1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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
incorporation or organization) identification no.)
199 North Lake Avenue, Pasadena, California 91101
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (818) 585-2400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
--- ---
Number of shares outstanding of the registrant's sole class of common stock at
April 30, 1997: 5,770,637
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CENFED FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 1997
and December 31, 1996.....................................................................3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1997 and 1996.............................................................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996.............................................................5
Notes to Consolidated Financial Statements................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................................8
PART II. OTHER INFORMATION
Item 6. Exhibits
a. Exhibits
b. Reports on Form 8-K
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CENFED Financial Corporation
Consolidated Statements of Financial Condition
Dollars In Thousands, Except Share Amounts March 31, DECEMBER 31,
1997 1996
----------- -----------
ASSETS:
Cash ............................................................................. $ 17,247 $ 17,441
Federal funds sold ............................................................... 15,000 7,500
----------- -----------
Cash and cash equivalents .............................................. 32,247 24,941
----------- -----------
Investment securities available for sale, at fair value .......................... 167,135 161,719
Mortgage-backed securities ("MBS") available for sale, at fair value ............. 440,989 442,015
Loans held for investment, net ................................................... 1,451,051 1,391,307
Loans held for sale, at lower of cost or fair value .............................. 114,684 109,651
Accrued interest receivable ...................................................... 15,760 14,685
Real estate acquired in settlement of loans ("REO") .............................. 11,129 10,466
Real estate held for development and sale, net ................................... 202 202
Premises and equipment, net ...................................................... 9,284 9,663
Intangible assets, net of accumulated amortization ............................... 205 205
Deferred income taxes ............................................................ 6,201 6,201
Other assets ..................................................................... 14,512 13,592
----------- -----------
$ 2,263,399 $ 2,184,647
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Customer deposit accounts ........................................................ $ 1,566,314 $ 1,558,470
Securities sold under agreements to repurchase ................................... 161,665 130,639
Notes payable .................................................................... 17,750 17,750
FHLB advances .................................................................... 382,579 349,479
Other liabilities ................................................................ 19,568 14,491
----------- -----------
Total liabilities ...................................................... 2,147,876 2,070,829
----------- -----------
Commitments and contingent liabilities
Common stock. $.01 par value
Authorized shares: 14,000,000 at March 31, 1997 and December 31, 1996
Outstanding shares: 5,236,808 at March 31, 1997 and 5,154,533 at December 31, 1996 52 52
Additional paid in capital ....................................................... 43,005 42,729
Treasury stock, at cost: 15,000 shares ........................................... (496) --
Retained earnings - substantially restricted ..................................... 76,521 72,468
Unrealized loss on securities available for sale, net of tax ..................... (2,516) (237)
Deferred compensation - retirement plans ......................................... (1,043) (1,194)
----------- -----------
Total stockholders' equity ............................................. 115,523 113,818
----------- -----------
$ 2,263,399 $ 2,184,647
=========== ===========
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
---------------------------------
1997 1996
----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Interest and Dividend Income:
Loans ......................................................... $ 29,664 $ 30,523
Investment securities and short-term investments .............. 2,599 1,934
Mortgage-backed securities .................................... 8,007 6,275
----------- -----------
Total interest and dividend income .................. 40,270 38,732
----------- -----------
Interest Expense:
Customer deposit accounts .................................... 19,519 20,062
Securities sold under agreements to repurchase ............... 1,932 1,754
FHLB advances ................................................ 5,040 4,153
Other borrowings ............................................. 522 626
----------- -----------
Total interest expense .............................. 27,013 26,595
----------- -----------
Net interest income .......................................... 13,257 12,137
Provisions for loan losses ...................................... 2,500 2,800
----------- -----------
Net interest income after provisions for loan losses 10,757 9,337
----------- -----------
Non-Interest Income:
Loan servicing fees .......................................... 980 1,065
Customer deposit account fees ................................ 466 484
Gain on sale of investments and MBS .......................... 1,071 597
Gain on sale of loans ........................................ (1) 33
Income (Loss) from real estate operations .................... (313) 4,249
Commissions from sales of investment products ................ 443 405
Other ........................................................ 98 97
----------- -----------
Total non-interest income ............................. 2,744 6,930
----------- -----------
Operating Expenses:
Compensation and employee benefits ........................... 4,294 4,155
Net occupancy ................................................ 1,389 1,552
Deposit insurance premiums ................................... 246 850
Data and check processing .................................... 371 410
Advertising and marketing .................................... 134 194
Intangible amortization ...................................... 1 19
Other ........................................................ 1,643 1,654
----------- -----------
Total operating expenses .............................. 8,078 8,834
----------- -----------
Earnings before income taxes and extraordinary item ... 5,423 7,433
Income taxes .................................................... 1,887 2,783
----------- -----------
Earnings before extraordinary item .................... 3,536 4,650
Extraordinary Item:
Early extinguishment of debt (net of income taxes of $267) .... -- (364)
Net Earnings ...................................... $ 3,536 $ 4,286
=========== ===========
Primary Earnings per share:
Before extraordinary item ...................................... $ 0.60 $ 0.81
Extraordinary item ............................................. -- ($ 0.06)
----------- -----------
After extraordinary item .............................. $ 0.60 $ 0.75
=========== ===========
Average primary shares outstanding .............................. 5,927,000 5,706,000
=========== ===========
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
--------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................... $ 3,536 $ 4,286
Adjustments to reconcile net earnings to net cash provided:
Net amortization of fees, discounts and premiums ....................... 265 428
