1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ------ ACT OF 1934
For the quarterly period ended June 30, 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 identification no.)
incorporation or organization)
199 North Lake Avenue, Pasadena, California 91101
- ------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (818) 585-2400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
--- ---
Number of shares outstanding of the registrant's sole class of common stock at
July 31, 1997: 5,732,581
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CENFED FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 1997 and
December 31, 1996.........................................................................3
Consolidated Statements of Earnings for the Three Months and Six Months
Ended June 30, 1997 and 1996..............................................................4
Consolidated Statements of Cash Flows for the Three Months and Six Months
Ended June 30, 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
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
ASSETS
Cash ................................................................... $ 16,234 $ 17,441
Federal funds sold ..................................................... 700 7,500
----------- -----------
Cash and cash equivalents .................................... 16,934 24,941
----------- -----------
Investment securities available for sale, at fair value ................ 188,990 161,719
Mortgage-backed securities (AMBS@) available for sale, at fair value ... 478,094 442,015
Loans held for investment, net ......................................... 1,439,711 1,391,307
Loans held for sale, at lower of cost or fair value .................... 116,304 109,651
Accrued interest receivable ............................................ 16,134 14,685
Real estate acquired in settlement of loans (AREO@) .................... 9,485 10,466
Premises and equipment, net ............................................ 8,961 9,663
Intangible assets, net of accumulated amortization ..................... 204 205
Deferred income taxes .................................................. 6,201 6,201
Other assets ........................................................... 14,505 13,794
----------- -----------
$ 2,295,523 $ 2,184,647
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposit accounts .............................................. $ 1,544,168 $ 1,558,470
Securities sold under agreements to repurchase ......................... 163,448 130,639
Notes payable .......................................................... 17,750 17,750
FHLB advances .......................................................... 433,579 349,479
Other liabilities ...................................................... 17,133 14,491
----------- -----------
Total liabilities ............................................ 2,176,078 2,070,829
----------- -----------
Commitments and contingent liabilities
Common stock. $.01 par value
Authorized shares: 14,000,000 at June 30, 1997 and December 31, 1996
Outstanding shares: 5,728,607 at June 30, 1997 and 5,154,533 at December 58 52
31, 1996
Additional paid in capital ............................................. 58,153 42,729
Treasury stock, at cost; 68,470 shares ................................ (2,257) --
Retained earnings - substantially restricted ........................... 65,220 72,468
Unrealized loss on securities available for sale, net of tax ........... (736) (237)
Deferred compensation - retirement plans ............................... (993) (1,194)
----------- -----------
Total stockholders= equity ................................... 119,445 113,818
----------- -----------
$ 2,295,523 $ 2,184,647
=========== ===========
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
IN THOUSANDS, EXCEPT SHARE AMOUNTS 1997 1996 1997 1996
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans .............................................. $ 30,518 $ 30,530 $ 60,182 $ 61,053
Mortgage-backed securities ......................... 8,096 6,743 16,103 13,018
Investment securities and short-term investments ... 2,779 1,845 5,378 3,779
----------- ----------- ----------- -----------
Total interest and dividend income ....... 41,393 39,118 81,663 77,850
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Customer deposit accounts ......................... 19,696 19,762 39,215 39,824
Securities sold under agreements to repurchase .... 2,260 1,256 4,192 3,010
FHLB advances ..................................... 6,100 4,060 11,140 8,213
Other borrowings .................................. 521 602 1,043 1,228
----------- ----------- ----------- -----------
Total interest expense ................... 28,577 25,680 55,590 52,275
----------- ----------- ----------- -----------
Net interest income ............................... 12,816 13,438 26,073 25,575
PROVISIONS FOR LOAN LOSSES ........................... 1,500 2,250 4,000 5,050
----------- ----------- ----------- -----------
Net interest income after provisions for 11,316 11,188 22,073 20,525
loan losses
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Loan servicing fees ............................... 944 964 1,924 2,029
Customer deposit account fees ..................... 479 490 945 974
Gain on sale of investments and MBS ............... 595 395 1,666 992
Gain (loss) on sale of loans ...................... -- 14 (1) 47
Income (loss) from real estate operations ......... (342) (443) (655) 3,806
Commissions from sales of investment products ...... 430 513 873 918
Other ............................................. 161 78 259 175
----------- ----------- ----------- -----------
Total non-interest income .................. 2,267 2,011 5,011 8,941
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Compensation ...................................... 4,042 4,130 8,336 8,285
Net occupancy ..................................... 1,459 1,509 2,848 3,061
Deposit insurance premiums ........................ 252 897 498 1,747
Data and check processing ......................... 301 386 672 796
Advertising and marketing ......................... 211 138 345 332
Intangible amortization ........................... -- 17 1 36
Other ............................................. 1,562 1,406 3,205 3,060
----------- ----------- ----------- -----------
Total operating expenses ................... 7,827 8,483 15,905 17,317
----------- ----------- ----------- -----------
Earnings before income taxes and ........... 5,756 4,716 11,179 12,149
extraordinary item
INCOME TAXES ......................................... 1,960 1,670 3,847 4,453
----------- ----------- ----------- -----------
Earnings before extraordinary item ......... 3,796 3,046 7,332 7,696
EXTRAORDINARY ITEM:
Early extinguishment of debt (net of income taxes of -- -- -- (364)
$267)
=========== =========== =========== ===========
NET EARNINGS ........................... $ 3,796 $ 3,046 $ 7,332 $ 7,332
=========== =========== =========== ===========
PRIMARY EARNINGS PER SHARE:
Before extraordinary item ............. $ 0.64 $ 0.53 $ 1.23 $ 1.35
Extraordinary item .................... -- -- -- $ (0.06)
=========== =========== =========== ===========
After extraordinary item ............ $ 0.64 $ 0.53 $ 1.23 $ 1.29
