<PAGE>
PROSPECTUS
[LOGO]
UP TO 5,865,000 SHARES OF COMMON STOCK (ANTICIPATED MAXIMUM)
Provident Financial Holdings, Inc. (the "Holding Company"), a Delaware
corporation, is offering between 4,335,000 and 5,865,000 shares of its common
stock, $.01 par value per share (the "Common Stock"), in connection with the
conversion of Provident Savings Bank, F.S.B. (the "Savings Bank") from a
federally chartered mutual savings bank to a federally chartered capital stock
savings bank and the simultaneous issuance of the Savings Bank's capital stock
to the Holding Company. The simultaneous conversion of the Savings Bank to stock
form, the issuance of the Savings Bank's capital stock to the Holding Company
and the offer and sale of the Common Stock by the Holding Company are being
undertaken pursuant to a plan of conversion ("Plan" or "Plan of Conversion") and
are referred to herein as the "Conversion."
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR SUBSCRIPTION RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER
PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER
SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS") OR
ANOTHER AGENCY OF THE U.S. GOVERNMENT.
(COVER CONTINUED ON FOLLOWING PAGE)
--------------------------
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE
CONVERSION CENTER AT (909) 782-6122 AND ASK FOR AN EVEREN SECURITIES, INC.
REPRESENTATIVE.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY
OTHER FEDERAL OR STATE GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR
ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ESTIMATED
UNDERWRITING
COMMISSIONS AND
OTHER FEES AND ESTIMATED NET
PURCHASE PRICE (1) EXPENSES (2) PROCEEDS (3)
<S> <C> <C> <C>
Minimum Price Per Share............................ $10.00 $0.26 $9.74
Midpoint Price Per Share........................... $10.00 $0.22 $9.78
Maximum Price Per Share............................ $10.00 $0.19 $9.81
Maximum Price Per Share, as adjusted(4)............ $10.00 $0.17 $9.83
Minimum Total(5)................................... $43,350,000 $1,139,000 $42,211,000
Midpoint Total(6).................................. $51,000,000 $1,139,000 $49,861,000
Maximum Total(7)................................... $58,650,000 $1,139,000 $57,511,000
Maximum Total, as adjusted(4)(8)................... $67,447,500 $1,139,000 $66,308,500
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") as of March 1, 1996, which states that the
estimated aggregate pro forma market value of the Holding Company and the
Savings Bank as converted ranged from $43,350,000 to $58,650,000, with a
midpoint of $51,000,000 ("Estimated Valuation Range"). Based on the
Estimated Valuation Range, the Board of Directors of the Savings Bank
established the estimated aggregate price range of $43,350,000 to
$58,650,000, or between 4,335,000 and 5,865,000 shares of Common Stock at
the $10.00 price per share (the "Purchase Price") to be paid for each share
of Common Stock subscribed for or purchased in the Offerings (as defined
herein). The final aggregate Purchase Price, which will be determined at the
time of the closing of the Offerings, is subject to change due to material
changes in the financial condition or performance of the Savings Bank or in
market conditions or general financial or economic conditions. RP
Financial's appraisal is based upon estimates and projections that are
subject to change, and the valuation must not be construed as a
recommendation as to the advisability of purchasing such shares or that a
purchaser will thereafter be able to sell such shares at or above the
Purchase Price. See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
(2) Includes estimated costs to the Holding Company and the Savings Bank arising
from the Conversion, including fees to be paid to EVEREN Securities in
connection with the Offerings. Such fees may be deemed to be underwriting
fees and EVEREN Securities may be deemed to be an underwriter. Expenses of
the Conversion, other than fees to be paid to EVEREN Securities, are
estimated to total approximately $636,000. Actual expenses, and thus net
proceeds, may be more or less than estimated amounts. The Holding Company
and the Savings Bank have agreed to indemnify EVEREN Securities against
certain liabilities, including liabilities that may arise under the
Securities Act of 1933, as amended ("Securities Act"). See "USE OF PROCEEDS"
and "THE CONVERSION -- Plan of Distribution for the Subscription and Direct
Community Offering."
(3) Actual net proceeds may vary substantially from the estimated amounts
depending upon the relative number of shares sold in the Offerings. See "USE
OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares which could be sold in
the Conversion, either in the Subscription Offering, Direct Community
Offering or Public Offering, due to an increase in the pro forma market
value of the Holding Company and the Savings Bank, as converted, up to 15%
above the maximum of the Estimated Valuation Range, without the
resolicitation of subscribers or any right of cancellation. The ESOP shall
have a first priority right to subscribe for such additional shares up to an
aggregate of 8% of the Common Stock issued in the Conversion. The issuance
of such additional shares will be conditioned on a determination by RP
Financial that such issuance is compatible with its determination of the
estimated pro forma market value of the Holding Company and the Savings Bank
as converted. See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued."
(5) Assumes the issuance of 4,335,000 shares at $10.00 per share.
(6) Assumes the issuance of 5,100,000 shares at $10.00 per share.
(7) Assumes the issuance of 5,865,000 shares at $10.00 per share.
(8) Assumes the issuance of 6,744,750 shares at $10.00 per share.
------------------------------
EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS MAY 7, 1996.
<PAGE>
Pursuant to the Plan of Conversion, nontransferable rights to subscribe for
the Common Stock ("Subscription Rights") have been granted, in order of
priority, to (i) depositors with $50.00 or more on deposit at the Savings Bank
as of August 31, 1994 ("Eligible Account Holders"), (ii) the Savings Bank's
employee stock ownership plan ("ESOP"), a tax-qualified employee benefit plan,
(iii) depositors with $50.00 or more on deposit at the Savings Bank as of March
31, 1996 ("Supplemental Eligible Account Holders"), and (iv) depositors of the
Savings Bank as of April 30, 1996 ("Other Members"), subject to the priorities
and purchase limitations set forth in the Plan of Conversion ("Subscription
Offering"). See "THE CONVERSION -- The Subscription, Direct Community and Public
Offerings" and "-- Limitations on Purchases of Shares." Concurrently, but
subject to the prior rights of holders of Subscription Rights, the Holding
Company is offering the Common Stock for sale to members of the general public
through a direct community offering ("Direct Community Offering") with
preference being given to natural persons and trusts of natural persons who are
permanent residents of Riverside or San Bernardino Counties of California
("Local Community"), subject to the right of the Holding Company to accept or
reject orders in the Direct Community Offering in whole or in part. The
Subscription Offering and the Direct Community Offering are referred to herein
as the "Subscription and Direct Community Offering." Depending on market
conditions, the shares of Common Stock may be offered for sale in the Direct
Community Offering to eligible members of the general public on a best efforts
basis by a selling group of broker-dealers managed by EVEREN Securities, Inc.
("EVEREN Securities"). In addition, depending on market conditions upon the
completion of the Direct Community Offering, any shares not subscribed for in
the Subscription and Direct Community Offering may be offered to the general
public in an underwritten public offering (the "Public Offering") to be managed
by EVEREN Securities (the Subscription and Direct Community Offering and the
Pubic Offering are referred to collectively as the "Offerings").
With the exception of the ESOP, which is expected to purchase 8% of the
Common Stock issued in the Conversion, subject to the approval of the OTS, NO
PERSON OR ENTITY MAY PURCHASE SHARES WITH AN AGGREGATE PURCHASE PRICE OF MORE
THAN $250,000 (OR 25,000 SHARES BASED ON THE PURCHASE PRICE) AND NO PERSON OR
ENTITY, TOGETHER WITH ASSOCIATES OF OR PERSONS ACTING IN CONCERT WITH SUCH
PERSON OR ENTITY, MAY PURCHASE IN THE AGGREGATE MORE THAN 1% OF THE SHARES
ISSUED IN THE CONVERSION. Under certain circumstances, the maximum purchase
limitation may be increased or decreased at the sole discretion of the Savings
Bank and the Holding Company. See "THE CONVERSION -- The Subscription, Direct
Community and Public Offerings," "-- Limitations on Purchases of Shares" and "--
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering" for other purchase and sale limitations. The minimum subscription is
25 shares.
THE SUBSCRIPTION OFFERING WILL EXPIRE AT NOON, PACIFIC TIME, ON JUNE 17,
1996 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE SAVINGS BANK AND THE HOLDING
COMPANY FOR UP TO 11 DAYS TO JUNE 28, 1996. SUCH EXTENSION MAY BE GRANTED
WITHOUT ADDITIONAL NOTICE TO SUBSCRIBERS. THE DIRECT COMMUNITY OFFERING IS ALSO
EXPECTED TO TERMINATE AT NOON, PACIFIC TIME, ON THE EXPIRATION DATE, OR AT ANY
DATE THEREAFTER, HOWEVER, IN NO EVENT LATER THAN AUGUST 12, 1996. The Holding
Company must receive at any full-service office of the Savings Bank the
accompanying original Stock Order Form (facsimile copies and photocopies will
not be accepted) and a fully executed separate Certification Form along with
full payment (or appropriate instructions authorizing a withdrawal of the full
payment from a deposit account at the Savings Bank) of $10.00 per share for all
shares subscribed for or ordered. Funds so received will be placed in segregated
accounts created for this purpose at the Savings Bank, and interest will be paid
at the Savings Bank's passbook rate from the date payment is received until the
Conversion is consummated or terminated. These funds will be otherwise
unavailable to the depositor until such time. Payments authorized by withdrawals
from deposit accounts will continue to earn interest at the contractual rate
until the Conversion is consummated or terminated, although such funds will be
unavailable for withdrawal until the Conversion is consummated or terminated.
Payment for shares of Common Stock by wire transfer will not be accepted. ORDERS
SUBMITTED ARE IRREVOCABLE UNTIL THE CONSUMMATION OR TERMINATION OF THE
CONVERSION. If the Conversion is not consummated within 45 days after the last
day of the Subscription Offering (which date will be no later than August 12,
1996) and the OTS consents to an extension of time to consummate the Conversion,
subscribers will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any such resolicitation is not received by
the Holding Company or the Savings Bank from subscribers, such orders will be
rescinded and all funds will be returned promptly with interest. If such period
is not extended or, in any event, if the Conversion is not consummated, all
subscription funds will be promptly returned, together with accrued interest,
and all withdrawal authorizations terminated.
The Savings Bank and the Holding Company have engaged EVEREN Securities as
their financial advisor and to assist the Holding Company in the sale of the
Common Stock on a best-efforts basis in the Subscription and Direct Community
Offering, including, if necessary, managing selected broker-dealers to assist in
selling the Common Stock in the Direct Community Offering and/or managing the
Public Offering. Neither EVEREN Securities nor any other registered
broker-dealer is obligated to take or purchase any shares of Common Stock in the
Subscription and Direct Community Offering. The Holding Company and the Savings
Bank reserve the right, in their absolute discretion, to accept or reject, in
whole or in part, any or all orders in the Direct Community Offering either at
the time of receipt of an order or as soon as practicable following the
termination of the Offerings. See "THE CONVERSION -- Subscription, Direct
Community and Public Offerings" and " -- Plan of Distribution for the
Subscription and Direct Community Offering."
Prior to the Offerings, the Holding Company has not issued any capital stock
and accordingly there has been no market for the shares offered hereby. There
can be no assurance that an active and liquid trading market for the Common
Stock will develop or, if developed, will be maintained. The Holding Company has
received conditional approval to have its Common Stock listed on the Nasdaq
National Market under the symbol "PROV." EVEREN Securities has advised the
Holding Company that it intends to act as a market maker for the Common Stock
following the Conversion. See "RISK FACTORS -- Absence of Prior Market for the
Common Stock" and "MARKET FOR COMMON STOCK."
<PAGE>
PROVIDENT SAVINGS BANK, F.S.B.
RIVERSIDE, CALIFORNIA
<TABLE>
<C> <S> <C> <C>
1. Corporate Office: SAVINGS OFFICE/PROFED-Retail 8. Blythe Office: SAVINGS OFFICE
3576 Central Ave., Riverside 201 E. Hobson Way, Blythe
2. Canyon Crest Office: SAVINGS OFFICE/PROFED-Retail 9. Redlands Office: SAVINGS OFFICE/PROFED-Retail
5225 Canyon Crest Dr., #86, Riverside 125 E. Citrus, Redlands
3. Moreno Valley Office: SAVINGS OFFICE 10. Rancho Cucamonga Office: PROFED-Retail PROFED-Wholesale
12460 Heacock St., Moreno Valley 10390 Commerce Center Dr., Ste. 190, Rancho Cucamonga
4. Moreno Valley North Office: SAVINGS OFFICE 11. Gardena Office: PROFED-Retail
23575 Sunnymead Ranch Pkwy., Moreno Valley 1411 W. 190th St., Gardena
5. Sun City Office: SAVINGS OFFICE 12. Santa Ana Office: PROFED-Retail
27010 Sun City Blvd., Sun City 1450 N. Tustine Ave., Ste. 212, Santa Ana
6. Hemet Office: SAVINGS OFFICE 13. Marin Office: PROFED-Retail
1690 E. Florida Ave, Hemet 900 Larkspur Circle, Ste. 230, Larkspur
7. Rancho Mirage Office: SAVINGS OFFICE/PROFED-Retail 14. Las Vegas Office: PROFED-Retail/PROFED-Wholesale
71-991 Highway 111, Rancho Mirage 3233 W. Charleston St., #106, Las Vegas, NV
</TABLE>
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE SAVINGS BANK'S PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE ELIGIBLE VOTING MEMBERS, THE SALE
OF AT LEAST 4,335,000 SHARES OF COMMON STOCK PURSUANT TO THE PLAN OF
CONVERSION, AND RECEIPT OF ALL REGULATORY APPROVALS.
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
- --------------------------------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE INFORMATION SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) PRESENTED ELSEWHERE IN THIS
PROSPECTUS. THE PURCHASE OF COMMON STOCK IS SUBJECT TO CERTAIN RISKS. SEE
"RISK FACTORS."
PROVIDENT FINANCIAL HOLDINGS, INC.
The Holding Company is a Delaware corporation organized in January 1996 at
the direction of the Savings Bank to acquire all of the capital stock that the
Savings Bank will issue upon its conversion from the mutual to stock form of
ownership. The Holding Company has not engaged in any significant business to
date. The Holding Company has received the approval of the OTS to become a
savings and loan holding company and to acquire 100% of the capital stock of the
Savings Bank. Immediately following the Conversion, the only significant assets
of the Holding Company will be the capital stock of the Savings Bank, that
portion of the net proceeds of the Offerings permitted by the OTS to be retained
by the Holding Company and a note receivable from the ESOP evidencing a loan
from the Holding Company to fund the Savings Bank's ESOP. The Holding Company
has received approval from the OTS to retain up to 50% of the net proceeds of
the Offerings. Funds retained by the Holding Company will be used for general
business activities, including a loan by the Holding Company directly to the
ESOP to enable the ESOP to purchase 8% of the Common Stock issued in the
Conversion. See "USE OF PROCEEDS." Upon Conversion, the Holding Company will
be classified as a unitary savings and loan holding company subject to
regulation by the OTS. See "REGULATION -- Savings and Loan Holding Company
Regulation." Management believes that the holding company structure and
retention of proceeds may facilitate the expansion and diversification of its
operations should it decide to do so. The holding company structure will also
enable the Holding Company to repurchase its stock without adverse tax
consequences, subject to applicable regulatory restrictions and waiting periods.
There are no present plans, arrangements, agreements, or understandings, written
or oral, regarding any such activities or repurchases. The office of the
Holding Company is located at 3756 Central Avenue, Riverside, California 92506,
and its telephone number is (909) 686-6060.
PROVIDENT SAVINGS BANK, F.S.B.
The Savings Bank, founded in 1956, is a federally chartered mutual savings
bank headquartered in Riverside, California. The Savings Bank amended its
mutual charter from that of a federally chartered mutual savings and loan
association to that of a California-chartered mutual savings bank in 1988 and
then to a federally chartered mutual savings bank in 1990. In connection with
the Conversion, the Savings Bank will convert to a federally chartered capital
stock savings bank and will become a wholly owned subsidiary of the Holding
Company. The Savings Bank is regulated by the OTS, its primary federal
regulator, and the FDIC, the insurer of its deposits. The Savings Bank's
deposits are federally insured up to applicable limits by the FDIC (under the
SAIF). The Savings Bank has been a member of the Federal Home Loan Bank
("FHLB") System since 1956. At December 31, 1995, the Savings Bank had total
assets of $570.7 million, total deposits of $498.5 million and retained earnings
of $38.2 million.
The Savings Bank's business consists of both traditional savings and loan
and mortgage banking operations. The savings and loan operations consist
primarily 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, consumer and other loans. The Savings Bank has two full-
service offices in Riverside, California, two in Moreno Valley, California and
one in each of Blythe, Hemet,
(i)
<PAGE>
Rancho Mirage, Redlands, and Sun City, California. At December 31, 1995, one-
to four-family residential mortgage loans totalled $333.6 million, or 70.6% of
the Savings Bank's loan portfolio. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities."
The mortgage banking activities of the Savings Bank are conducted through
the Savings Bank's Profed Mortgage division. 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. Profed Mortgage
operates four offices within the Savings Bank's facilities and five free-
standing loan production offices located in Santa Ana, Rancho Cucamonga, and
Gardena in Southern California; Larkspur in Northern California; and in Las
Vegas, Nevada. During the year ended June 30, 1995 and the six months ended
December 31, 1995, loans originated for sale totalled $161.5 million and $214.6
million, respectively. Since mid-1994, the Savings Bank has sold most loans on
a servicing-released basis. At December 31, 1995, the Savings Bank serviced
$625.3 million of loans for others. See "RISK FACTORS -- Reliance on Mortgage
Banking Operations" and "BUSINESS OF THE SAVINGS BANK -- Mortgage Banking
Activities."
The main office of the Savings Bank is located at 3756 Central Avenue,
Riverside, California 92506, and its telephone number is (909) 686-6060.
THE CONVERSION
The Savings Bank is in the process of converting from a federally chartered
mutual savings bank to a federally chartered capital stock savings bank and, in
connection with the Conversion, has formed the Holding Company. As part of the
Conversion, the Savings Bank will issue all of its capital stock to the Holding
Company in exchange for at least 50% of the net proceeds of the Offerings.
Simultaneously, the Holding Company will sell its Common Stock in the Offerings.
The Conversion is subject to the approval of the OTS, as well as the Savings
Bank's members at a special meeting to be held on June 17, 1996. After
consummation of the Conversion, depositors of the Savings Bank will have no
voting rights in the Holding Company unless they become stockholders.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Savings Bank as converted. RP Financial has advised the Savings Bank that in
its opinion, at March 1, 1996, the aggregate estimated pro forma market value of
the Holding Company and the Savings Bank as converted ranged from $43,350,000 to
$58,650,000 or from 4,335,000 shares to 5,865,000 shares, assuming a $10.00 per
share Purchase Price. The appraisal of the pro forma market value of the
Holding Company and the Savings Bank as converted is based on a number of
factors and should not be considered a recommendation to buy shares of the
Common Stock or any assurance that after the Conversion shares of Common Stock
will be able to be resold at or above the Purchase Price. The appraisal will be
updated or confirmed prior to the consummation of the Conversion.
The Board of Directors and management believe that the Conversion offers a
number of advantages which will be important to the future growth and
performance of the Savings Bank. The Conversion is intended: (i) to provide
substantially increased capital for investment in its business and to expand the
operations of the Savings Bank; (ii) to enhance the Savings Bank's ability to
expand through mergers and acquisitions and to diversify its operations into new
business activities (although there are no specific plans, arrangements or
understandings, written or oral, regarding any such activities); (iii) to afford
members of the Savings Bank and others the opportunity to become stockholders of
the Holding Company and thereby participate more directly in, and contribute to,
any future growth of the Holding Company and the Savings Bank; and (iv) to
provide future access to capital markets. See "THE CONVERSION."
(ii)
<PAGE>
THE SUBSCRIPTION, DIRECT COMMUNITY AND PUBLIC OFFERINGS
The Holding Company is offering up to 5,865,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Savings Bank's ESOP;
(iii) Supplemental Eligible Account Holders; and (iv) Other Members. In the
event the number of shares offered in the Conversion is increased above the
maximum of the Estimated Valuation Range, the Savings Bank's ESOP shall have a
priority right to purchase any such shares exceeding the maximum of the
Estimated Valuation Range up to an aggregate of 8% of the Common Stock.
Concurrently, and subject to the prior rights of holders of Subscription Rights,
any shares of Common Stock not subscribed for in the Subscription Offering are
being offered in the Direct Community Offering to the general public with
preference being given to natural persons and trusts of natural persons who are
permanent residents of the Local Community. ORDERS SUBMITTED ARE IRREVOCABLE
UNTIL THE CONSUMMATION OF THE CONVERSION. The Savings Bank has engaged EVEREN
Securities to consult with and advise the Holding Company and the Savings Bank
in the Offerings, and EVEREN Securities has agreed to use its best efforts to
assist the Holding Company with the solicitation of subscriptions and purchase
orders for shares of Common Stock in the Offerings. The Common Stock may be
offered for sale to the general public on a best efforts basis in the Direct
Community Offering through a selected dealer arrangement to be managed by EVEREN
Securities. EVEREN Securities is not obligated to take or purchase any shares
of Common Stock in the Subscription and Direct Community Offering. If all
shares of Common Stock to be issued in the Conversion are not sold through the
Subscription and Direct Community Offering, then the Holding Company may offer
the remaining shares in a Public Offering to be managed by EVEREN Securities,
which would occur as soon as practicable following the close of the Subscription
and Direct Community Offering. All shares of Common Stock will be sold at the
same price per share in the Public Offering as in the Subscription and Direct
Community Offering. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE CONVERSION
- -- Stock Pricing and Number of Shares to be Issued." The Subscription Offering
will expire at Noon, Pacific Time, on the Expiration Date unless extended by the
Savings Bank and the Holding Company for up to 11 days. The Direct Community
Offering is also expected to terminate on the Expiration Date and may terminate
on any date thereafter, however, in no event later than August 12, 1996.
PURCHASE LIMITATIONS
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Conversion, no person or entity may
purchase shares in the Conversion with an aggregate purchase price of more than
$250,000 (or 25,000 shares based on the Purchase Price); and no person or
entity, together with associates of and persons acting in concert with such
person or entity, may purchase in the aggregate more than 1% of the shares of
Common Stock issued in the Conversion. THIS MAXIMUM PURCHASE LIMITATION MAY BE
INCREASED OR DECREASED AS CONSISTENT WITH OTS REGULATIONS IN THE SOLE DISCRETION
OF THE HOLDING COMPANY AND THE SAVINGS BANK SUBJECT TO ANY REQUIRED REGULATORY
APPROVAL. The minimum subscription is 25 shares. In addition, stock orders
received through the Direct Community Offering may be accepted or rejected, in
whole or in part, at the discretion of the Holding Company and the Savings Bank.
See "THE CONVERSION -- Limitations on Purchases of Shares." In the event of an
oversubscription, shares will be allocated in accordance with the Plan of
Conversion. See "THE CONVERSION -- The Subscription, Direct Community and
Public Offerings."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
The Purchase Price in the Subscription and Direct Community Offering is a
uniform price for all subscribers, including the Savings Bank's Board of
Directors, its management, employees and tax-qualified employee plans, and was
set by the Board of Directors. The number of shares to be offered at the
Purchase Price is based upon an independent appraisal of the aggregate pro forma
market value of the Holding Company and the Savings Bank as converted. The
aggregate pro forma market value was estimated by RP Financial to range from
$43,350,000 to $58,650,000 as of March 1, 1996, or from 4,335,000 to 5,865,000
shares based on the Purchase Price. See "THE CONVERSION -- Stock Pricing and
Number of Shares to be Issued." The appraisal of the pro forma value of the
Holding Company and the Savings Bank as converted will be updated or confirmed
at the completion of the Offerings. The maximum of the Estimated Valuation
Range may be increased by up to 15% and the number of
(iii)
<PAGE>
shares of Common Stock to be issued in the Conversion may be increased to
6,744,750 shares due to material changes in the financial condition or
performance of the Savings Bank or changes in market conditions or general
financial and economic conditions. No resolicitation of subscribers will be
made and subscribers will not be permitted to modify or cancel their
subscriptions unless the gross proceeds from the sale of the Common Stock are
more than 15% above the maximum of the current Estimated Valuation Range. THE
APPRAISAL OF THE COMMON STOCK IS NOT INTENDED AND SHOULD NOT BE CONSTRUED AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH STOCK NOR
CAN ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE CONVERSION
WILL BE ABLE TO SELL SUCH SHARES AFTER THE CONVERSION AT A PRICE THAT IS EQUAL
TO OR ABOVE THE PURCHASE PRICE. Furthermore, the pro forma stockholders' equity
is not intended to represent the fair market value of the Common Stock and may
be greater than amounts that would be available for distribution to stockholders
in the event of liquidation.
PROSPECTUS DELIVERY
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no prospectus will be mailed any
later than five days prior to the Expiration Date or hand delivered any later
than two days prior to such date. Execution of the Stock Order Form will
confirm receipt or delivery of a prospectus in accordance with Rule 15c2-8.
Stock Order Forms will only be distributed with a prospectus.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts on the Stock Order Form
giving all names on each deposit account and the account numbers at the
applicable eligibility date.
Full payment by check, cash, money order, bank draft or withdrawal
authorization (payment by wire transfer will not be accepted) must accompany an
original Stock Order Form (facsimile copies and photocopies will not be
accepted) and a fully executed separate Certification Form. ORDERS CANNOT AND
WILL NOT BE ACCEPTED WITHOUT A FULLY EXECUTED SEPARATE CERTIFICATION FORM. See
"THE CONVERSION -- Procedure for Purchasing Shares in the Subscription and
Direct Community Offering."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the consummation of the Conversion, no person may transfer or
enter into any agreement or understanding to transfer the legal or beneficial
ownership of the Subscription Rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Each person exercising
Subscription Rights will be required to certify that a purchase of Common Stock
is solely for the purchaser's own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. THE HOLDING
COMPANY AND THE SAVINGS BANK MAY PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES
IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL
NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OR PURPORTED TRANSFER OF
SUCH RIGHTS.
BENEFITS OF THE CONVERSION TO MANAGEMENT
ESOP. In connection with the Conversion, the Savings Bank will adopt the
ESOP, a tax-qualified employee benefit plan for officers and employees of the
Savings Bank, which intends to purchase 8% of the shares of Common Stock issued
in the Offerings (469,200 shares of Common Stock, based on the issuance of the
maximum of the Estimated Valuation Range). In the event the number of shares
offered in the Conversion is increased above the maximum of the Estimated
Valuation Range, the Savings Bank's ESOP shall have a priority right to purchase
any such shares exceeding the maximum of the Estimated Valuation Range up to an
aggregate of 8% of the Common Stock issued in the Conversion. In the event that
the ESOP's subscription is not filled in its entirety, the ESOP may purchase
additional shares in the open market or may purchase additional authorized but
unissued shares with cash
(iv)
<PAGE>
contributed to it by the Savings Bank. For additional information concerning
the ESOP, see "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
MRP. The Holding Company intends to seek approval of the Management
Recognition Plan and Trust ("MRP") at a meeting of stockholders occurring no
earlier than six months following consummation of the Conversion. The MRP,
which will be funded with a number of shares equal to 4% of the number of shares
issued in the Conversion, is a non-tax-qualified restricted stock plan intended
for the benefit of key employees and directors of the Holding Company and the
Savings Bank. If stockholder approval of the MRP is obtained, it is expected
that shares of Common Stock of the Holding Company will be awarded pursuant to
such plan to key employees and directors of the Holding Company and the Savings
Bank (which shares will be awarded at no cost to such recipients). Subject to
approval by stockholders and vesting provisions, key employees and directors are
initially intended to be granted 234,600 restricted shares of Common Stock under
the MRP (based on the issuance of the maximum of the Estimated Valuation Range),
with an aggregate value of $2,346,000 based on the Purchase Price of $10.00 per
share. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management
Recognition Plan."
STOCK OPTION PLAN. The Holding Company intends to seek stockholder
approval of the 1996 Stock Option Plan ("Stock Option Plan"), which will reserve
a number of shares equal to 10% of the number of shares issued in the
Conversion, at a meeting of stockholders occurring no earlier than six months
following consummation of the Conversion. If stockholder approval of the Stock
Option Plan is obtained, it is expected that options to acquire up to 586,500
shares of Common Stock of the Holding Company will be awarded to key employees
and directors of the Holding Company and the Savings Bank (based on the issuance
of the maximum of the Estimated Valuation Range). The exercise price of such
options will be 100% of the fair market value of the Common Stock on the date
the option is granted. Options granted to officers and directors have value
only to the extent that such options are exercisable and the market price for
the underlying share of common stock is in excess of the exercise price. An
option effectively eliminates the market risk of holding the underlying security
because no consideration is paid for the option until it is exercised and,
therefore, the recipient may, within the limits of the term of the option, wait
to exercise the option until the market price exceeds the exercise price. For
additional information concerning the Stock Option Plan, see "MANAGEMENT OF THE
SAVINGS BANK -- Benefits -- 1996 Stock Option Plan."
SEVERANCE AND EMPLOYMENT AGREEMENTS. In connection with the Conversion,
the Holding Company and the Savings Bank have agreed to enter into severance
agreements with certain members of management that provide certain benefits and
cash payments in the event of their termination following a change in control of
the Holding Company or the Savings Bank. In addition, the Chief Executive
Officer's current employment agreement provides for certain benefits and cash
payments in the event of his termination without cause following a change in
control of the Savings Bank. Assuming a change of control had occurred as of
December 31, 1995, the aggregate amounts payable under these agreements would
have been approximately $1.5 million. See "MANAGEMENT OF THE SAVINGS BANK --
Executive Compensation."
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS -- Anti-
takeover Considerations -- Voting Control by Insiders."
OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP
Officers and directors of the Savings Bank (11 persons) are expected to
subscribe for an aggregate of approximately $1.4 million of Common Stock, or
2.4% of the shares based on the maximum of the Estimated Valuation Range. See
"THE CONVERSION -- Shares to be Purchased by Management Pursuant to Subscription
Rights." In addition, purchases by the ESOP, allocations under the MRP, and the
exercise of stock options issued under the Stock Option Plan, will increase the
number of shares beneficially owned by officers, directors and employees. See
"RISK FACTORS -- Anti-takeover Considerations -- Voting Control by Insiders."
The MRP and Stock Option Plan are subject to approval by the stockholders of the
Holding Company at a meeting to be held no earlier than six months following
consummation of the Conversion.
(v)
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock are estimated to range
from $42.2 million to $57.5 million, or to $66.3 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received the
approval of the OTS to purchase all of the capital stock of the Savings Bank to
be issued in the Conversion in exchange for the greater of 50% of the net
proceeds of the Offerings or that amount of net proceeds sufficient to increase
the Savings Bank's tangible capital to 10% of total assets. In determining the
amount of net proceeds to be used for the purchase of the capital stock of the
Savings Bank, consideration was given to such factors as the regulatory capital
position of the Savings Bank (both before and after giving effect to the
Conversion) and the rules and regulations of the OTS governing the amount of
proceeds that may be retained by the Holding Company. Net proceeds to be used
to purchase the capital stock of the Savings Bank are estimated to be between
$29.5 million and $31.5 million (or $33.2 million if the Estimated Valuation
Range is increased by 15%). The remainder of the net proceeds will be retained
by the Holding Company. See "USE OF PROCEEDS."
Receipt of at least 50% of the net proceeds of the sale of the Common Stock
will increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including, initially,
investment in short to intermediate term securities or, possibly, the repayment
of FHLB advances. Shares of Common Stock may be purchased with funds on deposit
at the Savings Bank, which will reduce deposits by the amounts of such
purchases. As a result, the net amount of funds available to the Savings Bank
for additional investment following receipt of the Conversion proceeds will be
reduced by the amount of deposit withdrawals used to fund stock purchases.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the Savings Bank's ESOP to enable it to
purchase 8% of the shares of Common Stock issued in the Conversion. Such loan
would fund the entire purchase price of the ESOP shares ($4,692,000 at the
maximum of the Estimated Valuation Range) and would be repaid principally from
the Savings Bank's contributions to the ESOP and from dividends, if any, payable
on the Common Stock held by the ESOP. The remaining net proceeds retained by
the Holding Company initially will be invested in short to intermediate term
securities and a portion of the funds may be placed in a short-term deposit
account with, or a loan to, the Savings Bank. Such proceeds will be available
for additional contributions to the Savings Bank in the form of debt or equity,
to support future acquisitions and diversification activities, as a source of
dividends to the stockholders of the Holding Company and for future repurchases
of Common Stock (including possible repurchases to fund the MRP or to provide
shares to be issued upon exercise of stock options) to the extent permitted
under Delaware law and OTS regulations. Currently, as discussed below under
"USE OF PROCEEDS," there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any such activities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market under the symbol "PROV." No assurance can be given that
the Common Stock will be listed on the Nasdaq National Market or that an
established and liquid trading market for the Common Stock will develop.
Further, no assurance can be given that purchasers will be able to sell their
shares at or above the Purchase Price after the Conversion. See "RISK FACTORS -
- - Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
DIVIDENDS
The Board of Directors of the Holding Company has not formulated a dividend
policy, but intends to consider a policy of paying cash dividends in the future.
Future declarations and payments of dividends by the Board of Directors will
depend upon a number of factors, including the amount of the net proceeds
retained by the Holding
(vi)
<PAGE>
Company, capital requirements, regulatory limitations, the Savings Bank's and
the Holding Company's financial condition and results of operations, tax
considerations and general economic conditions. In order to pay such cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the Offerings and retained by the Holding Company,
dividends received from the Savings Bank or earnings on Holding Company assets.
There are certain limitations on the payment of dividends from the Savings Bank
to the Holding Company. See "REGULATION -- Federal Regulation of Savings
Associations -- Limitations on Capital Distributions." 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. See
"DIVIDEND POLICY."
RISK FACTORS
See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Offerings that should be considered by all prospective investors.
(vii)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
THE FOLLOWING TABLES SET FORTH CERTAIN INFORMATION CONCERNING THE
CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATIONS OF THE SAVINGS BANK
AND ITS SUBSIDIARIES AT THE DATES AND FOR THE PERIODS INDICATED. INFORMATION AT
DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 IS
UNAUDITED, BUT, IN THE OPINION OF MANAGEMENT, CONTAINS ALL ADJUSTMENTS (NONE OF
WHICH WERE OTHER THAN NORMAL RECURRING ENTRIES) NECESSARY FOR A FAIR STATEMENT
OF THE RESULTS OF SUCH PERIODS. 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 PROSPECTUS.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------- At
1991 1992 1993 1994 1995 December 31, 1995
---- ---- ---- ---- ---- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets . . . . . . . . . . . $530,724 $550,850 $590,440 $580,336 $567,186 $570,691
Loans receivable, net. . . . . . . 399,255 389,195 404,651 420,159 471,543 460,801
Loans available for sale, net. . . 47,784 33,294 104,409 83,049 34,489 56,544
Cash and overnight deposits. . . . 15,493 37,399 32,954 19,909 11,433 6,063
Investment securities. . . . . . . 39,341 63,466 20,326 26,301 20,067 21,531
Deposits . . . . . . . . . . . . . 450,224 454,371 454,118 471,787 486,585 498,491
Borrowings . . . . . . . . . . . . 35,259 41,047 76,047 56,153 35,063 20,078
Retained earnings,
substantially restricted. . . . . 31,837 38,539 42,648 41,315 37,323 38,186
</TABLE>
<TABLE>
<CAPTION>
Six Months
Year Ended June 30, Ended December 31,
------------------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1994 1995
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income. . . . . . . . . . $51,517 $46,738 $40,167 $36,197 $36,020 $17,373 $21,062
Interest expense . . . . . . . . . 36,164 28,935 21,839 19,532 22,491 10,513 13,137
------- ------- ------- ------- ------- ------- -------
Net interest income . . . . . . . 15,353 17,803 18,328 16,665 13,529 6,860 7,925
Provision for loan losses. . . . . 1,021 607 1,655 2,033 4,787 594 940
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses. . . . 14,332 17,196 16,673 14,632 8,742 6,266 6,985
Loan servicing and other fees. . . 1,303 1,671 1,927 3,072 2,476 1,360 1,275
Gains (losses) from sale of loans. 2,078 5,680 5,726 1,246 701 (238) 1,944
Gain on bulk sale of servicing rights -- 819 -- 2,052 -- -- --
Other non-interest income. . . . . 1,253 2,793 1,989 1,141 1,308 753 589
Real estate operations, net. . . . (1,167) (377) (125) (366) (1,600) (598) (180)
Operating and administrative
expenses. . . . . . . . . . . . . 14,664 16,401 18,243 23,758 17,354 9,404 8,907
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes. 3,135 11,381 7,947 (1,981) (5,727) (1,861) 1,706
Provision (benefit) for income taxes 2,071 4,894 3,838 (648) (1,735) (689) 843
------- ------- ------- ------- ------- ------- -------
Net income (loss). . . . . . . . . $ 1,064 $ 6,487 $ 4,109 $(1,333) $(3,992) $(1,172) $ 863
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
(viii)
<PAGE>
<TABLE>
<CAPTION>
At June 30, At
-------------------------------- December 31,
1993 1994 1995 1995
---- ---- ---- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
OTHER DATA:
Loans serviced for others. . . . . . $658,008 $703,646 $657,451 $625,344
Number of:
Real estate loans in portfolio. . . 3,844 3,612 3,623 3,765
Real estate loans
serviced for others. . . . . . . . 4,909 5,676 5,140 4,955
Deposit accounts. . . . . . . . . . 34,710 33,669 32,786 32,928
Full-service offices. . . . . . . . 9 10 9 9
Loan origination offices. . . . . . 6 10 8 6
</TABLE>
<TABLE>
<CAPTION>
At or For the
At or For the Six Months
Year Ended June 30, Ended December 31,
----------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1994 1995
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
PERFORMANCE RATIOS(1)
Return (loss) on assets(2) . . . . . . . 0.20% 1.20% 0.73% (0.23)% (0.72)% (0.42)% 0.30%
Return (loss) on retained earnings(3) . . 3.33 18.54 10.24 (3.08) (9.81) (5.60) 4.56
Retained earnings-to-assets(4). . . . . . 6.11 6.46 7.17 7.47 7.34 7.47 6.68
Interest rate spread(5) . . . . . . . . . 2.75 3.09 3.13 2.71 2.31 2.35 2.68
Net interest margin(6). . . . . . . . . . 3.08 3.43 3.42 2.99 2.55 2.56 2.91
Average interest-earning assets to
average interest-bearing liabilities . . 104.66 106.04 107.14 108.05 105.60 106.08 105.57
Operating and administrative
expenses as a percent of
average total assets . . . . . . . . . . 2.80 3.03 3.26 4.09 3.13 3.36 3.15
REGULATORY CAPITAL RATIOS
Tangible capital. . . . . . . . . . . . . 5.46 6.34 6.74 6.65 6.19 6.84 6.21
Core capital. . . . . . . . . . . . . . . 5.76 6.55 6.86 6.69 6.19 6.84 6.21
Risk-based capital. . . . . . . . . . . . 9.30 11.49 11.86 12.68 11.25 11.17 10.50
ASSET QUALITY RATIOS
Nonaccrual and 90 days
or more past due loans as a
percent of loans receivable, net . . . . 0.44 0.66 1.18 1.08 0.54 1.02 0.96
Nonperforming assets as a
percent of total assets(7) . . . . . . . 0.82 1.09 1.63 1.49 1.65 1.88 1.29
Allowance for loan losses as a
percent of gross loans receivable. . . . 0.27 0.46 0.79 0.78 1.06 0.58 1.01
Allowance for loan losses as a
percent of nonperforming loans . . . . . 62.02 71.84 68.86 73.62 198.79 57.29 108.28
Net charge-offs (recoveries) to
average outstanding loans. . . . . . . . 0.02 (0.03) 0.04 0.39 0.62 0.24 0.25
</TABLE>
- ------------------
(1) Ratios for the six-month periods are annualized.
(2) Net income (loss) divided by average total assets.
(3) Net income (loss) divided by average retained earnings.
(4) Average retained earnings divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) For a more detailed discussion of nonperforming and classified assets, see
"BUSINESS OF THE SAVINGS BANK -- Delinquencies and Classified Assets."
(ix)
<PAGE>
RECENT DEVELOPMENTS
The following tables set forth selected financial condition data for the
Savings Bank at June 30, 1995, December 31, 1995 and March 31, 1996, selected
operating data for the Savings Bank for the three months and the nine months
ended March 31, 1995 and 1996 and selected financial ratios for the Savings Bank
at and for the three months and the nine months ended March 31, 1995 and 1996.
The selected financial and operating data and financial ratios at and for the
three months and the nine months ended March 31, 1995 and 1996 are derived from
the unaudited consolidated financial statements of the Savings Bank, which, in
the opinion of management, reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation. This information should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At At At
June 30, December 31, March 31,
1995 1995 1996
----------- ------------ ---------
(Unaudited)
(In Thousands)
FINANCIAL CONDITION DATA:
<S> <C> <C> <C>
Total assets . . . . . . . . . . . . . . . . . . . $567,186 $570,691 $557,615
Loans receivable, net. . . . . . . . . . . . . . . 471,543 460,801 450,830
Loans available for sale, net. . . . . . . . . . . 34,489 56,544 56,242
Cash and overnight deposits. . . . . . . . . . . . 11,433 6,063 7,135
Investment securities. . . . . . . . . . . . . . . 20,067 21,531 18,605
Deposits . . . . . . . . . . . . . . . . . . . . . 486,585 498,491 489,188
Borrowings . . . . . . . . . . . . . . . . . . . . 35,063 20,078 17,577
Retained earnings, substantially restricted. . . . 37,323 38,186 39,605
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
------------------- --------------------
1995 1996 1995 1996
---- ---- ---- ----
(Unaudited)
(In Thousands)
OPERATING DATA:
<S> <C> <C> <C> <C>
Interest income. . . . . . . . . . . . . . $8,826 $10,367 $26,199 $31,429
Interest expense . . . . . . . . . . . . . 5,672 6,221 16,167 19,339
------ ------ ------- -------
Net interest income. . . . . . . . . . . . 3,154 4,146 10,032 12,090
Provision for loan losses. . . . . . . . . 1,033 900 1,627 1,840
------ ------ ------- -------
Net interest income after
provision for loan losses. . . . . . . . 2,121 3,246 8,405 10,250
Loan servicing and other fees. . . . . . . 542 562 1,902 1,837
Gains from sale of loans . . . . . . . . . 397 1,448 159 3,400
Other non-interest income. . . . . . . . . 217 1,295 969 1,877
Real estate operations, net. . . . . . . . (424) (56) (1,040) (254)
Operating and administrative expenses. . . 3,853 4,972 13,255 13,881
------ ------ ------- -------
Income (loss) before income taxes. . . . . (1,000) 1,523 (2,860) 3,229
Provision (benefit) for income taxes . . . (406) 104 (1,095) 947
------ ------ ------- -------
Net income (loss). . . . . . . . . . . . . $ (594) $ 1,419 $(1,765) $ 2,282
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
(x)
<PAGE>
<TABLE>
<CAPTION>
At or For the At or For the
Three Months Nine Months
Ended March 31, Ended March 31,
------------------- -------------------
1995 1996 1995 1996
---- ---- ---- ----
KEY OPERATING RATIOS:
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS(1):
Return (loss) on assets (2) . . . . . . . . (0.44)% 1.01% (0.42)% 0.54%
Return (loss) on retained earnings(3) . . . (5.94) 14.68 (5.71) 7.98
Retained earnings-to-assets(4). . . . . . . 7.38 6.87 7.44 6.76
Interest rate spread (5). . . . . . . . . . 2.14 2.71 2.29 2.70
Net interest margin(6). . . . . . . . . . . 2.44 3.06 2.52 2.97
Average interest-earning assets to
average interest-bearing liabilities . . . 105.34 106.23 105.86 105.69
Operating and administrative expenses
as a percent of average total assets . . . 2.85 3.54 3.19 3.28
ASSET QUALITY RATIOS:
Nonaccrual and 90 days or more
past due loans as a percent
of total loans receivable, net . . . . . . 1.22 0.84 1.22 0.84
Nonperforming assets as a
percent of total assets. . . . . . . . . . 2.03 1.07 2.03 1.07
Allowance for loan losses as a
percent of gross loans receivable. . . . . 0.60 1.12 0.60 1.12
Allowance for loan losses as a
percent of nonperforming loans . . . . . . 50.11 138.23 50.11 138.23
Net charge-offs to average
outstanding loans. . . . . . . . . . . . . 0.74 0.34 0.56 0.44
</TABLE>
- ------------
(1) Ratios for the three- and nine-month periods are annualized.
(2) Net income (loss) divided by average total assets.
(3) Net income (loss) divided by average retained earnings.
(4) Average retained earnings divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(xi)
<PAGE>
REGULATORY CAPITAL
The table below sets forth the Savings Bank's capital position relative to
its OTS capital requirements at March 31, 1996.
