SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No. 0-16970
CALIFORNIA FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 68-0150457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 W. WEBER AVENUE, STOCKTON, CALIFORNIA 95203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 948-6870
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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1996
Common Stock, $.01 par value 4,720,970 shares
Part 1. FINANCIAL INFORMATION
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Condition
(unaudited)
Sept. 30, 1996 Dec. 31, 1995 Sept. 30, 1995
-------------- -------------- --------------
Cash, including non-interest-bearing deposits $ 6,071,492 $ 13,162,431 $ 9,540,517
Interest-bearing deposits 1,673,054 4,691,615 11,071,947
Investments securities:
Securities available for sale, at market 203,341,342 144,144,806 120,160,755
Mortgage-Backed Securities:
Available for sale, at market 106,189,512 117,199,924 138,510,291
Loans held for sale, at lower of cost or market 7,696,647 13,153,264 6,412,805
Loans receivable, net of loss reserves of
$7,393,076, $8,173,801 and $8,952,000 respectively 995,660,130 942,727,060 954,906,524
Less: loans in process 42,305,763 34,810,024 38,363,676
-------------- -------------- --------------
Net loans receivable $ 953,354,367 $ 907,917,036 $ 916,542,848
-------------- -------------- --------------
Real estate held for development or sale,
net of loss reserves of $3,102,853, $6,958,757 and
$6,393,418 respectively $ 7,160,580 $ 12,480,183 $ 15,457,511
Office property and equipment 21,041,861 20,769,858 20,613,135
Federal Home Loan Bank stock 13,468,700 10,395,200 10,258,800
Accrued interest and dividends receivable 7,265,054 6,092,335 6,044,213
Deposit base premium 247,557 1,058,444 1,348,833
Other assets, net 11,867,746 6,519,971 7,390,111
-------------- -------------- --------------
TOTAL ASSETS $1,339,377,912 $1,257,585,067 $1,263,351,766
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings and checking accounts $ 937,211,601 $ 960,147,775 $ 983,717,108
Advances from FHLB 266,300,000 162,500,000 121,000,000
Collateralized mortgage obligation -- 6,462,509 6,966,252
Securities sold under agreements to repurchase 33,955,000 35,408,000 59,807,000
Accrued interest payable 2,173,923 1,181,068 1,772,127
Other liabilities, net 13,262,682 6,283,494 6,006,658
-------------- -------------- --------------
TOTAL LIABILITIES $1,252,903,206 $1,171,982,846 $1,179,269,145
Stockholders' Equity
Serial preferred stock, 4,000,000 shares
authorized, no shares outstanding - - -
Capital stock, 12,000,000 shares authorized
4,720,970, 4,662,779 and 4,659,031 shares
outstanding $ 47,210 $ 46,628 $ 46,590
Paid in capital in excess of par 27,259,296 26,553,810 26,499,563
Unrealized (loss) gain on securities available for
sale, net of tax (1,698,446) 998,198 (646,177)
Retained earnings, substantially restricted 60,866,646 58,003,585 58,182,645
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY $ 86,474,706 $ 85,602,221 $ 84,082,621
-------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,339,377,912 $1,257,585,067 $1,263,351,766
============== ============== ==============
-2-
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the three months ended: For the nine months ended:
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
INTEREST INCOME
Interest and fees on loans $ 19,749,784 $ 18,548,677 $ 58,185,955 $ 53,663,189
Interest and dividends on investments 5,404,444 4,842,069 15,359,862 14,100,247
------------- ------------- ------------- -------------
TOTAL INTEREST INCOME $ 25,154,228 $ 23,390,746 $ 73,545,817 $ 67,763,436
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest on savings $ 10,651,685 $ 12,283,277 $ 32,924,863 $ 35,980,585
Interest on short-term borrowings 257,469 1,217,613 1,123,783 3,261,288
Interest on long-term borrowings 3,921,240 1,925,780 9,771,090 5,496,326
------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE $ 14,830,394 $ 15,426,670 $ 43,819,736 $ 44,738,199
Less: interest capitalized -- (26,296) (10,487) (146,149)
------------- ------------- ------------- -------------
NET INTEREST EXPENSE $ 14,830,394 $ 15,400,374 $ 43,809,249 $ 44,592,050
------------- ------------- ------------- -------------
NET INTEREST INCOME $ 10,323,834 $ 7,990,372 $ 29,736,568 $ 23,171,386
------------- ------------- ------------- -------------
Provision for loan losses 525,000 67,300 1,046,000 1,633,500
------------- ------------- ------------- -------------
NET INTEREST INCOME LESS PROVISION FOR
LOAN LOSSES $ 9,798,834 $ 7,923,072 $ 28,690,568 $ 21,537,886
------------- ------------- ------------- -------------
OTHER INCOME Gain (loss) on sale of:
Loans $ 375,777 $ (3,154) $ 1,187,810 $ 65,706
Real estate held for investment or sale 287,430 32,289 494,290 (38,960)
Provisions for losses on real estate (85,000) (180,000) (276,000) (3,725,324)
Available for sale securities, net 1,781 136,351 573,792 115,435
Operating losses on foreclosed real estate (185,191) (125,477) (488,952) (491,397)
Loan servicing fee income 351,517) 376,690 986,168 1,122,413
Other fee income 1,261,104 971,391 3,396,949 2,832,075
Write down of other assets (85,348) (260,924) (208,806) (816,413)
Other income, net (99,725) (29,559) (192,857) (77,121)
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (LOSS) $ 1,822,345 $ 917,607 $ 5,472,394 $ (1,013,586)