Depreciation and amortization ........................................... 500 751
Gain (loss) on sale of loans ............................................ 1 (33)
Gain on sales of investments and MBS .................................... (1,071) (597)
Provisions for loan and real estate losses .............................. 2,642 2,800
Change in deferred income taxes ......................................... -- 2,366
Originations and purchases of loans held for sale ....................... (8,597) (11,446)
Repayments and prepayments of loans held for sale ....................... 3,334 7,469
Proceeds from sales of loans held for sale .............................. 232 4,003
Increase in accrued interest receivable ................................. (1,075) (370)
Increase (decrease) in accrued interest payable ......................... (59) 712
Change in other assets and other liabilities ............................ 5,787 (1,985)
FHLB stock dividends .................................................... (290) (202)
Other, net .............................................................. 4 5
--------- ---------
Net cash provided by operating activities .............................. 5,209 8,187
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale .................. (23,904) (12,878)
Proceeds from sales of investment securities available for sale ......... 8,013 21,674
Maturities of investment securities available for sale .................. 10,000 5,000
Purchases of MBS available for sale ..................................... (29,875) (94,183)
Proceeds from sales of MBS available for sale ........................... 16,689 71,431
Principal repayments on MBS ............................................. 12,890 13,201
Originations and purchases of loans held for investment ................. (110,895) (36,416)
Loan repayments and prepayments ......................................... 41,970 51,469
Purchases of premises and equipment ..................................... (121) (212)
Capital expenditures in REO and real estate held for development and sale (262) (204)
Sales of REO and real estate held for development and sale .............. 5,283 7,460
--------- ---------
Net cash provided by (used in) investing activities ................... (70,212) 26,342
--------- ---------
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer deposit accounts .......................... 7,887 29,819
Net decrease in notes payable ...................................... -- (50)
Net increase (decrease) in short-term financing:
FHLB advances ................................................... (50,900) (11,400)
Securities sold under agreements to repurchase .................. 31,026 (58,546)
Repayment of long-term FHLB advance ................................ -- (9,200)
Proceeds from long-term FHLB advance ............................... 84,000 10,000
Dividends paid ..................................................... (466) (411)
Proceeds from issuance of common stock ............................. 1,258 120
Treasury stock repurchased ......................................... (496) --
-------- --------
Net cash (used in) provided by financing activities ............. 72,309 (39,668)
-------- --------
Net (decrease) increase in cash and cash equivalents ............... 7,306 (5,139)
Cash and cash equivalents, beginning of period ..................... 24,941 29,216
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................... $ 32,247 $ 24,077
======== ========
SUPPLEMENTARY INFORMATION
CASH PAID FOR:
Interest on customer deposit accounts ............................... $ 27,092 $ 25,883
Income tax payments (refunds)........................................ ($ 2,550) $ 150
NON-CASH ITEMS:
Real estate acquired in settlement of loans ......................... $ 8,296 $ 5,476
Net change in unrealized gain (loss) on securities available for sale ($ 2,279) ($ 2,948)
Loans to facilitate the sale of REO.................................. $ 2,034 $ 496
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, DECEMBER 31, 1996 AND
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(1) BASIS OF PRESENTATION
The consolidated statement of financial condition as of March 31, 1997,
and the related consolidated statements of operations and cash flows for the
three months ended March 31, 1997 and 1996, are unaudited. These statements
reflect, in the opinion of management, all material adjustments, consisting
solely of normal recurring accruals, necessary for a fair presentation of the
financial condition of CENFED Financial Corporation (the "Company") as of March
31, 1997 and its results of operations and cash flows for the three months ended
March 31, 1997 and 1996. The results of operations for the unaudited interim
periods are not necessarily indicative of the results of operations to be
expected for the entire year of 1997.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes normally included in financial statements
prepared in conformity with generally accepted accounting principles.
Accordingly, these consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
(2) SUBSEQUENT EVENTS
On April 2, 1997, the Company announced a 10% stock dividend payable to
shareholders of record as of April 17, 1997. The Company also declared its
quarterly cash dividend of $.09 per share to shareholders of record as of the
same date. Both the stock and cash dividends were distributed on May 2, 1997.
(3) EARNINGS PER SHARE
The Company has long term incentive plans that include incentive stock
options. For purposes of determining primary earnings per share and fully
diluted earnings per share, stock options granted to officers and directors of
the Company are considered common stock equivalents and are added to common
shares outstanding, using the treasury stock method. At March 31, 1997, fully
diluted earnings per share were the same as primary earnings per share, as the
dilution under the fully diluted earnings per share calculation was not
material.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings per Share
("SFAS 128"). SFAS 128 provides reporting standards for basic and diluted
earnings per share and is effective for financial statement periods ending after
December 15, 1997. Earlier application is not permitted. Had the Company applied
SFAS 128 to the accompanying financial statements, basic earnings per share
would have been $0.61 and $.076 for the three months ended March 31, 1997 and
1996, respectively, and diluted earnings would have been $0.60 and $0.75 for the
same periods, respectively.
Earnings per share for all periods presented have been calculated based
upon the increased number of shares of common stock and common stock equivalent
after giving effect to the stock dividend distributed on May 2, 1997.
(4) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets, and
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. This statement supersedes SFAS 122, although the general
concepts of SFAS 122 are retained in it. Effective January 1, 1997 the Company
adopted SFAS 125. There was no material effect on the Company's financial
condition as of March 31, 1997, or results from operations for the three-month
period then ended, resulting from the adoption of SFAS 125.
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ITEM 2.
CENFED FINANCIAL CORPORATION
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 cost of capital requirements; (ii) gathering retail
deposits as the principal source of funding; and (iii) improving on the
efficiency of Company operations.
Acquiring assets providing returns that satisfy the Company's cost of
capital requirements. The Company seeks assets that provide returns, on a credit
risk-adjusted basis, that meet or exceed its cost of capital. The Company seeks
lines of business in which it believes it can successfully serve customer niches
and achieve satisfactory returns, rather than pursuing traditional thrift
business lines, which increasingly are being served by non-bank competitors.