Percent of Adjusted Total
Amount or Risk-Weighted Assets
------ -------------------------
(In Thousands)
Tangible capital level . . . . . . . $37,313 6.7%
Tangible capital requirement . . . . 8,345 1.5
------- ----
Excess . . . . . . . . . . . . . . . $28,968 5.2%
------- ----
------- ----
Core capital level . . . . . . . . . $37,313 6.7%
Core capital requirement . . . . . . 16,690 3.0
------- ----
Excess . . . . . . . . . . . . . . . $20,623 3.7%
------- ----
------- ----
Risk-based capital level . . . . . . $42,092 11.0%
Risk-based capital requirement . . . 30,547 8.0
------- ----
Excess . . . . . . . . . . . . . . . $11,545 3.0%
------- ----
------- ----
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND MARCH 31, 1996
Total assets decreased $13.1 million, or 2.2%, from $570.7 million at
December 31, 1995 to $557.6 million at March 31, 1996. This decrease was
principally the result of reductions in loans receivable, investment securities,
deposits, and borrowings. Net loans receivable declined by $10.0 million from
$460.8 million at December 31, 1995 to $450.8 million at March 31, 1996
primarily as a result of increased prepayments and amortization. Investment
securities declined from $21.5 million at December 31, 1995 to $18.6 million at
March 31, 1996 as a result of maturing securities whose proceeds were used to
pay maturing FHLB advances.
Total liabilities decreased $14.5 million, or 2.7%, from $532.5 million at
December 31, 1995 to $518.0 million at March 31, 1996. Total deposit accounts
decreased by $9.3 million, or 1.9%, from $498.5 million at December 31, 1995 to
$489.2 million at March 31, 1996. Management believes that the decline in
deposits was principally attributable to a disintermediation of money market
deposit accounts into other investment vehicles such as mutual funds and equity
markets during January 1996 and the maturation of seven month retail
certificates of deposits opened in July 1995. Management elected to pursue
retention of such deposits only to the extent that the retention could be
achieved at interest rates not in excess of current market rates. FHLB advances
decreased from $20.1 million at December 31, 1995 to $17.6 million at March 31,
1996 as the Savings Bank retired maturing FHLB advances rather than renew these
borrowings.
Retained earnings increased $1.4 million, or 3.7%, from $38.2 million at
December 31, 1995 to $39.6 million at March 31, 1996. The increase in retained
earnings was due entirely to the addition of $1.4 million to retained earnings
from net income for the quarter ended March 31, 1996.
NONPERFORMING ASSETS AND DELINQUENCIES
Nonperforming assets decreased from $7.3 million, or 1.3% of total assets,
at December 31, 1995 to $6.0 million, or 1.1% of total assets, at March 31,
1996. This decline was primarily the result of a decrease in the amount of non-
accrual commercial real estate loans and a reduction in the amount of real
estate owned through liquidation
(xii)
<PAGE>
of properties. Total classified assets declined from $20.7 million at December
31, 1995 to $18.4 million at March 31, 1996 principally as a result of the
reduction in the level of real estate owned.
The following table sets forth information regarding nonperforming assets
and restructured loans within the meaning of SFAS No. 15 at the dates indicated.
At At
December 31, 1995 March 31, 1996
----------------- --------------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One-to four-family . . . . . . . . . . . $2,991 $3,793
Multi-family . . . . . . . . . . . . . . 148 --
Commercial . . . . . . . . . . . . . . . 1,270 --
Consumer loans . . . . . . . . . . . . . . -- --
------ ------
Total. . . . . . . . . . . . . . . . . 4,409 3,793
Accruing loans which are contractually
past due 90 days or more . . . . . . . . -- --
Foreclosed real estate, net. . . . . . . . 2,935 2,187
------ ------
Total nonperforming assets . . . . . . . . $7,344 $5,980
------ ------
------ ------
Restructured loans . . . . . . . . . . . . $3,758 $3,366
------ ------
------ ------
Non accrual and 90 days or more past due
loans as a percentage of loans
receivable, net. . . . . . . . . . . . . 0.96% 0.84%
Non accrual and 90 days or more past due
loans as a percentage of total assets. . 0.77% 0.68%
Nonperforming assets as a percentage
of total assets. . . . . . . . . . . . . 1.29% 1.07%
Interest income which would have been recorded for the three months ended
March 31, 1996 had nonaccruing loans been current in accordance with their
original terms amounted to $100,000. The amount included in the results of
operations on such loans for the three months ended March 31, 1996 was $1,000.
The allowance for loan losses increased from $4.8 million, or 1.0% of gross
loans receivable, at December 31, 1995 to $5.2 million, or 1.1% of gross loans
receivable, at March 31, 1996. As a result of the decline in the level of
nonperforming loans during the three months ended March 31, 1996, the allowance
for loan losses as a percentage of nonperforming loans increased from 108.3% at
December 31, 1995 to 138.2% at March 31, 1996. Although the Savings Bank's
nonperforming loans declined from December 31, 1995 to March 31, 1996, the
higher unemployment levels in the Savings Bank's market areas than those
prevailing nationally and the continuation of depressed real estate values in
the Savings Bank's market area resulted in management's decision to maintain the
allowance for loan losses at a level similar to that at December 31, 1995.
(xiii)
<PAGE>
The following table sets forth activity in the Savings Bank's allowance for
loan losses for the periods indicated.
For the For the
Three Months Nine Months
Ended March 31, Ended March 31,
1996 1996
--------------- ---------------
(In Thousands)
Balance beginning of period. . . . $4,774 $5,085
Recoveries:
Mortgage loans:
One- to four-family . . . -- 5
Multi-family. . . . . . . 49 253
Commercial. . . . . . . . -- 250
Consumer loans . . . . . . . . -- --
Other Loans. . . . . . . . . . -- --
------ ------
Total recoveries. . 49 508
Charge-offs:
Mortgage loans:
One- to four-family . . . 98 190
Multi family. . . . . . . 8 999
Commercial. . . . . . . . 374 1,001
Consumer loans . . . . . . . . -- --
Other loans. . . . . . . . . . -- --
------ ------
Total charge-offs . 480 2,190
Net loan charge-offs . . . . . . . 431 1,682
Provision for loan losses. . . . . 900 1,840
------ ------
Balance at end of period . . . . . $5,243 $5,243
------ ------
------ ------
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND
1996
GENERAL. The Savings Bank's operating results improved from a net loss of
$594,000 for the three months ended March 31, 1995 to net income of $1.4 million
for the three months ended March 31, 1996. The improvement in net income was
primarily attributable to an increased interest rate spread, increased income
from the sales of loans, and the receipt of $1.0 million in life insurance
proceeds.
NET INTEREST INCOME. Net interest income increased by $992,000, or 31.5%,
from $3.2 million for the three months ended March 31, 1995 to $4.1 million for
the three months ended March 31, 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 2.14% for the quarter ended March 31, 1995 to
2.71% for the quarter ended March 31, 1996. In addition, net interest-earning
assets increased by 21.4%, which resulted in an increase in the Savings Bank's
net interest margin from 2.44% for the three months ended March 31, 1995 to
3.06% for the three months ended March 31, 1996.
INTEREST INCOME. Interest income increased $1.5 million, or 17.5%, from
$8.8 million for the quarter ended March 31, 1995, to $10.4 million for the
quarter ended March 31, 1996. This increase between the periods is the result
of an increase in interest income on loans receivable (including loans held for
sale), which rose by $1.5 million to $9.9 million for the quarter ended March
31, 1996 from $8.4 million for the quarter ended March 31, 1995. The average
balance of loans receivable, including loans held for sale, increased by $19.9
million to $505.0 million for the quarter ended March 31, 1996 compared with
$485.1 million for the quarter ended March 31, 1995 principally
(xiv)
<PAGE>
as a result of increased mortgage banking activities. The Savings Bank
originated $119.7 million in loans held for sale in the quarter ended March 31,
1996 compared with $34.3 million during the same period in 1995. The average
yield on loans receivable, including loans held for sale, increased 89 basis
points from 6.91% for the quarter end March 31, 1995 to 7.80% for the quarter
ended March 31, 1996. This increase in average yield reflects higher rates on
the loans held for sale portfolio relative to the Savings Bank's portfolio of
adjustable rate loans. In addition, the Savings Bank's portfolio of adjustable
rate loans tied to the FHLB Eleventh District Cost of Funds Index ("COFI") also
reflected increases in market interest rates during this period.
INTEREST EXPENSE. Interest expense increased $549,000, or 9.7%, from $5.7
million for the three months ended March 31, 1995 to $6.2 million for the three
months ended March 31, 1996. The increase in interest expense was the result of
an increase in average interest-bearing liabilities, which rose $20.0 million,
or 4.1%, from $490.2 million for the quarter ended March 31, 1995 to $510.2
million for the quarter ended March 31, 1996, and an increase of 26 basis points
in the rate paid on those liabilities from 4.69% during the quarter ended March
31, 1995 to 4.95% for the quarter ended March 31, 1996. The increase in average
interest-bearing liabilities was largely due to a $14.2 million, or 3.0%,
increase in the average balance of deposits. Deposits averaged $477.2 million
in the quarter ended March 31, 1995 compared to $491.4 million in the quarter
ended March 31, 1996. The average rate paid on those deposits increased from
4.67% for the quarter ended March 31, 1995 to 4.90% for the quarter ended March
31, 1996.
Average FHLB advances also increased $5.7 million, or 44.0% from $13.1
million for the three months ended March 31, 1995 to $18.8 million for the three
months ended March 31, 1996. At the same time, rates paid on FHLB advances
increased from 5.41% for the quarter ended March 31, 1995 to 6.20% for the
quarter ended March 31, 1996.
PROVISION FOR LOAN LOSSES. During the three months ended March 31, 1996,
the Savings Bank's provision for loan losses was $900,000 compared to $1.0
million for the three months ended March 31, 1995. The provision for loan
losses during the three months ended March 31, 1996 increased the allowance for
loan losses to $5.2 million at March 31, 1996, which was 1.1% of gross loans
receivable. 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 values of properties securing loans made
by the Savings Bank. These factors, in combination with higher unemployment
levels within the Savings Bank's market areas and regulatory recommendations
received during 1995, resulted in management's decision to maintain the
allowance for loan losses at a level similar to that at December 31, 1995.
NON-INTEREST INCOME. Non-interest income increased from $1.2 million for
the three months ended March 31, 1995 to $3.3 million for the three months ended
March 31, 1996. This increase is attributable to an increase in the gain from
sales of loans and to the receipt of $1.0 million in life insurance proceeds.
Gains from sales of loans increased $1.1 million, or 264.7%, from $397,000 for
the three months ended March 31, 1995 to $1.4 million for the three months ended
March 31, 1996. This increase reflected an increase in the volume of loan
originations and resultant loan sales. Loan sales for the quarter ended March
31, 1996 totaled $118.5 million compared to $27.8 million for the same period in
1995. Substantially all of the loans sold in the quarter ended March 31, 1996
were sold on a servicing-released basis. During the three months ended March
31, 1996, the Savings Bank received $1.0 million in proceeds from a life
insurance policy upon the passing of the former chief executive officer. This
policy was designated as reimbursement of previously expensed retirement
benefits. Loan servicing and other fees increased $20,000, or 3.7%, to $562,000
for the quarter ended March 31, 1996 from $542,000 for the quarter ended March
31, 1995. This increase was principally the result of increases in
miscellaneous fees and late payment charges.
NON-INTEREST EXPENSE. Non-interest expense increased from $4.3 million for
the three months ended March 31, 1995 to $5.0 million for the three months ended
March 31, 1996. Losses from real estate operations decreased $368,000, or
86.8%, from a loss of $424,000 for the three months ended March 31, 1995 to a
loss of $56,000 for the three months ended March 31, 1996 as a result of
decreased loss provisions, decreased operating expenses, and increased operating
income. Loss provisions declined from $347,000 in the quarter ended March 31,
1995 to $200,000 for the same period in 1996. Operating expenses declined as a
result of reduced levels of real estate
(xv)
<PAGE>
owned. The level of real estate owned declined from $5.3 million at March 31,
1995 to $2.2 million at March 31, 1996. Operating revenue increased by $222,000
principally as a result of the timing of an annual ground lease payment. The
1996 payment was received and recorded in March 1996 while the 1995 payment was
received and recorded in April 1995.
Operating and administrative expenses increased $1.1 million, or 29.0%,
from $3.9 million for the quarter ended March 31, 1995 to $5.0 million for the
quarter ended March 31, 1996, as a result of significantly increased mortgage
banking activity. The quarter ended March 31, 1995 was a period of contraction
in mortgage banking activity, while the quarter ended March 31, 1996 was a
period of expansion. Increases in staffing levels to process the additional
volume of loan originations accounted for a $649,000 increase in salaries and
employee benefits from $2.2 million for the quarter ended March 31, 1995 to $2.9
million for the same period in 1996. Other expenses, particularly expenses
associated with increased loan production such as telephone, supplies, other
loan expenses, increased $254,000 to $866,000 for the quarter ended March 31,
1996 from $612,000 for the quarter ended March 31, 1995. In addition SAIF
premiums and legal expenses increased $176,000 reflecting increased legal
expenses and increased deposit balances.
PROVISION FOR INCOME TAXES. Provision for income taxes were $104,000 for
the three months ended March 31, 1996 (resulting in an effective tax rate of
6.8%) compared to a tax benefit of $406,000 for the three months ended March 31,
1995 (resulting in an effective tax rate of 40.6%). The $510,000 increase in
income taxes was chiefly the result of an increase in pre-tax earnings between
the two periods of $2.5 million, reduced by the $1.0 million of non-taxable
insurance proceeds.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1995 AND
1996
GENERAL. Operating results for the nine months ended March 31, 1996
improved to net income of $2.3 million from a net loss of $1.8 million for the
nine months ended March 31, 1995. This increase in net income is attributable
to an increased interest rate spread, increased income from the sale of loans,
control of operating and administrative expenses, and the receipt of $1.0
million in life insurance proceeds.
NET INTEREST INCOME. Net interest income increased $2.1 million, or 20.5%,
from $10.0 million for the nine months ended March 31, 1995 to $12.1 million for
the nine months ended March 31, 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 2.29% for the nine months ended March 31, 1995
to 2.70% for the nine months ended March 31, 1996. Net average interest-earning
assets remained essentially unchanged during these periods.
INTEREST INCOME. Total interest income increased $5.2 million, or 20.0%,
from $26.2 million for the nine months ended March 31, 1995 to $31.4 million for
the nine months ended March 31, 1996. The increase in interest income was
almost entirely the result of a $5.1 million, or 20.8% increase in interest
income on loans receivable (including loans held for sale) to $29.8 million for
the nine months ended March 31, 1996 from $24.7 million for the nine months
ended March 31, 1995. The average balance of outstanding loans (including loans
held for sale) increased by $13.2 million to $505.3 million for the nine months
ended March 31, 1996 as a result of increased mortgage banking activities, and
the average yield increased 118 basis points to 7.87% from 6.69% for the nine
months ended March 31, 1995. The increase in the average yield on loans is
primarily a function of the changes in the COFI, whose average was 4.27% for the
nine months ended March 31, 1995 compared to 5.10% for the nine months ended
March 31, 1996. This increase resulted in higher yields earned on the Savings
Bank's COFI-based ARM portfolio. In addition, loans originated for sale
increased to $334.4 million for the nine months ended March 31, 1996 compared to
$92.6 million for the nine months ended March 31, 1995. The increase in the
average balance of loans held for sale, which were primarily fixed-rate loans
whose rates were in excess of the average yield on the Savings Bank's ARM
portfolio, also contributed to an increase in the average yield.
INTEREST EXPENSE. Total interest expense increased $3.2 million, or 19.6%,
from $16.2 million for the nine months ended March 31, 1995 to $19.4 million for
the nine months ended March 31, 1996. The increase in interest expense was
primarily due to an increase in interest paid on deposits. Interest expense on
deposits increased $3.0
(xvi)
<PAGE>
million, or 19.8%, from $15.3 million for the nine months ended March 31, 1995
to $18.3 million for the nine months ended March 31, 1996 principally as a
result of an increase in market interest rates. During the nine months ended
March 31, 1996, the average cost of deposits increased from 4.28% for the nine
months ended March 31, 1995 to 4.97% for nine months ended March 31, 1996, while
the average balance of deposits increased by $15.6 million, or 3.3%, between the
periods. Average FHLB advances increased from $20.9 million for the nine months
ended March 31, 1995 to $21.8 million for the nine months ended March 31, 1996.
At the same time, the average rate paid on FHLB advances increased from 4.83%
for the nine months ended March 31, 1995 to 6.15% for the nine months ended
March 31, 1996.
PROVISION FOR LOAN LOSSES. Loan loss provisions during the nine months
ended March 31, 1996 increased $213,000 to $1.8 million compared to $1.6 million
for the nine months ended March 31, 1995. The increased provisions reflected
management's concern with the continued weakness in Southern California real
estate values and reflected management's decision to maintain the allowance, as
a percentage of gross loans receivable, at a level similar to that at December
31, 1995.
NON-INTEREST INCOME. Non-interest income increased $4.1 million, or
134.8%, from $3.0 million for the nine months ended March 31, 1995 to $7.1
million for the nine months ended March 31, 1996. This increase is attributable
to an increase in the gain from sales of loans and to the receipt of $1.0
million in life insurance proceeds. Gains from sales of loans increased $3.2
million from $159,000 for the nine months ended March 31, 1995 to $3.4 million
for the nine months ended March 31, 1996. This increase reflects the increased
level of mortgage banking activities, as loan sales for the nine months ended
March 31, 1996 totaled $312.1 million compared to $158.6 million for the nine
months ended March 31, 1995. Substantially all of the loans sold for the nine
months ended March 31, 1996 were sold on a servicing-released basis. During the
nine months ended March 31, 1996, the Savings Bank received $1.0 million in
proceeds from a life insurance policy upon the passing of the former chief
executive officer. This policy was designated as reimbursement of previously
expensed retirement benefits. Loan servicing and other fees declined by $65,000
from $1.9 million for the nine months ended March 31, 1995 to $1.8 million for
the nine months ended March 31, 1996. This decline is primarily attributable to
a reduction in the level of loans serviced for others from $669.0 million at
March 31, 1995 to $609.3 million at March 31, 1996.
NON-INTEREST EXPENSE. Non-interest expense decreased slightly from $14.3
million for the nine months ended March 31, 1995 to $14.1 million for the nine
months ended March 31, 1996. Losses from real estate operations decreased from
$1.0 million for the nine months ended March 31, 1995 to $254,000 for the nine
months ended March 31, 1996 principally as a result of reduced loss provisions
and increased operating income. Loss provisions for real estate operations
declined from $935,000 for the nine months ended March 31, 1995 to $360,000 for
the nine months ended March 31, 1996, as a result of reductions in the level of
real estate investments and real estate owned. Operating revenue increased by
$211,000 principally as a result of the timing of an annual ground lease
payment. The 1996 payment was received and recorded in March 1996 while the
1995 payment was received and recorded in April 1995.
Operating and administrative expenses increased $626,000, or 4.7%, from
$13.3 million for the nine months ended March 31, 1995 to $13.9 million for the
nine months ended March 31, 1996, primarily as the result of increased mortgage
banking activities. Salaries and employee benefits increased $800,000, or
11.1%, from $7.3 million for the nine months ended March 31, 1995 to $8.1
million for the nine months ended March 31, 1996. At the same time,
consolidation of loan production facilities helped reduce occupancy expense by
$369,000, or 20.6% to $1.4 million for the nine months ended March 31, 1996
compared to $1.8 million for the nine months ended March 31, 1995. Other
operating expenses declined $211,000 to $2.2 million for the nine months ended
March 31, 1996 from $2.4 million for the nine months ended March 31, 1995 as a
result of the final amortization of goodwill in December 1994 from the
acquisition of another institution in 1982.
PROVISION FOR INCOME TAXES. Provisions for income taxes were $947,000 for
the nine months ending March 31, 1996 (resulting in an effective tax rate of
29.3%) compared to a tax benefit of $1.1 million for the nine months ended March
31, 1995 (resulting in an effective tax rate of 38.3%). The increase of $2.0
million is principally attributable to an increase in pre-tax income of $6.1
million between the periods, reduced by the $1.0 million of non-taxable
insurance proceeds.
(xvii)
<PAGE>
RISK FACTORS
BEFORE INVESTING IN SHARES OF THE COMMON STOCK OFFERED HEREBY, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS PRESENTED BELOW, IN ADDITION TO
MATTERS DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
PROFITABILITY OF THE SAVINGS BANK
During the years ended June 30, 1994 and 1995, the Savings Bank had net
losses of $1.3 million and $4.0 million, respectively. The Savings Bank's
profitability is dependent to a large extent upon its net interest income and on
its mortgage banking activities. During the three most recent fiscal years, the
Savings Bank has experienced a decrease in its interest rate spread and net
interest margin. The Savings Bank's interest rate spread, which is the
difference between the weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing liabilities, decreased from 3.13% for
the year ended June 30, 1993 to 2.71% for the year ended June 30, 1994 to 2.31%
for the year ended June 30, 1995. For the six months ended December 31, 1995,
the Savings Bank's interest rate spread improved to 2.68%. The Savings Bank's
net interest margin, which is net interest income as a percentage of average
interest-earning assets, decreased from 3.42% for the year ended June 30, 1993
to 2.99% for the year ended June 30, 1994 to 2.55% for the year ended June 30,
1995. For the six months ended December 31, 1995, the Savings Bank's net
interest margin improved to 2.91%. Gains from sale of loans were $5.7 million,
$1.2 million (after a lower-of-cost-or-market adjustment) and $701,000 during
the years ended June 30, 1993, 1994 and 1995, respectively. For the six months
ended December 31, 1995, gains from sale of loans totalled $1.9 million. The
Savings Bank's results of operations are also affected by the amount of its
provision for loan losses, which is reflected as a charge to operations. During
the years ended June 30, 1993, 1994 and 1995, the Savings Bank's provisions for
loan losses were $1.7 million, $2.0 million and $4.8 million. During the six
months ended December 31, 1995, the provision for loan losses was $940,000. See
"-- Weakness in the Regional Economy and Adverse Effect on Asset Quality," "--
Potential Adverse Impact of Changes in Interest Rates" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Future results of operations will be effected by additional costs of being a
public company and by expenses associated with the ESOP and other stock benefit
plans.
WEAKNESS IN THE REGIONAL ECONOMY AND ADVERSE EFFECT ON ASSET QUALITY
Southern California, including the Savings Bank's market area, has
experienced reduced employment and recessionary economic conditions in recent
years as a result of downsizing of the defense and construction industries and
corporate relocations. Additionally, the area has experienced a continuing
decrease in real estate values and a slow down of home sales and construction.
As a result, loan repayment delinquencies and defaults have increased and the
underlying values of properties securing nonperforming loans made by lending
institutions have declined, and in some cases, have resulted in substantial
losses to some institutions. Due in large part to these factors, the Savings
Bank has experienced increases in the aggregate amounts of its delinquent loans,
nonperforming assets, and classified assets. Net losses from real estate
operations totalled $125,000, $366,000, $1.6 million and $180,000 for the years
ended June 30, 1993, 1994 and 1995 and the six months ended December 31, 1995,
respectively. At June 30, 1993, 1994 and 1995 and December 31, 1995,
nonperforming assets totalled $9.6 million, $8.6 million, $9.3 million and $7.3
million, respectively. At December 31, 1995, the Savings Bank's ratios of
nonperforming loans to net loans and nonperforming assets to total assets were
0.96% and 1.29%, respectively. See "BUSINESS OF THE SAVINGS BANK --
Delinquencies and Classified Assets." The Southern California economy and real
estate market continue to be weak and there can be no assurance that they will
not deteriorate further or that such deterioration, if it occurs, will not have
an adverse impact on the Savings Bank's financial condition or results of
operations.
The Savings Bank's financial condition and results of operations are
affected by the amount of its allowance for loan losses that the Savings Bank
establishes to reflect probable and estimable losses in its loan portfolio. The
allowance for loan losses is increased by means of the provision for loan
losses, which is reflected as a charge to operations. The amounts of loan loss
provisions are determined by the Savings Bank on the basis of its evaluation of
a variety of factors as of the date of determination, including an evaluation of
the portfolio, past experience, prevailing market conditions, and as a result of
regulatory examinations. Accordingly, the amounts of such loan loss
1
<PAGE>
provisions can vary substantially from period to period. The Savings Bank has
increased its provision for loan losses in recent years. During the years ended
June 30, 1993, 1994 and 1995 and the six months ended December 31, 1995, the
Savings Bank's provision for loan losses was $1.7 million, $2.0 million, $4.8
million and $940,000, respectively, and net charge-offs during these periods
were $208,000, $2.0 million, $3.0 million and $1.3 million, respectively. At
December 31, 1995, the Savings Bank's allowance for loan losses was $4.8
million, or 108.3% of nonperforming loans. The continuing weakness or the
further decline in the regional economy, local economy or the Southern
California real estate market may result in increased nonperforming loans and
loan losses and an increase in the provision for loan losses which, in turn,
will adversely affect the Savings Bank's financial condition and results of
operations. Although management uses the best information available, future
adjustments to the allowance may be necessary due to economic, operating and
other conditions that may be beyond the Savings Bank's control. In addition,
the various regulatory agencies, as an integral part of their examination
process, periodically review the Savings Bank's allowance for loan losses.
These agencies may require the Savings Bank to establish additional allowances
for loan losses based on their judgment of the information available at the time
of examination. For additional information regarding the Savings Bank's
allowances for loan losses and loss provisions, see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS OF THE
SAVINGS BANK -- Delinquencies and Classified Assets -- Allowance for Loan
Losses."
RELIANCE ON MORTGAGE BANKING OPERATIONS
Mortgage banking activities significantly influence the Savings Bank's
results of operations. The Savings Bank's mortgage banking operations involve
the origination and sale of mortgage loans for the purpose of generating income
from the sale of mortgage loans and from servicing fees (from loans sold on a
servicing-retained basis). The profitability of mortgage banking operations
depends primarily on managing the volume of loan originations and sales and the
expenses associated with loan originations so that gains on the sale of loans
together with fee income exceeds the costs of this activity. Changes in the
level of interest rates and the condition of the local and national economies
affect the amount of loans originated by the Savings Bank and demanded by
investors to whom the loans are sold. Generally, the Savings Bank's loan
origination and sale activity and, therefore, its results of operations, may be
adversely affected by an increasing interest rate environment to the extent such
environment results in decreased loan demand by borrowers and/or investors.
Accordingly, the volume of loan originations and the profitability of this
activity can vary significantly from period to period. During the years ended
June 30, 1993, 1994 and 1995, and the six months ended December 31, 1995, the
Savings Bank originated for sale loans totalling $684.0 million, $1.0 billion,
$161.5 million, and $214.6 million, respectively. In addition, the Savings
Bank's results of operations are affected by the amount of non-interest expenses
associated with mortgage-banking activities, such as compensation and benefits,
occupancy and equipment expenses, and other operating costs. During periods of
reduced loan demand, the Savings Bank's results of operations may be adversely
affected to the extent that it is unable to reduce expenses commensurate with
the decline in loan originations. During the years ended June 30, 1993, 1994
and 1995, and the six months ended December 31, 1995, the Savings Bank's net
gains on sales of loans were $5.7 million, $1.2 million (after a lower-of-cost-
or-market ("LOCOM") adjustment of $4.7 million recorded as of June 30, 1994),
$701,000 and $1.9 million, respectively. In comparison, the Savings Bank's pre-
tax income (loss) for these periods was $7.9 million, $(2.0) million, $(5.7)
million, and $1.7 million, respectively.
As part of its mortgage banking activities, the Savings Bank originates
loans for subsequent sale into the secondary market. Between the time that
origination commitments are issued and the time the loans are sold, the Savings
Bank is exposed to movements in the price (due to changes in interest rates) of
such loans (or of securities into which such loans are sometimes converted).
The Savings Bank attempts to manage this risk by utilizing the sale of forward
commitments through which the Savings Bank agrees to sell loans at a specified
price on a future specified date. The amount of such forward commitments and
the date on which they settle is based upon management's estimate as to
estimated closing volumes and the length of the origination commitment.
Differences between the volume or timing of actual loan originations and in
management's estimates or in actual sales of the loans can expose the Savings
Bank to significant losses. This activity is managed daily. There can be no
assurance that the Savings Bank will be successful in its efforts to reduce the
risk of interest rate fluctuation between the time of origination of a mortgage
loan and the time of the ultimate sale of the loan. See "BUSINESS OF THE
SAVINGS
2
<PAGE>
BANK -- Mortgage Banking Activities -- Hedging Activities." To the extent that
the Savings Bank does not adequately manage its interest rate risk, the Savings
Bank may incur significant mark-to-market losses or losses relating to the sale
of such loans, adversely affecting financial condition and results of
operations.
The Savings Bank's loan servicing portfolio consists of retained loan
servicing rights that relate to loans originated by the Savings Bank and sold to
investors. At June 30, 1993, 1994 and 1995 and at December 31, 1995, the
Savings Bank serviced $658.0 million, $703.6 million, $657.5 million and $625.3
million, respectively, of loans for others. Since mid-1994, the Savings Bank
has sold a larger portion of loans originated for sale on a servicing-released
basis in order to increase the sales prices of the loans. In addition, in
fiscal 1994 the Savings Bank completed a bulk sale of servicing rights for a
gain of $2.1 million. Loan servicing and other fees decreased from $3.1 million
in fiscal 1994 to $2.5 million for fiscal 1995 and were $1.3 million for the six
months ended December 31, 1995. Although management intends to continue to
emphasize its loan servicing activities, so long as the Savings Bank continues
to sell mortgage loans with servicing released, the size of the mortgage
servicing portfolio, and therefore loan servicing fees, is expected to decrease.
In addition, a decreasing interest rate environment may result in a higher
volume of prepayments as borrowers refinance their loans, which reduces the size
and adversely impacts the income received from the loan servicing portfolio.
See "BUSINESS OF THE SAVINGS BANK -- Mortgage Banking Activities -- Loan
Servicing."
INCREASED RISKS ASSOCIATED WITH MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
At December 31, 1995, the Savings Bank's loan portfolio included multi-
family real estate loans totalling $54.5 million, or 11.5% of total loans, and
commercial real estate loans totalling $58.8 million, or 12.5% of total loans.
Multi-family and commercial real estate loans are generally viewed as exposing
the lender to greater credit risk than one- to four-family residential loans and
typically involve higher loan principal amounts. Repayment of multi-family and
commercial real estate loans generally is dependent, in large part, on
sufficient income from the property to cover operating expense and debt service.
Economic events and government regulations, which are outside the control of the
borrower or lender, could impact the value of the security for such loans or the
future cash flow of the affected properties. Approximately $44.4 million, or
81.5%, of the Savings Bank's multi-family loans and approximately $43.3 million,
or 73.6%, of the Savings Bank's commercial real estate loans are secured by
properties located in Riverside or San Bernardino County. As a result of
reduced employment and 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 decline in real estate values experienced in the Savings Bank's
lending area has been more pronounced with respect to multi-family and
commercial properties than owner-occupied one- to four-family properties and the
market for such properties continues to weaken. Accordingly, even though the
Savings Bank has originated loans secured by multi-family and commercial real
estate properties on a limited basis since 1990 and the Savings Bank's multi-
family and commercial real estate loans are generally considered by management
to be older or seasoned loans, there can be no assurance that the current market
value of the properties securing these loans equals or exceeds the outstanding
loan balance. Management believes that the cash flow from the properties
securing many of its performing multi-family and commercial real estate loans is
insufficient to support the debt service and that borrowers are satisfying
mortgage payment obligations with other sources of funds. The Savings Bank's
prior experience indicates that some borrowers may eventually cease contributing
resources to properties where the loan balance substantially exceeds the
depreciated value of the property, thereby necessitating foreclosure or other
collection procedures. Furthermore, because most of the Savings Bank's multi-
family and commercial real estate loans are adjustable-rate mortgage ("ARM")
loans, the increased payments required of borrowers in a rising interest rate
environment may cause an increase in delinquencies and defaults. See "BUSINESS
OF THE SAVINGS BANK -- Lending Activities."
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
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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. Major competitors include state-wide banks
and thrifts. These institutions are significantly larger than the Savings Bank
and therefore have greater financial and marketing resources than the Savings
Bank. Such competition may limit the Savings Bank's growth and profitability in
the future. The Savings Bank also competes in the origination of loans with a
significant number of mortgage bankers and brokers. Because the profitability
of mortgage banking operations generally depends on maintaining a sufficient
volume of loan originations, such competition may limit the Savings Bank's
profitability in the future. See "BUSINESS OF THE SAVINGS BANK -- Market Area"
and "-- Competition."
POTENTIAL ADVERSE IMPACT OF CHANGES IN INTEREST RATES
The Savings Bank's profitability, like that of most financial institutions,
is dependent to a large extent on its net interest income, which is the
difference between the interest income received from its interest-earning assets
and the interest expense incurred in connection with its interest-bearing
liabilities. The Savings Bank, like other savings institutions, is vulnerable
to an increase in interest rates to the extent that its interest-earning assets
have longer effective maturities or repricing periods than its interest-bearing
liabilities. Under such circumstances, material and prolonged increases in
interest rates generally would adversely affect net interest income, while
material and prolonged decreases in interest rates generally would have a
favorable effect on net interest income. To better control the impact of
changes in interest rates on net interest income, the Savings Bank has sought to
improve the match between asset and liability maturities or repricing periods
and rates by retaining ARM loans in its portfolio. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and
Liability Management."
At December 31, 1995, of $472.3 million of total loans, the Savings Bank
had $415.6 million of ARM loans in its loan portfolio. The Savings Bank
originates ARM loans at initial "teaser" rates below the rate that would prevail
were the market rate index used for repricing applied initially. Furthermore,
the Savings Bank's ARM loans contain periodic and lifetime interest rate
adjustment limits which, in a rising interest rate environment, may prevent such
loans from repricing to market interest rates. A majority of the Savings Bank's
ARM loans are based on the COFI. Because the COFI is a lagging market index,
upward adjustments on these loans may occur more slowly than increases in the
Savings Bank's costs of interest-bearing liabilities, especially during periods
of rapidly increasing interest rates. While management anticipates that the
Savings Bank's ARM loans better offset the adverse effects of an increase in
interest rates as compared to fixed-rate mortgages, the increased mortgage
payments required of ARM borrowers in a rising interest rate environment could
potentially cause an increase in delinquencies and defaults. Furthermore, the
Savings Bank currently has $139.4 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. The Savings Bank
has not historically had an increase in such delinquencies and defaults on ARM
or negative amortization loans, but no assurance can be given that such
delinquencies or defaults would not occur in the future. The marketability of
the underlying property also may be adversely affected in a high interest rate
environment. Moreover, the Savings Bank's ability to originate ARM loans may be
affected by changes in the level of interest rates and by market acceptance of
the terms of such loans.
Changes in interest rates also can affect the average life of loans.
Decreases in interest rates may result in increased prepayments of loans, as
borrowers refinance to reduce borrowing costs. Under these circumstances, the
Savings Bank is subject to reinvestment risk to the extent that it is not able
to reinvest such prepayments at rates which are comparable to the rates on the
maturing loans or securities. Moreover, volatility in interest rates also can
result in disintermediation, or the flow of funds away from savings institutions
into direct investments, such as U.S. Government and corporate securities and
other investment vehicles which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than
savings institutions.
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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 SAIF member institutions, the FDIC has retained the
existing rate schedule of 23 to 31 basis points. The Savings Bank is, and after
the Conversion will remain, 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 non-interest 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.
The magnitude of the competitive advantage of BIF-insured institutions due to a
disparity in deposit insurance premiums and its impact on the Savings Bank's
results of operations cannot be determined at this time.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring 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. The assessment is expected to be approximately 80 basis
points on the amount of deposits held by a SAIF-member institution at March 31,
1995. 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 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. This charge, if incurred, would represent, on a pro
forma basis, a decrease in book value per share at December 31, 1995 of $0.90
based upon the sale of shares at the minimum of the Estimated Valuation Range
and of $0.67 based upon the sale of shares at the maximum of the Estimated
Valuation Range. Management cannot predict whether any legislation, including
legislation imposing such a fee, will be enacted, or, if enacted, the amount of
any one-time fee or whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums. See "REGULATION."
ANTI-TAKEOVER CONSIDERATIONS
PROVISIONS IN THE HOLDING COMPANY'S GOVERNING INSTRUMENTS AND DELAWARE LAW.
Certain provisions included in the Holding Company's Certificate of
Incorporation and in the Delaware General Corporation Law ("DGCL") might
discourage potential takeover attempts, particularly those which have not been
negotiated with the Board of Directors. As a result, these provisions might
preclude takeover attempts which certain stockholders may deem to be in their
best interest and might tend to perpetuate existing management. These
provisions include, among other things, a provision limiting voting rights of
beneficial owners of more than 10% of the Common Stock, supermajority voting
requirements for certain business combinations, staggered terms for directors,
non-cumulative voting for directors, limits on the calling of special meetings,
and specific notice requirements for stockholder nominations and proposals. In
addition, the Certificate of Incorporation provides for the election of
directors to staggered terms of three years and for their removal without cause
only upon the vote of holders of 80% of the outstanding voting shares. Certain
provisions of the Certificate of Incorporation of the Holding Company cannot be
amended by stockholders unless an 80% stockholder vote is obtained. The Bylaws
of the Holding Company also contain provisions regarding the timing and content
of stockholder proposals and nominations. The existence of these anti-takeover
provisions could result in the Holding Company being less attractive to a
potential acquiror and in stockholders receiving less for their shares than
otherwise might be available in the event of a takeover attempt. Furthermore,
federal regulations prohibit for three years after consummation of the
Conversion the ownership of more than 10% of the Savings Bank or the Holding
Company without prior OTS approval. Federal law also requires OTS approval
prior to the acquisition of "control" (as defined in OTS regulations) of an
insured institution. For a more detailed discussion of these provisions, see
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
VOTING CONTROL BY INSIDERS. Directors and officers of the Savings Bank and
the Holding Company expect to purchase 141,500 shares of Common Stock, or 2.4%
of the shares issued in the Offerings at the maximum of the Estimated Valuation
Range. Directors and officers are also expected to control indirectly the
voting of approximately
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8% of the shares of Common Stock issued in the Conversion through the ESOP
(assuming shares have been allocated under the ESOP). Under the terms of the
ESOP, the unallocated shares will be voted by the ESOP trustees in the same
proportion as the votes cast by participants with respect to the allocated
shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company intends to
seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Savings Bank. Assuming the receipt of stockholder
approval, the Holding Company expects to acquire Common Stock of the Holding
Company on behalf of the MRP in an amount equal to 4% of the Common Stock issued
in the Conversion, or 234,600 shares at the maximum of the Estimated Valuation
Range. These shares will be acquired either through open market purchases or
from authorized but unissued shares of Common Stock. Under the terms of the
MRP, the MRP committee or the MRP trustees will have the power to vote
unallocated and unvested shares. In addition, the Holding Company intends to
reserve for future issuance pursuant to the Stock Option Plan a number of
authorized shares of Common Stock equal to 10% of the Common Stock issued in the
Conversion (586,500 shares at the maximum of the Estimated Valuation Range).
The Holding Company also intends to seek approval of the Stock Option Plan at a
meeting of stockholders to be held no earlier than six months following the
consummation of the Conversion.
Assuming (i) the receipt of stockholder approval for the MRP and the Stock
Option Plan, (ii) the open market purchase of shares on behalf of the MRP,
(iii) the purchase by the ESOP of 8% of the Common Stock sold in the Offerings,
and (iv) the exercise of stock options equal to 10% of the number of shares of
Common Stock issued in the Conversion, directors, officers and employees of the
Holding Company and the Savings Bank would have voting control, on a fully
diluted basis, of 22.2% of the Common Stock, based on the issuance of the
maximum of the Estimated Valuation Range. Management's potential voting control
could, together with additional stockholder support, preclude or make more
difficult takeover attempts that certain stockholders deem to be in their best
interest and might tend to perpetuate existing management.
PROVISIONS OF EMPLOYMENT AND SEVERANCE AGREEMENTS. The Chief Executive
Officer's current employment agreement and proposed severance agreements with
certain members of management provide for cash severance payments in the event
of a change in control of the Holding Company or the Savings Bank. Such
agreements also provide for the continuation of certain insurance benefits
following a change in control. Assuming a change of control occurred as of
December 31, 1995, the aggregate amounts payable under these agreements would
have been approximately $1.5 million. These provisions may have the effect of
increasing the cost of acquiring the Holding Company, thereby discouraging
future attempts to take over the Holding Company or the Savings Bank.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits," "DESCRIPTION OF CAPITAL
STOCK OF THE HOLDING COMPANY" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS
At a meeting to be held no earlier than six months following consummation
of the Conversion, the Holding Company intends to seek stockholder approval of
the MRP. If approved, the MRP intends to acquire an amount of Common Stock of
the Holding Company equal to 4% of the shares issued in the Conversion. Such
shares of Common Stock of the Holding Company may be acquired by the Holding
Company in the open market or from authorized but unissued shares of Common
Stock of the Holding Company. The issuance of an additional 4% of the shares of
Common Stock for the MRP from authorized but unissued shares of Common Stock of
the Holding Company would dilute the ownership interest of stockholders by 3.85%
and would decrease net income per share and stockholders' equity per share. See
"PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management
Recognition Plan."
At a meeting to be held no earlier than six months following consummation
of the Conversion, the Holding Company intends to seek stockholder approval of
the Stock Option Plan. If approved, the Stock Option Plan will provide for
options of up to a number of shares of Common Stock of the Holding Company equal
to 10% of the
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shares issued in the Conversion. If all of the shares issued upon exercise of
the options are authorized but unissued shares of Common Stock of the Holding
Company, rather than treasury shares which could be acquired, the ownership
interests of existing stockholders would be diluted by 9.1%. In addition, the
issuance of authorized but unissued shares upon the exercise of stock options
may decrease net income per share and stockholders' equity per share. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock Option Plan."
If the ESOP is not able to purchase 8% of the shares of Common Stock issued
in the Offerings, the ESOP may purchase newly issued shares from the Holding
Company. In such event, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income), to those Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members who receive
and/or exercise the Subscription Rights in an amount equal to such value.
Additionally, the Savings Bank could be required to recognize a gain for tax
purposes on such distribution. Whether Subscription Rights are considered to
have ascertainable value is an inherently factual determination. The Savings
Bank has been advised by RP Financial that such rights have no value, however,
RP Financial's conclusion is not binding on the Internal Revenue Service
("IRS"). See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Tax Effects."
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market under the symbol "PROV," there can be no assurance that the Holding
Company will meet Nasdaq National Market listing requirements, which include a
minimum market capitalization, at least two market makers and a minimum number
of record holders. Making a market in securities involves maintaining bid and
ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. The development of a public trading market
depends upon the existence of willing buyers and sellers, the presence of which
is not within the control of the Holding Company, the Savings Bank or any market
maker. Furthermore, there can be no assurance that purchasers will be able to
sell their shares at or above the Purchase Price. See "MARKET FOR COMMON
STOCK."
REGULATORY OVERSIGHT AND POSSIBLE LEGISLATION
The Savings Bank is subject to extensive regulation, supervision and
examination by the OTS, as its chartering authority and primary federal
regulator, and by the FDIC, which insures its deposits up to applicable limits.
The Savings Bank is a member of the FHLB System and is subject to certain
limited regulations promulgated by the Board of Governors of the Federal Reserve
System ("Federal Reserve"). As the holding company of the Savings Bank, the
Holding Company also will be subject to regulation and oversight by the OTS.
Such regulation and supervision govern the activities in which an institution
can engage and is intended primarily for the protection of the insurance fund
and depositors. Regulatory authorities have been granted extensive discretion
in connection with their supervisory and enforcement activities which are
intended to strengthen the financial condition of the banking industry,
including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC or Congress, could have a material impact on the Holding
Company, the Savings Bank and their respective operations. See "REGULATION."
Legislation proposing a comprehensive reform of the banking and thrift
industries has recently been discussed in the United States Congress. Under
such legislation, (i) the BIF and the SAIF would be merged at which time thrifts
and banks would pay the same deposit insurance premiums, (ii) federal savings
associations would be required to convert to national banks or state-chartered
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banks or thrifts, (iii) thrifts' 8% bad-debt tax deduction would be eliminated,
(iv) all savings and loan holding companies would become bank holding companies,
and (v) the OTS would be merged with the Office of the Comptroller of the
Currency. It is uncertain when or if such legislation may be passed and, if
passed, in what form such legislation may be passed.
PROVIDENT FINANCIAL HOLDINGS, INC.
The Holding Company was organized as a Delaware corporation at the
direction of the Savings Bank in January 1996 to acquire all of the outstanding
capital stock of the Savings Bank to be issued in the Conversion. The Holding
Company has received the approval of the OTS to become a savings and loan
holding company and to acquire 100% of the capital stock of the Savings Bank.