=========== =========== =========== ===========
AVERAGE PRIMARY SHARES OUTSTANDING ................... 5,901,271 5,706,390 5,913,185 5,688,406
=========== =========== =========== ===========
See notes to consolidated financial statements
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
IN THOUSANDS 1997 1996 1997 1996
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .............................................. $ 3,796 $ 3,046 $ 7,332 $ 7,332
Adjustments to reconcile net earnings to net cash
provided: ................................................. 943 192 1,208 620
Net amortization of fees, discounts and premiums
Depreciation and amortization .......................... 488 554 988 1,305
Gain on sales of loans ................................. -- (14) 1 (47)
Gain on sales of investments and MBS ................... (595) (395) (1,666) (992)
Fair value adjustment to loans held for sale ........... -- 100 -- 100
Provisions for loan and real estate losses ............. 1,502 2,291 4,144 5,091
Change in deferred income taxes ........................ -- -- -- 2,366
Originations and purchases of loans held for sale ...... (5,000) (10,400) (13,597) (21,846)
Repayment and prepayments of loans held for sale ....... 3,023 2,649 6,357 9,681
Proceeds from sales of loans held for sale ............. 357 285 589 4,288
(Increase) decrease in interest receivable ............. (374) 124 (1,449) (246)
Increase (decrease) in interest payable ................ (1,232) 112 (1,291) 824
Change in other assets and other liabilities, net ...... (1,864) (2,037) 3,923 (4,023)
FHLB stock dividends ................................... (273) (212) (563) (414)
Other, net ............................................. -- 36 4 42
--------- --------- --------- ---------
Net cash provided by (used in) operating activities .... 771 (3,669) 5,980 4,081
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale . (46,893) (21,347) (70,797) (34,225)
Proceeds from sales of investment securities available
for sale ........................................... 28,542 12,887 36,555 34,561
Maturities of investment securities available for sale . -- -- 10,000 5,000
Purchases of MBS available for sale .................... (101,087) (94,408) (130,962) (188,591)
Proceeds from sales of MBS available for sale .......... 47,369 16,258 64,058 87,689
Principal repayments on MBS available for sale ......... 17,581 20,015 30,471 33,216
Originations and purchases of loans held for investment (52,845) (24,274) (163,740) (60,690)
Loan repayments and prepayments ........................ 56,363 48,741 98,333 100,647
Purchases of premises and equipment .................... (164) (170) (285) (382)
Capital expenditures for REO and real estate held for
development and sale ............................... (92) (284) (354) (488)
Sales of REO and real estate held for development and .. 6,179 4,609 11,462 12,069
--------- --------- --------- ---------
sale
Net cash used in investing activities ................ (45,047) (37,973) (115,259) (11,194)
--------- --------- --------- ---------
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30,
-------------------------- -------------------------
IN THOUSANDS 1997 1996 1997 1996
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in customer deposit accounts ... (22,116) (19,654) (14,229) 10,165
Net decrease in notes payable .......................... -- (4,050) -- (4,100)
Net increase (decrease) in short-term financing:
FHLB advances ....................................... 61,000 14,000 10,100 2,600
Securities sold under agreements to repurchase ...... 1,783 45,161 32,809 (13,385)
Repayment of long-term FHLB advances ................... (10,000) -- (10,000) (9,200)
Proceeds from long-term FHLB advances .................. -- -- 84,000 10,000
Dividends paid ......................................... (516) (452) (982) (863)
Proceeds from issuance of common stock ................. 371 115 1,629 235
Treasury stock repurchased ............................. (1,559) -- (2,055) --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities . 28,963 35,120 101,272 (4,548)
--------- --------- --------- ---------
Net decrease in cash and cash equivalents .............. (15,313) (6,522) (8,007) (11,661)
Cash and cash equivalents, beginning of period ......... 32,247 24,077 24,941 29,216
--------- --------- --------- ---------
Cash and cash equivalents, end of period ............... $ 16,934 $ 17,555 $ 16,934 $ 17,555
========= ========= ========= =========
CASH PAID FOR:
Interest on customer deposit accounts ................... $ 29,809 $ 25,568 $ 56,881 $ 51,451
Income tax payments .................................... $ 3,349 $ 2,325 $ 799 $ 2,475
NON-CASH ITEMS:
Additions to REO ........................................ $ 5,942 $ 3,919 $ 14,238 $ 9,395
Net change in unrealized gain (loss) on
securities available for sale, net of taxes ......... $ 1,780 $ (1,313) $ (499) $ (4,261)
Loans to facilitate sales of REO and
real estate held for development and sale ........... $ 1,474 $ 2,623 $ 3,508 $ 3,119
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, DECEMBER 31, 1996 AND
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(1) BASIS OF PRESENTATION
The consolidated statement of financial condition as of June 30, 1997,
and the related consolidated statements of operations and cash flows for the
three months and six months ended June 30, 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 June 30, 1997, and its results of operations and cash flows for
the three months and six months ended June 30, 1997 and 1996. The results of
operations for the unaudited periods are not necessarily indicative of the
results of operations to be expected for the entire year of 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 EVENT
On July 2, 1997, the Company declared its quarterly cash dividend of
$.09 per share to shareholders of record as of July 18, 1997. The dividend was
distributed on August 1, 1997.
(3) EARNINGS PER SHARE
The Company has a long-term incentive plan that includes incentive
stock options. For purposes of determining primary earnings per share and fully
diluted earnings per share, stock options granted to officers and directors of
the Company are considered common stock equivalents and are added to common
shares outstanding, using the treasury stock method. At June 30, 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 is 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 $0.66 and $0.55, and diluted earnings per share would have been
$0.63and $0.53, for the three months ended June 30, 1997 and 1996, respectively.
For the six months ended June 30, 1997 and 1996, basic earnings per share would
have been $1.27 and $1.33, and diluted earnings per share would have been $1.23
and $1.29, respectively.
Earnings per share for all periods presented have been calculated based
upon the increased number of shares of common stock and common stock equivalents
after giving effect to the stock dividend distributed on May 2, 1997.
(4) DERIVATIVE FINANCIAL INSTRUMENTS
In response to recent rule amendments of the Securities and Exchange
Commission, additional information is required with respect to derivative
financial instruments. The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes.
