<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 27, 1996
---------------------
HF Bancorp, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware
-------------
(State or other jurisdiction of incorporation)
0-25722
(Commission File Number)
33-0576146
(IRS Employer Identification No.)
445 E. Florida Avenue, Hemet, California 92543
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(909) 658-4411
----------------
Not Applicable
-------------
(Former name or former address, if changed since last report)
THIS REPORT INCLUDES A TOTAL OF 46 PAGES
EXHIBIT INDEX ON PAGE 45
<PAGE> 2
Item 1. Changes in Control of Registrant.
None.
Item 2. Acquisition or Disposition of Assets.
On September 27, 1996, HF Bancorp, Inc. (the "Company"), acquired
Palm Springs Savings Bank, FSB ("Palm Springs") of Palm Springs, California
pursuant to the Agreement and Plan of Merger by and between HF Bancorp, Inc.,
Hemet Federal Savings and Loan Association and Palm Springs Savings Bank, FSB,
dated May 9, 1996 (the "Agreement"). Pursuant to the Agreement, the purchase
price was $16,265,000, and the funds used to consummate the acquisition were
derived from cash on hand.
Item 3. Bankruptcy or Receivership.
None.
Item 4. Changes in Registrant's Certifying Accountant.
None.
Item 5. Other Events.
None.
Item 6. Resignations of Registrant's Directors.
None
Page 2
<PAGE> 3
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
FINANCIAL STATEMENT
Index to Palm Springs Savings Bank, FSB Financial Statement Page
Independent Auditors' Report 4
Consolidated Balance Sheets-- 5
December 31, 1995 and 1994
Consolidated Statements of Earnings-- 6
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity-- 8
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows-- 9
Years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 11
Unaudited Consolidated Balance Sheets-- 34
June 30, 1996 and 1995, and December 31, 1995
Unaudited Consolidated Statements of Earnings-- 35
For the three-month periods ended June 30, 1996 and 1995
and the six-month-periods ended June 30, 1996 and 1995
Unaudited Consolidated Statements of Cash Flows-- 36
For the six-month periods ended June 30, 1996 and 1995
Notes to Unaudited Consolidated Financial Statements 38
Page 3
<PAGE> 4
Independent Auditors' Report
----------------------------
The Board of Directors
Palm Springs Savings Bank, FSB
Palm Springs, California:
We have audited the consolidated balance sheets of Palm Springs Savings Bank FSB
and subsidiaries (the "Savings Bank") as of December 31, 1995 and 1994 and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Savings
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Palm Springs Savings
Bank FSB and subsidiaries as of December 31, 1995 and 1994 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick, LLP
- --------------------------
Orange County, California
January 19, 1996
Page 4
<PAGE> 5
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Cash and cash equivalents (note 2) $ 13,252,000 4,964,000
Investment securities available-for-sale, at fair value
(note 3) 8,462,000 6,760,000
Mortgage-backed securities held-to-maturity, fair value
$610,000 (note 4) -- 647,000
Mortgage-backed securities available-for-sale, at fair value
(note 4) 985,000 --
Loans held for sale at lower of cost or market
(note 5) 651,000 145,000
Loans receivable, net (notes 5 and 10) 164,738,000 171,785,000
Accrued interest receivable (note 6) 1,177,000 998,000
Investment in FHLB stock (note 10) 1,559,000 1,276,000
Real estate (note 7) 2,541,000 1,540,000
Offices and equipment (note 8) 1,382,000 1,422,000
Excess servicing fee receivable (note 5) 5,000 55,000
Other assets 916,000 1,462,000
------------ -----------
$ 195,668,000 191,054,000
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits (notes 3 and 9) $ 172,652,000 157,320,000
Borrowed funds (note 10) 10,000,000 22,400,000
Income taxes payable (note 12) 72,000 272,000
Deferred income taxes (note 12) 808,000 233,000
Accrued interest payable 42,000 64,000
Other liabilities 620,000 502,000
------------- -----------
Total liabilities 184,194,000 180,791,000
------------- -----------
Commitments and contingent liabilities (notes 8,
17 and 19)
Stockholders' equity (notes 14 and 16):
Serial preferred stock, $2.50 par value per share;
1,000,000 shares authorized in 1995 and 1994,
none outstanding - -
Common stock, $2.50 par value, 4,000,000 shares
authorized; 1,130,946 shares issued in 1995 and 1994 2,827,000 2,827,000
Additional paid-in capital 3,564,000 3,564,000
Retained earnings - substantially restricted 5,067,000 4,001,000
Net unrealized gain (loss) on investment
securities available-for-sale 16,000 (129,000)
----------- ----------
Total stockholders' equity 11,474,000 10,263,000
----------- -----------
$ 95,668,000 191,054,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE> 6
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 14,387,000 12,501,000 11,566,000
Mortgage-backed securities 53,000 14,000 235,000
Interest and dividends on
investment securities
available-for-sale 531,000 323,000 150,000
Other investment income 74,000 65,000 39,000
------------ ---------- ----------
Total interest income 15,045,000 12,903,000 11,990,000
------------ ---------- ----------
Interest expense:
Deposits (note 9) 7,326,000 5,315,000 4,972,000
Borrowings 1,066,000 754,000 388,000
------------ ---------- ----------
Total interest expense 8,392,000 6,069,000 5,360,000
------------ ---------- ----------
Net interest income 6,653,000 6,834,000 6,630,000
Provision for loan losses
(note 5) 620,000 573,000 789,000
------------ ---------- ----------
Net interest income after
provision for loan losses 6,033,000 6,261,000 5,841,000
------------ ---------- ----------
Non-interest income:
Miscellaneous loan fees and
service charges 256,000 331,000 334,000
Other fees and service charges 864,000 736,000 708,000
Gain on sale of loans (note 5) 282,000 150,000 570,000
Gain on sale of servicing 549,000 35,000 -
Gain on sale of mortgage-backed
securities held-to-maturity
(note 4) 16,000 - 163,000
------------ ---------- ----------
Total non-interest income 1,967,000 1,252,000 1,775,000
------------ ---------- ----------
(Continued)
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE> 7
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Consolidated Statements of Earnings
(Continued)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Non-interest expense:
Compensation and employee expense 2,587,000 2,433,000 2,430,000
Occupancy expense (note 8) 753,000 739,000 800,000
Office supplies and expense 245,000 250,000 302,000
Advertising 169,000 143,000 127,000
Insurance and bond premiums 429,000 389,000 435,000
Data processing expense 576,000 531,000 471,000
Legal, accounting and supervisory
fees 178,000 190,000 188,000
Other general and administrative
expense 590,000 571,000 711,000
Loss on real estate operations
(note 7) 408,000 226,000 259,000
Other 2,000 12,000 49,000
------------ ---------- ----------
Total non-interest expense 5,937,000 5,484,000 5,772,000
------------ ---------- ----------
Earnings before income taxes 2,063,000 2,029,000 1,844,000
Income taxes (note 12) 861,000 857,000 766,000
------------ ---------- ----------
Net earnings $ 1,202,000 1,172,000 1,078,000
============ ========== ==========
Earnings per share (note 15):
Primary $ 1.04 1.02 1.09
============ ========== ==========
Fully diluted $ 1.04 1.02 .98
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE> 8
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Investment
Common Stock Additional Securities Total
---------------- Paid-In Retained Available-for- Stockholders'
Shares Amount Capital Earnings Sale Equity
------ ------ ---------- -------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 806,931 $ 2,017,000 2,553,000 1,948,000 - 6,518,000
Net earnings - - - 1,078,000 - 1,078,000
Dividends (.06 per share) - - - (61,000) - (61,000)
Change in net unrealized
gain (loss) on investment
securities available-for-sale
(notes 1 and 3) - - - - 19,000 19,000
Subordinated debenture
conversion (note 12) 324,015 810,000 1,011,000 - - 1,821,000
--------- ----------- --------- --------- --------- ----------
Balance, December 31, 1993 1,130,946 2,827,000 3,564,000 2,965,000 19,000 9,375,000
Net earnings - - - 1,172,000 - 1,172,000
Dividends (.12 per share) - - - (136,000) - (136,000)
Change in net unrealized
gain (loss) on investment
securities
available-for-sale - - - - (148,000) (148,000)
--------- ----------- --------- --------- --------- ----------
Balance, December 31, 1994 1,130,946 2,827,000 3,564,000 4,001,000 (129,000) 10,263,000
Net earnings - - - 1,202,000 - 1,202,000
Dividends (.12 per share) - - - (136,000) - (136,000)
Change in net unrealized
gain (loss) on investment
securities
available-for-sale - - - - 145,000 145,000
--------- ----------- --------- --------- --------- ----------
Balance, December 31, 1995 1,130,946 $ 2,827,000 3,564,000 5,067,000 16,000 11,474,000
========= =========== ========= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 8
<PAGE> 9
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings 1,202,000 1,172,000 1,078,000
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Amortization of:
Discounts/premiums mortgaged-backed
securities (9,000) (5,000) -
Deferred loan fees (590,000) (670,000) (585,000)
Excess servicing fee receivable 19,000 65,000 130,000
Discount on loans (13,000) (5,000) (11,000)
Write off of excess servicing fee receivable 31,000 9,000 85,000
Provision for loan losses and real estate 801,000 689,000 956,000
Net (gain) loss on sales of:
Loans, servicing and mortgage-backed securities (847,000) (185,000) (733,000)
Investment securities (6,000) - -
Foreclosed real estate 84,000 (14,000) 5,000
Fixed assets - 7,000 2,000
