<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1995
( ) Transition Report Pursuant to Section 13 or 15(d) of The
Securities Exchange Act of 1934 (No Fee Required)
For the transition period from _________ to ___________
Commission File No. 0-16970
CALIFORNIA FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 68-0150457
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
501 WEST WEBER AVE., STOCKTON, CALIFORNIA 95203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (209) 948-1675
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 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 requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained, herein, and will not be contained to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of
the registrant as of March 15, 1996: $79,688,914. The number of shares
of Common Stock outstanding as of March 15, 1996: 4,675,907.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Portions of the Proxy Statement for the 1996 Annual Meeting of
Stockholders.
<PAGE>
CALIFORNIA FINANCIAL HOLDING COMPANY
FORM 10-K
Year Ended December 31, 1995
TABLE OF CONTENTS
Item Number
In Form
10-K Page
----------- ----
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 53
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . 53
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . 54
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 55
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . 56
8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . 129
PART III
10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . 130
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 130
12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . . . . . . 130
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . . 130
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . 131
2
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PART I
ITEM 1. BUSINESS
GENERAL
California Financial Holding Company ("California Financial" or the
"Company"), a Delaware corporation incorporated on June 1, 1988, is a
financial services holding company engaged primarily in the savings and
loan business through its wholly-owned subsidiary, Stockton Savings Bank
(the "Bank" or "Stockton Savings"). No business activities were conducted
by California Financial during 1994 and very few were conducted in past
years aside from a third-party borrowing in 1990, 1991 and 1992;
therefore, unless indicated, discussion of business activities and
corresponding results relates primarily to the Bank.
The Bank's business consists predominately of attracting savings
deposits from the general public through a network of 22 Northern
California retail branches and originating, for its own portfolio and for
sale to others, loans secured by mortgages on residential and other real
estate. The home office of California Financial and the Bank is located
in Stockton, California. Originally organized as a state mutual
association, the Bank was converted to a federal mutual charter in 1982.
In 1983, Stockton Savings became a federally-chartered stock association
with the issuance of 2,760,000 shares of common stock. The Bank converted
to a California-chartered stock association in April 1986. In June 1986,
an additional 977,500 shares of common stock were sold. In 1990, the Bank
converted to a federally-chartered savings bank.
The Bank's income is derived primarily from interest charged on real
estate and other types of loans. To a lesser extent, additional income is
obtained through interest on investment securities and fees received in
connection with loan and deposit activities. Although not on a consistent
basis, income is also generated through the sale of loans and investments
and from the sale of real estate held for development. The major expenses
are interest paid on deposits and borrowings and general and
administrative expenses. The general economic and interest rate
environments have a material effect on the financial performance of the
Bank. Deposit flows and costs of funds are influenced by market rates and
alternative investments available in the marketplace. Lending activity
levels are also dependent on interest rates, the demand for mortgage
financing, and the overall health of the real estate market in the Bank's
primary lending territory - California's Central Valley. In addition,
regulatory policies and procedures promulgated by the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB"), and the Federal Deposit Insurance Corporation ("FDIC")
substantially impact Stockton Savings. See "Regulation of the Company"
and "Regulation of the Bank" for further discussion of regulatory issues.
3
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LENDING ACTIVITIES
The lending activities of the Bank are conducted through four
regional loan centers and nine branch facilities concentrated primarily in
San Joaquin and Stanislaus counties. With the 1988 purchase of eight
former Citicorp branches in the Sierra foothills and the Southern Central
Valley and the opening of a new branch in Elk Grove in Sacramento County
in the same year, Stockton Savings substantially expanded its geographical
lending as well as deposit market area to take advantage of projected
commuter growth in those regions. The Bank also increased its potential
market for both savings and lending activities with the opening of a
branch in Fresno in September 1994. Expansion of lending activities to
Sacramento occurred in 1995.
Stockton Savings generally does not lend on more than 80% of the
appraised value on residential real property without mortgage insurance.
In certain special circumstances, usually due to reappraisals or loan
workouts, the Bank may lend on real estate in excess of 80% value without
mortgage insurance. The total of these loans as of December 31, 1995 was
$5.2 million. Lending limits on commercial properties do not exceed 75%
of appraised value. The Bank's loan portfolio is mainly composed of
single-family residential loans. Construction loans on residential
subdivisions and permanent multi-family residential loans represent most
of the remaining portfolio. The Bank also offers secured equity lines of
credit.
Title insurance is required for all mortgage loans. Fire and
casualty coverage is required for all improved secured properties, and
private mortgage insurance is usually purchased to indemnify Stockton
Savings against potential loss on the portion of any loan in excess of 80%
of the appraised value.
Loan Originations: A majority of loans originated by the Bank are
permanent residential mortgage loans with terms of 10 to 30 years. Most
long-term fixed-rate mortgages are sold in the secondary market with
servicing retained, while adjustable-rate loans ("ARMs") are generally
retained in portfolio. The origination of permanent adjustable mortgages
represented 30%, 37% and 25% of total origination volume in 1995, 1994 and
1993 respectively. The demand for adjustable mortgages declines in a
falling rate environment as borrowers opt for the certainty of fixed
rates. Consequently, the volume of adjustable originations as a percent
of the total was lower in 1993 and 1995, both lower rate environments. If
rates remain at their current low level, the origination of adjustable
rate loans is expected to decline in 1996 and fixed-rate originations are
expected to increase.
The Bank originates a substantial volume of short-term speculative
construction loans, normally written for a three-year period with interest
rates fixed at a spread over Bank prime for the first year and adjusting
to a spread over the Federal Home Loan Bank Eleventh District Cost of
Funds Index ("COFI") for the remaining term. In 1995, 31% of all
originations were for short-term construction loans as compared to 28% in
4
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1994 and 20% in 1993. The increase in construction lending this year is
reflective of the Bank's impression that the worst of the real estate
slowdown is over. Construction loans for owner-occupied single-family
residences also represents a considerable amount of loan origination
volume. A total of 11%, 10% and 11% of total originations in 1995, 1994
and 1993, respectively, consisted of this type of lending.
Loan origination volume was down significantly in 1995 and 1994 from
1993 as rising interest rates and lower real estate values reduced
refinancing demand. Loan origination volume in 1995 and 1994 totalled
$283 million and $369 million, respectively, compared to $501 million in
1993. Heavy refinance activity beginning in 1992 due to the low-rate
environment fueled much of the increase in 1993. Roughly 25% or $71
million of total originations in the current year was due to refinancing
compared to 35% in 1994 and 54% in 1993. Origination volume excluding
refinance activity remained fairly flat among the three periods.
Loan Sales: The Bank continues to be active in the secondary market.
Strong underwriting criteria permits the sale of new loan originations in
the secondary market to both government agencies and private investors. A
majority of loan sales by Stockton Savings has been and will continue to
be composed of long-term, fixed-rate mortgages. The Bank may sell
permanent ARMs on an infrequent basis, usually to meet unanticipated cash
requirements. Construction and commercial loans are also sold on occasion
to meet loans-to-one-borrower regulations.
Typically, the Bank sells, without recourse, all or a major portion
of a loan balance to an investor and retains servicing. In 1995, $85
million in loans were sold, primarily to the agencies and consisted of
long-term, fixed-rate, single-family mortgage loans. This total compares
to 1994 loan sales of $64 million. Sales in 1993 totalled $179 million
and again, were primarily to the agencies. Loans serviced for others, an
off-balance sheet item to the Bank, totalled $549 million and $509 million
at December 31, 1995 and 1994, respectively.
Because the Bank sells loans in the secondary market on a regular
basis, a portion of the portfolio is designated as held for sale and, as
such, must be accounted for at the lower of cost or market. The amount of
loans that is held for sale at any point in time depends on such factors
as origination volume and mix, as well as cash flow, capital and growth
requirements of the Bank. The balance of loans held for sale as of
December 31, 1995 was up from the prior year, reflecting the increase in
fixed-rate originations towards the end of the year. Loans available for
sale at year-end consisted of single-family, fixed-rate loans saleable to
the Federal Home Loan Mortgage Corporation ("FHLMC") and totalled $13
million.
Gains or losses on the sale of loans are composed of the following:
. cash received on loans sold in excess of or less than the
principal balance;
5
<PAGE>
. the present value of expected cash flows on the spread between
the rate paid by the borrower to the Bank and the net yield to
the investor, excluding normal servicing fees and considering
prepayments; and
. net unamortized loan fees on loans sold recognized as income at
the point of sale.
. gains and losses on hedging activities.
The amount of gains in a given year is dependent upon the volume of
sales and the interest rate environment. The composition of loan sale
gains for 1995, 1994 and 1993 is included in Table IV of Management's
Discussion and Analysis of Financial Condition and Results of Operations,
Item 7.
Loan Purchases: Loan purchases have historically represented a minor
activity for the Bank as origination volume has always been sufficient to
meet growth needs. Generally, purchases consist of ARM products that the
Bank has been unable to generate in adequate volume internally. Purchase
activity totalled $480,000, $16 million and $5 million in 1995, 1994 and
1993, respectively.
The following table details loan origination, purchase, sale and
prepayment activities and mortgage-backed security activity during the
past five calendar years:
6
<PAGE>
<TABLE>
<CAPTION>
Lending Activity
(in thousands)
For the Years Ended December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans originated:
Real estate loans:
Conventional loans
on existing property $103,198 $ 93,980 $ 72,411 $ 85,133 $ 85,416
Construction 71,730 102,514 101,242 80,327 76,808
Construction for owner 31,736 38,956 51,794 53,263 44,490
Loans refinanced 71,372 130,774 272,399 319,539 170,271
Loans for other 5,254 2,641 3,268 5,716 17,076
purposes -------- -------- -------- -------- --------
Total loans originated $283,290 $368,865 $501,114 $543,978 $394,061
-------- -------- -------- -------- --------
Loans purchased $ 481 $ 15,879 $ 5,482 $ 28,803 $ 40,599
-------- -------- -------- -------- --------
Total loans originated $283,771 $384,744 $506,596 $572,781 $434,660
and purchased -------- -------- -------- -------- --------
Principal repayments and
payoffs 194,011 246,490 280,211 266,039 232,172
Whole loans sold 85,199 64,346 175,110 209,415 187,628
Loan participations -- -- 3,879 7,035 4,665
sold
Loans swapped for
mortgage-backed
securities -- 8,434 -- -- 20,109
-------- -------- -------- -------- --------
Total loans sold and
paid off $279,210 $319,270 $459,200 $482,489 $444,574
-------- -------- -------- -------- ---------
Net loan activity $ 4,561 $ 65,474 $ 47,396 $ 90,292 $(9,914)
======== ======== ======== ======== ==========
(Does not include deductions for LIP, discounts, or unamortized loan fees.)
</TABLE>
Loan Maturity and Prepayments: The Bank's residential loans are
amortized by monthly payments over terms ranging from 5 to 30 years;
however, loans normally remain outstanding for a shorter period of time as
borrowers refinance or accelerate the repayment of their loans. The
likelihood of early repayment increases with higher rate or adjustable
loans, particularly in a lower rate environment. Loan repayment activity
in 1995 was down $52 million from the prior year, corresponding to the
decline in refinancing activity. The Bank estimates the life of the
average permanent residential mortgage loan to be between 5 and 7 years.
7
<PAGE>
The following table summarizes information regarding the term to
maturity of Stockton Savings' loan portfolio at December 31, 1995:
<TABLE>
<CAPTION>
Loan Maturity Schedule
(in thousands)
As of December 31, 1995
Real Estate
Mortgage
Loans Construction Other loans Total (2)
-------- Loans (1) ------- --------
-----------
<S> <C> <C> <C> <C>
Due in less than 1 year $ 39,346 $ 24,446 $ 1,724 $ 65,516
Due in 1-2 years 44,781 51,179 434 96,394
Due in 2-3 years 31,205 3,612 48 34,865
Due in 3-5 years 63,396 3 63,399
Due in 5-10 years 50,878 139 51,017
Due in more than 10 years 658,430 354 658,784
-------- -------- -------- --------
Total Portfolio $888,036 $ 79,237 $ 2,702 $969,975
======== ======== ======== ========
(1) All current "construction for owner" loans are
classified under real estate loans, as they have or
will roll over to permanent long-term financing. All
construction loans are adjustable-rate in nature.
(2) Excludes deductions for LIP, discounts and unamortized
fees.
</TABLE>
At December 31, 1995, the Bank's balance of loans maturing after one
year totalled $904 million; $671 million adjustable in nature and $233
million fixed rate.
The following schedule breaks out the loan portfolio by type as of
the dates indicated:
8
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<TABLE>
<CAPTION>
Loan Composition - By Type
(in thousands)
As of December 31,
1995 1994 1993
Amount % Amount % Amount %
-------- ---- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
By type of Loan:
Residential mortgage loans
Existing structures
1-4 unit dwellings $745,793 79.7 $735,338 79.0 $642,624 74.4
5 or more unit dwellings 38,130 4.1 37,110 4.0 46,851 5.4
Construction
1-4 unit dwellings 57,517 6.2 59,793 6.4 71,504 8.3
5 or more unit dwellings 1,278 .1 4,853 0.5 821 0.1
-------- ----- -------- ----- -------- ----
Total residential $842,718 90.1 $837,094 89.9 $761,800 88.2
-------- ----- -------- ----- -------- ----
Commercial mortgage loans $ 55,518 5.9 $ 57,818 6.2 $ 54,969 6.4
Existing structures
Construction -- -- -- -- -- --
-------- ---- -------- ---- -------- ----
Total commercial $ 55,518 5.9 $ 57,818 6.2 $ 54,969 6.4
-------- ----- -------- ----- -------- ----
Land loans $ 34,227 3.7 $ 33,862 3.6 $ 43,668 5.1
-------- ----- -------- ----- -------- ----
Other loans $ 29 0.0 $ 80 0.0 $ 393 0.0
Educational loans
Savings loans 2,196 0.2 1,953 0.2 2,535 0.3
Other loans 477 0.1 505 0.1 385 0.0
-------- ----- -------- ----- -------- ----
Total other loans $ 2,702 0.3 $ 2,538 0.3 $ 3,313 0.3
-------- ----- -------- ----- -------- ----
Total loans $935,165 100.0 $931,312 100.0 $863,750 100.0
-------- ----- -------- ----- -------- -----
Weighted average rate at end of period 7.92% 7.02% 7.38%
======== ======== ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Loan Composition - By Type
(in thousands)
As of December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount % Amount % Amount % Amount % Amount %
-------- ---- -------- --- -------- --- -------- --- -------- ---
By type of Loan:
Residential mortgage loans
Existing structures
1-4 unit $745,793 79.7 $735,338 79.0 $642,624 74.4 $596,651 73.2 $497,126 67.9
dwellings
5 or more unit
dwellings 38,130 4.1 37,110 4.0 46,851 5.4 39,428 4.8 41,000 5.6
Construction
1-4 unit 57,517 6.2 59,793 6.4 71,504 8.3 71,039 8.7 66,616 9.1
dwellings
5 or more
unit 1,278 .1 4,853 0.5 821 0.1 1,449 0.2 1,708 0.2
dwellings -------- ----- -------- ----- -------- ---- -------- ---- -------- ----
Total $842,718 90.1 $837,094 89.9 $761,800 88.2 $708,567 86.9 $606,450 82.8
residential -------- ----- -------- ----- -------- ---- -------- ---- -------- ----
Commercial
mortgage loans
Existing
structures
$ 55,518 5.9 $ 57,818 6.2 $ 54,969 6.4 $ 59,774 7.3 $ 66,787 9.1
Construction
-- -- -- -- -- -- 998 0.1 7,560 1.1
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total
commercial $ 55,518 5.9 $ 57,818 6.2 $ 54,969 6.4 $ 60,772 7.4 $ 74,347 10.2
-------- ----- -------- ----- -------- ---- -------- ---- -------- ----
Land loans $ 34,227 3.7 $ 33,862 3.6 $ 43,668 5.1 $ 41,334 5.1 $ 45,389 6.2
-------- ----- -------- ----- -------- ---- -------- ---- -------- ----
Other loans
Educational
loans $ 29 0.0 $ 80 0.0 $ 393 0.0 535 0.1 $ 900 0.1
Savings
loans 2,196 0.2 1,953 0.2 2,535 0.3 3,828 0.5 4,714 0.7
Other
loans 477 0.1 505 0.1 385 0.0 346 0.0 279 0.0
-------- ----- -------- ----- -------- ---- -------- ---- -------- ----
Total other
loans $ 2,702 0.3 $ 2,538 0.3 $ 3,313 0.3 $ 4,709 0.6 $ 5,893 0.8
-------- ----- -------- ----- -------- ---- -------- ---- -------- ----
10
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Total loans $935,165 100.0 $931,312 100.0 $863,750 100.0 $815,382 100.0 $732,079 100.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Weighted average
rate at end of
period 7.92% 7.02% 7.38% 8.67% 10.20%
======== ======== ======== ======== ========
(Does not include deductions for discounts or unamortized loan fees.)
The composition of the loan portfolio remained fairly stable as
compared to the end of the prior year.
Loan Fee Income: The Bank generally charges a fee for originating
loans, as well as for committing to specific interest rates. Modification
fees, assumption fees and late charges are also collected on existing
loans. Fee income is considered a less dependable source of income than
interest income as it will vary depending on volume, loan mix,
competition, and the overall economic environment. The following table
shows loan origination fees as a percentage of loans originated for the
periods indicated:
For the Years Ended Total Loan Origination Fees as a Percent of
December 31, Loans Originated
---------------- ----------------------
1995 .98%
1994 1.55%
1993 1.79%
1992 2.03%
1991 2.13%
The lower fees collected as a percentage of total originations in the
current year is due to a change in marketing which has provided the
borrower with the option of being charged a higher rate in exchange for a
lesser fee.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 91 ("FASB 91"), "Accounting for
Nonrefundable Fees and Costs Associated with Originating and Acquiring
Loans and Initial Direct Costs of Leases"; and the Bank implemented it
beginning January 1, 1989. FASB 91 requires that loan origination fees
and commitment fees, offset by certain specific direct costs of
origination, are to be deferred and amortized over the contractual life of
the loans as an adjustment to yield. Unamortized fees on loans sold or
prepaid are taken into income immediately. The accelerated recognition of
fees due to loan prepayments is included with regular amortization in loan
interest income. Unamortized fees recognized on the sale of loans are
included as part of "gain on sale of loans". Deferred loan fees
outstanding as of December 31 of the years indicated are shown below:
11
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At Deferred Fees Outstanding (in
December 31, thousands)
---------- -----------------------
1995 $ 5,628
1994 6,607
1993 7,265
1992 7,762
1991 7,875
The decline in deferred fees outstanding is due in large part to the
preference by borrowers to pay less of a fee up front in exchange for a
higher rate on the loan for the life of the borrowing.
The amortization of loan origination fees included in 1995 interest
income totalled $2.8 million, compared to $4.1 million recorded in 1994
and $4.7 million in 1993. The steady decline in amortization is due to
the reduction in prepayment activity over the past several years. General
and administrative expense was reduced for specific direct costs of
origination by $1.4 million, $ 1.9 million, and $2.7 million in 1995, 1994
and 1993, respectively. The decline in deferrals in 1995 was due to the
continued reduction in origination volume mentioned earlier.
Loan servicing fee income results from sales of loans and loan
participations. Under the sales agreements, the Bank is obligated to
service the sold loans (i.e., to continue to collect payments on the loans
as they become due and to monitor tax and insurance payments) and to pay
the purchaser an agreed upon yield. The differential between the interest
paid by the borrower and the yield paid by the Bank to the purchaser is
retained by Stockton Savings. To the extent that this differential is
more or less than the estimated normal rate of servicing, after adjustment
for estimated prepayments using a discount market rate, it is recognized
as gain or loss by the Bank in accordance with generally accepted
accounting principles ("GAAP"). The net yield to the Bank on its
servicing portfolio is indicated below:
Weighted Average Yield on Servicing
Portfolio for year ending
December 31,
-----------------------------------
1995 .28%
1994 .25%
1993 .23%
1992 .25%
1991 .35%
Net servicing spreads have generally declined since 1991 as most
agency sales are now made on a cash basis whereby the average spread
between the underlying loan and the yield retained by the Bank is 25 basis
points. In the past, participation sales allowed for a much larger spread
between the underlying face rate on the note and the pass-through rate.
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<PAGE>
Loan Commitments: The Bank will generally issue fixed-rate
commitments to originate conventional mortgages on existing residential
dwellings for a 30-day period from the receipt of a completed application.
Borrowers requesting extensions on the initial commitment period are
charged a fee commensurate with the extended period. During this
commitment period, fixed-rate permanent loans in the pipeline (which the
Bank generally tends to sell) are subject to interest rate risk. The Bank
makes a concerted effort to reduce this exposure by locking in forward
sales of these loans or hedging through the forward sales of participation
certificates.
Asset Quality: Per Bank policy, a loan is delinquent when a required
payment has not been received within 15 days of its scheduled due date.
It is Bank policy to cease accruing interest on loans that are 90 days or
more delinquent and on restructured troubled debt. At December 31, 1995,
$2.3 million in interest on delinquent and troubled loans was not
recorded. Interest income of $628,000 was recorded on these loans during
1995 and gross interest income that would have been recorded during the
year had the loans been performing was $1.2 million. Upon failure of the
borrower to make a required payment on a loan, the Bank attempts to remedy
the deficiency through contact with the borrower. Most defaults are cured
promptly; however, if the loan remains delinquent, Stockton Savings seeks
remedy through appropriate legal action, such as foreclosure proceedings
or acceptance from the trustor of a voluntary deed on the secured property
in lieu of foreclosure. If a foreclosure action is instituted and the
loan is not reinstated, paid in full or refinanced, the property is sold
in a proceeding at which the Bank may be the buyer. The acquired property
is subsequently listed as "real estate owned" until it is sold. Real
estate acquired through settlement of loans is recorded at the lower of
carrying value or fair value less estimated selling costs. At the time of
foreclosure, any excess of the loan amount over the fair value of the
property is written off. Specific valuation allowances for estimated
losses are provided on real estate when a further decline in value occurs
after the property has been acquired. Specific allowances on foreclosed
real estate of $3.9 million existed at the end of 1995 and $3.1 million at
the end of 1994. Stockton Savings may finance the sale of real estate
owned with a loan which may involve more favorable terms than normally
permitted by applicable regulations or the Bank's loan underwriting
criteria. If the terms are more favorable than what would normally be
offered, the differential in terms is discounted and recorded as a loss at
time of disposition of the foreclosed asset. If a loan made to facilitate
the sale of real estate owned involves relaxed underwriting criteria, the
loan is classified as a "loan to facilitate" on the balance sheet. No
loans to facilitate existed for any periods covered under this filing.
The level of nonperforming assets declined by 35% in 1995 compared to
the prior year. Improvements were noted in all nonperforming asset
categories with the exception of 1-4 family residential mortgage
delinquencies.
Gains and losses on sale and loss provisions on real estate owned
through foreclosure are summarized below for the calendar years indicated:
13
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Gain or Loss on Sale and Loss Provisions on Real Estate Owned Through Foreclosure
(in thousands)
For the Years Ended December 31,
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Gains on sale $ 236 $ 385 $ 384 $ 263 $ -
Losses on sale (228) (221) (164) (97) (80)
Provisions for
losses (1,630) (2,385) (1,245) (281) (421)
------- ------- ------- ------ -----
Total impact
on income $(1,622) $(2,221) $(1,025) $ (115) $(501)
------- ------- ------- ------ -----
</TABLE>
Loss provisions added on foreclosed real estate in 1995, 1994 and
1993 totalled $1.6 million, $2.4 million and $1.2 million, respectively.
Provisions taken over the past two years related primarily to losses
inherent in a single property located in Galt, California collateralizing
a construction loan.
A summary of loan loss experience by loan type is provided in the
following table:
<TABLE>
<CAPTION>
Analysis of Allowance for Loan Losses
(in thousands)
For the Years Ended December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $7,726 $9,965 $8,042 $5,047 $2,157
Charge-offs
Mortgage Loans
1-4 dwelling units 338 197 42 -- --
Multifamily and commercial -- 1,142 630 380 460
Construction loans
1-4 dwelling units -- 145 220 390 --
Land 847 1,343 170
------ ------ ------ ------ ------
Total charge-offs $1,185 $2,827 $1,062 $ 770 $ 460
Recoveries -- 307 -- -- --
Net charge-offs $1,185 $2,520 $1,062 $ 770 $ 435
------ ------ ------ ------ ------
14
<PAGE>
Additions to allowances $1,633 $ 281 $2,985 $3,765 $3,325
------ ------ ------ ------ ------
Balance at end of period $8,174 $7,726 $9,965 $8,042 $5,047
------ ------ ------ ------ ------
Ratio of net charge-offs during the
period to average loans outstanding
during the period .13% .29% .12% .10% .06%
</TABLE>
The Bank took $1.2 million in charge-offs in the current year,
largely due to the foreclosure on one large tract of land. Additions to
loan loss allowances were lower than levels established in 1993, 1992 and
1991, reflecting the improvement in the level of nonperforming assets
discussed above.
Loan Loss Reserves: The Competitive Equality Banking Act of 1987
("CEBA") required that the Federal Home Loan Bank Board ("FHLBB"), now
OTS, establish an asset classification system for savings and loan
associations consistent with asset classification practices of national
banks. The subsequent regulation, effective December 31, 1987, required
all institutions to establish an internal asset review system to evaluate
and classify assets on a regular basis and provide prudent valuation
allowances. The regulation calls for the classification of troubled
assets as either "substandard", "doubtful" or "loss". An asset is
considered "substandard" if inadequately protected by the current net
worth and paying capacity of the obligor or by the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection or
liquidation in full", on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable". Assets
classified "loss" are those considered "uncollectible" and of such little
value that their continuance as assets without the establishment of a loss
reserve is not warranted. In addition, the Bank designates certain assets
that do not currently expose the Bank to a sufficient degree of risk to
warrant classification but possess credit deficiencies or future potential
weaknesses as "special mention".
Classified assets reported to OTS as of December 31, 1995, 1994 and
1993 are shown in the following schedule:
15
<PAGE>
<TABLE>
<CAPTION>
Classified Assets
(in thousands)
At December 31,
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Substandard assets $ 37,841 $ 47,310 $ 54,737
Doubtful assets -- -- 400
Loss assets 6,370 6,348 5,267
-------- -------- --------
Total $ 44,211 $ 53,658 $ 60,404
======== ======== ========
</TABLE>
Loss reserves are established on all assets classified as "loss".
General loan loss reserves are established on a percentage of loans
classified as substandard and doubtful, as well as special mention and
unclassified assets, according to the type of asset, historical loss
experience and its perceived relative risk. A breakdown of the general
allowance for loan losses is provided below:
16
<PAGE>
<TABLE>
<CAPTION>
Allocation of Allowance for Loan Losses
(Dollars in thousands)
At December 31,
1995 1994 1993
Amt % Amt % Amt %
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans
1-4 dwelling units $1,069 13.1 $ 818 10.6 $ 751 7.5
Multifamily and Commercial 2,426 29.7 2,120 27.4 2,639 26.5
Construction loans 1,022 12.5 1,727 22.4 1,092 10.9
Land loans 2,070 25.3 2,144 27.8 3,804 38.2
Other loans 508 6.2 58 .7 57 .6
Unallocated 1,079 13.2 859 11.1 1,622 16.3
------ ---- ----- ---- ------ ----
$8,174 100% $7,726 100% $9,965 100%
====== ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Allocation of General Allowance for Loan Losses
(Dollars in thousands)
At December 31,
1992 1991
Amt % Amt %
<S> <C> <C> <C> <C>
Mortgage loans
1-4 dwelling units $1,129 14.0 $ 217 4.3
Multifamily and Commercial 2,991 37.3 2,206 43.7
Construction loans 1,239 15.4 792 15.7
Land loans 2,133 26.5 944 18.7
Other loans -- -- -- 0
Unallocated 550 6.8 888 17.6
------ ---- ----- ----
$8,042 100% $5,047 100%
====== ==== ====== ====
</TABLE>
For a more detailed discussion of asset quality, see the "Asset
Quality" section in Management's Discussion and Analysis of Financial
Condition and Results of Operations, Item 7.
17
<PAGE>
INVESTMENT ACTIVITIES
Stockton Savings' second largest source of income is interest earned
on investments. The Bank is required by federal regulation to maintain a
balance of 5% of its average deposits and short-term borrowings in liquid
assets with terms of five years or less. At December 31, 1995, the Bank's
liquidity ratio was 6.18%. The Bank's liquidity qualifying investments
generally consist of government-backed obligations and federal funds
alternatives. Realistically, management seeks to maintain a liquidity
ratio in the range of 5.5% and 6%. These levels are generally met only
after all short-term borrowings have been retired.
In addition to its liquidity qualifying assets, the Bank also has a
large portfolio of mortgage-backed securities and collateralized mortgage
obligations. These investments supplement the Bank's own lending
portfolio and are utilized frequently as collateral for borrowings.
The following table summarizes the Bank's investments at December 31
for the periods indicated:
<TABLE>
<CAPTION>
Investment Security Composition
(Dollars in thousands)
At December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Securities Available
for Sale (1):
Federal funds $ 255 $ -- $ -- $ -- $ --
Mutual fund investment 4,424 -- -- -- --
U.S. Government and
agency securities 48,020 39,249 -- -- --
Collateralized
mortgage obligations 95,050 11,190 -- -- --
Mortgage-backed
securities 117,200 7,154 -- -- --
Other 1,087 -- -- -- --
-------- -------- ------- ------- --------
Total Available for Sale $266,036 $ 57,593 $ 0 $ 0 $ 0
-------- -------- ------- ------- --------
18
<PAGE>
Securities Held to
Maturity (2):
Federal funds $ -- $ 350 $ 11,400 $ 925 $ 2,250
Mutual fund investment -- 2,901 19,233 9,212 30,311
Securities purchased
under agreements to
resell -- -- -- 700 51,000
U.S. Government and
agency securities -- 6,335 20,905 24,068 7,202
Collateralized
mortgage obligations -- 46,414 30,575 33,910 15,214
Mortgage-backed
securities -- 159,436 80,405 84,603 101,275
Other -- 74 10 10 517
-------- -------- -------- -------- --------
Total Held to Maturity $ 0 $215,510 $162,528 $153,428 $207,769
-------- -------- -------- -------- --------
Trading Account
Securities (3):
Mutual fund investment $ -- $ -- $ 3,244 $ 233 $ 5,743
U.S. Government and
agency securities -- -- 17,858 20,381 16,708
-------- -------- -------- -------- --------
Total Trading Account $ 0 $ 0 $ 21,102 $ 20,614 $ 22,451
-------- -------- -------- -------- --------
Total Investment
Securities $266,036 $273,103 $183,630 $174,042 $230,220
======== ======== ======== ======== ========
Weighted average
rate at end of 6.66% 6.70% 5.58% 6.75% 6.93%
period ======== ======== ======== ======== ========
</TABLE>
Statement of Financial Accounting Standards 115 ("SFAS 115")
"Accounting for Certain Investments in Debt and Equity Securities",
adopted on January 1, 1994, requires the classification of securities as
available for sale or held to maturity.
The Bank designated its entire investment portfolio as available for
sale as of year-end 1995. During the year, $52.1 million in securities
classified as available for sale were sold with net losses of $27,000
recorded. The designation made by management in August 1995 was the
result of a decision by management at that point in time to restructure
its balance sheet. See Notes 2 and 3 of the Financial Statements in Item
8.
At December 31, 1994, the Bank had classified $52.8 million of
securities and $159.4 million of mortgage-backed securities as held to
19
<PAGE>
maturity. An additional $50.4 million in securities were classified as
available for sale. During the year, $14.2 million in securities
classified as available for sale were sold with net losses of $66,000
recorded.
The Bank designated $17.9 million in treasury securities at December
31, 1993 as held for trading purposes. These assets were under active
management by portfolio managers and, as such, were marked-to-market value
with the resulting gain or loss shown as an adjustment to pretax income.
Net losses recognized on trading activities during 1994, 1993 and 1992
totalled $416,000, $15,000 and $471,000, respectively. No investments
designated as held for trading purposes were outstanding at year-end, 1995
or 1994 as all such assets were transferred to other portfolios at market
value in 1994 as described in Note 2 of the Financial Statements and
Supplementary Data, Item 8.
The Bank's securities held for investment purposes totalled $51.5
million at December 31, 1993. The Bank had the intent and ability to hold
investment-designated securities to maturity. No securities designated as
held for investment purposes were sold during 1993. No securities were
classified as held for sale at December 31, 1993.
REAL ESTATE DEVELOPMENT ACTIVITIES
The Bank has historically been involved in the development of real
estate through its wholly-owned subsidiary, Stockton Service Corporation
("SSC"). All current real estate investments are in residential
development, primarily single-family homes and lots. All real estate is
currently owned 100% by SSC which has traditionally contracted with local
developers to build projects in exchange for a construction fee and a
split in profits. SSC is allowed a preferential return (before any profit
splits) that is equivalent to interest and fees that would normally have
been earned on a construction loan. The breakout of SSC's gross income
before reduction for the effect of capitalized interest relieved is shown
in the following table for the periods indicated:
20
<PAGE>
<TABLE>
<CAPTION>
SSC Profit
(in thousands)
For the Years Ended December 31,
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Preferential return $ 9 $ 973 $ 1,993
SSC profit split (39) (155) 207
------ ------ ------
Total gross profits $ (30) $ 818 $ 2,200
====== ====== ======
</TABLE>
The slow real estate market has led to declining sales, reduced
profit margins and significant loss provisions established on the Bank's
remaining real estate investment inventory.
SSC recorded $4.1 million in loss reserves in 1995 despite
significant increases in reserves established in previous years. For a
more detailed discussion of real estate development activities see the
"Real Estate Investment" section in Management's Discussion and Analysis
of Financial Condition and Results of Operations, Item 7.
The 1995 Annual Report to Shareholders (incorporated within this
filing by reference), as well as the regulatory section of this text,
discusses the implications of current regulatory constraints on real
estate investment opportunities for savings banks. The constraints no
longer make investment in real estate through a subsidiary of Stockton
Savings a feasible alternative. The Bank's indirect investment in real
estate through SSC will be limited to 2% of assets. In addition, this
investment can no longer be included in capital when calculating the
Bank's regulatory capital. Both of these provisions are phased-in over a
stated time frame. See "Regulation - General".
The Bank anticipates selling or completing development of all
projects currently owned by SSC by the end of 1996. Any future projects
will be developed through a separate wholly-owned subsidiary of California
Financial.
SAVINGS AND CHECKING ACTIVITY
The Bank's asset base is financed primarily through savings and
checking accounts located throughout its branch system. Accounts offered
include certificates of deposit, NOW/checking accounts, money market
accounts, passbook accounts and Individual Retirement Accounts.
Certificate accounts differ as to rate and term to maturity. Account
21
<PAGE>
activity by type is shown in the following table for the periods
indicated:
<TABLE>
<CAPTION>
Savings and Checking Activity
(Dollars in thousands)
For the Years Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Interest credits $ 39,995 $ 30,584 $ 30,986 $ 39,670 $ 46,364
Net deposits (80,918) 85,429 (38,429) (35,839) (38,378)
(withdrawals) -------- -------- -------- -------- --------
Net increase $(40,923) $116,013 $ (7,443) $ 3,831 $ 7,986
(decrease) ======== ======== ======== ======== ========
4.75% 4.19% 3.67% 4.26% 5.87%
Cost of savings
Number of accounts:
Savings 59,496 56,751 53,357 53,963 56,551
Checking 35,778 32,871 29,106 25,288 22,647
</TABLE>
Deposits were down by $41 million in 1995. The declining rate
environment in 1995, making these investments a less attractive
alternative, as well as the runoff of $56.7 million in brokered funds,
were responsible for the decline. Conversely, deposits increased by $116
million in 1994, the result of a higher, more favorable rate environment
as well as the acquisition of $61 million in brokered funds.
Net deposit balances are shown below for the dates indicated:
22
<PAGE>
<TABLE>
<CAPTION>
Deposits by Type and Interest Rate
(Dollars in thousands)
At December 31,
1995 % of Total 1994 % of Total
<S> <C> <C> <C> <C>
Passbook accounts $ 47,423 4.94% $ 53,376 5.33
Checking accounts:
Interest-bearing 91,231 9.50 98,250 9.81
Noninterest-bearing 17,381 1.81 11,967 1.20
Money Market accounts 66,066 6.88 85,844 8.58
Certificate Accounts:
2.00% to 2.99% 509 .05 5,820 .58
3.00% to 3.99% 9,819 1.02 119,104 11.90
4.00% to 4.99% 132,274 13.78 263,036 26.27
5.00% to 5.99% 372,310 38.78 222,917 22.27
6.00% to 6.99% 213,362 22.22 131,620 13.15
7.00% to 7.99% 9,360 .97 7,069 .71
8.00% to 8.99% 272 .03 1,246 .12
9.00% to 9.99% 141 .02 592 .06
10.00% to 10.99% -- -- 229 .02
11.00% to 11.99% -- -- -- --
12.00% to 12.99% -- -- -- --
13.00% to 13.99% -- -- -- --
-------- ------ --------- ------
Total Deposits $960,148 100.00% $1,001,070 100.00%
======== ====== ========== ======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Deposits by Type and Interest Rate
(Dollars in thousands)
At December 31,
1993 % of Total
<S> <C> <C>
Passbook accounts $ 56,256 6.39
Checking accounts:
Interest-bearing 106,060 11.98
Noninterest-bearing 2,243 .25
Money Market accounts 101,070 11.42
Certificate Accounts:
2.00% to 2.99% 52,431 5.92
3.00% to 3.99% 175,090 19.78
4.00% to 4.99% 253,504 28.64
5.00% to 5.99% 76,030 8.59
6.00% to 6.99% 45,870 5.18
7.00% to 7.99% 10,837 1.22
8.00% to 8.99% 3,757 .43
9.00% to 9.99% 805 .09
10.00% to 10.99% 225 .03
11.00% to 11.99% 505 .06
12.00% to 12.99% 27 .03
13.00% to 13.99% 148 .02
-------- ------
Total Deposits $885,058 100.00%
======== ======
</TABLE>
The maturities of Stockton Savings' certificate accounts are an
indication of the relative stability of the supply of lendable funds.
Every effort is made to extend the maturities of accounts to simulate the
maturities and rate adjustments of the Bank's loan portfolio. The
24
<PAGE>
following schedule illustrates the Bank's certificate accounts by maturity
as of December 31, 1995:
<TABLE>
<CAPTION>
Savings Certificates by Maturity
(in thousands)
At December 31, 1995
Interest Rate 1996 1997 1998 After 1998 Total
------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C>
2.00% to 2.99% $ 437 $ 24 $ 48 $ -- $ 509
3.00% to 3.99% 9,790 24 4 1 9,819
4.00% to 4.99% 128,466 2,529 1,007 272 132,274
5.00% to 5.99% 250,160 98,595 17,023 6,532 372,310
6.00% to 6.99% 183,024 11,633 11,045 7,660 213,362
7.00% to 7.99% 3,863 2,505 873 2,119 9,360
8.00% to 8.99% 121 143 3 5 272
9.00% to 9.99% 141 -- -- -- 141
-------- -------- -------- -------- --------
$576,002 $115,453 $ 30,003 $ 16,589 $738,047
======== ======== ======== ======== ========
</TABLE>
The Bank's deposit maturity structure was shortened during 1995,
reflecting the depositor's bias towards decreasing interest rates and
their corresponding desire not to want to lock in current interest rates
long term.
Average balances and rates for deposits are shown below for the
periods indicated:
<TABLE>
<CAPTION>
Average Deposits by Type and Interest Rate
(Dollars in thousands)
For Years Ended December 31,
1995 1994 1993
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Checking Accounts
Interest-bearing $ 92,701 1.56% $102,925 1.58% $101,873 1.91%
Non interest-bearing 14,858 -- 7,984 -- 6,843 --
Savings Accounts 132,228 2.72% 150,134 2.35% 156,501 2.63%
Certificate Accounts 758,778 5.54% 672,957 4.43% 621,807 4.68%
-------- ---- -------- ---- -------- ----
Total $989,565 4.85% $934,000 3.75% $887,024 3.96%
======== ==== ======== ==== ======== ====
25
<PAGE>
Does not include impact of interest rate swaps of interest
forfeitures.
The balance of less rate sensitive checking and savings accounts
declined by $30 million in 1995 as funds were attracted out of money
market accounts into higher-yielding 3 month certificates. The actual
number of checking accounts, a product the Bank is emphasizing, grew by
2,907, even though net balances actually fell by $3 million. The
difference in yield between these accounts and current interest rates
became too great, causing depositors to invest excess funds in higher-
yielding certificates.
The Bank held "jumbo" certificates of deposit (deposits of $100,000
or more) of $223 million at December 31, 1995. Certificate maturities as
of that date were as follows:
Jumbo Maturities
(in thousands)
At December 31, 1995
3 months or less $ 43,947
3 to 6 months 31,643
6 to 12 months 52,938
More than 12 months 42,499
--------
Total $171,027
========
Brokered accounts with terms of three months or less declined
compared to the prior year, reflecting the desire by jumbo customers to
take advantage of attractive yields offered by the Bank in non-jumbo
three-month maturities.
At December 31, 1995, savings of out-of-state account holders
amounted to $11.9 million, less than 1.3% of total savings.
BORROWING ACTIVITY
Reverse Repurchase Agreements: Periodically, the Bank uses its
investments in U.S. Government and agency securities, mortgage-backed
securities and mortgage derivative securities as collateral to borrow
funds on a short-term basis through reverse repurchase agreements.
Reverse repurchase agreements consist of sales of securities to securities
dealers with the commitment by the Bank to repurchase such securities for
a predetermined price at a specified date in the future, usually 1 to 90
days. If the Bank decides to replace a maturing repurchase agreement with
another agreement, the amount of the new borrowing will be based on the
market value of the underlying collateral at the date of refinancing.
Statistical information regarding these borrowing arrangements is detailed
in Note 10 of the Financial Statements and Supplementary Data, Item 8.
Due to the additional growth taken on by the Bank in 1994, reverse
26
<PAGE>
repurchase agreements totalled $35 million and $65 million at year-end
1995 and 1994, respectively. The weighted average maturity of these
borrowings at year-end was less than one month.
