United States
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, 1998 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. [ X ]
As of September 15, 1998, there were issued and outstanding 4,625,414 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, 1998, was $66,243,996.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the fiscal year
ended June 30, 1998 ("Annual Report") (Part II).
2. Portions of the definitive Proxy Statement for the 1998 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, 1998, the Corporation had total assets of $816.2
million, total deposits of $583.0 million and stockholders' equity of $86.7
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 has recently begun offering business loans and other
business banking services. 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
On March 27, 1998 Provident Savings Bank consummated the purchase of the
Blythe, California branch of Bank of America. The assets acquired in the
transaction totaled $16.4 million, of which $15.8 million was cash, and the
liabilities assumed were $16.4 million in deposits.
MARKET AREA
The Savings Bank is headquartered in Riverside, California and operates
eight 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 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. As the Inland Empire is widely believed to be
entering a period of recovery from the recessionary trends that have prevailed
in Southern California over the past several years, unemployment remains
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above the national average but is improving. The recession in Southern
California resulted in an over-supply of commercial, multi-family and
residential properties but real estate values appear to be rising. 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 $620.1 million at June 30, 1998, representing approximately
76.0% of consolidated total assets. This compares to $517.1 million, or 84.0%
of consolidated total assets, at June 30, 1997. Following the Savings Bank'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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LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of the Savings Bank's
loan portfolio at the dates indicated.
At June 30,
-----------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to four-
family........ $507,194 80.08% $402,296 76.41% $327,490 70.77% $345,034 71.59% $277,986 64.94%
Multi-family... 46,635 7.36 52,564 9.98 54,427 11.76 53,531 11.11 63,719 14.88
Commercial..... 42,696 6.74 47,887 9.09 54,813 11.84 61,518 12.76 63,659 14.87
Construction... 13,746 2.17 5,778 1.10 10,222 2.21 5,938 1.23 4,324 1.01
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total Mortgage
loans......... 610,273 96.35 508,525 96.58 446,952 96.58 466,021 96.69 409,688 95.70
Consumer loans... 19,824 3.13 16,749 3.18 15,497 3.35 15,830 3.28 18,177 4.25
Commercial business
loans........... 2,819 0.45 991 0.19 0 0.00 0 0.00 0 0.00
Other loans ..... 422 0.07 289 0.05 332 0.07 137 0.03 218 0.05
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans
receivable... 633,336 100.00% 526,554 100.00% 462,781 100.00% 481,988 100.00% 428,083 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Loans in process. 7,320 3,695 3,694 4,121 3,324
Deferred loan fees (298) 247 690 1,239 1,268
Allowance for loan
losses.......... 6,186 5,465 5,452 5,085 3,332
-------- -------- -------- -------- --------
Total loans
receivable,
net..... $620,128 $517,147 $452,945 $471,543 $420,159
======== ======== ======== ======== ========
Loans held for
sale ..... $67,248 $19,984 $49,612 $34,489 $83,049
======= ======= ======= ======= =======
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MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at June 30, 1998, 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
One After After
Year 3 Years 5 years
Within Through Through Through
One 3 5 10 Beyond
Year Years Years Years 10 Years Total
---- ----- ----- ----- -------- -----
Mortgage loans:
One-to four-family. $2,835 $3,794 $3,693 $2,909 $493,963 $507,194
Multifamily........ 102 35 517 445 45,536 46,635
Commercial ........ 43 645 479 1,167 40,362 42,696
Construction....... 2,641 399 -- -- 10,706 13,746
Consumer loans...... 15 769 3,100 6,206 9,734 19,824
Commercial business
loans.............. 1,551 770 498 -- -- 2,819
Other loans ........ 60 251 47 -- 64 422
------ ------ ------ ------- -------- --------
Total loans
receivable....... $7,247 $6,663 $8,334 $10,727 $600,365 $633,336
====== ====== ====== ======= ======== ========
The following table sets forth the dollar amount of all loans held in
the Savings Bank's portfolio due after June 30, 1999 which have fixed interest
rates and have floating or adjustable interest rates.
Floating or
Adjustable
Fixed-Rates Rates
----------- -----------
(In Thousands)
Mortgage loans:
One-to four-family............... $39,002 $465,357
Multifamily ..................... 1,042 45,491
Commercial....................... 2,684 39,969
Construction...................... 399 10,706
Consumer loans.................... 8,242 11,566
Commercial Business Lending....... 4372 896
Other loans....................... -- 362
------- --------
Total loans receivable... $51,742 $574,347
======= ========
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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, 1998, $507.2 million, or 80.1% 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.
One- to four-family loans originated for portfolio increased 73.9% during
fiscal 1998 to $195.3 million. At June 30, 1998, adjustable-rate loans
comprised 77.5% 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 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 3.0 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 Treasury CMT constitute a majority of the Savings Bank's loan
portfolio. The COFI has become dominated by a few large savings institutions
and, accordingly, movement in the index is closely tied to the deposit pricing
and borrowing cost of those institutions. Currently, the Savings Bank does not
originate COFI indexed loans but emphasizes products based on the one-year CMT
and LIBOR, which adjust more rapidly than the COFI to changes in interest
rates. The majority of the ARM loans being originated for portfolio by the
Savings bank at the present time have three, five or seven year fixed periods
prior to the first adjustment period. Loans of this type have an inherent
interest rate risk if rates should rise during the initial fixed rate period.
As of June 30, 1998, the Savings Bank had $104.3 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 non-performing 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.
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The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce the Savings Bank's exposure to changes in interest rates. There are,
however, unquantifiable credit risks resulting from the potential of increased
interest to be paid by the customer due to increases in interest rates. It is
possible that, during periods of rising interest rates, the risk of default on
ARM loans may increase as a result of re-pricing 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.
The Savings Bank's present policy generally limits loan amounts to 97%
of the appraised value or purchase price of a property, whichever is lower,
for conventional loans. Higher loan-to-value ratios are 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, 1998, the Savings Bank's
loan portfolio included $46.6 million in multi-family real estate loans and
$42.7 million in commercial real estate loans, or 7.4% and 6.7%, respectively,
of total loans receivable. After 1989, the Savings Bank de-emphasized this
type of lending and made multi-family and commercial real estate mortgage
loans only on a selective basis. With the improvement in the market and the
decline in delinquencies, the Savings Bank has begun to consider loans of this
type more extensively. At June 30, 1998, the Savings Bank had 94 multi-family
and 117 commercial real estate loans in its portfolio, the largest of which
was a multi-family real estate loan with a balance of $3.3 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 at a specific interval over the COFI, subject to annual payment
caps and life-of-loan interest rate caps. At June 30, 1998, $27.9 million, or
59.8%, of the Savings Bank's multi-family loans were secured by five to 36
unit projects, of which $17.3 million, or 37.2 %, 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,
1998, the Savings Bank had 20 commercial real estate and multi-family loans
with principal balances of over $1 million that totaled $32.8 million.
Independent appraisers, engaged by the Savings Bank, perform appraisals on
properties that secure multi-family real estate loans. 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, 1998,
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approximately $44.2 million, or 94.7 %, of the Savings Bank's multi-family
loans and approximately $31.8 million, or 74.5%, of the Savings Bank's
commercial real estate loans were secured by properties located in Riverside
or San Bernardino County. The decline in real estate values in the early years
of this decade were more pronounced with respect to multifamily and commercial
real estate. Even though the Savings Bank's multi-family and commercial real
estate loans are considered by Management to be seasoned, and there has been
an improvement in the market, 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, 1998, the Savings Bank had no multi-family
real estate loans and one commercial real estate loan with a balance of
$422,000 that were 60 to 89 days past due. There were no multi-family real
estate loans or commercial real estate loans that were delinquent 90 days or
more. See also "REGULATION -- Federal Regulation of Savings Associations --
Loans to One Borrower."
CONSTRUCTION LENDING. The Savings Bank also originates residential
construction loans to individuals to build owner-occupied single family homes.
At June 30, 1998, the Savings Bank's construction loan portfolio totaled $13.7
million, or 2.2% of total loans receivable. Occasionally, the Savings Bank
makes loans to builders for the construction of small subdivisions. Typically,
the Savings Bank requires a specific number of presales prior to the
commencement of building in an individual phase of the planned development.
With the increased demand for new housing, the Savings Bank is actively
seeking construction loans for single family subdivisions. 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,
1998, the Savings Bank had $20.2 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 re-pricing speed of its interest-earning assets. As of June
30, 1998, commercial loans totaled $2.8 million, or 0.45% 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. Given current pricing in the mortgage markets, the
Savings Bank generally sells all of its loans on a servicing-released basis to
cover the cost of loan origination. 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
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approximately 400 loan correspondents approved by the Savings Bank who
originate and submit loans at a mark-up over the Savings Bank's daily
published price. During the years ended June 30, 1998 and 1997, wholesale loan
originations accounted for 60.7% and 58.6%, respectively, of loans originated
for sale. The Savings Bank maintains a regional wholesale lending office in
Rancho Cucamonga, California.
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, 1998, Profed Mortgage operated three
offices within Savings Bank facilities and seven free standing loan production
offices located in Lake Forest, Rancho Cucamonga, Redlands, 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 $45.0 million at June 30, 1998. See Note 15 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 ($298,000) of net deferred mortgage loan fees at June 30, 1998.
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
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deliver loans into the secondary market. Conventional mortgage loans
originated by the Savings Bank that do not meet FNMA or FHLMC guidelines may
be sold to private institutional investors. See "-- Mortgage Banking
Activities -- Hedging Activities."
The following table shows the Savings Bank's loan originations,
repurchases, sales and principal repayments during the periods indicated.
Year Ended June 30,
----------------------------
1998 1997 1996
----- ----- ----
(In Thousands)
Loans originated for sale:
Retail originations................. $183,702 $129,740 $163,411
Wholesale originations.............. 283,744 183,642 305,756
-------- -------- --------
Total loans
originated for sale.............. 467,446 313,382 469,167
-------- -------- --------
Loans sold(1):
Servicing released................... 424,246 341,471 437,917
Servicing retained................... 428 1,539 16,127
-------- -------- --------
Total loans sold................... 424,674 343,010 454,044
-------- -------- --------
Loans originated for portfolio:
Mortgage loans:
One- to four-family ................ 195,287 112,310 39,182
Multi-family........................ 2,644 916 4,631
Commercial.......................... 370 1,562 --
Construction........................ 13,786 5,240 90
Consumer loans....................... 10,760 6,160 3,634
Commercial business loans ........... 4,179 2,008 --
Other loans.......................... 333 123 197
-------- -------- --------
Total loans originated for
portfolio......................... 227,359 128,428 47,734
-------- -------- --------
Loans purchased:
Mortgage loans:
One- to four-family................. 20,065 2,737 1,176
Mortgage loan principal
repayments.......................... 146,234 60,973 66,379
Real estate acquired in
settlement of loans................. 6,932 7,094 3,967
Increase (decrease) in other
items, net(2)....................... 13,215 1,105 2,838
-------- -------- --------
Net increase (decrease) in loans
receivable, net..................... $150,245 $ 34,575 $ (3,475)
======== ======== ========
(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>
Mortgage loans sold to FHLMC and FNMA are sold on a non-recourse 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.
Occasionally, the Savings Bank is required to repurchase loans sold to
FHLMC, FNMA or private investors if it is determined that such loans do not
meet the credit requirements of the investor, or if one of the parties
involved in a loan committed fraud. Such loans must be repurchased even though
they may be performing. During the years ended June 30, 1998, 1997, and 1996,
the Savings Bank repurchased single-family mortgage loans, totaling $3.1
million, $2.7 million, and $1.2 million, respectively. The continued increase
in 1998 and 1997 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, 1998, the Savings Bank
was servicing $434.7 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 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, 1998, the Savings Bank had
gains of $4.5 million attributable to sales of loans, which included hedging
gains or
10
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<PAGE>
losses. At June 30, 1998, the Savings Bank had outstanding commitments to sell
loans totaling $66.0 million. See Note 15 of the Notes to Consolidated
Financial Statements.
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, 1998, the Savings Bank had two option contracts
outstanding with a notional value of $3,000,000.
The above activities are managed continually as markets change, however,
there can be no assurance that the Savings Bank will be successful in its
effort to eliminate the risk of interest rate fluctuation between the time
origination commitments are issued and the ultimate sale of the loan. The
Savings Bank 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 Board of Directors receives monthly information 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.
11
<PAGE>
<PAGE>
<TABLE>
The following table sets forth delinquencies in the Savings Bank's loan portfolio as of the dates
indicated.
At June 30,
--------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------------- ----------------------------
90 90 90
60 - 89 Days Days or More 60 - 90 Days Days or More 60 - 89 Days Days or More
------------- ------------- -------------- -------------- -------------- -------------
Prin- Prin- Prin- Prin- Prin- Prin-
cipal cipal cipal cipal cipal cipal
Bal- Bal- Bal- Bal- Bal- Bal-
Number ance Number ance Number ance Number ance Number ance Number 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 ...... 1 $176 14 $1,700 6 $918 30 $3,227 5 $763 18 $2,874
Multifamily.... -- -- -- -- -- -- 2 1,725 -- -- 2 387
Commercial..... 1 422 -- -- 1 465 2 960 -- -- -- --
Construction... -- -- -- -- -- -- -- -- -- -- -- --
Commercial
Business Loans... -- -- -- -- -- -- -- -- -- -- -- --
Consumer loans... 1 2 2 35 1 14 7 201 3 66 4 30
Other loans...... -- - -- -- -- - -- -- -- -- -- --
-- ---- -- ------ -- ------ -- ------ -- ---- -- ------
Total........ 3 $600 16 $1,735 8 $1,397 41 $6,113 8 $829 24 $3,291
= ==== == ====== = ====== == ====== = ==== == ======
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,
---------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Loans accounted for on a
non-accrual basis:
Mortgage loans:
One-to four-family.......... $1,669 $3,667 $3,511 $1,137 $1,616
Multi-family................ -- 1,176 798 142 2,039
Commercial.................. 245 979(1) -- 1,279 864
Consumer loans............... 18 150 108 -- 6
------ ------ ------ ------ ------
Total...................... 1,932 5,972 4,417 2,558 4,525
------ ------ ------ ------ ------
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.............. 1,932 6,249 4,417 2,558 4,526
Foreclosed real estate, net.. 4,447 2,636 2,711 6,784 4,117
------ ------ ------ ------ ------
Total nonperforming assets... $6,379 $8,885 $7,128 $9,342 $8,643
====== ====== ====== ====== ======
Restructured loans........... $2,074 $4,910 $4,905 $3,272 $4,015
====== ====== ====== ====== ======
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net...... 0.31% 1.21% 0.98% 0.54% 1.08%
Nonaccrual and 90 days or more
past due loans as a percentage
of total assets............... 0.24 1.02 0.76 0.45 0.78
Nonperforming assets as a
percentage of total assets.... 0.78 1.44 1.22 1.65 1.49
- --------------
(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.
