AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1996
REGISTRATION NO. 333-6387
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
REDFED BANCORP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6035 33-0588105
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
REDFED BANCORP INC.
300 E. STATE STREET
REDLANDS, CALIFORNIA 92373
(909) 335-3551
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
D. BRIAN REIDER
REDFED BANCORP INC.
300 E. STATE STREET
REDLANDS, CALIFORNIA 92373
(909) 335-3551
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
JAMES R. WALTHER TODD H. BAKER
MAYER, BROWN & PLATT GIBSON, DUNN & CRUTCHER LLP
350 SOUTH GRAND AVENUE ONE MONTGOMERY STREET
25TH FLOOR TELESIS TOWER
LOS ANGELES, CALIFORNIA 90071 SAN FRANCISCO, CALIFORNIA 94104
(213) 229-9500 (415) 393-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
TITLE OF PROPOSED PROPOSED
EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
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Common Stock (par value
$0.01 per share)...... 2,990,000 $9.63 $28,793,700 $9,929
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(1) Estimated solely for the purpose of calculating the registration fee.
Based on the average of the high and low sales prices on June 18, 1996 as
reported on the Nasdaq National Market.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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REDFED BANCORP INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K
ITEM AND HEADING OF FORM S-1 HEADING OR LOCATION IN PROSPECTUS
---------------------------- ---------------------------------
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus.... Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk
Factors and Ratio of
Earnings to Fixed Charges... Prospectus Summary; Risk Factors; Selected
Consolidated Financial, Operating and
Other Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations
4. Use of Proceeds.............. Use of Proceeds
5. Determination of Offering
Price....................... Not Applicable
6. Dilution..................... Not Applicable
7. Selling Security Holders..... Not Applicable
8. Plan of Distribution......... Underwriting
9. Description of Securities to
be Registered............... Outside Front Cover Page of Prospectus;
Prospectus Summary; Description of Common
Stock
10. Interests of Named Experts
and Counsel................. Not Applicable
11. Information with Respect to
the Registrant.............. Prospectus Summary; Risk Factors;
Capitalization; Selected Consolidated
Financial, Operating and Other Data;
Prospectus Summary; Recent Developments;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Directors and
Executive Officers; Executive
Compensation; Security Ownership of
Certain Beneficial Owners and Management;
Certain Relationships and Related
Transactions; Index to Consolidated
Financial Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................. Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 8, 1996
2,600,000 SHARES
[LOGO OF REDFED BANCORP INC.]
COMMON STOCK
All of the shares of Common Stock, $0.01 par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by RedFed Bancorp Inc.
(the "Company"). The Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "REDF." On July 26, 1996, the last reported sale
price of the Common Stock on Nasdaq was $9.00 per share. See "Price Range of
Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share..................................... $ $ $
Total(3)...................................... $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting expenses payable by the Company estimated at $400,000.
(3) The Company has granted a 30-day option to the Underwriter to purchase up
to 390,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriter exercises this option in full, the
Price to Public will total $ , the Underwriting Discount will total $ ,
and the Proceeds to Company will total $ . See "Underwriting."
The shares of Common Stock are offered by the Underwriter subject to receipt
and acceptance by it, and subject to its right to reject any order in whole or
in part. It is expected that delivery of the certificates representing such
shares will be made against payment therefor at the office of Montgomery
Securities in San Francisco, California on or about , 1996.
-----------
Montgomery Securities
, 1996
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH
RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
----------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF ANY SAVINGS BANK OR NON-BANK SUBSIDIARY OF THE COMPANY
AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
2
[MAP OF MARKET AREA]
3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
concerning the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 75 Park
Place, Fourteenth Floor, New York, New York 10007 and Room 1400, Northwest
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of
such material may be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Company's Common Stock is quoted on Nasdaq under the symbol "REDF"
and reports, proxy statements and other information concerning the Company may
be inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement") with the Commission under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules thereto. The
Company refers anyone seeking further information to the Registration
Statement. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission in Washington, D.C., and copies of all or any part thereof may be
obtained from that office at prescribed rates. The Commission also maintains a
site accessible to the public by computer on the World Wide Web, at
http://www.sec.gov., that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission, including the Company.
4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements of the Company appearing elsewhere in this Prospectus. Historical
information presented herein at dates and for periods prior to the Company's
commencement of operations on April 7, 1994 is that of the Bank (as defined
below) and its subsidiaries. Except as otherwise indicated, (i) references to
the Company herein include the Bank and its subsidiaries on a consolidated
basis, and (ii) all information contained herein assumes that the Underwriter's
over-allotment option is not exercised.
THE COMPANY
RedFed Bancorp Inc. (the "Company") is the holding company for Redlands
Federal Bank, a federal savings bank (the "Bank"). The Bank is one of the three
largest financial institutions headquartered in Southern California's "Inland
Empire" region, a relatively less urban area to the east of Los Angeles
comprised of San Bernardino and Riverside counties. During its 106-year
history, the Bank has operated as a community-oriented savings institution
serving the residential loan and retail deposit needs of the predominantly
suburban and rural communities in its market area. At March 31, 1996, the
Company had consolidated assets of $858.0 million, deposits of $769.7 million
and stockholders' equity of $48.3 million.
The Company offers a range of consumer financial services to its customers,
including retail transaction and term deposits, single-family mortgage loans
and consumer loans. The Company's single-family mortgage loan products include
adjustable and fixed rate conforming and nonconforming permanent loans, as well
as spot (non-tract) construction loans, which are combination construction and
permanent loans made to borrowers who will occupy the completed home as their
primary residence ("spot construction loans"). The Company's consumer loan
products, which have to date been offered on a relatively limited basis,
include home equity lines of credit, Federal Housing Administration ("FHA")
Title I home improvement loans, credit card loans, mobile home loans, new and
used automobile and recreational vehicle loans and secured and unsecured
personal loans (collectively, "consumer loans"). The Company also invests in
U.S. government and agency securities, mortgage-backed securities ("MBS") and
other investments permitted by federal laws and regulations. The Company also
offers insurance and securities brokerage services through a subsidiary of the
Bank.
The Company formerly originated substantial amounts of multi-family (5 or
more units) residential real estate loans, as well as a lesser amount of loans
secured by small commercial and mixed use properties, tract construction
projects and developed and undeveloped land. Due to significant losses in the
Company's multi-family loan portfolio resulting from higher defaults and
substantial declines in the value of multi-family residential properties caused
by the Southern California recession beginning in 1991, the Company has
substantially curtailed its multi-family lending activities, other than in
connection with the disposition of problem assets. The Company has also
eliminated tract construction and land lending and limited its commercial
lending activities. Multi-family and commercial loans constituted 36.02%, and
developed lot, tract construction and land loans constituted 6.50%, of the
Company's loan portfolio at March 31, 1996.
Due to its long history in the Inland Empire region and its customer service
focus, the Company believes that it has developed strong deposit customer
relationships and substantial deposit market share in the small and medium
sized communities in which its banking offices are primarily located. The
Company has historically had an average cost of deposits that has been lower
than that reflected in the Federal Home Loan Bank Eleventh District Cost of
Funds Index ("11th District COFI"), the index on which the adjustable interest
rates on most of its loan portfolio are based. The Company conducts business
from its home office located in Redlands and thirteen branch offices located in
Fontana (2), Yucaipa, Beaumont, Riverside, Loma Linda, Norco, Calimesa, Big
Bear, Banning, Colton, Corona and Highland, and its three loan production
offices located in Palm Desert, Temecula and Laguna Hills. The Company
estimates that it currently serves over 50,000 households in the Inland Empire
region and believes that it is the primary financial institution for many of
those households. The Company's market share of all bank and thrift deposits in
San Bernardino and Riverside counties was 5.82% and 2.80%, respectively, at
June 30, 1995. At June 30, 1995, the Company's market share of thrift deposits
5
in nine out of the thirteen communities it serves was greater than 30% and in
four of such communities its market share of thrift deposits was greater than
70%.
The Company and the Bank are subject to regulation and examination by the
Office of Thrift Supervision (the "OTS"). The Bank's customer deposits are
insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC"). The Bank is also a member of the
Federal Home Loan Bank (the "FHLB") of San Francisco. The Company was
incorporated in 1993 in connection with the Bank's 1994 conversion from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank. The Company's executive office is located at 300 E. State Street,
Redlands, California 92373; its telephone number is (909) 335-3551.
BUSINESS STRATEGY
As a result of adverse economic conditions in Southern California, including
defense industry declines and military base closures and downsizings in, and
corporate relocations from, the Company's primary market area, real estate
markets have experienced a severe decline since 1991. These recessionary
conditions have had an adverse effect on the Company's loan portfolio,
particularly with respect to its portfolio of multi-family loans, and results
of operations. In response to these adverse economic conditions, the Company is
(i) aggressively managing and reducing the level of nonperforming and adversely
classified assets, (ii) reducing non-interest expense and improving non-
interest expense ratios and (iii) maintaining capital in compliance with
regulatory requirements. The Company is also enhancing and streamlining its
operations and initiating new lines of business to promote future growth and
increase profitability. Key elements in the development and implementation of
the Company's strategies include the following:
NEW MANAGEMENT. Anne Bacon, an executive with substantial and successful
experience in managing and improving the performance of troubled thrift
institutions, became the Company's President and Chief Executive Officer in
April 1995 upon the retirement for health reasons of the Company's former
Chief Executive Officer. Most recently before joining the Company, Ms.
Bacon was the President and Chief Executive Officer of First Western
Financial Corporation, a Nevada-based savings and loan holding company
("First Western"), until First Western's merger into AMFED Financial, Inc.
in October 1994. See "Directors and Executive Officers--Biographical
Information." To complement existing management, Ms. Bacon has hired
experienced asset managers to assist in managing and reducing problem
assets, including nonperforming and other classified assets.
AGGRESSIVELY MANAGE AND REDUCE PROBLEM ASSETS. The Company has
intensified its procedures for the classification, management and
resolution of problem assets. The Company's Internal Asset Review Committee
meets monthly to review and approve actions to be taken with respect to
asset classification, nonaccrual loans, and real estate acquired through
foreclosure, deed in lieu of foreclosure or in-substance foreclosure
(collectively, "REO"). Performing loans meeting specified criteria are also
reviewed on a periodic basis, with any loans exhibiting weaknesses being
scheduled for more intensive monitoring and action. An asset manager is
assigned to monitor each loan relationship and to develop and implement an
appropriate plan of action, which may include modification of the loan to
reduce the interest rate or payment structure, acquisition of the property
through foreclosure where modification or workout is not feasible,
rehabilitation of the property if required to maximize the sale value
thereof, and sale of the REO. As a result of these procedures, the
Company's classified assets have been reduced by 53.6% from $114.1 million
at December 31, 1994 to $52.9 million at March 31, 1996, and its nonaccrual
loans and REO, net of specific valuation allowances (collectively,
"nonperforming assets") have been reduced by 34.8% from $47.1 million to
$30.7 million during the same period. See "Management's Discussion and
Anaylsis of Financial Condition and Results of Operations--Nonperforming
Assets and Allowance for Losses" and "Business--Asset Quality."
6
CONTROL COSTS. During 1995, the Company implemented a 20% staff
reduction, a salary and retirement plan freeze and substantial reductions
in other operating expenses resulting in a $895,000 ($3.6 million, or
13.6%, annualized) decrease in general and administrative expense ("G&A")
for the three-month period ended March 31, 1996 as compared with the three-
month period ended March 31, 1995. Additional cost savings are expected
beginning in 1997 from the consolidation of the Company's two current data
processing arrangements in one outside service bureau, which is expected to
be completed in August 1996. Total costs estimated for the data processing
consolidation are $1.8 million, of which $1.5 million for hardware and
software will be capitalized and amortized over subsequent years. Costs
incurred as of June 30, 1996 amounted to $510,000. The Company intends to
continue its efforts to monitor and reduce G&A, although further reductions
are expected to be less substantial than those achieved during the past
year.
CHANGE LOAN PRODUCT MIX. The Company has substantially curtailed its
multi-family and other non-single-family mortgage lending activities, other
than in connection with resolutions of problem assets. While the Company
expects to continue its small commercial property lending activities on a
limited basis and may reenter the multi-family lending market on a reduced
basis (as compared with its prior level of activity) if conditions warrant
in the future, the Company's current principal lending products are
adjustable rate single-family loans, including spot construction loans. The
Company plans to expand its consumer lending operations to capitalize on
its strong existing community base and diversify its product offerings. The
Company has recently begun to utilize third party "conduit" programs to
broker loans insured by the FHA and loans partially guaranteed by the
Department of Veteran Affairs ("VA"), and conventional single-family loans
made to borrowers not meeting the Company's normal credit criteria
(referred to in the lending industry as "B" and "C" credit loans). Under
the conduit programs, third party lenders preapprove and fund such loans,
with the Company being paid a fee by the third party lenders. The Company
believes that such loans are an attractive lending product in its
marketplace that can be originated prudently, and with higher rates and
fees than normally qualifying single-family loans. While the Company
currently only acts as a broker for such loans, it may consider originating
such loans for sale and for retention in its portfolio in the future as it
gains further experience in this market.
MAINTAIN LOW COST DEPOSIT BASE. The Company emphasizes its community and
retail customer service focus in attracting deposits. The Company believes
that this focus has enabled it to develop primary household banking
relationships with many of its customers and to maintain the Company's
historical deposit cost advantage as compared with the 11th District COFI
on which the interest rates on its adjustable rate loans are primarily
based. The Company is placing particular emphasis on offering checking and
other transaction account services to obtain deposits at lower cost and to
position itself as the customer's primary bank so as to increase cross-
selling opportunities for other financial services. The Company also
intends to focus on attracting small business deposit relationships in its
communities. The consolidation and enhancement of its data processing
service arrangements and related systems that is currently in process will
enable the Company to provide more comprehensive and integrated deposit and
cash management services for such customers.
INCREASE REGULATORY CAPITAL. As a result of the substantial losses
experienced in recent years, the Bank's margin of compliance with its
regulatory capital requirement has been reduced, with its risk-based
capital at March 31, 1996 being $55.2 million, or 8.39% of risk-adjusted
assets, as compared with its minimum required level of risk-based capital,
based on total risk-adjusted assets at that date, of $52.6 million, or
8.00% of risk-adjusted assets. The Bank is subject to a Supervisory
Agreement (the "Supervisory Agreement") with the OTS, its primary federal
regulator, that requires, among other things, that the Bank submit a
business plan to the OTS and explore the possibility of raising additional
capital. The Company will use the proceeds of this Offering for the primary
purpose of increasing the Bank's regulatory capital in order to provide
maximum flexibility of operations under applicable regulatory requirements
and to enable the Company to take advantage of future growth opportunities,
including the prudent expansion of the Company's lending operations. The
Company anticipates that the net proceeds
7
from the sale of the Common Stock offered hereby will be sufficient to
enable it to increase the regulatory capital of the Bank to the levels
required to qualify as a "well capitalized" institution under OTS
regulations (even after payment of the one-time surcharge on SAIF-insured
institutions that has been proposed in connection with the recapitalization
of the SAIF) and believes that the OTS will thereafter terminate the
Supervisory Agreement. The Company further believes that, based on its
expected "well capitalized" status, the FDIC will substantially reduce the
Bank's annual deposit insurance premiums from their current high level of
0.30% of insured deposits. See "Selected Consolidated Financial, Operating
and Other Data of the Company--Regulatory Capital Ratios," "Risk Factors--
Recapitalization of SAIF and Its Impact on SAIF Premiums and the Company's
Results of Operations," "Regulation and Supervision--Capital Requirements"
and "--Deposit Insurance."
THE OFFERING
Common Stock offered hereby........................... 2,600,000 shares
Common Stock to be outstanding after the Offering(1).. 6,990,504 shares
Use of Proceeds....................................... The Company intends to
contribute $20.6 million
of the net proceeds to
the Bank to increase the
Bank's regulatory
capital and to retain
the remainder of such
net proceeds for general
corporate purposes. See
"Use of Proceeds."
Nasdaq Symbol......................................... "REDF"
- --------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1996. Does not include shares issuable pursuant to outstanding employee
stock options. See "Executive Compensation."
8
SUMMARY CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA OF THE COMPANY
The summary data presented below under the captions "Consolidated Financial
Condition Data" and "Consolidated Operating Data" for, and as of the end of,
each of the years in the five-year period ended December 31, 1995, are derived
from the audited consolidated financial statements of the Company. The
consolidated financial statements as of December 31, 1995 and 1994, and for
each of the years in the three-year period ended December 31, 1995, and the
report thereon are included elsewhere in this Prospectus. The summary unaudited
data presented below under the captions "Consolidated Financial Condition Data"
and "Consolidated Operating Data" as of March 31, 1996 and for each of the
three-month periods ended March 31, 1996 and 1995, are derived from the
unaudited consolidated financial statements of the Company included elsewhere
in this Prospectus, which in the opinion of management of the Company, reflect
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation. The results of operations for the three-month period ended
March 31, 1996 are not necessarily indicative of the results of operations to
be expected for the entire year.
AT AT DECEMBER 31,
MARCH 31, --------------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED FINANCIAL
CONDITION DATA:
Total assets............ $857,959 $871,814 $960,853 $916,846 $932,232 $849,299
Loans receivable,
net(1)................. 672,151 682,984 733,132 645,670 647,889 570,542
MBS..................... 56,499 52,116 79,971 109,982 100,771 160,807
Investment securities... 38,797 41,655 38,899 55,101 42,004 9,293
Real estate(2).......... 17,416 26,258 41,269 22,011 28,349 26,933
Deposits................ 769,679 776,528 805,334 835,134 828,054 750,319
Borrowed funds.......... 24,534 31,133 80,085 8,845 26,845 33,345
Total liabilities....... 809,630 823,736 905,345 863,485 875,993 796,621
Stockholders' equity,
substantially
restricted............. 48,329 48,078 55,508 53,361 56,239 52,678
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED OPERATING
DATA:
Interest income......... $ 15,446 $ 15,134 $ 64,224 $ 56,515 $59,436 $69,257 $77,118
Interest expense........ 8,463 9,319 38,366 29,869 30,869 37,154 49,804
---------- ---------- ---------- ---------- ------- ------- -------
Net interest income..... 6,983 5,815 25,858 26,646 28,567 32,103 27,314
Provision for losses on
loans.................. 1,400 373 7,938 12,651 12,990 6,106 2,968
---------- ---------- ---------- ---------- ------- ------- -------
Net interest income af-
ter provision for
losses on loans....... 5,583 5,442 17,920 13,995 15,577 25,997 24,346
---------- ---------- ---------- ---------- ------- ------- -------
Non-interest income..... 1,589 1,448 11,198 6,275 6,884 6,066 6,362
---------- ---------- ---------- ---------- ------- ------- -------
Non-interest expense:
G&A.................... 5,701 6,596 24,285 27,195 25,458 23,931 22,712
Real estate operations,
net(3)................ 528 2,126 10,258 8,370 3,222 2,148 88
Provision for losses on
letters of credit..... -- 193 2,536 9,895 694 1,866 276
---------- ---------- ---------- ---------- ------- ------- -------
Total non-interest
expense............. 6,229 8,915 37,079 45,460 29,374 27,945 23,076
---------- ---------- ---------- ---------- ------- ------- -------
Earnings (loss) before
income taxes........... 943 (2,025) (7,961) (25,190) (6,913) 4,118 7,632
Income taxes (benefit).. 2 -- 124 1,150 (3,669) 557(4) 3,700
---------- ---------- ---------- ---------- ------- ------- -------
Net earnings (loss)..... $ 941 $ (2,025) $ (8,085) $ (26,340) $(3,244) $ 3,561 $ 3,932
========== ========== ========== ========== ======= ======= =======
PER SHARE DATA:
Net earnings (loss) per
share.................. $ 0.23 $ (0.51) $ (2.03) $ (6.08)(5) n/a n/a n/a
Average shares used for
calculation of earnings
per share.............. 4,126,438 3,978,617 3,981,821 4,002,920 n/a n/a n/a
Stockholders' equity per
share.................. $ 11.90 $ 13.58 $ 12.06 $ 13.87 n/a n/a n/a
Shares used for
calculation of
stockholders' equity
per share.............. 4,059,914 3,978,617 3,987,010 4,002,920 n/a n/a n/a
(See notes on following page.)
9
AT OR FOR THE
THREE MONTHS
ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
PERFORMANCE RATIOS:
Return on average assets
(6)(7)................. 0.39% (0.76)% (0.78)% (2.50)% (0.31)% 0.35% 0.41%
Return on average equity
(7).................... 7.76 (14.58) (15.05) (38.30) (6.00) 6.34 7.68
Equity to total assets.. 5.63 5.52 5.51 5.78 5.82 6.03 6.20
Interest rate spread
(7).................... 3.46 2.44 2.87 3.19 3.44 3.90 3.44
Net interest margin..... 3.48 2.57 2.98 3.19 3.45 3.95 3.53
Average interest-earning
assets to average
interest-bearing
liabilities............ 100.60 103.03 102.62 100.03 100.25 101.21 101.35
G&A to average assets
(6)(7)................. 2.37 2.48 2.36 2.59 2.44 2.38 2.38
Efficiency ratio (8).... 66.51 90.59 72.14 82.61 71.81 62.70 67.44
REGULATORY CAPITAL
RATIOS:
TANGIBLE CAPITAL:
Actual.................. 5.51 5.40 5.24 5.65 5.42 5.58 5.68
Pro Forma (9)(10)....... 7.74 n/a n/a n/a n/a n/a n/a
CORE CAPITAL:
Actual.................. 5.51 5.40 5.24 5.65 5.42 5.58 5.68
Pro Forma (9)(10)....... 7.74 n/a n/a n/a n/a n/a n/a
RISK-BASED CAPITAL:
Actual.................. 8.39 8.37 8.17 8.59 8.11 8.64 7.71
Pro Forma (9)(10)....... 11.40 n/a n/a n/a n/a n/a n/a
ASSET QUALITY RATIOS:
Nonaccrual loans to
total loans............ 1.98 1.37 2.45 1.77 3.34 2.74 1.89
Nonperforming assets to
total assets and LOCs
(11)................... 3.21 4.70 4.53 4.46 3.17 3.18 2.62
Total allowance for
losses on loans, LOCs
and real estate to
total assets and LOCs.. 2.58 2.57 3.28 2.85 1.95 1.15 0.66
GVAs for losses on loans
to nonaccrual loans.... 80.37 119.69 56.53 108.03 44.96 33.85 32.62
GVAs for losses on
loans, real estate and
LOCs to total
nonperforming assets
(11)................... 58.41 42.18 39.30 51.20 40.90 25.52 15.89
OTHER DATA:
Number of deposit
accounts............... 88,566 91,374 89,015 89,763 87,630 84,344 81,464
Full service customer
facilities............. 14 15 14 16 16 16 15
Full time equivalent
employees.............. 275 333 281 350 337 313 294
- --------
(1) Includes loans held for sale.
(2) Includes REO and real estate held for sale or investment.
(3) Includes provision for losses on real estate of $0, $1,422, $8,336, $4,653,
$1,968, $1,128 and $768 for the three-month periods ended March 31, 1996
and 1995 and for the years ended December 31, 1995, 1994, 1993, 1992 and
1991, respectively.
(4) Income taxes (benefit) for the year ended December 31, 1992 includes a $1.3
million benefit due to the cumulative effect of a change in accounting
principle.
(5) Loss per share data has been calculated based on the Company's net loss of
$24.4 million for the period April 7, 1994 (the date of the Company's
initial public offering) through December 31, 1994.
(6) Off-balance sheet letters of credit ("LOCs") have been added to recorded
assets for purposes of this calculation. See "Business--Lending
Activities--Multi-family Lending; LOCs."
(7) Ratios for the three-month periods ended March 31, 1996 and 1995 have been
annualized.
(8) G&A expense to net interest income plus total non-interest income. Excludes
provisions for losses on loans and LOCs and real estate operations, and for
the year ended December 31, 1995, excludes curtailment gain on retirement
plan of $3.4 million.
(9) The OTS minimum capital requirements at March 31, 1996 were 1.50% for
tangible capital, 3.00% for core capital and 8.00% for risk-based capital.
A "well capitalized" institution under OTS regulations must have a risk-
based capital ratio of 10.00% or greater and a leverage (core capital)
ratio of 5.00% or greater, as well as a Tier 1 risk-based capital ratio of
6.00% or greater. See "Regulation and Supervision--Capital Requirements."
(10) Assumes the issuance of 2,600,000 shares of Common Stock in the Offering
at an assumed offering price of $9.00 per share, after deducting the
underwriting discount and estimated offering expenses payable by the
Company and the disposition of the proceeds thereof. Does not include the
effect of possible special assessment on SAIF-insured institutions. See
"Use of Proceeds."
(11) Excludes troubled debt restructures which are currently performing under
their restructured terms.
10
RISK FACTORS
The following matters, in addition to those discussed elsewhere in this
Prospectus, should be carefully considered by investors in deciding whether to
purchase the Common Stock offered hereby.
IMPACT OF RECESSION ON AND ECONOMIC CONDITIONS IN THE COMPANY'S MARKET AREAS;
RECENT OPERATING LOSS HISTORY; ADEQUACY OF GENERAL AND OTHER VALUATION
ALLOWANCES
Virtually all of the Company's lending activities are conducted in the
Company's market area located in the Inland Empire and other areas of Southern
California; and a significant portion of the Company's assets are invested in
loans that are secured by multi-family and, to a lesser extent, commercial
real estate. Since 1991, Southern California, including the Inland Empire, has
experienced an economic recession as a result of defense industry declines,
including military base closures and downsizings, corporate relocations and
general weakness in the real estate market. This recession has been
characterized by, among other things, high levels of unemployment, declining
business and real estate activity, significant increases in vacancies in
multi-family residential and commercial properties, declining rents and
property values and slowing sales of new one- to four-family residential
properties. Loan delinquencies have increased and the underlying values of
many properties securing loans have declined, resulting in substantial losses
to lending institutions. The recession has caused substantial increases in the
Company's levels of nonperforming assets, particularly in its multi-family
lending and off-balance sheet letter of credit ("LOC") portfolios, and in its
provisions for loan and real estate losses, as well as a decline in interest
income. Primarily as a result of these factors, the Company reported net
losses of $8.1 million, $26.3 million and $3.2 million in 1995, 1994 and 1993,
respectively. While the Inland Empire economy has recently exhibited positive
employment trends there is no assurance that such trends will continue. The
Company has significantly reduced the amounts of its nonperforming and
classified assets since year end 1994 and recorded net earnings of $941,000 in
the first quarter of 1996. A worsening of current economic conditions in the
Company's primary lending area, however, would have an adverse effect upon the
Company's business and operations, including the level of the Company's
delinquencies and nonperforming and classified assets, the magnitude of its
provisions for estimated loan and real estate losses, the value of the
collateral securing the Company's mortgage loans and its portfolio of REO and
the demand for new loan originations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Asset Quality."
The Company establishes valuation allowances for losses on specific loans,
LOCs and REO ("specific valuation allowances") and for its evaluation from
period to period of the inherent risk in its loan, LOC and real estate
portfolios which has yet to be specifically identified ("general valuation
allowances" or "GVA"). Additions to the GVA are made through provisions
charged to expense, and thereby reduce net earnings or result in loss in the
periods in which such additions are determined to be necessary.
The amount of the Company's GVA represents management's evaluation of the
amount of loan, LOC and real estate losses that may be incurred by the
Company, based upon various assumptions as to future economic and other
conditions. As such, the GVA does not represent the amount of such losses that
could be incurred under adverse conditions that management believes to be
unlikely to arise. The Company had GVAs of $18.0 million as of March 31, 1996.
The OTS, as an integral part of its regulatory examination process,
periodically reviews the Company's valuation allowances on loans and other
assets, and the FDIC may do so as well. These agencies may require the Company
to establish additional valuation allowances, based on their judgments of the
information available to them at the time of their examination. In addition,
management's classification of assets and evaluation of the adequacy of the
GVA is an ongoing process. Consequently, there is no assurance that material
additions to the Company's GVA will not be required in the future.
RISKS ASSOCIATED WITH MULTI-FAMILY AND NONRESIDENTIAL LENDING AND OFF-BALANCE
SHEET LETTERS OF CREDIT
At March 31, 1996, $322.5 million, or 46.04%, of the Company's total loans
consisted of multi-family and nonresidential loans, including: multi-family
loans of $177.2 million, or 25.30% of total loans; commercial real estate
loans of $75.1 million, or 10.72% of total loans; developed lot loans of $44.5
million, or 6.35% of total
11
loans; other mortgage loans of $1.1 million, or 0.15% of total loans; and
consumer loans of $24.7 million, or 3.52% of total loans. See "Business--
Lending Activities--Multi-family Lending; LOCs," "--Developed Lot Loans" and
"--Commercial Real Estate Lending."
Multi-family and commercial real estate, tract construction and land
development loans are generally considered to involve a higher degree of
credit risk and to be more vulnerable to deteriorating economic conditions
than one- to four-family residential mortgage and spot construction loans.
These loans typically involve higher loan principal amounts and the repayment
of such loans generally depends on the income produced by the operation or
sale of the property being sufficient to cover operating expenses and debt
service. Recessionary economic conditions of the type that have prevailed in
the Company's primary lending market area tend to result in higher vacancy and
reduced rental rates and net operating incomes from multi-family residential
and commercial real estate properties as well as declining home sales.
Construction lending involves additional risks, although the Company believes
that these risks are not presented to the same degree by spot construction
loans. Because of the uncertainties inherent in estimating construction costs
and the market value of the completed project, as well as the effects of
governmental regulation of real property, it can be relatively difficult to
evaluate accurately the total funds required to complete a project and the
related loan-to-value ratio. If the Company is forced to foreclose on a
project prior to or at completion due to a default, there is no assurance that
the Company will be able to recover all of the unpaid balance of, and accrued
interest on, the loan, as well as any related foreclosure and holding costs.
In addition, the Company may be required to fund additional amounts to
complete the project and may be required to hold the property for an
unspecified period of time. In recognition of these risks, and of the
significant effect of the recessionary economic conditions in the Company's
primary market area upon the performance of these types of loans, the Company
has substantially curtailed or eliminated multi-family lending, commercial
real estate, tract construction and land development lending, other than in
connection with resolution of problem assets.
At March 31, 1996, the Company had 21 direct pay LOCs outstanding in the
aggregate amount of $118.2 million. These LOCs guaranty the repayment of tax-
exempt municipal bonds issued to finance the development of multi-family
housing, primarily in Southern California, in which, in most cases, 20%-25% of
the units are required to be made available to persons with low- to moderate-
incomes. In the event of a default in the payment of principal or interest by
the borrowers on the multi-family mortgage loans underlying a bond issue, the
Company may not receive reimbursement for bond principal and interest payments
made by the Company on the LOC issued by it but would generally have the right
to foreclose on the related multi-family project. Although the LOCs are not
reflected on the Company's balance sheet, the credit risk to the Company is
substantially the same as if the Company originated a multi-family loan in the
amount of the LOC. At March 31, 1996, $4.0 million or 3.40% of the Company's
LOCs, were considered in-substance foreclosed. The largest classified LOC at
March 31, 1996 was an LOC in the amount of $8.5 million, with $7.5 million
classified as Substandard and $1.0 million classified as Loss. This project is
secured by a 280 unit apartment complex located in Fontana, California. An
allowance for estimated losses on the Company's LOCs in the amount of $6.9
million was included in other liabilities at March 31, 1996. See "Business--
Lending Activities--Multi-family Lending; LOCs" and "--Asset Quality--
Classified Assets."
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES ON RESULTS OF OPERATIONS
The Company's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and other borrowings. Based upon certain
assumptions, net interest-earning assets maturing or repricing within one year
exceeded total interest-bearing liabilities maturing or repricing in the same
time period by $317.3 million at March 31, 1996. This represented a cumulative
one year positive gap as a percentage of total assets of 36.98%. In a rising
interest rate environment, an institution with a positive gap would be in a
better position than an institution with a negative gap to invest in higher
yielding assets or have its asset yields adjusted upward, which would result
in the yield on its assets increasing at a faster pace than the cost of its
interest-bearing liabilities. During a period of
12
falling interest rates, an institution with a positive gap would tend to have
its assets repricing at a faster rate than one with a negative gap, which
would tend to reduce or restrain the growth of its net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Interest Rate Sensitivity Analysis."
The Company manages its interest rate risk primarily by maintaining a large
base of core deposits, maintaining adequate liquidity through investment in
shorter-term securities, emphasizing the origination of adjustable rate
mortgage loans ("ARM loans") for retention in its portfolio, and selling most
of its fixed rate loan originations in the secondary market. See "Business--
Lending Activities."
Higher interest rates could cause an increase in the Company's nonperforming
loans to the extent that borrowers are unable to pay higher interest rates on
ARM loans, particularly with respect to the Company's multi-family loans, many
of which currently have marginal debt service coverage ratios. At March 31,
1996, approximately 90.89% of the Company's mortgage loans had adjustable
rates. In addition, certain of the lending programs offered by the Company
have payment schedules that provide for negative amortization. During a period
of rising interest rates, the loan principal on negative amortization loans
may increase above the amount originally advanced, thereby increasing the
Company's risk of loss in the event of a default. At March 31, 1996, $140.8
million of multi-family and commercial loans and $68.2 million of one- to
four-family ARM loans had payment schedules that permit negative amortization.
None of such multi-family or commercial loans had loan balances exceeding the
original amounts advanced at that date. The amount that exceeded the original
amount advanced on one- to four-family loans at that date was $290,000. See
"Business--Lending Activities--One- to Four-family Mortgage Lending," "Multi-
family Lending" and "--Commercial Real Estate Lending."
The Company's results of operations will continue to be significantly
affected by changes in interest rates due, among other factors, to (i) the
lagging nature of the 11th District COFI on which interest rate adjustments on
a large percentage of the Company's interest-earning assets are based, coupled
with the fact that the Company's ARM loans reprice on a monthly, quarterly,
semiannual or annual basis, (ii) the repricing of the Company's interest-
earning assets and interest-bearing liabilities at different times, (iii) the
effect of periodic and lifetime interest rate caps on such assets, (iv) the
different response of interest rates on such assets and liabilities to
different economic, market and competitive factors, (v) the adverse effect
that sustained high levels of interest rates may have on real estate and
lending markets in general, and (vi) the possibility that sustained low levels
of interest rates may increase the difficulty of originating ARM loans as well
as increased loan prepayments, which prepayment amounts would be reinvested by
the Company at lower interest rates. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Interest Rate Sensitivity
Analysis," "--Analysis on Net Interest Income" and "--Rate/Volume Analysis."
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS AND THE COMPANY'S
RESULTS OF OPERATIONS
The Bank's deposits are insured by the SAIF while the deposits of its
commercial bank competitors are insured by the Bank Insurance Fund ("BIF"),
both of which are administered by the FDIC. Until recently, the deposit
insurance premiums paid by institutions insured by the SAIF and the BIF were
assessed based on identical rate schedules. The SAIF and the BIF are each
required by statute to attain, and thereafter to maintain, a reserve to
deposits ratio of 1.25%. The SAIF is not expected to attain its reserve ratio
prior to at least 2002. The BIF attained its required reserve level in late
May 1995 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 pay the
interest on certain bonds (the "FICO Bonds") issued for the purpose of funding
the resolution of failed thrift institutions.
The FDIC has reduced the deposit insurance premium assessment rate for BIF
members to between 0% and 0.27%, with approximately 92% of BIF members paying
only the legal minimum of $2,000 in annual deposit insurance premiums. The
assessment rate schedule applicable to SAIF member institutions, in contrast,
ranges from 0.23% to 0.31% (the Bank's current assessment rate is 0.30%). As a
result, there is a significant disparity between the assessment rate for BIF
and SAIF member institutions. As long as the deposit rate premium disparity
13
continues, SAIF-insured institutions will be placed at a significant
competitive disadvantage due to their higher premium costs and the financial
condition of the SAIF could worsen if its deposit base shrinks as a result of
the disparity.
A number of proposals for assisting the SAIF in attaining its required
reserve level, and thereby permitting SAIF deposit insurance premiums to be
reduced to levels at or near those paid by BIF-insured institutions, have been
under discussion by various of the affected parties, relevant government
agencies and members of Congress. Bills approved, respectively, by the United
States House of Representatives and Senate have had common elements that would
provide for a one-time surcharge on SAIF-insured institutions in an amount
sufficient (expected to be approximately 80 to 90 basis points on SAIF-insured
deposits, or approximately $6.2 million to $6.9 million, respectively, with
respect to the Bank's deposits at March 31, 1995) to enable the SAIF to attain
its required reserve level and revision of the applicable statutory provisions
to devote a portion of the BIF insurance premiums to payment of the interest
on the FICO Bonds. The legislative proposals have contained one or more of the
following additional elements: elimination of the separate Federal thrift
institution charter, coupled with a requirement that each federally chartered
thrift institution convert to a national bank, a state chartered bank or a
state chartered savings and loan association by January 1, 1998; merger of the
BIF and SAIF as of that date; the elimination of the OTS as a separate
regulatory agency; treatment of thrift holding companies as bank holding
companies for federal regulatory purposes; and elimination of certain tax bad
debt reserve deductions that are currently available to qualifying thrift
institutions. See "Federal Taxation" for a further description of the proposed
federal income tax law changes. The Company is not able to predict whether or
in what form any of the proposals that have been discussed will be adopted or
the effect that such adoption will have on the Company's operations. A
significant increase in the SAIF insurance premiums or a significant surcharge
to recapitalize the SAIF would have an initial adverse effect on the operating
expenses and results of operations of the Bank and the Company and would
reduce the Bank's regulatory capital. Over the longer term, however,
recapitalization of the SAIF could be expected to reduce the Bank's annual
deposit insurance costs.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings institution. The regulatory authorities have extensive discretion in
connection with their supervision and enforcement activities and their
examination policies, including in connection with the imposition of
restrictions on the operation of an institution, the classification of assets
by the institution and the adequacy of an institution's allowances for loan
and real estate losses. The Company is also subject to regulation and
supervision as a savings and loan holding company. Any change in the
regulatory structure or regulations, whether by the OTS or the FDIC, or any
change in the applicable statutes by Congress could have a material adverse
impact on the Company and its operations. Various proposals, including those
described above, have been made in recent years to consolidate the regulatory
functions of the federal banking agencies, particularly including proposals to
combine the OTS and the Office of the Comptroller of the Currency, as well as
proposals to eliminate the separate thrift institution charter and to develop
a new form of charter that would apply to both commercial banks and thrift
institutions. See "Regulation and Supervision--Deposit Insurance." The outcome
of efforts to effect such regulatory consolidation and other changes is
uncertain, and the Company is unable to determine the extent to which such
legislation, if enacted, would affect its business.
SUPERVISORY AGREEMENT
On April 25, 1995, the Bank entered into the Supervisory Agreement with the
OTS. The Supervisory Agreement required (i) the Bank to develop and submit to
the OTS a revised business plan which included specific plans for the
reduction of classified assets and G&A and the continued maintenance of
adequate regulatory capital levels, (ii) the Board of Directors of the Bank to
file quarterly reports with the OTS documenting the Board's review of the
Bank's operating results and to adopt quarterly compliance resolutions
reflecting the Board's review of the Bank's compliance with the Supervisory
Agreement, (iii) the Bank to develop improved internal asset review policies
and procedures and to explore the possibility of raising additional
14
capital, (iv) prior OTS approval for the removal of any assets with a balance
of $1.0 million or more from the Bank's schedule of classified assets as of
November 30, 1994 unless such assets were sold on a non-recourse basis or
charged-off and (v) the Bank to use specified percentages in calculating its
allowance for loan loss and GVAs. Failure to comply with the Supervisory
Agreement could subject the Bank and its officers and directors to
administrative enforcement actions, including civil money penalties and cease
and desist orders.
Pursuant to the requirements of the Supervisory Agreement, the Bank has (i)
submitted the required business plan by June 16, 1995 and has submitted an
annual update, (ii) reduced its classified assets, maintained adequate capital
levels and reduced G&A, (iii) developed and submitted to the OTS improved
internal asset review policies and procedures and (iv) complied with the
specified loan loss and GVA percentages. The restriction on the
declassification of assets in the Supervisory Agreement was rescinded by the
OTS in September 1995. Initially, the Bank did not contemplate raising
additional capital as a part of the business plan since the plan provided for
adequate capital levels and because of the expense involved in raising
capital. The OTS has since strongly recommended, but not directed, raising
additional capital. Since the Bank's performance has improved the Company has
decided to raise capital through this Offering of Common Stock. The Bank
believes that it is currently, and the OTS examination completed on February
8, 1996 deemed the Bank to be, in substantial compliance with the Supervisory
Agreement.