Over the past two years, the Company has executed this strategy by eliminating
its single family lending operations and by focusing on small business and
commercial real estate lending. The Company defines commercial real estate
properties as multifamily residential and commercial nonresidential properties.
Although it no longer originates single family loans, the Company purchases
packages of single family loans from other institutions from time to time.
During the first quarter of 1997, the Company purchased $79.4 million of home
equity loans.
The Company's new loan volume, consisting of originations and purchases,
increased by $65.2 million or 137% in the first quarter of 1997, compared to the
corresponding quarter in 1996. The following table sets forth loan volume
information:
Three Months Ended March 31:
----------------------------
(In Thousands) 1997 1996
-------- --------
Single family first mortgage ... $ -- $ 12,924
Home equity .................... 79,436 --
Commercial real estate ......... 17,799 21,164
Small business ................. 15,713 13,612
-------- --------
$112,948 $ 47,700
======== ========
The Company seeks to purchase packages of whole loans when it is not able
to originate sufficient volumes of loans to meet the its growth targets. The
Company is unable to predict whether it will succeed in identifying packages of
suitable loans for purchase, or the magnitude of such packages, in the future.
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. The Company's deposit gathering efforts in recent periods have
emphasized increasing its market share in the markets in which it has a presence
and increasing the numbers and amounts of its transaction accounts in the retail
deposit base. 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
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CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
of the communities in which the Company has branch offices. The following table
sets forth the composition of retail deposits at the dates indicated:
MARCH 31, 1997 March 31, 1996
--------------------------- --------------------------
(Dollars in Thousands) Number Amount Number Amount
---------- ---------- ---------- ----------
Checking accounts ..... 27,918 $ 123,478 26,083 $ 127,922
Savings accounts ...... 19,723 86,484 21,740 111,377
Money market accounts . 2,977 115,522 1,881 73,069
Certificate accounts .. 33,755 997,102 37,728 1,044,263
---------- ---------- ---------- ----------
Total retail deposits 84,373 $1,322,586 87,432 $1,356,631
========== ========== ========== ==========
Retail deposits, as a %
of interest-bearing
liabilities ......... 62.10 68.30%
Total transaction account balances increased by $13.2 million at the end
of March 1997, compared to the corresponding date one year earlier. Among its
transaction accounts, the Company is most interested in increasing the number of
customer checking account relationships. Although deposits in checking accounts
decreased by $4.4 million at March 31, 1997, compared to one year earlier, the
number of accounts has increased by 1,835.
Focusing on the efficiency of Company operations. One measure of
operational efficiency is the ratio of general and administrative expenses
(excluding goodwill amortization) to average assets. In the first quarter of
1997, the annualized general and administrative expense ratio was 1.46%,
compared to 1.65% in the corresponding period in the previous year. Included in
the 19 basis point reduction in the operating expense ratio in the first quarter
of 1997 was an eleven basis point reduction attributable to lower deposit
insurance costs.
A second measure of operational efficiency is the ratio of operating
expenses to the sum of net interest income and non-interest income ("efficiency
ratio"). For purposes of this calculation, the Company excludes gains from sales
of investment securities and gains from sales of real estate, which are
non-recurring sources of revenue. In the first quarter of 1997, the Company's
efficiency ratio was 54.1%, compared to 63.3% in the corresponding quarter in
1996. Had the deposit insurance reduction been applicable to the 1996 quarter,
the efficiency ratio would have been 59.0%.
Even though the Company seeks ways to decrease its costs to deliver its
products, future improvements in operating efficiency are largely contingent
upon growth in the asset base.
ANALYSIS OF STATEMENT OF FINANCIAL CONDITION
The Company's total assets increased by $78.8 million, or by 3.6%, during
the first quarter of 1997. The following table sets forth significant changes in
the Company's statement of financial condition:
INCREASE DURING
(In Thousands) FIRST QUARTER OF 1997:
----------------------
Loans held for investment, net ................. $59,744
Cash and cash equivalents ...................... 7,306
All other, net ................................. 11,702
-------
Change in total assets ...................... $78,752
=======
Customer deposit accounts ...................... $ 7,844
Borrowings ..................................... 64,126
Stockholders' equity ........................... 1,705
All other, net ................................. 5,077
-------
Change in total liabilities and equity .... $78,752
=======
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Loans Held for Investment. Loans held for investment increased by $59.7
million during the quarter largely due to the purchase of $79.4 million of home
equity loans. Management believes that the credit risk-adjusted earnings on the
home equity loans meets the Company's rate of return objectives.
MBS and Investment Securities. The Company has historically purchased MBS
and investment securities when it could not meet its growth objectives through
loan originations and purchases. Because the Company purchased a large amount of
whole loans during the quarter, its securities acquisitions were limited. For
the three-month period ended March 31, 1997, the MBS portfolio decreased by $1.0
million. In the future, the Company will continue to focus on identifying
securities for purchase with suitable yield and interest rate risk
characteristics if preferable whole loans aren't available for purchase.
Customer Deposit Accounts. Customer deposit accounts increased by $7.8
million, consisting of a $9.2 million decrease in retail deposits and a $17.0
million increase in wholesale certificates of deposit.
Borrowings. Total borrowings increased by $64.1 million during the first
quarter of 1997 as funds were borrowed to finance a loan purchase. The Company
frequently uses borrowings as a source of funds when purchasing securities or
loans and expects to do so in the future.
