<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 MARCH 31, 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 MARCH 31, 1996
Common Stock, $.01 par value 4,677,615 shares
<PAGE>
<TABLE>
<CAPTION>
Part 1. FINANCIAL INFORMATION
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Condition
(unaudited)
March 31, 1996 Dec. 31, 1995 March 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Cash, Including Noninterest-Bearing Deposits $ 9,245,266 $ 13,162,431 $ 11,160,162
Interest-Bearing Deposits 8,266,395 4,691,615 6,093,121
Investments Securities:
Securities Available for Sale, at Market 170,932,719 144,144,806 49,629,205
Securities Held to Maturity - - 52,260,047
Mortgage-Backed Securities:
Available for Sale, at Market 103,834,619 117,199,924 6,663,071
Held to Maturity - - 161,336,585
Loans Held for Sale 6,863,063 13,153,264 2,734,000
Loans Receivable, net of loss reserves of
$8,178,214, $8,173,807 and $7,940,500 respectively 959,972,054 942,727,060 957,260,655
Less: Loans in Process 37,654,694 34,810,024 31,244,582
-------------- -------------- --------------
Net Loans Receivable $ 922,317,360 $ 907,917,036 $ 926,016,073
-------------- -------------- --------------
Real Estate Held for Development or Sale,
net of allowances of $4,950,658, $6,958,757 and
$6,589,776 $ 10,223,507 $ 12,480,183 $ 24,910,697
Office Property and Equipment 20,537,533 20,769,858 21,211,083
Federal Home Loan Bank Stock 10,529,900 10,395,200 10,039,300
Accrued Interest and Dividends Receivable 6,416,040 6,092,335 5,431,683
Deposit Base Premium 768,056 1,058,444 1,929,611
Other Assets, net 7,633,518 6,519,971 6,195,698
-------------- -------------- --------------
TOTAL ASSETS $1,277,567,976 $1,257,585,067 $1,285,610,336
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Savings and Checking Accounts $ 962,928,193 $ 960,147,775 $1,003,508,050
Advances from FHLB 177,500,000 162,500,000 110,000,000
Collateralized Mortgage Obligation 5,985,373 6,462,509 7,609,272
Securities Sold Under Agreements to Repurchase 37,506,000 35,408,000 72,997,000
Accrued Interest Payable 2,124,787 1,181,068 1,629,228
Other Liabilities, net 5,255,991 6,283,494 5,608,894
-------------- -------------- --------------
TOTAL LIABILITIES $1,191,300,344 $1,171,982,846 $1,201,352,444
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<PAGE>
Part 1. FINANCIAL INFORMATION
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statement of Condition
(unaudited)
March 31, 1996 Dec. 31, 1995 March 31, 1995
-------------- -------------- --------------
Stockholders' Equity
Serial Preferred Stock, 4,000,000 shares
authorized, no shares outstanding - - -
Capital Stock, 12,000,000 shares authorized
4,677,615, 4,662,779 and 4,639,548 shares
outstanding $ 46,776 $ 46,628 $ 46,395
Paid in Capital in Excess of Par 26,718,705 26,553,810 26,304,771
Unrealized Loss on Securities Available for Sale,
net of tax (541,095) 998,198 (567,754)
Retained Earnings, Substantially Restricted 60,043,246 58,003,585 58,474,480
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY $ 86,267,632 $ 85,602,221 $ 84,257,892
-------------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,277,567,976 $1,257,585,067 $1,285,610,336
============== ============== ==============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the three months ended:
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 18,948,219 $ 17,155,315
Interest and Dividends on Investments 4,628,406 4,602,990
------------- -------------
TOTAL INTEREST INCOME $ 23,576,625 $ 21,758,305
------------- -------------
INTEREST EXPENSE
Interest on Savings $ 11,397,806 $ 11,603,996
Interest on Short-term Borrowings 427,753 908,730
Interest on Long-term Borrowings 2,526,682 1,691,588
------------- -------------
TOTAL INTEREST EXPENSE $ 14,352,241 $ 14,204,314
Less: Interest Capitalized (8,297) (92,074)
------------- -------------
NET INTEREST EXPENSE $ 14,343,944 $ 14,112,240
------------- -------------
NET INTEREST INCOME $ 9,232,681 $ 7,646,065
------------- -------------
Provision for Loan Losses 265,000 265,000
------------- -------------
NET INTEREST INCOME LESS PROVISION FOR LOAN LOSSES $ 8,967,681 $ 7,381,065
------------- -------------
OTHER INCOME
Gain on sale of:
Loans $ 421,426 $ 40,175
Real Estate Held for Investment or Sale 39,609 (30,959)
Provisions for Losses on Real Estate (35,000) (80,000)
Available for Sale Securities, net 464,233 (20,916)
Operating Losses on Foreclosed Real Estate (181,676) (199,095)
Loan Servicing Fee Income 309,316 374,452
Other Fee Income 1,036,345 915,683
Writedown of Other Assets (40,224) (497,299)
Other Income, net (20,493) 8,935
------------- -------------
TOTAL OTHER INCOME (LOSS) $ 1,993,536 $ 510,976
------------- -------------
NONINTEREST EXPENSE
Compensation and Other Related Benefits $ 3,027,033 $ 3,124,910
Occupancy 712,842 727,069
Advertising and Promotion 210,962 227,779
Data Processing 570,170 528,524
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<PAGE>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the three months ended:
March 31, 1996 March 31, 1995
-------------- --------------
Insurance 780,235 672,335
Other 986,244 870,314
------------- -------------
Amortization of Deposit Base Premium 290,389 290,389
------------- -------------
TOTAL NONINTEREST EXPENSE $ 6,577,875 $ 6,441,320
------------- -------------
Income Before Taxes $ 4,383,342 $ 1,450,721
Income Tax Expense 1,830,772 616,850
------------- -------------
NET INCOME $ 2,552,570 $ 833,871
============= =============
EARNINGS PER SHARE $ 0.54 $ 0.18
============= =============
CASH DIVIDENDS PER SHARE $ 0.11 $ 0.11
============= =============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,552,570 $ 833,871
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Amortization of:
Loan Premium 80,101 --
Deferred Loan Fees (635,173) (736,600)
Discount Amortization on Mortgage-Backed Bonds -- 54,699
Deposit Base Premium 290,389 290,389
Net (gain) Loss on Sale of:
Loans (421,426) (40,175)
Real Estate Held for Development or Sale (39,609) 30,959
Net (gain) Loss on Securities Activities (464,233) 20,916
Provision for Losses on:
Loans 265,000 265,000
Real Estate Held for Development or Sale 35,000 80,000
Depreciation and Amortization 654,634 643,158
(Decrease) Increase in Income Taxes Payable (9,851) 935,106
Net Increase in Accrued Interest Payable 943,719 18,588
Net Increase in Accrued Interest Receivable (323,705) (123,600)
Mortgage Loans Originated as Held for Sale (18,790,852) (3,802,162)
Proceeds from Loans Sold 25,502,479 11,626,248
Other, net (2,178,030) (809,503)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,461,013 $ 9,286,894
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal Payments on Loans $ 51,241,875 $ 34,973,362
Mortgage Loans Originated as Held for Investment (59,785,856) ( 48,235,157)
Purchase of Loan Participations (6,722,316) (7,797,216)
Maturity and Payments of Securities Held for Investment -- 499,562
Purchase of Securities Available for Sale (48,093,325) (11,292,115)
Maturity and Payments of Securities Available for Sale 7,467,929 1,709,182
Sale of Securities Available for Sale 26,088,803 10,371,301
Purchase of Office Property and Equipment, net (422,309) (742,397)
Purchase of FHLB Stock and FHLMC Preferred Stock (134,700) (1,302,400)
Investment in Real Estate Held for Development or Sale (558,276) (1,469,362)
Proceeds from Sales of Real Estate Held for Development or Sale 1,846,610 1,391,525
Proceeds from Sale of Foreclosed Property 2,209,097 634,499
Other, net 5,654 686,473
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES $ (26,856,814) $ (20,572,743)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) Increase in Deposit Accounts $ (773,949) $ 7,090,808
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<PAGE>
CALIFORNIA FINANCIAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
March 31, 1996 March 31, 1995
-------------- --------------
Net (decrease) Increase in Checking Accounts 3,554,367 (4,653,178)
Proceeds from FHLB Advances 116,300,000 1,000,000
Repayments of FHLB Advances (101,300,000) (1,000,000)
Securities Sold Under Agreement to Repurchase, net 2,098,000 8,019,000
Payments on Mortgage-Backed Bonds (477,136) (343,222)
Proceeds from Stock Options Exercised and Dividends Reinvested 165,043 97,739
Dividends Paid to Shareholders (512,909) (509,523)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 19,053,416 $ 9,701,624
Net Decrease in Cash and Cash Equivalents $ (342,385) $ (1,584,225)
Cash and Cash Equivalents at the beginning of the year 17,854,046 18,837,508
------------- -------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 17,511,661 $ 17,253,283
============= =============
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 13,408,522 $ 14,185,726
Cash Payments of Income Taxes 362,740 100,000
Supplemental Disclosures of Cash Flow Information:
Additions to Real Estate Acquired through Foreclosure 1,236,146 344,457
Unrealized (gains) Losses on Available for Sale Securities 1,539,293 (618,315)
</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 $1.4
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 decreased by $8 million over the past year as a
result of declines in the balance of real estate held. The components of
interest-bearing liabilities changed somewhat as brokered deposits
declined by $43 million, and reverse repurchase balances declined by $35.5
million. Federal Home Loan Bank advances, on the other hand, increased by
$67.5 million. The Company's total assets have increased by $20 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 quarter of 1996 totalled
$78.6 million compared to volume of $60.0 million for the first three
months of 1995. Increases in refinance activity due to the lower rate
environment as well as increases in construction originations were
responsible for most of the improvement in volume. Construction loan
volume was up $15 million or 75% while refinance activity increased by $11
million or 61%.