COMPETITION IN MAKING LOANS AND ATTRACTING DEPOSITS
The Company faces significant competition both in making loans and in
attracting deposits. The Company's competitors are the financial institutions
operating in its primary market area, many of which are significantly larger
and have greater financial resources than the Company. The Company's
competition for loans comes principally from commercial banks, other savings
institutions, mortgage banking companies, insurance companies and credit
unions. Its most direct competition for deposits has historically come from
other savings institutions and commercial banks. In addition, the Company
faces increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such areas as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
NEW MANAGEMENT AND BUSINESS STRATEGY
The success of the Company's business strategy and its operating results
following completion of the offering of the Common Stock made hereby will
depend in significant measure on the efforts of its management, particularly
including its Chief Executive Officer. On April 3, 1995, Anne Bacon became
President and Chief Executive Officer of the Company and the Bank, after
serving previously as President, Chief Executive Officer and a Director of
First Western until its merger into AMFED Financial, Inc. in October 1994 and,
prior to that, in executive positions with a number of other savings
institutions. While Ms. Bacon has had significant experience in the operations
of savings institutions comparable to the Company, she has had only limited
experience with the Company.
Since Ms. Bacon joined the Company, the Company has embarked on a strategy
of managing and reducing the level of nonperforming and classified assets,
reducing expenses and maintaining regulatory capital, and is in the early
stages of developing and implementing new business lines. As part of this
strategy, the Company has substantially curtailed its multi-family lending
activities, other than in connection with the disposition of problem assets,
eliminated tract construction and land lending and limited its commercial
lending activities. While the Company expects to continue its small commercial
property lending activities on a limited basis and may reenter the multi-
family lending market on a reduced basis (as compared with its prior level of
activity) if conditions warrant in the future, the Company's current principal
lending products are adjustable rate single-family loans, including spot
construction loans. The Company plans to expand its consumer lending
operations to capitalize on its strong existing community base and diversify
its product offerings. The Company has recently begun to utilize third-party
"conduit" programs to broker loans insured by the FHA and loans partially
guaranteed by the VA, and conventional single-family loans made to borrowers
not meeting the Company's normal credit criteria
15
(referred to in the lending industry as "B" and "C" credit loans). Under the
conduit programs, third party lenders preapprove and fund such loans, with the
Company being paid a fee by the third party lenders. The Company believes that
such loans are an attractive lending product in its marketplace that can be
originated prudently, and with higher rates and fees than normally qualifying
single-family loans. While the Company currently only acts as a broker for
such loans, it may consider originating such loans for sale and for retention
in its portfolio in the future as it gains further experience in this market.
The Company is placing additional emphasis on originating these types of
consumer loans through its community-oriented branches. The Company is also
negotiating an agreement with another bank for that bank to originate single
family residential, adjustable rate loans, for immediate sale to the Company.
Such loans will be subject to the Company's policies on underwriting and
verification of borrower and property information. Management also intends to
enhance deposit and loan relationships with small businesses in its markets.
After the data processing service bureau consolidation is completed, the
Company expects to be able to develop small business depository accounts,
small business loans, home banking and electronic bill paying. See "Prospectus
Summary--The Company." There is no assurance that management's strategy to
shift the focus of the Company's lending activities will be implemented
successfully or that such strategy will generate acceptable stockholder
returns initially or over the longer term.
16
RECENT DEVELOPMENTS
SUMMARY CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA OF THE COMPANY
The summary data presented below under the caption "Consolidated Financial
Condition Data" as of December 31, 1995 is derived from the audited
consolidated financial statements of the Company. The summary unaudited data
presented below under the captions "Consolidated Financial Condition Data" and
"Consolidated Operating Data" as of June 30, 1996 and for the three-month and
six-month periods ended June 30, 1996 and 1995, are derived from the unaudited
consolidated financial statements of the Company, which, in the opinion of
management of the Company, reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation. The results of
operations for the three-month periods and six-month periods ended June 30,
1996 are not necessarily indicative of the results of operations to be expected
for the entire year.
AT JUNE 30, 1996 AT DECEMBER 31, 1995
---------------- --------------------
(IN THOUSANDS)
CONSOLIDATED FINANCIAL CONDITION DATA:
Total assets............................ $840,142 $871,814
Loans receivable, net(1)................ 664,794 682,984
MBS..................................... 55,261 52,116
Investment securities................... 37,807 41,655
Real estate(2).......................... 12,216 26,258
Deposits................................ 762,203 776,528
Borrowed funds.......................... 13,865 31,133
Total liabilities....................... 790,717 823,736
Stockholders' equity, substantially
restricted............................. 49,425 48,078
FOR THE THREE
MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
CONSOLIDATED OPERATING DATA:
Interest income..................... $ 15,086 $ 17,394 $ 30,532 $ 32,528
Interest expense.................... 8,120 10,105 16,583 19,424
--------- --------- --------- ---------
Net interest income................. 6,966 7,289 13,949 13,104
Provision for losses on loans....... 678 4,166 2,078 4,539
--------- --------- --------- ---------
Net interest income after
provision for losses on loans.... 6,288 3,123 11,871 8,565
--------- --------- --------- ---------
Non-interest income................. 2,325 5,561 3,914 7,009
--------- --------- --------- ---------
G&A................................. 5,618 6,597 11,319 13,193
Other non-interest expense:
Real estate operations, net(3).... 305 3,965 833 6,091
Provision for losses on LOCs...... 1,412 1 1,412 194
--------- --------- --------- ---------
Total non-interest expense...... 7,335 10,563 13,564 19,478
--------- --------- --------- ---------
Earnings (loss) before income
taxes.............................. 1,278 (1,879) 2,221 (3,904)
Income taxes........................ 5 22 7 22
--------- --------- --------- ---------
Net earnings (loss)................. $ 1,273 $ (1,901) $ 2,214 $ (3,926)
========= ========= ========= =========
PER SHARE DATA:
Net earnings (loss) per share....... $ 0.31 $ (0.48) $ 0.54 $ (0.99)
Average shares used for calculation
of net earnings (loss) per share... 4,123,447 3,979,881 4,121,788 3,980,419
Stockholders' equity per share...... $ 12.11 $ 13.21 $ 12.11 $ 13.21
Shares used for calculation of
stockholders' equity per share..... 4,082,511 3,981,567 4,082,511 3,981,567
(See notes on following page.)
17
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1996 1995 1996 1995
--------- --------- -------- --------
(DOLLARS IN THOUSANDS)
FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets(4)(5).... 0.53% (0.72)% 0.46% (0.74)%
Return on average equity(5)....... 10.50 (14.17) 9.12 (14.38)
Equity to total assets............ 5.88 5.58 5.88 5.58
Interest rate spread(5)........... 3.37 2.41 3.42 2.42
Net interest margin............... 3.50 2.51 3.49 2.53
Average interest-earning assets to
average interest-bearing
liabilities...................... 103.03 102.14 101.80 102.46
G&A to average assets(4)(5)....... 2.36 2.50 2.37 2.49
Efficiency ratio(6)............... 60.47 69.29 63.37 78.61
REGULATORY CAPITAL RATIOS:
Tangible and core capital......... 5.77 5.41 -- --
Risk-based capital................ 8.80 8.34 -- --
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans... 2.26 1.82 -- --
Nonperforming assets to total
assets and LOCs(7)............... 2.89 4.76 -- --
Allowance for losses on loans and
LOCs to total loans and LOCs..... 2.26 3.05 -- --
Total allowance for losses on
loans, LOCs and real estate to
total assets and LOCs............ 2.20 3.38 -- --
GVA for losses on loans to
nonaccrual loans................. 61.52 117.52 -- --
GVA for losses on loans, real
estate and LOCs to total
nonperforming assets(7).......... 63.24 49.03 -- --
OTHER DATA:
Number of deposit accounts........ 88,990 91,804 -- --
Full service customer facilities.. 14 15 -- --
Full time equivalent employees.... 294 282 -- --
- --------
(1) Includes loans held for sale.
(2) Includes REO and real estate held for sale or investment.
(3) Includes provision for losses on real estate of $0 and $3,614 for the
three-month periods ended June 30, 1996 and 1995, respectively, and $0 and
$5,036 for the six-month periods ended June 30, 1996 and 1995,
respectively.
(4) LOCs have been added to average assets for purposes of this calculation.
See "Business--Lending Activities--Multi-family Lending; LOCs."
(5) Ratios for the three-month and six-month periods ended June 30, 1996 and
1995 have been annualized.
(6) G&A expense to net interest income plus total non-interest income.
Excludes provision for losses on loans, LOCs and real estate operations,
and for the three-month and six-month periods ended June 30, 1995,
excludes curtailment gain on retirement plan of $3.3 million.
(7) Excludes troubled debt restructures which are currently performing under
their restructured terms.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND
1995
General. The Company recorded net earnings of $1.3 million for the three
months ended June 30, 1996, or $0.31 per share, as compared to a loss of $1.9
million, or $0.48 per share, for the three months ended June 30, 1995.
Operating results for the three months ended June 30, 1996 were favorably
impacted by a reduction in provisions for losses on loans, LOCs and real
estate of $5.7 million and by a reduction in G&A of $979,000. Another factor
affecting operating results during the three months ended June 30, 1996 was an
increase in interest rate spread to 3.37% compared to 2.41% for the same
period ended June 30, 1995.
Interest income. Interest income for the three months ended June 30, 1996
was $15.1 million compared to $17.4 million for the same period in the
previous year. Included in interest income for the three months ended June 30,
1995 was approximately $1.6 million of income due to the recognition of net
deferred fees. The decrease in interest income for the three months ended June
30, 1996 is due in part to a decrease in average interest earning assets of
approximately $113.2 million, partially offset by an increase in the average
yield for interest-earning assets from an average of 6.98% for the three
months ended June 30, 1995 to 7.62% for the three months ended June 30, 1996.
Interest expense. Interest expense for the three months ended June 30, 1996
was $8.1 million compared to $10.1 million for the same period in the previous
year. This decrease in interest expense is the result of a decrease in average
interest bearing liabilities for the three months ended June 30, 1996 of
$117.5 million and a decrease in average cost of interest-bearing liabilities
from 4.57% for the three months ended June 30, 1995 to 4.25% for the three
months ended June 30, 1996.
Net interest income. Net interest income for the three months ended June 30,
1996 was $7.0 million, which represents an interest rate spread of 3.37%. This
compares to $7.3 million, which represents an interest rate spread of 2.41%,
for the same period in 1995. The 96 basis point increase in the interest rate
spread for the three months ended June 30, 1996, compared to the three months
ended June 30, 1995, was a result of an increase in the average yield for
interest-earning assets of 64 basis points and a decrease in the average cost
for interest-bearing liabilities of 32 basis points.
Provision for losses on loans. The provision for losses on loans was
$678,000 for the three months ended June 30, 1996 compared to $4.2 million for
the same period last year. The Company also recognized a provision for losses
on LOCs of $1.4 million for the three months ended June 30, 1996 and a
provision for losses on real estate of $3.6 million for the three months ended
June 30, 1995, which are included in "Other non-interest expense." The loss
provisions reflect management's assessment of the loan, real estate, and LOC
portfolios in light of conditions in the Southern California real estate
market, borrowers' ability to perform and certain other factors.
Non-interest income. Non-interest income for the three months ended June 30,
1996 was $2.3 million compared to $5.6 million for the same period last year.
The decrease in non-interest income for the three months ended June 30, 1996
was primarily the result of nonrecurring income in the form of a curtailment
gain of $3.3 million in the three months ended June 30, 1995 resulting from
freezing the Company's employee defined benefit plan.
General and administrative expense. G&A for the three months ended June 30,
1996 decreased to $5.6 million from $6.6 million for the three months ended
June 30, 1995. The decrease for the three months ended June 30, 1996 was the
result of a Company-wide cost reduction plan implemented in 1995 which
included a 20% staff reduction, a salary and retirement plan freeze and
cutbacks in other operating expenses. The Company's efficiency ratio improved
from 69.29% for the three months ended June 30, 1995 to 60.47% for the three
months ended June 30, 1996.
19
Other non-interest expense. Other non-interest expense for the three months
ended June 30, 1996 was $1.7 million compared to $4.0 million for the same
period in 1995. The decrease for the three months ended June 30, 1996 resulted
primarily from a net decrease in the provision for losses on real estate and
LOCs of $2.2 million.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995
General. The Company recorded net earnings of $2.2 million for the six
months ended June 30, 1996, or $0.54 per share, as compared to a loss of $3.9
million, or $0.99 per share, for the six months ended June 30, 1995. Operating
results for the six months ended June 30, 1996 were favorably impacted by a
reduction in provisions for losses on loans, LOCs and real estate of $6.3
million and by a reduction in G&A of $1.9 million. Another factor affecting
operating results during the six months ended June 30, 1996 was an increase in
interest rate spread compared to the same period in 1995.
Interest income. Interest income for the six months ended June 30, 1996 was
$30.5 million compared to $32.5 million for the same period in the previous
year. Included in interest income for the six months ended June 30, 1995 was
approximately $1.6 million of income due to the recognition of net deferred
fees. The decrease in interest income for the six months ended June 30, 1996
is due in part to a decrease in average interest-earning assets of
approximately $102.5 million, partially offset by an increase in the average
yield for interest-earning assets from an average of 6.90% for the six months
ended June 30, 1995 to 7.69% for the six months ended June 30, 1996.
Interest expense. Interest expense for the six months ended June 30, 1996
was $16.6 million compared to $19.4 million for the same period in the
previous year. This decrease in interest expense is the result of a decrease
in average interest bearing liabilities for the six months ended June 30, 1996
of $95.0 million and a decrease in the average cost of interest-bearing
liabilities from 4.48% to 4.27% for the six months ended June 30, 1996.
Net interest income. Net interest income for the six months ended June 30,
1996 was $14.0 million, which represents an interest rate spread of 3.42%.
This compares to $13.1 million, which represents an interest rate spread of
2.42%, for the same period in the prior year. The 100 basis point increase in
the interest rate spread for the six months ended June 30, 1996, as compared
to the six months ended June 30, 1995, was a result of an increase in the
average yield for interest-earning assets of 79 basis points and a decrease in
the average cost for interest-bearing liabilities of 21 basis points.
Provision for losses on loans. The provision for losses on loans was $2.1
million for the six months ended June 30, 1996 compared to $4.5 million for
the same period last year. The Company also recognized a provision for losses
on LOCs of $1.4 million for the six months ended June 30, 1996 compared to
provisions of $194,000 for losses on LOCs and $5.0 million for losses on real
estate for the six months ended June 30, 1995, which are included in "Other
non-interest expense." The loss provisions reflect management's assessment of
the loan, real estate, and LOC portfolios in light of conditions in the
Southern California real estate market, borrowers' ability to perform and
certain other factors.
Non-interest income. Non-interest income for the six months ended June 30,
1996 was $3.9 million compared to $7.0 million for the same period last year.
The decrease in non-interest income for the six months ended June 30, 1996 was
primarily the result of nonrecurring income in the form of a curtailment gain
of $3.3 million in the six months ended June 30, 1995 resulting from freezing
the Company's employee defined benefit plan.
General and administrative expense. G&A for the six months ended June 30,
1996 was $11.3 million compared to $13.2 million for the same period in 1995.
The decrease for the six months ended June 30, 1996 was the result of the
Company-wide cost reduction plan implemented in 1995 described above. The
Company's efficiency ratio improved from 78.61% for the six months ended June
30, 1995 to 63.37% for the six months ended June 30, 1996.
20
Other non-interest expense. Other non-interest expense for the six months
ended June 30, 1996 was $2.2 million compared to $6.3 million for the same
period last year. The decrease for the six months ended June 30, 1996 resulted
primarily from a decrease in the provision for losses on real estate and LOCs
of $3.8 million.
FINANCIAL CONDITION
The Company's consolidated assets totaled $840.1 million at June 30, 1996
compared to $871.8 million at December 31, 1995. The decrease of $31.7 million
was primarily the result of loan repayments in excess of loan originations and
a reduction in real estate. The decrease in consolidated liabilities consisted
primarily of a decrease in the deposit base and a reduction in outstanding FHLB
advances and other borrowed money.
Loans receivable, net decreased to $664.8 million at June 30, 1996 from
$683.0 million at December 31, 1995. The decrease of $18.2 million for the six
months ended June 30, 1996 consisted primarily of loan originations of $39.5
million and a reduction in the undisbursed portion of construction loans of
$7.2 million, offset by loan principal payments of $59.3 million and the
transfer of $9.1 million of loans to REO. Real estate declined $14.0 million
during the six months ended June 30, 1996 primarily as a result of $21.5
million of sales of REO, offset by net transfers to REO from loans of $6.9
million.
Savings deposits totaled $762.2 million at June 30, 1996 compared to $776.5
million at December 31, 1995. The decrease of $14.3 million in savings deposits
was due primarily to the maturities of higher yielding certificates of deposit
resulting in deposit outflows. The Company reduced net borrowings by $17.3
million during the six months ended June 30, 1996 as a result of the sale of
REO properties and the reduction of related borrowings, and the repayment of a
$5.0 million FHLB advance. Stockholders' equity increased to $49.4 million at
June 30, 1996 from $48.1 million at December 31, 1995 as a result of net
earnings of approximately $2.2 million for the six months ended June 30, 1996,
partially offset by a $1.4 million change in the unrealized loss on securities
available for sale.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
repayments of loans, retained earnings and, to a lesser extent, FHLB advances
and other short-term borrowings. While maturities and scheduled amortization of
loans are predictable sources of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 5%. The Bank's average liquidity ratios for the three months ended
June 30, 1996 and December 31, 1995 were 7.71% and 7.72%, respectively. The
Bank currently attempts to maintain a liquidity ratio as close to the minimum
requirements as possible, since loan originations provide both higher interest
rates, in addition to loan fees, than are available from liquidity investments.
SUBSEQUENT EVENTS
The Company has entered into an agreement to purchase approximately $11.0
million in adjustable rate single-family loans having interest rates tied to
the one year Constant Maturity Treasury Rate ("CMT") index. These loans will be
serviced by the seller.
The Company is negotiating for the acquisition of deposits from a local
institution totaling approximately $24.0 million which would include checking
accounts, savings accounts, and certificates of deposits. The deposits will be
merged into an existing branch facility. The premium is expected to be 0.50%.
The acquisition, which will not include any branch facilities, will be subject
to the Company's completion of this Offering or other increases in the Bank's
capital and any necessary regulatory approvals.
21
REGULATORY CAPITAL
The following table presents information regarding actual and proforma
capital at June 30, 1996 and at December 31, 1995.
REGULATORY CAPITAL
AT JUNE 30, 1996 AT DECEMBER 31,
PROFORMA(1)(2) AT JUNE 30, 1996 1995
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
ASSETS ASSETS ASSETS
AMOUNT (3)(4) AMOUNT (3)(4) AMOUNT (3)(4)
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Tangible Capital:
Capital level....... $68,745 8.05% $48,141 5.77% $45,193 5.24%
Requirement......... 12,815 1.50 12,506 1.50 12,933 1.50
------- ----- ------- ---- ------- ----
Excess.............. $55,930 6.55% $35,635 4.27% $32,260 3.74%
======= ===== ======= ==== ======= ====
Core Capital:
Capital level....... $68,745 8.05% $48,141 5.77% $45,193 5.24%
Requirement......... 25,630 3.00 25,012 3.00 25,866 3.00
------- ----- ------- ---- ------- ----
Excess.............. $43,115 5.05% $23,129 2.77% $19,327 2.24%
======= ===== ======= ==== ======= ====
Risk-Based Capital:
Capital level....... $76,838 11.89% $56,233 8.80% $53,463 8.17%
Requirement......... 51,712 8.00 51,143 8.00 52,341 8.00
------- ----- ------- ---- ------- ----
Excess.............. $25,126 3.89% $ 5,090 0.80% $ 1,122 0.17%
======= ===== ======= ==== ======= ====
- --------
(1) A well capitalized institution under OTS regulations must have a risk-
based capital ratio of 10% or greater and a leverage (core capital) ratio
of 5% or greater, as well as a Tier 1 risk-based capital ratio of 6% or
greater. See "Regulation and Supervision--Capital Requirements."
(2) Assumes the issuance of 2,600,000 shares of Common Stock in the Offering
at an assumed offering price of $9.00 per share, after deducting the
underwriting discount and estimated offering expenses payable by the
Company and the disposition of the proceeds thereof. Does not include the
effect of possible special assessments on SAIF--insured institutions. See
"Use of Proceeds."
(3) Tangible capital levels are shown as a percentage of tangible assets and
core capital is shown as a percentage of total adjusted assets. Risk-based
capital levels are shown as a percentage of risk-weighted assets.
(4) Requirements under OTS regulations for an "adequately capitalized"
institution at June 30, 1996 and December 31, 1995 were 4.00% for core and
Tier 1 risk-based capital and 8.00% for risk-based capital.
22
NONPERFORMING ASSETS
The following table sets forth information regarding nonperforming assets.
The table excludes restructured loans that are performing in accordance with
their restructured terms.
NONPERFORMING ASSETS
AT JUNE 30, 1996 AT DECEMBER 31, 1995
---------------- --------------------
(DOLLARS IN THOUSANDS)
NONPERFORMING ASSETS:
NONACCRUAL LOANS:
One- to four-family..................... $11,312 $ 8,818
Multi-family............................ 2,779 6,115
Commercial real estate.................. -- 223
Spot construction....................... 418 418
Developed lots.......................... 716 1,036
Tract construction and land............. 163 581
Consumer loans.......................... 246 413
------- -------
Total nonaccrual loans................ 15,634 17,604
------- -------
REO(1):
One- to four-family..................... 3,712 5,393
Multi-family (2)........................ 4,529 17,807
Commercial real estate.................. 390 536
Developed lots.......................... 2,181 1,836
Tract construction and land............. 662 463
Consumer loans.......................... 24 43
------- -------
Total REO............................. 11,498 26,078
------- -------
Total nonperforming assets................ $27,132 $43,682
======= =======
- --------
(1) Does not include the effect of GVAs of $933 and $1,518 at June 30, 1996
and December 31, 1995, respectively.
(2) Includes properties securing LOCs acquired through foreclosure.
Nonperforming assets were $27.1 million, or 2.89% of total assets and LOCs,
at June 30, 1996, compared to $43.7 million, or 4.53% of total assets and LOCs
at December 31, 1995. Nonaccrual loans, net of specific valuation allowance
decreased to $15.6 million at June 30, 1996 from $17.6 million at December 31,
1995. REO decreased to $11.5 million at June 30, 1996 from $26.1 million at
December 31, 1995 as a result of the sale of certain properties during this
period. Restructured loans, which are currently performing under their
restructured terms are excluded from nonperforming assets. Management
continues to seek to reduce the amount of nonperforming assets by
concentrating efforts on early detection through the asset classification
process and by taking an aggressive stance to quickly resolve nonperforming
assets.
23
ALLOWANCE FOR LOSSES
The following table sets forth activity in the Company's allowance for
losses on loans, LOCs and real estate for the periods set forth in the table.
ANALYSIS OF ALLOWANCE FOR LOSSES
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
------------------ ----------------
(IN THOUSANDS)
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of period............ $12,076 $14,745
Provision charged to income............... 678 2,078
Charge-offs:
One- to four-family..................... (744) (933)
Multi-family............................ (468) (3,005)
Commercial real estate.................. -- (12)
Developed lots.......................... (135) (208)
Tract construction and land............. (1) (1,074)
Consumer loans.......................... (246) (471)
------- -------
Total charge-offs..................... (1,594) (5,703)
Recoveries................................ 82 122
------- -------
Balance at end of period.................. 11,242 11,242
------- -------
ALLOWANCE FOR LOSSES ON LOCS:
Balance at beginning of period............ 6,947 7,447
Provision charged to income............... 1,412 1,412
Charge-offs............................... (1,753) (2,253)
------- -------
Balance at end of period.................. 6,606 6,606
------- -------
Total allowance for losses on loans and
LOCs..................................... $17,848 $17,848
======= =======
ALLOWANCE FOR LOSSES ON REAL ESTATE:
Balance at beginning of period............ $ 5,680 $ 9,496
Charge-offs............................... (2,839) (6,655)
------- -------
Balance at end of period.................. $ 2,841 $ 2,841
======= =======
TOTAL ALLOWANCE FOR LOSSES ON LOANS, LOCS
AND REAL ESTATE:
GVA..................................... $17,157 $17,157
Specific................................ 3,532 3,532
------- -------
Total................................. $20,689 $20,689
======= =======
The allowance for losses on loans, LOCs and real estate decreased to $20.7
million at June 30, 1996 from $31.7 million at December 31, 1995. The ratio of
GVA for losses on loans, LOCs and real estate to nonperforming assets
increased to 63.24% at June 30, 1996 from 39.30% at December 31, 1995.
Included in the allowance for losses on loans, LOCs and real estate were
specific allowances against individual loans, LOCs and real estate of $3.5
million at June 30, 1996. Management continues to address the levels of
allowance for losses in relation to the local real estate economy.
24
CLASSIFIED ASSETS
The following table sets forth the Company's classified assets, including
substandard and doubtful categories, net of specific valuation allowances. The
amount of specific valuation allowance at June 30, 1996 and December 31, 1995
was $3,279 and $12,800, respectively.
CLASSIFIED ASSETS
AT JUNE 30,
1996 AT DECEMBER 31, 1995
-------------- -----------------------
NUMBER AMOUNT NUMBER AMOUNT
------ ------- ---------- ------------
(DOLLARS IN THOUSANDS)
SUBSTANDARD
LOANS:
One- to four-family.................. 88 $15,112 37 $ 6,790
Multi-family......................... 11 5,327 15 14,566
Commercial real estate............... 1 661 2 879
Construction single family........... -- -- 1 418
Developed lots....................... 10 1,179 12 1,114
Tract construction and land.......... 2 590 3 1,058
Consumer loans....................... 59 278 36 218
--- ------- -------- ------------
Total.............................. 171 23,147 106 25,043
--- ------- -------- ------------
REO:
One- to four-family.................. 31 3,712 48 5,393
Multi-family......................... 5 4,529 11 17,807
Commercial real estate............... 2 390 3 536
Developed lots....................... 30 2,181 21 1,836
Tract construction and land.......... 3 662 1 463
Consumer loans....................... 4 24 8 43
--- ------- -------- ------------
Total.............................. 75 11,498 92 26,078
--- ------- -------- ------------
REAL ESTATE HELD FOR SALE OR
INVESTMENT............................ 1 280 1 280
--- ------- -------- ------------
LOCS................................... -- -- 1 7,524
--- ------- -------- ------------
Total substandard.................. 247 34,925 200 58,925
--- ------- -------- ------------
DOUBTFUL
Multi-family......................... 1 163 -- --
--- ------- -------- ------------
TOTAL CLASSIFIED ASSETS................ 248 $35,088 200 $ 58,925
=== ======= ======== ============
25
USE OF PROCEEDS
The net proceeds of the Offering are estimated to be $21.6 million, after
deducting the underwriting discount and estimated expenses payable by the
Company, based on an assumed offering price of $9.00 per share. The Company
intends to contribute $20.6 million of such net proceeds to the Bank to
increase the Bank's regulatory capital. The net proceeds from the Offering
will initially be invested primarily in short-term liquid investments such as
federal funds, short-term, investment grade marketable securities or in MBS.
After giving effect to the Offering and the application of the net proceeds
therefrom, the Bank will have a pro forma tangible capital ratio of 7.74%, a
core capital ratio of 7.74% and a risk-based capital ratio of 11.40%, based on
balances at March 31, 1996, and will meet the regulatory capital criteria to
be considered a "well capitalized" institution under OTS regulations. In
addition, the net proceeds of the Offering will be available to pay the one-
time surcharge that may be assessed on the Bank's deposits in connection with
the proposed recapitalization of the SAIF, which the Company estimates to be
approximately $6.2 million to $6.9 million based on the Bank's deposits at
March 31, 1995. The remaining net proceeds from the Offering will be retained
by the Company and will be used for general corporate purposes.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on Nasdaq under the symbol "REDF." The
following table sets forth on a per share basis for the fiscal quarter ending
on the date indicated the range of high and low sale prices for the Common
Stock of the Company as reported on Nasdaq since the Company's initial public
offering on April 7, 1994.
HIGH LOW
------ ------
FISCAL YEAR 1994
June 30................................................... $12.25 $ 7.75
September 30.............................................. 14.50 11.00
December 31............................................... 12.75 7.75
FISCAL YEAR 1995
March 31.................................................. 9.50 7.75
June 30................................................... 10.38 7.88
September 30.............................................. 10.00 7.75
December 31............................................... 10.63 9.50
FISCAL YEAR 1996
March 31.................................................. 10.00 8.88
June 30................................................... 10.00 8.38
September 30(1)........................................... 9.00 8.38
--------
(1) Through July 26, 1996.
On July 26, 1996, the closing sale price of the Common Stock as reported by
Nasdaq was $9.00 per share. At June 30, 1996, the Company had 741 stockholders
of record.
DIVIDEND POLICY
The Company has not paid dividends to date and has no present plans to do
so. See "Taxation" and "Regulation and Supervision--Restrictions on Dividends
and Other Capital Distributions" for descriptions of certain Federal income
tax and regulatory limitations on the payment of dividends by the Bank to the
Company.
26
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company, including deposits, at March 31, 1996, and as adjusted to give effect
to the assumed issuance of 2,600,000 shares of Common Stock offered hereby at
an assumed offering price of $9.00 per share, the closing sale price of the
Common Stock on Nasdaq on July 26, 1996, after deducting the underwriting
discount and estimated offering expenses payable by the Company.
AT MARCH 31, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
Deposits................................................. $769,679 $769,679
Borrowings............................................... 24,534 24,534
-------- --------
Total deposits and borrowings........................ $794,213 $794,213
======== ========
Stockholders' equity:
Common stock, $0.01 par value (15,000,000 shares
authorized; 4,390,504 shares outstanding; 6,990,504
shares outstanding, as adjusted)...................... $ 44 $ 70
Additional paid-in capital............................. 32,629 54,207
Treasury stock......................................... (860) (860)
Retained earnings, substantially restricted............ 19,511 19,511
Deferred compensation.................................. (2,290) (2,290)
Unrealized gain (loss) on securities available-for-
sale, net............................................. (705) (705)
-------- --------
Total stockholders' equity........................... $ 48,329 $ 69,933
======== ========
27
SELECTED CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA OF THE COMPANY
The selected data presented below under the captions "Consolidated Financial
Condition Data" and "Consolidated Operating Data" for, and as of the end of,
each of the years in the five-year period ended December 31, 1995, are derived
from the audited consolidated financial statements of the Company. The
consolidated financial statements as of December 31, 1995 and 1994, and for
each of the years in the three-year period ended December 31, 1995, and the
report thereon are included elsewhere in this prospectus. The selected
unaudited data presented below under the captions "Consolidated Financial
Condition Data" and "Consolidated Operating Data" as of March 31, 1996 and for
each of the three-month periods ended March 31, 1996 and 1995, are derived
from the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus, which in the opinion of management of the
Company, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation. The results of operations for the
three-month period ended March 31, 1996 are not necessarily indicative of the
results of operations to be expected for the entire year.
AT DECEMBER 31,
AT MARCH 31, --------------------------------------------
1996 1995 1994 1993 1992 1991
------------ -------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED FINANCIAL
CONDITION DATA:
Total assets............ $857,959 $871,814 $960,853 $916,846 $932,232 $849,299
Loans receivable,
net(1)................. 672,151 682,984 733,132 645,670 647,889 570,542
MBS..................... 56,499 52,116 79,971 109,982 100,771 160,807
Investment securities... 38,797 41,655 38,899 55,101 42,004 9,293
Real estate(2).......... 17,416 26,258 41,269 22,011 28,349 26,933
Deposits................ 769,679 776,528 805,334 835,134 828,054 750,319
Borrowed funds.......... 24,534 31,133 80,085 8,845 26,845 33,345
Total liabilities....... 809,630 823,736 905,345 863,485 875,993 796,621
Stockholders' equity,
substantially
restricted............. 48,329 48,078 55,508 53,361 56,239 52,678
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED OPERATING
DATA:
Interest income......... $ 15,446 $ 15,134 $ 64,224 $ 56,515 $59,436 $69,257 $77,118
Interest expense........ 8,463 9,319 38,366 29,869 30,869 37,154 49,804
---------- ---------- ---------- ---------- ------- ------- -------
Net interest income..... 6,983 5,815 25,858 26,646 28,567 32,103 27,314
Provision for losses on
loans.................. 1,400 373 7,938 12,651 12,990 6,106 2,968
---------- ---------- ---------- ---------- ------- ------- -------
Net interest income af-
ter provision for
losses on loans....... 5,583 5,442 17,920 13,995 15,577 25,997 24,346
---------- ---------- ---------- ---------- ------- ------- -------
Non-interest income:
Fee income............. 1,528 1,449 6,212 6,280 6,404 5,231 5,825
Other non-interest in-
come.................. 61 (1) 4,986 (5) 480 835 537
---------- ---------- ---------- ---------- ------- ------- -------
Total non-interest
income.............. 1,589 1,448 11,198 6,275 6,884 6,066 6,362
---------- ---------- ---------- ---------- ------- ------- -------
Non-interest expense:
Compensation and bene-
fits.................. 2,758 3,238 12,063 14,200 12,494 12,285 11,456
Occupancy and equip-
ment.................. 1,676 1,951 6,831 7,816 6,973 6,943 6,538
Other G&A.............. 1,267 1,407 5,391 5,179 5,991 4,703 4,718
---------- ---------- ---------- ---------- ------- ------- -------
Total G&A.............. 5,701 6,596 24,285 27,195 25,458 23,931 22,712
Real estate operations,
net(3)................ 528 2,126 10,258 8,370 3,222 2,148 88
Provision for losses on
letters of credit..... -- 193 2,536 9,895 694 1,866 276
---------- ---------- ---------- ---------- ------- ------- -------
Total non-interest
expense............. 6,229 8,915 37,079 45,460 29,374 27,945 23,076
---------- ---------- ---------- ---------- ------- ------- -------
Earnings (loss) before
income taxes........... 943 (2,025) (7,961) (25,190) (6,913) 4,118 7,632
Income taxes (benefit).. 2 -- 124 1,150 (3,669) 1,868 3,700
---------- ---------- ---------- ---------- ------- ------- -------
Earnings (loss) before
cumulative effect of
change in accounting
principle.............. 941 (2,025) (8,085) (26,340) (3,244) 2,250 3,932
Cumulative effect of
change in accounting
principle.............. -- -- -- -- -- 1,311 --
---------- ---------- ---------- ---------- ------- ------- -------
Net earnings (loss)..... $ 941 $ (2,025) $ (8,085) $ (26,340) $(3,244) $ 3,561 $ 3,932
========== ========== ========== ========== ======= ======= =======
PER SHARE DATA:
Net earnings (loss) per
share.................. $ 0.23 $ (0.51) $ (2.03) $ (6.08)(4) n/a n/a n/a
Average shares used for
calculation of earnings
per share.............. 4,126,438 3,978,617 3,981,821 4,002,920 n/a n/a n/a
Stockholders' equity per
share.................. $ 11.90 $ 13.58 $ 12.06 $ 13.87 n/a n/a n/a
Shares used for
calculation of
stockholders' equity
per share.............. 4,059,914 3,978,617 3,987,010 4,002,920 n/a n/a n/a
(See notes on following page.)
28
AT OR FOR THE
THREE MONTHS
ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------- ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
FINANCIAL RATIOS AND
OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets
(5)(6)................. 0.39% (0.76)% (0.78)% (2.50)% (0.31)% 0.35% 0.41%
Return on average equity
(6).................... 7.76 (14.58) (15.05) (38.30) (6.00) 6.34 7.68
Equity to total assets.. 5.63 5.52 5.51 5.78 5.82 6.03 6.20
Interest rate spread
(7).................... 3.46 2.44 2.87 3.19 3.44 3.90 3.44
Net interest margin..... 3.48 2.57 2.98 3.19 3.45 3.95 3.53
Average interest-earning
assets to average
interest-bearing
liabilities............ 100.60 103.03 102.62 100.03 100.25 101.21 101.35
G&A to average assets
(5)(6)................. 2.37 2.48 2.36 2.59 2.44 2.38 2.38
Efficiency ratio (7).... 66.51 90.59 72.14 82.61 71.81 62.70 67.44
REGULATORY CAPITAL
RATIOS:
TANGIBLE CAPITAL:
Actual.................. 5.51 5.40 5.24 5.65 5.42 5.58 5.68
Pro Forma (8)(9)........ 7.74 n/a n/a n/a n/a n/a n/a
CORE CAPITAL:
Actual.................. 5.51 5.40 5.24 5.65 5.42 5.58 5.68
Pro Forma (8)(9)........ 7.74 n/a n/a n/a n/a n/a n/a
RISK-BASED CAPITAL:
Actual.................. 8.39 8.37 8.17 8.59 8.11 8.64 7.71
Pro Forma (8)(9)........ 11.40 n/a n/a n/a n/a n/a n/a
ASSET QUALITY RATIOS:
Nonaccrual loans to
total loans............ 1.98 1.37 2.45 1.77 3.34 2.74 1.89
Nonperforming assets to
total assets and LOCs
(10)................... 3.21 4.70 4.53 4.46 3.17 3.18 2.62
Total allowance for
losses on loans, LOCs
and real estate to
total assets and LOCs.. 2.58 2.57 3.28 2.85 1.95 1.15 0.66
GVAs for losses on loans
to nonaccrual loans.... 80.37 119.69 56.53 108.03 44.96 33.85 32.62
GVAs for losses on
loans, real estate and
LOCs to total
nonperforming assets
(10)................... 58.41 42.18 39.30 51.20 40.90 25.52 15.89
OTHER DATA:
Number of deposit
accounts............... 88,566 91,374 89,015 89,763 87,630 84,344 81,464
Full service customer
facilities............. 14 15 14 16 16 16 15
Full time equivalent
employees.............. 275 333 281 350 337 313 294
- --------
(1) Includes loans held for sale.
(2) Includes REO and real estate held for sale or investment.
(3) Includes provision for losses on real estate of $0, $1,422, $8,336,
$4,653, $1,968, $1,128 and $768 for the three-month periods ended March
31, 1996 and 1995 and for the years ended December 31, 1995, 1994, 1993,
1992 and 1991, respectively.
(4) Loss per share data has been calculated based on the Company's net loss of
$24.4 million for the period April 7, 1994 (the date of the Company's
initial public offering) through December 31, 1994.
(5) LOCs have been added to recorded assets for purposes of this calculation.
See "Business--Lending Activities--Multi-family Lending; LOCs."
(6) Ratios for the three-month periods ended March 31, 1996 and 1995 have been
annualized.
(7) G&A expense to net interest income plus total non-interest income.
Excludes provisions for losses on loans and LOCs and real estate
operations, and for the year ended December 31, 1995, excludes curtailment
gain on retirement plan of $3.4 million.
(8) The OTS minimum capital requirements at March 31, 1996 were 1.50% for
tangible capital, 3.00% for core capital and 8.00% for risk-based capital.
A "well capitalized" institution under OTS regulations must have a risk-
based capital ratio of 10.00% or greater and a leverage (core capital)
ratio of 5.00% or greater, as well as a Tier 1 risk-based capital ratio of
6.00% or greater. See "Regulation and Supervision--Capital Requirements."
(9) Assumes the issuance of 2,600,000 shares of Common Stock in the Offering
at an assumed offering price of $9.00 per share, after deducting the
underwriting discount and estimated offering expenses payable by the
Company and the disposition of the proceeds thereof. Does not include the
effect of possible special assessment on SAIF-insured institutions. See
"Use of Proceeds."
(10) Excludes troubled debt restructures which are currently performing under
their restructured terms.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company reported net earnings of $941,000, or $0.23 per share, for the
three months ended March 31, 1996, compared to a net loss of $2.0 million, or
$0.51 per share, for the three months ended March 31, 1995. The Company
reported a 1995 net loss of $8.1 million, or $2.03 per share, versus a net
loss of $26.3 million, or $6.08 per share, in 1994 and a net loss of $3.2
million in 1993. The Bank converted from a mutual savings bank to a stock-form
savings bank and became a wholly-owned subsidiary of the Company in April,
1994.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and other
borrowings. The Company also generates non-interest income, including LOC
fees, other transactional fees, loan servicing fees, and commissions from the
sale of insurance products and investments through its wholly-owned
subsidiaries. The Company's operating expenses primarily consist of employee
compensation and benefits, occupancy and equipment expenses, federal deposit
insurance premiums and other G&A. The Company's results of operations are
significantly affected by its provision for loan and LOC losses and the net
cost of real estate operations. Results of operations are also significantly
affected by general economic and competitive conditions, particularly changes
in market interest rates, government policies and actions of regulatory
agencies. In addition, the Company's results of operations would be initially
adversely affected in the event that a one-time deposit insurance premium
surcharge is imposed on SAIF-insured institutions. See "Risk Factors--
Recapitalization of SAIF and Its Impact on SAIF Premiums and the Company's
Results of Operations" and "Regulation and Supervision--Deposit Insurance."
At March 31, 1996, the Company had consolidated assets of $858.0 million,
deposits of $769.7 million and stockholders' equity of $48.3 million,
representing 5.63% of total assets. At December 31, 1995, the Company had
consolidated assets of $871.8 million, deposits of $776.5 million and
stockholders' equity of $48.1 million, representing 5.51% of total assets. At
December 31, 1994, the Company had consolidated assets of $960.9 million,
deposits of $805.3 million and stockholders' equity of $55.5 million,
representing 5.78% of total assets.