Prior to the Conversion, the Holding Company will not engage in any material
operations. After the Conversion, the Holding Company will be classified as a
unitary savings and loan holding company subject to regulation by the OTS, and
its principal business will be the ownership of the Savings Bank. Immediately
following the Conversion, the only significant assets of the Holding Company
will be the capital stock of the Savings Bank, that portion of the net proceeds
of the Offerings to be retained by the Holding Company and a note receivable
from the ESOP evidencing a loan from the Holding Company to fund the Savings
Bank's ESOP. See "BUSINESS OF THE HOLDING COMPANY."
The holding company structure will permit the Holding Company to expand the
financial services currently offered through the Savings Bank. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Offerings will, should it decide to do so, facilitate the
expansion and diversification of its operations. The holding company structure
also will enable the Holding Company to repurchase its stock without adverse tax
consequences, subject to applicable regulatory restrictions and waiting periods.
There are no present plans, arrangements, agreements, or understandings,
written or oral, regarding any such activities or repurchases. See ""USE OF
PROCEEDS" and "REGULATION -- Savings and Loan Holding Company Regulation."
PROVIDENT SAVINGS BANK, F.S.B.
The Savings Bank, founded in 1956, is a federally chartered mutual savings
bank headquartered in Riverside, California. The Savings Bank amended its
mutual charter from that of a federally chartered mutual savings and loan
association to that of a California-chartered mutual savings bank in 1988 and
then to a federally chartered mutual savings bank in 1990. In connection with
the Conversion, the Savings Bank will convert to a federally chartered capital
stock savings bank and will become a wholly-owned subsidiary of the Holding
Company. The Savings Bank is regulated primarily by the OTS. The Savings
Bank's deposits are federally insured by the FDIC under the SAIF. The Savings
Bank has been a member of the FHLB System since 1956. At December 31, 1995, the
Savings Bank had total assets of $570.7 million, total deposits of $498.5
million and retained earnings of $38.2 million on a consolidated basis.
The Savings Bank's business consists of both traditional savings and loan
and mortgage banking operations. The savings and loan operations consist
primarily 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 and certain other investments.
The Savings Bank has two full service offices in Riverside, California, two in
Moreno Valley, California and one in each of Blythe, Hemet, Rancho Mirage,
Redlands, and Sun City, California. At December 31, 1995, one- to four-family
residential mortgage loans totalled $333.6 million, or 70.6% of the Savings
Bank's loan portfolio. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities."
The mortgage banking activities of the Savings Bank are conducted through
the Savings Bank's Profed Mortgage division. 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. Profed Mortgage
operates four offices within Savings Bank facilities and five free standing loan
production offices located in Santa Ana, Rancho
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Cucamonga, and Gardena in Southern California; Larkspur in Northern California;
and in Las Vegas, Nevada. During the year ended June 30, 1995 and the six
months ended December 31, 1995, loans originated for sale totalled $161.5
million and $214.6 million, respectively. Since mid-1994, the Savings Bank has
sold most loans on a servicing-released basis. At December 31, 1995, the
Savings Bank serviced $625.3 million of loans for others. See "RISK FACTORS --
Reliance on Mortgage Banking Operations" and "BUSINESS OF THE SAVINGS BANK --
Mortgage Banking Activities."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $42.2 million to $57.5 million, or up to $66.3 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has
received the approval of the OTS to purchase all of the capital stock of the
Savings Bank to be issued in the Conversion in exchange for the greater of 50%
of the net proceeds of the Offerings or that amount of net proceeds sufficient
to increase the Savings Bank's tangible capital to 10% of total assets. Net
proceeds to be used to purchase the capital stock of the Savings Bank are
estimated to be between $29.5 million and $31.5 million (or $33.2 million if the
Estimated Valuation Range is increased by 15%). The remainder of the net
proceeds will be retained by the Holding Company.
Receipt of at least 50% of the net proceeds of the sale of the Common Stock
will increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the
funds contributed to it for general corporate purposes, including, initially,
investment in short to intermediate term securities or, possibly, the repayment
of FHLB advances. Shares of Common Stock may be purchased with funds on deposit
at the Savings Bank, which will reduce deposits by the amounts of such
purchases. As a result, the net amount of funds available to the Savings Bank
for additional investment following receipt of the Conversion proceeds will be
reduced by the amount of deposit withdrawals used to fund stock purchases.
In connection with the Conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of Common Stock issued in the Conversion. The Holding Company's loan
to fund the ESOP may range from $3,468,000 to $4,692,000 based on the sale of
346,800 shares to the ESOP (at the minimum of the Estimated Valuation Range) and
469,200 shares (at the maximum of the Estimated Valuation Range), respectively,
at $10.00 per share. If 15% above the maximum of the Estimated Valuation Range,
or 6,744,750 shares, are sold in the Conversion, the Holding Company's loan to
the ESOP would be approximately $5,395,800. It is anticipated that the ESOP
loan will have a ten-year term with interest payable at the prime rate as
published in THE WALL STREET JOURNAL on the closing date of the Conversion. The
loan will be repaid principally from the Savings Bank's contributions to the
ESOP and from any dividends paid on shares of Common Stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially will
be invested in short to intermediate term securities and a portion of the funds
may be placed in a short-term deposit account with, or a loan to, the Savings
Bank. Such proceeds will be available for additional contributions to the
Savings Bank in the form of debt or equity, to support future diversification or
acquisition activities, as a source of dividends to the stockholders of the
Holding Company and for future repurchases of Common Stock to the extent
permitted under Delaware law and federal regulations. Currently, there are no
specific plans, arrangements, agreements or understandings, written or oral,
regarding any such activities.
Upon consummation of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Because the Holding Company has not yet issued stock, there is
currently insufficient information upon which an intention to repurchase stock
could be based. The facts and circumstances upon which the Board of Directors
may determine to repurchase stock in the future may include but are not limited
to: (i) market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining
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outstanding shares, and the ability to improve the Holding Company's return on
equity; (ii) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iii) any other circumstances in which repurchases
would be in the best interests of the Holding Company and its stockholders. Any
stock repurchases will be subject to a determination by the Board of Directors
that both the Holding Company and the Savings Bank will be capitalized in excess
of all applicable regulatory requirements after any such repurchases and that
capital will be adequate, taking into account, among other things, the level of
nonperforming and classified assets, the Holding Company's and the Savings
Bank's current and projected results of operations and asset/liability
structure, the economic environment and tax and other regulatory considerations.
See "THE CONVERSION -- Restrictions on Repurchase of Stock."
DIVIDEND POLICY
GENERAL
The Board of Directors of the Holding Company 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 Holding Company's Board of Directors, which will take into account the
amount of the net proceeds retained by the Holding Company, the Holding
Company'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 Holding Company discussed below. 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. In order to pay such cash dividends, however, the
Holding Company must have available cash either from the net proceeds raised in
the Offerings and retained by the Holding Company, dividends received from the
Savings Bank or earnings on Holding Company assets. 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.
CURRENT REGULATORY RESTRICTIONS
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Savings Bank because the Holding Company initially will have
no source of income other than dividends from the Savings Bank, interest income
from the ESOP loan and earnings from the investment of the net proceeds from the
Offerings retained by the Holding Company. OTS regulations require the Savings
Bank to give the OTS 30 days' advance notice of any proposed declaration of
dividends to the Holding Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Holding Company.
The OTS imposes certain limitations on the payment of dividends from the Savings
Bank to the Holding Company which utilizes a three-tiered approach that permits
various levels of distributions based primarily upon a savings association's
capital level. In addition, the Savings Bank may not declare or pay a cash
dividend on its capital stock if the effect thereof would be to reduce the
regulatory capital of the Savings Bank below the amount required for the
liquidation account to be established pursuant to the Savings Bank's Plan of
Conversion. See "REGULATION -- Federal Regulation of Savings Associations --
Limitations on Capital Distributions," "THE CONVERSION -- Effects of Conversion
to Stock Form on Depositors and Borrowers of the Savings Bank -- Liquidation
Account" and Note 15 of Notes to the Consolidated Financial Statements included
elsewhere herein.
The Savings Bank currently meets the criteria to be designated a Tier 1
association, as hereinafter defined, 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.
10
<PAGE>
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Savings Bank to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Savings Bank at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note 9 of Notes to the Consolidated Financial
Statements included elsewhere herein. The Holding Company does not contemplate
any distribution by the Savings Bank that would result in a recapture of the
Savings Bank's bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
The Holding Company has not previously issued capital stock, and,
consequently, there is no established market for the Common Stock. The Holding
Company has received conditional approval to have its Common Stock quoted on the
Nasdaq National Market under the symbol "PROV" upon consummation of the
Conversion. One of the requirements for continued quotation of the Common Stock
on the Nasdaq National Market is that there be at least two market makers for
the Common Stock. The Holding Company will seek to encourage and assist at
least two market makers to make a market in its Common Stock. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. EVEREN Securities
has advised the Holding Company that it intends to act as a market maker in the
Common Stock following the consummation of the Conversion, but that it is under
no obligation to do so. Furthermore, EVEREN Securities has agreed to use its
best efforts to assist the Holding Company in obtaining at least one additional
market maker. While the Holding Company will attempt to obtain commitments from
broker-dealers to act as market makers, and anticipates that prior to the
consummation of the Conversion it will be able to obtain the commitment from at
least one other broker-dealer to act as a market maker for the Common Stock,
there can be no assurance there will be two or more market makers for the Common
Stock. Additionally, the development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within the
control of the Holding Company, the Savings Bank or any market maker. The
number of active buyers and sellers of the Common Stock at any particular time
may be limited. Under such circumstances, investors in the Common Stock could
have difficulty disposing of their shares on short notice and should not view
the Common Stock as a short-term investment. There can be no assurance that an
active and liquid trading market for the Common Stock will develop or that, if
developed, it will continue, nor is there any assurance that persons purchasing
shares will be able to sell them at or above the Purchase Price or that
quotations will be available on the Nasdaq National Market as contemplated.
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Savings Bank as converted, based upon an independent valuation. The Estimated
Valuation Range as of March 1, 1996 is from a minimum of $43,350,000 to a
maximum of $58,650,000 with a midpoint of $51,000,000 or, at a price per share
of $10.00, a minimum number of shares of 4,335,000, a maximum number of shares
of 5,865,000 and a midpoint number of shares of 5,100,000. The actual net
proceeds from the sale of the Common Stock cannot be determined until the
Conversion is consummated. However, net proceeds set forth on the following
tables are based upon the following assumptions: (i) all of the shares of Common
Stock will be sold in the Subscription and Direct Community Offering without the
assistance of selected broker-dealers and no shares will be sold in the Public
Offering; (ii) EVEREN Securities will receive a fee of $25,000 plus 1.05% of the
aggregate dollar amount of Common Stock sold at the midpoint of the Estimated
Valuation Range, excluding shares purchased by the Savings Bank's directors,
officers and employees and the ESOP; (iii) the ESOP will purchase 8% of the
Common Stock issued in the Offerings and directors and officers of the Savings
Bank will purchase 141,500 shares; and (iv) Conversion expenses, excluding the
fees paid to EVEREN
11
<PAGE>
Securities, will total approximately $636,000. Actual expenses may vary from
this estimate, and the fees paid will depend upon the percentages and total
number of shares sold in the Subscription, Direct Community and Public Offerings
and other factors.
The pro forma consolidated net income of the Holding Company for the year
ended June 30, 1995 and the six months ended December 31, 1995 has been
calculated as if the Conversion had been consummated at the beginning of each
period and the estimated net proceeds received by the Holding Company and the
Savings Bank had been invested at 5.14% at the beginning of each period, which
represents the one year U.S. Treasury Bill yield as of December 31, 1995. While
OTS regulations provide for the use of a yield representing the arithmetic
average of the weighted average yield earned by the Savings Bank on its
interest-earning assets and the rates paid on its deposits, the Holding Company
believes the U.S. Treasury Bill yield represents a more realistic yield on the
Savings Bank's investments. As discussed under "USE OF PROCEEDS," the Holding
Company expects to retain up to 50% of the net proceeds of the Offerings from
which it will fund the ESOP loan. A pro forma after-tax return of 3.03% is used
for both the Holding Company and the Savings Bank for the six- and 12-month
periods, after giving effect to an incremental combined federal and state tax
rate of 41%. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock. Per share amounts have been computed as if the Common Stock had
been outstanding at the beginning of the period or at the dates shown, but
without any adjustment of per share historical or pro forma stockholders' equity
to reflect the earnings on the estimated net proceeds.
The following tables summarize the historical net income and total equity
of the Savings Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. No effect
has been given to: (i) the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be voted upon by stockholders
at a meeting to be held no earlier than six months following consummation of the
Conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing
Common Stock in the Conversion; (iii) the issuance of shares from authorized but
unissued shares to the MRP, which is expected to be voted upon by stockholders
at a meeting to be held no earlier than six months following consummation of the
Conversion; or (iv) the establishment of a liquidation account for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock Option Plan" and "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued." Shares of
Common Stock may be purchased with funds on deposit at the Savings Bank, which
will reduce deposits by the amounts of such purchases. Accordingly, the net
amount of funds available for investment will be reduced by the amount of
deposit withdrawals used to fund stock purchases.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY
OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF
CONSOLIDATED ASSETS AND LIABILITIES OF THE HOLDING COMPANY COMPUTED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP").
STOCKHOLDERS' EQUITY HAS NOT BEEN INCREASED OR DECREASED TO REFLECT THE
DIFFERENCE BETWEEN THE CARRYING VALUE OF LOANS AND OTHER ASSETS AND MARKET
VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT FAIR MARKET VALUE NOR
DOES IT REPRESENT AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION.
12
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1995
-------------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation
Range(1)
--------- -------- --------- ---------
4,335,000 5,100,000 5,865,000 6,744,750
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- --------- --------- ---------
(Dollars In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds . . . . . . . . . . . . . . . . . . . . . $43,350 $51,000 $58,650 $67,448
Less:
Estimated Offering expenses. . . . . . . . . . . . . . . 1,139 1,139 1,139 1,139
------- ------- ------- -------
Estimated net proceeds . . . . . . . . . . . . . . . . . 42,211 49,861 57,511 66,309
Less:
ESOP shares. . . . . . . . . . . . . . . . . . . . . . . (3,468) (4,080) (4,692) (5,396)
MRP shares . . . . . . . . . . . . . . . . . . . . . . . (1,734) (2,040) (2,346) (2,698)
------- ------- ------- -------
Estimated net cash proceeds . . . . . . . . . . . . . . $37,009 $43,741 $50,473 $58,215
------- ------- ------- -------
------- ------- ------- -------
Consolidated net income (loss):
Historical. . . . . . . . . . . . . . . . . . . . . . . $(3,992) $(3,992) $(3,992) $(3,992)
Pro forma income on net proceeds(2) . . . . . . . . . . 1,122 1,326 1,531 1,765
Pro forma ESOP adjustments(3) . . . . . . . . . . . . . (205) (241) (277) (318)
Pro forma MRP adjustments(4). . . . . . . . . . . . . . (205) (241) (277) (318)
------- ------- ------- -------
Pro forma net income (loss) . . . . . . . . . . . . . $(3,280) $(3,148) $(3,015) $(2,863)
------- ------- ------- -------
Consolidated net income per share(5)(6):
Historical. . . . . . . . . . . . . . . . . . . . . . . $(1.00) $(0.85) $(0.74) $(0.64)
Pro forma income on net proceeds. . . . . . . . . . . . 0.28 0.28 0.28 0.28
Pro forma ESOP adjustments(3) . . . . . . . . . . . . . (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustments(4). . . . . . . . . . . . . . (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net income (loss) per share . . . . . . . . $ (0.82) $ (0.67) $ (0.56) $ (0.46)
------- ------- ------- -------
------- ------- ------- -------
Consolidated stockholders' equity (book value)(7):
Historical. . . . . . . . . . . . . . . . . . . . . . . $37,323 $37,323 $37,323 $37,323
Estimated net proceeds. . . . . . . . . . . . . . . . . 42,211 49,861 57,511 66,309
Less:
Common Stock acquired by ESOP . . . . . . . . . . . . . (3,468) (4,080) (4,692) (5,396)
Common Stock to be acquired by MRP(4) . . . . . . . . . (1,734) (2,040) (2,346) (2,698)
------- ------- ------- -------
Pro forma stockholders' equity(7) . . . . . . . . . . $74,332 $81,064 $87,796 $95,538
------- ------- ------- -------
------- ------- ------- -------
Consolidated stockholders' equity per share(6)(8):
Historical(6) . . . . . . . . . . . . . . . . . . . . . $8.61 $7.32 $6.36 $5.53
Estimated net proceeds. . . . . . . . . . . . . . . . . 9.74 9.78 9.81 9.83
ESOP. . . . . . . . . . . . . . . . . . . . . . . . . . (0.80) (0.80) (0.80) (0.80)
MRP(4). . . . . . . . . . . . . . . . . . . . . . . . . (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per share(9) . . . . . $ 17.15 $ 15.90 $ 14.97 $ 14.16
------- ------- ------- -------
------- ------- ------- -------
Purchase Price as a percentage of pro forma
stockholders' equity per share. . . . . . . . . . . . . 58.31% 62.89% 66.80% 70.62%
Purchase Price as a multiple of pro forma
net income per share(10). . . . . . . . . . . . . . . . NM NM NM NM
</TABLE>
(FOOTNOTES ON PAGE 15)
13
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended December 31, 1995
-------------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation
Range(1)
--------- -------- --------- ---------
4,335,000 5,100,000 5,865,000 6,744,750
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- --------- --------- ---------
(Dollars In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds . . . . . . . . . . . . . . . . . . . . . $43,350 $51,000 $58,650 $67,448
Less:
Estimated Offering expenses. . . . . . . . . . . . . . . 1,139 1,139 1,139 1,139
------- ------- ------- -------
Estimated net proceeds . . . . . . . . . . . . . . . . . $42,211 $49,861 $57,511 $66,309
Less:
ESOP shares. . . . . . . . . . . . . . . . . . . . . . . (3,468) (4,080) (4,692) (5,396)
MRP shares . . . . . . . . . . . . . . . . . . . . . . . (1,734) (2,040) (2,346) (2,698)
------- ------- ------- -------
Estimated net cash proceeds . . . . . . . . . . . . . . $37,009 $43,741 $50,473 $58,215
------- ------- ------- -------
------- ------- ------- -------
Consolidated net income:
Historical. . . . . . . . . . . . . . . . . . . . . . . $ 863 $ 863 $ 863 $ 863
Pro forma income on net proceeds(2) . . . . . . . . . . 561 663 765 883
Pro forma ESOP adjustments(3) . . . . . . . . . . . . . (102) (120) (138) (159)
Pro forma MRP adjustments(4). . . . . . . . . . . . . . (102) (120) (138) (159)
------- ------- ------- -------
Pro forma net income. . . . . . . . . . . . . . . . . $1,220 $1,286 $1,352 $1,428
------- ------- ------- -------
------- ------- ------- -------
Consolidated net income per share(5)(6):
Historical. . . . . . . . . . . . . . . . . . . . . . . $0.22 $0.18 $0.16 $0.14
Pro forma income on net proceeds. . . . . . . . . . . . 0.14 0.14 0.14 0.14
Pro forma ESOP adjustments(3) . . . . . . . . . . . . . (0.03) (0.03) (0.03) (0.03)
Pro forma MRP adjustments(4). . . . . . . . . . . . . . (0.03) (0.03) (0.03) (0.03)
------- ------- ------- -------
Pro forma net income per share. . . . . . . . . . . . $0.30 $0.26 $0.24 $0.22
------- ------- ------- -------
------- ------- ------- -------
Consolidated stockholders' equity (book value)(7):
Historical. . . . . . . . . . . . . . . . . . . . . . . $38,186 $38,186 $38,186 $38,186
Estimated net proceeds. . . . . . . . . . . . . . . . . 42,211 49,861 57,511 66,309
Less:
Common Stock acquired by ESOP . . . . . . . . . . . . . (3,468) (4,080) (4,692) (5,396)
Common Stock to be acquired by MRP(4) . . . . . . . . . (1,734) (2,040) (2,346) (2,698)
------- ------- ------- -------
Pro forma stockholders' equity(7) . . . . . . . . . . $75,195 $81,927 $88,659 $96,401
------- ------- ------- -------
------- ------- ------- -------
Consolidated stockholders' equity per share(6)(8):
Historical(6) . . . . . . . . . . . . . . . . . . . . . $8.81 $7.49 $6.51 $5.66
Estimated net proceeds. . . . . . . . . . . . . . . . . 9.74 9.78 9.81 9.83
ESOP. . . . . . . . . . . . . . . . . . . . . . . . . . (0.80) (0.80) (0.80) (0.80)
MRP(4). . . . . . . . . . . . . . . . . . . . . . . . . (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per share(9) . . . . . $17.35 $16.07 $15.12 $14.29
------- ------- ------- -------
------- ------- ------- -------
Purchase Price as a percentage of pro forma
stockholders' equity per share. . . . . . . . . . . . . 57.64% 62.23% 66.14% 69.98%
Purchase Price as a multiple of pro forma
net income per share(11). . . . . . . . . . . . . . . . 16.67x 19.23x 20.83x 22.73x
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
14
<PAGE>
- -------------------
(1) Gives effect to the sale of an additional 879,750 shares in the Conversion,
which may be issued to cover an increase in the pro forma market value of
the Holding Company and the Savings Bank as converted without the
resolicitation of subscribers or any right of cancellation. The issuance
of such additional shares will be conditioned on a determination of the
independent appraiser that such issuance is compatible with its
determination of the estimated pro forma market value of the Holding
Company and the Savings Bank as converted. See "THE CONVERSION -- Stock
Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in THE WALL STREET JOURNAL on the closing date of the
Conversion, which rate is currently 8.25%), from the net proceeds from the
Conversion retained by the Holding Company. The amount of this borrowing
has been reflected as a reduction from gross proceeds to determine
estimated net proceeds. The Savings Bank intends to make contributions to
the ESOP in amounts at least equal to the principal and interest
requirement of the debt. As the debt is paid down, stockholders' equity
will be increased. The Savings Bank's payment of the ESOP debt is based
upon equal installments of principal over a ten-year period, assuming a
combined federal and state tax rate of 41%. Shares purchased by the ESOP
with the proceeds of the loan will be held in a suspense account and
released on a pro rata basis as the loan is repaid. Interest income earned
by the Holding Company on the ESOP debt offsets the interest paid by the
Savings Bank on the ESOP loan. No reinvestment is assumed on proceeds
contributed to fund the ESOP. The ESOP expense reflects adoption of
Statement of Position ("SOP") 93-6, which will require recognition of
expense based upon shares committed to be released and the exclusion of
unallocated shares from earnings per share computations. The valuation of
shares committed to be released would be based upon the average market
value of the shares during the year, which, for purposes of this
calculation, was assumed to be equal to the $10.00 per share Purchase
Price. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
(4) Gives effect to the MRP expected to be adopted by the Holding Company
following the Conversion. If the MRP is approved by stockholders, the MRP
intends to acquire an amount of Common Stock equal to 4.0% of the shares of
Common Stock issued in the Conversion either through open market purchases
or from authorized but unissued shares of Common Stock. In calculating the
pro forma effect of the MRP, it is assumed that the required stockholder
approval has been received, that the shares were acquired by the MRP at the
beginning of the period presented in open market purchases at the Purchase
Price and that 20% of the amount contributed was an amortized expense
during such period. The issuance of authorized but unissued shares of the
Common Stock instead of open market purchases would dilute the voting and
ownership interests of existing stockholders by approximately 3.85% and pro
forma net income (loss) per share would be $(0.78) and $0.31, $(0.63) and
$0.28, $(0.53) and $0.25 and $(0.43) and $0.23 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range for the
year ended June 30, 1995 and for the six months ended December 31, 1995,
respectively, and pro forma stockholders' equity per share would be $16.87
and $17.06, $15.67 and $15.83, $14.78 and $14.92 and $14.00 and $14.12 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range at June 30, 1995 and December 31, 1995, respectively.
Shares issued under the MRP vest over a five-year period at 20% per year
and, for purposes of this table, compensation expense is recognized on a
straight-line basis over each vesting period. In the event the fair market
value per share is greater than $10.00 per share on the date of stockholder
approval of the MRP, total MRP expense would increase. The total estimated
MRP expense was multiplied by 20% (the total percent of shares for which
expense is recognized in the first year) resulting in pre-tax MRP expense
of $347,000 and $173,000, $408,000 and $204,000, $469,000 and $235,000 and
$540,000 and $270,000 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range the year ended June 30, 1995 and
for the six months ended December 31, 1995, respectively. No effect has
been given to the shares reserved for issuance under the proposed Stock
Option Plan. If stockholders approve the Stock Option Plan following the
Conversion, the Holding Company will have reserved for issuance under the
Stock Option Plan
15
<PAGE>
authorized but unissued shares of Common Stock representing an amount of
shares equal to 10% of the shares sold in the Offerings. If all of the
options were to be exercised utilizing these authorized but unissued shares
rather than treasury shares which could be acquired, the voting and
ownership interests of existing stockholders would be diluted by
approximately 9.1%. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits --
1996 Stock Option Plan" and "-- Management Recognition Plan" and "RISK
FACTORS -- Possible Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 4,005,540 and
3,996,870, 4,712,400 and 4,702,200, 5,419,260 and 5,407,530 and 6,232,130
and 6,218,640 at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range for the year ended June 30, 1995 and the
six months ended December 31, 1995, respectively, which includes the shares
of Common Stock sold in the Offerings less the number of shares assumed to
be held by the ESOP not committed to be released within the first year
following the Conversion.
(6) Historical per share amounts have been computed as if the shares of Common
Stock expected to be issued in the Conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment of
historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
Conversion, the additional ESOP expense or the proposed MRP expense, as
described above.
(7) "Book value" represents the difference between the stated amounts of the
Holding Company's assets and liabilities. The amounts shown do not reflect
the liquidation account which will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in the
Conversion, or the federal income tax consequences of the restoration to
income of the Savings Bank's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank" and "TAXATION." The amounts shown for book
value do not represent fair market values or amounts distributable to
stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 4,335,000,
5,100,000, 5,865,000 and 6,744,750 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the Common Stock.
(10) The Savings Bank had a net loss for the year ended June 30, 1995.
Accordingly, this information is not meaningful.
(11) Annualized.
16
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Savings
Bank at December 31, 1995, and the pro forma consolidated capitalization of the
Holding Company after giving effect to the assumptions set forth under "PRO
FORMA DATA," based on the sale of the number of shares of Common Stock set forth
below in the Conversion at the minimum, midpoint and maximum of the Estimated
Valuation Range, and based on the sale of 6,744,750 shares (representing the
shares that would be issued in the Conversion after giving effect to an
additional 15% increase in the maximum valuation in the Estimated Valuation
Range, subject to receipt of an updated appraisal confirming such valuation and
OTS approval). A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
MAY MATERIALLY AFFECT PRO FORMA CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
------------------------------------------------------------------------
4,335,000 5,100,000 5,865,000 6,744,750
Shares at Shares at Shares at Shares at
Savings Bank $10.00 $10.00 $10.00 $10.00
Historical Per Share(1) Per Share(1) Per Share(1) Per Share(2)
------------ ------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3). . . . . . . . . . . . $498,491 $498,491 $498,491 $498,491 $498,491
FHLB advances. . . . . . . . . . . 20,078 20,078 20,078 20,078 20,078
ESOP borrowings(4) . . . . . . . . -- -- -- -- --
-------- -------- -------- -------- --------
Total deposits and
borrowed funds. . . . . . . . . . $518,569 $518,569 $518,569 $518,569 $518,569
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Stockholders' equity:
Preferred stock:
2,000,000 shares, $.01
par value per share,
authorized; none issued
or outstanding(5) . . . . . . $ -- $ -- $ -- $ -- $ --
Common Stock:
15,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(5). . . . . . . . -- 43 51 59 67
Additional paid-in capital. . . -- 42,168 49,810 57,452 66,242
Less:
Common Stock acquired
by ESOP(4). . . . . . . . . -- (3,468) (4,080) (4,692) (5,396)
Common Stock to be acquired
by MRP(6) . . . . . . . . . -- (1,734) (2,040) (2,346) (2,698)
Retained earnings(7) . . . . . . . 38,186 38,186 38,186 38,186 38,186
-------- -------- -------- -------- --------
Total stockholders' equity . . . . $38,186 $75,195 $81,927 $88,659 $96,401
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or performance of the
Savings Bank or changes in market conditions or general financial and
economic conditions, or the issuance of additional shares under the Stock
Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of Common Stock issued in the
Conversion is 15% above the maximum of the Estimated Valuation Range. See
"PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) Assumes that 8% of the Common Stock sold in the Offerings will be acquired
by the ESOP in the Conversion with funds borrowed from the Holding Company.
In accordance with GAAP, the amount of Common Stock to be purchased by the
ESOP represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As shares are released to ESOP participants'
accounts, a corresponding reduction in the charge against capital will
occur. Since the funds are borrowed from the Holding Company, the
borrowing will be eliminated in consolidation and no liability will be
reflected in the consolidated financial statements of the Holding Company.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock Ownership
Plan."
(5) The Savings Bank's authorized capital will consist solely of 1,000 shares
of common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
Conversion.
(6) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of Common
Stock issued in the Conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The issuance of an
additional 4% of the shares of Common Stock for the MRP from authorized but
unissued shares of Holding Company Common Stock would dilute the voting and
ownership interests of stockholders by 3.85%. The shares are reflected as
a reduction of stockholders' equity. See "RISK FACTORS -- Possible
Dilutive Effect of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF
THE SAVINGS BANK -- Benefits -- Management Recognition Plan." The MRP is
subject to stockholder approval, which is expected to be sought at a
meeting to be held no earlier than six months following consummation of the
Conversion.
(7) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank will be prohibited
from paying any dividend that would reduce its regulatory capital below the
amount in the liquidation account, which will be established for the
benefit of the Savings Bank's Eligible Account Holders and Supplemental
Eligible Account Holders at the time of the Conversion and adjusted
downward thereafter. See "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Savings Bank -- Liquidation
Account."
18
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro forma
capital position relative to its capital requirements at December 31, 1995. The
amount of capital infused into the Savings Bank for purposes of the following
table is the greater of 50% of the net proceeds of the Offerings or that amount
of net proceeds sufficient to increase the Savings Bank's tangible capital to
10% of total assets. For purposes of the table below, the amount expected to be
borrowed by the ESOP and the cost of the shares expected to be acquired by the
MRP are deducted from pro forma regulatory capital. For a discussion of the
assumptions underlying the pro forma capital calculations presented below, see
"USE OF PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA." The definitions of
the terms used in the table are those provided in the capital regulations issued
by the OTS. For a discussion of the capital standards applicable to the Savings
Bank, see "REGULATION -- Federal Regulation of Savings Associations -- Capital
Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1995
------------------------------
Minimum of Estimated
Valuation Range
------------------------------
4,335,000 Shares
December 31, 1995 at $10.00 Per Share
----------------------------- ------------------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets (1) Amount Assets (1)
------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
GAAP capital . . . . . . . . . $38,186 6.69% $62,493 10.44%
------- ----- ------- -----
------- ----- ------- -----
Tangible capital . . . . . . . $35,251 6.21% $59,558 10.00%
Tangible capital
requirement. . . . . . . . . 8,517 1.50 8,934 1.50%
------- ----- ------- -----
Excess . . . . . . . . . . . . $26,734 4.71% $50,624 8.50%
------- ----- ------- -----
------- ----- ------- -----
Core capital . . . . . . . . . $35,251 6.21% $59,558 10.00%
Core capital requirement(2). . 17,034 3.00% 17,867 3.00%
------- ----- ------- -----
Excess . . . . . . . . . . . . $18,217 3.21% $41,691 7.00%
------- ----- ------- -----
------- ----- ------- -----
Risk-based capital(3). . . . . $40,015 10.50% $64,322 16.63%
Risk-based
capital requirement . . . . . 30,489 8.00 30,934 8.00%
------- ----- ------- -----
Excess . . . . . . . . . . . . $ 9,526 2.50% $33,388 8.63%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1995
--------------------------------------------------------------------------------
15% above
Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Rangee
--------------------- -------------------- --------------------
5,100,000 Shares 5,865,000 Shares 6,744,750 Shares
at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
--------------------- --------------------- --------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital . . . . . . . . . $62,560 10.44% $62,628 10.44% $63,247 10.52%
------- ----- ------- ----- ------- -----
Tangible capital . . . . . . . $59,625 10.00% $59,693 10.00% $60,312 10.08%
Tangible capital
requirement. . . . . . . . . 8,944 1.50% 8,954 1.50% 8,974 1.50%
------- ----- ------- ----- ------- -----
Excess . . . . . . . . . . . . $50,681 8.50% $50,739 8.50% $51,338 8.58%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Core capital . . . . . . . . . $59,625 10.00% $59,693 10.00% $60,312 10.08%
Core capital requirement(2). . 17,888 3.00% 17,908 3.00% 17,948 3.00%
------- ----- ------- ----- ------- -----
Excess . . . . . . . . . . . . $41,737 7.00% $41,785 7.00% $42,364 7.08%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Risk-based capital(3). . . . . $64,389 16.65% $64,457 16.66% $65,076 16.81%
Risk-based
capital requirement . . . . 30,944 8.00% 30,955 8.00% 30,976 8.00%
------- ----- ------- ----- ------- -----
Excess . . . . . . . . . . . . $33,445 8.65% $33,502 8.66% $34,100 8.81%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
- -------------------
(1) Based upon total assets of $570.7 million for purposes of GAAP capital,
adjusted total assets of $567.8 million for purposes of the tangible
capital and core capital requirements, and risk-weighted assets of $381.1
million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Percentage represents total core and supplementary capital divided by total
risk-weighted assets.
19
<PAGE>
PROVIDENT SAVINGS BANK, F.S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THE FOLLOWING CONSOLIDATED STATEMENT OF OPERATIONS OF PROVIDENT SAVINGS
BANK, F.S.B. AND SUBSIDIARIES FOR THE FISCAL YEARS ENDED JUNE 30, 1993, 1994 AND
1995 HAVE BEEN AUDITED BY PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS, WHOSE
REPORT THEREON APPEARS ELSEWHERE IN THIS PROSPECTUS. THESE STATEMENTS SHOULD BE
READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
INCLUDED ELSEWHERE HEREIN. THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED DECEMBER 31, 1994 AND 1995 ARE UNAUDITED BUT, IN THE OPINION OF
MANAGEMENT, REFLECT ALL ADJUSTMENTS CONSISTING ONLY OF NORMAL RECURRING
ADJUSTMENTS NECESSARY FOR A FAIR PRESENTATION OF THE RESULTS OF SUCH PERIODS.
THE RESULTS FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1995 ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS OF THE SAVINGS BANK THAT MAY BE EXPECTED FOR THE
ENTIRE FISCAL YEAR.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
------------------------ ----------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
(In Thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans (Note 3) . . . . . . . . . $37,745 $34,604 $34,045 $16,319 $19,990
Investment securities (Note 2) . 2,422 1,593 1,975 1,054 1,072
------- ------- ------- ------- -------
Total interest income. . . . 40,167 36,197 36,020 17,373 21,062
------- ------- ------- ------- -------
Interest expense:
Deposits (Note 7). . . . . . . . 19,913 17,665 21,189 9,802 12,396
Borrowings . . . . . . . . . . . 1,926 1,867 1,302 711 741
------- ------- ------- ------- -------
Total interest expense . . . . 21,839 19,532 22,491 10,513 13,137
------- ------- ------- ------- -------
Net interest income. . . . . . 18,328 16,665 13,529 6,860 7,925
Provision for loan losses (Note 3) 1,655 2,033 4,787 594 940
------- ------- ------- ------- -------
Net interest income, after
provision for loan losses . . 16,673 14,632 8,742 6,266 6,985
Non-interest income (loss):
Loan servicing and other fees. . 1,927 3,072 2,476 1,360 1,275
Gain (loss) on sale of loans, net 5,726 1,246 701 (238) 1,944
Gain on bulk sale of servicing rights -- 2,052 -- -- --
Gain on sale of investment securities 587 -- -- -- --
Gain on sale of FHLMC stock. . . 425 -- -- -- --
Other. . . . . . . . . . . . . . 977 1,141 1,308 753 589
------- ------- ------- ------- -------
Total non-interest income. . . 9,642 7,511 4,485 1,875 3,808
------- ------- ------- ------- -------
Non-interest expenses:
Salaries and employee benefits . 10,604 13,537 9,671 5,071 5,222
Premises and occupancy . . . . . 1,775 2,180 2,336 1,292 958
SAIF insurance premiums. . . . . 778 1,084 1,105 552 637
Telephone. . . . . . . . . . . . 386 634 460 254 227
Other. . . . . . . . . . . . . . 4,700 6,323 3,782 2,235 1,863
------- ------- ------- ------- -------
Total operating and
administrative expenses. . . 18,243 23,758 17,354 9,404 8,907
Real estate operations, net (Note 5) 125 366 1,600 598 180
------- ------- ------- ------- -------
Total non-interest expenses. . 18,368 24,124 18,954 10,002 9,087
------- ------- ------- ------- -------
Income (loss) before income taxes. 7,947 (1,981) (5,727) (1,861) 1,706
Provision (benefit) for
income taxes (Note 9). . . . . . 3,838 (648) (1,735) (689) 843
------- ------- ------- ------- -------
Net income (loss) . . . . . . $4,109 $ (1,333) $(3,992) $(1,172) $ 863
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The notes beginning at page F-7 are an integral part of these statements.
20
<PAGE>
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.
21
<PAGE>
COMPARISON OF FINANCIAL CONDITION
Total assets decreased from $580.3 million at June 30, 1994 to $567.2
million at June 30, 1995. Total assets increased to $570.7 million at December
31, 1995. In the face of increasing short-term interest rates throughout fiscal
1995, increasing long-term interest rates in the first half of fiscal 1995,
declining mortgage banking activities and reduced profitability, the Savings
Bank sought to stabilize its asset growth so as to reduce the effect on its
capital ratios. Loans receivable increased $51.4 million from $420.2 million at
June 30, 1994 to $471.6 million at June 30, 1995. As market interest rates
generally increased during 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 addition, as market interest
rates generally increased during fiscal 1995, refinancing activity and,
therefore, loan prepayments decreased significantly. Loans receivable decreased
$10.7 million to $460.8 million at December 31, 1995 as market interest rates
generally decreased and refinancing and, therefore, loan prepayments, increased.
Loans held for sale decreased from $83.0 million at June 30, 1994 to $34.5
million at June 30, 1995 as a result of a smaller volume of loan originations in
fiscal 1995. Loans held for sale increased to $56.5 million at December 31,
1995 as the volume of loan originations increased during the six months then
ended. Contributing to the decrease in total assets from June 30, 1994 was a
decrease in investment securities, which totalled $26.3 million at June 30,
1994, $20.1 million at June 30, 1995 and $21.5 million at December 31, 1995, and
a decrease in cash and overnight deposits from $19.9 million at June 30, 1994 to
$11.4 million at June 30, 1995 to $6.1 million at December 31, 1995. Prepaid
expenses and other assets, consisting primarily of deferred tax assets and
income taxes receivable, declined from $5.0 million at June 30, 1994 to $3.7
million at June 30, 1995 and increased to $5.1 million at December 31, 1995.
These fluctuations resulted principally from changes in the Savings Bank's
income tax position. See Note 9 of Notes to the Consolidated Financial
Statements.
Total liabilities decreased from $539.0 million at June 30, 1994 to $529.9
million at June 30, 1995. At December 31, 1995, total liabilities had increased
to $532.5 million. FHLB advances decreased from $51.1 million at June 30, 1994
to $33.1 million at June 30, 1995 to $20.1 million at December 31, 1995 as the
Savings Bank retired maturing FHLB advances rather than renew these borrowings.
As the volume of mortgage originations, and therefore the balance of loans held
for sale, decreased, the Savings Bank was less reliant on this funding source.
Deposits increased from $471.8 million at June 30, 1994 to $486.6 million at
June 30, 1995 to $498.5 million at December 31, 1995. The increase in deposits
was the result of increases in interest credited on deposits rather than inflows
of funds. During fiscal 1995 withdrawals exceeded deposits by $3.7 million and
interest credited totalled $18.5 million. This net withdrawal of deposits in
fiscal 1995 was not only the result of competitive investment alternatives for
customers (I.E., mutual funds, equity investments and U.S. Treasury obligations)
but also a result of management's intent to reduce the asset size of the Savings
Bank and contain interest costs. During the six months ended December 31, 1995,
deposits exceeded withdrawals by $1.0 million and interest credited totalled
$10.9 million. During this period, the Savings Bank made an effort to utilize
comparatively more deposit funding rather than more expensive FHLB advances.
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, declined from $11.1 million at June 30, 1994 to $8.2 million at June
30, 1995 as a result of a significant decline in loan prepayments in response to
increased market interest rates. As a result of declining market interest rates
during the six months ended December 31, 1995 and a corresponding increase in
loan prepayments associated with refinancing activities, accounts payable and
other liabilities increased to $13.9 million at December 31, 1995.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 AND
1995
GENERAL. The Savings Bank's operating results improved from a net loss of
$1.2 million for the six months ended December 31, 1994 to net income of
$863,000 for the six months ended December 31, 1995. The improvement in net
income was primarily attributable to an increased spread on interest-earning
assets, increased income from the sales of loans and reduced non-interest
expenses.
22
<PAGE>
NET INTEREST INCOME. Net interest income increased by $1.1 million, or
15.5%, from $6.9 million for the six months ended December 31, 1994 to $7.9
million for the six months ended December 31, 1995. 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 2.35% for the six months ended
December 31, 1994 to 2.68% for the six months ended December 31, 1995 as the
yield on ARMs increased more than the average rate paid on deposits.
INTEREST INCOME. Total interest income increased $3.7 million, or 21.2%,
from $17.4 million for the six months ended December 31, 1994 to $21.1 million
for the six months ended December 31, 1995. 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 $3.7 million from
$16.3 million for the six months ended December 31, 1994 to $20.0 million for
the like period in 1995. This increase is primarily attributable to the increase
in the average yield on the loan portfolio from 6.60% for the six months ended
December 31, 1994 to 7.88% for the six months ended December 31, 1995. The
increase in the average yield on loans is primarily a function of the changes in
the COFI index, whose average was 4.17% for the six months ended December 31,
1994 compared with an average of 5.11% for the same period in 1995. This
increase resulted in upward adjustments in the interest rates on the Savings
Bank's COFI-based ARMs. In addition, an increase in mortgage banking activities
during the six months ended December 31, 1995 accounted for a $12.8 million
increase in the average balance of loans receivable (including loans held for
sale). The Savings Bank originated $214.6 million in loans held for sale in the
six months ended December 31, 1995 compared with $58.4 million in the same six
months in 1994. Due to the small difference between short- and long-term
interest rates that prevailed during the six months ended December 31, 1995, the
interest rate on fully-indexed ARM loans generally exceeded rates available on
30-year fixed-rate mortgage loans. Accordingly, the level of refinancing
activities increased during this period as borrowers sought to replace ARM loans
with fixed-rate loans.
Interest income on investment securities increased by $53,000, or 7.6%, as
a result of higher yields. The average yield on investment securities increased
from 6.09% for the six months ended December 31, 1994 to 7.09% for the six
months ended December 31, 1995. This increase was partially offset by a $1.7
million decline in the average balance of investment securities from $22.9
million in 1994 to $21.2 million in 1995. Management used maturing security
investments to repay maturing FHLB advances.
INTEREST EXPENSE. Interest expense increased by $2.6 million, or 25.0%,
from $10.5 million during the six months ended December 31, 1994 to $13.1
million for the six months ended December 31, 1995. Interest expense on
deposits increased $2.6 million, or 26.5%, from $9.8 million for the six months
ended December 31, 1994 to $12.4 million for the same period in 1995 as a result
of both an increase in the average balance of total deposits and the 90 basis
point increase in the cost of deposits. The average balance of deposits
increased $17.9 million, or 3.8%, from $474.3 million in 1994 to $492.2 million
in 1995. This reflected management's strategy to replace FHLB advances and
other borrowings with relatively less expensive 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 the six months ended December 31,
1995, the Savings Bank paid higher rates on new and renewing certificates of
deposit, and some customers shifted from lower rate passbook, demand, and NOW
accounts to higher rate 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
$1.6 million, or 6.6%, the rate paid on this funding source increased from 4.64%
to 6.13%. Consequently, the interest expense on FHLB advances rose $137,000, or
23.5%, from $583,000 for the six months ended December 31, 1994 to $720,000 for
the six months ended December 31, 1995. Furthermore, the average balance of
other borrowings (principally reverse repurchase agreements) declined $5.5
million and the related interest expense also declined by $107,000 to $21,000
for the six months ended December 31, 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased 58.3%
from $594,000 for the six months ended December 31, 1994 to $940,000 for the six
months ended December 31, 1995. Net charge-offs were $1.2 million for both the
six months ended December 31, 1994 and the six months ended December 31, 1995.