------------- ------------- ------------- -------------
NON-INTEREST EXPENSE
Compensation and other related benefits $ 3,129,429 $ 2,692,429 $ 9,150,131 $ 7,291,195
Occupancy 733,682 815,375 2,174,765 2,330,366
Advertising and promotion 376,562 272,309 927,859 812,740
Data processing 528,950 506,415 1,582,100 1,576,053
Insurance 758,900 702,066 2,296,327 2,044,183
SAIF insurance recapitalization 6,615,000 0 6,615,000 0
Other general & administrative expense 966,156 936,476 2,971,246 2,789,109
------------- ------------- ------------- -------------
Total general & administrative expense $ 13,108,679 $ 5,925,070 $ 25,717,428 $ 16,843,646
Amortization of deposit base premium 245,179 290,389 810,887 871,166
------------- ------------- ------------- -------------
TOTAL NON-INTEREST EXPENSE $ 13,353,858 $ 6,215,459 $ 26,528,315 $ 17,714,812
------------- ------------- ------------- -------------
Income before taxes $ (1,732,679) $ 2,625,220 $ 7,634,647 $ 2,809,488
Income tax expense (691,720) 1,100,670 3,225,241 1,245,472
------------- ------------- ------------- -------------
NET INCOME $ (1,040,959) $ 1,524,550 $ 4,409,406 $ 1,564,016
============= ============= ============= =============
EARNINGS PER SHARE $ (0.22) $ 0.32 $ 0.92 $ 0.33
============= ============= ============= =============
CASH DIVIDENDS PER SHARE $ 0.11 $ 0.11 $ 0.33 $ 0.33
============= ============= ============= =============
-3-
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
For the nine months ended:
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,409,406 $ 1,564,016
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of:
Mortgage servicing rights 194,033 --
Deferred loan fees (1,998,156) (2,152,692)
Discount amortization on mortgage-backed bonds -- 85,456
Deposit base premium 810,887 871,166
Net (gain) loss on sale of:
Loans (1,187,810) (65,706)
Real estate held for development or sale (494,290) 38,960
Net (gain) loss on securities activities (573,792) (115,435)
Provision for losses on:
Loans 1,046,000 1,633,500
Real estate held for development or sale 276,000 3,725,324
Depreciation and amortization 1,766,879 1,941,964
Decrease in income taxes payable (3,753,237) (279,453)
Net increase in accrued interest payable 992,855 161,487
Net increase in accrued interest receivable (1,172,719) (736,130)
Mortgage loans originated as held for sale (63,986,480) (66,385,020)
Proceeds from loans sold 70,630,907 62,693,329
Other, net 6,055,050 (1,095,298)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 13,015,533 $ 1,885,468
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments on loans $ 166,704,630 $ 139,725,900
Mortgage loans originated as held for investment (199,564,170) (145,320,834)
Purchase of loan participations (16,821,208) (559,629)
Purchase of securities held for investment -- (25,439,665)
Maturity and payments of securities held for investment -- 4,407,494
Purchase of securities available for sale (112,987,297) (13,271,304)
Maturity and payments of securities available for sale 26,443,650 14,148,053
Sale of securities available for sale 38,931,314 31,388,769
Purchase of office property and equipment, net (2,038,882) (1,443,255)
Purchase of FHLB stock and FHLMC preferred stock (3,073,500) (1,521,900)
Investment in real estate held for development or sale (593,361) (5,936,086)
Proceeds from sales of real estate held for development or sale 5,805,873 8,639,825
Proceeds from sale of foreclosed property 5,520,954 7,540,452
Other, net (3,561,076) 1,311,757
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES $ (95,233,073) $ 13,669,577
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposit accounts $ (24,524,428) $ (12,699,107)
Net increase (decrease) in checking accounts 1,588,254 (4,654,205)
Proceeds from FHLB advances 378,700,000 84,300,000
Repayments of FHLB advances (274,900,000) (73,300,000)
Securities sold under agreement to repurchase, net (1,453,000) (5,171,000)
Payments on mortgage-backed bonds (6,462,509) (1,016,999)
Proceeds from stock options exercised and dividends reinvested 706,068 292,726
Dividends paid to shareholders (1,546,345) (1,531,504)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 72,108,040 $ (13,780,089)
Net increase in cash and cash equivalents $ (10,109,500) $ 1,774,956
Cash and cash equivalents at the beginning of the year 17,854,046 18,837,508
------------- -------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 7,744,546 $ 20,612,464
============= =============
-4-
Supplemental disclosures of cash flow information:
Interest paid $ 42,826,881 $ 44,576,712
Cash payments of income taxes 4,958,373 1,835,852
Supplemental disclosures of cash flow information:
Additions to real estate acquired through foreclosure 5,195,573 4,232,125
Unrealized (gains) losses on available for sale securities 2,696,644 (477,026)
-5-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
California Financial Holding Company ("Company") was incorporated in
1988 in the State of Delaware. Its principal asset is Stockton Savings Bank
("Stockton Savings" or "Bank") a wholly-owned subsidiary which has been in
existence since 1887. The investment in Stockton Savings is the Company's
primary asset with the only other asset consisting of $1.8 million in cash, the
result of dividends paid by the Bank to the Company. Because the Bank represents
the Company's major asset, discussion in this text will focus primarily on the
activities of Stockton Savings.