Stockholders' Equity. The changes in stockholders' equity for the
three-month periods ended March 31, 1997 and 1996, were as follows:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(In Thousands) 1997 1996
------- -------
Net earnings ................................................ $ 3,536 $ 4,286
Dividends paid to shareholders .............................. (466) (411)
Increase in unrealized loss on securities available for sale (2,279) (2,948)
Stock repurchased ........................................... (496) --
Proceeds from exercises of stock options .................... 1,410 296
------- -------
Increase in stockholders' equity ........................ $ 1,705 $ 1,223
======= =======
All of the Company's investment securities and MBS are classified as
available for sale, requiring that they be reported fair value through an
unrealized gain or loss component of stockholders' equity. Securities classified
as available for sale provide maximum flexibility with respect to disposition
but subject the Company's equity to more volatility from changes in market
interest rates.
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CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
ASSET QUALITY
Delinquent Loans. Total delinquent loan balances decreased by $1.3
million during the first quarter of 1997, with improvements in each loan type.
Loan delinquency information by aging category and by type of loan is set forth
in the following table:
MARCH 31, DECEMBER 31, MARCH 31,
(In Thousands) 1997 1996 1996
------- ------- -------
31 - 60 days delinquent:
Single family .................................................. $ 4,328 $ 5,887 $ 5,166
Commercial real estate ......................................... 1,150 404 2,445
Small business ................................................. 716 715 896
Consumer ....................................................... 9 6 56
------- ------- -------
6,203 7,012 8,563
------- ------- -------
61 - 90 days delinquent:
Single family .................................................. 2,167 3,129 1,224
Commercial real estate ......................................... 950 -- 1,140
Small business ................................................. 1,283 1,857 868
Consumer ....................................................... 1 10 12
------- ------- -------
4,401 4,996 3,244
------- ------- -------
Over 90 days delinquent:
Single family .................................................. 13,675 11,467 11,115
Commercial real estate ......................................... 1,528 3,858 1,233
Small business ................................................. 1,817 1,550 1,187
Consumer ....................................................... 6 3 11
------- ------- -------
17,026 16,878 13,546
------- ------- -------
GRAND TOTAL:
Single family .................................................. 20,170 20,483 17,505
Commercial real estate ......................................... 3,628 4,262 4,818
Small business ................................................. 3,816 4,122 2,951
Consumer ....................................................... 16 19 79
------- ------- -------
$27,630 $28,886 $25,353
======= ======= =======
Delinquent loans by type, as a percentage of total loans:
Single family .................................................. 1.39% 1.47% 1.20%
Commercial real estate ......................................... 0.25% 0.31% 0.32%
Small business ................................................. 0.26% 0.30% 0.21%
------- ------- -------
Total ........................................................ 1.90% 2.08% 1.73%
======= ======= =======
Delinquent loans by type, as a percentage of outstanding loans by type:
Single family .................................................. 2.01% 2.11% 1.62%
Commercial real estate ......................................... 0.89% 1.09% 1.28%
Small business ................................................. 2.57% 3.07% 2.73%
The ratio of delinquent loans to total loans at March 31, 1997 was 17
basis points higher than one year earlier but 18 basis points lower than at the
end of 1996. Delinquent commercial real estate and small business loans
represented a smaller portion of their respective portfolios at March 31, 1997
than at either of the comparative dates. Management believes, however, that
total delinquent commercial real estate and small business loans could increase
in future periods if increases in interest rates and loan payments on certain
adjustable rate loans exceed the borrowers' abilities to pass through such
increased debt service to their tenants and customers. Delinquent small business
loans at March 31, 1997, December 31, 1996 and March 31, 1996 included $3.7
million, $4.0 million and $3.0 million, respectively, of balances guaranteed
directly by the SBA or by a collateralized credit agreement given by the
corporation from whom the Company purchased the loans.
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CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Delinquent single family loans were a smaller percentage of outstanding
single family loans at March 31, 1997 than at December 31, 1996, but were a
higher percentage than one year earlier. The credit quality in the Company's
single family loan portfolio varies significantly by the years of the loans
originations, as shown in the following table:
Year of Delinquent Outstanding Delinquency
Origination Balances(1) Balances(2) Percentage
----------- ---------- ----------- -----------
(Dollars in Thousands)
1988 and before ............ $ 1,018 $ 96,476 1.06%
1989 ....................... 2,493 23,647 10.54%
1990 ....................... 0 7,871 0.00%
1991 ....................... 759 25,184 3.01%
1992 ....................... 3,773 70,206 5.37%
1993 ....................... 3,368 149,511 2.25%
1994 ....................... 4,899 408,943 1.20%
1995 ....................... 2,099 110,117 1.91%
1996 ....................... 0 16,198 0.00%
-------- --------
Total .................... $ 18,409 $908,153 2.01%
======== ======== =====
- ----------------
(1) Delinquent balances exclude loans serviced by other institutions on behalf
of the Company and delinquent loans which the Company services for other
investors but in which it has no ownership investment.
(2) Outstanding balances exclude loans serviced by other institutions on behalf
of the Company and outstanding loans which the Company services for other
investors but in which it has no ownership investment.
The above table illustrates that loans originated between 1989 and 1992,
with the exception of 1990, are the poorest performing segment of the single
family loan portfolio. In general, the periods with the greatest dollar amounts
of delinquent loans were the periods in which the Company originated the
greatest volumes of new loans. In the future, management believes that single
family delinquency rates may continue to rise primarily because the seasoning of
loans made in the 1993 - 1995 time period can be expected to result in higher
levels of delinquency, if future seasoning trends follow past trends.