Collateralized Mortgage Obligations: The Bank's finance subsidiary,
Stockton Securities Corporation, exists primarily to issue debt as
securities. In March 1985, a $50 million CMO was issued (Series A),
secured by $57 million in fixed-rate mortgage loans converted to FHLMC
participation certificates. In December 1987, an additional $57 million
CMO was issued (Series B), collateralized by $57 million in FHLMC
certificates. The debt service on the CMOs corresponds with the cash flow
on the participation certificates and, therefore, provides a close
matching of the underlying asset and liability maturities, reducing
exposure to interest rate risk. The Series A bonds were paid off in total
during 1992.
The bonds carried a weighted average face rate of 8.25% at December
31, 1995 and an effective rate of 8.25% compared to an average face rate
of 8.25% and an effective rate of 10.97% at December 31, 1994. For
additional statistical information on these borrowings, see Note 9 of the
Financial Statements and Supplementary Data, Item 8.
Federal Home Loan Bank Advances: As a member of the Federal Home
Loan Bank ("FHLB") System, the Bank is entitled to borrow funds from the
FHLB of San Francisco on the security of capital stock of FHLB owned by
Stockton Savings, certain mortgage loans and other specified securities.
Funds are advanced to an association based on its creditworthiness and
ability to pay. There are currently no restrictions on the Bank's ability
to borrow from the FHLB. The weighted average rate on advances at
December 31, 1995 and 1994 was 5.98% and 5.49%, respectively. The
following table identifies FHLB advances by type of borrowing for each
period indicated:
</TABLE>
<TABLE>
<CAPTION>
Federal Home Loan Bank Advances By Type
(In thousands)
At December 31,
1995 1994 1993
Reprice % % %
Freq. Rate Balance Rate Balance Rate Balance
<S> <C> <C> <C> <C> <C> <C> <C>
27
<PAGE>
Long-term
fixed rate -- 6.06 $110,000 5.80 $ 65,000 5.53 45,000
Adjustable-rate credit
Variable-rate Mtly 5.63 25,000 5.04 45,000 3.65 55,800
line of credit
Short-term
collateralized Daily -- -- -- -- .66 10,000
Total FHLB
advances Wkly/ 5.95 27,500 -- -- --
Mtly ---- -------- ------ -------- ---- -------
5.98 $162,500 5.49 $110,000 4.42 $110,800
==== ======== ==== ======== ==== ========
</TABLE>
The increase in the average rate on advances in the current year is
due to the increase in the cost of adjustable-rate advances indexed to
COFI due to the increase in that index as well as to increases in the
balance of higher-costing fixed-rate advances and the addition of $27
million in higher-costing short-term borrowings.
The following table summarizes consolidated borrowings as of December
31 for the years indicated:
<TABLE>
<CAPTION>
Borrowings By Type
(Dollars in thousands)
At December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Federal Home Loan
Bank advances $162,500 $110,000 $110,800 $ 52,800 $ 25,000
Collateralized
mortgage
obligations 6,463 7,898 14,147 28,873 43,519
Bank borrowings Reverse -- -- -- -- 3,000
repurchase
agreements
35,408 64,978 396 544 110
Weighted average cost of -------- -------- -------- -------- --------
borrowings $204,371 $182,876 $125,343 $ 82,217 $ 71,629
======== ======== ======== ======== ========
6.02% 5.92% 5.64% 7.12% 9.72%
======== ======== ======== ======== ========
</TABLE>
NET INTEREST INCOME
28
<PAGE>
Net interest income is affected primarily by three factors:
1) the weighted average yield on interest-earning assets less the
weighted average cost of interest-bearing liabilities,
2) the balance of interest-earning assets, and
3) the balance of interest-earning assets relative to interest-
bearing liabilities.
The impact of the first two factors on net interest income is
illustrated on Table II of Management's Discussion and Analysis of
Financial Condition and Results of Operations, Item 7. Discussion of
changes in the components of net interest income in 1995 and 1994 is
reflected under "Net Interest Income" of Management's Discussion and
Analysis of Financial Condition and Results of Operations, Item 7.
Net interest income, before capitalized interest, increased by $1.2
million in 1993 compared to 1992. A $43 million increase in the average
balance of loans outstanding was primarily responsible for the increase in
net interest income for the year as the reduced cost of funds was
virtually offset by declining asset yields.
A 103 basis point drop in the loan portfolio yield was primarily
offset by a 79 basis point drop in the cost of deposits and a 301 basis
point decline in the cost of borrowings. The drop in loan yields was due
to the continued prepayment of higher yielding loans, the lower initial
start rate on adjustable-rate product as well as to the decline in COFI.
The downward repricing of higher-costing long-term deposits as well
as the drop in rates on transaction accounts led to the decline in deposit
costs in 1993. Additionally, $32 million in higher-costing FHLB advances
matured in 1993 and were replaced with lower-costing fixed and adjustable-
rate advances.
As indicated above, changes in the balance of interest-earning assets
relative to interest-bearing liabilities also impact net interest income.
The table below reflects the composition of the Bank's average balance
sheet for the three periods indicated and highlights these changes:
<TABLE>
<CAPTION>
Average Balance Sheet
(In thousands)
For the Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
29
<PAGE>
ASSETS
Interest-earning assets:
Federal funds sold and securities
purchased under agreements to resell $ 513 $ 7,863 $ 22,305
U.S. Government and agency securities 44,463 39,719 37,369
Mortgage Derivative securities 68,303 50,389 30,065
Mutual fund investments 4,002 8,067 5,091
Other investment securities including
FHLB stock 10,072 12,646 6,418
Mortgage-backed securities (net) 153,618 130,324 82,211
Loans receivable (net) 927,151 879,293 821,506
---------- ---------- ----------
Total interest-earning assets $1,208,122 $1,128,301 $1,004,965
All other assets 65,931 73,756 71,010
---------- ---------- ----------
Total average assets $1,274,053 $1,202,057 $1,075,975
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 989,565 $ 934,000 $ 887,024
Federal Home Loan Bank advances 120,715 118,113 72,916
Securities sold under agreements to
repurchase 59,120 37,506 2,111
Mortgage-backed bonds 7,235 9,378 21,588
Other borrowings -- 49 419
---------- ---------- ----------
Total interest-bearing liabilities $1,176,635 $1,099,046 $ 984,058
All other liabilities 13,331 20,022 14,052
Stockholders'equity 84,087 82,989 77,865
---------- ---------- ----------
Total average liabilities and equity $1,274,053 $1,202,057 $1,075,975
========== ========== ==========
</TABLE>
Averages are calculated on a daily basis.
Net interest income has benefitted over the past two years from a
decline in the level of real estate owned. As the level of problem assets
and real estate investments is expected to continue to decline, net
interest income should continue to benefit.
ASSET/LIABILITY MANAGEMENT
The ability of the Bank to maintain consistent earnings under varying
interest rate environments is largely dependent on how successfully it
manages interest rate risk. One of management's major objectives is to
match the repricing and maturity characteristics of its interest-earning
assets and interest-bearing liabilities to reduce earnings volatility in
fluctuating interest rate environments.
30
<PAGE>
The primary methods utilized by the Bank to control interest rate
risk include:
. the origination and purchase of permanent ARMs for portfolio
purposes,
. the sale of originated fixed-rate product,
. forward commitments for sale of originated fixed-rate product,
. the origination of short-term, adjustable-rate construction
loans,
. obtaining longer-term, fixed-rate borrowings or otherwise
extending the repricing terms on liabilities through the use of
fixed-pay interest rate swaps, and
. emphasizing passbook and checking accounts as these deposit
types are less sensitive to changes in interest rates.
Most of the Bank's permanent ARMs are indexed to a spread over the
11th District COFI. These loans assist in reducing interest rate exposure
and maintaining spreads, particularly when the Bank is able to keep its
average cost of funds below that of the Eleventh District. The Bank's
cost of funds was roughly equal to the Eleventh District during 1995 and
significantly higher in 1994. High-costing short-term borrowings and
interest rate swaps were responsible for the higher-funding costs in 1994.
Although ARMs are effective in reducing risk in less volatile interest
rate environments, periodic and lifetime interest rate adjustment "caps"
contained in all permanent ARM product, as well as the lagging nature of
the COFI index, limit the ability of these loans to reduce rate
vulnerability in volatile rate environments. As a result, the benefits
derived from the rising rate environment in 1994 on asset yields did not
really begin to occur until 1995.
Although the Bank makes every effort to originate adjustable-rate
product, certain market conditions may make it difficult to do so. In a
low-rate environment, the difference between the start rate on an
adjustable-rate mortgage and the rate on a fixed-rate mortgage is much
less than the difference in a higher interest rate environment, making the
adjustable-rate loan less attractive to the borrower. In addition,
adjustable loans tend to prepay faster in lower-rate environments further
reducing the balance of these loans outstanding.
The average repricing period on deposits declined in 1995 due to the
flatness of the yield curve, allowing a depositor to lock in a higher
yield for a shorter time frame. In 1994, repricing periods also shortened
up, due to the consumers bias towards increasing rates and a desire not to
lock in perceived lower yields for an extended time. A concerted effort
was made in 1993 and 1992 to extend the Bank's repricing periods on its
deposits by offering more competitive pricing on longer-term accounts. As
a result, the percentage of total certificates repricing within one year
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dropped to 69% at December 31, 1993, down from 77% one year earlier. The
inability to increase the average life of the deposit base in 1994 was
reflected in the percentage of total certificates repricing within one
year, which increased to 77% at the end of 1994.
In an effort to reduce balance sheet vulnerability to rising interest
rates, the Bank reduced its level of long-term fixed-rate assets by $84
million, increased its level of current index floating rate assets by $40
million and COFI product by $33 million. The level of long-term fixed-
rate borrowings increased by $45 million while the maturity structure of
deposits remained fairly constant. The Bank took advantage of a higher
capital position in 1994 by growing assets 15.5% or $171.5 million from
the prior year. The purchase of $88.3 million in 15-year, fixed-rate
mortgage-backed securities as well as a $91.3 million increase in the
balance of loans receivable, provided most of the growth. The increase in
loans receivable came primarily through growth in the balance of COFI
mortgages held. Asset growth was funded through an increase in retail
deposits, long-term fixed-rate borrowings and short-term debt. The
increase in the balance of short-term funds made the Bank more vulnerable
to declining spreads in rising rate environments.
LIQUIDITY
The Bank's primary source of liquidity to fund new loan originations
comes from repayments of loans already in the portfolio and sales of loans
in the secondary market. Desired asset growth may be funded through
deposit growth by pricing deposits more competitively or through deposit
acquisitions. FHLB advances are also an alternative to fund growth. For
short-term liquidity needs, the Bank's portfolio of mortgage-backed
securities and other security investments totaling $144 million can be
utilized as collateral to borrow under reverse repurchase agreements. A
significant portion of the Bank's single-family loan portfolio is also
available as collateral for FHLB advances. The Bank can also use brokered
deposits as a short-term funding vehicle in place of reverse repurchase
agreements.
Excess liquidity is usually utilized to pay off short-term borrowings
and, in some cases, absorb deposit runoff, particularly when taking
advantage of a reduction in the cost of funds. Excess funds may also be
used to purchase loans, particularly if management is attempting to
maintain or increase asset size.
The Bank has been unable to absorb significant additional growth as a
result of regulatory capital constraints due to the continued acceleration
in the phase-out of real estate. However, due to its stronger regulatory
capital position, additional asset growth occurred in 1994. Due to
uncertainties surrounding an interest-rate risk component to risk-based
regulatory capital, as well as to reduced earnings in 1995 and 1994, asset
growth was not significant in 1995.
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Moderate asset growth is expected in 1996 as the Bank continues to
liquidate the balance of its real estate investments which have restrained
growth in the past due to regulatory capital implications.
Short-term liquidity is not expected to increase in 1996,
particularly if rates remain stable and the level of prepayment and sale
activity is weak.
SUBSIDIARIES AND AFFILIATES
Stockton Service Corporation is a wholly-owned subsidiary of Stockton
Savings, formed primarily for the purpose of investing in real estate.
See "Real Estate Development Activities". The Bank's loans to and
investments in this subsidiary totalled $8.9 million at December 31, 1995.
The Subsidiary is incorporated in the State of California.
Stockton Securities Corporation is a wholly-owned finance subsidiary
of the Bank, organized to issue collateralized mortgage obligations. The
subsidiary recorded a net loss after tax of $41,000 for 1995 compared to
an after tax loss of $203,000 and $434,000 in 1994 and 1993, respectively.
See "Borrowing Activity - Collateralized Mortgage Obligations" for a
further discussion of this subsidiary's activities. The Bank's investment
in this subsidiary totalled $1.6 million at December 31, 1995. The
Subsidiary is incorporated in the State of California.
Stockton Financial Corporation was formed to act as the trustee for
the deeds of trust that secure the loans made by the Bank. Stockton
Financial Corporation also operates as a life and disability insurance
agent, collecting premiums on policies sold to Bank borrowers. In 1988,
Stockton Financial contracted with Marketing One, a licensed insurance and
securities brokerage firm, to offer single-premium deferred annuities and
securities products to Bank depositors. Stockton Financial Corporation
receives a commission on all products sold. During 1995, commissions
earned from Marketing One sales totalled $573,000 compared to commissions
of $724,000 and $1.2 million recorded in 1994 and 1993, respectively. The
1995 after-tax income of Stockton Financial was $396,000, compared to
$471,000 and $738,000 in 1994 and 1993, respectively. This year's decline
in income was due entirely to the lower level of Marketing One commissions
earned. The Bank's investment in this subsidiary totalled $177,000 at
December 31, 1995. The Subsidiary is incorporated in the State of
California.
COMPETITION AND ECONOMIC CONDITIONS
The Bank's principal competitive market is in San Joaquin and
Stanislaus counties in the northern part of California's Central Valley.
The Bank competes for real estate loans against other savings and loan
associations, mortgage companies, banks, insurance companies, government
agencies and real estate investment trusts. Interest rates, loan fee
charges, types of mortgages and quality of services rendered are the
primary competitive factors. The Bank is the largest real estate lender
in San Joaquin County and one of the largest in Stanislaus County.
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Competition has increased substantially as many major California savings
and loan associations, banks and mortgage brokers have come to the
Northern Central Valley looking for lending opportunities. In order to
continue to grow, the Bank continued to focus in 1995 on expanding lending
activities to surrounding areas such as greater Sacramento and Fresno.
The Bank competes for deposits against other savings and loan
associations, commercial banks, brokerage firms, money market funds and
credit unions. Primary competitive factors include convenience of office
location and hours, available services and rates of return on invested
funds. The Bank's offices held $573 million in deposits in San Joaquin
County, $190 million in Stanislaus County and an additional $197 million
in other counties in Northern Central California at December 31, 1995. In
terms of market share of deposits, the Bank is among the largest in both
San Joaquin and Stanislaus counties.
It is anticipated that the Bank will continue to be a major
participant in the real estate lending market in its area and in outlying
areas, as well as a viable force in attracting savings capital to fund
lending demands.
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EMPLOYEES
The Bank had 345 full-time equivalent employees, including executive
personnel on December 31, 1995. Employee relations are considered
excellent. Employees are not represented by any collective bargaining
agent. The Bank provides employees with health, major medical and life
insurance benefits and maintains a 401k plan.
REGULATION OF THE COMPANY
HOME OWNERS' LOAN ACT. The Company is subject to regulation as a
savings and loan holding company under the Home Owners' Loan Act ("HOLA").
As such, the Company is subject to regulations of the OTS, as well as
examinations and reporting requirements relating to savings and loan
holding companies. In addition, the OTS has enforcement authority over
the Company and the Bank. Among other things, this authority permits the
OTS to restrict or prohibit activities that are determined to be a serious
risk to the Bank. See "Regulation of the Bank -- Enforcement Authority."
The Company is a nondiversified unitary savings and loan holding
company. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions, as long as the Bank
remains a qualified thrift lender ("QTL"). If the Bank fails the QTL
test, the Company may not engage in or continue after such failure,
directly or through its other subsidiaries, any business activities not
permitted to multiple savings and loan holding companies or their
subsidiaries. In addition, the Company would have to register as and be
subject to limits on a bank holding company if the Bank ceased to be a
QTL. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), made certain changes to the QTL test. See "Regulation of the
Bank -- Qualified Thrift Lender Test" and "FDICIA."
RESTRICTIONS ON ACQUISITION. If the Company acquires control of
another savings institution as a separate subsidiary, the Company would
become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
savings association) would become subject to restrictions under HOLA. No
multiple savings and loan holding company or subsidiary thereof that is
not a savings association may commence, or continue for more than two
years after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity other than (i) furnishing or
performing management services for a subsidiary savings association; (ii)
conducting an insurance agency or an escrow business; (iii) holding,
managing or liquidating assets owned or acquired from a savings
association subsidiary; (iv) holding or managing properties used or
occupied by a subsidiary savings association; or (v) acting as a trustee
under deeds of trust. In addition, unless prohibited or limited by the
OTS, a multiple savings and loan holding company may engage in nonbanking
activities permissible for bank holding companies, including, but not
limited to, investment advice, leasing, underwriting credit insurance,
management consulting services, and securities brokerage activities, as
the Federal Reserve Board ("FRB") determines under Section 4(c)(8) of the
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Bank Holding Company Act of 1956 ("Bank Holding Company Act"), and may
engage in those activities authorized by the FHLBB, the predecessor to the
OTS, for multiple savings and loan holding companies as of March 5, 1987.
A multiple savings and loan holding company must obtain prior OTS approval
before it may engage in any particular activity permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act.
Moreover, the insured depository institution subsidiaries of a multiple
savings and loan holding company are subject to the provisions of the
Federal Deposit Insurance Act ("FDI Act") added by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),
which imposes liability for losses incurred by the FDIC in connection with
the default of, or assistance provided to, a commonly controlled insured
depository institution.
The Company must obtain approval from the OTS before acquiring
control of any other FDIC-insured Savings Association Insurance Fund
("SAIF") member savings association or a savings and loan holding company.
Such acquisitions are generally prohibited if they result in a multiple
savings and loan holding company controlling savings associations in more
than one state. However, such interstate acquisitions are permitted based
on specific state authorization or in a supervisory acquisition of a
failing savings association.
The Company and any nonsavings association subsidiary thereof may
acquire up to 5%, in the aggregate, of the voting stock of any
nonsubsidiary savings association or savings association holding company
without being deemed to acquire "control" of the association or holding
company. In addition, a savings and loan holding company may hold shares
of a savings association or a savings and loan holding company for certain
purposes, including as a bona fide fiduciary, as an underwriter or in an
account solely for trading purposes.
The OTS has adopted a regulation that requires persons or companies
that control a savings association and are subject to capital maintenance
agreements with respect thereto to provide the OTS with notice prior to
divesting control of the association. A divestiture may be completed only
upon providing such notice and paying or agreeing to pay any amount then
due under the capital maintenance obligation. The OTS may conduct an
examination of the association to determine whether any capital deficiency
exists.
The Company entered into a capital maintenance agreement with the OTS
in connection with the holding company reorganization of the Bank.
Accordingly, this regulation would apply to the Company if it ever sought
to divest control of the Bank. The Company currently has no plans to
divest control of the Bank.
RESTRICTIONS ON ACQUISITION. Under the Bank Holding Company Act, the
approval of the FRB would be required before any company that controlled a
"bank" as defined in the Bank Holding Company Act (e.g., a commercial
bank) could acquire and operate a savings association, such as the Bank.
The Change in Bank Control Act and the savings and loan holding company
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provisions of the Home Owners' Loan Act, together with the regulations of
the OTS under those Acts, require that the consent or nondisapproval of
the OTS be obtained prior to any person or company acquiring "control" of
a savings association or a savings and loan holding company. Under the
OTS regulations, control is conclusively presumed to exist if an
individual or company acquires more than 25% of any class of voting stock
of the association. Control is rebuttably presumed to exist if a person
acquires more than 10% of any class of voting stock (or more than 25% of
any class of nonvoting stock) and is subject to any of several "control
factors." The control factors relate, among other matters, to the
relative ownership position of a person, the percentage of debt and/or
equity of the association controlled by the person, agreements giving the
person influence over a material aspect of the operations of the
association and the number of seats on the board of directors of the
association held by the person or his designees. The regulations provide
a procedure for challenge of the rebuttable control presumption.
Restrictions applicable to the operations of savings and loan holding
companies and conditions imposed by the OTS in connection with its
approval of companies to become savings and loan holding companies may
deter companies from seeking to obtain control of the Company.
TRANSACTIONS WITH AFFILIATES. The Bank's authority to engage in
transactions with related parties or "affiliates," including the Company
and any nonsavings association subsidiaries of the Company, is limited by
certain provisions of law and regulations. Savings associations are
prohibited from making extensions of credit to any affiliate that engages
in an activity not permissible under the regulations of the FRB for a bank
holding company. In addition, savings associations, such as the Bank, are
subject to substantially similar restrictions regarding affiliate
transactions to those imposed upon member banks under Section 23A and 23B
of the Federal Reserve Act. The affiliates of the Bank include persons
who directly or indirectly own, control or vote more than 25% of any class
of stock of the Bank, any other persons who exercise a controlling
influence over the management of the Bank, any company controlled by
controlling stockholders of the Bank or with a majority of interlocking
directors with the Bank, any company sponsored and advised on a
contractual basis by the Bank and any company (other than a subsidiary)
under common control with the Bank, as "control" is defined in the
regulations of OTS relating to changes in control. See "Restrictions on
Acquisition." Transactions between the Bank and its affiliates are
subject to certain requirements and limitations. Among other things,
these provisions limit the amounts of such transactions that may be
undertaken with any one affiliate and with all affiliates in the aggregate
and require that transactions with affiliates be on terms and conditions
comparable to those for similar transactions with unaffiliated parties.
The Director of the OTS may further restrict such transactions in the
interest of safety and soundness.
FEDERAL SECURITIES LAWS. The Company is subject to the reporting
requirements of the Securities Exchange Act of 1934 and, accordingly, is
required to file periodic and other reports with the Securities and
Exchange Commission ("SEC").
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PAYMENT OF DIVIDENDS. Under Delaware law, dividends generally may
be paid in cash or in property owned by the Company only from the profits
and earned surplus of the Company and only when the Company does not have,
and the payment of a dividend would not create, a capital deficit.
The Company's principal source of income, however, is dividends to
the extent declared and paid by the Bank. Existing restrictions on the
Bank's ability to pay dividends to the Company may impact the Company's
ability to pay dividends to stockholders. Current OTS regulations require
the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, as its holding company.
Furthermore, the right of the Company to receive dividends from the Bank
will be subject to the right of the OTS to object to such dividends under
certain circumstances. See "Regulation of the Bank -- Capital
Distributions."
REGULATION OF THE BANK
GENERAL. The Bank is a federally-chartered stock savings bank, the
deposits of which are insured by the FDIC through the SAIF. The Bank
converted from a California-chartered savings and loan association to a
federally-chartered savings bank on June 29, 1990. The Bank is subject to
broad federal regulation and oversight extending to all aspects of its
operations. The OTS has extensive authority over the operations of the
Bank. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS.
The Bank is also a member of the FHLB of San Francisco and is subject to
certain limited regulation by the FRB.
The investment and lending authority of the Bank is prescribed by
federal laws and regulations, and the Bank is prohibited from engaging in
any activities not permitted by such laws and regulations. These laws and
regulations generally prohibit the Bank's investment in real estate (other
than that acquired through, or in lieu of, foreclosure or used by the Bank
for offices and related facilities) and equity securities of companies
that are not subsidiaries, and limit to a specified percentage of assets
the Bank's investment in service corporations, consumer loans, tangible
personal property, commercial loans, corporate debt securities, and
nonresidential real estate loans.
FIRREA acts as a deterrent to investment by savings associations in
subsidiaries such as SSC that engage in activities that are not
permissible for national banks by imposing higher capital requirements on
such investments. See "Capital Requirements."
A savings association seeking to establish or acquire a new
subsidiary, or conduct any new activity through a subsidiary, must provide
30 days' prior notice to the FDIC and the OTS and conduct the activities
of the subsidiary in accordance with OTS orders and regulations. The
Director of the OTS has the power to force divestiture of any subsidiary
or termination of any activity the Director determines to be a serious
threat to the safety, soundness or stability of such savings association
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or otherwise to be inconsistent with sound banking principles.
Additionally, the FDIC is authorized to determine whether any specific
activity poses a threat to the SAIF and to prohibit any SAIF member from
engaging directly in such activity, even if it is an activity that is
permissible for a federally-chartered savings association.
CAPITAL REQUIREMENTS. General. The Bank must meet three primary
capital requirements: a leverage requirement, a tangible capital
requirement, and a risk-based capital requirement. As of December 31,
1994, the Bank was in compliance with all three requirements, as described
in the following paragraphs:
LEVERAGE REQUIREMENT. The leverage requirement mandates that a
savings association maintain "core capital" of at least 3% of its adjusted
total assets. For purposes of this requirement, total assets are adjusted
to exclude intangible assets and investments in certain subsidiaries and
to include the assets of certain other subsidiaries, certain intangibles
arising from prior period supervisory transactions, and permissible
mortgage servicing rights. "Core capital" includes (i) common
stockholders' equity and retained earnings, noncumulative preferred stock
and related earnings and minority interests in the equity accounts of
consolidated subsidiaries, minus (ii) the sum of those intangibles
(including goodwill) and investments in subsidiaries not permitted as
capital for national banks and those mortgage servicing rights not
includable in core capital.
Intangible assets such as core deposit premiums are generally
deducted from core capital. FIRREA also requires deductions from core
capital for certain investments in service corporations and other
subsidiaries. In determining core capital, all investments in and loans
to subsidiaries engaged in activities not permissible for national banks
(which are generally more limited than activities permissible for savings
associations and their subsidiaries), after April 12, 1989, must generally
be deducted in calculating a savings association's core capital. This
exclusion of investments in and loans to pre-existing subsidiaries engaged
in activities not permissible for national banks as of April 12, 1989 is
generally phased in through June 30, 1994. However, Section 953 of the
Housing and Community Development Act of 1992 authorizes the Director of
OTS to prescribe by order greater percentages than the foregoing for
specified associations until June 30, 1996. The Bank was granted an
extension by OTS, which allowed the inclusion of the lesser of the
investments in and loans to impermissible subsidiaries on April 12, 1989
or as of the calculation of capital date, to remain at the rate of 75%
through June 30, 1994. The applicable percentage was reduced to 60% on
July 1, 1994 and to 40% on July 1, 1995. After June 30, 1996, the
percentage will be zero. Generally, except for special rules applicable
during the phase-out of investments in nonconforming subsidiaries and
except for subsidiaries that are insured depository institutions, all
subsidiaries engaged in permissible activities are required to be
consolidated for purposes of calculating capital compliance by the parent.
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SSC, the wholly-owned subsidiary service corporation of the Bank, is
engaged in real estate development, an activity impermissible for the
Bank. Accordingly, loans to and investments in SSC by the Bank must be
deducted from the Bank's capital. The amount of loans and investments
made on or prior to April 12, 1989 must be deducted in accordance with the
phase-out schedule described above; currently, 60% of such loans and
investments must be deducted. In addition, the total dollar amount of
loans and investments made subsequent to April 12, 1989, must be deducted
immediately from capital.
As of December 31, 1995, 60% of loans to and investments in SSC made
on or prior to April 12, 1989 or $5.3 million was deducted from the Bank's
capital in accordance with the amended schedule set forth above; and $3.6
million was still included in the Bank's regulatory capital. As of
July 1, 1996, none of the loans and investments will be includable in the
Bank's capital for regulatory purposes.
TANGIBLE CAPITAL REQUIREMENT. The tangible capital requirement
mandates that a savings association maintain tangible capital of at least
1.5% of adjusted total assets. For purposes of this requirement, adjusted
total assets are calculated on the same basis as for the leverage limit.
Tangible capital is defined in the same manner as core capital, except
that all formerly includable goodwill must be deducted. Because the Bank
has no goodwill, its tangible capital is equal to its core capital.
RISK-BASED CAPITAL REQUIREMENT. The risk-based requirement
promulgated by the OTS is required by FIRREA to track the standard
applicable to national banks, except as the OTS may determine to reflect
interest rate and other risks not specifically included in that standard.
However, such deviations from the national bank standard may not result in
a materially lower risk-based requirement for savings associations than
for national banks. The risk-based standard adopted by the OTS is similar
to the standard prescribed by the Office of the Controller of the Currency
("OCC") for national banks. Although the OTS has adopted regulations that
require associations with significantly more than normal interest rate
risk to meet higher risk-based capital requirements, the effective date
for these regulations has been deferred indefinitely. See "Interest Rate
Risk Component" below.
The risk-based standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted assets and total capital
equal to at least 8% of risk-weighted assets. Total capital includes core
capital plus supplementary capital (except that includable supplementary
capital may not exceed core capital). Supplementary capital includes:
cumulative perpetual preferred stock; mutual capital, income capital and
net worth certificates; nonwithdrawable accounts and pledged deposits to
the extent not included in core capital; perpetual and mandatory
convertible subordinated debt and maturing capital instruments meeting
specified requirements; and general loan loss allowances, up to a maximum
of 1.25% of risk-weighted assets.
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In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk
factor ranging from 0% to 100%, as assigned by the OTS based on the risks
it believes are inherent in the type of asset. Comparable weights are
assigned to off-balance sheet activities.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations, Item 7, for a more detailed discussion of the
Bank's regulatory capital position.
INTEREST RATE RISK COMPONENT. On August 31, 1993, the OTS issued a
final rule that a savings association's risk-based capital requirement
would be based, in part, on the level of its exposure to interest rate
risk. However, the initial effective date of the regulation has been
postponed indefinitely. Under this rule, an association with a greater
than normal level of interest rate risk is subject to an "add on" to its
risk-based capital requirements. This "add on" equals 50% of the decline
in the market value of the association's assets that would result from
either a 200-basis point increase or a 200-basis point decrease in market
interest rates, whichever results in a greater decline. Management
believes that, if the interest rate risk regulation had been effective as
of December 31, 1995, it would not have reduced the amount of the Bank's
risk-based capital available to meet its risk-based capital requirement.
FAILURE TO MEET REQUIREMENTS. Any savings association that fails to
meet its regulatory capital requirements is subject to enforcement actions
by the OTS or the FDIC. A savings association that fails to meet its
capital requirements may not increase its liabilities during any two
consecutive calendar quarters at a rate in excess of 12.5% or make any
capital distributions without regulatory approval. See "Capital
Distributions." The OTS must limit the asset growth of any
undercapitalized association and issue a capital directive against the
association. Associations may seek exemptions from the various sanctions
or penalties for failure to meet their capital requirements (other than
appointment of a conservator or receiver); however, exemptions are not
allowed with respect to mandatory growth restrictions.
The FDICIA authorizes and, under certain circumstances, requires the
OTS to take certain actions against associations that fail to meet certain
new capital-based requirements. See "FDICIA".
CAPITAL DISTRIBUTIONS. Limitations are imposed by OTS regulation
upon all "capital distributions" by savings associations, including cash
dividends, payments by institutions in a cash-out merger and other
distributions charged against capital. A three-tiered system of
regulation is established, with the greatest flexibility afforded to well
capitalized institutions. Under the capital distribution regulation, an
association that immediately prior to a proposed capital distribution, and
on a pro forma basis after giving effect to a proposed capital
distribution, has capital that is equal to or greater than the amount of
its fully phased-in capital requirement is a Tier 1 association ("Tier 1
Association").
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An association that immediately prior to a proposed capital
distribution, and on a pro forma basis after giving effect to a proposed
capital distribution, has capital that is equal to or in excess of its
minimum capital requirement is a Tier 2 association ("Tier 2
Association").
An association that immediately prior to a proposed capital
distribution, and on a pro forma basis after giving effect to a proposed
capital distribution, has capital that is less than its minimum regulatory
capital requirement is a Tier 3 association ("Tier 3 Association").
The Bank currently qualifies as a Tier 1 Association and, as such, is
authorized to make capital distributions during a calendar year up to the
higher of: A) 100 percent of net income to date during the calendar year
plus the amount that would reduce by one-half its surplus capital ratio at
the beginning of the calendar year; or B) 75% of its net income over the
most recent four-quarter period.
QUALIFIED THRIFT LENDER TEST. Under the QTL test, an association
must have invested at least 65% of its portfolio tangible assets in
qualifying investments and must maintain this level of qualifying
investments, measured on a monthly average basis, in 9 out of every 12
months.
Portfolio tangible assets are defined as total assets less
intangibles, properties used to conduct business and liquid assets (up to
20% of total assets). The following assets may be included as qualifying
investments without limit: domestic residential housing or manufactured
housing loans; home equity loans and mortgage-backed securities backed by
residential housing or manufactured housing loans; FHLB stock; and certain
obligations of the FDIC and certain other related entities. Other
qualifying assets, which may be included up to an aggregate of 20% of
portfolio assets, are: (i) 50% of originated residential mortgage loans
sold within 90 days of origination; (ii) investments in debt or equity of
service corporations that derive 80% of their gross revenues from housing-
related activities; (iii) 200% of certain loans to and investments in low
cost, one-to-four family housing; (iv) 200% of loans for residential real
property, churches, nursing homes, schools and small businesses in areas
where the credit needs of low to moderate income families are not met; (v)
other loans for churches, schools, nursing homes and hospitals; (vi)
consumer and education loans up to 10% of total portfolio assets; and
(vii) stock of the FHLMC or Federal National Mortgage Association.
As of December 31, 1995, the Bank was in full compliance with the QTL
test.
Any savings association that fails to meet the QTL test must convert
to a commercial bank charter, unless it requalifies as a QTL on an average
basis in at least three out of every four quarters for two out of three
years and thereafter remains a QTL. If an institution that fails the QTL
test has not yet requalified and has not converted to a commercial bank,
its new investments and activities are limited to those permissible for a
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national bank, and it is limited to national bank branching rights in its
home state. In addition, the institution is immediately ineligible to
receive any new FHLB advances and is subject to national bank limits for
payment of dividends. If such association has not requalified or
converted to a commercial bank charter three years after the failure, it
must divest all investments and cease all activities not permissible for a
national bank. In addition, it must repay promptly any outstanding FHLB
advances. If any institution that fails the QTL test and is subject to
these restrictions on activities is controlled by a holding company, then,
within one year after the failure, the holding company must register as a
bank holding company and would be subject to all restrictions on bank
holding companies. These restrictions would limit the activities of the
holding company to those activities that the FRB has determined are
closely related to banking. Certain temporary and limited exceptions from
meeting the QTL test may be granted by the OTS.
LIQUIDITY. All savings associations, including the Bank, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of average daily balances of net
withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the required liquid asset ratio is 5%.
Short-term liquid assets currently must constitute at least 1% of the
institution's average daily balance of net withdrawable deposit accounts
and current borrowings.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain bankers acceptances and
short-term U.S. treasury obligations) and long-term assets (e.g., U.S.
treasury obligations of more than one and less than five years and certain
federal and state agency obligations). The regulations governing
liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from, or debt securities subject to
repurchase agreements with, members of the Association of Primary Dealers
in U.S. Government securities or banks whose accounts are insured by the
FDIC, debt securities directly hedged with a short financial futures
position, and debt securities that provide the holder with a right to
redeem the security at par value, regardless of the stated maturities of
such securities. The OTS may designate as liquid assets certain mortgage
related securities and certain mortgage loans qualifying as backing for
certain mortgage-backed securities with less than one year to maturity.
Penalties may be imposed upon associations for violations of liquidity
requirements. At December 31, 1995, the Bank was in compliance with these
requirements, with an overall liquidity ratio of 6.18% and a short-term
liquidity ratio of 1.81%.
TRANSACTIONS WITH RELATED PARTIES. Transactions involving a savings
association and its affiliates are subject to Sections 23A and 23B of the
Federal Reserve Act. See "Regulation of the Company -- Transactions with
Affiliates."
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<PAGE>
In addition, the Bank is subject to various limitations and
requirements with respect to extensions of credit to insiders as set forth
in Sections 22(g) and (h) of the Federal Reserve Act and as implemented by
Regulation O of the FRB. Pursuant to Section 22(g) and relevant
regulations, the Bank may not extend credit to an individual executive
officer in an amount in excess of $100,000, subject to certain limited
exceptions for first mortgage or educational loans. Section 22(h)
requires that all extensions of credit to insiders, who include executive
officers, directors, and principal shareholders, be on nonpreferential
terms and be made consistent with specified procedural requirements.
Section 22(h) also limits extensions of credit to any one insider and his
or her related interests generally to 15% of unimpaired capital and
unimpaired surplus, subject to certain exceptions, and limits the
aggregate level of extensions of credit by a depository institution to all
of its insiders and their related interests to 100% of the institution's
capital.
The Bank believes that it is in compliance with all relevant
limitations on transactions with affiliates and insiders.
BRANCHING AND MERGERS. As a federal savings bank, the Bank may
establish branch offices and merge only in accordance with OTS regulations
and with OTS approval. Pursuant to these regulations, a federal savings
bank is authorized to branch nationwide except in certain limited
circumstances, provided that the association satisfies certain tests
relating to its asset composition based upon criteria set forth in the
Internal Revenue Code of 1986, (the "Code") as amended (see "Federal and
State Taxation"), and OTS approval for the branch is obtained.
LENDING LIMITATIONS. FIRREA reduced the amount a savings association
is permitted to lend to one borrower to the greater of $500,000 or 15% of
an association's unimpaired capital and unimpaired surplus (subject to
certain exceptions, including higher limits for loans fully secured by
certain readily marketable collateral and for loans to develop domestic
residential housing units if certain requirements are met and OTS approval
is obtained).
This limitation is applicable on a prospective basis only. At
December 31, 1995, the maximum amount that the Bank could lend to one
borrower (and related entities) under the limit imposed by FIRREA was
approximately $12.6 million. At that date, the largest amount of loans
that the Bank had outstanding to any one borrower was approximately $8.3
million.
ENFORCEMENT AUTHORITY. The OTS has extensive enforcement authority
over all savings associations, including the Bank and the Company. This
enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
44
<PAGE>
the OTS. FIRREA significantly increased the amount of and grounds for
civil money penalties.
The grounds for appointment of a conservator or receiver for a
savings association include: insolvency in that the assets of the
association are less than its liabilities to depositors and others,
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices, existence of an unsafe or unsound condition
to transact business, likelihood that the association will be unable to
meet the demands of its depositors or to pay its obligations in the normal
course of business, and insufficient capital or the incurring or likely
incurring of losses that will deplete substantially all of the
institution's capital with no reasonable prospect for replenishment of
capital without federal assistance.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank's
deposits are insured up to $100,000 per insured depositor (as defined by
law and regulation) by the FDIC through the SAIF. The SAIF is
administered and managed by the FDIC. As insurer, the FDIC is authorized
to conduct examinations of and to require reporting by SAIF member
institutions. The FDIC may prohibit any SAIF member institution from
engaging in any activity the FDIC determines by regulation or order poses
a serious threat to the SAIF. The FDIC also has the authority to initiate
enforcement actions against savings associations, after first giving the
OTS an opportunity to take such action.
Since January 1, 1994, the annual FDIC deposit insurance assessment
rate for SAIF members has varied between 0.23% and 0.31% of insured
deposits, depending upon the classifications of each institution made by
the FDIC based upon the association's capital level and a supervisory
evaluation by the institution's primary federal supervisor and, if
appropriate, state supervisor. During the year ended December 31, 1995,
the Bank incurred $2.3 million in expenses for deposit insurance. On
November 14, 1995, the FDIC adopted a resolution to reduce the assessment
rates for Bank Insurance Fund ("BIF") members to a range of 0 to 27 basis
points. The action could have negative implications for the Bank in its
ability to compete with BIF insured institutions.
As part of the funding of the resolution of insolvency of the FSLIC,
Congress created the Financing Corporation and the Resolution Funding
Corporation ("REFCO"). Each of these entities, under specified
conditions, may assess premiums on SAIF member associations. Such
premiums may not exceed assessments able to be made by the SAIF and are
payable in lieu thereof. FIRREA provides that the Treasury Department
shall make contributions to the SAIF, if assessments actually paid to it
are insufficient to maintain certain statutorily prescribed capital levels
for the SAIF.
The FDIC may terminate the deposit insurance of any insured
depository institution, including the Bank, if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue
45
<PAGE>
operations or has violated any applicable law, regulation, order or any
condition imposed in writing by the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent
termination of insurance if the institution has no tangible capital. If
deposit insurance is terminated, the deposits at the institution at the
time of the termination, less subsequent withdrawals, continue to be
insured for a period of six months or two years, as determined by the
FDIC.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
San Francisco, which is 1 of 12 regional FHLBs which are subject to
oversight by the Federal Housing Finance Board ("FHFB"). As a member of
the FHLB system, the Bank is required to purchase and maintain stock in
the FHLB of San Francisco in an amount equal to the greater of 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year, 0.3% of its assets, or
5% (or such greater fraction as established by the FHLB) of outstanding
FHLB advances. At December 31, 1995, the Bank had $10.4 million in FHLB
stock, which was in compliance with this requirement. At December 31,
1995, the Bank had $162.5 million in FHLB advances outstanding.
Each FHLB serves as a reserve or central bank for its members within
its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes
advances to members (i.e., loans) in accordance with policies and
procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
FHFB.
FIRREA established collateral requirements for FHLB advances. All
long-term advances are required to provide funds for residential home
financing, and members must meet standards of community service to
maintain access to long-term advances.
In past years, the Bank has received substantial dividends on its
FHLB stock. During the past 5 years, such dividends have averaged 4.29%
and were 4.90% or $501,000 for fiscal year 1995. Certain provisions of
FIRREA require all 12 FHLBs to contribute funds to REFCO. In addition,
pursuant to FIRREA, each FHLB is required to establish programs for
affordable housing that involve interest subsidies from the FHLBs on
advances to members engaged in lending at subsidized interest rates for
low and moderate income, owner-occupied housing and affordable rental
housing, and certain have adversely affected other community purposes.
These contributions affect the level of FHLB dividends paid and the value
of FHLB stock, as well as interest rates payable on FHLB advances.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions
to maintain reserves against their transaction accounts (primarily NOW and
Super NOW checking accounts) and nonpersonal time deposits. At December
31, 1995, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the FRB
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<PAGE>
may be used to satisfy liquidity requirements that may be imposed by the
OTS. See "Liquidity."
Savings associations are authorized to borrow from the FRB "discount
window"; but FRB regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB advances, before
borrowing from the FRB.