Total assets increased by $76.0 million over the past year primarily as
a result of increases in loans and investments outstanding. The components of
interest-bearing liabilities changed somewhat as deposits declined by $46.5
million, reverse repurchase agreements declined by $25.9 million and Federal
Home Loan Bank advances increased by $145.3 million. The Company's total assets
have increased by $81.8 million so far this year. Again, growth occurred
primarily in the loan and investment portfolios and was funded with Federal Home
Loan Bank advances.
Loan origination volume for the first nine months of 1996 totaled
$263.6 million compared to volume of $211.7 million for the first nine months of
1995. Increases in fixed-rate single-family originations, due to the lower rate
environment experienced earlier in the year, created most of the improvement in
volume.
A breakout of lending volume by type is shown below for the periods
indicated:
Originations through
September 30
(in millions)
1996 1995
Short-term construction loans $118.6 $100.8
Permanent fixed-rate loans 83.7 41.9
Permanent adjustable-rate loans 61.3 69.0
------ ------
TOTAL ORIGINATIONS $263.6 $211.7
====== ======
The reduced interest rate environment early in 1996 led to increases in
the origination of permanent fixed-rate loan originations relative to
adjustable-rate mortgages. Historically, adjustable-rate mortgages have been
more popular in periods of rising interest rates, due particularly to attractive
start rates offered on this product. Alternatively, fixed-rate mortgages have
been more popular in low rate environments as the borrower seeks to lock in a
low fixed rate. The Bank has traditionally retained most adjustable-rate product
in portfolio and sold most permanent fixed-rate mortgages in an effort to limit
exposure to rising interest rates. Loan sale activity of $70.6 million in the
current year was up significantly from the $62.7 million in sales recorded in
the first nine months of 1995, primarily due to the increase in fixed-rate
mortgages originated this year.
The increase in rates in the third quarter has lead to a decline in
refinance activity and possibly future loan origination volume. Alternatively,
the volume of adjustable-rate originations has increased with a corresponding
decrease in fixed-rate originations.
-6-
The balance of real estate held for development or sale has declined by
$8.3 million from a year ago and by $5.3 million in the current year. Real
estate held by the Bank at quarter-end consisted of $5.6 million in real estate
owned through foreclosure and $1.5 million in real estate held for investment
purposes. The Bank is currently in the process of disposing of its real estate
investments due to regulatory constraints. As a result, the balance has declined
steadily over the past several years. It is anticipated that the Bank will be
out of its real estate investments by the end of 1996.
The balance of real estate owned through the foreclosure process has
declined by $1.3 million from a year ago, which is a reflection of the overall
decline in troubled assets. (See "Asset Quality" for further discussion.)
A breakdown of the Bank's portfolio of real estate held is shown below
as of the dates indicated:
Real Estate Held for Development
or Sale, net
(in thousands)
9/30/96 12/31/95 9/30/95
Real estate owned through foreclosure $ 5,606 $ 5,977 $ 6,931
Real estate held for development 1,555 6,503 8,527
--------- --------- ---------
TOTAL $ 7,161 $ 12,480 $ 15,458
========= ========= =========
Effective January 1, 1994, the Bank implemented FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". FAS 115
requires that debt and equity securities be classified as either held to
maturity, available for sale or held for trading. The pronouncement severely
restricts the transfer of assets between classifications. In August 1995, the
Bank made a decision to restructure its balance sheet by selling $31 million in
fixed-rate mortgage-backed securities. As a result, the Bank's entire investment
portfolio, that was originally classified as held for investment, was
redesignated as available for sale as of September 1995. At September 30, 1996,
the investment portfolio was adjusted to market value with the after-tax net
loss of $1.7 million shown as an adjustment to stockholder's equity.
