<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17044
SFFED CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3063232
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
88 KEARNY STREET, SAN FRANCISCO, CALIFORNIA 94108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(415) 955-5800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT NOVEMBER 3, 1995
----- -------------------------------
<S> <C>
Common 7,873,247
</TABLE>
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- -------------------------------------------------------------------------------
<PAGE>
SFFED CORP. AND SUBSIDIARY
FORM 10-Q
SEPTEMBER 30, 1995
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition September 30, 1995
and December 31, 1994............................................ 3
Consolidated Statements of Operations Three Months Ended September
30, 1995 and 1994 and Nine Months Ended September 30, 1995 and
1994............................................................. 4
Consolidated Statements of Cash Flows Nine Months Ended September
30, 1995 and 1994................................................ 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 21
Item 2. Changes in Securities........................................ 21
Item 3. Defaults Upon Senior Securities.............................. 21
Item 4. Submission of Matters to a Vote of Security Holders.......... 21
Item 5. Other Information............................................ 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
SIGNATURES............................................................ 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SFFED CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash on hand and amounts due from depository in-
stitutions..................................... $ 24,861 18,306
Federal funds sold.............................. 10,000 34,900
Securities purchased under agreements to re-
sell........................................... 161,000 112,000
---------- ---------
195,861 165,206
Mortgage-backed securities available for sale, at
market........................................... 74,698 77,458
Mortgage-backed securities held for investment,
net (approximate market value of $897,941 at
September 30, 1995 and $323,257 at December 31,
1994)............................................ 888,332 330,578
Loans held for sale, net.......................... 5,454 3,627
Loans receivable held for investment, net......... 2,734,353 3,011,504
Accrued interest receivable....................... 23,659 18,798
Federal Home Loan Bank stock, at cost............. 31,165 30,049
Premises and equipment, net....................... 22,138 22,946
Real estate owned, net............................ 27,446 25,784
Other assets...................................... 30,296 23,986
Excess of cost over fair value of net assets
acquired (net of accumulated amortization of
$8,801 at September 30, 1995 and $8,298 at
December 31, 1994)............................... 8,219 8,722
---------- ---------
$4,041,621 3,718,658
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits................................. $2,707,841 2,481,988
Federal funds purchased........................... -- 35,000
Securities sold under agreements to repurchase.... 821,869 347,679
Advances from Federal Home Loan Bank of San Fran-
cisco............................................ 218,983 580,983
Senior notes...................................... 49,223 49,158
Advance payments by borrowers for taxes and insur-
ance............................................. 4,152 3,425
Taxes on income................................... 8,246 602
Other liabilities and accrued expenses............ 30,615 23,636
Unearned income................................... 1,376 1,643
---------- ---------
3,842,305 3,524,114
---------- ---------
Stockholders' equity:
Serial preferred stock--par value $.01 per share;
4,000,000 shares authorized and unissued......... -- --
Common stock--par value $.01 per share; 20,000,000
shares authorized; 7,870,995 and 7,833,282 shares
issued and outstanding at September 30, 1995 and
December 31, 1994, respectively.................. 79 78
Additional paid-in capital........................ 70,273 69,912
Retained earnings--substantially restricted....... 130,749 128,512
Unrealized loss on securities available for sale,
net of tax....................................... (1,457) (3,449)
Minimum pension liability adjustment.............. (328) (509)
---------- ---------
Total stockholders' equity...................... 199,316 194,544
---------- ---------
$4,041,621 3,718,658
========== =========
</TABLE>
3
<PAGE>
SFFED CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ------------------
1995 1994 1995 1994
---------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans.................. $ 53,693 47,051 160,950 139,418
Interest on mortgage-backed securi-
ties.............................. 17,629 6,018 42,837 16,693
Interest and dividends on
investments and FHLB stock........ 3,057 1,809 8,053 4,643
---------- -------- -------- --------
74,379 54,878 211,840 160,754
---------- -------- -------- --------
Interest expense:
Interest on customer deposits...... 34,793 26,554 100,003 73,012
Interest on Federal Home Loan Bank
advances.......................... 4,371 5,712 19,570 18,503
Interest on senior notes........... 1,421 334 4,281 334
Interest on other borrowings....... 13,197 3,215 30,154 8,393
---------- -------- -------- --------
53,782 35,815 154,008 100,242
---------- -------- -------- --------
Net interest income................ 20,597 19,063 57,832 60,512
Provision for loan losses............ 3,968 2,219 9,309 15,667
---------- -------- -------- --------
Net interest income after provision
for loan losses................... 16,629 16,844 48,523 44,845
---------- -------- -------- --------
Noninterest income (loss):
Mortgage banking activities:
Gain (loss) on sale of real es-
tate loans...................... (16) 9 (170) 495
Loan servicing income............ 1,454 1,143 4,007 2,986
---------- -------- -------- --------
1,438 1,152 3,837 3,481
Loan, deposit and other fees....... 1,421 1,379 3,930 4,358
Income from real estate partner-
ships............................. 39 29 196 45
Other income (loss)................ 353 (153) 1,091 (10)
---------- -------- -------- --------
3,251 2,407 9,054 7,874
---------- -------- -------- --------
Noninterest expense:
Compensation and benefits.......... 5,607 8,892 22,532 27,519
Occupancy and equipment............ 3,420 3,247 10,258 9,620
Advertising and promotion.......... 336 619 1,754 1,886
Outside data processing............ 970 1,008 2,782 3,052
Deposit insurance premiums and
regulatory assessments............ 1,747 1,594 5,006 4,585
Provision for losses on real estate
owned and other................... 2,200 1,346 3,529 8,034
Real estate owned operations, net.. 431 1,038 921 3,038
Deferred loan origination costs.... (966) (1,437) (3,744) (4,905)
Amortization of excess of cost over
fair value of net assets
acquired.......................... 165 177 503 531
Other expense...................... 2,526 2,571 7,451 7,750
---------- -------- -------- --------
16,436 19,055 50,992 61,110
---------- -------- -------- --------
Income (loss) before income taxes.. 3,444 196 6,585 (8,391)
Income tax expense (benefit)......... 1,412 81 2,700 (3,493)
---------- -------- -------- --------
Net income (loss).................. $ 2,032 115 3,885 (4,898)
========== ======== ======== ========
Earnings (loss) per share............ $ 0.25 0.01 0.48 (0.63)
========== ======== ======== ========
Dividends per share.................. $ 0.07 0.07 0.21 0.21
========== ======== ======== ========
</TABLE>
4
<PAGE>
SFFED CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1994
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)....................................... $ 3,885 (4,898)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises and equip-
ment................................................. 2,433 2,379
Amortization of excess of cost over fair value of net
assets acquired...................................... 503 531
Provision for losses, net............................. 12,838 23,701
Deferred income taxes................................. 1,859 (1,723)
Increase (decrease) in interest payable............... 7,837 (726)
Increase in interest receivable....................... (4,861) (642)
Dividend income on FHLB stock......................... (1,116) (944)
(Gain) loss on sales of real estate loans, net........ 170 (495)
Amortization of deferred loan fees.................... (1,414) (2,011)
Proceeds from sale of loans originated for sale....... 24,174 130,673
Originations of loans held for sale................... (37,014) (153,783)
Net change in other assets/liabilities................ (7,342) (11,318)
Increase (decrease) in income taxes payable........... 4,257 (2,235)
--------- --------
Net cash provided by (used in) operating activities..... 6,209 (21,491)
--------- --------
Cash Flows from Investing Activities:
Principal payments received on mortgage-backed securi-
ties available for sale................................ 6,043 34,482
Principal payments received on mortgage-backed securi-
ties held for investment............................... 44,905 21,732
Purchases of mortgage-backed securities held for invest-
ment................................................... (104,472) (4,074)
Principal payments received on loans.................... 177,044 299,355
Originations of loans held for investment............... (409,893) (542,737)
Loans purchased......................................... (12,176) --
Sales of premises and equipment......................... 208 43
Purchases of premises and equipment..................... (1,833) (1,775)
Sales of real estate.................................... 20,988 34,483
Investment in and acquisition of real estate............ (1,201) (1,278)
Other, net.............................................. 3,141 (6,143)
--------- --------
Net cash used in investing activities................... (277,246) (165,912)
--------- --------
Cash Flows from Financing Activities:
Net increase (decrease) in demand deposits.............. $ 278,487 (133,045)
Certificate account deposits............................ 354,745 731,209
Certificate account withdrawals......................... (407,379) (324,883)
Decrease in borrowings with maturities of three months
or less................................................ (114,127) (12,806)
Proceeds from long-term borrowings...................... 914,741 449,540
Principal payments on long-term borrowings.............. (723,359) (524,395)
Proceeds from issuance of common stock.................. 232 397
Payment of dividends.................................... (1,648) (1,644)
--------- --------
Net cash provided by financing activities............... 301,692 184,373
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents...... 30,655 (3,030)
Cash and Cash Equivalents at Beginning of Period.......... 165,206 163,174
--------- --------
Cash and Cash Equivalents at End of Period................ $ 195,861 160,144
========= ========
Supplemental disclosures of cash flow information
Cash paid for:
Interest on customer deposits......................... $ 99,988 72,369
Interest on borrowings................................ 44,130 27,830
Income taxes.......................................... 27 466
Non-cash investing activities:
Transfers of loans to real estate owned............... 29,527 48,596
Loans converted to mortgage-backed securities......... 499,657 92,264
Mortgage-backed securities transferred from available-
for-sale portfolio to held-for-investment portfolio.. -- 258,344
Loans transferred from held-for-sale portfolio to
held-for-investment portfolio........................ 11,013 59,814
</TABLE>
5
<PAGE>
SFFED CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SFFed Corp. (Company) is the holding company for San Francisco Federal
Savings and Loan Association (Association). The unaudited consolidated
financial statements of the Company included herein reflect all adjustments
which are, in the opinion of management, necessary to present a fair
statement of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1994 Annual Report on Form 10-K.
