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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE (INCLUDING ATTACHED STOCK PURCHASE RIGHTS)
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed by reference to the closing price of such stock as of the
close of trading on March 21, 1997 was $165,111,000.
As of March 21, 1997, 5,235,667 shares of the Registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed with the Securities
and Exchange Commission in connection with Registrant's annual meeting of
stockholders to be held on May 28, 1997 are incorporated by reference into Part
III of this Form 10-K.
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CENFED FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business.................................................................. 1
ITEM 2. Properties................................................................ 35
ITEM 3. Legal Proceedings......................................................... 36
ITEM 4. Submission of Matters to a Vote of Security Holders....................... 37
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 37
ITEM 6. Selected Financial Data................................................... 39
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 40
ITEM 8. Financial Statements and Supplementary Data............................... 63
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 63
PART III
ITEM 10. Directors and Executive Officers of the Registrant........................ 63
ITEM 11. Executive Compensation.................................................... 63
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............ 63
ITEM 13. Certain Relationships and Related Transactions............................ 63
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 63
3
ITEM 1. BUSINESS
GENERAL
CENFED Financial Corporation ("CENFED" or the "Company") was organized in
1991 to become the holding company for Century Federal Savings and Loan
Association (the "Association") in connection with the Association's conversion
from mutual to stock form. As used herein, the "Company" means CENFED and its
subsidiaries and includes the Association as the predecessor of CENFED. On April
1, 1992, the Association changed its name to CenFed Bank, A Federal Savings Bank
(the "Bank") and its charter was changed to that of a federally chartered
savings bank. As used herein, the "Bank" includes the activities of the
Association prior to the name change.
The Bank was organized as a California licensed state savings and loan
association in 1927, converted to a federally chartered mutual savings and loan
association in 1936 and merged with Pasadena Federal Savings and Loan
Association, which was also a mutual institution, in 1983. On July 15, 1994, the
Company purchased United California Savings Bank ("UCSB"), an Orange
County-based savings institution dating back to 1921, for a combination of
CENFED common stock and cash. The acquisition of UCSB increased the Company's
presence in Orange County, provided entrance into Riverside County and
significantly increased the Company's retail deposit accounts so that the
Company was then able to sell four branches that were not economically viable in
the long term and, in the process, exit the Central California market. The
Company currently expects to continue to pursue such transactions in the future,
market conditions permitting. The Company conducts business through 18 branch
offices located in Los Angeles, Orange, Riverside and San Bernardino Counties in
Southern California. At December 31, 1996, the Company had total assets of $2.2
billion, deposits of $1.6 billion and stockholders' equity of $113.8 million.
CENFED is a savings and loan holding company and as such is subject to
examination and regulation by the Office of Thrift Supervision (the "OTS"). The
deposits of the Bank are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is
regulated by the Director of the OTS (the "OTS Director") and the FDIC. The Bank
is a member of the Federal Home Loan Bank ("FHLB") of San Francisco, which is
one of the twelve regional banks comprising the Federal Home Loan Bank System.
The Bank is also subject to certain regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") with respect to reserves
required to be maintained against deposits and certain other matters.
The Company is primarily engaged in the business of attracting deposits
from the general public and using such deposits, together with borrowings and
equity capital, to originate and purchase real estate loans, small business
loans and mortgage-backed securities ("MBSs"), such as those issued or
guaranteed by the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage
Association ("GNMA") and other financial institutions and intermediaries. Prior
to 1996, the Company's primary emphasis was on single family lending. The
Company greatly reduced its single family lending presence in early 1996 by
closing its wholesale-based lending operations because the rates at which such
loans could be originated and the cost of acquiring such loans did not generate
sufficient income to support the Company's cost of capital. At the end of 1996,
the Company discontinued its retail-based single family lending operations for
similar reasons and due to insufficient volumes of new loans to justify the
Company's investment in its minimal lending presence.
The Company's results of operations are dependent primarily upon net
interest income, which is the difference between interest income from interest
earning assets and interest expense on interest bearing liabilities. Results of
operations are also influenced by non-interest income derived from loan
servicing fees, customer deposit service charges, commissions from sales of
alternative investments, real estate operations and gains and losses from the
sale of loans, MBSs and investments. Operating expenses of the Company include
general and administrative expenses such as salaries, employee benefits, federal
deposit insurance premiums and branch occupancy and related expenses.
The Company's operations are significantly influenced by general economic
conditions, the monetary and fiscal policies of the federal government and the
regulatory policies of governmental authorities. Deposit flows
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and the cost of interest bearing liabilities are influenced by the interest
rates and rates of return available on competing investments and general market
interest rates. Similarly, loan volume and yields, and the level of prepayments
on loans, are affected by market interest rates on loans and the availability of
funds.
LENDING ACTIVITIES
General. The Company's principal source of revenue is interest income from
its real estate and small business lending activities. The Company's lending
activities historically consisted primarily of making loans secured by first
liens on residential real property located in California. To a lesser extent,
but of growing importance, is the origination of small business loans and loans
secured by commercial non-residential and multifamily residential real property
(collectively referred to as "commercial real estate"). Neither federal law nor
California law imposes usury ceilings on interest rates that may be charged by
the Bank. In addition to interest earned on loans, the Company receives fees in
connection with servicing loans for other investors and charges are assessed to
borrowers for certain loan prepayments, loan modifications, late payments, loan
assumptions and other miscellaneous services.
Loans Held for Investment. The net loan portfolio held for investment
totaled approximately $1.4 billion, representing 64% of total assets, at
December 31, 1996. The following table sets forth the composition of loans held
for investment by type of loan at the dates indicated.
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- ------- ---------- ------- -------- ------- -------- -------
(Dollars in thousands)
Single family real
estate........... $ 903,811 64.96% $1,043,687 69.95% $ 901,613 73.18% $579,907 68.16% $418,510 58.27%
Commercial real
estate........... 389,576 28.00% 366,018 24.53% 329,636 26.75% 269,470 31.67% 293,968 40.93%
Small business
loans:
Loans under
SBA lending
programs....... 71,700 5.15% 65,188 4.37% 910 -- -- -- -- --
Other small
business
loans.......... 21,079 1.52% 6,235 0.42% -- -- -- -- -- --
Construction....... 2,375 0.17% 6,321 0.42% 6,086 0.49% 1,557 0.18% 6,285 0.88%
Home equity and
property
improvement...... 1,929 0.14% 2,235 0.15% 2,763 0.22% 3,982 0.47% 6,125 0.85%
Consumer loans..... 2,483 0.17% 2,887 0.19% 3,018 0.33% 2,580 0.30% 3,421 0.48%
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total gross
loans........ 1,392,953 100.11% 1,492,571 100.03% 1,244,026 100.97% 857,496 100.78% 728,309 101.39%
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Unearned fees,
discounts and
premiums..... 12,813 0.92% 14,861 1.00% 5,416 0.44% 2,360 0.28% (1,176) (0.16%)
Undisbursed
loan funds... (971) (0.07%) (2,549) (0.17%) (4,858) (0.39%) (200) (0.02%) (1,166) (0.16%)
Allowance for
loan
losses....... (13,488) (0.96%) (12,789) (0.86%) (12,529) (1.02%) (8,832) (1.04%) (7,702) (1.07%)
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
$1,391,307 100.00% $1,492,094 100.00% $1,232,055 100.00% $850,824 100.00% $718,265 100.00%
========== ====== ========== ====== ========== ====== ======== ====== ======== ======
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The following table sets forth the final contractual maturities of the loan
portfolio at December 31, 1996. The table does not include scheduled principal
payments or unscheduled prepayments. Scheduled principal payments and
unscheduled prepayments on the loan portfolio for the years ended December 31,
1996, 1995 and 1994 were $208.0 million, $143.5 million, and $143.9 million,
respectively.
AT DECEMBER 31, 1996
------------------------------------------------------
UP TO AFTER 1 YEAR OVER
1 YEAR TO 5 YEARS 5 YEARS TOTAL
------- ------------ ---------- ----------
(In thousands)
Real estate loans............ $17,765 $ 46,914 $1,233,012 $1,297,691
Small business loans......... 2,097 1,979 88,703 92,779
Other loans.................. 2,184 201 98 2,483
------- ------- ---------- ----------
Total................... $22,046 $ 49,094 $1,321,813 1,392,953
======= ======= ==========
Unearned discounts and premiums and deferred loan fees................ 12,813
Undisbursed portion of construction loans............................. (971)
Allowance for loan losses............................................. (13,488)
----------
Loans held for investment, net................................... $1,391,307
==========
The following table sets forth the dollar amount of all loans with
maturities in excess of one year with adjustable and fixed interest rates at
December 31, 1996.
FIXED ADJUSTABLE
RATES RATES
------- ----------
(In thousands)
Single family real estate........................... $35,497 $ 867,214
Commercial real estate.............................. 32,141 342,603
Small business loans................................ -- 90,682
Home equity and property improvement................ 869 992
Construction........................................ -- 610
Other loans......................................... 299 --
------- ----------
Total.......................................... $68,806 $1,302,101
======= ==========
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The following table sets forth the Bank's total loan origination, purchase
and sale activity and loan portfolio repayment and amortization experience
during the periods indicated. The table does not include loans originated or
purchased by the Bank for sale, which are reflected in the table on the
following page.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- -------- --------
(Dollars in thousands)
Loans held for investment,
beginning of year............. $1,492,094 $1,232,055 $ 850,824 $718,265 $718,448
Loan originations:
Single family real estate..... 17,883 133,619 483,738 250,857 125,826
Commercial real estate........ 63,498 60,036 35,950 17,616 20,056
Small business loans.......... 22,526 6,038 910 -- --
Construction.................. -- 3,727 7,201 1,060 3,567
Home equity and property
improvement................ -- 56 35 72 --
---------- ---------- ---------- --------- ---------
Total loan originations.... 103,907 203,476 527,834 269,605 149,449
---------- ---------- ---------- --------- ---------
Loan purchases:
Single family real estate..... 19,576 110,916 21,236 16,344 15,804
Commercial real estate........ 180 135 70,411 827 5,456
Small business loans.......... -- 70,028 -- -- --
Other real estate............. -- 15 -- 1,144 --
---------- ---------- ---------- --------- ---------
Total loan purchases.......... 19,756 181,094 91,647 18,315 21,260
---------- ---------- ---------- --------- ---------
Reclassified as held for
sale....................... 296 (279) (46,154) 279 840
Loan sales.................... (3,947) (1,383) (1,000) (17,243) --
Foreclosures.................. (27,251) (12,163) (14,550) (12,836) (2,641)
Loan exchanges (1)............ -- -- (39,898) -- --
Principal repayments (2)...... (192,379) (122,200) (131,349) (128,933) (165,564)
Increase in allowance for loan
losses..................... (699) (260) (3,697) (1,130) (3,252)
Increase (decrease) in
unearned fees, discounts
and premiums............... (2,048) 9,445 3,056 3,536 (2,554)
Other changes................. 1,578 2,309 (4,658) 966 2,279
---------- ---------- ---------- --------- ---------
Increase (decrease) in loans
held for investment........ (100,787) 260,039 381,231 132,559 (183)
---------- ---------- ---------- --------- ---------
Loans held for investment, end
of year...................... $1,391,307 $1,492,094 $1,232,055 $850,824 $718,265
========== ========== ========== ========= =========
The percentage of dollar volume of the Company's loans originated by type
is summarized below for the years shown:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Single family real estate.......... 18.10% 65.67% 91.65% 93.05% 84.19%
Commercial real estate............. 59.10% 29.51% 6.81% 6.53% 13.42%
Small business loans............... 22.80% 2.97% 0.17% -- --
Other.............................. -- 1.85% 1.37% 0.42% 2.39%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
- ---------------
(1) Represents the exchange of single family real estate loans for
mortgage-backed securities with servicing retained.
(2) Principal repayments include the net change in deposit account loans between
periods.
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Loans Held for Sale. The Company's historical policy with respect to
originating fixed rate mortgages loans has been that such loans would be held
for sale due to their undesirable interest rate risk characteristics. More
recently, the Company has originated limited amounts of fixed rate loans for
retention in its loan portfolio when management believes the interest rate risk
can be managed. In connection with its entry into small business lending, the
Company has been placing the SBA-guaranteed portion of small business loans into
loans held for sale. Although management intends to retain these loans in the
loan portfolio, due to their attractive yield and minimal credit risk
characteristics, the loans have been classified as held for sale to retain
maximum flexibility and liquidity. The following table sets forth loans
originated or purchased for sale.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- ---------
(In thousands)
Loans held for sale, beginning of year.................... $100,183 $ 95,214 $ 89,819
Loan originations:
Single family........................................... 9,922 31,668 40,035
Small business loans -- SBA-guaranteed balances......... 26,571 17,272 --
Loan purchases............................................ 1,520 3,643 --
Loans acquired from UCSB subject to sales commitments..... -- -- 206,674
Reclassified from (to) held for investment................ (296) 279 46,154
Loan sales................................................ (13,061) (27,756) (274,171)
Loan principal repayments................................. (16,461) (19,985) (13,204)
Increase (decrease) in deferred loan fees, net............ 1,273 (152) (93)
-------- -------- -------
Increase in loans held for sale........................... 9,468 4,969 5,395
-------- -------- -------
Loans held for sale, end of year........................ $109,651 $100,183 $ 95,214
======== ======== =======
Single Family Real Estate Lending. The Company's primary lending activity
has historically been the origination and purchase of first mortgage loans
secured by single family residential real property. Loans held for investment
secured by single family residences at December 31, 1996 constituted
approximately 65% of gross loans held for investment. The Company's decision to
discontinue all single family lending operations and, instead, to rely upon
purchases of packages of single family loans may result in a reduction in the
proportion of single family loans.
During 1990 and 1991, the Company increased its volume of loan originations
by establishing a staff of loan agents who solicited loan applications on a
retail basis exclusively for the Company. From 1992 through 1995, the Company
shifted its emphasis to development of wholesale and correspondent lending
programs in response to the increasing market share of new loan volume in the
Company's market areas being captured by mortgage brokers.
Originations of single family loans through the wholesale lending program
reached their zenith in 1994. In 1995, several factors led to a 72% decrease in
originations of adjustable rate loans that caused the Company to reconsider, and
ultimately discontinue, wholesale lending:
- interest rates changed such that fixed rate loans became more attractive
to borrowers, especially since the rapid increases in rates during 1994
had led to increased rates and payments on most adjustable rate loans
("ARMS");
- total loan volume in the Company's marketplace declined due to a
reduction in refinance activity and fewer real estate sale transactions;
and
- the acquisition costs of loans acquired through wholesale lending sources
increased due to competition for declining loan volumes.
In light of these factors and the high cost of maintaining a wholesale
lending unit, the Company determined that wholesale residential lending could
not provide a suitable return. A similar analysis was performed on the Company's
retail-based single family lending business and it was determined that the
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limited volumes of new loans being originated did not justify the costs of
maintaining a single family lending presence.
To meet the Company's need for new loans, the Company purchases single
family ARMs from time to time that have been originated by other institutions in
its marketplace and that meet the Company's underwriting standards. Following
the discontinuation of single family lending operations, the Company may
increase this purchasing activity. From time to time, the Company also purchases
fixed rate loans with the intention of selling such loans and retaining the
related loan servicing rights. The Company typically purchases loans on a
"servicing released basis," meaning that the Company collects the subsequent
loan payments and any fee income associated with "servicing" the loans it has
purchased.
Interest Rates. The ARMs in the Company's loan portfolio have interest
rates that adjust on a monthly, quarterly, semi-annual or annual basis and loan
payments that adjust on a quarterly, semi-annual or annual basis. The Company
has primarily originated ARMs with interest rates tied to the FHLB Eleventh
District Cost of Funds Index ("COFI"). COFI is a lagging index since the index
is currently computed and announced on the last day of the month following the
month in which such cost of funds was incurred.
The single family loan portfolio also includes ARMs tied to the one-year
Treasury Constant Maturities Rate ("Treasury CMT") and the London Interbank
Offered Rate ("LIBOR"), which indices gained market acceptance during the
sustained low interest rates prior to 1994. Treasury CMT- and LIBOR-indexed
loans are more rate-sensitive than COFI loans. The increase in interest rates
that began when the Federal Reserve Board announced rate increases in February
1994 resulted in a return to borrower preferences for ARMs tied to COFI.
The following chart sets forth information about the interest rates on the
Company's single family loans held for investment at December 31, 1996 (dollars
in thousands):
ARM-COFI ..................... $541,573
ARM-LIBOR .................... $185,401
ARM-CMT ...................... $133,779
ARM-Other .................... $ 7,057
Fixed ........................ $ 36,001
Loan Terms. To protect borrowers from unlimited interest rate and payment
increases, the ARMs in the Company's portfolio have periodic interest rate caps,
which govern the maximum increase in the interest rate at the date of rate
adjustment, and lifetime interest rate caps, which govern the maximum rate that
the borrower may be charged at any time during the life of the loan. Increases
in the loan payment may also be restricted in certain ARMs.
The Company's portfolio includes both amortizing loans and negatively
amortizing ARM loans. Amortizing ARM loans are designed so that the timing and
limitations on payment and interest rate changes result in the loan payment
covering all interest accrued during the period plus some amount of loan
principal. Negatively amortizing loans are ARM loans with a monthly payment that
may be insufficient to cover the interest accrued on the loan after loan rate
changes during periods of increasing interest rates. Any resultant interest
shortage is added to the loan's principal balance and is to be repaid through
future payments as interest rates subside or required monthly payments are
periodically recast. At December 31, 1996, $268.5 million, or 29.7%, of the
Company's single family loan portfolio permitted negative amortization.
If the original principal amount of a loan bears a high loan-to-value
ratio, the default risk associated with a negative amortizing loan could
increase significantly. Management of the Company believes that the
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increased risk of default that may be associated with negatively amortizing
loans is reduced by the 10% maximum negative amortization limitation that the
Company imposes. Negatively amortizing ARMs require a minimum 20% down payment
so the loan-to-value ratio should not exceed 100% of the property's value, in
the absence of declines in property values. The Company requires private
mortgage insurance on negatively amortizing ARMs with a down payment less than
20%.
Single family residential real estate loans are normally originated with
30-year, 15-year or seven-year contractual terms but typically remain
outstanding for a shorter period than the contractual lives of the loans. This
is because borrowers often prepay their loans in full upon sale of the security
property or upon refinancing the original loan, although the Company permits
ARMs to be assumed by qualified borrowers, subject to Company approval. In
addition, substantially all of the fixed interest rate loans in the loan
portfolio contain due-on-sale clauses providing that the Company may declare the
unpaid amount to be due and payable upon the sale of the property securing the
loan. The Company enforces these due-on-sale clauses to the extent permitted by
law. Therefore, the average loan maturity is a function of, among other factors,
the level of purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding loans.
Under OTS regulations, the Bank is permitted to lend up to 100% of the
appraised value of the real property securing a loan (referred to as the
"loan-to-value" ratio). However, as a matter of policy, the Bank has typically
made conventional loans with a loan-to-value ratio in excess of 80% only when
secured by first liens on owner-occupied single family residences. The Bank
requires that private mortgage insurance be obtained on loans with loan-to-value
ratios in excess of 80%, with coverage of a minimum of 17% of the greater of the
loan amount or the amount required by FHLMC or FNMA. Loans with loan-to-value
ratios in excess of 80% are also generally required to have a mortgage escrow
account from which disbursements are made for real estate taxes, hazard and
flood insurance and private mortgage insurance. The Company requires title
insurance insuring the status of its lien on all of the real estate securing its
loans and also requires that hazard insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the lesser of the loan
balance or the replacement cost of the improvements. Where the value of the
unimproved real estate exceeds the amount of the loan on the real estate, the
Company may make exceptions to its property insurance requirements.
Commercial Real Estate Lending. The Company provides financing for
multifamily residential and commercial real estate properties (collectively
referred to as "commercial real estate lending"). At December 31, 1996, the
Company had $150.0 million of multifamily residential and $239.6 million of
commercial nonresidential loans, for a combined commercial real estate portfolio
totaling $389.6 million, representing 18.4% of interest bearing assets at that
date. Commercial real estate lending has historically been and remains a line of
business which the Company believes supports its return on capital objectives.
When underwriting commercial real estate loans, the Company considers a
number of factors, including: the net operating income of the property (before
debt service and depreciation), the debt service ratio (the ratio of net
operating income to debt service), the ratio of the loan amount to the
collateral's appraised value and concentrations of property types within the
Company's portfolio. The Company underwrites commercial real estate loans using
the fully indexed interest rate plus 1% or the floor rate, whichever is greater
for ARM loans. The Company underwrites loans with initial periods at fixed
interest rates that become adjustable at the end of such periods based upon the
initial fixed rate of interest.
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The following chart sets forth the Company's originations of multifamily
residential and commercial nonresidential real estate loans in the past five
years (dollars in thousands):
COMMERCIAL/
YEAR NONRESIDENTIAL MULTIFAMILY TOTAL
- ---- -------------- ----------- -----
1992 ................. $11,520 $ 8,536 $20,056
1993 ................. $11,695 $ 5,921 $17,616
1994 ................. $17,076 $18,874 $35,950
1995 ................. $37,621 $22,415 $60,036
1996 ................. $43,193 $20,305 $63,498
Multifamily Residential Lending. The Company originates multifamily ARMs
that have 15- to 30-year terms, some of which have an initial five- or
seven-year period with a fixed interest rate. In general, the interest rates
charged and required debt service coverage ratios are higher, and the maximum
permissible loan-to-value ratios are lower, for multifamily properties with more
than 36 units than for properties with five to 36 residential units. This
difference reflects a general perception of greater risk associated with
extensions of credit on larger apartment properties. Other characteristics of
the Company's multifamily residential ARM loans include interest rate ceilings
and floors, introductory interest rates that are in effect for the first three
months, limitations on the amount of annual payment increases and the maximum
negative amortization accrual and prepayment penalties.
The following chart sets forth information about the interest rates on the
Company's multifamily residential real estate portfolio at December 31, 1996
(dollars in thousands):
ARM-COFI .................... $94,688
ARM-LIBOR ................... $50,286
ARM-Other ................... $ 1,423
Fixed ....................... $ 3,630
The geographic concentration of the Company's multifamily real estate loans
at December 31, 1996 was as follows:
BALANCES PERCENTAGE OF
OUTSTANDING OUTSTANDING
----------- -------------
(Dollars in Thousands)
California Counties:
Los Angeles..................................................... $ 102,671 68%
San Luis Obispo................................................. 11,011 7%
Orange.......................................................... 8,369 6%
Other California................................................ 26,528 18%
Out of State...................................................... 1,448 1%
-------- ----
Total........................................................ $ 150,027 100%
======== ====
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The average outstanding loan balance of the multifamily residential loan
portfolio at December 31, 1996 was $425,000, with the single largest loan having
a balance of $3.8 million. At that date, five loans had balances greater than
$2.0 million and 30 loans had balances between $1.0 million and $2.0 million.
Commercial Nonresidential Lending. The Company originates loans secured by
commercial nonresidential properties with adjustable interest rates or
fixed/adjustable interest rates. Some commercial nonresidential loans that the
Company originates have an initial five-, seven- or 10-year period at a fixed
interest rate with 5- to 15-year terms. Loan payments for these loans are based
upon amortization periods of 15 to 25 years.
The following chart sets forth information about the interest rates on the
Company's commercial nonresidential loan portfolio at December 31, 1996 (dollars
in thousands):
ARM-COFI .................... $148,616
ARM-LIBOR ................... $ 56,118
ARM-Other ................... $ 393
Fixed ....................... $ 34,422
The following table sets forth the industry distributions and geographic
concentrations of the Company's commercial real estate portfolio at December 31,
1996.
BALANCES PERCENTAGE OF
OUTSTANDING OUTSTANDING
---------------------- -------------
(Dollars in thousands)
California counties:
--------------------
Manufacturing/warehouse...... $ 62,322 Los Angeles.................. 56%
Stores and shopping Orange....................... 13%
centers.................... 61,601
Office buildings............. 74,909 San Luis Obispo.............. 10%
Other........................ 40,717 Ventura...................... 5%
--------
Other California........... 16%
---
Total................... $239,549 Total........................ 100%
======== ===
The average outstanding loan balance of this portfolio was $576,000 at
December 31, 1996 and the largest loan at that date had a balance of $7.1
million. Of the remaining commercial real estate loans, nine loans had balances
over $2.0 million and 44 loans had balances between $1.0 million and $2.0
million.
Small Business Lending. The Company started offering loans for equipment,
working capital, debt repayment, and construction and acquisition of commercial
real estate through its small business lending division in 1994. The majority of
loans originated in this division have been made under business programs
sponsored by the United States Small Business Administration. The Small Business
Act of 1953 was passed by the United States Congress to make credit available to
small businesses that were unable to obtain such credit through other financial
institutions. The SBA was established to assist small businesses in obtaining
long term credit at similar terms, conditions and rates as were made available
to larger borrower through traditional financial sources. The SBA has
established borrower eligibility requirements which include size standards based
upon the average number of employees, sales volume and other factors.
In 1994, the Company identified small business lending as a line of
business which would generate the types of returns the Company requires without
causing undue credit risk. Among the appealing aspects of small business lending
are: (i) prime-based interest rates; (ii) relatively low credit risk if the
Company holds the SBA-guaranteed portions of loans made under the 7(a) loan
program; and (iii) a hands-on, retail
9
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approach to the lending process that other financial institutions might find
unappealing. The Company started an SBA lending division in 1994. The Company
significantly increased its small business lending capacity with its June 1995
purchase of loans, certain other assets and the operations of Government Funding
California Business and Industrial Development Corporation ("GFC"), a Los
Angeles-based originator of SBA loans with significant market share. The Company
purchased $73 million of non-guaranteed balances of small business loans, the
rights to service $286 million of SBA-guaranteed loan balances that had
previously been sold by GFC and $50 million of loan applications in process. In
addition, the Company hired GFC's loan origination, processing and servicing
personnel. The Company paid a $16 million premium in the transaction that was
allocated among the retained loan balances, the servicing portfolio and the loan
applications in process. In the six-month period subsequent to the GFC
transaction, the Company originated $23.3 million of small business loans. In
1996, small business loan originations increased to $49.1 million.
Small Business Loan Programs. The Company originates small business loans
under its own loan programs and under business loan programs sponsored by the
SBA. The following chart sets forth the composition of the Company's small
business loan portfolio at December 31, 1996 (dollars in thousands):
7(a)-Subject to Third Party
Credit Enhancement .............. $59,139
7(a)-SBA-Guaranteed .................. $41,508
7(a)-Unguaranteed Portions ........... $12,561
First Trust Deeds .................... $21,079
The Company's portfolio includes $59.1 million of unguaranteed loan
balances for which it has a Credit-Enhancement agreement with the seller of such
loans. Under the Credit Enhancement provisions, the Company is to be fully
reimbursed for credit losses incurred.
At the present time, the majority of the small business loans that the
Company originates are made under the SBA's 7(a) General Loan Program ("7(a)
Program"). For loans made under the 7(a) Program, a portion of the principal
amount of the loan is guaranteed by the SBA. Historically, the guaranteed amount
has ranged from 70% to 90% of the loan amount, depending upon loan size and
other factors. The SBA changes its guarantee amounts and percentages from time
to time. At present, the maximum SBA guarantee amount has the following
limitations:
- for loans of $100,000 or less, the SBA may grant a maximum guarantee of
80% of the loan amount;
- for loans greater than $100,000, the SBA may grant a maximum guarantee of
75% of the loan amount, subject to a maximum guarantee of $750,000; and
- the statutory limit for aggregate SBA guarantees to a single borrower is
$750,000, in general.
In 1996, the Company began providing loans under the SBA's 504 loan
program. The 504 loan program provides loans for the sole purposes of fixed
asset acquisition and owner-user commercial real estate construction and
acquisition. Under the 504 loan program, the Company provides financing
collateralized by a first lien on the property and a short-term interim loan,
collateralized by a second lien on the property, that is purchased by a
certified development company using the proceeds from a debenture it issues. The
debenture is guaranteed 100% by the SBA. The Company's loan under this program,
therefore, has a relatively low loan to value ratio. The 504 loan program is
intended to accommodate larger business and loan sizes than the 7(a) Program.
Businesses with net income less than $2.0 million and net worth less than $6.0
million are eligible to apply. Under the 504 program, the SBA does not guarantee
any portion of a loan but instead
10
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directly funds up to 40% of the fixed asset project, to a maximum of $750,000
per borrower, and takes a subordinate lien position on the assets being
financed.
During 1996, the Company's small business lending division originated $49.1
million of loans, consisting of $8.5 million of unguaranteed balances and $26.6
million of SBA-guaranteed balances under the 7(a) Program and $14.0 million of
first trust deeds, including loans made under the 504 loan program.
Interest Rates, Fees and Terms. Interest rates charged borrowers under the
7(a) and 504 Programs are negotiated between the Company and the borrower and
are subject to SBA maximums. In general, the SBA establishes limitations on
interest rates charged to borrowers under the loan programs it sponsors as
follows:
- fixed rates -- a negotiated, reasonable interest rate is permitted with
maximums published periodically in the Federal Register;
- adjustable rates -- for loans with terms less than 7 years, the maximum
interest rate cannot exceed 225 basis points (2.25%) over the prime rate
and for loans with terms greater than 7 years, the maximum interest rate
cannot exceed 275 basis points (2.75%) over the prime rate. Adjustments
to the interest rate may be made no more often than monthly.
At the time a loan applicant submits an application for a loan under an
SBA-sponsored loan program, the Company charges a non-refundable application
fee. The fee is dependent upon the complexity of the loan application.
The length of time for repayment of loans guaranteed by the SBA depends
upon the use of the proceeds and the ability of the borrower's business to
repay. Working capital loans generally have maturities of five to seven years.
Loans to finance fixed assets, such as the purchase or renovation of business
premises, can have a maximum maturity of up to 25 years.
Underwriting Authority. The SBA designates lenders as General Program
("GP"), Certified Lender Program ("CLP") and Preferred Lender Program ("PLP").
The designation determines the amount of analysis performed by the SBA on loans
submitted by lenders and, therefore, affects the time required to obtain loan
approval. A lender with a GP designation must submit loan applications for
complete analysis by the SBA prior to a guaranty being granted, a process which
can take up to six weeks. A lender with a CLP designation submits all loan
applications to the SBA for a cursory review, a process generally requiring five
business days, prior to the granting of a guaranty by the SBA. A lender with a
PLP designation is authorized to approve the guaranty request on behalf of the
SBA and is only required to send the SBA limited loan documentation. Lenders
with the PLP designation have a distinct marketing advantage to the extent that
a shortened underwriting and approval process improves the lender's credibility
and customer service reputation. Designation as a CLP or PLP lender is awarded
after several years of proven performance in lending, servicing and liquidating
loans. During 1995 and most of 1996, the Company was designated a GP lender. In
the fourth quarter of 1996, the Company was designated as a CLP lender.
11
14
Credit Risk and Concentration. The Company's small business portfolio is
diversified among a variety of industries. At December 31, 1996, the composition
of the small business portfolio, based upon the standard industrial
classification codes assigned to each loan, was as follows (dollars in
thousands):
Motels ....................... $33,065
Professional Services ........ $21,770
Automotive ................... $18,482
Wholesale Trade .............. $16,818
Manufacturing ................ $10,597
Restaurants .................. $10,128
Retail ....................... $10,003
Other ........................ $13,406
Secondary Marketing Considerations. There is an active market for the sale
of the guaranteed portions of SBA loans originated under the 7(a) Program. The
premium paid by investors for loans similar to the type originated by the
Company in the fourth quarter of 1995 averaged approximately 10% of the sold
portion. The premium paid by investors is subject to change. At December 31,
1996, the Company had $41.5 million of SBA-guaranteed loan balances in its loans
held for sale. Due to the desirable interest rate and credit risk
characteristics of these loans, the Company may choose to retain these loans in
its portfolio. As part of the legislation passed in October 1995, the SBA
charges a 50 basis point monthly guarantee fee on all loans approved after
October 12, 1995, whether such guaranteed balances have been sold in the
secondary market or retained by the originator. The Company's net yield on loans
made after this date that are not sold in the secondary market will be subject
to this monthly guarantee fee. By classifying the guaranteed portion of SBA
loans as held for sale, the Company retains the flexibility to sell some or all
of these balances at a future date. If guaranteed portions are sold into the
secondary market, the Company would expect to realize a gain on sale related to
the initial sale premium, as well as servicing income on the sold portion for
which there are no recourse, liquidity or capital requirements.
At December 31, 1996, the Company serviced SBA-guaranteed loan balances
totaling $230.8 million. At that date, the average contractual servicing fee
that the Company received was 112 basis points. In connection with its servicing
obligation, the Company collects and remits the investors' portion of loan
payments on a monthly basis to Colson Services Corporation, the exclusive Fiscal
and Transfer Agent for guaranteed portions of SBA loans sold in the secondary
market. In the future, the Company may purchase the servicing rights to SBA loan
portfolios.
Sales of Loans. With the exception of fixed rate mortgage loans and the
guaranteed portion of SBA loans, the Company generally originates and purchases
loans to be held for long term investment. For the years ended December 31,
1996, 1995 and 1994, the Company originated $9.9 million, $31.7 million and
$40.0 million, respectively, of fixed rate loans secured by single family
residences which are held for sale. The Company's interest rate risk policy
requires that hedging action, such as the purchase of a put option, be taken
whenever the sum of fixed rate loans held for sale (but not yet subject to a
commitment) and loans in process that are committed with fixed rates exceeds $10
million.
In addition, for the years ended December 31, 1996 and 1995, the Company
originated small business loans with $26.6 million and $17.3 million,
respectively, of balances guaranteed by the SBA which are classified as held for
sale. At the present time, the Company intends to retain these loans due to
their superior rate and credit risk characteristics.
Sales of loans generate gains or losses and a future stream of loan
servicing revenue when the Company retains the servicing rights, as well as
providing cash for lending or liquidity. Principal balances of loans held
12
15
for investment and held for sale that were sold totaled $17.0 million, $29.1
million and $275.2 million in the years ended December 31, 1996, 1995 and 1994,
respectively. Included in loans sold during 1994 was $206.7 million of loans
that the Company acquired in connection with its acquisition of UCSB, but which
were subject to sales commitments as a condition at the date of consummation of
the acquisition.
