SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one) 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, 1999 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 .
--- ---
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 10, 1999, there were issued and outstanding 4,307,585 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 non affiliates of the Registrant, based on
the closing sales price of the Registrant's common stock as quoted on the
Nasdaq National Market on September 10, 1999, was $79,068,542.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the fiscal year ended
June 30, 1999 ("Annual Report") (Part II).
2. Portions of the definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders ("Proxy Statement") (Part III).
<PAGE>
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, 1999, the Corporation had total assets of $957.4
million, total deposits of $632.9 million and stockholders' equity of $89.7
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, business, consumer and other loans.
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. In addition, the Savings Bank also facilitates business
loans, business checking accounts and other business banking services. The
Savings Bank's revenues are derived principally from interest on its loan and
investment portfolio and fees generated through its mortgage banking
activities.
Recent Developments
1. A new branch in Corona, California:
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The Savings Bank received the approval from the OTS on May 25, 1999 to
open a new branch in Corona, California. The construction of the branch is
still in progress and the Savings Bank plans to open the branch by January
2000.
2. Ground lease buyout:
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The ground lease buyout by one of the Corporation's ground lease tenants
in West Los Angeles, California was completed on June 30, 1999 for $8.1
million. The book value of the property at the time of the sale was $1.9
million. After transaction costs and a provision for income taxes, the
Corporation recorded a net gain of $3.6 million, or $0.87 per diluted share.
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 its full-service branches and loan production offices.
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The large geographic area encompassing Riverside and San Bernardino
Counties is referred to as the "Inland Empire." 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. Southern California's
economic growth has transformed the economy from one with a large segment in
the aerospace and other defense-related industries, to a more diverse economy
with service companies, including financial services, along with technology
and other industries. The Inland Empire has enjoyed a recent economic boom,
which has resulted in a major improvement in real estate properties. The
unemployment rate in the Inland Empire in August, 1999 was at 5.7%, compared
to 5.0% in California and 4.2% nationwide. The Savings Bank faces intense
competition for deposits and loan originations. See --TAXATION--Competition."
Lending Activities
General. The lending activity of the Savings Bank is predominately
centered around 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, business, consumer and other loans for its portfolio. The
Savings Bank's net loans held for investment totaled approximately $669.4
million at June 30, 1999, representing approximately 69.9% of consolidated
total assets. This compares to $620.1 million, or 76.0% of consolidated total
assets, at June 30, 1998.
2
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<TABLE>
Loan Portfolio Analysis. The following table sets forth the composition of the Savings Bank's loan
portfolio at the dates indicated.
At June 30,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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........ $538,915 77.50% $507,194 80.08% $402,296 76.41% $327,490 70.77% $345,034 71.59%
Multi-family... 38,663 5.56 46,635 7.36 52,564 9.98 54,427 11.76 53,531 11.11
Commercial..... 41,845 6.02 42,696 6.74 47,887 9.09 54,813 11.84 61,518 12.76
Construction... 23,249 3.34 13,746 2.17 5,778 1.10 10,222 2.21 5,938 1.23
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total mortgage
loans......... 642,672 92.42 610,273 96.35 508,525 96.58 446,952 96.58 466,021 96.69
Consumer loans... 41,620 5.99 19,824 3.13 16,749 3.18 15,497 3.35 15,830 3.28
Commercial business
loans........... 10,239 1.47 2,819 0.45 991 0.19 0 0.00 0 0.00
Other loans ..... 822 0.12 422 0.07 289 0.05 332 0.07 137 0.03
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans
receivable... 695,353 100.00% 633,336 100.00% 526,554 100.00% 462,781 100.00% 481,988 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Loans in process. 19,698 7,320 3,695 3,694 4,121
Deferred loan
(costs) fees.... (448) (298) 247 690 1,239
Unearned discounts
on loans pur-
chased.......... 15 (30) 145 177 205
Allowance for loan
losses.......... 6,702 6,186 5,465 5,452 5,085
-------- -------- -------- -------- --------
Total loans
receivable,
net..... $669,386 $620,128 $517,147 $452,945 $471,543
======== ======== ======== ======== ========
Loans held for
sale ..... $37,667 $67,248 $19,984 $49,612 $34,489
======= ======= ======= ======= =======
3
</TABLE>
<PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at June 30, 1999, regarding the dollar amount of principal
repayments becoming contractually due during the periods indicated for loans
held for investment. 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.. $ 7 $ 5,371 $ 8,876 $17,308 $507,353 $538,915
Multi-family........ 7 6,456 7,230 17,646 7,324 38,663
Commercial.......... 1,367 10,668 6,676 17,031 6,101 41,845
Construction........ 18,428 4,821 -- -- -- 23,249
Consumer loans........ 204 392 3,333 4,569 33,122 41,620
Commercial business
loans................ 4,802 1,530 2,552 1,355 -- 10,239
Other loans........... -- 418 404 -- -- 822
------- ------- ------- ------- -------- --------
Total loans
receivable......... $24,815 $29,656 $29,071 $57,909 $553,900 $695,353
======= ======= ======= ======= ======== ========
The following table sets forth the dollar amount of all loans held in the
Savings Bank's portfolio due after June 30, 2000 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............... $31,138 $507,770
Multi-family..................... 1,943 36,713
Commercial....................... 2,501 37,977
Construction...................... 4,821 --
Consumer loans.................... 27,840 13,576
Commercial business loans......... 1,318 4,119
Other loans....................... -- 822
------- --------
Total loans receivable......... $69,561 $600,977
======= ========
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<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally gives 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
predominate lending is 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, 1999, $538.9 million, or 77.5% 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 a majority of the residential mortgage loans that it
has originated. See "-- Mortgage Banking Activities." A portion of the
adjustable rate mortgage ("ARM") loans originated by the Savings Bank is
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 decreased by $11.3 million during fiscal 1999 as increases were
posted by construction, consumer and commercial business lending. At June 30,
1999, adjustable-rate loans comprised 79.4% of the Savings Bank's loan
portfolio.
The Savings Bank's residential mortgage loans are generally underwritten
and documented in accordance with the guidelines established by the Federal
Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"). All government insured loans are generally underwritten
and documented in accordance with the guidelines established by the Department
of Housing and Urban Development ("HUD") and the VA. The Savings Bank's loan
underwriters are approved as underwriters under HUD's delegated underwriter
program.
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 FHLB eleventh district cost of funds index
("COFI"), the London interbank offered rates index ("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.
Currently, the Savings Bank does not originate COFI indexed loans but
emphasizes products based on the one-year CMT and LIBOR, which respond more
closely 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 inherent interest rate risk if market rates should rise
during the initial fixed rate period.
As of June 30, 1999, the Savings Bank had $86.2 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.
5
<PAGE>
The retention of ARM loans in the Savings Bank's loan portfolio helps
reduce 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 ARM loans originated by the
Savings Bank generally provide, as a marketing incentive, for initial rates of
interest below rates that would apply if the adjustment index plus the
applicable margin were initially used for pricing. Such 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 loan-to-value ratios exceeding
80% at origination.
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, 1999, the Savings Bank's
loans held for investment included $38.7 million in multi-family real estate
loans and $41.8 million in commercial real estate loans, or 5.6% and 6.0%,
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 strengthening in
these markets and the decline in delinquencies, the Savings Bank is broadening
its consideration of these types of loans. At June 30, 1999, the Savings Bank
had 80 multi-family and 102 commercial real estate loans in its portfolio, the
largest of which was a multi-family real estate loan with a balance of $3.2
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, 1999, $24.4 million, or
63.1%, of the Savings Bank's multi-family loans were secured by five to 36
unit projects, of which $15.2 million, or 39.2 %, 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,
1999, the Savings Bank had 19 commercial real estate and multi-family loans
with principal balances of over $1 million that totaled $30.5 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, 1999,
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<PAGE>
approximately $29.4 million, or 76.1%, of the Savings Bank's multi-family
loans and approximately $31.6 million, or 75.5%, 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, 1999, the Savings Bank had no
multi-family or commercial real estate loans that were 60 days or more past
due. See also "REGULATION -- Federal Regulation of Savings Associations --
Loans to One Borrower."
Construction Lending. The Savings Bank also originates residential loans
to individuals for the construction of owner-occupied single family homes. At
June 30, 1999, the Savings Bank's construction loans totaled $23.2 million, or
3.3% of total loans held for investment. 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 to lend
to single family subdivisions. Individual residential construction loans,
that are not made in conjunction with the granting of permanent financing,
are, generally 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,
1999, the Savings Bank had $41.6 million, or 6.0% 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 lending and increase the average
portfolio yield. As of June 30, 1999, commercial loans totaled $10.2 million,
or 1.5% 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 approximately
410 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, 1999 and 1998, wholesale loan
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<PAGE>
originations accounted for 57.2% and 60.7%, 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 utilize loan
officers and processors employed by the Profed Mortgage Division of the
Savings Bank. The Savings Bank's loan agents generate retail loan
originations through referrals from realtors, builders and customers. As of
June 30, 1999, Profed Mortgage operated two offices within Savings Bank
facilities and seven separate loan production offices located in Lake Forest,
Rancho Cucamonga, Orange, Redlands, Riverside, Hacienda Heights and Torrence
in Southern California; and one 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 cross-sell other banking services to
borrowers 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 $39.9 million at June 30, 1999. 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 as a hedge. 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 ($448,000) of net deferred mortgage loan costs at June 30, 1999.
Loan Originations, Sales and Purchases. The Savings Bank's mortgage
originations include loans insured by the FHA and VA, as well as conventional
loans. Except for loans originated for the Savings Bank's portfolio, loans
originated through the mortgage banking operations are originated for eventual
sale into the secondary market. As such, these loans must meet the
origination and underwriting criteria established by the final investors. The
Savings Bank sells a large percentage of the mortgage loans that it originates
as whole loans to private investors. The Savings Bank also sells conventional
whole loans to FNMA and FHLMC through their purchase programs, as well as
pooling loans in exchange for mortgage-backed securities guaranteed by FNMA or
FHLMC. These securities are then sold through various Wall Street investment
firms. In connection with such exchanges, the Savings Bank pays fees to
either FNMA or FHLMC who in return guarantee the payment of scheduled
principal and interest to security holders. It is the guarantee that enables
the Savings Bank to efficiently deliver loans into the secondary market.
Conventional mortgage loans originated by the Savings Bank that do not
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<PAGE>
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,
----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Loans originated for sale:
Retail originations.................... $262,656 $183,702 $129,740
Wholesale originations................. 350,882 283,744 183,642
-------- -------- --------
Total loans originated for sale... 613,538 467,446 313,382
-------- -------- --------
Loans sold(1):
Servicing released..................... 648,141 424,246 341,471
Servicing retained..................... 1,568 428 1,539
-------- -------- --------
Total loans sold.................. 649,709 424,674 343,010
-------- -------- --------
Loans originated for portfolio:
Mortgage loans:
One- to four-family.................. 183,961 195,287 112,310
Multi-family......................... -- 2,644 916
Commercial........................... 4,168 370 1,562
Construction......................... 32,656 13,786 5,240
Consumer loans......................... 30,574 10,760 6,160
Commercial business loans.............. 12,033 4,179 2,008
Other loans............................ 628 333 232
-------- -------- --------
Total loans originated for
portfolio........................ 264,020 227,359 128,428
-------- -------- --------
Loans purchased:
Mortgage loans:
One- to four-family.................. 425 20,065 2,737
Commercial........................... 1,010 -- --
-------- -------- --------
Total loans purchased............. 1,435 20,065 2,737
-------- -------- --------
Mortgage loan principal repayments....... 222,455 146,234 60,973
Real estate acquired in settlement of
loans................................... 1,775 6,932 7,094
Increase (decrease) in other items,
net(2).................................. 14,622 13,215 1,105
-------- -------- --------
Net increase (decrease) in loans
receivable, net......................... $ 19,676 $150,245 $ 34,575
======== ======== =========
(1) Includes loans swapped for mortgage-backed securities.
(2) Includes net changes in loans in process, discounts on loans and loss
reserves.
9
<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, 1999, 1998,
and 1997, the Savings Bank repurchased single-family mortgage loans, totaling
$425,000, $3.1 million, and $2.7 million, respectively.
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, 1999, the Savings
Bank was servicing $315.0 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, 1999, the Savings Bank
had gains of $6.59 million attributable to sales of loans, which included
hedging gains or
10
<PAGE>
losses. At June 30, 1999, the Savings Bank had outstanding commitments to sell
loans totaling $36.7 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, 1999, the Savings Bank had no option contracts
outstanding.
The above activities are managed continually as markets change, however,
there can be no assurance that the Savings Bank will be successful in its
effort to eliminate the risk of interest rate fluctuation between the time
origination commitments are issued and the ultimate sale of the loan. The
Savings Bank employs a risk management firm to analyze daily and report the
Savings Bank's interest rate risk position with respect to its loan
origination and sale activities and to advise the Savings Bank on interest
rate movements and interest rate risk management strategies. The Savings
Bank's hedging activities are conducted in accordance with a Board approved
written policy that covers objectives, functions, instruments to be used,
monitoring and internal controls. The Savings Bank does not enter into option
positions for trading or speculative purposes and does not enter into options
that could generate a financial obligation beyond the initial premium.
Delinquencies and Classified Assets
Delinquent Loans. When a mortgage loan borrower fails to make a required
payment when due, the Savings Bank institutes collection procedures. If the
Savings Bank is unsuccessful at curing a delinquency, a property inspection is
performed between the 45th day and 60th day of delinquency. In most cases,
delinquencies are cured promptly; however, if by the 90th day of delinquency,
or sooner if the borrower is chronically delinquent, and all reasonable means
of obtaining payment on time have been 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.
11
<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........ 3 $429 16 $1,764 1 $176 14 $1,700 6 $ 918 30 $3,227
Multi-family... -- -- -- -- -- -- -- -- -- -- 2 1,725
Commercial..... -- -- -- -- 1 422 -- -- 1 465 2 960
Construction... -- -- -- -- -- -- -- -- -- -- -- --
Commercial
business loans... -- -- -- -- -- -- -- -- -- -- -- --
Consumer loans... 5 12 13 39 1 2 2 35 1 14 7 201
Other loans...... -- -- -- -- -- -- -- -- -- -- -- --
-- ---- -- ------ -- ---- -- ------ -- ------ -- ------
Total........ 8 $441 29 $1,803 3 $600 16 $1,735 8 $1,397 41 $6,113
= ==== == ====== = ==== == ====== = ====== == ======
12
</TABLE>
<PAGE>
The following table sets forth information with respect to the Savings
Bank's non-performing assets and restructured loans within the meaning of
Statement of Financial Accounting Standards ("SFAS") No. 15 at the dates
indicated.
