortgage-backed securities. At June 30, 1996, the Savings Bank had entered
into an aggregate of $3.5 million of put options on U.S. Treasury bonds at a
total premium of $37,000. These options expired in August 1996. For the
year ended June 30, 1996, option activity generated net hedging gains of
$495,000.
The above activities are managed continually as markets change, however,
there can be no assurance that the Savings Bank will be successful in its
effort to eliminate the risk of interest rate fluctuation between the time
origination commitments are issued and the ultimate sale of the loan. The
Savings Bank has recently hired a risk management firm to analyze daily and
report the Savings Bank's interest rate risk position with respect to its
loan origination and sale activities and to advise the Savings Bank on
interest rate movements and interest rate risk management strategies. The
Savings Bank's hedging activities are conducted in accordance with a Board
approved written policy that covers objectives, functions, instruments to be
used, monitoring and internal controls. The Savings Bank does not enter into
option positions for trading or speculative purposes and does not enter into
options that could generate a financial obligation beyond the initial
premium.
Delinquencies and Classified Assets
Delinquent Loans. When a mortgage loan borrower fails to make a
required payment when due, the Savings Bank institutes collection procedures.
The first notice is mailed to the borrower when a required payment becomes 18
days past due and, if necessary, a second notice is mailed within 33 days
thereafter. Attempts to contact the borrower by telephone generally begin at
the time that the first notice is mailed to the borrower. If a satisfactory
response is not obtained, continuous follow-up contacts are attempted until
the loan has been brought current. If satisfactory arrangements to cure a
delinquency have not been obtained, the Savings Bank performs a property
between the 45th day and 60th day of delinquency. Attempts to interview the
borrower in person are made to determine (i) cause of the delinquency, (ii)
whether the cause is temporary, (iii) the attitude of the borrower toward the
debt, and (iv) a mutually satisfactory arrangement for curing the default.
In most cases, delinquencies are cured promptly; however, if by the 90th
day of delinquency, or sooner if the borrower is chronically delinquent, and
all reasonable means of obtaining payment on time have exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. Interest income on loans is reduced by the full amount of
accrued and uncollected interest.
The Savings Bank's Board of Directors is informed on a monthly basis as
to the number and amount of all mortgage loans that are delinquent more than
30 days, the number and amount on all loans currently in foreclosure, and the
status of all foreclosed and repossessed property owned by the Savings Bank.
12
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<PAGE>
<TABLE>
The following table sets forth delinquencies in the Savings Bank's loan portfolio as of the dates
indicated.
At June 30,
1996 1995
60-89 Days 90 Days 60-89 Days 90 Days
or more or more
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
(Dollars in Thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family 5 $763 18 $2,874 1 $ 2 8 $1,191
Multi-family -- -- 2 387 1 142 -- --
Commercial -- -- -- -- 1 470 2 810
Construction -- -- -- -- -- -- -- --
Consumer loans 3 66 4 30 1 114 2 16
Other loans -- -- -- -- -- -- -- --
---- ----- --- ------- --- ------ -- ------
Total 8 $829 24 $3,291 4 $728 12 $2,017
==== ===== === ======= === ===== === =======
</TABLE>
At June 30,
1994
60-89 Days 90 Days or More
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
(Dollars in Thousands)
Mortgage loans:
One- to four-family 3 $355 9 $1,110
Multi-family 1 392 4 2,040
Commercial -- -- 3 864
Construction -- -- -- --
Consumer loans 4 121 4 35
Other loans -- -- -- --
---- ----- --- ------
Total 8 $868 20 $4,049
====== ====== ==== =======
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<PAGE>
The following table sets forth information with respect to the Savings
Bank's nonperforming assets and restructured loans within the meaning of SFAS
No. 15 at the dates indicated.
At June 30,
1996 1995 1994 1993 1992
(Dollars in Thousands)
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to four-family $3,511 $1,137 $1,616 $2,149 $1,839
Multi-family 798 142 2,039 950 --
Commercial -- 1,279 864 1,669 715
Consumer loans 108 -- 6 4 --
------ ------ ----- ------ -----
Total 4,417 2,558 4,525 4,772 2,554
------- ------- ----- ------- ------
Accruing loans which are
contractually past due
90 days or more:
One- to four-family -- -- -- -- 6
Consumer -- -- 1 -- --
---- ---- ---- ---- -----
Total -- -- 1 -- 6
---- ----- ---- ----- ----
Total nonaccrual
and 90 days or more
past due loans 4,417 2,558 4,526 4,772 2,560
Foreclosed real estate, net 2,711 6,784 4,117 4,829 3,426
------ ------ ------ ------ -----
Total nonperforming assets $7,128 $9,342 $8,643 $9,601 $5,986
======= ====== ======= ====== ======
Restructured loans $4,905 $3,272 $4,015 $7,087 $5,307
======= ======= ======= ======= ======
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net .98% 0.54% 1.08% 1.18% 0.66%
Nonaccrual and 90 days or more
past due loans as a percentage
of total assets 0.76 0.45 0.78 0.81 0.46
Nonperforming assets as a
percentage of total assets 1.22 1.65 1.49 1.63 1.09
The Savings Bank assesses loans individually and identifies impairment
when the accrual of interest has been discontinued, loans have been
restructured or management has serious doubts about the future collectibility
of principal and interest, even though the loans are currently performing.
Factors considered in determining impairment include, but are not limited to,
expected future cash flows, the financial condition of the borrower and
current economic conditions. The Savings Bank measures each impaired loan
based on the fair value of its collateral and charges off those loans or
portions of loans deemed uncollectible.
Interest income which would have been recorded for the year ended June
30, 1996 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $720. The amount of interest
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<PAGE>
included in the results of operations on such loans for the year ended June
30, 1996 amounted to approximately $352. Interest income foregone on
restructured loans for such periods was not material.
Foreclosed and Investment Real Estate. Real estate acquired by the
Savings Bank as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as foreclosed real estate until it is sold. When property is
acquired it is recorded at the lower of its cost, which is the unpaid
principal balance of the related loan plus foreclosure costs, or market value
less cost of sale. Subsequent declines in value are charged to operations.
At June 30, 1996, the Savings Bank had $2.7 million of real estate owned, net
of allowance for losses of $292,000. Due primarily to continued depressed
market conditions for multi-family and commercial properties in Southern
California, the Savings Bank established provisions of $239,000 for losses on
foreclosed real estate during the year ended June 30, 1996. At June 30,
1996, the Savings Bank's foreclosed real estate was comprised of 19
properties, the largest of which was a commercial center in Yucca Valley with
a book value of $414,000. The remaining properties included two multi-family
properties, one commercial property and 15 single family residences.
Investment real estate is carried at the lower of cost or fair market
value. All costs of anticipated disposition are considered in the
determination of fair value. The Savings Bank had $3.1 million of
investment real estate, net of reserves at June 30, 1996, all of which was
held by a wholly owned subsidiary.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
as loss is considered uncollectible and of such little value that continuance
as an asset of the institution is not warranted. If an asset or portion
thereof is classified as loss, the insured institution establishes specific
allowances for loan losses for the full amount of the portion of the asset
classified as loss. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory
capital, while specific valuation allowances for loan losses generally do not
qualify as regulatory capital. Assets that do not currently expose the
insured institution to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are designated as
special mention and monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified assets, including
assets designated as special mention, were as follows at the dates indicated:
At June 30,
1996 1995
(Dollars In Thousands)
Doubtful $ -- $ --
Substandard assets 14,387 19,195
Special mention 4,594 7,404
-------- --------
Total $18,981 $26,599
======= ========
Total classified assets as of
percentage total assets 2.46% 3.65%
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<PAGE>
As set forth below, as of June 30, 1996, assets classified as
substandard and special mention included 90 loans and properties totalling
approximately $19.0 million.
Number of Special
Type of Loan/Property Loans Substandard Mention Total
(Dollars in Thousands)
One- to four-family 50 $3,655 $1,040 $4,695
Multi-family 7 1,367 619 1,986
Commercial real estate 11 6,653 1,484 8,137
Construction 3 -- 1,451 1,451
Real estate owned 19 2,712 -- 2,712
-- ------- ------ -------
Total 90 $14,387 $4,594 $18,981
=== ======= ======= =======
Not all of the Savings Bank's classified assets are delinquent or
nonperforming. In determining whether the Savings Bank's assets expose the
Savings Bank to sufficient risk to warrant classification the Savings Bank
may consider various factors, including the payment history of the borrower,
the loan-to-value ratio, and the debt coverage ratio of the property securing
the loan. Upon consideration of these factors, the Savings Bank may
determine that the asset in question, though not currently delinquent,
presents a risk of loss that requires it to be classified or designated as
special mention. In addition, the Savings Bank's loan portfolio includes
commercial and multi-family real estate loans with a balance exceeding the
current market value of the collateral that are not classified because they
are performing and have borrowers who have sufficient resources to support
the payment of the loan.
Allowance for Loan Losses. The Savings Bank has established a
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific
allowances that are tied to individual loans.
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term
of the loan, general economic conditions and, in the case of a secured loan,
the quality of the collateral securing the loan. The Savings Bank increases
its allowance for loan losses by charging provisions for loan losses against
the Savings Bank's operations.
The general valuation allowance is maintained to cover losses inherent
in the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on an evaluation of the portfolio, past
experience, prevailing market conditions and other relevant factors.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation. Generally, a provision for
losses is charged against operations on a monthly basis as necessary to
maintain the allowances at appropriate levels.
At June 30, 1996, the Savings Bank had an allowance for loan losses of
$5.5 million. Management believes that the amount maintained in the
allowance will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
As a result of declines in local and regional real estate values and the
significant losses experienced by many financial institutions, there has been
a greater level of scrutiny by regulatory authorities of the loan portfolios
of financial institutions undertaken as a part of the examinations of such
institutions by banking regulators. While the Savings Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Savings Bank's
loan portfolio, will not request the Savings Bank to increase significantly
its allowance for loan losses. In addition, because future events affecting
borrowers and
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collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate
as a result of the factors discussed above. Any material increase in the
allowance for loan losses may adversely affect the Savings Bank's financial
condition and results of operations.
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated. Where specific loan
loss reserves have been established, any differences between the loss
allowances and the amount of loss realized has been charged or credited to
current operations.
Year Ended June 30,
1996 1995 1994 1993 1992
(Dollars in Thousands)
Balance at beginning
of period $5,085 $3,332 $3,286 $1,839 $1,091
Recoveries:
Mortgage loans:
One- to four-family 16 97 53 -- 174
Multi-family 258 145 62 -- --
Commercial 315 177 4 -- --
Consumer loans -- -- -- -- --
Other loans -- 40 -- -- --
---- --- ---- ---- ----
Total recoveries 589 459 119 -- 174
---- ---- ----- ----- -----
Charge-offs:
Mortgage loans:
One- to four-family 214 772 438 200 33
Multi-family 934 1,589 1,112 -- --
Commercial 1,335 1,101 540 -- --
Consumer loans -- 17 3 5 --
Other loans -- 14 13 3 --
------ ----- ------ ---- ---
Total charge-offs 2,483 3,493 2,106 208 33
------ ------- ------ ------ ----
Net loan charge-offs
(recoveries) 1,894 3,034 1,987 208 (141)
Provision for loan losses 2,261 4,787 2,033 1,655 607
------ ------ ------ ------- -------
Balance at end of period $5,452 $5,085 $3,332 $3,286 $1,839
======= ====== ====== ======= =======
Allowance for loan losses
as a percentage of gross
loans receivable 1.18% 1.06% 0.78% 0.79% 0.46%
Net loan charge-offs
(recoveries) as a
percentage of average
loans outstanding
during the period 0.38 0.62 0.39 0.04 (0.03)
Allowance for loan losses
as a percentage of
nonperforming loans at
end of period 123.43 198.79 73.62 68.86 71.84
17
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<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated. Management believes that the allowance can be allocated by category only on an
approximate basis. The allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in any other category.
At June 30,
1996 1995 1994 1993 1992
% of % of % of % of % of
Loans Loans Loans Loans Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in Thousands)
Mortgage
loans:
One- to
four-
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
family $ 930 70.77% $ 661 71.59% $ 470 64.94% $ 444 57.76% $ 428 53.12%
Multi-
family 1,532 11.76 1,030 11.11 1,140 14.88 516 16.02 261 16.84
Commer-
cial 2,848 11.84 2,587 12.76 1,271 14.87 1,525 16.51 642 17.79
Construc-
tion 28 2.21 13 1.23 25 1.01 42 2.83 42 3.28
Consumer
loans 112 3.35 108 3.28 126 4.25 171 6.78 141 8.77
Other loans 2 0.07 1 0.03 2 0.05 3 0.10 6 0.20
Unallocated -- N/A 685 N/A 298 N/A 585 N/A 319 N/A
------ ------ ------- ------- -------- ------ ------- ------- ------- -----
Total
allowance
for loan
losses $5,452 100.00% $5,085 100.00% $3,332 100.00% $3,286 100.00% $1,839 100.00%
====== ====== ======= ====== ======= ===== ====== ===== ====== ======
18
</TABLE>
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Investment Activities
Federally chartered savings institutions are permitted under federal and
state laws to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various federal agencies and of state and
municipal governments, deposits at the FHLB, certificates of deposit of
federally insured institutions, certain bankers' acceptances and federal
funds. Subject to various restrictions, federally chartered savings
institutions may also invest a portion of their assets in commercial paper
and corporate debt securities. Savings institutions like the Savings Bank
are also required to maintain an investment in FHLB stock. In addition, the
Savings Bank is required to maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. See "REGULATION" and
"Liquidity and Capital Resources" in Item 7 of this Report. At June 30,
1996, the Savings Bank's regulatory liquidity was 10.45%, which is in excess
of the 5.0% required by OTS regulations.
The investment policy of the Savings Bank, established by the Board of
Directors and implemented by the Savings Bank's asset/liability committee,
seeks to provide and maintain adequate liquidity, complement the Savings
Bank's lending activities, and generate a favorable return on investments
without incurring undue interest and credit risk. The Savings Bank's
policies, which are more restrictive than OTS regulations allow, generally
limit investments to U.S. Government and agency securities, federal funds,
U.S. Government sponsored agency issued mortgage-backed securities, bankers'
acceptances and commercial paper. Bankers' acceptances must be issued by
insured institutions, be eligible for rediscount at the Federal Reserve Bank
and be rated in one of the two highest categories by a nationally recognized
investment rating firm. Commercial paper issuers must be rated in one of the
two highest categories by two nationally recognized investment rating firms.
Investments are made based on certain considerations, which include the
interest rate, yield, settlement date and maturity of the investment, the
Savings Bank's liquidity position, and anticipated cash needs and sources
(which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The
effect that the proposed investment would have on the Savings Bank's
risk-based capital is also considered during the evaluation.
At June 30, 1996, the Savings Bank's investment securities portfolio
totalled $27.1 million at amortized cost and consisted of U.S. Government and
federal agency obligations and bankers' acceptances. The Savings Bank
adopted SFAS No. 115 effective July 1, 1994. This statement requires that
investment securities be categorized as held to maturity, trading securities
or available for sale, based on management's intent as to the ultimate
disposition of each security acquired. At June 30, 1996, all of the Savings
Bank's investment securities were classified as held to maturity. Pursuant
to SFAS No. 115, securities classified as held to maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts over
the terms of the securities.
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<TABLE>
The following table sets forth the composition of the Savings Bank's investment portfolio at the dates
indicated.
At June 30,
1996 1995 1994
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Percent Cost Value Percent Cost Value Percent
(Dollars in Thousands)
U.S. Government
and agency
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
obligations $24,973 $24,977 92.09% $18,910 $18,913 94.24% $23,121 $22,846 87.91%
Securities
purchased under
agreements to
resell -- -- -- -- -- -- 3,000 3,000 11.41
Commercial
paper -- -- -- -- -- -- -- -- --
Corporate
securities(1)2,000 1,992 7.37 990 978 4.93 -- -- --
Other(2) 145 143 0.54 167 188 0.83 180 202 0.68
Total ------- -------- ------ -------- -------- ----- ------- -------- ------
investment
portfolio $27,118 $27,112 100.00% $20,067 $20,079 100.00% $26,301 $26,048 100.00%
======= ======= ====== ======= ====== ===== ======== ======== ======
___________________
(1) Consists of bankers' acceptances
(2) Consists of mortgage-backed securities.
</TABLE>
The following table sets forth the maturities and weighted average
yields of the debt securities in the Savings Bank's securities portfolio at
June 30, 1996.
Due in Due Due
One Year After One to After
or Less Five Years Five Years Total
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
U.S.
Government
and federal
agency
obligations $22,973 5.32% $2,000 6.14% -- -- $24,973 5.38%
Corporate
securities 2,000 5.27 -- -- -- -- 2,000 5.27
Other -- -- 81 6.00 64 8.43% 145 7.07
------- ----- --- --------
Total $24,973 5.31 $2,081 6.13 $64 8.43 27,118 5.38
======== ====== ==== =========
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and the proceeds from loan sales are
the major sources of the Savings Bank's funds for lending and other investment
purposes. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Loan
sales are also influenced significantly by general interest rates. Borrowings
through the FHLB-San Francisco and repurchase agreements may also be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. Presently, the Savings Bank has no other borrowing arrangements.
Deposit Accounts. Substantially all of the Savings Bank's depositors
are residents of the State of California. Deposits are attracted from within
the Savings Bank's market area through the offering of a broad selection of
deposit instruments, including checking accounts, money market deposit
accounts, regular savings accounts and certificates of deposit. Deposit
account terms vary, according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. In determining the terms of its deposit accounts, the Savings Bank
considers current market interest rates, profitability to the Savings Bank,
matching deposit and loan products and its customer preferences and concerns.
Generally, the Savings Bank's
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deposit rates are close to the median rates of its peer group of competitors.
The Savings Bank may occasionally pay above-market interest rates to attract
and/or retain deposits when less expensive sources of funds are not
available. The Savings Bank may also pay above-market rates in specific
markets in order to increase the deposit base of a particular office or group
of offices. The Savings Bank does not generally accept brokered deposits.
The Savings Bank reviews its deposit mix and pricing weekly.
The Savings Bank currently offers certificates of deposit for terms not
exceeding 60 months. As illustrated in the following table, certificates of
deposit accounted for 67.0% of the Savings Bank's deposit portfolio at June
30, 1996. The Savings Bank intends to attempt to reduce the overall cost of
its deposit portfolio by increasing its consumer checking account base and by
expanding into business banking. See, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in Item 7 of this Report.
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<PAGE>
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at June 30, 1996.
Weighted Percentage
Average Checking and Minimum of Total
Interest Rate Term Savings Deposits Amount Balance Deposits
(In Thousands)
Savings Accounts
2.58 N/A Basic savings $ 10 $35,609 7.43%
2.58 Savings Plus 100 17,243 3.60
NOW Accounts
1.00 N/A Value checking -- 20,238 4.22
- -- N/A Commercial checking -- 2,106 0.47
Money Market Deposit Accounts
4.64 N/A Asset management -- 73,321 15.30
1.20 N/A Checking plus -- 9,776 2.01
Certificates of Deposit
4.84 18-42 Months Variable CD 500 3,569 0.74
4.30 90 Days or Less Fixed term, fixed rate 1,000 5,862 1.23
5.04 6-7 Months Fixed-term, fixed rate 1,000 101,666 21.21
5.04 9 Months Fixed-term, fixed rate 1,000 4,506 0.94
5.21 1 Year Fixed-term, fixed rate 1,000 71,172 14.85
5.62 15 Months Fixed-term, fixed rate 10,000 51,840 10.81
5.42 2 Years Fixed-term, fixed rate 1,000 21,257 4.43
5.07 3 Years Fixed-term, fixed rate 1,000 6,096 1.27
5.22 4 Years Fixed-term, fixed rate 1,000 3,495 0.73
5.93 5 Years Fixed-term, Compounded
Certificate 1,000 50,325 10.50
5.00 Negotiable Jumbo-negotiable rate100,000 700 0.15
5.07 Negotiable Mini-jumbo 50,000 595 0.12
4.62% -------- -------
$479,376 100.00%
========= ======
The following table indicates the amount of the Savings Bank's
certificates of deposit in amounts of $100,000 or more by time remaining
until maturity as of June 30, 1996.
Maturity Period Amount
(In Thousands)
Three months or less. . . . . . . . . $13,831
Over three through six months . . . . 13,622
Over six through 12 months. . . . . . 15,648
Over 12 months. . . . . . . . . . . . 13,127
-------
Total. . . . . . . . . . . . . . $55,228
========
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<TABLE>
Deposit Flow. The following table sets forth the balances (inclusive of interest credited) and
changes in dollar amount of deposits in the various types of accounts offered by the Savings Bank at and
between the dates indicated.
At June 30,
1996 1995 1994
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing $1,614 0.43% $(1,173) $ 2,787 0.57% $ (181) $ 2,968 0.63%
NOW checking 20,730 4.32 1,201 19,529 4.01 1,246 18,288 3.88
Regular savings
accounts 52,852 10.94 2,002 50,850 10.45 (16,314) 67,164 14.24
Money market deposit 83,097 17.30 (9,093) 92,191 18.95 (19,536) 111,727 23.68
Fixed-rate certificates
which mature:
Within 1 year 250,132 52.19 12,052 238,079 48.93 84,366 153,713 32.57
After 1 year, but
within 2 years 40,668 8.48 3,773 36,886 7.58 (12,870) 49,756 10.55
After 2 years, but
within 5 years 26,608 5.56 (13,031) 39,639 8.15 (15,845) 55,484 11.76
After 5 years 112 0.02 9 103 0.02 100 3 --
Other 3,569 0.74 (2,951) 6,521 1.34 (6,168) 12,689 2.69
-------- ----- --------- ------- ----- ------- -------- ------
Total $479,374 100.00% $(7,211) $486,585 100.00% $14,798 $471,787 100.00%
======== ====== ======== ======== ===== ======== ======= ======
</TABLE>
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Time Deposits by Rates. The following table sets forth the time
deposits in the Savings Bank categorized by rates at the dates indicated.
At June 30,
1996 1995 1994
(In Thousands)
Below 3.00% $ 504 $ 828 $ 21,441
3.00 - 4.49% 4,617 45,604 154,118
4.50 - 5.49% 224,224 79,797 54,539
5.50 - 6.49% 79,626 146,847 26,922
6.50 - 7.49% 11,537 46,869 11,832
Over 7.50% 573 1,284 2,793
-------- -------- --------
Total $321,081 $321,229 $271,645
========= ======== ========
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at June 30, 1996.
Amount Due
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
(In Thousands)
Below 3.00% $ 504 $ -- $ -- $ -- $ -- $ 504
3.00-4.49% 4,610 7 -- -- -- 4,617
4.50-5.49% 185,856 20,206 12,949 1,211 4,002 224,224
5.50-6.49% 50,663 21,120 393 6,724 726 79,626
6.50-7.49% 9,712 783 102 940 0 11,536
Over 7.50% 248 93 117 3 112 573
-------- ------- ------- ------ ------ --------
Total $251,593 $42,209 $13,561 $8,878 $4,840 $321,080
========== ======= ======== ====== ======== ========
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Deposit Activity. The following table sets forth the deposit activities
of the Savings Bank for the periods indicated.
Year Ended June 30,
1996 1995 1994
(In Thousands)
Beginning balance $486,585 $471,787 $454,118
-------- --------- --------
Net deposits (withdrawals)
before interest credited (28,350) (3,707) 2,433
Interest credited 21,139 18,505 15,236
------ ------- ------
Net increase (decrease) in
deposits (7,211) 14,798 17,669
--------- --------- --------
Ending balance $479,374 $486,585 $471,787
========= ======== =========
Borrowings. The FHLB-San Francisco functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member, the Savings Bank is required to own capital stock
in the FHLB-San Francisco and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. The Savings Bank utilizes advances from the FHLB-San
Francisco as an alternative to retail deposits to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB-San
Francisco has, from time to time, served as the Savings Bank's primary
borrowing source. Advances from the FHLB-San Francisco are typically secured
by the Savings Bank's first mortgage loans. At June 30, 1996, the Savings
Bank had $8.6 million of borrowings from the FHLB-San Francisco at a weighted
average rate of 6.10%. Such borrowings mature between 1996 and 2003.