Depreciation and amortization of
offices and equipment 304,000 286,000 294,000
Loans originations - held for sale (12,974,000) (16,797,000) (40,972,000)
Proceeds from sales of loans 26,101,000 16,982,000 41,541,000
(Increase) decrease in assets:
Accrued interest receivable (179,000) (130,000) 82,000
Income tax receivable - - 45,000
Other assets 546,000 (234,000) (744,000)
Increase (decrease) in liabilities:
Income tax payable (200,000) (122,000) 111,000
Deferred income taxes 575,000 186,000 (274,000)
Accrued interest payable (22,000) 30,000 34,000
Other liabilities 118,000 (616,000) (115,000)
----------- ----------- -----------
Net cash provided by operating
activities 14,941,000 648,000 929,000
----------- ----------- -----------
Cash flows from investing activities:
Loan originations, net of deferred loan fees (48,714,000) (68,716,000) (60,288,000)
Proceeds from sale of mortgage-backed securities
held-to-maturity 663,000 - -
Purchases of mortgage-backed securities
held-to-maturity - (650,000) -
Principal payments on loans and mortgage-
backed securities 41,888,000 46,262,000 43,420,000
Purchases of loans (1,342,000) (1,106,000) (752,000)
Purchase of mortgaged backed securities
available-for-sale (999,000) - (3,009,000)
Proceeds from sale of mortgaged backed securities
available-for-sale - - 8,743,000
Principal payments on investment securities - 26,000 -
Purchases of investment securities (8,206,000) (2,059,000) (7,618,000)
Proceeds from maturities of investment securities 2,500,000 - 3,000,000
Proceeds from sales of investment securities 4,006,000 - -
Proceeds from sales of foreclosed real estate 1,019,000 213,000 964,000
Additions to offices and equipment (264,000) (187,000) (282,000)
Proceeds from sale of offices and equipment - 1,000 1,000
----------- ----------- -----------
Net cash used in investing activities (9,449,000) (26,216,000) (15,821,000)
----------- ----------- -----------
(Continued)
</TABLE>
Page 9
<PAGE> 10
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits 15,332,000 16,390,000 11,641,000
Borrowed funds - advances 34,800,000 50,000,000 21,600,000
Borrowed funds - repayments (47,200,000) (40,200,000) (16,900,000)
Dividends paid (136,000) (136,000) (61,000)
----------- ----------- -----------
Net cash provided by financing activities 2,796,000 26,054,000 16,280,000
----------- ----------- -----------
Net increase in cash and cash equivalents 8,288,000 486,000 1,388,000
Cash and cash equivalents at beginning of the year 4,964,000 4,478,000 3,090,000
---------- ---------- ----------
Cash and cash equivalents at end of the year $ 13,252,000 4,964,000 4,478,000
========== ========== ==========
Supplemental disclosures:
Interest paid $ 8,418,000 5,345,000 4,993,000
Income taxes paid 591,000 761,000 941,000
Property transferred to foreclosed real estate 4,619,000 3,186,000 2,065,000
Conversion of subordinated debentures - - 1,875,000
Loans to facilitate 2,334,000 2,321,000 350,000
</TABLE>
See accompanying notes to consolidated financial statements.
Page 10
<PAGE> 11
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) Summary of Significant Accounting Policies
- -----------------------------------------------
Business
--------
Palm Springs Savings Bank FSB provides a full range of deposit and lending
services to individual and corporate customers through its branch offices and
subsidiaries in the Coachella Valley. The Savings Bank is subject to
competition from other financial institutions. It is subject to the
regulations of certain federal agencies and undergoes periodic examinations
by those regulatory authorities.
Basis of Financial Statement Presentation
-----------------------------------------
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowances for loan losses and real estate owned, management obtains
independent appraisals for significant properties.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Palm Springs
Savings Bank FSB and its wholly-owned subsidiaries, Coachella Valley
Financial Services Corp. and PSSB Insurance Services, Inc. (collectively, the
"Savings Bank"). Coachella Valley Financial Services Corp. is primarily
engaged in real estate development activities, and PSSB Insurance Services,
Inc. is primarily engaged in providing tax advantaged insurance products. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents
----------------
For purposes of the consolidated statements of cash flows, the Savings Bank
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The Savings Bank, effective December 31, 1993, adopted Statement of
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." This statement requires the Savings Bank to classify
investment and mortgage-backed securities as held-to-maturity, trading
securities, and/or available-for-sale securities. Held-to-maturity investment
and mortgage-backed securities are reported at amortized cost, trading
securities are reported at fair value, with unrealized gains and losses
included in earnings, and available-for-sale securities are reported at fair
value with unrealized gains and losses, net of related income taxes as a
separate component of stockholders' equity.
Investment and mortgage-backed securities held-to-maturity are those
securities that management has the positive intent and ability to hold to
maturity. These securities are reported at amortized cost and any premium or
discount is amortized using the interest method over the life of the
security.
(Continued)
Page 11
<PAGE> 12
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investment securities available-for-sale are those securities which are not held
in the trading portfolio and are not held in the held-to-maturity portfolio.
These securities are reported at fair value, with unrealized gains and losses,
net of related income taxes, reported as a separate component of stockholders'
equity.
Investment in FHLB Stock
- ------------------------
The Savings Bank's investment in FHLB stock, at cost, totaled $1,559,000 and
$1,276,000 at December 31, 1995 and 1994, respectively. As a member of the FHLB
system, the Savings Bank is required to maintain an investment in the capital
stock of the FHLB in an amount at least equal to the greater of 1% of
residential mortgage assets, or 5% of outstanding borrowings (advances), or 0.3%
of total assets. FHLB capital stock is pledged to secure FHLB advances.
Loans Held for Sale
- -------------------
Loans originated and intended for sale in the secondary market are carried at
the lower of cost, net of undisbursed loan funds, deferred fees, or estimated
fair value in the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to earnings. Loans held for sale at December 31, 1995 and
1994 are carried at cost, which approximates market at each date.
Servicing Fee Income
- --------------------
Servicing fee income is based on a percentage of the outstanding principal
balances of the serviced mortgage loans and is recognized as income as the
collections on mortgages are received.
Loans Receivable
- ----------------
Loans receivable are stated at unpaid principal balances, less unearned
discounts, deferred loan fees and an allowance for loan losses.
Allowance for Loan Losses
- -------------------------
The Savings Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures" effective January 1, 1995. SFAS
No. 114 does not apply to large groups of smaller balance homogeneous loans that
are collectively evaluated for impairment. For the Savings Bank, loans
collectively reviewed for impairment include all single-family loans excluding
loans which are individually reviewed based on specific criteria, such as
delinquency, debt coverage, LTV ratio and condition of collateral property. The
Savings Bank's impaired loans within the scope of SFAS No. 114 include
nonaccrual loans (excluding those collectively reviewed for impairment),
troubled debt restructurings ("TDRs"), and performing loans less than 90 days
delinquent ("other impaired loans") which the Savings Bank believes will be
collected in full, but which the Savings Bank believes it is probable will not
be collected in accordance with contractual terms of the loans.
The Savings Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable the Savings Bank will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. The Savings Bank continues to accrue interest on TDRs and other
impaired loans since full payment of principal and interest is expected and such
loans are performing or less than 90 days delinquent and therefore do not meet
the criteria for nonaccrual status.
(Continued)
Page 12
<PAGE> 13
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Savings Bank bases the measurement of loan impairment on the fair value of
the loans' collateral properties in accordance with SFAS No. 114. Impairment
losses are included in the allowance for loan losses through a charge to
provision for loan losses. Adjustments to impairment losses due to changes in
the fair value of impaired loans' collateral properties are included in the
provision for loan losses.
The allowance for loan losses is maintained by additions charged to operations
as provision for loan losses and by loan recoveries, with actual losses charged
as reductions to the allowance. The Savings Bank's process for evaluating the
adequacy of allowance for loan losses has three basic elements: first, the
identification of impaired loans; second, the establishment of appropriate loan
loss allowances once individual specific impaired loans are identified; and
third, a methodology for estimating loan losses based on the inherent risk in
the remainder of the loan portfolio. Loss allowances are established for
specifically identified impaired loans based on the fair value of the underlying
collateral property.