At June 30,
---------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans accounted for on a
non-accrual basis:
Mortgage loans:
One-to four-family.......... $1,165 $1,669 $3,667 $3,511 $1,137
Multi-family................ -- -- 1,176 798 142
Commercial.................. -- 245 979(1) -- 1,279
Consumer loans............... 39 18 150 108 --
------ ------ ------ ------ ------
Total...................... 1,204 1,932 5,972 4,417 2,558
------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
One- to four-family.......... 138 -- 268 -- --
Consumer..................... -- -- 9 -- --
------ ------ ------ ------ ------
Total...................... 138 -- 277 -- --
------ ------ ------ ------ ------
Total nonaccrual
and 90 days or more
past due loans.............. 1,342 1,932 6,249 4,417 2,558
Foreclosed real estate, net.. 1,775 4,447 2,636 2,711 6,784
------ ------ ------ ------ ------
Total nonperforming assets... $3,117 $6,379 $8,885 $7,128 $9,342
====== ====== ====== ====== ======
Restructured loans........... $1,508 $2,074 $4,910 $4,905 $3,272
====== ====== ====== ====== ======
Nonaccrual and 90 days or more
past due loans as a percentage
of loans receivable, net...... 0.20% 0.31% 1.21% 0.98% 0.54%
Nonaccrual and 90 days or more
past due loans as a percentage
of total assets............... 0.14% 0.24 1.02 0.76 0.45
Nonperforming assets as a
percentage of total assets.... 0.33% 0.78 1.44 1.22 1.65
- --------------
(1) Includes two restructured loans totaling $835.
The Savings Bank assesses loans individually and identifies impairment
when the accrual of interest has been discontinued, loans have been
restructured or management has serious doubts about the future collectibility
of principal and interest, even though the loans are currently performing.
Factors considered in determining impairment include, but are not limited to,
expected future cash flows, the financial condition of the borrower and
current economic conditions. The Savings Bank measures each impaired loan
based on the fair value of its collateral and charges off those loans or
portions of loans deemed uncollectible.
13
<PAGE>
Interest income, which would have been recorded for the year ended June
30, 1999 had nonaccruing loans been current in accordance with their original
terms, amounted to approximately $399,000. The amount of interest included in
the results of operations on such loans for the year ended June 30, 1999
amounted to approximately $175,000. Interest income foregone on restructured
loans for such periods was not material.
Foreclosed and Investment Real Estate. Real estate acquired by the
Savings Bank as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as foreclosed real estate until it is sold. When property is
acquired it is recorded at the lower of its cost, which is the unpaid
principal balance of the related loan plus foreclosure costs, or market value
less cost of sale. Subsequent declines in value are charged to operations.
At June 30, 1999, the Savings Bank had $1.7 million of foreclosed real estate,
net of allowance for losses of $32,000. The Savings Bank established
provisions of $52,000 for losses on foreclosed real estate during the year
ended June 30, 1999. At June 30, 1999, the Savings Bank's foreclosed real
estate was comprised of 16 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 $1.1 million of investment
real estate, net of reserves at June 30, 1999, 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,
-------------------
1999 1998
---- ----
Doubtful.............. $ -- $ --
Substandard assets.... 6,429 11,398
Special mention....... 891 1,627
------- -------
Total........... $ 7,320 $13,025
======= =======
Total classified assets
as of percentage total
assets............... 0.76% 1.60%
14
<PAGE>
As set forth below, as of June 30, 1999, assets classified as substandard
and special mention included 52 loans and properties totaling approximately
$7.3 million.
Number
of Special
Type of Loan/Property Loans Substandard Mention Total
- --------------------- ----- ----------- ------- -----
(Dollars in Thousands)
One- to four-family.... 34 $ 2,832 $ 341 $ 3,173
Multi-family........... 1 -- 550 550
Commercial real estate. 4 2,634 -- 2,634
Construction........... 5 42 -- 42
Real estate owned...... 8 921 -- 921
--- ------- ------ ------
Total.............. 52 $ 6,429 $ 891 $ 7,320
== ======= ====== =======
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 credit-worthiness 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. The responsibility for the review of the
Savings Bank's assets and the determination of the adequacy of the general
valuation allowance lies with the Internal Asset Review Committee ("IAR").
This committee assigns the loss reserve ratio for each type of asset and
reviews the adequacy of the allowance at least quarterly based on an
evaluation of the portfolio, past experience, prevailing market conditions,
concentration in loan types and other relevant factors. Specific valuation
allowances are established to absorb losses on loans for which full
collectibility may not be reasonably assured as prescribed in SFAS No. 114 (as
amended by SFAS No. 118). The amount of the allowance is based on the
estimated value of the collateral securing the loan and other analyses
pertinent to each situation. Estimates of identifiable losses are reviewed
continually and, generally, a provision for losses is charged against
operations on a monthly basis as necessary to maintain the allowances at
appropriate levels. Management presents a review of the allowance for loan
losses to the Corporation's board of directors on a quarterly basis.
At June 30, 1999, the Savings Bank had an allowance for loan losses of
$6.7 million or 0.96% of gross loans receivable. This compares to $6.2
million at June 30, 1998 which was 0.98% of gross loans receivable. The
provision for loan losses totaled $525,000 in fiscal 1999 compared to $1.2
million in fiscal 1998. The Savings Bank's focus on expanding its investment
in Consumer and Business Banking loans may lead to increased levels of
charge-offs. However, management believes that the amount maintained in the
allowance will be adequate to absorb
15
<PAGE>
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
generally accepted accounting principles ("GAAP"), there can be no assurance
that regulators, in reviewing the Savings Bank's loan portfolio, will not
request the Savings Bank to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
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.
16
<PAGE>
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated. Where specific loan loss
reserves have been established, any differences between the loss allowances
and the amount of loss realized has been charged or credited to current
operations.
Year Ended June 30,
--------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of
period.................... $6,186 $5,465 $5,452 $5,085 $3,332
Recoveries:
Mortgage loans:
One- to four-family....... 129 11 11 16 97
Multi-family.............. -- 191 60 258 145
Commercial................ -- 173 38 315 177
Consumer.................. 36 29 -- -- --
Other..................... 135 -- 27 -- 40
------ ------ ------ ------ ------
Total recoveries........ 300 404 136 589 459
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family..... 201 187 457 214 772
Multi-family............ -- 2 609 934 1,589
Commercial.............. 52 580 309 1,335 1,101
Consumer loans.......... 56 114 -- -- 17
Other loans............. -- -- 2 -- 14
------ ------ ------ ------ ------
Total charge-offs..... 309 883 1,377 2,483 3,493
------ ------ ------ ------ ------
Net loan charge-offs
(recoveries)............. 9 479 1,241 1,894 3,034
Provision for loan losses 525 1,200 1,254 2,261 4,787
------ ------ ------ ------ ------
Balance at end of period. $6,702 $6,186 $5,465 $5,452 $5,085
====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of gross loans
receivable............... 0.95% 0.98% 1.04% 1.18% 1.06%
Net loan charge-offs
(recoveries) as a percentage
of average loans outstanding
during the period........ 0.25 0.10 0.25 0.38 0.62
Allowance for loan losses as
a percentage of nonperforming
loans at end of period... 499.48 320.19 87.45 123.42 198.79
17
<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,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ---------------- ---------------- --------------- --------------
% 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. $ 1,588 76.48% $ 972 80.08% $ 863 76.40% $ 930 70.77% $ 661 71.59%
Multi-family........ 733 5.91 854 7.36 935 9.98 1,532 11.76 1,030 11.11
Commercial.......... 1,547 6.69 1,334 6.74 1,542 9.09 2,848 11.84 2,587 12.76
Construction........ 14 3.34 20 2.17 7 1.10 28 2.21 13 1.23
Consumer loans........ -- 5.99 147 3.13 114 3.18 112 3.35 108 3.28
Commercial Business
Loans................ -- 1.47 -- 0.45 -- 0.19 -- -- -- --
Other loans........... 16 0.12 3 0.07 2 0.06 2 0.07 1 0.03
Unallocated........... 2,804 N/A 2,856 N/A 2,002 N/A -- N/A 685 N/A
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Total allowance for
loan losses........ $ 6,702 100.00% $ 6,186 100.00% $15,465 100.00% $5,452 100.00% $5,085 100.00%
======= ====== ======= ====== ======= ====== ====== ====== ====== ======
18
</TABLE>
<PAGE>
Investment Activities
Federally chartered savings institutions are permitted under federal and
state laws to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various federal agencies and of state and
municipal governments, deposits at the FHLB, certificates of deposit of
federally insured institutions, certain bankers' acceptances and federal
funds. Subject to various restrictions, federally chartered savings
institutions may also invest a portion of their assets in commercial paper and
corporate debt securities. Savings institutions like the Savings Bank are
also required to maintain an investment in FHLB stock. In addition, the
Savings Bank is required to maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. See "REGULATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS--Liquidity and Capital Resources" in Item 7 of this Report. At
June 30, 1999, the Savings Bank's regulatory liquidity was 24.6%, 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 risks. Investments are made based
on certain considerations, which include yield, quality, maturity and
marketablility. The effect that the proposed investment would have on the
Savings Bank's risk-based capital is also calculated during the evaluation.
At June 30, 1998, the Corporation's investment securities portfolio
totaled $185.9 million at amortized cost and consisted of U.S. Government and
federal agency obligations. Only the Corporation's FNMA, FHLMC and real
estate investment trust ("REIT") investments were available for sale, all
other securities were classified as held to maturity.
19
<PAGE>
The following table sets forth the composition of the Savings Bank's
investment portfolio at the dates indicated.
<TABLE>
The following table sets forth the composition of the Savings Bank's investment portfolio at the
dates indicated.
At June 30,
--------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ------------------------- -------------------------
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)
FHLMC stock......... 20 1,160 0.01% 20 941 0.03% 20 700 0.06%
FNMA stock.......... 1 95 -- 1 85 -- 1 61 --
Equity securities... 1,071 1,095 0.58 500 500 0.67 -- -- --
U.S. Treasury
securities and
obligations
of other U.S.
government and
corporation........ 4,989 4,994 2.68 -- -- -- -- -- --
Investment securities
held to maturity
U.S. Government and
agency obligations. 179,803 175,992 96.71 73,975 73,884 99.23 32,555 32,570 96.70
Corporate securities
(2)................. -- -- -- -- -- -- 998 1,000 2.97
Other(3)............. 31 41 0.02 53 64 0.07 92 94 0.27
-------- -------- ------ ------- ------- ------ ------- ------- ------
Total................ $185,915 $183,377 100.00% $74,549 $75,474 100.00% $33,666 $34,425 100.00%
======== ======== ====== ======= ======= ====== ======= ======= ======
- ---------------------
(1) Consists of FHLMC, FNMA and FBR Asset Investment Corp. 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, 1999.
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.......... $ 3,609 5.61% $20,995 6.06% $155,199 6.29% $179,803 6.25%
Other........................ -- -- -- -- 31 6.23% 31 6.22
------- ---- ------- ---- -------- ---- -------- ----
Total ....................... $ 3,609 5.61% $20,995 6.06% $155,230 6.29% $179,834 6.25%
======= ======= ========= ========
</TABLE>
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and the proceeds from loan sales are
the major sources of the Savings Bank's funds for lending and other investment
purposes. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Loan
sales are also influenced significantly by general interest rates. Borrowings
through the FHLB-San Francisco and repurchase agreements may also be used on a
short-term basis to compensate for reductions in the availability of funds
from other sources. Presently, the Savings Bank has no other borrowing
arrangements.
20
<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 64.4% of the Savings Bank's deposit portfolio at June
30, 1999. 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, 1999.
Weighted Per-
Average centage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
- ---- ---- ---------------- ------ ------- --------
(In Thousands)
3.06% N/A Savings Accounts $ 10 $ 81,108 12.82%
1.54 N/A NOW Accounts -- 75,443 11.92
3.74 N/A Money Market Accounts -- 68,835 10.88
Certificates of Deposit
-----------------------
5.12 18-36 Months Variable CD 1,000 7,174 1.13
3.90 90 Days or Less Fixed term, fixed rate 1,000 10,291 1.63
4.36 6-7 Months Fixed-term, fixed rate 1,000 67,739 10.70
4.84 9 Months Fixed-term, fixed rate 1,000 63,294 10.00
5.04 1 Year Fixed-term, fixed rate 1,000 144,894 22.89
5.00 15 Months Fixed-term, fixed rate 1,000 55,222 8.73
5.41 2 Years Fixed-term, fixed rate 1,000 22,779 3.60
5.68 3 Years Fixed-term, fixed rate 1,000 7,900 1.25
5.33 4 Years Fixed-term, fixed rate 1,000 1,840 .29
5.84 5 Years Fixed-term, Compounded
Certificate 1,000 26,162 4.13
4.78 Negotiable Jumbo-negotiable rate 100,000 200 .03
-------- ------
4.13% $632,881 100.00%
======== ======
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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, 1999.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less........... $27,986
Over three through six months.. 18,885
Over six through 12 months..... 39,344
Over 12 months................. 11,057
-------
Total..................... $97,272
=======
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amount of deposits in the various
types of accounts offered by the Savings Bank at and between the dates
indicated.
At June 30,
-------------------------------------------------------
1999 1998
Percent Percent
of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ----------
Non-interest-bearing.$ 14,764 2.33% 3,996 $ 10,768 1.85% 8,433
NOW checking......... 60,679 9.58% 14,817 45,862 7.87% 21,815
Regular savings
accounts............. 81,108 12.82% 18,907 62,201 10.67% 16,303
Money market deposit. 68,835 10.88% (2,658) 71,493 12.26% (14,503)
Fixed-rate
certificates which
mature:
Within 1 year....... 362,821 57.33% 28,441 334,380 57.35% 48,314
After 1 year, but
within 2 years..... 18,119 2.86% (17,791) 35,910 6.16% (647)
After 2 years, but
within 5 years.... 19,157 3.03% (429) 19,586 3.36% (5,320)
After 5 years...... 224 .03% 224 -- -- (121)
Other............... 7,174 1.14% 4,349 2,825 .48% (8)
-------- ------ ------- -------- ------ -------
Total...........$632,881 100.00% $49,856 $583,025 100.00% $74,266
======== ====== ======= ======== ====== =======
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<PAGE>
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
---------------------------------------
1999 1998 1997
----- ----- ----
(In Thousands)
Below 3.00% $ 199 $ 184 $ 164
3.00 - 4.49% 81,691 7,104 3,333
4.50 - 5.49% 260,349 175,701 119,452
5.50 - 6.49% 63,110 206,938 223,525
6.50 - 7.49% 1,997 2,462 3,657
Over 7.50% 149 312 352
-------- -------- --------
Total $407,495 $392,701 $350,483
======== ======== ========
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at June 30, 1999.