Interest income, which would have been recorded for the year ended June
30, 1998 had nonaccruing loans been current in accordance with their original
terms, amounted to approximately $899. The amount of interest
13
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<PAGE>
included in the results of operations on such loans for the year ended June
30, 1998 amounted to approximately $574. 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, 1998, the Savings Bank had $4.4 million, net of allowance for losses
of $462,000. Due primarily to continued depressed market conditions for
multi-family and commercial properties in Southern California, the Savings
Bank established provisions of $326,000 for losses on foreclosed real estate
during the year ended June 30, 1998. At June 30, 1998, the Savings Bank's
foreclosed real estate was comprised of 21 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 $2.5 million of investment
real estate, net of reserves at June 30, 1998, 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
a 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,
-------------------
1998 1997
---- ----
Doubtful.............. $ -- $ --
Substandard assets.... 11,398 13,062
Special mention....... 1,627 489
------- -------
Total........... $13,025 $13,551
======= =======
Total classified assets
as of percentage total
assets............... 1.60% 2.20%
14
<PAGE>
<PAGE>
As set forth below, as of June 30, 1998, assets classified as
substandard and special mention included 56 loans and properties totaling
approximately $13.0 million.
Number
of Special
Type of Loan/Property Loans Substandard Mention Total
- --------------------- ----- ----------- ------- -----
(Dollars in Thousands)
One- to four-family.... 39 $ 2,900 $ 265 $ 3,165
Multi-family........... 2 550 570 1,120
Commercial real estate. 3 3,501 318 3,819
Construction........... 1 -- 475 475
Real estate owned...... 11 4,447 -- 4,447
--- ------- ------ ------
Total.............. 56 $11,398 $1,627 $13,025
== ======= ====== =======
Not all of the Savings Bank's classified assets are delinquent or
non-performing. 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, 1998, the Savings Bank had an allowance for loan losses of
$6.2 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 past decreases 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
15
<PAGE>
<PAGE>
Bank to increase significantly its allowance for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Savings Bank's financial condition and results of operations.
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated. Where specific loan loss
reserves have been established, any differences between the loss allowances
and the amount of loss realized has been charged or credited to current
operations (dollars in thousands).
Year Ended June 30,
--------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance at beginning of
period.................... $5,465 $5,452 $5,085 $3,332 $3,286
Recoveries:
Mortgage loans:
One- to four-family....... 11 11 16 97 53
Multi-family.............. 191 60 258 145 62
Commercial................ 173 38 315 177 4
Consumer.................. 29 -- -- -- --
Other loans............... -- 27 -- 40 --
------ ------ ------ ------ ------
Total recoveries........ 404 136 589 459 119
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family..... 187 457 214 772 438
Multi-family............ 2 609 934 1,589 1,112
Commercial.............. 580 309 1,335 1,101 540
Consumer loans.......... 114 -- -- 17 3
Other loans............. -- 2 -- 14 13
------ ------ ------ ------ ------
Total charge-offs..... 883 1,377 2,483 3,493 2,106
------ ------ ------ ------ ------
Net loan charge-offs 479 1,241 1,894 3,034 1,987
(recoveries).............
Provision for loan losses 1,200 1,254 2,261 4,787 2,033
------ ------ ------ ------ ------
Balance at end of period. $6,186 $5,465 $5,452 $5,085 $3,332
====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of gross loans
receivable............... 0.98% 1.04% 1.18% 1.06% 0.78%
Net loan charge-offs
(recoveries) as a percentage
of average loans outstanding
during the period........ 0.10 0.25 0.38 0.62 0.39
Allowance for loan losses as
a percentage of nonperforming
loans at end of period... 320.19 87.45 123.42 198.79 73.62
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,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ---------------- ---------------- --------------- --------------
% of in % of in % of in % of in % of in
Each Each Each Each Each
Cate- Cate- Cate- Cate- Cate-
gory gory gory gory gory
To To To To To
Total Total Total Total 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. $ 972 80.08% $ 863 76.40% $ 930 70.77% $ 661 71.59% $ 470 64.94
Multi-family........ 854 7.36 935 9.98 1,532 11.76 1,030 11.11 1,140 14.88
Commercial.......... 1,334 6.74 1,542 9.09 2,848 11.84 2,587 12.76 1,271 14.87
Construction........ 20 2.17 7 1.10 28 2.21 13 1.23 25 1.01
Consumer loans........ 147 3.13 114 3.18 112 3.35 108 3.28 126 4.25
Commercial business
loans................ -- 0.45 -- 0.19 -- -- -- -- -- --
Other loans........... 3 0.07 2 0.06 2 0.07 1 0.03 2 0.05
Unallocated........... 2,856 N/A 2,002 N/A -- N/A 685 N/A 298 N/A
------- ------ ------- ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses........ $ 6,186 100.00% $15,465 100.00% $5,452 100.00% $5,085 100.00% $3,332 100.00%
======= ====== ======= ====== ====== ====== ====== ====== ====== ======
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, 1998, the Savings
Bank's regulatory liquidity was 12.83%, which is in excess of the 4.0%
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, 1998, the Corporation's investment securities portfolio
totaled $74.0 million at amortized cost and consisted of U.S. Government and
federal agency obligations. Only the Corporation's FNMA, FHLMC and REIT
investments were available for sale, all other securities were classified as
held to maturity.
18
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<PAGE>
<TABLE>
The following table sets forth the composition of the Savings Bank's investment portfolio at the
dates indicated.
At June 30,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------- -------------------------
Esti- Esti- Esti-
Amor- mated Amor- mated Amor- mated
tized Market tized Market tized 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) $ 521 $ 1,526 0.70% $ 21 $ 761 0.06% $ 21 $ - 0.08%
Investment securities
held to maturity
U.S. Government and
agency obligations.. 73,975 73,884 99.23 32,555 32,570 96.70 $24,973 24,977 92.02
Corporate securities
(2)................. -- -- -- 998 1,000 2.97 2,000 1,992 7.37
Other(3)............. 53 64 .07 92 94 .27 145 143 0.53
------- ------- ------ ------- ------- ------ ------- ------- ------
Total investment
portfolio......... $74,549 $75,474 100.00% $33,666 $34,425 100.00% $27,139 $27,112 100.00%
======= ======= ====== ======= ======= ====== ======= ======= ======
- ---------------------
(1) Consists of FHLMC, FNMA and REIT stock
(2) Consists of bankers' acceptances
(3) Consists of mortgage-backed securities.
</TABLE>
<TABLE>
The following table sets forth the maturities and weighted average yields of the debt securities
in the Savings Bank's securities portfolio at June 30, 1998.
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency obligations.......... $11,003 5.75% $20,977 6.67% $41,995 6.50% $73,975 6.43%
Other........................ 00 0.00 -- -- 53 8.43% 53 8.43
------- ---- ------- ---- ------- ---- ------- ----
Total ....................... $11,003 5.75% $20,977 6.67% $42,048 6.50% $74,028 6.44%
======= ======= ======= =======
</TABLE>
<PAGE>
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.
19
<PAGE>
<PAGE>
DEPOSIT ACCOUNTS. Substantially all of the Savings Bank's depositors are
residents of the State of California. Deposits are attracted from within the
Savings Bank's market area through the offering of a broad selection of
deposit instruments, including checking accounts, money market deposit
accounts, regular savings accounts and certificates of deposit. Deposit
account terms vary, according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. In determining the terms of its deposit accounts, the Savings Bank
considers current market interest rates, profitability to the Savings Bank,
matching deposit and loan products and its customer preferences and concerns.
Generally, the Savings Bank's deposit rates are close to the median rates of
its peer group of competitors. The Savings Bank may occasionally pay above-
market interest rates to attract and/or retain deposits when less expensive
sources of funds are not available. The Savings Bank may also pay above-market
rates in specific markets in order to increase the deposit base of a
particular office or group of offices. The Savings Bank does not generally
accept brokered deposits. The Savings Bank reviews its deposit mix and pricing
weekly.
The Savings Bank currently offers certificates of deposit for terms not
exceeding 60 months. As illustrated in the following table, certificates of
deposit accounted for 68.6% of the Savings Bank's deposit portfolio at June
30, 1998. 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.
The following table sets forth information concerning the Savings Bank's time
deposits and other interest-bearing deposits at June 30, 1998.
Weighted Per-
Average centage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
- ---- ---- ---------------- ------ ------- --------
(In Thousands)
2.98 N/A Savings Accounts $10 62,201 10.87
1.57 N/A NOW Accounts -- 45,861 8.02
4.27 N/A Money Market Accounts -- 71,493 12.49
Certificates of Deposit
-----------------------
4.97 18-36 Months Variable CD 1,000 2,825 .49
4.74 90 Days or Less Fixed term, fixed rate 1,000 36,166 6.32
5.36 6-7 Months Fixed-term, fixed rate 1,000 40,983 7.16
5.35 9 Months Fixed-term, fixed rate 1,000 36,516 6.38
5.53 1 Year Fixed-term, fixed rate 1,000 126,237 22.06
5.69 15 Months Fixed-term, fixed rate 1,000 72,905 12.74
5.78 2 Years Fixed-term, fixed rate 1,000 33,892 5.92
5.70 3 Years Fixed-term, fixed rate 1,000 8,239 1.44
5.43 4 Years Fixed-term, fixed rate 1,000 1,917 .34
5.80 5 Years Fixed-term, Compounded
Certificate 1,000 31,319 5.47
5.48 Negotiable Jumbo-negotiable rate 100,000 1,504 .26
5.33 Negotiable Mini-jumbo 50,000 199 .04
- ---- -------- ------
4.76% $572,257 100.00%
======== ======
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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, 1998.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less........... $19,582
Over three through six months.. 17,672
Over six through 12 months..... 32,466
Over 12 months................. 14,497
-------
Total..................... $84,217
=======
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,
-------------------------------------------------------
1998 1997
Percent Percent
of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ----------
Non-interest-bearing. $10,768 1.85% 8,433 $2,335 .46% $721
NOW checking......... 45,862 7.87% 21,815 24,047 4.73% 3,317
Regular savings
accounts............. 62,201 10.67% 16,303 45,898 9.02% (6,954)
Money market deposit. 71,493 12.26% (14,503) 85,996 16.9% 2,898
Fixed-rate
certificates which
mature:
Within 1 year....... 334,380 57.35% 48,314 286,066 56.23% 35,934
After 1 year, but
within 2 years..... 35,910 6.16% (647) 36,557 7.18% (4,102)
After 2 years, but
within 5 years.... 19,586 3.36% (5,320) 24,906 4.9% (1,702)
After 5 years...... -- -- (121) 121 0.02% 9
Other............... 2,825 .48% (8) 2,833 0.56% (736)
-------- ------ ------- -------- ------ -------
Total...........$583,025 100.00% $74,266 $508,759 100.00% $29,385
-------- ------ ======= ======== ====== =======
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TIME DEPOSITS BY RATES. The following table sets forth the time deposits
in the Savings Bank categorized by rates at the dates indicated.
At June 30
---------------------------------------
1998 1997 1996
----- ----- ----
(In Thousands)
Below 3.00% $ 184 $ 164 $ 504
3.00 - 4.49% 7,104 3,333 4,617
4.50 - 5.49% 175,701 119,452 224,224
5.50 - 6.49% 206,938 223,525 79,626
6.50 - 7.49% 2,462 3,657 11,537
Over 7.50% 312 352 573
-------- -------- --------
Total $392,701 $350,483 $321,081
======== ======== ========
TIME DEPOSITS BY MATURITIES. The following table sets forth the
amount and maturities of time deposits at June 30, 1998.
Amount Due
----------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(In Thousands)
Below 3.00%..... 182 2 -- -- -- 184
3.00 - 4.49..... 7,104 -- -- -- -- 7,104
4.50 - 5.49%.... 164,128 7,516 1,978 45 2,034 175,701
5.50 - 6.49%.... 163,773 27,531 1,742 8,974 4,919 206,939
6.50 - 7.49%.... 1,257 1,203 -- -- 3 2,462
Over 7.50%...... 174 5 -- 132 -- 312
-------- ------- ------ ------ ------ --------
Total...... $336,618 $36,257 $3,720 $9,151 $6,956 $392,702
======== ======= ====== ====== ====== ========
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DEPOSIT ACTIVITY. The following table sets forth the deposit
activities of the Savings Bank for the periods indicated.
Year Ended June 30,
-----------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Beginning balance........... $508,759 $479,374 $486,585
-------- -------- --------
Net deposits (withdrawals)
before interest credited.. 52,020 9,128 (28,350)
Interest credited........... 22,246 20,257 21,139
-------- -------- --------
Net increase (decrease) in
deposits................... 74,266 29,385 (7,211)
-------- -------- --------
Ending balance.............. $583,025 $508,759 $479,374
======== ======== ========
BORROWINGS. The FHLB-San Francisco functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member, the Savings Bank is required to own capital stock
in the FHLB-San Francisco and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. The Savings Bank utilizes advances from the FHLB-San
Francisco as an alternative to retail deposits to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB-San
Francisco has, from time to time, served as the Savings Bank's primary
borrowing source. Advances from the FHLB-San Francisco are typically secured
by the Savings Bank's first mortgage loans. At June 30, 1998, the Savings Bank
had $132.0 million of borrowings from the FHLB-San Francisco at a weighted
average rate of 5.7%. Such borrowings mature between 1998 and 2004. The
following tables sets forth certain information regarding borrowings by the
Savings Bank at the dates and for the periods indicated:
At June 30,
------------------------
1998 1997 1996
---- ---- ----
Balance outstanding at end of period:
FHLB advances......................... $132,114 $6,828 $8,578
-------- ------ ------
Weighted average rate paid on:
FHLB advances.......................... 5.70% 5.82% 6.10%
Year Ended June 30
------------------------
1998 1997 1996
---- ---- ----
Maximum amount of borrowings outstanding
at any month end:
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FHLB advances......................... $132,114 $8,578 $25,578
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances......................... 121,500 7,098 $20,354
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances......................... 5.69% 5.87% 6.16%
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, 1998.
The Savings Bank has three wholly owned subsidiaries: Profed Mortgage,
Inc., Provident Financial Corp. ("Provident Financial") and First Service
Corporation ("First Service"). Provident Financial participated in a number of
real estate joint ventures in the 1980s, with the last joint ventures entered
into in 1989. The final joint venture was concluded with the sale of the
remaining land in July 1995. Provident Financial's current activities include:
(i) acting as trustee for the Savings Bank's real estate transactions, (ii)
engaging in annuity sales and providing brokerage services at branch offices
of the Savings Bank, (iii) selling property and life insurance, primarily to
Savings Bank customers, and (iv) holding real estate for investment. The real
estate held for investment by Provident Financial at June 30, 1998 totaled
$2.5 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, 1998, the Savings Bank's investment in its subsidiaries was $3.8
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,
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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 $6.6
million at June 30, 1998.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions. The FDIC currently maintains two separate
insurance funds: the BIF and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
The Savings Bank's accounts are insured by the SAIF 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. 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, 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 until
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
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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 4.0%) of its net withdrawable accounts plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources" in Item 7 of
this Report.
