<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934
For the fiscal year ended December 31, 1997
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: (626) 585-2400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value (including attached Stock Purchase Rights)
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
The aggregate market value of the voting stock held by nonaffiliates
of the registrant, computed by reference to the closing price of such stock as
of the close of trading on March 26, 1998 was $272,168,000.
As of March 26, 1998, 6,135,966 shares of the Registrant's Common
Stock, $.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement filed with the Securities
and Exchange Commission in connection with Registrant's agreement and plan of
merger with Golden State Bancorp Inc., are incorporated by reference into Part
III of this Form 10-K.
<PAGE> 2
CENFED FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1. BUSINESS .................................................. 1
ITEM 2. PROPERTIES .................................................. 35
ITEM 3. LEGAL PROCEEDINGS............................................. 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................... 37
ITEM 6. SELECTED FINANCIAL DATA....................................... 39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............... 67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 67
ITEM 11. EXECUTIVE COMPENSATION........................................ 68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 68
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K .............................. 71
</TABLE>
<PAGE> 3
ITEM 1. BUSINESS
GENERAL
CENFED Financial Corporation ("CENFED" or the "Company") was
organized in 1991 to become the holding company for Century Federal Savings and
Loan Association (the "Association") in connection with the Association's
conversion from mutual to stock form. As used herein, the "Company" means CENFED
and its subsidiaries and includes the Association as the predecessor of CENFED.
On April 1, 1992, the Association changed its name to CenFed Bank, A Federal
Savings Bank (the "Bank") and its charter was changed to that of a federally
chartered savings bank. As used herein, the "Bank" includes the activities of
the Association prior to the name change.
The Bank was organized as a California licensed state savings and
loan association in 1927, converted to a federally chartered mutual savings and
loan association in 1936 and merged with Pasadena Federal Savings and Loan
Association, which was also a mutual institution, in 1983. On July 15, 1994, the
Company purchased United California Savings Bank ("UCSB"), an Orange
County-based savings institution dating back to 1921. The Company conducts
business through 18 branch offices located in Los Angeles, Orange, Riverside and
San Bernardino Counties in Southern California. At December 31, 1997, the
Company had total assets of $2.2 billion, deposits of $1.6 billion and
stockholders' equity of $135.6 million.
CENFED is a savings and loan holding company and as such is subject
to examination and regulation by the Office of Thrift Supervision (the "OTS").
The deposits of the Bank are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is
regulated by the Director of the OTS (the "OTS Director") and the FDIC. The Bank
is a member of the Federal Home Loan Bank ("FHLB") of San Francisco, which is
one of the twelve regional banks comprising the Federal Home Loan Bank System.
The Bank is also subject to certain regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") with respect to reserves
required to be maintained against deposits and certain other matters.
On August 18, 1997, the Company announced that it had entered into
an Agreement and Plan of Merger (the "Merger Agreement") with Golden State
Bancorp, Inc., a Delaware corporation ("GSB"). GSB is the parent company of
Glendale Federal Bank. Pursuant to the terms of the Merger Agreement, GSB will
acquire the Company through merger into a wholly-owned GSB subsidiary. Each
outstanding share of the Company's common stock will be converted to the right
to receive 1.2 shares of GSB's common stock. Consummation of the merger is
conditional upon the receipt of regulatory approvals and the adoption and
approval of the Merger Agreement by CENFED Financial Corporation's stockholders.
All necessary documents and applications have been filed with the regulatory
bodies and the solicitation of CENFED Financial Corporation's shareholders began
on March 10, 1998.
The Company is primarily engaged in the business of attracting
deposits from the general public and using such deposits, together with
borrowings and equity capital, to originate and purchase real estate loans,
small business loans and mortgage-backed securities ("MBSs"), such as those
issued or guaranteed by the Federal National Mortgage Association ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National
Mortgage Association ("GNMA") and other financial institutions and
intermediaries. The Company's asset generation emphasis is placed on lines of
business which provide net returns that satisfy rate of return requirements. In
recent years, the Company's loan originations personnel have pursued two
business lines: (i) small business loans, and (ii) and multifamily residential
and non-residential commercial real estate (collectively referred to as
"commercial real estate"). The Company no longer originates single family loans,
although it purchases single family loans when such loans can generate required
levels of return.
The Company's results of operations are dependent primarily upon net
interest income, which is the difference between interest income from interest
earning assets and interest expense on interest bearing liabilities. Results of
operations are also influenced by non-interest income derived from loan
servicing fees, customer deposit service charges, commissions from sales of
alternative investments, real estate operations and gains and losses from the
sale of loans, MBSs and investments. Operating expenses of the Company include
general and administrative expenses such as salaries, employee benefits, federal
deposit insurance premiums and branch occupancy and related expenses.
3
<PAGE> 4
The Company's operations are significantly influenced by general
economic conditions, the monetary and fiscal policies of the federal government
and the regulatory policies of governmental authorities. Deposit flows and the
cost of interest-bearing liabilities are influenced by the interest rates and
rates of return available on competing investments and general market interest
rates. Similarly, loan volume and yields, and the level of prepayments on loans,
are affected by market interest rates on loans and the availability of funds.
LENDING ACTIVITIES
General. The Company's principal source of revenue is interest
income from its real estate and small business lending activities. The Company's
lending activities historically consisted primarily of making single family
loans. Although the Company no longer emphasizes originating such loans, single
family real estate loans remain the largest component of the loan portfolio. Of
growing importance in recent years has been increasing the small business and
commercial real estate components of the loan portfolio.
Neither federal law nor California law imposes usury ceilings on
interest rates that may be charged by the Bank. In addition to interest earned
on loans, the Company receives fees in connection with servicing loans for other
investors and charges are assessed to borrowers for certain loan prepayments,
loan modifications, late payments, loan assumptions and other miscellaneous
services.
Loans Held for Investment. The net loan portfolio held for
investment totaled approximately $1.4 billion, representing 64% of total assets,
at December 31, 1997. The following table sets forth the composition of loans
held for investment by type of loan at the dates indicated.
4
<PAGE> 5
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
--------- --------- ---------
PERCENT Percent Percent
OF of of
AMOUNT TOTAL Amount total Amount total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single family real estate ............ $ 792,717 56.27% $ 903,811 64.96% $ 1,043,687 69.95%
Commercial real estate ............... 446,965 31.73% 389,576 28.00% 366,018 24.53%
Small business loans:
Loans under SBA lending programs ... 71,149 5.05% 71,700 5.15% 65,188 4.37%
Other small business loans ......... 33,968 2.41% 21,079 1.52% 6,235 0.42%
Construction ......................... 463 0.03% 2,375 0.17% 6,321 0.42%
Home equity and property improvement . 61,580 4.37% 1,929 0.14% 2,235 0.15%
Consumer loans ....................... 3,128 0.22% 2,483 0.17% 2,887 0.19%
----------- ----------- ----------- ----------- ----------- -----------
Total gross loans .................. 1,409,970 100.08% 1,392,953 100.11% 1,492,571 100.03%
----------- ----------- ----------- ----------- ----------- -----------
Unearned fees, discounts and premiums 16,521 1.17% 12,813 0.92% 14,861 1.00%
Undisbursed loan funds ............... (405) -0.02% (971) -0.07% (2,549) -0.17%
Allowance for loan losses ............ (17,298) -1.23% (13,488) -0.96% (12,789) -0.86%
----------- ----------- ----------- ----------- ----------- -----------
$ 1,408,788 100.00% $ 1,391,307 100.00% $ 1,492,094 100.00%
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1994 1993
--------- ---------
Percent Percent
of of
Amount total Amount total
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family real estate ............ $ 901,613 73.18% $ 579,907 68.16%
Commercial real estate ............... 329,636 26.75% 269,470 31.67%
Small business loans:
Loans under SBA lending programs ... 910 -- -- --
Other small business loans ......... -- -- -- --
Construction ......................... 6,086 0.49% 1,557 0.18%
Home equity and property improvement . 2,763 0.22% 3,982 0.47%
Consumer loans ....................... 3,018 0.33% 2,580 0.30%
----------- ----------- ----------- -----------
Total gross loans .................. 1,244,026 100.97% 857,496 100.78%
----------- ----------- ----------- -----------
Unearned fees, discounts and premiums 5,416 0.44% 2,360 0.28%
Undisbursed loan funds ............... (4,858) -0.39% (200) -0.02%
Allowance for loan losses ............ (12,529) -1.02% (8,832) -1.04%
----------- ----------- ----------- -----------
$ 1,232,055 100.00% $ 850,824 100.00%
=========== =========== =========== ===========
</TABLE>
5
<PAGE> 6
The following table sets forth the final contractual maturities of
the loan portfolio at December 31, 1997. The table does not include scheduled
principal payments or unscheduled prepayments. Scheduled principal payments and
unscheduled prepayments on the loan portfolio for the years ended December 31,
1997, 1996 and 1995 were $253.0 million, $208.8 million, and $143.5 million,
respectively.
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------
Up to After 1 Year Over
(In thousands) 1 Year to 5 Years 5 Years Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Real estate loans .................................... $ 11,516 $ 76,179 $ 1,214,030 $ 1,301,725
Small business loans ................................. 2,563 2,226 100,328 105,117
Other loans .......................................... 2,974 88 66 3,128
----------- ----------- ----------- -----------
Total ........................................... $ 17,053 $ 78,493 $ 1,314,424 $ 1,409,970
=========== =========== ===========
Unearned discounts and premiums and deferred loan fees 16,521
Undisbursed portion of construction loans ............ (405)
Allowance for loan losses ............................ (17,298)
-----------
Loans held for investment, net .................. $ 1,408,788
===========
</TABLE>
The following table sets forth the dollar amount of all loans with
maturities in excess of one year with adjustable and fixed interest rates at
December 31, 1997.
<TABLE>
<CAPTION>
Fixed Adjustable
(In thousands) Rates Rates
---------- ----------
<S> <C> <C>
Single family real estate .................. $ 19,828 $ 772,728
Commercial real estate ..................... 61,157 375,178
Small business loans ....................... 14,299 88,255
Home equity and property improvement ....... 60,399 919
Construction ............................... -- --
Other loans ................................ 154 --
---------- ----------
Total ................................. $ 155,837 $1,237,080
========== ==========
</TABLE>
6
<PAGE> 7
The following table sets forth the Bank's total loan origination,
purchase and sale activity, and loan portfolio repayment and amortization
experience during the periods indicated. The table does not include loans
originated or purchased by the Bank that are held for sale, which are reflected
in the table on the following page.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans held for investment, beginning of year ......... $ 1,391,307 $ 1,492,094 $ 1,232,055 $ 850,824 $ 718,265
Loan originations:
Single family real estate ....................... 277 17,883 133,619 483,738 250,857
Commercial real estate .......................... 92,399 63,498 52,133 35,950 17,616
Small business loans ............................ 29,252 22,526 13,941 910 --
Construction .................................... -- -- 3,727 7,201 1,060
Home equity and property improvement ............ -- -- 56 35 72
----------- ----------- ----------- ----------- -----------
Total loan originations .................... 121,928 103,907 203,476 527,834 269,605
----------- ----------- ----------- ----------- -----------
Loan purchases:
Single family real estate ..................... 158,686 19,576 110,916 21,236 16,344
Commercial real estate ........................ 640 180 135 70,411 827
Small business loans .......................... 933 -- 70,028 -- --
Other real estate ............................. -- -- 15 -- 1,144
----------- ----------- ----------- ----------- -----------
Total loan purchases .......................... 160,259 19,756 181,094 91,647 18,315
----------- ----------- ----------- ----------- -----------
Reclassified as held for sale .................. 277 296 (279) (46,154) 279
Loan sales ..................................... -- (3,947) (1,383) (1,000) (17,243)
Foreclosures ................................... (23,981) (27,251) (12,163) (14,550) (12,836)
Loan exchanges (1) ............................. -- -- -- (39,898) --
Principal repayments (2) ....................... (241,425) (192,379) (122,200) (131,349) (128,933)
Increase in allowance for loan losses .......... (3,850) (699) (260) (3,697) (1,130)
Increase (decrease) in unearned fees,
discounts and premiums ....................... 3,708 (2,048) 9,445 3,056 3,536
Other changes .................................. 565 1,578 2,309 (4,658) 966
----------- ----------- ----------- ----------- -----------
Increase (decrease) in loans held for investment 17,481 (100,787) 260,039 381,231 132,559
----------- ----------- ----------- ----------- -----------
Loans held for investment, end of year ............... $ 1,408,788 $ 1,391,307 $ 1,492,094 $ 1,232,055 $ 850,824
=========== =========== =========== =========== ===========
</TABLE>
(1) Represents the exchange of single family real estate loans for
mortgage-backed securities with servicing retained.
(2) Principal repayments include the net change in deposit account loans
between periods.
The percentage of the dollar volume of the Company's loans originated by type is
summarized below at December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Single family real estate ................................... 0.23% 17.21% 65.67% 91.65% 93.05%
Commercial real estate ...................................... 75.78% 61.11% 25.62% 6.81% 6.53%
Small business loans ........................................ 23.99% 21.68% 6.86% 0.17% --
Other ....................................................... -- -- 1.85% 1.37% 0.42%
------- ------- ------- ------- -------
100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
</TABLE>
7
<PAGE> 8
The Company's loans held for sale consists of adjustable-rate single
family loans and the SBA-guaranteed portions of small business loans. With
respect to the small business loans, management intends to retain these loans in
the loan portfolio, due to their attractive yield and minimal credit risk
characteristics, but has classified them as held for sale to retain maximum
flexibility and liquidity. The following table sets forth loans originated or
purchased for sale.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
(In thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Loans held for sale, beginning of period ............ $ 109,651 $ 100,183 $ 95,214
Loan originations:
Single family ..................................... -- 9,922 31,668
Small business loans, SBA-guaranteed balances ..... 20,999 26,571 17,272
Loan purchases ...................................... -- 1,520 3,643
Loans acquired from UCSB subject to sales commitments -- -- --
Reclassified from (to) held for investment .......... (277) (296) 279
Loan sales .......................................... (1,505) (13,061) (27,756)
Loan principal repayments ........................... (11,555) (16,461) (19,985)
Increase (decrease) in deferred loan fees, net ...... (543) 1,273 (152)
--------- --------- ---------
Increase in loans held for sale ..................... 7,119 9,468 4,969
--------- --------- ---------
Loans held for sale, end of period ............. $ 116,770 $ 109,651 $ 100,183
========= ========= =========
</TABLE>
SINGLE FAMILY REAL ESTATE LENDING. The Company's primary lending
activity has historically been the origination and purchase of first mortgage
loans secured by single family residential real property. At December 31, 1997,
single family first and second mortgages represented 59% of gross loans held for
investment. Single family loans have been originated through retail, wholesale
and correspondent sources, with the largest volume generated from wholesale
sources. Single family loan originations reached their peak in 1994, when $523.8
million of such loans were originated, primarily through wholesale and
correspondent sources. At the end of 1995, the Company discontinued its
wholesale-based single family lending operations. Retail single family lending
operations were discontinued one year later. Several factors led to the
Company's decision to discontinue single family lending, including:
o interest rates changed such that fixed-rate loans have become more
attractive to borrowers in recent years;
o competitive pressures reduced yields on single family loans below a
level that was acceptable to meet the Company's return objectives; and
o the volumes of single family loans that the Company could reasonably
expect to originate, using pricing that meets its return objectives,
were too low to justify the cost of maintaining an originations
capability.
To meet the Company's need for new loans, the Company purchases
single family adjustable-rate mortgage loans ("ARMs") from time to time that
have been originated by other institutions in its marketplace and that meet the
Company's underwriting standards. From time to time, the Company also purchases
fixed-rate loans with the intention of selling such loans and retaining the
related loan servicing rights. The Company typically purchases loans on a
"servicing released basis," meaning that the Company collects the subsequent
loan payments and any fee income associated with "servicing" the loans it has
purchased.
Interest Rates. The ARMs in the Company's loan portfolio have
interest rates that adjust on a monthly, quarterly, semi-annual or annual basis
and loan payments that adjust on a quarterly, semi-annual or annual basis. The
Company has primarily originated ARMs with interest rates tied to the FHLB
Eleventh District Cost of Funds Index ("COFI"), the one-year Treasury Constant
Maturities Rate ("Treasury CMT") and the London Interbank Offered Rate
("LIBOR"), and others.
8
<PAGE> 9
The following chart sets forth information about the interest rates on the
Company's single family loans held for investment at December 31, 1997 (dollars
in thousands):
PIE CHART
<TABLE>
<S> <C>
COFI.......................... $ 498,417
LIBOR......................... $ 153,325
CMT........................... $ 120,035
ARM-OTHER..................... $ 951
FIXED......................... $ 19,989
</TABLE>
Loan Terms. To protect borrowers from unlimited interest rate and
payment increases, the ARMs in the Company's portfolio have periodic interest
rate caps, which govern the maximum increase in the interest rate at the date of
rate adjustment, and lifetime interest rate caps, which govern the maximum rate
that the borrower may be charged at any time during the life of the loan.
Increases in the loan payment may also be restricted in certain ARMs.
The Company's portfolio includes both amortizing loans and negatively
amortizing ARM loans. Amortizing ARM loans are designed so that the timing and
limitations on payment and interest rate changes result in the loan payment
covering all interest accrued during the period plus some amount of loan
principal. Negatively amortizing loans are ARM loans with a monthly payment that
may be insufficient to cover the interest accrued on the loan after loan rate
changes during periods of increasing interest rates. Any resultant interest
shortage is added to the loan's principal balance and is to be repaid through
future payments as interest rates subside or required monthly payments are
periodically recast. At December 31, 1997, $493 million, or 47%, of the
Company's single family loan portfolio permitted negative amortization.
COMMERCIAL REAL ESTATE LENDING. The Company provides financing for
multifamily residential and commercial real estate properties (collectively
referred to as "commercial real estate lending"). At December 31, 1997, the
Company had $158.10 million of multifamily residential and $288.9 million of
commercial nonresidential loans, for a combined commercial real estate portfolio
totaling $447.0 million, representing 21% of interest-bearing assets at that
date. Commercial real estate lending has historically been and remains a line of
business which the Company believes supports its return on capital objectives.
The following chart sets forth the Company's originations of multifamily
residential and commercial nonresidential real estate loans in the past five
years (dollars in thousands):
BAR GRAPH
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Multifamily ............. $ 5,921 $18,874 $22,415 $20,305 $22,511
Commercial nonresidential $11,695 $17,076 $37,621 $43,193 $69,888
</TABLE>
9
<PAGE> 10
When underwriting commercial real estate loans, the Company considers a
number of factors, including: the net operating income of the property (before
debt service and depreciation), the debt service ratio (the ratio of net
operating income to debt service), the ratio of the loan amount to the
collateral's appraised value and concentrations of property types within the
Company's portfolio. The Company underwrites commercial real estate loans using
the fully indexed interest rate plus 1% or the floor rate, whichever is greater
for ARM loans. The Company underwrites loans with initial periods at fixed
interest rates that become adjustable at the end of such periods based upon the
initial fixed-rate of interest.
Multifamily Residential Lending. The Company originates multifamily ARMs
that have 15- to 30-year terms, some of which have an initial five- or
seven-year period with a fixed interest rate. In general, the interest rates
charged and required debt service coverage ratios are higher, and the maximum
permissible loan-to-value ratios are lower, for multifamily properties with more
than 36 units than for properties with five to 36 residential units. This
difference reflects a general perception of greater risk associated with
extensions of credit on larger apartment properties. Other characteristics of
the Company's multifamily residential ARM loans include interest rate ceilings
and floors, introductory interest rates that are in effect for the first three
months, limitations on the amount of annual payment increases and the maximum
negative amortization accrual and prepayment penalties.
The following chart sets forth information about the interest rates on
the Company's multifamily residential real estate portfolio at December 31, 1997
(dollars in thousands):
PIE CHART
<TABLE>
<S> <C>
ARM-COFI........................ $ 107,468
FIXED........................... $ 2,438
ARM-OTHER....................... $ 206
ARM-LIBOR....................... $ 47,991
</TABLE>
The geographic concentration of the Company's multifamily real estate loans at
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Balances Percentage of
(Dollars in Thousands) Outstanding Outstanding
-------- --------
<S> <C> <C>
California Counties:
Los Angeles ............................ $108,331 68%
San Luis Obispo ........................ 11,418 7%
Santa Barbara .......................... 10,833 7%
Orange ................................. 9,428 6%
Other California ....................... 16,793 11%
Out of State ........................... 1,300 1%
-------- --------
Total ............................... $158,103 100%
======== ========
</TABLE>
10
<PAGE> 11
The average outstanding loan balance of the multifamily residential loan
portfolio at December 31, 1997 was $438,000, with the single largest loan having
a balance of $3.7 million. At that date, 5 other loans had balances greater than
$2.0 million and 32 loans had balances between $1.0 million and $2.0 million.
Commercial Nonresidential Lending. The Company originates loans secured
by commercial nonresidential properties with adjustable interest rates or
fixed/adjustable interest rates. Some commercial nonresidential loans that the
Company originates have an initial five-, seven- or 10-year period at a fixed
interest rate with 5- to 15-year terms. Loan payments for these loans are based
upon amortization periods of 15 to 25 years.
The following chart sets forth information about the interest rates on
the Company's commercial nonresidential loan portfolio at December 31, 1997
(dollars in thousands):
PIE CHART
<TABLE>
<S> <C>
ARM-COFI........................ $ 132,689
ARM-LIBOR....................... $ 81,992
ARM-OTHER....................... $ 4,222
FIXED........................... $ 62,403
TREASURY........................ $ 7,556
</TABLE>
The following table sets forth the industry distributions and geographic
concentrations of the Company's commercial nonresidential loan portfolio at
December 31, 1997.
<TABLE>
<CAPTION>
BALANCES
(Dollars in Thousands) OUTSTANDING
-----------
<S> <C>
Manufacturing/warehouse ................................. $ 64,780
Stores and shopping centers ............................. 80,460
Office buildings ........................................ 99,950
Other ................................................... 43,672
--------
Total ................................................. $288,862
========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
-------------
<S> <C>
California counties:
Los Angeles ....................................................... 62%
Orange ............................................................ 10%
San Luis Obispo ................................................... 8%
Ventura ........................................................... 4%
Other California .................................................. 16%
--------
Total ................................................................ 100%
========
</TABLE>
The average outstanding loan balance of this portfolio was $615,000 at
December 31, 1997 and the largest loan at that date had a balance of $7.0
million. Of the remaining commercial real estate loans, 25 loans had balances
over $2.0 million and 88 loans had balances between $1.0 million and $2.0
million.
SMALL BUSINESS LENDING. The Company started offering loans for
equipment, working capital, debt repayment, and construction and acquisition of
commercial real estate through its small business lending division in 1994. The
majority of loans originated in this division have been made under business
programs sponsored by the United States Small Business Administration (the
"SBA"). The Small Business Act of 1953 was passed by the United States Congress
to make credit available to small businesses that were unable to obtain such
credit through other financial institutions. The SBA was established to assist
small businesses in obtaining long term credit at similar terms, conditions and
rates as were made available to larger borrowers through traditional financial
sources. The SBA has established borrower eligibility requirements which include
size standards based upon the average number of
11
<PAGE> 12
employees, sales volume and other factors.
In 1994, the Company identified small business lending as a line of
business which would generate the types of returns the Company requires without
causing undue credit risk. Among the appealing aspects of small business lending
are:
o adjustable-rate loans indexed to the prime rate;
o relatively low credit risk if the Company holds the SBA-guaranteed
portions of loans made under the SBA's 7(a) loan program; and
o a hands-on, retail approach to the lending process that other financial
institutions might find unappealing.
The Company started an SBA lending division in 1994. The Company
significantly increased its small business lending capacity with its June 1995
purchase of loans, certain other assets and the operations of Government Funding
California Business and Industrial Development Corporation ("GFC"), a Los
Angeles-based originator of SBA loans with significant market share. The Company
purchased $73 million of non-guaranteed balances of small business loans, the
rights to service $286 million of SBA-guaranteed loan balances that had
previously been sold by GFC and $50 million of loan applications in process. In
addition, the Company hired GFC's loan origination, processing and servicing
personnel. The Company paid a $16 million premium in the transaction that was
allocated among the retained loan balances and the servicing portfolio. In the
years ended December 31, 1997 and 1996, the Company originated $50.3 million and
$49.1 million, respectively, of new small business loans.
Small Business Loan Programs. The Company originates small business
loans under its own loan programs and under business loan programs sponsored by
the SBA. The following chart sets forth the composition of the Company's small
business loan portfolio at December 31, 1997 (dollars in thousands):
PIE CHART
<TABLE>
<S> <C>
7(a)-UNGUARANTEED PORTIONS......................... $ 19,655
7(a)-SUBJECT TO THIRD PARTY CREDIT ENHANCEMENT..... $ 51,494
FIRST TRUST DEEDS.................................. $ 33,968
7(a)-SBA-GUARANTEED................................ $ 59,442
</TABLE>
The Company's portfolio includes $51.5 million of unguaranteed loan
balances for which it has a credit-enhancement agreement with the seller of such
loans. Under the credit enhancement provisions, the Company is fully reimbursed
for credit losses incurred.
The majority of the small business loans that the Company originates are
made under the SBA's 7(a) General Loan Program ("7(a) Program"). Under the 7(a)
Program, a portion of the principal amount of the loan is guaranteed by the SBA.
Historically, the guaranteed amount has ranged from 70% to 90% of the loan
amount, depending upon loan size and other factors. The Company retains the
SBA-guaranteed portion of these small business loans but classifies them as
loans held for sale so that the Company has maximum flexibility with respect to
holding or selling them.
In 1996, the Company began providing loans under the SBA's 504 loan
program. The 504 loan program
12
<PAGE> 13
provides loans for the sole purposes of fixed asset acquisition and owner-user
commercial real estate construction and acquisition. Under the 504 loan program,
the Company provides financing collateralized by a first lien on the property
and a short-term interim loan, collateralized by a second lien on the property,
that is purchased by a certified development company using the proceeds from a
debenture it issues. The debenture is guaranteed 100% by the SBA. The Company's
loan under this program, therefore, has a relatively low loan to value ratio.
The 504 loan program is intended to accommodate larger business and loan sizes
than the 7(a) Program. Businesses with net income less than $2.0 million and net
worth less than $6.0 million are eligible to apply. Under the 504 program, the
SBA does not guarantee any portion of a loan but instead directly funds up to
40% of the fixed asset project, to a maximum of $750,000 per borrower, and takes
a subordinate lien position on the assets being financed.
During 1997, the Company's small business lending division originated
$50.3 million of loans, consisting of $10.2 million of unguaranteed balances and
$21.0 million of SBA-guaranteed balances under the 7(a) Program and $19.0
million of first trust deeds, including loans made under the 504 loan program.
Interest Rates, Fees and Terms. Interest rates charged borrowers under
the 7(a) and 504 Programs are negotiated between the Company and the borrower
and are subject to SBA maximums. In general, the SBA establishes limitations on
interest rates charged to borrowers under the loan programs it sponsors as
follows:
o fixed rates - a negotiated, reasonable interest rate is permitted with
maximums published periodically in the Federal Register;
o adjustable rates - for loans with terms less than 7 years, the maximum
interest rate cannot exceed 225 basis points (2.25%) over the prime rate
and for loans with terms greater than 7 years, the maximum interest rate
cannot exceed 275 basis points (2.75%) over the prime rate. Adjustments
to the interest rate may be made no more often than monthly.
At the time a loan applicant submits an application for a loan under an
SBA-sponsored loan program, the Company charges a non-refundable application
fee. The fee is dependent upon the complexity of the loan application.
The length of time for repayment of loans guaranteed by the SBA depends
upon the use of the proceeds and the ability of the borrower's business to
repay. Working capital loans generally have maturities of five to seven years.
Loans to finance fixed assets, such as the purchase or renovation of business
premises, can have a maximum maturity of up to 25 years.
Underwriting Authority. The SBA designates lenders as General Program
("GP"), Certified Lender Program ("CLP") and Preferred Lender Program ("PLP").
The designation determines the amount of analysis performed by the SBA on loans
submitted by lenders and, therefore, affects the time required to obtain loan
approval. A lender with a GP designation must submit loan applications for
complete analysis by the SBA prior to a guaranty being granted, a process which
can take up to six weeks. A lender with a CLP designation submits all loan
applications to the SBA for a cursory review, a process generally requiring five
business days, prior to the granting of a guaranty by the SBA. A lender with a
PLP designation is authorized to approve the guaranty request on behalf of the
SBA and is only required to send the SBA limited loan documentation. Lenders
with the PLP designation have a distinct marketing advantage to the extent that
a shortened underwriting and approval process improves the lender's credibility
and customer service reputation. Designation as a CLP or PLP lender is awarded
after several years of proven performance in lending, servicing and liquidating
loans. The Company was designated a GP lender until it was designated as a CLP
lender in the fourth quarter of 1996.
Credit Risk and Concentration. The Company's small business portfolio is
diversified among a variety of industries. At December 31, 1997, the composition
of the small business portfolio, based upon the standard industrial
classification codes assigned to each loan, was as follows (dollars in
thousands):
13
<PAGE> 14
PIE CHART
<TABLE>
<S> <C>
AUTOMOTIVE.............................. $ 21,055
WHOLESALE TRADE......................... $ 22,675
PROFESSIONAL SERVICES................... $ 26,745
RESTAURANTS............................. $ 14,296
RETAIL.................................. $ 12,536
MANUFACTURING........................... $ 15,931
OTHER................................... $ 6,745
MOTELS.................................. $ 44,576
</TABLE>
Secondary Marketing Considerations. At December 31, 1997, the Company
had $59.4 million of SBA-guaranteed loan balances in its loans held for sale.
Due to the desirable interest rate and credit risk characteristics of these
loans, the Company may choose to retain these loans in its portfolio. However,
there is an active market for the sale of the guaranteed portions of SBA loans
originated under the 7(a) Program. Historically, the premium paid in the
secondary market for SBA-guaranteed loans has been approximately 10 points.
At December 31, 1997, the Company serviced SBA-guaranteed loan balances
totaling $230.8 million. At that date, the average contractual servicing fee
that the Company received was 112 basis points. In connection with its servicing
obligation, the Company collects and remits the investors' portion of loan
payments on a monthly basis to Colson Services Corporation, the exclusive Fiscal
and Transfer Agent for guaranteed portions of SBA loans sold in the secondary
market. In the future, the Company may purchase the servicing rights to SBA loan
portfolios.
SALES OF LOANS. With the exception of fixed-rate mortgage loans and the
guaranteed portion of SBA loans, the Company generally originates and purchases
loans to be held for long term investment. For the years ended December 31,
1997, 1996 and 1995, the Company originated zero, $9.9 million and $31.7
million, respectively, of fixed-rate loans secured by single family residences
which are held for sale. The Company's interest rate risk policy requires that
hedging action, such as the purchase of a put option, be taken whenever the sum
of fixed-rate loans held for sale (but not yet subject to a commitment) and
loans in process that are committed with fixed rates exceeds $10 million.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Company originated small business loans with $21.0 million, $26.6 million and
$17.3 million, respectively, of balances guaranteed by the SBA which are
classified as held for sale. At the present time, the Company intends to retain
these loans due to their superior rate and credit risk characteristics.
Sales of loans generate gains or losses and a future stream of loan
servicing revenue when the Company retains the servicing rights, as well as
providing cash for lending or liquidity. Principal balances of loans sold
totaled $1.5 million, $15.5 million and $29.1 million in the years ended
December 31, 1997, 1996 and 1995, respectively.
MORTGAGE-BACKED SECURITIES. The Company invests in mortgage-backed
securities, including securities guaranteed by GNMA, FNMA and FHLMC. The Company
also invests in privately issued mortgage-backed securities which have been
credit-enhanced and typically have received a "AA" or "AAA" credit rating from
at least one nationally recognized credit rating service. Mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings, including reverse repurchase agreements. The Company
invests in both adjustable-rate and fixed-rate mortgage-backed securities.
Fixed-rate mortgage-backed securities acquired by the Company typically have
short expected average lives (approximately five years or less) in order to
limit interest rate risk exposure. The interest rate risk of the fixed-rate
mortgage-backed securities portfolio is monitored and managed on a quarterly
basis, at a minimum, in conjunction with the total asset and liability
portfolio. The Company has purchased fixed-rate mortgage-backed securities that
have prepayment limitations on the underlying mortgages.
14
<PAGE> 15
At December 31, 1997 and 1996, the mortgage-backed securities portfolio
consisted of $417.4 million and $442.0 million, respectively, of securities, all
of which were classified as available for sale and were reported at fair value.
The Company has classified all mortgage-backed securities as available for sale
so that it has the flexibility to retain or sell such securities as it deems
necessary to manage interest rate risk, liquidity and yield.
The Company has the following investments in mortgage-backed securities
of certain issuers that exceeded 10% of stockholders' equity at December 31,
1997 as follows:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
ISSUER AMORTIZED COST FAIR VALUE
------ -------------- ----------
(In Thousands)
<S> <C> <C>
Resolution Trust Corporation $142,177 $142,466
Ryland Mortgage Securities Corporation 20,543 20,508
</TABLE>
The privately issued mortgage-backed securities owned by the Company are
credit-enhanced in a variety of ways. Many of the securities represent senior
interests in real estate mortgage investment conduits ("REMICs") in which other
subordinated classes of the same security absorb all of the losses in the
underlying mortgage pools up to a specified amount. Other securities owned by
the Company are credit-enhanced through the purchase and placement in trust of
mortgage insurance pool policies from highly-rated institutions (not the issuer)
which provide protection against losses sustained in the underlying mortgage
pools up to a specified amount. A third form of credit enhancement is provided
on many of the Company's privately issued mortgage-backed securities through
establishment of a "cash reserve fund" whereby the issuer places a certain
amount of cash or government securities in trust, which may be applied against
losses sustained on the underlying mortgage pool.
The relative amount of credit enhancement available to absorb losses for
each security in the Company's portfolio varies depending upon the initial level
of credit enhancement provided by the security issuer and the ensuing
amortization, prepayment and loss experience in the mortgage loans that comprise
the security. At December 31, 1997 the Company's mortgage-backed securities
portfolio included $23.2 million of securities with credit ratings below "AA,"
consisting of $12.2 million of "A" - rated securities, $6.6 million of "B"
- -rated securities and the remainder that were rated "BBB" or below. A $6.6
million security with a "B" rating was on the Company's watch list because the
security's level of credit enhancement had declined from 39% at the date of
issue to 30% at the end of 1997. Management believes that the current level of
credit enhancement should be adequate to cover all future collateral losses.
