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 September 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
October 24, 1997: 5,992,167
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CENFED FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 1997 and
December 31, 1996............................................................................................3
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1997 and 1996............................................................................4
Consolidated Statements of Cash Flows for the Three Months and Nine Months
Ended September 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
SEPTEMBER 30, DECEMBER 31,
In Thousands, Except Share Amounts 1997 1996
------ -----
ASSETS:
Cash .............................................................................................. $ 18,831 $ 17,441
Federal funds sold ................................................................................ 8,500 7,500
----------- -----------
Cash and cash equivalents ............................................................. 27,331 24,941
Investment securities available for sale, at fair value ........................................... 178,871 161,719
Mortgage-backed securities ("MBS") available for sale, at fair value .............................. 467,613 442,015
Loans held for investment, net .................................................................... 1,460,201 1,391,307
Loans held for sale, at lower of cost or fair value ............................................... 116,958 109,651
Accrued interest receivable ....................................................................... 16,289 14,685
Real estate acquired in settlement of loans ("REO") ............................................... 7,908 10,466
Premises and equipment, net ....................................................................... 8,505 9,663
Intangible assets, net of accumulated amortization ................................................ 203 205
Deferred income taxes ............................................................................. 6,201 6,201
Other assets ...................................................................................... 14,598 13,794
----------- ----------
$ 2,304,678 $2,184,647
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Customer deposit accounts ......................................................................... $ 1,577,248 $ 1,558,470
Securities sold under agreements to repurchase .................................................... 148,685 130,639
Notes payable ..................................................................................... 17,750 17,750
FHLB advances ..................................................................................... 412,079 349,479
Other liabilities ................................................................................. 20,737 14,491
----------- ----------
Total liabilities ....................................................................... 2,176,499 2,070,829
----------- ----------
Commitments and contingent liabilities
Common stock. $.01 par value
Authorized shares: 14,000,000 at September 30, 1997 and December 31, 1996
Outstanding shares: 5,959,417 at September 30, 1997 and 5,154,533 at December 31, 1996 ............ 60 52
Additional paid in capital ........................................................................ 61,546 42,729
Treasury stock, at cost; 68,470 shares............................................................. (2,055) --
Retained earnings - substantially restricted ...................................................... 69,005 72,468
Unrealized gain (loss) on securities available for sale, net of tax ............................... 566 (237)
Deferred compensation - retirement plans .......................................................... (943) (1,194)
----------- -----------
Total stockholders' equity .............................................................. 128,179 113,818
----------- -----------
$ 2,304,678 $ 2,184,647
=========== ===========
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
IN THOUSANDS, EXCEPT SHARE AMOUNTS 1997 1996 1997 1996
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans .............................................................. $ 31,290 $ 30,045 $ 91,472 $ 91,098
Mortgage-backed securities ......................................... 8,083 7,559 24,186 20,577
Investment securities and short-term investments ................... 3,145 2,012 8,523 5,791
----------- ----------- ----------- -----------
Total interest and dividend income ....................... 42,518 39,616 124,181 117,466
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Customer deposit accounts ......................................... 20,128 19,647 59,343 59,471
Securities sold under agreements to repurchase .................... 2,174 1,511 6,366 4,521
FHLB advances ..................................................... 6,416 4,727 17,556 12,940
Other borrowings .................................................. 525 544 1,568 1,772
----------- ----------- ----------- -----------
Total interest expense ................................... 29,243 26,429 84,833 78,704
----------- ----------- ----------- -----------
Net interest income ............................................... 13,275 13,187 39,348 38,762
PROVISIONS FOR LOAN LOSSES ........................................... 1,000 1,500 5,000 6,549
----------- ----------- ----------- -----------
Net interest income after provisions for loan losses .... 12,275 11,687 34,348 32,213
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Loan servicing fees ............................................... 903 931 2,827 2,960
Customer deposit account fees ..................................... 496 491 1,441 1,465
Gain (Loss) on sale of investments and MBS ........................ 305 (112) 1,971 880
Gain on sale of loans ............................................. 4 10 3 57
Income (Loss) from real estate operations ......................... (480) (426) (1,135) 3,379
Commissions from sales of investment products ...................... 459 472 1,332 1,390
Other ............................................................. 183 81 442 256
----------- ----------- ----------- -----------
Total non-interest income .................................. 1,870 1,447 6,881 10,387
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Compensation ...................................................... 3,680 3,767 12,016 12,052
Net occupancy ..................................................... 1,330 1,570 4,178 4,631
Deposit insurance premiums ........................................ 245 904 743 2,651
Data and check processing ......................................... 371 383 1,043 1,179
Advertising and marketing ......................................... 245 318 590 650
Intangible amortization ........................................... 1 17 2 53
SAIF recapitalization assessment .................................. -- 9,106 -- 9,106
Other ............................................................. 1,637 1,607 4,842 4,667
----------- ----------- ----------- -----------
Total operating expenses ................................... 7,509 17,672 23,414 34,989
----------- ----------- ----------- -----------
Earnings before income taxes and extraordinary item ........ 6,636 (4,538) 17,815 7,611
INCOME TAXES ......................................................... 2,336 (5,816) 6,183 (1,363)
----------- ----------- ----------- -----------