A breakout of lending volume by type is shown below for the
periods indicated:
Originations through
March 31
(in millions)
1996 1995
Short-term construction loans $ 33.8 $ 19.3
Permanent fixed-rate loans 30.0 4.4
Permanent adjustable-rate loans 14.8 36.3
------- -------
TOTAL ORIGINATIONS $ 78.6 $ 60.0
======= =======
The reduced interest rate environment also led to increases in
the origination of permanent fixed-rate loan originations relative to
adjustable-rate mortgages. Historically, adjustable-rate mortgages have
been more popular in periods of rising interest rates, due particularly to
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<PAGE>
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 the interest rate
risk inherent in the balance sheet. Loan sale activity of $25.5 million
in the current quarter was up significantly from the $11.6 million in
sales recorded in the first quarter of 1995, primarily due to the increase
in fixed-rate mortgages originated this year.
The recent increase in rates may 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 $14.7 million from a year ago and by $2.2 million in the
current year. Real estate held by the Bank at quarter-end consisted of
$5.0 million in real estate owned through foreclosure and $5.2 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 $5.3 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:
Real Estate Held for Development
or Sale, net
(in thousands)
3/31/96 12/31/95 3/31/95
Real estate owned through $ 5,010 $ 5,977 $ 10,280
foreclosure 5,214 6,503 14,631
Real estate held for --------- --------- ---------
development $ 10,224 $ 12,480 $ 24,911
========= ========= =========
TOTAL
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
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<PAGE>
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 March 31, 1996, the investment portfolio was
adjusted to market value with the after-tax net loss of $541,000 shown as
an adjustment to stockholder's equity.
The amortized cost and estimated market values of investment and
mortgage-backed securities as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
AVAILABLE FOR SALE:
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government & Agency Securities $ 44,420,358 $ 54,786 $ 280,888 $ 44,194,256
CMO'S 124,146,365 600,899 1,410,069 123,337,195
Other securities 3,452,650 1,219 52,601 3,401,268
------------ ------------ ----------- ------------
Total investment securities $172,019,373 $ 656,904 $ 1,743,558 $170,932,719
------------ ------------ ----------- ------------
Mortgage-backed securities:
FHLMC $ 67,306,822 $ 754,147 $ 439,321 $ 67,621,648
FNMA 34,441,425 159,405 12,665 34,588,165
FHA Title One 2,467,631 0 842,825 1,624,806
------------ ------------ ----------- ------------
Total mortgage-backed securities: $104,215,878 $ 913,552 $ 1,294,811 $103,834,619
------------ ------------ ----------- ------------
Total available for sale portfolio $276,235,251 $ 1,570,456 $ 3,038,369 $274,767,338
------------ ------------ ----------- ------------
</TABLE>
NOTE: Above adjustments are on a pre-tax basis.
RESULTS OF OPERATIONS
The Company earned $2.6 million or $.54 per share for the first
three months of 1996 compared to earnings of $834,000 or $.18 per share
for the first three months of 1995.
Improved earnings in the current quarter over last year's first
quarter can be attributed to increased margins, increased gains taken on
the sale of assets and steady noninterest expense.