Management believes the allowance for losses on loans is adequate. While
management uses available information to recognize losses on loans and real
estate owned which are deemed to be probable and can be reasonably estimated,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Savings Bank's allowances for
losses on loans and real estate owned. Such agencies may require the Savings
Bank to recognize additions to the allowances based on their judgments of
information available to them at the time of their examination.
Uncollected interest on loans that are contractually 90 days or more past due is
charged-off or an allowance is established. The allowance is established by a
charge to interest income equal to all interest previously accrued. Subsequent
payments are either recognized as interest income or credited to the loan
principal based on management's' determination of the ultimate collectability of
the loan.
Loan Origination and Commitment Fees and Related Costs
- ------------------------------------------------------
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized in income using the interest method. Such amortization
is discontinued in the event a loan becomes contractually 90 days or more
delinquent, and is continued when the borrower's ability to make periodic
interest and principal payments is restored. When a loan is paid off, any
unamortized net loan origination fee balance is credited to income. Commitment
fees and costs relating to commitments whose likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitment is subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the life
of the loan as an adjustment of yield, using the interest method.
Concentration of Credit Risk
- ----------------------------
The Savings Bank's loan portfolio is collateralized by mostly residential and
some multi-family, commercial, industrial and land properties throughout
Southern California. As a result, the real estate owned portfolio consists of
similar property types in the same region. Although the Savings Bank has a
diversified portfolio, a substantial portion of its debtors' ability to honor
their contracts is dependent upon the economy of Southern California.
(Continued)
Page 13
<PAGE> 14
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Real Estate
- -----------
Real estate represents properties acquired through loan foreclosure, and are
initially recorded at fair value, determined by an appraisal or available market
information, at the date of foreclosure, less estimated costs of disposition.
Costs relating to development and improvement of property are capitalized,
whereas costs relating to holding property are expensed. The portion of interest
costs related to development of real estate is capitalized.
Valuations are periodically performed by management and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs of disposal.
Offices and Equipment
- ---------------------
Offices and equipment are recorded at cost less accumulated depreciation.
Depreciation of offices and equipment is computed using the straight-line method
over estimated useful lives of three to ten years. Leasehold improvements are
amortized using the straight-line method over the life of the lease or the
economic life of the asset, whichever is shorter.
Excess Servicing Fee Receivable
- -------------------------------
Excess servicing fee receivable ("ESFR") results from the sale of mortgage loan
participations on which the Savings Bank retains servicing rights. ESFRs are
determined by computing the difference between the weighted average yield of the
loans sold and the yield guaranteed to the purchaser, adjusted for a normal
servicing fee. Normal servicing fees are generally defined as the minimum
servicing fee which comparable mortgage issuers typically require servicers to
charge. The resulting ESFRs are recorded as a gain or loss equal to the present
value of such fees to be received over the life of the loans, adjusted for
anticipated prepayments. The ESFRs are amortized using the interest method
adjusted periodically for actual prepayment experience, which offsets the excess
servicing fee revenue received.
Periodically, the Savings Bank evaluates the recoverability of ESFR based on the
projected future net servicing income discounted at the same rate used to
calculate the original ESFR. Future prepayment rates are estimated based on
current interest rates and various portfolio characteristics, including loan
type, interest rate and recent prepayment experience. If the estimated net
present value is lower than the current amount of ESFR, a reduction to present
value is recorded by a charge to earnings.
The Savings Bank has not sold any loans with terms that provide for excess
servicing fees since January of 1990.
(Continued)
Page 14
<PAGE> 15
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
- ------------
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
Net Earnings per Share
- ----------------------
Net earnings per share and equivalent shares are based on the weighted average
number of shares and equivalent shares outstanding during 1995, 1994 and 1993
(note 15).
Primary earnings per share is calculated by dividing net earnings by the
weighted average number of common shares and dilutive common stock equivalents.
Stock options are regarded as common stock equivalents and are therefore
considered in both primary and fully diluted earnings per share calculations.
Common stock equivalents are computed using the treasury stock method.
Fully diluted earnings per share is calculated by dividing net earnings,
adjusted for interest expense (net of applicable income taxes) on convertible
subordinated debentures, by the weighted average number of common shares,
dilutive common stock equivalents, and potentially dilutive shares which would
be issued upon conversion of convertible subordinated debentures outstanding
during the year.
Recent Accounting Pronouncements
- --------------------------------
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS 121 requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or circumstances indicate the carrying amount of an asset may not be
recoverable. However, SFAS 121 does not apply to financial instruments, core
deposit intangibles, mortgage and other servicing rights or deferred tax assets.
SFAS 121 is effective for fiscal years beginning after December 15, 1995.
Management believes that the adoption of this statement will not have a material
impact on the Savings Bank's operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
("SFAS 122"), "Accounting for Mortgage Servicing Rights," an amendment to
Statement of Financial Accounting Standards No. 65. SFAS 122 requires an
institution that purchases or originates mortgage loans and sells or securitizes
those loans with servicing rights retained to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. In addition,
institutions are required to assess impairment of the capitalized mortgage
servicing portfolio based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized through a valuation
allowance for each impaired stratum. Capitalized mortgage servicing rights are
to be stratified based upon one or more of the predominate risk characteristics
of the underlying loans such as loan type, size, note rate, date of origination,
term and/or geographic location. SFAS 122 is effective for fiscal years
beginning after December 15, 1995. Management believes that the adoption of SFAS
122 will not have a material impact on the Savings Bank's operations.
In December 1994, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 94-6, "Disclosure of Certain Significant Risks and
(Continued)
Page 15
<PAGE> 16
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Uncertainties." SOP 94-6 supplements disclosure requirements for risks and
uncertainties existing as of the date of the financial statements in the
following areas: a) nature of operations, b) use of estimates in the preparation
of financial statements c) certain significant estimates and (d) current
vulnerability due to certain concentrations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995, and for
financial statements for interim periods in fiscal years subsequent to the year
for which this SOP is to be first applied. The Savings Bank adopted SOP 94-6 in
the financial statements as of and for the year ended December 31, 1995.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123,
establishes a fair value based method of accounting for stock based compensation
plans. SFAS 123 encourages, but does not require, adopting the fair value based
method. The Savings Bank has elected not to adopt the fair value based method
and will continue to report under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." As a result, SFAS 123 will not have
an impact on the Savings Bank's operations or financial position. The Savings
Bank, in accordance with SFAS 123, will disclose in the footnotes in 1996 the
impact as if the fair value based method was adopted.
Reclassifications
- -----------------
Certain reclassifications have been made to the prior consolidated financial
statements to conform with the current presentation.
(Continued)
Page 16
<PAGE> 17
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Cash and Cash Equivalents
- ------------------------------
The following is a summary of cash and cash equivalents held by the Savings
Bank at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash and non interest-bearing deposits $ 1,355,000 1,363,000
Demand deposits 6,911,000 3,601,000
U.S. Treasuries, original maturities
less than 3 months 4,986,000 -
---------- ---------
$ 13,252,000 4,964,000
========== =========
</TABLE>
(3) Investment Securities
- --------------------------
The following table summarizes the amortized cost, fair value and
gross unrealized holding gains and losses on investment securities
available-for-sale at December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------------- ----------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Fair
Cost Gain Loss Value Cost Loss Value
--------- ---------- ---------- ----- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
notes $ 8,426,000 45,000 (9,000) 8,462,000 6,982,000 (222,000) 6,760,000
========= ====== ===== ========= ========= ======= =========
</TABLE>
Maturities of investment securities available-for-sale at December 31, 1995
are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Within 1 year $ 5,944,000
After 1 year through 5 years 2,518,000
---------
$ 8,462,000
=========
</TABLE>
<TABLE>
<CAPTION>
For the period ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales of investment $ 6,506,000 - -
securities available-for-sale
Purchase of investment securities
available-for-sale 8,206,000 2,059,000 7,618,000
Gross (loss)/gain included as a
component of stockholders' equity 16,000 (129,000) 19,000
</TABLE>
All gains are computed on the specific identification basis.
At December 31, 1995, $500,000 in U.S. Treasury notes were pledged as
collateral for Treasury, Tax, and Loan accounts, as required by the
U.S. Treasury in relation to the Savings Bank's holding of customer
deposits to be remitted to the Internal Revenue Service.
(Continued)
Page 17
<PAGE> 18
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Mortgage-Backed Securities
- --------------------------------
The carrying values (amortized cost), net of unamortized premiums or
discounts, and estimated fair value of mortgage-backed securities at
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995
------------------------------------
(Available-for-sale)
Gross
Amortized Fair Unrealized
Cost Value Loss
--------- ----- ----------
<S> <C> <C> <C>
Participation certificates
GNMA $988,000 985,000 (3,000)
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------
(Held-to-maturity)
Gross
Amortized Fair Unrealized
Cost Value Loss
--------- ----- ----------
<S> <C> <C> <C>
Participation certificates
GNMA $ 647,000 610,000 (37,000)
========= ======= ======
</TABLE>
There were no unrealized gains at December 31, 1994 or 1995.