Nonperforming Assets. Nonperforming assets at March 31, 1997 decreased by
$179,000 from the end of 1996 but were $6.0 million greater than one year
earlier. At March 31, 1997, nonperforming assets were 1.40% of total assets,
representing a 6 basis point decrease from the beginning of the quarter. The
following table sets forth the composition of nonperforming assets at the dates
indicated:
MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
(Dollars in Thousands) 1997 1996 1996 1996 1996
------- ------- ------- ------- -------
Nonaccrual loans .................................. $20,660 $21,502 $21,028 $22,625 $18,700
Real estate acquired in settlement of loans ("REO") 11,129 10,466 7,867 7,134 7,107
------- ------- ------- ------- -------
Nonperforming assets ......................... $31,789 $31,968 $28,895 $29,759 $25,807
======= ======= ======= ======= =======
Nonperforming assets, % of total assets ........... 1.40% 1.46% 1.34% 1.39% 1.22%
Nonaccrual loans, % of total loans held for
investment and for sale ........................... 1.31% 1.42% 1.37% 1.45% 1.18%
Loans are placed on nonaccrual status when, in the opinion of management,
the full and timely collection of principal or interest is in doubt. As a
general rule, the accrual of interest is discontinued when principal or interest
payments become 90 days past due. However, in certain instances, the Company may
place a particular loan on nonaccrual status earlier or later than the 90 days
past due standard, depending upon the individual circumstances surrounding the
loan's delinquency. At March 31, 1997, the Company had no loans over 90 days
past due and still accruing. When an interest-earning asset is placed on
nonaccrual status, previously accrued but unpaid interest is reversed against
current income.
12
13
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth the Company's nonperforming asset activity
for the three months ended March 31, 1997:
NONACCRUAL
LOANS REO TOTAL
-------- -------- --------
Balance at December 31, 1996 ...... $ 21,502 $ 10,466 $ 31,968
New Nonaccruing Loans:
Single family (1) ............ 4,104 -- 4,104
Commercial real estate ....... 4,613 -- 4,613
Small business ............... 432 -- 432
Consumer, net ................ 3 -- 3
Foreclosures:
Single family ................ (3,269) 2,211 (1,058)
Commercial real estate ....... (4,464) 2,833 (1,631)
Small business ............... (496) 773 277
Loans Brought Current:
Commercial real estate ....... (827) -- (827)
Small business ............... (200) -- (200)
Sales of REO:
Single family ................ -- (2,897) (2,897)
Commercial real estate ....... -- (2,385) (2,385)
SBA .......................... -- -- --
Other:
Single family ................ -- 65 65
Commercial real estate ....... (738) 63 (675)
Small business ............... -- -- --
Consumer ..................... -- -- --
-------- -------- --------
Net change during period .. (842) 663 (179)
-------- -------- --------
BALANCE AT MARCH 31, 1997 ......... $ 20,660 $ 11,129 $ 31,789
======== ======== ========
(1) New nonaccruing single family loans have been reduced by single family loans
that were brought current during the quarter.
The Company's $179,000 decrease in nonperforming assets during the first
quarter of 1997 included a $838,000 increase in nonaccrual single family loans
and a $1.0 million decrease in nonaccrual small business loans.
Impaired Loans. Loans are evaluated for impairment in accordance with the
provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan ,"
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosure."
An impaired loan is measured based on the present value of the expected
future cash flows, discounted at the loan's effective interest rate, or the
loan's observable market value or the fair value of the collateral (if the loan
is collateral dependent). 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
13
14
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
the cash flows previously projected, or if the fair value of the collateral
fluctuates materially, the Company recalculates the impairment and adjusts the
specific valuation allowance.
The following table sets forth information with respect to impaired loans
at the dates indicated:
MARCH 31, 1997 DECEMBER 31, 1996
------------------------------------- --------------------------------------
SPECIFIC NET SPECIFIC NET
LOAN LOSS RECORDED LOAN LOSS RECORDED
(in thousands) BALANCES ALLOWANCES INVESTMENT BALANCES ALLOWANCES INVESTMENT
-------- ---------- ---------- -------- ---------- ----------
Nonaccrual loans:
Requiring specific loss allowances .... $ 3,523 $ 612 $ 2,911 $ 3,457 $ 1,439 $ 2,018
Not requiring specific loss allowances 1,923 -- 1,923 3,668 -- 3,668
Restructured loans:
Requiring specific loss allowances .... 4,732 765 3,967 4,756 707 4,049
Not requiring specific loss allowances 940 -- 940 -- -- --
Other loans:
Requiring specific loss allowances .... 2,931 359 2,572 2,937 709 2,228
Not requiring specific loss allowances 1,214 -- 1,214 618 -- 618
------- ------- ------- ------- ------- -------
Total ............................. $15,263 $ 1,736 $13,527 $15,436 $ 2,855 $12,581
======= ======= ======= ======= ======= =======
For the three months ended March 31, 1997, the average net recorded
investment in impaired loans was $13.1 million and the interest income
recognized totaled $188,000. In the corresponding period in the previous year,
the average net recorded investment in impaired loans was $14.8 million and the
interest income recognized totaled $43,000.
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, based upon information
currently available to management and management's judgements as to the
collectibility of loans and prior loan loss experience. While management
believes that it uses the best information available to determine the
appropriate amount of loan loss provisions, future adjustments to the allowance
for loan losses may be necessary and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the determinations.
14
15
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
An analysis of the activity in the allowance for loan losses follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
(In thousands) 1997 1996
-------- --------
Balance, beginning of period ............................. $ 13,488 $ 12,789
Provisions for loan losses ............................... 2,500 2,800
Acquisitions and purchases ............................... 2,606(1) --
Recoveries ............................................... 1,012 164
Charge-offs .............................................. (3,336) (1,716)
-------- --------
Balance, end of period ................................... $ 16,270 $ 14,037
======== ========
Ratio of allowance for loan losses to total loans held for
investment at end of period .............................. 1.11% 0.95%
Ratio of allowance for loan losses to nonaccrual loans at
end of period ............................................ 78.7% 75.1%
- ----------------
(1) During the first quarter of 1997, the Company purchased a portfolio of
home equity loans and recorded $2.6 million in allowances for loan
losses.
