<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
501 W. WEBER AVENUE, STOCKTON, CALIFORNIA 95203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (209) 948-6870
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JUNE 30, 1996
Common Stock, $.01 par value 4,688,652 shares
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<TABLE>
<CAPTION>
Part 1. FINANCIAL INFORMATION
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Condition
(unaudited)
June 30, 1996 Dec. 31, 1995 June 30, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Cash, Including Non-interest-Bearing Deposits $ 15,490,703 $ 13,162,431 $ 15,957,784
Interest-Bearing Deposits 4,383,456 4,691,615 6,760,294
Investments Securities:
Securities Available for Sale, at Market 194,919,536 144,144,806 46,748,470
Securities Held to Maturity - - 64,977,539
Mortgage-Backed Securities:
Available for Sale, at Market 108,565,363 117,199,924 6,326,844
Held to Maturity - - 156,321,654
Loans Held for Sale 11,420,000 13,153,264 26,579,639
Loans Receivable, net of loss reserves of
$7,464,864, $8,173,807 and $8,986,700 respectively 980,260,314 942,727,060 945,929,716
Less: Loans in Process 46,426,612 34,810,024 30,300,554
-------------- -------------- --------------
Net Loans Receivable $ 933,833,702 $ 907,917,036 $ 915,629,162
-------------- -------------- --------------
Real Estate Held for Development or Sale,
net of allowances of $3,125,853, $6,958,757 and
$9,369,095 respectively $ 6,108,865 $ 12,480,183 $ 18,859,645
Office Property and Equipment 20,624,627 20,769,858 21,037,215
Federal Home Loan Bank Stock 13,300,000 10,395,200 10,139,200
Accrued Interest and Dividends Receivable 7,373,904 6,092,335 5,948,471
Deposit Base Premium 492,737 1,058,444 1,639,222
Other Assets, net 10,664,874 6,519,971 8,362,160
-------------- -------------- --------------
TOTAL ASSETS $1,327,177,767 $1,257,585,067 $1,305,287,299
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings and Checking Accounts $ 946,631,911 $ 960,147,775 $ 996,594,461
Advances from FHLB 266,000,000 162,500,000 115,000,000
Collateralized Mortgage Obligation 5,780,111 6,462,509 7,270,070
Securities Sold Under Agreements to Repurchase 13,063,000 35,408,000 95,571,000
Accrued Interest Payable 2,337,718 1,181,068 2,081,357
Other Liabilities, net 6,441,099 6,283,494 5,292,200
-------------- -------------- --------------
TOTAL LIABILITIES $1,240,253,839 $1,171,982,846 $1,221,809,088
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Part 1. FINANCIAL INFORMATION
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Condition
(unaudited)
June 30, 1996 Dec. 31, 1995 June 30, 1995
-------------- -------------- --------------
Stockholders' Equity
Serial Preferred Stock, 4,000,000 shares
authorized, no shares outstanding - - -
Capital Stock, 12,000,000 shares authorized
4,688,652, 4,662,779 and 4,646,160 shares
outstanding $ 46,887 $ 46,628 $ 46,462
Paid in Capital in Excess of Par 26,861,320 26,553,810 26,375,383
Unrealized Loss on Securities Available for Sale,
net of tax (2,410,660) 998,198 (113,418)
Retained Earnings, Substantially Restricted 62,426,381 58,003,585 57,169,784
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY $ 86,923,928 $ 85,602,221 $ 83,478,211
-------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,327,177,767 $1,257,585,067 $1,305,287,299
============== ============== ==============
</TABLE>
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<TABLE>
<CAPTION>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the three months ended: For the six months ended:
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 19,487,952 $ 17,959,198 $ 38,436,171 $ 35,114,512
Interest and Dividends on Investments 5,327,012 4,655,188 9,955,418 9,258,179
------------ ------------- ------------ ------------
TOTAL INTEREST INCOME $ 24,814,964 $ 22,614,386 $ 48,391,589 $ 44,372,691
------------ ------------- ------------ ------------
INTEREST EXPENSE
Interest on Savings $ 10,875,372 $ 12,093,312 $ 22,273,178 $ 23,697,308
Interest on Short-term Borrowings 438,560 1,134,944 866,314 2,043,675
Interest on Long-term Borrowings 3,323,168 1,878,959 5,849,849 3,570,546
------------ ------------- ------------ ------------
TOTAL INTEREST EXPENSE $ 14,637,100 $ 15,107,215 $ 28,989,341 $ 29,311,529
Less: Interest Capitalized (2,189) (27,780) (10,487) (119,853)
------------ ------------- ------------ ------------
NET INTEREST EXPENSE $ 14,634,911 $ 15,079,435 $ 28,978,854 $ 29,191,676
------------ ------------- ------------ ------------
NET INTEREST INCOME $ 10,180,053 $ 7,534,951 $ 19,412,735 $ 15,181,015
------------ ------------- ------------ ------------
Provision for Loan Losses 256,000 1,301,200 521,000 1,566,200
------------ ------------- ------------ ------------
NET INTEREST INCOME LESS PROVISION FOR
LOAN LOSSES $ 9,924,053 $ 6,233,751 $ 18,891,735 $ 13,614,815
------------ ------------- ------------ ------------
OTHER INCOME
Gain on sale of:
Loans $ 389,053 $ 28,684 $ 810,478 $ 68,860
Real Estate Held for Investment or Sale 167,251 (40,290) 206,860 (71,248)
Provisions for Losses on Real Estate (156,000) (3,465,324) (191,000) (3,545,324)
Available for Sale Securities, net 107,778 -- 572,011 (20,916)
Operating Losses on Foreclosed Real Estate (122,084) (166,825) (303,761) (365,920)
Loan Servicing Fee Income 325,335 371,271 634,651 745,723
Other Fee Income 1,101,055 945,001 2,137,400 1,860,685
Write down of Other Assets (83,234) (58,190) (123,458) (555,489)
Other Income, net (69,366) (56,497) (89.858) (47,564)
------------ ------------- ------------ ------------
TOTAL OTHER INCOME (LOSS) $ 1,659,788 $ (2,442,170) $ 3,653,323 $ (1,931,193)
------------ ------------- ------------ ------------