In June 1995, the Savings Bank sold a mortgage-backed security from its
held-to-maturity portfolio. The unamortized cost at the sale date was
$647,000 which yielded a gain of $16,000. Management sold the security to
increase liquidity and to maintain all investments in the available-for-
sale portfolio.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales of mortgage-backed $663,000 - 8,743,000
securities ======== ===== =========
Gross recognized gains on sales of
mortgage-backed securities $ 16,000 - 173,000
======== ===== =========
Gross recognized loss on sales of
mortgage-backed securities $ - - 10,000
======== ===== =========
</TABLE>
(Continued)
Page 18
<PAGE> 19
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Loans Receivable
- ----------------------
Loans receivable at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Mortgage loans:
Secured 1-4 unit family dwelling $ 111,331,000 119,818,000
5 or more residential units 8,864,000 8,891,000
Non-residential 21,578,000 21,888,000
Land 3,704,000 1,763,000
Construction 22,621,000 28,339,000
Non-mortgage loans:
Consumer 1,460,000 2,533,000
Commercial 3,183,000 870,000
Loans on savings accounts 595,000 709,000
------------- -----------
173,336,000 184,811,000
Less:
Undisbursed loan funds (6,219,000) (10,285,000)
Deferred loan fees (1,020,000) (1,192,000)
Allowance for loan losses (1,322,000) (1,518,000)
Discount on loans (37,000) (31,000)
------------- -----------
$ 164,738,000 171,785,000
============= ===========
</TABLE>
The weighted average yield on loans receivable at December 31, 1995 and
1994 was 8.43% and 7.36%, respectively.
At December 31, 1995, impaired loans, which includes $137,000 of troubled
debt restructurings, recognized in accordance with SFAS No. 114, and the
related specific loan loss allowances, were as follows:
<TABLE>
<CAPTION>
Loan Loss
Loan Balance Allowance
------------ ----------
<S> <C> <C>
Nonaccrual loans:
With specific allowances $ 690,000 $ 41,000
Without specific allowances 3,183,000 -
----------- ---------
$ 3,873,000 $ 41,000
=========== =========
</TABLE>
The average net recorded investment in impaired loans for the year ended
December 31, 1995 was $2.4 million. Interest income of $201,000 for the
year ended December 31, 1995 was recognized on impaired loans during the
period of impairment.
(Continued)
Page 19
<PAGE> 20
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans in nonaccrual status as of December 31, 1995 had interest due but not
recognized of approximately $149,000.
A summary of changes in the allowance for loan losses for the years ended
December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 1,518,000 1,293,000 801,000
Provision for loan losses 620,000 573,000 789,000
Charge-offs (816,000) (362,000) (300,000)
Recoveries - 14,000 3,000
----------- --------- ----------
Balance at end of period $ 1,322,000 1,518,000 1,293,000
=========== ========= ==========
</TABLE>
Nonaccrual loans outstanding at December 31, 1995 with an aggregate principal
balance of $3,874,000 earned $201,000 interest in 1995 prior to placement on
nonaccrual status. Gross interest income that would have been earned in 1995,
1994 and 1993 if these loans had been current throughout the periods amounted to
$350,000, $217,000 and $240,000, respectively.
At December 31, 1995, 1994 and 1993, the Savings Bank was servicing mortgage
loans for investors in the amount of approximately $30,135,000, $96,838,000 and
$102,774,000, respectively, which are not included in the accompanying
consolidated balance sheets.
A summary of changes in the excess servicing fee receivable for the years ended
December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 55,000 129,000 344,000
Amortization (19,000) (65,000) (130,000)
Write offs (31,000) (9,000) (85,000)
--------- -------- --------
Balance at end of period $ 5,000 55,000 129,000
========= ======== =======
</TABLE>
Write offs resulting from excess prepayments have been charged to loss on loans
and investments in the accompanying statements of earnings.
Loans held for sale at December 31, 1995 and 1994 of $651,000 and $145,000,
respectively, are carried at cost which approximates market.
Net gains on sales of loans in 1995, 1994 and 1993 were $282,000, $150,000 and
$570,000, respectively.
(Continued)
Page 20
<PAGE> 21
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Accrued Interest Receivable
- ---------------------------------
Accrued interest receivable at December 31, 1995 and 1994 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Interest on investment securities $ 145,000 68,000
Interest on mortgage-backed securities 6,000 3,000
Interest on loans 1,026,000 927,000
--------- -------
$ 1,177,000 998,000
=========== =======
</TABLE>
(7) Real Estate
- ----------------
Real estate consists of properties acquired through loan foreclosure and is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Properties acquired in settlement of loans $ 2,546,000 1,558,000
Less allowance for estimated losses 5,000 18,000
----------- ---------
$ 2,541,000 1,540,000
=========== =========
</TABLE>
Activity in the allowance for losses on real estate is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 18,000 100,000 -
Provisions 181,000 116,000 167,000
Charge-offs (194,000) (198,000) (67,000)
---------- --------- --------
$ 5,000 18,000 100,000
========== ========= ========
</TABLE>
Loss on real estate operations is comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Provision for losses on
real estate $ 181,000 116,000 167,000
Loss (gain) on sale, net 77,000 (14,000) (29,000)
Other expenses 150,000 124,000 121,000)
------- ------- --------
$ 408,000 226,000 259,000
======= ======= =======
</TABLE>
(Continued)
Page 21
<PAGE> 22
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Offices and Equipment
- ---------------------------
Offices and equipment, at cost, at December 31, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 127,000 127,000
Office buildings 376,000 301,000
Furniture, fixtures and equipment 1,695,000 1,582,000
Leasehold improvements 1,238,000 1,223,000
----------- ---------
3,436,000 3,233,000
Less accumulated depreciation
and amortization (2,054,000) (1,811,000)
----------- ---------
$ 1,382,000 1,422,000
=========== =========
</TABLE>
The Savings Bank leases certain of its facilities and equipment under
operating leases with terms of 1 to 20 years. These leases call for
minimum annual rental payments as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1996 $ 392,000
1997 395,000
1998 398,000
1999 254,000
2000 223,000
Thereafter 1,613,000
---------
3,275,000
===========
</TABLE>
The Savings Bank incurred total rental expense of $447,000, $439,000
and $504,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
(Continued)
Page 22
<PAGE> 23
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Deposits
- --------------
<TABLE>
<CAPTION>
Deposits at December 31, 1995 and 1994 are summarized as follows:
1995 1994
----------------------------- -----------------
Interest Weighted Weighted
Rate Average Average
Range Rate Amount Rate Amount
-------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Checking accounts:
Interest bearing 1.01% 1.01% $ 9,051,000 1.01% $10,505,000
Non-interest bearing - - 19,239,000 - 15,640,000
Passbook accounts 2.00-5.27 4.04 45,116,000 2.48 22,022,000
Insured money market
accounts 2.55 2.55 3,999,000 2.81 7,791,000
Term certificate accounts:
32 to 360 days 4.40-5.17 4.96 14,389,000 4.70 21,780,000
12 to 18 months 5.11-6.00 5.78 25,061,000 5.18 23,034,000
18 to 30 months 5.50-5.70 5.64 8,108,000 4.12 9,113,000
30 to 60 months 5.43-7.06 6.58 30,548,000 6.07 34,802,000
Jumbo certificates 4.64-6.55 5.64 17,122,000 4.70 12,610,000
---------- ----------
Total term certifi-
cates accounts 95,228,000 101,339,000
----------- -----------
Accrued interest payable 19,000 23,000
----------- -----------
4.50% $172,652,000 3.92% $157,320,000
==== =========== ===== ===========
</TABLE>
Term certificate accounts have scheduled maturities as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C> <C>
1996 $ 77,618,000
1997 8,797,000
1998 1,945,000
1999 4,101,000
2000 2,767,000
------------
$ 95,228,000
============
</TABLE>
Interest expense on deposits for the years ended December 31, 1995, 1994
and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Checking accounts $ 95,000 116,000 188,000
Passbook accounts 1,344,000 608,000 573,000
Insured money market accounts 168,000 228,000 257,000
Term certificate accounts 5,719,000 4,363,000 3,954,000
---------- --------- ---------
$7,326,000 5,315,000 4,972,000
========== ========= =========
</TABLE>
(Continued)
Page 23
<PAGE> 24
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Borrowed Funds
- --------------------
Borrowed funds consist of advances from the Federal Home Loan Bank of
$10,000,000 and $22,400,000 at December 31, 1995 and 1994, respectively.
Advances from the Federal Home Loan Bank at December 31, 1995 consist of
the following:
<TABLE>
<CAPTION>
Advance Interest Rate Maturity Date
------- ------------- -------------
<C> <C> <C>
$ 3,000,000 6.06% January 8, 1996
2,000,000 6.10 July 24, 1996
3,000,000 6.23 December 27, 1996
2,000,000 6.18 September 2, 1996
---------
$ 10,000,000
============
</TABLE>
The advances are pursuant to an agreement in which the Savings Bank may
draw up to a maximum of 30% of total assets or $58,700,000 at December 31,
1995. These advances are secured by mortgage loans with a balance of
approximately $77,695,000 and the Savings Bank's investment in capital
stock the Federal Home Loan Bank of San Francisco totaling $1,559,000 at
December 31, 1995.