Amount Due
----------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(In Thousands)
Below 3.00%..... $ 125 $ 50 $ -- $ -- $ 24 $ 199
3.00 - 4.49..... 76,503 4,109 432 140 507 81,691
4.50 - 5.49%.... 243,772 12,100 1,345 1,751 1,382 260,350
5.50 - 6.49%.... 47,162 3,024 8,180 4,614 130 63,110
6.50 - 7.49%.... 812 1,179 -- -- 6 1,997
Over 7.49%...... 6 -- -- -- 142 148
-------- ------- ------ ------ ------ --------
Total...... $368,380 $20,462 $9,957 $6,505 $2,191 $407,495
======== ======= ====== ====== ====== ========
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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,
-----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Beginning balance........... $583,025 $508,759 $479,374
-------- -------- --------
Net deposits (withdrawals)
before interest credited.. 28,493 52,020 9,128
Interest credited........... 21,363 22,246 20,257
-------- -------- --------
Net increase (decrease) in
deposits................... 49,856 74,266 29,385
-------- -------- --------
Ending balance.............. $632,881 $583,025 $508,759
======== ======== ========
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, 1999, the Savings
Bank had $214.5 million of borrowings from the FHLB-San Francisco at a
weighted average rate of 5.25%. Such borrowings mature between 1999 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,
------------------------
1999 1998 1997
---- ---- ----
Balance outstanding at end of period:
FHLB advances...................... $214,506 $132,114 $6,828
Weighted average rate paid on:
FHLB advances....................... 5.25% 5.70% 5.82%
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Year Ended June 30
------------------------
1999 1998 1997
---- ---- ----
Maximum amount of borrowings outstanding
at any month end:
FHLB advances....................... $214,506 $132,114 $8,578
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances....................... 100,825 121,500 7,098
Approximate average short-term borrowing
rate with respect to:
FHLB advances....................... 5.42% 5.69% 5.87%
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 30,1999.
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. Since 1991 Provident Financial has held the ground lease on a
property in West Los Angeles. During fiscal 1999 one of the tenants on this
property exercised its option to purchase the ground lease. The transaction
was completed on June 30, 1999 and resulted in a net gain of $3.6 million.
The remaining real estate held for investment by Provident Financial at June
30, 1999 totaled $1.1 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, 1999, the Savings Bank's investment in its subsidiaries
was $7.3 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
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<PAGE>
requirements. In addition, the Savings Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in
such matters as the ownership of deposit accounts and the form and content of
the Savings Bank's mortgage documents. The Savings Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Savings Bank's compliance with various regulatory requirements.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Corporation, the Savings
Bank and their operations. The Corporation, as a savings and loan holding
company, is also required to file certain reports with, and otherwise comply
with the rules and regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
The Savings Bank, as a member of the FHLB-San Francisco, is required to
acquire and hold shares of capital stock in the FHLB-San Francisco in an
amount equal to the greater of (i) 1.0% of the aggregate outstanding principal
amount of residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or (ii) 1/20 of its advances
(borrowings) from the FHLB-San Francisco. The Savings Bank is in compliance
with this requirement with an investment in FHLB-San Francisco stock of $6.6
million at June 30, 1999.
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 Bank Insurance Fund ("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
26
<PAGE>
the SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the Savings
Bank, paying 0%. This assessment schedule is the same as that for the BIF,
which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
0.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be
the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 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
27
<PAGE>
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At June 30, 1999, 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 re-qualify 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 of
1986, as amended ("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
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<PAGE>
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, 1999, the qualified thrift
investments of the Savings Bank were approximately 90.8% of its portfolio
assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt, and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, and (iii) general valuation loan and lease loss allowances up to 1.25%
of risk-weighted assets.
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 loans and that portion of land loans and nonresidential
construction loans which do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then 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.
29
<PAGE>
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in
lieu of the OTS-calculated amount. The OTS has postponed the date that the
component will first be deducted from an institution's total capital.
At June 30, 1999, the Savings Bank's Tier I capital of approximately
$72.4 million, or 15.4% of risk weighted assets, was $44.1 million in excess
of the OTS requirement of $28.3 million, or 6.0% of risk weighted assets.
Finally, at June 30, 1999, the Savings Bank had risk-based capital of
approximately $79.1 million or 16.8% of total risk-weighted assets, which was
$31.9 million in excess of the OTS risk-based capital requirement of $47.2
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.
30
<PAGE>
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At June 30, 1999, the Savings
Bank's limit on loans to one borrower was $14.4 million, and the Savings
Bank's largest aggregate amount of loans to one borrower was $3.7 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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<PAGE>
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
32
<PAGE>
to the tax bad debt reserve. The Savings Bank used the experience method bad
debt deduction for the taxable year ended June 30, 1997.
Legislation enacted in 1996 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 permitted to deduct as bad debt expense its
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, 1999, the Savings Bank's total bad debt
reserve for tax purposes was approximately $9.2 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 the Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the amount distributed will be
includable in taxable 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.
33
<PAGE>
Other Matters. The IRS has concluded its examination of the Savings
Bank's income tax returns for the fiscal years 1994, 1995 and 1996. The IRS
has notified the Savings Bank of proposed adjustments to its income tax
liability for the years under examination. The proposed adjustments are not
material to the Savings Bank's audited financial statements. The California
Franchise Tax Board has audited the Savings Bank through tax year 1990.
State Taxation
California. The California franchise tax rate applicable to the Savings
Bank equals the franchise tax rate applicable to corporations generally, plus
an "in lieu" rate of 2%, which is approximately equal to personal property
taxes and business license taxes paid by such corporations (but not generally
paid by banks or financial corporations such as the Savings Bank). At June
30, 1999, 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, 1999, the Savings Bank had 294 full-time and 76 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. See,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in Item 7 of this Report.
Item 2. Properties
- ------------------
At June 30, 1999, the net book value of the Savings Bank's property
(including land and buildings) and its fixtures, furniture and equipment was
$8.4 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
nine branch offices, of which eight are in Riverside County in the cities of
Riverside (2), Moreno Valley (2), Hemet, Sun City, Rancho Mirage and Blythe,
California and one is in Redlands, California in San Bernardino County. Six
of the Savings Bank's branch offices are owned by the Savings Bank and 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.
34
<PAGE>
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, 1999.
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 10, 1999, there were approximately 2,234 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.
Item 6. Selected Financial Data
- --------------------------------
The information required herein is incorporated by reference from pages 6
and 7 of the Annual Report, which is included herein as Exhibit 14. The
following table sets forth quarterly financial data.
35
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
1999
--------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
(Dollars in Thousands, Except
per share)
Interest income............ $59,314 $15,445 $14,878 $14,763 $14,228
Interest expense........... 34,372 8,643 8,295 8,701 8,733
------- ------- ------- ------- -------
Net interest income........ 24,942 6,802 6,583 6,062 5,495
Noninterest income......... 18,319 8,929 2,976 3,363 3,051
Provision for loan losses.. 525 75 75 150 225
Noninterest expense........ 24,717 6,558 6,093 6,489 5,577
------- ------- ------- ------- -------
Earnings before taxes...... 18,019 9,098 3,391 2,786 2,744
Taxes on income............ 7,554 3,782 1,431 1,180 1,161
------- ------- ------- ------- -------
Net earnings .............. $10,465 $ 5,316 $ 1,960 $ 1,606 1,583
======= ======= ======= ======= =======
Per common share:
Per share earnings, diluted $2.53 $1.34 $.48 $.39 $.37
===== ===== ==== ==== ====
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain information required herein is incorporated by reference from
pages 8 through 16 of the Corporation's Annual Report, which is included
herein as Exhibit 13.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Aspects of Market Risk. The Savings Bank does not maintain
a trading account for any class of financial instrument nor does it purchase
high-risk derivative instruments. Furthermore, the Savings Bank is not
subject to foreign currency exchange rate risk or commodity price risk. For
information regarding the sensitivity to interest rate risk of the Savings
Bank's interest-earning assets and interest-bearing liabilities, see the
tables under "Item 1. Business - Lending Activities - Maturity of Loan
Portfolio," "-Investment Activities" and "-Deposit Activities and Other
Sources of Funds - Time Deposits by Maturities" contained herein.
Qualitative Aspects of Market Risk. The Savings Bank's principal
financial objective is to achieve long-term profitability while reducing its
exposure to fluctuating market interest rates. The Savings Bank has sought to
reduce the exposure of its earnings to changes in market interest rates by
attempting to manage 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 Bank's interest-earning assets
by retaining for its portfolio loans with interest rates subject to periodic
adjustment to market conditions and the selling of fixed-rate, one-to-four
family mortgage loans. In addition, the Savings Bank maintains an investment
portfolio of U.S. Government and agency securities with contractual maturities
of between zero and ten years. The Savings Bank
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<PAGE>
relies on retail deposits as its primary source of funds. Management believes
retail deposits, compared to brokered deposits, reduce 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. For additional information, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein.
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.
37
<PAGE>
<TABLE>
Year Ended June 30,
------------------------------------------------------------------------------
1999 1998 1997
------------------------ -------------------------- --------------------------
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)................. $707,799 $52,217 7.38% $613,672 46,305 7.55% $498,853 $38,445 7.71%
Investment securities... 105,227 6,448 6.13 52,361 3,257 6.22 55,207 3,133 5.68
FHLB stock.............. 7,496 381 5.08 5,214 303 5.81 4,749 290 6.10
Interest-earning deposits 5,717 268 4.69 4,358 231 5.31 14,712 731 4.97
-------- ------ ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets................ 826,239 59,314 7.17 675,605 50,096 7.41 573,521 42,599 7.43
-------- ------ -------- ------- -------- -------
Non-interest-earning assets 35,486 27,502 25,051
-------- -------- --------
Total assets....... $861,725 $703,107 $598,572
======== ======== ========
Interest-bearing liabilities:
Passbook accounts....... $ 73,974 2,399 3.24 $50,010 1,216 2.43 $49,567 1,363 2.75
Demand and NOW accounts. 140,157 3,677 2.62 119,571 3,470 2.90 111,059 3,733 3.36
Certificate accounts.... 401,286 21,012 5.24 368,501 21,025 5.71 329,099 18,016 5.47
-------- ------ ---- -------- ------- ---- -------- ------- ----
Total deposits .... 615,417 27,088 4.40 538,082 25,711 4.78 489,725 23,112 4.72
FHLB advances........... 139,240 7,275 5.22 64,228 3,695 5.75 7,098 416 5.87
Other borrowings........ 167 9 5.38 206 11 5.35 -- -- --
-------- ------ ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing liabilities 754,824 34,372 4.55 602,516 29,417 4.88 496,823 23,528 4.74
-------- ------ -------- ------- -------- -------
Non-interest-bearing
liabilities............. 22,652 16,602 15,912
-------- -------- --------
Total liabilities....... 777,476 619,118 512,735
-------- -------- --------
Shareholders equity..... 84,249 83,989 80,837
-------- -------- --------
Total liabilities
and Shareholders
equity............ $861,725 $703,107 $598,572
======== ======== ========
Net interest income..... $24,942 $20,679 $19,071
======= ======= =======
Interest rate spread(3). 2.62% 2.53% 2.69%
Net interest margin(4).. 3.01% 3.06% 3.33%
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 109.46% 112.13% 115.44%
(1) Includes loans available for sale.
(2) Includes deferred loan fee amortization of ($585,000), ($752,000) and ($254,000) for the years ended
June 30, 1999, 1998 and 1997, 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.
39
</TABLE>
<PAGE>
Yields Earned and Rates Paid. The following table sets forth (on a
consolidated basis) for the periods and at the dates indicated the weighted
average yields earned on the Savings Bank's assets and the weighted average
interest rates paid on the Savings Bank's liabilities, together with the net
yield on interest-earning assets.
At June Year Ended June 30,
30, -----------------------
1999 1999 1998 1997
---- ---- ---- ----
Weighted average yield on:
Loans receivable (1)................. 7.38% 7.52% 7.55% 7.71%
Investment securities................ 6.13 6.25 6.22 5.68
FHLB stock........................... 5.08 5.24 5.81 6.10
Interest-earning deposits............ 4.69 4.94 5.31 4.97
All interest-earning assets.......... 7.17 7.25 7.41 7.43
Weighted average rate paid on:
Passbook accounts.................... 3.24 3.06 2.43 2.75
Demand and NOW accounts.............. 2.62 2.59 2.90 3.36
Certificate accounts................. 5.24 4.95 5.71 5.47
FHLB advances........................ 5.22 5.25 5.75 5.87
Other borrowings..................... 5.38 5.14 5.34 --
All interest-beraing liabilities..... 4.55 4.44 4.88 4.74
Interest rate spread (spread between
weighted average rates on all
interest-earnings assets and all
interest-bearing liabilities......... 2.62 2.80 2.53 2.69
Net interest margin (net interest
income as a percentage of average
interest-earning assets)............. 3.01 3.04 3.06 3.33
(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.
40
<PAGE>
<TABLE>
Year Ended June 30, Year Ended June 30,
1999 Compared to Year 1998 Compared to Year
Ended June 30, 1998 Ended June 30, 1997
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).............. ($1,032) $7,102 ($158) $5,912 ($804) $8,849 ($185) $7,860
Investment
securities....... (49) 3,289 (49) 3,191 300 (161) (15) 123
FHLB stock........ (38) 133 (17) 78 (13) 28 (1) 14
Interest-bearing
deposits......... (27) 72 (8) 37 50 (515) (35) (500)
----- ------ ----- ------ ------ ------ ----- ------
Total net change
in income on
interest earning
assets.......... (1,146) 10,596 (232) 9,218 (467) 8,201 (236) 7,497
----- ------ ----- ------ ------ ------ ----- ------
Interest-bearing
liabilities:
Passbook accounts.. 406 583 194 1,183 (157) 12 (1) (146)
Demand and NOW
accounts.......... (333) 597 (57) 207 (510) 286 (39) (263)
Certificate accounts. (1,729) 1,870 (154) (13) 761 2,157 91 3,009
FHLB advances...... (340) 4,317 (397) 3,580 (8) 3,351 (64) 3,279
Other borrowings... -- (2) - (2) -- -- 11 11
----- ------ ----- ------ ------ ------ ----- ------
Total net change
in expense on
interest-bearing
liabilities ....... (1,996) 7,365 (414) 4,955 86 5,806 (3) 5,890
----- ------ ----- ------ ------ ------ ----- ------
Net change in net
interest income...... $ 850 $3,231 $ 182 $4,263 ($553) $2,395 ($234) $1,607
===== ====== ===== ====== ==== ====== ===== ======
(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.
41
</TABLE>
<PAGE>
Impact of New Accounting Pronouncements. SFAS No.130. "Reporting
Comprehensive Income." Comprehensive income is comprised of net income and ll
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 Corporation
has adopted this statement in the year ended June 30, 1999.
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
Corporation has adopted this statement in the year ended June 30, 1999.
The Corporation has determined that its reportable segments are the
operation pertaining to mortgage banking ("Profed Mortgage") and the
operations pertaining to consumer and commercial banking ("Banking
Operations"). See footnote Number 17 for disclosure pertaining to the
Corporation's operating segments for the fiscal years ended June 30, 1999,
1998 and 1997, respectively.