Certain of the 1994 consolidated financial statement amounts have been
reclassified to conform to the 1995 presentation.
2. During the first nine months of 1995, primarily for additional flexibility
in borrowings, the Company converted a total of $500 million of its
adjustable-rate loans secured by single-family homes into mortgage-backed
securities, retaining a recourse liability for possible losses. All
mortgage-backed securities converted in 1995 are maintained in the
Company's held-for-investment portfolio.
3. Earnings (loss) per share for the three months and nine months ended
September 30, 1995 have been computed using the weighted-average number of
shares outstanding of 8,218,386 and 8,109,499, respectively, compared with
8,053,581 and 7,825,802 for the year-earlier periods. The weighted-average
number of shares for the third quarter and first nine months of 1995 and
the third quarter of 1994 includes the dilutive effect of unexercised stock
options.
4. In August 1995, the Company signed a definitive agreement wherein the
Company will be acquired by First Nationwide Bank in an all-cash
transaction for $32 per common share or an aggregate price of approximately
$264.2 million. Associated with the approval of the pending merger, a
shareholders' meeting is expected to take place in mid December. The
Company anticipates the merger to be completed in the first quarter of
1996.
5. During the third quarter of 1995, the Company recorded a one-time $1.6
million reduction in retirement plan expenses reflecting a net curtailment
gain arising from the suspension of the Company's defined benefit
retirement plan. This gain is net of the costs of enhancing certain
retirement benefits under that plan immediately before it was suspended and
net of certain other costs associated primarily with enhancing benefits
provided under the Company's defined contribution (401(k)) plan.
6. The results of operations for the nine months ended September 30, 1995 are
not necessarily indicative of the results to be expected for the full year.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SUMMARY
Net income for the third quarter of 1995 was $2.0 million compared with $0.1
million in the year-earlier period. The Company reported net income for the
first nine months of 1995 amounting to $3.9 million compared with a net loss
for the 1994 period of $4.9 million. The main differences in the quarterly and
year-to-date results between the periods are as follows:
1. A decline in the Company's net interest margin, partially offset by an
increase in interest-earning assets, has decreased net interest income
for the first nine months of 1995 by $2.7 million compared with the
year-earlier period.
2. The provision for loan losses, foreclosed real estate and other losses
for the third quarter and first nine months of 1995 was $6.2 million and
$12.8 million, respectively, compared with $3.6 million and $23.7
million for the same periods in 1994.
3. Expenses from real estate owned operations amounted to $0.4 million and
$0.9 million for the third quarter and first nine months of 1995,
respectively, compared with $1.0 million and $3.0 million for the same
periods in 1994.
4. Compensation and benefits expense totalled $5.6 million and $22.5
million for the third quarter and first nine months of 1995,
respectively, compared with $8.9 million and $27.5 million for the same
periods in 1994.
These and other changes are discussed below.
NET INTEREST INCOME
Net interest income for the third quarter and first nine months of 1995 was
$20.6 million and $57.8 million, respectively, compared with $19.1 million and
$60.5 million for the year-earlier periods. The amount of net interest income
is determined from a combination of the amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned and paid on these
assets and liabilities.
The Company's interest margin on total assets has declined to 2.09% and
1.94% for the third quarter and first nine months of 1995, respectively,
compared with 2.22% and 2.34% for the 1994 periods. This decrease is mainly
due to market interest rates rising during 1994 before leveling off and then
decreasing starting in the first quarter of 1995. The effect of the decrease
in margin for the 1995 periods was offset by an increase in interest-earning
assets compared with the year-earlier periods. The table on the following page
highlights the effect that the change in general market interest rates has had
on net interest income, comparing the two quarters and the nine months ended
September 30, 1995 and 1994. However, the period-end interest margin on total
assets at September 30, 1995 has increased to 2.13% from 1.95% at June 30,
1995 and 1.70% at December 31, 1994. As market interest rates stabilized and
began decreasing again starting in the first quarter of 1995, the yield on the
Company's portfolio of adjustable-rate mortgages (ARM) and mortgage-backed
securities (MBS) with adjustable rates has continued to increase while during
the third quarter of 1995 the Company's cost of funds have begun to decrease
(see below).
ARMs and MBS with adjustable rates represent approximately 92% of the
Company's portfolio. The fact that the Company's ARMs and adjustable-rate MBS
do not reprice to market as rapidly as the Company's interest-bearing
liabilities means that initially the Company's interest rate margin decreases
during a period of rising interest rates. However, as the rate of increase in
interest rates begins to slow or as interest rates level off and/or begin to
fall, the Company's interest rate margin will increase.
7
<PAGE>
Most of the Company's borrowings and customer deposit certificate accounts
are short term and adjust to market quite rapidly. Therefore, in periods of
rising interest rates, the Company's cost of funds increases as borrowings
mature and reprice to market and as savings certificate accounts mature and
renew at higher rates. In addition, competition among the financial
institutions in the Company's market area for retail customer deposits remains
strong and the rates on these deposits remain higher than the rates in the
year-earlier period. However, as discussed above, general market interest
rates have declined during the second and third quarters of 1995. As a result,
the Company's cost of deposits at September 30, 1995 decreased to 5.20% from
5.22% at June 30, 1995 but have increased from 4.99% at March 31, 1995 and
4.61% at December 31, 1994, respectively. The total cost of borrowings
increased to 6.61% at September 30, 1995 from 6.37% at year-end 1994. For
further discussion see Asset/Liability Management below.