The Bank entered into a Supervisory Agreement with the OTS during the second
quarter of 1995 which, among other things, required the Bank to submit to the
OTS a revised business plan that includes specific plans for the reduction of
classified assets and G&A and the continued maintenance of adequate capital
levels. The Bank believes that it is currently in substantial compliance with
the Supervisory Agreement. See "Risk Factors--Supervisory Agreement."
NONPERFORMING ASSETS AND ALLOWANCE FOR LOSSES
For much of the period since 1991, the economy in Southern California,
including the Inland Empire, has been characterized by recessionary economic
conditions, resulting in high levels of unemployment, increases in vacancies
in multi-family residential and commercial properties, declining rents and
property values and slowing sales of new and existing one- to four-family
residential properties. These factors have caused significant increases in the
Company's level of nonperforming assets, which include nonaccrual loans and
REO. At March 31, 1996, the Company's level of nonperforming assets decreased
to $30.7 million, or 3.21% of total assets and LOCs, from the December 31,
1995 level of nonperforming assets of $43.7 million, or 4.53% of total assets
and LOCs, and $47.1 million, or 4.46% of total assets and LOCs, at December
31, 1994. The Company's level of classified assets, which consist of assets
adversely classified in accordance with regulatory guidelines because they
possess one or more well-defined weaknesses, has decreased to $52.9 million,
or 5.52% of total assets and LOCs, at March 31, 1996, a reduction of $18.8
million in classified assets, as compared to $71.7 million, or 7.44% of total
assets and LOCs, at December 31, 1995 and $114.1 million, or 10.78% of total
assets and LOCs, at December 31, 1994. Of the $52.9 million of classified
assets at March 31, 1996, $17.1 million were performing in accordance with
their terms. The allowance for losses on loans, LOCs and real estate decreased
to $24.7 million at March 31, 1996 from $31.7 million at December 31, 1995 and
$30.2 million
30
at December 31, 1994. The March 31, 1996 aggregate allowance of $24.7 million
included a GVA of $18.0 million, which represents an increase of $791,000 from
December 31, 1995 and a decrease of $6.2 million from the December 31, 1994
balance. The remaining allowances of $6.7 million, $14.5 million and $6.0
million at March 31, 1996, December 31, 1995 and December 31, 1994,
respectively, were for specific asset valuation allowances. The Company's
ratio of GVA for losses on loans, LOCs, and real estate to nonperforming
assets and LOCs increased to 58.41% at March 31, 1996 from 39.30% at December
31, 1995 and 51.20% at December 31, 1994.
Management considers the level of nonperforming assets, as well as regional
and local economic conditions and other factors when assessing the adequacy of
the allowance for losses on loans, LOCs and real estate. Management considers
the level of allowance for losses at March 31, 1996 to be adequate. However,
there is no assurance that the Company will not have to establish additional
loss provisions in the future. See "Business--Lending Activities" and "--Asset
Quality."
INTEREST RATE SENSITIVITY ANALYSIS
The matching of interest-earning assets and interest-bearing liabilities,
and their combined effects on net interest income, may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that same time period. A gap is said to be "positive" when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is said to be "negative" when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of falling interest rates, the net earnings of an institution
with a positive gap theoretically may be adversely affected due to its
interest-earning assets repricing faster than its interest-bearing
liabilities. Conversely, during a period of rising interest rates,
theoretically the net earnings of an institution with a positive gap position
may increase as its interest-earning assets reprice upward at a more rapid
rate than its interest-earning liabilities. However, a positive gap may not
protect an institution with a large portfolio of ARM loans from rises in
interest rates for extended time periods as such instruments generally have
annual and lifetime interest rate caps. Interest rates and the resulting cost
of funds increases in a rapidly increasing rate environment could exceed the
cap levels on these instruments and negatively impact net interest income.
The Company has managed its interest rate risk through the marketing and
funding of adjustable rate loans, which reprice periodically and are indexed
to the 11th District COFI and, to a lesser extent, the CMT. As a result of
this strategy, and based upon the Company's internally developed loan
prepayment speed estimates and core deposit decay rate assumptions used in the
table below, at March 31, 1996, the Company's net interest-earning assets
maturing or repricing within one year exceeded its total interest-bearing
liabilities maturing or repricing in the same time by $317.3 million,
representing a one year cumulative gap ratio of positive 36.98%. The Company
closely monitors its interest rate risk as such risk relates to its
operational strategies.
The Company's Board of Directors has established an Asset/Liability
Management Committee that is responsible for reviewing its asset/liability
policies and interest rate risk position. This committee meets and reports to
the Board on interest rate risk and trends on a quarterly basis. The Company
is currently attempting to maintain a positive gap position in light of a
forecasted modest rising interest rate environment; however, there is no
assurance that the Company will be able to maintain its positive gap position
or that its strategies will not result in a negative gap position in the
future. Nor is there any assurance as to the actual levels of interest rates
in future periods. To the extent that the Company's core deposits are reduced
at a more rapid rate than the Company's decay rate assumptions for such
deposits, the Company's current positive gap positions could be negatively
impacted. Although the Company has not experienced a material decline in its
core deposits, there is no assurance that such a decline will not occur in the
future if depositors seek higher yielding investments. For
31
information concerning the Company's deposit activity and the distribution of
its deposits, see "Business--Sources of Funds--Deposits."
The Company does not currently engage in the use of trading activities,
derivative instruments, or hedging activities to control its interest rate
risk. Although the use of such instruments or activities may be permitted at
the recommendation of the Asset/Liability Management Committee and with the
approval of the Board of Directors, the Company does not intend to engage in
such practices in the immediate future.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities of the Company, outstanding at March 31, 1996,
which are anticipated by the Company, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual terms of the asset or liability. Loans
were assumed to prepay at rates ranging from 5% to 12% on ARM loans, and 6% to
18% on fixed rate loans, and core deposit decay rate assumptions from 6% to
18% for passbook accounts, 5% to 12% for checking accounts and 8% to 22% for
money market deposit accounts in the one year or less category were used.
These prepayment and decay rates are based on the Company's historical
experience, but there is no assurance that the assumed rates will correspond
to future rates. For information regarding the contractual maturities of the
Company's loans, investments and deposits, see "Business--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
32
INTEREST RATE SENSITIVITY ANALYSIS
AT MARCH 31, 1996
-------------------------------------------------------------------------------------------
THREE THREE SIX ONE THREE FIVE MORE
MONTHS TO SIX MONTHS TO TO THREE TO FIVE TO TEN THAN
OR LESS MONTHS ONE YEAR YEARS YEARS YEARS TEN YEARS OTHER TOTAL
-------- -------- --------- --------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Mortgage loans and
MBS(1)(2).............. $422,296 $231,650 $ 11,654 $ 24,166 $ 4,447 $ 6,911 $ 7,828 $ -- $708,952
Consumer loans(1)...... 9,400 1,081 1,920 6,063 2,903 2,224 790 -- 24,381
Investment securities
and cash equivalents... 25,533 5,441 5,638 22,716 -- -- -- -- 59,328
Non-interest earning as-
sets.................... -- -- -- -- -- -- -- 65,298 65,298
-------- -------- --------- --------- -------- -------- -------- -------- --------
Total assets........ $457,229 $238,172 $ 19,212 $ 52,945 $ 7,350 $ 9,135 $ 8,618 $ 65,298 $857,959
======== ======== ========= ========= ======== ======== ======== ======== ========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Interest-bearing liabil-
ities:
Regular passbook depos-
its.................... $ 1,032 $ 1,032 $ 2,502 $ 9,402 $ 7,749 $ 9,629 $ 4,768 -- 36,114
Money market deposits.. 6,711 6,711 12,158 38,184 25,676 29,316 23,388 -- 142,144
Interest-bearing check-
ing (NOW) deposits..... 1,860 1,860 4,108 16,589 16,614 20,878 23,833 -- 85,742
Certificates of depos-
it..................... 87,902 87,233 163,391 133,804 16,163 -- -- -- 488,493
Other borrowed money... 15,834 5,000 -- -- 3,700 -- -- -- 24,534
Non-interest-bearing li-
abilities............... -- -- -- -- -- -- -- $ 32,603 32,603
Stockholders' equity.... -- -- -- -- -- -- -- 48,329 48,329
-------- -------- --------- --------- -------- -------- -------- -------- --------
Total liabilities
and stockholders'
equity.............. $113,339 $101,836 $ 182,159 $ 197,979 $ 69,902 $ 59,823 $ 51,989 $ 80,932 $857,959
-------- -------- --------- --------- -------- -------- -------- -------- ========
Interest sensitivity
gap(3).................. $343,890 $136,336 $(162,947) $(145,034) $(62,552) $(50,688) $(43,371) $(15,634)
======== ======== ========= ========= ======== ======== ======== ========
Cumulative interest sen-
sitivity gap............ $343,890 $480,226 $ 317,279 $ 172,245 $109,693 $ 59,005 $ 15,634
======== ======== ========= ========= ======== ======== ========
Cumulative interest
sensitivity gap as a
percentage of total
assets.................. 40.08% 55.97% 36.98% 20.08% 12.79% 6.88% 1.82%
Cumulative net interest-
earning assets as a
percentage of interest-
sensitive liabilities... 403.42% 323.18% 179.85% 128.93% 116.49% 108.14% 102.01%
- ----
(1) For purposes of the gap analysis, mortgage and other loans are net of
nonaccrual loans but are not reduced for the allowance for losses on
loans, unearned discounts and deferred loan fees.
(2) Includes available-for-sale portfolio.
(3) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
33
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed
in calculating the table. Finally, the ability of many borrowers to service
their ARM loans may decrease in the event of an interest rate increase.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between the income earned on
interest-earning assets and the interest expense on interest-bearing
liabilities.
Average Balance Sheet. The following table sets forth certain information
relating to the elements of the Company's net interest income for each of the
three-month periods ended March 31, 1996 and 1995, and for each of the years
ended December 31, 1995, 1994, and 1993. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown except where noted otherwise. Average
balances are derived from daily average balances in 1996, 1995 and 1994 and
average month-end balances in 1993. Management does not believe that the use
of average monthly balances instead of average daily balances has caused any
material differences in the information presented. The average balance of
loans receivable excludes loans on which the Company has discontinued accruing
interest. The yields and costs include fees which are considered adjustments
to yields.
34
AVERAGE BALANCE SHEET
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
1996 1995
-------------------------- --------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
INTEREST-EARNING
ASSETS (1):
Mortgage loans.... $652,497 $12,732 7.81% $718,525 $12,116 6.75%
MBS............... 53,599 1,044 7.79 79,104 1,443 7.30
Consumer loans.... 25,007 697 11.15 29,243 796 10.89
Investment
securities........ 65,386 973 5.95 58,278 779 5.35
-------- ------- -------- -------
Total interest-
earning assets.. 796,489 15,446 7.76 885,150 15,134 6.84
Non-interest-
earning assets..... 66,863 85,258
-------- --------
Total assets.... $863,352 $970,408
======== ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
INTEREST-BEARING
LIABILITIES:
Regular passbook
deposits.......... $ 35,264 177 2.02 35,484 182 2.07
Money market
deposits.......... 141,400 1,071 3.05 126,510 804 2.58
Interest-bearing
checking (NOW)
deposits.......... 87,003 238 1.10 87,117 228 1.06
Certificates of
deposits.......... 500,046 6,602 5.31 534,757 6,868 5.21
Other borrowed
money............. 28,038 375 5.37 75,238 1,237 6.65
-------- ------- -------- -------
Total interest-
bearing
liabilities..... 791,751 8,463 4.30 859,106 9,319 4.40
Non-interest-
bearing
liabilities........ 23,066 55,761
Stockholders'
equity............. 48,535 55,541
-------- --------
Total
liabilities and
stockholders'
equity.......... $863,352 $970,408
======== ------- ======== -------
Net interest rate
spread (2)......... $ 6,983 3.46% $ 5,815 2.44%
======= ===== ======= =====
Net interest margin
(3)................ 3.48% 2.57%
===== =====
Ratio of interest-
earning assets to
interest-bearing
liabilities........ 100.60% 103.03%
======== ========
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
INTEREST-EARNING
ASSETS (1):
Mortgage loans.... $708,440 $52,652 7.43% $641,313 $43,416 6.77% $615,175 $46,264 7.52%
MBS............... 68,459 5,152 7.53 99,855 6,590 6.60 110,537 7,551 6.83
Consumer loans.... 26,784 2,989 11.16 27,277 2,908 10.66 26,176 2,911 11.12
Investment
securities........ 64,546 3,431 5.32 66,330 3,601 5.43 75,699 2,710 3.58
-------- ------- -------- ------- -------- -------
Total interest-
earning assets.. 868,229 64,224 7.40 834,775 56,515 6.77 827,587 59,436 7.18
Non-interest-
earning assets..... 71,061 108,694 102,932
-------- -------- --------
Total assets.... $939,290 $943,469 $930,519
======== ======== ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
INTEREST-BEARING
LIABILITIES:
Regular passbook
deposits.......... $ 35,271 685 1.94 $ 42,970 831 1.93 $ 42,810 828 1.93
Money market
deposits.......... 128,239 3,622 2.82 149,561 3,509 2.35 160,242 4,279 2.67
Interest-bearing
checking (NOW)
deposits.......... 86,199 1,000 1.16 97,397 997 1.02 90,046 1,322 1.47
Certificates of
deposits.......... 542,100 29,651 5.47 516,383 22,708 4.40 522,506 23,667 4.53
Other borrowed
money............. 54,252 3,408 6.28 28,251 1,824 6.46 9,881 773 7.82
-------- ------- -------- ------- -------- -------
Total interest-
bearing
liabilities..... 846,061 38,366 4.53 834,562 29,869 3.58 825,485 30,869 3.74
Non-interest-
bearing
liabilities........ 39,504 40,133 50,946
Stockholders'
equity............. 53,725 68,774 54,088
-------- -------- --------
Total
liabilities and
stockholders'
equity.......... $939,290 $943,469 $930,519
======== ------- ======== ------- ======== -------
Net interest rate
spread (2)......... $25,858 2.87% $26,646 3.19% $28,567 3.44%
======= ===== ======= ===== ======= =====
Net interest margin
(3)................ 2.98% 3.19% 3.45%
===== ===== =====
Ratio of interest-
earning assets to
interest-bearing
liabilities........ 102.62% 100.03% 100.25%
======== ======== ========
- ----
(1) Includes accrued interest and is net of loans in process, unearned
discounts, deferred loan fees, nonaccrual loans and valuation allowances.
(2) Net interest rate spread represents the difference between the average
yield on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets net of nonaccrual loans.
35
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by current volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
RATE/VOLUME ANALYSIS
YEAR ENDED YEAR ENDED
THREE MONTHS ENDED DECEMBER 31, 1995 DECEMBER 31, 1994
MARCH 31, 1996 COMPARED TO COMPARED TO
COMPARED TO THREE MONTHS YEAR ENDED YEAR ENDED
ENDED MARCH 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
----------------------------- ---------------------------- ------------------------------
INCREASE (DECREASE) IN NET INCREASE (DECREASE) IN NET INCREASE (DECREASE) IN NET
INTEREST INCOME DUE TO INTEREST INCOME DUE TO INTEREST INCOME DUE TO
----------------------------- ---------------------------- ------------------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
---------- -------- -------- ------------------ -------- ------------------- ---------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
Mortgage loans........ $ (1,113) $ 1,729 $ 616 $ 4,544 $ 4,692 $ 9,236 $ 1,966 $ (4,814) $ (2,848)
MBS................... (465) 66 (399) (2,072) 634 (1,438) (730) (231) (961)
Consumer loans........ (115) 16 (99) (53) 134 81 122 (125) (3)
Investment securi-
ties................. 95 99 194 (97) (73) (170) (335) 1,226 891
--------- -------- -------- -------- -------- -------- -------- --------- ---------
Total............... (1,598) 1,910 312 2,322 5,387 7,709 1,023 (3,944) (2,921)
--------- -------- -------- -------- -------- -------- -------- --------- ---------
INTEREST-BEARING
LIABILITIES:
Regular passbook
deposits............. (1) (4) (5) (149) 3 (146) 3 -- 3
Money Market depos-
its.................. 95 172 267 (500) 613 113 (285) (485) (770)
Interest-bearing
checking (NOW) depos-
its.................. -- 10 10 (115) 118 3 108 (433) (325)
Certificates of depos-
it................... (446) 180 (266) 1,131 5,812 6,943 (277) (682) (959)
Other borrowed money.. (776) (86) (862) 1,679 (95) 1,584 1,437 (386) 1,051
--------- -------- -------- -------- -------- -------- -------- --------- ---------
Total............... (1,128) 272 (856) 2,046 6,451 8,497 986 (1,986) (1,000)
--------- -------- -------- -------- -------- -------- -------- --------- ---------
Change in net interest
income................. $ (470) $ 1,638 $ 1,168 $ 276 $ (1,064) $ (788) $ 37 $ (1,958) $ (1,921)
========= ======== ======== ======== ======== ======== ======== ========= =========
36
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
1995
General. The Company recorded net earnings of $941,000 for the three months
ended March 31, 1996, or $0.23 per share, as compared to a loss of $2.0
million for the three months ended March 31, 1995, or $0.51 per share.
Operating results were favorably impacted by an increase in net interest
income before provision for losses on loans of $1.2 million and by a reduction
in G&A of $895,000 when compared to the three months ended March 31, 1995. Net
operating results for the three months ended March 31, 1996, were also
impacted favorably by a net reduction of $588,000 in provisions for losses on
loans, real estate and LOCs. Management continues to seek to reduce the
balances in nonperforming assets by concentrating efforts toward early
detection through the asset classification process and by taking an aggressive
stance to resolve nonperforming assets as they occur. In addition, management
continues to address the levels of allowance for losses in relation to the
local real estate economy.
Interest income. Interest income for the three months ended March 31, 1996
was $15.4 million, compared to $15.1 million for the same period in the
previous year. The $312,000 increase in interest income is primarily due to an
increase in interest rates, partially offset by a decrease in the average
balance of interest-earning assets. Interest income on investment securities
and deposits increased to $973,000 for the three months ended March 31, 1996,
from $779,000 for the three months ended March 31, 1995.
Interest expense. Interest expense for the three months ended March 31, 1996
was $8.5 million, compared to $9.3 million for the same period in the previous
year. The $856,000 decrease is primarily the result of a $67.4 million
decrease in the average balance of interest-bearing liabilities, when compared
to the three months ended March 31, 1995.
Net interest income. Net interest income for the three months ended March
31, 1996 was $7.0 million, which represents an interest rate spread of 3.46%.
This compares to $5.8 million, which represents an interest rate spread of
2.44%, for the same period in 1995. In accordance with the Company's plan to
control growth and maintain capital in compliance with regulatory ratios,
average interest-earning assets declined $88.7 million and average interest-
bearing liabilities declined $67.4 million when compared to the three months
ended March 31, 1995. The 102 basis point increase in the interest rate spread
for the three months ended March 31, 1996, when compared to the three months
ended March 31, 1995, was a result of an increase in the average yield for
interest-earning assets of 92 basis points, and a decrease in the average cost
for interest-bearing liabilities of 10 basis points.
Provision for losses on loans. The provision for losses on loans was $1.4
million for the three months ended March 31, 1996, compared to $373,000 for
the same period last year. The loss provision reflects management's ongoing
assessment of the loan portfolio, in light of conditions in the Southern
California real estate market, which continue to be weak.
The allowances for losses on loans, real estate and LOCs are established
through provisions based on management's evaluation of the risks inherent in
the Company's portfolios and the local real estate economy. The allowances are
maintained at amounts management considers adequate to cover losses which are
deemed probable and calculable. The allowances are based upon a number of
factors, including asset classifications, collateral values, management's
assessment of the credit risk inherent in the portfolio, historical loan loss
experience, and the Company's underwriting policies.
As a result of continuing uncertainties in certain real estate markets,
increases in the valuation allowances may be required in future periods. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's valuation allowance.
These agencies may require additional valuation allowances, based on their
judgments of the information available to them at the time of the examination.
Non-interest income. Non-interest income for the three months ended March
31, 1996 was $1.6 million, compared to $1.5 million for the same period last
year. The increase was due primarily to an increase in fee income between the
two periods.
37
General and administrative expense. G&A for the three months ended March 31,
1996 was $5.7 million compared to $6.6 million for the same period last year.
The decrease of $895,000 is the result of a Company- wide cost reduction plan
implemented in 1995, which included a 20% staff reduction, a salary and
retirement plan freeze and cutbacks in other operating expenses. The
efficiency ratio for the three months ended March 31, 1996 was 66.51% as
compared to 90.59% for the three months ended March 31, 1995.
Other non-interest expense. Other non-interest expense includes provisions
for losses on REO and LOCs, as well as operating expenses for real estate
operations including gains and losses on the sale of real estate held for sale
or acquired through foreclosure. The Company recorded no provision for losses
on real estate or LOCs for the three months ended March 31, 1996 because of
the reduction in the REO balances as a result of the disposition of assets
during the period. This compares with provisions for losses of $1.4 million on
real estate and $193,000 for LOCs for the three months ended March 31, 1995.
The loss provisions reflect management's ongoing assessment of the real estate
and LOC portfolios. Real estate operating expense, net (excluding the
provision for losses on real estate), decreased to $528,000 for the three
months ended March 31, 1996, as compared to $704,000 for the same period in
1995. The decrease in real estate operating expense is due to a reduction in
REO, resulting in lower carrying costs.
Income taxes (benefit). There was a $2,000 franchise tax for the three
months ended March 31, 1996, and no such tax for the three months ended March
31, 1995. There was no income tax as a result of the Company's net operating
loss ("NOL") carryforward tax position. At December 31, 1995, the Company had
NOLs aggregating approximately $14.3 million for federal income tax purposes
and approximately $9.3 million for California franchise tax purposes available
to offset taxable income in future tax years. The federal NOLs would expire,
if unutilized, in taxable years 2009 and 2010, and the California NOLs would
expire in 1999 and 2000. These NOLs could become subject to certain
limitations on utilization in the event of accumulations of shares of the
Company's Common Stock by 5% or greater shareholders or in the event of
certain new issuances of capital stock by the Company. See "Taxation--Federal
Taxation--NOLs."
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
General. The Company's net loss decreased by $18.3 million to an $8.1
million loss for the year ended December 31, 1995 from $26.3 million loss for
the year ended December 31, 1994. This improvement was primarily due to a
decrease in the provision for losses on loans, real estate and LOCs of $8.4
million, an increase in non-interest income of $4.9 million, a decrease in the
carrying cost of real estate operations of $1.8 million, a reduction in G&A of
$2.9 million, and a reduction in income taxes of $1.0 million.
Interest income. Interest income increased by $7.7 million, or 13.64%, from
$56.5 million in 1994 to $64.2 million in 1995. The increase in interest
income was primarily the result of a 63 basis point increase in the average
yield on interest-earning assets from 6.77% in 1994, to 7.40% in 1995, and a
$33.5 million increase in average interest-earning assets during this period.
Interest income from mortgage loans, which accounted for approximately 81.98%
of total interest income in 1995, increased by $9.2 million, or 21.27%, due to
an increase in the average yield from 6.77% to 7.43%. The increase in average
yield of the mortgage loan portfolio was partially the result of a one time
recognition of approximately $1.6 million due to the acceleration of
recognition of deferred loan fees and the result of adjustable rate loans
repricing at higher interest rates during much of 1995. Interest income from
MBS declined by $1.4 million, or 21.82%, due to a reduction in the average
principal balance on MBS by $31.4 million, or 31.44%, from $99.9 million for
the year ended December 31, 1994 to $68.5 million for the year ended December
31, 1995. This decline was partially offset by a 93 basis point increase in
the average yield from 6.60% to 7.53%. Interest income on consumer loans
increased by $81,000, and interest income on investment securities and cash
equivalents decreased $170,000.
Interest expense. Interest expense increased $8.5 million, or 28.45%, from
$29.9 million in 1994 to $38.4 million in 1995. The increase resulted
primarily from a 95 basis point increase in the average rate paid on interest-
bearing liabilities, from 3.58% in 1994 to 4.53% in 1995. Interest expense for
certificates of deposit increased by 107 basis points in the average rate
paid, from 4.40% in 1994 to 5.47% in 1995. The average
38
balance of certificates of deposit increased $25.7 million, or 4.98%, from
$516.4 million at December 31, 1994 to $542.1 million at December 31, 1995.
The increase in interest expense was partially offset by a decline in the
average balance of passbook, money market and checking accounts of $40.2
million, or 13.87%, from $289.9 million at December 31, 1994 to $249.7 million
at December 31, 1995. The decrease of 14.26% in the average balance of money
market deposits in 1995 compared with 1994 was the result of depositors
shifting investments to higher yielding mutual funds and equity markets. In
addition, interest expense on average borrowed funds increased by $1.6
million, or 86.84%, in 1995 to $3.4 million as a result of a $26.0 million
increase in the average balance of borrowed funds, partially offset by a
reduction in the average rate paid on such funds from 6.46% in 1994, to 6.28%
in 1995.
Net interest income. Net interest income decreased by $788,000, or 2.96%,
from $26.6 million in 1994 to $25.9 million in 1995. The decrease in net
interest income primarily reflects a decline in the Company's average interest
rate spread from 3.19% in 1994 to 2.87% in 1995, which is attributable to a
more rapid increase in its average cost of interest-bearing liabilities than
in the average yield on interest-earning assets between the respective
periods, which was partially offset by an increase in the ratio of average
interest-earning assets to average interest-bearing liabilities from 100.03%
in 1994 to 102.62% in 1995.
Provision for losses on loans. The provision for losses on loans decreased
by $4.7 million from $12.7 million for the year ended December 31, 1994 to
$7.9 million for the year ended December 31, 1995. This provision, when
combined with provisions for losses on real estate and LOCs included in non-
interest expense, reflects management's assessment of the risk associated with
the loan, real estate and LOC portfolio in consideration of various factors,
including declines in the California real estate market, recommendations made
by OTS following a regulatory examination, and the levels of the Company's
nonperforming and classified assets. Nonaccrual loans net of specific
allowances increased from $14.1 million, or 1.77% of total loans, at December
31, 1994, to $17.6 million, or 2.45% of total loans, at December 31, 1995. The
increase of $3.5 million was mainly comprised of $1.6 million in one- to four-
family loans and $2.1 million of multi-family loans. However, total REO
decreased to $26.1 million at December 31, 1995, from $33.0 million at
December 31, 1994. Loan, LOC, and real estate charge-offs were $17.8 million
for the year ended December 31, 1995, compared to $17.2 million for the year
ended December 31, 1994. The allowance for losses on loans and LOCs at
December 31, 1995, was $22.2 million, or 2.73% of total loans and LOCs, as
compared to $25.8 million, or 2.89% of total loans and LOCs, at December 31,
1994. The allowance for losses on real estate at December 31, 1995, was
$9.5 million, or 26.56% of total real estate, as compared to $4.4 million, or
9.59% of total real estate at December 31, 1994.
Non-interest income. Non-interest income increased by $4.9 million from $6.3
million for the year ended December 31, 1994, to $11.2 million for the year
ended December 31, 1995, primarily as a result of a $3.4 million curtailment
gain resulting from freezing the employee and director defined benefit plans.
LOC fees on tax exempt bond transactions decreased from $1.8 million in 1994
to $1.6 million in 1995. The Company's net gain or loss on sale of loans,
investments and MBS increased by $1.9 million from 1994 to 1995. Included in
the net gain on sale of loans, investments and MBS was $317,000 on the sale of
Federal National Mortgage Association ("FNMA") stock, $395,000 on the sale of
Federal Home Loan Mortgage Corporation ("FHLMC") MBS and $680,000 on loan
sales and related sales of servicing. Other fee income increased from $4.5
million for 1994 to $4.6 million for 1995, an increase of $111,000. Loan and
deposit fees, insurance and securities brokerage commissions, and trustee and
escrow fees are included in other fee income. Other income decreased $268,000
from 1994 to 1995.
Non-interest expense. Non-interest expense decreased by $8.4 million, or
18.44%, from $45.5 million in 1994 to $37.1 million in 1995. Included in this
decrease was a reduction in G&A of $2.9 million, or 10.70%, from $27.2 million
in 1994 to $24.3 million in 1995. This decrease resulted from the company-wide
cost cutting measures mentioned above that were implemented in 1995.
Compensation and benefit expense decreased $2.1 million, or 15.05%, in 1995,
from $14.2 million in 1994 to $12.1 million in 1995, and occupancy and
equipment decreased by $1.0 million, or 12.60%, during 1995. Other G&A expense
accounts increased by $212,000, or 4.09%, during 1995. The increase in the
cost of real estate operations of $1.9 million, or 22.56%, from $8.4
39
million in 1994 to $10.3 million in 1995 was the result of an increase in the
provision for loss on real estate of $3.7 million offset by a reduction in
loss on real estate operations, net of $1.8 million. Also included in non-
interest expense was a reduction in the provision for losses on LOCs of $7.4
million, or 74.37%, from $9.9 million in 1994 to $2.5 million in 1995. The
efficiency ratio for the year ended December 31, 1995 was 72.14% as compared
to 82.61% for the year ended December 31, 1994.
Income taxes (benefit). The effect of income taxes changed by $1.0 million
from a $1.2 million provision for the year ended December 31, 1994, to a
$124,000 provision for the year ended December 31, 1995. The difference in the
income tax amounts reflects the limitation of the recognition of net tax
assets to amounts recoverable from NOL carryback at December 31, 1994.
Deferred tax assets as of December 31, 1995 and 1994 have been recognized to
the extent of the expected reversal of taxable temporary differences and the
amount of federal income tax paid in the carryback period which would be
available through the carryback of NOLs. The realization of NOL carryforwards
is dependent upon the Company's ability to generate future taxable income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
General. The Company's net losses increased by $23.1 million during 1994 to
a $26.3 million loss for the year ended December 31, 1994 from a $3.2 million
loss for the year ended December 31, 1993, due primarily to an increase in the
provision for estimated losses on loans, real estate and LOCs of
$11.5 million, an increase in the cost of real estate operations of $2.5
million and a reduction in income tax benefits of $4.8 million.
Interest income. Interest income decreased by $2.9 million, or 4.91%, from
$59.4 million in 1994 to $56.5 million in 1995. The decline in interest income
was caused primarily by a 41 basis point decline in the average yield on
interest-earning assets from 7.18% in 1993 to 6.77% in 1994, which was
partially offset by a $7.2 million increase in average interest-earning assets
during this period. Interest income from loans, which accounted for
approximately 81.97% of total interest income in 1994, decreased by $2.9
million, or 5.80%, due to a decrease in the average yield from 7.52% to 6.77%.
The decrease in average yield of the mortgage loan portfolio was the result of
ARM loans repricing at lower interest rates and loans refinancing to lower
rates during the falling interest rate environment experienced during the
first five months of 1994. Interest income also declined as a result of an
increase in nonperforming assets from $32.7 million at December 31, 1993, to
$47.1 million at December 31, 1994. Interest income on mortgage-backed
securities, the average principal balance of which decreased by $10.7 million,
or 9.66%, between 1994 and 1993, totaled $6.6 million in 1994, a decrease of
$1.0 million, or 12.73%, from 1993. Interest income on investment securities
and cash equivalents increased $891,000.
Interest expense. Interest expense in 1994 decrease by $1.0 million, or
3.24%, from $30.9 million in 1993 to $29.9 million in 1994. The decrease
resulted primarily from a 16 basis point reduction in the average rate paid on
interest-bearing liabilities from 3.74% in 1993 to 3.58% in 1994. In addition,
interest expense on average borrowed funds increased by $1.1 million, or
135.96%, in 1994 to $1.8 million due to a $18.4 million increase in the
average balance of borrowed funds, partially offset by a reduction in the
average rate paid on such funds from 7.82% in 1993 to 6.46% in 1994. The
increase in the average balance of borrowed funds was the result of $55.0
million of additional FHLB advances and $16.4 million of notes payable on
revenue bonds in the second half of 1994.
Net interest income. Net interest income decreased by $1.9 million, or
6.72%, from $28.6 million in 1993 to $26.6 in 1994. The decrease in net
interest income primarily reflects a decline in the Company's average interest
rate spread from 3.44% in 1993, to 3.19% in 1994, which is attributable to a
more rapid decline in the Company's average yield on interest-earning assets
than in its average cost of interest-bearing liabilities between the
respective periods, and by a decrease in the ratio of average interest-earning
assets to average interest-bearing liabilities from 100.25% in 1993 to 100.03%
in 1994. ARM loans tied to the 11th District COFI began repricing upward at
the end of the third quarter of 1994, but more slowly than the Company's cost
of funds, resulting in a decrease of the net interest margin.
40
Provision for losses on loans. The provision for losses on loans decreased
by $339,000 from $13.0 million for the year ended December 31, 1993, to $12.7
million for the year ended December 31, 1994. This provision, when combined
with provisions for losses on real estate and LOCs included in non-interest
expense, reflects management's assessment of the risk associated with the
loan, real estate and LOCs portfolio in consideration of various factors,
including the continued declines in the California real estate market,
recommendations made by OTS following a regulatory examination, and the
increase in the Company's nonperforming and classified assets. The large
provisions for losses on loans, real estate and LOCs are a direct result of
the economic recession in California and the Company's market area. The OTS
during its annual examinations in 1993, 1994 and 1995 strongly recommended
that the Company increase its provisions for possible losses based on its
assessment of the risk, and, in accordance with the Supervisory Agreement,
required the Company to improve its internal asset review policies and
procedures. Following these examinations, provisions for losses on loans, real
estate and LOCs were $15.7 million in 1993, $27.2 million in 1994, and $18.8
million in 1995, which included any adjustments requested by the examiners.
Nonaccrual loans net of specific allowances decreased from $22.7 million, or
3.34% of total loans at December 31, 1993, to $14.1 million, or 1.77% of total
loans at December 31, 1994. However, REO increased net of specific allowances
to $33.0 million at December 31, 1994 from $9.9 million at December 31, 1993.
This increase was primarily due to the in-substance foreclosure of three
properties securing LOCs for $19.1 million, net of specific valuation
allowances, at December 31, 1994. Loan, real estate, and LOCs charge-offs were
$17.2 million for the year ended December 31, 1994, compared to $7.6 million
for the year ended December 31, 1993. The allowance for losses on loans and
LOCs at December 31, 1994, was $25.8 million, or 2.89% of gross loans and
LOCs, as compared to $18.0 million, or 2.26% of gross loans and LOCs, at
December 31, 1993. The allowance for losses on real estate at December 31,
1994, was $4.4 million or 9.59% of total real estate as compared to $2.1
million, or 8.76%, of total real estate at December 31, 1993.
Non-interest income. Non-interest income decreased by $609,000 from $6.9
million for the year ended December 31, 1993, to $6.3 million for the year
ended December 31, 1994. LOC fees on tax exempt bond transactions decreased
from $2.1 million in 1993 to $1.8 million in 1994. There are two components to
the LOC fee income generated by the Company on tax exempt bonds, an
origination and a guarantee fee. The direct origination costs incurred are
credited to operations and the remainder of the origination fee is deferred
and amortized over the life of the bond in accordance with SFAS 91. The
guarantee fee received is recognized as earned. Although new LOC transactions
have declined in recent years, and are now limited to resolution of troubled
existing LOC arrangements, the Company expects guarantee fee income to
continue to be a source of non-interest income in future periods. Other fee
income increased from $4.3 million for 1993 to $4.5 million for 1994, an
increase of $171,000 or 3.94%. It includes loan and deposit fees, insurance
and securities brokerage commissions, and trustee and escrow fees. The
Company's net gain or loss on sale of loans, investments and MBS decreased by
$851,000 from 1993 to 1994. Other income increased $366,000 from 1993 to 1994.
Non-interest expense. Non-interest expense increased by $16.1 million, or
54.76%, from $29.4 million in 1993 to $45.5 million in 1994, primarily because
of the increase in the cost of other real estate operations and the provision
for losses on real estate and LOCs, which together increased by $14.3 million
from $3.9 million for the year ended December 31, 1993, to $18.3 million for
the year ended December 31, 1994. Compensation and benefit expense (net of
capitalized loan origination costs of $1.3 million for the year ended December
31, 1994, and $1.2 million for the year ended December 31, 1993) increased by
$1.7 million, or 13.65%, in 1994, due primarily to a $626,000 expense for the
Employee Stock Ownership Plan and the Redlands Federal Bank Recognition and
Retention Plan for Officers and Employees and normal salary adjustments. Other
general and administrative costs increased $31,000 from 1993 to 1994. The
efficiency ratio for the year ended December 31, 1994 was 82.61% as compared
to 71.81% for the year ended December 31, 1993.
Income taxes (benefit). The effect of income taxes (benefit) changed by $4.8
million from a $3.7 million benefit (an effective benefit rate of 53.07%) for
the year ended December 31, 1993, to a $1.2 million provision for income taxes
for the year ended December 31, 1994. The difference in the income tax amounts
reflects the limitation of the recognition of net tax assets to amounts
recoverable from NOL carryback at December 31, 1994. Deferred tax assets as of
December 31, 1994 and 1993 have been recognized to the extent of the expected
41
reversal of taxable temporary differences and the amount of federal income tax
paid in the carryback period which would be available through the carryback of
NOLs. The realization of NOL carryforwards is dependent upon the Company's
ability to generate future taxable income.
FINANCIAL CONDITION
The Company's consolidated assets totaled $858.0 million at March 31, 1996
compared to $871.8 million at December 31, 1995. The decrease in consolidated
assets of $13.9 million during the three months ended March 31, 1996 was
primarily the result of a net reduction in loans, MBS and REO. Loans
receivable, including those held for sale, declined by $10.8 million net for
the three months ended March 31, 1996, which consisted primarily of loan
originations of $18.2 million and a reduction in the undisbursed portion of
construction loans of $5.3 million offset by loan principal payments of $31.6
million and the transfer of loans to REO. MBS increased by $4.4 million net as
a result of the acquisition of an LOC related bond for $5.9 million. REO
declined by $8.8 million as a result of net sales of $12.8 million offset by
net transfers from loans of $4.0 million. The proceeds of these net
consolidated asset reductions for the three months ended March 31, 1996 were
used to absorb decreases in consolidated liabilities. The decrease in
consolidated liabilities primarily consisted of a decline in the deposit base
of $6.8 million and a reduction in other borrowed money of $6.6 million. The
increase in stockholders' equity for the three months ended March 31, 1996
represented primarily net earnings of $941,000 offset by a change in the
unrealized loss on securities available for sale of $879,000.
The Company's consolidated assets totaled $871.8 million at December 31,
1995 compared to $960.9 million at December 31, 1994. The decrease in
consolidated assets of $89.0 million during 1995 is primarily the result of a
combined decrease in loans receivable, net and loans held for sale of $50.1
million, a combined decrease in MBS of $27.9 million, and a decrease in net
REO and real estate held for sale or investment of $15.0 million. Loans
originated and purchased decreased to $114.0 million for the year ended
December 31, 1995 compared to $246.0 million for the year ended December 31,
1994. This decrease is the result of a reduction in refinance activity as well
as a continuing weak California economy. Net principal repayments on loans and
MBS held-to-maturity decreased by $42.6 million to $76.9 million in 1995 from
$119.6 million in 1994. This decrease in repayments is the result of a
continuing reduction in refinance activity because of the rising rate
environment during 1995. Proceeds from sales of loans held-for-sale and MBS
available-for-sale and maturities of MBS (net of MBS purchases) was $95.3
million in 1995, an increase of $65.0 million from the 1994 total of $30.2
million. The proceeds of the 1995 reduction in consolidated assets were used
to absorb decreases in consolidated liabilities and stockholders' equity. The
decrease in consolidated liabilities is primarily the result of the repayment
of FHLB advances of $50.0 million, and net deposit outflows of $28.8 million.
The outflow of deposits was the result of a planned reduction in interest
rates offered on certificates of deposit. This outflow was part of the
strategic business plan to reduce the assets of the Company in order to
maintain its regulatory capital ratios while reducing classified assets. The
decrease in stockholders' equity is primarily attributable to the 1995 loss
from operations of $8.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans and retained earnings and, to a lesser extent, advances from
the FHLB. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 5%. The Bank average liquidity ratios were 7.91%, 7.72%, and 6.31%
for the three months ended March 31, 1996, December 31, 1995 and December 31,
1994, respectively. The Bank currently attempts to maintain a liquidity ratio
as close to the minimum requirements as possible, since loan originations
provide both higher interest rates and fee income than is available from
liquidity investments.
42
The Bank's most liquid assets are cash and short term investments. The
levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At March 31, 1996
and at December 31, 1995 and 1994, cash and cash equivalents totaled $31.3
million, $31.0 million and $23.1 million, respectively. These amounts were
adequate to provide funding sources for loan originations. Whenever funds
provided from loan repayments, loan sales and deposit inflows are insufficient
to fund loan originations and deposit outflows, liquid assets are impacted as
indicated on the "Consolidated Statement of Cash Flows" in the Financial
Statements.
