SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-28304 PROVIDENT FINANCIAL HOLDINGS, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 33-0704889 - ---------------------------------------------- ---------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) I.D. Number) 3756 Central Avenue, Riverside, California 92506 - ---------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (909) 686-6060 ---------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO . ----- ----- Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] As of September 15, 1997, there were issued and outstanding 4,881,215 shares of the Registrant's Common Stock. The Registrant's voting stock is listed on the Nasdaq National Market under the symbol "PROV." The aggregate market value of the voting stock held by nonaffiliates of the Registrant, based on the closing sales price of the Registrant's common stock as quoted on the Nasdaq National Market on September 15, 1997, was $19.875. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1997 ("Annual Report") (Part II). 2. Portions of the definitive Proxy Statement for the 1997 Annual Meeting of Shareholders ("Proxy Statement") (Part III).
PART I Item 1. Business - ----------------- General Provident Financial Holdings, Inc. ("Provident Financial" or the "Corporation"), a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company for Provident Savings Bank, F.S.B. ("Savings Bank") upon the Savings Bank's conversion from a federal mutual to a federal stock savings bank ("Conversion"). The Conversion was completed on June 27, 1996. At June 30, 1997, the Corporation had total assets of $615.5 million, total deposits of $508.8 million and stockholders' equity of $85.4 million. Provident Financial has not engaged in any significant activity other than holding the stock of the Savings Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Savings Bank and its subsidiaries. The Savings Bank, founded in 1956, is a federally chartered savings bank headquartered in Riverside, California. The Savings Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Savings Bank's deposits are federally insured up to applicable limits by the FDIC (under the Savings Association Insurance Fund ("SAIF")). The Savings Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1956. The Savings Bank's business consists of both traditional savings and loan and mortgage banking operations. The savings and loan operations primarily consist of accepting deposits from customers within the communities surrounding its full service offices and investing those funds in one- to four-family mortgage loans and, to a lesser extent, in multi-family, commercial real estate, construction, consumer and other loans. The mortgage banking activities consist of the origination and sale of mortgage loans secured by one- to four-family residences and the servicing of such loans for others. The Savings Bank's revenues are derived principally from interest on its mortgage loan portfolio and fees generated through its mortgage banking activities. Recent Developments Recapitalization of SAIF and Its Impact on SAIF Premiums. During the fiscal 1997 first quarter, federal legislation required the recapitalization of SAIF through a one-time assessment to increase SAIF's reserves to $1.25 per $100 of deposits. The assessment was based on assessable deposits at March 31, 1995 and was approximately 66 basis points on the amount of deposits held by a SAIF-member institution. The one-time fee had an immediate after-tax impact of approximately $1.9 million on the Savings Bank's earnings and capital. Following the assessment, SAIF premiums were lowered to $0.065 per $100 in January 1997. Market Area The Savings Bank is headquartered in Riverside, California and operates seven additional full-service offices in Riverside County and one in San Bernardino County. Management considers Riverside and western San Bernardino Counties to be the Savings Bank's primary market for deposits. Through the operations of its Profed Mortgage division, the Savings Bank has expanded its retail lending market to include a larger portion of southern California and southern Nevada. Profed Mortgage's loan production offices include wholesale loan departments through which the Savings Bank maintains a network of loan correspondents. Most of the Savings Bank's business is conducted in the communities surrounding the Savings Bank's full-service branches and loan production offices. The large geographic area encompassing Riverside and San Bernardino Counties is referred to as the "Inland Empire" due to a combination of the large volume of economic activity, the large population and the extremely rapid economic and demographic growth that occurred during the 1980s. According to 1995 population estimates, San 1
Bernardino and Riverside Counties have the fourth and sixth largest county populations in California, respectively. The Savings Bank's market area consists primarily of suburban and urban communities. Western Riverside and San Bernardino Counties are relatively densely populated and are within the greater Los Angeles metropolitan area. Military spending cuts have had a negative impact on the economy and the labor force in the market area, as much of Southern California's economic growth was tied to growth in the aerospace and other defense-related industries. Though the Inland Empire is widely believed to be entering a period of slow recovery from the recessionary trends that have prevailed in Southern California over the past several years, unemployment remains high. The recession in Southern California has resulted in an over-supply of commercial, multi-family and residential properties and real estate values continue to remain weak. The Savings Bank faces intense competition for deposits and loan originations. See "-- Competition." Lending Activities General. The principal lending activity of the Savings Bank is the origination of conventional, Federal Housing Administration ("FHA") and Veterans Administration ("VA") mortgage loans secured by one- to four-family residential properties. To a lesser extent, the Savings Bank also originates multi-family, commercial real estate, construction, consumer and other loans for its portfolio. The Savings Bank's net loans receivable totaled approximately $517.1 million at June 30, 1997, representing approximately 84.0% of consolidated total assets. This compares to $452.9 million, or 77.4% of consolidated total assets, at June 30, 1996. Following the Corporation's conversion to a stock company and the subsequent increase in capital, the Savings Bank began to retain a larger portion of its mortgage loan production. The Savings Bank believes that this strategy will enable it to leverage the new capital and provide a higher return on equity in the future. 2
<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, ---------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------- --------------- ---------------- ----------------- --------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Mortgage Loans: (In Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> One-to four- family. . . . $402,296 76.41% $327,490 70.77% $345,034 71.59% $277,986 64.94% $241,019 57.76% Multi-family . 52,564 9.98 54,427 11.76 53,531 11.11 63,719 14.88 66,871 16.02 Commercial . . 47,887 9.09 54,813 11.84 61,518 12.76 63,659 14.87 68,915 16.51 Construction . 5,778 1.10 10,222 2.21 5,938 1.23 4,324 1.01 11,817 2.83 Total Mortgage -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ loans . . . 508,525 96.58 446,952 96.58 466,021 96.69 409,688 95.70 388,622 93.12 Consumer loans 16,749 3.18 15,497 3.35 15,830 3.28 18,177 4.25 28,297 6.78 Commercial business loans . . . . 991 0.19 0 0.00 0 0.00 0 0.00 0 0.00 Other loans. . 289 0.05 332 0.07 137 0.03 218 0.05 402 0.10 Total loans -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ receivable. 526,554 100.00% 462,781 100.00% 481,988 100.00% 428,083 100.00% 417,321 100.00% -------- ====== -------- ====== -------- ====== -------- ====== -------- ====== Loans in process 3,695 3,694 4,121 3,324 8,183 Deferred loan fees and discounts 247 690 1,239 1,268 1,201 Allowance for loan losses . . . . 5,465 5,452 5,085 3,332 3,286 Total loans -------- -------- -------- -------- -------- receivable, net . . . . $517,147 $452,945 $471,543 $420,159 $404,651 Loans held for ======== ======== ======== ======== ======== sale . . . . . $19,985 $49,612 $34,489 $83,049 $104,409 ======= ======= ======= ======= ======== 3 </TABLE>
Maturity of Loan Portfolio. The following table sets forth certain information at June 30, 1997, regarding the dollar amount of principal repayments becoming contractually due during the periods indicated for loans held in the Savings Bank's portfolio. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as becoming due within one year. The table does not include any estimate of prepayments, which significantly shorten the average life of loan portfolios and may cause the Savings Bank's actual repayment experience to differ from that shown below. After After After Within One Year 3 Years 5 years One Through Through Through Beyond year 3 Years 5 Years 10 years 10 Years Total ---- ------- ------- -------- -------- ----- Mortgage loans: One-to four- family. . . . $28 $3,185 $6,089 $3,922 $389,072 $402,296 Multifamily. . 123 165 209 863 51,204 52,564 Commercial . . 8 95 681 2,453 44,650 47,887 Construction . 971 181 -- -- 4,626 5,778 Consumer loans. 7 637 2,791 7,721 5,593 16,749 Commercial business loans. . . . . 213 332 204 242 -- 991 Other loans . . 85 74 -- 53 77 289 Total loans ------ ------ ------ ------- -------- -------- receivable. . $1,435 $4,669 $9,974 $15,254 $495,222 $526,554 ====== ====== ====== ======= ======== ======== The following table sets forth the dollar amount of all loans held in the Savings Bank's portfolio due after June 30, 1998 which have fixed interest rates and have floating or adjustable interest rates. Floating or Adjustable Fixed-Rates Rates ----------- ----- (In Thousands) Mortgage loans: One-to four-family. . . . . . . . $44,071 $358,225 Multifamily . . . . . . . . . . . 1,175 51,389 Commercial. . . . . . . . . . . . 741 47,147 Construction. . . . . . . . . . . 512 5,265 Consumer loans . . . . . . . . . . 5,616 11,133 Commercial Business Lending. . . . 159 832 Other loans. . . . . . . . . . . . -- 289 ------- -------- Total loans receivable. . . . . $52,274 $474,280 ======= ======== 4
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Savings Bank the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. One- to Four-Family Residential Real Estate Lending. The Savings Bank's primary focus in lending is on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences in the communities where the Savings Bank has established full service branches and loan production offices. At June 30, 1997, $402.3 million, or 76.4% of the Savings Bank's loan portfolio consisted of permanent loans on one- to four-family residences. Since 1989, the Savings Bank has emphasized its mortgage banking activities and has sold most of the residential mortgage loans that it has originated. See "-- Mortgage Banking Activities." A portion of the ARM loans originated by the Savings Bank are retained in the Savings Bank's loan portfolio to meet the Savings Bank's asset/liability management objectives. At June 30, 1997, adjustable-rate loans comprised 90.1% of the Savings Bank's loan portfolio. The Savings Bank's residential mortgage loans are generally underwritten and documented in accordance with the guidelines established by the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA"). All government insured loans are generally underwritten and documented in accordance with the guidelines established by the Department of Housing and Urban Development ("HUD") and the VA. The Savings Bank's loan underwriters are approved as underwriters under HUD's delegated underwriter program. The Savings Bank offers ARM loans at rates and terms competitive with market conditions. Substantially all of the ARM loans originated by the Savings Bank meet the underwriting standards of the secondary markets. The Savings Bank offers several ARM products which generally adjust semi-annually or annually after an initial fixed period ranging from six months to seven years subject to a limitation on the annual increase of 1.0 to 2.0 percentage points and an overall limitation of 5.0 to 6.0 percentage points. Certain ARM loans are originated with an option to convert the loan to a 30-year fixed-rate loan at the then prevailing market interest rate. The ARM loans in the Savings Bank's portfolio utilize the COFI, London interbank offered rates ("LIBOR") or the weekly average yield on one-year U.S. Treasury securities adjusted to a constant maturity of one year ("CMT"), plus a margin of 2.00% to 3.25%. Loans based on the COFI constitute a majority of the Savings Bank's loan portfolio. The COFI has become dominated by a few large California-based savings institutions and, accordingly, movement in the index is closely tied to the deposit pricing and borrowing cost of these institutions. Currently, the Savings Bank is emphasizing products based on the one-year CMT and LIBOR, which adjust more rapidly than the COFI to changes in interest rates. As of June 30, 1997, the Savings Bank had $127.5 million in mortgage loans that may be subject to negative amortization. Negative amortization involves a greater risk to the Savings Bank because during a period of high interest rates the loan principal balance may increase above the amount of the original loan up to 115% of the loan amount. However, the Savings Bank believes that the risk of default is reduced by the stability provided by payment schedules and has historically found that its origination of negative amortization loans has not resulted in higher amounts of nonperforming loans. Borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a given interest rate and competitive environment. The retention of ARM loans in the Savings Bank's loan portfolio helps reduce the Savings Bank's exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased 5
interest to be paid by the customer due to increases in interest rates. It is possible that, during periods of rising interest rates, the risk of default on ARM loans may increase as a result of repricing and the increased required payment from the borrower. Furthermore, because the ARM loans originated by the Savings Bank generally provide, as a marketing incentive, for initial rates of interest below the rates which would apply were the adjustment index plus the applicable margin initially used for pricing, these loans are subject to increased risks of default or delinquency. Another consideration is that although ARM loans allow the Savings Bank to increase the sensitivity of its asset base due to changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. In addition, because the COFI is a lagging market index, upward adjustments on these loans may occur more slowly than increases in the Savings Bank's cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates. Because of these considerations, the Savings Bank has no assurance that yields on ARM loans will be sufficient to offset increases in the Savings Bank's cost of funds. It is the Savings Bank's present policy to lend up to 97% of the lesser of the appraised value of the property or purchase price of the property on conventional loans. Higher loan-to-value ratios are also available on certain government insured programs. The Savings Bank generally requires private mortgage insurance on residential loans with a loan-to-value ratio at origination exceeding 80%. Multi-Family Residential and Commercial Real Estate Lending. Historically, the Savings Bank has originated loans secured by multi-family residential and commercial real estate. At June 30, 1997, the Savings Bank's loan portfolio included $52.6 million in multi-family real estate loans and $47.9 million in commercial real estate loans, or 10.0% and 9.1%, respectively, of total loans receivable. Since 1990, the Savings Bank has de- emphasized this type of lending and does not intend to actively pursue these loans until the Southern California real estate market improves. During this period, the Savings Bank has, however, selectively made multi-family and commercial real estate mortgage loans, including loans to facilitate the sale of real estate owned. At June 30, 1997, the Savings Bank had 107 multi-family and 133 commercial real estate loans in its portfolio, the largest of which was a multi-family real estate loan with a balance of $3.4 million. Multi-family real estate loans originated by the Savings Bank are predominately adjustable rate loans with a term to maturity of 15 years based on a 30-year amortization schedule. Commercial real estate loans originated by the Savings Bank are also predominately adjustable rate loans with a term to maturity of ten years based on a 30-year amortization schedule. Rates on multi-family and commercial ARM loans generally adjust monthly, semi-annually or annually to specified spreads over the COFI, subject to annual payment caps and life-of-loan interest rate caps. At June 30, 1997, $30.8 million, or 58.5%, of the Savings Bank's multi-family loans were secured by five to 36 unit projects, of which $20.5 million, or 39.1%, were located in Riverside or San Bernardino Counties. The Savings Bank's commercial real estate loan portfolio generally consists of loans secured by small office buildings and small retail centers, substantially all of which are located in Southern California. The Savings Bank originates multi-family and commercial real estate loans in amounts ranging from $200,000 to $1.5 million. At June 30, 1997, the Savings Bank had 24 commercial real estate and multi-family loans with principal balances of over $1 million that totaled $40.7 million. Appraisals on properties that secure multi-family real estate loans are performed by an independent appraiser engaged by the Savings Bank before the loan is made. Underwriting of multi-family and commercial loans includes a thorough analysis of the cash flows generated by the real estate to support the debt service and the financial resources, experience, and income level of the borrowers. Multi-family and commercial real estate lending affords the Savings Bank an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by such properties are generally greater in amount, more difficult to evaluate and monitor and are more susceptible to default as a result of general economic conditions and, therefore, involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family and commercial properties are often dependent on the successful operation and management of the properties, repayment of such loans may be impacted by adverse conditions in the real estate market or the economy. At June 30, 1997, approximately $41.1 million, or 78.3%, of the Savings Bank's multi-family loans and approximately $38.4 million, or 80.3%, of the Savings Bank's commercial real estate loans were secured by properties located in Riverside or San Bernardino 6
County. As a result of the recessionary economic conditions that have prevailed in the Savings Bank's lending area in recent years, the Savings Bank has experienced increased delinquencies and charge-offs in these categories of loans. The recent declines in real estate values in the region have been more pronounced with respect to multi-family and commercial real estate. As a result, even though the Savings Bank's multi-family and commercial real estate loans are older and generally are considered by management to be seasoned, there can be no assurance that the current market value of the properties securing these loans equals or exceeds the outstanding loan balance. The Savings Bank seeks to minimize the risks posed by multi-family and commercial real estate lending by originating such loans on a selective basis. At June 30, 1997, the Savings Bank had no multi-family real estate loans and one commercial real estate loan with a balance of $465,000 that were 60 to 89 days past due and two multi-family real estate loans totaling $1.7 million and two commercial real estate loans totaling $960,000 that were delinquent 90 days or more. See also "REGULATION -- Federal Regulation of Savings Associations -- Loans to One Borrower." Construction Lending. The Savings Bank also originates residential construction loans to individuals to build owner-occupied single family homes. At June 30, 1997, the Savings Bank's construction loan portfolio totaled $5.8 million, or 1.1% of total loans receivable. Occasionally, the Savings Bank makes loans to builders for the construction of small subdivisions. Typically, the Savings Bank requires a specific number of presales prior to the commencement of building in an individual phase of the planned development. As of June 30, 1997, the Savings Bank had no subdivision loans outstanding. Individual residential construction loans that are not made in conjunction with the granting of permanent financing of the property are for terms of up to 12 months. Construction lending is generally considered to involve a higher level of risk as compared to one- to four-family residential lending because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of value proves to be inaccurate, the Savings Bank may be confronted at, or prior to, the maturity of the loan, with a project the value of which is insufficient to assure full repayment. Consumer and Other Lending. The Savings Bank originates a variety of consumer loans, including secured second mortgage loans, loans secured by deposit accounts and unsecured loans. Consumer and other lending has traditionally been a small part of the Savings Bank's business. At June 30, 1997, the Savings Bank had $16.7 million, or 3.2% of its total loans receivable in outstanding consumer and other loans. Commercial Business Lending. The Savings Bank has created a business banking department in order to diversify its credit risk and increase the average yield and repricing speed of its interest-earning assets. As of June 30, 1997, commercial loans totaled $991,000, or 0.19% of total loans. These loans represent unsecured lines of credit and term loans secured by business property. The Savings Bank is actively seeking to expand its business banking activities. Mortgage Banking Activities General. Mortgage banking involves the origination and sale of mortgage loans for the purpose of generating income on the sale of loans and fee income. The Savings Bank limits its mortgage banking lending activities to mortgage loans on one- to four-family properties. Mortgage banking generates income primarily from the sale of loans (which may be sold either servicing-retained or servicing-released) and from servicing fees from loans sold on a servicing-retained basis. To a lesser extent, mortgage banking also generates income from origination and loan fees. Generally, the level of loan sale activity and, therefore, its contribution to the Savings Bank's profitability depends on maintaining a sufficient volume of loan originations. Changes in the level of interest rates and the local economy affect the amount of loans originated by the Savings Bank and, thus, the amount of loan sales as well as origination and loan fees earned. Loan Solicitation and Processing. The Savings Bank's mortgage banking operations combine both wholesale and retail loan origination. The Savings Bank's wholesale loan production operation utilizes a network of approximately 600 loan correspondents approved by the Savings Bank who originate and submit loans at a mark-up 7
over the Savings Bank's daily published price. During the years ended June 30, 1997 and 1996, wholesale loan originations accounted for 58.6% and 65.2%, respectively, of loans originated for sale. The Savings Bank maintains two regional wholesale lending offices located in Rancho Cucamonga, California and Las Vegas, Nevada. The Savings Bank's retail loan production operations, which are organized in the Profed Mortgage division of the Savings Bank, utilize loan officers and processors employed by the Savings Bank. The Savings Bank's loan agents generate retail loan originations through referrals from realtors, builders and customers. As of June 30, 1997, Profed Mortgage operated three offices within Savings Bank facilities and seven free standing loan production offices located in Glendora, Laguna Niguel, Rancho Cucamonga, Riverside, Santa Ana and Torrence in Southern California; and in Las Vegas, Nevada. Normally, the cost of originations from retail operations exceeds the cost of wholesale operations due to the burden of additional employees and greater overhead costs. However, the revenue per mortgage for retail originations is generally higher since a portion of the origination fee mark-up is retained by the Savings Bank. Because wholesale loan production tends to decrease more dramatically than retail loan production during periods of higher interest rates, the Savings Bank is seeking to originate a greater proportion of its loans through its retail operations. Further, the Savings Bank believes that it is better able to attract repeat business and to cross-sell other banking services to borrowers generated from its retail loan production operations. The Savings Bank requires evidence of marketable title and lien position from title insurance and appraisals on all properties. The Savings Bank also requires evidence of fire and casualty insurance insuring the value of improvements. As required by federal regulations, the Savings Bank also requires flood insurance to protect the property securing its interest if such property is located in a designated flood area. Loan Commitments and Rate Locks. The Savings Bank issues commitments for residential mortgage loans conditioned upon the occurrence of certain events. Such commitments are made in writing on specified terms and conditions. Interest rate lock-ins are offered to prospective borrowers for up to a 60 day period. The borrower may lock in the rate at any time from application until the time they wish to close the loan. Occasionally, borrowers obtaining financing on new home developments are offered rate lock-ins up to 120 days from application. The Savings Bank had outstanding commitments to originate loans totaling $51.0 million at June 30, 1997. See Note 14 of Notes to Consolidated Financial Statements contained in Item 8 hereof. When the Savings Bank commits to a borrower to lock in an interest rate there is the risk to the Savings Bank that a rise in market interest rates will reduce the value of the mortgage before it can be closed and sold. To control the interest rate risk caused by mortgage banking activities, the Savings Bank uses forward sales agreements and over-the-counter put options related to mortgage-backed securities. See "-- Mortgage Banking Activities -- Hedging Activities." Loan Origination and Other Fees. The Savings Bank generally receives origination points and loan fees. Origination points are a percentage of the principal amount of the mortgage loan which are charged to the borrower for funding the loan. The amount of points charged by the Savings Bank is generally 1% to 2%. Current accounting standards require points and fees received (net of certain loan origination costs) for originating loans to be deferred and amortized into interest income over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid or sold are recognized as income at the time of prepayment or sale. The Savings Bank had $102,000 of net deferred mortgage loan fees at June 30, 1997. Loan Originations, Sales and Purchases. The Savings Bank's mortgage originations include loans insured by the FHA and VA, as well as conventional loans. Except for loans originated for the Savings Bank's portfolio, loans originated through the mortgage banking operations are originated for eventual sale into the secondary market. As such, these loans must meet the origination and underwriting criteria established by the final investors. The Savings Bank sells a large percentage of the mortgage loans that it originates as whole loans to private investors. The Savings Bank also sells conventional whole loans to FNMA and FHLMC through their purchase programs, as well as pooling loans in exchange for mortgage-backed securities guaranteed by FNMA or FHLMC. These securities are then sold through various Wall Street investment firms. In connection with such exchanges, the Savings Bank pays fees to either FNMA or FHLMC who in return guarantee the payment of scheduled principal and interest to security holders. It is the guarantee that enables the Savings Bank to efficiently deliver loans into the secondary market. 8
Conventional mortgage loans originated by the Savings Bank that do not meet FNMA or FHLMC guidelines may be sold to private institutional investors. See "-- Mortgage Banking Activities -- Hedging Activities." The following table shows the Savings Bank's loan originations, repurchases, sales and principal repayments during the periods indicated. Year Ended June 30, ------------------------------- 1997 1996 1995 ---- ---- ---- (In Thousands) Loans originated for sale: Retail originations. . . . . . . . $129,740 $163,411 $ 48,638 Wholesale originations . . . . . . 183,642 305,756 112,842 -------- -------- -------- Total loans originated for sale. . 313,382 469,167 161,480 Loans sold(1): ======== ======== ======== Servicing released . . . . . . . . 341,471 437,917 198,463 Servicing retained . . . . . . . . 1,539 16,127 11,577 -------- -------- -------- Total loans sold. . . . . . . . . 343,010 454,044 210,040 Loans originated for portfolio: ======== ======== ======== Mortgage loans: One- to four-family. . . . . . . 112,310 39,182 78,227 Multi-family . . . . . . . . . . 916 4,631 3,115 Commercial . . . . . . . . . . . 1,562 -- 3,495 Construction . . . . . . . . . . 5,240 90 6,746 Consumer loans . . . . . . . . . 6,160 3,634 2,052 Commercial business lending. . . 2,008 -- -- Other loans. . . . . . . . . . . 232 197 -- -------- -------- -------- Total loans originated for portfolio 128,428 47,734 93,635 Loans repurchased: ======== ======== ======== Mortgage loans: One- to four-family . . . . . . . 2,737 1,176 731 Commercial. . . . . . . . . . . . -- -- 849 -------- -------- -------- Total loans repurchased . . . . 2,737 1,176 1,580 -------- -------- -------- Mortgage loan principal repayments. 60,973 66,379 39,783 Real estate acquired in settlement of loans 7,094 3,967 11,546 Increase (decrease) in other items, net(2) 7,094 2,838 7,498 Net increase (decrease) in loans -------- -------- -------- receivable, net. . . . . . . . . . $ 34,575 $ (3,475) $ 2,824 ======== ======== ======== - -------------------- (1) Includes loans swapped for mortgage-backed securities. (2) Includes net changes in loans in process, discounts on loans and loss reserves. 9
Historically, the Savings Bank had sold a small portion of its mortgage loans on a servicing-released basis. However, since mid-1994, the Savings Bank has sold a larger portion of loans servicing-released in order to increase the sales price of the mortgages and be able to realize a gain on the sale of mortgages. The Savings Bank has determined that it will continue to sell loans servicing-released. Mortgage loans sold to FHLMC and FNMA are sold on a nonrecourse basis whereby foreclosure losses are generally the responsibility of the purchasing agency and not the Savings Bank, except in the case of VA loans used to form Government National Mortgage Association ("GNMA") pools, which are subject to limitations on the VA's loan guarantees. Mortgage loans sold to private investors generally have a limited recourse arrangement varying from three to 12 months after the loan is sold. Generally, the Savings Bank does not purchase loans. Occasionally, the Savings Bank is required to repurchase a loan sold by the Savings Bank to FHLMC, FNMA or private investors if it is determined that the loan does not meet the credit requirements of the investor, or the borrower or other party involved in the loan committed fraud in order to close the loan. Such loans must be repurchased even though they may be performing. During the years ended June 30, 1997, 1996, and 1995, the Savings Bank repurchased single-family mortgage loans, totaling $2.7 million, $1.2 million, and $731,000, respectively. The continued increase in 1997 and 1996 repurchases was largely due to the expansion of FHA/VA mortgage loan production during those years. Loan Servicing. The Savings Bank receives fees from a variety of institutional mortgage owners in return for performing the traditional services of collecting individual payments. At June 30, 1997, the Savings Bank was servicing $530.3 million of loans for others. The Savings Bank's loan servicing portfolio has decreased in recent years primarily because the Savings Bank has sold a larger portion of its loans on a servicing-released basis. So long as the Savings Bank continues to sell most mortgage loans with servicing released, the size of the mortgage servicing portfolio is expected to decrease. Loan servicing includes processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such as private mortgage insurance. When the Savings Bank receives the gross mortgage payment from individual borrowers, it remits to the investor in the mortgage a predetermined net amount based on the yield on that mortgage. Hedging Activities. Mortgage banking involves the risk that a rise in market interest rates will reduce the value of a mortgage before it can be sold. This type of risk often occurs when the Savings Bank commits to a borrower to lock in an interest rate during the origination process and market interest rates increase before the mortgage can be closed and sold. Such interest rate risk also arises when mortgages are placed in the warehouse (i.e., held for sale) without locking in an interest rate for their eventual sale in the secondary market. The Savings Bank seeks to control or limit the interest rate risk caused by mortgage banking activities. The two methods used by the Savings Bank to help reduce interest rate risk from its mortgage banking activities are forward sales agreements and purchases of over-the-counter put options related to mortgage-backed securities. At various times, depending on management's assessment of interest rate movements and other economic conditions, the Savings Bank may reduce or increase its hedging positions. Under forward sales agreements, usually with FNMA, FHLMC or private investors, the Savings Bank is obligated to sell certain dollar amounts of mortgage loans that meet certain underwriting and legal criteria under specific terms before the expiration of the commitment period. These terms include the minimum maturity of loans, the yield to the purchaser, the servicing spread to the Savings Bank (if servicing is retained) and the maximum principal amount of the individual loans. Forward sales of mortgages in the pipeline protect the price of currently processed loans from interest rate fluctuations that may occur from the time the interest rate of the loan is fixed to the time of the sale. The amount of and delivery date of the forward sales commitments is based upon management's estimates as to the volume of loans that will close and the length of the origination commitment. Forward sales do not provide complete interest-rate protection, however, because of the possibility of fallout (i.e., the failure to close) during the origination process. Differences between volume and timing of actual loan originations and management's estimates can expose the Savings Bank to significant losses. If the Savings Bank is not able to deliver the mortgage loans during the appropriate delivery period, the Savings Bank may be required to pay a non-delivery fee or repurchase the delivery commitments at current market prices. Similarly, if the Savings Bank has too many loans to 10