The Company purchased interest rate cap contracts in 1996 as a
component of its interest rate risk program. The interest rate cap contracts
were intended to limited the adverse effects of lifetime interest rate maximums
on certain adjustable-rate loans in the Company's loan portfolio. The Company
purchased two interest rate cap contracts with notional amounts of $200 million
and $75 million and respective strike rates of 7.50% and 7.00%. Under the
interest rate cap contracts, if the London Interbank Offered Rate ("LIBOR")
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
will receive,
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in addition, 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. At June 30, 1997, the unamortized cost basis in the
interest rate caps was $1.9 million. The market value of the cap contracts at
that date was $418,000.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, 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 June 30, 1997 or the results from operations for the three- and
six-month periods then ended, resulting from the adoption of SFAS 125.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"). This statement was issued in
connection with SFAS 128 and lists the required disclosures about capital
structure that had been included in a number of previously existing separate
statements and opinions. Whereas SFAS 128 applies only to public entities, the
guidance relative to SFAS 129 is applicable to both public and non-public
entities. SFAS 129 is effective for financial statements for periods ending
after December 15, 1997. Implementation of SFAS 129 will not have a material
adverse effect on the Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). Comprehensive income represents the change in equity of
the Company during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires all components of comprehensive income, which are required to be
recognized under accounting standards, be reported in a financial statement that
is displayed in equal prominence with the other financial statements. SFAS 130
does not require a specific presentation format but will require the Company to
display an amount representing total comprehensive income for the period in the
financial statements. SFAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. Implementation of SFAS 130 will not have a
material adverse effect on the Company's financial condition or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131"). SFAS 131 establishes
standard for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 supercedes numerous requirements in a previously issued statement --
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise" -- but
retains the requirement to report information about major customers. SFAS 131 is
effective for financial statements for periods beginning after December 15,
1997. Implementation of SFAS 130 will not have a material adverse effect on the
Company's financial condition or results of operations.
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ITEM 2.
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
OPERATING STRATEGY
The operating strategy of CENFED Financial Corporation (the ACompany@)
consists of three primary elements: (i) acquiring assets providing returns that
satisfy the Company's cost of capital requirements; (ii) focusing on retail
deposit gathering as the principal source of funding; and (iii) focusing on the
efficiency of Company operations.
Acquiring assets providing returns that satisfy the Company's cost of
capital requirements. The Company seeks assets that provide returns, on a credit
risk-adjusted basis, that meet or exceed its cost of capital. 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 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 six
months of 1997, the Company purchased $79.4 million of home equity loans and
$24.8 million of single family loans.
The Company's new loan volume, consisting of originations and
purchases, increased by $23.2 million, or 67% in the second quarter of 1997,
compared to the corresponding quarter in 1996. For the six months ended June 30,
1997, loan volume increased by 107%, compared to the first half of 1996. The
following table sets forth loan volume information:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(In Thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Single family first mortgage $ 24,792 $ 7,155 $ 24,792 $ 20,225
Home equity ................ -- -- 79,436 --
Commercial real estate ..... 24,639 13,314 42,438 34,331
Small business ............. 8,378 14,147 24,091 27,759
-------- -------- -------- --------
$ 57,809 $ 34,616 $170,757 $ 82,315
======== ======== ======== ========
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. Competition in the Southern California marketplace
is intense due to the number of financial institution competitors in most of the
same communities in which the Company has branch offices. The following table
sets forth the composition of retail deposits at the dates indicated:
JUNE 30, 1997 JUNE 30, 1996
------------------------- ------------------------
(Dollars in Thousands) NUMBER AMOUNT NUMBER AMOUNT
---------- ---------- ---------- ----------
Checking accounts ............................. 29,205 $ 141,388 26,051 $ 119,830
Savings accounts .............................. 19,353 81,051 21,299 102,720
Money market accounts ......................... 3,111 101,158 2,292 97,413
Certificates of deposit ....................... 33,102 991,640 36,176 1,030,850
---------- ---------- ---------- ----------
Total retail deposits ...................... 84,771 $1,315,237 85,818 $1,350,813
========== ========== ========== ==========
Retail deposits to interest bearing liabilities 60.9% 66.9%
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Total retail deposits were lower at June 30, 1997 than at June 30, 1996
and represented a smaller portion of interest bearing liabilities. However,
total transaction account balances increased by $3.6 million at the end of June
1997, compared to the corresponding date one year earlier.
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 second quarter of
1997, the annualized general and administrative expense ratio was 1.37%,
compared to 1.61% in the corresponding period in the previous year. For the
first six months of 1997, the annualized general and administrative expense
ratio was 1.42%, compared to 1.63% during the same period in 1996.
A second measure of 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 second quarter of 1997, the Company's
efficiency ratio was 52.8%, compared to 54.4% in the corresponding period in the
previous year. For the first six months of 1997, the efficiency ratio was 52.9%,
compared to 58.2% during the same period in 1996.
While 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 grew by $32.1 million from the
beginning-of-quarter level. Since the beginning of the year, total assets have
grown by $110.9 million. The following table sets forth significant changes in
the Company's statement of financial condition:
INCREASE (DECREASE)
----------------------------------------------------
THREE MONTHS ENDED JUNE SIX MONTHS ENDED JUNE
(In Thousands) 30, 1997 30,1997
------------------------ ---------------------
Loans held for investment, net..................... $(11,340) $44,404
MBS and investment securities...................... 58,960 63,350
All other, net..................................... (15,496) 3,122
-------- --------
Change in total assets.......................... $ 32,124 $110,876
======== ========
Customer deposit accounts.......................... ($22,146) $(14,302)
Borrowings......................................... 52,783 116,909
Stockholders= equity............................... 3,922 5,627
All other, net..................................... (2,435) 2,642
-------- --------
Change in total liabilities and equity........ $ 32,124 $110,876
======== ========
Loans Held for Investment. Loans held for investment decreased by $11.3
million during the second quarter, largely due to insufficient new loan volume
to counter the effects of repayments within the portfolio, continuing a trend
from the first quarter. During the first six months of 1997, the Company was
able to purchase loans to supplement its loan originations, resulting in a $44.4
million increase in loans.
MBS and Investment Securities. The Company purchases MBS and investment
securities when it cannot meet its growth objectives through loan originations
and purchases. During the second quarter of 1997, the Company purchased $101.1
million in MBS and $46.9 million in investment securities. In the future, the
Company will continue to focus on identifying securities for purchase with
suitable yield and interest rate risk characteristics.
Customer Deposit Accounts. During the second quarter of 1997, total
balances of customer deposit accounts decreased by $22.1 million, consisting of
a $7.3 million decrease in retail deposits and a $14.8 million decrease in
wholesale certificates of deposit. For the six months ended June 30, 1997,
customer deposit accounts decreased by $14.3 million, consisting of a $16.5
million decrease in retail deposits and a $2.2 million increase in wholesale
deposits.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Borrowings. Total borrowings increased by $52.8 million during the
second quarter of 1997. The new borrowings were used to finance the purchase of
MBS and investment securities and to replace runoff of deposit accounts. Most of
the increase was in the form of short-term borrowings.
Stockholders' Equity. Net earnings for the second quarter of 1997
totaled $3.8 million, accounting for most of the $3.9 million increase in
stockholders' equity. During the quarter, stockholders' equity increased due to
a $1.8 million decline in the unrealized loss on securities available for sale,
and decreased by treasury stock purchases of $1.8 million.