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<PAGE>
The table below breaks out the components of the Bank's margin
and spread for the periods indicated:
<TABLE>
<CAPTION
Average for the quarter *Weighted average as of
ended Mar. 31 Mar. 31
---------------------- ------------------------
Basis- Basis-
point point
1996 1995 change 1996 1995 change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Yield on interest-earning assets:
Loan portfolio yield 8.23% 7.44% 0.79% 7.98% 7.16% 0.82%
Yield on marketable investments 6.59 6.31 0.28 6.58 6.59 (0.01)
Weighted yield on assets 7.84 7.17 0.67 7.64 7.03 0.61
Cost of funds:
Cost of deposits 4.74% 4.63% 0.11% 4.68% 4.78% (0.10)%
FHLB advances & other borrowings 5.97 5.92 0.05 5.81 6.05 0.24
Weighted cost of funds 4.95 4.79 0.16 4.89 4.99 0.10
Interest rate spread 2.90% 2.38% 0.52% 2.75% 2.05% 0.70%
Net yield on interest-earning assets 3.07% 2.52% 0.55% 2.90% 2.13% 0.77%
* Does not consider the effect of amortization of loan fees.
</TABLE>
Improved net interest income in the current quarter relative to
the first quarter of 1995 was primarily the result of increasing yields on
the loan portfolio as well as an improvement in the level of average
interest-earning assets to average interest-bearing liabilities.
Loan interest income increased by roughly $1.8 million for the
first three months of 1996 compared to 1995. A 79-basis point increase in
the average yield on the loan portfolio in the current year was completely
responsible for the earnings improvement as the average balance of loans
outstanding remained flat between the two periods. 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
increase in starting rates on new adjustable product added to the
portfolio, added 8-10 basis points to the Bank's loan portfolio yield on a
monthly basis since the first quarter of 1995. Yields on the COFI
portfolio should begin to level out with the recent decline in the Index.
Investment interest income remained fairly flat between the two
periods as the impact of a 28-basis point increase in average yield was
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<PAGE>
offset by the impact of a $10.9 million decline in the average balance of
investments outstanding.
Net interest expense increased only slightly in the current
quarter compared to the first quarter of 1995. The impact of a slight
increase in the average cost of funds was generally offset by a decline in
the balance of average interest-bearing liabilities outstanding. Interest
expense on deposits decreased by $206,000 compared to the first quarter of
1995. An 11-basis point increase in the overall cost of deposits,
reflected in a $276,000 increase in expense was more than offset by a
$41.7 million decline in the average balance of deposits outstanding. The
balance of deposits has declined due to the maturing of $32 million in
brokered funds as well as to a conscious effort by the Bank to price
deposits less competitively in an effort to reduce interest expense.
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 periods of rising interest
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 $119,000 to
interest expense in 1996 compared to $564,000 for the first three 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.
Interest costs on borrowings increased by $354,000 this year
compared to the first three months of 1995. A $22.5 million increase in
the average balance of borrowings outstanding on a year to date basis
added $332,000 to interest expense in the current year compared to the
first three months of 1995. The average borrowing balances increased on a
year-to-date basis to replace the decline in brokered deposits. Borrowing
costs increased only minimally in the current year, having virtually no
impact on interest expense.
Interest rate spreads are expected to continue to widen in the
second quarter as asset yields remain fairly constant while a significant
amount of higher-costing deposits mature and are replaced by lower-costing
funds.
The Bank's average margin continued to exceed average spread by
17 basis points in the current quarter. 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 the first quarter of 1995 when average
margin exceeded average spread by 14 basis points.
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<PAGE>
Loan loss provisions established during the quarter totaled
$265,000 which was consistent with the level of loan loss provisions
established in the first quarter of 1995 and reflects the current
stabilized to improving real estate market.
Noninterest income of $2.0 million was reported for the quarter
compared to noninterest income of $511,000 reported in the first quarter
of 1995. Noninterest income has increased in the current year due to
increases in loan sale gains as well as gains recognized on the sale of
investments.
In the first quarter of 1996, the Bank implemented FASB 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 first quarter of 1996
totalled $318,000, representing 1.25% of total loan sale gains recorded.
The bank used market prices under comparable servicing sale contracts to
value the servicing asset, when available. In the absence of available
market prices, 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 default rates. Servicing fee
income was reduced by $64,000 in the first quarter 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.
Recording the servicing asset at the point of sale will be reflected in
reduced servicing fee income in future periods.
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.