The following table sets forth the Company's net charge-offs by loan
types for the periods indicated:
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
(In thousands) 1997 1996
------- -------
Single family ........................... $ 847 $ 665
Commercial real estate .................. 1,429 877
Small business .......................... (3) 6
Other ................................... 51 4
------- -------
Total .............................. $ 2,324 $ 1,552
======= =======
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company include scheduled
principal payments and unscheduled prepayments of loans and mortgage-backed
securities, proceeds from sales of investments, mortgage-backed securities and
loans held for sale, cash flows generated from operations and proceeds from
increases in customer deposits, FHLB advances and short-term borrowings.
Principal payments on loans and mortgage-backed securities were $58.2
million and $72.1 million for the three months ended March 31, 1997 and 1996,
respectively. Proceeds from sales of loans totaled $232,000 and $4.0 million in
the same comparative periods.
Sales of investments and mortgage-backed securities totaled $24.7
million and $93.1 million in the first quarters of 1997 and 1996, respectively.
In the first quarter of 1996, sales activity was at higher-than-normal levels
because the Company's efforts to reduce its exposure to changes in interest
rates entailed the sale of certain investment securities. Generally, the
proceeds from sales of investments and mortgage-backed securities were
reinvested in other mortgage-backed securities or used to reduce borrowings.
Customer deposits increased by $7.9 million in the three months ended
March 31, 1997, compared to a net increase of $29.8 million in the first quarter
of 1996. In the first quarter of 1997, the Company's net increase in borrowings
was $64.1 million, compared to a net decrease of $69.1 million in the
corresponding quarter in 1996.
Savings banks must, by regulation, maintain average liquidity equal to
5% of deposits and short-term borrowings. Liquidity is measured by cash and
certain investments which are not committed, pledged or required to
15
16
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
liquidate specific liabilities. The Company's average liquidity ratios for March
31, 1997 and 1996 were 5.41% and 6.7%, respectively.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1997 and 1996
The Company's net earnings for the three months ended March 31, 1997
and 1996 were $3.5 million and $4.3 million, respectively. Earnings per share on
a primary earnings per share basis were $.60 and $.75 for the same periods,
respectively. The Company's net earnings in the first quarter of 1996 included a
$2.6 million after-tax gain from the sale of an office building.
The Company's core earnings per share in the first quarters of 1997 and
1996 were $.49 and $.30, respectively. Core earnings excludes gains and losses
on sales of investments and mortgage-backed securities, gains on sales of real
estate investments and nonrecurring adjustments.
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The Company's average net
interest margin during the first quarter of 1997 was 2.50%, representing a 7
basis point increase from the fourth quarter of 1996 and a 9 basis point
increase from the first quarter of 1996. The Company calculates the components
of its interest earning assets on a tax- equivalent basis.
During the first quarter of 1997, the yield on interest earning assets
increased by 9 basis points and the cost of interest bearing liabilities
increased by 2 basis points. Compared to the year-earlier quarter, the yield on
interest earning assets rose by 6 basis points and the cost of funds decreased
by 3 basis points. Included in the yield on interest earning assets in the first
quarter of 1997 is seven basis points attributable to prepayments of certain
mortgage-backed securities, which accelerated the accretion of related
discounts.
The following table displays average balances and average interest
rates on the Company's interest earning assets and interest bearing liabilities
at the end of and for the following periods:
MARCH 31, 1997 MARCH 31, 1996
---------------------------------------- -------------------------------------
YIELD/RATE, YIELD/RATE,
Dollars In Thousands AVERAGE AVERAGE END OF AVERAGE AVERAGE END OF
BALANCE YIELD/RATE QUARTER BALANCE YIELD/RATE QUARTER
---------- ---------- ---------- ---------- ----- -----
Assets:
Loans.................................. $1,515,652 7.83% 7.92% $1,575,526 7.75% 7.73%
Mortgage-backed securities............. 439,772 7.28% 6.94% 350,519 7.16% 7.65%
Other.................................. 183,061 6.66% 6.49% 145,105 6.62% 6.47%
------- -------
Total interest earning assets......... 2,138,485 7.63% 7.61% 2,071,150 7.57% 7.64%
Non-interest earning assets............ 70,308 69,100
---------- ----------
Total $2,208,793 $2,140,250
========== ==========
Liabilities and Equity:
Customer deposit accounts.............. $1,552,915 5.10% 5.06% $1,567,562 5.15% 5.13%
Borrowings............................. 518,054 5.87% 5.92% 441,963 5.71% 6.08%
------- -------
Total interest bearing liabilities.... 2,070,969 5.29% 5.29% 2,009,525 5.32% 5.33%
Non-interest bearing liabilities....... 22,840 25,983
Stockholders' equity................... 114,984 104,742
------- -------
Total............................. $2,208,793 $2,140,250
========== ==========
Interest rate spread................. 2.34% 2.32% 2.25% 2.31%
===== ===== ===== =====
Net interest margin.................. 2.50% 2.46% 2.41% 2.46%
===== ===== ===== =====
16
17
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
RATE/VOLUME. Net interest income before loss provisions in the first quarter of
1997 totaled $13.2 million, compared to $12.1 million in the corresponding
period in 1996. The rate- and volume-related increases in net interest income in
the first quarter of 1997, compared to the corresponding period in 1996, totaled
$684,000 and $147,000, respectively. Because 1996 was a leap year, the first
quarter of that year had one more day than the corresponding quarter in 1997,
resulting in $289,000 of additional net interest expense. Details were as
follows:
(In thousands) Increase (Decrease) Attributable To:
-------------------------------------------------
INTEREST INCOME ON INTEREST EARNING ASSETS: Rate Volume Days Net
------- ------- ------- -------
Loans held for investment and held for sale ............ $ 312 ($1,171) $ -- ($ 859)
MBS .................................................... 107 1,625 -- 1,732
Investment securities .................................. 127 541 (3) 665
------- ------- ------- -------
Total interest income on interest earning assets ..... 546 995 (3) 1,538
------- ------- ------- -------
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Customer deposit accounts .............................. (164) (159) (220) (543)
Borrowings ............................................. 26 1,007 (72) 961
------- ------- ------- -------
Total interest expense on interest bearing liabilities (138) 848 (292) 418
------- ------- ------- -------
Net interest income .................................... $ 684 $ 147 $ 289 $ 1,120
======= ======= ======= =======
Interest and Dividend Income. Interest and dividend income in the first
quarter of 1997 totaled $40.3 million and increased by 4.0% from the
corresponding period in 1996. In the three-month period ended March 31, 1997,
the Company's average interest earning assets were 3.2% greater than in the
comparative period in 1996, resulting in a $995,000 increase in interest and
dividend income. In addition, a $546,000 increase in interest and dividend
income was generated by a 6 basis point increase in the yield on average
interest earning assets in the first quarter of 1997, compared to 1996.