(11) Disclosures about the Fair Value of Financial Instruments
- ------------------------------------------------------------------
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have
been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that could be realized in a current market exchange. The
use of different market assumptions or estimation methodologies may have a
material impact on the estimated fair value amounts.
(Continued)
Page 24
<PAGE> 25
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair value information related to financial instruments is as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------
Book Value Fair Value
----------- ---------------
Financial Instrument
--------------------
<S> <C> <C>
Cash and cash equivalents $ 13,252 13,252
Investment securities -
available-for-sale 8,462 8,462
Mortgage-backed securities
available-for-sale 985 985
Loans receivable 164,738 170,048
Loans held-for-sale 651 662
Deposits 172,652 173,077
Borrowed funds 10,000 10,012
Commitments -- --
</TABLE>
Cash and Cash Equivalents
- -------------------------
The carrying amount for cash approximates fair value because these instruments
are demand deposits and do not present unanticipated interest rate or credit
concerns.
Investment Securities and Mortgage-Backed Securities
- ----------------------------------------------------
The fair value of investment securities and mortgage-backed securities is based
on estimates received from market sources.
Loans Receivable
- ----------------
The fair value of loans receivable is estimated by a method that discounts the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and maturities. The majority of the
Savings Bank's loans receivable contain terms which include variable interest
rates.
Loans Held-for-Sale
- -------------------
The fair value is determined by the price at which the Savings Bank can sell
these loans for on the secondary market.
Deposits
- --------
For passbook accounts, fair value is the amount reported as payable in the
financial statements as such amounts are payable on demand. For certificates of
deposit, fair value is estimated using the rates currently offered for deposits
of similar remaining maturities.
(Continued)
Page 25
<PAGE> 26
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Borrowed Funds
--------------
The fair value of borrowed funds is estimated by a method that discounts
the future cash flows using current rates offered by the Federal Home Loan
Bank.
Commitments
-----------
The Savings Bank has no mandatory commitments; therefore, there is no
market value for these commitments.
(12) Income Taxes
- ---------------------
The Savings Bank and its subsidiaries file consolidated Federal income and
combined state franchise tax returns on a calendar year basis. If certain
conditions are met in determining taxable income, the Savings Bank is
allowed a special bad debt deduction based on a percentage of taxable
income (presently 8%) or on specified experience formula. The Savings Bank
used the specific experience method in 1995, 1994 and 1993.
Income taxes for the years ended December 31, 1995, 1994 and 1993 is
comprised of the following:
<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
------- -------- -----
1995:
Federal $ 256,000 446,000 702,000
State 30,000 129,000 159,000
--------- ------- -------
$ 286,000 575,000 861,000
========= ======= =======
1994:
Federal $ 743,000 (115,000) 628,000
State 274,000 (45,000) 229,000
--------- ------- -------
$1,017,000 (160,000) 857,000
========== ========= ========
1993:
Federal $ 765,000 (202,000) 563,000
State 275,000 (72,000) 203,000
----------- --------- -------
$1,040,000 (274,000) 766,000
=========== ========= ========
</TABLE>
(Continued)
Page 26
<PAGE> 27
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of income taxes and the amount computed by applying the
statutory U.S. Federal income tax rates of 35% in 1995, 1994 and 1993 to
earnings before income taxes follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Computed "expected" Federal income $ 722,000 710,000 645,000
taxes
California franchise tax, net of
Federal income tax benefit 103,000 151,000 134,000
Other 36,000 (4,000) (13,000)
--------- ------- -------
$ 861,000 857,000 766,000
========= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax liability and deferred income tax
benefit are presented below:
<TABLE>
<CAPTION>
Deferred Deferred Deferred
Income Income Income
December Taxes December Taxes December Taxes December
31, 1995 (Benefit) 31, 1994 (Benefit) 31, 1993 (Benefit) 31, 1992
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Allowance for
loan and REO
losses $ 337,000 398,000 735,000 (240,000) 495,000 (223,000) 272,000
State taxes 58,000 (22,000) 36,000 22,000 58,000 63,000 121,000
Other 78,000 9,000 87,000 (4,000) 83,000 (12,000) 71,000
--------- ------- ------- ------- ------- --------- -------
473,000 385,000 858,000 (222,000) 636,000 (172,000) 464,000
Deferred tax
liabilities:
Property and
equipment 106,000 (79,000) 185,000 55,000 130,000 25,000 105,000
ESFR - (22,000) 22,000 (34,000) 56,000 (100,000) 156,000
Loan fees 639,000 148,000 491,000 7,000 484,000 (15,000) 499,000
FHLB dividends 276,000 62,000 214,000 2,000 212,000 (2,000) 214,000
Other 260,000 81,000 179,000 32,000 147,000 (10,000) 157,000
------- ------- ------- ------ ------- ------- -------
$808,000 575,000 233,000 (160,000) 393,000 (274,000) 667,000
======== ======= ======= ======= ======= ======== =======
</TABLE>
Based on the Savings Bank's current and historical pre-tax earnings,
adjusted for significant items, management believes it is more likely than
not that the Savings Bank will realize the benefit of the existing
deferred tax asset at December 31, 1995. In determining the possible
future realization of deferred tax assets, future taxable income from the
following sources may be taken into account: a) the reversal of taxable
temporary differences, b) future operations exclusive of reversing
temporary differences and c) tax planning strategies that, if necessary,
would be implemented to accelerate taxable income into years in which net
operating losses might otherwise expire.
(13) Convertible Subordinated Debentures
- -----------------------------------------
On June 30, 1993, the Savings Bank converted all of its outstanding
convertible subordinated debentures in the amount of $1,875,000 to 324,015
shares of common stock in the amount of $810,000 and additional paid-in
capital of $1,011,000 less a 3% conversion premium. The debentures were
direct, unsecured, obligations, subordinated to all present and future
obligations of the Savings Bank, including deposit liabilities, and would
have matured in 10 years. The debentures were issued in minimum
denominations of $50,000 and in integral multiples of $25,000 to members
of the Savings Bank's
(Continued)
Page 27
<PAGE> 28
board of directors and other accredited investors. Interest was payable
semi-annually at an adjustable rate equal to 1% annually in excess of the
weighted monthly average cost of funds of the Federal Home Loan Bank Board
Eleventh District, adjusted monthly, but in no event at a rate less than 9%
or greater than 12% annually.
(14) Regulatory Capital (Unaudited)
- ----------------------------------
FIRREA was signed into law on August 9, 1989; regulations for savings
institutions' minimum capital requirements went into effect on December 7,
1989. In addition to its capital requirements, FIRREA includes provisions
for changes in the Federal regulatory structure for institutions including
a new deposit insurance system, increased deposit insurance premiums and
restricted investment activities with respect to non-investment grade
corporate debt and certain other investments. FIRREA also increases the
required ratio of housing-related assets in order to qualify as a savings
institution.
FIRREA regulations require institutions to have a minimum regulatory
tangible capital equal to 1.5% of total assets, a minimum 3% core capital
ratio and an 8.0% risk-based capital ratio.
FDICIA was signed into law on December 19, 1991. Regulations implementing
the prompt corrective action provisions of FDICIA became effective on
December 19, 1992. In addition to the prompt corrective action
requirements, FDICIA includes significant changes to the legal and
regulatory environment for insured depository institutions, including
reductions to insurance coverage for certain kinds of deposits, increased
supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning
internal controls, accounting, and operations.
The Office of Thrift Supervision ("OTS") was required by FDICIA, by no
later than December 1, 1993, to prescribe minimum acceptable operational
and managerial standards and standards for asset quality, earnings, and
valuation of publicly-traded shares. The operational standards must cover
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth, and employee compensation. The asset quality and
earnings standards must specify a maximum ratio of classified assets to
capital, minimum earnings sufficient to absorb losses, and a minimum ratio
of market value to book value of publicly traded shares. Any institution
that fails to meet such standards must submit a plan for corrective action
within 30 days, and will be subject to a host of restrictive sanctions if
it fails to implement the plan.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in
declining order, are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." Institutions categorized as "undercapitalized" or worse
are subject to certain restrictions, including the requirement to file a
capital plan with its primary federal regulator, prohibitions on the
payment of dividends and management fees, restrictions on executive
compensation, and increased supervisory monitoring, among other things.
Other restrictions may be imposed on the institution either by its primary
federal regulator or by the FDIC, including requirements to raise
additional capital, sell assets, or sell the entire institution. Once an
institution becomes "critically undercapitalized" it must generally be
placed in receivership or conservatorship within 90 days.
(Continued)
Page 28
<PAGE> 29
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of
at least 4%, and a total risk-based capital ratio of at least 8%. An
institution is deemed to be "critically undercapitalized" if it has a
tangible equity ratio of 2% or less.