The Savings Bank occasionally uses retail repurchase agreements in
order to meet short-term cash needs. In general, such repurchase agreements
are secured by U.S. Government or federal agency securities and have a
maturity of less than 90 days. At June 30, 1996, the Savings Bank had no
outstanding retail repurchase agreements.
Although additional funds may be obtained through commercial
banking credit lines, the Savings Bank has not traditionally relied on such
sources of funds, and no borrowings of this nature were outstanding on June
30, 1996. The following tables sets forth certain information regarding
borrowings by the Savings Bank at the dates and for the periods indicated:
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At June 30,
1996 1995 1994
(Dollars in Thousands)
Balance outstanding at end of period:
Securities sold under agreements
to repurchase $ -- $ 1,985 $ 5,075
FHLB advances 8,578 33,078 51,078
Weighted average rate paid on:
Securities sold under agreements
to repurchase N/A 6.15% 4.92%
FHLB advances 6.10 6.56 4.29
Year Ended June 30,
1996 1995 1994
(Dollars in Thousands)
Maximum amount of borrowings
outstanding at any month end:
Securities sold under agreements
to repurchase $ -- $15,119 $ 5,075
FHLB advances 25,578 33,078 99,047
Approximate average short-term
borrowings outstanding with
respect to:
Securities sold under
agreements to repurchase -- 2,678 990
FHLB advances 20,354 21,655 49,987
Approximate weighted average
rate paid on:
Securities sold under
agreements to repurchase -- 4.91% 4.15%
FHLB advances 6.16% 4.94 3.61
Subsidiary Activities
Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
development projects. The Savings Bank's investment in its service
corporations did not exceed these limits at June 30, 1996.
The Savings Bank has three wholly owned subsidiaries: Profed Mortgage,
Inc., Provident Financial Corp. ("Provident Financial") and First Service
Corporation ("First Service"). Provident Financial participated in a number
of real estate joint ventures in the 1980s, with the last joint ventures
entered into in 1989. The final joint venture was concluded with the sale of
the remaining land in July 1995. Provident Financial's current activities
include: (i) acting as trustee for the Savings Bank's real estate
transactions, (ii) engaging in annuity sales and providing brokerage services
at branch offices of the Savings Bank, (iii) selling property and life
insurance, primarily to Savings Bank customers, and (iv) holding real estate
for investment. The real estate held for investment by Provident Financial
at June 30, 1996 totalled $3.5 million, and included a parcel of land in
Riverside purchased as a potential
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future home office site, a residence which is adjacent to the Savings Bank's
home office, the site of a now closed branch office in Los Angeles,
California and a retail strip center in Hesperia, California. Profed
Mortgage, Inc., which formerly contained the Savings Bank's mortgage banking
activities that are currently conducted by the Savings Bank's Profed Mortgage
division, and First Service are currently inactive. At June 30, 1996, the
Savings Bank's investment in its subsidiaries was $4.1 million.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA") and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which
federal savings associations may engage. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. In addition, the Savings Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in
such matters as the ownership of deposit accounts and the form and content of
the Savings Bank's mortgage documents. The Savings Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition
in addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Savings Bank's compliance with various regulatory requirements.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities
and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS,
the FDIC or Congress, could have a material adverse impact on the
Corporation, the Savings Bank and their operations. The Corporation, as a
savings and loan holding company, will also be required to file certain
reports with, and otherwise comply with the rules and regulations of, the
OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Savings Bank, as a member of the FHLB-San Francisco, is required to
acquire and hold shares of capital stock in the FHLB-San Francisco in an
amount equal to the greater of (i) 1.0% of the aggregate outstanding
principal amount of residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or (ii) 1/20 of its
advances (borrowings) from the FHLB-San Francisco. The Savings Bank is in
compliance with this requirement with an investment in FHLB-San Francisco
stock of $4.6 million at June 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-San Francisco.
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Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to
prescribed statutory limits, of federally insured banks and to preserve the
safety and soundness of the banking industry. In 1989 the FDIC also became
the insurer, up to the prescribed limits, of the deposit accounts held at
federally insured savings associations and established two separate insurance
funds: the BIF and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Savings Bank's accounts are insured by the SAIF. The FDIC insures
deposits at the Savings Bank to the maximum extent permitted by law. The
Savings Bank currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one
of three capital groups which are based solely on the level of an
institution's capital --"well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the
FDIA, as discussed below. These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates currently ranging from 0.23% of
insured deposits for well capitalized, financially sound institutions with
only a few minor weaknesses to 0.31% of insured deposits for undercapitalized
institutions that pose a substantial risk of loss to the SAIF unless
effective corrective action is taken. Until the second half of 1995, the
same amounts applied to BIF member institutions. The FDIC is authorized to
raise assessment rates in certain circumstances. The Savings Bank's
assessments expensed for the year ended June 30, 1996, equaled $1.3 million.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule,
approximately 12% of BIF members pay the statutory minimum annual assessment
of $2,000. With respect to SAIF member institutions, the FDIC has retained
the existing rate schedule of 0.23% to 0.31% of insured deposits. The
Savings Bank is a member of the SAIF rather than the BIF.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may
be imposed for failure to meet liquidity requirements. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources" in Item 7 of this Report.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement this
system of prompt corrective action. Under the regulations, an institution
shall be deemed to be (i) "well capitalized" if it has a total risk-based
capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0%
or more, has
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a leverage ratio of 5.0% or more and is not subject to specified requirements
to meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0%
or more, a Tier I risk-based capital ratio of 4.0% or more and a leverage
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet
the definition of "well capitalized;" (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a leverage ratio that is less than
4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized"
if it has a ratio of tangible equity to total assets that is equal to or less
than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At June 30, 1996, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; (v) asset
growth; and (vi) compensation, fees and benefits. The federal banking
agencies recently adopted final regulations and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") to implement
safety and soundness standards required by the FDIA. The Guidelines set
forth the safety and soundness standards that the federal banking agencies
use to identify and address problems at insured depository institutions
before capital becomes impaired. The agencies also proposed asset quality
and earnings standards which, if adopted in final, would be added to the
Guidelines. Under the final regulations, if the OTS determines that the
Savings Bank fails to meet any standard prescribed by the Guidelines, the
agency may require the Savings Bank to submit to the agency an acceptable
plan to achieve compliance with the standard, as required by the FDIA. The
final regulations establish deadlines for the submission and review of such
safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test set forth in Section 10(m) of the
HOLA and regulations of the OTS thereunder to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by
the association shall be subject to the rules regarding the statutory and
regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings institution ceases
to be a QTL, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank
and would be required to repay any
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outstanding advances to any FHLB. In addition, within one year of the date
on which a savings association controlled by a company ceases to be a QTL,
the company must register as a bank holding company and become subject to the
rules applicable to such companies. A savings institution may requalify as a
QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets
on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; and direct or
indirect obligations of the FDIC. In addition, the following assets, among
others, may be included in meeting the test subject to an overall limit of
20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer and educational loans (limited to 10% of total portfolio assets);
and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total
assets minus the sum of (i) goodwill and other intangible assets, (ii)
property used by the savings institution to conduct its business, and (iii)
liquid assets up to 20% of the institution's total assets. At June 30, 1996,
the qualified thrift investments of the Savings Bank were approximately 94.9%
of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital
and risk-based capital. Savings associations must meet all of the standards
in order to comply with the capital requirements. The Corporation is not
subject to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core
capital is defined to include common stockholders' equity, noncumulative
perpetual preferred stock and any related surplus, and minority interests in
equity accounts of consolidated subsidiaries, less (i) any intangible assets,
except for certain qualifying intangible assets; (ii) certain mortgage
servicing rights; and (iii) equity and debt investments in subsidiaries that
are not "includable subsidiaries," which is defined as subsidiaries engaged
solely in activities not impermissible for a national bank, engaged in
activities impermissible for a national bank but only as an agent for its
customers, or engaged solely in mortgage-banking activities. In calculating
adjusted total assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and nonincludable
subsidiaries. Institutions that fail to meet the core capital requirement
would be required to file with the OTS a capital plan that details the steps
they will take to reach compliance. In addition, the OTS's prompt corrective
action regulation provides that a savings institution that has a leverage
ratio of less than 4% (3% for institutions receiving the highest CAMEL
examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See "-- Federal Regulation of Savings
Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be
required to maintain a minimum leverage ratio of 4% to 5%. The OTS will
assess each individual savings association through the supervisory process on
a case-by-case basis to determine the applicable requirement. No assurance
can be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of
the sum of core and supplementary capital, provided that supplementary
capital
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cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt, and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible
subordinated debt, and (iii) general valuation loan and lease loss allowances
up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount
of credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi- family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and
residential construction loans are assigned a 100% risk weight, as are
nonqualifying residential mortgage loans and that portion of land loans and
nonresidential construction loans which do not exceed an 80% loan-to-value
ratio. The book value of assets in each category is multiplied by the
weighing factor (from 0% to 100%) assigned to that category. These products
are then totalled to arrive at total risk-weighted assets. Off-balance sheet
items are included in risk-weighted assets by converting them to an
approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk
categories in the same manner as balance sheet assets and included
risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from
total capital for purposes of calculating their risk-based capital
requirements. A savings association's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets, liabilities
and off-balance sheet contracts) that would result from a hypothetical 200
basis point increase or decrease in market interest rates divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
risk component in calculating its total capital under the risk-based capital
rule. The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is
a two quarter lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that
data. The rule also provides that the Director of the OTS may waive or defer
an association's interest rate risk component on a case-by-case basis. Under
certain circumstances, a savings association may request an adjustment to its
interest rate risk component if it believes that the OTS-calculated interest
rate risk component overstates its interest rate risk exposure. In addition,
certain "well-capitalized" institutions may obtain authorization to use their
own interest rate risk model to calculate their interest rate risk component
in lieu of the OTS-calculated amount. The OTS has postponed the date that
the component will first be deducted from an institution's total capital
until savings associations become familiar with the process for requesting an
adjustment to its interest rate risk component.
At June 30, 1996, the Savings Bank's core capital of approximately $58.7
million, or 10.4% of adjusted total assets, was $41.8 million in excess of
the OTS requirement of $16.9 million, or 3% of adjusted total assets. As of
such date, the Savings Bank's tangible capital of approximately $58.7
million, or 10.4% of adjusted total assets, was $50.2 million in excess of
the OTS requirement of $8.5 million, or 1.5% of adjusted total assets.
Finally, at June 30, 1996, the Savings Bank had risk-based capital of
approximately $63.5 million or 16.5% of total risk-weighted assets, which was
$32.7 million in excess of the OTS risk-based capital requirement of $30.8
million or 8% of risk- weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
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mergers. In addition, OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application
but upon prior notice to, and no objection made by, the OTS) capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus one-half its surplus capital ratio (i.e., the
amount of capital in excess of its fully phased-in requirement) at the
beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully phased-in
capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting
its fully phased-in capital requirement. Capital distributions exceeding
this amount require prior OTS approval. Tier 3 associations are savings
associations with capital below the minimum capital requirement (either
before or after the proposed capital distribution). Tier 3 associations may
not make any capital distributions without prior approval from the OTS.
The Savings Bank is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net
income during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At June 30, 1996, the Savings
Bank's limit on loans to one borrower was $10.0 million. At June 30, 1996,
the Savings Bank's largest aggregate amount of loans to one borrower was $5.0
million.
Activities of Thrift Institutions and Their Subsidiaries. When a
savings association establishes or acquires a subsidiary or elects to conduct
any new activity through a subsidiary that the association controls, the
savings association must notify the FDIC and the OTS 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes
a serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF
member engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company
under common control are considered affiliates of the subsidiary savings
association under the HOLA. Generally, Sections 23A and 23B: (i) limit the
extent to which the insured association
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or its subsidiaries may engage in certain covered transactions with an
affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all
such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
the purchase of assets, the issuance of a guaranty and similar types of
transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies; (ii) a savings association may not purchase or invest
in securities issued by an affiliate (other than securities of a subsidiary);
and (iii) the OTS may, for reasons of safety and soundness, impose more
stringent restrictions on savings associations but may not exempt
transactions from or otherwise abridge Section 23A or 23B. Exemptions from
Section 23A or 23B may be granted only by the Federal Reserve Board, as is
currently the case with respect to all FDIC-insured banks. The Savings Bank
has not been significantly affected by the rules regarding transactions with
affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Savings Bank may
make to such persons based, in part, on the Savings Bank's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Savings and Loan Holding Company Regulation
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions.
If the Corporation acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become
a multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple
savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management
services for a subsidiary insured institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple holding company.
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Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Corporation and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Savings Bank or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Savings Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Savings Bank's deduction with respect to "qualifying loans,"
which are generally loans secured by certain interests in real property, may
have been computed using an amount based on the Savings Bank's actual loss
experience, or a percentage equal to 8% of the Savings Bank's taxable income,
computed with certain modifications and reduced by the amount of any
permitted additions to the nonqualifying reserve. The Savings Bank's
deduction with respect to nonqualifying loans was computed under the
experience method, which essentially allows a deduction based on the Savings
Bank's actual loss experience over a period of several years. Each year the
Savings Bank selected the most favorable way to calculate the deduction
attributable to an addition to the tax bad debt reserve. The Savings Bank
used the experience method bad debt deduction for the taxable years ended
June 30, 1996, 1995 and 1994.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As
result, the Savings Bank will no longer be able to calculate its deduction
for bad debts using the percentage-of-taxable-income method. Instead, the
Savings Bank will be required to compute its deduction based on specific
charge-offs during the taxable year. This legislation also requires savings
associations to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability. At June 30, 1996, the Savings Bank had no post-1987 additions to
its bad debt tax reserves.
Under prior law, if the Savings Bank failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would have been unable to
make additions to its bad debt reserve. Instead, the Savings Bank would have
been required to deduct bad debts as they occurred and would have
additionally been required to recapture its bad debt reserve deductions
ratably over a multi-year period. At June 30, 1996, the Savings Bank's total
bad debt reserve for tax purposes was approximately $9.0 million. Among
other things, the qualifying thrift definitional tests required the Savings
Bank to hold at least 60% of its assets as "qualifying assets." Qualifying
assets generally include cash, obligations of the United States or any agency
or instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by the
Savings Bank in the conduct of its banking business. Under current law, a
savings association will not be required to recapture its pre-1988 bad debt
reserves if it ceases to meet the qualifying thrift definitional tests.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from
reserve
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for losses on qualifying real property loans, to the extent the reserve for
such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will
be included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank's current and accumulated
earnings and profits, distributions in redemption of stock, and distributions
in partial or complete liquidation. However, dividends paid out of the
Savings Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Savings Bank's bad debt reserve. Thus, any dividends
to the Corporation that would reduce amounts appropriated to the Savings
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Savings Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after the Conversion, the Savings Bank makes a
"nondividend distribution," then approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and
local taxes). See "REGULATION" for limits on the payment of dividends by the
Savings Bank. The Savings Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI.
In addition, only 90% of AMTI can be offset by net operating loss carryovers.
AMTI is increased by an amount equal to 75% of the amount by which the
Savings Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses).
For taxable years beginning after December 31, 1986, and before January 1,
1996, an environmental tax of .12% of the excess of AMTI (with certain
modification) over $2.0 million is imposed on corporations, including the
Savings Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Savings Bank as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Corporation and the
Savings Bank will not file a consolidated tax return, except that if the
Corporation or the Savings Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may
be deducted.
There have not been any IRS audits of the Savings Bank's federal income
tax returns during the past five years. The Savings Bank has been audited by
the California Franchise Tax Board through tax year 1990.
State Taxation
California. The California franchise tax rate applicable to the Savings
Bank equals the franchise tax rate applicable to corporations generally, plus
an "in lieu" rate of 2%, which is approximately equal to personal property
taxes and business license taxes paid by such corporations (but not generally
paid by banks or financial corporations such as the Savings Bank). At June
30, 1996, the total tax rate was 11.3%. Bad debt deductions are available in
computing California franchise taxes using the specific charge-off method.
The Savings Bank and its California subsidiaries file California state
franchise tax returns on a combined basis. The Corporation will be treated
as a general corporation subject to the general corporate tax rate.
Delaware. As a Delaware holding company not earning income in Delaware,
the Corporation is exempted from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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Competition
The Savings Bank faces significant competition in its market area in
both originating real estate loans and attracting deposits. The rapid
population growth in Riverside County has attracted numerous financial
institutions to the Savings Bank's market areas, which resulted in
competition that has been exacerbated by the recessionary trends that have
prevailed in the Savings Bank's market area in the past several years. The
Savings Bank's primary competitors are large regional and superregional
commercial banks as well as other community-oriented banks and savings
institutions. The Savings Bank also faces competition from credit unions and
a large number of mortgage companies that operate within its market area.
Many of these institutions are significantly larger than the Savings Bank and
therefore have greater financial and marketing resources than the Savings
Bank. The Savings Bank's mortgage banking operations also face strong
competition from other mortgage bankers and brokers as well as other
financial institutions. Such competition may limit the Savings Bank's growth
and profitability in the future.
Personnel
As of June 30, 1996, the Savings Bank had 281 full-time and 68 part-time
employees. The employees are not represented by a collective bargaining unit
and the Savings Bank believes its relationship with its employees to be good.
Item 2. Properties
At June 30, 1996, the net book value of the Savings Bank's property
(including land and buildings) and its fixtures, furniture and equipment was
$7.1 million. The Savings Bank's home office, which is owned by the Savings
Bank, is located in Riverside, California. In addition, the Savings Bank has
eight branch offices, of which seven are in Riverside County in the cities of
Riverside, Moreno Valley (2), Hemet, Sun City, Rancho Mirage and Blythe,
California and one is in Redlands, California in San Bernardino County. Six
of the Savings Bank's branch offices are owned by the Savings Bank and two
are leased. The leases expire in 2000 and 2008. The Savings Bank also has
five loan production offices, which are located in Gardena, Rancho Cucamonga,
Santa Ana and Larspur, California and Las Vegas, Nevada. All of these
offices are leased. The leases expire from 1996 to 1997.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims
involving the making and servicing of real property loans and other issues in
the ordinary course of and incident to the Savings Banks' business. The
Savings Bank is not a party to any pending legal proceedings that it believes
would have a material adverse effect on the financial condition or operations
of the Savings Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The common stock of Provident Financial on the Nasdaq Stock Market under
the symbol "PROV." As of September 16, 1996, there were approximately 639
stockholders of record.
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The Board of Directors of the Corporation has not formulated a dividend
policy, but intends to consider a policy of paying cash dividends in the
future. Future declarations or payments of dividends will be subject to
determination by 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 Savings 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. No assurances can be given that any
dividends will be declared or, if declared, what the amount of dividends will
be or whether such dividends, once declared, will continue.
The Corporation's common stock was sold in its initial public offering
at $10.00 per share and commenced trading on June 28, 1996. The high and low
stock sales prices for the common stock from June 28, 1996 through June 30,
1996 were $11 and $10 5/8, respectively.
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Item 6. Selected Financial Data
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Corporation
and its subsidiaries at the dates and for the periods indicated. This
information is qualified in its entirety by reference to the detailed
information contained in the Consolidated Financial Statements and Notes
thereto presented elsewhere in this Form 10-K.
At June 30,
1996 1995 1994 1993 1992
(In Thousands)
FINANCIAL CONDITION DATA:
Total assets $584,847 $567,186 $580,336 $590,440 $550,850
Loans receivable,
net 452,945 471,543 420,159 404,651 389,195
Loans available
for sale, net 49,612 34,489 83,049 104,409 33,294
Cash and overnight
deposits 30,831 11,433 19,909 32,954 37,399
Investment
securities 27,118 20,067 26,301 20,326 63,466
Deposits 479,374 486,585 471,787 454,118 454,371
Borrowings 8,578 35,063 56,153 76,047 41,047
Retained earnings,
substantially
restricted 85,970 37,323 41,315 42,648 38,539
At June 30,
1996 1995 1994 1993 1992
(In Thousands)
OPERATING DATA:
Interest income $41,817 $36,020 $36,197 $40,167 $46,738
Interest expense 25,269 22,491 19,532 21,839 28,935
------ ------- ------ ------ -------
Net Interest income 16,548 13,529 16,665 18,328 17,803
Provision for
loan losses 2,261 4,787 2,033 1,655 607
-------- ------- -------- -------- --------
Net Interest income
after provision
for loan losses 14,287 8,742 14,632 16,673 17,196
Loan servicing
and other fees 2,442 2,476 3,072 1,927 1,671
Gains (losses) from
sale of loans 4,753 701 1,246 5,726 5,680
Gain on bulk sale
of servicing rights -- -- 2,052 -- 819
Other non-interest
income 2,256 1,308 1,141 1,989 2,793
Real estate
operations, net (101) (1,600) (366) (125) (377)
Operating and
administrative
expenses 19,499 17,354 23,758 18,243 16,401
------- ------ ------ ------ ------
Income (loss)
before income taxes 4,138 (5,727) (1,981) 7,947 11,381
Provision (benefit)
for income taxes 1,332 (1,735) (648) 3,838 4,894
------ --------- -------- --------- --------
Net income (loss) $ 2,806 $ (3,992) $ (1,333) $ 4,109 $ 6,487
======== ======== ========= ========= ========
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At June 30,
1996 1995 1994
OTHER DATA:
Loans serviced for others $601,097 $657,451 $703,646
Number of:
Real estate loans in portfolio 3,593 3,623 3,612
Real estate loans
serviced for others 4,846 5,140 5,676
Deposit accounts 32,102 32,786 33,669
Full-service offices 9 9 10
Loan origination offices 8 8 10
At or For the
Year Ended June 30,
1996 1995 1994 1993 1992
KEY OPERATING RATIOS:
Performance Ratios
Return (loss) on assets(1) 0.50% (0.72)% (0.23)% 0.73% 1.20%
Return (loss) on
retained earnings(2) 6.98 (9.81) (3.08) 10.24 18.54
Retained earnings-
to-assets(3) 7.12 7.34 7.47 7.17 6.46
Interest rate spread(4) 2.75 2.31 2.71 3.13 3.09
Net interest margin(5) 3.05 2.55 2.99 3.42 3.43
Average interest-earning
assets to average
interest-bearing
liabilities 106.32 05.60 108.05 107.14 106.04
Operating and administrative
expenses as a percent of
average total assets 3.46 3.13 4.09 3.26 3.03
Regulatory Capital Ratios
Tangible capital 10.41 6.19 6.65 6.74 6.34
Core capital 10.41 6.19 6.69 6.86 6.55
Risk-based capital 16.49 11.25 12.68 11.86 11.49
Asset Quality Ratios
Nonaccrual and 90 days
or more past due loans
as a percent of loans
receivable, net 0.98 0.54 1.08 1.18 0.66
Nonperforming assets as a
percent of total assets 1.22 1.65 1.49 1.63 1.09
Allowance for loan losses
as a percent of gross
loans receivable 1.18 1.06 0.78 0.79 0.46
Allowance for loan losses
as a percent of
nonperforming loans 123.43 198.79 73.62 68.86 71.84
Net charge-offs
(recoveries) to
average outstanding
loans 0.38 0.62 0.39 0.04 (0.03)
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) divided by average retained earnings.
(3) Average retained earnings divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets
and weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning
assets.
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
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 Savings Bank. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto and the other sections contained in
this Prospectus.
Operating Strategy
The Savings Bank's primary goal has been to improve the Savings Bank's
profitability while maintaining a sound capital position. To accomplish this
goal, the Savings Bank has employed an operating strategy that includes: (1)
originating for its portfolio one- to four-family residential mortgage loans,
primarily with adjustable rates, secured by properties located in its primary
market area; (2) enhancing net income and controlling interest rate risk by
originating fixed-rate loans for sale in the secondary market on a
servicing-released basis, as market conditions permit, as a means of
generating current income through the recognition of cash gains on loan
sales; (3) improving asset quality by limiting new originations of commercial
real estate and multi-family loans, increasing real estate owned marketing
efforts and establishing and utilizing more effective problem loan monitoring
procedures; (4) controlling asset growth to a level sustainable by the
Savings Bank's capital position; and (5) controlling operating expenses. The
Savings Bank intends to continue this operating strategy in an effort to
enhance its long-term profitability while maintaining a reasonable level of
loan loss reserves. The Savings Bank intends to enhance such strategy by
expanding the products and services it offers within its primary market area
in order to improve market share. In this regard, the Savings Bank intends
to attempt to originate commercial business loans, including Small Business
Administration loans, which will diversify its credit risk and increase the
average yield of its interest-earning assets.