The following table sets forth the carrying values of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- --------
AVAILABLE FOR SALE, AT FAIR VALUE: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Pass-through and REMIC:
Guaranteed by GNMA ... $ 32,680 7.83% $ 29,324 6.63% $ 30,544 8.95%
Guaranteed by FNMA ... 81,115 19.43% 111,502 25.23% 60,923 17.85%
Guaranteed by FHLMC .. 32,832 7.87% 31,809 7.20% 49,899 14.62%
"AAA"- and "AA"- rated 247,605 59.32% 244,827 55.39% 188,188 55.14%
Other ................ 23,161 5.55% 24,553 5.55% 11,734 3.44%
-------- -------- -------- -------- -------- --------
Total ........... $417,393 100.00% $442,015 100.00% $341,288 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
15
<PAGE> 16
The following table sets forth, as of December 31, 1997, the amortized
cost basis, fair value basis, weighted average final maturities and the weighted
average yields (based on amortized cost) of mortgage-backed securities available
for sale or held to maturity. Due to amortization and prepayments of the
underlying loans, the actual maturities are expected to be substantially less
than the final maturities shown in the table.
<TABLE>
<CAPTION>
Up to Five to Over
Five Years Ten Years Ten Years Total
---------- --------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------- ------- --------
Amortized Cost: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA-guaranteed .... $ 2,377 6.00% -- -- $ 78,478 6.37% $ 80,855 6.36%
GNMA-guaranteed .... -- -- -- -- 32,165 6.75% 32,165 6.75%
FHLMC-guaranteed ... -- -- -- -- 32,462 6.48% 32,462 6.48%
Privately-issued ... 6,024 7.51% -- -- 263,914 7.10% 269,938 7.11%
-------- -------- -------- -------
Total ........... $ 8,401 7.08% -- -- $407,019 6.88% $415,420 6.89%
======== ======== ======== ========
Fair Value:
FNMA-guaranteed .... $ 2,371 -- $ 78,744 $ 81,115
GNMA-guaranteed .... -- -- 32,680 32,680
FHLMC-guaranteed ... -- -- 32,832 32,832
Privately-issued ... 6,117 -- 264,649 270,766
-------- -------- -------- ---------
Total ........... $ 8,488 -- $408,905 $ 417,393
======== ======== ======== ==========
</TABLE>
LOAN DELINQUENCIES. When a borrower fails to make a required payment on
a loan and does not cure the delinquency promptly, the loan is considered
delinquent. In this event, the Company normally contacts the borrower at
prescribed intervals in an effort to bring the loan to current status. If the
delinquency is not cured promptly, the Company normally records a notice of
default, subject to any required prior notice to the borrower, and commences
foreclosure proceedings. If the loan is not reinstated within the time permitted
by law for reinstatement, which is normally five business days prior to the date
set for the non-judicial trustee's sale, and the property is not redeemed prior
to such sale, the property may be sold at the non-judicial trustee's sale. In
most cases, the Company is not permitted under applicable law to obtain a
deficiency judgment against the borrower if the security property is
insufficient to cover the balance owed. Under certain circumstances, the Company
can obtain a deficiency judgment against the borrower through a judicial
foreclosure, but the cost of a judicial foreclosure often exceeds the benefit of
the judgment. In trustee's sales, the Company may acquire title to the property,
in which case the property so acquired is thereafter sold and may be financed by
a loan involving terms more favorable to the borrower than normally offered.
16
<PAGE> 17
The following table sets forth the principal amount and percentage of
the Company's loan delinquencies, by property type, at the dates indicated
(dollars in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------------
% OF TYPE OF % OF TYPE OF % OF TYPE
GROSS LOAN GROSS LOAN OF GROSS LOAN
AMOUNT RECEIVABLE(1) AMOUNT RECEIVABLE(1) AMOUNT RECEIVABLE(1)
------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Single Family:
31-60 days (2) $2,037 0.22% $5,887 0.61% $3,485 0.31%
61-90 days (2) 2,435 0.27% 3,129 0.32% 1,417 0.13%
Over 90 days (2) 8,012 0.88% 11,467 1.18% 10,502 0.93%
----- ----- ------ ----- ------ -----
12,484 1.37% 20,483 2.11% 15,404 1.37%
------ ----- ------ ----- ------ -----
Multifamily residential:
31-60 days -0- -0- 404 0.27% 262 0.18%
61-90 days -0- -0- -- -- -- --
Over 90 days 678 0.43% 2,563 1.71% 1,274 0.88%
--- ----- ----- ----- ----- -----
678 0.43% 2,967 1.98% 1,536 1.06%
--- ----- ----- ----- ----- -----
Commercial nonresidential:
31-60 days -0- -0- -- -- 162 0.07%
61-90 days -0- -0- -- -- -- --
Over 90 days 1,468 0.51% 1,295 0.54% 1,524 0.69%
----- ----- ----- ----- ----- -----
1,468 0.51% 1,295 0.54% 1,686 0.76%
----- ----- ----- ----- ----- -----
Small business, guaranteed by the SBA:
31-60 days 80 0.13% -- -- -- --
61-90 days -0- -0- 739 1.78% 22 0.13%
Over 90 days 1,039 1.75% -- -- 83 0.48%
----- ----- -- -- -- -----
1,119 1.88% 739 1.78% 105 0.61%
----- ----- --- ----- --- -----
Small business, other:
31-60 days 216 0.20% 715 0.77% 483 0.68%
61-90 days 364 0.35% 1,118 1.21% 349 0.49%
Over 90 days 2,788 2.65% 1,550 1.67% 1,750 2.45%
----- ----- ----- ----- ----- -----
3,368 3.20% 3,383 3.65% 2,582 3.62%
----- ----- ----- ----- ----- -----
Other:
31-60 days 15 0.48% 6 0.09% 16 0.14%
61-90 days 16 0.51% 10 0.15% 2 0.02%
Over 90 days 13 0.42% 3 0.04% 40 0.35%
------ ----- ------ ----- ------ -----
44 1.41% 19 0.28% 58 0.51%
------ ----- ------ ----- ------ -----
TOTAL:
31-60 days (2) 2,348 0.15% 7,012 0.47% 4,408 0.28%
61-90 days (2) 2,815 0.19% 4,996 0.33% 1,790 0.11%
Over 90 days (2) 13,998 0.92% 16,878 1.12% 15,173 0.95%
------ ----- ------ ----- ------ -----
$19,161 1.26% $28,886 1.92% $21,371 1.34%
======= ===== ======= ===== ======= =====
</TABLE>
(1) Gross loans receivable consists of gross loans held for investment and
gross loans held for sale.
17
<PAGE> 18
(2) Delinquent loans includes delinquent negative amortizing loans as
follows at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ --------------------
% OF % OF % OF
NEGATIVE NEGATIVE NEGATIVE
AMORTIZING AMORTIZING AMORTIZING
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
<S> <C> <C> <C> <C> <C> <C>
31-60 days..................... $924 0.19% $1,555 0.32% $1,097 0.20%
61-90 days..................... 915 0.19% 862 0.18% 342 0.06%
Over 90 days................... 2,515 0.50% 5,795 1.21% 3,413 0.65%
----- ----- ----- ----- ----- -----
$4,354 0.88% $8,212 1.71% $4,852 0.91%
====== ===== ====== ===== ====== =====
</TABLE>
The Company's delinquency experience is affected by the value of the
real estate securing its loans, the ability of borrowers to make increased
payments on ARMS if interest rates increase, the state of the national and local
economies, and other unforeseeable events. As a result of economic conditions
and other factors beyond the Company's control affecting the ability of
borrowers to make payments and the value of real estate, the future loss and
delinquency experience cannot be predicted.
Delinquency trends are discussed in greater detail in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Asset Quality."
NONPERFORMING ASSETS. The following table sets forth information with
respect to nonperforming assets, including nonaccrual loans, real estate
acquired in settlement of loans ("real estate owned" or "REO"), other
nonperforming assets and restructured loans.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Nonaccrual loans: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Single family real estate ............... $10,040 $14,373 $11,487 $ 6,786 $ 5,697
Commercial real estate .................. 2,146 4,263 3,222 3,700 5,848
Small business loans .................... 4,053 2,863 92 -- --
Other ................................... 12 3 40 13 37
------- ------- ------- ------- -------
Total nonaccrual loans .............. 16,251 21,502 14,841 10,499 11,582
------- ------- ------- ------- -------
Real estate owned:
Single family real estate .............. 2,289 7,867 4,741 5,295 1,634
Commercial real estate ................. 850 2,599 1,495 4,531 2,273
Small business loan collateral .......... 865 -- -- -- --
------- ------- ------- ------- -------
Total real estate owned ............. 4,004 10,466 6,236 9,826 3,907
------- ------- ------- ------- -------
Automobile leases and other .............. -- -- -- 16 504
------- ------- ------- ------- -------
Total nonperforming assets .......... $20,255 $31,968 $21,077 $20,341 $15,993
======= ======= ======= ======= =======
Nonperforming assets, % of total assets .. 0.92% 1.46% 0.98% 1.10% 1.07%
Allowances for loan losses to
nonaccrual loans ........................ 106.44% 62.7% 86.2% 119.3% 76.3%
</TABLE>
The Company's general policy is to account for a loan on a nonaccrual
basis when the loan becomes 90 days past due unless conditions warrant
nonaccrual treatment at an earlier time. In certain instances, a loan more than
90 days past due may continue to accrue interest, if the loan has a low
loan-to-value ratio or if the borrower has exhibited a pattern of becoming
delinquent and subsequently curing. Any unpaid interest previously accrued with
respect to a loan that is placed on nonaccrual status is reversed and charged
against interest income. Interest income is recognized
18
<PAGE> 19
on nonaccrual loans only to the extent that payments are received. Nonaccrual
loans are placed back into accrual status only if the borrower has demonstrated
the ability to make future payments of principal and interest. At December 31,
1997, the Company reported no loans as still accruing that were more than 90
days delinquent.
At December 31, 1997, nonaccrual loans included $1.4 million of small
business loans with credit guarantees. At that date, the Company's nonaccrual
loans consisted of 65 single family residential real estate loans, 1 multifamily
residential loan, 3 commercial real estate loans, 18 small business loans and 14
consumer loans. Under the original terms of the nonaccrual loans, interest
earned during the years ended December 31, 1997, 1996 and 1995 would have been
$1.5 million , $2.1 million and $1.3 million, respectively, compared to the
$718,000, $1.1 million and $581,000, respectively, of interest actually earned
during those periods.
At December 31, 1997, real estate owned included 20 single family
residences, one commercial real estate property and 16 properties that
collateralized foreclosed small business loans.
IMPAIRED LOANS. Loans are evaluated for impairment in accordance with
the provisions of statement of Financial Accounting Standards No. 114 ("SFAS No.
114"), "Accounting By Creditors for Impairment of a Loan," as amended by
Statement of Financial Accounting Standards No. 118 ("SFAS No. 118"),
"Accounting By Creditors for Impairment of a Loan, Income Recognition and
Disclosures." SFAS No. 114 does not apply to large groups of smaller-balance
homogenous loans that are collectively evaluated for impairment. The Company
collectively reviews all single family and consumer loans for impairment.
SFAS No. 114 requires that an impaired loan be measured based on one of
three methods: (i) the present value of the expected future cash flows,
discounted at the loan's effective interest rate; (ii) the loan's observable
market value; or (iii) 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 the fair value of the collateral
fluctuates materially, the Company recalculates the impairment and adjusts the
specific valuation allowance.
The Company periodically reviews the relevant factors and the formulas
by which additions are made to the allowances for losses. In the opinion of
management, the present allowances are adequate to absorb reasonably anticipated
losses. Recovery of the carrying value of such loans, real estate and investment
securities is dependent to a great extent on economic, operating, and other
conditions that may be beyond the Company's control.
19
<PAGE> 20
The following table sets forth information with respect to impaired
loans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------
SPECIFIC NET SPECIFIC NET
LOAN LOSS RECORDED LOAN LOSS RECORDED
BALANCES ALLOWANCES INVESTMENT BALANCES ALLOWANCES INVESTMENT
-------- -------- -------- -------- -------- --------
Nonaccrual loans: (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Requiring specific loss allowances ...... $ 2,267 $ 768 $ 1,499 $ 3,457 $ 1,439 $ 2,018
Not requiring specific loss allowances .. 2,894 -- 2,894 3,668 -- 3,668
-------- -------- -------- -------- -------- --------
5,161 768 4,393 7,125 1,439 5,686
-------- -------- -------- -------- -------- --------
Restructured loans:
Requiring specific loss allowances ...... 4,210 636 3,574 4,756 707 4,049
Not requiring specific loss allowances .. 1,200 -- 1,200 -- -- --
-------- -------- -------- -------- -------- --------
5,410 636 4,774 4,756 707 4,049
-------- -------- -------- -------- -------- --------
Other loans:
Requiring specific loss allowances ...... 1,951 407 1,544 2,937 709 2,228
Not requiring specific loss allowances .. 2,202 -- 2,202 618 -- 618
-------- -------- -------- -------- -------- --------
4,153 407 3,746 3,555 709 2,846
-------- -------- -------- -------- -------- --------
TOTAL .............................. $ 14,724 $ 1,811 $ 12,913 $ 15,436 $ 2,855 $ 12,581
======== ======== ======== ======== ======== ========
</TABLE>
The average recorded investment in impaired loans during the years ended
December 31, 1997 and 1996 was $12,747,000 and $11,349,000, respectively, and
interest recognized during those respective periods totaled $1,107,000 and
$991,000, respectively.
Impaired loans at December 31, 1997 and 1996 included $2,668,000 and
$1,514,000, respectively, of small business loans that were purchased from GFC
and which are subject to credit enhancement provisions that management believes
will minimize the risk of loss.
Impaired loans at December 31, 1997 and 1996 also included $4,741,000
and $4,756,000, respectively, of commercial real estate loans which have been
modified. These modifications are generally in the form of lower interest rates,
payment decreases or maturity extensions. The effect of the modifications was
not material to the Company's financial condition or results of operations.
ALLOWANCE FOR LOAN LOSSES. The Company maintains specific allowances for
possible losses related to specific identified assets and a general allowance
for loan losses. The general allowance for loan losses is an amount that
management believes will be adequate to absorb reasonably anticipated losses on
existing loans that may become uncollectible in the future. The determination of
the appropriate amount of and allocation of the general allowance for loan
losses is based upon an analysis of the loan portfolio. The analysis is based
upon such factors as prior loan loss experience, economic conditions affecting
the real estate market, 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. In
addition, the OTS may require additions to the allowance for loan losses based
on its evaluation of information available to it in connection with its periodic
examinations of the Bank.
A summary of the activity in the allowance for loan losses is set forth
on the following page.
20
<PAGE> 21
<TABLE>
<CAPTION>
Ratios of
--------------------------------
Single Commercial Small Consumer & Allowance to Net Charge-Offs
Family Real Estate Business Other TOTAL Gross Loans to Average Loans
(Dollars in thousands) -------- -------- -------- -------- -------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 ... $ 1,880 $ 5,662 -- $ 160 $ 7,702 1.06% 0.12%
Provisions ................... 680 3,380 15 4,075
Allowance for lease
losses recoveries ............ 500 693 (93) 1,100
Charge-offs .................. (721) (3,390) (7) (4,118)
Recoveries ................... 13 60 -- 73
-------- -------- -------- --------
Net charge-offs .......... (708) (3,330) (7) (4,045)
-------- -------- -------- --------
Balance, December 31, 1993 ... 2,352 6,405 -- 75 8,832 1.03% 0.52%
Provisions ................... 1,815 485 -- 2,300
Acquisitions and purchases ... -- 6,052 -- 6,052
Allowance for lease
losses recoveries ............ -- 296 57 353
Charge-offs .................. (1,679) (3,843) (40) (5,562)
Recoveries ................... 141 412 1 554
-------- -------- -------- --------
Net charge-offs .......... (1,538) (3,431) (39) (5,008)
-------- -------- -------- --------
Balance, December 31, 1994 ... 2,629 9,807 -- 93 12,529 1.01% 0.45%
Provisions (reductions
credited) .................... 3,221 (1,510) 1,130 59 2,900
Allowance for lease
losses recoveries ............ -- -- 11 11
Acquisitions and purchases ... -- -- 500 -- 500
Charge-offs .................. (2,163) (2,329) (49) (4,541)
Recoveries ................... 356 1,034 -- 1,390
-------- -------- -------- --------
Net charge-offs .......... (1,807) (1,295) -- (49) (3,151)
-------- -------- -------- -------- --------
Balance, December 31, 1995 ... $ 4,043 $ 7,002 $ 1,630 $ 114 $ 12,789 0.80% 0.22%
Provisions (reductions
credited) .................... 3,622 3,950 507 (29) $ 8,050
Allowance for lease
losses recoveries ............ -- -- -- 16 16
Charge-offs .................. (4,539) (4,062) (565) (34) (9,200)
Recoveries ................... 866 452 509 6 1,833
-------- -------- -------- -------- --------
Net charge-offs .......... (3,673) (3,610) (56) (28) (7,367)
-------- -------- -------- -------- --------
Balance, December 31, 1996 ... $ 3,992 $ 7,342 $ 2,081 $ 73 $ 13,488 0.90% 0.48%
Provisions ................... 1,245 3,050 1,635 70 6,000
Acquisitions and purchases ... 2,606 -- -- -- 2,606
Charge-offs .................. (2,927) (3,527) (642) (123) (7,219)
Recoveries ................... 1,200 603 619 1 2,423
-------- -------- -------- -------- --------
Net charge-offs .......... (1,727) (2,924) (23) (122) (4,796)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 ... $ 6,116 $ 7,468 $ 3,693 $ 21 $ 17,298 1.13% 0.31%
======== ======== ======== ======== ========
</TABLE>
21
<PAGE> 22
The Company's distribution of its allowance for losses to the types of
loans in the portfolio is performed as part of the asset classification process.
The allocations presented should not be interpreted as an indication that loans
charged against the allowance for loan losses will occur in these amounts and
proportions. The following table sets forth the relationship of the allowance
distribution to each type of loan in the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996
----------------------------------------- -----------------------------------------
RATIO OF RATIO OF
GROSS ALLOWANCE TO GROSS ALLOWANCE TO
(Dollars in thousands) LOAN GROSS LOAN LOAN GROSS LOAN
ALLOWANCE BALANCE BALANCE ALLOWANCE BALANCE BALANCE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Single family ............ $ 6,116 $ 910,103 0.67% $ 3,992 $ 971,768 0.41%
Commercial real estate ... 7,468 446,965 1.67% 7,342 409,819 1.88%
Small business ........... 3,693 164,559 2.24% 2,081 114,093 1.55%
Other .................... 21 3,591 0.58% 73 4,858 1.50%
---------- ---------- ---------- ----------
$ 17,298 $1,525,218 1.13% $ 13,488 $1,500,538 0.90%
========== ========== ========== ==========
</TABLE>
OTHER INVESTMENTS
Federal regulations require the Bank to maintain a minimum amount of liquid
assets which may be invested in specified short-term securities. See
"--Regulation." The Bank is also permitted to make certain other securities
investments. Investment decisions are made by authorized officers of the Bank
under policies established by the board of directors. Such investments are
managed with the objective of producing the highest yield consistent with
maintaining safety of principal and compliance with regulations governing the
savings industry.
The following table sets forth the carrying value of the investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE,
AT FAIR VALUE:
Equity securities ................. $ 260 $ 52 --
Municipal obligations ............. 83,125 75,763 $ 93,240
Federal Home Loan Bank stock ...... 22,914 17,919 15,578
U.S. Government obligations ....... 83,500 67,985 24,960
-------- -------- --------
Total ........................ $189,799 $161,719 $133,778
======== ======== ========
</TABLE>
As of December 31, 1997, the fair values, maturities and weighted
average yields of investment securities available for sale were as follows:
<TABLE>
<CAPTION>
After One Year After Five Years After
One Year Through Through Ten
No maturity or Less Five Years Ten Years Years
----------------- ----------------- ----------------- ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal obligations(1) .... -- -- -- -- -- -- -- -- $83,125 7.70%
Equity securities ........... $23,174 5.93% -- -- -- -- -- -- -- --
U.S. Government obligations . -- -- $43,529 5.64% $39,971 6.15% -- -- -- --
------- ------- ------- ------- -------
Total .................... $23,174 5.93% $43,529 5.64% $39,971 6.15% -- -- $83,125 7.70%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) The yield on municipal obligations is shown on a tax-equivalent basis.
22
<PAGE> 23
DEPOSITS AND BORROWINGS
DEPOSITS. Deposits are the Company's principal source of funds for
supporting its lending and investing activities. The following table sets forth
information relating to the Company's deposit flows during the periods shown and
the total deposits at the ends of the periods shown.
<TABLE>
<CAPTION>
(In thousands) FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Total deposits, beginning of year ........ $ 1,558,470 $ 1,551,329 $ 1,310,505
Customer deposits (withdrawals), net ..... (66,794) (54,172) 121,619
Savings deposits assumed from acquisitions -- -- 208,740
Savings deposits sold .................... -- -- (148,671)
Interest credited ........................ 59,564 61,313 59,136
------------ ------------ ------------
Net increase (decrease) during year .... (7,230) 7,141 240,824
------------ ------------ ------------
Total deposits, end of year .............. $ 1,551,240 $ 1,558,470 $ 1,551,329
============ ============ ============
</TABLE>
The Company attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates. The Company offers
passbook accounts, checking accounts, various money market accounts and fixed
interest rate certificates with varying maturities. The Company has historically
relied upon "retail" deposit accounts (accounts of individuals, including IRA
and Keogh accounts, and small businesses) as opposed to "wholesale" deposit
accounts (accounts of government entities, partnerships, trusts and other legal
entities and balances placed by brokers). At December 31, 1997, approximately
86% of total deposit accounts were retail deposits. The Company's retail
deposits at that date included "jumbo" deposits (certificates accounts with
balances of $98,000 or greater) of $4.0 million, or .26% of total deposits.
While management considers retail deposits to be a more stable source of funds
than wholesale sources of funds, all deposit flows are greatly influenced by
economic conditions, the general level of interest rates, competition, and other
factors.
The Company also obtains deposits from deposit brokers for jumbo
certificates of deposit ("Brokered Deposits"). At December 31, 1997, 1996 and
1995, the Company had outstanding Brokered Deposits of $213.3 million, $224.5
million and $204.1 million, respectively. At December 31, 1997, 1996 and 1995
the Company also had $2.9 million, $2.2 million and $3.3 million, respectively,
of jumbo deposits from other non-retail institutional depositors.
23
<PAGE> 24
The following table sets forth the amounts of the Company's savings
deposits by type of account at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1997 1996
------------------------------ ----------------------------------
(Dollars in Thousands)
WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE
OF NOMINAL OF NOMINAL
AMOUNT TOTAL RATE AMOUNT TOTAL RATE
---------- ------ -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Demand Accounts:
Checking/NOW ................ $ 113,470 7.32% 0.87% $ 106,453 6.83% 1.05%
Money market deposits ....... 61,243 3.95% 4.12% 14,191 0.91% 1.44%
Passbook .................... 53,977 3.48% 2.00% 59,349 3.81% 2.01%
Market rate passbook ........ 113,877 7.34% 3.77% 141,358 9.07% 4.20%
---------- ------ ---------- ------
Total demand accounts ..... 342,567 22.09% 321,351 20.62%
---------- ------ ---------- ------
Time Deposits:
Certificate accounts with original
maturities of:
3-5 months ........................... 22,211 1.43% 4.86% 64,568 4.14% 5.34%
6-11 months .......................... 404,075 26.05% 5.48% 329,062 21.10% 5.21%
12-23 months ......................... 262,156 16.90% 5.79% 244,502 15.69% 5.57%
24-35 months ......................... 54,965 3.54% 5.68% 99,198 6.37% 6.28%
36 or more months .................... 92,969 5.99% 6.48% 111,382 7.15% 6.28%
IRA/Keogh ............................ 151,872 9.79% 6.17% 152,964 9.82% 6.23%
Other retail ......................... 3,981 0.26% 6.58% 8,750 0.56% 6.61%
Jumbos (wholesale) .................. 216,444 13.95% 5.56% 226,693 14.55% 5.65%
---------- ------ ---------- ------
Total time deposits .................. 1,208,673 77.91% 1,237,119 79.38%
---------- ------ ---------- ------
Total deposits ....................... $1,551,240 100.00% 5.04% $1,558,470 100.00% 5.06%
========== ====== ====== ========== ====== =====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1995
--------------------------------
(Dollars in Thousands)
WEIGHTED
PERCENT AVERAGE
OF NOMINAL
AMOUNT TOTAL RATE
---------- ------- -------
<S> <C> <C> <C>
Demand Accounts:
Checking/NOW ................ $ 105,574 6.81% 1.15%
Money market deposits ....... 17,497 1.13% 2.20%
Passbook .................... 73,584 4.74% 2.06%
Market rate passbook ........ 97,413 6.28% 3.69%
---------- ------
Total demand accounts ..... 294,068 18.96%
---------- ------
Time Deposits:
Certificate accounts with original
maturities of:
3-5 months ........................... 27,959 1.80% 5.10%
6-11 months .......................... 373,692 24.09% 5.55%
12-23 months ......................... 211,077 13.61% 5.78%
24-35 months ......................... 121,427 7.83% 6.23%
36 or more months .................... 137,463 8.86% 6.10%
IRA/Keogh ............................ 148,950 9.60% 6.30%
Other retail ......................... 29,290 1.89% 6.19%
Jumbos (wholesale) .................. 207,403 13.36% 5.82%
---------- ------
Total Time Deposits .................. 1,257,261 81.04%
---------- ------
Total Deposits ....................... $1,551,32? 100.00% 5.18%
========== ====== ====
</TABLE>
24
<PAGE> 25
The following table presents the amount of certificate accounts
outstanding by various rate categories at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
(Dollars in 1997 1996 1995
thousands) ---------- ---------- ----------
<S> <C> <C> <C>
0.000% - 2.5% .... $ 507 $ 586 $ 832
2.501% - 3.5% .... -- -- 2,852
3.501% - 4.5% .... 7,053 15,836 50,794
4.501% - 5.5% .... 421,253 655,958 444,886
5.501% - 6.5% .... 628,303 341,902 449,943
6.501% - 7.5% .... 139,434 204,080 248,856
7.501% - 8.5% .... 8,546 13,021 52,573
8.501% - 9.5% .... 3,359 5,454 5,556
9.501% - 10.5% ... 218 282 534
OVER 10.5% ....... -- -- 435
---------- ---------- ----------
TOTAL ....... $1,208,673 $1,237,119 $1,257,261
========== ========== ==========
</TABLE>
The following table sets forth at December 31, 1997 the amount of
fixed-term certificates of deposit maturing during the periods indicated.
<TABLE>
<CAPTION>
DEPOSITS MATURING IN THE YEAR ENDING DECEMBER 31,
------------------------------------------------------------------------
(Dollars in thousands) 1998 1999 2000 AFTER 2000 TOTAL
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
0.000% - 2.5% ..... $ 461 $ 39 $ 4 $ 3 $ 507
2.501% - 3.5% ..... -- -- -- -- --
3.501% - 4.5% ..... 7,051 -- 2 -- 7,053
4.501% - 5.5% ..... 359,975 36,167 15,958 9,153 421,253
5.501% - 6.5% ..... 499,851 62,335 24,983 41,134 628,303
6.501% - 7.5% ..... 35,457 36,275 58,993 8,709 139,434
7.501% - 8.5% ..... 2,409 466 4,076 1,595 8,546
8.501% - 9.5% ..... 1,148 320 1,891 -- 3,359
9.501% - 10.5% .... -- 218 -- -- 218
Over 10.5% ........ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total ........ $ 906,352 $ 135,820 $ 105,907 $ 60,594 $1,208,673
========== ========== ========== ========== ==========
</TABLE>
As of December 31, 1997, the aggregate amount of time certificates
outstanding in amounts of $98,000 or more was $482.8 million. The following
table presents the maturity of these time certificates of deposit at such date:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
3 months or less $170,535
Over 3 months through 6 months 68,223
Over 6 months through 12 months 94,962
Over 12 months 149,058
--------
Total $482,778
========
</TABLE>
25
<PAGE> 26
The following table presents by category the weighted average balance
and rates paid on the deposits during the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ----------------------
AVERAGE AVERAGE AVERAGE
(Dollars in thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- -------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Checking accounts . . . . $143,172 1.60% $119,407 1.11% $121,566 1.14%
Savings accounts . . . . . 184,502 3.40% 193,292 3.40% 167,419 2.44%
Certificate accounts . . . 1,079,299 5.71% 1,087,231 6.57% 1,008,467 5.67%
Retirement accounts . . . 152,909 6.19% 156,567 6.05% 142,739 6.10%
---------- ------- -------
Total $1,559,882 5.11% $1,556,497 5.09% $1,440,191 4.94%
========== ========== ==========
</TABLE>
BORROWINGS. The Company's principal types of recurring borrowings are
advances from the FHLB of San Francisco and sales of securities under agreements
to repurchase ("reverse repurchase agreements"), which are executed with primary
government securities dealers. The following table sets forth information
concerning FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
(Dollars in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
FHLB advances . . . . . . . . . . . . . . . . . . . . $413,500 $349,479 $300,500
Securities sold under agreements to repurchase . . . $74,488 $130,639 $150,052
Notes payable:
Senior debentures . . . . . . . . . . . . . . . . . 17,750 17,750 17,750
Other notes payable . . . . . . . . . . . . . . . . -- -- 5,050
-------- -------- --------
Total borrowings . . . . . . . . . . . . . . . . . $505,738 $497,868 $473,352
======== ======== ========
Weighted average rate on borrowings during 5.97% 5.83% 5.92%
period . . . . . . . . . . . . . . . . . . . . . .
Total borrowings as a percent of total deposits . . . 32.60% 31.95% 30.51%
Total borrowings as a percent of total assets . . . . 22.89% 22.79% 22.00%
</TABLE>
As a member of the FHLB of San Francisco, the Company is required to own
capital stock in the FHLB of San Francisco and is authorized to apply for
advances from it. Such borrowings may be made pursuant to several different
credit programs offered by the FHLB. For each credit program, the FHLB
prescribes the acceptable uses to which the advances may be used, as well as
limitations on the size of the advances. Depending upon the credit program, the
FHLB advances bear fixed- or adjustable-interest rates.
The Company utilizes borrowings from the FHLB of San Francisco as its
most significant source of borrowed funds. At December 31, 1997, outstanding
FHLB advances represented 20% of total liabilities and were collateralized by
pledges of the Company's investment in the stock of the FHLB, $415.4 million of
single family residential real estate loans and $126.0 million of
mortgage-backed securities.
Reverse repurchase agreements are sales of securities with a concurrent
commitment to repurchase the same securities at a predetermined price at a
future date, typically within three to six months of the date of the initial
sale. For financial reporting purposes, such arrangements are considered to be
borrowings secured by the securities sold. The securities sold in these
transactions are government, agency and mortgage-backed. Reverse repurchase
transactions are subject to certain risks relating to the financial strength of
the other party to the transaction, the location of the securities held subject
to the transaction and the disparity between the book value of the securities
sold and the amount of funds obtained in the transaction. The Company attempts
to reduce such risks by entering into reverse repurchase agreements only with
primary government securities dealers who are approved by the board of directors
and by regularly obtaining
26
<PAGE> 27
and reviewing financial statements of such dealers.
The following table sets forth the amounts of short-term borrowings and
the weighted average rates thereon for the dates indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------- ------------
At end of year: (Dollars in thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase $74,488 $130,639 $150,052
FHLB advances (short-term) $319,500 $274,479 $95,900
Weighted average interest rate 5.77% 5.47% 5.91%
Maximum outstanding at any end of month during year:
Securities sold under agreements to repurchase $167,686 $140,757 $201,447
FHLB advances (short-term) $319,500 $274,479 $95,900
Average balance outstanding during year:
Securities sold under agreements to repurchase $139,864 $114,546 $165,101
FHLB advances (short-term) $271,643 $199,675 $53,875
Weighted average interest rate on the average
balance during year:
Securities sold under agreements to repurchase 5.69% 5.47% 6.19%
FHLB advances (short-term) 5.77% 5.43% 5.36%
</TABLE>
SUBSIDIARY ACTIVITIES
PFS Corporation, Inc., a wholly-owned subsidiary of the Bank, acts as an
insurance agency for life and hazard insurance policies and serves as trustee
under deeds of trust originated by the Bank. CenFed Investments, Inc., another
wholly-owned subsidiary of the Bank, markets products such as annuities issued
by insurance companies, mutual funds and life insurance. Crescent Bay
Diversified, Inc., also a Bank subsidiary engaged in real estate development
activities in prior years, but has discontinued such activities and has disposed
of all but one property, which had a recorded value of $202,000 at December 31,
1997.
COMPETITION
Savings associations face strong competition both in attracting deposits
and acquiring assets. The Company's most direct competition for deposits has
historically come from other savings associations and from commercial banks
located in its principal market areas in Southern California, including many
large financial institutions which have greater financial and marketing sources
available to them. The Company has also faced significant competition for
investors' funds from short-term money market securities and other corporate and
government securities and mutual funds. During periods of low interest rates,
attracting and retaining deposits has been difficult as savers seek higher rates
of return in alternative investments. The ability of the Company to attract and
retain savings deposits depends on its ability to provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities.
The Company experiences strong competition for real estate loans
principally from other savings associations, commercial banks, mortgage banking
companies and other non-bank lenders. It competes for loans principally through
the interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers.
27
<PAGE> 28
REGULATION
General. CENFED is a savings and loan holding company and, as such, is
subject to the regulations, examination and reporting requirements of the OTS
Director. The Bank is a federally chartered savings bank and is a member of the
FHLB System. Its deposits are insured by the FDIC through the Savings Insurance
Fund (the "SAIF"). The Bank is subject to examination and regulation by the OTS
with respect to most of its business activities, including, among others,
capital standards, general investment authority, deposit taking and borrowing
authority, mergers, establishment of branch offices, and permitted subsidiary
investments and activities.