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. This SFAS No. 133 has been amended by SFAS No. 137 to extend
implementation of SFAS No. 133 for one year to all fiscal quarters beginning
after June 15, 2000. Management is still assessing the impact of SFAS No.
133, if any, and will adopt this statement in the year ended June 30, 2001.
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 July 26, 1999, the Corporation announced the
commencement of a 10% stock repurchase program beginning on or about August 2,
1999. Approximately 439,000 shares will be repurchased over the next 12
months. As of August 31, 1999, 203,500 shares had been repurchased at an
average price of $19.92.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information required herein is incorporated by reference from pages
18 through 45 of the Corporation's Annual Report, which is included herein as
Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
None.
42
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information concerning the Corporation's directors required by this
item is incorporated by reference from the information set forth under
Proposal I - Election of Directors" and "Compliance with Section 16(a) of the
Exchange Act" in the Proxy Statement.
Executive Officers of the Corporation and Savings Bank
Age at Position
June 30, ---------------------------------------------
Name 1999 Corporation Savings Bank
---- ---- ----------- ------------
Craig G. Blunden 51 President, Chief President, Chief
Executive Officer Executive Officer and
and Director Director
Brian M. Riley 34 Chief Financial Senior Vice President
Officer and Chief Financial
Officer
Robert G. Schrader 59 Secretary Executive Vice
President, Chief
Operating Officer
Secretary and Director
Donald L. Blanchard 48 N/A Senior Vice President,
Retail Banking
Lil Brunner 45 N/A Senior Vice President
Chief Information
Officer
Richard L. Gale 47 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 Board of Directors for the Federal Home Loan
Bank of San Francisco, 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.
43
<PAGE>
Item 11. Executive Compensation
- --------------------------------
The information required by this Item is incorporated by reference to the
information under "Executive Compensation" and "Directors' Compensation" in
the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference to the
information under "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
( c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge by
any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated by reference to the
information under "Transactions with Management" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1)(2) Report of Independent Accountants
Consolidated Financial Statements
(a)Consolidated Balance Sheets, June 30, 1999 and 1998
(b)Consolidated Statement of Operations For the Years
Ended June 30, 1999, 1998 and 1997
(c)Consolidated Statement of Stockholders' Equity For
the Years Ended June 30, 1999, 1998 and 1997
(d)Consolidated Statement of Cash Flows For the Years
Ended June 30, 1999, 1998 and 1997
(e)Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have
been omitted as the required information is inapplicable.
44
<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 (incorporated by reference
to Exhibit 10.6 in the Corporation's Annual Report on Form
10-K for the year ended June 30, 1998)
10.7 Severance Agreement with Brian Riley (incorporated by
reference to Exhibit 10.7 in the Corporation's Annual Report
on Form 10-K for the year ended June 30, 1998)
10.8 Severance Agreement with Donald Blanchard (incorporated by
reference to Exhibit 10.8 in the Corporation's Annual Report
on Form 10-K for the year ended June 30, 1998)
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, 1999.
45
<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 22, 1999 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 22, 1999
- ----------------------------- Executive Officer and
Craig G. Blunden Director (Principal
Executive Officer)
/s/Brian M. Riley Chief Financial Officer September 22, 1999
- ----------------------------- (Principal Financial
Brian M. Riley and Accounting Officer)
/s/Robert G. Schrader Director September 22, 1999
- -----------------------------
Robert G. Schrader
/s/Bruce W. Bennett Director September 22, 1999
- -----------------------------
Bruce W. Bennett
/s/Debbi H. Guthrie Director September 22, 1999
- -----------------------------
Debbi H. Guthrie
/s/Roy H. Taylor Director September 22, 1999
- -----------------------------
Roy H. Taylor
/s/William E. Thomas Director September 22, 1999
- -----------------------------
William E. Thomas
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
Provident Financial Holdings, Inc.
1999 ANNUAL REPORT
[Picture appears here]
Meeting Your Banking Needs
of Tomorrow...Today
<PAGE>
TABLE OF CONTENTS
Message From the Chairman..................................................4
Financial Highlights.......................................................6
Management's Discussion and Analysis.......................................8
Report of Independent Accountants.........................................17
Consolidated Financial Statements.........................................18
Notes to Consolidated Financial Statements................................23
Shareholder Information...................................................46
Market Information........................................................46
Corporate Profile.........................................................46
Board of Directors and Senior Officers....................................47
Provident Bank and ProFed Mortgage Locations..............................48
<PAGE>
[Picture appears in background]
Changes in the way
our clients live and work
have taught us
what they want
and what they expect.
Page 2 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
More Like You Every Day
Things have changed since 1956, the year we were chartered. Then, we built
Provident Bank on the strongest foundation possible: Our customers. Today,
our customers are more the focus of what we do than ever before. Changes in
the way they live and work have taught us what our customers want and expect.
Asking and listening have taught us what a bank should be.
Holding on to hard-earned dollars is but one of many concerns facing the
banking client. Constantly changing tax laws, along with a fluctuating
economy, can present significant challenges. In meeting individual needs,
Provident is aware of differing demands. While some may feel completely at
ease in the information age, others prefer a more familiar and traditional
approach. Provident provides choice. We are capable of meeting the challenges
of the banking customer of today, and the client of the future.
Provident staff plays a key role in not only obtaining new clients, but in
retaining them as well. Our representatives are empowered and encouraged to
take ownership in the quest for financial solutions. This leads to a simple
fact - a Provident client is a satisfied client.
We are continually mindful that in order to maintain a lasting partnership we
must develop a meaningful financial relationship with our clients. The
retention of a client is based on the value of what we provide, from
technology to one-on-one service.
We are proud of how far we have come. And we enthusiastically embrace our
vision of how far we can go. That's why we say: Provident Bank More like you
every day!
Provident [LOGO]
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 3
<PAGE>
Message From the Chairman
Dear Fellow Shareholders,
As you will read in this report, the results of fiscal 1999 were the best in
the history of our Company. Not only were income and growth strong, but our
non-performing assets were at their lowest levels in nearly a decade. The
sale of our Los Angeles property, through the exercise of a purchase option,
was a major headline item during the past year. Even without that gain, the
Company still posted strong performance numbers.
Net Income (In Thousands)
1995 - $(4,700)
1996 - $ 2,500
1997 - $ 1,900
1998 - $ 5,000
1999 - $ 6,900
Note: (*) Excluding the non-recurring property gain, totaling $3.57 million
(net of tax).
Net income, excluding the gain from our property sale, was $6.9 million, or
$1.67 per diluted share. This represents an increase of 50% over comparable
earnings per share in fiscal 1998. There were three key factors that
contributed to our success: an exceptional mortgage market, the impact of
sustained balance sheet growth, and active share repurchases, including one 5%
share repurchase program in August 1998 and a second 5% repurchase program in
March 1999.
Mortgage Banking
During fiscal year 1999, we originated over $614 million in loans for sale, an
increase of 31% over the prior year. A favorable interest rate environment
and a strong local housing market were the primary forces behind this
increase. The mortgage industry experienced its highest level of refinancing
volume since the early 1990s. Refinancing transactions represented
approximately 45% of our total mortgage originations during fiscal 1999. In
addition, the Southern California and Nevada housing markets were strong
during the past year in terms of both unit sales and home prices.
Total Loans (In Millions)
Loans - AFS Loans - HFI
1995 - $34 1995 - $472
1996 - $49 1996 - $453
1997 - $20 1997 - $517
1998 - $67 1998 - $620
1999 - $38 1999 - $669
As with most cyclical businesses, mortgage banking is susceptible to market
changes which can dramatically affect origination volume. During the last few
months, the interest rate environment has begun to change. Fear of wage and
price inflation has prompted the Federal Reserve to take corrective action.
The recent upward movement in short-term rates has sent mortgage rates over 8%
for the first time in two years. As a result, industry-wide mortgage
origination volume is expected to decrease. Although the local housing market
remains strong, it is too early to determine what impact higher interest rates
will have.
Savings Bank
Our substantial balance sheet growth over the past two years has continued to
improve net interest income and operating efficiency. Net interest income
increased by 20% during fiscal 1999 as we added over $128 million in earning
assets while maintaining our net interest margin above 3%. The operating
efficiency of the overall Company, excluding the non-recurring property gain,
fell to 68% from 70% in the prior year. This decrease was in
Page 4 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Total Deposits (In Millions)
1995 - $487
1996 - $479
1997 - $509
1998 - $583
1999 - $633
spite of additional operating expenses arising from our computer system
conversion and Year 2000 (Y2K) remediation work, both of which required
considerable resources.
Year 2000 Preparation
During March of this fiscal year, we converted all of our major operating
systems to Y2K compliant software and hardware. Although Y2K was the immediate
reason for converting, we also benefited substantially with improved
technology and information delivery systems in the process. We remain on track
with the federal regulatory requirements for Year 2000 testing, contingency
planning and monitoring. We are confident as to the success of our efforts to
achieve Y2K compliance in all our major operating systems.
The Year Ahead
Until the new millennium actually arrives and for a period thereafter, we will
continue to have people and equipment deployed in activities related to the
century date change. Through our continuous customer awareness programs,
contingency planning and outside vendor monitoring, we hope to allay many of
the Y2K concerns that exist in our marketplace.
With a potentially volatile mortgage market looming, we expect to face these
challenges through consolidation and careful cost controls. We look for
continued growth in our balance sheet and anticipate that recent rise in rates
will actually benefit our adjustable rate loan production. During this next
fiscal year, we will be opening a branch in Corona. This area represents one
of the highest growth areas in Riverside County and supports our commitment to
the Inland Empire.
Total Assets (In Millions)
1995 - $567
1996 - $585
1997 - $616
1998 - $816
1999 - $957
Fiscal 1999 was a very successful year for all of us. This next year, no
doubt, will bring new and different challenges; yet, we have never been more
committed to the concept of community banking. Trends in the market place
including mergers and acquisitions continue to present more opportunities for
us. Our people, technology and strategies will help us capitalize on these
opportunities as we partner with the communities we serve.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
Chairman, President &
Chief Executive Officer
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 5
<PAGE>
The following tables set forth information concerning the consolidated
financial position and results of operations of the Corporation and its
subsidiaries at the dates and for the periods indicated.
At or for the year ended June 30,
- ------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
==============================================================================
Financial Condition Data:
Total assets............... $957,431 $816,205 $615,500 $584,847 $567,186
Loans held for investment,
net....................... 669,386 620,128 517,147 452,945 471,543
Loans available for sale,
net....................... 37,667 67,248 19,984 49,612 34,489
Cash and overnight deposits 19,729 23,433 20,111 30,831 11,433
Investment securities...... 187,178 75,554 34,406 27,118 20,067
Deposits................... 632,881 583,025 508,759 479,374 486,585
Borrowings................. 214,506 132,114 6,828 8,578 35,063
Stockholders' equity (1)... 89,686 86,650 85,447 85,970 37,323
Operating Data:
Interest income............ $ 59,314 $ 50,096 $ 42,599 $ 41,817 $ 36,020
Interest expense........... 34,372 29,417 23,528 25,269 22,491
- -----------------------------------------------------------------------------
Net interest income........ 24,942 20,679 19,071 16,548 13,529
Provision for loan losses.. 525 1,200 1,254 2,261 4,787
- -----------------------------------------------------------------------------
Net interest income after
provision................. 24,417 19,479 17,817 14,287 8,742
Loan servicing and other
fees...................... 2,714 3,035 2,738 2,442 2,476
Gains from sale of loans... 6,590 4,491 3,597 4,753 701
Other non-interest income.. 2,044 1,619 1,273 2,256 1,308
Real estate operations,
net....................... 6,971 196 (11) (101) (1,600)
Operating expenses......... 24,717 20,095 22,313 19,499 17,354
- -----------------------------------------------------------------------------
Income (loss) before income
taxes..................... 18,019 8,725 3,101 4,138 (5,727)
Provision (benefit) for
income taxes.............. 7,554 3,705 1,160 1,332 (1,735)
- -----------------------------------------------------------------------------
Net income (loss).......... $ 10,456 $ 5,020 $ 1,941 $ 2,806 $ (3,992)
- -----------------------------------------------------------------------------
Basic earnings per share... $ 2.56 $ 1.14 $ 0.41 N/A N/A
=============================================================================
Diluted earnings per share. $ 2.53 $ 1.11 $ 0.41 N/A N/A
=============================================================================
(1) Amount represents retained earnings, substantially restricted.
Page 6 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Financial Highlights
At or For the Year Ended June 30,
- ------------------------------------------------------------------------------
1999* 1998 1997 1996 1995
==============================================================================
Key Operating Ratios:
Performance Ratios
Return (loss) on assets..... 0.80% 0.71% 0.32% 0.50% (0.72)%
Return (loss) on share-
holders' equity............ 8.19 5.98 2.26 6.98 (9.81)
Interest rate spread........ 2.62 2.53 2.69 2.75 2.31
Net interest margin......... 3.01 3.06 3.33 3.05 2.55
Average interest-earning
assets to average
interest-bearing
liabilities................ 109.46 112.13 115.44 106.32 105.60
Operating and administra-
tive expenses as a
percent of average
total assets............... 2.87 2.86 3.73 3.46 3.13
Efficiency Ratio............ 67.56 69,73 87.80 82.57 143.30
Regulatory Capital Ratios
Tangible capital............ 7.66 8.09 9.89 10.41 6.19
Tier 1 (core) capital....... 7.66 8.09 9.89 10.41 6.19
Total risk-based capital.... 16.76 14.12 16.12 16.49 11.25
Tier 1 risk-based capital... 15.35 12.89 14.87 N/A N/A
Asset Quality Ratios
Nonaccrual and 90 days or
more past due loans as a
percent of loans held for
investment, net............ 0.20 0.31 1.21 0.98 0.54
Nonperforming assets as a
percent of total assets.... 0.33 0.78 1.44 1.22 1.65
Allowance for loan losses
as a percent of gross
loans held for investment.. 0.99 0.98 1.04 1.18 1.06
Allowance for loan losses
as a percent of
nonperforming loans........ 499.40 320.19 87.45 123.43 198.79
Net charge-offs (recoveries)
to average outstanding
loans...................... 0.20 0.08 0.25 0.38 0.62
(*) Excludes the impact of the non-recurring property gain, totaling $3.57
million (net of tax).
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
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. Provident Savings Bank, FSB, is a
wholly owned subsidiary of Provident Financial Holdings, Inc. and as such,
comprises substantially all of the activity for Provident Financial Holdings,
Inc.
Certain matters in this annual report constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward looking statements relate to, among others, expectations of the
business environment in which the Corporation operates, projections of future
performance, perceived opportunities in the market, potential future credit
experience, and statements regarding the Corporation's mission and vision.
