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, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-28304
PROVIDENT FINANCIAL HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0704889
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
3756 Central Avenue, Riverside, California 92506
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (909) 686-6060
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
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Indicate by check mark whether disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or other
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. [ X ]
As of September 18, 2000, there were issued and outstanding 3,912,066 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 18, 2000, was $70,591,706.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the fiscal year ended
June 30, 2000 ("Annual Report") (Part II).
2. Portions of the definitive Proxy Statement for the 2000 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, 2000, the Corporation had total assets of $1.1
billion, total deposits of $696.5 million and stockholders' equity of $89.0
million. Provident Financial has not engaged in any significant activity
other than holding the stock of the Savings Bank. Accordingly, the
information set forth in this report, including financial statements and
related data, relates primarily to the Savings Bank and its 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 is a financial services company committed to serving
consumers and small to mid-sized businesses in the Inland Empire region of
Southern California. The Savings Bank conducts its business operations as
Provident Bank, Provident Bank Mortgage and through its subsidiary, Provident
Financial Corp. The business activities of the Corporation consist of
community banking and mortgage banking.
The Savings Bank 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 portfolios and fees
generated through its mortgage banking activities.
Recent Developments
In July 2000, the Savings Bank completed a purchase of land on which it
will construct a new branch office in Temecula, California. The total budget
for the new branch, including land, is $1.5 million; and the expected opening
date is June 30, 2001, subject to construction delays.
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 Provident Bank Mortgage, the Savings Bank has expanded its
retail lending market to include a larger portion of Southern California and
Southern Nevada. Provident Bank 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 1999 population
estimates, Riverside and San Bernardino Counties have the third and fifth
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 June 2000 was at 5.7%, compared to
5.3% in California and 4.0% 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. 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 $824.9 million at June 30, 2000,
representing approximately 71.9% of consolidated total assets. This compares
to $669.4 million, or 69.9% of consolidated total assets, at June 30, 1999.
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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,
---------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans: (In Thousands)
One-to four-
family........ $651,116 76.23% $538,915 77.50% $507,194 80.08% $402,296 76.41% $327,490 70.77%
Multi-family... 41,437 4.85 38,663 5.56 46,635 7.36 52,564 9.98 54,427 11.76
Commercial..... 45,907 5.37 41,845 6.02 42,696 6.74 47,887 9.09 54,813 11.84
Construction... 47,011 5.50 23,249 3.34 13,746 2.17 5,778 1.10 10,222 2.21
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total mortgage
loans......... 785,471 91.95 642,672 92.42 610,271 96.35 508,525 96.58 446,952 96.58
Consumer loans. 47,618 5.58 41,620 5.99 19,824 3.13 16,749 3.18 15,497 3.35
Commercial
business
loans......... 19,721 2.31 10,239 1.47 2,819 0.45 991 0.19 -- --
Other loans.... 1,402 0.16 822 0.12 422 0.07 289 0.05 332 0.07
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans
receivable.. 854,212 100.00% 695,353 100.00% 633,336 100.00% 526,554 100.00% 462,781 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Loans in process 23,407 19,698 7,320 3,695 3,694
Deferred loan
(costs) fees.. (928) (448) (268) 102 513
Unearned
discounts on
loans
purchased..... 21 15 (30) 145 177
Allowance for
loan losses... 6,850 6,702 6,186 5,465 5,452
-------- -------- -------- -------- --------
Total loans
receivable,
net......... $824,862 $669,386 $620,128 $517,147 $452,945
======== ======== ======== ======== ========
Loans held
for sale...... $ 52,049 $ 37,667 $ 67,248 $ 19,984 $ 49,612
======== ======== ======== ======== ========
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</TABLE>
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Maturity of Loan Portfolio. The following table sets forth certain
information at June 30, 2000, 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: (Dollars in Thousands)
One-to four-family.. $ 1,315 $ 861 $ 340 $12,894 $635,706 $651,116
Multi-family........ 1,566 8,830 7,570 14,074 9,397 41,437
Commercial.......... 36,265 6,696 1,155 30 1,761 45,907
Construction........ 2,477 8,247 9,696 15,716 10,875 47,011
Consumer loans........ 127 1,415 1,844 4,316 39,916 47,618
Commercial business
loans................ 10,752 1,249 5,653 1,942 125 19,721
Other loans........... -- -- -- -- 1,402 1,402
Total loans ------- ------- ------- ------- -------- --------
receivable........ $52,502 $27,298 $26,258 $48,972 $699,182 $854,212
======= ======= ======= ======= ======== ========
The following table sets forth the dollar amount of all loans held in the
Savings Bank's portfolio due after June 30, 2001 which have fixed interest
rates and have floating or adjustable interest rates.
Floating or
Adjustable
Fixed-Rates Rates
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(In Thousands)
Mortgage loans:
One-to four-family............... $25,269 $624,532
Multi-family..................... -- 39,871
Commercial....................... 1,801 7,842
Construction...................... 3,778 40,755
Consumer loans.................... 34,382 13,110
Commercial business loans......... 6,462 2,506
Other loans....................... -- 1,402
------- --------
Total loans receivable......... $71,692 $730,018
======= ========
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Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates.
One- to Four-Family Residential Real Estate Lending. The Savings Bank's
predominant 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, 2000, $651.1 million, or 76.2% of the Savings Bank's
loan portfolio consisted of permanent loans on one- to four-family residences.
Due to the recent increases in interest rates during fiscal year 2000,
the Savings Bank took proactive steps to ensure that its capital was not
overly exposed to interest rate risk. In September 1999, the Savings Bank
initiated several mitigation strategies to improve core capital and reduced
exposure to interest rate risk. These strategies included reducing total
assets through loan repayments, selling current production of
single-family-residential mortgage loans, and extending the maturity of
liabilities.
The Savings Bank intends, subject to market conditions, to remix its
balance sheet by decreasing the concentration of single-family residential
mortgage loans within its loan portfolio and increasing the origination of
commercial business and commercial real estate loans, and consumer loans. The
Savings Bank also intends to decrease the percentage of certificates of
deposits in its deposit base and to increase the percentage of core checking
and savings deposits. This strategy is intended to improve core revenue
through a higher net interest margin. For further information, reference is
made to the Corporation's Annual Report for fiscal 2000 for details on the
operating strategies.
One- to four-family loans originated for portfolio increased by $10.3
million while construction, consumer and commercial business lending decreased
by $1.2 million during fiscal 2000. At June 30, 2000, adjustable-rate loans
comprised 85% 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 Veterans Association ("VA").
The Savings Bank's loan underwriters are approved as underwriters under HUD's
delegated underwriter program.
The Savings Bank offers adjustable rate mortgage ("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. 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"), the twelve month average Treasury index ("12 MAT) 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 in
the portfolio 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, 2000, the Savings Bank had $82.1 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
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<PAGE>
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.
The retention of ARM loans, rather than fixed 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, 2000, the Savings Bank's
loans held for investment included $41.4 million in multi-family real estate
loans and $45.9 million in commercial real estate loans, or 4.9% and 5.4%,
respectively, of total loans receivable. Starting in the second quarter of
fiscal 2000, the Savings Bank re-emphasized this type of lending and made the
origination of multi-family and commercial real estate mortgage loans a
priority. With the increased demand for these loans and the decline in
delinquencies, the Savings Bank is broadening its consideration of these types
of loans. At June 30, 2000, the Savings Bank had 98 multi-family and 172
commercial real estate loans in its portfolio, the largest of which was a
commercial real estate loan with a balance of $5.0 million that was performing
in accordance with its terms.
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 25-year amortization schedule. Rates on
multi-family and commercial ARM loans generally adjust monthly, semi-annually
or annually at a specific interval over the 12 MAT, subject to annual payment
caps and life-of-loan interest rate caps. At June 30, 2000, $22.2 million, or
53.6%, of the Savings Bank's multi-family loans were secured by five to 36
unit projects, of which $7.4 million, or 17.9 %, 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, light
industrial centers, mini warehouses 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, 2000, the Savings Bank had 17 commercial real
estate and multi-family loans with principal balances of over $1.0 million
that totaled $29.5 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
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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, 2000, approximately $20.9 million, or 50.5%, of the
Savings Bank's multi-family loans and approximately $35.2 million, or 76.7%,
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 1990s 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. At June 30, 2000, 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. Prompted by improved economic conditions and
increased residential housing demand in its primary market area, the Savings
Bank actively originates two types of residential construction loans: (i)
Short- term construction loans and (ii) Construction/permanent loans. At June
30, 2000, the Savings Bank's construction loans totaled $47.0 million, or 5.5%
of total loans held for investment. This type of loan increased by $23.8
million, or 102.2%, during fiscal 2000, which is in line with the Savings
Bank's operational strategy.
The composition of the Savings Bank's construction loan portfolio was as
follows:
At June 30,
------------------------------------------
2000 1999
------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Short-term construction $12,958 28% $ 3,043 13%
Construction/permanent 34,053 72 20,206 87
------- --- ------- ---
$47,011 100% $23,249 100%
======= === ======= ===
Short term construction loans include three types of loans: (1) speculative
constructions, (2) tract construction, and (3) custom construction.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Savings Bank or another lender for the
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant period of time after
the completion of construction until the home buyer is identified. Rather
than originating lines of credit to home builders to construct several homes
at once, the Savings Bank originates and underwrites a separate loan for each
home.
The Savings Bank utilizes speculative loans to accommodate certain
builders involved in a community reinvestment program. Under a maximum
allowable line of credit each property is approved for 75% of the after
rehabilitated value. The goal under this type of construction is the
revitalization of the housing stock in certain targeted areas. The terms for
these loans are 12 months, with interest rates above the prime rate. The
Savings Bank also makes short-term construction loans to tract builders.
These loans are usually financed in phases and may require a certain amount of
pre-sales before building may begin. Tract lending may also include the
financing of models. The terms for tract loans range from 12 to 18 months
with interest rates ranging from 1% to 2% above the prime lending rate.
Unlike speculative construction loans, custom construction loans are also
made to home buyers who, at the time of construction, have a signed contract
with a contractor and the home buyer has a commitment for permanent financing
for the finished home with the Savings Bank or another lender. Custom
construction loans are generally originated for a term of 12
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month, with fixed interest rates at the prime lending rate and with
loan-to-value ratios of up to 80% of the appraised estimated value of the
completed property.
Construction/permanent loans are originated to the home owner rather than
the home builder. When the construction portion of the loan is complete, the
loan automatically rolls into the permanent phase. The construction phase of a
construction/permanent loan generally lasts 9 to 12 months and the interest
rate charged is generally fixed at prime or above and with a loan-to-value
ratio of up to 80% of the appraised estimated value of the completed property.
The interest rate charged on the construction portion is 0.25% to 1.25% higher
as a protection against the risk of an increase in interest rates before the
permanent loan is funded.
The Savings Bank also provides construction financing for non-residential
properties (i.e. construction multi-family and construction commercial
properties). The Savings Bank has increased its commercial lending resources
with the intent of increasing the amount of commercial real estate loan
balances such as construction commercial and construction multi-family loans.
Members of the Savings Bank's Loan Committee must approve all
construction loans. Prior to preliminary approval of any construction loan
application, an independent fee appraiser inspects the site and the Savings
Bank reviews the existing or proposed improvements, identifies the market for
the proposed project, and analyzes the pro forma data and assumptions on the
project. In the case of a speculative or custom construction loan, the
Savings Bank reviews the experience and expertise of the builder. After
preliminary approval has been given, the application is processed, which
includes obtaining credit reports, financial statements and tax returns on the
borrowers and guarantors, an independent appraisal of the project, and any
other expert reports necessary to evaluate the proposed project. In the event
of cost overruns, the Savings Bank requires that the borrower increase the
loan amount or deposit their own funds into a loans-in-process account and the
Savings Bank disburses additional loan proceeds consistent with the original
loan-to-value ratio.
The construction loan documents require that construction loan proceeds
be disbursed in increments as construction progresses. Disbursements are
based on periodic on-site inspections by independent fee inspectors and
Savings Bank personnel. At inception, the Savings Bank also requires
borrowers to deposit funds to the loans-in-process account covering the
difference between the actual cost of construction and the loan amount. The
Savings Bank regularly monitors the construction loan portfolio and the
economic conditions and housing inventory. The Savings Bank's property
inspector performs property inspections. The Savings Bank believes that the
internal monitoring system helps reduce many of the risks inherent in its
construction lending.
Construction lending affords the Savings Bank the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage 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 construction cost
proves to be inaccurate, the Savings Bank may be required to advance funds
beyond the amount originally committed to permit completion of the project.
If the estimate of value upon completion proves to be inaccurate, the Savings
Bank may be confronted with a project whose value is insufficient to assure
full repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been
identified carry more risk because the payoff for the loan depends on the
builder's ability to sell the property prior to the time that the construction
loan is due. The Savings Bank has sought to address these risks by adhering
to strict underwriting policies, disbursement procedures and monitoring
practices. In addition, because the Savings Bank's construction lending is in
its primary market area, changes in the local economy and real estate market
could adversely affect the Savings Bank's construction loan portfolio.
Consumer and Other Lending. At June 30, 2000, the Savings Bank's consumer
loans totaled approximately $47.6 million, or 5.6%, of the Savings Bank's
total loans. The Savings Bank has emphasized the origination of consumer
loans, and, in particular, home equity lines of credit and equity loans due to
higher yields than residential mortgage loans.
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The Savings Bank anticipates that it will continue to be an active originator
of home equity loans. At June 30, 2000, the home equity loans amounted to
$45.8 million, or 96.2% of the consumer loans.
The Savings Bank offers open-ended lines of credit on either a secured or
unsecured basis. Secured lines of credit are generally secured by a second
mortgage on the borrower's primary residence. Secured lines of credit have an
interest rate that is one to two percentage points above the prime lending
rate, as published in The Wall Street Journal, while the rate on overdraft
lines of credit is ten percentage points above this prime lending rate. In
addition, the Savings Bank offers savings lines of credit which have an
interest rate that is four percentage points above the 11th district cost of
fund. In all cases, the rate adjusts monthly.
The Savings Bank offers closed-end, fixed-rate home equity loans that are
made on the security of primary residences. Loans normally do not exceed 100%
of the appraised or tax assessed value of the residence, less the outstanding
principal of the first mortgage, and have terms of up to 15 years requiring
monthly payments of principal and interest.
Consumer loans potentially have a greater risk than do residential
mortgage loans, particularly in the case of loans that are unsecured. Consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount that can be recovered on such loans. At June 30,
2000, the Savings Bank had $13,000 in consumer loans accounted for on a
nonaccrual basis.
Commercial Business Lending. The Savings Bank has a business banking
department in order to diversify its lending and increase the average
portfolio yield. As of June 30, 2000, commercial business loans totaled $19.7
million, or 2.3% of total loans held for investment. 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, to a lesser extent, from servicing fees
on 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. Since its
beginning more than a decade ago, mortgage operations have been marketed
separately as Profed Mortgage. Today, the Savings Bank recognizes the
importance of marketing Provident Bank and all of its elements as one complete
financial solution. Profed Mortgage is now known as Provident Bank Mortgage.
This name gives clients and prospects a greater sense of Provident Bank and
allows the Savings Bank to market just one image rather than two.
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
552 loan correspondents approved by the Savings Bank who originate and submit
loans at a mark-up over the Savings Bank's daily published price. Similar to
the prior year, wholesale loan originations accounted for 57.2% of loans
originated for sale during the year ended June 30, 2000. The Savings Bank
maintains a regional wholesale lending office in Rancho Cucamonga, California.
