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 MARCH 31, 1997
[ ] 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 MARCH 31, 1997
Common Stock, $.01 par value 4,740,914 shares
Part 1. FINANCIAL INFORMATION
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Condition
(unaudited)
March 31, 1997 Dec. 31, 1996 March 31, 1996
-------------- -------------- --------------
Cash, including non-interest-bearing deposits $ 7,868,817 $ 14,280,370 $ 9,245,266
Interest-bearing deposits 3,836,011 2,697,244 8,266,395
Investments securities:
Securities available for sale, at market 186,322,617 201,059,141 170,932,719
Mortgage-Backed Securities:
Available for sale, at market 98,800,471 103,007,268 103,834,619
Loans held for sale, at lower of cost or market 7,280,839 7,057,252 6,863,063
Loans receivable, net of loss reserves of
$7,448,119, $7,276,710 and $8,178,214 respectively 996,460,729 983,900,530 959,972,054
Less: loans in process 39,989,909 31,549,075 37,654,694
-------------- -------------- --------------
Net loans receivable $ 956,470,820 $ 952,351,455 $ 922,317,360
-------------- -------------- --------------
Real estate held for development or sale,
net of loss reserves of $2,190,589, $2,310,488 and
$4,950,658 respectively $ 5,713,558 $ 6,982,976 $ 10,223,507
Office property and equipment 19,832,399 20,261,053 20,537,533
Federal Home Loan Bank stock 13,903,300 13,682,300 10,529,900
Accrued interest and dividends receivable 7,650,363 7,117,645 6,416,040
Deposit base premium 386,883 424,515 768,056
Mortgage servicing rights 996,978 829,621 255,363
Other assets, net 5,988,563 7,628,460 7,378,155
-------------- -------------- --------------
TOTAL ASSETS $1,315,051,619 $1,337,379,300 $1,277,567,976
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings and checking accounts $ 973,128,319 $ 957,834,294 $ 962,928,193
Advances from FHLB 231,000,000 263,500,000 177,500,000
Collateralized mortgage obligation -- -- 5,985,373
Securities sold under agreements to repurchase 12,293,000 19,550,000 37,506,000
Accrued interest payable 2,004,338 1,849,992 2,124,787
Other liabilities, net 5,088,566 4,768,262 5,255,991
-------------- -------------- --------------
TOTAL LIABILITIES $1,223,514,223 $1,247,502,548 $1,191,300,344
Stockholders' Equity
Serial preferred stock, 4,000,000 shares
authorized, no shares outstanding - - -
Capital stock, 12,000,000 shares authorized
4,765,793, 4,740,914 and 4,677,615 shares
outstanding $ 47,627 $ 47,409 $ 46,776
Paid in capital in excess of par 27,804,520 27,490,907 26,718,705
Unrealized (loss) gain on securities available for
sale, net of tax (1,322,267) (504,200) (541,095)
Retained earnings, substantially restricted 65,007,516 62,842,636 60,043,246
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY $ 91,537,396 $ 89,876,752 $ 86,267,632
-------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,315,051,619 $1,337,379,300 $1,277,567,976
============== ============== ==============
2
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the three months ended:
March 31, 1997 March 31, 1996
-------------- --------------
INTEREST INCOME
Interest and fees on loans $ 20,005,870 $ 18,948,219
Interest and dividends on investments 5,195,321 4,628,406
------------- -------------
TOTAL INTEREST INCOME $ 25,201,191 $ 23,576,625
------------- -------------
INTEREST EXPENSE
Interest on savings $ 10,918,845 $ 11,397,806
Interest on short-term borrowings 210,445 427,753
Interest on long-term borrowings 3,612,984 2,526,682
------------- -------------
TOTAL INTEREST EXPENSE $ 14,742,274 $ 14,352,241
Less: interest capitalized -- (8,297)
------------- -------------
NET INTEREST EXPENSE $ 14,742,274 $ 14,343,944
------------- -------------
NET INTEREST INCOME $ 10,458,917 $ 9,232,681
------------- -------------
Provision for loan losses 350,000 265,000
------------- -------------
NET INTEREST INCOME LESS PROVISION FOR LOAN LOSSES $ 10,108,917 $ 8,967,681
------------- -------------
OTHER INCOME
Gain (loss) on sale of:
Loans $ 374,948 $ 421,426
Real estate held for investment or sale 27,058 39,609
Provisions for losses on real estate (89,000) (35,000)
Available for sale securities, net 129,899 464,233
Operating losses on foreclosed real estate (102,407) (181,676)
Loan servicing fee income 377,503 309,316