The amortized cost and estimated market values of investment and
mortgage-backed securities as of September 30, 1996 are as follows (in thousands
of dollars):
-7-
AMORTIZED GROSS GROSS ESTIMATED
COST UNREALIZED UNREALIZED MARKET VALUE
GAINS LOSSES
AVAILABLE FOR SALE:
Investment securities:
U.S. Government & Agency Securities $ 43,979 $ 18 $ 388 $ 43,609
CMO'S 156,516 554 1,964 155,106
Other securities 4,640 11 24 4,627
------------ ------------ ----------- ------------
Total investment securities $205,135 $ 583 $ 2,376 $203,342
------------ ------------ ----------- ------------
Mortgage-backed securities:
FHLMC $ 59,207 $ 205 $ 682 $ 58,730
FNMA 32,230 27 183 32,074
GNMA 13,863 14 64 13,813
FHA Title One 2,448 0 876 1,572
------------ ------------ ----------- ------------
Total mortgage-backed securities: $107,748 $ 246 $ 1,805 $106,189
------------ ------------ ----------- ------------
Total available for sale portfolio $312,883 $ 829 $ 4,181 $309,531
============ ============ =========== ============
NOTE: Above adjustments are on a pre-tax basis.
RESULTS OF OPERATIONS
The Company lost $1.0 million or $.22 per share for the third quarter
of 1996 compared to recording a net income of $1.5 million or $.32 per share for
the like quarter of 1995. Earnings on a year-to-date basis total $4.4 million or
$.92 per share compared to total income of $1.6 million or $.33 per share for
the like period in 1995. Earnings in the current quarter were hindered by a $6.6
million industry-wide special assessment. On September 30, 1996, the government
mandated the assessment in order to recapitalize the Savings Association
Insurance Fund ("SAIF"), which is part of the Federal Deposit Insurance
Corporation ("FDIC"). The assessment, charged to most SAIF-insured financial
institution in the country, represented .657% of insured deposits as of March
31, 1995. The Bank's portion of this assessment totalled $6.6 million (3.9
million on an after-tax basis)and was included in normal operating income.
Excluding the one-time assessment, the Company would have earned $2.9 million or
$.60 per share in the third quarter, comparable to the $.60 per share earned in
the second quarter.
As the result of the one-time charge, future earnings will be enhanced
as regular assessments will drop by 16.5 basis points on an annual basis.
Improved earnings (excluding the special assessment) in the current
quarter and year to date over last year's third quarter and year to date can be
attributed to increased margins, reduced loss provisions established on real
estate investment and increased gains on asset sales. Last year's earnings were
also significantly reduced by losses taken on real estate development
activities.
The table below breaks out the components of the Bank's margin and
spread for the periods indicated:
-8-
Average for the quarter Average for the nine *Weighted average as of
ended Sept. 30 months ended Sept. 30 Sept. 30
Basis- Basis Basis
Point Point Point
1996 1995 Change 1996 1995 Change 1996 1995 Change
Yield on interest-earning assets:
Loan portfolio yield 8.30% 8.00% 0.30% 8.29% 7.70% 0.59% 7.96% 7.72% 0.24%
Yield on marketable investments 6.73 6.67 0.06 6.67 6.58 0.09 6.72 6.70 0.02
Weighted yield on assets 7.91 7.68 0.23 7.89 7.44 0.45 7.65 7.48 0.17
Cost of funds:
Cost of deposits 4.53% 4.99% (0.46)% 4.61% 4.82% (0.21)% 4.53 4.98% (0.45)%
FHLB advances & other borrowings 5.91 6.29 (0.38) 5.92 6.13 (0.21) 5.86 6.13 (0.27)
Weighted cost of funds 4.85 5.20 (0.35) 4.88 5.02 (0.14) 4.85 5.17 (0.32)
Interest rate spread 3.06% 2.48% 0.58% 3.01% 2.42% 0.59% 2.80% 2.32% 0.48%
Net yield on interest-earning 3.24% 2.62% 0.62% 3.19% 2.54% 0.65% 2.98% 2.45% 0.53%
assets
* Does not consider the effect of amortization of loan fees.
Improved net interest income in the current year relative to the first
nine months of 1995 was primarily the result of increasing yields on the loan
portfolio, decreasing cost of funds, increases in the balance of assets
outstanding as well as an improvement in the level of average interest-earning
assets relative to average interest-bearing liabilities.