9
<PAGE>
The Savings Bank's retail loan production operations utilize loan
officers and processors employed by the Provident Bank 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, 2000, Provident Bank Mortgage operated two offices within the Savings
Bank's facilities and five separate loan production offices located in Rancho
Cucamonga, Glendora, Riverside, Hacienda Heights and Torrance in Southern
California; and one retail office 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 $31.7 million at June 30, 2000. 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 is charged to a borrower for
funding a 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
$931,000 of net deferred mortgage loan costs at June 30, 2000.
Loan Originations, Sales and Purchases. The Savings Bank's mortgage
originations include loans insured by the FHA and VA, as well as conventional
loans. Except for loans originated for the Savings Bank's portfolio, loans
originated through the mortgage banking operations are originated for eventual
sale into the secondary market. As such, these loans must meet the
origination and underwriting criteria established by the final investors. The
Savings Bank sells a large percentage of the mortgage loans that it originates
as whole loans to private investors. The Savings Bank also sells conventional
whole loans to FNMA and FHLMC through their purchase programs, as well as
pooling loans in exchange for mortgage-backed securities guaranteed by FNMA or
FHLMC. These securities are then sold through various Wall Street investment
firms. In connection with such exchanges, the Savings Bank pays fees to
either FNMA or FHLMC who in return guarantee the payment of scheduled
principal and interest to security holders. It is the guarantee that enables
the Savings Bank to efficiently deliver loans into the secondary market.
Conventional mortgage loans originated by the Savings Bank that do not meet
FNMA or FHLMC guidelines may be sold to private institutional investors. See
"-- Mortgage Banking Activities -- Hedging Activities."
The following table shows the Savings Bank's loan originations,
repurchases, sales and principal repayments during the periods indicated.
10
<PAGE>
Year Ended June 30,
----------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Loans originated for sale:
Retail originations.................... $174,331 $262,656 $183,702
Wholesale originations................. 232,890 350,882 283,744
-------- -------- --------
Total loans originated for sale.... 407,221 613,538 467,446
-------- -------- --------
Loans sold (1):
Servicing released..................... 388,583 648,141 424,246
Servicing retained..................... 1,275 1,568 428
-------- -------- --------
Total loans sold................... 389,858 649,709 424,674
-------- -------- --------
Loans originated for portfolio:
Mortgage loans:
One- to four-family.................. 194,213 183,961 195,287
Multi-family......................... 3,100 -- 2,644
Commercial........................... 3,812 4,168 370
Construction......................... 51,096 32,656 13,786
Consumer loans......................... 15,672 30,574 10,760
Commercial business loans.............. 7,288 12,033 4,179
Other loans............................ 1,093 628 333
-------- -------- --------
Total loans originated for
portfolio......................... 276,274 264,020 227,359
-------- -------- --------
Loans purchased:
Mortgage loans:
One- to four-family.................. 703 425 20,065
Commercial........................... 5,915 1,010 --
-------- -------- --------
Total loans purchased.............. 6,618 1,435 20,065
-------- -------- --------
Mortgage loan principal repayments....... 129,392 222,455 146,234
Real estate acquired in settlement
of loans................................ 1,144 1,775 6,932
Increase in other items, net (2)....... 139 14,622 13,215
-------- -------- --------
Net increase in loans receivable, net... $169,858 $ 19,676 $150,245
======== ======== ========
(1) Includes loans swapped for mortgage-backed securities.
(2) Includes net changes in loans in process, discounts on loans and loss
reserves.
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.
11
<PAGE>
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, 2000, 1999,
and 1998, the Savings Bank purchased single-family mortgage loans, totaling
$703,000, $425,000, and $3.1 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, 2000, the Savings
Bank was servicing $261.2 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, 2000, the Savings Bank
had gains of $3.3 million attributable to sales of loans, which included
hedging gains or losses. At June 30, 2000, the Savings Bank had outstanding
commitments to sell loans totaling $49.6 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, 2000, the Savings Bank had $3.0
million put-option coverage outstanding.
12
<PAGE>
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.
13
<PAGE>
<TABLE>
The following table sets forth delinquencies in the Savings Bank's loan portfolio as of the dates
indicated.
At June 30,
--------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- ----------------------------- ----------------------------
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........ 11 $1,893 6 $749 3 $429 16 $1,764 1 $176 14 $1,700
Multi-family... -- -- -- -- -- -- -- -- -- -- -- --
Commercial..... 4 647 -- -- -- -- -- -- 1 422 -- --
Construction... -- -- -- -- -- -- -- -- -- -- -- --
Commercial
business loans.. -- -- -- -- -- -- -- -- -- -- -- --
Consumer loans... -- -- 4 1 5 12 13 39 1 2 2 35
Other loans...... -- -- -- -- -- -- -- -- -- -- -- --
--- ------ --- ---- --- ---- --- ------ --- ------ --- ------
Total......... 15 $2,540 10 $750 8 $441 29 $1,803 3 $600 16 $1,735
== ====== == ==== = ==== == ====== = ==== == ======
14
</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,
---------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans accounted for on a
non-accrual basis:
Mortgage loans:
One-to four-family.......... $749 $1,165 $1,669 $3,667 $3,511
Multi-family................ -- -- -- 1,176 798
Commercial.................. -- -- 245 979(1) --
Consumer loans.............. 13 39 18 150 108
------ ------ ------ ------ ------
Total....................... 762 1,204 1,932 5,972 4,417
------ ------ ------ ------ ------
Accruing loans which are
contractually past due
90 days or more:
One- to four-family......... -- 138 -- 268 --
Consumer.................... -- -- -- 9 --
------ ------ ------ ------ ------
Total....................... -- 138 -- 277 --
------ ------ ------ ------ ------
Total nonaccruals
and 90 days or more
past due loans.............. 762 1,342 1,932 6,249 4,417
Foreclosed real estate, net.. 1,048 1,775 4,447 2,636 2,711
------ ------ ------ ------ ------
Total non-performing assets.. $1,810 $3,117 $6,379 $8,885 $7,128
====== ====== ====== ====== ======
Restructured loans........... $1,481 $1,508 $2,074 $4,910 $4,905
====== ====== ====== ====== ======
Nonaccruals and 90 days or more
past due loans as a percentage
of loans receivable, net.... 0.09% 0.20% 0.31% 1.21% 0.98%
Nonaccruals and 90 days or more
past due loans as a percentage
of total assets............. 0.07% 0.14% 0.24% 1.02% 0.76%
Non-performing assets as a
percentage of total assets.. 0.16% 0.33% 0.78% 1.44% 1.22%
--------------
(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.
15
<PAGE>
Interest income, which would have been recorded for the year ended June
30, 2000 had non-accruing loans been current in accordance with their original
terms, amounted to approximately $304,000. The amount of interest included in
the results of operations on such loans for the year ended June 30, 2000
amounted to approximately $234,000. 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, 2000, the Savings Bank had $1.0 million of foreclosed real estate,
net of allowance for losses of $12,000. At June 30, 2000, the Savings Bank's
foreclosed real estate was comprised of nine single-family 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 $12.4 million of investment
real estate, net of reserves of $20,000 at June 30, 2000, 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 allowances for loan losses
established to cover possible losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory
capital, while specific valuation allowances for loan losses generally do not
qualify as regulatory capital. Assets that do not currently expose the
insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated as special
mention and monitored by the Savings Bank.
The aggregate amounts of the Savings Bank's classified assets, including
assets designated as special mention, were as follows at the dates indicated:
At June 30,
------------------
2000 1999
---- ----
(Dollars in Thousands)
Doubtful...................... $ -- $ --
Substandard assets............ 4,481 6,429
Special mention............... 6,018 891
------- -------
Total............... $10,499 $ 7,320
======= =======
Total classified and special
mentioned assets as
percentage of total assets... 0.91% 0.76%
16
<PAGE>
As set forth below, as of June 30, 2000, assets classified as substandard
and special mention included 52 loans and properties totaling approximately
$10.5 million.
Number
of Special
Type of Loan/Property Loans Substandard Mention Total
--------------------- ----- ----------- ------- -----
(Dollars in Thousands)
One- to four-family.... 23 $2,105 $ 313 $ 2,418
Multi-family........... -- -- -- --
Commercial real estate. 4 1,481 2,888 4,369
Construction........... 2 -- 809 809
Commercial business.... 16 208 2,005 2,213
Consumer............... 2 7 3 10
Real estate owned...... 5 680 -- 680
--- ------ ------ -------
Total............... 52 $4,481 $6,018 $10,499
== ====== ====== =======
Not all of the Savings Bank's classified assets are delinquent or non-
performing. In determining whether the Savings Bank's assets expose the
Savings Bank to sufficient risk to warrant classification, the Savings Bank
may consider various factors, including the payment history of the borrower,
the loan-to-value ratio, and the debt coverage ratio of the property securing
the loan. Upon consideration of these factors, the Savings Bank may determine
that the asset in question, though not currently delinquent, presents a risk
of loss that requires it to be classified or designated as special mention.
In addition, the Savings Bank's loan portfolio includes commercial and
multi-family real estate loans with a balance exceeding the current market
value of the collateral that are not classified because they are performing
and have borrowers who have sufficient resources to support the payment of the
loan.
Allowance for Loan Losses. The Savings Bank has established a
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the collateral securing the loan. The Savings Bank increases its
allowance for loan losses by charging provisions for loan losses against the
Savings Bank's operations.
The allowance for loan losses 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, 2000, the Savings Bank had an allowance for loan losses of
$6.9 million or 0.82% of gross loans held for investment. This compares to
$6.7 million at June 30, 1999 which was 0.95% of gross loans held for
investment. The provision for loan losses totaled $250,000 in fiscal 2000
compared to $525,000 in fiscal 1999. The Savings Bank's focus on expanding
its investment in Consumer, Commercial Real Estate, Construction 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, but not
excessive, to absorb losses inherent in the portfolio. Although management
believes that they use the best
17
<PAGE>
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.
18
<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,
--------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period.... $6,702 $6,186 $5,465 $5,452 $5,085
Recoveries:
Mortgage loans:
One- to four-family............ 17 129 11 11 16
Multi-family................... -- -- 191 60 258
Commercial........................ -- -- 173 38 315
Consumer.......................... 14 36 29 -- --
Other............................. -- 135 -- 27 --
------ ------ ------ ------ ------
Total recoveries............. 31 300 404 136 589
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family............ 125 201 187 457 214
Multi-family................... -- -- 2 609 934
Commercial........................ -- 52 580 309 1,335
Consumer loans.................... 8 56 114 -- --
Other loans....................... -- -- -- 2 --
------ ------ ------ ------ ------
Total charge-offs............ 133 309 883 1,377 2,483
------ ------ ------ ------ ------
Net loan charge-offs.............. 102 9 479 1,241 1,894
Provision for loan losses......... 250 525 1,200 1,254 2,261
------ ------ ------ ------ ------
Balance at end of period.......... $6,850 $6,702 $6,186 $5,465 $5,452
====== ====== ====== ====== ======
Allowance for loan losses as a
percentage of gross loans held
for investment................... 0.82% 0.95% 0.98% 1.04% 1.18%
Net loan charge-offs as a
percentage of average loans
outstanding during the period.... 0.01 0.25 0.08 0.25 0.38
Allowance for loan losses as a
percentage of nonperforming
loans at end of period........... 904.46 499.48 320.19 87.45 123.42
19
<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,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ---------------- ---------------- --------------- --------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans 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. $1,780 76.23% $1,588 76.48% $ 972 80.08% $ 863 76.40% $ 930 70.77%
Multi-family........ 714 4.85 733 5.91 854 7.36 935 9.98 1,532 11.76
Commercial.......... 1,662 5.37 1,547 6.69 1,334 6.74 1,542 9.09 2,848 11.84
Construction........ 124 5.50 14 3.34 20 2.17 7 1.10 28 2.21
Consumer loans........ 489 7.07 -- 5.99 147 3.13 114 3.18 112 3.35
Commercial business
loans................ 243 0.82 -- 1.47 -- 0.45 -- 0.19 -- --
Other loans........... 26 0.16 16 0.12 3 0.07 2 0.06 2 0.07
Unallocated........... 1,812 N/A 2,804 N/A 2,856 N/A 2,002 N/A -- N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses....... $6,850 100.00% $6,702 100.00% $6,186 100.00% $5,465 100.00% $5,452 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
20
</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 CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources" in Item 7 of this Report. At
June 30, 2000, the Savings Bank's regulatory liquidity was 9.6%, 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
marketability. 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, 2000, the Corporation's investment securities portfolio
totaled $199.3 million at amortized cost, which mainly consisted of federal
agency obligations. A total of $23.5 million of the Corporation's federal
agency obligations along with the FNMA, FHLMC and real estate investment trust
("REIT") investments were available for sale, all other securities were
classified as held to maturity.
21
<PAGE>
<TABLE>
The following table sets forth the composition of the Savings Bank's investment portfolio at the dates
indicated.
At June 30,
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------- ------------------------- -------------------------
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
FHLMC stock........ $ 20 $ 810 0.43% $ 20 $ 1,160 0.01% $ 20 $ 941 0.03%
FNMA stock......... 1 73 0.04 1 95 -- 1 85 --
Equity securities.. 49 32 0.02 1,071 1,095 0.58 500 500 0.67
U.S. Treasury
securities and
obligations of
other U.S.
government
agencies and
corporations...... 23,997 23,467 12.32 4,989 4,994 2.68 -- -- --
Investment securities
held to maturity:
U.S. Treasury
securities and
obligations of
other U.S.
government
agencies and
corporations...... 175,214 166,029 87.17 179,803 175,992 96.71 73,975 73,884 99.23
Other (1).......... 20 30 0.02 31 41 0.02 53 64 0.07
-------- -------- ------ -------- -------- ------ ------- ------- ------
Total........... $199,301 $190,441 100.00% $185,915 $183,377 100.00% $74,549 $75,474 100.00%
======== ======== ====== ======== ======== ====== ======= ======= ======
----------------
(1) Consists of mortgage-backed securities.
</TABLE>
<TABLE>
The following table sets forth the maturities and weighted average yields of the investment securities
in the Savings Bank's securities portfolio at June 30, 2000:
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>
Held to maturity............. $ -- -- $48,262 6.18% $126,972 6.29% $175,234 6.26%
Available for sale........... -- -- 11,997 6.87 12,000 7.06 23,997 6.97
------- ---- ------- ---- -------- ---- -------- ----
Total........................ $ -- -- $60,259 6.32% $138,972 6.36% $199,231 6.34%
======= ==== ======= ==== ======== ==== ======== ====
</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.
22
<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 5 years. As illustrated in the following table, certificates of
deposit accounted for 66.1% of the Savings Bank's deposit portfolio at June
30, 2000. The Savings Bank intends to attempt to reduce the overall cost of
its deposit portfolio by increasing its consumer checking account base and by
expanding into business banking. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Corporation's Annual
Report, which is included herein as Exhibit 13.
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at June 30, 2000.