ASSET QUALITY
Delinquent Loans. Total delinquent loan balances decreased by $3.4
million during the second quarter of 1997. The most marked improvement occurred
in the single family portfolio. Loan delinquency information by aging category
and by type of loan is set forth in the following table:
JUNE 30, DECEMBER 31, JUNE 30,
(In Thousands) 1997 1996 1996
-------- ------------ --------
31 - 60 days delinquent:
Single family.................................. $3,529 $5,887 $5,285
Commercial real estate......................... 5 404 296
Small business................................. 334 715 1,011
Consumer....................................... 9 6 10
- - --
3,877 7,012 6,602
----- ----- -----
61 - 90 days delinquent:
Single family.................................. 1,550 3,129 1,345
Commercial real estate......................... - - 435
Small business................................. 1,763 1,857 643
Consumer....................................... 14 10 57
-- -- --
3,327 4,996 2,480
----- ----- -----
Over 90 days delinquent:
Single family.................................. 10,317 11,467 11,272
Commercial real estate......................... 3,842 3,858 7,048
Small business................................. 2,849 1,550 1,370
Consumer....................................... 6 3 10
- - --
17,014 16,878 19,700
------ ------ ------
GRAND TOTAL:
Single family.................................. 15,396 20,483 17,902
Commercial real estate......................... 3,847 4,262 7,779
Small business................................. 4,946 4,122 3,024
Consumer....................................... 29 19 77
-- -- --
$24,218 $28,886 $28,782
======= ======= =======
Delinquent loans by type, as a percentage of outstanding loans by type:
Single family.................................. 1.58% 2.11% 1.72%
Commercial real estate......................... 0.91% 1.09% 1.90%
Small business................................. 3.27% 3.07% 2.55%
The ratio of delinquent loans to total loans at June 30, 1997 was 31
basis points lower than one year earlier and 37 basis points lower than at the
end of 1996. Delinquent small business loans at June 30, 1997, December 31,
11
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
1996, and June 30, 1996 included $4.6 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.
Nonperforming assets. Nonperforming assets at June 30, 1997 decreased by
$376,000 from the second quarter of 1996, and represented 1.28% of total assets
at that date. The following table sets forth the composition of non-performing
assets at the dates indicated:
JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30,
(Dollars in Thousands) 1997 1997 1996 1996 1996
------- ------- ------- ------- -------
Nonaccrual loans...................................... $19,898 $20,660 $21,502 $21,028 $22,625
Real estate acquired in settlement of loans........... 9,485 11,129 10,466 7,867 7,134
------- ------- ------- ------- -------
Nonperforming assets ........................... $29,383 $31,789 $31,968 $28,895 $29,759
======= ======= ======= ======= =======
Total nonperforming assets as a % of total assets..... 1.28% 1.40% 1.46% 1.34% 1.39%
Nonaccrual loans as a % of total loans held for
investment and for sale.......................... 1.28% 1.31% 1.42% 1.37% 1.45%
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 would be
required by the 90 days past due standard, depending upon the individual
circumstances surrounding the loan's delinquency. At June 30, 1997, the Company
had no loans over 90 past due that were still accruing. When an interest earning
asset is placed on nonaccrual status, previously accrued but unpaid interest is
reversed against current income.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth the Company's nonperforming asset activity
for the three- and six-month periods ended June 30, 1997:
THREE MONTHS: SIX MONTHS:
-------------------------------- --------------------------------
(In Thousands) NONACCRUAL NONACCRUAL
LOANS REO TOTAL LOANS REO TOTAL
-------- -------- -------- -------- -------- --------
Balance, beginning of period .... $ 20,660 $ 11,129 $ 31,789 $ 21,502 $ 10,466 $ 31,968
New Nonaccruing Loans:
Single family (1) ............ 1,236 -- 1,236 5,340 -- 5,340
Income property .............. 1,873 -- 1,873 6,486 -- 6,486
Small business ............... 3,150 -- 3,150 3,582 -- 3,582
Consumer, net ................ -- -- -- 3 -- 3
Foreclosures:
Single family ................ (4,633) 3,920 (713) (7,902) 6,491 (1,411)
Income property .............. (989) 710 (279) (5,453) 3,605 (1,848)
Small business ............... (319) 342 23 (815) 1,115 300
Loans Brought Current:
Income property .............. (625) -- (625) (1,452) -- (1,452)
Consumer ..................... (406) -- (406) (606) -- (606)
Sales of REO:
Single family ................ -- (4,293) (4,293) -- (6,912) (6,912)
Income property .............. -- (1,708) (1,708) -- (4,093) (4,093)
Small business ............... -- (158) (158) -- (158) (158)
Other:
Single family ................ -- 127 127 -- (445) (445)
Income property .............. -- (231) (231) (738) (231) (969)
Small business ............... (49) (353) (402) (49) (353) (402)
-------- -------- -------- -------- -------- --------
Net change during the period . (762) (1,644) (2,406) (1,604) (981) (2,585)
-------- -------- -------- -------- -------- --------
BALANCE, AT JUNE 30, 1997 ....... $ 19,898 $ 9,485 $ 29,383 $ 19,898 $ 9,485 $ 29,383
======== ======== ======== ======== ======== ========
- ----------
(1) New nonaccruing single family loans have been reduced by single family
loans that were brought current during the quarter.
The Company experienced a $2.4 million decrease in nonperforming assets
during the second quarter of 1997, consisting primarily of a $3.4 million
decrease in nonaccrual single family loans, a $2.8 million increase in
nonaccrual small business loans, and a $1.6 million decrease in REO. At June 30,
1997, the nonperforming asset ratio decreased by 12 basis points from the
beginning of the quarter, consisting of a 10 basis point decrease due to lower
amounts of nonperforming assets, and a 2 basis point decrease due to the growth
in total assets.
Impaired Loans. Loans are evaluated for impairment in accordance
with the provisions of Statement of Financial Accounting Standards Number 114,
"Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"), 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 rate, or the loan's
observable market value or the fair value of the collateral (if the loan is
collateral dependent). If the Company determines that foreclosure is probable,
it measures impairment based on the fair value of the collateral. If the measure
of the impaired loan is less than the Company's recorded investment in the loan,
the impairment is recognized by creating a specific valuation allowance.