The following is a reconciliation of stockholders' equity as reported
in the consolidated financial statements prepared in conformity with
generally accepted accounting principles ("GAAP"), with regulatory
capital as presently defined under FIRREA:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- -----------
<S> <C> <C> <C>
Stockholders' equity ("GAAP") $ 11,474,000 11,474,000 11,474,000
Unrealized gain on securities
available-for-sale (16,000) (16,000) (16,000)
General loss allowance - - 1,281,000
----------- ---------- ----------
Regulatory capital 11,458,000 11,458,000 12,739,000
Minimum capital requirement 2,935,000 5,869,000 9,325,000
----------- ---------- ----------
Excess regulatory capital $ 8,523,000 5,589,000 3,414,000
=========== ========== ==========
</TABLE>
(Continued)
Page 29
<PAGE> 30
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
-------- ------- ----------
<S> <C> <C> <C>
Regulatory capital as a
percentage of:
Total assets 5.9% 5.9% -
Risk-weighted assets - - 10.9%
Capital requirement as a
percentage of:
Total assets 1.5 3.0 -
Risk-weighted assets - - 8.0%
---- ---- -----
Percentage excess 4.4% 2.9% 2.9%
==== ==== ====
</TABLE>
(15) Earnings per Share
- -----------------------
The calculations of earnings per share for each of the three years
ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Primary:
Net earnings $1,202,000 1,172,000 1,078,000
=========== ========= =========
Weighted average number of common
shares and dilutive common stock
equivalents 1,156,872 1,153,863 985,388
========== ========= =========
Primary earnings per share $ 1.04 1.02 1.09
========== ========= =========
Fully diluted:
Net earnings $1,202,000 1,172,000 1,078,000
Interest on convertible subordinated
debentures, net of tax - - 49,000
---------- --------- ---------
Net earnings applicable to common
stock, common stock equivalents
and other dilutive securities $1,202,000 1,172,000 1,127,000
========== ========= =========
Weighted average number of common
shares outstanding 1,130,946 1,130,946 968,939
Assumed conversion of convertible
subordinated debentures - - 162,007
Stock options 37,901 15,784 19,258
--------- --------- ---------
Weighted average shares outstanding 1,168,847 1,146,730 1,150,204
========= ========= =========
Fully diluted earnings per share $ 1.04 1.02 .98
========== ========== =========
</TABLE>
(Continued)
Page 30
<PAGE> 31
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Stock Option Plan
- --------------------------
The Savings Bank adopted an Employee Stock Option Plan in 1989. Under the
1984 and 1989 Employee Stock Option Plans, the Savings Bank may grant to
key employees options to purchase up to 126,699 shares of the Savings
Bank's common stock.
On February 26, 1993, the Board of Directors approved the Palm Springs FSB
1993 Stock Option Plan (the "1993 Plan").
The 1993 Plan provides that the total number of shares available for
issuance under the Plan, including shares issuable upon exercise of 1989
Plan Options, will not exceed 30% of Palm Springs FSB's Common Stock
issued and outstanding from time to time. Accordingly, since there were
806,931 shares issued and outstanding on April 1, 1993, the number of
shares that would have been available for issuance under the 1993 Plan as
of that date would have been 242,079 compared to the 110,091 shares
subject to the 1989 Plan as of that date. Moreover, as the number of
shares of issued and outstanding Common Stock increases, the number of
shares subject to the 1993 Plan increases. Such increases would occur as a
result of stock splits, stock dividends, issuance of stock upon exercise
of stock options, or other issuances of Common Stock. All shares subject
to any option granted under the 1989 Plan or the 1993 Plan, which remain
unpurchased at the expiration of such option will become available again
for purposes of the 1993 Plan. To the extent any such option is exercised,
the number of shares available under the 1993 plan will be reduced by the
number of shares issued upon such exercise or exercises.
A summary of stock option transactions under the plans for the years ended
December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
Number of Shares
----------------------- Option
1995 1994 1993 Price Range
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period 139,914 122,318 96,869$ 4.99-9.50
Granted 9,000 20,750 26,500 7.50
Canceled/expired (3,756) (3,154) (1,051) 8.50-8.62
Options outstanding, ------- ------- ------ ---------
end of period 145,158 139,914 122,318 $ 4.99-9.50
======= ======= ======= ===========
Options exercisable 124,150 99,075 70,147 $ 4.99-9.50
======= ======= ======= ===========
</TABLE>
(Continued)
Page 31
<PAGE> 32
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Financial Instruments with Off-Balance-Sheet Risk
- ------------------------------------------------------
The Savings Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to originate loans, and the prior sale of loans with recourse.
Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statement of earnings. The contract or notional amounts of those
instruments reflect the extent of involvement the Savings Bank has in
particular classes of financial instruments.
The Savings Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial guarantees written is represented by
the contractual notional amount of those instruments. The Savings Bank
uses the same credit policies in making commitments to originate loans and
conditional obligations as it does for on-balance- sheet instruments. For
commitments to originate fixed rate loans the contract amounts represent
exposure to loss from market fluctuations as well as credit loss. The
Savings Bank controls the credit risk of its commitments to originate
fixed rate loans through credit approvals, limits, and monitoring
procedures.
Unless noted otherwise, the Savings Bank does not require collateral or
other security to support financial instruments with credit risk.
<TABLE>
<CAPTION>
Contract Amount
at December 31, 1995
--------------------
<S> <C>
Financial instruments whose contract amounts
represent credit risk:
o Commitments to originate variable rate
mortgage loans with an interest rate
range of 7.00% to 10.96% $ 3,168,000
o Remaining principal of loans sold with
recourse 682,000
</TABLE>
Commitments to originate fixed and variable rate mortgage loans are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since some of the commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Savings Bank evaluates each customer's creditworthiness
on a case-by-case basis. Collateral held consists of the real estate
properties underlying the mortgage loans. The average commitment term is
14 days.
(Continued)
Page 32
<PAGE> 33
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Savings Bank receives collateral to support commitments for which
collateral is deemed necessary. The most significant categories of
collateral include real estate properties underlying mortgage loans, liens
of personal property, and cash on deposit with the Savings Bank. At
December 31, 1995, the extent of collateral supporting mortgage and other
loans varied from 0% to 100% of the maximum credit exposure.
As the Savings Bank's operations are located entirely within the Coachella
Valley, the majority of the loans owned by the Savings Bank are extended
to finance the purchase of real estate in this area. At December 31, 1995,
97% of the Savings Bank's 1-4 unit mortgage loans were concentrated in
single family residences in the Coachella Valley.
(18) 401K Retirement Savings Plan
- ----------------------------------
The Savings Bank established a 401K Retirement Savings Plan (the "Plan")
in 1993. Employees at least 21 years of age, having one year of continuous
service and working at least 1,000 hours per year are eligible to
participate. Participants may defer, pre-tax, from 2% up to 17% of their
income and the Savings Bank will match 25% of the contribution up to 6%.
If the income goals of the Savings Bank are met, the match will increase
from 25% to 50% of the first 6% of contribution. The participants fully
vest in the matching contribution within 5 years. The contributions made
to the Plan by the Savings Bank amounted to $22,000 and $23,000 for the
years ended 1995 and 1994, respectively.
(19) Commitments
- -----------------
Outstanding commitments to originate and purchase loans amounted to
approximately $3,168,000 and $883,000, respectively, at December 31, 1995
(see note 17). Commitments to sell loans amounted to approximately
$10,339,000 and $17,886,000 for the years ended December 31, 1995 and
1994, respectively. Commitments outstanding at December 31, 1995 are
expected to be satisfied from future originations. No material losses are
anticipated as a result of these transactions. The Savings Bank had no
commitments to purchase or sell mortgage-backed securities at December 31,
1995 and at December 31, 1994.