Other income was reduced in the first quarter of 1995 due to
$476,000 in writedowns taken on FHA Title I Securities. Only minimal
writedowns have occurred in the current year.
Fee income is expected to remain relatively consistent for the
remainder of the year. The level of loan sale gains will be heavily
dependent on the volume of fixed-rate loans originated as well as on the
volatility and level of interest rates.
Noninterest expense increased by $137,000 this year compared to
the first three months of 1995 or by roughly 2% with no material changes
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<PAGE>
in expense noted in any one area. Current expense levels are expected to
continue for the remainder of the year.
The effective tax rate for the first three months of 1996 was
41.8% compared to a rate of 42.5% for the first three months of 1995. The
lower rate this year is due to the higher level of income in the current
year combined with a flat tax paid to the state of Delaware.
ASSET QUALITY
The Bank continued to maintain its level of nonperforming assets
in the current quarter relative to the fourth quarter of 1995.
Nonperforming assets were down significantly from the first quarter of
1995.
Detail on nonperforming assets is shown in the table below for
the dates indicated:
<TABLE>
<CAPTION>
Nonperforming Assets
(in thousands)
March 31, 1996 Dec. 31, 1995 March 31, 1995
<S> <C> <C> <C>
Loans 90 days or more delinquent $ 6,129 $ 4,559 $ 8,563
Troubled debt restructurings 6,605 6,965 14,235
Real estate owned through foreclosure 5,010 5,977 11,395
--------- -------- --------
Net nonperforming assets $ 17,744 $ 17,501 $ 34,193
========= ======== ========
Nonperforming assets/Total assets 1.39% 1.39% 2.66%
</TABLE>
As indicated above, the level of nonperforming assets has
decreased by roughly $16.4 million from the prior year. Non- performing
assets as a percentage of total assets was 1.39% at quarter end compared
to 2.66% a year ago.
Nonperforming assets as of March 31, 1996 consisted of the
following asset types:
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<PAGE>
Nonperforming Assets by Type
(in thousands)
March 31, 1996
Commercial and multi-family real estate $ 1,456
Construction 2,314
1-4 family homes 10,555
Land 3,419
---------
$ 17,744
=========
All types of nonperforming assets have declined 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 three months of 1996 totaled $366,000. Life-to-date
unrecorded interest on these same loans totaled $2.5 million through
quarter-end. A total of $46,000 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 three construction
loans originated during the peak of real estate values totalling $5.9
million. 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 in restructured debt was more than
90 days delinquent. The restructured debt total above does not include
$763,000 in interest that has been capitalized but has not been recognized
in income. An additional $356,000 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. 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.
The following table identifies the Bank's loan loss reserves at
March 31, 1996 by loan type:
- 15 -
<PAGE>
<TABLE>
<CAPTION>
Reserves Percent of loans
(in thousands) in each category
at 3/31/96 to total loans
<S> <C> <C>
1-4 family permanent loans $ 2,397 76.8%
Multi-family loans 1,158 3.9
Commercial real estate loans 2,300 5.8
Land, construction and development loans 2,323 13.5
-------- -----
TOTAL $ 8,178 100.0%
======== =====
</TABLE>
Although total loan loss reserves have declined by $267,000 from
a year ago, the level of loss reserves to nonperforming assets has
increased from 20.5% to 37.9%.
Activity in the allowances for both loans and real estate for the
first three months of 1996 is summarized below:
Loss Reserves
(in thousands)
Loans Real Estate
Balance, December 31, 1995 $ 8,174 $ 6,959
Provision for losses 265 35
Charge-offs (261) (2,043)
Recoveries -- --
--------- ---------
Balance, March 31, 1996 $ 8,178 $ 4,951
========= =========
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:
Classified Assets
(in thousands)
as of
3/31/96 12/31/95 3/31/95
Substandard $ 36/116 $ 37/841 $ 59,776
Doubtful -- -- --
Loss 4,942 6,370 3,949
-------- -------- --------
TOTAL $ 41,058 $ 44,211 $ 63,725
======== ======== ========
- 16 -
<PAGE>
The level of total classified assets declined by $22.7 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" increased by $1.0 million as a result of the
significant reserves established on real estate investments in the second
quarter of 1995.
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 were 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 should further reduce the level of
sensitivity to changing rates. This effort has helped in reducing
interest rate exposure in rising rate environments. 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 $78 million from the previous year
while adjustable rate assets increased by $81 million.