PROMPT CORRECTIVE ACTION. Under 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 under-
capitalized or critically undercapitalized. Immediately upon becoming
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under-capitalized, an institution shall become subject to various mandatory
and discretionary restrictions on its operations.
At June 30, 1998, 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 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,
1998, the qualified thrift investments of the Savings Bank were approximately
95.0% 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
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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.
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 non-qualifying
residential mortgage loan sand 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 totaled 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
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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, 1998, the Savings Bank's tier I leverage capital of
approximately $64.8 million, or 9.3% of average assets, was $30.0 million in
excess of the OTS requirement of $34.8 million, or 5.0% of adjusted total
assets. As of such date, the Savings Bank's tier I capital of approximately
$64.8 million, or 12.9% of risk weighted assets, was $34.7 million in excess
of the OTS requirement of $30.1 million, or 6.0% of risk weighted assets.
Finally, at June 30, 1998, the Savings Bank had risk-based capital of
approximately $70.9 million or 14.1% of total risk-weighted assets, which was
$20.7 million in excess of the OTS risk-based capital requirement of $50.2
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 year up to 100% of its net income to date during the
calendar year plus one-half its surplus capital ratio (i.e., the amount of
capital in excess of its fully phased-in requirement) at the beginning of the
calendar year or the amount authorized for a Tier 2 association. Capital
distributions in excess of such amount require advance notice to the OTS. A
Tier 2 savings association has capital equal to or in excess of its minimum
capital requirement but below its fully phased-in capital requirement (both
before and after the proposed capital distribution). Such an association may
make (without application) capital distributions up to an amount equal to 75%
of its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution). Tier 3
associations may not make any capital distributions without prior approval
from the OTS.
The Savings Bank is currently meeting the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited
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essentially to loans to develop or complete residential housing units. At June
30, 1998, the Savings Bank's limit on loans to one borrower was $11.5 million.
At June 30, 1998, the Savings Bank's largest aggregate amount of loans to one
borrower was $3.9 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.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Savings Bank has not been significantly
affected by the rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Savings Bank may
make to such persons based, in part, on the Savings Bank's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
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SAVINGS AND LOAN HOLDING COMPANY REGULATION
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding
company, the 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.
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
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to the tax bad debt reserve. The Savings Bank used the experience method bad
debt deduction for the taxable year ended June 30, 1996.
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, 1998, 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 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.
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OTHER MATTERS. The IRS is in the process of reviewing activity for the
Savings Bank's tax returns for fiscal years 1994, 1995 and 1996. The
California Franchise Tax Board through tax year 1990 has audited the Savings
Bank.
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,
1998, the total tax rate was 10.84%. 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 super-regional commercial banks as
well as other community-oriented banks and savings institutions. The Savings
Bank also faces competition from credit unions and a large number of mortgage
companies that operate within its market area. Many of these institutions are
significantly larger than the Savings Bank and therefore have greater
financial and marketing resources than the Savings Bank. The Savings Bank's
mortgage banking operations also face strong competition from other mortgage
bankers and brokers as well as other financial institutions. Such competition
may limit the Savings Bank's growth and profitability in the future.
PERSONNEL
As of June 30, 1998, the Savings Bank had 263 full-time and 83
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.
YEAR 2000
The company has undertaken a major project to ensure that its internal
operating systems, as well as those of its major customers and suppliers, will
be fully capable of processing transactions in the Year 2000 and beyond. The
initial phase of the project was to assess and identify all internal business
processes requiring modification and to develop comprehensive renovation plans
as needed. This phase was largely completed in late 1997. The second phase,
expected to be accomplished by the end of 1998, was largely completed in late
1997. The second phase, expected to be accomplished by the end of 1998, will
be to execute those renovation plans and begin testing systems by simulating
Year 2000 data conditions. Testing and implementation is planned to be
completed during the first half of 1999.
The cost of the project primarily consists of replacement systems and
the reallocation of internal resources. The estimated cost of the project is
$3.5 million, which includes approximately $2.5 million in replacement
equipment and software, $400,000 in equipment write-downs, and $200,000 in
outside project management expenses. In addition, the estimated value of
internal resources allocated to the Year 2000 project is approximately
$400,000. The replacement equipment and software will be capitalized and
depreciated in accordance with the Company's normal accounting policies.
Beyond the cost described, it is not expected that the Year 2000 project will
have any material effect on the Company's results of operations, liquidity or
capital resources.
The risk of Year 2000 processing problems is not completely known. As a
participant in the domestic payment system, the Company's Year 2000
preparedness is largely dependent upon the preparedness of other participants
in the system including the United States government. The Company does rely on
third-party software vendors. The Company is
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developing contingency plans for its most critical vendors, as well as its
internal systems, in the event of failure in the Year 2000.
ITEM 2. PROPERTIES
- ------------------
At June 30, 1998, the net book value of the Savings Bank's property
(including land and buildings) and its fixtures, furniture and equipment was
$7.4 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
ten branch offices, of which nine are in Riverside County in the cities of
Riverside (2), Moreno Valley (3), Hemet, Sun City, Rancho Mirage and Blythe,
California and one is in Redlands, California in San Bernardino County. Seven
of the Savings Bank's branch offices are owned by the Savings Bank and three
are leased. The leases expire in 2000 and 2008. The Savings Bank also has
seven separate loan production offices, which are located in Riverside, Rancho
Cucamonga, Redlands, Santa Ana, Lake Forest and Torrance, California and Las
Vegas, Nevada. All of these offices are leased. The leases expire from 1998 to
2003.
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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
-------
The information required herein is incorporated by reference from page
39 of the Corporation's Annual Report, which is included herein as Exhibit 13.
As of September 15, 1998, there were approximately 1,970 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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ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required herein is incorporated by reference from pages
4 and 5 of the Corporation's Annual Report. The following table sets forth
quarterly financial data.
QUARTERLY FINANCIAL DATA (UNAUDITED)
1998
--------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
(Dollars in Thousands, Except
per share)
Interest income............ $50,096 $13,461 $13,004 $12,210 $11,421
Interest expense........... 29,417 8,153 7,628 7,169 6,467
------- ------- ------- ------- -------
Net interest income........ 20,679 5,308 5,376 5,041 4,954
Noninterest income......... 9,145 2,757 2,010 2,192 2,186
Provision for loan losses.. 1,200 150 300 450 300
Noninterest expense........ 19,899 5,812 4,999 4,773 4,315
------- ------- ------- ------- -------
Earnings before taxes...... 8,725 2,103 2,087 2,010 2,525
Taxes on income............ 3,705 904 886 857 1,058
------- ------- ------- ------- -------
Net earnings .............. $ 5,020 $ 1,199 $ 1,201 $ 1,153 1,467
======= ======= ======= ======= =======
Per common share:
Per share earnings, diluted $1.11 $.27 $.27 $.25 $.32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Certain information required herein is incorporated by reference from
pages 6 through 11 of the Corporation's Annual Report.
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.
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<TABLE>
Year Ended June 30,
------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- --------------------------
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)................. $613,672 46,305 7.55% $498,853 $38,445 7.71% $504,336 $39,701 7.87%
Investment securities... 52,361 3,257 6.22 55,207 3,133 5.68 20,135 1,386 6.88
FHLB stock.............. 5,214 303 5.81 4,749 290 6.10 4,489 230 5.13
Interest-earning deposits 4,358 231 5.31 14,712 731 4.97 13,873 500 3.61
-------- ------ ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets................ 675,605 50,096 7.41 573,521 42,599 7.43 542,833 41,817 7.70
-------- ------ -------- ------- -------- -------
Non-interest-earning assets 27,502 25,051 21,313
-------- -------- --------
Total assets....... $703,107 $598,572 $564,146
======== ======== ========
Interest-bearing liabilities:
Passbook accounts....... $50,010 1,216 2.43 $49,567 1,363 2.75 $ 52,345 1,743 3.33
Demand and NOW accounts. 119,571 3,470 2.90 111,059 3,733 3.36 111,145 4,237 3.81
Certificate accounts.... 368,501 21,025 5.71 329,099 18,016 5.47 326,056 18,027 5.53
-------- ------ ---- -------- ------- ---- -------- ------- ----
Total deposits .... 538,082 25,711 4.78 489,725 23,112 4.72 489,546 24,007 4.90
FHLB advances........... 64,228 3,695 5.75 7,098 416 5.87 20,155 1,260 6.25
Other borrowings........ 206 11 5.35 -- -- -- 840 2 0.24
-------- ------ ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing liabilities 602,516 29,417 4.88 496,823 23,528 4.74 510,541 25,269 4.95
-------- ------ -------- ------- -------- -------
Non-interest-bearing
liabilities............. 16,602 15,912 13,432
-------- -------- --------
Total liabilities....... 619,118 512,735 523,973
-------- -------- --------
Shareholders equity..... 83,989 80,837 40,173
-------- -------- --------
Total liabilities
and Shareholders
equity............ 703,107 $598,572 $564,146
======== ======== ========
Net interest income..... $20,679 $19,071 $16,548
======= ======= =======
Interest rate spread(3). 2.53% 2.69% 2.75%
Net interest margin(4).. 3.06% 3.33% 3.05%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 112.13% 115.44% 106.33%
(1) Includes loans available for sale.
(2) Includes deferred loan fee amortization of ($752,000), ($254,000) and $112,000 for the years ended
June 30, 1998, 1997 and 1996, 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 Year Ended June 30,
30, -----------------------
1998 1998 1997 1996
---- ---- ---- ----
Weighted average yield on:
Loans receivable (1)................. 7.63% 7.55% 7.71% 7.87%
Investment securities................ 6.44 6.22 5.68 6.88
FHLB stock........................... 5.88 5.81 6.10 5.13
Interest-earning deposits............ 5.41 5.31 4.97 3.61
All interest-earning assets.......... 7.49 7.41 7.43 7.70
Weighted average rate paid on:
Passbook accounts.................... 2.98 2.43 2.75 3.33
Demand and NOW accounts.............. 2.95 2.90 3.36 3.81
Certificate accounts................. 5.50 5.71 5.47 5.53
FHLB advances........................ 5.70 5.75 5.87 6.25
Other borrowings..................... 5.14 5.34 -- 0.30
All interest-beraing liabilities..... 4.86 4.88 4.74 4.95
Interest rate spread (spread between
weighted average rates on all
interest-earnings assets and all
interest-bearing liabilities......... 2.63 2.53 2.69 2.75
Net interest margin (net interest
income as a percentage of average
interest-earning assets)............. 3.16 3.06 3.33 3.05
(1) Includes loans available for sale.
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.
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<TABLE>
1998 Compared to Year 1997 Compared to Year
Ended June 30, 1997 Ended June 30, 1996
Increase (Decrease) Due to Increase (Decrease) Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans Receivable
(1).............. ($804) $8,849 ($185) $7,860 ($834) ($432) $9 ($1,257)
Investment
securities....... 300 (161) (15) 123 (243) 2,415 (424) 1,748
FHLB stock........ (13) 28 (1) 14 44 13 3 60
Interest-bearing
deposits......... 50 (515) (35) (500) 189 30 11 230
----- ------ ----- ------ ------ ------ ----- ------
Total net change
in income on
interest earning
assets.......... (467) 8,201 (236) 7,497 (844) 2,026 (401) 781
----- ------ ----- ------ ------ ------ ----- ------
Interest-bearing
liabilities:
Passbook accounts.. (157) 12 (1) (146) (304) (92) 17 (379)
Demand and NOW (510) 286 (39) (263) (501) (3) -- (504)
accounts..........
Certificate accounts. 761 2,157 91 3,009 (178) 168 (2) (12)
FHLB advances...... (8) 3,351 (64) 3,279 (77) (816) 50 (843)
Other borrowings... -- -- 11 11 (3) (3) 3 (3)
----- ------ ----- ------ ------ ------ ----- ------
Total net change
in expense on
interest-bearing
liabilities ....... 86 5,806 (3) 5,890 (1,063) (746) 68 1,741
----- ------ ----- ------ ------ ------ ----- ------
Net change in net
interest income...... ($553) $2,395 ($234) $1,607 $219 $2,772 ($469) $2,522
===== ====== ====== ====== ==== ====== ===== ======
(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.
39
</TABLE>
<PAGE>
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
SFAS No.130. "Reporting Comprehensive Income." Comprehensive income is
comprised of net income and all changes to stockholder's equity, except those
due to investments by owners (changes in paid-in capital) and distributions to
owners (dividends). This statement requires that all components of
comprehensive income and total comprehensive income be reported in the
financial statements. The Company will adopt this statement in the year ended
June 30, 1999. Management does not believe that the adoption of this statement
will have a material impact on the financial position or results of operations
of the Company.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." This statement requires public companies to report certain
information about operating segments as well as certain information about
products, services and major customer in their financial statements. The
Company will adopt this statement in the year ended June 30, 1999. Management
does not believe that the adoption of this statement will have a material
impact on the financial position or results of operations of the Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes new accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. The Company must adopt this statement in the year ended June 30,
2000. Management will evaluate the impact of SFAS 133, if any, on its
consolidated financial reporting during fiscal 1999.
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP which generally
requires the measurement of financial position and operating results in terms
of historical dollars, without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation is reflected in the increased cost of the Savings Bank's operations.
Unlike most industrial companies, virtually all the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services. In the current interest rate environment, liquidity and
maturity structure of the Savings Bank's assets and liabilities are critical
to the maintenance of performance levels.
SUBSEQUENT EVENTS
On August 17, 1998, the Corporation announced the completion of a 5%
stock repurchase program in which 228,711 shares were repurchased at an
average price of $20.32.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required herein is incorporated by reference from pages
13 through 38 of the Corporation's Annual Report.
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.
40
<PAGE>
<PAGE>
EXECUTIVE OFFICERS OF THE CORPORATION AND SAVINGS BANK
Age at Position
June 30, ---------------------------------------------
Name 1998 Corporation Savings Bank
---- ---- ----------- ------------
Craig G. Blunden 50 President, Chief President, Chief
Executive Officer Executive Officer and
and Director Director
Brian M. Riley 33 Chief Financial Senior Vice President
Office and Chief Financial
Officer
Robert G. Schrader 58 Secretary Executive Vice
President, Chief
Operating Officer
Secretary and Director
Donald L. Blanchard 47 N/A Senior Vice President,
Retail Banking
Lil Brunner 44 N/A Senior Vice President
Chief Information
Officer
Richard L. Gale 46 N/A Senior Vice President,
Mortgage Banking
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.
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
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this Item is incorporated by reference to
the information under "Excutive 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, icnluding 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) Report of Independent Accountants
Consolidated Financial Statements
(a)Consolidated Balance Sheets, June 30, 1998 and 1997
(b)Consolidated Statement of Operations For the Years
Ended June 30, 1998, 1997 and 1996
(c)Consolidated Statement of Stockholders' Equity For
the Years Ended June 30, 1998, 1997 and 1996
(d)Consolidated Statement of Cash Flows For the Years
Ended June 30, 1998, 1997 and 1996
(e)Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have been
omitted as the required information is inapplicable.