The Bank is further subject to the regulations of the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") concerning reserves
required to be maintained against deposits, transactions with affiliates,
consumer protection requirements and certain other matters. Financial
institutions, including the Bank and the Bank's real estate subsidiary, are also
subject, under certain circumstances, to potential liability under various
statutes and regulations applicable to property owners generally, including
statutes and regulations relating to the environmental condition of real
property and liability for the remediation of certain adverse environmental
conditions thereof.
The descriptions of the statutes and regulations applicable to CENFED
and its subsidiaries and the effects thereof set forth below and elsewhere in
this document do not purport to be a complete description of such statutes and
regulations and their effects on CENFED and it subsidiaries and also do not
purport to identify every statute and regulation that may apply to CENFED and
its subsidiaries.
The OTS has enforcement authority over savings institutions and their
holding companies that includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist orders and to initiate injunctive
actions and removal and prohibition orders against officers, directors and
certain other persons. In general, enforcement actions may be initiated for
violations of specific laws and regulations and for unsafe or unsound conditions
or practices.
The FDIC also has authority to recommend that the OTS take any
authorized enforcement action with respect to any federally insured savings
institution. If the OTS does not take the recommended action or provide an
acceptable plan for addressing the FDIC's concerns within 60 days after receipt
of a recommendation from the FDIC, the FDIC may take such action if the FDIC
board of directors determines that the institution is in an unsafe or unsound
condition or that failure to take such action will result in the continuation of
unsafe or unsound practices in conducting the business of the institution. The
FDIC may also take action prior to the expiration of the 60-day time period in
exigent circumstances after notifying the OTS.
The FDIC may also terminate the deposit insurance of any insured
depository if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
Deposit Insurance. The FDIC administers two separate deposit insurance
funds. The SAIF is the insurance fund responsible for insuring the deposits of
savings institutions, the deposits of which were formerly insured by the Federal
Savings and Loan Insurance Corporation ("FSLIC"). The Bank Insurance Fund (the
"BIF") is the insurance fund responsible for insuring the deposits of commercial
banks and certain other institutions. The Bank is a member of the SAIF.
Since January 1, 1993, FDIC deposit insurance premiums have been
assessed pursuant to a "risk-based" system. Under this risk-based assessment
system, institutions are classified on the basis of capital ratios, supervisory
evaluations by the institution's primary federal regulatory agency and other
information determined by the FDIC to be relevant. Each of the nine resulting
risk category subgroups of institutions is assigned a deposit insurance premium
assessment rate which currently ranges from 0.06% to 0.33%. Included in this
range of assessments is a .06% charge that is required to repay bonds issued in
connection with the resolution of failed thrifts.
28
<PAGE> 29
The risk-based deposit insurance premiums paid by savings associations
insured by the SAIF and by commercial banks and other institutions insured by
the BIF, which, together with earnings on investments, are the principal funding
sources for the respective insurance funds. The SAIF and BIF are each required
by statute to attain, and thereafter to maintain, a reserve to deposits ratio of
1.25%. The BIF attained its required reserve level in 1995, while the SAIF had
not, because of the BIF's greater premium revenues and the fact that a
substantial portion of the SAIF premiums is required to be used to repay bonds
("FICO Bonds") issued for the purpose of funding the resolution of failed thrift
institutions. In recognition of the fact that the BIF had reached its
statutorily prescribed ratio of reserves to deposits insured, the FDIC
substantially reduced the deposit insurance premium assessment rate to be paid
by commercial banks and other institutions whose deposits are insured by the BIF
on August 8, 1995 but did not reduce the rates for SAIF-insured institutions,
such as CenFed Bank.
The deposit rate premium disparity between BIF-insured institutions and
SAIF-insured institutions resulting from the BIF premium reduction placed
SAIF-insured institutions at a significant competitive disadvantage due to their
higher premium costs. This competitive disadvantage was resolved during 1996
through the passage of legislation that assessed a one-time recapitalization
charge to all SAIF-insured institutions in an amount sufficient to bring the
SAIF to the statutorily prescribed ratio of reserves to deposits insured. In
connection with this legislation, the Company incurred a $9.6 million charge
that is reflected in operating expenses for 1996. Following the
recapitalization, deposit premiums to SAIF-insured institutions decreased
significantly, although SAIF-insured institutions will continue to bear higher
deposit insurance premiums than similarly-rated institutions insured by the BIF.
In 1997, the Company's deposit insurance premium was assessed at $.065 per $100
of insured deposits.
Capital Requirements. The capital regulations of the OTS (the "Capital
Regulations") establish 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 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 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),
non-cumulative 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 included in the calculation of core capital for
regulatory capital purposes. Intangible assets (with certain exceptions and
limitations, including purchased mortgage servicing rights, and certain other
intangibles such as core deposit premiums, which may be included on a limited
basis) must be deducted from core capital. At December 31, 1997, the Bank had
$1.3 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. The Company had a $103,000
capital deductions of this type at December 31, 1997.
29
<PAGE> 30
A savings institution is required to maintain "tangible capital" in an
amount not less than 1.5 % of adjusted total assets. "Tangible capital" is
defined for this purpose to mean core capital less any intangible assets, plus
purchased mortgage servicing rights, subject to certain limitations.
The risk-based capital requirements, among other things, provide that
the capital ratios 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 December 31, 1997, $15.0 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 the institution's core capital.
The OTS, the 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 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, real estate lending activities will not, by itself, be
deemed to constitute an exposure to concentration of credit risk that would
require greater capital levels.
The following table sets forth the Bank's capital position relative to
the Capital Regulations at December 31, 1997:
<TABLE>
<CAPTION>
Tangible Core Risk-based
(In thousands) Capital Capital Capital
--------- --------- ---------
<S> <C> <C> <C>
Equity capital ..................................... $ 137,109 $ 137,109 $ 137,109
Excluded assets:
Intangible assets .................................. (1,298) -- --
Unrealized gain on securities available for sale ... (2,527) (2,527) (2,527)
Excess net deferred tax asset ...................... (1,485) (1,485) (1,485)
Investments in and advances to subsidiary developing
real estate ...................................... (103) (103) (103)
Additional supplementary capital:
General loan valuation allowances .................. -- -- 14,988
--------- --------- ---------
Regulatory capital amounts ........................... 131,696 132,994 147,982
Minimum amounts required ............................. 32,987 66,012 97,832
--------- --------- ---------
Excess over requirement .............................. $ 98,709 $ 66,982 $ 50,150
========= ========= =========
</TABLE>
Federal banking legislation contains prompt corrective action ("PCA")
provisions pursuant to which banks and savings institutions are to be classified
into one of five categories based primarily upon capital adequacy, ranging from
"well capitalized" to "critically undercapitalized" and which require, subject
to certain exceptions, the appropriate federal banking agency to take prompt
corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized." The PCA
provisions expand the powers and duties of the OTS and the FDIC and expressly
authorize, or in many cases direct, regulatory intervention at an earlier stage
than was previously the case.
The OTS regulations implementing the PCA provisions define the five
capital categories as follows:
30
<PAGE> 31
<TABLE>
<CAPTION>
Tangible Total Tier 1 Tier 1
Capital Category: Capital Risk-based Risk-based Leverage
Ratio Ratio Ratio Ratio
- ------------------------------------- -------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Well-capitalized..................... N/A *10% *6% *5%
Adequately capitalized............... N/A *8% *4% *4%
Undercapitalized..................... N/A <8% <4% <4%
Significantly undercapitalized....... N/A <6% <3% <3%
Critically undercapitalized.......... *2% N/A N/A N/A
CenFed Bank, at December 31, 1997.... N/A 12.10% 10.90% 6.04%
</TABLE>
- ----------
* Less than or equal to symbol.
The OTS also has authority, after an opportunity for a hearing, to downgrade an
institution from "well capitalized" to "adequately capitalized," or to subject
an "adequately capitalized" or "undercapitalized" institution to the supervisory
actions applicable to the next lower category, for supervisory concerns. At
December 31, 1997, the Bank was a well capitalized institution.
Under the PCA provisions, an institution that is deemed to be
undercapitalized is subject to mandatory restrictions on capital distributions
(including cash dividends) and management fees, increased supervisory monitoring
by the OTS, growth restrictions, restriction on certain expansion proposals and
capital restoration plan submission requirements. If an institution is deemed to
be significantly undercapitalized, all of the foregoing mandatory restrictions
apply, as well as a restriction on compensation paid to senior executive
officers. Furthermore, the OTS must take one or more of the following actions:
(i) require the institution to sell shares (including voting shares) or
obligations; (ii) require the institution to be acquired or merge (if one or
more grounds for the appointment of a conservator or receiver exist); (iii)
implement various restrictions on transactions with affiliates; (iv) restrict
interest rates on deposits; (v) impose further asset growth restrictions or
require asset reductions; (vi) require the institution or a subsidiary to alter,
reduce or terminate activities considered risky; (vii) order a new election of
directors; (viii) dismiss directors and/or officers who have held office for
more than 180 days before the institution became undercapitalized; (ix) require
the hiring of qualified executives; (x) prohibit correspondent bank deposits;
(xi) require the institution to divest or liquidate a subsidiary in danger of
insolvency or a controlling company to divest any affiliate that poses a
significant risk, or is likely to cause a significant dissipation of assets or
earnings; (xii) require a controlling company to divest the institution if it
improves the institution's financial prospects; or (xiii) require any other
action the OTS determines fulfills the purposes of the PCA provisions.
Loans to One Borrower. Savings institutions are generally subject to the
same loans to one borrower limitations that are applicable to national banks.
With certain limited exceptions, the maximum amount that a savings institution
may lend to one borrower (including certain related persons or entities of such
borrower) is an amount equal to 15% of the savings institution's unimpaired
capital and unimpaired surplus, plus an additional 10% for loans fully secured
by readily marketable collateral. Real estate is not included within the
definition of "readily marketable collateral" for this purpose. The loan to one
borrower limitation for national banks, to which the OTS limit is required by
statute to conform, to, among other things, define the term "unimpaired capital
and unimpaired surplus" by reference to an institution's regulatory capital, and
also to include in the basic 15% of capital lending limit that portion of an
institution's general valuation allowances that is not includable in the
institution's regulatory capital. At December 31, 1997, the maximum amount which
the Bank could lend to any one borrower (including related persons and entities)
under current loans to one borrower the limit was $22.3 million. At that date,
the largest aggregate amount of loans which the Bank had outstanding to any one
borrower was $7.7 million.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB system, the Bank is
required to own capital stock in its regional FHLB, the FHLB of San Francisco,
in an amount at least equal to the greater of 1% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations at the end of each calendar year, or 5% of its
31
<PAGE> 32
outstanding FHLB advances (borrowings).
Liquidity. Federal regulations require savings institutions to maintain
balances of liquid assets (including cash, certain time deposits, bankers'
acceptances, and specified United States Government, state or federal agency
obligations) at a specified percentage of the average daily balance of the
institution's net withdrawable accounts plus short-term borrowings. This
liquidity requirement may be changed from time to time by the OTS Director to an
amount within a range of 4% to 10% of such accounts and borrowings depending
upon economic conditions and the deposit flows of savings institutions. In 1997,
the OTS Director reduced the liquidity requirement from 5% to 4%. In addition,
the OTS Director eliminated a separate short-term liquidity requirement.
Monetary penalties may be imposed for failure to meet liquidity ratio
requirements. For the calculation period including December 31, 1997, the
average liquidity ratio of the Bank was 8.2% which exceeded the applicable
requirements.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires each savings institution, as well as other lenders, to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The CRA
also requires the OTS to assess, as part of its examination of a savings
institution, the performance of the institution in meeting the credit needs of
its communities and to take such assessments into consideration in reviewing
applications for mergers, acquisitions and other transactions. An unsatisfactory
CRA rating may be the basis for denying such application. Community groups have
successfully protested applications on CRA grounds. In connection with the
assessment of a savings institution's CRA performance, the OTS will assign a
rating of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The Bank was rated "satisfactory" in its last CRA exam.
Qualified Thrift Lender Test. Savings institutions regulated by the OTS
are subject to a qualified thrift lender ("QTL") test which requires such an
institution to invest at least 65% of its portfolio assets (as defined) in
"qualified thrift investments." Qualified thrift investments include, in
general, loans, securities and other investments that are related to housing and
certain other permitted thrift investments. A savings institution's failure to
remain a QTL may result in: (1) limitations on new investments and activities;
(2) imposition of branching restrictions; (3) loss of FHLB borrowing privileges;
and (4) limitations on the payment of dividends. At December 31, 1997, the Bank
was in compliance with its QTL test requirements.
Service Corporations. Federal regulations permit federal savings
institutions to invest in the capital stock, obligations or other securities of
certain types of subsidiaries (referred to as "service corporations") and to
make loans to these corporations (and to projects in which they participate) in
an aggregate amount not to exceed 2% of the institution's assets, plus an
additional 1% of assets if such investment is used for community development or
inner-city purposes. Additionally, federal regulations permit an institution
having regulatory capital in an amount at least equal to the minimum
requirements set forth in the applicable OTS regulations to make additional
loans to such subsidiaries in an aggregate amount which, generally, may not
exceed 100% of the regulatory capital in the case of subsidiaries of which the
institution owns or controls not more than 10% of the capital stock of certain
limited partnership joint ventures and 50% of regulatory capital in the case of
certain other subsidiaries or joint ventures. Federal savings institutions are
also permitted to invest in and maintain so-called "operating subsidiaries"
(generally, subsidiaries that are engaged solely in activities the parent
institution could conduct directly and meeting certain other criteria) free of
such investment limitations.
Classification of Assets. Savings institutions are required to review
their assets on a regular basis and classify them as "special mention,"
"substandard," "doubtful," or "loss," if warranted. If any assets are classified
as special mention, substandard or doubtful, the institution must establish a
prudent general allowance for loan losses. If an asset is classified as a loss,
the institution must either establish a specific valuation allowance equal to
the amount classified as loss or charge off such amount. An asset which does not
currently warrant classification as substandard but which possesses weaknesses
or deficiencies deserving close attention is required to be designated as
"special mention." In addition, a savings institution is required to set aside
adequate valuation allowances to the extent that any affiliate possesses assets
which pose a risk to the savings institution. The institution's OTS Regional
Director has the authority to approve, disapprove or modify any asset
classification and amount established as an allowance pursuant to such
32
<PAGE> 33
classification. In addition, a savings institution is required to record as
liabilities off-balance sheet items, such as letters of credit, when loss
becomes probable or estimable.
Savings and Loan Holding Company Regulation. As a savings bank holding
company, CENFED is subject to the savings and loan holding company regulations.
Among other things, CENFED is generally prohibited, either directly or
indirectly, from acquiring control of any other savings institutions or savings
and loan holding company, absent prior approval of the OTS, and from acquiring
more than 5% of the voting stock of any savings association or savings and loan
holding company which is not a subsidiary of CENFED.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Bank or CENFED. Control is conclusively presumed to exist if,
among other things, a person acquires more than 25% of any class of voting stock
of the institution or holding company or controls in any manner the election of
a majority of the directors of the insured institution or the holding company.
Savings and loan holding companies which control only one savings
institution are exempt, if the institution meets its QTL test, from restrictions
on the conduct of unrelated business activities that are applicable to other
savings and loan holding companies and that are similar to the restriction on
the conduct of unrelated business activities applicable to bank holding
companies under the Bank Holding Company Act.
Restriction on Dividends and Other Capital Distributions. Savings
institution subsidiaries of holding companies generally are required to provide
advance notice to their OTS Regional Director of any proposed declaration of a
dividend on the institution's stock. Any dividend declared within the notice
period, or without giving the prescribed notice, is invalid.
Limitations are imposed under OTS regulations on "capital distributions"
by savings institutions, including cash dividends, payments to repurchase or
otherwise acquire an institution's shares, payments to stockholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulations grant the greatest flexibility to well-capitalized
institutions.
An institution that meets its capital requirements is permitted to make
capital distributions during a calendar year of up to the greater of (i) 100% of
its net income during the calendar year, plus the amount that would reduce by
not more than one-half its "surplus capital ratio" at the beginning of the
calendar year (the amount by which the institution's actual capital exceeded its
fully phased-in capital requirement at that date) or (ii) 75% of its net income
over the most recent four-quarter period. An institution that does not meet its
minimum regulatory capital requirements prior to, or on a pro forma basis after
giving effect to, a proposed capital distribution is not authorized to make any
capital distributions unless it receives prior written approval from the OTS or
the distributions are in accordance with the express terms of an approved
capital plan.
The OTS retains the authority to prohibit any capital distribution
otherwise authorized under the regulation if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulation also
states that the capital distribution limitations apply to direct and indirect
distributions to affiliates, including those occurring in connection with
corporation reorganizations. At December 31, 1997, the Bank was a Tier 1
institution.
Lending Standards. The OTS and the other federal banking agencies have
jointly adopted uniform rules on real estate lending and related Interagency
Guidelines for Real Estate Lending Policies. The uniform rules require that
institutions adopt and maintain comprehensive written policies for real estate
lending. The policies must reflect consideration of the Interagency Guidelines
and must address relevant lending procedures, such as loan to value limitations,
loan administration procedures, portfolio diversification standards and
documentation, approval and reporting requirements. Although the uniform rules
do not impose specific maximum loan to value ratios, the related Interagency
Guidelines state that such ratio limits established by individual institutions'
boards of directors generally
33
<PAGE> 34
should not exceed levels set forth in the Guidelines, which range from a maximum
of 65% for loans secured by unimproved land to 85% for improved property. No
limit is set for single family residence loans, but the Guidelines state that
such loans exceeding a 90% loan to value ratio should have private mortgage
insurance or some form of credit enhancement. The Guidelines further permit a
limited amount of loans that do not conform to these criteria.
TAX MATTERS
Federal Income Tax. The Company's maximum federal corporate income tax
rate is 35%. In addition to the regular corporate income tax, corporations,
including qualifying savings association, are subject to an alternative minimum
tax. This 20% tax is computed with respect to the Bank's regular taxable income
(with certain adjustments) as increased by tax preference items and will apply
if it exceeds the Bank's regular tax liability.
Until passage of legislation in 1996, savings and loan associations that
met certain definitional tests as prescribed by the Internal Revenue Code
("Code") were allowed a bad debt deduction, when computing federal income taxes,
equivalent to 8% of taxable income, subject to a minimum tax for preference
items. Alternatively, a deduction based upon actual experience losses of the
Company could be taken if it resulted in a greater deduction. Both houses of
Congress passed legislation in 1996 that repealed the tax rules formerly
applicable to bad debt reserves of thrift institutions for taxable years
beginning after December 31, 1995. Pursuant to the legislation, the Company was
required to change its tax method of accounting for bad debts from the reserve
method formerly permitted to the "specific charge-off" method under which tax
deductions are permissible for bad debts only as and to the extent that the
loans become wholly or partially worthless. At December 31, 1997, the Company
had a $23 million tax bad debt reserve that was accumulated using the provisions
of the tax law prior to the 1996 changes which accumulated reserve is subject to
recapture in whole or in part in future years upon the occurrence of certain
events, such as a distribution to shareholders in excess of the Company's
current and accumulated earnings and profits, a redemption of shares, or upon a
partial or complete liquidation of the Company.
The Bank's tax returns have been audited by the Internal Revenue Service
through its taxable year ended June 30, 1991.
California Tax. For California franchise tax purposes, savings
associations are taxed as "financial corporations." Financial corporations are
taxed at the general corporate franchise tax rate plus an "in lieu" rate based
on their exemption from personal property and business license taxes. For the
year ended December 31, 1997, the California franchise tax rate applicable to
financial corporations was approximately 10.8%.
For additional information regarding taxation, see the Notes to
Consolidated Financial Statements.
EMPLOYEES
At December 31, 1997, CENFED and its subsidiaries had a total of 260
full-time employees and 121 part-time employees. The Company provides its
employees with a comprehensive benefits program, including basic and major
medical insurance, life insurance, sick leave, a defined contribution retirement
plan and an employee stock ownership program. Employees are not represented by
any union or collective bargaining group and the Company considers its employee
relations to be good.
34
<PAGE> 35
ITEM 2. PROPERTIES
The following table sets forth the locations of the offices of CENFED
and its subsidiaries, as well as certain additional information relating to such
offices, as of December 31, 1997. The Company believes these facilities are
suitable for its current needs.
<TABLE>
<CAPTION>
Year Book Square Lease
Address Opened Value Footage Title Termination
------- ------ ----- ------- ----- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
PASADENA CORPORATE OFFICE
199 North Lake Avenue
Pasadena, CA 91101 1968 $ 3,281 43,434 Owned
ANAHEIM
198 W. Lincoln
Anaheim, CA 92805 1921 $ 564(1) 10,000 Owned
BRENTWOOD
11726 San Vicente Boulevard
Los Angeles, CA 90049 1991 $ 104 4,081 Leased February 28, 2003
CHINO
14808 Pipeline Avenue
Chino, CA 91709 1978 $ 684 4,828 Owned
CITY OF INDUSTRY
800 Puente Hills Mall
City of Industry, CA 91748 1974 $ 70 3,500 Leased December 31, 2004
CYPRESS
10081 Valley View Street Ground
Cypress, CA 90630 1975 $ 9 3,000 Lease August 31, 2005
HEMET (EAST)
1700 East Florida Ave
Hemet, CA 92544 1995 $ 74(1) 10,364 Leased May 16, 2001
HEMET (WEST)
1745 West Florida Ave
Hemet, CA 92545 1973 $ 445(1) 6,462 Owned
LA CANADA
707 Foothill Boulevard
La Canada, CA 91011 1983 $ 123 20,240 Leased April 1, 2001
MARINA DEL REY
4375 Glencoe Avenue
Marina Del Rey, CA 90291 1974 $ 62 3,522 Leased December 31, 2001
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C> <C> <C> <C> <C>
PASADENA (EAST)
3677 East Foothill Boulevard Ground
Pasadena, CA 91107 1957 $ 157 4,816 Lease June 4, 2004
PASADENA (DOWNTOWN)
315 East Colorado Boulevard
Pasadena, CA 91101 1993 $ 257 9,850 Leased October 8, 2008
PASADENA (WEST)
161 West California Boulevard
Pasadena, CA 91105 1979 $ 64 2,637 Leased June 30, 2003
PLACENTIA
1300 North Kraemer Boulevard
Placentia, CA 92670 1975 $ 341 4,346 Owned
RIVERSIDE
3825 Tyler Avenue
Riverside, CA 92503 1970 $1,354(1) 6,635 Owned
RIVERSIDE CENTRAL
6600 Magnolia Avenue
Riverside, CA 92506 1995 $ 376 9,200 Leased February 28, 2009
SANTA MONICA
501 Santa Monica Boulevard
Santa Monica, CA 90401 1975 $ 47 9,918 Leased February 28, 2001
SUN CITY
27190 Sun City Boulevard
Sun City, CA 92586 1995 $ 30(1) 10,681 Leased May 6, 2001
GOVERNMENT FUNDING LOAN CENTER
6255 Sunset Boulevard
2nd Floor, Suite 215 & 217
Los Angeles, CA 90028 1995 $ 0 691 Leased Month-to-Month
GOVERNMENT FUNDING LOAN CENTER
999 Baker Way, Suite 290
San Mateo, CA 94404 1996 $ 0 1,043 Leased August 31, 1999
</TABLE>
- ----------
(1) The book values of these branches acquired from UCSB have been presented
before the application of negative goodwill. For financial statement
purposes, the book values have been written down to zero at December 31,
1994.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not parties to any pending legal
proceedings, other than ordinary routine litigation incidental to their
business. None of such litigation is expected to have a material impact on the
Company.
36
<PAGE> 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of and Market for Common Stock. The common stock of CENFED is
traded in the over-the-counter market and is quoted by the National Association
of Securities Dealers Automated Quotation System-National Market System
("NASDAQ/NMS") under the trading symbol of "CENF." The following table sets
forth for the periods indicated the range of high and low closing sale prices of
CENFED common stock as quoted on the NASDAQ/NMS, as adjusted to reflect 10%
stock dividends that took effect in May 1996 and May 1997:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
First Quarter .......................... $32.73 $25.91
Second Quarter ......................... $34.75 $26.38
Third Quarter .......................... $37.00 $32.38
Fourth Quarter ......................... $45.38 $32.38
YEAR ENDED DECEMBER 31, 1996:
First Quarter .......................... $20.66 $18.59
Second Quarter ......................... $21.28 $18.86
Third Quarter .......................... $22.73 $19.09
Fourth Quarter ......................... $27.62 $21.82
</TABLE>
Dividends. The following table sets forth the cash dividends per Common
Share declared and paid by the Company during the last two fiscal years,
adjusted to reflect 10% stock dividends that took effect in May 1996 and 1997:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31, 1997:
First Quarter ......................... $.082
Second Quarter ........................ .090
Third Quarter ......................... .090
Fourth Quarter ........................ .090
YEAR ENDED DECEMBER 31, 1996:
First Quarter ......................... $.075
Second Quarter ........................ .082
Third Quarter ......................... .082
Fourth Quarter ........................ .082
</TABLE>
The Board of Directors contemplates the payment of future dividends only if
warranted by the Company's consolidated earnings and financial condition and
other relevant factors, including regulatory restrictions and tax consequences.
There can be no assurance regarding the timing or the amount, if any, of future
dividends.
The principal source of income to CENFED consists of dividends received from
the Bank. Consequently, future declarations of cash dividends by CENFED will
depend principally upon dividend payments by CenFed Bank to CENFED, which
payments are subject to regulatory restrictions. CenFed Bank is subject to the
restriction, among others under such regulations, that it will not be permitted
to declare or pay a cash dividend on or repurchase any of its capital stock if
the effect thereof
37
<PAGE> 38
would be to cause the regulatory capital of CenFed Bank to be reduced below the
amount required for the liquidation account established in connection with the
conversion from mutual to stock form. See "Item 1. Business -- Regulation --
Restrictions on Dividends and Other Capital Distributions." In addition,
distributions by CenFed Bank to its stockholder in excess of current earnings
and profits for federal income tax purposes may result in a federal recapture
tax. See "Item 1. Business -- Tax Matters."
Number of Holders of Common Stock. As of February 28, 1998, the number of
holders of record of CENFED's Common Stock was 562. The majority of the
Company's stock is held in "street name" by nominees for the beneficial owners
thereof.
38
<PAGE> 39
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share amounts) At December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets .............................. $2,209,038 $2,184,647 $2,155,239 $1,849,683 $1,488,854
Loans held for investment, gross (1):
Residential and commercial real estate .... $1,239,682 $1,293,387 $1,409,705 $1,231,249 $ 849,378
Small business loans ...................... 105,117 92,779 71,423 -- --
Construction .............................. 463 2,375 6,321 6,086 1,557
Home equity and property improvement ...... 61,580 1,929 2,235 2,763 3,982
Consumer and other ........................ 3,128 2,483 2,887 3,928 2,579
---------- ---------- ---------- ---------- ----------
Total gross loans held for investment .... $1,409,970 $1,392,953 $1,492,571 $1,244,026 $ 857,496
========== ========== ========== ========== ==========
Mortgage-backed securities ................ $ 417,393 $ 442,015 $ 341,288 $ 315,753 $ 375,905
Intangible assets, net .................... $ 203 $ 205 $ 248 $ 701 $ 3,745
Total deposits ............................ $1,551,240 $1,558,470 $1,551,329 $1,310,505 $1,040,181
Total borrowings .......................... $ 505,738 $ 497,868 $ 473,352 $ 436,112 $ 354,658
Equity capital ............................ $ 135,606 $ 113,818 $ 104,552 $ 91,221 $ 86,506
Equity to assets ratio .................... 6.14% 5.21% 4.85% 4.93% 5.81%
</TABLE>
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income .............. $ 164,410 $ 157,083 $ 136,449 $ 99,137 $ 86,488
Interest expense .......................... 113,179 105,924 97,964 60,141 47,145
---------- ---------- ---------- ---------- ----------
Net interest income ....................... 51,231 51,159 38,485 38,996 39,343
Provisions for loan losses ................ 6,000 8,050 2,900 2,300 4,075
---------- ---------- ---------- ---------- ----------
Net interest income after provisions for
loan losses............................... 45,231 43,109 35,585 36,696 35,268
========== ========== ========== ========== ==========
Non-interest income ....................... 8,607 12,633 7,254 7,363 4,669
Operating expenses ........................ 33,040 44,067 33,151 32,069 25,527
---------- ---------- ---------- ---------- ----------
Net earnings .............................. $ 13,790 $ 11,338 $ 7,197 $ 8,998 $ 8,608
========== ========== ========== ========== ==========
PER SHARE DATA:
Net earnings, basic ....................... $ 2.37 $ 2.03 $ 1.32 $ 1.73 $ 1.72
Net earnings, diluted ..................... $ 2.27 $ 1.92 $ 1.26 $ 1.66 $ 1.66
Dividends paid ............................ $ 0.35 $ 0.31 $ 0.25 $ 0.16 $ 0.14
Dividends paid as % of basic earnings
per share................................. 14.77% 15.27% 18.94% 9.25% 8.14%
Book value, at end of year ................ $ 22.58 $ 20.07 $ 18.96 $ 16.89 $ 17.29
Tangible book value, at end of year ....... $ 22.55 $ 20.04 $ 18.92 $ 16.76 $ 16.54
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Return on average assets .................... 0.61% 0.53% 0.36% 0.55% 0.66%
Return on average equity .................... 11.39% 10.54% 7.46% 10.21% 11.13%
Average tangible equity to average assets ... 5.34% 5.00% 4.82% 5.14% 5.63%
Interest rate spread for period ............. 2.24% 2.37% 2.01% 2.53% 3.16%
Net yield on average interest earning
assets..................................... 2.42% 2.54% 2.11% 2.60% 3.19%
Average interest earning assets to average
interest bearing liabilities ................ 103.54% 103.33% 101.89% 101.79% 101.01%
Net interest income after provisions for
loan losses to other expenses ............... 136.90% 97.83% 107.34% 114.43% 138.16%
Other expenses to average assets (2) ........ 1.46% 2.05% 1.65% 1.95% 1.95%
Nonperforming assets to total assets (3) .... 0.92% 1.46% 0.98% 1.10% 1.07%
Loan originations (4) ....................... $142,927 $138,579 $252,416 $567,869 $347,614
Number of full service banking offices ...... 18 18 18 20 18
</TABLE>
(1) Loans held for investment are presented before adjustments for undisbursed
loan funds, unearned fees, discounts and premiums, and allowances for
losses.
(2) For the year ended December 31, 1996, operating expenses included a $9.1
non-recurring charge in connection with the recapitalization of the Savings
Association Insurance Fund. Without this one-time charge, the ratio would
have been 1.63%.
(3) Nonperforming assets include nonaccrual loans and restructured loans, real
estate owned, leases receivable delinquent 90 days or more and repossessed
automobiles.
(4) Originations in the years ended December 31, 1997, 1996, 1995, 1994 and 1993
included $21.0 million, $36.5 million, $48.9 million, $40.0 million and
$78.0 million, respectively, of loans held for sale.
40
<PAGE> 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AND ASSET QUALITY
OPERATING STRATEGY
Prior to its decision to enter into a plan of merger with Golden State,
the Company's operating strategy consisted of three primary elements: (i)
acquiring assets providing net returns that satisfy the Company's rate of return
requirements; (ii) focusing on retail deposit gathering as the principal source
of funding; and (iii) increasing the efficiency of Company operations. Pursuant
to this operating strategy, the Company emphasized an asset acquisition program
that focused on lines of business which management believed had higher
risk-adjusted returns than residential mortgage lending.
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 at satisfactory returns. It also
identifies current lines of business that no longer meet return requirements and
exits those businesses. This strategy has been realized through the Company's
entry into small business lending, primarily under lending programs sponsored by
the United States Small Business Administration ("SBA"), and through the
discontinuation of single family lending operations. The Company offers single
family real estate loans through a referral relationship with a lender whose
lending officers utilize office space in the Company's retail delivery system.
The Company purchases packages of single family loans from other institutions
from time to time. The Company offers multifamily and commercial real estate
loans (collectively referred to as "commercial real estate loans"), which
management believes meet its return objectives. Small business loans and
commercial real estate loans involve more credit risk than does single family
lending and the Company's emphasis on these lines of business will increase the
credit risk in the its loan portfolio. The increased credit risk requires higher
levels of provisions for loan losses, but management believes the credit cost
will be more than offset by higher returns.
The mix of loans originated and purchased has been significantly altered
by the strategic emphasis on risk-adjusted returns. The following charts compare
the product mix of loans originated and purchased in 1995 (excluding the GFC
purchase) and 1997:
PIE CHART
<TABLE>
<CAPTION>
1995 1997
---- ----
<S> <C> <C>
Single family....................$276,203 $79,319
Commercial.......................$ 52,268 $93,039
Small business...................$ 31,213 $51,184
Equity/other.....................$ 3,798 $79,644
</TABLE>
Focusing on retail deposit gathering as the principal source of funding.
The Company believes that deposits
41
<PAGE> 42
gathered through its retail delivery system are the most stable and economical
source of funding for its operations in the long run. To increase the size of
its retail delivery offices and gain greater name recognition in the highly
competitive Southern California marketplace, the Company uses consolidations,
acquisitions, sales and exchanges of deposits. In 1994, the Company acquired
United California Savings Bank and, as a result, gained entrance into Riverside
County and strengthened its presence in Orange County. In 1994 and 1995, the
Company also entered into branch exchanges with competitors that led to a
decrease in the numbers of retail offices while maintaining total retail deposit
balances. The combination of these branching transactions have enabled the
Company to achieve an average deposit portfolio of $74.2 million per retail
delivery office.
Focusing on the efficiency of Company operations. The Company has
achieved economies of scale through cost containment and asset growth. Asset
growth and branching opportunities in recent years have been significant
contributors to the achievement of these objectives. The ratio of general and
administrative expenses (excluding the deposit insurance recapitalization
premium paid in 1996) to average assets--one traditional measure of
efficiency--has fallen in each year, as illustrated in the following chart:
BAR GRAPH
<TABLE>
<CAPTION>
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Assets (billions).......... $1.65 $2.00 $2.15 $2.26
G&A ratio.......................... 1.95% 1.65% 1.63% 1.46%
</TABLE>
Management believes that its cost containment efforts have led to a cost
structure that cannot be significantly reduced so further improvements in the
Company's efficiency will be dependent upon asset growth.
