<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
__________________________________
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 0-19491
CENFED FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4314853
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
199 North Lake Avenue, Pasadena, California 91101
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (818) 585-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No___
Number of shares outstanding of the registrant's sole class of common stock at
April 19, 1996: 5,027,590
<PAGE> 2
CENFED FINANCIAL CORPORATION
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits
a. Exhibits
b. Reports on Form 8-K
</TABLE>
2
<PAGE> 3
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS MARCH 31, DECEMBER 31,
1996 1995
--------------- ------------------
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------------------------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,189 $21,928
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . 2,888 7,288
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . 24,077 29,216
- ------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale, at fair value . . . . . . . . 117,670 133,778
Mortgage-backed securities ("MBS") available for sale, at fair value . 349,078 341,288
Loans held for investment, net . . . . . . . . . . . . . . . . . . . . 1,466,292 1,492,094
Loans held for sale, at lower of cost or fair value . . . . . . . . . . 102,100 100,183
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . 15,264 14,894
Real estate acquired in settlement of loans ("REO") . . . . . . . . . . 7,107 6,236
Real estate held for development and sale, net . . . . . . . . . . . . 400 5,410
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . 12,927 13,300
Intangible assets, net of accumulated amortization . . . . . . . . . . 249 248
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 3,818 3,818
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,600 14,774
------ ------
- ------------------------------------------------------------------------------------------------------------------------
$2,113,582 $2,155,239
========================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
- ------------------------------------------------------------------------------------------------------------------------
Customer deposit accounts . . . . . . . . . . . . . . . . . . . . . . . $1,580,815 $1,551,329
Securities sold under agreements to repurchase . . . . . . . . . . . . 91,506 150,052
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,750 22,800
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289,900 300,500
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,836 26,006
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 2,007,807 2,050,687
- ------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
Common stock. $.01 par value
Authorized shares: 14,000,000 at March 31, 1996 and December 31, 1995
Outstanding shares: 5,031,500 at March 31, 1996 and 5,013,000 at 46 46
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . 30,447 30,126
Retained earnings - substantially restricted . . . . . . . . . . . . . 77,597 73,721
Unrealized gain (loss) on securities available for sale, net of tax . . (769) 2,179
Deferred compensation - retirement plans . . . . . . . . . . . . . . . (1,546) (1,520)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 105,775 104,552
- ------------------------------------------------------------------------------------------------------------------------
$2,113,582 $2,155,239
========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
IN THOUSANDS, EXCEPT SHARE AMOUNTS 1996 1995
-------------- --------------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,523 $22,567
Investment securities and short-term investments . . . . . . . . . . 1,934 1,744
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . 6,275 5,948
- ------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income . . . . . . . . . . . . 38,732 30,259
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Customer deposit accounts . . . . . . . . . . . . . . . . . . . . . 20,062 14,841
Securities sold under agreements to repurchase . . . . . . . . . . . 1,754 2,586
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,153 3,017
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 626 607
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . . . . . . . . . . . . . 26,595 21,051
- ------------------------------------------------------------------------------------------------------------------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . 12,137 9,208
PROVISIONS FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . 2,800 600
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provisions for loan losses . . . 9,337 8,608
- ------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Loan servicing fees . . . . . . . . . . . . . . . . . . . . . . . . 1,065 645
Customer deposit account fees . . . . . . . . . . . . . . . . . . . 484 454
Gain on sale of investments and MBS . . . . . . . . . . . . . . . . 597 50
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . 33 77
Income (Loss) from real estate operations . . . . . . . . . . . . . 4,249 (181)
Commissions from sales of investment products . . . . . . . . . . . . 405 426
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 122
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest income . . . . . . . . . . . . . . . . . . 6,930 1,593
- ------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Compensation and employee benefits . . . . . . . . . . . . . . . . . 4,155 4,250
Net occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,552 1,349
Deposit insurance premiums . . . . . . . . . . . . . . . . . . . . . 850 749
Data and check processing . . . . . . . . . . . . . . . . . . . . . 410 435
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . 194 244
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . 19 (41)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,654 1,183
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses . . . . . . . . . . . . . . . . . . 8,834 8,169
- ------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item . . . . . 7,433 2,032
INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,783 440
- ------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item . . . . . . . . . . . . . 4,650 1,592
EXTRAORDINARY ITEM:
Early extinguishment of debt (net of income taxes of $267) . . . . . (364) --
- ------------------------------------------------------------------------------------------------------------------------
NET EARNINGS . . . . . . . . . . . . . . . . . . . . . . $4,286 $1,592
========================================================================================================================
PRIMARY EARNINGS PER SHARE:
Before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $0.90 $0.32
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . ($0.07) $0.00
- ------------------------------------------------------------------------------------------------------------------------
After extraordinary item . . . . . . . . . . . . . . . . . . $0.83 $0.32
========================================================================================================================
AVERAGE PRIMARY SHARES OUTSTANDING . . . . . . . . . . . . . . . . . . 5,157,000 4,929,000
========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
IN THOUSANDS 1996 1995
-------------- --------------
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,286 $1,592
Adjustments to reconcile net earnings to net cash provided:
Net amortization (accretion) of fees, discounts and premiums . . . 428 (517)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 751 569
Gain on sales of loans . . . . . . . . . . . . . . . . . . . . . . . (21) (77)
Gain on sales of investments and mortgage-backed securities . . . . (598) (48)
Provisions for loan and real estate losses . . . . . . . . . . . . . 2,800 664
Change in accrued income taxes . . . . . . . . . . . . . . . . . . . 2,366 440
Originations and purchases of loans held for sale . . . . . . . . . (11,446) (11,048)
Proceeds from sales of loans held for sale . . . . . . . . . . . . . 4,003 5,127
Increase in interest receivable . . . . . . . . . . . . . . . . . . (370) (739)
Increase in interest payable . . . . . . . . . . . . . . . . . . . 712 942
Change in other assets and other liabilities . . . . . . . . . . . . (1,986) (1,648)
FHLB stock dividends . . . . . . . . . . . . . . . . . . . . . . . . (202) (251)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) -
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities . . . . . . . . 718 (4,994)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities held to maturity . . . . . . . . -- --
Purchases of investment securities available for sale . . . . . . . (12,878) --
Proceeds from sales of investment securities available for sale . . 21,674 --
Maturities of investment securities available for sale . . . . . . . 5,000 --
Purchases of MBS held to maturity . . . . . . . . . . . . . . . . . -- (22,872)
Purchases of MBS available for sale . . . . . . . . . . . . . . . . (94,183) (33,936)
Proceeds from sales of MBS available for sale . . . . . . . . . . . 71,431 31,448