deliver, the Savings Bank must sell additional cash forward commitments at current market prices. Generally, the Savings Bank seeks to maintain forward sales agreements equal to the closed loans held in inventory plus a portion of the loans the Savings Bank has rate locked and/or committed to close where the interest rate is fixed and which are projected to close. The ultimate accuracy of such projections will directly bear upon the amount of interest rate risk incurred by the Savings Bank. To the extent that this strategy is not effective, the Savings Bank could have mark-to-market losses in its loans held for sale portfolio. For the year ended June 30, 1997, the Savings Bank had gains of $3.6 million, respectively, attributable to sales of loans which included hedging gains or losses. At June 30, 1997, the Savings Bank had outstanding commitments to sell loans totaling $22.3 million. See Note 14 of the Notes to Consolidated Financial Statements contained herein. In order to reduce the interest rate risk associated with commitments to originate loans that are in excess of forward sales commitments, the Savings Bank purchases over-the-counter options on treasury bonds and/or mortgage-backed securities. At June 30, 1997, the Savings Bank had no option contracts outstanding. The above activities are managed continually as markets change, however, there can be no assurance that the Savings Bank will be successful in its effort to eliminate the risk of interest rate fluctuation between the time origination commitments are issued and the ultimate sale of the loan. The Savings Bank employs a risk management firm to analyze daily and report the Savings Bank's interest rate risk position with respect to its loan origination and sale activities and to advise the Savings Bank on interest rate movements and interest rate risk management strategies. The Savings Bank's hedging activities are conducted in accordance with a Board approved written policy that covers objectives, functions, instruments to be used, monitoring and internal controls. The Savings Bank does not enter into option positions for trading or speculative purposes and does not enter into options that could generate a financial obligation beyond the initial premium. Delinquencies and Classified Assets Delinquent Loans. When a mortgage loan borrower fails to make a required payment when due, the Savings Bank institutes collection procedures. If the Savings Bank is unsuccessful at curing a delinquency, a property inspection is performed between the 45th day and 60th day of delinquency. In most cases, delinquencies are cured promptly; however, if by the 90th day of delinquency, or sooner if the borrower is chronically delinquent, and all reasonable means of obtaining payment on time have exhausted, foreclosure, according to the terms of the security instrument and applicable law, is initiated. Interest income on loans is reduced by the full amount of accrued and uncollected interest. The Savings Bank's Board of Directors is informed on a monthly basis as to the number and amount of all mortgage loans that are delinquent more than 30 days, the number and amount on all loans currently in foreclosure, and the status of all foreclosed and repossessed property owned by the Savings Bank. The following table sets forth delinquencies in the Savings Bank's loan portfolio as of the dates indicated. 11
<TABLE> At June 30, --------------------------------------------------------------------------- 1997 1996 1995 ------------------------- ----------------------- ------------------------ 60 - 89 90 Days 60 - 89 90 Days 60 - 89 90 Days Days or More Days or More Days or More ----------- ----------- ---------- ---------- ---------- ------------ Prin- Prin- Prin- Prin- Prin- Prin- cipal cipal cipal cipal cipal cipal Num- Bal- Num- Bal- Num- Bal- Num- Bal- Num- Bal- Num- Bal- ber ance ber ance ber ance ber ance ber ance ber ance of of of of of of of of of of of of Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans Loans ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Mortgage loans: One-to four-family 6 $918 30 $3,227 5 $763 18 $2,874 1 $2 8 $1,191 Multifamily. . . -- -- 2 1,725 -- -- 2 387 1 142 -- -- Commercial . . . 1 465 2 960 -- -- -- -- 1 470 2 810 Construction . . -- -- -- -- -- -- -- -- -- -- -- -- Commercial business loans . . . . . -- -- -- -- -- -- -- -- -- -- -- -- Consumer . . . . 1 14 7 201 3 66 4 30 1 114 2 16 Other loans. . . -- -- -- -- -- -- -- -- -- -- -- -- -- ------ -- ------ -- ---- -- ------ -- ---- -- ------ Total . . . . . 8 $1,397 41 $6,113 8 $829 24 $3,291 4 $728 12 $2,017 == ====== == ====== == ==== == ====== == ==== == ====== 12 </TABLE>
The following table sets forth information with respect to the Savings Bank's nonperforming assets and restructured loans within the meaning of SFAS No. 15 at the dates indicated (dollars in thousands). At June 30, --------------------------------------- 1997 1996 1995 1994 1993 Loans accounted for on ---- ---- ---- ---- ---- a non-accrual basis: Mortgage loans: One-to four-family . . $3,667 $3,511 $1,137 $1,616 $2,149 Multi-family . . . . . 1,176 798 142 2,039 950 Commercial . . . . . . 979(1) -- 1,279 864 1,669 Consumer loans. . . . . 150 108 -- 6 4 ------ ------ ------ ------ ------ Total . . . . . . . . 5,972 4,417 2,558 4,525 4,772 Accruing loans which are ------ ------ ------ ------ ------ contractually past due 90 days or more: One- to four-family . . 268 -- -- -- -- Consumer. . . . . . . . 9 -- -- 1 -- ------ ------ ------ ------ ------ Total . . . . . . . . 277 -- -- 1 -- ------ ------ ------ ------ ------ Total nonaccrual and 90 days or more past due loans. . . 6,249 4,417 2,558 4,526 4,772 Foreclosed real estate, net 2,636 2,711 6,784 4,117 4,829 ------ ------ ------ ------ ------ Total nonperforming assets $8,885 $7,128 $ 9,342 $ 8,643 $ 9,601 ====== ====== ======= ======= ======= Restructured loans. . . $4,910 $4,905 $ 3,272 $ 4,015 $ 7,087 ====== ====== ======= ======= ======= Nonaccrual and 90 days or more past due loans as a percentage of loans receivable, net 1.21% 0.98% 0.54% 1.08% 1.18% Nonaccrual and 90 days or more past due loans as a percentage of total assets. . . . 1.02 0.76 0.45 0.78 0.81 Nonperforming assets as a percentage of total assets 1.44 1.22 1.65 1.49 1.63 - ---------------- (1) Includes two restructured loans totaling $835. The Savings Bank assesses loans individually and identifies impairment when the accrual of interest has been discontinued, loans have been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans are currently performing. Factors considered in determining impairment include, but are not limited to, expected future cash flows, the financial condition of the borrower and current economic conditions. The Savings Bank measures each impaired loan based on the fair value of its collateral and charges off those loans or portions of loans deemed uncollectible. 13
Interest income which would have been recorded for the year ended June 30, 1997 had nonaccruing loans been current in accordance with their original terms amounted to approximately $871. The amount of interest included in the results of operations on such loans for the year ended June 30, 1997 amounted to approximately $539,000. Interest income foregone on restructured loans for such periods was not material. Foreclosed and Investment Real Estate. Real estate acquired by the Savings Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid principal balance of the related loan plus foreclosure costs, or market value less cost of sale. Subsequent declines in value are charged to operations. At June 30, 1997, the Savings Bank had $2.6 million, net of allowance for losses of $126,000. Due primarily to continued depressed market conditions for multi-family and commercial properties in Southern California, the Savings Bank established provisions of $306,000 for losses on foreclosed real estate during the year ended June 30, 1997. At June 30, 1997, the Savings Bank's foreclosed real estate was comprised of 24 properties. Investment real estate is carried at the lower of cost or fair market value. All costs of anticipated disposition are considered in the determination of fair value. The Savings Bank had $3.0 million of investment real estate, net of reserves at June 30, 1997, all of which was held by a wholly owned subsidiary. Asset Classification. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as special mention and monitored by the Savings Bank. The aggregate amounts of the Savings Bank's classified assets, including assets designated as special mention, were as follows at the dates indicated (dollars in thousands): At June 30, ----------------- 1997 1996 ---- ---- Doubtful. . . . . . . . . $ -- $ -- Substandard assets 13,062 14,387 Special mention . . . . . 489 4,594 ------- ------- Total . . . . . . . $13,551 $18,981 ======= ======= Total classified assets as of percentage total assets 2.20% 3.25% 14
As set forth below, as of June 30, 1997, assets classified as substandard and special mention included 86 loans and properties totaling approximately $13.6 million. Number of Special Type of Loan/Property Loans Substandard Mention Total - --------------------- ----- ----------- ------- ----- (Dollars in Thousands) One- to four-family . . . 53 $3,725 $ 489 $4,214 Multi-family. . . . . . . 2 1,176 -- 1,176 Commercial real estate. . 7 5,525 -- 5,525 Construction. . . . . . . -- -- -- -- Real estate owned . . . . 24 2,636 -- 2,636 -- ------- ----- ------- Total . . . . . . . . 86 $13,062 $ 489 $13,551 == ======= ===== ======= Not all of the Savings Bank's classified assets are delinquent or nonperforming. In determining whether the Savings Bank's assets expose the Savings Bank to sufficient risk to warrant classification the Savings Bank may consider various factors, including the payment history of the borrower, the loan-to-value ratio, and the debt coverage ratio of the property securing the loan. Upon consideration of these factors, the Savings Bank may determine that the asset in question, though not currently delinquent, presents a risk of loss that requires it to be classified or designated as special mention. In addition, the Savings Bank's loan portfolio includes commercial and multi-family real estate loans with a balance exceeding the current market value of the collateral that are not classified because they are performing and have borrowers who have sufficient resources to support the payment of the loan. Allowance for Loan Losses. The Savings Bank has established a methodology for the determination of provisions for loan losses. The methodology is set forth in a formal policy and takes into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual loans. In originating loans, the Savings Bank recognizes that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The Savings Bank increases its allowance for loan losses by charging provisions for loan losses against the Savings Bank's operations. The general valuation allowance is maintained to cover losses inherent in the portfolio of performing loans. Management reviews the adequacy of the allowance at least quarterly based on an evaluation of the portfolio, past experience, prevailing market conditions and other relevant factors. Specific valuation allowances are established to absorb losses on loans for which full collectibility may not be reasonably assured. The amount of the allowance is based on the estimated value of the collateral securing the loan and other analyses pertinent to each situation. Generally, a provision for losses is charged against operations on a monthly basis as necessary to maintain the allowances at appropriate levels. At June 30, 1997, the Savings Bank had an allowance for loan losses of $5.5 million. Management believes that the amount maintained in the allowance will be adequate to absorb losses inherent in the portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. As a result of declines in local and regional real estate values and the significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as a part of the examinations of such institutions by banking regulators. While the Savings Bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Savings Bank's loan portfolio, will not request the Savings Bank to increase significantly its allowance for loan losses. In addition, because future events affecting borrowers and collateral 15
cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Savings Bank's financial condition and results of operations. The following table sets forth an analysis of the Savings Bank's allowance for loan losses for the periods indicated. Where specific loan loss reserves have been established, any differences between the loss allowances and the amount of loss realized has been charged or credited to current operations (dollars in thousands). Year Ended June 30, ----------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance at beginning of period. . $5,452 $5,085 $3,332 $3,286 $1,839 Recoveries: Mortgage loans: One- to four-family. . . . . . . 11 16 97 53 -- Multi-family . . . . . . . . . . 60 258 145 62 -- Commercial . . . . . . . . . . . 38 315 177 4 -- Other loans. . . . . . . . . . . 27 -- 40 -- -- ------ ------ ------ ------ ------ Total recoveries. . . . . . . . 136 589 459 119 -- Charge-offs: ------ ------ ------ ------ ------ Mortgage loans: One- to four-family. . . . . . . 457 214 772 438 200 Multi-family . . . . . . . . . . 609 934 1,589 1,112 -- Commercial . . . . . . . . . . . 309 1,335 1,101 540 -- Consumer loans . . . . . . . . . -- -- 17 3 5 Other loans. . . . . . . . . . . 2 -- 14 13 3 ------ ------ ------ ------ ------ Total charge-offs . . . . . . . 1,377 2,483 3,493 2,106 208 ------ ------ ------ ------ ------ Net loan charge-offs (recoveries) 1,241 1,894 3,034 1,987 208 Provision for loan losses . . . . 1,254 2,261 4,787 2,033 1,655 ------ ------ ------ ------ ------ Balance at end of period. . . . . $5,465 $5,452 $5,085 $3,332 $3,286 ====== ====== ====== ====== ====== Allowance for loan losses as a percentage of gross loans receivable . . . . . . . . 1.04% 1.18% 1.06% 0.78% 0.79% Net loan charge-offs (recoveries) as a percentage of average loans outstanding during the period. . . . . . . . 0.25 0.38 0.62 0.39 0.04 Allowance for loan losses as a percentage of nonperforming loans at end of period . . . . . 87.45 123.43 198.79 73.62 68.86 16
<TABLE> The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category. At June 30, ------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ---------------- --------------- ----------------- ---------------- ---------------- % of % of % of % of % of Loans Loans Loans Loans Loans in Each in Each in Each in Each in Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Mortgage loans: One- to four-family 863 76.40% $ 930 70.77% $ 661 71.59% $ 470 64.94% $444 57.76 Multi-family . . . 935 9.98 1,532 11.76 1,030 11.11 1,140 14.88 516 16.02 Commercial . . . . 1,542 9.09 2,848 11.84 2,587 12.76 1,271 14.87 1,525 16.51 Construction . . . 7 1.10 28 2.21 13 1.23 25 1.01 42 2.83 Consumer loans. . . 114 3.18 112 3.35 108 3.28 126 4.25 171 6.78 Commercial business lending. . . . . . -- 0.19 -- -- -- -- -- -- -- -- Other loans . . . . 2 0.06 2 0.07 1 0.03 2 0.05 3 0.10 Unallocated . . . . 2,002 N/A -- N/A 685 N/A 298 N/A 585 N/A Total allowance for ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ loan losses . . . $5,465 100.00% $5,452 100.00% $5,085 100.00% $3,332 100.00% $3,286 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== 17 </TABLE>
Investment Activities Federally chartered savings institutions are permitted under federal and state laws to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the FHLB, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest a portion of their assets in commercial paper and corporate debt securities. Savings institutions like the Savings Bank are also required to maintain an investment in FHLB stock. In addition, the Savings Bank is required to maintain minimum levels of investments that qualify as liquid assets under OTS regulations. See "REGULATION" and "Liquidity and Capital Resources" in Item 7 of this Report. At June 30, 1997, the Savings Bank's regulatory liquidity was 6.77%, which is in excess of the 5.0% required by OTS regulations. The investment policy of the Savings Bank, established by the Board of Directors and implemented by the Savings Bank's asset/liability committee, seeks to provide and maintain adequate liquidity, complement the Savings Bank's lending activities, and generate a favorable return on investments without incurring undue interest and credit risk. The Savings Bank's policies, which are more restrictive than OTS regulations allow, generally limit investments to U.S. Government and agency securities, federal funds, U.S. Government sponsored agency issued mortgage-backed securities, bankers' acceptances and commercial paper. Bankers' acceptances must be issued by insured institutions, be eligible for rediscount at the Federal Reserve Bank and be rated in one of the two highest categories by a nationally recognized investment rating firm. Commercial paper issuers must be rated in one of the two highest categories by two nationally recognized investment rating firms. Investments are made based on certain considerations, which include the interest rate, yield, settlement date and maturity of the investment, the Savings Bank's liquidity position, and anticipated cash needs and sources (which in turn include outstanding commitments, upcoming maturities, estimated deposits and anticipated loan amortization and repayments). The effect that the proposed investment would have on the Savings Bank's risk-based capital is also considered during the evaluation. At June 30, 1997, the Corporation's investment securities portfolio totaled $33.6 million at amortized cost and consisted of U.S. Government and federal agency obligations. Only the Savings Bank's investment in FNMA and FHLMC stock was available for sale, all other securities were classified as held to maturity. 18
<TABLE> The following table sets forth the composition of the Savings Bank's investment portfolio at the dates indicated. At June 30, --------------------------------------------------------------------------------- 1997 1996 1995 -------------------------- ------------------------- -------------------------- Estimated Estimated Estimated Amortized Market Amortized Market Amortized Market Cost Value Percent Cost Value Percent Cost Value Percent (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Investment securities available for sale(1) 21 761 0.06% 21 -- 0.08% 21 -- 0.10% Investment securities held to maturity U.S. Government and agency obligations. . . . 32,555 32,570 96.70 $24,973 $24,977 92.02 $18,910 $18,913 94.14 Corporate securities(2). . . 998 1,000 2.97 2,000 1,992 7.37 990 978 4.93 Other(3). . . . . . 92 94 .27 145 143 0.53 167 188 0.83 Total investment ------- ------- ------ ------- ------- ------ ------- ------- ------ portfolio . . . . $33,666 $34,425 100.00% $27,139 $27,112 100.00% $20,088 $20,079 100.00% ======= ======= ====== ======= ======= ====== ======= ======= ====== _____________________ (1) Consists of FHLMC and FNMA stock (1) Consists of bankers' acceptances (2) Consists of mortgage-backed securities. </TABLE>
The following table sets forth the maturities and weighted average yields of the debt securities in the Savings Bank's securities portfolio at June 30, 1997. Due in Due Due One Year After One to After or Less Five Years Five Years Total ------------- -------------- ------------ ------------ Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) U.S. Government and federal agency obligations . . . $22,064 5.68% $10,490 6.09% -- -- $33,554 5.81% Corporate securities 999 5.25 -- -- -- -- 999 5.25 Other. . . . . . . 33 6.00 -- -- $59 8.43% 92 7.56 ------- ------- --- ------- Total . . . . $23,096 5.66 $10,490 6.09 $59 8.43 $33,645 5.80 ======= ======= === ======= Deposit Activities and Other Sources of Funds General. Deposits, loan repayments and the proceeds from loan sales are the major sources of the Savings Bank's funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. Loan sales are also influenced significantly by general interest rates. Borrowings through the FHLB-San Francisco and repurchase agreements may also be used on a short-term basis to compensate for reductions in the availability of funds from other sources. Presently, the Savings Bank has no other borrowing arrangements. Deposit Accounts. Substantially all of the Savings Bank's depositors are residents of the State of California. Deposits are attracted from within the Savings Bank's market area through the offering of a broad selection of deposit instruments, including checking accounts, money market deposit accounts, regular savings accounts and certificates of deposit. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Savings Bank considers current market interest rates, profitability to the Savings Bank, matching deposit and loan products and its customer preferences and concerns. Generally, the Savings Bank's deposit rates are close to the median rates of its peer group of competitors. The Savings Bank may occasionally pay above-market interest rates to attract and/or retain deposits when less expensive sources of funds are not available. The Savings Bank may also pay above-market rates in specific markets in order to increase the deposit base of a particular office or group of 19
offices. The Savings Bank does not generally accept brokered deposits. The Savings Bank reviews its deposit mix and pricing weekly. The Savings Bank currently offers certificates of deposit for terms not exceeding 60 months. As illustrated in the following table, certificates of deposit accounted for 68.9% of the Savings Bank's deposit portfolio at June 30, 1997. The Savings Bank intends to attempt to reduce the overall cost of its deposit portfolio by increasing its consumer checking account base and by expanding into business banking. See, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in Item 7 of this Report. 20
The following table sets forth information concerning the Savings Bank's time deposits and other interest-bearing deposits at June 30, 1997. Weighted Per- Average centage Interest Checking and Minimum of Total Rate Term Savings Deposits Amount Balance Deposits - ---- ---- ---------------- ------ ------- -------- (In Thousands) Savings Accounts 2.60 N/A Basic savings $ 10 $31,822 6.25% 2.58 N/A Savings Plus 100 14,076 2.77 NOW Accounts 1.00 N/A Value checking -- 22,803 4.48 - -- N/A Commercial checking -- 3,579 0.70 Money Market Deposit Accounts ----------------------------- 4.41 N/A Asset management -- 75,924 14.92 1.09 N/A Checking plus -- 10,071 1.98 Certificates of Deposit ----------------------- 4.82 18-42 Months Variable CD 500 2,833 0.56 4.52 90 Days or Less Fixed term, fixed rate 1,000 5,354 1.05 5.22 6-7 Months Fixed-term, fixed rate 1,000 52,520 10.32 5.58 9 Months Fixed-term, fixed rate 1,000 20,431 4.02 5.70 1 Year Fixed-term, fixed rate 1,000 109,580 21.54 5.73 15 Months Fixed-term, fixed rate 10,000 72,067 14.17 5.63 2 Years Fixed-term, fixed rate 1,000 31,181 6.13 5.71 3 Years Fixed-term, fixed rate 1,000 8,036 1.58 5.23 4 Years Fixed-term, fixed rate 1,000 2,775 0.55 7.71 5 Years Fixed-term, Compounded Certificate 1,000 44,708 8.78 5.54 Negotiable Jumbo-negotiable rate 100,000 900 0.18 5.70 Negotiable Mini-jumbo 50,000 99 0.02 -------- ------ 4.82% $508,759 100.00% ======== ====== The following table indicates the amount of the Savings Bank's certificates of deposit in amounts of $100,000 or more by time remaining until maturity as of June 30, 1997. Maturity Period Amount --------------- ------ (In Thousands) Three months or less. . . . . . $15,875 Over three through six months . 18,032 Over six through 12 months. . . 22,215 Over 12 months. . . . . . . . . 12,426 ------- Total. . . . . . . . . . . $68,548 ======= 21
Deposit Flow. The following table sets forth the balances (inclusive of interest credited) and changes in dollar amount of deposits in the various types of accounts offered by the Savings Bank at and between the dates indicated. At June 30, ---------------------------------------------------------------- 1997 1996 1995 ------------------------- ------------------------ ------------- Percent Percent Percent of Increase of Increase of Amount Total (Decrease) Amount Total (Decrease) Amount Total ------ ----- ---------- ------ ----- ---------- ------ ----- Non- interest- bearing $2,335 .46% $721 $1,614 0.43% $(1,173) $ 2,787 0.57% NOW checking 24,047 4.73% 3,317 20,730 4.32% 1,201 19,529 4.01% Regular savings accounts 45,898 9.02% (6,954) 52,852 10.94% 2,002 50,850 10.45% Money market deposit 85,996 16.9% 2,898 83,098 17.30% (9,093) 92,191 18.95% Fixed-rate certificates which mature: Within 1 year 286,066 56.23% 35,934 250,132 52.19% 12,053 238,079 48.93% After 1 year, but within 2 years 36,557 7.18% (4,102) 40,659 8.49% 3,773 36,886 7.58% After 2 years, but within 5 years 24,906 4.9% (1,702) 26,608 5.57% (13,031) 39,639 8.15% After 5 years 121 0.02% 9 112 0.02% 9 103 0.02% Other 2,833 0.56% (736) 3,569 0.74% (2,952) 6,521 1.34% -------- ------ ------- -------- ------ ------- -------- ------ Total $508,759 100.00% $29,385 $479,374 100.00% $(7,211) $486,585 100.00% ======== ====== ======= ======== ====== ======= ======== ====== Time Deposits by Rates. The following table sets forth the time deposits in the Savings Bank categorized by rates at the dates indicated. At June 30 ---------------------------------- 1997 1996 1995 ---- ---- ---- (In Thousands) Below 3.00% $ 164 $ 504 $ 828 3.00 - 4.49% 3,333 4,617 45,604 4.50 - 5.49% 119,452 224,224 79,797 5.50 - 6.49% 223,525 79,626 146,847 6.50 - 7.49% 3,657 11,537 46,869 Over 7.50% 352 573 1,284 --------- -------- -------- Total $350,483 $321,081 $321,229 ======== ======== ======== 22
Time Deposits by Maturities. The following table sets forth the amount and maturities of time deposits at June 30, 1997. Amount Due --------------------------------------------------------- Less Than 1-2 2-3 3-4 After One Year Years Years Years 4 Years Total -------- ----- ----- ----- ------- ----- (In Thousands) Below 3.00% . . 164 -- -- -- -- 164 3.00 - 4.49%. . 3,319 14 -- -- -- 3,333 4.50 - 5.49%. . 102,992 13,037 1,426 1,987 10 119,452 5.50 - 6.49%. . 180,306 23,616 10,961 1,268 7,374 223,525 6.50 - 7.49%. . 1,293 381 889 -- 1,094 3,657 Over 7.50%. . . 104 125 2 -- 121 352 -------- ------- ------- ------ ------ -------- Total $288,178 $37,173 $13,278 $3,255 $8,599 $350,483 ======== ======= ======= ====== ====== ======== Deposit Activity. The following table sets forth the deposit activities of the Savings Bank for the periods indicated. Year Ended June 30, ------------------------------ 1997 1996 1995 ---- ---- ---- (In Thousands) Beginning balance. . . . . . $479,374 $486,585 $471,787 Net deposits (withdrawals) before interest credited 9,128 (28,350) (3,707) Interest credited. . . . . . 20,257 21,139 18,505 Net increase (decrease) in deposits. . . . . . . . . . 29,385 (7,211) 14,798 -------- -------- -------- Ending balance . . . . . . . $508,759 $479,374 $486,585 ======== ======== ======== Borrowings. The FHLB-San Francisco functions as a central reserve bank providing credit for savings institutions and certain other member financial institutions. As a member, the Savings Bank is required to own capital stock in the FHLB-San Francisco and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. The Savings Bank utilizes advances from the FHLB-San Francisco as an alternative to retail deposits to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB-San Francisco has, from time to time, served as the Savings Bank's primary borrowing 23
source. Advances from the FHLB-San Francisco are typically secured by the Savings Bank's first mortgage loans. At June 30, 1997, the Savings Bank had $6.8 million of borrowings from the FHLB-San Francisco at a weighted average rate of 5.82%. Such borrowings mature between 1997 and 2003. The following tables sets forth certain information regarding borrowings by the Savings Bank at the dates and for the periods indicated: At June 30, ------------------------- 1997 1996 1995 ---- ---- ---- Balance outstanding at end of period: Securities sold under agreements to repurchase. . . . . . . . . . . . . . . . . -- -- $ 1,985 FHLB advances. . . . . . . . . . . . . . . . $6,828 $8,578 33,078 Weighted average rate paid on: Securities sold under agreements to repurchase. . . . . . . . . . . . . . . . . -- -- 6.15% FHLB advances. . . . . . . . . . . . . . . . 5.82% 6.10% 6.56% Year Ended June 30 ------------------------- 1997 1996 1995 ---- ---- ---- Maximum amount of borrowings outstanding at any month end: Securities sold under agreements to repurchase. . . . . . . . . . . . . . . . . -- -- $15,119 FHLB advances . . . . . . . . . . . . . . . $8,578 $25,578 $33,078 Approximate average short-term borrowings outstanding with respect to: Securities sold under agreements to repurchase. . . . . . . . . . . . . . . . . -- -- $2,678 FHLB advances. . . . . . . . . . . . . . . . 7,098 $20,354 $21,655 Approximate average short-term borrowings outstanding with respect to: Securities sold under agreements to repurchase. . . . . . . . . . . . . . . . . -- -- 4.91% FHLB advances. . . . . . . . . . . . . . . . 5.87% 6.16% 4.94% Subsidiary Activities Federal savings associations generally may invest up to 3% of their assets in service corporations, provided that at least one-half of any amount in excess of 1% is used primarily for community, inner-city and community development projects. The Savings Bank's investment in its service corporations did not exceed these limits at June 30, 1997. The Savings Bank has three wholly owned subsidiaries: Profed Mortgage, Inc., Provident Financial Corp. ("Provident Financial") and First Service Corporation ("First Service"). Provident Financial participated in a number of real estate joint ventures in the 1980s, with the last joint ventures entered into in 1989. The final joint venture was concluded with the sale of the remaining land in July 1995. Provident Financial's current activities include: (i) acting as trustee for the Savings Bank's real estate transactions, (ii) engaging in annuity sales and providing brokerage 24
services at branch offices of the Savings Bank, (iii) selling property and life insurance, primarily to Savings Bank customers, and (iv) holding real estate for investment. The real estate held for investment by Provident Financial at June 30, 1997 totaled $3.0 million. Profed Mortgage, Inc., which formerly contained the Savings Bank's mortgage banking activities that are currently conducted by the Savings Bank's Profed Mortgage division, and First Service are currently inactive. At June 30, 1997, the Savings Bank's investment in its subsidiaries was $4.5 million. REGULATION General The Savings Bank is subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of its deposits. The activities of federal savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements. In addition, the Savings Bank's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Savings Bank's mortgage documents. The Savings Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to review the Savings Bank's compliance with various regulatory requirements. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Corporation, the Savings Bank and their operations. The Corporation, as a savings and loan holding company, is also required to file certain reports with, and otherwise comply with the rules and regulations of, the OTS. Federal Regulation of Savings Associations Office of Thrift Supervision. The OTS is an office in the Department of the Treasury subject to the general oversight of the Secretary of the Treasury. The OTS generally possesses the supervisory and regulatory duties and responsibilities formerly vested in the Federal Home Loan Bank Board. Among other functions, the OTS issues and enforces regulations affecting federally insured savings associations and regularly examines these institutions. Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs carry out their housing finance mission; ensure that the FHLBs remain adequately capitalized and able to raise funds in the capital markets; and ensure that the FHLBs operate in a safe and sound manner. The Savings Bank, as a member of the FHLB-San Francisco, is required to acquire and hold shares of capital stock in the FHLB-San Francisco in an amount equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-San Francisco. The Savings Bank is in compliance with this requirement with an investment in FHLB-San Francisco stock of $4.9 million at June 30, 1997. Federal Deposit Insurance Corporation. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. In 1989 the FDIC also became the insurer, up to the prescribed limits, of the deposit accounts held at federally insured savings associations and established two separate insurance funds: the BIF 25