NON-INTEREST EXPENSE
Compensation and Other Related Benefits $ 2,993,669 $ 1,473,856 $ 6,020,702 $ 4,598,766
Occupancy 731,514 787,922 1,444,356 1,514,991
Advertising and Promotion 340,334 312,652 551,296 540,431
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<PAGE>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the three months ended: For the six months ended:
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- -------------- ------------- -------------
Data Processing 482,980 541,113 1,053,150 1,069,637
Insurance 757,192 669,783 1,537,427 1,342,117
Other general & administrative expense 1,018,848 982,319 2,005,092 1,852,634
------------ ------------- ------------ ------------
Total general & administrative expense $ 6,324,537 $ 4,767,645 $ 12,612,023 $ 10,918,576
Amortization of Deposit Base Premium 275,319 290,289 565,708 580,778
------------- ------------- ------------ ------------
TOTAL NON-INTEREST EXPENSE $ 6,599,856 $ 5,058,034 $ 13,177,731 $ 11,499,354
------------ ------------- ------------ ------------
Income Before Taxes $ 4,983,985 $ (1,266,453) $ 9,367,327 $ 184,268
Income Tax Expense 2,086,189 (472,048) 3,916,961 144,802
------------ ------------- ------------ ------------
NET INCOME $ 2,897,796 $ (794,405) $ 5,450,366 $ 39,466
============ ============= ============ ============
EARNINGS PER SHARE $ 0.60 $ (0.17) $ 1.14 $ 0.01
============ ============= ============ ============
CASH DIVIDENDS PER SHARE $ 0.11 $ 0.11 $ 0.22 $ 0.22
============ ============= ============ ============
</TABLE>
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<TABLE>
<CAPTION>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
For the six months ended:
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 5,450,366 $ 39,466
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Amortization of:
Loan Premium 146,947 --
Deferred Loan Fees (1,299,566) (1,407,424)
Discount Amortization on Mortgage-Backed Bonds 0 85,456
Deposit Base Premium 565,708 580,778
Net (Gain) Loss on Sale of:
Loans (810,478) (68,860)
Real Estate Held for Development or Sale (206,860) 71,248
Net (Gain) Loss on Securities Activities (572,011) 20,916
Provision for Losses on:
Loans 521,000 1,566,200
Real Estate Held for Development or Sale 191,000 3,545,324
Depreciation and Amortization 1,207,961 1,291,405
Decrease in Income Taxes Payable (2,157,521) (458,518)
Net Increase in Accrued Interest Payable 1,156,650 470,717
Net Increase in Accrued Interest Receivable (1,281,569) (640,388)
Mortgage Loans Originated as Held for Sale (50,649,451) (43,065,454)
Proceeds from Loans Sold 53,193,193 19,210,083
Other, net (1,782,031) (2,669,455)
-------------
-------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 3,673,338 $ (21,428,506)
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal Payments on Loans $ 114,516,696 $ 80,582,312
Mortgage Loans Originated as Held for Investment (125,296,195) (84,401,052)
Purchase of Loan Participations (16,748,426) (599,629)
Purchase of securities held for investment -- (20,490,708)
Maturity and Payments of Securities Held for Investment -- 11,387,412
Purchase of Securities Available for Sale (91,235,231) (13,054,612)
Maturity and Payments of Securities Available for Sale 12,202,287 5,871,557
Sale of Securities Available for Sale 34,055,928 11,679,886
Purchase of Office Property and Equipment, net (1,062,730) (1,216,776)
Purchase of FHLB Stock and FHLMC Preferred Stock (2,904,800) (1,402,300)
Investment in Real Estate Held for Development or Sale (776,382) (3,517,426)
Proceeds from Sales of Real Estate Held for Development or Sale 5,804,289 3,040,530
Proceeds from Sale of Foreclosed Property 3,749,096 5,926,189
Other, net (194,694) 1,911,477
------------- -------------
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<PAGE>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
For the six months ended:
June 30, 1996 June 30, 1995
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES $ (67,890,162) $ (4,243,140)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposit Accounts $ (13,607,464) $ 1,361,024
Net Increase (Decrease) in Checking Accounts 91,600 (5,836,983)
Proceeds from FHLB Advances 249,800,000 66,300,000
Repayments of FHLB Advances (146,300,000) (61,300,000)
Securities Sold Under Agreement to Repurchase, net (22,345,000) 30,593,000
Payments on Mortgage-Backed Bonds (682,398) (713,181)
Proceeds from Stock Options Exercised and Dividends Reinvested 307,769 168,418
Dividends Paid to Shareholders (1,027,570) (1,020,062)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 66,236,937 $ 29,552,216
Net Increase in Cash and Cash Equivalents $ 2,020,113 $ 3,880,570
Cash and Cash Equivalents at the beginning of the year 17,854,046 18,837,508
------------- -------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 19,874,159 $ 22,718,078
============= =============
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 27,832,691 $ 28,840,812
Cash Payments of Income Taxes 3,546,613 1,410,060
Supplemental Disclosures of Cash Flow Information:
Additions to Real Estate Acquired through Foreclosure 2,389,825 2,691,649
Unrealized (gains) Losses on Available for Sale Securities 3,408,858 (1,072,651)
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
California Financial Holding Company ("Company") was incorporated
in 1988 in the State of Delaware. Its principal asset is Stockton Savings
Bank ("Stockton Savings" or "Bank") a wholly-owned subsidiary which has
been in existence since 1887. The investment in Stockton Savings is the
Company's primary asset with the only other asset consisting of $1.5
million in cash, the result of dividends paid by the Bank to the Company.