DECISION TO ENTER INTO PLAN OF MERGER
The Company entered into an Agreement and Plan of Merger with Golden
State Bancorp Inc. ("GSB") on August 17, 1997. The Company's decision to
consider a merger was the result of an ongoing evaluation process that began in
1994 when the Company engaged an investment banking firm to provide financial
advice on strategic direction and business combination prospects. In connection
with the annual strategic planning process for 1997, the Company discussed a
number of factors relative to the likelihood of success in achievement of its
financial objectives, including: (i) asset growth and business line expansion
that would be required for the Company to achieve its goals, including a 15%
return on equity, and risks associated with those goals, (ii) acquisition
premiums being paid in the current market and the adverse impact thereof on the
prospects of CENFED's success in acquiring another financial institution, (iii)
competitive forces that make achievement of growth objectives dependent on
significant investments in marketing and technology with no assurance of
success, and (iv) record premiums being paid for thrift institutions, as
measured by ratios of price-to-earnings, price-to-book value and
price-to-tangible book value.
The Company entered into the Agreement and Plan of Merger with GSB
because it determined that such a merger was in the best interest of
shareholders. In reaching this determination, the Company's directors
considered, among other things: (i) the fairness of the consideration, (ii)
risks to achieving a business strategy based upon independence, (iii) benefits
to customers and shareholders of a business combination with GSB, and (iv) the
reputation, business practices, strategic objectives and financial condition of
GSB. The list of factors considered is not exhaustive, but includes several of
the material factors considered by the Company's directors and executive
management.
More details of the merger agreement may be found in the Definitive
Proxy Statement filed pursuant to Schedule
42
<PAGE> 43
14(a) of the Securities Exchange Act of 1934 which is incorporated herein by
reference.
The effect of the Agreement and Plan of Merger on the execution of the
Company's business plan for 1997 was, in general, to replace the asset
acquisition and growth objectives with actions intended to maintain the
franchise value of the Company and further the consummation of the merger. Among
the financial consequences of the change in business strategy were: (i) limited
asset growth in 1997, (ii) cancellation of the development and introduction of
certain products and services originally intended to further diversify the
Company's assets and liabilities, and (iii) incurrence and inclusion of
substantial merger-related expenditures that are reflected in net earnings.
EARNINGS PERFORMANCE
Management refines its evaluation of the Company's earnings performance
by excluding certain "non-core" items which obscure the performance of its core
lines of business. Core earnings exclude gains and losses on sales of
investments and mortgage-backed securities and nonrecurring adjustments. The
following table reconciles the Company's net earnings as reported in the
consolidated statements of operations to core earnings, as defined by the
Company:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
(In thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net earnings .............................. $ 13,790 $ 11,338 $ 7,197
Non-core elements, after taxes:
Gains on sales of investments and MBS ... 1,177 652 48
Income (loss) from real estate operations (896) 1,907 (396)
SAIF recapitalization assessment ........ -- (5,281) --
Extraordinary items ..................... -- (364) --
Nonrecurring adjustments ................ (1,147) (620) (119)
Adjustments to income taxes ............. -- 3,356 --
-------- -------- --------
Non-core items, after taxes ......... (866) (350) (467)
-------- -------- --------
CORE EARNINGS ........................ $ 14,656 $ 11,688 $ 7,664
======== ======== ========
Core earnings per share, diluted ..... $ 2.41 $ 1.98 $ 1.34
======== ======== ========
</TABLE>
Summarized statements of income, on a core-earnings basis, are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
(In thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net interest income ............ $ 51,231 $ 51,159 $ 38,485
Provisions for loan losses ..... (6,000) (8,050) (2,900)
Non-interest income ............ 8,123 8,221 7,854
Operating expenses ............. (31,063) (33,893) (32,945)
Income taxes ................... (7,635) (5,749) (2,830)
-------- -------- --------
Core earnings ................ $ 14,656 $ 11,688 $ 7,664
======== ======== ========
</TABLE>
Improvement in core earnings in 1997, compared to 1996, was primarily
attributable to lower provisions for losses and reductions in operating expenses
due to lower deposit insurance premiums. Merger-related expenses, totaling $1.1
million after taxes, were excluded from core earnings for 1997.
Core earnings in 1996, compared to 1995, increased by 52% primarily due
to a 32% increase in net interest income in 1996. Greater net interest income in
1996 than in 1995 more than offset increases in provisions for loan losses,
operating expenses and income taxes.
43
<PAGE> 44
Changes in elements of the income statement are described in greater
detail in "--Results of Operations."
ANALYSIS OF STATEMENT OF FINANCIAL CONDITION
Consolidated assets of the Company at December 31, 1997 increased by
$24.4 million, or 1.1%, from the end of the previous year. The Company's
original business plan for 1997, based on the assumption that the Company would
remain an independent entity, projected greater asset growth than was achieved
during the year. In connection with the announcement of the Plan of Merger with
GSB in August 1997, the Company's emphasis on asset growth was replaced with a
focus on maintaining the franchise while simultaneously taking steps to
consummate the merger. In 1996, the Company's consolidated assets increased by
$29.6 million, or 1.4%, from the end of 1995. Limited growth in 1996 was
predominantly due to a decrease in originations and purchases of single family
loans, which led to loan portfolio shrinkage.
The following tables sets forth significant changes in the Company's
statement of financial condition:
<TABLE>
<CAPTION>
INCREASE (DECREASE) AT DECEMBER 31,
-----------------------------------
(In thousands) 1997 VS. 1996 1996 VS. 1995
-------------- ---------------
<S> <C> <C>
Loans held for investment, net ............... $ 17,481 ($ 100,787)
Mortgage-backed securities ................... (24,622) 100,727
Investment securities ........................ 28,080 27,941
All other, net ............................... 3,452 1,738
------------ ------------
Change in total assets ................... $ 24,391 $ 29,619
============ ============
Customer deposit accounts .................... ($ 7,230) $ 7,141
Borrowings ................................... 7,870 24,516
Stockholders' equity ......................... 21,788 9,477
All other, net ............................... 1,963 (11,515)
------------ ------------
Change in total liabilities and equity ... $ 24,391 $ 29,619
============ ============
</TABLE>
Loans Held for Investment. Loans held for investment increased by $17.5
million during 1997, compared to $100.8 million of net shrinkage in the
portfolio in 1996. During the year, the Company's portfolio of home equity
loans, commercial real estate loans and small business loans increased while its
single family first mortgage portfolio declined. Home equity loan balances
increased by $59.7 million at the end of 1997, compared to 1996, due to a
purchase of $79.6 million of loans in the first quarter of the year. Commercial
real estate and small business loan balances increased by $57.4 million and
$12.3 million, respectively, during 1997. Loan originations for both loan types
increased in 1997, compared to 1996. Single family first mortgages decreased by
$111.1 million in 1997 due to decreases in originations volume during the year.
Loans held for investment decreased by $100.8 million during 1996,
compared to an increase of $260.0 million during 1995. In 1996, the Company's
originations and purchases of loans held for investment totaled $123.7 million,
compared to $384.6 million in 1995. The Company's discontinuation of
wholesale-based single family lending at the end of 1995 led to a $115.7 million
decline in single family originations. In addition, the Company's volume of loan
purchases decreased by $161.3 million due to a lack of suitable loan packages at
prices that would result in an acceptable risk-adjusted return. The Company's
commercial real estate operations and small business lending operations
generated loan origination increases of $3.5 million and $16.5 million,
respectively, in 1996 compared to 1995.
Mortgage-backed securities. Historically, the Company has purchased
mortgage-backed securities to meet asset growth or mix objectives when it
couldn't meet those objectives through loan originations and purchases. The
Company sought to maximize the size of its asset base, within the constraints
necessary to maintain its regulatory designation as a "well-capitalized"
institution. The Company designates its mortgage-backed securities as available
for sale and may
44
<PAGE> 45
eventually sell them and use the proceeds to fund loans. After entering into the
Agreement and Plan of Merger in 1997, asset growth objectives were moderated. As
a result, total mortgage-backed securities decreased.
During 1996, the Company's portfolio of mortgage-backed securities
increased by $100.7 million, as the Company was unable to originate sufficient
loan volumes during the year to meet its growth objectives.
Investment Securities. With the exception of municipal tax advantaged
securities and Federal Home Loan Bank of San Francisco stock, the Company's
investment securities are generally acquired to meet regulatory liquidity
requirements. In 1997, investment securities grew by $28.1 million, comprised of
$15.5 million of liquidity-qualified investments, $7.4 million of municipal
securities and $5.0 million of FHLB stock. The growth in liquidity investments
occurred prior to the reduction in the liquidity requirement from 5% to 4% late
in 1997.
During 1996, the Company's investment security portfolio increased by
$27.9 million, primarily due to an increase in holdings of U.S. Government
obligations. In connection with an interest rate reduction strategy, the Company
sold fixed rate mortgage-backed securities during 1996 and, in certain cases,
reinvested the proceeds in U.S. Government obligations.
Customer Deposit Accounts. As stated in its operating strategy, the
Company believes that customer deposit accounts are the most valuable source of
funding, in the long run. In 1997, customer deposit accounts from retail sources
increased by $3.0 million, but a $10.2 million decrease in wholesale-sourced
accounts led to a net decrease in deposits. During 1997, retail transaction
account balances, which generally bear a lower rate of interest than time
deposits, increased by $21.2 million.
During 1996, customer deposit account balances increased by $7.1
million, consisting of a $19.3 million increase in brokered account balances and
a $12.2 million decrease in retail account balances. Although total retail
account balances declined, the Company's retail transaction account balances
increased by $27.3 million as a result of the Company's greater emphasis on
these types of accounts.
Borrowings. When it is unable to build its customer deposit account base
to levels required to fund assets, the Company utilizes borrowings. The Company
primarily utilizes borrowings from the FHLB of San Francisco and securities sold
under agreements to repurchase to meet funding needs. During 1997, total
borrowings increased by $7.9 million -- an amount that offset the decrease in
deposits -- which consisted of a $64.0 million increase in FHLB advances and a
$56.2 million decrease in securities sold under agreements to repurchase.
In 1996, borrowing increased by $24.5 million, consisting of $49.0
million of additional FHLB advances, a decrease of $19.4 million of securities
sold under agreements to repurchase, and a $5.1 million decrease in notes
payable.
Stockholders' Equity. Stockholders' equity increased by $21.8 million in
1997, consisting primarily of $11.8 million of net earnings after deducting cash
dividends paid, a $ 2.8 million improvement in the unrealized gain on securities
available for sale, and $5.2 million of paid in capital growth in connection
with exercises of stock options. The volume of stock options exercises increased
during 1997 due to the announced Plan of Merger with GSB. Stockholders' equity
increased by $9.5 million in 1996, due primarily to $11.3 million of net
earnings that was reduced by a $2.4 million decrease in the unrealized gain on
securities available for sale.
ASSET QUALITY
Delinquent Loans. The Company's delinquency experience is affected by
the value of the real estate securing its loans, the ability of borrowers to
make increased payments under ARMs if interest rates increase and other factors
that are not in the Company's control, such as national and local economic
conditions. Total delinquent loans as a percentage of loans receivable (held for
investment and held for sale) were 1.26% at December 31, 1997, compared to 2.08%
at the end of 1996. The 82 basis point improvement during 1997 brought the
delinquent loan ratio to its lowest level since June 30, 1995 and represented
the reversal of an adverse trend of increasing percentages of delinquent loans
that the Company had experienced in 1995 and 1996.
45
<PAGE> 46
The following table sets forth the Company's delinquent loans by type of
loan, in dollars and as a percentage of the portfolio of loans held for
investment and for sale, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
% OF % OF % OF
PRINCIPAL GROSS PRINCIPAL GROSS PRINCIPAL GROSS
(Dollars in thousands) BALANCE LOANS BALANCE LOANS BALANCE LOANS
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans Delinquent For:
31-60 days .................................. $ 2,348 0.15% $ 7,012 0.47% $ 4,408 0.28%
61-90 days .................................. 2,815 0.19% 4,996 0.33% 1,790 0.11%
91 days and over ............................ 13,998 0.92% 16,878 1.12% 15,173 0.95%
------- ------- ------- ------- ------- -------
$19,161 1.26% $28,886 1.92% $21,371 1.34%
======= ======= ======= ======= ======= =======
Delinquencies, as a Percentage of Product Line
Single family ............................... $12,484 1.37% $20,483 2.11% $15,404 1.37%
Commercial real estate ...................... 2,146 0.48% 4,262 1.09% 3,222 0.88%
Small business .............................. 4,487 2.72% 4,122 3.07% 2,687 3.03%
Other ....................................... 44 1.41% 19 0.28% 58 0.51%
------- ------- ------- ------- ------- -------
$19,161 1.26% $28,886 1.92% $21,371 1.34%
======= ======= ======= ======= ======= =======
</TABLE>
Although all types of loans have exhibited fluctuations in the
percentage of loans that were delinquent, the Company's recent favorable trend
and previous adverse trends were largely a function of the performance of the
single family loan portfolio, as illustrated in the following chart:
CHART
<TABLE>
<CAPTION>
12/94 6/95 12/95 6/96 12/96 6/97 12/97
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
All Loans ... 0.94% 1.16% 1.34% 1.86% 1.92% 1.56% 1.26%
Single Family 0.90% 1.15% 1.37% 1.50% 2.11% 1.58% 1.37%
</TABLE>
46
<PAGE> 47
Management believes the recent improvements in single family delinquencies is
attributable to a combination of factors, including improvement in Southern
California's economy, increased volumes of home purchases, reductions in
financial institution REO inventories which suppressed home prices and greater
home liquidity which enabled borrowers to sell their homes to resolve
delinquencies.
The Company's small business loan portfolio has components that are
guaranteed by the SBA or are subject to private credit enhancement provisions.
The following table sets forth the components of delinquent small business loans
at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
(In thousands) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Guaranteed by the SBA ...................... $1,119 $ 739 $ 105
Subject to credit enhancement .............. 1,703 3,303 2,570
Other delinquencies ........................ 1,665 80 12
------ ------ ------
Total .................................. $4,487 $4,122 $2,687
====== ====== ======
</TABLE>
Although total small business loan delinquencies didn't increase materially
during 1997, the balances of delinquent loans that are not subject to full
credit reimbursement has increased. At December 31, 1997, the Company had $1.7
million of delinquent small business loans to which general and specific
valuation allowances totaling $187,000 were allocated.
Commercial real estate loans, consisting of multifamily residential and
commercial nonresidential loans, are subject to greater volatility due to the
size of the individual loans. At December 31, 1997 and 1996, delinquent
commercial real estate loans represented 0.48% and 1.09% of the commercial real
estate portfolios at those respective dates. The improvements in delinquency
during 1997 occurred during the fourth quarter of the year and were largely due
to payments being brought current on a $2.0 million loan. During 1996,
delinquent commercial real estate loans increased during the first half of the
year, then declined during the second half of the year such that the year-end
delinquency rate exceeded the year-end 1995 rate by only 21 basis points.
47
<PAGE> 48
Nonperforming Assets. In general, the Company's nonperforming assets
reflect the trends previously described with respect to loan delinquencies. The
following table sets forth the Company's nonperforming asset activity for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------- --------------------------------------
NONACCRUAL NONACCRUAL
(In thousands) LOANS REO TOTAL LOANS REO TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year ......... 21,502 10,466 31,968 $ 14,841 $ 6,236 $ 21,077
Additions:
Single family (1) ............... 8,100 -- 8,100 20,843 -- 20,843
Commercial real estate .......... 11,717 -- 11,717 16,438 -- 16,438
Small business .................. 7,310 -- 7,310 6,512 -- 6,512
Other (1) ....................... 9 -- 9 33 -- 33
-------- -------- -------- -------- -------- --------
27,136 -- 27,136 43,826 -- 43,826
-------- -------- -------- -------- -------- --------
Foreclosures:
Single family ................... (12,435) 10,165 (2,270) (14,746) 10,556 (4,190)
Commercial real estate .......... (7,508) 6,291 (1,217) (10,251) 7,445 (2,806)
Small business .................. (2,119) 2,430 311 (1,776) -- (1,776)
-------- -------- -------- -------- -------- --------
(22,062) 18,886 (3,176) (26,773) 18,001 (8,772)
-------- -------- -------- -------- -------- --------
Negotiated Settlements and Holding
Period Writedowns:
Single family (2) ............... -- -- -- (3,206) (385) (3,591)
Commercial real estate (3) ...... (738) -- (738) (913) (17) (930)
Small business .................. (426) -- (426) (413) -- (413)
Other ........................... -- -- -- (40) -- (40)
-------- -------- -------- -------- -------- --------
(1,164) -- (1,164) (4,572) (402) (4,974)
-------- -------- -------- -------- -------- --------
REO Sales:
Single family ................... -- (14,927) (14,927) -- (7,729) (7,729)
Commercial real estate .......... -- (7,811) (7,811) -- (6,913) (6,913)
Small business .................. -- (692) (692) -- -- --
-------- -------- -------- -------- -------- --------
-- (23,430) (23,430) -- (14,642) (14,642)
-------- -------- -------- -------- -------- --------
Loans Brought Current:
Commercial real estate .......... (6,324) -- (6,324) (4,233) -- (4,233)
Small business .................. (2,837) -- (2,837) (1,535) -- (1,535)
Other ........................... -- -- -- (29) -- (29)
-------- -------- -------- -------- -------- --------
(9,161) -- (9,161) (5,797) -- (5,797)
-------- -------- -------- -------- -------- --------
Other Changes, net:
Single family ................... -- (595) (595) (23) 683 660
Commercial real estate .......... -- (351) (351) -- 590 590
Small business and other ........ -- (972) (972) -- -- --
-------- -------- -------- -------- -------- --------
-- (1,918) (1,918) (23) 1,273 1,250
-------- -------- -------- -------- -------- --------
BALANCE, END OF YEAR ............... $ 16,251 $ 4,004 $ 20,255 $ 21,502 $ 10,466 $ 31,968
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) For single family and other loans, the additions figure represents the
net change from additions and loans brought current.
(2) Represents single family nonaccrual loans resolved through a negotiated
payoff in an amount less than the borrowers' contractual obligations to
the Company.
(3) Represents loan balances charged off on nonaccruing loans that were not
foreclosed.
48
<PAGE> 49
Allowances for Loan Losses. The Company maintains specific allowances
for loan losses related to particular identified assets and general allowances
for loan losses. An analysis of the activity in the allowance for loan losses
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
(In thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year ........ $ 13,488 $ 12,789 $ 12,529
Provision for estimated losses .... 6,000 8,050 2,900
Acquisitions/Purchases ............ 2,606 -- 500
Recoveries ........................ 2,423 1,849 1,401
Charge-offs ....................... (7,219) (9,200) (4,541)
-------- -------- --------
Balance, end of year .............. $ 17,298 $ 13,488 $ 12,789
======== ======== ========
</TABLE>
The following table sets forth the Company's net charge-offs by loan
types for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
(In thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Single family ........................ $ 1,727 $ 3,673 $ 1,807
Commercial real estate ............... 2,924 3,610 1,295
Small business ....................... 23 56 --
Other ................................ 122 12 38
-------- -------- --------
$ 4,796 $ 7,351 $ 3,140
======== ======== ========
</TABLE>
Net charge-offs of single family loans in 1997 totaled $1.7 million and
represented a 53% decrease from the prior year. Net charge-offs in 1997 related
to 112 properties upon which the Company experienced an average loss of 19% per
property. During 1996, the Company's net charge-offs of single family loan
balances totaled $3.7 million, related to 157 properties.
Net charge-offs of commercial real estate loans in 1997 totaled $2.9
million, representing a 19% decrease from the preceding year. During the year,
the Company repossessed 10 properties during the year and recorded charge-offs
of $2.5 million in connection therewith. In 1996, the Company recorded net
charge-offs of $3.6 million on its commercial real estate property loan
portfolio. During the year, 16 properties were repossessed and $3.5 million
charged off.
The Company's relatively low level of net charge-offs on its small
business loans reflects the financial benefits of the credit loss protections on
the balances guaranteed by the SBA and the balances guaranteed by GFC. During
1997 and 1996, the Company received credit reimbursements totaling $878,000 and
$1.2 million, respectively, from GFC.
The Company evaluates the adequacy of its allowance for loan losses on
at least a quarterly basis. The adequacy of the allowance is measured by
comparing the amount of the allowance reflected on the Company's balance sheet
to the amount determined to be required by examination of the loan portfolio,
including the portions of the loan portfolio classified in accordance with
regulatory requirements as special mention, substandard, doubtful or loss
(collectively, "criticized loans") and nonperforming loans. The ratio of the
allowance to the aggregate amount of criticized loans and to the aggregate
amount of nonperforming loans can be affected in unpredictable ways by the
specific assets which comprise criticized loans and nonperforming loans and by
allowances for losses that are allocated to loans, including
49
<PAGE> 50
criticized loans, that are not nonperforming loans. Accordingly, the Company
does not use the ratio of the allowance to aggregate criticized loans or to
aggregate nonperforming loans, standing alone, as a measure of the adequacy of
the allowance for loan losses.
At December 31, 1997, the allowance for loan losses totaled $17.3
million and represented 1.13% of total loans held for investment and for sale,
compared to an allowance for loan losses totaled $13.5 million which represented
.90% of total loans held for investment and for sale one year earlier. The
increase in the allowance in 1997 was due to a $1.2 million excess of loss
provisions over net charge-offs and the recording of a $2.6 million allowance in
connection with a bulk purchase of home equity loans.
The following table sets forth activity in the allowance for loan
losses, by type of loan, for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
SINGLE COMMERCIAL SMALL
(In thousands) FAMILY(1) REAL ESTATE BUSINESS OTHER(2) TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, 12/31/95 .................... 4,043 7,002 1,630 114 12,789
Provisions for loan losses (reductions
credited) ............................ 3,622 3,950 507 (29) 8,050
Allowance for lease losses recoveries 16 16
Charge-offs .......................... (4,539) (4,062) (565) (34) (9,200)
Recoveries ........................... 866 452 509 6 1,833
-------- -------- -------- -------- --------
Balance, 12/31/96 .................... $ 3,992 $ 7,342 $ 2,081 $ 73 $ 13,488
PROVISIONS FOR LOAN LOSSES (REDUCTIONS
CREDITED) ............................ 1,245 3,050 1,635 70 6,000
ACQUISITIONS AND PURCHASES ........... 2,606 -- -- -- 2,606
CHARGE-OFFS .......................... (2,927) (3,527) (642) (123) (7,219)
RECOVERIES ........................... 1,200 603 619 1 2,423
-------- -------- -------- -------- --------
BALANCE, 12/31/97 .................... $ 6,116 $ 7,468 $ 3,693 $ 21 $ 17,298
======== ======== ======== ======== ========
</TABLE>
(1) Single family includes home equity loans.
(2) Other consists of construction and consumer loans.
Allowances for loan losses allocated to single family loans, which
includes home equity loans, increased by $2.1 million in 1997. The combination
of the following factors resulted in the net increase: (i) portfolio shrinkage
and credit quality improvements at the end of 1997, compared to the end of 1996,
resulted in a $845,000 reduction in allocated allowances, (ii) allowances
allocated to home equity loans purchased during 1997 and still outstanding at
the end of the year resulted in a $1.8 million increase in allowances, and (iii)
otherwise unassigned general valuation allowance allocated to single family
loans increased by $1.1 million. In 1996, the allowance for loan losses
allocated to the single family loan portfolio was largely unchanged from the
beginning to the end of the year, although the percentage of the allocated
allowance to outstanding single family loans increased by five basis points. The
increase is the result of two factors: (i) the amounts of single family loan
balances classified as "special mention" or "substandard" were greater at the
end of 1996 than at the beginning of the year and progressively greater
percentages of the loan loss allowance are allocated to these designations and
(ii) the Company increased the allocation factors for "special mention" and
"substandard" loans during the year in concert with the results of the Company's
migration analysis. The migration analysis is a statistical tool for forecasting
future potential loan losses based on historical loss patterns.
Allowances for loan losses allocated to the commercial real estate
portfolio at December 31, 1997 totaled $7.5 million, representing a $126,000
increase from the prior year end. The increase consisted of : (i) a $1.5 million
reduction in allocated general valuation allowances due to improvements in the
credit quality, (ii) a $275,000 increase due to portfolio growth, (iii) a
$152,000 increase attributable to higher general valuation allowance factors on
50
<PAGE> 51
"pass"-classified multifamily loans; and (iv) a $1.1 million increase
attributable to otherwise unassigned general valuation allowances. The Company's
allowances for loan losses allocated to its commercial real estate loan
portfolio increased due to growth in the portfolio during 1996.
The Company's small business loan portfolio was allocated $3.4 million
of allowances for loan losses at December 31,1997, compared to $2.1 million at
the end of 1996. The majority of the $1.3 million increase was attributable to
portfolio growth in small business loans that do not bear credit loss guarantees
of either the SBA or GFC. The Company allocated $1.1 million of additional
allowances for loan losses to "pass"-graded small business loans of this type.
In addition, the Company increased its allocation of otherwise unassigned
general valuation allowances by $639,000. During 1996, the Company increased the
allocation percentage of allowances on the loans it purchased from GFC in 1995.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company include scheduled and
unscheduled payments on loans, proceeds from sales of investment securities,
mortgage-backed securities and loans, cash flows generated from operations, and
increases in deposits, FHLB advances and other borrowings.
The Company offers fixed rate loans to its customers from time to time,
but generally sells them in the secondary market. In addition, the Company also
purchases ARMs in the secondary market to meet asset growth and earnings
objectives. In the years ended December 31, 1997, 1996, and 1995, the Company
received $1.5 million, $11.6 million and $27.9 million, respectively, in funds
from the sales of loans held for sale. In addition, the Company received $0,
$3.9 and $1.5 million of proceeds from the sales of loans and participating
interests in loans in the held for investment portfolio in the years ended
December 31, 1997, 1996 and 1995, respectively.
Proceeds from the sales of mortgage-backed securities and investment
securities for the years ended December 31, 1997, 1996, and 1995 totaled $214.6
million, $290.2 million, and $66.7 million, respectively. Although the Company's
portfolio of mortgage-backed securities grew during 1996, the Company's sales of
mortgage-backed securities increased significantly due to portfolio
restructuring activities during the year in connection with interest rate risk
reduction objectives. The Company sold securities with less favorable interest
rate risk characteristics and reinvested in securities that improved the
Company's interest rate risk profile.
Principal repayments on loans and mortgage-backed securities were $310.5
million, $271.8 million, and $186.0 million for the years ended December 31,
1997, 1996, and 1995, respectively. The repayment rate on the Company's loan
portfolio increased substantially during 1996. For the years ended December 31,
1997, 1996 and 1995, repayments of loans held for investment represented 17.3%,
12.9% and 9.9%, respectively, of the loan portfolio balances at the beginning of
the respective years.
Customer deposit accounts, the Company's primary source of funds,
represented approximately 75% and 76% of interest bearing liabilities at
December 31, 1997 and 1996. The percentage of retail customer deposits (deposits
not acquired through the Company's money desk operations) to interest bearing
liabilities was 64.9% and 64.8% at December 31, 1997 and 1996, respectively. For
the years ended December 31, 1997, 1996 and 1995, customer deposit accounts had
a net decrease of $7.0 million, and a net increase of $8.1 million and $183.8
million, respectively. During those same respective periods, the Company's
deposit purchases, net of deposit sales, totaled $0, $0 and $59.6 million.
During periods of asset expansion when net deposit flows and increases
in stockholders' equity are not sufficient to fund desired levels of growth, the
Company may borrow funds from a variety of sources. In the years ended December
31, 1997, 1996 and 1995, the Company increased its total borrowings by $7.9
million, $24.5 million and $37.2 million, respectively. Increases in FHLB
advances in those same periods totaled $64.0 million, $49.0 million and $34.8
million, respectively. In addition, the Company frequently borrows funds in the
form of repurchase agreements. In the years ended December 31, 1997 and 1996,
the Company decreased its borrowings under agreements to repurchase by $56.1
million and $19.4 million, respectively. During 1995, the Company increased this
type of borrowing by $2.6 million.
51
<PAGE> 52
Savings institutions must, by regulation, maintain liquid assets at
prescribed percentages of deposits and short-term borrowings. Liquidity is
measured by cash and certain investments which are not committed, pledged, or
required to liquidate specific liabilities. Short-term liquidity is generally
measured by such assets which have maturities of 12 months or less. Until late
1997, the liquidity ratio and short-term liquidity ratio were 5% and 1%,
respectively. Late in 1997, liquidity requirements were modified such that the
liquidity requirement was reduced to 4% and the short-term liquidity requirement
was eliminated. For the calculation period including December 31, 1997, the
Company's liquidity ratio was 8.2%, compared to the 4% requirement. Subsequent
to the end of 1997, the Company has reduced its excess liquidity to a level
nearer, but still above, the requirement.
ASSET/LIABILITY MANAGEMENT
Since the mid-1980's, the Company has emphasized the origination of ARMs
for portfolio retention to reduce the sensitivity of its earnings to interest
rate fluctuations. Interest rate "gap" analysis is a common, but imperfect,
measure of interest rate risk which measures the relative dollar amounts of
interest earning assets and interest bearing liabilities which reprice within a
specific time period, either through maturity or rate adjustment. The "gap" is
the difference between the amounts of such assets and liabilities that are
subject to such repricing. A "positive" gap for a given period means that the
amount of interest earning assets maturing or otherwise repricing within that
period exceeds the amount of interest bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a rising interest rate
environment, an institution with a positive gap would generally be expected,
absent the effects of other factors, to experience a greater increase in the
yield of its assets relative to the cost of its liabilities. Conversely, the
cost of funds for an institution with a positive gap would generally be expected
to decline less quickly than the yield on its assets in a falling interest rate
environment. Changes in interest rates generally have the opposite effect on an
institution with a "negative" gap. At December 31, 1997, the Company's one-year
gap was a positive 16.7% of assets.
There are fairly significant shortcomings inherent in this simplified gap
analysis, however, that may result in an institution with a nominally positive
gap having interest rate behavior associated with a negative gap. Among the
factors that the gap analysis does not reflect are:
(i) restrictions on maximum changes in rates at date of repricing -
certain assets, such as ARMs, have features which limit
increases and decreases in interest rates on both a short-term
basis and over the lives of the assets (generally referred to as
"interest rate caps" and "interest rate floors");
(ii) rate-sensitivity of index upon which ARMs are based - interest
rates on certain types of assets and liabilities typically
fluctuate in advance of changes in general market interest
rates, while interest rates on other types may lag changes in
general market rates, as is the case with ARMs with interest
rate adjustments tied to an index published by the FHLB of San
Francisco, which tends to lag changes in general market rates of
interest and thus react more slowly to such changes than does
the Company's actual cost of funds;
(iii) frequency of repricing - a further delay in the ability of the
Company's ARMs to react to changes in general market rates may
be expected because the interest rate on a substantial portion
of the ARMs adjusts quarterly or semi-annually; and
(iv) introductory interest rates - at certain times, the Company's
new loans have introductory interest rates that are lower than
the loans' general rate terms would provide. While the period
during which such introductory interest rates are in effect is
limited, the introductory interest rates have the effect of
reducing the net interest income earned by the Company as
compared with what would be earned were such introductory rates
not offered.
In the event of a change in interest rates, prepayments of ARMs and
early withdrawals of deposits could also deviate
52
<PAGE> 53
significantly from those assumed in calculating the interest rate gap. The
ability of many borrowers to service their debt may also decrease in the event
of an interest rate increase.
53
<PAGE> 54
The following table sets forth the amount of interest earning assets and
interest bearing liabilities outstanding at December 31, 1997 which are expected
to reprice or mature in each of the future time periods shown.
<TABLE>
<CAPTION>
MORE MORE MORE MORE
6 THAN 6 THAN 1 THAN 3 THAN 5
MONTHS MONTHS TO YEAR TO YEARS TO YEARS TO OVER 10
OR LESS 1 YEAR 3 YEARS 5 YEARS 10 YEARS YEARS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Federal funds sold ...................... $ 2,000 -- -- -- -- -- $ 2,000
Investment securities ................... 53,692 10,008 20,058 -- -- 83,127 166,885
MBS ..................................... 388,575 18,824 9,696 298 -- -- 417,393
Loans held for sale, at lower of cost or
fair value .............................. 102,807 8,331 2,740 724 1,182 986 116,770
Loans held for investment, net .......... 1,015,286 163,226 106,485 85,213 34,195 4,383 1,408,788
Investment in FHLB stock, at cost ....... 22,914 -- -- -- -- -- 22,914
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST EARNING ASSETS ...... $1,585,274 $ 200,389 $ 138,979 $ 86,235 $ 35,377 $ 88,496 $2,134,750
========== ========== ========== ========== ========== ========== ==========
INTEREST BEARING LIABILITIES:
Customer deposit accounts ............. $ 613,547 $ 421,230 $ 325,163 $ 90,648 $ 61,103 $ 39,549 $1,551,240
Securities sold under agreement to
repurchase .............................. 74,488 -- -- -- -- -- 74,488
Notes payable ......................... -- -- 17,750 -- -- -- 17,750
FHLB advances ......................... 264,500 55,000 94,000 -- -- -- 413,500
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST BEARING LIABILITIES . $ 952,535 $ 476,230 $ 436,913 $ 90,648 $ 61,103 $ 39,549 $2,056,978
========== ========== ========== ========== ========== ========== ==========
Interest sensitivity gap per period ..... $ 632,739 $ (275,841) $ (297,934) $ (4,413) $ (25,726) $ 48,947 $ 77,772
Cumulative interest sensitivity gap ..... $ 632,739 $ 356,898 $ 58,964 $ 54,551 $ 28,825 $ 77,772
Cumulative gap as a percent of
total interest earning assets ........... 29.64% 16.72% 2.76% 2.56% 1.35% 3.64%
Cumulative interest sensitive assets as a
percent of interest sensitive liabilities 166.43% 124.98% 103.16% 102.79% 101.43% 103.78%
</TABLE>
54
<PAGE> 55
Except as stated below, the amounts of assets and liabilities shown
which reprice or mature within a particular period were determined in accordance
with the contractual terms of the asset or liability. For one- to four-family
residential fixed rate mortgages, the assumed average annual prepayment rate was
21%. Prepayment rates on other fixed rate mortgage loans ranged from 12% to 40%,
with an average of 23%. Loans with adjustable rates are shown as being due in
the next adjustment period. Withdrawal rates on the Company's regular passbook
savings, money-market deposits, NOW and checking accounts, which totaled $342.6
million at December 31, 1997, were based on statistics developed with the Office
of Thrift Supervision Net Portfolio Value Model. The interest rate sensitivity
of the Bank's assets and liabilities illustrated on the previous page would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.