The changes in net interest income for the third quarter and first nine
months of 1995 compared with the year-earlier periods are analyzed in the
following table. The table shows the changes by major component,
distinguishing between changes related to volume as opposed to changes in
interest rates and the net effect of both:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1995 COMPARED WITH 1994 (1)
-----------------------------------
INCREASE (DECREASE)
-----------------------------------
VOLUME RATE NET
------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
From loans............................... $ (671) 7,313 6,642
From mortgage-backed securities.......... 9,479 2,132 11,611
From investment securities............... 621 627 1,248
----------- ---------- ----------
9,429 10,072 19,501
----------- ---------- ----------
Interest expense:
On customer deposits..................... 1,154 7,085 8,239
On borrowings............................ 6,698 3,030 9,728
----------- ---------- ----------
7,852 10,115 17,967
----------- ---------- ----------
$ 1,577 (43) 1,534
=========== ========== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1995 COMPARED WITH 1994 (1)
-----------------------------------
INCREASE (DECREASE)
-----------------------------------
VOLUME RATE NET
------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
From loans............................... $ 5,311 16,221 21,532
From mortgage-backed securities.......... 20,973 5,171 26,144
From investment securities............... 1,270 2,140 3,410
----------- ---------- ----------
27,554 23,532 51,086
----------- ---------- ----------
Interest expense:
On customer deposits..................... 6,501 20,490 26,991
On borrowings............................ 15,267 11,508 26,775
----------- ---------- ----------
21,768 31,998 53,766
----------- ---------- ----------
$ 5,786 (8,466) (2,680)
=========== ========== ==========
</TABLE>
- --------
(1) The changes have been computed as follows: average balance changes -
change in volume holding initial rate constant; average rate changes -
change in average rate holding the initial balance constant; changes
attributable to both volume and rate have been allocated proportionately.
8
<PAGE>
Average assets and liabilities together with average interest rates earned
and paid for the three months and nine months ended September 30, 1995 and 1994
are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ------------------------------------
1995 1994 1995 1994
------------------ ------------------ ----------------- -----------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
--------- ------- --------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans .......................... $2,728 7.87% $ 2,767 6.80% $ 2,836 7.57% $ 2,735 6.80%
Mortgage-backed securities ..... 976 7.23 429 5.62 818 6.98 401 5.56
Investment securities........... 195 6.19 151 4.76 182 5.85 146 4.19
--------- ------- --------- ------- -------- ------ -------- ------
3,899 7.62 3,347 6.55 3,836 7.36 3,282 6.53
Noninterest-earning as sets..... 140 138 135 150
--------- ------- --------- ------- -------- ------ -------- ------
$ 4,039 7.36% $ 3,485 6.30% $ 3,971 7.11% $ 3,432 6.24%
========= ======= ========= ======= ======== ====== ======== ======
Interest-bearing liabilities:
Deposits........................ $ 2,661 5.19% $ 2,554 4.13% $ 2,649 5.05% $ 2,444 3.99%
Borrowings...................... 1,129 6.61 702 5.23 1,083 6.62 750 4.84
--------- ------- --------- ------- -------- ------ -------- ------
3,790 5.61 3,256 4.36 3,732 5.50 3,194 4.19
Noninterest-bearing liabilities.. 50 33 42 39
Stockholders' equity............. 199 196 197 199
--------- ------- --------- ------- -------- ------ -------- ------
$ 4,039 5.27% $ 3,485 4.08% $ 3,971 5.17% $ 3,432 3.90%
========= ======= ========= ======= ======== ====== ======== ======
Net earning assets and benefit.. $ 109 0.16% $ 91 0.12% $ 104 0.15% $ 88 0.12%
========= ========= ======== ========
Interest rate margin on
earning assets.................. 2.17% 2.31% 2.01% 2.46%
Interest rate margin on
total assets.................... 2.09% 2.22% 1.94% 2.34%
</TABLE>
- --------
Notes:
(1) The average balances are daily averages.
(2) Non-accrual loans have been included as noninterest-earning assets in the
above table.
At September 30, 1995 and 1994 period-end average interest rates on earning
assets and interest-bearing liabilities were as follows:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------
1995 1994
-------------- --------------
YIELD/ YIELD/
BALANCE RATE BALANCE RATE
------- ------ ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans............................................ $2,735 7.91% $2,822 6.83%
Mortgage-backed securities....................... 963 7.30 421 5.72
Investment securities............................ 202 6.23 170 5.29
------ ---- ------ ----
3,900 7.67% 3,413 6.62%
==== ====
Noninterest-earning assets........................ 142 136
------ ------
$4,042 $3,549
====== ======
Interest-bearing liabilities:
Customer deposits................................ $2,708 5.20% $2,573 4.27%
Borrowings....................................... 1,090 6.61 751 5.69
------ ---- ------ ----
3,798 5.61% 3,324 4.59%
==== ====
Noninterest-bearing liabilities................... 45 30
Net worth......................................... 199 195
------ ------
$4,042 $3,549
====== ======
Net earning assets and benefit.................... $ 102 0.15% $ 89 0.12%
====== ======
Interest rate margin on earning assets............ 2.21% 2.15%
Interest rate margin on total assets.............. 2.13% 2.07%
</TABLE>
- --------
Note: Non-accrual loans have been included as noninterest-earning assets in the
above table.
9
<PAGE>
PROVISION FOR LOSSES
The provision for loan losses for the quarter ended September 30, 1995 of
$3.9 million was $1.7 million higher than for the year-earlier period and $3.0
million higher than the quarter ended June 30, 1995. This provision
represented additions to loss reserves primarily covering certain multi-family
and non-residential real estate loans. The provision for losses on real estate
owned and other increased to $2.2 million from $1.3 million during the third
quarter of 1995 compared with the year-earlier period. The increase in the
quarter primarily represented additional loss reserves on foreclosed real
estate. Increases in the provisions during the 1995 third quarter were
recorded in response to the increase in nonperforming assets, comprised of
nonaccrual loans and foreclosed real estate (REO). Both the provision for loan
losses and the provision for losses on real estate owned and other are lower
during the nine months ended September 30, 1995 compared with the 1994 period.
Net nonperforming assets have increased to $74.1 million at September 30, 1995
from $69.7 at June 30, 1995 and $71.2 million at December 31, 1994, but have
decreased from $83.9 million at September 30, 1994. For further discussion of
nonperforming assets and reserves for losses, refer to Asset Quality, below.
NONINTEREST INCOME
Net losses on the sale of mortgage loans for the first nine months of 1995
were $0.2 million compared with net gains on sales of mortgage loans of $0.5
million for the year-earlier period. The volume of loans sold decreased to
$24.0 million for the first nine months of 1995 from $131 million during the
year-earlier period, see Asset/Liability Management below.
Loan servicing income increased to $4.0 million for the first nine months of
1995 from $3.0 million a year ago primarily due to the Company converting
approximately $500 million monthly adjustable-rate single-family home loans
during the first nine months of 1995 into Federal National Mortgage
Association (FNMA) MBS. For further discussion, see Asset/Liability
Management. In addition, the Company recorded lower amortization of its
deferred premium on loan sales during the 1995 period as the anticipated
prepayment rate of these loans has slowed primarily due to the increase in
market interest rates compared with the prior year. Amortization of the
deferred premium on loan sales in the first nine months of 1995 and 1994 was
$0.4 million and $0.6 million, respectively. The unamortized balance of the
deferred premium on loan sales was $2.4 million at September 30, 1995,
compared with $3.0 million a year earlier.
NONINTEREST EXPENSE
General and administrative expenses decreased by $2.9 million and $3.5
million in the third quarter and first nine months of 1995, respectively,
compared with the year-earlier periods. The major components of this decrease
were comprised of a reduction in retirement costs due in part to the
suspension of the Company's defined benefit pension plan, a decrease in loan
commissions of $0.4 million and $1.0 million in the third quarter and first
nine months of 1995, respectively, and a decrease in regular compensation
expense of $0.4 million and $0.8 million in the third quarter and first nine
months of 1995, respectively. These decreases more than offset the decrease of
$0.5 million and $1.2 million in deferred loan origination costs in the third
quarter and first nine months of 1995, respectively, compared with the prior-
year periods.