Loan interest income increased by roughly $1.2 million for the third
quarter of 1996 compared to 1995. A 30-basis point increase in the average yield
on the loan portfolio in the third quarter of the current year was primarily
responsible for the earnings improvement although the $23.9 million increase in
average balance of loans outstanding also caused part of the increase. On a year
to date basis, loan interest income increased by $4.5 million relative to the
prior year, again primarily the result of a 59-basis point increase in yield on
the loan portfolio. The upward repricing on 6-month adjustable-rate mortgages
indexed to COFI was primarily responsible for the improved yield in the current
year compared to the previous year.
The steady increase in COFI during 1995, combined with the repricing on
teaser rate loans originated in 1994, added 7-9 basis points to the Bank's loan
portfolio yield on a monthly basis since the second quarter of 1995. Yields on
the COFI portfolio leveled out in the early part of this year and have declined
slightly in conjunction with the slow decline in the Index.
Investment interest income increased by $562,000 this quarter relative
to the third quarter of 1995 and by $1.3 million on a year to date basis
compared to the first nine months of 1995. In both cases, interest income has
increased due primarily to an increase in the average balance of investments
outstanding. In the latter part of the first quarter of 1996, the Bank purchased
$48.1 million in securities. The securities consisted primarily of adjustable
rate collateralized mortgage obligations indexed to LIBOR or CMT that reprice
monthly.
Interest expense decreased by $918,000 for the nine month period
compared to the same period in 1995 and decreased by $596,000 for the third
quarter of 1996 relative to the same period in 1995. A decline in the average
cost of funds for both the three and nine month periods was entirely responsible
for the expense decrease as average interest-bearing liabilities were up by
$12.3 million for the nine months of 1996 relative to 1995 and increased by
$38.4 million in the third quarter compared to the same quarter in 1995.
Interest expense on deposits decreased by $1.6 million for the third
quarter of 1996 and by $3.1 million on a year to date basis relative to the same
periods last year.
The average balance of deposits outstanding decreased by $44.3 million
and $42.7 million in the third quarter and on a year-to-date basis,
respectively. Brokered deposits of $31 million matured in the first quarter of
1996, accounting for most of the decrease. Declines in the balance of regular
certificate accounts have also occurred as a result of the Bank pricing less
competitively this year in an effort to reduce future interest costs. The
decline in average savings balances reduced expense by $535,000 and $1.5 million
for the quarter and on a year to date basis respectively.
-9-
The Bank's deposit costs include the negative impact of interest rate
swaps. The swaps are structured for the Bank to pay a fixed amount of interest
on a notional principal amount and to receive a variable amount of interest
indexed to COFI on the same notional amount. This structure is designed to act
as a hedge in period of rising interest rates. As a result, as the general
interest rate environment increases, the Bank receives a benefit from the swaps
while the reverse holds true in periods of falling rates. It should be noted
that since the swaps are tied to COFI, which is a lagging index, the impact of
any changes in the index will lag the general interest rate market, thereby
providing a lagging benefit in periods of rising interest rates with the reverse
holding true in falling rate environments. The swaps added $364,000 to interest
expense in 1996 compared to $1.1 million for the first nine months of 1995. The
decline in the impact of interest rate swaps on deposit expense this year is due
to the higher COFI rate this year as well as to the maturity in 1995 of $55
million in high-costing swaps.
Declines in the cost of savings of 46-basis points for the quarter and
21- basis points for the first nine months of 1996 relative to the prior year
reduced savings interest expense by $1.1 million and $1.5 million, respectively.
Excluding the cost of interest rate swaps, the average cost of deposits was down
40-basis points this quarter compared to the third quarter of 1995 and down 11
basis points for the nine month period, relative to the same time frame last
year. The declining rate environment this year as well as a concerted effort by
the Bank to reduce deposit costs through less competitive pricing, are the
primary reasons for the November 12, 1996 decline in deposit costs this year.
Borrowing costs increased by $1.0 million for the quarter and $2.1
million for the nine months of 1996 relative to the prior year. Increased costs
were entirely the result of borrowing growth that occurred between the two
years. The average balance of borrowings outstanding for the third quarter was
$82.7 million higher than the third quarter of last year and $55.0 million
higher for the first nine months of this year relative to 1995. The increase in
average borrowings outstanding in the current year was the result of asset
growth, particularly in the second quarter as well as to replace the runoff of
brokered and retail funds.
Interest rate spreads are expected to remain stable for the remainder
of the year, reflecting stabilized deposit costs and a flat COFI index.
The Bank's average margin continued to exceed average spread by 18
basis points in the current quarter and on a year-to-date basis. The Bank's
success in reducing its level of nonperforming assets over the past year, as
well as the increased sell-off of real estate held for development purposes, has
provided the improvement from 1995 when average margin exceeded average spread
by 14 basis points on a quarterly basis and by 12 basis points on a year-to-date
basis.
Loan loss provisions established during the quarter totaled $525,000
which were somewhat higher than the level of loan loss provisions established in
the first two quarters of 1996 and reflect an increase in charge-off activity in
the current period.