Other fee income 1,189,210 1,036,345
Write down of other assets (64,969) (40,224)
Other income, net (85,556) (20,493)
------------- -------------
TOTAL OTHER INCOME (LOSS) $ 1,756,686 $ 1,993,536
------------- -------------
NON-INTEREST EXPENSE
Compensation and other related benefits $ 3,470,271 $ 3,027,033
Occupancy 724,634 712,842
Advertising and promotion 208,269 210,962
Data processing 555,654 570,170
Insurance 336,712 780,235
SAIF insurance recapitalization 660,556 --
Other general & administrative expense 1,147,852 986,244
------------- -------------
Total general & administrative expense $ 7,103,948 $ 6,287,486
Amortization of deposit base premium 37,632 290,389
------------- -------------
TOTAL NON-INTEREST EXPENSE $ 7,141,580 $ 6,577,875
------------- -------------
Income before taxes $ 4,724,023 $ 4,383,342
Income tax expense 2,036,492 1,830,772
------------- -------------
NET INCOME $ 2,687,531 $ 2,552,570
============= =============
EARNINGS PER SHARE $ 0.55 $ 0.54
============= =============
CASH DIVIDENDS PER SHARE $ 0.11 $ 0.11
============= =============
3
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
For the three months ended:
March 31, 1997 March 31, 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,687,531 $ 2,552,570
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of:
Mortgage servicing rights 7,174 80,101
Deferred loan fees (682,785) (635,173)
Deposit base premium 37,632 290,389
Net gain on sale of:
Loans (374,948) (421,426)
Real estate held for development or sale (27,058) (39,609)
Net gain on securities activities (129,899) (464,233)
Provision for losses on:
Loans 350,000 265,000
Real estate held for development or sale 89,000 35,000
Depreciation and amortization 600,412 654,634
(Decrease) increase in income taxes payable 1,439,152 (9,851)
Net increase in accrued interest payable 154,346 943,719
Net increase in accrued interest receivable (532,718) (323,705)
Mortgage loans originated as held for sale (17,301,976) (18,790,852)
Proceeds from loans sold 17,453,337 25,502,479
Other, net 82,326 (2,178,030)
------------- -------------
$ 3,851,526 $ 7,461,013
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments on loans $ 57,085,359 $ 51,241,875
Mortgage loans originated as held for investment (62,328,338) (59,785,856)
Purchase of loan participations (95,370) (6,722,316)
Purchase of securities available for sale -- (48,093,325)
Maturity and payments of securities held for investment 6,388,601 7,467,929
Purchase of securities available for sale 11,866,552 26,088,803
Purchase of office property and equipment, net (171,758) (422,309)
Purchase of FHLB stock (221,000) (134,700)
Investment in real estate held for development or sale (9,794) (558,276)
Proceeds from sales of real estate held for development or sale 616,287 1,846,610
Proceeds from sale of foreclosed property 2,152,752 2,209,097
Other, net 264,192 5,654
------------- -------------
$ 15,547,483 $ (26,856,814)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposit accounts $ 14,137,627 $ (773,949)
Net increase in checking accounts 1,156,398 3,554,367
Proceeds from FHLB advances 71,000,000 116,300,000
Repayments of FHLB advances (103,500,000) (101,300,000)
Securities sold under agreement to repurchase, net (7,257,000) 2,098,000
Payments on mortgage-backed bonds -- (477,136)
Proceeds from stock options exercised and dividends reinvested 313,831 165,043
Dividends paid to shareholders (522,651) (512,909)
------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $ (24,671,795) $ 19,053,416
Net decrease in cash and cash equivalents (5,272,786) (342,385)
Cash and cash equivalents at the beginning of the year 16,977,614 17,854,046
------------- -------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 11,704,828 $ 17,511,661
============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 14,547,928 $ 13,408,522
Cash payments of income taxes 18,005 362,740
Supplemental disclosures of noncash investing and financing activities:
Additions to real estate acquired through foreclosure 1,551,769 1,236,146
Unrealized losses on available for sale securities 818,067 1,539,293
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
California Financial Holding Company ("California Financial" or
"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.