The Bank has other sources of liquidity if a need for additional funds
arises. Additional sources of funds include FHLB advances. At March 31, 1996
and at December 31, 1995 and 1994, the Company had $10.0 million, $10.0
million and $60.0 million, respectively, in advances outstanding from the
FHLB. See "Business--Sources of Funds--Borrowings." Other sources of liquidity
include investment securities maturing within one year.
At March 31, 1996, the Company had net outstanding loan commitments of $3.2
million. The Company anticipates that it will have sufficient funds available
to meet its current loan origination commitments.
43
BUSINESS
GENERAL
The Company was incorporated under Delaware law on October 18, 1993, for the
purpose of becoming the holding company for the Bank. On April 7, 1994, the
Company acquired the Bank as a part of the Bank's conversion from a federally
chartered mutual savings bank to a federally chartered stock savings bank. The
Bank is one of the three largest financial institutions headquartered in
Southern California's Inland Empire region, a relatively less urban area to
the east of Los Angeles comprised of San Bernardino and Riverside counties.
During its 106-year history, the Bank has operated as a community-oriented
savings institution serving the residential loan and retail deposit needs of
the predominantly suburban and rural communities in its market area. At
March 31, 1996, the Company had consolidated assets of $858.0 million,
deposits of $769.7 million and stockholders' equity of $48.3 million. The
Company is subject to regulation as a savings and loan holding company by the
OTS. The Bank is subject to regulation by the OTS, the FDIC and, to a more
limited extent, by certain other agencies. See "Regulation and Supervision."
The Company offers a range of consumer financial services to its customers,
including retail transaction and term deposits, single-family mortgage loans
and consumer loans. The Company's single-family mortgage loan products include
adjustable and fixed rate conforming and nonconforming permanent loans, as
well as spot construction loans. The Company's consumer loan products, which
have to date been offered on a relatively limited basis, include home equity
lines of credit, FHA Title I home improvement loans, credit card loans,
automobile loans and secured and unsecured personal loans. The Company invests
in U.S. government and agency securities, mortgage-backed securities and other
investments permitted by federal laws and regulations. The Company also offers
insurance and securities brokerage services through a subsidiary of the Bank.
The Company formerly originated substantial amounts of multi-family
residential real estate loans, as well as a lesser amount of loans secured by
small commercial and mixed use properties, tract developments and developed
and undeveloped land. Due to significant losses in the Company's multi-family
loan portfolio resulting from higher defaults and substantial declines in the
value of multi-family residential properties during the Southern California
recession beginning in 1991, the Company has substantially curtailed its
multi-family lending activities, other than in connection with the disposition
of problem assets, eliminated tract construction and land lending and limited
its commercial lending activities. Multi-family and commercial loans
constituted 36.02% of the Company's loan portfolio at March 31, 1996.
MARKET AREA
The Company's fourteen banking offices are located in Redlands, California
and other population centers in the western portions of San Bernardino and
Riverside counties that comprise the Inland Empire region of Southern
California. Although portions of the region have experienced substantial
residential real estate development targeted toward commuters employed in
neighboring Los Angeles and Orange counties, the Company's market area remains
less urbanized than Los Angeles and Orange counties. The Inland Empire has a
diversified economy that includes manufacturing, retail sales and agricultural
sectors, as well as employment related to local government, universities and
major health care facilities. Transportation (rail and trucking), distribution
and related logistics activities are an important part of the current Inland
Empire economy and are expected to increase, with the Inland Empire providing
a staging area for the shipment of goods between the Pacific Rim and the
United States through the ports of Los Angeles and Long Beach, California.
According to a recent economic study, the Inland Empire possesses a number of
characteristics that make it attractive for business, including the lowest
average home prices among major Southern California counties, the lowest
industrial space cost, the lowest average pay level and the highest growth in
employment at 3.30% in 1995.
Virtually all of the Company's lending activities are conducted in the
Company's market area located in the Inland Empire and other areas of Southern
California; and a significant portion of the Company's assets are invested in
loans that are secured by multi-family and, to a lesser extent, commercial
real estate located in these areas. Since 1991, Southern California, including
the Inland Empire, has experienced an economic recession as a
44
result of defense industry declines, including military base closures and
downsizings, corporate relocations and general weakness in the real estate
market. This recession has been characterized by, among other things, high
levels of unemployment, declining business and real estate activity,
significant increases in vacancies in multi-family residential and commercial
properties, declining rents and property values and slowing sales of new one-
to four-family residential properties. Loan delinquencies have increased and
the underlying values of many properties securing loans have declined,
resulting in substantial losses to lending institutions. The recession has
caused substantial increases in the Company's levels of nonperforming assets,
particularly in its multi-family lending and LOC portfolios, and in its
provisions for loan and real estate losses, as well as a decline in interest
income. Primarily as a result of these factors, the Company reported net
losses of $8.1 million, $26.3 million and $3.2 million in 1995, 1994 and 1993,
respectively. While the Inland Empire economy has recently exhibited positive
employment trends, there is no assurance that such trends will continue. The
Company has significantly reduced the amounts of its nonperforming and
classified assets since year-end 1994 and recorded net earnings of $941,000 in
the first quarter of 1996. A worsening of current economic conditions in the
Company's primary lending area, however, would have an adverse effect upon the
Company's business and operations, including the level of the Company's
delinquencies and nonperforming and classified assets, the magnitude of its
provisions for estimated loan and real estate losses, the value of the
collateral securing the Company's mortgage loans and its portfolio of REO and
the demand for new loan originations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Asset Quality."
The Company's deposit gathering activities are concentrated in the areas
surrounding its home and branch offices. Due to its community and customer
service orientation, together with its long history in the Inland Empire, the
Bank has developed strong depositor loyalty and significant deposit market
shares in the communities it serves. At June 30, 1995, the Company's market
share of all bank and thrift institution deposits in San Bernardino and
Riverside counties was 5.82% and 2.80%, respectively. Its market share of
thrift deposits at that date in nine out of the thirteen communities it serves
exceeded 30% and in four of such communities exceeded 70%.
LENDING ACTIVITIES
General. The Company emphasizes the origination of one- to four-family
residential loans, including loans secured by existing homes and spot
construction loans. Substantially all of the Company's one- to four-family
mortgage loans are secured by property located in Southern California. The
Company has also historically made various types of consumer loans and intends
to expand this activity in the future. Prior to 1993, the Company also
originated multi-family residential mortgage loans and, to a lesser extent,
tract construction and land development and commercial real estate loans.
However, in recent periods, the Company has substantially curtailed the
origination of multi-family residential units, eliminated the orgination of
tract construction and land development loans and limited the orgination of
commercial real estate loans, except in connection with the sale of problem
assets. This is due to adverse conditions in the Company's primary lending
market which have led to increases in the levels of delinquencies and
nonperforming and restructured loans in these portfolios.
Loan originations for the three months ended March 31, 1996 were $18.2
million compared to $42.1 million for the three months ended March 31, 1995.
The reduction in loan originations was a result of increasing interest rates
and the Company's business plan to reduce assets and eliminate certain types
of loans originated.
Since 1982, the Company has emphasized the origination of ARM loans for
retention in its portfolio in order to increase the percentage of loans with
more frequent repricing with most of such loans having rates based on the 11th
District COFI, which is comprised of the average cost of funds of all savings
institutions that are members of the FHLB of San Francisco. In 1995 the
Company also began offering an ARM loan tied to the one year CMT, which
responds more quickly to market conditions than the 11th District COFI, which
is a lagging index. At March 31, 1996, approximately 90.89% of its total
mortgage loan portfolio were ARM loans. To date, the Company has sold most of
the fixed rate loans it has originated, although it currently plans to retain
a limited amount of its future fixed rate loan production in its portfolio.
45
Loan Portfolio Composition. At March 31, 1996, the Company had total loans
outstanding of $700.5 million, of which $347.6 million, or 49.63%, were one-
to four-family residential mortgage loans and $177.2 million, or 25.30%, were
multi-family residential mortgage loans. At that same date, 93.64% of the
Company's one- to four-family mortgage loans, 95.82% of its multi-family
residential mortgage loans and 80.45% of its other mortgage loans had
adjustable interest rates. Further information concerning the composition of
the Company's loan portfolio at March 31, 1996 and at the prior dates
indicated is set forth in the following table.
LOAN PORTFOLIO COMPOSITION
AT DECEMBER 31,
AT ----------------------------------------------------------------------------------------------
MARCH 31, 1996 1995 1994 1993 1992 1991
----------------- ------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
One- to four-
family(1)........ $347,613 49.63% $334,691 46.52% $349,386 43.88% $277,196 40.74% $258,323 38.00% $221,097 36.98%
Multi-family(2)... 177,204 25.30 186,375 25.90 213,057 26.76 220,768 32.45 240,287 35.34 199,137 33.31
Commercial real
estate........... 75,083 10.72 74,339 10.33 70,963 8.91 72,664 10.68 61,514 9.05 59,932 10.02
Spot
construction(3).. 30,343 4.33 47,512 6.60 73,688 9.25 28,790 4.23 25,038 3.68 28,878 4.83
Developed lots.... 44,509 6.35 47,598 6.62 52,961 6.65 43,571 6.40 38,490 5.66 30,620 5.12
Tract construction
and land......... 1,053 0.15 2,705 0.38 6,596 0.83 9,690 1.42 29,365 4.32 33,393 5.58
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans.......... 675,805 96.48 693,220 96.35 766,651 96.28 652,679 95.92 653,017 96.05 573,057 95.84
CONSUMER LOANS.... 24,674 3.52 26,287 3.65 29,584 3.72 27,731 4.08 26,866 3.95 24,858 4.16
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans..... 700,479 100.00% 719,507 100.00% 796,235 100.00% 680,410 100.00% 679,883 100.00% 597,915 100.00%
====== ====== ====== ====== ====== ======
LESS:
Undistributed
portion of
construction
loans............ (13,125) (18,467) (39,801) (14,617) (19,472) (19,465)
Unearned discounts
and net deferred
loan origination
fees............. (3,127) (3,311) (4,428) (4,750) (4,849) (3,449)
Allowance for
losses on loans.. (12,076) (14,745) (18,874) (15,373) (7,673) (4,459)
-------- -------- -------- -------- -------- --------
$672,151 $682,984 $733,132 $645,670 $647,889 $570,542
======== ======== ======== ======== ======== ========
- --------
(1) Includes loans held for sale.
(2) Excludes LOCs.
(3) Consists of spot construction loans in the construction phase; such loans
that are in the permanent loan phase are included in one- to four-family
mortgage loans.
46
Loan Maturity. The following table shows the maturity of the Company's loans
at March 31, 1996. The table does not include principal repayments. Principal
repayments on loans totaled $31.5 million for the three-month period ended
March 31, 1996 and $91.9 million, $82.6 million, and $127.1 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
LOAN MATURITY
AT MARCH 31, 1996
----------------------------------------------------------------------------------------
ONE- TO TRACT
FOUR- MULTI- SPOT DEVELOPED CONSTRUCTION TOTAL LOANS
FAMILY FAMILY COMMERCIAL CONSTRUCTION LOTS AND LAND CONSUMER RECEIVABLE
-------- -------- ---------- ------------ --------- ------------ -------- -----------
(IN THOUSANDS)
Amount due:
Within one year......... $ 881 $ 6,637 $ 3,388 $ 902 $ 3,927 $ 565 $ 8,093 $ 24,393
-------- -------- ------- -------- ------- ------ ------- --------
After one year:
More than one to
three years.......... 3,033 3,878 5,306 1,519 1,187 488 2,524 17,935
More than three to
five years........... 1,387 1,087 194 -- 276 -- 5,798 8,742
More than five to
10 years............. 3,493 16,462 4,615 -- 4,693 -- 1,338 30,601
More than 10 to
20 years............. 17,489 20,165 18,629 -- 33,604 -- 5,901 95,788
Over 20 years......... 321,330 128,975 42,951 27,922 822 -- 1,020 523,020
-------- -------- ------- -------- ------- ------ ------- --------
Total due after one
year............... 346,732 170,567 71,695 29,441 40,582 488 16,581 676,086
-------- -------- ------- -------- ------- ------ ------- --------
Total amount due........ 347,613 177,204 75,083 30,343 44,509 1,053 24,674 700,479
Loans in process........ (2,891) -- -- (10,226) -- -- (8) (13,125)
Unearned discounts and
deferred loan fees
net.................... (1,157) (750) (571) (256) (383) (1) (9) (3,127)
Allowance for losses on
loans.................. (2,360) (7,016) (860) (141) (822) (288) (589) (12,076)
-------- -------- ------- -------- ------- ------ ------- --------
341,205 169,438 73,652 19,720 43,304 764 24,068 672,151
-------- -------- ------- -------- ------- ------ ------- --------
Loans held for sale..... (5,568) -- -- -- -- -- -- (5,568)
-------- -------- ------- -------- ------- ------ ------- --------
$335,637 $169,438 $73,652 $ 19,720 $43,304 $ 764 $24,068 $666,583
======== ======== ======= ======== ======= ====== ======= ========
47
The following table sets forth at March 31, 1996, the dollar amount of all
loans due after March 31, 1997, and whether such loans have fixed interest
rates or adjustable interest rates.
LOANS BY INTEREST RATE TYPE
DUE AFTER MARCH 31, 1997
---------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- --------
(IN THOUSANDS)
Mortgage loans:
One- to four-family........................ $21,456 $325,276 $346,732
Multi-family............................... 7,407 163,160 170,567
Commercial real estate..................... 1,298 70,397 71,695
Spot construction.......................... 1,519 27,922 29,441
Developed lots............................. 2,087 38,495 40,582
Tract construction and land................ 488 -- 488
Consumer..................................... 12,288 4,293 16,581
------- -------- --------
Total loans.............................. $46,543 $629,543 $676,086
======= ======== ========
The following table sets forth the Company's loan originations, purchases,
sales, and principal repayments for the periods indicated:
LOAN ACTIVITY
AT OR FOR THE THREE
MONTHS ENDED AT OR FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------- -----------------------------
1996 1995 1995 1994 1993
--------- --------- -------- -------- ---------
(IN THOUSANDS)
Beginning balance
(gross)................ $ 719,507 $ 796,235 $796,235 $680,410 $ 679,883
Loans originated:(1)
One- to four-
family(2)............ 8,060 12,324 33,648 124,570 97,909
Multi-family(3)....... 3,300 541 3,088 9,252 13,658
Commercial real
estate............... -- 5,695 7,010 1,144 6,838
Spot construction..... 2,835 14,968 36,725 74,987 29,304
Developed lots........ 65 3,887 10,868 20,621 14,934
Tract construction and
land................. -- -- -- 5,130 744
Consumer.............. 3,926 4,731 21,057 9,903 9,557
--------- --------- -------- -------- ---------
Total loans
originated......... 18,186(4) 42,146 112,396 245,607 172,944
Loans purchased......... -- -- 1,585 400 170
--------- --------- -------- -------- ---------
Total............... 18,186 42,146 113,981 246,007 173,114
Transfer of loans to
REO(5)................. (5,444) (6,949) (22,124) (28,971) (18,733)
Principal repayments.... (31,554) (19,934) (91,890) (82,571) (127,057)
Sales of loans.......... (216) (510) (76,695) (18,640) (26,797)
--------- --------- -------- -------- ---------
Ending balance (gross).. $ 700,479 $ 810,988 $719,507 $796,235 $ 680,410
========= ========= ======== ======== =========
- --------
(1) Includes loans made to facilitate the sale of real estate.
(2) Includes loans held for sale.
(3) Excludes LOCs.
(4) The decrease in total loans originated for the three-month period ended
March 31, 1996 compared to March 31, 1995 was a result of increasing
interest rates and the Company's business plan to reduce assets and
eliminate certain types of loans originated.
(5) Excludes allowance for losses on loans and unamortized deferred loan fees
on loans transferred to REO.
48
One- to Four-family Mortgage Lending. The Company offers both fixed rate
mortgage loans and ARM loans secured by one- to four-family residences,
including, to a limited extent, condominium units, located in the Company's
primary market area, with maturities of up to 40 years. Loan originations are
primarily obtained through Company employed loan representatives who are
compensated on a commission basis, and, to a lesser extent, from wholesale
loan brokers. Loan originations that satisfy the Company's underwriting
criteria are solicited from existing or past customers, members of the local
community and realtors in the Company's market area.
The Company's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan, or up to 95% of the lower of
the appraised value or selling price if private mortgage insurance is
obtained. Title and casualty insurance are required on all such loans.
Mortgage loans originated by the Company generally include due-on-sale clauses
which provide the Company with the contractual right to declare the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Company's consent. Due-on-sale clauses are a means of
adjusting the rates on the Company's fixed rate mortgage loan portfolio and
the Company has generally exercised its rights under these clauses.
Of the $347.6 million of one- to four-family residential mortgage loans
outstanding at March 31, 1996, 6.36% were fixed rate loans and 93.64% were ARM
loans. The interest rates for the majority of the Company's ARM loans are
indexed to the monthly weighted average 11th District COFI. During 1995, the
Company introduced loans tied to the one year CMT, a current rate index. The
Company offers a number of ARM loan programs with interest rates which adjust
monthly, quarterly, semi-annually or annually. At March 31, 1996, $68.2
million of the Company's one- to four-family ARM loans had payment schedules
that permit "negative amortization," that is, a portion of the interest
accrued on loans whose interest rates have adjusted upward due to an interest
rate index increase are not payable currently (due to monthly payment caps)
and are instead added to loan principal. Negative amortization involves a
greater risk to the Company because during a period of rising interest rates
the loan principal may increase above the amount originally advanced, thereby
increasing the Company's risk of loss in the event of default. At March 31,
1996, the aggregate balances of such one- to four-family loans at that date
exceeded the original amounts advanced by $290,000. The Company believes that
the resulting risk of default is not material due to the underwriting criteria
and relatively low loan-to-value ratios applied by the Company in originating
such loans, and the stability provided by the payment schedules.
The Company also originates loans secured by second mortgages on single
family residences. At March 31, 1996 the Company had $3.2 million of loans
secured by second mortgages on single family residences on which the Company
did not also have the first lien mortgage. These second mortgage loans are
originated either as fixed rate loans with terms of up to 15 years or as ARM
loans which adjust either monthly or semi-annually and have terms of up to 30
years. These loans are generally subject to an 80% combined loan-to-value
limitation, including any other outstanding mortgage or lien on the property.
At March 31, 1996, $11.3 million of the Company's one- to four-family
residential mortgage loans were nonaccrual as compared to $8.8 million at
December 31, 1995 and $7.3 million at December 31, 1994. One- to four-family
REO at March 31, 1996 amounted to $5.1 million, compared to $5.4 million at
December 31, 1995 and $4.5 million at December 31, 1994. See "--Asset
Quality--Nonperforming Assets."
Multi-family Lending; LOCs. The Company formerly originated multi-family
mortgage loans generally secured by apartment complexes located in Southern
California. Of the $177.2 million of multi-family mortgage loans outstanding
at March 31, 1996, 4.18% were fixed rate loans and 95.82% were ARM loans,
$114.9 million, or 67.67%, of the ARM loans had payment schedules that permit
negative amortization, although none of these loans currently have loan
balances exceeding the original amounts advanced. Since 1993, the Company has
substantially curtailed the origination of multi-family loans, except in
connection with the sale of problem assets. This action was taken as a result
of adverse market conditions that have led to increases in the level of
delinquencies, nonperforming and restructured loans in this portfolio. At
March 31, 1996, $169.7 million, or 95.76%, of the multi-family mortgage loan
portfolio had been originated prior to January 1, 1995, and 109 loans
49
with an outstanding balance of $73.5 million, and 170 loans with an
outstanding balance of $88.9 million, had been originated in the periods from
1989 through 1993 and 1971 through 1988, respectively.
In reaching its decision on whether to make a multi-family loan, the Company
considers the qualifications of the borrower as well as the underlying
security, including the net operating income of the mortgaged premises before
debt service and depreciation; the debt service coverage ratio (the ratio of
such net operating income to required principal and interest payments); and
the ratio of the loan amount to appraised value. Pursuant to the Company's
underwriting policies, a multi-family mortgage loan may only be made in an
amount up to 70% (85% on the sale of REO) of the lesser of the appraised value
or sales price of the underlying property and the Company generally requires a
debt service coverage ratio of 1.2x. Properties securing a loan are appraised
by a licensed appraiser. Title and casualty insurance are required on all
loans.
When evaluating the qualifications of the borrower for a multi-family loan,
the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar properties,
and the Company's lending experience with the borrower. The Company's
underwriting policies require that the borrower be able to demonstrate strong
management skills and the ability to maintain the property from current rental
income. The borrower must also present evidence of the ability to repay the
loan and a history of making mortgage payments on a timely basis. In making
its assessment of the creditworthiness of the borrower, the Company generally
reviews the financial statements, employment and credit history of the
borrower, as well as other related documentation. The Company's largest credit
exposure at March 31, 1996 relates to $16.3 million of loans underlying County
of San Bernardino bonds owned by the Company totalling $25.5 million. The
Company's largest multi-family loan at March 31, 1996, had an outstanding
balance of $5.0 million and is secured by an apartment complex located in
Rancho Cucamonga. The average outstanding multi-family loan balance at March
31, 1996, excluding LOCs, was $605,000. At March 31, 1996, the multi-family
loan portfolio consisted of 293 loans with an aggregate outstanding balance of
$177.2 million, or 25.30% of total loans. Of this amount, $521,000, or 0.29%
of the multi-family loan portfolio, was nonaccrual, as compared to $6.1
million, or 3.28% of the multi-family loan portfolio, at December 31, 1995,
and $4.0 million, or 1.87% of the multi-family loan portfolio, at December 31,
1994. Multi-family REO amounted to $8.2 million, $17.8 million and $23.0
million at March 31, 1996, and at December 31, 1995 and 1994, respectively.
See "--Asset Quality--Nonperforming Assets."
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured
by multi-family properties are often dependent on successful operation or
management of the security properties, repayment of such loans may be subject,
to a greater extent, to adverse conditions in the real estate market or the
economy. The Company seeks to minimize these risks through its underwriting
policies, which require such loans to be qualified at origination on the basis
of the property's income and debt service coverage ratio. In addition, higher
market interest rates could cause an increase in the Company's nonperforming
multi-family loans to the extent that borrowers are unable to pay higher
interest rates on adjustable rate loans. Many of the Company's multi-family
loans currently have marginal debt service coverage ratios due to vacancies
and the inability of landlords to increase rental rates in the current
economic environment.
From 1982 through 1993, a significant business activity for the Company
involved the issuance of direct pay LOCs for the purpose of providing
assurance to bondholders of the payment of principal and interest on tax-
exempt bonds issued to finance the acquisition or development of multi-family
housing. Under the terms of the related bond financing, up to 25% of the units
in the multi-family project must typically be reserved for low and moderate
income rental purposes, although in some cases a greater percentage is
required to be so reserved. In most of these transactions, the FHLB issues a
stand by letter of credit securing the Company's LOC and the Company pledges
unrelated loans and MBS in an amount sufficient to secure the Company's
obligation to reimburse the FHLB in the event of any draw on the FHLB's letter
of credit. Because of the direct pay nature of the Company's LOCs in these
transactions, the Company must make all payments on the related bonds as such
payments become due, including regular interest payments and payments of
principal due at maturity or upon default, and then obtain reimbursement for
such payments from the payments required to be made by the owners of the
related multi-family housing projects on the mortgage loans underlying the
bonds. In the event that the
50
borrower fails to perform its reimbursement obligations, the Company may,
among other things, foreclose on the project. Such foreclosure may generally
be accomplished without causing a default on the related issue of bonds, with
the result that the benefit of any favorable financing represented by the
interest rate on the bonds may, in effect, be made available to a subsequent
purchaser of the multi-family project from the Company after such foreclosure.
The term "LOC" is used herein to refer to the letter of credit issued by the
Company, the related mortgage or deed of trust taken by the Company as
security for the reimbursement obligations of its LOC account party (i.e., the
developer or owner of the project) and all related rights. The Company has
discontinued issuing any new LOCs, except on the sale of existing LOC
properties foreclosed on by the Company or the restructuring of existing
loans.
The Company typically received an origination fee of between 1% and 2% of
the amount of its LOC when issued and a fixed annual fee of between 1.30% and
2.00% for each year in which the related bond is outstanding.
The LOCs are not reflected on the Company's statement of financial condition
unless the properties securing the LOCs are either foreclosed upon by the
Company or treated as in-substance foreclosures. Upon foreclosure or in-
substance foreclosure, the foreclosed property is included in the Company's
recorded assets at its fair value and the related tax-exempt bond financing
supported by the Company's LOC is concurrently included in the Company's
recorded liabilities.
The credit risks to the Company posed by an LOC include risks identical to
those that would be involved if the Company had made a conventional multi-
family loan in the amount of the LOC. LOCs may also involve certain prepayment
risks not directly related to the economic viability or value of the related
multi-family property. Failure of the project owner to comply with the low and
moderate income set aside requirements could result in default and
acceleration of the maturity of the related bond financing. In addition, most
of the LOCs were issued in connection with variable rate bond financings in
which individual bondholders may "put" their bonds back to the issuer on seven
days' advance notice, in which event the bonds must either be remarketed to
new holders within the seven-day notice period by the firm engaged for such
purpose (which is not the Company) pursuant to the LOC arrangements or
prepaid. If the project owner is not able to pay the amounts required in the
event of either acceleration of the bonds on default or required prepayment on
failure of the remarketing mechanism, the Company would be required to rely on
its mortgage security to obtain reimbursement of the bond principal and
interest amounts paid by it under its direct pay LOCs. A specialized firm is
engaged with respect to each LOC project to monitor compliance with the low
and moderate income set aside requirements of the related bond financing and
the Company has not to date experienced any bond defaults resulting from such
requirements, nor has it experienced any instance of required bond prepayments
resulting from failure of bond remarketing activities.
The Company applies the same underwriting criteria to the LOCs as to multi-
family loans. As with conventional multi-family loans, the performance of the
LOCs has been adversely affected by the recessionary economic conditions in
the Company's primary market area. However, because the LOCs carry
significantly lower interest rates than conventional multi-family loans, the
amount of net operating income required to service the LOCs is correspondingly
less than for conventional multi-family loans. In accordance with generally
accepted accounting principles and applicable regulatory requirements, the
economic benefit of such financing as compared with normal financing costs
(the "bond enhancement value") is taken into account, to the extent it will
remain outstanding, in determining the fair value of the LOC arrangement at
the time of foreclosure or in-substance foreclosure.
At March 31, 1996, 21 LOCs in the aggregate amount of $118.2 million were
outstanding. One LOC in the amount of $4.0 million, net of specific valuation
allowances, was considered in-substance foreclosed at March 31, 1996. LOCs are
considered in-substance foreclosed when the Company has possession (including
through a receiver) of the underlying collateral, but not the legal title. An
allowance for losses on the Company's LOCs in the amount of $6.9 million was
included in other liabilities at March 31, 1996. Since the inception of
51
the LOC program in 1985, the Company has identified losses in the amount of
$14.3 million, or 25.02% of LOCs that have been nonperforming in the past, or
11.12% of the aggregate original amount of LOCs.
Commercial Real Estate Lending. The Company has historically originated
commercial real estate loans that are generally secured by properties used for
business purposes such as skilled nursing care facilities and small office
buildings located in the Company's primary market area. Of the $75.1 million
of commercial loans outstanding at March 31, 1996, 5.96% were fixed rate loans
and 94.04% were ARM loans. $25.9 million, or 36.68%, of the ARM loans had
payment schedules that permit negative amortization, although none of these
loans currently have loan balances exceeding the original amounts advanced.
Due to adverse market conditions, the Company has limited the origination of
commercial real estate loans, except in connection with the sale of problem
assets. See "--General." The Company's underwriting procedures provide that
commercial real estate loans may be made in amounts up to 75% of the lesser of
the appraised value or the sales price of the property. These loans may be
made with terms of up to 30 years and are indexed to the 11th District COFI or
the one year CMT. The Company's underwriting standards and procedures for
commercial loans are similar to those applicable to its multi-family loans,
under which the Company considers the net operating income of the property and
the borrower's expertise, credit history and profitability. The Company has
generally required that the properties securing commercial real estate loans
have debt service coverage ratios of at least 1.2x. The largest commercial
real estate loan in the Company's portfolio at March 31, 1996, had an
outstanding balance of $5.6 million and is secured by a commercial office
building located in Redlands, California. The average outstanding loan balance
of commercial real estate loans at March 31, 1996, was $381,000. At March 31,
1996, the commercial real estate loan portfolio consisted of 197 loans with an
aggregate outstanding balance of $75.1 million, or 10.72% of total loans. Of
this amount, none was nonaccrual, compared to $223,000, or 0.30%, at December
31, 1995 and to $113,000, or 0.16%, at December 31, 1994. Commercial REO
amounted to $513,000, $536,000 and $209,000 at March 31, 1996, and at December
31, 1995 and 1994, respectively. See "--Asset Quality--Nonperforming Assets."
Loans secured by commercial real estate, like multi-family loans, are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial
real estate are often dependent on successful operation or management of the
properties, repayment of such loans may be subject, to a greater extent, to
adverse conditions in the real estate market or the economy. The Company seeks
to minimize these risks through its underwriting standards, which require such
loans to be qualified on the basis of the property's income and debt service
coverage ratio.
Spot Construction Loans. The Company originates spot construction loans to
individuals who intend to occupy the home upon completion as their primary
residence. The properties securing such loans are spread out geographically
throughout the Company's market area, and thus avoid or reduce most of the
risks associated with large tract construction loans. These loans typically
have a construction term of twelve months and at the completion of the
construction phase automatically convert to an adjustable rate permanent
mortgage loan. When these loans are converted to permanent mortgage loans they
are reclassified as one- to four-family residential mortgage loans. At
March 31, 1996, $71.8 million of the $347.6 million of one- to four-family
residential mortgage loans were spot construction loans that had converted to
the permanent loan phase.
The Company's policies provide that spot construction loans may be made in
amounts up to 80% of the appraised (as built) value, with a minimum of a 20%
cash investment by the borrower in the property. As part of the loan approval
process, Company personnel with relevant construction experience review the
borrower's proposed construction costs. The Company requires that any excess
of its construction cost estimates over 80% of the appraised value be paid by
the borrower in cash at the origination of the loan. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
At March 31, 1996, the Company had $30.3 million of spot construction loans,
or 4.33% of the Company's total loan portfolio. At March 31, 1996 and December
31, 1995, only one spot construction loan, for $418,000, was nonaccrual
compared to none at December 31, 1994. No spot construction loans were
included in REO at March 31, 1996, or at December 31, 1995 or 1994. See "--
Asset Quality--Nonperforming Assets."
52
Developed Lot Loans. At March 31, 1996, the Company had $44.5 million of
developed lot loans, comprising 6.35% of total loans. These are loans made to
individual borrowers secured by developed building lots, typically intended
for future construction of a home, rather than bulk loans to builders to
finance the builders' lot inventories. Of the Company's developed lot loans,
$719,000, or 1.62%, were nonaccrual at March 31, 1996, as compared to $1.0
million, or 2.18% of such loans, at December 31, 1995, and $2.3 million, or
4.30% of such loans, at December 31, 1994. Developed lots in the amount of
$2.3 million, $1.8 million and $842,000 were classified REO at March 31, 1996
and at December 31, 1995, and 1994, respectively. See "--Asset Quality--
Nonperforming Assets." The Company has discontinued this line of lending,
except in connection with the disposition of problem assets.
Tract Construction and Land Development Lending. At March 31, 1996, the
Company had remaining loans of $1.1 million, or 0.15% of total loans at that
date, in the category of tract construction and land development loans (none
of which were tract construction at such date) compared to $2.7 million, or
0.38% of total loans, at December 31, 1995, and $6.6 million, or 0.83% of
total loans, at December 31, 1994. At March 31, 1996, $565,000, or 53.66%, of
the Company's tract construction and land loans were nonaccrual, compared to
$581,000, or 21.48%, at December 31, 1995 and none at December 31, 1994. Tract
construction and land loans classified as REO amounted to $667,000, $463,000
and $4.4 million at March 31, 1996 and at December 31, 1995, and 1994,
respectively. See "--Asset Quality--Nonperforming Assets."
Consumer Loans. The Company also offers loans in the form of home equity
lines of credit and FHA Title I home improvement loans (both of which are
secured by single-family residences), mobile home loans, new and used auto and
recreational vehicle loans and secured and unsecured personal loans. FHA Title
I home improvement loans are insured by the FHA up to 90% of the original loan
balance, subject to certain per lender limitations based on the aggregate
amounts of such loans made, and insured losses incurred, by the individual
lending institution. The Company also currently offers credit cards that are
underwritten and owned by the Company. The Company has engaged a specialized
servicing firm to manage its credit card portfolio, including billing and
collection of delinquent accounts. As of March 31, 1996, consumer loans
totaled $24.7 million, or 3.52% of the Company's total loan portfolio. Except
for equity lines of credit, consumer loans are offered primarily on a fixed
rate, short term basis. The underwriting standards employed by the Company for
consumer loans include a determination of the applicant's payment history on
other debts and an assessment of the borrower's ability to meet payments on
the proposed loan along with the borrower's existing obligations. In addition
to the creditworthiness of the applicant, the underwriting process also
includes a comparison of the value of the security, if any, in relation to the
proposed loan amount. The Company's consumer loans tend to have higher risk of
default than one- to four-family mortgage loans. The level of delinquencies of
90 days or more in the Company's consumer loan portfolio was $293,000, or
approximately 1.19% of the consumer loan portfolio, at March 31, 1996,
compared to $413,000 at December 31, 1995 and $476,000 at December 31, 1994.
Consumer loan repossessed assets were $44,000 at March 31, 1996, $43,000 at
December 31, 1995 and $62,000 at December 31, 1994. See "--Asset Quality--
Nonperforming Assets."
Loan Approval Procedures and Authority. The Board of Directors authorizes
and may limit the lending activity of the Company. Management of the Company
has established a loan committee comprised of the Chief Executive Officer, the
Chief Operating Officer, the Senior Vice President-Chief Lending Officer, and
two other loan officers. The Board of Directors has authorized the following
persons to approve mortgage loans up to the amounts indicated: conforming
mortgage loans up to the FHLMC and FNMA secondary market purchase limit, which
currently is $207,000, may be approved by any member of the loan committee or
designated staff members; nonconforming mortgage loans in amounts of $400,000
and below may be approved by any two members of the loan committee; and
mortgage loans in excess of $400,000 and up to $2.0 million require the
approval of three members of the loan committee, one of whom must be the Chief
Lending Officer or the Chief Executive Officer. The approval of the loan
committee of the Board of Directors or the full Board of Directors is required
for mortgage loans in excess of $2.0 million and below $5.0 million. Any loan
in excess of $5.0 million requires the approval of the full Board of
Directors.
53
Mortgage-backed Securities. The Company invests in MBS and utilizes such
securities to complement its mortgage lending activities. At March 31, 1996,
MBS totaled $56.5 million, or 6.59% of total assets. Included in this amount
is a San Bernardino County tax exempt pass-through bond relating to multi-
family residential properties with an original principal amount of $38.2
million. The Company originated the loans securing the bonds, and subsequently
purchased all of the bonds. The remaining principal amount at March 31, 1996
was $25.5 million. Also included in held-to-maturity MBS at that date is $5.9
million relating to the acquisition of an LOC bond. The balance of MBS are
categorized as available-for-sale investments, including $20.2 million of
Government National Mortgage Association ("GNMA") certificates and $4.8
million of FHLMC certificates. The market value of all MBS totaled
approximately $55.9 million at March 31, 1996 and the MBS portfolio had a
weighted average yield of 7.79% at that date. The MBS portfolio at March 31,
1996 consisted of $48.4 million of fixed rate securities and $8.1 million of
adjustable rate securities. Investments in MBS involve risks that actual
prepayments may exceed the estimates used at the time of purchase of the
prepayments that will be experienced over the life of the security, which may
result in a loss of any premium paid for such instruments and thereby reduce
the net yield on such securities. If interest rates increase, the market value
of such securities may be adversely affected.
The following table sets forth the composition of the Company's MBS
portfolio in dollar amounts and in percentages of the total portfolio at the
dates indicated.
MORTGAGE-BACKED SECURITIES PORTFOLIO
AT DECEMBER 31,
---------------------------------------------------------
AT MARCH 31, 1996 1995 1994 1993
------------------ ------------------ ------------------ -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ---------- ------- ---------- ------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Held-to-maturity:
GNMA certificates...... -- -- -- -- $ 1,296 1.62% -- --
FHLMC certificates..... -- -- -- -- 32,778 40.99 $ 43,688 39.72%
San Bernardino County
bond.................. $25,544 45.21% $25,615 49.15% 30,698 38.39 36,771 33.43
Indio Mortgage Revenue
bond.................. 5,950 10.53 -- -- -- -- -- --
------- ------ ------- ------ ------- ------ -------- ------
31,494 55.74 25,615 49.15 64,772 81.00 80,459 73.15
------- ------ ------- ------ ------- ------ -------- ------
Available-for-sale:
GNMA certificates...... 20,160 35.68 21,098 40.48 11,589 14.49 24,642 22.41
FHLMC certificates..... 4,845 8.58 5,403 10.37 -- -- 596 0.54
FNMA certificates...... -- -- -- -- 3,610 4.51 4,285 3.90
------- ------ ------- ------ ------- ------ -------- ------
25,005 44.26 26,501 50.85 15,199 19.00 29,523 26.85
------- ------ ------- ------ ------- ------ -------- ------
$56,499 100.00% $52,116 100.00% $79,971 100.00% $109,982 100.00%
======= ====== ======= ====== ======= ====== ======== ======
54
The following table sets forth the Company's MBS purchases and repayment
experience (including prepayments) for the periods indicated.
MORTGAGE-BACKED SECURITIES PURCHASES AND REPAYMENTS
AT OR FOR THE
THREE MONTHS AT OR FOR THE YEAR
ENDED MARCH 31, ENDED DECEMBER 31,
---------------- ----------------------------
1996 1995 1995 1994 1993
------- ------- -------- -------- --------
(IN THOUSANDS)
MBS:
At beginning of period......... $52,116 $79,971 $ 79,971 $109,982 $100,771
MBS purchased/transferred..... 5,950 -- 21,053 -- 29,276
Principal repayments and
sales........................ (1,567) (1,350) (48,908) (30,011) (20,065)
------- ------- -------- -------- --------
At end of period.............. $56,499 $78,621 $ 52,116 $ 79,971 $109,982
======= ======= ======== ======== ========
ASSET QUALITY
Collection Procedures. The Company's collection procedures for mortgage
loans with principal balances of less than $500,000 secured by property
consisting of one- to four-family residential units include sending a 30-day
notice of intent to foreclose to the borrower on the day after the expiration
of the payment grace period, which is between 10 and 15 days after a payment
due date depending on the type of property. If the notice of intent expires
and the borrower has made no arrangements to bring the loan current, a notice
of default is sent to the borrower. The notice of default allows the borrower
to reinstate the loan during a 90-day period. If the borrower does not
reinstate the loan, a foreclosure sale will generally be held 30 to 45 days
after the expiration of the notice of default.
Experienced asset managers employed by the Company handle collections for
loans having balances of $500,000 or more or that are secured by income
property consisting of 5 or more units. The Company typically seeks to have a
receiver appointed to collect rents and manage the property as soon as
possible after a loan becomes delinquent if the borrower is not cooperative or
in the best judgment of management future collection of any unpaid amounts is
believed to be in jeopardy.
The Company conducts an appraisal or other determination of the value of
foreclosed properties at the time the Company acquires title or when the
properties are deemed to be in-substance foreclosures, and transfers the loan
to REO at fair value. The Company generally conducts external inspections on
foreclosed properties on at least a quarterly basis to determine if an
adjustment to the carrying value is required.
