SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-28304
PROVIDENT FINANCIAL HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0704889
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
3756 Central Avenue, Riverside, California 92506
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 686-6060
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
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Indicate by check mark whether disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or other
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. [ ]
As of September 15, 1997, there were issued and outstanding 4,881,215
shares of the Registrant's Common Stock. The Registrant's voting stock is
listed on the Nasdaq National Market under the symbol "PROV." The aggregate
market value of the voting stock held by nonaffiliates of the Registrant, based
on the closing sales price of the Registrant's common stock as quoted on the
Nasdaq National Market on September 15, 1997, was $19.875.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1997 ("Annual Report") (Part II).
2. Portions of the definitive Proxy Statement for the 1997 Annual Meeting
of Shareholders ("Proxy Statement") (Part III).
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PART I
Item 1. Business
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General
Provident Financial Holdings, Inc. ("Provident Financial" or the
"Corporation"), a Delaware corporation, was organized in January 1996 for the
purpose of becoming the holding company for Provident Savings Bank, F.S.B.
("Savings Bank") upon the Savings Bank's conversion from a federal mutual to a
federal stock savings bank ("Conversion"). The Conversion was completed on June
27, 1996. At June 30, 1997, the Corporation had total assets of $615.5 million,
total deposits of $508.8 million and stockholders' equity of $85.4 million.
Provident Financial has not engaged in any significant activity other than
holding the stock of the Savings Bank. Accordingly, the information set forth
in this report, including financial statements and related data, relates
primarily to the Savings Bank and its subsidiaries.
The Savings Bank, founded in 1956, is a federally chartered savings bank
headquartered in Riverside, California. The Savings Bank is regulated by the
Office of Thrift Supervision ("OTS"), its primary federal regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits.
The Savings Bank's deposits are federally insured up to applicable limits by the
FDIC (under the Savings Association Insurance Fund ("SAIF")). The Savings Bank
has been a member of the Federal Home Loan Bank ("FHLB") System since 1956.
The Savings Bank's business consists of both traditional savings and loan
and mortgage banking operations. The savings and loan operations primarily
consist of accepting deposits from customers within the communities surrounding
its full service offices and investing those funds in one- to four-family
mortgage loans and, to a lesser extent, in multi-family, commercial real estate,
construction, consumer and other loans. The mortgage banking activities consist
of the origination and sale of mortgage loans secured by one- to four-family
residences and the servicing of such loans for others. The Savings Bank's
revenues are derived principally from interest on its mortgage loan portfolio
and fees generated through its mortgage banking activities.
Recent Developments
Recapitalization of SAIF and Its Impact on SAIF Premiums. During the
fiscal 1997 first quarter, federal legislation required the recapitalization of
SAIF through a one-time assessment to increase SAIF's reserves to $1.25 per $100
of deposits. The assessment was based on assessable deposits at March 31, 1995
and was approximately 66 basis points on the amount of deposits held by a
SAIF-member institution. The one-time fee had an immediate after-tax impact of
approximately $1.9 million on the Savings Bank's earnings and capital.
Following the assessment, SAIF premiums were lowered to $0.065 per $100 in
January 1997.
Market Area
The Savings Bank is headquartered in Riverside, California and operates
seven additional full-service offices in Riverside County and one in San
Bernardino County. Management considers Riverside and western San Bernardino
Counties to be the Savings Bank's primary market for deposits. Through the
operations of its Profed Mortgage division, the Savings Bank has expanded its
retail lending market to include a larger portion of southern California and
southern Nevada. Profed Mortgage'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
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Bernardino and Riverside Counties have the fourth and sixth largest county
populations in California, respectively. The Savings Bank's market area
consists primarily of suburban and urban communities. Western Riverside and San
Bernardino Counties are relatively densely populated and are within the greater
Los Angeles metropolitan area. Military spending cuts have had a negative
impact on the economy and the labor force in the market area, as much of
Southern California's economic growth was tied to growth in the aerospace and
other defense-related industries. Though the Inland Empire is widely believed
to be entering a period of slow recovery from the recessionary trends that have
prevailed in Southern California over the past several years, unemployment
remains high. The recession in Southern California has resulted in an
over-supply of commercial, multi-family and residential properties and real
estate values continue to remain weak. The Savings Bank faces intense
competition for deposits and loan originations. See "-- Competition."
Lending Activities
General. The principal lending activity of the Savings Bank is the
origination of conventional, Federal Housing Administration ("FHA") and Veterans
Administration ("VA") mortgage loans secured by one- to four-family residential
properties. To a lesser extent, the Savings Bank also originates multi-family,
commercial real estate, construction, consumer and other loans for its
portfolio. The Savings Bank's net loans receivable totaled approximately $517.1
million at June 30, 1997, representing approximately 84.0% of consolidated total
assets. This compares to $452.9 million, or 77.4% of consolidated total assets,
at June 30, 1996. Following the Corporation's conversion to a stock company and
the subsequent increase in capital, the Savings Bank began to retain a larger
portion of its mortgage loan production. The Savings Bank believes that this
strategy will enable it to leverage the new capital and provide a higher return
on equity in the future.
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<TABLE>
Loan Portfolio Analysis. The following table sets forth the composition of the Savings Bank's loan
portfolio at the dates indicated.
At June 30,
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1997 1996 1995 1994 1993
----------------- --------------- ---------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Mortgage Loans: (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-
family. . . . $402,296 76.41% $327,490 70.77% $345,034 71.59% $277,986 64.94% $241,019 57.76%
Multi-family . 52,564 9.98 54,427 11.76 53,531 11.11 63,719 14.88 66,871 16.02
Commercial . . 47,887 9.09 54,813 11.84 61,518 12.76 63,659 14.87 68,915 16.51
Construction . 5,778 1.10 10,222 2.21 5,938 1.23 4,324 1.01 11,817 2.83
Total Mortgage -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
loans . . . 508,525 96.58 446,952 96.58 466,021 96.69 409,688 95.70 388,622 93.12
Consumer loans 16,749 3.18 15,497 3.35 15,830 3.28 18,177 4.25 28,297 6.78
Commercial business
loans . . . . 991 0.19 0 0.00 0 0.00 0 0.00 0 0.00
Other loans. . 289 0.05 332 0.07 137 0.03 218 0.05 402 0.10
Total loans -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
receivable. 526,554 100.00% 462,781 100.00% 481,988 100.00% 428,083 100.00% 417,321 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Loans in process 3,695 3,694 4,121 3,324 8,183
Deferred loan fees
and discounts 247 690 1,239 1,268 1,201
Allowance for loan
losses . . . . 5,465 5,452 5,085 3,332 3,286
Total loans -------- -------- -------- -------- --------
receivable,
net . . . . $517,147 $452,945 $471,543 $420,159 $404,651
Loans held for ======== ======== ======== ======== ========
sale . . . . . $19,985 $49,612 $34,489 $83,049 $104,409
======= ======= ======= ======= ========
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Maturity of Loan Portfolio. The following table sets forth certain
information at June 30, 1997, regarding the dollar amount of principal
repayments becoming contractually due during the periods indicated for loans
held in the Savings Bank's portfolio. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
becoming due within one year. The table does not include any estimate of
prepayments, which significantly shorten the average life of loan portfolios and
may cause the Savings Bank's actual repayment experience to differ from that
shown below.
After After After
Within One Year 3 Years 5 years
One Through Through Through Beyond
year 3 Years 5 Years 10 years 10 Years Total
---- ------- ------- -------- -------- -----
Mortgage loans:
One-to four-
family. . . . $28 $3,185 $6,089 $3,922 $389,072 $402,296
Multifamily. . 123 165 209 863 51,204 52,564
Commercial . . 8 95 681 2,453 44,650 47,887
Construction . 971 181 -- -- 4,626 5,778
Consumer loans. 7 637 2,791 7,721 5,593 16,749
Commercial business
loans. . . . . 213 332 204 242 -- 991
Other loans . . 85 74 -- 53 77 289
Total loans ------ ------ ------ ------- -------- --------
receivable. . $1,435 $4,669 $9,974 $15,254 $495,222 $526,554
====== ====== ====== ======= ======== ========
The following table sets forth the dollar amount of all loans held in the
Savings Bank's portfolio due after June 30, 1998 which have fixed interest rates
and have floating or adjustable interest rates.
Floating or
Adjustable
Fixed-Rates Rates
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(In Thousands)
Mortgage loans:
One-to four-family. . . . . . . . $44,071 $358,225
Multifamily . . . . . . . . . . . 1,175 51,389
Commercial. . . . . . . . . . . . 741 47,147
Construction. . . . . . . . . . . 512 5,265
Consumer loans . . . . . . . . . . 5,616 11,133
Commercial Business Lending. . . . 159 832
Other loans. . . . . . . . . . . . -- 289
------- --------
Total loans receivable. . . . . $52,274 $474,280
======= ========
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
One- to Four-Family Residential Real Estate Lending. The Savings Bank's
primary focus in lending is on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences in the communities
where the Savings Bank has established full service branches and loan production
offices. At June 30, 1997, $402.3 million, or 76.4% of the Savings Bank's loan
portfolio consisted of permanent loans on one- to four-family residences.
Since 1989, the Savings Bank has emphasized its mortgage banking activities
and has sold most of the residential mortgage loans that it has originated. See
"-- Mortgage Banking Activities." A portion of the ARM loans originated by the
Savings Bank are retained in the Savings Bank's loan portfolio to meet the
Savings Bank's asset/liability management objectives. At June 30, 1997,
adjustable-rate loans comprised 90.1% of the Savings Bank's loan portfolio.
The Savings Bank's residential mortgage loans are generally underwritten
and documented in accordance with the guidelines established by the Federal Home
Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"). All government insured loans are generally underwritten
and documented in accordance with the guidelines established by the Department
of Housing and Urban Development ("HUD") and the VA. The Savings Bank's loan
underwriters are approved as underwriters under HUD's delegated underwriter
program.
The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. Substantially all of the ARM loans originated by the Savings
Bank meet the underwriting standards of the secondary markets. The Savings Bank
offers several ARM products which generally adjust semi-annually or annually
after an initial fixed period ranging from six months to seven years subject to
a limitation on the annual increase of 1.0 to 2.0 percentage points and an
overall limitation of 5.0 to 6.0 percentage points. Certain ARM loans are
originated with an option to convert the loan to a 30-year fixed-rate loan at
the then prevailing market interest rate. The ARM loans in the Savings Bank's
portfolio utilize the COFI, London interbank offered rates ("LIBOR") or the
weekly average yield on one-year U.S. Treasury securities adjusted to a constant
maturity of one year ("CMT"), plus a margin of 2.00% to 3.25%. Loans based on
the COFI constitute a majority of the Savings Bank's loan portfolio. The COFI
has become dominated by a few large California-based savings institutions and,
accordingly, movement in the index is closely tied to the deposit pricing and
borrowing cost of these institutions. Currently, the Savings Bank is
emphasizing products based on the one-year CMT and LIBOR, which adjust more
rapidly than the COFI to changes in interest rates. As of June 30, 1997, the
Savings Bank had $127.5 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 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
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interest to be paid by the customer due to increases in interest rates. It is
possible that, during periods of rising interest rates, the risk of default on
ARM loans may increase as a result of repricing and the increased required
payment from the borrower. Furthermore, because the ARM loans originated by the
Savings Bank generally provide, as a marketing incentive, for initial rates of
interest below the rates which would apply were the adjustment index plus the
applicable margin initially used for pricing, these loans are subject to
increased risks of default or delinquency. Another consideration is that
although ARM loans allow the Savings Bank to increase the sensitivity of its
asset base due to changes in the interest rates, the extent of this interest
sensitivity is limited by the periodic and lifetime interest rate adjustment
limits. In addition, because the COFI is a lagging market index, upward
adjustments on these loans may occur more slowly than increases in the Savings
Bank's cost of interest-bearing liabilities, especially during periods of
rapidly increasing interest rates. Because of these considerations, the Savings
Bank has no assurance that yields on ARM loans will be sufficient to offset
increases in the Savings Bank's cost of funds.
It is the Savings Bank's present policy to lend up to 97% of the lesser of
the appraised value of the property or purchase price of the property on
conventional loans. Higher loan-to-value ratios are also available on certain
government insured programs. The Savings Bank generally requires private
mortgage insurance on residential loans with a loan-to-value ratio at
origination exceeding 80%.
Multi-Family Residential and Commercial Real Estate Lending. Historically,
the Savings Bank has originated loans secured by multi-family residential and
commercial real estate. At June 30, 1997, the Savings Bank's loan portfolio
included $52.6 million in multi-family real estate loans and $47.9 million in
commercial real estate loans, or 10.0% and 9.1%, respectively, of total loans
receivable. Since 1990, the Savings Bank has de- emphasized this type of
lending and does not intend to actively pursue these loans until the Southern
California real estate market improves. During this period, the Savings Bank
has, however, selectively made multi-family and commercial real estate mortgage
loans, including loans to facilitate the sale of real estate owned. At June 30,
1997, the Savings Bank had 107 multi-family and 133 commercial real estate loans
in its portfolio, the largest of which was a multi-family real estate loan with
a balance of $3.4 million.
Multi-family real estate loans originated by the Savings Bank are
predominately adjustable rate loans with a term to maturity of 15 years based on
a 30-year amortization schedule. Commercial real estate loans originated by the
Savings Bank are also predominately adjustable rate loans with a term to
maturity of ten years based on a 30-year amortization schedule. Rates on
multi-family and commercial ARM loans generally adjust monthly, semi-annually or
annually to specified spreads over the COFI, subject to annual payment caps and
life-of-loan interest rate caps. At June 30, 1997, $30.8 million, or 58.5%, of
the Savings Bank's multi-family loans were secured by five to 36 unit projects,
of which $20.5 million, or 39.1%, were located in Riverside or San Bernardino
Counties. The Savings Bank's commercial real estate loan portfolio generally
consists of loans secured by small office buildings and small retail centers,
substantially all of which are located in Southern California. The Savings Bank
originates multi-family and commercial real estate loans in amounts ranging from
$200,000 to $1.5 million. At June 30, 1997, the Savings Bank had 24 commercial
real estate and multi-family loans with principal balances of over $1 million
that totaled $40.7 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.
Multi-family and commercial real estate lending affords the Savings Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties are generally greater in amount, more difficult to evaluate and
monitor and are more susceptible to default as a result of general economic
conditions and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multi-family and commercial properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
impacted by adverse conditions in the real estate market or the economy. At
June 30, 1997, approximately $41.1 million, or 78.3%, of the Savings Bank's
multi-family loans and approximately $38.4 million, or 80.3%, of the Savings
Bank's commercial real estate loans were secured by properties located in
Riverside or San Bernardino
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County. As a result of the recessionary economic conditions that have prevailed
in the Savings Bank's lending area in recent years, the Savings Bank has
experienced increased delinquencies and charge-offs in these categories of
loans. The recent declines in real estate values in the region have been more
pronounced with respect to multi-family and commercial real estate. As a
result, even though the Savings Bank's multi-family and commercial real estate
loans are older and generally are considered by management to be seasoned, there
can be no assurance that the current market value of the properties securing
these loans equals or exceeds the outstanding loan balance. The Savings Bank
seeks to minimize the risks posed by multi-family and commercial real estate
lending by originating such loans on a selective basis. At June 30, 1997, the
Savings Bank had no multi-family real estate loans and one commercial real
estate loan with a balance of $465,000 that were 60 to 89 days past due and two
multi-family real estate loans totaling $1.7 million and two commercial real
estate loans totaling $960,000 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 June 30, 1997, the Savings Bank's construction loan portfolio totaled $5.8
million, or 1.1% of total loans receivable. Occasionally, the Savings Bank
makes loans to builders for the construction of small subdivisions. Typically,
the Savings Bank requires a specific number of presales prior to the
commencement of building in an individual phase of the planned development. As
of June 30, 1997, the Savings Bank had no subdivision loans outstanding.
Individual residential construction loans that are not made in conjunction with
the granting of permanent financing of the property are for terms of up to 12
months.
Construction lending is generally considered to involve a higher level of
risk as compared to one- to four-family residential lending because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated cost of the project. The nature of these loans is
such that they are generally more difficult to evaluate and monitor. If the
estimate of value proves to be inaccurate, the Savings Bank may be confronted
at, or prior to, the maturity of the loan, with a project the value of which is
insufficient to assure full repayment.
Consumer and Other Lending. The Savings Bank originates a variety of
consumer loans, including secured second mortgage loans, loans secured by
deposit accounts and unsecured loans. Consumer and other lending has
traditionally been a small part of the Savings Bank's business. At June 30,
1997, the Savings Bank had $16.7 million, or 3.2% of its total loans receivable
in outstanding consumer and other loans.
Commercial Business Lending. The Savings Bank has created a business
banking department in order to diversify its credit risk and increase the
average yield and repricing speed of its interest-earning assets. As of June
30, 1997, commercial loans totaled $991,000, or 0.19% of total loans. These
loans represent unsecured lines of credit and term loans secured by business
property. The Savings Bank is actively seeking to expand its business banking
activities.
Mortgage Banking Activities
General. Mortgage banking involves the origination and sale of mortgage
loans for the purpose of generating income on the sale of loans and fee income.
The Savings Bank limits its mortgage banking lending activities to mortgage
loans on one- to four-family properties. Mortgage banking generates income
primarily from the sale of loans (which may be sold either servicing-retained or
servicing-released) and from servicing fees from loans sold on a
servicing-retained basis. To a lesser extent, mortgage banking also generates
income from origination and loan fees. Generally, the level of loan sale
activity and, therefore, its contribution to the Savings Bank's profitability
depends on maintaining a sufficient volume of loan originations. Changes in the
level of interest rates and the local economy affect the amount of loans
originated by the Savings Bank and, thus, the amount of loan sales as well as
origination and loan fees earned.
Loan Solicitation and Processing. The Savings Bank's mortgage banking
operations combine both wholesale and retail loan origination. The Savings
Bank's wholesale loan production operation utilizes a network of approximately
600 loan correspondents approved by the Savings Bank who originate and submit
loans at a mark-up
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over the Savings Bank's daily published price. During the years ended June 30,
1997 and 1996, wholesale loan originations accounted for 58.6% and 65.2%,
respectively, of loans originated for sale. The Savings Bank maintains two
regional wholesale lending offices located in Rancho Cucamonga, California and
Las Vegas, Nevada.
The Savings Bank's retail loan production operations, which are organized
in the Profed Mortgage division of the Savings Bank, utilize loan officers and
processors employed by the Savings Bank. The Savings Bank's loan agents
generate retail loan originations through referrals from realtors, builders and
customers. As of June 30, 1997, Profed Mortgage operated three offices within
Savings Bank facilities and seven free standing loan production offices located
in Glendora, Laguna Niguel, Rancho Cucamonga, Riverside, Santa Ana and Torrence
in Southern California; and in Las Vegas, Nevada. 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. 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.
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
totaling $51.0 million at June 30, 1997. See Note 14 of Notes to Consolidated
Financial Statements contained in Item 8 hereof. When the Savings Bank commits
to a borrower to lock in an interest rate there is the risk to the Savings Bank
that a rise in market interest rates will reduce the value of the mortgage
before it can be closed and sold. To control the interest rate risk caused by
mortgage banking activities, the Savings Bank uses forward sales agreements and
over-the-counter put options related to mortgage-backed securities. See "--
Mortgage Banking Activities -- Hedging Activities."
Loan Origination and Other Fees. The Savings Bank generally receives
origination points and loan fees. Origination points are a percentage of the
principal amount of the mortgage loan which are charged to the borrower for
funding the loan. The amount of points charged by the Savings Bank is generally
1% to 2%. Current accounting standards require points and fees received (net of
certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees or costs associated with loans that are prepaid or sold are
recognized as income at the time of prepayment or sale. The Savings Bank had
$102,000 of net deferred mortgage loan fees at June 30, 1997.
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.
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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."
The following table shows the Savings Bank's loan originations,
repurchases, sales and principal repayments during the periods indicated.
Year Ended June 30,
-------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Loans originated for sale:
Retail originations. . . . . . . . $129,740 $163,411 $ 48,638
Wholesale originations . . . . . . 183,642 305,756 112,842
-------- -------- --------
Total loans originated for sale. . 313,382 469,167 161,480
Loans sold(1): ======== ======== ========
Servicing released . . . . . . . . 341,471 437,917 198,463
Servicing retained . . . . . . . . 1,539 16,127 11,577
-------- -------- --------
Total loans sold. . . . . . . . . 343,010 454,044 210,040
Loans originated for portfolio: ======== ======== ========
Mortgage loans:
One- to four-family. . . . . . . 112,310 39,182 78,227
Multi-family . . . . . . . . . . 916 4,631 3,115
Commercial . . . . . . . . . . . 1,562 -- 3,495
Construction . . . . . . . . . . 5,240 90 6,746
Consumer loans . . . . . . . . . 6,160 3,634 2,052
Commercial business lending. . . 2,008 -- --
Other loans. . . . . . . . . . . 232 197 --
-------- -------- --------
Total loans originated for portfolio 128,428 47,734 93,635
Loans repurchased: ======== ======== ========
Mortgage loans:
One- to four-family . . . . . . . 2,737 1,176 731
Commercial. . . . . . . . . . . . -- -- 849
-------- -------- --------
Total loans repurchased . . . . 2,737 1,176 1,580
-------- -------- --------
Mortgage loan principal repayments. 60,973 66,379 39,783
Real estate acquired in settlement of loans 7,094 3,967 11,546
Increase (decrease) in other items, net(2) 7,094 2,838 7,498
Net increase (decrease) in loans -------- -------- --------
receivable, net. . . . . . . . . . $ 34,575 $ (3,475) $ 2,824
======== ======== ========
- --------------------
(1) Includes loans swapped for mortgage-backed securities.
(2) Includes net changes in loans in process, discounts on loans and loss
reserves.
9
<PAGE>
<PAGE>
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 continue to sell loans
servicing-released.
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,
1997, 1996, and 1995, the Savings Bank repurchased single-family mortgage loans,
totaling $2.7 million, $1.2 million, and $731,000, respectively. The continued
increase in 1997 and 1996 repurchases was largely due to the expansion of
FHA/VA mortgage loan production during those years.
Loan Servicing. The Savings Bank receives fees from a variety of
institutional mortgage owners in return for performing the traditional services
of collecting individual payments. At June 30, 1997, the Savings Bank was
servicing $530.3 million of loans for others. The Savings Bank's loan servicing
portfolio has decreased in recent years primarily because the Savings Bank has
sold a larger portion of its 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.
Hedging Activities. Mortgage banking involves the risk that a rise in
market interest rates will reduce the value of a mortgage before it can be sold.
This type of risk often occurs when the Savings Bank commits to a borrower to
lock in an interest rate during the origination process and market interest
rates increase before the mortgage can be closed and sold. Such interest rate
risk also arises when mortgages are placed in the warehouse (i.e., held for
sale) without locking in an interest rate for their eventual sale in the
secondary market. The Savings Bank seeks to control or limit the interest rate
risk caused by mortgage banking activities. The two methods used by the Savings
Bank to help reduce interest rate risk from its mortgage banking activities are
forward sales agreements and purchases of over-the-counter put options related
to mortgage-backed securities. At various times, depending on management's
assessment of interest rate movements and other economic conditions, the Savings
Bank may reduce or increase its hedging positions.
Under forward sales agreements, usually with FNMA, FHLMC or private
investors, the Savings Bank is obligated to sell certain dollar amounts of
mortgage loans that meet certain underwriting and legal criteria under specific
terms before the expiration of the commitment period. These terms include the
minimum maturity of loans, the yield to the purchaser, the servicing spread to
the Savings Bank (if servicing is retained) and the maximum principal amount of
the individual loans. Forward sales of mortgages in the pipeline protect the
price of currently processed loans from interest rate fluctuations that may
occur from the time the interest rate of the loan is fixed to the time of the
sale. The amount of and delivery date of the forward sales commitments is based
upon management's estimates as to the volume of loans that will close and the
length of the origination commitment. Forward sales do not provide complete
interest-rate protection, however, because of the possibility of fallout (i.e.,
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
10
<PAGE>
<PAGE>
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, 1997, the Savings Bank had
gains of $3.6 million, respectively, attributable to sales of loans which
included hedging gains or losses. At June 30, 1997, the Savings Bank had
outstanding commitments to sell loans totaling $22.3 million. See Note 14 of
the Notes to Consolidated Financial Statements contained herein.