Principal repayments on MBS . . . . . . . . . . . . . . . . . . . . 13,201 16,561
Originations and purchases of loans held for investment . . . . . . (36,416) (75,072)
Proceeds from sale of loans held for investment . . . . . . . . . . -- 1,452
Loan repayments and prepayments . . . . . . . . . . . . . . . . . . 58,938 25,888
Purchases of premises and equipment . . . . . . . . . . . . . . . . (212) (499)
Sales of premises and equipment . . . . . . . . . . . . . . . . . . -- 35
Investment in REO and real estate held for development and sale . . (204) 36
Sales of REO and real estate held for development and sale . . . . . 7,460 2,617
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities . . . . . . . 33,811 (54,342)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 6
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in customer deposit accounts . . . . . . . . . . . . . 29,819 82,994
Net decrease in notes payable . . . . . . . . . . . . . . . . . . . (50) (50)
Net increase (decrease) in short-term financing:
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . (11,400) (28,200)
Securities sold under agreements to repurchase . . . . . . . . . (58,546) 18,173
Repayment of long-term FHLB advance . . . . . . . . . . . . . . . . (9,200) -
Proceeds from long-term FHLB advance . . . . . . . . . . . . . . . . 10,000 -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (411) (322)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . 120 26
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities . . . . . . . (39,668) 72,621
- ------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents . . . . . . . . (5,139) 13,285
Cash and cash equivalents, beginning of period . . . . . . . . . . . 29,216 23,954
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . $24,077 $37,239
========================================================================================================================
SUPPLEMENTARY INFORMATION
CASH PAID FOR:
Interest on customer deposit accounts . . . . . . . . . . . . . . . . $25,883 $22,261
Income tax payments . . . . . . . . . . . . . . . . . . . . . . . . . $150 --
NON-CASH ITEMS:
Real estate acquired in settlement of loans . . . . . . . . . . . . . $5,476 $2,712
Net change in unrealized gain (loss) on securities available for sale ($2,948) $1,589
Transfer to real estate held for development and sale from
premises and equipment . . . . . . . . . . . . . . . . . . . . . . -- $5,164
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CENFED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, DECEMBER 31, 1995 AND
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(1) BASIS OF PRESENTATION
The consolidated statement of financial condition as of March 31, 1996,
and the related consolidated statements of operations and cash flows for the
three months ended March 31, 1996 and 1995, are unaudited. These statements
reflect, in the opinion of management, all material adjustments, consisting
solely of normal recurring accruals, necessary for a fair presentation of the
financial condition of CENFED Financial Corporation (the "Company") as of March
31, 1996 and its results of operations and cash flows for the three months
ended March 31, 1996 and 1995. The results of operations for the unaudited
interim period are not necessarily indicative of the results of operations to
be expected for the entire year of 1996.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnotes normally included in financial
statements prepared in conformity with generally accepted accounting
principles. Accordingly, these consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(2) SUBSEQUENT EVENTS
On April 4, 1996, the Company announced a 10% stock dividend payable to
shareholders of record as of April 19, 1996. The Company also declared its
quarterly cash dividend of $.09 per share to shareholders of record as of the
same date. Both the stock and cash dividends will be distributed on May 10,
1996.
(3) EARNINGS PER SHARE
The Company has a long term incentive plan that includes incentive stock
options. For purposes of determining primary earnings per share and fully
diluted earnings per share, stock options granted to officers and directors of
the Company are considered common stock equivalents and are added to common
shares outstanding, using the treasury stock method. At March 31, 1996, fully
diluted earnings per share were the same as primary earnings per share as the
dilution under the fully diluted earnings per share calculation is not
material.
Earnings per share for all periods presented have been calculated based
upon the increased number of shares of common stock and common stock equivalent
after giving effect to the stock dividend distributed on May 10, 1996.
7
<PAGE> 8
ITEM 2.
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND ASSET QUALITY
OPERATING STRATEGY
The operating strategy of CENFED Financial Corporation (the "Company")
consists of three primary elements: (i) acquiring assets providing returns that
satisfy the Company's cost of capital requirements; (ii) focusing on retail
deposit gathering as the principal source of funding; and (iii) focusing on the
efficiency of Company operations.
Acquiring assets providing returns that satisfy the Company's cost of
capital requirements. The Company seeks assets that provide returns, on a
credit risk-adjusted basis, that meet or exceed its cost of capital. In
pursuit of this strategy, the Company identifies new lines of business in
which it believes it can successfully serve customer niches and achieve
satisfactory returns. Management has pursued this strategy through the
Company's entry into business lending under lending programs sponsored by the
United States Small Business Administration ("SBA") and through the
discontinuation of wholesale-originated, single family lending in 1995. The
Company continues to offer single family real estate loans through retail loan
officers and it purchases packages of single family loans from other
institutions from time to time. In addition, the Company continues to offer
multifamily residential and commercial real estate loans, which historically
have met and continue to meet its return objectives.
In the first quarter of 1996, loan originations totaled $47.6 million,
representing a 30% decrease from the $68.1 million of loans originated in the
corresponding period in 1995. The mix of loan originations in the first
quarter of 1996 reflected the Company's emphasis on higher risk assets with
expected higher rates of return. Income property loans, SBA loans and single
family loans represented 44%, 29% and 27%, respectively, of total originations
in the first quarter of 1996, compared to 7%, 4% and 89%, respectively, in the
first quarter of 1995.
The Company views purchasing loans as a suitable alternative to
originating loans when loan origination volumes are insufficient to meet the
Company's growth requirements. During the first quarter of 1996, the Company
purchased only $127,000 of loans, compared to $18.0 million in the year-earlier
quarter. In the absence of changes in current market conditions, the Company
expects that the volume of loans originated and purchased in 1996 will be less
than in 1995.
Focusing on retail deposit gathering as the principal source of funding.
The Company believes that deposits gathered through its retail delivery system
are the most stable and economical source of funding for its operations, in the
long run. Gaining substantial market share and name recognition in the
Southern California marketplace is particularly challenging due to the number
of competitors and the presence of several large financial institutions in most
of the same communities in which the Company has branch offices. In light of
this challenge, the Company looks for opportunities to increase its market
share in those communities where institutional name recognition is possible and
franchise value is greatest. The Company uses consolidations, acquisitions,
sales and exchanges of deposits to increase its average branch size and improve
market share in selected communities.
Retail deposits at March 31, 1996 represented 64% of total assets,
compared to 62% one year earlier. The Company's average retail deposits per
branch totaled $75.4 million, compared to $59.0 million at the same dates,
respectively. The increase in average deposits per branch reflects the
cumulative beneficial impact of the deposit and branching transactions in
recent periods in combination with the Company's success at generating deposit
growth through its delivery system.
Focusing on the efficiency of Company operations. The Company believes
that it can achieve economies of scale primarily through asset growth and
increasing the average size of its retail branches. One measure of operational
efficiency is the ratio of general and administrative expenses (excluding
goodwill amortization) to average assets. In the first quarter of 1996, the
annualized general and administrative expense ratio was 1.65%, compared to
1.73% in the corresponding period in the previous year. Even though the
Company seeks ways to decrease its costs to deliver its products, future
improvements in operating efficiency are largely contingent upon growth in the
asset base. Management believes that growing the asset base in the immediate
future may be difficult.
