1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
__________________________________
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1996
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 0-19491
CENFED FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4314853
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
199 North Lake Avenue, Pasadena, California 91101
- ------------------------------------------- -----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (818) 585-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 requirement for the past 90 days. Yes X No
---
Number of shares outstanding of the registrant's sole class of common stock at
July 19, 1996: 5,040,437
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CENFED FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1996 and December 31, 1995. . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1996 and 1995 . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months
and Six Months Ended June 30, 1996 and 1995 . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 6. Exhibits
a. Exhibits
b. Reports on Form 8-K
3
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS
JUNE 30, DECEMBER 31,
1996 1995
--------------- ------------------
Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Cash $17,267 $21,928
Federal funds sold 288 7,288
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 17,555 29,216
- ------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale, at fair value 126,315 133,778
Mortgage-backed securities ("MBS") available for sale, at fair value 405,849 341,288
Loans held for investment, net 1,436,204 1,492,094
Loans held for sale, at lower of cost or fair value 109,308 100,183
Accrued interest receivable 15,140 14,894
Real estate acquired in settlement of loans ("REO") 7,134 6,236
Real estate held for development and sale, net 398 5,410
Premises and equipment, net 10,466 13,300
Intangible assets, net of accumulated amortization 232 248
Deferred income taxes 3,818 3,818
Other assets 15,925 14,774
- ------------------------------------------------------------------------------------------------------------------------------
$2,148,344 $2,155,239
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
- ------------------------------------------------------------------------------------------------------------------------------
Customer deposit accounts $1,560,862 $1,551,329
Securities sold under agreements to repurchase 136,667 150,052
Notes payable 18,700 22,800
FHLB advances 303,900 300,500
Other liabilities 20,994 26,006
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,041,123 2,050,687
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
Common stock. $.01 par value
Authorized shares: 14,000,000 at June 30, 1996 and December 31, 1995
Outstanding shares: 5,040,437 at June 30, 1996 and 5,013,000 at December 31, 1995 50 50
Additional paid in capital 30,357 30,122
Retained earnings - substantially restricted 80,190 73,721
Unrealized gain (loss) on securities available for sale, net of tax (2,082) 2,179
Deferred compensation - retirement plans (1,294) (1,520)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 107,221 104,552
- ------------------------------------------------------------------------------------------------------------------------------
$2,148,344 $2,155,239
==============================================================================================================================
See notes to consolidated financial statements.
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CENFED Financial Corporation
Consolidated Statements of Operations
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
IN THOUSANDS, EXCEPT SHARE AMOUNTS 1996 1995 1996 1995
------------- ------------- ------------- ---------
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,530 $24,671 $61,053 $47,238
Investment securities and short-term investments . . . . . . 1,845 1,947 3,779 3,691
Mortgage-backed securities . . . . . . . . . . . . . . . . . 6,743 5,614 13,018 11,562
- -----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income . . . . . . . . 39,118 32,232 77,850 62,491
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Customer deposit accounts . . . . . . . . . . . . . . . . . 19,762 17,273 39,824 32,114
Securities sold under agreements to repurchase . . . . . . . 1,256 2,570 3,010 5,156
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . 4,060 3,101 8,213 6,118
Other borrowings . . . . . . . . . . . . . . . . . . . . . . 602 612 1,228 1,219
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . . . . . . . . . 25,680 23,556 52,275 44,607
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income . . . . . . . . . . . . . . . . . . . . 13,438 8,676 25,575 17,884
PROVISIONS FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . 2,250 300 5,050 900
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provisions for loan losses 11,188 8,376 20,525 16,984
- -----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Loan servicing fees . . . . . . . . . . . . . . . . . . . . 964 712 2,029 1,357
Customer deposit account fees . . . . . . . . . . . . . . . 490 451 974 905
Gain on sale of investments and MBS . . . . . . . . . . . . 395 12 992 62
Gain on sale of loans . . . . . . . . . . . . . . . . . . . 14 19 47 96
Income (Loss) from real estate operations . . . . . . . . . (418) (166) 3,831 (347)
Commissions from sales of investment products. . . . . . . . 513 288 918 714
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 52 175 174
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income . . . . . . . . . . . . . . 2,036 1,368 8,966 2,961
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Compensation . . . . . . . . . . . . . . . . . . . . . . . . 4,130 4,158 8,285 8,408
Net occupancy . . . . . . . . . . . . . . . . . . . . . . . 1,509 1,194 3,061 2,543
Deposit insurance premiums . . . . . . . . . . . . . . . . . 897 749 1,747 1,498
Data and check processing . . . . . . . . . . . . . . . . . 386 435 796 870
Advertising and marketing . . . . . . . . . . . . . . . . . 138 231 332 475
Intangible amortization . . . . . . . . . . . . . . . . . . 17 (11) 36 (52)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,431 1,356 3,085 2,539
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses . . . . . . . . . . . . . . 8,508 8,112 17,342 16,281
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item . 4,716 1,632 12,149 3,664
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 1,670 291 4,453 731
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item . . . . . . . . . 3,046 1,341 7,696 2,933
EXTRAORDINARY ITEM:
Early extinguishment of debt (net of income taxes of $267). . - - (364) -
- -----------------------------------------------------------------------------------------------------------------------------
Net Earnings . . . . . . . . . . . . . . . . . . $ 3,046 $1,341 $7,332 $2,933
=============================================================================================================================
PRIMARY EARNINGS PER SHARE:
Before extraordinary item . . . . . . . . . . . $0.59 $0.27 $1.49 $0.61
Extraordinary item . . . . . . . . . . . . . . - - ($0.07) -
- -----------------------------------------------------------------------------------------------------------------------------
After extraordinary item . . . . . . . . . . . $0.59 $0.27 $1.42 $0.61
=============================================================================================================================
AVERAGE PRIMARY SHARES OUTSTANDING . . . . . . . . . . . . . . 5,187,627 5,017,322 5,171,278 4,774,348
=============================================================================================================================
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ --------------------
IN THOUSANDS 1996 1995 1996 1995
---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $3,046 $1,341 $7,332 $2,933
Adjustments to reconcile net earnings to net cash provided:
Net amortization (accretion) of fees, discounts and premiums . . . 192 (367) 620 (884)
Depreciation and amortization . . . . . . . . . . . . . . . . . . 554 595 1,305 1,164
Gain on sales of loans . . . . . . . . . . . . . . . . . . . . . . (14) (19) (47) (96)
Gain on sales of investments and MBS . . . . . . . . . . . . . . . (395) (12) (992) (62)
Lower of cost or market adjustment to loans held for sale . . . . 100 -- 100 --
Provisions for loan and real estate losses . . . . . . . . . . . . 2,291 300 5,091 964
Originations and purchases of loans held for sale . . . . . . . .(10,400) (8,879) (21,846) (19,927)
Proceeds from sales of loans held for sale . . . . . . . . . . . . 285 7,022 4,288 12,149
(Increase) decrease in interest receivable . . . . . . . . . . . . 124 833 (246) 94
Increase (decrease) in interest payable . . . . . . . . . . . . . 112 497 824 1,439
Change in other assets and other liabilities . . . . . . . . . . . (2,037) 2,906 (1,657) 1,702
FHLB stock dividends . . . . . . . . . . . . . . . . . . . . . . . (212) (162) (414) (413)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (5) 42 (3)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities . . . . . . . (6,318) 4,050 (5,600) (940)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale . . . . . .(21,347) (20,585) (34,225) (20,585)
Proceeds from sales of investment securities available for sale. . 12,887 2,803 34,561 2,803
Maturities of investment securities available for sale . . . . . . -- -- 5,000 --
Purchases of MBS held to maturity . . . . . . . . . . . . . . . . -- (8,341) -- (31,213)
Purchases of MBS available for sale . . . . . . . . . . . . . . . (94,408) (1,133) (188,591) (35,069)
Proceeds from sales of MBS available for sale . . . . . . . . . . 16,258 10,931 87,689 42,379
Principal repayments on MBS . . . . . . . . . . . . . . . . . . . 20,015 9,426 33,216 25,987
Originations and purchases of loans held for investment . . . . . (24,274) (136,353) (60,690) (211,425)