Retirement costs, included in compensation and benefits, decreased by $2.5
million and $3.0 million in the third quarter and first nine months of 1995,
respectively, compared with the year-earlier periods. During the third quarter
of 1995, the Company recorded a one-time $1.6 million reduction in retirement
plan expenses reflecting a net curtailment gain arising from the suspension of
the Company's defined benefit retirement plan. This gain is net of the costs
of enhancing certain retirement benefits under that plan immediately before it
was suspended and net of certain other costs associated primarily with
enhancing benefits provided under the Company's defined contribution (401(k))
plan. The net gain has been recorded in accordance with Statement of Financial
Accounting Standard (FAS) No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
Ongoing retirement costs for the quarter and nine months ended September 30,
1995, excluding the curtailment gain, totalled $0.3 million and $2.1 million,
respectively,
10
<PAGE>
compared with $1.2 million and $3.5 million for the year-earlier periods. The
decrease is due to changes in the actuarial assumptions used for the Company's
pension plans and also to the suspension of the qualified plan (thus the
Company no longer must accrue for future service costs).
The decreases in loan commissions and deferred loan origination costs were
primarily due to the decrease in loan volume in the third quarter and first
nine months of 1995 compared with year-earlier periods. For further
discussion, see Asset/Liability Management. The decrease in regular
compensation expense is primarily due to staff reductions following the
closing of several of the Company's loan origination offices and centralizing
the Company's loan processing and underwriting functions in the first quarter
of 1995.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense was 41.0% of pre-tax income in the third quarter of 1995
compared with 41.3% for the year-earlier period. The income tax expense was
41.0% of pre-tax income in the first nine months of 1995 compared with income
tax benefit of 41.2% on pre-tax loss a year earlier.
PENDING MERGER
In August 1995, the Company signed a definitive agreement whereby the
Company will be acquired by First Nationwide Bank (FNB) in an all-cash
transaction for $32 per common share or an aggregate price of approximately
$264.2 million. The merger is expected to be completed in the first quarter of
1996. The merger agreement contains operating restrictions on the Company,
certain of which are described in the paragraphs which follow. For a complete
list of all operating restrictions and other terms of the merger, refer to the
Agreement and Plan of Merger, attached as an exhibit to the Company's Form 8-
K, filed with the Securities and Exchange Commission on September 13, 1995,
which is incorporated herein by this reference. Also, for further discussion,
refer to Part II, Item 5--Other Information.
ASSET/LIABILITY MANAGEMENT
GENERAL
Market interest rates began to rise during the first quarter of 1994 in
reaction to the Federal Reserve Board's increases in its discount rate in an
attempt to forestall the onset of inflation and continued to rise through
December 31, 1994 before leveling off and decreasing in the first quarter of
1995. Interest rates have continued to decline during the second and third
quarters of 1995, although the decline has slowed in the third quarter. For
the reasons discussed in the Company's 1994 Annual Report on Form 10-K, the
Company's interest rate margin generally decreases during a period of rising
interest rates before stabilizing and increasing again once market interest
rates stabilize and/or begin to decline. Thus, the Company's interest rate
margin on total assets was 2.13% at September 30, 1995 compared with 1.70% at
year-end 1994 and 2.07% at September 30, 1994.
The Company's customer deposits increased by $226 million during the first
nine months of 1995 to $2.71 billion at September 30, 1995. This increase,
along with an increase in total borrowings of $77 million, has been used
primarily to fund the increase of $323 million in total assets.
REAL ESTATE LOANS AND MORTGAGE-BACKED SECURITIES (MBS)
Real estate loan originations totalled $440 million for the first nine
months of 1995 compared with $691 million in the first nine months of 1994.
Originations of 1-4 unit home loans amounted to 90% of total originations for
the first nine months of 1995 and 79% in the year-earlier period. This
percentage increase in 1-4 unit home loan originations is due to the Company
withdrawing from the multi-family residential loan market and a reduction in
construction loan originations.
The demand for fixed versus adjustable-rate loans is sensitive to changes in
market interest rates. Interest rates being offered by the Company for fixed-
rate 1-4 unit home loans were generally lower in the third and
11
<PAGE>
second quarters of 1995 than in the first quarter. Primarily because of these
lower rates, and the rates on fixed-rate loans in relation to adjustable rates
being offered, 24% and 19% of 1-4 unit loan originations in the third and
second quarters of 1995, respectively, were at fixed rates compared with 6% in
the first quarter.
In August 1994, in anticipation of the senior notes issued by the Company in
September 1994 and consequent availability of capital contributions enabling
the Association to increase its total assets, while maintaining its well
capitalized status for regulatory purposes, the Association essentially ceased
designating loans at origination as being originated for sale. During the
second quarter of 1995 the Company began originating fixed-rate loans for sale
again in order to maintain the interest rate sensitivity of its loan portfolio
and to once again control the growth of total assets.
During the third quarter of 1995 the Company converted approximately $100
million of its monthly-adjusting ARM loans held for investment secured by
single-family homes into FNMA MBS with recourse to the Company for possible
losses. The Company had also converted approximately $400 million of similar-
type loans into FNMA MBS during the first half of 1995. All MBS converted in
1995 are in the Company's held-for-investment portfolio. These conversions
have enabled the Company to reduce its borrowing costs by using these MBS as
collateral for reverse repurchase agreement borrowings at a lower cost than
for similar-term FHLB advances.
In January 1995, the Company purchased $98 million of 9% fixed-rate
Government National Mortgage Association MBS. The Company had purchased these
MBS to increase its asset size and yield. This purchase has not materially
affected the Company's interest rate risk.
As part of the merger agreement signed with FNB, the Company is restricted
from originating loans in excess of $500,000, without the prior written
consent of FNB. This restriction has not had a material impact on the
origination of loans. For further discussion of this and other restrictions
due to the pending merger, refer to the Agreement and Plan of Merger, attached
as an exhibit to the Company's Form 8-K, filed with the Securities and
Exchange Commission on September 13, 1995, which is incorporated herein by
this reference. Also, for further discussion, refer to Part II, Item 5--Other
Information.
CUSTOMER DEPOSITS
Customer deposits increased by $226 million during the first nine months of
1995 to $2.71 billion at September 30, 1995. Early in 1995 the Company began
offering a new demand-type account with a minimum balance requirement and an
initial interest rate of 5.50%. This account was successful in attracting new
funds, rather than transfers from existing deposit accounts with the Company.
As discussed above, general market interest rates have declined during the
first nine months of 1995 and as a result, during the third quarter of 1995,
the interest rate paid on this new demand-type account was lowered to 5.10%.
Despite the lower rate, demand for this account has remained strong. During
the third quarter of 1995, the Company took advantage of a period of
relatively low certificate of deposit maturities by offering competitive rates
for certain short-term certificate of deposit accounts, which resulted in the
overall quarterly increase of $61 million in certificate accounts.
Customer deposits are mainly short-term with 60% being withdrawable on
demand or in certificate accounts maturing over the next six months. This
compares with 48% at year-end 1994. Certificate accounts comprised 69% of
total customer deposits at September 30, 1995 compared with 77% at year-end
1994. This decrease reflects the success of the new demand-type account, as
total demand deposits have increased by $271 million during the first nine
months of 1995. Certificate accounts have decreased by $54 million during the
first nine months of 1995 as a result of net withdrawals and transfers to the
new demand-type deposit account.