8
<PAGE> 9
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
ANALYSIS OF STATEMENT OF FINANCIAL CONDITION
Following six consecutive quarters of growth in total assets, the
Company's total assets decreased by $41.7 million, or by 1.9%, during the first
quarter of 1996. The following table sets forth significant changes in the
Company's statement of financial condition:
<TABLE>
<CAPTION>
INCREASE (DECREASE) DURING
(In thousands) FIRST QUARTER OF 1996:
----------------------
<S> <C>
Loans held for investment, net . . . . . . ($25,802)
MBS and investment securities . . . . . . . (8,318)
All other, net . . . . . . . . . . . . . . (7,537)
-------
Change in total assets . . . . . . . . . ($41,657)
=========
Customer deposit accounts . . . . . . . . . $29,486
Borrowings . . . . . . . . . . . . . . . . (69,169)
Stockholders' equity . . . . . . . . . . . 1,223
All other, net . . . . . . . . . . . . . . (3,197)
-------
Change in total liabilities and equity ($41,657)
=========
</TABLE>
Loans Held for Investment. Loans held for investment decreased by $25.8
million during the quarter largely due to weak loan demand that resulted in
levels of loan originations that were insufficient to offset repayments within
the portfolio. During the quarter, the Company was not able to purchase loans
at satisfactory prices to supplement its loan originations.
MBS and Investment Securities. The Company has historically purchased
MBS and investment securities when it could not meet its growth objectives
through loan originations and purchases. During the first quarter of 1996, the
Company's efforts were focused on reducing its exposure to changes in interest
rates rather than identifying securities for purchase. In the future, the
Company will focus on identifying securities for purchase with suitable yield
and interest rate risk characteristics.
Customer Deposit Accounts. Although total assets decreased during the
first quarter of 1996, total balances of customer deposit accounts increased by
$29.5 million, or by 1.9%, consisting of a $12.8 million increase in retail
deposits and a $16.7 million increase in wholesale certificates of deposit.
Borrowings. Total borrowings decreased by $69.2 million during the first
quarter of 1996, due to asset shrinkage in combination with growth in customer
deposit accounts. However, the Company frequently uses borrowings as a source
of funds when purchasing securities or loans and expects to do so in the
future.
Stockholders' Equity. Stockholders' equity increased by only $1.2
million during the first quarter of 1996 even though net earnings totaled $4.3
million. As a result of an increase in market interest rates during the first
quarter of 1996, the Company recorded a $769,000 unrealized loss on securities
available for sale, after taxes, as of March 31, 1996, compared to an
unrealized gain of $2.2 million at the beginning of the quarter. The resulting
$2.9 million reduction in stockholders' equity partially offset net earnings.
In December 1995, the Company took advantage of an opportunity to reclassify to
available for sale the components of its investment securities and MBS
portfolios that previously had been designated as held to maturity. Generally
accepted accounting principles require that debt and equity securities so
designated be reported at fair value through an unrealized gain or loss
component of stockholder equity. Securities classified as available for sale
provide maximum flexibility with respect to disposition but subject the
Company's equity to more volatility from changes in market interest rates.
EARNINGS PERFORMANCE
The Company recorded net earnings of $4.3 million for the first quarter
of 1996, representing $.83 per primary share after extraordinary items,
compared to $1.6 million and $.32 per primary share in the corresponding period
in 1995. The 169% increase in net earnings in the first quarter of 1996 over
1995 included a non-recurring $2.6 million gain, on an after-tax basis, from
the sale of an office building that formerly served as corporate headquarters.
Partially offsetting the gain was a $1.0 million provision for loan losses,
after taxes, associated with the SBA loans acquired by
9
<PAGE> 10
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
the Company from Government Funding Corporation in 1995.
In the first quarter of 1996, compared to 1995, the Company's core
earnings (which excludes gains and losses on securities sales, real estate
operations and non-recurring adjustments but includes the aforementioned
additional provision for loan losses) increased by 10% due to increases in net
interest income and fee income that exceeded increases in operating expenses
and provisions for loan losses.
ASSET QUALITY
Delinquent Loans. Despite improvement in the economic outlook for
Southern California during the first quarter of 1996, the Company continued to
experience rising loan delinquencies. Loan delinquency information by aging
category and by type of loan is set forth in the following table:
<TABLE>
<CAPTION>
(In Thousands) MARCH 31, DEC. 31, MARCH 31,
1996 1995 1995
-------- -------- ----
<S> <C> <C> <C>
By aging category:
31-60 days delinquent $ 8,563 $ 4,408 $4,218
61-90 days delinquent 3,344 1,790 1,061
Over 90 days delinquent 13,446 15,173 10,361
------- ------- ------
Total $ 25,353 $ 21,371 $15,640
====== ====== ======
By types of loans:
Single family residential $ 17,505 $ 15,404 $ 10,795
Multifamily residential 1,712 1,536 2,734
Commercial real estate 3,106 1,686 2,049
Business loans under SBA lending 2,951 2,687 -
Consumer 79 58 62
----- ----- ------
Total $ 25,353 $ 21,371 $ 15,640
====== ====== ======
Delinquent loans by type as a percentage of
total loans:
Single family 1.20% 1.03% .85%
Multifamily .10% .10% .21%
Commercial .22% .12% .16%
Business loans under SBA lending .21% .18% -
---- ---- ----
Total 1.73% 1.43% 1.22%
===== ===== =====
</TABLE>
The major components of the 51 basis point increase in delinquent loans
as a percentage of total loans at March 31, 1996, compared to one year earlier,
consisted of 35 basis points attributable to single family loans and 21 basis
points attributable to the new SBA portfolio. At March 31, 1996, delinquent
single family loans represented 1.62% of total single family loans, which is
the highest percentage of portfolio delinquency since December 1993, and
represented 1.20% of total loans. Historically, the Company has experienced
rising single family delinquencies in the first two calendar quarters of each
year. The $2.1 million increase in delinquent single family loans during the
first quarter of 1996 is consistent with this pattern but also reflects
weakness in the single family real estate market in Southern California.
Management does not foresee improvement in the fundamental problems that have
taken form in higher rates of single family loan delinquencies in the near
future and may be required to record higher provisions for loan losses than it
recorded in corresponding prior year quarters.
Because the Company's investment in SBA lending increased significantly
in June 1995, the increase in the delinquent loan ratio attributable to SBA
loans is a matter of portfolio size at the comparative dates, rather than as an
indicator of asset quality deterioration.
Management believes that the $1.6 million combined increase in delinquent
multifamily and commercial real estate loans is reflective of the unique
circumstances of individual properties. Management further believes, however,
that total delinquent multifamily and commercial real estate loans could
increase in future periods if increases in interest rates and loan payments on
certain adjustable rate loans exceed the borrowers' abilities to pass through
such increased debt service to their tenants in the form of higher rents.