55
Delinquent Loans. At March 31, 1996 and at December 31, 1995, 1994, and
1993, delinquencies in the Company's loan portfolio were as follows:
DELINQUENT LOANS
AT DECEMBER 31,
AT MARCH 31, ---------------------------------
1996 1995
--------------------------------- ---------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------- ---------------- ---------------- ----------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
One- to four-
family........... 3 $ 90 61 $11,329 5 $ 722 49 $ 8,818
Multi-family..... -- -- 2 521 -- -- 7 6,115
Commercial real
estate........... -- -- -- -- -- -- 1 223
Spot
construction..... -- -- 1 418 -- -- 1 418
Developed lots... -- -- 11 719 4 242 14 1,036
Tract
construction and
land............. -- -- 1 565 2 182 2 581
Consumer......... 21 49 99 293 40 74 94 413
--- ---- --- ------- --- ------ --- -------
Total........... 24 $139 175 $13,845 51 $1,220 168 $17,604
=== ==== === ======= === ====== === =======
Delinquent loans
to total loans,
net of specific
allowances....... 0.02% 1.98% 0.17% 2.46%
==== ======= ====== =======
AT DECEMBER 31,
-------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------- ---------------- ---------------- ----------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
One- to four-
family........... 15 $1,626 58 $ 7,255 18 $2,092 47 $10,282
Multi-family..... 2 205 10 3,980 1 208 20 9,857
Commercial real
estate........... -- -- 1 113 -- -- 2 1,070
Spot
construction..... -- -- -- -- -- -- -- --
Developed lots... -- -- 16 2,278 2 142 8 1,220
Tract
construction and
land............. -- -- -- -- 1 306 3 200
Consumer......... 39 122 138 476 55 193 14 120
--- ------ --- ------- --- ------ --- -------
Total........... 56 $1,953 223 $14,102 77 $2,941 94 $22,749
=== ====== === ======= === ====== === =======
Delinquent loans
to total loans,
net of specific
allowances....... 0.25% 1.78% 0.44% 3.37%
====== ======= ====== =======
56
Nonperforming Assets. Nonperforming assets consist of nonaccrual loans and
REO, and exclude restructured loans which were performing in accordance with
their restructured terms. Loans are placed on nonaccrual status when they
become contractually delinquent more than 90 days or are specifically
identified by management as nonaccrual. Loans over $500,000 are placed on
nonaccrual status when they become contractually delinquent more than 60 days.
Management also places certain loans on nonaccrual status whenever available
information indicates that the borrower will not be repaying the loan in
accordance with its terms. Uncollected interest on nonaccrual loans is
excluded from interest income and accrued interest receivable and subsequently
recognized in the period when loan principal and interest is paid current.
Primarily as a result of recessionary economic conditions in the Company's
Southern California market area, which have had an adverse impact upon the
Company's multi-family, commercial real estate, developed lot, tract
construction and land development loan portfolios, the Company experienced
significant increases in the level of its nonperforming assets in the period
from 1992 through 1995. As part of the management's strategy developed in
response to these prevailing economic conditions, the Company has reduced the
level of its nonperforming assets by working with borrowers to restore
nonaccrual loans to performing status where possible, by foreclosing upon
security property where workouts are determined to be impracticable and by
selling existing REO. Additionally, in 1995 the Company conducted a bulk sale
of nonperforming assets for net proceeds of $7.2 million. The loans included
in the bulk sale had loss provisions which had been previously charged to
operations in the amount of $2.9 million. An additional loss of $572,000 was
recognized at the time of the sale. No further bulk sales are anticipated.
Through these efforts, the Company has substantially reduced the amounts of
its nonperforming assets, and the Company intends to continue to aggressively
pursue reduction in the level of its nonperforming assets. However, the level
of such nonperforming assets will continue to be affected by regional economic
and real estate market conditions beyond the Company's control. To the extent
that economic and real estate market conditions deteriorate, the Company could
experience increases in the levels of nonperforming assets.
The interest income that would have been received on the Company's
nonaccrual loans for the three month periods ended March 31, 1996, March 31,
1995 and for the years ended December 31, 1995, 1994, and 1993, if such loans
had been performing in accordance with their terms, was $241,000, $215,000,
$1.4 million, $1.1 million and $1.8 million, respectively. The interest income
that was actually recorded for such loans for such periods was $64,000,
$22,000, $955,000, $624,000, and $803,000, respectively.
The Company's ratios of nonaccrual loans to total loans and net
nonperforming assets to total assets and LOCs was 1.98% and 3.21%,
respectively, at March 31, 1996 as compared to 2.45% and 4.53%, respectively,
at December 31, 1995 and 1.77% and 4.46%, respectively, at December 31, 1994.
57
The following table sets forth information regarding nonperforming assets.
The table excludes restructured loans that are performing in accordance with
their restructured terms.
NONPERFORMING ASSETS
AT MARCH 31, AT DECEMBER 31,
---------------- -------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
NONPERFORMING ASSETS:
NONACCRUAL LOANS:
One- to four-family.... $11,329 $ 6,716 $ 8,818 $ 7,255 $10,282 $ 2,784 $ 3,772
Multi-family........... 521 2,135 6,115 3,980 9,857 9,809 5,510
Commercial real es-
tate.................. -- 113 223 113 1,070 2,241 725
Spot construction...... 418 -- 418 -- -- -- --
Developed lots......... 719 1,724 1,036 2,278 1,220 423 43
Tract construction and
land.................. 565 -- 581 -- 200 3,232 1,131
Consumer............... 293 388 413 476 120 118 143
------- ------- ------- ------- ------- ------- -------
Total nonaccrual
loans................ 13,845 11,076 17,604 14,102 22,749 18,607 11,324
------- ------- ------- ------- ------- ------- -------
REO (1):
One- to four-family.... 5,145 3,939 5,393 4,487 1,212 887 139
Multi-family (2)....... 8,233 29,103 17,807 22,981 2,050 10,048 9,792
Commercial real es-
tate.................. 513 538 536 209 799 -- --
Developed lots......... 2,296 972 1,836 842 259 -- --
Tract construction and
land.................. 667 4,414 463 4,447 5,574 3,536 3,726
Consumer............... 44 76 43 62 53 -- --
------- ------- ------- ------- ------- ------- -------
Total real estate
(2).................. 16,898 39,042 26,078 33,028 9,947 14,471 13,657
------- ------- ------- ------- ------- ------- -------
Total nonperforming as-
sets................... $30,743 $50,118 $43,682 $47,130 $32,696 $33,078 $24,981
======= ======= ======= ======= ======= ======= =======
Nonaccrual loans to to-
tal loans.............. 1.98% 1.37% 2.45% 1.77% 3.34% 2.74% 1.89%
Nonperforming assets to
total assets and LOCs.. 3.21 4.70 4.53 4.46 3.17 3.18 2.62
- --------
(1) Does not include the effect of GVAs of $1,133, $2,224, $1,518, $1,987,
$518, $0, and $0 for the three-month periods ended March 31, 1996 and 1995
and for the years ended December 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
(2) Includes properties securing LOCs acquired through foreclosure.
Restructured Loans. Restructured loans, net of specific valuation
allowances, that are performing in accordance with their restructured terms
are not included in nonperforming assets. At March 31, 1996, there were $9.0
million in restructured loans. The amount of interest income recognized on
restructured loans during the three-month periods ended March 31, 1996 and
1995 and for the years ended December 31, 1995, 1994 and 1993 was $170,000,
$293,000, $802,000, $1.2 million and $474,000, respectively. The amount of
interest income that would have been recorded for such loans had they been
performing in accordance with their original terms for such periods was
$201,000, $278,000, $931,000, $1.3 million and $468,000, respectively. The
following table sets forth information regarding restructured loans.
RESTRUCTURED LOANS
AT
AT DECEMBER 31,
MARCH 31, ----------------------
1996 1995 1994 1993
--------- ------ ------- -------
(IN THOUSANDS)
Multi-family............................ $8,559 $6,400 $18,531 $ 9,215
Commercial.............................. -- -- 1,819 1,905
Developed lots.......................... -- -- 117 155
Tract construction and land............. 423 488 -- --
------ ------ ------- -------
Total loans........................... $8,982 $6,888 $20,467 $11,275
====== ====== ======= =======
58
Classified Assets. Federal regulations and the Company's asset
classification policy provide for the classification of loans and other assets
that are considered to be inadequately protected by the current net worth and
paying capacity of the obligor or by the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified Substandard with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss allowance is not warranted. Assets which do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but do possess
weaknesses are required to be designated "Special Mention" by management. All
nonperforming assets are included in classified assets.
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a GVA for
loan losses in an amount deemed prudent by management. GVAs represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies one or more assets, or portions thereof, as Loss, it is
required either to establish a specific allowance for losses equal to 100% of
the difference between the book value and fair value of the asset so
classified or to charge off such amount. The Company uses Doubtful as a
temporary classification until sufficient information becomes available to
enable the Company to classify an asset as Substandard or Loss. A management
Internal Asset Review Committee meets monthly and the Asset Classification
Committee of the Board of Directors meets quarterly to review problem loans
and classified assets. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can require a different classification and
order the establishment of additional general or specific loss allowances.
At March 31, 1996, the Company had 166 loans totaling $22.8 million
classified as Substandard, as compared to $25.0 million at December 31, 1995
and $48.0 million at December 31, 1994. The largest loan or LOC classified as
Substandard at March 31, 1996 was an LOC in the amount of $8.5 million, with
$7.5 million classified as Substandard and $1.0 million classified as Loss,
which is secured by a 280 unit apartment complex located in Fontana,
California. In May 1996 the Company increased the specific valuation allowance
to $1.5 million. The largest REO (which was an in-substance foreclosure) was
$4.0 million. At March 31, 1996, the Company also had 117 loans and 4 LOCs,
designated as Special Mention, totaling $59.2 million as compared to $45.4
million so categorized at December 31, 1995 and $46.6 million so categorized
at December 31, 1994. The largest loan or LOC designated as Special Mention
was an LOC with a balance of $5.5 million at March 31, 1996, and secured by a
140 unit apartment complex located in Moreno Valley, California. The majority
of the loans or LOCs designated as Special Mention are current but are so
identified because of past delinquencies or restructuring and are being
monitored for the possibility of future upgrading. $280,000 of real estate
held for sale was classified as Substandard and $172,000 was classified as
Loss at March 31, 1996 and December 31, 1995, as compared to $6.8 million
classified as Substandard and none classified as Loss at December 31, 1994. No
real estate held for sale was designated as Special Mention at March 31, 1996
or at December 31, 1995 or 1994.
59
The following table sets forth at March 31, 1996 and at December 31, 1995,
1994 and 1993, the Company's aggregate reported value of assets and LOCs
classified as Substandard, Doubtful or Loss. No loans were classified as
Doubtful at December 31, 1995 or 1993.
CLASSIFIED ASSETS
AT DECEMBER 31,
------------------------------------------------------------------
AT MARCH 31, 1996 1995 1994 1993
------------------------------------------ ------------------- --------------------------- ------------------
SUBSTANDARD DOUBTFUL LOSS SUBSTANDARD LOSS SUBSTANDARD DOUBTFUL LOSS SUBSTANDARD LOSS
-------------- ------------- ------------- ----------- ------- ----------- -------- ------ ----------- ------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------ ------- ------ ------ ------ ------ ----------- ------- ----------- -------- ------ ----------- ------
(DOLLARS IN THOUSANDS)
LOANS:
One- to four-
family........... 77 $13,416 -- -- -- -- $ 6,790 -- $ 9,242 $ 44 $ 293 $10,564 $ 29
Multi-family..... 12 6,088 2 $404 4 $ 885 14,566 $ 3,607 32,933 730 3,064 25,928 3,988
Commercial real
estate........... 2 683 -- -- -- -- 879 118 2,640 -- 120 1,967 --
Spot
construction..... -- -- -- -- -- -- 418 -- -- -- -- 417 --
Developed lots... 13 1,256 -- -- -- -- 1,114 -- 2,741 118 162 1,219 34
Tract
construction and
land............. 2 987 -- -- 1 65 1,058 1,069 -- -- -- 2,918 1,068
Consumer......... 60 355 -- -- -- -- 218 -- 430 -- -- 333 --
--- ------- --- ---- --- ------ ------- ------- -------- ---- ------ ------- ------
Total........... 166 22,785 2 404 5 950 25,043 4,794 47,986 892 3,639 43,346 5,117
--- ------- --- ---- --- ------ ------- ------- -------- ---- ------ ------- ------
REAL ESTATE OWNED
AND IN-SUBSTANCE
FORECLOSED LOANS:
One- to four-
family........... 43 5,145 -- -- 6 176 5,393 203 4,487 -- 125 1,212 90
Multi-family..... 10 8,233 -- -- 5 1,412 17,807 4,922 22,981 -- 134 2,050 0
Commercial real
estate........... 3 513 -- -- 2 120 536 96 209 -- -- 799 164
Developed lots... 25 2,296 -- -- 8 352 1,836 269 842 -- 43 259 10
Tract
construction and
land............. 2 667 -- -- 1 593 463 593 4,447 -- 323 5,574 181
Consumer......... 8 44 -- -- -- -- 43 -- 62 -- -- 53 --
--- ------- --- ---- --- ------ ------- ------- -------- ---- ------ ------- ------
Total........... 91 16,898 -- -- 22 2,653 26,078 6,083 33,028 -- 625 9,947 445
--- ------- --- ---- --- ------ ------- ------- -------- ---- ------ ------- ------
REAL ESTATE HELD
FOR SALE OR
INVESTMENT........ 1 280 -- -- 1 172 280 172 6,777 -- -- 2,326 --
LOCS.............. 1 7,524 -- -- 2 1,251 7,524 1,751 21,133 -- -- 10,680 --
--- ------- --- ---- --- ------ ------- ------- -------- ---- ------ ------- ------
Total........... 259 $47,487 2 $404 30 $5,026 $58,925 $12,800 $108,924 $892 $4,264 $66,299 $5,562
=== ======= === ==== === ====== ======= ======= ======== ==== ====== ======= ======
60
Allowances for Losses on Loans and LOCs. The Company determines its total
allowances for losses on loans and LOCs by evaluating all non-homogeneous
loans and LOCs individually and establishing specific allowances as
appropriate. A GVA for losses on loans and LOCs is also established based on
management's evaluation of the risks inherent in the portfolios and other
economic factors. Such evaluation, which includes a review of all loans and
LOCs on which full collectibility may not be reasonably assured, considers
among other matters, debt service coverage ratios, vacancy rates, the
estimated value of the underlying collateral, economic conditions, historical
loan loss experience and other factors that management believes to warrant
recognition in providing for an adequate loan loss allowance. In response to
the general decline in the economic conditions of its primary market area and
the resultant increases in the Company's levels of nonperforming and
classified assets, as well as recommendations made by the OTS following an
examination of the Company, management has increased its allowances to account
for its evaluation of the potential effects of such factors. The allowances at
March 31, 1996 reflect management's evaluation of the risks inherent in the
Company's loan and LOC portfolios in consideration of the decline in the
regional economy, the deterioration of real estate values experienced in
recent periods, the regulatory environment and the levels of nonperforming
assets. At March 31, 1996, the Company's ratio of GVAs for losses on loans,
real estate and LOCs to nonperforming assets was 58.41%. The allowance for
losses on loans and LOCs was $19.0 million, or 2.37% of total loans and LOCs,
and the total allowances for losses on loans, LOCs and real estate was $24.7
million, or 2.58% of the total assets and LOCs, at that date. The Company will
continue to monitor and modify its allowances for losses on loans as
conditions dictate. Although the Company maintains its allowances at a level
which it considers adequate to provide for potential losses, there can be no
assurances that such losses will not exceed the estimated amounts.
Allowance for Losses on REO and Real Estate Held for Sale or Investment. REO
is initially recorded at fair value, including estimated sale costs, at the
date of foreclosure. If the collateral for the loan has been in-substance
foreclosed, the loan is reported as if the real estate had been received in
satisfaction of the loan. Further declines in the value of the investment in
real estate held for sale or investment or REO are recorded as a provision for
loss and an increase in the allowance for losses on real estate. Real estate
held for sale or investment is recorded at the lower of cost or fair value. At
March 31, 1996, the Company's allowance for losses on real estate was $5.7
million, or 24.59% of the Company's real estate acquired or held for
investment.
61
The following table sets forth the Company's allowances for losses on loans,
LOCs and real estate at the dates and for the periods indicated.
ANALYSIS OF ALLOWANCE FOR LOSSES
AT OR FOR THE THREE
MONTHS ENDED
MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- ------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOSSES ON
LOANS:
Balance at beginning of
period................. $ 14,745 $ 18,874 $18,874 $15,373 $ 7,673 $ 4,459 $1,734
Provision charged to in-
come................... 1,400 373 7,938 12,651 12,990 6,106 2,968
Charge-offs:
One- to four-family.... (189) (291) (2,311) (913) (376) (68) --
Multi-family........... (2,537) (2,044) (8,779) (5,480) (2,526) (2,110) --
Commercial real es-
tate.................. (12) (203) (203) (4) (157) -- --
Developed lots......... (73) (106) (600) (322) -- -- --
Tract construction and
land.................. (1,073) -- -- (2,051) (1,933) (327) --
Consumer............... (225) (149) (684) (408) (413) (411) (276)
--------- --------- ------- ------- ------- ------- ------
Total charge-offs...... (4,109) (2,793) (12,577) (9,178) (5,405) (2,916) (276)
Recoveries.............. 40 34 510 28 115 24 33
--------- --------- ------- ------- ------- ------- ------
Balance at end of peri-
od..................... 12,076 16,488 14,745 18,874 15,373 7,673 4,459
--------- --------- ------- ------- ------- ------- ------
ALLOWANCE FOR LOSSES ON
LOCS:
Balance at beginning of
period................. 7,447 6,908 6,908 2,599 2,142 276 --
Provision charged to in-
come................... -- 193 2,536 9,895 694 1,866 276
Charge-offs............. (500) (1,444) (1,997) (5,586) (237) -- --
--------- --------- ------- ------- ------- ------- ------
Balance at end of peri-
od..................... 6,947 5,657 7,447 6,908 2,599 2,142 276
--------- --------- ------- ------- ------- ------- ------
Total allowance for
losses on loans and
LOCs................... $ 19,023 $ 22,145 $22,192 $25,782 $17,972 $ 9,815 $4,735
========= ========= ======= ======= ======= ======= ======
ALLOWANCE FOR LOSSES ON
REAL ESTATE:
Balance at beginning of
period................. $ 9,496 $ 4,378 $ 4,378 $ 2,113 $ 2,149 $ 1,548 $ 780
Provision charged to in-
come................... -- 1,422 8,336 4,653 1,968 1,128 768
Charge-offs............. (3,816) (557) (3,218) (2,388) (2,004) (527) --
--------- --------- ------- ------- ------- ------- ------
Balance at end of peri-
od..................... $ 5,680 $ 5,243 $ 9,496 $ 4,378 $ 2,113 $ 2,149 $1,548
========= ========= ======= ======= ======= ======= ======
TOTAL ALLOWANCE FOR
LOSSES ON LOANS, LOCS
AND REAL ESTATE:
Specific............... $ 6,747 $ 6,250 $14,523 $ 6,031 $ 6,711 $ 3,524 $2,313
GVA.................... 17,956 21,138 17,165 24,129 13,374 8,440 3,970
--------- --------- ------- ------- ------- ------- ------
$ 24,703 $ 27,388 $31,688 $30,160 $20,085 $11,964 $6,283
========= ========= ======= ======= ======= ======= ======
ASSET QUALITY RATIOS:
Charge-offs to average
loans and LOCs (1)..... 2.38% 2.02% 1.76% 1.90% 0.75% 0.40% 0.04%
Allowance for losses on
loans to total loans... 1.72 2.03 2.05 2.37 2.26 1.13 0.75
Allowance for losses on
LOCs to total LOCs..... 6.89 6.43 8.02 7.17 2.25 1.98 0.27
Allowance for losses on
real estate to total
real estate............ 24.59 11.58 26.56 9.59 8.76 7.05 5.44
Allowances for losses on
loans, LOCs and real
estate to total assets
and LOCs............... 2.58 2.57 3.28 2.85 1.95 1.15 0.66
GVA for losses on loans,
LOCs and real estate to
total nonperforming
assets................. 58.41 42.18 39.30 51.20 40.90 25.52 15.89
- --------
(1) Ratios for the three months ended March 31, 1996 and 1995 are annualized.
62
The following table sets forth the Company's allowance for losses on loans
to total loans in each of the categories listed at the dates indicated.
ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
AT DECEMBER 31,
AT MARCH 31, -----------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE TO ALLOWANCE TO ALLOWANCE TO
TOTAL LOANS TOTAL LOANS TOTAL LOANS
AMOUNT BY CATEGORY AMOUNT BY CATEGORY AMOUNT BY CATEGORY
------- ------------ ------- ------------ ------- ------------
(DOLLARS IN THOUSANDS)
ALLOCATED:
One- to four
family.......... $ 2,360 0.68% $ 1,615 0.48% $ 1,910 0.55%
Multi-family.... 7,016 3.96 9,320 5.00 14,308 6.72
Commercial real
estate.......... 860 1.15 878 1.18 598 0.84
Spot construc-
tion............ 141 0.46 255 0.54 186 0.25
Developed lots.. 822 1.85 828 1.74 771 1.46
Tract construc-
tion and land... 288 27.35 1,234 45.62 558 8.46
Consumer........ 589 2.39 615 2.34 543 1.84
------- ------- -------
$12,076 $14,745 $18,874
======= ======= =======
AT DECEMBER 31,
------------------------------------------------------------
1993 1992 1991
-------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE TO ALLOWANCE TO ALLOWANCE TO
TOTAL LOANS TOTAL LOANS TOTAL LOANS
AMOUNT BY CATEGORY AMOUNT BY CATEGORY AMOUNT BY CATEGORY
------- ------------ ------ ------------ ------ ------------
(DOLLARS IN THOUSANDS)
ALLOCATED:
One- to four
family.......... $ 700 0.25% $ 367 0.14% $ 324 0.15%
Multi-family.... 10,591 4.80 3,596 1.50 1,390 0.70
Commercial real
estate.......... 1,528 2.10 1,165 1.89 880 1.47
Spot construc-
tion............ 61 0.21 43 0.17 162 0.56
Developed lots.. 188 0.43 123 0.32 107 0.35
Tract construc-
tion and land... 1,837 18.96 1,914 6.52 1,186 3.55
Consumer........ 468 1.69 465 1.73 410 1.65
------- ------ ------
$15,373 $7,673 $4,459
======= ====== ======
63
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly. Additionally, the Bank
must maintain minimum levels of investments that qualify as liquid assets
under OTS regulations. See "Regulation and Supervision--Liquidity."
Historically, the Bank has maintained liquid assets above the minimum OTS
requirements and at a level believed to be adequate to meet its normal daily
activities.
The investment policy of the Company, established by the Board of Directors
and implemented by the Asset/Liability Management Committee, attempts to
provide and maintain liquidity, generate a favorable return on investments
without incurring undue interest rate and credit risk, and complement the
Company's lending activities. Investments are made with the intent to hold
them to maturity. The Company's policies generally limit investments to U.S.
government and agency securities, certificates of deposit, commercial paper
and investment grade corporate debt securities. The Company's policies provide
that all investment purchases be ratified by the Asset/Liability Management
Committee. At March 31, 1996, the Company had investment securities in the
aggregate amount of $38.8 million with a fair value of $38.2 million
classified as held-to-maturity. The held-to-maturity investment portfolio is
accounted for on an amortized cost basis.
The following table sets forth certain information regarding the carrying
and market values of the Company's cash equivalents and investment securities
at the dates indicated. All investment securities were held-to-maturity except
the ARM mutual funds which at December 31, 1993, were available-for-sale.
CARRYING AND MARKET VALUES OF CASH AND INVESTMENT SECURITIES
AT DECEMBER 31,
AT MARCH 31, --------------------------------------------------
1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
CASH & CASH EQUIVALENTS:
Cash on hand and in
banks.................. $21,778 $21,778 $18,035 $18,035 $18,149 $18,149 $22,997 $22,997
Federal funds sold...... 9,475 9,475 12,950 12,950 4,925 4,925 5,025 5,025
------- ------- ------- ------- ------- ------- ------- -------
Total.................. $31,253 $31,253 $30,985 $30,985 $23,074 $23,074 $28,022 $28,022
======= ======= ======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES:
U. S. government
securities (maturities
more than three
months)................ $ 4,441 $ 4,441 $ 3,467 $ 3,500 $ 499 $ 500 $ 499 $ 500
Floating agency notes... 16,524 16,024 16,527 15,886 16,540 14,933 16,553 16,602
Step up notes........... 4,194 4,194 4,000 3,998 11,997 11,519 -- --
Callable notes.......... 8,998 8,951 9,000 9,035 -- -- -- --
FNMA stock.............. -- -- -- -- 25 219 25 261
ARM mutual funds........ -- -- -- -- -- -- 9,000 8,964
Certificates of deposit
(maturities more than
three months).......... -- -- 4,000 4,000 -- -- 19,000 19,000
Corporate and term
notes.................. 4,640 4,624 4,661 4,638 9,838 9,467 10,060 9,995
------- ------- ------- ------- ------- ------- ------- -------
Total.................. $38,797 $38,234 $41,655 $41,057 $38,899 $36,638 $55,137 $55,322
======= ======= ======= ======= ======= ======= ======= =======
Floating agency notes are issued by one or more government sponsored
enterprises ("GSEs"), including the FHLB System, FHLMC and FNMA, and have
interest rates that adjust quarterly based on the CMT. Certain notes have call
provisions at the option of the issuer whereby the issuer may redeem the notes
at the repricing date. Certain notes have interest rate floors.
64
Step up notes are issued by one or more GSEs, including the FHLB System and
the Student Loan Marketing Association ("SLMA"), and have interest rates that
adjust based on a semi-annual or annual pre-determined interest rate "step up"
schedule. The notes are callable at the option of the issuer on the interest
coupon date.
Callable notes are issued by one or more GSEs, including the FHLB System,
FNMA, SLMA and the Federal Farm Credit Bank, and are callable prior to the
contractual maturity date of the note at the option of the issuer. Callable
notes are generally issued at a premium compared to non-callable instruments
with similar maturities.
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's investment
securities as of March 31, 1996. There were no investment securities with
maturities greater than five years.
CARRYING VALUE AND YIELDS FOR INVESTMENT SECURITIES
AT MARCH 31, 1996
-----------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS OVER FIVE YEARS TOTAL
----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. government securi-
ties................... $ 4,441 4.93% -- -- -- -- $ 4,441 4.93%
Floating agency notes... 3,000 4.20 $13,524 4.85% -- -- 16,524 4.73
Step up notes........... -- -- 3,000 5.65 $1,194 6.30% 4,194 5.84
Callable notes.......... -- -- 8,998 6.49 -- -- 8,998 6.49
Corporate notes......... 4,640 4.62 -- -- -- -- 4,640 4.62
------- ------- ------ -------
Total.................. $12,081 $25,522 $1,194 $38,797
======= ======= ====== =======
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and, to a lesser extent, FHLB
advances are the primary sources of the Company's funds used for lending,
investing and other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of passbook savings,
checking accounts and certificates of deposit. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Company's
deposits are obtained predominantly from the areas in which its banking
offices are located. The Company relies primarily on customer service and
long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract
and retain deposits. Certificate accounts in excess of $100,000 are not
actively solicited by the Company nor does the Company use brokers to obtain
deposits. Further, the Company generally has not solicited deposit accounts by
increasing the rates of interest paid as quickly as some of its competitors,
nor has it emphasized offering high dollar amount deposit accounts with higher
yields to replace deposit account withdrawals. Management continually monitors
the Company's certificate accounts and, based on historical experience,
management believes it will retain a large portion of such accounts upon
maturity.
65
The following table presents the deposit activity of the Company for the
periods indicated.
DEPOSIT ACTIVITY
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
------------------ ----------------------------------
1996 1995 1995 1994 1993
-------- -------- ---------- ---------- ----------
(IN THOUSANDS)
Deposits................ $460,028 $512,395 $1,874,670 $2,015,417 $1,881,939
Withdrawals............. 474,200 496,474 1,934,999 2,069,636 1,899,876
-------- -------- ---------- ---------- ----------
Net deposits (withdraw-
als)................... (14,172) 15,921 (60,329) (54,219) (17,937)
Interest credited on de-
posits................. 7,323 7,393 31,523 24,419 25,017
-------- -------- ---------- ---------- ----------
Total increase (de-
crease) in deposits.... $ (6,849) $ 23,314 $ (28,806) $ (29,800) $ 7,080
======== ======== ========== ========== ==========
At March 31, 1996, the Company had $62.9 million in deposit accounts in the
amount of more than $100,000 with maturities as follows:
MORE THAN $100,000 DEPOSIT ACCOUNTS
AT MARCH 31, 1996
--------------------------------------------------
MATURITY PERIOD AMOUNT
----------------------------------- --------------
(IN THOUSANDS)
Passbook and checking.............. $11,127
Money market....................... 16,909
Three months or less............... 1,841
Over three through six months...... 1,103
Over six through 12 months......... 9,060
Over 12 months..................... 22,850
-------
Total.............................. $62,890
=======
66
The following table sets forth the distribution by average balance of the
Company's deposit accounts for the periods indicated and the weighted average
nominal interest rates on each category of deposits.
DEPOSIT ACCOUNT AVERAGE BALANCE
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
1996 1995
-------------------------- --------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Regular pass-
book............. $ 35,264 4.52% 2.00% $ 35,484 4.45% 2.07%
Money market..... 141,400 18.13 3.05 126,510 15.85 2.58
Interest-bearing
checking (NOW)
deposits......... 87,003 11.16 1.10 87,117 10.92 1.06
Non-interest
bearing.......... 16,022 2.05 -- 13,969 1.75 --
-------- ------ -------- ------
Total........... 279,689 35.86 2.32 263,080 32.97 1.98
-------- ------ -------- ------
Certificates of
deposit:
Less than 3
months........... 1,698 0.22 2.85 4,102 0.51 2.99
3 to 6 months.... 2,264 0.29 3.85 3,083 0.39 3.20
6 to 12 months... 142,103 18.22 4.81 132,298 16.58 4.64
12 to 24 months.. 204,895 26.28 5.48 202,230 25.35 5.25
24 to 48 months.. 78,644 10.09 5.47 95,086 11.92 4.97
48 to 71 months.. 43,736 5.61 5.60 68,033 8.53 6.40
72 months or
more............. 26,504 3.40 6.00 29,236 3.66 6.01
Jumbo certifi-
cates............ 202 0.03 5.15 689 0.09 5.32
-------- ------ -------- ------
Total certifi-
cates............ 500,046 64.14 5.31 534,757 67.03 5.21
-------- ------ -------- ------
Total average de-
posits........... $779,735 100.00% 4.26% $797,837 100.00% 4.18%
======== ====== ==== ======== ====== ====
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Regular pass-
book............. $ 35,271 4.37% 1.94% $ 42,970 5.23% 1.93% $ 42,810 5.14% 1.93%
Money market..... 128,239 15.90 2.82 149,561 18.22 2.35 160,242 19.26 2.67
Interest-bearing
checking (NOW)
deposits......... 86,199 10.68 1.16 97,397 11.86 1.02 90,046 10.82 1.47
Non-interest
bearing.......... 15,102 1.87 -- 14,857 1.81 -- 16,628 2.00 --
-------- ------ -------- ------ -------- ------
Total........... 264,811 32.82 2.00 304,785 37.12 1.75 309,726 37.22 2.08
-------- ------ -------- ------ -------- ------
Certificates of
deposit:
Less than 3
months........... 2,630 0.33 2.84 6,626 0.81 2.47 7,531 0.90 2.59
3 to 6 months.... 2,328 0.29 3.49 5,429 0.66 2.76 64,307 7.73 3.32
6 to 12 months... 184,005 22.80 5.12 145,219 17.68 3.33 110,972 13.33 3.45
12 to 24 months.. 166,305 20.61 5.69 144,397 17.58 4.00 138,409 16.63 4.09
24 to 48 months.. 93,288 11.56 5.18 112,704 13.72 4.76 113,668 13.66 5.50
48 to 71 months.. 65,769 8.15 6.24 67,302 8.20 6.35 58,485 7.03 6.40
72 months or
more............. 27,293 3.38 6.13 33,384 4.07 6.29 27,054 3.25 6.62
Jumbo certifi-
cates............ 482 0.06 3.32 1,322 0.16 2.86 2,080 0.25 3.41
-------- ------ -------- ------ -------- ------
Total certifi-
cates............ 542,100 67.18 5.47 516,383 62.88 4.40 522,506 62.78 4.53
-------- ------ -------- ------ -------- ------
Total average de-
posits........... $806,911 100.00% 4.33% $821,168 100.00% 3.42% $832,232 100.00% 3.62%
======== ====== ==== ======== ====== ==== ======== ====== ====
67
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 1996.
CERTIFICATE ACCOUNTS
PERIOD TO MATURITY
FROM MARCH 31, 1996 AT DECEMBER 31,
---------------------------- --------------------------
AT MARCH 31, WITHIN 1 1 TO 3
1996 YEAR YEARS THEREAFTER 1995 1994 1993
------------ -------- -------- ---------- -------- -------- --------
(IN THOUSANDS)
Certificate Amounts:
3.99% or less.......... $ 3,823 $ 3,822 $ 1 -- $ 4,225 $147,228 $283,714
4.00% to 4.99%......... 168,318 142,110 25,562 $ 646 131,602 141,365 91,806
5.00% to 5.99%......... 230,128 150,992 63,732 15,404 226,707 145,498 64,568
6.00% to 6.99%......... 82,681 52,947 27,736 1,998 139,232 75,018 54,930
7.00% to 7.99%......... 3,029 1,668 1,122 239 3,924 22,532 25,522
8.00% and over......... 514 110 32 372 606 1,901 4,317
-------- -------- -------- ------- -------- -------- --------
$488,493 $351,649 $118,185 $18,659 $506,296 $533,542 $524,857
======== ======== ======== ======= ======== ======== ========
Borrowings. The Company does not routinely utilize borrowings but has
utilized borrowings in the past and may do so in the future as an alternative
or less costly source of funds. The Company's primary source of borrowings are
FHLB advances. These advances are collateralized by FHLB capital stock held by
the Company and certain of the Company's mortgage loans. See "Regulation and
Supervision--Federal Home Loan Bank System." Such advances are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. The maximum amount that the FHLB will advance to
member institutions, including the Company, for purposes other than meeting
withdrawals, fluctuates from time to time in accordance with its advance
policies. At March 31, 1996 the Company's FHLB of San Francisco line of credit
was approximately $129.9 million and the Company had $10.0 million in
outstanding advances from the FHLB, $14.5 million in other borrowings and
$105.1 million of letters of credit from the FHLB, which secure the Company's
obligations under its own LOCs and are counted against the Company's FHLB
borrowing capacity. The Company anticipates that its FHLB line of credit will
be increased from 15% to 25% of total assets upon receipt of the net proceeds
from this Offering. This increase will provide additional line of credit and
borrowing capacity of $85.8 million based on total assets at March 31, 1996.
The other borrowings consist of a note payable related to certain Loma Linda
Housing Revenue Bonds in the amount of $3.7 million and notes payable related
to other revenue bonds in the amount of $10.8 million.
68
The following table sets forth certain information regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:
BORROWED FUNDS
AT OR FOR AT OR FOR THE YEAR ENDED
THE THREE DECEMBER 31,
MONTHS ENDED ----------------------------
MARCH 31, 1996 1995 1994 1993
-------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
FHLB ADVANCES:
Average balance outstanding....... $10,000 $ 32,260 $ 20,562 $ 6,036
Maximum amount outstanding at any
month-end during the period...... 10,000 60,000 60,000 5,000
Balance outstanding at end of pe-
riod............................. 10,000 10,000 60,000 5,000
Weighted average interest rate
during the period................ 7.27% 7.22% 6.30% 7.33%
Weighted average interest rate at
end of period.................... 7.27 7.27 6.20 7.93
OTHER BORROWINGS:
Average balance outstanding....... $18,038 $ 21,992 $ 7,689 $ 3,845
Maximum amount outstanding at any
month-end during the period...... 21,133 23,740 20,085 3,845
Balance outstanding at end of pe-
riod............................. 14,534 21,133 20,085 3,845
Weighted average interest rate
during the period................ 4.31% 4.91% 6.88% 8.61%
Weighted average interest rate at
end of period.................... 4.55 5.01 6.13 7.36
SUBSIDIARY ACTIVITIES
The Company has three wholly-owned subsidiary corporations through the Bank:
REDFED, Inc. ("RFI"); RedFed Escrow, Inc. ("REI") and Redlands Financial
Services, Inc. ("RFSI"). RFI is currently engaged, on an agency basis, in the
sale of insurance and the purchase and sale of securities, primarily for the
Company's customers and other members of the communities served by the
Company. REI formerly engaged in providing escrow services, primarily to the
Company's customers and other members of the communities served by the
Company, and ceased operations in November 1995. RFSI was formerly engaged in
real estate development activities, has no development currently in process
and is selling its remaining real estate.
COMPETITION
The Company faces significant competition both in making loans and in
attracting deposits. The Company's competitors are the financial institutions
operating in its primary market area, many of which are significantly larger
and have greater financial resources than the Company. The Company's
competition for loans comes principally from commercial banks, other savings
institutions, mortgage banking companies, insurance companies and credit
unions. The Company competes for loans on the basis of mortgage interest
rates, rate adjustment provisions, origination fees and quality of service to
borrowers, home builders and real estate agents. Its most direct competition
for deposits has historically come from other savings institutions and
commercial banks. The Company competes for deposits by striving to provide a
higher quality of service to its customers through its community-oriented
branches and customer service focus. In addition, the Company faces increasing
competition for deposits from non-bank institutions such as brokerage firms
and insurance companies in such areas as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on
the interstate operations of financial institutions.
PERSONNEL
As of March 31, 1996, the Company and its subsidiaries had 275 full time
equivalent employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees
to be good.
69
PROPERTIES
The Company owns its principal office building in Redlands, California,
along with 13 other branch offices. The Company leases the land on two of
these branches, one through 2007 and the other through 2013. In June 1995 the
Company consolidated a branch in San Bernardino with an existing branch
located a mile away. The Company leases its three loan origination offices for
periods through 1996. The Company believes that the Company's current branch
network is adequate to meet the present and immediately foreseeable needs of
the Company.
LEGAL PROCEEDINGS
The Bank is a named defendant in two wrongful termination lawsuits filed in
the Superior Court of the State of California for San Bernardino County by two
former senior officers whose positions were eliminated in a May 1995 reduction
in force. The first lawsuit, which was filed by Maurice A. Calderon on October
24, 1995, alleges that the plaintiff had an oral employment agreement with the
Bank which was breached by the plaintiff's demotion and subsequent termination
and further alleges that such demotion and termination was a result of age
discrimination by the Bank. The second lawsuit, which was filed by Ruth
Mariani on March 25, 1996, also alleges that the plaintiff had an oral
employment agreement with the Bank which was breached by the plaintiff's
termination and that such termination was a result of age discrimination. Both
lawsuits seek an unspecified amount of damages. The Bank has denied any
liability, and has engaged outside counsel to defend against the actions.
The Bank is also a named defendant in a lawsuit filed on January 9, 1996 in
the Superior Court of the State of California for San Bernardino County by
Developers Insurance Company, a bonding company, which alleges that the Bank
is bound to reimburse it for certain sums paid by the bonding company to
complete a construction project formerly financed by the Bank. The lawsuit
seeks an unspecified amount of damages. The Bank has not yet been formally
served, but intends to dispute the claim, and has engaged outside counsel to
defend against the action.
The Company is not involved in any other material pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business. Such other routine legal proceedings in the aggregate are believed
by management to be immaterial to the Company.
70
REGULATION AND SUPERVISION
GENERAL
The Company is registered with the OTS as a savings and loan holding company
and is subject to regulation and examination as such by the OTS. The Bank is a
federally chartered savings bank, is a member of the FHLB System and its
deposits are insured through the SAIF managed by the FDIC. It is subject to
examination and regulation by the OTS with respect to most of its business
activities, including, among other things, capital standards, general
investment authority, deposit taking and borrowing authority, mergers,
establishment of branch offices, and permitted subsidiary investments and
activities. The OTS's operations, including examination activities, are funded
by assessments levied on its regulated institutions.
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,
truth in lending and other consumer protection requirements and certain other
matters. Financial institutions, including the Bank, 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 the Company
and its subsidiaries and the effects thereof set forth below and elsewhere
herein do not purport to be a complete description of such statutes and
regulations and their effects on the Company, the Bank and the Company's other
subsidiaries, and also do not purport to identify every statute and regulation
that may apply to the Company, the Bank and the Company's other subsidiaries.
The OTS has primary 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 "institution affiliated parties." In general,
enforcement actions may be initiated for violations of specific laws and
regulations and for unsafe or unsound conditions or practices.
The FDIC 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 giving notice to the OTS.
The FDIC may also terminate the deposit insurance of any insured depository
institution 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. In
addition, FDIC regulations provide that any insured institution that falls
below a 2% minimum leverage ratio will be subject to FDIC deposit insurance
termination proceedings unless it has submitted, and is in compliance with, a
capital plan with its primary federal regulator and 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 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.
71
The FDIC has the authority to set the respective deposit insurance premiums
of the SAIF and of the BIF at levels it determines to be appropriate to
maintain the SAIF or BIF reserves at their designated reserve ratios or to
fund the administration of the FDIC. In addition, the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") authorizes emergency special
assessments applicable to BIF and SAIF members. The OTS Director is also
authorized to impose assessments on savings institutions to fund certain of
the costs of administration of the OTS.
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 to the institution's
financial condition and the risk posed to the insurance funds. Each of the
nine resulting risk category subgroups of institutions is assigned an annual
deposit insurance premium assessment rate which currently ranges from 0.23% to
0.31% for SAIF member institutions, as compared with the uniform 0.23% rate
that had previously been in effect. The Bank's current assessment rate is
0.30%.