Proceeds from sale of loans held for investment . . . . . . . . . -- -- -- 1,452
Loan repayments . . . . . . . . . . . . . . . . . . . . . . . . . 51,390 31,598 110,328 57,482
Purchases of premises and equipment . . . . . . . . . . . . . . . (170) (424) (382) (923)
Sales of premises and equipment . . . . . . . . . . . . . . . . . 2,093 5 2,093 40
Investment in REO and real estate held for development and sale. . (284) (808) (488) (772)
Sales of REO and real estate held for development and sale . . . . 2,516 5,552 9,976 8,169
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities . . . . . . . . . . . . . (35,324) (107,329) (1,513) (161,675)
- ----------------------------------------------------------------------------------------------------------------------------
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- --------------------
IN THOUSANDS 1996 1995 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES: ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in customer deposit accounts . . . . . (19,654) 49,876 10,165 132,870
Net decrease in notes payable . . . . . . . . . . . . . . . . (4,050) (50) (4,100) (100)
Net increase (decrease) in short-term financing:
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . 14,000 (17,000) 2,600 (45,200)
Securities sold under agreements to repurchase . . . . . . 45,161 24,230 (13,385) 42,403
Repayment of long-term FHLB advances . . . . . . . . . . . . . -- -- (9,200) --
Proceeds from long-term FHLB advances . . . . . . . . . . . . -- 35,000 10,000 35,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . (452) (416) (863) (738)
Proceeds from issuance of common stock . . . . . . . . . . . . 115 131 235 157
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities . . . . 35,120 91,771 (4,548) 164,392
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents . . . . . (6,522) (11,508) (11,661) 1,777
Cash and cash equivalents, beginning of period . . . . . . . . 24,077 37,239 29,216 23,954
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period . . . . . . . . . . . $ 17,555 $ 25,731 $ 17,555 $ 25,731
============================================================================================================================
SUPPLEMENTARY INFORMATION
CASH PAID FOR:
Interest on customer deposit accounts . . . . . . . . . . . . . $ 25,568 $ 23,071 $ 51,451 $ 43,180
Income tax (refunds)/payments . . . . . . . . . . . . . . . . . $2,325 ($3,237) $2,475 ($3,237)
NON-CASH ITEMS:
Additions to REO . . . . . . . . . . . . . . . . . . . . . . . $3,919 $3,521 $9,395 $6,233
Net change in unrealized gain (loss) on
securities available for sale, net of taxes . . . . . . . . ($1,313) $2,157 ($4,261) $3,746
Loans to facilitate sales of REO and
real estate held for development and sale . . . . . . . . . $2,623 $2,007 $10,259 $2,607
Transfer to real estate held for development and sale from
premises and equipment . . . . . . . . . . . . . . . . . . . -- -- -- $5,164
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996, DECEMBER 31, 1995 AND
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(1) BASIS OF PRESENTATION
The consolidated statement of financial condition as of June 30, 1996,
and the related consolidated statements of operations and cash flows for the
three months and six months ended June 30, 1996 and 1995, are unaudited. These
statements reflect, in the opinion of management, all material adjustments,
consisting solely of normal recurring accruals, necessary for a fair
presentation of the financial condition of CENFED Financial Corporation (the
"Company") as of June 30, 1996, and its results of operations and cash flows
for the three months and six months ended June 30, 1996 and 1995. The results
of operations for the unaudited periods are not necessarily indicative of the
results of operations to be expected for the entire year of 1996.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnotes normally included in financial
statements prepared in conformity with generally accepted accounting
principles. Accordingly, these consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(2) SUBSEQUENT EVENT
On July 2, 1996, the Company declared its quarterly cash dividend of
$.09 per share to shareholders of record as of July 19, 1996. The dividend was
distributed on August 2, 1996.
(3) EARNINGS PER SHARE
The Company has a long term incentive plan that includes incentive
stock options. For purposes of determining primary earnings per share and
fully diluted earnings per share, stock options granted to officers and
directors of the Company are considered common stock equivalents and are added
to common shares outstanding, using the treasury stock method. At June 30,
1996, fully diluted earnings per share were the same as primary earnings per
share as the dilution under the fully diluted earnings per share calculation is
not material.
Earnings per share for all periods presented have been calculated
based upon the increased number of shares of common stock and common stock
equivalents after giving effect to the stock dividend distributed on May 10,
1996.
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ITEM 2.
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
OPERATING STRATEGY
The operating strategy of CENFED Financial Corporation (the "Company")
consists of three primary elements: (i) acquiring assets providing returns that
satisfy the Company's cost of capital requirements; (ii) focusing on retail
deposit gathering as the principal source of funding; and (iii) focusing on the
efficiency of Company operations.
ACQUIRING ASSETS PROVIDING RETURNS THAT SATISFY THE COMPANY'S COST OF
CAPITAL REQUIREMENTS. The Company seeks assets that provide returns, on a
credit risk-adjusted basis, that meet or exceed its cost of capital. In pursuit
of this strategy, the Company identifies lines of business in which it believes
it can successfully serve customer niches and achieve satisfactory returns.
Management has pursued this strategy by offering business loans under lending
programs sponsored by the United States Small Business Administration ("SBA")
and multifamily residential and commercial real estate loans. The Company offers
single family real estate loans through retail loan officers and it purchases
packages of single family loans from other institutions from time to time.
In the second quarter of 1996, loan originations totaled $34.1
million, representing a 37.9% decrease from the $54.9 million of loans
originated in the corresponding period in 1995. The mix of loan originations
in the second quarter of 1996 continued to reflect the Company's emphasis on
higher risk assets with expected higher rates of return. Income property
loans, SBA loans and single family loans represented 44%, 35% and 19%,
respectively, of total originations in the second quarter of 1996, compared to
23%, 6% and 71%, respectively, in the second quarter of 1995. Loan
originations for the first six months of 1996 totaled $81.7 million, compared
to $123.0 million in the same period in 1995.
The Company views purchasing loans as a suitable alternative to
originating loans when loan origination volumes are insufficient to meet the
Company's growth requirements. Even though the Company maintains an active
presence in the secondary market, it purchased only $511,000 of loans, compared
to $73.7 million in the year-earlier quarter. Most of the loans purchased in
the second quarter of 1995 were acquired in connection with the purchase of SBA
loans from Government Funding Corporation (" GFC"). In the absence of changes
in current market conditions, the Company expects that the volume of loans
originated and purchased in 1996 will be less than in 1995.
FOCUSING ON RETAIL DEPOSIT GATHERING AS THE PRINCIPAL SOURCE OF
FUNDING. The Company believes that deposits gathered through its retail
delivery system are the most stable and economical source of funding for its
operations, in the long run. Gaining substantial market share and name
recognition in the Southern California marketplace is particularly challenging
due to the number of competitors and the presence of several large financial
institutions in most of the same communities in which the Company has branch
offices. In light of this challenge, the Company looks for opportunities to
increase its market share in those communities where institutional name
recognition is possible and franchise value is greatest. The Company uses
consolidations, acquisitions, sales and exchanges of deposits to increase its
average branch size and improve market share in selected communities.
Retail deposits at June 30, 1996 represented 67% of total
interest-bearing liabilities, compared to 65% one year earlier. The Company's
average retail deposits per branch totaled $75.0 million, compared to $61.8
million at the same dates, respectively. The increase in average deposits per
branch reflects the cumulative beneficial impact of the deposit and branching
transactions in recent periods.
FOCUSING ON THE EFFICIENCY OF COMPANY OPERATIONS. The Company
believes that it can achieve economies of scale primarily through asset growth
and increasing the average size of its retail branches. One measure of
operational efficiency is the ratio of general and administrative expenses
(excluding goodwill amortization) to average assets. In the second quarter of
1996, the annualized general and administrative expense ratio was 1.61%,
compared to 1.68% in the corresponding period in the previous year. For the
first six months of 1996, the annualized general and administrative expense
ratio was 1.63%, compared to 1.70% during the same period in 1995. Even though
the Company seeks ways to decrease its costs to deliver its products, future
improvements in operating efficiency are largely contingent upon growth in the
asset base. Management believes that growing the asset base in the immediate
future may be difficult.