and the SAIF. As insurer of deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations. The Savings Bank's accounts are insured by the SAIF. The FDIC insures deposits at the Savings Bank to the maximum extent permitted by law. The Savings Bank currently pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups which are based solely on the level of an institution's capital --"well capitalized," "adequately capitalized," and "undercapitalized" - -- which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of the FDIA, as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates that from September 30, 1996 ranged from 0.23% of insured deposits for well capitalized, financially sound institutions with only a few minor weaknesses to 0.31% of insured deposits for undercapitalized institutions that pose a substantial risk of loss to the SAIF unless effective corrective action is taken. Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted on September 30, 1996, the FDIC imposed a special assessment on each depository institution with SAIF-assessable deposits which resulted in the SAIF achieving its designated reserve ratio. In connection therewith, the FDIC reduced the assessment schedule for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with most institutions, including the Savings Bank, paying 0%. This assessment schedule is the same as that for the BIF, which reached its designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF members are charged an assessment of 0.065% of SAIF assessable deposits for the purpose of paying interest on the obligations issued by the Financing Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be charged an assessment to help pay interest on the FICO bonds at a rate of approximately 0.013% until the earlier of December 31, 1999 or the date upon which the last savings association ceases to exist, after which time the assessment will be the same for all insured deposits. The DIF Act provides for the merger of the BIF and the SAIF into the Deposit Insurance Fund on January 1, 1999, but only if no insured depository institution is a savings association on that date. The DIF Act contemplates the development of a common charter for all federally chartered depository institutions and the abolition of separate charters for national banks and federal savings associations. It is not known what form the common charter may take and what effect, if any, the adoption of a new charter would have on the operation of the Savings Bank. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which could result in termination of the deposit insurance of the Savings Bank. Liquidity Requirements. Under OTS regulations, each savings institution is required to maintain an average daily balance of liquid assets (cash, certain time deposits and savings accounts, bankers' acceptances, and specified U.S. Government, state or federal agency obligations and certain other investments) equal to a monthly average of not less than a specified percentage (currently 5.0%) of its net withdrawable accounts plus short-term borrowings. OTS regulations also require each savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1.0%) of the total of its net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources" in Item 7 of this Report. 26 PAGE
Prompt Corrective Action. Under the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action. Under the regulations, an institution shall be deemed to be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized;" (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. A federal banking agency may, after notice and an opportunity for a hearing, reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or has received in its most recent examination, and has not corrected, a less than satisfactory rating for asset quality, management, earnings or liquidity. (The OTS may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized.) An institution generally must file a written capital restoration plan which meets specified requirements, as well as a performance guaranty by each company that controls the institution, with the appropriate federal banking agency within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. Immediately upon becoming undercapitalized, an institution shall become subject to various mandatory and discretionary restrictions on its operations. At June 30, 1997, the Savings Bank was categorized as "well capitalized" under the prompt corrective action regulations of the OTS. Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that the Savings Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Savings Bank to submit to the agency an acceptable plan to achieve compliance with the standard. OTS regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Qualified Thrift Lender Test. All savings associations are required to meet a qualified thrift lender ("QTL") test set forth in Section 10(m) of the HOLA and regulations of the OTS thereunder to avoid certain restrictions on their operations. A savings institution that fails to become or remain a QTL shall either become a national bank or be subject to the following restrictions on its operations: (i) the association may not make any new investment or engage in activities that would not be permissible for national banks; (ii) the association may not establish any new branch office where a national bank located in the savings institution's home state would not be able to establish a branch office; (iii) the association shall be ineligible to obtain new advances from any FHLB; and (iv) the payment of dividends by the association shall be subject to the rules regarding the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings institution ceases to be a QTL, the savings institution would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank and would be required to repay any outstanding advances to any 27
FHLB. In addition, within one year of the date on which a savings association controlled by a company ceases to be a QTL, the company must register as a bank holding company and become subject to the rules applicable to such companies. A savings institution may requalify as a QTL if it thereafter complies with the QTL test. Currently, the QTL test requires that either an institution qualify as a domestic building and loan association under the Internal Revenue Code or that 65% of an institution's "portfolio assets" (as defined) consist of certain housing and consumer-related assets on a monthly average basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); FHLB stock; direct or indirect obligations of the FDIC; and loans for educational purposes, loans to small business and loans made through credit cards. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution's portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination; 100% of consumer and educational loans (limited to 10% of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business, and (iii) liquid assets up to 20% of the institution's total assets. At June 30, 1997, the qualified thrift investments of the Savings Bank were approximately 93.8% of its portfolio assets. Capital Requirements. Under OTS regulations a savings association must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. The Corporation is not subject to any minimum capital requirements. OTS capital regulations establish a 3% core capital or leverage ratio (defined as the ratio of core capital to adjusted total assets). Core capital is defined to include common stockholders' equity, noncumulative perpetual preferred stock and any related surplus, and minority interests in equity accounts of consolidated subsidiaries, less (i) any intangible assets, except for certain qualifying intangible assets; (ii) certain mortgage servicing rights; and (iii) equity and debt investments in subsidiaries that are not "includable subsidiaries," which is defined as subsidiaries engaged solely in activities not impermissible for a national bank, engaged in activities impermissible for a national bank but only as an agent for its customers, or engaged solely in mortgage-banking activities. In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to account appropriately for the investments in and assets of both includable and nonincludable subsidiaries. Institutions that fail to meet the core capital requirement would be required to file with the OTS a capital plan that details the steps they will take to reach compliance. In addition, the OTS's prompt corrective action regulation provides that a savings institution that has a leverage ratio of less than 4% (3% for institutions receiving the highest CAMEL examination rating) will be deemed to be "undercapitalized" and may be subject to certain restrictions. See "-- Federal Regulation of Savings Associations -- Prompt Corrective Action." Savings associations also must maintain "tangible capital" not less than 1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is defined, generally, as core capital minus any "intangible assets" other than purchased mortgage servicing rights. Each savings institution must maintain total risk-based capital equal to at least 8% of risk-weighted assets. Total risk-based capital consists of the sum of core and supplementary capital, provided that supplementary capital cannot exceed core capital, as previously defined. Supplementary capital includes (i) permanent capital instruments such as cumulative perpetual preferred stock, perpetual subordinated debt, and mandatory convertible subordinated debt, (ii) maturing capital instruments such as subordinated debt, intermediate-term preferred stock and mandatory convertible subordinated debt, and (iii) general valuation loan and lease loss allowances up to 1.25% of risk-weighted assets. 28
The risk-based capital regulation assigns each balance sheet asset held by a savings institution to one of four risk categories based on the amount of credit risk associated with that particular class of assets. Assets not included for purposes of calculating capital are not included in calculating risk-weighted assets. The categories range from 0% for cash and securities that are backed by the full faith and credit of the U.S. Government to 100% for repossessed assets or assets more than 90 days past due. Qualifying residential mortgage loans (including multi-family mortgage loans) are assigned a 50% risk weight. Consumer, commercial, home equity and residential construction loans are assigned a 100% risk weight, as are nonqualifying residential mortgage loans and that portion of land loans and nonresidential construction loans which do not exceed an 80% loan-to-value ratio. The book value of assets in each category is multiplied by the weighing factor (from 0% to 100%) assigned to that category. These products are then totalled to arrive at total risk-weighted assets. Off-balance sheet items are included in risk-weighted assets by converting them to an approximate balance sheet "credit equivalent amount" based on a conversion schedule. These credit equivalent amounts are then assigned to risk categories in the same manner as balance sheet assets and included risk-weighted assets. The OTS has incorporated an interest rate risk component into its regulatory capital rule. Under the rule, savings associations with "above normal" interest rate risk exposure would be subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. A savings association whose measured interest rate risk exposure exceeds 2% must deduct an interest rate risk component in calculating its total capital under the risk-based capital rule. The interest rate risk component is an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. The rule also provides that the Director of the OTS may waive or defer an association's interest rate risk component on a case-by-case basis. Under certain circumstances, a savings association may request an adjustment to its interest rate risk component if it believes that the OTS-calculated interest rate risk component overstates its interest rate risk exposure. In addition, certain "well-capitalized" institutions may obtain authorization to use their own interest rate risk model to calculate their interest rate risk component in lieu of the OTS-calculated amount. The OTS has postponed the date that the component will first be deducted from an institution's total capital. At June 30, 1997, the Savings Bank's core capital of approximately $58.4 million, or 9.9% of adjusted total assets, was $28.9 million in excess of the OTS requirement of $29.5 million, or 5% of adjusted total assets. As of such date, the Savings Bank's tangible capital of approximately $58.4 million, or 9.9% of adjusted total assets, was $34.8 million in excess of the OTS requirement of $23.6 million, or 4.0% of adjusted total assets. Finally, at June 30, 1997, the Savings Bank had risk-based capital of approximately $63.3 million or 16.1% of total risk-weighted assets, which was $24.0 million in excess of the OTS risk-based capital requirement of $39.3 million or 10% of risk-weighted assets. Limitations on Capital Distributions. Ots regulations impose uniform limitations on the ability of all savings associations to engage in various distributions of capital such as dividends, stock repurchases and cash-out mergers. In addition, OTS regulations require the Savings Bank to give the OTS 30 days' advance notice of any proposed declaration of dividends, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends. The regulation utilizes a three-tiered approach which permits various levels of distributions based primarily upon a savings association's capital level. A Tier 1 savings association has capital in excess of its fully phased-in capital requirement (both before and after the proposed capital distribution). A Tier 1 savings association may make (without application but upon prior notice to, and no objection made by, the OTS) capital distributions during a calendar years up to 100% of its net 29
income to date during the calendar year plus one-half its surplus capital ratio (i.e., the amount of capital in excess of its fully phased-in requirement) at the beginning of the calendar year or the amount authorized for a Tier 2 association. Capital distributions in excess of such amount require advance notice to the OTS. A Tier 2 savings association has capital equal to or in excess of its minimum capital requirement but below its fully phased-in capital requirement (both before and after the proposed capital distribution). Such an association may make (without application) capital distributions up to an amount equal to 75% of its net income during the previous four quarters depending on how close the association is to meeting its fully phased-in capital requirement. Capital distributions exceeding this amount require prior OTS approval. Tier 3 associations are savings associations with capital below the minimum capital requirement (either before or after the proposed capital distribution). Tier 3 associations may not make any capital distributions without prior approval from the OTS. The Savings Bank is currently meeting the criteria to be designated a Tier 1 association and, consequently, could at its option (after prior notice to, and no objection made by, the OTS) distribute up to 100% of its net income during the calendar year plus 50% of its surplus capital ratio at the beginning of the calendar year less any distributions previously paid during the year. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limit on loans to one borrower. Generally, this limit is 15% of the Savings Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. The OTS by regulation has amended the loans to one borrower rule to permit savings associations meeting certain requirements, including capital requirements, to extend loans to one borrower in additional amounts under circumstances limited essentially to loans to develop or complete residential housing units. At June 30, 1997, the Savings Bank's limit on loans to one borrower was $10.5 million. At June 30, 1997, the Savings Bank's largest aggregate amount of loans to one borrower was $4.9 million. Activities of Thrift Institutions and Their Subsidiaries. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly. Transactions with Affiliates. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B") relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. A savings and loan holding company, its subsidiaries and any other company under common control are considered affiliates of the subsidiary savings association under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which the insured association or its subsidiaries may engage in certain covered transactions with an affiliate to an amount equal to 10% of such institution's capital and surplus and place an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, the purchase of assets, the issuance of a guaranty and similar types of transactions. 30
Three additional rules apply to savings associations: (i) a savings association may not make any loan or other extension of credit to an affiliate unless that affiliate is engaged only in activities permissible for bank holding companies; (ii) a savings association may not purchase or invest in securities issued by an affiliate (other than securities of a subsidiary); and (iii) the OTS may, for reasons of safety and soundness, impose more stringent restrictions on savings associations but may not exempt transactions from or otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by the Federal Reserve Board, as is currently the case with respect to all FDIC-insured banks. The Savings Bank has not been significantly affected by the rules regarding transactions with affiliates. The Savings Bank's authority to extend credit to executive officers, directors and 10% shareholders, as well as entities controlled by such persons, is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O thereunder. Among other things, these regulations require that such loans be made on terms and conditions substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. Regulation O also places individual and aggregate limits on the amount of loans the Savings Bank may make to such persons based, in part, on the Savings Bank's capital position, and requires certain board approval procedures to be followed. The OTS regulations, with certain minor variances, apply Regulation O to savings institutions. Savings and Loan Holding Company Regulation Holding Company Acquisitions. The HOLA and OTS regulations issued thereunder generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof. They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS. Holding Company Activities. As a unitary savings and loan holding company, the Corporation generally is not subject to activity restrictions. If the Corporation acquires control of another savings association as a separate subsidiary other than in a supervisory acquisition, it would become a multiple savings and loan holding company. There generally are more restrictions on the activities of a multiple savings and loan holding company than on those of a unitary savings and loan holding company. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not an insured association shall commence or continue for more than two years after becoming a multiple savings and loan association holding company or subsidiary thereof, any business activity other than: (i) furnishing or performing management services for a subsidiary insured institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary insured institution, (iv) holding or managing properties used or occupied by a subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the OTS by regulation, prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above also must be approved by the OTS prior to being engaged in by a multiple holding company. Qualified Thrift Lender Test. The HOLA requires any savings and loan holding company that controls a savings association that fails the QTL test, as explained under "-- Federal Regulation of Savings Associations -- Qualified Thrift Lender Test," must, within one year after the date on which the association ceases to be a QTL, register as and be deemed a bank holding company subject to all applicable laws and regulations. 31
TAXATION Federal Taxation General. The Corporation and the Savings Bank report their income on a fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Savings Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Savings Bank or the Corporation. Tax Bad Debt Reserves. For taxable years beginning prior to January 1, 1996, savings institutions such as the Savings Bank which met certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, have been deducted in arriving at their taxable income. The Savings Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, may have been computed using an amount based on the Savings Bank's actual loss experience, or a percentage equal to 8% of the Savings Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the nonqualifying reserve. The Savings Bank's deduction with respect to nonqualifying loans was computed under the experience method, which essentially allows a deduction based on the Savings Bank's actual loss experience over a period of several years. Each year the Savings Bank selected the most favorable way to calculate the deduction attributable to an addition to the tax bad debt reserve. The Savings Bank used the experience method bad debt deduction for the taxable years ended June 30, 1997, 1996 and 1995. Recently enacted legislation repealed the reserve method of accounting for bad debt reserves for tax years beginning after December 31, 1995. As result, the Savings Bank is no longer able to calculate its deduction for bad debts using the percentage-of-taxable-income method or the experience method. Instead, the Savings Bank will be required to compute its deduction based on specific charge-offs during the taxable year. This legislation also requires savings associations to recapture into taxable income over a six-year period their post-1987 additions to their bad debt tax reserves, thereby generating additional tax liability. As of the effective date of the legislation, the Savings Bank had no post-1987 additions to its bad debt tax reserves. Under prior law, if the Savings Bank failed to satisfy the qualifying thrift definitional tests in any taxable year, it would have been unable to make additions to its bad debt reserve. Instead, the Savings Bank would have been required to deduct bad debts as they occurred and would have additionally been required to recapture its bad debt reserve deductions ratably over a multi-year period. At June 30, 1997, the Savings Bank's total bad debt reserve for tax purposes was approximately $7.7 million. Among other things, the qualifying thrift definitional tests required the Savings Bank to hold at least 60% of its assets as "qualifying assets." Qualifying assets generally include cash, obligations of the United States or any agency or instrumentality thereof, certain obligations of a state or political subdivision thereof, loans secured by interests in improved residential real property or by savings accounts, student loans and property used by the Savings Bank in the conduct of its banking business. Under current law, a savings association will not be required to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying thrift definitional tests. Distributions. To the extent that the Savings Bank makes "nondividend distributions" to the Corporation that are considered as made: (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method; or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Savings Bank's taxable income. Nondividend distributions include distributions in excess of the Savings Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Savings Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Savings Bank's bad debt reserve. Thus, any dividends to the Corporation that would reduce 32
amounts appropriated to the Savings Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Savings Bank. The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, after the Conversion, the Savings Bank makes a "nondividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes). See "REGULATION" for limits on the payment of dividends by the Savings Bank. The Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve. Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Savings Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Savings Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. Other Matters. There have not been any IRS audits of the Savings Bank's federal income tax returns during the past five years. The Savings Bank has been audited by the California Franchise Tax Board through tax year 1990. State Taxation California. The California franchise tax rate applicable to the Savings Bank equals the franchise tax rate applicable to corporations generally, plus an "in lieu" rate of 2%, which is approximately equal to personal property taxes and business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the Savings Bank). At June 30, 1997, the total tax rate was 11%. Bad debt deductions are available in computing California franchise taxes using the specific charge-off method. The Savings Bank and its California subsidiaries file California state franchise tax returns on a combined basis. The Corporation will be treated as a general corporation subject to the general corporate tax rate. Delaware. As a Delaware holding company not earning income in Delaware, the Corporation is exempted from Delaware corporate income tax, but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. Competition The Savings Bank faces significant competition in its market area in both originating real estate loans and attracting deposits. The rapid population growth in Riverside County has attracted numerous financial institutions to the Savings Bank's market areas, which resulted in competition that has been exacerbated by the recessionary trends that have prevailed in the Savings Bank's market area in the past several years. The Savings Bank's primary competitors are large regional and superregional commercial banks as well as other community-oriented banks and savings institutions. The Savings Bank also faces competition from credit unions and a large number of mortgage companies that operate within its market area. Many of these institutions are significantly larger than the Savings Bank and therefore have greater financial and marketing resources than the Savings Bank. The Savings Bank's mortgage banking operations also face strong competition from other mortgage bankers and brokers as well as other financial institutions. Such competition may limit the Savings Bank's growth and profitability in the future. 33
Personnel As of June 30, 1997, the Savings Bank had 212 full-time and 60 part-time employees. The employees are not represented by a collective bargaining unit and the Savings Bank believes its relationship with its employees to be good. Item 2. Properties - ------------------ At June 30, 1997, the net book value of the Savings Bank's property (including land and buildings) and its fixtures, furniture and equipment was $6.8 million. The Savings Bank's home office, which is owned by the Savings Bank, is located in Riverside, California. In addition, the Savings Bank has eight branch offices, of which seven are in Riverside County in the cities of Riverside, Moreno Valley (2), Hemet, Sun City, Rancho Mirage and Blythe, California and one is in Redlands, California in San Bernardino County. Six of the Savings Bank's branch offices are owned by the Savings Bank and two are leased. The leases expire in 2000 and 2008. The Savings Bank also has six loan production offices, which are located in Riverside, Rancho Cucamonga, Santa Ana, Laguna Niguel and Torrence, California and Las Vegas, Nevada along with one satellite office in Glendora, California. All of these offices are leased. The leases expire from 1997 to 1998. Item 3. Legal Proceedings - -------------------------- Periodically, there have been various claims and lawsuits involving the Savings Bank, such as claims to enforce liens, condemnation proceedings on properties in which the Savings Bank holds security interests, claims involving the making and servicing of real property loans and other issues in the ordinary course of and incident to the Savings Banks' business. The Savings Bank is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Savings Bank. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1997. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------- Matters - ------- The common stock of Provident Financial on the Nasdaq Stock Market under the symbol "PROV." As of September 15, 1997, there were approximately 523 stockholders of record. The Board of Directors of the Corporation has not formulated a dividend policy and does not intend to pay cash dividends in the near future. Future declarations or payments of dividends will be subject to determination by the Corporation's Board of Directors, which will take into account the Corporation's financial condition, results of operations, tax considerations, capital requirements, industry standards, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Savings Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. 34
The following table provides the high and low stock prices for PROV during the last fiscal year following its initial public offering in June 1996. 1ST Qtr. 1997 2nd Qtr. 1997 3rd Qtr. 1997 4th Qtr. 1997 9/30/96 12/31/96 3/31/97 6/30/97 ------- -------- ------- ------- High $12.625 $14.625 $17.250 $17.375 Low 10.125 12.375 13.750 14.125 Last 12.625 14.000 15.125 16.625 35
Item 6. Selected Financial Data - -------------------------------- The following tables set forth certain information concerning the consolidated financial position and results of operations of the Corporation and its subsidiaries at the dates and for the periods indicated. This information is qualified in its entirety by reference to the detailed information contained in the Consolidated Financial Statements and Notes thereto presented elsewhere in this Form 10-K. At June 30, ------------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) FINANCIAL CONDITION DATA: Total assets. . . . . $615,500 $584,847 $567,186 $580,336 $590,440 Loans receivable, net 517,147 452,945 471,543 420,159 404,651 Loans available for sale, net. . . . . . 19,984 49,612 34,489 83,049 104,409 Cash and overnight deposits . . . . . . 20,111 30,831 11,433 19,909 32,954 Investment securities 34,406 27,118 20,067 26,301 20,326 Deposits. . . . . . . 508,759 479,374 486,585 471,787 454,118 Borrowings. . . . . . 6,828 8,578 35,063 56,153 76,047 Stockholders' equity (1) . . . . . 85,447 85,970 37,323 41,315 42,648 At June 30, ------------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In Thousands) OPERATING DATA: Interest income . . . $42,599 $41,817 $36,020 $36,197 $40,167 Interest expense. . . 23,528 25,269 22,491 19,532 21,839 Net interest income . 19,071 16,548 13,529 16,665 18,328 Provision for loan losses . . . . . . . 1,254 2,261 4,787 2,033 1,655 Net interest income after provision for loans losses . . . . 17,817 14,287 8,742 14,632 16,673 Loan servicing and other fees . . . . . 2,738 2,442 2,476 3,072 1,927 Gains (losses) from sale of loans. . . . 3,597 4,753 701 1,246 5,726 Gain on bulk sale of servicing rights . . -- -- -- 2,052 -- Other non-interest income . . . . . . . 1,273 2,256 1,308 1,141 1,989 Real estate operations, net. . . . . . . . . (11) (101) (1,600) (366) (125) Operating and administrative expenses . . . . . . 22,313 19,499 17,354 23,758 18,243 Income (loss) before ------- ------- ------- ------- ------- income taxes . . . . 3,101 4,138 (5,727) (1,981) 7,947 Provision (benefit) for income taxes . . 1,160 1,332 (1,735) (648) 3,838 ------- ------- ------- ------- ------- Net income (loss) . . $1,941 $2,806 $(3,992) $(1,333) $4,109 ====== ====== ======= ======= ====== _______________ (1) For years prior to 1996, amount represents retained earnings, substantially restricted. 36
At June 30, ------------------------------------- 1997 1996 1995 ---- ---- ---- OTHER DATA: Loans serviced for others . . . . . $530,318 $601,097 $657,451 Number of: Real estate loans in portfolio. . 3,641 3,593 3,623 Real estate loans serviced for others . . . . . . . . . . . 4,669 4,846 5,140 Deposit accounts. . . . . . . . . 33,410 32,102 32,786 Full-service offices. . . . . . . 9 9 9 Loan origination offices. . . . . 7 8 8 At or For the Year Ended June 30, ------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- KEY OPERATING RATIOS: Performance Ratios Return (loss) on assets(1). . . 0.32% 0.50% (0.72)% (0.23)% 0.73% Return (loss) on stockholder's equity(2). . . . . . . . . . . 2.26 6.98 (9.81) (3.08) 10.24 Interest rate spread(3) . . . . 2.69 2.75 2.31 2.71 3.13 Net interest margin(4). . . . . 3.33 3.05 2.55 2.99 3.42 Average interest-earning assets to average interest-bearing liabilities. . . . . . . . . . 115.44 106.32 105.60 108.05 107.14 Operating and administrative expenses as a percent of average total assets . . . . . 3.73 3.46 3.13 4.09 3.26 Regulatory Capital Ratios Tangible capital. . . . . . . . 9.89 10.41 6.19 6.65 6.74 Core capital. . . . . . . . . . 9.89 10.41 6.19 6.69 6.86 Risk-based capital. . . . . . . 16.12 16.49 11.25 12.68 11.86 Asset Quality Ratios Nonaccrual and 90 days or more past due loans as a percent of loans receivable, net . . . 1.21 10.98 0.54 1.08 1.18 Nonperforming assets as a percent of total assets. . . . 1.44 1.22 1.65 1.49 1.63 Allowance for loan losses as a percent of gross loans receivable . . . . . . . . . . 1.04 1.18 1.06 0.78 0.79 Allowance for loan losses as a percent of nonperforming loans 87.45 123.43 198.79 73.62 68.86 Net charge-offs (recoveries) to average outstanding loans. . . 0.25 0.38 0.62 0.39 0.04 - ------------------ (1) Net income (loss) divided by average total assets. (2) Net income (loss) divided by average stockholder's equity. (3) Difference between weighted average yield on interest-earning assets and weighted average rate on interest-bearing liabilities. (4) Net interest income as a percentage of average interest-earning assets. 37