Weighted Per-
Average centage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
---- ---- ---------------- ------ ------- --------
(In Thousands)
2.88% N/A Savings Accounts $ 10 $ 86,417 12.41%
2.08 N/A NOW Accounts -- 92,115 13.23
3.77 N/A Money Market Accounts -- 57,258 8.22
Certificates of Deposit
-----------------------
5.20 18-36 Months Variable CD 1,000 2,099 0.30
5.21 90 Days or Less Fixed-term, fixed rate 1,000 41,532 5.96
3.96 4 Months Fixed-term, fixed rate 1,000 434 0.06
3.94 5 Months Fixed-term, fixed rate 1,000 2,150 0.31
5.38 6-7 Months Fixed-term, fixed rate 1,000 15,578 2.24
5.52 9 Months Fixed-term, fixed rate 1,000 30,888 4.44
5.62 1 Year Fixed-term, fixed rate 1,000 167,661 24.07
5.88 15 Months Fixed-term, fixed rate 1,000 44,354 6.37
5.83 18 Months Fixed-term, fixed rate 1,000 28,331 4.07
5.94 20 Months Fixed-term, fixed rate 1,000 23,732 3.41
6.00 2 Years Fixed-term, fixed rate 1,000 40,464 5.81
6.36 3 Years Fixed-term, fixed rate 1,000 35,075 5.04
5.70 4 Years Fixed-term, fixed rate 1,000 1,545 0.22
5.82 5 Years Fixed-term, fixed rate 1,000 18,334 2.63
8.00 8 Years Fixed-term, fixed rate 1,000 155 0.02
3.68 10 Years Fixed-term, fixed rate 1,000 158 0.02
6.01 Negotiable Jumbo-negotiable rate 100,000 8,178 1.17
---- -------- ------
4.67% $696,458 100.00%
======== ======
23
<PAGE>
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, 2000.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less................ $ 39,072
Over three through six months....... 18,540
Over six through 12 months.......... 28,777
Over 12 months...................... 34,375
--------
Total............................ $120,764
========
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,
-------------------------------------------------------
2000 1999
--------------------------- -------------------------
Percent Percent
of Increase of Increase
Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ----------
Non-interest-
bearing............ $ 18,185 2.61% $ 3,421 $ 14,764 2.33% $ 3,996
NOW checking........ 73,930 10.62 13,251 60,679 9.58 14,817
Regular savings
accounts........... 86,417 12.41 5,309 81,108 12.82 18,907
Money market deposit 57,258 8.22 (11,577) 68,835 10.88 (2,658)
Fixed-rate
certificates which
mature:
Within 1 year...... 319,044 45.81 (43,777) 362,821 57.33 28,441
After 1 year, but
within 2 years.... 95,133 13.66 77,014 18,119 2.86 (17,791)
After 2 years, but
within 5 years..... 43,800 6.29 24,643 19,157 3.03 (429)
After 5 years..... 158 0.02 (66) 224 0.03 224
Other............... 2,533 0.36 (4,641) 7,174 1.14 4,349
-------- ------ -------- -------- ------ -------
Total.......... $696,458 100.00% $ 63,577 $632,881 100.00% $49,856
======== ====== ======== ======== ====== =======
24
<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
---------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Below 3.00% $ 241 $ 199 $ 184
3.00 - 4.49% 13,724 81,691 7,104
4.50 - 5.49% 155,861 260,349 175,701
5.50 - 6.49% 234,992 63,110 206,939
6.50 - 7.49% 55,695 1,997 2,462
Over 7.50% 155 149 311
-------- -------- --------
Total $460,668 $407,495 $392,701
======== ======== ========
Time Deposits by Maturities. The following table sets forth the amount
and maturities of time deposits at June 30, 2000.
Amount Due
----------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(In Thousands)
Below 3.00%............ $ 175 $ 36 $ -- $ -- $ 30 $ 241
3.00 - 4.49%........... 12,892 361 98 245 128 13,724
4.50 - 5.49%........... 148,943 3,240 1,819 1,245 614 155,861
5.50 - 6.49%........... 142,834 71,193 19,314 503 1,148 234,992
6.50 - 7.49%........... 15,867 21,030 17,277 182 1,339 55,695
Over 7.49%............. -- -- 155 -- -- 155
-------- ------- ------- ------ ------ --------
Total............... $320,711 $95,860 $38,663 $2,175 $3,259 $460,668
======== ======= ======= ====== ====== ========
25
<PAGE>
Deposit Activity. The following table sets forth the deposit activities
of the Savings Bank for the periods indicated.
Year Ended June 30,
-----------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
Beginning balance......... $632,881 $583,025 $508,759
Net deposits before
interest credited........ 33,191 28,493 52,020
Interest credited......... 30,386 21,363 22,246
-------- -------- --------
Net increase in deposits.. 63,577 49,856 74,266
-------- -------- --------
Ending balance............ $696,458 $632,881 $583,025
======== ======== ========
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, 2000, the Savings
Bank had $338.3 million of borrowings from the FHLB-San Francisco at a
weighted average rate of 6.35%. Such borrowings mature between 2000 and 2005.
In addition to FHLB advances, the Savings Bank, through its subsidiary,
assumed a loan to facilitate the purchase of an investment property in
downtown Riverside. This loan has a maturity date of July 1, 2001. The
following tables set forth certain information regarding borrowings by the
Savings Bank at the dates and for the periods indicated:
At June 30,
-----------------------------
2000 1999 1998
Balance outstanding at end of period: (Dollars in Thousand)
FHLB advances............................ $338,338 $214,506 $132,114
A loan to facilitate purchase of
investment property..................... 3,330 -- --
Weighted average rate:
FHLB advances............................ 6.35% 5.25% 5.70%
A loan to facilitate purchase of
investment property..................... 8.25% -- --
26
<PAGE>
At June 30,
-----------------------------
2000 1999 1998
-------- -------- --------
Maximum amount of borrowings outstanding (Dollars in Thousands)
at any month end:
FHLB advances............................ $392,342 $214,506 $132,114
A loan to facilitate purchase of
investment property..................... 3,543 -- --
Short-term borrowings outstanding with
respect to:
FHLB advances............................ 225,000 100,825 121,500
Weighted average short-term borrowing
rate with respect to:
FHLB advances............................ 6.11% 5.42% 5.69%
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, 2000.
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. In December 1999, Provident Financial purchased an office
building in downtown Riverside for $11.7 million. The purchase was made with
the proceeds from the sale of a property in west Los Angeles and the
assumption of a loan for $3.5 million. Other real estate held for investment
by Provident Financial at June 30, 2000 totaled $1.0 million. Profed Mortgage,
Inc., which formerly contained the Savings Bank's mortgage banking activities
that are currently conducted by the Savings Bank's Provident Bank Mortgage
Division, and First Service are currently inactive. At June 30, 2000, the
Savings Bank's investment in its subsidiaries was $7.6 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 and, in certain respects, the Federal Deposit
Insurance Act, and the regulations issued by the OTS and the FDIC to implement
these statutes. These laws and regulations delineate the nature and extent of
the activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Savings Bank's relationship
with its depositors and borrowers is also regulated to a great extent,
especially in such matters as the ownership of deposit accounts and the form
and content of the Savings Bank's mortgage documents. The Savings Bank is
required to file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
entering into
27
<PAGE>
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.
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 has extensive authority over the operations of savings
associations. Among other functions, the OTS issues and enforces regulations
affecting federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Savings Bank's OTS assessment for
the fiscal year ended June 30, 2000 was $178,000.
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, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
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 (i.e.,
borrowings) from the FHLB-San Francisco. The Savings Bank is in compliance
with this requirement with an investment in FHLB-San Francisco stock of $17.3
million at June 30, 2000.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-San Francisco.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Savings Bank's
deposit accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Savings Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period. The
capital categories are: (i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
28
<PAGE>
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. This amount is currently equal to about
six basis points for each $100 in domestic deposits for SAIF members while BIF
insured institutions pay an assessment equal to about 1.50 basis points for
each $100 in domestic deposits. These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature
in the year 2015.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Savings
Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. Management of the Savings Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of specified liquid assets
equal to a monthly average of not less than a specified percentage of its net
withdrawable accounts deposit plus short-term borrowings. This liquidity
requirement is currently 4%, but may be changed from time to time by the OTS
to any amount within the range of 4% to 10%. Monetary penalties may be
imposed for failure to meet liquidity requirements. The Savings Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is "critically undercapitalized." OTS regulations
also require that a capital restoration plan be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company in an amount of up to the lesser of 5% of the institution's
assets or the amount which would bring the institution into compliance with
all capital standards. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including,
but not limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. The OTS also could take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
At June 30, 2000, 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
29
<PAGE>
achieve compliance with the standard. Management is aware of no conditions
relating to these safety and soundness standards which would require
submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Savings Bank, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At June 30, 2000, the Savings Bank met the test and its QTL
percentage was 81.90%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "-- Savings and Loan Holding Company
Regulations."
Capital Requirements. Federally insured savings associations, such as the
Savings Bank, are required to maintain a minimum level of regulatory capital.
The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At June 30, 2000, the
Savings Bank had tangible capital of $74.5 million, or 6.56% of adjusted total
assets, which is approximately $57.5 million above the minimum requirement of
1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets, depending on an institution's supervisory rating.
Core capital generally consists of tangible capital. At June 30, 2000, the
Savings Bank had core capital equal to $74.5 million, or 6.56% of adjusted
total assets, which is $40.4 million above the minimum leverage ratio
requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by FNMA or FHLMC.
30
<PAGE>
On June 30, 2000, the Savings Bank had total risk-based capital of
approximately $81.7 million, including $74.5 million in core capital and $7.2
million in qualifying supplementary capital, and risk-weighted assets of
$608.9 million, or total capital of 13.42% of risk-weighted assets. This
amount was $33.0 million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS
may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Corporation or the Savings Bank may have a substantial adverse effect on their
operations and profitability.
Limitations on Capital Distributions. The OTS imposes various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. The OTS also prohibits a savings association from declaring or paying
any dividends or from repurchasing any of its stock if, as a result of such
action, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
The Savings Bank may make a capital distribution without OTS approval
provided that the Savings Bank notify the OTS 30 days before it declares the
capital distribution and that the following requirements are met: (i) the
Savings Bank has a regulatory rating in one of the two top examination
categories, (ii) the Savings Bank is not of supervisory concern, and will
remain adequately or well capitalized, as defined in the OTS prompt corrective
action regulations, following the proposed distribution, and (iii) the
distribution does not exceed the Savings Bank's net income for the calendar
year-to-date plus retained net income for the previous two calendar years
(less any dividends previously paid). If the Savings Bank does not meet these
stated requirements, it must obtain the prior approval of the OTS before
declaring any proposed distributions.
In the event the Savings Bank's capital falls below its regulatory
requirements or the OTS notifies it that it is in need of more than normal
supervision, the Savings Bank's ability to make capital distributions will be
restricted. In addition, no distribution will be made if the Savings Bank is
notified by the OTS that a proposed capital distribution would constitute an
unsafe and unsound practice, which would otherwise be permitted by the
regulation.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At June
30, 2000, the Savings Bank's limit on loans to one borrower was $16.2 million.
At June 30, 2000, the Savings Bank's largest single loan to one borrower was
$5.0 million, which was performing according to its original terms.
31
<PAGE>
Activities of Associations 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 Savings 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 relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member Savings Bank. Generally,
transactions between a savings association or its subsidiaries and its
affiliates are required to be on terms as favorable to the association as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of the Savings Bank include the Corporation
and any company which is under common control with the Savings Bank. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a Savings Bank holding company or acquire the
securities of most affiliates. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal Savings Banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Savings Bank received a "satisfactory" rating
as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
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<PAGE>
Savings and Loan Holding Company Regulations
The Corporation is a unitary savings and loan company subject to
regulatory oversight of the OTS. Accordingly, the Corporation is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Corporation and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to a
serious risk to the subsidiary savings association.
Acquisitions. Federal law 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.
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 and the activities of the Savings Bank and
any other subsidiaries (other than the Savings Bank or any other SAIF insured
savings association) would generally become subject to additional
restrictions. 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. Federal law 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 Savings 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 savings
and loan holding company.
Qualified Thrift Lender Test. If the Savings Bank fails the qualified
thrift lender test, within one year the Corporation must register as, and will
become subject to, the significant activity restrictions applicable to Savings
Bank holding companies. See "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test" for information regarding the Savings Bank's
qualified thrift lender test.
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
33
<PAGE>
additions may, within specified formula limits, have been deducted in arriving
at their taxable income. The Savings Bank's deduction with respect to
"qualifying loans," which are generally loans secured by certain interests in
real property, may have been computed using an amount based on the Savings
Bank's actual loss experience, or a percentage equal to 8% of the Savings
Bank's taxable income, computed with certain modifications and reduced by the
amount of any permitted additions to the nonqualifying reserve. The Savings
Bank's deduction with respect to nonqualifying loans was computed under the
experience method, which essentially allows a deduction based on the Savings
Bank's actual loss experience over a period of several years. Each year the
Savings Bank selected the most favorable way to calculate the deduction
attributable to an addition to the tax bad debt reserve. The Savings Bank
used the experience method bad debt deduction for the taxable year ended June
30,1999.
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, 2000, 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. Non-dividend
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%. 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).
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<PAGE>
Other Matters. The Internal Revenue Service has audited the Savings
Bank's income tax returns through 1996 and 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, 2000, the total net state tax rate was 7.1%. 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. 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, 2000, the Savings Bank had 271 full-time and 86 part-time
employees. The employees are not represented by a collective bargaining unit
and the Savings Bank believes its relationship with its employees to be good.
Item 2. Properties
------------------
At June 30, 2000, the net book value of the Savings Bank's property
(including land and buildings) and its fixtures, furniture and equipment was
$7.5 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 2001 and 2002. The Savings Bank also has six
separate loan production offices, which are located in Riverside, Rancho
Cucamonga, Glendora, Hacienda Heights and Torrance, California and Las Vegas,
Nevada. All of these offices are leased. The leases expire from 2000 to
2003.
Item 3. Legal Proceedings
--------------------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims
involving the making and servicing of real property loans and other issues in
the ordinary course of and incident to the Savings Banks' business. The
Savings Bank is not a party to any pending legal proceedings that it believes
would have a material adverse effect on the financial condition or operations
of the Savings Bank.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2000.
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 43
of the Corporation's Annual Report. As of June 30, 2000, there were
approximately 408 registered 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 4
and 5 of the Corporation's Annual Report, which is included herein as Exhibit
13. The following table sets forth quarterly financial data.
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<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
2000
--------------------------------------------
Fourth Third Second First
Total Quarter Quarter Quarter Quarter
----- ------- ------- ------- -------
(Dollars in Thousands, Except
per share)
Interest income............ $77,696 $20,554 $20,703 $19,269 $17,170
Interest expense........... 48,725 13,376 13,363 11,907 10,079
------- ------- ------- ------- -------
Net interest income........ 28,971 7,178 7,340 7,362 7,091
Noninterest income......... 8,802 3,124 1,569 1,893 2,216
Provision for loan losses.. 250 75 175 -- --
Noninterest expense........ 24,957 6,362 6,024 6,056 6,515
------- ------- ------- ------- -------
Earnings before taxes...... 12,566 3,865 2,710 3,199 2,792
Taxes on income............ 5,310 1,649 1,128 1,351 1,182
------- ------- ------- ------- -------
Net earnings............... $7,256 $2,216 $1,582 $1,848 $1,610
====== ====== ====== ====== ======
Per common share:
Per share earnings, diluted $1.96 $0.63 $0.45 $0.49 $0.41
===== ===== ===== ===== =====
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain information required herein is incorporated by reference from
pages 20 through 42 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
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<PAGE>
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 decrease 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 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.