Earnings before extraordinary item ......................... 4,300 1,278 11,632 8,974
EXTRAORDINARY ITEM:
Early extinguishment of debt (net of income taxes of $267) ......... -- -- -- (364)
----------- ----------- ----------- -----------
NET EARNINGS ........................................... $ 4,300 $ 1,278 $ 11,632 $ 8,610
=========== =========== =========== ===========
Primary Earnings per Share:
Before extraordinary item ............................. $ 0.72 $ 0.22 $ 1.96 $ 1.57
Extraordinary item .................................... -- -- -- ($ 0.06)
----------- ----------- ----------- -----------
After extraordinary item ............................ $ 0.72 $ 0.22 $ 1.96 $ 1.51
=========== =========== =========== ===========
Average primary shares outstanding ................................... 5,948,245 5,756,520 5,927,585 5,710,103
=========== =========== =========== ===========
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
IN THOUSANDS 1997 1996 1997 1996
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................ $ 4,300 $ 1,278 $ 11,632 $ 8,610
Adjustments to reconcile net earnings to net cash provided:
Net amortization of fees, discounts and premiums .................... 915 260 2,123 880
Depreciation and amortization ........................................ 484 558 1,472 1,863
Gain on sales of loans ............................................... (4) (10) (3) (57)
(Gain) loss on sales of investments and MBS .......................... (305) 112 (1,971) (880)
Lower of cost or fair value adjustment to loans held for sale ........ -- (9) -- 91
Provisions for loan and real estate losses ........................... 1,025 1,817 5,169 6,908
Change in deferred income taxes ...................................... -- (3,356) -- (3,356)
Originations and purchases of loans held for sale .................... (4,602) (8,105) (18,199) (29,951)
Repayment and prepayments of loans held for sale ..................... 2,753 2,577 9,110 12,258
Proceeds from sales of loans held for sale ........................... 922 219 1,511 4,507
(Increase) decrease in interest receivable ........................... (155) 49 (1,604) (197)
Increase (decrease) in interest payable .............................. 899 168 (392) 99
Change in other assets and other liabilities ......................... 2,107 (874) 6,030 558
FHLB stock dividends ................................................. (321) (231) (884) (10)
Other, net ........................................................... -- (24) 4 (305)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities .................. 8,018 (5,571) 13,998 (1,490)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale ............... 26,917 (73,834) (97,714) (108,059)
Proceeds from sales of investment securities available for sale ...... 38,158 49,638 74,713 84,199
Maturities of investment securities available for sale ............... -- -- 10,000 5,000
Purchases of MBS available for sale .................................. (20,165) (72,022) (151,127) (260,613)
Proceeds from sales of MBS available for sale ........................ 1,977 50,659 83,837 138,348
Principal repayments on MBS .......................................... 1,304 16,606 43,517 49,822
Originations and purchases of loans held for investment .............. (91,357) (18,923) (255,097) (79,613)
Loan repayments and prepayments ...................................... 64,955 43,127 163,288 143,774
Purchases of premises and equipment .................................. (30) (358) (315) (740)
Capital expenditures in REO and real estate held for ................. (84) (255) (438) (743)
Sales of REO and real estate held for development and sale ........... 4,969 4,360 16,431 16,429
--------- --------- --------- ---------
Net cash provided by (used in) investing activities ................ 2,354 (1,002) (112,905) (12,196)
--------- --------- --------- ---------
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CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
IN THOUSANDS 1997 1996 1997 1996
------ ------ ------ -----
Cash flows from financing activities:
Net increase (decrease) in customer deposit accounts ........................ 33,207 (31,863) 18,978 (21,698)
Net decrease in notes payable ............................................... -- (50) -- (4,150)
Net increase (decrease) in short-term financing:
FHLB advances ............................................................ (21,500) 28,500 (11,400) 31,100
Securities sold under agreements to repurchase ........................... (14,763) (7,900) 18,046 (21,285)
Repayment of long-term FHLB advances ........................................ -- -- 18,978 (9,200)
Proceeds from long-term FHLB advances ....................................... -- 20,000 84,000 30,000
Dividends paid .............................................................. (516) (458) (1,498) (1,321)
Proceeds from issuance of common stock ...................................... 3,597 517 5,226 752
Treasury stock repurchased .................................................. -- -- (2,055) --
--------- --------- --------- ---------
Net cash provided by financing activities ................................ 25 8,746 101,297 4,198
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........................ 10,397 2,173 2,390 (9,488)
Cash and cash equivalents, beginning of period .............................. 16,934 17,555 24,941 29,216
--------- --------- --------- ---------
Cash and cash equivalents, end of period .................................... $ 27,331 $ 19,728 $ 27,331 $ 19,728
========= ========= ========= =========
SUPPLEMENTARY INFORMATION
CASH PAID FOR:
Interest on customer deposit accounts ........................................ $ 28,344 $ 26,262 $ 85,225 $ 77,713
Income tax payments .......................................................... $ 240 $ 3,720 $ 3,199 $ 6,195
NON-CASH ITEMS:
Additions to REO ............................................................. $ 520 $ 941 $ 19,438 $ 10,336
Net change in unrealized gain (loss) on
securities available for sale, net of taxes .............................. $ 1,302 $ 322 $ 803 ($ 3,939)
Loans to facilitate sales of REO and
real estate held for development and sale ................................ $ 1,030 $ 584 $ 4,538 $ 10,843
See notes to consolidated financial statements.
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CENFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, DECEMBER 31, 1996 AND
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(1) BASIS OF PRESENTATION
The consolidated statement of financial condition as of September
30, 1997, and the related consolidated statements of operations and cash flows
for the three months and nine months ended September 30, 1997 and 1996, are
unaudited. These statements reflect, in the opinion of management, all material
adjustments, consisting solely of recurring accruals, necessary for a fair
presentation of the financial condition of CENFED Financial Corporation (the
"Company") as of September 30, 1997, and its results of operations and cash
flows for the three months and nine months ended September 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 October 9, 1997, the Company declared its quarterly cash dividend
of $.09 per share to shareholders of record as of October 24, 1997. The dividend
was paid on November 7, 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 September 30, 1997,
fully diluted earnings per share were not reported as they were not materially
different from primary earnings per share.