The profitability of the Savings Bank's operations depends primarily on
its net interest income, its non-interest income (principally from mortgage
banking activities) and its non-interest expense. Net interest income is the
difference between the income the Savings Bank receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid
on deposits and borrowings. Non-interest income is comprised of income from
mortgage banking activities, gain on the occasional sale of assets and
miscellaneous fees and income. Mortgage banking generates income from the
sale of mortgage loans (which may be sold with servicing retained or with
servicing released) and from servicing fees on loans sold on a
servicing-retained basis. The Savings Bank receives a higher price for loans
sold on a servicing-released basis because it is relinquishing the right to
service the loan. The contribution of mortgage banking activities to the
Savings Bank's results of operations is highly dependent on the demand for
loans by borrowers and investors, and therefore the amount of gain on sale of
loans may vary significantly from period to period as a result of changes in
market interest rates and the local and national economy and whether the
Savings Bank sells loans servicing-released or servicing-retained. The
Savings Bank's profitability is also affected by the level of non-interest
expense. Non-interest expenses include compensation and benefits, occupancy
and equipment expenses, deposit insurance premiums, data servicing expenses
and other operating costs. Non-interest expenses related to mortgage banking
activities include compensation and benefits, occupancy and equipment
expenses, telephone and other operating costs, all of which are related to
the volume of loans originated. The Savings Bank's results of operations may
be adversely affected during periods of reduced loan demand to the extent
that non-interest expenses associated with mortgage banking activities are
not reduced commensurate with the decrease in loan originations.
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Comparison of Financial Condition
Total assets increased from $567.2 million at June 30, 1995 to $584.8
million at June 30, 1996 primarily as a result of the receipt of the proceeds
received from the initial public offering completed on June 27, 1996. In the
face of increasing short- and long-term interest rates, particularly during
the latter half of fiscal 1996, the Savings Bank sought to stabilize its
asset growth so as to reduce the effect on its capital ratios. Loans
receivable decreased $18.6 million from $471.5 million at June 30, 1995 to
$452.9 million at June 30, 1996 as refinancing activity, and thus
prepayments, accelerated during most of fiscal 1996. With rising interest
rates in fiscal 1995, borrowers favored ARM loans, which the Savings Bank
retained in its portfolio since there was not a high demand for COFI-based
ARM loans in the secondary market. In fiscal 1996, with a continuation of
rising interest rates, borrowers attempted to lock in fixed rate loans.
Loans held for sale increased from $34.5 million at June 30, 1995 to $49.6
million at June 30, 1996 as a result of increased volume of loan originations
during fiscal 1996. Contributing to the increase in total assets from June
30, 1995 was an increase in investment securities, which totaled $27.0
million at June 30, 1996 compared to $20.0 million at June 30, 1995, and an
increase in cash and overnight deposits, which aggregated $30.8 million at
June 30, 1996 compared to $11.4 million at June 30, 1995. These latter
increases reflect the cash proceeds received from the initial public
offering.
Total liabilities decreased from $529.9 million at June 30, 1995 to
$498.9 million at June 30, 1996 principally as a result of a contraction in
deposits and borrowings. Deposits declined from $486.5 million at June 30,
1995 to $479.4 million at June 30, 1996. During fiscal 1996, withdrawals
exceeded deposits by $7.2 million, net of interest credits. This net
decrease was the result of competitive investment alternatives for customers
(i.e. mutual funds, equity investments, and U.S. Treasury obligations)
particularly during the latter half of fiscal 1996. In addition, in an
effort to contain interest costs, management elected to mature higher costing
certificate accounts. FHLB advances decreased from $33.1 million at June 30,
1995 to $8.6 million at June 30, 1996 as the Savings Bank retired maturing
FHLB advances rather than renew this borrowing. Similarly, the $2.0 million
balance of securities sold under agreements to repurchase at June 30, 1995
was also retired during fiscal 1996. Increased volume of loan prepayments,
coupled with proceeds from the initial public offering, allowed management of
the Savings Bank to be less reliant on this latter funding sources. Accounts
payable and other liabilities, which consist primarily of negotiable items
drawn on the Savings Bank and custodial accounts related to loans serviced
for others, increased from $8.2 million at June 30, 1995 to $10.9 million at
June 30, 1995 as a result of a corresponding increase in loan prepayments
associated with refinancing activities.
Total stockholders' equity was $86.0 million at June 30, 1996 compared
to $37.3 million at June 30, 1996. The $48.7 million increase reflects the
successful consummation of the initial public offering of common stock by the
Company. The increase in stockholders' equity from the sale of common stock
by the Company was $49.8 million, after deducting from gross proceeds $1.5
million of offering expenses. The Company made a $4.1 million interest
bearing loan to its Employee Stock Ownership Plan ("ESOP"), to enable the
ESOP to purchase 410,000 shares of Company stock in the conversion. The ESOP
repaid $162,000 of this loan at June 30, 1996; the unpaid portion of this
loan is shown as a deduction from stockholders' equity. The remaining $2.8
million increase in total stockholders' equity between June 30, 1995 and 1996
is attributable to net earnings of the Company.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1996
General. The Company reported net earnings of $2.8 million for the year
ended June 30, 1996 compared to a net loss of $4.0 million for the year ended
June 30, 1995. The improvement in operating results between fiscal 1995 and
fiscal 1996 was due to an increased interest rate spread, reduced provisions
for loan losses, and increased income from sales of loans.
Net Interest Income. Net interest income increased by $3.0 million, or
22.3%, from $13.5 million for fiscal 1995 to $16.5 million for fiscal 1996.
This increase resulted from an increase in the spread between the yield on
interest-earning assets and the rate paid on interest-bearing liabilities
from 2.31% for the year ended June 30, 1995
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to 2.75% for the year ended June 30, 1996 as the average yield on loans
increased more than the average rate paid on deposits.
Interest Income. Total interest income increased $5.8 million, or
16.1%, from $36.0 million for the year ended June 30, 1995 to $41.8 million
for the year ended June 30, 1996. This increase between the periods was
almost exclusively the result of an increase in interest income on loans
receivable (including loans held for sale), which rose by $5.7 million from
$34.0 million for the year ended June 30, 1995 to $39.7 million for the year
ended June 30, 1996. This increase is primarily attributable to the increase
in the average yield on the loan portfolio from 6.89% in fiscal 1995 to 7.87%
in fiscal 1996. The increase in the average yield on loans is primarily a
function of the changes in the COFI index, whose average was 4.59% during
fiscal 1995 compared to an average of 5.03% during fiscal 1996. In addition,
an increase in mortgage banking activities during the year ended June 30,
1996 accounted for a $10.7 million increase in the average balance of loans
receivable (including loans held for sale). The Savings Bank originated
$161.5 million in loans held for sale during fiscal 1995 compared to $469.2
million in fiscal 1996. Due to the small difference between short- and
long-term interest rates that prevailed during much of fiscal 1996, the
interest rate on fully-indexed ARM loans generally exceeded rates available
on 30-year fixed rate mortgage loans. As a result, the level of refinancing
activities increased during fiscal 1996 as borrowers sought to replace ARM
loans with fixed rate loans.
Interest income on investment securities increased by $101,000, or 7.9%,
as a result of higher market interest rates. The average yield on investment
securities increased from 6.23% for the year ended June 30, 1995 to 6.88% for
the year ended June 30, 1996. This increase was partially offset by a
$500,000 decline in the average balance of investment securities from $20.6
million in fiscal 1995 to $20.1 million in fiscal 1996. During fiscal 1996,
management used maturing security investments to repay maturing FHLB
advances. Because the yield available on overnight deposits often equaled or
exceeded the rates available on short term investments, management elected to
increase its holdings of overnight deposits. As a result, average
interest-earning deposits increased $2.0 million to $13.9 million for fiscal
1996 from the $11.9 million for fiscal 1995. Interest income on
interest-earning deposits rose $78,000, or 18.4%, to $500,000 in fiscal 1996
compared to $423,000 in fiscal 1995.
Interest Expense. Interest expense increased by $2.8 million, or 12.4%,
from $22.5 million during the year ended June 30, 1995 to $25.3 million for
the year ended June 30, 1996. Interest expense on deposits increase $2.8
million, or 13.3%, from $21.2 million for fiscal 1995 to $24.0 million for
fiscal 1996 as a result of both an increase in the average balance of total
deposits and a 47 basis point increase in the cost of deposits. The average
balance of deposits increased $12.1 million, or 2.5%, from $477.4 million in
fiscal 1995 to $489.5 million in fiscal 1996. This reflected management's
strategy to replace FHLB advances and other borrowings with relatively less
expense deposits. The Savings Bank attracted certificate accounts because
their costs were less than, or equal to, comparable FHLB advances for similar
durations. In addition, as a result of higher short-term market interest
rates during fiscal 1996, the Savings Bank paid higher rates on new and
renewing certificates of deposits, and some customers shifted from lower rate
passbook, demand, and NOW accounts to higher yielding certificate accounts.
The Savings Bank reduced its use of FHLB advances and other borrowings
between the two periods. Although the average balance of FHLB advances
declined $1.5 million, or 6.9%, the average rate paid on this funding source
increased from 4.94% to 6.25% as a result of increased market interest rates
and longer maturities. Consequently, interest expense on FHLB advances rose
$190,000, or 17.7%, from $1.1 million for the year ended June 30, 1995 to
$1.3 million for the year ended June 30, 1996. The average balance of other
borrowings (principally reverse repurchase agreements) declined $3.5 million
and the related interest expense also declined by $229,000 to $3,000 for the
year ended June 30, 1996. Included in the fiscal 1995 expense on other
borrowings was $65,000 of capitalized interest expense which the Savings Bank
recognized at June 30, 1995 in connection with the write down of a joint
venture project.
Provisions for Loan Losses. Provisions for losses on loans were $2.3
million for fiscal 1996 compared to $4.8 million for fiscal 1995. The $2.5
million decline was attributable to a stabilization in the level of non-
performing commercial and multi-family loans during 1996. Although past due
and non-accrual loans totaled $4.5
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million, or .98% of net loans receivable, at June 30, 1996 compared to $2.6
million, or .54%, at June 30, 1996, past due and non-accrual commercial and
multi-family loans at June 30, 1996 were $798,000, or .18%, compared to $1.4
million or .30% of net loans receivable at June 30, 1995. Net charge-offs
aggregated $1.9 million in fiscal 1996 compared to $3.0 million in fiscal
1995. Of these amounts, charge-offs on commercial and multi-family loans
were $1.0 million and $1.3 million, respectively. Despite the improvement in
the levels of commercial and multi-family loans during fiscal 1996, the
recessionary economic conditions prevailing in Southern California in recent
years have resulted in increased loan delinquencies and defaults as well as
reductions in the value of properties securing loans made by the Savings
Bank. These factors, in combination with higher unemployment levels within
the Savings Bank market areas, resulted in management's decision to increase
the allowance for loan losses to a level which exceeded that of June 30,
1995. At June 30, 1996, the allowance for loan losses as a percentage of
gross loans receivable were 1.18% compared to 1.06% at June 30, 1995.
Non-interest Income. Total non-interest income increased by $5.0
million, or 110.7%, from $4.5 million for fiscal 1995 to $9.5 million for
fiscal 1996. This increase is attributable to an increase in the gain from
the sales of loans and the receipt of $1.0 million in life insurance
proceeds. Gains from sales of loans increased $4.0 million, or 578.0% to
$4.8 million for fiscal 1996 from $701,000 for fiscal 1995. This increase
resulted from increased production levels at existing offices and, to a
lesser extent, gains from related interest rate risk management activities.
Loan originations and sales totaled $469.2 million and $458.8 million,
respectively, during fiscal 1996 compared to $161.5 million and $210.0
million, respectively, in fiscal 1995. Substantially all of the loans sold
in fiscal 1996 were sold on a servicing released basis. Servicing income
remained constant at $2.5 million in both fiscal 1996 and 1995. In March,
1996, the Savings Bank received $1.0 million in proceeds from a life
insurance policy upon the passing of the former chief executive officer. The
policy was designated as a reimbursement of previously expensed retirement
benefits.
Non-interest Expense. Total non-interest expense increased $647,000, or
3.4% from $19.0 million for fiscal 1995 to $19.6 million for fiscal 1996.
Salaries and employee benefits increased by $1.8 million, or 18.3%, over
fiscal 1995 principally as a result of production related compensation from
increased mortgage banking activities during fiscal 1996. In addition, at
June 30, 1996, the Savings Bank recognized $162,000 of expenses related to
the newly implemented ESOP. Occupancy expenses declined by $397,000, or
17.0%, between the periods. However, occupancy expenses for fiscal 1995
include $298,000 of charges related to the closing of offices and related
expenses within the Profed Mortgage division. Other expenses increased by
$617,000, or 16.3%, principally because of expenses from interest rate risk
management activities.
The loss from real estate operations declined from $1.6 million for
fiscal 1995 to $101,000 for fiscal 1996. The decreased loss reflects the
liquidation of the Savings Bank's one remaining real estate joint venture in
July 1995 and reduced provisions on foreclosed real estate. There were no
provisions for losses on joint ventures during fiscal 1996 compared to a
provision of $682,000 during fiscal 1995. Provisions for losses on
foreclosed real estate decreased by $744,000 from $983,000 during fiscal 1995
to $239,000 during fiscal 1996.
Income Taxes. Income taxes were $1.3 million for fiscal 1996 (resulting
in an effective tax rate of 32.2%) compared to a tax benefit of $1.8 million
for fiscal 1995 (resulting in an effective rate of 30.3%). The increase of
$3.1 million in tax expense is principally attributable to an increase in
pre-tax income of $9.9 million between the periods, reduced by the $1.0
million of non-taxable insurance proceeds. The Savings Bank has a California
net operating loss carryforward which is reduced by 50% in future tax years.
As a result, the Savings Bank did not fully tax benefit its tax losses in
fiscal 1995, thereby decreasing the effective tax rate.
Comparison of Operating Results for the Years Ended June 30, 1994 and 1995
General. The Savings Bank's net loss increased $2.7 million from a net
loss of $1.3 million for the year ended June 30, 1994 to a net loss of $4.0
million for the year ended June 30, 1995. The increased loss was
attributable to lower net interest income and a larger provision for loan
losses during fiscal 1995 compared to fiscal 1994 and to a large decline in
loan originations by the Savings Bank's mortgage banking operations.
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Net Interest Income. Net interest income declined by $3.2 million, or
18.8%, from $16.7 million for the year ended June 30, 1994 to $13.5 million
for the year ended June 30, 1995. This decrease resulted from a 40 basis
point decrease in the spread between the yield on interest-earning assets and
the rate paid on interest-bearing liabilities from 2.71% for the year ended
June 30, 1994 to 2.31% for the year ended June 30, 1995. In addition, net
interest-earning assets declined $13.4 million, or 32.2%, to $28.2 million
during fiscal 1995.
Interest Income. Total interest income decreased $177,000 from $36.2
million for the year ended June 30, 1994 to $36.0 million for the year ended
June 30, 1995. The decrease in interest income between the periods was
primarily the result of a decrease in interest income on loans that was
partially offset by an increase in interest income on investment securities.
Interest income on loans decreased by $559,000 from $34.6 million during
fiscal 1994 to $34.0 million during fiscal 1995. Although the average yield
on loans receivable (including loans held for sale) increased from 6.76%
during fiscal 1994 to 6.89% in fiscal 1995, this increase was more than
offset by an $18.1 million decline in the average balance of outstanding
loans (including loans held for sale) from $512.2 million in 1994 to $494.1
million in fiscal 1995. The decrease in the average balance of outstanding
loans was a result of a large decline in loan originations. During fiscal
1994 the Savings Bank originated $1.0 billion in loans for sale in the
secondary market compared to $161.5 million in loans originated for sale
during fiscal 1995. This decline in the volume of loan originations was a
result of reduced loan demand in the Savings Bank's primary market area
caused by the rising interest rate environment in the second half of fiscal
1995 which had an adverse effect on refinancing activities. The average
yield on loans receivable increased as a result of the increase in market
interest rates between fiscal 1994 and fiscal 1995. During fiscal 1995,
adjustable-rate loans with interest rates that adjust based on the COFI,
which constitute a majority of the Savings Bank's held to maturity loan
portfolio, experienced increases in rates as the average COFI interest rate
increased from 3.80% to 4.59%.
Interest income on investment securities increased by $224,000 as a
result of higher yields in 1995 as compared to 1994. The average yield on
investment securities was 4.09% during fiscal 1994 compared to 6.23% during
fiscal 1995. This was offset in part by a $5.3 million decline in the
average balance of investment securities from $25.9 million during fiscal
1994 to $20.6 million during fiscal 1995. The average balance of investment
securities decreased as securities matured and management used the funds to
repay FHLB advances.
Interest Expense. Interest expense increased by $3.0 million, or 15.1%,
from $19.5 million for the year ended June 30, 1994 to $22.5 million for the
year ended June 30, 1995. The increase in interest expense was primarily due
to an increase in interest paid on deposits that was partially offset by a
decrease in interest paid on borrowings. Interest expense on deposits
increased $3.5 million, or 19.9%, from $17.0 million for fiscal 1994 to $21.2
million for fiscal 1995 primarily as a result of the increase in market
interest rates. During fiscal 1995 the average cost of deposits increased
from 3.80% to 4.44% while the average balance of deposits increased by $12.6
million, or 2.7%. The increase in interest paid on deposits between the
periods was also caused in part by a shift in deposits from passbook accounts
to higher paying demand and NOW accounts and certificates of deposit.
As a result of the reduced volume of the loan and investment portfolio,
the Savings Bank relied less heavily on FHLB advances during fiscal 1995,
which reduced interest expense for FHLB advances by $736,000, or 40.8%, from
$1.8 million in fiscal 1994 to $1.1 million in fiscal 1995. The decrease in
the average balance of FHLB advances from $50.0 million in fiscal 1994 to
$21.7 million in fiscal 1995 was partially offset by an increase in the
average cost of FHLB advances from 3.61% to 4.94%, which was caused by an
increase in market interest rates. Interest paid on other borrowings
(principally repurchase agreements) increased by $171,000, or 280.3%, from
fiscal 1994 to fiscal 1995 as a result of an increase in the amount of such
borrowings. The average balance of other borrowings increased from $1.4
million in fiscal year 1994 to $4.3 million in fiscal year 1995.
Provision for Loan Losses. During fiscal 1995, the provision for loan
losses increased 135.5% to $4.8 million from the prior year's provision of
$2.0 million. As a result of the continued deterioration in Southern
California real estate values management elected to significantly increase
the allowance for loan losses. Net charge-offs during fiscal 1995 totalled
$3.0 million compared with $2.0 million during fiscal 1994. Of the
charge-offs during fiscal 1995, $675,000 represented charge-offs of loans
secured by single-family properties (an increase of $290,000 from
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fiscal 1994) and $1.4 million were charge-offs of loans secured by
multi-family properties (an increase of $394,000 from fiscal 1994). Fiscal
1995 represented the second consecutive year in which net multi-family
charge-offs exceeded $1.0 million. In addition, charge-offs of loans secured
by commercial real estate increased from $536,000 in fiscal 1994 (after
having none in the three previous fiscal years) to $924,000 in fiscal 1995.
The increased provision for loan losses increased the allowance for loan
losses. The allowance for loan losses allocated to commercial mortgage loans
increased from $1.3 million at June 30, 1994 to $2.6 million at June 30,
1995. Based upon the level of substandard commercial loans and continued
weakness in real estate values, management accepted the regulatory suggestion
to increase the proportion of the allowance allocable to commercial mortgage
loans. At June 30, 1995, the allowance for loan losses represented 1.1% of
gross loans receivable compared with 0.8% at June 30, 1994.
Non-interest Income. Total non-interest income declined by $3.0
million, or 40.3%, from $7.5 million for the year ended June 30, 1994 to $4.5
million for the year ending June 30, 1995. Total non-interest income
declined primarily as a result of a decline in gain on sale of loans and a
decline in loan servicing and other fees. In addition, the Savings Bank
completed a bulk sale of servicing rights in fiscal 1994 with no comparable
transaction in fiscal 1995.
Loans sold decreased from $1.0 billion for the year ended June 30, 1994
to $210.0 million for the year ended June 30, 1995. The greatly reduced
volume of mortgage banking activities during fiscal 1995 significantly
reduced the gains from the sale of loans between fiscal 1994 and fiscal 1995.
Gains from the sale of loans decreased from $1.2 million (after a LOCOM
adjustment of $4.7 million) during fiscal 1994 to $701,000 in fiscal 1995 and
represented a return of 33 basis points on total loans sold in fiscal 1995
versus 12 basis points in fiscal 1994. Beginning in fiscal 1995, more loans
were sold on a servicing-released basis in an attempt to increase the current
income from mortgage banking activities. Of the $210.0 million of loans sold
in fiscal 1995, $198.5 million were sold servicing released.
A bulk sale of servicing rights on $184.6 million of loans in fiscal
1994 produced a gain of $2.1 million. There were no bulk sales of servicing
rights in fiscal 1995. This bulk sale of loan servicing rights in fiscal
1994 coupled with the sale of more loans on a servicing-released basis during
fiscal 1995 reduced the amount of loans serviced for others from an average
balance of $829.3 million during the year ended June 30, 1994 to an average
balance of $687.1 million for the year ended June 30, 1995 and resulted in a
$596,000 decline in income from loan servicing between the periods. So long
as the Savings Bank continues to sell mortgage loans on a servicing-released
basis, the size of its mortgage servicing portfolio, and therefore loan
servicing fees, are expected to decrease.
Non-interest Expense. Total non-interest expense decreased by $5.2
million from $24.1 million for the year ended June 30, 1994 to $19.0 million
for the year ended June 30, 1995. During fiscal 1995, the Savings Bank
attempted to reduce its expenses in connection with the decline in loan
origination activities. Salaries, commissions and employee benefits were
reduced from $13.5 million during fiscal 1994 to $9.7 million during fiscal
1995, a decrease of $3.9 million, or 28.6%, as a result of the reduction in
loan production related compensation expense, full time equivalent employees,
reduced sales and back office personnel, and the closure of certain loan
production offices. Other expenses, many of which related to mortgage
banking activities (e.g., telephone, appraisal, operating supplies, option
fees, etc.) decreased $2.7 million, or 33.5%, as a result of fewer loan
originations. During fiscal 1995, the Savings Bank closed loan production
offices in San Jose, San Diego, Las Vegas (retail), Phoenix (retail) and
Rancho Cucamonga (retail) which resulted in a pre-tax charge of $368,000,
$298,000 of which is included in fiscal 1995 occupancy expenses.
The loss from real estate operations increased from $366,000 in fiscal
1994 to a loss of $1.6 million in fiscal 1995 primarily as a result of the
increased provisions for losses on both foreclosed real estate as well as
investments in joint ventures. The provision for losses on foreclosed real
estate increased by $578,000 to $983,000 while the provision for losses on
investments in joint ventures increased by $562,000 to $682,000. These
increases were a result of the continued deterioration in real estate values
in the Savings Bank's primary market area. In July 1995
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the Savings Bank liquidated its interest in its one remaining joint venture,
which consisted of a tract of single family homes.
Income Taxes. Income tax benefit was $1.7 million for the year ended
June 30, 1995, (resulting in an effective tax rate of 30.3%) compared to a
tax benefit of $648,000 for the year ended June 30, 1994 (resulting in an
effective tax rate of 32.7%). The increase of $1.1 million in income tax
benefit is primary attributable to a decline in pre-tax income of $3.7
million during the year ended June 30, 1995 as compared to the year ended
June 30, 1994.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields
and costs thereof. Such yields and costs for the periods indicated are
derived by dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods presented. Average
balances are derived from month-end balances. Management does not believe
that the use of month-end balances instead of daily balances has caused any
material difference in the information presented.