These forward looking statements are based upon current management
expectations, and may, therefore, involve risks and uncertainties. The
Corporation's actual results, performance, or achievements may differ
materially from those suggested, expressed, or implied by forward looking
statements due to a wide range of factors including, but not limited to, the
general business environment, the California real estate market, competitive
conditions between banks and non-bank financial services providers, regulatory
changes, and other risks detailed in the Corporation's reports filed with the
Securities and Exchange Commission, including the Annual Report on Form 10-K
for the fiscal year ended June 30, 1999.
Operating Strategy
The Corporation's primary goal has been to improve 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 this 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 expenses. Net interest income is the
difference between the income the Savings Bank receives on its loans and
investments 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, miscellaneous fees and other income from banking services,
and gains on the occa-
Page 8 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
sional sale of assets. Mortgage banking generates income from the sale of
mortgage loans, of which substantially all are sold 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 releasing the right to future loan servicing income. 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 with 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, premises and
occupancy, deposit insurance premiums, equipment, professional, sales and
marketing 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.
The Corporation also actively utilizes share repurchases in its operating
strategy. Share repurchases increase shareholder value through higher earnings
per share and improved liquidity in the Corporation's shares.
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
Total assets increased from $816.2 million at June 30, 1998 to $957.4 million
primarily as a result of growth in loans and investments. Loans held for
investment increased by $49.3 million from $620.1 million at June 1998 to
$669.4 million at June 30, 1999. The Savings Bank continues to accept
adjustable rate mortgage loans generated by its mortgage division into its own
portfolio. The Savings Bank believes that this strategy will ensure a flow of
high quality loans and will support its growth objectives. Loans held for sale
decreased from $67.2 million at June 30, 1998 to $37.7 million. The amount of
loans held for sale is largely dependent on timing of loan fundings, loan
commitment expirations, and loan sale settlements.
As part of its growth strategy, the Corporation purchases investment
securities when they can be profitably matched against borrowings. This
activity increased the investment securities by $111.6 million to $187.2
million at June 30, 1999.
Total liabilities increased from $729.6 million at June 30, 1998 to $867.7
million at June 30, 1999 as a result of retail deposit growth and an increase
in Federal Home Loan Bank (FHLB) advances. Deposits increased from $583.0
million at June 30, 1998 to $632.9 million at June 30, 1999. During fiscal
1999, the Savings Bank continued its emphasis on building new client
relationships, particularly with low cost checking accounts. FHLB advances
increased
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
from $132.1 million at June 30, 1998 to $214.5 million as the Savings Bank
utilized FHLB advances to finance a portion of its loan and investment
securities growth.
Total stockholders' equity was $89.7 million at June 30, 1999, as compared to
$86.7 million at June 30, 1998. The increase in stockholders' equity during
fiscal 1999 was substantially offset by share repurchases. The Corporation
repurchased 228,711 shares, or 5% of outstanding shares, for a total cost of
$4.6 million in August 1998 and 232,700 shares, or 5% of outstanding shares,
for a total cost of $4.0 million in March 1999. The amortization of unearned
stock compensation of $1.0 million in fiscal 1999 which consisted of $740,000
in MRP (Management Recognition Program) and $271,000 in ESOP (Employee Stock
Ownership Program). The Corporation's book value per share increased from
$17.85 at June 30, 1998 to $20.45 at June 30, 1999.
Comparison of Operating Results for the Years Ended June 30, 1999 and 1998
General. The Corporation had net earnings of $10.5 million, or $2.53 per
diluted share, for the year ended June 30, 1999, as compared to $5.0 million,
or $1.11 per diluted share, for the year ended June 30, 1998. The increase in
operating results in fiscal 1999 was due primarily to: (1) a non-recurring
gain of $3.57 million (net of tax) from the sale of investment property
located in Los Angeles, California, upon which the Corporation controlled a
ground lease; (2) an increase in net interest income; and (3) an increase in
non-interest income. These factors were partially offset by an increase in
overhead, which was mainly attributable to: (1) non-recurring expenses related
to system conversions and Year 2000 preparations and (2) additional expenses
related to mortgage production costs. Excluding the non-recurring property
gain, net income for fiscal 1999 would have been $6.9 million, or $1.67 per
diluted share, an increase of 50% over fiscal 1998.
Net Interest Income. Net interest income increased by $4.2 million, or 20.6%,
from $20.7 million in fiscal 1998 to $24.9 million in fiscal 1999. This
increase resulted principally from the growth of interest earning assets and a
stable net interest spread.
Interest Income. Total interest income increased by $9.2 million, or 18.4%, to
$59.3 million in fiscal 1999 as the average earning assets increased from $676
million during fiscal 1998 to $826 million during fiscal 1999. The impact of
earning asset growth was partially offset by lower market rates as the average
yield on assets decreased from 7.42% to 7.18%, respectively. Average loan
receivables increased from $614 million during fiscal 1998 to $708 million
during fiscal 1999 while the average yield fell from 7.55% to 7.38%,
respectively. Average investment securities increased from $52 million during
fiscal 1998 to $105 million during fiscal 1999 while the average yield fell
from 6.22% to 6.13%, respectively.
Interest Expense. Total interest expense increased by $5.0 million, or 16.8%,
from $ 29.4 million in fiscal 1998 to $34.4 million in fiscal 1999. Average
customer deposits increased from $538 million during fiscal 1998 to $615
million during fiscal 1999 while the average cost of the deposits decreased
from 4.78% to 4.40%, respectively.
Page 10 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Average FHLB advances also increased from $64.2 million during fiscal 1998 to
$139.2 million during fiscal 1999 while the average cost fell from 5.75% to
5.22%, respectively.
Provision for loan losses. Provision for loan losses decreased by $675,000, or
56%, from $1.2 million in fiscal 1998 to $525,000 in fiscal 1999. The decrease
in provisions reflects continued improvement in the local economy and
improvement in asset quality. The allowance for loan losses was $6.7 million,
or 0.99% of gross loan held for investment, at June 30, 1999, as compared to
$6.2 million, or 0.98% of gross loan held for investment, at June 30, 1998.
The allowance for loan losses as percentage of non-performing loans at the end
of fiscal 1999 was 499.4%, as compared to 320.2% at the end of fiscal 1998.
Non-interest Income. Total non-interest income increased by $9.0 million to
$18.3 million in fiscal 1999 from $9.3 million in fiscal 1998. Excluding the
non-recurring property gain of $6.2 million, non-interest income in fiscal
1999 would have been $12.2 million, or an increase of 30.3% over the $9.3
million in fiscal 1998. This improvement was mainly attributable to a
substantial increase in gains from the sale of loans from $4.5 million in
fiscal 1998 to $6.6 million in fiscal 1999 as the volume of loans sold
increased from $425 million in fiscal 1998 to $649 million in fiscal 1999.
Non-interest Expense. Total non-interest expense increased by $4.6 million, or
23%, to $24.7 million in fiscal 1999 as compared to $20.1 million in fiscal
1998. This increase was attributable mainly to (1) non-recurring expenses
related to system conversions and year 2000 preparations totaling $454,000;
and (2) additional salaries and employee benefits of $2.8 million as a result
of higher mortgage production and additional overtime and temporary staffing
requirements required by the system conversion and Y2K preparations.
Income Taxes. The provision for income taxes was $7.6 million for fiscal 1999
(for an effective tax rate of 41.9%) as compared to $3.7 million in 1998 (for
an effective tax rate of 42.5%).
Comparison of Operating Results for the Years Ended June 30, 1998 and 1997
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 primarily due to a
one-time $3.2 million SAIF (Savings Association Insurance Fund) 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 growth in interest earning assets, customer
deposits and FHLB advances.
Interest Income. The average yield on interest earning assets for fiscal
1998, at 7.41%, was virtually unchanged from the average yield for fiscal
1997. Total interest income increased by $7.5 million in 1998 due to the
increase
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
in loans receivable. The yield on loans receivable decreased by 16 basis
points to 7.55%, reflecting the general decrease in interest rates during the
fiscal 1998. Interest income on investment securities increased slightly in
fiscal 1998 to $3.3 million from $3.1 million in fiscal 1997. The average
balance in investment securities declined from $55.2 million in fiscal 1997 to
$52.4 million in fiscal 1998 while the yield increased from 5.68% to 6.22%,
respectively.
Provision for Loan Losses. Provisions for loan 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 multi-family properties while
commercial real estate and consumer loans showed increases. The allowance for
loan losses ended fiscal 1998 at $6.2 million, as compared to $5.5 million in
fiscal 1997. Because of growth in the loan portfolio during fiscal 1998, the
ratio of the allowance for loan losses as a percentage of total loans
outstanding declined from 1.04% in fiscal 1997 to 0.98% in fiscal 1998. The
allowance for loan losses as a percentage of non-performing loans at the end
of fiscal 1998 was 320.2%, as compared to 87.5% at the end of fiscal 1997.
Non-interest Income. Total non-interest income increased by 22.9%, from $7.6
million in fiscal 1997 to $9.3 million in fiscal 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 fiscal 1997 to $425 million in fiscal
1998.
Non-interest Expense. Total non-interest expense decreased by $2.2 million, or
9.9%, in fiscal 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 expenses and the
adoption of additional benefit programs.
Income Taxes. The provision for income taxes was $3.7 million in fiscal 1998
(for an effective tax rate of 42.5%), as compared to $1.2 million in fiscal
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.
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 government and investment
grade securities. The Savings Bank relies on retail deposits as its primary
source of funding while utilizing FHLB advances as a secondary source of
funding. 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.
Page 12 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Using data from the Savings Bank's quarterly report to the Office of Thrift
Supervision (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. The interest rate analysis
received from OTS is similar to the Savings Bank's owned interest rate
analysis model. This procedure for measuring interest rate risk was developed
by the OTS to replace "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, 1999
the estimated changes in NPV based on the indicated interest rate
environments. In general, if the interest rates increase, the NPV of the
Savings Bank and its expected future net interest income would both decrease.
Conversely, if the 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)
+300 bp $ 71,631 $ (41,569) (37%) 7.77% -375 bp
+200 bp 87,867 (25,333) (22) 9.31 -221 bp
+100 bp 102,404 (10,796) (10) 10.61 -91 bp
0 bp 113,200 11.52
-100 bp 121,098 7,898 7 12.16 +63 bp
-200 bp 129,844 16,644 15 12.85 +133 bp
-300 bp 140,694 27,494 24 13.70 +218 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, 1999 ("base case").
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV").
(3) Calculated as the change in the NPV ratio from the base case amount
assuming the indicated change in interest rates.
The following table is provided by the OTS and is based on the calculations in
the above table. It sets forth the change in the NPV at a 200 bp rate shock at
June 30, 1999 and June 30, 1998.
At June 30, 1999 At June 30, 1998
- -----------------------------------------------------------------------------
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of
Assets.................................. 11.52% 11.36%
Exposure Measure: Post-Shock NPV Ratio... 9.31 10.43
Sensitivity Measure: Change in NPV Ratio. 221 bp 93 bp
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
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.
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 operations.
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
present 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 and coupon payments of investment securities, fee income
generated from banking services and mortgage banking activities 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
to meet short-term liquidity needs. At June 30, 1999, cash totaled $19.7
million, or 2.0% of total assets. 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% of the
average quarterly balance of its net withdrawable deposits and short-term
borrowings. The Savings Bank's actual liquidity ratio at June 30, 1999 was
24.6%. The Savings Bank has, in the past, consistently maintained liquidity
levels relatively close to and in excess of regulatory requirements and
believes this is an appropriate strategy for proper asset and liability
management.
The primary investing activity of the Savings Bank is the origination of
mortgage loans. During the years ended June 30, 1999, 1998 and 1997, the
Savings Bank originated loans in the amounts of $876.5 million, $707.3 million
Page 14 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
and $441.8 million, respectively. At June 30, 1999, the Savings Bank had loan
commitments totaling $39.9 million and undisbursed loans in process totaling
$17.2 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 one year or less from June 30, 1999
totaled $368.4 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, 1999, the Savings Bank was in compliance
with all regulatory capital requirements which were effective as of such date
with tangible capital, tier 1 (core) capital, total risk-based capital and
tier 1 risk-based capital ratios of 7.66%, 7.66%, 16.72% and 15.35%,
respectively.
Year 2000 Readiness
General
Year 2000 issues relate to the possibility of computer programs and hardware
not being able to distinguish between the Year 1900 and the Year 2000. If it
is not corrected, some, if not all, systems used by the Corporation might be
at risk of not being able to function properly. To prevent this from happening
during the turn of the century and beyond, the Corporation has undertaken a
major project to ensure that its internal operating systems, as well as those
of its customers and suppliers, will be fully capable of processing
transactions in the Year 2000 and beyond. The Corporation has completed
testing on all internal mission critical components and the project is on
schedule according to the Year 2000 milestones established by the Federal
Financial Institutions Examination Council ("FFIEC").
Project
The Corporation formed a Year 2000 Committee in July 1997, which consists of
the Chief Information Officer and senior management staff from all levels. The
committee reports the progress of the Year 2000 project to the Board of
Directors on a monthly basis. A regular review is also performed by the
Internal Audit department. In addition, the Corporation engaged an information
technology consultant to strengthen the Year 2000 project team.
The Corporation completed the replacement of its core processing systems in
March 1999 and has completed Year 2000 testing on all internal mission
critical components. The Corporation has also reviewed its critical
non-information technology systems to assess the risk of Year 2000 failure.
Critical systems that pose risk of Year 2000 failure have detailed contingency
plans, which were developed to ensure uninterrupted services.
The Corporation, as part of its Year 2000 remediation plan, continues to
monitor the progress of critical third party vendors as they implement
corrective actions to ensure an uninterrupted flow of goods and services. For
both systems and vendors that are classified as critical, contingency plans
have been developed which include, among other things, alternate processing
methods, steps for transitioning to manual processes, and alternate vendors or
sources of goods and services.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
The Corporation has contacted its commercial borrowers to assess their Year
2000 exposure and continues to monitor their remediation progress. The
Corporation has also distributed a Year 2000 Readiness Statement to all
depositors, borrowers, and vendors. The Corporation continues to monitor the
overall systems and critical vendors until the turn of the century and beyond.
Costs
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-down, and $200,000 in external project management expenses. In
addition, the estimated value of internal resources allocated to the Year 2000
project is $400,000. The new loan and deposit systems which are already Year
2000 compliant have been able to enhance the overall banking system. A total
of $3.4 million, or 96.0% of the total costs has been spent for the project as
of June 30, 1999. The replacement equipment and software will be capitalized
and depreciated in accordance with the Corporation's normal accounting
policies.
Risks
The failure of not being able to completely detect potential problems related
to Year 2000 could result in an interruption of normal business activities/
operations, which may materially and adversely affect the Corporation's
results of operations. As a participant in domestic payment systems, the
Corporation's Year 2000 preparedness is largely dependent upon the readiness
of other participants in the system including the United States government.
The Corporation relies largely on third-party software vendors and service
providers for many critical functions in the conduct of its businesses. The
focus of the Corporation has been to monitor and test the Year 2000 compliance
progress of its critical vendors. The Year 2000 project is expected to
significantly reduce the risk inherent in the Year 2000 problem.