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 $0.75 and $0.23, and diluted earnings per share would have been
$0.72 and $0.22, for the three months ended September 30, 1997 and 1996,
respectively. For the nine months ended September 30, 1997 and 1996, basic
earnings per share would have been $2.03 and $1.56, respectively, and diluted
earnings per share would have been $1.95 and $1.50, 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, the following information is presented 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 limit 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, in addition, a payment stream representing the difference between
the actual LIBOR rate and 7.5%, based upon a notional amount of $200 million.
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CENFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, DECEMBER 31, 1996 AND
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
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 September 30, 1997, the unamortized cost basis in
the interest rate caps was $1.7 million. The market value of the cap contracts
at that date was $227,000.
(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 September 30, 1997 or the results from operations for the three-
and nine-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 that 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 standards 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 supersedes 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 131 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
RECENT DEVELOPMENTS
On August 18, 1997, Golden State Bancorp Incorporated ("GSB"), and
its subsidiary Glendale Federal Bank, entered into an agreement to acquire the
Company. The agreement is subject to regulatory, shareholder and other approvals
and is expected to close in the first calendar quarter of 1998. The terms of the
transaction provide for a tax-free exchange of 1.2 shares of GSB common stock
for each outstanding share of the Company's common stock. The acquisition will
be accounted for as a pooling of interests. GSB is headquartered in Glendale,
California, and operated 171 banking offices and 25 loan offices as of June 30,
1997.
FINANCIAL CONDITION
OPERATING STRATEGY
The operating strategy of CENFED Financial Corporation (the
"Company") consists of three primary elements: (I) acquiring assets providing
returns that satisfy the Company's rate of return expectations; (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 rate
of return expectations. 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 nine months of 1997, the Company purchased $79.4 million of
home equity loans and $79.1 million of single family loans.
The Company's new loan volume, consisting of originations and
purchases, increased by $68.4 million in the third quarter of 1997, compared to
the corresponding quarter in 1996. For the nine months ended September 30, 1997,
loan volume increased by 145%, compared to the first nine months of 1996. The
following table sets forth loan volume information:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30: SEPTEMBER 30:
------------------------- ----------------------
(In Thousands) 1997 1996 1997 1996
---- ---- ---- ----
Single family............ $54,590 $4,794 $79,382 $24,793
Home equity.............. - - 79,436 -
Income property.......... 22,011 14,134 64,449 56,478
Small business........... 18,014 7,273 42,105 27,246
------- ------- -------- --------
$94,615 $26,201 $265,372 $108,517
======= ======= ======== ========
As a result of the Company's emphasis on return, the weighted
average yield on the loan portfolio was 16 basis points higher in the third
quarter of 1997 than in the corresponding 1996 quarter.
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CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
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:
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------- -------------------
(Dollars in Thousands) NUMBER AMOUNT NUMBER AMOUNT
------ ------ ------ ------
Checking accounts.............. 28,040 $105,080 25,446 $102,369
Savings accounts............... 18,848 76,665 20,680 95,640
Money market accounts.......... 5,297 148,288 3,080 119,065
Certificates of deposit....... 32,728 996,136 35,444 1,026,129
-------- ---------- ------ ----------
Total retail deposits....... 84,913 $1,326,169 84,650 $1,343,203
======== ========== ====== ==========
Retail deposits to interest
bearing liabilities......... 84.1% 87.9%
Total retail deposits were lower at September 30, 1997 than at
September 30, 1996 and represented a smaller portion of interest bearing
liabilities. However, total transaction account balances increased by $13.0
million at the end of September 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 third quarter of
1997, the annualized general and administrative expense ratio was 1.29%,
compared to 1.60% (excluding the deposit insurance fund recapitalization charge
recorded in the third quarter of 1996) in the corresponding period in the
previous year. For the first nine months of 1997, the annualized general and
administrative expense ratio was 1.38%, compared to 1.62% (excluding the deposit
insurance fund recapitalization charge) 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 (the "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 third quarter of 1997, the Company's
efficiency ratio was 49.0%, compared to 56.5% (excluding the SAIF
recapitalization charge) in the corresponding period in the previous year. For
the first nine months of 1997, the efficiency ratio was 51.6%, compared to 57.7%
(excluding the SAIF recapitalization charge) during the same period in 1996.
ANALYSIS OF STATEMENT OF FINANCIAL CONDITION
The Company's total assets grew by $9.2 million during the third
quarter of 1997. Since the beginning of the year, total assets have grown by
$120.0 million, or 5.5%. The following table sets forth significant changes in
the Company's statement of financial condition:
INCREASE (DECREASE)
-----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
(In Thousands) SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
-------------------- -------------------
Assets:
Loans held for investment, net ................ $ 20,490 $ 64,894
MBS and investment securities ................. (20,600) 42,750
All other, net ................................ 9,265 12,387
-------- --------
Change in total assets ................... $ 9,155 $120,031
======== ========
Liabilities and Stockholders' Equity:
Customer deposit accounts ..................... $ 33,080 $ 18,778
Borrowings .................................... (36,263) 80,646
Stockholders' equity .......................... 8,734 14,361
All other, net ................................ 3,604 6,246
-------- --------
Change in total liabilities and equity ... $ 9,155 $120,031
======== ========
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Loans Held for Investment. Loans held for investment increased by
$20.5 million during the quarter, reflecting $55.0 million of loan purchases.
For the first nine months of 1997, purchases totaling $160.2 million led to loan
growth.
Customer Deposit Accounts. During the third quarter of 1997, total
balances of customer deposit accounts increased by $33.1 million, consisting of
a $10.9 million increase in retail deposits and a $22.2 million increase in
wholesale certificates of deposit. For the nine months ended September 30, 1997,
customer deposit accounts increased by $18.8 million, consisting of a $5.6
million decrease in retail deposits and a $24.4 million increase in wholesale
deposits.