SENIOR NOTES DUE SEPTEMBER 2004
For the reasons discussed in the Company's 1994 Annual Report on Form 10-K,
in September 1994, the Company issued $50 million of 11.20% senior notes due
on September 1, 2004. The Company may contribute up to $34 million from the
senior note sale proceeds in the form of equity capital to the Association.
The
12
<PAGE>
Company made equity capital contributions to the Association from the senior
note proceeds of $5.0 million during 1995 and $25.0 million during 1994. These
contributions have enabled the Company to increase its total assets by $323
million during the first nine months of 1995 and $170 million during the
fourth quarter of 1994, while maintaining the Association's well capitalized
status for regulatory purposes.
BORROWED FUNDS
Borrowed funds increased by $77 million during the first nine months of 1995
to $1.09 billion at September 30, 1995 and had a weighted-average cost at that
date of 6.61% compared with 6.37% at December 31, 1994. A large portion of
this increase occurred in the second quarter as the growth in total assets
during the first quarter of 1995 was funded by the increase in customer
deposits discussed above. As discussed above, the Company has been able to
reduce its borrowing costs by using its newly-converted MBS as collateral for
additional reverse repurchase agreement borrowings as opposed to acquiring
higher-costing similar-term FHLB advances. The Company's reverse repurchase
agreement borrowings comprise 75% of total borrowings at September 30, 1995
compared with 34% at year-end 1994. In October 1995, because of changes in the
Federal Home Loan Bank borrowing policies, the Company began acquiring FHLB
advances in lieu of additional reverse repurchase agreement borrowings using
MBS as collateral and maintaining the cost benefit over the traditional
advance program.
As part of the merger agreement signed with FNB, the Company is restricted
from incurring any indebtedness for borrowed money, including reverse
repurchase agreements, with a final maturity falling on any date after June
30, 1996, without the prior written consent of FNB. This restriction has not
had any material adverse effect on the Company. For further discussion of this
and other restrictions due to the pending merger, refer to the Agreement and
Plan of Merger, attached as an exhibit to the Company's Form 8-K, filed with
the Securities and Exchange Commission on September 13, 1995, which is
incorporated herein by this reference. Also, for further discussion, refer to
Part II, Item 5--Other Information.
INTEREST RATE RISK AND SENSITIVITY
To minimize interest rate risk, the Company's real estate loan and MBS
portfolios are primarily adjustable rate. At September 30, 1995, a total of
$3.4 billion, or 92%, of the Company's real estate loan and MBS portfolios
have adjustable rates, with the interest rates on $2.9 billion of these loans
and MBS being adjustable monthly.
The sensitivity of earnings to interest rate changes is often measured by
the difference, or gap, between the amount of assets and liabilities scheduled
to reprice within the same time period expressed as a percentage of assets.
Generally, the lower the amount of this gap, the less sensitive are an
institution's earnings to interest rate changes. A positive gap means an
excess of assets over liabilities repricing during the same period. This
measure of interest rate risk is discussed in more detail in the Company's
1994 Annual Report on Form 10-K. The Company's gap position at September 30,
1995 and December 31, 1994 is summarized as follows:
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
------------------------------------------------------------------------------------
0-6 MONTHS 7-12 MONTHS 1-3 YEARS OVER 3 YEARS
--------------------- -------------------- -------------------- --------------------
9-30-95 12-31-94 (1) 9-30-95 12-31-94 (1) 9-30-95 12-31-94 (1) 9-30-95 12-31-94 (1)
------- ------------ ------- ------------ ------- ------------ ------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative gap, interest
earning assets over
(under) interest
bearing liabilities.... $1,493 1,531 459 765 105 161 102 97
Cumulative gap, as a
percent of interest
earning assets......... 38.3% 42.6 11.8 21.3 2.7 4.5 2.6 2.7
</TABLE>
- --------
(1) The Company, commencing in 1995, classified all transaction account
maturities to the 0-6 months maturity category. Consequently, all
transaction accounts in 1994 have been reclassified to conform with 1995
presentation.
13
<PAGE>
The changes in the various gap categories in the above table during the
period were mainly the result of the additional demand-type customer deposits
obtained by the Company and both customer deposits and borrowings moving
between categories as they get closer to maturity or mature and are renewed.
INTEREST RATE MARGIN
The Company's interest rate margin on total assets has improved to 2.13% at
September 30, 1995 from 1.70% at December 31, 1994 and 2.07% at September 30,
1994. As discussed in the Company's 1994 Annual Report on Form 10-K, the cost
of the Company's interest-bearing liabilities reacts to changes in market
interest rates faster than the yield on its earning assets, which are
primarily indexed to the slower-moving Federal Home Loan Bank Eleventh
District Cost of Funds Index (COFI). As discussed in the Company's 1994 Annual
Report on Form 10-K, there is a minimum of a two-month delay between a change
in the COFI and the related change in the interest rates on the Company's
loans indexed to the COFI. During the first nine months of 1995, the COFI has
increased by 77 basis points. During the second quarter of 1995 the COFI
peaked at 5.18% and has been declining since. The September 1995 COFI was
5.11%. The combined yield on the Company's loan and MBS portfolios increased
by 97 basis points during the first nine months of 1995 to 7.75% at September
30, 1995 and improved 106 basis points from September 30, 1994. Because of the
many factors involved, the Company is unable to accurately predict changes in
its interest rate margin.
ASSET QUALITY
There has been no material change in the California economy or real estate
market during the first nine months of 1995. The commercial real estate market
remains weak and the demand for new homes is slow compared with earlier years.
The Company's net nonperforming assets at September 30, 1995 were $74.1
million, or 1.83% of total assets compared with $71.2 million, or 1.91% at
year-end 1994, respectively.
Foreclosure activity has remained at a relatively high level during the
first nine months of 1995, totalling $34.1 million for the first nine months
of 1995 compared with $48.5 million during the year-earlier period.
Foreclosure activity in 1-4 unit home loans was similar to the first nine
months of 1994, with 60 homes with outstanding principal balances totalling
$11.5 million being acquired during the nine months ended September 30, 1995.
The 1995 activity includes the foreclosure of a $13.4 million land development
loan, to be discussed in further detail below. Sales of REO properties during
the first nine months of 1995 totalled $23.8 million, including multi-family
residential and commercial real estate properties with a book value of $11.0
million.
Charges to expense during the first nine months of 1995 for provisions for
loan and REO losses totalled $9.3 million and $2.5 million, respectively.
These charges were primarily related to certain loans secured by multi-family
and commercial real estate and foreclosed multi-family, commercial real estate
and land development properties where information obtained during the current
period indicated a significant decrease in credit quality or decrease in
property values. In addition to these charges, a provision for loss on a real
estate joint venture was recorded in the second quarter of 1995 amounting to
$1.0 million.