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<TABLE>
Year Ended June 30,
1996 1995 1994
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
Interest-earning
assets:
Loans
receivable,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
net(1)(2) $504,336 $39,701 7.87% $494,087 $34,045 6.89% $512,173 $34,604 6.76%
Investment
securities 20,135 1,386 6.88 20,636 1,284 6.23 25,926 1,060 4.09
FHLB stock 4,489 230 5.13 4,944 268 5.41 4,726 174 3.68
Interest-earning
deposits 13,873 500 3.61 11,885 423 3.56 14,938 359 2.40
------- ------- -------- ------- -------- --------
Total interest-
earning
assets 542,833 41,817 7.70 531,552 36,020 6.78 557,763 36,197 6.49
------- ------ ------- ------ ------- ------
Non-interest-
earning
assets 21,313 23,332 22,761
Total
assets $564,146 $554,884 $580,524
======== ======== =========
Interest-bearing
liabilities:
Passbook
accounts 52,345 1,743 3.33 $ 55,805 1,466 2.63 $ 71,883 1,679 2.34
Demand and NOW
accounts 111,145 4,237 3,81 126,913 5,082 4.00 109,544 3,326 3.04
Certificate
accounts 326,056 18,027 5.53 294,701 14,641 4.97 283,421 12,660 4.47
------- -------- ------- ------ ------- -------
Total
deposits 489,546 24,007 4.90 477,419 21,189 4.44 464,848 17,665 3.80
FHLB advances 20,155 1,260 6.25 21,655 1,070 4.94 49,987 1,806 3.61
Other
borrowings 840 2 0.24 4,302 232 5.38 1,388 61 4.42
------ ------ ------- ----- ------ -----
Total interest-
bearing
liabili-
ties 510,541 25,269 4.95 503,376 22,491 4.47 516,223 19,532 3.78
------ ------ ------
Non-interest-
bearing
liabilities 13,432 10,804 20,954
------ ------ ------
Total
liabili-
ties 523,973 514,180 537,177
------- ------- ------- <PAGE>
Retained
earnings 40,173 40,704 43,347
------- ------- ------
Total
liabilities
and retained
earnings $564,146 $554,884 $580,524
======== ======== =========
Net interest income $16,548 $13,529 $16,665
======= ======= ========
Interest rate spread (3) 2.75% 2.31% 2.71%
Net interest margin (4) 3.05% 2.55% 2.99%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 106.33% 105.60% 108.05%
- ------------------------
(1) Includes loans available for sale.
(2) Includes deferred loan fee amortization of $112,000, $98,000 and $478,000 or the years ended June 30,
1996, 1995 and 1995, respectively.
(3) Represents difference between weighted average yield on all interest-earning assets and weighted
average rate on all interest-bearing liabilities.
(4) Represents net interest income before provision for loan losses as a percentage of average
interest-earning assets.
46
</TABLE>
PAGE
<PAGE>
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods
and at the dates indicated the weighted average yields earned on the Savings
Bank's assets and the weighted average interest rates paid on the Savings
Bank's liabilities, together with the net yield on interest-earning assets.
At
June 30, Year Ended June 30,
1996 1996 1995 1994
Weighted average yield on:
Loans receivable (1) 7.79% 7.87% 6.89% 6.76%
Investment securities 5.45 6.88 6.23 4.09
FHLB stock 6.05 5.13 5.41 3.68
Interest-earning deposits 4.03 3.61 3.56 2.40
All interest-earning assets7.51 7.70 6.78 6.49
Weighted average rate paid on:
Passbook accounts 3.15 3.33 2.63 2.34
Demand and NOW accounts 3.89 3.81 4.00 3.04
Certificate accounts 5.21 5.53 4.97 4.47
FHLB advances 6.10 6.25 4.94 3.61
Other borrowings -- 0.30 5.38 4.42
All interest-bearing
liabilities 4.76 4.95 4.47 3.78
Interest rate spread (spread
between weighted average
rates on all interest-
earning assets and
all interest-
bearing liabilities) 2.76 2.75 2.31 2.71
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) 3.37 3.05 2.55 2.99
(1) Includes loans available for sale.
47
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<PAGE>
Rate/Volume Table
The following table sets forth the effects of changing rates and volumes
on interest income and expense of the Savings Bank. Information is provided
with respect to (i) effects attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) changes that
cannot be allocated between rate and volume.
Year Ended June 30, Year Ended June 30,
1996 Compared to Year 1995 Compared to Year
Ended June 30, 1995 Ended June 30, 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
----------------------------------------------------------
(In Thousands)
Interest
income:
Loans
receivable(1) $4,850 $706 $100 $5,656 $ 687 $(1,222) $ (24)$ (559)
Investment
securities 135 (31) (3) 102 554 (217) (113) 224
FHLB stock (14) (25) 1 (38) 82 8 4 94
Interest-bearing
deposits 6 70 1 77 172 (73) (35) 64
----- ---- ---- ----- ----- ------ ------ -----
Total net
change in
income
on interest-
earning
assets 4,977 720 99 5,797 1,495 (1,504) (168) (177)
------ --- --- ----- ----- ----- ----- -----
Interest-bearing
liabilities:
Passbook
accounts 392 (91) (24) 277 209 (376) (46) (213)
Demand and
NOW accounts (244) (631) 30 (845) 1,061 527 168 1,756
Certificate
accounts 1,653 1,558 176 3,387 1,421 504 56 1,981
FHLB advances 283 (74) (20) 189 664 (1,024) (376) (736)
Other
borrowings (219) (187) 177 (230) 13 129 29 171
------ ------ ---- ----- ---- ----- ---- -----
Total net change
in expense on
interest-
bearing
liabilities1,865 575 338 2,778 3,368 (240) (169) 2,959
------ ----- --- ----- ----- ----- ----- ------
Net change in
net interest
income $3,112 $145$(239)$3,019 $(1,873)$(1,264) $ 1 $(3,136)
====== ==== ===== ===== ======= ======== ===== ========
- ------------------
(1) Includes loans available for sale. For purposes of calculating volume,
rate and rate/volume variances, nonaccrual loans were included in the
weighted average balance outstanding.
Asset and Liability Management
The principal financial objective of the Savings Bank's interest rate
risk management function is to achieve long-term profitability while limiting
its exposure to fluctuating interest rates. The Savings Bank has sought to
reduce exposure of its earnings to changes in market interest rates by
managing the mismatch between asset and liability maturities and interest
rates. The principal element in achieving this objective is to increase the
interest-rate sensitivity of the Savings Bank's assets by holding loans with
interest rates subject to periodic adjustment to market conditions. In
addition, the Savings Bank maintains an investment portfolio with laddered
maturities in shorter-term securities. The Savings Bank relies on retail
deposits as its primary source of funds. Management believes retail
deposits, compared to brokered deposits, limits the effects of interest rate
fluctuations because they generally represent a more stable source of funds.
As part of its interest rate risk management strategy, the Savings Bank
promotes transaction accounts and certificates of deposit with terms up to
five years.
In order to encourage savings associations to reduce their interest rate
risk, the OTS adopted a rule incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. Using data from the Savings
48
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<PAGE>
Bank's quarterly reports to the OTS, the Savings Bank receives a report from
the OTS that measures interest rate risk by modeling the change in Net
Portfolio Value ("NPV") over a variety of interest rate scenarios. This
procedure for measuring interest rate risk was developed by the OTS to
replace the "gap" analysis (the difference between interest-earning assets
and interest-bearing liabilities that mature or reprice within a specific
time period). NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The calculation is intended to
illustrate the change in NPV that would occur in the event of an immediate
change in interest rates of at least 200 basis points with no effect given to
any steps which management might take to counter the effect of that interest
rate movement. Under OTS regulations, an institution whose "measured
interest rate risk" is greater than 2.0% of the portfolio value of total
assets will be subject to a deduction from total capital for purposes of
calculating its risk-based capital.
The following table is provided by the OTS and sets forth as of June 30,
1996 the estimated changes in NPV based on the indicated interest rate
environments. No effect has been given to any steps that management of the
Savings Bank may take to counter the effects of interest rate movements
presented in the table.
Net Portfolio as % of
Net Portfolio Value Portfolio Value
of Assets
Basis Point ("bp")
Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
(Dollars in Thousands)
+400 bp $61,386 (20,560) (25)% 1.11% (286) bp
+300 bp 68,743 (13,202) (16) 12.21 (176) bp
+200 bp 75,142 (6,803) (8) 13.12 (85) bp
+100 bp 79,764 (2,181) (3) 15.73 (24) bp
0 81,945 -- -- 13.97 --
- -100 bp 82,045 100 0 13.90 (7) bp
- -200 bp 80,756 (1,189) (1) 13.64 (33) bp
- -300 bp 80,167 (1,778) (2) 13.48 (50) bp
- -400 bp 80,587 (1,359) (2) 13.46 (51) bp
- --------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV based on prevailing
interest rates at June 30, 1996 ("base case").
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV").
(3) Calculated as the change in the NPV ratio from the base case amount
assuming the indicated change in interest rates.
The following table is provided by the OTS and is based on the
calculations in the above table. It sets forth the IRR component deducted
from risk-based capital in determining the level of risk-based capital. At
June 30, 1996, the change in NPV as a percentage of portfolio value of total
assets was negative 1.16%, which is less than negative 2.0%, indicating that
the Savings Bank would not be required to deduct an IRR component from its
risk-based capital.
49
PAGE
<PAGE>
At At At
June 30, March 31, December 31,
1996 1996 1995
------------------------------------
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio:
NPV as % of PV of Assets 13.97% 10.64% 9.79%
Exposure Measure:
Post-Shock NPV Ratio 13.12 9.89 9.35
Sensitivity Measure:
Change in NPV Ratio (85)bp (74)bp (43)bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of
PV of Assets (1.16)% (0.94)% (0.34)%
Interest Rate Risk Capital
Component ($000) -- -- --
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table. It is
also possible that, as a result of an interest rate increase, the increased
mortgage payments required of ARM borrowers could result in an increase in
delinquencies and defaults. Changes in market interest rates would also
affect the volume and profitability of the Savings Bank's mortgage banking
activities. Accordingly, the data presented in the tables above should not
be relied upon as indicative of actual results in the event of changes in
interest rates. Furthermore, the NPV presented in the foregoing tables is
not intended to represent the fair market value of the Savings Bank, nor does
it represent amounts that would be available for distribution to stockholders
in the event of the liquidation of the Savings Bank.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are deposits, proceeds from
sales of loans originated for sale, proceeds from principal and interest
payments on loans, the maturity of and interest income on investment
securities, and FHLB advances. While maturities and scheduled amortization
of loans and investment securities are a predictable source of funds, deposit
flows, mortgage prepayments and loan sales are greatly influenced by general
interest rates, economic conditions and competition.
The Savings Bank must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. The Savings Bank generally maintains sufficient
cash and overnight deposits to meet short-term liquidity needs. At June 30,
1996, cash (including overnight deposits) totalled $30.8 million, or 5.3% of
total assets. In addition, the Savings Bank maintains a credit facility with
the FHLB-San Francisco, which provides for immediately available advances.
Advances under this credit facility totalled $8.6 million at June 30, 1996.
Depending on market conditions and the pricing of deposit products and FHLB
borrowings, the Savings Bank may continue to rely on FHLB borrowings for its
liquidity needs.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least
5.0% of the average daily balance of its net withdrawable deposits and
short-term borrowings. In addition, short-term liquid assets currently must
constitute 1.0% of the sum of net withdrawable deposit accounts plus
short-term borrowings. The Savings Bank's actual short- term liquidity ratio
at June 30, 1996
50
PAGE
<PAGE>
was 6.1%. The Savings Bank has in the past consistently maintained liquidity
levels relatively close to and in excess of regulatory requirements and
believes this is an appropriate strategy for proper asset and liability
management.
The primary investing activity of the Savings Bank is the origination of
mortgage loans. During years ended June 30, 1994, 1995 and 1996, the Savings
Bank originated loans in the amounts of $1.1 billion, $255.1 million and
$515.0 million, respectively. At June 30, 1996, the Savings Bank had loan
commitments totalling $19.9 million and undisbursed loans in process
totalling $3.7 million. The Savings Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit that are scheduled to mature in less than one year
from June 30, 1996 totalled $251.6 million. Historically, the Savings Bank
has been able to retain a significant amount of its deposits as they mature.
Management of the Savings Bank believes it has adequate resources to fund all
loan commitments by deposits and FHLB advances and that it can adjust the
offering rates of savings certificates to retain deposits in changing
interest rate environments. Proposed federal legislation to recapitalize the
SAIF would require savings associations like the Savings Bank to pay a
one-time assessment to increase the SAIF's reserves to $1.25 per $100 of
deposits. Such assessment is expected to be approximately 80 basis points on
the amount of deposits held by a SAIF-member institution at March 31, 1995.
Based on the Savings Bank's assessable deposits of $490.5 million at March
31, 1995, a one-time assessment of 80 basis points would equal approximately
$3.9 million. The Savings Bank believes that it has adequate resources to
pay such assessment from cash and other liquid investments, including
short-term investment securities.
The Savings Bank is required to maintain specific amounts of capital
pursuant to OTS requirements. As of June 30, 1996, the Savings Bank was in
compliance with all regulatory capital requirements which were effective as
of such date with tangible, core and risk-based capital ratios of 10.4%,
10.4% and 16.5%, respectively. For a detailed discussion of regulatory
capital requirements, see "REGULATION -- Federal Regulation of Savings
Associations -- Capital Requirements" in Item 1 of this Report.
Impact of New Accounting Pronouncements
Disclosure of Certain Significant Risks and Uncertainties. In December
1994, the Accounting Standards Executive Committee issued SOP 94-6,
"Disclosure of Certain Significant Risks and Uncertainties." This SOP
applies to financial statements prepared in conformity with GAAP by all
nongovernmental entities. The disclosure requirements in SOP 94-6 focus
primarily on risks and uncertainties that could significantly effect the
amounts reported in the financial statements in the near-term functioning of
the reporting entity. The risks and uncertainties discussed in SOP 94-6 stem
from the nature of the entity's operations, from the necessary use of
estimates in the preparation of the entity's financial statements and from
significant concentrations in certain aspects of the entity's operations.
SOP 94-6 is effective for financial statements issued for fiscal years ending
after December 15, 1995 and is not expected to have any impact on the
financial position or results of operations of the Corporation.
Accounting for the Impairment of Long-Lived Assets. In March 1995, the
FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The statement does not apply to financial instruments,
long-term customer relationships of a financial institution (core deposits),
mortgage and other servicing rights and deferred tax assets. SFAS No. 121
requires the review of long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances include, for
example, a significant decrease in market value of an asset, a significant
change in use of an asset, or an adverse change in a legal factor that could
effect the value of an asset. If such an event occurs and it is determined
that the carrying value of the asset may not be recoverable, an impairment
loss should be recognized as measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Fair value can be
determined by a current transaction, quoted market prices or present value of
estimated expected future cash flows discounted at the appropriate rate. The
statement is effective for fiscal years beginning after
51
PAGE
<PAGE>
December 15, 1995. The Corporation does not anticipate that implementation
of SFAS No. 121 will have a material impact on its results of operations or
financial position.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122
eliminates distinctions between servicing rights that were purchased and
those that were retained upon the sale of loans. The statement requires
mortgage servicers to recognize as separate assets rights to service loans,
no matter how the rights were acquired. Institutions who sell loans and
retain the servicing rights will be required to allocate the total cost of
the loans to servicing rights and loans based on their relative fair values
if that value can be estimated. SFAS No. 122 is effective for fiscal years
beginning after December 15, 1995. Further SFAS No. 122 requires that all
capitalized mortgage servicing rights be periodically evaluated for
impairment based upon the current fair value of these rights. Management
believes that the implementation of this statement will not have a
significant effect on the Corporation's financial condition or results of
operations because the Savings Bank is currently selling the majority of
loans on a servicing-released basis.
Accounting for Stock-Based Compensation. In October 1995, the FASB
issued SFAS No. 123, "Accounting for Stock-Based Compensation," establishing
financial accounting and reporting standards for stock-based employee
compensation plans. This statement encourages all entities to adopt a new
method of accounting to measure compensation cost of all employee stock
compensation plans based on the estimated fair value of the award at the date
it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net income and, if presented, earnings per share, as if this
statement had been adopted. The accounting requirements of this statement
are effective for transactions entered into in fiscal years that begin after
December 15, 1995; however, companies are required to disclose information
for awards granted in their first fiscal year beginning after December 15,
1994. Management of the Corporation has not completed an analysis of the
potential effects of this Statement on its financial condition or results of
operations. Any effect this Statement will have on the Holding Company will
not occur until following adoption of the Stock Option Plan and the MRP.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP which generally
requires the measurement of financial position and operating results in terms
of historical dollars, without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation is reflected in the increased cost of the Savings Bank's
operations. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as
the prices of goods and services. In the current interest rate environment,
liquidity and maturity structure of the Savings Bank's assets and liabilities
are critical to the maintenance of performance levels.
52
PAGE
<PAGE>
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and Shareholders of Provident Financial Holdings,
Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Provident Financial Holdings, Inc. and its subsidiary at June 30, 1996 and
1995, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
/s/ Price Waterhouse LLP
Los Angeles, CA
August 5, 1996
53
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Consolidated Balance Sheet
(Dollars in Thousands)
June 30,
1996 1995
Assets
Cash $ 7,031 $ 6,233
Overnight deposits 23,800 5,200
Investment securities held-to-maturity,
approximates market (Note 2) 27,118 20,067
Loans receivable, net (Note 3) 452,945 471,543
Loans receivable available-for-sale,
net (Note 4) 49,612 34,489
Accrued interest receivable 3,083 2,855
Real estate available-for-sale,
net (Note 5) 5,779 11,204
Federal Home Loan Bank stock - at cost 4,590 4,360
Premises and equipment, net (Note 6) 7,058 7,536
Prepaid expenses and other assets 3,831 3,699
------------ ------------
Total assets $ 584,847 $ 567,186
============ =============
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits (Note 7)$ 2,106 $ 2,787
Interest bearing deposits (Note 7) 477,268 483,798
Borrowings (Note 8) 8,578 35,063
Accounts payable and other liabilities 10,925 8,215
------- -------
Total liabilities 498,877 529,863
Commitments and contingencies (Note 13)
Stockholders' equity (Notes 10, 11 and 16):
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 and outstanding
5,125,215 at June 30, 1996 51
Additional paid-in capital 49,742
Retained earnings - substantially
restricted (Notes 10 and 16) 40,129 37,323
Unearned ESOP shares (Note 11) (3,952)
------- -------
Total stockholders' equity 85,970 37,323
------- --------
Total liabilities and
stockholders' equity $ 584,847 $ 567,186
============= ============
The accompanying notes are an integral part of these statements.
54
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Consolidated Statements of Operations
(Dollars in Thousands)
Year Ended June 30,
1996 1995 1994
Interest income:
Loans (Note 3) $ 39,701 $ 34,045 $ 34,604
Investment securities
(Note 2) 2,116 1,975 1,593
-------- -------- -------
Total interest income 41,817 36,020 36,197
-------- -------- --------
Interest expense:
Deposits (Note 7) 24,007 21,189 17,665
Borrowings 1,262 1,302 1,867
------- ------ ------
Total interest expense 25,269 22,491 19,532
------- ------- ------
Net interest income 16,548 13,529 16,665
Provision for loan losses (Note 3) 2,261 4,787 2,033
------- ------ -----
Net interest income, after provision
for loan losses 14,287 8,742 14,632
Non-interest income
Loan servicing and other fees 2,442 2,476 3,072
Gain on sale of loans, net 4,753 701 1,246
Gain on bulk sale of
servicing rights 2,052
Life insurance proceeds 1,000
Other 1,256 1,308 1,141
------ ----- -----
Total non-interest income 9,451 4,485 7,511
------ ------ ------
Non-interest expenses
Salaries and employee benefits 11,444 9,671 13,537
Premises and occupancy 1,939 2,336 2,180
SAIF insurance premiums 1,293 1,105 1,084
Telephone 426 460 634
Other 4,397 3,782 6,323
------ ------ ------
Total operating and
administrative expenses 19,499 17,354 23,758
Real estate operations, net (Note 5) 101 1,600 366
------ ------- ------
Total non-interest expenses 19,600 18,954 24,124
------ ------- -------
Income (loss) before income taxes 4,138 (5,727) (1,981)
Provision (benefit) for income
taxes (Note 9) 1,332 (1,735) (648)
------ ------- -------
Net income (loss) $ 2,806 $ (3,992) $ (1,333)
======= ======== =======
The accompanying notes are an integral part of these statements.
55
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
(Dollars in Thousands)
Additional Unearned
Common Paid-in Retained ESOP
Shares Stock Capital Earnings Shares Total
Balance at
June 30, 1993 $ 42,648 $42,648
Net loss for
the year ended
June 30, 1994 (1,333) (1,333)
------- ----- ----------- ---------- ------ -------
Balance at June
30, 1994 41,315 41,315
Net loss for the
year ended
June 30, 1995 (3,992) (3,992)
-------- ----- ------------ ----------- ----- -------
Balance at June
30, 1995 37,323 37,323
Issuance of stock
in a public
offering
(Note 16) 5,125,215 $ 51 $ 49,728 49,779
Purchase of shares by ESOP
(Note 11) $ (4,100)
(4,100)
Release of ESOP shares 14 148 162
Net income for year ended
June 30, 1996 2,806 2,806
---------- ----- ------------- ------------- ------- ------
Balance at June
30, 1996 5,125,215 $ 51 $ 49,742 $ 40,129 $(3,952) $85,970
========= ======= =========== ============ ======= ========
The accompanying notes are an integral part of these statements.
56
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Consolidated Statement of Cash Flows
(Dollars in Thousands)
Year Ended June 30,
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 2,806 $ (3,992) $ (1,333)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization 1,058 1,387 1,692
Amortization of loan fees (112) (90) (478)
Provision for loan losses 2,261 4,787 2,033
Provision for losses on
real estate 239 1,665 525
Gain on sale of loans (4,753) (701) (1,246)
Increase (decrease) in accounts
payable and other liabilities 2,710 (2,866) (6,546)
(Increase) decrease in prepaid
expenses and other assets (592) 1,054 (2,831)
Loans originated for sale (469,167) (161,480) (1,023,377)
Proceeds from sale of loans 458,797 210,741 1,045,983
Other (1,000) (961) 163
-------- -------- ---------
Net cash (used for) provided
by operating activities (7,753) 49,544 14,585
---------- -------- ---------
Cash flows from financing activities:
Net (decrease) increase in NOW,
passbook and money market
deposits (7,064) (34,786) 46,998
Net (decrease) increase in
term deposits (147) 49,584 (29,329)
Repayment of Federal Home
Loan Bank Advances (37,000) (153,500) (338,000)
Proceeds from Federal
Home Loan Bank Advances 12,500 135,500 313,031
Proceeds from issuance of
capital stock 45,841
Net (decrease) increase in
securities sold under
agreements to repurchase (1,985) (3,090) 5,075
-------- ------ ------
Net cash provided by
(used for) financing
activities 12,145 (6,292) (2,225)
-------- -------- --------
The accompanying notes are an integral part of these statements.
57
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Consolidated Statement of Cash Flows
(Dollars in Thousands)
Year Ended June 30,
1996 1995 1994
Cash flows from investing
activities:
Net decrease (increase) in
loans receivable 13,047 (67,400) (22,036)
Maturity of investment
securities held-to-maturity 207,104 334,046
Purchases of investment securities
held-to-maturity (214,155) (330,267) (23,121)
Redemption (purchases) of
Federal Home
Loan Bank stock 1,000 (751)
Proceeds from disposal of
real estate 8,619 8,245 5,280
(Purchases) of premises and equipment,
net of proceeds from sales (609) (352) (1,757)
Other 1,000 (118)
------- -------- ---------
Net cash provided by (used for)
investing activities 15,006 (54,728) (42,503)
-------- --------- -----------
Net increase (decrease) in cash
and cash equivalents 19,398 (11,476) (30,143)
Cash and cash equivalents at
beginning of period 11,433 22,909 53,052
--------- -------- ------
Cash and cash equivalents at
end of period $ 30,831 $ 11,433 $ 22,909
======== ====== =======
Supplemental information:
Cash paid for interest $ 25,302 $ 22,607 $ 19,417
======= ====== =======
Cash paid (received)
for income taxes $ 704 $ (3,014) $ 1,840
========= ====== =======
Real estate acquired in
settlement of loans $ 3,433 $ 11,546 $ 4,973
========= ======= ======
The accompanying notes are an integral part of these statements.