In order to restructure the balance sheet, the Bank sold $31
million of fixed-rate mortgage-backed securities in the second 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
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
- 17 -
<PAGE>
preceding calendar month. At March 31, 1996, this liquidity ratio was
6.18%.
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 March 31, 1996, the Bank had $66 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. However, beginning in 1994, Bank management initiated a
balance sheet growth strategy incorporating the use of these short-term
borrowings on a longer-term basis. For a further discussion of this
strategy, see "Interest Rate Sensitivity". Additional short-term cash
needs can also be met through the use of a line of credit with the FHLB.
At quarter-end, approximately $144 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 March 31, 1996 is set
forth in the following schedule:
- 18 -
<PAGE>
Regulatory capital position
(in thousands)
Tangible Core Risk-based
Book capital $ 84,900 $ 84,900 $ 84,900
Unrealized losses on securities 541 541 541
Real estate investment deduction (3,660) (3,660) (3,660)
Intangible deduction (768) (768) (768)
Loan loss reserves -- -- 6,733
Nonqualifying equity investments -- -- (1,124)
Miscellaneous (26) (26) (26)
-------- -------- --------
Net regulatory capital $ 80,987 $ 80,987 $ 86,596
Minimum required 19,250 38,500 56,020
-------- -------- --------
Excess over minimum $ 61,737 $ 42,487 $ 30,576
======== ======== ========
Excess over "well capitalized" $ 76,819 N/A $ 16,571
======== ========
Capital Ratio 6.31% 6.31% 12.37%
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
nonincludable 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 March 31, 1996, the Bank's total risk-based
capital, Tier 1 risk-based and core ratios were 12.37%, 11.57% and 6.31%,
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 March 31, 1996,
the Bank's fully phased-in, total risk-based capital ratio (deducting all
$8.7 million in subsidiary investments) was 12.05%, $28.4 million above
the 8% minimum requirement and $14.4 million above the 10% requirement to
be considered "well capitalized". Based on the above and the Bank's
current strategy to accelerate the sale of real estate held for investment
purposes, it is not anticipated that the Bank will have any problems in
meeting the final phase-out requirement, scheduled to take effect on July
- 19 -
<PAGE>
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 March 31, 1996, it
would not have 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 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 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 $5 million negative impact on the Bank's
earnings in the year of enactment. Going forward, however, the level of
SAIF premiums would be expected to drop significantly.
In addition, pursuant to identical provisions recently passed by
both the House of Representatives and the Senate, 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. The merging of the funds may affect the Bank's competitive
environment by facilitating consolidation between the banking and thrift
sectors.
No assurance can be given as to the ultimate resolution of the
legislative matters described in the previous two paragraphs. However,
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 March 31, 1996.
- 20 -
<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
March 31, 1996
- 21 -
<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: May 9, 1996 BY: /s/ ROBERT V. KAVANAUGH
________________________________
ROBERT V. KAVANAUGH
President, Chief Operating Officer
DATE: May 9, 1996 BY: /s/ JANE R. BUTTERFIELD
________________________________
JANE R. BUTTERFIELD
Senior Vice President, Treasurer,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
- 22 -
<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 September 30,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,245
<INT-BEARING-DEPOSITS> 2,716
<FED-FUNDS-SOLD> 5,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 274,767
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 922,317
<ALLOWANCE> 8,178
<TOTAL-ASSETS> 1,277,568
<DEPOSITS> 962,928
<SHORT-TERM> 40,006
<LIABILITIES-OTHER> 14,817
<LONG-TERM> 180,985
0
0
<COMMON> 26,766
<OTHER-SE> 59,502
<TOTAL-LIABILITIES-AND-EQUITY> 1,277,568
<INTEREST-LOAN> 18,948
<INTEREST-INVEST> 4,629
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,577
<INTEREST-DEPOSIT> 11,398
<INTEREST-EXPENSE> 14,344
<INTEREST-INCOME-NET> 9,233
<LOAN-LOSSES> 265
<SECURITIES-GAINS> 464
<EXPENSE-OTHER> 6,578
<INCOME-PRETAX> 4,383
<INCOME-PRE-EXTRAORDINARY> 4,383
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,553
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 3.07
<LOANS-NON> 6,129
<LOANS-PAST> 0
<LOANS-TROUBLED> 6,605
<LOANS-PROBLEM> 4,523
<ALLOWANCE-OPEN> 8,174
<CHARGE-OFFS> 261
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 8,178
<ALLOWANCE-DOMESTIC> 1,445
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,733
<PAGE>
</TABLE>