Nonperforming Assets. Nonperforming assets at March 31, 1996 increased
by $4.7 million from the end of 1995
10
<PAGE> 11
CENFED FINANCIAL CORPORATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
and by $2.8 million from one year earlier. At March 31, 1996, nonperforming
assets were 1.22% of total assets, representing a 24 basis point increase from
the beginning of the quarter. The following table sets forth the composition
of nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1996 1995 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Nonaccrual loans $18,698 $14,841 $15,053
Real estate acquired in settlement of loans ("REO") 7,107 6,236 7,993
----- ----- -----
Nonperforming assets $25,805 $21,077 $23,046
======= ======= =======
Nonperforming assets, % of total assets 1.22% 0.98% 1.20%
Nonaccrual loans, % of total loans held for investment 1.25% 0.97% 1.14%
</TABLE>
Loans are placed on nonaccrual status when, in the opinion of management,
the full timely collection of principal or interest is in doubt. As a general
rule, the accrual of interest is discontinued when principal or interest
payments become 90 days past due. However, in certain instances, the Company
may place a particular loan on nonaccrual status earlier or later than the 90
days past due standard, depending upon the individual circumstances surrounding
the loan's delinquency. In general, the Company initiates foreclosure
proceedings on commercial real estate and multifamily residential loans before
such loans become 60 days past due and places such loans on nonaccrual status
at that time. By accelerating the foreclosure process, the Company hopes to
stimulate those borrowers who have the capacity to keep their loans current to
do so immediately. In addition, if a borrower is unable to make timely
payments, beginning foreclosure proceedings at an earlier date reduces the
amount of time before the Company can acquire title to the property.
The following table sets forth the Company's nonperforming asset activity
for the three months ended March 31, 1996:
<TABLE>
<CAPTION>
NONACCRUAL
LOANS REO TOTAL
----- --- -----
<S> <C> <C> <C>
Balance at December 31, 1995 . . . . . . . $14,841 $6,236 $21,077
New Nonaccruing Loans:
Single family (1) . . . . . . . . . . . . 3,555 -- 3,555
Income property . . . . . . . . . . . . . 4,192 -- 4,192
SBA . . . . . . . . . . . . . . . . . . . 1,777 -- 1,777
Foreclosures:
Single family . . . . . . . . . . . . . . (2,985) 2,250 (735)
Income property . . . . . . . . . . . . . (2,434) 1,529 (905)
SBA . . . . . . . . . . . . . . . . . . . (57) 52 (5)
Loans Brought Current:
Income property . . . . . . . . . . . . . (162) -- (162)
Consumer . . . . . . . . . . . . . . . . (29) -- (29)
Sales of REO:
Single family . . . . . . . . . . . . . . -- (2,759) (2,759)
Income property . . . . . . . . . . . . . -- (149) (149)
SBA . . . . . . . . . . . . . . . . . . . -- (52) (52)
-- ---- ----
Net change during quarter . . . . . 3,857 871 4,728
----- --- -----
BALANCE AT MARCH 31, 1996 . . . . . . . . . $18,698 $7,107 $25,805
======= ====== =======
</TABLE>
- ----------------------------
(1) New nonaccruing single family loans have been reduced by single family
loans that were brought current during the quarter.
The Company experienced a $4.7 million increase in nonperforming assets
during the first quarter of 1996,
11
<PAGE> 12
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
consisting primarily of $1.7 million and $1.5 million of additional nonaccruing
SBA loans and nonaccruing income property loans, respectively, and an $871,000
increase in REO. The increase in nonaccruing SBA loans during the first
quarter of 1996 was attributable to the Company's conforming its reporting of
past due SBA loans--that were purchased from Government Funding and which are
subject to credit enhancement--to its reporting of past due real estate loans.
As a result, all SBA loans 90 days or more past due are placed in nonaccrual
status, whether or not such loans are subject to credit enhancement provisions.
The net increase in the Company's portfolio of REO during the first quarter of
1996 was primarily due to acquiring title to two commercial properties with
fair values totaling $788,000 and three multifamily properties with fair values
totaling $741,000.
Impaired Loans. During the first quarter of 1995, the Company adopted
Statement of Financial Accounting Standards Number 114, "Accounting by
Creditors for Impairment of a Loan ," (SFAS No. 114"), as amended by Statement
of Financial Accounting Standards Number 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosure." SFAS No. 114
applies to the accounting by creditors for impairment of loans, whether
collateralized or not, and to all loans that are restructured in a troubled
debt restructuring.
A loan is impaired, under the provisions of SFAS No. 114, when, based on
current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires that an impaired loan be measured based on
the present value of the expected future cash flows, discounted at the loan's
effective interest rate, or the loan's observable market value or the fair
value of the collateral (if the loan is collateral dependent). The Company
measures impairment based on the fair value of the collateral if the Company
determines that foreclosure is probable. If the measure of the impaired loan
is less than the Company's recorded investment in the loan, the impairment is
recognized by creating a specific valuation allowance. Subsequent to the
initial measurement of impairment, if there is a significant increase or
decrease in the amount or timing of an impaired loan's expected future cash
flows, or if actual cash flows are significantly different from the cash flows
previously projected, or if the fair value of the collateral fluctuates
materially, the Company recalculates the impairment and adjusts the specific
valuation allowance.
The following table sets forth information with respect to impaired loans
at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, 1996 December 31, 1995
------------------------------------------------------------------------
SPECIFIC NET Specific Net
LOAN LOSS RECORDED Loan Loss Recorded
(In thousands) BALANCES ALLOWANCES INVESTMENT Balances Allowances Investment
-------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Requiring specific loss allowances $5,572 $1,434 $4,138 $3,152 $801 $2,351
Not requiring specific loss allowances 1,059 - 1,059 162 - 162
Restructured loans:
Requiring specific loss allowances 4,737 724 4,013 6,981 1,753 5,228
Other loans:
Requiring specific loss allowances 4,079 1,361 2,718 2,298 794 1,504
Not requiring specific loss
allowances 654 - 654 872 - 872
--- - --- --- - ---
Total . . . . . . . . . . . . . $16,101 $3,519 $12,582 $13,465 $3,348 $10,117
======= ====== ======= ======= ====== =======
</TABLE>
For the three months ended March 31, 1996, the average net recorded
investment in impaired loans was $14.8 million and the interest income
recognized totaled $43,000. In the corresponding period in the previous year,
the average net recorded investment in impaired loans was $6.0 million and the
interest income recognized totaled $65,000.
Allowance for Loan Losses. The Company maintains specific reserves
for possible losses related to particular identified loans and other assets and
general allowances for possible losses on loans. The general allowance for
possible loan losses is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible in the
future, based upon information currently available to management and
management's judgements as to the collectibility of loans and prior loan loss
experience. The determination of the appropriate amount and allocation of the
general allowance for loan losses is based upon an analysis of the loan
portfolio. The analysis is
12
<PAGE> 13
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
based upon such factors as prior loan loss experience, economic conditions
affecting the real estate market and other factors which management believes
deserve consideration, and regulatory considerations. While management
believes that it uses the best information available to determine the
appropriate amount of loan loss provisions, future adjustments to the allowance
for loan losses may be necessary and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the determinations.