Interest earned on loans decreased by $859,000 in the first quarter of
1997, compared to the corresponding period in the previous year. In the same
comparative periods, the average yield on loans increased by 8 basis points,
resulting in rate-related increase in interest of $312,000. The Company's
average balances of loans were 3.8% lower in the first quarter of 1997 than in
the comparative quarter in 1996, resulting in a volume-related decrease in
interest income totaling $1.2 million.
Interest earned on MBS increased by $1.7 million in the first quarter
of 1997, compared to the corresponding period in the previous year. The
Company's average balances of MBS were more than 25% greater in the first
quarter of 1997 than in the comparable quarter in 1996, resulting in
volume-related increases in interest income totaling $1.6 million. The average
yield on MBS increased by 12 basis points during the first quarter of 1997, when
compared to the same period in 1996, resulting in a rate-related increase in
interest income of $107,000.
Interest Expense. Total interest expense increased by $418,000, or by
1.6%, in the first quarter of 1997, compared to the first quarter of 1996. Due
to the asset growth, the Company's average interest bearing liabilities in the
first quarter of 1997, compared to 1996, were approximately 3.1% greater than in
the corresponding period in 1996, resulting in a $848,000 volume-related
increase in interest expense. During the quarter, the average cost of interest
bearing liabilities decreased by 3 basis points compared to the first quarter of
1996. The rate-related decrease in interest expense in the comparative periods
was $138,000. The first quarter of 1997 benefited from one less day than in the
corresponding quarter in 1996, resulting in a decrease in interest expense of
$292,000.
Interest rates paid on the Company's customer deposits decreased by 5
basis points, compared to the corresponding period in 1996. As a result, the
rate-related decrease in interest expense in the same comparative periods
totaled $164,000. Lower average balances of customer deposits resulted in a
decrease in interest expense totaling $159,000, in the same comparative
quarters.
Interest expense from borrowings increased by $961,000 in the first
quarter of 1997, compared to 1996, primarily due to a 17% increase in average
borrowings. The average interest rate paid on the Company's borrowings increased
by 16 basis points in the first quarter of 1997, compared to the corresponding
period in 1996, resulting in a $26,000 rate-related increase in interest
expense.
17
18
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Provisions for Loan Losses. In the first quarter of 1997, the Company
recorded $2.5 million of provisions for loan losses, compared to $2.8 in the
first quarter of 1996. Although the provision for loan losses was lower in the
first quarter of 1997 than in the first quarter of 1996, it was greater than in
the preceding three quarters. The provision for loan losses was increased in the
first quarter of 1997 to reflect (i) sustained levels of net charge-offs
experienced in recent quarters, and (ii) the Company's desire for its allowance
for loan losses to increase, as a percentage of outstanding loans, due to the
Company's current emphasis on small business and commercial real estate lending.
Management believes that the allowance for loan losses, as a percentage of
outstanding loans, should be more reflective of its current strategy than its
current balance sheet composition and, to that end, increased the provision for
loan losses.
Non-Interest Income. Total non-interest income in the first quarter of
1997 decreased by $4.2 million from the comparative period in 1996. Most of the
decrease in the 1997 quarter was attributable to a $4.5 million nonrecurring
gain from the sale of an office building that benefited the first quarter of
1996.
One of the Company's objectives has been to enhance its fee-based
income. The following table indicates the fee income derived from the Company's
principal fee-based activities for the periods presented:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
(In thousands) 1997 1996
------ ------
Loan servicing ................................ $ 980 $1,065
Customer deposit fees ......................... 466 484
Commissions from sales of uninsured investments 443 405
------ ------
$1,889 $1,954
====== ======
Excluding gains and losses from sales of securities and sales of real
estate investments -- considered non-core elements of non-interest income --
non-interest income in the first quarter of 1997 was 8% less than in the
corresponding quarter in 1996. In the 1997 quarter, compared to the 1996
quarter, the Company's commission income from sales of investment products
increased while its loan servicing fees and customer deposit fee income both
decreased. The Company's portfolio of loans serviced for others has been
declining in light of its operating strategy of focusing in originating and
purchasing loans for portfolio retention. Customer deposit fee income declined
in the first quarter of 1997, compared to the corresponding period in 1996,
primarily because the highly competitive market for new checking relationships
has required fee concessions.
Income or loss from real estate operations consists of net income from
operations of Company facilities, including tenant-occupied space, holding costs
and loss provisions related to REO, gains from sales of real estate, and loss
provisions and operating income or expense from real estate held for development
and sale. The majority of the $4.6 million decrease in non-interest income from
real estate operations was due to the building sale mentioned previously.