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ANALYSIS OF STATEMENT OF FINANCIAL CONDITION
The Company's total assets grew by $34.8 million, or 1.64%, during
the second quarter of 1996, following a $41.7 million decrease in the first
quarter. The following table sets forth significant changes in the Company's
statement of financial condition:
INCREASE/(DECREASE)
--------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, 1996 JUNE 30, 1996
------------- -------------
Loans held for investment, net . . . . . . . . . $(30,088) $(55,890)
MBS and investment securities . . . . . . . . . . 65,416 57,098
All other, net . . . . . . . . . . . . . . . . . (566) (8,103)
-------- --------
Change in total assets . . . . . . . . . . . . $ 34,762 $ (6,895)
======== ========
Customer deposit accounts . . . . . . . . . . . . $(19,953) $ 9,533
Borrowings . . . . . . . . . . . . . . . . . . . 55,111 (14,085)
Stockholders' equity . . . . . . . . . . . . . . 1,446 2,669
All other, net . . . . . . . . . . . . . . . . . (1,842) (5,012)
-------- --------
Change in total liabilities and equity . . . $ 34,762 $ (6,895)
======== ========
Loans Held for Investment. Loans held for investment decreased by
$30.1 million during the quarter, largely due to weak loan demand that resulted
in levels of loan originations that were insufficient to offset repayments
within the portfolio, continuing a trend from the first quarter. During the
first six months of 1996, the Company has not been able to purchase loans at
satisfactory prices to supplement its loan originations.
MBS and Investment Securities. The Company has historically purchased
MBS and investment securities when it could not meet its growth objectives
through loan originations and purchases. During the second quarter of 1996,
the Company purchased $94.4 million in MBS and $21.3 million in investment
securities. In the future, the Company will continue to focus on identifying
securities for purchase with suitable yield and interest rate risk
characteristics.
Customer Deposit Accounts. During the second quarter of 1996, total
balances of customer deposit accounts decreased by $20.0 million, or by 1.26%,
consisting of a $5.8 million decrease in retail deposits and a $14.2 million
decrease in wholesale certificates of deposit. During the second quarter of
1996, the Company operated in a very rate-driven competitive market which
resulted in net deposit outflows. For the six months ended June 30, 1996,
customer deposit accounts increased by $9.5 million, or 0.61%, consisting of a
$6.9 million increase in retail deposits and a $2.6 million increase in
wholesale deposits.
Borrowings. Total borrowings increased by $55.1 million during the
second quarter of 1996, to finance the purchase of MBS and investment
securities. Most of the increase is in the form of short-term borrowings.
Stockholders' Equity. Although net earnings for the second quarter of
1996 totaled $3.0 million, stockholders' equity increased by only $1.4 million.
During the quarter, stockholders' equity was reduced through the payment of a
$452,000 cash dividend and by a $1.3 million after-tax increase in the
unrealized loss on securities available for sale due to rising interest rates.
Generally accepted accounting principles require that debt and equity
securities so designated be reported at fair value through an unrealized gain
or loss component of stockholder equity. Securities classified as available
for sale provide maximum flexibility with respect to disposition but subject
the Company's equity to more volatility from changes in market interest rates.
EARNINGS PERFORMANCE
The Company recorded net earnings of $3.0 million for the second
quarter of 1996, representing $.59 per primary share, compared to $1.3 million
and $.27 per primary share in the corresponding period in 1995. For the six
months ended June 30, 1996, the Company recorded net earnings of $7.3 million,
or $1.42 per primary share, compared to $2.9 million, or $.61 per primary share
in 1995. The 150% increase in net earnings in the first six months of 1996
over 1995 included a non-recurring $2.6 million after-tax gain from the sale of
an office building that formerly served as corporate headquarters. Partially
offsetting the gain was a $1.0 million provision for loan losses, after taxes,
9
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CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
associated with the SBA loans acquired by the Company from Government Funding
Corporation in 1995.
In the second quarter of 1996, compared to 1995, the Company's core
earnings (which excludes gains and losses on securities sales, real estate
operations and non-recurring adjustments but includes the aforementioned
additional provision for loan losses) increased by 109% due to increases in net
interest income and fee income that exceeded increases in operating expenses
and provisions for loan losses.
ASSET QUALITY
Delinquent Loans. Despite improvement in many of the economic
indicators for Southern California during the first six months of 1996, the
Company continued to experience rising loan delinquencies. Loan delinquency
information by aging category and by type of loan is set forth in the following
table:
JUNE 30, DECEMBER 31, JUNE 30,
(In Thousands) 1996 1995 1995
---- ---- ----
31 - 60 days delinquent:
------------------------
Single family . . . . . . . . . . . . . . . . . . . . $5,285 $3,485 $4,212
Multifamily . . . . . . . . . . . . . . . . . . . . . -- 362 --
Commercial real estate . . . . . . . . . . . . . . . 296 162 56
SBA . . . . . . . . . . . . . . . . . . . . . . . . . 1,011 483 339
Consumer . . . . . . . . . . . . . . . . . . . . . . 10 16 3
-- -- --
6,602 4,408 4,610
----- ----- -----
61 - 90 days delinquent:
------------------------
Single family . . . . . . . . . . . . . . . . . . . . 1,345 1,417 1,258
Multifamily . . . . . . . . . . . . . . . . . . . . . 434 -- 857
Commercial real estate . . . . . . . . . . . . . . . 1 -- --
SBA . . . . . . . . . . . . . . . . . . . . . . . . . 643 371 229
Consumer . . . . . . . . . . . . . . . . . . . . . . 57 2 13
-- -- --
2,480 1,790 2,357
----- ----- -----
Over 90 days delinquent:
------------------------
Single family . . . . . . . . . . . . . . . . . . . . 11,272 10,502 6,685
Multifamily . . . . . . . . . . . . . . . . . . . . . 3,534 1,274 2,767
Commercial real estate . . . . . . . . . . . . . . . 3,514 1,524 365
SBA . . . . . . . . . . . . . . . . . . . . . . . . . 1,370 1,833 364
Consumer . . . . . . . . . . . . . . . . . . . . . . 10 40 4
-- -- --
19,700 15,173 10,185
------ ------ ------
GRAND TOTAL:
------------
Single family . . . . . . . . . . . . . . . . . . . . 17,902 15,404 12,155
Multifamily . . . . . . . . . . . . . . . . . . . . . 3,968 1,536 3,624
Commercial real estate . . . . . . . . . . . . . . . 3,811 1,686 421
SBA . . . . . . . . . . . . . . . . . . . . . . . . . 3,024 2,687 932
Consumer . . . . . . . . . . . . . . . . . . . . . . 77 58 20
-- -- --
$28,782 $21,371 $17,152
======= ======= =======
Delinquent loans by type, as a percentage of total loans:
---------------------------------------------------------
Single family . . . . . . . . . . . . . . . . . . . . 1.25% 1.03% 0.88%
Multifamily . . . . . . . . . . . . . . . . . . . . . 0.28% 0.10% 0.26%
Commercial real estate . . . . . . . . . . . . . . . 0.26% 0.12% 0.03%
SBA . . . . . . . . . . . . . . . . . . . . . . . . . 0.21% 0.18% 0.07%
Consumer . . . . . . . . . . . . . . . . . . . . . . -- -- --
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . 2.00% 1.43% 1.24%
===== ===== =====
10
11
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Delinquent loans increased by $3.4 million during the second quarter of
1996 and represented 2.00% of total loans held for investment at June 30, 1996.
The major components of the 76 basis point increase in delinquent loans as a
percentage of total loans at June 30, 1996, compared to one year earlier,
consisted of increases of 37 basis points, 25 basis points, and 14 basis points
attributable to single family, income property and SBA loans, respectively.