An analysis of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Balance, beginning of period . . . . . . . . . . . . . . . 12,789 12,529
Provisions for loan losses . . . . . . . . . . . . . . . . 2,800 600
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . 164 40
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . (1,716) (796)
--------------- ---------------
Balance, end of period . . . . . . . . . . . . . . . . . . 14,037 (1) 12,373
=============== ===============
Ratio of allowance for loan losses to total loans held for
investment at end of period . . . . . . . . . . . . . . . . 0.95% 0.95%
Ratio of allowance for loan losses to nonaccrual loans at
end of period . . . . . . . . . . . . . . . . . . . . . . . 75.1% 82.2%
</TABLE>
---------------------------
(1) The allowance for loan losses at March 31, 1996 includes
$71,000 of allowances allocated to loans held for sale.
The following table sets forth the Company's net charge-offs by loan
types for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------------
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Single family . . . . . . . . . . . . . . . . . . . . . . . $666 $144
Multifamily residential . . . . . . . . . . . . . . . . . . 508 212
Commercial real estate . . . . . . . . . . . . . . . . . . 370 399
SBA loans . . . . . . . . . . . . . . . . . . . . . . . . . 6 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1
-------------------- ---------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $1,552 $756
==================== ===============
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company include scheduled
principal payments and unscheduled prepayments of loans and mortgage-backed
securities, proceeds from sales of investments, mortgage-backed securities and
loans held for sale, cash flows generated from operations and proceeds from
increases in customer deposits, FHLB advances and short-term borrowings.
Principal payments on loans and mortgage-backed securities were $72.1
million and $42.4 million for the three months ended March 31, 1996 and 1995,
respectively. Proceeds from sales of loans totaled $4.0 million and $6.5
million for the first quarters of 1996 and 1995, respectively.
Sales of investments and mortgage-backed securities totaled $93.1
million and $31.4 million in the first quarters of 1996 and 1995, respectively.
Generally, the proceeds from sales of investments and mortgage-backed
securities were reinvested in other mortgage-backed securities or used to
reduce borrowings.
Customer deposits increased by $29.5 million in the three months ended
March 31, 1996, compared to a net increase of $82.1 million in the first
quarter of 1995. Neither period included deposit purchases.
Savings banks must, by regulation, maintain average liquidity equal to
5% of deposits and short-term borrowings. Liquidity is measured by cash and
certain investments which are not committed, pledged or required to
13
<PAGE> 14
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
liquidate specific liabilities. The Company's average liquidity ratios for
March 31, 1996 and 1995 were 6.7% and 6.2%, respectively.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1996 and 1995
The Company's net earnings for the three months ended March 31, 1996
and 1995 were $4.3 million and $1.6 million, respectively. Earnings per share
on a primary earnings per share basis were $.83 and $.32 for the same periods,
respectively. The Company's net earnings in the first quarter of 1996
included $2.6 million of after-tax gain from the sale of an office building.
In addition, net interest income and non-interest income were higher in the
first quarter of 1996 than in the comparative period in 1995, which more than
offset higher operating expenses and provisions for loan losses.
Net Interest Margin. The Company calculates the components of its
interest earning assets on a tax-equivalent basis. The Company's average net
interest margin during the first quarter of 1996 was 2.41%, representing a
fourteen basis point increase from the fourth quarter of 1995 and a 33 basis
point increase from the first quarter of 1995. During the first quarter of
1996, the yield on interest earning assets increased by 4 basis points and the
cost of interest bearing liabilities decreased by 6 basis points. Compared to
the year-earlier quarter, the yield on interest earning assets rose by 80 basis
points and the cost of funds increased by 56 basis points. The following table
displays average interest rates on the Company's interest earning assets and
interest bearing liabilities at the end of and for the following periods:
<TABLE>
<CAPTION>
MARCH 31, 1996 March 31, 1995
----------------------------------------------------
QUARTER END OF Quarter End of
AVERAGE QUARTER Average Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Yield on Interest Earning Assets:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.75% 7.73% 6.68% 6.82%
Mortgage-backed securities . . . . . . . . . . . . . . . . 7.16% 7.65% 6.94% 6.89%
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.62% 6.47% 7.37% 7.23%
----- ----- ----- -----
Yield on interest earning assets . . . . . . . . . . . . 7.57% 7.64% 6.77% 6.86%
----- ----- ----- -----
Cost of Interest Bearing Liabilities:
Customer deposit accounts . . . . . . . . . . . . . . . . . 5.15% 5.13% 4.44% 4.69%
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . 5.95% 6.08% 5.76% 5.75%
----- ----- ----- -----
Cost of interest bearing liabilities . . . . . . . . . . 5.32% 5.33% 4.76% 4.94%
----- ----- ----- -----
Interest rate spread . . . . . . . . . . . . . . . . . . 2.25% 2.31% 2.01% 1.92%
===== ===== ===== =====
Net interest margin . . . . . . . . . . . . . . . . . . . 2.41% 2.46% 2.08% 2.01%
===== ===== ===== =====
</TABLE>
The Company's net interest margin reached its trough in the second
quarter of 1995, following a trend of steady declines that began in late 1992.
For the first time in several years, the current quarter's net interest margin
exceeded the net interest margin in the corresponding prior year quarter.
Rate/Volume. Net interest income before loss provisions in the first
quarter of 1996 totaled $12.1 million, compared to $9.2 million in the
corresponding period in 1995. The rate- and volume-related increases in net
interest
14
<PAGE> 15
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
income in the first quarter of 1996, compared to the corresponding period in
1995, totaled $1.8 million and $1.1 million, respectively, and were comprised
of the following:
<TABLE>
<CAPTION>
(In thousands) Increase (Decrease) Attributable To:
--------------------------------------------
INTEREST INCOME ON INTEREST EARNING ASSETS: Rate Volume Net
------------------------------------------- ---- ------ ---
<S> <C> <C> <C>
Loans held for investment and held for sale $4,038 $3,917 $7,955
MBS 134 193 327
Investment securities 281 (91) 190
--- ---- ---
Total interest income on interest earning assets 4,453 4,019 8,472
----- ----- -----
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Customer deposit accounts 2,589 2,632 5,221
Borrowings 28 295 323
-- --- ---
Total interest expense on interest bearing liabilities 2,617 2,927 5,544
----- ----- -----
Net interest income $1,836 $1,092 $2,928
====== ====== ======
</TABLE>
Interest and Dividend Income. Interest and dividend income in the
first quarter of 1996 totaled $38.7 million and increased by 28.0% from the
corresponding period in 1995. In the three-month period ended March 31, 1996,
the Company's average interest earning assets were 13.9% greater than in the
comparative period in 1995, resulting in a $4.0 million increase to interest
and dividend income. In addition, a $4.4 million increase in interest and
dividend income was created from an 80 basis point increase in the yield on
average interest earning assets in the first quarter of 1996, compared to 1995.