QUARTERLY FINANCIAL DATA (UNAUDITED) 1997 ----------------------------------------------------- Fourth Third Second First Total Quarter Quarter Quarter Quarter ----- ------- ------- ------- ------- (Dollars in Thousands, Except per share) Interest income. . . $42,599 $10,870 $10,543 $10,622 $10,564 Interest expense . . 23,528 6,141 5,897 5,813 5,677 ------- ------- ------- ------- ------- Net interest income. 19,071 4,729 4,646 4,809 4,887 Noninterest income . 7,608 1,778 1,649 2,182 1,999 Provision for loan losses. . . . . . . 1,254 300 250 450 254 Noninterest expense. 22,324 4,556 4,049 5,204 8,515 Earnings (loss) before ------- ------- ------- ------- ------- taxes . . . . . . . 3,101 1,651 1,996 1,337 (1,883) Taxes (benefit) on income. . . . . . . 1,160 518 850 559 (767) ------- ------- ------- ------- ------- Net earnings (loss). $1,941 $1,133 $1,146 $778 ($1,116) ====== ====== ====== ==== ======= Per common share: Per share earnings (loss) $0.41 $0.25 $0.24 $0.16 $(0.24) 38
Item 7. Management's Discussion and Analysis of Financial - ---------------------------------------------------------- Condition and Results of Operations ----------------------------------- General Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Corporation. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto. Operating Strategy The Corporation's primary goal has been to improve its profitability while maintaining a sound capital position. To accomplish this goal, the Corporation has employed an operating strategy that includes: (1) originating for its portfolio one- to four-family residential mortgage loans, primarily with adjustable rates; (2) enhancing net income and controlling interest rate risk by originating fixed-rate loans for sale in the secondary market; (3) diversifying its revenue sources through commercial banking and; (4) improving asset quality by limiting new originations of commercial real estate and multi-family loans, increasing real estate owned marketing efforts and establishing and utilizing more effective problem loan monitoring procedures; (5) controlling asset growth to a level sustainable by the Corporation's capital position; and (6) controlling operating expenses. The Corporation and the Savings Bank intend to continue this operating strategy in an effort to enhance long-term profitability while maintaining a reasonable level of loan loss reserves. The Savings Bank intends to enhance such strategy by expanding the products and services it offers within its primary market area in order to improve market share. The profitability of the Savings Bank's operations depends primarily on its net interest income, its non-interest income (principally from mortgage banking activities) and its non-interest expense. Net interest income is the difference between the income the Savings Bank receives on its loan and investment portfolio and its cost of funds, which consists of interest paid on deposits and borrowings. Non-interest income is comprised of income from mortgage banking activities, gains on the occasional sale of assets and miscellaneous fees and income. Mortgage banking generates income from the sale of mortgage loans (which may be sold with servicing retained or with servicing released) and from servicing fees on loans sold on a servicing-retained basis. The Savings Bank receives a higher price for loans sold on a servicing-released basis because it is relinquishing the right to service the loan. The contribution of mortgage banking activities to the Savings Bank's results of operations is highly dependent on the demand for loans by borrowers and investors, and therefore the amount of gain on sale of loans may vary significantly from period to period as a result of changes in market interest rates and the local and national economy and whether the Savings Bank sells loans servicing-released or servicing-retained. The Savings Bank's profitability is also affected by the level of non-interest expense. Non-interest expenses include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums, data servicing expenses and other operating costs. Non-interest expenses related to mortgage banking activities include compensation and benefits, occupancy and equipment expenses, telephone and other operating costs, all of which are related to the volume of loans originated. The Corporation's results of operations may be adversely affected during periods of reduced loan demand to the extent that non-interest expenses associated with mortgage banking activities are not reduced commensurate with the decrease in loan originations. Comparison of Financial Condition Total assets increased from $584.8 million at June 30, 1996 to $615.5 million at June 30, 1997 primarily as a result of growth in retail deposits. Loans held for investment increased $64.2 million from $452.9 million at June 30, 1996 to $517.1 million at June 30, 1997. The Savings Bank, during the later half of fiscal 1997, decided to accept a larger percentage of ARM loans generated by its mortgage division into its own portfolio. The Savings Bank believed that this strategy would help leverage its capital base through high quality loans which would produce a 39
higher return on assets and equity. Loans held for sale decreased from $49.6 million at June 30, 1996 to $20.0 million at June 30, 1997. The amount of loans held for sale is largely dependent on timing of loan fundings, loan commitment expirations, and loan sale settlements. Total liabilities increased from $498.9 million at June 30, 1996 to $530.1 million at June 30, 1997 principally as a result of retail deposit growth. Deposits increased from $479.4 million at June 30, 1996 to $508.8 million at June 30, 1997. During 1997, the Savings Bank increased its emphasis on building new client relationships. FHLB advances decreased from $8.6 million at June 30, 1996 to $6.8 million at June 30, 1997 as the Savings Bank retired maturing FHLB advances rather than renew this borrowing. Total stockholders' equity was $85.4 million at June 30, 1997 compared to $86.0 million at June 30, 1996. The Corporation repurchased 205,000 shares for a total cost of $3.3 million which partially offset the $1.9 million increase in retained earnings. The Corporation's book value per share increased from $16.77 at June 30, 1996 to $17.37 at June 30, 1997. Comparison of Operating Results for the Years Ended June 30, 1996 and 1997 General. The Corporation reported net earnings of $1.9 million, or $0.41 per share, for the year ended June 30, 1997 as compared to $2.8 million for the year ended June 30, 1996. The decline in operating results between fiscal 1996 and fiscal 1997 was due primarily to a one-time $3.2 million SAIF assessment charged in fiscal 1997. Without this special assessment, net income for fiscal 1997 would have been $3.8 million. Net Interest Income. Net interest income increased by $2.6 million, or 15.2%, from $16.5 million in fiscal 1996 to $19.1 million in fiscal 1997. This increase resulted principally from the investment of the conversion proceeds into interest earning assets and the widening of the Corporation's net interest margin from 3.1% to 3.3%. Interest Income. The average yield on interest-earning assets declined slightly in fiscal 1997 because a large portion of the stock conversion proceeds were invested in short-term securities. Total interest income increased by $782,000 in 1997 due to the increase in earning assets provided by the stock conversion. The average balance in investment securities rose from $20.1 million in 1996 to $55.2 million in 1997 while the yield decreased from 6.9% to 5.7%. The loans receivable yield also decreased 16 basis points reflecting the slightly downward trend of interest rates during the year. Interest Expense. Interest expense declined on both deposits and FHLB advances. The conversion proceeds allowed the Corporation to repay higher cost FHLB advances. The average balance of these advances declined from $20.2 million in fiscal 1996 to $7.1 million in fiscal 1997. With the decline in interest rates during fiscal 1997, the average cost of deposits decreased by 18 basis points from 4.9% in 1996 to 4.7% in 1997. Provisions for Loan Losses. Provisions for losses declined in fiscal 1997 to $1.3 million as compared to $2.3 million in fiscal 1996. A smaller provision was required because of a significant decline in credit losses. Credit losses fell from $2.5 million in 1996 to $1.4 million in 1997. Commercial real estate losses, which fell from $1.3 million in 1996 to $309,000 in 1997, experienced the greatest drop. The allowance for loan losses ended fiscal 1997 at $5.5 million, unchanged from 1996. Because of growth in the loan portfolio during fiscal 1997 the ratio of the allowance for loan losses as a percent of total loans outstanding declined from 1.18% in 1996 to 1.04% in 1997. Allowance for loan losses as a percent of nonperforming loans at the end of the period was 87.5% compared to 123.4% at the end of 1996. Recent loss reserve experience has indicated that a reduction in the ratio is warranted. Non-interest Income. Total non-interest income decreased by 19.5%, from $9.5 million in 1996 to $7.6 million in 1997 primarily as a result of lower gains on sale of loans. The ratio of gains to total loan sales remained constant during the two periods at 105 basis points, however, the volume of sales declined from $454 million in 1996 to $343 million in 1997. In addition, non-interest income was increased in 1996 by the receipt of $1 million in life insurance proceeds on a former Chief Executive Officer. 40
Non-interest Expense. Total non-interest expense increased by $2.7 million, or 13.9% in 1997 because of the one-time SAIF assessment of $3.2 million. The payment of this special assessment brought the SAIF fund to its legally required minimum reserve level which should result in lower premiums in future years. Income Taxes. Provision for income taxes was $1.2 million for fiscal 1997 (for an effective tax rate of 37.4%) compared to $1.3 million in 1996 (for an effective tax rate of 32.2%). The Corporation eliminated the valuation allowance previously established against the deferred state tax asset because management determined that it was more likely than not to utilize its future benefit. The effective rate for 1996 was lower because it was reduced by $1.0 million in non-taxable life insurance proceeds. Comparison of Operating Results for the Years Ended June 30, 1995 and 1996 General. The Company reported net earnings of $2.8 million for the year ended June 30, 1996 compared to a net loss of $4.0 million for the year ended June 30, 1995. The improvement in operating results between fiscal 1995 and fiscal 1996 was due to an increased interest rate spread, reduced provisions for loan losses, and increased income from sales of loans. Net Interest Income. Net interest income increased by $3.0 million, or 22.3%, from $13.5 million for fiscal 1995 to $16.5 million for fiscal 1996. This increase resulted from an increase in the spread between the yield on interest-earning assets and the rate paid on interest-bearing liabilities from 2.31% for the year ended June 30, 1995 to 2.75% for the year ended June 30, 1996 as the average yield on loans increased more than the average rate paid on deposits. Interest Income. Total interest income increased $5.8 million, or 16.1%, from $36.0 million for the year ended June 30, 1995 to $41.8 million for the year ended June 30, 1996. This increase between the periods was almost exclusively the result of an increase in interest income on loans receivable (including loans held for sale), which rose by $5.7 million from $34.0 million for the year ended June 30, 1995 to $39.7 million for the year ended June 30, 1996. This increase is primarily attributable to the increase in the average yield on the loan portfolio from 6.89% in fiscal 1995 to 7.87% in fiscal 1996. The increase in the average yield on loans is primarily a function of the changes in the COFI index, whose average was 4.59% during fiscal 1995 compared to an average of 5.03% during fiscal 1996. In addition, an increase in mortgage banking activities during the year ended June 30, 1996 accounted for a $10.7 million increase in the average balance of loans receivable (including loans held for sale). The Savings Bank originated $161.5 million in loans held for sale during fiscal 1995 compared to $469.2 million in fiscal 1996. Due to the small difference between short- and long-term interest rates that prevailed during much of fiscal 1996, the interest rate on fully-indexed ARM loans generally exceeded rates available on 30-year fixed rate mortgage loans. As a result, the level of refinancing activities increased during fiscal 1996 as borrowers sought to replace ARM loans with fixed rate loans. Interest income on investment securities increased by $101,000, or 7.9%, as a result of higher market interest rates. The average yield on investment securities increased from 6.23% for the year ended June 30, 1995 to 6.88% for the year ended June 30, 1996. This increase was partially offset by a $500,000 decline in the average balance of investment securities from $20.6 million in fiscal 1995 to $20.1 million in fiscal 1996. During fiscal 1996, management used maturing security investments to repay maturing FHLB advances. Because the yield available on overnight deposits often equaled or exceeded the rates available on short term investments, management elected to increase its holdings of overnight deposits. As a result, average interest-earning deposits increased $2.0 million to $13.9 million for fiscal 1996 from the $11.9 million for fiscal 1995. Interest income on interest-earning deposits rose $78,000, or 18.4%, to $500,000 in fiscal 1996 compared to $423,000 in fiscal 1995. Interest Expense. Interest expense increased by $2.8 million, or 12.4%, from $22.5 million during the year ended June 30, 1995 to $25.3 million for the year ended June 30, 1996. Interest expense on deposits increase $2.8 million, or 13.3%, from $21.2 million for fiscal 1995 to $24.0 million for fiscal 1996 as a result of both an increase 41
in the average balance of total deposits and a 47 basis point increase in the cost of deposits. The average balance of deposits increased $12.1 million, or 2.5%, from $477.4 million in fiscal 1995 to $489.5 million in fiscal 1996. This reflected management's strategy to replace FHLB advances and other borrowings with relatively less expense deposits. The Savings Bank attracted certificate accounts because their costs were less than, or equal to, comparable FHLB advances for similar durations. In addition, as a result of higher short-term market interest rates during fiscal 1996, the Savings Bank paid higher rates on new and renewing certificates of deposits, and some customers shifted from lower rate passbook, demand, and NOW accounts to higher yielding certificate accounts. The Savings Bank reduced its use of FHLB advances and other borrowings between the two periods. Although the average balance of FHLB advances declined $1.5 million, or 6.9%, the average rate paid on this funding source increased from 4.94% to 6.25% as a result of increased market interest rates and longer maturities. Consequently, interest expense on FHLB advances rose $190,000, or 17.7%, from $1.1 million for the year ended June 30, 1995 to $1.3 million for the year ended June 30, 1996. The average balance of other borrowings (principally reverse repurchase agreements) declined $3.5 million and the related interest expense also declined by $229,000 to $3,000 for the year ended June 30, 1996. Included in the fiscal 1995 expense on other borrowings was $65,000 of capitalized interest expense which the Savings Bank recognized at June 30, 1995 in connection with the write down of a joint venture project. Provisions for Loan Losses. Provisions for losses on loans were $2.3 million for fiscal 1996 compared to $4.8 million for fiscal 1995. The $2.5 million decline was attributable to a stabilization in the level of non- performing commercial and multi-family loans during 1996. Although past due and non-accrual loans totaled $4.5 million, or .98% of net loans receivable, at June 30, 1996 compared to $2.6 million, or .54%, at June 30, 1996, past due and non-accrual commercial and multi-family loans at June 30, 1996 were $798,000, or .18%, compared to $1.4 million or .30% of net loans receivable at June 30, 1995. Net charge-offs aggregated $1.9 million in fiscal 1996 compared to $3.0 million in fiscal 1995. Of these amounts, charge-offs on commercial and multi-family loans were $1.0 million and $1.3 million, respectively. Despite the improvement in the levels of commercial and multi- family loans during fiscal 1996, the recessionary economic conditions prevailing in Southern California in recent years have resulted in increased loan delinquencies and defaults as well as reductions in the value of properties securing loans made by the Savings Bank. These factors, in combination with higher unemployment levels within the Savings Bank market areas, resulted in management's decision to increase the allowance for loan losses to a level which exceeded that of June 30, 1995. At June 30, 1996, the allowance for loan losses as a percentage of gross loans receivable were 1.18% compared to 1.06% at June 30, 1995. Non-interest Income. Total non-interest income increased by $5.0 million, or 110.7%, from $4.5 million for fiscal 1995 to $9.5 million for fiscal 1996. This increase is attributable to an increase in the gain from the sales of loans and the receipt of $1.0 million in life insurance proceeds. Gains from sales of loans increased $4.0 million, or 578.0% to $4.8 million for fiscal 1996 from $701,000 for fiscal 1995. This increase resulted from increased production levels at existing offices and, to a lesser extent, gains from related interest rate risk management activities. Loan originations and sales totaled $469.2 million and $458.8 million, respectively, during fiscal 1996 compared to $161.5 million and $210.0 million, respectively, in fiscal 1995. Substantially all of the loans sold in fiscal 1996 were sold on a servicing released basis. Servicing income remained constant at $2.5 million in both fiscal 1996 and 1995. In March, 1996, the Savings Bank received $1.0 million in proceeds from a life insurance policy upon the passing of the former chief executive officer. The policy was designated as a reimbursement of previously expensed retirement benefits. Non-interest Expense. Total non-interest expense increased $647,000, or 3.4% from $19.0 million for fiscal 1995 to $19.6 million for fiscal 1996. Salaries and employee benefits increased by $1.8 million, or 18.3%, over fiscal 1995 principally as a result of production related compensation from increased mortgage banking activities during fiscal 1996. In addition, at June 30, 1996, the Savings Bank recognized $162,000 of expenses related to the newly implemented ESOP. Occupancy expenses declined by $397,000, or 17.0%, between the periods. However, occupancy expenses for fiscal 1995 include $298,000 of charges related to the closing of offices and related expenses 42
within the Profed Mortgage division. Other expenses increased by $617,000, or 16.3%, principally because of expenses from interest rate risk management activities. The loss from real estate operations declined from $1.6 million for fiscal 1995 to $101,000 for fiscal 1996. The decreased loss reflects the liquidation of the Savings Bank's one remaining real estate joint venture in July 1995 and reduced provisions on foreclosed real estate. There were no provisions for losses on joint ventures during fiscal 1996 compared to a provision of $682,000 during fiscal 1995. Provisions for losses on foreclosed real estate decreased by $744,000 from $983,000 during fiscal 1995 to $239,000 during fiscal 1996. Income Taxes. Income taxes were $1.3 million for fiscal 1996 (resulting in an effective tax rate of 32.2%) compared to a tax benefit of $1.8 million for fiscal 1995 (resulting in an effective rate of 30.3%). The increase of $3.1 million in tax expense is principally attributable to an increase in pre-tax income of $9.9 million between the periods, reduced by the $1.0 million of non-taxable insurance proceeds. The Savings Bank has a California net operating loss carryforward which is reduced by 50% in future tax years. As a result, the Savings Bank did not fully tax benefit its tax losses in fiscal 1995, thereby decreasing the effective tax rate. Average Balances, Interest and Average Yields/Cost The following table sets forth certain information for the periods regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs thereof. Such yields and costs for the periods indicated are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily balances has causes any material difference in the information presented. 43
<TABLE> Year Ended June 30, -------------------------------------------------------------------------------- 1997 1996 1995 ------------------------- -------------------------- --------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- -------- ---- ------- -------- ---- ------- -------- ---- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans receivable, net (1)(2). . . . . $498,853 38,445 7.71% $504,336 $39,701 7.87% $494,087 $34,045 6.89% Investment securities 55,207 3,133 5.68 20,135 1,386 6.88 20,636 1,284 6.23 FHLB stock . . . . . 4,749 290 6.10 4,489 230 5.13 4,944 268 5.41 Interest-earning deposits. . . . . . 14,712 731 4.97 13,873 500 3.61 11,885 423 3.56 Total interest- -------- ------- ---- -------- ------- ---- --------- ------- ---- earning assets. . 573,521 42,599 7.43 542,833 41,817 7.70 531,552 36,020 6.78 -------- ------- -------- ------- --------- ------- Non-interest-earning assets . . . . . . . 25,051 21,313 23,332 -------- -------- -------- Total assets. . . . $598,572 $564,146 $554,884 ======== ======== ======== Interest-bearing liabilities: Passbook accounts. . $49,567 1,363 2.75 $52,345 1,743 3.33 $ 55,805 1,466 2.63 Demand and NOW accounts. . . . . . 111,059 3,733 3.36 111,145 4,237 3.81 126,913 5,082 4.00 Certificate accounts. . . . . . 329,099 18,016 5.47 326,056 18,027 5.53 294,701 14,641 4.97 -------- ------- -------- ------- --------- ------- Total deposits . . 489,725 23,112 4.72 489,546 24,007 4.90 477,419 21,189 4.44 FHLB advances. . . . 7,098 416 5.87 20,155 1,260 6.25 21,655 1,070 4.94 Other borrowings . . -- -- -- 840 2 0.24 4,302 232 5.38 Total interest- -------- ------- -------- ------- --------- ------- bearing liabilities. . . . 496,823 23,528 4.74 510,541 25,269 4.95 503,376 22,491 4.47 ------- ------- ------- Non-interest-bearing liabilities . . . . 15,912 13,432 10,804 -------- -------- -------- Total liabilities. . 512,735 523,973 514,180 -------- -------- -------- Shareholders equity. 85,837 40,173 40,704 Total liabilities and-------- -------- -------- Shareholders equity $598,572 $564,146 $554,884 ======== ======== ======== Net interest income. $19,071 $16,548 $13,529 ======= ======= ======= Interest rate spread (3) 2.69% 2.75% 2.31% Net interest margin (4) 3.33% 3.05% 2.55% Ratio of average interest-earning assets to average interest-bearing liabilities . . . . 115.44% 106.33% 105.60% - ------------------- (1) Includes loans available for sale. (2) Includes deferred loan fee amortization of ($254,000), $112,000 and $98,000 for the years ended June 30, 1997, 1996 and 1995, respectively. (3) Represents difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities. (4) Represents net interest income before provision for loan losses as a percentage of average interest-earning assets. 44 </TABLE>
Yields Earned and Rates Paid The following table sets forth (on a consolidated basis) for the periods and at the dates indicated the weighted average yields earned on the Savings Bank's assets and the weighted average interest rates paid on the Savings Bank's liabilities, together with the net yield on interest-earning assets. At June 30, Year Ended June 30, ------- --------------------------- 1997 1997 1996 1995 ---- ---- ---- ---- Weighted average yield on: Loans receivable (1). . . . . 7.79% 7.71% 7.87% 6.89% Investment securities . . . . 5.89 5.68 6.88 6.23 FHLB stock. . . . . . . . . . 5.94 6.10 5.13 5.41 Interest-earning deposits 5.25 4.97 3.61 3.56 All interest-earning assets . 7.17 7.43 7.70 6.78 Weighted average rate paid on: Passbook accounts . . . . . . 2.64 2.75 3.33 2.63 Demand and NOW accounts . . . 3.26 3.36 3.81 4.00 Certificate accounts. . . . . 5.50 5.47 5.53 4.97 FHLB advances . . . . . . . . 5.93 5.87 6.25 4.94 Other borrowings. . . . . . . -- -- 0.30 5.38 All interest-bearing liabilities. . . . . . . . . 4.11 4.74 4.95 4.47 Interest rate spread (spread between weighted average rates on all interest- earnings assets and all interest-bearing liabilities. . . . . . . . . 3.06 2.69 2.75 2.31 Net interest margin (net interest income as a percentage of average interest-earning assets) . . 3.55 3.33 3.05 2.55 - ----------------- (1) Includes loans available for sale. 45
Rate/Volume Table The following table sets forth the effects of changing rates and volumes on interest income and expense of the Savings Bank. Information is provided with respect to (i) effects attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes that cannot be allocated between rate and volume. 1997 Compared to Year 1996 Compared to Year Ended June 30, 1996 Ended June 30, 1995 Increase (Decrease) Due to Increase (Decrease) Due to --------------------------- -------------------------- Rate/ Rate/ Rate Volume Volume Net Rate Volume Volume Net ---- ------ ------ --- ---- ------ ------ --- (In Thousands) Interest income: Loans Receivable (1) . . ($834) ($432) $9 ($1,257) $4,850 $706 $100 $5,656 Investment. . . . . securities . . . . (243) 2,415 (424) 1,748 135 (31) (3) 102 FHLB stock. . . . . 44 13 3 60 (14) (25) 1 (38) Interest-bearing deposits . . . . . 189 30 11 230 6 70 1 77 Total net change ------ ------ ----- ------ ------ ---- ----- ------ in income on interest earning assets. . . . . . (844) 2,026 (401) 781 4,977 720 99 5,797 ------ ------ ----- ------ ------ ---- ----- ------ Interest-bearing liabilities: Passbook accounts . (304) (92) 17 (379) 392 (91) (24) 277 Demand and NOW accounts . . . . . (501) (3) -- (504) (244) (631) 30 (845) Certificate accounts. . . . . . (178) 168 (2) (12) 1,653 1,558 176 3,387 FHLB advances. . . (77) (816) 50 (843) 283 (74) (20) 189 Other borrowings . (3) (3) 3 (3) (219) (187) 177 (230) Total net change ------ ------ ----- ------ ------ ---- ----- ------ in expense on interest-bearing liabilities. . . (1,063) (746) 68 (1,741) 1,865 575 338 2,778 Net change in net ------ ------ ----- ------ ------ ---- ----- ------ interest income . . $219 $2,772 ($469) $2,522 $3,112 $145 ($239) $3,019 ==== ====== ===== ====== ====== ==== ===== ====== - ------------------- (1) Includes loans available for sale. For purposes of calculating volume, rate and rate/volume variances, nonaccrual loans were included in the weighted average balance outstanding. Asset and Liability Management The principal financial objective of the Savings Bank's interest rate risk management function is to achieve long-term profitability while limiting its exposure to fluctuating interest rates. The Savings Bank has sought to reduce exposure of its earnings to changes in market interest rates by managing the mismatch between asset and liability 46
maturities and interest rates. The principal element in achieving this objective is to increase the interest-rate sensitivity of the Savings Bank's assets by holding loans with interest rates subject to periodic market adjustments. In addition, the Savings Bank maintains a liquid investment portfolio comprised of short-term government securities. The Savings Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, limits the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Savings Bank promotes transaction accounts and certificates of deposit with terms up to five years. In order to encourage savings associations to reduce their interest rate risk, the OTS adopted a rule incorporating an interest rate risk ("IRR") component into the risk-based capital rules. Using data from the Savings Bank's quarterly reports to the OTS, the Savings Bank receives a report from the OTS that measures interest rate risk by modeling the change in Net Portfolio Value ("NPV") over a variety of interest rate scenarios. This procedure for measuring interest rate risk was developed by the OTS to replace the "gap" analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period). NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The calculation is intended to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of at least 200 basis points with no effect given to any steps which management might take to counter the effect of that interest rate movement. Under OTS regulations, an institution whose "measured interest rate risk" is greater than 2.0% of the portfolio value of total assets will be subject to a deduction from total capital for purposes of calculating its risk-based capital. The following table is provided by the OTS and sets forth as of June 30, 1997 the estimated changes in NPV based on the indicated interest rate environments. No effect has been given to any steps that management of the Savings Bank may take to counter the effects of interest rate movements presented in the table. Net Portfolio as % of Net Portfolio Value Portfolio Value of Assets Basis Point ("bp") ----------------------------- ------------------------- Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(3) - --------------- -------- ----------- -------- ------------ --------- (Dollars in Thousands) +400 bp $60,882 (25,312) (29)% 10.53% (344) bp +300 bp 69,923 (16,272) (19)% 11.84 (213) bp +200 bp 77,854 (8,340) (10)% 12.94 (103) bp +100 bp 83,666 (2,529) (3)% 13.69 (27) bp 0 bp 86,195 -- -- 13.97 -- -100 bp 85,389 (805) (1) 13.77 (20) bp -200 bp 83,178 (3,017) (4) 13.38 (59) bp -300 bp 81,958 (4,236) (5) 13.13 (83) bp -400 bp 82,707 (3,488) (4) 13.16 (81) bp - ------------------- (1) Represents the increase (decrease) of the estimated NPV at the indicated change in interest rates compared to the NPV based on prevailing interest rates at June 30, 1997 ("base case"). (2) Calculated as the estimated NPV divided by the portfolio value of total assets ("PV"). (3) Calculated as the change in the NPV ratio from the base case amount assuming the indicated change in interest rates. The following table is provided by the OTS and is based on the calculations in the above table. It sets forth the change in the NPV Ratio at a 200 bp rate shock at the end of the last three quarters of fiscal 1997. 47
At At At June 30, March 31, December 31, 1997 1997 1996 ---- ---- ---- RISK MEASURES: 200 BP RATE SHOCK: Pre-Shock NPV Ratio: NPV as % of PV of Assets . . 13.97% 14.19% 13.70% Exposure Measure: Post-Shock NPV Ratio . . . . 12.94 12.68 12.68 Sensitivity Measure: Change in NPV Ratio. . . . . (103) bp (118) bp (102) bp As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. It is also possible that, as a result of an interest rate increase, the increased mortgage payments required of ARM borrowers could result in an increase in delinquencies and defaults. Changes in market interest rates would also affect the volume and profitability of the Savings Bank's mortgage banking activities. Accordingly, the data presented in the tables above should not be relied upon as indicative of actual results in the event of changes in interest rates. Furthermore, the NPV presented in the foregoing tables is not intended to represent the fair market value of the Savings Bank, nor does it represent amounts that would be available for distribution to stockholders in the event of the liquidation of the Savings Bank. Liquidity and Capital Resources The Savings Bank's primary sources of funds are deposits, proceeds from sales of loans originated for sale, proceeds from principal and interest payments on loans, the maturity of and interest income on investment securities, and FHLB advances. While maturities and scheduled amortization of loans and investment securities are a predictable source of funds, deposit flows, mortgage prepayments and loan sales are greatly influenced by general interest rates, economic conditions and competition. The Savings Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. The Savings Bank generally maintains sufficient cash and overnight deposits to meet short-term liquidity needs. At June 30, 1997, cash (including overnight deposits) totaled $20.1 million, or 3.3% of total assets. In addition, the Savings Bank maintains a credit facility with the FHLB-San Francisco, which provides for immediately available advances. Advances under this credit facility totaled $6.8 million at June 30, 1997. Depending on market conditions and the pricing of deposit products and FHLB borrowings, the Savings Bank may continue to rely on FHLB borrowings for its liquidity needs. The OTS requires a savings institution to maintain an average daily balance of liquid assets (cash and eligible investments) equal to at least 5.0% of the average daily balance of its net withdrawable deposits and short-term borrowings. In addition, short-term liquid assets currently must constitute 1.0% of the sum of net withdrawable deposit accounts plus short-term borrowings. The Savings Bank's actual short-term liquidity ratio at June 30, 1997 was 6.8%. The Savings Bank has in the past consistently maintained liquidity levels relatively close to and in excess of regulatory requirements and believes this is an appropriate strategy for proper asset and liability management. 48