At June 30, 1996, delinquent single family loans represented 1.54% of
total single family loans, which is the highest percentage of portfolio
delinquency since December 1993. The increases in delinquent single family
loans in recent quarters reflect weakness in the single family real estate
market in Southern California, especially in loans made three to ten years ago
as these borrowers were most adversely affected by the decline in the area's
real estate values. Management does not foresee immediate improvement in the
fundamental problems that have caused higher rates of single family loan
delinquencies. Therefore, the Company may be required to record higher
provisions for loan losses in the future than it recorded in corresponding
prior year quarters.
Because the Company's investment in SBA lending increased significantly
in June 1995, the increase in the delinquent loan ratio attributable to SBA
loans is a matter of portfolio size at the comparative dates, rather than an
indicator of asset quality deterioration.
Management believes that the $1.6 million combined increase in delinquent
multifamily and commercial real estate loans during the second quarter of 1996
is reflective of unique circumstances related to individual properties, and is
not necessarily indicative of a trend.
Nonperforming assets. Nonperforming assets at June 30, 1996 increased by
$4.0 million from the second quarter of 1996, and represented 1.39% of total
assets at that date. The following table sets forth the composition of
non-performing assets at the dates indicated:
JUNE 30, DECEMBER 31, JUNE 30,
(Dollars in Thousands) 1996 1995 1995
---- ---- ----
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . $22,623 $14,841 $11,717
Real estate acquired in settlement of loans ("REO") . . . 7,134 6,236 6,753
------- ------- -------
Nonperforming assets . . . . . . . . . . . . . . . $29,757 $21,077 $18,470
======= ======= =======
Total nonperforming assets as a % of total assets . . . . 1.39% 0.98% 0.92%
Nonaccrual loans as a % of total loans held for investment 1.57% 0.99% 0.86%
Loans are placed on nonaccrual status when, in the opinion of management,
the full and timely collection of principal or interest is in doubt. As a
general rule, the accrual of interest is discontinued when principal or
interest payments become 90 days past due. However, in certain instances, the
Company may place a particular loan on nonaccrual status earlier or later than
the 90 days past due standard, depending upon the individual circumstances
surrounding the loan's delinquency. In general, the Company initiates
foreclosure proceedings on commercial real estate and multifamily residential
loans before such loans become 60 days past due and places such loans on
nonaccrual status at that time. By accelerating the foreclosure process, the
Company hopes to stimulate those borrowers who have the capacity to keep their
loans current to do so immediately. In addition, if a borrower is unable to
make timely payments, beginning foreclosure proceedings at an earlier date
reduces the amount of time before the Company can acquire title to the
property.
11
12
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth the Company's nonperforming asset activity
for the three- and six-month periods ended June 30, 1996:
THREE MONTHS SIX MONTHS
--------------------- ----------------------
(In Thousands) NONACCRUAL NONACCRUAL
LOANS REO LOANS REO
----- --- ----- ---
Balance, beginning of period . . . . $18,698 $7,107 $14,841 $6,236
New Nonaccruing Loans:
Single family (1) . . . . . . . . 3,481 -- 7,036 --
Income property . . . . . . . . . 5,361 -- 9,553 --
SBA . . . . . . . . . . . . . . . 668 -- 2,445 --
Foreclosures:
Single family . . . . . . . . . . (2,578) 2,114 (5,563) 4,364
Income property . . . . . . . . . (517) 277 (2,951) 1,806
SBA . . . . . . . . . . . . . . . (606) -- (663) 52
Loans Brought Current:
Income property . . . . . . . . . (1,884) -- (2,046) --
Consumer . . . . . . . . . . . . -- -- (29) --
Sales of REO:
Single family . . . . . . . . . . -- (1,600) -- (4,359)
Income property . . . . . . . . . -- (764) -- (913)
SBA . . . . . . . . . . . . . . . -- -- -- (52)
-- -- -- --
Net change during the 3,925 27 7,782 898
------- ------ ------- ------
BALANCE, AT JUNE 30, 1996 . . . . . . $22,623 $7,134 $22,623 $7,134
======= ====== ======= ======
- ---------------------------------------
(1) New nonaccruing single family loans have been reduced by single family
loans that were brought current during the quarter.
The Company experienced a $4.0 million increase in nonperforming assets
during the second quarter of 1996, consisting primarily of increases of $3.0
million and $1.4 million in nonaccrual income property and single family loans,
respectively. At June 30, 1996, the nonperforming asset ratio increased by 17
basis points from the beginning of the quarter, and consisted of a 19 basis
point increase due to greater amounts of nonperforming assets, and a 2 basis
point decrease due to the growth in total assets. The increase in nonaccruing
SBA loans during the first six months of 1996 was attributable to the Company's
conforming its reporting of past due SBA loans--purchased from GFC and which
are subject to credit enhancement--to its reporting of past due real estate
loans. All SBA loans 90 days or more past due are now placed in nonaccrual
status, whether or not such loans are subject to credit enhancement provisions.
Impaired Loans. A loan is impaired, under the provisions of Statement of
Financial Accounting Standards Number 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS No. 114"), when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. SFAS No. 114
requires that an impaired loan be measured based on the present value of the
expected future cash flows, discounted at the loan's effective interest rate,
or the loan's observable market value or the fair value of the collateral (if
the loan is collateral dependent). The Company measures impairment based on
the fair value of the collateral if the Company determines that foreclosure is
probable. If the measure of the impaired loan is less than the Company's
recorded investment in the loan, the impairment is recognized by creating a
specific valuation allowance. Subsequent to the initial measurement of
impairment, if there is a significant increase or decrease in the amount or
timing of an impaired loan's expected future cash flows, or if actual cash
flows are significantly different from the cash flows previously projected, or
if the fair value of the collateral fluctuates materially, the Company
recalculates the impairment and adjusts the specific valuation allowance.
12
13
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth information with respect to impaired
loans at the dates indicated:
JUNE 30, 1996 DECEMBER 31, 1995
-------------------------------- ---------------------------------
SPECIFIC NET SPECIFIC NET
LOAN LOSS RECORDED LOAN LOSS RECORDED
(IN THOUSANDS) BALANCES ALLOWANCES INVESTMENT BALANCES ALLOWANCES INVESTMENT
-------- ---------- ---------- -------- ---------- ----------
Nonaccrual loans:
Requiring specific loss allowances $8,414 $2,474 $5,940 $3,152 $801 $2,351
Not requiring specific loss allowances 803 -- 803 162 -- 162
Restructured loans:
Requiring specific loss allowances 4,984 795 4,189 6,981 1,753 5,228
Other loans:
Requiring specific loss allowances 3,882 1,008 2,874 2,298 794 1,504
Not requiring specific loss allowances 1,158 -- 1,158 872 -- 872
------- ------ ------- ------- ------ -------
Total . . . . . . . . . . . . . $19,241 $4,277 $14,964 $13,465 $3,348 $10,117
======= ====== ======== ======= ====== =======
For the three months ended June 30, 1996, the average net recorded
investment in impaired loans was $13.8 million and the interest income
recognized totaled $264,000. In the corresponding period in the previous
year, the average net recorded investment in impaired loans was $5.6 million
and the interest income recognized totaled $68,000.
Allowance for Loan Losses. The Company maintains specific valuation allowances
related to individually significant loans as well as a general valuation
allowance. The general valuation allowance for loan losses is an amount that
management believes will be adequate to absorb losses on existing loans that
may become uncollectible in the future, based upon information currently
available to management, management's judgements as to the collectibility of
loans and prior loan loss experience. The determination of the appropriate
amount and allocation of the general allowance for loan losses is based upon an
analysis of the loan portfolio. The analysis is based upon such factors as
prior loan loss experience, economic conditions affecting the real estate
market, regulatory considerations, and other factors which management believes
deserve consideration. While management believes that it uses the best
information available to determine the appropriate amount of loan loss
provisions, future adjustments to the allowance for loan losses may be
necessary and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the determinations.