Borrowings. Marginal asset growth during the third quarter in
combination with growth in retail deposits and wholesale deposits led to a
reduction in borrowings. For the nine months ended June 30, 1997, borrowings
increased largely due to asset growth.
Stockholders' Equity. Net earnings of $4.3 million and proceeds from
the exercise of stock options during the third quarter of 1997 accounted for
most of the $8.7 million increase in stockholders' equity. In addition, the
market value of securities available for sale increased by $1.3 million.
ASSET QUALITY
Delinquent Loans. Total delinquent loans decreased by $3.3 million
during the third quarter of 1997, and represented 1.32% of total loans
outstanding at September 30, 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:
(In Thousands) SEPT. 30, 1997 DEC. 31, 1996 SEPT. 30, 1996
-------------- ------------- --------------
31 - 60 days delinquent:
Single family .................... $ 2,934 $ 5,887 $ 4,136
Income property .................. 45 404 2,213
Small business ................... 1,032 715 712
Consumer ......................... 9 6 22
------- ------- -------
4,020 7,012 7,083
------- ------- -------
61 - 90 days delinquent:
Single family .................... 1,330 3,129 3,604
Income property .................. 1,415 -- 543
Small business ................... 1,072 1,857 1,505
Consumer ......................... 9 10 51
------- ------- -------
3,826 4,996 5,703
------- ------- -------
Over 90 days delinquent:
Single family .................... 7,695 11,467 11,054
Income property .................. 1,798 3,858 4,965
Small business ................... 3,565 1,550 1,953
Consumer ......................... 10 3 7
------- ------- -------
13,068 16,878 17,979
------- ------- -------
GRAND TOTAL:
Single family .................... 11,959 20,483 18,794
Income property .................. 3,258 4,262 7,721
Small business ................... 5,669 4,122 4,170
Consumer ......................... 28 19 80
------- ------- -------
$20,914 $28,886 $30,765
======= ======= =======
Delinquent loans by type, as a percentage of
outstanding loans by type:
Single family .................... 1.30% 2.11% 1.87%
Income property .................. 0.75% 1.09% 2.00%
Small business ................... 3.52% 3.07% 3.24%
Total ............................ 1.32% 1.93% 2.00%
11
12
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The ratio of delinquent loans to total loans at September 30, 1997 was
68 basis points lower than one year earlier and 61 basis points lower than at
the end of 1996. Delinquent small business loans at September 30, 1997, December
31, 1996, and September 30, 1996 included $4.2 million, $4.0 million, and $4.1
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 September 30, 1997
decreased by $7.1 million from the second quarter of 1997, and represented 0.97%
of total assets at that date. The following table sets forth the composition of
nonperforming assets at the dates indicated:
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
(Dollars in Thousands) 1997 1997 1997 1996 1996
------- ------- ------- ------- -------
Nonaccrual loans .................................. $14,342 $19,898 $20,660 $21,502 $21,028
Real estate acquired in settlement of loans ("REO") 7,906 9,485 11,129 10,466 7,867
------- ------- ------- ------- -------
Nonperforming assets ......................... $22,248 $29,383 $31,789 $31,968 $28,895
======= ======= ======= ======= =======
Total nonperforming assets as a % of total assets . 0.97% 1.28% 1.40% 1.46% 1.34%
Nonaccrual loans as a % of total loans held for
investment and for sale ........................... 0.88% 1.28% 1.31% 1.42% 1.37%
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 than the 90
days past due standard, depending upon the individual circumstances surrounding
the loan's delinquency. At September 30, 1997, the Company has no loans over 90
days past due that were still accruing interest. 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- and nine-month periods ended September 30, 1997:
THREE MONTHS NINE MONTHS
----------------------------------- ----------------------------------
(In Thousands) NONACCRUAL NONACCRUAL
LOANS REO TOTAL LOANS REO TOTAL
-------- -------- -------- -------- -------- --------
Balance, beginning of period ...... $ 19,898 $ 9,485 $ 29,383 $ 21,502 $ 10,466 $ 31,968
New Nonaccruing Loans:
Single family (1) ......... (598) -- (598) 4,742 -- 4,742
Income property ........... 2,913 -- 2,913 9,399 -- 9,399
Small business ............ 1,344 -- 1,344 4,926 -- 4,926
Consumer .................. 4 -- 4 7 -- 7
Foreclosures:
Single family ............. (2,366) 1,871 (495) (10,268) 8,362 (1,906)
Income property ........... (2,055) 1,424 (631) (7,508) 5,029 (2,479)
Small business ............ (700) 704 4 (1,515) 1,819 304
Loans Brought Current:
Income property ........... (2,844) -- (2,844) (4,296) -- (4,296)
Small business ............ (1,254) -- (1,254) (1,860) -- (1,860)
Sales of REO:
Single family ............. -- (2,859) (2,859) -- (9,771) (9,771)
Income property ........... -- (1,945) (1,945) -- (6,038) (6,038)
Small business ............ -- (85) (85) -- (243) (243)
Other:
Single family ............. -- (104) (104) -- (549) (549)
Income property ........... -- (123) (123) (738) (354) (1,092)
Small business ............ -- (462) (462) (49) (815) (864)
-------- -------- -------- -------- -------- --------
Net change during the (5,556) (1,579) (7,135) (7,160) (2,560) (9,720)
-------- -------- -------- -------- -------- --------
BALANCE, AT SEPTEMBER 30, 1997 .... $ 14,342 $ 7,906 $ 22,248 $ 14,342 $ 7,906 $ 22,248
======== ======== ======== ======== ======== ========
(1) New nonaccruing single family loans have been reduced by single family
loans that were brought current during the quarter.