In order to reduce the interest rate risk associated with commitments to
originate loans that are in excess of forward sales commitments, the Savings
Bank purchases over-the-counter options on treasury bonds and/or mortgage-backed
securities. At June 30, 1997, the Savings Bank had no option contracts
outstanding.
The above activities are managed continually as markets change, however,
there can be no assurance that the Savings Bank will be successful in its effort
to eliminate the risk of interest rate fluctuation between the time origination
commitments are issued and the ultimate sale of the loan. The Savings Bank
employs 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. If the
Savings Bank is unsuccessful at curing a delinquency, a property inspection is
performed between the 45th day and 60th day of delinquency. 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. The
following table sets forth delinquencies in the Savings Bank's loan portfolio as
of the dates indicated.
11
<PAGE>
<PAGE>
<TABLE>
At June 30,
---------------------------------------------------------------------------
1997 1996 1995
------------------------- ----------------------- ------------------------
60 - 89 90 Days 60 - 89 90 Days 60 - 89 90 Days
Days or More Days or More Days or More
----------- ----------- ---------- ---------- ---------- ------------
Prin- Prin- Prin- Prin- Prin- Prin-
cipal cipal cipal cipal cipal cipal
Num- Bal- Num- Bal- Num- Bal- Num- Bal- Num- Bal- Num- Bal-
ber ance ber ance ber ance ber ance ber ance ber ance
of of of of of of of of of of of of
Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family 6 $918 30 $3,227 5 $763 18 $2,874 1 $2 8 $1,191
Multifamily. . . -- -- 2 1,725 -- -- 2 387 1 142 -- --
Commercial . . . 1 465 2 960 -- -- -- -- 1 470 2 810
Construction . . -- -- -- -- -- -- -- -- -- -- -- --
Commercial business
loans . . . . . -- -- -- -- -- -- -- -- -- -- -- --
Consumer . . . . 1 14 7 201 3 66 4 30 1 114 2 16
Other loans. . . -- -- -- -- -- -- -- -- -- -- -- --
-- ------ -- ------ -- ---- -- ------ -- ---- -- ------
Total . . . . . 8 $1,397 41 $6,113 8 $829 24 $3,291 4 $728 12 $2,017
== ====== == ====== == ==== == ====== == ==== == ======
12
</TABLE>
<PAGE>
<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 (dollars in thousands).
At June 30,
---------------------------------------
1997 1996 1995 1994 1993
Loans accounted for on ---- ---- ---- ---- ----
a non-accrual basis:
Mortgage loans:
One-to four-family . . $3,667 $3,511 $1,137 $1,616 $2,149
Multi-family . . . . . 1,176 798 142 2,039 950
Commercial . . . . . . 979(1) -- 1,279 864 1,669
Consumer loans. . . . . 150 108 -- 6 4
------ ------ ------ ------ ------
Total . . . . . . . . 5,972 4,417 2,558 4,525 4,772
Accruing loans which are ------ ------ ------ ------ ------
contractually past due
90 days or more:
One- to four-family . . 268 -- -- -- --
Consumer. . . . . . . . 9 -- -- 1 --
------ ------ ------ ------ ------
Total . . . . . . . . 277 -- -- 1 --
------ ------ ------ ------ ------
Total nonaccrual
and 90 days or more
past due loans. . . 6,249 4,417 2,558 4,526 4,772
Foreclosed real estate, net 2,636 2,711 6,784 4,117 4,829
------ ------ ------ ------ ------
Total nonperforming assets $8,885 $7,128 $ 9,342 $ 8,643 $ 9,601
====== ====== ======= ======= =======
Restructured loans. . . $4,910 $4,905 $ 3,272 $ 4,015 $ 7,087
====== ====== ======= ======= =======
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net 1.21% 0.98% 0.54% 1.08% 1.18%
Nonaccrual and 90 days or more
past due loans as a percentage
of total assets. . . . 1.02 0.76 0.45 0.78 0.81
Nonperforming assets as a
percentage of total assets 1.44 1.22 1.65 1.49 1.63
- ----------------
(1) Includes two restructured loans totaling $835.
The Savings Bank assesses loans individually and identifies impairment
when the accrual of interest has been discontinued, loans have been restructured
or management has serious doubts about the future collectibility of principal
and interest, even though the loans are currently performing. Factors
considered in determining impairment include, but are not limited to, expected
future cash flows, the financial condition of the borrower and current economic
conditions. The Savings Bank measures each impaired loan based on the fair
value of its collateral and charges off those loans or portions of loans deemed
uncollectible.
13
<PAGE>
<PAGE>
Interest income which would have been recorded for the year ended June 30,
1997 had nonaccruing loans been current in accordance with their original terms
amounted to approximately $871. The amount of interest included in the results
of operations on such loans for the year ended June 30, 1997 amounted to
approximately $539,000. Interest income foregone on restructured loans for such
periods was not material.
Foreclosed and Investment Real Estate. Real estate acquired by the Savings
Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified
as foreclosed real estate until it is sold. When property is acquired it is
recorded at the lower of its cost, which is the unpaid principal balance of the
related loan plus foreclosure costs, or market value less cost of sale.
Subsequent declines in value are charged to operations. At June 30, 1997, the
Savings Bank had $2.6 million, net of allowance for losses of $126,000. Due
primarily to continued depressed market conditions for multi-family and
commercial properties in Southern California, the Savings Bank established
provisions of $306,000 for losses on foreclosed real estate during the year
ended June 30, 1997. At June 30, 1997, the Savings Bank's foreclosed real
estate was comprised of 24 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 $3.0 million of investment real estate,
net of reserves at June 30, 1997, all of which was held by a wholly owned
subsidiary.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated as special mention and monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified assets, including
assets designated as special mention, were as follows at the dates indicated
(dollars in thousands):
At June 30,
-----------------
1997 1996
---- ----
Doubtful. . . . . . . . . $ -- $ --
Substandard assets 13,062 14,387
Special mention . . . . . 489 4,594
------- -------
Total . . . . . . . $13,551 $18,981
======= =======
Total classified assets as of
percentage total assets 2.20% 3.25%
14
<PAGE>
<PAGE>
As set forth below, as of June 30, 1997, assets classified as substandard
and special mention included 86 loans and properties totaling approximately
$13.6 million.
Number
of Special
Type of Loan/Property Loans Substandard Mention Total
- --------------------- ----- ----------- ------- -----
(Dollars in Thousands)
One- to four-family . . . 53 $3,725 $ 489 $4,214
Multi-family. . . . . . . 2 1,176 -- 1,176
Commercial real estate. . 7 5,525 -- 5,525
Construction. . . . . . . -- -- -- --
Real estate owned . . . . 24 2,636 -- 2,636
-- ------- ----- -------
Total . . . . . . . . 86 $13,062 $ 489 $13,551
== ======= ===== =======
Not all of the Savings Bank's classified assets are delinquent or
nonperforming. In determining whether the Savings Bank's assets expose the
Savings Bank to sufficient risk to warrant classification the Savings Bank may
consider various factors, including the payment history of the borrower, the
loan-to-value ratio, and the debt coverage ratio of the property securing the
loan. Upon consideration of these factors, the Savings Bank may determine that
the asset in question, though not currently delinquent, presents a risk of loss
that requires it to be classified or designated as special mention. In
addition, the Savings Bank's loan portfolio includes commercial and multi-family
real estate loans with a balance exceeding the current market value of the
collateral that are not classified because they are performing and have
borrowers who have sufficient resources to support the payment of the loan.
Allowance for Loan Losses. The Savings Bank has established a methodology
for the determination of provisions for loan losses. The methodology is set
forth in a formal policy and takes into consideration the need for an overall
general valuation allowance as well as specific allowances that are tied to
individual loans.
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the collateral securing the loan. The Savings Bank increases its
allowance for loan losses by charging provisions for loan losses against the
Savings Bank's operations.
The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans. Management reviews the adequacy of the
allowance at least quarterly based on an evaluation of the portfolio, past
experience, prevailing market conditions and other relevant factors. Specific
valuation allowances are established to absorb losses on loans for which full
collectibility may not be reasonably assured. The amount of the allowance is
based on the estimated value of the collateral securing the loan and other
analyses pertinent to each situation. Generally, a provision for losses is
charged against operations on a monthly basis as necessary to maintain the
allowances at appropriate levels.
At June 30, 1997, the Savings Bank had an allowance for loan losses of
$5.5 million. Management believes that the amount maintained in the allowance
will be adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
As a result of declines in local and regional real estate values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions undertaken as a part of the examinations of such
institutions by banking regulators. While the Savings Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Savings Bank's loan
portfolio, will not request the Savings Bank to increase significantly its
allowance for loan losses. In addition, because future events affecting
borrowers and collateral
15
<PAGE>
<PAGE>
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
(dollars in thousands).
Year Ended June 30,
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance at beginning of period. . $5,452 $5,085 $3,332 $3,286 $1,839
Recoveries:
Mortgage loans:
One- to four-family. . . . . . . 11 16 97 53 --
Multi-family . . . . . . . . . . 60 258 145 62 --
Commercial . . . . . . . . . . . 38 315 177 4 --
Other loans. . . . . . . . . . . 27 -- 40 -- --
------ ------ ------ ------ ------
Total recoveries. . . . . . . . 136 589 459 119 --
Charge-offs: ------ ------ ------ ------ ------
Mortgage loans:
One- to four-family. . . . . . . 457 214 772 438 200
Multi-family . . . . . . . . . . 609 934 1,589 1,112 --
Commercial . . . . . . . . . . . 309 1,335 1,101 540 --
Consumer loans . . . . . . . . . -- -- 17 3 5
Other loans. . . . . . . . . . . 2 -- 14 13 3
------ ------ ------ ------ ------
Total charge-offs . . . . . . . 1,377 2,483 3,493 2,106 208
------ ------ ------ ------ ------
Net loan charge-offs (recoveries) 1,241 1,894 3,034 1,987 208
Provision for loan losses . . . . 1,254 2,261 4,787 2,033 1,655
------ ------ ------ ------ ------
Balance at end of period. . . . . $5,465 $5,452 $5,085 $3,332 $3,286
====== ====== ====== ====== ======
Allowance for loan losses
as a percentage of gross
loans receivable . . . . . . . . 1.04% 1.18% 1.06% 0.78% 0.79%
Net loan charge-offs
(recoveries) as a
percentage of average
loans outstanding
during the period. . . . . . . . 0.25 0.38 0.62 0.39 0.04
Allowance for loan losses as
a percentage of nonperforming
loans at end of period . . . . . 87.45 123.43 198.79 73.62 68.86
16
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated. Management believes that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any other category.
At June 30,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- --------------- ----------------- ---------------- ----------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family 863 76.40% $ 930 70.77% $ 661 71.59% $ 470 64.94% $444 57.76
Multi-family . . . 935 9.98 1,532 11.76 1,030 11.11 1,140 14.88 516 16.02
Commercial . . . . 1,542 9.09 2,848 11.84 2,587 12.76 1,271 14.87 1,525 16.51
Construction . . . 7 1.10 28 2.21 13 1.23 25 1.01 42 2.83
Consumer loans. . . 114 3.18 112 3.35 108 3.28 126 4.25 171 6.78
Commercial business
lending. . . . . . -- 0.19 -- -- -- -- -- -- -- --
Other loans . . . . 2 0.06 2 0.07 1 0.03 2 0.05 3 0.10
Unallocated . . . . 2,002 N/A -- N/A 685 N/A 298 N/A 585 N/A
Total allowance for ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
loan losses . . . $5,465 100.00% $5,452 100.00% $5,085 100.00% $3,332 100.00% $3,286 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
17
</TABLE>
<PAGE>
<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 "Liquidity and Capital Resources" in Item 7
of this Report. At June 30, 1997, the Savings Bank's regulatory liquidity was
6.77%, which is in excess of the 5.0% required by OTS regulations.
The investment policy of the Savings Bank, established by the Board of
Directors and implemented by the Savings Bank's asset/liability committee, seeks
to provide and maintain adequate liquidity, complement the Savings Bank's
lending activities, and generate a favorable return on investments without
incurring undue interest and credit risk. The Savings Bank's policies, which
are more restrictive than OTS regulations allow, generally limit investments to
U.S. Government and agency securities, federal funds, U.S. Government sponsored
agency issued mortgage-backed securities, bankers' acceptances and commercial
paper. Bankers' acceptances must be issued by insured institutions, be eligible
for rediscount at the Federal Reserve Bank and be rated in one of the two
highest categories by a nationally recognized investment rating firm.
Commercial paper issuers must be rated in one of the two highest categories by
two nationally recognized investment rating firms. Investments are made based
on certain considerations, which include the interest rate, yield, settlement
date and maturity of the investment, the Savings Bank's liquidity position, and
anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits and anticipated loan
amortization and repayments). The effect that the proposed investment would
have on the Savings Bank's risk-based capital is also considered during the
evaluation.
At June 30, 1997, the Corporation's investment securities portfolio totaled
$33.6 million at amortized cost and consisted of U.S. Government and federal
agency obligations. Only the Savings Bank's investment in FNMA and FHLMC stock
was available for sale, all other securities were classified as held to
maturity.
18
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the composition of the Savings Bank's investment portfolio at the dates
indicated.
At June 30,
---------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- --------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Percent Cost Value Percent Cost Value Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale(1) 21 761 0.06% 21 -- 0.08% 21 -- 0.10%
Investment securities
held to maturity
U.S. Government
and agency
obligations. . . . 32,555 32,570 96.70 $24,973 $24,977 92.02 $18,910 $18,913 94.14
Corporate
securities(2). . . 998 1,000 2.97 2,000 1,992 7.37 990 978 4.93
Other(3). . . . . . 92 94 .27 145 143 0.53 167 188 0.83
Total investment ------- ------- ------ ------- ------- ------ ------- ------- ------
portfolio . . . . $33,666 $34,425 100.00% $27,139 $27,112 100.00% $20,088 $20,079 100.00%
======= ======= ====== ======= ======= ====== ======= ======= ======
_____________________
(1) Consists of FHLMC and FNMA stock
(1) Consists of bankers' acceptances
(2) Consists of mortgage-backed securities.
</TABLE>
<PAGE>
The following table sets forth the maturities and weighted average yields
of the debt securities in the Savings Bank's securities portfolio at June 30,
1997.
Due in Due Due
One Year After One to After
or Less Five Years Five Years Total
------------- -------------- ------------ ------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government and
federal agency
obligations . . . $22,064 5.68% $10,490 6.09% -- -- $33,554 5.81%
Corporate securities 999 5.25 -- -- -- -- 999 5.25
Other. . . . . . . 33 6.00 -- -- $59 8.43% 92 7.56
------- ------- --- -------
Total . . . . $23,096 5.66 $10,490 6.09 $59 8.43 $33,645 5.80
======= ======= === =======
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
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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 68.9% of the Savings Bank's deposit portfolio at June 30,
1997. The Savings Bank intends to attempt to reduce the overall cost of its
deposit portfolio by increasing its consumer checking account base and by
expanding into business banking. See, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in Item 7 of this Report.
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The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at June 30, 1997.
Weighted Per-
Average centage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
- ---- ---- ---------------- ------ ------- --------
(In Thousands)
Savings Accounts
2.60 N/A Basic savings $ 10 $31,822 6.25%
2.58 N/A Savings Plus 100 14,076 2.77
NOW Accounts
1.00 N/A Value checking -- 22,803 4.48
- -- N/A Commercial checking -- 3,579 0.70
Money Market Deposit Accounts
-----------------------------
4.41 N/A Asset management -- 75,924 14.92
1.09 N/A Checking plus -- 10,071 1.98
Certificates of Deposit
-----------------------
4.82 18-42 Months Variable CD 500 2,833 0.56
4.52 90 Days or Less Fixed term, fixed rate 1,000 5,354 1.05
5.22 6-7 Months Fixed-term, fixed rate 1,000 52,520 10.32
5.58 9 Months Fixed-term, fixed rate 1,000 20,431 4.02
5.70 1 Year Fixed-term, fixed rate 1,000 109,580 21.54
5.73 15 Months Fixed-term, fixed rate 10,000 72,067 14.17
5.63 2 Years Fixed-term, fixed rate 1,000 31,181 6.13
5.71 3 Years Fixed-term, fixed rate 1,000 8,036 1.58
5.23 4 Years Fixed-term, fixed rate 1,000 2,775 0.55
7.71 5 Years Fixed-term, Compounded
Certificate 1,000 44,708 8.78
5.54 Negotiable Jumbo-negotiable rate 100,000 900 0.18
5.70 Negotiable Mini-jumbo 50,000 99 0.02
-------- ------
4.82% $508,759 100.00%
======== ======
The following table indicates the amount of the Savings Bank's certificates
of deposit in amounts of $100,000 or more by time remaining until maturity as of
June 30, 1997.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less. . . . . . $15,875
Over three through six months . 18,032
Over six through 12 months. . . 22,215
Over 12 months. . . . . . . . . 12,426
-------
Total. . . . . . . . . . . $68,548
=======
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Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amount of deposits in the various types
of accounts offered by the Savings Bank at and between the dates indicated.
At June 30,
----------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ -------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
Non-
interest-
bearing $2,335 .46% $721 $1,614 0.43% $(1,173) $ 2,787 0.57%
NOW
checking 24,047 4.73% 3,317 20,730 4.32% 1,201 19,529 4.01%
Regular
savings
accounts 45,898 9.02% (6,954) 52,852 10.94% 2,002 50,850 10.45%
Money market
deposit 85,996 16.9% 2,898 83,098 17.30% (9,093) 92,191 18.95%
Fixed-rate
certificates
which mature:
Within 1
year 286,066 56.23% 35,934 250,132 52.19% 12,053 238,079 48.93%
After 1
year, but
within 2
years 36,557 7.18% (4,102) 40,659 8.49% 3,773 36,886 7.58%
After 2
years, but
within 5
years 24,906 4.9% (1,702) 26,608 5.57% (13,031) 39,639 8.15%
After 5
years 121 0.02% 9 112 0.02% 9 103 0.02%
Other 2,833 0.56% (736) 3,569 0.74% (2,952) 6,521 1.34%
-------- ------ ------- -------- ------ ------- -------- ------
Total $508,759 100.00% $29,385 $479,374 100.00% $(7,211) $486,585 100.00%
======== ====== ======= ======== ====== ======= ======== ======
Time Deposits by Rates. The following table sets forth the time deposits
in the Savings Bank categorized by rates at the dates indicated.
At June 30
----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Below 3.00% $ 164 $ 504 $ 828
3.00 - 4.49% 3,333 4,617 45,604
4.50 - 5.49% 119,452 224,224 79,797
5.50 - 6.49% 223,525 79,626 146,847
6.50 - 7.49% 3,657 11,537 46,869
Over 7.50% 352 573 1,284
--------- -------- --------
Total $350,483 $321,081 $321,229
======== ======== ========
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Time Deposits by Maturities. The following table sets forth the amount and
maturities of time deposits at June 30, 1997.
Amount Due
---------------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(In Thousands)
Below 3.00% . . 164 -- -- -- -- 164
3.00 - 4.49%. . 3,319 14 -- -- -- 3,333
4.50 - 5.49%. . 102,992 13,037 1,426 1,987 10 119,452
5.50 - 6.49%. . 180,306 23,616 10,961 1,268 7,374 223,525
6.50 - 7.49%. . 1,293 381 889 -- 1,094 3,657
Over 7.50%. . . 104 125 2 -- 121 352
-------- ------- ------- ------ ------ --------
Total $288,178 $37,173 $13,278 $3,255 $8,599 $350,483
======== ======= ======= ====== ====== ========
Deposit Activity. The following table sets forth the deposit activities of
the Savings Bank for the periods indicated.
Year Ended June 30,
------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Beginning balance. . . . . . $479,374 $486,585 $471,787
Net deposits (withdrawals)
before interest credited 9,128 (28,350) (3,707)
Interest credited. . . . . . 20,257 21,139 18,505
Net increase (decrease) in
deposits. . . . . . . . . . 29,385 (7,211) 14,798
-------- -------- --------
Ending balance . . . . . . . $508,759 $479,374 $486,585
======== ======== ========
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
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source. Advances from the FHLB-San Francisco are typically secured by the
Savings Bank's first mortgage loans. At June 30, 1997, the Savings Bank had
$6.8 million of borrowings from the FHLB-San Francisco at a weighted average
rate of 5.82%. Such borrowings mature between 1997 and 2003. The following
tables sets forth certain information regarding borrowings by the Savings Bank
at the dates and for the periods indicated:
At June 30,
-------------------------
1997 1996 1995
---- ---- ----
Balance outstanding at end of period:
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . . -- -- $ 1,985
FHLB advances. . . . . . . . . . . . . . . . $6,828 $8,578 33,078
Weighted average rate paid on:
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . . -- -- 6.15%
FHLB advances. . . . . . . . . . . . . . . . 5.82% 6.10% 6.56%
Year Ended June 30
-------------------------
1997 1996 1995
---- ---- ----
Maximum amount of borrowings outstanding
at any month end:
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . . -- -- $15,119
FHLB advances . . . . . . . . . . . . . . . $8,578 $25,578 $33,078
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . . -- -- $2,678
FHLB advances. . . . . . . . . . . . . . . . 7,098 $20,354 $21,655
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . . -- -- 4.91%
FHLB advances. . . . . . . . . . . . . . . . 5.87% 6.16% 4.94%
Subsidiary Activities
Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that at least one-half of any amount in excess
of 1% is used primarily for community, inner-city and community development
projects. The Savings Bank's investment in its service corporations did not
exceed these limits at June 30, 1997.
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
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services at branch offices of the Savings Bank, (iii) selling property and life
insurance, primarily to Savings Bank customers, and (iv) holding real estate for
investment. The real estate held for investment by Provident Financial at June
30, 1997 totaled $3.0 million. Profed Mortgage, Inc., which formerly contained
the Savings Bank's mortgage banking activities that are currently conducted by
the Savings Bank's Profed Mortgage division, and First Service are currently
inactive. At June 30, 1997, the Savings Bank's investment in its subsidiaries
was $4.5 million.
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and
the FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Savings Bank's mortgage documents. The Savings Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and
the FDIC to review the Savings Bank's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Corporation, the
Savings Bank and their operations. The Corporation, as a savings and loan
holding company, is also 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 $4.9 million at June 30, 1997.
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
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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 that from September 30, 1996 ranged 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.
Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted on
September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Savings Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately 0.013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances which could result in termination of the
deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources" in Item
7 of this Report.
26
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Prompt Corrective Action. Under the FDIA, 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%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At June 30, 1997, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, 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; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). 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. 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. OTS 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
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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 either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or 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; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
business and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer and educational loans (limited to 10% of total portfolio assets); and
stock issued by the FHLMC or the FNMA. Portfolio assets consist of total assets
minus the sum of (i) goodwill and other intangible assets, (ii) property used by
the savings institution to conduct its business, and (iii) liquid assets up to
20% of the institution's total assets. At June 30, 1997, the qualified thrift
investments of the Savings Bank were approximately 93.8% of its portfolio
assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS's prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."
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.
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The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans which do
not exceed an 80% loan-to-value ratio. The book value of assets in each
category is multiplied by the weighing factor (from 0% to 100%) assigned to that
category. These products are then totalled to arrive at total risk-weighted
assets. Off-balance sheet items are included in risk-weighted assets by
converting them to an approximate balance sheet "credit equivalent amount" based
on a conversion schedule. These credit equivalent amounts are then assigned to
risk categories in the same manner as balance sheet assets and included
risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. The rule also provides that the Director of the
OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital.