Subsequent to the initial measurement of impairment, if there is a significant
increase or decrease in the amount or timing of an impaired loan's expected
future cash flows, or if actual cash flows are significantly different from the
cash flows previously projected, or if the fair value of the collateral
fluctuates materially, the Company recalculates the impairment and adjusts the
specific valuation allowance.
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth information with respect to impaired loans at the
dates indicated:
JUNE 30, 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 $ 4,294 $ 739 $ 3,555 $ 3,457 $1,439 $ 2,018
Not requiring specific loss 1,751 - 1,751 3,668 - 3,668
allowances
Restructured loans:
Requiring specific loss allowances 4,729 910 3,819 4,756 707 4,049
Not requiring specific loss 927 - 927 - - -
allowances
Other loans:
Requiring specific loss allowances 2,106 439 1,667 2,937 709 2,228
Not requiring specific loss 1,219 - 1,219 618 - 618
------- ------ ------- ------- ------ -------
allowances
Total......................... $15,026 $2,088 $12,938 $15,436 $2,855 $12,581
======= ====== ======= ======= ====== =======
For the three months ended June 30, 1997, the average net recorded
investment in impaired loans was $13.0 million and the interest income
recognized totaled $189,000. In the corresponding period in the previous year,
the average net recorded investment in impaired loans was $13.8 million and the
interest income recognized totaled $264,000.
Allowance for Loan Losses. The Company maintains specific valuation
allowances for loan losses related to impaired loans and a general valuation
allowance. The general valuation 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.
An analysis of the activity in the allowance for loan losses follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(Dollars in Thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Balance, beginning of period ....... $ 16,270 $ 14,037 $ 13,488 $ 12,789
Provision for loan losses .......... 1,500 2,250 4,000 5,050
Acquisitions and purchases ......... -- -- 2,606 --
Recoveries ......................... 710 341 1,722 505
Charge-offs ........................ (1,165) (1,684) (4,501) (3,400)
-------- -------- -------- --------
Balance, end of period ............. $ 17,315 $ 14,944 $ 17,315 $ 14,944
======== ======== ======== ========
Ratio of allowance for loan losses to total loans at end of period 1.11% 0.96%
Ratio of allowance for loan losses to nonaccrual loans at end of period 87.0% 72.0%
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth the Company's net charge-offs by loan types for
the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(In Thousands) 1997 1996 1997 1996
------- ------- ------- -------
Single family ............. $ 291 $ 1,123 $ 1,045 $ 1,788
Commercial real estate .... 169 112 1,691 989
Small business ............ (13) 114 (16) 120
Other ..................... 8 (6) 59 (2)
------- ------- ------- -------
Total ................ $ 455 $ 1,343 $ 2,779 $ 2,895
======= ======= ======= =======
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, MBS and loans held for sale;
cash flows generated from operations; and proceeds from increases in customer
deposits, FHLB advances and short-term borrowings.
Principal payments on loans and MBS were $77.0 million and $71.4
million for the three months ended June 30, 1997 and 1996, respectively, and
$135.2 million and $143.5 million for the six months ended June 30, 1997 and
1996, respectively. Proceeds from the sales of loans were $357,000 and $285,000
for the second quarters of 1997 and 1996, respectively, and $589,000 and $4.3
million for the six months ended June 30, 1997 and 1996, respectively.
Sales of investments and MBS totaled $75.9 million and $29.1 million
for the second quarters of 1997 and 1996, respectively, and $100.6 million and
$122.2 million for the six months ended June 30, 1997 and 1996, respectively.
Customer deposits decreased by $22.1 million in the three months ended
June 30, 1997, compared to a decrease of $19.7 million in the second quarter
of 1996. In the same respective quarters, borrowings increased by $52.8 million
and $55.1 million. For the six months ended June 30, 1997 and 1996, customer
deposits decreased by $14.3 million and increased by $10.2 million,
respectively.
Savings banks must, by regulation, maintain liquidity of 5% of deposits
and short-term borrowings. Liquidity is measured by cash and certain investments
that are not committed, pledged, or required to liquidate specific liabilities.
The Company's average liquidity ratios for June 30, 1997 and 1996 were 5.48% and
5.80%, respectively.
RESULTS OF OPERATIONS
Comparisons of the Three Months and Six Months Ended June 30, 1997 and 1996
The Company's net earnings for the three months ended June 30, 1997 and
1996 were $3.8 million and $3.0 million, respectively. Primary earnings per
share were $.64 and $.53 for the same periods, respectively. For the six months
ended June 30, 1997 and 1996, the Company recorded net earnings of $7.3 million
and $7.3 million, respectively, for primary earnings per share of $1.23 and
$1.29.
Net Interest Margin. The net interest margin for the second quarter of
1997 was 2.40%, representing a 10 basis point decrease from the first quarter of
1997 and a 29 basis point decrease from the second quarter of 1996. For the six
months ended June 30, 1997 and 1996, the net interest margin was 2.45% and
2.55%, respectively. The following table displays average interest rates on the
Company's interest earning assets and interest bearing liabilities, on a fully
tax equivalent basis, at the end of and for the periods indicated:
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
THREE MONTHS ENDED JUNE 30:
------------------------------------------------------------------------
1997 1996
------------------------------------ ---------------------------------
AT At
Dollars in Thousands AVERAGE AVERAGE JUNE 30, Average Average June 30,
BALANCE YIELD/RATE 1997 Balance Yield/Rate 1996
-------- ---------- -------- ---------- ---------- --------
Assets:
Loans................................. $1,553,134 7.86% 7.90% $1,556,211 7.85% 7.79%
Mortgage-backed securities............ 464,946 6.97% 6.89% 363,060 7.43% 7.18%
Other................................. 191,461 6.85% 6.79% 125,779 6.23% 6.81%
---------- ----------
Total interest earning assets........ 2,209,541 7.59% 7.59% 2,045,050 7.74% 7.62%
Non-interest earning assets........... 69,636 62,788
---------- ----------
Total $2,279,177 $2,107,838
========== ==========
Liabilities and Equity:
Customer deposit accounts............. $1,548,269 5.10% 5.13% $1,567,301 5.07% 5.01%
Borrowings............................ 593,593 6.00% 5.92% 410,746 5.80% 5.71%
---------- ----------
Total interest bearing liabilities... 2,141,862 5.35% 5.36% 1,978,047 5.22% 5.17%
Non-interest bearing liabilities...... 20,952 24,181
Stockholders' equity.................. 116,363 105,610
---------- ----------
Total............................ $2,279,177 $2,107,838
========== ==========
Interest rate spread................ 2.24% 2.23% 2.52% 2.45%
===== ===== ===== =====
Net interest margin................. 2.40% 2.39% 2.69% 2.60%
===== ===== ===== =====
In the second quarter of 1997, compared to 1996, the Company's interest
earning asset mix changed such that loans, which are the Company's highest
yielding assets, represented 70% of total interest earning assets, compared to
76% in the year-earlier quarter. Loan portfolio growth has not kept pace with
the Company's asset growth, leading to an increased percentage of interest
earning assets held in the form of lower-yielding securities. In addition,
balances of customer deposit accounts, representing the lowest-cost form of
financing, decreased to 72% of interest bearing liabilities in the second
quarter of 1997, compared to 79% in the second quarter of 1996. The combined
effects of these mix changes in interest earning assets and interest bearing
liabilities was a significant cause of the decrease in the Company's net
interest margin in the second quarter of 1997, compared to the second quarter of
1996.