The Company experienced an $7.1 million decrease in nonperforming
assets during the third quarter of 1997, consisting primarily of decreases of
$3.0 million and $2.0 million in nonaccrual single family and nonaccrual income
property, respectively, and a $1.1 million decrease in single family REO. At
September 30, 1997, the nonperforming asset ratio decreased by 31 basis points
from the beginning of the quarter, and reached its lowest level since June 1995.
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, 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
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table sets forth information with respect to impaired
loans at the dates indicated:
SEPTEMBER 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 ..... $ 2,264 $ 776 $ 1,488 $ 3,457 $ 1,439 $ 2,018
Not requiring specific loss allowances.. 1,366 -- 1,366 3,668 -- 3,668
Restructured loans:
Requiring specific loss allowances ..... 4,212 636 3,576 4,756 707 4,049
Not requiring specific loss allowances.. 1,346 -- 1,346 -- -- --
Other loans:
Requiring specific loss allowances ..... 3,213 454 2,759 2,937 709 2,228
Not requiring specific loss allowances.. 578 -- 578 618 -- 618
------- ------- ------- ------- ------- -------
Total .............................. $12,979 $ 1,866 $11,113 $15,436 $ 2,855 $12,581
======= ======= ======= ======= ======= =======
For the three months ended September 30, 1997, the average net
recorded investment in impaired loans was $12.0 million and the interest income
recognized totaled $244,000. In the corresponding period in the previous year,
the average net recorded investment in impaired loans was $14.6 million and the
interest income recognized totaled $399,000.
Allowance for Loan Losses. The Company maintains specific valuation
allowances 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, 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, including loss migration analysis,
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
(Dollars in Thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Balance, beginning of period .................... $ 17,315 $ 14,944 $ 13,488 $ 12,789
Provision for loan losses ....................... 1,000 1,500 5,000 6,549
Acquisition ..................................... -- -- 2,606 --
Recoveries ...................................... 217 560 1,939 1,066
Charge-offs ..................................... (1,538) (2,614) (6,039) (6,014)
-------- -------- -------- --------
Balance, end of period .......................... $ 16,994 $ 14,390 $ 16,994 $ 14,390
======== ======== ======== ========
Ratio of allowance for loan losses to total loans
held for investment at end of period .......... 1.15% 1.01%
Ratio of allowance for loan losses to nonaccrual
loans at end of period ........................ 118.5% 68.4%
14
15
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,.
The following table sets forth the Company's net charge-offs by loan types for
the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
(In Thousands) 1997 1996 1997 1996
------ ------ ------ ------
Single family .................... $ 466 $1,243 $1,511 $3,031
Income property................... 773 740 2,464 1,729
Small business.................... 39 67 23 187
Other ............................ 43 4 102 1
------ ------ ------ ------
Total ....................... $1,321 $2,054 $4,100 $4,948
====== ====== ====== ======
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company include:
o scheduled principal payments and unscheduled prepayments of loans and MBS;
o proceeds from sales of investments, MBS and loans held for sale;
o cash flows generated from operations; and
o proceeds from increases in customer deposits, FHLB advances and short-term
borrowings.
Principal payments received on loans and MBS totaled $80.8 million
and $62.3 million for the three months ended September 30, 1997 and 1996,
respectively, and $215.9 million and $205.8 million for the nine months ended
September 30, 1997 and 1996, respectively. Proceeds from the sales of loans were
$922,000 and $219,000 for the third quarter of 1997 and 1996, respectively, and
$1.5 million and $4.5 million for the nine months ended September 30, 1997 and
1996, respectively.
Sales of investments and MBS totaled $57.9 million and $100.3
million for the third quarters of 1997 and 1996, respectively, and $158.6
million and $222.5 million for the nine months ended September 30, 1997 and
1996, respectively.
Customer deposits increased by $33.2 million in the three months
ended September 30, 1997, compared to a net decrease of $31.9 million in the
third quarter of 1996. For the nine months ended September 30, 1997 and 1996,
customer deposits increased by $18.8 million and decreased by $21.7 million,
respectively.
Savings banks must, by regulation, maintain liquidity of 5% of
deposits and short-term borrowings. Liquidity is measured by cash and certain
investments which are not committed, pledged, or required to liquidate specific
liabilities. The Company's average liquidity ratios for September 30, 1997 and
1996 were 5.3% and 5.2%, respectively.
RESULTS OF OPERATIONS
Comparisons of the Three Months and Nine Months Ended September 30, 1997 and
- ----------------------------------------------------------------------------
1996
- ----
The Company's net earnings for the three months ended September 30,
1997 and 1996 were $4.3 million and $1.3 million, respectively. Primary earnings
per share were $.72 and $.22 for the same periods, respectively. For the nine
months ended September 30, 1997 and 1996, the Company recorded net earnings of
$11.6 million and $8.6 million, respectively, for primary earnings per share of
$1.96 and $1.51.
In the third quarter of 1997, compared to 1996, the Company's core
earnings (which excludes gains and losses on securities sales, real estate
operations and non-recurring adjustments but includes provisions for loan
losses) increased by 30.4% mostly due to decreases in provisions for loan losses
and operating expenses.