On December 9, 1996, California Financial and Temple-Inland Inc. ("TI")
announced the signing of a definitive Agreement and Plan of Merger (the "Merger
Agreement") under which California Financial will merge with and into TI. The
transaction is expected to close during the second quarter of 1997. Under the
terms of the Merger Agreement, California Financial's shareholders will receive
a combination of TI stock and cash valued at $30 per share for each share of
California Financial stock they hold, for a total transaction value of
approximately $150 million. Immediately following the consummation of the
Merger, Stockton Savings will merge with and into Guaranty Federal Bank, F.S.B.,
a wholly owned subsidiary of TI. The transaction was approved by the Company's
shareholders at the Annual Meeting held on April 28, 1997.
FINANCIAL CONDITION
Total assets increased by $37.5 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 increased by $10.2
million, reverse repurchase agreements declined by $25.2 million and Federal
Home Loan Bank advances increased by $53.5 million. The Company's total assets
have decreased by $22.3 million in the first quarter of 1997 as a result of a
decline in the investment portfolio. Interest-bearing liabilities decreased by
$24.5 million in the first quarter of 1997 despite a $15.3 million increase in
savings deposits, as Federal Home Loan Bank advances declined by $32.5 million.
The lack of asset growth over the past quarter was primarily the result of the
planned merger.
Loan origination volume for the first three months of 1997 totaled
$79.0 million compared to volume of $78.6 million for the first three months of
1996. Increases in short-term construction loans offset the decreases in
fixed-rate single-family originations in the first quarter of 1997 as compared
to the first quarter of 1996.
A breakout of lending volume by type is shown below for the periods
indicated:
Originations through
March 31
(in millions)
1997 1996
Short-term construction loans $42.9 $33.8
Permanent fixed-rate loans 18.0 30.0
Permanent adjustable-rate loans 18.1 14.8
------ ------
TOTAL ORIGINATIONS $79.0 $78.6
====== ======
5
The improving economy in the Bank's lending area led to the increases
in the origination of presold speculative construction loans in the first
quarter of 1997. While loans originated for the purchase of existing homes
remained constant between the two periods, refinances declined by $11.1 million
in 1997. The reduced interest rate environment early in 1996 led to increases in
the origination and refinance of permanent fixed-rate loan originations relative
to adjustable-rate mortgages during that period. 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 $17.5 million in the current year was down from the $25.5 million in
sales recorded in the first three months of 1996, consistent with the decrease
in fixed-rate mortgages originated this year.
The balance of real estate held for development or sale has declined by
$4.5 million from a year ago and by $1.3 million in the current year. Real
estate held by the Bank at quarter-end consisted of $5.3 million in real estate
owned through foreclosure and $385,000 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.
The balance of real estate owned through the foreclosure process has
increased by $319,000 from a year ago, however the balance has decreased by
$665,000 as compared to December 31, 1996.
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)
3/31/97 12/31/96 3/31/96
Real estate owned through foreclosure $ 5,329 $ 5,994 $ 5,010
Real estate held for development 385 989 5,214
--------- --------- ---------
TOTAL $ 5,714 $ 6,983 $ 10,224
========= ========= =========
At March 31, 1997, the Bank held investment and mortgage-backed
securities with an amortized cost basis of $287.5 million. Under the guidelines
of FAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", all debt and equity securities are to be classified as either held
to maturity, available for sale or held for trading. The Bank currently
classifies its entire investment portfolio as available for sale. Under the
provisions of FAS No. 115, all securities classified as available for sale must
be carried at market value with the unrealized gains or losses recorded as an
adjustment to stockholders' equity. At March 31, 1997, the Bank's investment
portfolio was adjusted to market value with a net after tax loss of $1.3
million.
The amortized cost and estimated market values of investment and
mortgage-backed securities as of March 31, 1997 are as follows (in thousands of
dollars):
6
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---- ----- ------ ------------
AVAILABLE FOR SALE:
Investment securities:
U.S. Government & Agency Securities $ 42,536 $ 2 $ 440 $ 42,098
CMO'S 145,316 731 1,832 144,215
Other securities 10 - - 10
------------ ------------ ---------- ------------
Total investment securities $ 187,862 $ 733 $ 2,272 $ 186,323
------------ ------------ ----------- ------------
Mortgage-backed securities:
FHLMC $ 52,098 $ 127 $ 590 $ 51,635
FNMA 27,658 - 153 27,505
GNMA 13,681 40 - 13,721
SBA Pools 4,306 10 38 4,278
FHA Title One 1,858 - 197 1,661
------------ ------------ ----------- ------------
Total mortgage-backed securities: $ 99,601 $ 177 $ 978 $ 98,800
------------ ------------ ----------- ------------
Total available for sale portfolio $ 287,463 $ 910 $ 3,250 $ 285,123
============ ============ =========== ============
NOTE: Above adjustments are on a pre-tax basis.