Mortgage-Backed Securities. The Company invests in mortgage-backed
securities, including securities guaranteed by GNMA, FNMA and FHLMC. The Company
also invests in privately issued mortgage-backed securities which have been
credit-enhanced and typically have received a "AA" or "AAA" credit rating from
at least one nationally recognized credit rating service. Mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings, including reverse repurchase agreements. The Company
invests in both adjustable rate and fixed rate mortgage-backed securities. Fixed
rate mortgage-backed securities acquired by the Company typically have short
expected average lives (approximately five years or less) in order to limit
interest rate risk exposure. The interest rate risk of the fixed rate
mortgage-backed securities portfolio is monitored and managed on a quarterly
basis, at a minimum, in conjunction with the total asset and liability
portfolio. The Company has purchased fixed rate mortgage-backed securities at
attractive yields that have prepayment limitations on the underlying mortgages.
At December 31, 1996 and 1995, the mortgage-backed securities portfolio
consisted of $442.0 million and $341.3 million, respectively, of securities, all
of which were classified as available for sale and were reported at fair value.
The Company has classified all mortgage-backed securities as available for sale
so that it has the flexibility to retain or sell such securities as it deems
necessary to manage interest rate risk, liquidity and yield.
The Company has the following investments in mortgage-backed securities of
certain issuers that exceeded 10% of stockholders' equity at December 31, 1996
as follows:
AGGREGATE
AGGREGATE FAIR
ISSUER AMORTIZED COST VALUE
- --------------------------------------------------------------------- -------------- ---------
(In Thousands)
Resolution Trust Corporation......................................... $117,700 $ 116,683
Residential Funding Corporation...................................... $ 21,787 $ 22,825
Ryland Mortgage Securities Corporation............................... $ 19,350 $ 19,298
Countrywide Funding Corporation...................................... $ 13,333 $ 14,034
Greenwich Capital Acceptance Incorporated............................ $ 13,093 $ 13,149
The privately issued mortgage-backed securities owned by the Company are
credit-enhanced in a variety of ways. Many of the securities represent senior
interests in real estate mortgage investment conduits ("REMICs") in which other
subordinated classes of the same security absorb all of the losses in the
underlying mortgage pools up to a specified amount. Other securities owned by
the Company are credit-enhanced through the purchase and placement in trust of
mortgage insurance pool policies from highly-rated institutions (not the issuer)
which provide protection against losses sustained in the underlying mortgage
pools up to a specified amount. A third form of credit enhancement is provided
on many of the Company's privately issued mortgage-backed securities through
establishment of a "cash reserve fund" whereby the issuer places a certain
amount of cash or government securities in trust, which may be applied against
losses sustained on the underlying mortgage pool and which protect the interests
of the security holders.
The relative amount of credit enhancement available to absorb losses for
each security in the Company's portfolio varies depending upon the initial level
of credit enhancement provided by the security issuer and the ensuing
amortization, prepayment and loss experience in the mortgage loans that comprise
the security. At December 31, 1996, the Company's mortgage-backed securities
portfolio included $24.6 million of securities with credit ratings below "AA,"
consisting of $11.2 million of "A"-rated securities, $8.0 million of "B"-rated
securities and the remainder that were rated "BBB" or below. An $8.0 million
security with a "B" rating was placed on the Company's watch list because the
security's level of credit enhancement had declined from 39% of the aggregated
principal of all tranches of the underlying loans at the date of issue to 25% at
the end of 1996. Management believes that the current level of credit
enhancement should be adequate to cover all future collateral losses.
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16
The following table sets forth the carrying values of the Company's
mortgage-backed securities at the dates indicated.
AT DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
AVAILABLE FOR SALE, AT FAIR VALUE:
Pass-through and REMIC:
Guaranteed by GNMA............. $ 29,324 6.63% $ 30,544 8.95% $ 47,271 29.95%
Guaranteed by FNMA............. 111,502 25.23% 60,923 17.85% 38,394 24.33%
Guaranteed by FHLMC............ 31,809 7.20% 49,899 14.62% 45,836 29.04%
"AAA"- and "AA"- rated......... 244,827 55.39% 188,188 55.14% 25,765 16.33%
Other.......................... 24,553 5.55% 11,734 3.44% 541 0.34%
Derivative interest-only
securities..................... -- -- -- -- 10 0.01%
-------- ------- -------- ------- -------- -------
Total Available for
Sale.................... $442,015 100.00% $341,288 100.00% $157,817 100.00%
======== ======= ======== ======= ======== =======
HELD TO MATURITY, AT AMORTIZED COST:
Pass-through and REMIC:
Guaranteed by FHLMC............ $ -- -- $ -- -- $ 27,645 17.50%
"AAA"- and "AA"- rated......... -- -- -- -- 125,328 79.35%
Other.......................... -- -- -- -- 4,963 3.15%
-------- ------- -------- ------- -------- -------
Total Held to Maturity.... $ -- -- $ -- -- $157,936 100.00%
======== ======= ======== ======= ======== =======
The following table sets forth, as of December 31, 1996, the amortized cost
basis, fair value basis, weighted average final maturities and the weighted
average yields (based on amortized cost) of mortgage-backed securities available
for sale or held to maturity. Due to amortization and prepayments of the
underlying loans, the actual maturities are expected to be substantially less
than the final maturities shown in the table.
UP TO FIVE TO OVER
FIVE YEARS TEN YEARS TEN YEARS TOTAL
--------------- --------------- ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ---- ------ ---- -------- ---- -------- ----
(Dollars in Thousands)
AMORTIZED COST BASIS:
FNMA-guaranteed..... $2,698 5.84% $ -- --% $109,140 6.42% $111,838 6.40%
GNMA-guaranteed..... -- -- -- -- 29,022 6.77% 29,022 6.77%
FHLMC-guaranteed.... 1,621 8.87% -- -- 30,139 6.38% 31,760 6.50%
Privately-issued.... 2,504 7.98% 6,331 7.29% 259,202 7.35% 268,037 7.36%
------ ------ -------- --------
Total............ $6,823 7.36% $6,331 7.29% $427,503 7.00% $440,657 7.01%
====== ====== ======== ========
FAIR VALUE BASIS:
FNMA-guaranteed..... $2,661 $ -- $108,841 $111,502
GNMA-guaranteed..... -- -- 29,324 29,324
FHLMC-guaranteed.... 1,635 -- 30,174 31,809
Privately-issued.... 2,500 6,370 260,510 269,380
------ ------ -------- --------
Total............ $6,796 $6,370 $428,849 $442,015
====== ====== ======== ========
Loan Delinquencies. When a borrower fails to make a required payment on a
loan and does not cure the delinquency promptly, the loan is considered
delinquent. In this event, the Company normally makes contact with the borrower
at prescribed intervals in an effort to bring the loan to current status. If the
delinquency is not cured promptly, the Company normally records a notice of
default, subject to any required prior notice to the borrower, and commences
foreclosure proceedings. If the loan is not reinstated within the time permitted
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by law for reinstatement, which is normally five business days prior to the date
set for the nonjudicial trustee's sale, and the property is not redeemed prior
to such sale, the property may be sold at the nonjudicial trustee's sale. In
most cases, the Company is not permitted under applicable law to obtain a
deficiency judgment against the borrower if the security property is
insufficient to cover the balance owed. Under certain circumstances, the Company
can obtain a deficiency judgment against the borrower through a judicial
foreclosure, but the cost of a judicial foreclosure often exceeds the benefit of
the judgment. In trustee's sales, the Company may acquire title to the property,
in which case the property so acquired is thereafter sold and may be financed by
a loan involving terms more favorable to the borrower than normally offered.
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The following table sets forth the principal amount and percentage of the
Company's loan delinquencies, by property type, at the dates indicated (dollars
in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ----------------------- -----------------------
% OF TYPE OF % OF TYPE OF % OF TYPE OF
GROSS LOAN GROSS LOAN GROSS LOAN
AMOUNT RECEIVABLE(1) AMOUNT RECEIVABLE(1) AMOUNT RECEIVABLE(1)
------- ------------- ------- ------------ ------- ------------
Single Family:
31-60 days(2)............. $ 5,887 0.61% $ 3,485 0.31% $ 1,763 0.18%
61-90 days(2)............. 3,129 0.32% 1,417 0.13% 1,302 0.13%
Over 90 days(2)........... 11,467 1.18% 10,502 0.93% 5,826 0.59%
------- ---- ------- ---- ------- ----
20,483 2.11% 15,404 1.37% 8,891 0.90%
------- ---- ------- ---- ------- ----
Multifamily residential:
31-60 days................ 404 0.27% 262 0.18% -- --
61-90 days................ -- -- -- -- 984 0.75%
Over 90 days.............. 2,563 1.71% 1,274 0.88% 1,390 1.06%
------- ---- ------- ---- ------- ----
2,967 1.98% 1,536 1.06% 2,374 1.81%
------- ---- ------- ---- ------- ----
Commercial nonresidential:
31-60 days................ -- -- 162 0.07% -- --
61-90 days................ -- -- -- -- 113 0.06%
Over 90 days.............. 1,295 0.54% 1,524 0.69% 1,214 0.61%
------- ---- ------- ---- ------- ----
1,295 0.54% 1,686 0.76% 1,327 0.67%
------- ---- ------- ---- ------- ----
Small business, guaranteed
by the SBA:
31-60 days................ -- -- -- -- -- --
61-90 days................ 739 1.78% 22 0.13% -- --
Over 90 days.............. -- -- 83 0.48% -- --
------- ---- ------- ---- ------- ----
739 1.78% 105 0.61% -- --
------- ---- ------- ---- ------- ----
Small business, other:
31-60 days................ 715 0.77% 483 0.68% -- --
61-90 days................ 1,118 1.21% 349 0.49% -- --
Over 90 days.............. 1,550 1.67% 1,750 2.45% -- --
------- ---- ------- ---- ------- ----
3,383 3.65% 2,582 3.62% -- --
------- ---- ------- ---- ------- ----
Other:
31-60 days................ 6 0.09% 16 0.14% 2 0.02%
61-90 days................ 10 0.15% 2 0.02% 15 0.13%
Over 90 days.............. 3 0.04% 40 0.35% 13 0.11%
------- ---- ------- ---- ------- ----
19 0.28% 58 0.51% 30 0.26%
------- ---- ------- ---- ------- ----
TOTAL:
31-60 days(2)............. 7,012 0.47% 4,408 0.28% 1,765 0.13%
61-90 days(2)............. 4,996 0.33% 1,790 0.11% 2,414 0.18%
Over 90 days(2)........... 16,878 1.12% 15,173 0.95% 8,443 0.63%
------- ---- ------- ---- ------- ----
$28,886 1.92% $21,371 1.34% $12,622 0.94%
======= ==== ======= ==== ======= ====
- -------------------------------------
(1) Gross loans receivable consists of gross loans held for investment and gross
loans held for sale.
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(2) Delinquent loans includes delinquent negative amortizing loans as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------ ------------------------
% OF NEGATIVE % OF NEGATIVE % OF NEGATIVE
AMORTIZING AMORTIZING AMORTIZING
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ------------- ------ ------------- ------ -------------
31-60 days............... $1,555 0.32% $1,097 0.20% $ 224 0.05%
61-90 days............... 862 0.18% 342 0.06% 1,458 0.34%
Over 90 days............. 5,795 1.21% 3,413 0.65% 3,885 0.90%
------ ---- ------ ---- ------ ----
$8,212 1.71% $4,852 0.91% $5,567 1.29%
====== ==== ====== ==== ====== ====
The Company's delinquency experience is affected by the value of the real
estate securing its loans, the ability of borrowers to make increased payments
on ARMS if interest rates increase, the state of the national and local
economies, and other unforeseeable events. As a result of economic conditions
and other factors beyond the Company's control affecting the ability of
borrowers to make payments and the value of real estate, the future loss and
delinquency experience cannot be predicted. The Company has experienced
increased levels of delinquencies in recent years due to a general downturn in
the California economy.
The primary reason that the Company's total delinquency ratio has been
increasing is the performance of its single family loan portfolio. Even though
the Southern California economy began showing indications of recovery beginning
in 1995, the Company's delinquencies have not reflected the economic
improvement. The following chart sets forth total delinquent loans and single
family delinquent loans as a percentages of total loans held for investment and
held for sale and single family loans held for investment and sale,
respectively, in the past twelve quarters:
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) SINGLE FAMILY TOTAL
Q1-94 ....................... 1.38 1.4
Q2-94 ....................... 1.32 1.35
Q3-94 ....................... 0.93 1.00
Q4-94 ....................... 0.89 0.95
Q1-95 ....................... 1.03 1.13
Q2-95 ....................... 1.15 1.16
Q3-95 ....................... 1.43 1.41
Q4-95 ....................... 1.37 1.34
Q1-96 ....................... 1.62 1.62
Q2-96 ....................... 1.72 1.86
Q3-96 ....................... 1.88 2.02
Q4-96 ....................... 2.11 1.92
Delinquency trends are discussed in greater detail in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition and Asset Quality."
Nonperforming Assets. The following table sets forth information with
respect to nonperforming assets, including nonaccrual loans, real estate
acquired in settlement of loans ("real estate owned" or "REO"), other
nonperforming assets and restructured loans.
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AT DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
NONACCRUAL LOANS:
Single family real estate................. $14,373 $11,487 $ 6,786 $ 5,697 $ 4,516
Commercial real estate.................... 4,263 3,222 3,700 5,848 7,171
Small business loans...................... 2,863 92 -- -- --
Other..................................... 3 40 13 37 4
------- ------- ------- ------- -------
Total nonaccrual loans................. 21,502 14,841 10,499 11,582 11,691
------- ------- ------- ------- -------
RESTRUCTURED LOANS:
Commercial real estate.................... -- -- -- -- 4,286
------- ------- ------- ------- -------
Total restructured loans............... -- -- -- -- 4,286
------- ------- ------- ------- -------
REAL ESTATE OWNED:
Single family real estate................. 7,867 4,741 5,295 1,634 1,622
Commercial real estate.................... 2,599 1,495 4,531 2,273 1,869
------- ------- ------- ------- -------
Total real estate owned................ 10,466 6,236 9,826 3,907 3,491
------- ------- ------- ------- -------
Automobile leases and other................. -- -- 16 504 2,472
------- ------- ------- ------- -------
Total nonperforming assets............. $31,968 $21,077 $20,341 $15,993 $21,940
======= ======= ======= ======= =======
Nonperforming assets, % of total assets..... 1.46% 0.98% 1.10% 1.07% 1.86%
Allowance for loan losses to nonaccrual and
restructured loans........................ 62.7% 86.2% 119.3% 76.3% 48.2%
The Company's general policy is to account for a loan on a nonaccrual basis
when the loan becomes 90 days past due unless conditions warrant nonaccrual
treatment at an earlier time. In certain instances, a loan more than 90 days
past due may remain in accrual status, if the loan has a low loan-to-value ratio
and the borrower has exhibited a pattern of becoming delinquent and subsequently
curing. Any unpaid interest previously accrued with respect to a loan that is
placed on nonaccrual status is reversed and charged against interest income.
Interest income is recognized on nonaccrual loans only to the extent that
payments are received. Nonaccrual loans are placed back into accrual status only
if the borrower has demonstrated the ability to make future payments of
principal and interest.
At December 31, 1996, the Company's nonaccrual loans consisted of 73 single
family residential real estate loans, eight commercial real estate loans and
four consumer loans. At that date, the Company had no loans still accruing that
were more than 90 days delinquent. Under the original terms of the nonaccrual
loans at the following dates, interest earned during the years ended December
31, 1996, 1995 and 1994 would have been $2.1 million, $1.3 million and $892,000,
respectively, compared to the $1.1 million, $581,000 and $405,000, respectively,
of interest actually earned during those periods.
At December 31, 1996, real estate owned included 54 single family
residential real estate and four commercial real estate properties.
Impaired Loans. Loans are evaluated for impairment in accordance with the
provisions of Statement of Financial Accounting Standards No. 114 ("SFAS No.
114"), "Accounting By Creditors for Impairment of a Loan," as amended by
Statement of Financial Accounting Standards No. 118 ("SFAS No. 118"),
"Accounting By Creditors for Impairment of a Loan, Income Recognition and
Disclosures." SFAS No. 114 does not apply to large groups of smaller-balance
homogenous loans that are collectively evaluated for impairment. The Company
collectively reviews all single family and consumer loans for impairment.
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 loans are collateral dependent. Regardless of the
measurement method, the Company measures impairment based on the fair value of
the collateral if the Company determines that
18
21
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 the
fair value of the collateral fluctuates materially, the Company recalculates the
impairment and adjusts the specific valuation allowance.
The Company periodically reviews the relevant factors and the formulas by
which additions are made to the allowances for losses. In the opinion of
management, the present allowances are adequate to absorb reasonably anticipated
losses. Recovery of the carrying value of such loans, real estate and investment
securities is dependent to a great extent on economic, operating, and other
conditions that may be beyond the Company's control.
The following table sets forth information with respect to impaired loans:
AT DECEMBER 31,
-----------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
SPECIFIC NET SPECIFIC NET
LOAN LOSS RECORDED LOAN LOSS RECORDED
BALANCES ALLOWANCES INVESTMENT BALANCES ALLOWANCES INVESTMENT
-------- ---------- ---------- -------- ---------- ----------
(In Thousands)
Nonaccrual loans:
Requiring specific loss
allowances...................... $ 3,457 $1,439 $ 2,018 $ 3,152 $ 801 $ 2,351
Not requiring specific loss
allowances...................... 3,668 -- 3,668 162 -- 162
------- ------ ------- ------- ------ -------
7,125 1,439 5,686 3,314 801 2,513
------- ------ ------- ------- ------ -------
Restructured loans:
Requiring specific loss
allowances...................... 4,756 707 4,049 6,981 1,753 5,228
Not requiring specific loss
allowances...................... -- -- -- -- -- --
------- ------ ------- ------- ------ -------
4,756 707 4,049 6,981 1,753 5,228
------- ------ ------- ------- ------ -------
Other loans:
Requiring specific loss
allowances...................... 2,937 709 2,228 2,298 794 1,504
Not requiring specific loss
allowances...................... 618 -- 618 872 -- 872
------- ------ ------- ------- ------ -------
3,555 709 2,846 3,170 794 2,376
------- ------ ------- ------- ------ -------
Total........................... $ 15,436 $2,855 $ 12,581 $ 13,465 $3,348 $ 10,117
======= ====== ======= ======= ====== =======
The average recorded investment in impaired loans during the years ended
December 31, 1996 and 1995 was $10,535,000 and $5,950,000, respectively.
Interest recognized during the years ended December 31, 1996 and 1995 on
impaired loans totaled $991,000 and $993,000, respectively.
Impaired loans at December 31, 1996 and 1995 included $1,514,000 and
$1,894,000, respectively, of small business loans that were purchased from GFC
and which are subject to credit enhancement provisions that management believes
will minimize the risk of loss.
Impaired loans at December 31, 1996 and 1995 also included $4,756,000 and
$6,981,000 of commercial real estate loans which have been modified. These
modifications are generally in the form of lower interest rates, payment
decreases or maturity extensions. The effect of the modifications was not
material to the Company's financial condition or results of operations.
Allowance for Loan Losses. The Company maintains specific allowances for
loan losses related to impaired loans and a general allowance for loan losses.
The general allowance for loan losses is an amount that management believes will
be adequate to absorb reasonably anticipated losses on existing loans that may
become uncollectible in the future. The determination of the appropriate amount
of 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,
other factors which management believes deserve consideration, and regulatory
considerations. 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,
19
22
if circumstances differ substantially from the assumptions used in making the
determinations. In addition, the OTS may require additions to the allowance for
loan losses based on its evaluation of information available to it in connection
with its periodic examinations of the Bank.
A summary of the activity in the allowance for loan losses is set forth on
the following page.
RATIOS OF
COMMERCIAL -------------------------------
SINGLE REAL SMALL CONSUMER & ALLOWANCE TO NET CHARGE-OFFS
FAMILY ESTATE BUSINESS OTHER TOTAL GROSS LOANS TO AVERAGE LOANS
------- ---------- -------- ---------- -------- ------------ ----------------
(Dollars in thousands)
Balance, December 31, 1991...... $ 4,450
Provisions for loan losses.... 4,099
Charge-offs................... (980)
Recoveries.................. 133
-------
Net charge-offs........... (847)
-------
Balance, December 31, 1992...... $ 1,880 $ 5,662 -- $ 160 7,702 1.06% 0.12%
Provisions for loan losses.... 680 3,380 15 4,075
Allowance for lease losses
recoveries.................. 500 693 (93) 1,100
Charge-offs................... (721) (3,390) (7) (4,118)
Recoveries.................. 13 60 -- 73
------ ------ ---- -------
Net charge-offs........... (708) (3,330) (7) (4,045)
------ ------ ---- -------
Balance, December 31, 1993...... 2,352 6,405 -- 75 8,832 1.03% 0.52%
Provisions for loan losses.... 1,815 485 -- 2,300
Acquisitions and purchases.... -- 6,052 -- 6,052
Allowance for lease losses
recoveries.................. -- 296 57 353
Charge-offs................... (1,679) (3,843) (40) (5,562)
Recoveries.................. 141 412 1 554
------ ------ ---- -------
Net charge-offs........... (1,538) (3,431) (39) (5,008)
------ ------ ---- -------
Balance, December 31, 1994...... 2,629 9,807 -- 93 12,529 1.01% 0.48%
Provisions (reductions
credited) for loan losses... 3,221 (1,510) 1,130 59 2,900
Allowance for lease losses
recoveries.................. -- -- 11 11
Acquisitions and purchases.... -- -- 500 -- 500
Charge-offs................... (2,163) (2,329) (49) (4,541)
Recoveries.................. 356 1,034 -- 1,390
------ ------ ---- -------
Net charge-offs........... (1,807) (1,295) -- (49) (3,151)
------ ------ ---- -------
BALANCE, DECEMBER 31, 1995...... $ 4,043 $ 7,002 $ 1,630 $ 114 $ 12,789 0.80% 0.24%
PROVISIONS (REDUCTIONS
CREDITED) FOR LOAN LOSSES... 3,622 3,950 507 (29) 8,050
ALLOWANCE FOR LEASE LOSSES
RECOVERIES.................. -- -- -- 16 16
CHARGE-OFFS................... (4,539) (4,062) (565) (34) (9,200)
RECOVERIES.................. 866 452 509 6 1,833
------ ------ ------ ---- -------
NET CHARGE-OFFS........... (3,673) (3,610) (56) (28) (7,367)
------ ------ ------ ---- -------
BALANCE, DECEMBER 31, 1996...... $ 3,992 $ 7,342 $ 2,081 $ 73 $ 13,488 0.90% 0.34%
====== ====== ====== ==== =======
- ---------------
Note: Information with respect to the distribution of the allowance for loan
losses to the company's product lines is not available prior to December
31, 1992.
The Company's distribution of its allowance for losses to the types of
loans in the portfolio is performed as part of the asset classification process.
The allocations presented should not be interpreted as an indication that loans
charged against the allowance for loan losses will occur in these amounts and
proportions. The following
20
23
table sets forth the relationship of the allowance distribution to each type of
loan in the portfolio at the dates indicated:
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------- -------------------------------------
RATIO OF RATIO OF
GROSS ALLOWANCE TO GROSS ALLOWANCE TO
LOAN GROSS LOAN LOAN GROSS LOAN
ALLOWANCE BALANCE BALANCE ALLOWANCE BALANCE BALANCE
--------- ---------- ------------ --------- ---------- ------------
(Dollars in thousands)
Single family................. $ 3,992 $ 971,768 0.41% $ 4,043 $1,128,040 .36%
Commercial real estate........ 7,342 409,819 1.88% 7,002 366,018 1.91%
Small Business................ 2,081 114,093 1.55% 1,630 88,695 1.84%
Construction.................. 19 2,375 0.80% 105 6,321 1.66%
Other......................... 54 2,483 2.17% 9 2,887 .31%
------- ---------- ------- ----------
$13,488 $1,500,538 0.90% $12,789 $1,591,961 0.80%
======= ========== ======= ==========
OTHER INVESTMENTS
Federal regulations require the Bank to maintain a minimum amount of liquid
assets which may be invested in specified short-term securities. See
"-- Regulation." The Bank is also permitted to make certain other securities
investments. Investment decisions are made by authorized officers of the Bank
under policies established by the board of directors. Such investments are
managed with the objective of producing the highest yield consistent with
maintaining safety of principal and compliance with regulations governing the
savings industry.
The following table sets forth the carrying value of the investment
securities portfolio at the dates indicated.
AT DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- -------
(Dollars in thousands)
INVESTMENTS HELD TO MATURITY, AT AMORTIZED COST:
Municipal obligations..................................... -- $94,901
=======
INVESTMENTS AVAILABLE FOR SALE, AT FAIR VALUE:
Equity securities......................................... $ 52 -- --
Municipal obligations(1).................................. 75,763 $ 93,240 --
Federal Home Loan Bank stock.............................. 17,919 15,578 $14,653
U.S. Government obligations(2)............................ 67,985 24,960 5,077
-------- -------- -------
Total.................................................. $161,719 $133,778 $19,730
======== ======== =======
- ---------------
(1) None of the issuers in the Company's municipal bond portfolio aggregates to
over 10% of the Company's equity.
(2) The fair value of obligations by issuers that exceed 10% of the Company's
equity at December 31, 1996 included the Student Loan Marketing Association
($46.5 million) and FNMA ($11.5 million).
21
24
As of December 31, 1996, the carrying value, maturities and weighted
average yields of investment securities available for sale were as follows.
AFTER FIVE
AFTER ONE YEAR YEARS
ONE YEAR OR THROUGH FIVE THROUGH TEN
NO MATURITY LESS YEARS YEARS AFTER TEN YEARS
--------------- --------------- --------------- -------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
(Dollars in thousands)
Municipal
obligations(1)......... -- -- -- -- -- -- $1,261 7.11% $74,502 7.46%
Equity securities........ $17,971 5.73% -- -- -- -- -- -- -- --
U.S. Government
obligations............ -- -- $10,005 6.00% $57,980 5.86% -- -- -- --
------- ------- ------- ------ -------
Total................ $17,971 5.73% $10,005 6.00% $57,980 5.86% $1,261 7.11% $74,502 7.46%
======= ==== ======= ==== ======= ==== ====== ==== ======= ====
- ---------------
(1) The yield on municipal obligations is shown on a tax-equivalent basis.
DEPOSITS AND BORROWINGS
Deposits. Deposits are the Company's principal source of funds for
supporting its lending and investing activities. The following table sets forth
information relating to the Company's deposit flows during the periods shown and
the total deposits at the date of the periods shown.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(In Thousands)
Total deposits, beginning of year...................... $1,551,329 $1,310,505 $1,040,181
Customer deposits (withdrawals)........................ (54,172) 121,619 (83,034)
Savings deposits assumed from acquisitions............. -- 208,740 413,749
Savings deposits sold.................................. -- (148,671) (97,593)
Interest credited...................................... 61,313 59,136 37,202
---------- ---------- ----------
Net increase during year............................. 7,141 240,824 270,324
---------- ---------- ----------
Total deposits, end of year....................... $1,558,470 $1,551,329 $1,310,505
========== ========== ==========
The Company attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates. The Company offers
passbook accounts, checking accounts, various money market accounts and fixed
interest rate certificates with varying maturities. The Company has historically
relied upon "retail" deposit accounts (accounts of individuals, including IRA
and Keogh accounts) as opposed to "wholesale" deposit accounts (accounts of
corporations, government entities, partnerships, trusts and other legal
entities). At December 31, 1996, approximately 85% of total deposit accounts
were retail deposits. The Company's retail deposits at that date included
"jumbo" deposits (certificates accounts with balances of $98,000 or greater) of
$8.8 million, or 0.6% of total deposits. While management considers retail
deposits to be a more stable source of funds than wholesale sources of funds,
all deposit flows are greatly influenced by economic conditions, the general
level of interest rates, competition, and other factors, including industry
restructuring.
The Company's savings deposits traditionally have been obtained from areas
in California located near its branch offices. One of the Company's objectives
in recent years has been to improve its retail deposit gathering efficiency by
exiting markets where the Company is unable to increase the size of its smaller
branches through internally-generated deposit growth and/or deposit
acquisitions. In accordance with this strategy, the
22
25
Company has entered into several deposit purchases and sales. The following
table sets forth deposit transactions since 1994:
RETAIL DEPOSITS: CHANGE IN
------------------- NUMBER OF
FINANCIAL INSTITUTION DATE ACQUIRED SOLD RETAIL OFFICES
- --------------------------------------------- ------------- -------- ------ --------------
(Dollars in millions)
United California Savings Bank Acquisition... July 1994 $413.7 -- +8
California Federal Bank...................... October 1994 -- $ 97.6
Coast Federal Bank........................... October 1995 $208.8 $148.7 -2
Through its acquisition of UCSB in 1994, the Company gained entrance into
Riverside County and strengthened its presence in Orange County. The
consummation of the UCSB acquisition increased the Company's retail deposit base
sufficiently to enable the Company to dispose of four branch offices and exit
the Central California market. The Company further improved its market share in
Riverside County in October 1995 through a deposit exchange in which retail
deposits were added to two existing branch offices and a new office location was
acquired. In the October 1995 transaction, the Company also exited three
locations which had undesirable size or geographic characteristics. As a result
of a combination of internally-generated deposit activity and the aforementioned
deposit transactions, the Company's average deposits per retail location have
increased from $49.1 million at December 31, 1993 to $74.0 million at December
31, 1996.
The Company also obtains deposits from deposit brokers for jumbo
certificates of deposit ("Brokered Deposits"). At December 31, 1996, 1995 and
1994, the Company had outstanding Brokered Deposits of $224.5 million, $204.1
million and $134.9 million, respectively, of total deposits at those dates. At
December 31, 1996 the Company also had $2.2 million of jumbo deposits from other
non-retail institutional depositors.
The following table sets forth the amounts of the Company's savings
deposits by type of account at the dates indicated.
23
26
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- --------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
PERCENT NOMINAL PERCENT NOMINAL PERCENT NOMINAL
AMOUNT OF TOTAL RATE AMOUNT OF TOTAL RATE AMOUNT OF TOTAL RATE
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(Dollars in Thousands)
Demand Accounts:
Checking/NOW............ $ 106,453 6.83% 1.05% $ 105,574 6.81% 1.15% $ 119,610 9.13% 1.18%
Money market deposits... 14,191 0.91% 1.44% 17,497 1.13% 2.20% 17,469 1.33% 2.30%
Passbook................ 59,349 3.81% 2.01% 73,584 4.74% 2.06% 84,972 6.48% 2.01%
Market rate passbook.... 141,358 9.07% 4.20% 97,413 6.28% 3.69% 104,951 8.01% 2.15%
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total demand
accounts.......... 321,351 20.62% 294,068 18.96% 327,002 24.95%
---------- ------ ---------- ------ ---------- ------
Time Deposits:
Certificate accounts with
original maturities of:
3-5 months................ 64,568 4.14% 5.34% 27,959 1.80% 5.10% 15,718 1.20% 0.033
6-11 months............... 329,062 21.10% 5.21% 373,692 24.09% 5.55% 179,018 13.66% 4.27%
12-23 months.............. 244,502 15.69% 5.57% 211,077 13.61% 5.78% 210,935 16.10% 4.80%
24-35 months.............. 99,198 6.37% 6.28% 121,427 7.83% 6.23% 78,373 5.98% 5.53%
36 or more months......... 111,382 7.15% 6.28% 137,463 8.86% 6.10% 180,932 13.81% 5.24%
IRA/Keogh................. 152,964 9.82% 6.23% 148,950 9.60% 6.30% 130,006 9.92% 5.47%
Savings branch jumbos
(retail)................ 8,750 0.56% 6.61% 29,290 1.89% 6.19% 40,752 3.11% 4.83%
Other jumbos
(wholesale)............. 226,693 14.55% 5.65% 207,403 13.36% 5.82% 147,769 11.27% 5.09%
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total time deposits....... 1,237,119 79.38% 1,257,261 81.04% 983,503 75.05%
---------- ------ ---------- ------ ---------- ------
Total deposits............ $1,558,470 100.00% 5.06% $1,551,329 100.00% 5.18% $1,310,505 100.00% 4.15%
========== ====== ==== ========== ====== ==== ========== ====== ====
Number of Retail Branch
Offices................. 18 18 20
Average Deposits per
Retail Office........... $ 73,988 $ 74,663 $ 58,137
The following table presents the amount of certificate accounts outstanding
by various rate categories at the dates indicated.
AT DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- --------
(Dollars in thousands)
0.000% -- 2.5%.......................................... $ 586 $ 832 $ 1,325
2.501% -- 3.5%.......................................... -- 2,852 79,655
3.501% -- 4.5%.......................................... 15,836 50,794 229,931
4.501% -- 5.5%.......................................... 655,958 444,886 322,594
5.501% -- 6.5%.......................................... 341,902 449,943 151,553
6.501% -- 7.5%.......................................... 204,080 248,856 93,565
7.501% -- 8.5%.......................................... 13,021 52,573 66,276
8.501% -- 9.5%.......................................... 5,454 5,556 34,512
9.501% -- 10.5%......................................... 282 534 2,067
Over 10.5%.............................................. -- 435 2,025
---------- ---------- --------
Total.............................................. $1,237,119 $1,257,261 $983,503
========== ========== ========
The following table sets forth at December 31, 1996 the amount of
fixed-term certificates of deposit maturing during the periods indicated.