The following table shows the Bank's financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instrument's fair values at December 31, 1997.
55
<PAGE> 56
<TABLE>
<CAPTION>
Expected Maturity Date at December 31, 1997
----------------------------------------------------------------------------------------------
After Total Fair
1998 1999 2000 2001 2002 2002 Balance Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Federal funds sold ................ $ 2,000 $ -- $ -- $ -- $ -- $ -- $ 2,000 $ 2,000
Average interest rate ......... 4.50% -- -- -- -- -- 4.50%
Investment securities ............. 35,043 8,485 -- 29,950 10,020 83,387 166,885 166,885
Average interest rate ......... 5.63% 5.66% -- 6.02% 6.57% 7.70% 6.78%
Gross loans:
Single family real estate ..... 196,267 153,126 119,920 94,230 73,703 272,857 910,103 929,242
Average interest rate ....... 8.23% 8.15% 8.07% 8.01% 7.97% 7.85% 8.04%
Multifamily and
commercial real estate .............. 88,708 75,858 57,524 46,619 37,010 141,246 446,965 451,966
Average interest rate ....... 8.43% 8.43% 8.39% 8.41% 8.39% 8.29% 8.37%
Small business loans ......... 23,989 18,685 16,385 14,400 12,583 78,517 164,559 182,693
Average interest rate ..... 10.55% 10.54% 10.53% 10.53% 10.53% 10.52% 10.53%
Construction .................. 463 -- -- -- -- -- 463 463
Average interest rate ..... 8.50% -- -- -- -- -- 8.50%
Consumer loans ................ 3,013 35 22 14 11 33 3,128 3,128
Average interest rate ..... 11.09% 12.87% 12.77% 11.41% 11.01% 11.01% 11.12%
Mortgage-backed securities ....... 82,084 66,052 53,074 42,682 34,372 139,129 417,393 417,393
Average interest rate ..... 6.86% 6.85% 6.86% 6.86% 6.90% 6.88% 6.89%
Investment in FHLB stock ......... -- -- -- -- -- 22,914 22,914 22,914
Average interest rate ..... -- -- -- -- -- 6.00% 6.00%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive assets... $ 431,567 $ 322,241 $ 246,925 $ 227,895 $ 167,699 $ 738,083 $2,134,410 $2,176,684
========== ========== ========== ========== ========== ========== ========== ==========
Interest sensitive liabilities:
Deposits:
Checking ...................... $ 51,444 $ 16,703 $ 16,703 $ 4,834 $ 4,834 $ 18,952 $ 113,470 $ 113,470
Average interest rate ..... 0.87% 0.87% 0.87% 0.87% 0.87% 0.87% 0.87%
Savings ....................... 28,535 21,671 21,671 14,128 14,128 67,721 167,854 167,854
Average interest rate ..... 3.20% 3.20% 3.20% 3.20% 3.20% 3.20% 3.20%
Money-market .................. 48,381 3,369 3,369 1,604 1,604 2,916 61,243 61,243
Average interest rate ..... 4.12% 4.12% 4.12% 4.12% 4.12% 4.12% 4.12%
Certificates .................. 906,352 135,821 105,906 25,870 23,657 11,067 1,208,673 1,208,971
Average interest rate ..... 5.56% 6.08% 6.52% 6.09% 6.10% 5.77% 5.73%
Borrowings:
Reverse repurchase agreements . 74,488 -- -- -- -- -- 74,488 74,502
Average interest rate ..... 5.83% -- -- -- -- -- 5.83%
Notes payable ................. -- -- -- 17,750 -- -- 17,750 19,238
Average interest rate ..... -- -- -- 11.17% 11.17%
FHLB advances ................. 319,500 49,000 45,000 -- -- -- 413,500 413,810
Average interest rate ..... 5.79% 6.11% 6.37% -- -- -- 5.90%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest sensitive liabilities $1,428,700 $ 226,564 $ 192,649 $ 64,186 $ 44,223 $ 100,656 $2,056,978 $2,059,078
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
Expected maturities are contractual maturities adjusted for prepayments
of principal. The bank uses assumptions
56
<PAGE> 57
to estimate fair values and expected maturities. For assets, expected maturities
are based on contractual maturity, projected repayments and prepayments of
principal. The assumed annual prepayment rate was 21%, 40% and 12% for the
single family, home equity and home improvement, and commercial and small
business portfolios, respectively.
Net Portfolio Value. Another method of analyzing a financial
institution's interest rate risk is by measuring the change in net portfolio
value ("NPV") under various interest rate scenarios. NPV represents the
difference between the fair values of assets and the fair values of liabilities
and off-balance sheet contracts. The NPV ratio, under any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in that scenario. The sensitivity measure is the decline in the NPV ratio
in basis points, caused by a 200 basis point instantaneous increase or decrease
in interest rates, whichever produces a greater decline. The higher an
institution's sensitivity measure is, the greater its exposure to interest rate
risk.
On a quarterly basis, the Office of Thrift Supervision produces an
analysis on the above basis using its internal model. The Company also
calculates its NPV ratio utilizing a simulation program. Due to differences in
assumptions used to calculate the fair values of the assets, liabilities and
off-balance sheet contracts, the OTS model may generate different results from
the Company's.
As of September 30, 1997, the Company-calculated sensitivity measure was
20.5%, compared to 22% as calculated by the OTS.
Hedging Activities. In addition to managing its exposure to interest
rate risk through asset and liability acquisition and disposition activities,
the Company purchased interest rate cap contracts in 1996. The interest rate cap
contracts were intended to limit the adverse effects of lifetime interest rate
maximums on certain LIBOR-based ARMs in the Company's loan portfolio. The
Company purchased two interest rate cap contracts with the following
characteristics:
<TABLE>
<S> <C> <C>
Notional Amount .... $200 million $75 million
Strike Rate ........ 7.50% 7.00%
</TABLE>
Under the interest rate cap contracts, if the LIBOR rate exceeds 7%,
then the Company will receive a stream of interest payments representing the
difference between the actual LIBOR rate and 7%, based upon a notional amount of
$75 million. If the LIBOR rate exceeds 7.5%, then the Company also will receive,
in addition, a payment stream representing the difference between the actual
LIBOR rate and 7.5%, based upon a notional amount of $200 million.
The initial cost of the three-year interest rate cap contracts was $2.9
million, which is being charged to interest income on a pro rata basis over the
lives of the contracts.
The market value of the loans being hedged will likely exhibit more
volatility than will their hedge instrument counterparts. For example, when
market yields decline, the increase in value of the loans being hedged can be
expected to exceed the decline in the value of the hedging instruments.
Conversely, when market yields rise, the decline in the value of the loans being
hedged can be expected to exceed the gain in value of the hedging instruments.
ANALYSIS OF NET INTEREST INCOME
General. The Company's results of operations are primarily dependent
upon net interest income, which is the difference between income derived from
interest earning assets and the interest expense on interest bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest earning assets and the rates paid on
interest bearing liabilities (the "interest rate spread") and (ii) the relative
amounts of interest earning assets and interest bearing liabilities, which is
sometimes referred to as the "net earning balance."
57
<PAGE> 58
Average Balances, Interest Rates and Yields. The following table sets
forth information concerning the Company's interest earning assets, interest
bearing liabilities, net interest income, interest rate spreads and interest
rate margins during the periods indicated.
Average balances were calculated using the average daily balance method.
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31, 1997 YIELD/RATE
-----------------------------------------
AT
AVERAGE AVERAGE DECEMBER
BALANCE INTEREST YIELD/RATE 31,1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Short-term investments (1) ..... $ 14,536 $ 785 5.40% 4.50%
Investment securities (2) ...... 181,184 12,580 6.94% 6.67%
MBS ............................ 453,232 31,667 6.99% 6.89%
Loans (3) ...................... 1,547,579 121,335 7.84% 7.98%
----------- -----------
TOTAL INTEREST EARNING ASSETS .... 2,196,531 166,367 7.57% 7.65%
Non-interest earning assets ...... 68,111 --
----------- -----------
Total ....................... 2,264,642 166,367
----------- -----------
INTEREST BEARING LIABILITIES:
Customer deposit accounts ...... $ 1,559,882 $ 79,674 5.11% 5.10%
Short-term borrowings .......... 140,740 7,962 5.66% 5.83%
FHLB advances .................. 403,155 23,456 5.82% 5.89%
Notes payable .................. 17,750 2,087 11.76% 11.17%
----------- -----------
TOTAL INTEREST BEARING LIABILITIES 2,121,527 113,179 5.33% 5.34%
Non-interest bearing liabilities . 22,088
Retained earnings - substantially
restricted ..................... 121,027
----------- -----------
Total ....................... $ 2,264,642 $ 113,179 -- --
----------- -----------
Net interest income/interest
rate spread (4) ................. $ 53,188 2.24%
Net interest earning assets/net
interest margin (5) ............. $ 75,004 2.42%
</TABLE>
<TABLE>
<CAPTION>
Year Ended Dec. 31, 1996 Year Ended Dec. 31, 1995
----------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Short-term investments (1) ..... $ 13,624 $ 694 5.09% $ 13,116 $ 795 6.06%
Investment securities (2) ...... 130,426 9,241 7.09% 127,550 9,072 7.11%
MBS ............................ 393,005 28,254 7.19% 333,620 23,527 7.05%
Loans (3) ...................... 1,543,579 120,616 7.81% 1,453,284 105,164 7.24%
----------- ----------- ----------- -----------
TOTAL INTEREST EARNING ASSETS .... 2,080,634 158,805 7.63% 1,927,570 138,558 7.19%
Non-interest earning assets ...... 66,371 -- 75,567 --
----------- ----------- ----------- -----------
Total ....................... $ 2,147,005 $ 158,805 $ 2,003,137 $ 138,558
----------- ----------- ----------- -----------
INTEREST BEARING LIABILITIES:
Customer deposit accounts ...... $ 1,556,497 $ 79,286 5.09% $ 1,440,191 $ 71,130 4.94%
Short-term borrowings .......... 114,852 6,442 5.61% 167,668 10,371 6.19%
FHLB advances .................. 321,878 17,897 5.56% 261,119 13,972 5.35%
Notes payable .................. 20,375 2,299 11.28% 22,924 2,491 10.87%
----------- ----------- ----------- -----------
TOTAL INTEREST BEARING LIABILITIES 2,013,602 105,924 5.26% 1,891,902 97,964 5.18%
Non-interest bearing liabilities . 25,833 14,715 --
Retained earnings - substantially
restricted ..................... 107,570 -- 96,520 --
----------- ----------- ----------- -----------
Total ....................... $ 2,147,005 $ 105,924 -- $ 2,003,137 $ 97,964
----------- ----------- ----------- -----------
Net interest income/interest
rate spread (4) ................. $ 52,881 2.37% $ 40,594 2.01%
Net interest earning assets/net
interest margin (5) ............. $ 67,032 2.54% $ 35,668 2.11%
</TABLE>
- ----------
1) Short-term investments includes federal funds sold, certificates of
deposit and repurchase agreements.
2) Investment securities at and for the years ended December 31, 1997, 1996
and 1995 include tax-exempt securities which have been presented on a
fully taxable-equivalent basis by increasing interest income by
$1,957,000, $1,722,000, and $2,109,000 respectively, and applying the
federal statutory tax rate.
3) Loans held for investment includes nonaccrual loans. For nonaccrual
loans, interest income is recorded on a cash basis.
4) Interest rate spread represents the difference between the average rate
on interest earning assets and the average cost of interest bearing
liabilities.
5) Net interest margin represents net interest income divided by average
interest earning assets.
58
<PAGE> 59
Rate/Volume Analysis. The following table analyzes the dollar amount of
changes in interest income and interest expense for major components of interest
earning assets and interest bearing liabilities. The tables distinguishes
between (i) changes attributable to rate (change in rate multiplied by prior
volume), (ii) changes attributable to volume (changes in volume multiplied by
prior rate) and (iii) net change (the sum of the previous columns). The net
changes attributable to the combined effect of volume and rate, which cannot be
segregated, have been allocated proportionately to the changes due to volume and
to rate.
<TABLE>
<CAPTION>
COMPARATIVE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
INCREASE (DECREASE) INCREASE (DECREASE)
ATTRIBUTABLE TO: ATTRIBUTABLE TO:
-------------------------------------------- --------------------------------------------
VOLUME RATE DAYS NET VOLUME RATE DAYS NET
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON INTEREST
EARNING ASSETS:
Short-term investments (1) ....... $ 49 $ 45 $ (2) $ 92 $ 28 $ (131) $ 2 $ (101)
Investment securities (2) ........ 2,671 118 0 2,789 41 224 0 265
MBS .............................. 4,227 (814) 0 3,413 4,253 474 0 4,727
Loans ............................ 313 406 0 719 6,815 8,637 0 15,452
FHLB stock ....................... 297 17 0 314 119 172 0 291
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL INTEREST INCOME ON ........... 7,557 (228) (2) 7,327 11,256 9,376 2 20,634
-------- -------- -------- -------- -------- -------- -------- --------
INTEREST EARNING ASSETS
INTEREST EXPENSE ON INTEREST BEARING LIABILITIES:
Customer deposit
accounts ...................... 269 336 (217) 388 5,786 2,175 195 8,156
Short-term borrowings ............ 1,482 55 (17) 1,520 (3,049) (908) 28 (3,929)
FHLB advances .................... 4,738 870 (49) 5,559 3,326 561 38 3,925
Notes payable .................... (301) 95 (6) (212) (289) 90 7 (192)
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL INTEREST EXPENSE ON .......... 6,188 1,356 (289) 7,255 5,774 1,918 268 7,960
-------- -------- -------- -------- -------- -------- -------- --------
INTEREST BEARING
LIABILITIES
NET INTEREST INCOME ................ $ 1,369 $ (1,584) $ 287 $ 72 $ 5,482 $ 7,458 $ (266) $ 12,674
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Short-term investments includes federal funds sold, certificates of
deposit and repurchase agreements.
(2) For purposes of computing the rate and volume related variances in net
interest income, the municipal bonds have been treated on a non-tax
equivalent yield basis.
RESULTS OF OPERATIONS
The Company's net earnings have historically been affected by
fluctuations in interest rates, gains and losses recognized on sales of loans,
mortgage-backed securities and investment securities, provisions for loan losses
and real estate operations.
Net Interest Income. Net interest income for the years ended December
31, 1997, 1996 and 1995 totaled $51.2 million, $51.2 million and $38.5 million,
respectively. The Company's net interest margin in those same periods was 2.42%,
2.54% and 2.11%, respectively and its net interest spread was 2.24%, 2.37% and
2.01%, respectively. The net interest spread represents the difference between
the yield on interest-earning assets and the cost of interest-bearing
liabilities.
The following chart presents a twelve-quarter history of the Company's yields
on interest-earning assets and cost of interest bearing liabilities:
59
<PAGE> 60
CHART
<TABLE>
<CAPTION>
Q1-94 Q2-94 Q3-94 Q4-94 Q1-95 Q2-95 Q3-95 Q4-95
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yield on Interest Earning Assets 6.44% 6.24% 6.43% 6.46% 6.77% 7.03% 7.36% 7.54%
Cost of Interest Bearing Liabilities 3.67% 3.67% 3.82% 4.21% 4.76% 5.16% 5.35% 5.38%
</TABLE>
<TABLE>
<CAPTION>
Q1-96 Q2-96 Q3-96 Q4-96 Q1-97 Q2-97 Q3-97 Q4-97
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Yield on Interest Earning Assets 7.57% 7.74% 7.68% 7.54% 7.63% 7.59% 7.65% 7.45%
Cost of Interest Bearing Liabilities 5.32% 5.22% 5.22% 5.27% 5.29% 5.35% 5.33% 5.36%
</TABLE>
Generally, the Company's net interest spread and net interest margin
have not fluctuated materially in 1997 and 1996. In 1997, the average yield on
interest-earning assets decreased by 6 basis points, largely due to a 5 basis
point reduction in connection with a fourth quarter 1997 loan premium write-down
in response to increased prepayments. The Company's cost of funds in 1997,
compared to 1996, increased by 7 basis points primarily due to greater reliance
on higher-cost borrowings in 1997. An increase in average earning assets in
1997, compared to 1996, and one fewer day in the year (reducing interest
expense) almost completely offset the unfavorable effects of the decrease in net
interest margin.
During 1996, compared to 1995, the Company's net interest margin
increased by 43 basis points primarily due to a 44 basis point increase in the
yield on interest earning assets. As a result, the Company experienced a $7.4
million rate-related increase in net interest income which was augmented by $5.3
million of additional net interest income stemming from growth in the Company's
balance sheet.
Interest and Dividend Income. Interest and dividend income for the years
ended December 31, 1997, 1996 and 1995 totaled $164.4 million, $157.1 million
and $136.4 million, respectively. Average interest-earning assets steadily
increased during the comparative periods, with 5.6% growth in 1997 and 7.9%
growth in 1996. Asset growth generated a $7.6 million volume-related increase in
interest income in 1997, compared to 1996, and a $11.3 million volume-related
increase in interest income in 1996, compared to 1995. The yield on
interest-earning assets decreased in 1997, compared to 1996, which resulted in a
rate-related decrease in interest income totaling $228,000. The mortgage-backed
securities and investment securities portfolios both registered lower yields in
1997 which, in combination, exceeded the beneficial impact of higher loan yields
during the year. A 44 basis point increase in the yield on average interest
earning assets in 1996, compared to 1995, resulted in a $9.4 million
rate-related increase in interest and dividend income.
For the years ended December 31, 1997, 1996 and 1995, the Company's
ratio of average loans to average interest-earning assets was 70%, 74% and 75%,
respectively. In 1997, the average yield on loans was 7.84%, representing a
three basis point increase from the preceding year. Excluding a $1.1 million
loan premium write-down that was recorded in 1997 due to accelerated prepayment
rates, the average loan yield would have been 7.91%, or ten basis points higher
than in 1996. The yield improvement in 1997 was largely attributable to a
greater percentage of the loan portfolio being held in higher-yielding loans,
such as small business and home equity loans. The rate-related benefit of the
yield improvement was $406,000 including the effect of the loan premium
write-down (and $1.5 million excluding the premium write-down). Average loans
outstanding increased only marginally in 1997, compared to 1996, resulting in a
$313,000 volume-related improvement in interest income. In 1996, the average
yield on the loan portfolio increased by 57 basis points, compared to 1995, due
to the combined effects of the Company's adjustable rate loans reaching
fully-indexed status and a greater percentage of the loan portfolio being
represented by higher-yielding small business and commercial real estate loans.
As a result, interest on loans increased by $8.6 million due to an increased in
rate and by $6.8 million due to higher average portfolio balances in 1996.
The Company's second largest type of interest earning assets is
mortgage-backed securities. In 1997, 1996, and 1995, mortgage-backed securities
represented 21%, 19% and 17%, respectively, of average interest-earning assets.
For 1997, the average yield on mortgage-backed securities was 6.99%,
representing a 20 basis-point decrease from 1996, and resulting in a $814,000
rate-related decrease in interest income. An increase in average mortgage-backed
securities balances in 1997, compared to 1996, resulted in a $4.3 million
volume-related increase in interest income. The average
60
<PAGE> 61
yield on mortgage-backed securities increased by 14 basis points in 1996,
compared to 1995, resulting in a $500,000 rate-related increase to interest
income. During 1996, the Company's average holdings of mortgage-backed
securities increased by 17.8%, compared to 1995, resulting in a $4.3 million
increase in interest income.
Interest income from short-term investments and investment securities
totaled $11.4 million, $8.2 million and $7.8 million, respectively, in the years
ended December 31, 1997, 1996 and 1995. During 1997, the average investment
securities portfolio was 36% larger than in 1996. The Company increased its
holdings of FHLB stock as was required due to higher levels of FHLB advances. In
addition, the Company acquired additional liquidity instruments during the year.
During 1996, the Company increased its holdings of investment securities that
qualify for regulatory liquidity.
Interest Expense. Interest expense for the years ended December 31,
1997, 1996 and 1995 totaled $113.2 million, $105.9 million and $98.0 million,
respectively, resulting in weighted average costs of funds of 5.33%, 5.26% and
5.18% in the same respective periods. The Company's interest-bearing liabilities
grew in both 1997 and 1996 to fund asset growth. Interest-bearing liability
growth in 1997 and 1996, compared to the respective preceding years, generated
volume-related increases in interest expense of $6.2 million and $5.8 million,
respectively. In 1997, the cost of interest-bearing liabilities was seven basis
points higher than in 1996, leading to a rate-related increase in interest
expense totaling $1.4 million. In 1996, the cost of interest-bearing liabilities
increased by six basis points, compared to 1995, and resulted in $1.9 million of
additional interest expense. Finally, calendar year 1996 was a leap year, adding
one additional day of interest expense on interest-bearing liabilities.
Customer deposit accounts are the Company's principal source of funds.
Average total customer deposits represented 74%, 77% and 76% of average
interest-bearing liabilities during 1997, 1996 and 1995, respectively. Higher
average balances of customer deposits in 1997 and 1996, compared to the
respective preceding years, led to volume-related increases in interest expense
totaling $269,000 and $5.8 million, respectively. The weighted average cost of
customer deposits increased by two basis points in 1997, compared to 1996, and
by 15 basis points in 1996, compared to 1995. The resultant rate-related
increases in interest expense were $336,000 and $2.2 million. Interest expense
on customer deposits for 1996 increased by $8.2 million from the preceding year.
Interest expense on borrowings totaled $33.5 million, $26.6 million and
$26.8 million, respectively, for the years ended December 31, 1997, 1996 and
1995. The weighted average interest rates on borrowings in the same respective
periods were 5.97%, 5.83% and 5.94%. In 1997, interest expense on borrowings
increased by $6.9 million, compared to 1996, consisting of a $1.0 million
rate-related increase, a $5.9 million volume-related increase and a $73,000
decrease due to one fewer day in the year. The cost of FHLB advances, in
particular, rose in 1997 as several low-rate advances matured during the year
and were replaced with market-rate advances. In 1996, interest expense on
borrowings decreased by $196,000, compared to 1995, consisting of a $248,000
rate-related decrease, a $52,000 volume-related increase and a $73,000 increase
due to the additional day in the 1996 leap year.
Provisions for Loan Losses. The Company recorded provisions for losses
of $6.0 million, $8.1 million and $2.9 million for the years ended December 31,
1997, 1996 and 1995, respectively. The amounts of the provisions for loan losses
are determined on the basis of the Company's evaluation of a variety of factors,
including the specific loans in the portfolio, estimated collateral values,
historical loss experience, current economic trends, current delinquency trends,
the level of criticized assets and the existing level of allowances for losses.
Accordingly, the amounts of loan loss provisions can vary substantially from
period to period.
During 1997, the Company recorded a provision for loan losses of $6.0
million, representing a $2.1 million decrease from the previous year. The
decrease for the year, compared to the prior year, reflects the Company's
sharply improved levels of delinquent and nonaccruing loans during the third and
fourth calendar quarter of the year. By the end of 1997, the ratios of
nonperforming loans to total assets and delinquent loans to total loans had
fallen to June 30, 1995 levels after having risen steadily until mid-1997.
During 1996, the Company recorded a provision for loan losses of $8.1
million, representing a $5.2 million increase over 1995. Included in the
provision for loan losses and the year-over-year increase is $1.8 million of
provisions allocated to small business loans purchased from GFC and for which
credit enhancement provisions are expected by management to fully reimburse the
Company for losses. Adverse asset quality trends observed in 1995 continued into
1996, resulting in increased levels of provisions for loan losses. Problem asset
activity increased sharply in 1996 as loan balances totaling $26.8 million were
foreclosed, compared to $10.6 million in 1995, and $3.2 million of single family
nonaccruing loans were resolved outside the foreclosure process by negotiated
payoffs at amounts less than the borrowers' loan balances. Even with greater
foreclosure activity in 1996, total delinquent loans increased by 35% at
61
<PAGE> 62
the end of 1996, compared to the end of 1995. The majority of the increase in
delinquent loan balances was in single family loans.
Non-Interest Income. Non-interest income totaled $8.6 million, $12.6
million and $7.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Non-interest income includes fee-based revenue from core operating
activities, such as loan servicing income, fees earned on customer deposit
accounts, commission income from sales of investment products and gains on sales
of loans. Non-interest income also includes non-core items such as gains and
losses from sales of investment securities and mortgage-backed securities,
income or loss from real estate operations, gains from sales of other assets and
certain nonrecurring items.
The Company engages in certain fee-based activities. The following table
indicates the fee income derived from the Company's principal fee-based
activities in the periods presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
(DOLLARS IN THOUSANDS)
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Loan servicing (1) .................................. $3,652 $3,940 $3,977
Customer deposits ................................... 1,946 1,947 1,921
Commissions from sales of alternative investments (2) 1,694 1,721 1,226
------ ------ ------
$7,292 $7,608 $7,124
====== ====== ======
</TABLE>
- ----------
(1) Loan servicing fee income includes fees earned from collection of late
charges, fees earned from servicing loans for others and prepayment,
trustee and reconveyance fees.
(2) Commissions from sales of tax deferred annuities, mutual funds and life
insurance.
Loan servicing fee income decreased in 1997, compared to 1996, largely
due to a decrease in revenues from servicing loans for others. While the same
circumstances affected 1996, compared to 1995, loan servicing fee income
remained relatively unchanged in 1996 because higher amounts of late charges,
prepayment fees and foreclosure fees offset decreasing revenues from servicing
loans for others. In 1997 and 1996, the Company's portfolio of loans serviced
for others declined by 14% and 12%, respectively, due to servicing portfolio
repayments and limited sales of loans with servicing retained.
Deposit fee income is largely derived from demand deposit accounts and
will vary from period to period as the mix of deposits changes. In 1997, the
Company increased its demand deposit accounts by 6.6% and recorded a modest
increase in checking account fee income. The increase in checking account fees
was offset, however, by decreased service charges on savings accounts and
reduced ATM network fees. Prior to 1997, the Company was able to neutralize the
adverse effects of declining demand deposit balances by increasing its fees to
the levels of its competitors.
The Company offers investment alternatives to traditional deposit
accounts to its customers through one of its subsidiaries, earning commission
income from the sales of tax deferred annuities, mutual funds and life insurance
products. During 1997, income from the sale of investment products decreased
from the prior year by $27,000. Although the total volumes of products sold in
1997 didn't vary materially from 1996, the Company sold higher volumes of
investment products which had a lower commission structure. During 1996 income
from sales of investment products increased by $495,000 to $1.7 million due to
increases in sales volume of tax deferred annuities, which bear the highest rate
of commission to the Company, and mutual funds.
The Company invests in mortgage-backed securities and investment
securities for two purposes: (i) maintaining adequate liquidity and (ii)
achieving asset growth targets when loan acquisition volume is insufficient. To
the extent that the Company can earn a satisfactory spread on investment
securities and mortgage-backed securities, it will invest in such securities.
Sales of these securities are generally motivated by the Company's ability to
replace securities with whole loans, to take gains on securities with market
value gains and, as was the case during 1996, to restructure the securities
portfolio to improve the Company's interest rate risk profile. Gains on sales of
mortgage-backed and investment securities available for sale totaled $2.0
million, $1.1 million and $82,000 in the years ended December 31, 1997, 1996 and
1995, respectively.
62
<PAGE> 63
Real estate operations have historically produced net losses for the
Company including losses in 1997 and 1995. The sale of an office building in
1996 resulted in gains from real estate operations in that year. The following
table reflects the composition of real estate operations for the periods noted:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
(Dollars in Thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Holding period write-downs on real estate owned ............... $ (266) $ (402) $ (119)
Real estate owned expenses .................................... (1,338) (666) (595)
Gains on sales of real estate held for development and sale and
REO, net ...................................................... 106 4,417 203
Other, net .................................................... (47) (61) (171)
------- ------- -------
$(1,545) $ 3,288 $ (682)
======= ======= =======
</TABLE>
Operating Expenses. Operating expenses in the years ended December 31,
1997, 1996 and 1995 totaled $33.0 million, $44.1 million and $33.1 million,
respectively. Operating expenses in 1997 included $2.0 million of non-recurring,
merger-related expenditures which must be charged to expense as incurred. In
1996, operating expenses included a non-recurring $9.1 million charge in
connection with the recapitalization of the Savings Association Insurance Fund.
Excluding these items, operating expenses as a percentage of average assets were
1.37%, 1.63% and 1.95% for 1997, 1996 and 1995, respectively.
Operating expenses in 1997 decreased by $1.9 million from 1996,
excluding the 1996 SAIF assessment. Because $2.0 million of merger-related costs
were recorded in 1997, the expense decrease in 1997 associated with recurring
operations was $3.9 million. The following table sets forth the change in
operating expenses in 1997, compared to 1996 (excluding the SAIF assessment) and
the portions related to recurring operations and the merger:
<TABLE>
<CAPTION>
TOTAL CHANGE Recurring Merger-
(In Thousands) IN YEAR Operations Related
-------- -------- --------
<S> <C> <C> <C>
Compensation ....................... $ 1,179 ($110) $ 1,289
Net occupancy ...................... (432) (705) 273
Deposit insurance premiums ......... (2,344) (2,344) --
Data and check processing .......... (182) (182) --
Advertising and marketing .......... (223) (223) --
Intangible amortization ............ (59) (59)
Other .............................. 140 (275) 415
------- ------- --------
Total .......................... ($1,921) ($3,898) $ 1,977
======= ======= ========
</TABLE>
In 1997, the majority of the decrease in operating expenses is related
to a $2.3 million reduction in the cost of deposit insurance following the 1996
recapitalization of the SAIF. In addition, facilities and equipment maintenance
contract costs decreased in 1997, compared to 1996, as did advertising and
marketing costs due to the merger-related cancellation of development and
promotion of new products. Cancellation of other projects, also due to the
merger, resulted in a decrease in professional fees in 1997, compared to 1996.
Merger-related expenditures recorded in 1997 included $1.2 million of
retirement benefits associated with: (i) the Company's termination and
allocation of all shares in the Employee Stock Ownership Plan, and (ii) an
increase in directors' pension liability. Fees paid to attorneys and accountants
totaled $415,000 and the Company recorded a $273,000 depreciation charge in
connection with fixed assets for which the economic lives were shortened.
The Company's acquisition activity in 1994 and 1995 resulted in
volatility in operating expenses in the three years ended December 31, 1996. In
1996, the Company incurred a full year's costs in its small business lending
division, whereas in 1995 the Company incurred increased expenses for only 6
months following the June 1995 acquisition of the operations of GFC. In
addition, the cost savings from the closure of the Company's wholesale-based,
single family lending operation were fully realized in 1996, since the
discontinuation was effective at the end of 1995.
63
<PAGE> 64
The following table sets forth the change in operating expenses in 1996,
compared to 1995, and the reasons therefor:
<TABLE>
<CAPTION>
Increase (Decrease) in 1996 vs. 1995
---------------------------------------------------------------------------------
TOTAL
CHANGE Branch Swap
IN GFC SAIF with Lending Other,
YEAR Acquisition(1) Assessment Coast(2) Reorganization(3) net
-------- -------------- ---------- ---------- ----------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Compensation .......... $ (806) $ 354 $ -- $ (38) $ (1,706) $ 584
Net occupancy ......... 899 260 -- 355 (137) 421
Deposit insurance
premiums .............. 9,286 -- 9,106 60 -- 120
Advertising and
marketing ............. 122 -- -- -- -- 122
Intangible amortization 108 -- -- (21) -- 129
Other ................. 1,307 455 -- 238 (441) 1,055
-------- -------- -------- -------- -------- --------
Total ............. $ 10,916 $ 1,069 $ 9,106 $ 594 $ (2,284) $ 2,431
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) The GFC acquisition was consummated on June 23, 1995.
(2) On October 1995, the Company completed a deposit and branch swap with
Coast Federal Bank.
(3) The Company disbanded its wholesale-based single family lending division
at the end of 1995, generating cost savings in 1996.
(4) Nonrecurring costs associated with the July 1994 acquisition of UCSB
included expenses incurred in 1994 to wind down corporate and lending
operations.
(5) In 1994, recurring costs represented incremental additional expenses
associated with eight branch offices from the date of closing the UCSB
acquisition. In 1995, recurring costs represent additional costs during
the year due to one full year of ownership, compared to the shorter
period in 1994, and the net effect of the Coast Federal Bank transaction
mentioned above.
(6) Cost savings arising from the sale of four branch offices to California
Federal Bank on September 23, 1994. In 1995, the Company experienced one
full year of cost savings.
Income Taxes. Income tax expense or benefit varies from year to year
based on the Company's level of earnings before taxes. For the years ended
December 31, 1997 and 1996, the Company applied effective tax rates of 33.7% and
(0.2%), respectively, to earnings before taxes of $20.8 million and $11.3
million, respectively. For the year ended December 31, 1995, the Company applied
an effective tax rate of 25.7% to earnings before taxes of $9.7 million.
In 1997, 1996 and 1995, the Company's statutory federal income tax was
35.0%. The Company's statutory state franchise tax rate in 1997 was 10.8% and
was 11.3% in both 1996 and 1995. The following table reconciles the Company's
combined federal and state statutory tax rates for the periods shown to its
effective tax rates:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory tax rate ......................... 42.0% 42.4% 42.4%
Adjustments to statutory tax rate:
Decrease in deferred tax valuation allowance -- (16.8%) --
Reduction of liabilities from prior periods -- (12.9%) --
Tax exempt investment interest ............. (6.1%) (9.6%) (14.2%)
Other, net ................................. (2.2%) (3.3%) (2.5%)
-------- -------- --------
Adjustments, net ....................... (8.3%) (42.6%) (16.7%)
-------- -------- --------
Effective tax rate ......................... 33.7% (0.2%) 25.7%
======== ======== ========
</TABLE>
As part of its ongoing analysis of its deferred taxes and after the
finalization of its 1995 tax returns, the Company
64
<PAGE> 65
determined that a $1.9 million valuation allowance on its deferred tax asset and
$1.5 million of taxes on certain deferred items were no longer needed. The
removal of the valuation allowance on the deferred tax asset and the reduction
of these deferred tax items was accomplished by reducing income tax expense in
1996 and resulted in an inordinately low effective tax rate.
Extraordinary Item. During the first quarter of 1996, the Company repaid
an $8.2 million fixed rate borrowing bearing a rate of 8.9% before its scheduled
maturity. As a result, the Company incurred a prepayment penalty of $364,000,
net of taxes of $267,000.