RESULTS OF OPERATIONS
The Company earned $2.7 million or $.55 per share for the first quarter
of 1997 compared to earnings of $2.6 million or $.54 per share for the like
quarter of 1996. Earnings in the current quarter were hindered by $661,000 in
merger related expenses.
Improved earnings the current quarter over last year's first quarter
can be attributed to stronger core earnings from increased interest margins and
an increase in fee income net of merger-related costs. Earnings in the first
quarter of 1996 were aided by large gains realized on the sale of assets.
The table below breaks out the components of the Bank's margin and
spread for the periods indicated:
Average for the quarter *Weighted average as of
ended March 31, March 31,
------------------------- -------------------------
Basis- Basis-
Point Point
1997 1996 Change 1997 1996 Change
Yield on interest-earning assets:
Loan portfolio yield 8.33% 8.23% 0.10% 7.93% 7.98% (0.05)%
Yield on marketable investments 6.66 6.59 0.07 6.67 6.58 0.09
Weighted yield on assets 7.92 7.84 0.08 7.63 7.64 (0.01)
Cost of funds:
Cost of deposits 4.52% 4.74% (0.22)% 4.56 4.68% (0.12)%
FHLB advances & other borrowings 6.01 5.97 0.04 6.02 5.81 0.21
Weighted cost of funds 4.83 4.95 (0.12) 4.86 4.89 (0.03)
Interest rate spread 3.09% 2.90% 0.19% 2.77% 2.75% 0.02%
Net yield on interest-earning assets 3.29% 3.07% 0.22% 2.96% 2.90% 0.06%
----
* Does not consider the effect of amortization of loan fees.
7
Improved net interest income in the current year relative to the first
three months of 1996 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 $1.1 million for the first
quarter of 1997 compared to 1996. A $39 million increase in the average balance
of loans outstanding in the first quarter of the current year was primarily
responsible for the earnings improvement although a 10-basis point increase in
average yield of the portfolio also contributed to the increase. A larger
percentage of construction and non-single family residential loans in the
portfolio resulted in the improvement of the yield in the current year as
compared to the previous year.
Investment interest income increased by $567,000 this quarter relative
to the first quarter of 1996. Interest income has increased due primarily to an
increase in the average balance of investments outstanding. During 1996, the
Bank purchased $129.0 million in securities with only $83.3 million in sales and
payoffs to provide for the increase in the average balance. The securities
purchased consisted primarily of adjustable-rate collateralized mortgage
obligations tied to current indices CMT that reprice monthly.
Interest expense increased by $390,000 for the three month period
compared to the same period in 1996. A $10.2 million dollar increase in the
average balance of interest-bearing liabilities, including $53.5 million in
borrowings, more than offset the 22-basis point drop in the cost of savings
deposits. The reduction of deposit costs resulted from a change in Bank policy
during 1996 to price less competitively in an effort to reduce future interest
costs.
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 the Federal Home Loan Bank's Eleventh District Cost of Funds Index
"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 $105,000 to interest expense
in 1997 compared to $119,000 for the first three months of 1996.
Declines in the cost of savings of 22-basis points for the first
quarter 1997 relative to the prior year reduced savings interest expense by
$526,000. The declining rate environment during 1996 as well as a concerted
effort by the Bank to reduce deposit costs through less competitive pricing, are
the primary reasons for the decline in deposit costs in the first quarter of
1997 as compared to 1996.
Borrowing costs increased by $869,000 for the first quarter of 1997
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 first quarter of 1997 was $56.4 million higher
than the first quarter of last year. The increase in average borrowings
outstanding in the current year as compared to 1996 was the result of asset
growth, particularly in the second quarter of 1996 as well as to replace the
runoff of brokered and retail funds during that period.