24
27
DEPOSITS MATURING IN THE
YEAR ENDING DECEMBER 31,
---------------------------------------------
1997 1998 1999 AFTER 1999 TOTAL
-------- -------- ------- ---------- ----------
(Dollars in thousands)
0.000% -- 2.5%.......................... $ 503 $ 67 $ 11 $ 5 $ 586
2.501% -- 3.5%.......................... -- -- -- -- --
3.501% -- 4.5%.......................... 15,452 382 -- 2 15,836
4.501% -- 5.5%.......................... 579,392 33,464 18,353 24,749 655,958
5.501% -- 6.5%.......................... 186,019 90,371 21,683 43,829 341,902
6.501% -- 7.5%.......................... 71,506 33,387 33,865 65,322 204,080
7.501% -- 8.5%.......................... 5,215 2,366 446 4,994 13,021
8.501% -- 9.5%.......................... 2,379 1,034 306 1,735 5,454
9.501% -- 10.5%......................... 74 -- 208 -- 282
Over 10.5%.............................. -- -- -- -- --
-------- -------- ------- -------- ----------
Total.............................. $860,540 $161,071 $74,872 $ 140,636 $1,237,119
======== ======== ======= ======== ==========
As of December 31, 1996, the aggregate amount of time certificates
outstanding in amounts of $98,000 or more was $235.4 million. The following
table presents the maturity of these time certificates of deposit at such date:
(Dollars in thousands)
3 months or less.......................................... $120,605
Over 3 months through 6 months............................ 60,239
Over 6 months through 12 months........................... 1,312
Over 12 months............................................ 53,287
--------
Total................................................ $235,443
========
The following table presents by category the weighted average balance and
rates paid on the deposits during the periods indicated.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ---- ---------- ----
(Dollars in thousands)
Checking accounts.................... $ 119,407 1.11% $ 121,566 1.14% $ 134,433 1.16%
Savings accounts..................... 193,292 3.40% 167,419 2.44% 211,436 1.63%
Certificate accounts................. 1,087,231 6.57% 1,008,468 5.67% 704,755 4.42%
Retirement accounts.................. 156,567 6.05% 142,738 6.10% 122,161 5.40%
---------- ---- ---------- ---- ---------- ----
Total........................... $1,556,497 5.09% $1,440,191 4.94% $1,172,785 3.64%
========== ==== ========== ==== ========== ====
Borrowings. The Company's principal types of recurring borrowings are the
Bank's advances from the FHLB of San Francisco and sales of securities under
agreements to repurchase ("reverse repurchase
25
28
agreements"), which are executed with primary government securities dealers. The
following table sets forth information concerning FHLB advances and other
borrowings at the dates indicated.
AT DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
Securities sold under agreements to repurchase............. $130,639 $150,052 $147,412
Notes payable:
Installment note for ESOP................................ -- 1,050 1,250
Senior debentures........................................ 17,750 17,750 17,750
Other notes payable...................................... -- 4,000 4,000
FHLB advances.............................................. 349,479 300,500 265,700
-------- -------- --------
Total borrowings......................................... $497,868 $473,352 $436,112
======== ======== ========
Weighted average rate on borrowings during period.......... 5.83% 5.92% 5.55%
Total borrowings as a percent of total deposits............ 31.95% 30.51% 33.28%
Total borrowings as a percent of total assets.............. 22.79% 22.00% 23.58%
As a member of the FHLB of San Francisco, the Company is required to own
capital stock in the FHLB of San Francisco and is authorized to apply for
advances from it. Such borrowings may be made pursuant to several different
credit programs offered from time to time by the FHLB. For each credit program,
the FHLB prescribes the acceptable uses to which the advances may be used as
well as limitations on the size of the advances. Depending upon the credit
program, the FHLB advances bear fixed or adjustable interest rates.
The Company has traditionally relied upon borrowings from the FHLB of San
Francisco as a significant source of funds. More recently, the Company has
utilized securities sold under agreements to repurchase as a funding source to
finance asset growth. At December 31, 1996, outstanding FHLB advances
represented 17% of total liabilities, with a weighted average interest rate of
5.52% and a weighted average remaining maturity of 10 months. These FHLB
advances were collateralized by pledges of the Company's investment in the stock
of the FHLB, $407.5 million of single family residential real estate loans and
$106.7 million of mortgage-backed securities.
Reverse repurchase agreements are sales of securities with a concurrent
commitment to repurchase the same securities at a predetermined price at a
future date, typically within three to six months of the date of the initial
sale. For financial reporting purposes, such arrangements are considered to be
borrowings secured by the securities sold. The securities sold in these
transactions are government, agency and mortgage-backed. Reverse repurchase
transactions are subject to certain risks relating to the financial strength of
the other party to the transaction, the location of the securities held subject
to the transaction and the disparity between the book value of the securities
sold and the amount of funds obtained in the transaction. The Company attempts
to reduce such risks by entering into reverse repurchase agreements only with
primary government securities dealers who are approved by the board of directors
and by regularly obtaining and reviewing financial statements of such dealers.
At December 31, 1996, the Company had entered into reverse repurchase agreements
totaling $130.6 million, secured by $137.7 million of mortgage-backed
securities.
The following table sets forth the amounts of short-term borrowings and the
weighted average rates thereon for the dates indicated.
26
29
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
AT END OF YEAR:
Securities sold under agreements to repurchase........... $130,639 $150,052 $147,412
FHLB advances (short-term)............................... $274,479 $ 95,900 $ 65,200
Weighted average interest rate........................... 5.47% 5.91% 6.19%
MAXIMUM OUTSTANDING AT ANY END OF MONTH DURING YEAR:
Securities sold under agreements to repurchase........... $140,757 $201,447 $196,742
FHLB advances (short-term)............................... $274,479 $ 95,900 $ 65,200
AVERAGE BALANCE OUTSTANDING DURING YEAR:
Securities sold under agreements to repurchase........... $114,546 $165,101 $124,069
FHLB advances (short-term)............................... $199,675 $ 53,875 $ 22,741
WEIGHTED AVERAGE INTEREST RATE ON THE AVERAGE BALANCE
DURING YEAR:
Securities sold under agreements to repurchase........... 5.47% 6.19% 4.51%
FHLB advances (short-term)............................... 5.43% 5.36% 5.87%
SUBSIDIARY ACTIVITIES
PFS Corporation, Inc. acts as an insurance agency for life and hazard
insurance policies and serves as trustee under deeds of trust originated by the
Bank. CenFed Investments, Inc., another wholly-owned subsidiary of the Bank,
markets products such as annuities issued by insurance companies, mutual funds
and life insurance.
In prior years, the Company engaged in real estate development activities
through Crescent Bay Diversified, Inc. ("Crescent Bay"), the Bank's wholly-owned
subsidiary. The Company has discontinued this line of business and has disposed
of all but one property, which had a recorded value of $202,000 at December 31,
1996.
COMPETITION
Savings associations face strong competition both in attracting deposits
and making real estate loans. The Company's most direct competition for deposits
has historically come from other savings associations and from commercial banks
located in its principal market areas in Southern California, including many
large financial institution which have greater financial and marketing sources
available to them. The Company has also faced significant competition for
investors' funds from short-term money market securities and other corporate and
government securities and mutual funds which invest in such securities,
particularly during times of high interest rates. During periods of low interest
rates, attracting and retaining deposits has been difficult as savers seek
higher rates of return in alternative investments. The ability of the Company to
attract and retain savings deposits depends on its ability to provide a rate of
return, liquidity and risk comparable to that offered by competing investment
opportunities.
The Company experiences strong competition for real estate loans
principally from other savings associations, commercial banks and mortgage
banking companies. It competes for loans principally through the interest rates
and loan fees it charges and the efficiency and quality of services it provides
borrowers. Competition may increase as a result of the continuing reduction in
restrictions on the interstate operations of financial institutions.
REGULATION
General. CENFED is a savings and loan holding company and, as such, is
subject to the regulations, examination and reporting requirements of the OTS
Director. The Bank is a federally chartered savings bank and is a member of the
FHLB System. Its deposits are insured by the FDIC through the Savings Insurance
Fund (the "SAIF"). The Bank is subject to examination and regulation by the OTS
with respect to most of its
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business activities, including, among others, capital standards, general
investment authority, deposit taking and borrowing authority, mergers,
establishment of branch offices, and permitted subsidiary investments and
activities.
The Bank is further subject to the regulations of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") concerning reserves
required to be maintained against deposits, transactions with affiliates,
consumer protection requirements and certain other matters. Financial
institutions, including the Bank and the Bank's real estate subsidiary, are also
subject, under certain circumstances, to potential liability under various
statutes and regulations applicable to property owners generally, including
statutes and regulations relating to the environmental condition of real
property and liability for the remediation of certain adverse environmental
conditions thereof.
The descriptions of the statutes and regulations applicable to CENFED and
its subsidiaries and the effects thereof set forth below and elsewhere in this
document do not purport to be a complete description of such statutes and
regulations and their effects on CENFED and it subsidiaries and also do not
purport to identify every statute and regulation that may apply to CENFED and
its subsidiaries.
The OTS has enforcement authority over savings institutions and their
holding companies that includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist orders and to initiate injunctive
actions and removal and prohibition orders against officers, directors and
certain other persons. In general, enforcement actions may be initiated for
violations of specific laws and regulations and for unsafe or unsound conditions
or practices.
The FDIC also has authority to recommend that the OTS take any authorized
enforcement action with respect to any federally insured savings institution. If
the OTS does not take the recommended action or provide an acceptable plan for
addressing the FDIC's concerns within 60 days after receipt of a recommendation
from the FDIC, the FDIC may take such action if the FDIC board of directors
determines that the institution is in an unsafe or unsound condition or that
failure to take such action will result in the continuation of unsafe or unsound
practices in conducting the business of the institution. The FDIC may also take
action prior to the expiration of the 60-day time period in exigent
circumstances after notifying the OTS.
The FDIC may also terminate the deposit insurance of any insured depository
if the FDIC determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation or order or
any condition imposed in writing by the FDIC. The FDIC may also suspend deposit
insurance temporarily during the hearing process if the institution has no
tangible capital.
Deposit Insurance. The FDIC administers two separate deposit insurance
funds. The SAIF is the insurance fund responsible for insuring the deposits of
savings institutions, the deposits of which were formerly insured by the Federal
Savings and Loan Insurance Corporation ("FSLIC"). The Bank Insurance Fund (the
"BIF") is the insurance fund responsible for insuring the deposits of commercial
banks and certain other institutions. The Bank is a member of the SAIF.
Since January 1, 1993, FDIC deposit insurance premiums have been assessed
pursuant to a "risk-based" system. Under this risk-based assessment system,
institutions are classified on the basis of capital ratios, supervisory
evaluations by the institution's primary federal regulatory agency and other
information determined by the FDIC to be relevant. Each of the nine resulting
risk category subgroups of institutions is assigned a deposit insurance premium
assessment rate which currently ranges from .06% to .33%. Included in this range
of assessments is a .06% charge that is required to repay bonds issued in
connection with the resolution of failed thrifts.
The risk-based deposit insurance premiums paid by savings associations
insured by the SAIF and by commercial banks and other institutions insured by
the BIF, which, together with earnings on investments, are the principal funding
sources for the respective insurance funds, have been assessed based on
identical rate schedules having the above range of premium assessment rates. The
SAIF and BIF are each required by statute to attain, and thereafter to maintain,
a reserve to deposits ratio of 1.25%. The BIF attained its required reserve
level in 1995, while the SAIF had not, because of the BIF's greater premium
revenues and the fact
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that a substantial portion of the SAIF premiums is required to be used to repay
bonds ("FICO Bonds") issued for the purpose of funding the resolution of failed
thrift institutions. In recognition of the fact that the BIF had reached its
statutorily prescribed ratio of reserves to deposits insured, the FDIC
substantially reduced the deposit insurance premium assessment rate to be paid
by commercial banks and other institutions whose deposits are insured by the BIF
on August 8, 1995 but did not reduce the rates for SAIF-insured institutions,
such as CenFed Bank.
The deposit rate premium disparity between BIF-insured institutions and
SAIF-insured institutions resulting from the BIF premium reduction placed
SAIF-insured institutions at a significant competitive disadvantage due to their
higher premium costs. This competitive disadvantage was resolved during 1996
through the passage of legislation that assessed a one-time recapitalization
charge to all SAIF-insured institutions in an amount sufficient to bring the
SAIF to the statutorily prescribed ratio of reserves to deposits insured. In
connection with this legislation, the Company incurred a $9.6 million charge
that is reflected in operating expenses for 1996. Following the
recapitalization, deposit premiums to SAIF-insured institutions decreased
significantly, although SAIF-insured institutions will continue to bear higher
deposit insurance premiums than similarly-rated institutions insured by the BIF.
Beginning in 1997, the Company's deposit insurance premium will be assessed at
$.065 per $100 of insured deposits.
Capital Requirements. The capital regulations of the OTS (the "Capital
Regulations") establish 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 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. CenFed Bank has exceeded
its regulatory capital requirements at all times.
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 purchased mortgage servicing rights, and certain other
intangibles such as core deposit premiums, which may be included on a limited
basis) must be deducted from core capital. At December 31, 1996, the Bank had
$1.9 million of core deposit premium included in core capital. A core deposit
premium is a type of intangible asset relating to purchased deposit operations.
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. The Company had no capital
deductions of this type at December 31, 1996.
A savings institution is required to maintain "tangible capital" in an
amount not less than 1.5% of adjusted total assets. "Tangible capital" is
defined for this purpose to mean core capital less any intangible assets, plus
purchased mortgage servicing rights, subject to certain limitations.
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The risk-based capital requirements, among other things, provide that the
capital ratios 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% 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 December 31, 1996, $9.9 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 the institution's core capital.
The OTS, the FDIC and other federal banking agencies recently amended their
risk-based capital regulations to provide that an institution must hold capital
in excess of regulatory minimums to the extent that examiners find either (i)
significant exposure to concentration of credit risk such as risks from higher
interest rates, prepayments, significant off-balance sheet items (especially
standby letters of credit), or risks arising from nontraditional activities, or
(ii) that the institution is not adequately managing these risks. For this
purpose, however, the agencies have stated that, in view of the statutory
requirements relating to permitted lending and investment activities of savings
institutions, real estate lending activities will not, by itself, be deemed to
constitute an exposure to concentration of credit risk that would require
greater capital levels.
Effective July 1, 1994, the OTS amended its capital regulations to require
institutions to maintain additional risk-based capital equal to half of the
amount by which the decline in the institution's "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 requires 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 December 31, 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.
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The following table sets forth the Bank's capital position relative to the
Capital Regulations at December 31, 1996:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- -------- ----------
(In thousands)
Equity capital................................................. $126,827 $126,827 $126,827
Excluded assets:
Intangible assets............................................ (1,874) -- --
Unrealized loss on investment securities and MBS available
for sale.................................................. 237 237 237
Excess net deferred tax asset................................ (1,671) (1,671) (1,671)
Additional supplementary capital:
General loan valuation allowances............................ -- -- 9,944
------- ------- -------
Regulatory capital amounts..................................... 123,519 125,393 135,337
Minimum amounts required....................................... 32,784 65,625 93,176
------- ------- -------
Excess over requirement........................................ $ 90,735 $ 59,768 $ 42,161
======= ======= =======
Federal banking legislation contains prompt corrective action ("PCA")
provisions pursuant to which banks and savings institutions are to be classified
into one of five categories based primarily upon capital adequacy, ranging from
"well capitalized" to "critically undercapitalized" and which require, subject
to certain exceptions, the appropriate federal banking agency to take prompt
corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized." The PCA
provisions expand the powers and duties of the OTS and the FDIC and expressly
authorize, or in many cases direct, regulatory intervention at an earlier stage
than was previously the case.
The OTS regulations implementing the PCA provisions define the five capital
categories as follows:
TANGIBLE TOTAL RISK- TIER 1 RISK- TIER 1 LEVERAGE
CAPITAL CATEGORY: CAPITAL RATIO BASED RATIO BASED RATIO RATIO
- ----------------------------------------------- ------------- -------------------- ----------------- -------------------
[greater than [greater than [greater than
Well-capitalized............................... N/A or equal to] 10% or equal to] 6% or equal to] 5%
[greater than [greater than [greater than
Adequately capitalized......................... N/A or equal to] 8% or equal to] 4% or equal to] 4%
Undercapitalized............................... N/A [less than] 8% [less than] 4% [less than] 4%
Significantly undercapitalized................. N/A [less than] 6% [less than] 3% [less than] 3%
Critically undercapitalized.................... [less than] 2% N/A N/A N/A
CenFed Bank, at December 31, 1996.............. N/A 11.60% 10.90% 5.70%
The OTS also has authority, after an opportunity for a hearing, to downgrade an
institution from "well capitalized" to "adequately capitalized," or to subject
an "adequately capitalized" or "undercapitalized" institution to the supervisory
actions applicable to the next lower category, for supervisory concerns. At
December 31, 1996, the Bank was a well capitalized institution.
Under the PCA provisions, an institution that is deemed to be
undercapitalized is subject to mandatory restrictions on capital distributions
(including cash dividends) and management fees, increased supervisory monitoring
by the OTS, growth restrictions, restriction on certain expansion proposals and
capital restoration plan submission requirements. If an institution is deemed to
be significantly undercapitalized, all of the foregoing mandatory restrictions
apply, as well as a restriction on compensation paid to senior executive
officers. Furthermore, the OTS must take one or more of the following actions:
(i) require the institution to sell shares (including voting shares) or
obligations; (ii) require the institution to be acquired or merge (if one or
more grounds for the appointment of a conservator or receiver exist); (iii)
implement various restrictions on transactions with affiliates; (iv) restrict
interest rates on deposits; (v) impose further asset growth restrictions or
require asset reductions; (vi) require the institution or a subsidiary to alter,
reduce or terminate activities considered risky; (vii) order a new election of
directors; (viii) dismiss directors and/or officers who have held office for
more than 180 days before the institution became undercapitalized; (ix) require
the hiring of
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qualified executives; (x) prohibit correspondent bank deposits; (xi) require the
institution to divest or liquidate a subsidiary in danger of insolvency or a
controlling company to divest any affiliate that poses a significant risk, or is
likely to cause a significant dissipation of assets or earnings; (xii) require a
controlling company to divest the institution if it improves the institution's
financial prospects; or (xiii) require any other action the OTS determines
fulfills the purposes of the PCA provisions.
Loans to One Borrower. Savings institutions are generally subject to the
same loans to one borrower limitations that are applicable to national banks.
With certain limited exceptions, the maximum amount that a savings institution
may lend to one borrower (including certain related persons or entities of such
borrower) is an amount equal to 15% of the savings institution's unimpaired
capital and unimpaired surplus, plus an additional 10% for loans fully secured
by readily marketable collateral. Real estate is not included within the
definition of "readily marketable collateral" for this purpose. The Office of
the Comptroller of the Currency has amended its loan to one borrower limitation
for national banks, to which the OTS limit is required by statute to conform,
to, among other things, define the term "unimpaired capital and unimpaired
surplus" by reference to an institution's regulatory capital, and also to
include in the basic 15% of capital lending limit that portion of an
institution's general valuation allowances that is not includable in the
institution's regulatory capital. At December 31, 1996, the maximum amount which
the Bank could lend to any one borrower (including related persons and entities)
under current loans to one borrower the limit was $20.3 million. At that date,
the largest aggregate amount of loans which the Bank had outstanding to any one
borrower was $7.7 million.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB system, the Bank is
required to own capital stock in its regional FHLB, the FHLB of San Francisco,
in an amount at least equal to the greater of 1% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations at the end of each calendar year, or 5% of its outstanding
FHLB advances (borrowings).
Liquidity. Federal regulations currently require savings institutions to
maintain, for each calendar month, an average daily balance of liquid assets
(including cash, certain time deposits, bankers' acceptances, and specified
United States Government, state or federal agency obligations) equal to at least
5% of the average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. This liquidity requirement may
be changed from time to time by the OTS Director to an amount within a range of
4% to 10% of such accounts and borrowings depending upon economic conditions and
the deposit flows of savings institutions. Federal regulations also require each
savings institution to maintain, for each calendar month, an average daily
balance of short-term liquid assets (generally those having maturities of 12
months or less) equal to at least 1% of the average daily balance of its net
withdrawable accounts plus short-term borrowings during the preceding calendar
month. Monetary penalties may be imposed for failure to meet liquidity ratio
requirements. For the calculation period including December 31, 1996, the
average liquidity and average short-term liquidity ratios of the Bank were 5.7%
and 2.6%, respectively, which exceeded the applicable requirements.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires each savings institution, as well as other lenders, to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The CRA
also requires the OTS to assess, as part of its examination of a savings
institution, the performance of the institution in meeting the credit needs of
its communities and to take such assessments into consideration in reviewing
applications for mergers, acquisitions and other transactions. An unsatisfactory
CRA rating may be the basis for denying such application. Community groups have
successfully protested applications on CRA grounds. In connection with the
assessment of a savings institution's CRA performance, the OTS will assign a
rating of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The Bank was rated "satisfactory" in its last CRA exam.
Qualified Thrift Lender Test. Savings institutions regulated by the OTS
are subject to a qualified thrift lender ("QTL") test which requires such an
institution to invest at least 65% of its portfolio assets (as defined) in
"qualified thrift investments." Qualified thrift investments include, in
general, loans, securities and
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other investments that are related to housing and certain other permitted thrift
investments. A savings institution's failure to remain a QTL may result in: (1)
limitations on new investments and activities; (2) imposition of branching
restrictions; (3) loss of FHLB borrowing privileges; and (4) limitations on the
payment of dividends. At December 31, 1996, the Bank was in compliance with its
QTL test requirements.
Service Corporations. Federal regulations permit federal savings
institutions to invest in the capital stock, obligations or other securities of
certain types of subsidiaries (referred to as "service corporations") and to
make loans to these corporations (and to projects in which they participate) in
an aggregate amount not to exceed 2% of the institution's assets, plus an
additional 1% of assets if such investment is used for community development or
inner-city purposes. Additionally, federal regulations permit an institution
having regulatory capital in an amount at least equal to the minimum
requirements set forth in the applicable OTS regulations to make additional
loans to such subsidiaries in an aggregate amount which, generally, may not
exceed 100% of the regulatory capital in the case of subsidiaries of which the
institution owns or controls not more than 10% of the capital stock of certain
limited partnership joint ventures and 50% of regulatory capital in the case of
certain other subsidiaries or joint ventures. Federal savings institutions are
also permitted to invest in and maintain so-called "operating subsidiaries"
(generally, subsidiaries that are engaged solely in activities the parent
institution could conduct directly and meeting certain other criteria) free of
such investment limitations.
Classification of Assets. Savings institutions are required to review
their assets on a regular basis and classify them as "special mention,"
"substandard," "doubtful," or "loss," if warranted. If any assets are classified
as special mention, substandard or doubtful, the institution must establish a
prudent general allowance for loan losses. If an asset is classified as a loss,
the institution must either establish a specific valuation allowance equal to
the amount classified as loss or charge off such amount. An asset which does not
currently warrant classification as substandard but which possesses weaknesses
or deficiencies deserving close attention is required to be designated as
"special mention." In addition, a savings institution is required to set aside
adequate valuation allowances to the extent that any affiliate possesses assets
which pose a risk to the savings institution. The institution's OTS Regional
Director has the authority to approve, disapprove or modify any asset
classification and amount established as an allowance pursuant to such
classification. In addition, a savings institution is required to record as
liabilities offbalance sheet items, such as letters of credit, when loss becomes
probable or estimable.
Savings and Loan Holding Company Regulation. As a savings bank holding
company, CENFED is subject to the savings and loan holding company regulations,
which make certain restriction with respect to its activities and investments.
Among other things, CENFED is generally prohibited, either directly or
indirectly, from acquiring control of any other savings institutions or savings
and loan holding company, absent prior approval of the OTS, and from acquiring
more than 5% of the voting stock of any savings association or savings and loan
holding company which is not a subsidiary of CENFED.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Bank or CENFED. Control is conclusively presumed to exist if,
among other things, a person acquires more than 25% of any class of voting stock
of the institution or holding company or controls in any manner the election of
a majority of the directors of the insured institution or the holding company.
Savings and loan holding companies which control only one savings
institution which is a QTL are exempt, if the institution meets its QTL test,
from restrictions on the conduct of unrelated business activities that are
applicable to other savings and loan holding companies and that are similar to
the restriction on the conduct of unrelated business activities applicable to
bank holding companies under the Bank Holding Company Act.
Restriction on Dividends and Other Capital Distributions. Savings
institution subsidiaries of holding companies generally are required to provide
advance notice to their OTS Regional Director of any proposed declaration of a
dividend on the institution's stock. Any dividend declared within the notice
period, or without giving the prescribed notice, is invalid.
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Limitations are imposed under OTS regulations on "capital distributions" by
savings institutions, including cash dividends, payments to repurchase or
otherwise acquire an institution's shares, payments to stockholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulations establish a three-tiered system of regulation with the
greatest flexibility being afforded to well-capitalized institutions.
An institution that meets its capital requirements is permitted to make
capital distributions during a calendar year of up to the greater of (i) 100% of
its net income during the calendar year, plus the amount that would reduce by
not more than one-half its "surplus capital ratio" at the beginning of the
calendar year (the amount by which the institution's actual capital exceeded its
fully phased-in capital requirement at that date) or (ii) 75% of its net income
over the most recent four-quarter period. An institution that does not meet its
minimum regulatory capital requirements prior to, or on a pro forma basis after
giving effect to, a proposed capital distribution is not authorized to make any
capital distributions unless it receives prior written approval from the OTS or
the distributions are in accordance with the express terms of an approved
capital plan.
The OTS retains the authority to prohibit any capital distribution
otherwise authorized under the regulation if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulation also
states that the capital distribution limitations apply to direct and indirect
distributions to affiliates, including those occurring in connection with
corporation reorganizations. At December 31, 1996, the Bank was a Tier 1
institution.
Lending Standards. The OTS and the other federal banking agencies have
jointly adopted uniform rules on real estate lending and related Interagency
Guidelines for Real Estate Lending Policies. The uniform rules require that
institutions adopt and maintain comprehensive written policies for real estate
lending. The policies must reflect consideration of the Interagency Guidelines
and must address relevant lending procedures, such as loan to value limitations,
loan administrations procedures, portfolio diversification standards and
documentation, approval and reporting requirements. Although the uniform rules
do not impose specific maximum loan to value ratios, the related Interagency
Guidelines state that such ratio limits established by individual institutions'
boards of directors generally should not exceed levels set forth in the
Guidelines, which range from a maximum of 65% for loans secured by unimproved
land to 85% for improved property. No limit is set for single family residence
loans, but the Guidelines state that such loans exceeding a 90% loan to value
ratio should have private mortgage insurance or some form of credit enhancement.
The Guidelines further permit a limited amount of loans that do not conform to
these criteria.
TAX MATTERS
Federal Income Tax. The Company's maximum federal corporate income tax
rate is 35%. In addition to the regular corporate income tax, corporations,
including qualifying savings association, are subject to an alternative minimum
tax. This 20% tax is computed with respect to the Bank's regular taxable income
(with certain adjustments) as increased by tax preference items and will apply
if it exceeds the Bank's regular tax liability.
Until passage of legislation in 1996, savings and loan associations that
met certain definitional tests as prescribed by the Internal Revenue Code
("Code") were allowed a bad debt deduction, when computing federal income taxes,
equivalent to 8% of taxable income, subject to a minimum tax for preference
items. Alternatively, a deduction based upon actual experience losses of the
Company could be taken if it resulted in a greater deduction. Both houses of
Congress passed legislation in 1996 that repealed the tax rules formerly
applicable to bad debt reserves of thrift institutions for taxable years
beginning after December 31, 1995. Pursuant to the legislation, the Company was
required to change its tax method of accounting for bad debts from the reserve
method formerly permitted to the "specific charge-off" method under which tax
deductions are permissible for bad debts only as and to the extent that the
loans become wholly or partially worthless. At December 31, 1996, the Company
had a $23 million tax bad debt reserve that was accumulated using the provisions
of the tax law prior to the 1996 changes that is subject to recapture in whole
or in part in future years upon the occurrence of certain events, such as a
distribution to shareholders in excess of the Company's
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current and accumulated earnings and profits, a redemption of shares, or upon a
partial or complete liquidation of the Company.
The Bank's tax returns have been audited by the Internal Revenue Service
through its taxable year ended June 30, 1991.
California Tax. For California franchise tax purposes, savings
associations are taxed as "financial corporations." Financial corporations are
taxed at the general corporate franchise tax rate plus an "in lieu" rate based
on their exemption from personal property and business license taxes. For the
year ended December 31, 1996, the California franchise tax rate applicable to
financial corporations was approximately 11.3%.
For additional information regarding taxation, see the Notes to
Consolidated Financial Statements.
EMPLOYEES
At December 31, 1996, CENFED and its subsidiaries had a total of 280
full-time employees and 120 part-time employees. The Company provides its
employees with a comprehensive benefits program, including basic and major
medical insurance, life insurance, sick leave, a defined contribution retirement
plan and an employee stock ownership program. Employees are not represented by
any union or collective bargaining group and the Company considers its employee
relations to be good.
ITEM 2. PROPERTIES
The following table sets forth the location of the offices of CENFED and
its subsidiaries, as well as certain additional information relating to such
offices, as of December 31, 1996. The Company believes these facilities are
suitable for its current needs.
YEAR BOOK SQUARE LEASE
ADDRESS OPENED VALUE FOOTAGE TITLE TERMINATION
- ------------------------------------------ ------ ------ ------- ------ ------------------
(Dollars in Thousands)
PASADENA CORPORATE OFFICE
199 North Lake Avenue
Pasadena, CA 91101........................ 1968 $3,416 43,434 Owned
ANAHEIM
198 W. Lincoln
Anaheim, CA 92805......................... 1921 $ 626(1) 10,000 Owned
BRENTWOOD
11726 San Vicente Boulevard
Los Angeles, CA 90049..................... 1991 $ 125 4,081 Leased February 28, 2003
CHINO
14808 Pipeline Avenue
Chino, CA 91709........................... 1978 $ 730 4,828 Owned
CITY OF INDUSTRY
800 Puente Hills Mall
City of Industry, CA 91748................ 1974 $ 87 3,500 Leased December 31, 2004
CYPRESS
10081 Valley View Street Ground
Cypress, CA 90630......................... 1975 $ 0 3,000 Lease August 31, 2005
HEMET (EAST)
1700 East Florida Ave
Hemet, CA 92544........................... 1995 $ 83(1) 10,364 Leased May 16, 2001
HEMET (WEST)
1745 West Florida Ave
Hemet, CA 92545........................... 1973 $ 479(1) 6,462 Owned
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YEAR BOOK SQUARE LEASE
ADDRESS OPENED VALUE FOOTAGE TITLE TERMINATION
- ------------------------------------------ ------ ------ ------- ------ ------------------
(Dollars in Thousands)
LA CANADA
707 Foothill Boulevard
La Canada, CA 91011....................... 1983 $ 176 11,725 Leased April 1, 2001
MARINA DEL REY
4375 Glencoe Avenue
Marina Del Rey, CA 90291.................. 1974 $ 78 3,522 Leased December 31, 2001
PASADENA (EAST)
3677 East Foothill Boulevard Ground
Pasadena, CA 91107........................ 1957 $ 186 4,816 Lease June 4, 2004
PASADENA (DOWNTOWN)
315 East Colorado Boulevard
Pasadena, CA 91101........................ 1993 $ 291 9,850 Leased October 8, 2008
PASADENA (WEST)
161 West California Boulevard
Pasadena, CA 91105........................ 1979 $ 78 2,637 Leased June 30, 2003
PLACENTIA
1300 North Kraemer Boulevard
Placentia, CA 92670....................... 1975 $ 360 4,346 Owned
RIVERSIDE
3825 Tyler Avenue
Riverside, CA 92503....................... 1970 $1,389(1) 6,635 Owned
RIVERSIDE CENTRAL
6600 Magnolia Avenue
Riverside, CA 92506....................... 1995 $ 423 9,200 Leased February 28, 2009
SANTA MONICA
501 Santa Monica Boulevard
Santa Monica, CA 90401.................... 1975 $ 58 8,104 Leased February 28, 2001
SUN CITY
27190 Sun City Boulevard
Sun City, CA 92586........................ 1995 $ 40(1) 10,681 Leased May 6, 2001
GOVERNMENT FUNDING LOAN CENTER
6255 Sunset Boulevard
2nd Floor, Suite 215 & 217
Los Angeles, CA 90028..................... 1995 $ 0 691 Leased July 31, 1997
GOVERNMENT FUNDING LOAN CENTER
999 Baker Way, Suite 290
San Mateo, CA 94404....................... 1996 $ 0 1,043 Leased March 31, 1997
- ---------------
(1) The book values of these branches acquired from UCSB have been presented
before the application of negative goodwill. For financial statement
purposes, the book values have been written down to zero at December 31,
1994.
ITEM 3. LEGAL PROCEEDINGS
In March 1996, the Company was named as a defendant in a lawsuit filed by a
former employee in the United States District Court for the Central District of
California. The plaintiff alleges breach of contract, among other things, and
seeks payment of a commission of $3.9 million alleged to be due him for services
rendered in connection with the GFC acquisition and punitive damages. The
Company believes that it has
36
39
meritorious defenses to the allegations and that the outcome of the matter will
not have a material adverse effect on the consolidated financial position or
results of operations of the Company. Accordingly, no provisions for losses have
been recorded in the accompanying financial statements.