52
<PAGE>
<PAGE>
(3) Exhibits
3.1 Certificate of Incorporation of Provident Financial
Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to
the Corporation's Registration Statement on Form S-1 (File
No. 333-2230))
3.2 Bylaws of Provident Financial Holdings, Inc. (Incorporated
by reference to Exhibit 3.2 to the Corporation's
Registration Statement on Form S-1 (File No. 333-2230))
10.1 Employment Agreement with Craig G. Blunden (Incorporated by
reference to Exhibit 10.1 to the Corporation's Annual Report
on Form 10-K for the Year Ended June 30, 1997)
10.2 Post-Retirement Compensation Agreement with Craig G. Blunden
(Incorporated by reference to Exhibit 10.2 to the
Corporation's Annual Report on Form 10-K for the Year Ended
June 30, 1997)
10.3 Severance Agreement with Robert G. Schrader (Incorporated by
reference to Exhibit 10.3 to the Corporation's Annual Report
on Form 10-K for the Year Ended June 30, 1996)
10.4 1996 Stock Option Plan (incorporated by reference to Exhibit
A to the Corporation's proxy statement dated December 12,
1996)
10.5 1996 Management Recognition Plan (incorporated by reference
to Exhibit B to the Corporation's proxy statement dated
December 12, 1996)
10.6 Severance Agreement Richard Gale
10.7 Severance Agreement with Brian Riley
10.8 Severance Agreement with Donald Blanchard
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, 1998.
53
<PAGE>
<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, 1998 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, 1998
- ----------------------------- Executive Officer and
Craig G. Blunden Director (Principal
Executive Officer)
/s/Brian M. Riley Chief Financial Officer September 25, 1998
- ----------------------------- (Principal Financial
Brian M. Riley and Accounting Officer)
/s/Robert G. Schrader Director September 25, 1998
- -----------------------------
Robert G. Schrader
/s/Bruce W. Bennett Director September 25, 1998
- -----------------------------
Bruce W. Bennett
/s/Debbi H. Guthrie Director September 25, 1998
- -----------------------------
Debbi H. Guthrie
/s/Roy H. Taylor Director September 25, 1998
- -----------------------------
Roy H. Taylor
/s/William E. Thomas Director September 25, 1998
- -----------------------------
William E. Thomas
<PAGE>
<PAGE>
EXHIBIT 10.6
Severance Agreement with Richard Gale
<PAGE>
<PAGE>
FORM OF SEVERANCE AGREEMENT FOR CERTAIN OFFICERS
Agreement
THIS AGREEMENT is made effective as of June 28, 1998 by and between
PROVIDENT SAVINGS BANK, F.S.B. (the "Bank"); PROVIDENT FINANCIAL HOLDINGS,
INC. ("Company"); and Richard Gale (the "Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive serves in the position of Senior Vice President, a
position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twelve (12) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional
year. The Board will conduct a performance evaluation of the Executive for
purposes of determining whether to extend the Agreement, and the results
thereof shall be included in the minutes of the Board's meeting.
2. Payments to Executive Upon Change in Control
(a) Upon the occurrence of a Change in Control (as herein defined)
followed within twelve (12) months of the effective date of a Change in
Control by the voluntary or involuntary termination of Executive's employment,
other than for Cause, as defined in Section 2(c) hereof, the provisions of
Section 3 shall apply. For purposes of this Agreement, "voluntary
termination" shall be limited to the circumstances in which the Executive
elects to voluntarily terminate his employment within twelve (12) months of
the effective date of a Change in Control following any demotion, loss of
title, office or significant authority, reduction in his annual compensation
or benefits (other than a reduction affecting the Bank's personnel generally),
or relocation of his principal place of employment by more than thirty-five
(35) miles from its location immediately prior to the Change in Control.
(b) A "Change in Control" of the Company or the Bank shall be deemed to
occur if and when (a) an offeror other than the Company purchases shares of
the common stock of the Company or the Bank pursuant to a tender or exchange
offer for such shares, (b) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of securities of the Company or the
Bank representing 25% or more of the combined voting power of the Company's
then outstanding securities, (c) the membership of the board of directors of
the Company or the Bank changes as the result of a contested election, such
that individuals who were directors at the beginning of any twenty-four (24)
month period (whether commencing before or after the date of adoption of this
Plan) do not constitute a majority of the Board at the end of such period, or
(d) shareholders of the Company or the Bank approve a merger, consolidation,
sale or disposition of all or substantially all of the Company's or the Bank's
assets, or a plan of partial or complete liquidation.
<PAGE>
<PAGE>
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of the Executive's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order, or
any material breach of any material provision of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards generally prevailing in the savings institution industry.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying Termination for Cause and specifying the particulars thereof in
detail. The Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of the
Executive's employment, other than for Termination for Cause, the Bank shall
be obligated to pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay, a sum equal to two (2) times Executive's then current base
annual salary in a lump sum no later than thirty (30) days after the date of
his termination.
(b) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the Executive's voluntary or involuntary termination of
employment, other than for Termination for Cause, the Bank shall cause to be
continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for the Executive prior to
his severance. Such coverage shall cease upon expiration of twelve (12)
months from the date of the Executive's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to the
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Internal Revenue Code of 1986, as amended,
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
the Executive's "base amount" under Section 280G(b)(3) of the Code.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
(e) As a condition of the receipt of any payments or benefits under this
Section 3, Executive shall in writing release the Bank, the Company or any
successors thereto from any or all claims or causes of action relating to
Executive's termination of employment.
4. Effect on Prior Agreements and Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive,
except that this Agreement shall not affect or operate to reduce any benefit
or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
-2-
<PAGE>
<PAGE>
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Bank and their respective successors and assigns.
6. Modification and Waiver
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
7. Required Provisions
(a) The Bank may terminate the Executive's employment at any time, but
any termination by the Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in
Section 2(c) herein.
(b) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay the Executive all or part of the compensation withheld
while its contract obligations were suspended and (ii) reinstate (in whole or
in part) any of its obligations that were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by
the Director of the Office of Thrift Supervision (the "Director") or his or
her designee at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA and (ii) by the Director, or his or her designee at the time the Director
or such designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in
an unsafe
-3-
<PAGE>
<PAGE>
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
9. Headings for Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of California, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within fifty (50) miles from the location of the Bank, in accordance with the
rules of the American Arbitration Bank then in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
12. Payment of Legal Fees
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement.
13. Successor to the Bank or the Company
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent
that the Bank or the Company would be required to perform if no such
succession or assignment had taken place.
-4-
<PAGE>
<PAGE>
14. Signatures
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed by a duly authorized officer, and Executive has signed this
Agreement, on the day and date first written above.
ATTEST: PROVIDENT SAVINGS BANK, F.S.B.
By: /s/ Craig G. Blunden
- ---------------------------- ----------------------------------
ATTEST: PROVIDENT FINANCIAL HOLDINGS, INC.
By: /s/ Craig G. Blunden
- ---------------------------- ----------------------------------
WITNESS:
By: /s/ Richard L. Gale
- ---------------------------- ----------------------------------
Executive
<PAGE>
<PAGE>
<PAGE>
EXHIBIT 10.7
Severance Agreement with Brian Riley
<PAGE>
<PAGE>
FORM OF SEVERANCE AGREEMENT FOR CERTAIN OFFICERS
Agreement
THIS AGREEMENT is made effective as of June 2, 1998 by and between
PROVIDENT SAVINGS BANK, F.S.B. (the "Bank"); PROVIDENT FINANCIAL HOLDINGS,
INC. ("Company"); and Brian Riley (the "Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive serves in the position of Senior Vice President, a
position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twelve (12) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional
year. The Board will conduct a performance evaluation of the Executive for
purposes of determining whether to extend the Agreement, and the results
thereof shall be included in the minutes of the Board's meeting.
2. Payments to Executive Upon Change in Control
(a) Upon the occurrence of a Change in Control (as herein defined)
followed within twelve (12) months of the effective date of a Change in
Control by the voluntary or involuntary termination of Executive's employment,
other than for Cause, as defined in Section 2(c) hereof, the provisions of
Section 3 shall apply. For purposes of this Agreement, "voluntary
termination" shall be limited to the circumstances in which the Executive
elects to voluntarily terminate his employment within twelve (12) months of
the effective date of a Change in Control following any demotion, loss of
title, office or significant authority, reduction in his annual compensation
or benefits (other than a reduction affecting the Bank's personnel generally),
or relocation of his principal place of employment by more than thirty-five
(35) miles from its location immediately prior to the Change in Control.
(b) A "Change in Control" of the Company or the Bank shall be deemed to
occur if and when (a) an offeror other than the Company purchases shares of
the common stock of the Company or the Bank pursuant to a tender or exchange
offer for such shares, (b) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of securities of the Company or the
Bank representing 25% or more of the combined voting power of the Company's
then outstanding securities, (c) the membership of the board of directors of
the Company or the Bank changes as the result of a contested election, such
that individuals who were directors at the beginning of any twenty-four (24)
month period (whether commencing before or after the date of adoption of this
Plan) do not constitute a majority of the Board at the end of such period, or
(d) shareholders of the Company or the Bank approve a merger, consolidation,
sale or disposition of all or substantially all of the Company's or the Bank's
assets, or a plan of partial or complete liquidation.
<PAGE>
<PAGE>
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of the Executive's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order, or
any material breach of any material provision of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards generally prevailing in the savings institution industry.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying Termination for Cause and specifying the particulars thereof in
detail. The Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of the
Executive's employment, other than for Termination for Cause, the Bank shall
be obligated to pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay, a sum equal to two (2) times Executive's then current base
annual salary in a lump sum no later than thirty (30) days after the date of
his termination.
(b) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the Executive's voluntary or involuntary termination of
employment, other than for Termination for Cause, the Bank shall cause to be
continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for the Executive prior to
his severance. Such coverage shall cease upon expiration of twelve (12)
months from the date of the Executive's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to the
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Internal Revenue Code of 1986, as amended,
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
the Executive's "base amount" under Section 280G(b)(3) of the Code.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
(e) As a condition of the receipt of any payments or benefits under this
Section 3, Executive shall in writing release the Bank, the Company or any
successors thereto from any or all claims or causes of action relating to
Executive's termination of employment.
4. Effect on Prior Agreements and Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive,
except that this Agreement shall not affect or operate to reduce any benefit
or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
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<PAGE>
<PAGE>
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Bank and their respective successors and assigns.
6. Modification and Waiver
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
7. Required Provisions
(a) The Bank may terminate the Executive's employment at any time, but
any termination by the Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in
Section 2(c) herein.
(b) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay the Executive all or part of the compensation withheld
while its contract obligations were suspended and (ii) reinstate (in whole or
in part) any of its obligations that were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by
the Director of the Office of Thrift Supervision (the "Director") or his or
her designee at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA and (ii) by the Director, or his or her designee at the time the Director
or such designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in
an unsafe
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<PAGE>
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
9. Headings for Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of California, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within fifty (50) miles from the location of the Bank, in accordance with the
rules of the American Arbitration Bank then in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
12. Payment of Legal Fees
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement.
13. Successor to the Bank or the Company
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent
that the Bank or the Company would be required to perform if no such
succession or assignment had taken place.
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<PAGE>
<PAGE>
14. Signatures
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed by a duly authorized officer, and Executive has signed this
Agreement, on the day and date first written above.
ATTEST: PROVIDENT SAVINGS BANK, F.S.B.
By: /s/ Craig G. Blunden
- ---------------------------- ----------------------------------
ATTEST: PROVIDENT FINANCIAL HOLDINGS, INC.
By: /s/ Craig G. Blunden
- ---------------------------- ----------------------------------
WITNESS:
By: /s/ Brian M. Riley
- ---------------------------- ----------------------------------
Executive
<PAGE>
<PAGE>
EXHIBIT 10.8
Severance Agreement with Donald Blanchard
<PAGE>
<PAGE>
FORM OF SEVERANCE AGREEMENT FOR CERTAIN OFFICERS
Agreement
THIS AGREEMENT is made effective as of June 28, 1998 by and between
PROVIDENT SAVINGS BANK, F.S.B. (the "Bank"); PROVIDENT FINANCIAL HOLDINGS,
INC. ("Company"); and Donald Blanchard (the "Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive serves in the position of Senior Vice President, a
position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twelve (12) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional
year. The Board will conduct a performance evaluation of the Executive for
purposes of determining whether to extend the Agreement, and the results
thereof shall be included in the minutes of the Board's meeting.
2. Payments to Executive Upon Change in Control
(a) Upon the occurrence of a Change in Control (as herein defined)
followed within twelve (12) months of the effective date of a Change in
Control by the voluntary or involuntary termination of Executive's employment,
other than for Cause, as defined in Section 2(c) hereof, the provisions of
Section 3 shall apply. For purposes of this Agreement, "voluntary
termination" shall be limited to the circumstances in which the Executive
elects to voluntarily terminate his employment within twelve (12) months of
the effective date of a Change in Control following any demotion, loss of
title, office or significant authority, reduction in his annual compensation
or benefits (other than a reduction affecting the Bank's personnel generally),
or relocation of his principal place of employment by more than thirty-five
(35) miles from its location immediately prior to the Change in Control.
(b) A "Change in Control" of the Company or the Bank shall be deemed to
occur if and when (a) an offeror other than the Company purchases shares of
the common stock of the Company or the Bank pursuant to a tender or exchange
offer for such shares, (b) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) is or becomes the
beneficial owner, directly or indirectly, of securities of the Company or the
Bank representing 25% or more of the combined voting power of the Company's
then outstanding securities, (c) the membership of the board of directors of
the Company or the Bank changes as the result of a contested election, such
that individuals who were directors at the beginning of any twenty-four (24)
month period (whether commencing before or after the date of adoption of this
Plan) do not constitute a majority of the Board at the end of such period, or
(d) shareholders of the Company or the Bank approve a merger, consolidation,
sale or disposition of all or substantially all of the Company's or the Bank's
assets, or a plan of partial or complete liquidation.
<PAGE>
<PAGE>
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of the Executive's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty involving
personal profit, willful violation of any law, rule, regulation (other than
traffic violations or similar offenses) or final cease and desist order, or
any material breach of any material provision of this Agreement. In
determining incompetence, the acts or omissions shall be measured against
standards generally prevailing in the savings institution industry.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct
justifying Termination for Cause and specifying the particulars thereof in
detail. The Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the voluntary or involuntary termination of the
Executive's employment, other than for Termination for Cause, the Bank shall
be obligated to pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay, a sum equal to two (2) times Executive's then current base
annual salary in a lump sum no later than thirty (30) days after the date of
his termination.