FDICIA. On December 19, 1991, FDICIA was enacted to recapitalize the
Bank Insurance Fund and impose certain supervisory and regulatory reforms
on insured depository institutions.
FDICIA required the federal banking agencies, including the OTS, to
establish the levels at which insured depository institutions are well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, or critically undercapitalized. As a result, the
federal banking agencies established the following applicable capital
levels for institutions within their jurisdictions: well capitalized
institutions have a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of
5.0% or greater; adequately capitalized institutions have a total risk-
based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio
and leverage ratio of 4.0% or greater; undercapitalized institutions have
a total risk-based capital ratio below 8.0% or a Tier 1 risk-based capital
ratio or leverage ratio below 4.0%; significantly undercapitalized
institutions have a total risk-based capital ratio below 6.0% or a Tier 1
risk-based capital ratio or leverage ratio below 3.0%; and critically
undercapitalized institutions have a ratio of tangible equity to total
assets equal to or below 2.0%. The Bank was considered well capitalized
under the above definition as of December 31, 1995 as its total risk-
based, Tier 1 risk-based and leverage ratios were 12.12%, 11.16% and
6.07%, respectively.
Undercapitalized institutions are required to submit capital
restoration plans to the appropriate federal banking regulator and are
subject to certain operational restrictions. Moreover, companies
controlling an undercapitalized institution are required to guarantee the
subsidiary institution's compliance with the capital restoration plan
subject to an aggregate limitation of the lesser of 5% of the
institution's assets or the amount of the capital deficiency when the
institution first failed to meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that do not submit or comply with acceptable
capital restoration plans are subject to one or more of an enumerated
group of more stringent sanctions than those applied to undercapitalized
institutions. A forced sale of shares or merger, restrictions on
affiliate transactions and restrictions on rates paid on deposits must be
imposed by the regulator unless the regulator determines that they would
not resolve problems of insured depository institutions at the least
possible long-term loss to the deposit insurance fund.
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A critically undercapitalized institution is prohibited from making
payments on subordinated debt and engaging in certain other corporate
transactions without regulatory approval. FDICIA generally requires the
appointment of a conservator or receiver within 90 days after an
institution becomes critically undercapitalized.
On July 10, 1995, the federal bank regulatory agencies published
minimum operational standards, including standards with respect to
internal controls, loan documentation, credit underwriting and
compensation arrangements. Institutions failing to meet one or more of
the operational standards may be required to submit corrective plans and
may be subject to sanctions for failure to submit or comply with a plan.
The acceptance and renewal of brokered deposits is limited generally to
well capitalized institutions.
FDICIA provides for certain consumer and low and moderate income
lending and deposit programs and increases the aggregate authority of
federal savings associations to invest in consumer loans, corporate debt
securities and commercial paper from 30% to 35% of assets.
ACCOUNTING. FIRREA requires the OTS to establish accounting
standards to be applicable to all savings associations for purposes of
complying with regulations, except to the extent otherwise specified in
the capital standards. Such standards must incorporate GAAP to the same
degree as is prescribed by the federal banking agencies for banks or may
be more stringent than such requirements.
Under FDICIA, the federal bank regulatory agencies are required to
adopt uniform capital and accounting rules with respect to reports filed
with those agencies. The accounting rules require the disclosure of the
market value of assets and liabilities and the disclosure of contingent
liabilities in the regulatory reports of a depository institution. The
investment activities of a savings association must be in compliance with
approved and documented investment policies and strategies and must be
accounted for in accordance with GAAP. Management must support its
classification of and, to the extent feasible, accounting for loans and
securities (i.e., whether held for investment, sale or trading) with
appropriate documentation. Management of the Bank believes that it is in
compliance with these requirements. At December 31, 1995, the Bank had
designated approximately $13.2 million of loans as held for sale and
approximately $261.3 million of investments and mortgage-backed securities
as available for sale. The effect of these requirements may be to reduce
the ability of the Bank to respond in a timely manner to changes in the
market for its investments without resulting in a change in the valuation
of such investments from cost basis to market value.
The Company will be implementing several new accounting standards in
1996. For a detailed discussion of the standards and their potential
impact on the Company, see "Recent Accounting Developments" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 7. No new accounting standards were adopted in 1995.
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DELAWARE TAXATION
As a Delaware holding company, the Company is exempted from Delaware
corporate income tax but is required to file an annual report with and pay
an annual fee to the State of Delaware. The Company is also subject to an
annual franchise tax imposed by the State of Delaware.
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FEDERAL AND STATE TAXATION
Under applicable provisions of the Code, thrift institutions who meet
certain definitional tests related to the composition of assets and nature
of their business, such as Stockton Savings, are permitted to establish
reserves for bad debts and to make annual additions thereto that qualify
as deductions from taxable income. The amount allowable as a bad debt
deduction is generally based upon a thrift institution's actual loss
experience (the "experience method"), or a thrift institution may elect
annually to compute the allowable addition to its bad debt reserves for
"qualifying real property loans" (generally loans secured by improved real
estate) by reference to a percentage of its taxable income (the
"percentage of taxable income method"). The Bank used the percentage of
taxable income method for 1994 and 1993. The Bank expects to utilize this
method in 1995.
For taxable years beginning after 1986, a thrift institution's bad
debt reserve deduction under the percentage of taxable income method (the
"percentage bad debt deduction") is computed by multiplying its taxable
income (before the percentage bad debt deduction and certain other
deductions) by 8%. The percentage bad debt deduction thus computed is
reduced by the amount permitted as a deduction for nonqualifying loans
under the experience method. The availability of the percentage of
taxable income method permits qualifying thrift institutions to be taxed
at a lower effective federal income tax rate than that generally
applicable to corporations. The effective maximum federal income tax rate
applicable to a qualifying savings institution (exclusive of the
corporation minimum tax), assuming the maximum percentage bad debt
deduction, is approximately 31.3% (except for 1987 when, due to the 1986
Act transition rules, the rate was 36.8%).
For all taxable years, if an institution's specified qualifying
assets constitute less than 60% of its total assets, the institution is
not eligible to compute its bad debt deduction under the percentage of
taxable income method. In addition, certain large thrift institutions,
such as the Bank, are required to recapture all or part of their existing
bad debt reserve according to a statutory schedule in the event less than
60% of the thrift's assets for any taxable year are specified assets.
(See also "Qualified Thrift Lender" above.)
The percentage of taxable income method is available to thrift
institutions only to the extent that (i) the amounts accumulated in
reserves for losses on qualifying real estate loans do not exceed 6% of
such loans outstanding at the end of the taxable year and (ii) the bad
debt deduction does not exceed the amount by which 12% of the amount
comprising savings accounts at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the taxable year. At
December 31, 1995, the 6% and 12% limitations did not restrict the
percentage bad debt deduction available to the Bank.
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Under the experience method, the bad debt deduction for an addition
to the reserve for "qualifying real property loans" or "nonqualifying
loans" is an amount determined under a formula based generally upon bad
debts actually sustained by a thrift institution over a period of years.
In addition to the regular income tax, corporations, including thrift
institutions such as the Bank, generally are subject to the corporate
minimum tax. For taxable years beginning after 1986, the alternative
minimum tax is imposed at a minimum tax rate of 20% on the sum of a
corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. For any taxable year
beginning after 1986, the alternative minimum taxable income that may be
offset by alternative minimum net operating losses is limited to 90%. The
alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. In
addition, for taxable years beginning after 1986 and before 1996,
corporations, including thrift institutions such as Stockton Savings, are
also subject to an environmental tax equal to 0.12% of the excess of
alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the
environmental tax) exceeding $2 million.
The "excess" portion of a thrift institution's bad debt reserves
generally may be utilized only to absorb bad debt losses and to meet
regulatory reserve requirements. If such excess is used for any other
purpose including the payment of cash dividends or other distributions to
stockholders (including distributions on redemption or liquidation), the
thrift institution would be treated for federal income tax purposes as
having received taxable income in such an amount which, when reduced by
the federal income tax liability, if any, attributable to the inclusion of
such amount in gross income, is equal to the amount of such distribution.
The amount that would be deemed removed from the bad debt reserve in the
event of such a distribution would be the amount treated as taxable income
received. Certain distributions (including dividends), however, made by
thrift institutions to shareholders are treated as being made first out of
current tax earnings and profits, next out of previously taxed earnings
and profits and only then out of bad debt reserves. The "excess" portion
of such bad debt reserves means (a) that portion of the reserve for
qualifying real property loans that exceeds the allowable bad debt
deduction amount computed using the experience method, plus (b) the
supplemental reserve for losses on loans. The Bank does not expect to
make any distributions out of its excess bad debt reserves.
In 1994, the Internal Revenue Service concluded its examination of
the tax returns for tax years 1989 through 1992. One of the issues raised
by the IRS was the amortization of deposit base intangibles. The issue
was resolved under the IRS' Global Intangibles Settlement Offer. Under
this offer, taxpayers have the following options for amortization of
certain intangibles: a basis adjustment of the amortizable intangible or
the extension of the assets' useful life. The Company accepted the useful
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life extension option. The IRS did not make any other adjustments to the
taxable income for the years under examination.
The California franchise tax applicable to the Bank is a variable-
rate tax. This rate is computed under a formula that results in a rate
higher than the rate applicable to nonfinancial corporations, because it
reflects an amount "in lieu" of local personal property and business
license taxes paid by such corporations (but not generally paid by banks
or financial corporations such as the Bank). The total tax rate was 11.3%
in 1995, 11.47% in 1994 and 11.11% in 1993. Under California regulations,
bad debt deductions are available in computing California franchise taxes
using a maximum reserve balance limitation computed based on a six or a
three-year moving average. The Bank and its subsidiaries file California
state franchise tax returns on a combined reporting basis.
The Company changed its method of accounting for income taxes as of
January 1, 1992. See Note 11 of the Financial Statements and
Supplementary Data, Item 8, for further discussion of the implementation
of SFAS 109.
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ITEM 2. OFFICE PROPERTIES
The Bank owned or leased the following offices at December 31, 1995:
STOCKTON: 501 W. Weber Ave. (Corporate Offices)
212 N. San Joaquin St. (Former Corporate Offices)
131 N. San Joaquin St. (Main Branch)
209 E. Channel St. (Parking Lot)
1110 W. Robinhood Dr. (Former Branch)
1782 W. Hammer Ln. (Branch)
2562 Pacific Ave. (Branch)
2287 W. March Ln. (Branch)
8135 N. West Ln. (Branch)
LODI: 200 N. Church St. (Branch)
1150 W. Kettleman Ln. (Branch)
MANTECA: 201 N. Main St. (Branch)
TRACY: 1070 N. Tracy Blvd. (Branch)
MODESTO: 3013 McHenry Ave. (Branch)
2601 T Oakdale Rd. (Branch)
1101 J St. (Branch)
TURLOCK: 2846 Geer Rd. (Branch)
501 E. Olive St. (Branch)
ELK GROVE: 150 Elk Grove-Florin Road (Branch)
ANGELS CAMP: 479 S. Main St. (Branch)
SONORA: 13755 A Mono Way (Branch)
ATWATER: 1329 Broadway Ave. (Branch)
MERCED: 3065 "G" St. (Branch)
JACKSON: P.O. Box 636 (2048 W. Hwy. 88 - Martell) (Branch)
ESCALON: 1701 Main St. (Branch)
FRESNO: 1015 W. Shaw Avenue (Branch)
SACRAMENTO: 640 Watt Avenue, Suite 200 (Loan Center)
The total net book value of the offices at December 31, 1995 was $15.9
million.
ITEM 3. LEGAL PROCEEDINGS
California Financial and its subsidiary are involved in various
routine legal actions incidental to the business, none of which is
believed to be material to the Company on an overall basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK
As of June 1, 1988, Stockton Savings Bank reorganized into a holding
company -- California Financial Holding Company. The common stock is
listed on the National Association of Securities Dealers Automated
Quotations (NASDAQ) under the exchange symbol CFHC (California Financial
Holding Company).
<TABLE>
<CAPTION> STOCK BID PRICES
1993 High Low 1995 High Low
<S> <C> <C> <S> <C> <C>
1st Quarter 18 1/4 12 1st Quarter 15 12
2nd Quarter 16 1/4 13 1/4 2nd Quarter 17 1/2 14
3rd Quarter 20 15 1/4 3rd Quarter 20 1/4 15 3/8
4th Quarter 21 1/4 17 4th Quarter 22 18 3/8
1994 High Low 1996 High Low
1st Quarter 18 15 3/4 Jan. 1 - Mar. 1 20 7/8 18 7/8
2nd Quarter 19 1/2 16
3rd Quarter 18 3/4 15 1/4
4th Quarter 16 12
</TABLE>
California Financial paid regular quarterly dividend payments of 11 cents
per share on February 15, May 16, August 15, November 15, 1995 and
February 15, 1996. California Financial also paid a 10% stock dividend on
December 15, 1993.
The Company had 1,097 stockholders as of December 31, 1995.
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ITEM 6. SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Five-Year Financial Information
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
AT OR FOR THE YEARS ENDED DECEMBER 31 1995 1994 1993 1992 1991
SELECTED FINANCIAL CONDITION INFORMATION
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS $ 1,257,585 $ 1,275,127 $ 1,103,648 $ 1,058,409 $ 1,041,429
LOANS RECEIVABLE, NET 921,070 916,757 846,489 799,622 719,213
MORTGAGE-BACKED SECURITIES 117,200 166,591 80,405 84,603 101,275
SAVINGS DEPOSITS 960,148 1,001,070 885,058 892,501 888,670
BORROWINGS 204,371 182,876 125,343 82,217 71,629
STOCKHOLDERS' EQUITY 85,602 83,217 81,462 72,939 65,997
SELECTED OPERATIONS INFORMATION
INTEREST INCOME $ 91,128 $ 81,127 $ 79,600 $ 85,569 $ 95,481
INTEREST EXPENSE 59,373 46,851 43,331 50,134 65,658
NET INTEREST INCOME $ 31,755 $ 34,276 $ 36,269 $ 35,435 $ 29,823
PROVISION FOR LOAN LOSSES 1,634 281 2,985 3,765 3,350
FEE INCOME 5,407 5,004 5,345 4,718 4,557
OTHER INCOME (LOSS) (7,282) (6,910) 1,560 (838) 6,792
OTHER EXPENSES 24,818 25,271 23,325 22,895 24,431
INCOME BEFORE TAXES AND ACCOUNTING CHANGE $ 3,428 $ 6,818 $ 16,864 $ 12,655 $ 13,391
INCOME TAX PROVISION 1,530 2,316 7,465 5,318 6,107
INCOME BEFORE ACCOUNTING CHANGE $ 1,898 $ 4,502 $ 9,399 $ 7,337 $ 7,284
ACCOUNTING CHANGE - - - 1,000 -
NET INCOME $ 1,898 $ 4,502 $ 9,399 $ 8,337 $ 7,284
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EARNINGS PER SHARE $ 0.40 $ 0.96 $ 2.04 $ 1.84 $ 1.64
DIVIDENDS PER SHARE $ 0.44 $ 0.44 $ 0.44 $ 0.40 $ 0.40
SELECTED OTHER INFORMATION
RATIO OF NET INCOME TO AVERAGE ASSETS 0.15% 0.37% 0.87% 0.80% 0.70%
RATIO OF NET INCOME TO AVERAGE SHAREHOLDERS' 2.26% 5.42% 12.07% 11.96% 11.60%
EQUITY
RATIO OF GENERAL AND ADMINISTRATIVE EXPENSES
TO AVERAGE ASSETS 1.86% 2.01% 2.05% 2.08% 2.23%
INTEREST RATE SPREAD-END OF YEAR 2.62% 2.23% 2.82% 3.23% 2.92%
BRANCH OFFICES 22 23 22 22 23
</TABLE>
Per share calculations for 1992 and 1991 have been adjusted for a 10%
stock dividend in 1993.
<TABLE>
<CAPTION>
Statistical Ratios
December 31,
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net income/average stockholders' equity
2.26% 5.42% 12.07% 11.96% 11.60%
General and administrative
expenses/gross income
26.51% 30.43% 25.44% 24.30% 21.78%
Dividend payout ratio
108.97% 45.06% 21.60% 19.44% 22.06%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
California Financial Holding Company ("the Company" or "California
Financial") is the holding company for its principal subsidiary, Stockton
Savings Bank ("Stockton Savings" or "the Bank"). Virtually all financial
activity of the holding company is conducted through the Bank.
The financial results of the Company are impacted primarily by the
interest rate environment and the health of the real estate market in the
Bank's lending territory.
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Although interest rates began a steady decline during 1995,
short-term rates remained stubbornly high, keeping the Bank's cost of
funds up while asset yields increased by a lesser amount. The end result
was a narrowing of margins in 1995 and a $2.5 million reduction in net
interest income. The real estate market also continued to show signs of
weakness during the year, leading to further provisions on real estate
investments and to a lesser degree, foreclosed properties.
The weakness in the real estate market, as well as relatively high
mortgage rates for most of the year, also reduced the amount of loan
refinance activity, leading to reduced origination volume and low loan
sale activity. Similar to 1994, gains recorded on the sale of loans in
1995 were minimal.
Noninterest expense declined by $452,000 in 1995 as the Company
changed from a defined benefit pension plan to a lower costing 401k plan,
allowing for the reversal of $1.5 million in accrued pension expense.
The continued reduction in the Federal Funds rate in late 1995 and
early 1996 by the Federal Reserve, the upward repricing of the Bank's
loans indexed to the lagging Eleventh District Cost of Funds ("COFI") and
the decline in deposit and borrowing costs caused by the lower rate
environment, bode well for improved interest rate margins over the coming
year. In addition, aggressive writedowns taken in 1995 on real estate
investments as well as real estate owned, coupled with significant
declines in the level of troubled assets, indicate that losses recorded on
problem assets should also decline substantially in 1996.
The Bank expects to focus on growth in loan origination volume over
the next year, primarily in its two newest market areas, Fresno and
Sacramento counties. The introduction of a Federal Housing Administration
("FHA") lending program, to capture speculative construction take-out
business, as well as an increased focus on construction loan originations,
should facilitate this growth. Construction lending is however, an
inherently riskier form of business than lending on single-family
residences.
The balance of nonperforming assets and nonearning real estate
declined significantly by year-end as the level of nonperforming assets
was $22.7 million compared to $32.5 million a year earlier. The balance
of real estate held for development purposes, which is not considered a
nonperforming asset, totalled $6.5 million compared to $14.7 million a
year earlier. The lower balance of nonearning assets should have a
positive impact on the Bank's margin in 1996.
RESULTS OF OPERATIONS
The Company reported earnings of $1.9 million or $.40 per share in
1995 compared to earnings of $4.5 million or $.96 per share in 1994 and
$9.4 million or $2.04 per share in 1993. Earnings trends over the three
year period are highlighted as follows:
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<PAGE>
- Net interest income, the major component of income for the Bank,
has declined steadily over the past three years due primarily to
the significant rise in interest rates beginning early in 1994.
Although rates began to drop in 1995, the decline was gradual
and occurred primarily on the long end of the yield curve,
having little positive impact on the Bank's short-term funding
costs.
- Loss provisions established on the loan portfolio remained at
lower levels than 1993, reflective of the decline in the level
of nonperforming assets.
- Operating expenses decreased in 1995 relative to 1994, largely
due to the positive impact of the change in employee benefit
plans. Operating expenses increased in 1994 compared to 1993.
Additional expenses in 1994 occurred primarily in salaries and
compensation as the result of annual increases as well as to the
opening of a new branch in Fresno in 1994. Deferred loan
origination costs declined in 1994 and 1995 due to the decline
in origination volume, having a negative impact on expense.
- Noninterest income, in the past a source of considerable revenue
to the Bank, was completely eliminated in 1995 and 1994, due in
large part to losses taken on real estate investments as well as
to reduced income recognized on the sale of loans. Net
noninterest losses of $1.9 million were recorded in 1995 and
1994, while net noninterest income totalled $6.9 million in
1993.
NET INTEREST INCOME
Net interest income is impacted by the yield on interest-earning
assets, the cost of interest-bearing liabilities, the amount and type of
interest-earning assets and the level of interest-earning assets relative
to interest-bearing liabilities. Net interest income totalled $31.8
million in 1995, down from $34.3 million in 1994 and $36.3 million in
1993. Table 1 breaks out the components of interest-earning assets and
interest-bearing liabilities for the three years ending December 31, 1995.
The Bank's average spread or the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, dropped to 2.49% in 1995 from 2.93% in 1994
and 3.52% in 1993. Although asset yields increased in 1995, largely the
result of increases in yields on adjustables due to increases in the
index, the cost of funds increased by significantly more, reflecting the
Bank's sensitivity to changes in interest rates on interest-bearing
liabilities and the lagging impact of changes in interest rates on
interest-earning assets. The relatively short maturity structure of the
Bank's liabilities and the large portfolio of adjustable-rate mortgages
that reprice on an infrequent basis, create the balance sheet disparity to
interest rate changes. In 1994, asset yields declined much more
significantly than funding costs, as the large increase in rates that
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<PAGE>
occurred in 1994 began to negatively impact funding costs while asset
yields had still not received any benefits from the rising rate
environment.
<TABLE>
<CAPTION>
Table I
AVERAGE BALANCES (1) / AVERAGE RATES
(Dollars in Thousands)
Years Ended December 31 1995 1994 1993
----------------------- ---- ---- ----
<S> <C> <C> <C>
Loans: (2)
Average balances 927,151 $ 879,293 $ 821,506
Interest income 72,589 65,923 69,057
Weighted average yield 7.83% 7.50% 8.41%
Investment and mortgage-backed securities: (3)
Average balances 280,971 249,008 183,459
Interest income 18,540 15,204 10,543
Weighted average yield 6.60% 6.11% 5.75%
Total average interest-earning assets $1,208,122 $1,128,301 $1,004,965
Total interest income 91,129 81,127 79,600
Weighted average yield on all
interest-earning assets 7.54% 7.19% 7.92%
Deposits:
Average balances $ 989,565 $ 934,000 $ 887,024
Interest expense 48,030 38,220 37,842
Weighted average rate 4.85% 4.09% 4.27%
Borrowings:
Average balances 187,070 165,046 97,034
Interest expense 11,506 9,163 6,250
59
<PAGE>
(Dollars in Thousands)
Years Ended December 31 1995 1994 1993
----------------------- ---- ---- ----
Weighted average rate 6.15% 5.55% 6.44%
Total average interest-bearing liabilities $1,176,635 $1,099,046 $ 984,058
Total interest expense 59,536 47,383 44,092
Weighted average rate on all interest-bearing 5.06% 4.31% 4.48%
liabilities
Interest expense (net of capitalized interest) 59,373 46,851 43,331
Net weighted average rate on all interest-bearing 5.05% 4.26% 4.40%
liabilities
Average interest-earning assets in excess of (less
than) average interest-bearing liabilities $ 31,487 $ 29,255 $ 20,907
Net interest income 31,756 34,276 36,269
Interest rate spread 2.49% 2.93% 3.52%
Net interest margin 2.63% 3.04% 3.61%
</TABLE>
(1) Average balances were calculated on a daily basis.
(2) Nonaccruing loans were included in the average loan amounts
outstanding.
(3) Investment and mortgage-backed securities are based on amortized
cost.
Table II shows the relative impact of changes in average volume and
average interest rates to changes in net interest income for the periods
indicated.
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<PAGE>
<TABLE>
<CAPTION>
Table II
RATE/VOLUME VARIANCES
(Dollars in Thousands)
For the Years Ended December 31 Total Volume Rate
------------------------------- ----- ------ ----
<S> <C> <C> <C>
1995 compared to 1994
Loans $ 6,666 $ 4,519 $ 2,147
Investments and mortgage-backed securities 3,336 2,053 1,283
Deposits (9,810) (2,379) (7,431)
Borrowings (2,342) (1,906) (436)
Change in net interest income $ (2,150) $ 2,287 $ (4,437)
1994 compared to 1993
Loans $ (3,134) $ 4,731 $ (7,865)
Investments and mortgage-backed securities 4,660 3,965 695
Deposits (379) (1,989) 1,610
Borrowings (2,913) (3,876) 963
Change in net interest income $ (1,766) $ 2,831 $ (4,597)
1993 compared to 1992
Loans $ (3,512) $ 5,160 $ (8,672)
Investments and mortgage-backed securities (2,457) (1,094) (1,363)
Deposits 7,393 330 7,063
Borrowings (201) (2,507) 2,306
Change in net interest income $ 1,223 $ 1,889 $ (666)
</TABLE>
Interest income increased by $10.0 million in 1995 as compared to 1994.
The increase was the result of both increases in asset yields and
increases in the average balance of interest-earning assets. An increase
in the average balance of assets outstanding of $79.8 million added
roughly $6.7 million to interest income while a 35 basis point increase in
the average yield on interest-earning assets added an additional $3.3
million to interest income. Average asset growth in 1995 occurred in both
the loan and investment portfolios although by year-end, both asset types
had declined from year-end 1994 as the Bank took advantage of the lower
rate environment later in the year to sell some lower-yielding fixed-rate
investments. In addition, less loan product was added to portfolio as the
decline in interest rates reduced the volume of adjustable mortgages
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<PAGE>
originated. At the same time, prepayment speeds by year-end began to
increase.
The increase in asset yields this year was primarily due to the upward
repricing of the Bank's adjustable-rate loan portfolio indexed to the
COFI. The index is a composite average of the cost of funds of savings
institutions in the Eleventh District of the Federal Home Loan Bank. Like
the Bank's own cost of funds, COFI increased in 1995 as a direct result of
the rise in interest rates in 1994 and the minimal change in short-term
rates in 1995.
Interest income increased by $1.5 million in 1994 relative to 1993. The
benefit of average interest-earning asset growth of $123.3 million
experienced in 1994 as compared to the prior year was almost completely
offset by a 73 basis point decline in the weighted average yield between
the two periods. Most of the asset growth during 1994 occurred in the
balance of loans and mortgage-backed securities as $148 million in
primarily mortgage-backed securities and $15.8 million in loans were
purchased in order to take advantage of underutilized capital. The decline
in asset yields was caused by the downward repricing on the Bank's COFI
loan portfolio as the index declined during 1994, despite the increase in
rates that occurred during the period, again reflecting COFI's tendency to
lag the general interest rate environment. The addition of lower-yielding
COFI product added during the year also contributed to the decline in
average loan portfolio yield.
Interest expense of $59.5 million was recorded in 1995, up $12.2 million
from $47.3 million recorded in 1994. The increase can be attributed to
$77.6 million in average liability growth and to a larger extent,
increases in the weighted average cost of funds. A $55.6 million increase
in the average balance of deposits outstanding, created mostly through the
addition of $61.0 million in brokered funds during the latter part of
1994, added $2.4 million to interest expense in 1995. The Bank funded a
portion of its asset growth in 1994 through the use of wholesale deposits.
Average borrowings also increased by $22.0 million during the year, adding
$1.9 million to interest expense. The growth in borrowings consisted
primarily of short-term reverse repurchase agreements and again was used
to fund asset growth.
Interest expense was influenced the most in 1995 by the rapid increase
in interest rates in 1994. The weighted average cost of deposits increased
by 76 basis points in 1995 relative to 1994, adding $7.4 million to
interest expense during the period. Most of the decline in interest rates
that occurred in 1995 was in the long end of the yield curve, having very
little impact on the Bank's shorter-maturity deposit base. A 60 basis
point increase in the average cost of borrowings, again the result of
higher short-term rates and the heavier use of short-term borrowings,
added $436,000 to interest expense in 1995.
Interest expense of $47.3 million was recorded in 1994, up $3.3 million
or 7.5% from $44.1 million reported in 1993. The entire increase can be
attributed to a $115.0 million increase in the average balance of
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<PAGE>
interest-bearing liabilities in 1994 compared to 1993. Savings balances
increased an average of $47.0 million between the two periods, adding $2.0
million to interest expense. Roughly $20.1 million of the average savings
balance increase was retail in nature, the remaining increase consisting
of wholesale deposits. Wholesale funding was utilized as a cheaper funding
source than borrowings to grow the institution. Average borrowings also
increased by $68.0 million, increasing interest expense by $3.9 million.
The increase in average borrowings consisted of $35.0 million in reverse
repurchase agreements with terms not exceeding three months and roughly
$31.0 million in Federal Home Loan Bank advances. The additional funds
were utilized to fund the mortgage-backed securities purchased during the
year. The average cost of deposits declined in 1994 as compared to 1993 by
18 basis points, reducing interest expense by $1.6 million. Borrowing
costs declined by 89 basis points, reducing the impact associated with the
growth in borrowings by just under $1.0 million.
Included in interest expense is the cost of off-balance sheet interest
rate swaps which are designed to protect the Bank's cost of funds in
rising rate environments. The cost of these hedges totalled $1.2 million
in 1995, and $3.4 and $3.1 million in 1994 and 1993, respectively. Swaps
added 10 basis points to the Bank's overall cost of funds in 1995 and 31
basis points in both 1994 and 1993. The impact of swaps on the Bank's cost
of funds is largely dependent on movements in COFI as a large percentage
of the swaps are tied to this index. If rates increase significantly, the
Bank receives a benefit from the swaps which serves to offset the increase
in the overall cost of funds. Swap costs declined in 1995 relative to
1994, due to both an increase in COFI as well as to a $55 million
reduction in the overall balance of swaps outstanding. These instruments
are used only to hedge asset and liability portfolios, and are not used
for speculative purposes.
Spread is expected to continue to widen in 1996 as the yield on the
Bank's large portfolio of six-month adjustable-rate mortgages indexed to
COFI continues to widen, while the cost of funds declines in conjunction
with the recent decline in short-term rates. Although COFI may begin to
decline, the impact on the Bank's asset yields will be somewhat mitigated
by the lagging effect of the index as well as the infrequent repricing of
these assets.
Interest rate spread does not take into consideration the impact that
the relationship between the level of interest-earning assets and
interest-bearing liabilities has on net interest income. Net interest
margin or net interest income as a percentage of average interest-earning
assets does consider the relationship and as a result is a better measure
of current and future net interest income. By comparing the difference
between net margin and net spread between two periods, the impact of this
additional factor on net interest income can be explained. The Bank's net
margin was 2.63%, 3.04% and 3.61% in 1995, 1994 and 1993, respectively.
Net margin exceeded net spread by 14, 11 and 9 basis points for each of
the three periods, respectively. The improvement noted from 1993 to 1995
is indicative of a reduced level of nonperforming assets and real estate
held for investment purposes, as well as the continued increase in the
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<PAGE>
balance of equity outstanding. Average noninterest-bearing liabilities and
equity exceeded average noninterest-earning assets by $32.3 million, $30.1
million and $20.9 million at December 31, 1995, 1994 and 1993, respec-
tively. Margin relative to spread is expected to continue to improve as
the level of nonperforming assets and real estate held for development
purposes declined by year-end 1995 from the average for the year.
Table III highlights the improvements discussed above.
<TABLE>
<CAPTION>
Table III
ANALYSIS OF AVERAGE
NONINTEREST-EARNING ASSETS
& AVERAGE NONINTEREST-BEARING LIABILITIES
(Dollars in Thousands)
Years Ended December 31 1995 1994 1993
----------------------- ---- ---- ----
<S> <C> <C> <C>
Noninterest-earning assets:
Real estate held for development $ 11,660 $ 17,501 $ 22,595
Real estate acquired through foreclosure 8,226 7,330 14,054
Office property and equipment 20,933 21,285 17,473
Deposit base premium 1,672 3,184 4,469
Other 22,592 23,599 12,419
Total $ 65,083 $ 72,899 $ 71,010
Noninterest-bearing liabilities and equity:
Miscellaneous liabilities $ 13,331 $ 20,022 $ 14,052
Capital stock 26,415 26,095 18,277
Retained earnings 57,672 56,894 59,588
Total $ 97,418 $103,011 $ 91,917
Noninterest-earning assets less than $(32,335) $(30,112) $(20,907)
noninterest-bearing liabilities and equity
</TABLE>
Average balances are calculated on a daily basis.
NONINTEREST INCOME
In the past, Management has relied heavily on noninterest income for
profitability, however, noninterest losses of $1.9 million have been
recorded in both 1995 and 1994. In contrast, noninterest income of $6.9
million was recorded in 1993. A deteriorating real estate environment can
explain most of the noninterest losses recorded over the past two years as
total loss provisions, operating losses and writedowns taken on real
64
<PAGE>
estate were $7.3 million and $5.3 million in 1995 and 1994, respectively.
The lack of gains recorded on the sale of loans due to a volatile interest
rate climate and a lack of gains on the sale of real estate investments
also hampered earnings. Increased emphasis on fee income generation, cost
reductions and redeployment of funds currently invested in real estate
development should significantly reduce the previous reliance on volatile
noninterest income.
Gains recognized on the sale of loans were virtually nonexistent in 1995
and 1994 although sales totalled $85.2 million and $64.3 million,
respectively. Alternatively, loan sale gains totalled $2.2 million in 1993
on sales of $179.0 million, indicating a margin on sale of 1.20%. The lack
of sale margins over the past two years was due to the increasing and
volatile interest rate environment experienced during these periods and
the corresponding increase in hedge protection taken on by the Bank.
Similarly, the declining rate environment in 1993, as well as the reduced
hedging activity, allowed for the improvement in sales margins during that
period. Table IV provides a detailed breakdown of loan sale gains during
the three-year period.
<TABLE>
<CAPTION>
Table IV
LOAN SALE GAINS
(Dollars in Thousands)
Years Ended December 31 1995 1994 1993
----------------------- ---- ---- ----
<S> <C> <C> <C>
Net cash losses $(1,178) $(610) $ (22)
Fees recognized on sale 1,389 673 2,223
Premium write-offs - - (50)
Net gains on sale $ 211 $ 63 $2,151
Total gains as a percentage 0.17% 0.10% 1.20%
of sales
</TABLE>
Gains recorded on the sale of real estate held for investment purposes
totalled $607,000 and $1.4 million in 1994 and 1993, respectively. No
gains were recorded in 1995 due to the extensive loss provisions taken.
Loss provisions of $5.7 million, $5.0 million and $1.2 million were
established in 1995, 1994 and 1993, respectively. Most of the loss
provisions taken in each of the last three years have been on real estate
the Bank purchased in the late 1980's for development purposes and not on
real estate obtained through the foreclosure process. The Bank is in the
process of divesting all real estate held for development purposes as the
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<PAGE>
result of changes in regulation. Due to the lack of future anticipated
acquisitions as well as to the relatively small balance of real estate
remaining, future losses in this area should be minimal.
Miscellaneous fee and servicing revenues continue to provide a stable
source of income to the Bank. Fee and servicing income of $5.4 million,
$5.0 million and $5.3 million was recorded in 1995, 1994 and 1993,
respectively. Fee income increased in the current year relative to 1994 as
a result of an increase in the balance of loans serviced for others as
well as a significant increase in fees collected on checking accounts. Fee
income was negatively impacted in both 1995 and 1994 from decreases in the
level of annuity sales. The higher rate environment tends to reduce the
level of mutual funds and annuity sales as additional investment
alternatives become available. Alternatively, mutual funds and annuity
sales are anticipated to increase in the current lower rate environment.
Regardless of the direction of interest rates, fee income is anticipated
to continue to grow in the future, given the Bank's current emphasis on
increasing the level of fee-generating transaction accounts.
NONINTEREST EXPENSE
Noninterest expense totalled $24.8 million in 1995, down $452,000 or 2%
from $25.3 million reported in 1994. The Bank's change from a defined
contribution pension plan to a less expensive 401K plan permitted the
reduction of $1.5 million in benefit expense in 1995. The $1.5 million
benefit achieved through the change in plan was somewhat mitigated by a
$372,000 decline in deferred loan origination expense as a result of the
decline in loan origination volume. The Bank's earnings are negatively
impacted when loan volume declines as all loan officers are on salary
rather than commissioned and in-house appraisers are utilized to perform
most appraisals. Occupancy and data processing expense also increased in
the current year as a new branch and loan facility were built and a branch
added last year was fully occupied in the current year. Additional
occupancy costs incurred in the current year were somewhat offset by a
branch consolidation during the year. Noninterest expenses in 1994
totalled $25.3 million, up from $23.3 million recorded in 1993. A
reduction in deferred costs of origination of $800,000 due to reduced loan
volume and higher occupancy costs due to the move to a new corporate
headquarters were reflected in 1994 expenses.
INCOME TAX PROVISION
The Company recorded income tax provisions of $1.5 million, $2.3 million
and $7.5 million in 1995, 1994 and 1993, respectively. The Company's
effective tax rate was 44.6%, 34.0% and 44.3% in 1995, 1994 and 1993,
respectively. The effective tax rate decreased in 1994 relative to 1993
due primarily to a $500,000 one-time tax benefit taken as a result of a
settlement with the IRS regarding the tax treatment for amortization of
core deposit intangibles.
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<PAGE>
LIQUIDITY
The Bank derives its liquidity primarily from the payment, payoff or
sale of loans, the acquisition of new deposits, both retail and wholesale,
Federal Home Loan Bank advances and borrowings securitized by investments.
Total assets of the Company remained fairly flat during the year,
decreasing by $17.5 million or slightly over 1%. Although total asset
balances changed very little, asset composition did change somewhat as the
Bank sought to reduce its susceptibility to rising interest rates by
selling fixed-rate mortgage-backed securities. These assets were replaced
by floating-rate current-index collateralized mortgage obligations which
respond more rapidly to changes in the interest rate environment. The
Bank's collateralized mortgage obligations carry little credit risk as
they are all agency-backed or AAA-rated (with the exception of a $5
million A-rated security purchased in December, 1995) and are therefore
not subject to permanent impairment. Floating rate securities are,
however, subject to market value volatility, particularly in rising
interest rate environments when the level of rates approaches the
life-time caps on these instruments.
The decline in loan origination volume to $283.3 million from $368.9
million also reduced the balance of mortgages added to the portfolio.
Principal payments on mortgages completely offset the amount of new loans
originated for portfolio, providing no ability to grow assets through
originations. Loan purchase activity was minimal in the current year,
providing for no additional asset growth.
The Bank reclassified its entire investment portfolio as "available for
sale" in August 1995 so that it would have the flexibility to sell any of
its investments in an effort to reduce the interest sensitivity in its
balance sheet. At the time of reclassification, the Bank's portfolio of
investments previously designated as held to maturity was adjusted to
market value and reclassified as available for sale. The market value
adjustment also impacted net worth. As a result of the reclassification,
the Bank will be unable to classify any investment purchases over a one
year period following the date of reclassification as held to maturity.
Net worth in future periods will therefore be subject to some level of
volatility due to the required classification of all current investments
and any investments purchased over the following year as available for
sale. Sales of investments totalled $52.1 million in 1995 compared to
investment sales of $14.2 million in 1994. No sales occurred in 1993. The
majority of sales in 1995 consisted of long-term fixed-rate
mortgage-backed securities.
Total liability balances also changed very little although deposits and
reverse repurchase agreements declined by $40.9 million and $29.5 million,
respectively in 1995, and were replaced by Federal Home Loan Bank
advances. Brokered deposits totalled $61.0 million as of December 31, 1994
compared to $4.3 million outstanding as of year-end 1995. The $56.7
million decline in brokered certificates was partially offset by a $15.8
million increase in retail deposits. The decline in short-term reverse
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<PAGE>
repurchase agreements was replaced by like-term Federal Home Loan Bank
advances.
ASSET/LIABILITY MANAGEMENT
The level of net interest income, the primary source of revenue to the
Bank, is largely dependent on the level of interest rates and how key
rates interact in that environment. The repricing and maturity structures
of both assets and liabilities also impact the volatility in net interest
income. Historically, the Bank's level of net interest income has been
negatively impacted in rising rate environments as most of its assets
adjust to an index that lags the general interest rate environment while
most of its liabilities tend to reprice on a much more frequent basis,
responding more quickly to changes in rates. The significant increase in
rates experienced in 1994 reduced margins in the latter half of that year
and into 1995 as the yields on assets increased slowly while the cost of
deposits and borrowings increased much more quickly. Alternatively, the
decline in rates in 1995 has started to reduce the Bank's cost of funds
while asset yields are continuing to increase, leading to wider margins.
The Bank undertook some balance sheet restructuring in 1995 in an effort
to reduce its susceptibility to rising rates. More specifically:
- The level of long-term fixed-rate mortgages and mortgage-backed
securities was reduced by $76.6 million as a result of sale and
prepayment activity.
- Permanent adjustable-rate mortgages and mortgage-backed securities
increased by $31.5 million as all $140 million of adjustable mortgages
originated during 1995 were retained in the portfolio.
- Current-index floating-rate securities of $40.3 million were added to
the investment portfolio.
Further restructuring is expected in 1996 as the emphasis will continue
to be placed on the origination and retention of current-index adjustable
mortgages and one-month COFI product. In addition, the Bank expects to
take advantage of the current low rate environment to increase the level
of long-term fixed-rate borrowings with the Federal Home Loan Bank to
replace short-term borrowings.
LOAN ORIGINATION VOLUME AND MORTGAGE BANKING ACTIVITY
The amount and type of loans originated are largely dependent on the
interest rate environment as well as the overall health of the Bank's real
estate lending market. A continued weak real estate market as well as a
rate environment, although falling, that was still higher than the market
of 1992-1993, led to a significantly lower level of loan origination
volume in 1995.
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<PAGE>
Originations totalled $283.3 million in 1995, $368.9 million in 1994 and
$501.1 million in 1993. Refinance activity represented 25% of total loan
volume in 1995, down from 35.5% and 57.0% in 1994 and 1993, respectively.
All types of loans originated declined during the year relative to 1994.
However, adjustable-rate mortgage loan originations declined the most from
the previous year, a reflection of the current declining rate environment.
Table V provides a breakout of loan volume by type of loan for the three
years. The volume of fixed-rate loan originations was highest in 1993 when
refinance activity was still high and COFI was lagging the general
interest rate decline. The rate differential between COFI and current
fixed rates was not wide enough to attract borrowers away from the
certainty of a fixed-rate mortgage compared to the uncertainty of an
adjustable.
TABLE V
LENDING VOLUME
(Dollars in Thousands)
Years Ended December 31 1995 1994 1993
----------------------- ---- ---- ----
Short-term construction $ 88,299 $102,014 $101,242
Long-term fixed-rate 90,060 111,522 262,778
Long-term adjustable-rate 85,073 136,631 125,807
Other 19,858 18,698 11,288
Total originations $283,290 $368,865 $501,115
Loan origination volume is expected to increase in 1996 due to the low
current rate environment, leading to increased refinancing activity and
the offering of FHA loans, which represent roughly 30% of total loans
originated in the Bank's current market area.