The primary investing activity of the Savings Bank is the origination of mortgage loans. During years ended June 30, 1997, 1996 and 1995, the Savings Bank originated loans in the amounts of $440.6 million,$516.9 million and $255.1 million, respectively. At June 30, 1997, the Savings Bank had loan commitments totaling $51.0 million and undisbursed loans in process totaling $3.7 million. The Savings Bank anticipates that it will have sufficient funds available to meet its current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from June 30, 1997 totaled $288.2 million. Historically, the Savings Bank has been able to retain a significant amount of its deposits as they mature. Management of the Savings Bank believes it has adequate resources to fund all loan commitments by deposits and FHLB advances and that it can adjust the offering rates of savings certificates to retain deposits in changing interest rate environments. The Savings Bank is required to maintain specific amounts of capital pursuant to OTS requirements. As of June 30, 1997, the Savings Bank was in compliance with all regulatory capital requirements which were effective as of such date with tangible, core and risk-based capital ratios of 9.9%, 9.9% and 16.1%, respectively. For a detailed discussion of regulatory capital requirements, see "REGULATION -- Federal Regulation of Savings Associations -- Capital Requirements" in Item 1 of this Report. Impact of New Accounting Pronouncements Effective July 1, 1996 the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" recognizing mortgage servicing rights as separate assets from the underlying mortgage loans at the time such loans are sold and servicing is retained. SFAS 122 did not have a material impact on the Company's financial reporting. Effective January 1, 1997, the Company adopted SFAS 125 "Accounting for Transfers of Financial Assets and Liabilities." Under the financial-components approach of SFAS 125, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes al financial and servicing assets it no longer controls and liabilities that have been extinguished. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. The adoption of SFAS 125 did not have a material impact on the Company's financial reporting. In February 1997, FASB issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128). SFAS 128 supercedes APB Opinion No. 15 "Earnings per Share" (APB 15) and establishes standards for computing and presenting earnings per share (EPS) for entities with publicly held common stock or potential common stock. SFAS 128 simplifies the reporting of EPS and brings them substantially in line with those found in International Accounting Standard 33, Earnings per Share, recently issued by the International Accounting Standards Committee. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator of the diluted EPS computation. This statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. The Company has determined that this statement will have no significant impact on the financial position, results of operations, or earnings per share. In February 1997, the FASB also issued Statement of Financial Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS 129). This Statement is effective for financial statements for periods ending after December 15, 1997. The Company does not expect SFAS 129 to have any significant impact on prior disclosures since it primarily consolidates requirements from previously issued Opinions and Statements into one Statement. The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP which generally requires the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Savings Bank's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general 49
levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In the current interest rate environment, liquidity and maturity structure of the Savings Bank's assets and liabilities are critical to the maintenance of performance levels. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- For information regarding the market risk of the Company's investments, see "Asset and Liability Management" under Item 7 of this Report and "Lending Activities -- Maturity of Loan Portfolio" and "Investment Activities" under Item 1 of this Report. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The financial statements contained in the Annual Report, which are listed under Item 14 herein, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information concerning the Corporation's directors required by this Item is incorporated by reference from the information set forth under "Proposal I - Election of Directors" and "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement. Executive Officers of the Corporation and Savings Bank Age at Position June 30, ------------------------------------------- Name 1997 Corporation Savings Bank ---- ---- ----------- ------------ Craig G. Blunden 49 President, Chief President, Chief Executive Executive Officer, Officer and Director and Director Brian M. Riley 32 Chief Financial Senior Vice President and Officer Chief Financial Officer Robert G. Schrader 57 Secretary Executive Vice President, Chief Operating Officer Secretary and Director Donald L. Blanchard 46 N/A Senior Vice President, Retail Banking Lil Brunner 43 N/A Senior Vice President Chief Information Officer Richard L. Gale 45 N/A Senior Vice President, Mortgage Banking William E. Harris 55 N/A Senior Vice President, Administration and Treasurer 50
Biographical Information Set forth below is certain information regarding the executive officers of the Corporation and the Savings Bank. There are no family relationships among or between the directors or executive officers. Craig G. Blunden has been associated with the Savings Bank since 1974 and has held his current positions at the Savings Bank since 1991 and as President and Chief Executive Officer of the Corporation since its formation in 1996. Mr. Blunden also serves on the Foundation Board of Trustees for the University of California, Riverside, the Western League of Savings Institutions Board of Directors and America's Community Bankers Mortgage Finance Committee. Robert G. Schrader has been associated with the Savings Bank since 1963 and has served as Executive Vice President of the Savings Bank since January 1995. From 1990 through 1994, Mr. Schrader served as Senior Vice President of the Savings Bank. Mr. Schrader has held his current position with the Corporation since its formation in 1996. Donald L. Blanchard, who joined the Savings Bank in 1989, has held his current position with the Savings Bank since 1989. Richard L. Gale, who joined the Savings Bank in 1988, has served as President of the Profed Mortgage division since 1989. Mr. Gale has held his current position with the Savings Bank since 1993. William E. Harris has been associated with the Savings Bank since 1969 and has held his current position with the Savings Bank since 1989. Brian M. Riley, who joined the Savings Bank in 1997, was previously Executive Vice President/Chief Financial Officer for Metro Commerce Bank from 1992 to 1997. Lil Brunner, who joined the Savings Bank in 1993, was general auditor prior to being promoted to Chief Information Officer in 1997. 51
Item 11. Executive Compensation - -------------------------------- The information required by this Item is incorporated by reference to the information under "Executive Compensation" and "Directors' Compensation" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information required by this Item is incorporated by reference to the information under "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. (c) Changes In Control The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Corporation. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this Item is incorporated by reference to the information under "Transactions with Management" in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) (1)(2) Independent Auditors' Report Consolidated Financial Statements (a) Consolidated Balance Sheets, June 30, 1997 and 1996 (b) Consolidated Statement of Operations For the Years Ended June 30, 1997, 1996 and 1995 (c) Consolidated Statement of Stockholders' Equity For the Years Ended June 30, 1996, 1995 and 1994 (d) Consolidated Statement of Cash Flows For the Years Ended June 30, 1996, 1995 and 1994 (e) Notes to Consolidated Financial Statements Schedules to the consolidated financial statements have been omitted as the required information is inapplicable. (3) Exhibits 3.1 Certificate of Incorporation of Provident Financial Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to the Corporation's Registration Statement on Form S-1 (File No. 333-2230)) 3.2 Bylaws of Provident Financial Holdings, Inc. (Incorporated by reference to Exhibit 3.2 to the Corporation's Registration Statement on Form S-1 (File No. 333-2230)) 10.1 Employment Agreement with Craig G. Blunden 10.2 Post-Retirement Compensation Agreement with Craig G. Blunden 10.3 Severance Agreement with Robert G. Schrader (Incorporated by referenced to Exhibit 10.3 to the Corporation's Annual Report on Form 10-K for the year ended June 30, 1996) 52
10.4 1997 Stock Option Plan (incorporated by reference to Exhibit A to the Corporation's proxy statement dated December 12, 1996) 10.5 1997 Management Recognition Plan (incorporated by reference to Exhibit B to the Corporation's proxy statement dated December 12, 1996) 13. Annual Report to Stockholders 21. Subsidiaries of Registrant 23. Consent of Independent Auditors 27. Financial data schedule (b) The Corporation did not file any Reports on Form 8-K during the quarter ended June 30, 1997. 53
SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROVIDENT FINANCIAL HOLDINGS, INC. Date: September 25, 1997 By: /s/ Craig G. Blunden --------------------------------- Craig G. Blunden President and Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE ---------- ----- ---- /s/ Craig G. Blunden President, Chief September 25, 1997 - -------------------------- Executive Officer and Craig G. Blunden Director (Principal Executive Officer) /s/ Brian M. Riley Chief Financial Officer September 25, 1997 - -------------------------- (Principal Financial Brian M. Riley and Accounting Officer) /s/ Robert G. Schrader Director September 25, 1997 - -------------------------- Robert G. Schrader /s/ Bruce W. Bennett Director September 25, 1997 - -------------------------- Bruce W. Bennett Director September __, 1997 - -------------------------- Michael C. Billings /s/ Debbi H. Guthrie Director September 25, 1997 - -------------------------- Debbi H. Guthrie
Director September __, 1997 - -------------------------- David W. Mitchell /s/ Roy H. Taylor Director September 25, 1997 - -------------------------- Roy H. Taylor
EXHIBIT 10.1 Employment Agreement with Craig C. Blunden
EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 1st day of January, 1997, between PROVIDENT SAVINGS BANK (the "Bank"), and CRAIG G. BLUNDEN (the "Executive"), with reference to the following facts: A. The Executive is currently the Chief Executive Officer and Chairman of the Board of the Bank and an officer and director of subsidiaries of the Bank. The Executive is an experienced and knowledgeable savings and loan executive whose creativity, expertise and effort have assisted in the development of the business and growth of the Bank. B. The Bank recognizes that the future growth, profitability and success of the business of the Bank will be advanced by the continued employment of the Executive. in order to retain the services of the Executive and to maximize the period of his continued availability, the Bank desires to offer the Executive the compensation, amenities and other benefits which executives of comparable experience and ability generally receive. C. The Executive is currently employed by the Bank under the terms and conditions of an employment agreement dated March 26, 1992. The Executive and the Bank now desire to terminate that agreement and replace it with the new agreement set forth herein, such termination and replacement to be effective as of the date hereof. NOW, THEREFORE, the parties hereto agree as follows: 1. Employment. ---------- The Bank hereby employs the Executive and the Executive hereby accepts employment with the Bank on the terms and subject to the conditions hereinafter set forth in this Agreement. 2. Term. ---- (a) The term of this Agreement shall be deemed to commence on January 1, 1997 and shall continue through December 31, 1999 (which period is referred to herein as the "Initial Term"), provided that this Initial Term shall be subject to extension pursuant to the provisions of this Section 2 and to earlier termination pursuant to Section 11 hereof. (b) The Board of Directors of the Bank (the "Board") shall review this Agreement and the performance of the Executive hereunder at the December meeting of the Board each year and the fact of such review shall be recorded in the minutes of each such meeting. Commencing with January 1, 1997, and on each January 1 thereafter during the Initial Term and any extensions hereof, the term of this Agreement shall be extended for an additional calendar year period, provided that the Board shall have voted to approve such extension at the immediately preceding December meeting of the Board, so that as of any such January 1 this Agreement shall have a remaining term of three calendar years, unless, on or before such Extension Date (i) the Executive has attained age 62, (ii) this Agreement has -1-
been terminated pursuant to Section 11 hereof; (iii) the Board or the Executive has provided the other party with written notice stating that such party is thereby exercising its option to discontinue further extensions of this Agreement, or (iv) the Board has declined to approve such extension at the immediately preceding December meeting of the Board. For purposes of this Agreement, a reference to an 'Extension Date' shall mean any such January 1 which results in a one year extension under the provisions of this Section 2(b), and a reference to the 'term' of this Agreement shall include the Initial Term and any extensions hereunder. (c) If this Agreement is terminated or otherwise becomes inoperative, all rights and benefits which have become vested hereunder prior to such termination shall remain in full force and effect and such termination shall not be construed as relieving any party from the performance of any accrued obligation incurred to the other under the operation of this Agreement, including, without limitation, any obligation requiring performance after the date of such termination. 3. Position And Duties. ------------------- (a) The Bank hereby engages the Executive, and the Executive hereby agrees to render services, as the Chief Executive officer of the Bank, or in such other capacity as the parties hereto shall mutually agree, and as an executive officer of such of the Bank's affiliates as the parties hereto shall mutually agree, including affiliates which may be formed or acquired subsequent to the date of this Agreement. The Executive shall have responsibility for the overall conduct of the Bank's business and shall have full authority to do and perform or cause to be performed all such services, acts or things as he shall deem necessary or advisable to manage and conduct the business of the Bank, including, without limitation, hiring, supervision and termination of employees and consultants, in a manner consistent with policies established from time to time by the Board. In the performance of such duties, the Executive shall only be required to report to the Board. (b) The Executive agrees that during the term of this Agreement he shall, as long as he shall be elected, serve on the Board and on the boards of directors of such of the Bank's affiliates as the parties hereto shall mutually agree, including affiliates which may be formed or acquired subsequent to the date of this Agreement. (c) During the term of this Agreement the Executive shall devote substantially all of his regular business time solely to the business of the Bank, including community affairs, charitable matters or other activities that may reasonably be expected to benefit the general image of the Bank in the communities it serves, and the Executive shall not provide services on behalf of, or otherwise engage in or promote, any business competitive with that of the Bank or its affiliates. Subject to the foregoing, the Executive may serve on boards of directors of unaffiliated corporations, subject to advance approval by the Board, and may engage in personal business and investment activities, including real estate investments. -2-
4. Authority of Bank. The Bank reserves the right to elect, from time to time, any person to its Board, to appoint any person as an officer of the Bank and to remove any of its officers and directors, without exception, in any manner and upon such basis or bases as shall be deemed appropriate; provided however, that except to the extent expressly provided herein to the contrary, any such removal shall not relieve the Bank from any of its obligations to the Executive, or any additional obligations set forth under the terms of this Agreement. Nothing herein shall be deemed to limit the authority of the Executive, subject to the overall authority of the Board, to retain, supervise or remove Bank personnel. 5. Place Of Performance. -------------------- (a) In connection with his employment by the Bank, the Executive shall at all times be entitled to an appropriate office at the principal executive offices of the Bank, which offices are presently located at 3756 Central Avenue, Riverside, California 92506. In the event of a Change in Control of the Bank (as defined below), the Bank shall not, at any time thereafter, without the written consent of the Executive, transfer the Executive to a location more than 20 miles from the Executive's current principal residence. If the Bank pro poses to transfer the Executive to a location that is more than 20 miles from his principal residence after a Change in Control of the Bank has occurred, and if Executive shall agree to such transfer, the Bank shall promptly pay (or reimburse the Executive for) all reasonable moving expenses incurred by the Executive as a result of a change of his principal residence in connection with any such relocation, and will indemnify the Executive against, and reimburse the Executive for, any loss incurred as the result of the sale of his principal residence (which loss shall be computed for the purpose hereof as the difference between the actual sales price of such residence (net of closing costs and brokerage fees) and the higher of (i) the Executive's adjusted basis for tax purposes in such residence, or (ii) the fair market value of such residence as determined by a real estate appraiser designated by the Executive and satisfactory to the Bank) in connection with any such transfer. (b) For the purposes of this Agreement, a "Change in Control" of the Bank shall be deemed to occur if any person or entity becomes a 'controlling person' of the Bank or of any entity controlling the Bank, as that term is defined for purposes of Section 561.14 of the Rules and Regulations of the Office of Thrift Supervision or if the Bank or any entity controlling the Bank is the subject of a merger, consolidation or other business combination or reorganization and a majority of the board of directors of the resulting entity does not thereafter consist of persons who were directors of the Bank immediately prior to such transaction; provided, however, that no Change in Control shall be deemed to occur in the event of any regulatory action specified in Section 11(c) below or solely as a result of the conversion of the Bank from the mutual to the stock form of organization, including such a conversion in which the Bank forms a holding company for itself. 6. Working Facilities. ------------------ -3-
The Executive shall be furnished with a private office, stenographic and other necessary secretarial assistance, and with such other facilities, amenities and services as are presently or may hereafter be furnished to the most senior executive officers of the Bank and are adequate in the reasonable judgment of the Executive for the performance of his responsibilities hereunder. 7. Compensation. ------------ (a) As compensation for the performance of Executive's services here under, including services as a director of the Bank and as an officer or director of the Bank's affiliates, the Bank shall pay to the Executive in accordance with its normal payroll practices an annual salary (the "Annual Base Salary") as set forth on Schedule 1 to this Agreement, attached hereto and incorporated herein by this reference. The Annual Base Salary may be redetermined from time to time by the Board (or a duly authorized committee thereof) and set forth in an amendment to this Agreement. For the purposes of this Agreement, the Annual Base Salary payable to the Executive shall mean the gross amount payable to the Executive prior to any deductions for withholding taxes and voluntary contributions by the Executive to any retirement or deferred compensation plan maintained or offered by the Bank. (b) If the Executive's salary is increased during the term of this Agreement, the minimum Annual Base Salary payable to the Executive subsequent to the date of such increase shall be equal to his salary as so increased, except that the Executive's Annual Base Salary thereafter may be reduced pursuant to and consistent with a general program of salary reductions for senior executive personnel, provided that no such reduction shall in any event reduce the Executive's Annual Base Salary to a level below the amount stated in Section 7(a). In the event of a Change in Control of the Bank (as defined in Section 5(b) hereof) during the term of this Agreement, the Annual Base Salary payable to the Executive for the balance of the then current year and for each succeeding calendar year during the term of this Agreement shall in no event be less than the sum of (i) the aggregate amount of Annual Base Salary (without giving effect to any reduction pursuant to the exception set forth in the first sentence of this Section 7(b)) and (ii) the aggregate amount of any discretionary bonuses received by the Executive during the twelve-month period immediately preceding the Change in Control. For the purposes hereof, discretionary bonuses shall include amounts paid pursuant to any cash bonus or incentive program maintained by the Bank, but shall not otherwise include any amounts payable to the Executive pursuant to any benefit program covered by Section 9 here of (dealing with the employee benefit programs and other fringe benefits to which the Executive is entitled) unless the payment of benefits thereunder is totally in the discretion of the Board. 8. Expenses. -------- Subject to compliance with the Bank's normal and customary policies regarding substantiation and verification of business expenses, as in effect from time to time, which policies currently include quarterly review of the Executive's expense reports by the Personnel Compensation Committee of the Board, the Executive is authorized to incur on behalf of the Bank, and the Bank shall directly pay or shall fully reimburse the Executive for, all customary and reasonable expenses -4-
incurred for promoting, pursuing or otherwise furthering the business of the Bank or its affiliates, including but not limited to expenses for travel, entertainment and related matters, attendance at conventions and industry related meetings, the cost of trade publications related to financial institutions or otherwise relating to the business of the Bank or its affiliates, and dues, fees and assessments with respect to those executive facilities and country clubs for which the Bank, as of the date of this Agreement, is making direct payment on behalf of the Executive, or in respect of which the Bank is providing the Executive with reimbursement. 9. Fringe Benefits. --------------- During the term of this Agreement, the Executive shall be entitled to participate in, and to receive benefits and perquisites under, any formal or informal employee benefit plans, under standings, arrangements or programs now provided to the Executive and any additional such benefits that may hereafter generally be made available by the Bank or its affiliates to senior executives, key management employees and their eligible dependents including, but not limited to, (i) cash bonus and incentive plans, profit sharing plans and plans providing for life insurance coverage in which the Executive is a participant on the date of this Agreement or plans or arrangements providing the Executive with at least equivalent benefits thereunder, (ii) use of a company automobile of a quality commensurate with the Executive's position as chief executive officer of the Bank, including replacement of such automobile after not more than three calendar years of use and including payment by the Bank of the costs of insurance, repairs, gas and oil for such automobile, (iii) reimbursement of annual tax return preparation fees incurred at an accounting firm of the Executive's choice, (iv) reimbursement for costs related to or incurred in connection with annual comprehensive physical examinations of the Executive at a facility of his choice, including the costs of any additional examinations or diagnostic expense recommended by the examining physician, and (v) payment of a stipend to Executive in order to pay the premium on the Long Term Disability Policy described on Schedule 2 attached, plus any and all income tax attributable to the payment of such stipend. Nothing paid to or received by the Executive pursuant to this Section 9 shall be deemed to be in lieu of any of the compensation to the Executive provided for in Section 7 of this Agreement. 10. Vacations. --------- The Executive shall be entitled to a minimum of four weeks of fully compensated vacation time each year during the term of this Agreement, together with all paid holidays provided by the Bank to its employees or senior executive officers. Except as otherwise required by applicable regulatory authorities, such vacation time need not be taken in consecutive periods. The Executive shall be entitled to carry over unused vacation time for a period of up to one (1) year. 11. Termination. This Agreement may be terminated or suspended prior to the expiration of its term in accordance with the following: (a) Death. This Agreement shall terminate upon the Executive's death. -5-
(b) Disability. If the Executive becomes disabled within the meaning of the Long Term Disability Policy described on Schedule 2 attached and as in effect on the date this Agreement is entered into, this Agreement shall terminate as of the date on which the Executive is determined to have become disabled unless the Executive resumes the performance of substantially all of his duties under this Agreement within 180 days thereafter. (c) Regulatory Action. If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Sections 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the Bank's obligations under this Agreement shall be suspended as of the date of service of such notice, unless stayed by appropriate proceedings. If the charges specified in such notice are dismissed the Bank shall pay to the Executive all compensation that was withheld from him and shall reinstate all of the obligations of the Bank suspended hereunder. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) Cause. This Agreement may be terminated by the Board for cause, which for purposes of this Agreement shall mean a termination on the grounds of the Executive's personal dishonesty, incompetence (other than incompetence resulting from mental or physical illness, both of which shall be deemed covered by Section 11(b) above), willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform the stated duties under this Agreement, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or in the event of a material breach by the Executive of any provision of this Agreement. For purposes of this Agreement, the Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the Board at a meeting duly called and held for such purpose after reasonable notice to the Executive, which shall not be less than thirty days notice, and an opportunity for the Executive, together with his counsel, to be heard by the Board, finding that, in the good faith opinion of the Board, the Executive is guilty of misconduct of the type described in this Section 11(d), and specifying the particulars thereof in detail, which determination shall be subject to a complete and de novo review as to reasonableness and good faith in accordance with Section 19 hereof (dealing with the arbitration of disputes under this Agreement). (e) Default. If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of such default, but vested rights of the contracting parties shall not be affected. -6-
(f) Other Regulatory Action. This Agreement may be terminated: (A) by the Director of the Office of Thrift Supervision or his of her designee at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or (B) by the Director of the office of Thrift Supervision at the time such Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is determined by such Director to be in an unsafe and unsound condition. Any rights of the contracting Parties that have already vested, however, shall not be affected by any such action. (g) Notice by the Executive. This Agreement may be terminated by the Executive upon one (1) year's written notice, provided that a termination by the Executive in the event the Bank shall fail continuously to comply, both in form and substance, with each and all of its obligations to the Executive under this Agreement, including without limitation the provisions of this Agreement relating to responsibilities, authority, reporting relationships, compensation and benefits, shall be deemed a termination initiated by the Bank under Section 11(h) below. (h) Notice by the Bank. This Agreement may be terminated at any time by the Bank upon ninety days written notice; provided, however, that a termination of this Agreement under this Section 11(h) shall not reduce the remaining term of this Agreement for purposes of calculating the amounts payable to the Executive under Section 12(b). 12. Compensation and Benefits Payable By the Bank Upon Termination. Compensation and benefits shall be payable by the Bank upon a termination or suspension of this Agreement in accordance with the following: (a) If this agreement is terminated pursuant to any of Sections 11(a) through 11(g), the Bank's obligation to provide compensation and benefits under this Agreement shall, except as provided below, terminate for any period after such termination, subject, however, to potential reinstatement in the case of a regulatory suspension, as provided in Section 11(c). If this Agreement is terminated pursuant to any of Sections 11(a), (b) or (h) hereof, or in the event of the normal or early retirement of the Executive as defined for purposes of the Provident Savings Bank 401(k) Profit Sharing Plan, the Bank shall continue to provide the following benefits to the Executive: (A) The Bank shall continue in force, with out cost to the Executive, those life and accidental death and dismemberment insurance coverages being provided by the Bank to the Executive and his spouse and his eligible dependents as of the date of such termination, provided that after the Executive's 65th birthdate such coverages may be reduced to reflect any decreases which would have occurred if the Executive continued in the employment of the Bank after his 65th birthdate (as determined under the coverage schedules for such insurance in place as of the date of such termination); (B) The Bank shall continue to provide to the Executive and his eligible dependents medical insurance coverage equivalent in benefits, duration and terms to that provided to the -7-