(b) Upon the occurrence of a Change in Control during the term of this
Agreement, followed within twelve (12) months of the effective date of a
Change in Control by the Executive's voluntary or involuntary termination of
employment, other than for Termination for Cause, the Bank shall cause to be
continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for the Executive prior to
his severance. Such coverage shall cease upon expiration of twelve (12)
months from the date of the Executive's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to the
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Internal Revenue Code of 1986, as amended,
such payments or benefits shall be payable or provided to Executive over the
minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
the Executive's "base amount" under Section 280G(b)(3) of the Code.
(d) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
(e) As a condition of the receipt of any payments or benefits under this
Section 3, Executive shall in writing release the Bank, the Company or any
successors thereto from any or all claims or causes of action relating to
Executive's termination of employment.
4. Effect on Prior Agreements and Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive,
except that this Agreement shall not affect or operate to reduce any benefit
or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
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<PAGE>
<PAGE>
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Company, the Bank and their respective successors and assigns.
6. Modification and Waiver
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
7. Required Provisions
(a) The Bank may terminate the Executive's employment at any time, but
any termination by the Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause as defined in
Section 2(c) herein.
(b) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay the Executive all or part of the compensation withheld
while its contract obligations were suspended and (ii) reinstate (in whole or
in part) any of its obligations that were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by
the Director of the Office of Thrift Supervision (the "Director") or his or
her designee at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
FDIA and (ii) by the Director, or his or her designee at the time the Director
or such designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in
an unsafe
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<PAGE>
<PAGE>
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
9. Headings for Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of California, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within fifty (50) miles from the location of the Bank, in accordance with the
rules of the American Arbitration Bank then in effect.
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
12. Payment of Legal Fees
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement.
13. Successor to the Bank or the Company
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent
that the Bank or the Company would be required to perform if no such
succession or assignment had taken place.
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<PAGE>
<PAGE>
14. Signatures
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed by a duly authorized officer, and Executive has signed this
Agreement, on the day and date first written above.
ATTEST: PROVIDENT SAVINGS BANK, F.S.B.
By: /s/ Craig G. Blunden
- ---------------------------- ----------------------------------
ATTEST: PROVIDENT FINANCIAL HOLDINGS, INC.
By: /s/ Craig G. Blunden
- ---------------------------- ----------------------------------
WITNESS:
By: /s/ Donald Blanchard
- ---------------------------- ----------------------------------
Executive
<PAGE>
<PAGE>
EXHIBIT 13
Annual Report to Stockholders
<PAGE>
<PAGE>
CORPORATE VALUE
In today's marketplace, "community bank" is an often-overused cliche that is
long on ideals and short on action. We at Provident wish to dispel the myth
that ideas and actions are incompatible. We remain committed to the belief
that our communities are better served when decisions about financial products
and services are made locally by people who know the markets. Our corporate
values reinforce this philosophy and challenge us to empower our ideas with
action.
At Provident, we aspire to...
1. Be the preeminent financial services provider within our market region
2. Develop effective distribution channels for our products and services
3. Be a customer focused business that seeks to provide financial solutions
4. Leverage the use of technology to achieve the best ROI that supports our
operating culture
5. Understand that people drive the bottom line, therefore we will
o Seek only the best people
o Provide resources that guarantee excellence in products, service and
operations
o Empower the talent to get it done!
TABLE OF CONTENTS
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Message From the Chairman 2
Financial Highlights 4
Management's Discussion and Analysis 6
Report of Independent Accountants 12
Consolidated Financial Statements 13
Notes to Consolidated Financial Statements 18
Shareholder Information 39
Market Information 39
Corporate Profile 39
Board of Directors and Senior Officers 40
Provident Bank and ProFed Mortgage Locations INSIDE
BACK COVER
1
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<PAGE>
MESSAGE FROM THE CHAIRMAN
DEAR FELLOW SHAREHOLDERS,
By many measures, fiscal 1998 was a true success. Net income for the year
was $5.0 million, up from a SAIF assessment adjusted net income of $3.8
million in fiscal 1997 ($1.9 million including the SAIF assessment). This
represents an increase of over 31%. These results were achieved in a year in
which we added significant growth. Total assets reached $816 million by
year-end, an increase of $200 million, or 33%, from the prior year-end. As a
result of our accelerated growth and consistent performance, our return on
equity more than doubled to 5.98% while our return on assets improved to
0.71%. We remain committed to profitable growth and continued improvement in
our ROE.
Mortgage originations accelerated during fiscal 1998 as low interest
rates and a positive economic environment combined to produce the best lending
conditions in years. Over $467 million in mortgage loans were originated for
sale during fiscal 1998. Gains from the sale of these loans increased to $4.5
million, up from $3.6 million in fiscal 1997. Our loan portfolio increased by
$103 million, or 20% during fiscal 1998. Despite this significant growth, net
loan losses hit a four-year low of $479,000 and non-performing assets of $6.4
million represented just 0.78% of total assets at June 30, 1998. The quality
of our loan portfolio reflects the continued improvement within the Inland
Empire's economic condition.
Recognizing the value of repurchasing our own shares, we completed a five
percent stock repurchase in January 1998 and announced regulatory approval for
a second share repurchase program in July 1998. The second repurchase program
was completed one month later as 228,711 shares were repurchased at an average
price of $20.32 per share. We believe that our price to book multiple remains
one of the lowest in the industry and worthy of attention. Our stock price
responded favorable to the share repurchases as it reached a new high of
$24.25 in March before settling to $20.75 at year-end. Our stock provided a
24.8% return in fiscal 1998 to those investors who held shares for the entire
year.
2
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<PAGE>
Perhaps the most significant trend of fiscal 1998 was the frenzied pace
of bank acquisitions. More than five of our strongest competitors were either
merged out of existence or announced merger plans during the year. This
phenomenon provides us with an incredible opportunity to emerge as the
dominant, independent financial services provider within the Inland Empire. We
recognize that this position requires us to assume a leading role in the
delivery of products and services. To prepare, we are in the process of
installing new state of the art data systems that will enable us to offer
technology based solutions to our clients for many years to come. We
anticipate that these core systems will be fully functional by March 1999.
In addition to the challenge of converting our data systems, this fiscal
1999 will be devoted to making sure we stay on track with Year 2000
preparations. A significant component in our Year 2000 preparedness is the
replacement of our core data systems. Separately, we are in constant
communication with "mission critical" vendors to ensure that they too will be
prepared for this monumental date. We certainly expect to be fully Year 2000
compliant within our established time line. But we must ultimately rely on the
preparations of others within financial payment system including the United
States government.
With the number of conflicting priorities this next year, we expect that
asset growth will take a lesser role in fiscal 1999 than it did in fiscal
1998. We are carefully considering the impact of any potential expansion
opportunities on our overall objectives and strategic priorities during the
coming year. Nevertheless, we look forward to another quality year as we
continue to become the preeminent financial services provider within the
Inland Empire.
Sincerely,
Craig G. Blunden
Chairman, President and
Chief Executive Officer
3
<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables set forth information concerning the consolidated
financial position and results of operations of the Corporation and its
subsidiary at the dates and for the periods indicated.
At or for the year ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------
(In Thousands)
FINANCIAL CONDITION DATA:
Total assets $816,205 $615,500 $584,847 $567,186 $580,336
Loans held for investment,
net 620,128 517,147 452,945 471,543 420,159
Loans available for sale,
net 67,248 19,984 49,612 34,489 83,049
Cash and overnight deposits 23,433 20,111 30,831 11,433 19,909
Investment securities 75,554 34,406 27,118 20,067 26,301
Deposits 583,025 508,759 479,374 486,585 471,787
Borrowings 132,114 6,828 8,578 35,063 56,153
Stockholders' equity (1) 86,650 85,447 85,970 37,323 41,315
-------------------------------------------------
OPERATING DATA:
Interest income $ 50,096 $ 42,599 $ 41,817 $ 36,020 $ 36,197
Interest expense 29,417 23,528 25,269 22,491 19,532
Net interest income 20,679 19,071 16,548 13,529 16,665
Provision for loan losses 1,200 1,254 2,261 4,787 2,033
Net interest income after
provision 19,479 17,817 14,287 8,742 14,632
Loan servicing and other fees 3,035 2,738 2,442 2,476 3,072
Gains from sale of loans 4,491 3,597 4,753 701 1,246
Gain on bulk sale of servicing
rights -- -- -- -- 2,052
Other non-interest income 1,619 1,273 2,256 1,308 1,141
Real estate operations, net 196 (11) (101) (1,600) (366)
Operating expenses 20,095 22,313 19,499 17,354 23,758
Income (loss) before income
taxes 8,725 3,101 4,138 (5,727) (1,981)
Provision (benefit) for
income taxes 3,705 1,160 1,332 (1,735) (648)
Net income (loss) $ 5,020 $ 1,941 $ 2,806 $ (3,992) $ (1,333)
- -----------------------------------------------------------------------------
Basic earnings per share $ 1.14 $ 0.41 N/A N/A N/A
=============================================================================
Diluted earnings per share $ 1.11 $ 0.41 N/A N/A N/A
=============================================================================
- -----------------
(1) For years prior to 1996, amount represents retained earnings,
substantially restricted.
4
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<PAGE>
FINANCIAL HIGHLIGHTS
At or For the Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------
KEY OPERATING RATIOS:
PERFORMANCE RATIOS
Return (loss) on assets(1) 0.71% 0.32% 0.50% (0.72)% (0.23)%
Return (loss) on shareholders'
equity(2) 5.98 2.26 6.98 (9.81) (3.08)
Interest rate spread(3) 2.53 2.69 2.75 2.31 2.71
Net interest margin(4) 3.06 3.33 3.05 2.55 2.99
Average interest-earning
assets to average interest-
bearing liabilities 112.13 115.44 106.32 105.60 108.05
Operating and administrative
expenses as a percent of
average total assets 2.86 3.73 3.46 3.13 4.09
REGULATORY CAPITAL RATIOS
Tangible capital 8.09 9.89 10.41 6.19 6.65
Core capital 8.09 9.89 10.41 6.19 6.69
Risk-based capital 14.12 16.12 16.49 11.25 12.68
ASSET QUALITY RATIOS
Nonaccrual and 90 days or
more past due loans as a
percent of loans held for
investment, net 0.31 1.21 0.98 0.54 1.08
Nonperforming assets as a
percent of total assets 0.78 1.44 1.22 1.65 1.49
Allowance for loan losses
as a percent of gross
loans held for investment 0.98 1.04 1.18 1.06 0.78
Allowance for loan losses
as a percent of
nonperforming loans 320.19 87.45 123.43 198.79 73.62
Net charge-offs (recoveries)
to average outstanding
loans 0.10 0.25 0.38 0.62 0.39
- -----------------
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) divided by average stockholders' 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.
5
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<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the 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 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) increasing assets in
order to leverage 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 $615.5 million at June 30, 1997 to $816.2 million
at June 30, 1998 primarily as a result of growth in the loan and investment
securities portfolios. Loans held for investment increased $103.0 million from
$517.1million at June 30, 1997 to $620.1 million at June 30, 1998. 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 believes that this strategy will help leverage its
capital base through high quality loans which will produce a higher return on
assets and equity. Loans held for sale increased from $20.0 million at June
30, 1997 to $67.2 million at June 30, 1998. The amount of loans held for sale
is largely dependent on timing of loan fundings, loan commitment expirations,
and loan sale settlements.
6
<PAGE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
As part of the leveraging strategy, the Corporation purchased investment
securities when they could be profitably matched against borrowings. This
activity increased the investment securities held to maturity by $40.4 million
to $74.0 million at June 30, 1998.
Total liabilities increased from $530.1 million at June 30, 1997 to $729.6
million at June 30, 1998 as a result of retail deposit growth and an increase
in Federal Home Loan Bank advances. Deposits increased from $508.8 million at
June 30, 1997 to $583.0 million at June 30, 1998. During 1998, the Savings
Bank continued its emphasis on building new client relationships, particularly
in the low cost checking account area. FHLB advances increased from $6.8
million at June 30, 1997 to $132.1 million at June 30, 1998 as the Savings
Bank utilized FHLB advances to finance a portion of its loan and investment
security growth.
Total stockholders' equity was $86.7 million at June 30, 1998 compared to
$85.4 million at June 30, 1997. The Corporation repurchased 251,000 shares for
a total cost of $5.0 million, which offset the $5.0 million increase in
retained earnings. The Corporation's book value per share increased from
$17.37 at June 30, 1997 to $17.85 at June 30, 1998.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1998
GENERAL. The Corporation reported net earnings of $5.0 million, or $1.11 per
diluted share, for the year ended June 30, 1998 as compared to $1.9 million,
or $0.41 per diluted share, for the year ended June 30, 1997. The increase in
operating results between fiscal 1997 and fiscal 1998 was due primarily to a
one-time $3.2 million SAIF assessment charged in fiscal 1997.
NET INTEREST INCOME. Net interest income increased by $1.6 million, or 8.4%,
from $19.1 million in fiscal 1997 to $20.7 million in fiscal 1998. This
increase resulted principally from the growth of interest earning assets and
interest earning liabilities.
INTEREST INCOME. The average yield on interest-earning assets for 1998, at
7.41%, remained on a par with the average yield for 1997. Total interest
income increased by $7.5 million in 1998 due to the increase in loans
receivable. The yield on loans receivable decreased 16 basis points to 7.55%,
reflecting the general decrease in interest rates during the year. Interest
income on investment securities increased slightly in fiscal 1998 to $3.3
million from $3.1 million in 1997. The average balance in investment
securities declined from $55.2 million in 1997 to $52.4 million in 1998 due to
purchases of treasury stock while the yield increased from 5.7% to 6.2% as the
maturities on renewing securities were lengthened.
INTEREST EXPENSE. Interest expense increased on both deposits and FHLB
advances reflecting the growth in the balance sheet of the Corporation.
Average total deposits increased by $48.4 million to $538.1 million during
fiscal 1998, primarily in certificate accounts, which grew by $39.4 million to
$368.5 million. The average cost of passbook accounts declined 32 basis points
to 2.43% in 1998, along with demand and NOW accounts which decreased 46 basis
points to 2.90%. The average cost of certificate accounts increased by 24
basis points to 5.71% during the year, reflecting competitive forces within
the marketplace and special offerings to promote growth in the portfolio.
Average FHLB advances increased from $7.1 million in 1997 to $64.2 million in
1998 in support of the growth in asset, while the average cost declined from
5.87% to 5.75%.
PROVISIONS FOR LOAN LOSSES. Provisions for credit losses declined slightly in
fiscal 1998 to $1.2 million as compared to $1.3 million in fiscal 1997.
Charge-offs declined in one-to-four family and multifamily properties while
commercial real estate and consumer loans showed increases. The allowance for
loan losses ended fiscal 1998 at $6.2 million, compared to $5.5 million in
1997. Because of growth in the loan portfolio during fiscal 1998 the ratio of
the allowance for loan losses as a percent of total loans outstanding declined
from 1.04% in 1997 to 0.98% in 1998. The allowance for loan losses as a
percent of nonperforming loans at the end of the period was 320.2% compared to
87.5% at the end of 1997.