58
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (Dollars in Thousands)
As more fully described in note 16, pursuant to a plan of conversion,
Provident Savings Bank, FSB (the Bank) converted from a Federally chartered
mutual savings bank to a Federally chartered stock savings bank effective
June 27, 1996. Provident Financial Holdings, Inc. (the Holding Company), a
Delaware corporation organized by the Bank, acquired all of the capital stock
of the Bank issued in the conversion; the transaction was recorded on a book
value basis. Any references to financial information for periods prior to
June 30, 1996 refer to the Bank prior to conversion.
The following accounting policies, together with those disclosed
elsewhere in the consolidated financial statements, represent the significant
accounting policies of Provident Financial Holdings, Inc. and subsidiary.
Principles of consolidation
The consolidated financial statements include the accounts of Provident
Financial Holdings Inc., and its wholly- owned subsidiary, Provident Savings
Bank, FSB (collectively, the Company). All significant intercompany
balances and transactions have been eliminated.
The Company operates primarily in one business segment -attracting
customer deposits to originate loans secured primarily by mortgages on
residential real estate. The segment includes ancillary activities related
to real estate lending such as mortgage banking and real estate development.
Customer deposits are collected substantially from Riverside and San
Bernardino Counties out of nine branch locations with lending operations in
California and Nevada using nine lending offices.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to prevailing practices within
the banking industry. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment securities
Upon acquisition, securities are classified as held-to-maturity,
trading, or available-for-sale based on the Company's intent with respect to
holding the security. Through June 30, 1996, management has classified all
investments as held-to-maturity. Accordingly, investment securities are
stated at cost, adjusted for amortization of premiums and accretion of
discounts over the terms of the securities using the interest method. The
Company has both the intent and ability to hold investment securities to
maturity.
Loans receivable
The Company's real estate loan portfolio consists primarily of long-term
loans secured by first trust deeds on single-family residences, other
residential property, commercial property and land. The adjustable-rate
mortgage (ARM) is the Company's primary loan investment.
Fees are charged for originating loans at the time the loan is granted.
Loan origination fees are deferred, partially offset by certain direct
origination expenses, and amortized to interest income on loans over the
contractual life of the loan using the interest method. Amortization is
discontinued for nonperforming loans and loans held-for-sale and is realized
upon the ultimate disposition of the assets.
Interest receivable represents, for the most part, the current month's
interest which will be included as a part of the borrower's next monthly loan
payment. Interest receivable is accrued only if deemed collectible. Loans
generally are deemed to be in non-accrual status when they become 90 days
past due. When a loan is placed on non-accrual status, interest accrued but
not received is reversed against income.
59
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Mortgage banking activities
Loans are originated for both investment and sale in the secondary
market. Since the Company is primarily an adjustable-rate mortgage lender
for its own portfolio, most fixed rate products are originated for sale to
others. Loans available-for-sale are carried at lower of cost or fair
value. Fair value is generally determined by outstanding commitments from
investors or current investor yield requirements as calculated on the
aggregate loan basis.
The Company sells mortgage loans which are originated in order to limit
interest rate risk and to provide additional funds for investment by the
Company. Loans are sold without recourse other than short term covenants
which are standard in the industry. For some loans sold, the Company may
retain the servicing rights in order to generate servicing income. Where the
Company continues to service loans after sale, investors are paid their share
of the principal collections together with interest at an agreed-upon rate,
which generally differs from the loan's contractual interest rate.
Gains or losses on sales of loans, including fees received or paid, are
recognized at the time of sale and are determined by the difference between
the net sales proceeds and the book value of the loans sold. When loans are
sold with servicing retained, an adjustment, if necessary, is made to
increase or decrease the difference in order to provide for a normal
servicing spread.
Bulk sales of servicing rights are recognized when title and all risks
and rewards of ownership of the underlying loans have been irrevocably
transferred to the buyer and all significant contingencies have been
resolved.
The Financial Accounting Standards Board has issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." This Statement will require the
Company to recognize mortgage servicing rights as separate assets from the
underlying mortgage loans at the time such loans are sold and servicing is
retained. The Company will be required to allocate a cost basis to the
mortgage servicing rights asset and to the loan (without the mortgage
servicing rights) based on their relative fair values. The Company intends
to implement this Statement for the year ending June 30, 1997; retroactive
application is prohibited. Management believes this Statement will not have
a significant effect on the Company's results of operations or financial
position.
Allowance for loan losses
It is the policy of the Company to provide for estimated losses on real
estate loans when any significant and permanent decline in the value of the
underlying collateral occurs. Periodic reviews are made in an attempt to
identify potential problems at an early date. Individual loans are
periodically reviewed and are classified according to their inherent risk.
The internal asset classification system used by the Company is the primary
basis by which the Company evaluates the possible loss exposure.
Management's determination of the adequacy of the allowance for losses is
based on an evaluation of the portfolio, past experience, prevailing market
conditions, and other relevant factors. The determination of the allowance
for loan losses is based on estimates that are particularly susceptible to
changes in the economic environment and market conditions. The allowance is
increased by the provision for losses charged against income and reduced by
charge-offs, net of recoveries.
Impaired loans
The Company assesses loans individually and identifies impairment when
the accrual of interest has been discontinued, loans have been restructured
or management has serious doubts about the future collectibility of principal
and interest, even though the loans are currently performing. Factors
considered in determining impairment include, but are not limited to,
expected future cash flows, the financial condition of the borrower and
current economic conditions. The Company measures each impaired loan based
on the fair value of its collateral and charges off those loans or portions
of loans deemed uncollectible.
60
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Real estate available-for-sale
All foreclosed real estate and investment real estate is
available-for-sale. Real estate acquired through foreclosure is initially
recorded at the lesser of the loan balance at the time of foreclosure or the
fair value of the real estate acquired less estimated selling costs. All
real estate is carried at the lower of cost or fair value less estimated
selling costs. Real estate loss provisions are recorded when the carrying
value of the property exceeds the fair value. Costs relating to improvement
of property are capitalized. Other costs are expensed as incurred.
Federal regulations require that investments in subsidiaries conducting
real estate investments and joint venture activities be phased out by 1996
or, that institutions conducting such activities maintain sufficient capital
over the minimum regulatory requirements. The Company maintains capital in
excess of the minimum requirements.
The Company had real estate acquisition and development activities
through joint ventures. No new joint ventures were formed after fiscal year
1989 and the Company's interest in its final joint venture was liquidated
July 3, 1995. The Company provided funding to these joint ventures through
capital contributions and participated in the profit or loss from the sale of
the property. Investments in joint ventures were accounted for on the equity
method, with adjustments, if necessary to reflect net realizable value.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed primarily on a straight-line
basis over the estimated useful lives as follows:
Buildings 10-40 years
Furniture and fixtures 3-10 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the respective
lease terms or the lives of the improvements. Maintenance and repair costs
are charged to operations as incurred.
Excess of cost over net assets acquired
Beginning in fiscal year 1990, the Bank amortized its excess of cost
over net assets acquired on a straight-line basis over 5 years, requiring an
approximate annual charge of $469,000. The balance was fully amortized of
June 30, 1995.
Income taxes
Taxes are provided on substantially all income and expense items
included in earnings, regardless of the period in which such items are
recognized for tax purposes. Taxes on income are determined by using the
liability method. This approach requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, all expected future events
other than enactments of changes in the tax law or rates are considered. A
valuation allowance is provided against deferred tax assets when realization
is not considered "more likely than not."
Risks and uncertainties
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market risk.
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on a
different basis, than its interest-earning assets. Credit risk is the risk
of default on the Company's loan portfolio that results from the borrower's
inability or unwillingness to make contractually required payments. Market
risk results from changes in the value of assets and liabilities which may
impact, favorably or unfavorably, the realizability of those assets and
liabilities held by the Company.
61
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Company is subject to the regulations of various government
agencies. These regulations can and do change significantly from period to
period. The Company also undergoes periodic examinations by the regulatory
agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances and operating restrictions
resulting from the regulators' judgements based on information available to
them at the time of their examination.
Statement of cash flows
Cash equivalents include overnight deposits and securities purchased
under agreements to resell.
Reclassifications
Certain reclassifications of prior year financial data have been made to
conform to the current reporting practices of the Company.
Earnings per share
Presentation of earnings per share is not considered meaningful due to
the closing of the Company's initial public offering on June 27, 1996.
Employee Stock Ownership Plan
The Company recognizes compensation expense for shares committed to be
released to directly compensates employees in an amount equal to the fair
value of the shares so committed. Fluctuations in compensation expense as a
result of changes in the fair value of the Company's common stock would
result in an offsetting adjustment to additional paid-in capital. Therefore,
total capital would not be affected.
2. Investment Securities Held-To-Maturity (Dollars in Thousands):
The book value and estimated market value of investment securities
held-to-maturity as of June 30, 1996 were as follows:
June 30, 1996
Gross Gross Estimated
Book Unrealized Unrealized Market
Value Gains (Losses) Value
U.S. Treasury
securities and
obligations of
other U.S.
government
agencies and
corporations $ 26,973 $ 27 $ (30) $ 26,970
Other 145 2 (5) 142
------- ------ -------- --------
$ 27,118 $ 29 $ (35) $ 27,112
======= ======== ========= ========
62
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The book value and estimated market value of investment securities
held-to-maturity as of June 30, 1995 were as follows:
June 30, 1996
Gross Gross Estimated
Book Unrealized Unrealized Market
Value Gains (Losses) Value
U.S. Treasury
securities and
obligations of
other U.S.
government
agencies
and
corporations $ 18,910 $ 23 $ (20) $ 18,913
Securities
purchased
under
agreements
to resell 990 (12) 978
Other 167 23 (2) 188
------- ------ ------- ---------
$ 20,067 $ 46 $ (34) $ 20,079
======== ======== ======== ==========
Securities purchased under agreements to resell at June 30, 1995, were
secured by mortgage-backed securities pledged by dealers whose market values
exceeded the Company's investment in these agreements. These agreements
matured within ninety days of the end of the period.
The maturities of investment securities were as follows:
June 30, 1996 June 30, 1995
Carrying Market Carrying Market
Amount Value Amount Value
Due in one year $ 24,973 $ 24,985 $ 14,900 $ 14,892
Due after one
through five years 2,145 2,127 5,167 5,187
-------- --------- -------- ---------
$ 27,118 $ 27,112 $ 20,067 $ 20,079
======= ======= ====== ======
63
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
3. Loans Receivable (Dollars in Thousands):
Loans receivable consisted of the following:
June 30,
1996 1995
Residential real
estate - single family $ 327,490 $ 345,034
Residential real estate
- multi-family 54,427 53,531
Commercial real estate 54,813 61,518
Real estate construction 10,222 5,938
Consumer 15,497 15,830
Other 332 137
-------- --------
462,781 481,988
Less:
Undisbursed loan funds 3,694 4,121
Deferred loan fees 513 1,034
Unearned discounts on
loans purchased 177 205
Allowance for loan losses 5,452 5,085
--------- -------
$ 452,945 $ 471,543
========= ========
Fixed rate loans comprised 13% and 11%, respectively, of the loan
portfolio at June 30, 1996 and 1995.
The following summarizes the components of the net change in the
allowance for loan losses:
Year Ended June 30,
1996 1995 1994
Balance, beginning
of period $ 5,085 $ 3,332 $ 3,286
Provision for losses 2,261 4,787 2,033
Recoveries 589 459 119
(Charge-offs) (2,483) (3,493) (2,106)
------- ------- ------
Balance, end of period $ 5,452 $ 5,085 $ 3,332
======= ======= ======
The following summarizes information regarding non-accrual and
restructured loans:
June 30,
1996 1995
Non-accrual loans $ 4,417 $ 2,558
======= =========
Restructured loans $ 6,652 $ 3,272
======== =========
64
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The following summarizes information regarding the reduction of interest
income on non-accrual loans:
Year Ended June 30,
1996 1995 1994
Income in accordance with
original terms $ 720 $ 631 $ 546
Income recognized 352 154 92
---- ----- ----
Foregone interest income
during year $ 367 $ 477 $ 454
===== ====== =====
At June 30, 1996 and 1995, there were no commitments to lend additional
funds to those borrowers whose loans were classified as restructured or
non-accrual.
At June 30, 1996, the recorded investment in loans which have been
identified by the Bank as impaired loans was $12,757 for which no allowance
for loan losses has been provided. During the year ended June 30, 1996, the
average recorded value of impaired loans was $11,092, $1,074 of interest
income was recognized, and $1,473 of interest income would have been
recognized under original terms.
In the ordinary course of business, the Bank makes loans to its
directors, officers and employees at substantially the same terms prevailing
at the time of origination for comparable transactions with borrowers. The
following is a summary of related party loan activity:
Year ended June 30,
1996 1995 1994
Balance, beginning
of period $ 2,315 $ 2,719 $ 2,000
Originations 471 4 962
Payments (90) (29) (99)
Terminations (234) (379) (144)
------ -------- -------
Balance, end of period $ 2,462 $ 2,315 $ 2,719
====== ======= =======
4. Mortgage Banking (Dollars in Thousands)
The following summarizes the unpaid principal balance of loans serviced
by the Company:
Year ended June 30,
1996 1995 1994
Loans serviced for
Federal Home
Loan Mortgage
Corporation $ 221,019 $ 238,187 $ 252,259
Loans serviced
for Federal National
Mortgage Association 305,446 338,86 362,923
Loans serviced for
other investors 74,632 80,403 88,464
--------- -------- -------
$ 601,097 $ 657,451 $ 703,646
========= ======== ========
65
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income includes servicing fees from
investors and certain charges collected from borrowers, such as late payment
fees. The Company held borrowers' escrow balances related to loans serviced
for others of $877 and $1,119 as of June 30, 1996 and 1995, respectively.
These escrow balances are included in deposits in the accompanying
consolidated balance sheet.
The composition of loans sold was as follows:
Year ended June 30,
1996 1995 1994
Loans sold
Servicing - released $ 437,917 $ 198,463 $ 558,726
Servicing - retained 16,127 11,577 486,011
------- ------- ----------
$ 454,044 $ 210,040 $ 1,044,737
======= ======= =========
Included in gain on sale of loans for the years ended June 30, 1996 and
1995 were hedging gains relating to put options of $495 and $0, respectively.
Loans receivable available-for-sale consisted of the following:
June 30,
1996 1995
Adjustable rate $ 7,891 $ 3,291
Fixed rate 41,721 31,209
------- -------
49,612 34,500
Less: Valuation allowance (11)
-------- --------
$ 49,612 $ 34,489
======== ========
66
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
5. Real Estate Available-for-Sale (Dollars in Thousands)
Real estate consisted of the following:
June 30,
1996 1995
Foreclosed real estate $ 3,003 $ 7,661
Investment real estate 3,531 3,560
Investments in joint ventures 1,325
----- ------
6,534 12,546
------ ------
Allowance for estimated losses:
Foreclosed real estate (292) (877)
Investment real estate (463) (465)
------- -------
(755) (1,342)
------- --------
$ 5,779 $ 11,204
======== =======
The following summarizes the components of the net change in the
allowance for losses on real estate:
Year ended June 30,
1996 1995 1994
Balance, beginning of period $ 1,342 $ 1,384 $ 2,980
Provisions for losses 239 1,665 525
Charge-offs (826) (1,707) (2,121)
------- ------ -------
Balance, end of period $ 755 $ 1,342 $ 1,384
======= ====== ======
The following summarizes the components of the Company's real estate
operations:
Year ended June 30,
1996 1995 1994
Provision for losses:
Foreclosed real estate $ (239) $ (983) $ (405)
Investments in joint
ventures (682) (120)
Net operating income
(losses) and holding costs 138 65 159
----- ------ -----
$ (101) $ (1,600) $ (366)
======= ======= ======
67
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
6. Premises and Equipment (Dollars in Thousands)
Premises and equipment consisted of the following:
June 30,
1996 1995
Land $ 2,564 $ 2,564
Buildings 6,632 6,571
Leasehold improvements 464 461
Furniture and equipment 7,364 6,913
Automobiles 173 178
------- ------
17,197 16,687
Less accumulated depreciation
and amortization (10,139) (9,151)
--------- --------
$ 7,058 $ 7,536
======== ========
7. Deposits (Dollars in Thousands)
June 30, 1996 June 30, 1995
Interest Rate Amount Rate Amount
Checking deposits 0%-1.00% $ 22,344 0%-1.00% $ 22,316
Passbook deposits 2.08%-2.92% 52,852 2.08%-3.92% 50,850
Money market
deposits 1.00%-4.64% 83,097 1.20%-5.17% 92,191
Term deposits
Under $100,000 2.66%-8.00% 265,853 2.71%-8.00% 268,174
$100,000 and
over 4.45%-8.00% 55,228 2.71%-8.00% 53,054
--------- ----------
$ 479,374 $ 486,585
========= ========
Weighted average interest
rate on deposits 4.65% 4.90%
==== ===
68
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The aggregate annual maturities of term accounts are as follows:
June 30,
1996 1995
Within one year $ 251,589 $ 243,631
One to two years 44,995 37,652
Two to three years 10,774 22,970
Three to four years 8,864 9,054
Four to five years 4,741 7,819
Thereafter 117 103
------- --------
$ 321,080 $ 321,229
======== ========
Interest expense is summarized as follows:
Year ended June 30,
1996 1995 1994
Checking $ 203 $ 189 $ 203
Term deposits 18,027 14,641 12,660
Money market deposits 4,034 4,893 3,123
Passbook deposits 1,743 1,466 1,679
------- ------- --------
$ 24,007 $ 21,189 $ 17,665
======= ======= =======
The Company is required to maintain cash and reserve balances with the
Federal Reserve Bank. Such reserve is calculated based on deposit levels and
amounted to $816 and $291 at June 30, 1996 and 1995, respectively.
8. Borrowings (Dollars in Thousands)
Borrowings consisted of the following:
June 30,
1996 1995
Advances from Federal Home Loan Bank $ 8,578 $ 33,078
Securities sold under agreements
to repurchase 1,985
------- ---------
$ 8,578 $ 35,063
====== =======
Advances from the Federal Home Loan Bank were collateralized by pledges
of certain real estate loans with an aggregate principal balance at June 30,
1996 and 1995 of $193,306 and $279,192, respectively. The Bank's overall
borrowing capacity which is limited to 30% of total assets, as reported on
the Bank's quarterly thrift financial reports, is approximately $169,865,
and $170,946 at June 30, 1996 and 1995, respectively.
As a member of the FHLB system, the Bank is required to maintain a
minimum investment in FHLB stock. The investment exceeds the required level
by $408 and $49 at June 30, 1996 and 1995, respectively. Any excess may be
redeemed by the Bank or called by FHLB at par.
69
PAGE
<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The aggregate annual maturities of advances are as follows:
June 30,
1996 1995
Within one year $ 1,750 $ 32,000
One to two years 6,500 750
Two to three years
Over three years 328 328
-------- ----------
$ 8,578 $ 33,078
========= =========
Weighted average interest rate 6.10% 6.37%
===== ====
Occasionally, the Company enters into reverse repurchase agreements,
usually for thirty days or less, secured by its investments. At June 30,
1995, the Company had an outstanding reverse repurchase agreement of $1,985
secured by securities under the Company's control with a carrying value of
$1,995 and with a market value of $1,997. The weighted average interest rate
of reverse repurchase agreements at June 30, 1995 was 6.15%. There were no
reverse repurchase agreements outstanding as of June 30, 1996.
9. Income Taxes (Dollars in Thousands)
The provision for income taxes consisted of the following:
Year ended June 30,
1996 1995 1994
Current:
Federal $ 1,244 $ (952) $ (880)
State 111 3 271
----- ----- -----
1,355 (949) (609)
------ ----- ------
Deferred:
Federal (95) (1,050) 430
State 72 264 (469)
---- ----- -----
(23) (786) (39)
---- ----- -----
Provision (benefit)
for income taxes $ 1,332 $ (1,735) $ (648)
====== ====== =======
70
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pre-tax income from continuing operations as a result of the following
differences:
Year ended June 30,
1996 1995 1994
Statutory U.S. federal
income tax rate 34.0% (34.0%) (34.0%)
State taxes net of
Federal income tax effect 2.9% 3.1% (6.6%)
Nondeductible goodwill
amortization 1.9% 10.7%
Life insurance proceeds (10.7%)
Other 6.0% (1.3%) (2.8%)
------- ------ -------
Effective income
tax rate 32.2% (30.3%) (32.7%)
====== ======= ======
Deferred tax liabilities (assets) by jurisdiction were as follows:
June 30,
1996 1995
Deferred taxes - federal $ (872) $ (777)
Deferred taxes - state (387) (459)
------- -------
$ (1,259) $ (1,236)
======== ========
Deferred tax liabilities (assets) were comprised of the following:
June 30,
1996 1995
State taxes $ 93 $ 189
Depreciation 614 611
Federal Home Loan
Bank dividends 1,254 1,148
------ -----
Market value adjustments 67
Total deferred tax liabilities 1,961 2,015
------- -------
Market value adjustments (284)
Loss reserves (2,552) (2,509)
Deferred compensation (640) (547)
Investment in real estate (142) (146)
Other (64) (151)
NOL carryforward (379)
------ -------
Total deferred tax assets (3,682) (3,732)
------- --------
Deferred tax asset
valuation allowance 462 481
------ -----
Net deferred tax assets $ (1,259) $ (1,236)
======== =======
71
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended June 30, 1996, 1995, and 1994 the Company used its
loss experience to calculate its bad debt deduction used in determining
federal income taxes payable. As a result of recently enacted legislation,
the Company's future bad debt deductions will be based only on charge-offs
claimed during the year.
10. Capital (Dollars in Thousands)
Retained earnings at June 30, 1996 and 1995 included approximately
$9,019 for which federal income tax of approximately $3,066 had not been
provided. If the amounts that qualify as deductions for federal income tax
purposes are later used for purposes other than for bad debt losses,
including distribution in liquidation, they will be subject to federal income
tax at the then current corporate tax rate. If those amounts are not so
used, they will not be subject to tax even in the event the Company were to
convert its charter.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets,liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1996, that
the Bank meets all capital adequacy requirements to which it is subject.
Various adjustments are required to be made to retained earnings and
total assets for computing these capital ratios, depending on an
institution's capital and asset structure. The adjustment presently
applicable to the Bank is for equity investments in real estate. In
addition, in calculating risk-based capital, general loss allowances are
includable as capital on a limited basis.
The Bank's actual capital amounts and ratios as of June 30, 1996 are as
follows:
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
Amount Ratio Amount Ratio
Risk Based Capital $ 63,487 16.49% $ 38,490 10.0%
Core Capital 58,668 10.41% 16,914 3.0%
Tangible Capital 58,668 10.41% 8,457 1.5%
72
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
11. Benefit Plans (Dollars in Thousands)
The Company has a 401(k) defined-contribution plan covering all
employees meeting specific age and service requirements. Under the plan,
employees may contribute up to 10% of their pre-tax compensation. The
Company makes matching contributions up to 3% of participants' pre-tax
compensation. Participants vest immediately in their own contributions with
100% vesting in the Company's contributions occurring after 6 years of
credited service. The Company's expense for these plans was approximately
$550, $249, and $425 for the years ended June 30, 1996, 1995 and 1994,
respectively.
The Company adopted SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective July 1, 1995. SFAS 106 requires
measurement of the obligations of an employer to provide future
postretirement benefits and the accrual of costs during the years that the
employee provides services. Postretirement health care and life insurance
benefits expense is based on the actuarial computation of current and future
benefits to earnings for employees and retirees. The Company sponsors
postretirement health care and life insurance benefits to certain retired
officers and directors. Prior to fiscal 1996, the Company expensed the net
cost of providing such benefits to retired employees on a pay-as-you-go
basis. Adoption of SFAS 106 did not have a material effect on the Company's
financial position or operating results.
The Company has severance agreements with certain of its officers which
are renewable on an annual basis at the Company's option and a multi-year
employment contract with one executive officer. The Company has an unfunded
obligation of approximately $1,762 and $1,687 at June 30, 1996 and 1995,
respectively, to pay certain benefits upon retirement. Actuarially
determined retirement costs are being accrued and expensed annually.