Page 16 - Provident Financial Holdings, Inc. - 1999 Annual Report
<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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, 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 6, 1999
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 17
<PAGE>
Consolidated Balance Sheets
Provident Financial Holdings, Inc. and Subsidiary
June 30,
--------------------
(Dollars in Thousands) 1999 1998
==============================================================================
Assets
Cash................................................... $ 19,729 $ 20,933
Overnight deposits..................................... - 2,500
- -----------------------------------------------------------------------------
Total cash and cash equivalents.................... 19,729 23,433
Investment securities-held to maturity................. 179,834 74,028
-available for sale............... 7,344 1,526
Loans held for investment, net......................... 669,386 620,128
Loans available for sale, net.......................... 37,667 67,248
Accrued interest receivable............................ 5,984 4,940
Real estate available for sale, net.................... 2,793 6,922
Federal Home Loan Bank stock........................... 10,725 6,606
Premises and equipment, net............................ 8,422 7,429
Prepaid expenses and other assets...................... 15,547 3,945
- -----------------------------------------------------------------------------
Total assets....................................... $957,431 $816,205
=============================================================================
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits........................ $ 14,764 $ 10,768
Interest bearing deposits............................ 618,117 572,257
- -----------------------------------------------------------------------------
Total deposits..................................... 632,881 583,025
Borrowings........................................... 214,506 132,114
Accounts payable, accrued interest and other
liabilities......................................... 20,358 14,416
- -----------------------------------------------------------------------------
Total liabilities.................................. 867,745 729,555
- -----------------------------------------------------------------------------
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 4,385,785 and 4,854,125,
respectively........................................ 51 51
Additional paid-in capital........................... 51,069 50,875
Retained earnings - substantially restricted......... 57,555 47,090
Treasury stock at cost (739,430 and 251,000
shares, respectively)............................... (14,089) (5,305)
Unearned stock compensation.......................... (5,644) (6,654)
Accumulated other comprehensive income, net
of tax.............................................. 744 593
- -----------------------------------------------------------------------------
Total stockholders' equity......................... 89,686 86,650
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity......... $957,431 $816,205
=============================================================================
The accompanying notes are an integral part of these financial statements.
Page 18 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Consolidated Statements of Operations
Provident Financial Holdings, Inc. and Subsidiary
Year Ended June 30,
---------------------------------
(Dollars in Thousands) 1999 1998 1997
==============================================================================
Interest income:
Loans.................................... $ 52,217 $ 46,305 $ 38,445
Investment securities.................... 7,097 3,791 4,154
- -----------------------------------------------------------------------------
Total interest income.................. 59,314 50,096 42,599
- -----------------------------------------------------------------------------
Interest expense:
Deposits................................. 27,088 25,711 23,112
Borrowings............................... 7,284 3,706 416
- -----------------------------------------------------------------------------
Total interest expense..................... 34,372 29,417 23,528
- -----------------------------------------------------------------------------
Net interest income........................ 24,942 20,679 19,071
Provision for loan losses.................. 525 1,200 1,254
- -----------------------------------------------------------------------------
Net interest income, after provision
for loan losses........................... 24,417 19,479 17,817
- -----------------------------------------------------------------------------
Non-interest income
Loan servicing and other fees............ 2,714 3,035 2,738
Gain on sale of loans, net............... 6,590 4,491 3,597
Real estate operations, net.............. 6,971 196 (11)
Other.................................... 2,044 1,619 1,273
- -----------------------------------------------------------------------------
Total non-interest income.............. 18,319 9,341 7,597
- -----------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits........... 15,268 12,450 11,269
Premises and occupancy................... 1,966 2,065 2,064
SAIF insurance premiums.................. 358 329 3,954
Equipment................................ 1,390 999 845
Professional expenses.................... 1,028 712 447
Sales and marketing expenses............. 767 893 452
Other.................................... 3,940 4,645 4,610
- -----------------------------------------------------------------------------
Total non-interest expenses............ 24,717 20,095 22,313
- -----------------------------------------------------------------------------
Income before income taxes................. 18,019 8,725 3,101
Provision for income taxes................. 7,554 3,705 1,160
- -----------------------------------------------------------------------------
Net income............................. $ 10,465 $ 5,020 $ 1,941
=============================================================================
Basic earnings per share................... $ 2.56 $ 1.14 $ 0.41
=============================================================================
Diluted earnings per share................. $ 2.53 $ 1.11 $ 0.41
=============================================================================
The accompanying notes are an integral part of these financial statements.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 19
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
Provident Financial Holdings, Inc. and Subsidiary
Unrea-
lized
Gain
on
Secu-
rities
Unearned Avail-
Additional Stock able
(Dollars in Thousands, Common Stock Paid-in Retained Treasury Compen- For
Except Shares) Shares Amount Capital Earnings Stock sation Sale Total
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996.......... 5,125,215 $51 $49,742 $40,129 $(3,952) $85,970
Comprehensive income
Net income...................... 1,941 1,941
Accumulated other comprehensive
income, net of tax.............. $495 495
Total comprehensive income........ 2,436
Purchase of treasury stock........ (205,000) $ (3,291) (3,291)
Release of shares under stock-
based compensation plans......... 100 232 332
- ---------------------------------------------------------------------------------------------------------
Balance at June 30, 1997.......... 4,920,215 51 49,842 42,070 (3,291) (3,720) 495 85,447
Comprehensive income
Net income...................... 5,020 5,020
Accumulated other comprehensive
income, net of tax.............. 98 98
Total comprehensive income........ 5,118
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
- ---------------------------------------------------------------------------------------------------------
Balance at June 30, 1998.......... 4,854,125 51 50,875 47,090 (5,305) (6,654) 593 86,650
Comprehensive income
Net income...................... 10,465 10,465
Accumulated other comprehensive
income, net of tax.............. 151 151
-------
Total comprehensive income........ 10,616
Purchase of treasury stock........ (468,340) (8,784) (8,784)
Release of shares under stock-
based compensation plans......... 194 1,010 1,204
- ---------------------------------------------------------------------------------------------------------
Balance at June 30, 1999.......... 4,385,785 $51 $51,069 $57,555 $(14,089) $(5,644) $744 $89,686
=========================================================================================================
The accompany notes are an integral part of these financial statements.
Page 20 - Provident Financial Holdings, Inc. - 1999 Annual Report
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
Provident Financial Holdings, Inc. and Subsidiary
Year Ended June 30,
-------------------------------
(Dollars in Thousands) 1999 1998 1997
==============================================================================
Cash flows from operating activities:
Net income................................. $ 10,465 $ 5,020 $ 1,941
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 392 (95) 828
Provision for loan fees................. 525 1,200 1,254
Provision for losses on real estate..... -- 126 306
Gain on sale of loans................... (6,590) (4,491) (3,597)
Net gain on sale of investment
securities............................. (41) -- --
Increase (decrease) in accounts payable
and other liabilities.................. 5,835 (49) 3,541
(Increase) decrease in prepaid expenses
and other assets...................... (12,639) (2,237) 153
Loans originated for sale.............. (613,538) (467,446) (313,382)
Proceeds from sale of loans............ 649,709 424,673 346,607
Stock compensation..................... 1,204 1,068 332
- -----------------------------------------------------------------------------
Net cash provided by (used for)
operating activities................. 35,322 (42,231) 37,983
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans..................... (47,468) (110,187) (70,891)
Maturity of investment securities......... 83,432 57,502 285,034
Purchases of investment securities
held to maturity......................... (189,124) (98,430) (292,322)
Purchase of investment securities
available for sale....................... (6,443) -- --
Sales of investment securities
available for sale....................... 919 -- --
Purchase of Federal Home Loan Bank stock.. (4,119) (4,119) (1,727)
Proceeds from disposal of real estate..... 2,353 5,561 5,518
Purchases of premises and equipment, net
of proceeds from sales................... (2,040) (1,199) (881)
Other..................................... -- (536) 495
- -----------------------------------------------------------------------------
Net cash for investing activities........ (162,490) (149,016) (73,047)
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 21
<PAGE>
Consolidated Statements of Cash Flows
Provident Financial Holdings, Inc. and Subsidiary
Year Ended June 30,
----------------------------------
(Dollars in Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Net increases in deposits............. $ 49,856 $ 74,266 $ 29,385
Repayment of Federal Home Loan Bank
advances............................. (2,379,408) (2,638,693) (1,750)
Proceeds from Federal Home Loan Bank
advances............................. 2,461,800 2,763,979 --
Treasury stock purchases.............. (8,784) (4,983) (3,291)
- -----------------------------------------------------------------------------
Net cash provided by financing
activities........................ 123,464 194,569 24,344
- -----------------------------------------------------------------------------
Net increase (decrease) increase in
cash and cash equivalents........... (3,704) 3,322 (10,720)
Cash and cash equivalents at beginning of
period................................. 23,433 20,111 30,831
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of
period................................. $ 19,729 $ 23,433 $ 20,111
=============================================================================
Supplemental information:
Cash paid for interest................ $ 35,155 $ 29,984 $ 23,505
=============================================================================
Cash paid for income taxes............ $ 7,101 $ 4,623 $ 732
=============================================================================
Real estate acquired in settlement of
loans................................ $ 1,775 $ 6,932 $ 5,721
=============================================================================
The accompanying notes are an integral part of these financial statements.
Page 22 - Provident Financial Holdings, Inc. - 1999 Annual Report
<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 June
27, 1996. Provident Financial Holdings, Inc. (the Holding Company), a
Delaware corporation organized by the Bank, acquired all of the capital stock
of the Bank issued in the conversion; the transaction was recorded on a book
value basis. Any references to financial information for periods prior to
June 30, 1996 refer to the Bank prior to conversion.
The following accounting policies, together with those disclosed elsewhere in
the consolidated financial statements, represent the significant accounting
policies of Provident Financial Holdings, Inc. and subsidiary.
Principles of consolidation
The consolidated financial statements include the accounts of Provident
Financial Holdings Inc., and its wholly-owned subsidiary, Provident Savings
Bank, FSB (collectively, the Company). All significant inter-company balances
and transactions have been eliminated.
The Company operates in two business segments: Savings Bank Operations
(Provident Savings Bank) and Mortgage Banking (Profed Mortgage, a division of
Provident Savings Bank). Savings Bank Operations include attracting customer
deposits, offering banking services and originating commercial and consumer
loans. Mortgage Banking activities include originating loans for sale and
servicing loans for investors. Customer deposits are collected substantially
from Riverside and San Bernardino Counties out of ten branch locations;
whereas mortgage loans are generated from the ten deposit branch locations and
nine free standing lending offices in California and Nevada.
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. 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 the disposition of investment securities are included in
non-interest income and are determined using the specific identification
method.
Loans
Loans held for investment consist primarily of long-term loans secured by
first trust deeds on single-family residences, other residential property,
commercial property and land.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 23
<PAGE>
Notes to Consolidated Financial Statements
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 non-performing
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 an 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.
Most loans are sold with servicing released. 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 the sale 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 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 stage. Individual loans are
periodically reviewed and are classified according to their inherent risk.
The internal asset classification system used by the Company is the primary
basis by which the Company evaluates the possible loss exposure. Management's
determination of the adequacy of the allowance for losses is based on an
evaluation of the portfolio, past experience, prevailing market conditions,
and other relevant factors. The determination of the allowance for loan losses
is based on estimates that are particularly susceptible to changes in the
economic environment and market conditions. The allowance is increased by the
provision for losses charged against income and reduced by charge-offs, net of
recoveries.
Impaired loans
The Company assesses loans individually and identifies impairment when the
accrual of interest has been discontinued, loans have been restructured or
management has serious doubts about the future collectibility of principal and
interest, even though the loans are currently performing. Factors considered
in determining impairment include, but are not limited to, expected future
cash flows, the financial condition of the borrower and current economic
conditions. The Company measures each impaired loan based on the fair value
of its collateral and charges off those loans or portions of loans deemed
uncollectible.
Page 24 - Provident Financial Holdings, Inc. - 1999 Annual Report
<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
Automobiles 3 years
Computer equipment 3 - 5 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 for 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 a borrower's inability or
unwillingness to make contractually required payments. Market risk results
from changes in the value of assets and liabilities which may impact,
favorably or unfavorably, the realizability of those assets and liabilities
held by the Company.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
judgments of regulators 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 an increase in the weighted average shares outstanding due to the
assumed exercise of stock options and the vesting of restricted stock.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 25
<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.
Post retirement benefits
The estimated obligation for post retirement 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 has adopted this statement in the year
ended June 30, 1999.
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 has adopted this statement in the year ended June 30, 1999.
The Company has determined that its reportable segments are the operations
pertaining to mortgage banking and the operations pertaining to consumer and
commercial banking ("Savings Bank Operations"). See footnote No. 17 for
disclosure pertaining to the Company's operating segments for the fiscal years
ended June 30, 1999, 1998 and 1997, respectively.
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. This SFAS No. 133 has been amended by SFAS No. 137 to extend
implementation of SFAS No. 133 for one year to all fiscal quarters beginning
after June 15, 2000. Management is still assessing the impact of SFAS No. 133,
if any, and will adopt this statement in the year ended June 30, 2001.