NON-INTEREST INCOME. Total non-interest income increased by 20.2%, from $7.6
million in 1997 to $9.1 million in 1998 primarily as a result of higher 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
increased from $343 million in 1997 to $425 million in 1998.
7
<PAGE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
NON-INTEREST EXPENSE. Total non-interest expense decreased by $2.4 million, or
10.9% in 1998 because of the one-time SAIF assessment of $3.2 million in 1997.
Salaries and employee benefits increased by $1.2 million, or 10.5%, to $12.5
million on higher mortgage production compensation and the adoption of
additional benefit programs.
INCOME TAXES. The provision for income taxes was $3.7 million for fiscal 1998
(for an effective tax rate of 42.5%) compared to $1.2 million in 1997 (for an
effective tax rate of 37.4%). 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 this future
benefit.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
GENERAL. The Company reported net earnings of $1.9 million for the year ended
June 30, 1997 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 credit 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.
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.
8
<PAGE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
ASSET AND LIABILITY MANAGEMENT
The principal financial objective of the Corporation's interest rate risk
management function is to achieve long-term profitability while limiting its
exposure to fluctuating interest rates. The Corporation has sought to reduce
exposure of its earnings to changes in market interest rates by managing the
mismatch between asset and liability maturities and interest rates. The
principal element in achieving this objective is to increase the interest-rate
sensitivity of the Corporation'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.
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.
The following table is provided by the OTS and sets forth as of June 30, 1998
the estimated changes in NPV based on the indicated interest rate
environments. In general, if interest rates increase, the NPV of the Savings
Bank and its expected future net interest income would both decrease.
Conversely, if interest rates decrease, the NPV of the Savings Bank and its
expected future net interest income would both increase. No effect has been
given to any steps that management of the Savings Bank may take to counter the
effects of interest rate movements presented in the table.
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
- ------------------------------------------------------------------------------
Basis Point ("bp")
Change in
Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(3)
- ------------------------------------------------------------------------------
(Dollars in Thousands)
+400 bp $ 61,225 $(32,972) (35)% 8.01% (335) bp
+300 bp 73,289 (20,908) (22) 9.35 (201) bp
+200 bp 83,656 (10,541) (11) 10.43 (93) bp
+100 bp 90,963 (3,233) (3) 11.13 (23) bp
0 bp 94,196 - - 11.36 -
-100 bp 95,006 809 1 11.34 (2) bp
-200 bp 96,042 1,845 2 11.36 0 bp
-300 bp 99,837 5,641 6 11.67 31 bp
-400 bp 106,063 11,866 13 12.22 86 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, 1998 ("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.
9
PAGE
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 1998.
At At At
June 30, March 31, December 31,
1998 1998 1997
- -----------------------------------------------------------------------------
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets 11.36% 11.99% 12.43%
Exposure Measure: Post-Shock NPV Ratio 10.43 10.33 11.42
Sensitivity Measure: Change in NPV Ratio 93 bp 166 bp 101 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 Corporation'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 Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation'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, 1998,
cash (including overnight deposits) totaled $23.4 million, or 2.9% 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 $132.1 million at June 30, 1998.
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 4.0% of the
average daily balance of its net withdrawable deposits and short-term
borrowings. The Savings Bank's actual liquidity ratio at June 30, 1998 was
9.3%. 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.
10
<PAGE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The primary investing activity of the Savings Bank is the origination of
mortgage loans. During years ended June 30, 1998, 1997 and 1996, the Savings
Bank originated loans in the amounts of $707.3 million, $441.8 million and
$516.9 million, respectively. At June 30, 1998, the Savings Bank had loan
commitments totaling $44.9 million and undisbursed loans in process totaling
$7.3 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, 1998
totaled $336.6 million. Historically, the Savings Bank has been able to retain
a significant amount of its deposits as they mature. Management of the Savings
Bank believes it has adequate resources to fund all loan commitments by
deposits and FHLB advances and that it can adjust the offering rates of
savings certificates to retain deposits in changing interest rate
environments.
The Savings Bank is required to maintain specific amounts of capital pursuant
to OTS requirements. As of June 30, 1998, the Savings Bank was in compliance
with all regulatory capital requirements which were effective as of such date
with tier I leverage, tier I capital and risk-based capital ratios of 9.3%,
12.9% and 14.1%, respectively.
YEAR 2000
The Company has undertaken a major project to ensure that its internal
operating systems, as well as those of its major customers and suppliers, will
be fully capable of processing transactions in the Year 2000 and beyond. The
initial phase of the project was to assess and identify all internal business
processes requiring modification and to develop comprehensive renovation plans
as needed. This phase was largely completed in late 1997. The second phase,
expected to be accomplished by the end of 1998, will be to execute those
renovation plans and begin testing systems by simulating Year 2000 data
conditions. Testing and implementation is planned to be completed during the
first half of 1999.
The cost of the project primarily consists of replacement systems and the
reallocation of internal resources. The estimated cost of the project is $3.5
million, which includes approximately $2.5 million in replacement equipment
and software, $400,000 in equipment write-downs, and $200,000 in outside
project management expenses. In addition, the estimated value of internal
resources allocated to the Year 2000 project is approximately $400,000. The
replacement equipment and software will be capitalized and depreciated in
accordance with the Company's normal accounting policies. Beyond the costs
described, it is not expected that the Year 2000 project will have any
material effect on the Company's results of operations, liquidity or capital
resources.
The risk of Year 2000 processing problems is not completely known. As a
participant in the domestic payment system, the Company's Year 2000
preparedness is largely dependent upon the preparedness of other participants
in the system including the United States government. The Company does rely on
third-party software vendors and service providers for many critical functions
in the conduct of its business. The focus of the Company has been to monitor
and test the Year 2000 compliance progress of its critical vendors. The
Company is developing contingency plans for its most critical vendors, as well
as its internal systems, in the event of failure in the Year 2000.
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
PROVIDENT FINANCIAL HOLDINGS, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Provident Financial Holdings, Inc. and its subsidiary at June 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, 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/ PricewaterhouseCoopers LLP
Los Angeles, CA
August 14, 1998
12
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
Provident Financial Holdings, Inc. and Subsidiary
- -----------------------------------------------------------------------------
(Dollars in Thousands) June 30,
- -----------------------------------------------------------------------------
1998 1997
ASSETS
Cash $ 20,933 $ 10,411
Overnight deposits 2,500 9,700
- -----------------------------------------------------------------------------
Total cash and cash equivalents 23,433 20,111
Investment securities - held to maturity 74,028 33,645
available for sale 1,526 761
Loans held for investment, net 620,128 517,147
Loans available for sale, net 67,248 19,984
Accrued interest receivable 4,940 3,378
Real estate available for sale, net 6,922 5,676
Federal Home Loan Bank stock 6,606 4,879
Premises and equipment, net 7,429 6,825
Prepaid expenses and other assets 3,945 3,094
- -----------------------------------------------------------------------------
Total assets $816,205 $615,500
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 10,768 $ 2,335
Interest bearing deposits 572,257 506,424
- -----------------------------------------------------------------------------
Total deposits 583,025 508,759
Borrowings 132,114 6,828
Accounts payable, accrued interest and other
liabilities 14,416 14,466
- -----------------------------------------------------------------------------
Total liabilities 729,555 530,053
- -----------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
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 4,854,125 and 4,920,215,
respectively 51 51
Additional paid-in capital 50,875 49,842
Retained earnings - substantially restricted 47,090 42,070
Treasury stock at cost (251,000 and 205,000
shares, respectively) (5,305) (3,291)
Unearned stock compensation (6,654) (3,720)
Unrealized gain on securities available for
sale, net of tax 593 495
- -----------------------------------------------------------------------------
Total stockholders' equity 86,650 85,447
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity $816,205 $615,500
=============================================================================
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Provident Financial Holdings, Inc. and Subsidiary
- ------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
- ------------------------------------------------------------------------------
1998 1997 1996
Interest income:
Loans (Note 3) $ 46,305 $ 38,445 $ 39,701
Investment securities (Note 2) 3,791 4,154 2,116
- -----------------------------------------------------------------------------
Total interest income 50,096 42,599 41,817
Interest expense:
Deposits (Note 7) 25,711 23,112 24,007
Borrowings 3,706 416 1,262
- -----------------------------------------------------------------------------
Total interest expense 29,417 23,528 25,269
- -----------------------------------------------------------------------------
Net interest income 20,679 19,071 16,548
Provision for loan losses (Note 3) 1,200 1,254 2,261
- -----------------------------------------------------------------------------
Net interest income, after provision
for loan losses 19,479 17,817 14,287
- -----------------------------------------------------------------------------
Non-interest income
Loan servicing and other fees 3,035 2,738 2,442
Gain on sale of loans, net 4,491 3,597 4,753
Life insurance proceeds 1,000
Other 1,619 1,273 1,256
- -----------------------------------------------------------------------------
Total non-interest income 9,145 7,608 9,451
- -----------------------------------------------------------------------------
Non-interest expenses
Salaries and employee benefits 12,450 11,269 11,444
Premises and occupancy 2,065 2,064 1,939
SAIF insurance premiums 329 3,954 1,293
Telephone 410 427 426
Other 4,645 4,610 4,498
- -----------------------------------------------------------------------------
Total non-interest expenses 19,899 22,324 19,600
Income (loss) before income taxes 8,725 3,101 4,138
Provision (benefit) for income taxes 3,705 1,160 1,332
- -----------------------------------------------------------------------------
Net income $ 5,020 $ 1,941 $ 2,806
=============================================================================
Basic earnings per share $ 1.14 $ 0.41 N/A
=============================================================================
Diluted earnings per share $ 1.11 $ 0.41 N/A
=============================================================================
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Provident Financial Holdings, Inc. and Subsidiary
Unrealized
Gain on
Common Stock Additional Unearned Securities
--------------- Paid-in Retained Treasury Stock Available
Shares Amount Capital Earnings Stock Compensation For Sale Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 shares
under stock-based
compensation plans 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
Net income 5,020 5,020
Purchase of treasury
stock (251,000) (4,983) (4,983)
Issuance of shares
under MRP 184,910 729 2,969 (3,698)
Release of shares
under stock-based
compensation plans 304 764 1,068
Change in unrealized
gain on securities
available for sale,
net of tax 98 98
- ---------------------------------------------------------------------------------------------------------
Balance at June 30,
1998 4,854,125 $51 $50,785 $47,090 $(5,305) $(6,654) $593 $86,650
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
15
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Provident Financial Holdings, Inc. and Subsidiary
- ------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
- ------------------------------------------------------------------------------
1998 1997 1996
Cash flows from operating activities:
Net income $ 5,020 $ 1,941 $ 2,806
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 659 1,082 1,058
Amortization of loan fees (754) (254) (112)
Provision for loan losses 1,200 1,254 2,261
Provision for losses on real estate 126 306 239
Gain on sale of loans (4,491) (3,597) (4,753)
(Decrease) increase in accounts payable
and other liabilities (49) 3,541 2,710
(Increase) decrease in prepaid expenses
and other assets (2,237) 153 (592)
Loans originated for sale (467,446) (313,382) (469,167)
Proceeds from sale of loans 424,673 346,607 458,797
Stock compensation 1,068 332
Other (1,000)
- -----------------------------------------------------------------------------
Net cash (used for) provided by
operating activities (42,231) 37,983 (7,753)
Cash flows from investing activities:
Net (increase) decrease in loans (110,187) (70,891) 13,047
Maturity of investment securities 57,502 285,034 207,104
Purchases of investment securities (98,430) (292,322) (214,155)
Purchase of Federal Home Loan Bank stock (1,727)
Proceeds from disposal of real estate 5,561 5,518 8,619
Purchases of premises and equipment, net of
proceeds from sales (1,199) (881) (609)
Other (536) 495 1,000
- -----------------------------------------------------------------------------
Net cash (used for) provided by investing
activities (149,016) (73,047) 15,006
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
Provident Financial Holdings, Inc. and Subsidiary
- ------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
- ------------------------------------------------------------------------------
1998 1997 1996
Cash flows from financing activities:
Net increase (decrease) in deposits $ 74,266 $ 29,385 $ (7,211)
Repayment of Federal Home Loan Bank
Advances (2,638,693) (1,750) (37,000)
Proceeds from Federal Home Loan Bank
Advances 2,763,979 12,500
Proceeds from issuance of capital stock 45,841
Treasury stock purchases (4,983) (3,291)
Net decrease in securities sold under
agreements to repurchase (1,985)
- -----------------------------------------------------------------------------
Net cash provided by financing
activities 194,569 24,344 12,145
- -----------------------------------------------------------------------------
Net increase (decrease) increase in
cash and cash equivalents 3,322 (10,720) 19,398
Cash and cash equivalents at beginning of
period 20,111 30,831 11,433
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 23,433 $ 20,111 $ 30,831
=============================================================================
Supplemental information:
Cash paid for interest $ 29,984 $ 23,505 $ 25,302
=============================================================================
Cash paid for income taxes $ 4,623 $ 732 $ 704
=============================================================================
Real estate acquired in settlement of
loans $ 6,932 $ 5,721 $ 3,433
=============================================================================
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
Provident Savings Bank, FSB (the Bank) converted from a federally chartered
mutual savings bank to a Federally chartered stock savings bank effective
Junea27, 1996. Provident Financial Holdings, Inc. (the Holding Company), a
Delaware corporation organized by the Bank, acquired all of the capital stock
of the Bank issued in the conversion; the transaction was recorded on a book
value basis. Any references to financial information for periods prior to June
30, 1996 refer to the Bank prior to conversion.
The following accounting policies, together with those disclosed elsewhere in
the consolidated financial statements, represent the significant accounting
policies of Provident Financial Holdings, Inc. and subsidiary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Provident
Financial Holdings Inc., and its wholly-owned subsidiary, Provident Savings
Bank, FSB (collectively, the Company). All significant intercompany balances
and transactions have been eliminated.
The Company operates primarily in one business segment -attracting customer
deposits to originate loans secured primarily by mortgages on residential real
estate. The segment includes ancillary activities related to real estate
lending such as mortgage banking and real estate development. Customer
deposits are collected substantially from Riverside and San Bernardino
Counties out of ten 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.
18
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Interest receivable represents, for the most part, the current month's
interest which will be included as a part of the borrower's next monthly loan
payment. Interest receivable is accrued only if deemed collectible. Loans
generally are deemed to be in non-accrual status when they become 90 days past
due. When a loan is placed on non-accrual status, interest accrued but not
received is reversed against income.
MORTGAGE BANKING ACTIVITIES
Loans are originated for both investment and sale in the secondary market.
Since the 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, the carrying value is allocated between the
assets transferred and the fair value of the retained servicing in determining
the amount of gain. Servicing assets and liabilities are amortized over the
estimated life of the net servicing income or loss and are assessed for
subsequent impairment.
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.