FORWARD-LOOKING INFORMATION
The discussions contained above in "Management's Discussion and Analysis
of Financial Condition and Results of operations" are intended to provide
information to facilitate the understanding and assessment of the consolidated
financial condition of the Company, as reflected in the accompanying
consolidated financial statements and footnotes and should be read and
considered in conjunction therewith. These discussions include forward-looking
statements within the meaning of Section 21E of the Exchange Act regarding
management's beliefs, estimates, projections, and assumptions with respect to
future operations. All forward-looking statements herein are subject to risks
and uncertainties. Actual results and operations for any future period may vary
materially from those projected and from past results discussed herein.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and accompanying footnotes have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchase
power of money over time due to inflation. The impact of inflation can be found
in the increased cost of the Company's operations. The assets and liabilities of
the Company are primarily monetary and interest rates have a greater impact on
the Company's performance than do the effects of inflation.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). Comprehensive income represents the change in equity of
the Company during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all components of comprehensive income, which are required to be
recognized under accounting standards, be reported in a financial statement that
is displayed in equal prominence with the other financial statements. SFAS 130
does not require a specific presentation format but will require the Company to
display an amount representing total comprehensive income for the period in the
financial statements. SFAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. Implementation of SFAS 130 will not have a
material adverse effect on the Company's financial condition or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131"). SFAS 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS 131 supersedes numerous requirements in a previously issued
statement -- SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" -- but retains the requirement to report information about major
customers. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. Implementation of SFAS 131 will not have a material
adverse effect on the Company's financial condition or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other postretirement benefits
plans but does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when the FASB issued Statements No. 87, "Employers
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pensions Plans and for Termination Benefits" and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 suggests combined formats for presentation of pension
and other postretirement benefits disclosures. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. Restatement of disclosures for
earlier periods provided for comparative purposes is required unless the
information is not readily available, in which case the notes to the financial
statements should include all available information and a description of the
information not available. Implementation of SFAS 131 will not have a material
adverse effect on the Company's financial condition or results of operations.
65
<PAGE> 66
YEAR 2000
The Company has an ongoing program designed to ensure that its
operational and financial systems will not be adversely affected by year 2000
software failures due to processing errors arising from calculations using the
year 2000 date. Prior to announcing its agreement to merge with GSB, the Company
was proceeding with a plan to upgrade its core processing capabilities through a
change of service bureaus. One of the criteria for selection of a new service
bureau was a requirement that a year 2000 plan either be underway or completed
at the time of contract signing. Therefore, the expenses related to year 2000
programming enhancements would likely have been part of the contractual fee paid
by the Company to the service bureau. Due to the merger with GSB, the Company
discontinued the service bureau evaluation process.
66
<PAGE> 67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page 74 and the Financial
Statements which begin on page F-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The following tables sets forth information about the directors of CENFED
Financial Corporation:
<TABLE>
<CAPTION>
AGE AT TERM OF POSITIONS CURRENTLY
DECEMBER 31, DIRECTOR OFFICE HELD WITH CENFED
NAME 1997 SINCE EXPIRES AND THE BANK
---- ---- ----- ------- ------------
<S> <C> <C> <C> <C>
John H. Michel 66 1974 1998 Chairman of the Board
of CENFED and the Bank
D. Tad Lowrey 45 1990 1999 Director, President and
Chief Executive Officer
of CENFED and the Bank
Ralph DiMeglio 71 1974 1998 Director
Gareth A. Dorn 58 1980 2000 Director
Robert K. Leishman 68 1973 1999 Director
Richard W. Patton 66 1982 2000 Director
Richard G. Redman 66 1969 1998 Director
</TABLE>
The business experience of each of the directors is as follows:
JOHN H. MICHEL has been President and owner of North Valley
Distribution, a dairy product and medical supply distributor in Santa Monica,
California, since 1984 and a partner in a family-owned dairy ranch in Modesto,
California, since 1962. From 1982 until 1984 he was Vice President and General
Manager of Edgemar Farms, a division of Foremost Dairies, Inc. Mr. Michel
currently serves as chairman of Saint John's Hospital and Health Center
Corporation in Santa Monica, California.
D. TAD LOWREY was elected President and Chief Executive Officer of
CENFED and the Bank in March 1991 and August 1990, respectively, and had served
as Senior Vice President and Chief Financial Officer of the Bank since May 1988.
He has previous employment experience as a partner in a public accounting firm
and as a senior financial officer with other savings institutions. He is a
certified public accountant. Mr. Lowrey has served as a director and chairman of
the Western League of Savings Institutions. He also serves as a director of the
Federal Home Loan Bank of San Francisco and is the Eleventh District's
representative on the Savings Association Insurance Fund Advisory Council. Mr.
Lowrey is a member of the Government Affairs Council of America's Community
Bankers. He serves as a director and on the executive committee of the San
Gabriel Valley Council of Boy Scouts, Pacific Clinics and the Azusa Pacific
University Business Advisory Council.
RALPH DIMEGLIO has been President and Chief Executive Officer of H.C.
Henshey Co., a real estate management company in Santa Monica, California, since
1974 and has been employed by that company in various capacities since 1959.
67
<PAGE> 68
GARETH A. DORN has been President and owner of Dorn Realty Company, a
real estate brokerage firm, in Arcadia, California, since 1986.
ROBERT K. LEISHMAN has been the President and co-owner of Leishman
Management Company, Inc., a real estate management and brokerage company in
Pasadena, California, since 1971.
RICHARD W. PATTON is the owner and President of Richard W. Patton
Enterprises, a private investment firm and a secondary mortgage market broker.
He served as President and Chief Executive Officer of NMI, a mortgage banking
and brokerage subsidiary of the Bank, from March 1973 to July 1984, at which
time he became its Vice Chairman and Secretary and served in those capacities
until NMI discontinued business in 1989.
RICHARD G. REDMAN is past president of La Quinta Air Services, Inc., an
aviation services business at Thermal Airport in Southern California. Mr. Redman
is President of the Downie Redman Co., a truck and equipment leasing company,
and is the managing partner of Redman Properties, a private real estate
investment-management firm based in Los Angeles County. He has been involved in
Downie Redman Co. and Redman Properties for nineteen years and twelve years,
respectively.
NON-DIRECTOR EXECUTIVE OFFICERS
The following table sets forth certain information with respect to
executive officers of CENFED and/or the Bank who are not directors. Officers of
CENFED and the Bank serve at the discretion of their respective Boards of
Directors.
<TABLE>
<CAPTION>
AGE AT POSITIONS HELD WITH CENFED
NAME DECEMBER 31, 1997 AND/OR THE BANK
---- ----------------- ---------------
<S> <C> <C>
William D. Nichol 53 Executive Vice President and
Chief Financial Officer
Lawrence J. Winslow 44 Executive Vice President and
Chief Lending Officer of the
Bank
</TABLE>
The business experience of each of the executive officers is as follows:
WILLIAM D. NICHOL joined the Bank as Executive Vice President and Chief
Financial Officer in January 1995. Prior to joining CENFED, he serviced in a
similar capacity at a Scottsdale, Arizona-based mortgage banking company and,
prior to that, he served for nine years as Executive Vice President and Chief
Financial Officer of HomeFed Bank in San Diego, California.
LAWRENCE J. WINSLOW joined the Bank as Executive Vice President and
Chief Administrative Officer in April 1993. Prior to joining the Bank, he was
employed as President and Chief Executive Officer of Tracy Federal Bank, Tracy,
California for eight years.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with CENFED's 1998 Annual Meeting of Shareholders (the "Proxy
Statement") under the caption "Executive Compensation" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the shares of
CENFED Common Stock beneficially owned by each director, by certain executive
officers and by all directors and executive officers of CENFED and its
68
<PAGE> 69
subsidiaries as a group, as of February 17, 1998. Except as otherwise noted,
each beneficial owner listed has sole investment and voting power with respect
to the Common Stock indicated.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER OR AMOUNT AND NATURE OF
NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
-------------------------- ------------------------ ----------------
<S> <C> <C>
RALPH DIMEGLIO 14,785 *
GARETH A. DORN 24,520 *
ROBERT K. LEISHMAN - *
D. TAD LOWREY 87,780 1.44%
JOHN H. MICHEL 26,093 *
RICHARD W. PATTON 5,445 *
RICHARD G. REDMAN 26,263 *
WILLIAM NICHOL 34,459 *
LAWRENCE J. WINSLOW 45,246 *
ALL DIRECTORS AND OFFICERS
AS A GROUP (9 PERSONS) 264,591 (2) 4.32%
</TABLE>
* LESS THAN 1%.
(1) INCLUDES OPTIONS AWARDED UNDER LONG-TERM INCENTIVE PLANS TO THE EXTENT
SUCH OPTIONS WERE EXERCISABLE WITHIN SIXTY DAYS OF THE DATE OF THIS
TABLE.
(2) INCLUDES 29,300 STOCK OPTIONS WHICH ARE FULLY VESTED WITHIN SIXTY DAYS
OF THE DATE OF THIS TABLE. THE PERCENTAGE OF COMMON STOCK IS BASED UPON
THE 6,099,777 SHARES OF COMMON STOCK ISSUED AND OUTSTANDING ON FEBRUARY
17, 1998 PLUS 29,300 STOCK OPTIONS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of December 31, 1997, with respect
to any person or entity known by CENFED to be the beneficial owners of more than
5% of the issued and outstanding Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
---------------- -------------------- -----
<S> <C> <C>
FMR Corp. 575,334 9.58%
82 Devonshire Street
Boston, MA 02109
Neumeier Investment Counsel 444,067 7.39%
26435 Carmel Rancho Blvd.
Carmel, CA 93923
Keefe Managers, Inc. 337,140 5.61%
375 Park Avenue
New York, NY 10152
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing in the Proxy Statement under the caption
"Executive Compensation -- Certain
69
<PAGE> 70
Indebtedness and Transactions of Management" is incorporated herein by
reference.
70
<PAGE> 71
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS*
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of CENFED (incorporated by reference to
Exhibit 3.1 and 3.3 to CENFED's Registration Statement on Form S-1
(Registration No. 33-39487), as amended).
3.2 Bylaws of CENFED (incorporated by reference to Exhibit 3.2 to CENFED's
Registration Statement on Form S-1 (Registration No. 33-39487), as
amended).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 CENFED Financial Corporation Debenture Purchase Agreement dated December
19, 1994.
10.1 Century Federal Executive Performance Incentive Plan as of January 1,
1989 (incorporated by reference to Exhibit 10.1 to CENFED's Registration
Statement on Form S-1 (Registration No. 33-39487), as amended).
10.2 Century Federal Executive Performance Incentive Plan as of January 1,
1991 (incorporated by reference to Exhibit 10.2 to CENFED's Registration
Statement on Form S-1 (Registration No. 33-39487), as amended).
10.3 Century Federal Deferred Compensation Plan as of January 1, 1986
(incorporated by reference to Exhibit 10.3 to CENFED's Registration
Statement on Form S-1 (Registration No. 33-39487), as amended).
10.4 Century Federal Deferred Compensation and Benefit Restoration Plan
(incorporated by reference to Exhibit 10.4 to CENFED's Registration
Statement on Form S-1 (Registration No. 33-39487), as amended).
10.5 CENFED Financial Corporation 1992 Long -Term Incentive Plan
(incorporated by reference to Exhibit 10.5 to CENFED's Annual Report on
Form 10-K for December 31, 1991).
10.6 Form of Stock Option Agreement (See Exhibit Number 10.5) (incorporated
by reference to Exhibit 10.5 to CENFED's Annual Report on Form 10-K for
December 31, 1991).
10.7 Century Federal Savings and Loan Association Management Development and
Recognition Plan (incorporated by reference to Exhibit 10.7 to CENFED's
Annual Report on Form 10-K for December 31, 1991).
10.8 CENFED Financial Corporation Employee Stock Ownership Plan (incorporated
by reference to Exhibit 10.7 to CENFED's Annual Report on Form 10-K for
December 31, 1991).
10.9 Century Federal Profit Sharing and 401(k) Plan (incorporated by
reference to Exhibit 4.2 to CENFED's Registration Statement on Form S-8
(Registration No. 33-43010), as amended).
10.10 Employment Agreement between the Association and D. Tad Lowrey
(incorporated by reference to Exhibit 10.10 to CENFED's Registration
Statement on Form S-1 (Registration No. 33-39487), as amended).
10.11 Form of Employment Agreement between the Association and certain
officers (for each of the following: Messrs. Prince, Quigley and Renney)
(incorporated by reference to Exhibit 10.11 to CENFED's Registration
Statement on Form S-1 (Registration No.
33-39487), as amended).
10.12 Form of Salary Continuation Agreement between the Association and
certain officers (for each of the following: Messrs. Dieter, Neiffer,
Schwartz, and Taylor) (incorporated by reference to Exhibit 10.12 to
</TABLE>
71
<PAGE> 72
<TABLE>
<S> <C>
CENFED's Registration Statement on Form S-1 (Registration No. 33-39487),
as amended).
10.13 Amended and Restated Directors' Retainer Continuance Plan (incorporated
by reference to Exhibit 10.13 to CENFED's Registration Statement on Form
S-1 (Registration No.
33-39487), as amended).
10.14 Stock Purchase Agreement among CENFED, the Association, the Trustee of
the CENFED Employee Stock Ownership Trust and the Administrative
Committee of the CENFED Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.14 to CENFED's Annual Report on Form 10-K for
December 31, 1991).
10.15 Agreement and Plan of Merger, dated March 31, 1994, among CENFED
Financial Corporation, CenFed Bank, a Federal Savings Bank, United
California Savings Bank and N. Lawrence Ulvestad (incorporated by
reference to Exhibit B to CENFED's Current Report on Form 8-K for July
15, 1994).
10.16 CENFED Financial Corporation 1994 Directors' Stock Option Plan
(incorporated by reference to CENFED's Proxy Statement dated April 21,
1994).
10.17 CENFED Financial Corporation 1994 Long-Term Incentive Plan (incorporated
by reference to CENFED's Proxy Statement dated April 21, 1994).
10.18 Agreement and Plan of Merger, dated as of August 17, 1998, by and
between CENFED and Golden State Bancorp Inc. (incorporated by reference
to Exhibit 2.1 to CENFED's Current Report on Form 8-K dated August 17,
1997).
11 Statement Regarding Computation of Per Share Earnings.
12 Statement Regarding Computation of Ratios.
21 List of subsidiaries of CENFED.
</TABLE>
* Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described therein.
FINANCIAL STATEMENTS
See the Index to Financial Statements on page 74 and the Financial
Statements which begin on page F-2.
REPORTS ON FORM 8-K
CENFED filed no reports on Form 8-K with the Securities and Exchange Commission
during the three months ended December 31, 1997.
72
<PAGE> 73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pasadena,
State of California, on the 25th day of March, 1998.
CENFED FINANCIAL CORPORATION
By: /s/ D. Tad Lowrey
-------------------------------------
D. Tad Lowrey
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ D. Tad Lowrey President, Chief Executive March 25, 1998
- -------------------------------------- Officer and Director
D. Tad Lowrey (Principal Executive Officer)
/s/ William D. Nichol Executive Vice President, March 25, 1998
- -------------------------------------- Chief Financial Officer
William D. Nichol (Principal Financial Officer)
/s/ Steven P. Neiffer Comptroller March 25, 1998
- -------------------------------------- (Principal Accounting Officer)
Steven P. Neiffer
/s/ John H. Michel Chairman of the Board March 25, 1998
- --------------------------------------
John H. Michel
/s/ Ralph DiMeglio Director March 25, 1998
- --------------------------------------
Ralph DiMeglio
/s/ Gareth A. Dorn Director March 25, 1998
- --------------------------------------
Gareth A. Dorn
/s/ Robert K. Leishman Director March 25, 1998
- --------------------------------------
Robert K. Leishman
/s/ Richard W. Patton Director March 25, 1998
- --------------------------------------
Richard W. Patton
/s/ Richard G. Redman Director March 25, 1998
- --------------------------------------
Richard G. Redman
</TABLE>
73
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report............................................................................ F-1
Consolidated Statements of Financial Condition as of December 31, 1997 and 1996......................... F-2
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.............. F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.............. F-5
Notes to the Consolidated Financial Statements.......................................................... F-7
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements of notes thereto.
74
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CENFED Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of CENFED Financial Corporation and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CENFED
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
March 17, 1998
F-1
<PAGE> 76
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
<S> <C> <C>
Cash ................................................................................ $24,947 $17,441
Federal funds sold .................................................................. 2,000 7,500
---------- ----------
Cash and cash equivalents ................................................. 26,947 24,941
Investment securities available for sale, at fair value ............................. 189,799 161,719
Mortgage-backed securities ("MBS") available for sale, at fair value ................ 417,393 442,015
Loans held for investment, net ...................................................... 1,408,788 1,391,307
Loans held for sale, at lower of cost or fair value ................................. 116,770 109,651
Accrued interest receivable ......................................................... 15,700 14,685
Real estate acquired in settlement of loans ("REO") ................................. 4,004 10,466
Mortgage servicing rights ........................................................... 5,206 6,658
Premises and equipment, net ......................................................... 7,804 9,663
Intangible assets, net of accumulated amortization .................................. 203 205
Deferred income taxes ............................................................... 3,558 6,721
Other assets ........................................................................ 11,301 6,616
---------- ----------
$2,207,473 $2,184,647
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposit accounts ........................................................... $1,551,240 $1,558,470
Securities sold under agreements to repurchase ...................................... 74,488 130,639
Notes payable ....................................................................... 17,750 17,750
FHLB advances ....................................................................... 413,500 349,479
Other liabilities ................................................................... 14,889 14,491
---------- ----------
Total liabilities ......................................................... 2,071,867 2,070,829
---------- ----------
Commitments and contingent liabilities
Common stock. $.01 par value
Authorized shares: 14,000,000 at December 31, 1997 and December 31, 1996
Outstanding shares: 6,005,638 at December 31, 1997 and 5,154,533 at December 31, 1996 61 52
Additional paid in capital .......................................................... 62,638 41,747
Retained earnings -- substantially restricted ....................................... 70,623 73,450
Unrealized gain (loss) on securities available for sale, net of tax ................. 2,527 (237)
Deferred compensation -- retirement plans ........................................... (243) (1,194)
---------- ----------
Total stockholders' equity ................................................ 135,606 113,818
---------- ----------
$2,207,473 $2,184,647
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 77
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Interest and Dividend Income:
Loans ...................................................... $121,335 $120,616 $105,164
Investment securities and short-term investments ........... 11,408 8,213 7,758
Mortgage-backed securities ................................. 31,667 28,254 23,527
--------- --------- ---------
Total interest and dividend income ..................... 164,410 157,083 136,449
--------- --------- ---------
Interest Expense:
Customer deposit accounts .................................. 79,674 79,286 71,130
Securities sold under agreements to repurchase ............. 7,962 6,442 10,371
FHLB advances .............................................. 23,456 17,897 13,972
Notes payable .............................................. 2,087 2,299 2,491
--------- --------- ---------
Total interest expense ................................. 113,179 105,924 97,964
--------- --------- ---------
Net interest income ........................................ 51,231 51,159 38,485
Provisions for loan losses ................................... 6,000 8,050 2,900
----------- ----------- -----------
Net interest income after provisions for loan losses ... 45,231 43,109 35,585
----------- ----------- -----------
Non-Interest Income:
Loan servicing fees ........................................ 3,652 3,940 3,977
Customer deposit account fees .............................. 1,946 1,947 1,921
Gain on sale of investments and MBS ........................ 2,029 1,124 82
Gain on sale of loans ...................................... 3 40 101
Income (Loss) from real estate operations .................. (1,545) 3,288 (682)
Commissions from sales of investment products .............. 1,694 1,721 1,226
Other ...................................................... 828 573 629
--------- --------- ---------
Total non-interest income .............................. 8,607 12,633 7,254
--------- --------- ---------
Operating Expenses:
Compensation ............................................... 17,451 16,272 17,078
Net occupancy .............................................. 5,755 6,187 5,288
Deposit insurance premiums ................................. 985 3,329 3,149
Savings Association Insurance Fund recapitalization
assessment -- 9,106 --
Data and check processing .................................. 1,367 1,549 1,707
Advertising and marketing .................................. 719 942 820
Intangible amortization .................................... 3 62 (46)
Other ...................................................... 6,760 6,620 5,155
--------- --------- ---------
Total operating expenses ............................... 33,040 44,067 33,151
--------- --------- ---------
Earnings before income taxes and extraordinary item .... 20,798 11,675 9,688
Income tax expense (benefit) ................................. 7,008 (27) 2,491
--------- --------- ---------
Earnings before extraordinary item ..................... 13,790 11,702 7,197
Extraordinary Item:
Early extinguishment of debt (net of income taxes of $267) . -- (364) --
--------- --------- ---------
Net Earnings ........................................... $13,790 $11,338 $7,197
========= ========= =========
Basic Earnings per Share:
Before extraordinary item .............................. 2.37 2.10 1.32
Extraordinary item ..................................... -- (0.07) --
--------- --------- ---------
After extraordinary item ............................... $2.37 $2.03 $1.32
========= ========= =========
Diluted Earnings per Share:
Before extraordinary item .............................. 2.27 1.98 1.26
Extraordinary item ..................................... -- (0.06) --
--------- --------- ---------
After extraordinary item ............................... $2.27 $1.92. $1.26
========= ========= =========
Weighted Average Shares Outstanding:
Common shares .......................................... 5,806,607 5,574,406 5,455,086
Common shares and dilutive potential shares ............ 6,074,474 5,896,904 5,729,734
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 78
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
ADDITIONAL SECURITIES
COMMON PAID IN RETAINED AVAILABLE DEFERRED
TOTAL STOCK CAPITAL EARNINGS FOR SALE COMPENSATION
-------- ------ ------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ................................... 91,221 45 29,406 68,075 (4,629) (1,676)
Net earnings ............................................... 7,197 7,197
Shares issued pursuant to stock option and incentive plans . 463 1 592 (130)
Cash dividends paid ........................................ (1,423) (1,423)
Shares issued in connection with dividend reinvestment ..... -- 128 (128)
Change in unrealized gain or loss on securities available
for sale ................................................. 6,808 6,808
Deferred compensation amortized to expense ................. 286 286
-------- --- ------- ------- ------ -----
Balance, December 31, 1995 ................................... 104,552 46 30,126 73,721 2,179 (1,520)
Net earnings ............................................... 11,338 11,338
Shares issued pursuant to stock option and incentive plans . 1,634 1 1,633
Shares issued in connection with stock dividend ............ -- 5 9,822 (9,827)
Cash dividends paid ........................................ (1,616) (1,616)
Shares issued in connection with dividend reinvestment ..... -- 166 (166)
Change in unrealized gain or loss on securities available
for sale ................................................. (2,416) (2,416)
Deferred compensation amortized to expense ................. 326 326
-------- --- ------- ------- ------ -----
Balance, December 31, 1996 ................................... $113,818 $52 $41,747 $73,450 $ (237) $(1,194)
Net earnings ............................................... 13,790 13,790
Shares issued pursuant to stock option and incentive plans . 8,200 4 8,196
Shares issued in connection with stock dividend ............ -- 5 14,576 (14,581)
Cash dividends paid ........................................ (1,862) (1,862)
Shares repurchased ......................................... (2,055) (2,055)
Shares issued in connection with dividend reinvestment ..... -- 174 (174)
Change in unrealized gain or loss on securities available
for sale ................................................. 2,764 2,764
Deferred compensation amortized to expense ................. 951 951
-------- --- ------- ------- ------ -----
Balance, December 31, 1997 ................................... $135,606 $61 $62,638 $70,623 $2,527 $(243)
======== === ======= ======= ====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 79
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................................... $13,790 $11,338 $7,197
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Net amortization (accretion) of fees, discounts and premiums.... 3,111 1,403 (142)
Depreciation and amortization..................................... 2,161 2,402 2,481
(Gain) loss on sale of loans...................................... (3) (40) (101)
Gain on sale of investments and MBS............................... (2,029) (1,124) (82)
Provisions for loan and real estate losses........................ 6,193 8,452 3,219
Deferred income taxes............................................. 3,163 (2,383) 13,410
Originations and purchases of loans held for sale................. (20,999) (37,619) (52,594)
Repayments and prepayments on loans held for sale................. 11,555 16,461 19,985
Proceeds from sale of loans held for sale......................... 1,511 11,570 27,888
(Increase) decrease in interest receivable........................ (1,015) 209 (3,225)
Increase (decrease) in accrued interest payable................... (986) 1,689 2,663
Change in other assets and other liabilities...................... 3,427 (10,149) 6,059
FHLB stock dividends.............................................. (1,248) (919) (749)
Other, net........................................................ 2 (19) --
------- ------- --------
Net cash provided by operating activities......................... 18,633 1,271 26,009
------- ------- --------
Cash flows from investing activities:
Purchases of investment securities held to maturity.............. -- -- --
Purchases of investment securities available for sale............ (123,619) (122,579) (22,906)
Proceeds from sale of investment securities available for sale.... 91,379 90,459 2,803
Maturities of investment securities available for sale............ 10,000 5,000 --
Purchases of MBS held to maturity................................. -- -- (38,897)
Purchases of MBS available for sale............................... (151,704) (365,712) (78,315)
Proceeds from sale of MBS available for sale...................... 123,213 199,773 63,909
Principal repayments on MBS available for sale.................... 57,507 63,813 42,502
Originations and purchases of loans held for investment........... (289,646) (124,781) (405,998)
Proceeds from sale of loans held for investment................... -- 3,947 1,452
Repayments and prepayments on loans held for investment........... 241,425 192,379 122,200
Lease repayments and sales of leased autos........................ -- -- 12
Purchases of premises and equipment............................... (328) (977) (3,448)
Sale of premises and equipment.................................... 3 2,419 116
Capital expenditures on REO and real estate held for
development and sale........................................... (548) (956) (1,096)
Sales of REO and real estate held for development and sale........ 23,553 19,502 17,085
------- ------- --------
Net cash used in investing activities .......................... (18,765) (37,713) (300,581)
------- ------- --------
</TABLE>
F-5
<PAGE> 80
CENFED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in customer deposit accounts.............. (7,030) 8,109 183,821
Purchase of customer deposit accounts............................. -- -- 59,603
Net decrease in notes payable..................................... -- (5,050) (200)
Net increase (decrease) in short-term financing:
FHLB advances.................................................. (16,479) 48,179 (27,700)
Securities sold under agreements to repurchase................. (49,651) (19,413) 2,640
Dividends paid to shareholders.................................... (2,037) (1,616) (1,423)
Proceeds from long-term FHLB advances............................. 74,000 800 62,500
Proceeds from issuance of common stock............................ 5,390 1,158 593
Repurchases of common stock....................................... (2,055) -- --
-------- -------- --------
Net cash (used by) provided by financing activities............ 2,138 32,167 279,834
-------- -------- --------
Net (decrease) increase in cash and cash equivalents.............. 2,006 (4,275) 5,262
Cash and cash equivalents, beginning of period.................... 24,941 29,216 23,954
-------- -------- --------
Cash and cash equivalents, end of period.......................... $ 26,947 $ 24,941 $ 29,216
======== ======== ========
SUPPLEMENTARY INFORMATION
Cash paid for:
Interest on interest-bearing liabilities........................... $114,165 $104,239 $ 95,305
Income tax payments (refunds), net ................................ $ 3,137 $ 6,180 $(10,919)
Non-cash items:
Real estate acquired in settlement of loans........................ $ 23,981 $ 27,251 $ 12,163
Net change in unrealized gain (loss) on securities
available for sale............................................... $ 2,764 $ (2,416) $ 6,808
Transfer to real estate held for development and
sale from premises and equipment................................. -- -- $ 5,164
Transfer of investment securities and MBS from held
to maturity to available for sale................................ -- -- $285,682
Loans to facilitate the sale of REO................................ $ 6,409 $ 3,350 $ 5,233
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 81
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared on an accrual
basis in conformity with generally accepted accounting principles and include
the accounts of CENFED Financial Corporation and its wholly-owned subsidiary,
CenFed Bank (the "Bank"), and its subsidiaries, Crescent Bay Diversified, Inc.,
PFS Corporation, and CENFED Investments, Inc. As used herein, the "Company"
refers to CENFED Financial Corporation and its subsidiaries. All material
intercompany transactions and accounts have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of financial condition and revenues
and expenses for the period. Actual results could differ from those estimates.
Certain reclassifications have been made to the consolidated financial
statements from prior years to conform them to the current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks and federal
funds sold with maturities less than three months.
INVESTMENT SECURITIES AVAILABLE FOR SALE
The Company accounts for debt and equity securities in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Investment
securities and mortgage-backed securities (collectively referred to as
"securities") available for sale are reported at fair value and net unrealized
gains and losses (unless other than temporary) are presented, net of income tax
effects, as a separate component of stockholders' equity. To the extent a
security has a decline in fair value that is deemed other than temporary, the
cost basis is adjusted to fair value through a charge to the statement of
operations. Gains and losses from the sales of mortgage-backed securities
("MBS") and investment securities available for sale are recognized at the time
of sale and are determined by the specific identification method.
LOANS
Loans held for investment are recorded at the contractual amounts owed by
borrowers adjusted for unamortized discounts, premiums, undisbursed funds,
hedging instruments, deferred loan fees and the allowance for loan losses. Loans
held for sale are carried at the lower of cost or fair value as determined by
outstanding commitments from investors or current investor yield requirements,
calculated on an aggregate basis. A valuation allowance is established if the
fair value of such loans is less than their cost and operations are charged or
credited for valuation adjustments
Loans are evaluated for impairment in accordance with the provisions of
statement of Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting By Creditors for Impairment of a Loan," as amended by Statement of
Financial Accounting Standards No. 118 ("SFAS No. 118"), "Accounting By
Creditors for Impairment of a Loan, Income Recognition and Disclosures." SFAS
No. 114 does not apply to large groups of smaller-balance homogenous loans that
are collectively evaluated for impairment. The Company collectively reviews all
single family and consumer loans for impairment.
SFAS No. 114 requires that an impaired loan be measured based on: (i) the
present value of the expected future cash flows discounted at the loan's
effective interest rate; or (ii) the loan's observable fair value; or (iii) 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
F-7
<PAGE> 82
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
expected future cash flows, or if actual cash flows are significantly different
from the cash flows previously projected, or the fair value of the collateral
fluctuates materially, the Company recalculates the impairment and adjusts the
specific valuation allowance.
The Company reviews all multifamily residential, commercial real estate,
construction and small business loans for impairment when they become delinquent
or otherwise come to the attention of management. Once identified, such loans
are reviewed periodically until management believes such loans no longer are
impaired or are exhibiting sufficient weakness that it is likely they might
become impaired in the future.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is comprised of both specific and general
allowances. General valuation allowances are provided based on a number of
factors, including current economic trends, estimated collateral values,
management's assessment of credit risk inherent in the portfolio and historical
loss experience. The general valuation allowance for loan losses has been
established to provide for reasonably anticipated future losses resulting from
lending activities.
The Company periodically reviews the relevant factors and the formulas by
which additions are made to the allowances for losses. In the opinion of
management, the present allowances are adequate to absorb reasonably anticipated
losses. Recovery of the carrying value of such loans, however, is dependent to a
great extent on economic, operating, and other conditions that may be beyond the
Company's control. In addition, various regulatory agencies, as part of their
examination process, periodically review the Company's allowance for loan
losses. These agencies may require the Company to establish additional valuation
allowances, based on their judgments of the information available at the time of
the examination.
LOAN INTEREST INCOME AND FEES
Interest on loans is credited to income as earned and is accrued only if
deemed collectible. Loan origination fees and commitment fees are offset by
certain direct loan origination costs and are deferred and recognized over the
contractual life of the loan as a yield adjustment using the interest method.
Discounts or premiums associated with purchased loans are amortized into
interest income using the interest method over the contractual lives of the
loans, as adjusted for prepayments.
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 than or later than the 90
days past due standard, depending upon the individual circumstances surrounding
the loan's delinquency. When an asset is placed on nonaccrual status, previously
accrued but unpaid interest is reversed against current income. Subsequent
collections of cash may be applied as reductions to the principal balance or
recorded as income, depending upon management's assessment of the ultimate
collectibility of the asset. Nonaccrual assets may be restored to accrual status
when principal and interest become current and full payment of principal and
interest is expected.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is stated at fair value less
the estimated costs to sell. At the time the Company acquires title to property
in settlement of a loan, the allowance for loan losses is charged in an amount
necessary to reduce the recorded investment in the asset to its fair value.
Further deterioration in the fair value of real estate acquired in settlement of
loans during the disposition period is charged to earnings.
Costs related to development and improvement of properties are capitalized,
whereas costs relating to holding the properties are charged to expense.
F-8
<PAGE> 83
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
PREMISES AND EQUIPMENT
Depreciation and amortization are provided using the straight-line method
over the estimated lives of the various classes of assets. The ranges of useful
lives for the principal classes of assets are as follows:
<TABLE>
<S> <C>
Buildings ................................. 30 to 50 years
Furniture, fixtures and equipment ......... 3 to 10 years
Automobiles ............................... 3 to 5 years
Leasehold improvements and leasehold rights Life of lease
</TABLE>
BUSINESS COMBINATIONS AND INTANGIBLE ASSETS
The Company has engaged in business combinations in recent years to acquire
assets and customer deposit accounts from financial institutions in its market
area. The Company recorded the assets and liabilities acquired using the
purchase method of accounting under which the acquired assets and liabilities
were recorded at their fair values. The difference between the purchase price
and the fair values of the assets acquired and liabilities assumed was recorded
as an intangible asset, in the form of goodwill and/or core deposit premium. The
core deposit premium is an identifiable intangible based upon the core value of
the depositor relationships and is amortized over the estimated lives of the
deposit relationships. The Company determined the lives and appropriate methods
of amortizing the core deposit premiums based upon the characteristics of each
acquisition. Any remaining premium is an unidentifiable asset, goodwill, which
is amortized over a 5-year period using the straight-line method.