14
<PAGE>
Loans 30 days or more delinquent increased by $4.6 million, or 4%, during
the first nine months of 1995 to $112.0 million at September 30, 1995. Loans
30 to 59 days delinquent increased by $2.9 million, or 6%, from year-end 1994
levels to $53.2 million at September 30, 1995, including reductions in multi-
family home loan delinquencies of $5.8 million. Delinquent loans by type of
loan and as a percentage of loans by type are summarized as follows at
September 30, 1995 and December 31, 1994:
SEPTEMBER 30, 1995:
<TABLE>
<CAPTION>
NUMBER OF DAYS DELINQUENT
----------------------------------------------
30-59 60-89 90 OR MORE TOTAL
---------- ---------- ---------- ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ --- ------ ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 unit family homes......... $41.9 2.0% $11.8 0.6% $25.8 1.3% $ 79.5 3.9%
Multi-family homes............ 3.5 0.5 7.5 1.2 7.1 1.1 18.1 2.8
Construction and land develop-
ment......................... 0.4 0.9 0.8 2.1 1.7 4.3 2.9 7.3
Commercial real estate........ 6.1 1.3 -- -- 2.8 0.6 8.9 1.9
Consumer and other............ 1.3 1.2 0.5 0.5 0.8 0.8 2.6 2.5
----- --- ----- --- ----- --- ------ ---
Total......................... $53.2 1.6% $20.6 0.6% $38.2 1.2% $112.0 3.4%
===== === ===== === ===== === ====== ===
</TABLE>
DECEMBER 31, 1994:
<TABLE>
<CAPTION>
NUMBER OF DAYS DELINQUENT
------------------------------------------------
30-59 60-89 90 OR MORE TOTAL
---------- ---------- ----------- -----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---- ------ ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 unit family homes....... $34.9 2.0% $11.6 0.7% $20.5 1.2% $ 67.0 3.8%
Multi-family homes.......... 9.3 1.4 1.0 0.2 3.2 0.5 13.5 2.1
Construction and land devel-
opment..................... 0.5 1.0 -- -- 14.9 27.7 15.4 28.7
Commercial real estate...... 3.8 0.8 1.3 0.2 3.6 0.7 8.7 1.7
Consumer and other.......... 1.8 1.8 0.4 0.4 0.6 0.6 2.8 2.8
----- --- ----- --- ----- ---- ------ ----
Total....................... $50.3 1.6% $14.3 0.5% $42.8 1.4% $107.4 3.5%
===== === ===== === ===== ==== ====== ====
</TABLE>
- --------
Note:The above amounts represent total remaining principal balances of the
related loans rather than the payment amounts which are overdue. The 1995
amounts for 1-4 unit family home loans included securitized loans where
the Company has retained a recourse liability for possible losses.
15
<PAGE>
Nonperforming assets are defined by the Company as nonaccrual loans,
primarily loans that are 90 days or more delinquent, and real estate acquired
by foreclosure. Such assets together with restructured loans (see below) are
summarized as follows as of September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994 (2)
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Nonaccrual loans:
1-4 unit family homes... $25.8 20.5
Multi-family homes...... 10.9 3.8
Construction and land
development............ 1.7 14.9
Commercial real estate.. 6.5 5.0
Consumer and other...... 0.8 0.6
----- ----
45.7 44.8
----- ----
Real estate acquired by
foreclosure:
1-4 unit family homes... 10.2 9.5
Multi-family homes...... 4.6 6.1
Construction and land
development............ 10.2 4.3
Commercial real estate.. 11.6 14.9
Consumer and other...... 0.1 --
----- ----
36.7 34.8
----- ----
Gross nonperforming as-
sets................... 82.4 79.6
Specific allowances for
losses................... (8.3) (8.4)
----- ----
Net nonperforming assets.. $74.1 71.2
===== ====
Percent of total assets... 1.83% 1.91
===== ====
Restructured loans, ex-
cluding nonaccrual loans
(1)...................... $ 4.3 29.6
===== ====
</TABLE>
- --------
(1) Loans where the Company has granted concessions to borrowers because of
financial difficulty. During 1995 the Company reevaluated its policies on
restructured loans and determined that several loans that had been
restructured were current for several years and had reverted back to
original note terms.
(2) Certain 1994 balances have been reclassified to conform with 1995
presentation.
Changes in nonperforming assets during the first nine months of 1995 are
analyzed as follows:
1-4 UNIT FAMILY HOMES
Total delinquent loans at September 30, 1995 increased to 3.9% of the total
portfolio compared with 3.3% at June 30, 1995 and 3.8% at year-end 1994. Much
of the quarterly increase took place in September 1995, apparently the result
of a decrease in the number of working days compared with prior months.
Numerous loan payments received on the first working day in October 1995 were
for loans that were 30 days delinquent at the end of September. Total
delinquent loans at the end of October 1995 have decreased to 3.5% of the
total portfolio. Regarding the overall increase in loan delinquencies, it
should be noted that industry publications indicate the industry as a whole is
experiencing a similar trend. Loan foreclosure activity during the first nine
months of 1995 was similar to the Company's 1994 experience with 60 homes with
outstanding loan principal balances totalling $11.5 million being acquired
through foreclosure. Sales of 57 foreclosed homes with a book value of $11.0
million closed during the first nine months of 1995. The average ratio of loss
to book value on these sales was 15.2% compared with an average loss ratio of
18.7% on 1994 sales of foreclosed homes.
MULTI-FAMILY HOMES
There has been no significant change in the overall performance of this
portfolio during the first nine months of 1995. Delinquent loans totalled
$18.1 million, or 2.8% of total loans at September 30, 1995, compared with
16
<PAGE>
$13.5 million and 2.1%, respectively, at year-end 1994. Nonaccrual loans
increased by $7.1 million during the first nine months of 1995 to $10.9
million at September 30, 1995. This increase was due in part to the transfer
of a $3.8 million loan to an insubstance foreclosure status. The loan is 60
days delinquent, the property has occupancy and deferred maintenance problems
and the borrower is believed to have insufficient financial resources to
resolve these problems. A $0.7 million specific loss reserve was established
for this loan in 1994 and an additional $0.2 was established in the third
quarter of 1995.
The Company's "special mention" loan category at September 30, 1995 includes
six multi-family loans with outstanding balances of $14.7 million. These loans
are current but are being monitored because of prior debt relief requests,
deferred maintenance problems and other factors.
CONSTRUCTION AND LAND DEVELOPMENT
A land development project in Fairfield, California with a net book value of
$12.3 million was acquired by foreclosure during the second quarter of 1995.
As part of the foreclosure, the Company received a $4.5 million note secured
by real estate with an estimated value of $6.0 million. Additionally, the
first deeds of trust on properties formerly held by the borrower with
outstanding principal balances of $0.6 million were assigned to the Company.
The Company has recorded a specific REO loss allowance of $1.2 million on this
property during the third quarter of 1995. This property is currently being
marketed.
COMMERCIAL REAL ESTATE
At September 30, 1995, just ten loans out of the total portfolio of 586
loans were 30 days or more delinquent. These loans had outstanding principal
balances of $9.0 million, or 1.9% of the portfolio total at September 30, 1995
compared with 17 loans with outstanding principal balances of $8.7 million at
year-end 1994. Nonaccrual loans increased by $0.9 million during the quarter
to $6.5 million at September 30, 1995 compared with $5.6 million at June 30,
1995 and $5.0 million at December 31, 1994. Two loans became nonaccrual during
the quarter with outstanding balances of $2.9 million and properties securing
two loans with outstanding balances of $2.1 million were acquired by
foreclosure.
REGULATORY CLASSIFICATION OF ASSETS
As part of the evaluation of its loan portfolio, the Company takes into
account general economic and real estate market conditions and other factors
that could have an impact on the future performance of its loan portfolio and
REO inventory. These factors are part of the process of identifying loans with
certain weaknesses or deficiencies that are classified for regulatory
reporting purposes, depending on the severity of the problem, as special
mention, substandard, doubtful or loss. The level of assets classified in
these various categories is taken into account in determining the appropriate
level of the Company's general valuation allowances. In addition to the
nonperforming assets included in the above table, assets classified as
substandard for regulatory purposes at September 30, 1995 and December 31,
1994 included the following real estate loans:
<TABLE>
<CAPTION>
LOAN BALANCES
--------------------------
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(IN MILLIONS)
<S> <C> <C>
1-4 unit homes...................................... $ 2.1 3.0
Loans secured by properties with real estate taxes
two or more years delinquent.
Multi-family residential............................ 9.5 9.9
Comprised primarily of loans which are current or
30 to 60 days delinquent secured by properties
with vacancy-related problems.
Commercial real estate.............................. 12.3 16.9
Comprised primarily of loans which are current but
where the properties securing the loans have cash
flow problems, mainly vacancy related, or where
the Company has been unable to obtain current
financial information from the borrowers.