Noninterest income of $1.8 million was reported for the quarter
compared to noninterest income of $918,000 reported in the third quarter of
1995. Noninterest income for the nine month period was $5.5 million compared to
a year-to-date loss of $1.0 million reported in 1995. Losses of $3.7 million on
real estate were reported in 1995, explaining most of the earnings shortfall
last year. Noninterest income has benefitted in the current year as well as
quarter from increased loan sale gains, increased real estate and investment
gains and increases in fee income recorded.
In the first quarter of 1996, the Bank implemented Statement of
Financial Accounting Standards No. 122 (SFAS 122) which requires that the rights
to service mortgage loans for others be recognized as a separate asset, however
those rights
-10-
are acquired. Implementation of SFAS 122 requires the recognition of a servicing
asset (and thus, income) at the point of sale of a loan and therefore has the
impact of increasing income compared to what would have been recognized had
implementation not occurred. Servicing gains recognized in the third quarter of
1996 totaled $218,000, representing 58% of total loan sale gains recorded. On a
year to date basis, servicing gains of $873,000 have been reported. A present
value calculation model was utilized to compute the present value of future cash
flows of the servicing rights based upon current assumptions including: costs of
servicing the loans, the discount rate, prepayment speeds, float value and
delinquency rates. Servicing fee income was reduced by $47,000 in the third
quarter and by $194,000 on a year to date basis to reflect declines in value on
the servicing asset. The calculation of impairment was derived utilizing the
same methods as described above for computing the original servicing asset by
segregating the asset portfolio into major risk categories, predominately
property type, loan term and interest rate. Capitalized mortgage servicing
rights are amortized in proportion to, and over the period of, estimated future
net servicing income.
The bank sold roughly $26.1 million in investments classified as
available for sale in the first quarter, recognizing net gains of $464,000. A
majority of investments sold consisted of 15-year fixed-rate mortgage-backed
securities. The sale was done in order to reduce balance sheet sensitivity to
rising rates. Miscellaneous sales have occurred since then totaling $12.8
million with additional gains of $110,000 recognized.
Other income was further reduced in 1995 due to $816,000 in writedowns
taken primarily on FHA Title I Securities. Additional writedowns of $209,000
have occurred in the current year. The Bank still has $2.4 million of FHA Title
I Securities in its investment portfolio.
Fee income of $3.4 million has been recorded through the third quarter
of 1996, up 20.0% compared to fees of $2.8 million reported in the like period
of 1995. An increased number of checking accounts and corresponding fees are
responsible for earnings improvement.
Fee income is expected to remain relatively consistent in the fourth
quarter. The level of loan sale gains is expected to decline due to a decline in
the origination of fixed-rate mortgages as a result of the somewhat higher rate
environment. No material writedowns of real estate are expected in the current
year as the balance of real estate investments has been reduced significantly.
Excluding the $6.6 million one-time SAIF assessment, noninterest
expense increased by $2.3 million this year compared to the first nine months of
1995. The Company recorded a one-time reversal of pension expense in 1995,
understating expense for that period by $1.7 million. Excluding that adjustment,
general and administrative expense actually increased by only 3.0%. The increase
is primarily due to the accrual of a bonus and 401k contribution in the current
year. No such accrual was made in 1995. Salary expense is actually down slightly
from the prior years.
The effective tax rate for the nine months of 1996 was 42.2% compared
to a rate of 44.3% for the first nine months of 1995. The higher rate last year
is due to the low level of income last year combined with a minimum tax paid to
the state of Delaware.
ASSET QUALITY
The Bank has steadily reduced its level of nonperforming assets in the
current quarter relative to year-end 1995 and September 30, 1995.
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Detail on nonperforming assets is shown in the table below for the
dates indicated:
Nonperforming Assets
(in thousands)
Sept. 30, 1996 Dec. 31, 1995 Sept. 30, 1995
Loans 90 days or more delinquent $ 6,296 $ 4,559 $ 4,994
Troubled debt restructurings 4,312 6,965 7,551
Real estate owned through foreclosure 5,606 5,977 6,931
--------- -------- --------
Net nonperforming assets $ 16,214 $ 17,501 $ 19,476
========= ======== ========
Nonperforming assets/Total assets 1.21% 1.39% 1.54%
As indicated above, the level of nonperforming assets has decreased by
roughly $3.3 million from the prior year. Non-performing assets as a percentage
of total assets was 1.21% at quarter-end compared to 1.54% a year ago.
Nonperforming assets as of quarter-end consisted of the following asset
types:
Nonperforming Assets by Type
(in thousands)
September 30, 1996
Commercial and multi-family real estate $ 1,804
Construction 1,488
1-4 family homes 10,150
Land 2,772
---------
$ 16,214
=========
All types of nonperforming assets have declined over the past year with
the exception of 1-4 family residences which have represented a majority of the
new nonperforming assets added.