Prior to 1995, the risk-based deposit insurance premiums paid by savings
institutions insured by the SAIF and by commercial banks and other
institutions insured by the BIF which, together with earnings on investments,
were the principal funding sources for the respective insurance funds, had
been assessed based on identical rate schedules having the above range of
premium assessment rates (that is, from 0.23% to 0.31%). The SAIF and the BIF
are each required by statute to attain and thereafter to maintain a reserve to
deposits ratio of 1.25%. The BIF has reached the required reserve level,
whereas, based upon projections by the FDIC, the SAIF is not expected to reach
its targeted ratio until at least the year 2002, or later. This disparity
arises from the BIF's greater premium revenues and the requirement that a
substantial portion of the SAIF premiums be used to pay the interest on bonds
(commonly referred to as the "FICO Bonds") that were issued by a specially
created federal corporation for the purpose of funding the resolution of
failed thrift institutions. In November 1995, the FDIC reduced its deposit
insurance premiums for BIF member institutions to a range of $0 (subject to a
statutory minimum of $2,000 in annual assessments) to $0.27 per $100 of
deposits (0.27%), with an historical low average of approximately $0.0043 per
$100 of deposits being paid by BIF member institutions, effective beginning
with the semi-annual period commencing January 1, 1996. The FDIC maintained
the current range of deposit insurance premiums assessable against SAIF member
institutions at $0.23 to $0.31 per $100 of deposits.
The current deposit rate premium disparity between BIF-insured institutions
and SAIF-insured institutions resulting from the recently implemented BIF
premium reduction places SAIF-insured institutions at a competitive
disadvantage due to higher premium costs and may worsen the financial
condition of the SAIF by leading to a shrinkage in its deposit base. A number
of proposals for assisting the SAIF in attaining its required reserve level,
and thereby permitting SAIF deposit insurance premiums to be reduced to levels
at or near those paid by BIF-insured institutions, have been under discussion
in Congress and among various of the affected parties and relevant government
agencies. Congress proposed, as part of the budget reconciliation bill
submitted to and vetoed by the President in late 1995, a one-time, special
assessment on all savings institutions to recapitalize the SAIF. The proposal
would have required SAIF-insured institutions to pay a one-time special
assessment on January 1, 1996 (estimated to be between approximately 80 and 90
basis points on deposits as of March 31, 1995) and would have provided for a
pro rata sharing by all federally insured institutions of the obligation, now
borne entirely by SAIF-insured institutions, to pay the interest on the FICO
Bonds. Subsequent efforts to enact such legislation have not been successful
to date. If the proposed legislation were ultimately to become law, the
special assessment would be reported in the Company's consolidated statement
of operations in the quarter during which the relevant legislation is finally
enacted. Also included in the budget reconciliation bill were provisions that
would eliminate the deduction for additions to tax bad debt reserves available
to qualifying thrift institutions under existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). See "Taxation--Federal
Taxation."
The Company is not able to predict whether or in what form any of the
proposals that have been discussed will be adopted or the effect that such
adoption will have on the Company's operations. Management believes that
certain of the provisions of such proposed legislation could benefit the
Company and its stockholders through eliminating one source of financial
uncertainty facing thrift institutions in the current environment and by
72
providing greater operating flexibility to pursue its business strategies. A
significant increase in the SAIF insurance premiums or a significant surcharge
to recapitalize the SAIF, however, would likely have an adverse effect on the
operating expenses and results of operations of the Bank and the Company and
would reduce the Bank's regulatory capital on at least a temporary basis.
CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the capital regulations of the OTS promulgated thereunder (the
"Capital Regulations") require savings institutions to meet three capital
requirements: a "leverage limit" (also referred to as the "core capital
requirement"), a "tangible capital requirement" and a "risk-based capital
requirement." 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, certain noncumulative perpetual
preferred stock and any related surplus and minority interests in the equity
accounts of fully consolidated subsidiaries. The amount of an institution's
core capital is, in general, calculated in accordance with generally accepted
accounting principles ("GAAP"), with certain exceptions. Among other
exceptions, adjustments to an institution's GAAP equity accounts that are
required pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," to reflect
changes in the market value of certain securities held by the institution that
are categorized as "available-for-sale" are not included in the calculation of
core capital for regulatory capital purposes. Intangible assets must be
deducted from core capital, with certain exceptions and limitations, including
purchased and originated mortgage servicing rights and certain other
intangibles, which may be included on a limited basis. "Originated mortgage
servicing rights" consist of the servicing rights with respect to loans that
are originated and then sold by the institution or that are categorized by it
as held for sale.
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 and originated 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, including 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 GVAs. Such GVAs can generally be included up to 1.25% of risk-
weighted assets. At March 31, 1996, $8.3 million of the Bank's GVA was
included in supplementary capital. A savings institution's supplementary
capital may be used to satisfy the risk-based capital requirement only to the
extent of that institution's core capital.
The OTS, the FDIC and other federal banking agencies 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 or credit, or
risks arising from nontraditional activities, or (ii) that the institution is
not adequately managing these risks. For this purpose, however, the agencies
have stated that, in
73
view of the statutory requirements relating to permitted lending and
investment activities of savings institutions, the general concentration by
such institutions in real estate lending activities would not, by itself, be
deemed to constitute an exposure to concentration of credit risk that would
require greater capital levels.
The OTS has adopted an amendment to its Capital Regulations that, upon
implementation, will require each OTS-regulated institution to maintain
additional risk-based capital equal to half of the amount by which the decline
in its "net portfolio value" that would result from a hypothetical 200 basis
point change (up or down, depending on which would result in the greater
reduction in net portfolio value) in interest rates on its assets and
liabilities exceeds 2% of the estimated "economic value" of its assets. In
computing its compliance with the risk based capital standards, that dollar
amount is subtracted from an institution's total capital. The OTS has stated
that implementation of this amendment to its regulations will require
additional capital to be maintained only by institutions having "above normal"
interest rate risk. An institution's "net portfolio value" is defined for this
purpose as the difference between the aggregate expected future cash inflows
from an institution's assets and the aggregate expected future cash outflows
on its liabilities, plus the net expected cash inflows from existing off-
balance sheet contracts, each discounted to present value. The estimated
"economic value" of an institution's assets is defined as the discounted
present value of the estimated future cash flows from its assets. The OTS has
deferred implementation of the interest rate risk amendment. Had it been in
effect at March 31, 1996, this provision would not have resulted in any
required adjustment to the Bank's regulatory capital at that date.
The following table presents information regarding actual and proforma
regulatory capital at March 31, 1996.
REGULATORY CAPITAL
AT MARCH 31, 1996 AT MARCH 31, 1996
-------------------- --------------------
PROFORMA(1)(2)
PERCENT OF PERCENT OF
AMOUNT ASSETS(3)(4) AMOUNT ASSETS(3)(4)
------- ------------ ------- ------------
(DOLLARS IN THOUSANDS)
REGULATORY CAPITAL
Tangible Capital:
Capital level....................... $67,431 7.74% $46,827 5.51%
Requirement......................... 13,068 1.50 12,759 1.50
------- ----- ------- ----
Excess.............................. $54,363 6.24% $34,068 4.01%
======= ===== ======= ====
Core Capital:
Capital level....................... $67,431 7.74% $46,827 5.51%
Requirement......................... 26,136 3.00 25,517 3.00
------- ----- ------- ----
Excess.............................. $41,295 4.74% $21,310 2.51%
======= ===== ======= ====
Risk-Based Capital:
Capital level....................... $75,754 11.40% $55,150 8.39%
Requirement......................... 53,156 8.00 52,586 8.00
------- ----- ------- ----
Excess.............................. $22,598 3.40% $ 2,564 0.39%
======= ===== ======= ====
- --------
(1) A well capitalized institution under OTS regulations must have a risk-
based capital ratio of 10% or greater and a leverage (core capital) ratio
of 5% or greater, as well as a Tier 1 risk-based capital ratio of 6% or
greater. See "Regulation and Supervision--Capital Requirements."
(2) Assumes the issuance of 2,600,000 shares of Common Stock in the Offering
at an assumed offering price of $9.00 per share, after deducting the
underwriting discount and estimated offering expenses payable by the
Company and the disposition of the proceeds thereof. Does not include the
effect of possible special assessments on SAIF-insured institutions. See
"Use of Proceeds."
(3) Tangible capital levels are shown as a percentage of tangible assets and
core capital is shown as a percentage of total adjusted assets. Risk-based
capital levels are shown as a percentage of risk-weighted assets.
(4) Requirements under OTS regulations for an "adequately capitalized"
institution at March 31, 1996 were 4.00% for core and Tier 1 risk-based
capital and 8.00% for risk-based capital.
74
The Federal Deposit Insurance Act contains prompt corrective action ("PCA")
provisions pursuant to which banks and savings institutions are to be
classified into one of five categories which are 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: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10.00% or greater, has a Tier 1 risk-based
capital ratio (Tier 1 capital to total risk-weighted assets) of 6.00% or
greater, has a leverage ratio (also known as core capital ratio) of 5.00% or
greater and is not subject to any written capital order or directive to meet
and maintain a specific capital level or any capital measure; (ii) an
institution is "adequately capitalized" if it has a total risk-based capital
ratio of 8.00% or greater, has a Tier 1 risk-based capital ratio of 4.00% or
greater and has a leverage ratio of 4.00% or greater (3.00% for certain highly
rated institutions); (iii) an institution is "undercapitalized" if it has a
total risk-based capital ratio of less than 8.00% or has either a Tier 1 risk-
based or a leverage ratio that is less than 4.00%; (iv) an institution is
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.00%, or has either a Tier 1 risk-based or leverage ratio
that is less than 3.00%; and (v) an institution is "critically
undercapitalized" if its "tangible equity" (defined in the PCA regulations to
mean core capital plus cumulative perpetual preferred stock) is equal to or
less than 2.00% of its total assets. 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 March 31, 1996, the Bank was
an adequately 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, restrictions 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. In addition, subject
to a limited exception, the OTS is required to appoint a receiver or
conservator for an institution that is critically undercapitalized.
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 OTS has recently amended
its loan to one borrower limitation (following similar
75
amendment of the corresponding regulation for national banks), 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 March 31, 1996, the maximum amount which the Company could lend to
any one borrower (including related persons and entities) under the current
loan to one borrower limit was $9.7 million. At March 31, 1996, the largest
aggregate amount of loans which the Company had outstanding to any one
borrower consisted of four loans in the amount of $16.3 million. All loans to
this borrower were current. The loans were made prior to the 1989 amendment to
the Home Owners Loan Act that reduced the loans to one borrower limitations
for savings institutions, were within the Company's loan to one borrower
limitations when made and therefore are grandfathered under applicable OTS
interpretations.
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 outstanding FHLB advances (borrowings).
Each FHLB is required to transfer a certain amount of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"), the
government entity established to raise funds to resolve troubled savings
institution cases, to fund the principal and a portion of the interest on the
REFCORP bonds and certain other obligations. In addition, each FHLB must
transfer a percentage of its annual net earnings to a federal affordable
housing program. That amount increased from 5% of the annual net earnings of
the FHLB in 1990 to at least 10% of its annual net earnings in 1995 and
subsequent years. As a result of these requirements, which began in 1989, the
earnings of the FHLB of San Francisco were reduced and the Bank received
reduced dividends on its FHLB of San Francisco stock as compared with prior
periods. The Bank recorded dividend income on its FHLB of San Francisco stock
in the amounts of $413,000 and $312,000 for the years ended December 31, 1995
and 1994, respectively. If dividends are further reduced, or interest on
future FHLB advances increased, the Bank's net interest income would likely
also be reduced. Further, there can be no assurance that the impact of recent
proposed legislation on the FHLB would not cause a decrease in the value of
the FHLB stock held by the Bank.
LIQUIDITY
Federal regulations currently require savings institutions to maintain, for
each calendar month, an average daily balance of liquid assets (including
cash, certain time deposits, bankers' acceptances, and specified United States
government, state or Federal agency obligations) equal to at least 5% of the
average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. 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. Federal regulations
also require each savings institution to maintain, for each calendar month, an
average daily balance of short-term liquid assets (generally those having
maturities of 12 months or less) equal to at least 1% of the average daily
balance of its net withdrawable accounts plus short-term borrowings during the
preceding calendar month. Monetary penalties may be imposed for failure to
meet liquidity ratio requirements. For the calculation period including March
31, 1996, the total liquidity and total short-term liquidity ratios of the
Bank were 7.91% and 4.87%, respectively, which exceeded the total
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
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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 examination.
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 maintain on an
averaging basis 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 conversion of the institution to a bank
charter or operation under certain restrictions including: (i) limitations on
new investments and activities; (ii) imposition of branching restrictions;
(iii) loss of FHLB borrowing privileges; and (iv) limitations on the payment
of dividends. At March 31, 1996, the Bank was in compliance with its QTL
requirements.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
As a savings and loan holding company, the Company is subject to certain
restrictions with respect to its activities and investments. Among other
things, the Company is generally prohibited, either directly or indirectly,
from acquiring more than 5% of the voting shares of any savings institution or
savings and loan holding company which is not a subsidiary of the Company.
Prior OTS approval is required for the Company to acquire an additional
savings institution as a subsidiary.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Company or the Bank. 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.
The Company is considered an "affiliate" of the Bank for regulatory
purposes. Savings institutions are subject to the rules relating to
transactions with affiliates and loans to insiders generally applicable to
commercial banks that are members of the Federal Reserve System and certain
additional limitations. In addition, savings institutions are generally
prohibited from extending credit to an affiliate, other than the institution's
subsidiaries, unless the affiliate is engaged only in activities which the
Federal Reserve Board has determined to be permissible for bank holding
companies and which the OTS has not disapproved.
A savings and loan holding company that controls only one savings
institution is 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 restrictions on the conduct of unrelated business activities that are
applicable to bank holding companies under the Bank Holding Company Act.
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") that engage in certain
prescribed activities 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.
77
RESTRICTIONS 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 establish a tiered system of regulation with the
greatest flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions during a calendar year, without prior
OTS approval, 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 meets its current minimum capital
requirements but not its fully phased-in capital requirements may make capital
distributions, without prior OTS approval, of up to 75% of its net income over
the most recent four-quarter period, as reduced by the amounts of any capital
distributions previously made during such 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, or that the OTS
has notified as needing more than normal supervision, 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 has proposed an amendment to its capital distribution regulation to
conform to its PCA regulations by replacing the current "tiered" approach
summarized above with one that would allow institutions to make capital
distributions that would not result in the institution falling below the PCA
"adequately capitalized" capital category. Under this proposal, an institution
would be able to make a capital distribution (i) without notice or
application, if the institution is not held by a savings and loan holding
company and received a sufficiently favorable regulatory rating of 1 or 2,
(ii) by providing notice to the OTS if, after the capital distribution, the
institution would remain at least "adequately capitalized," or (iii) by
submitting an application to the OTS.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including those
occurring in connection with corporation reorganizations.
LENDING STANDARDS
The OTS and the other federal banking agencies have jointly adopted uniform
rules on real estate lending and the related Interagency Guidelines for Real
Estate Lending Policies (the "Guidelines"). The uniform rules require that
institutions adopt and maintain comprehensive written policies for real estate
lending. The policies must reflect consideration of the 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 Guidelines
state that such ratio limits established by individual institutions' boards of
directors generally 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 with a 90% or greater 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.
78
TAXATION
FEDERAL TAXATION
General. The Company and the Bank report their income on a calendar year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
Company and its subsidiaries file federal income tax returns on a consolidated
basis. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company.
Tax Bad Debt Reserves. Savings institutions such as the Bank which meet
certain definitional tests primarily relating to their assets and the nature
of their business ("qualifying thrifts") are permitted to establish a reserve
for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans" (generally
loans secured by certain interests in real property), may be computed using a
percentage based on the Bank's actual loss experience (the "experience
method"), or a percentage equal to eight percent of the Bank's taxable income
before such deduction (the "percentage of taxable income method"). Use of the
percentage of taxable income method of calculating its deductible addition to
its bad debt loss reserve has the effect of reducing the marginal rate of
federal tax on a qualifying thrift's taxable income from 35% to 32.2%,
exclusive of any alternative minimum or environmental tax. The Bank's
deduction with respect to non-qualifying loans must be computed under the
experience method which allows a deduction based on the Bank's actual loss
experience over a period of several years. Each year the Bank selects the most
favorable way to calculate the deduction attributable to an addition to the
bad debt reserve.
The Bank presently satisfies the qualifying thrift definitional tests. If
the Bank failed to satisfy such tests in any taxable year, it would be unable
to make additions to its bad debt reserve. Instead, the Bank would be required
to deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions previously taken. Among other
things, the qualifying thrift definitional test requires the Bank to hold at
least 60% of its assets as "qualifying assets." Qualifying assets generally
include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by the Bank
in the conduct of its banking business. The Bank's ratio of qualifying assets
to total assets exceeded 60% through December 31, 1995. Although there can be
no assurance that the Bank will satisfy the 60% test in the future, management
believes that this level of qualifying assets can be maintained by the Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. The Bank's balance of its reserve for losses on qualifying real
property loans was approximately $12.3 million as of December 31, 1995, less
than 6% of its qualifying real property loans outstanding. Also, if the
qualifying thrift uses the percentage of taxable income method, then the
qualifying thrift's aggregate addition to its reserve for losses on qualifying
real property loans cannot, when added to the addition to the reserve for
losses on nonqualifying loans, exceed the amount by which (i) 12% of the
amount that the total deposits or withdrawable accounts of depositors of the
qualifying thrift at the close of the taxable year exceeded (ii) the sum of
the qualifying thrift's surplus, undivided profits and reserves at the
beginning of such year. As of December 31, 1995, 12% of the Bank's deposits
and withdrawable accounts, less its surplus, undivided profits and reserves,
exceeds by approximately $37.9 million the balance of its reserve for losses
on qualifying real property loans. Accordingly, the advantage to the Bank of
using the percentage of taxable income method is limited.
Pursuant to H.R. 3448, the Small Business Job Protection Act of 1996, which
has been passed by both houses of Congress and which is awaiting the signature
of the President (the "Pending Legislation"), the above-described bad debt
deduction rules available to thrift institutions such as the Bank would be
repealed. If the
79
Pending Legislation becomes law, the Bank will be required to change its
method of accounting for bad debts from the reserve method formerly permitted
under section 593 of the Code to the "specific charge-off" method. Under the
specific charge-off method, which is governed by section 166 of the Code and
the regulations thereunder, tax deductions may be taken for bad debts only if
loans become wholly or partially worthless. Although the Pending Legislation
generally would require that qualifying thrifts recapture (i.e., include in
taxable income) over a six-year period a portion of their existing bad debt
reserves equal to their "applicable excess reserves," the Bank will not have
applicable excess reserves subject to recapture. However, the Bank's tax bad
debt reserve balance of approximately $12.3 million (as of December 31, 1995)
will, in future years, be subject to recapture in whole or in part upon the
occurrence of certain events, such as a distribution to shareholders in excess
of the Bank's current and accumulated earnings and profits, a redemption of
shares, or upon partial or complete liquidation of the Bank. The Bank does not
intend to make distributions to shareholders that would result in recapture of
any portion of its bad debt reserves.
Distributions. To the extent that the Bank makes "nondividend distributions"
to the Company such distributions will generally be considered to be made (i)
from the Bank's reserve for losses on qualifying real property loans, under
present law, to the extent the reserve for such losses exceeds the amount that
would have been allowed under the experience method; and then to be made (ii)
from the supplemental reserve for losses on loans ("Excess Distributions"),
and an amount based on the amount distributed will be included in the Bank's
taxable income. Nondividend distributions include distributions in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's bad debt reserve. Thus, any
distributions from the Bank that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes may
create a tax liability. The tax treatment of non-dividend distributions under
the Pending Legislation is the same as under existing law, except that
recapture of reserves for qualifying real property loans is required without
regard to the portion which would have been allowed under the experience
method.
The amount of additional taxable income created from an excess distribution
is an amount that when reduced by the tax attributable to the income is equal
to the amount of the distribution. Thus, if certain portions of the Bank's
accumulated bad debt reserve are used for any purpose other than to absorb
qualified bad debt loans, such as for the payment of dividends or other
distributions with respect to the Bank's capital stock (including
distributions upon redemption or liquidation), approximately one and one-half
times the amount so used would be includable in gross income for federal
income tax purposes, assuming a 35% corporate income tax rate (exclusive of
state taxes). The Bank does not intend to make distributions that would result
in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under an experience method is treated
as a preference item for purposes of computing the AMTI. Only 90% of AMTI can
be offset by net operating losses. AMTI is increased by an amount equal to 75%
of the amount by which a corporation's adjusted current earnings and profits
as calculated for federal income tax purposes exceeds its AMTI (determined
without regard to this preference and prior to reduction for net operating
losses).
NOLs. At December 31, 1995, the Company had net operating losses aggregating
approximately $14.3 million for federal income tax purposes and approximately
$9.3 million for California franchise tax purposes available to offset taxable
income in future tax years. The federal NOLs would expire, if unutilized, in
taxable years 2009 and 2010, and the California NOLs would expire in 1999 and
2000. In addition, section 382 of the Code provides in general that if a
corporation undergoes an "ownership change" the amount of taxable income that
the corporation may offset after the date of such change with NOLs and certain
"built-in" losses existing at the date of such ownership change will be
subject to an annual limitation that is calculated as the
80
product of the fair market value of the corporation's equity on the date of the
change and a long-term tax exempt bond rate of return that is published monthly
by the IRS. In general, an "ownership change" is deemed to occur with respect
to a corporation if holders of 5% or more of the capital stock of the
corporation increase their aggregate percentage ownership of the corporation's
stock by more than 50 percentage points over the lowest percentage of such
stock owned by such holders in the aggregate at any time during a prescribed
three-year testing period. For purposes of this test, an issuance of new shares
of stock is, to the extent provided in regulations, considered to create a new
5% shareholder even if no person acquiring the stock in fact owns as much as 5%
of the issuer's stock. While the regulations of the IRS relating to the making
of such determinations are complex, the Company believes that the offering of
Common Stock made hereby will not cause an ownership change with respect to the
Company for purposes of section 382, but may increase the possibility that
future acquisitions of shares by 5% or greater holders, or future issuances of
shares by the Company, could result in such an ownership change.
STATE AND LOCAL TAXATION
As a savings and loan holding company filing California franchise tax returns
on a combined basis with its subsidiaries, the Company is subject to the
California franchise tax at the rate applicable to "financial corporations."
The applicable tax rate is the rate on general corporations (currently 9.3%)
plus 2%. For income years beginning on or after January 1, 1997, the tax rate
on general corporations will be 8.84%. Under California regulations, bad debt
deductions are available in computing California franchise taxes using a three
or six year average loss experience method.
California does not permit net operating loss carrybacks to prior tax years,
but does permit such losses to be carried forward to future tax years. The
carryforward period is generally five years and generally only 50% of net
operating losses may be deducted. Additionally, California tax law follows the
federal tax law which, in the event of an "ownership change" of the Company,
would apply an annual limitation to the use of net operating loss carryovers
and "built-in" losses.
81
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Company and the Bank:
DIRECTOR DIRECTOR TERM
NAME AGE(1) POSITIONS HELD WITH COMPANY AND THE BANK SINCE(2) EXPIRES
- ---- ------ ---------------------------------------- -------- -------------
Stanley C. Weisser...... 54 Director of the Company and the Bank 1986 1999
William T. Hardy, Jr. .. 52 Director of the Company and the Bank 1990 1999
Anne Bacon.............. 51 Director, President and Chief Executive 1995 1998
Officer of the Company and the Bank
William C. Buster, Jr. . 59 Director of the Company and the Bank 1989 1998
John D. McAlearney, Jr.. 51 Chairman of the Board of Directors of 1989 1998
the Company and the Bank
Robert G. Wiens......... 60 Director of the Company and the Bank 1986 1997
Douglas R. McAdam....... 51 Director of the Company and the Bank 1987 1997
Henry Van Mouwerik...... 67 Director of the Company and the Bank 1966 1997
- --------
(1) As of March 31, 1996.
(2) Includes years of service as a director of the Bank.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.
NAME AGE(1) POSITIONS HELD WITH COMPANY AND THE BANK
---- ------ ----------------------------------------
D. Brian Reider......... 45 Vice President, General Counsel and Assistant Secretary of the
Company; Executive Vice President, Chief Operating Officer and
General Counsel of the Bank
David C. Gray........... 53 Treasurer and Chief Financial Officer of the Company; Senior
Vice President and Chief Financial Officer of the Bank
Norman E. Bellefeuille.. 43 Senior Vice President and Chief Loan Officer of the Bank
Carol A. Snodgress...... 41 Vice President/Investor Relations of the Company; Senior Vice
President/Retail Banking of the Bank
Daniel L. Goehring...... 44 Senior Vice President and Chief Administrative Officer of the
Bank
- --------
(1) As of March 31, 1996.
Officers of the Company and the Bank are elected annually by the Board of
Directors of the Company and the Bank, respectively.
BIOGRAPHICAL INFORMATION
Directors
Anne Bacon became the President, Chief Executive Officer and a Director of
the Company and the Bank on April 3, 1995. Ms. Bacon is the former President
and Chief Executive Officer and a former Director of First Western Financial
Corporation ("First Western"), the holding company for First Western Bank,
f.s.b., a Las Vegas, Nevada-based thrift institution with over $750 million in
assets. From 1971 to 1985, Ms. Bacon held positions of increasing
responsibility with Downey Savings and Loan Association, a Newport Beach,
California-based thrift which then had over $2 billion in assets, last holding
the position of Senior Vice President. In 1985,
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Ms. Bacon became the Chief Operating Officer of Butterfield Savings and Loan
Association ("Butterfield"), Santa Ana, California, which had $815 million in
assets, and President and Chief Executive Officer in 1986. Ms. Bacon managed
Butterfield for the FSLIC until its sale in 1988. Subsequently, the FSLIC
appointed Ms. Bacon President of Westco Savings Bank, Culver City, California,
pending its FDIC conservatorship. Prior to joining First Western, Ms. Bacon
spent 16 months as President, Chief Executive Officer and Director of Pioneer
Savings & Loan Association, FSLA, a small Newport Beach, California-based
thrift institution.
Robert G. Wiens has been a Director of the Bank since 1986. Mr. Wiens is the
former President, Chief Executive Officer and Chairman of the Board of
Directors of the Company and the Bank and retired on March 31, 1995 for health
reasons.
Douglas R. McAdam has been a Director of the Bank since 1987. Mr. McAdam is
a certified public accountant and an Officer and Director of Soren McAdam
Bartells, Certified Public Accountants, Inc.
Henry H. Van Mouwerik has been a Director of the Bank since 1966. Mr. Van
Mouwerik is self-employed in managing and developing family-owned properties.
Stanley C. Weisser has been a Director of the Bank since 1986. Mr. Weisser
is the President, Chief Executive Officer and a Director of Network
Pharmaceuticals, Inc., which is engaged in the retail pharmacy business.
William C. Buster, Jr. has been a Director of the Bank since 1989. Mr.
Buster is the president of Wm. C. Buster, Inc., a general contracting firm,
and Vespar Development Co., a residential and commercial real estate
development company.
John D. McAlearney, Jr. has been a Director of the Bank since 1989 and
Chairman of the Board since 1995. Mr. McAlearney is an attorney, officer and a
Director of McPeters McAlearney Shimoff & Hatt, a Professional Corporation.
William T. Hardy, Jr. has been a Director of the Bank since 1990. Mr. Hardy
is the President of Renown LLC, a company which engages in the international
exporting business.
Executive Officers Who Are Not Directors
David C. Gray first joined the Bank in 1977 as Treasurer and Controller and
became Senior Vice President and Chief Financial Officer in 1981. He is a
certified public accountant.
D. Brian Reider was a partner with Reynolds, Reider & Bawden prior to
joining the Bank as Senior Vice President and General Counsel in 1989. Mr.
Reider became an Executive Vice President and the Chief Operating Officer of
the Bank in October 1994. Mr. Reider is also the President of REI and the
Treasurer of RFI and RFSI.
Norman E. Bellefeuille first joined the Bank in 1974 and became the Senior
Vice President--Retail Lending in 1991. Mr. Bellefeuille became the Chief Loan
Officer of the Bank in November 1994.
Carol A. Snodgress first joined the Bank in 1977 and became the Senior Vice
President--Retail Banking in 1991. Ms. Snodgress is also the Senior Vice
President of RFI.
Daniel L. Goehring first joined the Bank in 1972, and was promoted to Senior
Vice President and Chief Administrative Officer in 1994. Mr. Goehring is also
the President of RFI.
83
DIRECTORS' COMPENSATION
Directors' Fees. Directors do not receive any fees for serving on the
Company's Board of Directors. Non-employee directors of the Bank receive an
annual retainer fee of $34,200 each, and do not receive any additional fees
for attending meetings. The Chairman of the Board receives additional fees of
$1,000 per month. For months in which the Vice Chairman presides over Board of
Directors meetings, he receives an additional $250. The fees are paid by the
Bank.
Directors' Retirement Plan. The Bank maintains the Redlands Federal Bank
Outside Directors Retirement Plan (the "Directors' Retirement Plan") for non-
employee directors with six or more years of service with the Bank. The
Directors' Retirement Plan provides that retiring Directors are eligible to
receive an annual benefit equal to 100% of the retiring Directors' retainer
fee in the last year of service which shall continue to be paid annually for a
number of years, up to 15, equal to the number of years the participant served
as an outside Director. In the event of a participant's death prior to payment
of all benefits due to a participant under the Directors' Retirement Plan, the
remaining benefits are payable to the beneficiary or beneficiaries designated
by the participant or, if no such designation has been made, to the estate of
the participant. An irrevocable grantor trust is maintained to hold funds for
the payment of benefits under the Directors' Retirement Plan and under a
deferred fee agreement with one Director. An unrelated trustee has the
authority to invest the trust's assets in the Company's Common Stock. As of
March 29, 1996, the trustee held 28,400 shares, or 0.06% of the Company's
issued shares of Common Stock, for the benefit of participants in the
Directors' Retirement Plan. Effective June 30, 1995, the Company elected to
partially freeze the Directors' Retirement Plan.
Directors' Option Plan. Under the RedFed Bancorp Inc. 1994 Option Plan for
Outside Directors (the "Directors' Option Plan"), each outside Director has
been granted options to purchase 17,480 shares of Common Stock at an exercise
price of $8.00 per share, which was the fair market value of the shares on the
date of grant (April 7, 1994). On each anniversary of the effective date of
the Directors' Option Plan and to the extent options for shares are available
for grants under the Directors' Option Plan, each subsequently elected outside
director will be granted non-statutory stock options to purchase a number of
shares of Common Stock equal to 2,185 shares or options to purchase such
lesser number of shares as remain in the Directors' Option Plan. If options
for sufficient shares are not available to fulfill the grant of options to an
outside director, and thereafter options become available, such directors are
to receive options to purchase an amount of shares of Common Stock determined
by dividing pro rata among such directors the number of options available. The
exercise price of each option granted to subsequent directors will be equal to
the fair market value of the Common Stock on the date of the grant. All
options initially granted under the Directors' Option Plan become exercisable
in three equal installments commencing one year from the date of grant,
provided, however, that in the event of death, disability or retirement of the
participant or upon a change in control of the Company or the Bank, all
options previously granted would automatically become exercisable.
Directors' Retention and Recognition Plan. Under the Directors' Retention
and Recognition Plan (the "DRP"), each outside Director was awarded 4,283
restricted shares of Common Stock. Awards to directors began vesting in five
equal annual installments on April 7, 1995, the first anniversary of the
effective date of the award. Awards will be fully vested upon termination of
service as a Director due to death or disability of the Director, following a
change in the control of the Bank or the Company or the failure of the
Director to be reelected at any annual meeting of shareholders at which such
Director has been duly nominated for election, unless such Director continues
to serve as a consulting Director. In the event that a Director terminates
service with the Bank or the Company before his or her awards have been fully
vested, the Director's nonvested awards will be forfeited.
84
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table shows, for the fiscal years
ending December 31, 1995, 1994, and 1993, the cash compensation paid by the
Bank, as well as certain other compensation paid or accrued for those years,
to the Chief Executive Officer and those executive officers ("Named Executive
Officers") of the Company, who received salary and bonus in excess of $100,000
in 1995.
SUMMARY COMPENSATION TABLE
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING OTHER
SALARY COMPENSATION STOCK OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) AWARD(S)($) (#)(2) ($)(3)
- --------------------------- ---- --------- ------------ ----------- ------------ ------------
Anne Bacon (4).......... 1995 $ 203,506 -- $431,720(5) 75,000 --
President and Chief
Executive Officer
Robert G. Wiens (6)..... 1995 250,075 $26,504(1) -- -- $36,534
President, Chief Execu- 1994 239,825 -- 167,808(7) 69,920 5,344
tive Officer and 1993 234,125 -- -- -- --
Chairman of the Board
David C. Gray, CPA...... 1995 116,100 -- -- -- 7,655
Senior Vice President 1994 113,725 -- 65,728(7) 17,480 4,056
and Chief Financial 1993 107,400 -- -- -- --
Officer
D. Brian Reider......... 1995 134,200 -- -- -- 8,849
Executive Vice Presi- 1994 116,730 -- 51,960(7) 17,480 4,160
dent, Chief Operating 1993 105,850 -- -- -- --
Officer and General
Counsel
Norman E. Bellefeuille,
Jr..................... 1995 107,092 -- -- -- 7,067
Senior Vice President-- 1994 101,072 -- 65,728(7) 17,480 3,600
Chief Loan Officer 1993 87,640 -- -- -- --
- --------
(1) Includes an automobile valued at $25,762 provided to Mr. Wiens in 1995 as
part of his severance agreement.
(2) The options granted to Messrs. Gray, Reider, and Bellefeuille under the
Stock Option Plan become exercisable in five equal annual installments,
commencing on April 7, 1995. The options granted to Ms. Bacon under the
Incentive Plan become exercisable in five equal annual installments
commencing on April 25, 1996. The options granted to Mr. Wiens under the
Stock Option Plan became exercisable upon his retirement.
(3) Includes $26,642 contributed by the Bank under the Deferred Compensation
Plan to Mr. Wiens for fiscal 1995. Includes $9,892, $7,655, $8,849 and
$7,067 contributed by the Bank pursuant to the ESOP and allocated
respectively for the benefit of Messrs. Wiens, Gray, Reider and
Bellefeuille for fiscal 1995.
(4) Ms. Bacon was appointed President and Chief Executive Officer of the
Company and the Bank, effective April 3, 1995.
(5) Pursuant to the Incentive Plan, Ms. Bacon was awarded 43,000 performance
restricted stock awards which had a market value of $431,720 on the date
of grant. 12,600 shares have vested to date and 30,400 shares vest on
April 25, 2000, subject to the discretionary authority of the Board of
Directors to accelerate vesting, in whole or in part, based upon
performance. Under the Incentive Plan, when awards become vested and are
distributed, the recipient is also entitled to receive an amount equal to
accumulated dividends and any earnings thereon and all awards vest upon a
change in control. In the event of retirement, death or disability,
restricted awards will vest in proportion to the amount of the restricted
period that has then elapsed.
(6) Mr. Wiens retired from his position as President and Chief Executive
Officer of the Company and the Bank effective March 31, 1995.
(7) Pursuant to the Bank's Recognition and Retention Plan ("RRP"), Messrs.
Wiens, Gray, Bellefeuille and Reider were awarded 20,976, 8,216, 8,216 and
6,495 shares of Common Stock, respectively, in fiscal 1994, which had a
market value of $8.00 per share on the date of grant. Such awards vest in
five annual installments commencing on April 7, 1995, one year from the
date of grant. Under the RRP, when shares become vested and are
distributed, the recipient will also receive an amount equal to
accumulated dividends
85
and any earnings thereon and awards will be fully vested upon termination
of employment due to death, disability or following a change of control. If
a recipient terminates employment due to retirement, such awards will
continue to be earned in annual installments of 20% if the Compensation
Committee determines that such recipient is expected to continue to provide
valuable services to the Bank. At December 31, 1995, the shares held by
Messrs. Wiens, Gray, Bellefeuille and Reider had a market value of $10.125
per share.
EMPLOYMENT AGREEMENTS. The Bank and the Company have each entered into an
employment agreement with Ms. Bacon providing for a two-year term. Commencing
on the first anniversary date and continuing on each anniversary date
thereafter, the Board of Directors of the Bank and the Company may extend the
agreements for an additional year such that the remaining term shall be two
years, unless written notice of non-renewal is given by the Boards of
Directors after conducting a performance evaluation of Ms. Bacon. The
agreements provide for an annual base salary of $250,000, which will be
reviewed at least annually, participation in stock benefit plans and other
fringe benefits applicable to executive personnel. Payments to Ms. Bacon under
the Bank's employment agreement are guaranteed by the Company in the event
that payments or benefits are not paid by the Bank. The employment agreements
may be terminated by the Bank or the Company for cause at any time.
In the event the Bank or the Company chooses to terminate Ms. Bacon's
employment for reasons other than for cause or for disability, or in the event
of Ms. Bacon's resignation from the Bank and the Company upon (each of the
following, an "Event of Termination"): (i) failure to re-elect Ms. Bacon to
her current offices; (ii) a material change in her functions, duties or
responsibilities, or relocation of her principal place of employment, or a
material reduction in benefits or perquisites; (iii) liquidation or
dissolution of the Bank or the Company; or (iv) a breach of the agreement by
the Bank or the Company, Ms. Bacon or, in the event of death, her beneficiary
would be entitled to receive an amount equal to the payments due for the
remaining term of the employment agreements including base salary for the
remaining term of the agreements (not to exceed one year of base salary) and
any bonuses and other cash compensation paid or expected to be paid to Ms.
Bacon in the year of the Event of Termination, and the amount of benefits
received or to be received pursuant to any employee benefit plan at the time
of termination including all payments made to Ms. Bacon, or for her benefit,
during the twelve months preceding termination. The Bank and the Company will
also continue Ms. Bacon's life, health and disability coverage for one year to
the extent allowed by the plans or policies maintained by the Company or the
Bank from time to time.
If termination of employment follows a "change in control" of the Bank or
the Company, as defined in the employment agreements, Ms. Bacon or, in the
event of death, Ms. Bacon's beneficiary is entitled to a severance payment
equal to the greater of: (1) the payments due under the remaining term of the
employment agreements; or (2) two times the average of the five (5) preceding
years' base salary or such lesser number of years Ms. Bacon was employed,
including bonuses and the amount of contributions made or to be made to
employee benefit plans on her behalf. The Bank and the Company will also
continue Ms. Bacon's life, health and disability coverage for two years to the
extent allowed by the plans or policies maintained by the Company or Bank from
time to time. In the event of a change in control, based upon 1995 salary, Ms.
Bacon would receive approximately $500,000 in severance payments in addition
to other cash and noncash benefits provided under the agreements.
The Bank and the Company had previously entered into employment agreements
with Robert G. Wiens, the former President and Chief Executive Officer of the
Company. The employment agreements with Mr. Wiens contained substantially the
same terms as the employment agreements described above with the exception of
the term, which was three years for Mr. Wiens. Mr. Wiens retired as Chairman,
President and Chief Executive Officer of the Bank and the Company on March 31,
1995.
Payments and benefits under the employment agreements may constitute an
excess parachute payment under Section 280G of the Code, resulting in the
imposition of an excise tax on the recipient and denial of the deduction for
such payments to the Company and the Bank.
CHANGE IN CONTROL AGREEMENTS. The Company and the Bank have entered into
two-year change in control agreements with Messrs. Reider, Gray, Bellefeuille
and Goehring and Ms. Snodgress. Commencing on
86
the first anniversary date of the Bank's conversion from mutual to stock form
and continuing on each anniversary thereafter, the agreements may be extended
by the Board of Directors of the Bank for an additional 12 months so that the
remaining term is 24 months. Each agreement provides that at any time
following a change in control of the Bank, if the Company or the Bank
terminates the employee's employment for any reason other than cause, or if
the employee terminates his or her employment following demotion, loss of
title, office or significant authority, a reduction in compensation, or
relocation of the principal place of employment, the employee or, in the event
of death, the employee's beneficiary, would be entitled to receive a payment
equal to two times the employee's then current annual compensation, including
bonuses and any other cash compensation. The Bank and the Company will also
continue the employee's life, health, and disability coverage for the
remaining unexpired term of his or her agreement to the extent allowed by the
plans or policies maintained by the Company or Bank from time to time.
Payments to the employee under the change in control agreements will be
guaranteed by the Company in the event that payments or benefits are not paid
by the Bank. If a change in control occurs, based upon current annual
compensation, the amounts payable in the aggregate to the above-referenced
executive officers would be approximately $268,400, $232,200 and $214,184 in
addition to other cash and noncash benefits provided for under the Change in
Control Agreements for Messrs. Reider, Gray and Bellefeuille, respectively.
Payments and benefits under the Change in Control Agreements may constitute
an excess parachute payment under Section 280G of the Code, resulting in the
imposition of an excise tax on the recipient and denial of the deduction for
such payments to the Company and the Bank.