15
16
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Net Interest Margin. The net interest margin for the third quarter
of 1997 was 2.49%, representing a 9 basis point increase from the second quarter
of 1997 and a 15 basis point decrease from the third quarter of 1996. For the
nine months ended September 30, 1997 and 1996, the net interest margins were
2.46% and 2.58%, 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 for the comparative quarters:
Three Months Ended September 30:
--------------------------------- ------------------------------------
1997 1996
--------------------------------- ------------------------------------
At At
(Dollars in Thousands) Average Average Sept. 30, Average Average Sept. 30,
Balance Yield/Rate 1997 Balance Yield/Rate 1996
---------- ---------- ---------- ---------- ---------- ----------
Assets:
Loans ................................. $1,569,150 7.97% 7.92% $1,533,286 7.83% 7.83%
Mortgage-backed securities ............ 470,634 6.87% 6.87% 416,181 7.27% 7.13%
Other ................................. 210,968 6.98% 6.74% 134,757 7.22% 6.44%
---------- ----------
Total interest earning assets ..... 2,250,752 7.65% 7.60% 2,084,224 7.68% 7.59%
Non-interest earning assets ........... 70,695 61,545
---------- ----------
Total ............................. $2,321,447 $2,145,769
========== ==========
Liabilities and Equity:
Customer deposit accounts ............. $1,570,939 5.08% 5.09% $1,545,267 5.06% 5.02%
Borrowings ............................ 605,128 5.98% 5.91% 467,841 5.77% 5.68%
---------- ----------
Total interest bearing liabilities 2,176,067 5.33% 5.31% 2,013,108 5.22% 5.18%
Non-interest bearing liabilities ...... 24,296 24,476
Stockholders' equity .................. 121,084 108,185
---------- ----------
Total ............................. $2,321,447 $2,145,769
========== ==========
Interest rate spread ................ 2.32% 2.29% 2.46% 2.41%
==== ==== ==== ====
Net interest margin ................. 2.49% 2.47% 2.64% 2.55%
==== ==== ==== ====
The 15 basis point decrease in the net interest margin in the third
quarter of 1997, compared to the third quarter of 1996, was due to lower yields
on interest-earning assets and a higher cost of funds. While the yield on loans
increased by 16 basis points in the third quarter of 1997, compared to 1996, the
yields on mortgage-backed and investment securities decreased. Securities
represent a larger portion of the asset mix in the third quarter of 1997,
compared to 1996, which magnified the effect of their yield reduction. The
Company's cost of funds increased by 11 basis points, as the rate paid on
interest-bearing liabilities increased and the funding mix reflected greater
reliance on borrowings.
16
17
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
The following table displays average interest rates on the Company's
interest earning assets and interest bearing liabilities, on a fully tax
equivalent basis for the comparative nine-month periods:
Nine Months Ended September 30:
----------------------------------------------------
1997 1996
------------------------ ------------------------
Dollars in Thousands Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
---------- ---------- ---------- ----------
Assets:
Loans ................................. $1,546,174 7.89% $1,554,928 7.81%
Mortgage-backed securities ............ 458,696 7.03% 376,731 7.28%
Other ................................. 195,284 6.84% 135,213 7.00%
---------- ----------
Total interest earning assets .... 2,200,154 7.62% 2,066,872 7.66%
Non-interest earning assets ........... 70,113 64,482
---------- ----------
Total ............................ $2,270,267 $2,131,354
========== ==========
Liabilities and Equity:
Customer deposit accounts ............. $1,557,441 5.09% $1,559,989 5.09%
Borrowings ............................ 572,577 5.96% 440,284 5.84%
---------- ----------
Total interest bearing liabilities 2,130,018 5.32% 2,000,273 5.26%
Non-interest bearing liabilities ...... 22,693 24,877
Stockholders' equity .................. 117,556 106,204
---------- ----------
Total ............................ $2,270,267 $2,131,354
========== ==========
Interest rate spread ................ 2.30% 2.40%
==== ====
Net interest margin ................. 2.46% 2.58%
==== ====
Similar to the comparative quarters, the Company's interest earning
asset mix consisted of a lower percentage of loans in the first nine months of
1997 than in the first nine months 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 nine
months 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
nine-month periods was not as significant as in the comparative quarters.
Rate/Volume. Net interest income before loss provisions in the third
quarter of 1997 totaled $13.3 million, compared to $13.2 million in the
corresponding period in 1996. The rate-related decrease and volume-related
increase in net interest income in the third quarter of 1997, compared to the
corresponding period in 1996, totaled $472,000 and $560,000, respectively, and
were comprised of the following:
(In Thousands) Increase (Decrease) Attributable To:
-------------------------------------
Interest income on interest earning assets: Rate Volume Net
- ------------------------------------------- ------ ------ ------
Loans .................................................. $ 399 $ 846 $1,245
MBS .................................................... (430) 954 524
Investment securities .................................. -- 1,133 1,133
------ ------ ------
Total interest income on interest earning assets ..... (31) 2,933 2,902
------ ------ ------
Interest expense on interest bearing liabilities:
- -------------------------------------------------
Customer deposit accounts .............................. 93 388 481
Borrowings ............................................. 348 1,985 2,333
------ ------ ------
Total interest expense on interest bearing liabilities 441 2,373 2,814
------ ------ ------
Net interest income .................................... ($ 472) $ 560 $ 88
====== ====== ======
17
18
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Net interest income before loss provisions for the first nine months
of 1997 totaled $39.3 million, compared to $38.8 million in the corresponding
period in 1996. The rate- and volume-related changes in net interest income in
the first nine 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 .................................................. $ 401 $ (27) $ -- $ 374
MBS .................................................... (728) 4,337 -- 3,609
Investment securities .................................. 118 2,617 (3) 2,732
------- ------- ------- -------
Total interest income on interest earning assets ..... (209) 6,927 (3) 6,715
------- ------- ------- -------
Interest expense on interest bearing liabilities:
- -------------------------------------------------
Customer deposit accounts .............................. -- 92 (220) (128)
Borrowings ............................................. 761 5,568 (72) 6,257
------- ------- ------- -------
Total interest expense on interest bearing liabilities 761 5,660 (292) 6,129
------- ------- ------- -------
Net interest income .................................... $ (970) $ 1,267 $ 289 $ 586
======= ======= ======= =======
Interest and Dividend Income. Interest and dividend income in the
third quarter of 1997 totaled $42.5 million, representing a 7.3% increase from
the corresponding period in 1996. For the nine months ended September 30, 1997,
interest and dividend income totaled $124.2 million, which was 5.7% greater than
in the corresponding period in 1996. For both the three- and nine- month periods
ended September 30, 1997, the Company's average interest earning assets were
greater than in the comparative periods in 1996, generating volume-related
increases of $2.9 million and $6.9 million, respectively. Average yields on
interest earning assets were lower in 1997, compared to 1996, resulting in
$31,000 and $209,000 decreases in interest and dividend income in the respective
three- and nine-month periods ended September 30.