Because the Bank represents the Company's major asset, discussion in this
text will focus primarily on the activities of Stockton Savings.
Total assets increased by $21.9 million over the past year as a
result of increases in loans and investments outstanding somewhat offset
by declines in the balance of real estate held. The components of
interest-bearing liabilities changed somewhat as brokered deposits of $31
million outstanding at June 30, 1995 were paid off by June 30, 1996 and
reverse repurchase balances declined by $82.5 million. Federal Home Loan
Bank advances, on the other hand, increased by $151 million. The
Company's total assets have increased by $69.6 million so far this year.
Growth occurred primarily in the loan and investment portfolios and was
funded through Federal Home Loan Bank advances.
Loan origination volume for the first half of 1996 totaled $175.9
million compared to volume of $127.5 million for the first six months of
1995. Increases in subdivision construction originations were responsible
for most of the improvement in volume. Construction loan volume was up
$36.6 million or 79% from the previous year.
A breakout of lending volume by type is shown below for the
periods indicated:
Originations through
June 30
(in millions)
1996 1995
Short-term construction loans $ 83.1 $ 46.5
Permanent fixed-rate loans 58.7 18.7
Permanent adjustable-rate loans 34.1 62.3
------ ------
TOTAL ORIGINATIONS $175.9 $127.5
====== ======
The reduced interest rate environment early in 1996 led to
increases in the origination of permanent fixed-rate loan originations
relative to adjustable-rate mortgages. Historically, adjustable-rate
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mortgages have been more popular in periods of rising interest rates, due
particularly to attractive start rates offered on this product.
Alternatively, fixed-rate mortgages have been more popular in low rate
environments as the borrower seeks to lock in a low fixed rate. The Bank
has traditionally retained most adjustable-rate product in portfolio and
sold most permanent fixed-rate mortgages in an effort to limit exposure to
rising interest rates. Loan sale activity of $53.2 million in the current
year was up significantly from the $19.2 million in sales recorded in the
first half of 1995, primarily due to the increase in fixed-rate mortgages
originated this year.
The recent increase in rates has lead to a decline in refinance
activity and possibly future loan origination volume. Alternatively, the
volume of adjustable-rate originations may increase with a corresponding
decrease in fixed-rate originations.
The balance of real estate held for development or sale has
declined by $12.8 million from a year ago and by $6.4 million in the
current year. Real estate held by the Bank at quarter-end consisted of
$4.6 million in real estate owned through foreclosure and $1.5 million in
real estate held for investment purposes. The Bank is currently in the
process of disposing of its real estate investments due to regulatory
constraints. As a result, the balance has declined steadily over the past
several years. It is anticipated that the Bank will be out of its real
estate investments by the end of 1996.
The balance of real estate owned through the foreclosure process
has declined by $2.6 million from a year ago, which is a reflection of the
overall decline in troubled assets. (See "Asset Quality" for further
discussion.)
A breakdown of the Bank's portfolio of real estate held is shown
below as of the dates indicated:
<TABLE>
<CAPTION>
Real Estate Held for Development
or Sale, net
(in thousands)
6/30/96 12/31/95 6/30/95
<S> <C> <C> <C>
Real estate owned through foreclosure $ 4,623 $ 5,977 $ 7,212
Real estate held for development 1,486 6,503 11,648
--------- --------- ---------
TOTAL $ 6,109 $ 12,480 $ 18,860
========= ========= =========
</TABLE>
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<PAGE>
Effective January 1, 1994, the Bank implemented FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". FAS
115 requires that debt and equity securities be classified as either held
to maturity, available for sale or held for trading. The pronouncement
severely restricts the transfer of assets between classifications. In
August 1995, the Bank made a decision to restructure its balance sheet by
selling $31 million in fixed-rate mortgage-backed securities. As a
result, the Bank's entire investment portfolio, that was originally
classified as held for investment, was redesignated as available for sale
as of September 1995. At June 30, 1996, the investment portfolio was
adjusted to market value with the after-tax net loss of $2.4 million shown
as an adjustment to stockholder's equity.