ALLOWANCE FOR LOAN LOSSES
It is the policy of the Company to provide for estimated losses on real estate
loans when any significant and permanent decline in the value of the
underlying collateral occurs. Periodic reviews are made in an attempt to
identify potential problems at an early date. Individual loans are
periodically reviewed and are classified according to their inherent risk. The
internal asset classification system used by the Company is the primary basis
by which the Company evaluates the possible loss exposure. Management's
determination of the adequacy of the allowance for losses is based on an
evaluation of the portfolio, past experience, prevailing market conditions,
and other relevant factors. The determination of the allowance for loan losses
is based on estimates that are particularly susceptible to changes in the
economic environment and market conditions. The allowance is increased by the
provision for losses charged against income and reduced by charge-offs, net of
recoveries.
IMPAIRED LOANS
The Company assesses loans individually and identifies impairment when the
accrual of interest has been discontinued, loans have been restructured or
management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered
in determining impairment include, but are not limited to, expected future
cash flows, the financial condition of the borrower and current economic
conditions. The Company measures each impaired loan based on the fair value of
its collateral and charges off those loans or portions of loans deemed
uncollectible.
19
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REAL ESTATE AVAILABLE FOR SALE
All foreclosed real estate and investment real estate is available for sale.
Real estate acquired through foreclosure is initially recorded at the lesser
of the loan balance at the time of foreclosure or the fair value of the real
estate acquired less estimated selling costs. All real estate is carried at
the lower of cost or fair value less estimated selling costs. Real estate loss
provisions are recorded when the carrying value of the property exceeds the
fair value. Costs relating to improvement of property are capitalized. Other
costs are expensed as incurred.
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
Computer equipment 3-5 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 realiability 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.
NET INCOME PER COMMON SHARE
Effective June 30, 1998, the Company adopted a new accounting standard, SFAS
No. 128,"Earnings Per Share" which replaces retroactively the presentation of
primary earnings per share (EPS) and fully diluted EPS. Basic EPS represents
net income divided by the weighted average common shares outstanding during
the period excluding any potential dilutive effects. Diluted EPS gives effect
to all potential issuances of common stock that would have caused basic EPS to
be lower as if the issuance had already occurred. Accordingly, diluted EPS
reflects as increase in the weighted average shares outstanding due to the
assumed exercise of stock options and the vesting of restricted stock.
20
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
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.
MANAGEMENT RECOGNITION PLAN (MRP)
The Company recognizes compensation expense over the vesting period of the
shares awarded equal to the fair value of the shares at the date of
allocation.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income is
comprised of net income and all changes to stockholders' equity, except those
due to investments by owners (changes in paid-in capital) and distributions to
owners (dividends). This statement requires that all components of
comprehensive income and total comprehensive income be reported in the
financial statements. The Company will adopt this statement in the year ended
June 30, 1999. Management does not believe that the adoption of this statement
will have a material impact on the financial position or results of operations
of the Company.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." This statement requires public companies to report certain
information about operating segments as well as certain information about
products, services and major customers in their financial statements. The
Company will adopt this statement in the year ended June 30, 1999. Management
does not believe that the adoption of this statement will have a material
impact on the financial position or results of operations of the Company.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes new accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. The Company must adopt this statement in the year ended June 30,
2000. Management will evaluate the impact of SFAS 133, if any, on its
consolidated financial reporting during fiscal 1999.
2. INVESTMENT SECURITIES (DOLLARS IN THOUSANDS)
The amortized and estimated fair value of investment securities as of June 30,
1998 were as follows:
June 30, 1998
- -----------------------------------------------------------------------------
Gross Gross Estimated
Book Unrealized Unrealized 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 $73,975 $ 56 $(147) $73,884 $73,975
Other 53 11 - 64 53
- -----------------------------------------------------------------------------
Total held to
maturity 74,028 67 (147) 73,948 74,028
- -----------------------------------------------------------------------------
Available for sale
securities FHLMC
stock 20 921 - 941 941
FNMA stock 1 84 - 85 85
Real Estate
Investment Trust 500 - - 500 500
- -----------------------------------------------------------------------------
Total available
for sale 521 1,005 - 1,526 1,526
- -----------------------------------------------------------------------------
Total investment
securities $74,549 $1,072 $(147) $75,474 $75,554
=============================================================================
21
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The book value and estimated market value of investment securities as of June
30, 1997 were as follows:
June 30, 1997
- -----------------------------------------------------------------------------
Gross Gross Estimated
Book Unrealized Unrealized 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
=============================================================================
The maturities of investment securities were as follows:
June 30, 1998 June 30, 1997
- -----------------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
- -----------------------------------------------------------------------------
Due in one year $11,003 $11,009 $23,096 $23,183
Due after one through five years 20,977 21,017 10,549 10,481
Due beyond five years 42,048 41,922 - -
- -----------------------------------------------------------------------------
$74,028 $73,948 $33,645 $33,664
=============================================================================
22
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LOANS HELD FOR INVESTMENT (DOLLARS IN THOUSANDS)
Loans held for investment consisted of the following:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Residential real estate - single family $507,194 $402,296
Residential real estate - multi-family 46,635 52,564
Commercial real estate 42,696 47,887
Real estate construction 13,746 5,778
Commercial business lending 2,819 991
Consumer 19,824 16,749
Other 422 289
- -----------------------------------------------------------------------------
633,336 526,554
Less:
Undisbursed loan funds 7,320 3,695
Deferred loan fees (268) 102
Unearned discounts on loans purchased (30) 145
Allowance for loan losses 6,186 5,465
- -----------------------------------------------------------------------------
$620,128 $517,147
=============================================================================
Fixed rate loans comprised 22% and 14%, respectively, of the loan portfolio at
June 30, 1998 and 1997.
The following summarizes the components of the net change in the allowance for
loan losses:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Balance, beginning of period $ 5,465 $ 5,452 $ 5,085
Provision for losses 1,200 1,254 2,261
Recoveries 404 136 589
(Charge-offs) (883) (1,377) (2,483)
- -----------------------------------------------------------------------------
Balance, end of period $ 6,186 $ 5,465 $ 5,452
=============================================================================
23
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of nonaccrual and restructured loans on interest income for the
years ended June 30, 1998, 1997 and 1996 is presented below:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Contractual interest due $ 899 $ 871 $ 814
Interest recognized 547 539 589
- -----------------------------------------------------------------------------
Net interest foregone $ 352 $ 332 $ 225
=============================================================================
At June 30, 1998 and 1997, 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:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Non-accrual loans:
Single family $ 1,669 $ 3,667
Multi-family - 1,176
Commercial 245 144
Non-mortgage 18 150
Restructured loans:
Single family - 268
Multi-family - -
Commercial 2,074 4,642
Non-mortgage - -
Other impaired loans:
Single family 114 116
Multi-family 146 150
Commercial - -
Non-mortgage - -
- -----------------------------------------------------------------------------
Total impaired loans $ 4,266 $ 10,313
=============================================================================
24
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended June 30, 1998 and 1997, the Company's average
investment in impaired loans was $7,212 and $10,054, respectively, and
interest income recorded during this period was $574 and $581, 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,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Balance, beginning of period $ 1,825 $ 2,462 $ 2,315
Originations 1,364 43 471
Payments (105) (340) (90)
Termination (343) (340) (234)
- -----------------------------------------------------------------------------
Balance, end of period $ 2,741 $ 1,825 $ 2,462
=============================================================================
4. MORTGAGE BANKING (DOLLARS IN THOUSANDS)
The following summarizes the unpaid principal balance of loans serviced by the
Company:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Loans serviced for Federal Home Loan
Mortgage Corporation $149,730 $189,586 $221,019
Loans serviced for Federal National
Mortgage Association 233,066 274,348 305,446
Loans serviced for other investors 51,905 66,384 74,632
- -----------------------------------------------------------------------------
$434,701 $530,318 $601,097
=============================================================================
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 $754 and $882 as of June 30, 1998 and 1997, respectively. These escrow
balances are included in deposits in the accompanying consolidated balance
sheet.
25
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The composition of loans sold was as follows:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Loans sold
Servicing - released $424,246 $341,471 $437,917
Servicing - retained 428 1,539 16,127
- -----------------------------------------------------------------------------
$424,674 $343,010 $454,044
=============================================================================
Loans receivable available for sale consisted of the following:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Adjustable rate $ 153 $ 4,128
Fixed rate 67,095 15,856
- -----------------------------------------------------------------------------
$ 67,248 $ 19,984
=============================================================================
5. REAL ESTATE AVAILABLE FOR SALE (DOLLARS IN THOUSANDS)
Real estate consisted of the following:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Foreclosed real estate $ 4,909 $ 2,761
Investment real estate 2,624 3,504
- -----------------------------------------------------------------------------
7,533 6,265
- -----------------------------------------------------------------------------
Allowance for estimated losses:
Foreclosed real estate (462) (126)
Investment real estate (149) (463)
- -----------------------------------------------------------------------------
(611) (589)
- -----------------------------------------------------------------------------
$ 6,922 $ 5,676
=============================================================================
The following summarizes the components of the net change in the allowance for
losses on real estate:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Balance, beginning of period $ 589 $ 755 $ 1,342
Provisions for losses 326 306 239
Charge-offs (304) (472) (826)
- -----------------------------------------------------------------------------
Balance, end of period $ 611 $ 589 $ 755
=============================================================================
26
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREMISES AND EQUIPMENT (DOLLARS IN THOUSANDS)
Premises and equipment consisted of the following:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Land $ 2,648 $ 2,564
Buildings 6,812 6,678
Leasehold improvements 578 491
Furniture and equipment 8,736 7,594
Automobiles 146 180
- -----------------------------------------------------------------------------
18,920 17,507
Less accumulated depreciation and amortization (11,491) (10,682)
- -----------------------------------------------------------------------------
$ 7,429 $ 6,825
=============================================================================
7.DEPOSITS (DOLLARS IN THOUSANDS)
June 30, 1998 June 30, 1997
- -----------------------------------------------------------------------------
Interest Rate Amount Interest Rate Amount
- -----------------------------------------------------------------------------
Checking deposits 0%-3.20% $ 56,630 0%-1.00% $ 26,382
Passbook deposits 1.98%-4.78% 62,201 2.08%-2.96% 45,898
Money market deposits 2.37%-4.51% 71,493 1.00%-4.55% 85,995
Term deposits
Under $100,000 2.00%-8.00% 308,484 2.62%-8.00% 281,946
$100,000 and over 4.40%-8.00% 84,217 4.40%-8.00% 68,538
- -----------------------------------------------------------------------------
$583,025 $508,759
=============================================================================
Weighted average interest
rate on deposits 4.67% 4.79%
=============================================================================
On March 26, 1998, the Bank assumed $16 million in deposits in connection with
its purchase of the Blythe branch of Bank of America and subsequently merged
its operations in Blythe.
The aggregate annual maturities of term accounts are as follows:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Within one year $336,618 $288,178
One to two years 36,257 37,173
Two to three years 3,720 13,278
Three to four years 9,151 3,255
Thereafter 6,955 8,599
- -----------------------------------------------------------------------------
$392,701 $350,483
=============================================================================
Interest expense is summarized as follows:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Checking $ 223 $ 229 $ 203
Term deposits 21,025 18,036 18,027
Money market deposits 3,247 3,490 4,034
Passbook deposits 1,216 1,357 1,743
- -----------------------------------------------------------------------------
$ 25,711 $ 23,112 $ 24,007
=============================================================================
27
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $1,585 and $903 at Junea30, 1998 and 1997, respectively.
8. BORROWINGS (DOLLARS IN THOUSANDS)
Borrowings consisted of the following:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Advances from Federal Home Loan Bank $132,114 $ 6,828
Advances from the Federal Home Loan Bank were collateralized by pledges of
certain real estate loans with an aggregate principal balance at June 30, 1998
and 1997 of $331,855 and $207,129, 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 $241,357 and $178,530 at
June 30, 1998 and 1997, respectively.
As a member of the FHLB system, the Bank is required to maintain a minimum
investment in FHLB stock. The investment exceeds the required level by $9 and
$188 at June 30, 1998 and 1997, 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,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Within one year $121,500 $ 6,500
One to two years 10,260
Two to three years 260
Over three years 354 68
- -----------------------------------------------------------------------------
$132,114 $ 6,828
=============================================================================
Weighted average interest rate 5.70% 5.82%
=============================================================================
9. INCOME TAXES (DOLLARS IN THOUSANDS)
The provision for income taxes consisted of the following:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Current:
Federal $ 3,376 $ 1,339 $ 1,244
State 1,001 270 111
- -----------------------------------------------------------------------------
4,377 1,609 1,355
- -----------------------------------------------------------------------------
Deferred:
Federal (649) (62) (95)
State (23) (387) 72
- -----------------------------------------------------------------------------
(672) (449) (23)
- -----------------------------------------------------------------------------
Provision (benefit) for income taxes $ 3,705 $ 1,160 $ 1,332
=============================================================================
28
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pre-tax income from continuing operations as a result of the following
differences:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State taxes net of Federal tax effect 7.2% 7.3% 2.9%
Release of state valuation allowance (9.8%)
Life insurance proceeds (10.7%)
Other 1.3% 5.9% 6.0%
- -----------------------------------------------------------------------------
Effective income tax rate 42.5% 37.4% 32.2%
=============================================================================
Deferred tax liabilities (assets) by jurisdiction were as follows:
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Deferred taxes - federal $ (1,264) $ (934)
Deferred taxes - state (632) (774)
- -----------------------------------------------------------------------------
$ (1,896) $ (1,708)
=============================================================================
Deferred tax liabilities (assets) were comprised of the following:
June 30,
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
State taxes $ - $ 216
Depreciation 299 474
Federal Home Loan Bank dividends 1,498 1,374
Unrealized Gain on Securities 412 -
- -----------------------------------------------------------------------------
Total deferred tax liabilities 2,209 2,064
- -----------------------------------------------------------------------------
State Tax (79) -
Market value adjustments (94) (230)
Loss reserves (2,705) (2,675)
Deferred compensation (694) (667)
Investment in real estate (141) (142)
Other (392) (58)
- -----------------------------------------------------------------------------
Total deferred tax assets (4,105) (3,772)
- -----------------------------------------------------------------------------
Net deferred tax assets $ (1,896) $ (1,708)
=============================================================================
29
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. CAPITAL (DOLLARS IN THOUSANDS)
Retained earnings at June 30, 1998 and 1997 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.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1998, 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, 1998, 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, 1998 and 1997
are as follows:
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
- -----------------------------------------------------------------------------
Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------
As of June 30, 1998
Risk based Capital (to risk
weighted assets) $ 70,940 14.12% $ 50,240 Greater than 10.0%
or equal to
Core Capital (Tier I)
(to total assets) 64,754 8.09% 40,032 Great than 5.0%
or equal to
Tier I leverage (to
average assets) 64,754 9.32% 34,756 Greater than 5.0%
or equal to
Tier I capital (to risk
weighted assets) 64,754 12.89% 30,144 Greater than 6.0%
or equal to
Tangible Capital (to
total assets) 64,754 8.09% 32,035 Greater than 4.0%
or equal to
As of June 30, 1997
Risk based Capital (to
risk weighted assets) $ 63,293 16.12% $ 39,268 Greater than 10.0%
or equal to
Core Capital (Tier I)
(to total assets) 58,377 9.89% 29,513 Greater than 5.0%
or equal to
Tier I leverage (to
average assets) 58,377 10.21% 28,586 Greater than 5.0%
or equal to
Tier I capital (to
risk weighted assets) 58,377 14.87% 23,561 Greater than 6.0%
or equal to
Tangible Capital (to
total assets) 58,377 9.89% 23,610 Greater than 4.0%
or equal to
30
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (DOLLARS IN THOUSANDS)
The Company has a 401(k) defined-contribution plan covering all employees
meeting specific age and service requirements. Under the plan, employees may
contribute up to 10% of their pre-tax compensation. The Company makes matching
contributions up to 3% of participants' pre-tax compensation. Participants
vest immediately in their own contributions with 100% vesting in the Company's
contributions occurring after 6 years of credited service. The Company's
expense for these plans was approximately $142, $13, and $550 for the years
ended Junea30, 1998, 1997 and 1996, 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 $2,228 and $1,745 at Junea30, 1998 and 1997,
respectively, to pay certain benefits upon retirement. Actuarially determined
retirement costs are being accrued and expensed annually.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
As part of the conversion, an ESOP was established for all employees who are
age 21 or older and have completed one year of service with the Company during
which they have served a minimum of 1,000 hours. The ESOP borrowed $4,100 from
the Company to purchase 410,017 shares of the common stock issued in the
conversion. The loan will be repaid principally from the Company's
contributions to the ESOP over a period of 15 years. At June 30, 1998, the
outstanding balance on the loan was $3,619. 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 $579 and $338 for
the years ending Junea30, 1998 and 1997. At June 30, 1998, the unearned ESOP
shares account of $3,449 is reported as a reduction of stockholders' equity.