8
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 20
basis points for the first quarter of 1997. 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 the first quarter of 1996 when average margin exceeded average
spread by 17 basis points.
Loan loss provisions established during the quarter totaled $350,000
which were somewhat higher than the level of loan loss provisions established in
the first quarter of 1996, reflecting a slight increase in charge-offs in the
current year.
Noninterest income of $1.8 million was reported for the quarter
compared to noninterest income of $2.0 million reported in the first quarter of
1996. Fee income increased $221,000 in the first quarter of 1997 as compared to
the first quarter of 1996, however gains realized on the sale of loans and
investment securities were $381,000 higher in the first quarter of 1996.
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 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
first quarter of 1997 totaled $175,000, representing 47% of total loan sale
gains recorded. This compares to $178,000 recognized during the first quarter of
1996 representing 42% of total loan sale gains recorded. 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 $7,000 in the first
quarter of 1997 as compared to $80,000 in the first quarter of 1996 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 $11.9 million in adjustable-rate collateralized mortgage
obligations "CMO" investments classified as available for sale in the first
quarter of 1997, recognizing gains of $130,000. This compares to $26.1 million
in sales in the first quarter of 1996, recognizing net gains of $464,000. A
majority of investments sold in 1996 were for the purpose of reducing balance
sheet sensitivity to rising rates and consisted of 15-year fixed-rate
mortgage-backed securities.
Fee income from operations of $1.2 million has been recorded for the
first quarter of 1997, up 14.8% compared to fees of $1.0 million reported in the
like period of 1996. An increased number of checking accounts and corresponding
fees are responsible for most of the earnings improvement.
Fee income is expected to remain relatively consistent in the second
quarter. The level of loan sale gains is expected to remain the same as
originations of fixed-rate mortgages are expected to remain constant and
interest rates are relatively flat. Due to the merger, investment sale
activities will continue to be minimal.
9
Excluding merger related costs of $661,000, noninterest expense
decreased by $97,000 this year compared to the first quarter of 1996. The lower
expense resulted from a $418,000 reduction in deposit insurance expense. In the
third quarter of 1996, the Bank incurred a $6.6 million one-time assessment to
recapitalize the SAIF insurance fund, thereby reducing the regular premium on an
ongoing basis. Compensation expense increased $443,000 in the first quarter of
1997 as compared to the first quarter of 1996 as the Bank added two branches and
an FHA lending operation during the latter part of 1996.
The effective tax rate for the first three months of 1997 was 43.1%
compared to a rate of 41.8% for the first three months of 1996. The higher rate
this year results from the merger related expenses incurred by the company which
are not tax deductible.
ASSET QUALITY
The Bank has steadily reduced its level of nonperforming assets in the
current quarter relative to year-end, 1996 and March 31, 1996.
Detail on nonperforming assets is shown in the table below for the
dates indicated:
Nonperforming Assets
(in thousands)
March 31, 1997 Dec. 31, 1996 March 31, 1996
Loans 90 days or more delinquent $ 6,722 $ 7,300 $ 6,129
Troubled debt restructurings 1,565 1,466 6,605
Real estate owned through foreclosure 5,329 5,994 5,010
--------- -------- --------
Net nonperforming assets $ 13,616 $ 14,760 $ 17,744
========= ======== ========
Nonperforming assets/total assets 1.04% 1.11% 1.39%
As indicated above, the level of nonperforming assets has decreased by
roughly $4.1 million from the prior year. Non-performing assets as a percentage
of total assets was 1.04% at March 31, 1997, an improvement from 1.39% at March
31, 1996, and 1.11% at year end.
Nonperforming assets as of quarter-end consisted of the following asset
types:
Nonperforming Assets by Type
(in thousands)
March 31, 1997
Commercial and multi-family real estate $ 976
Construction 1,048
1-4 family homes 10,168
Land 1,424
---------
$ 13,616
=========
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
three months of 1997 totaled $172,000. Life-to-date unrecorded interest on these
same loans totaled $1.5 million through quarter-end. A total of $91,000 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
10
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 restructured
assets are land and construction loans totaling $1.6 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.