An analysis of the activity in the allowance for loan losses follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
(Dollars in Thousands) 1996 1995 1996 1995
---- ---- ---- ----
Balance, beginning of period $14,037 $12,373 $12,789 $12,529
Provision for loan losses 2,250 300 5,050 900
GFC acquisition -- 500 -- 500
Recoveries 341 834 505 874
Charge-offs (1,684) (906) (3,400) (1,702)
------- ------- ------- -------
Balance, end of period $14,944 $13,101 $14,944 $13,101
======= ======= ======= =======
Ratio of allowance for loan losses to total loans
held for investment at end of period 1.03% 0.94%
Ratio of allowance for loan losses to nonaccrual
loans at end of period 72.0% 106.9%
13
14
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth the Company's net charge-offs by loan types for
the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(In Thousands) 1996 1995 1996 1995
---- ---- ---- ----
Single family . . . . . . $1,123 $825 $1,788 $969
Multifamily residential . 133 (154) 640 58
Commercial real estate . (21) (638) 349 (239)
SBA loans . . . . . . . . 114 -- 120 --
Other . . . . . . . . . . (6) 39 (2) 40
------ ---- ------ ----
Total . . . . . . . $1,343 $ 72 $2,895 $828
====== ==== ====== ====
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company include:
* scheduled principal payments and unscheduled prepayments of
loans and MBS;
* proceeds from sales of investments, MBS and loans held for sale;
* cash flows generated from operations; and
* proceeds from increases in customer deposits, FHLB advances and
short-term borrowings.
Principal payments on loans and MBS were $71.4 million and $41.0
million for the three months ended June 30, 1996 and 1995, respectively, and
$143.5 million and $83.5 million for the six months ended June 30, 1996 and
1995, respectively. Proceeds from the sales of loans were $285,000 and $7.0
million for the second quarters of 1996 and 1995, respectively, and $4.3
million and $13.6 million for the six months ended June 30, 1996 and 1995,
respectively.
Sales of investments and MBS totaled $29.1 million and $13.7 million
for the second quarters of 1996 and 1995, respectively, and $122.2 million and
$45.2 million for the six months ended June 30, 1996 and 1995, respectively.
Generally, the proceeds from the sale of investments and MBS were reinvested in
loans and MBS.
Customer deposits decreased by $20.0 million in the three months ended
June 30, 1996, compared to a net increase of $49.9 million in the second
quarter of 1995. For the six months ended June 30, 1996 and 1995, customer
deposits increased by $9.5 million and by $132.9 million, respectively.
Savings banks must, by regulation, maintain liquidity of 5% of
deposits and short-term borrowings. Liquidity is measured by cash and certain
investments which are not committed, pledged, or required to liquidate specific
liabilities. The Company's average liquidity ratios for June 30, 1996 and 1995
were 5.80% and 7.73%, respectively.
RESULTS OF OPERATIONS
Comparisons of the Three Months and Six Months Ended June 30, 1996 and 1995
The Company's net earnings for the three months ended June 30, 1996
and 1995 were $3.0 million and $1.3 million, respectively. Earnings per share
on a primary earnings per share basis were $.59 and $.27 for the same periods,
respectively. For the six months ended June 30, 1996 and 1995, the Company
recorded net earnings of $7.3 million and $2.9 million, respectively, for
primary earnings per share of $1.42 and $0.61. In the three- and six-month
comparative periods, net interest income, non-interest income, and provisions
for loan losses were significantly higher in 1996 than in 1995.
Net Interest Margin. The net interest margin for the second quarter
of 1996 was 2.69%, representing a 28 basis point increase from the first
quarter of 1996 and a 73 basis point increase from the second quarter of 1995.
For the six months ended June 30, 1996 and 1995, the net interest margin was
2.55% and 2.02%, respectively. During the second quarter of 1996, the yield on
interest earning assets increased by 17 basis points and the cost of interest
bearing liabilities decreased by 10 basis points.
The following table displays average interest rates on the Company's
interest earning assets and interest bearing liabilities, on a fully tax
equivalent basis, at the end of and for the following periods:
14
15
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
JUNE 30, 1996 JUNE 30, 1995
------------------------------- ------------------------------
SIX SIX
QUARTER MONTH END OF QUARTER MONTH END OF
AVERAGE AVERAGE QUARTER AVERAGE AVERAGE QUARTER
------- ------- ------- ------- ------- -------
Yield on Interest Earning Assets:
Loans . . . . . . . . . . . . . . . 7.85% 7.81% 7.79% 7.08% 6.88% 7.39%
Mortgage-backed securities . . . . . 7.43% 7.30% 7.18% 6.98% 6.96% 6.95%
Other . . . . . . . . . . . . . . . . 6.23% 6.14% 6.81% 6.74% 7.03% 6.90%
----- ----- ----- ----- ----- -----
Yield on interest earning assets . 7.74% 7.65% 7.62% 7.03% 6.90% 7.28%
----- ----- ----- ----- ----- -----
Cost of Interest Bearing Liabilities:
Customer Deposits . . . . . . . . . . 5.07% 5.11% 5.01% 4.92% 4.69% 5.02%
Borrowings . . . . . . . . . . . . . 5.80% 5.87% 5.71% 5.96% 5.86% 5.96%
----- ----- ----- ----- ----- -----
Cost of interest bearing liabilities 5.22% 5.27% 5.17% 5.16% 4.97% 5.25%
----- ----- ----- ----- ----- -----
Interest rate spread . . . . . . . 2.52% 2.38% 2.45% 1.87% 1.93% 2.03%
===== ===== ===== ===== ===== =====
Net interest margin . . . . . . . . 2.69% 2.55% 2.60% 1.96% 2.02% 2.10%
===== ===== ===== ===== ===== =====
The Company's net interest margin reached its trough in the second
quarter of 1995, following a trend of steady quarterly declines that began in
late 1992. The primary cause of the spread compression in recent periods was a
combination of introductory interest rates on new loans and interest rate
adjustment limitations on certain adjustable rate single family loans that
prevented such loans from achieving fully-indexed rates. Management believes
that the majority of the increases in the net interest margin since the second
quarter of 1995 are attributable to rate adjustments to such loans, which have
largely reached fully-indexed rates.
Rate/Volume. Net interest income before loss provisions in the second quarter
of 1996 totaled $13.4 million, compared to $8.7 million in the corresponding
period in 1995. The rate- and volume-related increases in net interest income
in the second quarter of 1996, compared to the corresponding period in 1995,
totaled $1.7 million and $3.0 million, respectively, and were comprised of the
following:
(In Thousands) Increase (Decrease) Attributable To:
------------------------------------
Rate Volume Net
---- ------ ---
INTEREST INCOME ON INTEREST EARNING ASSETS:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . $3,023 $2,836 $5,859
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752 377 1,129
Investment securities . . . . . . . . . . . . . . . . . . . (298) 196 (102)
------ ------ -------
Total interest income on interest earning assets . . . . 3,477 3,409 6,886
------ ------ -------
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Customer deposit accounts . . . . . . . . . . . . . . . . . 1,964 525 2,489
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . (232) (133) (365)
------ ------ ------
Total interest expense on interest bearing liabilities . 1,732 392 2,124
------ ------ ------
Net interest income . . . . . . . . . . . . . . . . . . . . $1,745 $3,017 $4,762
====== ====== ======
15
16
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Net interest income before loss provisions for the first six months of
1996 totaled $25.6 million, compared to $17.9 million in the corresponding
period in 1995. The rate- and volume-related increases in net interest income
in the first six months of 1996, compared to the corresponding period in 1995,
totaled $3.5 million and $4.2 million, respectively, and were comprised of the
following:
(In Thousands) Increase (Decrease) Attributable To:
------------------------------------
Rate Volume Net
---- ------ ---
INTEREST INCOME ON INTEREST EARNING ASSETS:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . $7,067 $6,748 $13,815
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876 580 1,456
Investment securities . . . . . . . . . . . . . . . . . . . 93 (5) 88
-- --- --
Total interest income on interest earning assets . . . . 7,938 7,421 15,359
----- ----- ------
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Customer deposit accounts . . . . . . . . . . . . . . . . . 4,636 3,074 7,710
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . (182) 140 (42)
----- --- ----
Total interest expense on interest bearing liabilities . 4,454 3,214 7,668
----- ----- -----
Net interest income . . . . . . . . . . . . . . . . . . . . $3,484 $4,207 $7,691
====== ====== ======
Interest and Dividend Income. Interest and dividend income in the
second quarter of 1996 totaled $39.1 million, representing a 21.4% increase
from the corresponding period in 1995. For the six months ended June 30,
1996, interest and dividend income totaled $77.9 million, or 24.6% greater than
in the corresponding period in 1995. For both the three- and six-month
periods ended June 30, 1996, the Company's average interest earning assets were
greater than in the comparative periods in 1995, such that interest and
dividend income was higher in 1996 than in the corresponding periods in 1995 by
$3.4 million and $7.4 million, respectively. Average yields on interest
earning assets increased in 1996, compared to 1995, resulting in $3.5 million
and $7.9 million increases in interest and dividend income in the three- and
six-month periods ended June 30, 1996, compared to the corresponding periods
in the previous year.