Executive and such persons as of the date of such termination; (C) The Bank shall reimburse the Executive for the categories of expense specified in Section 8 hereof, provided that the Executive shall obtain approval for such expenditures in accordance with policies adopted by the Bank from time to time. (b) In the event of a termination of this Agreement pursuant to Section 11(h), the Bank shall make a lump sum payment to the Executive (or to his personal representatives, spouse, heirs or estate should he thereafter become disabled or die) equal to the discounted present value computed using a discount rate equal to the (lesser of 1) the then current Eleventh District Cost of Funds Index, or 2) the prime rate then charged by representative commercial banks as then most recently reported in the Wall Street Journal) of the aggregate future Annual Base Salary to which the Executive would have been entitled had he continued in the Bank's employ for the then remaining balance of the term of this Agreement. Such lump sum payment shall be made within thirty (30) days following the date of such termination. In addition, the Executive (or his spouse, personal representative, heirs or estate) shall be entitled to receive payment of any amounts required to obtain benefits com parable to those provided to the Executive by the Bank at the time of his termination of employment (a "Covered Expenditure") for the then remaining term of this Agreement; provided, however, that should the Executive obtain alternate employment during such remaining term, the Bank's obligations to thereafter reimburse the Executive for Covered Expenditures shall be limited to the cost to the Executive, if any, of obtaining any benefits needed to make the benefits provided by his new employer comparable to those previously provided by the Bank. Any payments due to the Executive hereunder shall be made within thirty days (30) after the Bank's receipt of suitable evidence that the Executive will be required to incur or has incurred a Covered Expenditure in order to obtain the benefits contemplated hereby. If such termination by the Bank pursuant to Section 11(h) occurs following a Change in Control of the Bank (as defined in Section 5(b) above), then in addition to all other benefits hereunder, the Bank shall be obligated to pay to the Executive upon such termination, a lump sum equal to (A) three times the Executive's aggregate Annual Base Salary for the twelve months in the calendar year preceding such termination, plus (B) three times the maximum cumulative bonuses or incentive awards of any nature whatsoever that the Executive had theretofore received or been credited with by the Bank with respect to the previous year of his employment by the Bank; provided that, the amounts payable to the Executive pursuant to this sentence shall be reduced by the amounts paid to the Executive pursuant to the preceding pro visions of this Section 12(b). Notwithstanding any other provision of this Agreement, if any amount payable under this Agreement would otherwise constitute an "excess parachute payment" (as defined in Section 28OG of the Internal Revenue Code of 1986, as amended (the "Code"), the amount payable under this Agreement shall be reduced in such order and manner as the Executive may elect (or, in the absence of such election, as shall be determined by the Bank) to the largest amount which may be paid without any portion of such amount being subject to the excise tax imposed by Code Section 4999. In addition, in the event the Bank is not in compliance with its minimum core capital requirement, or if the payments pursuant to this subsection (b) would cause the Bank's capital to be reduced below its minimum regulatory core capital requirement, such payments shall be deferred until such time as the Bank, or any successor thereto, is in capital compliance. -8-
(c) No Duty to Mitigate. If the Executive shall become entitled to receive compensation or benefits pursuant to this Agreement after his termination of employment, Executive shall have no duty to mitigate such payments by seeking or obtaining other employment or otherwise. Subject to the Provisions of Section 12(b) above regarding Covered Expenditures, in the event the Executive obtains other employment, any amounts otherwise due hereunder shall not be reduced as a result of the Executive's receipt of compensation from such other employment. 13. Definition Of "Affiliate". ------------------------- The term "affiliate", as used in this Agreement, shall mean any person, firm, corporation, association, organization, or unincorporated trade or business that, now or hereinafter, directly or indirectly, controls, is controlled by, or is under common control with the Bank, including, without limitation, any holding company for, or service corporation of, the Bank. 14. Assignment Limited; Successors. ------------------------------ (a) The obligations and duties of the Executive under this Agreement are personal and not assignable. This Agreement shall inure to the benefit of and shall be binding upon the Bank, its successors and its assigns. As used in this Agreement, the term "successor," shall include any firm, corporation or other business entity which at any time, whether by merger, consolidation, purchase, conversion or other corporate reorganization involving the Bank, acquires all or substantially all of the assets or business of the Bank. (b) Neither the Executive, his spouse (if any), his designated beneficiaries (if any) or his estate shall have any right to alienate, pledge, hypothecate, encumber or dispose of the right to receive payments under this Agreement, nor shall such payments be subject to pledge, attachment or claims of creditors. Such payments and the rights thereto are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer, the Bank shall not be bound thereby and may fully discharge its obligations under this Agreement by making the payments provided for in this Agreement to the parties designated herein. (c) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. Any amounts payable to the Executive hereunder at the time of his death shall be paid in accordance with the terms of this Agreement to the Executive's estate, unless the Executive has provided writ ten notice to the Bank' specifying a different beneficiary or beneficiaries (which notice(s) may be changed from time to time at the option of the Executive, subject to the consent of the Executive's spouse if his spouse then has an enforceable interest in such benefits). 15. Post-termination Obligations. Following any termination of the Executive's employment under this Agreement, the Executive (i) shall not solicit, directly or indirectly, for one year following such termination, the employment of any person who is an employee of the Bank at -9-
the time of such termination or who was, within six months prior to such termination, an employee of the Bank, and (ii) shall not make use of, divulge or disclose, directly or indirectly, any trade secret or other confidential information concerning the business or policies of the Bank or of any of its affiliates, which he learned of as a result of his employment by the Bank, except to the extent that (A) such use or disclosure is necessary to the performance of this Agreement and in furtherance of the Bank's best interests, required by applicable law, necessary to the defense of the Executive in any legal proceeding, or is authorized by the Bank, or (B) such information is lawfully obtainable from other sources. 16. Waiver And Modification. ----------------------- Any waiver, alteration or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto. No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transactions hereunder unless such waiver specifically states that it is to be construed as a continuing waiver. 17. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of California. 18. Severability. ------------ If any provision of this Agreement is held to be prohibited or unenforceable this Agreement shall be deemed ineffective to the extent of such prohibition or unenforceability only without invalidating the remaining provisions hereof. 19. Arbitration. ----------- Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award resulting from such arbitration in any court of competent jurisdiction. 20. Notices. ------- All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by United States certified or registered mail, prepaid, to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by either party to the other). -10-
If to Bank: Provident Savings Bank 3756 Central Avenue Riverside, California 92506 Attn: Secretary of the Company If to Executive: To the most recent address of the Executive as shown in the personnel records of the Bank. The date of such personal delivery or the third business day following the date of mailing shall be deemed to be the date of such notice, demand or communication. 21. Headings. -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. 22. Entire Agreement. ---------------- The Bank and the Executive are entering into a Post- Retirement Compensation Agreement concurrently herewith. This Agreement and such Post-Retirement Compensation Agreement constitute the entire understanding and agreement of the parties hereto and, except as otherwise referred to herein, there are no other agreements or understandings, written or oral, in effect between the parties relating to the employment of the Executive by the Bank. All prior negotiations or agreements, if any, between the parties relating solely to the employment of the Executive by the Bank are hereby superseded. 23. Rules And Regulations. --------------------- To the extent required by any state or federal rules or regulations applicable to the Bank, the terms and provisions of such rules and regulations as in effect as of the date hereof are hereby incorporated into this Agreement by this reference, and notwithstanding anything contained in this Agreement to the contrary, the rights and obligations of any party hereunder shall be subject to all of the terms and limitations contained in such rules and regulations. 24. Counterparts. ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. 25. Withholding. ----------- All amounts paid pursuant to this Agreement shall be subject to applicable federal, state and local tax withholding laws and regulations. -11-
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the day and year first above written. EXECUTIVE: /s/ Craig G. Blunden --------------------------------------- CRAIG G. BLUNDEN BANK: PROVIDENT SAVINGS BANK By: /s/ Robert G. Schrader Its: Executive Vice President/ Chief Operating Officer BOARD OF DIRECTORS /s/ Roy H. Taylor - ---------------------------- ---------------------------- /s/ Robert G. Schrader - ---------------------------- ---------------------------- /s/ Bruce W. Bennett - ---------------------------- ---------------------------- -12-
SCHEDULE 1 ANNUAL BASE SALARY JANUARY 1, 1997 $210,000.00 -13-
SCHEDULE 2 Agreement Payment for Long Term Disability Policy Paul Revere Insurance Group Policy #010273019303 The Personnel/Compensation Committee recommended the payment of a stipend to Craig G. Blunden in order to meet the requirements of the Employment Agreement for Long Term Disability; this recommendation was approved by the Board of Directors. The annual premium is $7,754.45. This is net of $12,718.17, taking into consideration the actual cost to Mr. Blunden in paying for this disability premium, i.e. Federal, State and Medicare Tax. -14-
EXHIBIT 10.2 Post-Retirement Compensation Agreement with Craig C. Blunden
POST-RETIREMENT COMPENSATION AGREEMENT -------------------------------------- This Agreement ("Agreement") is entered into as of the 1st day of January, 1997, between PROVIDENT SAVINGS BANK (the "Bank") and CRAIG G. BLUNDEN (the "Executive") with reference to the following facts. A. The Executive has been employed by the Bank since May 28, 1974 and has performed his duties in an exemplary manner resulting in substantial profits to the Bank. B. The Bank has previously entered into an Employment Agreement and a Post Retirement Compensation Agreement with the Executive, both dated as of March 26, 1992, pursuant to which agreements, (the "Prior Employment Agreement" and "Prior Compensation Agreement", respectively), the Executive is entitled to receive certain post-retirement benefits. C. The parties are entering into a revised employment agreement of even date herewith (the "Revised Employment Agreement") and wish to set forth separately herein the terms of a revised post-retirement compensation agreement that is to exist between the Executive and the Bank as a complete replacement of the Prior Compensation Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Retirement Benefit. ------------------ If the Executive terminates employment with the Bank after reaching age 60, the Bank shall pay the Executive a retirement benefit equivalent in value to a monthly income for the remainder of the Executive's life equal to fifty percent (50%) of the Executive's Final Average Monthly Salary ("Basic Benefit"). The term "Final Average Monthly Salary" shall mean the average gross amount of the Executive's basic monthly salary determined in accordance with the Bank's customary payroll practices, before tax withholding and other payroll deductions and including deferred salary compensation when credited rather than when paid, but excluding bonus or incentive awards, director fees paid to the Executive by the Bank or its Affiliates and any accelerated payments of future salary. "Final Average Monthly Salary" shall be computed based on the highest paid thirty-six (36) consecutive months of the Executive's employment with the Bank. 2. Distribution of Benefits. ------------------------ (a) Lump Sum. Unless the Executive elects to receive the annuity described in subsection (b) below, the Bank shall make a lump sum payment to the Executive in an amount equal to the actuarially determined discounted present value of the Basic Benefit. In calculating the actuarially determined present value of the Basic Benefit, the calculation shall be as of the actual benefit commencement date and shall be based on the prevailing National Association of Insurance Commissioners ("NAIC") standard mortality tables used as of such benefit commencement date, and the discount rate used shall be the lesser of the prime rate or the Eleventh District cost of funds. -1-
(b) Annuity. If the Executive so chooses by irrevocable election communicated to the Bank in writing stating that such election is irrevocable, delivered to the Bank prior to the Executive attaining age 59 or, if earlier, one year prior to the date on which the Executive first becomes entitled to receive payments of benefits under this Agreement, the Executive shall be entitled to receive, in lieu of the lump sum benefit specified in subsection (a) above, an annuity purchased by the Bank with the lump sum benefit otherwise payable pursuant to subsection (a) above, providing for such payments and for such duration as the Executive shall indicate in such election. 3. Early Termination. ----------------- (a) Termination by Executive: Reduced Benefits. Subject to Section 3(b) below, if the Executive's employment with the Bank is terminated prior to reaching age sixty (60) for any reason other than death, disability or as a result of a termination by the Bank, as defined in Sections 11(a), 11(b) or 11(h) respectively, of the Revised Employment Agreement, the monthly benefits due and payable to the Executive under this Agreement shall be reduced from fifty percent (50%) of the Executive's Final Average Monthly Salary by multi plying the benefits otherwise payable hereunder by a fraction, the numerator of which shall be the number of months between March 26, 1992 and the date of such termination of employment, and the denominator of which shall be the number of months from March 26, 1992 to the date Executive reaches age sixty (60). The Executive shall be entitled to commence receipt of such reduced monthly benefits hereunder upon reaching age sixty (60) or at such earlier date as the Executive shall elect by giving written notice of such election to the Bank; provided that, if the Executive elects to commence receipt of such payments prior to reaching age sixty (60), then the amounts of such payments shall be actuarially adjusted so that the discounted present value of the total benefits payable to the Executive pursuant to this Section 3(a) shall equal the present value of such payments that would otherwise have been payable to the Executive commencing upon his reaching age sixty (60). Actuarial adjustments made for this purpose shall be calculated in accordance with the requirements of Section 2(b) above. (b) Death, Disability or Termination by Bank: Full Benefits. If, prior to reaching age sixty (60), the Executive's employment with the Bank is terminated as a result of death, disability or termination by the Bank, as defined in Sections 11(a), 11(b) or 11(h), respectively, of the Revised Employment Agreement, including a termination that is deemed pursuant to Section 11(g) of the Revised Employment Agreement to constitute a termination pursuant to Section 11(h) thereof, the Executive, or his surviving spouse, if applicable, shall be entitled to a lump sum benefit equal to the amount that would have become payable to the Executive pursuant to Section 2(a); provided, however, that such lump sum benefit shall be reduced by any benefit actually received by the Executive under the Long Term Disability Policy described on Schedule 2 of the Employment Agreement entered into between the Bank and the Executive as of January 1, 1997. -2-
4. Prior Agreements. ---------------- The post-retirement compensation agreement set forth herein, together with the provisions of the Revised Employment Agreement, are in full replacement of and supersede the agreements relating to post-retirement compensation set forth in the Prior Employment Agreement. 5. Non-assignment of Benefits. -------------------------- Neither the Executive, his spouse (if any), his designated beneficiaries (if any) or his estate shall have any right to alienate, pledge, hypothecate, encumber or dispose of the right to receive payments under this Agreement, nor shall such payments be subject to pledge, attachment or claims of creditors. Such payments and the rights thereto are expressly declared to be nonassignable and nontransferable. In the event of any attempted assignment or transfer, the Bank shall not be bound thereby and may fully discharge its obligations under this Agreement by making the payments provided for in this Agreement to the parties designated herein. 6. Successors. ---------- This Agreement shall be binding upon and inure to the benefit of any successor of the Bank and any such successor shall be deemed substituted for the Bank under the terms of this Agreement. As used in this Agreement, the term "successor" shall include any firm, corporation, or other business entity which at any time, whether by merger, consolidation, purchase, conversion or other corporate reorganization involving the Bank, acquires all or substantially all of the assets or business of the Bank. 7. Administration. -------------- The Personnel/Compensation Committee of the Board of Directors of the Bank (the "Committee") shall be responsible for administration of this Agreement, and shall have the authority to make, amend or rescind such rules and to make such determinations as it shall deem necessary or appropriate for the proper implementation of this Agreement; provided that, the Committee shall report all actions taken by it to the Board on a regular basis. Any action taken or determination made by the Committee shall be final, binding and conclusive on all parties absent manifest error. The Committee shall be the agent for the service of process on the Bank in connection with this Agreement. 8. Procedure For Appeal of Denial of Benefits; Arbitration. ------------------------------------------------------- (a) The Executive, or the Executive's spouse if applicable, shall have the right to request review by the Committee of any decision denying claims for benefits under this Agreement in accordance with the following appeal procedure: (i) The Committee shall provide notice in writing to the Executive (or to the Executive's spouse, if applicable) if a claim for benefits under this Agreement has been denied in whole or in part. Such notice shall be made within 60 days -3-
of the receipt by the Committee of the claim or, if special circumstances require, and the Executive (or spouse) is so notified in writing, within 90 days of the receipt by the Committee of the claim. The notice shall (A) set forth the specific reasons for the denial of benefits; (B) contain specific references to provisions of the Agreement relevant to the denial; (C) describe any material and information, if any, necessary for the claim for benefits to be allowed, which had been requested, but not received by the Committee; and (D) advise the Executive (or spouse) that any appeal of the Committee's adverse determination must be made in writing to the Committee, within 90 days after receipt of this notification, setting forth the facts upon which the appeal is based. (ii) If the Executive (or spouse) fails to appeal the Committee's denial of benefits in writing and within ninety (90) days, the Committee's determination shall become final and conclusive. (iii) If the Executive (or spouse) timely appeals the Committee's denial of benefits, the Committee shall reexamine all issues relevant to the original denial of benefits. The Committee may in addition, upon at least ten (10) days written notice, request the claimant or his representative to appear personally before it to make an oral presentation or answer questions that may have been raised, or the Executive (or spouse) or their representative may make a request to appear personally before the Committee. (iv) The Committee shall advise the Executive (or spouse) in writing of its decision and the specific reasons on which such decision was based within 60 days of receipt of the written appeal, or personal appearance of the Executive (or spouse) or their representative, unless special circumstances require an extension of such sixty (60) day period for not more than an additional sixty (60) days. Where such extension is necessary the Executive (or spouse) shall be given written notice of the delay. (b) If any issue regarding claims under this Agreement is not resolved to the satisfaction of the Executive, or the Executive's spouse if applicable, such issue shall be submitted for final and binding arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award resulting from such arbitration in any court of competent jurisdiction. 9. Notices, Statements and Reports. ------------------------------- The Committee shall be the "administrator" of the Agreement as defined in Section 3(16)(A) of the Employee Retirement Income Security Act of 1974 ("ERISA") for purposes of the reporting and disclosure requirements imposed by ERISA and the Internal Revenue Code of 1986, as amended. -4-
10. Indemnification. --------------- To the extent permitted by applicable law and regulation, the Bank shall indemnify and hold harmless the members of the Board of Directors of the Bank and the members of the Committee from and against any and all liabilities, costs, and expenses incurred by such persons as a result of any act, or omission to act, in connection with the performance of such persons' duties, responsibilities, and obligations under this Agreement, other than such liabilities, costs and expenses as may result from the negligence, gross negligence, bad faith, willful misconduct, or criminal acts of such persons. 11. Withholding. ----------- All amounts paid pursuant to this Agreement shall be subject to applicable federal, state and local tax withholding laws and regulations. 12. Headings. -------- Headings herein are for convenience only, are not a part hereof and shall not be used in construing this Agreement. 13. Counterparts. ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one instrument. 14. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of California. 15. Severability. ------------ Any provision of this Agreement which is held to be prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability only, without invalidating the remaining provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates set opposite their respective names. EXECUTIVE /s/ Craig G. Blunden ------------------------------------- CRAIG G. BLUNDEN -5-
BANK PROVIDENT SAVINGS BANK By: /s/ Robert G. Schrader ----------------------------------- BOARD OF DIRECTORS /s/ Roy H. Taylor - ----------------------------- /s/ Robert G. Schrader - ----------------------------- /s/ Bruce W. Bennett - ----------------------------- -6-
EXHIBIT 13 Annual Report to Stockholders
PFH PROVIDENT FINANCIAL HOLDINGS, INC. Holding Company for Provident Savings Bank 1997 ANNUAL REPORT
CORPORATE VALUE The Board of Directors and Management have the ultimate responsibility for ensuring the success and viability of this Company through predictable, long-term profitability, a strong capital base, and continued quality within the balance sheet. Our primary purpose is to understand the unique financial needs of our customers and to consistently deliver reliable products and services which nurture solid, long-term client relationships. By fulfilling our purpose, we will achieve success through continuing to build shareholder value, creating a dynamic, customer-driven corporate culture, and actively participating within the communities we serve. - ------------------------------------------------------------------------------- TABLE OF CONTENTS Message From the Chairman................................................ 1 Financial Highlights..................................................... 2 Report of Independent Accountants........................................ 4 Consolidated Financial Statements........................................ 5 Notes to Consolidated Financial Statements............................... 10 Shareholder Information.................................................. 31 Market Information....................................................... 31 Corporate Profile........................................................ 31 Board of Directors and Senior Officers................................... 32 Provident Bank Branch Locations.......................................... 33
MESSAGE FROM THE CHAIRMAN DEAR FELLOW SHAREHOLDERS, As we end our first year as a public company, we are pleased to report the financial results for your company. Net income for fiscal 1997 was approximately $1.9 million, or $0.41 per share, as compared to $2.8 million for fiscal 1996. These results reflect a one-time charge in fiscal 1997 to recapitalize the Savings Association Insurance Fund and, in fiscal 1996, proceeds from a key man life insurance policy. Excluding these two items, net income in fiscal 1997 would have been $3.8 million as compared to $1.8 million in fiscal 1996. Balance sheet growth was moderate as assets increased by 5.2 percent to $615.5 million. In similar fashion, total loans held for investment increased by 14.2 percent and total deposits increased by 6.1 percent. Our goal over the next fiscal year is to increase the rate of growth through mortgage loan originations, business banking development, wholesale funding, retail deposit gathering, branch acquisitions, and new branch openings. Our newest office, located in downtown Riverside's nascent courthouse district, is projected to open during the second quarter of fiscal 1998. In addition, we expect to complete the previously announced Blythe branch acquisition during the third quarter of fiscal 1998. Progress has been made in developing our business banking operation. We have hired a seasoned banking professional who is leading the direction of this essential division. We expect to include business banking in the product offering at select retail branches by year-end. We are excited by the prospect of creating strategic partnerships with local businesses and together strengthening the economic fabric of the communities we mutually serve. Following the success of our initial public offering, we remain committed to increasing the return on shareholder equity and building long-term shareholder value. We initiated a five percent stock buy-back in August which will be completed within six months. In addition, we will continue to pursue and evaluate potential expansion opportunities that will enhance the economic worth of our organization. On behalf of the Board of Directors and management, we sincerely appreciate your continued support as we look forward to meeting the challenges of the future. Sincerely, /s/ Craig G. Blunden Craig G. Blunden Chairman, President and Chief Executive Officer 1
FINANCIAL HIGHLIGHTS The following tables set forth certain information concerning the consolidated financial position and results of operations of the Corporation and its subsidiaries at the dates and for the periods indicated. At June 30, - ------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------- (In Thousands) FINANCIAL CONDITION DATA: Total assets......... $615,500 $584,847 $567,186 $580,336 $590,440 Loans held for investment, net..... 517,147 452,945 471,543 420,159 404,651 Loans available for sale, net........... 19,984 49,612 34,489 83,049 104,409 Cash and overnight deposits............. 20,111 30,831 11,433 19,909 32,954 Investment securities........... 34,406 27,118 20,067 26,301 20,326 Deposits.............. 508,759 479,374 486,585 471,787 454,118 Borrowings............ 6,828 8,578 35,063 56,153 76,047 OPERATING DATA: Interest income....... $(42,599) $(41,817) $(36,020) $(36,197) $(40,167) Interest expense...... 23,528 25,269 22,491 19,532 21,839 - ------------------------------------------------------------------------------ Net interest income... 19,071 16,548 13,529 16,665 18,328 Provision for loan losses............... 1,254 2,261 4,787 2,033 1,655 - ------------------------------------------------------------------------------ Net interest income after provision for loans losses..... 17,817 14,287 8,742 14,632 16,673 Loan servicing and other fees........... 2,738 2,442 2,476 3,072 1,927 Gains from sale of loans................ 3,597 4,753 701 1,246 5,726 Gain on bulk sale of servicing rights..... -- -- -- 2,052 -- Other non-interest income............... 1,273 2,256 1,308 1,141 1,989 Real estate operations, net.................. (11) (101) (1,600) (366) (125) Operating and administrative expenses............. 22,313 19,499 17,354 23,758 18,243 - ------------------------------------------------------------------------------ Income (loss) before income taxes......... 3,101 4,138 (5,727) (1,981) 7,947 Provision (benefit) for income taxes..... 1,160 1,332 (1,735) (648) 3,838 - ------------------------------------------------------------------------------ Net income (loss)..... $ 1,941 $ 2,806 $ (3,992) $ (1,333) $ 4,109 ============================================================================== 2
At June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- KEY OPERATING RATIOS: PERFORMANCE RATIOS Return (loss) on assets(1).......... 0.32% 0.50% (0.72)% (0.23)% 0.73% Return (loss) on shareholders' equity(2).......... 2.26 6.98 (9.81) (3.08) 10.24 Interest rate spread(3).......... 2.69 2.75 2.31 2.71 3.13 Net interest margin(4).......... 3.33 3.05 2.55 2.99 3.42 Average interest- earning assets to average interest- bearing liabilities 115.44 106.32 105.60 108.05 107.14 Operating and adminis- trative expenses as a percent of average total assets....... 3.73 3.46 3.13 4.09 3.26 REGULATORY CAPITAL RATIOS Tangible capital.... 9.89 10.41 6.19 6.65 6.74 Core capital........ 9.89 10.41 6.19 6.69 6.86 Risk-based capital.. 16.12 16.49 11.25 12.68 11.86 ASSET QUALITY RATIOS Nonaccrual and 90 days or more past due loans as a percent of loans held for investment, net.... 1.21 0.98 0.54 1.08 1.18 Nonperforming assets as a percent of total assets....... 1.44 1.22 1.65 1.49 1.63 Allowance for loan losses as a percent of gross loans held for investment..... 1.04 1.18 1.06 0.78 0.79 Allowance for loan losses as a percent of nonperforming loans.............. 87.45 123.43 198.79 73.62 68.86 Net charge-offs to average outstanding loans.............. 0.25 0.38 0.62 0.39 0.04 - ------------------ (1) Net income (loss) divided by average total assets. (2) Net income (loss) divided by average shareholders' equity. (3) Difference between weighted average yield on interest-earning assets and weighted average rate on interest- bearing liabilities. (4) Net interest income as a percentage of average interest-earning assets. 3
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PROVIDENT FINANCIAL HOLDINGS In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Provident Financial Holdings, Inc. and its subsidiary at June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Los Angeles, CA August 11, 1997 4
CONSOLIDATED BALANCE SHEETS Provident Financial Holdings, Inc. and Subsidiary June 30, - ------------------------------------------------------------------------------- (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------- ASSETS Cash............................................... $ 10,411 $ 7,031 Overnight deposits................................. 9,700 23,800 - ------------------------------------------------------------------------------- Total cash and cash equivalents................... 20,111 30,831 Investment securities held to maturity (market value of $34,425 and $27,112) (Note 2)............. 33,645 27,118 Investment securities available for sale, at fair market value (Note 2)...................... 761 -- Loans held for investment, net (Note 3)............ 517,147 452,945 Loans available for sale, net (Note 4)............. 19,984 49,612 Accrued interest receivable........................ 3,378 3,083 Real estate available for sale, net (Note 5)....... 5,676 5,779 Federal Home Loan Bank stock - at cost............. 4,879 4,590 Premises and equipment, net (Note 6)............... 6,825 7,058 Prepaid expenses and other assets.................. 3,094 3,831 - ------------------------------------------------------------------------------- Total assets.................................... $615,500 $584,847 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Non-interest bearing deposits (Note 7)............ $ 2,335 $ 2,106 Interest bearing deposits (Note 7)................ 506,424 477,268 - ------------------------------------------------------------------------------- Total deposits.............. 508,759 479,374 Borrowings (Note 8)............................... 6,828 8,578 Accounts payable, accrued interest and other liabilities................................ 14,466 10,925 - ------------------------------------------------------------------------------- Total liabilities............................... 530,053 498,877 - ------------------------------------------------------------------------------- Commitments and contingencies (Note 13) Stockholders' equity (Notes 10, 11 and 16): Preferred stock, $.01 par value; authorized 2,000,000 shares; none issued and outstanding Common stock, $.01 par value; authorized 15,000,000 shares; issued 5,125,215 shares; outstanding 4,920,215 and 5,125,215, respectively.......................... 51 51 Additional paid-in capital........................ 49,842 49,742 Retained earnings - substantially restricted (Notes 10 and 16)..................... 42,070 40,129 Treasury stock at cost (205,000 shares)........... (3,291) -- Unearned ESOP shares (Note 11).................... (3,720) (3,952) Unrealized gain on securities available for sale, net of tax................... 495 -- - ------------------------------------------------------------------------------- Total stockholders' equity...................... 85,447 85,970 - ------------------------------------------------------------------------------- Total liabilities and stockholders' equity...... $615,500 $584,847 ============================================================================== The accompanying notes are an integral part of these financial statements. 5