The Bank has traditionally sold a majority of fixed-rate mortgages
originated in an effort to reduce its balance sheet susceptibility to
rising interest rates. The level of interest rates tends to have a major
impact on the type of loan originated and thus, on the level of mortgage
banking activities undertaken. In periods of falling interest rates, the
rate differential between a fixed and adjustable-rate mortgage is usually
not significant enough to draw a consumer to the uncertainty of an
adjustable-rate mortgage so the level of fixed-rate mortgage originations
increases. Volume is further impacted by increased refinance activity in
low rate environments. The reverse holds true in a rising rate environment
and the consumer tends to move to adjustable-rate mortgages. At the same
time, total originations decline due to a reduction in refinance activity.
This phenomenon creates a large amount of volatility in mortgage loan sale
activity for the Bank, depending on the level of rates. Loan sale volume
totalled $85.2 million, $64.3 million and $179.0 million for 1995, 1994
and 1993, respectively. In 1995 and 1993, both relatively low rate
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<PAGE>
environments, sales represented 30.1% and 35.6% of total origination
volume, respectively. Alternatively, in the higher rate environment of
1994, sales volume only represented 17.4% of total originations,
reflecting the increase in volume of adjustable-rate originations.
Consistent with the volatility in sales over the past three years, gains
recognized on loans sales also fluctuated significantly. Gains of
$211,000, $63,000 and $2.2 million were recognized in 1995, 1994 and 1993,
respectively. In addition to the volume of loan sales, loan sale gains are
also impacted by the direction and degree of change in interest rates. In
1995, with interest rates heading down, the Bank's gain on loan sales as a
percentage of sales totalled 25 basis points. In 1994, with rates
increasing rather rapidly, loan sale margins were only 10 basis points. In
1993, a declining rate environment, margins averaged 120 basis points. The
significant difference in margins between 1995 and 1993, both periods of
declining rates, was the result of increased hedging activity in the
current year.
The Bank has made it a practice to retain servicing on all loans sold in
order to insure good customer service, generate consistent servicing
revenues and provide an opportunity to cross-sell the servicing customer
other Bank products. Servicing income totalled $1.5 million, $1.3 million
and $1.2 million in 1995, 1994 and 1993, respectively. The Bank's
portfolio of loans serviced for others totalled $548.5 million, $509.1
million and $519.5 million as of December 31, 1995, 1994 and 1993,
respectively. Effective January 1, 1996, the Bank will implement SFAS122-
"Accounting for Mortgage Servicing Rights." FAS 122 requires that the
rights to servicing mortgage loans for others be recognized as a separate
asset, however those servicing assets are acquired. Additionally, the
recognized mortgage servicing asset must be regularly evaluated for
impairment. The impact of adoption of this standard will be to increase
the level of loan sale gains recognized as a percentage of loans sold.
Based on currently available information, management estimates loan sale
gain margins will increase by roughly 100 basis points. In addition,
future servicing income should decline, a trade-off for recognition at the
time of sale of the servicing asset. Income volatility may also increase
due to the potential impairment and corresponding writedown of the
servicing asset.
ASSET QUALITY
The Bank's level of nonperforming assets, which consists of nonaccruing
loans, restructured troubled debt and real estate owned through
foreclosure, declined significantly over the past year. Table VI breaks
out nonperforming assets by type for the five periods indicated.
Nonperformers totalled $22.7 million, $35.2 million and $37.9 million at
December 31, 1995, 1994 and 1993, respectively.
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<TABLE>
<CAPTION>
TABLE VI
SUMMARY OF NONPERFORMING ASSETS
(Dollars in thousands)
At December 31 1995 1994 1993 1992 1991
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
1-4 family residential mortgages $ 4,606 $ 3,734 $ 3,894 $ 4,242 $ 2,269
Commercial real estate mortgages 555 450 2,510 3,066 1,428
Construction and land 18 2,180 5,198 4,034 9,254
Troubled debt restructured:
1-4 family residential mortgages 2,382 1,718 681 681 -
Commercial real estate mortgages - 4,529 4,531 5,202 -
Construction and land 5,338 8,948 10,914 5,159 1,758
Gross nonperforming loans $12,899 $21,559 $27,728 $22,384 $14,709
Real estate owned:
1-4 family residential property $ 2,722 $ 3,929 $ 885 $ 2,005 $ 82
Commercial real estate property 3,743 8,039 6,392 8,366 3,451
Construction and land 3,365 1,717 2,881 5,181 4,917
Gross real estate owned $ 9,830 $13,685 $10,158 $15,552 $ 8,450
Gross nonperforming assets $22,729 $35,244 $37,886 $37,936 $23,159
Loan losses reserves $ 8,174 $ 7,726 $ 9,965 $ 8,042 $ 5,047
Real estate owned loss reserves $ 3,853 $ 3,142 $ 1,675 $ 702 $ 421
Loan loss reserves/gross
nonperforming loans 35.96% 21.92% 26.30% 21.20% 21.79%
</TABLE>
Generally, loans are considered nonaccruing once they become 90 days or
more delinquent or have been classified as impaired. The nonaccrual of a
loan is generally the first sign that a loan is in trouble. In many
circumstances, once a loan becomes delinquent to this extent, it is either
restructured or goes into foreclosure. Deferred interest income on
delinquent loans totalled $263,000, $371,000 and $1.0 million at December
31, 1995, 1994 and 1993, respectively.
Restructured debt is usually considered troubled when the terms or
conditions of the restructure are more advantageous to the borrower than
what would normally be offered. It is generally the Bank's position when
restructuring debt that it is in the Bank's best interest to allow the
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<PAGE>
borrower to continue the financing under revised terms rather than to take
the property back through the foreclosure process. The level of troubled
restructured debt decreased to $7.7 million at December 31, 1995 from
$15.2 million at the end of 1994 and $16.1 million at the end of 1993.
Three large acquisition and development loans totalling $7.0 million
comprised most of the troubled debt outstanding as of year-end. All three
loans were made to facilitate the sale of real estate development in 1989
due to regulatory divestiture requirements. Most of the debt was
restructured by lowering the interest rate or advancing funds for taxes,
insurance or interest. Interest income on troubled debt is normally
deferred by the Bank and recognized on a cash basis only. The amount of
interest deferred by the Bank on troubled debt totalled $1.7 million, $1.8
million and $2.0 million at December 31, 1995, 1994 and 1993,
respectively. Of the balance of troubled debt outstanding, $2.8 million,
$1.1 million and $2.8 million was more than 90-days delinquent at year-end
1995, 1994 and 1993, respectively. The delinquent debt at year-end 1995
included the land loans on two of the three large debt restructurings
discussed above. The level of provisions established on loans has declined
significantly as compared to 1993, an indication of declining troubled
loans and management's opinion that Stockton's loan portfolio is
improving. Loan loss provisions totalled $1.6 million in 1995, $281,000 in
1994 and $3.0 million in 1993.
The Bank's level of real estate owned, totalled $9.8 million at the end
of 1995, compared to $13.7 million and $10.2 million at the end of 1994
and 1993, respectively. Real estate outstanding as of year-end consisted
of single-family residences, two office buildings and land in four
different subdivisions. Loss reserves on real estate of $1.5 million at
the end of 1994 had not been allocated to specific assets but were
outstanding to cover uncertainties in the valuation of several properties.
The unallocated reserves for real estate owned were fully allocated in
1995.
In connection with foreclosures during the year, the Bank's loan
charge-offs totalled $1.2 million, compared to charge-offs taken of $2.5
million and $1.0 million in 1994 and 1993, respectively. Subsequent to
foreclosure, valuation concerns resulted in loss provisions that were
established on real estate owned totalling $1.6 million for 1995, $2.4
million in 1994 and $1.2 million in 1993. Charge-offs taken on the sale of
real estate owned totalled $920,000 in 1995, $917,000 in 1994 and $272,000
in 1993. The sale of an apartment building was the single largest
charge-off in 1995 on real estate taken back.
Loan charge-offs in 1995 related primarily to the foreclosure of a
speculative construction subdivision in the Galt area, a city just south
of Sacramento, California. A portion of this subdivision was taken back
in 1994, when significant charge-offs also occurred. A majority of the
reserves established on real estate owned in 1995 also related to the
portion of the Galt subdivision taken back in 1994. Real estate values in
the Galt area have fallen tremendously over the past year, necessitating
the additional reserves. Land values have declined due to very high fees
charged by the City of Galt and by liquidation sales by developers.
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<PAGE>
Further declines in land value in that market should have little impact on
the Bank as the remaining book value of this land at December 31, 1995 was
$122,000. The remaining loss reserves established on real estate owned in
1995 related to property owned in Downtown Stockton.
The Bank uses an asset classification process to identify troubled loans
in its portfolio. Paying capacity of the borrower as well as the adequacy
of collateral value are evaluated. Assets identified through this process
as possessing some weakness are classified by the Bank and are monitored
on an ongoing basis. By definition, all nonperforming assets are
immediately classified. The level and type of nonperforming and classified
assets, historical experience, current economic conditions and trends, as
well as the lending mix are all reviewed when determining the level and
adequacy of loan loss reserves. The balance of classified assets totalled
$47.0 million, $63.1 million and $65.8 million at December 31, 1995, 1994
and 1993, respectively. Alternatively, loan loss reserves totalled $8.2
million, $7.7 million, and $10.0 million at year-end, 1995, 1994 and 1993,
respectively. The slight increase in loan loss reserves in 1995 can be
primarily attributed to the decline in nonperforming loans and reduced
level of charge-offs taken in the current year. The decline in loan loss
reserves in 1994 relative to 1993, despite the increase in the overall
loan portfolio and level of charge-offs, is the result of a decline in the
balance of total nonperforming loans in the fourth quarter of 22%, as well
as a decline in the overall balance of higher-risk construction and land
loans. The reduction in nonperforming loans also occurred in higher-risk
loans. The higher than normal level of charge-offs taken in 1994 was
isolated to one large block of land.
REAL ESTATE INVESTMENTS
The Bank has, for many years, invested in real estate for development
purposes through a wholly-owned subsidiary, Stockton Service Corporation,
("Stockton Service"). Stockton Service would generally acquire land and
then contract with a developer to build out and manage the project in
exchange for a share in profits after Stockton Service received a
preferential return equivalent to interest and fees earned on a
construction loan. All profits earned in excess of the preferential return
are then split between the two parties in an agreed-upon manner. All
projects currently outstanding involve the build out of single family
subdivisions.
All income, including the preferential return, is reported as gain on
the sale of real estate in the Bank's financial statement. Gains were
nonexistent in 1995 and totalled $444,000 and $1.2 million for 1994 and
1993, respectively, and are shown in more detail at Table VII. Loss
provisions of $4.1 million and $2.7 million were recorded in 1995 and
1994, respectively. No reserves were recorded in 1993. Loss reserves on
real estate investments totalled $3.1 million at year-end 1995, $3.7
million at December 31, 1994 and $2.0 million at year-end 1993. The
significant amount of losses taken on the Bank's real estate development
activities over the past several years is due to the significant amount of
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<PAGE>
purchases that occurred in 1989, a period when real estate values were at
their peak, and the decline in values that has occurred subsequently. The
decision by the Bank in 1995 to accelerate the disposition of real estate
through bulk sales also increased the level of reserves necessary.
<TABLE>
<CAPTION>
TABLE VII
SALES AND PROFITS
ON REAL ESTATE HELD FOR DEVELOPMENT
(Dollars In Thousands)
Years Ended December 31 1995 1994 1993
----------------------- ---- ---- ----
<S> <C> <C> <C>
Gross sales of real estate $10,514 $11,858 $ 18,785
Profits consisting of preferential returns 9 973 1,993
Additional (losses) gains (39) (155) 207
Total (losses) gains before capitalized interest $ (30) $ 818 $ 2,200
Capitalized interest relieved 5 374 1,019
Net (losses) profits $ (35) $ 444 $ 1,181
Profit margins (.33%) 3.74% 6.29%
</TABLE>
The level of reserves on real estate development outstanding at December
31, 1995 was based on bonafide bulk sales anticipated in 1996 as well as
the anticipated sales of 24 remaining homes. Conservative absorption and
pricing estimates were used in the valuation of homes. As a result, the
current level of reserves should be adequate and no material additional
provisions are anticipated.
The enactment of FIRREA in 1989 required the divestiture of all real
estate held for development purposes by financial institutions in excess
of 2% of assets. Consequently, no new projects have been taken on by
Stockton Service since then. The balance of real estate currently
outstanding represents the remaining build-out of older projects which
Stockton Service is attempting to divest itself of as expeditiously as
possible. As a result, the balance of real estate outstanding has steadily
declined over the past several years; from $19.9 million at the end of
1993 to $6.5 million at the end of 1995. Even though the balance currently
outstanding is less than the 2% of the permissible limit of $25.3 million,
the full balance of this investment must be deducted from regulatory
capital, subject to a phase-out schedule. Further discussion of the impact
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<PAGE>
of this investment on regulatory capital can be found under the "Capital
Resources and Regulatory Compliance" section of this discussion.
CAPITAL RESOURCES AND REGULATORY COMPLIANCE
The Company's capital position increased by $2.4 million or roughly 3%
from the previous year. Income recorded of $1.9 million and a positive
mark to market of the Bank's investment portfolio designated as available
for sale of $2.3 million were partially offset by dividends paid of $2.0
million. The investment portfolio increased in value in the current year
due to the decreasing interest rate environment. Dividends paid during the
year of $.44 per share represented 108% of total income earned in 1995.
Total capital increased by $1.8 million or roughly 2% in 1994 compared
to 1993. Earnings of $4.5 million were partially offset by dividends paid
of $2.0 million and a negative mark to market adjustment on the Bank's
investment portfolio classified as available for sale totalling $1.2
million. The increasing rate environment during that period was
responsible for the negative adjustment. During 1994, dividends
represented 45.8% of total net income.
A 10% stock dividend was affected in December of 1993. All per share
calculations within this report have been adjusted to reflect the dividend
and assure comparability.
The Bank is under the regulatory guidance of both the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation
("FDIC").
Three minimum capital requirements were mandated by FIRREA, requiring
that financial institutions must maintain minimum risk-based capital of at
least 8% of risk-weighted assets, core capital of at least 3% of adjusted
total assets and tangible capital of at least 1.5% of adjusted total
assets. Under FIRREA's risk-based capital guidelines, the Bank is required
to maintain higher levels of capital against assets deemed to involve
higher degrees of credit risk. In addition, the Bank must deduct from
regulatory capital, subject to a phase-in schedule, its investments and
loans to subsidiaries engaged in nonpermissable activities such as real
estate development. The Bank's capital ratios and net requirements as of
December 31, 1995 are detailed on Table VIII. At December 31, 1995, the
Bank exceeded all minimum regulatory capital requirements mandated by
FIRREA with risk-based, core/tangible capital of 12.12% and 6.07%,
respectively. At December 31, 1995, the Bank's fully phased-in risk-based,
core/tangible capital ratios were 11.67% and 5.71%, respectively. The
decrease in capital ratios on a fully phased-in basis is due to the 100%
deduction from capital due to investments in subsidiaries involved in
impermissible activities. According to the phase-in schedule mandated by
FIRREA, the Bank is currently only required to deduct 60% of its
investments in Stockton Service from capital. This percentage increases to
100% on July 1, 1996.
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<PAGE>
TABLE VIII
CAPITAL REQUIREMENTS
(UNAUDITED)
(Dollars In Thousands)
At December 31 1995 1994
$ % $ %
Current capital:
Risk-based capital $ 83,083 12.12% $ 79,695 11.55%
Excess over minimum 28,264 24,472
Core capital $ 76,440 6.07% $ 73,036 5.73%
Excess over minimum 38,634 34,784
Tangible capital $ 76,440 6.07% $ 73,036 5.73%
Excess over minimum 57,537 53,909
Fully phased-in capital:
Risk-based capital $ 79,967 11.67% $ 70,529 10.37%
Core capital 71,958 5.71% 63,870 5.05%
Tangible capital 71,958 5.71% 63,870 5.05%
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA")
provided for increased funding for FDIC deposit insurance and for expanded
regulation of the banking industry. Among other things, FDICIA requires
that the federal banking regulators take prompt corrective action with
respect to institutions failing to meet minimum capital standards.
Specific categories defined in the act include "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Various restrictions
are to be applied on institutions characterized as undercapitalized.
To be considered "well capitalized," an institution must generally have
a leverage ratio of at least 5%, a tier-one, risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. The
Bank was in the "well capitalized" category as of December 31, 1995, even
on a fully phased-in basis with the 100% deduction from capital for
investments in subsidiaries involved in impermissible activities. As the
Bank meets its fully phased-in capital requirements, it is allowed to make
capital distributions (primarily dividends) to the Company upon 30 days
notice to the OTS, up to an amount that would reduce its surplus capital
ratio by one-half of the surplus outstanding at the beginning of the year,
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<PAGE>
plus all of its income for the year, as long as it still meets its fully
phased-in capital requirements after the proposed capital distribution.
The OTS adopted a final rule in August of 1993 for calculating an
interest rate risk component for risk-based capital. Under the rule, the
component will be an addition to the existing 8% minimum risk-based
capital requirement. Implementation has been delayed for an indefinite
period. The rule provides that the OTS will calculate the interest rate
risk component on a quarterly basis for the Bank. The rule provides that
if an institution's market value of portfolio equity or the relationship
of its market value of interest-earning assets to the market value of
interest-bearing liabilities declines by more than 2% of the market value
of interest-earning assets with a 200 basis point shift in interest rates,
then an institution must maintain additional capital equivalent to
one-half the measured difference between its current market value of
portfolio equity and the calculated decline in value with the interest
rate shift. Based on current interest rate risk calculations provided by
OTS to the Bank, there would have been no interest rate risk component for
the Bank at December 31, 1995. Therefore, even if the interest rate risk
component were in effect at year-end, it would have no impact on the
Bank's regulatory capital designation as "well capitalized." Regulatory
capital increased in 1995 compared to the prior year. The reduced level of
investment in subsidiaries with impermissible activities and lower balance
of core deposit premium, which are both deducted from regulatory capital,
are responsible for the improvement in capital position. The adjustment to
capital for marking to market the investment portfolio is not includable
in the calculation of regulatory capital and thus has no impact on the
Bank's capital position.
The Treasury Department, the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation have recommended to Congress that
institutions with SAIF-assessable deposits pay a special assessment in an
amount sufficient to recapitalize the fund. The issue is currently
included in the Budget Reconciliation Bill, waiting to be approved by
Congress. Once approved, it is estimated that SAIF-insured institutions
such as the Bank will be charged a one-time assessment of approximately 80
basis points on all deposits outstanding as of March 31, 1995. This
assessment would approximate $8.1 million for the Bank, assuming the
foregoing assessment rate and date. Under a separate bill, the assessment
would be fully deductible for income tax purposes. If the above-described
legislation is enacted, it is anticipated to have an estimated $5 million
negative impact on the Bank's earnings in the year of enactment. Going
forward, however, the level of SAIF premiums paid is expected to drop
significantly. If the assessment was paid as of year-end 1995, the Bank
would have still been well capitalized by regulatory definition.
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<PAGE>
RECENT ACCOUNTING DEVELOPMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement applies to financial statements
for fiscal years beginning after December 15, 1995. It requires that
long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may not be
recoverable. Additionally, this statement requires that long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. It is
management's opinion that applying the provisions of this statement will
not have a significant effect on the Company's financial position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective beginning in 1996. SFAS No.
123 allows companies either to continue to account for stock-based
employee compensation plans under existing accounting standards or adopt a
fair value based method of accounting for stock options as compensation
expense over the service period (generally the vesting period) as defined
in the new standard. SFAS No. 123 requires that if a company continues to
account for stock options under Accounting Principles Board ("APB")
Opinion No. 25, it must provide pro forma net income and earnings per
share information "as if" the new fair value approach had been adopted.
The Company will continue to account for stock based compensation under
APB Opinion No. 25 and will make the required disclosures in 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
California Financial Holding Company
Independent Auditors' Report
The Board of Directors, California Financial Holding Company:
We have audited the accompanying consolidated statements of financial
condition of California Financial Holding Company and Subsidiary as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
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<PAGE>
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
California Financial Holding Company and Subsidiary as of December 31,
1995 and 1994, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Sacramento, California
February 16, 1996
79
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
At December 31 1995 1994
<S> <C> <C>
ASSETS
Cash, including noninterest-bearing deposits $ 13,162,431 $ 15,523,626
Interest-bearing deposits (Note 2) 4,691,615 3,313,882
Investment securities (Notes 2 and 10)
Securities held to maturity (market value: 1995 - $0; 1994 - $47,713,390) - 52,759,609
Securities available for sale, at market 144,144,806 50,438,489
Mortgage-backed securities (Note 3)
Held to maturity (market value: 1995 - $0; 1994 - $151,247,851) - 159,436,288
Available for sale, at market 117,199,924 7,154,572
Loans held for sale (Note 4) (market value: 1995 - $13,260,317; 1994 - $2,656,737) 13,153,264 2,655,408
Loans receivable, net (Notes 4 and 8) (allowance for loan losses:
1995 - $8,173,807; 1994 - $7,725,500) 907,917,036 914,101,218
Real estate held for development or sale, net (Note 5)
(allowance for losses: 1995 - $6,958,757; 1994 - $6,850,636) 12,480,183 25,233,861
Office property and equipment, at cost, less accumulated depreciation:
1995 - $14,721,731; 1994 - $12,894,036 20,769,858 21,111,844
Federal Home Loan Bank stock, at cost, and FHLMC preferred stock (Note 8) 10,395,200 8,736,900
Accrued interest and dividends receivable (Note 6) 6,092,335 5,308,083
Deposit base premium 1,058,444 2,219,999
Other assets (Note 11) 6,519,971 7,133,371
TOTAL ASSETS $1,257,585,067 $1,275,127,150
At December 31 1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings and checking accounts (Note 7) $ 960,147,775 $1,001,070,420
Advances from Federal Home Loan Bank (Note 8) 162,500,000 110,000,000
Collateralized mortgage obligations (Note 9) 6,462,509 7,897,795
Securities sold under agreements to repurchase (Note 10) 35,408,000 64,978,000
Advances by borrowers for taxes and insurance 782,113 942,262
Accrued interest payable 1,181,068 1,610,640
Other liabilities (Note 11) 5,501,381 5,410,543
TOTAL LIABILITIES $1,171,982,846 $1,191,909,660
Stockholders' equity: (Note 12 and 14)
Serial preferred stock (par value $.01 per share; 4,000,000 shares authorized;
none issued and outstanding) $ - $ -
Common stock (par value $.01 per share; 12,000,000 shares authorized;
4,662,779 and 4,626,063 outstanding on December 31, 1995 and 1994) 46,628 46,261
Paid in capital in excess of par 26,553,810 26,207,166
Unrealized gain (loss) on marketable equity securities, net of tax 998,198 (1,186,069)
Retained earnings (restricted: 1995 - $50,967,000; 1994 - $38,130,000) 58,003,585 58,150,132
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TOTAL STOCKHOLDERS' EQUITY $ 85,602,221 $ 83,217,490
Commitments (Note 17)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,257,585,067 $1,275,127,150
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<TABLE>
<CAPTION>
Consolidated Statements of Operations
Years ended December 31 1995 1994 1993
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $72,588,415 $65,922,870 $69,057,100
Interest on mortgage-backed securities 10,703,543 9,069,179 5,858,569
Interest and dividends on investments 7,512,907 5,727,784 4,031,915
Other interest income 323,649 406,799 652,418
TOTAL INTEREST INCOME $91,128,514 $81,126,632 $79,600,002
Interest expense:
Interest on savings (Note 7) $48,029,879 $38,220,211 $37,841,869
Interest on short-term borrowings 3,750,929 1,966,014 116,818
Interest on long-term borrowings 7,754,619 7,197,138 6,133,219
TOTAL INTEREST EXPENSE $59,535,427 $47,383,363 $44,091,906
LESS: INTEREST CAPITALIZED (NOTE 5) (162,292) (532,566) (761,271)
NET INTEREST EXPENSE $59,373,135 $46,850,797 $43,330,635
NET INTEREST INCOME $31,755,379 $34,275,835 $36,269,367
Provision for loan losses 1,633,500 281,000 2,985,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN $30,121,879 $33,994,835 $33,284,367
LOSSES
Noninterest (Loss) income:
Gain (Loss) on sale of:
Loans $ 210,907 $ 62,926 $ 2,151,387
Investment securities 90,119 (40,274) -
Real estate held for development or sale, net (27,519) 607,270 1,400,939
Less: provision for losses on real estate held for (5,751,878) (5,035,000) (1,245,000)
development
Other Writedowns (908,271) (635,068) (210,115)
Operating losses on real estate held for sale, net (671,172) (868,551) (726,844)
Trading securities activities - (415,511) (15,278)
Servicing fee income 1,510,271 1,297,761 1,206,034
Other Fee income 3,896,855 3,706,663 4,138,845
Other (Loss) income (225,143) (586,014) 205,258
TOTAL NONINTEREST (LOSS) INCOME $(1,875,831) $(1,905,798) $ 6,905,226
Noninterest expense:
Compensation and related benefits $10,715,096 $11,639,362 $10,437,397
Occupancy 3,128,654 2,987,245 2,643,535
Advertising and promotion 1,086,841 1,149,699 821,141
Data processing 2,138,038 1,946,619 1,732,818
Insurance 2,794,970 2,626,868 2,760,576
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Amortization of deposit base premium 1,161,555 1,161,555 1,317,950
Other 3,793,385 3,759,632 3,611,940
TOTAL NONINTEREST EXPENSE $24,818,539 $25,270,980 $23,325,357
Income before taxes $ 3,427,509 $ 6,818,057 $16,864,236
Income taxes (Note 11) 1,530,000 2,316,000 7,465,000
NET INCOME $ 1,897,509 $ 4,502,057 $ 9,399,236
INCOME PER SHARE $ 0.40 $ 0.96 $ 2.04
</TABLE>
Net income per share calculations for 1995, 1994, and 1993 were based upon
4,721,778, 4,674,234 and 4,618,605 shares, respectively.
See accompanying Notes to Consolidated Financial Statements.
83
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1995, 1994 and 1993
Capital Stock Substantially
Authorized Restricted
12,000,000 shares (Note 12)
Unrealized Loss
on Marketable
Equity Total
Retained Securities, Net Stockholders'
Shares Amount Earnings of Tax Equity
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 4,476,828 $17,496,105 $55,489,897 $ (46,922) $72,939,080
Shares exercised under Incentive Stock
Option Plan (Note 14) 95,360 $ 792,257 $ - $ - $ 792,257
Shares issued under the Dividend
Reinvestment Plan (Note 14) 11,339 165,829 - - 165,829
Shares issued in payment of 10% stock
dividend to shareholders - 7,394,347 (7,394,347) - -
Dividends paid ($.44 per share) - - (1,818,094) - (1,818,094)
Increase in unrealized losses on
marketable equity securities
(Note 2) - - - (15,944) (15,944)
Net income for year ended December 31,
1993 - - 9,399,236 - 9,399,236
Balance, December 31, 1993 4,583,527 $25,848,538 $55,676,692 $ (62,866) $81,462,364
Shares exercised under Incentive Stock
Option Plan (Note 14) 30,195 $ 209,734 $ - $ - $ 209,734
Shares issued under the Dividend
Reinvestment Plan (Note 14) 12,341 195,155 - - 195,155
84
<PAGE>
Dividends paid ($.44 per share) - - (2,028,617) - (2,028,617)
Unrealized gains upon implementation
of FASB 115 (Note 2) - - - 563,606 -
Unrealized losses on available for sale
securities (Note 2) - - - (1,686,809) (1,123,203)
Net income for year ended December 31,
1994 - - 4,502,057 - 4,502,057
Balance, December 31, 1994 4,626,063 $26,253,427 $58,150,132 $(1,186,069) $83,217,490
Shares exercised under Incentive Stock
Option Plan (Note 14) 26,532 $ 185,471 $ - $ - $ 185,471
Shares issued under the Dividend
Reinvestment Plan (Note 14) 10,184 161,540 - - 161,540
Dividends paid ($.44 per share) - - (2,044,056) - (2,044,056)
Unrealized gains on available for sale
securities (Note 2) - - - 2,184,267 2,184,267
Net income for year ended December 31,
1995 - - 1,897,509 - 1,897,509
Balance, December 31, 1995 4,662,779 $26,600,438 $58,003,585 $ 998,198 $85,602,221
</TABLE>
Number of shares adjusted for a 10% stock dividend in 1993.
See accompanying Notes to Consolidated Financial Statements.
85
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31 1995 1994 1993
<S> <C> <C> <C>
Cash Flows From Operating Activities: $ 1,897,509 $ 4,502,057 $ 9,399,236
Net Income
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Amortization of:
Loan premium - 227,329 513,247
Deferred loan fees (2,811,971) (4,093,454) (4,735,171)
Discount amortization on mortgage-backed bonds 85,456 488,344 653,399
Deposit base premium 1,161,555 1,161,555 1,317,950
Net (gain) loss on sale of:
Loans (210,907) (62,926) (2,151,387)
Real estate held for development or sale 27,519 (607,270) (1,400,939)
Net (gain) loss on securities activities (90,119) 455,785 15,278
Provision for losses on:
Loans 1,633,500 281,000 2,985,000
Real estate held for development or sale 5,751,878 5,035,000 1,245,000
Depreciation and amortization 2,594,707 2,324,433 2,105,072
Decrease in income taxes payable (625,072) (3,429,970) (1,330,693)
Net increase (decrease) in accrued interest payable (429,572) 850,897 144,935
Net (increase) decrease in accrued interest receivable (784,252) (824,047) 1,481,623
Mortgage loans originated as held for sale (95,486,430) (43,243,567) (183,665,936)
Proceeds from loans sold 85,199,481 64,345,990 178,989,245
Purchase of trading account securities - (38,632,428) (210,132,378)
Sale of trading account securities - 41,186,243 212,639,909
Other, net (1,413,193) (3,257,118) 173,587
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (3,499,911) $ 26,707,853 $ 8,246,977
Cash Flows From Investing Activities:
Principal payments on loans $189,475,781 $ 232,721,340 $ 280,143,541
Mortgage loans originated as held for investment (187,803,991) (325,621,537) (317,448,569)
Purchase of loan participations (480,600) (15,878,519) (5,481,737)
Purchase of securities held for investment (25,439,665) (112,933,571) (45,080,541)
Maturity and payments of securities held for investment 4,407,494 1,950,000 55,777,208
Purchase of securities available for sale (44,599,634) (37,569,321) -
Maturity and payments of securities available for sale 25,868,987 17,362,213 -
Sale of securities available for sale 52,059,260 14,154,170 -
Purchase of office property and equipment, net (2,252,721) (3,524,626) (7,234,096)
Purchase of FHLB stock and FHLMC preferred stock (1,658,300) (624,017) (560,000)
Investment in real estate held for development or sale (7,395,962) (7,483,809) (13,511,132)
Proceeds from sales of real estate held for development or sale 10,514,376 11,857,704 18,785,248
Proceeds from sale of foreclosed property 10,027,330 7,420,578 10,089,769
Other, net 1,004,526 (743,186) 1,779,598
86
<PAGE>
YEARS ENDED DECEMBER 31 1995 1994 1993
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 23,726,881 $(218,912,581) $ (22,740,711)
Cash Flows from Financing Activities:
Net (decreases) additions to deposit accounts $(39,317,075) $ 114,098,168 $ (9,646,118)
Net (decrease) increase in checking accounts (1,605,570) 1,914,368 2,203,358
Proceeds from FHLB advances 253,200,000 183,000,000 158,000,000
Repayments of FHLB advances (200,700,000) (183,800,000) (100,000,000)
Securities sold under agreements to repurchase, net (29,570,000) 64,978,000 -
Payments on mortgage-backed bonds (1,520,742) (6,737,652) (15,379,140)
Bank and other borrowings, net - (396,236) (148,254)
Proceeds from stock options exercised and dividends reinvested 347,011 404,889 958,086
Dividends paid to shareholders (2,044,056) (2,028,617) (1,818,094)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES $(21,210,432) $ 171,432,920 $ 34,169,838
Net (decrease) increase in cash and cash equivalents $ (983,462) $ (20,771,808) $ 19,676,104
Cash and cash equivalents at the beginning of the year 18,837,508 39,609,316 19,933,212
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 17,854,046 $ 18,837,508 $ 39,609,316
Supplemental disclosures of cash flow information:
Interest paid $ 59,964,999 $ 43,128,214 $ 40,878,359
Cash payments of income taxes 1,908,100 5,238,392 9,494,700
Supplemental disclosures of noncash investing and financing
activities:
Loans exchanged for mortgage-backed securities $ - $ 8,434,201 $ 94,533
Additions to real estate acquired through foreclosure 6,171,463 11,905,163 4,498,030
Transfer of securities from trading to held to maturity portfolio - 4,875,000 -
Transfer of securities from trading to available for sale
portfolio - 10,014,089 -
Transfer of securities from held to maturity to available for sale
portfolio 223,766,211 - -
Unrealized (gains) losses on available for sale securities (3,762,095) 2,175,077 -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
California Financial Holding Company and Subsidiary
For the years ended December 31, 1995, 1994 and 1993
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the significant accounting policies, not disclosed
elsewhere in the notes to the consolidated financial statements, which
California Financial Holding Company and Stockton Savings Bank, its
87
<PAGE>
subsidiary, follow in preparing and presenting their consolidated
financial statements.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary. The Company is a financial services
holding company engaged primarily in the savings and loan business through
Stockton Savings Bank. The Bank, organized in 1887, converted in 1990 from
a state-chartered to a federally-chartered institution which provides
financial services through traditional banking activities. In addition,
the Bank has other subsidiaries which are engaged primarily in real estate
acquisition, development and financing activities. All significant
intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1995 presentation.
Cash and Cash Equivalents
The Company considers all highly liquid assets purchased with maturities
of three months or less to be cash equivalents. These include
interest-bearing deposits at other financial institutions, other
short-term investments and securities purchased under agreements to
resell.
Investment and Mortgage-Backed Securities
In accordance with regulation, the Bank maintains an amount at least equal
to 5% of average daily withdrawable savings accounts plus short-term
borrowings in U.S. Government and other securities that are readily
convertible to cash. In 1994, the Bank adopted the provisions of Statement
of Financial Accounting Standards No. 115. "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 requires
debt and equity securities to be classified into one of three categories:
held to maturity, available for sale or trading. Securities held to
maturity are limited to debt securities that the holder has the positive
intent and ability to hold to maturity, and are reported at amortized
cost. Amortization is computed using a method which approximates the
interest method. Securities held for trading are limited to debt and
equity securities that are held principally to be sold in the near term,
and are reported at fair value with unrealized gains and losses reflected
in earnings. Securities held as available for sale consist of all other
securities and are reported at fair value with unrealized gains and losses
reflected as a separate component of stockholders' equity. Realized gains
and losses for securities classified as available for sale are included in
earnings, and are derived using the specific identification method for
determining the cost of securities sold. SFAS 115 prohibits retroactive
application to prior statements.
Interest and dividends on investment and mortgage-backed securities
include interest earned on these securities, amortization of related
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<PAGE>
premiums and discounts, and dividends earned on stock of the Federal Home
Loan Bank of San Francisco.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or estimated market
value, determined on an aggregate basis. Market values are calculated
based on direct market quotes for sales of similar loans. The Bank
protects the value of its loan origination pipeline and loans held for
sale portfolio against a potential rise in interest rates by utilizing
forward commitments to sell loans and mortgage-backed securities. These
forward sales are entered into at the time a rate is committed to a
potential borrower.
Loans Receivable
Loans are recorded at cost, net of discounts or premiums, unearned fees
and deferred fees. Discounts and premiums on purchased loans are amortized
using the interest method over the remaining contractual life of the
portfolio adjusted for anticipated prepayments. During 1994, the Bank
adopted the provisions of Statement of Financial Accounting Standards No.
114 "Accounting by Creditors for Impairment of a Loan" (SFAS 114). Under
SFAS 114, an impaired loan is measured based upon the present value of
future cash flows, discounted at the loan's effective rate, the loans
observable market price, or fair value if the loan is collateral
dependent. Generally, the factors utilized to determine impairment include
delinquency, borrower financial weaknesses and collateral value
deterioration. Interest is normally accrued to income as earned. All loans
defined as impaired and all loans 90 days or more delinquent, record
interest income on a cash basis. Since all of the Bank's loans are
collateral-dependent, losses are charged-off at the point of foreclosure
and the asset is written down to fair market value. SFAS 114 does not
apply to large groups of homogeneous loans under $500,000 that are
collectively evaluated for impairment, consisting of primarily residential
loans.
Real Estate Held for Development or Sale
Real estate held for development or sale consists of real estate
investments and foreclosed properties. Real estate investments are carried
at the lower of cost or net realizable value. Interest and carrying
charges related to certain properties held for development are capitalized
throughout the construction and development period using the Bank's cost
of funds.
Real estate acquired through settlement of loans is recorded at lower of
carrying value or fair value at the date of foreclosure and at the lower
of such amount or market value less estimated selling costs thereafter.
Revenue recognition on the disposition of real estate is dependent on the
transaction meeting certain criteria relating to the nature of the
property sold and terms of sale.
89
<PAGE>
Gain or Loss on Sale of Mortgage Loans and Loan Participations
Gains or losses resulting from sales of mortgage loans and loan
participations are recorded at the settlement of sale. A cash gain or loss
is recognized to the extent that the sales proceeds of the mortgage loans
or participations sold exceed or are less than the book value, net of
unearned discount or premium, at the time of sale. A present value gain or
loss is measured by the difference between the effective loan interest
rate paid by the borrower to the Bank and the net yield to the investor,
excluding normal servicing fees and considering estimated prepayments on
such loans. The resulting deferred premium or discount is amortized or
accredited to interest income using the interest method, adjusted as
necessary for loan prepayments in excess of estimated prepayments. No
deferred premium remained at December 31, 1995 or 1994.
Allowance for Losses
The Bank regularly reviews assets to determine that loss allowances are
maintained at adequate levels. In determining the level to be maintained,
management evaluates many factors including prevailing and anticipated
economic conditions, industry experience, historical loss experience, the
borrower's ability to repay and repayment performance and estimated
collateral values. During 1993, the Bank increased loan loss reserves
significantly as a result of declining economic conditions and
subsequently increasing delinquencies. During 1995 and 1994, loan loss
exposure improved, measured in part by the dollar amount of nonperforming
loans. Accordingly, the provision for loan losses was less significant.
Management uses the best information available for estimates of value.
Future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions and information used
in making the evaluation. When it is anticipated that real estate will be
held for an extended period of time, holding costs, including a discount
factor to give effect to the time value of money, are considered in
providing the valuation allowance. Regulatory examiners may require the
Bank to recognize additions to the allowances based upon their judgements
at the time of their examination.
Interest Rate Exchange Contracts
Interest rate exchange contracts (swaps and caps) are used by the Bank in
the management of its interest rate risk. Swaps are agreements in which
the Bank and another party agree to exchange interest payments on notional
principal amounts. Caps are agreements in which the Bank pays a fixed
option premium to an issuing party, and in return receives a specified
return on a notional principal amount should interest rates exceed a
specified minimum. The objective of these financial instruments is to
match estimated repricing periods of interest-sensitive assets and
liabilities in order to reduce interest rate exposure.
The effect on interest expense from these swaps is recognized currently
over the terms of the agreements and is shown as an adjustment to interest
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<PAGE>
on the hedged liability. The option premium paid on caps is included in
other assets in the statement of financial condition and is amortized to
interest expense on a straight-line basis over the term of the agreement.
Amounts receivable, if any, are recognized as a reduction of interest
expense. These instruments are used only to hedge asset and liability
portfolios, and are not used for speculative purposes.
Deposit Base Premium
The Company's branch acquisitions have been accounted for under the
purchase method of accounting in accordance with applicable accounting
requirements. Assets acquired and liabilities assumed were recorded at
their fair values at the date of acquisition. The excess of cost over fair
value of the net assets acquired in the amount of $9.3 million was
classified as deposit base premium based upon a core deposit study and is
being amortized over eight years on a straight-line basis. At December 31,
1995, $1.1 million of deposit base premium had a remaining life of two
years.
Loan Origination Fees
Loan origination fees, offset by certain direct costs of origination, are
recognized as an adjustment to yield over the life of the loan using the
effective interest method, which results in a constant return.
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank System and as such is
required to own capital stock in an amount specified by regulation,
generally 1% of net outstanding residential loans receivable. At December
31, 1995 and 1994, the Bank owned 103,952 and 87,369 shares, respectively,
of $100 par value capital stock of the Federal Home Loan Bank of San
Francisco.
Office Property and Equipment
Depreciation of office, property and equipment is computed on a
straight-line basis over the estimated useful lives of the various classes
of assets. Leasehold improvements are amortized on a straight-line basis
over the remaining term of the lease or the estimated useful life of the
asset, whichever is less. Maintenance and repairs are charged to expense
when incurred, and improvements are capitalized.
Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 107
(SFAS 107), fair value of financial instruments is disclosed throughout
the various notes herein as of December 31, 1995 and 1994. Market quotes
for investments and borrowings were obtained from representative
over-the-counter quotations based on transactions from major market
publications. Fair value of loans and savings deposits was calculated by
estimating the net present value of future cash flows using current market
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<PAGE>
rates of interest. Prepayment assumptions were obtained from standard
industry publications.
Taxes on Income
The Company accounts for income taxes in accordance with SFAS 109
"Accounting for Income Taxes". Under the deferred method, annual income
tax expense is matched with pre-tax accounting income by providing
deferred taxes at current tax rates for timing differences between the
determination of net income for financial reporting and tax purposes. The
objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities
at enacted tax rates expected to be in effect when such amounts are
realized or settled.
Income Per Share
Income per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the year. Common stock
equivalents do not have a material effect on the income per share
calculation.
Impact of New Accounting Standards
In May, 1995, FASB issued Statement of Financial Accounting Standards No.
122 (SFAS122), an amendment of FASB statement FAS65 "Accounting for
Mortgage Servicing Rights". SFAS122 requires that the rights to service
mortgage loans for others be recognized as a separate asset, however those
servicing rights are acquired. The total cost of originating or purchasing
mortgage loans should be allocated between the loan and the servicing
rights based upon their relative fair values. The statement also requires
the assessment of all capitalized mortgage servicing rights for impairment
to be based on current fair value of those rights. The Bank will
implement SFAS122 starting January 1, 1996. The impact of SFAS122 on the
Bank's results of operations will be to increase reported earnings by an
amount which will vary with the level of loans sold and market conditions.