At June 30, 1997, the Savings Bank's core capital of approximately $58.4
million, or 9.9% of adjusted total assets, was $28.9 million in excess of the
OTS requirement of $29.5 million, or 5% of adjusted total assets. As of such
date, the Savings Bank's tangible capital of approximately $58.4 million, or
9.9% of adjusted total assets, was $34.8 million in excess of the OTS
requirement of $23.6 million, or 4.0% of adjusted total assets. Finally, at
June 30, 1997, the Savings Bank had risk-based capital of approximately $63.3
million or 16.1% of total risk-weighted assets, which was $24.0 million in
excess of the OTS risk-based capital requirement of $39.3 million or 10% of
risk-weighted assets.
Limitations on Capital Distributions. Ots regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
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
years up to 100% of its net
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income to date during the calendar year plus one-half its surplus capital ratio
(i.e., the amount of capital in excess of its fully phased-in requirement) at
the beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully phased-in capital
requirement (both before and after the proposed capital distribution). Such an
association may make (without application) capital distributions up to an amount
equal to 75% of its net income during the previous four quarters depending on
how close the association is to meeting its fully phased-in capital requirement.
Capital distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution). Tier 3
associations may not make any capital distributions without prior approval from
the OTS.
The Savings Bank is currently meeting the criteria to be designated a Tier
1 association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Savings Bank's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At June 30, 1997, the Savings Bank's limit on loans
to one borrower was $10.5 million. At June 30, 1997, the Savings Bank's largest
aggregate amount of loans to one borrower was $4.9 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.
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Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Savings Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Savings Bank may make to such persons based, in part, on the
Savings Bank's capital position, and requires certain board approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
Savings and Loan Holding Company Regulation
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding company,
the Corporation generally is not subject to activity restrictions. If the
Corporation acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties used
or occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies or
(vii) those activities authorized by the Federal Reserve Board as permissible
for bank holding companies, unless the OTS by regulation, prohibits or limits
such activities for savings and loan holding companies. Those activities
described in (vii) above also must be approved by the OTS prior to being engaged
in by a multiple holding company.
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.
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TAXATION
Federal Taxation
General. The Corporation and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Savings Bank or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Savings Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Savings Bank's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may have been
computed using an amount based on the Savings Bank's actual loss experience, or
a percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the nonqualifying reserve. The Savings Bank's deduction with respect to
nonqualifying loans was computed under the experience method, which essentially
allows a deduction based on the Savings Bank's actual loss experience over a
period of several years. Each year the Savings Bank selected the most favorable
way to calculate the deduction attributable to an addition to the tax bad debt
reserve. The Savings Bank used the experience method bad debt deduction for the
taxable years ended June 30, 1997, 1996 and 1995.
Recently enacted legislation repealed the reserve method of accounting for
bad debt reserves for tax years beginning after December 31, 1995. As result,
the Savings Bank is no longer able to calculate its deduction for bad debts
using the percentage-of-taxable-income method or the experience method.
Instead, the Savings Bank will be required to compute its deduction based on
specific charge-offs during the taxable year. This legislation also requires
savings associations to recapture into taxable income over a six-year period
their post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. As of the effective date of the legislation, the
Savings Bank had no post-1987 additions to its bad debt tax reserves.
Under prior law, if the Savings Bank failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would have been unable to make
additions to its bad debt reserve. Instead, the Savings Bank would have been
required to deduct bad debts as they occurred and would have additionally been
required to recapture its bad debt reserve deductions ratably over a multi-year
period. At June 30, 1997, the Savings Bank's total bad debt reserve for tax
purposes was approximately $7.7 million. Among other things, the qualifying
thrift definitional tests required the Savings Bank to hold at least 60% of its
assets as "qualifying assets." Qualifying assets generally
include cash, obligations of the United States or any agency or instrumentality
thereof, certain obligations of a state or political subdivision thereof, loans
secured by interests in improved residential real property or by savings
accounts, student loans and property used by the Savings Bank in the conduct of
its banking business. Under current law, a savings association will not be
required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from 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 Corporation that
would reduce
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amounts appropriated to the Savings Bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Savings Bank.
The amount of additional taxable income attributable to an Excess Distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if, after the Conversion, the Savings
Bank makes a "nondividend distribution," then approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of state and
local taxes). See "REGULATION" for limits on the payment of dividends by the
Savings Bank. The Savings Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Savings Bank's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of .12% of
the excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Savings Bank, whether or not an Alternative Minimum
Tax ("AMT") is paid.
Other Matters. There have not been any IRS audits of the Savings Bank's
federal income tax returns during the past five years. The Savings Bank has
been audited by the California Franchise Tax Board through tax year 1990.
State Taxation
California. The California franchise tax rate applicable to the Savings
Bank equals the franchise tax rate applicable to corporations generally, plus an
"in lieu" rate of 2%, which is approximately equal to personal property taxes
and business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Savings Bank). At June 30, 1997,
the total tax rate was 11%. Bad debt deductions are available in computing
California franchise taxes using the specific charge-off method. The Savings
Bank and its California subsidiaries file California state franchise tax returns
on a combined basis. The Corporation will be treated as a general corporation
subject to the general corporate tax rate.
Delaware. As a Delaware holding company not earning income in Delaware,
the Corporation is exempted from Delaware corporate income tax, but is required
to file an annual report with and pay an annual franchise tax to the State of
Delaware.
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.
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Personnel
As of June 30, 1997, the Savings Bank had 212 full-time and 60 part-time
employees. The employees are not represented by a collective bargaining unit
and the Savings Bank believes its relationship with its employees to be good.
Item 2. Properties
- ------------------
At June 30, 1997, the net book value of the Savings Bank's property
(including land and buildings) and its fixtures, furniture and equipment was
$6.8 million. The Savings Bank's home office, which is owned by the Savings
Bank, is located in Riverside, California. In addition, the Savings Bank has
eight branch offices, of which seven are in Riverside County in the cities of
Riverside, Moreno Valley (2), Hemet, Sun City, Rancho Mirage and Blythe,
California and one is in Redlands, California in San Bernardino County. Six of
the Savings Bank's branch offices are owned by the Savings Bank and two are
leased. The leases expire in 2000 and 2008. The Savings Bank also has six loan
production offices, which are located in Riverside, Rancho Cucamonga, Santa Ana,
Laguna Niguel and Torrence, California and Las Vegas, Nevada along with one
satellite office in Glendora, California. All of these offices are leased. The
leases expire from 1997 to 1998.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues in the ordinary
course of and incident to the Savings Banks' business. The Savings Bank is not
a party to any pending legal proceedings that it believes would have a material
adverse effect on the financial condition or operations of the Savings Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
The common stock of Provident Financial on the Nasdaq Stock Market under
the symbol "PROV." As of September 15, 1997, there were approximately 523
stockholders of record.
The Board of Directors of the Corporation has not formulated a dividend
policy and does not intend to pay cash dividends in the near future. Future
declarations or payments of dividends will be subject to determination by the
Corporation's Board of Directors, which will take into account the Corporation's
financial condition, results of operations, tax considerations, capital
requirements, industry standards, economic conditions and other factors,
including the regulatory restrictions which affect the payment of dividends by
the Savings Bank to the Corporation. Under Delaware law, dividends may be paid
either out of surplus or, if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
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The following table provides the high and low stock prices for PROV during
the last fiscal year following its initial public offering in June 1996.
1ST Qtr. 1997 2nd Qtr. 1997 3rd Qtr. 1997 4th Qtr. 1997
9/30/96 12/31/96 3/31/97 6/30/97
------- -------- ------- -------
High $12.625 $14.625 $17.250 $17.375
Low 10.125 12.375 13.750 14.125
Last 12.625 14.000 15.125 16.625
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Item 6. Selected Financial Data
- --------------------------------
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Corporation and
its subsidiaries at the dates and for the periods indicated. This information
is qualified in its entirety by reference to the detailed information contained
in the Consolidated Financial Statements and Notes thereto presented elsewhere
in this Form 10-K.
At June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
FINANCIAL CONDITION
DATA:
Total assets. . . . . $615,500 $584,847 $567,186 $580,336 $590,440
Loans receivable, net 517,147 452,945 471,543 420,159 404,651
Loans available for
sale, net. . . . . . 19,984 49,612 34,489 83,049 104,409
Cash and overnight
deposits . . . . . . 20,111 30,831 11,433 19,909 32,954
Investment securities 34,406 27,118 20,067 26,301 20,326
Deposits. . . . . . . 508,759 479,374 486,585 471,787 454,118
Borrowings. . . . . . 6,828 8,578 35,063 56,153 76,047
Stockholders'
equity (1) . . . . . 85,447 85,970 37,323 41,315 42,648
At June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
OPERATING DATA:
Interest income . . . $42,599 $41,817 $36,020 $36,197 $40,167
Interest expense. . . 23,528 25,269 22,491 19,532 21,839
Net interest income . 19,071 16,548 13,529 16,665 18,328
Provision for loan
losses . . . . . . . 1,254 2,261 4,787 2,033 1,655
Net interest income
after provision for
loans losses . . . . 17,817 14,287 8,742 14,632 16,673
Loan servicing and
other fees . . . . . 2,738 2,442 2,476 3,072 1,927
Gains (losses) from
sale of loans. . . . 3,597 4,753 701 1,246 5,726
Gain on bulk sale of
servicing rights . . -- -- -- 2,052 --
Other non-interest
income . . . . . . . 1,273 2,256 1,308 1,141 1,989
Real estate operations,
net. . . . . . . . . (11) (101) (1,600) (366) (125)
Operating and
administrative
expenses . . . . . . 22,313 19,499 17,354 23,758 18,243
Income (loss) before ------- ------- ------- ------- -------
income taxes . . . . 3,101 4,138 (5,727) (1,981) 7,947
Provision (benefit)
for income taxes . . 1,160 1,332 (1,735) (648) 3,838
------- ------- ------- ------- -------
Net income (loss) . . $1,941 $2,806 $(3,992) $(1,333) $4,109
====== ====== ======= ======= ======
_______________
(1) For years prior to 1996, amount represents retained earnings,
substantially restricted.
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At June 30,
-------------------------------------
1997 1996 1995
---- ---- ----
OTHER DATA:
Loans serviced for others . . . . . $530,318 $601,097 $657,451
Number of:
Real estate loans in portfolio. . 3,641 3,593 3,623
Real estate loans serviced
for others . . . . . . . . . . . 4,669 4,846 5,140
Deposit accounts. . . . . . . . . 33,410 32,102 32,786
Full-service offices. . . . . . . 9 9 9
Loan origination offices. . . . . 7 8 8
At or For the
Year Ended June 30,
------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Performance Ratios
Return (loss) on assets(1). . . 0.32% 0.50% (0.72)% (0.23)% 0.73%
Return (loss) on stockholder's
equity(2). . . . . . . . . . . 2.26 6.98 (9.81) (3.08) 10.24
Interest rate spread(3) . . . . 2.69 2.75 2.31 2.71 3.13
Net interest margin(4). . . . . 3.33 3.05 2.55 2.99 3.42
Average interest-earning assets
to average interest-bearing
liabilities. . . . . . . . . . 115.44 106.32 105.60 108.05 107.14
Operating and administrative
expenses as a percent of
average total assets . . . . . 3.73 3.46 3.13 4.09 3.26
Regulatory Capital Ratios
Tangible capital. . . . . . . . 9.89 10.41 6.19 6.65 6.74
Core capital. . . . . . . . . . 9.89 10.41 6.19 6.69 6.86
Risk-based capital. . . . . . . 16.12 16.49 11.25 12.68 11.86
Asset Quality Ratios
Nonaccrual and 90 days or more
past due loans as a percent
of loans receivable, net . . . 1.21 10.98 0.54 1.08 1.18
Nonperforming assets as a
percent of total assets. . . . 1.44 1.22 1.65 1.49 1.63
Allowance for loan losses as a
percent of gross loans
receivable . . . . . . . . . . 1.04 1.18 1.06 0.78 0.79
Allowance for loan losses as a
percent of nonperforming loans 87.45 123.43 198.79 73.62 68.86
Net charge-offs (recoveries) to
average outstanding loans. . . 0.25 0.38 0.62 0.39 0.04
- ------------------
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) divided by average stockholder's equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
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QUARTERLY FINANCIAL DATA (UNAUDITED)
1997
-----------------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
(Dollars in Thousands,
Except per share)
Interest income. . . $42,599 $10,870 $10,543 $10,622 $10,564
Interest expense . . 23,528 6,141 5,897 5,813 5,677
------- ------- ------- ------- -------
Net interest income. 19,071 4,729 4,646 4,809 4,887
Noninterest income . 7,608 1,778 1,649 2,182 1,999
Provision for loan
losses. . . . . . . 1,254 300 250 450 254
Noninterest expense. 22,324 4,556 4,049 5,204 8,515
Earnings (loss) before ------- ------- ------- ------- -------
taxes . . . . . . . 3,101 1,651 1,996 1,337 (1,883)
Taxes (benefit) on
income. . . . . . . 1,160 518 850 559 (767)
------- ------- ------- ------- -------
Net earnings (loss). $1,941 $1,133 $1,146 $778 ($1,116)
====== ====== ====== ==== =======
Per common share:
Per share earnings (loss) $0.41 $0.25 $0.24 $0.16 $(0.24)
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Item 7. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Corporation. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto.
Operating Strategy
The Corporation's primary goal has been to improve its profitability while
maintaining a sound capital position. To accomplish this goal, the Corporation
has employed an operating strategy that includes: (1) originating for its
portfolio one- to four-family residential mortgage loans, primarily with
adjustable rates; (2) enhancing net income and controlling interest rate risk by
originating fixed-rate loans for sale in the secondary market; (3) diversifying
its revenue sources through commercial banking and; (4) 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; (5) controlling asset growth
to a level sustainable by the Corporation's capital position; and (6)
controlling operating expenses. The Corporation and the Savings Bank intend to
continue this operating strategy in an effort to enhance 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.
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, gains 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 Corporation'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.
Comparison of Financial Condition
Total assets increased from $584.8 million at June 30, 1996 to $615.5
million at June 30, 1997 primarily as a result of growth in retail deposits.
Loans held for investment increased $64.2 million from $452.9 million at June
30, 1996 to $517.1 million at June 30, 1997. The Savings Bank, during the later
half of fiscal 1997, decided to accept a larger percentage of ARM loans
generated by its mortgage division into its own portfolio. The Savings Bank
believed that this strategy would help leverage its capital base through high
quality loans which would produce a
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higher return on assets and equity. Loans held for sale decreased from $49.6
million at June 30, 1996 to $20.0 million at June 30, 1997. The amount of loans
held for sale is largely dependent on timing of loan fundings, loan commitment
expirations, and loan sale settlements.
Total liabilities increased from $498.9 million at June 30, 1996 to $530.1
million at June 30, 1997 principally as a result of retail deposit growth.
Deposits increased from $479.4 million at June 30, 1996 to $508.8 million at
June 30, 1997. During 1997, the Savings Bank increased its emphasis on building
new client relationships. FHLB advances decreased from $8.6 million at June 30,
1996 to $6.8 million at June 30, 1997 as the Savings Bank retired maturing FHLB
advances rather than renew this borrowing.
Total stockholders' equity was $85.4 million at June 30, 1997 compared to
$86.0 million at June 30, 1996. The Corporation repurchased 205,000 shares for
a total cost of $3.3 million which partially offset the $1.9 million increase
in retained earnings. The Corporation's book value per share increased from
$16.77 at June 30, 1996 to $17.37 at June 30, 1997.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1997
General. The Corporation reported net earnings of $1.9 million, or $0.41
per share, for the year ended June 30, 1997 as compared to $2.8 million for the
year ended June 30, 1996. The decline in operating results between fiscal 1996
and fiscal 1997 was due primarily to a one-time $3.2 million SAIF assessment
charged in fiscal 1997. Without this special assessment, net income for fiscal
1997 would have been $3.8 million.
Net Interest Income. Net interest income increased by $2.6 million, or
15.2%, from $16.5 million in fiscal 1996 to $19.1 million in fiscal 1997. This
increase resulted principally from the investment of the conversion proceeds
into interest earning assets and the widening of the Corporation's net interest
margin from 3.1% to 3.3%.
Interest Income. The average yield on interest-earning assets declined
slightly in fiscal 1997 because a large portion of the stock conversion proceeds
were invested in short-term securities. Total interest income increased by
$782,000 in 1997 due to the increase in earning assets provided by the stock
conversion. The average balance in investment securities rose from $20.1
million in 1996 to $55.2 million in 1997 while the yield decreased from 6.9% to
5.7%. The loans receivable yield also decreased 16 basis points reflecting the
slightly downward trend of interest rates during the year.
Interest Expense. Interest expense declined on both deposits and FHLB
advances. The conversion proceeds allowed the Corporation to repay higher cost
FHLB advances. The average balance of these advances declined from $20.2
million in fiscal 1996 to $7.1 million in fiscal 1997. With the decline in
interest rates during fiscal 1997, the average cost of deposits decreased by 18
basis points from 4.9% in 1996 to 4.7% in 1997.
Provisions for Loan Losses. Provisions for losses declined in fiscal 1997
to $1.3 million as compared to $2.3 million in fiscal 1996. A smaller provision
was required because of a significant decline in credit losses. Credit losses
fell from $2.5 million in 1996 to $1.4 million in 1997. Commercial real estate
losses, which fell from $1.3 million in 1996 to $309,000 in 1997, experienced
the greatest drop. The allowance for loan losses ended fiscal 1997 at $5.5
million, unchanged from 1996. Because of growth in the loan portfolio during
fiscal 1997 the ratio of the allowance for loan losses as a percent of total
loans outstanding declined from 1.18% in 1996 to 1.04% in 1997. Allowance for
loan losses as a percent of nonperforming loans at the end of the period was
87.5% compared to 123.4% at the end of 1996. Recent loss reserve experience has
indicated that a reduction in the ratio is warranted.
Non-interest Income. Total non-interest income decreased by 19.5%, from
$9.5 million in 1996 to $7.6 million in 1997 primarily as a result of lower
gains on sale of loans. The ratio of gains to total loan sales remained
constant during the two periods at 105 basis points, however, the volume of
sales declined from $454 million in 1996 to $343 million in 1997. In addition,
non-interest income was increased in 1996 by the receipt of $1 million in life
insurance proceeds on a former Chief Executive Officer.
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Non-interest Expense. Total non-interest expense increased by $2.7
million, or 13.9% in 1997 because of the one-time SAIF assessment of $3.2
million. The payment of this special assessment brought the SAIF fund to its
legally required minimum reserve level which should result in lower premiums in
future years.
Income Taxes. Provision for income taxes was $1.2 million for fiscal 1997
(for an effective tax rate of 37.4%) compared to $1.3 million in 1996 (for an
effective tax rate of 32.2%). The Corporation eliminated the valuation allowance
previously established against the deferred state tax asset because management
determined that it was more likely than not to utilize its future benefit. The
effective rate for 1996 was lower because it was reduced by $1.0 million in
non-taxable life insurance proceeds.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1996
General. The Company reported net earnings of $2.8 million for the year
ended June 30, 1996 compared to a net loss of $4.0 million for the year ended
June 30, 1995. The improvement in operating results between fiscal 1995 and
fiscal 1996 was due to an increased interest rate spread, reduced provisions for
loan losses, and increased income from sales of loans.
Net Interest Income. Net interest income increased by $3.0 million, or
22.3%, from $13.5 million for fiscal 1995 to $16.5 million for fiscal 1996.
This increase resulted from an increase in the spread between the yield on
interest-earning assets and the rate paid on interest-bearing liabilities from
2.31% for the year ended June 30, 1995 to 2.75% for the year ended June 30, 1996
as the average yield on loans increased more than the average rate paid on
deposits.
Interest Income. Total interest income increased $5.8 million, or 16.1%,
from $36.0 million for the year ended June 30, 1995 to $41.8 million for the
year ended June 30, 1996. This increase between the periods was almost
exclusively the result of an increase in interest income on loans receivable
(including loans held for sale), which rose by $5.7 million from $34.0 million
for the year ended June 30, 1995 to $39.7 million for the year ended June 30,
1996. This increase is primarily attributable to the increase in the average
yield on the loan portfolio from 6.89% in fiscal 1995 to 7.87% in fiscal 1996.
The increase in the average yield on loans is primarily a function of the
changes in the COFI index, whose average was 4.59% during fiscal 1995 compared
to an average of 5.03% during fiscal 1996. In addition, an increase in mortgage
banking activities during the year ended June 30, 1996 accounted for a $10.7
million increase in the average balance of loans receivable (including loans
held for sale). The Savings Bank originated $161.5 million in loans held for
sale during fiscal 1995 compared to $469.2 million in fiscal 1996. Due to the
small difference between short- and long-term interest rates that prevailed
during much of fiscal 1996, the interest rate on fully-indexed ARM loans
generally exceeded rates available on 30-year fixed rate mortgage loans. As a
result, the level of refinancing activities increased during fiscal 1996 as
borrowers sought to replace ARM loans with fixed rate loans.
Interest income on investment securities increased by $101,000, or 7.9%, as
a result of higher market interest rates. The average yield on investment
securities increased from 6.23% for the year ended June 30, 1995 to 6.88% for
the year ended June 30, 1996. This increase was partially offset by a $500,000
decline in the average balance of investment securities from $20.6 million in
fiscal 1995 to $20.1 million in fiscal 1996. During fiscal 1996, management
used maturing security investments to repay maturing FHLB advances. Because the
yield available on overnight deposits often equaled or exceeded the rates
available on short term investments, management elected to increase its holdings
of overnight deposits. As a result, average interest-earning deposits increased
$2.0 million to $13.9 million for fiscal 1996 from the $11.9 million for fiscal
1995. Interest income on interest-earning deposits rose $78,000, or 18.4%, to
$500,000 in fiscal 1996 compared to $423,000 in fiscal 1995.
Interest Expense. Interest expense increased by $2.8 million, or 12.4%,
from $22.5 million during the year ended June 30, 1995 to $25.3 million for the
year ended June 30, 1996. Interest expense on deposits increase $2.8 million,
or 13.3%, from $21.2 million for fiscal 1995 to $24.0 million for fiscal 1996 as
a result of both an increase
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in the average balance of total deposits and a 47 basis point increase in the
cost of deposits. The average balance of deposits increased $12.1 million, or
2.5%, from $477.4 million in fiscal 1995 to $489.5 million in fiscal 1996. This
reflected management's strategy to replace FHLB advances and other borrowings
with relatively less expense deposits. The Savings Bank attracted certificate
accounts because their costs were less than, or equal to, comparable FHLB
advances for similar durations. In addition, as a result of higher short-term
market interest rates during fiscal 1996, the Savings Bank paid higher rates on
new and renewing certificates of deposits, and some customers shifted from lower
rate passbook, demand, and NOW accounts to higher yielding certificate accounts.
The Savings Bank reduced its use of FHLB advances and other borrowings
between the two periods. Although the average balance of FHLB advances declined
$1.5 million, or 6.9%, the average rate paid on this funding source increased
from 4.94% to 6.25% as a result of increased market interest rates and longer
maturities. Consequently, interest expense on FHLB advances rose $190,000, or
17.7%, from $1.1 million for the year ended June 30, 1995 to $1.3 million for
the year ended June 30, 1996. The average balance of other borrowings
(principally reverse repurchase agreements) declined $3.5 million and the
related interest expense also declined by $229,000 to $3,000 for the year ended
June 30, 1996. Included in the fiscal 1995 expense on other borrowings was
$65,000 of capitalized interest expense which the Savings Bank recognized at
June 30, 1995 in connection with the write down of a joint venture project.