With the exception of the aforementioned legal proceeding, the Company and
its subsidiaries are not parties to any pending legal proceedings, other than
ordinary routine litigation incidental to their business. None of such
litigation is expected to have a material impact on the financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of and Market for Common Stock. The common stock of CENFED is
traded in the over-the-counter market and is quoted by the National Association
of Securities Dealers Automated Quotation System-National Market System
("NASDAQ/NMS") under the trading symbol of "CENF." The following table sets
forth for the periods indicated the range of high and low closing sale prices of
CENFED common stock as quoted on the NASDAQ/NMS, as adjusted to reflect a 10%
stock dividend that took effect in May 1996:
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 1996:
First Quarter............................................ $22.73 $20.45
Second Quarter........................................... 23.41 20.75
Third Quarter............................................ 25.00 21.00
Fourth Quarter........................................... 30.38 24.00
YEAR ENDED DECEMBER 31, 1995:
First Quarter............................................ $15.45 $13.18
Second Quarter........................................... 18.64 15.00
Third Quarter............................................ 21.59 17.95
Fourth Quarter........................................... 21.82 19.77
37
40
Dividends. On April 30, 1992, CENFED's Board of Directors declared the
Company's first cash dividend, payable on May 29, 1992. The following table sets
forth the cash dividends per Common Share declared and paid by the Company
during the last two fiscal years, adjusted to reflect a 10% stock dividend that
took effect in May 1996:
YEAR ENDED DECEMBER 31, 1996:
First Quarter.............................................. $.082
Second Quarter............................................. .090
Third Quarter.............................................. .090
Fourth Quarter............................................. .090
YEAR ENDED DECEMBER 31, 1995:
First Quarter.............................................. $.068
Second Quarter............................................. .082
Third Quarter.............................................. .082
Fourth Quarter............................................. .082
The Board of Directors contemplates the payment of future dividends only if
warranted by the Company's consolidated earnings and financial condition and
other relevant factors, including regulatory restrictions and tax consequences.
There can be no assurance regard the timing or the amount, if any, of future
dividends.
The principal source of income to CENFED consists of dividends received
from the Bank. Consequently, future declarations of cash dividends by CENFED
will depend principally upon dividend payments by CenFed Bank to CENFED, which
payments are subject to regulatory restrictions. CenFed Bank is also subject to
the restriction that it will not be permitted to declare or pay a cash dividend
on or repurchase any of its capital stock if the effect thereof would be to
cause the regulatory capital of CenFed Bank to be reduced below the amount
required for the liquidation account established in connection with the
Conversion. See "Item 1. Business -- Regulation -- Restrictions on Dividends and
Other Capital Distributions." In addition, distributions by CenFed Bank to its
stockholder in excess of current earnings and profits for federal income tax
purposes may result in a federal recapture tax. See "Item 1. Business -- Tax
Matters."
Number of Holders of Common Stock. As of February 28, 1997, the number of
holders of record of CENFED's Common Stock was 5,231,747. The majority of the
Company's stock is held in "street name" by nominees for the beneficial owners
thereof.
38
41
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AT DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
FINANCIAL CONDITION DATA:
Total assets......................... $2,184,647 $2,155,239 $1,849,683 $1,488,854 $1,181,475
Loans held for investment, gross(1):
Residential and commercial
real estate........................ $1,293,387 $1,409,705 $1,231,249 $ 849,378 $ 712,478
Small business loans................. 92,779 71,423 -- -- --
Construction......................... 2,375 6,321 6,086 1,557 6,285
Home equity and property
improvement........................ 1,929 2,235 2,763 3,982 6,125
Consumer and other................... 2,483 2,887 3,928 2,579 3,421
---------- ---------- ---------- -------- --------
Total gross loans held for
investment...................... $1,392,953 $1,492,571 $1,244,026 $ 857,496 $ 728,309
========== ========== ========== ======== ========
Mortgage-backed securities........... $ 442,015 $ 341,288 $ 315,753 $ 375,905 $ 362,338
Intangible assets, net............... $ 205 $ 248 $ 701 $ 3,745 $ 1,503
Total deposits....................... $1,558,470 $1,551,329 $1,310,505 $1,040,181 $ 817,852
Total borrowings..................... $ 497,868 $ 473,352 $ 436,112 $ 354,658 $ 284,396
Equity capital....................... $ 113,818 $ 104,552 $ 91,221 $ 86,506 $ 73,177
Equity to assets ratio............... 5.21% 4.85% 4.93% 5.81% 6.19%
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
OPERATING DATA:
Interest and dividend income......... $ 157,083 $ 136,449 $ 99,137 $ 86,488 $ 90,858
Interest expense..................... 105,924 97,964 60,141 47,145 53,305
---------- ---------- ---------- ---------- ----------
Net interest income.................. 51,159 38,485 38,996 39,343 37,553
Provisions for loan losses........... 8,050 2,900 2,300 4,075 4,099
---------- ---------- ---------- ---------- ----------
Net interest income after provisions
for loan losses.................... 43,109 35,585 36,696 35,268 33,454
========= ========= ========= ========= =========
Non-interest income.................. 12,633 7,254 7,363 4,669 3,526
Operating expenses................... 44,067 33,151 32,069 25,527 25,968
---------- ---------- ---------- ---------- ----------
Net earnings......................... $ 11,338 $ 7,197 $ 8,998 $ 8,608 $ 6,947
========= ========= ========= ========= =========
PER SHARE DATA:
Net earnings......................... $ 2.17 $ 1.42 $ 1.82 $ 1.83 $ 1.50
Dividends paid....................... $ 0.35 $ 0.31 $ 0.25 $ 0.16 $ 0.09
Dividend payout ratio................ 16.22% 21.66% 13.50% 9.12% 6.05%
Book value at December 31,........... $22.08 $20.86 $18.58 $19.02 $16.12
Tangible book value at December
31,................................ $22.04 $20.81 $18.44 $18.19 $15.79
39
42
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
OTHER DATA:
Return on average assets............. 0.53% 0.36% 0.55% 0.66% 0.60%
Return on average equity............. 10.54% 7.46% 10.21% 11.13% 9.94%
Average tangible equity to average
assets............................. 5.00% 4.82% 5.14% 5.63% 5.89%
Interest rate spread for period...... 2.37% 2.01% 2.53% 3.16% 3.34%
Net yield on average interest earning
assets............................. 2.54% 2.11% 2.60% 3.19% 3.44%
Average interest earning assets to
average interest bearing
liabilities........................ 103.33% 101.89% 101.79% 101.01% 102.13%
Net interest income after provisions
for loan losses to other
expenses........................... 97.83% 107.34% 114.43% 138.16% 128.83%
Other expenses to average
assets(2).......................... 2.05% 1.65% 1.95% 1.95% 2.25%
Nonperforming assets to total
assets(3).......................... 1.46% 0.98% 1.10% 1.07% 1.86%
Loan originations(4)................. $138,579 $252,416 $567,869 $347,614 $251,616
Number of full service banking
offices............................ 18 18 20 18 16
- ---------------
(1) Loans held for investment are presented before adjustments for undisbursed
loan funds, unearned fees, discounts and premiums, and allowances for
losses.
(2) For the year ended December 31, 1996, operating expenses included a $9.1
non-recurring charge in connection with the recapitalization of the Savings
Association Insurance Fund. Without this one-time charge, the ratio would
have been 1.63%.
(3) Nonperforming assets include nonaccrual loans and restructured loans, real
estate owned, leases receivable delinquent 90 days or more and repossessed
automobiles.
(4) Originations in the years ended December 31, 1996, 1995, 1994, 1993, and
1992 included $36.5 million, $48.9 million, $40.0 million, $78.0 million,
and $102.2 million, respectively, of loans held for sale.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AND ASSET QUALITY
Operating Strategy
The operating strategy of CENFED Financial Corporation (the "Company")
consists of three primary elements: (i) acquiring assets providing net returns
that satisfy the Company's rate of return requirements; (ii) focusing on retail
deposit gathering as the principal source of funding; and (iii) increasing the
efficiency of Company operations. In the past two years, the Company has
emphasized an asset acquisition strategy that focuses on lines of business which
management believes have higher risk-adjusted returns than residential mortgage
lending.
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 new lines of business in which it
believes it can successfully serve customer niches at satisfactory returns. It
also identifies current lines of business that no longer meet return
requirements and exits those businesses. This strategy has been realized through
the Company's entry into small business lending, primarily under lending
programs sponsored by the United States Small Business Administration ("SBA"),
and through the discontinuation of single family lending operations. The Company
offers single family real estate loans through a referral relationship with a
lender whose lending officers utilize office space in the Company's retail
delivery system. The Company purchases packages of single family loans from
other institutions from time to time. The Company continues to offer multifamily
and commercial real estate loans (collectively referred to as "commercial real
estate loans"), which management believes meet its return objectives. Small
business loans and commercial real estate loans
40
43
involved more credit risk than did single family lending and the Company's
emphasis on these lines of business will increase the credit risk in the its
loan portfolio. The increased credit risk requires higher levels of provisions
for loan losses, but management believes the credit cost will be more than
offset by higher returns.
The decision to discontinue its single family wholesale lending operations
at the end of 1995 was a major departure from the Company's prior operating
strategy, which strongly emphasized this line of business. From 1992 through
1995, the Company invested significant resources in its wholesale lending
operations to further its long-term goal of originating the majority of the
adjustable-rate loans in its portfolio. Beginning in 1992, the Company
established a wholesale lending program in response to the increasing share of
loan volume being provided by mortgage brokers and correspondent financial
intermediaries ("correspondents"). As the volume of adjustable rate loans began
to decrease in the latter half of 1994 and shrunk further in 1995, the
acquisition costs of wholesale-originated loans and the market rate terms under
which such loans could be successfully offered in the marketplace were expected
to generate returns below the levels required by the Company. Further, the
long-term prospects for this line of business were not favorable, leading
management to the decision to discontinue it.
In June 1995, the Company acquired the loan portfolio of Government Funding
of California Business and Industrial Corporation ("GFC"), a Los Angeles-based
originator of business loans made under lending programs sponsored by the United
States Small Business Administration ("SBA"). In connection with the
transaction, the Company acquired $73.5 million of unguaranteed balances of SBA
loans (subject to separate credit enhancement provisions provided by the
seller), $286 million of SBA-guaranteed servicing balances, and $50 million of
loan applications in process. The Company paid a $16 million premium in the
transaction that was allocated among the retained loan balances, the servicing
portfolio and the loan applications in process. Subsequent to the acquisition
through the end of 1995, the Company funded $22.9 million and canceled $27.1
million of the loan applications in process.
The mix of loans originated and purchased has been significantly altered by
the strategic emphasis on risk-adjusted returns. The following charts compare
the mix of loans originated for investment and for sale in 1994 and 1996
(dollars in thousands):
Loan Type 1994 1996
--------- ---- ----
Single Family ........ $523,808 $27,805
Commercial ........... $ 43,151 $63,498
Small Business ....... $ 910 $49,097
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. During the past three years, the Company has entered into
a number of branching and deposit transactions that have furthered its market
share increase
41
44
objectives and have led to greater economies of scale. The following table sets
forth branching and deposit transactions that the Company has consummated in the
three years ended December 31, 1996:
RETAIL DEPOSITS:
-------------------
ACQUIRED CHANGE IN
-------- NUMBER OF
FINANCIAL INSTITUTION DATE SOLD RETAIL OFFICES
- ------------------------------------------- ------------- (Dollars ------ --------------
in
millions)
United California Savings Bank ("UCSB").... July 1994 $413.7 -- +8
California Federal Bank.................... October 1994 -- $ 97.6 -4
Coast Federal Bank......................... October 1995 $208.8 $147.8 -2
Through its acquisition of UCSB in 1994, the Company gained entrance into
Riverside County and strengthened its presence in Orange County. The
consummation of the UCSB acquisition increased the Company's retail deposit base
sufficiently to enable the Company to dispose of four branch offices and exit
the Central California market. The Company further improved its market share in
Riverside County in October 1995 through a deposit exchange in which retail
deposits were added to two existing branch offices and a new office location was
acquired. In the October 1995 transaction, the Company also exited three
locations which had undesirable size or geographic characteristics. Through a
combination of internally-generated deposit activity and the deposit
transactions, the Company's average deposits per retail location have increased
from $49.1 million at December 31, 1993 to $74.0 million at December 31, 1996.
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 branch facilities. Asset growth and branching
opportunities in recent years have been significant contributors to the
achievement of these objectives and are expected to continue to be, as
opportunities permit. As a result, the ratio of general and administrative
expenses (excluding the deposit insurance recapitalization premium paid in 1996)
to average assets -- one traditional measure of efficiency -- has fallen in each
year, as illustrated in the following chart:
(in billions)
Year Ended December 31, Average Assets G&A Ratio
----------------------- -------------- ---------
1994 ................ $1.65 1.95%
1995 ................ $2.00 1.65%
1996 ................ $2.15 1.63%
Management believes that its cost containment efforts have led to a cost
structure that cannot be significantly reduced so further improvements in the
Company's efficiency will be dependent upon asset growth.
Earnings Performance
The Company's net earnings for 1996 totaled $11.3 million, compared to $7.2
million in 1995 and $9.0 million in 1994. Earnings per primary share in the
years ended December 31, 1996, 1995 and 1994 were $2.17, $1.42 and $1.82,
respectively. During the three-year period, the most significant influences on
the Company's net earnings were the change in its net interest margin, the
levels of provisions for loan losses and, in 1996, the gain from the sale of an
office building.
Management refines its evaluation of the Company's earnings performance by
excluding certain "non-core" items which obscure the performance of its core
lines of business. Core earnings exclude gains and losses on sales of
investments and mortgage-backed securities, results of real estate operations
and nonrecurring
42
45
adjustments. The following table reconciles the Company's net earnings as
reported in the consolidated statements of operations to core earnings, as
defined by the Company:
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------ ------
(In thousands)
Net earnings............................................ $11,338 $7,197 $8,998
NON-CORE ELEMENTS, AFTER TAXES:
Gain on sale of investments and MBS................... 652 48 758
Income (loss) from real estate operations............. 1,907 (396) (822)
SAIF recapitalization assessment...................... (5,281) -- --
Extraordinary items................................... (364) -- --
Nonrecurring adjustments.............................. (620) (119) 218
Adjustments to income taxes........................... 3,356 -- --
------- ------- -------
Non-core items, after taxes........................ (350) (467) 154
------- ------- -------
CORE EARNINGS........................................... $11,688 $7,664 $8,844
======= ====== ======
Core earnings per primary share....................... $ 2.24 $ 1.52 $ 1.79
======= ====== ======
Summarized statements of income, on a core-earnings basis, are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- -------
(In thousands)
Net interest income.................................. $ 51,159 $38,485 $38,996
PROVISIONS FOR LOAN LOSSES........................... (8,050) (2,900) (2,300)
NON-INTEREST INCOME.................................. 8,221 7,854 7,474
OPERATING EXPENSES................................... (33,893) (32,945) (31,339)
INCOME TAXES......................................... (5,749) (2,830) (3,987)
------- -------- --------
NET EARNINGS....................................... $ 11,688 $ 7,664 $ 8,844
======= ======== ========
Core earnings in 1996, compared to 1995, increased by 52% primarily due to
a 32% increase in net interest income in 1996. Greater net interest income in
1996 than in 1995 more than offset increases in provisions for loan losses,
operating expenses and income taxes. In 1995, compared to 1994, the Company's
core earnings decreased by 13%, primarily due to a decrease in net interest
income and increases in provisions for loan losses and operating expenses.
Changes in elements of the income statement are described in greater detail
in "-- Results of Operations."
Analysis of Statement of Financial Condition
Consolidated assets of the Company at December 31, 1996 increased by $29.6
million, or 1.4%, from the end of 1995, following a 16% increase in total assets
at the end of 1995 over 1994. In 1996, the Company's loan portfolio decreased by
$100.8 million and asset growth was achieved through increases in the
mortgage-backed securities and investment securities portfolios of $100.7
million and $27.9 million, respectively. A decrease in the Company's
originations and purchases of single family loans was the predominant reason
that the loan portfolio shrank in 1996.
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46
The following tables sets forth significant changes in the Company's
statement of financial condition:
INCREASE (DECREASE) AT DECEMBER 31,
-----------------------------------
1996 VS. 1995 1995 VS. 1994
------------- -------------
(In thousands)
Loans held for investment, net........................... $(100,787) $ 260,039
Mortgage-backed securities............................... 100,727 25,535
Investment securities.................................... 27,941 19,147
All other, net........................................... 1,738 (2,983)
--------- --------
Change in total assets.............................. $ 29,619 $ 301,738
========= ========
Customer deposits accounts............................... $ 7,141 $ 240,824
Borrowings............................................... 24,516 37,240
Stockholders' equity..................................... 9,477 13,331
All other, net........................................... (11,515) 10,343
--------- --------
Change in total liabilities and equity.............. $ 29,619 $ 301,738
========= ========
Loans Held for Investment. Loans held for investment decreased by $100.8
million during 1996, compared to an increase of $260.0 million during 1995. In
1996, the Company's originations and purchases of loans held for investment
totaled $123.7 million, compared to $384.6 million in 1995. The Company's
discontinuation of wholesale-based single family lending at the end of 1995 led
to a $115.7 million decline in single family originations. In addition, the
Company's volume of loan purchases decreased by $161.3 million due to a lack of
suitable loan packages at prices that would result in an acceptable
risk-adjusted return. The Company's commercial real estate operations and small
business lending operations generated loan origination increases of $3.5 million
and $16.5 million, respectively, in 1996 compared to 1995.
Loans held for investment increased by $260.0 million during 1995, compared
to $381.2 million during 1994. In 1995, the Company's originations and purchases
of loans held for investment totaled $384.6 million, compared to $619.5 million
in 1994. The most significant component of the decrease in loan originations and
purchases was due to a $260.4 million decrease in the single family product
line. The effect of the commoditization of single family lending was strongly
felt in 1995 as loan pricing was often unacceptable to the Company. In 1995, the
Company's volume of small business loans increased by $22.4 million to $23.3
million, and the Company purchased $73 million of unguaranteed portions of loans
made under SBA lending programs.
Mortgage-backed securities. When loan originations and purchases are
inadequate to maximize interest earning assets or meet other Company asset mix
objectives, the Company frequently purchases mortgage-backed securities, which
it designates as "available for sale". The Company seeks to maximize the size of
its asset base, within the constraints necessary to maintain its regulatory
designation as a "well-capitalized" institution. The Company holds its purchases
of mortgage-backed securities available for sale in portfolio and may eventually
sell them and use the proceeds to fund loans.
During 1996, the Company's portfolio of mortgage-backed securities
increased by $100.7 million, as the Company was unable to originate sufficient
loan volumes during the year to meet its growth objectives. During 1995, growth
in the Company's portfolio of mortgage-backed securities was more moderate due
to higher loan originations and purchases that year.
Investment Securities. With the exception of municipal tax advantaged
securities and Federal Home Loan bank of San Francisco stock, the Company's
investment securities are held to meet regulatory liquidity requirements. During
1996, the Company's investment security portfolio increased by $27.9 million,
primarily due to an increase in holdings of U.S. Government obligations. In
connection with an interest rate reduction strategy, the Company sold fixed rate
mortgagebacked securities during 1996 and, in certain cases, reinvested the
proceeds in U.S. Government obligations.
44
47
Customer Deposit Accounts. As stated in its operating strategy, the
Company believes that customer deposit accounts are the most valuable source of
funding, in the long run. During 1996, customer deposit account balances
increased by $7.1 million, consisting of a $19.3 million increase in brokered
account balances and a $12.2 million decrease in retail account balances.
Although total retail account balances declined, the Company's retail
transaction account balances increased by $27.3 million as a result of the
Company's greater emphasis on these types of accounts.
During 1995, customer deposit account balances increased by $240.8 million.
The principal elements of this increase were: $62.0 million of growth in retail
customer deposits due to several popular accounts offered during the year; $60.1
million of net purchased deposits; $59.6 million of additional
brokered/institutional deposits; and $59.1 million of interest credited to
customer account balances.
Borrowings. When it is unable to build its customer deposit account base
to levels required to fund assets, the Company utilizes borrowings. The Company
has traditionally relied upon borrowings from the FHLB of San Francisco as a
significant source of funds. More recently, the Company has utilized securities
sold under agreements to repurchase to a greater extent as a funding source to
finance asset growth. In 1996, borrowing increased by $24.5 million, consisting
of $49.0 million of additional FHLB advances, a decrease of $19.4 million of
securities sold under agreements to repurchase, and a $5.1 million decrease in
notes payable.
In 1995, the Company's borrowings increased by $37.2 million, consisting of
a $2.6 million increase in securities sold under agreements to repurchase,
issuance of $17.8 million of seven-year senior debentures, a $34.2 million
increase in FHLB advances, and a $200,000 reduction in notes payable.
Stockholders' Equity. Stockholders' equity increased by $9.5 million in
1996, due primarily to $11.3 million of net earnings that was reduced by a $2.4
million decrease in the unrealized gain on securities available for sale. In
1995, stockholders' equity increased by $13.3 million, due primarily to $7.2
million of net income and a $6.8 million improvement in the unrealized gain on
securities available for sale.
Asset Quality
Delinquent Loans. The Company's delinquency experience is affected by the
value of the real estate securing its loans, the ability of borrowers to make
increased payments under ARMs if interest rates increase and other factors that
are not in the Company's control, such as national and local economic
conditions. Total delinquent loans as a percentage of loans held for investment
were 2.08% at December 31, 1996, representing a 65 basis point increase from the
end of the previous year. In the two-year period ended December 31, 1996, the
Company's delinquency experience has been characterized by steadily rising
delinquencies, both in dollars and as a percentage of outstanding loans. In
general, the source of this adverse trend has been the Company's single family
loan portfolio, which has historically represented approximately two-thirds of
the loan portfolio.
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48
The following table sets forth the Company's delinquent loans by type of
loan, in dollars and as a percentage of the portfolio of loans held for
investment and for sale, at the dates indicated:
AT DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
% OF % OF % OF
PRINCIPAL GROSS PRINCIPAL GROSS PRINCIPAL GROSS
BALANCE LOANS BALANCE LOANS BALANCE LOANS
--------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
LOANS DELINQUENT FOR:
31-60 days......................... $ 7,012 0.47% $ 4,408 0.28% $ 1,765 0.13%
61-90 days......................... 4,996 0.33% 1,790 0.11% 2,414 0.18%
91 days and over................... 16,878 1.12% 15,173 0.95% 8,443 0.63%
------- ---- ------- ---- ------- ----
$ 28,886 1.92% $ 21,371 1.34% $ 12,622 0.94%
======= ==== ======= ==== ======= ====
DELINQUENCIES, AS A PERCENTAGE OF
PRODUCT LINE
Single family...................... $ 20,483 2.11% $ 15,404 1.37% $ 8,891 0.90%
Commercial real estate............. 4,262 1.09% 3,222 0.88% 3,701 1.12%
Small business..................... 4,122 3.07% 2,687 3.03% -- --
Other.............................. 19 0.28% 58 0.51% 30 0.26%
------- ---- ------- ---- ------- ----
$ 28,886 1.92% $ 21,371 1.34% $ 12,622 0.94%
======= ==== ======= ==== ======= ====
The following chart sets forth delinquency trend information by loan type
at the dates indicated:
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) SINGLE FAMILY COMMERCIAL R/E SMALL BUSINESS TOTAL
DEC-94 ....................... 0.89 1.12 0 0.94
MAR-95 ....................... 1.03 1.46 0 1.12
JUN-95 ....................... 1.15 1.21 1.27 1.16
SEP-95 ....................... 1.43 1.10 2.47 1.41
DEC-95 ....................... 1.37 0.88 3.03 1.34
MAR-96 ....................... 1.62 1.30 2.72 1.61
JUN-96 ....................... 1.72 2.04 2.52 1.86
SEP-96 ....................... 1.88 2.02 3.20 2.02
DEC-96 ....................... 2.11 1.09 3.07 1.93
The preceding delinquency chart illustrates the strong correlation between
the Company's delinquency trend in total and with respect to its single family
loan portfolio. Even though there are signs that the Southern California economy
has improved in 1996, the Company's single family delinquency experience has not
improved accordingly. Management believes a number of factors are contributing
to the unfavorable single family delinquency trend:
- levels of consumer debt have been rising;
- although real estate purchase volume has been rising, inventories of
financial institution REO have been high enough to suppress sales prices;
- certain single family borrowers may be experiencing financial
difficulties associated with higher payments on ARMs arising from
refinances prior to the rise in interest rates in 1994 and 1995 and may
have, in some cases, exhausted their capacities to continue to make
payments; and
- lack of liquidity in single family homes prevents many borrowers from
selling their homes and, with limited or no equity in their homes, many
borrowers in such a situation are not able to resolve their delinquent
loans, resulting in foreclosure.
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The following chart sets forth single family delinquencies by the year of
the delinquent loans' origination and the percentage of loans outstanding from
each year that were delinquent at December 31, 1996:
Delinquent Single % of Outstanding Loans
Family Loans Originated during the Year
----------------- --------------------------
Before 1988 ....... $1,671 3.32%
1988 .............. $ 982 1.88%
1989 .............. $1,391 5.75%
1990 .............. $ 0 -
1991 .............. $1,394 5.26%
1992 .............. $4,519 6.29%
1993 .............. $2,747 1.75%
1994 .............. $4,992 1.17%
1995 .............. $2,207 1.92%
The years with the greatest dollars of delinquent single family loans were
the years in which the Company's loan originations increased significantly.
However, the loans on which the Company has experienced the worst rates of
delinquency were originated in the 1989 - 1992 period, which is the time period
most dramatically affected by the recession and decline in real estate values in
Southern California. The exception is loans made in 1990, none of which were
delinquent at the end of 1996. In the near future, management believes that
single family delinquency rates may continue to rise because: (i) the seasoning
of the loans made in 1993 - 1995 can be expected to result in higher levels of
delinquency (based upon historical experience) and (ii) for certain borrowers
whose loans are current at the present time, real estate sales appreciation may
not occur rapidly enough to justify the economic effects of remaining in their
homes.
At December 31, 1996 and 1995, the Company's small business loan
delinquencies included $739,000 and $105,000, respectively, of loan balances
fully guaranteed by the SBA and $3.3 million and $2.6 million, respectively, of
loan balances subject to private credit enhancement provisions.
Commercial real estate loans, consisting of multifamily residential and
commercial nonresidential loans, are subject to greater volatility due to the
size of the individual loans. At December 31, 1996 and 1995, delinquent
commercial real estate loans represented 1.09% and .88% of the commercial real
estate portfolios at those respective dates. During 1996, delinquent commercial
real estate loans increased during the first half of the year, then declined
during the second half of the year such that the year-end delinquency rate
increased by only 21 basis points. During 1995, the Company's general
delinquency trend was downward, resulting in a 24 basis point decrease during
the year.
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50
Nonperforming Assets. In general, the Company's nonperforming assets
reflect the trends previously described with respect to loan delinquencies. The
following table sets forth the Company's nonperforming asset activity for the
years ended December 31, 1996 and 1995:
FOR THE YEARS ENDED
-------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------- --------------------------------
NONACCRUAL NONACCRUAL
LOANS REO TOTAL LOANS REO TOTAL
---------- -------- -------- ---------- -------- --------
(In thousands)
Balance, beginning of year........ $ 14,841 $ 6,236 $ 21,077 $ 10,515 $ 9,826 $ 20,341
Additions:
Single family (1)............... 20,843 -- 20,843 12,331 12,331
Commercial real estate.......... 16,438 -- 16,438 4,051 4,051
Small business (1).............. 6,512 -- 6,512 173 173
Other (1)....................... 33 -- 33 -- 0
---------- -------- -------- ---------- -------- --------
43,826 -- 43,826 16,555 16,555
---------- -------- -------- ---------- -------- --------
Foreclosures:
Single family................... (14,746) 10,556 (4,190) (7,399) 5,463 (1,936)
Commercial real estate.......... (10,251) 7,445 (2,806) (3,166) 1,578 (1,588)
Small business.................. (1,776) -- (1,776) -- -- 0
---------- -------- -------- ---------- -------- --------
(26,773) 18,001 (8,772) (10,565) 7,041 (3,524)
---------- -------- -------- ---------- -------- --------
Negotiated Settlements and Holding
Period Writedowns:
Single family (2)............... (3,206) (385) (3,591) (227) (103) (330)
Commercial real estate (3)...... (913) (17) (930) -- (16) (16)
Small business.................. (413) -- (413) (54) -- (54)
Other........................... (40) -- (40) -- -- --
---------- -------- -------- ---------- -------- --------
(4,572) (402) (4,974) (281) (119) (400)
---------- -------- -------- ---------- -------- --------
REO Sales:
Single family................... -- (7,729) (7,729) -- (5,913) (5,913)
Commercial real estate.......... -- (6,913) (6,913) -- (4,881) (4,881)
---------- -------- -------- ---------- -------- --------
-- (14,642) (14,642) -- (10,794) (10,794)
---------- -------- -------- ---------- -------- --------
Loans Brought Current:
Commercial real estate.......... (4,233) -- (4,233) (1,360) -- (1,360)
Small business.................. (1,535) -- (1,535) -- -- --
Other........................... (29) -- (29) -- -- --
---------- -------- -------- ---------- -------- --------
(5,797) -- (5,797) (1,360) -- (1,360)
---------- -------- -------- ---------- -------- --------
Other Changes, net:
Single family................... (23) 683 660 (4) (4)
Commercial real estate.......... -- 590 590 (3) 282 279
Small business and other........ -- -- -- (16)
---------- -------- -------- ---------- -------- --------
(23) 1273 1250 (23) 282 259
---------- -------- -------- ---------- -------- --------
BALANCE, END OF YEAR.............. $ 21,502 $ 10,466 $ 31,968 $ 14,841 $ 6,236 $ 21,077
======== ======== ======== ======== ======== ========
- ---------------
(1) For single family, small business and other loans, the additions figure
represents the net change from additions and loans brought current.
(2) Represents single family nonaccrual loans resolved through a negotiated
payoff in an amount less than the borrowers' contractual obligations to the
Company.
(3) For nonaccrual loans, represents loan balances charged-off on loans that
remain in nonaccrual status.
At December 31, 1996, the Company's nonaccrual loans consisted of 91 single
family residential real estate loans, 26 small business loans, 4 multifamily
residential loans, 2 commercial real estate loans and 4 consumer loans. At that
date, the Company had no loans still accruing that were more than 90 days
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delinquent. At December 31, 1996, real estate owned included 54 properties
secured by single family residential real estate, 2 properties secured by
multifamily residential real estate and 2 properties secured by commercial real
estate. At December 31, 1996, 1995 and 1994, the Company had one loan considered
a troubled debt restructuring due to a principal charge-off resulting from
damage to the real estate collateral from the 1994 earthquake in Los Angeles.
Allowances for Loan Losses. The Company maintains specific allowances for
loan losses related to particular identified assets and general allowances for
loan losses. An analysis of the activity in the allowance for loan losses
follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Balance, beginning of year.................................... $12,789 $12,529 $ 8,832
Provisions for loan losses.................................... 8,050 2,900 2,300
Acquisitions/Purchases........................................ -- 500 6,052
Recoveries from lease reserve................................. 16 11 353
Recoveries.................................................... 1,833 1,390 554
Charge-offs................................................... (9,200) (4,541) (5,562)
------- ------- -------
Balance, end of year.......................................... $13,488 $12,789 $12,529
======= ======= =======
The following table sets forth the Company's net charge-offs by loan types
for the periods indicated:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
Single family.................................................. $3,673 $1,807 $1,538
Commercial real estate......................................... 3,610 1,295 3,431
Small business................................................. 56 -- --
Other.......................................................... 28 49 39
------ ------ ------
$7,367 $3,151 $5,008
====== ====== ======
During 1996, the Company's net charge-offs of single family loan balances
totaled $3.7 million, related to 157 properties. For the year, the Company
experienced an average loss of 23% of its investment in single family REO
(consisting of unpaid loan principal, advanced taxes and insurance and
capitalized improvements) upon disposition. During 1995, the Company's average
loss was 23.5% of its investment in the single family REO.
In 1996, the Company recorded net charge-offs of $3.6 million on its
commercial real estate property loan portfolio. During the year, 16 properties
were repossessed and $3.5 million charged off. The average loss on multifamily
residential properties disposed of during 1996 amounted to 39% of the Company's
investment in the foreclosed loans, compared to 34.1% during 1995.
The Company evaluates the adequacy of its allowance for loan losses on at
least a quarterly basis. The adequacy of the allowance is measured by comparing
the amount of the allowance reflected on the Company's balance sheet to the
amount determined to be required by examination of the loan portfolio, including
the portions of the loan portfolio classified in accordance with regulatory
requirements as special mention, substandard, doubtful or loss (collectively,
"criticized loans") and nonperforming loans. The ratio of the allowance to the
aggregate amount of criticized loans and to the aggregate amount of
nonperforming loans can be affected in unpredictable ways by the specific assets
which comprise criticized loans and nonperforming loans and by allowances for
losses that are allocated to loans, including criticized loans, that are not
nonperforming loans. Accordingly, the Company does not use the ratio of the
allowance to aggregate criticized loans or to aggregate nonperforming loans,
standing alone, as a measure of the adequacy of the allowance for loans losses.
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52
At December 31, 1996, the allowance for loan losses totaled $13.5 million
and represented .90% of total loans held for investment and for sale. One year
earlier, the allowance for loan losses totaled $12.8 million and represented
.80% of loans held for investment and for sale.
The following table sets forth activity in the allowance for loan losses,
by type of loan, for the years ended December 31, 1996 and 1995:
SINGLE COMMERCIAL SMALL
FAMILY REAL ESTATE BUSINESS OTHER(1) TOTAL
------ ----------- -------- -------- -------
Balance, 12/31/94........................ $2,629 $ 9,807 -- $ 93 $12,529
Provisions (reductions credited) for
loan losses......................... 3,221 (1,510) 1,130 59 2,900
Acquisitions and purchases............. 500 500
Allowance for lease losses
recoveries.......................... 11 11
Charge-offs............................ (2,163) (2,329) -- (49) (4,541)
Recoveries............................. 356 1,034 -- -- 1,390
------ ------ ------ --- -------
BALANCE, 12/31/95........................ 4,043 7,002 1,630 114 12,789
PROVISIONS FOR LOAN LOSSES (REDUCTIONS
CREDITED)........................... 3,622 3,950 507 (29) 8,050
ALLOWANCE FOR LEASE LOSSES
RECOVERIES.......................... 16 16
CHARGE-OFFS............................ (4,539) (4,062) (565) (34) (9,200)
RECOVERIES............................. 866 452 509 6 1,833
------ ------ ------ --- -------
BALANCE, 12/31/96........................ $3,992 $ 7,342 $2,081 $ 73 $13,488
====== ====== ====== === =======
- ---------------
(1) Other consists of construction and consumer loans.