CONSOLIDATED STATEMENTS OF OPERATIONS Provident Financial Holdings, Inc. and Subsidiary Year Ended June 30, - ------------------------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Interest income: Loans (Note 3)....................... $ 38,445 $ 39,701 $ 34,045 Investment securities (Note 2)....... 4,154 2,116 1,975 - ------------------------------------------------------------------------------- Total interest income............... 42,599 41,817 36,020 - ------------------------------------------------------------------------------- Interest expense: Deposits (Note 7)................... 23,112 24,007 21,189 Borrowings.......................... 416 1,262 1,302 - ------------------------------------------------------------------------------- Total interest expense............. 23,528 25,269 22,491 - ------------------------------------------------------------------------------- Net interest income................ 19,071 16,548 13,529 Provision for loan losses (Note 3)... 1,254 2,261 4,787 - ------------------------------------------------------------------------------- Net interest income, after provision for loan losses..................... 17,817 14,287 8,742 - ------------------------------------------------------------------------------- Non-interest income Loan servicing and other fees....... 2,738 2,442 2,476 Gain on sale of loans, net.......... 3,597 4,753 701 Life insurance proceeds............. 1,000 Other............................... 1,273 1,256 1,308 - ------------------------------------------------------------------------------- Total non-interest income.......... 7,608 9,451 4,485 - ------------------------------------------------------------------------------- Non-interest expenses Salaries and employee benefits...... 11,269 11,444 9,671 Premises and occupancy.............. 2,064 1,939 2,336 SAIF insurance premiums............. 3,954 1,293 1,105 Telephone........................... 427 426 460 Other............................... 4,599 4,397 3,782 - ------------------------------------------------------------------------------- Total operating and administrative expenses........... 22,313 19,499 17,354 Real estate operations, net (Note 5). 11 101 1,600 - ------------------------------------------------------------------------------- Total non-interest expenses.......... 22,324 19,600 18,954 - ------------------------------------------------------------------------------- Income (loss) before income taxes.... 3,101 4,138 (5,727) Provision (benefit) for income taxes (Note 9)...................... 1,160 1,332 (1,735) - ------------------------------------------------------------------------------- Net income (loss).................. $ 1,941 $ 2,806 $ (3,992) =============================================================================== Net income per common share.......... $ 0.41 N/A N/A =============================================================================== The accompanying notes are an integral part of these financial statements. 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Provident Financial Holdings, Inc. and Subsidiary Common Addi- Un- Securi- Stock tional Unearned earned ties --------------- Paid-in Retained Treasury ESOP Available Shares Amount Capital Earnings Stock Shares For Sale Total - ------------------------------------------------------------------------------- Balance at June 30, 1994........ $41,315 $41,315 Net loss..... (3,992) (3,992) - ------------------------------------------------------------------------------- Balance at June 30, 1995........ 37,323 37,323 Issuance of stock in a public offering.... 5,125,215 $51 $49,728 49,779 Purchase of shares by ESOP........ $(4,100) (4,100) Release of ESOP shares. 14 148 162 Net income... 2,806 2,806 - ------------------------------------------------------------------------------- Balance at June 30, 1996........ 5,125,215 51 49,742 40,129 (3,952) 85,970 Net income... 1,941 1,941 Purchase of treasury stock....... (205,000) $(3,291) (3,291) Release of ESOP shares...... 100 232 332 Unrealized gain on securities available for sale, net of tax......... $495 495 - ------------------------------------------------------------------------------- Balance at June 30, 1997........ 4,920,215 $51 $49,842 $42,070 $(3,291) $(3,720) $495 $85,447 =============================================================================== The accompanying notes are an integral part of these financial statements. 7
CONSOLIDATED STATEMENTS OF CASH FLOWS Provident Financial Holdings, Inc. and Subsidiary Year Ended June 30, - ------------------------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss)............................ $ 1,941 $ 2,806 $ (3,992) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................ 1,082 1,058 1,387 Amortization of loan fees.................... (254) (112) (90) Amortization of unearned ESOP shares ........ 332 Provision for loan losses.................... 1,254 2,261 4,787 Provision for losses on real estate.......... 306 239 1,665 Gain on sale of loans........................ (3,597) (4,753) (701) Increase (decrease) in accounts payable and other liabilities........................... 3,541 2,710 (2,866) Decrease (increase) in prepaid expenses and other assets................................ 153 (592) 1,054 Loans originated for sale.................... (313,382) (469,167) (161,480) Proceeds from sale of loans.................. 346,607 458,797 210,741 Other........................................ (1,000) (961) - ------------------------------------------------------------------------------- Net cash provided by (used for) operating activities........................ 37,983 (7,753) 49,544 - ------------------------------------------------------------------------------- Cash flows from investing activities: Net (increase) decrease in loans............. (70,891) 13,047 (67,400) Maturity of investment securities............ 285,034 207,104 334,046 Purchases of investment securities........... (292,322) (214,155) (330,267) Redemption of Federal Home Loan Bank stock... 1,000 Proceeds from disposal of real estate........ 5,518 8,619 8,245 Purchases of premises and equipment, net of proceeds from sales......................... (881) (609) (352) Other........................................ 495 1,000 - ------------------------------------------------------------------------------- Net cash (used for) provided by investing activities........................ (73,047) 15,006 (54,728) - ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 8
CONSOLIDATED STATEMENTS OF CASH FLOWS Provident Financial Holdings, Inc. and Subsidiary Year Ended June 30, - ------------------------------------------------------------------------------- (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Cash flows from financing activities: Net decrease in NOW, passbook and money market deposits............................. (18) (7,064) (34,786) Net increase (decrease) in term deposits..... 29,403 (147 ) 49,584 Repayment of Federal Home Loan Bank Advances. (1,750) (37,000) (153,500) Proceeds from Federal Home Loan Bank Advances.................................... 12,500 135,500 Proceeds from issuance of capital stock...... 45,841 Treasury stock purchases..................... (3,291) Net (decrease) increase in securities sold under agreements to repurchase.............. (1,985) (3,090) - ------------------------------------------------------------------------------- Net cash provided by (used for) financing activities.................................. 24,344 12,145 (6,292) - ------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents................................. (10,720) 19,398 (11,476) Cash and cash equivalents at beginning of period...................................... 30,831 11,433 22,909 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of period...................................... $ 20,111 $ 30,831 $ 11,433 =============================================================================== Supplemental information: Cash paid for interest....................... $ 23,505 $ 25,302 $ 22,607 =============================================================================== Cash paid (received) for income taxes........ $ 732 $ 704 $ (3,014) =============================================================================== Real estate acquired in settlement of loans.. $ 5,721 $ 3,433 $ 11,546 =============================================================================== The accompanying notes are an integral part of these financial statements. 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS) Pursuant to a plan of conversion, Provident Savings Bank, FSB (the Bank) converted from a Federally chartered mutual savings bank to a Federally chartered stock savings bank effective June 27, 1996. Provident Financial Holdings, Inc. (the Holding Company), a Delaware corporation organized by the Bank, acquired all of the capital stock of the Bank issued in the conversion; the transaction was recorded on a book value basis. Any references to financial information for periods prior to June 30, 1996 refer to the Bank prior to conversion. The following accounting policies, together with those disclosed elsewhere in the consolidated financial statements, represent the significant accounting policies of Provident Financial Holdings, Inc. and subsidiary. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Provident Financial Holdings Inc., and its wholly-owned subsidiary, Provident Savings Bank, FSB (collectively, the Company). All significant intercompany balances and transactions have been eliminated. The Company operates primarily in one business segment attracting customer deposits to originate loans secured primarily by mortgages on residential real estate. The segment includes ancillary activities related to real estate lending such as mortgage banking and, to a lesser extent, real estate development. Customer deposits are collected substantially from Riverside and San Bernardino Counties out of nine branch locations with lending operations in California and Nevada using nine lending offices. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to prevailing practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, due from banks and overnight deposits. INVESTMENT SECURITIES The Company classifies its qualifying investments as available for sale or held to maturity. Management has reviewed the securities portfolio and classified securities as either held to maturity or available for sale. The Company's policy of classifying investments as held to maturity is based upon its ability and management's intent to hold such securities to maturity. Securities expected to be held to maturity are carried at amortized historical cost. All other securities are classified as available for sale and are carried at fair value. Fair value is determined based upon quoted market prices. Unrealized gains and losses on securities available for sale are included in stockholders' equity net of taxes. Gains and losses on dispositions of investment securities are included in noninterest income and are determined using the specific identification method. LOANS Loans held for investment consist primarily of long-term loans secured by first trust deeds on single-family residences, other residential property, commercial property and land. The adjustable-rate mortgage (ARM) is the Company's primary loan investment. Loan origination fees and certain direct origination expenses are deferred and amortized to interest income on loans over the contractual life of the loan using the interest method. Amortization is discontinued for nonperforming loans. 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest receivable represents, for the most part, the current month's interest which will be included as a part of the borrower's next monthly loan payment. Interest receivable is accrued only if deemed collectible. Loans generally are deemed to be in non-accrual status when they become 90 days past due. When a loan is placed on non-accrual status, interest accrued but not received is reversed against income. MORTGAGE BANKING ACTIVITIES Loans are originated for both investment and for sale in the secondary market. Since the Company is primarily an adjustable-rate mortgage lender for its own portfolio, most fixed rate products are originated for sale to others. Loans available-for-sale are carried at lower of cost or fair value. Fair value is generally determined by outstanding commitments from investors or current investor yield requirements as calculated on the aggregate loan basis. The Company sells loans in order to minimize interest rate risk and to provide additional funds for investment by the Company. Loans are sold without recourse other than short-term covenants which are standard in the industry. For some loans sold, the Company may retain the servicing rights in order to generate servicing income. Where the Company continues to service loans after sale, investors are paid their share of the principal collections together with interest at an agreed-upon rate, which generally differs from the loan's contractual interest rate. Gains or losses on sales of loans, including fees received or paid, are recognized at the time of sale and are determined by the difference between the net sales proceeds and the book value of the loans sold. When loans are sold with servicing retained, an adjustment, if necessary, is made to increase or decrease the difference in order to provide for a normal servicing spread. Bulk sales of servicing rights are recognized when title and all risks and rewards of ownership of the underlying loans have been irrevocably transferred to the buyer and all significant contingencies have been resolved. Effective July 1, 1996 the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" recognizing mortgage servicing rights as separate assets from the underlying mortgage loans at the time such loans are sold and servicing is retained. SFAS 122 did not have a material impact on the Company's financial reporting. Effective January 1, 1997, the Company adopted SFAS 125 "Accounting for Transfers of Financial Assets and Liabilities." Under the financial-components approach of SFAS 125, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes all financial and servicing assets it no longer controls and liabilities that have been extinguished. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. The adoption of SFAS 125 did not have a material impact on the Company's financial reporting. ALLOWANCE FOR LOAN LOSSES It is the policy of the Company to provide for estimated losses on real estate loans when any significant and permanent decline in the value of the underlying collateral occurs. Periodic reviews are made in an attempt to identify potential problems at an early date. Individual loans are periodically reviewed and are classified according to their inherent risk. The internal asset classification system used by the Company is the primary basis by which the Company evaluates the possible loss exposure. Management's determination of the adequacy of the allowance for losses is based on an evaluation of the portfolio, past experience, prevailing market conditions, and other relevant factors. The determination of the allowance for loan losses is based on estimates that are particularly susceptible to changes in the economic environment and market conditions. The allowance is increased by the provision for losses charged against income and reduced by charge-offs, net of recoveries. 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPAIRED LOANS The Company assesses loans individually and identifies impairment when the accrual of interest has been discontinued, loans have been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans are currently performing. Factors considered in determining impairment include, but are not limited to, expected future cash flows, the financial condition of the borrower and current economic conditions. The Company measures each impaired loan based on the fair value of its collateral and charges off those loans or portions of loans deemed uncollectible. REAL ESTATE AVAILABLE FOR SALE All foreclosed real estate and investment real estate is available for sale. Real estate acquired through foreclosure is initially recorded at the lesser of the loan balance at the time of foreclosure or the fair value of the real estate acquired less estimated selling costs. All real estate is carried at the lower of cost or fair value less estimated selling costs. Real estate loss provisions are recorded when the carrying value of the property exceeds the fair value. Costs relating to improvement of property are capitalized. Other costs are expensed as incurred. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed primarily on a straight-line basis over the estimated useful lives as follows: Buildings 10-40 years Furniture and fixtures 3-10 years Automobiles 3 years Leasehold improvements are amortized over the shorter of the respective lease terms or the lives of the improvements. Maintenance and repair costs are charged to operations as incurred. INCOME TAXES Taxes are provided on substantially all income and expense items included in earnings, regardless of the period in which such items are recognized for tax purposes. Taxes on income are determined by using the liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. A valuation allowance is provided against deferred tax assets when realization is not considered "more likely than not." RISKS AND UNCERTAINTIES In the normal course of its business, the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from the borrower's inability or unwillingness to make contractually required payments. Market risk results from changes in the value of assets and liabilities which may impact, favorably or unfavorably, the realizability of those assets and liabilities held by the Company. The Company is subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examination. 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NET INCOME PER COMMON SHARE Net income per common share is based on the weighted average number of shares outstanding plus, when applicable, the dilutive effect of stock options. Shares repurchased by the Company are excluded from shares outstanding for these calculations. No amounts are presented for the periods prior to June 27, 1996 as the Company was a mutual savings bank and no stock was outstanding. The weighted average number of shares used for the computation for the year ended June 30, 1997 was 4,704,974. EMPLOYEE STOCK OWNERSHIP PLAN The Company recognizes compensation expense when shares are committed to be released to directly compensate employees in an amount equal to the fair value of the shares so committed. The difference between the amount of compensation expense and the cost of the shares released is recorded as additional paid-in capital. Therefore, total shareholders' equity is not affected. POSTRETIREMENT BENEFITS The estimated obligation for postretirement health care and life insurance benefits is determined based on an actuarial computation of the cost of current and future benefits for employees and retirees. Such costs are charged to expense during the years that the employees provide service. RECLASSIFICATIONS Certain reclassifications of prior year financial data have been made to conform to the current reporting practices of the Company. 2. INVESTMENT SECURITIES (DOLLARS IN THOUSANDS) The amortized and estimated fair value of investment securities as of June 30, 1997 were as follows: Gross Gross Esti- Unrea- Unrea- mated Book lized lized Fair Carrying Value Gains (Losses) Value Value - ------------------------------------------------------------------------------- Held to maturity securities U.S. Treasury securities and obligations of other U.S. government agencies and corporations................... $33,553 $ 53 $(36) $33,570 $33,553 Other........................... 92 2 -- 94 92 - ------------------------------------------------------------------------------- Total held to maturity.......... 33,645 55 (36) 33,664 33,645 - ------------------------------------------------------------------------------- Available for sale securities FHLMC stock.................... 20 680 -- 700 700 FNMA stock..................... 1 60 -- 61 61 - ------------------------------------------------------------------------------- Total available for sale........ 21 740 -- 761 761 - ------------------------------------------------------------------------------- Total investment securities..... $33,666 $795 $(36) $34,425 $34,406 =============================================================================== 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The book value and estimated market value of investment securities as of June 30, 1996 were as follows: Gross Gross Esti- Unrea- Unrea- mated Book lized lized Fair Carrying Value Gains (Losses) Value Value - ------------------------------------------------------------------------------- Held to maturity securities U.S. Treasury securities and obligations of other U.S. government agencies and corporations................... $26,973 $27 $(30) $26,970 $26,973 Other........................... 145 2 (5) 142 145 - ------------------------------------------------------------------------------- Total held to maturity.......... $27,118 $29 $(35) $27,112 $27,118 =============================================================================== Securities purchased under agreements to resell at June 30, 1996, were secured by mortgage-backed securities pledged by dealers whose market values exceeded the Company's investment in these agreements. These agreements matured within ninety days of the end of the period. The maturities of investment securities were as follows: June 30, 1997 June 30, 1996 - ------------------------------------------------------------------------------- Amortized Market Amortized Market Cost Value Cost Value - ------------------------------------------------------------------------------- Due in one year.............. $23,096 $23,183 $24,973 $24,985 Due after one through five years....................... 10,549 10,481 2,145 2,127 - ------------------------------------------------------------------------------- $33,645 $33,664 $27,118 $27,112 =============================================================================== 3.O LOANS HELD FOR INVESTMENT (DOLLARS IN THOUSANDS) Loans held for investment consisted of the following: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Residential real estate - single family..................................... $402,296 $327,490 Residential real estate - multi-family............................... 52,564 54,427 Commercial real estate...................... 47,887 54,813 Real estate construction.................... 5,778 10,222 Commercial business lending................. 991 -- Consumer.................................... 16,749 15,497 Other....................................... 289 332 - ------------------------------------------------------------------------------- 526,554 462,781 Less: Undisbursed loan funds..................... 3,695 3,694 Deferred loan fees......................... 102 513 Unearned discounts on loans purchased...... 145 177 Allowance for loan losses.................. 5,465 5,452 - ------------------------------------------------------------------------------- $517,147 $452,945 =============================================================================== 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fixed rate loans comprised 14% and 13%, respectively, of the loan portfolio at June 30, 1997 and 1996. The following summarizes the components of the net change in the allowance for loan losses: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Balance, beginning of period................. $ 5,452 $ 5,085 $ 3,332 Provision for losses......................... 1,254 2,261 4,787 Recoveries................................... 136 589 459 (Charge-offs)................................ (1,377) (2,483) (3,493) - ------------------------------------------------------------------------------- Balance, end of period....................... $ 5,465 $ 5,452 $ 5,085 =============================================================================== The following summarizes information regarding impaired loans: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Non-accrual loans................................ $ 5,137 $ 4,417 Restructured loans............................... 4,910 4,905 Other............................................ 266 1,031 - ------------------------------------------------------------------------------- Total impaired loans............................. $ 10,313 $ 10,353 =============================================================================== The effect of nonaccrual and restructured loans on interest income for the years ended June 30, 1997, 1996 and 1995 is presented below. Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Contractual interest due.................... $ 871 $ 814 $ 631 Interest recognized......................... 539 589 154 - ------------------------------------------------------------------------------- Net interest foregone....................... $ 332 $ 225 $ 477 =============================================================================== At June 30, 1997 and 1996, there were no commitments to lend additional funds to those borrowers whose loans were classified as impaired. The following table identifies the Company's total recorded investment in impaired loans, net of specific allowances, by type at June 30: 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Non-accrual loans: Single family........................... $ 3,667 $ 3,511 Multi-family............................ 1,176 798 Commercial.............................. 144 -- Non-mortgage............................ 150 108 Restructured loans Single family........................... 268 273 Multi-family............................ -- -- Commercial.............................. 4,642 4,632 Non-mortgage............................ -- -- Other impaired loans: Single family........................... 116 120 Multi-family............................ 150 569 Commercial.............................. -- 317 Non-mortgage............................ -- 25 - ------------------------------------------------------------------------------- Total impaired loans..................... $ 10,313 $ 10,353 =============================================================================== During the years ended June 30, 1997 and 1996, the Company's average investment in impaired loans was $10,054 and $11,092, respectively, and interest income recorded during this period was $581 and $806, respectively. The Company records interest on non-accrual loans utilizing the cash basis method of accounting during periods when the loans are in non-accrual status. In the ordinary course of business, the Bank makes loans to its directors, officers and employees at substantially the same terms prevailing at the time of origination for comparable transactions with borrowers. The following is a summary of related party loan activity: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Balance, beginning of period............... $ 2,462 $ 2,315 $ 2,719 Originations............................... 43 471 4 Payments................................... (340) (90) (29) Terminations............................... (340) (234) (379) - ------------------------------------------------------------------------------- Balance, end of period..................... $ 1,825 $ 2,462 $ 2,315 =============================================================================== 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. MORTGAGE BANKING (DOLLARS IN THOUSANDS) The following summarizes the unpaid principal balance of loans serviced by the Company: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Loans serviced for Federal Home Loan Mortgage Corporation....................... $189,586 $221,019 $238,187 Loans serviced for Federal National Mortgage Association....................... 274,348 305,446 338,861 Loans serviced for other investors.......... 66,384 74,632 80,403 - ------------------------------------------------------------------------------- $530,318 $601,097 $657,451 =============================================================================== Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. The Company held borrowers' escrow balances related to loans serviced for others of $882 and $877 as of June 30, 1997 and 1996, respectively. These escrow balances are included in deposits in the accompanying consolidated balance sheet. The composition of loans sold was as follows: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Loans sold Servicing - released................... $341,471 $437,917 $198,463 Servicing - retained................... 1,539 16,127 11,577 - ------------------------------------------------------------------------------- $343,010 $454,044 $210,040 =============================================================================== Included in gain on sale of loans for the years ended June 30, 1997 and 1996 were hedging gains relating to put options of $188 and $495, respectively. Loans receivable available for sale consisted of the following: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Adjustable rate................................. $ 4,128 $ 7,891 Fixed rate...................................... 15,856 41,721 - ------------------------------------------------------------------------------- $ 19,984 $ 49,612 =============================================================================== 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. REAL ESTATE AVAILABLE FOR SALE (DOLLARS IN THOUSANDS) Real estate consisted of the following: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Foreclosed real estate......................... $ 2,761 $ 3,003 Investment real estate......................... 3,504 3,531 - ------------------------------------------------------------------------------- 6,265 6,534 - ------------------------------------------------------------------------------- Allowance for estimated losses: Foreclosed real estate........................ (126) (292) Investment real estate........................ (463) (463) - ------------------------------------------------------------------------------- (589) (755) - ------------------------------------------------------------------------------- $ 5,676 $ 5,779 =============================================================================== The following summarizes the components of the net change in the allowance for losses on real estate: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Balance, beginning of period.................. $ 755 $ 1,342 $ 1,384 Provisions for losses......................... 306 239 1,665 Charge-offs................................... (472) (826) (1,707) - ------------------------------------------------------------------------------- Balance, end of period........................ $ 589 $ 755 $ 1,342 =============================================================================== The following summarizes the components of the Company's real estate operations: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Provisions for losses: Foreclosed real estate....................... $ (306) $ (239) $ (983) Investments in joint ventures................ (682) Net operating income (losses) and holding costs....................................... 295 138 65 - ------------------------------------------------------------------------------- Balance, end of period....................... $ (11) $ (101) $(1,600) =============================================================================== 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. PREMISES AND EQUIPMENT (DOLLARS IN THOUSANDS) Premises and equipment consisted of the following: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Land.................................... $ 2,564 $ 2,564 Buildings............................... 6,678 6,632 Leasehold improvements.................. 491 464 Furniture and equipment................. 7,594 7,364 Automobiles............................. 180 173 17,507 17,197 Less accumulated depreciation and amortization........................... (10,682) (10,139) - ------------------------------------------------------------------------------- $ 6,825 $ 7,058 =============================================================================== 7. DEPOSITS (DOLLARS IN THOUSANDS) June 30, 1997 June 30, 1996 - ------------------------------------------------------------------------------- Interest Rate Amount Interest Rate Amount - ------------------------------------------------------------------------------- Checking deposits.......... 0%-1.00% $ 26,382 0%-1.00% $ 22,344 Passbook deposits.......... 2.08%-2.96% 45,898 2.08%-2.92% 52,852 Money market deposits...... 1.00%-4.55% 85,995 1.00%-4.64% 83,097 Term deposits Under $100,000............ 2.62%-8.00% 281,946 2.66%-8.00% 265,853 $100,000 and over......... 4.40%-8.00% 68,538 4.45%-8.00% 55,228 - ------------------------------------------------------------------------------- $508,759 $479,374 =============================================================================== Weighted average interest rate on deposits........... 