Provisions for Loan Losses. Provisions for losses on loans were $2.3
million for fiscal 1996 compared to $4.8 million for fiscal 1995. The $2.5
million decline was attributable to a stabilization in the level of non-
performing commercial and multi-family loans during 1996. Although past due and
non-accrual loans totaled $4.5 million, or .98% of net loans receivable, at June
30, 1996 compared to $2.6 million, or .54%, at June 30, 1996, past due and
non-accrual commercial and multi-family loans at June 30, 1996 were $798,000, or
.18%, compared to $1.4 million or .30% of net loans receivable at June 30, 1995.
Net charge-offs aggregated $1.9 million in fiscal 1996 compared to $3.0 million
in fiscal 1995. Of these amounts, charge-offs on commercial and multi-family
loans were $1.0 million and $1.3 million, respectively. Despite the improvement
in the levels of commercial and multi- family loans during fiscal 1996, the
recessionary economic conditions prevailing in Southern California in recent
years have resulted in increased loan delinquencies and defaults as well as
reductions in the value of properties securing loans made by the Savings Bank.
These factors, in combination with higher unemployment levels within the Savings
Bank market areas, resulted in management's decision to increase the allowance
for loan losses to a level which exceeded that of June 30, 1995. At June 30,
1996, the allowance for loan losses as a percentage of gross loans receivable
were 1.18% compared to 1.06% at June 30, 1995.
Non-interest Income. Total non-interest income increased by $5.0 million,
or 110.7%, from $4.5 million for fiscal 1995 to $9.5 million for fiscal 1996.
This increase is attributable to an increase in the gain from the sales of loans
and the receipt of $1.0 million in life insurance proceeds. Gains from sales of
loans increased $4.0 million, or 578.0% to $4.8 million for fiscal 1996 from
$701,000 for fiscal 1995. This increase resulted from increased production
levels at existing offices and, to a lesser extent, gains from related interest
rate risk management activities. Loan originations and sales totaled $469.2
million and $458.8 million, respectively, during fiscal 1996 compared to $161.5
million and $210.0 million, respectively, in fiscal 1995. Substantially all of
the loans sold in fiscal 1996 were sold on a servicing released basis.
Servicing income remained constant at $2.5 million in both fiscal 1996 and 1995.
In March, 1996, the Savings Bank received $1.0 million in proceeds from a life
insurance policy upon the passing of the former chief executive officer. The
policy was designated as a reimbursement of previously expensed retirement
benefits.
Non-interest Expense. Total non-interest expense increased $647,000, or
3.4% from $19.0 million for fiscal 1995 to $19.6 million for fiscal 1996.
Salaries and employee benefits increased by $1.8 million, or 18.3%, over fiscal
1995 principally as a result of production related compensation from increased
mortgage banking activities during fiscal 1996. In addition, at June 30, 1996,
the Savings Bank recognized $162,000 of expenses related to the newly
implemented ESOP. Occupancy expenses declined by $397,000, or 17.0%, between
the periods. However, occupancy expenses for fiscal 1995 include $298,000 of
charges related to the closing of offices and related expenses
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within the Profed Mortgage division. Other expenses increased by $617,000, or
16.3%, principally because of expenses from interest rate risk management
activities.
The loss from real estate operations declined from $1.6 million for fiscal
1995 to $101,000 for fiscal 1996. The decreased loss reflects the liquidation
of the Savings Bank's one remaining real estate joint venture in July 1995 and
reduced provisions on foreclosed real estate. There were no provisions for
losses on joint ventures during fiscal 1996 compared to a provision of $682,000
during fiscal 1995. Provisions for losses on foreclosed real estate decreased
by $744,000 from $983,000 during fiscal 1995 to $239,000 during fiscal 1996.
Income Taxes. Income taxes were $1.3 million for fiscal 1996 (resulting in
an effective tax rate of 32.2%) compared to a tax benefit of $1.8 million for
fiscal 1995 (resulting in an effective rate of 30.3%). The increase of $3.1
million in tax expense is principally attributable to an increase in pre-tax
income of $9.9 million between the periods, reduced by the $1.0 million of
non-taxable insurance proceeds. The Savings Bank has a California net operating
loss carryforward which is reduced by 50% in future tax years. As a result, the
Savings Bank did not fully tax benefit its tax losses in fiscal 1995, thereby
decreasing the effective tax rate.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and average yields and costs
thereof. Such yields and costs for the periods indicated are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily balances has causes any material difference
in the information presented.
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<TABLE>
Year Ended June 30,
--------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net (1)(2). . . . . $498,853 38,445 7.71% $504,336 $39,701 7.87% $494,087 $34,045 6.89%
Investment securities 55,207 3,133 5.68 20,135 1,386 6.88 20,636 1,284 6.23
FHLB stock . . . . . 4,749 290 6.10 4,489 230 5.13 4,944 268 5.41
Interest-earning
deposits. . . . . . 14,712 731 4.97 13,873 500 3.61 11,885 423 3.56
Total interest- -------- ------- ---- -------- ------- ---- --------- ------- ----
earning assets. . 573,521 42,599 7.43 542,833 41,817 7.70 531,552 36,020 6.78
-------- ------- -------- ------- --------- -------
Non-interest-earning
assets . . . . . . . 25,051 21,313 23,332
-------- -------- --------
Total assets. . . . $598,572 $564,146 $554,884
======== ======== ========
Interest-bearing liabilities:
Passbook accounts. . $49,567 1,363 2.75 $52,345 1,743 3.33 $ 55,805 1,466 2.63
Demand and NOW
accounts. . . . . . 111,059 3,733 3.36 111,145 4,237 3.81 126,913 5,082 4.00
Certificate
accounts. . . . . . 329,099 18,016 5.47 326,056 18,027 5.53 294,701 14,641 4.97
-------- ------- -------- ------- --------- -------
Total deposits . . 489,725 23,112 4.72 489,546 24,007 4.90 477,419 21,189 4.44
FHLB advances. . . . 7,098 416 5.87 20,155 1,260 6.25 21,655 1,070 4.94
Other borrowings . . -- -- -- 840 2 0.24 4,302 232 5.38
Total interest- -------- ------- -------- ------- --------- -------
bearing
liabilities. . . . 496,823 23,528 4.74 510,541 25,269 4.95 503,376 22,491 4.47
------- ------- -------
Non-interest-bearing
liabilities . . . . 15,912 13,432 10,804
-------- -------- --------
Total liabilities. . 512,735 523,973 514,180
-------- -------- --------
Shareholders equity. 85,837 40,173 40,704
Total liabilities and-------- -------- --------
Shareholders equity $598,572 $564,146 $554,884
======== ======== ========
Net interest income. $19,071 $16,548 $13,529
======= ======= =======
Interest rate spread (3) 2.69% 2.75% 2.31%
Net interest margin (4) 3.33% 3.05% 2.55%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities . . . . 115.44% 106.33% 105.60%
- -------------------
(1) Includes loans available for sale.
(2) Includes deferred loan fee amortization of ($254,000), $112,000 and $98,000 for the years ended June 30,
1997, 1996 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.
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Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods
and at the dates indicated the weighted average yields earned on the Savings
Bank's assets and the weighted average interest rates paid on the Savings Bank's
liabilities, together with the net yield on interest-earning assets.
At
June 30, Year Ended June 30,
------- ---------------------------
1997 1997 1996 1995
---- ---- ---- ----
Weighted average yield on:
Loans receivable (1). . . . . 7.79% 7.71% 7.87% 6.89%
Investment securities . . . . 5.89 5.68 6.88 6.23
FHLB stock. . . . . . . . . . 5.94 6.10 5.13 5.41
Interest-earning deposits 5.25 4.97 3.61 3.56
All interest-earning assets . 7.17 7.43 7.70 6.78
Weighted average rate paid on:
Passbook accounts . . . . . . 2.64 2.75 3.33 2.63
Demand and NOW accounts . . . 3.26 3.36 3.81 4.00
Certificate accounts. . . . . 5.50 5.47 5.53 4.97
FHLB advances . . . . . . . . 5.93 5.87 6.25 4.94
Other borrowings. . . . . . . -- -- 0.30 5.38
All interest-bearing
liabilities. . . . . . . . . 4.11 4.74 4.95 4.47
Interest rate spread (spread
between weighted average
rates on all interest-
earnings assets and all
interest-bearing
liabilities. . . . . . . . . 3.06 2.69 2.75 2.31
Net interest margin (net
interest income as a
percentage of average
interest-earning assets) . . 3.55 3.33 3.05 2.55
- -----------------
(1) Includes loans available for sale.
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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.
1997 Compared to Year 1996 Compared to Year
Ended June 30, 1996 Ended June 30, 1995
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------- --------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In Thousands)
Interest income:
Loans
Receivable (1) . . ($834) ($432) $9 ($1,257) $4,850 $706 $100 $5,656
Investment. . . . .
securities . . . . (243) 2,415 (424) 1,748 135 (31) (3) 102
FHLB stock. . . . . 44 13 3 60 (14) (25) 1 (38)
Interest-bearing
deposits . . . . . 189 30 11 230 6 70 1 77
Total net change ------ ------ ----- ------ ------ ---- ----- ------
in income on
interest earning
assets. . . . . . (844) 2,026 (401) 781 4,977 720 99 5,797
------ ------ ----- ------ ------ ---- ----- ------
Interest-bearing
liabilities:
Passbook accounts . (304) (92) 17 (379) 392 (91) (24) 277
Demand and NOW
accounts . . . . . (501) (3) -- (504) (244) (631) 30 (845)
Certificate
accounts. . . . . . (178) 168 (2) (12) 1,653 1,558 176 3,387
FHLB advances. . . (77) (816) 50 (843) 283 (74) (20) 189
Other borrowings . (3) (3) 3 (3) (219) (187) 177 (230)
Total net change ------ ------ ----- ------ ------ ---- ----- ------
in expense on
interest-bearing
liabilities. . . (1,063) (746) 68 (1,741) 1,865 575 338 2,778
Net change in net ------ ------ ----- ------ ------ ---- ----- ------
interest income . . $219 $2,772 ($469) $2,522 $3,112 $145 ($239) $3,019
==== ====== ===== ====== ====== ==== ===== ======
- -------------------
(1) Includes loans available for sale. For purposes of calculating volume,
rate and rate/volume variances, nonaccrual loans were included in the
weighted average balance outstanding.
Asset and Liability Management
The principal financial objective of the Savings Bank's interest rate risk
management function is to achieve long-term profitability while limiting its
exposure to fluctuating interest rates. The Savings Bank has sought to reduce
exposure of its earnings to changes in market interest rates by managing the
mismatch between asset and liability
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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 market
adjustments. In addition, the Savings Bank maintains a liquid investment
portfolio comprised of short-term government 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 June 30,
1997 the estimated changes in NPV based on the indicated interest rate
environments. No effect has been given to any steps that management of the
Savings Bank may take to counter the effects of interest rate movements
presented in the table.
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
Basis Point ("bp") ----------------------------- -------------------------
Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
- --------------- -------- ----------- -------- ------------ ---------
(Dollars in Thousands)
+400 bp $60,882 (25,312) (29)% 10.53% (344) bp
+300 bp 69,923 (16,272) (19)% 11.84 (213) bp
+200 bp 77,854 (8,340) (10)% 12.94 (103) bp
+100 bp 83,666 (2,529) (3)% 13.69 (27) bp
0 bp 86,195 -- -- 13.97 --
-100 bp 85,389 (805) (1) 13.77 (20) bp
-200 bp 83,178 (3,017) (4) 13.38 (59) bp
-300 bp 81,958 (4,236) (5) 13.13 (83) bp
-400 bp 82,707 (3,488) (4) 13.16 (81) bp
- -------------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV based on prevailing interest
rates at June 30, 1997 ("base case").
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV").
(3) Calculated as the change in the NPV ratio from the base case amount
assuming the indicated change in interest rates.
The following table is provided by the OTS and is based on the calculations
in the above table. It sets forth the change in the NPV Ratio at a 200 bp rate
shock at the end of the last three quarters of fiscal 1997.
47
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<PAGE>
At At At
June 30, March 31, December 31,
1997 1997 1996
---- ---- ----
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio:
NPV as % of PV of Assets . . 13.97% 14.19% 13.70%
Exposure Measure:
Post-Shock NPV Ratio . . . . 12.94 12.68 12.68
Sensitivity Measure:
Change in NPV Ratio. . . . . (103) bp (118) bp (102) bp
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table. It is also
possible that, as a result of an interest rate increase, the increased mortgage
payments required of ARM borrowers could result in an increase in delinquencies
and defaults. Changes in market interest rates would also affect the volume and
profitability of the Savings Bank's mortgage banking activities. Accordingly,
the data presented in the tables above should not be relied upon as indicative
of actual results in the event of changes in interest rates. Furthermore, the
NPV presented in the foregoing tables is not intended to represent the fair
market value of the Savings Bank, nor does it represent amounts that would be
available for distribution to stockholders in the event of the liquidation of
the Savings Bank.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are deposits, proceeds from
sales of loans originated for sale, proceeds from principal and interest
payments on loans, the maturity of and interest income on investment securities,
and FHLB advances. While maturities and scheduled amortization of loans and
investment securities are a predictable source of funds, deposit flows, mortgage
prepayments and loan sales are greatly influenced by general interest rates,
economic conditions and competition.
The Savings Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Savings Bank generally maintains sufficient cash and
overnight deposits to meet short-term liquidity needs. At June 30, 1997, cash
(including overnight deposits) totaled $20.1 million, or 3.3% of total assets.
In addition, the Savings Bank maintains a credit facility with the FHLB-San
Francisco, which provides for immediately available advances. Advances under
this credit facility totaled $6.8 million at June 30, 1997. Depending on market
conditions and the pricing of deposit products and FHLB borrowings, the Savings
Bank may continue to rely on FHLB borrowings for its liquidity needs.
The OTS requires a savings institution to maintain an average daily balance
of liquid assets (cash and eligible investments) equal to at least 5.0% of the
average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute
1.0% of the sum of net withdrawable deposit accounts plus short-term borrowings.
The Savings Bank's actual short-term liquidity ratio at June 30, 1997 was 6.8%.
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.
48
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<PAGE>
The primary investing activity of the Savings Bank is the origination of
mortgage loans. During years ended June 30, 1997, 1996 and 1995, the Savings
Bank originated loans in the amounts of $440.6 million,$516.9 million and $255.1
million, respectively. At June 30, 1997, the Savings Bank had loan commitments
totaling $51.0 million and undisbursed loans in process totaling $3.7 million.
The Savings Bank anticipates that it will have sufficient funds available to
meet its current loan origination commitments. Certificates of deposit that are
scheduled to mature in less than one year from June 30, 1997 totaled $288.2
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.
The Savings Bank is required to maintain specific amounts of capital
pursuant to OTS requirements. As of June 30, 1997, 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 9.9%, 9.9% and
16.1%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements" in Item 1 of this Report.
Impact of New Accounting Pronouncements
Effective July 1, 1996 the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights" recognizing mortgage servicing rights as separate
assets from the underlying mortgage loans at the time such loans are sold and
servicing is retained. SFAS 122 did not have a material impact on the Company's
financial reporting. Effective January 1, 1997, the Company adopted SFAS 125
"Accounting for Transfers of Financial Assets and Liabilities." Under the
financial-components approach of SFAS 125, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes al financial and servicing assets
it no longer controls and liabilities that have been extinguished. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with pledge of collateral. The adoption of SFAS 125 did not
have a material impact on the Company's financial reporting.
In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (SFAS 128). SFAS 128 supercedes APB Opinion No. 15
"Earnings per Share" (APB 15) and establishes standards for computing and
presenting earnings per share (EPS) for entities with publicly held common stock
or potential common stock. SFAS 128 simplifies the reporting of EPS and brings
them substantially in line with those found in International Accounting Standard
33, Earnings per Share, recently issued by the International Accounting
Standards Committee. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator of the diluted EPS computation. This
statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The Company has determined that this statement will have no significant impact
on the financial position, results of operations, or earnings per share.
In February 1997, the FASB also issued Statement of Financial Standards No.
129, "Disclosure of Information about Capital Structure" (SFAS 129). This
Statement is effective for financial statements for periods ending after
December 15, 1997. The Company does not expect SFAS 129 to have any significant
impact on prior disclosures since it primarily consolidates requirements from
previously issued Opinions and Statements into one Statement.
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
49
<PAGE>
<PAGE>
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
For information regarding the market risk of the Company's investments, see
"Asset and Liability Management" under Item 7 of this Report and "Lending
Activities -- Maturity of Loan Portfolio" and "Investment Activities" under Item
1 of this Report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements contained in the Annual Report, which are listed
under Item 14 herein, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information concerning the Corporation's directors required by this
Item is incorporated by reference from the information set forth under "Proposal
I - Election of Directors" and "Compliance with Section 16(a) of the Exchange
Act" in the Proxy Statement.
Executive Officers of the Corporation and Savings Bank
Age at Position
June 30, -------------------------------------------
Name 1997 Corporation Savings Bank
---- ---- ----------- ------------
Craig G. Blunden 49 President, Chief President, Chief Executive
Executive Officer, Officer and Director
and Director
Brian M. Riley 32 Chief Financial Senior Vice President and
Officer Chief Financial Officer
Robert G. Schrader 57 Secretary Executive Vice President,
Chief Operating Officer
Secretary and Director
Donald L. Blanchard 46 N/A Senior Vice President,
Retail Banking
Lil Brunner 43 N/A Senior Vice President
Chief Information Officer
Richard L. Gale 45 N/A Senior Vice President,
Mortgage Banking
William E. Harris 55 N/A Senior Vice President,
Administration and Treasurer
50
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<PAGE>
Biographical Information
Set forth below is certain information regarding the executive officers of
the Corporation and the Savings Bank. There are no family relationships among
or between the directors or executive officers.
Craig G. Blunden has been associated with the Savings Bank since 1974 and
has held his current positions at the Savings Bank since 1991 and as President
and Chief Executive Officer of the Corporation since its formation in 1996. 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 and America's Community Bankers Mortgage Finance Committee.
Robert G. Schrader has been associated with the Savings Bank since 1963 and
has served as Executive Vice President of the Savings Bank since January 1995.
From 1990 through 1994, Mr. Schrader served as Senior Vice President of the
Savings Bank. Mr. Schrader has held his current position with the Corporation
since its formation in 1996.
Donald L. Blanchard, who joined the Savings Bank in 1989, has held his
current position with the Savings Bank since 1989.
Richard L. Gale, who joined the Savings Bank in 1988, has served as
President of the Profed Mortgage division since 1989. Mr. Gale has held his
current position with the Savings Bank since 1993.
William E. Harris has been associated with the Savings Bank since 1969 and
has held his current position with the Savings Bank since 1989.
Brian M. Riley, who joined the Savings Bank in 1997, was previously
Executive Vice President/Chief Financial Officer for Metro Commerce Bank from
1992 to 1997.
Lil Brunner, who joined the Savings Bank in 1993, was general auditor prior
to being promoted to Chief Information Officer in 1997.
51
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<PAGE>
Item 11. Executive Compensation
- --------------------------------
The information required by this Item is incorporated by reference to the
information under "Executive Compensation" and "Directors' Compensation" in the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference to the
information under "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
(c) Changes In Control
The Corporation is not aware of any arrangements, including any pledge by
any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated by reference to the
information under "Transactions with Management" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1)(2) Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets, June 30, 1997 and 1996
(b) Consolidated Statement of Operations For the Years Ended
June 30, 1997, 1996 and 1995
(c) Consolidated Statement of Stockholders' Equity For the
Years Ended June 30, 1996, 1995 and 1994
(d) Consolidated Statement of Cash Flows For the Years Ended
June 30, 1996, 1995 and 1994
(e) Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have been
omitted as the required information is inapplicable.
(3) Exhibits
3.1 Certificate of Incorporation of Provident Financial
Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to
the Corporation's Registration Statement on Form S-1 (File
No. 333-2230))
3.2 Bylaws of Provident Financial Holdings, Inc. (Incorporated
by reference to Exhibit 3.2 to the Corporation's
Registration Statement on Form S-1 (File No. 333-2230))
10.1 Employment Agreement with Craig G. Blunden
10.2 Post-Retirement Compensation Agreement with Craig G. Blunden
10.3 Severance Agreement with Robert G. Schrader (Incorporated by
referenced to Exhibit 10.3 to the Corporation's Annual
Report on Form 10-K for the year ended June 30, 1996)
52
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<PAGE>
10.4 1997 Stock Option Plan (incorporated by reference to Exhibit
A to the Corporation's proxy statement dated December 12,
1996)
10.5 1997 Management Recognition Plan (incorporated by reference
to Exhibit B to the Corporation's proxy statement dated
December 12, 1996)
13. Annual Report to Stockholders
21. Subsidiaries of Registrant
23. Consent of Independent Auditors
27. Financial data schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended June 30, 1997.
53
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<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROVIDENT FINANCIAL HOLDINGS, INC.
Date: September 25, 1997 By: /s/ Craig G. Blunden
---------------------------------
Craig G. Blunden
President and Chief
Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Craig G. Blunden President, Chief September 25, 1997
- -------------------------- Executive Officer and
Craig G. Blunden Director (Principal
Executive Officer)
/s/ Brian M. Riley Chief Financial Officer September 25, 1997
- -------------------------- (Principal Financial
Brian M. Riley and Accounting Officer)
/s/ Robert G. Schrader Director September 25, 1997
- --------------------------
Robert G. Schrader
/s/ Bruce W. Bennett Director September 25, 1997
- --------------------------
Bruce W. Bennett
Director September __, 1997
- --------------------------
Michael C. Billings
/s/ Debbi H. Guthrie Director September 25, 1997
- --------------------------
Debbi H. Guthrie
<PAGE>
<PAGE>
Director September __, 1997
- --------------------------
David W. Mitchell
/s/ Roy H. Taylor Director September 25, 1997
- --------------------------
Roy H. Taylor
<PAGE>
<PAGE>
EXHIBIT 10.1
Employment Agreement with Craig C. Blunden
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the
1st day of January, 1997, between PROVIDENT SAVINGS BANK (the "Bank"), and CRAIG
G. BLUNDEN (the "Executive"), with reference to the following facts:
A. The Executive is currently the Chief Executive Officer and
Chairman of the Board of the Bank and an officer and director of subsidiaries of
the Bank. The Executive is an experienced and knowledgeable savings and loan
executive whose creativity, expertise and effort have assisted in the
development of the business and growth of the Bank.
B. The Bank recognizes that the future growth, profitability and
success of the business of the Bank will be advanced by the continued employment
of the Executive. in order to retain the services of the Executive and to
maximize the period of his continued availability, the Bank desires to offer the
Executive the compensation, amenities and other benefits which executives of
comparable experience and ability generally receive.
C. The Executive is currently employed by the Bank under the
terms and conditions of an employment agreement dated March 26, 1992. The
Executive and the Bank now desire to terminate that agreement and replace it
with the new agreement set forth herein, such termination and replacement to be
effective as of the date hereof.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment.
----------
The Bank hereby employs the Executive and the Executive hereby
accepts employment with the Bank on the terms and subject to the conditions
hereinafter set forth in this Agreement.
2. Term.
----
(a) The term of this Agreement shall be deemed to commence
on January 1, 1997 and shall continue through December 31, 1999 (which
period is referred to herein as the "Initial Term"), provided that this
Initial Term shall be subject to extension pursuant to the provisions of
this Section 2 and to earlier termination pursuant to Section 11 hereof.
(b) The Board of Directors of the Bank (the "Board") shall
review this Agreement and the performance of the Executive hereunder at
the December meeting of the Board each year and the fact of such review
shall be recorded in the minutes of each such meeting. Commencing with
January 1, 1997, and on each January 1 thereafter during the Initial
Term and any extensions hereof, the term of this Agreement shall be
extended for an additional calendar year period, provided that the Board
shall have voted to approve such extension at the immediately preceding
December meeting of the Board, so that as of any such January 1 this
Agreement shall have a remaining term of three calendar years, unless,
on or before such Extension Date (i) the Executive has attained age 62,
(ii) this Agreement has
-1-
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<PAGE>
been terminated pursuant to Section 11 hereof; (iii) the Board or the
Executive has provided the other party with written notice stating that
such party is thereby exercising its option to discontinue further
extensions of this Agreement, or (iv) the Board has declined to approve
such extension at the immediately preceding December meeting of the
Board. For purposes of this Agreement, a reference to an 'Extension
Date' shall mean any such January 1 which results in a one year
extension under the provisions of this Section 2(b), and a reference to
the 'term' of this Agreement shall include the Initial Term and any
extensions hereunder.