With
23
<PAGE>
respect to the 1995 amount, commercial and multi-family net charge-offs totalled
$1.2 million. The recessionary economic conditions that have prevailed in
Southern California in recent years have resulted in increased loan repayment
delinquencies and defaults and have reduced the values of properties securing
loans made by the Savings Bank. The higher unemployment levels in the Savings
Bank's market area than those prevailing nationally and the continuation of
depressed real estate activity and values, together with regulatory
recommendations received in March 1995, prompted management to increase the
provision for loan losses in order to maintain the allowance for loan losses at
a level similar with that of June 1995. As a result, the allowance for loan
losses represented 1.0% of gross loans receivable at December 31, 1995 compared
with 1.1% at June 30, 1995. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of the portfolio, past experience, prevailing market conditions and
other relevant factors. Management also reviews individual loans for which full
collectibility may not be reasonably assured and considers, among other factors,
the estimated fair value of the underlying collateral. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Savings Bank's allowance for loan losses. Such agencies may require the
Savings Bank to provide additions to the allowance based upon judgments that may
differ from those of management. Although management uses the best information
available, future adjustments to the allowance may be necessary due to economic,
operating, regulatory and other conditions that may be beyond the Savings Bank's
control. While the Savings Bank maintains its allowance for loan losses at a
level which it considers to be adequate to provide for potential losses, there
can be no assurance that further additions will not be made to the allowance for
loan losses and that actual losses will not exceed the estimated amounts. See
"RISK FACTORS--Weakness in the Regional Economy and Adverse Effect on Asset
Quality."
NON-INTEREST INCOME. Total non-interest income increased by $1.9 million,
or 103.1%, from $1.9 million for the six months ended December 31, 1994 to $3.8
million for the six months ended December 31, 1995. Despite a decline in loan
servicing and other fees, total non-interest income increased principally as a
result of increased gains on sales of loans.
Loans sold increased from $130.9 million for the six months ended December
31, 1994 to $193.6 million for the six months ended December 31, 1995. Of the
$193.6 million of loans sold during the six months ended December 31, 1995,
$190.0 million were sold servicing-released. The increased volume of mortgage
banking activities significantly increased the results from the sale of loans
between the periods. Results from the sales of loans increased from a loss of
$238,000 for the six months ended December 31, 1994 to a gain of $1.9 million
for the six months ended December 31, 1995. Subsequent to the end of the 1994
fiscal year, management identified $45.8 million of 30-year fixed-rate loans in
the available for sale portfolio that had been originated between September 1993
and March 1994 and not been sold contrary to the intent at origination and the
Savings Bank's policy, which requires that loans be sold within 60 days of
origination. Due to the increase in market interest rates between the time such
loans were originated and June 30, 1994, the market value of the loans decreased
which required the Savings Bank to record a LOCOM adjustment of $4.7 million. A
portion of these loans were sold during the six months ended December 31, 1994.
Despite the LOCOM adjustment recorded as of June 30, 1994, additional losses
totalling $431,000 were incurred as a result of further declines in the market
value of these loans due to increases in market interest rates between June 30,
1994 and the time of sale.
The amount of loans serviced for others declined from an average balance of
$704.2 million for the six months ended December 31, 1994 to $642.3 million for
same period in 1995. As a result, income from loan servicing declined $85,000
to $1.3 million from $1.4 million. So long as the Saving Bank continues to sell
mortgage loans on a servicing-released basis, the size of the mortgage servicing
portfolio and, therefore, loan servicing income, are expected to decrease.
NON-INTEREST EXPENSE. Total non-interest expense declined $915,000 from
$10.0 million for the six months ended December 31, 1994 to $9.1 million for the
six months ended December 31, 1995, reflecting management's concerted efforts to
contain overhead and gain greater operating efficiencies. During the six months
ended December 31, 1995, salaries and employee benefits increased by $151,000,
or 3.0%, over the comparable period in 1994 as a
24
<PAGE>
result of the production related compensation expenses of increased mortgage
banking activities during 1995. Occupancy costs declined by $334,000, or 25.9%
between the periods. However, occupancy expenses for the six months ended
December 31, 1994 include $298,000 of charges related to the closing of offices
and related expenses within the Profed Mortgage division. Other expenses
declined by $314,000, or 10.3%, principally because of a reduction in the number
of mortgage banking offices. The Savings Bank expects to experience increased
costs following consummation of the Conversion because of expenses associated
with the ESOP and the other stock benefit plans as well as the additional costs
of being a public company.
The loss from real estate operations declined from $598,000 for the six
months ended December 31, 1994 to $180,000 for the same period in 1995. The
decreased loss reflects the liquidation of the Savings Bank's one remaining real
estate joint venture in July 1995 and reduced provisions for losses on
foreclosed real estate. There were no provisions for losses on joint ventures
during the six months ended December 31, 1995 compared with a provision of
$132,000 during the six months ended December 31, 1994. Provisions for losses
on foreclosed real estate decreased by $296,000 from $456,000 during the six
months ended December 31, 1994 to $160,000 during the same period in 1995.
INCOME TAXES. Income taxes were $843,000 for the six months ended December
31, 1995 (resulting in an effective tax rate of 49.4%) compared with a tax
benefit of $689,000 for the six months ended December 31, 1994 (resulting in an
effective tax rate of 37.0%). The increase of $1.5 million in tax expense is
principally attributable to an increase in pre-tax income of $3.6 million
between the periods. The Savings Bank has a California net operating loss
carry-forward which is reduced by 50% in future tax years. As a result, the
Savings Bank did not fully tax benefit its tax losses for the six months ended
December 31, 1994, thereby decreasing the effective tax rate. The Savings Bank
anticipates that its effective tax rate for the 1996 fiscal year will be less
than that for the six months ended December 31, 1995.
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.
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
25
<PAGE>
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 $17.7 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 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
26
<PAGE>
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 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.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1993 AND 1994
GENERAL. Net income decreased from $4.1 million for the year ended June
30, 1993 to a loss of $1.3 million for the year ended June 30, 1994. Loan
originations increased as market interest rates declined; however, the income
that resulted from the increase in originations did not offset the decrease in
net interest income caused by lower interest rates received on loans and
investments and the increase in the provision for loan losses. In addition, the
Savings Bank recorded a valuation adjustment of $4.7 million on loans receivable
held for sale that took the Savings Bank from positive net income to a net loss
for fiscal 1994.
NET INTEREST INCOME. Net interest income declined by $1.7 million, or
9.1%, from $18.3 million for the year ended June 30, 1993 to $16.7 million for
the year ended June 30, 1994. This decrease resulted from a 42 basis point
decrease in the spread between the yield on interest-earning assets and the rate
paid on interest-bearing
27
<PAGE>
liabilities from 3.13% for the year ended June 30, 1993 to 2.71% for the year
ended June 30, 1994. This was offset in part by an increase in net interest-
earning assets from $35.6 million during fiscal 1993 to $41.5 million during
fiscal 1994.
INTEREST INCOME. Total interest income declined by $4.0 million, or 9.9%,
from $40.2 million for the year ended June 30, 1993 to $36.2 million for the
year ended June 30, 1994. Interest income decreased primarily as a result of
lower interest income on loans, mortgage-backed securities and investment
securities. Interest income on loans (including loans held for sale) declined
by $3.1 million, or 8.3%, from $37.7 million during fiscal 1993 to $34.6 million
during fiscal 1994. The decline in interest income on loans was attributable to
a reduction in the average yield from 8.03% in fiscal 1993 to an average yield
of 6.76% in fiscal 1994. This decline was the result of the combination of two
factors: (1) the decline in market interest rates, which adversely affected the
yield on loans held for sale, and (2) a decline in the COFI rate, which had an
adverse effect on the yield on ARM loans in the held to maturity loan portfolio.
The COFI, which is used to determine the interest rate on most of the ARM loans
in the Savings Bank's held to maturity portfolio, declined from an average of
4.46% in fiscal 1993 to 3.80% in fiscal 1994. The decline in interest income on
loans receivable (including loans held for sale) caused by a lower average yield
was partially offset by a larger average balance of loans receivable (including
loans held for sale) from $469.8 million during fiscal 1993 to $512.2 million
during fiscal 1994. This increase was the result of a larger number of loans
originated for sale in fiscal 1994 than in fiscal 1993.
Interest income on investment securities decreased by $980,000 between
fiscal 1993 and fiscal 1994 as investment securities were liquidated to meet the
funding demands of mortgage banking operations. The average balance of
investment securities declined by $18.7 million from $44.6 million during fiscal
1993 to $25.9 million during fiscal 1994. Also contributing to the lower
interest income on investment securities was a decrease in the average yield on
investment securities from 4.58% in fiscal 1993 to 4.09% in fiscal 1994.
INTEREST EXPENSE. Interest expense decreased by $2.3 million, or 10.6%,
from $21.8 million for the year ended June 30, 1993 to $19.5 million for the
year ended June 30, 1994. Interest on deposit accounts declined by $2.2
million, or 11.3%, from $19.9 million for fiscal 1993 as compared to $17.7
million for fiscal 1994 primarily as a result of the general decline in market
interest rates. This decline resulted in a decrease in the Savings Bank's
average rate paid on deposits from 4.38% in fiscal 1993 to 3.80% in fiscal 1994
that was offset somewhat by a $10.3 million increase in the average balance of
deposits. Interest paid on FHLB advances decreased $56,000 between the periods.
Although the average balance of FHLB advances increased by $5.1 million from
$44.9 million during fiscal 1993 to $50.0 million during fiscal 1994, the
average cost of such borrowings decreased from 4.15% to 3.61% between the
periods. The Savings Bank favored the use of FHLB advances during fiscal 1994
because the cost of such borrowings was less than the average cost of deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$1.7 million in fiscal 1993 to $2.0 million in fiscal 1994, an increase of
$378,000, or 22.8%. In fiscal 1994 the Savings Bank began to experience an
increased deterioration in asset quality that was more than a temporary cycle
due to declining values for multi-family and commercial real estate in the
Savings Bank's lending area. The amount of nonperforming assets to total assets
decreased slightly from 1.63% at June 30, 1993 to 1.49% at June 30, 1994;
however, the level of charge-off activity increased significantly. In fiscal
1993, net charge-offs totalled $208,000 compared to $2.0 million in 1994. Net
charge-offs in fiscal 1994 were concentrated more in multi-family and commercial
properties ($1.1 million and $536,000, respectively) than they had been
historically. This change, combined with a $1.2 million increase in the amount
of nonaccrual commercial and multi-family loans at June 30, 1994, prompted
management to increase the provision for loan losses during fiscal 1994. None
of these charge-offs was related to the Northridge Earthquake which occurred in
January 1994.
NON-INTEREST INCOME. Total non-interest income decreased by $2.1 million,
or 22.1%, from $9.6 million for the year ended June 30, 1993 to $7.5 million for
the year ended June 30, 1994. The decrease in total other income between the
periods is primarily the result of a valuation reserve on loans receivable held
for sale which was partially offset by the bulk sale of loan servicing rights
and an increase in loan servicing and other fees.
28
<PAGE>
Market conditions in fiscal 1994 were much more competitive than fiscal
1993 and secondary marketing profit margins were lower as a result. Net gains
on the sale of loans decreased from $5.7 million in fiscal 1993 to $1.2 million
(after the LOCOM adjustment) in fiscal 1994, while the related level of loans
sold increased from $612.9 million in fiscal 1993 to $1.0 billion in fiscal
1994. As a result, the average gain on loan sales declined from nearly 93 basis
points during fiscal 1993 to 12 basis points in fiscal 1994. At June 30, 1994
the Savings Bank recorded a $4.7 million LOCOM adjustment on the loans
available-for-sale portfolio following the identification of $45.8 million of
30-year fixed-rate loans being carried in the available for sale portfolio
contrary to the intent at origination.
In December 1993, the Savings Bank completed a bulk sale of servicing
rights on $184.6 million of mortgage loans for a gain of $2.1 million. Until
the middle of in fiscal 1994, most loans were sold on a servicing-retained
basis. Thus, despite the bulk sale of loan servicing rights, the Savings Bank's
average servicing portfolio increased from $570.1 million for fiscal 1993 to
$829.3 million for fiscal 1994. As a direct result of this increase, loan
servicing fee income increased from $1.9 million in fiscal 1993 to $3.1 million
in fiscal 1994.
During fiscal 1993 investment securities and mortgage-backed securities
aggregating approximately $92.2 million were sold generating a net profit on
$587,000 and shares of FHLMC stock were sold at a gain of $425,000. No
comparable transactions occurred in fiscal 1994.
NON-INTEREST EXPENSE. Total non-interest expense increased $5.8 million
from $18.4 million for the year ended June 30, 1993 to $24.1 million for the
year ended June 30, 1994. Fiscal 1994 was a period of expansion of the Savings
Bank's mortgage banking operations. During the year the Savings Bank opened
several new wholesale and retail loan production offices and increased both
salaried and commissioned staff. As a result, all general and administrative
expenses increased, particularly salaries and employee benefits ($2.9 million,
or 27.7%) and occupancy expenses ($405,000, or 22.8%) and other expense ($1.9
million, or 36.8%).
INCOME TAXES. Income tax expense was $3.8 million for the year ended June
30, 1993 (for an effective tax rate of 48.3%), compared to a tax benefit of
$648,000 for the year ended June 30, 1994 (for an effective tax rate of 32.7%).
The decrease in income tax expense was a result of a decline in pre-tax income
from $7.9 million in fiscal 1993 to a loss of $2.0 million in fiscal 1994. As a
result, the Savings Bank created a California net operating loss carry-forward,
which is reduced by 50% in future tax years. Consequently, the Savings Bank did
not fully tax benefit for its tax losses for the fiscal year 1994, resulting in
a decreased effective tax rate.
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the periods
indicated 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.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------
1993 1994
-------------------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ----- ------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)(2) . . . . . . . . $469,850 $37,745 8.03% $512,173 $34,604 6.76%
Investment securities . . . . . . . . . . . 44,591 2,041 4.58 25,926 1,060 4.09
FHLB stock. . . . . . . . . . . . . . . . . 3,853 55 1.43 4,726 174 3.68
Interest-earning deposits . . . . . . . . . 17,616 326 1.85 14,938 359 2.40
--------- ------ -------- ------
Total interest-earning assets. . . . . 535,910 40,167 7.50 557,763 36,197 6.49
-------- ------ -------- ------
Non-interest-earning assets. . . . . . . . . 23,654 22,761
--------- ---------
Total assets . . . . . . . . . . . . . $559,564 $580,524
-------- --------
-------- --------
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . $ 89,066 2,658 2.98 $ 71,883 1,679 2.34
Demand and NOW accounts . . . . . . . . . . 55,389 1,308 2.36 109,544 3,326 3.04
Certificate accounts. . . . . . . . . . . . 310,093 15,947 5.14 283,421 12,660 4.47
-------- ------ -------- ------
Total deposits . . . . . . . . . . . . 454,548 19,913 4.38 464,848 17,665 3.80
FHLB advances . . . . . . . . . . . . . . . 44,893 1,862 4.15 49,987 1,806 3.61
Other borrowings. . . . . . . . . . . . . . 772 64 8.30 1,388 61 4.42
-------- ------ -------- ------
Total interest-bearing liabilities . . 500,213 21,839 4.37 516,223 19,532 3.78
------ ------
Non-interest-bearing liabilities. . . . . . 19,220 20,954
-------- --------
Total liabilities. . . . . . . . . . . 519,433 537,177
-------- --------
Retained earnings . . . . . . . . . . . . . 40,131 43,347
-------- --------
Total liabilities and
retained earnings . . . . . . . . . . $559,564 $580,524
-------- ---------
-------- ---------
Net interest income . . . . . . . . . . . . $18,328 $16,665
------- -------
------- -------
Interest rate spread (3). . . . . . . . . . 3.13% 2.71%
Net interest margin (4) . . . . . . . . . . 3.42% 2.99%
Ratio of average interest-earning
assets to average interest-bearing
liabilities. . . . . . . . . . . . . . . . 107.14% 108.05%
<CAPTION>
--------------------------------------------
1995
--------------------------------------------
Average
Average Yield/
Balance Interest Cost
-------- ------- ------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)(2) . . . . . . . . $494,087 $34,045 6.89%
Investment securities . . . . . . . . . . . 20,636 1,284 6.23
FHLB stock. . . . . . . . . . . . . . . . . 4,944 268 5.41
Interest-earning deposits . . . . . . . . . 11,885 423 3.56
--------- -------
Total interest-earning assets. . . . . 531,552 36,020 6.78
-------- ------
Non-interest-earning assets. . . . . . . . . 23,332
--------
Total assets . . . . . . . . . . . . . $554,884
--------
--------
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . $ 55,805 1,466 2.63
Demand and NOW accounts . . . . . . . . . . 126,913 5,082 4.00
Certificate accounts. . . . . . . . . . . . 294,701 14,641 4.97
-------- ------
Total deposits . . . . . . . . . . . . 477,419 21,189 4.44
FHLB advances . . . . . . . . . . . . . . . 21,655 1,070 4.94
Other borrowings. . . . . . . . . . . . . . 4,302 232 5.38
-------- -------
Total interest-bearing liabilities . . 503,376 22,491 4.47
------
Non-interest-bearing liabilities. . . . . . 10,804
--------
Total liabilities. . . . . . . . . . . 514,180
--------
Retained earnings . . . . . . . . . . . . . 40,704
--------
Total liabilities and
retained earnings . . . . . . . . . . $554,884
--------
--------
Net interest income . . . . . . . . . . . . $13,529
-------
-------
Interest rate spread (3). . . . . . . . . . 2.31%
Net interest margin (4) . . . . . . . . . . 2.55%
Ratio of average interest-earning
assets to average interest-bearing
liabilities. . . . . . . . . . . . . . . . 105.60%
</TABLE>
(Footnotes on the following page)
30
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
--------------------------------------------------------------------------------
1994 1995
------------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost(5) Balance Interest Cost(5)
------- -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)(2). . . . . . . . $494,855 $16,319 6.60% $507,648 $19,990 7.88%
Investment securities . . . . . . . . . . . 22,939 699 6.09 21,193 752 7.09
FHLB stock. . . . . . . . . . . . . . . . . 5,182 138 5.34 4,429 110 4.97
Interest-earning deposits . . . . . . . . . 13,469 217 3.22 11,977 210 3.51
-------- ------ ------- ------
Total interest-earning assets. . . . . 536,445 17,373 6.48 545,247 21,062 7.73
-------- ------ ------- ------
Non-interest-earning assets. . . . . . . . . 23,253 21,160
---------- --------
Total assets . . . . . . . . . . . . . $559,698 $566,407
-------- --------
-------- --------
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . $60,328 751 2.47 $ 51,440 953 3.68
Demand and NOW accounts . . . . . . . . . . 134,056 2,576 3.81 113,166 2,287 4.01
Certificate accounts. . . . . . . . . . . . 279,922 6,475 4.59 327,594 9,156 5.54
-------- ------ ------- -------
Total deposits . . . . . . . . . . . . 474,306 9,802 4.10 492,200 12,396 5.00
FHLB advances . . . . . . . . . . . . . . . 24,935 583 4.64 23,292 720 6.13
Other borrowings. . . . . . . . . . . . . . 6,447 128 3.94 996 21 4.17
-------- ------ ------- -------
Total interest-bearing liabilities . . 505,688 10,513 4.12 516,488 13,137 5.05
------ -------
Non-interest-bearing liabilities. . . . . . 12,194 12,079
-------- -------
Total liabilities. . . . . . . . . . . 517,882 528,567
-------- -------
Retained earnings . . . . . . . . . . . . . 41,816 37,840
-------- -------
Total liabilities and
retained earnings . . . . . . . . . . $559,698 $566,407
-------- --------
-------- --------
Net interest income . . . . . . . . . . . . $6,860 $7,925
------ ------
------ ------
Interest rate spread (3) . . . . . . . . . . 2.35% 2.68%
Net interest margin (4). . . . . . . . . . . 2.56% 2.91%
Ratio of average interest-earning
assets to average interest-bearing
liabilities . . . . . . . . . . . . . . . . 106.08% 105.57%
</TABLE>
- --------------------------------------
(1) Includes loans available for sale.
(2) Includes deferred loan fee amortization of $552,000, $478,000, $98,000,
($1,000) and $118,000 for the years ended June 30, 1993, 1994 and 1995 and
the six months ended December 31, 1994 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.
(5) Annualized for purposes of comparability with year-end data.
31
<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.
<TABLE>
<CAPTION>
Six Months
Ended At
Year Ended June 30, December 31,(2) December 31,
------------------------ ----------------
1993 1994 1995 1994 1995 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable (1). . . . . . . . . . . 8.03% 6.76% 6.89% 6.60% 7.88% 7.98%
Investment securities . . . . . . . . . . 4.58 4.09 6.23 6.09 7.09 5.78
FHLB stock. . . . . . . . . . . . . . . . 1.43 3.68 5.41 5.34 4.97 5.16
Interest-earning deposits . . . . . . . . 1.85 2.40 3.56 3.22 3.51 1.16
All interest-earning assets . . . . . . . 7.50 6.49 6.78 6.48 7.73 7.76
Weighted average rate paid on:
Passbook accounts . . . . . . . . . . . . 2.98 2.34 2.63 2.47 3.68 2.74
Demand and NOW accounts . . . . . . . . . 2.36 3.04 4.00 3.81 4.01 3.73
Certificate accounts. . . . . . . . . . . 5.14 4.47 4.97 4.59 5.54 5.68
FHLB advances . . . . . . . . . . . . . . 4.15 3.61 4.94 4.64 6.13 6.05
Other borrowings. . . . . . . . . . . . . 8.30 4.42 5.38 3.94 4.17 --
All interest-bearing liabilities. . . . . 4.37 3.78 4.47 4.12 5.05 4.96
Interest rate spread (spread between
weighted average rates on all interest-
earning assets and all interest-
bearing liabilities). . . . . . . . . . . 3.13 2.71 2.31 2.35 2.68 2.80
Net interest margin (net interest income
as a percentage of average
interest-earning assets). . . . . . . . . 3.42 2.99 2.55 2.56 2.91 --
</TABLE>
- ------------------------------
(1) Includes loans available for sale.
(2) Annualized.
32
<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.
<TABLE>
<CAPTION>
Year Ended June 30,
1994 Compared to Year
Ended June 30, 1993
Increase (Decrease) Due to
------------------------------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
<S> <C> <C> <C> <C>
Interest income:
Loans receivable(1) . . . . . . . . . . . . $(6,001) $3,401 $(541) $(3,141)
Investment securities . . . . . . . . . . . (217) (854) 90 (981)
FHLB stock. . . . . . . . . . . . . . . . . 87 12 20 119
Interest-bearing deposits . . . . . . . . . 98 (50) (15) 33
------- ------- ------- -------
Total net change in income
on interest-earning assets . . . . . . . (6,033) 2,509 (446) (3,970)
------- ------- ------- -------
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . (578) (513) 112 (979)
Demand and NOW accounts . . . . . . . . . . 375 1,278 365 2,018
Certificate accounts. . . . . . . . . . . . (2,097) (1,371) 180 (3,287)
FHLB advances . . . . . . . . . . . . . . . (240) 211 (27) (56)
Other borrowings. . . . . . . . . . . . . . (30) 51 (24) (3)
------- ------- ------- -------
Total net change in expense
on interest-bearing
liabilities. . . . . . . . . . . . . . . (2,570) (344) 607 (2,307)
------- ------- ------- -------
Net change in net
interest income . . . . . . . . . . . . . . $(3,463) $2,853 $(1,053) $(1,663)
------- ------- ------- -------
------- ------- ------- -------
Year Ended June 30,
1995 Compared to Year
Ended June 30, 1994
Increase (Decrease) Due to
----------------------------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable(1) . . . . . . . . . . . . $ 687 $(1,222) $ (24) $ (559)
Investment securities . . . . . . . . . . . 554 (217) (113) 224
FHLB stock. . . . . . . . . . . . . . . . . 82 8 4 94
Interest-bearing deposits . . . . . . . . . 172 (73) (35) 64
------ ------- ------ -------
Total net change in income
on interest-earning assets . . . . . . . 1,495 (1,504) (168) (177)
------ -------- ------ --------
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . 209 (376) (46) (213)
Demand and NOW accounts . . . . . . . . . . 1,061 527 168 1,756
Certificate accounts. . . . . . . . . . . . 1,421 504 56 1,981
FHLB advances . . . . . . . . . . . . . . . 664 (1,024) (376) (736)
Other borrowings. . . . . . . . . . . . . . 13 129 29 171
------ -------- ------ -------
Total net change in expense
on interest-bearing
liabilities. . . . . . . . . . . . . . . 3,368 (240) (169) 2,959
------ -------- ------ -------
Net change in net
interest income . . . . . . . . . . . . . . $(1,873) $(1,264) $ 1 $(3,136)
------ -------- ----- --------
------ -------- ----- --------
Six Months Ended December 31,
1995 Compared to
Six Months Ended December 31, 1994
Increase (Decrease) Due to
------------------------------------------
Rate/
Rate Volume Volume Net
---- ------ ------ ---
<S> <C> <C> <C> <C>
Interest income:
Loans receivable(1) . . . . . . . . . . . . $3,167 $ 422 $82 $3,671
Investment securities . . . . . . . . . . . 115 (53) (9) 53
FHLB stock. . . . . . . . . . . . . . . . . (9) (20) 1 (28)
Interest-bearing deposits . . . . . . . . . 19 (24) (2) (7)
------ ------- ---- -------
Total net change in income
on interest-earning assets . . . . . . . 3,292 325 72 3,689
------ ------ --- -------
Interest-bearing liabilities:
Passbook accounts . . . . . . . . . . . . . 367 (111) (54) 202
Demand and NOW accounts . . . . . . . . . . 133 (401) (21) (289)
Certificate accounts. . . . . . . . . . . . 1,348 1,103 230 2,681
FHLB advances . . . . . . . . . . . . . . . 187 (38) (12) 137
Other borrowings. . . . . . . . . . . . . . 8 (109) (6) (107)
------ -------- ---- ------
Total net change in expense
on interest-bearing
liabilities. . . . . . . . . . . . . . . 2,043 444 137 2,624
------- ------ ---- ------
Net change in net
interest income . . . . . . . . . . . . . . $1,249 $ (119) $(65) $ 1,065
------ -------- ----- -------
------ -------- ----- -------
</TABLE>
- ---------------
(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.
33
<PAGE>
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 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 December
31, 1995 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
400 48,636 (9,347) (16) 8.59 (119)bp
300 53,433 (4,550) (8) 9.29 (49)bp
200 56,761 (1,221) (2) 9.75 (4)bp
100 58,226 243 0 9.90 11bp
0 57,983 0 0 9.79 0
(100) 57,253 (729) (1) 9.61 (18)bp
(200) 55,959 (2,024) (3) 9.35 (43)bp
(300) 55,264 (2,718) (5) 9.19 (59)bp
(400) 56,498 (1,485) (3) 9.32 (47)bp
</TABLE>
- --------------------
(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 December 31, 1995 ("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.
34
<PAGE>
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 December 31, 1995,
the change in NPV as a percentage of portfolio value of total assets was
negative 0.34%, 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.
<TABLE>
<CAPTION>
At At At
December 31, September 30, December 31,
1995 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets . 9.79% 9.60% 10.09%
Exposure Measure: Post-Shock NPV Ratio. . . . . 9.35 9.15 8.89
Sensitivity Measure: Change in NPV Ratio. . . . (43)bp (45)bp (120)bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of PV of Assets . . . . . . . (0.34)% (0.35)% (1.44)%
Interest Rate Risk Capital Component ($000). . . -- -- --
</TABLE>
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 December 31, 1995,
cash (including overnight deposits) totalled $6.1 million, or 1.1% 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 $20.1 million at December 31, 1995.
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.
35
<PAGE>
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 December 31, 1995 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, 1993, 1994 and 1995 and the six
months ended December 31, 1995, the Savings Bank originated loans in the amounts
of $803.9 million, $1.1 billion, $255.1 million and $236.7 million,
respectively. At December 31, 1995, the Savings Bank had loan commitments
totalling $30.7 million and undisbursed loans in process totalling $6.0 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 December 31, 1995 totalled $246.5
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's cash flows are comprised of three primary
classifications: cash flows from operating activities, financing activities, and
investing activities. Cash flows (used for) provided by operating activities
were $(49.7) million, $14.6 million and $49.5 million for the years ended June
30 1993, 1994 and 1995, respectively, and $74.2 million and $(15.2) million for
the six months ended December 31, 1994 and 1995, respectively. Net cash
provided by (used for) financing activities consisted primarily of net activity
in demand and time deposits, FHLB advances and securities sold under agreements
to repurchase. The net (decrease) increase in deposits was $(253,000), $17.7
million and $14.8 million for the years ended June 30, 1993, 1994 and 1995,
respectively, and $108,000 and $11.9 million for the six months ended December
31, 1994 and 1995, respectively. The net (decrease) increase in FHLB advances
was $35.0 million, $(25.0) million and $(18.0) million for the years ended June
30, 1993, 1994 and 1995, respectively, and $(33.0) million and $(13.0) million
for the six months ended December 31, 1994 and 1995, respectively. The net
(decrease) increase in securities sold under agreements to repurchase was zero,
$5.1 million and $(3.1) million for the years ended June 30, 1993, 1994 and
1995, respectively, and $(5.1) million and $(2.0) million for the six months
ended December 31, 1994 and 1995, respectively. Net cash (used for) provided by
investing activities consisted primarily of net increase in loans receivable,
purchases of investment securities, and proceeds of disposal of real estate
offset by maturity of investment securities. Net increase in loans receivable
was $19.3 million, $22.0 million and $67.4 million for the years ended June 30,
1993, 1994 and 1995, respectively, and $57.3 million and $(7.8) million for the
six months ended December 31, 1994 and 1995, respectively. Purchases of
investment securities were zero, $23.1 million and $330.3 million for the years
ended June 30, 1993, 1994 and 1995, respectively, and $228.5 million and $97.2
million for the six months ended December 31, 1994 and 1995, respectively.
Maturities of investment securities were zero, zero and $334.0 million for the
years ended June 30, 1993, 1994 and 1995, respectively, and $241.7 million and
$96.3 million for the six months ended December 31, 1994 and 1995, respectively.
Proceeds from disposal of real estate were $927,000, $5.3 million and $8.2
million for the years ended June 30, 1993, 1994 and 1995, respectively, and $3.8
million and $6.2 million for the six months ended December 31, 1994 and 1995,
respectively.
The Savings Bank is required to maintain specific amounts of capital
pursuant to OTS requirements. As of December 31, 1995, 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 6.21%, 6.21% and
10.50%, respectively.
36
<PAGE>
For a detailed discussion of regulatory capital requirements, see "REGULATION --
Federal Regulation of Savings Associations -- Capital Requirements." See also
"HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. In May 1993, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," which became effective for the Savings Bank for the fiscal year
beginning July 1, 1995. This statement requires a lender to consider a loan to
be impaired if the lender believes it is probable that it will be unable to
collect all principal and interest due according to the contractual terms of the
loan. If a loan is impaired, the lender will be required to record a loan
valuation allowance equal to the present value of the estimated future cash
flows discounted at the loan's effective rate or at the loan's observable market
price or fair value of the collateral. In October 1994, FASB issued SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," which amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on impaired loans and eliminates the
income recognition provisions in SFAS No. 114. SFAS No. 118 also requires
disclosure of certain information about the recorded investment in impaired
loans and how the creditor recognizes interest income related to impaired loans.
SFAS No. 118 became effective for the Savings Bank for the fiscal year beginning
July 1, 1995. The adoption of these statements did not have a material effect
on the Savings Bank's financial condition or results of operations at December
31, 1995.
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 Holding Company.
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 December 15, 1995. The Holding Company 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
37
<PAGE>
implementation of this statement will not have a significant effect on the
Savings Bank'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 Holding Company 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.
BUSINESS OF THE HOLDING COMPANY
GENERAL
The Holding Company was organized as a Delaware business corporation at the
direction of the Savings Bank in January 1996 for the purpose of becoming a
holding company for the Savings Bank upon consummation of the Conversion. Upon
consummation of the Conversion, the Savings Bank will be a wholly-owned
subsidiary of the Holding Company.
BUSINESS
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon consummation of the Conversion, the Holding
Company's sole business activity will be the ownership of all of the outstanding
stock of the Savings Bank. In the future, the Holding Company may acquire or
organize other operating subsidiaries, although there are no current plans,
arrangements, agreements or understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Savings Bank with
the payment of appropriate rental fees, as required by applicable law. The
Holding Company will utilize the employees of the Savings Bank.
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<PAGE>
Because the primary activity of the Holding Company will be to hold the
capital stock of the Savings Bank, the competitive conditions applicable to the
Holding Company will be the same as those confronting the Savings Bank. See
"BUSINESS OF THE SAVINGS BANK -- Competition."
BUSINESS OF THE SAVINGS BANK
GENERAL
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.
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 the Profed Mortgage division, the Savings Bank has expanded its
retail lending market to include a larger portion of southern California and
southern Nevada. Profed 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. At November 1995, the unemployment rate in Riverside
County was 9.7% compared to 5.3% for the United States. 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. See
"RISK FACTORS -- Weakness in the Regional Economy and Adverse Effect on Asset
Quality." The Savings Bank faces intense competition for deposits and loan
originations. See "-- Competition" and "RISK FACTORS -- 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
$460.8 million at December 31, 1995, representing approximately 80.7% of
consolidated total assets.
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<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
the Savings Bank's loan portfolio by type of loan and type of security at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------
1991 1992 1993
-------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Mortgage loans:
One- to four-family . . . . . . . . $220,875 53.96% $211,572 53.12% $241,019 57.76%
Multi-family. . . . . . . . . . . . 61,634 15.06 67,065 16.84 66,871 16.02
Commercial. . . . . . . . . . . . . 77,585 18.96 70,885 17.79 68,915 16.51
Construction. . . . . . . . . . . . 14,747 3.60 13,081 3.28 11,817 2.83
-------- ------ -------- ------ -------- ------
Total mortgage loans . . . . . . . 374,841 91.58 362,603 91.03 388,622 93.12
Consumer loans . . . . . . . . . . . 33,681 8.23 34,934 8.77 28,297 6.78
Other loans. . . . . . . . . . . . . 775 0.19 786 0.20 402 0.10
-------- ------ -------- ------ -------- ------
Total loans receivable. . . . . . 409,297 100.00% 398,323 100.00% 417,321 100.00%
-------- ------ -------- ------ -------- ------
------ ------ ------
Less:
Loans in process. . . . . . . . . . 6,570 5,472 8,183
Deferred loan fees and discounts. . 2,382 1,817 1,201
Allowance for loan losses . . . . . 1,091 1,839 3,286
-------- -------- --------
Total loans receivable, net. . . . $399,254 $389,195 $404,651
-------- -------- --------
-------- -------- --------
Loans held for sale. . . . . . . . . $ 47,784 $ 33,294 $104,409
-------- -------- --------
-------- -------- --------
TYPE OF SECURITY:
Residential real estate
Single-family. . . . . . . . . . . $243,431 59.48% $231,737 58.18% $261,555 62.67%
Other dwellings. . . . . . . . . . 62,939 15.38 69,932 17.56 68,296 16.37
Commercial or industrial real estate 79,205 19.35 70,885 17.80 68,915
Land . . . . . . . . . . . . . . . . 775 0.19 786 0.20 402 0.10
Savings accounts . . . . . . . . . . 60 0.01 35 0.01 -- --
Other and unsecured. . . . . . . . . 22,887 5.59 24,948 6.26 18,153 4.35
-------- ------ -------- ------ -------- ------
Total loans receivable . . . . . . 409,297 100.00% 398,323 100.00% 417,321 100.00%
-------- ------ -------- ------ -------- ------
------ ------ ------
Less:
Loans in process. . . . . . . . . . 6,570 5,472 8,183
Deferred loan fees and discounts. . 2,382 1,817 1,201
Allowance for loan losses . . . . . 1,091 1,839 3,286
-------- -------- --------
Total loans receivable, net . . . . $399,254 $389,195 $404,651
-------- -------- --------
-------- -------- --------
<CAPTION>
At June 30,
------------------------------------------- At
1994 1995 December 31, 1995
-------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Mortgage loans:
One- to four-family . . . . . . . . $277,986 64.94% $345,034 71.59% $333,586 70.63%
Multi-family. . . . . . . . . . . . 63,719 14.88 53,531 11.11 54,515 11.54
Commercial. . . . . . . . . . . . . 63,659 14.87 61,518 12.76 58,817 12.45
Construction. . . . . . . . . . . . 4,324 1.01 5,938 1.23 10,251 2.17
-------- ------ --------- ------ -------- ------
Total mortgage loans . . . . . . . 409,688 95.70 466,021 96.69 457,169 96.79
Consumer loans . . . . . . . . . . . 18,177 4.25 15,830 3.28 14,904 3.16
Other loans. . . . . . . . . . . . . 218 0.05 137 0.03 240 0.05
-------- ------ --------- ------ -------- ------
Total loans receivable. . . . . . 428,083 100.00% 481,988 100.00% 472,313 100.00%
-------- ------ --------- ------ -------- ------
------ ------ ------
Less:
Loans in process. . . . . . . . . . 3,324 4,121 6,013
Deferred loan fees and discounts. . 1,268 1,239 725
Allowance for loan losses . . . . . 3,332 5,085 4,774
-------- -------- --------
Total loans receivable, net. . . . $420,159 $471,543 $460,801
-------- -------- --------
-------- -------- --------
Loans held for sale. . . . . . . . . $ 83,049 $ 34,489 $ 56,544
-------- -------- --------
-------- -------- --------
TYPE OF SECURITY:
Residential real estate
Single-family. . . . . . . . . . . $288,413 67.37% $357,782 74.23% $349,431 73.99
Other dwellings. . . . . . . . . . 65,144 15.22 53,531 11.11 54,515 11.54
Commercial or industrial real estate 63,659 14.87 61,518 12.76 58,817 12.54
Land . . . . . . . . . . . . . . . . 218 0.05 137 0.03 240 0.05
Savings accounts . . . . . . . . . . -- -- -- -- -- --
Other and unsecured. . . . . . . . . 10,649 2.49 9,020 1.87 9,310 1.97
Total loans receivable . . . . . . 428,083 100.00% 481,988 100.00% 472,313 100.00%
-------- ------ -------- ------ -------- ------
------ ------ -------- ------
Less:
Loans in process. . . . . . . . . . 3,324 4,121 6,013
Deferred loan fees and discounts. . 1,268 1,239 725
Allowance for loan losses . . . . . 3,332 5,085 4,774
-------- -------- --------
Total loans receivable, net . . . . $420,159 $471,543 $460,801
-------- -------- --------
-------- -------- --------
</TABLE>
40
<PAGE>
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1995, regarding the dollar amount of principal
repayments becoming contractually due during the periods indicated for loans
held in the Savings Bank's portfolio. 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.
<TABLE>
<CAPTION>
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
-------- -------- ------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family. . . . . . . . . . $ 42 $ 261 $1,137 $ 6,276 $325,871 $333,587
Multi-family . . . . . . . . . . . . . 8 336 163 1,320 52,688 54,515
Commercial . . . . . . . . . . . . . . -- 126 440 5,206 53,044 58,816
Construction . . . . . . . . . . . . . 600 1,623 -- -- 8,028 10,251
Consumer loans . . . . . . . . . . . . . 4 106 1,452 8,612 4,730 14,904
Other loans. . . . . . . . . . . . . . . 137 28 75 -- -- 240
---- ------ ------ ------- -------- --------
Total loans receivable. . . . . . . . $791 $2,480 $3,267 $21,414 $444,361 $472,313
---- ------ ------ ------- -------- --------
---- ------ ------ ------- -------- --------
</TABLE>
The following table sets forth the dollar amount of all loans held in the
Savings Bank's portfolio due after December 31, 1996, which have fixed interest
rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed- Floating- or
Rates Adjustable-Rates Total
------ ---------------- -----
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family. . . . . . . . . . $49,691 $283,854 $333,545
Multi-family . . . . . . . . . . . . . 1,081 53,426 54,507
Commercial . . . . . . . . . . . . . . 1,983 56,833 58,816
Construction . . . . . . . . . . . . . -- 9,651 9,651
Consumer loans . . . . . . . . . . . . . 5,580 9,320 14,900
Other loans. . . . . . . . . . . . . . . -- 103 103
------- -------- --------
Total loans receivable. . . . . . . . $58,335 $413,187 $471,522
------- -------- --------
------- -------- --------
</TABLE>
41
<PAGE>
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 December 31, 1995, $333.6 million, or 70.6% 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 December 31, 1995,
adjustable-rate loans comprised 87.7% of the Savings Bank's loan portfolio.
The Savings Bank's 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 five 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 December 31, 1995, the Savings Bank had $139.4
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 between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
42
<PAGE>
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. See "RISK FACTORS -- Potential
Adverse Impact of Changes in Interest Rates." 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 December 31, 1995, the Savings Bank's loan portfolio
included $54.5 million in multi-family real estate loans and $58.8 million in
commercial real estate loans, or 11.5% and 12.5%, 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 December 31,
1995, the Savings Bank had 98 multi-family and 158 commercial real estate loans
in its portfolio, the largest of which was a commercial loan with a balance of
$3.5 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 December 31, 1995, $32.7 million, or 60.0%,
of the Savings Bank's multi-family loans were secured by five to 36 unit
projects, of which $22.2 million, or 40.7%, were located in Riverside or San
Bernardino Counties. At December 31, 1995, $22.2 million of the Savings Bank's
multi-family loans were secured by 37 or more unit projects, all of which 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 December
31, 1995, the Savings Bank had 26 commercial real estate and multi-family loans
with principal balances of over $1 million that totalled $44.5 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.
43
<PAGE>
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 December 31,
1995, approximately $44.4 million, or 81.5%, of the Savings Bank's multi-family
loans and approximately $43.3 million, or 73.6%, 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. See "RISK FACTORS -
- - Increased Risks Associated with Multi-Family and Commercial Real Estate
Lending." 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 December 31, 1995, the Savings Bank had no multi-family loans and two
commercial real estate loans with a total balance of $1.0 million that were 60
to 89 days past due and one multi-family loan with a balance of $148,000 and one
commercial real estate loan with a balance of $581,000 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 December 31, 1995, the Savings Bank's construction loan portfolio totalled
$10.3 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 December 31, 1995, 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 December 31,
1995, the Savings Bank had $15.1 million, or 3.2% 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, but as of
December 31, 1995 has not originated any commercial business loans. 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 successful in its efforts to originate commercial business loans.
44
<PAGE>
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. See "RISK FACTORS -- Reliance on Mortgage Banking
Operations" and "-- Competition."
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 fiscal
1995 and the first six months of fiscal 1996, wholesale loan originations
accounted for 69.9% and 51.3%, 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 December 31, 1995, 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 December 31, 1995, 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;
Sonoma 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. The Sonoma office has since been closed and an office opened in
Larkspur in Northern California. 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-unit properties 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.
45
<PAGE>
Generally, loans may be approved in two to four weeks from application and may
be funded within 30 days of submitting an application.
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 $24.4 million at December 31, 1995. See Note 13 of Notes to
Consolidated Financial Statements. 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 and call 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
$725,000 of net deferred mortgage loan fees at December 31, 1995.
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."
46
<PAGE>
The following table shows the Savings Bank's loan originations,
repurchases, sales and principal repayments during the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
-------------------------------------- -----------------------
1993 1994 1995 1994 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans originated for sale:
Retail originations . . . . . . . . . . . . $128,460 $ 117,279 $ 48,638 $ 13,318 $104,427
Wholesale originations. . . . . . . . . . . 555,568 906,098 112,842 45,042 110,178
-------- --------- -------- --------- --------
Total loans originated for sale . . . . . 684,028 1,023,377 161,480 58,360 214,605
-------- --------- -------- --------- --------
Loans sold(1):
Servicing released . . . . . . . . . . . . 211,531 558,726 198,463 124,144 190,015
Servicing retained . . . . . . . . . . . . 401,382 486,011 11,577 6,718 3,538
-------- --------- -------- --------- --------
Total loans sold . . . . . . . . . . . . 612,913 1,044,737 210,040 130,862 193,553
-------- --------- -------- --------- --------
Loans originated for portfolio:
Mortgage loans:
One- to four-family . . . . . . . . . . . 85,688 115,247 78,227 57,953 11,265
Multi-family. . . . . . . . . . . . . . . 9,775 2,792 3,115 732 3,806
Commercial . . . . . . . . . . . . . . . . 1,073 436 3,495 1,481 --
Construction . . . . . . . . . . . . . . . 12,184 5,205 6,746 2,824 5,797
Consumer loans. . . . . . . . . . . . . . . 11,098 2,781 2,052 359 1,141
Other loans . . . . . . . . . . . . . . . . 57 -- -- -- 104
-------- --------- -------- --------- --------
Total loans originated for portfolio. . . 119,875 126,461 93,635 63,349 22,113
-------- --------- -------- --------- --------
Loans repurchased:
Mortgage loans:
One- to four-family . . . . . . . . . . . 1,232 933 731 490 294
Commercial. . . . . . . . . . . . . . . . -- -- 849 849 --
-------- --------- -------- --------- --------
Total loans repurchased. . . . . . . . . 1,232 933 1,580 1,339 294
-------- --------- -------- --------- --------
Mortgage loan principal repayments . . . . . 84,677 101,197 39,783 23,364 27,048
Real estate acquired in
settlement of loans. . . . . . . . . . . . 2,749 4,973 11,546 4,910 1,184
Increase (decrease) in other
items, net(2). . . . . . . . . . . . . . . (18,225) (5,716) 7,498 15,402 (3,914)
-------- --------- -------- --------- --------
Net increase (decrease) in loans
receivable, net. . . . . . . . . . . . . . $ 86,571 $ (5,852) $ 2,824 $(20,686) $ 11,313
-------- --------- -------- --------- --------
-------- --------- -------- --------- --------
</TABLE>
- ---------------------------
(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.