The amortized cost and estimated market values of investment and
mortgage-backed securities as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
AMORTIZED GROSS GROSS ESTIMATED
COST UNREALIZED UNREALIZED MARKET VALUE
GAINS LOSSES
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Government & Agency Securities $ 46,563,257 $ 21,055 $ 565,958 $ 46,018,354
CMO'S 145,806,643 474,189 2,079,745 144,201,087
Other securities 4,730,157 0 30,062 4,700,095
------------ ------------ ----------- ------------
Total investment securities $197,100,057 $ 495,244 $ 2,675,765 $194,919,536
------------ ------------ ----------- ------------
Mortgage-backed securities:
FHLMC $ 64,723,899 $ 289,529 $ 923,241 $ 64,090,187
FNMA 33,583,493 0 424,351 33,159,142
GNMA 10,033,988 0 146,836 9,887,152
FHA Title One 2,294,483 0 865,601 1,428,882
------------ ------------ ----------- ------------
Total mortgage-backed securities: $110,635,863 $ 289,529 $ 2,360,029 $108,565,363
------------ ------------ ----------- ------------
Total available for sale portfolio $307,735,920 $ 784,773 $ 5,035,794 $303,484,899
------------ ------------ ----------- ------------
</TABLE>
NOTE: Above adjustments are on a pre-tax basis.
RESULTS OF OPERATIONS
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<PAGE>
The Company earned $2.9 million or $.60 per share for the second
quarter of 1996 compared to recording a loss of $794,000 or $.17 per share
for the like quarter of 1995.
Improved earnings in the current quarter and year to date over
last year's second quarter and year to date can be attributed to increased
margins, reduced loss provisions established on real estate investment and
increased gains on asset sales.
The table below breaks out the components of the Bank's margin
and spread for the periods indicated:
<TABLE>
<CAPTION>
Average for the quarter Average for the six *Weighted average as of
ended June 30 months ended June 30 June 30
Basis- Basis Basis
Point Point Point
1996 1995 Change 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Yield on interest-earning assets:
Loan portfolio yield 8.35% 7.67% 0.68% 8.29% 7.56% 0.73% 8.00% 7.44% 0.56%
Yield on marketable investments 6.67 6.53 0.14 6.63 6.53 0.10 6.71 6.58 0.13
Weighted yield on assets 7.92 7.41 0.51 7.88 7.32 0.56 7.67 7.24 0.43
Cost of funds:
Cost of deposits 4.56% 4.86% (0.30)% 4.65% 4.74% (0.09)% 4.52 4.91% (0.39)%
FHLB advances & other borrowings 5.88 6.15 (0.27) 5.92 6.04 (0.12) 5.81 6.17 (0.36)
Weighted cost of funds 4.84 5.05 (0.21) 4.89 4.93 (0.04) 4.83 5.16 (0.33)
Interest rate spread 3.08% 2.36% 0.72% 2.99% 2.39% 0.60% 2.84% 2.08% 0.76%
Net yield on interest-earning 3.25% 2.47% 0.78% 3.16% 2.50% 0.66% 2.98% 2.17% 0.81%
assets
* Does not consider the effect of amortization of loan fees.
</TABLE>
Improved net interest income in the current year relative to the
first six months of 1995 was primarily the result of increasing yields on
the loan portfolio, decreasing cost of funds, increases in the balance of
assets outstanding as well as an improvement in the level of average
interest-earning assets to average interest-bearing liabilities.
Loan interest income increased by roughly $1.5 million for the
second quarter of 1996 compared to 1995. A 68-basis point increase in the
average yield on the loan portfolio in the second quarter of the current
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<PAGE>
year was completely responsible for the earnings improvement as the
average balance of loans outstanding remained flat between the two
periods. On a year to date basis, loan interest income increased by $3.3
million relative to the prior year again primarily the result of a 73-
basis point increase in yield on the loan portfolio. The upward repricing
on 6-month adjustable-rate mortgages indexed to COFI was primarily
responsible for the improved yield this year compared to the previous
year.
The steady increase in COFI during 1995, combined with the
repricing on teaser rate loans originated in 1995, added 7-9 basis points
to the Bank's loan portfolio yield on a monthly basis since the second
quarter of 1995. Yields on the COFI portfolio have begun to level out
with the recent decline in the Index.
Investment interest income increased by $672,000 this quarter
relative to the second quarter of 1995 and by $697,000 on a year to date
basis compared to the first six months of 1995. In both cases, interest
income has increased due primarily to an increase in the average balance
of investments outstanding. In the latter part of the first quarter of
1996, the Bank purchased $48.1 million in securities. The securities
consisted primarily of adjustable rate collateralized mortgage obligations
indexed to LIBOR or CMT that reprice monthly.
Net interest expense decreased by $213,000 for the six month
period compared to the same period in 1995 and decreased by $445,000 for
the second quarter of 1996 relative to the same period in 1995. A decline
in the average cost of funds for both the three and six month periods was
entirely responsible for the expense decrease as average interest-bearing
liabilities were relatively flat for the six months of 1996 relative to
1995 and actually increased by $17.7 million in the second quarter
compared to the same quarter in 1995.
Interest expense on deposits decreased by $1.2 million for the
second quarter of 1996 and by $1.4 million on a year to date basis
relative to the same periods last year.