In June 1995, the Company purchased certain assets and the operations of
Government Funding California Business and Industrial Development Corporation
("GFC"), a Los Angeles-based originator of business loans offered under programs
sponsored and guaranteed by the Small Business Administration. The Company
purchased $69 million of non-guaranteed balances of SBA loans, $4 million of
guaranteed balances of SBA loans subject to sales commitments, the rights to
service $286 million of SBA-guaranteed loan balances that had previously been
sold by GFC, and $50 million of loan applications in process. The seller of
GFC's assets provided certain credit enhancements with respect to the portfolio
of non-guaranteed balances of SBA loans. The Company paid a premium in the
transaction that was allocated among the retained loan balances and the
servicing portfolio. The loan premium is being amortized using the interest
method over the estimated life of the loans. The servicing rights premium is
being amortized in proportion to and over the period of estimated net servicing
income. The servicing premium is evaluated for impairment based upon fair value.
To the extent impairment existed, a valuation allowance would be established for
the difference between the fair value of the asset and its carrying value.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights represent the cost of acquiring the right to
service SBA loans secured by real estate. At December 31, 1997, the Company had
$5.2 million of purchased mortgage servicing rights resulting from the
acquisition of assets from GFC.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. The Statement distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 125 supersedes
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," ("SFAS No. 122"), though the general concepts of SFAS No. 122
were retained in the new pronouncement. The Company adopted SFAS No. 125 on
January 1, 1997, at which time of adoption there was not a material impact upon
its financial condition or results of operations.
F-9
<PAGE> 84
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities with an agreement to repurchase
the same security, also referred to as "reverse repurchase agreements." Reverse
repurchase agreements are accounted for as financings, and the obligations of
the Company to repurchase the securities are reflected as liabilities. The
securities underlying the agreements remain in the asset accounts of the
Company. Securities sold in these financing arrangements have consisted of U.S.
Government, agency, and mortgage-backed securities and have only been arranged
through primary dealers in U.S. Government securities. The securities underlying
the agreements are book entry securities. During the period of such agreements,
the securities are delivered by appropriate entry into the counterparties'
accounts at the Federal Reserve Bank of New York.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," effective December 31, 1997. Under this accounting
standard, the Company is required to report basic and diluted earnings per
share. Basic earnings per share is computed by dividing net earnings by the
average number of shares of common stock outstanding during the period. Diluted
earnings per share is determined by dividing net earnings by the average number
of shares of common stock outstanding adjusted for the dilutive effect of common
stock equivalents. The Company uses the treasury stock method for converting
common stock equivalents to common stock. Earnings per share for 1996 and 1995
have been restated to conform to the provisions of this accounting standard. In
addition, earnings per share data for 1996 and 1995 has been restated to give
retroactive recognition to a stock dividend declared in 1997.
INCOME TAXES
The Company and its subsidiaries file consolidated federal income and state
franchise tax returns. Income tax expense or benefit is allocated to each member
of the consolidated group based on earnings or losses before income taxes,
adjusted for any permanent differences.
The Company applies the principles set forth in Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities represent the tax
effects, calculated at currently effective tax rates, of future deductible or
taxable amounts attributable to events that have been recognized on a cumulative
basis in the consolidated financial statements. Under this standard, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
for which the change becomes effective.
STOCK OPTION PLANS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," which permits entities to (i) recognize as expense over the
vesting period the fair value of all stock-based compensation awards on the date
of grant, or (ii) continue to apply the provisions of previously issued
accounting standards and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants. The Company elected to
continue to apply the provisions of previous accounting standards, pursuant to
which compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price, and to provide
the pro forma disclosures required by SFAS No. 123.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). Comprehensive income represents the change in equity of
the Company during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all
F-10
<PAGE> 85
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
components of comprehensive income, which are required to be recognized under
accounting standards, be reported in a financial statement that is displayed in
equal prominence with the other financial statements. SFAS 130 does not require
a specific presentation format but will require the Company to display an amount
representing total comprehensive income for the period in the financial
statements. SFAS 130 is effective for both interim and annual periods beginning
after December 15, 1997. Implementation of SFAS 130 will not have a material
adverse effect on the Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," ("SFAS 131"). SFAS 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS 131 supersedes numerous requirements in a previously issued
statement -- SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" -- but retains the requirement to report information about major
customers. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. Implementation of SFAS 131 will not have a material
adverse effect on the Company's financial condition or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other postretirement benefits
plans but does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when the FASB issued Statements No. 87, "Employers
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pensions Plans and for Termination Benefits" and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 suggests combined formats for presentation of pension
and other postretirement benefits disclosures. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. Restatement of disclosures for
earlier periods provided for comparative purposes is required unless the
information is not readily available, in which case the notes to the financial
statements should include all available information and a description of the
information not available. Implementation of SFAS 132 will not have a material
adverse effect on the Company's financial condition or results of operations.
YEAR 2000
The Company has an ongoing program designed to ensure that its operational
and financial systems will not be adversely affected by year 2000 software
failures due to processing errors arising from calculations using the year 2000
date. Prior to announcing its agreement to merge with Golden State Bancorp Inc.
("GSB"), the Company was proceeding with a plan to upgrade its core processing
capabilities through a change of service bureaus. One of the criteria for
selection of a new service bureau was a the requirement that a year 2000 plan
either be underway or completed at the time of contract signing. Therefore, the
expenses related to year 2000 programming enhancements would likely have been
part of the contractual fee paid by the Company to the service bureau. Any
costs incurred in connection with year 2000 will be charged to expense.
(2) AGREEMENT AND PLAN OF MERGER
On August 18, 1997, the Company announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Golden State Bancorp
Inc., a Delaware corporation ("GSB" or "Golden State"). GSB is the parent
company of Glendale Federal Bank. Pursuant to the terms of the Merger Agreement,
GSB will acquire the Company and merge it into a wholly-owned subsidiary. Each
outstanding share of the Company's common stock will be converted to the right
to receive 1.2 shares of GSB's common stock. Consummation of the merger is
conditional upon the receipt of regulatory approvals and the adoption and
approval of the Merger Agreement by CENFED Financial Corporation's stockholders.
All necessary documents and applications have been filed with the regulatory
bodies and the solicitation of CENFED Financial Corporation's shareholders began
on March 10, 1998.
F-11
<PAGE> 86
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized as follows at:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Obligations of municipalities ....... $ 80,725 $ 2,403 $ 3 $ 83,125
U.S. Government obligations ......... 83,482 73 55 83,500
Stock of the Federal Home Loan Bank.. 22,914 -- -- 22,914
Other equity securities ............. 260 -- -- 260
-------- -------- -------- --------
$187,381 $ 2,476 $ 58 $189,799
======== ======== ======== ========
Weighted average yield .............. 6.68%
====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Holding Gains Holding Losses Value
---- ------------- -------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Obligations of municipalities........ $77,540 $80 $1,857 $75,763
U.S. Government obligations.......... 67,978 47 40 67,985
Stock of the Federal Home Loan Bank.. 17,919 -- - 17,919
Other equity securities.............. 52 -- - 52
-- -- - --
$163,489 $127 $1,897 $161,719
======== ==== ====== ========
Weighted average yield............... 6.61%
====
</TABLE>
At both dates presented, the weighted average yield for investment securities
available for sale is presented on a tax equivalent basis.
Investment securities available for sale pledged as collateral against Federal
Home Loan Bank Advances totaled $22,914,000 and $17,919,000 at December 31, 1997
and 1996, respectively.
Gross realized gains and losses on sales of investments securities available for
sale were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
----- ------
(IN THOUSANDS)
<S> <C> <C>
Years Ended:
December 31, 1997 ............................. $329,000 $245,000
December 31, 1996.............................. $ 94,000 $ 23,174
December 31, 1995.............................. 2,000 --
</TABLE>
F-12
<PAGE> 87
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The contractual maturities of investment securities available for sale at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equity securities without maturities............. $ 23,174 $ 23,174
Due in one year or less.......................... 43,521 43,529
Due after one year through five years............ 39,961 39,971
Due after five years through ten years........... -- --
Due after ten years.............................. 80,725 83,125
-------- --------
$187,381 $189,799
======== ========
</TABLE>
(4) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows at:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
---- ------------- -------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Pass-through and REMIC securities:
Guaranteed by FNMA ............... $ 80,855 $ 702 $ 442 $ 81,115
Guaranteed by GNMA ............... 32,165 515 -- 32,680
Guaranteed by FHLMC .............. 32,462 415 45 32,832
"AAA"- and "AA"-rated securities.. 246,447 1,381 223 247,605
Other securities ................. 23,491 115 445 23,161
-------- -------- -------- --------
$415,420 $ 3,128 $ 1,155 $417,393
======== ======== ======== ========
Weighted average yield ................ 6.89%
====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
---- ------------- -------------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Pass-through and REMIC securities:
Guaranteed by FNMA ............... $111,838 $ 256 $ 592 $111,502
Guaranteed by GNMA ............... 29,022 302 -- 29,324
Guaranteed by FHLMC .............. 31,760 115 66 31,809
"AAA"- and "AA"-rated securities.. 241,954 3,277 404 244,827
Other securities ................. 26,083 91 1,621 24,553
-------- -------- -------- --------
$440,657 $ 4,041 $ 2,683 $442,015
======== ======== ======== ========
Weighted average yield............ 7.01%
====
</TABLE>
F-13
<PAGE> 88
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The fair value of mortgage-backed securities available for sale with
adjustable rates totaled $401,199,000 and $410,362,000 at December 31, 1997 and
1996, respectively.
The "AAA"- and "AA"-rated MBS owned by the Company are credit-enhanced in
a variety of ways. Many of the securities represent senior interests in Real
Estate Mortgage Investment Conduits ("REMICs") in which other subordinated
classes of the same security absorb all of the losses in the underlying mortgage
pools up to a specified amount. Other securities owned by the Company are
credit-enhanced through the purchase and placement in trust of mortgage
insurance pool policies from highly-rated institutions (not the issuer) which
provide protection against losses sustained in the underlying mortgage pools up
to a specified amount. A third form of credit enhancement is provided through
establishment of a "cash reserve fund" whereby the issuer places in trust a
certain amount of cash or government securities, which may be applied against
losses sustained on the underlying mortgage pool and which protect the interests
of the security holders. The relative amount of credit enhancement available to
absorb losses for each security in the Company's portfolio varies depending upon
the initial level of credit enhancement provided by the security issuer and the
ensuing amortization, prepayment and loss experience in the mortgage loans that
comprise the security.
The real estate collateral securing the mortgage-backed securities
available for sale was as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---- ----
(IN THOUSANDS
<S> <C> <C>
Single family real estate.......... $355,921 $375,475
Multifamily real estate ........... 61,472 66,540
-------- --------
$417,393 $442,015
======== ========
</TABLE>
Mortgage-backed securities available for sale were pledged as collateral as
follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---- ----
(IN THOUSANDS
<S> <C> <C>
Federal Home Loan Bank Advances...................... $126,047 $106,696
Securities Sold Under Agreement to Repurchase........ 85,595 137,736
Other................................................ 3,471 3,458
</TABLE>
Gross realized gains and losses on sales of mortgage-backed securities
available were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
----- ------
<S> <C> <C>
Years Ended:
December 31, 1997 ..... $2,322,000 $ 377,000
December 31, 1996 ..... $3,001,000 $1,485,000
December 31, 1995 ..... $ 279,000 $ 199,000
</TABLE>
F-14
<PAGE> 89
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The contractual maturities of mortgage-backed securities available for
sale, excluding periodic principal payments, at December 31, 1997, were as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less .............. $ 289 $ 315
Due after one year through five years 8,112 8,173
Due after five years through ten years -- --
Due after ten years .................. 407,019 408,905
-------- --------
$415,420 $417,393
======== ========
</TABLE>
(5) LOANS
The following is a summary of loans held for investment and loans held for
sale at:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
HELD FOR HELD
INVESTMENT FOR SALE COMBINED
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Single family real estate ................................... $ 792,717 $ 55,806 $ 848,523
Commercial real estate (multifamily residential and
commercial nonresidential ................................ 446,965 -- 446,965
Small business loans:
Business loans under SBA lending programs ................. 71,149 59,442 130,591
Other small business loans ................................ 33,968 -- 33,968
Construction ................................................ 463 -- 463
Home equity and property improvement ........................ 61,580 -- 61,580
Consumer loans, including loans secured by deposit accounts.. 3,128 -- 3,128
----------- ----------- -----------
Total gross loans ................................. 1,409,970 115,248 1,525,218
Unearned fees, discounts and premiums .................. 16,521 1,522 18,043
Undisbursed loan funds ................................. (405) -- (405)
Allowance for loan losses .............................. (17,298) -- (17,298)
----------- ----------- -----------
$ 1,408,788 $ 116,770 $ 1,525,558
=========== =========== ===========
Weighted average yield at end of year .................. 7.89% 9.03% 7.98%
=========== =========== ===========
</TABLE>
F-15
<PAGE> 90
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
HELD FOR HELD
INVESTMENT FOR SALE COMBINED
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Single family real estate ................................. $ 903,811 $ 66,077 $ 969,888
Commercial real estate (multifamily residential and
commercial nonresidential .............................. 389,576 -- 389,576
Small business loans:
Business loans under SBA lending programs ............... 71,700 41,508 113,208
Other small business loans .............................. 21,079 -- 21,079
Construction .............................................. 2,375 -- 2,375
Home equity and property improvement ...................... 1,929 -- 1,929
Consumer loans, including loans secured by deposit accounts 2,483 -- 2,483
----------- ----------- -----------
Total gross loans ............................... 1,392,953 107,585 1,500,538
Unearned fees, discounts and premiums ................ 12,813 2,066 14,879
Undisbursed loan funds ............................... (971) -- (971)
Allowance for loan losses ............................ (13,488) -- (13,488)
----------- ----------- -----------
$ 1,391,307 $ 109,651 $ 1,500,958
=========== =========== ===========
Weighted average yield at end of year ................ 7.74% 9.11% 7.84%
=========== =========== ===========
</TABLE>
Loans held for sale are reported at the lower of cost or fair value. At
December 31, 1997 and 1996, the fair values of loans held for sale were
$123,043,000 and $110,836,000, respectively.
Loans with adjustable rates totaled $1,376,599,000 and $1,422,344,000 at
December 31, 1997 and 1996, respectively. Such loans adjust monthly, quarterly,
semi-annually or annually and are subject to interest rate adjustment
limitations. The loans are indexed to the cost of funds of savings institutions
in the 11th District of the FHLB, the London Interbank Offered Rate, 1-year U.S.
Treasury Constant Maturity Notes or the prime rate.
Loans held for investment with aggregate carrying values of $415,394,000
and $407,526,000 were pledged as collateral on FHLB advances at December 31,
1997 and 1996, respectively.
CREDIT RISK
F-16
<PAGE> 91
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
An analysis of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year ................................ $ 13,488 $ 12,789 $ 12,529
Provisions for loan losses ................................ 6,000 8,050 2,900
Acquisitions and purchases ................................ 2,606 -- 500
Recoveries from allowance for lease losses ................ -- 16 11
Recoveries ................................................ 2,423 1,833 1,390
Charge-offs ............................................... (7,219) (9,200) (4,541)
-------- -------- --------
Balance, end of year ...................................... $ 17,298 $ 13,488 $ 12,789
======== ======== ========
</TABLE>
Nonaccrual Loans. Information regarding interest that would have been
earned under the original terms of the Company's nonaccrual loans and interest
actually reported during each financial reporting period follows:
<TABLE>
<CAPTION>
INTEREST LOANS
INTEREST UNDER ON NONACCRUAL
RECORDED ORIGINAL TERMS STATUS
-------- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Years Ended:
December 31, 1997 ......................................... $ 718 $ 1,519 $ 16,251
December 31, 1996 ......................................... $ 1,081 $ 2,091 $ 21,502
December 31, 1995 ......................................... $ 581 $ 1,293 $ 14,841
</TABLE>
Impaired Loans. The following table sets forth information with respect to
impaired loans at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1997 1996
---------------------------------- -----------------------------------
SPECIFIC NET SPECIFIC NET
LOAN LOSS RECORDED LOAN LOSS RECORDED
BALANCES ALLOWANCES INVESTMENT BALANCES ALLOWANCES INVESTMENT
-------- ---------- --------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Requiring specific loss allowances ...... $ 2,267 $ 768 $ 1,499 $ 3,457 $ 1,439 $ 2,018
Not requiring specific loss allowances .. 2,894 -- 2,894 3,668 -- 3,668
------- ------- ------- ------- ------- -------
5,161 768 4,393 7,125 1,439 5,686
------- ------- ------- ------- ------- -------
Restructured loans:
Requiring specific loss allowances ..... 4,210 636 3,574 4,756 707 4,049
Not requiring specific loss allowances . 1,200 -- 1,200 -- -- --
------- ------- ------- ------- ------- -------
5,410 636 4,774 4,756 707 4,049
------- ------- ------- ------- ------- -------
Other loans:
Requiring specific loss allowances ...... 1,951 407 1,544 2,937 709 2,228
Not requiring specific loss allowances .. 2,202 -- 2,202 618 -- 618
------- ------- ------- ------- ------- -------
4,153 407 3,746 3,555 709 2,846
------- ------- ------- ------- ------- -------
TOTAL .............................. $14,724 $ 1,811 $12,913 $15,436 $ 2,855 $12,581
======= ======= ======= ======= ======= =======
</TABLE>
The average recorded investment in impaired loans during the years ended
December 31, 1997 and 1996 was
F-17
<PAGE> 92
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
$12,747,000 and $11,349,000. Interest recognized during the years ended December
31, 1997 and 1996 totaled $1,107,000 and $991,000, respectively, for impaired
loans.
Impaired loans at December 31, 1997 and 1996 included $2,668,000 and
$3,195,000 of small business loans that were purchased from GFC. The purchase
agreement contains credit enhancement provisions with respect to these loans
that management believes minimize risk of loss.
Impaired loans at December 31, 1997 and 1996 included $4,741,000 and
$4,756,000 of multifamily residential and commercial real estate loans which
have been modified. These modifications are generally in the form of lower
interest rates, payment decreases or maturity extensions.
CONCENTRATIONS OF CREDIT
Commercial Real Estate. The Company had commercial real estate loans
secured by properties in a number of different industries, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Office buildings .............. $ 99,950 $ 77,835
Stores and shopping centers.... 80,460 62,540
Manufacturing and warehouses... 64,780 62,689
Motels ........................ 11,827 16,868
Medical buildings ............. 9,081 9,225
Other commercial properties.... 22,764 30,586
-------- --------
$288,862 $259,743
======== ========
</TABLE>
The ability of the Company's customers to honor their loan agreements is
dependent upon the health of these economic sectors as well as the general
economy of the Company's market area.
Small Business Loans. The Company's small business loan portfolio was
diversified by industry, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Motels ..................... $ 44,576 $ 33,065
Professional Services ...... 26,744 21,770
Automotive ................. 21,055 18,482
Wholesale Trade ............ 22,675 16,818
Manufacturing .............. 15,931 10,597
Restaurants ................ 14,296 10,128
Retail Trade ............... 12,536 10,003
Other ...................... 6,746 13,406
-------- --------
$164,559 $134,269
======== ========
</TABLE>
Geographic. The Company's loan portfolio contained $1,387,228,000 and
$1,388,391,000 of loans secured by real estate properties located in California
at December 31, 1997 and 1996, respectively, representing about 99% of gross
loans at both dates.
F-18
<PAGE> 93
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
EXTENSIONS OF CREDIT TO DIRECTORS, OFFICERS AND EMPLOYEES
The following table sets forth the activity with regard to loans to Company
directors, officers and employees: At and for the years ended
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED
DECEMER 31,
-------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year . $ 7,277 $ 10,057
New extensions of credit ... -- 1,053
Repayments ................. (1,963) (3,833)
-------- --------
Balance, end of year ....... $ 5,314 $ 7,277
======== ========
</TABLE>
LOANS SERVICED FOR OTHERS
Loans serviced for others totaled $500,184,000 and $583,290,000 at December
31, 1997 and 1996, respectively. Servicing loans for others generally consists
of collecting payments, maintaining escrow accounts, disbursing payments to
investors, and processing foreclosures. Loan servicing income is recorded on the
cash basis and includes servicing fees and interest spread from investors, as
well as certain charges collected from borrowers (such as late payment fees) and
is reduced by the amortization of the purchased servicing asset. The Company
holds an immaterial amount of borrowers' escrow balances in connection with this
servicing.
An analysis of the activity in the purchased servicing asset follows:
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED
DECEMER 31,
-------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year......................... $6,658 $6,589
Purchases or reallocations during year............. -- 1,458
Amortization....................................... (1,452) (1,389)
------- -------
Balance, end of year............................... $5,206 $6,658
====== ======
</TABLE>
Periodically, the Company evaluates the recoverability of purchased
mortgage servicing rights based on the projected value of future net servicing
income. Future prepayment rates are estimated based on current interest rates
and various portfolio characteristics, including loan type, interest rate, and
market prepayment estimates. If the estimated recovery is lower that the current
amount of purchased mortgage servicing rights, a reduction to purchased mortgage
servicing rights is recorded.
F-19
<PAGE> 94
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(6) REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS, NET
The following is a summary of real estate acquired in settlement of
loans ("REO"), by property type at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Single family ................... $ 2,289 $ 7,867
Commercial real estate .......... 850 2,599
Small business loan collateral... 865 --
-------- --------
$ 4,004 $ 10,466
======== ========
</TABLE>
REO is recorded at fair value at the time that title is obtained to the
foreclosed property. Generally, this requires a charge against the allowance for
loan losses. If, during the disposition period, the value of REO declines
further, a loss provision is recorded as a current expense in the period the
deterioration in value is determined.
The Company incurs costs associated with the holding and disposing of REO.
These costs are combined with revenues and expenses associated with real estate
held for development and sale and reported, on a combined basis, in gains and
losses from real estate operations, as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loss on sale of REO ....................................... $ (8) $ (103) $ (62)
Holding period writedowns of REO .......................... (266) (402) (119)
REO holding costs ......................................... (1,336) (667) (595)
REO operating expenses, net ............................... (159) (98) (141)
------- -------- -----
REO sub-total ........................................ (1,769) $(1,270) $(917)
Net revenues on real estate held
for development and sale ................................ 224 4,558 235
------- -------- -----
$(1,545) $ 3,288 $(682)
======= ======== =====
</TABLE>
(7) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land ......................................................... $ 1,717 $ 1,717
Buildings and leasehold improvement .......................... 8,407 8,378
Furniture, fixtures, equipment and automobiles ............... 9,721 9,966
-------- --------
19,845 20,061
Less accumulated depreciation and amortization ............... (12,041) (10,398)
-------- --------
$ 7,804 $ 9,663
======== ========
</TABLE>
Depreciation and leasehold amortization expense for the years ended
December 31, 1997, 1996 and 1995 totaled $2,093,000, $2,165,000 and $1,855,000,
respectively.
F-20
<PAGE> 95
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(8) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Investment securities available for sale..................... $ 2,695 $ 1,721
Mortgage-backed securities available for sale................ 2,544 2,683
Loans held for investment and held for sale.................. 10,461 10,281
-------- -------
$15,700 $14,685
======== =======
</TABLE>
Accrued interest on investment securities available for sale includes
accrued dividends receivable on the Company's holdings of FHLB stock.
(9) CUSTOMER DEPOSIT ACCOUNTS
Customer deposit account balances are summarized as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- ---------------------------
1997 1996
------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand accounts:
Checking ................... $ 113,470 0.87% $ 106,453 1.05%
Passbook ................... 53,977 2.00 59,349 2.01
Money market accounts ...... 175,120 3.90 155,549 3.95
---------- ----------
342,567 321,351
---------- ----------
Fixed rate term certificates
of deposit:
3 to 5 months ............. 22,211 4.86 64,568 5.34
6 to 11 months ............. 404,075 5.48 329,062 5.21
12 to 23 months ............ 262,156 5.79 244,502 5.57
24 to 35 months ............ 54,965 5.68 99,198 6.28
36 to 60 months ............ 92,969 6.48 111,382 6.28
IRA/Keogh accounts ......... 151,872 6.17 152,964 6.23
Jumbos -- retail ........... 3,981 6.58 8,750 6.61
Jumbos -- wholesale ........ 216,444 5.56 226,693 5.65
---------- ----------
1,208,673 1,237,119
---------- ----------
$1,551,240 5.04% $1,558,470 5.06%
========== ==========
</TABLE>
At December 31, 1996, the contractual deposit liability balances in the 36
to 60 months certificates included a $200,000 discount to adjust the contractual
interest rates to market interest rates on certain above market rate
certificates that the Company acquired in connection with its purchase of United
California Savings Bank in July 1995.
F-21
<PAGE> 96
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth the amount of fixed-term certificates of
deposit as of December 31, 1997 maturing in the periods indicated:
<TABLE>
<CAPTION>
DEPOSITS MATURING IN THE YEARS ENDING DECEMBER 31,
------------------------------------------------------------------
1998 1999 2000 After 2000 TOTAL
---- ---- ---- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Contractual interest rate:
0.000% - 2.5% ......... $ 461 $ 39 $ 4 $ 3 $ 507
2.501% - 3.5% ......... -- -- -- -- --
3.501% - 4.5% ......... 7,051 -- 2 -- 7,053
4.501% - 5.5% ......... 359,975 36,167 15,958 9,153 421,253
5.501% - 6.5% ......... 499,851 62,335 24,983 41,134 628,303
6.501% - 7.5% ......... 35,457 36,275 58,993 8,709 139,434
7.501% - 8.5% ......... 2,409 466 4,076 1,595 8,546
8.501% - 9.5% ......... 1,148 320 1,891 -- 3,359
9.501% - 10.5% ........ -- 218 -- -- 218
-------- -------- -------- ------- ----------
$906,352 $135,820 $105,907 $60,594 $1,208,673
======== ======== ======== ======= ==========
</TABLE>
Accrued interest payable on customer deposit accounts was $3,942,000 and
$4,146,000 at December 31, 1997 and 1996, respectively, and was reported in
"Other liabilities" in the Consolidated Statements of Condition.
Interest expense on customer deposits by type was as follows: Years Ended
December 31,
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Checking .................................................. $ 1,006 $ 1,055 $ 1,037
Passbook .................................................. 1,132 1,370 1,544
Money market accounts ..................................... 6,417 5,468 2,891
Time deposits ............................................. 71,119 71,393 65,658
------- ------- -------
$79,674 $79,286 $71,130
======= ======= =======
</TABLE>
F-22
<PAGE> 97
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, also referred to as
"reverse repurchase agreements," consisted of the following:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Reverse repurchase agreements at end of year ................ $ 74,488 $130,639
Fair value of MBS pledged as collateral at end of year ...... $ 85,595 $137,736
Weighted average interest rate at end of year ............... 5.83% 5.47%
Maximum amount outstanding at any month-end during the year.. $167,686 $140,757
Average balance outstanding during the year ................. $139,864 $114,546
</TABLE>
The securities underlying the reverse repurchase agreements are delivered
to the dealers who arrange the transactions and have control over the
securities. For this reason, reverse repurchase agreements are subject to
certain risks relating to the strength of the other party to the transaction,
the location of the securities held subject to the transaction and the disparity
between the book value of the securities sold and the amount of funds obtained
in transaction. The Company attempts to reduce such risks by entering into
reverse repurchase agreements only with primary government securities dealers.
(11) NOTES PAYABLE
Notes payable at December 31, 1997 and 1996 consisted of $17,750,000 of
senior debentures with an 11.17% fixed rate of interest, all due and payable in
December 2001. The Company is subject to restrictive covenants with respect to
its subordinated debentures. At all times during the periods presented, the
Company was in compliance with such restrictions.
(12) FEDERAL HOME LOAN BANK ADVANCES
Following is a summary of advances from the Federal Home Loan Bank of San
Francisco at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1997 1996
--------------------------- ----------------------------
MATURING DURING WEIGHTED WEIGHTED
THE FISCAL YEAR AVERAGE AVERAGE
ENDED DECEMBER 31: BALANCE RATE BALANCE RATE
- ----------------- ------- ---- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1997............ $274,479 5.50%
1998............ $319,500 5.79% 65,000 5.56
1999............ 49,000 6.10% 10,000 5.76
2000............ 45,000 6.37% --
------ --------
$413,500 5.89% $349,479 5.52%
======== ========
</TABLE>
Fixed rate advances totaled $311,500,000 and $211,579,000 at December 31,
1997 and 1996, respectively, and adjustable rate advances totaled $102,000,000
and $137,900,000 at the same dates, respectively. The Company pledged the
F-23
<PAGE> 98
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
following assets as collateral on FHLB advances at:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Stock of the Federal Home Loan Bank of San Francisco......... $22,914 $17,919
Mortgage-backed securities................................... 126,047 106,696
Loans held for investment.................................... 415,394 407,526
------- -------
$564,355 $532,141
======== ========
</TABLE>
(13) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current taxes:
Federal ........................................... $2,149 $(100) $202
State ........................................... 999 233 --
------ ---- ------
Total current ................................ 3,148 133 202
------ ---- ------
Deferred taxes:
Federal ......................................... 860 (878) 1,246
State ........................................... 264 243 1,043
------ ---- ------
Total deferred ............................... 1,124 (635) 2,289
------ ---- ------
Taxes credited to stockholders' equity for exercise
of stock options ............................... 2,736 475 --
------ ---- ------
$7,008 $(27) $2,491
====== ==== ======
</TABLE>
The sources of difference between the federal statutory income tax rate and
the effective tax rate as a percentage of pretax earnings are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
(IN PERCENTAGES)
<S> <C> <C> <C>
Statutory federal income tax rate .................. 35.0% 35.0% 35.0%
Increase (decrease) in taxes:
State franchise tax, net of federal benefit ...... 7.0 7.0 7.0
Interest from tax exempt investments ............. (6.2) (9.6) (14.1)
Decrease in deferred tax asset valuation allowance -- (16.8) --
Reduction of liabilities from prior periods ...... -- (12.9) --
Other, net ....................................... (2.1) (2.9) (2.2)
---- ----- ----
Effective tax rate ................................. 33.7% -0.2% 25.7%
==== ===== =====
</TABLE>
At December 31,1997 and 1996, the Company's accrued taxes receivable were
$1.8 million and $2.1 million, respectively.
F-24
<PAGE> 99
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The net deferred tax asset is comprised of the following items:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Loan fees................................................... $ 606 $ 1,755
FHLB stock dividends........................................ 2,667 2,283
Prepaid expenses............................................ 396 590
State taxes................................................. - 414
Other....................................................... 4 3
Unrealized gain on securities available for sale............ 1,873 --
-------- --------
Gross deferred tax liabilities........................... 5,546 5,045
-------- --------
Deferred tax assets:
Depreciation................................................ (774) (615)
Provision for losses on real estate......................... (233) (181)
Provision for loan losses .................................. (4,809) (6,212)
Income from REMIC trust..................................... - (300)
Purchase accounting differences............................. (1,181) (1,488)
Net operating losses........................................ (1,460) (1,645)
Unrealized loss and securities available for sale........... - (166)
Other....................................................... (647) (1,159)
-------- --------
Gross deferred tax assets................................ (9,104) (11,766)
-------- --------
Net deferred tax asset................................... $(3,558) $(6,721)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize most of the benefits related to these deductible differences.
Until passage of legislation in 1996, savings and loan associations that
met certain definitional tests as prescribed by the Internal Revenue Code
("Code") were allowed a bad debt deduction, when computing federal income taxes,
equivalent to 8% of taxable income, subject to a minimum tax for preference
items. Alternatively, a deduction based upon actual experience losses of the
Company could be taken if it resulted in a greater deduction. Both houses of
Congress passed legislation in 1996 that repealed the tax rules formerly
applicable to bad debt reserves of thrift institutions for taxable years
beginning after December 31, 1995. Pursuant to the legislation, the Company was
required to change its tax method of accounting for bad debts from the reserve
method formerly permitted to the "specific charge-off" method under which tax
deductions are permissible for bad debts only as and to the extent that the
loans become wholly or partially worthless. At both December 31, 1997 and 1996,
the Company had a $23 million tax bad debt reserve that was accumulated using
the provisions of the tax law prior to the 1996 changes that is subject to
recapture in whole or in part in future years upon the occurrence of certain
events, such as a distribution to shareholders in excess of the Company's
current and accumulated earnings and profits, a redemption of shares, or upon a
partial or complete liquidation of the Company.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its subsidiaries are defendants in litigation arising in
the normal course of business. In the opinion of management, after discussion
with legal counsel, the ultimate outcome of such litigation will not have a
material effect on the financial condition of the Company or its results of
operations.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit in the form of
real estate loans and commitments to purchase real estate loans and
mortgage-backed securities. These instruments involve, to varying
F-25
<PAGE> 100
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position. The Company's exposure to
credit loss in the event of nonperformance by the other party to commitments to
extend credit is represented by the contractual notional amount of those
instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
On December 31, 1997, the Company had commitments to originate $33,285,000
of real estate loans. On December 31, 1996, the Company had commitments to
purchase and originate $26,899,000 of real estate loans.
The Company has agreements to lease facilities and land for certain of its
offices for varying periods to the year 2004 with options through 2023.
Facilities rental expense for the years ended December 31, 1997, 1996 and 1995
was $1,895,000, $1,988,000 and $1,485,000 respectively. Future minimum rental
payments under noncancelable operating leases are payable as follows for the
years ending:
<TABLE>
<CAPTION>
December 31:
- ----------- (In thousands)
<S> <C> <C>
1998........................................... $ 2,564
1999........................................... 2,573
2000........................................... 2,592
2001........................................... 1,870
2002........................................... 1,341
After 2003..................................... 5,149
-------
$16,089
=======
</TABLE>
(15) RETIREMENT PLANS
401(k). The Company sponsors a savings plan which allows employee
participants to make pre-tax salary contributions up to 10% of their salaries
pursuant to section 401(k) of the Internal Revenue Code. Employees who have
completed one year of service and have reached 21 years of age are eligible to
enroll in the savings plan. Employee contributions are matched dollar for dollar
by the Company up to 5% of the employee's salary. Employees vest immediately in
their own contributions and earnings thereon and vest in the Company's
contributions at the rate of 20% per year of service. The Company's contribution
expense for the years ended December 31, 1997, 1996 and 1995 was $493,000,
$544,000, and $492,000, respectively.