47
<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,
1993, 1994, and 1995 and the six months ended December 31, 1995, the Savings
Bank repurchased single-family mortgage loans totalling $1.2 million, $933,000,
$731,000 and $294,000, 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 December 31, 1995, the Savings Bank was
servicing $625.3 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 December 31, 1995,
the Savings Bank held $939,000 in escrow for its portfolio of loans serviced for
others. The loan servicing portfolio at December 31, 1995 was composed
primarily of FNMA mortgage loans (51.3%) and FHLMC mortgage loans (36.6%). The
balance of the loan servicing portfolio at December 31, 1995 consisted of loans
serviced for a variety of private investors. At December 31, 1995, the
portfolio included 4,955 loans secured by property located primarily in the
States of California, Arizona and Nevada. For the year ended June 30, 1995 and
the six months ended December 31, 1995, loan servicing fees totalled $2.5
million and $1.3 million, respectively.
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 and call 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.
48
<PAGE>
Forward sales do not provide complete interest-rate protection, however, because
of the possibility of fallout (i.e., 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, 1995 and the six months ended December
31, 1995, the Savings Bank had gains of $701,000 and $1.9 million, respectively,
attributable to sales of loans which included hedging gains or losses. At
December 31, 1995, the Savings Bank had outstanding commitments to sell loans
totalling $61.4 million. See Note 13 of the Notes to Consolidated Financial
Statements.
In order to reduce the risk of pair-off costs arising from the failure to
deliver mortgages into a forward sales agreement, the Savings Bank purchases
over-the-counter options on treasury bonds and/or mortgage-backed securities.
At December 31, 1995, the Savings Bank had entered into an aggregate of $5.0
million of put options on FHLMC securities at a total premium of $26,000. These
options expired in January and February 1996. For the year ended June 30, 1995,
and the six months ended December 31, 1995, option activity and expenses, which
were minimal, totalled $38,000 and $39,000, respectively.
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. See "RISK FACTORS --
Reliance on Mortgage Banking Operations." 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 inspection 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.
49
<PAGE>
The following table sets forth delinquencies in the Savings Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------
1993 1994
--------------------------------------------- ---------------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family . . 7 $583 24 $1,690 3 $355 9 $1,110
Multi-family. . . . . . 1 506 2 444 1 392 4 2,040
Commercial. . . . . . . -- -- 3 1,669 -- -- 3 864
Construction. . . . . . -- -- -- -- -- -- -- --
Consumer loans . . . . . 1 2 4 94 4 121 4 35
Other loans. . . . . . . -- -- -- -- -- -- -- --
-- ------ -- ------ -- ---- -- ------
Total. . . . . . . . . 9 $1,091 33 $3,897 8 $868 20 $4,049
-- ------ -- ------ -- ---- -- ------
-- ------ -- ------ -- ---- -- ------
<CAPTION>
At June 30, At December 31,
--------------------------------------------- ---------------------------------------------
1995 1995
--------------------------------------------- ---------------------------------------------
60 - 89 Days 90 Days or More 60 - 89 Days 90 Days 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family . . 1 $ 2 8 $1,191 8 $1,029 14 $1,746
Multi-family. . . . . . 1 142 -- -- -- -- 1 148
Commercial. . . . . . . 1 470 2 810 2 690 1 581
Construction. . . . . . -- -- -- -- -- -- -- --
Consumer loans . . . . . 1 114 2 16 2 44 6 111
Other loans. . . . . . . -- -- -- -- -- -- -- --
-- ------ -- ------ -- ----- -- ------
Total. . . . . . . . . 4 $728 12 $2,017 12 $1,763 22 $2,586
-- ------ -- ------ -- ----- -- ------
-- ------ -- ------ -- ----- -- ------
</TABLE>
50
<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.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------- At December 31,
1991 1992 1993 1994 1995 1995
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to four-family . . . . . . . $1,759 $1,839 $2,149 $1,616 $1,137 $2,991
Multi-family . . . . . . . . . . -- -- 950 2,039 142 148
Commercial . . . . . . . . . . . -- 715 1,669 864 1,279 1,270
Consumer loans. . . . . . . . . . -- -- 4 6 -- --
------ ------ ------ ------ ------ ------
Total . . . . . . . . . . . . . 1,759 2,554 4,772 4,525 2,558 4,409
------ ------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
One- to four-family . . . . . . . -- 6 -- -- -- --
Consumer. . . . . . . . . . . . . -- -- -- 1 -- --
------ ------ ------ ------ ------ ------
Total . . . . . . . . . . . . . -- 6 -- 1 -- --
------ ------ ------ ------ ------ ------
Total nonaccrual
and 90 days or more
past due loans. . . . . . . . . 1,759 2,560 4,772 4,526 2,558 4,409
Foreclosed real estate, net. . . . 2,596 3,426 4,829 4,117 6,784 2,935
------ ------ ------ ------ ------ ------
Total nonperforming assets . . . $4,355 $5,986 $9,601 $8,643 $9,342 $7,344
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Restructured loans . . . . . . . . $ -- $5,307 $7,087 $4,015 $3,272 $3,758
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net. . . . . 0.44% 0.66% 1.18% 1.08% 0.54% 0.96%
Nonaccrual and 90 days or more
past due loans as a percentage
of total assets . . . . . . . . . 0.33 0.46 0.81 0.78 0.45 0.77
Nonperforming assets as a
percentage of total assets. . . . 0.82 1.09 1.63 1.49 1.65 1.29
</TABLE>
Interest income which would have been recorded for the year ended June 30,
1995 and the six months ended December 31, 1995 had nonaccruing loans been
current in accordance with their original terms amounted to approximately
$477,000 and $155,000, respectively. The amount of interest included in the
results of operations on such loans for the year ended June 30, 1995 and the six
months ended December 31, 1995 amounted to approximately $154,000 and $32,000,
respectively. Interest income foregone on restructured loans for such periods
was not material.
At December 31, 1995, nonaccrual commercial real estate loans included
three loans varying in size from $463,000 to $581,000. The largest loan was
originated in 1988 and is secured by a mini-storage facility.
51
<PAGE>
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 December 31, 1995,
the Savings Bank had $2.9 million of real estate owned, net of allowance for
losses of $693,000. Due primarily to continued depressed market conditions for
multi-family and commercial properties in Southern California, the Savings Bank
established provisions of $983,000 and $160,000 for losses on foreclosed real
estate during the year ended June 30, 1995 and the six months ended December 31,
1995. At December 31, 1995, the Savings Bank's foreclosed real estate was
comprised of 16 properties, the largest of which was a 51-unit apartment complex
in Riverside with a book value of $884,000. The remaining properties included
ten one- to four-family residential properties.
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 December 31, 1995, all of which was held by a wholly owned
subsidiary. Losses from investment real estate totalled $474,000 for the year
ended June 30, 1995 and there were no losses for the six months ended December
31, 1995.
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.
At June 30, 1994 and 1995, and December 31, 1995 the aggregate amounts of
the Savings Bank's classified assets, including assets designated as special
mention, were as follows:
At June 30,
------------------ At December 31,
1994 1995 1995
----- ---- ----
(In Thousands)
Doubtful . . . . . . . . . . . $ -- $ -- $ --
Substandard assets . . . . . . 19,195 25,200 14,892
Special mention. . . . . . . . 7,407 4,415 5,771
-------- -------- --------
Total. . . . . . . . . . $26,602 $29,615 $20,663
------- ------- -------
------- ------- -------
Total classified assets as of
percentage total assets. . . 4.58% 5.22% 3.62%
52
<PAGE>
As set forth below, as of December 31, 1995, assets classified as
substandard and special mention included 93 loans and properties totalling
approximately $20.7 million.
<TABLE>
<CAPTION>
Number of
Type of Loan/Property Loans Substandard Special Mention Total
- --------------------- ---------- ----------- --------------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family. . . . . . . . 55 $ 3,542 $1,450 $ 4,992
Multi-family . . . . . . . . . . . 5 727 621 1,348
Commercial real estate . . . . . . 12 7,415 1,498 8,913
Construction . . . . . . . . . . . 5 -- 2,202 2,202
Real estate owned. . . . . . . . . 16 3,208 -- 3,208
--- ------- ------ -------
Total . . . . . . . . . . . . 93 $14,892 $5,771 $20,663
--- ------- ------ -------
--- ------- ------ -------
</TABLE>
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. See
"RISK FACTORS -- Weakness in the Regional Economy and Adverse Effect on Asset
Quality."
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 December 31, 1995, the Savings Bank had an allowance for loan losses of
$4.8 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
53
<PAGE>
to increase significantly its allowance for loan losses. In addition, because
future events affecting borrowers and 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.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
---------------------------------------------- -----------------
1991 1992 1993 1994 1995 1994 1995
------ ------ ------ ------ ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period . . . . . $ 159 $1,091 $1,839 $3,286 $3,332 $3,332 $5,085
Recoveries:
Mortgage loans:
One- to four-family . . . . . . . . . -- 174 -- 53 97 68 5
Multi-family. . . . . . . . . . . . . -- -- -- 62 145 92 204
Commercial. . . . . . . . . . . . . . -- -- -- 4 177 132 250
Consumer loans. . . . . . . . . . . . . -- -- -- -- -- -- --
Other loans . . . . . . . . . . . . . . -- -- -- -- 40 40 --
------ ------ ------ ------ ------ ------ ------
Total recoveries . . . . . . . . . . -- 174 -- 119 459 332 459
------ ------ ------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family . . . . . . . . . 89 33 200 438 772 624 92
Multi-family. . . . . . . . . . . . . -- -- -- 1,112 1,589 570 991
Commercial. . . . . . . . . . . . . . -- -- -- 540 1,101 297 627
Consumer loans. . . . . . . . . . . . . -- -- 5 3 17 3 --
Other loans . . . . . . . . . . . . . . -- -- 3 13 14 11 --
------ ------ ------ ------ ------ ------ ------
Total charge-offs. . . . . . . . . . 89 33 208 2,106 3,493 1,505 1,710
------ ------ ------ ------ ------ ------ ------
Net loan charge-offs (recoveries). . . . 89 (141) 208 1,987 3,034 1,173 1,251
Provision for loan losses. . . . . . . . 1,021 607 1,655 2,033 4,787 594 940
------ ------ ------ ------ ------ ------ ------
Balance at end of period . . . . . . . . $1,091 $1,839 $3,286 $3,332 $5,085 $2,753 $4,774
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Allowance for loan losses as a
percentage of gross loans
receivable. . . . . . . . . . . . . . . 0.27% 0.46% 0.79% 0.78% 1.05% 0.58% 1.01%
Net loan charge-offs (recoveries)
as a percentage of average loans
outstanding during the period . . . . . 0.02 (0.03) 0.04 0.39 0.62 0.24 0.25
Allowance for loan losses as a
percentage of nonperforming
loans at end of period. . . . . . . . . 62.02 71.84 68.86 73.62 198.79 57.29 108.28
</TABLE>
54
<PAGE>
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.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1991 1992 1993
------------------- ------------------ ------------------
% of % of % of
Loans Loans Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family. . . . . $ 274 54.02% $ 428 53.12% $ 444 57.76%
Multi-family . . . . . . . . 299 15.06 261 16.84 516 16.02
Commercial . . . . . . . . . 323 18.96 642 17.79 1,525 16.51
Construction . . . . . . . . 44 3.54 42 3.28 42 2.83
Consumer loans . . . . . . . . 146 8.13 141 8.77 171 6.78
Other loans. . . . . . . . . . 5 0.29 6 0.20 3 0.10
Unallocated. . . . . . . . . . -- N/A 319 N/A 585 N/A
------ ------ ------ ------ ------ ------
Total allowance for
loan losses. . . . . . . $1,091 100.00% $1,839 100.00% $3,286 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
<CAPTION>
At June 30,
-------------------------------------- At December 31,
1994 1995 1995
------------------- ----------------- ------------------
% of % of % of
Loans Loans Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family. . . . . $ 470 64.94% $ 661 71.59% $ 723 70.63%
Multi-family . . . . . . . . 1,140 14.88 1,030 11.11 717 11.54
Commercial . . . . . . . . . 1,271 14.87 2,587 12.76 2,280 12.45
Construction . . . . . . . . 25 1.01 13 1.23 28 2.17
Consumer loans . . . . . . . . 126 4.25 108 3.28 100 3.16
Other loans. . . . . . . . . . 2 0.05 1 0.03 2 0.05
Unallocated. . . . . . . . . . 298 N/A 685 N/A 924 N/A
------ ------ ------ ------ ------ ------
Total allowance for
loan losses. . . . . . . $3,332 100.00% $5,085 100.00% $4,774 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
55
<PAGE>
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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources." At December 31, 1995, the Savings Bank's regulatory liquidity was
6.1%, 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 December 31, 1995, the Savings Bank's investment securities portfolio
totalled $21.5 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 December 31, 1995, 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.
56
<PAGE>
The following table sets forth the composition of the Savings Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
1993 1994
----------------------------------- ----------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Percent Cost Market Value Percent
---- ------------ ------- ---- ------------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations. . . . . . . . $ 98 $ 98 0.48% $23,121 $22,846 87.91%
Securities purchased under
agreements to resell. . . . . . . 15,000 15,000 73.80 3,000 3,000 11.41
Commercial paper . . . . . . . . . 5,000 5,000 24.60 -- -- --
Corporate securities(1). . . . . . -- -- -- -- -- --
Other(2) . . . . . . . . . . . . . 228 264 1.12 180 202 0.68
------- ------- ------ ------- ------- ------
Total investment portfolio. . . $20,326 $20,362 100.00% $26,301 $26,048 100.00%
------- ------- ------ ------- ------- ------
------- ------- ------ ------- ------- ------
<CAPTION>
At June 30,
-----------------------------------
1995 December 31, 1995
----------------------------------- ----------------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Percent Cost Market Value Percent
--------- ------------ ------- --------- ------------ -------
U.S. Government and
agency obligations. . . . . . . . $18,910 $18,913 94.24% $19,383 $19,390 90.03%
Securities purchased under
agreements to resell. . . . . . . -- -- -- -- -- --
Commercial paper . . . . . . . . . -- -- -- -- -- --
Corporate securities(1). . . . . . 990 978 4.93 1,997 1,997 9.27
Other(2) . . . . . . . . . . . . . 167 188 0.83 151 174 .70
------- ------- ------ ------- ------- ------
Total investment portfolio. . . $20,067 $20,079 100.00% $21,531 $21,561 100.00%
------- ------- ------ ------- ------- ------
------- ------- ------ ------- ------- ------
</TABLE>
- ---------------------
(1) Consists of bankers' acceptances
(2) Consists of mortgage-backed securities.
57
<PAGE>
The following table sets forth the maturities and weighted average yields
of the debt securities in the Savings Bank's securities portfolio at December
31, 1995.
<TABLE>
<CAPTION>
Due in Due
One Year After One to
or Less Five Years Total
------------------- ----------------- -------------------
Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency obligations. . . . . $19,383 5.82% $ -- --% $19,383 5.82%
Corporate securities . . . . . 1,997 5.86 -- -- 1,997 5.86
Other. . . . . . . . . . . . . -- -- 151 9.46 151 9.46
------- ---- -------
Total . . . . . . . . . . $21,380 5.83 $151 9.46 $21,531 5.85
------- ---- -------
------- ---- -------
</TABLE>
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 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 66.4% of the Savings Bank's deposit portfolio at December
31, 1995. 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 the unlikely event the Savings Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the Holding Company, as the sole stockholder of the
Savings Bank.
58
<PAGE>
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at December 31, 1995.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
- ------------- ---- ----------------------------- ------ ------- --------
(In Thousands)
<C> <C> <S> <C> <C> <C>
SAVINGS ACCOUNTS
2.79% N/A Basic savings $ 10 $ 32,359 6.49%
2.65 N/A Savings Plus 100 20,078 4.03
NOW ACCOUNTS
1.00 N/A Value checking -- 19,312 3.87
- -- N/A Commercial checking -- 1,967 0.39
MONEY MARKET DEPOSIT ACCOUNTS
4.77 N/A Asset management -- 83,242 16.70
1.20 N/A Checking plus -- 10,573 2.12
CERTIFICATES OF DEPOSIT
5.12 18-42 Months Variable CD 500 4,519 0.91
4.13 90 Days or Less Fixed term, fixed rate 1,000 4,601 0.92
5.45 6-7 Months Fixed-term, fixed rate 1,000 91,037 18.25
5.74 9 Months Fixed-term, fixed rate 1,000 5,608 1.13
5.49 1 Year Fixed-term, fixed rate 1,000 40,004 8.03
6.14 15 Months Fixed-term, fixed rate 10,000 97,688 19.59
5.13 2 Years Fixed-term, fixed rate 1,000 22,764 4.57
4.93 3 Years Fixed-term, fixed rate 1,000 6,754 1.35
5.63 4 Years Fixed-term, fixed rate 1,000 4,771 0.96
5.99 5 Years Fixed-term, Compounded
Certificate 1,000 48,044 9.64
5.82 Negotiable Jumbo-negotiable rate 100,000 3,300 0.66
5.93 Negotiable Mini-jumbo 50,000 1,870 0.38
-------- ------
4.92 $498,491 100.00%
-------- ------
-------- ------
</TABLE>
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
December 31, 1995.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less . . . . . . . $21,139
Over three through six months. . . 13,255
Over six through 12 months . . . . 9,667
Over 12 months . . . . . . . . . . 13,323
-------
Total . . . . . . . . . . . . $57,384
-------
-------
59
<PAGE>
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.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
1993 1994
--------------------- ---------------------------------------
Percent Percent
of of Increase
Amount Total Amount Total (Decrease)
-------- -------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-interest-bearing . . . . . . . . . . $ 1,921 0.42% $ 2,968 0.63% $ 1,047
NOW checking . . . . . . . . . . . . . . 18,465 4.07 18,283 3.88 (182)
Regular savings accounts . . . . . . . . 80,434 17.71 67,164 14.24 (13,270)
Money market deposit . . . . . . . . . . 52,324 11.52 111,727 23.68 59,403
Fixed-rate certificates which mature:
Within 1 year. . . . . . . . . . . . . 190,840 42.02 153,713 32.57 (37,127)
After 1 year, but within 2 years . . . 46,933 10.34 49,756 10.55 2,823
After 2 years, but within 5 years. . . 47,444 10.45 55,484 11.76 8,040
After 5 years. . . . . . . . . . . . . 206 0.05 3 -- (203)
Other . . . . . . . . . . . . . . . . . 15,551 3.42 12,689 2.69 (2,862)
-------- ------ -------- ------ --------
Total . . . . . . . . . . . . . . . $454,118 100.00% $471,787 100.00% $ 17,669
-------- ------ -------- ------ --------
-------- ------ -------- ------ --------
<CAPTION>
At June 30,
------------------------------------- At December 31,
1995 1995
------------------------------------- --------------------------------------
Percent Percent
of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease)
-------- --------- ----------- -------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing . . . . . . . . . . $ 2,787 0.57% $ (181) $ 1,887 0.38% $ (900)
NOW checking . . . . . . . . . . . . . . 19,529 4.01 1,246 19,392 3.89 (137)
Regular savings accounts . . . . . . . . 50,850 10.45 (16,314) 52,437 10.52 1,587
Money market deposit . . . . . . . . . . 92,191 18.95 (19,536) 93,815 18.82 1,624
Fixed-rate certificates which mature:
Within 1 year. . . . . . . . . . . . . 238,079 48.93 84,366 246,459 49.43 8,380
After 1 year, but within 2 years . . . 36,886 7.58 (12,870) 49,280 9.89 12,394
After 2 years, but within 5 years. . . 39,639 8.15 (15,845) 30,595 6.14 (9,044)
After 5 years. . . . . . . . . . . . . 103 0.02 100 107 0.02 4
Other . . . . . . . . . . . . . . . . . 6,521 1.34 (6,168) 4,519 0.91 (2,002)
-------- ------ -------- -------- ------ -------
Total . . . . . . . . . . . . . . . $486,585 100.00% $ 14,798 $498,491 100.00% $11,906
-------- ------ -------- -------- ------ -------
-------- ------ -------- -------- ------ -------
</TABLE>
60
<PAGE>
TIME DEPOSITS BY RATES. The following table sets forth the time deposits
in the Savings Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------- At December 31,
1993 1994 1995 1995
-------- -------- -------- ---------------
(In Thousands)
<S> <C> <C> <C> <C>
Below 3.00%. . . . . . . $ 16,220 $ 21,441 $ 828 $ 575
3.00 - 4.49% . . . . . . 153,571 154,118 45,604 11,394
4.50 - 5.49% . . . . . . 53,918 54,539 79,797 119,164
5.50 - 6.49% . . . . . . 35,637 26,922 146,847 157,090
6.50 - 7.49% . . . . . . 35,634 11,832 46,869 41,786
Over 7.50% . . . . . . . 5,994 2,793 1,284 951
-------- -------- -------- --------
Total . . . . . . . . $300,974 $271,645 $321,229 $330,960
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount and
maturities of time deposits at December 31, 1995.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
--------- ------- ------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Below 3.00%. . . . . . . $ 575 $ -- $ -- $ -- $ -- $ 575
3.00 - 4.49% . . . . . . 10,079 1,311 4 -- -- 11,394
4.50 - 5.49% . . . . . . 94,903 10,714 10,116 3,034 397 119,164
5.50 - 6.49% . . . . . . 111,942 28,950 9,249 2,164 4,785 157,090
6.50 - 7.49% . . . . . . 31,826 8,943 98 919 -- 41,786
Over 7.50% . . . . . . . 415 230 175 24 107 951
-------- ------- ------- ------ ------ --------
Total . . . . . . . $249,740 $50,148 $19,642 $6,141 $5,289 $330,960
-------- ------- ------- ------ ------ --------
-------- ------- ------- ------ ------ --------
</TABLE>
DEPOSIT ACTIVITY. The following table sets forth the deposit activities of
the Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Year Ended June 30, Ended December 31,
-------------------------------------- -----------------------
1993 1994 1995 1994 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance. . . . . . . . . . . $454,371 $454,118 $471,787 $471,787 $486,585
-------- -------- -------- -------- --------
Net deposits (withdrawals)
before interest credited. . . . . . . (15,315) 2,433 (3,707) (8,565) 985
Interest credited. . . . . . . . . . . 15,062 15,236 18,505 8,673 10,921
-------- -------- -------- -------- --------
Net increase (decrease) in
deposits. . . . . . . . . . . . . . . (253) 17,669 14,798 108 11,906
-------- -------- -------- -------- --------
Ending balance . . . . . . . . . . . . $454,118 $471,787 $486,585 $471,895 $498,491
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
61
<PAGE>
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
December 31, 1995, the Savings Bank had $20.1 million of borrowings from the
FHLB-San Francisco at a weighted average rate of 6.05%. 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 December 31, 1995, 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 December 31, 1995. The
following tables sets forth certain information regarding borrowings by the
Savings Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At June 30, At December 31,
----------------------------------------------
1993 1994 1995 1995
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance outstanding at end of period:
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . $ -- $ 5,075 $ 1,985 $ --
FHLB advances . . . . . . . . . . . . . . 76,047 51,078 33,078 20,078
Weighted average rate paid on:
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . -- 4.92% 6.15% --%
FHLB advances . . . . . . . . . . . . . . 3.89 4.29 6.56 6.05
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
------------------------------------ -------------------
1993 1994 1995 1994 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . $ 5,027 $ 5,075 $15,119 $15,119 $ 4,988
FHLB advances . . . . . . . . . . . . . . 76,074 99,047 33,078 31,078 25,578
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . 972 990 2,678 4,389 81
FHLB advances . . . . . . . . . . . . . . 44,893 49,987 21,655 24,935 23,292
Approximate weighted average rate paid on:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . 2.80% 4.15% 4.91% 4.66% 6.12%
FHLB advances . . . . . . . . . . . . . . 4.15 3.61 4.94 4.64 6.13
</TABLE>
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.
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 December 31, 1995.
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 December 31, 1995 totalled
$3.1 million, and included a parcel of land in Riverside purchased as a
potential 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,
<PAGE>
63
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 December 31, 1995, the Savings Bank's
investment in its subsidiaries was $4.5 million.
PERSONNEL
As of December 31, 1995, the Savings Bank had 224 full-time and 77
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.
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.
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<PAGE>
PROPERTIES
At December 31, 1995, the net book value of the Savings Bank's property
(including land and buildings) and its fixtures, furniture and equipment was
$7.2 million. The following table sets forth the location and certain other
information relating to the Savings Bank's offices as of December 31, 1995.
<TABLE>
<CAPTION>
Lease Approximate
Year Building and Land Expiration Building
Location County Opened Owned/Leased Date Square Footage Deposits
- -------- ------ ------ ----------------- ---------- -------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Main Office
- -----------
3756 Central Avenue Riverside 1963 Owned N/A 20,000 $128,076
Riverside, CA 92506
Branch Offices
- --------------
5225 Canyon Crest Dr. Riverside 1986 Leased 2000 4,300 28,833
Riverside, CA 92507
23575 Sunnymead Ranch Pkwy. Riverside 1993 Leased 2008 300 2,143
Moreno Valley, CA 92557
12460 Heacock St. Riverside 1978 Owned N/A 2,800 42,542
Moreno Valley, CA 92553
1690 E. Florida Ave. Riverside 1972 Owned N/A 6,800 62,700
Hemet, CA 92544
27010 Sun City Blvd. Riverside 1975 Owned N/A 7,000 98,938
Sun City, CA 92586
125 E. Citrus Ave. San Bernardino 1961 Owned N/A 6,900 72,550
Redlands, CA 92373
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Lease Approximate
Year Building and Land Expiration Building
Location County Opened Owned/Leased Date Square Footage Deposits
- -------- ------ ------ ----------------- ---------- -------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
71-991 Hwy 111 Riverside 1982 Owned N/A 7,200 $34,901
Rancho Mirage, CA 92270
201 E. Hobson Way Riverside 1974 Owned N/A 6,900 27,808
Blythe, CA 92225
Loan Production Offices
- -----------------------
1411 W. 190th St. Los Angeles 1993 Leased 1996 3,624 N/A
Gardena, California 90248
10390 Commerce Center Dr. San Bernardino 1993 Leased 1996 4,437 N/A
Rancho Cucamonga, CA 92705
472 5th St. West (1) Sonoma 1994 Leased Month-to-Month 1,000 N/A
Sonoma, CA 95476
3233 W. Charleston, Ste. 106 Clark 1994 Leased 1996 3,000 N/A
Las Vegas, NV 89102
1450 N. Tustin Ave. Orange 1995 Leased 1996 1,524 N/A
Santa Ana, CA 92705
900 Larkspur Landing Cir. (2) Marin 1996 Leased 1997 1,531 N/A
Larkspur, CA 94939
</TABLE>
- -----------------
(1) This office was closed subsequent to December 31, 1995.
(2) This office was opened subsequent to December 31, 1995.
66
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company consists of seven persons and
is divided into three classes, each of which contains approximately one third of
the Board. The Directors are elected by the stockholders of the Holding Company
for staggered three-year terms, or until their successors are elected and
qualified. All directors of the Savings Bank became directors of the Holding
Company upon its formation in January 1996. One class of Directors, consisting
of Mr. Bennett and Ms. Guthrie, has a term of office expiring at the first
annual meeting of stockholders, a second class, consisting of Messrs. Blunden,
Mitchell and Taylor, has a term of office expiring at the second annual meeting
of stockholders, and a third class, consisting of Messrs. Billings and Schrader,
has a term of office expiring at the third annual meeting of stockholders. The
executive officers of the Holding Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
The following individuals are executive officers of the Holding Company and
hold the offices set forth opposite their names below.
Name Position Held with Holding Company
---- ----------------------------------
Craig G. Blunden President and Chief Executive Officer
Karl P. Zalazowski Chief Financial Officer
Robert G. Schrader Secretary
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
Information concerning the principal occupations, employment and compensation of
the directors and executive officers of the Holding Company during the past five
years is set forth under "MANAGEMENT OF THE SAVINGS BANK -- Biographical
Information."
MANAGEMENT OF THE SAVINGS BANK
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Savings Bank 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 Savings Bank.
The executive officers of the Savings Bank are elected annually by the Board of
Directors and serve at the Board's discretion. The following table sets forth
information with respect to the Directors and executive officers of the Savings
Bank.
67
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
Current
Director Term
Name Age (1) Position with Savings Bank Since Expires
- ---- ------- -------------------------- -------- -------
<S> <C> <C> <C> <C>
Bruce W. Bennett 47 Director 1993 1999
Michael C. Billings 55 Director 1994 1998
Craig G. Blunden 48 President, Chief Executive 1975 1997
Officer and Director
Debbi H. Guthrie 44 Director 1994 1999
David W. Mitchell 67 Director 1988 1997
Robert G. Schrader 56 Executive Vice President, 1995 1998
Chief Operating Officer,
Director and Secretary
Roy H. Taylor 45 Director 1990 1997
</TABLE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Name Age (1) Position with Savings Bank
- ---- ------- --------------------------
<S> <C> <C>
Donald L. Blanchard 45 Senior Vice President, Retail Banking
Richard L. Gale 45 Senior Vice President, Loan Production
William E. Harris 54 Senior Vice President, Administration and Treasurer
Karl P. Zalazowski 40 Senior Vice President, Chief Financial Officer
</TABLE>
- ---------------------
(1) As of December 31, 1995.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. 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 has served as a director of the Savings Bank
since 1993 and currently serves on the 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 has
served as a director of the Savings Bank since 1994 and currently serves on the
Audit and Personnel/Compensation Committees.
CRAIG G. BLUNDEN is the Chief Executive Officer, President and Chairman of
the Board of the Savings Bank, positions he has held since 1991. Mr. Blunden
has been associated with the Savings Bank since 1974 and has served as a
director since 1975. 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.
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<PAGE>
DEBBI H. GUTHRIE is the President and owner of Roy O. Huffman Roof Company,
with which she has been associated since 1971. Ms. Guthrie has served as a
director of the Savings Bank since 1994 and currently serves on the 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 has served as a director of
the Savings Bank since 1988 and currently serves as chairman of the Audit
Committee. Mr. Mitchell also serves as a director of New York Life Insurance Co.
and Express Scripts, Inc.
ROBERT G. SCHRADER, who has been associated with the Savings Bank since
1963, has served as Executive Vice President since January 1995. From 1990
through 1994, Mr. Schrader served as Senior Vice President. Mr. Schrader has
served as director of the Savings Bank since 1995.
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 has served as a director of the Savings Bank since 1991 and currently
serves as chairman of the Personnel/Compensation Committee. Mr. Taylor also
serves as Chairman of the Riverside Visitor and Convention Bureau.
DONALD L. BLANCHARD, who joined the Savings Bank in 1989, currently serves
as the Senior Vice President, Retail Banking, a position he has held since 1989.
RICHARD L. GALE, who joined the Savings Bank in 1988, has served as
President of the Profed Mortgage division since 1989. Since 1993, Mr. Gale has
also served as Senior Vice President, Loan Production of the Savings Bank.
WILLIAM E. HARRIS has been associated with the Savings Bank since 1969 and
currently serves as Senior Vice President, Administration and Treasurer.
KARL P. ZALAZOWSKI has been associated with the Savings Bank since 1984 and
has served as Senior Vice President, Chief Financial Officer since 1988. Mr.
Zalazowski also served as Chairman of the Financial Managers Society in 1994-
1995.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Savings Bank is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended June 30, 1995, the Board of Directors held 12 regular meetings and one
special meeting. No director attended fewer than 75% of the total meetings of
the Board of Directors and of committees on which such director served.
The Audit Committee, consisting of Directors Mitchell (Chairman), Guthrie
and Billings, is responsible for reviewing the adequacy of the Savings Bank's
system of internal accounting controls, approving the services provided by the
Savings Bank's outside auditor and meeting with the Savings Bank's outside
auditor to discuss the results of the annual audit and any related matters. The
Audit Committee met five times during the fiscal year ended June 30, 1995.
The Personnel/Compensation Committee, consisting of Directors Taylor
(Chairman), Bennett and Billings, is responsible for reviewing the Savings
Bank's employee benefit programs and wage and salary administration program,
making recommendations to the full Board of Directors on annual salary increases
and bonuses and addressing other personnel issues as they arise. The
Personnel/Compensation Committee met five times during the fiscal year ended
June 30, 1995.
69
<PAGE>
DIRECTORS' COMPENSATION
Directors 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. It is currently
anticipated that, after consummation of the Conversion, directors' fees will
continue to be paid by the Savings Bank and no separate fees will be paid for
service on the Board of Directors of the Holding Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for the
President of the Savings Bank for the year ended June 30, 1995 and each
executive officer of the Savings Bank who received salary and bonus in excess of
$100,000 during the year ended June 30, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE(1)
- --------------------------------------------------------------------------------
Annual Compensation
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Position Year ($) ($) ($)(2) ($)
- --------------------------------------------------------------------------------
Craig G Blunden, 1995 $204,000 -- -- $12,914 (3)
President and Chief
Executive Officer
Robert G. Shrader, 1995 105,958 -- -- 7,791 (3)
Executive Vice
President and Chief
Operating Officer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------
(1) Compensation information for fiscal years ended June 30, 1994 and 1993 has
been omitted as the Savings Bank 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
70
<PAGE>
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.
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 January 1, 1996, based solely on the cash compensation paid to Mr. Blunden
during 1995 and excluding the value of any other employee benefits which may be
payable, Mr. Blunden would have received a payment of approximately $600,000.
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. A
conversion of the Savings Bank from mutual to stock form is excluded from the
definition of "change in control."
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 December 31, 1995, the
accrued liability of the Savings Bank with respect to its obligations under the
agreement was $351,000.
SEVERANCE AGREEMENTS. Upon consummation of the Conversion, the Holding
Company and the Savings Bank intend to enter into severance agreements with
Messrs. Schrader, Blanchard, Gale, Harris and Zalazowski (the "Executives").
Each agreement will have a term of one year. Commencing on the first
anniversary of the effective date of the agreements and continuing on each
anniversary thereafter, the Boards of Directors of the Holding Company and the
Savings Bank may extend the agreements for an additional year. The agreements
will provide that in the event of an involuntary termination of an Executive
following a change in control of the Holding Company or the Savings Bank, the
Executive 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, an
Executive is assigned duties inconsistent with his position, duties,
responsibilities and status immediately prior to such change in control. The
Savings Bank or its successor would
71
<PAGE>
also be obligated to continue each Executive's other employee benefits for a
one-year period following termination of employment.
The term "change in control" is defined in the agreements as having
occurred when, among other things, (a) a person other than the Holding Company
purchases shares of 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 Holding Company representing 25% or more of the combined
voting power of the Holding Company'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 Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation. If a change in
control of the Holding Company or the Savings Bank occurred during 1996, based
solely on the current salary levels of each of the Executives and excluding the
value of any other employee benefits which may be payable, the Executives would
receive payments in the aggregate of approximately $900,000.
BENEFITS
GENERAL. The Savings Bank currently provides health and life insurance
benefits for full-time employees and employees who work 30 hours or more per
week, subject to certain deductibles.
401(K) PLAN. The Savings Bank maintains the Provident Savings Bank 401(k)
Plan (the "401(k) Plan") for the benefit of eligible employees of the Savings
Bank. The 401(k) Plan is intended to be a tax-qualified plan under Sections
401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code").
Employees of the Savings Bank who have completed 1,000 hours of service during
12 consecutive months and who have attained age 21 are eligible to participate
in the 401(k) Plan. Participants may contribute a portion of their annual
compensation to the 401(k) Plan through a salary reduction election. The
Savings Bank matches participant contributions to a maximum of 50% of the first
6% of compensation (excluding commissions) contributed by the participant. In
addition to employer matching contributions, the Savings Bank may contribute a
discretionary amount to the 401(k) Plan in any plan year which is allocated to
individual participants in the proportion that their annual compensation
(excluding commissions) bears to the total compensation of all participants
during the plan year. To be eligible to receive a discretionary employer
contribution, the participant must complete 1,000 hours of service during the
plan year and remain employed by the Savings Bank on the last day of the plan
year. Participants are at all times 100% vested in salary reduction
contributions. With respect to employer matching and discretionary employer
contributions, participants vest in such contributions at the rate of 20% per
year beginning with the completion of their second year of service with full
vesting occurring after six years of service. For the fiscal year ended June
30, 1995, the Savings Bank incurred total contribution-related expenses of
$249,000 in connection with the 401(k) Plan.
In general, the investment of 401(k) Plan assets is directed by an
investment committee authorized by the Board of Directors of the Savings Bank.
However, in connection with the Conversion, the 401(k) Plan has been amended to
provide participants with the opportunity to direct the investment of up to 40%
of their vested account balance to purchase shares of the Common Stock. A
participant in the 401(k) Plan who elects to purchase Common Stock in the
Conversion through the 401(k) Plan will receive the same subscription priority
and be subject to the same individual purchase limitations as if the participant
had elected to make such purchase using other funds. See "THE CONVERSION --
Limitations on Purchases of Shares."
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors has authorized the
adoption by the Savings Bank of an ESOP for employees of the Savings Bank to
become effective upon the consummation of the Conversion. The ESOP is intended
to satisfy the requirements for an employee stock ownership plan under the Code
and the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Savings Bank who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 21 will be eligible to participate in the ESOP.
72
<PAGE>
In order to fund the purchase of up to 8% of the Common Stock to be issued
in the Conversion, it is anticipated that the ESOP will borrow funds from the
Holding Company. Such loan will equal 100% of the aggregate purchase price of
the Common Stock. The loan to the ESOP will be repaid principally from the
Savings Bank's contributions to the ESOP and from any dividends paid on Common
Stock held by the ESOP over the anticipated ten-year term of the loan. The
interest rate for the ESOP loan is expected to be the prime rate as published in
THE WALL STREET JOURNAL on the closing date of the Conversion. See "PRO FORMA
DATA." In any plan year, the Savings Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by the
Holding Company. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will be fully vested in their accrued benefits under the ESOP
upon the completion of six years of service. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Savings Bank's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
It is anticipated that Messrs. Blunden, Schrader and Zalazowski will be
appointed by the Board of Directors of the Savings Bank to serve as trustees of
the ESOP. Under the ESOP, the trustees must vote all allocated shares held in
the ESOP in accordance with the instructions of plan participants and allocated
shares for which no instructions are received must be voted in the same ratio on
any matter as those shares for which instructions are given.
Pursuant to SOP 93-6, compensation expense for a leveraged employee stock
ownership plan, such as the ESOP, is recorded at the fair market value of the
ESOP shares committed to be released to participants' accounts.
If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder. The Savings Bank
intends to request a determination letter from the IRS regarding the tax-
qualified status of the ESOP. Although no assurance can be given that a
favorable determination letter will be issued, the Savings Bank expects that a
favorable determination letter will be received by the ESOP.
1996 STOCK OPTION PLAN. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the Holding Company's stockholders for approval at a meeting held no earlier
than six months following consummation of the Conversion. The approval of a
majority vote of the Holding Company's outstanding shares is required prior to
the implementation of the Stock Option Plan within one year of the consummation
of the Conversion. The Stock Option Plan will comply with all applicable
regulatory requirements. However, the Stock Option Plan will not be approved or
endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as a incentive to contribute to the success of the Holding Company and
the Savings Bank,
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<PAGE>
and to reward officers and key employees for outstanding performance. The Stock
Option Plan will provide for the grant of incentive stock options ("ISOs")
intended to comply with the requirements of Section 422 of the Code and for the
grant of nonqualified stock options ("NQOs"). Upon receipt of stockholder
approval of the Stock Option Plan, stock options may be granted to key employees
of the Holding Company and its subsidiaries, including the Savings Bank.
Nonemployee directors will receive stock option awards in accordance with a
formula set forth in the Stock Option Plan. The Stock Option Plan will be
administered and interpreted by a committee of the Board of Directors
("Committee") which is "disinterested" pursuant to applicable regulations under
the federal securities laws. Unless sooner terminated, the Stock Option Plan
will continue in effect for a period of ten years from the date the Stock Option
Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the number
of shares of Common Stock issued in connection with the Conversion will be
reserved for future issuance under the Stock Option Plan (586,500 shares based
on the issuance of 5,865,000 shares at the maximum of the Estimated Valuation
Range). Such shares will be authorized but unissued shares or treasury shares.
In the event of a stock split, reverse stock split, stock dividend, or similar
event, the number of shares of Common Stock under the Stock Option Plan, the
number of shares to which any award relates and the exercise price per share
under any option may be adjusted by the Committee to reflect the increase or
decrease in the total number of shares of Common Stock outstanding. If all of
the shares issued upon exercise of the options are authorized but unissued
shares of Common Stock of the Holding Company, rather than treasury shares which
could be acquired, the voting and ownership interests of existing stockholders
would be diluted by 9.1%. In addition, the issuance of authorized but unissued
shares upon the exercise of stock options may decrease net income per share and
stockholders' equity per share.
Under the Stock Option Plan, the Committee will determine which officers
and key employees will be granted options, whether such options will be ISOs or
NQOs, the number of shares subject to each option, and the exercisability of
such options. The per share exercise price of an option will equal at least
100% of the fair market value of a share of Common Stock on the date the option
is granted.
The number of options granted to nonemployee directors and the terms
thereof will be determined under a formula set forth in the Stock Option Plan.
The formula will provide that no individual nonemployee director may be awarded
an option covering in excess of 5% of the number of shares of Common Stock
reserved under the Plan. All options granted to nonemployee directors will be
NQOs and such options will be granted at an exercise price equal to 100% of the
fair market value of the Common Stock on the date the option is granted.
Options granted upon the effective date of the Stock Option Plan will become
exercisable ratably over a five-year period following the date of grant.
However, unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options will also be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Savings Bank to the extent authorized or not prohibited
by applicable law or regulations.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
The Stock Option Plan will also provide that upon the payment of an
"extraordinary dividend" by the Holding Company, each optionee will receive a
cash payment equivalent to the dividends that would have been payable to such
optionee had the options been exercised on or before the record date of such
dividend. For purposes of the Stock Option Plan, an "extraordinary dividend" is
a dividend payable at a rate in excess of the Savings Bank's
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weighted average cost of funds on interest-bearing liabilities for the 12-month
period preceding the record date of the dividend.
Under current provisions of the Code, the federal tax treatment of ISOs
and NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO is generally not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price will generally be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Subject to stockholder approval of the Stock Option Plan, the Committee
intends to grant awards under the Stock Option Plan equal to the following
percentages of shares issued in the Offerings: Mr. Blunden -- 2.0%; Mr.
Schrader -- 1.2%; other officers (ten persons) -- 3.0%. In addition, each
current nonemployee director (five persons) is intended to receive an award
equal to 0.4% of the number of shares issued in the Offerings. The balance of
the shares reserved under the Stock Option Plan, or a number of shares equal to
1.8% of the number of shares issued in the Offerings, are expected to be
allocated in the future to current and prospective officers, employees and
directors.
MANAGEMENT RECOGNITION PLAN. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Savings
Bank. The MRP will enable the Holding Company and the Savings Bank to provide
participants with a proprietary interest in the Holding Company as an incentive
to contribute to the success of the Holding Company and the Savings Bank.
The MRP is expected to be submitted to stockholders of the Holding Company
for approval at a meeting to be held no earlier than six months following
consummation of the Conversion. The approval of a majority vote of the Holding
Company's stockholders is required prior to implementation of the MRP within one
year of the consummation of the Conversion. The MRP will comply with all
applicable regulatory requirements. However, the OTS will not approve or
endorse the MRP. The MRP expects to acquire a number of shares of Common Stock
equal to 4% of the Common Stock issued in connection with the Conversion
(234,600 shares based on the issuance of 5,865,000 shares in the Conversion at
the maximum of the Estimated Valuation Range). Such shares will be acquired on
the open market, if available, with funds contributed by the Holding Company to
a trust which the Holding Company may establish in conjunction with the MRP
("MRP Trust") or from authorized shares but unissued or treasury shares of the
Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company to the MRP Trust. Shares of Common
Stock granted pursuant to the MRP will be in the form of restricted stock
payable ratably over a five-year period following the date of grant. During the
period of restriction, all shares will be held in escrow by the Holding Company
or by the MRP Trust. If a recipient terminates employment for reasons other
than death or disability, the recipient will forfeit all rights to allocated
shares which are then subject to restriction. In the event of the recipient's
death or disability, all restrictions will expire and all allocated shares will
become unrestricted. In addition, all allocated shares will become unrestricted
in the event of a change in control (as defined in the MRP) of the Holding
Company or the Savings Bank to the extent authorized or not prohibited by
applicable law or regulations. Compensation expense in the
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amount of the fair market value of the Common Stock at the date of the grant to
the recipient will be recognized during the years in which the shares vest.