The average balance of deposits outstanding decreased by $42.1
million and $41.9 million in the second quarter and on a year-to-date
basis, respectively. Brokered deposits of $31 million matured in the
first quarter of 1996, accounting for most of the decrease. Declines in
the balance of regular certificate accounts have also occurred as a result
of the Bank pricing less competitively this year in an effort to reduce
future interest costs. The decline in average savings balances reduced
expense by $505,000 and $980,000 for the quarter and on a year to date
basis respectively.
The Bank s deposit costs include the negative impact of interest
rate swaps. The swaps are structured for the Bank to pay a fixed amount
of interest on a notional principal amount and to receive a variable
amount of interest indexed to COFI on the same notional amount. This
structure is designed to act as a hedge in period of rising interest
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<PAGE>
rates. As a result, as the general interest rate environment increases,
the Bank receives a benefit from the swaps while the reverse holds true in
periods of falling rates. It should be noted that since the swaps are
tied to COFI, which is a lagging index, the impact of any changes in the
index will lag the general interest rate market, thereby providing a
lagging benefit in periods of rising interest rates with the reverse
holding true in falling rate environments. The swaps added $238,000 to
interest expense in 1996 compared to $865,000 for the first six months of
1995. The decline in the impact of interest rate swaps on deposit expense
this year is due to the higher COFI rate this year as well as to the
maturity in 1995 of $55 million in high-costing swaps.
Declines in the cost of savings of 30 basis points for the
quarter and 9 basis points for the first six months of 1996 relative to
the prior year reduced savings interest expense by $737,000 and $444,000,
respectively. Excluding the cost of interest rate swaps, the average cost
of deposits was down 23 basis points this quarter compared to the second
quarter of 1995 and actually up 3 basis points for the six month period,
relative to the same time frame last year. The impact of rising interest
rates in 1995 was not reflected in the Bank s deposit costs until the
second quarter of that year. Therefore, average costs for the first six
months of 1995 were relatively low compared to the current year.
Likewise, the drop in interest rates that occurred in the later part of
1995 and early 1996 were not reflected in deposit costs until the second
quarter of this year, indicating a positive trend in deposit costs this
quarter relative to the second quarter of 1995.
Borrowing costs increased by $748,000 for the quarter and $1.1
million for the six months of 1996 relative to the prior year. Increased
costs were entirely the result of borrowing growth that occurred between
the two years. The average balance of borrowings outstanding for the
second quarter was $59.8 million higher than the second quarter of last
year and $41.2 million higher for the first six months of this year
relative to 1995. The increase in average borrowings outstanding in the
current year was the result of asset growth, particularly in the second
quarter as well as to replace the runoff of brokered funds.
Interest rate spreads are expected to stabilize for the remainder
of the year, reflecting stabilized deposit costs and a flat COFI index.
The Bank's average margin continued to exceed average spread by
17 basis points in the current quarter and on a year-to-date basis. The
Bank's success in reducing its level of nonperforming assets over the past
year, as well as the increased sell-off of real estate held for
development purposes, has provided the improvement from 1995 when average
margin exceeded average spread by 11 basis points both on a quarterly and
on a year-to-date basis.
Loan loss provisions established during the quarter totaled
$256,000 which were consistent with the level of loan loss provisions
established in the first quarter of 1996 and reflect the current
stabilized to improving real estate market.
-13-
<PAGE>
Noninterest income of $1.7 million was reported for the quarter
compared to noninterest losses of $2.4 million reported in the second
quarter of 1995. Noninterest income for the six month period was $3.7
million compared to a year-to-date loss of $1.9 million reported in 1995.
Losses of $3.5 million on real estate were reported in the second quarter
of 1995, explaining most of the earnings shortfall in that quarter.
Noninterest income has also increased on a quarterly as well as year-to-
date basis in the current year due to increases in loan sale gains and
gains recognized on the sale of investments.
In the first quarter of 1996, the Bank implemented Statement of
Financial Accounting Standards No. 122 (SFAS 122) which requires that the
rights to service mortgage loans for others be recognized as a separate
asset, however those rights are acquired. Implementation of SFAS 122
requires the recognition of a servicing asset (and thus, income) at the
point of sale of a loan and therefore has the impact of increasing income
compared to what would have been recognized had implementation not
occurred. Servicing gains recognized in the second quarter of 1996
totaled $477,000, representing 122% of total loan sale gains recorded. On
a year to date basis, servicing gains of $655,000 have been reported. A
present value calculation model was utilized to compute the present value
of future cash flows of the servicing rights based upon current
assumptions including: costs of servicing the loans, the discount rate,
prepayment speeds, float value and delinquency rates. Servicing fee
income was reduced by $67,000 in the second quarter and by $147,000 on a
year to date basis to reflect declines in value on the servicing asset.
The calculation of impairment was derived utilizing the same methods as
described above for computing the original servicing asset by segregating
the asset portfolio into major risk categories, predominately property
type, loan term and interest rate. Capitalized mortgage servicing rights
are amortized in proportion to, and over the period of, estimated future
net servicing income.
The bank sold roughly $26.1 million in investments classified as
available for sale in the first quarter, recognizing net gains of
$464,000. A majority of investments sold consisted of 15-year fixed-rate
mortgage-backed securities. The sale was done in order to reduce balance
sheet sensitivity to rising rates. Miscellaneous sales occurred in the
second quarter totaling $8.0 million with additional gains of $108,000
recognized.