NOTE 2: CASH AND SECURITIES
Cash and Short-Term Securities
The Bank's short-term liquid investments consist primarily of deposits
with the Federal Home Loan Bank and mutual fund investments. The mutual
fund investments consist of overnight and short-term maturity type funds.
The Bank's investment in overnight mutual funds totalled $4,423,776 and
$2,901,268 at December 31, 1995 and 1994, respectively. These funds
yielded 5.86% and 6.14%, respectively, and are backed by U.S. Government
securities bought under repurchase agreements and Federal Funds.
Securities Purchased Under Agreements to Resell
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<PAGE>
The Bank enters into purchases of U.S. Government securities under
agreements to resell (repurchase agreements). Due to the short-term nature
of the securities and the creditworthiness of primary dealers, the Bank
does not obtain control of the underlying securities. The following is a
summary of these securities at December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
U.S. Government securities $ - $ -
Average balance during each year - 16,667
Maximum balance at any month-end - 100,000
Weighted average interest rate - -
Weighted average days to maturity - -
</TABLE>
Investment Securities
The Bank's investment portfolio is comprised primarily of U.S. Government
and agency securities and collateralized mortgage obligations (CMO's)
which are generally backed by mortgage-backed securities issued by
agencies and private issues. The amortized cost and estimated market
values of investment securities are as follows at December 31:
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<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES MARKET VALUE
<S>
1995 AVAILABLE FOR SALE: <C> <C> <C> <C>
U.S. Government and Agency
Securities $ 47,808,939 $ 327,903 $ 117,333 $ 48,019,509
CMO's 95,329,548 494,824 774,257 95,050,115
Other securities 1,075,462 - 280 1,075,182
TOTAL AVAILABLE
FOR SALE $144,213,949 $ 822,727 $ 891,870 $144,144,806
1994 AVAILABLE FOR SALE:
U.S. Government & Agency
Securities $ 40,548,985 $ 2,169 $ 1,302,426 $ 39,248,728
CMO's 11,677,479 3,922 491,640 11,189,761
TOTAL AVAILABLE
FOR SALE $ 52,226,464 $ 6,091 $ 1,794,066 $ 50,438,489
1994 HELD TO MATURITY:
U.S. Government & Agency
Securities $ 6,335,270 $ 258 $ 392,119 $ 5,943,409
CMO's 46,414,339 - $ 4,654,358 41,759,981
Other Securities 10,000 - - 10,000
TOTAL HELD TO MATURITY $ 52,759,609 $ 258 $ 5,046,477 $ 47,713,390
</TABLE>
The market value of these investment securities is estimated based on
prices published in financial newspapers or bids received from securities
dealers.
The Bank held investments in privately issued CMO's totalling $11,303,649
and $835,980 at December 31, 1995 and 1994, respectively. At December 31,
1995, the Bank held one A-rated CMO with an amortized book value of $5.8
million. All other privately issued CMO's were AAA-rated. All of the
Bank's CMO investments are considered REMIC issues. The Bank did not hold
investments of any private issues where the aggregate book value exceeded
10% of stockholders' equity.
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<PAGE>
The Bank held $7.5 million in structured notes issued by government
agencies at December 31, 1995 and 1994, and are included with the U.S.
Government and agency issues.
95
<PAGE>
The maturities of Bank investments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Estimated Amortized Cost Market Value Yield By
Maturity
Available for Sale:
<S> <C> <C> <C>
Within 1 year $ 15,017,498 $ 15,133,239 6.34%
1-5 years 32,332,878 32,362,984 5.84%
6-10 years 7,500,000 7,536,158 5.15%
Over ten years 89,363,573 89,112,425 6.83%
$ 144,213,949 $ 144,144,806 6.47%
</TABLE>
Issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. This right may cause actual maturities to
differ from contractual maturities summarized above.
Upon adoption of SFAS 115, the Bank was permitted to make a one-time
transfer of investment and mortgage-backed securities into the available
for sale portfolio. The amortized cost and market value at the time of
transfer for these securities was $39,203,191 and $39,766,797,
respectively. This resulted in an unrealized gain of $563,606. During
1995, the Bank made a decision to restructure its balance sheet by selling
mortgage-backed securities from the held to maturity portfolio. As a
result, the Bank's entire held to maturity portfolio, consisting of
securities with an amortized cost of $69,381,748 and a market value of
$68,425,509, was transferred to the available for sale portfolio. At
December 31, 1995, the Bank recorded an increase to shareholders' equity
of $2,184,267 as a result of net unrealized gains on securities, net of
tax effect. The Bank recorded unrealized losses, net of tax effect, of
$1,686,809 at December 31, 1994, resulting in a reduction to shareholders'
equity.
During 1995, the Bank sold $6,987,813 of securities available for sale,
recognizing gross gains of $4,989 and gross losses of $40,916. This
compares to sales of $14,154,170 during 1994, recognizing gross losses of
$66,374. No sales of securities occurred from the investment portfolio
during 1993.
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<PAGE>
Trading Account Securities
During 1994, trading account operations were discontinued by the Bank, and
the remaining securities were transferred out of the trading portfolio at
market value. As a result, the Bank had no balance in the trading
portfolio as of December 31, 1995 and 1994. In 1994, the Bank transferred
$10,014,089 of trading securities to the available for sale portfolio
after recognizing gross losses of $309,563, and $4,875,000 to the held to
maturity portfolio after recognizing gross losses of $126,563. The Bank
sold $41,186,243 of U.S. Government and agency securities from the trading
portfolio in 1994, realizing gross gains of $38,285 and gross losses of
$226,708. This compares to sales of $212,655,187 in 1993, with gross
realized gains of $391,498 and gross losses of $427,200.
NOTE 3: MORTGAGE-BACKED SECURITIES
Amortized cost and estimated market values of mortgage-backed securities
at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS
GROSS UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
<S>
1995
AVAILABLE FOR SALE:
FHLMC MORTGAGE-BACKED <C> <C> <C> <C>
SECURITIES $ 82,793,531 $ 2,007,281 $ 57,592 $ 84,743,220
FNMA MORTGAGE-BACKED 30,169,481 505,419 -- 30,674,900
SECURITIES
FHA TITLE 1 SECURITIES 2,580,751 -- 798,947 1,781,804
TOTAL AVAILABLE FOR $ 115,543,763 $ 2,512,700 $ 856,539 $117,199,924
SALE:
1994
AVAILABLE FOR SALE:
FHLMC MORTGAGE-BACKED
SECURITIES $ 7,541,674 $ -- $ 387,102 $ 7,154,572
HELD TO MATURITY:
FHLMC MORTGAGE-BACKED
SECURITIES $ 117,690,955 $ 239,112 $6,351,753 $111,578,314
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<PAGE>
FNMA MORTGAGE-BACKED 37,990,105 -- 1,903,076 36,087,029
SECURITIES
FHA TITLE 1 SECURITIES 3,755,228 -- 172,720 3,582,508
TOTAL HELD TO MATURITY $ 159,436,288 $ 239,112 $8,427,549 $151,247,851
</TABLE>
The market value of mortgage-backed securities is estimated based on
prices published in financial newspapers or bids received from securities
dealers. The weighted average interest rate of the mortgage-backed
securities was 6.84% and 7.42% as of December 31, 1995 and 1994,
respectively.
During 1995, the Bank made a decision to restructure its balance sheet by
selling mortgage-backed securities from the held to maturity portfolio.
As a result, the Bank's entire held to maturity portfolio, consisting of
mortgage backed securities with an amortized cost of $154,384,463 and a
market value of $154,351,057, was transferred to the available for sale
portfolio. Sales of mortgage-backed securities totalled $45,071,447 in
1995, recognizing gross gains of $561,867 and gross losses of $435,821.
No sales of mortgage-backed securities occurred in 1994 or 1993.
The following mortgage-backed securities were pledged as collateral for
borrowings at December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATION (NOTE 9) SERIES B $ 6,477,805 $ 7,955,746
</TABLE>
NOTE 4: LOANS RECEIVABLE, NET
Loans receivable, net by type of loan, at December 31, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
<S>
Residential mortgage loans:
Existing structures: <C> <C>
1-4 Unit dwellings $ 745,793,031 $735,338,613
5 or more unit dwellings 38,129,869 37,109,786
98
<PAGE>
Construction:
1-4 Unit Dwellings 57,516,807 59,792,760
5 or more unit dwellings 1,278,289 4,852,865
Total residential $ 842,717,996 $837,094,204
Commercial loans $ 55,517,994 $ 57,818,197
Land loans $ 34,226,637 $ 33,861,805
Other loans:
Educational loans $ 28,850 $ 79,788
Savings loans 2,196,837 1,952,447
Credit reserve loans and other 476,876 505,507
Total other loans $ 2,702,563 $ 2,537,742
Total loans $ 935,165,190 $931,311,768
Less: $ 5,628,452 $ 6,607,048
Unamortized loan fees
Discounts and premiums, net 292,631 222,594
Allowance for loan losses 8,173,807 7,725,500
Loans receivable, net $ 921,070,300 $916,756,626
Weighted average interest rate 7.92% 7.02%
At December 31, 1995 and 1994, the above table includes $13,153,264 and $2,655,408 of loans held for
sale at book value, which were less than market. The estimated fair value of loans, as of December 31,
is as follows:
1995 1994
Residential $ 849,085,000 $ 801,224,000
Commercial 51,059,000 57,677,000
Land 32,733,000 30,435,000
Other loans 2,703,000 2,383,000
Total $ 935,580,000 $ 891,719,000
</TABLE>
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential,
commercial, land and other loans. Each loan is further segmented into
account types with similar characteristics.
The fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated discount and prepayment
rates. Discount rates were based on published information with
adjustments made, as required, by an estimate of the differences among
products. Estimates of prepayment speeds were obtained from published
information. Fair value of nonperforming loans was based on estimated
cash flows. Assumptions regarding credit risk, cash flows and discount
rates were judgementally determined using available market information and
specific borrower information.
99
<PAGE>
Loans in process, primarily related to construction loans, are netted in
total loans. They amounted to $34,810,00 and $34,102,000 at December 31,
1995 and 1994, respectively.
The Bank serviced loans and participating interests in loans owned by
investors in the amount of $548,462,487 and $509,128,597 as of December
31, 1995 and 1994, respectively.
Activity in the premium account from present value gains and losses on
loans sold is shown in the table below for the periods ending December 31:
100
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Beginning net premium balance $ - $ 227,329 $ 790,576
Net present value losses recognized - - (50,000)
Less: premium amortized and written off - $ (227,329) (513,247)
$ - $ - $ 227,329
</TABLE>
Certain of the Bank's real estate loans are pledged as collateral for
borrowings as set forth in Note 8.
At December 31, 1995, 1994 and 1993, there were 79, 82 and 103 mortgage
loans, respectively, with unpaid principal balances of approximately
$8,010,000, $7,466,000 and $11,600,000, respectively, which were past due
for three months or more or were in the process of foreclosure. The
interest that would have been accrued on these loans, but was not,
amounted to $262,975, $370,911 and $993,320 for 1995, 1994 and 1993,
respectively.
Impaired loans include troubled debt restructurings and loans on which
there is a probability that the Bank will not be able to collect all
amounts due. The Bank adopted SFAS 114 pertaining to impaired loans on
January 1, 1994. The following summarizes the balances relating to SFAS
114 impaired loans at December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Outstanding loan balances $ 10,270,248 $ 9,740,207
Loans with valuation allowances 5,218,830 3,519,432
Valuation allowances 1,190,000 724,000
Commitments to advance funds 666,893 829,235
Average balance for year 9,053,868 15,267,712
</TABLE>
101
<PAGE>
The Bank records interest income on loans classified as impaired or past
due for three or more months on a cash basis.
Interest income recorded on SFAS 114 impaired loans at year-end was
$387,681 and $424,294 for 1995 and 1994, respectively. At December 31,
1993 the Bank recorded $445,074 in interest income on restructured
troubled debt loans.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1992 $ 8,042,000
Provision for losses 2,985,000
Charge-offs (1,062,000)
Balance at December 31, 1993 $ 9,965,000
Provision for losses 281,000
Charge-offs (2,520,500)
Balance at December 31, 1994 $ 7,725,500
Provision for losses 1,633,500
Charge-offs (1,185,193)
Balance at December 31, 1995 $ 8,173,807
</TABLE>
The allowance for loan losses relates entirely to loans secured by real
estate. Consumer loans represent a minor portion of the Bank's total
portfolio. Losses in this portfolio are written off directly against the
asset.
All mortgage loans are secured by real estate in California, generally
located within the Bank's primary lending territory (i.e., Central
Northern California). The Bank's credit risk is therefore related to the
economic condition of the Central Valley. Loans are made on the basis of
the borrowers' ability to repay; however, collateral is generally a
secondary source for loan qualification. On occasion, loans have been
purchased that are secured by single-family residences in Southern
California and Northern California's Bay Area.
NOTE 5: REAL ESTATE HELD FOR DEVELOPMENT OR SALE
Real estate development and sale activities are conducted primarily
through Stockton Service Corporation, a wholly-owned service corporation
of the Bank. Capsulized financial information for Stockton Service
Corporation follows:
102
<PAGE>
Statements of Financial Condition
<TABLE>
<CAPTION>
At December 31 1995 1994
<S> <C> <C>
Assets: $ 413,057 $ 260,227
Cash
Real estate held for development at cost:
Partially developed and completed projects 6,542,931 15,597,723
Land held for development/sale 2,547,910 1,571,840
Capitalized interest 518,483 1,229,451
Less: loss reserves (3,106,250) (3,708,275)
Total real estate held $ 6,503,074 $14,690,739
Other assets 3,174,030 1,948,971
Total assets $10,090,161 $16,899,937
Liabilities:
Notes payable - Stockton Savings $8,900,000 $13,800,000
Notes payable - others 0 0
Other liabilities 2,823,194 1,625,011
Stockholder's (deficit) equity (1,633,033) 1,474,926
Total liabilities and stockholder's equity $10,090,161 $16,899,937
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations
Years ended December 31 1995 1994 1993
<S> <C> <C> <C>
Income:
(Loss) gain on sale of real $ (27,985) $ 472,766 $ 1,186,493
estate held for development, net
Provision for losses (4,121,878) (2,650,000) -
Other income 54,531 7,959 14,061
Total (loss) income $(4,095,332) $(2,169,275) $ 1,200,554
Expenses:
Interest expense $ 977,921 $ 1,250,225 $ 1,478,131
Less: interest capitalized (162,292) (532,566) (761,271)
General and administrative 280,910 377,312 336,268
expense
Total expenses $ 1,096,539 $ 1,094,971 $ 1,053,128
(Loss) income before tax $(5,191,871) $(3,264,246) $ 147,426
Income tax (benefit) expense (2,083,913) (1,310,203) 60,511
Net (loss) income $(3,107,958) $(1,954,043) $ 86,915
Statements of Cash Flows
Years ended December 31 1995 1994 1993
Cash Flows From Operations:
Net (loss) income $(3,107,958) $(1,954,043) $ 86,915
Provision for losses 4,121,878 2,650,000 -
Loss (gain) on sale of real 27,985 (472,766) (1,186,493)
estate
(Decrease) increase in income (6,611) (173,744) 60,511
taxes payable
104
<PAGE>
(Decrease) increase in net (21,156) 632 (25,508)
accrued interest
Other, net 891 (296,178) 123,867
Net cash used by operations $ 1,015,029 $ (246,099) $ (940,708)
Cash Flows From Investing
Activities:
Investments in real estate $(6,476,575) $(8,852,726) $(13,155,457)
Proceeds from sales 10,514,376 11,857,704 18,785,248
of real estate
Decrease in notes - 378,265 256,696
receivables, net
Net cash provided by
Investing activities $ 4,037,801 $ 3,383,243 $ 5,886,487
Cash Flows From
Financing Activities:
Notes payable, net $(4,900,000) $(3,135,802) $ (5,668,254)
Net Cash Used
By Financing Activities $(4,900,000) $(3,135,802) $ (5,668,254)
Net increase (decrease) in cash $ 152,830 $ 1,342 $ (722,475)
Cash at the beginning of the year 260,227 258,885 981,360
Cash at the end of the year 413,057 260,227 258,885
</TABLE>
Activity in the allowance for losses is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1992 $ 3,709,153
Provision for losses -
Charge-offs (1,619,295)
Balance at December 31, 1993 $ 2,089,858
Provision for losses 2,650,000
105
<PAGE>
Charge-Offs (1,031,583)
Balance at December 31, 1994 $ 3,708,275
Provision for losses 4,121,878
Charge-offs (4,723,903)
Balance at December 31, 1995 $ 3,106,250
</TABLE>
Also included in real estate held for development or sale is foreclosed
real estate held by the Bank at December 31 as follows:
106
<PAGE>
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Gross foreclosed real estate $ 9,829,615 $ 13,685,483
Allowance for losses (3,852,507) (3,142,361)
Net balance of foreclosed real estate $ 5,977,109 $ 10,543,122
</TABLE>
Activity in the allowance for losses on foreclosed property is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1992 $ 702,000
Provision for losses 1,245,000
Charge-offs (272,345)
Balance at December 31, 1993 $1,674,655
Provision for losses 2,385,000
Charge-offs (917,294)
Balance at December 31, 1994 $3,142,361
Provision for losses 1,630,000
Charge-offs (919,854)
Balance at December 31, 1995 $3,852,507
</TABLE>
NOTE 6: ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Loans receivable $4,076,669 $3,112,506
Mortgage-backed securities 775,906 1,055,280
Investment securities 1,046,078 987,280
Other 193,682 153,017
Interest and Dividends Receivable $6,092,335 $5,308,083
</TABLE>
107
<PAGE>
NOTE 7: SAVINGS AND CHECKING ACCOUNTS
Savings and checking accounts by type and rate as of December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Passbook accounts at 2.20% $ 47,423,181 $ 53,375,855
NOW accounts at 1.10% and 1.30% 108,611,667 110,217,237
Money market deposits at 2.60% and 2.40% 66,066,290 85,843,980
$222,101,138 $ 249,437,072
Weighted average interest rate 1.96% 2.05%
Certificate Accounts:
2.00% to 2.99% $ 509,137 $ 5,819,000
3.00% to 3.99% 9,818,635 119,104,201
4.00% to 4.99% 132,273,975 263,035,827
5.00% to 5.99% 372,309,964 222,917,030
6.00% to 6.99% 213,362,130 131,619,588
7.00% to 7.99% 9,360,344 7,068,805
8.00% to 8.99% 271,416 1,246,668
9.00% to 9.99% 141,036 592,024
10.00% to 10.99% - 229,325
$738,046,637 $ 751,633,348
Weighted average interest rate 5.59% 4.91%
Total Savings $960,147,775 $1,001,070,420
108
<PAGE>
Weighted average interest rate 4.75% 4.19%
(as of dates indicated above)
</TABLE>
Under SFAS 107, the fair value of deposits with no stated maturity, such
as noninterest bearing demand deposits, savings and NOW accounts, and
money market and checking accounts, is equal to the amount payable on
demand as of December 31. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of savings and checking
accounts as of December 31, 1995 and 1994 was $961,625,000 and
$986,437,000, respectively.
Certificate accounts with balances of $100,000 or more totalled
$171,026,736 and $223,382,000 at December 31, 1995 and 1994, respectively.
Broker-acquired deposits were $4,312,943 and $61,024,000 at December 31,
1995 and 1994, respectively.
At December 31, 1995, certificate maturities were as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $576,001,944
1997 115,452,586
1998 30,002,545
1999 5,831,088
2000 -
2001 and thereafter 10,758,474
$738,046,637
</TABLE>
Interest on savings accounts for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Passbook accounts $ 1,147,524 $ 1,237,088 $ 1,329,324
NOW accounts (including money market NOW 1,445,350 1,628,824 1,946,633
accounts)
Money market and certificate accounts 44,256,997 32,265,255 31,792,727
Interest forfeitures (204,825) (152,166) (144,653)
109
<PAGE>
Hedging effect of interest rate swaps 1,384,833 3,241,210 2,917,838
(note 18)
Net interest expense $ 48,029,879 $38,220,211 $37,841,869
</TABLE>
Interest credited to customer deposits amounted to $39,994,929,
$30,584,198 and $30,986,076 in 1995, 1994 and 1993, respectively.
NOTE 8: ADVANCES FROM THE FEDERAL HOME LOAN
BANK OF SAN FRANCISCO
Each Federal Home Loan Bank is authorized to make advances to its member
associations, subject to such regulations and limitations as the Bank may
prescribe. As of December 31, 1995 and 1994, the Bank had pledged its
stock in the Federal Home Loan Bank of San Francisco and real estate loans
with outstanding principal balances of approximately $318,461,647 and
$357,208,102, respectively, to secure current as well as future
borrowings.
The maturity schedules for advances outstanding as of December 31, 1995
and 1994 is shown in the following table:
<TABLE>
<CAPTION>
Principal Amount
Maturity Interest Rates 1995 1994
<S> <C> <C> <C>
1995 4.61% $ - $ 35,000,000
1996 5.44 - 4.36% 62,500,000 15,000,000
1997 6.04 - 6.44% 10,000,000 5,000,000
1998 6.00 - 5.90% 60,000,000 35,000,000
1999 6.94% 20,000,000 20,000,000
Thereafter 7.24% 10,000,000 -
$162,500,000 $110,000,000
Weighted average interest rate (as
of dates indicated above) 5.98% 5.49%
</TABLE>
110
<PAGE>
The fair value of FHLB advances was based on the discounted cash flows.
The discount rate is estimated using the rates currently offered for
advances of similar remaining maturities. The estimated market value of
advances from the Federal Home Loan Bank at December 31, 1995 and 1994 was
$163,607,000 and $105,261,000, respectively.
The interest on advances is payable monthly. The Bank paid interest on
advances of $7,145,216, $5,811,011 and $3,582,302 for the years ended
December 31, 1995, 1994 and 1993, respectively.
NOTE 9: COLLATERALIZED MORTGAGE OBLIGATIONS
On December 16, 1987, Stockton Securities Corporation issued Series B
Collateralized Mortgage Obligations (the "Bonds"), totalling $56,700,000
(net of discounts, $50,959,288) pursuant to an indenture dated January 1,
1985. Concurrent with the issuance of the Bonds, the Bank transferred
Federal Home Loan Mortgage Corporation participation securities (the
"FHLMC Securities") to Stockton Securities Corporation with aggregate
principal balances of approximately $56,960,000 to serve as collateral for
the Bonds. The weighted average pass-through rates on the FHLMC Securities
were 9.0%. The outstanding principal balances of the FHLMC Securities
amounted to approximately $6,738,000 and $7,956,000 at December 31, 1995
and 1994, respectively.
The following table summarizes certain information with regard to the
Bonds at December 31:
111
<PAGE>
<TABLE>
<CAPTION>
SERIES B:
REMAINING
ORIGINAL REMAINING FAIR MARKET PRINCIPAL FAIR MARKET
INTEREST PRINCIPAL PRINCIPAL VALUE BALANCE VALUE
STATED MATURITY RATE BALANCE BALANCE 1995 1995 1994 1994
<S>
Class B-1 <C> <C> <C> <C> <C> <C>
Dec. 20, 2000 8.25% $30,770,000 $ - $ - $ - $ -
Class B-2
Dec. 20, 2002 8.25% 8,750,000 - - - -
Class B-3
Dec. 20, 2007 8.25% 13,110,000 - - 739,906 736,000
Class B-4
Dec. 20, 2017 8.25% 4,070,000 6,462,509 6,477,000 7,243,345 6,968,000
$56,700,000 $ 6,462,509 $ 6,477,000 $ 7,983,251 $ 7,704,000
Less discount $ 5,740,712 $ - $ - $ 85,456 -
$50,959,288 $ 6,462,509 $ 6,477,000 $ 7,897,795 $ 7,704,000
</TABLE>
The fair market value of Series B was calculated from actual market quotes
of the Bonds.
In accordance with the terms of the indenture, all payments of principal
on the Bonds have been allocated among the Classes in the order of their
respective stated maturities so that no payment of principal has been made
on any of the Bonds until all Bonds having an earlier stated maturity have
been paid in full. Payments of principal are made monthly in an amount
equal to the excess of principal and interest collected each month on the
FHLMC Securities, plus the reinvestment income thereon, over interest and
expenses payable on the Bonds. Since the rate of payment of principal of
each Class of Bonds depends on the rate of payment (including prepayments)
on the FHLMC Securities, the actual maturity of any Class of Bonds may
occur earlier than its stated maturity. Interest on the Class B-4 Bonds
was accrued and added to the principal thereof until April 1995 when all
earlier classes of Bonds had been paid and certain other conditions in the
indenture were met, at which time semiannual and monthly payments of
principal and interest on the Class B-4 Bonds commenced.
The following is a schedule of the estimated repayments on the Bonds for
the next five years and thereafter. The schedule is based upon the
assumption that repayments of the loans underlying the FHLMC Securities
are at 175% of standard prepayment assumptions on Series B Bonds, which is
112
<PAGE>
consistent with historical prepayments, and assumes that future
prepayments will follow the same trend.
<TABLE>
<CAPTION>
Series B:
<S> <C>
1996 $ 1,424,500
1997 691,900
1998 610,500
1999 529,100
2000 488,400
Thereafter 2,718,109
$ 6,462,509
</TABLE>
NOTE 10: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into sales of U.S. Government securities and
mortgage-backed securities under agreements to repurchase (reverse
repurchase agreements). Reverse repurchase agreements are treated as
financings, and the obligations to repurchase securities sold are
reflected as a liability in the consolidated statements of financial
condition. The dollar amount of securities underlying the agreements
remains in the asset accounts. The following is a summary of these
securities at December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Securities sold under agreements to repurchase $35,408,000 $64,978,000
Average balance during the year 59,197,595 37,506,451
Maximum balance at any month-end 95,571,000 70,712,900
Weighted average interest rate 5.90% 6.03%
</TABLE>
These agreements are collateralized by U.S. Government securities and
mortgage-backed securities. The related collateral was held by the dealer.
The estimated market value of securities sold under agreements to
repurchase as of December 31, 1995 and 1994 was $35,404,000 and
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<PAGE>
$64,933,000, respectively. The fair market value was calculated using the
rates currently offered for agreements of similar remaining maturities.
NOTE 11: INCOME TAXES
The Company and Bank file consolidated federal income tax returns on a
calendar year basis. If certain conditions are met in determining taxable
income, the Bank is allowed a special bad debt deduction based on a
percentage of taxable income (presently 8%) or on specified experience
formulas. The Bank used the percentage of taxable income method for bad
debt deductions in 1994, 1993 and anticipates using such method in 1995.
Under the provisions of SFAS 109, savings and loan associations: (1) do
not recognize a deferred tax liability for the tax effects of the "base
year" (December 31, 1987) tax bad debt reserve unless it becomes apparent
that the reserve will reverse in the foreseeable future, (2) do recognize
a deferred tax liability for increases in the tax bad debt reserve over
the "base year" tax bad debt reserve and (3) do recognize a deferred tax
asset, reduced by any necessary valuation allowances for the allowance for
loan losses for financial reporting purposes.
Federal income and state franchise tax expense (benefit) in the
consolidated statements of operations is comprised of the following:
<TABLE>
<CAPTION>
1995 Current Deferred Total
<S> <C> <C> <C>
Federal income tax expense $ 1,476,000 $ (354,000) $ 1,122,000
California franchise tax expense 1,272,000 (864,000) 408,000
$ 2,748,000 $(1,218,000) $ 1,530,000
1994
Federal income tax expense $ 4,271,000 $(2,719,000) $ 1,552,000
California franchise tax expense 919,000 (155,000) 764,000
$ 5,190,000 $(2,874,000) $ 2,316,000
1993
Federal income tax expense $ 5,815,000 $ (246,000) $ 5,569,000
California franchise tax expense 2,076,00 (180,000) 1,896,000
$ 7,891,000 $ (426,000) $ 7,465,000
</TABLE>
Amounts for the current year are based upon estimates and assumptions as
of the date of this report and could vary from amounts shown on the tax
returns filed. Accordingly, the variances from amounts reported for prior
114
<PAGE>
years are primarily the result of adjustments to conform to prior years'
tax returns as filed.
Under SFAS 109, the temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
significant components of the deferred tax asset and liability amounts for
the years ended December 31, 1995 and 1994 relate to the following:
<TABLE>
<CAPTION>
1995 1994
<S>
Deferred Tax Assets: <C> <C>
Book provision for loan losses in excess of tax $ 3,398,000 $ 3,251,000
Book provision for losses on real estate in excess of tax 2,931,000 2,673,000
State franchise taxes 240,000 341,000
Tax effect of unrealized losses - 989,000
REMIC discount and other amortization 1,488,000 585,000
Other income deferred for tax purposes 1,177,000 757,000
Total gross deferred tax assets $ 9,234,000 $ 8,596,000
Less: valuation allowance - -
Net deferred tax assets $ 9,234,000 $ 8,596,000
Deferred Tax Liabilities:
Loan fee income deferred for tax purposes $ 4,544,000 $ 4,414,000
FHLB stock dividends deferred for tax purposes 2,131,000 1,924,000
Tax depreciation in excess of book depreciation 231,000 134,000
Tax effect of unrealized gains 1,579,000 -
Mark to market - 25,000
115
<PAGE>
1995 1994
Total deferred tax liabilities $ 8,485,000 $ 6,497,000
Net deferred taxes $ 749,000 $ 2,099,000
</TABLE>
Management believes a valuation allowance is not needed to reduce the
deferred tax asset because there is no material portion of the deferred
tax asset that will not be realized through sufficient taxable income
within the carryback and carryforward periods.
The reconciliation from the statutory income tax rate to the consolidated
effective tax rate, expressed as a percentage of pre-tax income, is as
follows:
116
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 34.0% 35.0%
California franchise tax, net of federal income tax
benefit 7.9% 7.4% 7.2%
Adjustments to amortization
Expenses as a result of change in tax law - (7.4%) -
Other 1.7% - 2.1%
44.6% 34.0% 44.3%
</TABLE>
NOTE 12: REGULATORY CAPITAL & STOCKHOLDERS' EQUITY
As a result of the Financial Institutions Reform, Recovery and
Enforcement Act, regulatory capital requirements were issued by the Office
of Thrift Supervision in December 1989. The regulations require that
savings associations meet a three-part capital test that consists of the
following: i) core capital must equal 3% of total assets, ii) tangible
capital must equal 1.5% of total assets, and iii) risk-based capital must
equal 8% of risk-weighted assets. In measuring compliance with the three
capital standards, loans to and investments in subsidiaries engaged in
activities impermissible to national banks (notably investing in real
estate) must be deducted from capital. There is a phase-in on the
impermissible activity deduction using the balance of investments held at
April 12, 1989. Any investment beyond this amount is considered excess
investment and is deducted from capital immediately. At December 31, 1995,
the Bank was required to deduct from capital 60% of its investment in real
estate. This compares to 40% at December 31, 1994. As of July 1, 1996,
100% of the Bank's investment in real estate must be deducted from
capital. The Bank's loans to and investments in its real estate investment
subsidiary totalled $8.9 million and $15.3 million at December 31, 1995
and 1994, respectively.
Retained earnings at December 31, 1995 includes $8,168,000 which has
been allocated on a tax basis by the Bank to bad debt reserves for federal
income tax purposes and for which no provision for income taxes has been
made. If, in future periods, this amount is used for any purpose other
than absorbing losses for bad debts, the Bank will be liable for federal
117
<PAGE>
income tax at the then current corporate tax rate. The Bank does not
anticipate using this amount in a manner which will create a federal
income tax liability. In addition, a liquidation account with a current
balance of $487,507 is reserved by the Bank as a result of the Bank's
conversion from a mutual to a stock association.
The Treasury Department, the OTS, and the Federal Deposit Insurance
Corporation have all recommended to Congress that institutions with
SAIF-assessable deposits pay a special assessment in an amount sufficient
to increase the SAIF reserve ratio to 1.25%. Representatives from the
Senate and House Banking Committees have agreed on a proposal under which
SAIF institutions will pay a one-time assessment of approximately 80 basis
points on all deposits held as of March 31, 1995. The resulting assessment
for the Bank would be approximately $8.1 million. The resulting after tax
effect of the assessment would be to reduce the stockholders' equity of
the Bank by approximately $4.7 million.
NOTE 13: PENSION PLAN
Due to escalating costs, the Bank curtailed future benefit accruals and
service under the noncontributory defined benefit pension plan (the
"Plan") by "freezing" the Plan June 30, 1995 under the provisions of
Statement of Financial Accounting Standards No. 88. Assets of the Plan are
maintained by a trustee and administered by the Bank's advisory board. In
January 1987, the Bank adopted the provisions of Statement of Financial
Accounting Standards No. 87 on a prospective basis. The purpose of this
policy is to reflect in the projected benefit obligation all benefit
improvements to which the Bank is committed as of the current valuation
date and to use a market-related value of assets to determine pension
cost. The Bank's policy is to fund the pension cost accrued on a projected
benefit cost method. Due to the Plan curtailment, the Bank experienced a
pension gain of $1,167,587 for the year ended December 31, 1995, compared
to pension expenses of $859,110 and $616,415 for 1994 and 1993
respectively. The December 31, 1995 and 1994 disclosure values are
projected from calculations prepared as of July 1, 1995 and 1994,
respectively. These values utilized a 7.00%, 8.50%, and 7.00% discount
rate for December 31, 1995, 1994 and 1993, respectively. A 4.50% rate of
compensation increase was used for December 31, 1994 and 1993; however,
due to the Plan curtailment, compensation increases will have no future
impact to the plan obligations. The pension expense is based on market
conditions as of January 1, 1996, 1995 and 1994 and has been based on a
discount rate of 7.00% for 1995, 8.50% for 1994, and 7.00% for 1993. The
expected long-term rate of return on assets was 9.00% for all three years.
118
<PAGE>
The following table provides a reconciliation of the Plan's estimated
funded status and amounts recognized in the Bank's financial statements at
December 31:
119
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Pension benefit obligations:
Accumulated benefit obligation:
Vested $3,762,661 $2,674,534 $ 2,805,714
Nonvested 421,039 365,979 391,151
$4,183,700 $3,040,513 $ 3,196,865
Projected benefit obligation $4,183,700 $4,794,442 $ 5,466,394
Market value of plan assets (3,925,856) (3,912,583) (3,080,654)
Unfunded projected benefit $ 257,844 $ 881,859 $ 2,385,740
obligation
Unrecognized net transition - - -
obligation
Unrecognized net transition - 386,174 407,274
asset
Unrecognized prior service costs - (305,251) (348,737)
Unrecognized net gain (loss) 50,404 513,053 (764,064)
Additional liability - - -
Pension liability recognized $ 308,248 $1,475,835 $ 1,680,213
Net pension cost for the year included the following components:
1995 1994 1993
Service cost $ 321,604 $ 822,657 $ 642,022
Interest cost 346,988 365,148 309,837
Actual return on plan assets (1,011,502) 16,482 (269,962)
Other components - net (824,677) (345,177) (65,482)
Net periodic pension cost $(1,167,587) $ 859,110 $ 616,415
</TABLE>
120
<PAGE>
Included in the Plan assets are 6,290 common shares of the Company's
stock. The market value of these shares as of December 31, 1995 and 1994
was $128,945 and $75,840, respectively. The market price of the Company's
stock held in the Plan as of January 31, 1996 was $122,655. Dividends
received on Company stock were $2,767.
On August 1, 1995, the Bank modified its 401(k) plan. Prior to August 1,
the 401(k) was funded by the employees. On August 1, 1995, the 401(k) plan
became a defined contribution profit sharing plan. The Bank makes a
monthly cash contribution equal to 5% of each employee's base salary and
an employer matching contribution of .25% for each 1.00% of employee
contribution up to a maximum contribution of 1.00% by the Bank. The Bank
also contributes 1.50% of each employee's base salary in CFHC stock on a
monthly basis. The Bank's total contribution ranges therefore from 6.50%
of base salary to 7.50% of base salary, depending on the level of employee
contribution. The assets of the 401(k) plan are maintained by a trustee
and administered by the employer. The administrative costs of the plan are
paid by the Bank. These costs amounted to $21,784, $20,574 and $8,263 for
the years ended December 31, 1995, 1994 and 1993, respectively.
NOTE 14: STOCK OPTIONS AND DIVIDEND REINVESTMENT PLAN
At December 31, 1983, 264,000 shares of common stock were reserved for
issuance to key employees under the Bank's 1982 Incentive Stock Option
Plan. On July 15, 1985, April 25, 1988 and March 15, 1993, the Board of
Directors reserved options for an additional 191,466, 196,340 and 220,000
shares of common stock, respectively. The exercise price of all options is
the market price of the common stock at the date of grant. Options are
exercisable on various conditions but generally not more than 10 years
from date of grant.
Information with respect to options under the above plan is summarized as
follows:
121
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Outstanding, December 31, 1992 252,167
<S> <C>
Granted (Price - $13.41) 110,000
Exercised (Price - $4.89) (14,554)
Exercised (Price - $8.18) (14,806)
Exercised (Price - $9.09) (66,000)
Outstanding, December 31, 1993 266,807
Granted (Price - $12.75) 50,000
Exercised (Price - $4.89) (10,910)
Exercised (Price - $7.95) (11,000)
Exercised (Price - $8.18) (6,531)
Exercised (Price - $8.86) (1,756)
Outstanding, December 31, 1994 286,610
Exercised (Price - $4.89) (12,463)
Exercised (Price - $8.18) (10,993)
Exercised (Price - $8.86) (1,463)
Exercised (Price - $13.41) (1,619)
Expired (691)
Outstanding, December 31, 1995 259,381
(Price - $8.18) 75,513
(Price - $8.86) 25,487
(Price - $12.75) 50,000
(Price - $13.41) 108,381
122
<PAGE>
Number of Shares
259,381
Shares currently exercisable 222,722
Shares available for future grants 111,888
</TABLE>
A 10% stock dividend was declared and effected in 1993. As a result, the
Company transferred $7,394,347 from retained earnings to capital accounts
reflecting 416,583 shares at the market price of $17.75. All calculated
per share information in these financial statements has been restated to
give effect to the stock dividend.
The Company also paid $.44 per share in cash dividends during 1995, 1994
and 1993 totalling $2,044,056 and $2,028,617 and $1,818,094, respectively.
A dividend reinvestment program was introduced in October, 1991. This plan
provides for the issuance of additional stock at a 3% discount from
prevailing market prices. During 1995 and 1994, 10,184 and 12,341 shares
were issued under this plan, adding $161,540 and $195,155, respectively,
to stockholders' equity.
NOTE 15: PARENT COMPANY FINANCIAL INFORMATION
On June 1, 1988, all shares of stock of the Bank were exchanged for stock
in the Company, making the Bank a wholly-owned subsidiary of the Company.
Prior to the reorganization, the Company had conducted no business and had
no material assets.
The Company and its Subsidiary file a consolidated federal income tax
return in which the taxable income or loss of the Company is combined with
that of its Subsidiary. The Company's share of income tax expense is based
on the amount which would be payable if separate returns were filed.
Accordingly, the Company's equity in net income of its subsidiary is
excluded from the computation of the provision for income taxes for
financial statement purposes.
Unconsolidated financial information for the Company follows:
123
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
At December 31, 1995 1994
<S> <C> <C> <C>
Assets:
Cash $ 1,797,993 $ 3,055,353
Investment in subsidiary 83,836,341 80,181,496
Other assets 933 -
Total assets $85,635,267 $83,236,849
Liabilities:
Accounts payable to subsidiary $ 33,046 $ 19,359
Stockholders' equity 85,602,221 83,217,490
Total liabilities and stockholders' $85,635,267 $83,236,849
equity
Statements of Operations
Years ended December 31, 1995 1994 1993
Income:
Interest income $ 118,106 $ 97,533 $ 52,791
Dividend from subsidiary 550,000 2,350,000 2,400,000
Undistributed net income 1,470,578 2,344,328 7,206,582
of subsidiary
Gross operating income $ 2,138,684 $ 4,791,861 $9,659,373
General and administrative 246,474 231,155 200,437
expenses
Income before taxes $ 1,892,210 $ 4,560,706 $9,458,936
Income tax (benefit) expense (5,299) 58,649 59,700
Net Income $ 1,897,509 $ 4,502,057 $9,399,236
Statements of Cash Flows
Years ended December 31, 1995 1994 1993
Cash Flows From Operations:
Net income $ 1,897,509 $ 4,502,057 $ 9,399,236
124
<PAGE>
Adjustments to reconcile net income
to net cash provided by
operations:
Undistributed net income of (1,470,578) (2,344,328) (7,206,582)
subsidiary
Decrease (increase) in other assets
and other liabilities 12,754 (25,185) (10,182)
Net cash provided by operations $ 439,685 $ 2,132,544 $ 2,182,472
Cash Flows From Financing Activities:
Dividends paid $(2,044,056) $(2,028,617) $(1,818,094)
Proceeds from issuance of
stock 347,011 404,889 958,085
Net cash used by financing
activities $(1,697,045) $(1,623,728) $ (860,009)
Net (decrease) increase in
cash $(1,257,360) $ 508,816 $ 1,322,463
Cash at beginning of year 3,055,353 2,546,537 1,224,074
Cash at end of year $ 1,797,993 $ 3,055,353 $ 2,546,537
</TABLE>
NOTE 16: INTEREST RATE EXCHANGE CONTRACTS
Results from interest rate swap agreements, exchanging interest rate flows
on notional principal amounts for 1995, 1994 and 1993 were as follows:
125
<PAGE>
<TABLE>
<CAPTION>
Net Interest
Notional Interest Rate Expense for the
Principal Termination at December 31, 1995 Years Ended December 31,
Amount Date Paid Received 1995 1994 1993
<S> <C> <C> <C> <C> <C>
$25,000,000 2/95 Matured $ 158,671 $1,184,678 $1,081,762
Fixed Variable
25,000,000 12/95 Matured 700,959 1,035,751 948,737
Fixed Variable
5,000,000 8/94 Matured - 35,234 32,396
Fixed Variable
5,000,000 3/95 Matured 21,316 142,739 124,975
Fixed Variable
5,000,000 7/96 5.63% 5.12% 35,558 88,767 68,052
Fixed Variable
15,000,000 3/97 7.36% 5.12% 350,237 522,116 468,825
Fixed Variable
10,000,000 7/97 6.18% 5.12% 120,091 231,925 193,092
Fixed Variable
15,000,000 6/98 5.44% 5.70% (152,690) 163,042 150,774
$1,232,142 $3,404,252 $3,068,613
</TABLE>
Although interest rate exchange contracts have no book value of principal,
SFAS 107 requires disclosure of fair value based upon the cost of
terminating these agreements which is estimated to be $628,000 and
$203,000 at December 31, 1995 and 1994, respectively.