Interest income from loans totaled $31.3 million in the third
quarter of 1997, an increase of $1.2 million over the corresponding period in
1996. The rate- and volume-related components of the increase were $399,000 and
$846,000, respectively. For the first nine months of 1997, interest income from
loans totaled $91.5 million, a slight increase from the corresponding period in
1996. The average yield on loans for the first nine months of 1997 was 7.89%,
compared to 7.81% in the corresponding period in 1996. The 7 basis point
increase in average yield resulted in a $401,000 increase in interest income.
However, lower average loan balances during the first half of 1997 compared to
1996 resulted in a $27,000 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 $430,000 and $728,000 for the three- and
nine-month periods ended September 30, 1997, compared to 1996, respectively. The
Company's average holdings of MBS were higher in both the three- and nine- month
periods ended September 30, 1997, compared to the corresponding period in 1996,
resulting in higher income of $1.0 million and $4.3 million, respectively.
Interest Expense. Total interest expense increased by $2.8 million
in the third quarter of 1997, compared to the third quarter of 1996. For the
quarter, the average cost of interest bearing liabilities increased 11 basis
points to 5.33%, compared to the corresponding quarter in 1996, resulting in a
rate-related increase in interest expense of $441,000. During the third quarter
of 1997, the Company's average interest bearing liabilities were approximately
8.1% greater than in the same period in 1996, resulting in increased interest
expense of $2.4 million. For the nine months ended September 30, 1997, interest
expense totaled $84.8 million, compared to $78.7 million for the corresponding
period in 1996. During the comparative nine-month periods, the average cost of
interest bearing liabilities was higher in 1997 than in 1996, resulting in a
rate-related increase to interest expense of $761,000. Average interest bearing
liabilities were greater in the first nine months of 1997 than in 1996,
increasing interest expense by $5.7 million. In addition, 1996 was a leap year,
resulting in an extra day of interest expense of approximately $289,000.
Interest on customer deposits increased by $481,000 in the third
quarter of 1997, compared to the corresponding quarter in 1996. The average rate
paid on customer deposit accounts during the third quarter of 1997 was 2 basis
points higher, increasing deposit interest expense by $93,000. Higher average
deposit balances increased interest expense for the third quarter of 1997 by
$388,000, compared to the corresponding period in 1996. For the nine months
ended September 30, 1997, total
18
19
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
interest expense on customer deposit accounts was $128,000 lower than in the
corresponding period in 1996. The average deposit base in the nine-month period
ended September 30, 1997 was lower than in the corresponding period in 1996. The
volume-related decrease to interest expense was $92,000 for the nine-month
period ended September 30, 1997, compared to the corresponding period in 1996.
Interest expense recorded on borrowings in the third quarter of 1997
totaled $9.1 million, representing an increase of 34.4% from the third quarter
of 1996. The average cost of borrowings in the third quarter of 1997 was 5.98%,
representing a 21 basis point increase from the same period in 1996. Because of
the increase in average cost of borrowings, interest expense increased by
$348,000 in the first quarter of 1997, compared to the 1996 quarter. The
Company's average borrowings represented 27.8% of interest bearing liabilities
during the third quarter of 1997. An increase in average borrowings in the
comparative periods resulted in a volume-related increase of $2.0 million in
interest expense. For the first nine months of 1997, interest expense on
borrowings increased by $6.3 million to $25.5 million compared to the same
period in 1996. Higher rates generated a $761,000 increase, and larger average
borrowings generated a $5.6 million increase.
Provisions for Loan Losses. In the third quarter of 1997, the
Company recorded $1.0 million of provisions for loan losses, compared to $1.5
million in the third quarter of 1996. The Company decreased its provisions for
loan losses in response to decreases in delinquent and nonaccruing loans. For
the nine months ended September 30, 1997, the Company recorded $5.0 million of
provisions for loan losses, compared to $6.5 million in 1996.
Non-Interest Income. Total non-interest income in the third quarter
of 1997 increased by $423,000 from the comparative period in 1996. For the nine
months ended September 30, 1997, total non-interest income decreased by $3.5
million over 1996, principally due to a $4.5 million nonrecurring gain from the
sale of an office building in the first quarter of 1996. The gain is reflected
in income from real estate operations.
Commission income from the sale of uninsured investment products
decreased by $13,000, or by 2.7%, in third quarter of 1997, compared to the
corresponding quarter in 1996. For the first nine months of 1997, commission
income decreased by 4.2% compared to the first nine months of 1996. The decrease
in commission income reflects a shift in the mix of sales to 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 third quarter of 1997, the $54,000 increase in the
loss from real estate operations, from the corresponding period in 1996, was due
to higher REO holding costs. The nine months ended September 30, 1996 included a
$4.5 million gain from the sale of an office building without which real estate
operations generated a loss virtually equal to that of 1997.