CONSULTING AGREEMENT. Mr. Wiens has entered into a consulting agreement with
the Bank (the "Consulting Agreement"). The Consulting Agreement will continue
through April 30, 2000. Under the terms of the Consulting Agreement, Mr. Wiens
will be available to advise the Bank as to strategies for dealing with
business issues it may confront, as well as providing certain historical
information regarding prior business. Mr. Wiens is compensated on an hourly
basis for any advice he may render. During the year ended December 31, 1995,
Mr. Wiens received no payments pursuant to the Consulting Agreement.
87
STOCK OPTION PLAN AND INCENTIVE PLAN. The Company maintains the RedFed
Bancorp Inc. 1994 Incentive Stock Option Plan (the "Stock Option Plan") and
the 1995 Long Term Incentive Plan (the "Incentive Plan") which provide
discretionary awards of stock options, stock appreciation rights ("SARs") and
other awards to officers and key employees as determined by a committee of
disinterested Directors. The following table lists all grants of options under
the Stock Option Plan or the Incentive Plan to the Named Executive Officers
for 1995 and contains certain information about the potential value of those
options based upon certain assumptions as to the appreciation of the Company's
stock over the life of the option.
OPTIONS/SARS GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTIONS(1)
- --------------------------------------------------------------------------- ---------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTION/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#)(2) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- -------------- ------------ ----------- ---------- ------------ --------------
Anne Bacon.............. 75,000 100% $10.04 4/25/05 $ 474,390 $ 1,197,270
- --------
(1) The amounts represent certain assumed rates of appreciation. Actual gains,
if any, on stock option exercises and Common Stock holdings are dependent
on the future performance of the Common Stock and overall stock market
conditions. There is no assurance that the amounts reflected in this table
will be realized.
(2) The options become exercisable in five equal annual installments beginning
April 25, 1996 and become exercisable in full upon a change in control. In
addition, vesting may be accelerated by the Compensation and Benefits
Committee. The option term is ten years. Under limited circumstances, such
as death, disability or normal retirement of an employee, the employee (or
his beneficiary) may request that the Company, in exchange for the
employee's surrender of an option, pay to the employee (or beneficiary),
the amount by which the fair market value of the Common Stock exceeds the
exercise price of the option on the date of the employee's termination of
employment. It is within the Company's discretion to accept or reject such
a request.
88
The following table provides certain information with respect to the options
held by the Named Executive Officers as of December 31, 1995.
FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES OPTIONS/SARS AT FISCAL THE-MONEY OPTIONS/SARS AT
ACQUIRED ON VALUE YEAR END(#) FISCAL YEAR END($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
- ---- ------------ ------------ ---------------------------- ----------------------------
Anne Bacon.............. -- -- 0/75,000 $ 0/6,375
Robert G. Wiens......... -- -- 69,920/0 148,580/0
D. Brian Reider......... -- -- 3,496/13,984 7,429/29,716
David C. Gray, CPA...... -- -- 3,496/13,984 7,429/29,716
Norman E. Bellefeuille,
Jr..................... -- -- 3,496/13,984 7,429/29,716
- --------
(1) The options held by Messrs. Wiens, Reider, Gray and Bellefeuille have an
exercise price of $8.00 and, except for the options held by Mr. Wiens,
which are currently exercisable, became exercisable at an annual rate of
20% beginning April 7, 1995. The options held by Ms. Bacon have an
exercise price of $10.04 and become exercisable at an annual rate of 20%
beginning April 25, 1996. The options will expire ten years from the date
of grant.
(2) Based on the $10.125 market value of the underlying stock at December 31,
1995, minus the exercise price.
DEFINED BENEFIT PLAN. The Bank currently maintains a qualified
noncontributory defined benefit plan (the "Retirement Plan"). All employees
are eligible to participate in the Retirement Plan on the first day of the
month following the date on which one hour of service is performed. The Bank's
contribution to the Retirement Plan in 1995 was zero. The accrued expense
under Statement of Accounting Standards No. 87 "Employers' Accounting for
Pensions" for 1995 was $145,000. Effective June 30, 1995, the Retirement Plan
was frozen and participants ceased the accrual of additional benefits
thereunder although vesting will continue according to the terms of the
Retirement Plan. Pursuant to the Retirement Plan, an unrelated trustee has the
authority to invest up to 10 percent of the plan assets in the Common Stock.
As of March 29, 1996, the trustee held 158,845 shares, or 3.71% of the
outstanding shares of Common Stock, for the benefit of participants in the
Retirement Plan.
The following table sets forth the estimated annual benefits payable upon
retirement at age 65 in calendar year 1995, expressed in the form of a single
life annuity, for the final average salary and benefit service classifications
specified pursuant to the Retirement Plan.
BENEFITS UNDER RETIREMENT PLAN
YEARS OF SERVICE(1)
---------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ ------ ------ ------ ------- -------
$25,000 8,951 11,935 14,231 16,527 18,823
50,000 18,232 24,309 29,012 33,714 38,416
75,000 27,513 36,684 43,793 50,901 58,010
100,000 36,794 49,059 58,574 68,089 77,604
150,000(2) 55,357(2) 73,809 88,136 102,463 116,791
- --------
(1) Benefit accruals were frozen at June 30, 1995.
(2) For 1995, the maximum compensation for Retirement Plan purposes under Code
Section 401(a)(17) is $150,000 and the maximum annual defined benefit
payable under Code Section 415 is $120,000. The amounts shown above were
determined without regard to any combined defined benefit/defined
contribution limit under Code Section 415.
89
The following table sets forth the years of credited service (i.e., benefit
service) as of June 30, 1995 (the freeze date of the Retirement Plan) for each
of the individuals named in the Summary Compensation Table.
CREDITED SERVICE UNDER RETIREMENT PLAN
CREDITED
SERVICE(1)
------------
YEARS MONTHS
----- ------
Anne Bacon(2)...................................................... 0 3
Robert G. Wiens(3)................................................. 38 6
D. Brian Reider.................................................... 6 3
David C. Gray, CPA................................................. 18 2
Norman E. Bellefeuille, Jr......................................... 20 8
- --------
(1) Assumes 0.5 years of credited service was earned by all participants
active throughout 1995.
(2) Ms. Bacon's date of hire was April 3, 1995.
(3) Mr. Wiens terminated service at December 31, 1994.
DEFERRED COMPENSATION PLAN. The Deferred Compensation Program of Redlands
Federal Bank (the "Deferred Compensation Plan") is a supplemental benefit plan
for executives designated by the Board. Participants are entitled to receive
benefits upon attaining the normal retirement age of 65 years. The
supplemental retirement benefit is the amount payable in monthly installments
during the joint lifetime of the participant and his or her spouse. The
payment is equal to the excess of the amount that would be payable under the
Retirement Plan, over the maximum permissible benefit determined under Section
401(a)(17) and 415 of the Code. Upon the death of the participant, the
participant's spouse will continue to receive 50% of the benefit that had been
paid to the participant, continuing until the death of the spouse. Upon the
early retirement, the Supplemental Retirement Benefit is reduced by 0.40% for
each month that the participant's retirement date precedes his or her 60th
birthday.
Under the Deferred Compensation Plan, the Bank also maintains a Supplemental
Profit Sharing Account ("Account") for each participant. The participants'
Accounts are credited annually with an amount by which the Bank's contribution
under the Profit Sharing Plan exceeds the limit determined by Sections
401(a)(17) and 415 of the Code. The amount in the Account is then paid to the
participant in one lump sum upon normal retirement. In the event of the
participant's death before retirement, the lump sum is payable to the
participant's designated beneficiary. Upon disability, the participant is
entitled to receive the entire lump sum. An unrelated trustee has the
authority to invest Plan trust assets in the Company's common stock. As of
March 29, 1996, the trustee held 54,865 shares, or 1.28% of the Company's
outstanding shares of Common Stock, for the benefit of participants in the
Deferred Compensation Plan. Effective June 30, 1995, the Company elected to
freeze the Deferred Compensation Plan.
90
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1996 certain information
concerning the shares of the Company's Common Stock owned by each person who
is known by the Company to own beneficially more than five percent of the
Company's Common Stock, by each of the Directors and Named Executive Officers
of the Company and for all Directors and executive officers as a group
(including in each case all "associates" of such persons).
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
------------------- ----------------- --------
Thomson Horstmann & Bryant
Inc.
Park 80 West, Plaza Two
Saddle Brook, New Jersey
07663 466,400(2) 10.70%
First Manhattan Corporation
437 Madison Avenue
New York, New York 10022 432,310(3) 9.90
Redlands Federal Bank ESOP
300 East State Street
Redlands, California 92373 305,900(4) 7.00
Anne Bacon 29,600(7) 0.68
Norman E. Bellefeuille, Jr. 24,012(5)(8)(9)(10) 0.55
William C. Buster, Jr. 59,637(5)(6) 1.36
William T. Hardy, Jr. 23,062(5)(6) 0.53
Douglas R. McAdam 31,562(5)(6) 0.72
John D. McAlearney, Jr. 62,887(5)(6) 1.44
Henry H. Van Mouwerik 40,937(5)(6) 0.94
Stanley C. Weisser 59,637(5)(6) 1.36
Robert G. Wiens 171,210(5)(8)(9)(10) 3.92
David C. Gray 28,882(5)(8)(9)(10) 0.66
D. Brian Reider 15,305(5)(8)(9)(10) 0.35
All directors and executive
officers as a group (13
persons) 593,702(11) 13.47%
- --------
(1) Each person whose shares are included herein, exercises sole (or shared
with spouse, relative or affiliate) voting and dispositive power as to
the shares reported.
(2) Based upon information in a Schedule 13G filed with the Commission by
Thomson Horstmann & Bryant, Inc. on January 12, 1996.
(3) Based upon information in a Schedule 13G filed with the Commission by
First Manhattan Corporation on February 6, 1996.
(4) A committee consisting of directors Henry Van Mouwerik, John D.
McAlearney, Jr., Robert G. Wiens, and Anne Bacon, and officers David C.
Gray, Daniel Goehring and Patricia M. Dillard has been appointed to
administer the ESOP (the "ESOP Committee"). Imperial Trust Company has
been appointed as the trustee for the ESOP ("ESOP Trustee") by the Board
of Directors. The ESOP Committee may instruct the ESOP Trustee regarding
investment of funds contributed to the ESOP. The ESOP Trustee, subject to
its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. As of
May 31, 1996, 87,400 shares have been allocated to participants'
accounts. Under the ESOP, unallocated shares held in the suspense account
will be voted by the ESOP Trustee in a manner calculated most accurately
to reflect the instructions it has received from participants regarding
the allocated stock so long as such vote is in accordance with the
provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
91
(5) Includes 16,781, 6,573, 6,573 and 5,196 shares awarded to Messrs. Wiens,
Gray, Bellefeuille and Reider, respectively, under the RRP and includes
3,427 shares each awarded to Messrs. McAdam, Van Mouwerik, Weisser,
Buster, McAlearney and Hardy, respectively, under the DRP, as to which
voting may be directed. Awards vest in five equal installments, the first
of which commenced on April 7, 1995.
(6) Includes 11,653 shares subject to currently exercisable options granted
to Messrs. McAdam, Van Mouwerik, Weisser, Buster, McAlearney and Hardy,
respectively, under the Directors' Option Plan, which began vesting on
April 7, 1995, one year from the date of grant. Does not include 5,827
shares subject to options granted to each of Messrs. McAdam, Van
Mouwerik, Weisser, Buster, McAlearney and Hardy, respectively, under the
Directors' Option Plan which will vest on April 7, 1997.
(7) Includes 15,000 shares subject to currently exercisable options granted
under the Incentive Plan. Does not include 60,000 shares subject to
options which become exercisable in four equal annual installments
commencing April 25, 1997. Includes 12,600 performance restricted stock
awards granted under the Incentive Plan which have vested. Does not
include 30,400 performance restricted stock awards which vest April 25,
2000, subject to the discretionary authority of the Board of Directors to
accelerate vesting, in whole or in part, based upon performance. See
"Executive Compensation--Stock Option Plan and Incentive Plan."
(8) Includes 69,920, 6,992, 6,992 and 6,992 shares subject to currently
exercisable options granted to Messrs. Wiens, Gray, Bellefeuille and
Reider, respectively, under the Stock Option Plan which began vesting on
April 7, 1995, one year from the date of grant. Does not include 10,488
shares subject to options granted to each of Messrs. Gray, Bellefeuille
and Reider under the Stock Option Plan which become exercisable in three
equal annual installments, the first of which commences on April 7, 1997.
(9) Includes 53,668, 13,660, 9,174 and 1,722 shares held in the Employer
Stock Fund of the Redlands Federal Bank Employee Profit Sharing Plan and
Trust and allocated to the accounts of Messrs. Wiens, Gray, Bellefeuille
and Reider, respectively, as to which voting may be directed.
(10) Includes 1,645, 1,394, 1,263 and 1,148 shares allocated to Messrs. Wiens,
Reider, Gray and Bellefeuille, respectively, under the ESOP.
(11) Includes 69,918 shares subject to options granted under the Directors'
Option Plan and 105,055 shares with respect to all executive officers
which may be acquired through the exercise of stock options granted under
the Incentive Option Plan, 20,556 shares awarded to directors and held in
trust under the DRP, and 47,416 shares awarded to executive officers and
held in trust under the RRP. Includes 12,600 shares awarded under the
Incentive Plan and 15,000 shares subject to options currently exercisable
granted under the Incentive Plan.
92
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Federal law and the Bank's policy require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with the general public and must not
involve more than the normal risk of repayment or present other unfavorable
features. In addition, loans made to an executive officer or director in
excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up
to a maximum of $500,000) must be approved in advance by a majority of the
disinterested members of the Bank's Board of Directors.
Set forth below is information at December 31, 1995 as to those loans made
by the Bank to directors and executive officers on preferential terms in
accordance with applicable law and regulations prior to August 1989 that
represented aggregate indebtedness of the borrower exceeding $60,000 at any
time since January 1, 1995:
CERTAIN LOANS MADE TO DIRECTORS AND OFFICERS
HIGHEST BALANCE
DATE OF MATURITY OUTSTANDING SINCE BALANCE AS OF LOAN INTEREST
NAME LOAN OF LOAN JANUARY 1, 1995 DECEMBER 31, 1995 TYPE RATE(1)
- ---- ------- -------- ----------------- ----------------- -------- --------
Robert G. Wiens......... 1986 2017 $215,958 $210,564 Mortgage 5.36%
David C. Gray, CPA...... 1988 2019 187,837 183,246 Mortgage 5.36
D. Brian Reider......... 1989 2019 177,618 173,719 Mortgage 5.36
Carol A. Snodgress...... 1985 2015 95,544 92,778 Mortgage 5.36
- --------
(1) All interest rates shown are adjustable pursuant to specified indices.
93
DESCRIPTION OF COMMON STOCK
GENERAL
The Company's Certificate of Incorporation authorizes the Company to issue
up to 15,000,000 shares of Common Stock, par value of $0.01 per share, and
3,000,000 shares of preferred stock, par value of $0.01 per share. As of June
30, 1996, the Company had outstanding 4,390,504 shares of Common Stock and no
shares of preferred stock. All issued and outstanding shares of Common Stock
are fully paid and non-assessable. Holders of Common Stock have no preemptive,
subscription, conversion or redemption rights and are not subject to further
call or assessment in their capacities as such.
Dividends. Subject to the rights of the holders of any preferred stock then
outstanding, dividends may be paid to the holders of Common Stock when, as and
if, declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any dividends on its Common Stock to date
and has no present plans to do so.
Voting Rights. Holders of Common Stock are entitled to one vote per share
and do not have the right to cumulate votes in the election of Directors.
Certain matters as described below require an 80% shareholder vote.
Limitation on Voting Rights. The Company's Certificate of Incorporation
provides that in no event shall any record owner of outstanding Common Stock
which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined for
this purpose pursuant to Rule 13d-3 of the General Rules and Regulations under
the Exchange Act, and includes shares beneficially owned by such person or any
of his or her Affiliates (as defined in the Certificate of Incorporation),
shares which such person or his or her Affiliates have the right to acquire
upon the exercise of conversion rights, options or otherwise and shares as to
which such person and his or her Affiliates have or share investment or voting
power, but does not include shares beneficially owned by the Bank's Employee
Stock Ownership Plan and Trust or shares that are subject to a revocable proxy
and that are not otherwise beneficially owned, or deemed by the Company to be
beneficially owned, by such person and his or her affiliates. The Certificate
of Incorporation of the Company further provides that this provision limiting
voting rights may only be amended upon the vote of 80% of the outstanding
shares of voting stock.
Transfer Agent And Registrar. The transfer agent and registrar for the
Common Stock is American Stock Transfer & Trust Company.
FACTORS AFFECTING ACQUISITIONS OF CONTROL
The provisions of the Company's Certificate of Incorporation and Bylaws and
the statutes and regulations summarized in the following paragraphs may be
deemed to have an anti-takeover effect and are intended to discourage non-
negotiated changes in control of the Company. Such provisions may also have
the effect of making it more difficult to acquire or exercise control of the
Company in transactions deemed by the Board of Directors not to be in the best
interests of all stockholders, or making it more difficult to effect changes
in the Company's management.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Company's Certificate of Incorporation requires the approval
of the holders of at least 80% of the Company's outstanding shares of voting
stock to approve certain specified "Business Combinations," as defined
therein, and related transactions. Under Delaware law, absent this provision,
such Business Combinations, including mergers, consolidations and sales of all
or substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
stockholders is required in connection with any transaction involving an
"Interested Stockholder"
94
(as defined below) except (i) in cases where the proposed transaction has been
approved in advance by a majority of those members of the Company's Board of
Directors who are unaffiliated with the Interested Stockholder and were
Directors prior to the time when the Interested Stockholder became an
Interested Stockholder; or (ii) if the proposed transaction meets certain
conditions set forth therein which are designed to afford the stockholders a
fair price in consideration for their shares, in which case, if a stockholder
vote is required, approval of only a majority of the outstanding shares of
voting stock is required. The term "Interested Stockholder" is defined to
include any individual, corporation, partnership or other entity (other than
the Company or its subsidiary) which owns beneficially or controls, directly
or indirectly, 10% or more of the outstanding shares of voting stock of the
Company.
Evaluation of Offers. The Company's Certificate of Incorporation provides
that the Board of Directors of the Company, when evaluating any offer of
another "Person" (as defined therein) to (i) make a tender or exchange offer
for any equity security of the Company; (ii) merge or consolidate the Company
with another corporation or entity; or (iii) purchase or otherwise acquire all
or substantially all of the properties and assets of the Company, may, in
connection with the exercise of its judgment in determining what is in the
best interest of the Company and the Company's stockholders, give due
consideration to, among other things, the social and economic effect of
acceptance of such offer on the Company's customers, on the communities in
which the Company operates or is located and on the ability of the Bank to
fulfill the objectives of a federally chartered stock savings bank under
applicable statutes and regulations. The consideration of these factors by the
Board of Directors may place the Board of Directors in a stronger position to
oppose a transaction if the Board concludes, based upon any of the foregoing
factors, that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Board of Directors. The Board of Directors of the Company is required under
the Company's Certificates of Incorporation and Bylaws to be divided into
three classes, each of which must contain approximately one-third of the whole
number of the members of the Board. Each class serves a staggered term, with
approximately one-third of the total number of Directors being elected each
year. Thus, a person seeking control of the Company would not be able to elect
a majority of Directors in any one year.
The Company's Certificate of Incorporation and Bylaws provide that the size
of the Board shall be determined by a majority of the Directors. This
provision will impede the ability of a holder of a substantial amount of
Common Stock to increase the authorized number of the Company's Directors and
to elect such holder's designees to fill those positions. In addition, the
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the Directors then in office.
Cumulative voting is not authorized under the Company's Certificate of
Incorporation or the Company's Bylaws. Because the holder of less than a
majority of the Common Stock cannot be assured of representation on the Board
of Directors without the support of other stockholders, the absence of
cumulative voting for Directors makes the ability of a minority stockholder to
elect Directors less certain and thus may discourage accumulations of Common
Stock or proxy contests that could result in changes in the Company's
management.
The Company's Certificate of Incorporation provides that a Director may be
removed from the Board of Directors prior to the expiration of his or her term
only for cause and upon the vote of 80% of the outstanding shares of voting
stock. This provision could have the effect of delaying the removal of a
Director that up to 80% of the stockholders believe should be removed.
Special Meetings and Action by Written Consent. The Company's Certificate of
Incorporation provides that special meetings of stockholders may only be
called by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent.
Regulatory Restrictions. For a period of three years from April 7, 1994, the
date of the Bank's conversion, the prior written approval of the OTS will be
required before any person may, directly or indirectly, acquire or
95
make any offer to acquire the beneficial ownership of any stock or other
equity security of the Company if, after such acquisition or consummation of
such offer, such person would be the beneficial owner of more than 10% of such
class of stock or other class of equity security of the Company. Under OTS
regulations, the holding of revocable proxies can be a factor in determining
whether a person is deemed to have acquired beneficial ownership for purposes
of this regulatory restriction. Accordingly, such regulatory restriction may
limit the ability of a potential acquiror to solicit or hold revocable proxies
absent OTS approval.
Delaware Stockholder Protection Act. The State of Delaware has enacted a law
designed to provide Delaware corporations with significant additional
protection against hostile takeovers. The statute, which is codified at
Section 203 of the Delaware General Corporation Law ("Section 203"), is
intended to discourage certain abusive takeover practices by impeding the
ability of a hostile acquiror to engage in certain self-dealing transactions
with the target company.
In general, Section 203 provides that a person who owns 15% or more of the
outstanding voting stock of a Delaware corporation (an "Interested
Stockholder") may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date that such person became an Interested Stockholder. The term
"business combination" is defined broadly to cover a wide range of corporation
transactions, including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following actions from the requirements of Section
203: (i) any business combination if, prior to the date a person became an
Interested Stockholder, the Board of Directors approved either the business
combination or the transaction in which such person became an Interested
Stockholder; (ii) any business combination involving a person who acquired at
least 85% of the outstanding voting stock in the transaction in which he
became an Interested Stockholder, calculated without regard to those shares
owned by the corporation's officers, directors or certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the shares not
owned by the Interested Stockholder; and (iv) certain business combinations
that are proposed prior to the consummation or abandonment of certain other
acquisition proposals and which are approved or not opposed by a majority of
the members of the Board of Directors then in office who were directors prior
to any person becoming an Interested Stockholder during the previous three
years. A corporation may exempt itself from the requirements of the statute by
adopting an amendment of its certificate of incorporation or by bylaws
electing not to be governed by Section 203. The Board of Directors of the
Company does not intend to propose any such amendment.
The constitutionality of Section 203 has been challenged by potential
acquirors, whose legal positions have been supported in court by an amicus
curiae brief filed by the Commission. However, in three cases involving
Delaware corporation law, federal district court judges upheld the
constitutionality of Section 203. Because no appellate court has yet ruled on
Section 203, the section's validity has not been definitively established. In
another case, the United States Supreme Court upheld the validity of a
"control share acquisitions" statute in Indiana. The Indiana statute provides
that entities that acquire "control shares" in certain corporations
incorporated in Indiana may not vote such shares unless a majority of the
corporation's disinterested stockholders consent to such vote at their next
regularly scheduled meeting or at a special meeting called for that purpose.
Although this decision may represent a reversal of the judicial trend toward
holding tender offer and other state anti-takeover statutes unconstitutional,
its effect on the constitutionality of the Delaware statute is uncertain.
Change in Bank Control Act. The Change in Bank Control Act and the savings
and loan holding company provisions of the Home Owners' Loan Act, together
with the regulations of the OTS under those Acts, require that the consent of
the OTS be obtained prior to any person or company acquiring "control" of a
savings association or a savings and loan holding company. Upon acquiring
control, such person or company will be deemed to be a savings and loan
holding company. Control is conclusively presumed to exist if any individual
or company acquires more than 25% of any class of voting stock of the savings
association. Control is rebuttably determined to exist if the person acquires
more than 10% of any class of voting stock (or more than 25% of any
96
class of nonvoting stock) and is subject to any of several "control factors."
The control factors relate to, among other matters, the relative ownership
position of a person, the percentage of debt and equity of the savings
association controlled by the person, agreements giving the person influence
over a material aspect of the operations of the association and the number of
seats on the Board of Directors of the savings association held by the person
or his designees. The regulations provide a procedure for challenge of the
rebuttable control determination. Restrictions applicable to the operations of
savings and loan holding companies and conditions imposed by the OTS in
connection with its approval of companies to become savings and loan holding
companies may deter companies from seeking to obtain control of the Company.
See "Regulation and Supervision--Savings and Loan Holding Company Regulation."
UNDERWRITING
Montgomery Securities (the "Underwriter") has agreed, subject to the terms
and conditions set forth in the Underwriting Agreement, to purchase from the
Company 2,600,000 shares of Common Stock at the public offering price, less
the underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent and that the Underwriter is committed
to purchase all of such shares if any are purchased.
The Underwriter has advised the Company that it proposes initially to offer
the Common Stock to the public on the terms set forth on the cover page of
this Prospectus. The Underwriter may allow to selected dealers a concession of
not more than per share, and the Underwriter may allow, and such dealers may
reallow, a concession of not more than per share to certain other dealers.
The Common Stock is offered subject to receipt and acceptance by the
Underwriter, and to certain other conditions, including the right to reject
orders in whole or in part.
The Company has granted an option to the Underwriter, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum
of 390,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,600,000 shares to be purchased by
the Underwriter. To the extent that the Underwriter exercises this option, the
Underwriter will be committed, subject to certain conditions, to purchase such
additional shares. The Underwriter may purchase such shares only to cover
over-allotments made in connection with this Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriter may be required
to make in respect thereof.
All of the Company's executive officers and directors have agreed that, for
a period of 180 days after the first date on which any shares of Common Stock
are released for sale to the public, they will not, without the prior written
consent of the Underwriter, directly or indirectly, offer to sell, sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into or exchangeable for shares of Common Stock. In addition, the Company has
agreed that, for a period of 180 days after the first date on which any shares
of Common Stock are released for sale to the public, it will not, without the
prior written consent of the Underwriter, offer to sell, issue, sell, grant
options to purchase or otherwise dispose of any of its equity securities, or
securities convertible into or exchangeable for its equity securities, except
(i) the shares of Common Stock offered hereby and (ii) shares of Common Stock
issued pursuant to exercise of outstanding options discussed in this
Prospectus.
The Underwriter may from time to time provide investment banking services to
the Company.
In connection with this Offering, the Underwriter may engage in passive
market making transactions in the Common Stock on Nasdaq immediately prior to
the commencement of sales in this offering, in accordance with Rule 10b-6A
under the Exchange Act. Passive market making consists of, among other things,
displaying bids on Nasdaq limited by the bid prices of independent market
makers and completing purchases in response to order
97
flow at prices limited by such bids. Net purchases by a passive market maker
on each day are limited to a specified percentage of a passive market maker's
average daily trading volume in the Common Stock during a specified prior
period. Purchases by the passive market maker must be discontinued for any day
on which such limit is reached. Passive market making may stabilize the market
price of the Common Stock at a level above that which might otherwise prevail
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Mayer, Brown & Platt, Los Angeles, California, and certain legal
matters will be passed upon for the Underwriter by Gibson, Dunn & Crutcher
LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995
and 1994 and for each of the years in the three-year period ended December 31,
1995 have been included herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of such firm as experts in accounting and
auditing.
98
REDFED BANCORP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................. F-2
Consolidated Statements of Financial Condition--March 31, 1996
(unaudited) and December 31, 1995 and 1994.............................. F-3
Consolidated Statements of Operations--Three months ended March 31, 1996
and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993... F-4
Consolidated Statements of Stockholders' Equity--Three months ended March
31, 1996 (unaudited) and years ended December 31, 1995, 1994 and 1993... F-5
Consolidated Statements of Cash Flows--Three months ended March 31, 1996
and 1995 (unaudited) and years ended December 31, 1995, 1994 and 1993... F-6
Notes to Consolidated Financial Statements............................... F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RedFed Bancorp Inc.
Redlands, California:
We have audited the accompanying consolidated statements of financial
condition of RedFed Bancorp Inc. and subsidiaries (the Company) as of December
31, 1995 and 1994 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995. 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 consolidated 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 RedFed
Bancorp Inc. and subsidiaries as of December 31, 1995 and 1994 and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Orange County, California
February 9, 1996
F-2
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31
MARCH 31, ----------------
1996 1995 1994
----------- ------- -------
(UNAUDITED)
ASSETS
Cash and cash equivalents (note 2)............... $ 31,253 30,985 23,074
Loans held for sale at lower of cost or market
value (note 5).................................. 5,568 4,578 381
Mortgage-backed securities available-for-sale at
fair value (note 4)............................. 25,005 26,501 15,199
Investment securities held-to-maturity (estimated
aggregate fair value of $38,234, $41,057 and
$36,638 at March 31, 1996 (unaudited) and
December 31, 1995 and 1994) (note 3)............ 38,797 41,655 38,899
Mortgage-backed securities held-to-maturity
(estimated aggregate fair value of $30,887,
$25,276 and $66,032 at March 31, 1996
(unaudited) and December 31, 1995 and 1994)
(notes 4 and 12)................................ 31,494 25,615 64,772
Loans receivable, net (notes 5, 11 and 12)....... 666,583 678,406 732,751
Accrued interest receivable (note 7)............. 4,909 5,014 4,590
Federal Home Loan Bank stock, at cost (note 12).. 7,003 6,914 8,561
Real estate acquired through foreclosure, net
(notes 8 and 12)................................ 15,765 24,560 31,041
Real estate held for sale or investment, net
(note 8)........................................ 1,651 1,698 10,228
Premises and equipment, net (note 9)............. 17,390 17,619 19,164
Prepaid expenses and other assets................ 12,277 8,005 11,929
Deferred income taxes (note 10).................. 264 264 264
-------- ------- -------
Total assets................................. $857,959 871,814 960,853
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 11)............................. $769,679 776,528 805,334
Other borrowed money (note 12)................. 24,534 31,133 80,085
Accrued expenses and other liabilities (notes
6, 13 and 15)................................. 14,380 14,982 18,533
Deferred income................................ 1,037 1,093 1,393
-------- ------- -------
Total liabilities............................ 809,630 823,736 905,345
-------- ------- -------
Commitments and contingencies (notes 6, 12, 15
and 16)
Stockholders' equity (notes 13, 14 and 19):
Common stock, $.01 par value. Authorized
15,000,000 shares; issued and outstanding
4,370,419, 4,370,000 and 4,370,000 at March
31, 1996 (unaudited) and December 31, 1995 and
1994.......................................... 44 44 44
Additional paid-in capital..................... 32,629 32,608 32,565
Retained earnings--substantially restricted
(notes 10, 14 and 19)......................... 19,511 18,570 26,655
Deferred compensation (note 13)................ (2,290) (2,430) (2,988)
Treasury stock, 83,265 and 85,830 shares at
March 31, 1996 (unaudited) and December 31,
1995 (note 13)................................ (860) (888) --
Unrealized gains (losses) on securities
available for sale............................ (705) 174 (768)
-------- ------- -------
Total stockholders' equity................... 48,329 48,078 55,508
-------- ------- -------
Total liabilities and stockholders' equity... $857,959 871,814 960,853
======== ======= =======
See accompanying notes to consolidated financial statements.
F-3
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
--------------------- ----------------------------
1996 1995 1995 1994 1993
---------- --------- --------- --------- ------
(UNAUDITED)
Interest income:
Loans receivable........ $ 13,429 12,912 55,641 46,324 49,175
Investment securities
and deposits........... 973 779 3,431 3,601 2,710
Mortgage-backed
securities............. 1,044 1,443 5,152 6,590 7,551
---------- --------- --------- --------- ------
Total interest
income............... 15,446 15,134 64,224 56,515 59,436
---------- --------- --------- --------- ------
Interest expense:
Deposits (note 11)...... 8,088 8,082 34,958 28,045 30,096
Other borrowed money.... 375 1,237 3,408 1,824 773
---------- --------- --------- --------- ------
Total interest
expense.............. 8,463 9,319 38,366 29,869 30,869
---------- --------- --------- --------- ------
Net interest income... 6,983 5,815 25,858 26,646 28,567
Provision for losses on
loans (note 5)........... 1,400 373 7,938 12,651 12,990
---------- --------- --------- --------- ------
Net interest income
after provision for
losses on loans...... 5,583 5,442 17,920 13,995 15,577
---------- --------- --------- --------- ------
Noninterest income:
Letter of credit fees... 376 350 1,592 1,771 2,066
Other fee income........ 1,152 1,099 4,620 4,509 4,338
Gain (loss) on sale of
loans, investments and
mortgage-backed
securities, net........ (4) (9) 1,383 (486) 365
Curtailment gain on
retirement plan
(note 13).............. -- -- 3,390 -- --
Other income............ 65 8 213 481 115
---------- --------- --------- --------- ------
Total noninterest
income............... 1,589 1,448 11,198 6,275 6,884
---------- --------- --------- --------- ------
Noninterest expense:
Compensation and
benefits (note 13)..... 2,758 3,238 12,063 14,200 12,494
Occupancy and
equipment.............. 1,676 1,951 6,831 7,816 6,973
Marketing and
professional services.. 326 476 1,634 1,680 1,408
Federal deposit
insurance premiums..... 605 584 2,401 2,423 2,274
Other expense........... 336 347 1,356 1,076 2,309
---------- --------- --------- --------- ------
Total general and
administrative
expense.............. 5,701 6,596 24,285 27,195 25,458
Real estate operations,
net (note 8)........... 528 2,126 10,258 8,370 3,222
Provision for estimated
losses on letters of
credit (note 6)........ -- 193 2,536 9,895 694
---------- --------- --------- --------- ------
Total noninterest
expense.............. 6,229 8,915 37,079 45,460 29,374
---------- --------- --------- --------- ------
Earnings (loss) before
income taxes......... 943 (2,025) (7,961) (25,190) (6,913)
Income taxes (benefit)
(note 10)................ 2 -- 124 1,150 (3,669)
---------- --------- --------- --------- ------
Net earnings (loss)... $ 941 (2,025) (8,085) (26,340) (3,244)
========== ========= ========= ========= ======
Net earnings (loss) per
share (notes 1 and 19)... $ 0.23 (0.51) (2.03) (6.08) N/A
========== ========= ========= ========= ======
Weighted average shares
outstanding.............. 4,126,438 3,978,617 3,981,821 4,002,920 N/A
========== ========= ========= ========= ======
See accompanying notes to consolidated financial statements.
F-4
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
UNREALIZED
GAINS
RETAINED (LOSSES) ON
ADDITIONAL EARNINGS, SECURITIES
NUMBER OF COMMON PAID-IN SUBSTANTIALLY DEFERRED TREASURY AVAILABLE
SHARES STOCK CAPITAL RESTRICTED COMPENSATION STOCK FOR SALE TOTAL
--------- ------ ---------- ------------- ------------ -------- ----------- -------
Balance at December 31,
1992................... -- $-- -- 56,239 -- -- -- 56,239
Net loss................ -- -- -- (3,244) -- -- -- (3,244)
Changes in unrealized
gains (losses) on
securities available
for sale............... -- -- -- -- -- -- 366 366
--------- ---- ------ ------- ------ ---- ------ -------
Balance at December 31,
1993................... -- -- -- 52,995 -- -- 366 53,361
Net loss................ -- -- -- (26,340) -- -- -- (26,340)
Proceeds from issuance
of stock............... 4,370,000 44 32,446 -- -- -- -- 32,490
Purchase of shares for
deferred compensation
plans.................. -- -- 119 -- (3,615) -- -- (3,496)
Deferred compensation
amortized to expense... -- -- -- -- 627 -- -- 627
Changes in unrealized
gains (losses) on
securities available
for sale............... -- -- -- -- -- -- (1,134) (1,134)
--------- ---- ------ ------- ------ ---- ------ -------
Balance at December 31,
1994................... 4,370,000 44 32,565 26,655 (2,988) -- (768) 55,508
Net loss................ -- -- -- (8,085) -- -- -- (8,085)
Deferred compensation
amortized to expense... -- -- 43 -- 558 -- -- 601
Acquisition of treasury
stock (note 13)........ -- -- -- -- -- (888) -- (888)
Changes in unrealized
gains (losses) on
securities available
for sale............... -- -- -- -- -- -- 942 942
--------- ---- ------ ------- ------ ---- ------ -------
Balance at December 31,
1995................... 4,370,000 44 32,608 18,570 (2,430) (888) 174 48,078
Net earnings
(unaudited)............ -- -- -- 941 -- -- -- 941
Proceeds from issuance
of stock (unaudited)... 419 -- 4 -- -- -- -- 4
Deferred compensation
amortized to expense
(unaudited)............ -- -- 17 -- 140 -- -- 157
Sale of treasury stock
(unaudited)............ -- -- -- -- -- 28 -- 28
Changes in unrealized
gains (losses) on
securities available
for sale (unaudited)... -- -- -- -- -- -- (879) (879)
--------- ---- ------ ------- ------ ---- ------ -------
Balance at March 31,
1996 (unaudited)....... 4,370,419 $ 44 32,629 19,511 (2,290) (860) (705) 48,329
========= ==== ====== ======= ====== ==== ====== =======
See accompanying notes to the consolidated financial statements.
F-5
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------------- ----------------------------
1996 1995 1995 1994 1993
--------- --------- -------- -------- --------
(UNAUDITED)
Cash flows from operating
activities:
Net earnings (loss)....... $ 941 (2,025) (8,085) (26,340) (3,244)
Adjustments to net
earnings (loss):
Loan fees collected...... 44 263 615 1,915 1,502
Depreciation and
amortization............ 336 420 (454) 2,070 754
Provisions for estimated
losses:
Loans................... 1,400 373 7,938 12,651 12,990
Real estate............. -- 1,422 8,336 4,653 1,968
Letters of credit....... -- 193 2,536 9,895 694
Write down of real
estate.................. -- -- -- 1,354 802
Net loss (gain) on:
Sale of loans,
investments and
mortgage-backed
securities............. 4 9 (1,383) 486 (365)
Sales of real estate and
premises and
equipment.............. (168) 371 (12) 278 (301)
Federal Home Loan Bank
stock dividends
received................ (89) (113) (419) (312) (178)
Proceeds from sale of
loans................... 216 510 76,695 18,640 26,797
Loans originated for
sale.................... -- -- (10,320) (14,707) (27,315)
Curtailment gain on
retirement plan......... -- -- (3,390) -- --
Increase (decrease) in:
Accrued expenses and
other liabilities...... (710) (1,531) (1,163) (7,741) (3,081)
Deferred income......... (56) (42) (300) (132) 799
(Increase) decrease in:
Deferred income taxes... -- -- -- 5,333 (2,932)
Accrued interest
receivable............. 105 (357) (424) 67 120
Prepaid expenses and
other assets........... (4,272) 813 3,925 8,523 (10,123)
--------- --------- -------- -------- --------
Net cash provided by
(used in) operating
activities............ (2,249) 306 74,095 16,633 (1,113)
--------- --------- -------- -------- --------
Cash flows from investing
activities:
Proceeds from maturities
of investment securities
held-to-maturity......... 10,500 500 30,534 31,000 57,590
Purchases of investment
securities held-to-
maturity................. (7,618) (465) (33,265) (23,968) (68,168)
Proceeds from sale of
(purchase of) investment
securities available-for-
sale..................... -- -- 326 8,755 (8,964)
Purchase of mortgage-
backed securities
available-for-sale....... -- -- (21,053) -- (29,276)
Proceeds from sales of
mortgage-backed
securities available-for-
sale..................... -- -- 38,721 -- --
Proceeds from maturities
of mortgage-backed
securities available-for-
sale..................... 618 103 903 11,605 119
Proceeds from maturities
of mortgage-backed
securities held-to-
maturity................. 71 1,652 10,776 15,461 20,312
Loan originated for
investment............... (18,186) (42,146) (102,076) (230,900) (145,629)
Purchases of loans........ -- -- (1,585) (400) (170)
Purchases of Federal Home
Loan Bank stock.......... -- (137) (137) (1,626) --
Sale of Federal Home Loan
Bank stock............... -- -- 2,203 -- --
Principal payments and
reductions of loans,
net...................... 23,525 19,857 66,164 104,117 124,957
Proceeds from sale of real
estate................... 3,839 8,779 24,367 24,687 15,110
Proceeds from sale of
premises and equipment... 1 4 287 22 19
Purchases of real estate.. -- (98) (104) (12,280) (948)
Purchases of premises and
equipment................ (134) (39) (376) (2,113) (1,430)
--------- --------- -------- -------- --------
Net cash provided by
(used in) investing
activities............ 12,616 (11,970) 15,685 (75,640) (36,478)
--------- --------- -------- -------- --------
F-6
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------------- -------------------------
1996 1995 1995 1994 1993
--------- --------- ------- ------- -------
(UNAUDITED)
Cash flows from financing
activities:
Deposits, net of withdrawals
and interest credited......... $ (6,849) 23,314 (28,806) (29,800) 7,080
Proceeds from FHLB advances.... -- 5,000 10,000 80,000 --
Repayment of other borrowed
money......................... (3,250) (14,175) (62,175) (25,135) (18,000)
Proceeds from issuance of
stock......................... -- -- -- 32,490 --
Purchase of treasury shares for
deferred compensation plans... -- -- (888) (3,496) --
--------- -------- ------- ------- -------
Net cash provided by (used
in) financing activities... (10,099) 14,139 (81,869) 54,059 (10,920)
--------- -------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents....... 268 2,475 7,911 (4,948) (48,511)
Cash and cash equivalents,
beginning of year or period.... 30,985 23,074 23,074 28,022 76,533
--------- -------- ------- ------- -------
Cash and cash equivalents, end
of year or period.............. $ 31,253 25,549 30,985 23,074 28,022
========= ======== ======= ======= =======
Supplemental information:
Interest paid (including
interest credited)............ $ 6,756 7,119 28,816 21,535 30,869
Income taxes paid.............. -- -- -- -- 250
Transfers from loans receivable
to real estate................ 3,988 3,495 16,386 21,906 10,695
Loans to facilitate the sale of
real estate................... 6,030 6,952 7,079 5,324 3,603
Transfer from mortgage-backed
securities held-to-maturity to
mortgaged-backed securities
available-for-sale (note 4)... -- -- 28,469 -- 2,642
Transfer from mortgage back
securities available-for-sale
to mortgage-backed-securities
held-to-maturity.............. -- -- -- 1,550 --
Transfers from mortgage-backed
securities to real estate..... -- -- -- 1,717 --
Real estate acquired subject to
bond financing................ -- (5,830) (5,830) (23,598) --
Real estate sold subject to
bond financing................ 3,349 -- 2,762 8,825 --
Bond financing subject to real
estate acquisitions........... -- 5,830 5,830 23,598 --
Bond financing subject to real
estate sales.................. (3,349) -- (2,762) (8,825) --
Transfers from loans to
mortgage-backed securities
held-to-maturity.............. (5,950) -- -- -- --
========= ======== ======= ======= =======
See accompanying notes to consolidated financial statements.