Construction and land development................... 2.1 1.2
Includes a matured loan (balance of $0.6 and $1.0
million at September 30, 1995 and December 31,
1994, respectively) which is current, but
projected sales have been slower than originally
forecast.
</TABLE>
17
<PAGE>
Additionally, at September 30, 1995 and December 31, 1994, the Company's
watch list of closely monitored loans included the following loans classified
as special mention for regulatory purposes:
<TABLE>
<CAPTION>
LOAN BALANCES
--------------------------
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Commercial real estate............................ $40.0 16.8
Multi-family residential.......................... 14.6 9.8
Construction and land development................. 0.6 0.3
----- ----
$55.2 26.9
===== ====
</TABLE>
At the date indicated, these loans did not exhibit the problems that would
require them to be classified as substandard, but there were potential
weaknesses that could lead to a substandard classification in future periods.
During the first quarter of 1995, the Company revised and broadened its
criteria for placing loans in its special mention category, accounting for
much of the increase in special mention commercial real estate loans.
VALUATION ALLOWANCES
As discussed in its 1994 Annual Report on Form 10-K, the Company regularly
reviews its various asset categories to determine the adequacy of its general
and specific valuation allowances, charging or crediting earnings, as
appropriate, with any changes considered necessary. The net charge to expense
for the first nine months of 1995, $12.8 million, included adjustments to the
levels of general valuation allowances, loan charge-offs and additional
specific valuation allowances. The Company's valuation allowances and certain
related ratios at September 30, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994 (2)
------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Loans: General allowances....................... $33.5 32.4
Specific allowances.......................... 5.5 4.4
----- ----
39.0 36.8
----- ----
REO:General allowances.......................... 2.8 3.0
Specific allowances.......................... 6.4 6.0
----- ----
9.2 9.0
----- ----
$48.2 45.8
===== ====
Ratios of:
Total loan allowances to gross loans (1)...... 1.2% 1.2
Total REO allowances to gross REO............. 25.2 25.9
Total allowances to gross nonperforming as-
sets......................................... 58.5 57.6
Total allowances to total assets.............. 1.2 1.2
</TABLE>
- --------
(1) Gross loans include loans converted to MBS where the Company has retained
a recourse liability for possible losses.
(2) During the second quarter of 1995 the Company reevaluated its policies on
REO loss provisions and reclassified certain REO valuation allowances to
real estate owned.
18
<PAGE>
The level of general and specific valuation allowances has been based on
information presently available on the economy, the California real estate
market and the Company's knowledge of its loan portfolio and inventory of REO
property. Management believes that at September 30, 1995, these allowances are
sufficient to cover inherent losses which may be incurred. However, future
economic conditions and other factors beyond the Company's control may require
future changes in these valuation allowances.
CAPITAL RESOURCES
STOCKHOLDERS' EQUITY
Stockholders' equity (net worth) increased by $4.8 million during the first
nine months of 1995 to $199.3 million at September 30, 1995. In addition to
the $3.9 million net income from operations discussed above under Results of
Operations, which more than offset the cash dividends of $.07 per share of
common stock paid on March 1, June 1, and September 1, 1995, see below, net
worth was further increased by the following items:
1. The leveling off and subsequent decrease in market interest rates has had
the effect of improving the market value of the Company's portfolio of MBS
available for sale compared with year-end 1994. As a result, in accordance
with FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities," the unrealized loss on securities available for sale decreased
thereby reducing the charge to net worth by $2.0 million.
2. In accordance with the provisions of FAS 87, "Employers' Accounting for
Pensions," the Company's required minimum pension liability was reduced due to
a change in the discount rate used in the measurement of pension plan
benefits. This liability represents the excess of the accumulated benefit
obligation over the fair value of pension plan assets and accrued pension
liability. The effect of this change has been to reduce the additional pension
liability from $0.9 million at year-end 1994 to $0.6 million at September 30,
1995. In addition, the related charge to net worth was reduced to $0.3 million
at September 30, 1995 from $0.5 million at year-end 1994.
REGULATORY CAPITAL REQUIREMENTS
The Association's regulatory capital was in excess of regulatory minimums
established pursuant to the requirements of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA) and the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) at both September 30,
1995 and December 31, 1994 and is summarized as follows at those dates:
<TABLE>
<CAPTION>
REGULATORY CAPITAL RATIOS
----------------------------------------------
ACTUAL EXCESS
MINIMUM ---------------- -----------------
REQUIREMENT 9-30-95 12-31-94 9-30-95 12-31- 94
----------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
FIRREA Capital Requirements:
Core capital.................. 3.00% 5.39 5.54 2.39 2.54
Tangible capital.............. 1.50 5.39 5.54 3.89 4.04
Risk-based capital............ 8.00 10.83 10.84 2.83 2.84
FDICIA Capital Standards
(Well Capitalized):
Leverage...................... 5.00 5.39 5.54 0.39 0.54
Tier 1 risk-based (1)......... 6.00 9.58 9.59 3.58 3.59
Total risk-based.............. 10.00 10.83 10.84 0.83 0.84
</TABLE>
- --------
(1) For the Association, the amount of Tier 1 capital is the same as the
amount of its core capital.
The reduction in the Association's core and tangible capital ratios compared
with December 31, 1994 reflects the increase in total assets during the nine
months ended September 30, 1995. Net unrealized gains and losses on available-
for-sale securities are not taken into account for regulatory capital
purposes.
19
<PAGE>
As discussed in the Company's 1994 Annual Report on Form 10-K , the Office
of Thrift Supervision (OTS) has added an interest rate risk component to its
risk-based capital regulations. Thrift Bulletin (TB) 67, "Modification of the
Interest Rate Risk Component of the Risk-Based Capital Requirement," was
issued in August 1995, outlining the procedures that a savings association may
follow in calculating the interest rate risk component under the OTS risk-
based capital rule. TB 67 notes that a savings institution may be able to
adjust the interest rate risk component if the association can demonstrate
that the OTS model overstates the association's interest rate risk exposure.
Additionally, an association that is well capitalized may use its own internal
model to determine the interest rate risk component of its risk-based capital
calculation. Based upon its September 30, 1995 calculations, the Association
does not have an above normal level of interest rate risk and accordingly does
not have an additional requirement.
DIVIDENDS
Pursuant to a policy adopted in 1993 for the payment of regular quarterly
dividends, in January, April and July 1995 the Company declared a cash
dividend of $0.07 per share of common stock which was paid on the first of
March, June and September 1995. In October 1995, the Company declared a cash
dividend of $0.05 per share of common stock which is payable on the first of
December 1995 to holders of record on November 15, 1995. The October dividend
is less than the $0.07 per share declared in prior quarters principally due to
restrictions contained in a definitive agreement whereby the Company will be
acquired by First Nationwide Bank. In this regard, refer to Part II, Item 5
hereof.
LIQUIDITY
The Company's principal sources of funds are set forth in the Company's 1994
Annual Report on Form 10-K and the inflow and outflow of funds for the nine
months ended September 30, 1995, with comparative data for the first nine
months of 1994, is detailed in the accompanying Consolidated Statements of
Cash Flows. The Company believes that its sources of funds are adequate for
the Company's projected liquidity requirements.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On January 26, 1989, the Board of Directors of SFFed Corp. ("SFFed" or the
"Company") declared a dividend distribution of one Right for each outstanding
share of the Company's common stock, par value $0.01 per share (the "SFFed
Common Stock"), to shareholders of record at the close of business on February
6, 1989 (the "Record Date") and authorized the issuance of one Right (as may
be adjusted pursuant to Section 11(p) of the Rights Agreement, as defined
below) for each share of SFFed Common Stock issued between the Record Date and
the Distribution Date (as defined below) and, in certain circumstances, after
the Distribution Date. Upon the occurrence of certain events set forth below,
the Rights may become exercisable for SFFed Common Stock and/or other
consideration. The description and terms of the Rights are set forth in a
Rights Agreement (the "Rights Agreement") dated as of January 26, 1989 between
the Company and Chemical Trust Company of California, as Rights Agent.