Interest income from loans totaled $30.5 million in the second quarter
of 1996, representing a 23.7% increase from the corresponding period in the
previous year. The average yield on loans in the second quarter of 1996 was
7.85%, compared to 7.08% in the corresponding period in 1995. The 77 basis
point increase in average yield resulted in a $3.0 million increase in interest
income. In addition, average loans in the second quarter of 1996 were greater
than in the corresponding period in 1995, generating $2.8 million of additional
interest income. Similar circumstances applied to the comparative six month
periods ended June 30, 1996 and 1995, during which higher average yields
increased interest income by $7.1 million and higher average balances generated
$6.7 million of additional interest in 1996, compared to 1995.
The Company views mortgage-backed securities as suitable investments
because they have lower credit risk and greater liquidity than whole loans.
MBS constituted approximately 18% of total interest earning assets in 1996,
compared to 17% in 1995. The average yield on MBS for the second quarter of
1996 was 7.43%, representing a 45 basis point increase from the second quarter
of 1995. For the six months ended June 30, 1996, the average yield on MBS was
7.30%, compared to 6.96% in the same period in 1995. The rise in average yield
had the effect of increasing interest income by $752,000 and $876,000 for the
three- and six-month periods ended June 30, 1996, compared to 1995
respectively. The Company's average holdings of MBS were higher in both the
three- and six-months ended June 30, 1996, compared to the corresponding
period in 1995, resulting in higher income of $377,000 and $580,000,
respectively.
Interest Expense. Total interest expense increased by $2.1 million in
the second quarter of 1996, compared to the second quarter of 1995. For the
quarter, the average cost of interest bearing liabilities increased 6 basis
points to 5.22%, compared to the corresponding quarter in 1995, resulting in a
rate-related increase in interest expense of $1.7 million. During the second
quarter of 1996, the Company's average interest bearing liabilities were
approximately 8.1% greater than in the same period in 1995, resulting in
increased interest expense of $392,000. For the six months ended June 30,
1996, interest expense totaled $52.3 million, compared to $44.6 million for the
corresponding period in 1995. As was the case for the comparative quarters,
the average cost of interest bearing liabilities was higher in 1996 than 1995,
resulting in a rate-related increase to interest expense of $4.5 million.
Average interest bearing liabilities were greater in the first six months of
1996 than 1995, increasing interest expense by $3.2 million.
16
17
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Customer deposits are the Company's primary source of funds. For the
quarter ended June 30, 1996, average customer deposits were 79% of average
interest bearing liabilities, compared to 77% for the second quarter of 1995.
The average rate paid on customer deposit accounts during the second quarter of
1996 was 15 basis points higher than in the corresponding quarter in 1995,
increasing deposit interest expense by $2.0 million in the second quarter of
1996, compared to 1995. Larger average deposit balances increased interest
expense for the second quarter of 1996 by $525,000, compared to the
corresponding period in 1995. For the six months ended June 30, 1996, total
interest expense on customer deposit accounts was $7.7 million greater than in
the corresponding period in 1995. Due to a 42 basis point increase in the
average rate paid on customer deposits in the first six months of 1996,
compared to 1995, interest expense on deposits increased by $4.6 million. The
average deposit base in the six-month period ended June 30, 1996 was higher
than in the corresponding period in 1995. The volume-related increase to
interest expense was $3.1 million for the six-month period ended June 30, 1996,
compared to the corresponding period in 1995.
The Company's average borrowings represented 21% of interest-bearing
liabilities during the second quarter of 1996. Interest expense recorded on
borrowings in the second quarter of 1996 totaled $5.9 million, representing a
decrease of 5.8% from the second quarter of 1995. The average cost of
borrowings in the second quarter of 1996 was 5.80%, representing a 16 basis
point decrease from the same period in 1995. Because of the decrease in
average cost of borrowings, interest expense decreased by $231,000 in the first
quarter of 1996, compared to the 1995 quarter. A decrease in average
borrowings in the comparative periods resulted in a decrease of $132,000 in
interest expense. For the first six months of 1996, interest expense on
borrowings decreased $42,000 to $12.4 million compared to the same period in
1995. Lower rates generated a $182,000 decrease, which was almost offset by
an increase of $140,000 due to larger average borrowings.
Provisions for Loan Losses. In the second quarter of 1996, the
Company recorded $2.3 million of provisions for loan losses, compared to
$300,000 in the second quarter of 1995. The Company increased its provisions
for loan losses in response to several factors: increases in delinquent and
nonaccruing loans; the level of charge-offs during the quarter; and the
recording of $1.1 million of specific valuation allowances on two impaired
income property loans. For the six months ended June 30, 1996, the Company
recorded $5.0 million of provisions for loan losses, compared to $900,000 in
1995. In addition to the factors that led to the $2 million increase in
provisions in the second quarter, the Company recorded a $1.8 million provision
for loan losses at the recommendation of its regulators and allocated the
provision to credit-enhanced SBA loans purchased from GFC in June 1995. Such
an allocation of allowances for loan losses will be required until a payment
history by the borrowers and a performance record by the guarantor have both
been established.
Non-Interest Income. Total non-interest income in the second quarter
of 1996 increased by $668,000 over the comparative period in 1995. For the six
months ended June 30, 1996, total non-interest income increased by $6.0 million
over 1995, principally due to a $4.5 million nonrecurring gain from the sale of
an office building in the first quarter of 1996. The gain is reflected in
income from real estate operations.
One of the Company's objectives has been to enhance its fee-based
activities. The following table indicates the fee income derived from the
Company's principal fee-based activities for the periods presented:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
(In Thousands) 1996 1995 1996 1995
---- ---- ---- ----
Loan servicing . . . . . . . . . . . . . . . . $964 $712 $2,029 $1,357
Customer deposit fees . . . . . . . . . . . . . 490 451 974 905
Commissions from sales of uninsured investments 513 288 918 714
--- --- --- ---
Total . . . . . . . . . . . . . . . . . . $1,967 $1,451 $3,921 $2,976
====== ====== ====== ======
The $516,000 increase in earnings from fee-based activities in the
second quarter of 1996, compared to the corresponding quarter in 1995, included
$196,000 of loan servicing income related to the Company's SBA operations,
which were increased significantly in size and scope following the GFC asset
acquisition in June 1995. For the six months ended June 30, 1996, $558,000 of
the increase in fees from fee-based activities was also related to the
servicing of the SBA portfolio.
17
18
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
One of the Company's subsidiaries sells uninsured investment products
on a commissioned basis. For the second quarter of 1996, commission income
increased by $225,000, or by 88%, compared to the corresponding quarter in
1995. For the first half of 1996, commission income increased by 28% compared
to the first half of 1995.