38
<PAGE>
<TABLE>
Year Ended June 30,
------------------------------------------------------------------------------
2000 1999 1998
------------------------ -------------------------- --------------------------
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)................. $850,717 $64,004 7.52% $707,799 $52,217 7.38% $613,853 $46,305 7.55%
Investment securities.. 203,061 12,707 6.26 105,277 6,448 6.13 52,361 3,257 6.22
FHLB stock............. 17,129 939 5.48 7,496 381 5.08 5,214 303 5.81
Interest-earning
deposits.............. 841 46 5.47 5,717 268 4.69 4,358 231 5.31
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
earning assets.... 1,071,748 77,696 7.25 826,239 59,314 7.17 675,605 50,096 7.41
---------- ------- -------- ------- -------- -------
Non-interest-earning
assets................. 47,322 35,486 27,502
---------- -------- --------
Total assets...... $1,119,070 $861,725 $703,107
========== ======== ========
Interest-bearing
liabilities:
Passbook accounts...... $ 85,204 2,391 2.81 $ 73,974 2,399 3.24 $ 50,010 1,216 2.43
Demand and negotiable
order of withdrawal
("NOW") accounts...... 150,097 3,973 2.65 140,157 3,677 2.62 119,571 3,470 2.90
Certificate accounts... 454,059 24,011 5.29 401,286 21,012 5.24 368,501 21,025 5.71
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits..... 689,360 30,375 4.41 615,417 27,088 4.40 538,082 25,711 4.78
FHLB advances.......... 314,488 18,131 5.77 139,240 7,275 5.22 64,228 3,695 5.75
Other borrowings....... 2,032 219(5) 10.78 167 9 5.38 206 11 5.34
---------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing
liabilities....... 1,005,880 48,725 4.84 754,824 34,372 4.55 602,516 29,417 4.88
---------- ------- -------- ------- -------- -------
Non-interest-bearing
liabilities........... 26,622 22,652 16,602
---------- -------- --------
Total liabilities...... 1,032,502 777,476 619,118
---------- -------- --------
Stockholders' equity... 86,568 84,249 83,989
---------- -------- --------
Total liabilities
and stockholders'
equity............ $1,119,070 $861,725 $703,107
========== ======== ========
Net interest income.... $28,971 $24,942 $20,679
======= ======= =======
Interest rate spread
(3)................... 2.41% 2.62% 2.53%
Net interest margin
(4)................... 2.70% 3.01% 3.06%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........... 106.55% 109.46% 112.13%
(1) Includes loans available for sale.
(2) Includes deferred loan fee amortization of ($270,000), ($585,000) and ($752,000) for the years ended
June 30, 2000, 1999 and 1998, respectively.
(3) Represents difference between weighted average yield on all interest-earning assets and weighted
average rate on all interest-bearing liabilities.
(4) Represents net interest income before provision for loan losses as a percentage of average
interest-earning assets.
(5) Includes nine-months of Special Employee Retirement Program accruals, totaling $51,300.
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.
4th Quarter Year Ended June 30,
Ended --------------------------
June 30,
2000 2000 1999 1998
---- ---- ---- ----
Weighted average yield on:
Loans receivable (1).............. 7.64% 7.52% 7.52% 7.55%
Investment securities............. 6.25 6.26 6.25 6.22
FHLB stock........................ 9.03 5.48 5.24 5.81
Interest-earning deposits......... 7.12 5.47 4.94 5.31
All interest-earning assets....... 7.41 7.25 7.25 7.41
Weighted average rate paid on:
Passbook accounts................. 2.89 2.81 3.06 2.43
Demand and NOW accounts........... 2.53 2.65 2.59 2.90
Certificate accounts.............. 5.60 5.29 4.95 5.71
FHLB advances..................... 5.60 5.77 5.25 5.75
Other borrowings.................. 8.01 10.78 5.14 5.34
All interest-bearing liabilities.. 5.14 4.84 4.44 4.88
Interest rate spread (spread
between weighted average rates
on all interest-earning assets
and all interest-bearing
liabilities)..................... 2.27 2.41 2.80 2.53
Net interest margin (net
interest income as a
percentage of average
interest-earning assets)......... 2.61 2.70 3.04 3.06
(1) Includes loans available for sale.
40
<PAGE>
<TABLE>
Rate/Volume Table. The following table sets forth the effects of changing rates and volumes on interest
income and expense of the Savings Bank. Information is provided with respect to (i) effects attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) effects attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) changes that cannot be allocated between rate and
volume.
Year Ended June 30, Year Ended June 30,
2000 Compared to Year 1999 Compared to Year
Ended June 30, 1999 Ended June 30, 1998
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)............. $1,035 $10,543 $209 $11,787 ($1,032) $7,102 ($158) $5,912
Investment
securities...... 137 5,995 127 6,259 (49) 3,289 (49) 3,191
FHLB stock....... 30 490 38 558 (38) 133 (17) 78
Interest-bearing
deposits........ 45 (229) (38) (222) (27) 72 (8) 37
------ ------- ------ ------- ------ ------- ----- ------
Total net change
in income on
interest earning
assets......... 1,247 16,799 336 18,382 (1,146) 10,596 (232) 9,218
------ ------- ------ ------- ------ ------- ----- ------
Interest bearing
liabilities:
Passbook accounts.. (323) 364 (49) (8) 406 583 194 1,183
Demand and NOW
accounts.......... 33 261 2 296 (333) 597 (57) 207
Certificate accounts 208 2,764 27 2,999 (1,729) 1,870 (154) (13)
FHLB advances...... 753 9,156 947 10,856 (340) 4,317 (397) 3,580
Other borrowings... 9 100 101 210 -- (2) -- (2)
------ ------- ----- ------- ------ ------- ----- ------
Total net change in
expense on interest
bearing Liabilities 680 12,645 1,028 14,353 (1,996) 7,365 (414) 4,955
------ ------- ------ ------- ------ ------- ----- ------
Net change in net
Interest income... $567 $4,154 $(692) $4,029 $850 $3,231 $182 $4,263
=== ====== ===== ====== ==== ====== ==== ======
(1) Includes loans available for sale. For purposes of calculating volume, rate and rate/volume variances,
non-accrual loans were included in the weighted average balance outstanding.
41
</TABLE>
<PAGE>
Impact of New Accounting Pronouncements. 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.
The Corporation has reviewed and inventoried all options and embedded
derivatives underlying loans in its portfolio and has concluded that the
Corporation is not qualified for hedged accounting. The majority of the
derivatives are closely related to the underlying contracts, and those which
are not, have an immaterial effect to the Corporation's overall financial
statements.
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. No major subsequent events have occurred which has
material impact to the financial statements.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The information required herein is incorporated by reference from pages
15 through 42 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.
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.
42
<PAGE>
Executive Officers of the Corporation and Savings Bank
Age at Position
June 30, ---------------------------------------------
Name 2000 Corporation Savings Bank
---- ---- ----------- ------------
Craig G. Blunden 52 President, Chief President, Chief
Executive Officer Executive Officer and
and Director Director
Brian M. Riley 35 Chief Financial Senior Vice President
Officer and Chief Financial
Officer
Robert G. Schrader 61 Secretary Executive Vice
President, Chief
Operating Officer
Secretary and Director
Donald L. Blanchard 50 N/A Senior Vice President,
Retail Banking
Lilian Brunner 45 N/A Senior Vice President
Chief Information
Officer
Richard L. Gale 49 N/A Senior Vice President,
Mortgage Banking
(1) Mr. Riley resigned from his positions at the Corporation and the Savings
Bank effective September 20, 2000. Mr. Wenzel D. Likness is serving as Acting
Chief Financial Officer, effective upon the date of Mr. Riley's resignation,
until a replacement for Mr. Riley is found.
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.
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. He resigned from the Corporation and the Savings Bank effective
September 20, 2000.
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.
Lilian Brunner, who joined the Savings Bank in 1993, was general auditor
prior to being promoted to Chief Information Officer in 1997.
43
<PAGE>
Richard L. Gale, who joined the Savings Bank in 1988, has served as
President of the Provident Bank Mortgage division since 1989. Mr. Gale has
held his current position with the Savings Bank since 1993.
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, 2000 and 1999
(b) Consolidated Statement of Operations For the Years
Ended June 30, 2000, 1999 and 1998
(c) Consolidated Statement of Stockholders' Equity For
the Years Ended June 30, 2000, 1999 and 1998
(d) Consolidated Statement of Cash Flows For the Years
Ended June 30, 2000, 1999 and 1998
(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 with 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 Accountants
27. Financial data schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended June 30, 2000.
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.
By: /s/Craig G. Blunden
-------------------------------------
Date: September 22, 2000 Craig G. Blunden
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/Craig G. Blunden President, Chief September 25, 2000
----------------------------- Executive Officer and
Craig G. Blunden Director (Principal
Executive Officer)
/s/Wenzel D. Likness Acting Chief Financial September 25, 2000
----------------------------- Officer (Acting Principal
Wenzel D. Likness Financial and Accounting
Officer)
/s/Robert G. Schrader Director September 25, 2000
-----------------------------
Robert G. Schrader
/s/Bruce W. Bennett Director September 25, 2000
-----------------------------
Bruce W. Bennett
/s/Debbi H. Guthrie Director September 25, 2000
-----------------------------
Debbi H. Guthrie
/s/Roy H. Taylor Director September 25, 2000
-----------------------------
Roy H. Taylor
/s/William E. Thomas Director September 25, 2000
-----------------------------
William E. Thomas
<PAGE>
EXHIBIT 13
Annual Report to Stockholders
<PAGE>
Provident [Logo]
Provident Financial Holdings, Inc.
2000 ANNUAL REPORT
<PAGE>
Table of Contents
Message From the Chairman.............................................. 2
Financial Highlights................................................... 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 6
Report of Independent Accountants...................................... 14
Consolidated Financial Statements...................................... 15
Notes to Consolidated Financial Statements............................. 20
Shareholder Information................................................ 43
Market Information..................................................... 43
Corporate Profile...................................................... 43
Board of Directors and Senior Officers................................. 44
Provident Bank and Provident Bank Mortgage
Branch Locations....................................... Inside Back Cover
<PAGE>
Message From the Chairman
Dear Fellow Shareholders,
Fiscal year 2000 was another solid year for our Corporation. Net income was
$7.3 million, or nearly $2 per share. Since our initial public offering at
the end of fiscal 1996, earnings per share have increased from $0.41 in 1997
to $1.96 in 2000. This represents a compounded annual growth rate of over 50%.
During the same time period, the Corporation experienced tremendous growth as
total assets increased from $585 million to $1.15 billion. Despite the stock
market's apparent lack of interest in financial service companies, we are
proud, nonetheless, of our accomplishments and remain hopeful our value will
ultimately be recognized in the future trading activity.
Net Income (In Thousands)
1996 - $2,806
1997 - $1,941
1998 - $5,020
1999 - $6,899
2000 - $7,256
Note: (*) Excluding the non-recurring property gain, totaling $3.57 million
(net of tax).
Mortgage Banking
Rising interest rates had a negative impact on mortgage banking volume and
revenue during fiscal 2000. We originated $407 million in loans for sale
during the most current year, down from $630 million in 1999. Although the
sale of new and existing homes in the region remains stable, higher interest
rates have all but eliminated the refinancing transactions that were so
prevalent in the prior two years. Mortgage banking represented just 3% of
pre-tax income in fiscal 2000, down from 23% in fiscal 1999.
Due to the cyclical nature of the mortgage industry, we continue to focus on
the cost of originating loans and look for opportunities to become more
efficient in the process. One such opportunity is the name of our mortgage
division. Since its beginning more than a decade ago, our mortgage operations
have been marketed separately as Profed Mortgage. Today, we recognize the
importance of marketing Provident Bank and all of its elements as one complete
financial solution. Profed Mortgage is now known as Provident Bank Mortgage.
This name gives clients and prospects a greater sense of Provident Bank and
allows us to market just one image rather than two.
Total Portfolio Loans (In Millions)
1996 - $453
1997 - $517
1998 - $620
1999 - $669
2000 - $825
Provident Bank
Provident Bank continued substantial growth into fiscal 2000 by adding more
than $180 million in new loans and investments during the first two quarters.
Given the concern of rising rates, we elected to slow the rate of growth
during the last two quarters of the fiscal year. This deceleration of growth
allowed us to maintain better control of interest rate risk and avoid
challenging our risk-adjusted capital levels. As part of this strategy, we
elected to further de-emphasize residential lending in our core portfolio
holdings. Going forward, the Bank intends to add only higher margin
construction, business banking and consumer loans to its portfolio.
Page 2 - Provident Financial Holdings, Inc. - 2000 Annual Report
We were pleased to announce the site selection for our eleventh branch, which
will be located in Temecula, California. This area has experienced incredible
growth over the last few years as the science and technology industries of San
Diego County have pushed northward. Our Temecula office will be the first of
a new prototype facility that offers a financial resource center, cyber cafe
and virtual office in which clients can conduct business. We expect this
branch to open June 2001.
Total Deposits (In Millions)
1996 - $479
1997 - $509
1998 - $583
1999 - $633
2000 - $696
During this next year, look for us on the web. We are in the process of
testing the final elements of our new internet/e-commerce banking solution
that can be found at www.myprovident.com. Visit us at this site to track our
progress and learn more information about this open community network that
enables clients to, not only conduct banking business, but also transact with
retailers on the world-wide web.
The Year Ahead
With the quantum leap in technology we experienced between 1999 and 2000, we
are poised to compete very effectively in the coming years. We are going to
narrow our technology focus this year to create a useful decision support
system that provides us with customer, product and delivery channel
profitability information. We believe that this information is critical to
make better pricing decisions and provides a better framework for
accomplishing the long-term strategic objective of building quality client
relationships.
Total Assets (In Millions)
1996 - $585
1997 - $616
1998 - $816
1999 - $957
2000 - $1,148
We are excited about the future of community banking more than ever. Despite
critics questioning the need for smaller institutions, we believe that a well
focused, relationship oriented community bank will not only survive, but
thrive in the marketplace today. People need professional expertise to help
them accomplish their financial goals. As they grow weary of major bank
apathy, we expect to be the clear local choice.
Sincerely,
/s/ Craig G. Blunden
Craig G. Blunden
Chairman, President & Chief Executive Officer
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 3
<PAGE>
Financial Highlights
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) 2000 1999* 1998 1997 1996
==============================================================================
Financial Condition Data:
Total assets.............. $1,147,804 $957,431 $816,205 $615,500 $584,847
Loans held for investment,
net...................... 824,862 669,386 620,128 517,147 452,945
Loans available for sale,
net...................... 52,049 37,667 67,248 19,984 49,612
Cash and overnight
deposits................. 18,965 19,729 23,433 20,111 30,831
Investment securities..... 199,616 187,178 75,554 34,406 27,118
Deposits.................. 696,458 632,881 583,025 508,759 479,374
Borrowings................ 341,668 214,506 132,114 6,828 8,578
Stockholders' equity...... 88,967 89,686 86,650 85,447 85,970
Operating Data:
Interest income........... $ 77,696 $ 59,314 $ 50,096 $ 42,599 $ 41,817
Interest expense.......... 48,725 34,372 29,417 23,528 25,269
------------------------------------------------------------------------------
Net interest income....... 28,971 24,942 20,679 19,071 16,548
Provision for loan losses. 250 525 1,200 1,254 2,261
------------------------------------------------------------------------------
Net interest income after
provision................ 28,721 24,417 19,479 17,817 14,287
Loan servicing and other
fees..................... 2,673 2,714 3,035 2,738 2,442
Gains from sale of loans.. 3,248 6,590 4,491 3,597 4,753
Other non-interest income. 2,337 2,044 1,619 1,273 2,256
Real estate operations,
net...................... 544 824 196 (11) (101)
Operating expenses........ 24,957 24,717 20,095 22,313 19,499
------------------------------------------------------------------------------
Income before income
taxes.................... 12,566 11,872 8,725 3,101 4,138
Provision for income
taxes.................... 5,310 4,973 3,705 1,160 1,332
------------------------------------------------------------------------------
Net income................ $ 7,256 $ 6,899 $ 5,020 $ 1,941 $ 2,806
------------------------------------------------------------------------------
Basic earnings per share.. $ 1.99 $ 1.69 $ 1.14 $ 0.41 N/A
==============================================================================
Diluted earnings per
share.................... $ 1.96 $ 1.67 $1.11 $ 0.41 N/A
==============================================================================
(*) Excluding the impact of the non-recurring property gain, totaling $3.57
million (net of tax).