Even though the amount of the allowance for loan losses allocated to the
single family loan portfolio was largely unchanged from the beginning of 1996 to
the end of 1996, the percentage of the allocated allowance to outstanding single
family loans increased by five basis points. The increase is the result of two
factors: (i) the amounts of single family loan balances classified as "special
mention" or "substandard" were greater at the end of 1996 than at the beginning
of the year and progressively greater percentages of the loan loss allowance are
allocated to these designations and (ii) the Company increased the allocation
factors for "special mention" and "substandard" loans during the year in concert
with the results of the Company's migration analysis. The migration analysis is
a statistical tool for forecasting future potential loan losses based on
historical loss patterns.
The Company's allowances for loan losses allocated to its commercial real
estate loan portfolio increased due to growth in the portfolio during 1996. The
allowance for loan losses allocated to commercial real estate loans was 1.88% of
outstanding loans at December 31, 1996, representing a three basis point
decrease from the allocation at the end of the prior year.
The Company's small business loan portfolio was allocated $2.1 million of
allowances for loan losses at December 31, 1996, representing a 27.7% increase
from the end of the previous year. As a percentage of small business loans, the
allowance was 1.55% at December 31, 1996, compared to 1.84% one year earlier.
During 1996, the Company's balances of loans fully-guaranteed by the SBA
increased from $17.3 million at the beginning of the year to $41.5 million at
the end of the year. The Company does not allocate allowances for loan losses to
these loans. During 1996, the Company increased the allocation percentage of
allowances on the loans it purchased from Government Funding Corporation in
1995. At December 31, 1996 and 1995, the allowance allocation percentages were
2.06% and 1.70%, respectively, resulting in loan loss allowance allocations of
$1.2 million and $1.2 million, respectively. The Company increased the
allocation due to regulators' concerns about the loss indemnification features
of the purchase agreement in the absence of a collection history. During 1996,
the Company billed to and received from the guarantor all funds due in
accordance with the credit enhancement provisions of the purchase agreement.
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CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company include scheduled and
unscheduled payments on loans, proceeds from sales of investment securities,
mortgage-backed securities and loans, cash flows generated from operations, and
increases in deposits, FHLB advances and other borrowings.
The Company offers fixed rate loans to its customers so as to remain
competitive but generally sells them in the secondary market. In addition, the
Company also purchases ARMs in the secondary market to meet asset growth and
earnings objectives. In the years ended December 31, 1996, 1995, and 1994, the
Company received $11.6 million, $27.9 million and $261.2 million, respectively,
in funds from the sales of loans held for sale. In 1994, loan sales included
$206.7 million of loans acquired from UCSB that were subject to sales
commitments at acquisition; without these loans, the proceeds from loan sales in
1994 would have been $54.5 million. In addition, the Company received $3.9
million, $1.5 and $1.0 million of proceeds from the sales of loans and
participating interests in loans in the held for investment portfolio in the
year ended December 31, 1996, 1995 and 1994, respectively.
Proceeds from the sales of mortgage-backed securities and investment
securities for the years ended December 31, 1996, 1995, and 1994 totaled $290.2
million, $66.7 million, and $213.9 million, respectively. Although the Company's
portfolio of mortgage- backed securities grew during 1996, the Company's sales
of mortgage-backed securities increased significantly due to portfolio
restructuring activities during the year in connection with interest rate risk
reduction objectives. The Company sold securities with less favorable interest
rate risk characteristics and reinvested in securities that improved the
Company's interest rate risk profile.
Principal repayments on loans and mortgage-backed securities were $271.8
million, $186.0 million, and $215.6 million for the years ended December 31,
1996, 1995, and 1994, respectively. The repayment rate on the Company's loan
portfolio increased substantially during 1996. For the years ended December 31,
1996, 1995 and 1994, repayments of loans held for investment represented 12.9%,
9.9% and 15.4%, respectively, of the loan portfolio balances at the beginning of
the respective years.
Customer deposit accounts, the Company's primary source of funds,
represented approximately 76% of interest bearing liabilities at both December
31, 1996 and 1995. The percentage of retail customer deposits (deposits not
acquired through the Company's money desk operations) to interest bearing
liabilities was 64.8% and 66.4% at December 31, 1996 and 1995, respectively. For
the years ended December 31, 1996, 1995 and 1994, the net increases in customer
deposit accounts was $8.1 million, $183.8 million and $270.3 million,
respectively. During those same respective periods, the Company's deposit
purchases, net of deposit sales, totaled zero, $59.6 million and $311.9 million.
During periods of asset expansion when net deposit flows and increases in
stockholders' equity are not sufficient to fund desired levels of growth, the
Company may borrow funds from a variety of sources. In the years ended December
31, 1996, 1995 and 1994, the Company increased its total borrowings by $24.5
million, $37.2 million and $81.5 million, respectively. Increases in FHLB
advances in those same periods totaled $49.0 million, $34.8 million and $13.2
million, respectively. In addition, the Company frequently borrows funds in the
form of repurchase agreements. In the years ended December 31, 1996, the Company
decreased its borrowings under agreements to repurchase by $19.4 million. During
1995 and 1994, the Company increase this type of borrowing by $2.6 million and
$53.1 million, respectively.
Savings institutions must, by regulation, maintain liquidity of 5% and
short-term liquidity of 1% 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. Short-term liquidity is generally
measured by such assets which have maturities of 12 months or less. For the
calculation period including December 31, 1996, the liquidity and short-term
liquidity ratios for the Company were 5.7% and 2.6%, respectively.
ASSET/LIABILITY MANAGEMENT
Since the mid-1980's, the Company has emphasized the origination of ARMs
for portfolio retention to reduce the sensitivity of its earnings to interest
rate fluctuations. Interest rate "gap" analysis is a common, but
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54
imperfect, measure of interest rate risk which measures the relative dollar
amounts of interest earning assets and interest bearing liabilities which
reprice within a specific time period, either through maturity or rate
adjustment. The "gap" is the difference between the amounts of such assets and
liabilities that are subject to such repricing. A "positive" gap for a given
period means that the amount of interest earning assets maturing or otherwise
repricing within that period exceeds the amount of interest bearing liabilities
maturing or otherwise repricing within the same period. Accordingly, in a rising
interest rate environment, an institution with a positive gap would generally be
expected, absent the effects of other factors, to experience a greater increase
in the yield of its assets relative to the cost of its liabilities. Conversely,
the cost of funds for an institution with a positive gap would generally be
expected to decline less quickly than the yield on its assets in a falling
interest rate environment. Changes in interest rates generally have the opposite
effect on an institution with a "negative" gap. At December 31, 1996, the
Company's one year gap was a positive 23.1% of assets.
There are fairly significant shortcomings inherent in this simplified gap
analysis, however, that may result in an institution with a nominally positive
gap having interest rate behavior associated with a negative gap. Among the
factors that the gap analysis does not reflect are:
(i) restrictions on maximum changes in rates at date of repricing --
certain assets, such as ARMs, have features which limit increases and
decreases in interest rates on both a short-term basis and over the
lives of the assets (generally referred to as "interest rate caps"
and "interest rate floors");
(ii) rate-sensitivity of index upon which ARMs are based -- interest rates
on certain types of assets and liabilities typically fluctuate in
advance of changes in general market interest rates, while interest
rates on other types may lag changes in general market rates, as is
the case with ARMs with interest rate adjustments tied to an index
published by the FHLB of San Francisco, which tends to lag changes in
general market rates of interest and thus react more slowly to such
changes than does the Company's actual cost of funds;
(iii) frequency of repricing -- a further delay in the ability of the
Company's ARMs to react to changes in general market rates may be
expected because the interest rate on a substantial portion of the
ARMs adjusts quarterly or semi-annually; and
(iv) introductory interest rates -- at certain times, the Company's new
loans have introductory interest rates that are lower than the loans'
general rate terms would provide. While the period during which such
introductory interest rates are in effect is limited, the
introductory interest rates have the effect of reducing the net
interest income earned by the Company as compared with what would be
earned were such introductory rates not offered.
In the event of a change in interest rates, prepayments of ARMs and early
withdrawals of deposits could also deviate significantly from those assumed in
calculating the interest rate gap. The ability of many borrowers to service
their debt may also decrease in the event of an interest rate increase.
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55
The following table sets forth the amount of interest earning assets and
interest bearing liabilities outstanding at December 31, 1996 which are expected
to reprice or mature in each of the future time periods shown.
MORE MORE MORE MORE
6 THAN 6 THAN 1 THAN 3 THAN 5
MONTHS MONTHS TO YEARS TO YEARS TO YEARS TO OVER 10
OR LESS 1 YEAR 3 YEARS 5 YEARS 10 YEARS YEARS TOTAL
---------- --------- --------- --------- -------- ------- ----------
(Dollars in Thousands)
INTEREST EARNING ASSETS:
Federal funds sold........... $ 7,500 $ 0 $ 0 $ 0 $ 0 $ 0 $ 7,500
Investment securities
available for sale, at fair
value...................... 58,032 10,005 0 0 1,261 74,502 143,800
MBS available for sale, at
fair value................. 388,384 35,841 14,930 2,860 0 0 442,015
Loans held for sale, at lower
of cost or fair value...... 92,982 10,012 3,915 2,054 320 368 109,651
Loans held for
investment, net............ 1,056,130 169,096 75,305 58,752 12,685 19,339 1,391,307
Investment in FHLB stock, at
cost....................... 17,919 0 0 0 0 0 17,919
---------- --------- --------- --------- -------- ------- ----------
TOTAL INTEREST EARNING
ASSETS................... $1,620,947 $ 224,954 $ 94,150 $ 63,666 $ 14,266 $94,209 $2,112,192
========== ========= ========= ========= ======== ======= ==========
INTEREST BEARING LIABILITIES:
Customer deposit accounts.... $ 650,910 $ 301,745 $ 321,306 $ 168,057 $ 71,187 $45,265 $1,558,470
Securities sold under
agreement to repurchase.... 130,639 0 0 0 0 0 130,639
Notes payable................ 0 0 0 0 17,750 0 17,750
FHLB advances................ 190,900 83,579 75,000 0 0 0 349,479
---------- --------- --------- --------- -------- ------- ----------
TOTAL INTEREST BEARING
LIABILITIES.............. $ 972,449 $ 385,324 $ 396,306 $ 168,057 $ 88,937 $45,265 $2,056,338
========== ========= ========= ========= ======== ======= ==========
Interest sensitivity gap
per period................... $ 648,498 $(160,370) $(302,156) $(104,391) $(74,671) $48,944 $ 55,854
Cumulative interest
sensitivity gap.............. $ 648,498 $ 488,128 $ 185,972 $ 81,581 $ 6,910 $55,854 --
Cumulative gap as a percent of
total interest earning....... 30.70% 23.11% 8.80% 3.86% 0.33% 2.64% --
Cumulative interest sensitive
assets as a percent of
interest sensitive
liabilities.................. 166.69% 135.95% 110.60% 104.24% 100.34% 102.72% --
Except as stated below, the amounts of assets and liabilities shown which
reprice or mature within a particular period were determined in accordance with
the contractual terms of the asset or liability. For one- to four-family
residential fixed rate mortgages, the assumed average annual prepayment rate was
19%. Prepayment rates on other fixed rate mortgage loans ranged from 6% to 13%,
with an average of 6.4%. Loans with adjustable rates are shown as being due in
the next adjustment period. Withdrawal rates on the Company's regular passbook
savings, money-market deposits, NOW and checking accounts, which totaled $321.4
million at December 31, 1996, were based on statistics developed with the Office
of Thrift Supervision Net Portfolio Value Model. The interest rate sensitivity
of the Bank's assets and liabilities illustrated on the previous page would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.
Net Portfolio Value. Another method of analyzing a financial institution's
interest rate risk is by measuring the change in net portfolio value ("NPV")
under various interest rate scenarios. NPV represents the difference between the
fair values of assets and the fair values of liabilities and off-balance sheet
contracts. The NPV ratio, under any interest rate scenario, is defined as the
NPV in that scenario divided by the market
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56
value of assets in that scenario. The sensitivity measure is the decline in the
NPV ratio in basis points, caused by a 200 basis point, instantaneous increase
or decrease in interest rates, whichever produces a greater decline. The higher
an institution's sensitivity measure is, the greater its exposure to interest
rate risk.
On a quarterly basis, the Office of Thrift Supervision produces an analysis
on the above basis using its internal model. The Company also calculates its NPV
ratio utilizing a simulation program. Due to differences in assumptions used to
calculate the fair values of the assets, liabilities and off-balance sheet
contracts, the OTS model may generate different results from the Company's.
As of December 31, 1996, the Company's sensitivity measure as calculated by
the Company was 20%, compared to 20% as calculated by the OTS.
Hedging Activities. In addition to managing its exposure to interest rate
risk through asset and liability acquisition and disposition activities, the
Company purchased interest rate cap contracts in 1996. The interest rate cap
contracts were intended to limit the adverse effects of lifetime interest rate
maximums on certain LIBOR-based ARMs in the Company's loan portfolio. The
Company purchased two interest rate cap contracts with the following
characteristics:
Notional Amount........................... $200 million $75 million
Strike Rate............................... 7.50% 7.00%
Under the interest rate cap contracts, if the LIBOR rate exceeds 7%, then
the Company will receive a stream of interest payments representing the
difference between the actual LIBOR rate and 7%, based upon a notional amount of
$75 million. If the LIBOR rate exceeds 7.5%, then the Company also will receive,
a payment stream representing the difference between the actual LIBOR rate and
7.5%, based upon a notional amount of $200 million.
The initial cost of the three-year interest rate cap contracts was $2.9
million, which is being charged to interest income on a pro rata basis over the
lives of the contracts.
The market value of the loans being hedged will likely exhibit more
volatility than will their hedge instrument counterparts. For example, when
market yields decline, the increase in value of the loans being hedged can be
expected to exceed the decline in the value of the hedging instruments.
Conversely, when market yields rise, the decline in the value of the loans being
hedged can be expected to exceed the gain in value of the hedging instruments.
ANALYSIS OF NET INTEREST INCOME
General. The Company's results of operations are primarily dependent upon
net interest income, which is the difference between income derived from
interest earning assets and the interest expense on interest bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest earning assets and the rates paid on
interest bearing liabilities (the "interest rate spread") and (ii) the relative
amounts of interest earning assets and interest bearing liabilities, which is
sometimes referred to as the "net earning balance."
Average Balances, Interest Rates and Yields. The following table sets
forth information concerning the Company's interest earning assets, interest
bearing liabilities, net interest income, interest rate spreads and interest
rate margins during the periods indicated. Average balances were calculated
using the average daily balance method.
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YEAR ENDED DEC. 31, 1996 YIELD/RATE YEAR ENDED DEC. 31, 1995
--------------------------------- AT ---------------------------------
AVERAGE AVERAGE DECEMBER 31, AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE 1996 BALANCE INTEREST YIELD/RATE
---------- -------- ---------- ------------ ---------- -------- ----------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Short-term investments(1)... $ 13,624 $ 694 5.09% 6.21% $ 13,116 $ 795 6.06%
Investment securities held
to maturity and available
for sale(2)............... 130,426 9,241 7.09% 6.60% 127,550 9,072 7.11%
MBS held to maturity and
available for sale........ 393,005 28,254 7.19% 7.01% 333,620 23,527 7.05%
Loans held for investment
and held for sale(3)...... 1,543,579 120,616 7.81% 7.84% 1,453,284 105,164 7.24%
---------- -------- ---------- --------
Total interest earning
assets.................. 2,080,634 158,805 7.63% 7.56% 1,927,570 138,558 7.19%
Non-interest earning
assets... 66,371 -- 75,567 --
---------- -------- ---------- --------
Total.................. $2,147,005 $158,805 $2,003,137 $138,558
---------- -------- ---------- --------
INTEREST BEARING LIABILITIES:
Customer deposit accounts.. $1,556,497 $ 79,286 5.09% 5.05% $1,440,191 $ 71,130 4.94%
Short-term borrowings...... 114,852 6,442 5.61% 5.47% 167,668 10,371 6.19%
FHLB advances.............. 321,878 17,897 5.56% 5.52% 261,119 13,972 5.35%
Notes payable.............. 20,375 2,299 11.28% 11.04% 22,924 2,491 10.87%
---------- -------- ---------- --------
Total interest bearing
liabilities........... 2,013,602 105,924 5.26% 5.21% 1,891,902 97,964 5.18%
Non-interest bearing
liabilities.............. 25,833 -- 14,715 --
Retained earnings --
substantially restricted. 107,570 -- 96,520 --
---------- -------- ---------- --------
Total.................. $2,147,005 $105,924 $2,003,137 $ 97,964
---------- -------- ---------- --------
Net interest income/interest
rate spread(4)............. $ 52,881 2.37% 2.35% $ 40,594 2.01%
Net interest earning assets/
net interest margin(5)..... $ 67,032 2.54% 2.49% $ 35,668 2.11%
YEAR ENDED DEC. 31, 1994
---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE
---------- -------- ----------
INTEREST EARNING ASSETS:
Short-term investments(1)... $ 4,251 $ 157 3.69%
Investment securities held
to maturity and available
for sale(2)............... 117,841 8,517 7.23%
MBS held to maturity and
available for sale........ 348,091 23,417 6.73%
Loans held for investment
and held for sale(3)...... 1,112,745 69,266 6.22%
--------- --------- -----
Total interest earning
assets............... 1,582,928 101,357 6.40%
Non-interest earning
assets................... 64,134 --
---------- ---------
Total................... $1,647,062 101,357
---------- ---------
INTEREST BEARING LIABILITIES:
Customer deposit accounts.. $1,172,785 $ 42,743 3.64%
Short-term borrowings...... 131,477 5,933 4.51%
FHLB advances.............. 244,809 11,009 4.50%
Notes payable.............. 6,068 456 7.51%
----------- -------- --------
Total interest bearing
liabilities......... 1,555,139 60,141 3.87%
Non-interest bearing
liabilities............. 3,821 --
Retained earnings --
substantially
restricted.............. 88,102 --
---------- --------
Total................. $1,647,062 $ 60,141
---------- --------
Net interest income/
interest rate spread(4)... $ 41,216 2.53%
Net interest earning
assets/net interest
margin(5)................ $ 27,789 2.60%
- ---------------
1) Short-term investments includes federal funds sold, certificates of deposit
and repurchase agreements.
2) Investment securities at and for the years ended December 31, 1996, 1995 and
1994 include tax-exempt securities which have been presented on a fully
taxable-equivalent basis by increasing interest income by $1,722,000,
$2,109,000, and $2,220,000 respectively, and applying the federal statutory
tax rate.
3) Loans held for investment includes nonaccrual loans. For nonaccrual loans,
interest income is recorded on a cash basis.
4) Interest rate spread represents the difference between the average rate on
interest earning assets and the average cost of interest bearing liabilities.
5) Net interest margin represents net interest income divided by average
interest earning assets.
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58
Rate/Volume Analysis. The following table analyzes the dollar amount of
changes in interest income and interest expense for major components of interest
earning assets and interest bearing liabilities. The tables distinguishes
between (i) changes attributable to rate (change in rate multiplied by prior
volume), (ii) changes attributable to volume (changes in volume multiplied by
prior rate) and (iii) net change (the sum of the previous columns). The net
changes attributable to the combined effect of volume and rate, which cannot be
segregated, have been allocated proportionately to the changes due to volume and
to rate.
COMPARATIVE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) INCREASE (DECREASE)
ATTRIBUTABLE TO ATTRIBUTABLE TO
-------------------------- ---------------------------
VOLUME RATE NET VOLUME RATE NET
------- ------ ------- ------- ------- -------
(In Thousands)
INTEREST INCOME ON INTEREST EARNING
ASSETS:
Short-term investments(1)............... $ 17 $ (118) $ (101) $ 487 $ 151 $ 638
Investment securities held to maturity
and available for sale(2)............ 40 225 265 573 158 731
MBS held to maturity and available for
sale................................. 4,253 474 4,727 (996) 1,106 110
Loans held for investment and held for
sale................................. 6,816 8,636 15,452 23,448 12,450 35,898
Investment in stock FHLB, at cost....... 119 172 291 (37) (28) (65)
------- ------ ------- ------- ------- -------
Total interest income on interest
earning assets..................... 11,245 9,389 20,634 23,475 13,837 37,312
------- ------ ------- ------- ------- -------
INTEREST EXPENSE ON INTEREST BEARING
LIABILITIES:
Customer deposit accounts............... 5,931 2,225 8,156 11,099 17,288 28,387
Short-term borrowings................... (3,024) (905) (3,929) 1,891 2,547 4,438
FHLB advances........................... 3,359 566 3,925 769 2,194 2,963
Notes payable........................... (283) 91 (192) 1,754 281 2,035
------- ------ ------- ------- ------- -------
Total interest expense on interest
bearing liabilities................ 5,983 1,977 7,960 15,513 22,310 37,823
------- ------ ------- ------- ------- -------
Net interest income............. $ 5,262 $7,412 $12,674 $ 7,962 $(8,473) $ (511)
======= ====== ======= ======= ======= =======
- ---------------
(1) Short-term investments includes federal funds sold, certificates of deposit
and repurchase agreements.
(2) For purposes of computing the rate and volume related variances in net
interest income, the municipal bonds have been treated on a non-tax
equivalent yield basis.
RESULTS OF OPERATIONS
The Company's net earnings have historically been affected by fluctuations
in interest rates, gains and losses recognized on sales of loans,
mortgage-backed securities and investment securities, provisions for loan losses
and real estate operations.
Net Interest Income. Net interest income for the years ended December 31,
1996, 1995 and 1994 totaled $51.2 million, $38.5 million and $39.0 million,
respectively. The Company's net interest margin in those same periods was 2.54%,
2.11% and 2.60%, respectively. The following chart sets forth the yield on
56
59
interest earning assets and the cost of interest bearing liabilities, with the
net interest spread representing the area between the two, for the twelve
quarters ended December 31, 1996:
Yield on Cost of
Period Interest-Earning Assets Interest-Bearing Liabilities
------ ----------------------- ----------------------------
Q1-94 .............. 6.44% 3.67%
Q2-94 .............. 6.24% 3.67%
Q3-94 .............. 6.43% 3.82%
Q4-94 .............. 6.46% 4.21%
Q1-95 .............. 6.77% 4.76%
Q2-95 .............. 7.03% 5.16%
Q3-95 .............. 7.36% 5.35%
Q4-95 .............. 7.54% 5.38%
Q1-96 .............. 7.57% 5.32%
Q2-96 .............. 7.74% 5.22%
Q3-96 .............. 7.68% 5.22%
Q4-96 .............. 7.54% 5.27%
During 1994 and 1995, the degree to which the Company's cost of funds rose
exceeded the degree to which yields on its adjustable rate assets increased,
resulting in a reduction in the net interest spread. Typically, changes in the
Company's interest rate spread lag general market interest rate changes because:
(i) many of the Company's ARM loans do not reprice on a monthly basis; (ii) most
are tied to the Eleventh District Cost of Funds Index which moves more slowly
than more market-sensitive indexes, and (iii) in rising rate environments as was
the case in 1994 and early 1995, rate repricing on ARM loans tied to
rate-sensitive indexes such as LIBOR or the 1-year Treasury Constant Maturities
may be constrained by limitations on the number of basis points the rate may
rise at the date of repricing. The rapid rise in interest rates in 1994, in
response to the Federal Reserve's six rate increases that year, caused
significant compression in the Company's net interest margin as the cost of
funds began to rise more rapidly than asset yields repriced upward. The margin
compression ceased in the third quarter of 1995 as interest rates were
relatively stable during the year.
During 1996, compared to 1995, the Company's net interest margin increased
by 43 basis points primarily due to a 44 basis point increase in the yield on
interest earning assets. As a result, the Company experienced a $7.4 million
rate-related increase in net interest income which was augmented by $5.3 million
of additional net interest income stemming from growth in the Company's balance
sheet.
In 1995, compared to 1994, the Company's net interest margin decreased by
49 basis points, consisting of a 131 basis point increase in the cost on
interest bearing liabilities, partially offset by a 79 basis point increase in
the yield of interest earning assets. As a result, net interest income in 1995
was $8.5 million lower than in 1994. Growth in the Company's balance sheet
contributed $8.0 million of additional net interest income. The increase in cost
of liabilities that was to have the greatest adverse effect on the Company's
spread in 1995 began in the second half of 1994.
Interest and Dividend Income. Interest and dividend income for the years
ended December 31, 1996, 1995 and 1994 totaled $157.1 million, $136.4 million
and $99.1 million, respectively. Average interest earning assets were 7.9%
greater in 1996 than in 1995, resulting in a $11.2 million volume-related
increase in interest and dividend income. A 44 basis point increase in the yield
on average interest earning assets in 1996, compared to 1995, resulted in a $9.4
million rate-related increase in interest and dividend income. In 1995, the
Company experienced a $13.8 million rate-related increase in interest and
dividend income when compared to 1994, due to a 79 basis point increase in the
net interest margin. Greater average interest earning assets in 1995 than in
1994 generated a $23.5 million increase in interest and dividend income.
For the years ended December 31, 1996, 1995 and 1994, the Company's ratio
of average loans, including loans held for sale, to average interest earning
assets was 74%, 75% and 67%, respectively. In 1996, the average yield on the
loan portfolio increased by 57 basis points, compared to 1995, due to the
combined effects of the Company's adjustable rate loans reaching fully-indexed
status and a greater percentage of the loan portfolio being represented by
higher-yielding small business and commercial real estate loans. As a result,
interest on loans increased by $8.6 million due to an increased in rate and by
$6.8 million due to higher average portfolio
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60
balances in 1996. In 1995, the average yield on the loan portfolio increased by
102 basis points, compared to 1994, as the Company's volume of new loans at
introductory interest rates declined, the interest rates on adjustable rate
loans that had been constrained by interest rate caps in 1994 repriced upward,
and the Company entered the small business lending business. The rate-related
increase in interest income on loans in 1995, compared to 1994, was $12.5
million. In addition, the Company's average loan portfolio increased by 30.6% in
1995, compared to 1994, resulting in a $23.4 million volume-related increase in
interest on loans.
The Company's second largest type of interest earning assets is
mortgage-backed securities. The average yield on mortgage-backed securities
increased by 14 basis points in 1996, compared to 1995, resulting in a $500,000
rate-related increase to interest income. During 1996, the Company's average
holdings of mortgage-backed securities increased by 17.8%, compared to 1995,
resulting in a $4.3 million increase in interest income. In 1995, the average
yield on mortgage-backed securities increased by 32 basis points, compared to
1994, resulting in a $1.1 million increase in interest income. The Company's
average holdings of mortgage-backed securities decreased by 4.0% in 1995,
compared to 1994, which decreased interest income by $1.0 million.
Interest income from short-term investments and investment securities
totaled $8.2 million, $7.8 million and $6.5 million in the years ended December
31, 1996, 1995 and 1994, respectively. During 1996, the Company increased its
holdings of investment securities that qualify for regulatory liquidity. In
1995, the increase in interest income from investment securities was primarily
due to the Company's acquisition of municipal bonds in the fourth quarter of
1994 and first quarter of 1995.
Interest Expense. Interest expense for the years ended December 31, 1996,
1995 and 1994 totaled $105.9 million, $98.0 million and $60.1 million,
respectively. The weighted average cost of funds in each of the same periods was
5.26%, 5.18% and 3.87%, respectively. Growth in assets in 1996 and 1995 resulted
in $6.0 million and $15.5 million of additional interest expense in 1996 and
1995, compared to the prior years, respectively. The eight basis point increase
in the Company's cost of interest bearing liabilities in 1996, compared to 1995,
resulted in $1.9 million of additional interest expense. In 1995, the 131 basis
point increase in the cost of interest bearing liabilities, compared to 1994,
generated $22.3 million of additional interest expense.
The Company's emphasis on customer deposit accounts as its principal source
of funds is reflected in its balance sheet. Customer deposit accounts comprised,
on average, 77.3%, 76.1% and 75.4% of average interest bearing liabilities
during 1996, 1995 and 1994, respectively. Interest expense on customer deposits
for 1996 increased by $8.2 million from the preceding year. The increase
consisted of a $2.2 million increase due to the 15 basis point increase in the
cost of deposits and a $6.0 million increase arising from greater average
balances. In 1995, the effects of rising interest rates in 1994 and early 1995
were manifested in a 130 basis point increase in the cost of deposits, compared
to the preceding year, and a $17.3 million rate-related increase in interest
expense from customer deposits. The Company's deposit portfolio is particularly
rate sensitive due to the combination of shortness in average customer maturity
and competitive factors in the Company's marketplace which are manifested in the
form of promotional interest rates. Growth in average customer deposit balances
added $11.1 million of interest expense in 1995, compared to 1994.
Interest expense on borrowings totaled $26.6 million, $26.8 million and
$17.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The weighted average interest rates on borrowings in the same
respective periods were 5.83%, 5.94% and 4.55%. In 1996, interest expense on
borrowings decreased by $196,000, compared to 1995, consisting of a $248,000
rate-related decrease and a $52,000 volume-related increase. In 1995, interest
expense on borrowings increased by $9.4 million, compared to 1994, consisting of
a $5.0 million rate-related increase and a $4.4 million volume-related increase.
Provisions for Loan Losses. The Company recorded provisions for losses of
$8.1 million, $2.9 million and $2.3 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The amounts of the provisions for loan losses are determined on the basis
of the Company's evaluation of a variety of factors, including the specific
loans in the portfolio, estimated collateral values, historical loss experience,
current economic trends, current delinquency trends, the level of criticized
assets and the existing
58
61
level of allowance for losses. Accordingly, the amounts of loan loss provisions
can vary substantially from period to period.
During 1996, the Company recorded a provision for loan losses of $8.1
million, representing a $5.2 million increase over 1995. Included in the
provision for loan losses and the year-over-year increase is $1.8 million of
provisions allocated to small business loans purchased from GFC and for which
credit enhancement provisions are expected by management to fully reimburse the
Company for losses. Adverse asset quality trends observed in 1995 continued into
1996, resulting in increased levels of provisions for loan losses. Problem asset
activity increased sharply in 1996 as loan balances totaling $26.8 million were
foreclosed, compared to $10.6 million in 1995, and $3.2 million of single family
nonaccruing loans were resolved outside the foreclosure process by negotiated
payoffs at amounts less than the borrowers' loan balances. Even with greater
foreclosure activity in 1996, total delinquent loans increased by 35% at the end
of 1996, compared to the end of 1995. The majority of the increase in delinquent
loan balances was in single family loans. Until the Company experiences
improvements in asset quality indicators for sufficient time to suggest that
favorable trends are being established, management may continue to provide
provisions for loan losses at higher levels than in years prior to 1996.
During 1995, the Company recorded a $2.9 million provision for loan losses,
representing a $600,000 increase from the previous year. Even though net
charge-offs declined during the year by $1.9 million, criticized assets
decreased by $6.4 million and delinquency trends with respect to multifamily
residential and commercial real estate loans were favorable, the Company
identified several adverse trends, including a 72% increase in nonaccrual,
single family loans and declines in collateral fair value which required that
higher specific valuation allowances be recorded against nonaccrual and impaired
loans. In addition, the Company entered the small business lending business in a
material way during the year. Despite credit enhancement provisions in
connection with the loans acquired from GFC, the Company believes that general
valuation allowances should be recorded against these SBA loans, which are
perceived to be more risky than mortgage loans.
Non-Interest Income. Non-interest income totaled $12.6 million, $7.3
million and $7.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Non-interest income includes fee-based revenue from core operating
activities, such as loan servicing income, fees earned on customer deposit
accounts, commission income from sales of investment products and gains on sales
of loans. Non-interest income also includes non-core items such as gains and
losses from sales of investment securities and mortgage-backed securities,
income or loss from real estate operations, gains from sales of other assets and
certain nonrecurring items.
The Company engages in certain fee-based activities. The following table
indicates the fee income derived from the Company's principal fee-based
activities in the periods presented:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(Dollars in thousands)
Loan servicing(1)................................................ $3,940 $3,977 $3,421
Customer deposits................................................ 1,947 1,921 2,044
Commissions from sales of alternative investments(2)............. 1,721 1,226 1,705
------ ------ ------
$7,608 $7,124 $7,170
====== ====== ======
- ---------------
(1) Loan servicing fee income includes fees earned from collection of late
charges, fees earned from servicing loans for others and prepayment, trustee
and reconveyance fees.
(2) Commissions from sales of tax deferred annuities, mutual funds and life
insurance.
Loan servicing fee income remained relatively unchanged in 1996, compared
to 1995, as higher amounts of late charges, prepayment fees and foreclosure fees
offset decreasing revenues from servicing loans for others. The Company's
portfolio of loans serviced for others declined by 12% in 1996 due to servicing
portfolio repayments and limited sales of loans with servicing retained. In
1995, loan servicing fee income increased by
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62
$556,000, compared to 1994, primarily due to $1.3 million of servicing fees
earned on the small business loan servicing portfolio that the Company acquired
from GFC in June 1995. A $326,000 reduction in prepayment fees and a $445,000
reduction in servicing fees associated with the Company's declining mortgage
servicing portfolio partially offset the additional servicing fees in 1995.
Deposit fee income is largely derived from demand deposit accounts and will
vary from period to period as the mix of deposits changes. Total deposit fee
income has not varied materially among the three years because the Company was
able to neutralize the adverse effects of declining demand deposit balances by
increasing its fees to the levels of its competitors. Even if the Company's
objective of increasing its demand deposit accounts is achieved, customer
deposit fee income may not increase accordingly because aggressive pricing for
such products in the Company's marketplace has resulted in the waiver of some of
the fees that historically have been earned on demand accounts.
The Company offers investment alternatives to traditional deposit accounts
to its customers through one of its subsidiaries, earning commission income from
the sales of tax deferred annuities, mutual funds and life insurance products.
During periods of low market interest rates, the Company has experienced deposit
disintermediation to these products as savers sought higher investment returns.
In the four years ended in 1994, the Company experienced steadily increasing
volumes of alternative investment product sales and commissions. When interest
rates began to rise in 1995, the relative attractiveness of these products,
particularly the fixed rate annuity, was diminished, resulting in a decrease in
commission income that year. During 1996 income from sales of these products
increased by $495,000 to $1.7 million due to increases in sales volume of tax
deferred annuities and mutual funds.