(c) If this Agreement is terminated or otherwise becomes
inoperative, all rights and benefits which have become vested hereunder
prior to such termination shall remain in full force and effect and such
termination shall not be construed as relieving any party from the
performance of any accrued obligation incurred to the other under the
operation of this Agreement, including, without limitation, any
obligation requiring performance after the date of such termination.
3. Position And Duties.
-------------------
(a) The Bank hereby engages the Executive, and the
Executive hereby agrees to render services, as the Chief Executive
officer of the Bank, or in such other capacity as the parties hereto
shall mutually agree, and as an executive officer of such of the Bank's
affiliates as the parties hereto shall mutually agree, including
affiliates which may be formed or acquired subsequent to the date of
this Agreement. The Executive shall have responsibility for the overall
conduct of the Bank's business and shall have full authority to do and
perform or cause to be performed all such services, acts or things as he
shall deem necessary or advisable to manage and conduct the business of
the Bank, including, without limitation, hiring, supervision and
termination of employees and consultants, in a manner consistent with
policies established from time to time by the Board. In the performance
of such duties, the Executive shall only be required to report to the
Board.
(b) The Executive agrees that during the term of this
Agreement he shall, as long as he shall be elected, serve on the Board
and on the boards of directors of such of the Bank's affiliates as the
parties hereto shall mutually agree, including affiliates which may be
formed or acquired subsequent to the date of this Agreement.
(c) During the term of this Agreement the Executive shall
devote substantially all of his regular business time solely to the
business of the Bank, including community affairs, charitable matters or
other activities that may reasonably be expected to benefit the general
image of the Bank in the communities it serves, and the Executive shall
not provide services on behalf of, or otherwise engage in or promote,
any business competitive with that of the Bank or its affiliates.
Subject to the foregoing, the Executive may serve on boards of directors
of unaffiliated corporations, subject to advance approval by the Board,
and may engage in personal business and investment activities, including
real estate investments.
-2-
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<PAGE>
4. Authority of Bank. The Bank reserves the right to elect, from
time to time, any person to its Board, to appoint any person as an officer of
the Bank and to remove any of its officers and directors, without exception, in
any manner and upon such basis or bases as shall be deemed appropriate; provided
however, that except to the extent expressly provided herein to the contrary,
any such removal shall not relieve the Bank from any of its obligations to the
Executive, or any additional obligations set forth under the terms of this
Agreement. Nothing herein shall be deemed to limit the authority of the
Executive, subject to the overall authority of the Board, to retain, supervise
or remove Bank personnel.
5. Place Of Performance.
--------------------
(a) In connection with his employment by the Bank, the
Executive shall at all times be entitled to an appropriate office at the
principal executive offices of the Bank, which offices are presently
located at 3756 Central Avenue, Riverside, California 92506. In the
event of a Change in Control of the Bank (as defined below), the Bank
shall not, at any time thereafter, without the written consent of the
Executive, transfer the Executive to a location more than 20 miles from
the Executive's current principal residence. If the Bank pro poses to
transfer the Executive to a location that is more than 20 miles from his
principal residence after a Change in Control of the Bank has occurred,
and if Executive shall agree to such transfer, the Bank shall promptly
pay (or reimburse the Executive for) all reasonable moving expenses
incurred by the Executive as a result of a change of his principal
residence in connection with any such relocation, and will indemnify the
Executive against, and reimburse the Executive for, any loss incurred
as the result of the sale of his principal residence (which loss shall
be computed for the purpose hereof as the difference between the actual
sales price of such residence (net of closing costs and brokerage fees)
and the higher of (i) the Executive's adjusted basis for tax purposes in
such residence, or (ii) the fair market value of such residence as
determined by a real estate appraiser designated by the Executive and
satisfactory to the Bank) in connection with any such transfer.
(b) For the purposes of this Agreement, a "Change in
Control" of the Bank shall be deemed to occur if any person or entity
becomes a 'controlling person' of the Bank or of any entity controlling
the Bank, as that term is defined for purposes of Section 561.14 of the
Rules and Regulations of the Office of Thrift Supervision or if the Bank
or any entity controlling the Bank is the subject of a merger,
consolidation or other business combination or reorganization and a
majority of the board of directors of the resulting entity does not
thereafter consist of persons who were directors of the Bank immediately
prior to such transaction; provided, however, that no Change in Control
shall be deemed to occur in the event of any regulatory action specified
in Section 11(c) below or solely as a result of the conversion of the
Bank from the mutual to the stock form of organization, including such a
conversion in which the Bank forms a holding company for itself.
6. Working Facilities.
------------------
-3-
<PAGE>
<PAGE>
The Executive shall be furnished with a private office,
stenographic and other necessary secretarial assistance, and with such other
facilities, amenities and services as are presently or may hereafter be
furnished to the most senior executive officers of the Bank and are adequate in
the reasonable judgment of the Executive for the performance of his
responsibilities hereunder.
7. Compensation.
------------
(a) As compensation for the performance of Executive's
services here under, including services as a director of the Bank and as
an officer or director of the Bank's affiliates, the Bank shall pay to
the Executive in accordance with its normal payroll practices an annual
salary (the "Annual Base Salary") as set forth on Schedule 1 to this
Agreement, attached hereto and incorporated herein by this reference.
The Annual Base Salary may be redetermined from time to time by the
Board (or a duly authorized committee thereof) and set forth in an
amendment to this Agreement. For the purposes of this Agreement, the
Annual Base Salary payable to the Executive shall mean the gross amount
payable to the Executive prior to any deductions for withholding taxes
and voluntary contributions by the Executive to any retirement or
deferred compensation plan maintained or offered by the Bank.
(b) If the Executive's salary is increased during the term
of this Agreement, the minimum Annual Base Salary payable to the
Executive subsequent to the date of such increase shall be equal to his
salary as so increased, except that the Executive's Annual Base Salary
thereafter may be reduced pursuant to and consistent with a general
program of salary reductions for senior executive personnel, provided
that no such reduction shall in any event reduce the Executive's Annual
Base Salary to a level below the amount stated in Section 7(a). In the
event of a Change in Control of the Bank (as defined in Section 5(b)
hereof) during the term of this Agreement, the Annual Base Salary
payable to the Executive for the balance of the then current year and
for each succeeding calendar year during the term of this Agreement
shall in no event be less than the sum of (i) the aggregate amount of
Annual Base Salary (without giving effect to any reduction pursuant to
the exception set forth in the first sentence of this Section 7(b)) and
(ii) the aggregate amount of any discretionary bonuses received by the
Executive during the twelve-month period immediately preceding the
Change in Control. For the purposes hereof, discretionary bonuses shall
include amounts paid pursuant to any cash bonus or incentive program
maintained by the Bank, but shall not otherwise include any amounts
payable to the Executive pursuant to any benefit program covered by
Section 9 here of (dealing with the employee benefit programs and other
fringe benefits to which the Executive is entitled) unless the payment
of benefits thereunder is totally in the discretion of the Board.
8. Expenses.
--------
Subject to compliance with the Bank's normal and customary
policies regarding substantiation and verification of business expenses, as in
effect from time to time, which policies currently include quarterly review of
the Executive's expense reports by the Personnel Compensation Committee of the
Board, the Executive is authorized to incur on behalf of the Bank, and the Bank
shall directly pay or shall fully reimburse the Executive for, all customary and
reasonable expenses
-4-
<PAGE>
<PAGE>
incurred for promoting, pursuing or otherwise furthering the business of the
Bank or its affiliates, including but not limited to expenses for travel,
entertainment and related matters, attendance at conventions and industry
related meetings, the cost of trade publications related to financial
institutions or otherwise relating to the business of the Bank or its
affiliates, and dues, fees and assessments with respect to those executive
facilities and country clubs for which the Bank, as of the date of this
Agreement, is making direct payment on behalf of the Executive, or in respect of
which the Bank is providing the Executive with reimbursement.
9. Fringe Benefits.
---------------
During the term of this Agreement, the Executive shall be
entitled to participate in, and to receive benefits and perquisites under, any
formal or informal employee benefit plans, under standings, arrangements or
programs now provided to the Executive and any additional such benefits that may
hereafter generally be made available by the Bank or its affiliates to senior
executives, key management employees and their eligible dependents including,
but not limited to, (i) cash bonus and incentive plans, profit sharing plans and
plans providing for life insurance coverage in which the Executive is a
participant on the date of this Agreement or plans or arrangements providing the
Executive with at least equivalent benefits thereunder, (ii) use of a company
automobile of a quality commensurate with the Executive's position as chief
executive officer of the Bank, including replacement of such automobile after
not more than three calendar years of use and including payment by the Bank of
the costs of insurance, repairs, gas and oil for such automobile, (iii)
reimbursement of annual tax return preparation fees incurred at an accounting
firm of the Executive's choice, (iv) reimbursement for costs related to or
incurred in connection with annual comprehensive physical examinations of the
Executive at a facility of his choice, including the costs of any additional
examinations or diagnostic expense recommended by the examining physician, and
(v) payment of a stipend to Executive in order to pay the premium on the Long
Term Disability Policy described on Schedule 2 attached, plus any and all income
tax attributable to the payment of such stipend. Nothing paid to or received by
the Executive pursuant to this Section 9 shall be deemed to be in lieu of any of
the compensation to the Executive provided for in Section 7 of this Agreement.
10. Vacations.
---------
The Executive shall be entitled to a minimum of four weeks of
fully compensated vacation time each year during the term of this Agreement,
together with all paid holidays provided by the Bank to its employees or senior
executive officers. Except as otherwise required by applicable regulatory
authorities, such vacation time need not be taken in consecutive periods. The
Executive shall be entitled to carry over unused vacation time for a period of
up to one (1) year.
11. Termination. This Agreement may be terminated or suspended
prior to the expiration of its term in accordance with the following:
(a) Death. This Agreement shall terminate upon the
Executive's death.
-5-
<PAGE>
<PAGE>
(b) Disability. If the Executive becomes disabled within
the meaning of the Long Term Disability Policy described on Schedule 2
attached and as in effect on the date this Agreement is entered into,
this Agreement shall terminate as of the date on which the Executive is
determined to have become disabled unless the Executive resumes the
performance of substantially all of his duties under this Agreement
within 180 days thereafter.
(c) Regulatory Action. If the Executive is suspended
and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Sections 8(e)(3) or 8(g)(1) of
the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the
Bank's obligations under this Agreement shall be suspended as of the
date of service of such notice, unless stayed by appropriate
proceedings. If the charges specified in such notice are dismissed the
Bank shall pay to the Executive all compensation that was withheld from
him and shall reinstate all of the obligations of the Bank suspended
hereunder. If the Executive is removed and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order
issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the
Bank under this Agreement shall terminate as of the effective date of
the order, but vested rights of the contracting parties shall not be
affected.
(d) Cause. This Agreement may be terminated by the Board
for cause, which for purposes of this Agreement shall mean a termination
on the grounds of the Executive's personal dishonesty, incompetence
(other than incompetence resulting from mental or physical illness, both
of which shall be deemed covered by Section 11(b) above), willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform the stated duties under this Agreement,
willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or in
the event of a material breach by the Executive of any provision of this
Agreement. For purposes of this Agreement, the Executive shall not be
deemed to have been terminated for cause unless and until there shall
have been delivered to the Executive a copy of a resolution, duly
adopted by the affirmative vote of not less than a majority of the Board
at a meeting duly called and held for such purpose after reasonable
notice to the Executive, which shall not be less than thirty days
notice, and an opportunity for the Executive, together with his counsel,
to be heard by the Board, finding that, in the good faith opinion of the
Board, the Executive is guilty of misconduct of the type described in
this Section 11(d), and specifying the particulars thereof in detail,
which determination shall be subject to a complete and de novo review as
to reasonableness and good faith in accordance with Section 19 hereof
(dealing with the arbitration of disputes under this Agreement).
(e) Default. If the Bank is in default (as defined in
Section 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1813(x)(1)), all obligations under this Agreement shall terminate as of
the date of such default, but vested rights of the contracting parties
shall not be affected.
-6-
<PAGE>
<PAGE>
(f) Other Regulatory Action. This Agreement may be
terminated: (A) by the Director of the Office of Thrift Supervision or
his of her designee at the time the Federal Deposit Insurance
Corporation enters into an agreement to provide assistance to or on
behalf of the Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the
Director of the office of Thrift Supervision at the time such Director
or his or her designee approves a supervisory merger to resolve problems
related to the operation of the Bank or when the Bank is determined by
such Director to be in an unsafe and unsound condition. Any rights of
the contracting Parties that have already vested, however, shall not be
affected by any such action.
(g) Notice by the Executive. This Agreement may be
terminated by the Executive upon one (1) year's written notice, provided
that a termination by the Executive in the event the Bank shall fail
continuously to comply, both in form and substance, with each and all of
its obligations to the Executive under this Agreement, including without
limitation the provisions of this Agreement relating to
responsibilities, authority, reporting relationships, compensation and
benefits, shall be deemed a termination initiated by the Bank under
Section 11(h) below.
(h) Notice by the Bank. This Agreement may be terminated
at any time by the Bank upon ninety days written notice; provided,
however, that a termination of this Agreement under this Section 11(h)
shall not reduce the remaining term of this Agreement for purposes of
calculating the amounts payable to the Executive under Section 12(b).
12. Compensation and Benefits Payable By the Bank Upon
Termination. Compensation and benefits shall be payable by the Bank upon a
termination or suspension of this Agreement in accordance with the following:
(a) If this agreement is terminated pursuant to any of
Sections 11(a) through 11(g), the Bank's obligation to provide
compensation and benefits under this Agreement shall, except as provided
below, terminate for any period after such termination, subject,
however, to potential reinstatement in the case of a regulatory
suspension, as provided in Section 11(c). If this Agreement is
terminated pursuant to any of Sections 11(a), (b) or (h) hereof, or in
the event of the normal or early retirement of the Executive as defined
for purposes of the Provident Savings Bank 401(k) Profit Sharing Plan,
the Bank shall continue to provide the following benefits to the
Executive: (A) The Bank shall continue in force, with out cost to the
Executive, those life and accidental death and dismemberment insurance
coverages being provided by the Bank to the Executive and his spouse and
his eligible dependents as of the date of such termination, provided
that after the Executive's 65th birthdate such coverages may be reduced
to reflect any decreases which would have occurred if the Executive
continued in the employment of the Bank after his 65th birthdate (as
determined under the coverage schedules for such insurance in place as
of the date of such termination); (B) The Bank shall continue to provide
to the Executive and his eligible dependents medical insurance coverage
equivalent in benefits, duration and terms to that provided to the
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<PAGE>
<PAGE>
Executive and such persons as of the date of such termination; (C) The
Bank shall reimburse the Executive for the categories of expense
specified in Section 8 hereof, provided that the Executive shall obtain
approval for such expenditures in accordance with policies adopted by
the Bank from time to time.
(b) In the event of a termination of this Agreement
pursuant to Section 11(h), the Bank shall make a lump sum payment to the
Executive (or to his personal representatives, spouse, heirs or estate
should he thereafter become disabled or die) equal to the discounted
present value computed using a discount rate equal to the (lesser of 1)
the then current Eleventh District Cost of Funds Index, or 2) the prime
rate then charged by representative commercial banks as then most
recently reported in the Wall Street Journal) of the aggregate future
Annual Base Salary to which the Executive would have been entitled had
he continued in the Bank's employ for the then remaining balance of the
term of this Agreement. Such lump sum payment shall be made within
thirty (30) days following the date of such termination. In addition,
the Executive (or his spouse, personal representative, heirs or estate)
shall be entitled to receive payment of any amounts required to obtain
benefits com parable to those provided to the Executive by the Bank at
the time of his termination of employment (a "Covered Expenditure") for
the then remaining term of this Agreement; provided, however, that
should the Executive obtain alternate employment during such remaining
term, the Bank's obligations to thereafter reimburse the Executive for
Covered Expenditures shall be limited to the cost to the Executive, if
any, of obtaining any benefits needed to make the benefits provided by
his new employer comparable to those previously provided by the Bank.
Any payments due to the Executive hereunder shall be made within thirty
days (30) after the Bank's receipt of suitable evidence that the
Executive will be required to incur or has incurred a Covered
Expenditure in order to obtain the benefits contemplated hereby. If such
termination by the Bank pursuant to Section 11(h) occurs following a
Change in Control of the Bank (as defined in Section 5(b) above), then
in addition to all other benefits hereunder, the Bank shall be obligated
to pay to the Executive upon such termination, a lump sum equal to (A)
three times the Executive's aggregate Annual Base Salary for the twelve
months in the calendar year preceding such termination, plus (B) three
times the maximum cumulative bonuses or incentive awards of any nature
whatsoever that the Executive had theretofore received or been credited
with by the Bank with respect to the previous year of his employment by
the Bank; provided that, the amounts payable to the Executive pursuant
to this sentence shall be reduced by the amounts paid to the Executive
pursuant to the preceding pro visions of this Section 12(b).
Notwithstanding any other provision of this Agreement, if any amount
payable under this Agreement would otherwise constitute an "excess
parachute payment" (as defined in Section 28OG of the Internal Revenue
Code of 1986, as amended (the "Code"), the amount payable under this
Agreement shall be reduced in such order and manner as the Executive may
elect (or, in the absence of such election, as shall be determined by
the Bank) to the largest amount which may be paid without any portion of
such amount being subject to the excise tax imposed by Code Section
4999. In addition, in the event the Bank is not in compliance with its
minimum core capital requirement, or if the payments pursuant to this
subsection (b) would cause the Bank's capital to be reduced below its
minimum regulatory core capital requirement, such payments shall be
deferred until such time as the Bank, or any successor thereto, is in
capital compliance.
-8-
<PAGE>
<PAGE>
(c) No Duty to Mitigate. If the Executive shall become
entitled to receive compensation or benefits pursuant to this Agreement
after his termination of employment, Executive shall have no duty to
mitigate such payments by seeking or obtaining other employment or
otherwise. Subject to the Provisions of Section 12(b) above regarding
Covered Expenditures, in the event the Executive obtains other
employment, any amounts otherwise due hereunder shall not be reduced as
a result of the Executive's receipt of compensation from such other
employment.
13. Definition Of "Affiliate".
-------------------------
The term "affiliate", as used in this Agreement, shall mean any
person, firm, corporation, association, organization, or unincorporated trade or
business that, now or hereinafter, directly or indirectly, controls, is
controlled by, or is under common control with the Bank, including, without
limitation, any holding company for, or service corporation of, the Bank.
14. Assignment Limited; Successors.
------------------------------
(a) The obligations and duties of the Executive under this
Agreement are personal and not assignable. This Agreement shall inure to
the benefit of and shall be binding upon the Bank, its successors and
its assigns. As used in this Agreement, the term "successor," shall
include any firm, corporation or other business entity which at any
time, whether by merger, consolidation, purchase, conversion or other
corporate reorganization involving the Bank, acquires all or
substantially all of the assets or business of the Bank.
(b) Neither the Executive, his spouse (if any), his
designated beneficiaries (if any) or his estate shall have any right to
alienate, pledge, hypothecate, encumber or dispose of the right to
receive payments under this Agreement, nor shall such payments be
subject to pledge, attachment or claims of creditors. Such payments and
the rights thereto are expressly declared to be nonassignable and
nontransferable. In the event of any attempted assignment or transfer,
the Bank shall not be bound thereby and may fully discharge its
obligations under this Agreement by making the payments provided for in
this Agreement to the parties designated herein.
(c) This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees.
Any amounts payable to the Executive hereunder at the time of his death
shall be paid in accordance with the terms of this Agreement to the
Executive's estate, unless the Executive has provided writ ten notice to
the Bank' specifying a different beneficiary or beneficiaries (which
notice(s) may be changed from time to time at the option of the
Executive, subject to the consent of the Executive's spouse if his
spouse then has an enforceable interest in such benefits).
15. Post-termination Obligations. Following any termination of
the Executive's employment under this Agreement, the Executive (i) shall not
solicit, directly or indirectly, for one year following such termination, the
employment of any person who is an employee of the Bank at
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<PAGE>
the time of such termination or who was, within six months prior to such
termination, an employee of the Bank, and (ii) shall not make use of, divulge or
disclose, directly or indirectly, any trade secret or other confidential
information concerning the business or policies of the Bank or of any of its
affiliates, which he learned of as a result of his employment by the Bank,
except to the extent that (A) such use or disclosure is necessary to the
performance of this Agreement and in furtherance of the Bank's best interests,
required by applicable law, necessary to the defense of the Executive in any
legal proceeding, or is authorized by the Bank, or (B) such information is
lawfully obtainable from other sources.
16. Waiver And Modification.
-----------------------
Any waiver, alteration or modification of any of the terms of
this Agreement shall be valid only if made in writing and signed by the parties
hereto. No waiver by either of the parties hereto of their rights hereunder
shall be deemed to constitute a waiver with respect to any subsequent
occurrences or transactions hereunder unless such waiver specifically states
that it is to be construed as a continuing waiver.
17. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance
with the laws of California.
18. Severability.
------------
If any provision of this Agreement is held to be prohibited or
unenforceable this Agreement shall be deemed ineffective to the extent of such
prohibition or unenforceability only without invalidating the remaining
provisions hereof.
19. Arbitration.
-----------
Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award resulting from such arbitration in any
court of competent jurisdiction.
20. Notices.
-------
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if personally
delivered or if mailed by United States certified or registered mail, prepaid,
to the parties or their permitted assignees at the following addresses (or at
such other address as shall be given in writing by either party to the other).
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<PAGE>
If to Bank: Provident Savings Bank
3756 Central Avenue
Riverside, California 92506
Attn: Secretary of the Company
If to Executive: To the most recent address of the
Executive as shown in the personnel
records of the Bank.
The date of such personal delivery or the third business day following the date
of mailing shall be deemed to be the date of such notice, demand or
communication.
21. Headings.
--------
Headings herein are for convenience only, are not a part hereof
and shall not be used in construing this Agreement.
22. Entire Agreement.
----------------
The Bank and the Executive are entering into a Post- Retirement
Compensation Agreement concurrently herewith. This Agreement and such
Post-Retirement Compensation Agreement constitute the entire understanding and
agreement of the parties hereto and, except as otherwise referred to herein,
there are no other agreements or understandings, written or oral, in effect
between the parties relating to the employment of the Executive by the Bank. All
prior negotiations or agreements, if any, between the parties relating solely to
the employment of the Executive by the Bank are hereby superseded.
23. Rules And Regulations.
---------------------
To the extent required by any state or federal rules or
regulations applicable to the Bank, the terms and provisions of such rules and
regulations as in effect as of the date hereof are hereby incorporated into this
Agreement by this reference, and notwithstanding anything contained in this
Agreement to the contrary, the rights and obligations of any party hereunder
shall be subject to all of the terms and limitations contained in such rules and
regulations.
24. Counterparts.
------------
This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which shall constitute one instrument.
25. Withholding.
-----------
All amounts paid pursuant to this Agreement shall be subject to
applicable federal, state and local tax withholding laws and regulations.
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<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement effective as of the day and year first above written.
EXECUTIVE:
/s/ Craig G. Blunden
---------------------------------------
CRAIG G. BLUNDEN
BANK:
PROVIDENT SAVINGS BANK
By: /s/ Robert G. Schrader
Its: Executive Vice President/
Chief Operating Officer
BOARD OF DIRECTORS
/s/ Roy H. Taylor
- ---------------------------- ----------------------------
/s/ Robert G. Schrader
- ---------------------------- ----------------------------
/s/ Bruce W. Bennett
- ---------------------------- ----------------------------
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<PAGE>
<PAGE>
SCHEDULE 1
ANNUAL BASE SALARY
JANUARY 1, 1997 $210,000.00
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<PAGE>
<PAGE>
SCHEDULE 2
Agreement
Payment for Long Term Disability Policy
Paul Revere Insurance Group
Policy #010273019303
The Personnel/Compensation Committee recommended the payment of a stipend to
Craig G. Blunden in order to meet the requirements of the Employment Agreement
for Long Term Disability; this recommendation was approved by the Board of
Directors.