Of the variable rates paid to the Bank on the agreements, $30,000,000 are
indexed to the FHLB Eleventh District Cost of Funds and the remaining
$15,000,000 are indexed to one-month LIBOR.
On December 30, 1994, the Bank paid a fixed option premium of $255,000 for
an interest rate cap agreement in exchange for future interest income on a
$30,000,000 national principal amount to the extent that LIBOR exceeds
7.50% and is less than 10%. The agreement expires on December 30, 1997.
Amortization of the premium totalled $85,000 in 1995. No amortization of
the premium was affected in 1994.
The fair market value of the interest rate cap agreement was $15,500 and
$255,000 on December 31, 1995 and 1994, respectively.
126
<PAGE>
NOTE 17: COMMITMENTS
The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and stand-by letters of credit. The
Bank applies the same credit standards to these contracts as it uses in
its lending process. As of December 31, 1995 and 1994, the Bank had
outstanding commitments to fund or purchase real estate loans in the
amount of $12,865,845 and $12,769,252, respectively. Of these,
approximately 50% and 66% were for variable rate loans in 1995 and 1994,
respectively. The Bank also had a commitment to purchase mortgage pool
securities at December 31, 1995 of $1,000,000. The Bank typically sells
the major portion of its fixed-rate loan originations to minimize interest
rate risk. The Bank generally enters into forward sales of loans or
mortgage-backed securities to protect the loans held for sale and loans
committed from market pricing losses resulting from rising interest rates.
At December 31, 1995, 1994 and 1993, the Bank had outstanding commitments
to sell loans and mortgage-backed securities of $9,024,000, $4,297,000 and
$30,229,000, respectively to provide this protection for its unsold loans
held for sale and committed loans. These commitments are short-term in
nature, and the fair value is based on prevailing offering prices in the
secondary market for similar loans expected to fund within 30 days. The
Bank also had outstanding optional commitments to sell mortgage-backed
securities in the amount of $5,000,000 at December 31,1995. The net gains
from the resulting loan sales were $211,000, $63,000 and $2,151,000 for
1995, 1994 and 1993, respectively.
The Bank issues letters of credit relating to its real estate development
and real estate development loans. The balance of these commitments was
$9,443,000 and $9,058,000 as of December 31, 1995 and 1994. Loans sold
with recourse totalled $4,979,016 and $5,100,518 as of December 31, 1995
and 1994, respectively.
The Board of Directors of the Company has established a quarterly dividend
policy. The Board declared cash dividends totalling $.44 in 1995 and 1994.
On January 23, 1996, the Board of Directors of the Company declared a
regular quarterly dividend of $.11 per share, payable February 15, 1996,
to holders of record on February 1, 1996. The total dividend was
approximately $513,000.
Certain properties are leased by the Bank under operating-type leases
expiring at various dates through the year 2019. Lease rental expense for
1995, 1994 and 1993 amounted to $518,327, $487,751 and $484,044,
respectively.
The following summarizes, by year, the future minimum rental payments as
of December 31, 1995:
127
<PAGE>
Years Ending December 31 Rental Payments
1996 $ 506,518
1997 528,846
1998 535,721
1999 456,240
2000 378,287
2001 and thereafter 4,301,518
$6,707,130
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in Thousands)
Selected quarterly results of operations for the years ended
December 31, 1995, 1994, and 1993 are summarized as follows:
Income
Before
Accounting
Net Provision Change
Interest Interest for Loan and Income Net Earnings
Income Income Losses Taxes Income Per Share
<S> <C> <C> <C> <C> <C> <C>
First quarter 1995 $21,758 $ 7,646 $ 265 $ 1,451 $ 834 $0.18
Second quarter 1995 22,614 7,535 1,301 (1,266) (794) (0.17)
Third quarter 1995 23,391 7,990 68 2,625 1,524 0.32
Fourth quarter 1995 23,365 8,584 - 618 334 0.07
$91,128 $31,755 $1,634 $ 3,428 $1,898 $0.40
First quarter 1994 $19,073 $ 8,821 $ (221) $ 3,007 $1,869 $0.40
Second quarter 1994 19,970 8,952 262 2,476 1,349 0.29
Third quarter 1994 20,869 8,488 740 (637) 120 0.02
Fourth quarter 1994 21,215 8,015 (500) 1,972 1,164 0.25
$81,127 $34,276 $ 281 $ 6,818 $4,502 $0.96
First quarter 1993 $19,840 $ 8,908 $ 880 $ 3,966 $2,269 $0.50
Second quarter 1993 20,117 9,414 1,070 4,437 2,509 0.55
Third quarter 1993 19,765 8,847 250 4,428 2,598 0.56
Fourth quarter 1993 19,878 9,100 785 4,033 2,023 0.43
$79,600 $36,269 $2,985 $16,864 $9,399 $2.04
</TABLE>
128
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
129
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information regarding Directors and Officers of California Financial
Holding Company is contained in the Proxy Statement and Notice of Annual
Meeting of Stockholders to be held on May 13, 1996 and incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Remuneration and Transactions is
contained in the Proxy Statement and Notice of Annual Meeting of
Stockholders to be held on May 13, 1996 and incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding Security Ownership of Certain Beneficial Owners
and Management is contained in the Proxy Statement and Notice of Annual
Meeting of Stockholders to be held on May 13, 1996 and incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions is
contained in the Proxy Statement and Notice of Annual Meeting of
Stockholders to be held on May 13, 1996 and incorporated herein by
reference.
130
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Index to Consolidated Financial Statements
1. a. Independent Auditors' Report
b. Consolidated Statements of Financial Condition at December
31, 1995 and 1994
c. Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993
d. Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993
e. Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
f. Notes to the Consolidated Financial Statements
2. All schedules are omitted because they are not applicable, not
required or the information is included in the consolidated
financial statements or notes thereto.
B. Exhibits
See Exhibit Index on page 134.
C. Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1995.
131
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CALIFORNIA FINANCIAL HOLDING COMPANY
Registrant
03-25-96 BY: /s/Robert V. Kavanaugh
---------------------- ----------------------------------
DATE ROBERT V. KAVANAUGH
President, Chief Operating Officer
03-25-96 BY: /s/JANE R. BUTTERFIELD
---------------------- ----------------------------------
DATE JANE R. BUTTERFIELD
Senior Vice President, Treasurer,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
BY: /s/DAVID K. REA 03-25-96
----------------------------------- --------------------
DAVID K. REA, Chairman of the Board DATE
BY: /s/ROBERT V. KAVANAUGH 03-25-96
----------------------------------- --------------------
ROBERT V. KAVANAUGH Director DATE
BY: /s/DENNIS DONALD GEIGER 03-25-96
----------------------------------- --------------------
DENNIS DONALD GEIGER Director DATE
BY: /s/G. THOMAS EGAN 03-25-96
----------------------------------- --------------------
G. THOMAS EGAN Director DATE
BY: /s/JERALD KIRSTEN 03-25-96
----------------------------------- --------------------
JERALD KIRSTEN Director DATE
BY:
----------------------------------- --------------------
GERALD L. BARTON Director DATE
BY: /s/DEAN A. CORTOPASSI 03-25-96
----------------------------------- --------------------
132
<PAGE>
DEAN A. CORTOPASSI Director DATE
133
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page
----------- ------- ----
3.1 Certificate of Incorporation of California
Financial Holding Company. (Incorporated by
reference to Exhibit C to the Prospectus and
Proxy Statement filed as part of the Post-
Effective Amendment on Form S-8 to the
Registration Statement on Form S-4,
Registration No. 33-19998 ("Registration
Statement").
3.2 Bylaws of California Financial Holding
Company.
10.1 Incentive Stock Plan. (Incorporated by
reference to Exhibit A to the Prospectus and
Proxy Statement files as part of the
Registration Statement.)
10.2 1982 Stockton Savings Incentive Stock Option
Plan. (Incorporated by reference to Exhibit
B to the Prospectus and Proxy Statement filed
as part of the Registration Statement.)
10.3 Amendments to the Incentive Stock Plan.
(Incorporated by reference to Exhibit 4.3 to
Post-Effective Amendment No. 1 to the
Registration Statement.)
10.4 Amended and Restated Incentive Stock Plan.
(Incorporated by reference to Exhibit 4.4 to
post-effective amendment number 1 to the
Registration Statement on Form S-8 (Reg. #33-
62584) filed on June 25, 1993.)
10.5 Severance Agreement dated June 21, 1993
between Stockton Savings Bank, FSB ("Stockton
Savings") and David K. Rea. (Incorporated by
reference to Exhibit 10.5 to Annual Report on
Form 10-K for the year ended December 31,
1993.)
10.6 Severance Agreement dated as of June 21,
1993, as amended and restated as of March 18,
1996, between Stockton Savings and Robert V.
Kavanaugh.
134
<PAGE>
Exhibit No. Exhibit Page
----------- ------- ----
10.7 Severance Agreement dated as of June 21,
1993, as amended and restated as of March 18,
1996, between Stockton Savings and Jane R.
Butterfield.
10.8 Severance Agreement dated as of June 21,
1993, as amended and restated as of March 18,
1996, between Stockton Savings and W. Henry
Claussen.
10.9 Severance Agreement dated as of June 21,
1993, as amended and restated as of March 18,
1996, between Stockton Savings and Morris W.
Knight.
10.10 Stockton Savings Bank Executive Compensation
Plan.
10.11 Stockton Savings and Loan Association
Directors' Retirement Plan.
10.12 Stockton Savings Tax Deferred 401(k) Plan-
Defined Contribution Plan. (Incorporated by
reference to Exhibit 4.1(a) to the
Registration Statement on Form S-8
(Registration No. 33-96308) filed on August
29, 1995.)
10.13 Stockton Savings Tax Deferred 401(k) Plan -
Adoption Agreement #003. (Incorporated by
reference to Exhibit 4.1(b) to Post -
Effective Amendment No. 1 to Registration
Statement on Form S-8 (Registration No. 33-
96308) filed on November 3, 1995.)
10.14 Amendment dated March 26, 1996, effective as
of November 21, 1994, to Severance Agreement
dated as of June 21, 1993 between Stockton
Savings and David K. Rea.
21.1 Subsidiaries of the Registrant.
(Incorporated by reference to Item 1.
"Business in Subsidiaries and Affiliates in
this Form 10-K.)
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
135
<PAGE>
<PAGE>
AMENDED AND RESTATED BYLAWS OF
California Financial Holding Company
As of March 28, 1995
ARTICLE I. OFFICES
SECTION 1. REGISTERED OFFICE. California Financial Holding
Company (hereinafter referred to as the "Corporation") shall at all times
maintain a registered office in the State of Delaware, which, except as
otherwise determined by the Board of Directors of the Corporation
(hereinafter referred to as the "Board"), shall be in the City of
Wilmington, County of New Castle.
SECTION 2. OTHER OFFICES. The Corporation may also have offices
at such other places within or without the State of Delaware as the Board
shall from time to time designate or the business of the corporation shall
require.
ARTICLE II. SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. All annual and special meetings
of shareholders shall be held at such places within or without the State
of Delaware as may from time to time be designated by the Board and
specified in the notice of meeting.
SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the
Corporation for the election of directors and for the transaction of any
other business of the Corporation shall be held annually on a date within
180 days after the end of the Corporation's fiscal year and at such time
as the Board of Directors may determine.
SECTION 3. SPECIAL MEETINGS. Special Meetings of the
shareholders may be called at any time for any purpose by the chairman of
the board, and shall be called by the president, a vice president or the
secretary upon the written request of stockholders holding of record at
least ten percent (10%) of the outstanding common stock of the
Corporation. Such written request shall state the purpose or purposes of
the meeting and shall be delivered at the principal office of the
Corporation addressed to the chairman of the board, the president or the
secretary.
SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings of
the shareholders shall be conducted in accordance with Delaware law unless
otherwise prescribed by the Bylaws. The Chairman of the Board, or in the
absence of the Chairman of the Board, the highest ranking officer of the
Corporation who is present, or such other person as the Board shall have
designated, shall call to order any meeting of the shareholders and act as
chairman of the meeting. The Secretary of the Corporation, if present at
the meeting, shall be the secretary of the meeting. In the absence of the
Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman of the meeting shall appoint. The chairman of any
meeting of the shareholders, unless otherwise prescribed by law or
<PAGE>
regulation or unless the Chairman of the Board has otherwise determined,
shall determine the order of business and the procedure at the meeting.
SECTION 5. NOTICE OF MEETINGS. Written notice stating the
place, day and hour of the meeting and the purpose or purposes for which
the meeting of the shareholders is called shall be delivered not less than
ten nor more than sixty days before the date of the meeting, either
personally or by mail, by or at the direction of the Chairman of the
Board, the Secretary or the directors requesting the meeting, to each
shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed given when deposited in the U.S. mail, postage
prepaid, addressed to the shareholder at his address as it appears on the
stock transfer books or records of the Corporation as of the record date
prescribed in Section 6 of this Article II. When any meeting of the
shareholders, either annual or special, is adjourned for more than thirty
days or if, after adjournment, a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given as in
the case of an original meeting. It shall not be necessary to give any
notice of the time and place of any other adjourned meeting of the
shareholders, other than an announcement at the meeting at which such
adjournment is taken.
SECTION 6. FIXING OF RECORD DATE. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting
of the shareholders or any adjournment thereof, or shareholders entitled
to receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose under Delaware law, the Board
may fix, in advance, a date as the record date for any such determination
of shareholders. Such date shall not be more than sixty days and not less
than ten days before the date of such meeting, nor more than sixty days
prior to any other action.
SECTION 7. VOTING LISTS. The Secretary of the Corporation, or
other officer or agent of the Corporation having charge of the stock
transfer books for shares of the capital stock of the Corporation, shall
prepare and make, at least ten days before each meeting of the
shareholders, a complete list of the shareholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order, with
the address of and the number of shares held by each shareholder. Such
list shall be open to the examination of any shareholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified in the notice of the
meeting, at the place where the meeting is to be held. Such list shall
also be produced and kept open at the time and place of the meeting during
the whole time thereof and shall be subject to the inspection of any
shareholder present at the meeting. The stock transfer books shall be the
only evidence as to who are the shareholders entitled to examine the stock
transfer books or to vote in person or by proxy at any meeting of
shareholders, and of the voting list required by this section.
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SECTION 8. QUORUM. A majority of the outstanding shares of the
Corporation entitled to vote at a meeting of the shareholders, represented
in person or by proxy, shall constitute a quorum at a meeting. If less
than a majority of the outstanding shares are represented at a meeting, a
majority of the shares so represented may adjourn the meeting from time to
time without further notice. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally called. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
SECTION 9. PROXIES. At any meeting of the shareholders, every
shareholder having the right to vote shall be entitled to vote in person,
or by proxy appointed by an instrument in writing and complying with the
requirements of Delaware law.
SECTION 10. INSPECTORS OF ELECTION. In advance of any meeting
of shareholders, the Board of Directors may appoint any person other than
a nominee for director as an inspector of election to act at such meeting
or any adjournment thereof. The number of inspectors shall be either one
or three. Any such appointment shall not be altered at the meeting for
which such appointment has been made. If inspector(s) of election are not
so appointed, the Chairman of the Board or the President may, or on the
request of the holders of not less than 10 percent (10%) of the shares
present in person or by proxy at the meeting, either of them shall, make
such appointment at the meeting. If inspector(s) are appointed at the
meeting, the majority of votes cast shall determine whether one or three
inspectors are to be appointed. In case any person appointed as inspector
fails to appear or fails or refuses to act as an inspector, the vacancy
may be filled by appointment by the Board of Directors in advance of the
meeting or at the meeting by the Chairman of the Board or the President.
The duties of such inspectors shall include: determining the
number of shares of stock represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving
votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with rights to vote; counting
and tabulating all votes or consents; determining the result of any vote;
and such other acts as may be proper to conduct the election or vote with
fairness to all shareholders.
SECTION 11. VOTING BY THE CORPORATION. Neither treasury shares
of its own capital stock held by the Corporation, nor shares held by
another corporation, a majority of the shares of which entitled to vote
for the election of directors are held by the Corporation, shall be
entitled to vote or be counted for quorum purposes at any meeting of the
shareholders; provided, however, that the Corporation may vote shares of
its capital stock held by it, or by any such other corporation, if such
shares of capital stock are held by the Corporation or such other
corporation in a fiduciary capacity.
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SECTION 12. NEW BUSINESS. Any new business to be taken up at
the annual meeting of the shareholders shall be stated in writing and
filed with the Secretary of the Corporation at least sixty days before the
date of the annual meeting, and all business so stated, proposed and filed
shall be considered at the annual meeting, but no other proposal shall be
considered at the annual meeting. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of the
shareholders of reports of officers, directors, and committees, but, in
connection with such reports, no new business shall be acted upon at such
annual meeting unless stated and filed as herein provided.
ARTICLE III. BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board. The
Board shall annually elect a Chairman of the Board, a President and one or
more Vice Chairmen of the Board from among its members and shall
designate, when present, either the Chairman or the President or a Vice
Chairman to preside at its meetings.
SECTION 2. NUMBER. The Board shall consist of not less than
five (5) nor more than twenty-five (25) members. The exact number of
directors shall be fixed from time to time by the Board pursuant to a
resolution adopted by a majority of the entire Board.
SECTION 3. ELECTION OF DIRECTORS. The Board shall be divided
into three classes, as nearly equal in number as possible: the first
class, the second class and the third class. Each director shall serve for
a term ending on the third annual meeting following the annual meeting of
the shareholders at which such director was elected; provided, however,
that the directors first elected to the first class shall serve for a term
ending upon the election of directors at the annual meeting next following
the end of calendar year 1987, the directors first elected to the second
class shall serve for a term ending upon the election of directors at the
second annual meeting next following the end of calendar year 1987, and
the directors first elected to the third class shall serve for a term
ending upon the election of directors at the third annual meeting next
following the end of calendar year 1987.
At each annual election commencing at the first annual meeting of
the shareholders, the successors to the class of directors whose term
expires at that time shall be elected by the shareholders to hold office
for a term of three years to succeed those directors whose term expires,
so that the term of one class of directors shall expire each year, unless,
by reason of any intervening changes in the authorized number of
directors, the Board shall have designated one or more directorships whose
term then expires as directorships of another class in order more nearly
to achieve equality of number of directors among the classes.
Notwithstanding the requirement that the three classes shall be
as nearly equal in number of directors as possible, in the event of any
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change in the authorized number of directors, each director then
continuing to serve as such shall nevertheless continue as a director of
the class of which he is a member until the expiration of his current
term, or his prior resignation, disqualification, disability or removal.
There shall be no cumulative voting in the election of directors.
SECTION 4. REGULAR MEETINGS. A regular meeting of the Board
shall be held without other notice than this Bylaw immediately after, and
at the same place as, the annual meeting of the shareholders. Additional
meetings shall be held at such time as the Board shall fix at such places
within or without the State of Delaware as shall be fixed by the Board. No
call shall be required for regular meetings for which the time and place
has been fixed.
SECTION 5. SPECIAL MEETINGS. Special Meetings of the Board may
be called by or at the request of the Chairman of the Board, the
President, a Vice Chairman of the Board or a majority of the directors.
The persons authorized to call special meetings of the Board may fix any
place as the place for holding any special meeting of the Board called by
such persons.
SECTION 6. NOTICE. Written notice of any special meeting shall
be given to each director at least two (2) days prior to the date of said
meeting when delivered personally or by telegram or cablegram or at least
five (5) days prior thereto when delivered by mail at the address
appearing on the Corporation's records. If mailed, such notice shall be
deemed to be delivered when deposited in the United States Mail so
addressed, with first-class postage thereon prepaid. If notice be given
by cablegram, such notice shall be deemed delivered when sent. Any
Director may waive notice of any meeting by a writing filed with the
secretary. The attendance of a Director at a meeting shall constitute a
waiver of notice of such meeting, except when a Director attends a meeting
for the express purpose of objecting to the transaction of any business on
the basis that the meeting is not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any meeting of the
Board of Directors need be specified in the notice or waiver of notice of
such meeting.
SECTION 7. QUORUM. A majority of the number of directors fixed
pursuant to Section 2 of this Article III shall constitute a quorum for
the transaction of business at any meeting of the Board, but if less than
such majority is present at a meeting, a majority of the directors present
may adjourn the meeting from time to time. Notice of any adjourned
meeting shall be given in the same manner as prescribed by Section 6 of
this Article III.
SECTION 8. CONSTRUCTIVE PRESENCE AT A MEETING. Members of the
Board of Directors or of any Committee of the Board of Directors may
participate in a meeting of such Board or Committee by means of a
conference telephone or similar communication equipment by means of which
all persons participating in the meeting can hear each other at the same
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time. Participation by such means shall constitute presence in person at a
meeting. Meetings of the Board of Directors and of any Committee of the
Board of Directors may be conducted entirely by such means.
SECTION 9. MANNER OF ACTING. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the
act of the Board.
SECTION 10. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Board at a meeting may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall
be signed by all of the directors.
SECTION 11. RESIGNATION. Any director may resign at any time by
sending a written notice of such resignation to the Corporation addressed
to the Chairman of the Board, the President, a Vice Chairman of the Board
or the Board. Unless otherwise specified therein, such resignation shall
take effect upon receipt thereof.
SECTION 12. VACANCIES. Any vacancy occurring in the Board may
be filled in accordance with the Certificate of Incorporation.
SECTION 13. COMPENSATION. Directors, as such, may receive a
stated salary for their services. By resolution of the Board, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed
for actual attendance at each regular or special meeting of the Board.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the Board may
determine.
SECTION 14. PRESUMPTION OF ASSENT. A director of the
Corporation who is present at a meeting of the Board at which action on a
corporation matter is taken shall be presumed to have assented to the
action taken unless his dissent or abstention shall be entered in the
minutes of the meeting or unless he shall file a written dissent to such
action with the person acting as the Secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to
the Secretary of the corporation within five days after the date a copy of
the minutes of the meeting is received. Such right to dissent shall not
apply to a director who voted in favor of such action.
SECTION 15. REMOVAL. At a meeting of shareholders called
expressly for that purpose, a director may be removed with or without
cause as determined by the affirmative vote of the holders of a majority
of the shares entitled to vote in an election of directors.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
SECTION 1. APPOINTMENT. The Board, by resolution adopted by a
majority of the Board, may designate the Chief Executive Officer and two
or more of the other directors to constitute an Executive Committee. The
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designation of any committee pursuant to this Article IV and the
delegation of authority thereto shall not operate to relieve the Board, or
any director, of any responsibility imposed by law or regulation.
SECTION 2. AUTHORITY. The Executive Committee, when the Board
is not in session, shall have and may exercise all of the authority of the
Board except to the extent, if any, that such authority shall be limited
by the resolution appointing the Executive Committee, or as otherwise
expressly provided by law, the Certificate of Incorporation or the Bylaws.
SECTION 3. TENURE. Subject to the provisions of Section 8 of
this Article IV, each member of the Executive Committee shall hold office
until the next regular annual meeting of the Board following his
designation and until a successor is designated as a member of the
Executive Committee.
SECTION 4. MEETINGS. Regular meetings of the Executive
Committee may be held without notice at such times and places as the
Executive Committee may fix from time to time. Special meetings of the
Executive Committee may be called by any member thereof upon not less than
one day's notice stating the place, date and hour of the meeting, which
notice may be written or oral. Any member of the Executive Committee may
waive notice of any meeting and no notice of any meeting need be given to
any member thereof who attends in person. The notice of a meeting of the
Executive Committee need not state the business proposed to be transacted
at the meeting.
Regular or special meetings may be held by means of conference
telephone or similar communications equipment by which all persons
participating in the meeting can hear each other.
SECTION 5. QUORUM. A majority of the members of the Executive
Committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the Executive Committee must be authorized
by the affirmative vote of a majority of the members present at a meeting
at which a quorum is present.
SECTION 6. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Executive Committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the members of the Executive Committee.
SECTION 7. VACANCIES. Any Vacancy in the Executive Committee
may be filled by a resolution adopted by a majority of the Board.
SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the Executive
Committee may be removed at any time with or without cause by resolution
adopted by a majority of the Board. Any member of the Executive Committee
may resign from the Executive Committee at any time by giving written
notice to the Chairman of the Board, the President, a Vice Chairman of the
Board or the Board. Unless otherwise specified therein, such resignation
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shall take effect upon receipt. The acceptance of such resignation shall
not be necessary to make it effective.
SECTION 9. PROCEDURE. The Executive Committee shall elect a
presiding officer from its members and may fix its own rules of procedure
which shall not be inconsistent with the Bylaws. It shall keep regular
minutes of its proceedings and report the same to the Board for its
information at the meeting thereof held next after the proceedings shall
have been taken.
SECTION 10. OTHER COMMITTEES. The Board may by resolution
establish an audit committee, a loan committee or such other committees
composed of directors as they may determine to be necessary or appropriate
for the conduct of the business of the Corporation and may prescribe the
duties, constitution and procedures thereof.
ARTICLE V. OFFICERS
SECTION 1. POSITIONS. The officers of the Corporation shall be a
Chairman of the Board, a President, one or more Vice Presidents, a
Secretary and a Treasurer or a Vice President in charge of financial
matters, each of whom shall be elected by the Board. The President shall
be the Chief Executive Officer unless the Board designates the Chairman of
the Board as Chief Executive Officer. The President shall be a director
of the Corporation. The offices of the Secretary and Treasurer may be held
by the same person and a Vice President may also be either the Secretary
or the Treasurer. The Board may designate one or more Vice Presidents as
Executive Vice President or Senior Vice President. The Board may also
elect or authorize the appointment of such other officers as the business
of the Corporation may require. The officers shall have such authority and
perform such duties as the Board may from time to time authorize or
determine. In the absence of action by the Board, the officers shall have
such powers and duties as generally pertain to their respective offices.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected annually at the first meeting of the Board
held after each annual meeting of the shareholders. If the election of
officers is not held at such meeting, such election shall be held as soon
thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death, resignation
or removal in the manner hereinafter provided. Election or appointment of
an officer, employee or agent shall not by itself create any contractual
rights. The Board may authorize the corporation to enter into an
employment contract with any officer, but no contract shall impair the
right of the Board to remove any officer at any time in accordance with
Section 3 of this Article V.
SECTION 3. REMOVAL. Any officer may be removed by the Board
whenever in its judgment the best interests of the Corporation will be
served thereby, but such removal, other than for cause, shall be without
prejudice to the contract rights, if any, of the person so removed.
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SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by a
majority vote of the Board for the unexpired portion of the term.
SECTION 5. REMUNERATION. The remuneration of the officers shall
be fixed from time to time by the Board.
ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. To the extent permitted by applicable law,
the Certificate of Incorporation or the Bylaws, the Board may authorize
any officer, employee or agent of the Corporation to enter into any
contract or execute and deliver any instrument in the name of and on
behalf of the Corporation. Such authority may be general or confined at
specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name
unless authorized by the Board. Such authority may be general or confined
to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness
issued in the name of the Corporation shall be signed by one or more
officers, employees or agents of the Corporation in such manner as shall
from time to time be determined by the Board.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the
Corporation in any duly authorized depositories as the Board may select.
ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing
shares of capital stock of the Corporation shall be in such form as shall
be determined by the Board. Such certificates shall be signed by the
Chairman of the Board, the Chief Executive Officer or any other officer of
the Corporation authorized by the Board, attested by the Secretary or an
Assistant Secretary, and sealed with the corporate seal or a facsimile
thereof. The signatures of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer
agent or a registrar other than the Corporation itself or one of its
employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of
the person to whom the shares are issued, with the number of shares issued
and date of issue, shall be entered on the stock transfer books of the
Corporation. All certificates surrendered to the Corporation for transfer
shall be cancelled and no new certificates shall be issued until the
former certificate for a like number of shares shall have been surrendered
and cancelled, except that in the case of a lost, stolen or destroyed
certificate, a new certificate may be issued therefor upon such terms and
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indemnity to the Corporation as the Board may prescribe as sufficient to
indemnify the Corporation against any claim that may be made against it on
account of such loss, theft or destruction.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital
stock to the Corporation shall be made only on its stock transfer books.
Authority for such transfer shall be given only by the holder of record
thereof or by his legal representative, who shall furnish proper evidence
of such authority, or by his attorney thereunto duly authorized by power
of attorney duly executed and filed with the Corporation. Such transfer
shall be made only on surrender for cancellation of the certificate for
such shares. The person in whose name shares of capital stock stand on the
books of the Corporation shall be deemed by the Corporation to be the
owner thereof for all purposes.
ARTICLE VIII. FISCAL YEAR, ANNUAL AUDIT
The fiscal year of the Corporation shall end on the 31st day of
December of each year. The Corporation shall be subject to an annual
audit as of the end of its fiscal year by independent public accountants
appointed by and responsible to the Board.
ARTICLE IX. DIVIDENDS
Subject to applicable law, the Certificate of Incorporation or
the Bylaws, the Board may, from time to time, declare, and the Corporation
may pay, dividends on the outstanding shares of capital stock of the
Corporation.
ARTICLE X. CORPORATE SEAL
The corporate seal of the Corporation shall be in such form as
the Board shall prescribe.
ARTICLE XI. AMENDMENTS
Bylaws may be adopted, amended or repealed by the vote of
two-thirds of the outstanding stock of the Corporation entitled to vote
thereon or by a resolution adopted two-thirds of the directors then in
office.
ARTICLE XII. INDEMNIFICATION
The Corporation shall indemnify its officers, directors,
employees and agents to the full extent permitted by Section 145, or any
successor provision, of the General Corporation Law of the State of
Delaware, and such rights of indemnification shall be in addition to any
rights to which any such director, officer, employee or agent may
otherwise be entitled under the Certificate of Incorporation, or by virtue
of any agreement or vote of the stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
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another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of
such person.
ARTICLE XIII. BUSINESS COMBINATIONS
Section 203 of the General Corporation Law of the State of
Delaware shall not govern the Corporation. This Article XIII may not be
amended by a vote of the Board.
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<PAGE>
AMENDED AND RESTATED SEVERANCE AGREEMENT
----------------------------------------
THIS AGREEMENT, made and entered as of this 21st day of June, 1993,
as amended and restated as of the 18th day of March, 1996 ("Effective
Date"), by and between Stockton Savings Bank, f.s.b., a federally
chartered savings bank, with its principal executive offices at 501 West
Weber Avenue, Stockton, California 95203 ("Bank") and Robert V. Kavanaugh
("Employee");
WHEREAS, Employee is currently employed by Bank and is considered a
key employee of Bank;
WHEREAS, Bank desires to retain the services of Employee;
WHEREAS, from time to time Bank has made payments and provided
benefits to employees who have terminated employment with Bank ("Prior
Severance Arrangements");
WHEREAS, Bank and Employee desire to set forth the amounts payable
and benefits to be provided by Bank to Employee in the event of a
termination of Employee's employment with Bank under the circumstances set
forth herein after the happening of a Change in Control (as defined
herein);
WHEREAS, the parties intend that the provisions of this Agreement
shall be in lieu of Employee's right to make any claim or demand with
respect to any severance policy of Bank arising from or alleged to arise
from the Prior Severance Arrangements; and
WHEREAS, Bank and Employee intend to amend and restate in its
entirety the Severance Agreement between them dated as of June 21, 1993;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein and intending to be legally bound hereby, the
parties agree as follows:
1. Continued Employment. In reliance upon the promises of Bank
hereinafter contained, Employee agrees that, for a period of no less than
one (1) year commencing on the date set forth above, and subject to
reasonable absences for illness, holiday, and vacation pursuant to Bank's
policies and practices in effect on the date hereof, Employee will
continue his or her employment with Bank and shall devote his or her best
efforts to such duties as may be assigned to him or her by Bank from time
to time.
2. Prior Severance Arrangements. Except to the extent set forth
herein, in the event of the termination of Employee's employment with
Bank, Employee shall make no claim or demand arising or alleged to arise
from any severance plan, program, policy or arrangement (including but not
limited to the Prior Severance Arrangements) that Bank may have had in
effect, may currently sponsor or may hereafter adopt. Notwithstanding the
foregoing, in the event of a termination of Employee's employment with
<PAGE>
Bank, Employee (and his or her spouse, heirs, estate and/or personal
representative, as the case may be) shall be entitled to receive any
benefits payable under any employee benefit plan, program, policy or
arrangement as such may then be in effect that is not a severance plan,
program, policy or arrangement.
3. Effective Date. This Agreement shall be effective as of the
date first above written ("Effective Date") and shall continue and remain
in full force and effect until the termination of Employee's employment
with Bank, unless earlier terminated by the parties in writing. The
completion of one (1) year of employment with Bank by Employee as set
forth in Section 1 shall not be a condition precedent to the effectiveness
of this Agreement or to the payments of amounts or provision of benefits
hereunder in the event Employee's employment with Bank is terminated under
the circumstances described in Section 4(b).
4. Termination of Employment.
(a) Requiring No Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, no payments shall be or become due and owing and Bank shall
have no other obligations under Section 5 of this Agreement:
(i) by either party for any reason prior to a Change in
Control, except as otherwise provided in Section 4(b)(iii)
below;
(ii) by either party for any reason at any time more than
the Applicable Number of Months (as hereinafter defined) after a
Change in Control;
(iii) by Bank, contemporaneously with or subsequent to a
Change in Control, for reason of "Cause" (as hereinafter
defined) or upon the death or "Disability" (as hereinafter
defined) of Employee; or
(iv) by Employee, contemporaneously with or subsequent to a
Change in Control, upon his or her retirement or resignation for
reasons other than "Good Reason" (as hereinafter defined).
(b) Requiring Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, Bank shall make the payments and provide the benefits as
set forth in Section 5:
(i) by Bank, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for any
reason other than (A) for Cause or (B) upon the death or
Disability of Employee;
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(ii) by Employee, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for Good
Reason; or
(iii) before a Change in Control occurs either (A) by Bank
other than for Cause or upon the death or Disability of
Employee, or (B) by Employee for Good Reason, and in either case
it is reasonably demonstrated that the termination of employment
(x) was at the request of a Third Party (as hereinafter defined)
that has taken steps reasonably calculated to effect a Change in
Control or (y) otherwise arose in connection with or in
anticipation of a Change in Control.
(c) Cause. For the purposes of this Agreement, the term
"Cause" shall mean Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement.
(d) Disability. For purposes of this Agreement, the term
"Disability" shall mean the complete inability of Employee to perform his
or her duties by reason of his or her total and permanent disability, as
determined by an independent physician selected with the approval of
Bank's Board of Directors and Employee.
(e) Good Reason. For purposes of this Agreement, the term
"Good Reason" shall, absent Employee's written consent to the contrary,
mean:
(i) any material breach by Bank of its obligations
contained in this Agreement;
(ii) the assignment to Employee of any duties inconsistent
with the status of his or her position with Bank on the day
immediately preceding the happening of a Change in Control or an
alteration in the nature or status of Employee's duties and
responsibilities that renders Employee's position to be of less
dignity, responsibility or scope from that which existed on the
day immediately preceding the happening of a Change in Control;
provided, however, that, in the event Employee terminates his or
her employment prior to a Change in Control, the assignment or
alteration shall have occurred reasonably contemporaneously with
such termination of employment;
(iii) a reduction by Bank in Employee's annual base salary
as in effect on the day immediately preceding the happening of a
Change in Control or as the same may be increased from time to
time, except for proportional across-the-board salary reductions
similarly affecting all of Bank's employees; provided, however,
that, in the event Employee terminates his or her employment
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<PAGE>
prior to a Change in Control, the reduction in annual base
salary shall have occurred reasonably contemporaneously with
such termination of employment;
(iv) the relocation of Bank's principal executive offices
to a location other than Stockton, California or Bank's
requiring Employee to be based anywhere other than Bank's
principal executive offices except for required travel on Bank's
business to an extent substantially consistent with Employee's
present business travel obligations; or
(v) any material reduction by Bank or California Financial
Holding Company, a Delaware corporation ("CFHC"), of the
benefits enjoyed by Employee under any of Bank's or CFHC's
pension, retirement, profit sharing, savings, life insurance,
medical, health-and-accident, disability or other employee
benefit plans, programs or arrangements as in effect from time
to time, the taking of any action by Bank or CFHC that would
directly or indirectly materially reduce any of such benefits or
deprive Employee of any material fringe benefits, or the failure
by Bank to provide Employee with the number of paid vacation
days to which he or she is entitled on the basis of years of
service with Bank in accordance with Bank's normal vacation
policy; provided, however, that this paragraph (v) shall not
apply to any proportional across-the-board reduction or action
similarly affecting all employees of Bank or CFHC.
(f) Change in Control. For purposes of this Agreement, a
"Change in Control" shall mean the occurrence, after the Effective Date,
of any of the following events, directly or indirectly or in one or more
series of transactions:
(i) A consolidation or merger of Bank or CFHC
with any third party (which includes a single person
or entity or a group of persons or entities acting in
concert) not wholly owned directly or indirectly by
Bank or CFHC (a "Third Party"), unless Bank or CFHC is
the entity surviving such merger or consolidation;
(ii) A transfer of all or substantially all of
the assets of Bank or CFHC to a Third Party or a
complete liquidation or dissolution of Bank or CFHC;
(iii) A Third Party, directly or indirectly,
through one or more subsidiaries or transactions or
acting in concert with one or more persons or
entities:
(A) acquires beneficial ownership of more
than 20% of any class of voting stock of Bank or
CFHC;
- 4 -
<PAGE>
(B) acquires irrevocable proxies
representing more than 20% of any class of
voting stock of Bank or CFHC;
(C) acquires any combination of beneficial
ownership of voting stock and irrevocable proxies
representing more than 20% of any class of voting
stock of Bank or CFHC;
(D) acquires the ability to control in
any manner the election of a majority of the
directors of Bank or CFHC; or
(E) acquires the ability to directly
or indirectly exercise a controlling
influence over the management or policies of
Bank or CFHC;
(iv) any election has occurred of persons to the
Board of Directors of CFHC ("Board") that causes a
majority of the Board to consist of persons other than
(A) persons who were members of the Board on the
Effective Date and/or (B) persons who were nominated
for election as members of the Board by the Board (or
a committee of the Board) at a time when the majority
of the Board (or of such committee) consisted of
persons who were members of the Board on the Effective
Date; provided, however, that any persons nominated
for election by the Board (or a committee of the
Board), a majority of whom are persons described in
clauses (A) and/or (B), or are persons who were
themselves nominated by such Board (or a committee of
such Board), shall for this purpose be deemed to have
been nominated by a Board composed of persons
described in clause (A); or
(v) A determination is made by the Office of
Thrift Supervision ("OTS"), the Federal Deposit
Insurance Corporation ("FDIC"), the Securities and
Exchange Commission ("SEC") or any similar agency
having regulatory control over Bank or CFHC that a
change in control, as defined in the banking,
insurance, or securities laws or regulations then
applicable to Bank or CFHC, has occurred.
Notwithstanding any provision contained herein, a Change in Control shall
not include any of the above described events if they (A) are related to
or occur in connection with the appointment of a receiver or a conservator
for Bank or CFHC, provision of assistance under Section 13(c) of the
Federal Deposit Insurance Act ("FDI Act"), the approval of a supervisory
merger, a determination that Bank is in default as defined in Section 3(x)
of the FDI Act, insolvent or in an unsafe or unsound condition to transact
- 5 -
<PAGE>
business or the suspension, removal and/or temporary or permanent
prohibition by the OTS, the FDIC, the SEC or another bank regulatory
agency of Employee from participation in the conduct of Bank's or CFHC's
business or affairs or (B) are the result of a Third Party inadvertently
acquiring beneficial ownership or irrevocable proxies or a combination of
both for 20% or more of any class of Bank's or CFHC's voting stock, and
the Third Party as promptly as practicable thereafter divests itself of
beneficial ownership or irrevocable proxies for a sufficient number of
shares so that the Third Party no longer has beneficial ownership or
irrevocable proxies or a combination of both for 20% or more of any class
of Bank's or CFHC's voting stock.
(g) Applicable Number of Months. For purposes of this
Agreement, the "Applicable Number of Months" shall mean thirty-six (36)
months.
5. Obligations of Bank Upon Termination of Employment. Upon
termination of Employee's employment with Bank under the circumstances set
forth in Section 4(b), Employee shall, notwithstanding such termination,
be entitled to receive the following payments and provided with the
following benefits:
(a) Base Salary. Bank shall pay Employee, within ten (10) days
after the termination of his or her employment, a lump sum payment equal
to the aggregate of the future base salary payments Employee would have
received if he or she had continued in Bank's employ until the Applicable
Number of Months following the date his or her employment is terminated
(unless a reduction in compensation preceded Employee's resignation or
retirement for Good Reason, in which case Bank shall pay Employee a lump
sum payment based on Employee's highest base salary in effect during the
twelve-month period preceding the termination of employment), discounted
to present value at a discount rate equal to the per annum rate offered on
the date employment is terminated (or the next preceding date on which
that rate is published) on U.S. Treasury bills with maturities of the
Applicable Number of Months.
(b) Bonus. Bank shall pay Employee, within ten (10) days after
the termination of his or her employment, a lump sum payment equal to his
or her projected bonus for the current year, which shall be computed
assuming that Employee had remained in the employ of Bank until the end of
the current year and that all performance goals or other performance
measures have been met at the then current level for the remainder of the
year.
(c) Benefits. During the Applicable Number of Months following
the date Employee's employment is terminated, at Bank's expense, Employee
shall participate in and be covered by all employee benefit plans,
programs, policies or arrangements of Bank applicable to executive
employees, whether funded or unfunded; provided, however, that, in the
event any administrator or any insurance carrier contests Employee's
participation in or coverage under such plan, program, policy or
arrangement, then Bank, in respect to insurance arrangements, shall cause,
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<PAGE>
at its own cost or expense, equivalent insurance coverage to be provided
and, in respect to arrangements other than insurance arrangements, shall
make cash payments to Employee in an amount equal to the amount that would
have been contributed by Bank with respect to Employee at the times such
amounts would have been contributed; and provided further, however, that,
to the extent Bank has an obligation to provide continuation coverage
within the meaning of Section 4980(B)(f) of the Internal Revenue Code of
1986, as amended ("Code"), the period for which benefits are provided
under this Section 5(c) constitutes a portion of such continuation
coverage.