Interest earned on loans--the Company's primary interest earning
assets--and on MBS increased by $8.0 million and $327,000, respectively, in the
first quarter of 1996, compared to the corresponding period in the previous
year. In the same comparative periods, the average yield on loans and MBS
increased by 107 basis points and 22 basis points, respectively, resulting in
rate-related increases in interest totaling $4.0 million and $134,000,
respectively. The Company's average balances of loans and MBS were greater in
the first quarter of 1996 than in the comparable quarter in 1995, resulting in
volume-related increases in interest income totaling $3.9 million and $193,000,
respectively.
Interest Expense. Total interest expense increased by $5.5 million,
or by 26.3%, in the first quarter of 1996, compared to the first quarter of
1995. During the quarter, the average cost of interest bearing liabilities
increased by 44 basis points compared to the first quarter of 1995. The
rate-related increase in interest expense in the comparative periods was $2.6
million. To fund the Company's larger asset base, the Company's average
interest bearing liabilities in the first quarter of 1996 were approximately
12.1% greater than in the corresponding period in 1995, resulting in increased
interest expense of $2.9 million.
Interest rates paid on the Company's customer deposits and borrowings
increased by 71 basis points and 19 basis points, respectively, in the first
quarter of 1996, compared to the corresponding period in 1995. As a result,
the rate-related increase in interest expense in the same comparative periods
totaled $2.6 million and $28,000 for customer deposits and borrowings,
respectively. Greater average balances of customer deposits and borrowings
generated additional interest expense totaling $2.6 million and $295,000,
respectively, in the same comparative quarters.
Provisions for Loan Losses. In the first quarter of 1996, the Company
recorded $2.8 million of provisions for loan losses, compared to $600,000 in
the first quarter of 1995. As described earlier, the most significant element
of the $2.2 million increase in provisions for loan losses was an additional
$1.8 million provision that was recorded for and allocated to credit-enhanced
loans purchased from Government Funding in June 1995. The Company's regulators
concluded, in a recently completed examination, that such an allocation of
allowances for loan losses would be required until a payment history by the
borrowers and a performance record by the guarantor have both been established.
The additional $400,000 increment of the increase in provisions for loan losses
is reflective of overall credit quality judgments that the Company has made
with respect to its single family loan portfolio in the current environment.
The Company increased its quarterly provisions for loan losses in the third
quarter of 1995 and continued to provide at these higher levels in the first
quarter of 1996.
Non-Interest Income. Total non-interest income in the first quarter
of 1996 increased by $5.3 million over the
15
<PAGE> 16
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
comparable period in 1995. The greatest increase in non-interest income was a
$4.5 million nonrecurring gain from the sale of an office building in the first
quarter of 1996.
One of the Company's objectives has been to enhance its fee-based
activities. The following table indicates the fee income derived from the
Company's principal fee-based activities for the periods presented:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------
(In thousands) 1996 1995
---- ----
<S> <C> <C>
Loan servicing . . . . . . . . . . . . . . . . . . . . $1,065 $645
Customer deposit fees . . . . . . . . . . . . . . . . . 484 454
Commissions from sales of uninsured investments . . . . 405 426
--- ---
$1,954 $1,525
====== ======
</TABLE>
The $429,000 increase in fees earned from fee-based activities in the
first quarter of 1996, compared to the corresponding quarter in 1995, included
$361,000 of loan servicing income related to the Company's SBA operations,
which were increased significantly in size and scope following the Government
Funding acquisition in June 1995. The Company, however, has retained the
SBA-guaranteed portion of new loans that it has originated since mid-1995, so
the SBA servicing portfolio has been declining.
Income or loss from real estate operations consists of net income from
operations of Company facilities, including tenant-occupied space, holding
costs and loss provisions related to REO, gains from sales of real estate, and
loss provisions and operating income or expense from real estate held for
development and sale. The majority of the increase in non-interest income from
real estate operations was due to the building sale mentioned previously.
In the first quarter of 1996, the Company recorded gains from sales of
investment securities and MBS totaling $597,000, compared to $50,000 in the
first quarter of 1995. Buying and selling securities for the purposes of
generating gains is not considered a core activity by the Company; rather, the
increase in gains from sales of such securities was largely due to execution of
the Company's interest rate risk reduction strategy during the first quarter
of 1996. The gains recorded during the first quarter of 1996 largely offset
the penalty the Company paid to retire an 8.9% fixed rate borrowing before its
maturity. The penalty paid is reflected, net of taxes, as an extraordinary
item.
Operating Expenses. The Company incurred operating expenses of $8.8
million in the first quarter of 1996, representing an increase of 9.2% from the
corresponding period in 1995, primarily due to changes in the Company's
operating structure as a result of acquisition and sales activities in 1995.
The ratios of annualized operating expenses to average assets in the first
quarters of 1996 and 1995 were 1.65% and 1.73%, respectively. Acquisition and
sales activities in 1995 included the June acquisition of loans, servicing
rights and the operations of Government Funding Corporation--an SBA lender in
Southern California--and a November 1995 branching transaction which reduced by
two the number of retail branch offices.
The following table sets forth the increases in operating expenses in
the first quarter of 1996, compared to the corresponding quarter in 1995, by
type of expense:
<TABLE>
<CAPTION>
INCREASE (DECREASE) DUE TO:
---------------------------------------------------------------
FIRST RETAIL OFFICE FIRST
QUARTER RESTRUC- NET QUARTER
--------
(In Thousands) 1995 TURINGS (1) GFC (2) LENDING OTHER CHANGE 1996
---- ------- ------ ------- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
Compensation . . . . . . . $4,250 $ 8 $ 261 $ (539) $175 $ (95) $4,155
Net occupancy . . . . . . . 1,349 98 70 (10) 45 203 1,552
Deposit insurance . . . . . 749 33 - - 68 101 850
Data and check processing . 435 30 4 (14) (45) (25) 410
Advertising . . . . . . . . 244 - - - (50) (50) 194
Intangible amortization . . (41) - - - 60 60 19
Other operating . . . . . . 1,183 46 58 (48) 415 471 1,654
------ ------------ -------- -------- ---- -------- -----
Total . . . . . . . . . . $8,169 $ 215 $ 393 $ (611) $668 $665 $8,834
======= ============ ======== ======== ===== ===== ======
</TABLE>
- ----------------------------
16
<PAGE> 17
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
(1) Retail Office Restructurings - in November 1995, the Company completed
a deposit and branch swap with another financial institution. The
result of the transaction was a net increase in deposits of $60.1
million and two fewer branches.