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth average balance, yield and rate
information for the periods indicated:
SIX MONTHS ENDED JUNE 30:
---------------------------------------------------------------
1997 1996
------------------------ ------------------------
AVERAGE AVERAGE Average Average
Dollars in Thousands BALANCE YIELD/RATE Balance Yield/Rate
---------- ---------- ---------- ----------
Assets:
Loans................................. $1,534,496 7.85% $1,565,869 7.81%
Mortgage-backed securities............ 452,499 7.12% 356,789 7.30%
Other................................. 187,399 6.75% 135,443 6.14%
---------- ----------
Total interest earning assets........ 2,174,394 7.60% 2,058,101 7.65%
Non-interest earning assets........... 69,859 65,943
---------- ----------
Total ........................... $2,244,253 $2,124,044
========== ==========
Liabilities and Equity: $1,550,579 5.10% $1,567,431 5.11%
- -----------------------
Customer deposit accounts.............
Borrowings............................ 556,032 5.94% 426,354 5.87%
---------- ----------
Total interest bearing liabilities... 2,106,611 5.32% 1,993,785 5.27%
Non-interest bearing liabilities...... 21,903 25,056
Stockholders' equity.................. 115,739 105,203
---------- ----------
Total............................ $2,244,253 $2,124,044
========== ==========
Interest rate spread................ 2.28% 2.38%
===== =====
Net interest margin................. 2.45% 2.55%
===== =====
Similar to the comparative quarters, the Company's interest earning asset mix
consists of a lower percentage of loans in the first half of 1997 than in the
first half of 1996, putting downward pressure on the yield on interest earning
assets. The decrease in the percentage of interest bearing liabilities in the
form of customer deposit accounts in the first half of 1997, compared to the
corresponding 1996 period, was less pronounced than for the quarterly
comparison. Therefore, the adverse effects of greater reliance on borrowings on
the Company's cost of funds in the comparative six-month periods was not as
significant as in the comparative quarters.
Rate/Volume. Net interest income before loss provisions in the second
quarter of 1997 totaled $12.8 million, compared to $13.4 million in the
corresponding period in 1996. The rate-related decrease and volume-related
increase in net interest income in the second quarter of 1997, compared to the
corresponding period in 1996, totaled $923,000 and $301,000, respectively, and
were comprised of the following:
(In Thousands) INCREASE (DECREASE) ATTRIBUTABLE TO:
------------------------------------------
INTEREST INCOME ON INTEREST EARNING ASSETS: RATE VOLUME DAYS NET
- ------------------------------------------- ---- ------ ---- ------
Loans.................................................. $ 42 $ (54) $- $ (12)
MBS..................................................... (440) 1,793 - 1,353
Investment securities................................... (15) 959 - 934
----- ------ ---- -----
Total interest income on interest earning assets...... (413) 2,688 - 2,275
----- ------ ---- ------
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Customer deposit accounts............................... 136 (202) - (66)
Borrowings.............................................. 374 2,589 - 2,963
----- ------ ---- ------
Total interest expense on interest bearing liabilities 510 2,387 - 2,897
----- ------ ---- ------
Net interest income..................................... $(923) $ 301 $- $ (622)
===== ====== ==== ======
17
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Net interest income before loss provisions for the first six months of
1997 totaled $26.1 million, compared to $25.6 million in the corresponding
period in 1996. The rate- and volume-related changes in net interest income in
the first six months of 1997, compared to the corresponding period in 1996 were
comprised of the following:
(In Thousands) INCREASE (DECREASE) ATTRIBUTABLE TO:
----------------------------------------------
INTEREST INCOME ON INTEREST EARNING ASSETS: RATE VOLUME DAYS NET
- ------------------------------------------- ----- ------- ---- ---
Loans.................................................. $ 321 $(1,192) $ - $ (871)
MBS..................................................... (328) 3,413 - 3,085
Investment securities................................... 96 1,506 (3) 1,599
---- ------- ---- ------
Total interest income on interest earning assets...... 89 3,727 (3) 3,813
---- ------- ---- ------
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Customer deposit accounts............................... (60) (329) (220) (609)
Borrowings.............................................. 421 3,575 (72) 3,924
----- ------- ---- ------
Total interest expense on interest bearing liabilities 361 3,246 (292) 3,315
----- ------- ---- ------
Net interest income..................................... $(272) $ 481 $289 $ $498
===== ======= ==== ======
Interest and Dividend Income. Interest and dividend income in the
second quarter of 1997 totaled $41.4 million, representing a 5.8% increase from
the corresponding period in 1996. For the six months ended June 30, 1997,
interest and dividend income totaled $81.7 million, or 4.9% greater than in the
corresponding period in 1996. For both the three- and six- month periods ended
June 30, 1997, the Company's average interest earning assets were greater than
in the comparative periods in 1996, resulting in volume-related increases in
1997 of $2.9 million and $3.7 million, respectively.
Interest income from loans totaled $30.5 million in the second quarter
of 1997, which was almost identical to the corresponding period in the previous
year. For the first six months of 1997, interest income from loans totaled $60.2
million, and decreased from the corresponding period in 1996 by 1.4%. The
average yield on loans for the first six months of 1997 was 7.85%, compared to
7.81% in the corresponding period in 1996. The 4 basis point increase in average
yield resulted in a $321,000 increase in interest income. However, lower average
loan balances during the first half of 1997 compared to 1996 resulted in a $1.2
million decrease in interest income.