The Company invests in mortgage-backed securities and investment securities
for two purposes: (i) maintaining adequate liquidity and (ii) achieving asset
growth targets when loan acquisition volume is insufficient. To the extent that
the Company can earn a satisfactory spread on investment securities and
mortgage-backed securities, it will invest in such securities. Sales of these
securities are generally motivated by the Company's ability to replace
securities with whole loans, to take gains on securities with market valuegains
and, as was the case during 1996, to restructure the securities portfolio to
improve the Company's interest rate risk profile. Gains on sales of
mortgage-backed and investment securities available for sale totaled $1.1
million, $82,000, and $1.3 million in the years ended December 31, 1996, 1995
and 1994, respectively.
Real estate operations have historically produced net losses for the
Company. In 1994 and 1995, the Company reported losses from real estate
operations. The sale of an office building in 1996 resulted in gains from real
estate operations in that year. The following table reflects the composition of
real estate operations for the periods noted:
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1996 1995 1994
------ ----- -------
(Dollars in Thousands)
Provisions for losses on real estate held for development and
sale........................................................... $ -- $(201) $ (414)
Holding period write downs on real estate owned.................. (402) (119) (443)
Real estate owned expenses....................................... (666) (595) (643)
Gains on sales of real estate held for development and sale and
REO, net....................................................... 4,417 203 76
Other, net....................................................... (61) 30 7
------ ----- -------
$3,288 $(682) $(1,417)
====== ===== =======
Operating Expenses. Operating expenses in the years ended December 31,
1996, 1995 and 1994 totaled $44.1 million, $33.1 million and $32.1 million,
respectively. As a percentage of average assets, operating expenses were 2.05%,
1.65% and 1.95% in the same years, respectively. Operating expenses in 1996
included a nonrecurring $9.1 million charge in connection with the
recapitalization of the Savings Association Insurance Fund, absent which
operating expenses would have been 1.63% of average assets.
The Company's acquisition activity in 1994 and 1995 resulted in volatility
in operating expenses. In 1996, the Company incurred a full year's costs in its
small business lending division, whereas in 1995 the Company
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63
incurred increased expenses for only 6 months following the June 1995
acquisition of the operations of Government Funding Corporation. In addition,
the cost savings from the closure of the Company's wholesale-based, single
family lending operation were fully realized in 1996, since the discontinuation
was effective at the end of 1995.
In 1995, the Company incurred a full year's recurring operating costs
associated with its acquisition of United California Savings Bank, compared to
only one-half of a year's costs in 1994. However, non-recurring costs associated
with the wind-down of the discontinued corporate operations of United California
Savings Bank were charged to 1994. In 1995, the Company recorded one-half of one
year's costs in connection with the Government Funding acquisition.
The Company's acquisition activity and growth in recent years have had a
significant effect on operating expenses. The following tables reconcile the
changes in operating expenses:
INCREASE (DECREASE) IN 1996 VS. 1995
--------------------------------------------------------------------------------------
TOTAL BRANCH SWAP
CHANGE IN GFC SAIF WITH LENDING
YEAR ACQUISITION(1) ASSESSMENT COAST(2) REORGANIZATION(3) OTHER, NET
--------- -------------- ---------- ----------- ----------------- ----------
(DOLLARS IN THOUSANDS)
Compensation.............. $ (806) $ 354 $ -- $ (38) $(1,706) $ 584
Net occupancy............. 899 260 -- 355 (137) 421
Deposit insurance
premiums................ 9,286 -- 9,106 60 -- 120
Advertising and
marketing............... 122 -- -- -- -- 122
Intangible amortization... 108 -- -- (21) -- 129
Other..................... 1,307 455 -- 238 (441) 1,055
------- ------ ------ ---- ------- ------
$10,916 $1,069 $9,106 $ 594 $(2,284) $2,431
======= ====== ====== ==== ======= ======
INCREASE (DECREASE) IN 1995 VS. 1994
---------------------------------------------------------------------------------
UCSB ACQUISITION BRANCHES
TOTAL ------------------------- SOLD TO
CHANGE IN GFC NON-RECURRING RECURRING CALIFORNIA
YEAR ACQUISITION(1) COSTS(4) COSTS(5) FEDERAL(6) OTHER, NET
--------- -------------- ------------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
Compensation..................... $ 2,155 $ 730 $(314) $ 1,248 $ (547) $1,038
Net occupancy.................... (6) 152 (203) 431 (262) (124)
Deposit insurance premiums....... 409 -- -- 515 (200) 94
Advertising and marketing........ (153) -- (103) 103 -- (153)
Intangible amortization.......... (968) -- -- (575) (57) (336)
Other............................ (355) 141 (110) 323 (365) (344)
------ ------ ----- ------ ------- ------
$ 1,082 $1,023 $(730) $ 2,045 $(1,431) $ 175
====== ====== ===== ====== ======= ======
- ---------------
(1) The GFC acquisition was consummated on June 23, 1995.
(2) On October 1995, the Company completed a deposit and branch swap with Coast
Federal Bank.
(3) The Company disbanded its wholesale-based single family lending division at
the end of 1995, generating cost savings in 1996.
(4) Nonrecurring costs associated with the July 1994 acquisition of UCSB
included expenses incurred in 1994 to wind down corporate and lending
operations.
(5) In 1994, recurring costs represented incremental additional expenses
associated with eight branch offices from the date of closing the UCSB
acquisition. In 1995, recurring costs represent additional costs during the
year due to one full year of ownership, compared to the shorter period in
1994, and the net effect of the Coast Federal Bank transaction mentioned
above.
(6) Cost savings arising from the sale of four branch offices to California
Federal Bank on September 23, 1994. In 1995, the Company experienced one
full year of cost savings.
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64
Income Taxes. Income tax expense or benefit varies from year to year based
on the Company's level of earnings before taxes. For the year ended December 31,
1996, the Company applied an effective tax rate of (0.23%) to earnings before
taxes of $11.3 million. For the year ended December 31, 1995, the Company
applied an effective tax rate of 25.7% to earnings before taxes of $9.7 million.
The tax benefits associated with the Company's municipal bonds reduced the
effective tax rate by fourteen percentage points.
In 1996, 1995 and 1994, the Company's statutory federal income tax was
35.0%. In 1996 and 1995, the Company's statutory state franchise tax rates was
11.3% in both periods and was 11.5% in 1994. The following table reconciles the
Company's statutory tax rates for the periods shown to its effective tax rates:
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
----- ----- -----
Statutory tax rate.................................. 42.4% 42.4% 42.5%
Adjustments to statutory tax rate:
Decrease in deferred tax valuation allowance...... (16.8%) -- --
Reduction of liabilities from prior periods....... (12.9%) -- --
Tax exempt investment interest.................... (9.6%) (14.2%) (12.0%)
Other, net........................................ (3.3%) (2.5%) (5.9%)
----- ----- -----
Adjustments, net............................... (42.6%) (16.7%) (17.9%)
----- ----- -----
Effective tax rate................................ (0.2%) 25.7% 24.6%
===== ===== =====
As part of its ongoing analysis of its deferred taxes and after the
finalization of its 1995 tax returns, the Company determined that a $1.9 million
valuation allowance on its deferred tax assets and $1.5 million of taxes
provided on certain items from prior periods were no longer needed. The removal
of the valuation allowance on the deferred tax asset and the reduction of
liabilities from prior periods resulted in a reduction of income tax expense in
1996 and in an inordinately low effective tax rate.
Extraordinary Item. During the first quarter of 1996, the Company repaid
an $8.2 million fixed rate borrowing bearing a rate of 8.9% before its scheduled
maturity. As a result, the Company incurred a prepayment penalty of $364,000,
net of taxes of $267,000.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchase
power of money over time due to inflation. The impact of inflation can be found
in the increased cost of the Company's operations. The assets and liabilities of
the Company are primarily monetary and interest rates have a greater impact on
the Company's performance than do the effects of inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. The Statement distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. The
Statement supercedes SFAS No. 122, though the general concepts of SFAS No. 122
are retained in the new pronouncement. The Company does not believe that its
adoption will have a material adverse impact upon its financial condition or
results of operations.
62
65
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page 66 and the Financial
Statements which begin on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing in the definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with CENFED's Annual Meeting of Stockholders to be held on May 28,
1997 (the "Proxy Statement") under the captions "Election of Directors" and
"Executive Officers Who Are Not Directors" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing in the Proxy Statement under the captions
"Principal Holders of CENFED Common Stock" and "Securities Ownership of
Management" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the caption
"Executive Compensation -- Certain Indebtedness and Transactions of Management"
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS*
- --------
3.1 Certificate of Incorporation of CENFED (incorporated by reference to Exhibit 3.1
and 3.3 to CENFED's Registration Statement on Form S-1 (Registration No.
33-39487), as amended).
3.2 Bylaws of CENFED (incorporated by reference to Exhibit 3.2 to CENFED's
Registration Statement on Form S1 (Registration No. 33-39487), as amended).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 CENFED Financial Corporation Debenture Purchase Agreement dated December 19, 1994
(incorporated by reference to Exhibit 4.2 to CENFED's Annual Report on Form 10-K
for December 31, 1994).
10.1 Century Federal Executive Performance Incentive Plan as of January 1, 1989
(incorporated by reference to Exhibit 10.1 to CENFED's Registration Statement on
Form S-1 (Registration No. 33-39487), as amended).
10.2 Century Federal Executive Performance Incentive Plan as of January 1, 1991
(incorporated by reference to Exhibit 10.2 to CENFED's Registration Statement on
Form S-1 (Registration No. 33-39487), as amended).
10.3 Century Federal Deferred Compensation Plan as of January 1, 1986 (incorporated by
reference to Exhibit 10.3 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
10.4 Century Federal Deferred Compensation and Benefit Restoration Plan (incorporated
by reference to Exhibit 10.4 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
63
66
EXHIBITS*
- --------
10.5 CENFED Financial Corporation 1992 Long -Term Incentive Plan (incorporated by
reference to Exhibit 10.5 to CENFED's Annual Report on Form 10-K for December 31,
1991).
10.6 Form of Stock Option Agreement (See Exhibit Number 10.5) (incorporated by
reference to Exhibit 10.5 to CENFED's Annual Report on Form 10-K for December 31,
1991).
10.7 Century Federal Savings and Loan Association Management Development and
Recognition Plan (incorporated by reference to Exhibit 10.7 to CENFED's Annual
Report on Form 10-K for December 31, 1991).
10.8 CENFED Financial Corporation Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.7 to CENFED's Annual Report on Form 10-K for December 31,
1991).
10.9 Century Federal Profit Sharing and 401(k) Plan (incorporated by reference to
Exhibit 4.2 to CENFED's Registration Statement on Form S-8 (Registration No.
33-43010), as amended).
10.10 Employment Agreement between the Association and D. Tad Lowrey (incorporated by
reference to Exhibit 10.10 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
10.11 Form of Employment Agreement between the Association and certain officers (for
each of the following: Messrs. Prince, Quigley and Renney) (incorporated by
reference to Exhibit 10.11 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
10.12 Form of Salary Continuation Agreement between the Association and certain officers
(for each of the following: Messrs. Dieter, Neiffer, Schwartz, and Taylor)
(incorporated by reference to Exhibit 10.12 to CENFED's Registration Statement on
Form S-1 (Registration No. 33-39487), as amended).
10.13 Amended and Restated Directors' Retainer Continuance Plan (incorporated by
reference to Exhibit 10.13 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
10.14 Stock Purchase Agreement among CENFED, the Association, the Trustee of the CENFED
Employee Stock Ownership Trust and the Administrative Committee of the CENFED
Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.14 to
CENFED's Annual Report on Form 10-K for December 31, 1991).
10.15 Agreement and Plan of Merger, dated March 31, 1994, among CENFED Financial
Corporation, CenFed Bank, a Federal Savings Bank, United California Savings Bank
and N. Lawrence Ulvestad (incorporated by reference to Exhibit B to CENFED's
Current Report on Form 8-K for July 15, 1994).
10.16 CENFED Financial Corporation 1994 Directors' Stock Option Plan (incorporated by
reference to CENFED's Proxy Statement dated April 21, 1994).
10.17 CENFED Financial Corporation 1994 Long-Term Incentive Plan (incorporated by
reference to CENFED's Proxy Statement dated April 21, 1994).
11 Statement Regarding Computation of Per Share Earnings.
12 Statement Regarding Computation of Ratios.
21 List of subsidiaries of CENFED.
23 Consents of KMPG Peat Marwick LLP and Deloitte & Touche LLP.
- ---------------
* Exhibits followed by a parenthetical reference are incorporated by reference
herein from the document described therein.
FINANCIAL STATEMENTS
See the Index to Financial Statements on page 66 and the Financial
Statements which begin on page F-2.
REPORTS ON FORM 8-K
CENFED filed no reports on Form 8-K with the Securities and Exchange
Commission during the three months ended December 31, 1996.
64
67
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, in the City of
Pasadena, State of California, on the 26th day of March, 1997.
CENFED FINANCIAL CORPORATION
By: /s/ D. TAD LOWREY
------------------------------------
D. Tad Lowrey
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ---------------
/s/ D. TAD LOWREY President, Chief Executive Officer March 26, 1997
- ------------------------------------- and Director (Principal Executive
D. Tad Lowrey Officer)
/s/ WILLIAM NICHOL Executive Vice President, Chief March 26, 1997
- ------------------------------------- Financial Officer (Principal
William Nichol Financial Officer)
/s/ STEVEN P. NEIFFER Comptroller (Principal Accounting March 26, 1997
- ------------------------------------- Officer)
Steven P. Neiffer
/s/ JOHN H. MICHEL Chairman of the Board March 26, 1997
- -------------------------------------
John H. Michel
/s/ RALPH DIMEGLIO Director March 26, 1997
- -------------------------------------
Ralph DiMeglio
/s/ GARETH A. DORN Director March 26, 1997
- -------------------------------------
Gareth A. Dorn
/s/ ROBERT K. LEISHMAN Director March 26, 1997
- -------------------------------------
Robert K. Leishman
/s/ RICHARD W. PATTON Director March 26, 1997
- -------------------------------------
Richard W. Patton
/s/ RICHARD G. REDMAN Director March 26, 1997
- -------------------------------------
Richard G. Redman
65
68
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports.......................................................... F-1
Consolidated Statements of Financial Condition as of December 31, 1996 and 1995........ F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994................................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994........................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................. F-6
Notes to the Consolidated Financial Statements......................................... F-8
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes thereto.
66
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CENFED Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of CENFED Financial Corporation and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and preform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CENFED
Financial Corporation and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 27, 1997
F-1
70
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
CENFED Financial Corporation
Pasadena, California
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of CENFED Financial Corporation and
subsidiaries (the "Company") for the year ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of CENFED
Financial Corporation and subsidiaries for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 8, 1995
Los Angeles, California
F-2
71
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Cash................................................................ $ 17,441 $ 21,928
Federal funds sold.................................................. 7,500 7,288
---------- ----------
Cash and cash equivalents......................................... 24,941 29,216
---------- ----------
Investment securities available for sale, at fair value............. 161,719 133,778
Mortgage-backed securities ("MBS") available for sale, at fair
value............................................................. 442,015 341,288
Loans held for investment, net...................................... 1,391,307 1,492,094
Loans held for sale, at lower of cost or fair value................. 109,651 100,183
Accrued interest receivable......................................... 14,685 14,894
Real estate acquired in settlement of loans ("REO")................. 10,466 6,236
Real estate held for development and sale, net...................... 202 5,410
Premises and equipment, net......................................... 9,663 13,300
Intangible assets, net of accumulated amortization.................. 205 248
Deferred income taxes............................................... 6,201 3,818
Other assets........................................................ 13,592 14,774
---------- ----------
$2,184,647 $2,155,239
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposit accounts........................................... $1,558,470 $1,551,329
Securities sold under agreements to repurchase...................... 130,639 150,052
Notes payable....................................................... 17,750 22,800
FHLB advances....................................................... 349,479 300,500
Other liabilities................................................... 14,491 26,006
---------- ----------
Total liabilities......................................... 2,070,829 2,050,687
---------- ----------
Commitments and contingent liabilities
Common stock. $.01 par value
Authorized shares: 14,000,000 at December 31, 1996 and December 31,
1995
Outstanding shares: 5,154,533 at December 31, 1996 and 4,557,626 at
December 31, 1995................................................. 52 46
Additional paid in capital.......................................... 42,729 30,126
Retained earnings -- substantially restricted....................... 72,468 73,721
Unrealized gain (loss) on securities available for sale, net of
tax............................................................... (237) 2,179
Deferred compensation -- retirement plans........................... (1,194) (1,520)
---------- ----------
Total stockholders' equity................................ 113,818 104,552
---------- ----------
$2,184,647 $2,155,239
========== ==========
See notes to consolidated financial statements.
F-3
72
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Interest and Dividend Income:
Loans................................................... $120,616 $105,164 $69,266
Investment securities and short-term investments........ 8,213 7,758 6,454
Mortgage-backed securities.............................. 28,254 23,527 23,417
--------- --------- ---------
Total interest and dividend income.............. 157,083 136,449 99,137
--------- --------- ---------
Interest Expense:
Customer deposit accounts............................... 79,286 71,130 42,743
Securities sold under agreements to repurchase.......... 6,442 10,371 5,933
FHLB advances........................................... 17,897 13,972 11,009
Notes payable........................................... 2,299 2,491 456
--------- --------- ---------
Total interest expense.......................... 105,924 97,964 60,141
--------- --------- ---------
Net interest income..................................... 51,159 38,485 38,996
Provisions for loan losses................................ 8,050 2,900 2,300
--------- --------- ---------
Net interest income after provisions for loan
losses........................................ 43,109 35,585 36,696
--------- --------- ---------
Non-Interest Income:
Loan servicing fees..................................... 3,940 3,977 3,421
Customer deposit account fees........................... 1,947 1,921 2,044
Gain on sale of investments and MBS..................... 1,124 82 1,307
Gain (Loss) on sale of loans............................ 40 101 (25)
Income (Loss) from real estate operations............... 3,288 (682) (1,417)
Commissions from sales of investment products........... 1,721 1,226 1,705
Other................................................... 573 629 328
--------- --------- ---------
Total non-interest income....................... 12,633 7,254 7,363
--------- --------- ---------
Operating Expenses:
Compensation............................................ 16,272 17,078 14,923
Net occupancy........................................... 6,187 5,288 5,294
Deposit insurance premiums.............................. 3,329 3,149 2,740
Savings Association Insurance Fund recapitalization
assessment........................................... 9,106 -- --
Data and check processing............................... 1,549 1,707 2,056
Advertising and marketing............................... 942 820 973
Intangible amortization................................. 62 (46) 922
Other................................................... 6,620 5,155 5,161
--------- --------- ---------
Total operating expenses........................ 44,067 33,151 32,069
--------- --------- ---------
Earnings before income taxes and extraordinary
item.......................................... 11,675 9,688 11,990
Income tax expense (benefit).............................. (27) 2,491 2,992
--------- --------- ---------
Earnings before extraordinary item.............. 11,702 7,197 8,998
Extraordinary Item:
Early extinguishment of debt (net of income taxes of
$267)................................................ (364) -- --
--------- --------- ---------
Net Earnings.................................... $ 11,338 $ 7,197 $ 8,998
--------- --------- ---------
Primary Earnings per Share:
Before extraordinary item....................... 2.24 1.42 1.82
Extraordinary item.............................. (0.07) -- --
--------- --------- ---------
After extraordinary item........................ $2.17 $1.42 $1.82
--------- --------- ---------
Average primary shares outstanding........................ 5,226,766 5,038,686 4,936,933
========= ========= =========
See notes to consolidated financial statements.
F-4
73
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNREALIZED GAIN
ADDITIONAL (LOSS) ON SECURITIES
COMMON PAID IN RETAINED AVAILABLE DEFERRED
TOTAL STOCK CAPITAL EARNINGS FOR SALE COMPENSATION
-------- ------ ---------- -------- -------------------- ------------
(IN THOUSANDS)
Balance, December 31, 1993...... $ 86,506 $ 41 $ 23,130 $ 60,264 $ 4,948 $ (1,877)
Net earnings.................. 8,998 8,998
Proceeds from exercise of
stock options.............. 33 33
Cash dividends paid........... (1,170) (1,170)
Shares issued in connection
with dividend
reinvestment............... -- 17 (17)
Issuance of stock in purchase
of United California
Savings Bank............... 6,230 4 6,226
Change in unrealized gain or
loss on securities
available for sale, net of
tax........................ (9,577) (9,577)
Deferred compensation
amortized to expense....... 201 201
-------- --- ------- ------- ------- -------
Balance, December 31, 1994...... 91,221 45 29,406 68,075 (4,629) (1,676)
Net earnings.................. 7,197 7,197
Shares issued pursuant to
stock option and incentive
plans...................... 463 1 592 (130)
Cash dividends paid........... (1,423) (1,423)
Shares issued in connection
with dividend
reinvestment............... -- 128 (128)
Change in unrealized gain or
loss on securities
available for sale, net of
tax........................ 6,808 6,808
Deferred compensation
amortized to expense....... 286 286
-------- --- ------- ------- ------- -------
Balance, December 31, 1995...... 104,552 46 30,126 73,721 2,179 (1,520)
Net earnings.................. 11,338 11,338
Shares issued pursuant to
stock option and incentive
plans...................... 1,634 1 1,633
Shares issued in connection
with stock dividend........ -- 5 10,804 (10,809)
Cash dividends paid........... (1,616) (1,616)
Shares issued in connection
with dividend
reinvestment............... -- 166 (166)
Change in unrealized gain or
loss on securities
available for sale, net of
tax........................ (2,416) (2,416)
Deferred compensation
amortized to expense....... 326 326
-------- --- ------- ------- ------- -------
Balance, December 31, 1996...... $113,818 $ 52 $ 42,729 $ 72,468 $ (237) $ (1,194)
======== === ======= ======= ======= =======
See notes to consolidated financial statements.
F-5
74
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.......................................... $ 11,338 $ 7,197 $ 8,998
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Net amortization (accretion) of fees, discounts and
premiums........................................... 1,403 (142) 42
Depreciation and amortization......................... 2,402 2,481 3,399
(Gain) loss on sale of loans.......................... (40) (101) 25
Gain on sale of investments and MBS................... (1,124) (82) (1,307)
Provisions for loan and real estate losses............ 8,452 3,219 3,157
Deferred income taxes................................. (2,383) 13,410 166
Originations and purchases of loans held for sale..... (37,619) (52,594) (40,268)
Repayments and prepayments on loans held for sale..... 16,461 19,985 13,204
Proceeds from sale of loans held for sale............. 11,570 27,888 261,162
(Increase) decrease in interest receivable............ 209 (3,225) (1,107)
Increase (decrease) in accrued interest payable....... 1,689 2,663 (235)
Change in other assets and other liabilities.......... (10,149) 6,059 (8,186)
FHLB stock dividends.................................. (919) (749) (644)
Other, net............................................ (19) -- 46
--------- --------- ---------
Net cash provided by (used in) operating activities... 1,271 26,009 238,452
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities held to maturity... -- -- (11,188)
Purchases of investment securities available for
sale............................................... (122,579) (22,906) (932)
Proceeds from sale of investment securities available
for sale........................................... 90,459 2,803 22,906
Maturities of investment securities available for
sale............................................... 5,000 -- --
Purchases of MBS held to maturity..................... -- (38,897) (34,597)
Purchases of MBS available for sale................... (365,712) (78,315) (52,225)
Proceeds from sale of MBS available for sale.......... 199,773 63,909 190,945
Principal repayments on MBS available for sale........ 63,813 42,502 71,768
Originations and purchases of loans held for
investment......................................... (124,781) (405,998) (528,960)
Proceeds from sale of loans held for investment....... 3,947 1,452 1,000
Repayments and prepayments on loans held for
investment......................................... 192,379 122,200 131,349
Lease repayments and sales of leased autos............ -- 12 649
Purchases of premises and equipment................... (977) (3,448) (2,827)
Sale of premises and equipment........................ 2,419 116 1,708
Capital expenditures on REO and real estate held for
development and sale............................... (956) (1,096) (405)
Net cash and cash equivalents paid in connection with
acquisitions....................................... -- -- (500)
Sales of REO and real estate held for development and
sale............................................... 19,502 17,085 13,698
--------- --------- ---------
Net cash used in investing activities................. (37,713) (300,581) (197,611)
--------- --------- ---------
F-6
75
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in customer deposit
accounts........................................... 8,109 183,821 (47,603)
(Sale) Purchase of customer deposit accounts.......... -- 59,603 (97,593)
Net decrease in notes payable......................... (5,050) (200) (2,633)
Proceeds from issuance of debentures.................. -- -- 17,750
Net increase (decrease) in short-term financing:
FHLB advances...................................... 48,179 (27,700) 13,200
Securities sold under agreements to repurchase..... (19,413) 2,640 53,135
Dividends paid to shareholders........................ (1,616) (1,423) (1,170)
(Repayment of) Proceeds from long-term FHLB
advances........................................... 800 62,500 (10,000)
Proceeds from issuance of common stock................ 1,158 593 33
--------- --------- ---------
Net cash (used by) provided by financing
activities....................................... 32,167 279,834 (74,881)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents........................................ (4,275) 5,262 (34,040)
Cash and cash equivalents, beginning of period........ 29,216 23,954 16,217
Cash and cash equivalents received in purchase of
UCSB............................................... -- -- 41,777
--------- --------- ---------
Cash and cash equivalents, end of period.............. 24,941 29,216 23,954
========= ========= =========
SUPPLEMENTARY INFORMATION
CASH PAID FOR:
Interest on interest-bearing liabilities.............. 104,239 95,305 59,496
Income tax payments (refunds), net.................... 6,180 (10,919) 2,868
NON-CASH ITEMS:
Real estate acquired in settlement of loans........... 27,251 11,178 14,550
MBS acquired in exchange of loans..................... -- -- 53,839
Net change in unrealized gain (loss) on securities
available for sale................................. (2,416) 6,808 (9,577)
Transfer to real estate held for development and sale
from premises and equipment........................ -- 5,164 --
Transfer of investment securities and MBS from held to
maturity to available for sale..................... -- 285,682 --
Loans to facilitate the sale of REO................... 3,350 5,233 2,687
F-7
76
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements have been prepared on an accrual
basis in conformity with generally accepted accounting principles and include
the accounts of CENFED Financial Corporation and its wholly-owned subsidiary,
CenFed Bank (the "Bank"), and its subsidiaries, Crescent Bay Diversified, Inc.,
PFS Corporation, and CENFED Investments, Inc. As used herein, the "Company"
refers to CENFED Financial Corporation and its subsidiaries. All material
intercompany transactions and accounts have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenues
and expenses for the period. Actual results could differ from those estimates.
Certain reclassifications have been made to the consolidated financial
statements from prior years to conform them to the current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and federal
funds sold with maturities less than three months.
Investment Securities
The Company accounts for debt and equity securities in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Under this
standard, the Company classifies as held to maturity those investment securities
and mortgage-backed securities (collectively referred to as "securities") that
it has the positive intent and ability to hold to maturity. The Company
classifies all other securities as available for sale. In December 1995, the
Company reclassified all securities from held to maturity to available for sale,
in accordance with the transition rules set forth in the Financial Accounting
Standards Board's ("FASB") implementation guidelines with respect to SFAS No.
115.
Securities that are to be held for indefinite periods of time and not
intended to be held to maturity are classified as available for sale. Securities
available for sale are reported at fair value and net unrealized gains and
losses (unless other than temporary) are presented, net of income tax effects,
as a separate component of stockholders' equity. To the extent a security has a
decline in fair value that is deemed other than temporary, the cost basis is
adjusted to fair value through a charge to the statement of operations. Gains
and losses from the sales of MBS and investment securities available for sale
are recognized at the time of sale and are determined by the specific
identification method.
Loans
Loans held for investment are recorded at the contractual amounts owed by
borrowers adjusted for unamortized discounts, premiums, undisbursed funds,
deferred loan fees and the allowance for loan losses. Loans held for sale are
carried at the lower of cost or fair value as determined by outstanding
commitments from investors or current investor yield requirements, calculated on
an aggregate basis. A valuation allowance is established if the fair value of
such loans is less than their cost and operations are charged or credited for
valuation adjustments.
F-8
77
Loans are evaluated for impairment in accordance with the provisions of
statement of Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting By Creditors for Impairment of a Loan," as amended by Statement of
Financial Accounting Standards No. 118 ("SFAS No. 118"), "Accounting By
Creditors for Impairment of a Loan, Income Recognition and Disclosures." SFAS
No. 114 does not apply to large groups of smaller-balance homogenous loans that
are collectively evaluated for impairment. The Company collectively reviews all
single family and consumer loans for impairment.
SFAS No. 114 requires that an impaired loan be measured based on: (i) the
present value of the expected future cash flows discounted at the loan's
effective interest rate; or (ii) the loan's observable fair value; or (iii) the
fair value of the collateral if the loans are collateral dependent. Regardless
of the measurement method, 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 the fair
value of the collateral fluctuates materially, the Company recalculates the
impairment and adjusts the specific valuation allowance.
The Company reviews all multifamily residential, commercial real estate,
construction and small business loans for impairment when they become delinquent
or otherwise come to the attention of management such as when the Company
receives a current appraisal on a property that reflects deterioration in value
or upon receipt of current borrower financial statements that reflect
deterioration in the borrower's financial condition. Once identified, such loans
are reviewed on a quarterly basis until management believes such loans no longer
are impaired or are exhibiting sufficient weakness that it is likely they might
become impaired in the future. In connection with its internal asset review
program, the Company reviews all multifamily residential and commercial real
estate loans with balances of $750,000 or greater on an annual basis and all
construction loans with approved amounts of $500,000 or greater on a quarterly
basis. In connection with such reviews, management conducts an impairment test
if such a test is deemed necessary.
Loans that are subject to impairment review that are on nonaccrual status
are generally considered impaired.
Allowance for Loan Losses
The allowance for loan losses is comprised of both specific and general
allowances. General valuation allowances are provided based on a number of
factors, including current economic trends, estimated collateral values,
management's assessment of credit risk inherent in the portfolio and historical
loss experience. The general valuation allowance for loan losses has been
established to provide for reasonably anticipated future losses resulting from
lending activities.
The Company periodically reviews the relevant factors and the formulas by
which additions are made to the allowances for losses. In the opinion of
management, the present allowance is are adequate to absorb reasonably
anticipated losses. Recovery of the carrying value of such loans is dependent to
a great extent on economic, operating, and other conditions that may be beyond
the Company's control. In addition, various regulatory agencies, as part of
their examination process, periodically review the Company's allowance for loan
losses. These agencies may require the Company to establish additional valuation
allowances, based on their judgments of the information available at the time of
the examination.
Loan Interest Income and Fees
Interest on loans is credited to income as earned and is accrued only if
deemed collectible. Loan origination fees and commitment fees are offset by
certain direct loan origination costs and are deferred and recognized over the
contractual life of the loan as a yield adjustment using the interest method.
Discounts or premiums associated with purchased loans are amortized into
interest income over the contractual lives of the loans, adjusted for
prepayments, using the interest method.
F-9
78
Loans are placed on nonaccrual status when, in the opinion of management,
the full 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 than or later than the 90
days past due standard, depending upon the individual circumstances surrounding
the loan's delinquency. When an asset is placed on nonaccrual status, previously
accrued but unpaid interest is reversed against current income. Subsequent
collections of cash may be applied as reductions to the principal balance or
recorded as income, depending upon management's assessment of the ultimate
collectibility of the asset. Nonaccrual assets may be restored to accrual status
when principal and interest become current and full payment of principal and
interest is expected.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans is stated at fair value less
the estimated costs to sell. At the time the Company acquires title to property
in settlement of a loan, the allowance for loan losses is charged in an amount
necessary to reduce the recorded investment in the asset to fair value. Further
deterioration in the fair value of real estate acquired in settlement of loans
during the disposition period is charged to earnings.
Costs related to development and improvement of properties are capitalized,
whereas costs relating to holding the properties are charged to expense.
Real Estate Held for Development and Sale
The carrying values of the Company's investments in real estate held for
development and sale includes interest and other carrying charges incurred and
capitalized while such properties were under development. A valuation allowance
is provided when a project's carrying value is in excess of its net realizable
value. All carrying costs through the date of anticipated disposition are
considered in the estimation of fair value, including interest during the
holding period computed using a market rate of interest.
The recognition of gains from the sale of real estate held for development
and sale is dependent on a number of factors relating to the nature of the
property sold, the terms of the sale and the future involvement of the Company
in the property sold. If a real estate transaction does not meet established
financial criteria, income recognition is deferred.
The costs of holding properties not in the process of development, net of
any rental or other income, are charged to operations in the current period.
Premises and Equipment
Depreciation and amortization are provided using the straight-line method
over the estimated lives of the various classes of assets. The ranges of useful
lives for the principal classes of assets are as follows:
Buildings........................................... 30 to 50 years
Furniture, fixtures and equipment................... 3 to 10 years
Automobiles......................................... 3 to 5 years
Leasehold improvements and leasehold rights......... Life of lease
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
F-10
79
the carrying amount or fair value less costs to sell. Adoption of SFAS No. 121
did not have a material impact on the Company's financial position, results of
operations or liquidity.
Business Combinations and Intangible Assets
The Company has engaged in business combinations in recent years to acquire
assets and customer deposit accounts from financial institutions in its market
area. The Company has recorded the assets and liabilities acquired using the
purchase method of accounting under which the acquired assets and liabilities
are recorded at their fair values. The difference between the purchase price and
the fair values of the assets acquired and liabilities assumed has been recorded
as an intangible asset, in the form of goodwill and/or core deposit premium. The
core deposit premium is an identifiable intangible based upon the core value of
the depositor relationships and, in accordance with Statement of Financial
Accounting Standards No. 72 ("SFAS No. 72"), "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," is amortized over the estimated
lives of the deposit relationships. The Company determines the lives and
appropriate methods of amortizing the core deposit premiums based upon the
characteristics of each acquisition. Any remaining premium is an unidentifiable
asset, goodwill, which is amortized over a 5-year period using the straight-line
method.