For the first six months of 1996, the Company recorded gains from
sales of investment securities and MBS totaling $992,000, compared to $62,000
for the corresponding period in 1995. Buying and selling securities for the
purposes of generating gains is not a core activity of the Company; rather, the
increase in gains from sales of such securities was largely due to execution of
the Company's interest rate risk reduction strategy during the first half of
1996. For example, the gains recorded during the first quarter of 1996 largely
offset the penalty the Company paid to retire an 8.9% fixed rate borrowing
before its maturity. The penalty paid is reflected, net of taxes, as an
extraordinary item.
Operating Expenses. The Company incurred operating expenses of $8.5
million in the second quarter of 1996, representing a 4.9% increase from the
corresponding period in 1995, primarily due to changes in the Company's
operating structure as a result of acquisition and sales activities in 1995.
As a percentage of average assets, annualized operating expenses in the second
quarters of 1996 and 1995 were 1.61% and 1.68%, respectively. For the first
six months of 1996, total operating expenses were $17.3 million, representing a
6.5% increase from the corresponding period in 1995. The operating expense
ratio for the six-month periods ended June 30, 1996 and 1995 were 1.63% and
1.70%, respectively.
The following tables set forth the increases in operating expenses in
the second quarter and first half of 1996, compared to the corresponding
periods in 1995, by type of expense:
INCREASE/(DECREASE) IN QUARTER DUE TO:
----------------------------------------------------------
SECOND RETAIL
(IN THOUSANDS) QUARTER OFFICE GOVT. SECOND
1995 RESTRUCT- FUNDING NET QUARTER
URINGS(1) DIVISION(2) LENDING(3) OTHER CHANGE 1996
------- --------- ----------- ---------- ----- ------ ----
Compensation . . . . . . $4,158 $(21) $165 $(613) $441 $(28) $4,130
Net occupancy . . . . . . 1,194 105 72 (14) 152 315 1,509
Deposit insurance . . . . 749 38 -- -- 110 148 897
Data and check processing 435 20 7 (18) (58) (49) 386
Advertising . . . . . . . 231 -- -- -- (93) (93) 138
Intangible amortization . (11) -- -- -- 28 28 17
Other operating . . . . . 1,356 38 271 (134) (100) 75 1,431
------ ---- ---- ------ ----- -- -----
Total . . . . . . . . . $8,112 $180 $515 $(779) $480 $396 $8,508
====== ==== ==== ===== ==== ==== ======
18
19
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
INCREASE/(DECREASE) IN FIRST HALF DUE TO:
-----------------------------------------
RETAIL
(IN THOUSANDS) FIRST OFFICE GOVT. FIRST
HALF RESTRUC- FUNDING NET HALF
1995 TURINGS(1) DIVISION(2) LENDING(3) OTHER CHANGE 1996
------- ---------- ----------- ---------- ----- ------ ----
Compensation . . . . . . $8,408 $(13) $473 $(1,152) $ 569 $ (123) $ 8,285
Net occupancy . . . . . . 2,543 203 143 (24) 196 518 3,061
Deposit insurance . . . . 1,498 71 -- -- 178 249 1,747
Data and check processing 870 50 10 (32) (102) (74) 796
Advertising . . . . . . . 475 -- -- -- (143) (143) 332
Intangible amortization . (52) -- -- -- 88 88 36
Other operating . . . . . 2,539 84 336 (182) 308 546 3,085
------ ---- ---- ------- ------- ------ -------
Total . . . . . . . . . $16,281 $395 $962 $(1,390) $1,094 $1,061 $17,342
======= ==== ==== ======= ======= ====== =======
- ---------
(1) Retail Office Restructurings - in November 1995, the Company completed
a deposit and branch swap with another financial institution. The
result of the transaction was a net increase in deposits of $60.1
million and two fewer branches.
(2) The Company established the Government Funding Division of the Bank
following the purchase of assets and operations of GFC in late June
1995. As a result, the first half of 1995 includes only limited
operating expenses for the division.
(3) Lending - During the second half of 1995, the Company downsized its
single family, wholesale-based lending operations to reflect
unfavorable market conditions.
Compensation and employee benefits expense decreased by $28,000 and
$123,000 for the three- and six-months ended June 30, 1996, respectively, when
compared to similar periods in 1995. Included in the reductions for the
comparative three- and six-month periods were $613,000 and $1.2 million of
decreases in compensation in the Company's mortgage lending division as a
result of the discontinuation of single family, wholesale-based lending.
Reductions in new loan volume in the first half of 1995 resulted in excess
capacity and led to greater levels of non-deferrable compensation expense.
Partially offsetting the benefit of lower single family lending division
compensation were increases of $165,000 and $473,000 in compensation expense
in the Government Funding division, which expanded the Company's SBA-lending
operations materially following the June 1995 asset acquisition of GFC.
Occupancy expense increased by $315,000 and $518,000 in the three- and
six-month periods ended June 30, 1996, compared to the same periods in 1995,
respectively. In 1996, the Company began to depreciate a new teller platform
system installed in the latter part of 1995. Depreciation on the platform
system accounted for the majority of the $110,000 and $176,000 increases in
depreciation expense in the three- and six-month periods ended June 30, 1996,
compared to the corresponding periods in 1995. Following the sale of two
office properties in 1996, building depreciation decreased by $110,000 and
$176,000 in the second quarter and first half of 1996, compared to the
corresponding periods in 1995. Most of the remaining increase can be
attributed to office restructuring expenses for both the three- and six-
month periods, as shown in the table above.
CenFed Bank is a "well capitalized" financial institution, as defined
by federal regulations, and accordingly is assessed the lowest deposit
insurance rate available for institutions insured by the Savings Association
Insurance Fund. Deposit insurance expense in the second quarter of 1996
increased by $148,000 from the second quarter of 1995 and by $249,000 in the
first six months of 1996, compared to the same period in 1995, due to the
growth in savings deposits.
Other operating expenses in the three- and six-month periods ended
June 30, 1996 increased by $77,000 and $548,000, respectively, over the
corresponding periods in 1995. Most of the change can be attributed to
incremental operating expenses associated with the Government Funding Division
and to cost savings stemming from the downsizing of single family lending
operations, as noted in the above tables.
Income Taxes. Income tax expense or benefit varies from period to
period based on the Company's level of earnings before taxes, the relative
amounts of taxable and tax exempt income, and changes to statutory tax rates.
For the three months ended June 30, 1996, the Company recorded income tax
expense of $1.7 million on earnings before taxes of $4.7 million, resulting in
an effective tax rate of 35.4%. In the comparative period in 1995, the Company
19
20
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
recorded income tax expense of $291,000 on earnings before taxes of $1.6
million, resulting in an effective tax rate of 17.8%. Income tax expense for
the six months ended June 30, 1996 was $4.5 million on earnings before taxes
and extraordinary items of $12.1 million, resulting in an effective tax rate of
36.65%. For the six months ended June 30, 1995, total income tax expense was
$731,000 on earnings before taxes of $3.7 million, resulting in an effective
tax rate of 19.9%. The Company's marginal tax rate is approximately 42%, but
tax advantages associated with its portfolio of municipal bonds reduced the
effective interest rate. The relative relationship of non-tax advantaged
income to tax advantaged income from the municipal bonds is the primary
determinant of the degree to which the effective tax rate deviates from the
marginal tax rate.
Extraordinary Item. During the first quarter of 1996, the Company
repaid an $8.2 million, 8.9% fixed rate borrowing before its scheduled
maturity. As a result, the Company incurred a prepayment penalty of $364,000,
net of taxes of $267,000.