Page 4 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
At or for the year ended June 30,
-------------------------------------------------
(Dollars in Thousands) 2000 1999* 1998 1997 1996
==============================================================================
Key Operating Ratios:
Performance Ratios
Return on assets.......... 0.65% 0.80% 0.71% 0.32% 0.50%
Return on shareholders'
equity................... 8.38 8.19 5.98 2.26 6.98
Net interest rate spread.. 2.41 2.62 2.53 2.69 2.75
Net interest margin....... 2.70 3.01 3.06 3.33 3.05
Average interest-earning
assets to average interest-
bearing liabilities....... 106.55 109.46 112.13 115.44 106.32
Operating and administrative
expenses as a percent of
average total assets...... 2.23 2.87 2.86 3.73 3.46
Efficiency ratio.......... 66.51 67.56 69.73 87.80 82.57
Equity to asset ratio..... 7.75 9.37 10.62 13.88 14.70
Regulatory Capital Ratios
Tangible capital.......... 6.56 7.66 8.09 9.89 10.41
Tier 1 (core) capital..... 6.56 7.66 8.09 9.89 10.41
Total risk-based capital.. 12.23 16.76 14.12 16.12 16.49
Tier 1 risk-based capital. 13.42 15.35 12.89 14.87 N/A
Asset Quality Ratios
Nonaccrual and 90 days or more
past due loans as a percent
of loans held for
investment, net........... 0.09 0.20 0.31 1.21 0.98
Nonperforming assets as a
percentage of total
assets.................... 0.16 0.33 0.78 1.44 1.22
Allowance for loan losses as
a percentage of gross loans
held for investment....... 0.82 0.99 0.98 1.04 1.18
Allowance for loan losses as
a percentage of nonperforming
loans..................... 904.46 499.40 320.19 87.45 123.43
Net charge-offs to average
outstanding loans......... 0.01 0.20 0.08 0.25 0.38
(*) Excludes the impact of the non-recurring property gain, totaling $3.57
million (net of tax).
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 5
<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 direction of future interest rates, the
California real estate market, competitive conditions between banks and
non-bank financial services providers, regulatory changes, labor market
competitiveness, 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, 2000.
Operating Strategy
Provident Savings Bank, FSB, established in 1956, is a financial services
company committed to serving consumers and small to mid-sized businesses in
the Inland Empire region of Southern California. The Savings Bank conducts
its business operations as Provident Bank, Provident Bank Mortgage and through
its subsidiary, Provident Financial Corp. The business activities of the
Corporation consist of community banking and mortgage banking.
The Corporation has established goals for the next five years that differ
somewhat from the capital leverage strategies employed since its initial
public offering. The Corporation has goals over the next five years to remix
and diversify the balance sheet; diversify revenue sources; and operate more
efficiently.
The Corporation intends to remix its balance sheet by decreasing the
concentration of single-family residential mortgage loans within its loan
portfolio and increasing the origination of commercial business and commercial
real estate loans, and consumer loans. The Corporation also intends to
decrease the percentage of certificates of deposits in its deposit base and to
increase the percentage of core checking and savings deposits. This strategy
is intended to improve core revenue through a higher net interest margin.
Page 6 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
The Corporation also intends to diversify revenue sources through continued
growth of non-interest income, primarily income from Mortgage Banking, fees
from banking products and revenue from investment sales.
The Corporation intends to reduce its operating efficiency ratio by
streamlining processes and procedures, deploying technology solutions to
improve productivity, leveraging its infrastructure to support revenue growth
and offering accessible, low cost customer transaction channels.
The Corporation also actively utilizes share repurchases in its operating
strategy. Share repurchases increase shareholder value through higher earnings
per share.
Comparison of Financial Condition at June 30, 2000 and June 30, 1999
Total assets increased from $957.4 million at June 30, 1999 to $1.1 billion at
June 30, 2000 primarily as a result of growth in loans and investments. Loans
held for investment increased by $155.5 million from $669.4 million at June
30, 1999 to $824.9 million at June 30, 2000. The Savings Bank originated
approximately $282.9 million in new loans, primarily through its mortgage
division. Loans held for sale increased from $37.7 million at June 30, 1999 to
$52.0 million at June 30, 2000. The amount of loans held for sale is largely
dependent on the timing of loan fundings, loan commitment expirations, and
loan sale settlements.
As a result of continued increases in market rates, the Savings Bank noted a
need to increase its capital and reduce its interest rate risk exposure.
Starting in September 1999, the Savings Bank took a number of steps to improve
capital and reduce exposure to rising rates, which included: eliminating the
portfolio origination of adjustable rate mortgage loans with an initial fixed
rate for a period of 3 to 7 years; allowing the balance sheet to naturally
decline in order to bolster core capital; lengthening the maturity of
liabilities; and reducing the level of fixed rate lending.
Total liabilities increased from $867.7 million at June 30, 1999 to $1.1
billion at June 30, 2000 as a result of retail deposit growth and an increase
in Federal Home Loan Bank (FHLB) advances. Deposits increased from $632.9
million at June 30, 1999 to $696.5 million at June 30, 2000. During fiscal
2000, the Savings Bank continued its emphasis on building new client
relationships, particularly with low cost checking accounts. The checking
accounts increased by $5.1 million, or 3.5%, from $144.3 at June 30, 1999 to
$149.4 at June 30, 2000. FHLB advances increased from $214.5 million at June
30, 1999 to $338.3 million as the Savings Bank utilized FHLB advances to
finance a portion of its loan and investment securities growth.
Total stockholders' equity was $89.0 million at June 30, 2000, as compared to
$89.7 million at June 30, 1999. An increase in stockholders' equity during
fiscal 2000 from net income was substantially offset by share repurchases.
The Corporation repurchased 460,000 shares, or approximately 10% of
outstanding shares, for an average price of $18.56 per share, totaling $8.5
million in fiscal 2000. The amortization of unearned stock compensation of
$1.0
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
million in fiscal 2000 consisted of $740,000 in MRP (Management Recognition
Plan) and $270,000 in ESOP (Employee Stock Ownership Plan). The Corporation's
book value per share increased from $20.45 at June 30, 1999 to $22.68 at June
30, 2000.
Comparison of Operating Results for the Years Ended June 30, 2000 and 1999
General. The Corporation had net earnings of $7.3 million, or $1.96 per
diluted share, for the year ended June 30, 2000, as compared to $6.9 million,
or $1.67 per diluted share, for the year ended June 30, 1999 (excluding the
non-recurring property gain of $3.6 million, net of tax). The increase in
operating results in fiscal 2000 was due primarily to an improvement in net
interest income and a greater operating efficiency. These factors were
partially offset by a reduction in gain on sale of loans, which was mainly
attributable to lower loan sales.
Net Interest Income. Net interest income increased by $4.0 million, or 16.0%,
from $25.0 million in fiscal 1999 to $29.0 million in fiscal 2000. This
increase resulted principally from the growth of interest earning assets. The
net interest margin declined from an average of 3.01% in fiscal 1999 to an
average of 2.70% in fiscal 2000. The decline in the net interest margin was
due mainly to an increase in short-term market interest rates during fiscal
2000 where the increase in the costs was greater than that of income from
earning assets.
Interest Income. Total interest income increased by $18.4 million, or 31.0%,
from $59.3 million to $77.7 million in fiscal 2000 as the average earning
assets increased from $826.2 million during fiscal 1999 to $1.1 billion during
fiscal 2000. The average yield on assets increased from 7.18% in fiscal 1999
to 7.25% in fiscal 2000. Average loan receivables increased from $707.8
million during fiscal 1999 to $850.7 million during fiscal 2000 and the
average yield increased from 7.38% to 7.53%, respectively. Average investment
securities increased from $105.2 million during fiscal 1999 to $203.1 million
during fiscal 2000 while the average yield increased from 6.13% to 6.26%,
respectively.
Interest Expense. Total interest expense increased by $14.3 million, or 41.6%,
from $ 34.4 million in fiscal 1999 to $48.7 million in fiscal 2000. Average
customer deposits increased from $615.4 million during fiscal 1999 to $689.4
million during fiscal 2000 while the average cost of the deposits remained at
4.40%. Average FHLB advances also increased from $139.2 million during fiscal
1999 to $314.5 million during fiscal 2000 while the average cost increased
from 5.22% to 5.77%, respectively.
Provision for Loan Losses. Provision for loan losses decreased by $275,000, or
52.4%, from $525,000 in fiscal 1999 to $250,000 in fiscal 2000. The decrease
in the provision for loan losses reflects continued improvement in the local
economy and improvement in asset quality. The allowance for loan losses was
$6.9 million, or 0.82% of gross loans held for investment, at June 30, 2000,
as compared to $6.7 million, or 0.99% of gross loans held for investment, at
June 30, 1999. The allowance for loan losses as a percentage of non-performing
loans at the end of fiscal 2000 was 904.5%, as compared to 499.4% at the end
of fiscal 1999.
Page 8 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
In accordance with current operating strategy, the fastest growing segments of
the loan portfolio are construction, business banking and multi-family loans.
These loans have risk characteristics different than single family residential
loans. Management believes that the current provision for loan losses is both
prudent and responsible.
Non-interest Income. Total non-interest income decreased by $3.4 million to
$8.8 million in fiscal 2000 from $12.2 million in fiscal 1999 (excluding the
non-recurring property gain, totaling $6.1 million). The decrease in non-
interest income was mainly attributable to a decrease in gains from the sale
of loans from $6.6 million in fiscal 1999 to $3.2 million in fiscal 2000 as
the volume of loans sold decreased from $649.7 million in fiscal 1999 to
$389.9 million in fiscal 2000.
Non-interest Expense. Total non-interest expense increased by $240,000, or
1.0%, to $25.0 million in fiscal 2000 as compared to $24.7 million in fiscal
1999. This increase was attributable mainly to additional depreciation expense
from the Corporation's Year 2000 computer renovation project.
Income Taxes. The provision for income taxes was $5.3 million for fiscal 2000,
representing an effective tax rate of 42.3%, as compared to $5.0 million in
1999 (excluding the impact of the non-recurring property gain), representing
an effective tax rate of 41.9%.
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
$675.6 million during fiscal 1998 to $826.2 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%. Average loan
receivables increased from $613.7 million during fiscal 1998 to $707.8 million
during fiscal 1999 while the average yield fell from 7.55% to 7.38%,
respectively. Average investment securities increased from $52.4 million
during fiscal 1998 to $105.2 million during fiscal 1999 while the average
yield fell from 6.22% to 6.13%, respectively.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
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 $538.1 million during fiscal 1998 to $615.4
million during fiscal 1999 while the average cost of the deposits decreased
from 4.78% to 4.40%, respectively. 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 provision for loan losses 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 loans held for investment, at June 30, 1999,
as compared to $6.2 million, or 0.98% of gross loans held for investment, at
June 30, 1998. The allowance for loan losses as a 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%).
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 fluctuation of 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 manage 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 10 - Provident Financial Holdings, Inc. - 2000 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 the OTS is similar to the Savings Bank's own interest rate
analysis model. 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, 2000
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 $ 33,682 $ (55,888) -62% 3.17% -465 bp
+200 bp 54,099 (35,471) -40 4.95 -287 bp
+100 bp 73,580 (15,991) -18 6.56 -125 bp
0 bp 89,570 7.82 bp
-100 bp 100,844 11,273 13 8.65 + 83 bp
-200 bp 103,632 13,791 15 8.79 + 97 bp
-300 bp 106,437 16,867 19 8.96 +115 bp
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV based on the prevailing
interest rates at June 30, 2000 ("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, 2000 and June 30, 1999.
At June 30, 2000 At June 30, 1999
-----------------------------------------------------------------------------
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of
Assets.................................... 7.82 % 11.52 %
Exposure Measure: Post-Shock NPV Ratio..... 4.95 9.31
Sensitivity Measure: Charge in NPV Ratio... 287 bp 221 bp
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 11
<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 adjustable rate mortgage ("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, 2000, cash totaled $19.0
million, or 1.7% 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, 2000 was
9.6%. The Savings Bank has consistently maintained liquidity levels 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, 2000, 1999 and 1998, the
Savings Bank originated loans in the amounts of $683.5 million, $877.6 million
Page 12 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operation
and $707.3 million, respectively. At June 30, 2000, the Savings Bank had loan
commitments totaling $31.7 million and undisbursed loans in process totaling
$23.3 million. The Savings Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificates of
deposit that are scheduled to mature in one year or less from June 30, 1999
totaled $320.7 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. Under OTS's current prompt corrective action provisions,
the minimum ratio of 2% for tangible equity ratio is to be deemed other than
"critically undercapitalized", while a minimum of 5% for tier 1 (core)
capital, 10% for total risk-based capital and 6% for tier 1 risk-based capital
ratios are deemed "well capitalized". As of June 30, 2000, the Savings Bank
was well in excess of all regulatory capital requirements with tangible
capital, tier 1 (core) capital, total risk-based capital and tier 1 risk-based
capital ratios of 6.56%, 6.56%, 13.42% and 12.23%, respectively.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 13
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Provident Financial Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Provident
Financial Holdings, Inc. and its subsidiary at June 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Corporation'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 auditing standards
generally accepted in the United States, 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 4, 2000
Page 14 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Consolidated Balance Sheets
June 30,
--------------------
(Dollars in Thousands) 2000 1999
==============================================================================
Assets
Cash...................................................$ 18,965 $ 19,729
Investment securities - held to maturity............... 175,234 179,834
- available for sale............. 24,382 7,344
Loans held for investment, net......................... 824,862 669,386
Loans held for sale, net............................... 52,049 37,667
Accrued interest receivable............................ 7,391 5,984
Real estate held for investment, net................... 12,380 1,018
Other real estate owned, net........................... 1,047 1,775
Federal Home Loan Bank stock........................... 17,287 10,725
Premises and equipment, net............................ 7,525 8,422
Prepaid expenses and other assets...................... 6,682 15,547
-----------------------------------------------------------------------------
Total assets......................................$1,147,804 $ 957,431
==============================================================================
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits.......................$ 18,666 $ 14,764
Interest bearing deposits........................... 677,792 618,117
-----------------------------------------------------------------------------
Total deposits.................................... 696,458 632,881
Borrowings.......................................... 341,668 214,506
Accounts payable, accrued interest and other
liabilities........................................ 20,711 20,358
-----------------------------------------------------------------------------
Total liabilities................................. 1,058,837 867,745
-----------------------------------------------------------------------------
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 3,922,066 and 4,385,785, respectively.. 51 51
Additional paid-in capital.......................... 51,249 51,069
Retained earnings................................... 64,811 57,555
Treasury stock at cost (1,203,149 and 739,430
shares, respectively).............................. (22,696) (14,089)
Unearned stock compensation......................... (4,634) (5,644)
Accumulated other comprehensive income, net of tax.. 186 744
-----------------------------------------------------------------------------
Total stockholders' equity........................ 88,967 89,686
-----------------------------------------------------------------------------
Total liabilities and stockholders' equity........$1,147,804 $ 957,431
==============================================================================
The accompanying notes are an integral part of these financial statements.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 15
<PAGE>
Consolidated Statements of Operations
Year Ended June 30,
---------------------------------
(Dollars in Thousands) 2000 1999 1998
==============================================================================
Interest income:
Loans.................................... $ 64,004 $ 52,217 $ 46,305
Investment securities.................... 13,692 7,097 3,791
------------------------------------------------------------------------------
Total interest income................. 77,696 59,314 50,096
------------------------------------------------------------------------------
Interest expense:
Deposits................................. 30,376 27,088 25,711
Borrowings............................... 18,349 7,284 3,706
------------------------------------------------------------------------------
Total interest expense..................... 48,725 34,372 29,417
------------------------------------------------------------------------------
Net interest income........................ 28,971 24,942 20,679
Provision for loan losses.................. 250 525 1,200
------------------------------------------------------------------------------
Net interest income, after provision
for loan losses........................... 28,721 24,417 19,479
------------------------------------------------------------------------------
Non-interest income
Loan servicing and other fees............ 2,673 2,714 3,035
Gain on sale of loans, net............... 3,248 6,590 4,491
Real estate operations, net.............. 544 6,971 196
Other.................................... 2,337 2,044 1,619
------------------------------------------------------------------------------
Total non-interest income............. 8,802 18,319 9,341
------------------------------------------------------------------------------
Non-interest expense
Salaries and employee benefits........... 15,024 15,268 12,450
Premises and occupancy................... 2,023 1,966 2,065
SAIF insurance premiums.................. 248 358 329
Equipment................................ 2,258 1,390 999
Professional............................. 681 1,028 712
Sales and marketing...................... 1,055 767 893
Other.................................... 3,668 3,940 2,647
------------------------------------------------------------------------------
Total non-interest expense............ 24,957 24,717 20,095
------------------------------------------------------------------------------
Income before income taxes................. 12,566 18,019 8,725
Provision for income taxes................. 5,310 7,554 3,705
------------------------------------------------------------------------------
Net income............................ $ 7,256 $ 10,465 $ 5,020
==============================================================================
Basic earnings per share................... $ 1.99 $ 2.56 $ 1.14
==============================================================================
Diluted earnings per share................. $ 1.96 $ 2.53 $ 1.11
==============================================================================
The accompanying notes are an integral part of these financial statements.