Employee Stock Ownership Plan (ESOP)
As part of the conversion, an ESOP was established for all employees who
are age 21 or older and have completed one year of service with the Company
during which they have served a minimum of 1,000 hours. The ESOP borrowed
$4,100 from the Company to purchase 410,017 shares of the common stock issued
in the conversion. The loan will be repaid principally from the Company's
contributions to the ESOP over a period of 10 years. At June 30, 1996, the
outstanding balance on the loan was $3,952. Shares purchased with the loan
proceeds are held in an unearned ESOP shares account and released on a pro
rata basis as the loan is repaid. Contributions to the ESOP and shares
released from the unearned ESOP shares account are allocated among
participants on the basis of compensation, as described in the plan, in the
year of allocation. Benefits generally become 100% vested after six years of
credited service. Vesting will accelerate upon retirement, death or
disability of the participant or in the event of a change in control of the
Company. Forfeitures will be reallocated among remaining participating
employees in the same proportion as contributions. Benefits may be payable
upon death, retirement, early retirement, disability or separation from
service. Since the annual contributions are discretionary, the benefits
payable under the ESOP cannot be estimated. The expense related to the ESOP
totaled $162 for the fiscal year ended June 30, 1996. At June 30, 1996, the
unearned ESOP shares account of $3,952 is reported as a reduction of
stockholders' equity.
The table below reflects ESOP activity for the period indicated:
Year Ended June 30,
1996
Unallocated shares at beginning of period
Purchased shares 410,017
Allocated 14,783
-------
Unallocated shares at end of period 395,234
=======
The fair value of unallocated ESOP shares totaled $4,335 at June 30,
1996.
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
12. Incentive Plans
Management Recognition Plan and Trust (MRP)
The Company intends to seek approval of the MRP at a meeting of
stockholders as a method of providing officers, employees and nonemployee
directors of the Company with a proprietary interest in the Company in a
manner designed to encourage such persons to remain with the Company. The
Company plans to contribute funds to the MRP to enable the trust to acquire,
in the aggregate, 4% of the shares of common stock in the conversion. Such
shares would be acquired either through open market purchases or from
authorized but unissued shares of common stock. Under the MRP, awards would
be granted in the form of shares of common stock held by the MRP. These
shares represent deferred compensation and would be accounted for as a
reduction of stockholders' equity.
Stock Option Plan
The Company also intends to seek stockholder approval of the 1996 Stock
Option Plan (the Stock Option Plan) which will reserve a number of shares
equal to 10% of the number of shares issued in the conversion. The Stock
Option Plan provides for the grant of options at an exercise price equal to
the fair market value on the date of grant. The Stock Option Plan is
intended to promote stock ownership by directors and selected officers and
employees of the Company to increase their proprietary interest in the
Company as an incentive to contribute to the success of the Company and to
reward officers and key employees for outstanding performance.
13. Commitments and Contingencies (Dollars in Thousands)
The Company is involved in various legal matters associated with its
normal operations. In the opinion of management, these matters will be
resolved without material effect on the Company's financial position.
The Company conducts a portion of its operations in leased facilities
under noncancellable agreements classified as operating leases. In addition,
the Company leases data processing equipment under operating leases expiring
during the next five years. The following is a schedule of minimum rental
payments under such operating leases which expire at various dates:
June 30,
1996
Fiscal Year
1997 $ 447
1998 331
1999 225
2000 125
2001 72
Thereafter 252
-----
Total minimum payments required $ 1,452
=====
Lease expense under operating leases approximated $390, $892 and $663
for the years ended June 30, 1996, 1995 and 1994, respectively.
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
14. Financial Instruments With Off-Balance Sheet Risk (Dollars in Thousands)
The Company 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 commitments to sell loans 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
balance sheet. The Company's exposure to credit loss, in the event of
nonperformance by the other party to these financial instruments is
represented by the contractual notional amount of these instruments. The
Company uses the same credit policies in making commitments to extend credit
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as all conditions have been met in the contract. These commitments
generally have expiration dates within 60 days of the commitment date and may
require the payment of a fee. Since some of these commitments are expected
to expire, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness
on a case-by-case basis. At June 30, 1996 and 1995, interest rates on
commitments to lend ranged from 5.75% to 9.50% and 6.50% to 10.875%,
respectively.
In an effort to minimize its exposure to interest rate fluctuations on
fixed rate loans originated for sale, the Company enters into forward
agreements to sell certain dollar amounts of fixed rate loans to third
parties. These agreements specify the minimum maturity of the loans, yield
to purchaser and servicing spread to the Company (if servicing is retained),
and the maximum principal amount of individual loans. The Company typically
satisfies these forward sale agreements with its current production; at June
30, 1996 and 1995 the aggregate amount of loans available for sale and of
commitments to originate exceeded the Company's forward sales commitments to
sell loans. At June 30, 1996 and 1995, interest rates on commitments to sell
loans ranged from 5.875% to 12.00% and 6.00% to 9.75%, respectively.
The Company is exposed to interest rate risk on fixed rate commitments
to originate loans for sale to the extent forward sale agreements have not
been entered into. To minimize this risk, the Company purchases over the
counter put options with option periods that generally coincide with the
terms of the commitments to originate loans. The contract or notional amount
of these instruments reflect the extent of involvement the Company has in
this particular class of financial instruments. The Bank's exposure to loss
on these financial instruments is limited to the premiums paid. Premiums
paid and deferred gains on put options are recorded as an adjustment to the
carrying value of loans available for sale and recognized in earnings when
the loan is sold. At June 30, 1996 and 1995, the notional principal amount of
options outstanding were $3,500 and $0, respectively. The market value of
open positions at June 30, 1996 is immaterial.
In addition to construction loans in process, the Company had the
following outstanding commitments:
June 30,
1996 1995
Commitments to originate mortgage loans:
Fixed rate $ 17,523 $ 18,947
Adjustable rate 2,351 2,629
Unused lines of credit 6,344 5,783
Commitments to sell loans 31,763 32,061
------- --------
$ 57,981 $ 59,420
======= =========
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
15. Fair Values of Financial Instruments (Dollars in Thousands)
The reported fair values of financial instruments are based on various
factors. In some cases, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions concerning the amount and timing of estimated
future cash flows, assumed discount rates and other factors reflecting
varying degrees of risk. The estimates are subjective in nature and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Accordingly, the reported fair values may
not represent actual values of the financial instruments that could have been
realized as of year end or that will be realized in the future. The
following methods and assumptions were used to estimate the fair value of
each class of significant financial instruments:
Cash and due from banks, federal funds sold, interest bearing deposits
with banks: The carrying amount of these financial assets approximates the
fair value.
Investment securities: The fair value of investment securities is based
on quoted market prices or dealer quotes.
Loans available-for-sale: Fair values for loans are based on quoted
market prices. Forward commitments to sell loans have been considered in the
determination of the estimated fair value of loans available-for-sale.
Loans: For loans that reprice frequently at market rates, the carrying
amount approximates the fair value. For fixed-rate loans, the fair value is
determined by either (i) discounting the estimated future cash flows of such
loans, using a current interest rate at which such loans would be made to
borrowers over estimated remaining contractual maturities, or (ii) quoted
market prices. The allowance for loan losses is subtracted as an estimate
of the underlying credit risk.
Accrued interest receivable: The carrying value for accrued interest
receivable approximates fair value because of the short-term nature of the
financial instruments.
Federal Home Loan Bank stock: The carrying amount reported for FHLB
stock approximates fair value. If redeemed, the Company will receive an
amount equal to the par value of the stock.
Deposits: The fair value of demand and savings deposits is the amount
payable on demand at the reporting date. The carrying amount for
variable-rate, fixed-term time deposit accounts approximates fair value. The
fair value of fixed-rate time deposits is estimated using a discounted cash
flow calculation. The discount rate on such deposits is based upon rates
currently offered for deposits of similar remaining maturities.
Borrowings: The fair value of borrowings has been estimated using a
discounted cash flow calculation. The discount rate on such borrowings is
based upon rates currently offered for borrowings of similar remaining
maturities. The fair value of securities sold under agreements to repurchase
is the carrying amount at the reporting date since these agreements were
repaid within one month of the reporting date.
Commitments: Commitments to extend credit at June 30, 1996 are offered
at substantially the same rates and terms of commitments offered on June 30,
1996 to parties of similar credit worthiness. Therefore, it is presumed that
no significant difference exists between the carrying and fair value. See
Note 14.
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The carrying amount and fair values of the Company's financial
instruments were as follows:
June 30, 1996 June 30, 1995
Carrying Market Carrying Market
Amount Value Amount Value
Financial assets:
Cash $ 30,831 $ 30,831 $ 11,433 $ 11,433
Investment
securities 27,118 27,112 20,067 20,079
Loans receivable
available-for-sale 49,612 49,990 34,489 34,881
Loans receivable 452,945 455,307 471,543 472,401
Accrued interest
receivable 3,083 3,083 2,855 2,855
FHLB stock 4,590 4,590 4,360 4,360
Financial Liabilities:
Deposits 479,374 479,729 86,585 487,580
Borrowings 8,578 8,551 35,063 35,095
16. Conversion (Dollars in Thousands)
Provident Financial Holdings, Inc. was incorporated under Delaware law
in January 1996 for the purpose of acquiring and holding all of the
outstanding capital stock of Provident Savings Bank, FSB as part of the
Bank's conversion from a Federally chartered mutual savings bank to a
Federally chartered stock savings bank. On June 27, 1996, the Bank became a
wholly owned subsidiary of the Holding Company. In connection with the
conversion, Provident Financial Holdings, Inc. issued and sold to the public
5,125,215 shares of its common stock (par value $.01 per share) at a price of
$10.00 per share. The proceeds, net of $1,474 in conversion costs, received
by the Company from the issuance amounted to $49,779. Prior to the
completion of the conversion, Provident Financial Holdings, Inc. had no
assets or liabilities and did not conduct any business other than of an
organizational nature.
At the time of the conversion, the Bank established a liquidation
account in the amount of $40,000 which was equal to its total retained
earnings as of May 31, 1996. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their
accounts at the Bank after the conversion.
The liquidation account will be reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any
of its shares of common stock, if the effect would cause stockholder's
equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise violate
regulatory requirements.
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<PAGE>
Provident Financial Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
17. Holding Company Condensed Financial Information (Dollars in Thousands)
This information should be read in conjunction with the other notes to
the consolidated financial statements. The following is the condensed
balance sheet for Provident Financial Holdings, Inc. (Holding Company only)
as of June 30, 1996.
Condensed Balance Sheet
June 30, 1996
Assets
Cash $ 1,484
Investment securities held to maturity 17,973
Investment in subsidiary 61,071
Other assets 5,492
------
$ 86,020
======
Liabilities and Stockholders' Equity
Other liabilities $ 50
------
Stockholders' equity 85,970
------
$ 86,020
======
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<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Board of Directors of the Corporation is presently composed of seven
members who are elected for terms of three years, approximately one-third of
whom are elected annually in accordance with the Bylaws of the Corporation.
The executive officers of the Corporation are elected annually by the Board
of Directors and serve at the Board's discretion. The following tables sets
forth information with respect to the Directors and executive officers of the
Corporation and the Savings Bank.
Directors of the Corporation
Age at Current
June 30, Director Term
Name 1996 Since(1) Expires
- -------------------------------------------------------------------
Bruce W. Bennett 47 1993 1999
Michael C. Billings 56 1994 1998
Craig G. Blunden 48 1975 1997
Debbi H. Guthrie 45 1994 1999
David W. Mitchell 68 1988 1997
Robert G. Schrader 57 1995 1998
Roy H. Taylor 45 1990 1997
- ---------------
(1) Includes prior service on the Board of Directors of the Savings Bank.
Executive Officers of the Corporation and Savings Bank
Age at
June 30, Position
Name 1996 Corporation Savings Bank
- --------------------------------------------------------------------------
Craig G. Blunden 48 President, Chief Executive President, Chief Executive
Officer and Director Officer and Director
Karl P. Zalazowski 41 Chief Financial Officer Senior Vice President and
Chief Financial Officer
Robert G. Schrader 57 Secretary Executive Vice President,
Chief Operating Officer
Secretary and Director
Donald L. Blanchard 46 N/A Senior Vice President,
Retail Banking
Richard L. Gale 45 N/A Senior Vice President,
Loan Production
William E. Harris 55 N/A Senior Vice President,
Administration and Treasurer
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<PAGE>
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Corporation and the Savings Bank. There are no
family relationships among or between the directors or executive officers.
Bruce W. Bennett is the President and majority owner of Community Care
and Rehabilitation Center, a skilled nursing facility, with which he has been
associated since 1973. Mr. Bennett currently serves on the Savings Bank's
Personnel/Compensation Committee.
Michael C. Billings is the retired Chief Executive Officer of Riverside
National Bank, with which he was associated from 1967 to 1992. Mr. Billings
currently serves on the Savings Bank's Audit and Personnel/Compensation
Committees.
Craig G. Blunden has been associated with the Savings Bank since 1974
and has held his current positions at the Savings Bank since 1991. Mr.
Blunden also serves on the Foundation Board of Trustees for the University of
California, Riverside, the Western League of Savings Institutions Board of
Directors, the Appraisal Foundation Board of Trustees and America's Community
Bankers Mortgage Finance Committee.
Debbi H. Guthrie is the President and owner of Roy O. Huffman Roof
Company, with which she has been associated since 1971. Ms. Guthrie
currently serves on the Savings Bank's Audit Committee. Ms. Guthrie also
serves as the Chair-Elect of the Greater Riverside Chamber of Commerce and is
on the Board of Directors of the Riverside Community College Foundation.
David W. Mitchell, who is retired, is a former Chairman and Chief
Executive Officer of Avon Products, Inc., a global direct sales cosmetics
company, with which he was associated for 36 years. Mr. Mitchell currently
serves as chairman of the Savings Bank's Audit Committee. Mr. Mitchell also
serves as a director of New York Life Insurance Co. and Express Scripts, Inc.
Robert G. Schrader has been associated with the Savings Bank since 1963
and has served as Executive Vice President of the Savings Bank since January
1995. From 1990 through 1994, Mr. Schrader served as Senior Vice President
of the Savings Bank. Mr. Schrader has held his current position with the
Corporation since its formation in 1996.
Roy H. Taylor is co-owner of Goldware & Taylor Insurance services, an
insurance brokerage firm, with which he has been associated since 1972. Mr.
Taylor currently serves as chairman of the Savings Bank's
Personnel/Compensation Committee. Mr. Taylor also serves as President of the
Raincross Club of Riverside.
Donald L. Blanchard, who joined the Savings Bank in 1989, has held his
current position with the Savings Bank since 1989.
Richard L. Gale, who joined the Savings Bank in 1988, has served as
President of the Profed Mortgage division since 1989. Mr. Gale has held his
current position with the Savings Bank since 1993.
William E. Harris has been associated with the Savings Bank since 1969
and has held his current position with the Savings Bank since 1989.
Karl P. Zalazowski has been associated with the Savings Bank since 1984
and has held his current position with the Savings Bank since 1988. Mr.
Zalazowski also served as Chairman of the Financial Managers Society in
1994-1995. Mr. Zalazowski has held his current position with the Corporation
since its formation in 1996.
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<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act") requires the Corporation's executive officers and directors,
and persons who own more than 10% of any registered class of the
Corporation's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than 10% shareholders are required by regulation to
furnish the Corporation with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Corporation by the above
referenced persons, the Corporation believes that during the fiscal year
ended June 30, 1996 all filing requirements applicable to its reporting
officers, directors and greater than 10% shareholders were properly and
timely complied with.
Item 11. Executive Compensation
Summary Compensation Table. The following information is furnished for
the President of the Corporation for the year ended June 30, 1996 and each
executive officer of the Corporation or the Savings Bank who received salary
and bonus in excess of $100,000 during the year ended June 30, 1996.
Annual Compensation(1)
----------------------------------------------
Name and Other Annual All Other
Position Year Salary($) Bonus($) Compensation($)(2) Compensation($)(3)
Craig G.
Blunden 1996 208,999 44,100 -- 13,162
Chief
Executive 1995 204,010 -- -- 12,914
Officer and
President
Robert G.
Schrader 1996 112,641 13,132 -- 10,105
Executive
Vice 1995 105,958 -- -- 7,791
President
and Chief
Operating
Officer
- --------------------
(1) Compensation information for fiscal years ended June 30, 1994 has been
omitted as the Corporation was not a public company nor a subsidiary
thereof at such time.
(2) Does not include perquisites which did not exceed the lesser of $50,000
or 10% of salary and bonus.
(3) Represents matching contribution by the Savings Bank to officer's
contribution to 401(k) plan and discretionary contribution made by the
Savings Bank to the 401(k) plan.
Employment Agreements. On March 26, 1992, the Savings Bank entered into
an employment agreement with Mr. Blunden. The agreement had an initial term
of three years and renews automatically for an additional year each year
unless Mr. Blunden has attained age 62 or the Board or Mr. Blunden have given
advance notice of their intention not to extend the term of the agreement.
The agreement further provides for a base salary which may not be reduced
except as part of a general salary reduction policy for senior executives of
the Savings Bank. Mr. Blunden's base salary is subject to annual review by
the Board. Mr. Blunden's current base salary under the agreement is
$210,000. In the event of a "change of control" of the Savings Bank (as
defined below), Mr. Blunden's base salary is fixed as the sum of his then
current base salary and any bonuses paid during the 12-month period preceding
the change in control. Under the agreement, Mr. Blunden is eligible to
participate in all fringe benefit programs available to employees of the
Savings Bank as well as any program made available to senior executives of
the Savings Bank, including the use of an employer-provided automobile. The
agreement also provides for the reimbursement of expenses incurred by Mr.
Blunden in the course of his employment.
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<PAGE>
In the event of Mr. Blunden's termination without cause by the Savings
Bank, the agreement provides for (i) a lump sum payment equal to the
discounted present value of the aggregate future base salary payments Mr.
Blunden would have received over the then remaining term of the agreement and
(ii) the continuation of life and medical insurance at the Savings Bank's
expense for Mr. Blunden and his dependents. If Mr. Blunden's employment
terminates by reason of his death or disability, the Savings Bank is also
obligated to continue life and medical insurance benefits for Mr. Blunden and
his dependents, as applicable.
In the event of Mr. Blunden's termination without cause following a
change in control of the Savings Bank, Mr. Blunden is entitled to an
additional payment equal to three times the sum of his base salary and
bonuses during the 12 months preceding his termination of employment reduced
by the value of any other payments made by the Savings Bank by reason of Mr.
Blunden's termination without cause. In the event that a change of control
of the Savings Bank had occurred on June 30, 1996, based solely on the cash
compensation paid to Mr. Blunden during 1996 and excluding the value of any
other employee benefits which may be payable, Mr. Blunden would have received
a payment of approximately $759,000. For purposes of the agreement, "change
in control" is defined to mean (i) a change in control of the Savings Bank as
determined under applicable OTS regulations and (ii) a change in the
composition of the Board following a merger, consolidation or other business
combination involving the Savings Bank such that a majority of the directors
of the resulting entity consists of persons who were not directors
immediately prior to such transaction.
Post-Retirement Compensation Agreement. Effective March 26, 1992, the
Savings Bank has also entered into a separate post-retirement compensation
agreement with Mr. Blunden. The agreement provides that, if Mr. Blunden
terminates employment with the Savings Bank after attaining age 60, the
Savings Bank will provide Mr. Blunden with a monthly benefit for life equal
to 50% of his final average monthly salary. For purpose of the agreement,
"final average monthly salary" is defined as the average of Mr. Blunden's
highest paid 36 months of employment with the Savings Bank determined by
reference to the gross amount of Mr. Blunden's monthly salary excluding bonus
and incentive awards, director's fees and accelerated payments of future
salary. Assuming that Mr. Blunden's current compensation level were
equivalent to his "final average monthly salary," the normal monthly benefit
payable under the agreement would be $8,750. Under the agreement, Mr.
Blunden may elect to receive the actuarially determined lump sum equivalent
of the normal monthly benefit or a joint-and-survivor benefit. Mr. Blunden
may also elect to receive an early retirement benefit under the agreement
which is reduced proportionately to reflect the number of months then
remaining to Mr. Blunden's 60th birthday. However, in the event of Mr.
Blunden's termination of employment prior to age 60 by reason of his death or
disability, the agreement provides for payment of the normal monthly benefit
to Mr. Blunden or his beneficiary. At June 30, 1996, the accrued liability
of the Savings Bank with respect to its obligations under the agreement was
$461,000.
Severance Agreements. In connection with the Savings Bank's mutual to
stock conversion, the Corporation and the Savings Bank entered into a
severance agreement with Mr. Schrader. The agreement has a term of one year,
which may be extended for an additional year on the anniversary of the
effective date of the agreement by the Board of Directors. The agreement
provides that in the event of an involuntary termination of Mr. Schrader
following a change in control of the Corporation or the Savings Bank, he will
be entitled to receive two times his then current base salary. Severance
payments also will be provided on a similar basis in connection with a
voluntary termination of employment where, subsequent to a change in control,
Mr. Schrader is assign duties inconsistent with his position, duties,
responsibilities and status immediately prior to such change in control. The
Savings Bank or its successor would also be obligated to continue Mr.
Schrader's other employee benefits for a one-year period following
termination of employment.
The term "change in control" is defined in the agreement as having
occurred when, among other things, (a) a person other than the Corporation
purchases shares of the Corporation's common stock pursuant to a tender or
exchange offer for such shares, (b) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act is or becomes the beneficial
owner, directly or indirectly, of securities of the Corporation representing
25% or more of the combined voting power of the Corporation's then
outstanding securities, (c) the membership of the Board of Directors changes
as the result of a contested election, or (d) shareholders of the Corporation
approve a merger,
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<PAGE>
consolidation, sale or disposition of all or substantially all of the
Corporation's assets, or a plan of partial or complete liquidation. If a
change in control of the Corporation or the Savings Bank occurred during the
fiscal year ending June 30, 1996, based solely on Mr. Schrader's current
salary level and excluding the value of any other employee benefits which may
be payable, Mr. Schrader would receive payment of approximately $233,000.
Directors' Compensation
Directors of the Savings Bank currently receive a monthly retainer of
$1,750. Directors also receive a fee of $300 for each committee meeting
attended. The committee chairman receives a fee of $400. In addition,
Directors are covered under the Savings Bank's policies for medical, dental
and vision care. Dependent coverage is available at the Directors' own
expense. Following retirement from the Board of Directors, Directors
continue to receive such coverage. No separate fees are paid for service on
the Board of Directors of the Corporation.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Persons and groups who beneficially own in excess of 5% of the
Corporation's Common Stock are required to file certain reports disclosing
such ownership pursuant to the Exchange Act. Based on such reports, the
following table sets forth, as of August 1, 1996, certain information as to
those persons who were beneficial owners of more than 5% of the outstanding
shares of Common Stock. Management knows of no persons other than those set
forth below who beneficially owned more than 5% of the outstanding shares of
Common Stock at August 1, 1996. The following table also sets forth, as of
August 1, 1996, information as to the shares of Common Stock beneficially
owned by each director, by the Chief Executive Officer of the Corporation, by
the Corporation's executive officers who received salaries and bonuses in
excess of $100,000 during the year ended June 30, 1996 and by all executive
officers and directors of the Corporation as a group.
83
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Number of Shares Percent of Shares
Beneficially Owned (1) Outstanding
Beneficial Owners of More Than 5%
Provident Savings Bank, F.S.B. 410,017 8.0%
Employee Stock Ownership Plan Trust
Directors
Bruce W. Bennett 5,331(2) *
Michael C. Billings 5,001 *
Debbi H. Guthrie 5,001(3) *
David W. Mitchell 25,001 *
Roy H. Taylor 25,001 *
Named Executive Officers
Craig G. Blunden** 30,463(4) *
Robert G. Schrader** 21,151 *
All Executive Officers and 150,169 2.9%
Directors as a Group
(11 persons)
_______________
* Less than 1 percent of shares outstanding.
** Mr. Blunden and Mr. Schrader are also directors of the Corporation.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
Common Stock if he or she has voting and/or investment power with
respect to such security. The table includes shares owned by spouses,
other immediate family members in trust, shares held in retirement
accounts or funds for the benefit of the named individuals, and other
forms of ownership, over which shares the persons named in the table may
possess voting and/or investment power.