For the third quarter of 1997, the Company recorded gains from sales
of investment securities and MBS totaling $305,000, compared to $112,000 in
losses for the corresponding period in 1996. In the first nine months of 1997,
gains on sales of securities increased by $1.1 million from the first nine
months 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 portfolio restructuring with the intent of reducing interest
rate risk.
Other non-interest income increased by $102,000 and $186,000,
respectively, in the three- and nine-month periods ended September 30, 1997,
compared to corresponding periods in 1996. In both periods, loan assumption and
cancellation fee income increase during 1997, compared to 1996.
Operating Expenses. Operating expenses in 1996 included a $9.1
million assessment by the Federal Deposit Insurance Corporation in connection
with the recapitalization of the Savings Association Insurance Fund. Both the
three- and nine-month periods in 1996 reflect this assessment. Excluding this
non-recurring charge, operating expenses in the third quarters of 1997 and 1996
totaled $7.5 million and $8.6 million, respectively. As a percentage of average
assets, annualized operating expenses for the third quarters of 1997 and 1996
(excluding the recapitalization charge) were 1.29% and 1.60%, respectively. The
31 basis point decrease in the operating expense ratio included 12 basis points
attributable to lower insurance rates, following the recapitalization and 12
basis points stemming from asset growth. For the nine months ended September 30,
1997 and 1996, operating expenses totaled $23.4 million and $25.9 million
(excluding the recapitalization charge), respectively, and resulting in
operating expense ratios of 1.38% and 1.62%, respectively. The 24 basis point
reduction included 12 basis points associated with lower deposit insurance, and
an additional 10 basis points attributable to asset growth.
19
20
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
Compensation and employee benefits expense decreased by $87,000 for
the three months ended September 30, 1997, when compared to 1996. For the nine
months ended September 30, 1997, compensation expense decreased by $36,000, when
compared to 1996. Included in the variances for the comparative three- and
nine-month periods were $86,000 and $284,000 of decreases in compensation
resulting from the discontinuation of single family, retail-based lending at the
end of 1996.
Occupancy expense decreased by $240,000 and $453,000 in the three-
and nine-month periods ended September 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 decreased by $659,000 and $1.9 million in the
three- and nine-month periods in 1997, respectively, compared to the same
periods in 1996.
Other operating expenses in the three- and nine-month periods ended
September 30, 1997 increased by $30,000 and $175,000, respectively, over the
corresponding periods in 1996, largely due to professional fees and corporate
insurance.
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 September 30, 1997, the Company recorded income tax
expense of $2.3 million on earnings before taxes of $6.6 million, resulting in
an effective tax rate of 35.2%. Income tax expense for the nine months ended
September 30, 1997 was $6.2 million on earnings before taxes and extraordinary
items of $17.8 million, resulting in an effective tax rate of 34.7%. For the
three- and nine month periods ended September 30, 1996, the Company recorded
income tax benefits of $5.8 million and $1.4 million, respectively. The
following table sets forth a reconciliation of the Company's marginal tax rates
to its effective tax rates for the periods presented:
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ---------------------------
1997 1996 1997 1996
---- ------ ---- -----
Marginal tax rate ............................... 42.1% (42.4%) 42.1% 42.4%
Tax benefits associated with (5.2%) (6.0%) (5.4%) (11.1%)
municipal bonds
Reduction in accrued taxes -% (76.3%) -% (45.5%)
Other ........................................ (1.7%) (3.5%) (2.0%) (3.7%)
---- ------ ---- -----
Effective tax rate .............................. 35.2% (128.2%) 34.7% (17.9%)
==== ====== ==== =====
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."
The following table sets forth the Bank's capital position relative
to the Capital Regulations at September 30, 1997:
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
--------------------- -------------------- ---------------------
(Dollars in Thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
Actual ................ $129,245 5.63% $130,687 5.69% $145,311 11.43%
Required .............. 34,447 1.50% 68,937 3.00% 101,749 8.00%
-------- ---- -------- ---- -------- ----
Excess ............. $ 94,798 4.13% $ 61,750 2.69% $ 43,562 3.43%
======== ==== ======== ==== ======== ====
The federal banking statutes also contain prompt corrective action
("PCA") provisions pursuant to which banks and
20
21
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
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 September 30, 1997:
Tangible TOTAL RISK-
CAPITAL CATEGORY: Capital Ratio BASED RATIO
------------- -----------
Well-capitalized N/A greater than or equal to 10%
Adequately capitalized N/A greater than or equal to 8%
Undercapitalized N/A less than 8%
Significantly undercapitalized N/A less than 6%
Critically undercapitalized less than or equal to 2 % N/A
CENFED BANK, AT SEPT. 30, 1997 5.63% 11.43%
TIER 1 RISK- TIER 1
CAPITAL CATEGORY: BASED RATIO LEVERAGE RATIO
----------- --------------
Well-capitalized greater than or equal to 6% greater than or equal to 5%
Adequately capitalized greater than or equal to 4% greater than or equal to 4%
Undercapitalized less than 4% less than 4%
Significantly undercapitalized less than 3% less than 3%
Critically undercapitalized N/A N/A
CENFED BANK, AT SEPT. 30, 1997 10.27% 5.69%
At September 30, 1997, the Bank was a well-capitalized institution.
21
22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11.1 Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) No reports were filed on Form 8-K during the quarter for which
this report is filed.
23
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENFED FINANCIAL CORPORATION
Date: November 14, 1997 By: /s/ Steven P. Neiffer
------------------ -----------------------
Steven P. Neiffer
Vice President & Controller
(Principal Accounting Officer)
24
EXHIBIT INDEX
Exhibit Description
11.1 Computation of Earnings Per Share
27.1 Financial Data Schdule