Other income was further reduced in 1995 due to $476,000 in
writedowns taken on FHA Title I Securities. Additional writedowns of
$100,000 have occurred in the current year.
Fee income of $2.1 million has been recorded through the second
quarter of 1996, up 14.9% compared to fees of $1.9 million reported in the
like period of 1995. An increased number of checking accounts and
corresponding fees are responsible for earnings improvement.
Fee income is expected to remain relatively consistent for the
remainder of the year. The level of loan sale gains will be heavily
-14-
<PAGE>
dependent on the volume of fixed-rate loans originated as well as on the
volatility and level of interest rates. No material writedowns of real
estate are expected in the current year as the balance of real estate
investments has been reduced significantly.
Noninterest expense increased by $1.7 million this year compared
to the first six months of 1995. The Company recorded a one-time $1.3
million reversal of pension expense in 1995, understating expense for that
period. Excluding that adjustment, general and administrative expense
actually increased by only 3.3%. The increase is primarily due to the
accrual of a bonus and 401k contribution in the current year. No such
accrual was made in 1995.
The effective tax rate for the six months of 1996 was 41.8%
compared to a rate of 78.6% for the first six months of 1995. The higher
rate last year is due to the low level of income last year combined with a
minimum tax paid to the state of Delaware.
ASSET QUALITY
The Bank has steadily reduced its level of nonperforming assets
in the current quarter relative to year-end 1995. Nonperforming assets
were down significantly from June 30, 1995.
Detail on nonperforming assets is shown in the table below for
the dates indicated:
<TABLE>
<CAPTION>
Nonperforming Assets
(in thousands)
June 30, 1996 Dec. 31, 1995 June 30, 1995
<S> <C> <C> <C>
Loans 90 days or more delinquent $ 6,221 $ 4,559 $ 6,359
Troubled debt restructurings 5,880 6,965 7,623
Real estate owned through foreclosure 4,623 5,977 7,726
--------- -------- --------
Net nonperforming assets $ 16,724 $ 17,501 $ 21,708
========= ======== ========
Nonperforming assets/Total assets 1.26% 1.39% 1.66%
</TABLE>
As indicated above, the level of nonperforming assets has
decreased by roughly $5.0 million from the prior year. Non-performing
assets as a percentage of total assets was 1.26% at quarter-end compared
to 1.66% a year ago.
-15-
<PAGE>
Nonperforming assets as of quarter-end consisted of the following
asset types:
Nonperforming Assets by Type
(in thousands)
June 30, 1996
Commercial and multi-family real estate $ 1,529
Construction 2,242
1-4 family homes 9,975
Land 2,978
---------
$ 16,724
=========
All types of nonperforming assets have declined over the past
year with the exception of 1-4 family residences which have represented a
majority of the new nonperforming assets added.
By policy, the Bank does not accrue interest on loans that are 90
days or more delinquent. Interest on troubled debt restructurings is
recorded on a cash basis only. Foregone interest on nonperforming loans
through the first six months of 1996 totaled $451,000. Life-to-date
unrecorded interest on these same loans totaled $2.2 million through
quarter-end. A total of $146,000 in interest income has been recorded on
these loans so far this year.
Troubled debt restructurings represent loans that have been
modified, usually as a result of financial difficulties experienced by the
borrower, to terms that are more favorable than what would normally be
offered. These modifications usually involve either a reduction in rates
to below market, capitalization of interest due, or the requirement that
monthly payments equate to the level of cashflow on the underlying
property. The Bank's largest restructured assets are two construction
loans totaling $5.4 million originated during the peak of real estate
values. The underlying properties have experienced a significant decline
in value and the borrowers have limited financial resources. A majority
of the restructured speculative development loans are in some stage of
delinquency.
At quarter-end, $2.9 million of the $5.9 million in restructured
debt was more than 90 days delinquent. The restructured debt total above
does not include $808,000 in interest that has been capitalized but has
not been recognized in income. An additional $285,000 in interest on
these loans has been accrued at quarter-end but not included in income.
The Bank's level of loan loss reserves has declined since a year
ago as a large number of loans with specific reserves has been charged-
off. The level of loss reserves outstanding at any point in time is
largely dependent on the amount and type of loans outstanding, level of
classified and nonperforming loans and historical loss experience.
-16-
<PAGE>
The following table identifies the Bank's loan loss reserves at
June 30, 1996 by loan type:
<TABLE>
<CAPTION>
Reserves Percent of loans
(in thousands) in each category
at 6/30/96 to total loans
<S> <C> <C>
1-4 family permanent loans $ 2,368 75.3%
Multi-family loans 1,118 3.9
Commercial real estate loans 2,213 6.0
Land, construction and development loans 1,766 14.8
TOTAL -------- -----
$ 7,465 100.0%
======== =====
</TABLE>
Although total reserves have declined by $1.5 million from a year
ago, the level of such loss reserves to nonperforming assets has increased
from 36.0% to 39.3%.