(2) Includes 880 shares owned by Mr. Bennett's spouse.
(3) Includes 5,000 shares owned by a company controlled by Ms. Guthrie.
(4) Includes 2,560 shares owned by Mr. Blunden's spouse.
(c) Changes In Control
The Corporation is not aware of any arrangements, including any pledge
by any person of securities of the Corporation, the operation of which may at
a subsequent date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and must not involve more
than the normal risk of repayment or present other unfavorable features. The
Savings Bank is therefore prohibited from making any new loans or extensions
of credit
84
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to the Savings Bank's executive officers and directors and at different rates
or terms than those offered to the general public and has adopted a policy to
this effect.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) (2) Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets, June 30, 1996 and 1995
(b) Consolidated Statement of Operations For the Years
Ended June 30, 1996, 1995 and 1994
(c) Consolidated Statement of Stockholders' Equity For
the Years Ended June 30, 1996, 1995 and 1994
(d) Consolidated Statement of Cash Flows For the Years
Ended June 30, 1996, 1995 and 1994
(e) Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have
been omitted as the required information is inapplicable.
(3) Exhibits
3.1 Certificate of Incorporation of Provident Financial
Holdings, Inc. (Incorporated by reference to Exhibit
3.1 to the Corporation's Registration Statement on
Form S-1 (File No. 333-2230))
3.2 Bylaws of Provident Financial Holdings, Inc.
(Incorporated by reference to Exhibit 3.2 to the
Corporation's Registration Statement on Form S-1
(File No. 333-2230))
10.1 Employment Agreement with Craig G. Blunden
(Incorporated by reference to Exhibit 10.1 to the
Corporation's Registration Statement on Form S-1
(File No. 333-2230))
10.2 Post-Retirement Compensation Agreement with Craig G.
Blunden (Incorporated by reference to Exhibit 10.2
to the Corporation's Registration Statement on
Form S-1 (File No. 333-2230))
10.3 Severance Agreement with Robert G. Schrader
21 Subsidiaries of Registrant
27 Financial data schedule
(b) The Corporation did not file any Reports on Form 8-K during
the quarter ended June 30, 1996.
85
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SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PROVIDENT FINANCIAL HOLDINGS, INC.
Date: September 27, 1996
By: /s/ Craig G. Blunden
Craig G. Blunden
President and Chief
Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Craig G. Blunden President, Chief September 27, 1996
Craig G. Blunden Executive Officer and
Director (Principal
Executive Officer)
/s/ Karl Zalazowski Chief Financial September 27, 1996
Karl Zalazowski Officer (Principal
Financial and Accounting
Officer)
/s/ Robert G. Schrader Director September 27, 1996
Robert G. Schrader
/s/ Bruce W. Bennett Director September 27, 1996
Bruce W. Bennett
/s/ Michael C. Billings Director September 27, 1996
Michael C. Billings
/s/ Debbie H. Guthrie Director September 27, 1996
Debbie S. Guthrie
/s/ David W. Mitchell Director September 27, 1996
David W. Mitchell
/s/ Roy H. Taylor Director September 27, 1996
Roy H. Taylor
PAGE
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EXHIBIT 10.3
PAGE
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Agreement
THIS AGREEMENT is made effective as of June 27, 1996 by and between
PROVIDENT SAVINGS BANK, F.S.B. (the "Bank"); PROVIDENT FINANCIAL HOLDINGS,
INC. ("Company"); and ROBERT G. SCHRADER (the "Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive serves in the position of Executive Vice President
and Chief Operating Officer of the Bank, positions of substantial
responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twelve (12) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional
year. The Board will conduct a performance evaluation of the Executive for
purposes of determining whether to extend the Agreement, and the results
thereof shall be included in the minutes of the Board's meeting.
2. Payments to Executive Upon Change in Control
(a) Upon the occurrence of a Change in Control (as herein defined)
followed within twelve (12) months of the effective date of a Change in
Control by the voluntary or involuntary termination of Executive's
employment, other than for Cause, as defined in Section 2(c) hereof, the
provisions of Section 3 shall apply. For purposes of this Agreement,
"voluntary termination" shall be limited to the circumstances in which the
Executive elects to voluntarily terminate his employment within twelve (12)
months of the effective date of a Change in Control following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation or benefits (other than a reduction affecting the Bank's
personnel generally), or relocation of his principal place of employment by
more than thirty-five (35) miles from its location immediately prior to the
Change in Control.
(b) A "Change in Control" of the Company or the Bank shall be deemed
to occur if and when (a) an offeror other than the Company purchases shares
of the common stock of the Company or the Bank pursuant to a tender or
exchange offer for such shares, (b) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Bank representing 25% or more of the combined voting power of
the Company's then outstanding securities, (c) the membership of the board of
directors of the Company or the Bank changes as the result of a contested
election, such that individuals who were directors at the beginning of any
twenty-four (24) month period (whether commencing before or after the date of
adoption of this Plan) do not constitute a majority of the Board at the end
of such period, or (d) shareholders of the Company or the Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Bank's assets, or a plan of partial or complete liquidation.
(c) Executive shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of the Executive's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order, or
any material breach of any material provision of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards generally prevailing in the savings institution industry.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
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him a copy of a resolution duly adopted by the affirmative vote of not less
than three-fourths of the members of the Board at a meeting of the Board
called and held for that purpose (after reasonable notice to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars
thereof in detail. The Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of the
Executive's employment, other than for Termination for Cause, the Bank shall
be obligated to pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay, a sum equal to two (2) times Executive's then current base
annual salary in a lump sum no later than thirty (30) days after the date of
his termination.
(b) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the Executive's voluntary or involuntary termination of
employment, other than for Termination for Cause, the Bank shall cause to be
continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for the Executive prior to
his severance. Such coverage shall cease upon expiration of twelve (12)
months from the date of the Executive's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to the
Executive under this Section would be deemed to include an "excess parachute
payment" under 280G of the Internal Revenue Code of 1986, as amended,
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
the Executive's "base amount" under 280G(b)(3) of the Code.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
(e) As a condition of the receipt of any payments or benefits under
this Section 3, Executive shall in writing release the Bank, the Company or
any successors thereto from any or all claims or causes of action relating to
Executive's termination of employment.
4. Effect on Prior Agreements and Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive,
except that this Agreement shall not affect or operate to reduce any benefit
or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Bank and their respective successors and assigns.
6. Modification and Waiver
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(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be deemed
a continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
7. Required Provisions
(a) The Bank may terminate the Executive's employment at any time, but
any termination by the Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in
Section 2(c) herein.
(b) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in
its discretion, (i) pay the Executive all or part of the compensation
withheld while its contract obligations were suspended and (ii) reinstate (in
whole or in part) any of its obligations that were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
parties.
(e) All obligations under this Agreement may be terminated: (i) by
the Director of the Office of Thrift Supervision (the "Director") or his or
her designee at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance
to or on behalf of the Bank under the authority contained in Section 13(c) of
the FDIA and (ii) by the Director, or his or her designee at the time the
Director or such designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
9. Headings for Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of California, unless
preempted by Federal law as now or hereafter in effect.
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Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within fifty (50) miles from the location of the Bank, in accordance with the
rules of the American Arbitration Bank then in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
12. Payment of Legal Fees
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Bank if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
13. Successor to the Bank or the Company
The Bank and the Company shall require any successor or assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all the business or assets of the Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Bank's or the Company's obligations under this Agreement, in the same manner
and to the same extent that the Bank or the Company would be required to
perform if no such succession or assignment had taken place.
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14. Signatures
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed by a duly authorized officer, and Executive has signed this
Agreement, on the day and date first written above.
ATTEST: PROVIDENT SAVINGS BANK, F.S.B.
By: /s/ Sheri Sebastian By: /s/Craig G. Blunden
ATTEST: PROVIDENT FINANCIAL HOLDINGS, INC.
By: /s/ Sheri Sebastian By: /s/Craig G. Blunden
WITNESS
By: /s/ Robert G. Schrader
Executive
PAGE
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EXHIBIT 21
Subsidiaries of the Registrant
PAGE
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Parent
Provident Financial Holdings, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
Provident Savings Bank, F.S.B. 100% United States
Profed Mortgage, Inc.(1) 100% California
Provident Financial Corporation(1) 100% California
First Service Corporation(1) 100% California
- ---------------
(1) This corporation is a wholly owned subsidiary of Provident Savings Bank,
F.S.B.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and Shareholders of Provident Financial Holdings,
Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Provident Financial Holdings, Inc. and its subsidiary at June 30, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, CA
August 5, 1996
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June 30,
1996 1995
Assets
Cash $ 7,031 $ 6,233
Overnight deposits 23,800 5,200
Investment securities held-to-maturity,
approximates market (Note 2) 27,118 20,067
Loans receivable, net (Note 3) 452,945 471,543
Loans receivable available-for-sale,
net (Note 4) 49,612 34,489
Accrued interest receivable 3,083 2,855
Real estate available-for-sale,
net (Note 5) 5,779 11,204
Federal Home Loan Bank stock - at cost 4,590 4,360
Premises and equipment, net (Note 6) 7,058 7,536
Prepaid expenses and other assets 3,831 3,699
Total assets $ 584,847 $ 567,186
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits (Note 7)$ 2,106 $ 2,787
Interest bearing deposits (Note 7) 477,268 483,798
Borrowings (Note 8) 8,578 35,063
Accounts payable and other liabilities 10,925 8,215
Total liabilities 498,877 529,863
Commitments and contingencies (Note 13)
Stockholders' equity (Notes 10, 11 and 16):
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 and outstanding 5,125,215
at June 30, 1996 51
Additional paid-in capital 49,742
Retained earnings - substantially
restricted (Notes 10 and 16) 40,129 37,323
Unearned ESOP shares (Note 11) (3,952)
Total stockholders' equity 85,970 37,323
Total liabilities and
stockholders' equity $ 584,847 $ 567,186
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Year Ended June 30,
1996 1995 1994
Interest income:
Loans (Note 3) $ 39,701 $ 34,045 $ 34,604
Investment securities
(Note 2) 2,116 1,975 1,593
Total interest income 41,817 36,020 36,197
Interest expense:
Deposits (Note 7) 24,007 21,189 17,665
Borrowings 1,262 1,302 1,867
Total interest expense 25,269 22,491 19,532
Net interest income 16,548 13,529 16,665
Provision for loan losses (Note 3) 2,261 4,787 2,033
Net interest income, after provision
for loan losses 14,287 8,742 14,632
Non-interest income
Loan servicing and other fees 2,442 2,476 3,072
Gain on sale of loans, net 4,753 701 1,246
Gain on bulk sale of
servicing rights 2,052
Life insurance proceeds 1,000
Other 1,256 1,308 1,141
Total non-interest income 9,451 4,485 7,511
Non-interest expenses
Salaries and employee benefits 11,444 9,671 13,537
Premises and occupancy 1,939 2,336 2,180
SAIF insurance premiums 1,293 1,105 1,084
Telephone 426 460 634
Other 4,397 3,782 6,323
Total operating and
administrative expenses 19,499 17,354 23,758
Real estate operations, net (Note 5) 101 1,600 366
Total non-interest expenses 19,600 18,954 24,124
Income (loss) before income taxes 4,138 (5,727) (1,981)
Provision (benefit) for income
taxes (Note 9) 1,332 (1,735) (648)
Net income (loss) $ 2,806 $ (3,992) $ (1,333)
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Additional Unearned
Common Paid-in Retained ESOP
Shares Stock Capital Earnings Shares Total
Balance at
June 30, 1993 $ 42,648 $42,648
Net loss for
the year ended
June 30, 1994 (1,333) (1,333)
Balance at June
30, 1994 41,315 41,315
Net loss for the
year ended
June 30, 1995 (3,992) (3,992)
Balance at June
30, 1995 37,323 37,323
Issuance of stock
in a public
offering
(Note 16) 5,125,215 $ 51 $ 49,728 49,779
Purchase of shares by ESOP
(Note 11) $ (4,100) (4,100)
Release of ESOP shares 14 148 162
Net income for year ended
June 30, 1996 2,806 2,806
Balance at June
30, 1996 5,125,215 $ 51 $ 49,742 $ 40,129 $(3,952) $85,970
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Year Ended June 30,
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 2,806 $ (3,992) $ (1,333)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and
amortization 1,058 1,387 1,692
Amortization of loan fees (112) (90) (478)
Provision for loan losses 2,261 4,787 2,033
Provision for losses on
real estate 239 1,665 525
Gain on sale of loans (4,753) (701) (1,246)
Increase (decrease) in accounts
payable and other liabilities 2,710 (2,866) (6,546)
(Increase) decrease in prepaid
expenses and other assets (592) 1,054 (2,831)
Loans originated for sale (469,167) (161,480) (1,023,377)
Proceeds from sale of loans 458,797 210,741 1,045,983
Other (1,000) (961) 163
Net cash (used for) provided by
operating activities (7,753) 49,544 14,585
Cash flows from financing activities:
Net (decrease) increase in NOW, passbook
and money market deposits (7,064) (34,786) 46,998
Net (decrease) increase in
term deposits (147) 49,584 (29,329)
Repayment of Federal Home
Loan Bank Advances (37,000) (153,500) (338,000)
Proceeds from Federal
Home Loan Bank Advances 12,500 135,500 313,031
Proceeds from issuance of
capital stock 45,841
Net (decrease) increase in
securities sold under
agreements to repurchase (1,985) (3,090) 5,075
Net cash provided by (used for)
financing activities 12,145 (6,292) (2,225)
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Year Ended June 30,
1996 1995 1994
Cash flows from investing
activities:
Net decrease (increase) in
loans receivable 13,047 (67,400) (22,036)
Maturity of investment
securities held-to-maturity 207,104 334,046
Purchases of investment securities
held-to-maturity (214,155) (330,267) (23,121)
Redemption (purchases) of
Federal Home
Loan Bank stock 1,000 (751)
Proceeds from disposal of
real estate 8,619 8,245 5,280
(Purchases) of premises and equipment,
net of proceeds from sales (609) (352) (1,757)
Other 1,000 (118)
Net cash provided by (used for)
investing activities 15,006 (54,728) (42,503)
Net increase (decrease) in cash
and cash equivalents 19,398 (11,476) (30,143)
Cash and cash equivalents at
beginning of period 11,433 22,909 53,052
Cash and cash equivalents at
end of period $ 30,831 $ 11,433 $ 22,909
Supplemental information:
Cash paid for interest $ 25,302 $ 22,607 $ 19,417
Cash paid (received)
for income taxes $ 704 $ (3,014) $ 1,840
Real estate acquired in
settlement of loans $ 3,433 $ 11,546 $ 4,973
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1. Summary of Significant Accounting Policies (Dollars in Thousands)
As more fully described in note 16, pursuant to a plan of conversion,
Provident Savings Bank, FSB (the Bank) converted from a Federally chartered
mutual savings bank to a Federally chartered stock savings bank effective
June 27, 1996. Provident Financial Holdings, Inc. (the Holding Company), a
Delaware corporation organized by the Bank, acquired all of the capital stock
of the Bank issued in the conversion; the transaction was recorded on a book
value basis. Any references to financial information for periods prior to
June 30, 1996 refer to the Bank prior to conversion.
The following accounting policies, together with those disclosed
elsewhere in the consolidated financial statements, represent the significant
accounting policies of Provident Financial Holdings, Inc. and subsidiary.
Principles of consolidation
The consolidated financial statements include the accounts of Provident
Financial Holdings Inc., and its wholly- owned subsidiary, Provident Savings
Bank, FSB (collectively, the Company). All significant intercompany
balances and transactions have been eliminated.
The Company operates primarily in one business segment -attracting
customer deposits to originate loans secured primarily by mortgages on
residential real estate. The segment includes ancillary activities related to
real estate lending such as mortgage banking and real estate development.
Customer deposits are collected substantially from Riverside and San
Bernardino Counties out of nine branch locations with lending operations
in California and Nevada using nine lending offices.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to prevailing practices within the banking
industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment securities
Upon acquisition, securities are classified as held-to-maturity, trading,
or available-for-sale based on the Company's intent with respect to holding
the security. Through June 30, 1996, management has classified all
investments as held-to-maturity. Accordingly, investment securities are
stated at cost, adjusted for amortization of premiums and accretion of
discounts over the terms of the securities using the interest method. The
Company has both the intent and ability to hold investment securities to
maturity.
Loans receivable
The Company's real estate loan portfolio consists primarily of long-term
loans secured by first trust deeds on single-family residences, other
residential property, commercial property and land. The adjustable-rate
mortgage (ARM) is the Company's primary loan investment.
Fees are charged for originating loans at the time the loan is granted.
Loan origination fees are deferred, partially offset by certain direct
origination expenses, and amortized to interest income on loans over the
contractual life of the loan using the interest method. Amortization is
discontinued for nonperforming loans and loans held-for-sale and is realized
upon the ultimate disposition of the assets.
Interest receivable represents, for the most part, the current month's
interest which will be included as a part of the borrower's next monthly loan
payment. Interest receivable is accrued only if deemed collectible. Loans
generally are deemed to be in non-accrual status when they become 90 days past
due. When a loan is placed on non-accrual status, interest accrued but not
received is reversed against income.
PAGE
<PAGE>
Mortgage banking activities
Loans are originated for both investment and sale in the secondary
market. Since the Company is primarily an adjustable-rate mortgage lender for
its own portfolio, most fixed rate products are originated for sale to
others. Loans available-for-sale are carried at lower of cost or fair value.
Fair value is generally determined by outstanding commitments from investors
or current investor yield requirements as calculated on the aggregate loan
basis.
The Company sells mortgage loans which are originated in order to limit
interest rate risk and to provide additional funds for investment by the
Company. Loans are sold without recourse other than short term covenants
which are standard in the industry. For some loans sold, the Company may
retain the servicing rights in order to generate servicing income. Where the
Company continues to service loans after sale, investors are paid their share
of the principal collections together with interest at an agreed-upon rate,
which generally differs from the loan's contractual interest rate.
Gains or losses on sales of loans, including fees received or paid, are
recognized at the time of sale and are determined by the difference between
the net sales proceeds and the book value of the loans sold. When loans
are sold with servicing retained, an adjustment, if necessary, is made to
increase or decrease the difference in order to provide for a normal servicing
spread.
Bulk sales of servicing rights are recognized when title and all risks
and rewards of ownership of the underlying loans have been irrevocably
transferred to the buyer and all significant contingencies have been
resolved.
The Financial Accounting Standards Board has issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." This Statement will require the
Company to recognize mortgage servicing rights as separate assets from the
underlying mortgage loans at the time such loans are sold and servicing is
retained. The Company will be required to allocate a cost basis to the
mortgage servicing rights asset and to the loan (without the mortgage
servicing rights) based on their relative fair values. The Company intends to
implement this Statement for the year ending June 30, 1997; retroactive
application is prohibited. Management believes this Statement will not have a
significant effect on the Company's results of operations or financial
position.
Allowance for loan losses
It is the policy of the Company to provide for estimated losses on real
estate loans when any significant and permanent decline in the value of the
underlying collateral occurs. Periodic reviews are made in an attempt
to identify potential problems at an early date. Individual loans are
periodically reviewed and are classified according to their inherent risk.
The internal asset classification system used by the Company is the primary
basis by which the Company evaluates the possible loss exposure. Management's
determination of the adequacy of the allowance for losses is based on an
evaluation of the portfolio, past experience, prevailing market conditions,
and other relevant factors. The determination of the allowance for loan
losses is based on estimates that are particularly susceptible to changes in
the economic environment and market conditions. The allowance is increased by
the provision for losses charged against income and reduced by charge-offs,
net of recoveries.
Impaired loans
The Company assesses loans individually and identifies impairment when
the accrual of interest has been discontinued, loans have been restructured or
management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered
in determining impairment include, but are not limited to, expected future
cash flows, the financial condition of the borrower and current economic
conditions. The Company measures each impaired loan based on the fair value
of its collateral and charges off those loans or portions of loans deemed
uncollectible.
<PAGE>
Real estate available-for-sale
All foreclosed real estate and investment real estate is
available-for-sale. Real estate acquired through foreclosure is initially
recorded at the lesser of the loan balance at the time of foreclosure or the
fair value of the real estate acquired less estimated selling costs. All real
estate is carried at the lower of cost or fair value less estimated selling
costs. Real estate loss provisions are recorded when the carrying value of
the property exceeds the fair value. Costs relating to improvement of
property are capitalized. Other costs are expensed as incurred.
Federal regulations require that investments in subsidiaries conducting
real estate investments and joint venture activities be phased out by 1996 or,
that institutions conducting such activities maintain sufficient capital over
the minimum regulatory requirements. The Company maintains capital in excess
of the minimum requirements.
The Company had real estate acquisition and development activities
through joint ventures. No new joint ventures were formed after fiscal year
1989 and the Company's interest in its final joint venture was liquidated
July 3, 1995. The Company provided funding to these joint ventures through
capital contributions and participated in the profit or loss from the sale of
the property. Investments in joint ventures were accounted for on the equity
method, with adjustments, if necessary to reflect net realizable value.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed primarily on a straight-line basis
over the estimated useful lives as follows:
Buildings 10-40 years
Furniture and fixtures 3-10 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the respective
lease terms or the lives of the improvements. Maintenance and repair costs
are charged to operations as incurred.
Excess of cost over net assets acquired
Beginning in fiscal year 1990, the Bank amortized its excess of cost over
net assets acquired on a straight-line basis over 5 years, requiring an
approximate annual charge of $469,000. The balance was fully amortized as
of June 30, 1995.
Income taxes
Taxes are provided on substantially all income and expense items included
in earnings, regardless of the period in which such items are recognized for
tax purposes. Taxes on income are determined by using the liability method.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. In estimating future
tax consequences, all expected future events other than enactments of changes
in the tax law or rates are considered. A valuation allowance is provided
against deferred tax assets when realization is not considered "more likely
than not."
Risks and uncertainties
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market risk.
The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on a
different basis, than its interest-earning assets. Credit risk is the risk of
default on the Company's loan portfolio that results from the borrower's
inability or unwillingness to make contractually required payments. Market
risk results from changes in the value of assets and liabilities which may
impact, favorably or unfavorably, the realizability of those assets and
liabilities held by the Company.
<PAGE>
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgements based on information available to them at the time of
their examination.
Statement of cash flows
Cash equivalents include overnight deposits and securities purchased
under agreements to resell.
Reclassifications
Certain reclassifications of prior year financial data have been made to
conform to the current reporting practices of the Company.
Earnings per share
Presentation of earnings per share is not considered meaningful due to
the closing of the Company's initial public offering on June 27, 1996.
Employee Stock Ownership Plan
The Company recognizes compensation expense for shares committed to be
released to directly compensates employees in an amount equal to the fair
value of the shares so committed. Fluctuations in compensation expense as a
result of changes in the fair value of the Company's common stock would result
in an offsetting adjustment to additional paid-in capital. Therefore, total
capital would not be affected.
2. Investment Securities Held-To-Maturity (Dollars in Thousands):
The book value and estimated market value of investment securities
held-to-maturity as of June 30, 1996 were as follows:
June 30, 1996
Gross Gross Estimated
Book Unrealized Unrealized Market
Value Gains (Losses) Value
U.S. Treasury
securities and
obligations of
other U.S.
government
agencies and
corporations $ 26,973 $ 27 $ (30) $ 26,970
Other 145 2 (5) 142
$ 27,118 $ 29 $ (35) $ 27,112
PAGE
<PAGE>
The book value and estimated market value of investment securities
held-to-maturity as of June 30, 1995 were as follows:
June 30, 1996
Gross Gross Estimated
Book Unrealized Unrealized Market
Value Gains (Losses) Value
U.S. Treasury
securities and
obligations of
other U.S.
government
agencies
and
corporations $ 18,910 $ 23 $ (20) $ 18,913
Securities
purchased
under
agreements
to resell 990 (12) 978
Other 167 23 (2) 188
$ 20,067 $ 46 $ (34) $ 20,079
Securities purchased under agreements to resell at June 30, 1995, were
secured by mortgage-backed securities pledged by dealers whose market values
exceeded the Company's investment in these agreements. These agreements
matured within ninety days of the end of the period.