In June 1995, the Company purchased certain assets and the operations of
Government Funding California Business and Industrial Development Corporation
("GFC"), a Los Angeles-based originator of business loans offered under programs
sponsored and guaranteed by the Small Business Administration. The Company
purchased $69 million of non-guaranteed balances of SBA loans, $4 million of
guaranteed balances of SBA loans subject to sales commitments, the rights to
service $286 million of SBA-guaranteed loan balances that had previously been
sold by GFC, and $50 million of loan applications in process. The seller of
GFC's assets provided certain credit enhancements with respect to the portfolio
of nonguaranteed balances of SBA loans. The Company paid a premium in the
transaction that was allocated among the retained loan balances, the servicing
portfolio and the loan applications in process. The premium on loans is being
amortized using the interest method over the estimated life of the loans. The
servicing premium is being amortized in proportion to and over the period of
estimated net servicing income. The servicing premium is evaluated for
impairment based upon fair value. To the extent impairment exists, a valuation
allowance would be established for the difference between the fair value of the
asset and its carrying value.
In July 1994, the Company purchased all of the shares of common stock of
United California Savings Bank ("UCSB") in exchange for approximately 322,000
shares of the Company's common stock (354,200 shares as adjusted for the May
1996 stock dividend) and $500,000 in cash. Pursuant to the terms of the
acquisition agreement, commitments were obtained to sell a majority of UCSB real
estate loans at prescribed minimum prices. The Company sold the loans that it
designated as held for sale shortly following the closing of the acquisition and
used the proceeds to repay borrowings. The fair values of the net assets
acquired in the UCSB acquisition exceeded the fair value of the consideration
paid, resulting in a remaining intangible credit referred to as "negative"
goodwill. When calculating the fair value of the assets acquired and liabilities
assumed, the Company included deferred tax assets which it will be able to
utilize in future tax years. In accordance with generally accepting accounting
principles, the Company reduced negative goodwill by reducing the book value of
the premises and equipment acquired in the combination to zero. The table below
reflects the application of negative goodwill to premises and equipment and sets
forth $1.7 million of remaining negative goodwill that will be accreted to
income over five years.
Mortgage Servicing Rights
Mortgage servicing rights represent the cost of acquiring the right to
service mortgage loans. At December 31, 1996, the Company had $6.2 million of
capitalized mortgage servicing rights purchased in connection with the
acquisition of assets from GFC. The mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net loan servicing income.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights," ("SFAS No. 122") which
amends Statement of Financial Accounting
F-11
80
Standards No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No.
122 eliminated certain accounting distinctions between rights to service
mortgage loans for others that are acquired through loan origination activities
and servicing rights acquired through purchase transactions under
previously-issued accounting standards. Under SFAS No. 122, entities engaging in
mortgage banking activities must allocate the costs of originating mortgage
loans between the mortgage servicing rights and the mortgage loans based upon
their relative fair values. SFAS No. 122 requires disclosure of the fair value
of mortgage servicing rights and the significant assumptions used to calculate
fair value. SFAS No. 122 is effective for fiscal years beginning after December
15, 1995 and is to be applied prospectively. The Company adopted SFAS No. 122 on
January 1, 1996 at which time of adoption there was not a material impact upon
its financial condition or results of operations.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities with an agreement to repurchase
the same security, also referred to as "reverse repurchase agreements." Such
sales have consisted of U.S. Government, agency, and mortgage-backed securities
and have only been arranged through primary dealers in U.S. Government
securities. The securities underlying the agreements are book entry securities.
During the period of such agreements, the securities are delivered by
appropriate entry into the counter parties' accounts at the Federal Reserve Bank
of New York.
Reverse repurchase agreements are accounted for as financings, and the
obligations of the Company to repurchase the securities are reflected as
liabilities. The securities underlying the agreements remain in the asset
accounts of the Company.
Earnings Per Share
Earnings per share in 1996, 1995 and 1994 was calculated by dividing net
earnings by the weighted average number of common stock and common stock
equivalents outstanding. The Company uses the treasury stock method for
converting common stock equivalents to common stock. Earnings per share have
been adjusted to reflect a ten percent stock dividend that took effect in May
1996.
For calculating primary earnings per share, the weighted average number of
common and common equivalent shares includes the average number of common shares
outstanding and the average number of shares issuable under employee
compensation plans that have a dilutive effect. For calculating fully diluted
earnings per share, the maximum dilutive effect is computed using the period-end
market price of the Company's common stock, if it is higher than average market
price used in calculating primary earnings per share. If the difference between
primary and fully diluted earnings per share is immaterial, as it was in the
years presented, it is not reported.
Income Taxes
The Company and its subsidiaries file consolidated federal income and state
franchise tax returns. Income tax expense or benefit is allocated to each member
of the consolidated group based on earnings or losses before income taxes,
adjusted for any permanent differences.
The Company applies the principles set forth in Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities represent the tax
effects, calculated at currently effective tax rates, of future deductible or
taxable amounts attributable to events that have been recognized on a cumulative
basis in the financial statements. Under this standard, the effect on deferred
taxes of a change in tax rates is recognized in income in the period for which
the change becomes effective.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to
F-12
81
Employees," and related interpretations. As such compensation expense was
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based
compensation awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock options grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB No. 25 and to provide the pro forma
disclosure provisions of SFAS No. 123.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS No. 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. The Statement distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. The
Statement supersedes SFAS No. 122, though the general concepts of SFAS No. 122
are retained in the new pronouncement. The Company does not believe that its
adoption will have a material adverse impact upon its financial condition or
results of operations.
(2) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized as follows at:
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
-------- ------------- -------------- --------
(Dollars in thousands)
Obligations of municipalities............... $ 77,540 $ 80 $1,857 $ 75,763
U.S. Government obligations................. 67,978 47 40 67,985
Stock of the Federal Home Loan Bank......... 17,919 -- -- 17,919
Other equity securities..................... 52 -- -- 52
-------- --- ------ --------
$163,489 $ 127 $1,897 $161,719
======== === ====== ========
Weighted average yield...................... 6.61%
========
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
-------- ------------- -------------- --------
(Dollars in thousands)
Obligations of municipalities............... $ 95,115 $ 143 $2,018 $ 93,240
U.S. Government obligations................. 24,946 14 -- 24,960
Stock of the Federal Home Loan Bank......... 15,578 -- -- 15,578
-------- --- ------ --------
$135,639 $ 157 $2,018 $133,7788
======== === ====== ========
Weighted average yield...................... 6.81%
========
At both dates presented, the weighted average yield for investment
securities available for sale is presented on a tax equivalent basis.
F-13
82
Investment securities available for sale were pledged as collateral as
follows at:
DECEMBER 31,
-------------------
1996 1995
------- -------
(Dollars in
thousands)
Federal Home Loan Bank Advances........................ $17,919 $15,578
Treasury, Tax and Loan Accounts........................ -- $ 1,000
Gross realized gains and losses on sales of investments securities
available for sale were as follows:
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
-------- --------
Years Ended:
December 31, 1996.............................................. $ 94,000 $486,000
December 31, 1995.............................................. $ 2,000 --
December 31, 1994.............................................. $824,000 --
The contractual maturities of investment securities available for sale at
December 31, 1996 were as follows:
AMORTIZED FAIR
COST VALUE
-------- --------
(In thousands)
Equity securities without maturities......................... $ 17,971 $ 17,971
Due in one year or less...................................... 10,000 10,005
Due after one year through five years........................ 57,978 57,980
Due after five years through ten years....................... 1,224 1,261
Due after ten years.......................................... 76,316 74,502
-------- --------
$163,489 $161,719
======== ========
(3) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows at:
DECEMBER 31, 1996
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
--------- ------------- -------------- --------
(Dollars in thousands)
Pass-through and REMIC securities:
Guaranteed by FNMA...................... $ 111,838 $ 256 $ 592 $111,502
Guaranteed by GNMA...................... 29,022 302 -- 29,324
Guaranteed by FHLMC..................... 31,760 115 66 31,809
"AAA"- and "AA"- rated securities....... 241,954 3,277 404 244,827
Other securities........................ 26,083 91 1,621 24,553
-------- ------ ------ --------
$ 440,657 $ 4,041 $2,683 $442,015
======== ====== ====== ========
Weighted average yield.................... 7.01%
========
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83
DECEMBER 31, 1995
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
--------- ------------- -------------- --------
(Dollars in thousands)
Pass-through and REMIC securities:
Guaranteed by FNMA...................... $ 60,581 $ 430 $ 88 $ 60,923
Guaranteed by GNMA...................... 30,108 436 -- 30,544
Guaranteed by FHLMC..................... 48,748 1,151 -- 49,899
"AAA"- and "AA"- rated securities....... 184,135 4,888 835 188,188
Other securities........................ 12,066 15 347 11,734
-------- ------ ------ --------
$ 335,638 $ 6,920 $1,270 $341,288
======== ====== ====== ========
Weighted average yield.................... 7.24%
========
Mortgage-backed securities available for sale with adjustable rates totaled
$410,362,000 and $178,913,000 at December 31, 1996 and 1995, respectively.
The "AAA"- and "AA"- rated MBS owned by the Company are credit-enhanced in
a variety of ways. Many of the securities represent senior interests in Real
Estate Mortgage Investment Conduits ("REMICs") in which other subordinated
classes of the same security absorb all of the losses in the underlying mortgage
pools up to a specified amount. Other securities owned by the Company are
credit-enhanced through the purchase and placement in trust of mortgage
insurance pool policies from highly-rated institutions (not the issuer) which
provide protection against losses sustained in the underlying mortgage pools up
to a specified amount. A third form of credit enhancement is provided through
establishment of a "cash reserve fund" whereby the issuer places in trust a
certain amount of cash or government securities, which may be applied against
losses sustained on the underlying mortgage pool and which protect the interests
of the security holders. The relative amount of credit enhancement available to
absorb losses for each security in the Company's portfolio varies depending upon
the initial level of credit enhancement provided by the security issuer and the
ensuing amortization, prepayment and loss experience in the mortgage loans that
comprise the security.
The real estate collateral securing the mortgage-backed securities
available for sale was as follows at:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(In thousands)
Single family real estate.............................. $375,475 $257,754
Multifamily real estate................................ 66,540 83,534
-------- --------
$442,015 $341,288
======== ========
Mortgage-backed securities available for sale were pledged as collateral as
follows at:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(In thousands)
Federal Home Loan Bank Advances........................ $106,696 $ 12,130
Securities Sold Under Agreement to Repurchase.......... 137,736 157,135
Other.................................................. 3,458 --
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84
Gross realized gains and losses on sales of mortgage-backed securities
available were as follows:
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
---------- ----------
Years Ended:
December 31, 1996................................. $3,001,000 $1,485,000
December 31, 1995................................. $ 279,000 $ 199,000
December 31, 1994................................. $1,705,000 $1,222,000
The contractual maturities of mortgage-backed securities available for
sale, excluding periodic principal payments, at December 31, 1996, was as
follows:
AMORTIZED FAIR
COST VALUE
--------- --------
(In thousands)
Due in one year or less................................ $ 1,621 $ 1,635
Due after one year through five years.................. 5,202 5,161
Due after five years through ten years................. 6,331 6,370
Due after ten years.................................... 427,503 428,849
--------- --------
$ 440,657 $442,015
======== ========
(4) LOANS HELD FOR INVESTMENT, NET
The following is a summary of loans held for investment, net, at:
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(Dollars in thousands)
Single family real estate..................................... $ 903,811 $1,043,687
Commercial real estate (multifamily residential and commercial
nonresidential)............................................. 389,576 366,018
Small business loans:
Business loans under SBA lending programs................... 71,700 65,188
Other small business loans.................................. 21,079 6,235
Construction.................................................. 2,375 6,321
Home equity and property improvement.......................... 1,929 2,235
Consumer loans, including loans secured by deposit accounts... 2,483 2,887
---------- ----------
Total gross loans........................................ 1,392,953 1,492,571
Unearned fees, discounts and premiums....................... 12,813 14,861
Undisbursed loan funds...................................... (971) (2,549)
Allowance for loan losses................................... (13,488) (12,789)
---------- ----------
$1,391,307 $1,492,094
========== ==========
Weighted average yield at end of year....................... 7.74% 7.73%
========== ==========
Loans with adjustable rates totaled $1,315,811,000 and $1,439,981,000 at
December 31, 1996 and 1995, respectively. Such loans adjust monthly, quarterly,
semi-annually or annually and are subject to interest rate adjustment
limitations. The loans are indexed to the cost of funds of savings institutions
in the 11th District of the FHLB, the London Interbank Offered Rate, 1-year U.S.
Treasury Constant Maturity Notes or the prime rate.
Loans held for investment with aggregate carrying values of $407,526,000
and $508,411,000 were pledged as collateral on FHLB advances at December 31,
1996 and 1995, respectively.
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85
Credit Risk and Concentration
An analysis of the activity in the allowance for loan losses follows:
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Balance, beginning of year................................ $12,789 $12,529 $ 8,832
Provisions for loan losses................................ 8,050 2,900 2,300
Acquisitions and purchases................................ -- 500 6,052
Recoveries from allowance for lease losses................ 16 11 353
Recoveries................................................ 1,833 1,339 554
Charge-offs............................................... (9,200) (4,490) (5,562)
------- ------- -------
Balance, end of year...................................... $13,488 $12,789 $12,529
======= ======= =======
Nonaccrual Loans. Information regarding interest that would have been
earned under the original terms of the Company's nonaccrual loans and interest
actually reported during each financial reporting period follows:
INTEREST LOANS
INTEREST UNDER ON NONACCRUAL
RECORDED ORIGINAL TERMS STATUS
-------- -------------- -------------
(In thousands)
Years Ended:
December 31, 1996................................. $1,081 $2,091 $21,502
December 31, 1995................................. $ 581 $1,293 $14,841
December 31, 1994................................. $ 405 $ 892 $10,499
Impaired Loans. The following table sets forth information with respect to
impaired loans at for the years ended December 31, 1996 and 1995:
AT DECEMBER 31,
-----------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
SPECIFIC NET SPECIFIC NET
LOAN LOSS RECORDED LOAN LOSS RECORDED
BALANCES ALLOWANCES INVESTMENT BALANCES ALLOWANCES INVESTMENT
-------- ---------- ---------- -------- ---------- ----------
Nonaccrual loans:
Requiring specific loss.... $ 3,457 $1,439 $ 2,018 $ 3,152 $ 801 $ 2,351
Not requiring specific
loss.................... 3,668 -- 3,668 162 -- 162
------- ------ ------- ------- ------ -------
7,125 1,439 5,686 3,314 801 2,513
------- ------ ------- ------- ------ -------
Restructured loans:
Requiring specific loss.... 4,756 707 4,049 6,981 1,753 5,228
Not requiring specific
loss.................... -- -- -- -- -- --
------- ------ ------- ------- ------ -------
4,756 707 4,049 6,981 1,753 5,228
------- ------ ------- ------- ------ -------
Other loans:
Requiring specific loss.... 2,937 709 2,228 2,298 794 1,504
Not requiring specific
loss.................... 618 -- 618 872 -- 872
------- ------ ------- ------- ------ -------
3,555 709 2,846 3,170 794 2,376
------- ------ ------- ------- ------ -------
Total................... $ 15,436 $2,855 $ 12,581 $ 13,465 $3,348 $ 10,117
======= ====== ======= ======= ====== =======
The average recorded investment in impaired loans during the years ended
December 31, 1996 and 1995 was $10,353,000 and $5,950,000. Interest recognized
during the years ended December 31, 1996 and 1995 totaled $991,000 and $993,000,
respectively, for impaired loans.
F-17
86
Impaired loans at December 31, 1996 and 1995 included $3,195,000 and
$1,894,000 of small business loans that were purchased from GFC. The purchase
agreement contains credit enhancement provisions with respect to these loans
that management believes will minimize risk of loss.
Impaired loans at December 31, 1996 and 1995 includes $4,756,000 and
$6,891,000 of multifamily residential and commercial real estate loans which
have been modified. These modifications are generally in the form of lower
interest rates, payment decreases or maturity extensions.
Commercial Real Estate. Under regulatory rules, the Company's aggregate
commercial and industrial real estate loans and the unguaranteed balances of
small business loans may not exceed 400% of its capital, as determined under the
OTS capital standards. At December 31, 1996, the Company's total loans of this
nature were less than the maximum limit by approximately $209 million.
The Company had commercial real estate loans secured by properties in a
number of different industries, as follows:
DECEMBER 31,
-------------------
1996 1995
-------- --------
(In thousands)
Office buildings................................................. $ 77,835 $ 58,774
Stores and shopping centers...................................... 62,540 54,195
Manufacturing and warehouses..................................... 62,689 64,481
Motels........................................................... 16,868 12,917
Medical buildings................................................ 9,225 9,360
Other commercial properties...................................... 30,586 21,425
-------- --------
$259,743 $221,152
======== ========
The ability of the Company's customers to honor their loan agreements is
dependent upon the health of these economic sectors as well as the general
economy of the Company's market area.
Geographic Concentrations of Credit. The Company's loan portfolio
contained $1,388,391,000 and $1,486,553,000 of loans secured by real estate
properties located in California at December 31, 1996 and 1995, respectively,
representing over 99% of gross loans at both dates.
Extensions of Credit to Directors, Officers and Employees
The following table sets forth the activity with regard to loans to Company
directors, officers and employees:
AT AND FOR THE YEARS
ENDED
DECEMBER 31,
----------------------
1996 1995
------- -------
(In thousands)
Balance, beginning of year.................................... $10,057 $10,930
New extensions of credit...................................... 1,053 328
Repayments.................................................... (3,833) (1,201)
------- -------
Balance, end of year.......................................... $ 7,277 $10,057
======= =======
Loans Serviced for Others
Loans serviced for others totaled $583,290,000 and $664,312,000 at December
31, 1996 and 1995, respectively. Servicing loans for others generally consists
of collecting payments, maintaining escrow accounts, disbursing payments to
investors, and processing foreclosures. Loan servicing income is recorded on the
cash basis and includes servicing fees and interest spread from investors,
certain charges collected from borrowers (such as late payment fees) and is
reduced by the amortization of the purchased servicing asset. The Company holds
an immaterial amount of borrowers' escrow balances in connection with this
servicing.
F-18
87
An analysis of the activity in the purchased servicing asset follows:
AT AND FOR THE YEARS
ENDED
DECEMBER 31,
---------------------
1996 1995
------- ------
(In thousands)
Balance, beginning of year..................................... $ 6,589 $ --
Purchases or reallocations during year......................... 1,458 7,258
Amortization................................................... (1,389) (669)
------- ------
Balance, end of year........................................... $ 6,658 $6,589
======= ======
Periodically, the Company evaluates the recoverability of purchased
mortgage servicing rights based on the projected value of future net servicing
income. Future prepayment rates are estimated based on current interest rates
and various portfolio characteristics, including loan tupe, interest rate, and
market prepayment estimates. If the estimated recovery is lower that the current
amount of purchased mortgage servicing rights, a reduction to purchased mortgage
servicing rights is recorded.
(5) LOANS HELD FOR SALE
The following is a summary of loans held for sale at:
DECEMBER 31,
-------------------------------------------------
1996 1995
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- --------
(In thousands)
Single family real estate............... $ 66,077 $ 66,724 $ 82,118 $ 84,153
Small business loans guaranteed by the
SBA................................... 41,508 44,112 17,272 18,463
Unearned fees and premiums.............. 2,066 -- 793 --
-------- -------- -------- --------
$ 109,651 $110,836 $ 100,183 $102,616
======== ======== ======== ========
The Company classifies the SBA-guaranteed portions of small business loans
as held for sale, thereby retaining the flexibility to sell some or all of such
loans at a future date.
(6) REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET
The following is a summary of real estate acquired in settlement of loans
("REO"), by property type at:
DECEMBER 31,
------------------
1996 1995
------- ------
(In thousands)
Single family..................................................... $ 7,867 $4,742
Commercial real estate............................................ 2,599 1,494
------- ------
$10,466 $6,236
======= ======
F-19
88
Costs associated with the holding and disposing of REO are included in
gains and losses from real estate operations. The following table sets forth
REO-related costs:
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
------- ----- -----
(In thousands)
Gain (loss) on sale of REO............................... $ (103) $ (62) $ 97
Holding period writedowns................................ (402) (119) (443)
Holding costs............................................ (667) (595) (644)
Operating expense, net................................... (98) (141) --
------- ----- -----
$(1,270) $(917) $(990)
======= ===== =====
REO is recorded at fair value at the time that title is obtained to the
foreclosed property. Generally, this requires a charge against the allowance for
loan losses. If, during the disposition period, the value of REO declines
further, a loss provision is recorded as a current expense in the period the
deterioration in value is determined.
(7) REAL ESTATE HELD FOR DEVELOPMENT AND SALE, NET
Real estate held for development and sale, net of specific valuation
allowances, is summarized as follows at:
DECEMBER 31,
----------------
1996 1995
----- ------
(In thousands)
Real estate held for development and sale.......................... $ 523 $6,027
Valuation allowances............................................... (321) (617)
----- ------
$ 202 $5,410
===== ======
A summary of activity in the allowance for losses is as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
----- ------- ------
(In thousands)
Balance, beginning of year............................... $ 617 $ 5,246 $4,833
Provisions for losses.................................... -- 201 414
Charge-offs.............................................. (296) (4,830) (1)
----- ------- ------
Balance, end of year..................................... $ 321 $ 617 $5,246
===== ======= ======
Income (loss) from real estate operations is summarized as follows:
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------ ------ -----
(In thousands)
Net operating income (expense)............................ $ (21) $1,139 $ 441
Depreciation charges...................................... (106) (672) (375)
Gain (Loss) on sale of real estate........................ 4,574 265 (21)
Other non-operating income (expense)...................... 111 (296) (58)
Provisions for losses..................................... -- (201) (414)
------ ----- -----
$4,558 $ 235 $(427)
====== ===== =====
Regulatory capital standards require savings banks to deduct from capital
their investments in and advances to subsidiaries engaged in real estate
development. If total outstanding investments in and advances to subsidiaries
exceed the April 12, 1989 limit, the excess is 100% deductible from capital. At
December 31,
F-20
89
1996 and 1995, the Company's combined investments in and loans to subsidiaries
holding real estate was none and $2,061,000, respectively.
(8) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(In thousands)
Land................................................................... $ 1,717 $ 2,647
Buildings and leasehold improvement.................................... 8,378 10,100
Furniture, fixtures, equipment and automobiles......................... 9,966 11,205
-------- --------
20,061 23,952
Less accumulated depreciation and amortization......................... (10,398) (10,652)
-------- --------
$ 9,663 $ 13,300
======== ========
Depreciation and leasehold amortization expense for the years ended
December 31, 1996, 1995 and 1994 totaled $2,165,000, $1,855,000 and $1,976,000,
respectively.
(9) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at:
DECEMBER 31,
-------------------
1996 1995
------- -------
(In thousands)
Investment securities available for sale................................. $ 1,721 $ 1,662
Mortgage-backed securities available for sale............................ 2,683 2,148
Loans held for investment and held for sale.............................. 10,281 11,084
------- -------
$14,685 $14,894
======= =======
Accrued interest on investment securities available for sale includes
accrued dividends receivable on the Company's holdings of FHLB stock.
F-21
90
(9) CUSTOMER DEPOSIT ACCOUNTS
Customer deposit account balances are summarized as follows at:
DECEMBER 31,
---------------------------------------------------
1996 1995
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
---------- -------- ---------- --------
(Dollars in thousands)
Demand accounts:
Checking..................................... $ 120,644 1.10% $ 123,071 1.30%
Passbook..................................... 59,349 2.01 73,584 2.06
Market rate passbook......................... 141,358 4.20 97,413 3.69
---------- ----------
321,351 294,068
---------- ----------
Fixed rate term certificates of deposit:
3 to 5 months................................ 64,568 5.34 27,959 5.10
6 to 11 months............................... 329,062 5.21 373,692 5.55
12 to 23 months.............................. 244,502 5.57 211,077 5.78
24 to 35 months.............................. 99,198 6.28 121,427 6.23
36 to 60 months.............................. 111,382 6.28 137,463 6.10
IRA/Keogh accounts........................... 152,964 6.23 148,950 6.30
Jumbos -- retail............................. 8,750 6.61 29,290 6.19
Jumbos -- wholesale.......................... 226,693 5.65 207,403 5.82
---------- ----------
1,237,119 1,257,261
---------- ----------
$1,558,470 5.06% $1,551,329 5.18%
========== ==========
The contractual deposit liability balances in the 36 to 60 months
certificates at December 31, 1996 and 1995 have been increased by $200,000 and
$1,168,000, respectively, to adjust the contractual interest rates to market
interest rates on certain above market rate certificates that the Company
acquired in connection with its purchase of United California Savings Bank in
July 1994.
The following table sets forth the amount of fixed-term certificates of
deposit as of December 31, 1996 maturing in the periods indicated:
DEPOSITS MATURING IN THE YEARS ENDING DECEMBER
31,
------------------------------------------------
1997 1998 1999 AFTER 2000 TOTAL
-------- -------- ------- ---------- ----------
(Dollars in thousands)
Contractual interest rate:
0.000%-2.5%....................... $ 503 $ 67 $ 11 $ 5 $ 586
2.501%-3.5%....................... -- -- -- -- --
3.501%-4.5%....................... 15,452 382 -- 2 15,836
4.501%-5.5%....................... 579,392 33,464 18,353 24,749 655,958
5.501%-6.5%....................... 186,019 90,371 21,683 43,829 341,902
6.501%-7.5%....................... 71,506 33,387 33,865 65,322 204,080
7.501%-8.5%....................... 5,215 2,366 446 4,994 13,021
8.501%-9.5%....................... 2,379 1,034 306 1,735 5,454
9.501%-10.5%...................... 74 -- 208 -- 282
-------- -------- ------- -------- ----------
$860,540 $161,071 $74,872 $ 140,636 $1,237,119
======== ======== ======= ======== ==========
Accrued interest payable on customer deposit accounts was $4,146,000 and
$2,530,000 at December 31, 1996 and 1995, respectively, and was reported in
"Other liabilities" in the Consolidated Statements of Condition.
F-22
91
Interest expense on customer deposits by type was as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(In thousands)
Checking...................................................... $ 1,322 $ 1,381 $ 1,562
Passbook and market rate passbook............................. 6,571 4,091 3,443
Time deposits................................................. 71,393 65,658 37,738
------- ------- -------
$79,286 $71,130 $42,743
======= ======= =======
(11) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, also referred to as
"reverse repurchase agreements," consisted of the following:
AT OR FOR THE YEARS
ENDED
DECEMBER 31,
-----------------------
1996 1995
-------- --------
(Dollars in thousands)
Reverse repurchase agreements at end of year....................... $130,639 $150,052
Fair value of MBS pledged as collateral at end of year............. $137,736 $157,135
Weighted average interest rate at end of year...................... 5.47% 5.91%
Maximum amount outstanding at any month-end during the year........ $140,757 $201,447
Average balance outstanding during the year........................ $114,546 $165,101
The securities underlying the reverse repurchase agreements are delivered
to the dealers who arrange the transactions and have control over the
securities. For this reason, reverse repurchase agreements are subject to
certain risks relating to the strength of the other party to the transaction,
the location of the securities held subject to the transaction and the disparity
between the book value of the securities sold and the amount of funds obtained
in transaction. The Company attempts to reduce such risks by entering into
reverse repurchase agreements only with primary government securities dealers.
(12) NOTES PAYABLE
Notes payable consisted of the following at:
DECEMBER 31,
---------------------
1996 1995
------- -------
(In thousands)
Installment note payable, interest at prime plus .25%, collateralized $ -- $ 1,050
by unallocated shares of the Company's stock held by the ESOP
trust..............................................................
Installment note payable, interest at 8%, due October 1996........... -- 4,000
Senior debentures, interest at 11.17%, with balloon payment due 17,750 17,750
December 2001......................................................
------- -------
$17,750 $22,800
======= =======
The Company is subject to restrictive covenants with respect to its
subordinated debentures. At all times during the periods presented, the Company
was in compliance with such covenants.
F-23
92
(13) FEDERAL HOME LOAN BANK ADVANCES
Following is a summary of advances from the Federal Home Loan Bank of San
Francisco at:
DECEMBER 31,
-----------------------------------------------
1996 1995
--------------------- ---------------------
MATURING DURING WEIGHTED WEIGHTED
THE FISCAL YEAR AVERAGE AVERAGE
ENDED DECEMBER 31: BALANCE RATE BALANCE RATE
- -------------------------------------------------- -------- -------- -------- --------
(Dollars in thousands)
1996.............................................. $ 95,900 5.40%
1997.............................................. $274,479 5.50% 130,400 5.49
1998.............................................. 65,000 5.56% 74,200 5.98
1999.............................................. 10,000 5.76% --
-------- --------
$349,479 5.52% $300,500 5.58%
======== ========
Fixed rate advances totaled $211,579,000 and $164,200,000 at December 31,
1996 and 1995, respectively, and adjustable rate advances totaled $137,900,000
and $136,300,000 at the same dates, respectively.
The Company pledged the following assets as collateral on FHLB advances at:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(In thousands)
Stock of the Federal Home Loan Bank of San Francisco................... $ 17,919 $ 15,578
Mortgage-backed securities............................................. 106,696 12,130
Loans held for investment.............................................. 407,526 508,411
-------- --------
$532,141 $536,119
======== ========
(14) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
----- ------ -------
(In Thousands)
Current taxes:
Federal........................................................ $(126) $ 202 $(2,188)
State.......................................................... 708 -- 149
----- ------ -------
Total current............................................... 582 202 (2,039)
----- ------ -------
Deferred taxes:
Federal........................................................ (852) 1,246 3,982
State.......................................................... 243 1,043 1,049
----- ------ -------
Total deferred.............................................. (609) 2,289 5,031
----- ------ -------
$ (27) $2,491 $ 2,992
===== ====== =======
F-24
93
The sources of difference between the federal statutory income tax rate and
the effective tax rate as a percentage of pretax earnings are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
----- ------ -------
(In Percentages)
Statutory federal income tax rate................................ 35.0% 35.0% 35.0%
Increase (decrease) in taxes:
State franchise tax, net of federal benefit.................... 7.0 7.0 6.6
Nondeductible items............................................ (1.7) (2.2) 0.4
Sale of branch office.......................................... -- -- (4.5)
Interest from tax exempt investments........................... (9.6) (14.1) (11.7)
Decrease in deferred tax asset valuation allowance............. (16.8) -- --
Reduction of liabilities from prior periods.................... (12.9) -- --
Other, net..................................................... (1.2) -- (0.8)
----- ----- -----
Effective tax rate............................................... (0.2%) 25.7% 25.0%
===== ===== =====
At December 31, 1996 and 1995, the Company's accrued taxes receivable were
$2.1 million and $4.4 million, respectively.
The net deferred tax asset is comprised of the following items:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(In thousands)
Deferred tax liabilities:
Loan fees............................................................ $ 1,755 $ 2,784
FHLB stock dividends................................................. 2,283 1,845
Prepaid expenses..................................................... 590 320
State taxes.......................................................... 414 348
Other................................................................ 3 21
Unrealized gain on securities available for sale..................... -- 1,608
------- -------
Gross deferred tax liabilities.................................... 5,045 6,926
------- -------
Deferred tax assets:
Depreciation......................................................... (615) (430)
Provision for losses on real estate.................................. (181) (294)
Provision for loan losses............................................ (6,212) (6,091)
Income from REMIC trust.............................................. (300) (360)
Purchase accounting differences...................................... (1,488) (2,356)
Net operating losses................................................. (1,645) (2,675)
Unrealized loss and securities available for sale.................... (166) --
Other................................................................ (639) (499)
------- -------
Gross deferred tax assets......................................... (11,246) (12,705)
Valuation allowance.................................................... -- 1,961
------- -------
Net deferred tax asset................................................. $ (6,201) $ (3,818)
======= =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
F-25
94
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize most of the benefits related to these deductible
differences. The valuation allowances at December 31, 1995 related to net
operating loss carryforwards in connection with the UCSB acquisition that are
limited as to timing and amount of deductibility in future years. In connection
with its finalization of its 1995 tax return, the Company re-evaluated the
necessity for the valuation allowance and determined that none was needed.
Until passage of legislation in 1996, savings and loan associations that
met certain definitional tests as prescribed by the Internal Revenue Code
("Code") were allowed a bad debt deduction, when computing federal income taxes,
equivalent to 8% of taxable income, subject to a minimum tax for preference
items. Alternatively, a deduction based upon actual experience losses of the
Company could be taken if it resulted in a greater deduction. Both houses of
Congress passed legislation in 1996 that repealed the tax rules formerly
applicable to bad debt reserves of thrift institutions for taxable years
beginning after December 31, 1995. Pursuant to the legislation, the Company was
required to change its tax method of accounting for bad debts from the reserve
method formerly permitted to the "specific charge-off" method under which tax
deductions are permissible for bad debts only as and to the extent that the
loans become wholly or partially worthless. At December 31, 1996, the Company
had a $23 million tax bad debt reserve that was accumulated using the provisions
of the tax law prior to the 1996 changes that is subject to recapture in whole
or in part in future years upon the occurrence of certain events, such as a
distribution to shareholders in excess of the Company's current and accumulated
earnings and profits, a redemption of shares, or upon a partial or complete
liquidation of the Company.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its subsidiaries are defendants in litigation arising in
the normal course of business. In March 1996, the Company was named as a
defendant in a lawsuit filed by a former employee in the United States District
Court for the Central District of California. The plaintiff alleges breach of
contract, among other things, and seeks payment of a commission of $3.9 million
alleged to be due him for services rendered in connection with the GFC
acquisition and punitive damages. The Company believes that it has meritorious
defenses to the allegations and that the outcome of the matter will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company. Accordingly, no provisions for losses have been
recorded in the accompanying financial statements.