Deferred Compensation and Benefit Restoration Plan. The Company's Deferred
Compensation and Benefit Restoration Plan ("Deferred Compensation Plan") is a
supplemental benefit plan which permits directors and selected officers to elect
to defer receipt of all or any portion of their future salary, bonus or
directors' fees. In addition, the Deferred Compensation Plan restores benefits
lost by employees under the ESOP and 401(k) plan due to specified Internal
Revenue Code restrictions on the maximum compensation that may be taken into
account and the maximum benefits that may be paid under those plans. Amounts
contributed to the Deferred Compensation Plan to restore benefits otherwise
limited by the Code restrictions have been included in the 401(k) contribution
expense reported in the previous paragraph. Interest is earned on contributions
to the Deferred Compensation Plan based upon a variable rate determined annually
by the Compensation Committee of the Board of Directors. For the years ended
December 31, 1997, 1996, and 1995, the Company paid interest on Deferred
Compensation Plan balances totaling $318,000, $271,000 and $74,000,
respectively.
Director Retainer Continuance Plan. Effective January 1, 1991, the Company
adopted a Director Retainer Continuance
F-26
<PAGE> 101
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Plan which provides retirement benefits to all directors who have reached age 70
or at any time after attaining the age of 55, provided the sum of his age and
years of service on the board equal or exceed 75. The plan replaces an informal
plan adopted in March 1983. The annual retirement benefit is 50% of the retainer
fee as of the date of retirement. In connection with the expected merger with
Golden State, the Company obtained an actuarial analysis taking into account the
acceleration of benefits that will occur upon change of control. In 1997, the
Company recorded a charge of $681,000 to increase its recognized liability to
the level indicated by the actuarial analysis. The Company's total contribution
expense for the years ended December 31, 1997, 1996 and 1995 was $801,000,
$114,000 and $109,000, respectively.
Employee Stock Ownership Plan ("ESOP"). As part of its initial public
offering, the Company purchased 363,000 shares of common stock, adjusted for
stock splits and stock dividends, to establish an ESOP. All employees who are
age 21 or older and have completed one year of service with the Company are
eligible under the plan. The purchase of the common shares was financed by a
loan from an unaffiliated lender. Shares purchased with the loan proceeds are
held in a suspense account for allocation among participants as the loan is
repaid. Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of compensation, as described in
the plan, in the year of allocation. Benefits generally become 20% vested after
each year of credited service. Vesting is accelerated upon retirement, death or
disability of the participant.
Payments on the third-party ESOP loan were made principally from the
Company's discretionary contributions to the ESOP. In 1996, the Company repaid
the third party loan at which time the Company granted a loan to the ESOP trust
in the amount of the loan paid off. Under generally accepted accounting
principles, the ESOP trust's debt to the Company is not reflected in the
Company's statement of condition. Interest paid on the obligation to the third
party lender was zero, $60,000 and $109,000, for the years ended December 31,
1997, 1996 and 1995, respectively.
Due to the expected merger with Golden State, the Company terminated the
ESOP in December 1997. All unallocated shares in the ESOP at that date, totaling
approximately 100,000 shares, were distributed to eligible employees. For the
years ended December 31, 1997, 1996 and 1995, the Company's contribution expense
to the ESOP was $778,000, $79,000 and $162,000, respectively.
(16) STOCK-BASED COMPENSATION PLANS
At December 31, 1997, the Company had stock-based compensation plans for
employees and nonemployee directors which are described below. The Company
applies APB Opinion No. 25 and related interpretations for its plans, both of
which are fixed stock option plans. Accordingly, the Company did not recognize
compensation expense in connection with awards of stock options because the
exercise price and the fair market price were the same at the dates of award,
with two exceptions:
(i) Compensation cost has been recognized in connection with the directors'
stock option program because the exercise prices at the dates of awards
equaled 75% of the fair market value at the dates of award; and
(ii) Prior to 1996, the Company permitted selected officers to elect to
receive some or all of their annual incentive pay in the form of stock
options. The exercise price of the shares is determined at the beginning of
the calendar year, based upon the market price at the date of
determination. The incentive pay is determined at the beginning of the
subsequent calendar year and is based upon a combination of corporate and
individual performance. To the extent that the market price of the stock
increases during the interval from the date the exercise price is set and
the date that the incentive awards are determined, the Company recognizes
compensation expense.
F-27
<PAGE> 102
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
(Dollars in Thousands, except Per Share Amounts) 1997 1996
---- ----
<S> <C> <C> <C>
Net Earnings: As Reported.................... $13,790 $11,338
Pro Forma...................... $12,889 $10,497
Diluted Earnings Per Share: As Reported.................... $ 2.27 $ 1.92
Pro Forma...................... $ 2.12 $ 1.78
</TABLE>
Long-Term Incentive Plans ("Incentive Plans"). At annual meetings held in
May 1992 and May 1994, the stockholders of the Company ratified the 1992
Long-Term Incentive Plan and the 1994 Long-Term Incentive Plan, respectively.
Both plans had been adopted by the board of directors before submission to the
shareholders for ratification. The Incentive Plans are intended to promote stock
ownership by directors and selected officers and employees to increase their
proprietary interest in the success of the Company and to encourage them to
remain in its employ. Awards granted under the Plans include incentive stock
options, non-qualified options, stock appreciation rights, and restricted stock.
The Incentive Plans are administered by a committee appointed by the Company's
board of directors.
With the exception of the previously-described program allowing certain
officers to receive some or all of their bonuses in stock options, the exercise
of each option equaled the market price of the Company's stock on the date of
grant. In all cases, each option's maximum term is ten years.
The following table sets forth activity with respect to incentive stock
options and non-qualifying stock options awarded to employees and non-employee
directors under the Company's incentive plans in the periods presented:
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ------------------------
WEIGHTED- WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 532,612 $11.65 588,038 $9.76 520,845 $ 7.91
Granted ........................ 9,830 $29.93 159,411 $16.91 184,616 $13.46
Exercised ...................... (442,326) $11.92 (208,280) $10.42 (99,071) $ 6.69
Terminated ..................... (5,750) $15.28 (6,557) $13.49 (18,352) $11.11
-------- ------ -------- ------ ------- -----
Outstanding at end of year ..... 94,366 $12.62 532,612 $11.65 588,038 $ 9.76
======== ====== ======== ====== ======= ======
</TABLE>
Directors' Stock Option Plan ("Directors' Plan"). Directors may elect to
receive some of all of their retainer and meeting fees in the form of stock
options, in accordance with the provisions of the Directors' Plan which was
approved by stockholders in May 1994. The exercise price of options awarded
under the Directors' Plan equals 75% of the fair market value of the common
stock at the date of award. Fair market value is determined at the date of each
award of options and generally equals the average of the closing prices of the
common stock for the five trading days preceding the date as of which fair
market value is determined. The difference between the exercise price and the
fair market value of each share subject to an option, after applying the
discount, is recognized as compensation expense.
F-28
<PAGE> 103
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table sets forth activity with respect to awards of stock
options under the Directors' Plan:
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ------------------------
WEIGHTED- WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 27,731 $15.07 15,937 $13.11 1,512 $11.24
Granted ........................ 5,873 $22.36 11,794 $17.73 14,425 $13.25
Exercised ...................... (33,604) $16.34 -- -- -- --
------- ------ ------ ------ ------ ------
Outstanding at end of year ..... -0- -- 27,731 $15.07 15,937 $13.11
======= ====== ====== ====== ====== ======
</TABLE>
The following table summarizes information about incentive stock options
and non-qualifying stock options granted to employees and nonemployee directors
as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- ---------------------
WEIGHTED WEIGHTED
AVG. AVG.
EXERCISE EXERCISE
Range of Exercise Prices SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
$ 5.51 - $ 9.99 36,955 $ 5.51 36,955 $ 5.51
$10.00 - $14.99 38,438 $13.02 21,898 $12.89
$15.00 - $19.99 6,050 $18.90 2,016 $18.90
$20.00 - $24.99 -- -- -- --
$25.00 - $29.99 7,077 $26.93 3,093 $25.31
$30.00 - $32.15 5,846 $31.12 -- --
------ ------
$ 5.51 - $32.15 94,366 $12.62 63,962 $ 9.42
====== ======
</TABLE>
At December 31, 1997, there were 5,822 unallocated shares of stock
remaining in the Incentive Plans for future awards in the form of incentive
stock options, non-qualified options or restricted stock. At the same date,
there were 36,217 unallocated shares reserved for future awards under the
Directors' Plan.
Fair Value of Stock Options Grants. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1997 and 1996,
respectively:
o dividend yields of 0.78% and 1.44%
o expected volatility of 30.8% and 27.6%, using a 100-week period
o risk-free interest rates based upon equivalent-term Treasury Rates
o expected option lives were the contractual lives at the date of grant
F-29
<PAGE> 104
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The following table summarizes the fair value of the stock options granted
in the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997: 1996:
----------------------- -----------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
GRANTED FAIR VALUE GRANTED FAIR VALUE
<S> <C> <C>
Incentive Stock Options.................... 6,983 22,025
Non-qualifying Stock Options............... 2,847 122,894
Directors' Plan............................ 5,873 11,794
------ -------
Total.................................. 15,703 $24.11 156,713 $12.91
====== ====== ======= ======
</TABLE>
Restricted Stock. The Company issues restricted stock awards as a means of
providing certain key officers with a proprietary interest in the Company in a
manner designed to encourage such persons to remain with the Company. In
connection with its initial public offering in 1991, the Company established the
Management Development and Retention Plan ("MDRP") and purchased 82,500 shares
of common stock. The Company obtained authority to award additional restricted
shares from its 1994 Long-Term Incentive Plan.
The shares purchased by the Company for the MDRP and issued under the 1994
Long-Term Incentive Plan represent deferred compensation. All of the shares of
the MDRP have been accounted for as a reduction of stockholders' equity until
such time as the shares are allocated and vest to the recipients. Shares awarded
under the 1994 Long-Term Incentive Plan are recorded as deferred compensation at
the time of award. In both cases, compensation expense is charged and deferred
compensation is reduced as the shares vest to the recipients. Shares allocated
to officers are earned over three- to five-year periods.
F-30
<PAGE> 105
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Awards of shares of stock under the MDRP and under the 1994 Long-Term
Incentive Plan, after giving effect to stock splits and stock dividends, were as
follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
---------
<S> <C>
Outstanding at December 31, 1994.................................. 77,454
Granted......................................................... 23,232
Forfeited....................................................... (3,933)
------
Outstanding at December 31, 1995.................................. 96,753
Granted......................................................... 7,835
Forfeited....................................................... (7,074)
------
Outstanding at December 31, 1996.................................. 97,514
Granted......................................................... 1,100
Forfeited....................................................... (3,836)
------
OUTSTANDING AT DECEMBER 31, 1997.................................. 94,778
======
</TABLE>
Fully-vested shares at December 31, 1997 totaled 67,033 and at that date
the MDRP had 5,408 shares available for future awards.
F-31
<PAGE> 106
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Disclosures about Fair Value of Financial Instruments." requires disclosure of
fair value information about financial instruments, regardless of whether
recognized in the financial statements of the reporting entity. For purposes of
determining fair value, SFAS No. 107 provides that the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
All of the fair values presented have been made under this definition of fair
value.
It is management's belief that the fair values presented below are accurate
based on the valuation techniques and data available to the Company as of
December 31, 1997, as more fully described below. It should be noted that the
operations of the Company are managed from a going concern basis and not a
liquidation basis. As a result, the ultimate value of the financial instruments
presented could be substantially different when actually recognized over time
through the normal course of operations. Additionally, a substantial portion of
the Company's inherent value is its franchise value. Neither of these components
have been given consideration in the presentation of fair values below.
The following presents the carrying amounts and fair values of financial
instruments included in assets and liabilities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------
1997 1996
--------------------------------- ------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(Dollars in thousands) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.......................... $ 26,947 $ 26,947 $ 24,941 $ 24,941
Investment securities.............................. 189,799 189,799 161,719 161,719
Mortgage-backed securities......................... 417,393 417,393 442,015 442,015
Loans ............................................. 1,525,558 1,549,789 1,500,958 1,507,337
---------- ---------- ---------- ----------
Net financial instruments -- Assets.............. $2,159,697 $2,183,928 $2,129,633 $2,136,012
========== ========== ========== ==========
LIABILITIES:
Customer deposit accounts.......................... $1,551,240 $1,551,528 $1,558,470 $1,560,156
Other borrowings................................... 505,738 507,550 497,868 498,437
---------- ---------- ---------- ----------
Net financial instruments -- liabilities......... $2,056,978 $2,059,078 $2,056,338 $2,058,593
========== ========== ========== ==========
</TABLE>
The following methods and assumptions were used to estimate fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and cash equivalents. For these short-term instruments, the carrying
value is a reasonable estimate of fair value.
Securities. For investment securities and mortgage-backed securities,
including derivative instruments and marketable equity securities, fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Loans. The fair values of loans are estimated by discounting the
contractual cash flows, adjusted for prepayment estimates, using market interest
rates based on secondary market sources, adjusted for servicing costs. The fair
value of
F-32
<PAGE> 107
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
consumer loans is based on an aggregate current market interest rate for those
products in the Company's portfolio in the aggregate. The following table
presents information for loans held for investment or sale:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------
1997 1996
-------------------------------- -------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT(1) FAIR VALUE AMOUNT(1) FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family, first and second trust deeds.. $ 920,634 $ 929,242 $ 979,178 $981,326
Commercial real estate ...................... 446,378 451,966 388,798 392,882
Construction ................................ 58 58 1,404 1,423
Small business loans ........................ 172,658 182,693 142,583 142,711
Consumer loans .............................. 3,128 3,128 2,483 2,483
---------- ---------- ---------- ---------
Total .................................. 1,542,856 1,567,087 1,514,446 1,520,825
Allowance for loan losses (2) ............... (17,298) (17,298) (13,488) (13,488)
---------- ---------- ---------- ---------
$1,525,558 $1,549,789 $1,500,958 1,507,337
========== ========== ========== =========
</TABLE>
- ----------
(1) The carrying amounts represent gross loan balances at the dates indicated as
adjusted for discounts and premiums, unearned fees, interest rate caps hedging
certain adjustable-rate loans and undisbursed loan funds.
(2) In its calculation of fair value, the Company did not consider possible
losses due to credit problems and, accordingly, has applied the allowance for
loan losses to reflect such credit risk.
The Company entered into interest rate cap agreements to hedge its exposure
to rising interest rates due to lifetime rate ceilings on certain
adjustable-rate loans. The Company has included the unamortized premium paid to
purchase such agreements in the carrying amount of single family loans as of the
reporting dates. At December 31, 1997, the unamortized premium totaled
$1,439,000 and the fair value of the hedging instruments was $173,000.
F-33
<PAGE> 108
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Deposit liabilities. Under SFAS No. 107, the fair value of deposits with no
stated maturity (such as non-interest bearing demand deposits, savings, and NOW
accounts and money market investment accounts) is equal to their carrying amount
at December 31, 1995. Therefore, the fair value estimates for these products do
not reflect the benefits that the Company receives from the low-cost, long-term
funding they provide. The fair value of time deposits is based on the discounted
value of contractual cash flows, applying interest rates currently being offered
on borrowings of similar duration from the FHLB.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1997 1996
----------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Transaction accounts .... $ 342,567 $ 342,567 $ 321,351 $ 321,351
---------- ---------- ---------- ----------
Time deposits:
Retail ................ 992,228 992,073 1,010,426 1,012,814
Wholesale ............. 216,445 216,888 226,693 225,991
---------- ---------- ---------- ----------
Total time deposits.. 1,208,673 1,208,961 1,237,119 1,238,805
---------- ---------- ---------- ----------
$1,551,240 $1,551,528 $1,558,470 $1,560,156
========== ========== ========== ==========
</TABLE>
SFAS No. 107 does not allow a deposit base intangible element to be
included in the fair value of deposits. The intangible element arises from the
low cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
Other borrowings. The fair value of borrowings at December 31, 1997 were
estimated using current market rates of interest for similar borrowings, as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
1997 1996
----------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE VALUE FAIR VALUE
------ ---------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances .................................. $413,500 $413,810 $349,479 $348,645
Securities sold under agreements to repurchase.. 74,488 74,502 130,639 130,646
Notes payable .................................. 17,750 19,238 17,750 19,146
-------- -------- -------- --------
$505,738 $507,550 $497,868 $498,437
======== ======== ======== ========
</TABLE>
F-34
<PAGE> 109
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(18) STOCKHOLDERS' EQUITY
The Company's ability to pay cash dividends to its shareholders primarily
depends upon cash dividends it receives from its wholly-owned subsidiary, CenFed
Bank, and is also subject to limitations set forth in restrictive covenants
relating to debt securities of the Company. CenFed Bank's ability to pay cash
dividends to the Company is subject to limitations contained in applicable
federal regulations. Payment of dividends in excess of CenFed Bank's accumulated
earnings and profits would have significant and adverse tax consequences to
CenFed Bank.
RESTRICTIVE COVENANTS
Certain debt agreements of the Company provide for the maintenance of
minimum levels of consolidated equity. In connection with its issuance of senior
debentures in 1994, the Company agreed to, among other provisions, the following
covenants:
(i) leverage restrictions on the Company's investment in CenFed Bank;
(ii) restrictions on the Company's minimum consolidated tangible equity;
and
(iii) restrictions on the indebtedness of the holding company.
The Company has complied with these restrictive covenants at all times.
STOCK REPURCHASE PLAN
In February 1997, the Company announced a stock repurchase plan pursuant to
which up to 5% of the Company's outstanding common stock, or approximately
250,000 common shares, could be repurchased over a twelve-month period. The
Company terminated the stock repurchase plan shortly after the announcement of
its intention to merge with Golden State. The Company had repurchased 68,470
shares at the date the plan was terminated.
STOCK DIVIDENDS
In May 1997 and 1996, the Company distributed stock dividends to
shareholders of record, in each case the stock dividend being 10% of the shares
outstanding as of the record date. In each year, the Company accounted for the
stock dividends by transferring from retained earnings to capital stock and
paid-in capital an amount equal to the fair value of the additional shares
issued. All earnings per share numbers include the effects of these stock
dividends.
EARNINGS PER SHARE
In 1997, the Company adopted a new accounting standard pursuant to which
the Company is required to report both basic and diluted net earnings per share.
The following is the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years as indicated:
F-35
<PAGE> 110
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1997: FOR THE YEAR ENDED 1996:
--------------------------------------- ----------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income after
extraordinary item..................... $13,790,000 $11,338,000
BASIC EPS:
Income available to
common stockholders.................... $13,790,000 5,806,607 $2.37 $11,338,000 5,574,406 $2.03
----------- --------- ----- ----------- --------- -----
Effect of Dilutive Securities:
Options -- common stock equivalent..... 267,867 322,498
DILUTED EPS:
Income available to common
stockholders plus
assumed conversions.................... $13,790,000 6,074,474 $2.27 $11,338,000 5,896,904 $1.92
----------- --------- ----- ----------- --------- -----
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1995:
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net income after
extraordinary item..................... $7,197,000
BASIC EPS:
Income available to
common stockholders.................... $7,197,000 5,455,086 $1.32
---------- --------- -----
Effect of Dilutive Securities:
Options -- common stock equivalent..... 274,648
DILUTED EPS:
Income available to common
stockholders plus
assumed conversions.................... $7,197,000 5,729,734 $1.26
---------- --------- -----
</TABLE>
F-36
<PAGE> 111
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(19) REGULATORY MATTERS
CAPITAL REGULATIONS
The Company is required to maintain certain minimum levels of regulatory
capital as set forth by the OTS in capital standards applicable to all
institutions regulated by it. These capital standards include a core capital
requirement, a tangible capital requirement and a risk-based capital
requirement. CenFed Bank exceeds all capital requirements, as shown in the
following table:
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
------------------ ------------------ ------------------
(Dollars in Thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Actual ............... $131,696 5.99% $132,994 6.04% $147,982 12.10%
Required.............. 32,987 1.50% 66,012 3.00% 97,832 8.00%
------ ------- ------ ------- ------ ------
Excess.............. $98,709 4.49% $66,982 3.04% $50,150 4.10%
====== ======= ====== ======= ====== ======
</TABLE>
Federal banking legislation contains prompt corrective action ("PCA") provisions
pursuant to which banks and savings institutions are to be classified into one
of five categories, based primarily upon capital adequacy, and which require
specific supervisory actions as capital levels decrease. The OTS regulations
implementing the PCA provisions define the five capital categories. The
following table sets forth the definitions of the categories and the Bank's
ratios as of December 31, 1997:
<TABLE>
<CAPTION>
TOTAL TIER 1 TIER 1
TANGIBLE RISK-BASED RISK-BASED LEVERAGE
CAPITAL CATEGORY: RATIO RATIO RATIO RATIO
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Well-capitalized ..................... N/A >=10% >=6% >=5%
Adequately capitalized ............... N/A >=8% >=4% >=4%
Undercapitalized ..................... N/A <8% <4% <4%
Significantly undercapitalized ....... N/A <6% <3% <3%
Critically undercapitalized .......... <=2% N/A N/A N/A
CENFED BANK, AT DECEMBER 31, 1997..... N/A 12.1% 10.9% 6.0%
</TABLE>
The OTS also has authority, after an opportunity for a hearing, to
downgrade an institution from well capitalized to adequately capitalized, or to
subject an adequately capitalized or undercapitalized institution to the
supervisory actions applicable to the next lower category, for supervisory
concerns. At December 31, 1997, the Bank was a well capitalized institution.
DIVIDENDS
Savings association are subject to regulations with respect to the
declaration and payment of dividends. These regulations establish a three-tiered
system of regulation, with the greatest flexibility to pay dividends being
afforded to well- capitalized associations. CenFed Bank is considered a
well-capitalized institution for purposes of dividend declarations. CenFed Bank
declared and paid a $7,500,000 dividend to its parent company in 1997. No
dividends were declared or paid in 1996.
F-37
<PAGE> 112
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
DEPOSIT INSURANCE
The Federal Deposit Insurance Corporation ("FDIC") administers the deposit
insurance fund under which CenFed Bank's deposits are insured. Deposit insurance
premiums are assessed pursuant to a risk-based system under which institutions
are classified on the basis of capital ratios, supervisory evaluation by the
institution's primary federal regulatory agency and other information deemed
relevant by the FDIC. The deposit insurance premium assessment rate for
institutions insured by the Savings Association Insurance Fund ("SAIF"), to
which CenFed Bank belongs, currently ranges from 0% to 0.27%.
During the third calendar quarter of 1996, federal legislation was enacted
which, among other things, recapitalized the SAIF, through a one-time special
assessment for SAIF members. The aggregate amount of the recapitalization
assessment for SAIF members was calculated to bring the reserve to insured
deposits ratio to 1.25%. The Company paid $9.1 million in connection with the
recapitalization.
Prior to the recapitalization of the SAIF, the deposit insurance premiums
assessed to SAIF members ranged from 0.23% to 0.31%. Following the
recapitalization, deposit premiums to SAIF-insured institutions decreased
significantly. Beginning in 1997, the Company's deposit insurance premium was
0.064%, which was based on a deposit insurance premium rate of 0% plus 0.064%
charged to pay interest on bonds issued in connection with the resolution of
failed thrift institutions in the early 1990's. All financial institutions
insured by either the SAIF or the Bank Insurance Fund share, on a full pro rata
basis, the interest cost on these bonds.
F-38
<PAGE> 113
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(20) CENFED FINANCIAL CORPORATION ONLY FINANCIAL INFORMATION
The following are the condensed financial statements for CENFED
Financial Corporation as of December 31, 1997 and 1996 and for the years ended
December 31, 1997, 1996 and 1995.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents .................... $ 851 $ 120
Investment in CenFed Bank .................... 149,205 130,463
Other assets ................................. 3,430 1,106
--------- ---------
$ 153,486 $ 131,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ................................ $ 17,750 $ 17,750
Other liabilities ............................ 130 121
--------- ---------
17,880 17,871
--------- ---------
Stockholders' equity:
Common stock, $.01 par value ................ 61 52
Additional paid in capital .................. 62,638 41,747
Retained earnings .......................... 70,623 73,450
Unrealized gain (loss) on securities
available for sale, after tax ............ 2,527 (237)
Deferred compensation -- retirement plans... (243) (1,194)
--------- ---------
135,606 113,818
--------- ---------
$ 153,486 $ 131,689
========= =========
</TABLE>
F-39
<PAGE> 114
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income ........................................... $ 583 $ 282 $ 131
Interest expense .......................................... (2,050) (2,189) (2,322)
Income from real estate operations ........................ -- 4,471 531
Operating expenses ........................................ (477) (482) (656)
-------- -------- --------
Earnings (loss) before income taxes and subsidiary earnings (1,944) 2,082 (2,316)
Income tax (expense) benefit .............................. 817 (882) 984
-------- -------- --------
Net earnings (loss) -- holding company only ............. (1,127) 1,200 (1,332)
Net earnings from subsidiary .............................. 14,917 10,138 8,529
-------- -------- --------
Net earnings ........................................... $ 13,790 $ 11,338 $ 7,197
======== ======== ========
</TABLE>
F-40
<PAGE> 115
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................ $ 13,790 $ 11,338 $ 7,197
Adjustments to reconcile net earnings to cash provided by
operating activities:
Amortization .......................................... -- 322 667
Net earnings of subsidiary ............................ (14,917) (10,138) (8,529)
Net change in other assets / liabilities .............. 2,552 (181) (157)
Increase in accrued interest payable .................. -- (127) 29
Income tax benefit (expense) .......................... (817) 882 (984)
-------- -------- --------
Net cash provided by (used in) operating activities 608 2,096 (1,777)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equity of subsidiary .................... (1,175) (2,130) (1,235)
Sale of real estate held for development and sale ..... -- 4,859 --
-------- -------- --------
Net cash provided by (used in) investing activities (1,175) 2,729 (1,235)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock ............ 5,390 1,589 463
Treasury stock repurchased ............................ (2,055) -- --
Net increase (decrease) in notes payable .............. -- (5,050) (200)
Dividends paid to stockholders ........................ (2,037) (1,781) (1,423)
-------- -------- --------
Net cash provided by (used in) financing activities 1,298 (5,242) (1,160)
-------- -------- --------
Net increase in cash during the year .................... 731 (417) (4,172)
Cash and cash equivalents, beginning of year ............ 120 537 4,709
-------- -------- --------
Cash and cash equivalents, end of year .................. $ 851 $ 120 $ 537
======== ======== ========
</TABLE>
F-41
<PAGE> 116
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(21) QUARTERLY FINANCIAL INFORMATION -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
1997: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income ............ $40,270 $41,393 $42,518 $40,229
Interest expense ...................... 27,013 28,577 29,243 28,346
------- ------- ------- -------
Net interest income ................. 13,257 12,816 13,275 11,883
Provisions for loan losses ............ 2,500 1,500 1,000 1,000
------- ------- ------- -------
Net interest income after provisions
for loan losses ............... 10,757 11,316 12,275 10,883
Non-interest income ................... 2,744 2,267 1,870 1,726
Operating expenses .................... 8,078 7,827 7,509 9,626
Income taxes .......................... 1,887 1,960 2,336 825
------- ------- ------- -------
Earnings before extraordinary items ... 3,536 3,796 4,300 2,158
Extraordinary item (net of income ... -- -- -- --
------- ------- ------- -------
taxes)
Net earnings .......................... $ 3,536 $ 3,796 $ 4,300 $ 2,158
======= ======= ======= =======
Earnings per share:
Basic ........................... $ 0.62 $ 0.66 $ 0.74 $ 0.36
======= ======= ======= =======
Diluted ......................... $ 0.59 $ 0.63 $ 0.71 $ 0.35
======= ======= ======= =======
Dividends paid per share during quarter $ 0.082 $ 0.09 $ 0.09 $ 0.09
======= ======= ======= =======
</TABLE>
F-42
<PAGE> 117
CENFED FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
1996: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income ............ $ 38,732 $ 39,118 $ 39,616 $ 39,617
Interest expense ....................... 26,595 25,680 26,429 27,220
-------- -------- -------- --------
Net interest income ................. 12,137 13,438 13,187 12,397
Provisions for loan losses ............ 2,800 2,250 1,500 1,500
-------- -------- -------- --------
Net interest income after provisions
for loan losses ................. 9,337 11,188 11,687 10,897
Non-interest income ................... 6,930 2,010 1,447 2,246
Operating expenses .................... 8,834 8,482 17,672 9,079
Income taxes .......................... 2,783 1,670 (5,816) 1,336
-------- -------- -------- --------
Earnings before extraordinary items ... 4,650 3,046 1,278 2,728
Extraordinary item (net of income ... (364) -- -- --
taxes -------- -------- -------- --------
Net earnings ........................ $ 4,286 $ 3,046 $ 1,278 $ 2,728
======== ======== ======== ========
Earnings per share:
Basic ........................... $ 0.77 $ 0.55 $ 0.23 $ 0.48
======== ======== ======== ========
Diluted ......................... $ 0.73 $ 0.52 $ 0.22 $ 0.45
======== ======== ======== ========
Dividends paid per share during quarter $ 0.074 $ 0.082 $ 0.082 $ 0.082
======== ======== ======== ========
</TABLE>
F-43
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BASIC DILUTED
------------ ------------
<S> <C> <C>
A Average Common Shares Outstanding 5,806,607 5,806,607
Common Share Equivalents:
-------------------------
B Average Stock Options Outstanding 420,124
C Average Option Exercise Price $ 12.03
------------
D Exercise Proceeds [B * C] $ 5,052,480
E Average Market Price $ 33.18
------------
F Shares Repurchased at Market Price [D / E] 152,257
------------
G Net Increase from Equivalents [B - F] 267,867
H Shares Outstanding and Equivalents [A + G] 5,806,607 6,074,474
============ ============
I Net Income $ 13,790,000 $ 13,790,000
============ ============
Earnings Per Share [I / H] $ 2.37 $ 2.27
============ ============
Market Price, at December 31, 1997 $ 45.00
============
</TABLE>
<PAGE> 1
EXHIBIT 12
STATEMENT REGARDING COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net earnings $ 13,790 $ 11,338 $ 7,197 $ 8,998 $ 8,608
============ ============ ============ ============ ============
Average assets $ 2,264,642 $ 2,147,005 $ 2,003,137 $ 1,647,062 $ 1,308,158
============ ============ ============ ============ ============
Average equity $ 121,027 $ 107,570 $ 96,520 $ 88,102 $ 77,357
============ ============ ============ ============ ============
RETURN ON AVERAGE ASSETS 0.61% 0.53% 0.36% 0.55% 0.66%
RETURN ON AVERAGE EQUITY 11.39% 10.54% 7.46% 10.21% 11.13%
Average equity $ 121,027 $ 107,570 $ 96,520 $ 88,102 $ 77,357
less: Average intangibles (204) (237) (35) (3,467) (3,744)
------------ ------------ ------------ ------------ ------------
Average tangible equity $ 120,832 $ 107,333 $ 96,485 $ 84,626 $ 73,613
============ ============ ============ ============ ============
Average assets $ 2,264,642 $ 2,147,005 $ 2,003,137 $ 1,647,062 $ 1,308,158
============ ============ ============ ============ ============
AVERAGE TANGIBLE EQUITY TO
AVERAGE ASSETS 5.34% 5.00% 4.82% 5.14% 5.63%
Average interest earning assets $ 2,196,531 $ 2,080,634 $ 1,927,570 $ 1,582,928 $ 1,236,440
============ ============ ============ ============ ============
Average interest bearing liabilities $ 2,121,527 $ 2,013,602 $ 1,891,902 $ 1,555,139 $ 1,224,120
============ ============ ============ ============ ============
AVERAGE INTEREST EARNING
ASSETS TO AVERAGE INTEREST
BEARING LIABILITIES 103.54% 103.33% 101.89% 101.79% 101.01%
Net interest income after provisions
for loan losses $ 45,231 $ 43,109 $ 35,585 $ 36,696 $ 35,268
============ ============ ============ ============ ============
Operating expenses $ 33,040 $ 44,067 $ 33,151 $ 32,069 $ 25,527
============ ============ ============ ============ ============
NET INTEREST INCOME
AFTER PROVISIONS FOR
LOSSES, TO OTHER EXPENSE 136.90% 97.83% 107.34% 114.43% 138.16%
Operating expenses $ 33,040 $ 44,067 $ 33,151 $ 32,069 $ 25,527
============ ============ ============ ============ ============
Average assets $ 2,264,642 $ 2,147,005 $ 2,003,137 $ 1,647,062 $ 1,308,158
============ ============ ============ ============ ============
OTHER EXPENSE TO
AVERAGE ASSETS 1.46% 2.05% 1.65% 1.95% 1.95%
</TABLE>
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF CENFED
The direct and indirect subsidiaries of CENFED Financial Corporation, a Delaware
corporation, are listed below. All subsidiaries are incorporated in the State of
California.
CenFed Investments, Inc.
Crescent Bay Diversified, Inc.
National Mortgage Investors, Inc.*
PFS Corporation
UCSB Securities Corporation*
United California Financial Corporation*
United California Funding Corporation
United Coastal Financial Services, Inc.*
United Energy Finance Corporation*
United Resources Capital Corporation
* Inactive.
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CENFED Financial Corporation
We consent to the incorporation by reference in the registration statements (No.
33-43010, No. 33-48077, No. 33-90098 and No. 33-90096) on Form S-8 of CENFED
Financial Corporation of our report dated March 17, 1998, relating to the
consolidated statements of financial condition of CENFED Financial Corporation
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 10-K of CENFED Financial
Corporation.
KPMG Peat Marwick LLP
Los Angeles, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,947
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 607,192
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,525,558
<ALLOWANCE> 17,298
<TOTAL-ASSETS> 2,207,473
<DEPOSITS> 1,551,240
<SHORT-TERM> 393,988
<LIABILITIES-OTHER> 14,889
<LONG-TERM> 111,750
0
0
<COMMON> 62,699
<OTHER-SE> 72,907
<TOTAL-LIABILITIES-AND-EQUITY> 2,207,473
<INTEREST-LOAN> 121,335
<INTEREST-INVEST> 43,075
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 164,410
<INTEREST-DEPOSIT> 79,674
<INTEREST-EXPENSE> 113,179
<INTEREST-INCOME-NET> 51,231
<LOAN-LOSSES> 6,000
<SECURITIES-GAINS> 2,029
<EXPENSE-OTHER> 34,040
<INCOME-PRETAX> 20,798
<INCOME-PRE-EXTRAORDINARY> 13,790
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,790
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 2.27
<YIELD-ACTUAL> 7.57
<LOANS-NON> 16,251
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,488
<CHARGE-OFFS> 7,219
<RECOVERIES> 2,423
<ALLOWANCE-CLOSE> 17,298
<ALLOWANCE-DOMESTIC> 17,298
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