The maturities of investment securities were as follows:
June 30, 1996 June 30, 1995
Carrying Market Carrying Market
Amount Value Amount Value
Due in one year $ 24,973 $ 24,985 $ 14,900 $ 14,892
Due after one
through five years 2,145 2,127 5,167 5,187
$ 27,118 $ 27,112 $ 20,067 $ 20,079
PAGE
<PAGE>
3. Loans Receivable (Dollars in Thousands):
Loans receivable consisted of the following:
June 30,
1996 1995
Residential real
estate - single family $ 327,490 $ 345,034
Residential real estate
- multi-family 54,427 53,531
Commercial real estate 54,813 61,518
Real estate construction 10,222 5,938
Consumer 15,497 15,830
Other 332 137
462,781 481,988
Less:
Undisbursed loan funds 3,694 4,121
Deferred loan fees 513 1,034
Unearned discounts on
loans purchased 177 205
Allowance for loan losses 5,452 5,085
$ 452,945 $ 471,543
Fixed rate loans comprised 13% and 11%, respectively, of the loan
portfolio at June 30, 1996 and 1995.
The following summarizes the components of the net change in the
allowance for loan losses:
Year Ended June 30,
1996 1995 1994
Balance, beginning
of period $ 5,085 $ 3,332 $ 3,286
Provision for losses 2,261 4,787 2,033
Recoveries 589 459 119
(Charge-offs) (2,483) (3,493) (2,106)
Balance, end of period $ 5,452 $ 5,085 $ 3,332
The following summarizes information regarding non-accrual and
restructured loans:
June 30,
1996 1995
Non-accrual loans $ 4,417 $ 2,558
Restructured loans $ 6,652 $ 3,272
PAGE
<PAGE>
The following summarizes information regarding the reduction of interest
income on non-accrual loans:
Year Ended June 30,
1996 1995 1994
Income in accordance with
original terms $ 720 $ 631 $ 546
Income recognized 352 154 92
Foregone interest income
during year $ 367 $ 477 $ 454
At June 30, 1996 and 1995, there were no commitments to lend additional
funds to those borrowers whose loans were classified as restructured or
non-accrual.
At June 30, 1996, the recorded investment in loans which have been
identified by the Bank as impaired loans was $12,757 for which no allowance
for loan losses has been provided. During the year ended June 30, 1996,
the average recorded value of impaired loans was $11,092, $1,074 of interest
income was recognized, and $1,473 of interest income would have been
recognized under original terms.
In the ordinary course of business, the Bank makes loans to its
directors, officers and employees at substantially the same terms prevailing
at the time of origination for comparable transactions with borrowers. The
following is a summary of related party loan activity:
Year ended June 30,
1996 1995 1994
Balance, beginning
of period $ 2,315 $ 2,719 $ 2,000
Originations 471 4 962
Payments (90) (29) (99)
Terminations (234) (379) (144)
Balance, end of period $ 2,462 $ 2,315 $ 2,719
4. Mortgage Banking (Dollars in Thousands)
The following summarizes the unpaid principal balance of loans serviced
by the Company:
Year ended June 30,
1996 1995 1994
Loans serviced for
Federal Home
Loan Mortgage
Corporation $ 221,019 $ 238,187 $ 252,259
Loans serviced
for Federal National
Mortgage Association 305,446 338,86 362,923
Loans serviced for
other investors 74,632 80,403 88,464
$ 601,097 $ 657,451 $ 703,646
PAGE
<PAGE>
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income includes servicing fees
from investors and certain charges collected from borrowers, such as late
payment fees. The Company held borrowers' escrow balances related to loans
serviced for others of $877 and $1,119 as of June 30, 1996 and 1995,
respectively. These escrow balances are included in deposits in the
accompanying consolidated balance sheet.
The composition of loans sold was as follows:
Year ended June 30,
1996 1995 1994
Loans sold
Servicing - released $ 437,917 $ 198,463 $ 558,726
Servicing - retained 16,127 11,577 486,011
$ 454,044 $ 210,040 $ 1,044,737
Included in gain on sale of loans for the years ended June 30, 1996 and
1995 were hedging gains relating to put options of $495 and $0, respectively.
Loans receivable available-for-sale consisted of the following:
June 30,
1996 1995
Adjustable rate $ 7,891 $ 3,291
Fixed rate 41,721 31,209
49,612 34,500
Less: Valuation allowance (11)
$ 49,612 $ 34,489
PAGE
<PAGE>
5. Real Estate Available-for-Sale (Dollars in Thousands)
Real estate consisted of the following:
June 30,
1996 1995
Foreclosed real estate $ 3,003 $ 7,661
Investment real estate 3,531 3,560
Investments in joint ventures 1,325
6,534 12,546
Allowance for estimated losses:
Foreclosed real estate (292) (877)
Investment real estate (463) (465)
(755) (1,342)
$ 5,779 $ 11,204
The following summarizes the components of the net change in the
allowance for losses on real estate:
Year ended June 30,
1996 1995 1994
Balance, beginning of period $ 1,342 $ 1,384 $ 2,980
Provisions for losses 239 1,665 525
Charge-offs (826) (1,707) (2,121)
Balance, end of period $ 755 $ 1,342 $ 1,384
The following summarizes the components of the Company's real estate
operations:
Year ended June 30,
1996 1995 1994
Provision for losses:
Foreclosed real estate $ (239) $ (983) $ (405)
Investments in joint
ventures (682) (120)
Net operating income
(losses) and holding costs 138 65 159
$ (101) $ (1,600) $ (366)
PAGE
<PAGE>
6. Premises and Equipment (Dollars in Thousands)
Premises and equipment consisted of the following:
June 30,
1996 1995
Land $ 2,564 $ 2,564
Buildings 6,632 6,571
Leasehold improvements 464 461
Furniture and equipment 7,364 6,913
Automobiles 173 178
17,197 16,687
Less accumulated depreciation
and amortization (10,139) (9,151)
$ 7,058 $ 7,536
7. Deposits (Dollars in Thousands)
June 30, 1996 June 30, 1995
Interest Rate Amount Rate Amount
Checking deposits 0%-1.00% $ 22,344 0%-1.00% $ 22,316
Passbook deposits 2.08%-2.92% 52,852 2.08%-3.92% 50,850
Money market
deposits 1.00%-4.64% 83,097 1.20%-5.17% 92,191
Term deposits
Under $100,000 2.66%-8.00% 265,853 2.71%-8.00% 268,174
$100,000 and
over 4.45%-8.00% 55,228 2.71%-8.00% 53,054
$ 479,374 $ 486,585
Weighted average interest
rate on deposits 4.65% 4.90%
PAGE
<PAGE>
The aggregate annual maturities of term accounts are as follows:
June 30,
1996 1995
Within one year $ 251,589 $ 243,631
One to two years 44,995 37,652
Two to three years 10,774 22,970
Three to four years 8,864 9,054
Four to five years 4,741 7,819
Thereafter 117 103
$ 321,080 $ 321,229
Interest expense is summarized as follows:
Year ended June 30,
1996 1995 1994
Checking $ 203 $ 189 $ 203
Term deposits 18,027 14,641 12,660
Money market deposits 4,034 4,893 3,123
Passbook deposits 1,743 1,466 1,679
$ 24,007 $ 21,189 $ 17,665
The Company is required to maintain cash and reserve balances with the
Federal Reserve Bank. Such reserve is calculated based on deposit levels and
amounted to $816 and $291 at June 30, 1996 and 1995, respectively.
8. Borrowings (Dollars in Thousands)
Borrowings consisted of the following:
June 30,
1996 1995
Advances from Federal Home Loan Bank $ 8,578 $ 33,078
Securities sold under agreements
to repurchase 1,985
$ 8,578 $ 35,063
Advances from the Federal Home Loan Bank were collateralized by pledges
of certain real estate loans with an aggregate principal balance at June 30,
1996 and 1995 of $193,306 and $279,192, respectively. The Bank's overall
borrowing capacity which is limited to 30% of total assets, as reported on the
Bank's quarterly thrift financial reports, is approximately $169,865, and
$170,946 at June 30, 1996 and 1995, respectively.
As a member of the FHLB system, the Bank is required to maintain a
minimum investment in FHLB stock. The investment exceeds the required level by
$408 and $49 at June 30, 1996 and 1995, respectively. Any excess may be
redeemed by the Bank or called by FHLB at par.
PAGE
<PAGE>
The aggregate annual maturities of advances are as follows:
June 30,
1996 1995
Within one year $ 1,750 $ 32,000
One to two years 6,500 750
Two to three years
Over three years 328 328
$ 8,578 $ 33,078
Weighted average interest rate 6.10% 6.37%
Occasionally, the Company enters into reverse repurchase agreements,
usually for thirty days or less, secured by its investments. At June 30,
1995, the Company had an outstanding reverse repurchase agreement of $1,985
secured by securities under the Company's control with a carrying value of
$1,995 and with a market value of $1,997. The weighted average interest rate
of reverse repurchase agreements at June 30, 1995 was 6.15%. There were no
reverse repurchase agreements outstanding as of June 30, 1996.
9. Income Taxes (Dollars in Thousands)
The provision for income taxes consisted of the following:
Year ended June 30,
1996 1995 1994
Current:
Federal $ 1,244 $ (952) $ (880)
State 111 3 271
1,355 (949) (609)
Deferred:
Federal (95) (1,050) 430
State 72 264 (469)
(23) (786) (39)
Provision (benefit)
for income taxes $ 1,332 $ (1,735) $ (648)
PAGE
<PAGE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pre-tax income from continuing operations as a result of the following
differences:
Year ended June 30,
1996 1995 1994
Statutory U.S. federal
income tax rate 34.0% (34.0%) (34.0%)
State taxes net of
Federal income tax effect 2.9% 3.1% (6.6%)
Nondeductible goodwill
amortization 1.9% 10.7%
Life insurance proceeds (10.7%)
Other 6.0% (1.3%) (2.8%)
Effective income
tax rate 32.2% (30.3%) (32.7%)
Deferred tax liabilities (assets) by jurisdiction were as follows:
June 30,
1996 1995
Deferred taxes - federal $ (872) $ (777)
Deferred taxes - state (387) (459)
$ (1,259) $ (1,236)
Deferred tax liabilities (assets) were comprised of the following:
June 30,
1996 1995
State taxes $ 93 $ 189
Depreciation 614 611
Federal Home Loan
Bank dividends 1,254 1,148
Market value adjustments 67
Total deferred tax liabilities 1,961 2,015
Market value adjustments (284)
Loss reserves (2,552) (2,509)
Deferred compensation (640) (547)
Investment in real estate (142) (146)
Other (64) (151)
NOL carryforward (379)
Total deferred tax assets (3,682) (3,732)
Deferred tax asset
valuation allowance 462 481
Net deferred tax assets $ (1,259) $ (1,236)
PAGE
<PAGE>
For the years ended June 30, 1996, 1995, and 1994 the Company used its
loss experience to calculate its bad debt deduction used in determining
federal income taxes payable. As a result of recently enacted legislation,
the Company's future bad debt deductions will be based only on charge-offs
claimed during the year.
10. Capital (Dollars in Thousands)
Retained earnings at June 30, 1996 and 1995 included approximately $9,019
for which federal income tax of approximately $3,066 had not been provided.
If the amounts that qualify as deductions for federal income tax purposes are
later used for purposes other than for bad debt losses, including distribution
in liquidation, they will be subject to federal income tax at the then current
corporate tax rate. If those amounts are not so used, they will not be
subject to tax even in the event the Company were to convert its charter.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets,liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1996, that
the Bank meets all capital adequacy requirements to which it is subject.
Various adjustments are required to be made to retained earnings and
total assets for computing these capital ratios, depending on an institution's
capital and asset structure. The adjustment presently applicable to the Bank
is for equity investments in real estate. In addition, in calculating
risk-based capital, general loss allowances are includable as capital on a
limited basis.
The Bank's actual capital amounts and ratios as of June 30, 1996 are as
follows:
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
Amount Ratio Amount Ratio
Risk Based Capital $ 63,487 16.49% $ 38,490 10.0%
Core Capital 58,668 10.41% 16,914 3.0%
Tangible Capital 58,668 10.41% 8,457 1.5%
PAGE
<PAGE>
11. Benefit Plans (Dollars in Thousands)
The Company has a 401(k) defined-contribution plan covering all employees
meeting specific age and service requirements. Under the plan, employees may
contribute up to 10% of their pre-tax compensation. The Company makes
matching contributions up to 3% of participants' pre-tax compensation.
Participants vest immediately in their own contributions with 100% vesting in
the Company's contributions occurring after 6 years of credited service. The
Company's expense for these plans was approximately $550, $249, and $425
for the years ended June 30, 1996, 1995 and 1994, respectively.
The Company adopted SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective July 1, 1995. SFAS 106 requires
measurement of the obligations of an employer to provide future postretirement
benefits and the accrual of costs during the years that the employee provides
services. Postretirement health care and life insurance benefits expense is
based on the actuarial computation of current and future benefits to earnings
for employees and retirees. The Company sponsors postretirement health care
and life insurance benefits to certain retired officers and directors. Prior
to fiscal 1996, the Company expensed the net cost of providing such benefits
to retired employees on a pay-as-you-go basis. Adoption of SFAS 106 did not
have a material effect on the Company's financial position or operating
results.
The Company has severance agreements with certain of its officers which
are renewable on an annual basis at the Company's option and a multi-year
employment contract with one executive officer. The Company has an unfunded
obligation of approximately $1,762 and $1,687 at June 30, 1996 and 1995,
respectively, to pay certain benefits upon retirement. Actuarially determined
retirement costs are being accrued and expensed annually.
Employee Stock Ownership Plan (ESOP)
As part of the conversion, an ESOP was established for all employees who
are age 21 or older and have completed one year of service with the Company
during which they have served a minimum of 1,000 hours. The ESOP borrowed
$4,100 from the Company to purchase 410,017 shares of the common stock issued
in the conversion. The loan will be repaid principally from the Company's
contributions to the ESOP over a period of 10 years. At June 30, 1996, the
outstanding balance on the loan was $3,952. Shares purchased with the loan
proceeds are held in an unearned ESOP shares account and released on a pro
rata basis as the loan is repaid. Contributions to the ESOP and shares
released from the unearned ESOP shares account are allocated among
participants on the basis of compensation, as described in the plan, in the
year of allocation. Benefits generally become 100% vested after six years of
credited service. Vesting will accelerate upon retirement, death or
disability of the participant or in the event of a change in control of the
Company. Forfeitures will be reallocated among remaining participating
employees in the same proportion as contributions. Benefits may be payable
upon death, retirement, early retirement, disability or separation from
service. Since the annual contributions are discretionary, the benefits
payable under the ESOP cannot be estimated. The expense related to the ESOP
totaled $162 for the fiscal year ended June 30, 1996. At June 30, 1996, the
unearned ESOP shares account of $3,952 is reported as a reduction of
stockholders' equity.
The table below reflects ESOP activity for the period indicated:
Year Ended June 30,
1996
Unallocated shares at beginning of period
Purchased shares 410,017
Allocated 14,783
Unallocated shares at end of period 395,234
The fair value of unallocated ESOP shares totaled $4,335 at June 30,
1996.
PAGE
<PAGE>
12. Incentive Plans
Management Recognition Plan and Trust (MRP)
The Company intends to seek approval of the MRP at a meeting of
stockholders as a method of providing officers, employees and nonemployee
directors of the Company with a proprietary interest in the Company in a
manner designed to encourage such persons to remain with the Company. The
Company plans to contribute funds to the MRP to enable the trust to acquire,
in the aggregate, 4% of the shares of common stock in the conversion. Such
shares would be acquired either through open market purchases or from
authorized but unissued shares of common stock. Under the MRP, awards would
be granted in the form of shares of common stock held by the MRP. These
shares represent deferred compensation and would be accounted for as a
reduction of stockholders' equity.
Stock Option Plan
The Company also intends to seek stockholder approval of the 1996 Stock
Option Plan (the Stock Option Plan) which will reserve a number of shares
equal to 10% of the number of shares issued in the conversion. The Stock
Option Plan provides for the grant of options at an exercise price equal to
the fair market value on the date of grant. The Stock Option Plan is intended
to promote stock ownership by directors and selected officers and employees of
the Company to increase their proprietary interest in the Company as an
incentive to contribute to the success of the Company and to reward officers
and key employees for outstanding performance.
13. Commitments and Contingencies (Dollars in Thousands)
The Company is involved in various legal matters associated with its
normal operations. In the opinion of management, these matters will be
resolved without material effect on the Company's financial position.
The Company conducts a portion of its operations in leased facilities
under noncancellable agreements classified as operating leases. In addition,
the Company leases data processing equipment under operating leases expiring
during the next five years. The following is a schedule of minimum rental
payments under such operating leases which expire at various dates:
June 30,
1996
Fiscal Year
1997 $ 447
1998 331
1999 225
2000 125
2001 72
Thereafter 252
Total minimum payments required $ 1,452
Lease expense under operating leases approximated $390, $892 and $663 for
the years ended June 30, 1996, 1995 and 1994, respectively.
PAGE
<PAGE>
14. Financial Instruments With Off-Balance Sheet Risk (Dollars in Thousands)
The Company 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 commitments to sell loans 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
balance sheet. The Company's exposure to credit loss, in the event of
nonperformance by the other party to these financial instruments is
represented by the contractual notional amount of these instruments. The
Company uses the same credit policies in making commitments to extend credit
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as all conditions have been met in the contract. These commitments generally
have expiration dates within 60 days of the commitment date and may require
the payment of a fee. Since some of these commitments are expected to expire,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. At June 30, 1996 and 1995, interest rates on commitments
to lend ranged from 5.75% to 9.50% and 6.50% to 10.875%, respectively.
In an effort to minimize its exposure to interest rate fluctuations on
fixed rate loans originated for sale, the Company enters into forward
agreements to sell certain dollar amounts of fixed rate loans to third
parties. These agreements specify the minimum maturity of the loans, yield to
purchaser and servicing spread to the Company (if servicing is retained), and
the maximum principal amount of individual loans. The Company typically
satisfies these forward sale agreements with its current production; at June
30, 1996 and 1995 the aggregate amount of loans available for sale and of
commitments to originate exceeded the Company's forward sales commitments to
sell loans. At June 30, 1996 and 1995, interest rates on commitments to sell
loans ranged from 5.875% to 12.00% and 6.00% to 9.75%, respectively.
The Company is exposed to interest rate risk on fixed rate commitments to
originate loans for sale to the extent forward sale agreements have not been
entered into. To minimize this risk, the Company purchases over the counter
put options with option periods that generally coincide with the terms of the
commitments to originate loans. The contract or notional amount of these
instruments reflect the extent of involvement the Company has in this
particular class of financial instruments. The Bank's exposure to loss on
these financial instruments is limited to the premiums paid. Premiums paid
and deferred gains on put options are recorded as an adjustment to the
carrying value of loans available for sale and recognized in earnings when the
loan is sold. At June 30, 1996 and 1995, the notional principal amount of
options outstanding were $3,500 and $0, respectively. The market value of
open positions at June 30, 1996 is immaterial.
In addition to construction loans in process, the Company had the
following outstanding commitments:
June 30,
1996 1995
Commitments to originate mortgage loans:
Fixed rate $ 17,523 $ 18,947
Adjustable rate 2,351 2,629
Unused lines of credit 6,344 5,783
Commitments to sell loans 31,763 32,061
$ 57,981 $ 59,420
PAGE
<PAGE>
15. Fair Values of Financial Instruments (Dollars in Thousands)
The reported fair values of financial instruments are based on various
factors. In some cases, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions concerning the amount and timing of estimated
future cash flows, assumed discount rates and other factors reflecting varying
degrees of risk. The estimates are subjective in nature and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates. Accordingly, the reported fair values may not represent
actual values of the financial instruments that could have been realized as of
year end or that will be realized in the future. The following methods and
assumptions were used to estimate the fair value of each class of significant
financial instruments:
Cash and due from banks, federal funds sold, interest bearing deposits
with banks: The carrying amount of these financial assets approximates the
fair value.
Investment securities: The fair value of investment securities is based
on quoted market prices or dealer quotes.
Loans available-for-sale: Fair values for loans are based on quoted
market prices. Forward commitments to sell loans have been considered in the
determination of the estimated fair value of loans available-for-sale.
Loans: For loans that reprice frequently at market rates, the carrying
amount approximates the fair value. For fixed-rate loans, the fair value is
determined by either (i) discounting the estimated future cash flows of such
loans, using a current interest rate at which such loans would be made to
borrowers over estimated remaining contractual maturities, or (ii) quoted
market prices. The allowance for loan losses is subtracted as an estimate
of the underlying credit risk.
Accrued interest receivable: The carrying value for accrued interest
receivable approximates fair value because of the short-term nature of the
financial instruments.
Federal Home Loan Bank stock: The carrying amount reported for FHLB
stock approximates fair value. If redeemed, the Company will receive an
amount equal to the par value of the stock.
Deposits: The fair value of demand and savings deposits is the amount
payable on demand at the reporting date. The carrying amount for
variable-rate, fixed-term time deposit accounts approximates fair value. The
fair value of fixed-rate time deposits is estimated using a discounted cash
flow calculation. The discount rate on such deposits is based upon rates
currently offered for deposits of similar remaining maturities.
Borrowings: The fair value of borrowings has been estimated using a
discounted cash flow calculation. The discount rate on such borrowings is
based upon rates currently offered for borrowings of similar remaining
maturities. The fair value of securities sold under agreements to repurchase
is the carrying amount at the reporting date since these agreements were
repaid within one month of the reporting date.
Commitments: Commitments to extend credit at June 30, 1996 are offered
at substantially the same rates and terms of commitments offered on June 30,
1996 to parties of similar credit worthiness. Therefore, it is presumed that
no significant difference exists between the carrying and fair value. See
Note 14.
PAGE
<PAGE>
The carrying amount and fair values of the Company's financial
instruments were as follows:
June 30, 1996 June 30, 1995
Carrying Market Carrying Market
Amount Value Amount Value
Financial assets:
Cash $ 30,831 $ 30,831 $ 11,433 $ 11,433
Investment
securities 27,118 27,112 20,067 20,079
Loans receivable
available-for-sale 49,612 49,990 34,489 34,881
Loans receivable 452,945 455,307 471,543 472,401
Accrued interest
receivable 3,083 3,083 2,855 2,855
FHLB stock 4,590 4,590 4,360 4,360
Financial Liabilities:
Deposits 479,374 479,729 86,585 487,580
Borrowings 8,578 8,551 35,063 35,095
16. Conversion (Dollars in Thousands)
Provident Financial Holdings, Inc. was incorporated under Delaware law in
January 1996 for the purpose of acquiring and holding all of the outstanding
capital stock of Provident Savings Bank, FSB as part of the Bank's conversion
from a Federally chartered mutual savings bank to a Federally chartered stock
savings bank. On June 27, 1996, the Bank became a wholly owned subsidiary of
the Holding Company. In connection with the conversion, Provident Financial
Holdings, Inc. issued and sold to the public 5,125,215 shares of its common
stock (par value $.01 per share) at a price of $10.00 per share. The
proceeds, net of $1,474 in conversion costs, received by the Company from the
issuance amounted to $49,779. Prior to the completion of the conversion,
Provident Financial Holdings, Inc. had no assets or liabilities and did not
conduct any business other than of an organizational nature.
At the time of the conversion, the Bank established a liquidation account
in the amount of $40,000 which was equal to its total retained earnings as of
May 31, 1996. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the Bank
after the conversion.
The liquidation account will be reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of
its shares of common stock, if the effect would cause stockholder's equity to
be reduced below applicable regulatory capital maintenance requirements or if
such declaration and payment would otherwise violate regulatory requirements.
PAGE
<PAGE>
17. Holding Company Condensed Financial Information (Dollars in Thousands)
This information should be read in conjunction with the other notes to
the consolidated financial statements. The following is the condensed balance
sheet for Provident Financial Holdings, Inc. (Holding Company only) as of June
30, 1996.
Condensed Balance Sheet
June 30, 1996
Assets
Cash $ 1,484
Investment securities held to maturity 17,973
Investment in subsidiary 61,071
Other assets 5,492
$ 86,020
Liabilities and Stockholders' Equity
Other liabilities $ 50
Stockholders' equity 85,970
$ 86,020
PAGE
<PAGE>
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<PERIOD-END> JUN-30-1996
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