Activity in the allowances for both loans and real estate for the
first six months of 1996 is summarized below:
Loss Reserves
(in thousands)
Loans Real Estate
Balance, December 31, 1995 $ 8,174 $ 6,959
Provision for losses 521 191
Charge-offs (1,230) (4,024)
Recoveries -- --
--------- ---------
Balance, June 30, 1996 $ 7,465 $ 3,126
========= =========
The Bank is required by regulation to classify and monitor all
assets exhibiting a defined weakness. The Bank's level of classified
assets is summarized in the following table for the dates indicated:
-17-
<PAGE>
Classified Assets
(in thousands)
as of
6/30/96 12/31/95 6/30/95
Substandard $ 32,436 $ 37,841 $ 56,844
Doubtful -- -- --
Loss 5,001 6,370 6,237
-------- -------- --------
TOTAL $ 37,437 $ 44,211 $ 63,081
======== ======== ========
The level of total classified assets declined by $25.6 million
from the previous year due primarily to the improved performance of a $5
million troubled debt restructuring and the reduced balances of foreclosed
real estate and real estate held for development purposes. The level of
assets classified as "loss" decreased by $1.2 million as a result of the
sales in real estate that occurred over the past year.
It is anticipated that the level of classified assets will
continue to decline due to the projected liquidation of the Bank's
portfolio of real estate held for investment purposes as well as escrowed
sales on foreclosed properties.
INTEREST RATE SENSITIVITY
The Bank's balance sheet has historically been exposed to some
level of interest rate risk in a rising rate environment as most of its
assets have been in the form of long-term, fixed-rate mortgages or
lagging-index adjustable loans which are funded with short-term,
frequently repricing deposits. During the past year, a concerted effort
has been made to portfolio more adjustable-rate loans, sell off fixed-rate
loans and investments as well as purchase current-index floating-rate
investments. Restructuring also occurred on the liability side as deposit
maturities were lengthened and additional long-term fixed-rate advances
were added. In addition, the Bank has become less competitive in the
pricing of its deposit base, which has further reduced the level of
sensitivity to changing rates. The interest rate protection received from
floating-rate assets is somewhat limited by lifetime rate caps which would
take effect in high-rate environments. Similarly, benefits derived from
current-index adjustable-rate mortgages are limited by periodic and
lifetime interest rate caps as well as by one year average repricing
periods. The level of fixed-rate loans and mortgage-backed securities
declined by $73 million from the previous year while adjustable rate
assets increased by $71 million.
In order to restructure the balance sheet, the Bank sold $31
million of fixed-rate mortgage-backed securities in the third quarter of
1995, using the cash to repay short-term borrowings. The securities had
been designated as held for investment purposes and the sale "tainted" the
-18-
<PAGE>
Bank's remaining investment portfolio, requiring the reclassification of
the remaining investment portfolio to available for sale. Since that
time, an additional $27 million in fixed-rate mortgage-backed securities
have been sold, further reducing the Bank's volatility to rising rates.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required by regulation to maintain cash and certain
short-term eligible investments equal to 5% of the average daily balance
of net withdrawable accounts and certain short-term borrowings during the
preceding calendar month. At June 30, 1996, this liquidity ratio was
6.04%.
The Bank generally has the ability to originate more loans than
it can portfolio and has relied heavily on loan prepayment and sale
activity to maintain desired growth levels. Asset growth is generally
funded through the Bank's internal retail branch system and, on occasion,
through the acquisition of branches from other depository institutions
within the Bank's market area. Growth is also funded to a lesser degree
with advances from the Federal Home Loan Bank and through the use of
short-term reverse repurchase agreements and brokered deposits.
As of June 30, 1996, the Bank had $64 million in collateral still
available for short-term reverse repurchase agreements. These agreements
are generally utilized on a short-term basis to meet daily operating
needs. Additional short-term cash needs can also be met through the use
of a line of credit with the FHLB. At quarter-end, approximately $67
million was still available through this borrowing source.
REGULATION
Under the Financial Institutions Reform, Recovery and Enforcement
Act signed into law on August 9, 1989, financial institutions are required
to meet three primary capital requirements: a tangible capital
requirement, a core capital requirement and a risk-based capital
requirement.
Tangible capital is defined as common stock, retained earnings,
noncumulative preferred stock less certain intangibles and a specified
phase-out of certain real estate and equity investments and must equal at
least 1.5% of tangible assets. Core capital is defined as tangible
capital plus certain intangibles and must equal at least 3% of tangible
assets. Risk-based capital is core capital plus supplementary capital,
which includes general loan loss reserves up to 1.25% of risk-weighted
assets and must equal at least 8% of risk-weighted assets.
The Bank's regulatory capital position at June 30, 1996 is set
forth in the following schedule:
-19-
<PAGE>
Regulatory capital position
(in thousands)
Tangible Core Risk-based
Book capital $ 85,397 $ 85,397 $ 85,397
Unrealized losses on securities 2,411 2,411 2,411
Real estate investment deduction (1,372) (1,372) (1,372)
Intangible deduction (493) (493) (493)
Loan loss reserves -- -- 6,581
Miscellaneous (52) (52) (52)
-------- -------- --------
Net regulatory capital $ 85,891 $ 85,891 $ 92,472
Minimum required 19,994 39,989 58,271
-------- -------- --------
Excess over minimum $ 65,897 $ 45,902 $ 34,201
======== ======== ========
Excess over "well capitalized" $ 19,243 N/A $ 19,633
======== ========
Capital Ratio 6.44% 6.44% 12.70%
There are several adjustments made to the level of capital
reported on a financial basis as compared to capital reported on a
regulatory basis. Certain intangible assets such as core deposit premiums
are excluded from regulatory capital. In addition, any investments in
non-includable subsidiaries are also deducted from capital, subject to a
phase-out rule. Any adjustments made to capital due to the mark to market
of the available for sale portfolio are also excluded from capital.