The average yield on MBS declined in the 1997 periods, compared to the
corresponding 1996 periods. The drop in average yield had the effect of
decreasing interest income by $440,000 and $328,000 for the three- and six-month
periods ended June 30, 1997, compared to 1996, respectively. The Company's
average holdings of MBS were higher in both the three- and six- month periods
ended June 30, 1997, compared to the corresponding period in 1996, resulting in
higher income of $1.8 million and $3.4 million, respectively.
Interest Expense. Total interest expense increased by $2.9 million in
the second quarter of 1997, compared to the second quarter of 1996. For the
quarter, the average cost of interest bearing liabilities increased 13 basis
points to 5.35%, compared to the corresponding quarter in 1996, resulting in a
rate-related increase in interest expense of $510,000. During the second quarter
of 1997, the Company's average interest bearing liabilities were approximately
8.3% greater than in the same period in 1996, resulting in increased interest
expense of $2.4 million. For the six months ended June 30, 1997, interest
expense totaled $55.6 million, compared to $52.3 million for the corresponding
period in 1996. As was the case for the comparative quarters, the average cost
of interest bearing liabilities was higher in 1997 than in 1996, resulting in a
rate-related increase to interest expense of $421,000. Average interest bearing
liabilities were greater in the first six months of 1997 than in the
corresponding period in 1996, increasing interest expense by $3.2 million. In
addition, 1996 was a leap year, resulting in an extra day of interest expense of
approximately $289,000.
For the quarter ended June 30, 1997, average customer deposits were 72%
of average interest bearing liabilities, compared to 79% for the second quarter
of 1996. The average rate paid on customer deposit accounts during the second
quarter of 1997 was 3 basis points higher than in the corresponding quarter in
1996, increasing deposit interest expense by $136,000 in the second quarter of
1997, compared to the 1996 quarter. Lower average deposit balances decreased
interest expense for the second quarter of 1997 by $202,000, compared to the
corresponding period in 1996. For the six months ended June 30, 1997, total
interest expense on customer deposit
18
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
accounts was $609,000 lower than in the corresponding period in 1996. Interest
expense on deposits decreased by $60,000 due to a 1 basis point decrease in the
average rate paid on customer deposits in the first six months of 1997, compared
to the corresponding 1996 period. The average deposit base in the six-month
period ended June 30, 1997 was lower than in the corresponding period in 1996.
The volume-related decrease to interest expense was $329,000 for the six-month
period ended June 30, 1997, compared to the corresponding period in 1996.
Interest expense recorded on borrowings in the second quarter of 1997
totaled $8.9 million, representing an increase of 50.1% from the second quarter
of 1996. The average cost of borrowings in the second quarter of 1997 was 6.00%,
representing a 20 basis point increase from the same period in 1996. Because of
the increase in average cost of borrowings, interest expense increased by
$374,000 in the first quarter of 1997, compared to the 1996 quarter. The
Company's average borrowings represented 28% of interest bearing liabilities
during the second quarter of 1997. An increase in average borrowings in the
comparative periods resulted in a volume-related increase of $2.6 million in
interest expense. For the first six months of 1997, interest expense on
borrowings increased $3.9 million to $16.4 million compared to the same period
in 1996. Higher rates generated a $421,000 increase, and larger average
borrowings generated a $3.6 million increase.
Provisions for Loan Losses. In the second quarter of 1997, the Company
recorded $1.5 million of provisions for loan losses, compared to $2.3 million in
the second quarter of 1996. The Company decreased its provisions for loan losses
in response to decreases in delinquent and nonaccruing loans, and significant
reduction in the level of net charge-offs during the quarter. For the six months
ended June 30, 1997, the Company recorded $4.0 million of provisions for loan
losses, compared to $5.0 million in 1996.
Non-Interest Income. Total non-interest income in the second quarter of
1997 increased by $256,000 over the comparative period in 1996. For the six
months ended June 30, 1997, total non-interest income decreased by $1.4 million
over 1996, principally due to a nonrecurring gain from the sale of an office
building in the first quarter of 1996. The gain is reflected in income from real
estate operations.
One of the Company's objectives has been to enhance its fee-based
activities. The following table indicates the fee income derived from the
Company's principal fee-based activities for the periods presented:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
-------------------- ------------------------
(In Thousands) 1997 1996 1997 1996
---- ---- ---- ----
Loan servicing ................................... $944 $964 $1,924 $2,029
Customer deposit fees............................. 479 490 945 974
Commissions from sales of uninsured investments... 430 513 873 918
------ ------ ------ ------
Total........................................ $1,853 $1,967 $3,742 $3,921
====== ====== ====== ======
The Company's decrease in loan servicing fees in 1997, when compared to
1996, reflects a decrease in the size of the portfolio of loans serviced for
others.
One of the Company's subsidiaries sells uninsured investment products
on a commission basis. For the second quarter of 1997, commission income
decreased by $83,000, or by 16%, compared to the corresponding quarter in 1996.
For the first half of 1997, commission income decreased by 4.9% compared to the
first half of 1996. The decrease in commission income reflects a shift in the
mix of sales to the lower-commission mutual funds in 1997, compounded by a
decrease in sales of tax-deferred annuities.
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. For the second quarter of 1997, the $101,000 increase from the
corresponding period in 1996, was due to higher REO holding costs. Higher
REO-related costs in the first half of 1997, compared to 1996, were in addition
to a decrease in gain on sale resulting from the Company's 1996 sale of a former
headquarters building.
For the first quarter of 1997, the Company recorded gains from sales of
investment securities and MBS totaling $595,000, compared to $395,000 for the
corresponding period in 1996. In the first half of 1997, gains on sales of
securities increased by $674,000 from the first half of 1996. Buying and selling
securities for the purposes of generating gains is not a core activity of the
Company; rather, sales of such securities was largely due to interest
19
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
rate risk considerations.
Operating Expenses. The Company incurred operating expenses of $7.8
million in the second quarter of 1997, representing a 7.7% decrease 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"). As a percentage of average assets, annualized operating expenses in
the second quarters of 1997 and 1996 were 1.37% and 1.61%, respectively. For the
first six months of 1997, total operating expenses were $15.9 million,
representing a 8.2% decrease from the corresponding period in 1996. The
operating expense ratios for the six-month periods ended June 30, 1997 and 1996
were 1.42% and 1.63%, respectively.