In the first quarter of 1997, the Company recorded gains from sales of
investment securities and MBS totaling $1.1 million, compared to $597,000 in the
first quarter of 1996. Buying and selling securities for the purposes of
generating gains is not considered a core activity by the Company; rather, the
increase in gains from sales of such securities was largely due to execution of
the Company's interest rate risk reduction strategies.
Operating Expenses. The Company incurred operating expenses of $8.0
million in the first quarter of 1997, representing a decrease of 8.6% from the
corresponding period in 1996. The decrease was primarily due to a reduction in
deposit insurance premiums in 1997, following an assessment paid in late 1996 in
connection with the recapitalization of the Saving Association Insurance Fund
("SAIF"). The ratios of annualized operating expenses to average assets in the
first quarters of 1997 and 1996 were 1.46% and 1.65%, respectively. The
annualized operating expense ratio for the first quarter of 1996 would have been
1.54% had current deposit insurance rates been in effect at that time.
18
19
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth the increases and decreases in the
components of operating expenses in the first quarter of 1997, compared to the
corresponding quarter in 1996:
INCREASE (DECREASE) DUE TO:
--------------------------------------------------
FIRST QUARTER NET FIRST QUARTER
(In Thousands) 1996 LENDING(1) OTHER CHANGE 1997
------ ---------- ------ ------ ------
Compensation ............ $4,155 $ (90) $ 229 $ 139 $4,294
Net occupancy ........... 1,552 (94) (69) (163) 1,389
Deposit insurance ....... 850 -- (604) (604) 246
Data and check processing 410 (12) (27) (39) 371
Advertising ............. 194 -- (60) (60) 134
Intangible amortization . 19 -- (18) (18) 1
Other operating ......... 1,654 (98) 87 (11) 1,643
------ ------ ------ ------ ------
Total ................. $8,834 $ (294) $ (462) $ (756) $8,078
====== ====== ====== ====== ======
- -------------
(1) Operating expense reductions in the first quarter of 1997, compared to 1996,
were achieved as a result of the discontinuation of the Company's retail-based
single family lending as of the end of 1996.
Compensation and employee benefits expense increased by $139,000 in the
first quarter of 1997 from the corresponding period in 1996. Included in the
variance is a $90,000 reduction in compensation in the Company's mortgage
lending division as a result of the discontinuation of single family,
retail-based lending. The majority of the increase in compensation expense was
attributable to the Company's annual performance and salary review process and
an increase in retirement benefits expense.
Occupancy expenses decreased by $163,000 in the three-month period
ended March 31, 1997, compared to the same period in 1996. Most of the decrease
is attributable to cost savings resulting from discontinued lending operations,
especially equipment-related expenses and depreciation
CenFed Bank is a "well capitalized" financial institution, as defined
by the Federal Deposit Insurance Corporation, and, as such, is charged the
lowest deposit insurance rate available for institutions insured by the Savings
Association Insurance Fund. Following the recapitalization of the SAIF, deposit
insurance rates fell by almost 72% for well capitalized institutions. Deposit
insurance in the first quarter of 1997 was based on an assessment rate of 6.48
basis points, down from 23 basis points in the first quarter of 1996, and
insurance expense decreased by $604,000.
Income Taxes. Income tax expense or benefit varies from period to
period based on the Company's level of earnings before taxes, the relative
amount of nondeductible and/or tax exempt income, and changes to statutory tax
rates. For the three months ended March 31, 1997, the Company recorded income
tax expense of $1.9 million on earnings before taxes of $5.4 million, resulting
in an effective tax rate of 34.8%. In the comparative period in 1996, the
Company recorded income tax expense of $2.8 on earnings before taxes and
extraordinary items of $7.4 million, resulting in an effective tax rate of
37.4%. The following table sets forth a reconciliation of the Company's marginal
tax rate of 42.4% to its effective tax rates for the quarters ended March 31,
1997 1996
---- ----
Marginal tax rate ................................ 42.4% 42.4%
Tax benefits associated with municipal bonds ..... (5.4)% (4.5)%
Tax benefits associated with enterprise zone loans (1.1)% --
Other ............................................ (1.1)% (0.5)%
---- ----
Effective tax rate ............................... 34.8% 37.4%
==== ====
Extraordinary Item. During the first quarter of 1996, the Company
repaid a fixed rate borrowing before its scheduled maturity. As a result, the
Company incurred a prepayment penalty of $364,000, net of taxes of $267,000.
19
20
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
REGULATORY CAPITAL
Capital regulations of the Office of Thrift Supervision ("OTS")
established three capital requirements: a "leverage limit" (also referred to as
the "core capital requirement"), a "tangible capital requirement" and a
"risk-based capital requirement." The following table sets forth the Bank's
capital position relative to the Capital Regulations at March 31, 1997:
Tangible Capital Core Capital Risk-based Capital
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands) -------- ------- -------- ------- -------- -------
Actual ............... $127,624 5.65% $129,354 5.72% $143,496 11.23%
Required ............. 33,906 1.50% 67,864 3.00% 102,245 8.00%
-------- ---- -------- ---- -------- -----
Excess ............... $ 93,718 4.15% $ 61,490 2.72% $ 41,251 3.23%
======== ==== ======== ==== ======== =====
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 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 March 31, 1997:
Tangible Total Risk- Tier 1 Risk- Tier 1 Leverage
Capital Category: Capital Ratio based Ratio based 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 MARCH 31, 1997 N/A 11.2% 10.1% 5.7%
At March 31, 1997, the Bank was a well capitalized institution.
20
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11.1 Computation of Per Share Earnings
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
21
22
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENFED FINANCIAL CORPORATION
Date: May 14, 1997 By: /s/ Steven P. Neiffer
------------------ --------------------------
Steven P. Neiffer
Vice President & Controller
Principal Accounting Officer)
23
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
- ------- ----------- ------------
11.1 Computation of Earnings Per Share