RECENT DEVELOPMENTS
Both houses of Congress have recently passed legislation, which, if
signed by the President, will repeal the tax rules formerly applicable to bad
debt reserves of thrift institutions for taxable years beginning after December
31, 1995. The Bank will thereupon be required to change its tax method of
accounting for bad debts from the reserve method formerly permitted under
section 593 of the Internal Revenue Code (the "Code") to the "specific
charge-off" method. Under the specific charge-off method, tax deductions may
be taken for bad debts only as and to the extent that the loans become wholly
or partially worthless. The pending legislation would generally require thrift
institutions, such as the Bank, which have previously utilized the section 593
reserve method to recapture (i.e., include in taxable income) over a six-year
period a portion of their existing bad debt reserves equal to their "applicable
excess reserves." The amount of the Bank's existing bad debt reserves that
will be subject to such recapture is approximately $23 million. In addition,
if the pending legislation becomes law, the remainder of the Bank's bad debt
reserve balance as of December 31, 1995 will in future years be subject to
recapture in whole or in part upon the occurrence of certain events such as a
distribution to shareholders in excess of the Bank's current and accumulated
earnings and profits, a redemption of shares, or upon a partial or complete
liquidation of the Bank. Contrary to current law, the amount that would be
subject to recapture under such circumstances would be computed without regard
to the portion of such reserves that would have been allowed under the
experience method. The Bank does not intend to make distributions to its
shareholders that would result in recapture of any portion of its bad debt
reserves.
REGULATORY CAPITAL
Capital regulations of the Office of Thrift Supervision ("OTS")
established three capital requirements: a "leverage limit" (also referred to as
the "core capital requirement"), a "tangible capital requirement" and a
"risk-based capital requirement." The capital standards contained in the
capital regulations are required by statute to be no less stringent than the
capital standards applicable to national banks. In addition to the general
standards, the OTS may establish, on a case-by-case basis, individual minimum
capital requirements for a savings institution which vary from the requirements
that would otherwise apply under the capital regulations.
A savings institution that fails to meet one or more of the
applicable capital requirements is subject to various regulatory limitations
and sanctions, including a prohibition on growth and the issuance of a capital
directive by the OTS Director requiring one or more of the following: an
increase in capital; a reduction of rates paid on savings accounts; cessation
of or limitations on operational expenditures; an increase in liquidity; and
such other actions as may be deemed necessary or appropriate by the OTS
Director. In addition, a conservator or receiver may be appointed under
appropriate circumstances.
The core capital requirement currently requires a savings institution
to maintain "core capital" of not less than 3% of adjusted total assets.
"Core capital" includes common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and any related surplus and
minority interests in the equity accounts of fully consolidated subsidiaries.
The amount of an institution's core capital is, in general, calculated in
accordance with generally accepted accounting principles ("GAAP"), but with
certain exceptions. Among other exceptions, adjustments to an institution's
GAAP equity accounts that are required pursuant to FASB 115 to reflect changes
in the market value of certain securities held by the institution that are
categorized "available-for-sale" are not be included in the calculation of core
capital for regulatory capital purposes. Intangible assets (with certain
exceptions and limitations, including mortgage servicing rights, qualifying
supervisory goodwill and certain other intangibles such as certain grand
fathered core deposit premiums, which may be included on a limited basis) must
be deducted from core capital. A core deposit premium is a type of intangible
asset relating to purchased deposit operations. At June 30, 1996, the Bank had
$2.2 million of core deposit premium included in core capital.
For purposes of determining compliance with the capital standards, a
savings institution's investments in and extensions of credit to any subsidiary
engaged in activities not permissible for national banks are required to be
deducted from the savings institution's capital over a phase-out period. Under
the phase-out rule, a savings institution must deduct an increasing percentage
of its investments in and extensions of credit to a subsidiary engaged in
activities not permissible for national banks as of April 12, 1989. At June
30, 1996, the Bank deducted $325,000 from its regulatory capital ratios,
representing 60% of the investment in and extensions of credit to its
subsidiary, Cresecent Bay Diversified.
A savings institution is required to maintain "tangible capital" in an
amount not less than 1.5 % of adjusted total assets, which is the minimum limit
permitted by FIRREA. "Tangible capital" is defined for this purpose to mean
core capital less any intangible assets (including supervisory goodwill), plus
purchased mortgage servicing rights, subject to certain limitations.
The risk-based capital requirements, among other things, provide that
the capital ratio applicable to various classes of assets are to be adjusted to
reflect the degree of risk associated with such classes of assets. In
addition, the asset base for computing a savings institution's capital
requirement includes off-balance sheet items, such as assets sold with
recourse. Generally, the Capital Regulations require savings institutions to
maintain "total capital" equal to 8.00%
20
21
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
of risk-weighted assets. "Total capital" for these purposes consists of core
capital and supplementary capital. Supplementary capital includes, among other
things, certain types of preferred stock and subordinated debt and, subject to
certain limitations, loan and lease general valuation allowances. Such general
valuation allowances can generally be included up to 1.25% of risk-weighted
assets. At June 30, 1996, $10.2 million of the Bank's general valuation
allowance was included in supplementary capital. A savings institution's
supplementary capital may be used to satisfy the risk-based capital requirement
only to the extent of that institution's core capital.
Under an amendment to the applicable OTS regulations, an OTS-regulated
institution would be required to maintain additional risk-based capital equal
to half of the amount by which the decline in its "net portfolio value" that
would result from a hypothetical 200 basis point change (up or down, depending
on which would result in the greater reduction in net portfolio value) in
interest rates on its assets and liabilities exceeds 2% of the estimated
"economic value" of its assets. In order to preserve the PCA capital category
system (described below) the regulation required that the foregoing amount be
subtracted from actual capital rather than requiring that an institution's
normal capital requirements be increased by that amount. The OTS has stated
that implementation of this amendment to its regulations will require
additional capital to be maintained only by institutions having "above normal"
interest rate risk. An institution's "net portfolio value" is defined for this
purpose as the difference between the aggregate expected future cash inflows
from an institution's assets and the aggregate expected future cash outflows on
its liabilities, plus the net expected cash inflows from existing off-balance
sheet contracts, each discounted to present value. The estimated "economic
value" of an institution's assets is defined as the discounted present value of
the estimated future cash flows from its assets. Although the OTS had
scheduled implementation of this provision for September 30, 1994, it has
delayed implementation. Had this provision been in effect at June 30, 1996, no
additional deduction would have been required from total capital.
Under the risk-based capital requirements, equity investments
(including certain direct investments in real estate) and that portion of land
loans and nonresidential construction loans in excess of an 80% loan-to-value
ratio and certain other items are excluded from capital.
The Bank was in compliance with all regulatory capital requirements in
effect at June 30, 1996. The following table reflects the required capital
ratios and the actual capital ratios of the Bank at June 30, 1996 and on a
fully phased-in basis:
Actual Required Excess
------ -------- ------
At June 30, 1996:
Tangible capital to adjusted total assets 5.58% 1.50% 4.08%
Core capital to adjusted total assets 5.68% 3.00% 2.68%
Total capital to risk-weighted assets 11.47% 8.00% 3.47%
Fully phased-in (pro forma):
Tangible capital to adjusted total assets 5.57% 1.50% 4.07%
Core capital to adjusted total assets 5.67% 3.00% 2.67%
Total capital to risk-weighted assets 11.45% 8.00% 3.45%
21
22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on May
22, 1996 for the purpose of electing two directors and voting on the proposals
described below. Proxies for the meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934, there was no solicitation in
opposition to the management's solicitation, and all of management's nominees
for director as listed in the proxy statement were elected.
PROPOSAL ONE
The proposal to elect two Directors for terms expiring in 1999:
Shares voted for Shares withheld
------------------ ---------------
Robert Leishman 3,289,337 11,158
D. Tad Lowrey 3,290,765 9,730
PROPOSAL TWO
The proposal to ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year commencing January 1, 1996
was approved by the following vote:
Shares voted for Shares voted against Shares voted abstain
- ---------------- -------------------- --------------------
3,286,086 2,826 11,583
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11.1 Computation of Per Share Earnings
(b) No reports were filed on Form 8-K during the quarter for which this
report is filed.
22
23
SIGNATURES
Pursuant to the requirement 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.
CENFED FINANCIAL CORPORATION
Date: August 14, 1996 By: /s/ Steven P. Neiffer
-------------------------------
Steven P. Neiffer
Vice President & Controller
(Principal Accounting Officer)
24
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
- ------- ----------- ------------
11.1 Computation of Earnings Per Share