6. Limitations; Excise Tax.
(a) Section 1828(k). Notwithstanding anything to the contrary
in this Agreement, any payments made to Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(b) Excess Parachute Payment. Notwithstanding anything to the
contrary in this Agreement, if tax counsel selected by Bank and acceptable
to Employee determines that any portion of any payment by Bank or CFHC
under this Agreement or otherwise would constitute an "excess parachute
payment," then the payments to be made to Employee under this Agreement
shall be reduced such that the value of the aggregate payments that
Employee is entitled to receive under this Agreement and any other
agreement, plan or program of Bank and/or CFHC shall be one dollar ($1)
less than the maximum amount of payments that Employee may receive without
becoming subject to the tax imposed by Section 4999 of the Code.
(c) Bank Not Responsible for Excise Tax. If the Internal
Revenue Service assesses an excise tax against Employee pursuant to
Sections 280G and 4999 of the Code, Bank shall be under no obligation to
Employee with respect to the amount of (i) the excise tax or (ii) any
additional federal income tax due from and payable by Employee as the
result of his or her receipt of any payment hereunder or otherwise.
7. No Duty to Mitigate. Employee shall not be required to mitigate
the amount of any payment required hereunder by seeking other employment
or otherwise, nor shall the amount paid hereunder be reduced or offset by
any compensation earned or received by Employee as result of employment
with another employer, self-employment, or any amount received from any
other plan, program, policy or arrangement; provided, however, that
benefits provided under Section 5(c) shall be reduced to the extent
comparable benefits are actually received by Employee from or through
another employer.
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<PAGE>
8. Miscellaneous.
(a) General Creditor. All payments required hereunder shall be
made from Bank's general assets and Employee shall have no rights greater
than the rights of a general creditor of Bank.
(b) Notices. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall
be deemed to have been duly given if delivered personally or sent by
certified mail, return receipt requested, first-class postage prepaid, to
the parties to this Agreement at the following addresses:
(i) if to Bank at:
Stockton Savings Bank, f.s.b.
501 West Weber Avenue
Stockton, California 95203
Attention: President
and
(ii) if to Employee at the address set forth
at the end of this Agreement
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and
communications shall be deemed to have been received on the earlier of the
date of receipt or the third business day after the date of mailing
thereof.
(c) Binding Effect; Benefits. This Agreement shall be binding
upon and inure to the benefit of the parties to this Agreement and their
respective successors and assigns. Nothing in this Agreement, express or
implied, is intended or shall be construed to give any person, other than
the parties to this Agreement or their respective successors or assigns,
any legal or equitable right, remedy or claim under or in respect of any
agreement or any provision contained herein.
(d) Costs of Enforcement. If Employee retains legal counsel to
enforce any or all of his or her rights to benefits under Section 5 above
and he or she substantially prevails in enforcing those rights, Employee
shall be entitled to recover from Bank Employee's reasonable attorneys'
fees, costs and expenses in connection with the enforcement of his or her
rights.
(e) Resolution of Differences Over Breaches of Agreement. In
the event of any controversy, dispute or claim arising out of, or relating
to, this Agreement or the breach thereof, Bank and Employee agree that
such underlying controversy, dispute or claim shall be settled by
arbitration conducted in accordance with this Section 8(e) and the
Commercial Arbitration Rules of the American Arbitration Association
("AAA"). The matter shall be heard and decided, and award rendered, by a
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<PAGE>
panel of three (3) arbitrators ("Arbitration Panel"). Bank and Employee
shall each select one (1) arbitrator from the AAA National Panel of
Commercial Arbitrators ("Commercial Panel") and the AAA shall elect a
third arbitrator from the Commercial Panel. The award rendered by the
Arbitration Panel shall be final and binding as between the parties hereto
and their heirs, executors, administrators, successors and assigns, and
judgment on the award may be entered by any court having jurisdiction
thereof.
(f) Waiver. Either party hereto may by written notice to the
other (i) extend the time for the performance of any of the obligations or
other actions of the other under this Agreement; (ii) waive compliance
with any of the conditions or covenants of the other contained in this
Agreement; and (iii) waive or modify performance of any of the obligations
of the other under this Agreement. Except as provided in the preceding
sentence, no action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of
compliance with any representation, warranty, covenant or agreement
contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any preceding or succeeding breach, and no failure by either party to
exercise any right or privilege hereunder shall be deemed a waiver of such
party's rights or privileges hereunder or shall be deemed a waiver of such
party's rights to exercise that right or privilege at any subsequent time
or times hereunder.
(g) Amendment. This Agreement may be terminated, amended,
modified or supplemented only by a written instrument executed by Employee
and Bank.
(h) Assignability. Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof
shall be assignable by either Bank or Employee without the prior written
consent of the other party.
(i) Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of California,
regardless of the law that might be applied under principles of conflict
of laws, except as that law is superseded by the laws of the United
States.
(j) Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
(k) Withholding of Taxes. Bank may withhold from amounts
required to be paid to Employee hereunder any applicable federal, state,
local and other taxes with respect thereto; provided, however, that Bank
shall promptly pay over the amounts so withheld to the appropriate taxing
bodies and provide to Employee appropriate statements on forms proscribed
for such purposes on the amounts so withheld.
- 9 -
<PAGE>
(l) Severability. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other
provision of this Agreement not held so invalid, and each such other
provision shall, to the full extent consistent with law, continue in full
force and effect. If any provision of this Agreement shall be held
invalid in part, such invalidity shall in no way affect the rest of such
provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent
consistent with law continue in full force and effect. If this Agreement
is held invalid or cannot be enforced, then to the full extent permitted
by law any prior agreement between Bank (or any predecessor thereof) and
Employee shall be deemed reinstated as if this Agreement had not be
executed.
(m) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, Bank has caused this Agreement to be executed and
its seal affixed hereunto by its officers thereunto duly authorized and
Employee has signed this Agreement, all as of the date first above
written.
ATTEST: STOCKTON SAVINGS BANK, F.S.B.
/s/ Kathleen L. Stover By:/s/ David K. Rea
------------------------------ --------------------------
Kathleen L. Stover, Assistant David K. Rea,
Secretary Chairman of the Board and
Chief Executive Officer
WITNESS: EMPLOYEE:
/s/ Kathleen L. Stover /s/ Robert V. Kavanaugh
------------------------------ -----------------------------
Name: Robert V. Kavanaugh
------------------------
Address: 6211 Culpepper Place
Stockton, CA 95207
-----------------------------
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<PAGE>
<PAGE>
AMENDED AND RESTATED SEVERANCE AGREEMENT
----------------------------------------
THIS AGREEMENT, made and entered as of this 21st day of June, 1993,
as amended and restated as of the 18th day of March, 1996 ("Effective
Date"), by and between Stockton Savings Bank, f.s.b., a federally
chartered savings bank, with its principal executive offices at 501 West
Weber Avenue, Stockton, California 95203 ("Bank") and Jane R. Butterfield
("Employee");
WHEREAS, Employee is currently employed by Bank and is considered a
key employee of Bank;
WHEREAS, Bank desires to retain the services of Employee;
WHEREAS, from time to time Bank has made payments and provided
benefits to employees who have terminated employment with Bank ("Prior
Severance Arrangements");
WHEREAS, Bank and Employee desire to set forth the amounts payable
and benefits to be provided by Bank to Employee in the event of a
termination of Employee's employment with Bank under the circumstances set
forth herein after the happening of a Change in Control (as defined
herein);
WHEREAS, the parties intend that the provisions of this Agreement
shall be in lieu of Employee's right to make any claim or demand with
respect to any severance policy of Bank arising from or alleged to arise
from the Prior Severance Arrangements; and
WHEREAS, Bank and Employee intend to amend and restate in its
entirety the Severance Agreement between them dated as of June 21, 1993;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein and intending to be legally bound hereby, the
parties agree as follows:
1. Continued Employment. In reliance upon the promises of Bank
hereinafter contained, Employee agrees that, for a period of no less than
one (1) year commencing on the date set forth above, and subject to
reasonable absences for illness, holiday, and vacation pursuant to Bank's
policies and practices in effect on the date hereof, Employee will
continue his or her employment with Bank and shall devote his or her best
efforts to such duties as may be assigned to him or her by Bank from time
to time.
2. Prior Severance Arrangements. Except to the extent set forth
herein, in the event of the termination of Employee's employment with
Bank, Employee shall make no claim or demand arising or alleged to arise
from any severance plan, program, policy or arrangement (including but not
limited to the Prior Severance Arrangements) that Bank may have had in
effect, may currently sponsor or may hereafter adopt. Notwithstanding the
foregoing, in the event of a termination of Employee's employment with
<PAGE>
Bank, Employee (and his or her spouse, heirs, estate and/or personal
representative, as the case may be) shall be entitled to receive any
benefits payable under any employee benefit plan, program, policy or
arrangement as such may then be in effect that is not a severance plan,
program, policy or arrangement.
3. Effective Date. This Agreement shall be effective as of the
date first above written ("Effective Date") and shall continue and remain
in full force and effect until the termination of Employee's employment
with Bank, unless earlier terminated by the parties in writing. The
completion of one (1) year of employment with Bank by Employee as set
forth in Section 1 shall not be a condition precedent to the effectiveness
of this Agreement or to the payments of amounts or provision of benefits
hereunder in the event Employee's employment with Bank is terminated under
the circumstances described in Section 4(b).
4. Termination of Employment.
(a) Requiring No Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, no payments shall be or become due and owing and Bank shall
have no other obligations under Section 5 of this Agreement:
(i) by either party for any reason prior to a Change in
Control, except as otherwise provided in Section 4(b)(iii)
below;
(ii) by either party for any reason at any time more than
the Applicable Number of Months (as hereinafter defined) after a
Change in Control;
(iii) by Bank, contemporaneously with or subsequent to a
Change in Control, for reason of "Cause" (as hereinafter
defined) or upon the death or "Disability" (as hereinafter
defined) of Employee; or
(iv) by Employee, contemporaneously with or subsequent to a
Change in Control, upon his or her retirement or resignation for
reasons other than "Good Reason" (as hereinafter defined).
(b) Requiring Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, Bank shall make the payments and provide the benefits as
set forth in Section 5:
(i) by Bank, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for any
reason other than (A) for Cause or (B) upon the death or
Disability of Employee;
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<PAGE>
(ii) by Employee, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for Good
Reason; or
(iii) before a Change in Control occurs either (A) by Bank
other than for Cause or upon the death or Disability of
Employee, or (B) by Employee for Good Reason, and in either case
it is reasonably demonstrated that the termination of employment
(x) was at the request of a Third Party (as hereinafter defined)
that has taken steps reasonably calculated to effect a Change in
Control or (y) otherwise arose in connection with or in
anticipation of a Change in Control.
(c) Cause. For the purposes of this Agreement, the term
"Cause" shall mean Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement.
(d) Disability. For purposes of this Agreement, the term
"Disability" shall mean the complete inability of Employee to perform his
or her duties by reason of his or her total and permanent disability, as
determined by an independent physician selected with the approval of
Bank's Board of Directors and Employee.
(e) Good Reason. For purposes of this Agreement, the term
"Good Reason" shall, absent Employee's written consent to the contrary,
mean:
(i) any material breach by Bank of its obligations
contained in this Agreement;
(ii) the assignment to Employee of any duties inconsistent
with the status of his or her position with Bank on the day
immediately preceding the happening of a Change in Control or an
alteration in the nature or status of Employee's duties and
responsibilities that renders Employee's position to be of less
dignity, responsibility or scope from that which existed on the
day immediately preceding the happening of a Change in Control;
provided, however, that, in the event Employee terminates his or
her employment prior to a Change in Control, the assignment or
alteration shall have occurred reasonably contemporaneously with
such termination of employment;
(iii) a reduction by Bank in Employee's annual base salary
as in effect on the day immediately preceding the happening of a
Change in Control or as the same may be increased from time to
time, except for proportional across-the-board salary reductions
similarly affecting all of Bank's employees; provided, however,
that, in the event Employee terminates his or her employment
- 3 -
<PAGE>
prior to a Change in Control, the reduction in annual base
salary shall have occurred reasonably contemporaneously with
such termination of employment;
(iv) the relocation of Bank's principal executive offices
to a location other than Stockton, California or Bank's
requiring Employee to be based anywhere other than Bank's
principal executive offices except for required travel on Bank's
business to an extent substantially consistent with Employee's
present business travel obligations; or
(v) any material reduction by Bank or California Financial
Holding Company, a Delaware corporation ("CFHC"), of the
benefits enjoyed by Employee under any of Bank's or CFHC's
pension, retirement, profit sharing, savings, life insurance,
medical, health-and-accident, disability or other employee
benefit plans, programs or arrangements as in effect from time
to time, the taking of any action by Bank or CFHC that would
directly or indirectly materially reduce any of such benefits or
deprive Employee of any material fringe benefits, or the failure
by Bank to provide Employee with the number of paid vacation
days to which he or she is entitled on the basis of years of
service with Bank in accordance with Bank's normal vacation
policy; provided, however, that this paragraph (v) shall not
apply to any proportional across-the-board reduction or action
similarly affecting all employees of Bank or CFHC.
(f) Change in Control. For purposes of this Agreement, a
"Change in Control" shall mean the occurrence, after the Effective Date,
of any of the following events, directly or indirectly or in one or more
series of transactions:
(i) A consolidation or merger of Bank or CFHC
with any third party (which includes a single person
or entity or a group of persons or entities acting in
concert) not wholly owned directly or indirectly by
Bank or CFHC (a "Third Party"), unless Bank or CFHC is
the entity surviving such merger or consolidation;
(ii) A transfer of all or substantially all of
the assets of Bank or CFHC to a Third Party or a
complete liquidation or dissolution of Bank or CFHC;
(iii) A Third Party, directly or indirectly,
through one or more subsidiaries or transactions or
acting in concert with one or more persons or
entities:
(A) acquires beneficial ownership of more
than 20% of any class of voting stock of Bank or
CFHC;
- 4 -
<PAGE>
(B) acquires irrevocable proxies
representing more than 20% of any class of
voting stock of Bank or CFHC;
(C) acquires any combination of beneficial
ownership of voting stock and irrevocable proxies
representing more than 20% of any class of voting
stock of Bank or CFHC;
(D) acquires the ability to control in
any manner the election of a majority of the
directors of Bank or CFHC; or
(E) acquires the ability to directly
or indirectly exercise a controlling
influence over the management or policies of
Bank or CFHC;
(iv) any election has occurred of persons to the
Board of Directors of CFHC ("Board") that causes a
majority of the Board to consist of persons other than
(A) persons who were members of the Board on the
Effective Date and/or (B) persons who were nominated
for election as members of the Board by the Board (or
a committee of the Board) at a time when the majority
of the Board (or of such committee) consisted of
persons who were members of the Board on the Effective
Date; provided, however, that any persons nominated
for election by the Board (or a committee of the
Board), a majority of whom are persons described in
clauses (A) and/or (B), or are persons who were
themselves nominated by such Board (or a committee of
such Board), shall for this purpose be deemed to have
been nominated by a Board composed of persons
described in clause (A); or
(v) A determination is made by the Office of
Thrift Supervision ("OTS"), the Federal Deposit
Insurance Corporation ("FDIC"), the Securities and
Exchange Commission ("SEC") or any similar agency
having regulatory control over Bank or CFHC that a
change in control, as defined in the banking,
insurance, or securities laws or regulations then
applicable to Bank or CFHC, has occurred.
Notwithstanding any provision contained herein, a Change in Control shall
not include any of the above described events if they (A) are related to
or occur in connection with the appointment of a receiver or a conservator
for Bank or CFHC, provision of assistance under Section 13(c) of the
Federal Deposit Insurance Act ("FDI Act"), the approval of a supervisory
merger, a determination that Bank is in default as defined in Section 3(x)
of the FDI Act, insolvent or in an unsafe or unsound condition to transact
- 5 -
<PAGE>
business or the suspension, removal and/or temporary or permanent
prohibition by the OTS, the FDIC, the SEC or another bank regulatory
agency of Employee from participation in the conduct of Bank's or CFHC's
business or affairs or (B) are the result of a Third Party inadvertently
acquiring beneficial ownership or irrevocable proxies or a combination of
both for 20% or more of any class of Bank's or CFHC's voting stock, and
the Third Party as promptly as practicable thereafter divests itself of
beneficial ownership or irrevocable proxies for a sufficient number of
shares so that the Third Party no longer has beneficial ownership or
irrevocable proxies or a combination of both for 20% or more of any class
of Bank's or CFHC's voting stock.
(g) Applicable Number of Months. For purposes of this
Agreement, the "Applicable Number of Months" shall mean twelve (12) months
plus one (1) month for each full year of Employee's service with Bank
prior to termination of employment, up to a maximum of twenty-four (24)
months in the aggregate.
5. Obligations of Bank Upon Termination of Employment. Upon
termination of Employee's employment with Bank under the circumstances set
forth in Section 4(b), Employee shall, notwithstanding such termination,
be entitled to receive the following payments and provided with the
following benefits:
(a) Base Salary. Bank shall pay Employee, within ten (10) days
after the termination of his or her employment, a lump sum payment equal
to the aggregate of the future base salary payments Employee would have
received if he or she had continued in Bank's employ until the Applicable
Number of Months following the date his or her employment is terminated
(unless a reduction in compensation preceded Employee's resignation or
retirement for Good Reason, in which case Bank shall pay Employee a lump
sum payment based on Employee's highest base salary in effect during the
twelve-month period preceding the termination of employment), discounted
to present value at a discount rate equal to the per annum rate offered on
the date employment is terminated (or the next preceding date on which
that rate is published) on U.S. Treasury bills with maturities of the
Applicable Number of Months.
(b) Bonus. Bank shall pay Employee, within ten (10) days after
the termination of his or her employment, a lump sum payment equal to his
or her projected bonus for the current year, which shall be computed
assuming that Employee had remained in the employ of Bank until the end of
the current year and that all performance goals or other performance
measures have been met at the then current level for the remainder of the
year.
(c) Benefits. During the Applicable Number of Months following
the date Employee's employment is terminated, at Bank's expense, Employee
shall participate in and be covered by all employee benefit plans,
programs, policies or arrangements of Bank applicable to executive
employees, whether funded or unfunded; provided, however, that, in the
event any administrator or any insurance carrier contests Employee's
- 6 -
<PAGE>
participation in or coverage under such plan, program, policy or
arrangement, then Bank, in respect to insurance arrangements, shall cause,
at its own cost or expense, equivalent insurance coverage to be provided
and, in respect to arrangements other than insurance arrangements, shall
make cash payments to Employee in an amount equal to the amount that would
have been contributed by Bank with respect to Employee at the times such
amounts would have been contributed; and provided further, however, that,
to the extent Bank has an obligation to provide continuation coverage
within the meaning of Section 4980(B)(f) of the Internal Revenue Code of
1986, as amended ("Code"), the period for which benefits are provided
under this Section 5(c) constitutes a portion of such continuation
coverage.
6. Limitations; Excise Tax.
(a) Section 1828(k). Notwithstanding anything to the contrary
in this Agreement, any payments made to Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(b) Excess Parachute Payment. Notwithstanding anything to the
contrary in this Agreement, if tax counsel selected by Bank and acceptable
to Employee determines that any portion of any payment by Bank or CFHC
under this Agreement or otherwise would constitute an "excess parachute
payment," then the payments to be made to Employee under this Agreement
shall be reduced such that the value of the aggregate payments that
Employee is entitled to receive under this Agreement and any other
agreement, plan or program of Bank and/or CFHC shall be one dollar ($1)
less than the maximum amount of payments that Employee may receive without
becoming subject to the tax imposed by Section 4999 of the Code.
(c) Bank Not Responsible for Excise Tax. If the Internal
Revenue Service assesses an excise tax against Employee pursuant to
Sections 280G and 4999 of the Code, Bank shall be under no obligation to
Employee with respect to the amount of (i) the excise tax or (ii) any
additional federal income tax due from and payable by Employee as the
result of his or her receipt of any payment hereunder or otherwise.
7. No Duty to Mitigate. Employee shall not be required to mitigate
the amount of any payment required hereunder by seeking other employment
or otherwise, nor shall the amount paid hereunder be reduced or offset by
any compensation earned or received by Employee as result of employment
with another employer, self-employment, or any amount received from any
other plan, program, policy or arrangement; provided, however, that
benefits provided under Section 5(c) shall be reduced to the extent
comparable benefits are actually received by Employee from or through
another employer.
- 7 -
<PAGE>
8. Miscellaneous.
(a) General Creditor. All payments required hereunder shall be
made from Bank's general assets and Employee shall have no rights greater
than the rights of a general creditor of Bank.
(b) Notices. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall
be deemed to have been duly given if delivered personally or sent by
certified mail, return receipt requested, first-class postage prepaid, to
the parties to this Agreement at the following addresses:
(i) if to Bank at:
Stockton Savings Bank, f.s.b.
501 West Weber Avenue
Stockton, California 95203
Attention: President
and
(ii) if to Employee at the address set forth
at the end of this Agreement
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and
communications shall be deemed to have been received on the earlier of the
date of receipt or the third business day after the date of mailing
thereof.
(c) Binding Effect; Benefits. This Agreement shall be binding
upon and inure to the benefit of the parties to this Agreement and their
respective successors and assigns. Nothing in this Agreement, express or
implied, is intended or shall be construed to give any person, other than
the parties to this Agreement or their respective successors or assigns,
any legal or equitable right, remedy or claim under or in respect of any
agreement or any provision contained herein.
(d) Costs of Enforcement. If Employee retains legal counsel to
enforce any or all of his or her rights to benefits under Section 5 above
and he or she substantially prevails in enforcing those rights, Employee
shall be entitled to recover from Bank Employee's reasonable attorneys'
fees, costs and expenses in connection with the enforcement of his or her
rights.
(e) Resolution of Differences Over Breaches of Agreement. In
the event of any controversy, dispute or claim arising out of, or relating
to, this Agreement or the breach thereof, Bank and Employee agree that
such underlying controversy, dispute or claim shall be settled by
arbitration conducted in accordance with this Section 8(e) and the
Commercial Arbitration Rules of the American Arbitration Association
("AAA"). The matter shall be heard and decided, and award rendered, by a
- 8 -
<PAGE>
panel of three (3) arbitrators ("Arbitration Panel"). Bank and Employee
shall each select one (1) arbitrator from the AAA National Panel of
Commercial Arbitrators ("Commercial Panel") and the AAA shall elect a
third arbitrator from the Commercial Panel. The award rendered by the
Arbitration Panel shall be final and binding as between the parties hereto
and their heirs, executors, administrators, successors and assigns, and
judgment on the award may be entered by any court having jurisdiction
thereof.
(f) Waiver. Either party hereto may by written notice to the
other (i) extend the time for the performance of any of the obligations or
other actions of the other under this Agreement; (ii) waive compliance
with any of the conditions or covenants of the other contained in this
Agreement; and (iii) waive or modify performance of any of the obligations
of the other under this Agreement. Except as provided in the preceding
sentence, no action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of
compliance with any representation, warranty, covenant or agreement
contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any preceding or succeeding breach, and no failure by either party to
exercise any right or privilege hereunder shall be deemed a waiver of such
party's rights or privileges hereunder or shall be deemed a waiver of such
party's rights to exercise that right or privilege at any subsequent time
or times hereunder.
(g) Amendment. This Agreement may be terminated, amended,
modified or supplemented only by a written instrument executed by Employee
and Bank.
(h) Assignability. Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof
shall be assignable by either Bank or Employee without the prior written
consent of the other party.
(i) Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of California,
regardless of the law that might be applied under principles of conflict
of laws, except as that law is superseded by the laws of the United
States.
(j) Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
(k) Withholding of Taxes. Bank may withhold from amounts
required to be paid to Employee hereunder any applicable federal, state,
local and other taxes with respect thereto; provided, however, that Bank
shall promptly pay over the amounts so withheld to the appropriate taxing
bodies and provide to Employee appropriate statements on forms proscribed
for such purposes on the amounts so withheld.
- 9 -
<PAGE>
(l) Severability. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other
provision of this Agreement not held so invalid, and each such other
provision shall, to the full extent consistent with law, continue in full
force and effect. If any provision of this Agreement shall be held
invalid in part, such invalidity shall in no way affect the rest of such
provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent
consistent with law continue in full force and effect. If this Agreement
is held invalid or cannot be enforced, then to the full extent permitted
by law any prior agreement between Bank (or any predecessor thereof) and
Employee shall be deemed reinstated as if this Agreement had not be
executed.
(m) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, Bank has caused this Agreement to be executed and
its seal affixed hereunto by its officers thereunto duly authorized and
Employee has signed this Agreement, all as of the date first above
written.
ATTEST: STOCKTON SAVINGS BANK, F.S.B.
/s/ Kathleen L. Stover By: /s/ Robert V. Kavanaugh
------------------------------ ---------------------------
Kathleen L. Stover, Assistant Robert V. Kavanaugh,
Secretary President
WITNESS: EMPLOYEE:
/s/ Kathleen L. Stover /s/ Jane R. Butterfield
------------------------------ ------------------------------
Name: Jane R. Butterfield
-------------------------
Address: 5726 Shelldrake Court
Stockton, CA 95207
------------------------------
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<PAGE>
<PAGE>
AMENDED AND RESTATED SEVERANCE AGREEMENT
----------------------------------------
THIS AGREEMENT, made and entered as of this 21st day of June, 1993,
as amended and restated as of the 18th day of March, 1996 ("Effective
Date"), by and between Stockton Savings Bank, f.s.b., a federally
chartered savings bank, with its principal executive offices at 501 West
Weber Avenue, Stockton, California 95203 ("Bank") and W. Henry Claussen
("Employee");
WHEREAS, Employee is currently employed by Bank and is considered a
key employee of Bank;
WHEREAS, Bank desires to retain the services of Employee;
WHEREAS, from time to time Bank has made payments and provided
benefits to employees who have terminated employment with Bank ("Prior
Severance Arrangements");
WHEREAS, Bank and Employee desire to set forth the amounts payable
and benefits to be provided by Bank to Employee in the event of a
termination of Employee's employment with Bank under the circumstances set
forth herein after the happening of a Change in Control (as defined
herein);
WHEREAS, the parties intend that the provisions of this Agreement
shall be in lieu of Employee's right to make any claim or demand with
respect to any severance policy of Bank arising from or alleged to arise
from the Prior Severance Arrangements; and
WHEREAS, Bank and Employee intend to amend and restate in its
entirety the Severance Agreement between them dated as of June 21, 1993;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein and intending to be legally bound hereby, the
parties agree as follows:
1. Continued Employment. In reliance upon the promises of Bank
hereinafter contained, Employee agrees that, for a period of no less than
one (1) year commencing on the date set forth above, and subject to
reasonable absences for illness, holiday, and vacation pursuant to Bank's
policies and practices in effect on the date hereof, Employee will
continue his or her employment with Bank and shall devote his or her best
efforts to such duties as may be assigned to him or her by Bank from time
to time.
2. Prior Severance Arrangements. Except to the extent set forth
herein, in the event of the termination of Employee's employment with
Bank, Employee shall make no claim or demand arising or alleged to arise
from any severance plan, program, policy or arrangement (including but not
limited to the Prior Severance Arrangements) that Bank may have had in
effect, may currently sponsor or may hereafter adopt. Notwithstanding the
foregoing, in the event of a termination of Employee's employment with
<PAGE>
Bank, Employee (and his or her spouse, heirs, estate and/or personal
representative, as the case may be) shall be entitled to receive any
benefits payable under any employee benefit plan, program, policy or
arrangement as such may then be in effect that is not a severance plan,
program, policy or arrangement.
3. Effective Date. This Agreement shall be effective as of the
date first above written ("Effective Date") and shall continue and remain
in full force and effect until the termination of Employee's employment
with Bank, unless earlier terminated by the parties in writing. The
completion of one (1) year of employment with Bank by Employee as set
forth in Section 1 shall not be a condition precedent to the effectiveness
of this Agreement or to the payments of amounts or provision of benefits
hereunder in the event Employee's employment with Bank is terminated under
the circumstances described in Section 4(b).
4. Termination of Employment.
(a) Requiring No Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, no payments shall be or become due and owing and Bank shall
have no other obligations under Section 5 of this Agreement:
(i) by either party for any reason prior to a Change in
Control, except as otherwise provided in Section 4(b)(iii)
below;
(ii) by either party for any reason at any time more than
the Applicable Number of Months (as hereinafter defined) after a
Change in Control;
(iii) by Bank, contemporaneously with or subsequent to a
Change in Control, for reason of "Cause" (as hereinafter
defined) or upon the death or "Disability" (as hereinafter
defined) of Employee; or
(iv) by Employee, contemporaneously with or subsequent to a
Change in Control, upon his or her retirement or resignation for
reasons other than "Good Reason" (as hereinafter defined).
(b) Requiring Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, Bank shall make the payments and provide the benefits as
set forth in Section 5:
(i) by Bank, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for any
reason other than (A) for Cause or (B) upon the death or
Disability of Employee;
- 2 -
<PAGE>
(ii) by Employee, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for Good
Reason; or
(iii) before a Change in Control occurs either (A) by Bank
other than for Cause or upon the death or Disability of
Employee, or (B) by Employee for Good Reason, and in either case
it is reasonably demonstrated that the termination of employment
(x) was at the request of a Third Party (as hereinafter defined)
that has taken steps reasonably calculated to effect a Change in
Control or (y) otherwise arose in connection with or in
anticipation of a Change in Control.
(c) Cause. For the purposes of this Agreement, the term
"Cause" shall mean Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement.
(d) Disability. For purposes of this Agreement, the term
"Disability" shall mean the complete inability of Employee to perform his
or her duties by reason of his or her total and permanent disability, as
determined by an independent physician selected with the approval of
Bank's Board of Directors and Employee.
(e) Good Reason. For purposes of this Agreement, the term
"Good Reason" shall, absent Employee's written consent to the contrary,
mean:
(i) any material breach by Bank of its obligations
contained in this Agreement;
(ii) the assignment to Employee of any duties inconsistent
with the status of his or her position with Bank on the day
immediately preceding the happening of a Change in Control or an
alteration in the nature or status of Employee's duties and
responsibilities that renders Employee's position to be of less
dignity, responsibility or scope from that which existed on the
day immediately preceding the happening of a Change in Control;
provided, however, that, in the event Employee terminates his or
her employment prior to a Change in Control, the assignment or
alteration shall have occurred reasonably contemporaneously with
such termination of employment;
(iii) a reduction by Bank in Employee's annual base salary
as in effect on the day immediately preceding the happening of a
Change in Control or as the same may be increased from time to
time, except for proportional across-the-board salary reductions
similarly affecting all of Bank's employees; provided, however,
that, in the event Employee terminates his or her employment
- 3 -
<PAGE>
prior to a Change in Control, the reduction in annual base
salary shall have occurred reasonably contemporaneously with
such termination of employment;
(iv) the relocation of Bank's principal executive offices
to a location other than Stockton, California or Bank's
requiring Employee to be based anywhere other than Bank's
principal executive offices except for required travel on Bank's
business to an extent substantially consistent with Employee's
present business travel obligations; or
(v) any material reduction by Bank or California Financial
Holding Company, a Delaware corporation ("CFHC"), of the
benefits enjoyed by Employee under any of Bank's or CFHC's
pension, retirement, profit sharing, savings, life insurance,
medical, health-and-accident, disability or other employee
benefit plans, programs or arrangements as in effect from time
to time, the taking of any action by Bank or CFHC that would
directly or indirectly materially reduce any of such benefits or
deprive Employee of any material fringe benefits, or the failure
by Bank to provide Employee with the number of paid vacation
days to which he or she is entitled on the basis of years of
service with Bank in accordance with Bank's normal vacation
policy; provided, however, that this paragraph (v) shall not
apply to any proportional across-the-board reduction or action
similarly affecting all employees of Bank or CFHC.
(f) Change in Control. For purposes of this Agreement, a
"Change in Control" shall mean the occurrence, after the Effective Date,
of any of the following events, directly or indirectly or in one or more
series of transactions:
(i) A consolidation or merger of Bank or CFHC
with any third party (which includes a single person
or entity or a group of persons or entities acting in
concert) not wholly owned directly or indirectly by
Bank or CFHC (a "Third Party"), unless Bank or CFHC is
the entity surviving such merger or consolidation;
(ii) A transfer of all or substantially all of
the assets of Bank or CFHC to a Third Party or a
complete liquidation or dissolution of Bank or CFHC;
(iii) A Third Party, directly or indirectly,
through one or more subsidiaries or transactions or
acting in concert with one or more persons or
entities:
(A) acquires beneficial ownership of more
than 20% of any class of voting stock of Bank or
CFHC;
- 4 -
<PAGE>
(B) acquires irrevocable proxies
representing more than 20% of any class of
voting stock of Bank or CFHC;
(C) acquires any combination of beneficial
ownership of voting stock and irrevocable proxies
representing more than 20% of any class of voting
stock of Bank or CFHC;
(D) acquires the ability to control in
any manner the election of a majority of the
directors of Bank or CFHC; or
(E) acquires the ability to directly
or indirectly exercise a controlling
influence over the management or policies of
Bank or CFHC;
(iv) any election has occurred of persons to the
Board of Directors of CFHC ("Board") that causes a
majority of the Board to consist of persons other than
(A) persons who were members of the Board on the
Effective Date and/or (B) persons who were nominated
for election as members of the Board by the Board (or
a committee of the Board) at a time when the majority
of the Board (or of such committee) consisted of
persons who were members of the Board on the Effective
Date; provided, however, that any persons nominated
for election by the Board (or a committee of the
Board), a majority of whom are persons described in
clauses (A) and/or (B), or are persons who were
themselves nominated by such Board (or a committee of
such Board), shall for this purpose be deemed to have
been nominated by a Board composed of persons
described in clause (A); or
(v) A determination is made by the Office of
Thrift Supervision ("OTS"), the Federal Deposit
Insurance Corporation ("FDIC"), the Securities and
Exchange Commission ("SEC") or any similar agency
having regulatory control over Bank or CFHC that a
change in control, as defined in the banking,
insurance, or securities laws or regulations then
applicable to Bank or CFHC, has occurred.
Notwithstanding any provision contained herein, a Change in Control shall
not include any of the above described events if they (A) are related to
or occur in connection with the appointment of a receiver or a conservator
for Bank or CFHC, provision of assistance under Section 13(c) of the
Federal Deposit Insurance Act ("FDI Act"), the approval of a supervisory
merger, a determination that Bank is in default as defined in Section 3(x)
of the FDI Act, insolvent or in an unsafe or unsound condition to transact
- 5 -
<PAGE>
business or the suspension, removal and/or temporary or permanent
prohibition by the OTS, the FDIC, the SEC or another bank regulatory
agency of Employee from participation in the conduct of Bank's or CFHC's
business or affairs or (B) are the result of a Third Party inadvertently
acquiring beneficial ownership or irrevocable proxies or a combination of
both for 20% or more of any class of Bank's or CFHC's voting stock, and
the Third Party as promptly as practicable thereafter divests itself of
beneficial ownership or irrevocable proxies for a sufficient number of
shares so that the Third Party no longer has beneficial ownership or
irrevocable proxies or a combination of both for 20% or more of any class
of Bank's or CFHC's voting stock.
(g) Applicable Number of Months. For purposes of this
Agreement, the "Applicable Number of Months" shall mean twenty-four (24)
months.
5. Obligations of Bank Upon Termination of Employment. Upon
termination of Employee's employment with Bank under the circumstances set
forth in Section 4(b), Employee shall, notwithstanding such termination,
be entitled to receive the following payments and provided with the
following benefits:
(a) Base Salary. Bank shall pay Employee, within ten (10) days
after the termination of his or her employment, a lump sum payment equal
to the aggregate of the future base salary payments Employee would have
received if he or she had continued in Bank's employ until the Applicable
Number of Months following the date his or her employment is terminated
(unless a reduction in compensation preceded Employee's resignation or
retirement for Good Reason, in which case Bank shall pay Employee a lump
sum payment based on Employee's highest base salary in effect during the
twelve-month period preceding the termination of employment), discounted
to present value at a discount rate equal to the per annum rate offered on
the date employment is terminated (or the next preceding date on which
that rate is published) on U.S. Treasury bills with maturities of the
Applicable Number of Months.
(b) Bonus. Bank shall pay Employee, within ten (10) days after
the termination of his or her employment, a lump sum payment equal to his
or her projected bonus for the current year, which shall be computed
assuming that Employee had remained in the employ of Bank until the end of
the current year and that all performance goals or other performance
measures have been met at the then current level for the remainder of the
year.
(c) Benefits. During the Applicable Number of Months following
the date Employee's employment is terminated, at Bank's expense, Employee
shall participate in and be covered by all employee benefit plans,
programs, policies or arrangements of Bank applicable to executive
employees, whether funded or unfunded; provided, however, that, in the
event any administrator or any insurance carrier contests Employee's
participation in or coverage under such plan, program, policy or
arrangement, then Bank, in respect to insurance arrangements, shall cause,
- 6 -
<PAGE>
at its own cost or expense, equivalent insurance coverage to be provided
and, in respect to arrangements other than insurance arrangements, shall
make cash payments to Employee in an amount equal to the amount that would
have been contributed by Bank with respect to Employee at the times such
amounts would have been contributed; and provided further, however, that,
to the extent Bank has an obligation to provide continuation coverage
within the meaning of Section 4980(B)(f) of the Internal Revenue Code of
1986, as amended ("Code"), the period for which benefits are provided
under this Section 5(c) constitutes a portion of such continuation
coverage.
6. Limitations; Excise Tax.
(a) Section 1828(k). Notwithstanding anything to the contrary
in this Agreement, any payments made to Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(b) Excess Parachute Payment. Notwithstanding anything to the
contrary in this Agreement, if tax counsel selected by Bank and acceptable
to Employee determines that any portion of any payment by Bank or CFHC
under this Agreement or otherwise would constitute an "excess parachute
payment," then the payments to be made to Employee under this Agreement
shall be reduced such that the value of the aggregate payments that
Employee is entitled to receive under this Agreement and any other
agreement, plan or program of Bank and/or CFHC shall be one dollar ($1)
less than the maximum amount of payments that Employee may receive without
becoming subject to the tax imposed by Section 4999 of the Code.
(c) Bank Not Responsible for Excise Tax. If the Internal
Revenue Service assesses an excise tax against Employee pursuant to
Sections 280G and 4999 of the Code, Bank shall be under no obligation to
Employee with respect to the amount of (i) the excise tax or (ii) any
additional federal income tax due from and payable by Employee as the
result of his or her receipt of any payment hereunder or otherwise.
7. No Duty to Mitigate. Employee shall not be required to mitigate
the amount of any payment required hereunder by seeking other employment
or otherwise, nor shall the amount paid hereunder be reduced or offset by
any compensation earned or received by Employee as result of employment
with another employer, self-employment, or any amount received from any
other plan, program, policy or arrangement; provided, however, that
benefits provided under Section 5(c) shall be reduced to the extent
comparable benefits are actually received by Employee from or through
another employer.
- 7 -
<PAGE>
8. Miscellaneous.
(a) General Creditor. All payments required hereunder shall be
made from Bank's general assets and Employee shall have no rights greater
than the rights of a general creditor of Bank.
(b) Notices. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall
be deemed to have been duly given if delivered personally or sent by
certified mail, return receipt requested, first-class postage prepaid, to
the parties to this Agreement at the following addresses:
(i) if to Bank at:
Stockton Savings Bank, f.s.b.
501 West Weber Avenue
Stockton, California 95203
Attention: President
and
(ii) if to Employee at the address set forth
at the end of this Agreement
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and
communications shall be deemed to have been received on the earlier of the
date of receipt or the third business day after the date of mailing
thereof.
(c) Binding Effect; Benefits. This Agreement shall be binding
upon and inure to the benefit of the parties to this Agreement and their
respective successors and assigns. Nothing in this Agreement, express or
implied, is intended or shall be construed to give any person, other than
the parties to this Agreement or their respective successors or assigns,
any legal or equitable right, remedy or claim under or in respect of any
agreement or any provision contained herein.
(d) Costs of Enforcement. If Employee retains legal counsel to
enforce any or all of his or her rights to benefits under Section 5 above
and he or she substantially prevails in enforcing those rights, Employee
shall be entitled to recover from Bank Employee's reasonable attorneys'
fees, costs and expenses in connection with the enforcement of his or her
rights.
(e) Resolution of Differences Over Breaches of Agreement. In
the event of any controversy, dispute or claim arising out of, or relating
to, this Agreement or the breach thereof, Bank and Employee agree that
such underlying controversy, dispute or claim shall be settled by
arbitration conducted in accordance with this Section 8(e) and the
Commercial Arbitration Rules of the American Arbitration Association
("AAA"). The matter shall be heard and decided, and award rendered, by a
- 8 -
<PAGE>
panel of three (3) arbitrators ("Arbitration Panel"). Bank and Employee
shall each select one (1) arbitrator from the AAA National Panel of
Commercial Arbitrators ("Commercial Panel") and the AAA shall elect a
third arbitrator from the Commercial Panel. The award rendered by the
Arbitration Panel shall be final and binding as between the parties hereto
and their heirs, executors, administrators, successors and assigns, and
judgment on the award may be entered by any court having jurisdiction
thereof.
(f) Waiver. Either party hereto may by written notice to the
other (i) extend the time for the performance of any of the obligations or
other actions of the other under this Agreement; (ii) waive compliance
with any of the conditions or covenants of the other contained in this
Agreement; and (iii) waive or modify performance of any of the obligations
of the other under this Agreement. Except as provided in the preceding
sentence, no action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of
compliance with any representation, warranty, covenant or agreement
contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any preceding or succeeding breach, and no failure by either party to
exercise any right or privilege hereunder shall be deemed a waiver of such
party's rights or privileges hereunder or shall be deemed a waiver of such
party's rights to exercise that right or privilege at any subsequent time
or times hereunder.
(g) Amendment. This Agreement may be terminated, amended,
modified or supplemented only by a written instrument executed by Employee
and Bank.
(h) Assignability. Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof
shall be assignable by either Bank or Employee without the prior written
consent of the other party.