With the exception of the aforementioned legal proceeding, the Company and
its subsidiaries are not parties to any pending legal proceedings, other than
ordinary routine litigation incidental to their business. None of such
litigation is expected to have a material impact on the financial condition of
the Company.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit in the form of
real estate loans and commitments to purchase real estate loans and mortgage-
backed securities. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial position. The Company's exposure to credit loss in the
event of nonperformance by the other party to commitments to extend credit is
represented by the contractual notional amount of those instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
On December 31, 1996, the Company had commitments to originate $26,899,000
of real estate loans. On December 31, 1995, the Company had commitments to
purchase and originate $12,140,000 of real estate loans and sell $3,938,000 of
real estate loans.
The Company has agreements to lease facilities and land for certain of its
offices for varying periods to the year 2004 with options through 2023.
Facilities rental expense for the years ended December 31, 1996,
F-26
95
1995 and 1994 was $1,988,000, $1,485,000 and $1,442,000 respectively. Future
minimum rental payments under noncancelable operating leases are payable as
follows for the years ending:
DECEMBER 31: (In thousands)
------------------------------------------------------- --------------
1997................................................. $ 2,945
1998................................................. 2,542
1999................................................. 2,558
2000................................................. 2,592
2001................................................. 1,870
After 2001........................................... 6,490
-------
$ 18,997
=======
(15) RETIREMENT PLANS
401(k). The Company sponsors a savings plan which allows employee
participants to make pre-tax salary contributions up to 10% of their salaries
pursuant to section 401(k) of the Internal Revenue Code. Employees who have
completed one year of service and have reached 21 years of age are eligible to
enroll in the savings plan. Employee contributions are matched dollar for dollar
by the Company up to 5% of the employee's salary. Employees vest immediately in
their own contributions and earnings thereon and vest in the Company's
contributions at the rate of 20% per year of service. The Company's contribution
expense for the years ended December 31, 1996, 1995 and 1994 was $544,000,
$492,000, and $473,000, respectively.
Deferred Compensation and Benefit Restoration Plan. The Company adopted
the Deferred Compensation and Benefit Restoration Plan ("Deferred Compensation
Plan") as a supplemental benefit plan which permits directors and selected
officers to elect to defer receipt of all or any portion of their future salary,
bonus or directors' fees. In addition, the Deferred Compensation Plan restores
benefits lost by employees under the ESOP and 401(k) plan due to specified
Internal Revenue Code restrictions on the maximum compensation that may be taken
into account and the maximum benefits that may be paid under those plans.
Amounts contributed to the Deferred Compensation Plan to restore benefits
otherwise limited by the Code restrictions have been included in the 401(k)
contribution expense reported in the previous paragraph. Interest is earned on
contributions to the Deferred Compensation Plan based upon a variable rate
determined annually by the Compensation Committee of the Board of Directors. For
the years ended December 31, 1996, 1995, and 1994, the Company paid interest on
Deferred Compensation Plan balances totaling $271,000, $74,000 and $60,000,
respectively.
Director Retainer Continuance Plan. Effective January 1, 1991, the Company
adopted a Director Retainer Continuance Plan which provides retirement benefits
to all directors who have reached age 70 or at any time after attaining the age
of 55, provided the sum of his age and years of service on the board equal or
exceed 75. The plan replaces an informal one adopted in March 1983. The annual
retirement benefit is 50% of the retainer fee as of the date of retirement. The
Company's contribution expense for the years ended December 31, 1996, 1995 and
1994 was $114,000, $109,000 and $109,000, respectively.
Employee Stock Ownership Plan ("ESOP"). As part of its initial public
offering, the Company established an ESOP for all employees who are age 21 or
older and have completed one year of service with the Company. Notwithstanding
the foregoing, all full-time employees who had completed 30 days of service with
the Company at the time of the initial public offering were made eligible to
participate. The ESOP borrowed $2,000,000 from a unaffiliated third party lender
and used the funds to purchase shares of the common stock of CENFED. The ESOP
purchased 330,000 shares of common stock, giving effect to stock splits and
stock dividends, at the time of the initial public offering.
Payments on the third-party ESOP loan were made principally from the
Company's discretionary contributions to the ESOP. In 1996, the Company repaid
the third party loan at which time the Company granted a loan to the ESOP trust
in the amount of the loan paid off. Under generally accepted accounting
principles, the ESOP trust's debt to the Company is not reflected in the
Company's statement of condition.
F-27
96
Interest paid on the obligation to the third party lender was $60,000, $109,000
and $100,000, for the years ended December 31, 1996, 1995 and 1994,
respectively. Shares purchased with the loan proceeds are held in a suspense
account for allocation among participants as the loan is repaid. Contributions
to the ESOP and shares released from the suspense account are allocated among
participants on the basis of compensation, as described in the plan, in the year
of allocation. Benefits generally become 20% vested after each year of credited
service. Vesting will be accelerated upon retirement, death or disability of the
participant. Forfeitures will be used to reduce the Company's future
contributions. Benefits may be payable upon retirement, death, disability, or
separation from service. Due to the fact that the Company's annual contributions
are discretionary, the benefits payable under the ESOP cannot be estimated.
(16) STOCK-BASED COMPENSATION PLANS
At December 31, 1996, the Company had stock-based compensation plans for
employees and nonemployee directors which are described below. The Company
applies APB Opinion No. 25 and related interpretations for its plans, both of
which are fixed stock option plans. Accordingly, the Company did not recognize
compensation expense in connection with awards of stock options because the
exercise price and the fair market price were the same at the dates of award,
with two exceptions:
(i) Compensation cost has been recognized in connection with the
directors' stock option program because the exercise prices at the dates of
awards equaled 75% of the fair market value at the dates of award; and
(ii) Prior to 1996, the Company permitted selected officers to elect
to receive some or all of their annual incentive pay in the form of stock
options. The exercise price of the shares is determined at the beginning of
the calendar year, based upon the market price at the date of
determination. The incentive pay is determined at the beginning of the
subsequent calendar year and is based upon a combination of corporate and
individual performance. To the extent that the market price of the stock
increases during the interval from the date the exercise price is set and
the date that the incentive awards are determined, the Company recognizes
compensation expense.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
------- ------
(Dollars in
Thousands, except
Per Share Amounts)
Net Earnings:
As Reported..................................................... $11,338 $7,197
Pro Forma....................................................... 10,497 6,839
Primary Earnings Per Share:
As Reported..................................................... $ 2.17 $ 1.42
Pro Forma....................................................... $ 2.01 $ 1.36
Long-Term Incentive Plans ("Incentive Plans"). At annual meetings held in
May 1992 and May 1994, the stockholders of the Company ratified the 1992
Long-Term Incentive Plan and the 1994 Long-Term Incentive Plan, respectively.
Both plans had been adopted by the board of directors before submission to the
shareholders for ratification. The Incentive Plans are intended to promote stock
ownership by directors and selected officers and employees to increase their
proprietary interest in the success of the Company and to encourage them to
remain in its employ. Awards granted under the Plans include incentive stock
options, non-qualified options, stock appreciation rights, and restricted stock.
The Incentive Plans are administered by a committee appointed by the Company's
board of directors.
F-28
97
With the exception of the previously-described program allowing certain
officers to receive some or all of their bonuses in stock options, the exercise
of each option equaled the market price of the Company's stock on the date of
grant. In all cases, each option's maximum term is ten years.
The following table sets forth activity with respect to incentive stock
options awarded to employees under the Company's incentive plans in the periods
presented:
AT AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------- -------- ------- --------
Outstanding at beginning of
year........................ 336,825 $11.03 339,680 $ 9.11 276,980 $ 7.62
Granted....................... 22,025 $21.24 99,010 $14.57 62,700 $15.68
Exercised..................... (136,952) $ 9.70 (85,181) $ 7.24 -- --
Terminated.................... (5,813) $14.85 (16,684) $12.22 -- --
--------- ------ ------- ------ ------- ------
Outstanding at end of year.... 216,085 $12.81 336,825 $11.03 339,680 $ 9.11
========= ====== ======= ====== ======= ======
The following table sets forth activity with respect to non-qualifying
stock options awarded to employees and nonemployee directors under the Company's
incentive plans in the periods presented:
AT AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------- -------- ------- --------
Outstanding at beginning of
year........................ 197,754 $10.23 133,815 $ 7.68 131,065 $ 7.11
Granted....................... 122,894 $18.13 68,823 $15.12 8,250 $15.68
Exercised..................... (52,394) $16.05 (4,884) $ 9.41 (5,500) $ 6.06
Terminated.................... (148) $14.50 -- -- -- --
--------- ------ ------- ------ ------- ------
Outstanding at end of year.... 268,106 $12.71 197,754 $10.23 133,815 $ 7.68
========= ====== ======= ====== ======= ======
Directors' Stock Option Plan ("Directors' Plan"). Directors may elect to
receive some of all of their retainer and meeting fees in the form of stock
options, in accordance with the provisions of the Directors' Plan which was
approved by stockholders in May 1994. The exercise price of options awarded
under the Directors' Plan equals 75% of the fair market value of the common
stock at the date of awarded. Fair market value is determined at the date of
each award of options and generally equals the average of the closing prices of
the common stock for the five trading days preceding the date as of which fair
market value is determined. The difference between the exercise price and the
fair market value of each share subject to an option, after applying the
discount, is recognized as compensation expense.
The following table sets forth activity with respect to awards of stock
options under the Directors' Plan:
AT AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- --------
Outstanding at beginning of
year........................ 15,937 $13.11 1,512 $11.24 -- --
Granted....................... 11,794 $17.73 14,425 $13.25 1,512 $11.24
------ ------ ------ ------ ----- ------
Outstanding at end of year.... 27,731 $15.07 15,937 $13.11 1,512 $11.24
====== ====== ====== ====== ===== ======
F-29
98
The following table summarizes information about incentive stock options
and non-qualifying stock options granted to employees and nonemployee directors
as of December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- --------------------
WEIGHTED WEIGHTED
AVG. AVG.
EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES PRICE SHARES PRICE
------- -------- ------- --------
$6.063 - $ 9.99................................... 161,069 $ 6.111 161,069 $ 6.111
$10.00 - $14.99................................... 173,572 $13.710 125,344 $13.539
$15.00 - $19.99................................... 103,021 $15.951 85,593 $16.006
$20.00 - $24.99................................... 71,449 $21.139 55,911 $20.791
$25.00 - $27.84................................... 2,811 $27.840 -- --
------- -------
$6.063 - $27.84................................... 511,922 $12.885 427,917 $12.184
======= ======= ======= =======
At December 31, 1996, there were 52,506 unallocated shares of stock
remaining in the Incentive Plans for future awards in the form of incentive
stock options, non-qualified options or restricted stock. At the same date,
there were 38,269 unallocated shares reserved for future awards under the
Directors' Plan.
Fair Value of Stock Options Grants. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1996 and 1995,
respectively:
- dividend yields of 1.44% and 2.15%
- expected volatility of 27.6% and 28.9%, using a 100-week period
- risk-free interest rates based upon equivalent-term Treasury Rates
- expected options lives were the contractual lives at the date of grant
The following table summarizes the fair value of the stock options granted
in the years ended December 31, 1996 and 1995:
1996: 1995:
---------------------- ----------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
GRANTED FAIR VALUE GRANTED FAIR VALUE
------- ---------- ------- ----------
Incentive Stock Options........................... 22,025 99,010
Non-qualifying Stock Options...................... 122,894 68,823
Directors' Plan................................... 11,794 14,425
------- -------
Total........................................ 156,713 $12.91 182,258 $10.01
======= ====== ======= ======
Restricted Stock. The Company issues restricted stock awards as a means of
providing certain key officers with a proprietary interest in the Company in a
manner designed to encourage such persons to remain with the Company. In
connection with its initial public offering in 1991, the Company established the
Management Development and Retention Plan ("MDRP") and purchased 82,500 shares
of common stock. The Company obtained authority to award additional restricted
shares from its 1994 Long-Term Incentive Plan.
The shares purchased by the Company for the MDRP and issued under the 1994
Long-Term Incentive Plan represent deferred compensation. All of the shares of
the MDRP have been accounted for as a reduction of stockholders' equity until
such time as the shares are allocated and vest to the recipients. Shares awarded
under the 1994 Long-Term Incentive Plan are recorded as deferred compensation at
the time of award. In both cases, compensation expense is charged and deferred
compensation is reduced as the shares vest to the recipients. Shares allocated
to officers are earned over three- to five-year periods.
F-30
99
Awards of shares of stock under the MDRP and under the 1994 Long-Term
Incentive Plan, after giving effect to stock splits and stock dividends, were as
follows:
NUMBER
OF SHARES
---------
Outstanding at December 31, 1993........................... 42,363
Granted.................................................. 28,050
------
Outstanding at December 31, 1994........................... 70,413
Granted.................................................. 21,120
------
Forfeited................................................ (3,575)
Outstanding at December 31, 1995........................... 87,958
Granted.................................................. 7119
Forfeited................................................ (6,428)
------
OUTSTANDING AT DECEMBER 31, 1996........................... 88,649
======
Fully-vested shares at December 31, 1996 totaled 59,951 and at that date
the MDRP had 2,428 shares available for future awards.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Disclosures about Fair Value of Financial Instruments." requires disclosure of
fair value information about financial instruments, regardless of whether
recognized in the financial statements of the reporting entity. For purposes of
determining fair value, SFAS No. 107 provides that the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
All of the fair values presented have been made under this definition of fair
value.
It is management's belief that the fair values presented below are accurate
based on the valuation techniques and data available to the Company as of
December 31, 1996, as more fully described below. It should be noted that the
operations of the Company are managed from a going concern basis and not a
liquidation basis. As a result, the ultimate value of the financial instruments
presented could be substantially different when actually recognized over time
through the normal course of operations. Additionally, a substantial portion of
the Company's inherent value is its franchise value. Neither of these components
have been given consideration in the presentation of fair values below.
F-31
100
The following presents the carrying amounts and fair values of financial
instruments included in assets and liabilities at December 31, 1996 and 1995.
AT DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents..................... $ 24,941 $ 24,941 $ 29,216 $ 29,216
Investment securities......................... 161,719 161,719 133,778 133,778
Mortgage-backed securities.................... 442,015 442,015 341,288 341,288
Loans......................................... 1,500,958 1,507,337 1,592,277 1,620,580
---------- ---------- ---------- ----------
Net financial instruments -- assets........ $2,129,633 $2,136,012 $2,096,559 $2,121,894
========== ========== ========== ==========
LIABILITIES:
Customer deposit accounts..................... $1,558,470 $1,560,156 $1,551,329 $1,567,475
Other borrowings.............................. 497,868 498,437 473,352 476,197
---------- ---------- ---------- ----------
Net financial instruments -- liabilities... $2,056,338 $2,058,593 $2,024,681 $2,043,672
========== ========== ========== ==========
OTHER:
Interest rate cap agreements.................. $ 2,406 $ 1,118 -- --
========== ==========
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and cash equivalents. For these short-term instruments, the carrying
value is a reasonable estimate of fair value.
Securities. For investment securities and mortgage-backed securities,
including derivative instruments and marketable equity securities, fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans. The fair values of loans are estimated by discounting the
contractual cash flows, adjusted for prepayment estimates, using market interest
rates based on secondary market sources, adjusted for servicing costs. The fair
value of consumer loans is based on an aggregate current market interest rate
for those products in the Company's portfolio in the aggregate. The following
table presents information for loans held for investment or sale at December 31,
1996:
DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT(1) FAIR VALUE AMOUNT(1) FAIR VALUE
---------- ---------- ---------- ----------
(In thousands)
Single family, first and second trust deeds..... $ 979,178 $ 981,326 $1,134,956 1,155,801
Commercial real estate.......................... 388,798 392,882 365,216 366,930
Construction.................................... 1,404 1,423 3,772 4,352
Small business loans............................ 142,583 142,711 98,235 103,399
Consumer loans.................................. 2,483 2,483 2,887 2,887
---------- ---------- ---------- ----------
Total...................................... 1,514,446 1,520,825 1,605,066 1,633,369
Allowance for loan losses (2)................... (13,488) (13,488) (12,789) (12,789)
---------- ---------- ---------- ----------
$1,500,958 1,507,337 $1,592,277 1,620,580
========== ========== ========== ==========
- ---------------
(1) The carrying amounts represent gross loan balances at the dates indicated as
adjusted for discounts and premiums, unearned fees and undisbursed loan
funds.
F-32
101
(2) In its calculation of fair value, the Company did not consider possible
losses due to credit problems and, accordingly, has applied the allowance
for loan losses to reflect such credit risk.
Deposit liabilities. Under SFAS No. 107, the fair value of deposits with
no stated maturity (such as non-interest bearing demand deposits, savings, and
NOW accounts and money market investment accounts) is equal to their carrying
amount at December 31, 1995. Therefore, the fair value estimates for these
products do not reflect the benefits that the Company receives from the
low-cost, long-term funding they provide. The fair value of time deposits is
based on the discounted value of contractual cash flows, applying interest rates
currently being offered on borrowings of similar duration from the FHLB.
AT DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
(In thousands)
Transaction accounts............................ $ 321,351 $ 321,351 $ 294,068 $ 294,068
---------- ---------- ---------- ----------
Time deposits:
Retail........................................ 1,010,426 1,012,814 1,049,858 1,063,899
Wholesale..................................... 226,693 225,991 207,403 209,508
---------- ---------- ---------- ----------
Total time deposits........................ 1,237,119 1,238,805 1,257,261 1,273,407
---------- ---------- ---------- ----------
$1,558,470 $1,560,156 $1,551,329 $1,567,475
========== ========== ========== ==========
SFAS No. 107 does not allow a deposit base intangible element to be
included in the fair value of deposits. The intangible arises from the low cost
funding provided by the deposit liabilities compared to the cost of borrowing
funds in the market.
Other borrowings. The fair value of borrowings at December 31, 1996 were
estimated using current market rates of interest for similar borrowings, as
follows:
AT DECEMBER 31,
-------------------------------------------
1996 1995
-------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE VALUE VALUE
-------- --------- -------- ---------
(In thousands)
FHLB advances......................................... $349,479 $ 348,645 $300,500 $ 300,970
Securities sold under agreements to repurchase........ 130,639 130,646 150,052 150,129
Notes payable......................................... 17,750 19,146 22,800 25,098
-------- -------- -------- ---------
$497,868 $ 498,437 $473,352 $ 476,197
======== ======== ======== =========
Interest rate cap agreements. The fair value of interest rate cap
contracts is determined by discounting the cash flows called for under the
agreements at rates available as of the reporting date. The carrying value of
the interest rate cap agreements represents the unamortized premium paid to
purchase such agreements as of the reporting date.
(19) STOCKHOLDERS' EQUITY
The Company's ability to pay cash dividends to its shareholders primarily
depends upon cash dividends it receives from its wholly-owned subsidiary CenFed
Bank, and is also subject to limitations set forth in restrictive covenants
relating to debt securities of the Company. CenFed Bank's ability to pay cash
dividends to the Company is subject to limitations contained in applicable
federal regulations. Payment of dividends in excess of CenFed Bank's accumulated
earnings and profits would have significant and adverse tax consequences to
CenFed Bank.
F-33
102
Restrictive Covenants
Certain debt agreements of the Company provide for the maintenance of
minimum levels of consolidated equity. In connection with its issuance of senior
debentures in 1994, the Company agreed to, among other provisions, the following
covenants:
(i) leverage restrictions on the Company's investment in CenFed Bank;
(ii) restrictions on the Company's minimum consolidated tangible equity;
and
(iii) restrictions on the indebtedness of the holding company.
The company has complied with these restrictive covenants at all times.
Stockholder Rights Plan
In 1995, the Company adopted a stockholder rights plan ("stockholder rights
plan") and declared a dividend distribution of stock purchase rights ("Rights")
on the Company's outstanding shares of common stock to stockholders of record at
the close of business on August 10, 1995 ("Record Date"). The distribution
consisted of one Right for each outstanding share of common stock held on the
Record Date. Each Right, when exercisable, entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share at a price of $80.00
(the "Rights Exercise Price") per one one-hundredth share, subject to
adjustment. If any person becomes the beneficial owner of 15% or more of the
outstanding common stock without complying with a specified procedure designed
to provide fair treatment to all holders of the common stock, then holders of
the Rights not previously exercised or redeemed by the Company will be entitled
upon payment of the Rights Exercise Price to receive common stock having a fair
market value equal to two times the Rights Exercise Price. In the event that the
Company is acquired in a merger or other business combination transaction or 50%
or more of the Company's assets or earnings power are sold, proper provision
will be made so that each holder of a Right (other than the acquiring entity or
person) will thereafter have the right to receive, upon exercise at the then
current exercise price of the Right, common stock of the acquiring or surviving
company having a value equal to two times the exercise price of the Right.
(20) REGULATORY MATTERS
Capital Regulations
The Company is required to maintain certain minimum levels of regulatory
capital as set forth by the OTS in capital standards applicable to all Thrifts..
These capital standards include a core capital requirement, a tangible capital
requirement and a risk-based capital requirement. CenFed Bank exceeds all
capital requirements, as shown in the following table:
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Actual........................... $123,519 5.64% $125,393 5.73% $135,337 11.60%
Required......................... 32,784 1.50% 65,625 3.00% 93,176 8.00%
-------- ---- -------- ---- -------- ----
Excess......................... $ 90,735 4.14% $ 59,768 2.73% $ 42,161 3.60%
======== ==== ======== ==== ======== ====
Federal banking legislation contains prompt corrective action ("PCA")
provisions pursuant to which banks and savings institutions are to be classified
into one of five categories, based primarily upon capital adequacy, and which
require specific supervisory actions as capital levels decrease. The OTS
regulations
F-34
103
implementing the PCA provisions define the five capital categories. The
following table sets forth the definitions of the categories and the Bank's
ratios as of December 31, 1996:
TOTAL TIER 1 TIER 1
TANGIBLE RISK-BASED RISK-BASED LEVERAGE
CAPITAL CATEGORY: CAPITAL RATIO RATIO RATIO RATIO
- --------------------------------------------------------- ------------- ---------- ---------- --------
Well-capitalized......................................... N/A 10% 6% 5%
Adequately capitalized................................... N/A 8% 4% 4%
Undercapitalized......................................... N/A <8% <4% <4%
Significantly undercapitalized........................... N/A <6% <3% <3%
Critically undercapitalized.............................. * 2% N/A N/A N/A
CENFED BANK, AT DECEMBER 31, 1996........................ N/A 11.6% 10.9% 5.7%
The OTS also has authority, after an opportunity for a hearing, to
downgrade an institution from well capitalized to adequately capitalized, or to
subject an adequately capitalized or undercapitalized institution to the
supervisory actions applicable to the next lower category, for supervisory
concerns. At December 31, 1996, the Bank was a well capitalized institution.
Dividends
Savings association subsidiaries of holding companies generally are
required to provide their OTS District Director not less than thirty days'
advance notice of any proposed declaration of a dividend on the association's
stock. Under a regulation adopted by the OTS in August 1990, the insured
institution's ability to declare and pay a dividend to its holding company is
subject to certain limitations. The regulation establishes a three-tiered system
of regulation, with the greatest flexibility being afforded to well-capitalized
associations. CenFed Bank is considered a well-capitalized institution for
purposes of dividend declarations. No dividends were declared or paid in 1995 or
1996.
Deposit Insurance
In November 1995, the Federal Deposit Insurance Corporation ("FDIC")
reduced its deposit insurance premiums for member institutions insured by the
Bank Insurance Fund ("BIF") to a range of from none to $.27 per $100 of deposits
(subject to a statutory minimum of $2,000 in annual assessments), with an
historical low average of approximately $.043 per $100 of deposits, effective
beginning with the semiannual period commencing January 1, 1996. The reduction
in deposit insurance premium assessment reflects the attainment of the BIF of
the statutorily required reserve-to-deposits ratio of 1.25%. The BIF attained
its required reserve level in 1995, while the Savings Association Insurance Fund
("SAIF") had not, because of the BIF's greater premium revenues and the fact
that a substantial portion of the SAIF premiums is required to be used to repay
bonds (commonly referred to as "FICO Bonds") issued for the purpose of funding
the resolution of failed thrift institutions. Because the SAIF had not attained
it statutorily required reserve-to-deposits ratio, the FDIC maintained the
current range of deposit insurance premiums assessable against member
institutions insured by the SAIF at $.23 to $.31 per $100 of deposits. CenFed
Bank's deposit insurance premium was .23% of deposits for 1995.
The competitive disadvantage that resulted from the deposit rate premium
disparity between BIF-insured institutions and SAIF-insured institutions was
resolved during 1996 through the passage of legislation that assessed a one-time
charge to all SAIF-insured institutions in sufficient amount to increase the
SAIF reserve-to-deposits ratio to 1.25%. The Company paid $9.1 million in
connection with the recapitalization. Following the recapitalization, deposit
premiums to SAIF-insured institutions decreased significantly. Beginning in
1997, the Company's deposit insurance premium will be $.064 per $100 of
deposits.
- --------------
* (less than or equal to)
F-35
104
(20) CENFED FINANCIAL CORPORATION ONLY FINANCIAL INFORMATION
The following are the condensed financial statements for CENFED Financial
Corporation as of December 31, 1996 and 1995 and for the years ended December
31, 1996, 1995 and 1994.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1996 1995
-------- --------
(In thousands)
ASSETS
Cash and cash equivalents.............................................. $ 120 $ 537
Real estate held for development and sale, net......................... -- 5,006
Investment in CenFed Bank.............................................. 130,612 120,212
Other assets........................................................... 1,167 1,887
-------- --------
$131,899 $127,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt incurred by ESOP.................................................. $ -- $ 1,050
Notes payable.......................................................... 17,750 21,750
Other liabilities...................................................... 331 290
-------- --------
18,081 23,090
-------- --------
Stockholders' equity:
Common stock, $.01 par value......................................... 52 46
Additional paid in capital........................................... 42,729 30,126
Retained earnings.................................................... 72,468 73,721
Unrealized gain (loss) on securities available for sale, after tax... (237) 2,179
Deferred compensation -- retirement plans............................ (1,194) (1,520)
-------- --------
113,818 104,552
-------- --------
$131,899 $127,642
======== ========
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- ------
(In thousands)
Interest income................................................ $ 282 $ 131 $ 102
Interest expense............................................... (2,189) (2,322) (311)
Income (Loss) from real estate operations...................... 4,471 531 --
Operating expenses............................................. (482) (656) (466)
------- ------- ------
Earnings (loss) before income taxes and subsidiary earnings.... 2,082 (2,316) (675)
Income tax (expense) benefit................................... (882) 984 287
------- ------- ------
Net earnings (loss) -- holding company only.................. 1,200 (1,332) (388)
Net earnings from subsidiary................................... 10,138 8,529 9,386
------- ------- ------
$11,338 $ 7,197 $8,998
======= ======= ======
F-36
105
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
------- ------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................... $11,338 $ 7,197 $ 8,998
Adjustments to reconcile net earnings to cash provided by
operating activities:
Amortization............................................ 322 667 152
Net earnings of subsidiary.............................. (10,138) (8,529) (9,386)
Net change in other assets/liabilities.................. (181) (157) (287)
Increase in accrued interest payable.................... (127) 29 --
Income tax benefit (expense)............................ 882 (984) (127)
------- ------- ------
Net cash provided by (used in) operating activities... 2,096 (1,777) (650)
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equity of subsidiary......................... (2,130) (1,235) (16,403)
Sale of real estate held for development and sale.......... 4,859 -- --
------- ------- ------
Net cash provided by (used in) investing activities... 2,729 (1,235) (16,403)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock................. 1,589 463 35
Net increase (decrease) in notes payable................... (5,050) (200) 17,598
Dividends paid to stockholders............................. (1,781) (1,423) (1,170)
------- ------- ------
Net cash provided by (used in) financing activities... (5,242) (1,160) 16,463
------- ------- ------
Net increase in cash during the year....................... (417) (4,172) (590)
Cash and cash equivalents, beginning of year............... 537 4,709 5,299
------- ------- ------
Cash and cash equivalents, end of year..................... $ 120 $ 537 $ 4,709
======= ======= ======
F-37
106
(21) QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
THREE MONTHS ENDED,
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(In thousands, except per share data)
1996:
Interest and dividend income............... $38,732 $ 39,118 $39,616 $ 39,617
Interest expense........................... 26,595 25,680 26,429 27,220
------- ------- ------- -------
Net interest income..................... 12,137 13,438 13,187 12,397
Provisions for loan losses................. 2,800 2,250 1,500 1,500
------- ------- ------- -------
Net interest income after provisions for
loan losses........................... 9,337 11,188 11,687 10,897
Non-interest income........................ 6,930 2,010 1,447 2,246
Operating expenses......................... 8,834 8,482 17,672 9,079
Income taxes............................... 2,783 1,670 (5,816) 1,336
------- ------- ------- -------
Earnings before extraordinary items........ 4,650 3,046 1,278 2,728
Extraordinary item (net of income
taxes)................................ (364) -- -- --
------- ------- ------- -------
Net earnings............................... $ 4,286 $ 3,046 $ 1,278 $ 2,728
======= ======= ======= =======
Net earnings per share.................. $ 0.83 $ 0.59 $ 0.24 $ 0.51
======= ======= ======= =======
Dividends paid per share during
quarter............................... $ 0.082 $ 0.09 $ 0.09 $ 0.09
======= ======= ======= =======
1995:
Interest and dividend income............... $30,259 $ 32,232 $35,667 $ 38,291
Interest expense........................... 21,051 23,556 26,029 27,328
------- ------- ------- -------
Net interest income..................... 9,208 8,676 9,638 10,963
Provisions for loan losses................. 600 300 1,000 1,000
------- ------- ------- -------
Net interest income after provisions for
loan losses........................... 8,608 8,376 8,638 9,963
Non-interest income........................ 1,592 1,369 1,989 2,304
Operating expenses......................... 8,168 8,113 7,904 8,966
Income taxes............................... 440 291 758 1,002
------- ------- ------- -------
Net earnings............................... 1,592 1,341 1,965 2,299
======= ======= ======= =======
Net earnings per share.................. $ 0.32 $ 0.27 $ 0.38 $ 0.45
======= ======= ======= =======
Dividends paid per share during
quarter............................... $ 0.068 $ 0.082 $ 0.082 $ 0.082
======= ======= ======= =======
F-38
107
EXHIBIT INDEX
3.1 Certificate of Incorporation of CENFED (incorporated by reference to Exhibit 3.1
and 3.3 to CENFED's Registration Statement on Form S-1 (Registration No. 33-39487),
as amended).
3.2 Bylaws of CENFED (incorporated by reference to Exhibit 3.2 to CENFED's Registration
Statement on Form S1 (Registration No. 33-39487), as amended).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 CENFED Financial Corporation Debenture Purchase Agreement dated December 19, 1994
(incorporated by reference to Exhibit 4.2 to CENFED's Annual Report on Form 10-K
for December 31, 1994).
10.1 Century Federal Executive Performance Incentive Plan as of January 1, 1989
(incorporated by reference to Exhibit 10.1 to CENFED's Registration Statement on
Form S-1 (Registration No. 33-39487), as amended).
10.2 Century Federal Executive Performance Incentive Plan as of January 1, 1991
(incorporated by reference to Exhibit 10.2 to CENFED's Registration Statement on
Form S-1 (Registration No. 33-39487), as amended).
10.3 Century Federal Deferred Compensation Plan as of January 1, 1986 (incorporated by
reference to Exhibit 10.3 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
10.4 Century Federal Deferred Compensation and Benefit Restoration Plan (incorporated by
reference to Exhibit 10.4 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
10.5 CENFED Financial Corporation 1992 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.5 to CENFED's Annual Report on Form 10-K for December 31,
1991).
10.6 Form of Stock Option Agreement (See Exhibit Number 10.5) (incorporated by reference
to Exhibit 10.5 to CENFED's Annual Report on Form 10-K for December 31, 1991).
10.7 Century Federal Savings and Loan Association Management Development and Recognition
Plan (incorporated by reference to Exhibit 10.7 to CENFED's Annual Report on Form
10-K for December 31, 1991).
10.8 CENFED Financial Corporation Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.7 to CENFED's Annual Report on Form 10-K for December 31,
1991).
10.9 Century Federal Profit Sharing and 401(k) Plan (incorporated by reference to
Exhibit 4.2 to CENFED's Registration Statement on Form S-8 (Registration No.
33-43010), as amended).
10.10 Employment Agreement between the Association and D. Tad Lowrey (incorporated by
reference to Exhibit 10.10 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
10.11 Form of Employment Agreement between the Association and certain officers (for each
of the following: Messrs. Prince, Quigley and Renney) (incorporated by reference to
Exhibit 10.11 to CENFED's Registration Statement on Form S-1 (Registration No.
33-39487), as amended).
10.12 Form of Salary Continuation Agreement between the Association and certain officers
(for each of the following: Messrs. Dieter, Neiffer, Schwartz, and Taylor)
(incorporated by reference to Exhibit 10.12 to CENFED's Registration Statement on
Form S-1 (Registration No. 33-39487), as amended).
10.13 Amended and Restated Directors' Retainer Continuance Plan (incorporated by
reference to Exhibit 10.13 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
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10.14 Stock Purchase Agreement among CENFED, the Association, the Trustee of the CENFED
Employee Stock Ownership Trust and the Administrative Committee of the CENFED
Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.14 to
CENFED's Annual Report on Form 10-K for December 31, 1991).
10.15 Agreement and Plan of Merger, dated March 31, 1994, among CENFED Financial
Corporation, CenFed Bank, a Federal Savings Bank, United California Savings Bank
and N. Lawrence Ulvestad (incorporated by reference to Exhibit B to CENFED's
Current Report on Form 8-K for July 15, 1994).
10.16 CENFED Financial Corporation 1994 Directors' Stock Option Plan (incorporated by
reference to CENFED's Proxy Statement dated April 21, 1994).
10.17 CENFED Financial Corporation 1994 Long-Term Incentive Plan (incorporated by
reference to CENFED's Proxy Statement dated April 21, 1994).
11 Statement Regarding Computation of Per Share Earnings.
12 Statement Regarding Computation of Ratios.
21 List of subsidiaries of CENFED.
23 Consents of KPMG Peat Marwick LLP and Deloitte & Touche LLP.
Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described herein.