(2) GFC - the purchase of assets and operations of Government Funding
Corporation was completed in late June 1995. The expenses associated
with operating this division are included in 1996 amounts only.
Compensation and employee benefits expense in the first quarter of
1996 decreased by $15,000 from the corresponding period in 1995. Included in
the reduction is a $539,000 reduction in compensation in the Company's mortgage
lending division as a result of the discontinuation of single family,
wholesale-based lending. The excess capacity that led to the discontinuation
was reflected in first quarter 1995 compensation expenses. Partially
offsetting the benefit of lower mortgage lending division compensation was a
$261,000 increase in compensation expense in the Company's SBA lending
division, which expanded materially following the June 1995 acquisition of
Government Funding.
Occupancy expenses increased by $203,000 in the three-month period
ended March 31, 1996, compared to the same period in 1995. The retail branch
office restructurings in 1995 resulted in the Company's acquiring larger office
space, accounting for approximately $98,000 of the increase. In addition,
computer depreciation expense increased by approximately $179,000 as a result
of the implementation of new systems in late 1995.
CenFed Bank is a "well capitalized" financial institution, as defined
by the Federal Deposit Insurance Corporation, and, as such, is charged the
lowest deposit insurance rate available for institutions insured by the Savings
Association Insurance Fund. Deposit insurance in the first quarter of 1996
increased by $101,000 when compared to 1995, due to a 15.6% growth in the
assessment base.
Other operating expenses increased by $391,000 during the first
quarter of 1996, when compared to the corresponding period in 1995. Included
in the increase was $200,000 of legal expense accruals and a $100,000 increase
in charitable expenses that were paid in the first quarter of 1996 but which
had been paid in a similar amount in the second quarter of 1995.
Income Taxes. Income tax expense or benefit varies from period to
period based on the Company's level of earnings before taxes, the relative
amount of nondeductible and/or tax exempt income, and changes to statutory tax
rates. For the three months ended March 31, 1996, the Company recorded income
tax expense of $2.8 million on earnings before taxes and extraordinary item of
$7.4 million, resulting in an effective tax rate of 37.4%. In the comparative
period in 1995, the Company recorded income tax expense of $440,000 on earnings
before taxes of $2.0 million, resulting in an effective tax rate of 21.7%.
The Company's marginal tax rate is approximately 42% but tax advantages
associated with its portfolio of municipal bonds reduced the effective tax
rate. The relative relationship of non-tax advantaged income to tax advantaged
income from the municipal bonds is the primary determinant of the degree to
which the effective tax rate deviates from the marginal tax rate.
Extraordinary Item. During the first quarter of 1996, the Company
repaid an $8.2 million, 8.9% fixed rate borrowing before its scheduled
maturity. As a result, the Company incurred a prepayment penalty of $364,000,
net of taxes of $267,000.
REGULATORY CAPITAL
Capital regulations of the Office of Thrift Supervision ("OTS")
established three capital requirements: a "leverage limit" (also referred to as
the "core capital requirement"), a "tangible capital requirement" and a
"risk-based capital requirement." The capital standards contained in the
capital regulations are required by statute to be no less stringent than the
capital standards applicable to national banks. In addition to the general
standards, the OTS may establish, on a case-by-case basis, individual minimum
capital requirements for a savings institution which vary from the requirements
that would otherwise apply under the capital regulations.
A savings institution that fails to meet one or more of the
applicable capital requirements is subject to various regulatory limitations
and sanctions, including a prohibition on growth and the issuance of a capital
directive by the OTS Director requiring one or more of the following: an
increase in capital; a reduction of rates paid on savings accounts; cessation
of or limitations on operational expenditures; an increase in liquidity; and
such other actions as may be deemed
17
<PAGE> 18
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
necessary or appropriate by the OTS Director. In addition, a conservator or
receiver may be appointed under appropriate circumstances.
The core capital requirement currently requires a savings institution
to maintain "core capital" of not less than 3% of adjusted total assets.
"Core capital" includes common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and any related surplus and
minority interests in the equity accounts of fully consolidated subsidiaries.
The amount of an institution's core capital is, in general, calculated in
accordance with generally accepted accounting principles ("GAAP"), but with
certain exceptions. Among other exceptions, adjustments to an institution's
GAAP equity accounts that are required pursuant to FASB 115 to reflect changes
in the market value of certain securities held by the institution that are
categorized "available-for-sale" are not be included in the calculation of core
capital for regulatory capital purposes. Intangible assets (with certain
exceptions and limitations, including mortgage servicing rights, qualifying
supervisory goodwill and certain other intangibles such as certain grand
fathered core deposit premiums, which may be included on a limited basis) must
be deducted from core capital. At March 31, 1996, the Bank had $2.3 million of
core deposit premium included in core capital. A core deposit premium is a
type of intangible asset relating to purchased deposit operations.
For purposes of determining compliance with the capital standards, a
savings institution's investments in and extensions of credit to any subsidiary
engaged in activities not permissible for national banks are required to be
deducted from the savings institution's capital over a phase-out period. Under
the phase-out rule, a savings institution must deduct an increasing percentage
of its investments in and extensions of credit to a subsidiary engaged in
activities not permissible for national banks as of April 12, 1989. The
required deduction percentage set forth in the applicable statute was 25% for
all institutions through October 31, 1992 and was, in effect, extended at that
level by OTS action through December 31, 1992 for all institutions. Pursuant
to an exemption available to institutions meeting certain criteria and
receiving approval from the OTS, the Bank's deduction percentage was 25% for
the period through June 30, 1994 and increases to 100% over the period to June
30, 1996.
A savings institution is required to maintain "tangible capital" in an
amount not less than 1.5 % of adjusted total assets, which is the minimum limit
permitted by FIRREA. "Tangible capital" is defined for this purpose to mean
core capital less any intangible assets (including supervisory goodwill), plus
purchased mortgage servicing rights, subject to certain limitations.
The risk-based capital requirements, among other things, provide that
the capital ratio applicable to various classes of assets are to be adjusted to
reflect the degree of risk associated with such classes of assets. In
addition, the asset base for computing a savings institution's capital
requirement includes off-balance sheet items, such as assets sold with
recourse. Generally, the Capital Regulations require savings institutions to
maintain "total capital" equal to 8.00% of risk-weighted assets. "Total
capital" for these purposes consists of core capital and supplementary capital.
Supplementary capital includes, among other things, certain types of preferred
stock and subordinated debt and, subject to certain limitations, loan and lease
general valuation allowances. Such general valuation allowances can generally
be included up to 1.25% of risk-weighted assets. At March 31, 1996, $10.1
million of the Bank's general valuation allowance was included in supplementary
capital. A savings institution's supplementary capital may be used to satisfy
the risk-based capital requirement only to the extent of that institution's
core capital.