Page 16 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
Unrea-
lized
Other
Compre-
Unearned hensive
Common Additional Stock Income,
(Dollars in Thousands, Stock Paid-in Retained Treasury Compen- Net of
Except Shares) Shares Amount Capital Earnings Stock sation Tax Total
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Unrealized holding gains on
securities available for sale,
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
Unrealized holding gains on
securities available for sale,
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
Comprehensive income
Net income...................... 7,256 7,256
Unrealized holding gains on
securities available for sale,
net of tax...................... (558) (558)
-------
Total comprehensive income........ 6,698
Purchase of treasury stock........ (463,719) (8,607) (8,607)
Release of shares under stock-
based compensation plans......... 180 1,010 1,190
---------------------------------------------------------------------------------------------------------
Balance at June 30, 2000.......... 3,922,066 $51 $51,249 $64,811 $(22,696) $(4,634) $186 $88,967
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 17
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
Year Ended June 30,
-------------------------------
(Dollars in Thousands) 2000 1999 1998
==============================================================================
Cash flows from operating activities:
Net income................................. $ 7,256 $ 10,465 $ 5,020
Adjustments to reconcile net income to net
cash provided by (used for) operating
activities:
Depreciation and amortization........... 2,124 392 (95)
Provision for loan losses............... 250 525 1,200
Provision for losses on real estate..... - - 126
Gain on sale of loans................... (3,248) (6,590) (4,491)
Net loss (gain) on sale of investment
securities............................. 5 (41) -
Increase (decrease) in accounts payable
and other liabilities.................. 742 5,835 (49)
Decrease (increase) in prepaid expenses
and other assets....................... 7,459 (12,639) (2,237)
Loans originated for sale............... (407,221) (613,538) (467,446)
Proceeds from sale of loans............. 396,087 649,709 424,673
Stock compensation...................... 1,190 1,204 1,068
------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities................. 4,644 35,322 (42,231)
------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loan receivables...... (155,329) (47,468) (110,187)
Maturity of investment securities
held to maturity..................... 6,650 83,432 57,502
Purchase of investment securities
held to maturity..................... - (189,124) (98,430)
Purchase of investment securities
available for sale................... (23,280) (6,443) -
Sales of investment securities
available for sale................... 3,220 919 -
Purchase of Federal Home Loan Bank
stock................................ (6,562) (4,119) (1,727)
Net (purchase) sales of real estate... (11,308) 2,353 5,561
Purchase of premises and equipment.... (931) (2,040) (1,199)
Other................................. - - (536)
------------------------------------------------------------------------------
Net cash used for investing
activities........................... $(187,540) $(162,490) $(149,016)
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Page 18 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Consolidated Statements of Cash Flows
Year Ended June 30,
---------------------------------------
(Dollars in Thousands) 2000 1999 1998
==============================================================================
Cash flows from operating activities:
Net increases in deposits........... $ 63,577 $ 49,856 $ 74,266
Repayment of Federal Home Loan Bank
advances........................... (11,061,531) (2,379,408) (2,638,693)
Proceeds from Federal Home Loan Bank
advances........................... 11,185,363 2,461,800 2,763,979
Proceeds from other borrowings...... 3,330
Treasury stock purchases............ (8,607) (8,784) (4,983)
------------------------------------------------------------------------------
Net cash provided by financing
activities.................... 182,132 123,464 194,569
------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents............... (764) (3,704) 3,322
Cash and cash equivalents at
beginning of year.................... 19,729 23,433 20,111
------------------------------------------------------------------------------
Cash and cash equivalents at end of
year................................. $ 18,965 $ 19,729 $ 23,433
==============================================================================
Supplemental information:
Cash paid for interest.............. $ 48,280 $ 35,155 $ 29,984
==============================================================================
Cash paid for income taxes.......... $ 4,305 $ 7,101 $ 4,623
==============================================================================
Real estate acquired in settlement
of loans........................... $ 1,144 $ 1,775 $ 6,932
==============================================================================
The accompanying notes are an integral part of these financial statements.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 19
<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 Corporation). All significant inter-company
balances and transactions have been eliminated.
The Corporation operates in two business segments: Savings Bank Operations
(Provident Savings Bank) and Mortgage Banking (Provident Bank Mortgage, a
division of Provident Savings Bank). Savings Bank Operations include
attracting customer deposits, offering banking services and originating
business banking, commercial and consumer loans. The primary commercial loans
are construction, multi-family residential and commercial property loans.
Mortgage Banking's primary activities are originating single-family mortgage
loans for sale to institutional 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 six free standing lending offices in California and Nevada.
The accounting and reporting policies of the Corporation 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 Corporation classifies its qualifying investments as available for sale or
held to maturity. The Corporation'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 holding gains and losses on
securities available for sale are included in other comprehensive income, net
of tax. Gains and losses on dispositions 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. The adjustable-rate mortgage (ARM) is the
Corporation's primary loan investment. In addition to the ARMs, business
banking, construction, second mortgage and consumer loans are becoming a
substantial part of the loan portfolio. 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.
Page 20 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
Interest receivable represents, for the most part, the current month's
interest which will be included as a part of the borrower's next monthly loan
payment. Interest receivable is accrued only if deemed collectible. Loans
generally are deemed to be in non-accrual status when they become 90 days past
due. When a loan is placed on non-accrual status, interest accrued but not
received is reversed against income.
Mortgage banking activities
Loans are originated for both investment and sale in the secondary market.
Since the Corporation is primarily an adjustable-rate mortgage lender for its
own portfolio, most fixed rate products are originated for sale to others.
Starting the second half of fiscal 2000, the Corporation decided to sell all
single-family first mortgage loans. Loans held-for-sale are carried at lower
of cost or fair value. Fair value is generally determined by outstanding
commitments from investors or current investor yield requirements as
calculated on the aggregate loan basis.
The Corporation sells loans in order to minimize interest rate risk and to
provide additional funds for investment by the Corporation. 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 Corporation may retain the servicing rights in order to generate servicing
income. Where the Corporation continues to service loans after sale, investors
are paid their share of the principal collections together with interest at an
agreed-upon rate, which generally differs from the loan's contractual interest
rate.
Gains or losses on sales of loans, including fees received or paid, are
recognized at the time of sale and are determined by the difference between
the net sales proceeds and the book value of the loans sold. When loans are
sold with servicing retained, the carrying value is allocated between the
assets transferred and the fair value of the retained servicing in determining
the amount of gain. Servicing assets and liabilities are amortized over the
estimated life of the net servicing income or loss and are assessed for
subsequent impairment.
Bulk sales of servicing rights are recognized when title and all risks and
rewards of ownership of the underlying loans have been irrevocably transferred
to the buyer and all significant contingencies have been resolved.
Allowance for loan losses
It is the policy of the Corporation to provide for estimated losses on
portfolio loans when any significant and permanent decline in the borrower
ability to pay or value of 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 review policy used by the Corporation
is the primary basis by which the Corporation 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 Corporation 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 Corporation measures each impaired loan based on the fair
value of its collateral and charges off those loans or portions of loans
deemed uncollectible.
Other real estate owned
Other 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 owned is
carried at the lower of costs or fair value less estimated selling costs.
Real estate loss provisions are recorded when
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 21
<PAGE>
Notes to Consolidated Financial Statements
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 Corporation'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.
Risks and uncertainties
In the normal course of its business, the Corporation 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 Corporation 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 Corporation's loan portfolio that results from the borrower's
inability or unwillingness to make contractually required payments. Market
risk results from changes in the value of assets and liabilities which may
impact, favorably or unfavorably, the realizability of those assets and
liabilities held by the Corporation.
The Corporation is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Corporation also undergoes periodic examinations by the regulatory agencies,
which may subject it to further changes with respect to asset valuations,
amounts of required loss allowances and operating restrictions resulting from
the regulators' judgments based on information available to them at the time
of their examination.
Net income per common share
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 an increase in the weighted average shares
outstanding due to the assumed exercise of stock options and the vesting of
restricted stock.
Employee Stock Ownership Plan (ESOP)
The Corporation 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.
Page 22 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
Management Recognition Plan (MRP)
The Corporation 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 Corporation.
Recent Accounting Pronouncements
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 pronouncement has been amended by SFAS No. 137 to extend
implementation of SFAS No. 133 for one year to all fiscal years beginning
after June 15, 2000.
The Corporation has reviewed inventories of all options and embedded
derivatives underlying loans in its portfolio and has concluded that the
Corporation is not qualified for hedged accounting. The majority of the
derivatives are closely related to the underlying contracts, and those which
are not, have an immaterial effect to the Corporation's overall financial
statements.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 23
<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, 2000 were as follows:
Amor- Gross Gross Estimated
tized Unrealized Unrealized Fair Carrying
Cost Gains (Losses) Value Value
=============================================================================
Held to maturity
securities
U.S. Treasury
securities and
obligations of
other U.S.
government agencies
and corporations.... $175,214 $ - $(9,185) $166,029 $175,214
Other............... 20 10 - 30 20
------------------------------------------------------------------------------
Total held to
maturity....... 175,234 10 (9,185) 166,059 175,234
------------------------------------------------------------------------------
Available for sale
securities
FHLMC stock........ 20 790 - 810 810
FNMA stock......... 1 72 - 73 73
Equity securities.. 49 - (17) 32 32
U.S. Treasury
securities and
obligations of
other U.S government
and corporation... 23,997 - (530) 23,467 23,467
------------------------------------------------------------------------------
Total available
for sale....... 24,067 862 (547) 24,382 24,382
------------------------------------------------------------------------------
Total investment
securities.......... $199,301 $ 872 $(9,732) $190,441 $199,616
==============================================================================
The amortized cost and estimated fair value of investment securities as of
June 30, 1999 were as follows:
Amor- Gross Gross Estimated
tized Unrealized Unrealized Fair Carrying
Cost 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 corporation.... 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
==============================================================================
Page 24 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
The maturities of investment securities were as follows:
June 30, 2000 June 30, 1999
------------------ ------------------
Amortized Market Amortized Market
Cost Value Cost Value
==============================================================================
Held to maturity
Due in one year................... $ - $ - $ 3,609 $ 3,600
Due after one through five years.. 48,262 45,829 20,995 20,658
Due after five through ten years.. 126,972 120,230 155,230 151,775
-----------------------------------------------------------------------------
175,234 166,059 179,834 176,033
-----------------------------------------------------------------------------
Available for sale
Due in one year................... - - - -
Due after one through five years.. 11,997 11,784 989 983
Due after five through ten years.. 12,000 11,683 4,000 4,011
-----------------------------------------------------------------------------
23,997 23,467 4,989 4,994
-----------------------------------------------------------------------------
Total Securities.................. $199,231 $189,526 $184,823 $181,027
==============================================================================
3. Loans held for Investment (Dollars in Thousands):
Loans held for investment consisted of the following: June 30,
-----------------
2000 1999
==============================================================================
Residential real estate - single family................ $ 651,116 $ 538,915
Residential real estate - multi-family................. 41,437 38,663
Commercial real estate................................. 45,907 41,845
Real estate construction............................... 47,011 23,249
Commercial business lending............................ 19,721 10,239
Consumer............................................... 47,618 41,620
Others................................................. 1,402 822
-----------------------------------------------------------------------------
854,212 695,353
Less:
Undisbursed loan funds............................... 23,407 19,698
Deferred loan fees................................... (928) (448)
Unearned discounts on loans purchased................ 21 15
Allowance for loan losses............................ 6,850 6,702
------------------------------------------------------------------------------
$824,862 $669,386
==============================================================================
Fixed rate loans comprised 15% and 20%, respectively, of the loan portfolio at
June 30, 2000 and 1999. The following summarizes the components of the net
change in the allowance for loan losses:
Year Ended June 30,
----------------------------------
2000 1999 1998
==============================================================================
Balance, beginning of period.............. $ 6,702 $ 6,186 $ 5,465
Provision for losses...................... 250 525 1,200
Recoveries................................ 31 300 404
Charge-offs............................... (133) (309) (883)
------------------------------------------------------------------------------
Balance, end of period.................... $ 6,850 $ 6,702 $ 6,186
==============================================================================
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 25
<PAGE>
Notes to Consolidated Financial Statements
The effect of non-accrual and restructured loans on interest income for the
years ended June 30, 2000, 1999 and 1998 is presented below:
Year Ended June 30,
----------------------------------
2000 1999 1998
==============================================================================
Contractual interest due.................. $ 304 $ 399 $ 899
Interest recognized....................... 234 145 547
------------------------------------------------------------------------------
Net interest foregone..................... $ 70 $ 254 $ 352
==============================================================================
At June 30, 2000 and 1999, there were no commitments to lend additional funds
to those borrowers whose loans were classified as impaired.