Approximately one third of the balance of restructured speculative development
loans are in excess of 90 days delinquent, and the property underlying one of
these loans is expected to revert back to the Bank in the second quarter. The
restructured debt total above does not include $331,000 in interest that has
been capitalized but has not been recognized in income. An additional $173,000
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 March
31, 1997 by loan type:
Reserves Percent of loans
(in thousands) in each category
at 3/31/97 to total loans
1-4 family permanent loans $ 2,330 74.0%
Multi-family loans 1,474 4.8
Commercial real estate loans 2,042 7.3
Land, construction and development loans 1,602 13.9
TOTAL -------- -----
$ 7,448 100.0%
======== =====
Although total loan loss reserves have declined by $730,000 from a year
ago, the level of loan loss reserves to nonperforming loans has increased from
52.9% to 78.3%.
Activity in the allowances for both loans and real estate for the first
three months of 1997 is summarized below:
Loss Reserves
(in thousands)
Loans Real Estate
Balance, December 31, 1996 $ 7,277 $ 2,310
Provision for losses 350 89
Charge-offs (179) (208)
Recoveries -- --
--------- ---------
Balance, March 31, 1997 $ 7,448 $ 2,191
========= =========
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:
11
Classified Assets
(in thousands)
as of
3/31/97 12/31/96 3/31/96
Substandard $ 24,509 $ 22,579 $ 36,116
Doubtful -- -- --
-------- -------- --------
TOTAL $ 24,509 $ 22,579 $ 36,116
======== ======== ========
The level of total classified assets declined by $11.6 million from the
previous year due primarily to a $5.0 million improvement in the balance of
troubled debt restructurings and the reduced balances of foreclosed real estate
and real estate held for development purposes. The increase in classified assets
from year end is attributable to a $2.5 million land loan that as of March 31,
1997 was 60 days delinquent.
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 six-month
repricing 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 six month to one year average
repricing periods. The level of fixed-rate loans and mortgage-backed securities
declined by $3.1 million from the previous year while adjustable-rate assets
increased by $30.9 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. For the month of March, 1997, the average liquidity ratio was
5.06% despite a 4.97% ratio on March 31, 1997.
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 March 31, 1997, the Bank had $47.1 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 $119.3 million was still
available through this borrowing source.
12
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
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 March 31, 1997 is set forth
in the following schedule:
Regulatory capital position
(in thousands)
Tangible Core Risk-based
-------- ---- ----------
Book capital $ 88,764 $ 88,764 $ 88,764
Unrealized losses on securities 1,322 1,322 1,322
Real estate investment deduction (1,073) (1,073) (1,073)
Intangible deduction (487) (487) (487)
Loan loss reserves - - 6,486
-------- -------- -------
Net regulatory capital $ 88,526 $ 88,526 $ 95,012
Minimum required 19,916 39,832 58,410
-------- -------- --------
Excess over minimum $ 68,610 $ 48,694 $ 36,602
======== ======== ========
Excess over "well capitalized" $ 22,139 N/A $ 22,000
======== ========
Capital Ratio 6.67% 6.67% 13.01%
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 March
31, 1997, the Bank's total risk-based capital, Tier 1 risk-based and core ratios
were 13.01%, 12.12% and 6.67%, respectively. The Bank's risk-based capital ratio
is currently $22.0 million above the minimum to be considered "well capitalized"
and $36.6 million above the 8% regulatory minimum.
13
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 became 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.
14
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
On April 28, 1997, the Stockholders of the Company approved the merger
of California Financial into Temple-Inland, Inc. The transaction is
expected to close during the second quarter of 1997, subject to
regulatory approval. Under the terms of the Merger Agreement,
California Financial's shareholders will receive a combination of TI
stock and cash valued at $30 per share for each share of California
Financial stock they hold, for a total transaction value of
approximately $150 million. Subject to certain limitations, California
Financial stockholders will be given the election to have the
consideration for their shares paid in TI stock, cash or a combination
of the two. TI, however, will issue no more than 1,692,000 shares of TI
stock in the transaction. The Merger Agreement permits California
Financial to terminate the transaction if the price of TI stock, as
calculated, is below $40 per share, provided that the number of shares
of TI stock issued in the transaction has not been increased.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
15
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: May 12, 1997 BY: /s/ ROBERT V. KAVANAUGH
--------------------------------
ROBERT V. KAVANAUGH
President, Chief Operating Officer
DATE: May 12, 1997 BY: /s/ JANE R. BUTTERFIELD
--------------------------------
JANE R. BUTTERFIELD
Senior Vice President, Treasurer,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16