The OTS, FDIC and other federal banking agencies recently amended
their risk-based capital regulations to provide that an institution must hold
capital in excess of regulatory minimums to the extent that examiners find
either (I) significant exposure to concentration of credit risk such as risks
from higher interest rates, prepayments, significant off-balance sheet items
(especially standby letters of credit) or credit, or risks arising from
nontraditional activities, or (ii) that the institution is not adequately
managing these risks. For this purpose, however, the agencies have stated
that, in view of the statutory requirements relating to permitted lending and
investment activities of savings institutions, the general concentration by
such institutions, the general concentration by such institutions in real
estate lending activities would not, by itself, be deemed to constitute an
exposure to concentration of credit risk that would require greater capital
levels.
Under an amendment to the applicable OTS regulations, an OTS-regulated
institution would be required to maintain additional risk-based capital equal
to half of the amount by which the decline in its "net portfolio value" that
would result from a hypothetical 200 basis point change (up or down, depending
on which would result in the greater reduction in net portfolio value) in
interest rates on its assets and liabilities exceeds 2% of the estimated
"economic value" of its assets. In order to preserve the PCA capital category
system (described below) the regulation required that
18
<PAGE> 19
CENFED FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT.
the foregoing amount be subtracted from actual capital rather than requiring
that an institution's normal capital requirements be increased by that amount.
The OTS has stated that implementation of this amendment to its regulations
will require additional capital to be maintained only by institutions having
"above normal" interest rate risk. An institution's "net portfolio value" is
defined for this purpose as the difference between the aggregate expected
future cash inflows from an institution's assets and the aggregate expected
future cash outflows on its liabilities, plus the net expected cash inflows
from existing off-balance sheet contracts, each discounted to present value.
The estimated "economic value" of an institution's assets is defined as the
discounted present value of the estimated future cash flows from its assets.
Although the OTS had scheduled implementation of this provision for September
30, 1994, it has delayed implementation. Had this provision been in effect at
March 31, 1996, no additional deduction would have been required from total
capital.
Under the risk-based capital requirements, equity investments
(including certain direct investments in real estate) and that portion of land
loans and nonresidential construction loans in excess of an 80% loan-to-value
ratio and certain other items are excluded from capital.
The assets and liabilities of each of a savings institution's
subsidiaries generally are consolidated with the assets and liabilities of the
savings institution for capital purposes unless all of the investments in and
extensions of credit to such subsidiary are deducted from capital. The Bank's
real estate development subsidiary, Crescent Bay, is its only subsidiary
engaged in activities not permissible for a national bank. At March 31, 1996,
the amount of the Bank's investments in and extensions of credit to Crescent
Bay totaled $555,000 of which $332,000 was deducted from capital. The Company
has discontinued real estate activities and is disposing of its real estate
held for development and sale as market conditions permit.
The Bank was in compliance with the capital requirements in effect at
March 31, 1996. The following table reflects the required capital ratios and
the actual capital ratios of the Bank at March 31, 1996 and on a fully
phased-in basis:
<TABLE>
<CAPTION>
At March 31, 1996: Actual Required Excess
- ------------------- ------ -------- ------
<S> <C> <C> <C>
Tangible capital to adjusted total assets 5.51% 1.50% 4.01%
Core capital to adjusted total assets 5.61% 3.00% 2.61%
Total capital to risk-weighted assets 11.17% 8.00% 3.17%
Fully phased-in (pro forma):
Tangible capital to adjusted total assets 5.50% 1.50% 3.00%
Core capital to adjusted total assets 5.60% 3.00% 2.60%
Total capital to risk-weighted assets 11.15% 8.00% 3.15%
</TABLE>
The above capital calculations are based on regulations in effect at
the present time. The OTS issues notices of proposed rulemaking relating to
modifications to the current capital regulations from time to time. The
Company is unable to predict whether, or in what form, any such amendments may
ultimately be adopted.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11.1 Computation of Per Share Earnings
(b) There were no reports on Form 8-K filed during the quarter for
which this report is filed.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENFED FINANCIAL CORPORATION
Date: May 13, 1996 By: /s/ Steven P. Neiffer
-------------------------------
Steven P. Neiffer
Vice President & Controller
(Principal Accounting Officer)
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Description Page
- ------- ----------- ------------
<S> <C> <C>
11.1 Computation of Earnings Per Share
</TABLE>
<PAGE> 1
EXHIBIT 11.1
CENFED FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
QUARTER ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PRIMARY FULLY-DILUTED
BASIS BASIS
---------------- -----------------
<S> <C> <C>
A Average Common Shares Outstanding . . . . . . . . . . . . . . . . 5,016,728 5,016,728
---------------- -----------------
Common Stock Equivalents:
B Average Stock Options Outstanding . . . . . . . . . . . . . 622,675 622,675
C Average Option Exercise Price . . . . . . . . . . . . . . . $10.62 $10.62
---------------- -----------------
D Exercise Proceeds (B x C) . . . . . . . . . . . . . . . $6,612,808 $6,612,808
---------------- -----------------
E Market Price in Period or at End of Period . . . . . . . . $21.64 $22.73
---------------- -----------------
F Shares Repurchased Using Exercise Proceeds (D / E) . . . . . 305,583 290,929
---------------- -----------------
G Increase in Common Shares (B - F) . . . . . . . . . . . . . . . . 317,092 331,746
H Unallocated Shares in Employee Stock Ownership Plan Trust . . . . 146,417 146,417
---------------- -----------------
I Shares Outstanding and Equivalents (A + G - H) . . . . . . . . . 5,187,403 5,202,057
================ =================
J Net Earnings for Period . . . . . . . . . . . . . . . . . . . . . $4,286,000 $4,286,000
================ =================
Earnings per Share (J / I) . . . . . . . . . . . . . . . . . . . $0.83 $0.82
================ =================
Market Price at March 31, 1996 . . . . . . . . . . . . . . . . . $22.73
=================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 21,189
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,888
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 466,748
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,568,392
<ALLOWANCE> 14,037
<TOTAL-ASSETS> 2,113,582
<DEPOSITS> 1,580,815
<SHORT-TERM> 243,906
<LIABILITIES-OTHER> 22,836
<LONG-TERM> 160,250
0
0
<COMMON> 30,493
<OTHER-SE> 75,282
<TOTAL-LIABILITIES-AND-EQUITY> 2,113,582
<INTEREST-LOAN> 30,523
<INTEREST-INVEST> 8,209
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 38,732
<INTEREST-DEPOSIT> 20,062
<INTEREST-EXPENSE> 26,595
<INTEREST-INCOME-NET> 12,137
<LOAN-LOSSES> 2,800
<SECURITIES-GAINS> 597
<EXPENSE-OTHER> 8,834
<INCOME-PRETAX> 7,433
<INCOME-PRE-EXTRAORDINARY> 4,650
<EXTRAORDINARY> (364)
<CHANGES> 0
<NET-INCOME> 4,286
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 7.57
<LOANS-NON> 18,698
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,789
<CHARGE-OFFS> 1,716
<RECOVERIES> 164
<ALLOWANCE-CLOSE> 14,037
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