By policy, the Bank does not accrue interest on loans that are 90 days
or more delinquent. Interest on troubled debt restructurings is recorded on a
cash basis only. Foregone interest on nonperforming loans through the first nine
months of 1996 totaled $500,000. Life-to-date unrecorded interest on these same
loans totaled $1.9 million through quarter-end. A total of $104,000 in interest
income has been recorded on these loans so far this year.
Troubled debt restructurings represent loans that have been modified,
usually as a result of financial difficulties experienced by the borrower, to
terms that are more favorable than what would normally be offered. These
modifications usually involve either a reduction in rates to below market,
capitalization of interest due, or the requirement that monthly payments equate
to the level of cashflow on the underlying property. The Bank's largest
restructured assets are two construction loans totaling $4.8 million originated
during the peak of real estate values. The underlying properties have
experienced a significant decline in value and the borrowers have limited
financial resources. A majority of the restructured speculative development
loans are in some stage of delinquency and the property underlying one of these
loans is expected to revert back to the Bank in the fourth quarter.
At quarter-end, $1.9 million of the $4.3 million in restructured debt
was more than 90 days delinquent. The restructured debt total above does not
include $652,000 in interest that has been capitalized but has not been
recognized in
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income. An additional $229,000 in interest on these loans has been accrued at
quarter-end but not included in income.
The Bank's level of loan loss reserves has declined since a year ago as
a large number of loans with specific reserves have been charged-off. The level
of loss reserves outstanding at any point in time is largely dependent on the
amount and type of loans outstanding, level of classified and nonperforming
loans and historical loss experience.
The following table identifies the Bank's loan loss reserves at
September 30, 1996 by loan type:
Reserves Percent of loans
(in thousands) in each category
at 9/30/96 to total loans
1-4 family permanent loans $ 2,084 74.5%
Multi-family loans 1,123 4.1
Commercial real estate loans 2,512 6.8
Land, construction and development loans 1,674 14.6
TOTAL -------- -----
$ 7,393 100.0%
======== =====
Although total loan loss reserves have declined by $1.6 million from a
year ago, the level of loss reserves to nonperforming assets has increased from
37.3% to 40.1%.
Activity in the allowances for both loans and real estate for the first
nine months of 1996 is summarized below:
Loss Reserves
(in thousands)
Loans Real Estate
Balance, December 31, 1995 $ 8,174 $ 6,959
Provision for losses 1,046 276
Charge-offs (1,827) (4,132)
Recoveries -- --
--------- ---------
Balance, September 30, 1996 $ 7,393 $ 3,103
========= =========
The Bank is required by regulation to classify and monitor all assets
exhibiting a defined weakness. The Bank's level of classified assets is
summarized in the following table for the dates indicated:
Classified Assets
(in thousands)
as of
9/30/96 12/31/95 9/30/95
Substandard $ 30,181 $ 37,841 $ 43,987
Doubtful -- -- --
Loss 4,523 6,370 11,159
-------- -------- --------
TOTAL $ 34,704 $ 44,211 $ 55,146
======== ======== ========
The level of total classified assets declined by $20.4 million from the
previous year due primarily to the improved performance of a $5 million troubled
debt restructuring and the reduced balances of foreclosed real estate and real
estate held for development purposes. The level of assets classified as "loss"
decreased by $6.6 million as a result of the sales of real estate investments
that occurred over the past year.
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It is anticipated that the level of classified as well as nonperforming
assets will continue to decline due to the current escrowed sales on foreclosed
properties.
INTEREST RATE SENSITIVITY
The Bank's balance sheet has historically been exposed to some level of
interest rate risk in a rising rate environment as most of its assets have been
in the form of long-term, fixed-rate mortgages or lagging-index adjustable loans
which are funded with short-term, frequently repricing deposits. During the past
year, a concerted effort has been made to portfolio more adjustable-rate loans,
sell off fixed-rate loans and investments as well as purchase current-index
floating-rate investments. Restructuring also occurred on the liability side as
deposit maturities were lengthened and additional long-term fixed-rate advances
were added. In addition, the Bank has become less competitive in the pricing of
its deposit base, which has further reduced the level of sensitivity to changing
rates. The interest rate protection received from floating-rate assets is
somewhat limited by lifetime rate caps which would take effect in high-rate
environments. Similarly, benefits derived from current-index adjustable-rate
mortgages are limited by periodic and lifetime interest rate caps as well as by
one year average repricing periods. The level of fixed-rate loans and
mortgage-backed securities declined by $26.5 million from the previous year
while adjustable rate assets increased by $28.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required by regulation to maintain cash and certain
short-term eligible investments equal to 5% of the average daily balance of net
withdrawable accounts and certain short-term borrowings during the preceding
calendar month.
At September 30, 1996, this liquidity ratio was 5.01%.