The following table identifies the Corporation's total recorded investment in
impaired loans, net of specific allowances, by type at June 30, 2000 and 1999:
June 30,
-----------------
2000 1999
==============================================================================
Non-accrual loans:
Single family........................................ $ 749 $ 1,165
Multifamily.......................................... - -
Commercial........................................... - -
Nonmortgage.......................................... 13 39
Restructured loans:
Single family........................................ - -
Multifamily.......................................... - -
Commercial........................................... 1,481 1,508
Nonmortgage.......................................... - -
Other impaired loans:
Single family........................................ 203 112
Multifamily.......................................... - 142
Commercial........................................... 137 485
Nonmortgage.......................................... - 1
------------------------------------------------------------------------------
Total impaired loans................................... $ 2,583 $ 3,452
==============================================================================
During the years ended June 30, 2000 and 1999, the Corporation's average
investment in impaired loans was $4,325 and $4,526, respectively, and interest
income recorded during this period was $234 and $175, respectively. The
Corporation records interest on non-accrual loans utilizing the cash basis
method of accounting during periods when the loans are in non-accrual status.
==============================================================================
Page 26 - Provident Financial Holdings, Inc. - 2000 Annual Report
<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,
----------------------------------
2000 1999 1998
==============================================================================
Balance, beginning of period.............. $ 2,362 $ 2,741 $ 1,825
Originations.............................. 1,744 2,260 1,364
Payments.................................. (632) (2,243) (105)
Terminations.............................. (31) (396) (343)
------------------------------------------------------------------------------
Balance, end of period.................... $ 3,443 $ 2,362 $ 2,741
==============================================================================
4. Mortgage Banking (Dollars in Thousands):
The following summarizes the unpaid principal balance of loans serviced for
others by the Corporation:
Year Ended June 30,
----------------------------------
2000 1999 1998
==============================================================================
Loans serviced for Federal Home Loan
Mortgage Corporation.................... $ 89,811 $108,285 $149,730
Loans serviced for Federal National
Mortgage Association.................... 141,148 167,904 233,066
Loans serviced for other investors........ 30,224 38,839 51,905
------------------------------------------------------------------------------
$261,183 $315,028 $434,701
==============================================================================
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
Corporation held borrowers' escrow balances related to loans serviced for
others of $397 and $602 as of June 30, 2000 and 1999, respectively. These
escrow balances are included in deposits in the accompanying consolidated
balance sheets.
Loans sold consisted of the following: Year Ended June 30,
----------------------------------
2000 1999 1998
==============================================================================
Loans sold
Servicing - released.................... $388,583 $648,141 $424,246
Servicing - retained.................... 1,275 1,568 428
------------------------------------------------------------------------------
$389,858 $649,709 $424,674
==============================================================================
Loans held for sale consisted of the following:
Year Ended June 30,
-------------------
2000 1999
==============================================================================
Adjustable rate........................................ $ 22,316 $ 1,129
Fixed rate............................................. 29,733 36,538
------------------------------------------------------------------------------
$ 52,049 $ 37,667
==============================================================================
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 27
<PAGE>
Notes to Consolidated Financial Statements
5. Real Estate Held for Investment and Other Real Estate Owned (Dollars in
Thousands):
Real estates consisted of the following:
Year Ended June 30,
-------------------
2000 1999
==============================================================================
Real estate held for investment........................ $ 12,400 $ 1,070
Other real estate owned................................ 1,059 1,775
------------------------------------------------------------------------------
13,459 2,845
------------------------------------------------------------------------------
Allowance for estimated losses:
Real estate held for investment...................... (20) (20)
Other real estate owned.............................. (12) (32)
------------------------------------------------------------------------------
(32) (52)
------------------------------------------------------------------------------
$ 13,427 $ 2,793
==============================================================================
The following summarizes the components of the net change in the allowance for
losses on real estate:
Year Ended June 30,
----------------------------------
2000 1999 1998
==============================================================================
Balance, beginning of period.............. $ 52 $ 611 $ 589
Provisions for losses..................... (20) (20) 326
Charge-offs............................... - (539) (304)
------------------------------------------------------------------------------
Balance, end of period.................... $ 32 $ 52 $ 611
==============================================================================
6. Premises and Equipment (Dollars in Thousands):
Premises and equipment consisted of the following:
Year Ended June 30,
-------------------
2000 1999
==============================================================================
Land................................................... $ 2,532 $ 2,531
Buildings.............................................. 6,312 6,279
Leasehold improvements................................. 640 622
Furniture and equipment................................ 9,538 10,275
Automobiles............................................ 121 137
------------------------------------------------------------------------------
19,143 19,844
Less accumulated depreciation and amortization ........ (11,618) (11,422)
------------------------------------------------------------------------------
$ 7,525 $ 8,422
==============================================================================
Page 28 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
7. Deposits (Dollars in Thousands):
June 30, 2000 June 30, 1999
------------------------- -----------------------------
Interest Rate Amount Interest Rate Amount
==============================================================================
Checking deposits... 0%-2.96% $ 92,115 0%-3.20% $ 75,443
Passbook deposits... 1.98%-5.69% 86,417 1.98%-4.16% 81,108
Money market
deposits........... 0%-3.93% 57,258 0%-3.93% 68,835
Term deposits
Under $100,000.... 2.00%-7.23% 339,904 2.00%-8.00% 310,223
$100,000 and over. 3.93%-8.00% 120,764 3.78%-8.00% 97,272
------------------------------------------------------------------------------
$ 696,458 $ 632,881
==============================================================================
Weighted average interest
rate on deposits.... 4.67% 4.13%
==============================================================================
The aggregate annual maturities of term accounts are as follows:
Year Ended June 30,
-------------------
2000 1999
==============================================================================
Within one year....................................... $ 320,711 $ 368,380
One to two years...................................... 95,860 20,462
Two to three years.................................... 38,663 9,957
Three to four years................................... 2,175 6,505
Thereafter............................................ 3,259 2,191
------------------------------------------------------------------------------
$ 460,668 $ 407,495
==============================================================================
Interest expense is summarized as follows:
Year Ended June 30,
----------------------------------
2000 1999 1998
==============================================================================
Checking................................. $ 1,679 $ 984 $ 223
Term deposits............................ 24,011 21,013 21,025
Money market deposits.................... 2,295 2,693 3,247
Passbook deposits........................ 2,391 2,398 1,216
------------------------------------------------------------------------------
$ 30,376 $ 27,088 $ 25,711
==============================================================================
The Corporation is required to maintain cash and reserve balances with the
Federal Reserve Bank. Such reserves are calculated based on deposit levels
and amounted to $207 and $2,830 at June 30, 2000 and 1999, respectively.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 29
<PAGE>
Notes to Consolidated Financial Statements
8. Borrowings (Dollars in Thousands):
Borrowings consisted of the following: June 30,
-----------------
2000 1999
------------------------------------------------------------------------------
Advances from Federal Home Loan Bank.................... $ 338,338 $ 214,506
A loan to facilitate purchase of investment property.... 3,330 -
------------------------------------------------------------------------------
Total Borrowings........................................ $ 341,668 $ 214,506
==============================================================================
Advances from the Federal Home Loan Bank were collateralized by pledges of
certain real estate loans with an aggregate principal balance at June 30, 2000
and 1999 of $628,094 and $358,026, respectively. In addition to the FHLB
advances, the Bank, via its subsidiary, assumed a loan to facilitate the
purchase of investment property in downtown Riverside. At June 30, 2000, the
Bank's overall FHLB borrowing capacity which is limited to 40% of total
assets, as reported on the Bank's quarterly thrift financial reports, is
approximately $466,039 as compared to 30% of total assets, or $264,010 at June
30, 1999.
As a member of the FHLB system, the Bank is required to maintain a minimum
investment in FHLB stock. The Bank holds the required investment in excess of
$370 at June 30, 2000, as compared to no excess at June 30, 1999. Any excess
may be redeemed by the Bank or called by FHLB at par.
The aggregate annual contractual maturities of borrowings are as follows:
June 30,
-----------------
2000 1999
==============================================================================
Within one year......................................... $ 230,541 $ 161,160
One to two years........................................ 93,825 23,000
Two to three years...................................... 17,000 -
Over three years........................................ 302 30,346
------------------------------------------------------------------------------
$ 341,668 $ 214,506
==============================================================================
Weighted average interest rate.......................... 6.37% 5.25%
==============================================================================
9. Income Taxes (Dollars in Thousands):
The provision for income taxes consisted of the following:
Year Ended June 30,
----------------------------------
2000 1999 1998
==============================================================================
Current:
Federal................................ $ 3,664 $ 5,475 $ 3,376
State.................................. 1,275 1,892 1,001
------------------------------------------------------------------------------
4,939 7,367 4,377
------------------------------------------------------------------------------
Deferred:
Federal................................ 294 115 (649)
State.................................. 77 72 (23)
------------------------------------------------------------------------------
371 187 (672)
------------------------------------------------------------------------------
Provision for income taxes............... $ 5,310 $ 7,554 $ 3,705
==============================================================================
Page 30 - Provident Financial Holdings, Inc. - 2000 Annual Report
<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,
--------------------------------
2000 1999 1998
==============================================================================
Federal statutory income tax rate........ 35.0% 35.0% 34.0%
State taxes net of Federal tax effect.... 7.1% 7.1% 7.2%
Release of state valuation allowance..... - - -
Other.................................... 0.2% (0.2%) 1.3%
------------------------------------------------------------------------------
Effective income tax rate................ 42.3% 41.9% 2.5%
==============================================================================
Deferred tax liabilities (assets) by jurisdiction were as follows:
June 30,
-----------------
2000 1999
==============================================================================
Deferred Taxes - federal................................ $ (1,110) $ (1,185)
Deferred Taxes - state.................................. (595) (731)
------------------------------------------------------------------------------
$ (1,705) $ (1,916)
==============================================================================
Deferred tax liabilities (assets) were comprised of the following:
June 30,
-----------------
2000 1999
==============================================================================
State taxes............................................. $ - $ -
Depreciation............................................ 387 155
Federal Home Loan Bank dividends........................ 2,135 1,704
Unrealized Gain on Securities........................... 129 518
------------------------------------------------------------------------------
Total deferred tax liabilities..................... 2,651 2,377
------------------------------------------------------------------------------
State Tax............................................... (387) (413)
Market value adjustments................................ 304 (34)
Loss reserves........................................... (2,248) (2,017)
Deferred compensation................................... (1,476) (1,149)
Investment in real estate............................... (373) (144)
Other................................................... (176) (536)
------------------------------------------------------------------------------
Total deferred tax assets.......................... (4,356) (4,293)
------------------------------------------------------------------------------
Net deferred tax assets............................ $ (1,705) $ (1,916)
==============================================================================
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 31
<PAGE>
Notes to Consolidated Financial Statements
10. Capital (Dollars in Thousands):
Retained earnings at June 30, 2000 included approximately $6,850 for which
federal income tax of approximately $2,809 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 Corporation were to convert its charter.
Federal regulations require that institutions with investment in subsidiaries
conducting real estate investments and joint venture activities maintain
sufficient capital over the minimum regulatory requirements. The Corporation
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 Corporation'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, 2000, 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 included as capital on a limited
basis.
As of June 30, 2000, the most recent notification from the Office of the
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, core, and
tangible leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
institution's category.
The Corporation 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.
Page 32 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios as of June 30, 2000, 1999 and
1998 are as follows:
To be "Well
Capitalized" Under
Prompt Corrective
Actual Action Provision
------------------ -----------------------------
Amount Ratio Amount Ratio
=============================================================================
As of June 30, 2000
Total Risk Based Capital
Ratio...................... $ 81,719 13.42% $ 60,889 Greater than or
equal to 10.0%
Tier 1 (Core) Capital Ratio. 74,482 6.56% 56,747 Greater than or
equal to 5.0%
Tier 1 Risk Based Capital... 74,482 12.23% 36,533 Greater than or
equal to 6.0%
Tangible Equity Ratio....... 74,482 6.56% 22,699 Greater than or
equal to 2.0%
As of June 30, 1999
Total Risk Based Capital
Ratio...................... $ 79,058 16.76% $ 47,172 Greater than or
equal to 10.0%
Tier 1 (Core) Capital Ratio. 72,421 7.66% 47,255 Great than or
equal to 5.0%
Tier 1 Risk Based Capital... 72,421 15.35% 28,303 Greater than or
equal to 6.0%
Tangible Equity Ratio....... 72,421 7.66% 37,804 Greater than or
equal to 4.0%
(*) To be deemed other than critically undercapitalized
11. Benefit Plans (Dollars in Thousands):
The Corporation 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 Corporation makes
matching contributions up to 3% of participants' pre-tax compensation.
Participants vest immediately in their own contributions with 100% vesting in
the Corporation's contributions occurring after six years of credited service.
The Corporation's expense for these plans was approximately $193, $182, and
$142 for the years ended June 30, 2000, 1999 and 1998, respectively.
The Corporation has a multi-year employment contract with one executive
officer to pay certain benefits upon retirement. The obligation was fully
funded at June 30, 2000 and 1999. 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 Corporation during which they have served a minimum of 1,000 hours.
The ESOP borrowed $4,100 from the Corporation to purchase 410,017 shares of
the common stock issued in the conversion. The loan will be repaid
principally from the Corporation's contributions to the ESOP over a period of
15 years. At June 30, 2000, the outstanding balance on the loan was $3,269.
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
Corporation. 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
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 33
<PAGE>
Notes to Consolidated Financial Statements
$451, $465 and $579 for the years ending June 30, 2000, 1999 and 1998,
respectively. At June 30, 2000, the unearned ESOP shares account of $2,908 is
reported as a reduction of stockholders' equity.
The table below reflects ESOP activity for the period indicated:
June 30,
-----------------
2000 1999
==============================================================================
Unallocated shares at beginning of period............... 317,860 344,912
Allocated............................................... 27,052 27,052
------------------------------------------------------------------------------
Unallocated shares at end of period..................... 290,808 317,860
==============================================================================
The fair value of unallocated ESOP shares totaled $4,053, $6,357 and $7,157 at
June 30, 2000, 1999 and 1998, respectively.
12. Incentive Plans
Management Recognition Plan and Trust (MRP)
The Corporation has established the 1996 Management Recognition Plan ("MRP")
to provide key employees and eligible directors with a proprietary interest in
the growth, development and financial success of the Corporation through the
award of restricted stock. The Corporation acquired 205,000 shares of its
common stock in the open market to fund the MRP. On October 30, 1997, 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 an employee or director of the
Corporation. The Corporation recognizes compensation expense for the MRP
based on the fair value of the shares at grant date. MRP compensation expense
was $740, $740 and $493 for the year ended June 30, 2000, 1999 and 1998,
respectively.
Stock Option Plan
The Corporation 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 vested over a five-year period as long as the employee or
director remains an employee or director of the Corporation. These options
are excercisable in equal installments over five years at the end of each
vesting period. 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 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
Granted............................................... - -
Cancelled............................................. 5,000 15.25
------------------------------------------------------------------------------
Outstanding at June 30, 2000.......................... 371,000 $16.19
==============================================================================
For outstanding options the weighted average remaining contractual life was
6.7 years. There were 241,930 shares under options that were exercisable at
June 30, 2000. At June 30, 2000, 141,522 shares were available for future
grants under the Plan.
Page 34 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
Additional Stock Option Plan Information
The Corporation 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 Corporation 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 value
method (as defined in SFAS No. 123) had been applied beginning in 1997.
The Corporation 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%;
risk free interest rate, 5.77% in 1998; and no dividends during the expected
term. The Corporation'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
$6,868 and $1.86 per share in fiscal 2000, $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, 2000
-----------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
==============================================================================
Basic EPS............................ $ 7,256 3,643,532 $ 1.99
Effect of dilutive shares
Stock options........................ 28,475
Restricted stock awards.............. 28,464
---------
Diluted EPS.......................... $ 7,256 3,700,471 $ 1.96
==============================================================================
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
==============================================================================
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 35
<PAGE>
Notes to Consolidated Financial Statements
14. Commitments and Contingencies (Dollars in Thousands):
The Corporation 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 Corporation's financial position.