Page 26 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
2. Investment Securities (Dollars in Thousands):
The amortized cost and estimated fair value of investment securities as of
June 30, 1999 were as follows:
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.... $179,803 $ 15 $(3,826) $175,992 $179,803
Other............. 31 10 - 41 31
- -----------------------------------------------------------------------------
Total held to
maturity....... 179,834 25 (3,826) 176,033 179,834
- -----------------------------------------------------------------------------
Available for sale
securities
FHLMC stock........ 20 1,140 - 1,160 1,160
FNMA stock......... 1 94 - 95 95
Equity securities.. 1,071 52 (28) 1,095 1,095
U.S. Treasury
securities and
obligations of
other U.S.
government and
corporations....... 4,989 11 (6) 4,994 4,994
- -----------------------------------------------------------------------------
Total available
for sale....... 6,081 1,297 (34) 7,344 7,344
- -----------------------------------------------------------------------------
Total investment
securities.......... $185,915 $1,322 $(3,860) $183,377 $187,178
=============================================================================
The amortized cost and estimated fair value of investment securities as of
June 30, 1998 were as follows:
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
Equity securities.. 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
=============================================================================
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 27
<PAGE>
Notes to Consolidated Financial Statements
The maturities of investment securities were as follows:
June 30, 1999 June 30, 1998
------------------ ------------------
Amortized Market Amortized Market
Cost Value Cost Value
==============================================================================
Held to maturity
Due in one year................... $ 3,609 $ 3,600 $ 11,003 $ 11,009
Due after one through five years.. 20,995 20,658 20,977 21,017
Due beyond five years............. 155,230 151,775 42,048 41,922
- ------------------------------------------------------------------------------
179,834 176,033 74,028 73,948
- ------------------------------------------------------------------------------
Available for sale
Due in one year................... - - - -
Due after one through five years.. 989 983 - -
Due beyond five years............. 4,000 4,011 - -
- ------------------------------------------------------------------------------
4,989 4,994 - -
- ------------------------------------------------------------------------------
Total Securities.................. $184,823 $181,027 $ 74,028 $ 73,948
==============================================================================
3. Loans held for Investment (Dollars in Thousands):
Loans held for investment consisted of the following: June 30,
-----------------
1999 1998
==============================================================================
Residential real estate - single family................ $ 538,915 $ 507,194
Residential real estate - multi-family................. 38,663 46,635
Commercial real estate................................. 41,845 42,696
Real estate construction............................... 23,249 13,746
Commercial business lending............................ 10,239 2,819
Consumer............................................... 41,620 19,824
Other.................................................. 822 422
- ------------------------------------------------------------------------------
695,353 633,336
Less:
Undisbursed loan funds............................... 19,698 7,320
Deferred loan costs.................................. (448) (268)
Unearned discounts on loans purchased................ 15 (30)
Allowance for loan losses............................ 6,702 6,186
- ------------------------------------------------------------------------------
$ 669,386 $ 620,128
==============================================================================
Fixed rate loans comprised 20% and 22%, respectively, of the loan portfolio at
June 30, 1999 and 1998. The following summarizes the components of the net
change in the allowance for loan losses:
Year Ended June 30,
----------------------------------
1999 1998 1997
==============================================================================
Balance, beginning of period.............. $ 6,186 $ 5,465 $ 5,452
Provision for losses...................... 525 1,200 1,254
Recoveries................................ 300 404 136
Charge-offs............................... (309) (883) (1,377)
- ------------------------------------------------------------------------------
Balance, end of period................... $ 6,702 $ 6,186 $ 5,465
==============================================================================
Page 28 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
The effect of nonaccrual and restructured loans on interest income for the
years ended June 30, 1999, 1998 and 1997 is presented below.
Year Ended June 30,
----------------------------------
1999 1998 1997
==============================================================================
Contractual interest due.................. $ 399 $ 899 $ 871
Interest recognized....................... 145 547 539
- ------------------------------------------------------------------------------
Net interest foregone..................... $ 254 $ 352 $ 332
==============================================================================
At June 30, 1999 and 1998, 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 1999 and 1998:
June 30,
-----------------
1999 1998
==============================================================================
Non-accrual loans:
Single family........................................ $ 1,165 $ 1,669
Multi-Family......................................... - -
Commercial........................................... - 245
Non-mortgage......................................... 39 18
Restructured loans:
Single family........................................ - -
Multi-family......................................... - -
Commercial........................................... 1,508 2,074
Non-mortgage......................................... - -
Other impaired loans:
Single family........................................ 112 114
Multi-family......................................... 142 146
Commercial........................................... 485 -
Non-mortgage......................................... 1 -
- ------------------------------------------------------------------------------
Total impaired loans................................... $ 3,452 $ 4,266
==============================================================================
During the years ended June 30, 1999 and 1998, the Company's average
investment in impaired loans was $4,526 and $7,212, respectively, and interest
income recorded during this period was $175 and $574, 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.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 29
<PAGE>
Notes to Consolidated Financial Statements
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,
----------------------------------
1999 1998 1997
==============================================================================
Balance, beginning of period.............. $ 2,741 $ 1,825 $ 2,462
Originations.............................. 2,260 1,364 43
Payments.................................. (2,243) (105) (340)
Terminations.............................. (396) (343) (340)
- ------------------------------------------------------------------------------
Balance, end of period.................... $ 2,362 $ 2,741 $ 1,825
==============================================================================
4. Mortgage Banking (Dollars in Thousands):
The following summarizes the unpaid principal balance of loans serviced by the
Company.
Year Ended June 30,
----------------------------------
1999 1998 1997
==============================================================================
Loans serviced for Federal Home Loan
Mortgage Corporation..................... $108,285 $149,730 $189,586
Loans serviced for Federal National
Mortgage Association..................... 167,904 233,066 274,348
Loans services for other investors........ 38,839 51,905 66,384
- ------------------------------------------------------------------------------
$315,028 $434,701 $530,318
==============================================================================
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 $602 and $754 as of June 30, 1999 and 1998, respectively. These escrow
balances are included in deposits in the accompanying consolidated balance
sheets.
The composition of proceeds of loans sold was as follows:
Year Ended June 30,
----------------------------------
1999 1998 1997
==============================================================================
Loans sold
Servicing - released.................... $648,141 $424,236 $341,471
Servicing - retained.................... 1,568 428 1,539
- ------------------------------------------------------------------------------
$649,709 $424,674 $343,010
==============================================================================
Loans available for sale consisted of the following:
Year Ended June 30,
-------------------
1999 1998
==============================================================================
Adjustable rate........................................ $ 1,129 $ 153
Fixed rate............................................. 36,538 67,095
- ------------------------------------------------------------------------------
$ 37,667 $ 67,248
==============================================================================
Page 30 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
5. Real Estate Available for Sale (Dollars in Thousands):
Real estate consisted of the following:
June 30,
-----------------
1999 1998
==============================================================================
Foreclosed real estate................................. $ 1,775 $ 4,909
Investment real estate................................. 1,070 2,624
- ------------------------------------------------------------------------------
2,845 7,533
- ------------------------------------------------------------------------------
Allowance for estimated losses:
Foreclosed real estate............................... (32) (462)
Investment real estate............................... (20) (149)
- ------------------------------------------------------------------------------
(52) (611)
- ------------------------------------------------------------------------------
$ 2,793 $ 6,922
==============================================================================
The following summarizes the components of the net change in the allowance for
losses on real estate:
Year Ended June 30,
----------------------------------
1999 1998 1997
==============================================================================
Balance, beginning of period.............. $ 611 $ 589 $ 755
Provision for losses...................... (20) 326 306
Charge-offs............................... (539) (304) (472)
- ------------------------------------------------------------------------------
Balance, end of period.................... $ 52 $ 611 $ 589
==============================================================================
6. Premises and Equipment (Dollars in Thousands):
Premises and equipment consisted of the following:
June 30,
-----------------
1999 1998
==============================================================================
Land................................................... $ 2,531 $ 2,648
Buildings.............................................. 6,279 6,812
Leasehold improvements................................. 622 578
Furniture and equipment................................ 10,275 8,736
Automobiles............................................ 137 146
- ------------------------------------------------------------------------------
19,844 18,920
Less accumulated depreciation and amortization (11,422) (11,491)
- ------------------------------------------------------------------------------
$ 8,422 $ 7,429
==============================================================================
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 31
<PAGE>
Notes to Consolidated Financial Statements
7. Deposits (Dollars in Thousands):
June 30, 1999 June 30, 1998
------------------------- -----------------------------
Interest Rate Amount Interest Rate Amount
==============================================================================
Checking deposits 0%-3.20% $ 75,443 0%-3.20% $ 56,630
Passbook deposits 1.98%-4.16% 81,108 1.98%-4.78% 62,201
Money market deposits 0%-3.93% 68,835 2.37%-4.51% 71,493
Term deposits
Under $100,000 2.00%-8.00% 310,223 2.00%-8.00% 308,484
$100,000 and over 3.78%-8.00% 97,272 4.40%-8.00% 84,217
- ------------------------------------------------------------------------------
$ 632,881 $ 583,025
==============================================================================
Weighted average interest
rate on deposits 4.13% 4.67%
==============================================================================
The aggregate annual maturities of term accounts are as follows:
June 30,
-----------------
1999 1998
==============================================================================
Within one year........................................ $ 368,380 $ 336,618
One to two years....................................... 20,462 36,257
Two to three years..................................... 9,957 3,720
Three to four years.................................... 6,505 9,151
Thereafter............................................. 2,191 6,955
- ------------------------------------------------------------------------------
....................................................... $ 407,495 $ 392,701
==============================================================================
Interest expense is summarized as follows:
Year Ended June 30,
----------------------------------
1999 1998 1997
==============================================================================
Checking deposits......................... $ 984 $ 223 $ 229
Term deposits............................. 21,013 21,025 18,036
Money market deposits..................... 2,693 3,247 3,490
Passbook deposits......................... 2,398 1,216 1,357
- ------------------------------------------------------------------------------
.......................................... $ 27,088 $ 25,711 $ 23,112
==============================================================================
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 $2,830 and $1,585 at June 30, 1999 and 1998, respectively.
Page 32 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
8. Borrowings (Dollars in Thousands):
Borrowings consisted of the following:
June 30,
-----------------
1999 1998
- ------------------------------------------------------------------------------
Advances from Federal Home Loan Bank................... $ 214,506 $ 132,114
Advances from the Federal Home Loan Bank were collateralized by pledges of
certain real estate loans with an aggregate principal balance at June 30, 1999
and 1998 of $358,026 and $331,885, 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 $264,010 and $226,326 at
June 30, 1999 and 1998, respectively.
As a member of the FHLB system, the Bank is required to maintain a minimum
investment in FHLB stock. The Bank held the required investment at June 30,
1999, as compared to excess holdings of $9 at June 30, 1998. 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,
-----------------
1999 1998
==============================================================================
Within one year........................................ $ 161,160 $ 121,500
One to two years....................................... 23,000 10,260
Two to three years..................................... - -
Over three years....................................... 30,346 354
- ------------------------------------------------------------------------------
....................................................... $ 214,506 $ 132,114
==============================================================================
Weighted average interest rate......................... 5.25% 5.70%
==============================================================================
9. Income Taxes (Dollars in Thousands):
The provision for income taxes consisted of the following:
Year Ended June 30,
----------------------------------
1999 1998 1997
==============================================================================
Current:
Federal................................. $ 5,475 $ 3,376 $ 1,339
State................................... 1,892 1,001 270
- ------------------------------------------------------------------------------
7,367 4,377 1,609
- ------------------------------------------------------------------------------
Deferred:
Federal................................. 115 (649) (62)
State................................... 72 (23) (387)
- ------------------------------------------------------------------------------
.......................................... 187 (672) (449)
- ------------------------------------------------------------------------------
Provision for income taxes................ $ 7,554 $ 3,705 $ 1,160
==============================================================================
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 33
<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,
----------------------------------
1999 1998 1997
==============================================================================
Federal statutory income tax rate......... 35.0% 34.0% 34.0%
State taxes net of Federal tax effect..... 7.1% 7.2% 7.3%
Release of state valuation allowance...... - - (9.8%)
Other..................................... (0.2%) 1.3% 5.9%
- ------------------------------------------------------------------------------
Effective income tax rate................. 41.9% 42.5% 37.4%
==============================================================================
Deferred tax liabilities (assets) by jurisdiction were as follows:
June 30,
-----------------
1999 1998
==============================================================================
Deferred taxes - federal............................... $ (1,185) $ (1,264)
Deferred taxes - state................................. (731) (632)
- ------------------------------------------------------------------------------
$ (1,916) $ (1,896)
==============================================================================
Deferred tax liabilities (assets) were comprised of the following:
June 30,
-----------------
1999 1998
==============================================================================
Depreciation........................................... $ 155 $ 299
Federal Home Loan Bank dividends....................... 1,704 1,498
Unrealized gain on securities.......................... 518 412
- ------------------------------------------------------------------------------
Total deferred tax liabilities....................... 2,377 2,209
- ------------------------------------------------------------------------------
State tax.............................................. (413) (79)
Market value adjustments............................... (34) (94)
Loss reserves.......................................... (2,017) (2,705)
Deferred compensation.................................. (1,149) (694)
Investment in real estate.............................. (144) (141)
Other.................................................. (536) (392)
- ------------------------------------------------------------------------------
Total deferred tax assets............................ (4,293) (4,105)
- ------------------------------------------------------------------------------
Net deferred tax assets................................ $ (1,916) $ (1,896)
==============================================================================
Page 34 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
10. Capital (Dollars in Thousands):
Retained earnings at June 30, 1999 and 1998 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, 1999, 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, 1999, the most recent notification from the Office of 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 below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
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 holders' 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 stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements or if
such declaration and payment would otherwise violate regulatory requirements.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 35
<PAGE>
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios as of June 30, 1999 and 1998 are
as follows:
To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
- -----------------------------------------------------------------------------
Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------
As of June 30, 1999
Total Risk Based Capital
Ratio..................... $ 79,058 16.76% $ 47,172 Greater than 10.0%
or equal to
Tier 1 (Core Capital)...... 72,421 7.66% 47,255 Greater than 5.0%
or equal to
Tier 1 Risk Based Capital.. 72,421 15.35% 28,303 Greater than 6.0%
or equal to
Tangible Equity Ratio...... 72,421 7.66% 37,804 Greater than 4.0%
or equal to
As of June 30, 1998
Total Risk Based Capital
Ratio..................... $ 70,940 14.12% $ 50,240 Greater than 10.0%
or equal to
Tier 1 (Core Capital)...... 64,754 8.09% 40,032 Great than 5.0%
or equal to
Tier 1 Risk Based Capital.. 64,754 12.89% 30,144 Greater than 6.0%
or equal to
Tangible Equity Ratio...... 64,754 8.09% 32,035 Greater than 4.0%
or equal to
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 a participant's pre-tax compensation. Participants
vest immediately in their own contributions with 100% vesting in the Company's
contributions occurring after six years of credited service. The Company's
expense for these plans was approximately $182, $142, and ($13) for the years
ended June 30, 1999, 1998 and 1997, respectively.
The Company has a multi-year employment contract with one executive officer to
pay certain benefits upon retirement. The obligation was fully funded at June
30, 1999 and 1998. Actuarially determined retirement costs are being accrued
and expensed annually.
Employee Stock Ownership Plan (ESOP)
As part of the conversion as described in Note 1, 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,
1999, the outstanding balance on the loan was $3,451. 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 $465 and $579 for the years ending June 30, 1999 and 1998,
respectively. At June 30, 1999, the unearned ESOP shares account of $3,179 is
reported as a reduction of stockholders' equity.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 36
<PAGE>
Notes to Consolidated Financial Statements
The table below reflects ESOP activity for the period indicated:
June 30,
-----------------
1999 1998
==============================================================================
Unallocated shares at beginning of period.............. $ 344,912 $ 371,964
Allocated.............................................. 27,052 27,052
- ------------------------------------------------------------------------------
Unallocated shares at end of period.................... $ 317,86 $ 344,912
==============================================================================
The fair value of unallocated ESOP shares totaled $6,357 and $7,157 at June
30, 1999 and 1998, 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 remains with 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, 1999 was $740,000.