The annual premium is $7,754.45. This is net of $12,718.17, taking into
consideration the actual cost to Mr. Blunden in paying for this disability
premium, i.e. Federal, State and Medicare Tax.
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<PAGE>
EXHIBIT 10.2
Post-Retirement Compensation Agreement with Craig C. Blunden
<PAGE>
<PAGE>
POST-RETIREMENT COMPENSATION AGREEMENT
--------------------------------------
This Agreement ("Agreement") is entered into as of the 1st day of
January, 1997, between PROVIDENT SAVINGS BANK (the "Bank") and CRAIG G. BLUNDEN
(the "Executive") with reference to the following facts.
A. The Executive has been employed by the Bank since May 28, 1974
and has performed his duties in an exemplary manner resulting in substantial
profits to the Bank.
B. The Bank has previously entered into an Employment Agreement
and a Post Retirement Compensation Agreement with the Executive, both dated as
of March 26, 1992, pursuant to which agreements, (the "Prior Employment
Agreement" and "Prior Compensation Agreement", respectively), the Executive is
entitled to receive certain post-retirement benefits.
C. The parties are entering into a revised employment agreement
of even date herewith (the "Revised Employment Agreement") and wish to set forth
separately herein the terms of a revised post-retirement compensation agreement
that is to exist between the Executive and the Bank as a complete replacement of
the Prior Compensation Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Retirement Benefit.
------------------
If the Executive terminates employment with the Bank after
reaching age 60, the Bank shall pay the Executive a retirement benefit
equivalent in value to a monthly income for the remainder of the Executive's
life equal to fifty percent (50%) of the Executive's Final Average Monthly
Salary ("Basic Benefit"). The term "Final Average Monthly Salary" shall mean the
average gross amount of the Executive's basic monthly salary determined in
accordance with the Bank's customary payroll practices, before tax withholding
and other payroll deductions and including deferred salary compensation when
credited rather than when paid, but excluding bonus or incentive awards,
director fees paid to the Executive by the Bank or its Affiliates and any
accelerated payments of future salary. "Final Average Monthly Salary" shall be
computed based on the highest paid thirty-six (36) consecutive months of the
Executive's employment with the Bank.
2. Distribution of Benefits.
------------------------
(a) Lump Sum. Unless the Executive elects to receive the
annuity described in subsection (b) below, the Bank shall make a lump
sum payment to the Executive in an amount equal to the actuarially
determined discounted present value of the Basic Benefit. In calculating
the actuarially determined present value of the Basic Benefit, the
calculation shall be as of the actual benefit commencement date and
shall be based on the prevailing National Association of Insurance
Commissioners ("NAIC") standard mortality tables used as of such benefit
commencement date, and the discount rate used shall be the lesser of the
prime rate or the Eleventh District cost of funds.
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<PAGE>
(b) Annuity. If the Executive so chooses by irrevocable
election communicated to the Bank in writing stating that such election
is irrevocable, delivered to the Bank prior to the Executive attaining
age 59 or, if earlier, one year prior to the date on which the Executive
first becomes entitled to receive payments of benefits under this
Agreement, the Executive shall be entitled to receive, in lieu of the
lump sum benefit specified in subsection (a) above, an annuity purchased
by the Bank with the lump sum benefit otherwise payable pursuant to
subsection (a) above, providing for such payments and for such duration
as the Executive shall indicate in such election.
3. Early Termination.
-----------------
(a) Termination by Executive: Reduced Benefits. Subject to
Section 3(b) below, if the Executive's employment with the Bank is
terminated prior to reaching age sixty (60) for any reason other than
death, disability or as a result of a termination by the Bank, as
defined in Sections 11(a), 11(b) or 11(h) respectively, of the Revised
Employment Agreement, the monthly benefits due and payable to the
Executive under this Agreement shall be reduced from fifty percent (50%)
of the Executive's Final Average Monthly Salary by multi plying the
benefits otherwise payable hereunder by a fraction, the numerator of
which shall be the number of months between March 26, 1992 and the date
of such termination of employment, and the denominator of which shall be
the number of months from March 26, 1992 to the date Executive reaches
age sixty (60). The Executive shall be entitled to commence receipt of
such reduced monthly benefits hereunder upon reaching age sixty (60) or
at such earlier date as the Executive shall elect by giving written
notice of such election to the Bank; provided that, if the Executive
elects to commence receipt of such payments prior to reaching age sixty
(60), then the amounts of such payments shall be actuarially adjusted so
that the discounted present value of the total benefits payable to the
Executive pursuant to this Section 3(a) shall equal the present value of
such payments that would otherwise have been payable to the Executive
commencing upon his reaching age sixty (60). Actuarial adjustments made
for this purpose shall be calculated in accordance with the requirements
of Section 2(b) above.
(b) Death, Disability or Termination by Bank: Full
Benefits. If, prior to reaching age sixty (60), the Executive's
employment with the Bank is terminated as a result of death, disability
or termination by the Bank, as defined in Sections 11(a), 11(b) or
11(h), respectively, of the Revised Employment Agreement, including a
termination that is deemed pursuant to Section 11(g) of the Revised
Employment Agreement to constitute a termination pursuant to Section
11(h) thereof, the Executive, or his surviving spouse, if applicable,
shall be entitled to a lump sum benefit equal to the amount that would
have become payable to the Executive pursuant to Section 2(a); provided,
however, that such lump sum benefit shall be reduced by any benefit
actually received by the Executive under the Long Term Disability Policy
described on Schedule 2 of the Employment Agreement entered into between
the Bank and the Executive as of January 1, 1997.
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<PAGE>
4. Prior Agreements.
----------------
The post-retirement compensation agreement set forth herein,
together with the provisions of the Revised Employment Agreement, are in full
replacement of and supersede the agreements relating to post-retirement
compensation set forth in the Prior Employment Agreement.
5. Non-assignment of Benefits.
--------------------------
Neither the Executive, his spouse (if any), his designated
beneficiaries (if any) or his estate shall have any right to alienate, pledge,
hypothecate, encumber or dispose of the right to receive payments under this
Agreement, nor shall such payments be subject to pledge, attachment or claims of
creditors. Such payments and the rights thereto are expressly declared to be
nonassignable and nontransferable. In the event of any attempted assignment or
transfer, the Bank shall not be bound thereby and may fully discharge its
obligations under this Agreement by making the payments provided for in this
Agreement to the parties designated herein.
6. Successors.
----------
This Agreement shall be binding upon and inure to the benefit of
any successor of the Bank and any such successor shall be deemed substituted for
the Bank under the terms of this Agreement. As used in this Agreement, the term
"successor" shall include any firm, corporation, or other business entity which
at any time, whether by merger, consolidation, purchase, conversion or other
corporate reorganization involving the Bank, acquires all or substantially all
of the assets or business of the Bank.
7. Administration.
--------------
The Personnel/Compensation Committee of the Board of Directors of
the Bank (the "Committee") shall be responsible for administration of this
Agreement, and shall have the authority to make, amend or rescind such rules and
to make such determinations as it shall deem necessary or appropriate for the
proper implementation of this Agreement; provided that, the Committee shall
report all actions taken by it to the Board on a regular basis. Any action taken
or determination made by the Committee shall be final, binding and conclusive on
all parties absent manifest error. The Committee shall be the agent for the
service of process on the Bank in connection with this Agreement.
8. Procedure For Appeal of Denial of Benefits; Arbitration.
-------------------------------------------------------
(a) The Executive, or the Executive's spouse if
applicable, shall have the right to request review by the Committee of
any decision denying claims for benefits under this Agreement in
accordance with the following appeal procedure:
(i) The Committee shall provide notice in writing
to the Executive (or to the Executive's spouse, if applicable) if
a claim for benefits under this Agreement has been denied in
whole or in part. Such notice shall be made within 60 days
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<PAGE>
of the receipt by the Committee of the claim or, if special
circumstances require, and the Executive (or spouse) is so
notified in writing, within 90 days of the receipt by the
Committee of the claim. The notice shall (A) set forth the
specific reasons for the denial of benefits; (B) contain specific
references to provisions of the Agreement relevant to the denial;
(C) describe any material and information, if any, necessary for
the claim for benefits to be allowed, which had been requested,
but not received by the Committee; and (D) advise the Executive
(or spouse) that any appeal of the Committee's adverse
determination must be made in writing to the Committee, within 90
days after receipt of this notification, setting forth the facts
upon which the appeal is based.
(ii) If the Executive (or spouse) fails to appeal
the Committee's denial of benefits in writing and within ninety
(90) days, the Committee's determination shall become final and
conclusive.
(iii) If the Executive (or spouse) timely appeals
the Committee's denial of benefits, the Committee shall reexamine
all issues relevant to the original denial of benefits. The
Committee may in addition, upon at least ten (10) days written
notice, request the claimant or his representative to appear
personally before it to make an oral presentation or answer
questions that may have been raised, or the Executive (or spouse)
or their representative may make a request to appear personally
before the Committee.
(iv) The Committee shall advise the Executive (or
spouse) in writing of its decision and the specific reasons on
which such decision was based within 60 days of receipt of the
written appeal, or personal appearance of the Executive (or
spouse) or their representative, unless special circumstances
require an extension of such sixty (60) day period for not more
than an additional sixty (60) days. Where such extension is
necessary the Executive (or spouse) shall be given written notice
of the delay.
(b) If any issue regarding claims under this Agreement is
not resolved to the satisfaction of the Executive, or the Executive's
spouse if applicable, such issue shall be submitted for final and
binding arbitration in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award resulting from such arbitration in any court of
competent jurisdiction.
9. Notices, Statements and Reports.
-------------------------------
The Committee shall be the "administrator" of the Agreement as
defined in Section 3(16)(A) of the Employee Retirement Income Security Act of
1974 ("ERISA") for purposes of the reporting and disclosure requirements imposed
by ERISA and the Internal Revenue Code of 1986, as amended.
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<PAGE>
10. Indemnification.
---------------
To the extent permitted by applicable law and regulation, the
Bank shall indemnify and hold harmless the members of the Board of Directors of
the Bank and the members of the Committee from and against any and all
liabilities, costs, and expenses incurred by such persons as a result of any
act, or omission to act, in connection with the performance of such persons'
duties, responsibilities, and obligations under this Agreement, other than such
liabilities, costs and expenses as may result from the negligence, gross
negligence, bad faith, willful misconduct, or criminal acts of such persons.
11. Withholding.
-----------
All amounts paid pursuant to this Agreement shall be subject to
applicable federal, state and local tax withholding laws and regulations.
12. Headings.
--------
Headings herein are for convenience only, are not a part hereof
and shall not be used in construing this Agreement.
13. Counterparts.
------------
This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which shall constitute one instrument.
14. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance
with the laws of California.
15. Severability.
------------
Any provision of this Agreement which is held to be prohibited or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability only, without invalidating the remaining provisions hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the dates set opposite their respective names.
EXECUTIVE
/s/ Craig G. Blunden
-------------------------------------
CRAIG G. BLUNDEN
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<PAGE>
BANK
PROVIDENT SAVINGS BANK
By: /s/ Robert G. Schrader
-----------------------------------
BOARD OF DIRECTORS
/s/ Roy H. Taylor
- -----------------------------
/s/ Robert G. Schrader
- -----------------------------
/s/ Bruce W. Bennett
- -----------------------------
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<PAGE>
EXHIBIT 13
Annual Report to Stockholders
<PAGE>
<PAGE>
PFH PROVIDENT FINANCIAL HOLDINGS, INC.
Holding Company for Provident Savings Bank
1997 ANNUAL REPORT
<PAGE>
<PAGE>
CORPORATE VALUE
The Board of Directors and Management have the ultimate responsibility for
ensuring the success and viability of this Company through predictable,
long-term profitability, a strong capital base, and continued quality within
the balance sheet. Our primary purpose is to understand the unique financial
needs of our customers and to consistently deliver reliable products and
services which nurture solid, long-term client relationships. By fulfilling our
purpose, we will achieve success through continuing to build shareholder value,
creating a dynamic, customer-driven corporate culture, and actively
participating within the communities we serve.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Message From the Chairman................................................ 1
Financial Highlights..................................................... 2
Report of Independent Accountants........................................ 4
Consolidated Financial Statements........................................ 5
Notes to Consolidated Financial Statements............................... 10
Shareholder Information.................................................. 31
Market Information....................................................... 31
Corporate Profile........................................................ 31
Board of Directors and Senior Officers................................... 32
Provident Bank Branch Locations.......................................... 33
<PAGE>
<PAGE>
MESSAGE FROM THE CHAIRMAN
DEAR FELLOW SHAREHOLDERS,
As we end our first year as a public company, we are pleased to report the
financial results for your company. Net income for fiscal 1997 was
approximately $1.9 million, or $0.41 per share, as compared to $2.8 million for
fiscal 1996. These results reflect a one-time charge in fiscal 1997 to
recapitalize the Savings Association Insurance Fund and, in fiscal 1996,
proceeds from a key man life insurance policy. Excluding these two items, net
income in fiscal 1997 would have been $3.8 million as compared to $1.8 million
in fiscal 1996.
Balance sheet growth was moderate as assets increased by 5.2 percent to $615.5
million. In similar fashion, total loans held for investment increased by 14.2
percent and total deposits increased by 6.1 percent. Our goal over the next
fiscal year is to increase the rate of growth through mortgage loan
originations, business banking development, wholesale funding, retail deposit
gathering, branch acquisitions, and new branch openings. Our newest office,
located in downtown Riverside's nascent courthouse district, is projected to
open during the second quarter of fiscal 1998. In addition, we expect to
complete the previously announced Blythe branch acquisition during the third
quarter of fiscal 1998.
Progress has been made in developing our business banking operation. We have
hired a seasoned banking professional who is leading the direction of this
essential division. We expect to include business banking in the product
offering at select retail branches by year-end. We are excited by the prospect
of creating strategic partnerships with local businesses and together
strengthening the economic fabric of the communities we mutually serve.
Following the success of our initial public offering, we remain committed to
increasing the return on shareholder equity and building long-term shareholder
value. We initiated a five percent stock buy-back in August which will be
completed within six months. In addition, we will continue to pursue and
evaluate potential expansion opportunities that will enhance the economic worth
of our organization.
On behalf of the Board of Directors and management, we sincerely appreciate
your continued support as we look forward to meeting the challenges of the
future.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
Chairman, President and
Chief Executive Officer
1
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FINANCIAL HIGHLIGHTS
The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Corporation and its
subsidiaries at the dates and for the periods indicated.
At June 30,
- ------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------
(In Thousands)
FINANCIAL CONDITION DATA:
Total assets......... $615,500 $584,847 $567,186 $580,336 $590,440
Loans held for
investment, net..... 517,147 452,945 471,543 420,159 404,651
Loans available for
sale, net........... 19,984 49,612 34,489 83,049 104,409
Cash and overnight
deposits............. 20,111 30,831 11,433 19,909 32,954
Investment
securities........... 34,406 27,118 20,067 26,301 20,326
Deposits.............. 508,759 479,374 486,585 471,787 454,118
Borrowings............ 6,828 8,578 35,063 56,153 76,047
OPERATING DATA:
Interest income....... $(42,599) $(41,817) $(36,020) $(36,197) $(40,167)
Interest expense...... 23,528 25,269 22,491 19,532 21,839
- ------------------------------------------------------------------------------
Net interest income... 19,071 16,548 13,529 16,665 18,328
Provision for loan
losses............... 1,254 2,261 4,787 2,033 1,655
- ------------------------------------------------------------------------------
Net interest income
after provision
for loans losses..... 17,817 14,287 8,742 14,632 16,673
Loan servicing and
other fees........... 2,738 2,442 2,476 3,072 1,927
Gains from sale of
loans................ 3,597 4,753 701 1,246 5,726
Gain on bulk sale of
servicing rights..... -- -- -- 2,052 --
Other non-interest
income............... 1,273 2,256 1,308 1,141 1,989
Real estate operations,
net.................. (11) (101) (1,600) (366) (125)
Operating and
administrative
expenses............. 22,313 19,499 17,354 23,758 18,243
- ------------------------------------------------------------------------------
Income (loss) before
income taxes......... 3,101 4,138 (5,727) (1,981) 7,947
Provision (benefit)
for income taxes..... 1,160 1,332 (1,735) (648) 3,838
- ------------------------------------------------------------------------------
Net income (loss)..... $ 1,941 $ 2,806 $ (3,992) $ (1,333) $ 4,109
==============================================================================
2
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At June 30,
- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
KEY OPERATING RATIOS:
PERFORMANCE RATIOS
Return (loss) on
assets(1).......... 0.32% 0.50% (0.72)% (0.23)% 0.73%
Return (loss) on
shareholders'
equity(2).......... 2.26 6.98 (9.81) (3.08) 10.24
Interest rate
spread(3).......... 2.69 2.75 2.31 2.71 3.13
Net interest
margin(4).......... 3.33 3.05 2.55 2.99 3.42
Average interest-
earning assets to
average interest-
bearing liabilities 115.44 106.32 105.60 108.05 107.14
Operating and adminis-
trative expenses as
a percent of average
total assets....... 3.73 3.46 3.13 4.09 3.26
REGULATORY CAPITAL RATIOS
Tangible capital.... 9.89 10.41 6.19 6.65 6.74
Core capital........ 9.89 10.41 6.19 6.69 6.86
Risk-based capital.. 16.12 16.49 11.25 12.68 11.86
ASSET QUALITY RATIOS
Nonaccrual and 90 days
or more past due
loans as a percent of
loans held for
investment, net.... 1.21 0.98 0.54 1.08 1.18
Nonperforming assets
as a percent of
total assets....... 1.44 1.22 1.65 1.49 1.63
Allowance for loan
losses as a percent
of gross loans held
for investment..... 1.04 1.18 1.06 0.78 0.79
Allowance for loan
losses as a percent
of nonperforming
loans.............. 87.45 123.43 198.79 73.62 68.86
Net charge-offs to
average outstanding
loans.............. 0.25 0.38 0.62 0.39 0.04
- ------------------
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) divided by average shareholders' equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest- bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
3
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PROVIDENT FINANCIAL HOLDINGS
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Provident Financial Holdings, Inc. and its subsidiary at June 30, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Los Angeles, CA
August 11, 1997
4
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<PAGE>
CONSOLIDATED BALANCE SHEETS
Provident Financial Holdings, Inc. and Subsidiary
June 30,
- -------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996
- -------------------------------------------------------------------------------
ASSETS
Cash............................................... $ 10,411 $ 7,031
Overnight deposits................................. 9,700 23,800
- -------------------------------------------------------------------------------
Total cash and cash equivalents................... 20,111 30,831
Investment securities held to maturity (market
value of $34,425 and $27,112) (Note 2)............. 33,645 27,118
Investment securities available for sale,
at fair market value (Note 2)...................... 761 --
Loans held for investment, net (Note 3)............ 517,147 452,945
Loans available for sale, net (Note 4)............. 19,984 49,612
Accrued interest receivable........................ 3,378 3,083
Real estate available for sale, net (Note 5)....... 5,676 5,779
Federal Home Loan Bank stock - at cost............. 4,879 4,590
Premises and equipment, net (Note 6)............... 6,825 7,058
Prepaid expenses and other assets.................. 3,094 3,831
- -------------------------------------------------------------------------------
Total assets.................................... $615,500 $584,847
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits (Note 7)............ $ 2,335 $ 2,106
Interest bearing deposits (Note 7)................ 506,424 477,268
- -------------------------------------------------------------------------------
Total deposits.............. 508,759 479,374
Borrowings (Note 8)............................... 6,828 8,578
Accounts payable, accrued interest and
other liabilities................................ 14,466 10,925
- -------------------------------------------------------------------------------
Total liabilities............................... 530,053 498,877
- -------------------------------------------------------------------------------
Commitments and contingencies (Note 13)
Stockholders' equity (Notes 10, 11 and 16):
Preferred stock, $.01 par value;
authorized 2,000,000 shares;
none issued and outstanding
Common stock, $.01 par value;
authorized 15,000,000 shares;
issued 5,125,215 shares;
outstanding 4,920,215 and
5,125,215, respectively.......................... 51 51
Additional paid-in capital........................ 49,842 49,742
Retained earnings - substantially
restricted (Notes 10 and 16)..................... 42,070 40,129
Treasury stock at cost (205,000 shares)........... (3,291) --
Unearned ESOP shares (Note 11).................... (3,720) (3,952)
Unrealized gain on securities
available for sale, net of tax................... 495 --
- -------------------------------------------------------------------------------
Total stockholders' equity...................... 85,447 85,970
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity...... $615,500 $584,847
==============================================================================
The accompanying notes are an integral part of these financial statements.
5
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<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Provident Financial Holdings, Inc. and Subsidiary
Year Ended June 30,
- -------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Interest income:
Loans (Note 3)....................... $ 38,445 $ 39,701 $ 34,045
Investment securities (Note 2)....... 4,154 2,116 1,975
- -------------------------------------------------------------------------------
Total interest income............... 42,599 41,817 36,020
- -------------------------------------------------------------------------------
Interest expense:
Deposits (Note 7)................... 23,112 24,007 21,189
Borrowings.......................... 416 1,262 1,302
- -------------------------------------------------------------------------------
Total interest expense............. 23,528 25,269 22,491
- -------------------------------------------------------------------------------
Net interest income................ 19,071 16,548 13,529
Provision for loan losses (Note 3)... 1,254 2,261 4,787
- -------------------------------------------------------------------------------
Net interest income, after provision
for loan losses..................... 17,817 14,287 8,742
- -------------------------------------------------------------------------------
Non-interest income
Loan servicing and other fees....... 2,738 2,442 2,476
Gain on sale of loans, net.......... 3,597 4,753 701
Life insurance proceeds............. 1,000
Other............................... 1,273 1,256 1,308
- -------------------------------------------------------------------------------
Total non-interest income.......... 7,608 9,451 4,485
- -------------------------------------------------------------------------------
Non-interest expenses
Salaries and employee benefits...... 11,269 11,444 9,671
Premises and occupancy.............. 2,064 1,939 2,336
SAIF insurance premiums............. 3,954 1,293 1,105
Telephone........................... 427 426 460
Other............................... 4,599 4,397 3,782
- -------------------------------------------------------------------------------
Total operating and
administrative expenses........... 22,313 19,499 17,354
Real estate operations, net (Note 5). 11 101 1,600
- -------------------------------------------------------------------------------
Total non-interest expenses.......... 22,324 19,600 18,954
- -------------------------------------------------------------------------------
Income (loss) before income taxes.... 3,101 4,138 (5,727)
Provision (benefit) for income
taxes (Note 9)...................... 1,160 1,332 (1,735)
- -------------------------------------------------------------------------------
Net income (loss).................. $ 1,941 $ 2,806 $ (3,992)
===============================================================================
Net income per common share.......... $ 0.41 N/A N/A
===============================================================================
The accompanying notes are an integral part of these financial statements.