The Board of Directors of the Holding Company may terminate the MRP at any
time and, upon termination, all unallocated shares of Common Stock will revert
to the Holding Company.
A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of Common Stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Subject to stockholder approval of the MRP, the Committee intends to grant
awards under the MRP equal to the following percentages of shares issued in the
Offerings: Mr. Blunden -- 1.0%; Mr. Schrader -- 0.64%; other officers (seven
persons) -- 1.48%. In addition, each nonemployee director (five persons) will
receive an award equal to 0.15% of the number of shares issued in the Offerings.
TRANSACTIONS WITH THE SAVINGS BANK
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
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. The aggregate amount of loans by the Savings Bank to its executive
officers and directors was approximately $342,000 at December 31, 1995, or
approximately 0.4% of pro forma stockholders' equity (based on the issuance of
the maximum of the Estimated Valuation Range.)
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
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OTS, the FDIC or Congress, could have a material adverse impact on the Holding
Company, the Savings Bank and their operations. The Holding Company, 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 $4.5 million at December 31,
1995.
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.
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, 1995, equaled
$1.1 million.
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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 92% 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, and after the
Conversion will remain, a member of the SAIF rather than the BIF. See RISK
FACTORS -- Recapitalization of SAIF and Its Impact on SAIF Premiums."
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."
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 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
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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 December 31, 1995, 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
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
December 31, 1995, the qualified thrift investments of the Savings Bank were
approximately 91.9% 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 Holding Company is not
subject to any minimum capital requirements.
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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 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
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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.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that sets
forth in terms of dollars and percentages the OTS tangible, core and risk-based
capital requirements, the Savings Bank's historical amounts and percentages at
December 31, 1995, and pro forma amounts and percentages based upon the
assumptions stated therein.
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
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.
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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 December 31, 1995, the Savings Bank's limit on
loans to one borrower was $6.4 million. At December 31, 1995, 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 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.
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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 Holding Company generally is not subject to activity restrictions. If the
Holding Company 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.
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 Holding Company and the Savings Bank will 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 Holding Company.
TAX BAD DEBT RESERVES. Savings institutions such as the Savings Bank which
meet certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be 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 be
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 must be 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 selects
the most favorable way to calculate the deduction attributable to
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an addition to the tax bad debt reserve. The Savings Bank used the
experience method bad debt deduction for the years ended June 30, 1993, 1994
and 1995 and the six months ended December 31, 1995.
The Savings Bank currently satisfies the qualifying thrift definitional
tests. If the Savings Bank failed to satisfy such tests in any taxable year, it
would be unable to make additions to its bad debt reserve calculated as a
percentage of taxable income. Instead, the Savings Bank would be required to
deduct bad debts as they occur and would additionally be required to recapture
its bad debt reserve deductions ratably over a multi-year period. Among other
things, the qualifying thrift definitional tests require 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. The Savings Bank's ratio of qualifying assets
to total assets exceeded 60% through June 30, 1995. Although there can be no
assurance that the Savings Bank will continue to satisfy the 60% test,
management believes that this level of qualifying assets can be maintained by
the Savings Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage-of-taxable-income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on qualifying
real property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding. Also, if the qualifying thrift uses
the percentage of taxable income method, then the qualifying thrift's aggregate
addition to its reserve for losses on qualifying real property loans cannot,
when added to the addition to the reserve for losses on nonqualifying loans,
exceed the amount by which: (i) 12% of the amount that the total deposits or
withdrawable accounts of depositors of the qualifying thrift at the close of the
taxable year exceeds (ii) the sum of the qualifying thrift's surplus, undivided
profits and reserves at the beginning of such year. The Savings Bank does not
expect this overall limitation to restrict the Savings Bank's deduction for
additions to its bad debt reserve for the year ending June 30, 1996. At June
30, 1995, the Savings Bank's total bad debt reserve for tax purposes was
approximately $9.0 million. Proposed legislation would eliminate future bad
debt deductions and would require thrifts to recapture into income over a six-
year period their post-1987 additions to their bad debt tax reserves, thereby
generating additional tax liability. The Savings Bank does not have any post-
1987 additions to its bad debt tax reserve.
DISTRIBUTIONS. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company that are considered as made: (i) from the
reserve 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 Holding Company
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" and "DIVIDEND
POLICY" 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
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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 Holding Company 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 Holding Company and the Savings Bank
will not file a consolidated tax return, except that if the Holding Company 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 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); however, the total tax rate
cannot exceed 11.7%. Bad debt deductions are available in computing California
franchise taxes using a three or six year weighted average loss experience
method. The Savings Bank and its California subsidiaries file California state
franchise tax returns on a combined basis. Assuming that the holding company
form of organization is utilized, the Holding Company, as a savings and loan
holding company commercially domiciled in California, will generally be treated
as a financial corporation and subject to the general corporate tax rate plus
the "in lieu" rate as described for the Savings Bank.
DELAWARE. As a Delaware holding company not earning income in Delaware,
the Holding Company 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.
THE CONVERSION
THE OTS HAS GIVEN APPROVAL TO THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY
THE MEMBERS OF THE SAVINGS BANK ENTITLED TO VOTE ON THE MATTER AND SUBJECT TO
THE SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL.
OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF
THE PLAN BY THE OTS.
GENERAL
On December 21, 1995, the Board of Directors of the Savings Bank
unanimously adopted the Plan of Conversion, pursuant to which the Savings Bank
will be converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank to be held as a wholly-owned subsidiary of the
Holding Company, a newly formed Delaware corporation. THE FOLLOWING DISCUSSION
OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN
OF CONVERSION, WHICH IS AVAILABLE FROM THE SAVINGS BANK UPON REQUEST. The OTS
has approved the Plan of Conversion subject to the Plan's approval by the
members of the Savings Bank entitled to vote on the matter at a Special Meeting
called for that purpose to be held on June 17, 1996, and subject to the
satisfaction of certain other conditions imposed by the OTS in its approval.
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If the Board of Directors of the Savings Bank decides for any reason, such
as possible delays resulting from overlapping regulatory processing or policies
or conditions which could adversely affect the Savings Bank's or the Holding
Company's ability to consummate the Conversion and transact its business as
contemplated herein and in accordance with the Savings Bank's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Savings Bank
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's registration statement from the SEC and
will take all steps necessary to consummate the Conversion and proceed with a
new offering without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Savings Bank
determines not to consummate the Conversion, the Savings Bank will issue and
sell the common stock of the Savings Bank. There can be no assurance that the
OTS would approve the Conversion if the Savings Bank decided to proceed without
the Holding Company. The following description of the Plan assumes that a
holding company form of organization will be utilized in the Conversion. In the
event that a holding company form of organization is not utilized, all other
pertinent terms of the Plan as described below will apply to the Conversion of
the Savings Bank from mutual to stock form of organization and the sale of the
Savings Bank's common stock.
The Conversion will be accomplished through adoption of a Federal Stock
Charter and Bylaws to authorize the issuance of capital stock by the Savings
Bank. Under the Plan, 4,335,000 to 5,865,000 shares of Common Stock are being
offered for sale by the Holding Company at the Purchase Price of $10.00 per
share. As part of the Conversion, the Savings Bank will issue all of its newly
issued common stock (1,000 shares) to the Holding Company in exchange for at
least 50% of the net proceeds from the sale of Common Stock by the Holding
Company.
The Plan of Conversion provides generally that: (i) the Savings Bank will
convert from a federally chartered mutual savings bank to a federally chartered
stock savings bank; (ii) the Common Stock will be offered by the Holding Company
in the Subscription Offering to persons having Subscription Rights and in a
Direct Community Offering to certain members of the general public with
preference given to natural persons and trusts of natural persons residing in
the Local Community; (iii) if necessary, shares of Common Stock not subscribed
for in the Subscription and Direct Community Offering will be offered to the
general public in a Public Offering; and (iv) the Holding Company will purchase
all of the capital stock of the Savings Bank to be issued in connection with the
Conversion. The Conversion will be effected only upon completion of the sale of
at least $43,350,000 of Common Stock to be issued pursuant to the Plan of
Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of August 31, 1994); (ii) the Savings Bank's ESOP;
(iii) Supplemental Eligible Account Holders (depositors with $50.00 or more on
deposit as of March 31, 1996); and (iv) Other Members (depositors of the Savings
Bank as of April 30, 1996). Concurrent with the Subscription Offering and
subject to the prior rights of holders of Subscription Rights, the Holding
Company is offering the Common Stock for sale to certain members of the general
public through a Direct Community Offering.
Shares of Common Stock not sold in the Subscription and Direct Community
Offering may be offered in the Public Offering. Regulations require that the
Public Offering be completed within 45 days after completion of the Subscription
Offering unless extended by the Savings Bank or the Holding Company with the
approval of the regulatory authorities. If the Public Offering is determined
not to be feasible, the Board of Directors of the Savings Bank will consult with
the regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan of Conversion by the members of the Savings Bank.
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No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Public Offerings, unless the Plan of Conversion is approved
by the members of the Savings Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Savings Bank's control. No assurance can be given
as to the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Offerings or other sale of the
Common Stock. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Holding Company and the Savings Bank as
converted, together with corresponding changes in the net proceeds realized by
the Holding Company from the sale of the Common Stock. In the event the
Conversion is terminated, the Savings Bank would be required to charge all
Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
4,335,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion is consummated. If the
Conversion is not consummated within 45 days after the last day of the fully
extended Subscription Offering and the OTS consents to an extension of time to
consummate the Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions. Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
Savings Bank's passbook rate from the date payment is received until the funds
are returned to the subscriber. If such period is not extended, or, in any
event, if the Conversion is not consummated, all withdrawal authorizations will
be terminated and all funds held will be promptly returned together with accrued
interest at the Savings Bank's passbook rate from the date payment is received
until the Conversion is terminated.
PURPOSES OF CONVERSION
The Savings Bank's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the Savings
Bank as its subsidiary. The Savings Bank, as a mutual savings association, does
not have stockholders and has no authority to issue capital stock. By
converting to the stock form of organization, the Holding Company and the
Savings Bank will be structured in the form used by holding companies of
commercial banks and by a growing number of savings institutions. Management of
the Savings Bank believes that the Conversion offers a number of advantages
which will be important to the future growth and performance of the Savings Bank
in that it is intended: (i) to improve the overall competitive position of the
Savings Bank in its market area and to support possible future expansion and
diversification of operations (currently there are no specific plans,
arrangements or understandings, written or oral, regarding any such activities);
(ii) to afford members of the Savings Bank and others the opportunity to become
stockholders of the Holding Company and thereby participate more directly in,
and contribute to, any future growth of the Savings Bank; and (iii) to provide
future access to capital markets.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE SAVINGS
BANK
VOTING RIGHTS. Savings members and borrowers will have no voting rights in
the converted Savings Bank or the Holding Company and therefore will not be able
to elect directors of the Savings Bank or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Savings Bank. Subsequent to the Conversion, voting rights will be vested
exclusively in the Holding Company with respect to the Savings Bank and the
holders of the Common Stock as to matters pertaining to the Holding Company.
Each holder of Common Stock shall be entitled to vote on any matter to be
considered by the stockholders of the Holding Company. A stockholder will be
entitled to one vote for each share of Common Stock owned.
SAVINGS ACCOUNTS AND LOANS. The Savings Bank's savings accounts, account
balances and existing FDIC insurance coverage of savings accounts will not be
affected by the Conversion. Furthermore, the Conversion will not affect the
loan accounts, loan balances or obligations of borrowers under their individual
contractual arrangements with the Savings Bank.
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TAX EFFECTS. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Savings Bank
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus their interest in the liquidation account; (iii) the tax
basis of account holders' accounts in the Savings Bank immediately after the
Conversion will be the same as the tax basis of their accounts immediately prior
to Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be equal to the value, if any, of that interest; (v)
the tax basis of the Common Stock purchased in the Conversion will be the amount
paid and the holding period for such stock will commence on the date following
the date of purchase; and (vi) no gain or loss will be recognized to account
holders upon the receipt or exercise of Subscription Rights in the Conversion,
except to the extent Subscription Rights are deemed to have value as discussed
below. Unlike a private letter ruling issued by the IRS, an opinion of counsel
is not binding on the IRS and the IRS could disagree with the conclusions
reached therein. In the event of such disagreement, no assurance can be given
that the conclusions reached in an opinion of counsel would be sustained by a
court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable to the
extent, if any, that the Subscription Rights are deemed to have a fair market
value. RP Financial, a financial consulting firm retained by the Savings Bank,
whose findings are not binding on the IRS, has indicated that the Subscription
Rights do not have any value, based on the fact that such rights are acquired by
the recipients without cost, are nontransferable and of short duration and
afford the recipients the right only to purchase shares of the Common Stock at a
price equal to its estimated fair market value, which will be the same price
paid by purchasers in the Direct Community Offering and/or Public Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their Subscription Rights. The Savings Bank could also
recognize a gain on the distribution of such Subscription Rights. Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members are
encouraged to consult with their own tax advisors as to the tax consequences in
the event the Subscription Rights are deemed to have a fair market value.
The Savings Bank has also received an opinion from Price Waterhouse LLP,
that, assuming the Conversion does not result in any federal income tax
liability to the Savings Bank, its account holders, or the Holding Company,
implementation of the Plan of Conversion will not result in any California
income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Price Waterhouse LLP and the letter
from RP Financial are filed as exhibits to the Registration Statement. See
"ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Savings Bank in its present mutual form, each depositor in the Savings Bank
would receive a pro rata share of any assets of the Savings Bank remaining after
payment of claims of all creditors (including the claims of all depositors up to
the withdrawal value of their accounts). Each depositor's pro rata share of
such remaining assets would be in the same proportion as the value of his
deposit account to the total value of all deposit accounts in the Savings Bank
at the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the Savings
Bank, including certificates of deposit ("Savings Account(s)"), shall not be
entitled to share in any residual assets in the event of liquidation of the
Savings Bank. However, pursuant to OTS regulations, the Savings Bank shall, at
the time of the Conversion,
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establish a liquidation account in an amount equal to its total equity as of the
date of the latest statement of financial condition contained herein.
The liquidation account shall be maintained by the Savings Bank subsequent
to the Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Savings Bank.
Each Eligible Account Holder and Supplemental Eligible Account Holder shall,
with respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Savings Bank subsequent to August 31, 1994 is less than the
lesser of (i) the deposit balance in such Savings Account at the close of
business on any other annual closing date subsequent to August 31, 1994 or March
31, 1996 or (ii) the amount of the "qualifying deposit" in such Savings Account
on August 31, 1994 or March 31, 1996, then the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
a downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Savings Bank (and only in
such event) each Eligible Account Holder and Supplemental Eligible Account
Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance(s) for Savings Account(s) then held by such holder before any
liquidation distribution may be made to stockholders. No merger, consolidation,
bulk purchase of assets with assumptions of Savings Accounts and other
liabilities or similar transactions with another federally insured institution
in which the Savings Bank is not the surviving institution shall be considered
to be a complete liquidation. In any such transaction the liquidation account
shall be assumed by the surviving institution.
THE SUBSCRIPTION, DIRECT COMMUNITY AND PUBLIC OFFERINGS
THE SUBSCRIPTION AND DIRECT COMMUNITY OFFERING IS EXPECTED TO EXPIRE AT
NOON, PACIFIC TIME, ON THE EXPIRATION DATE, UNLESS EXTENDED OR CONTINUED AS
DESCRIBED ON THE COVER PAGE OF THIS PROSPECTUS.
SUBSCRIPTION OFFERING. In accordance with the Plan, nontransferable
Subscription Rights to purchase the Common Stock have been issued to all persons
and entities entitled to purchase the Common Stock in the Subscription Offering.
The amount of the Common Stock which these parties may purchase will be subject
to the availability of the Common Stock for purchase under the categories set
forth in the Plan. Subscription priorities have been established for the
allocation of stock to the extent that the Common Stock is available. These
priorities are as follows:
Category 1: ELIGIBLE ACCOUNT HOLDERS. Each depositor with $50.00 or more
on deposit at the Savings Bank as of August 31, 1994 will receive
nontransferable Subscription Rights to subscribe for up to the greater of
$250,000 of Common Stock, one-tenth of one percent of the total offering of
Common Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of Subscription
Rights in this category results in an oversubscription, shares of Common Stock
will be allocated among
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subscribing Eligible Account Holders so as to permit each Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make such person's total allocation equal 100 shares or the number of shares
actually subscribed for, whichever is less. Thereafter, unallocated shares
will be allocated among subscribing Eligible Account Holders proportionately,
based on the amount of their respective qualifying deposits as compared to
total qualifying deposits of all Eligible Account Holders. Subscription
Rights received by officers and directors in this category based on their
increased deposits in the Savings Bank in the one year period preceding
August 31, 1994 are subordinated to the Subscription Rights of other Eligible
Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 8% of the shares
of Common Stock issued in the Conversion. The ESOP intends to purchase 8% of
the shares of Common Stock issued in the Conversion. In the event the number of
shares offered in the Conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the Common Stock issued in the Conversion.
Category 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each depositor with
$50.00 or more on deposit at the Savings Bank as of March 31, 1996 will receive
nontransferable Subscription Rights to subscribe for up to the greater of
$250,000 of Common Stock, one-tenth of one percent of the total offering of
Common Stock or 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make such
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated among subscribing Supplemental Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Supplemental Eligible Account
Holders.
Category 4: OTHER MEMBERS. Each depositor of the Savings Bank as of the
Voting Record Date will receive nontransferable Subscription Rights to purchase
up to $250,000 of Common Stock in the Conversion to the extent shares are
available following subscriptions by Eligible Account Holders, the Savings
Bank's ESOP and Supplemental Eligible Account Holders. In the event of an
oversubscription in this category, the available shares will be allocated
proportionately based on the amount of their respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR SUBSCRIPTION RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER
PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER
SANCTIONS AND PENALTIES IMPOSED BY THE OTS OR ANOTHER AGENCY OF THE U.S.
GOVERNMENT. Each person exercising Subscription Rights will be required to
certify that he or she is purchasing such shares solely for his or her own
account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares. Once tendered, subscription
orders cannot be revoked without the consent of the Savings Bank and the Holding
Company.
The Subscription Offering and all Subscription Rights under the Plan will
expire at Noon, Pacific Time, on the Expiration Date, whether or not the Savings
Bank has been able to locate each person entitled to such Subscription Rights.
The Subscription Offering may be extended by the Holding Company and the Savings
Bank up to June 28, 1996 without the OTS's approval. OTS regulations require
that the Holding Company complete the sale of Common Stock within 45 days after
the close of the Subscription Offering. If the Direct Community Offering and
the Public Offering, if one is held, are not completed by August 1, 1996 (or
August 12, 1996, if the Subscription Offering is fully extended), all funds
received will be promptly returned with interest at the Savings Bank's passbook
rate and all withdrawal authorizations will be canceled or, if regulatory
approval of an extension of the time period has been granted, all subscribers
and purchasers will be given the right to increase, decrease or
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rescind their orders. If an extension of time is obtained, all subscribers will
be notified of such extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by the
Holding Company from a subscriber, the subscriber's order will be rescinded and
all funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
DIRECT COMMUNITY OFFERING. Concurrently with the Subscription Offering,
the Holding Company is offering shares of the Common Stock to certain members of
the general public in a Direct Community Offering, with preference given to
natural persons and trusts of natural persons residing in the Local Community.
Depending on market conditions, shares of Common Stock may be offered for sale
to the general public in the Direct Community Offering through a syndicate of
registered broker-dealers to be managed by EVEREN Securities acting as agent of
the Holding Company. Purchasers in the Direct Community Offering are eligible
to purchase up to $250,000 of Common Stock in the Conversion (or 25,000 shares
based on the Purchase Price). Orders for the Common Stock in the Direct
Community Offering will be filled to the extent such shares remain available
after satisfaction of all orders received in the Subscription Offering. In the
event an insufficient number of shares are available to fill orders in the
Direct Community Offering, shares will be allocated among prospective purchasers
in an amount equal to the lesser of 100 shares or the number of shares
subscribed for by each such prospective purchaser if possible. Thereafter,
unallocated shares shall be allocated among the prospective purchasers whose
orders remain unsatisfied on a 100 shares per order basis until all such orders
have been filled or the remaining shares have been allocated. The Direct
Community Offering is expected to terminate at Noon, Pacific Time, on the
Expiration Date unless extended by the Holding Company and the Savings Bank,
with approval of the OTS, if necessary. Any extensions beyond 45 days after the
close of the Subscription Offering would require a resolicitation of orders,
wherein subscribers would be given the opportunity to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Savings Bank's passbook rate, or
be permitted to modify or cancel their orders. THE RIGHT OF ANY PERSON TO
PURCHASE SHARES IN THE DIRECT COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE
RIGHT OF THE HOLDING COMPANY AND THE SAVINGS BANK TO ACCEPT OR REJECT SUCH
PURCHASES IN WHOLE OR IN PART. THE HOLDING COMPANY PRESENTLY INTENDS TO
TERMINATE THE DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR
ALL SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering and all funds submitted pursuant to the Direct Community
Offering will be refunded promptly with interest.
PUBLIC OFFERING. In the event that shares of Common Stock remain
unsubscribed for after the completion of the Subscription and Direct Community
Offering, these shares may be sold to underwriters for resale in the Public
Offering. It is anticipated that EVEREN Securities will serve as the managing
underwriter for any such Public Offering. An underwriting agreement between the
Holding Company and EVEREN Securities, with respect to the Public Offering, will
not be executed until after the completion of the Subscription and Direct
Community Offering. Whether the Public Offering occurs and an underwriting
agreement with EVEREN Securities is executed will depend upon, among other
things, the negotiation of a mutually acceptable underwriting agreement, the
market conditions then prevailing, the aggregate market value of the Common
Stock not subscribed for in the Subscription and Direct Community Offering and
the then current financial condition of the Savings Bank. In the event that
there is a Public Offering, it is expected that EVEREN Securities will receive
underwriting compensation in an amount to be determined by the Holding Company
and EVEREN Securities, which is currently estimated to be 7% of the aggregate
Actual Purchase Price of the Common Stock sold in the Public Offering.
The number of shares of Common Stock to be sold in the Public Offering, if
any, at the Purchase Price per share will be determined by EVEREN Securities and
the Holding Company. No person may purchase in the Public Offering shares of
Common Stock with an aggregate purchase price of more than $250,000. Shares of
Common Stock purchased in the Direct Community Offering will be counted toward
meeting the maximum purchase limitations of the Public Offering.
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The Public Offering will terminate no more than 45 days following the
Expiration Date, unless extended by the Holding Company with the approval of the
OTS. Such extensions may not be beyond June 17, 1998.
In the event the Savings Bank is unable to find purchasers from the general
public for all unsubscribed shares, other purchase arrangements will be made by
the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (i) no single extension
exceeds 90 days, (ii) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan. If the Conversion is not consummated within 45 days after
the close of the Subscription Offering, either all funds received will be
returned with interest (and withdrawal authorizations canceled) or, if the OTS
has granted an extension of time, all subscribers will be given the right to
increase, decrease or rescind their subscriptions at any time prior to 20 days
before the end of the extension period. If an extension of time is obtained,
all subscribers will be notified of such extension and of their rights to modify
their orders. If an affirmative response to any resolicitation is not received
by the Holding Company from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).
PERSONS IN NON-QUALIFIED STATES. The Holding Company and the Savings Bank
will make reasonable efforts to comply with the securities laws of all states in
the United States in which persons entitled to subscribe for stock pursuant to
the Plan reside. However, the Holding Company and the Savings Bank are not
required to offer stock in the Subscription Offering to any person who resides
in a foreign country or resides in a state of the United States with respect to
which (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state; or (ii) the Holding Company or the Savings
Bank determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request that the Holding Company and the Savings Bank or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request to register or otherwise
qualify the Subscription Rights or Common Stock for sale or submit any filing
with respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Holding Company and the Savings
Bank will base their decision as to whether or not to offer the Common stock in
such state on a number of factors, including the size of accounts held by
account holders in the state, the cost of registering or qualifying the shares
or the need to register the Holding Company, its officers, directors or
employees as brokers, dealers or salesmen.
LIMITATIONS ON PURCHASES OF SHARES
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares. With the
exception of the ESOP, which is expected to subscribe for 8% of the shares of
Common Stock issued in the Conversion, no person or entity may purchase shares
with an aggregate purchase price of more than $250,000 (or 25,000 shares based
on the Purchase Price). Additionally, no person or entity, together with
associates of or persons acting in concert with such person or entity, may
purchase in the aggregate more than 1% of the shares issued in the Conversion.
Officers, directors and their associates may not purchase, in the aggregate,
more than 25% of the shares of Common Stock offered in the Conversion. For
purposes of the Plan, the directors are not deemed to be acting in concert
solely by reason of their Board membership. Pro rata reductions within each
Subscription Rights category will be made in allocating shares to the extent
that the maximum purchase limitations are exceeded.
The Savings Bank's and the Holding Company's Boards of Directors may, in
their sole discretion, increase the maximum purchase limitation set forth above
up to 9.99% of the shares of Common Stock sold in the Conversion, provided that
orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion may not exceed, in the aggregate, 10% of the shares sold in the
Conversion. The Savings Bank and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above 25,000
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shares of Common Stock, all persons who subscribed for the maximum number of
shares will be given the opportunity to increase their subscriptions
accordingly, subject to the rights and preferences of any person who has
priority Subscription Rights.
The term "acting in concert" is defined in the Plan to mean (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. In
general, a person who acts in concert with another other party shall also be
deemed to be acting in concert with any person who is also acting in concert
with that other party.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Savings Bank or a majority-owned
subsidiary of the Savings Bank) of which such person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Savings Bank or any of its parents or subsidiaries. For example, a corporation
of which a person serves as an officer would be an associate of such person,
and, therefore, all shares purchased by such corporation would be included with
the number of shares which such person could purchase individually under the
above limitations.
The term "officer" is defined in the Plan to mean an executive officer of
the Savings Bank, including its Chairman of the Board, President, Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary and Treasurer.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Savings Bank and the Holding Company and by members and persons associated with
members of the National Association of Securities Dealers, Inc. ("NASD"). See
"-- Restrictions on Transferability by Directors and Officers and NASD Members."
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION AND DIRECT COMMUNITY OFFERING
The Savings Bank and the Holding Company have retained EVEREN Securities to
consult with and advise the Savings Bank and to assist the Savings Bank and the
Holding Company, on a best efforts basis, in the distribution of shares in the
Offerings. EVEREN Securities will assist the Savings Bank in the Conversion as
follows: (i) it will act as marketing advisor with respect to the Subscription
Offering and will represent the Savings Bank as placement agent on a best
efforts basis in the sale of the Common Stock in the Direct Community Offering;
(ii) it will conduct training sessions so that directors, officers and employees
of the Savings Bank are knowledgeable regarding the Conversion process; and
(iii) it will establish and manage the Conversion Center.
Based upon negotiations between EVEREN Securities on the one hand and the
Holding Company and the Savings Bank on the other hand concerning fee structure,
EVEREN Securities has received a non-refundable retainer fee in the amount of
$25,000. Further, EVEREN Securities shall receive 1.05% of the aggregate dollar
amount of Common Stock offered at the midpoint of the Estimated Valuation Range,
excluding shares purchased by the Savings Bank's directors, officers and
employees and the ESOP. In the event selected dealers (including EVEREN
Securities) are utilized to assist in the sale of shares in the Direct Community
Offering, selected dealers will be paid a fee of 3.5% of the aggregate Purchase
Price of the shares sold in such manner and EVEREN Securities will be paid a
management fee equal to 1.5% of the aggregate Purchase Price of shares sold in
such manner. Any such management fees received by EVEREN Securities in the
Direct Community Offering will be credited to the fee described in the second
preceding sentence. Fees and commissions paid to EVEREN Securities and to any
other selected dealers may be
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deemed to be underwriting fees, and EVEREN Securities and such selected dealers
may be deemed to be underwriters. EVEREN Securities will also be reimbursed for
its reasonable out-of-pocket expenses, including legal fees, not to exceed
$60,000 in the aggregate. Total fees and expenses of EVEREN Securities are
expected to be $563,000. For additional information, see "-- Stock Pricing and
Number of Shares to be Issued" and "USE OF PROCEEDS." The Holding Company and
the Savings Bank have also agreed to indemnify EVEREN Securities against certain
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon the Offerings,
including certain liabilities under the Securities Act or to contribute to
payments made in the respect thereof.
DESCRIPTION OF SALES ACTIVITIES
The Common Stock will be offered in the Subscription and Direct Community
Offering principally by the distribution of this Prospectus and through
activities conducted at the Savings Bank's Conversion Center at its main office
facility. The Conversion Center is expected to operate during normal business
hours throughout the Subscription and Direct Community Offering. It is expected
that at any particular time, several EVEREN Securities employees will be working
at the Conversion Center. Such employees of EVEREN Securities will be
responsible for mailing materials relating to the Subscription and Direct
Community Offering, responding to questions regarding the Conversion and the
Subscription and Direct Community Offering and processing stock orders.
Sales of Common Stock will be made by registered representatives affiliated
with EVEREN Securities or by the selected dealers managed by EVEREN Securities.
The management and employees of the Savings Bank may participate in the
Offerings in clerical capacities, providing administrative support in effecting
sales transactions or, when permitted by state securities laws, answering
questions of a mechanical nature relating to the proper execution of the Stock
Order Form, subject to applicable state securities laws limitations, if any.
Management of the Savings Bank may answer questions regarding the business of
the Savings Bank when permitted by state securities laws. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. The management
and employees of the Savings Bank have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
No officer, director or employee of the Savings Bank or the Holding Company
will be compensated, directly or indirectly, for any activities in connection
with the offer or sale of securities issued in the Conversion.
None of the Savings Bank's personnel participating in the Subscription and
Direct Community Offering is registered or licensed as a broker or dealer or an
agent of a broker or dealer. The Savings Bank's personnel will assist in the
above-described sales activities pursuant to an exemption from registration as a
broker or dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the
Exchange Act. Rule 3a4-1 generally provides that an "associated person of an
issuer" of securities shall not be deemed a broker solely by reason of
participation in the sale of securities of such issuer if the associated person
meets certain conditions. Such conditions include, but are not limited to, that
the associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his or her participation in the sale of securities. For
purposes of this exemption, "associated person of an issuer" is defined to
include any person who is a director, officer or employee of the issuer or a
company that controls, is controlled by or is under common control with the
issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the Stock
Order Form will confirm receipt or delivery in accordance with Rule 15c2-8.
Stock Order Forms will only be distributed with a Prospectus. The Savings Bank
will accept for processing only orders submitted on original Stock Order Forms
accompanied by fully executed Certification Forms.
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To purchase shares in the Subscription and Direct Community Offering, the
accompanying original Stock Order Form (facsimile copies and photocopies will
not be accepted) and a fully executed separate Certification Form, along with
the required full payment for each share subscribed for, or with appropriate
authorization for withdrawal of full payment from the subscriber's deposit
account with the Savings Bank (which may be given by completing the appropriate
blanks in the Stock Order Form), must be received by the Savings Bank by Noon,
Pacific Time, on the Expiration Date. Payment for shares of Common Stock by
wire transfer will not be accepted. Stock Order Forms which are not received by
such time or are executed defectively or are received without full payment (or
without appropriate withdrawal instructions) are not required to be accepted.
The Holding Company and the Savings Bank have the right to waive or permit the
correction of incomplete or improperly executed Stock Order Forms, but do not
represent that they will do so. Pursuant to the Plan of Conversion, the
interpretation by the Holding Company and the Savings Bank of the terms and
conditions of the Plan of Conversion and of the Stock Order Form will be final.
Once received, an executed Stock Order Form may not be modified, amended or
rescinded without the consent of the Savings Bank unless the Conversion has not
been consummated within 45 days after the end of the Subscription Offering,
unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (August 31,
1994) and/or the Supplemental Eligibility Record Date (March 31, 1996) and/or
the Voting Record Date (April 30, 1996) must list all accounts on the Stock
Order Form giving all names in each account, the account number and the
approximate account balance as of such date.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Savings Bank, (ii) by check, bank draft, or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the Savings
Bank. Appropriate means by which such withdrawals may be authorized are
provided on the Stock Order Form. No wire transfers will be accepted. Interest
will be paid on payments made by cash, check, bank draft or money order at the
Savings Bank's passbook rate from the date payment is received until
consummation or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until consummation or termination of the Conversion (unless
the certificate matures after the date of receipt of the Stock Order Form but
prior to closing, in which case funds will earn interest at the passbook rate
from the date of maturity until consummation of the Conversion), but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
consummation or termination of the Conversion. At the consummation of the
Conversion, the funds received in the Offerings will be used to purchase the
shares of Common Stock ordered. THE SHARES ISSUED IN THE CONVERSION CANNOT AND
WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. In the event
that the Conversion is not consummated for any reason, all funds submitted will
be promptly refunded with interest as described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of the
aggregate Purchase Price from his or her deposit account, the Savings Bank will
do so as of the effective date of Conversion, though the account must contain
the full amount necessary for payment at the time the subscription order is
received. The Savings Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Savings Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment
from an unrelated financial institution or the Holding Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
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Individual Retirement Accounts ("IRAs") maintained in the Savings Bank do
not permit investment in the Common Stock. A depositor interested in using his
or her IRA funds to purchase Common Stock must do so through a self-directed
IRA. Because the Savings Bank does not offer such accounts, it will allow such
a depositor to make a trustee-to-trustee transfer of the IRA funds to a trustee
offering a self-directed IRA program with the agreement that such funds will be
used to purchase the Holding Company's Common Stock in the Offerings. There
will be no early withdrawal or IRS interest penalties for such transfers. The
new trustee would hold the Common Stock in a self-directed account in the same
manner as the Savings Bank now holds the depositor's IRA funds. An annual
administrative fee may be payable to the new trustee. Depositors interested in
using funds in a Savings Bank IRA to purchase Common Stock should contact the
Conversion Center at the main office of the Savings Bank so that the necessary
forms may be forwarded for execution and returned prior to the Expiration Date.
In addition, the provisions of ERISA and IRS regulations require that officers,
directors and 10% shareholders who use self-directed IRA funds to purchase
shares of Common Stock in the Subscription and Direct Community Offering, make
such purchases for the exclusive benefit of IRAs.
Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Stock Order Forms or to the last address of such persons
appearing on the records of the Savings Bank as soon as practicable following
completion of the sale of all shares of Common Stock. Any certificates returned
as undeliverable will be disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of Common Stock which they
purchased, even though trading in the Common Stock may have commenced.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations require that the aggregate Purchase Price of the
securities sold in connection with the Conversion be based upon an estimated pro
forma market value of the Holding Company and the Savings Bank as converted
(I.E., taking into account the expected receipt of proceeds from the sale of
securities in the Conversion), as determined by an independent appraisal. The
Savings Bank and the Holding Company have retained RP Financial to prepare an
appraisal of the pro forma market value of the Holding Company and the Savings
Bank as converted, as well as to prepare a business plan. RP Financial will
receive a fee expected to total approximately $32,500 for its appraisal services
and preparation of a business plan, plus reasonable out-of-pocket expenses
incurred in connection with the appraisal. The Savings Bank has agreed to
indemnify RP Financial under certain circumstances against liabilities and
expenses (including legal fees) arising out of, related to, or based upon the
Conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Holding Company and the Savings Bank as converted taking into
account the formation of the Holding Company as the holding company for the
Savings Bank. For its analysis, RP Financial undertook substantial
investigations to learn about the Savings Bank's business and operations.
Management supplied financial information, including annual financial
statements, information on the composition of assets and liabilities, and other
financial schedules. In addition to this information, RP Financial reviewed the
Savings Bank's Form AC Application for Approval of Conversion and the Holding
Company's Form S-1 Registration Statement. Furthermore, RP Financial visited
the Savings Bank's facilities and had discussions with the Savings Bank's
management and its special conversion legal counsel, Breyer & Aguggia. No
detailed individual analysis of the separate components of the Holding Company's
or the Savings Bank's assets and liabilities was performed in connection with
the evaluation.
In estimating the pro forma market value of the Holding Company and the
Savings Bank as converted, as required by applicable regulatory guidelines, RP
Financial's analysis utilized three selected valuation procedures, the
Price/Book ("P/B") method, the Price/Earnings ("P/E") method, and Price/Assets
("P/A") method, all of which are described in its report. RP Financial placed
the greatest emphasis on the P/E and P/B methods in estimating pro forma market
value. In applying these procedures, RP Financial reviewed, among other
factors, the economic make-up of the Savings Bank's primary market area, the
Savings Bank's financial performance and condition in relation
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to publicly-traded institutions that RP Financial deemed comparable to the
Savings Bank, the specific terms of the offering of the Holding Company's Common
Stock, the pro forma impact of the additional capital raised in the Conversion,
conditions of securities markets in general, and the market for thrift
institution common stock in particular. RP Financial's analysis provides an
approximation of the pro forma market value of the Holding Company and the
Savings Bank as converted based on the valuation methods applied and the
assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of the Holding Company after the
Conversion that were utilized in determining the appraised value. These
assumptions included expenses of $1.1 million at the midpoint of the Estimated
Valuation Range, an assumed after-tax rate of return on the net Conversion
proceeds of 3.03%, purchases by the ESOP of 8% of the stock sold in the
Conversion and purchases in the open market by the MRP of a number of shares
equal to 4% of the stock sold in the Conversion at the Purchase Price. See "PRO
FORMA DATA" for additional information concerning these assumptions. The use of
different assumptions may yield somewhat different results.
On the basis of the foregoing, RP Financial has advised the Holding Company
and the Savings Bank that, in its opinion, as of March 1, 1996, the aggregate
estimated pro forma market value of the Holding Company and the Savings Bank as
converted and, therefore, the Common Stock was within the valuation range of
$43,350,000 to $58,650,000 with a midpoint of $51,000,000. After reviewing the
methodology and the assumptions used by RP Financial in the preparation of the
appraisal, the Board of Directors established the Estimated Valuation Range
which is equal to the valuation range of $43,350,000 to $58,650,000 with a
midpoint of $51,000,000. Assuming that the shares are sold at $10.00 per share
in the Conversion, the estimated number of shares would be between 4,335,000 and
5,865,000 with a midpoint of 5,100,000. The Purchase Price of $10.00 was
determined by discussion among the Boards of Directors of the Savings Bank and
the Holding Company and EVEREN Securities, taking into account, among other
factors, (i) the requirement under OTS regulations that the Common Stock be
offered in a manner that will achieve the widest distribution of the stock and
(ii) desired liquidity in the Common Stock subsequent to the Conversion. Since
the outcome of the Offerings relate in large measure to market conditions at the
time of sale, it is not possible to determine the exact number of shares that
will be issued by the Holding Company at this time. The Estimated Valuation
Range may be amended, with the approval of the OTS, if necessitated by
developments following the date of such appraisal in, among other things, market
conditions, the financial condition or operating results of the Savings Bank,
regulatory guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription and Direct Community Offering, at
least the minimum number of shares are subscribed for, RP Financial, after
taking into account factors similar to those involved in its prior appraisal,
will determine its estimate of the pro forma market value of the Holding Company
and the Savings Bank as converted, as of the close of the Subscription and
Direct Community Offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the OTS that, to the best of RP Financial's knowledge and judgment,
nothing of a material nature has occurred which would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Savings Bank as converted at the time of the sale. If, however, the facts do
not justify such a statement, the Offerings or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Public Offerings held. Under such circumstances, subscribers
would have the right to modify or rescind their subscriptions and to have their
subscription funds returned promptly with interest and holds on funds authorized
for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. In the
event the total amount of shares issued is less than 4,335,000 or more than
6,744,750 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $43,350,000 or more than $67,447,500,
subscription funds will be returned promptly with interest to each
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subscriber unless such person indicates otherwise. In the event a new valuation
range is established by RP Financial, such new range will be subject to approval
by the OTS.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Savings Bank and the Holding Company, if possible.
Such other purchase arrangements will be subject to the approval of the OTS and
may provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended. If such other purchase
arrangements cannot be made, the Plan will terminate.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents the Savings Bank furnished it. RP
Financial also considered financial and other information from regulatory
agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of such information
and did not independently verify the financial statements and other data
provided by the Savings Bank and the Holding Company or independently value the
assets or liabilities of the Holding Company and the Savings Bank. THE
APPRAISAL BY RP FINANCIAL IS NOT INTENDED TO BE, AND MUST NOT BE INTERPRETED AS,
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
PLAN OF CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK. MOREOVER, BECAUSE
THE APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH CHANGE FROM TIME TO
TIME, THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE SUCH SHARES IN THE
CONVERSION WILL LATER BE ABLE TO SELL SHARES THEREAFTER AT PRICES AT OR ABOVE
THE PURCHASE PRICE.
RESTRICTIONS ON REPURCHASE OF STOCK
Pursuant to OTS regulations, OTS-regulated savings associations (and their
holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of: (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases of any of its common stock are prohibited if the effect thereof
would cause the savings association's regulatory capital to be reduced below (a)
the amount required for the liquidation account or (b) the regulatory capital
requirements imposed by the OTS. Repurchases are generally prohibited during
the first year following conversion. However, recent OTS policy has relaxed
this restriction, particularly during the second six months after conversion.
While an applicant needs to demonstrate the existence of "exceptional
circumstances" during the first six months after conversion, the OTS has
indicated that it would analyze repurchases during months six through 12 after
conversion on a case-by-case basis. Upon ten days' written notice to the OTS,
and if the OTS does not object, an institution may make open market repurchases
of its outstanding common stock during years two and three following the
conversion, provided that (x) no more than 5% of the outstanding common stock is
to be purchased during any 12-month period, (y) the repurchases do not cause the
institution to become undercapitalized as defined under the OTS prompt
corrective action regulations and (z) the repurchase would not adversely affect
the financial condition of the institution. No assurances, however, can be
given that the OTS will approve a repurchase program under current policy or
that such policy will not change or become more restrictive.
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the Savings
Bank, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement with respect to such intended
purchases. Directors and officers of the Savings Bank and their associates may
not purchase in excess of 25% of the shares sold in the Conversion and,
therefore, actual purchases could be more or less than indicated below. For
purposes of the
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following table, it has been assumed that sufficient shares will be available to
satisfy subscriptions in all categories. Directors, officers and employees will
pay the same price for the shares for which they subscribe as the price that
will be paid by all other subscribers.
<TABLE>
<CAPTION>
Percent of
Shares at
Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated
Position Shares Purchased(1) Amount Purchased Valuation Range
-------- ------------------- ---------------- ----------------
<S> <C> <C> <C>
Bruce W. Bennett 5,000 $ 50,000 0.09%
Director
Michael C. Billings 5,000 50,000 0.09
Director
Craig G. Blunden 25,000 250,000 0.43
President, Chief Executive
Officer and Director
Debbi H. Guthrie 5,000 50,000 0.09
Director
David W. Mitchell 25,000 250,000 0.43
Director
Roy H. Taylor 25,000 250,000 0.43
Director
Robert G. Schrader 20,000 200,000 0.34
Executive Vice President
and Director
Donald L. Blanchard 2,000 20,000 0.03
Senior Vice President
Richard L. Gale 2,500 25,000 0.04
Senior Vice President
William E. Harris 25,000 250,000 0.43
Senior Vice President
Karl P. Zalazowski 2,000 20,000 0.03
Senior Vice President ------- ---------- ----
Total 141,500 $1,415,000 2.41%
------- ---------- ----
------- ---------- ----
</TABLE>
- -----------------
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of the
number of shares to be purchased by the ESOP and expected awards under the
MRP and Stock Option Plan, see "MANAGEMENT OF THE SAVINGS BANK -- Benefits
-- Employee Stock Ownership Plan," "-- Benefits -- 1996 Stock Option Plan"
and "-- Benefits -- Management Recognition Plan."
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of Common Stock purchased in the Offerings by directors and officers
of the Holding Company may not be sold for a period of one year following
consummation of the Conversion, except in the event of the death of the
stockholder or in any exchange of the Common Stock in connection with a merger
or acquisition of the Holding Company. Shares of Common Stock received by
directors or officers through the ESOP or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the
Conversion are not subject to this restriction. Accordingly, shares of Common
Stock issued by the Holding Company to directors and
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officers shall bear a legend giving appropriate notice of the restriction, and,
in addition, the Holding Company will give appropriate instructions to the
transfer agent for the Holding Company's Common Stock with respect to the
restriction on transfers. Any shares issued to directors and officers as a
stock dividend, stock split or otherwise with respect to restricted Common Stock
shall be subject to the same restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Savings Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. The registration under the Securities Act of shares
of the Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with Subscription Rights and to certain reporting
requirements upon purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Delaware corporate law, as well as the Certificate of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Certificate of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
CONVERSION REGULATIONS
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution.