The following tables set forth the increases in operating expenses in
the second quarter and first half of 1997, compared to the corresponding periods
in 1996, by type of expense:
INCREASE (DECREASE) IN QUARTER DUE TO:
--------------------------------------
SECOND QUARTER DISCONTINUED NET SECOND QUARTER
(In Thousands) 1996 LENDING OTHER CHANGE 1997
------ ------ ------ ------ ------
Compensation .............. $4,130 $ (108) $ 20 $ (88) $4,042
Net occupancy ............. 1,509 (82) 32 (50) 1,459
Deposit insurance ......... 897 -- (645) (645) 252
Data and check processing . 386 (6) (79) (85) 301
Advertising ............... 138 -- 73 73 211
Intangible amortization ... 17 -- (17) (17) --
Other operating ........... 1,406 (41) 197 156 1,562
------ ------ ------ ------ ------
Total ................... $8,483 $ (237) $ (419) $ (656) $7,827
====== ====== ====== ====== ======
INCREASE (DECREASE) IN THE FIRST HALF OF
YEAR DUE TO:
--------------------------------------------
FIRST HALF OF DISCONTINUED NET FIRST HALF OF
(In Thousands) 1996 LENDING OTHER CHANGE 1997
------------- ---------- ------- ------- -------------
Compensation .............. $ 8,285 $ (198) $ 249 $ 51 $ 8,336
Net occupancy ............. 3,061 (176) (37) (213) 2,848
Deposit insurance ......... 1,747 -- (1,249) (1,249) 498
Data and check processing . 796 (18) (106) (124) 672
Advertising ............... 332 -- 13 13 345
Intangible amortization ... 36 -- (35) (35) 1
Other operating ........... 3,060 (139) 284 145 3,205
------- ------- ------- ------- -------
Total ................... $17,317 $ (531) $ (881) $(1,412) $15,905
======= ======= ======= ======= =======
Compensation and employee benefits expense decreased by $88,000 for the
three months ended June 30, 1997, when compared to 1996. For the six months
ended June 30, 1997, compensation expense increased by $51,000, when compared to
1996. Included in the variances for the comparative three- and six-month periods
were $108,000 and $198,000 of decreases in compensation in the Company's
mortgage lending division as a result of the discontinuation of single family,
retail-based lending at the end of 1996. The majority of the resulting increases
in compensation expense are attributable to the Company's annual performance and
salary review process and an
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21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
increase in retirement benefits expense.
Occupancy expense decreased by $50,000 and $213,000 in the three- and
six-month periods ended June 30, 1997, compared to the same periods in 1996,
respectively. 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 federal regulations, and accordingly is assessed 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 over 70% for well capitalized institutions beginning in 1997. As a result,
deposit insurance expense in the second quarter of 1997 decreased by $645,000
from the second quarter of 1996 and by $1.25 million in the first six months of
1997, compared to the same period in 1996.
Other operating expenses in the three- and six-month periods ended June
30, 1997 increased by $156,000 and $145,000, respectively, over the
corresponding periods in 1996. Increases in professional fees and insurance
account for most of the increase in operating expenses for both periods.
Income Taxes. Income tax expense or benefit varies from period to
period based on the Company's level of earnings before taxes, the relative
amounts of taxable and tax exempt income, and changes to statutory tax rates.
For the three months ended June 30, 1997, the Company recorded income tax
expense of $2.0 million on earnings before taxes of $5.8 million, resulting in
an effective tax rate of 34.1%. In the comparative period in 1996, the Company
recorded income tax expense of $1.7 million on earnings before taxes of $4.7
million, resulting in an effective tax rate of 35.4%. Income tax expense for the
six months ended June 30, 1997 was $3.8 million on earnings before taxes and
extraordinary items of $11.2 million, resulting in an effective tax rate of
34.4%. For the six months ended June 30, 1996, total income tax expense was $4.5
million on earnings before taxes of $12.1 million, resulting in an effective tax
rate of 36.6%. The Company's marginal tax rate is approximately 42%, but tax
advantages associated with its portfolio of municipal bonds reduced the
effective interest rate.
The following table sets forth a reconciliation of the Company's
marginal tax rate to its effective tax rate for the three- and six- months ended
June 30, 1997:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
------ ------ ------ -----
Marginal tax rate................... 42.1% 42.4% 42.1% 42.4%
Tax benefits associated
with municipal bonds.................. (5.6%) (5.8%) (5.5%) (4.7%)
Other............................... (2.4%) (1.2%) (2.2%) (1.0%)
----- ----- ------ -----
Effective tax rate................... 34.1% 34.4% 34.4% 36.7%
===== ===== ===== =====
Extraordinary Item. During the first quarter of 1996, the Company
repaid an $8.2 million, 8.9% fixed rate borrowing before its scheduled maturity.
As a result, the Company incurred a prepayment penalty of $364,000, net of taxes
of $267,000.
REGULATORY CAPITAL
Capital regulations of the Office of Thrift Supervision ("OTS")
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."
21
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth the Bank's capital position relative to
the Capital Regulations at June 30, 1997:
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
-------------------- -------------------- --------------------
(Dollars in Thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
Actual................. 124,340 5.42% 125,926 5.49% 140,613 11.08%
Required............... 34,381 1.50% 68,809 3.00% 101,547 8.00%
------- ----- ------- ----- ------- ------
Excess.............. 89,959 3.92% 57,117 2.49% 39,066 3.08%
======= ===== ======= ===== ======= ======
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 June 30, 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 JUNE 30, 1997 5.42% 11.08% 9.92% 5.49%
At June 30, 1997, the Bank was a well-capitalized institution.
22
23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on May
22, 1997 for the purpose of voting on the proposals described below. Proxies for
the meeting were solicited pursuant to Regulation 14 under the Securities
Exchange Act of 1934, there was no solicitation in opposition to the
management's solicitation, and all of management's nominees for elections as
directors listed in the proxy statement were elected.
PROPOSAL ONE
The proposal to elect two Directors for terms expiring in 2000:
Shares voted for Shares withheld
---------------- ---------------
Gareth A. Dorn 4,431,458 98,971
Richard W. Patton 4,431,128 99,301
PROPOSAL TWO
The proposal to ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year commencing January 1, 1997 was approved
by the following vote:
Shares voted for Shares voted against Shares voted abstain
---------------- -------------------- --------------------
4,513,437 2,408 11,173
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11.1 Computation of Per Share Earnings
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
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24
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENFED FINANCIAL CORPORATION
Date: August 14, 1997 By: /s/ Steven P. Neiffer
- ---------------------- -----------------------------
Steven P. Neiffer
Vice President & Controller
(Principal Accounting Officer)
24
25
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
- ------------ ----------- ----
11.1 Computation of Earnings Per Share
25