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 remains 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)..... 65,500 20.59
Cancelled........................................... 46,000 15.25
- ------------------------------------------------------------------------------
Outstanding at June 30, 1998.......................... 376,000 16.18
Granted............................................. - -
Cancelled........................................... - -
- ------------------------------------------------------------------------------
Outstanding at June 30, 1999.......................... 376,000 $ 16.18
==============================================================================
For outstanding options the weighted average remaining contractual life was
7.75 years. There were 169,960 shares under options that were exercisable at
June 30, 1999. At June 30, 1999, 136,522 shares were available for future
grants under the Plan.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 37
<PAGE>
Notes to Consolidated Financial Statements
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: 10 year expected life; stock volatility, 28% and 27% in
1998 and 1997, respectively; risk free interest rates, 5.57% and 6.60% 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 $10,072 and
$2.43 per share in fiscal 1999 and $4,674 and $1.04 per share in fiscal 1998.
13. Earnings Per Share
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.
For the Year Ended June 30, 1999
-----------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
==============================================================================
Basic EPS............................ $ 10,465 4,080,106 $ 2.56
Effect of Dilutive Shares
Stock options...................... 34,392
Restricted stock awards............ 27,564
-----------
Diluted EPS.......................... $ 10,465 4,142,062 $ 2.53
==============================================================================
For the Year Ended June 30, 1998
-----------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
==============================================================================
Basic EPS............................ $ 5,020 4,388,090 $ 1.14
Effect of Dilutive Shares
Stock options...................... 94,222
Restricted stock awards............ 19,701
-----------
Diluted EPS.......................... $ 5,020 4,502,013 $ 1.11
==============================================================================
For the Year Ended June 30, 1997
-----------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
==============================================================================
Basic EPS............................ $ 1,941 4,705,043 $ 0.41
Effect of Dilutive Shares
Stock options...................... 40,309
-----------
Diluted EPS.......................... $ 1,941 4,745,352 $ 0.41
==============================================================================
Page 38 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
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.
The Company conducts a portion of its operations in leased facilities under
non-cancelable agreements classified as operating leases. In addition, the
Company leases data processing equipment under operating leases expiring
during the next four years. The following is a schedule of minimum rental
payments under such operating leases which expire at various dates:
June 30,
1999
============================================
Fiscal Year
2000............................ $ 488
2001............................ 406
2002............................ 249
2003............................ 139
Thereafter...................... 266
--------------------------------------------
Total minimum payments required.... $ 1,548
============================================
Lease expense under operating leases approximated $600, $679, and $656 for the
years ended June 30, 1999, 1998 and 1997, 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 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, 1999 and 1998, interest rates on commitments
to lend ranged from 6.00% to 11.30% and 6.00% to 10.85%, 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, 1999 and 1998
the aggregate amount of loans available for sale and of commitments to
originate exceeded the Company's forward sales commitments to
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 39
<PAGE>
Notes to Consolidated Financial Statements
sell loans. At June 30, 1999 and 1998, interest rates on commitments to sell
loans ranged from 5.25% to 11.55% and 6.00% to 11.00%, respectively.
The Company is exposed to interest rate risk on fixed rate commitments to
originate loans for sale to the extent forward sale agreements have not been
entered into. To minimize this risk, the Company purchases over the counter
put options with option periods that generally coincide with the terms of the
commitments to originate loans. The contract or notional amount of these
instruments reflect the extent of involvement the Company has in this
particular class of financial instruments. The Bank's exposure to loss on
these financial instruments is limited to the premiums paid. Premiums paid
and deferred gains on put options are recorded as an adjustment to the
carrying value of loans available for sale and recognized in earnings when the
loan is sold. At June 30, 1999, and 1998, there were no options outstanding.
In addition to construction loans in process, the Company had the following
outstanding commitments:
June 30,
-----------------
1999 1998
==============================================================================
Commitments to originate mortgage loans:
Fixed rate............................................. $ 35,111 $ 38,385
Adjustable rate........................................ 4,740 6,537
- ------------------------------------------------------------------------------
39,851 44,922
Unused lines of credit................................. 139 9,529
Commitments to sell loans.............................. 36,672 65,965
==============================================================================
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: 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.
Page 40 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
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, 1999 are offered at
substantially the same rates and terms of commitments offered on June 30, 1999
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, 1999 June 30, 1998
-------------------- ---------------------
Carrying Market Carrying Market
Amount Value Amount Value
==============================================================================
Financial assets:
Cash.............................. $ 19,729 $ 19,729 $ 23,433 $ 23,433
Investment securities............. 179,834 176,033 74,028 73,948
Loans available for sale.......... 37,667 37,880 67,248 68,035
Loans held for investment......... 669,386 670,125 620,128 621,340
Accrued interest receivable....... 5,984 5,984 4,940 4,940
FHLB stock........................ 10,725 10,725 6,606 6,606
Financial liabilities:
Deposits.......................... 632,881 634,005 583,025 585,237
Borrowings........................ 214,506 214,095 132,114 132,118
==============================================================================
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 41
<PAGE>
Notes to Consolidated Financial Statements
17. Operating Segments (Dollars in Thousands):
The following tables set forth condensed income statement and total assets for
the Company's operating segments for the fiscal years ended June 30, 1999,
1998 and 1997, respectively.
Year Ended June 30, 1999
---------------------------------
Savings Consoli-
Bank Mortgage dated
Operations Banking Total
==============================================================================
Net interest income......................... $ 23,422 $ 995 $ 24,417
Non-interest income:
Loan servicing and other fees............. (1,402) 4,116 2,714
Gain on sale of loans, net................ 0 6,590 6,590
Real estate operations.................... 6,885 86 6,971
Other..................................... 1,993 51 2,044
- ------------------------------------------------------------------------------
Total non-interest income............... 7,476 10,843 18,319
Non-interest expense:
Salaries and employee benefits............ 10,706 4,562 15,268
Premises and occupancy.................... 1,315 651 1,966
Operating & admin. expenses............... 5,028 2,455 7,483
- ------------------------------------------------------------------------------
Total non-interest expense.............. 17,049 7,668 24,717
- ------------------------------------------------------------------------------
Operating income before income taxes........ $ 13,849 $ 4,170 $ 18,019
==============================================================================
Total assets, end of period................. $ 918,809 $ 38,622 $ 957,431
==============================================================================
Year Ended June 30, 1998
---------------------------------
Savings Consoli-
Bank Mortgage dated
Operations Banking Total
==============================================================================
Net interest income......................... $ 19,044 $ 435 $ 19,479
Non-interest income:
Loan servicing and other fees............. (910) 3,945 3,035
Gain on sale of loans, net................ 9 4,482 4,491
Real estate operations.................... 105 91 196
Other..................................... 1,552 67 1,619
- ------------------------------------------------------------------------------
Total non-interest income............... 756 8,585 9,341
Non-interest expense:
Salaries and employee benefits............ 9,355 3,095 12,450
Premises and occupancy.................... 1,024 1,041 2,065
Operating & admin. expenses............... 4,274 1,306 5,580
- ------------------------------------------------------------------------------
Total non-interest expense.............. 14,653 5,442 20,095
- ------------------------------------------------------------------------------
Operating income before income taxes........ $ 5,147 $ 3,578 $ 8,725
==============================================================================
Total assets, end of period................. $ 748,667 $ 67,538 $ 816,205
==============================================================================
Page 42 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
17. Operating Segments (Dollars in Thousands) continued
Year Ended June 30, 1997
---------------------------------
Savings Consoli-
Bank Mortgage dated
Operations Banking Total
==============================================================================
Net interest income......................... $ 17,635 $ 182 $ 17,817
Non-interest income:
Loan servicing and other fees............. (295) 3,033 2,738
Gain on sale of loans, net................ 97 3,500 3,597
Real estate operations.................... 8 (19) (11)
Other..................................... 1,172 101 1,273
- ------------------------------------------------------------------------------
Total non-interest income............... 982 6,615 7,597
Non-interest expense:
Salaries and employee benefits............ 7,632 3,637 11,269
Premises and occupancy.................... 1,288 776 2,064
Operating & admin. expenses............... 6,817 2,163 8,980
- ------------------------------------------------------------------------------
Total non-interest expenses............. 15,737 6,576 22,313
- ------------------------------------------------------------------------------
Operating income before income taxes........ $ 2,880 $ 221 $ 3,101
==============================================================================
Total assets, end of period................. $ 595,113 $ 20,387 $ 615,500
==============================================================================
The information above was derived from the internal management reporting
system used by management to measure performance of the segments.
The Company's overall internal transfer pricing arrangements as determined by
management are summarized as follows:
1. Borrowings for Mortgage Banking are indexed to the higher of the three-
month Federal Home Loan Bank rate or the overall cost of the customer deposits
and borrowings. The total cost of funds was $3.4 million in fiscal 1999 as
compared to $2.4 million in 1998 and $1.7 million in 1997.
2. Mortgage Banking receives servicing-released premiums for the loans
transferred to the Savings Bank Operations portfolio equal to the market price
of such loans. The servicing-released premiums were $2.2 million in fiscal
1999 as compared to $1.6 million in 1998 and ($35,000) in 1997.
3. Loan servicing fees are charged by Savings Bank Operations based on the
number of loans available for sale multiplied by a fixed fee which is subject
to management's regular review. The loan servicing fees were $252,000 in
fiscal 1999 as compared to $376,000 in 1998 and $422,000 in 1997.
4. Office rent for Mortgage Savings Bank offices which are located in Saving
Bank offices are internally charged based on the square footage. The total
office rents were $93,000 in fiscal 1999 as compared to $108,000 in 1998 and
$115,000 in 1997.
5. A management fee, which is subject to regular review, is charged to
Mortgage Banking for services provided by Savings Bank Operations. The
management fee was $170,000 in fiscal 1999 as compared to $33,000 in 1998 and
$30,000 in 1997.
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 43
<PAGE>
Notes to Consolidated Financial Statements
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, 1999 and 1998 and condensed statement of operations and cash flows for the
years ended June 30, 1999 and 1998.
Condensed Balance Sheets June 30,
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Assets
Cash........................................... $ 2,170 $ 2,176
Investment securities held to maturity......... 2,001 12,003
Investment securities available for sale....... 1,070 500
Investment in subsidiary....................... 79,794 68,337
Other assets................................... 3,953 3,788
- -----------------------------------------------------------------------------
$ 88,988 $ 86,804
=============================================================================
Liabilities and Stockholders' Equity
Other liabilities.............................. $ 47 $ 748
Stockholders' equity........................... 88,941 86,056
- -----------------------------------------------------------------------------
$ 88,988 $ 86,804
=============================================================================
Page 44 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
Year Ended June 30,
-------------------
Condensed Statement of Operations 1999 1998
- -----------------------------------------------------------------------------
Interest and other income......................... $ 830 $ 1,143
General and administrative expense................ 334 297
- -----------------------------------------------------------------------------
Income before equity in earnings of the
subsidiary..................................... 496 846
Equity in earnings of the subsidiary.............. 10,252 4,599
- -----------------------------------------------------------------------------
Income before income taxes...................... 10,748 5,445
Income taxes.................................... 283 425
- -----------------------------------------------------------------------------
Net income.................................... $ 10,465 $ 5,020
=============================================================================
Year Ended June 30,
-------------------
Condensed Statements of Cash Flows 1999 1998
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net income...................................... $ 10,465 $ 5,020
Adjustments to reconcile net earnings to cash
used by operating activities:
Equity in earnings of the subsidiary............ (10,252) (4,599)
Depreciation and amortization.................. (124) (205)
Net gain on sale of investment securities....... (39) -
Decrease in other assets........................ (165) 143
Increase in other liabilities................... (701) 136
- -----------------------------------------------------------------------------
Net cash provided by operating activities..... (816) 495
- -----------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of investment securities held to
maturity....................................... (5,959) (15,390)
Maturity of investment securities held to
maturity....................................... 16,088 21,762
Purchase of investment securities available
for sale....................................... (1,454) (500)
Sales of investment securities available
for sale....................................... 919 -
- -----------------------------------------------------------------------------
Net cash used by investing activities......... 9,594 5,872
- -----------------------------------------------------------------------------
Cash flow from financing activities:
Treasury stock purchases........................ (8,784) (4,983)
- -----------------------------------------------------------------------------
Net decrease in cash during the year.............. (6) 1,384
Cash and cash equivalents, beginning of year...... 2,176 792
- -----------------------------------------------------------------------------
Cash and cash equivalents, end of year............ $ 2,170 $ 2,176
=============================================================================
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 45
<PAGE>
Shareholder Information
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,)
- -----------------------------------------------------------------------------
1999 Quarters
High $20.75 $17.50 $17.63 $20.25
Low 14.13 14.00 15.63 16.00
1998 Quarters
High 20.13 22.25 24.25 24.13
Low 16.75 19.56 20.00 20.13
- -----------------------------------------------------------------------------
Annual Meeting
The annual meeting of shareholders will be held at the Riverside Art Museum at
3425 Mission Inn Avenue, Riverside, California on Thursday, October 28, 1999,
at 11:00 a.m., Pacific time. 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 & Associates PC
Attorneys at Law
1100 New York Avenue, N.W., Suite 700
Washington, D.C. 20005
(202) 737-7900
Independent Accountants
PricewaterhouseCoopers LLP
400 South Hope Street
Los Angeles, CA 90071-2889
(213) 236-3000
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(908) 497-2300
Advertising Agency of Record
Schroffel and Associates
4134 Del Rey Avenue
Marina Del Rey, CA 90292
(310) 754-1000
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
SVP/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.
Page 46 - Provident Financial Holdings, Inc. - 1999 Annual Report
<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
Roy H. Taylor
Executive Vice President, Pacific Region
Talbot-Goldware & Taylor Insurance
& Financial Services, Inc.
William E. Thomas
Executive Vice President &
General Counsel
KPC Global Care, Inc.
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
Provident Financial Holdings, Inc. - 1999 Annual Report - Page 47
<PAGE>
Branch Locations
Provident [LOGO]
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
Corona (expected opening, February 2000)
Ontario and Magnolia Avenues
Corona, CA 92879
AccessPlus Direct Talk
1-800-442-5201
PROFED
MORTGAGE
A Division of Provident Savings Bank
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 (Builder Division)
23201 Lake Center Drive, Suite 106
Lake Forest, CA 92630
Las Vegas - Pacific Sunbelt (Builder Division)
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
Orange
626 E. Chapman Avenue
Orange, CA 92866
Torrance
22805 Hawthorne Blvd.
Torrance, CA 90505
Riverside
2915 Van Buren Blvd., Suite J-2
Riverside, CA 92503
Hacienda Heights
17138 A. Colima Road
Hacienda Heights, CA 91745
Page 48 - Provident Financial Holdings, Inc. - 1999 Annual Report
<PAGE>
PROVIDENT [LOGO]
Provident Financial Holdings, Inc.
Corporate Office
3756 Central Avenue, Riverside, California 92506
909/686-6060
NASDAQ STOCK MARKET - PROV
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<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>
EXHIBIT 23
Consent of Independent Auditors
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 of Provident
Financial Holdings, Inc. of our report dated August 6, 1999 appearing in the
Annual Report to Shareholders which is included in this Annual Report on Form
10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
September 27, 1999
<PAGE>
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