Page 33
<PAGE> 34
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
--------------------- ------------
1996 1995 1995
-------- -------- -------
(Note 1)
------------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 12,445 4,183 13,252
Investment securities available-for-sale, 5,467 7,971 8,462
at fair value
Mortgage-backed securities available-for 882 - 985
- -sale, at fair
Loans held for sale, at lower of cost or 387 424 651
market
Loans receivable, net 159,524 173,372 164,738
Accrued interest receivable 1,153 1,099 1,177
Investment in Federal Home Loan Bank stock 1,388 1,521 1,559
Real estate 3,363 2,064 2,541
Offices and equipment 1,263 1,386 1,382
Excess servicing fee receivable - 12 5
Other assets 1,455 1,260 916
------- ------- -------
Total Assets $ 187,327 193,292 195,668
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 170,755 165,515 172,652
Borrowed funds 3,000 15,500 10,000
Income taxes payable 221 220 72
Deferred income taxes 808 319 808
Accrued interest payable - 118 42
Other liabilities 551 730 620
------- ------- -------
Total liabilities 175,335 182,402 184,194
------- ------- -------
Stockholders' equity (Note 3)
Serial preferred stock, $2.50 par
value, 1,000,000 shares authorized;
none outstanding - - -
Common stock, $2.50 par value,
4,000,000 shares authorized;
1,130,946 shares issued at June 30,
1996 and 1995 and December 31, 1995 2,827 2,827 2,827
Additional paid-in capital 3,564 3,564 3,564
Retained earnings - substantially
restricted 5,623 4,510 5,067
Net unrealized gain (loss) on
securities available-for-sale (22) (11) 16
------- ------ ------
Total stockholders' equity 11,992 10,890 11,474
------- ------- -------
Total Liabilities and Stockholders' Equity $ 187,327 193,292 195,668
======= ======= =======
</TABLE>
Page 34
<PAGE> 35
<TABLE>
<CAPTION>
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
========================================
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,565 3,525 7,092 6,935
Mortgage-backed securities 17 13 30 26
Interest and dividends on investment securities 251 125 486 226
Other investment income 20 13 38 33
----- ----- ----- -----
Total interest income 3,853 3,676 7,646 7,220
----- ----- ----- -----
INTEREST EXPENSE
Deposits 1,780 1,830 3,631 3,435
Borrowings 62 252 158 580
----- ----- ----- -----
Total interest expense 1,842 2,082 3,789 4,015
----- ----- ----- -----
Net interest income 2,011 1,594 3,857 3,205
PROVISION FOR LOAN LOSSES 252 360 510 410
----- ----- ----- -----
Net interest income after 1,759 1,234 3,347 2,795
provision for loan losses ----- ----- ----- -----
NON-INTEREST INCOME
Miscellaneous loan fees and service charges 56 68 102 156
Other fees and service charges 226 215 469 423
Gain on sale of loans and loan servicing rights 36 560 68 604
Gain on sale of mortgage-backed securities 21 16 21 16
Gain on sale of investment securities - - 18 -
--- --- --- ---
Total non-interest income 339 859 678 1,199
--- --- --- -----
NON-INTEREST EXPENSE
Compensation and employee expense 634 636 1,249 1,265
Occupancy expense 188 185 358 366
Office supplies and expense 50 70 102 132
Advertising 52 47 101 82
Insurance and bond premiums 111 104 220 209
Data processing expense 149 150 288 295
Legal, accounting and supervisory fees 19 46 62 98
Other general and administrative expenses 145 151 317 294
Loss on real estate operations 156 166 257 253
Other 2 6 6 8
----- ----- ----- -----
Total non-interest expense 1,506 1,561 2,960 3,002
----- ----- ----- -----
Earnings before income taxes 592 532 1,065 992
INCOME TAXES 246 224 442 415
--- --- --- ---
NET EARNINGS $ 346 308 623 577
=== === === ===
Earnings per share $ 0.29 0.27 0.53 0.50
==== ==== ==== ====
Weighted average number of shares of common
stock and common stock equivalents
outstanding
1,196 1,154 1,186 1,152
</TABLE>
Page 35
<PAGE> 36
<TABLE>
<CAPTION>
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months
Ended June 30,
1996 1995
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 623 577
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Amortization of:
----------------
Discounts/premiums mortgage-backed securities (8) (10)
Deferred loan fees (322) (304)
Excess servicing fee receivable 5 43
Discount on loans (10) (5)
Provision for loan and real estate losses 559 516
Net (gain) loss on sales of:
----------------------------
Loans and servicing rights (90) (620)
Investment securities (18) -
Foreclosed real estate 50 83
Depreciation and amortization of offices and equipment 171 143
Loan originations - held for sale (7,287) (5,286)
Proceeds from sale of loans and servicing rights 10,562 5,890
(Increase) decrease in assets:
------------------------------
Accrued interest receivable 24 (101)
Other assets (539) 202
Increase (decrease) in liabilities:
-----------------------------------
Income tax payable 149 (52)
Deferred income taxes - 86
Accrued interest payable (42) 54
Other liabilities (69) 228
-------- --------
Net cash provided by operating activities 3,758 1,444
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net of deferred loan fees (25,996) (25,222)
Principal payments on loans and mortgage backed securities 26,330 22,636
Purchases of loans (483) (552)
Purchases of investment securities (1,028) (1,748)
Proceeds from maturities of investment securities 3,000 500
Proceeds from sale of investment securities 1,229 -
Purchase of mortgage backed securities (1,299) -
Proceeds from sale of mortgage backed securities 1,320 663
Proceeds from sales of foreclosed real estate 1,379 377
Additions to offices and equipment (52) (106)
-------- --------
Net cash (used in) investing activities 4,400 (3,452)
-------- --------
</TABLE>
Page 36
<PAGE> 37
<TABLE>
<CAPTION>
PALM SPRINGS SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
(Continued)
Six Months
Ended June 30,
1996 1995
---------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(1,897) 8,195
Net increase in deposits
Borrowed funds - advances 12,000 17,300
Borrowed funds - repayments (19,000) (24,200)
Dividends paid (68) (68)
________ ________
Net cash (used in) provided by financing (8,965) 1,227
activities ________ ________
Net decrease in cash and cash equivalents (807) (781)
Cash and cash equivalents at beginning of the year 13,252 4,964
________ ________
Cash and cash equivalents at end of the period $ 12,445 4,183
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid 3,837 3,975
Income taxes paid 263 466
Property transferred to foreclosed real estate 3,932 2,787
Loans to facilitate 1,632 1,948
</TABLE>
Page 37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The December 31, 1995 balance sheet data is derived from the audited
financial statements filed in Palm Springs Savings Bank, FSB's ("Palm
Springs") 1995 Annual Report Form 10-K/A. The Balance Sheets dated June
30, 1996 and 1995, and the entire Statements of Earnings and Statements of
Cash Flows have not been audited. However, in the opinion of management,
these statements present fairly the results for the interim periods for
which they are presented.
2. Certain information and most footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with Palm Springs' 1995 Annual
Report Form 10-K/A which contains significant additional information that
is necessary for a complete understanding of the information presented
herein. The unaudited interim financial statements reflect all adjustments
necessary for a fair presentation of the interim periods presented.
3. The table below provides historical cash dividend distributions for 1996
and 1995.
<TABLE>
<CAPTION>
Record Date Per share Cash
of Cash Dividends Dividend Amount
-----------------------------------------------------------
<S> <C>
May 17, 1996 $ 0.03
February 16, 1996 0.03
November 17, 1995 0.03
August 18, 1995 0.03
May 19, 1995 0.03
February 17, 1995 0.03
===========================================================
</TABLE>
4. In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. Under
the financial-components approach, after a transfer of financial assets,
an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets and liabilities that exist after
the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does
not meet the criteria for a sale, the transfer is accounted for as a
secured borrowing with pledge of collateral. SFAS 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and should be applied
prospectively. Management has not yet evaluated the effect, if any, SFAS
125 will have on Palm Springs' financial condition or operations.
Page 38
<PAGE> 39
(b) Pro Forma Financial Information
Index to Pro Forma Financial Information Page
Pro Forma Consolidated Balance Sheets
June 30, 1996 40
Pro Forma Consolidated Statements of Income
For twelve months ended June 30, 1996 42
On September 27, 1996, the Company acquired Palm Springs for $16,265,000
pursuant to the Agreement.
The purchase price in excess of the net book value of assets is determined as
follows:
<TABLE>
<CAPTION>
<S> <C>
Total purchase price $ 16,265,000
Less: Net book value of assets & liabilities (9,288,000)
--------------
Premium paid over net book value $ 6,977,000
</TABLE>
The following allocates the premium paid by the Company over the net book value
of the assets and liabilities acquired:
<TABLE>
<CAPTION>
<S> <C>
Premium on loans or the amount in which
the market value exceeded Palm Springs'
book value on loans acquired $ 2,441,000
Core deposit intangible 9,445,000
Deferred tax liability on loan premium (1) (1,008,000)
Deferred tax liability on core deposit intangible (3,901,000)
--------------
Premium paid over net book value $ 6,977,000
(1) Assumes a combined federal and state effective income tax rate of 41.3%
</TABLE>
The following Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1996 combines the historical consolidated balance sheets of the Company and Palm
Springs as if the acquisition had been effective on June 30, 1996, after giving
effect to the purchase accounting adjustments described in the explanatory
notes. The Unaudited Pro Forma Consolidated Statements of Income presents the
combined results of operations of the Company and Palm Springs for the year
ended June 30, 1996, as if the acquisition had been effective on July 1, 1995,
after giving effect to the purchase accounting adjustments described in the
explanatory notes. In that Palm Springs' year end was December 31, Palm Springs'
Statement of Earnings for the first six months of 1996 is combined with the last
six months of 1995 to arrive at a twelve month Statement of Earnings ended June
30, 1996. The weighted average number of shares used in the calculation of the
proforma earnings per share was 5,954,000.