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However, offers made exclusively to an association (or its holding company) or
an underwriter or member of a selling group acting on the converting
institution's (or its holding company's) behalf for resale to the general public
are excepted. The regulation also provides civil penalties for willful
violation or assistance in any such violation of the regulation by any person
connected with the management of the converting institution (or its holding
company) or who controls more than 10% of the outstanding shares or voting
rights of a converting or converted institution (or its holding company).
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings association or its parent holding company unless the OTS
has been given 60 days' prior written notice and has not issued a notice
disapproving the proposed acquisition. In addition, OTS regulations provide
that no company may acquire control of a savings association without the prior
approval of the OTS. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
ANTI-TAKEOVER PROVISIONS IN THE HOLDING COMPANY'S CERTIFICATE OF INCORPORATION
AND BYLAWS AND DELAWARE LAW
A number of provisions of the Holding Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of
certain provisions of the Holding Company's Certificate of Incorporation and
Bylaws and regulatory provisions relating to stock ownership and transfers, the
Board of Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Holding Company stockholders may deem to be in
their best interests or in which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the
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Certificate of Incorporation and Bylaws of the Holding Company is necessarily
general, and reference should be made in each case to such Certificate of
Incorporation and Bylaws, which are incorporated herein by reference. See
"ADDITIONAL INFORMATION" as to how to obtain a copy of these documents.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES. The Certificate of
Incorporation provides that for a period of five years from the effective date
of the Conversion, no person may acquire directly or indirectly the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company, unless such offer or acquisition shall have been approved in advance by
a two-thirds vote of the Holding Company's Continuing Directors (as defined in
the Certificate of Incorporation). This provision does not apply to any
employee stock benefit plan of the Holding Company. In addition, during such
five-year period, no shares beneficially owned in violation of the foregoing
percentage limitation, as determined by the Holding Company's Board of
Directors, shall be entitled to vote in connection with any matter submitted to
stockholders for a vote. Additionally, the Certificate of Incorporation
provides for further restrictions on voting rights of shares owned in excess of
10% of any class of equity security of the Holding Company beyond five years
after the Conversion. Specifically, the Certificate of Incorporation provides
that if, at any time after five years from the Conversion, any person acquires
the beneficial ownership of more than 10% of any class of equity security of the
Holding Company, then, with respect to each vote in excess of 10%, the record
holders of voting stock of the Holding Company beneficially owned by such person
shall be entitled to cast only one-hundredth of one vote with respect to each
vote in excess of 10% of the voting power of the outstanding shares of voting
stock of the Holding Company which such record holders would otherwise be
entitled to cast without giving effect to the provision, and the aggregate
voting power of such record holders shall be allocated proportionately among
such record holders. An exception from the restriction is provided if the
acquisition of more than 10% of the securities received the prior approval by a
two-thirds vote of the Holding Company's "Continuing Directors." Under the
Holding Company's Certificate of Incorporation, the restriction on voting shares
beneficially owned in violation of the foregoing limitations is imposed
automatically. In order to prevent the imposition of such restrictions, the
Board of Directors must take affirmative action approving in advance a
particular offer to acquire or acquisition. Unless the Board took such
affirmative action, the provision would operate to restrict the voting by
beneficial owners of more than 10% of the Holding Company's Common Stock in a
proxy contest.
BOARD OF DIRECTORS. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's
Certificate of Incorporation provides that the size of the Board shall be as set
forth in the Bylaws. The Bylaws currently set the number of directors at seven.
The Certificate of Incorporation provides that any vacancy occurring in the
Board, including a vacancy created by an increase in the number of directors,
shall be filled by a vote of two-thirds of the directors then in office and any
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which the director has been
chosen expires. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Certificate of Incorporation of the Holding Company provides that
a director may be removed from the Board of Directors prior to the expiration of
his or her term only for cause and only upon the vote of 80% of the outstanding
shares of voting stock. In the absence of this provision, the vote of the
holders of a majority of the shares could remove the entire Board, but only with
cause, and replace it with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
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AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 15,000,000 shares of Common Stock and 2,000,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits, restricted stock grants and the exercise of stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences. As a result of
the ability to fix voting rights for a series of preferred stock, the Board has
the power to the extent consistent with its fiduciary duty to issue a series of
preferred stock to persons friendly to management in order to attempt to block a
tender offer, merger or other transaction by which a third party seeks control
of the Holding Company, and thereby assist members of management to retain their
positions. The Holding Company's Board currently has no plans for the issuance
of additional shares, other than the issuance of shares of Common Stock upon
exercise of stock options.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Holding Company's outstanding shares of voting
stock to approve certain "Business Combinations" (as defined therein) involving
a "Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became an
Related Person. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity (other than the Holding Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Holding Company or an
affiliate of such person or entity. This provision of the Certificate of
Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation of the Holding Company with or into
any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of the Holding Company or combined
assets of the Holding Company and its subsidiaries to a Related Person; (iii)
any merger or consolidation of a Related Person with or into the Holding Company
or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of the Holding
Company and any other affected class of stock. One exception under Delaware law
to the majority approval requirement applies to stockholders owning 15% or more
of the common stock of a corporation for a period of less than three years.
Such 15% stockholder, in order to obtain approval of a business combination,
must obtain the approval of two-thirds of the outstanding stock, excluding the
stock owned by such 15% stockholder, or satisfy other requirements under
Delaware law relating to board of director approval of his or her acquisition of
the shares of the Holding Company. The increased stockholder vote required to
approve a business combination may have the effect of foreclosing mergers and
other business combinations which a majority of stockholders deem desirable and
place the power to prevent such a merger or combination in the hands of a
minority of stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights,
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the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Holding Company and amendment of the Holding
Company's Bylaws and Certificate of Incorporation. The Holding Company's Bylaws
may be amended by its Board of Directors, or by a vote of 80% of the total votes
eligible to be voted at a duly constituted meeting of stockholders.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Certificate of Incorporation of
the Holding Company requires a stockholder who intends to nominate a candidate
for election to the Board of Directors or to raise new business at a stockholder
meeting to give not less than 30 nor more than 60 days' advance notice to the
Secretary of the Holding Company. The notice provision requires a stockholder
who desires to raise new business to provide certain information to the Holding
Company concerning the nature of the new business, the stockholder and the
stockholder's interest in the business matter. Similarly, a stockholder wishing
to nominate any person for election as a director must provide the Holding
Company with certain information concerning the nominee and the proposing
stockholder.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S CERTIFICATE
OF INCORPORATION AND BYLAWS. The Board of Directors of the Savings Bank
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by its Board of
Directors. These provisions will also assist the Savings Bank in the orderly
deployment of the Conversion proceeds into productive assets during the initial
period after the Conversion. The Board of Directors believes these provisions
are in the best interest of the Savings Bank and the Holding Company and its
stockholders. In the judgment of the Board of Directors, the Holding Company's
Board will be in the best position to determine the true value of the Holding
Company and to negotiate more effectively for what may be in the best interests
of its stockholders. Accordingly, the Board of Directors believes that it is in
the best interest of the Holding Company and its stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price reflective of the true value of the
Holding Company and which is in the best interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which
have not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
which is under different management and whose objective may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for Exchange Act deregistration.
Despite the belief of the Savings Bank and the Holding Company as to the
benefits to stockholders of these provisions of the Holding Company's
Certificate of Incorporation and Bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market
104
<PAGE>
prices. As a result, stockholders who might desire to participate in such a
transaction may not have any opportunity to do so. Such provisions will also
render the removal of the Holding Company's Board of Directors and of management
more difficult. The Board of Directors of the Savings Bank and the Holding
Company, however, have concluded that the potential benefits outweigh the
possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Delaware business corporation. The Holding Company and the
Savings Bank do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
The cumulative effect of the restrictions on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws and Holding
Company, federal law and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
GENERAL
The Holding Company is authorized to issue 15,000,000 shares of Common
Stock having a par value of $.01 per share and 2,000,000 shares of preferred
stock having a par value of $.01 per share. The Holding Company currently
expects to issue up to 5,865,000 shares of Common Stock and no shares of
preferred stock in the Conversion. Each share of the Holding Company's Common
Stock will have the same relative rights as, and will be identical in all
respects with, each other share of Common Stock. Upon payment of the Purchase
Price for the common stock, in accordance with the Plan of Conversion, all such
stock will be duly authorized, fully paid and nonassessable.
THE COMMON STOCK OF THE HOLDING COMPANY WILL REPRESENT NONWITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of Common Stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues preferred stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
STOCK REPURCHASES. The Plan of Conversion and OTS regulations place
certain limitations on the repurchase of the Holding Company's capital stock.
See "THE CONVERSION -- Restrictions on Repurchase of Stock" and "USE OF
PROCEEDS."
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the Holding
Company will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Delaware law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder of Common
Stock will be entitled to one vote per share and will not have any right to
cumulate votes in the election of directors. If the Holding Company issues
preferred stock, holders of the
105
<PAGE>
preferred stock may also possess voting rights. Certain matters require a vote
of 80% of the outstanding shares entitled to vote thereon. See "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY."
As a federal mutual savings bank, corporate powers and control of the
Savings Bank are vested in its Board of Directors, who elect the officers of the
Savings Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Savings Bank,
all of which will be owned by the Holding Company, and voted at the direction of
the Holding Company's Board of Directors. Consequently, the holders of the
Common Stock will not have direct control of the Savings Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Savings Bank, the Holding Company, as holder of the Savings Bank's capital
stock would be entitled to receive, after payment or provision for payment of
all debts and liabilities of the Savings Bank (including all deposit accounts
and accrued interest thereon) and after distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders (see "THE CONVERSION"), all assets of the Savings Bank
available for distribution. In the event of liquidation, dissolution or winding
up of the Holding Company, the holders of its common stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Holding Company available for
distribution. If Holding Company preferred stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares which may be
issued. The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the authorized Holding Company preferred stock will
be issued in the Conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights which could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
RESTRICTIONS ON ACQUISITION
Acquisitions of the Holding Company are restricted by provisions in its
Certificate of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Conversion and will
not deregister its Common Stock for a period of at least three years following
the completion of the Conversion. Upon such registration, the proxy and tender
offer rules, insider trading reporting and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Offerings have been opined upon by Breyer & Aguggia and
106
<PAGE>
the California tax consequences of the Offerings have been opined upon by Price
Waterhouse LLP. Breyer & Aguggia and Price Waterhouse LLP have consented to the
references herein to their opinions. Certain legal matters will be passed upon
for EVEREN Securities, Inc. by Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C.
EXPERTS
The consolidated financial statements of the Savings Bank as of June 30,
1994 and 1995 and for each of the three years in the period ended June 30, 1995
included in this Prospectus have been audited by Price Waterhouse LLP,
independent auditors, as stated in its report appearing herein, and have been so
included in reliance upon the report of such firm given upon its authority as
experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the Holding Company and the Savings Bank as converted and
its letter with respect to subscription rights and to the use of its name and
statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-2230) under the Securities Act with respect to the Common
Stock offered in the Conversion. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Savings Bank has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Savings Bank's Special
Meeting and certain other information. This Prospectus omits certain
information contained in such Application. The Application, including the proxy
materials, exhibits and certain other information that are a part thereof, may
be inspected, without charge, at the offices of the OTS, 1700 G Street, N.W.,
Washington, D.C. 20552 and at the office of the Regional Director of the OTS at
the West Regional Office of the OTS, 1 Montgomery Street, Suite 400, San
Francisco, California 94104.
107
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheet as of June 30, 1994 and 1995, and
December 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statement of Operations for the year ended
June 30, 1993, 1994 and 1995, and the six months ended
December 31, 1994 (unaudited) and 1995 (unaudited). . . . . . . . . . .20
Consolidated Statement of Retained Earnings for the year ended
June 30, 1993, 1994 and 1995, and the six months ended
December 31, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . .F-4
Consolidated Statement of Cash Flows for the year ended
June 30, 1993, 1994 and 1995, and the six months ended
December 31, 1994 (unaudited) and 1995 (unaudited) . . . . . . . . . .F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . .F-7
All schedules are omitted as the required information either is not applicable
or is included in the Consolidated Financial Statements or related Notes.
Separate financial statements on the Holding Company have not been included
since it will not engage in material transactions, if any, until after the
Conversion. The Holding Company, which has been inactive to date, has no
significant assets, liabilities, revenues, expenses or contingent liabilities.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Provident Savings Bank, FSB
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Provident Savings Bank, FSB and its subsidiaries at June 30, 1995 and 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Bank'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 8, 1995
F-2
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash $ 11,709 $ 6,233 $ 6,063
Overnight deposits 8,200 5,200 -
Investment securities held-to-maturity,
approximates market (Note 2) 26,301 20,067 21,531
Loans receivable, net (Note 3) 420,159 471,543 460,801
Loans receivable available-for-sale, net (Note 4) 83,049 34,489 56,544
Accrued interest receivable 2,773 2,855 3,017
Real estate available-for-sale, net (Note 5) 9,730 11,204 6,017
Federal Home Loan Bank stock - at cost 5,092 4,360 4,470
Premises and equipment, net (Note 6) 8,336 7,536 7,195
Prepaid expenses and other assets 4,987 3,699 5,053
-------- -------- --------
Total assets $580,336 $567,186 $570,691
-------- -------- --------
-------- -------- --------
LIABILITIES AND RETAINED EARNINGS
Non-interest bearing deposits (Note 7) $ 2,968 $ 2,787 $ 1,887
Interest bearing deposits (Note 7) 468,819 483,798 496,604
Borrowings (Note 8) 56,153 35,063 20,078
Accounts payable and other liabilities 11,081 8,215 13,936
-------- -------- --------
Total liabilities 539,021 529,863 532,505
Commitments and contingencies (Note 12)
Retained earnings - substantially restricted
(Note 10) 41,315 37,323 38,186
-------- -------- --------
Total liabilities and retained earnings $580,336 $567,186 $570,691
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
Balance at June 30, 1992 $ 38,539
Net income for the year ended June 30, 1993 4,109
--------
Balance at June 30, 1993 42,648
Net loss for the year ended June 30, 1994 (1,333)
--------
Balance at June 30, 1994 41,315
Net loss for the year ended June 30, 1995 (3,992)
--------
Balance at June 30, 1995 37,323
Net income for six months ended December 31, 1995 (unaudited) 863
--------
Balance at December 31, 1995 $ 38,186
--------
--------
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) $ 4,109 $ (1,333) $ (3,992) $ (1,172) $ 863
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 1,740 1,692 1,387 831 536
Amortization of loan fees (552) (478) (90) 1 (118)
Provision for loan losses 1,655 2,033 4,787 594 940
Provision for losses on real estate 419 525 1,665 588 160
(Gain) loss on sale of loans (5,726) (1,246) (701) 238 (1,944)
Increase (decrease) in accounts
payable and other liabilities 734 (6,546) (2,866) (2,016) 5,721
Decrease (increase) in prepaid
expenses and other assets 244 (2,831) 1,054 2,928 (1,356)
Loans originated for sale (684,028) (1,023,377) (161,480) (58,360) (214,605)
Proceeds from sale of loans 618,639 1,045,983 210,741 130,624 195,497
Liquidation of investment securities
held-for-sale 13,249 - - - -
Other (231) 163 (961) (14) (887)
--------- ----------- --------- -------- ---------
Net cash (used for) provided
by operating activities (49,748) 14,585 49,544 74,242 (15,193)
--------- ----------- --------- -------- ---------
Cash flows from financing
activities:
Net (decrease) increase in NOW,
passbook and money market deposits 16,068 46,998 (34,786) (15,840) 2,174
Net increase (decrease) in term deposits (16,321) (29,329) 49,584 15,948 9,732
Repayment of Federal Home
Loan Bank Advances (157,000) (338,000) (153,500) (79,500) (25,500)
Proceeds from Federal Home
Loan Bank Advances 192,000 313,031 135,500 46,500 12,500
Net (decrease) increase in securities
sold under agreements to repurchase - 5,075 (3,090) (5,075) (1,985)
--------- ----------- --------- -------- ---------
Net cash provided by (used for)
financing activities 34,747 (2,225) (6,292) (37,967) (3,079)
--------- ----------- --------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from investing
activities:
Net increase in loans receivable (19,308) (22,036) (67,400) (57,265) 7,770
Maturity of investment securities - - 334,046 241,689 96,302
Purchases of investment securities - (23,121) (330,267) (228,501) (97,186)
Sales (purchases)of Federal
Home Loan Bank stock (418) (751) - - -
Proceeds from the sale of Federal Home
Loan Mortgage Corporation stock - - 1,000 - -
Proceeds from disposal of real estate 927 5,280 8,245 3,814 6,211
(Purchases) of premises and equipment,
net of proceeds from sales (1,000) (1,757) (352) (940) (195)
Other 464 (118) - - -
--------- ----------- --------- -------- ---------
Net cash (used for) provided by
investing activities (19,335) (42,503) (54,728) (41,203) 12,902
--------- ----------- --------- -------- ---------
Net decrease in cash and
cash equivalents (34,336) (30,143) (11,476) (4,928) (5,370)
Cash and cash equivalents at
beginning of period 87,388 53,052 22,909 22,909 11,433
--------- ----------- --------- -------- ---------
Cash and cash equivalents
at end of period $ 53,052 $ 22,909 $ 11,433 $ 17,981 $ 6,063
--------- ----------- --------- -------- ---------
--------- ----------- --------- -------- ---------
Supplemental information:
Cash paid for interest $ 21,981 $ 19,417 $ 22,607 $ 10,591 $ 13,203
--------- ----------- --------- -------- ---------
--------- ----------- --------- -------- ---------
Cash paid (received)
for income taxes $ 5,299 $ 1,840 $ (3,014) $ - $ 950
--------- ----------- --------- -------- ---------
--------- ----------- --------- -------- ---------
Real estate acquired
in settlement of
loans $ 2,749 $ 4,973 $ 11,546 $ 4,910 $ 1,184
--------- ----------- --------- -------- ---------
--------- ----------- --------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
Provident Savings Bank, FSB (the Bank) is a federally chartered mutual
savings bank. The Bank 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 Bank 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Provident
Savings Bank, FSB and its wholly-owned subsidiaries, Provident Financial
Corporation, First Service Corporation and ProFed Mortgage Corporation (the
"Bank" or "Provident"). Provident Financial Corporation is principally
involved in holding real estate for investment. The other two subsidiaries
are inactive. All significant intercompany balances and transactions have
been eliminated.
INVESTMENT SECURITIES
Effective July 1, 1994, the Bank adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". This accounting standard requires that investments in debt
and equity securities be classified as held-to-maturity, trading, or
available-for-sale based on the Bank's intent with respect to holding the
security. 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 Bank has both the intent and
ability to hold investment securities to maturity.
LOAN RECEIVABLE
The Bank'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 Bank'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.
F-7
<PAGE>
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.
MORTGAGE BANKING ACTIVITIES
Loans are originated for both investment and sale in the secondary market.
Since the Bank 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 Bank sells mortgage loans which are originated in order to limit
interest rate risk and to provide additional funds for investment by the
Bank. Loans are sold without recourse other than short term covenants
which are standard in the industry. For some loans sold, the Bank may
retain the servicing rights in order to generate servicing income. Where
the Bank 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 Bank 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 Bank 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 Bank 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 Bank's results of operations or financial
position.
ALLOWANCE FOR LOAN LOSSES
It is the policy of the Bank 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
F-8
<PAGE>
internal asset classification system used by the Bank is the primary basis
by which the Bank 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 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 Bank measures each impaired loan based on
the fair value of its collateral and charges off those loans or portions of
loans deemed uncollectible.
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 Bank maintains
capital in excess of the minimum requirements.
The Bank had real estate acquisition and development activities through
joint ventures. No new joint ventures were formed after fiscal year 1989
and the Bank's interest in its final joint venture was liquidated July 3,
1995. The Bank 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
F-9
<PAGE>
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 Bank'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 Bank 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 Bank
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 Bank'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 Bank.
The Bank is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period.
The Bank 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 Bank.
F-10
<PAGE>
UNAUDITED INTERIM INFORMATION
The information as of December 31, 1995 and the results of operations for
the six months ended December 31, 1994 and 1995 are unaudited, but in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
such periods. The results for the six months ended December 31, 1995 are
not necessarily indicative of the results of the Bank that may be expected
for the entire fiscal year.
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, 1994 were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994
GROSS GROSS ESTIMATED
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS (LOSSES) VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of other
U.S. government agencies
and corporations $ 23,121 $ - $ (275) $ 22,846
Securities purchased under
agreements to resell 3,000 - - 3,000
Other 180 22 - 202
--------- --------- --------- ---------
$ 26,301 $ 22 $ (275) $ 26,048
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The book value and estimated market value of investment securities held-to-
maturity as of June 30, 1995 were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995
GROSS GROSS ESTIMATED
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS (LOSSES) VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
government agencies and
corporations $ 18,910 $ 23 $ (20) $ 18,913
Corporate securities 990 - (12) 978
Other 167 23 (2) 188
--------- --------- --------- ---------
$ 20,067 $ 46 $ (34) $ 20,079
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-11
<PAGE>
The book value and estimated market value of investment securities held-to-
maturity as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
(UNAUDITED)
GROSS GROSS ESTIMATED
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS (LOSSES) VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of other
U.S. government agencies and
corporations $ 19,383 $ 7 $ - $ 19,390
Corporate securities 1,997 - - 1,997
Other 151 25 (2) 174
--------- --------- --------- ---------
$ 21,531 $ 32 $ (2) $ 21,561
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Proceeds from sales of investment securities during the years ended June
30, 1993 and June 30, 1994 were $65,644 and $22,968, respectively. Gross
gains of $395 and $4, respectively, and gross losses of $38 and $4,
respectively, were realized on those sales. There were no sales of
investment securities for the year ended June 30, 1995 or the six months
ended December 31, 1994 and December 31, 1995.
Securities purchased under agreements to resell at June 30, 1994, were
secured by mortgage-backed securities pledged by dealers whose market
values exceeded the Bank's investment in these agreements. These
agreements matured within ninety days at the end of the period.
The maturities of investment securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
JUNE 30, 1994 JUNE 30, 1995 (UNAUDITED)
CARRYING MARKET CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
Due in one year $ 21,121 $ 21,038 $ 14,900 $ 14,892 $ 21,380 $ 21,387
Due after one
through five
years 5,180 5,010 5,167 5,187 151 174
-------- -------- -------- -------- -------- --------
$ 26,301 $ 26,048 $ 20,067 $ 20,079 $ 21,531 $ 21,561
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. LOANS RECEIVABLE (DOLLARS IN THOUSANDS):
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(Unaudited)
<S> <C> <C> <C>
Residential real estate - single family $ 277,986 $ 345,034 $ 333,587
Residential real estate - multi-family 63,719 53,531 54,515
Commercial real estate 63,659 61,518 58,816
Real estate construction 4,324 5,938 10,251
Consumer 18,177 15,830 14,904
Other 218 137 240
---------- ---------- ----------
428,083 481,988 472,313
Less:
Undisbursed loan funds 3,324 4,121 6,013
Deferred loan fees 1,003 1,034 537
Unearned discounts on loans purchased 265 205 188
Allowance for loan losses 3,332 5,085 4,774
---------- ---------- ----------
$ 420,159 $ 471,543 $ 460,801
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Fixed rate loans comprise 17%, 11%, and 12% (unaudited), respectively, of
the loan portfolio at June 30, 1994, 1995 and December 31, 1995.
The following summarizes the components of the net change in the allowance
for loan losses:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 1,839 $ 3,286 $ 3,332 $ 3,332 $ 5,085
Provision for losses 1,655 2,033 4,787 594 940
Recoveries - 119 459 332 459
(Charge-offs) (208) (2,106) (3,493) (1,505) (1,710)
-------- -------- -------- -------- --------
Balance, end of period $ 3,286 $ 3,332 $ 5,085 $ 2,753 $ 4,774
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
F-13
<PAGE>
The following summarizes information regarding non-accrual and restructured
loans:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Non-accrual loans $ 4,526 $ 2,558 $ 4,409
-------- -------- --------
-------- -------- --------
Restructured loans $ 4,015 $ 3,272 $ 3,758
-------- -------- --------
-------- -------- --------
</TABLE>
The following summarizes information regarding the reduction of interest
income on non-accrual loans:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income in accordance
with original terms $ 597 $ 546 $ 631 $ 303 $ 187
Income recognized 160 92 15 21 32
------ ------ ------ ------ ------
Foregone interest
income during year $ 437 $ 454 $ 477 $ 282 $ 155
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
At June 30, 1994, 1995 and December 31, 1995 (unaudited), there were no
commitments to lend additional funds to those borrowers whose loans were
classified as restructured or non-accrual.
At December 31, 1995, the recorded investment in loans which have been
identified by the Bank as impaired loans was $10,796 (unaudited) for which
no allowance for loan losses has been provided. During the six months
ended December 31, 1995, the average recorded value of impaired loans was
$8,446 (unaudited), $399 (unaudited) of interest income was recognized, and
$572 (unaudited) of interest income would have been recognized under
original terms.
F-14
<PAGE>
In the ordinary course of business, the Bank makes loans to its directors,
officers and their related interests 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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning
of period $ 795 $ 2,000 $ 2,719 $ 2,719 $ 2,315
Originations 1,245 962 4 20 10
Payments (40) (99) (29) (32) (284)
Terminations - (144) (379) (130) (92)
-------- -------- -------- -------- --------
Balance, end of period $ 2,000 $ 2,719 $ 2,315 $ 2,577 $ 1,949
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
4. MORTGAGE BANKING (DOLLARS IN THOUSANDS)
The following summarizes the unpaid principal balance of loans serviced by
the Bank:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Loans serviced for Federal Home
Loan Mortgage Corporation $ 252,259 $ 238,187 $ 228,581
Loans serviced for Federal National
Mortgage Association 362,923 338,861 321,095
Loans serviced for other investors 88,464 80,403 75,668
---------- ---------- ----------
$ 703,646 $ 657,451 $ 625,344
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Loans serviced for others at June 30, 1993 and December 31, 1994 were
$658,008 and $677,327 (unaudited), respectively.
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payment 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 Bank held borrowers' escrow balances related to loans
serviced for others of $1,301, $1,119 and $939 as of June 30, 1994 and 1995
and December 31, 1995 (unaudited), respectively. These escrow balances are
included in deposits in the accompanying consolidated balance sheet.
F-15
<PAGE>
The composition of loans sold was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Loans sold
Servicing-released $ 211,531 $ 8,726 $ 198,463 $ 124,144 $ 190,015
Servicing-retained 401,382 486,011 11,577 6,718 3,538
---------- ----------- ---------- ---------- ----------
$ 612,913 $ 1,044,737 $ 210,040 $ 130,862 $ 193,553
---------- ----------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ----------
</TABLE>
Loans receivable available-for-sale consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Adjustable rate $ 27,368 $ 3,291 $ 4,533
Fixed rate 59,761 31,209 52,033
-------- -------- --------
87,129 34,500 56,566
Less: Valuation allowance (4,080) (11) (22)
-------- -------- --------
$ 83,049 $ 34,489 $ 56,544
-------- -------- --------
-------- -------- --------
</TABLE>
F-16
<PAGE>
5. REAL ESTATE AVAILABLE-FOR-SALE (DOLLARS IN THOUSANDS)
Real estate consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Foreclosed real estate $ 5,026 $ 7,661 $ 3,628
Investment real estate 2,933 3,560 3,547
Investments in joint ventures 3,155 1,325 -
-------- -------- --------
11,114 12,546 7,175
-------- -------- --------
Allowance for estimated losses:
Foreclosed real estate (909) (877) (693)
Investment real estate (329) (465) (465)
Investments in joint ventures (146) - -
-------- -------- --------
(1,384) (1,342) (1,158)
-------- -------- --------
$ 9,730 $ 11,204 $ 6,017
-------- -------- --------
-------- -------- --------
</TABLE>
The following summarizes the components of the net change in the allowance
for losses on real estate:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning
of period $ 2,943 $ 2,980 $ 1,384 $ 1,384 $ 1,342
Provisions for losses 419 525 1,665 588 160
Charge-offs (382) (2,121) (1,707) (861) (344)
-------- -------- -------- -------- --------
Balance, end of period $ 2,980 $ 1,384 $ 1,342 $ 1,111 $ 1,158
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
F-17
<PAGE>
The following summarizes the components of the Bank's real estate
operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision for losses:
Foreclosed real estate $ (419) $ (405) $ (983) $ (456) $ (160)
Investment real estate - - - - -
Investments in joint
ventures - (120) (682) (132) -
Net operating income
(losses) and holding
costs 294 159 65 (10) (20)
------- ------- -------- ------- -------
$ (125) $ (366) $ (1,600) $ (598) $ (180)
------- ------- -------- ------- -------
------- ------- -------- ------- -------
</TABLE>
6. PREMISES AND EQUIPMENT (DOLLARS IN THOUSANDS)
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Land $ 2,564 $ 2,564 $ 2,564
Buildings 6,558 6,571 6,598
Leasehold improvements 455 461 461
Furniture and equipment 7,264 6,913 7,054
Automobiles 171 178 167
-------- -------- --------
17,012 16,687 16,844
Less accumulated depreciation
and amortization (8,676) (9,151) (9,649)
-------- -------- --------
$ 8,336 $ 7,536 $ 7,195
-------- -------- --------
-------- -------- --------
</TABLE>
F-18
<PAGE>
7. DEPOSITS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
JUNE 30, 1994 JUNE 30, 1995 (UNAUDITED)
INTEREST RATE AMOUNT INTEREST RATE AMOUNT INTEREST RATE AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Checking deposits 0%-1.00% $ 21,251 0%-1.00% $ 22,316 0%-1.00% $ 21,279
Passbook deposits 2.08%-2.42% 67,164 2.08%-3.92% 50,850 2.42%-3.41% 52,437
Money market deposits 1.20%-4.52% 111,727 1.20%-5.17% 92,191 1.20%-4.79% 93,815
Term deposits
Under $100,000 2.47%-8.00% 198,299 2.71%-8.00% 268,174 2.66%-8.00% 273,576
$100,000 and over 2.47%-8.00% 73,346 2.71%-8.00% 53,054 4.00%-8.00% 57,384
---------- --------- ---------
$ 471,787 $ 486,585 $ 498,491
---------- --------- ---------
---------- --------- ---------
Weighted average
interest rate
on deposits 3.80% 4.90% 4.92%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The aggregate annual maturities of term accounts are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Within one year $ 161,774 $ 243,631 $ 249,740
One to two years 53,853 37,652 50,148
Two to three years 15,124 22,970 19,642
Three to four years 26,486 9,054 6,141
Four to five years 14,405 7,819 5,182
Thereafter 3 103 107
---------- ---------- ----------
$ 271,645 $ 321,229 $ 330,960
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Interest expense is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Checking $ 331 $ 203 $ 189 $ 95 $ 99
Term deposits 15,947 12,660 14,641 6,475 9,156
Money market deposits 977 3,123 4,893 2,481 2,188
Passbook deposits 2,658 1,679 1,466 751 953
-------- -------- -------- ------- -------
$ 19,913 $ 17,665 $ 21,189 $ 9,802 $ 12,396
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
</TABLE>
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserve is calculated based on deposit levels and
amounted to $291 and $194 (unaudited) at June 30, 1995 and December 31,
1995.
F-19
<PAGE>
8. BORROWINGS (DOLLARS IN THOUSANDS)
Borrowings consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Advances from Federal Home
Loan Bank $ 51,078 $ 33,078 $ 20,078
Securities sold under agreements
to repurchase 5,075 1,985 -
--------- --------- ---------
$ 56,153 $ 35,063 $ 20,078
--------- --------- ---------
--------- --------- ---------
</TABLE>
Advances from the Federal Home Loan Bank were collateralized by pledges of
certain real estate loans with an aggregate principal balance at June 30,
1994, 1995 and December 31, 1995 of $154,576, $279,192, and $262,948
(unaudited), 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 $122,932, $170,946 and $171,445
(unaudited) at June 30, 1994, 1995 and December 31, 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
$785, $49 and $78 (unaudited) at June 30, 1994, 1995 and December 31, 1995,
respectively. Any excess may be redeemed by the Bank or called by FHLB at
par.
The aggregate annual maturities of advances are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Within one year $ 50,000 $ 32,000 $ 13,250
One to two years - 750 6,500
Two to three years 750 - -
Over three years 328 328 328
--------- --------- ---------
$ 51,078 $ 33,078 $ 20,078
--------- --------- ---------
--------- --------- ---------
Weighted average interest rate 4.48% 6.37% 6.05%
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
Occasionally, the Bank enters into reverse repurchase agreements, usually
for thirty days or less, secured by its investments. At June 30, 1994 and
1995, the Bank had an outstanding reverse repurchase agreement of $5,075
and $1,985, respectively, secured by securities under the Bank's control
with a carrying value of $5,064 and $1,995, respectively, and with a market
value of $5,056 and $1,997, respectively. The weighted average interest
rate of reverse repurchase agreements at June 30, 1994 and 1995, was 4.92%
and 6.15%, respectively. There were no reverse repurchase agreements
outstanding as of December 31, 1995.
9. INCOME TAXES (DOLLARS IN THOUSANDS)
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 2,968 $ (880) $ (952) $ (1,260) $ 832
State 1,304 271 3 3 3
-------- ------- -------- -------- -------
4,272 (609) (949) (1,257) 835
-------- ------- -------- -------- -------
Deferred:
Federal (265) 430 (1,050) 517 (180)
State (169) (469) 264 51 188
-------- ------- -------- -------- -------
(434) (39) (786) 568 8
-------- ------- -------- -------- -------
Provision (benefit)
for income taxes $ 3,838 $ (648) $ (1,735) $ (689) $ 843
-------- ------- -------- -------- -------
-------- ------- -------- -------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
1993 1994 1995 1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory U.S. federal
income tax rate 34.0% (34.0%) (34.0%) (34.0%) 34.0%
State taxes net of Federal
income tax effect 9.4 (6.6) 3.1 (8.9) 11.0
Nondeductible goodwill
amortization 2.4 10.7 1.9 10.7 -
Other 2.5 (2.8) (1.3%) (4.8) 4.4
------ ------ ------ ------ ------
Effective income tax rate 48.3% (32.7%) (30.3%) (37.0%) 49.4%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
F-21
<PAGE>
Deferred tax liabilities (assets) by jurisdiction were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Deferred taxes - federal $ 273 $ (777) $ (932)
Deferred taxes - state (723) (459) (296)
-------- --------- ---------
$ (450) $ (1,236) $ (1,228)
-------- --------- ---------
-------- --------- ---------
</TABLE>
Deferred tax liabilities (assets) were comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Investment in real estate $ 168 $ - $ -
State taxes 195 189 125
Depreciation 611 611 611
Federal Home Loan Bank dividends 1,269 1,148 1,192
Market value adjustments - 67 32
------- -------- -------
Total deferred tax liabilities 2,243 2,015 1,960
------- -------- -------
Market value adjustments (408) - -
Loss reserves (1,620) (2,509) (2,565)
Deferred compensation (526) (547) (579)
Investment in real estate - (146) (146)
Other (139) (151) (214)
NOL carryforward - (379) (165)
------- -------- -------
Total deferred tax assets (2,693) (3,732) (3,669)
------- -------- -------
Deferred tax asset valuation
allowance - 481 481
------- -------- -------
Net deferred tax assets $ (450) $ (1,236) $ (1,228)
------- -------- --------
------- -------- --------
</TABLE>
F-22
<PAGE>
PROVIDENT SAVINGS BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 1995 and December 31, 1995, the Bank had California NOL
carryforwards of $3,240 and $1,290 (unaudited) expiring in 2000. The
utilization of these carryforwards is subject to an annual limitation of
approximately $2,000 resulting from a deemed change in ownership under
Section 382 as a result of the conversion described in Note 15. Thrift
institutions that meet certain tests prescribed by the Internal Revenue
Code are allowed a bad debt deduction for federal income tax purposes of
either eight percent of taxable income, or an amount determined from the
thrift's loss experience. For the years ended June 30, 1993, 1994 and 1995
and the six months ended December 31, 1994 and 1995, the Bank used its loss
experience to determine federal income taxes payable. A deferred tax
liability of $3,066 has not been recognized at June 30, 1994, 1995, and
December 31, 1995 (unaudited) for $9,019 of temporary differences relating
to the tax bad debt reserves of the bank that arose prior to 1988.
10. CAPITAL (DOLLARS IN THOUSANDS)
Retained earnings at June 30, 1994, 1995 and December 31, 1995 (unaudited)
included approximately $9,019 for which federal income tax has not been
provided. The Bank is allowed a statutory bad debt deduction subject to
certain limitations. 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.
The Bank is required to meet minimum capital requirements established by
the Office of Thrift Supervision (OTS) pursuant to the Financial
Institution Reform, Recovery and Enforcement Act of 1989. The capital
requirements consist of three standards: a leverage ratio of core capital
to adjusted total assets (Core Capital), a tangible standard expressed as a
percentage of adjusted total assets (Tangible Capital) and a risk based
standard expressed as a percentage of risk weighted assets (Risk Based
Capital).
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 adjustments presently applicable to the
Bank are equity investments in real estate. In addition, in calculating
risk-based capital, general loss allowances are includable as capital on a
limited basis.
F-23
<PAGE>
The following is an analysis of the Bank's regulatory capital as of June
30, 1995:
<TABLE>
<CAPTION>
RISK
TANGIBLE CORE BASED
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
GAAP capital, as reported in the
Thrift Financial Report and these
financial statements $ 37,323 $ 37,323 $ 37,323
Required adjustments:
Investments in and advances to
"nonincludable" subsidiaries (1,981) (1,981) (1,981)
General valuation reserves 4,419
------------ ------------ ------------
Regulatory capital 35,342 35,342 39,761
Minimum regulatory capital requirement 8,501 17,003 28,227
------------ ------------ ------------
Regulatory capital in excess of
requirements $ 26,841 $ 18,339 $ 11,534
------------ ------------ ------------
------------ ------------ ------------
Minimum regulatory capital as a
percentage of regulatory assets 1.5% 3.0% 8.0%
------------ ------------ ------------
------------ ------------ ------------
Actual regulatory capital as a percentage
of regulatory assets 6.2% 6.2% 11.3%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-24
<PAGE>
The following is an analysis of the Bank's regulatory capital as of
December 31, 1995 (unaudited):
<TABLE>
<CAPTION>
RISK
TANGIBLE CORE BASED
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
GAAP capital, as reported in the
Thrift Financial Report and these
financial statements $ 38,186 $ 38,186 $ 38,186
Required adjustments:
Investments in and advances to
"nonincludable" subsidiaries (2,935) (2,935) (2,935)
General valuation reserves 4,764
------------ ------------ ------------
Regulatory capital 35,251 35,251 40,015
Minimum regulatory capital requirement 8,517 17,034 30,489
------------ ------------ ------------
Regulatory capital in excess of
requirements $ 26,734 $ 18,217 $ 9,526
------------ ------------ ------------
------------ ------------ ------------
Minimum regulatory capital as a
percentage of regulatory assets 1.5% 3.0% 8.0%
------------ ------------ ------------
------------ ------------ ------------
Actual regulatory capital as a percentage
of regulatory assets 6.2% 6.2% 10.5%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
11. BENEFIT PLANS (DOLLARS IN THOUSANDS)
The Bank 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 Bank makes
matching contributions up to 3% of participants' pre-tax compensation.
Participants vest immediately in their own contributions with 100% vesting
in the Bank's contributions occurring after 6 years of credited service.
The Bank's expense for these plans was approximately $304, $425, and $249
for the years ended June 30, 1993, 1994 and 1995, respectively, and $138
(unaudited) and $260 (unaudited) for the six months ended December 31, 1994
and 1995, respectively.
The Bank 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
F-25
<PAGE>
earnings for employees and retirees. The Bank sponsors postretirement
health care and life insurance benefits to certain retired officers and
directors. Prior to fiscal 1996, the Bank 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 Bank's financial
position or operating results.
The Bank has employment agreements with certain of its officers which are
renewable on an annual basis at the Bank's option and a multi-year
employment contract with its president. The Bank has an unfunded
obligation of approximately $1,687 and $1,762 (unaudited) at June 30, 1995
and December 31, 1995, respectively, to pay certain benefits upon
retirement. Actuarially determined retirement costs are being accrued and
expensed annually.
12. COMMITMENTS AND CONTINGENCIES (DOLLARS IN THOUSANDS)
The Bank 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 Bank's financial position.
The Bank conducts a portion of its operations in leased facilities under
noncancellable agreements classified as operating leases. In addition, the
Bank 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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
(UNAUDITED)
FISCAL YEAR
<S> <C> <C>
1996 $ 297 $ 186
1997 159 297
1998 137 241
1999 123 187
2000 125 125
Thereafter 330 330
---------- ----------
Total minimum payments required $ 1,171 $ 1,366
---------- ----------
---------- ----------
</TABLE>
Lease expense under operating leases approximated $400, $663 and $892 for
the years ended June 30, 1993, 1994 and 1995, respectively. Lease expense
approximated $649 (unaudited) and $211 (unaudited) for the six months ended
December 31, 1994 and 1995, respectively.
F-26
<PAGE>
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (DOLLARS IN THOUSANDS)
The Bank 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 investments 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 Bank'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 Bank 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 Bank evaluates each customer's
credit worthiness on a case-by-case basis. At June 30, 1995 and December
31, 1995, interest rates on commitments to lend ranged from 6.50% to
10.875% and 5.50% to 9.375% (unaudited), respectively.
In an effort to minimize its exposure to interest rate fluctuations on
fixed interest rate loans originated for sale, the Bank enters into forward
agreements to sell certain dollar amounts of fixed interest rate loans to
third parties. These agreements specify the minimum maturity of the loans,
yield to purchaser and servicing spread to the Bank (if servicing is
retained), and the maximum principal amount of individual loans. The Bank
typically satisfies these forward sale agreements with its current
production; at June 30, 1995 and December 31, 1995 the aggregate amount of
loans available for sale and of commitments to originate exceeded the
Bank's forward sales commitments to sell loans. At June 30, 1995 and
December 31, 1995, interest rates on commitments to sell loans ranged from
6.00% to 9.75% and 6.00% to 10.00% (unaudited), respectively. From time to
time, the Bank purchases over-the-counter put and call options as an
additional interest rate risk modifier. The activity through December 31,
1995 has been minimal and the market value of open positions at December
31, 1995 is immaterial.
F-27
<PAGE>
In addition to construction loans in process, the Bank had the following
outstanding commitments:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
(UNAUDITED)
<S> <C> <C> <C>
Commitments to originate mortgage loans:
Fixed interest rate $ 8,667 $ 67,405 $ 22,674
Adjustable interest rate 1,750
Unused lines of credit 5,613 5,783 6,281
Commitments to sell loans 130,075 32,061 61,351
--------- --------- ---------
$ 144,355 $ 105,249 $ 92,056
--------- --------- ---------
--------- --------- ---------
</TABLE>
14. 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 flow, 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.
F-28
<PAGE>
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 Bank 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.
Letters of credit and undisbursed real estate loan funds: Commitments to
extend credit are generally written on a variable rate basis and it is
presumed that no significant difference exists between the carrying and
fair value. See Note 13.
The carrying amount and fair values of the Bank's financial instruments
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
JUNE 30, 1994 JUNE 30, 1995 (UNAUDITED)
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash $ 19,909 $ 19,909 $ 11,433 $ 11,433 $ 6,063 $ 6,063
Investment securities 26,301 26,048 20,067 20,079 21,531 21,561
Loans receivable
available-for-sale 83,049 83,049 34,489 34,881 56,544 57,194
Loans receivable 420,159 420,790 471,543 472,401 460,801 462,872
Accrued interest
receivable 2,773 2,773 2,855 2,855 3,017 3,017
FHLB stock 5,092 5,092 4,360 4,360 4,470 4,470
FINANCIAL LIABILITIES:
Deposits 471,787 472,946 486,585 487,580 498,491 500,085
Borrowings 56,153 56,100 35,063 35,095 20,078 20,161
</TABLE>
15. SUBSEQUENT EVENT - PLAN OF CONVERSION (UNAUDITED) (DOLLARS IN THOUSANDS)
On December 21, 1995, the Board of Directors of the Bank adopted the Plan
of Conversion pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank,
all of the outstanding common stock of which will be acquired by Provident
Financial Holdings, Inc., (the Company), a holding company to be formed
expressly for such purpose, in exchange for a portion of the net Conversion
proceeds. All of the stock to be issued in the Conversion will be offered
initially to certain depositors
F-29
<PAGE>
and employees of the Bank through a newly established employee stock
ownership plan (ESOP).
The Company would also establish a non-tax-qualified restricted stock plan
and a stock option plan with a combined number of shares equal to 14% of
the number of shares issued in the Conversion.
The costs associated with Conversion will be deferred and will be deducted
from the proceeds upon the sale and issuance of stock. In the event the
Conversion is not consummated, costs incurred will be charged to expense.
At December 31, 1995 deferred conversion costs were $14 (unaudited).
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of account
holders in an amount equal to the retained earnings of the Bank as of the
date of Conversion. Each account holder, if he were to continue to
maintain his deposit account at the Bank, would be entitled, on a complete
liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholder of the Bank.