The table below reflects ESOP activity for the period indicated:
Year Ended June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Unallocated shares at beginning of period 371,964 395,234
Allocated 27,052 23,270
- -----------------------------------------------------------------------------
Unallocated shares at end of period 344,912 371,964
=============================================================================
The fair value of unallocated ESOP shares totaled $7,157 and $6,184 at
June 30, 1998 and 1997, respectively.
12. INCENTIVE PLANS
MANAGEMENT RECOGNITION PLAN AND TRUST (MRP)
The Company has established the 1996 Management Recognition Plan ("MRP") to
provide key employees and eligible directors with a propriety interest in the
growth, development and financial success of the Company through the award of
restricted stock. The Company acquired 205,000 shares of its common stock in
the open market to fund the MRP. At June 30, 1998, 184,910 shares had been
awarded with a weighted average fair value at the date of grant of $20.00 per
share. Awarded shares vest over a five-year period as long as the employee or
director remain an employee or director of the Company. The Company recognizes
compensation expense for the MRP based on the fair value of the shares at
grant date. MRP compensation expense for the year ended June 30, 1998 was
$493.
31
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLAN
The Company has established the 1996 Stock Option Plan ("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:
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
Granted (weighted average fair value of $10.93) 75,000 20.59
Cancelled 46,000 15.25
- -----------------------------------------------------------------------------
Outstanding at June 30, 1998 385,500 $16.29
- -----------------------------------------------------------------------------
For outstanding options the weighted average remaining contractual life was
8.77 years. There were 62,100 shares under options that were exercisable at
June 30, 1998. At June 30, 1998 127,022 shares were available for future
grants under the Plan.
ADDITIONAL STOCK OPTION PLAN INFORMATION
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation" (SFAS
No. 123) in 1997. As permitted by SFAS No. 123, the Company continues to
measure compensation cost in accordance with Accounting Principles Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but provides
pro forma disclosures of net income and earnings per share as if the fair
method (as defined in SFAS No. 123) had been applied beginning in 1997.
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, 28% and 27% in
1998 and 1997, respectively; risk free interest rates, 5.5% and 6.6% in 1998
and 1997, respectively; 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
awards had been amortized to expense over the vesting period of the awards,
pro forma net income and basic earnings per share would have been $4,505 and
$1.03 per share in 1998 and $1,789 and $0.38 per share in 1997.
13. EARNINGS PER SHARE
As of December 15, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." SFAS No. 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings per Share." 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 requires a reconciliation
of the numerator and denominator for the basic and diluted EPS computations.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the entity.
32
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended June 30, 1998
Income Shares Per Share
(numerator) (denominator) Amount
- -----------------------------------------------------------------------------
NET INCOME $5,020
- -----------------------------------------------------------------------------
BASIC EPS
Net income available to
common shareholders $5,020 4,388,090 $1.14
=============================================================================
EFFECT OF DILUTIVE SHARES
Stock options 94,222
Restricted stock awards 19,701
- -----------------------------------------------------------------------------
DILUTED EPS
Net income to common
shareholders plus
assumed conversion $5,020 4,502,013 $1.11
=============================================================================
For the Year Ended June 30, 1998
- -----------------------------------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
- -----------------------------------------------------------------------------
NET INCOME $1,941
- -----------------------------------------------------------------------------
BASIC EPS
Net income available to
common shareholders $1,941 4,705,043 $0.41
=============================================================================
EFFECT OF DILUTIVE SHARES
Stock options 40,309
- -----------------------------------------------------------------------------
DILUTED EPS
Net income to common
shareholders plus
assumed conversions $1,941 4,745,352 $0.41
=============================================================================
14. 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.
33
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1998
- -----------------------------------------------------------------------------
Fiscal Year
1999 $ 507
2000 343
2001 174
2002 137
2003 100
Thereafter 182
- -----------------------------------------------------------------------------
Total minimum payments required $1,443
=============================================================================
Lease expense under operating leases approximated $679, $656, and $390 for the
years ended Junea30, 1998, 1997 and 1996, respectively.
15. 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
34
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments is represented by the contractual notional amount of these
instruments. The Company uses the same credit policies in making commitments
to extend credit as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
all conditions have been met in the contract. These commitments generally have
expiration dates within 60 days of the commitment date and may require the
payment of a fee. Since some of these commitments are expected to expire, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness
on a case-by-case basis. At June 30, 1998 and 1997, interest rates on
commitments to lend ranged from 6.00% to 10.85% and 5.50% to 12.99%,
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, 1998 and 1997
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, 1998 and 1997, interest rates on commitments to sell loans ranged
from 6.00% to 11.00% and 5.75% to 12.25%, 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, 1998, the notional principal amount of options outstanding
was $3,000. 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,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
Commitments to originate mortgage loans:
Fixed rate $ 38,385 $ 31,070
Adjustable rate 6,537 19,902
44,922 50,972
- -----------------------------------------------------------------------------
Unused lines of credit 9,529 7,569
Commitments to sell loans 65,965 22,298
16. 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:
35
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 are offered at
substantially the same rates and terms of commitments offered on June 30, 1998
to parties of similar credit worthiness. Therefore, it is presumed that no
significant difference exists between the carrying and fair value. See Note
14.
The carrying amount and fair values of the Company's financial instruments
were as follows:
June 30, 1998 June 30, 1997
- -----------------------------------------------------------------------------
Carrying Market Carrying Market
Amount Value Amount Value
- -----------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash $ 23,433 $ 23,433 $ 20,111 $ 20,111
Investment securities 74,028 73,948 33,645 33,664
Loans receivable available
for sale 67,248 68,035 19,984 20,188
Loans held for investment 620,128 621,340 517,147 518,981
Accrued interest receivable 4,940 4,940 3,378 3,378
FHLB stock 6,606 6,606 4,879 4,879
FINANCIAL LIABILITIES:
Deposits 583,025 585,237 508,759 509,462
Borrowings 132,114 132,118 6,828 6,841
36
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. CONVERSION (DOLLARS IN THOUSANDS)
In connection with the conversion (see Note 1), the Company 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.
18. 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, 1998 and 1997 and condensed statements of operations and cash flows for
the year ended June 30, 1998.
CONDENSED BALANCE SHEETS
June 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
ASSETS
Cash $ 2,176 $ 792
Investment securities held to maturity 12,003 18,171
Investment securities available for sale 500 --
Investment in subsidiary 68,337 63,165
Other assets 3,788 3,931
- -----------------------------------------------------------------------------
$ 86,804 $ 86,059
=============================================================================
LIABILITIES AND STOCKHOLDERSAE EQUITY
Other liabilities $ 748 $ 612
- -----------------------------------------------------------------------------
Stockholders' equity 86,056 85,447
- -----------------------------------------------------------------------------
$ 86,804 $ 86,059
=============================================================================
37
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF OPERATIONS
Year ended Year ended
June 30, June 30,
1998 1997
- -----------------------------------------------------------------------------
Interest and other income $ 1,143 $ 1,470
General and administrative expense 297 185
- -----------------------------------------------------------------------------
Income before equity in earnings of the subsidiary 846 1,285
Equity in earnings of the subsidiary 4,599 1,267
- -----------------------------------------------------------------------------
Income before income taxes 5,445 2,552
Income taxes 425 611
- -----------------------------------------------------------------------------
Net income $ 5,020 $ 1,941
=============================================================================
CONDENSED STATEMENT OF CASH FLOWS
Year Ended Year Ended
June 30, June 30,
1998 1997
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 5,020 $ 1,941
Adjustments to reconcile net earnings to cash
used by operating activities:
Equity in earnings of the subsidiary (4,599) (1,267)
Decrease in other assets 143 1,561
Increase in other liabilities 136 562
- -----------------------------------------------------------------------------
Net cash provided by operating activities 700 2,797
- -----------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of investing securities held to maturity (15,390) (64,445)
Maturity of investing securities held to maturity 21,557 64,247
Purchase of investment securities available for
sale (500) -
- -----------------------------------------------------------------------------
Net cash used by investing activities 5,667 (198)
- -----------------------------------------------------------------------------
Cash flow from financing activities:
Treasury stock purchases (4,983) (3,291)
- -----------------------------------------------------------------------------
Net decrease in cash during the year 1,384 (692)
Cash and cash equivalents, beginning of year 792 1,484
- -----------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,176 $ 792
=============================================================================
38
<PAGE>
<PAGE>
SHAREHOLDER INFORMATION
MARKET FOR COMMON STOCK
The common stock of Provident Financial Holdings, Inc. is listed on the NASDAQ
Stock Market under the symbol of PROV. The following table provides the high
and low stock prices for PROV during the last two fiscal years.
First Second Third Fourth
(September 30,) (December 31,) (March 31,) (June 30,)
- -----------------------------------------------------------------------------
1998 QUARTERS
High $20.13 $22.25 $24.25 $24.13
Low 16.75 19.56 20.00 20.13
1997 QUARTERS
High 12.63 14.63 17.25 17.38
Low 10.13 12.38 13.75 14.13
- -----------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of shareholders will be held at the Riverside Art Museum at
3425 Mission Inn Avenue, Riverside, California on Tuesday, October 27, 1998,
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
PricewaterhouseCoopers LLP
400 South Hope Street
Los Angeles, CA 90071
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(908) 497-2300
MARKET INFORMATION
Provident Financial Holdings, Inc. is traded on the NASDAQ Stock 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. The Corporation
does not engage in any significant activity other than holding the stock of
the Savings Bank. The Savings Bank serves the banking needs of select
communities in Riverside and San Bernardino Counties and has mortgage lending
operations in Southern California and Nevada.
39
<PAGE>
<PAGE>
BOARD OF DIRECTORS AND SENIOR OFFICERS
BOARD OF DIRECTORS
Bruce W. Bennett
President
Community Care & Rehabilitation Center
Craig G. Blunden
Chairman, President & CEO
Provident Savings Bank, FSB
Debbi H. Guthrie
President
Roy O. Huffman Roofing Company
Robert G. Schrader
Executive Vice President &
Chief Operating Officer
Provident Savings Bank, FSB
Roy H. Taylor
President
Talbot-Goldware & Taylor Insurance
William E. Thomas
Partner
Burke, Williams & Sorenson, LLP
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
Brian M. Riley
Senior Vice President
Chief Financial Officer
40
<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
MORENO VALLEY NORTH
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
350 E. Hobson Way
Blythe, CA 92225
CUSTOMER INFORMATION LINE
1-800-442-5201
PROFED MORTGAGE
BRANCH LOCATIONS
DIVISION OFFICE
3756 Central Avenue
Riverside, CA 92506
WHOLESALE OFFICES
-----------------
RANCHO CUCAMONGA
10390 Commerce Center Drive
Suite 190
Rancho Cucamonga, CA 91730
RETAIL OFFICES
--------------
LAKE FOREST - PACIFIC SUNBELT
23201 Lake Center Drive
Suite 100
Lake Forest, CA 92630
LAS VEGAS - PACIFIC SUNBELT
7720 West Sahara Avenue
Suite 106
Las Vegas, NV 89117
RANCHO CUCAMONGA
10390 Commerce Center Drive
Suite 280
Rancho Cucamonga, CA 91730
RANCHO MIRAGE
71-991 Highway 111
Rancho Mirage, CA 92270
REDLANDS
501 W. Redlands Blvd., Suite G
Redlands, CA 92373
SANTA ANA
1450 N. Tustin Avenue, Suite 212
Santa Ana, CA 92705
TORRANCE
22805 Hawthorne Blvd.
Torrance, CA 90505
RIVERSIDE
2915 Van Buren Blvd., Suite J-2
Riverside, CA 92503
41
<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 Auditors
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT 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 14, 1998 appearing on page 12 of the 1998 Annual
Report which is incorporated in this Annual Report which is incorporated in
this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
September 24, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 20933
<INT-BEARING-DEPOSITS> 572257
<FED-FUNDS-SOLD> 2500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1526
<INVESTMENTS-CARRYING> 74028
<INVESTMENTS-MARKET> 73948
<LOANS> 693562
<ALLOWANCE> 6186
<TOTAL-ASSETS> 816205
<DEPOSITS> 583025
<SHORT-TERM> 121500
<LIABILITIES-OTHER> 14416
<LONG-TERM> 10614
0
0
<COMMON> 51
<OTHER-SE> 86599
<TOTAL-LIABILITIES-AND-EQUITY> 816205
<INTEREST-LOAN> 46305
<INTEREST-INVEST> 3791
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 50096
<INTEREST-DEPOSIT> 25711
<INTEREST-EXPENSE> 29417
<INTEREST-INCOME-NET> 20679
<LOAN-LOSSES> 1200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19899
<INCOME-PRETAX> 8725
<INCOME-PRE-EXTRAORDINARY> 8725
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5020
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 3.06
<LOANS-NON> 1932
<LOANS-PAST> 0
<LOANS-TROUBLED> 2074
<LOANS-PROBLEM> 4266
<ALLOWANCE-OPEN> 5465
<CHARGE-OFFS> 883
<RECOVERIES> 404
<ALLOWANCE-CLOSE> 6186
<ALLOWANCE-DOMESTIC> 3330
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2856
</TABLE>