The total purchase price, for purposes of the Unaudited Pro Forma
Consolidated Balance Sheet is allocated to the individual assets of the Company
based upon Palm Springs' historical cost with adjustments for estimated fair
value. The pro forma adjustments, subject to later adjustment, include only
items that are directly attributable to the acquisition and are factually
supportable.
The unaudited pro forma combined financial statements are intended for
informational purposes only and are not necessarily indicative of the future
financial position or results of operations of the Company, or of the financial
position or the results of operations of the Company that would have actually
occurred had the acquisition been in effect as of June 30, 1996, or for the year
then ended.
Page 39
<PAGE> 40
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Balance Sheets as of June 30, 1996
(Dollar amounts in thousands)
Purchase
Adjusted Accounting
Palm Palm Spring Palm Adjustments Pro Forma
Company Springs Adjustments Springs
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
- ------
Cash and cash equivalents $100,633 12,445 (4,418)A1,2 8,027 (16,265)B1 92,395
Investment securities held to maturity 34,666 - 34,666
Investment securities available for sale 173,171 5,467 33 A4 5,500 178,671
Loans held for sale, at lower or cost or market - 387 387 387
Loans receivable (net of allowance for estimated 225,161 159,524 (1,796)A3 157,728 2,441 B2 385,330
losses)
Mortgage-backed securities held to maturity 159,262 - 159,262
Mortgage-backed securities available for sale 100,259 882 882 101,141
Accrued interest receivable 6,260 1,153 1,153 7,413
Investment in FHLB capital stock 4,436 1,388 1,388 5,824
Premises and equipment, net 6,578 1,263 1,263 7,841
Real estate owned, net
Acquired through foreclosure 1,079 3,363 (432)A3 2,931 4,010
Acquired for sale or investment 996 - 996
Other assets 14,415 1,455 1,455 9,445 B3 25,315
-----------------------------------------------------------------------
Total assets $826,916 187,327 (6,613) 180,714 (4,379) 1,003,251
=======================================================================
Liabilities
- -----------
Deposit accounts $669,725 170,755 170,755 840,480
Advances from the FHLB 70,000 3,000 (3,000)A1 70,000
Accounts payable and other liabilities 5,278 551 551 5,829
Income taxes 842 1,029 (909)A3,4 120 4,909 B4 5,871
-----------------------------------------------------------------------
Total liabilities 745,845 175,335 (3,909) 171,426 4,909 922,180
-----------------------------------------------------------------------
Stockholders' Equity
- --------------------
Preferred stock - - - -
Common stock 66 2,827 2,827 (2,827)B5 66
Additional paid-in capital 51,113 3,564 3,564 (3,564)B5 51,113
Retained earnings, substantially restricted 40,957 5,623 (2,723)A2,3 2,900 (2,900)B5 40,957
Net unrealized gain (loss) of securities available for (2,309) (22) 19 A4 (3) 3 B5 (2,309)
sale, net of taxes
Deferred stock compensation (5,408) - (5,408)
Treasury stock (3,348) - (3,348)
-----------------------------------------------------------------------
Total stockholders' equity 81,071 11,992 (2,704) 9,288 (9,288) 81,071
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $826,916 187,327 (6,613) 180,714 (4,379) 1,003,251
=======================================================================
</TABLE>
Page 40
<PAGE> 41
<TABLE>
<CAPTION>
ADJUSTMENTS TO PALM SPRINGS' UNAUDITED CONSOLIDATED BALANCE SHEET
FOR ACTIVITY FROM JUNE 30, 1996 TO SEPTEMBER 27, 1996
Debit Credit
----------- ------------
<S> <C> <C> <C>
A1 Prepay advances from the FHLB Advances from the FHLB $3,000
subsequent to June 30, 1996. Cash & cash equivalents $3,000
A2 Financial activity July 1, 1996 to Retained earnings 1,418
September 27, 1996. Cash & cash equivalents 1,418
A3 Adjustment to loss reserve Income taxes 923
recorded by Palm Springs Retained earnings 1,305
subsequent to June 30, 1996. Loans receivable, net 1,796
Real estate owned, net 432
A4 Change in unrealized loss of Investment securities
securities available for sale from available for sale
June 30, 1996 to September 27, 33
1996. Income Taxes-Deferred 14
Net unrealized loss of
securities available
for sale, net of tax 19
</TABLE>
<TABLE>
<CAPTION>
Adjustments to the Unaudited Pro Forma Consolidated Balance Sheet
Due to Purchase Accounting
Debit Credit
----------- ------------
<S> <C> <C> <C>
B1 Purchase price of $16,265 to Palm Cash & cash equivalents $16,265
Springs' shareholders.
B2 Premium on loans of $2,441 to Loans receivable-Loan $2,441
adjust to market value Premium
B3 Establish core deposit intangible Other assets-Core deposit 9,445
intangible
B4 Establish deferred tax liability Income Taxes-Deferred 4,909
of $1,008 related to the loan
premium and $3,901 related to the
core deposit intangible at an
effective tax rate of 41.3%.
B5 Elimination of Palm Springs' Stockholders' equity 9,288
equity as of September 27, 1996.
</TABLE>
Page 41
<PAGE> 42
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Statement of Income
For twelve months ended June 30, 1996
Dollar amounts in thousands
Company Palm Adjustments Pro Forma
Springs
======================================================
Interest Income
- ---------------
<S> <C> <C> <C> <C>
Interest on loans $17,648 14,544 (349)C1 31,843
Interest on mortgage-backed securities 19,113 57 19,170
Interest and dividends on investment 13,594 870 14,464
securities ------------------------------------------------------
Total interest income 50,355 15,471 (349) 65,477
------------------------------------------------------
Interest Expense
- ----------------
Interest on deposit accounts 23,781 7,522 31,303
Interest on advances from the FHLB and 7,086 644 7,730
other borrowings
Net interest expense on hedging 3,192 - 3,192
transactions
------------------------------------------------------
Total interest expense 34,059 8,166 - 42,225
------------------------------------------------------
Net interest income before provision for 16,296 7,305 (349) 23,252
estimated loan losses
Provision for estimated loan losses 1,054 720 1,774
Net interest income after provision for 15,242 6,585 (349) 21,478
estimated loan losses
Other Income (Expense)
- ----------------------
Loan and other fees 193 202 395
Gain on sale of investment securities - 18 18
Gain on sales of mortgage backed - 21 21
securities
Gain on sales of loans - 274 274
Gain on sale of servicing - 21 21
Loss from real estate operations, net (498) (412) (910)
Amortization of intangible assets - - (1,349)C2 (1,349)
Other income 1,070 910 1,980
------------------------------------------------------
Total other income (expense) 765 1,034 (1,349) 450
------------------------------------------------------
General and Administrative Expenses
- -----------------------------------
Salaries and employee benefits 6,790 2,571 9,361
Occupancy and equipment expense 2,023 960 2,983
FDIC insurance and other assessments 1,322 433 1,755
Legal and professional services 489 86 575
Data processing service costs 832 569 1,401
Other 1,475 864 2,339
------------------------------------------------------
Total general & administrative expenses 12,931 5,483 - 18,414
------------------------------------------------------
Earnings before income tax expense 3,076 2,136 (1,698) 3,514
------------------------------------------------------
Income tax expense (benefit) 1,129 888 (701)C3 1,316
------------------------------------------------------
Net earnings $1,947 1,248 (997) 2,198
======================================================
Earnings per share $0.33 $1.07 $0.37
</TABLE>
Page 42
<PAGE> 43
ADJUSTMENTS TO UNAUDITED PRO FORMA STATEMENT OF INCOME
C1 Estimated amortization of loan premium. The loan premium is expected to be
amortized using the interest method over the life of the loans acquired.
C2 Estimated amortization of the core deposit intangible. The core deposit
intangible is expected to be amortized using the straight line method over
a seven year term.
C3 Estimated tax benefit on Items C1 and C2 at an estimated income tax rate
of 41.3%.
c) Exhibits Page
23 Consent of Independent Auditors 46
Page 43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has dully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HF Bancorp, Inc.
(Registrant)
Date: February 19, 1997 /s/ J. Robert Eichinger
-----------------------
J. Robert Eichinger
Chairman of the Board,
President and Chief Executive
Officer
/s/ Mark Andino
------------------------
Mark Andino
Vice President and
Treasurer
Page 44
<PAGE> 1
EXHIBIT INDEX
Exhibit Number Exhibit Name Page
- ---------------------------------------------------------------------
23 Consent of Experts and Counsel 46
Page 45
<PAGE> 2
Exhibit Number 23 Consent of Experts and Counsel
Consent Of Independent Auditors
The Board of Directors
HF Bancorp, Inc.:
We consent to the inclusion of our report dated January 19, 1996, with respect
to the consolidated balance sheets of Palm Springs Savings Bank, FSB and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995, which report appears in
the Form 8-K/A of HF Bancorp, Inc. dated February 19, 1997.
/S/ KPMG Peat Marwick, LLP
- -------------------------------
KPMG Peat Marwick, LLP
Orange County, California
February 19, 1997
Page 46