Upon completion of the Conversion, the Bank's retained earnings will be
substantially restricted with respect to payment of dividends to the
stockholder to the extent of liquidation account. Also, the Bank would be
unable to pay dividends on its stock if such payment would violate
statutory or regulatory requirements.
F-30
<PAGE>
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<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY PROVIDENT FINANCIAL HOLDINGS, INC., PROVIDENT SAVINGS BANK, F.S.B.
OR EVEREN SECURITIES, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PROVIDENT FINANCIAL HOLDINGS, INC. OR
PROVIDENT SAVINGS BANK, F.S.B. SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................ (i)
Selected Consolidated Financial Information....... (viii)
Recent Developments............................... (x)
Risk Factors...................................... 1
Provident Financial Holdings, Inc................. 8
Provident Savings Bank, F.S.B..................... 8
Use of Proceeds................................... 9
Dividend Policy................................... 10
Market for Common Stock........................... 11
Pro Forma Data.................................... 11
Capitalization.................................... 17
Historical and Pro Forma Capital Compliance....... 19
Provident Savings Bank, F.S.B. and Subsidiaries
Consolidated Statements of Operations............ 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 21
Business of the Holding Company................... 38
Business of the Savings Bank...................... 39
Management of the Holding Company................. 67
Management of the Savings Bank.................... 67
Regulation........................................ 76
Taxation.......................................... 83
The Conversion.................................... 85
Restrictions on Acquisition of the Holding
Company.......................................... 100
Description of Capital Stock of the Holding
Company.......................................... 105
Registration Requirements......................... 106
Legal and Tax Opinions............................ 106
Experts........................................... 107
Additional Information............................ 107
Index to Consolidated Financial Statements........ F-1
</TABLE>
------------------------
UNTIL THE LATER OF JUNE 1, 1996, OR 25 DAYS AFTER COMMENCEMENT OF THE PUBLIC
OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
4,335,000 TO 5,865,000 SHARES OF
COMMON STOCK
---------------------
PROSPECTUS
---------------------
EVEREN SECURITIES, INC.
MAY 7, 1996
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
[LOGO]
PROVIDENT SAVINGS BANK, F.S.B.
IS CONVERTING TO STOCK!
PLEASE VOTE TODAY!
QUESTIONS
&
ANSWERS
ABOUT
VOTING
FOR
CONVERSION
[LOGO]
PROVIDENT SAVINGS BANK, F.S.B.
VOTE YES FOR
CONVERSION.
YOUR VOTE COUNTS!
THE BOARD OF DIRECTORS OF PROVIDENT SAVINGS BANK, F.S.B. ("PROVIDENT SAVINGS" OR
THE "SAVINGS BANK"), HAS UNANIMOUSLY VOTED TO CONVERT PROVIDENT SAVINGS FROM
MUTUAL FORM TO STOCK OWNERSHIP, SUBJECT TO THE APPROVAL OF THE CONVERSION BY THE
SAVINGS BANK'S MEMBERS. AS PART OF THE CONVERSION, PROVIDENT SAVINGS HAS FORMED
PROVIDENT FINANCIAL HOLDINGS, INC. ("PROVIDENT FINANCIAL") TO ACT AS ITS HOLDING
COMPANY (THE "HOLDING COMPANY"). UPON CONSUMMATION OF THE CONVERSION, PROVIDENT
SAVINGS WILL BECOME A FEDERAL STOCK SAVINGS BANK AND WILL BECOME A WHOLLY OWNED
SUBSIDIARY OF PROVIDENT FINANCIAL. THE COMMON STOCK OF PROVIDENT FINANCIAL WILL
BE OFFERED ON A PRIORITY BASIS IN A SUBSCRIPTION OFFERING TO CERTAIN ELIGIBLE
DEPOSITORS OF PROVIDENT SAVINGS AND CERTAIN TAX-QUALIFIED EMPLOYEE PLANS OF THE
SAVINGS BANK. CONCURRENTLY, MEMBERS OF THE GENERAL PUBLIC WILL BE OFFERED THE
OPPORTUNITY TO SUBSCRIBE FOR STOCK IN A COMMUNITY OFFERING. SUBSCRIPTIONS IN THE
COMMUNITY OFFERING WILL BE SUBJECT TO THE PRIOR SUBSCRIPTION RIGHTS OF THOSE
LISTED ABOVE AND TO THE DELIVERY OF A PROSPECTUS. PREFERENCE WILL BE GIVEN IN
THE COMMUNITY OFFERING TO PERMANENT RESIDENTS OF RIVERSIDE AND SAN BERNARDINO
COUNTIES, CALIFORNIA. ANY STOCK THAT IS NOT SOLD IN THE CONCURRENT SUBSCRIPTION
AND COMMUNITY OFFERINGS IS EXPECTED TO BE SOLD IN AN EXTENSION OF THE COMMUNITY
OFFERING AND/OR AN UNDERWRITTEN PUBLIC OFFERING.
YOU MAY HAVE RECEIVED MORE THAN ONE PROXY CARD, REPRESENTING YOUR OPPORTUNITY TO
VOTE ON MULTIPLE ACCOUNTS. IT IS IMPORTANT THAT YOU SIGN AND RETURN ALL PROXY
CARDS TO PROVIDENT SAVINGS AS SOON AS POSSIBLE. PLEASE USE THE POSTAGE-PAID
ENVELOPE PROVIDED TO RETURN YOUR PROXY CARD.
FURTHER DETAILS ON THE CONVERSION, INCLUDING REASONS FOR CONVERSION, ARE
CONTAINED IN PROVIDENT SAVINGS' NOTICE OF SPECIAL MEETING AND PROXY STATEMENT.
PLEASE READ THE NOTICE AND PROXY STATEMENT CAREFULLY AND SIGN AND RETURN YOUR
PROXY CARD(S) PROMPTLY.
* * * * *
HOW TO COMPLETE THE PROXY CARD FORM
1. Check the appropriate box. YOUR BOARD OF
DIRECTORS HAS UNANIMOUSLY RECOMMENDED VOTING "FOR" THE CONVERSION.
2. Enter the date on the Proxy Card.
3. Sign the Proxy Card. If an account is held in
joint names, an additional signature is required only when multiple
signatures are required to withdraw funds.
4. Return the completed Proxy Card in the
postage-paid return envelope provided.
THE FOLLOWING INFORMATION WILL ANSWER THE MOST FREQUENTLY ASKED QUESTIONS
ABOUT THE CONVERSION.
1. Q. WHAT IS A "CONVERSION"?
A. A conversion is a change in the legal form of organization from a mutual
to a stock savings institution. Provident Savings currently operates as a
federally chartered mutual savings bank with no stockholders. Through the
conversion process, Provident Savings will become a federally chartered
stock savings bank which, in turn, will be owned by a "publicly owned"
company, Provident Financial. Provident Financial will be owned by its
stockholders, who will be, at the time of conversion, those depositors
and others who purchase Provident Financial stock in the Subscription and
Direct Community Offerings.
2. Q. WHY IS PROVIDENT SAVINGS CONVERTING?
A. The stock form of ownership is used by most business corporations and an
increasing number of savings institutions. Provident Savings has reached
an important point in its development with its decision to convert to the
stock form of ownership. The sale of stock in the conversion will:
- Increase the capital of Provident Savings and support expansion of its
financial services.
- Afford members an opportunity to purchase stock in Provident Financial and
share in Provident Savings' future.
<PAGE>
- Enhance Provident Savings' ability to open or acquire additional branch
offices as well as acquire other financial institutions (although no
openings or acquisitions are currently contemplated).
- Facilitate future access to the capital markets.
3. Q. WILL THE CONVERSION HAVE ANY EFFECT ON SAVINGS AND CHECKING ACCOUNTS,
CERTIFICATE ACCOUNTS, OR LOANS WITH PROVIDENT SAVINGS?
A. NO. The conversion will not change the general terms, balances, and FDIC
insurance coverage of savings and checking accounts or certificates of
deposit. The balances and obligations of borrowers under their loan
agreements will not be affected. However, upon conversion, deposit
account holders will no longer have voting rights in Provident Savings.
Those voting rights will be vested in the sole stockholder of the Savings
Bank, which will be Provident Financial. Voting rights in Provident
Financial will be exercised exclusively by stockholders of that
corporation, consisting initially of those persons who purchase stock in
the Subscription and Community Offering. Moreover, with the exception of
certain rights in a liquidation account to be established in the
conversion, in the unlikely event the Savings
Bank were ever to liquidate following the conversion, depositors will no
longer be entitled to receive any of the net assets of the Savings Bank
remaining after payment of all valid creditor claims (including payments
to depositors to the extent of their account balances).
4. Q. DID THE BOARD OF DIRECTORS OF PROVIDENT SAVINGS APPROVE THE CONVERSION?
A. Yes. The Board of Directors unanimously approved the Plan of Conversion on
December 21, 1995.
5. Q. DOES MY VOTE FOR CONVERSION MEAN THAT I MUST BUY STOCK IN PROVIDENT
FINANCIAL?
A. No. Voting for conversion does not obligate you to purchase stock.
However, as a valued customer of Provident Savings you are entitled, if
you so desire, to purchase stock on a priority basis, without payment of
a commission or fee, before it is offered to the general public.
6. Q. WHO IS ELIGIBLE TO VOTE?
A. Depositors having accounts on the Voting Record Date, April 30, 1996.
7. Q. AM I REQUIRED TO VOTE?
A. Members are not required to vote; however, because the conversion will
effect a fundamental change in Provident Savings' corporate structure,
the Board of Directors strongly encourages all members to vote. The
conversion must be approved by a majority of the total votes eligible to
be cast at the Special Meeting. Failure to vote will have the effect of
voting against the conversion.
8. Q. WHY DID I RECEIVE SEVERAL PROXY CARDS?
A. If you have more than one account at Provident Savings, you could receive
more than one Proxy Card, depending on the ownership structure of your
accounts. Please vote, date, sign and return all Proxy Cards today.
9. Q. IS THERE A DEADLINE FOR VOTING?
A. Yes. If you wish to vote your proxy, it must be actually received by
Provident Savings on or before the date of the Special Meeting of the
Members to be held on June 17, 1996. If you have not mailed your Proxy
Card well ahead of that date, please take it to any Provident Savings
office.
10. Q. I WOULD LIKE MORE INFORMATION ABOUT THE CONVERSION. WHERE CAN I GET IT?
A. If you have any questions or desire additional information, please call
our special Conversion Center at (909) 782-6122 and ask for a
representative of EVEREN Securities, Inc.
THE COMMON STOCK OF PROVIDENT FINANCIAL
HOLDINGS, INC. IS NOT A DEPOSIT OR ACCOUNT
AND IS NOT FEDERALLY INSURED OR GUARANTEED.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
THE STOCK OF PROVIDENT FINANCIAL HOLDINGS, INC. THE OFFER IS MADE
ONLY BY THE PROSPECTUS.
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have established
a Conversion Center to answer your questions. Please visit the Conversion
Center, 3756 Central Avenue, Riverside, California, or call:
(909) 782-6122
<PAGE>
QUESTIONS & ANSWERS
about the Stock Conversion of
PROVIDENT SAVINGS BANK, F.S.B.
and the Common Stock Offering of
[LOGO]
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS OF PROVIDENT SAVINGS BANK, F.S.B. ("PROVIDENT
SAVINGS" OR THE "SAVINGS BANK") HAS UNANIMOUSLY VOTED TO CONVERT PROVIDENT
SAVINGS FROM MUTUAL FORM TO STOCK OWNERSHIP, SUBJECT TO THE APPROVAL OF THE
CONVERSION BY THE SAVINGS BANK'S MEMBERS. AS PART OF THE CONVERSION, PROVIDENT
SAVINGS HAS FORMED PROVIDENT FINANCIAL HOLDINGS, INC. ("PROVIDENT FINANCIAL") TO
ACT AS ITS HOLDING COMPANY. UPON CONSUMMATION OF THE CONVERSION, PROVIDENT
SAVINGS WILL BECOME A FEDERALLY CHARTERED STOCK SAVINGS BANK AND WILL BE THE
WHOLLY OWNED SUBSIDIARY OF PROVIDENT FINANCIAL. THE COMMON STOCK OF PROVIDENT
FINANCIAL IS BEING OFFERED ON A PRIORITY BASIS IN A SUBSCRIPTION OFFERING TO
CERTAIN OF THE SAVINGS BANK'S DEPOSITORS AND TO THE TAX-QUALIFIED EMPLOYEE STOCK
BENEFIT PLANS OF PROVIDENT SAVINGS. CONCURRENTLY, MEMBERS OF THE GENERAL PUBLIC
ARE BEING OFFERED THE OPPORTUNITY TO SUBSCRIBE FOR STOCK IN A COMMUNITY
OFFERING. SUBSCRIPTIONS IN THE COMMUNITY OFFERING WILL BE SUBJECT TO THE PRIOR
SUBSCRIPTION RIGHTS OF THOSE LISTED ABOVE AND TO THE DELIVERY OF A PROSPECTUS,
CERTIFICATION FORM, AND STOCK ORDER FORM. PREFERENCE IN THE COMMUNITY OFFERING
WILL BE GIVEN TO PERMANENT RESIDENTS OF RIVERSIDE AND SAN BERNARDINO COUNTIES,
CALIFORNIA. STOCK THAT IS NOT SOLD IN THE CONCURRENT SUBSCRIPTION AND COMMUNITY
OFFERINGS IS EXPECTED TO BE SOLD IN AN EXTENSION OF THE COMMUNITY OFFERING
AND/OR AN UNDERWRITTEN PUBLIC OFFERING.
IF YOU ARE A MEMBER WITH VOTING RIGHTS, YOU MAY HAVE RECEIVED MORE THAN ONE
PROXY CARD, REPRESENTING YOUR OPPORTUNITY TO VOTE ON MULTIPLE ACCOUNTS. IT IS
IMPORTANT THAT YOU SIGN AND RETURN ALL PROXY CARDS TO PROVIDENT SAVINGS AS SOON
AS POSSIBLE. PLEASE USE THE POSTAGE-PAID ENVELOPE PROVIDED TO RETURN YOUR PROXY
CARD(S).
FURTHER DETAILS ON THE CONVERSION, INCLUDING REASONS FOR CONVERSION, ARE
CONTAINED IN PROVIDENT SAVINGS' NOTICE OF SPECIAL MEETING AND PROXY STATEMENT
AND PROVIDENT FINANCIAL'S PROSPECTUS. PLEASE READ THE PROXY STATEMENT AND
PROSPECTUS CAREFULLY.
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS, INC.
IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
THE FOLLOWING INFORMATION WILL ANSWER THE MOST FREQUENTLY ASKED QUESTIONS
ABOUT THE CONVERSION.
1. Q. WHAT IS A "CONVERSION"?
A. A conversion is a change in the legal form of ownership of a savings
institution from the mutual to the stock form. Provident Savings
currently operates as a federally chartered mutual savings bank with no
stockholders. Through the conversion process, Provident Savings will
become a federally chartered stock savings bank which, in turn, will be
owned by a "publicly owned" corporation, Provident Financial. This
corporation, in turn, will be owned by its stockholders, who will be, at
the time of conversion, those depositors and others who purchase
Provident Financial stock in the Subscription and Direct Community
Offering.
2. Q. WHY IS PROVIDENT SAVINGS CONVERTING?
A. The stock form of ownership is used by most business corporations and an
increasing number of savings institutions. Provident Savings has reached
an important point in its development with its decision to convert to
the stock form of ownership. The sale of stock in the conversion will:
- Increase the capital of Provident Savings and support expansion of its
financial services.
- Afford members an opportunity to purchase stock in Provident Financial
and share in Provident Savings' future.
- Enhance Provident Savings' ability to open or acquire additional
branch offices as well as acquire other financial institutions
(although no openings or acquisitions are currently contemplated).
- Facilitate future access to the capital markets.
3. Q. WILL THE CONVERSION HAVE ANY EFFECT ON SAVINGS AND CHECKING ACCOUNTS,
CERTIFICATE ACCOUNTS, OR LOANS WITH PROVIDENT SAVINGS?
A. NO. The conversion will not change the general terms, balances, and FDIC
insurance coverage of savings and checking accounts or certificates of
deposit. The balances and obligations of borrowers under their loan
agreements will not be affected. However, upon conversion, deposit
account holders will no longer have voting rights in Provident Savings.
Those voting rights will be vested in the sole stockholder of the
Savings Bank, Provident Financial. Voting rights in Provident Financial
will be exercised exclusively by stockholders of that corporation,
consisting initially of those persons who purchase stock in the
Subscription and Direct Community Offering. Moreover, with the exception
of certain rights in a liquidation account to be established in the
conversion, in the unlikely event the Savings Bank were ever to
liquidate following the conversion, depositors will no longer be
entitled to receive any of the net assets of the Savings Bank remaining
after payment of all valid creditor claims (including payments to
depositors to the extent of their account balances).
4. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN PERSONNEL OR MANAGEMENT?
A. No. The conversion will not cause any changes in personnel or management.
The normal day-to-day operations of the Savings Bank will continue as
before.
<PAGE>
5. Q. DID THE BOARD OF DIRECTORS OF PROVIDENT SAVINGS APPROVE THE CONVERSION?
A. Yes. The Board of Directors unanimously approved the Plan of Conversion
on December 21, 1995.
6. Q. DOES MY VOTE FOR CONVERSION MEAN THAT I MUST BUY STOCK IN PROVIDENT
FINANCIAL?
A. No. Voting for conversion does not obligate you to purchase stock.
However, as a valued customer of Provident Savings you are entitled, if
you so desire, to subscribe for stock on a priority basis, without
payment of a commission or fee, before it is offered to the general
public.
THE HOLDING COMPANY
7. Q. WHAT IS A HOLDING COMPANY?
A. A holding company is a corporation which owns one or more subsidiary
corporations. Concurrently with the conversion, Provident Savings will
become a wholly owned subsidiary of Provident Financial, a Delaware
corporation organized by Provident Savings.
8. Q. IF I DECIDE TO SUBSCRIBE FOR STOCK IN THIS OFFERING, WILL I BE
SUBSCRIBING FOR STOCK IN PROVIDENT FINANCIAL OR PROVIDENT SAVINGS?
A. You will own newly issued common stock in Provident Financial. As a
savings and loan holding company, Provident Financial will own all of
the outstanding stock of Provident Savings.
9. Q. WHY DID THE BOARD OF DIRECTORS FORM PROVIDENT FINANCIAL?
A. The Directors of Provident Savings believe that the conversion of
Provident Savings and concurrent holding company formation will result
in a financial services company with greater corporate flexibility and
resources to serve the financial needs of Provident Savings' customers
and stockholders.
10. Q. AS A CUSTOMER OF PROVIDENT SAVINGS, WHAT EFFECT WILL THE FORMATION OF
PROVIDENT FINANCIAL HAVE ON THE WAY I CURRENTLY TRANSACT BUSINESS WITH
THE SAVINGS BANK ?
A. None. Please refer to Question Nos. 3 and 4.
THE SUBSCRIPTION AND
DIRECT COMMUNITY OFFERING
11. Q. WHO IS ENTITLED TO SUBSCRIBE FOR PROVIDENT FINANCIAL COMMON STOCK?
A. In order of priority, the following parties may subscribe for Provident
Financial common stock:
SUBSCRIPTION OFFERING
ELIGIBLE ACCOUNT HOLDERS - Depositors of Provident Savings with a
deposit balance of $50 or more as of August 31, 1994 have a first
priority right to subscribe for stock in the Subscription and Direct
Community Offering.
TAX-QUALIFIED EMPLOYEE PLANS - Provident Savings' tax-qualified employee
stock benefit plans (i.e., its Employee Stock Ownership Plan) have a
second priority right to subscribe for stock in the Subscription and
Direct Community Offering following Eligible Account Holders.
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS - Depositors of Provident Savings
with a deposit balance of $50 or more as of March 31, 1996 have a third
priority right to subscribe for stock in the Subscription and Direct
Community Offering following Eligible Account Holders and Tax-Qualified
Employee Plans.
OTHER MEMBERS - Depositors of Provident Savings as of April 30, 1996,
the Voting Record Date (other than Eligible Account Holders and
Supplemental Eligible Account Holders) have a fourth priority right to
subscribe for stock in the Subscription and Direct Community Offering.
DIRECT COMMUNITY OFFERING
MEMBERS OF THE GENERAL PUBLIC - Persons to whom a Prospectus,
Certification Form, and Stock Order Form have been delivered, who do not
qualify in the priority categories listed above, may subscribe for stock
in the Direct Community Offering. Permanent residents of Riverside and
San Bernardino Counties, California will have a first preference in the
Direct Community Offering.
* * * * *
It may be impractical, for reasons of cost or otherwise, for Provident
Financial to comply with the securities laws of certain states in order
to offer the stock for sale in those states. Persons residing in such
states are not eligible to subscribe for stock of Provident Financial
during the Subscription and Direct Community Offering. These persons,
however, may purchase stock after it begins trading. Please refer to
Question No. 28.
12. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
A. You may order stock by completing an original Stock Order Form (facsimile
copies and photocopies will not be accepted), reading and signing the
separate Certification Form, and returning them along with full payment
or appropriate instructions authorizing a withdrawal from a deposit
account at Provident Savings to the Conversion Center on or prior to the
close of the Subscription and Direct Community Offering, which will
occur at Noon, Pacific Time, on June 17, 1996. ORDERS NOT CONTAINING A
COMPLETED CERTIFICATION FORM WILL NOT BE ACCEPTED.
You may pay for your stock by check or money order, or by cash if
presented in person at any Provident Savings full-service office. Those
funds will earn interest at Provident Savings' passbook rate from the
day of receipt until the consummation or termination of the conversion.
You may authorize Provident Savings to withdraw funds from your
Provident Savings certificate of deposit or savings account. The
withdrawal of funds from INDIVIDUAL RETIREMENT ACCOUNTS REQUIRES A
SPECIAL PROCEDURE DESCRIBED BELOW. These funds will continue to earn
interest at the stated rate in effect for your account until the
maturity or repricing date for the account. A hold will be placed on
your account for the funds you specify to be used in payment for shares
of stock. You will not have access to these funds from the day Provident
Savings receives your order until the consummation or termination of the
conversion. Early withdrawal penalties will be waived for funds from
certificates of deposit used to purchase shares in the Subscription and
Direct Community Offering.
IF YOU WANT TO USE ALL OR A PORTION OF YOUR PROVIDENT SAVINGS INDIVIDUAL
RETIREMENT ACCOUNT TO SUBSCRIBE FOR STOCK, please call the Conversion
Center at (909) 782-6122 for assistance. Individual Retirement Account
holders may make stock purchases from their deposits through a
pre-arranged "custodian-to-custodian" transfer. There will be no early
withdrawal or IRS penalties incurred by these transactions. Transfer
arrangements take time, so please contact the Conversion Center at your
earliest convenience. THE DEADLINE FOR IRA SUBSCRIPTIONS ARRANGED
THROUGH THE CONVERSION CENTER IS JUNE 10, 1996.
13. Q. WHEN MUST I PLACE MY ORDER FOR SHARES OF STOCK?
A. A properly completed, original Stock Order Form (facsimile copies and
photocopies will not be accepted) and executed separate Certification
Form must be actually received by Provident Savings with full payment
for all shares subscribed for no later than Noon, Pacific Time, on June
17, 1996.
14. Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED AND AT WHAT PRICE?
A. Provident Financial is offering a minimum of 4,335,000 shares of common
stock and up to a maximum of 5,865,000 shares of common stock at a price
of $10.00 per share. Having such a
<PAGE>
range is required by federal regulations and allows for changing market
conditions during the Subscription and Direct Community Offering. Under
certain circumstances, the top portion of this range may be increased to
up to 6,744,750 shares. During the Subscription and Direct Community
Offering, eligible purchasers may subscribe for shares at the price of
$10.00 per share.
15. Q. WILL I RECEIVE A DISCOUNT ON THE PRICE OF THE STOCK?
A. No. Federal regulations require that the offering price be the same for
everyone: customers, Provident Savings' employees, officers and
directors, and the general public.
16. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES THAT I CAN PURCHASE
DURING THE SUBSCRIPTION AND DIRECT COMMUNITY OFFERING?
A. The minimum subscription is 25 shares. The maximum subscription for each
person or entity (except for orders by the Tax-Qualified Employee Plans)
is 25,000 shares, or $250,000. The maximum subscription for each person
or entity (other than the Tax-Qualified Employee Plans), together with
associates of or persons acting in concert with such person or entity,
is 1% of the shares issued in the conversion, which at the anticipated
maximum of the offering is 58,650 shares, or $586,500 at the purchase
price of $10.00 per share.
17. Q. HOW WAS IT DETERMINED THAT UP TO 5,865,000 SHARES OF COMMON STOCK WOULD
BE ISSUED AT $10.00 PER SHARE?
A. The price range was determined on the basis of an appraisal of the PRO
FORMA market value of Provident Financial and Provident Savings as
converted by RP Financial, LC., a prominent financial consulting firm
experienced in appraising converting savings institutions.
18. Q. MUST I PAY A COMMISSION ON THE STOCK FOR WHICH I SUBSCRIBE?
A. No. You will not be charged a brokerage commission to subscribe for stock
in Provident Financial's initial stock offering.
19. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR STOCK PURCHASES?
A. Yes. Provident Savings will pay interest at its passbook rate from the
date funds are received (with a completed Stock Order Form) during the
Subscription and Direct Community Offering until consummation of the
Conversion.
20. Q. IF I HAVE MISPLACED MY STOCK ORDER FORM AND CERTIFICATION FORM OR NEED
ASSISTANCE IN COMPLETING THE STOCK ORDER FORM, WHAT SHOULD I DO?
A. Provident Savings will mail you another Stock Order Form and
Certification Form, or you may obtain them from the Conversion Center.
If you need assistance in obtaining or completing a Stock Order Form,
please call the Conversion Center at (909) 782-6122. You may also visit
the Conversion Center, located at 3756 Central Avenue, Riverside,
California.
21. Q. MAY I TRANSFER OR SELL MY (OUR) SUBSCRIPTION RIGHTS TO ANOTHER PARTY?
A. No. Pursuant to federal regulations, subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders, and
Other Members may be used to purchase stock only by the person(s) to
whom they are granted. THE TRANSFER OR ATTEMPTED TRANSFER OF
SUBSCRIPTION RIGHTS IS PROHIBITED BY FEDERAL LAW. Further, subscription
rights cannot be used to purchase stock pursuant to an agreement to
transfer the stock to another person. PROVIDENT FINANCIAL AND PROVIDENT
SAVINGS MAY PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT
THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS, AND ORDERS
INVOLVING THE TRANSFER OR PURPORTED TRANSFER OF SUCH RIGHTS WILL NOT BE
HONORED.
22. Q. ONCE I PLACE AN ORDER, MAY I CHANGE MY MIND?
A. No. Once Provident Financial receives your subscription, it may not be
withdrawn or modified without Provident Savings' consent.
23. Q. WILL THERE BE ANY DIVIDENDS PAID ON THE STOCK?
A. At this time the Board has not established a dividend policy, but when
and if it does declare dividends, the Board will consider the Holding
Company's consolidated financial condition and results of operations,
tax considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors.
24. Q. HOW MUCH STOCK DO THE DIRECTORS AND OFFICERS OF PROVIDENT SAVINGS INTEND
TO PURCHASE IN THE SUBSCRIPTION AND DIRECT COMMUNITY OFFERING?
A. Directors and officers intend to purchase approximately $1.4 million of
the stock to be offered in the conversion. The purchase price paid by
directors and officers will be the same as that paid by Provident
Savings' depositors and the general public.
25. Q. I CLOSED MY ACCOUNT SEVERAL MONTHS AGO. SOMEONE TOLD ME THAT I AM STILL
ELIGIBLE TO SUBSCRIBE FOR STOCK. IS THAT TRUE?
A. If you were a depositor of Provident Savings with a balance of $50 or
more on the Eligibility Record Date, August 31, 1994, or the
Supplemental Eligibility Record Date, March 31, 1996, you are entitled
to subscribe for stock even if you no longer hold your Provident Savings
account.
26. Q. MAY I OBTAIN A LOAN FROM PROVIDENT SAVINGS TO PURCHASE SHARES USING
PROVIDENT FINANCIAL'S STOCK AS COLLATERAL?
A. No. Federal regulations prohibit Provident Savings from making loans for
this purpose, but other lenders may make a loan for this purpose.
27. Q. WILL THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") INSURE THE
SHARES OF STOCK?
A. No. The shares are not and may not be insured by the FDIC or any other
government agency. The FDIC will continue, however, to insure savings
accounts, checking accounts, and certificates of deposit up to the
applicable limits allowed by law.
28. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE CONVERSION SO THAT I
MAY BUY MORE SHARES OR SELL MY SHARES?
A. While neither Provident Financial nor Provident Savings has ever issued
stock, Provident Financial anticipates that its common stock will be
quoted on The Nasdaq National MarketSM under the symbol "PROV" following
consummation of the conversion, but no assurance can be given that an
established and liquid market for the common stock will develop.
29. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK OFFERING?
A. You may call the Conversion Center collect at (909) 782-6122 and ask for
an EVEREN Securities representative. You may also visit the Conversion
Center, located at 3756 Central Avenue, Riverside, California.
<PAGE>
FOR YOUR CONVENIENCE
IN ORDER TO ASSIST YOU DURING THE STOCK OFFERING PERIOD, A CONVERSION CENTER
HAS BEEN ESTABLISHED TO ANSWER YOUR QUESTIONS. PLEASE VISIT THE CONVERSION
CENTER AT
3756 CENTRAL AVENUE
RIVERSIDE, CALIFORNIA
OR CALL (909) 782-6122
THE OFFICERS AND DIRECTORS
OF
[LOGO]
CORDIALLY INVITE YOU
TO ATTEND A BRIEF PRESENTATION
REGARDING THE STOCK OFFERING OF
PROVIDENT FINANCIAL HOLDINGS, INC.
ON JUNE 5, 1996.
PLEASE CALL THE CONVERSION CENTER AT
(909) 782-6122
FOR THE TIME AND LOCATION OF THE PRESENTATION.
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS, INC. IS NOT A DEPOSIT
OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS, INC. THE OFFER IS MADE ONLY BY
THE PROSPECTUS.
<PAGE>
<TABLE>
<S> <C>
[LOGO] PROVIDENT SAVINGS BANK
PROVIDENT 3756 Central Avenue, Riverside, CA 92506
SAVINGS BANK
</TABLE>
May 16, 1996
Dear Valued Customer:
We are pleased to announce that Provident Savings Bank, F.S.B. ("Provident
Savings") is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank. As part of this process, Provident
Savings has formed a new holding company, Provident Financial Holdings, Inc.
("Provident Financial"). Following the conversion, Provident Savings will be a
wholly owned subsidiary of Provident Financial.
As a depositor of Provident Savings on April 30, 1996, you are entitled to
vote on the proposed conversion. Accordingly, we have enclosed a Notice of
Special Meeting and Proxy Statement concerning the meeting to be held on June
17, 1996 so that you may vote on the proposed conversion. We are now asking for
your approval of this important plan.
YOUR VOTE IS IMPORTANT TO US. PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD
AND MAIL IT TO US PROMPTLY IN THE ENCLOSED PROXY-RETURN ENVELOPE. THE BOARD OF
DIRECTORS RECOMMENDS UNANIMOUSLY THAT YOU VOTE "FOR" THE CONVERSION. Execution
of the proxy card ensures that your votes are represented at the meeting.
In connection with the conversion and holding company formation, Provident
Financial is offering newly issued shares of its common stock to eligible
parties in a subscription and community offering. Capital raised from the sale
of the common stock will assist Provident Savings in achieving its future
objectives and will increase Provident Savings' capital position to support its
deposit, borrowing, lending, and investment activities.
AS AN ELIGIBLE CUSTOMER, YOU HAVE A PRIORITY RIGHT TO PURCHASE STOCK
DIRECTLY FROM PROVIDENT FINANCIAL, WITHOUT PAYMENT OF A COMMISSION OR FEE,
BEFORE IT IS OFFERED TO THE GENERAL PUBLIC. In order for you to obtain Provident
Financial's Prospectus and other offering materials, you may either call us,
complete and return the enclosed postage-paid blue request card, or visit any
full-service Provident Savings office and pick up a packet of materials. Please
return the blue request card on or before May 28, 1996. If you telephone, please
call our special Conversion Center at (909) 782-6122.
If you have any questions regarding the conversion and subscription
offering, please call our special Conversion Center at (909) 782-6122 from 9:00
A.M. to 4:00 P.M., Pacific Time, Monday through Friday, and ask for an EVEREN
Securities, Inc. representative.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
PRESIDENT AND CEO
Enclosures
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
VC
<PAGE>
<TABLE>
<S> <C>
[LOGO] PROVIDENT SAVINGS BANK
PROVIDENT 3756 Central Avenue, Riverside, CA 92506
SAVINGS BANK
</TABLE>
May 16, 1996
Dear Valued Customer:
We are pleased to announce that Provident Savings Bank, F.S.B. ("Provident
Savings"), is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank. As part of the conversion process,
Provident Savings has formed a new holding company, Provident Financial
Holdings, Inc. ("Provident Financial"). Following the conversion, Provident
Savings will be the wholly owned subsidiary of Provident Financial. Provident
Financial's common stock is being offered through a subscription offering of
NON-TRANSFERABLE subscription rights to certain of Provident Savings' deposit
account holders; to Provident Financial's and Provident Savings' tax-qualified
employee stock benefit plans; and through a community offering to certain
members of the general public.
AS AN ELIGIBLE CUSTOMER, YOU HAVE A PRIORITY RIGHT TO SUBSCRIBE FOR STOCK
DIRECTLY FROM PROVIDENT FINANCIAL, WITHOUT PAYMENT OF A COMMISSION OR FEE,
BEFORE IT IS OFFERED TO THE GENERAL PUBLIC. The enclosed materials relating to
the offering include a Prospectus, a brochure describing the conversion and
concurrent offering of Provident Financial common stock, a Stock Order Form, and
a Certification Form. If you decide to exercise your subscription rights, you
must return to Provident Financial a properly completed original Stock Order
Form (facsimile copies and photocopies will not be accepted) and executed
Certification Form together with full payment for the subscribed shares (or
appropriate instructions authorizing withdrawal of full payment from your
deposit account at Provident Savings) by Noon, Pacific Time on June 17, 1996.
YOUR ORDER CANNOT BE PROCESSED UNLESS YOU RETURN AN EXECUTED CERTIFICATION FORM.
A postage-paid stock-return envelope is enclosed for your convenience.
If you have an IRA account with Provident Savings, you can subscribe for
stock with those funds without an early withdrawal penalty and without a
negative tax consequence to your retirement account. To do so, a self-directed
retirement account must be established. Funds from your Provident Savings IRA
account could then be directly transferred to the new account for this purpose.
There would be a minimal fee for setup and maintenance of such an account.
Please call our Conversion Center for more information about subscribing for
stock through a self-directed retirement account. SUBSCRIPTIONS INVOLVING
PROVIDENT SAVINGS IRA ACCOUNTS MUST BE RECEIVED BY NOON, PACIFIC TIME, JUNE 10,
1996 TO ALLOW FOR ADDITIONAL PROCESSING TIME.
If you were a depositor of Provident Savings on April 30, 1996, you are
eligible to vote on the proposed conversion. If so, we are also enclosing a
Notice of Special Meeting and Proxy Statement concerning the meeting to be held
on June 17, 1996. YOUR VOTE IS IMPORTANT TO US. PLEASE SIGN THE PROXY CARD AND
MAIL IT TO US PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THE BOARD OF
DIRECTORS RECOMMENDS UNANIMOUSLY THAT YOU VOTE "FOR" THE CONVERSION. Execution
of the proxy card merely ensures that your votes are represented at the meeting
and in no way obligates you to purchase stock in the conversion.
If you have any questions regarding the conversion and subscription
offering, please call the special Conversion Center at (909) 782-6122 from 9:00
A.M. to 4:00 P.M., Pacific Time, Monday through Friday, and ask for an EVEREN
Securities, Inc. representative.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
PRESIDENT AND CEO
Enclosures
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
T
<PAGE>
-------------------
EVEREN
SECURITIES
To: Those Eligible to Subscribe in the
Subscription and Community Offering of
Provident Financial Holdings, Inc. and
Other Interested Investors
- --------------------------------------------------------------------------------
At the request of Provident Financial Holdings, Inc. ("Provident
Financial"), we are enclosing materials relating to the conversion of Provident
Savings Bank, F.S.B. ("Provident Savings") from a federally chartered mutual
savings bank to a federally chartered stock savings bank and the concurrent
formation of Provident Financial to act as its holding company. These materials
include a Prospectus, a brochure describing the conversion of Provident Savings
and the offering of Provident Financial common stock, a Stock Order Form, and a
Certification Form.
As part of the conversion process, Provident Financial is offering newly
issued shares of its common stock through a subscription offering involving
NON-TRANSFERABLE subscription rights to certain of Provident Savings' deposit
account holders; to Provident Savings' tax-qualified employee stock benefit
plans; and through a community offering to certain members of the general
public.
Please read these materials carefully. If you decide to subscribe for
shares, you must return to Provident Financial a properly completed original
Stock Order Form (facsimile copies and photocopies will not be accepted) and
executed Certification Form together with the full required payment for the
subscribed shares (or appropriate instructions authorizing withdrawal of full
payment from your deposit account at Provident Savings) by Noon, Pacific Time,
on June 17, 1996. YOUR ORDER CANNOT BE PROCESSED UNLESS YOU RETURN AN EXECUTED
CERTIFICATION FORM. A postage-paid return envelope is enclosed for your
convenience.
If appropriate, we are also enclosing a Notice of Special Meeting and Proxy
Statement concerning the meeting to be held on June 17, 1996 so that you may
vote on the proposed conversion. YOUR VOTE IS IMPORTANT. PLEASE SIGN THE
ENCLOSED PROXY CARD AND MAIL IT PROMPTLY TO PROVIDENT SAVINGS IN THE ENCLOSED
POSTAGE-PAID PROXY-RETURN ENVELOPE. THE BOARD OF DIRECTORS RECOMMENDS
UNANIMOUSLY THAT YOU VOTE "FOR" THE CONVERSION. Execution of the proxy card
merely ensures that your votes are represented at the meeting and in no way
obligates you to purchase stock in the conversion.
Provident Financial has asked us to forward the enclosed documents to you in
view of certain requirements of the securities laws in your state. We should not
be understood as recommending or soliciting any action by you with respect to
the stock offering or the Special Meeting.
If you have any questions, please call the special Conversion Center at
(909) 782-6122, from 9:00 A.M. to 4:00 P.M., Pacific Time, Monday through
Friday, and ask for an EVEREN Securities, Inc. representative.
Very truly yours,
EVEREN Securities, Inc.
Enclosures
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
B
EVEREN Securities, Inc.
77 West Wacker Drive Chicago, IL 60601-1694 Tel (312)574-6000
Member New York Stock Exchange and other principal exchanges
<PAGE>
<TABLE>
<S> <C>
[LOGO] PROVIDENT SAVINGS BANK
PROVIDENT 3756 Central Avenue, Riverside, CA 92506
SAVINGS BANK
</TABLE>
May 16, 1996
Dear Member:
We are pleased to announce that Provident Savings Bank, F.S.B. ("Provident
Savings") is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank. As part of the conversion process,
Provident Savings has formed Provident Financial Holdings, Inc. ("Provident
Financial") to act as its holding company. Following the conversion, Provident
Savings will be a wholly owned subsidiary of Provident Financial. Provident
Financial's common stock is being offered through a subscription offering of
NON-TRANSFERABLE subscription rights to certain of Provident Savings' eligible
deposit account holders; to Provident Savings' and Provident Financial's
tax-qualified employee stock benefit plans; and through a community offering to
certain members of the general public.
If you were a depositor of Provident Savings on April 30, 1996, you are
eligible to vote on the proposed conversion. If so, we are enclosing a Notice of
Special Meeting and Proxy Statement concerning the meeting to be held on June
17, 1996. YOUR VOTE IS IMPORTANT TO US. PLEASE SIGN THE PROXY CARD AND MAIL IT
TO US PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. THE BOARD OF DIRECTORS
RECOMMENDS UNANIMOUSLY THAT YOU VOTE "FOR" THE CONVERSION. Execution of the
proxy card ensures that your votes are represented at the meeting.
Although you may be eligible to vote on the proposed conversion or otherwise
eligible to subscribe for shares, Provident Financial is unfortunately unable to
offer or sell its common stock to you because the small number of eligible
subscribers in your state, the registration of the conversion stock or the
registration or qualification of Provident Savings' employees, officers,
directors, and persons acting on its behalf as broker-dealers in your state make
it impractical, for reasons of cost or otherwise, to comply with the securities
laws of your state. Accordingly, neither this letter nor the enclosed Notice of
Special Meeting and Proxy Statement should be considered an offer to sell or a
solicitation of an offer to buy the common stock of Provident Financial.
If you have any questions about your voting rights or the Conversion in
general, please call the Conversion Center at (909) 782-6122, from 9:00 A.M. to
4:00 P.M., Pacific Time, Monday through Friday and ask for an EVEREN Securities,
Inc. representative.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
PRESIDENT AND CEO
Enclosures
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
J
<PAGE>
<TABLE>
<S> <C>
[LOGO] PROVIDENT SAVINGS BANK
PROVIDENT 3756 Central Avenue, Riverside, CA 92506
SAVINGS BANK
</TABLE>
Dear Interested Investor:
Thank you for your interest in becoming a charter stockholder in Provident
Financial Holdings, Inc. ("Provident Financial"), the proposed holding company
for Provident Savings Bank, F.S.B. ("Provident Savings"), after the conversion.
We appreciate this opportunity to provide you with additional information on the
sale of Provident Financial common stock.
The enclosed information packet includes the following:
PROSPECTUS: This document provides detailed information about Provident
Financial's stock offering and Provident Savings' operations. Please read
it carefully.
QUESTIONS AND ANSWERS: This brochure answers key questions about the
conversion and the stock offering.
STOCK ORDER FORM: Use this original form to order stock and return it with
your payment and executed Certification Form in the enclosed postage-paid
stock-return envelope. Please fill out this form as completely as
possible. Facsimile copies and photocopies will not be accepted. The
deadline for ordering stock is Noon, Pacific Time, on June 17, 1996.
CERTIFICATION FORM: Please read the Certification Form carefully, sign it,
and return it along with your Stock Order Form and payment in the
enclosed postage-paid stock-return envelope. YOUR ORDER CANNOT BE
PROCESSED UNLESS YOU COMPLETE AND RETURN THIS CERTIFICATION FORM.
If you have any questions regarding the conversion and concurrent
subscription and community offerings, please call the Conversion Center at (909)
782-6122, from 9:00 A.M. to 4:00 P.M., Pacific Time, Monday through Friday, and
ask for an EVEREN Securities, Inc. representative.
We are pleased to offer you this opportunity to become a stockholder in
Provident Financial.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
PRESIDENT AND CEO
Enclosures
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
CC
<PAGE>
<TABLE>
<S> <C>
[LOGO] PROVIDENT SAVINGS BANK
PROVIDENT 3756 Central Avenue, Riverside, CA 92506
SAVINGS BANK
</TABLE>
May 16, 1996
Dear Friend:
We are pleased to announce that Provident Savings Bank, F.S.B. ("Provident
Savings") is converting from a federally chartered mutual savings bank to a
federally chartered stock savings bank. As part of this process, Provident
Savings has formed a new holding company, Provident Financial Holdings, Inc.
("Provident Financial"). Following the conversion, Provident Savings will be a
wholly owned subsidiary of Provident Financial.
In connection with the conversion and holding company formation, Provident
Financial is offering newly issued shares of its common stock to eligible
parties in a subscription and community offering. Capital raised from the sale
of the common stock will assist Provident Savings in achieving its future
objectives and will increase Provident Savings' capital position to support its
deposit, borrowing, lending, and investment activities.
AS A FORMER DEPOSIT ACCOUNT HOLDER, YOU HAVE A PRIORITY RIGHT TO PURCHASE
STOCK DIRECTLY FROM PROVIDENT FINANCIAL, WITHOUT PAYMENT OF A COMMISSION OR FEE,
BEFORE IT IS OFFERED TO THE GENERAL PUBLIC. In order for you to obtain Provident
Financial's Prospectus and other offering materials, you may either call us,
complete and return the enclosed postage-paid blue request card, or visit any
full-service Provident Savings office and pick up a packet of materials. Please
return the blue request card on or before May 28, 1996. If you telephone, please
call our special Conversion Center at (909) 782-6122.
If you have any questions regarding the conversion and subscription
offering, please call our special Conversion Center at (909) 782-6122 from 9:00
A.M. to 4:00 P.M., Pacific Time, Monday through Friday, and ask for an EVEREN
Securities, Inc. representative.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
PRESIDENT AND CEO
Enclosures
THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
THIS LETTER IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER
TO BUY THE COMMON STOCK OF PROVIDENT FINANCIAL HOLDINGS,
INC. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
F