6
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<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Provident Financial Holdings, Inc. and Subsidiary
Common Addi- Un- Securi-
Stock tional Unearned earned ties
--------------- Paid-in Retained Treasury ESOP Available
Shares Amount Capital Earnings Stock Shares For Sale Total
- -------------------------------------------------------------------------------
Balance at
June 30,
1994........ $41,315 $41,315
Net loss..... (3,992) (3,992)
- -------------------------------------------------------------------------------
Balance at
June 30,
1995........ 37,323 37,323
Issuance of
stock in a
public
offering.... 5,125,215 $51 $49,728 49,779
Purchase of
shares by
ESOP........ $(4,100) (4,100)
Release of
ESOP shares. 14 148 162
Net income... 2,806 2,806
- -------------------------------------------------------------------------------
Balance at
June 30,
1996........ 5,125,215 51 49,742 40,129 (3,952) 85,970
Net income... 1,941 1,941
Purchase of
treasury
stock....... (205,000) $(3,291) (3,291)
Release of ESOP
shares...... 100 232 332
Unrealized gain
on securities
available for
sale, net of
tax......... $495 495
- -------------------------------------------------------------------------------
Balance at
June 30,
1997........ 4,920,215 $51 $49,842 $42,070 $(3,291) $(3,720) $495 $85,447
===============================================================================
The accompanying notes are an integral part of these financial statements.
7
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Provident Financial Holdings, Inc. and Subsidiary
Year Ended June 30,
- -------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss)............................ $ 1,941 $ 2,806 $ (3,992)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization................ 1,082 1,058 1,387
Amortization of loan fees.................... (254) (112) (90)
Amortization of unearned ESOP shares ........ 332
Provision for loan losses.................... 1,254 2,261 4,787
Provision for losses on real estate.......... 306 239 1,665
Gain on sale of loans........................ (3,597) (4,753) (701)
Increase (decrease) in accounts payable and
other liabilities........................... 3,541 2,710 (2,866)
Decrease (increase) in prepaid expenses and
other assets................................ 153 (592) 1,054
Loans originated for sale.................... (313,382) (469,167) (161,480)
Proceeds from sale of loans.................. 346,607 458,797 210,741
Other........................................ (1,000) (961)
- -------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities........................ 37,983 (7,753) 49,544
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in loans............. (70,891) 13,047 (67,400)
Maturity of investment securities............ 285,034 207,104 334,046
Purchases of investment securities........... (292,322) (214,155) (330,267)
Redemption of Federal Home Loan Bank stock... 1,000
Proceeds from disposal of real estate........ 5,518 8,619 8,245
Purchases of premises and equipment, net of
proceeds from sales......................... (881) (609) (352)
Other........................................ 495 1,000
- -------------------------------------------------------------------------------
Net cash (used for) provided by
investing activities........................ (73,047) 15,006 (54,728)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Provident Financial Holdings, Inc. and Subsidiary
Year Ended June 30,
- -------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease in NOW, passbook and money
market deposits............................. (18) (7,064) (34,786)
Net increase (decrease) in term deposits..... 29,403 (147 ) 49,584
Repayment of Federal Home Loan Bank Advances. (1,750) (37,000) (153,500)
Proceeds from Federal Home Loan Bank
Advances.................................... 12,500 135,500
Proceeds from issuance of capital stock...... 45,841
Treasury stock purchases..................... (3,291)
Net (decrease) increase in securities sold
under agreements to repurchase.............. (1,985) (3,090)
- -------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities.................................. 24,344 12,145 (6,292)
- -------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents................................. (10,720) 19,398 (11,476)
Cash and cash equivalents at beginning of
period...................................... 30,831 11,433 22,909
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of
period...................................... $ 20,111 $ 30,831 $ 11,433
===============================================================================
Supplemental information:
Cash paid for interest....................... $ 23,505 $ 25,302 $ 22,607
===============================================================================
Cash paid (received) for income taxes........ $ 732 $ 704 $ (3,014)
===============================================================================
Real estate acquired in settlement of loans.. $ 5,721 $ 3,433 $ 11,546
===============================================================================
The accompanying notes are an integral part of these financial statements.
9
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
Pursuant to a plan of conversion, Provident Savings Bank, FSB (the Bank)
converted from a Federally chartered mutual savings bank to a Federally
chartered stock savings bank effective June 27, 1996. Provident Financial
Holdings, Inc. (the Holding Company), a Delaware corporation organized by the
Bank, acquired all of the capital stock of the Bank issued in the conversion;
the transaction was recorded on a book value basis. Any references to financial
information for periods prior to June 30, 1996 refer to the Bank prior to
conversion.
The following accounting policies, together with those disclosed elsewhere in
the consolidated financial statements, represent the significant accounting
policies of Provident Financial Holdings, Inc. and subsidiary. PRINCIPLES OF
CONSOLIDATION The consolidated financial statements include the accounts of
Provident Financial Holdings Inc., and its wholly-owned subsidiary, Provident
Savings Bank, FSB (collectively, the Company). All significant intercompany
balances and transactions have been eliminated.
The Company operates primarily in one business segment attracting customer
deposits to originate loans secured primarily by mortgages on residential real
estate. The segment includes ancillary activities related to real estate
lending such as mortgage banking and, to a lesser extent, real estate
development. Customer deposits are collected substantially from Riverside and
San Bernardino Counties out of nine branch locations with lending operations in
California and Nevada using nine lending offices. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
to prevailing practices within the banking industry. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, due from banks and overnight
deposits.
INVESTMENT SECURITIES
The Company classifies its qualifying investments as available for sale or held
to maturity. Management has reviewed the securities portfolio and classified
securities as either held to maturity or available for sale. The Company's
policy of classifying investments as held to maturity is based upon its ability
and management's intent to hold such securities to maturity. Securities
expected to be held to maturity are carried at amortized historical cost. All
other securities are classified as available for sale and are carried at fair
value. Fair value is determined based upon quoted market prices. Unrealized
gains and losses on securities available for sale are included in stockholders'
equity net of taxes.
Gains and losses on dispositions of investment securities are included in
noninterest income and are determined using the specific identification method.
LOANS
Loans held for investment consist primarily of long-term loans secured by first
trust deeds on single-family residences, other residential property, commercial
property and land. The adjustable-rate mortgage (ARM) is the Company's primary
loan investment.
Loan origination fees and certain direct origination expenses are deferred and
amortized to interest income on loans over the contractual life of the loan
using the interest method. Amortization is discontinued for nonperforming
loans.
10
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for sale in the secondary market.
Since the Company is primarily an adjustable-rate mortgage lender for its own
portfolio, most fixed rate products are originated for sale to others. Loans
available-for-sale are carried at lower of cost or fair value. Fair value is
generally determined by outstanding commitments from investors or current
investor yield requirements as calculated on the aggregate loan basis.
The Company sells loans in order to minimize interest rate risk and to provide
additional funds for investment by the Company. Loans are sold without recourse
other than short-term covenants which are standard in the industry. For some
loans sold, the Company may retain the servicing rights in order to generate
servicing income. Where the Company continues to service loans after sale,
investors are paid their share of the principal collections together with
interest at an agreed-upon rate, which generally differs from the loan's
contractual interest rate.
Gains or losses on sales of loans, including fees received or paid, are
recognized at the time of sale and are determined by the difference between the
net sales proceeds and the book value of the loans sold. When loans are sold
with servicing retained, an adjustment, if necessary, is made to increase or
decrease the difference in order to provide for a normal servicing spread.
Bulk sales of servicing rights are recognized when title and all risks and
rewards of ownership of the underlying loans have been irrevocably transferred
to the buyer and all significant contingencies have been resolved.
Effective July 1, 1996 the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights" recognizing mortgage servicing rights as separate
assets from the underlying mortgage loans at the time such loans are sold and
servicing is retained. SFAS 122 did not have a material impact on the Company's
financial reporting. Effective January 1, 1997, the Company adopted SFAS 125
"Accounting for Transfers of Financial Assets and Liabilities." Under the
financial-components approach of SFAS 125, after a transfer of financial
assets, an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes all financial and servicing assets
it no longer controls and liabilities that have been extinguished. If a
transfer does not meet the criteria for a sale, the transfer is accounted for
as a secured borrowing with pledge of collateral. The adoption of SFAS 125 did
not have a material impact on the Company's financial reporting.
ALLOWANCE FOR LOAN LOSSES
It is the policy of the Company to provide for estimated losses on real estate
loans when any significant and permanent decline in the value of the underlying
collateral occurs. Periodic reviews are made in an attempt to identify
potential problems at an early date. Individual loans are periodically reviewed
and are classified according to their inherent risk. The internal asset
classification system used by the Company is the primary basis by which the
Company evaluates the possible loss exposure. Management's determination of the
adequacy of the allowance for losses is based on an evaluation of the
portfolio, past experience, prevailing market conditions, and other relevant
factors. The determination of the allowance for loan losses is based on
estimates that are particularly susceptible to changes in the economic
environment and market conditions. The allowance is increased by the provision
for losses charged against income and reduced by charge-offs, net of
recoveries.
11
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRED LOANS
The Company assesses loans individually and identifies impairment when the
accrual of interest has been discontinued, loans have been restructured or
management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered in
determining impairment include, but are not limited to, expected future cash
flows, the financial condition of the borrower and current economic conditions.
The Company measures each impaired loan based on the fair value of its
collateral and charges off those loans or portions of loans deemed
uncollectible.
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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed primarily on a straight-line basis over
the estimated useful lives as follows:
Buildings 10-40 years
Furniture and fixtures 3-10 years
Automobiles 3 years
Leasehold improvements are amortized over the shorter of the respective lease
terms or the lives of the improvements. Maintenance and repair costs are
charged to operations as incurred.
INCOME TAXES
Taxes are provided on substantially all income and expense items included in
earnings, regardless of the period in which such items are recognized for tax
purposes. Taxes on income are determined by using the liability method. This
approach requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events other than enactments of changes in
the tax law or rates are considered. A valuation allowance is provided against
deferred tax assets when realization is not considered "more likely than not."
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on a different basis,
than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities held by the
Company.
The Company is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
12
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of shares
outstanding plus, when applicable, the dilutive effect of stock options. Shares
repurchased by the Company are excluded from shares outstanding for these
calculations. No amounts are presented for the periods prior to June 27, 1996
as the Company was a mutual savings bank and no stock was outstanding. The
weighted average number of shares used for the computation for the year ended
June 30, 1997 was 4,704,974.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company recognizes compensation expense when shares are committed to be
released to directly compensate employees in an amount equal to the fair value
of the shares so committed. The difference between the amount of compensation
expense and the cost of the shares released is recorded as additional paid-in
capital. Therefore, total shareholders' equity is not affected.
POSTRETIREMENT BENEFITS
The estimated obligation for postretirement health care and life insurance
benefits is determined based on an actuarial computation of the cost of current
and future benefits for employees and retirees. Such costs are charged to
expense during the years that the employees provide service.
RECLASSIFICATIONS
Certain reclassifications of prior year financial data have been made to
conform to the current reporting practices of the Company.
2. INVESTMENT SECURITIES (DOLLARS IN THOUSANDS)
The amortized and estimated fair value of investment securities as of June 30,
1997 were as follows:
Gross Gross Esti-
Unrea- Unrea- mated
Book lized lized Fair Carrying
Value Gains (Losses) Value Value
- -------------------------------------------------------------------------------
Held to maturity securities
U.S. Treasury securities and
obligations of other U.S.
government agencies and
corporations................... $33,553 $ 53 $(36) $33,570 $33,553
Other........................... 92 2 -- 94 92
- -------------------------------------------------------------------------------
Total held to maturity.......... 33,645 55 (36) 33,664 33,645
- -------------------------------------------------------------------------------
Available for sale securities
FHLMC stock.................... 20 680 -- 700 700
FNMA stock..................... 1 60 -- 61 61
- -------------------------------------------------------------------------------
Total available for sale........ 21 740 -- 761 761
- -------------------------------------------------------------------------------
Total investment securities..... $33,666 $795 $(36) $34,425 $34,406
===============================================================================
13
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The book value and estimated market value of investment securities as of June
30, 1996 were as follows:
Gross Gross Esti-
Unrea- Unrea- mated
Book lized lized Fair Carrying
Value Gains (Losses) Value Value
- -------------------------------------------------------------------------------
Held to maturity securities
U.S. Treasury securities and
obligations of other U.S.
government agencies and
corporations................... $26,973 $27 $(30) $26,970 $26,973
Other........................... 145 2 (5) 142 145
- -------------------------------------------------------------------------------
Total held to maturity.......... $27,118 $29 $(35) $27,112 $27,118
===============================================================================
Securities purchased under agreements to resell at June 30, 1996, were secured
by mortgage-backed securities pledged by dealers whose market values exceeded
the Company's investment in these agreements. These agreements matured within
ninety days of the end of the period. The maturities of investment securities
were as follows:
June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- -------------------------------------------------------------------------------
Due in one year.............. $23,096 $23,183 $24,973 $24,985
Due after one through five
years....................... 10,549 10,481 2,145 2,127
- -------------------------------------------------------------------------------
$33,645 $33,664 $27,118 $27,112
===============================================================================
3.O LOANS HELD FOR INVESTMENT (DOLLARS IN THOUSANDS)
Loans held for investment consisted of the following:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Residential real estate - single
family..................................... $402,296 $327,490
Residential real estate -
multi-family............................... 52,564 54,427
Commercial real estate...................... 47,887 54,813
Real estate construction.................... 5,778 10,222
Commercial business lending................. 991 --
Consumer.................................... 16,749 15,497
Other....................................... 289 332
- -------------------------------------------------------------------------------
526,554 462,781
Less:
Undisbursed loan funds..................... 3,695 3,694
Deferred loan fees......................... 102 513
Unearned discounts on loans purchased...... 145 177
Allowance for loan losses.................. 5,465 5,452
- -------------------------------------------------------------------------------
$517,147 $452,945
===============================================================================
14
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fixed rate loans comprised 14% and 13%, respectively, of the loan portfolio at
June 30, 1997 and 1996.
The following summarizes the components of the net change in the allowance for
loan losses:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Balance, beginning of period................. $ 5,452 $ 5,085 $ 3,332
Provision for losses......................... 1,254 2,261 4,787
Recoveries................................... 136 589 459
(Charge-offs)................................ (1,377) (2,483) (3,493)
- -------------------------------------------------------------------------------
Balance, end of period....................... $ 5,465 $ 5,452 $ 5,085
===============================================================================
The following summarizes information regarding impaired loans:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Non-accrual loans................................ $ 5,137 $ 4,417
Restructured loans............................... 4,910 4,905
Other............................................ 266 1,031
- -------------------------------------------------------------------------------
Total impaired loans............................. $ 10,313 $ 10,353
===============================================================================
The effect of nonaccrual and restructured loans on interest income for the
years ended June 30, 1997, 1996 and 1995 is presented below.
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Contractual interest due.................... $ 871 $ 814 $ 631
Interest recognized......................... 539 589 154
- -------------------------------------------------------------------------------
Net interest foregone....................... $ 332 $ 225 $ 477
===============================================================================
At June 30, 1997 and 1996, there were no commitments to lend additional funds
to those borrowers whose loans were classified as impaired.
The following table identifies the Company's total recorded investment in
impaired loans, net of specific allowances, by type at June 30:
15
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Non-accrual loans:
Single family........................... $ 3,667 $ 3,511
Multi-family............................ 1,176 798
Commercial.............................. 144 --
Non-mortgage............................ 150 108
Restructured loans
Single family........................... 268 273
Multi-family............................ -- --
Commercial.............................. 4,642 4,632
Non-mortgage............................ -- --
Other impaired loans:
Single family........................... 116 120
Multi-family............................ 150 569
Commercial.............................. -- 317
Non-mortgage............................ -- 25
- -------------------------------------------------------------------------------
Total impaired loans..................... $ 10,313 $ 10,353
===============================================================================
During the years ended June 30, 1997 and 1996, the Company's average investment
in impaired loans was $10,054 and $11,092, respectively, and interest income
recorded during this period was $581 and $806, respectively. The Company
records interest on non-accrual loans utilizing the cash basis method of
accounting during periods when the loans are in non-accrual status. In the
ordinary course of business, the Bank makes loans to its directors, officers
and employees at substantially the same terms prevailing at the time of
origination for comparable transactions with borrowers. The following is a
summary of related party loan activity:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Balance, beginning of period............... $ 2,462 $ 2,315 $ 2,719
Originations............................... 43 471 4
Payments................................... (340) (90) (29)
Terminations............................... (340) (234) (379)
- -------------------------------------------------------------------------------
Balance, end of period..................... $ 1,825 $ 2,462 $ 2,315
===============================================================================
16
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE BANKING (DOLLARS IN THOUSANDS)
The following summarizes the unpaid principal balance of loans serviced by the
Company:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Loans serviced for Federal Home Loan
Mortgage Corporation....................... $189,586 $221,019 $238,187
Loans serviced for Federal National
Mortgage Association....................... 274,348 305,446 338,861
Loans serviced for other investors.......... 66,384 74,632 80,403
- -------------------------------------------------------------------------------
$530,318 $601,097 $657,451
===============================================================================
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees. The
Company held borrowers' escrow balances related to loans serviced for others of
$882 and $877 as of June 30, 1997 and 1996, respectively. These escrow balances
are included in deposits in the accompanying consolidated balance sheet.
The composition of loans sold was as follows:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Loans sold
Servicing - released................... $341,471 $437,917 $198,463
Servicing - retained................... 1,539 16,127 11,577
- -------------------------------------------------------------------------------
$343,010 $454,044 $210,040
===============================================================================
Included in gain on sale of loans for the years ended June 30, 1997 and 1996
were hedging gains relating to put options of $188 and $495, respectively.
Loans receivable available for sale consisted of the following:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Adjustable rate................................. $ 4,128 $ 7,891
Fixed rate...................................... 15,856 41,721
- -------------------------------------------------------------------------------
$ 19,984 $ 49,612
===============================================================================
17
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. REAL ESTATE AVAILABLE FOR SALE (DOLLARS IN THOUSANDS)
Real estate consisted of the following:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Foreclosed real estate......................... $ 2,761 $ 3,003
Investment real estate......................... 3,504 3,531
- -------------------------------------------------------------------------------
6,265 6,534
- -------------------------------------------------------------------------------
Allowance for estimated losses:
Foreclosed real estate........................ (126) (292)
Investment real estate........................ (463) (463)
- -------------------------------------------------------------------------------
(589) (755)
- -------------------------------------------------------------------------------
$ 5,676 $ 5,779
===============================================================================
The following summarizes the components of the net change in the allowance for
losses on real estate:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Balance, beginning of period.................. $ 755 $ 1,342 $ 1,384
Provisions for losses......................... 306 239 1,665
Charge-offs................................... (472) (826) (1,707)
- -------------------------------------------------------------------------------
Balance, end of period........................ $ 589 $ 755 $ 1,342
===============================================================================
The following summarizes the components of the Company's real estate
operations:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Provisions for losses:
Foreclosed real estate....................... $ (306) $ (239) $ (983)
Investments in joint ventures................ (682)
Net operating income (losses) and holding
costs....................................... 295 138 65
- -------------------------------------------------------------------------------
Balance, end of period....................... $ (11) $ (101) $(1,600)
===============================================================================
18
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREMISES AND EQUIPMENT (DOLLARS IN THOUSANDS)
Premises and equipment consisted of the following:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Land.................................... $ 2,564 $ 2,564
Buildings............................... 6,678 6,632
Leasehold improvements.................. 491 464
Furniture and equipment................. 7,594 7,364
Automobiles............................. 180 173
17,507 17,197
Less accumulated depreciation and
amortization........................... (10,682) (10,139)
- -------------------------------------------------------------------------------
$ 6,825 $ 7,058
===============================================================================
7. DEPOSITS (DOLLARS IN THOUSANDS)
June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------
Interest Rate Amount Interest Rate Amount
- -------------------------------------------------------------------------------
Checking deposits.......... 0%-1.00% $ 26,382 0%-1.00% $ 22,344
Passbook deposits.......... 2.08%-2.96% 45,898 2.08%-2.92% 52,852
Money market deposits...... 1.00%-4.55% 85,995 1.00%-4.64% 83,097
Term deposits
Under $100,000............ 2.62%-8.00% 281,946 2.66%-8.00% 265,853
$100,000 and over......... 4.40%-8.00% 68,538 4.45%-8.00% 55,228
- -------------------------------------------------------------------------------
$508,759 $479,374
===============================================================================
Weighted average interest
rate on deposits........... 4.79% 4.65%
==============================================================================
The aggregate annual maturities of term accounts are as follows:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Within one year.................................. $288,178 $251,589
One to two years................................. 37,173 44,995
Two to three years............................... 13,278 10,774
Three to four years.............................. 3,255 8,864
Four to five years............................... 8,478 4,741
Thereafter....................................... 121 117
- -------------------------------------------------------------------------------
$350,483 $321,080
===============================================================================
19
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense is summarized as follows:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Checking.................................. $ 229 $ 203 $ 189
Term deposits............................. 18,036 18,027 14,641
Money market deposits..................... 3,490 4,034 4,893
Passbook deposits......................... 1,357 1,743 1,466
- -------------------------------------------------------------------------------
$23,112 $24,007 $21,189
===============================================================================
The Company is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserve is calculated based on deposit levels and amounted
to $903 and $816 at June 30, 1997 and 1996, respectively.
8. BORROWINGS (DOLLARS IN THOUSANDS)
Borrowings consisted of the following:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Advances from Federal Home Loan Bank............ $ 6,828 $ 8,578
- -------------------------------------------------------------------------------
$ 6,828 $ 8,578
===============================================================================
Advances from the Federal Home Loan Bank were collateralized by pledges of
certain real estate loans with an aggregate principal balance at June 30, 1997
and 1996 of $207,129 and $193,306, 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 $178,530 and $169,865 at
June 30, 1997 and 1996, respectively. As a member of the FHLB system, the Bank
is required to maintain a minimum investment in FHLB stock. The Bank's
investment exceeds the required level by $188 and $408 at June 30, 1997 and
1996, respectively. Any excess may be redeemed by the Bank or called by FHLB at
par.
The aggregate annual maturities of advances are as follows:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Within one year.................................. $ 6,500 $ 1,750
One to two years................................. 6,500
Two to three years............................... 260
Over three years................................. 68 328
- -------------------------------------------------------------------------------
$ 6,828 $ 8,578
===============================================================================
Weighted average interest rate................... 5.82% 6.10%
===============================================================================
20
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (DOLLARS IN THOUSANDS)
The provision for income taxes consisted of the following:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Current:
Federal............................... $ 1,339 $ 1,244 $ (952)
State................................. 270 111 3
- -------------------------------------------------------------------------------
1,609 1,355 (949)
- -------------------------------------------------------------------------------
Deferred:
Federal............................... (62) (95) (1,050)
State................................. (387) 72 264
- -------------------------------------------------------------------------------
(449) (23) (786)
- -------------------------------------------------------------------------------
Provision (benefit) for income taxes... $ 1,160 $ 1,332 $ (1,735)
===============================================================================
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pre-tax
income from continuing operations as a result of the following differences:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Federal statutory income tax rate................ 34.0% 34.0% (34.0%)
State taxes net of Federal tax effect............ 7.3% 2.9% 3.1%
Release of state valuation allowance............. (9.8%)
Life insurance proceeds.......................... (10.7%)
Other............................................ 5.9% 6.0% 0.6%
- -------------------------------------------------------------------------------
Effective income tax rate........................ 37.4% 32.2% (30.3%)
===============================================================================
Deferred tax liabilities (assets) by jurisdiction were as follows:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Deferred taxes - federal.............................. $ (934) $ (872)
Deferred taxes - state................................ (774) (387)
- -------------------------------------------------------------------------------
$ (1,708) $ (1,259)
===============================================================================
Deferred tax liabilities (assets) were comprised of the following:
21
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
State taxes................................... $ 216 $ 93
Depreciation.................................. 474 614
Federal Home Loan Bank dividends.............. 1,374 1,254
- -------------------------------------------------------------------------------
Total deferred tax liabilities............... 2,064 1,961
- -------------------------------------------------------------------------------
Market value adjustments...................... (230) (284)
Loss reserves................................. (2,675) (2,552)
Deferred compensation......................... (667) (640)
Investment in real estate..................... (142) (142)
Other......................................... (58) (64)
- -------------------------------------------------------------------------------
Total deferred tax assets................... (3,772) (3,682)
- -------------------------------------------------------------------------------
Deferred tax asset valuation allowance........ -- 462
- -------------------------------------------------------------------------------
Net deferred tax assets..................... $ (1,708) $ (1,259)
===============================================================================
During the year ended June 30, 1997, the Company eliminated the valuation
allowance previously established against the deferred state tax asset because
management has determined that it is more likely than not that such benefits
will be realized in future years.