On August 28, 1995, the Company and First Nationwide Bank ("First
Nationwide") executed an Agreement and Plan of Merger, dated as of August 27,
1995, (the "Merger Agreement"), providing for, among other things, the
acquisition of the Company by First Nationwide by means of a merger (the
"Merger") of a subsidiary of First Nationwide with and into the Company. In
connection with the execution of such agreement, the Company executed an
amendment (the "Amendment") to the Rights Agreement in order to amend the
definitions of "Acquiring Person" and "Adverse Person" set forth in the Rights
Agreement to provide that neither First Nationwide nor any of its Affiliates,
Associates or subsidiaries will be deemed to be either an Acquiring Person or
an Adverse Person by virtue of the fact that First Nationwide or such
Affiliate, Associate or subsidiary of First Nationwide is the Beneficial Owner
(as defined in the Rights Agreement) solely of SFFed Common Stock (i) of which
First Nationwide or such Affiliate, Associate or subsidiary was the Beneficial
Owner as of August 27, 1995, together with up to 1% more of the SFFed Common
Stock acquired after August 27, 1995 by First Nationwide's Affiliates and
Associates (as such terms are defined in the Rights Agreement), (ii) acquired
or acquirable pursuant to the grant or exercise of the option granted pursuant
to the Stock Option Agreement, dated as of August 27, 1995, between First
Nationwide and the Company, (iii) held directly or indirectly in trust
accounts, managed accounts and the like or otherwise held in a fiduciary
capacity for third parties and (iv) held in respect of a debt previously
contracted. The Amendment was executed to facilitate the consummation of the
Merger. It is expected that prior to the consummation of the Merger, the
Rights will be redeemed in accordance with the provisions of the Rights
Agreement.
The Rights Agreement between the Company and the Rights Agent specifying the
terms of the Rights was attached as an exhibit to the Company's Form 8-A,
filed with the Securities and Exchange Commission on February 6, 1989, and is
incorporated herein by reference. The Amendment was attached as an exhibit to
the Company's Form 8-A/A, filed with the Securities and Exchange Commission on
September 13, 1995 and is incorporated herein by reference. The foregoing
descriptions of the Rights, the Rights Agreement and the Amendment do not
purport to be complete and are qualified in their entirety by reference to
such exhibits.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
21
<PAGE>
ITEM 5. OTHER INFORMATION
On August 28, 1995, SFFed Corp. ("SFFed") and First Nationwide Bank ("First
Nationwide") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of August 27, 1995, providing for, among other things,
the merger (the "Merger") of SFFed with and into a wholly owned subsidiary,
which is to be incorporated subject to regulatory approval, of First
Nationwide, with SFFed surviving the Merger. Pursuant to the Merger Agreement,
each share of the common stock, par value $0.01 per share, of SFFed (the
"Common Stock") outstanding on the date of the Merger (excluding shares of
Common Stock held by SFFed as treasury stock or shares held by First
Nationwide or any of its subsidiaries, but including shares of Common Stock
(i) held by dissenting stockholders and (ii) held directly or indirectly by
First Nationwide or SFFed or any of their respective subsidiaries in a
fiduciary capacity that are beneficially owned by third parties) will be
converted into the right to receive $32.00 in cash, without interest from the
effective date of the Merger (the "Merger Consideration").
Consummation of the Merger is subject to certain standard conditions,
including but not limited to the approval of the Merger by the requisite vote
of SFFed shareholders cast at a meeting of such holders, and the receipt of
all required regulatory approvals, which approvals must be obtained without
the imposition of any condition that would (i) result in a Material Adverse
Effect (as defined in the Merger Agreement) on First Nationwide, or (ii)
significantly reduce the benefits of the transactions contemplated by the
Merger Agreement to First Nationwide in the reasonable, good faith judgment of
First Nationwide.
As a condition to the execution and delivery of the Merger Agreement, SFFed
and First Nationwide have entered into a stock option agreement, dated as of
August 27, 1995 (the "Stock Option Agreement"). Pursuant to the Stock Option
Agreement, SFFed granted First Nationwide an option (the "Option") to purchase
up to 1,574,638 authorized but unissued shares of Common Stock, representing
up to 19.9% of the outstanding shares of Common Stock. The Option is
exercisable only upon the occurrence of certain events described in the Stock
Option Agreement, none of which has occurred as of the date hereof.
In connection with entering into the Merger Agreement, the SFFed Board of
Directors approved an amendment (the "Amendment") to the Rights Agreement,
dated January 26, 1989, between SFFed and Chemical Trust Company of
California, as successor to Manufacturers Hanover Trust Company, as Rights
Agent (the "Rights Agreement'), so that neither the actions to be taken by
First Nationwide in order to effectuate the Merger (as contemplated by the
Merger Agreement) nor the execution of the Stock Option Agreement will
constitute an event which would allow exercise of the rights under the Rights
Agreement (see Part II, Item 2, above).
The Merger Agreement, the Stock Option Agreement and the Amendment were
attached as exhibits to the Company's Form 8-K, filed with the Securities and
Exchange Commission on September 13, 1995, and are incorporated herein by
reference. The foregoing summaries of the Merger Agreement, the Stock Option
Agreement and the Amendment do not purport to be complete and are qualified in
their entirety by reference to such exhibits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) The Company filed a Form 8-K, Current Report, dated September 13, 1995,
with the Securities and Exchange Commission. This filing was made in
connection with the August 28, 1995 announcement of the planned merger of the
Company into First Nationwide Bank for $32 per common share or aggregate price
of approximately $264.2 million.
The Company filed a Form 8-A/A, dated September 13, 1995, with the
Securities and Exchange Commission. This filing was made to disclose the
amendment to the Rights Agreement to amend the definitions of "Acquiring
Person" and "Adverse Person".
22
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SFFED CORP.
- -------------------------------------------------------------------------------
(REGISTRANT)
Date: November 9, 1995 /s/ Paul Weinberg
By: _________________________________
Paul Weinberg Senior Executive
Vice President & Chief Financial
Officer
Date: November 9, 1995 /s/ Peter J. Shaw
By: _________________________________
Peter J. Shaw Executive Vice
President & Chief Accounting
Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 24,861
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 171,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,698
<INVESTMENTS-CARRYING> 888,332
<INVESTMENTS-MARKET> 897,941
<LOANS> 2,739,807
<ALLOWANCE> 38,952
<TOTAL-ASSETS> 4,041,621
<DEPOSITS> 2,707,841
<SHORT-TERM> 717,949
<LIABILITIES-OTHER> 40,237
<LONG-TERM> 372,126
0
0
<COMMON> 79
<OTHER-SE> 199,237
<TOTAL-LIABILITIES-AND-EQUITY> 4,041,621
<INTEREST-LOAN> 160,950
<INTEREST-INVEST> 8,053
<INTEREST-OTHER> 42,837
<INTEREST-TOTAL> 211,840
<INTEREST-DEPOSIT> 100,003
<INTEREST-EXPENSE> 154,008
<INTEREST-INCOME-NET> 57,832
<LOAN-LOSSES> 9,309
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 50,992
<INCOME-PRETAX> 6,585
<INCOME-PRE-EXTRAORDINARY> 6,585
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,885
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 7.36
<LOANS-NON> 45,674
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,311
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 36,829
<CHARGE-OFFS> 7,579
<RECOVERIES> 393
<ALLOWANCE-CLOSE> 38,952
<ALLOWANCE-DOMESTIC> 38,952
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