The Bank is currently considered "well capitalized" under
applicable regulatory definitions which has a positive impact on the level
of deposit insurance premiums assessed and provides the Bank additional
operating flexibility. The "well capitalized" designation requires that
an institution's total risk-based capital to risk-weighted assets exceed
10%, its Tier 1 risk-based capital ratio (which is similar to the total
risk-based ratio but excludes the inclusion of general loan loss reserves)
exceed 6% of risk-weighted assets, and its core capital ratio exceed 5% of
total adjusted assets. At June 30, 1996, the Bank's total risk-based
capital, Tier 1 risk-based and core ratios were 12.70%, 11.79% and 6.44%,
respectively.
Currently, as part of a statutory phase-out schedule, 60% of
loans to and investments in subsidiaries invested in real estate
development must be deducted from regulatory capital. At June 30, 1996,
the Bank's fully phased-in, total risk-based capital ratio (deducting all
$2.3 million in subsidiary investments) was 12.58%, $33.3 million above
the 8% minimum requirement and $18.4 million above the 10% requirement to
be considered "well capitalized". Based on the above, the Bank will not
have any problems in meeting the final phase-out requirement, scheduled to
-20-
<PAGE>
take effect on July 1, 1996, at which time the phase-out percentage will
increase from the current 60% to 100% of loans to and investments in
subsidiaries.
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 June 30, 1996, it
would not have materially reduced the amount of the Bank's risk-based
capital available to meet its risk-based capital requirement.
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 capitalize the SAIF. SAIF capitalization legislation is
currently pending in Congress. If enacted, it is estimated that SAIF-
insured institutions such as the Bank would be charged between 60 and 65
basis points on all deposits outstanding as of March 31, 1995. This
assessment would approximate $6.6 million for the Bank, assuming the
foregoing assessment rate and measurement date. The Treasury Department
has stated that the amount of such special assessment would be fully
deductible for federal corporate income tax purposes by SAIF-insured
institutions. Thus, if the above described legislation is enacted, it is
anticipated to have an estimated $3.9 million negative impact on the
Bank's earnings in the year of payment. Going forward, however, the level
of SAIF premiums would be expected to drop very significantly.
In addition, pursuant to identical provisions recently passed by
both the House of Representatives and the Senate and expected to be signed
by the President, savings institutions such as the Bank would receive,
subject to a number of conditions, a "fresh start" with respect to the
potential recapture of certain tax bad debt reserves. However, certain
other reserves would be required to be treated as taxable income over a
six-year period beginning in 1996, which may be delayed up to two years if
a savings association meets a newly developed mortgage originations test.
Beginning in 1996, savings associations will become subject to the same
federal income tax treatment as commercial banks with the same levels of
total assets. This legislation would eliminate the long-standing tax
impediments to savings association conversions to commercial bank charters
and should lower the after-tax cost of bank acquisitions of savings
associations and the conversion or merger of these associations into
commercial banks.
No assurance can be given as to the ultimate resolution of the
legislative matters described in the previous two paragraphs. However,
-21-
<PAGE>
even after the payment of a special assessment of the magnitude described
above, the Bank would still be classified as well capitalized under the
relevant total risk-based capital, Tier 1 capital and core capital tests,
based on its regulatory capital positions at June 30, 1996.
-22-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) There were no reports filed on Form 8-K during the quarter ended
June 30, 1996.
-23-
<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
DATE: August 13, 1996 BY: /s/ ROBERT V. KAVANAUGH
________________________________
ROBERT V. KAVANAUGH
President, Chief Operating Officer
DATE: August 13, 1996 BY: /s/ JANE R. BUTTERFIELD
________________________________
JANE R. BUTTERFIELD
Senior Vice President, Treasurer,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
-24-
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
company's quarterly report on Form 10-Q for the three months ended June 30, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 15,491
<INT-BEARING-DEPOSITS> 3,683
<FED-FUNDS-SOLD> 700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 303,485
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 945,254
<ALLOWANCE> 7,465
<TOTAL-ASSETS> 1,327,178
<DEPOSITS> 946,632
<SHORT-TERM> 103,063
<LIABILITIES-OTHER> 8,779
<LONG-TERM> 181,780
0
0
<COMMON> 26,908
<OTHER-SE> 60,016
<TOTAL-LIABILITIES-AND-EQUITY> 1,327,178
<INTEREST-LOAN> 38,437
<INTEREST-INVEST> 9,955
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 48,392
<INTEREST-DEPOSIT> 22,273
<INTEREST-EXPENSE> 28,989
<INTEREST-INCOME-NET> 19,413
<LOAN-LOSSES> 521
<SECURITIES-GAINS> 572
<EXPENSE-OTHER> 13,178
<INCOME-PRETAX> 9,367
<INCOME-PRE-EXTRAORDINARY> 9,367
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,450
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 3.16
<LOANS-NON> 6,221
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,880
<LOANS-PROBLEM> 3,140
<ALLOWANCE-OPEN> 8,178
<CHARGE-OFFS> 969
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,465
<ALLOWANCE-DOMESTIC> 884
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,581
<PAGE>
</TABLE>