The Corporation conducts a portion of its operations in leased facilities
under non-cancelable agreements classified as operating leases. The following
is a schedule of minimum rental payments under such operating leases which
expire at various years:
June 30,
2000
============================================
Fiscal Year
2001............................ $ 524
2002............................ 319
2003............................ 113
--------------------------------------------
Total minimum payments required. $ 956
============================================
Lease expense under operating leases approximated $632, $600, and $679 for the
years ended June 30, 2000, 1999 and 1998, respectively.
15. Financial Instruments With Off-Balance Sheet Risk (Dollars in Thousands)
The Corporation 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 Corporation'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
Corporation 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 Corporation evaluates each customer's credit worthiness on
a case-by-case basis. At June 30, 2000 and 1999, interest rates on
commitments to lend ranged from 3.00% to 14.90% and 6.00% to 11.30%,
respectively.
In an effort to minimize its exposure to interest rate fluctuations on fixed
rate loans originated for sale, the Corporation enters into forward agreements
to sell certain dollar amounts of fixed as well as adjustable rate loans to
third parties. These agreements specify the minimum maturity of the loans,
yield to purchaser and servicing spread to the Corporation (if servicing is
retained), and the maximum principal amount of individual loans. The
Corporation typically satisfies these forward sale agreements with its current
production; at June 30, 2000 and 1999 the aggregate amount of loans held for
sale and of commitments to originate exceeded the Corporation's forward sales
commitments to sell loans. At June 30, 2000 and 1999, interest rates on
commitments to sell loans ranged from 3.00% to 14.88% and 5.25% to 11.55%,
respectively.
Page 36 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
The Corporation 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 Corporation 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 Corporation 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 held for sale and recognized in earnings when the loan
is sold. There was $3,000 of put options at June 30, 2000 as compared no
option coverage at June 30, 1999.
In addition to construction loans in process, the Corporation had the
following outstanding commitments:
June 30,
Commitments to originate mortgage loans: 2000 1999
---------------------
Fixed rate............................................. $ 24,331 $ 35,111
Adjustable rate........................................ 7,343 4,740
==============================================================================
31,674 39,851
Unused lines of credit................................. 21,250 139
Commitments to sell loans.............................. 49,593 36,672
==============================================================================
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 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 held 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 held 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.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 37
<PAGE>
Notes to Consolidated Financial Statements
Federal Home Loan Bank stock: The carrying amount reported for FHLB stock
approximates fair value. If redeemed, the Corporation 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 on existing obligations are at
substantially the same rates and terms of commitments offered on June 30, 2000
to parties of similar credit worthiness.
The carrying amount and fair values of the Corporation's financial instruments
were as follows:
June 30, 2000 June 30, 1999
-------------------- ---------------------
Carrying Market Carrying Market
Amount Value Amount Value
==============================================================================
Financial assets:
Cash.............................. $ 18,625 $ 18,625 $ 19,729 $ 19,729
Investment securities............. 199,301 190,441 179,834 176,033
Loans receivable available
for sale......................... 52,049 52,903 37,667 37,880
Loans held for investment......... 824,862 807,380 669,386 670,125
Accrued interest receivable....... 7,391 7,391 5,984 5,984
FHLB stock........................ 17,287 17,287 10,725 10,725
Financial liabilities:
Deposits.......................... 696,458 696,890 632,881 634,005
Borrowings........................ 341,668 340,980 214,506 214,095
==============================================================================
Page 38 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
17. Operating Segments (Dollars in Thousands):
The following tables illustrate the Corporation's operating segments for the
fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Year Ended June 30, 2000
---------------------------------
Savings Consoli-
Bank Mortgage dated
Operations Banking Total
==============================================================================
Net interest income........................ $ 28,195 $ 526 $ 28,721
Non-interest income:
Loan servicing and other fees............ (1,452) 4,125 2,673
Gain on sale of loans, net............... 37 3,211 3,248
Real estate operations................... 589 (45) 544
Other.................................... 2,334 3 2,337
------------------------------------------------------------------------------
Total non-interest income............. 1,508 7,294 8,802
Non-interest expenses:
Salaries and employee benefits........... 11,043 3,981 15,024
Premises and occupancy................... 1,316 707 2,023
Operating and administrative expenses.... 5,264 2,646 7,910
------------------------------------------------------------------------------
Total non-interest expenses........... 17,623 7,334 24,957
------------------------------------------------------------------------------
Operating income before income taxes....... $ 12,080 $ 486 $ 12,566
==============================================================================
Total assets, end of period................ $1,095,024 $ 52,780 $1,147,804
==============================================================================
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............... - 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 expenses:
Salaries and employee benefits........... 10,706 4,562 15,268
Premises and occupancy................... 1,315 651 1,966
Operating and administrative expenses.... 5,028 2,455 7,483
------------------------------------------------------------------------------
Total non-interest expenses........... 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
==============================================================================
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 39
<PAGE>
Notes to Consolidated Financial Statements
17. Operating Segments (Dollars in Thousands) continued
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 expenses:
Salaries and employee benefits........... 9,355 3,095 12,450
Premises and occupancy................... 1,024 1,041 2,065
Operating and administrative expenses.... 4,274 1,306 5,580
------------------------------------------------------------------------------
Total non-interest expenses........... 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
==============================================================================
The information above was derived from the internal management reporting
system used by management to measure performance of the segments.
The Corporation's overall internal transfer pricing arrangements 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 $3,289 in fiscal 2000 as
compared to $3,448 in 1999 and $2,388 in 1998.
2. Mortgage Banking receives servicing-released premiums for the loans
transferred to Savings Bank's portfolio equal to the market price of such
loans. The servicing-released premiums were $2,210 in fiscal 2000 as compared
to $2,240 in 1999 and $1,575 in 1998.
3. Loan servicing fees are charged by Savings Banking based on the number of
loans held for sale multiplied by a fixed fee which is subject to management's
regular review. The loan servicing fees were $70 in fiscal 2000 as compared to
$74 in 1999 and $121 in 1998.
4. Office rents for Mortgage Banking offices which are located at the Bank
offices are internally charged based on the square footage. The total office
rents were $93 in fiscal 2000 as compared to $93 in 1999 and $108 in 1998. A
management fee, which is subject to regular review, is charged to Mortgage
Banking for services provided by Bank Operations. The management fee was $240
in fiscal 2000 as compared to $170 in 1999 and $33 in 1998.
Page 40 - Provident Financial Holdings, Inc. - 2000 Annual Report
<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, 2000 and 1999 and condensed statements of operations and cash flows for
the year ended June 30, 2000.
June 30,
----------------------
Condensed Balance Sheet 2000 1999
==============================================================================
Assets
Cash.............................................. $ 2,880 $ 2,170
Investment securities held to maturity............ - 2,001
Investment securities available for sale.......... 49 1,070
Investment in subsidiary.......................... 82,163 79,794
Other assets...................................... 3,713 3,953
------------------------------------------------------------------------------
$ 88,805 $ 88,988
==============================================================================
Liabilities and Stockholders' Equity
Other liabilities................................. $ 24 $ 47
Stockholders' equity.............................. 88,781 88,941
------------------------------------------------------------------------------
$ 88,805 $ 88,988
==============================================================================
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 41
<PAGE>
Notes to Consolidated Financial Statements
Year Ended June 30,
----------------------------------
Condensed Statement of Operations 2000 1999 1998
==============================================================================
Interest and other income................ $ 530 $ 830 $ 1,143
General and administrative expenses...... 264 334 297
------------------------------------------------------------------------------
Income before equity in earnings of
the subsidiary........................ 266 496 846
Equity in earnings of the subsidiary..... 7,179 10,252 4,599
------------------------------------------------------------------------------
Income before income taxes............. 7,445 10,748 5,445
Income taxes........................... 189 283 425
------------------------------------------------------------------------------
Net income.......................... $ 7,256 $ 10,465 $ 5,020
==============================================================================
Year Ended June 30,
----------------------------------
Condensed Statement of Cash Flows 2000 1999 1998
==============================================================================
Cash flows from operating activities:
Net income............................. $ 7,256 $ 10,465 $ 5,020
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Equity in earnings of the subsidiary... (7,179) (10,252) (4,599)
Depreciation and amortization.......... 24 (124) (205)
Net loss (gain) on sale of investment
securities............................ 7 (39) -
Decrease (increase) in other assets.... 240 (165) 143
Decrease in other liabilities.......... (23) (701) 136
------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities............... 325 (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...................... 2,000 16,088 21,762
Purchase of investment securities
available for sale.................... (224) (1,454) (500)
Sales of investment securities
available for sale.................... 1,215 919 -
Dividend received from PSB............. 9,000 - -
Capital injection to PSB............... (3,000) - -
------------------------------------------------------------------------------
Net cash used by investing
activities......................... 8,991 9,594 5,872
------------------------------------------------------------------------------
Cash flow from financing activities:
Treasury stock purchases............... (8,606) (8,784) (4,983)
------------------------------------------------------------------------------
Net increase in cash during the year..... 710 (6) 1,384
Cash and cash equivalents, beginning
of year................................. 2,170 2,176 792
------------------------------------------------------------------------------
Cash and cash equivalents, end of year... $ 2,880 $ 2,170 $ 2,176
==============================================================================
Page 42 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Shareholder Information
The common stock of Provident Financial Holdings, Inc. is listed on the NASDAQ
Stock Market under the symbol 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,)
-----------------------------------------------------------------------------
2000 Quarters
High $20.44 $18.75 $16.50 $15.13
Low 17.38 16.50 13.00 13.38
1999 Quarters
High $20.75 $17.50 $17.63 $20.25
Low 14.13 14.00 15.63 16.00
-----------------------------------------------------------------------------
ANNUAL MEETING MARKET INFORMATION
The annual meeting of shareholders Provident Financial Holdings, Inc. is
will be held at the Riverside Art traded on the NASDAQ Stock Market
Museum at 3425 Mission Inn Avenue, under the symbol of PROV.
Riverside, California on Thursday,
October 26, 2000, at 11:00 a.m. FINANCIAL INFORMATION
Pacific time. A formal notice of Requests for copies of form 10-K and
the meeting, together with a proxy 10-Q filed with the Securities and
statement and proxy form, will be Exchange Commission should be directed
mailed to shareholders. in writing to:
CORPORATE OFFICES Robert G. Schrader
Provident Financial Holdings, Inc. Corporate Secretary
3756 Central Avenue Provident Financial Holdings, Inc.
Riverside, CA 92506 3756 Central Avenue
(909) 686-6060 Riverside, CA 92506
CORPORATE COUNSEL CORPORATE PROFILE
Breyer & Associates PC Provident Financial Holdings, Inc.
1100 New York Avenue, N.W. ("Corporation"), a Delaware corpora-
Suite 700 East tion, was organized in January 1996
Washington D.C. 20005 for the purpose of becoming the
(202) 737-7900 holding company for Provident Savings
Bank, F.S.B. ("Savings Bank") upon
INDEPENDENT ACCOUNTANTS the Savings Bank's conversion from a
PricewaterhouseCoopers LLP federal mutual to a federal stock
400 South Hope Street savings bank ("Conversion"). The
Los Angeles, CA 90071-2889 Conversion was completed on June 27,
(213) 236-3000 1996. The Corporation does not engage
in any significant activity other
TRANSFER AGENT than holding the stock of the Savings
Registrar and Transfer Company Bank. The Savings Bank serves the
10 Commerce Drive banking needs of select communities
Cranford, NJ 07016 in Riverside and San Bernardino
(908) 497-2300 Counties and has mortgage lending
operations in Southern California and
Nevada.
Provident Financial Holdings, Inc. - 2000 Annual Report - Page 43
<PAGE>
Board of Directors and Senior Officers
BOARD OF DIRECTORS SENIOR OFFICERS
Bruce W. Bennett Provident Financial Holdings, Inc.:
President
Community Care & Rehabilitation Center Craig G. Blunden
Chairman, President & CEO
Craig G. Blunden
Chairman, President & CEO Robert G. Schrader
Provident Savings Bank, FSB Corporate Secretary
Debbie H. Guthrie Provident Savings Bank, FSB:
President
Roy O. Huffman Roofing Company Craig G. Blunden
Chairman, President & CEO
Robert G. Schrader
Executive Vice President & Robert G. Schrader
Chief Operating Officer Executive Vice President &
Chief Operating Officer
Roy H. Taylor
President Donald L. Blanchard
Talbot & Financial Services - Senior Vice President
Pacific region Retail Banking
William E. Thomas Lilian Brunner
Executive Vice President/General Counsel Senior Vice President
KPC Global Care Chief Information Officer
Richard L. Gale
Senior Vice President
Mortgage Banking
Page 44 - Provident Financial Holdings, Inc. - 2000 Annual Report
<PAGE>
Branch Locations
Provident [LOGO] Provident [LOGO]
Bank Mortgage
Customer information: (800) 442-5201 Faster funded home loans.
Corporate Office Division Office
3756 Central Avenue 3756 Central Avenue
Riverside, CA 92506 Riverside, CA 92506
Downtown Business Center WHOLESALE OFFICES
4001 Main Street
Riverside, CA 92501 Rancho Cucamonga
10390 Commerce Center Drive, Suite 190
Canyon Crest Rancho Cucamonga, CA 91730
5225 Canyon Crest Drive #86
Riverside, CA 92507 RETAIL OFFICES
Moreno Valley Las Vegas - Pacific Sunbelt
12460 Heacock Street 7720 West Sahara Avenue, Suite 106
Moreno Valley, CA 92553 Las Vegas, NV 89117
Moreno Valley North Rancho Cucamonga
23575 Sunnymead Ranch Parkway 10390 Commerce Center Drive, Suite 190
Moreno Valley, CA 92557 Rancho Cucamonga, CA 91730
Redlands Rancho Mirage
125 E. Citrus Avenue 71-991 Highway 111
Redlands, CA 92373 Rancho Mirage, CA 92270
Sun City Glendora
27010 Sun City Boulevard 1200 E. Alosta Avenue, Suite 102
Sun City, CA 92586 Glendora, CA 91740
Hemet Hacienda Heights
1690 E. Florida Avenue 17138 A. Colima Road
Hemet, CA 92544 Hacienda Heights, CA 91745
Rancho Mirage Torrance
71-991 Highway 111 22805 Hawthorne Boulevard
Rancho Mirage, CA 92270 Torrance, CA 90505
Blythe Riverside
350 E. Hobson Way 6529 Riverside Avenue, Suite 160
Blythe, CA 92225 Riverside, CA 92506
Temecula Subprime Wholesale
(expected to be opened in June 2001) Provident Home Equities
10390 Commerce Center Dr. Suite 280
Rancho Cucamonga, CA 91730
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Provident [Logo]
Provident Financial Holdings, Inc.
Corporate Office
3756 Central Avenue, Riverside, California 92506
909/686-6060
NASDAQ STOCK MARKET - PROV
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EXHIBIT 21
Subsidiaries of the Registrant
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Parent
------
Provident Financial Holdings, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
---------------- ------------ ----------------------
Provident Savings Bank, F.S.B. 100% United States
Profed Mortgage, Inc.(1) 100% California
Provident Financial Corporation(1) 100% California
First Service Corporation(1) 100% California
(1) This corporation is a wholly owned subsidiary of Provident Savings Bank,
F.S.B.
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EXHIBIT 23
Consent of Independent Accountants
<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 4, 2000 appearing in the
Annual Report to Shareholders which is incorporated by reference in this
Annual Report on Form10-K.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
September 25, 2000
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