4.79% 4.65% ============================================================================== The aggregate annual maturities of term accounts are as follows: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Within one year.................................. $288,178 $251,589 One to two years................................. 37,173 44,995 Two to three years............................... 13,278 10,774 Three to four years.............................. 3,255 8,864 Four to five years............................... 8,478 4,741 Thereafter....................................... 121 117 - ------------------------------------------------------------------------------- $350,483 $321,080 =============================================================================== 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest expense is summarized as follows: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Checking.................................. $ 229 $ 203 $ 189 Term deposits............................. 18,036 18,027 14,641 Money market deposits..................... 3,490 4,034 4,893 Passbook deposits......................... 1,357 1,743 1,466 - ------------------------------------------------------------------------------- $23,112 $24,007 $21,189 =============================================================================== The Company is required to maintain cash and reserve balances with the Federal Reserve Bank. Such reserve is calculated based on deposit levels and amounted to $903 and $816 at June 30, 1997 and 1996, respectively. 8. BORROWINGS (DOLLARS IN THOUSANDS) Borrowings consisted of the following: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Advances from Federal Home Loan Bank............ $ 6,828 $ 8,578 - ------------------------------------------------------------------------------- $ 6,828 $ 8,578 =============================================================================== Advances from the Federal Home Loan Bank were collateralized by pledges of certain real estate loans with an aggregate principal balance at June 30, 1997 and 1996 of $207,129 and $193,306, respectively. The Bank's overall borrowing capacity which is limited to 30% of total assets, as reported on the Bank's quarterly thrift financial reports, is approximately $178,530 and $169,865 at June 30, 1997 and 1996, respectively. As a member of the FHLB system, the Bank is required to maintain a minimum investment in FHLB stock. The Bank's investment exceeds the required level by $188 and $408 at June 30, 1997 and 1996, respectively. Any excess may be redeemed by the Bank or called by FHLB at par. The aggregate annual maturities of advances are as follows: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Within one year.................................. $ 6,500 $ 1,750 One to two years................................. 6,500 Two to three years............................... 260 Over three years................................. 68 328 - ------------------------------------------------------------------------------- $ 6,828 $ 8,578 =============================================================================== Weighted average interest rate................... 5.82% 6.10% =============================================================================== 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. INCOME TAXES (DOLLARS IN THOUSANDS) The provision for income taxes consisted of the following: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Current: Federal............................... $ 1,339 $ 1,244 $ (952) State................................. 270 111 3 - ------------------------------------------------------------------------------- 1,609 1,355 (949) - ------------------------------------------------------------------------------- Deferred: Federal............................... (62) (95) (1,050) State................................. (387) 72 264 - ------------------------------------------------------------------------------- (449) (23) (786) - ------------------------------------------------------------------------------- Provision (benefit) for income taxes... $ 1,160 $ 1,332 $ (1,735) =============================================================================== The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from continuing operations as a result of the following differences: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Federal statutory income tax rate................ 34.0% 34.0% (34.0%) State taxes net of Federal tax effect............ 7.3% 2.9% 3.1% Release of state valuation allowance............. (9.8%) Life insurance proceeds.......................... (10.7%) Other............................................ 5.9% 6.0% 0.6% - ------------------------------------------------------------------------------- Effective income tax rate........................ 37.4% 32.2% (30.3%) =============================================================================== Deferred tax liabilities (assets) by jurisdiction were as follows: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Deferred taxes - federal.............................. $ (934) $ (872) Deferred taxes - state................................ (774) (387) - ------------------------------------------------------------------------------- $ (1,708) $ (1,259) =============================================================================== Deferred tax liabilities (assets) were comprised of the following: 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- State taxes................................... $ 216 $ 93 Depreciation.................................. 474 614 Federal Home Loan Bank dividends.............. 1,374 1,254 - ------------------------------------------------------------------------------- Total deferred tax liabilities............... 2,064 1,961 - ------------------------------------------------------------------------------- Market value adjustments...................... (230) (284) Loss reserves................................. (2,675) (2,552) Deferred compensation......................... (667) (640) Investment in real estate..................... (142) (142) Other......................................... (58) (64) - ------------------------------------------------------------------------------- Total deferred tax assets................... (3,772) (3,682) - ------------------------------------------------------------------------------- Deferred tax asset valuation allowance........ -- 462 - ------------------------------------------------------------------------------- Net deferred tax assets..................... $ (1,708) $ (1,259) =============================================================================== During the year ended June 30, 1997, the Company eliminated the valuation allowance previously established against the deferred state tax asset because management has determined that it is more likely than not that such benefits will be realized in future years. For the years ended June 30, 1997, 1996, and 1995 the Company used its loss experience to calculate its bad debt deduction used in determining federal income taxes payable. As a result of recently enacted legislation, the Company's future bad debt deductions will be based only on net charge-offs claimed during the year. 10. CAPITAL (DOLLARS IN THOUSANDS) Retained earnings at June 30, 1997 and 1996 included approximately $9,019 for which federal income tax of approximately $3,066 had not been provided. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distribution in liquidation, they will be subject to federal income tax at the then current corporate tax rate. If those amounts are not so used, they will not be subject to tax even in the event the Company were to convert its charter. Federal regulations require that investments in subsidiaries conducting real estate investments and joint venture activities be phased out by 1996 or, that institutions conducting such activities maintain sufficient capital over the minimum regulatory requirements. The Company maintains capital in excess of the minimum requirements. Subsequent to June 30, 1997, the Company initiated a stock repurchase program to acquire up to 5% of the Company's outstanding stock. The program commenced on August 1, 1997 and is expected to be completed within six months. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 1997, that the Bank meets all capital adequacy requirements to which it is subject. Various adjustments are required to be made to retained earnings and total assets for computing these capital ratios, depending on an institution's capital and asset structure. The adjustment presently applicable to the Bank is for equity investments in real estate. In addition, in calculating risk-based capital, general loss allowances are includable as capital on a limited basis. As of June 30, 1997, the most recent notification from the Office of the Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, core, and tangible leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios as of June 30, 1997 and 1996 are as follows: To Be Well Capitalized Under Prompt Corrective Actual Action Provisions - ------------------------------------------------------------------------------- Amount Ratio Amount Ratio - ------------------------------------------------------------------------------- As of June 30, 1997 Risk based Capital (to risk weighted assets)..................... $ 63,293 16.12% $ 39,268 10.0% Tier I leverage (to average assets)... 58,377 10.21% 22,869 5.0% Tier I capital (to risk weighted assets).............................. 58,377 14.87% 23,561 6.0% As of June 30, 1996 Risk based Capital (to risk weighted assets).............................. $ 63,487 16.49% $ 38,490 10.0% Tier I leverage (to average assets)... 58,668 10.45% 22,452 5.0% Tier I capital (to risk weighted assets).............................. 58,668 15.24% 23,094 6.0% 11. BENEFIT PLANS (DOLLARS IN THOUSANDS) The Company has a 401(k) defined-contribution plan covering all employees meeting specific age and service requirements. Under the plan, employees may contribute up to 10% of their pre-tax compensation. The Company makes matching contributions up to 3% of participants' pre-tax compensation. Participants vest immediately in their own contributions with 100% vesting in the Company's contributions occurring after 6 years of credited service. The Company's expense for these plans was approximately $13, $550 and $249 for the years ended June 30, 1997, 1996 and 1995, respectively. The Company has severance agreements with certain of its officers which are renewable on an annual basis at the Company's option and a multi-year employment contract with one executive officer. The Company has an unfunded obligation of approximately $1,745 and $1,762 at June 30, 1997 and 1996, respectively, to pay certain benefits upon retirement. Actuarially determined retirement costs are being accrued and expensed annually. 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) As part of the conversion, an ESOP was established for all employees who are age 21 or older and have completed one year of service with the Company during which they have served a minimum of 1,000 hours. The ESOP borrowed $4,100 from the Company to purchase 410,017 shares of the common stock issued in the conversion. The loan will be repaid principally from the Company's contributions to the ESOP over a period of 15 years. At June 30, 1997, the outstanding balance on the loan was $3,774. Shares purchased with the loan proceeds are held in an unearned ESOP shares account and released on a pro rata basis as the loan is repaid. Contributions to the ESOP and shares released from the unearned ESOP shares account are allocated among participants on the basis of compensation, as described in the plan, in the year of allocation. Benefits generally become 100% vested after six years of credited service. Vesting will accelerate upon retirement, death or disability of the participant or in the event of a change in control of the Company. Forfeitures will be reallocated among remaining participating employees in the same proportion as contributions. Benefits may be payable upon death, retirement, early retirement, disability or separation from service. Since the annual contributions are discretionary, the benefits payable under the ESOP cannot be estimated. The expense related to the ESOP totaled $338 for the fiscal year ended June 30, 1997. At June 30, 1997, the unearned ESOP shares account of $3,720 is reported as a reduction of stockholders' equity. The table below reflects ESOP activity for the period indicated: Year Ended June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Unallocated shares at beginning of period.................................. $395,234 Purchased shares............................ $410,017 Allocated................................... 23,270 14,783 - ------------------------------------------------------------------------------- Unallocated shares at end of period......... $371,964 $395,234 =============================================================================== The fair value of unallocated ESOP shares totaled $6,184 and $4,335 at June 30, 1997 and 1996, respectively. 12. INCENTIVE PLANS MANAGEMENT RECOGNITION PLAN AND TRUST (MRP) The Company's MRP was established to provide officers, employees and nonemployee directors of the Company with a proprietary interest in the Company in a manner designed to encourage such persons to remain with the Company. The Company has acquired 205,000 shares of its common stock through the open market which are being held as treasury stock for future issuance under the MRP. No shares have been issued under the MRP as of June 30, 1997. STOCK OPTION PLAN The Company has established the 1996 Stock Option Plan (the "Plan") for certain of its directors and key employees under which up to 512,522 shares of common stock have been authorized to be granted. Under the Plan, options may not be granted at a price less than the fair market value at the date of grant. Options are exercisable in equal installments over a five-year period as long as the employee or director remain an employee or director of the Company. The maximum term of the options granted during 1997 is 10 years. The following is a summary of changes in options outstanding: 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Weighted Number of Average Shares Price - ------------------------------------------------------------------------------- Outstanding at July 1, 1996............... -- Granted (weighted average fair value of $8.38)................................... 356,500 $15.25 - ------------------------------------------------------------------------------- Outstanding at June 30, 1997.............. 356,500 $15.25 =============================================================================== For outstanding options the weighted average remaining contractual life was 9.65 years. There were no options exercisable at June 30, 1997. At June 30, 1997, 156,022 shares were available for future grants under the Plan. ADDITIONAL STOCK OPTION PLAN INFORMATION The Company records no compensation expense for its stock-based awards since the exercise price at the date of grant is at least equal to the current market price of its common stock. The Company has calculated the fair value of stock-based awards to employees using the Black-Scholes option pricing model with the following weighted average assumptions: 5 year expected life; stock volatility, 27% in 1997; risk free interest rates, 6.6% in 1997; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1997 awards had been amortized to expense over the vesting period of the awards, pro forma net income and net income per common share would have been $1,788,000 and $0.38 in 1997, respectively. 13. COMMITMENTS AND CONTINGENCIES (DOLLARS IN THOUSANDS) The Company is involved in various legal matters associated with its normal operations. In the opinion of management, these matters will be resolved without material effect on the Company's financial position. The Company conducts a portion of its operations in leased facilities under noncancellable agreements classified as operating leases. In addition, the Company leases data processing equipment under operating leases expiring during the next five years. The following is a schedule of minimum rental payments under such operating leases which expire at various dates: June 30, 1997 - ------------------------------------------------------------------------------- Fiscal Year 1998.................................................. $ 425 1999.................................................. 301 2000.................................................. 183 2001.................................................. 126 2002.................................................. 78 Thereafter............................................ 217 - ------------------------------------------------------------------------------- Total minimum payments required....................... $1,330 =============================================================================== Lease expense under operating leases approximated $656, $390 and $892 for the years ended June 30, 1997, 1996 and 1995, respectively. 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (DOLLARS IN THOUSANDS) The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, and forward commitments to sell loans to third parties. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated balance sheet. The Company's exposure to credit loss, in the event of nonperformance by the other party to these financial instruments is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as all conditions in the contract have been met. These commitments generally have expiration dates within 60 days of the commitment date and may require the payment of a fee. Since some of these commitments are expected to expire, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. At June 30, 1997 and 1996, interest rates on commitments to lend ranged from 5.50% to 12.99% and 5.75% to 9.50%, respectively. In an effort to minimize its exposure to interest rate fluctuations on fixed rate loans originated for sale, the Company enters into forward agreements to sell certain dollar amounts of fixed rate loans to third parties. These agreements specify the minimum maturity of the loans, yield to purchaser and servicing spread to the Company (if servicing is retained), and the maximum principal amount of individual loans. The Company typically satisfies these forward sale agreements with its current production; at June 30, 1997 and 1996 the aggregate amount of loans available for sale and of commitments to originate exceeded the Company's forward sales commitments to sell loans. At June 30, 1997 and 1996, interest rates on commitments to sell loans ranged from 5.75% to 12.25% and 5.875% to 12.00%, respectively. The Company is exposed to interest rate risk on fixed rate commitments to originate loans for sale to the extent forward sale agreements have not been entered into. To minimize this risk, the Company purchases over the counter put options with option periods that generally coincide with the terms of the commitments to originate loans. The contract or notional amount of these instruments reflect the extent of involvement the Company has in this particular class of financial instruments. The Bank's exposure to loss on these financial instruments is limited to the premiums paid. Premiums paid and deferred gains on put options are recorded as an adjustment to the carrying value of loans available for sale and recognized in earnings when the loan is sold. At June 30, 1996, the notional principal amount of options outstanding was $3,500. There were no options outstanding at June 30, 1997. In addition to construction loans in process, the Company had the following outstanding commitments: June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Commitments to originate mortgage loans: Fixed rate................................... $ 31,070 $ 17,523 Adjustable rate.............................. 19,902 2,351 Unused lines of credit....................... 7,569 6,344 Commitments to sell loans.................... 22,298 31,763 - ------------------------------------------------------------------------------- $ 80,839 $ 57,981 =============================================================================== 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (DOLLARS IN THOUSANDS) The reported fair values of financial instruments are based on various factors. In some cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows, assumed discount rates and other factors reflecting varying degrees of risk. The estimates are subjective in nature and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accordingly, the reported fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future. The following methods and assumptions were used to estimate the fair value of each class of significant financial instruments: Cash and due from banks, federal funds sold, interest bearing deposits with banks: The carrying amount of these financial assets approximates the fair value. Investment securities: The fair value of investment securities is based on quoted market prices or dealer quotes. Loans available for sale: Fair values for loans are based on quoted market prices. Forward commitments to sell loans have been considered in the determination of the estimated fair value of loans available for sale. Loans held for investment: For loans that reprice frequently at market rates, the carrying amount approximates the fair value. For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans, using a current interest rate at which such loans would be made to borrowers over estimated remaining contractual maturities, or (ii) quoted market prices. The allowance for loan losses is subtracted as an estimate of the underlying credit risk. Accrued interest receivable: The carrying value for accrued interest receivable approximates fair value because of the short-term nature of the financial instruments. Federal Home Loan Bank stock: The carrying amount reported for FHLB stock approximates fair value. If redeemed, the Company will receive an amount equal to the par value of the stock. Deposits: The fair value of demand and savings deposits is the amount payable on demand at the reporting date. The carrying amount for variable-rate, fixed-term time deposit accounts approximates fair value. The fair value of fixed-rate time deposits is estimated using a discounted cash flow calculation. The discount rate on such deposits is based upon rates currently offered for deposits of similar remaining maturities. Borrowings: The fair value of borrowings has been estimated using a discounted cash flow calculation. The discount rate on such borrowings is based upon rates currently offered for borrowings of similar remaining maturities. The fair value of securities sold under agreements to repurchase is the carrying amount at the reporting date since these agreements were repaid within one month of the reporting date. Commitments: Commitments to extend credit at June 30, 1997 are offered at substantially the same rates and terms of commitments offered on June 30, 1997 to parties of similar credit worthiness. Therefore, it is presumed that no significant difference exists between the carrying and fair value. See Note 14. 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying amount and fair values of the Company's financial instruments were as follows: June 30, 1997 June 30, 1996 - ------------------------------------------------------------------------------- Carrying Market Carrying Market Amount Value Amount Value - ------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash....................... $ 20,111 $ 20,111 $ 30,831 $ 30,831 Investment securities...... 33,645 33,664 27,118 27,112 Loans receivable available for sale.................. 19,984 20,188 49,612 49,990 Loans held for investment.. 517,147 518,981 452,945 455,307 Accrued interest receivable................ 3,378 3,378 3,083 3,083 FHLB stock................. 4,879 4,879 4,590 4,590 FINANCIAL LIABILITIES: Deposits................... 508,759 509,462 479,374 479,729 Borrowings................. 6,828 6,841 8,578 8,551 16. CONVERSION (DOLLARS IN THOUSANDS) Provident Financial Holdings, Inc. was incorporated under Delaware law in January 1996 for the purpose of acquiring and holding all of the outstanding capital stock of Provident Savings Bank, FSB as part of the Bank's conversion from a Federally chartered mutual savings bank to a Federally chartered stock savings bank. On June 27, 1996, the Bank became a wholly owned subsidiary of the Holding Company. In connection with the conversion, Provident Financial Holdings, Inc. issued and sold to the public 5,125,215 shares of its common stock (par value $.01 per share) at a price of $10.00 per share. The proceeds, net of $1,474 in conversion costs, received by the Company from the issuance amounted to $49,779. Prior to the completion of the conversion, Provident Financial Holdings, Inc. had no assets or liabilities and did not conduct any business other than of an organizational nature. At the time of the conversion, the Bank established a liquidation account in the amount of $40,000 which was equal to its total retained earnings as of May 31, 1996. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect would cause stockholder's equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements. 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. HOLDING COMPANY CONDENSED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) This information should be read in conjunction with the other notes to the consolidated financial statements. The following is the condensed balance sheet for Provident Financial Holdings, Inc. (Holding Company only) as of June 30, 1997 and 1996 and condensed statements of operations and cash flows for the year ended June 30, 1997. CONDENSED BALANCE SHEETS June 30, - ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- ASSETS Cash....................................... $ 792 $ 1,484 Investment securities held to maturity..... 18,171 17,973 Investment in subsidiary................... 63,165 61,071 Other assets............................... 3,931 5,492 - ------------------------------------------------------------------------------- $ 86,059 $ 86,020 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities.......................... $ 612 $ 50 Stockholders' equity....................... 85,447 85,970 - ------------------------------------------------------------------------------- $ 86,059 $ 86,020 =============================================================================== CONDENSED STATEMENT OF OPERATIONS June 30, 1997 - ------------------------------------------------------------------------------- Interest and other income.................................. $ 1,470 General and administrative expense......................... 185 - ------------------------------------------------------------------------------- Income before equity in earnings of the subsidiary........ 1,285 Equity in earnings of the subsidiary....................... 1,267 - ------------------------------------------------------------------------------- Income before income taxes................................ 2,552 Income taxes.............................................. 611 - ------------------------------------------------------------------------------- Net income.............................................. $ 1,941 =============================================================================== 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------ Year Ended June 30, 1997 - ------------------------------------------------------------------------------ Cash flows from operating activities: Net income................................... $ 1,941 Adjustments to reconcile net earnings to cash used by operating activities: Equity in earnings of the subsidiary......... (1,267) Decrease in other assets..................... 1,561 Increase in other liabilities................ 562 - ------------------------------------------------------------------------------ Net cash provided by operating activities. $ 2,797 - ------------------------------------------------------------------------------ Cash flow from investing activities: Purchase of investing securities............. (64,445) Maturity of investment securities............ 64,247 - ------------------------------------------------------------------------------ Net cash used by investing activities..... (198) - ------------------------------------------------------------------------------ Cash flow from financing activities: Treasury stock purchases..................... (3,291) - ------------------------------------------------------------------------------ Net decrease in cash during the year.......... (692) Cash and cash equivalents, beginning of year.. 1,484 - ------------------------------------------------------------------------------ Cash and cash equivalents, end of year........ $ 792 =============================================================================== 30
SHAREHOLDER INFORMATION MARKET FOR COMMON STOCK The common stock of Provident Financial Holdings, Inc. is listed on the NASDAQ National Market under the symbol of PROV. The following table provides the high and low stock prices for PROV during the last fiscal year following its initial public offering in June, 1996. 1st Qtr. 1997 2nd Qtr. 1997 3rd Qtr. 1997 4th Qtr. 1997 9/30/96 12/31/96 3/31/97 6/30/97 - ------------------------------------------------------------------------------- High $12.625 $14.625 $17.250 $17.375 Low 10.125 12.375 13.750 14.125 Last 12.625 14.000 15.125 16.625 - ------------------------------------------------------------------------------- ANNUAL MEETING The annual meeting of shareholders will be held at the Mission Inn at 3649 Mission Inn Avenue, Riverside, California on Thursday, October 30, 1997, at 11:00 a.m. A formal notice of the meeting, together with a proxy statement and proxy form, will be mailed to shareholders. CORPORATE OFFICES Provident Financial Holdings, Inc. 3756 Central Avenue Riverside, CA 92506 (909) 686-6060 CORPORATE COUNSEL Breyer & Aguggia 1300 I Street, N.W. Washington, D.C. 20005 INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 400 South Hope Street Los Angeles, CA 90071 TRANSFER AGENT Registrar & Transfer Co. 10 Commerce Drive Cranford, NJ 07016 (908) 272-8511 MARKET INFORMATION Provident Financial Holdings, Inc. is traded on the NASDAQ National Market under the symbol of PROV. FINANCIAL INFORMATION Requests for copies of forms 10-K and 10-Q filed with the Securities and Exchange Commission should be directed in writing to: Brian M. Riley Chief Financial Officer Provident Financial Holdings, Inc. 3756 Central Avenue Riverside, CA 92506 CORPORATE PROFILE Provident Financial Holdings, Inc. ("Corporation"), a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company for Provident Savings Bank, F.S.B. ("Savings Bank") upon the Savings Bank's conversion from a federal mutual to a federal stock savings bank ("Conversion"). The Conversion was completed on June 27, 1996. At June 30, 1996, the Corporation had total assets of $615.5 million, total deposits of $508.8 million and stockholders' equity of $85.4 million. Provident Financial has not engaged in any significant activity other than holding the stock of the Savings Bank. 31
BOARD OF DIRECTORS AND SENIOR OFFICERS BOARD OF DIRECTORS Bruce W. Bennett President Community Care & Rehabilitation Center Michael C. Billings Former Chief Executive Officer (retired) Riverside National Bank Craig G. Blunden Chairman, President & CEO Provident Financial Holdings, Inc. and Provident Savings Bank, FSB Debbi H. Guthrie President Roy O. Huffman Roof Company David W. Mitchell Former Chairman & CEO (retired) Avon Products, Inc. Robert G. Schrader Executive Vice President & Chief Operating Officer Provident Savings Bank, FSB Roy H. Taylor President Goldware & Taylor Insurance SENIOR OFFICERS PROVIDENT FINANCIAL HOLDINGS, INC.: Craig G. Blunden Chairman, President & CEO Brian M. Riley Chief Financial Officer Robert G. Schrader Corporate Secretary PROVIDENT SAVINGS BANK, FSB: Craig G. Blunden Chairman, President & CEO Robert G. Schrader Executive Vice President & Chief Operating Officer Donald L. Blanchard Senior Vice President Retail Banking Lil Brunner Senior Vice President Chief Information Officer Richard L. Gale Senior Vice President Mortgage Banking William E. Harris Senior Vice President Administration Brian M. Riley Senior Vice President Chief Financial Officer 32
PROVIDENT BANK BRANCH LOCATIONS CORPORATE OFFICE 3756 Central Avenue Riverside, CA 92506 DOWNTOWN BUSINESS CENTER 4001 Main Street Riverside, CA 92501 CANYON CREST 5225 Canyon Crest Drive #86 Riverside, CA 92507 MORENO VALLEY 12460 Heacock Street Moreno Valley, CA 92553 NORTH MORENO VALLEY 23575 Sunnymead Ranch Pkwy. Moreno Valley, CA 92557 REDLANDS 125 E. Citrus Avenue Redlands, CA 92373 SUN CITY 27010 Sun City Boulevard Sun City, CA 92586 HEMET 1690 E. Florida Avenue Hemet, CA 92544 RANCHO MIRAGE 71-991 Highway 111 Rancho Mirage, CA 92270 BLYTHE 201 E. Hobson Way Blythe, CA 92225 CUSTOMER INFORMATION LINE 1-800-442-5201 33
PROVIDENT [LOGO] Building Your Bank of the Future PROVIDENT FINANCIAL HOLDINGS, INC. Corporate Office 3756 Central Avenue * Riverside, CA 92506 (909) 686-6060 NASDAQ - PROV
EXHIBIT 21 Subsidiaries of the Registrant
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.
EXHIBIT 23 Consent of Independent Accountants
CONSENT OF INDENPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-30935) of Provident Financial Holdings, Inc. of our report dated August 11, 1997 appearing on page 4 of the 1997 Annual Report which is incorporated in this Annual Report on Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Los Angeles, California September 26, 1997