(i) Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of California,
regardless of the law that might be applied under principles of conflict
of laws, except as that law is superseded by the laws of the United
States.
(j) Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
(k) Withholding of Taxes. Bank may withhold from amounts
required to be paid to Employee hereunder any applicable federal, state,
local and other taxes with respect thereto; provided, however, that Bank
shall promptly pay over the amounts so withheld to the appropriate taxing
bodies and provide to Employee appropriate statements on forms proscribed
for such purposes on the amounts so withheld.
- 9 -
<PAGE>
(l) Severability. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other
provision of this Agreement not held so invalid, and each such other
provision shall, to the full extent consistent with law, continue in full
force and effect. If any provision of this Agreement shall be held
invalid in part, such invalidity shall in no way affect the rest of such
provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent
consistent with law continue in full force and effect. If this Agreement
is held invalid or cannot be enforced, then to the full extent permitted
by law any prior agreement between Bank (or any predecessor thereof) and
Employee shall be deemed reinstated as if this Agreement had not be
executed.
(m) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, Bank has caused this Agreement to be executed and
its seal affixed hereunto by its officers thereunto duly authorized and
Employee has signed this Agreement, all as of the date first above
written.
ATTEST: STOCKTON SAVINGS BANK, F.S.B.
/s/ Kathleen L. Stover By:/s/ Robert V. Kavanaugh
------------------------------ ---------------------------
Kathleen L. Stover, Assistant Robert V. Kavanaugh,
Secretary President
WITNESS: EMPLOYEE:
/s/ Kathleen L. Stover /s/ W. Henry Claussen
------------------------------ ------------------------------
Name: W. Henry Claussen
Address: 3589 Pardee Court
Valley Springs, CA 95252
------------------------------
- 10 -
<PAGE>
<PAGE>
AMENDED AND RESTATED SEVERANCE AGREEMENT
----------------------------------------
THIS AGREEMENT, made and entered as of this 21st day of June, 1993,
as amended and restated as of the 18th day of March, 1996 ("Effective
Date"), by and between Stockton Savings Bank, f.s.b., a federally
chartered savings bank, with its principal executive offices at 501 West
Weber Avenue, Stockton, California 95203 ("Bank") and Morris W. Knight
("Employee");
WHEREAS, Employee is currently employed by Bank and is considered a
key employee of Bank;
WHEREAS, Bank desires to retain the services of Employee;
WHEREAS, from time to time Bank has made payments and provided
benefits to employees who have terminated employment with Bank ("Prior
Severance Arrangements");
WHEREAS, Bank and Employee desire to set forth the amounts payable
and benefits to be provided by Bank to Employee in the event of a
termination of Employee's employment with Bank under the circumstances set
forth herein after the happening of a Change in Control (as defined
herein);
WHEREAS, the parties intend that the provisions of this Agreement
shall be in lieu of Employee's right to make any claim or demand with
respect to any severance policy of Bank arising from or alleged to arise
from the Prior Severance Arrangements; and
WHEREAS, Bank and Employee intend to amend and restate in its
entirety the Severance Agreement between them dated as of June 21, 1993;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein and intending to be legally bound hereby, the
parties agree as follows:
1. Continued Employment. In reliance upon the promises of Bank
hereinafter contained, Employee agrees that, for a period of no less than
one (1) year commencing on the date set forth above, and subject to
reasonable absences for illness, holiday, and vacation pursuant to Bank's
policies and practices in effect on the date hereof, Employee will
continue his or her employment with Bank and shall devote his or her best
efforts to such duties as may be assigned to him or her by Bank from time
to time.
2. Prior Severance Arrangements. Except to the extent set forth
herein, in the event of the termination of Employee's employment with
Bank, Employee shall make no claim or demand arising or alleged to arise
from any severance plan, program, policy or arrangement (including but not
limited to the Prior Severance Arrangements) that Bank may have had in
effect, may currently sponsor or may hereafter adopt. Notwithstanding the
foregoing, in the event of a termination of Employee's employment with
<PAGE>
Bank, Employee (and his or her spouse, heirs, estate and/or personal
representative, as the case may be) shall be entitled to receive any
benefits payable under any employee benefit plan, program, policy or
arrangement as such may then be in effect that is not a severance plan,
program, policy or arrangement.
3. Effective Date. This Agreement shall be effective as of the
date first above written ("Effective Date") and shall continue and remain
in full force and effect until the termination of Employee's employment
with Bank, unless earlier terminated by the parties in writing. The
completion of one (1) year of employment with Bank by Employee as set
forth in Section 1 shall not be a condition precedent to the effectiveness
of this Agreement or to the payments of amounts or provision of benefits
hereunder in the event Employee's employment with Bank is terminated under
the circumstances described in Section 4(b).
4. Termination of Employment.
(a) Requiring No Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, no payments shall be or become due and owing and Bank shall
have no other obligations under Section 5 of this Agreement:
(i) by either party for any reason prior to a Change in
Control, except as otherwise provided in Section 4(b)(iii)
below;
(ii) by either party for any reason at any time more than
the Applicable Number of Months (as hereinafter defined) after a
Change in Control;
(iii) by Bank, contemporaneously with or subsequent to a
Change in Control, for reason of "Cause" (as hereinafter
defined) or upon the death or "Disability" (as hereinafter
defined) of Employee; or
(iv) by Employee, contemporaneously with or subsequent to a
Change in Control, upon his or her retirement or resignation for
reasons other than "Good Reason" (as hereinafter defined).
(b) Requiring Payments Under Section 5. In the event
Employee's employment with Bank is terminated under any of the following
circumstances, Bank shall make the payments and provide the benefits as
set forth in Section 5:
(i) by Bank, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for any
reason other than (A) for Cause or (B) upon the death or
Disability of Employee;
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<PAGE>
(ii) by Employee, contemporaneously with or within the
Applicable Number of Months after a Change in Control, for Good
Reason; or
(iii) before a Change in Control occurs either (A) by Bank
other than for Cause or upon the death or Disability of
Employee, or (B) by Employee for Good Reason, and in either case
it is reasonably demonstrated that the termination of employment
(x) was at the request of a Third Party (as hereinafter defined)
that has taken steps reasonably calculated to effect a Change in
Control or (y) otherwise arose in connection with or in
anticipation of a Change in Control.
(c) Cause. For the purposes of this Agreement, the term
"Cause" shall mean Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement.
(d) Disability. For purposes of this Agreement, the term
"Disability" shall mean the complete inability of Employee to perform his
or her duties by reason of his or her total and permanent disability, as
determined by an independent physician selected with the approval of
Bank's Board of Directors and Employee.
(e) Good Reason. For purposes of this Agreement, the term
"Good Reason" shall, absent Employee's written consent to the contrary,
mean:
(i) any material breach by Bank of its obligations
contained in this Agreement;
(ii) the assignment to Employee of any duties inconsistent
with the status of his or her position with Bank on the day
immediately preceding the happening of a Change in Control or an
alteration in the nature or status of Employee's duties and
responsibilities that renders Employee's position to be of less
dignity, responsibility or scope from that which existed on the
day immediately preceding the happening of a Change in Control;
provided, however, that, in the event Employee terminates his or
her employment prior to a Change in Control, the assignment or
alteration shall have occurred reasonably contemporaneously with
such termination of employment;
(iii) a reduction by Bank in Employee's annual base salary
as in effect on the day immediately preceding the happening of a
Change in Control or as the same may be increased from time to
time, except for proportional across-the-board salary reductions
similarly affecting all of Bank's employees; provided, however,
that, in the event Employee terminates his or her employment
- 3 -
<PAGE>
prior to a Change in Control, the reduction in annual base
salary shall have occurred reasonably contemporaneously with
such termination of employment;
(iv) the relocation of Bank's principal executive offices
to a location other than Stockton, California or Bank's
requiring Employee to be based anywhere other than Bank's
principal executive offices except for required travel on Bank's
business to an extent substantially consistent with Employee's
present business travel obligations; or
(v) any material reduction by Bank or California Financial
Holding Company, a Delaware corporation ("CFHC"), of the
benefits enjoyed by Employee under any of Bank's or CFHC's
pension, retirement, profit sharing, savings, life insurance,
medical, health-and-accident, disability or other employee
benefit plans, programs or arrangements as in effect from time
to time, the taking of any action by Bank or CFHC that would
directly or indirectly materially reduce any of such benefits or
deprive Employee of any material fringe benefits, or the failure
by Bank to provide Employee with the number of paid vacation
days to which he or she is entitled on the basis of years of
service with Bank in accordance with Bank's normal vacation
policy; provided, however, that this paragraph (v) shall not
apply to any proportional across-the-board reduction or action
similarly affecting all employees of Bank or CFHC.
(f) Change in Control. For purposes of this Agreement, a
"Change in Control" shall mean the occurrence, after the Effective Date,
of any of the following events, directly or indirectly or in one or more
series of transactions:
(i) A consolidation or merger of Bank or CFHC
with any third party (which includes a single person
or entity or a group of persons or entities acting in
concert) not wholly owned directly or indirectly by
Bank or CFHC (a "Third Party"), unless Bank or CFHC is
the entity surviving such merger or consolidation;
(ii) A transfer of all or substantially all of
the assets of Bank or CFHC to a Third Party or a
complete liquidation or dissolution of Bank or CFHC;
(iii) A Third Party, directly or indirectly,
through one or more subsidiaries or transactions or
acting in concert with one or more persons or
entities:
(A) acquires beneficial ownership of more
than 20% of any class of voting stock of Bank or
CFHC;
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<PAGE>
(B) acquires irrevocable proxies
representing more than 20% of any class of
voting stock of Bank or CFHC;
(C) acquires any combination of beneficial
ownership of voting stock and irrevocable proxies
representing more than 20% of any class of voting
stock of Bank or CFHC;
(D) acquires the ability to control in
any manner the election of a majority of the
directors of Bank or CFHC; or
(E) acquires the ability to directly
or indirectly exercise a controlling
influence over the management or policies of
Bank or CFHC;
(iv) any election has occurred of persons to the
Board of Directors of CFHC ("Board") that causes a
majority of the Board to consist of persons other than
(A) persons who were members of the Board on the
Effective Date and/or (B) persons who were nominated
for election as members of the Board by the Board (or
a committee of the Board) at a time when the majority
of the Board (or of such committee) consisted of
persons who were members of the Board on the Effective
Date; provided, however, that any persons nominated
for election by the Board (or a committee of the
Board), a majority of whom are persons described in
clauses (A) and/or (B), or are persons who were
themselves nominated by such Board (or a committee of
such Board), shall for this purpose be deemed to have
been nominated by a Board composed of persons
described in clause (A); or
(v) A determination is made by the Office of
Thrift Supervision ("OTS"), the Federal Deposit
Insurance Corporation ("FDIC"), the Securities and
Exchange Commission ("SEC") or any similar agency
having regulatory control over Bank or CFHC that a
change in control, as defined in the banking,
insurance, or securities laws or regulations then
applicable to Bank or CFHC, has occurred.
Notwithstanding any provision contained herein, a Change in Control shall
not include any of the above described events if they (A) are related to
or occur in connection with the appointment of a receiver or a conservator
for Bank or CFHC, provision of assistance under Section 13(c) of the
Federal Deposit Insurance Act ("FDI Act"), the approval of a supervisory
merger, a determination that Bank is in default as defined in Section 3(x)
of the FDI Act, insolvent or in an unsafe or unsound condition to transact
- 5 -
<PAGE>
business or the suspension, removal and/or temporary or permanent
prohibition by the OTS, the FDIC, the SEC or another bank regulatory
agency of Employee from participation in the conduct of Bank's or CFHC's
business or affairs or (B) are the result of a Third Party inadvertently
acquiring beneficial ownership or irrevocable proxies or a combination of
both for 20% or more of any class of Bank's or CFHC's voting stock, and
the Third Party as promptly as practicable thereafter divests itself of
beneficial ownership or irrevocable proxies for a sufficient number of
shares so that the Third Party no longer has beneficial ownership or
irrevocable proxies or a combination of both for 20% or more of any class
of Bank's or CFHC's voting stock.
(g) Applicable Number of Months. For purposes of this
Agreement, the "Applicable Number of Months" shall mean twenty-four (24)
months.
5. Obligations of Bank Upon Termination of Employment. Upon
termination of Employee's employment with Bank under the circumstances set
forth in Section 4(b), Employee shall, notwithstanding such termination,
be entitled to receive the following payments and provided with the
following benefits:
(a) Base Salary. Bank shall pay Employee, within ten (10) days
after the termination of his or her employment, a lump sum payment equal
to the aggregate of the future base salary payments Employee would have
received if he or she had continued in Bank's employ until the Applicable
Number of Months following the date his or her employment is terminated
(unless a reduction in compensation preceded Employee's resignation or
retirement for Good Reason, in which case Bank shall pay Employee a lump
sum payment based on Employee's highest base salary in effect during the
twelve-month period preceding the termination of employment), discounted
to present value at a discount rate equal to the per annum rate offered on
the date employment is terminated (or the next preceding date on which
that rate is published) on U.S. Treasury bills with maturities of the
Applicable Number of Months.
(b) Bonus. Bank shall pay Employee, within ten (10) days after
the termination of his or her employment, a lump sum payment equal to his
or her projected bonus for the current year, which shall be computed
assuming that Employee had remained in the employ of Bank until the end of
the current year and that all performance goals or other performance
measures have been met at the then current level for the remainder of the
year.
(c) Benefits. During the Applicable Number of Months following
the date Employee's employment is terminated, at Bank's expense, Employee
shall participate in and be covered by all employee benefit plans,
programs, policies or arrangements of Bank applicable to executive
employees, whether funded or unfunded; provided, however, that, in the
event any administrator or any insurance carrier contests Employee's
participation in or coverage under such plan, program, policy or
arrangement, then Bank, in respect to insurance arrangements, shall cause,
- 6 -
<PAGE>
at its own cost or expense, equivalent insurance coverage to be provided
and, in respect to arrangements other than insurance arrangements, shall
make cash payments to Employee in an amount equal to the amount that would
have been contributed by Bank with respect to Employee at the times such
amounts would have been contributed; and provided further, however, that,
to the extent Bank has an obligation to provide continuation coverage
within the meaning of Section 4980(B)(f) of the Internal Revenue Code of
1986, as amended ("Code"), the period for which benefits are provided
under this Section 5(c) constitutes a portion of such continuation
coverage.
6. Limitations; Excise Tax.
(a) Section 1828(k). Notwithstanding anything to the contrary
in this Agreement, any payments made to Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(b) Excess Parachute Payment. Notwithstanding anything to the
contrary in this Agreement, if tax counsel selected by Bank and acceptable
to Employee determines that any portion of any payment by Bank or CFHC
under this Agreement or otherwise would constitute an "excess parachute
payment," then the payments to be made to Employee under this Agreement
shall be reduced such that the value of the aggregate payments that
Employee is entitled to receive under this Agreement and any other
agreement, plan or program of Bank and/or CFHC shall be one dollar ($1)
less than the maximum amount of payments that Employee may receive without
becoming subject to the tax imposed by Section 4999 of the Code.
(c) Bank Not Responsible for Excise Tax. If the Internal
Revenue Service assesses an excise tax against Employee pursuant to
Sections 280G and 4999 of the Code, Bank shall be under no obligation to
Employee with respect to the amount of (i) the excise tax or (ii) any
additional federal income tax due from and payable by Employee as the
result of his or her receipt of any payment hereunder or otherwise.
7. No Duty to Mitigate. Employee shall not be required to mitigate
the amount of any payment required hereunder by seeking other employment
or otherwise, nor shall the amount paid hereunder be reduced or offset by
any compensation earned or received by Employee as result of employment
with another employer, self-employment, or any amount received from any
other plan, program, policy or arrangement; provided, however, that
benefits provided under Section 5(c) shall be reduced to the extent
comparable benefits are actually received by Employee from or through
another employer.
- 7 -
<PAGE>
8. Miscellaneous.
(a) General Creditor. All payments required hereunder shall be
made from Bank's general assets and Employee shall have no rights greater
than the rights of a general creditor of Bank.
(b) Notices. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall
be deemed to have been duly given if delivered personally or sent by
certified mail, return receipt requested, first-class postage prepaid, to
the parties to this Agreement at the following addresses:
(i) if to Bank at:
Stockton Savings Bank, f.s.b.
501 West Weber Avenue
Stockton, California 95203
Attention: President
and
(ii) if to Employee at the address set forth
at the end of this Agreement
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and
communications shall be deemed to have been received on the earlier of the
date of receipt or the third business day after the date of mailing
thereof.
(c) Binding Effect; Benefits. This Agreement shall be binding
upon and inure to the benefit of the parties to this Agreement and their
respective successors and assigns. Nothing in this Agreement, express or
implied, is intended or shall be construed to give any person, other than
the parties to this Agreement or their respective successors or assigns,
any legal or equitable right, remedy or claim under or in respect of any
agreement or any provision contained herein.
(d) Costs of Enforcement. If Employee retains legal counsel to
enforce any or all of his or her rights to benefits under Section 5 above
and he or she substantially prevails in enforcing those rights, Employee
shall be entitled to recover from Bank Employee's reasonable attorneys'
fees, costs and expenses in connection with the enforcement of his or her
rights.
(e) Resolution of Differences Over Breaches of Agreement. In
the event of any controversy, dispute or claim arising out of, or relating
to, this Agreement or the breach thereof, Bank and Employee agree that
such underlying controversy, dispute or claim shall be settled by
arbitration conducted in accordance with this Section 8(e) and the
Commercial Arbitration Rules of the American Arbitration Association
("AAA"). The matter shall be heard and decided, and award rendered, by a
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<PAGE>
panel of three (3) arbitrators ("Arbitration Panel"). Bank and Employee
shall each select one (1) arbitrator from the AAA National Panel of
Commercial Arbitrators ("Commercial Panel") and the AAA shall elect a
third arbitrator from the Commercial Panel. The award rendered by the
Arbitration Panel shall be final and binding as between the parties hereto
and their heirs, executors, administrators, successors and assigns, and
judgment on the award may be entered by any court having jurisdiction
thereof.
(f) Waiver. Either party hereto may by written notice to the
other (i) extend the time for the performance of any of the obligations or
other actions of the other under this Agreement; (ii) waive compliance
with any of the conditions or covenants of the other contained in this
Agreement; and (iii) waive or modify performance of any of the obligations
of the other under this Agreement. Except as provided in the preceding
sentence, no action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of
compliance with any representation, warranty, covenant or agreement
contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver
of any preceding or succeeding breach, and no failure by either party to
exercise any right or privilege hereunder shall be deemed a waiver of such
party's rights or privileges hereunder or shall be deemed a waiver of such
party's rights to exercise that right or privilege at any subsequent time
or times hereunder.
(g) Amendment. This Agreement may be terminated, amended,
modified or supplemented only by a written instrument executed by Employee
and Bank.
(h) Assignability. Neither this Agreement nor any right,
remedy, obligation or liability arising hereunder or by reason hereof
shall be assignable by either Bank or Employee without the prior written
consent of the other party.
(i) Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of California,
regardless of the law that might be applied under principles of conflict
of laws, except as that law is superseded by the laws of the United
States.
(j) Section and Other Headings. The section and other headings
contained in this Agreement are for reference purposes only and shall not
affect the meaning or interpretation of this Agreement.
(k) Withholding of Taxes. Bank may withhold from amounts
required to be paid to Employee hereunder any applicable federal, state,
local and other taxes with respect thereto; provided, however, that Bank
shall promptly pay over the amounts so withheld to the appropriate taxing
bodies and provide to Employee appropriate statements on forms proscribed
for such purposes on the amounts so withheld.
- 9 -
<PAGE>
(l) Severability. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other
provision of this Agreement not held so invalid, and each such other
provision shall, to the full extent consistent with law, continue in full
force and effect. If any provision of this Agreement shall be held
invalid in part, such invalidity shall in no way affect the rest of such
provision not held so invalid, and the rest of such provision, together
with all other provisions of this Agreement, shall to the full extent
consistent with law continue in full force and effect. If this Agreement
is held invalid or cannot be enforced, then to the full extent permitted
by law any prior agreement between Bank (or any predecessor thereof) and
Employee shall be deemed reinstated as if this Agreement had not be
executed.
(m) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, Bank has caused this Agreement to be executed and
its seal affixed hereunto by its officers thereunto duly authorized and
Employee has signed this Agreement, all as of the date first above
written.
ATTEST: STOCKTON SAVINGS BANK, F.S.B.
/s/ Kathleen L. Stover By:/s/ Robert V. Kavanaugh
------------------------------ ---------------------------
Kathleen L. Stover, Assistant Robert V. Kavanaugh,
Secretary President
WITNESS: EMPLOYEE:
/s/ Kathleen L. Stover /s/ Morris W. Knight
------------------------------ ------------------------------
Name: Morris W. Knight
Address: 357 E. River Meadow
Woodbridge, CA 95258
------------------------------
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<PAGE>
<PAGE>
STOCKTON SAVINGS BANK
EXECUTIVE COMPENSATION PLAN
<PAGE>
STOCKTON SAVINGS BANK
EXECUTIVE COMPENSATION PLAN
ARTICLE I
PURPOSE
-------
The purpose of this Executive Compensation Plan (the "Plan") is to provide
supplemental funds for retirement or death for an individual who is an
executive of Stockton Savings Bank (the "Company"). It is intended this
plan will restore most of the retirement benefits of selected executives
that were limited due to the Stockton Savings Bank Pension Plan freezing
benefit accruals as of June 30, 1995. This Plan will be effective as of
July 1, 1995 (the "Effective Date").
<PAGE>
ARTICLE II
DEFINITIONS
-----------
For the purposes of this Plan, the following terms shall have the
meanings indicated, unless the context clearly indicates
otherwise:
2.1 Accounts. "Accounts" shall mean the Benefit Restoration
Account.
2.2 Beneficiary. "Beneficiary" shall mean the person,
persons or entity entitled under Article VI to receive
any Plan benefits payable after a Participant's death.
2.3 Board. "Board" shall mean the Board of Directors of the
Company.
2.4 Committee. "Committee" shall mean the committee of the
Board designated to administer this Plan.
2.5 Company. "Company" shall mean Stockton Savings Bank or
any successor corporation resulting from a merger,
consolidation or transfer of assets, substantially as a
whole, that shall assume its obligations in writing under
this Plan.
2.6 Employer. "Employer" shall mean, with respect to any
Participant, the entity, whether the Company or a
subsidiary of the Company, that directly employs such
Participant.
2.7 Participant. "Participant" shall mean any individual who
is participating or has participated in this Plan as
provided in Article III.
2.8 Plan Benefit. "Plan Benefit" shall mean the benefit
payable to a Participant as calculated in Article V.
2.9 Plan Year. "Plan Year" shall mean the year beginning
July 1 and ending on June 30.
2.10 Retirement. "Retirement" shall mean the first day of the
calendar month coincident with or next following the date
on which the Participant attains age sixty-five (65), or
such earlier date as is determined by the Committee and
is otherwise consistent with the Company's retirement
policy.
2
<PAGE>
ARTICLE III
PARTICIPATION
-------------
3.1 Participation. Participation shall be limited to the
executives listed below:
Robert Kavanaugh
3
<PAGE>
ARTICLE IV
BENEFIT RESTORATION ACCOUNT
---------------------------
4.1 Accounts. For record keeping purposes only, Accounts
shall be maintained for each Participant.
4.2 Benefit Restoration Account. The Committee shall
establish and maintain a Benefit Restoration Account for
each Participant under the Plan. As of the last day of
each month, the Committee shall credit the Participant's
Benefit Restoration Account with an amount provided for
in Section 4.3.
4.3 Monthly Accrual. Each Account shall be credited on the
last day of each month with the amount specified below.
However, in no event will the Restoration Account Balance
be allowed to exceed the Maximum Account also listed
below.
Participant's Name Monthly Accrual Maximum Account
------------------ --------------- ---------------
Robert Kavanaugh $3,750 $263,789
4.4 Vesting of Accounts. The interest of the Participant in
his or her Benefit Adjustment Account shall be vested to
the same extent as the Participant's interest in the
Stockton Savings Bank Pension Plan is vested.
4
<PAGE>
ARTICLE V
PLAN BENEFITS
-------------
5.1 Timing and Form of Benefits. Except as described in 5.2, plan
benefits are payable in accordance with the selection made by the
Participant in the Participation Election filed 60 days prior to
retirement. A Participant may elect to receive payments as
follows:
(a) Lump Sum at Retirement. A lump sum payment made on the
first day of the second month following the month in
which Retirement.
(b) Lump Sum at Termination. A lump sum payment made on the
first day of the second month following the month in
which the Participant's employment terminates.
(c) Installment Payment at Retirement. Monthly installment
payments made, in substantially equal payments of
principal and interest over a payment period of 12 to 36
months, as selected by the Participant. Payments shall
begin on the first day of the second month following the
month in which Retirement occurs.
(d) Installment Payment at Termination. Monthly installment
payments made, in substantially equal payments of
principal and interest over a payment period of 12 to 36
months, as selected by the Participant.
In the absence of an election, Plan benefits are payable in
substantially equal payments of principal and interest over a
period of 36 months following Retirement. Payments shall begin
on the first day of the second month following the month of
Retirement.
5.2 Form of Benefit Payment Upon Termination.
Notwithstanding anything contained herein to the
contrary, Plan Benefits payable upon a Participant's
termination of employment with Employer for any reason
other than death or Retirement may, in the sole
discretion of Employer, be paid in a lump sum within one
month of termination, regardless of the Participant's
election. Furthermore, the Employer reserves the right
to pay the benefit in monthly installments over a period
of up to 36 months.
5
<PAGE>
5.3 Survivor Benefits. Upon the death of the Participant
prior to the completion of benefit payments, the amount
payable shall be the Benefit Restoration Account Balance
at the end of the month in which death occurs. The form
of the payment shall be a lump sum, payable on the first
day of the second month following that in which death
occurs, or otherwise as determined by the Committee.
5.4 Withholding; Payroll Taxes. The Employer shall withhold
from payments made hereunder any taxes required to be
withheld from such payments under federal, state or local
law.
5.5 Payment to Guardian. If a Plan Benefit is payable to a
minor or a person declared incompetent or to a person
incapable of handling the disposition of his property,
the Committee may direct payment of such Plan Benefit to
the guardian, legal representative or person having the
care and custody of such minor, incompetent or person.
The Committee may require proof of incompetency,
minority, incapacity or guardianship as it may deem
appropriate prior to distribution of the Plan Benefit.
Such distribution shall completely discharge the Company,
Employer and Committee from all liability with respect to
such benefit.
6
<PAGE>
ARTICLE VI
BENEFICIARY DESIGNATION
-----------------------
6.1 Beneficiary Designation. "Beneficiary" or
"Beneficiaries" shall mean the person or persons,
including a trustee, personal representative or other
fiduciary, last designated in writing by a Participant in
accordance with procedures established by the Committee
to receive the benefits specified hereunder in the event
of the Participant's death. If there is no valid
Beneficiary designation in effect, or if there is no
surviving designated Beneficiary, then the Participant's
surviving spouse shall be the Beneficiary. If there is
no surviving spouse to receive any benefits payable in
accordance with the preceding sentence, the duly
appointed and currently acting personal representative of
the Participant's estate (which shall include either the
Participant's probate estate or living trust) shall be
the Beneficiary. In any case where there is no such
personal representative of the Participant's estate duly
appointed and acting in that capacity within 90 days
after the Participant's death (or such extended period as
the Committee determines is reasonably necessary to allow
such personal representative to be appointed but not to
exceed 180 days after the Participant's death), then
Beneficiary shall mean the person or persons who can
verify by affidavit or court order to the satisfaction of
the Committee that they are legally entitled to receive
the benefits specified hereunder. In the event any
amount is payable under the Plan to a minor, payment
shall not be made to the minor, but instead be paid (a)
to that person's living parent(s) to act as custodian,
(b) if that person's parents are then divorced, and one
parent is the sole custodial parent, to such custodial
parent, or (c) if no parent of that person is then
living, to a custodian selected by the Committee to hold
the funds for the minor under the Uniform Transfers or
Gifts to Minors Act in effect in the jurisdiction in
which the minor resides. If no parent is living and the
Committee decides not to select another custodian to hold
the funds for the minor, then payment shall be made to
the duly appointed and currently acting guardian of the
estate for the minor or, if no guardian of the estate for
the minor is duly appointed and currently acting within
60 days after the date the amount becomes payable,
payment shall be deposited with the court having
jurisdiction over the estate of the minor.
7
<PAGE>
6.2 Amendments. Any Beneficiary designation may be changed
by a Participant without the consent of any designated
Beneficiary by the filing of a new Beneficiary
designation with the Committee. The filing of a new
Beneficiary designation form will cancel all Beneficiary
designations previously filed.
6.3 Effect of Payment. The payment to the Beneficiary or
deemed Beneficiary, in accordance with the provisions of
this Plan, shall completely discharge all obligations
under this Plan of the Employer, the Committee and the
Company.
8
<PAGE>
ARTICLE VII
ADMINISTRATION
--------------
7.1 Committee; Duties. This Plan shall be administered by
the Committee. The Committee shall have the authority to
make, amend, interpret, and enforce all appropriate rules
and regulations for the administration of this Plan and
decide or resolve any and all questions including
interpretations of this Plan, as may arise in connection
with the Plan. The Committee members may be Participants
under this Plan.
7.2 Agents. The Committee may, from time to time, employ
other agents and delegate to them such administrative
duties as it sees fit, and may from time to time consult
with counsel who may be counsel to the Employer.
7.3 Binding Effect of Decisions. The decision or action of
the Committee in respect of any question arising out of
or in connection with the administration, interpretation
and application of the Plan and the rules and regulations
promulgated hereunder shall be final and conclusive and
binding upon all persons having any interest in the Plan.
7.4 Indemnity of Committee. To the extent permitted under
applicable state law, the Company shall indemnify and
hold harmless the members of the Committee and any
delegate against any and all claims, loss, damage,
expense or liability arising from any action or failure
to act with respect to this Plan, except in the case of
gross negligence or willful misconduct.
9
<PAGE>
ARTICLE VIII
AMENDMENT AND TERMINATION OF THE PLAN
-------------------------------------
8.1 Amendment. The Board may at any time amend the Plan in
whole or in part provided, however, that no amendment
shall be effective to decrease or restrict the amount
accrued to the date of such amendment in any Account.
8.2 Company's Right to Terminate. The Board may at any time
partially or completely terminate the Plan if, in its
judgment, the accounting, or other effects of the
continuance of the Plan, or potential payments thereunder
would not be in the best interests of the Company or any
Employer.
(a) Partial Termination. The Board may partially terminate
the Plan by instructing the Committee not to credit any
additional Benefit Restoration amounts. In the event of
such a partial termination, the Plan shall continue to
operate on the same terms and conditions and be effective
with regard to Deferral Commitments entered into prior to
the effective date of such partial termination.
(b) Complete Termination. The Board may completely terminate
the Plan. In the event of complete termination, the Plan
shall cease to operate and the Employer shall pay out to
each Participant their Accounts as if that Participant
had terminated service as of the effective date of the
complete termination. Payments shall be made in equal
annual installments over the period listed below, based
on the sum of the Account balances:
Sum of Account Balances Payout Form
----------------------- -----------
Less than $100,000 Lump sum
$100,000 Three equal annual installments
10
<PAGE>
ARTICLE IX
MISCELLANEOUS
-------------
9.1 Unfunded Plan. This Plan is intended to be an unfunded
plan maintained primarily to provide deferred
compensation benefits for select group of "management or
highly-compensated employees" within the meaning of
Sections 201, 301, and 401 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and
therefore to be exempt from the provisions of Parts 2, 3,
and 4 of Title I or ERISA. Accordingly, the Plan shall
terminate in whole or part and no further benefits shall
accrue hereunder in the event it is determined by a court
of competent jurisdiction or by an opinion of counsel
that the Plan or any portion thereof constitutes an
employee pension benefit plan within the meaning of
Section 3(2) of ERISA (as now in effect or hereafter
amended) which is not so exempt. In the event of a
termination under this Section 9.1, no additional Benefit
Restoration amounts will accrue, and the amount of such
Participant's Account balance shall be distributed to
such Participant at such time and in such manner as the
Committee, in its sole discretion, determines.
9.2 Unsecured General Creditor. Nothing contained herein
shall be deemed or construed in any manner whatsoever (a)
as creating any trust or fiduciary relationship between
the Employee and the Company, (b) as granting to the
Employee any right or interest of any kind or nature in
any of the funds, assets or properties of the Company to
secure payment of all or any portion of the Account
payable to the Employee hereunder except the right as an
unsecured creditor with respect thereto, or (c) as
requiring or obligating the Company to set aside or
otherwise establish a fund for the payment of all or any
portion of the outstanding credit balance in the Account
payable to the Employee hereunder, it being expressly
recognized, acknowledged and agreed by the parties hereto
that the obligation of the Company to make any payment to
the Employee on account of all or any portion of the
Deferred Compensation hereunder shall be, and shall be
deemed to be, solely an unsecured contractual obligation
of the Company. In the event of Employer's insolvency,
Participants and their Beneficiaries, heirs, successors
and assigns shall have no legal or equitable rights,
interest or claims in any property or assets of Employer,
nor shall they be Beneficiaries of, or have any rights,
claims or interests in any life insurance policies,
11
<PAGE>
annuity contracts or the proceeds therefrom owned or
which may be acquired by Employer. In that event, any
and all of Employer's assets and policies shall be, and
remain, the general, unpledged, unrestricted assets of
Employer.
9.3 Nonassignability. Neither a Participant nor any other
person shall have the right to commute, sell, assign,
transfer, pledge, anticipate, mortgage or otherwise
encumber, transfer, hypothecate or convey in advance of
actual receipt the amounts, if any, payable hereunder, or
any part thereof, which are, and all rights to which are,
expressly declared to be unassignable and non-
transferable. No part of the amounts payable shall,
prior to actual payment, be subject to seizure or
sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by a Participant or
any other person, nor be transferable by operation of law
in the event of a Participant's or any other person's
bankruptcy or insolvency.
9.4 Not a Contract of Employment. The terms and conditions
of this Plan shall not be deemed to constitute a contract
of employment between the Employer and the Participant.
The Participant (or his Beneficiary) shall have no rights
against the Employer except as may otherwise be
specifically provided herein. Moreover, nothing in this
Plan shall be deemed to give a Participant the right to
be retained in the service of the Employer or to
interfere with the right of the Employer to discipline or
discharge him at any time. The obligation of payment
under this Plan shall be the obligation of the Employer
with respect to its employees.
9.5 Protective Provisions. A Participant will cooperate with
the Employer by furnishing any and all information
requested by the Employer, in order to facilitate the
payment of benefits hereunder, and by taking such
physical examinations as the employer may deem necessary
and taking such other actions as may be requested by the
Employer.
9.6 Terms. Whenever any words are used herein in the
masculine, they shall be construed as though they were
used in the feminine in all cases where they would so
apply; and wherever any words are used herein in the
singular or plural, they shall be construed as though
they were used in the plural or the singular, as the case
may be, in all cases where they would so apply.
12
<PAGE>
9.7 Captions. The captions of the articles, sections and
paragraphs of this Plan are for convenience only and
shall not control or affect the meaning or construction
of any of its provisions.
9.8 Governing Law. The provisions of this Plan shall be
construed and interpreted according to the laws of the
State of California.
9.9 Validity. In case any provision of this Plan shall be
held illegal or invalid for any reason, said illegality
or invalidity shall not affect the remaining parts
hereof, but his Plan shall be construed and enforced as
if such illegal and invalid provisions had never been
inserted herein.
9.10 Notice. Any notice or filing required or permitted to be
given to the Committee under the Plan shall be sufficient
if in writing and hand delivered, or sent by registered
or certified mail, to any member of the Committee or the
Secretary of the Employer. Such notice shall be deemed
given as of the date of delivery or, if delivery is made
by mail, as of the date shown on the postmark on the
receipt for registration or certification.
9.11 Successors. The provisions of this Plan shall bind and
inure to the benefit of the Company and its successors
and assigns. The term successors as used herein shall
include any corporate or other business entity which
shall, whether by merger, consolidation, purchase or
otherwise acquire all or substantially all of the
business and assets of the Company, and successors of any
such corporation or other business entity.
13
<PAGE>
STOCKTON SAVINGS BANK
By: /s/ David K. Rea
By: /s/ Mark Barawed
Dated: March 5, 1996
14
<PAGE>
STOCKTON SAVINGS BANK
EXECUTIVE COMPENSATION PLAN
PARTICIPATION ELECTION
I ___________________________ hereby elect my benefit payment
Name
option.
I understand that I will receive benefit payments commencing on
the first day of January of the year following my Retirement or death
unless I elect to receive payments as specified below:
_______ Commencing on the first day of the second month following
my Retirement.
_______ Commencing on the first day of the second month following
my termination of employment.
_______ Commencing ______________ (date).
I understand that I will receive benefit payments in 36 monthly
payments unless I elect to receive payments as specified below:
_______ Lump Sum
_______ A total of ____________ monthly payments.
(12 to 36)
Notwithstanding this Participation Election, upon termination
from service prior to retirement for any reason other than death, benefits
may be paid in a lump sum or over a 36 month period at the sole discretion
of the employer.
I hereby designate as my Beneficiary
Name: _______________________________
Address: _____________________________
Relationship: __________________________
Date ___________________Signed ___________________________
15
<PAGE>
<PAGE>
DIRECTORS' RETIREMENT PLAN
ADOPTED BY THE BOARD OF DIRECTORS
OF STOCKTON SAVINGS AND LOAN ASSOCIATION
AT MEETING HELD ON NOVEMBER 18, 1985
BE IT RESOLVED, by the Board of Directors of Stockton Savings and
Loan Association that any directors of this Association ceasing to be such
directors and who have attained the age of 70 with 10 years of continuous
service, may be elected by the Board of Directors as "Directors Emeritus",
and such persons who accept such election shall serve for life or until
removed as advisors and consultants to the Board of Directors of this
Association, and when invited, may sit with the Board of Directors at
regular meetings and discuss any question under consideration provided,
however, that such Directors Emeritus shall cast no vote.
Election to the position of Director Emeritus shall be a
discretionary act by the Board of Directors and the Board shall have the
power to remove any Director Emeritus with or without cause at any time.
Except for the following provisions with respect to health
insurance and spousal benefits, Directors Emeritus, in consideration of
the availability for their advice and consultation shall, whether or not
present at such regular meetings, be paid the same fees or other
consideration paid to the Directors of this Association as directors, and
when the fees paid to the Directors of this Association are increased, the
consideration paid to the Directors Emeritus shall also be increased in
the like amount. Health insurance shall be provided to Directors Emeritus
only if the Board of Directors determines that said insurance is
available. No spousal benefits shall be provided to Directors Emeritus.
The foregoing resolution as an act of the Board of Directors
shall become effective on Monday, November 18, 1985.
<PAGE>
<PAGE>
AMENDMENT TO SEVERANCE AGREEMENT
THIS AMENDMENT dated March 26, 1996 but effective as of November
21, 1994 ("Amendment") amends the Severance Agreement dated as of the 21st
day of June, 1993 by and between Stockton Savings Bank, F.S.B., a
federally chartered savings bank, with its principal executive offices at
501 West Weber Avenue, Stockton, California 95203 ("Bank") and David K.
Rea ("Employee").
NOW, THEREFORE, the parties agree as follows:
1. Each capitalized term defined in the Agreement shall have
the same meaning when used herein.
2. Section 5 of the Agreement is hereby amended to provide
that, upon termination of Employee's employment with the Bank under the
circumstances set forth in Section 4(b), in addition to the payments and
benefits provided in Sections 5(a) and 5(b), the Employee shall also be
entitled to receive in cash an amount equal to the bonus he received under
the Bank's bonus plan with respect to the preceding fiscal year.
3. The Bank's address for notices, as specified in Section
8, is amended to be 501 West Weber Avenue, Stockton, California 95203,
Attention: President.
4. Except as modified herein, the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the day and year first above written.
ATTEST: STOCKTON SAVINGS BANK, F.S.B.
/s/ Kathleen L. Stover By: /s/ Robert V. Kavanaugh
------------------------------ ---------------------------
Kathleen L. Stover, Assistant Robert V. Kavanaugh
Secretary President
WITNESS: EMPLOYEE:
/s/ Kathleen L. Stover /s/ David K. Rea
------------------------------ ------------------------------
Name: David K. Rea
Address: 1275 Greeley Way
Stockton, California 95207
<PAGE>
<PAGE>
The Board of Directors
California Financial Holding Company:
We consent to incorporation by reference in the post-effective amendment
on Form S-8 to the Registration Statement (No. 33-19998) on Form S-4; in
the Registration Statement (No. 33-62584) on Form S-8; in the Registration
Statement (No. 33-41917) on Form S-3; and in the Registration Statement
(No. 33-96308) on Form S-8 of California Financial Holding Company (the
Company) of our report dated February 16, 1996 relating to the
consolidated statements of financial condition of the Company as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1995.
February 16, 1996 KPMG Peat Marwick LLP
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's annual report on Form 10-K for the 12 months ended December 31, 1995
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 13,162
<INT-BEARING-DEPOSITS> 4,437
<FED-FUNDS-SOLD> 255
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 261,345
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 929,244
<ALLOWANCE> 8,174
<TOTAL-ASSETS> 1,257,585
<DEPOSITS> 960,148
<SHORT-TERM> 62,908
<LIABILITIES-OTHER> 7,464
<LONG-TERM> 141,463
0
0
<COMMON> 26,600
<OTHER-SE> 59,002
<TOTAL-LIABILITIES-AND-EQUITY> 1,257,585
<INTEREST-LOAN> 18,925
<INTEREST-INVEST> 4,440
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,365
<INTEREST-DEPOSIT> 12,049
<INTEREST-EXPENSE> 14,781
<INTEREST-INCOME-NET> 8,584
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (25)
<EXPENSE-OTHER> 7,104
<INCOME-PRETAX> 618
<INCOME-PRE-EXTRAORDINARY> 618
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<YIELD-ACTUAL> 2.88
<LOANS-NON> 5,179
<LOANS-PAST> 0
<LOANS-TROUBLED> 7,720
<LOANS-PROBLEM> 2,200
<ALLOWANCE-OPEN> 8,952
<CHARGE-OFFS> 778
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 8,174
<ALLOWANCE-DOMESTIC> 7,096
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,078
<PAGE>
</TABLE>