For the years ended June 30, 1997, 1996, and 1995 the Company used its loss
experience to calculate its bad debt deduction used in determining federal
income taxes payable. As a result of recently enacted legislation, the
Company's future bad debt deductions will be based only on net charge-offs
claimed during the year.
10. CAPITAL (DOLLARS IN THOUSANDS)
Retained earnings at June 30, 1997 and 1996 included approximately $9,019 for
which federal income tax of approximately $3,066 had not been provided. If the
amounts that qualify as deductions for federal income tax purposes are later
used for purposes other than for bad debt losses, including distribution in
liquidation, they will be subject to federal income tax at the then current
corporate tax rate. If those amounts are not so used, they will not be subject
to tax even in the event the Company were to convert its charter.
Federal regulations require that investments in subsidiaries conducting real
estate investments and joint venture activities be phased out by 1996 or, that
institutions conducting such activities maintain sufficient capital over the
minimum regulatory requirements. The Company maintains capital in excess of the
minimum requirements.
Subsequent to June 30, 1997, the Company initiated a stock repurchase program
to acquire up to 5% of the Company's outstanding stock. The program commenced
on August 1, 1997 and is expected to be completed within six months.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
22
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
Various adjustments are required to be made to retained earnings and total
assets for computing these capital ratios, depending on an institution's
capital and asset structure. The adjustment presently applicable to the Bank is
for equity investments in real estate. In addition, in calculating risk-based
capital, general loss allowances are includable as capital on a limited basis.
As of June 30, 1997, the most recent notification from the Office of the Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, core, and tangible leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios as of June 30, 1997 and 1996 are
as follows:
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
- -------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------
As of June 30, 1997
Risk based Capital (to risk
weighted assets)..................... $ 63,293 16.12% $ 39,268 10.0%
Tier I leverage (to average assets)... 58,377 10.21% 22,869 5.0%
Tier I capital (to risk weighted
assets).............................. 58,377 14.87% 23,561 6.0%
As of June 30, 1996
Risk based Capital (to risk weighted
assets).............................. $ 63,487 16.49% $ 38,490 10.0%
Tier I leverage (to average assets)... 58,668 10.45% 22,452 5.0%
Tier I capital (to risk weighted
assets).............................. 58,668 15.24% 23,094 6.0%
11. BENEFIT PLANS (DOLLARS IN THOUSANDS)
The Company has a 401(k) defined-contribution plan covering all employees
meeting specific age and service requirements. Under the plan, employees may
contribute up to 10% of their pre-tax compensation. The Company makes matching
contributions up to 3% of participants' pre-tax compensation. Participants vest
immediately in their own contributions with 100% vesting in the Company's
contributions occurring after 6 years of credited service. The Company's
expense for these plans was approximately $13, $550 and $249 for the years
ended June 30, 1997, 1996 and 1995, respectively.
The Company has severance agreements with certain of its officers which are
renewable on an annual basis at the Company's option and a multi-year
employment contract with one executive officer. The Company has an unfunded
obligation of approximately $1,745 and $1,762 at June 30, 1997 and 1996,
respectively, to pay certain benefits upon retirement. Actuarially determined
retirement costs are being accrued and expensed annually.
23
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
As part of the conversion, an ESOP was established for all employees who are
age 21 or older and have completed one year of service with the Company during
which they have served a minimum of 1,000 hours. The ESOP borrowed $4,100 from
the Company to purchase 410,017 shares of the common stock issued in the
conversion. The loan will be repaid principally from the Company's
contributions to the ESOP over a period of 15 years. At June 30, 1997, the
outstanding balance on the loan was $3,774. Shares purchased with the loan
proceeds are held in an unearned ESOP shares account and released on a pro rata
basis as the loan is repaid. Contributions to the ESOP and shares released from
the unearned ESOP shares account are allocated among participants on the basis
of compensation, as described in the plan, in the year of allocation. Benefits
generally become 100% vested after six years of credited service. Vesting will
accelerate upon retirement, death or disability of the participant or in the
event of a change in control of the Company. Forfeitures will be reallocated
among remaining participating employees in the same proportion as
contributions. Benefits may be payable upon death, retirement, early
retirement, disability or separation from service. Since the annual
contributions are discretionary, the benefits payable under the ESOP cannot be
estimated. The expense related to the ESOP totaled $338 for the fiscal year
ended June 30, 1997. At June 30, 1997, the unearned ESOP shares account of
$3,720 is reported as a reduction of stockholders' equity. The table below
reflects ESOP activity for the period indicated:
Year Ended June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Unallocated shares at beginning
of period.................................. $395,234
Purchased shares............................ $410,017
Allocated................................... 23,270 14,783
- -------------------------------------------------------------------------------
Unallocated shares at end of period......... $371,964 $395,234
===============================================================================
The fair value of unallocated ESOP shares totaled $6,184 and $4,335 at June 30,
1997 and 1996, respectively.
12. INCENTIVE PLANS
MANAGEMENT RECOGNITION PLAN AND TRUST (MRP)
The Company's MRP was established to provide officers, employees and
nonemployee directors of the Company with a proprietary interest in the Company
in a manner designed to encourage such persons to remain with the Company. The
Company has acquired 205,000 shares of its common stock through the open market
which are being held as treasury stock for future issuance under the MRP. No
shares have been issued under the MRP as of June 30, 1997.
STOCK OPTION PLAN
The Company has established the 1996 Stock Option Plan (the "Plan") for certain
of its directors and key employees under which up to 512,522 shares of common
stock have been authorized to be granted. Under the Plan, options may not be
granted at a price less than the fair market value at the date of grant.
Options are exercisable in equal installments over a five-year period as long
as the employee or director remain an employee or director of the Company. The
maximum term of the options granted during 1997 is 10 years.
The following is a summary of changes in options outstanding:
24
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted
Number of Average
Shares Price
- -------------------------------------------------------------------------------
Outstanding at July 1, 1996............... --
Granted (weighted average fair value of
$8.38)................................... 356,500 $15.25
- -------------------------------------------------------------------------------
Outstanding at June 30, 1997.............. 356,500 $15.25
===============================================================================
For outstanding options the weighted average remaining contractual life was
9.65 years. There were no options exercisable at June 30, 1997. At June 30,
1997, 156,022 shares were available for future grants under the Plan.
ADDITIONAL STOCK OPTION PLAN INFORMATION
The Company records no compensation expense for its stock-based awards since
the exercise price at the date of grant is at least equal to the current market
price of its common stock.
The Company has calculated the fair value of stock-based awards to employees
using the Black-Scholes option pricing model with the following weighted
average assumptions: 5 year expected life; stock volatility, 27% in 1997; risk
free interest rates, 6.6% in 1997; and no dividends during the expected term.
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of
the 1997 awards had been amortized to expense over the vesting period of the
awards, pro forma net income and net income per common share would have been
$1,788,000 and $0.38 in 1997, respectively.
13. COMMITMENTS AND CONTINGENCIES (DOLLARS IN THOUSANDS)
The Company is involved in various legal matters associated with its normal
operations. In the opinion of management, these matters will be resolved
without material effect on the Company's financial position.
The Company conducts a portion of its operations in leased facilities under
noncancellable agreements classified as operating leases. In addition, the
Company leases data processing equipment under operating leases expiring during
the next five years. The following is a schedule of minimum rental payments
under such operating leases which expire at various dates:
June 30,
1997
- -------------------------------------------------------------------------------
Fiscal Year
1998.................................................. $ 425
1999.................................................. 301
2000.................................................. 183
2001.................................................. 126
2002.................................................. 78
Thereafter............................................ 217
- -------------------------------------------------------------------------------
Total minimum payments required....................... $1,330
===============================================================================
Lease expense under operating leases approximated $656, $390 and $892 for the
years ended June 30, 1997, 1996 and 1995, respectively.
25
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (DOLLARS IN THOUSANDS)
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, in the form
of originating loans or providing funds under existing lines of credit, and
forward commitments to sell loans to third parties. These instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the accompanying consolidated balance sheet. The Company's
exposure to credit loss, in the event of nonperformance by the other party to
these financial instruments is represented by the contractual notional amount
of these instruments.
The Company uses the same credit policies in making commitments to extend
credit as it does for on-balance sheet instruments. Commitments to extend
credit are agreements to lend to a customer as long as all conditions in the
contract have been met. These commitments generally have expiration dates
within 60 days of the commitment date and may require the payment of a fee.
Since some of these commitments are expected to expire, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. At June
30, 1997 and 1996, interest rates on commitments to lend ranged from 5.50% to
12.99% and 5.75% to 9.50%, respectively.
In an effort to minimize its exposure to interest rate fluctuations on fixed
rate loans originated for sale, the Company enters into forward agreements to
sell certain dollar amounts of fixed rate loans to third parties. These
agreements specify the minimum maturity of the loans, yield to purchaser and
servicing spread to the Company (if servicing is retained), and the maximum
principal amount of individual loans. The Company typically satisfies these
forward sale agreements with its current production; at June 30, 1997 and 1996
the aggregate amount of loans available for sale and of commitments to
originate exceeded the Company's forward sales commitments to sell loans. At
June 30, 1997 and 1996, interest rates on commitments to sell loans ranged from
5.75% to 12.25% and 5.875% to 12.00%, respectively.
The Company is exposed to interest rate risk on fixed rate commitments to
originate loans for sale to the extent forward sale agreements have not been
entered into. To minimize this risk, the Company purchases over the counter put
options with option periods that generally coincide with the terms of the
commitments to originate loans. The contract or notional amount of these
instruments reflect the extent of involvement the Company has in this
particular class of financial instruments. The Bank's exposure to loss on these
financial instruments is limited to the premiums paid. Premiums paid and
deferred gains on put options are recorded as an adjustment to the carrying
value of loans available for sale and recognized in earnings when the loan is
sold. At June 30, 1996, the notional principal amount of options outstanding
was $3,500. There were no options outstanding at June 30, 1997.
In addition to construction loans in process, the Company had the following
outstanding commitments:
June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Commitments to originate mortgage loans:
Fixed rate................................... $ 31,070 $ 17,523
Adjustable rate.............................. 19,902 2,351
Unused lines of credit....................... 7,569 6,344
Commitments to sell loans.................... 22,298 31,763
- -------------------------------------------------------------------------------
$ 80,839 $ 57,981
===============================================================================
26
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (DOLLARS IN THOUSANDS)
The reported fair values of financial instruments are based on various factors.
In some cases, fair values represent quoted market prices for identical or
comparable instruments. In other cases, fair values have been estimated based
on assumptions concerning the amount and timing of estimated future cash flows,
assumed discount rates and other factors reflecting varying degrees of risk.
The estimates are subjective in nature and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Accordingly, the reported fair values may not represent actual values of the
financial instruments that could have been realized as of year end or that will
be realized in the future. The following methods and assumptions were used to
estimate the fair value of each class of significant financial instruments:
Cash and due from banks, federal funds sold, interest bearing deposits with
banks: The carrying amount of these financial assets approximates the fair
value.
Investment securities: The fair value of investment securities is based on
quoted market prices or dealer quotes.
Loans available for sale: Fair values for loans are based on quoted market
prices. Forward commitments to sell loans have been considered in the
determination of the estimated fair value of loans available for sale.
Loans held for investment: For loans that reprice frequently at market rates,
the carrying amount approximates the fair value. For fixed-rate loans, the fair
value is determined by either (i) discounting the estimated future cash flows
of such loans, using a current interest rate at which such loans would be made
to borrowers over estimated remaining contractual maturities, or (ii) quoted
market prices. The allowance for loan losses is subtracted as an estimate of
the underlying credit risk.
Accrued interest receivable: The carrying value for accrued interest receivable
approximates fair value because of the short-term nature of the financial
instruments.
Federal Home Loan Bank stock: The carrying amount reported for FHLB stock
approximates fair value. If redeemed, the Company will receive an amount equal
to the par value of the stock.
Deposits: The fair value of demand and savings deposits is the amount payable
on demand at the reporting date. The carrying amount for variable-rate,
fixed-term time deposit accounts approximates fair value. The fair value of
fixed-rate time deposits is estimated using a discounted cash flow calculation.
The discount rate on such deposits is based upon rates currently offered for
deposits of similar remaining maturities.
Borrowings: The fair value of borrowings has been estimated using a discounted
cash flow calculation. The discount rate on such borrowings is based upon rates
currently offered for borrowings of similar remaining maturities. The fair
value of securities sold under agreements to repurchase is the carrying amount
at the reporting date since these agreements were repaid within one month of
the reporting date.
Commitments: Commitments to extend credit at June 30, 1997 are offered at
substantially the same rates and terms of commitments offered on June 30, 1997
to parties of similar credit worthiness. Therefore, it is presumed that no
significant difference exists between the carrying and fair value. See Note 14.
27
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amount and fair values of the Company's financial instruments were
as follows:
June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------
Carrying Market Carrying Market
Amount Value Amount Value
- -------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash....................... $ 20,111 $ 20,111 $ 30,831 $ 30,831
Investment securities...... 33,645 33,664 27,118 27,112
Loans receivable available
for sale.................. 19,984 20,188 49,612 49,990
Loans held for investment.. 517,147 518,981 452,945 455,307
Accrued interest
receivable................ 3,378 3,378 3,083 3,083
FHLB stock................. 4,879 4,879 4,590 4,590
FINANCIAL LIABILITIES:
Deposits................... 508,759 509,462 479,374 479,729
Borrowings................. 6,828 6,841 8,578 8,551
16. CONVERSION (DOLLARS IN THOUSANDS)
Provident Financial Holdings, Inc. was incorporated under Delaware law in
January 1996 for the purpose of acquiring and holding all of the outstanding
capital stock of Provident Savings Bank, FSB as part of the Bank's conversion
from a Federally chartered mutual savings bank to a Federally chartered stock
savings bank. On June 27, 1996, the Bank became a wholly owned subsidiary of
the Holding Company. In connection with the conversion, Provident Financial
Holdings, Inc. issued and sold to the public 5,125,215 shares of its common
stock (par value $.01 per share) at a price of $10.00 per share. The proceeds,
net of $1,474 in conversion costs, received by the Company from the issuance
amounted to $49,779. Prior to the completion of the conversion, Provident
Financial Holdings, Inc. had no assets or liabilities and did not conduct any
business other than of an organizational nature.
At the time of the conversion, the Bank established a liquidation account in
the amount of $40,000 which was equal to its total retained earnings as of May
31, 1996. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the Bank
after the conversion. The liquidation account will be reduced annually to the
extent that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock, if the effect would cause stockholder's equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
28
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. HOLDING COMPANY CONDENSED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following is the condensed balance sheet
for Provident Financial Holdings, Inc. (Holding Company only) as of June 30,
1997 and 1996 and condensed statements of operations and cash flows for the
year ended June 30, 1997.
CONDENSED BALANCE SHEETS June 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
ASSETS
Cash....................................... $ 792 $ 1,484
Investment securities held to maturity..... 18,171 17,973
Investment in subsidiary................... 63,165 61,071
Other assets............................... 3,931 5,492
- -------------------------------------------------------------------------------
$ 86,059 $ 86,020
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities.......................... $ 612 $ 50
Stockholders' equity....................... 85,447 85,970
- -------------------------------------------------------------------------------
$ 86,059 $ 86,020
===============================================================================
CONDENSED STATEMENT OF OPERATIONS
June 30,
1997
- -------------------------------------------------------------------------------
Interest and other income.................................. $ 1,470
General and administrative expense......................... 185
- -------------------------------------------------------------------------------
Income before equity in earnings of the subsidiary........ 1,285
Equity in earnings of the subsidiary....................... 1,267
- -------------------------------------------------------------------------------
Income before income taxes................................ 2,552
Income taxes.............................................. 611
- -------------------------------------------------------------------------------
Net income.............................................. $ 1,941
===============================================================================
29
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
Year Ended June 30,
1997
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................... $ 1,941
Adjustments to reconcile net earnings
to cash used by operating activities:
Equity in earnings of the subsidiary......... (1,267)
Decrease in other assets..................... 1,561
Increase in other liabilities................ 562
- ------------------------------------------------------------------------------
Net cash provided by operating activities. $ 2,797
- ------------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of investing securities............. (64,445)
Maturity of investment securities............ 64,247
- ------------------------------------------------------------------------------
Net cash used by investing activities..... (198)
- ------------------------------------------------------------------------------
Cash flow from financing activities:
Treasury stock purchases..................... (3,291)
- ------------------------------------------------------------------------------
Net decrease in cash during the year.......... (692)
Cash and cash equivalents, beginning of year.. 1,484
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of year........ $ 792
===============================================================================
30
<PAGE>
<PAGE>
SHAREHOLDER INFORMATION
MARKET FOR COMMON STOCK
The common stock of Provident Financial Holdings, Inc. is listed on the NASDAQ
National Market under the symbol of PROV. The following table provides the high
and low stock prices for PROV during the last fiscal year following its initial
public offering in June, 1996.
1st Qtr. 1997 2nd Qtr. 1997 3rd Qtr. 1997 4th Qtr. 1997
9/30/96 12/31/96 3/31/97 6/30/97
- -------------------------------------------------------------------------------
High $12.625 $14.625 $17.250 $17.375
Low 10.125 12.375 13.750 14.125
Last 12.625 14.000 15.125 16.625
- -------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of shareholders will be held at the Mission Inn at 3649
Mission Inn Avenue, Riverside, California on Thursday, October 30, 1997, at
11:00 a.m. A formal notice of the meeting, together with a proxy statement and
proxy form, will be mailed to shareholders.
CORPORATE OFFICES
Provident Financial Holdings, Inc.
3756 Central Avenue
Riverside, CA 92506 (909) 686-6060
CORPORATE COUNSEL
Breyer & Aguggia 1300 I Street, N.W.
Washington, D.C. 20005
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
400 South Hope Street
Los Angeles, CA 90071
TRANSFER AGENT
Registrar & Transfer
Co. 10 Commerce Drive
Cranford, NJ 07016
(908) 272-8511
MARKET INFORMATION
Provident Financial Holdings, Inc. is traded on the NASDAQ National Market
under the symbol of PROV.
FINANCIAL INFORMATION
Requests for copies of forms 10-K and 10-Q filed with the Securities and
Exchange Commission should be directed in writing to:
Brian M. Riley
Chief Financial Officer
Provident Financial Holdings, Inc.
3756 Central Avenue
Riverside, CA 92506
CORPORATE PROFILE
Provident Financial Holdings, Inc. ("Corporation"), a Delaware corporation, was
organized in January 1996 for the purpose of becoming the holding company for
Provident Savings Bank, F.S.B. ("Savings Bank") upon the Savings Bank's
conversion from a federal mutual to a federal stock savings bank
("Conversion"). The Conversion was completed on June 27, 1996. At June 30,
1996, the Corporation had total assets of $615.5 million, total deposits of
$508.8 million and stockholders' equity of $85.4 million. Provident Financial
has not engaged in any significant activity other than holding the stock of the
Savings Bank.
31
<PAGE>
<PAGE>
BOARD OF DIRECTORS AND SENIOR OFFICERS
BOARD OF DIRECTORS
Bruce W. Bennett
President
Community Care & Rehabilitation Center
Michael C. Billings
Former Chief Executive Officer (retired)
Riverside National Bank
Craig G. Blunden
Chairman, President & CEO
Provident Financial Holdings, Inc. and
Provident Savings Bank, FSB
Debbi H. Guthrie
President
Roy O. Huffman Roof Company
David W. Mitchell
Former Chairman & CEO (retired)
Avon Products, Inc.
Robert G. Schrader
Executive Vice President &
Chief Operating Officer
Provident Savings Bank, FSB
Roy H. Taylor
President
Goldware & Taylor Insurance
SENIOR OFFICERS
PROVIDENT FINANCIAL HOLDINGS, INC.:
Craig G. Blunden
Chairman, President & CEO
Brian M. Riley
Chief Financial Officer
Robert G. Schrader
Corporate Secretary
PROVIDENT SAVINGS BANK, FSB:
Craig G. Blunden
Chairman, President & CEO
Robert G. Schrader
Executive Vice President &
Chief Operating Officer
Donald L. Blanchard
Senior Vice President
Retail Banking
Lil Brunner
Senior Vice President
Chief Information Officer
Richard L. Gale
Senior Vice President
Mortgage Banking
William E. Harris
Senior Vice President
Administration
Brian M. Riley
Senior Vice President
Chief Financial Officer
32
<PAGE>
<PAGE>
PROVIDENT BANK
BRANCH LOCATIONS
CORPORATE OFFICE
3756 Central Avenue
Riverside, CA 92506
DOWNTOWN BUSINESS CENTER
4001 Main Street
Riverside, CA 92501
CANYON CREST
5225 Canyon Crest Drive #86
Riverside, CA 92507
MORENO VALLEY
12460 Heacock Street
Moreno Valley, CA 92553
NORTH MORENO VALLEY
23575 Sunnymead Ranch Pkwy.
Moreno Valley, CA 92557
REDLANDS
125 E. Citrus Avenue
Redlands, CA 92373
SUN CITY
27010 Sun City Boulevard
Sun City, CA 92586
HEMET
1690 E. Florida Avenue
Hemet, CA 92544
RANCHO MIRAGE
71-991 Highway 111
Rancho Mirage, CA 92270
BLYTHE
201 E. Hobson Way
Blythe, CA 92225
CUSTOMER INFORMATION LINE
1-800-442-5201
33
<PAGE>
<PAGE>
PROVIDENT [LOGO]
Building Your Bank of the Future
PROVIDENT FINANCIAL HOLDINGS, INC.
Corporate Office
3756 Central Avenue * Riverside, CA 92506
(909) 686-6060
NASDAQ - PROV
<PAGE>
<PAGE>
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<PAGE>
<PAGE>
Parent
- ------
Provident Financial Holdings, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
Provident Savings Bank, F.S.B. 100% United States
Profed Mortgage, Inc.(1) 100% California
Provident Financial Corporation(1) 100% California
First Service Corporation(1) 100% California
- ---------------------
(1) This corporation is a wholly owned subsidiary of Provident Savings Bank,
F.S.B.
<PAGE>
<PAGE>
EXHIBIT 23
Consent of Independent Accountants
<PAGE>
<PAGE>
CONSENT OF INDENPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-30935) of Provident Financial Holdings, Inc. of
our report dated August 11, 1997 appearing on page 4 of the 1997 Annual Report
which is incorporated in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California
September 26, 1997
<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 9988
<INT-BEARING-DEPOSITS> 323
<FED-FUNDS-SOLD> 9700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 92
<INVESTMENTS-MARKET> 94
<LOANS> 537131
<ALLOWANCE> 5465
<TOTAL-ASSETS> 615500
<DEPOSITS> 508759
<SHORT-TERM> 6500
<LIABILITIES-OTHER> 14466
<LONG-TERM> 328
0
0
<COMMON> 51
<OTHER-SE> 85396
<TOTAL-LIABILITIES-AND-EQUITY> 615500
<INTEREST-LOAN> 38445
<INTEREST-INVEST> 4154
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 42599
<INTEREST-DEPOSIT> 23112
<INTEREST-EXPENSE> 23528
<INTEREST-INCOME-NET> 19071
<LOAN-LOSSES> 1254
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<EXPENSE-OTHER> 22324
<INCOME-PRETAX> 3101
<INCOME-PRE-EXTRAORDINARY> 3101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1941
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 7.43
<LOANS-NON> 5972
<LOANS-PAST> 277
<LOANS-TROUBLED> 7546
<LOANS-PROBLEM> 10313
<ALLOWANCE-OPEN> 5452
<CHARGE-OFFS> 1377
<RECOVERIES> 136
<ALLOWANCE-CLOSE> 5465
<ALLOWANCE-DOMESTIC> 5465
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