The Bank generally has the ability to originate more loans than it can
portfolio and has relied heavily on loan prepayment and sale activity to
maintain desired growth levels. Asset growth is generally funded through the
Bank's internal retail branch system and, on occasion, through the acquisition
of branches from other depository institutions within the Bank's market area.
Growth is also funded to a lesser degree with advances from the Federal Home
Loan Bank and through the use of short-term reverse repurchase agreements and
brokered deposits.
As of September 30, 1996, the Bank had $48.0 million in collateral
still available for short-term reverse repurchase agreements. These agreements
are generally utilized on a short-term basis to meet daily operating needs.
Additional short-term cash needs can also be met through the use of a line of
credit with the FHLB. At quarter-end, approximately $92.7 million was still
available through this borrowing source.
REGULATION
Under the Financial Institutions Reform, Recovery and Enforcement Act
signed into law on August 9, 1989, financial institutions are required to meet
three primary capital requirements: a tangible capital requirement, a core
capital requirement and a risk-based capital requirement.
Tangible capital is defined as common stock, retained earnings,
noncumulative preferred stock less certain intangibles and a specified phase-out
of certain real estate and equity investments and must equal at least 1.5% of
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tangible assets. Core capital is defined as tangible capital plus certain
intangibles and must equal at least 3% of tangible assets. Risk-based capital is
core capital plus supplementary capital, which includes general loan loss
reserves up to 1.25% of risk-weighted assets and must equal at least 8% of
risk-weighted assets.
The Bank's regulatory capital position at September 30, 1996 is set
forth in the following schedule:
Regulatory capital position
(in thousands)
Tangible Core Risk-based
Book capital $ 84,662 $ 84,662 $ 84,662
Unrealized losses on securities 1,698 1,698 1,698
Real estate investment deduction (2,156) (2,156) (2,156)
Intangible deduction (248) (248) (248)
Loan loss reserves -- -- 6,501
Miscellaneous (69) (69) (69)
-------- -------- --------
Net regulatory capital $ 83,887 $ 83,887 $ 90,388
Minimum required 20,232 40,465 59,365
-------- -------- --------
Excess over minimum $ 63,655 $ 43,422 $ 31,023
======== ======== ========
Excess over "well capitalized" $ 16,445 N/A $ 16,181
======== ========
Capital Ratio 6.22% 6.22% 12.18%
There are several adjustments made to the level of capital reported on
a financial basis as compared to capital reported on a regulatory basis. Certain
intangible assets such as core deposit premiums are excluded from regulatory
capital. In addition, any investments in non-includable subsidiaries are also
deducted from capital, subject to a phase-out rule. Any adjustments made to
capital due to the mark to market of the available for sale portfolio are also
excluded from capital.
The Bank is currently considered "well capitalized" under applicable
regulatory definitions, which has a positive impact on the level of deposit
insurance premiums assessed and provides the Bank additional operating
flexibility. The "well capitalized" designation requires that an institution's
total risk-based capital to risk-weighted assets exceed 10%, its Tier 1
risk-based capital ratio (which is similar to the total risk-based ratio but
excludes the inclusion of general loan loss reserves) exceed 6% of risk-weighted
assets, and its core capital ratio exceed 5% of total adjusted assets. At
September 30, 1996, the Bank's total risk-based capital, Tier 1 risk-based and
core ratios were 12.18%, 11.30% and 6.22%, respectively. The Bank's risk-based
capital ratio is currently $16.2 million above the minimum to be considered
"well capitalized" and $31.0 million above the 8% regulatory minimum.
Pursuant to recently enacted Federal tax legislation, savings
institutions such as the Bank will receive, subject to a number of conditions, a
"fresh start" with respect to the potential recapture of certain tax bad debt
reserves. However, certain other reserves are required to be treated as taxable
income over a six-year period beginning in 1996, which may be delayed up to two
years if a savings association meets a newly developed mortgage originations
test. Beginning in 1996, savings associations will become subject to the same
federal income tax treatment as commercial banks with the same levels of total
assets. This legislation has eliminated the long-standing tax impediments to
savings association conversions to commercial bank charters and should lower the
after-tax cost of bank acquisitions of savings associations and the conversion
or merger of these associations into commercial banks.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) There was an 8-K filed on September 16, 1996 to announce the
resignation of one of the Company's Board of Directors, Dean A.
Cortopassi from both the board of the Bank as well as the board of the
Company.
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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.
CALIFORNIA FINANCIAL HOLDING COMPANY
------------------------------------
Registrant
DATE: November 13, 1996 BY: /s/ ROBERT V. KAVANAUGH
--------------------------------
ROBERT V. KAVANAUGH
President, Chief Operating Officer
DATE: November 13, 1996 BY: /s/ JANE R. BUTTERFIELD
--------------------------------
JANE R. BUTTERFIELD
Senior Vice President, Treasurer,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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