F-7
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
As more fully described in note 19, pursuant to a plan of conversion,
Redlands Federal Bank (the Bank) converted from a Federally chartered savings
bank to a Federally chartered stock savings bank effective April 7, 1994.
RedFed Bancorp Inc. (the Bancorp), a Delaware corporation organized by the
Bank, acquired all of the capital stock of the Bank issued in the conversion.
Any references to financial information for periods prior to April 7, 1994,
refer to the Bank prior to conversion.
The following accounting policies, together with those disclosed elsewhere
in the consolidated financial statements, represent the significant accounting
policies used in presenting the accompanying consolidated financial
statements.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements of RedFed Bancorp Inc.
and subsidiaries (collectively, the Company) include Redlands Federal Bank, a
Federal savings bank and its wholly owned subsidiaries, Redlands Financial
Services, Inc., RedFed Inc. and Redfed Escrow, Inc. RedFed Escrow, Inc. was
closed in November 1995. RedFed Inc. includes the accounts of Redfed Insurance
Services and INVEST Financial Corporation. The consolidated financial
statements for the three-month periods ended March 31, 1996 and 1995 are
unaudited but in the opinion of management reflect all necessary adjustments,
consisting only of normal recurring items necessary for fair presentation. All
material intercompany balances and transactions are eliminated in
consolidation. Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the current year's
presentation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. 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 dates of
the statements of financial condition, and revenues and expenses for the
periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of Federal funds sold,
certificates of deposit and U.S. government securities with an original
maturity of 90 days or less.
Loans Held for Sale
Loans held for sale in the secondary market are carried at the lower of cost
or estimated market value in the aggregate, as determined by outstanding
commitments from investors or current investor requirements. Net unrealized
losses are recognized in a valuation allowance by charges against operations.
Investment Securities and Mortgage-Backed Securities
The Company, effective December 31, 1993, adopted Statement of Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). The Company classifies investment and mortgage-backed
securities as held-to-maturity, trading securities, and/or available-for-sale
securities. Held-to-maturity investments and mortgage-backed securities are
reported at amortized cost, trading securities are reported at fair value,
with unrealized gains and losses included in operations, and available-for-
sale securities are reported at fair value with unrealized gains and losses,
net of related income taxes, included as a separate component of stockholders'
equity.
F-8
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Investments and mortgage-backed securities held-to-maturity are those
securities that management has the positive intent and ability to hold to
maturity.
Investment and mortgage-backed securities available-for-sale are those
securities which are not held in the trading portfolio and are not held in the
held-to-maturity portfolio. These securities are reported at fair value, with
unrealized gains and losses, net of related income taxes, reported as a
separate component of stockholders' equity.
Loans Receivable
Loans receivable are stated at unpaid principal balances less undisbursed
portions of construction loans, unearned discounts, net deferred loan
origination fees and allowances for loan losses. Discounts are amortized using
the interest method over the remaining term to maturity.
Uncollected interest on certain loans identified by management or loans
contractually delinquent more than 90 days is excluded from interest income
and accrued interest receivable. When the accrual of interest is discontinued,
unpaid interest credited to income in the current year is reversed. Accretion
of discounts and deferred loan fees is discontinued when loans are placed on a
nonaccrual status. Income is subsequently recognized in the period the loan is
reinstated and the obligation is brought current. Payments on nonaccrual loans
are recorded as a reduction of principal or as interest income depending on
management's assessment of ultimate collectibility of the loan principal. In
May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS 114) and in October 1994, the FASB issued
Statement of Financial Accounting Standards No. 118 "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures" (SFAS 118). Under
the provisions of SFAS 114, a loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. SFAS 114 requires creditors to measure impairment of a loan based
on the present value of expected future cash flows discounted at the loan's
effective interest rate. If the measure of the impaired loan is less than the
recorded investment in the loan, a creditor shall recognize an impairment by
recording a valuation allowance with a corresponding charge to provision for
estimated losses on loans. All loans designated by the Company as "impaired"
are either placed on nonaccrual or are designated as restructured loans. This
statement also applies to restructured loans and eliminates the requirement to
classify loans that are in-substance foreclosures as foreclosed assets except
for loans where the creditor has physical possession of the underlying
collateral but not legal title. SFAS 118 amends SFAS 114 to allow a creditor
to use existing methods for recognizing interest income on impaired loans. In
addition, SFAS 118 amends certain disclosure requirements of SFAS 114.
SFAS 114 and SFAS 118 apply prospectively to financial statements for fiscal
years beginning after December 15, 1994. The Company adopted these statements
on January 1, 1995 and the effects on the financial statements were not
material.
The Company has established a monitoring system for its loans in order to
identify impaired loans and potential problem loans and to permit periodic
evaluation of the adequacy of allowances for losses in a timely manner. Total
loans include the following portfolios: (i) residential one-to-four family
loans, (ii) multifamily loans (iii) commercial loans, (iv) construction and
land loans, and (v) non-mortgage loans. In analyzing these loans, the Company
has established specific monitoring policies and procedures suitable for the
relative risk profile and other characteristics of the loans within the
various portfolios. The Company's residential one-to-four family, individual
lot, spot construction, equity line of credit, and non-mortgage loans, are
considered to be relatively homogeneous and no single loan is individually
significant in terms of its size or potential risk of loss. Therefore, the
Company generally reviews its residential one- to four-family, individual lot,
spot construction,
F-9
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
equity line of credit and non-mortgage loans by analyzing their performance
and the composition of their collateral for the portfolio as a whole. The
frequency and type of review is dependent upon the inherent risk attributed to
each loan. The frequency and intensity of the loan review is directly
proportionate to the adversity of the loan grade. The Company evaluates the
risk of loss and default for each loan subject to individual monitoring.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired, as defined under SFAS 114, address both the amount
the Company believes is probable that it will collect and the timing of such
collection. As part of the Company's loan review process the Company will
consider such factors as the ability of the borrower to continue to meet the
debt service requirements, assessments of other sources of repayment, the fair
value of any collateral and the creditor's prior history in dealing with these
types of credits. In evaluating whether a loan is considered impaired,
insignificant delays (less than six months) or shortfalls (less than 5% of the
payment amount) in payment amounts, in the absence of other facts and
circumstances, would not alone lead to the conclusion that a loan was
impaired.
Loans on which the Company has ceased the accrual of interest (nonaccrual
loans) constitute the primary component of the portfolio of nonperforming
loans. Loans are generally placed on nonaccrual status when the payment of
interest is 90 days or more delinquent, or 60 days or more delinquent for
loans over $500, or if the loan is in the process of foreclosure, or earlier
if the timely collection of interest and/or principal appears doubtful. In
addition, the Company monitors its loan portfolio in order to identify
performing loans with excessive risk characteristics indicating that the
collection of principal and interest may not be probable. In the event that
the Company believes collection of contractual principal and interest does not
appear probable, the Company will designate the loan as impaired and place the
loan on nonaccrual status. The Company's policy allows for loans to be
designated as impaired and placed on nonaccrual status even though the loan
may be current as to the principal and interest payments and may continue to
perform in accordance with its contractual terms.
All non-homogeneous loans designated by the Company as "impaired" are either
placed on nonaccrual status or are designated as restructured loans. Only
nonaccrual loans and restructured loans not performing in accordance with
their restructured terms are included in nonperforming loans. Additionally,
any loans which would be partially or completely classified as Doubtful or
Loss would also be considered impaired.
When a loan is designated as impaired, the Company measures impairment based
on (1) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (2) the
observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized
by recording a valuation allowance with a corresponding charge to operations.
The Company will charge-off a portion of an impaired loan against the
valuation allowance when it is probable that there is no possibility of
recovering the full amount of the impaired loan.
Payments received on impaired loans are recorded as a reduction of principal
or as interest income depending on management's assessment of the ultimate
collectibility of the loan principal. The amount of interest income recognized
is limited to the amount of interest that would have accrued at the loans'
contractual rate applied to the recorded loan balance, any difference would be
recorded as a loan loss recovery.
A "troubled, collateral dependent" loan is one where proceeds for repayment
can be expected to come only from the operation and sale of the collateral.
The Company considers a loan to be "troubled" under the following
circumstances: (i) when a determination has been made that a loan is
"impaired," the institution shall
F-10
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
presume that the loan is troubled or (ii) where a loan is not "impaired" it
will not generally be deemed to be "troubled", however, if there are unique
facts which demonstrate unusual risk to the institution, then the loan may
still nevertheless be considered "troubled."
A loan is considered "troubled debt restructured" when the Company provides
the borrower certain concessions that it would not normally consider. The
concessions must be because of the borrower's financial difficulty, and the
objective must be to maximize recovery of the Company's investment. Troubled
debt restructures include situations in which the Company accepts a note
(secured or unsecured) from a third party in payment of its receivable from
the borrower, other assets in payment of the loan, an equity interest in the
borrower or its assets in lieu of its receivable, or a modification of the
terms of the debt including, but not limited to: (i) a reduction in stated
interest rate, (ii) an extension of maturity at an interest rate below market,
(iii) a reduction in the face amount of the debt, and/or (iv) a reduction in
the accrued interest.
Loan Origination, Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, with the
net fee or cost being amortized to interest income over the contractual life
of the related loan using the interest method. When a loan is paid off, any
unamortized net loan origination fees are recognized in interest income.
Commitment fees and costs relating to commitments where the likelihood of
exercise is remote are recognized over the commitment period on a straight-
line basis. If the commitment is subsequently exercised during the commitment
period, the remaining net unamortized commitment fees at the time of exercise
are recognized over the life of the loan using the interest method.
Origination fees for construction loans prior to conversion to permanent
financing are recognized using the interest method over the contractual life
of the construction loan. If the Company intends to provide the permanent
financing on the construction project, the origination fees are recognized
using the interest method over the lives of the construction and the permanent
loans.
Real Estate
Real estate properties acquired through loan foreclosure are initially
recorded at fair value less estimated selling costs at the date of
foreclosure. If the collateral for the loan has been in-substance foreclosed,
the loan is reported as if the real estate had been received in satisfaction
of the loan. Once acquired, valuations are periodically obtained by management
and an allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its fair value less estimated costs of
disposal. Real estate properties held for investment are carried at the lower
of cost, including cost of improvements and amenities incurred subsequent to
acquisition, or net realizable value. All costs of anticipated disposition are
considered in the determination of net realizable value. Costs relating to
holding the property are expensed.
Allowances for Losses
The allowance for losses on loans and letters of credit is increased by
provisions to operations and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current and prospective
economic conditions.
Allowances for estimated losses on real estate acquired through foreclosure
and real estate held for investment are established when a decline in value
reduces the fair value and net realizable value, respectively, to less than
the carrying value.
F-11
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Management believes that allowances for losses are adequate. While
management uses available information to recognize losses on loans, real
estate and off-balance sheet letters of credit which are deemed to be probable
and can be reasonably estimated, future additions to the allowances may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans and real
estate. Such agencies may require the Company to recognize additions to the
allowances based on their judgments of the information available to them at
the time of their examination.
Excess Servicing Fee Receivable
Excess servicing fee receivable (ESFR) results from the sale of mortgage
loan participations on which the Company retains servicing rights. ESFRs are
determined by computing the difference between the weighted average yield of
the loans sold and the yield guaranteed to the purchaser, adjusted for a
normal servicing fee. Normal servicing fees are generally defined as the
minimum servicing fee which comparable mortgage issuers typically require
servicers to charge. The resulting ESFRs are recorded as a gain or loss equal
to the present value of such fees to be received over the life of the loans,
adjusted for anticipated prepayments. The ESFRs are amortized using the
interest method adjusted periodically for actual prepayment experience which
offsets the excess servicing fee revenue received.
Periodically, the Company evaluates the recoverability of ESFRs based on the
projected future net servicing income discounted at the same rate used to
calculate the original ESFR. Future prepayment rates are estimated based on
current interest rates and various portfolio characteristics, including loan
type, interest rate and recent prepayment experience. If the estimated net
present value is lower than the current amount of ESFR, a reduction to present
value is recorded by a charge to operations.
Premises and Equipment
Land is carried at cost. Buildings and improvements, leasehold and tenant
improvements, furniture, fixtures and equipment and automobiles are carried at
cost, less accumulated depreciation or amortization, and are depreciated or
amortized using the straight-line method over the estimated useful lives of
the assets or the term of the related lease, whichever is shorter. The useful
lives for the principal classes of assets are:
ASSET USEFUL LIFE
----- ------------
Buildings and improvements.................................. 10 to 50
years
Leasehold and tenant improvements........................... Life of
lease
Furniture, fixtures and equipment........................... 5 to 20
years
Automobiles................................................. 3 to 4 years
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
F-12
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest on Deposits
Interest is either paid to the depositor or added to the savings account on
a periodic basis. On term accounts, the forfeiture of interest (because of
withdrawal prior to maturity) is offset as of the date of withdrawal against
interest expense in the consolidated statements of operations.
Earnings (Loss) per Share
Earnings (loss) per share is computed on the earnings (losses) for the
three-month period ended March 31, 1996 and 1995 (unaudited) and for the year
ended December 31, 1995 and the period beginning April 7, 1994, the date of
conversion to stock form, through December 31, 1994, and are based on the
weighted average number of shares outstanding and common stock equivalents,
when dilutive, during those periods. Loss per share is not presented for
periods prior to conversion to stock form, as the Bank was a mutual savings
bank and no stock was outstanding.
Employee Stock Ownership Plan
The Company accounts for the issuance or sale of treasury shares to the
Employee Stock Ownership Plan (ESOP) when the issuance or sale occurs, and
recognizes compensation expense for shares committed to be released to
directly compensate employees equal to the fair value of the shares committed.
This results in fluctuations in compensation expense as a result of changes in
the fair value of the Company's common stock; however, any such compensation
expense fluctuations result in an offsetting adjustment to additional paid-in
capital. Therefore, total capital is not affected.
Current Accounting Pronouncements
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. However, SFAS 121 does not apply to financial
instruments, core deposit intangibles, mortgage and other servicing rights or
deferred tax assets. SFAS 121 is effective for fiscal years beginning after
December 15, 1995. The Company adopted this statement effective January 1,
1996 and the impact on the consolidated financial statements was
insignificant.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122 (SFAS 122), "Accounting for Mortgage Servicing Rights," an amendment to
Statement of Financial Accounting Standards No. 65. SFAS 122 requires an
institution that purchases or originates mortgage loans and sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
In addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized through a valuation
allowance for each impaired stratum. Capitalized mortgage servicing rights are
to be stratified based upon one or more of the predominate risk
characteristics of the underlying loans such as loan type, size, note rate,
date of origination, term and/or geographic location. SFAS 122 is effective
for fiscal years beginning after December 15, 1995. The Company adopted SFAS
122 effective January 1, 1996 and the impact on the consolidated financial
statements was insignificant.
F-13
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In December 1994, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 94-6, "Disclosure of Certain Significant
Risks and Uncertainties." SOP 94-6 supplements disclosure requirements for
risks and uncertainties existing as of the date of the financial statements in
the following areas: (a) nature of operations, (b) use of estimates in the
preparation of financial statements (c) certain significant estimates and (d)
current vulnerability due to certain concentrations. SOP 94-6 is effective for
financial statements issued for fiscal years ending after December 15, 1995,
and for financial statements for interim periods in fiscal years subsequent to
the year for which this SOP is to be first applied. The Company adopted SOP
94-6 in the financial statements as of and for the year ended December 31,
1995.
In November 1995 the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," (SFAS 123). This statement
establishes financial accounting standards for stock-based employee
compensation plans. SFAS 123 permits the Company to choose either a new fair
value based method or the current APB Opinion 25 intrinsic value based method
of accounting for its stock-based compensation arrangements. SFAS 123 requires
pro forma disclosures of net earnings and earnings per share computed as if
the fair value based method had been applied in financial statements of
companies that continue to follow current practice in accounting for such
arrangements under Opinion 25. SFAS 123 applies to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans.
SFAS 123 also applies to plans in which the employer incurs liabilities to
employees in amounts based on the price of the employer's stock, i.e., stock
option plans, stock purchase plans, restricted stock plans, and stock
appreciation rights. The statement also specifies the accounting for
transactions in which a company issues stock options or other equity
instruments for services provided by nonemployees or to acquire goods or
services from outside suppliers or vendors. The recognition provision of SFAS
123 for companies choosing to adopt the new fair value based method of
accounting for stock-based compensation arrangements may be adopted
immediately and will apply to all transactions entered into in fiscal years
that begin after December 15, 1995. The disclosure provisions of SFAS 123 are
effective for fiscal years beginning after December 15, 1995, however
disclosure of the pro forma net earnings and earnings per share, as if the
fair value method of accounting for stock-based compensation had been elected,
is required for all awards granted in fiscal years beginning after December
31, 1994. The Company will continue to account for stock based compensation
under APB Opinion 25 and, as a result, SFAS 123 will not have a material
impact on the Company's operations.
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
DECEMBER 31
MARCH 31, -------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
Cash on hand and in banks.......................... $21,778 18,035 18,149
Federal funds sold................................. 9,475 12,950 4,925
------- ------ ------
$31,253 30,985 23,074
======= ====== ======
F-14
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are
summarized as follows:
MARCH 31, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(UNAUDITED)
Held-to-maturity:
U.S. Government securities...... $ 4,441 -- -- 4,441
Floating agency notes........... 16,524 -- (500) 16,024
Step up notes................... 4,194 -- -- 4,194
Callable notes.................. 8,998 -- (47) 8,951
Corporate notes................. 4,640 -- (16) 4,624
------- --- ---- ------
$38,797 -- (563) 38,234
======= === ==== ======
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity:
U.S. Government securities...... $ 3,467 33 -- 3,500
Floating agency notes........... 16,527 -- (641) 15,886
Step up notes................... 4,000 -- (2) 3,998
Callable notes.................. 9,000 35 -- 9,035
Certificates of deposit......... 4,000 -- -- 4,000
Corporate notes................. 4,661 -- (23) 4,638
------- --- ------ ------
$41,655 68 (666) 41,057
======= === ====== ======
DECEMBER 31, 1994
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity:
U.S. Government securities...... $ 499 1 -- 500
Floating agency notes........... 16,540 -- (1,607) 14,933
Step up notes................... 11,997 -- (478) 11,519
FNMA stock...................... 25 194 -- 219
Term notes...................... 3,049 -- (95) 2,954
Corporate notes................. 6,789 -- (276) 6,513
------- --- ------ ------
$38,899 195 (2,456) 36,638
======= === ====== ======
Floating agency notes are issued by Government Sponsored Enterprises (GSEs)
and have interest rates that adjust quarterly based on the Constant Maturity
Treasury Index (CMT). Certain notes have call provisions at the option of the
issuer whereby the issuer may redeem the notes at the repricing date. Certain
notes have interest rate floors. Step up notes are notes issued by GSEs which
have an interest rate that adjusts based on a semiannual or annual pre-
determined interest rate "step up" schedule. The notes are callable at the
option of the issuer on the interest rate adjustment date.
F-15
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Callable notes are issued by GSEs and are callable prior to the contractual
maturity date of the note at the option of the issuer. Callable notes are
generally issued at a premium compared to non-callable instruments with
similar maturities.
The remaining contractual principal maturities for the investment securities
held-to-maturity as of March 31, 1996 (unaudited), are as follows:
REMAINING CONTRACTUAL PRINCIPAL MATURITY
----------------------------------------------
MATURING MATURING MATURING MATURING
WITHIN 1 YEAR TO 3 YEARS TO OVER
TOTAL 1 YEAR 3 YEARS 5 YEARS 5 YEARS
------- -------- --------- ---------- --------
U.S. Government
Securities............. $ 4,441 4,441 -- -- --
Floating agency notes... 16,524 3,000 8,024 5,500 --
Step up notes........... 4,194 -- 3,000 -- 1,194
Callable notes.......... 8,998 -- 3,000 5,998 --
Corporate notes......... 4,640 4,640 -- -- --
------- ------ ------ ------ -----
$38,797 12,081 14,024 11,498 1,194
======= ====== ====== ====== =====
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of mortgage-backed securities
are summarized as follows:
MARCH 31, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(UNAUDITED)
Held-to-maturity:
San Bernardino County bond..... $25,544 -- (607) 24,937
City of Indio Mortgage Revenue
Bonds......................... 5,950 -- -- 5,950
------- --- ---- ------
$31,494 -- (607) 30,887
======= === ==== ======
Available-for-sale:
GNMA certificates.............. $20,968 -- (808) 20,160
FHLMC certificates............. 4,742 103 -- 4,845
------- --- ---- ------
$25,710 103 (808) 25,005
======= === ==== ======
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity--
San Bernardino County bond..... $25,615 -- (339) 25,276
======= === ==== ======
Available-for-sale:
GNMA certificates.............. $21,052 46 -- 21,098
FHLMC certificates............. 5,275 130 (2) 5,403
------- --- ---- ------
$26,327 176 (2) 26,501
======= === ==== ======
F-16
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1994
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity:
GNMA certificates............... $ 1,296 -- -- 1,296
FHLMC certificates.............. 32,778 -- (1,196) 31,582
San Bernardino County bond...... 30,698 2,456 -- 33,154
------- ----- ------ ------
$64,772 2,456 (1,196) 66,032
======= ===== ====== ======
Available-for-sale:
GNMA certificates............... $12,228 -- (639) 11,589
FNMA certificates............... 3,668 -- (58) 3,610
------- ----- ------ ------
$15,896 -- (697) 15,199
======= ===== ====== ======
In November 1995, the FASB issued its Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities", that permitted enterprises to reassess the
appropriateness of the classifications of all securities held upon initial
adoption of the Special Report, provided that such reassessment and any
resulting reclassification was completed no later than December 31, 1995. As a
result, the Company reclassified $28,469 of mortgage-backed securities held-
to-maturity to the available-for-sale category in December 1995. There was a
gain of $395 on the subsequent sale of $21,718 of these securities.
The San Bernardino County bond matures in 1998.
The mortgage-backed securities included above have contractual terms to
maturity, but require periodic payments to reduce principal. In addition,
expected maturities will differ from contractual maturities because borrowers
have the right to prepay the underlying mortgages.
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31
MARCH 31, ----------------
1996 1995 1994
----------- ------- -------
(UNAUDITED)
Mortgage loans:
One- to four-family residential............ $347,613 334,691 349,386
Multifamily residential.................... 177,204 186,375 213,057
Commercial real estate..................... 75,083 74,339 70,963
Construction and land...................... 75,905 97,815 133,245
-------- ------- -------
Principal balance of mortgage loans...... 675,805 693,220 766,651
Consumer loans............................. 24,674 26,287 29,584
-------- ------- -------
700,479 719,507 796,235
Less:
Undisbursed portion of construction loans.. (13,125) (18,467) (39,801)
Unearned discounts and net deferred loan
origination fees.......................... (3,127) (3,311) (4,428)
Allowance for estimated loan losses........ (12,076) (14,745) (18,874)
-------- ------- -------
672,151 682,984 733,132
Less loans held-for-sale one-to-four family
residential................................. (5,568) (4,578) (381)
-------- ------- -------
$666,583 678,406 732,751
======== ======= =======
F-17
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
At March 31, 1996 and 1995 (unaudited) the Company was servicing loans and
participations in loans owned by others of $254,870 and $281,954,
respectively, and at December 31, 1995, 1994 and 1993, the Company was
servicing loans and participations in loans owned by others of $251,328,
$283,869 and $297,267, respectively. These loans are not included in the
accompanying consolidated balance sheets.
The weighted average annualized portfolio yield on loans receivable was
7.93%, 7.57% and 6.93% at March 31, 1996 (unaudited) and December 31, 1995 and
1994, respectively.
Loans receivable from executive officers and directors of the Company were
as follows:
DECEMBER 31
MARCH 31, ------------
1996 1995 1994
----------- ----- -----
(UNAUDITED)
Beginning balance.................................. $1,274 1,902 1,685
Additions........................................ -- 160 347
Repayments....................................... (34) (788) (130)
------ ----- -----
Ending balance..................................... $1,240 1,274 1,902
====== ===== =====
Activity in the allowance for losses on loans is summarized as follows:
MARCH 31 YEAR ENDED DECEMBER 31
--------------- --------------------------
1996 1995 1995 1994 1993
------- ------ -------- ------- -------
(UNAUDITED)
Balance, beginning of
period................... $14,745 18,874 18,874 15,373 7,673
Provisions.............. 1,400 373 7,938 12,651 12,990
Charge-offs............. (4,109) (2,793) (12,577) (9,178) (5,405)
Recoveries.............. 40 34 510 28 115
------- ------ -------- ------- -------
Balance, end of period.... $12,076 16,488 14,745 18,874 15,373
======= ====== ======== ======= =======
The following table provides information with respect to the Company's
nonaccrual loans and troubled debt restructured (TDR) loans, net of specific
allowances:
DECEMBER 31
MARCH 31, --------------------
1996 1995 1994 1993
----------- ------ ------ ------
(UNAUDITED)
Nonaccrual loans............................ $13,845 17,604 14,102 22,749
TDR loans................................... 8,982 6,888 20,467 11,275
------- ------ ------ ------
Total nonaccrual and TDR loans............ $22,827 24,492 34,569 34,024
======= ====== ====== ======
The effect of nonaccrual and TDR loans on interest income for the three
months ended March 31, 1996 and 1995 (unaudited) and the years ended December
31, 1995, 1994 and 1993 is presented below:
MARCH 31 YEAR ENDED DECEMBER 31
------------ -----------------------
1996 1995 1995 1994 1993
------ ----- ------- ------- -------
(UNAUDITED)
Contractual interest due............. $442 493 2,366 2,422 2,318
Interest recognized.................. 234 315 1,757 1,790 1,277
------ ----- ------- ------- -------
Net interest foregone.............. $208 178 609 632 1,041
====== ===== ======= ======= =======
F-18
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table identifies the Company's total recorded investment in
impaired loans, net of specific reserves, by type at March 31, 1996
(unaudited) and December 31, 1995:
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
Nonaccrual loans:
Multifamily....................................... $ 521 6,115
Commercial........................................ -- 223
Tract construction and land....................... 565 581
TDR loans........................................... 8,982 6,888
Other impaired loans:
Multifamily....................................... 4,259 5,187
Commercial........................................ -- 656
Tract construction and land....................... -- 432
------- ------
$14,327 20,082
======= ======
The related impairment valuation allowance at March 31, 1996 (unaudited) and
December 31, 1995 was $948 and $4,794, respectively, which is included as part
of the allowance for estimated losses on loans in the accompanying
consolidated statement of financial condition. The provision for losses and
any related recoveries are recorded as part of the provision for estimated
losses on loans in the accompanying statement of operations. During the three
months ended March 31, 1996 (unaudited) and the year ended December 31, 1995,
the Company's average investment in impaired loans was $895 and $1,131, and
interest income recorded during this period was $292 and $1,510, of which $261
and $1,510 was recorded utilizing the cash basis method of accounting
described above, respectively.
(6) LETTERS OF CREDIT--TAX EXEMPT BONDS
The Company has extended collateralized letters of credit for the account of
several owners of projects financed by tax-exempt bonds. The Company
guaranteed principal and interest payments in the approximate amounts of
$118,168, $122,633 and $119,358 as of March 31, 1996 (unaudited) and December
31, 1995 and 1994, respectively. Properties securing letters of credit in the
amount of $4,022, $14,093 and $19,228, net of specific valuation allowances,
were included in real estate acquired through foreclosure or considered in-
substance foreclosures as of March 31, 1996 (unaudited) and December 31, 1995
and 1994, respectively. The required value of collateral at March 31, 1996
(unaudited) and December 31, 1995 and 1994 amounted to approximately $144,344,
$143,197 and $156,730, respectively. The letters of credit are collateralized
with FHLMC participation certificates, GNMA participation certificates, U.S.
Government securities, and FHLB letters of credit which are collateralized by
pledged mortgage loans. The collateral book value amounted to approximately
$145,395, $144,572 and $180,631 as of March 31, 1996 (unaudited) and December
31, 1995 and 1994, respectively.
F-19
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Activity in the allowance for losses on off-balance sheet letters of credit,
included in other liabilities in the statements of financial condition, is as
follows:
THREE MONTHS YEAR ENDED
ENDED MARCH 31 DECEMBER 31
---------------- ---------------------
1996 1995 1995 1994 1993
------- ------- ------ ------ -----
(UNAUDITED)
Balance, beginning of period........ $ 7,447 6,908 6,908 2,599 2,142
Provisions........................ -- 193 2,536 9,895 694
Charge-offs....................... (500) (1,444) (1,997) (5,586) (237)
------- ------- ------ ------ -----
Balance, end of period.............. $ 6,947 5,657 7,447 6,908 2,599
======= ======= ====== ====== =====
The project owners have pledged the financed projects against the Company's
letters of credit. Should the project owners default on reimbursement
agreement payments, the Company could foreclose on the project. If the Company
were to default on a letter of credit draw, the bond Trustee would then
liquidate the collateral pledged by the Company. As of March 31, 1996
(unaudited) and December 31, 1995, the Company holds in trust a portion of the
proceeds, approximately $360 and $360, respectively, from one of the
aforementioned tax exempt bond projects. These are funds that were withheld
from the original fundings until specified conditions are met. The interest
earned on the investments is remitted to the project owners on a quarterly
basis as specified by the bond agreements.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
DECEMBER 31
MARCH 31, -----------
1996 1995 1994
----------- ----- -----
(UNAUDITED)
Loans receivable..................................... $4,002 4,103 3,764
Investment securities................................ 512 371 380
Mortgage-backed securities........................... 395 540 446
------ ----- -----
$4,909 5,014 4,590
====== ===== =====
(8) REAL ESTATE
Real estate acquired through foreclosure is summarized as follows:
DECEMBER 31
MARCH 31, --------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
Properties:
Acquired in settlement of loans................ $11,503 23,920 18,170
In-substance foreclosures...................... 8,048 8,241 15,483
------- ------ ------
19,551 32,161 33,653
Less allowance for estimated losses.............. (3,786) (7,601) (2,612)
------- ------ ------
$15,765 24,560 31,041
======= ====== ======
F-20
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Real estate held for sale or investment is summarized as follows:
DECEMBER 31
MARCH 31, --------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
Real estate held for investment.................. $ -- 1,471 2,789
Real estate held for sale........................ 3,545 2,122 9,205
------- ------ ------
3,545 3,593 11,994
Less allowance for estimated losses.............. (1,894) (1,895) (1,766)
------- ------ ------
$ 1,651 1,698 10,228
======= ====== ======
Activity in the allowance for losses on real estate is summarized as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
--------------------- ----------------------
1996 1995 1995 1994 1993
---------- --------- ------ ------ ------
(UNAUDITED)
Balance, beginning of
period...................... $ 9,496 4,378 4,378 2,113 2,149
Provisions................. -- 1,422 8,336 4,653 1,968
Charge-offs................ (3,816) (557) (3,218) (2,388) (2,004)
---------- -------- ------ ------ ------
Balance, end of period....... $ 5,680 5,243 9,496 4,378 2,113
========== ======== ====== ====== ======
Allowance for losses on:
Real estate acquired
through foreclosure....... $ 3,786 3,780 7,601 2,612 963
Real estate held for sale
or investment............. 1,894 1,463 1,895 1,766 1,150
---------- -------- ------ ------ ------
$ 5,680 5,243 9,496 4,378 2,113
========== ======== ====== ====== ======
Real estate operations are summarized as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
-------------------- --------------------
1996 1995 1995 1994 1993
--------- --------- ------ ----- -----
(UNAUDITED)
Loss on real estate operations,
net............................ $ 700 349 1,997 3,737 1,597
(Gain) loss on sale of real
estate, net.................... (172) 355 (75) (20) (343)
Provision for loss on real
estate......................... -- 1,422 8,336 4,653 1,968
--------- --------- ------ ----- -----
$ 528 2,126 10,258 8,370 3,222
========= ========= ====== ===== =====
F-21
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31
MARCH 31, -------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
Land............................................... $ 3,266 3,266 3,291
Buildings and leasehold improvements............... 18,131 18,142 18,185
Furniture, fixtures and equipment.................. 12,156 12,193 13,151
------- ------ ------
33,553 33,601 34,627
Accumulated depreciation and amortization.......... 16,163 15,982 15,463
------- ------ ------
$17,390 17,619 19,164
======= ====== ======
(10) INCOME TAXES
Income taxes (benefit) is comprised of the following:
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31
MARCH 31, --------------------------
1996 1995 1994 1993
------------ -------- ------- -------
(UNAUDITED)
Current:
Federal......................... $ -- 120 (4,183) (737)
State........................... 2 4 -- --
----- -------- ------- -------
Current income taxes
(benefit).................... 2 124 (4,183) (737)
----- -------- ------- -------
Deferred:
Federal......................... 64 (3,759) (4,367) (2,332)
State........................... 472 (157) (440) (600)
----- -------- ------- -------
536 (3,916) (4,807) (2,932)
Change in valuation
allowance.................... (536) 3,916 10,140 --
----- -------- ------- -------
Deferred income taxes
(benefit).................... -- -- 5,333 (2,932)
----- -------- ------- -------
Income taxes (benefit)........ $ 2 124 1,150 (3,669)
===== ======== ======= =======
F-22
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's effective income taxes differ from the amount determined by
applying the statutory Federal rate to earnings (loss) before income taxes as
follows:
THREE MONTHS
ENDED
MARCH 31,
1996 1995 1994 1993
------------ ------ ------ ------
(UNAUDITED)
Income taxes at Federal tax rate...... $321 (2,706) (8,816) (2,420)
Tax-exempt income..................... (99) (632) (568) (904)
California franchise tax, net of
Federal income tax benefit........... 261 (504) 244 (395)
Change in valuation allowance......... (536) 3,916 10,140 --
Other................................. 51 50 150 50
---- ------ ------ ------
$ 2 124 1,150 (3,669)
==== ====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax asset and deferred income tax benefit
are presented below:
DEFERRED
INCOME DEFERRED DEFERRED
MARCH 31, TAXES DECEMBER 31, INCOME TAXES DECEMBER 31, INCOME TAXES DECEMBER 31,
1996 (BENEFITS) 1995 (BENEFIT) 1994 (BENEFIT) 1993
----------- ----------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Accrued expenses....... $ 196 (196) -- 180 180 495 675
Allowance for losses on
loans and real
estate................ 10,887 155 11,042 1,109 12,151 (4,761) 7,390
Core deposit
intangible............ -- -- -- -- -- 247 247
Pension and deferred
compensation.......... 1,109 (2) 1,107 (426) 681 130 811
Other.................. 548 44 592 (941) (349) 270 (79)
Mark to market......... 117 (59) 58 (58) -- -- --
Net operating loss
carryforward.......... 5,432 453 5,885 (3,632) 2,253 (2,253) --
------- ---- ------- ------ ------- ------ -----
18,289 395 18,684 (3,768) 14,916 (5,872) 9,044
Valuation allowance..... (14,435) (536) (14,971) 3,916 (11,055) 10,140 (915)
------- ---- ------- ------ ------- ------ -----
3,854 (141) 3,713 148 3,861 4,268 8,129
------- ---- ------- ------ ------- ------ -----
Deferred tax
liabilities:
Premises and
equipment............. 1,084 100 984 (952) 1,936 365 1,571
FHLB stock............. 1,105 -- 1,105 193 912 209 703
Installment sale....... -- -- -- 7 (7) (26) 19
Accrued interest and
other................. -- 200 (200) (506) 306 244 62
California franchise
tax................... 1,401 (159) 1,560 1,110 450 273 177
------- ---- ------- ------ ------- ------ -----
3,590 141 3,449 (148) 3,597 1,065 2,532
------- ---- ------- ------ ------- ------ -----
Net deferred tax
asset................ $ 264 -- 264 -- 264 5,333 5,597
======= ==== ======= ====== ======= ====== =====
F-23
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In determining the possible future realization of deferred tax assets,
future taxable income from the following sources is taken into account: (a)
the reversal of taxable temporary differences, (b) future operations exclusive
of reversing temporary differences and (c) tax planning strategies that, if
necessary, would be implemented to accelerate taxable income into years in
which net operating losses might otherwise expire. As of March 31, 1996
(unaudited) and December 31, 1995 and 1994, the valuation allowance against
deferred tax assets amounted to $14,435, $14,971 and $11,055, respectively.
Deferred tax assets as of March 31, 1996 (unaudited) and December 31, 1995 and
1994 have been recognized to the extent of the expected reversal of taxable
temporary differences and the amount of Federal income tax paid in the
carryback period which would be recoverable through the carryback of net
operating losses.
The Bank was previously allowed a special bad debt deduction, subject to
certain limitations based on aggregate loans receivable and savings deposit
balances at the end of the year. If the amounts that qualified as deductions
for Federal income tax are later used for purposes other than bad debt losses,
they will be subject to Federal income tax at the then current rate. Included
in retained earnings of the Bank at December 31, 1995 is approximately $12,324
related to the base year for which no deferred tax liability has been
recognized for bad debt deductions claimed in prior years under the percentage
of taxable income method.
(11) DEPOSITS
Deposits and their respective weighted average interest rates are summarized
as follows:
DECEMBER 31
---------------------------------
MARCH 31, 1996 1995 1994
--------------------------- ---------------- ----------------
INTEREST WEIGHTED WEIGHTED WEIGHTED
RATE AVERAGE AVERAGE AVERAGE
RANGE RATE AMOUNT RATE AMOUNT RATE AMOUNT
--------- -------- -------- -------- ------- -------- -------
(UNAUDITED)
Regular passbook
deposits............... 2.00 2.00% $ 36,114 1.94% 34,429 1.93% 36,959
Money market deposits... 2.00-4.21 3.05 142,144 2.82 136,949 2.35 133,315
Interest bearing
checking (NOW)
deposits............... 1.05-1.30 1.10 85,742 1.16 83,470 1.02 87,362
Non-interest bearing
deposits............... -- -- 17,186 -- 15,384 -- 14,156
Certificates of
Deposit................ 2.81-8.75 5.31 488,493 5.47 506,296 4.40 533,542
-------- ------- -------
4.26 $769,679 4.33% 776,528 3.42% 805,334
==== ======== ==== ======= ==== =======
At March 31, 1996 (unaudited) and December 31, 1995 and 1994, deposits with
balances greater than $100 totaled $62,890, $62,835 and $73,757, respectively.
Certificates of deposit at March 31, 1996 (unaudited) mature as follows:
Immediately withdrawable........................................... $ 6,450
Less than one year................................................. 345,199
One to two years................................................... 98,138
Two to three years................................................. 20,047
Three to four years................................................ 11,757
Four to five years................................................. 2,875
More than five years............................................... 4,027
--------
$488,493
========
F-24
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
At March 31, 1996 (unaudited) and December 31, 1995 and 1994, $1,255, $1,199
and $811 of public funds on deposit were secured by loans receivable with an
aggregate carrying value of $3,905, $4,137 and $4,977, respectively.
Interest expense on deposits is summarized as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
---------------------------------------
1996 1995 1995 1994 1993
--------- --------------- ------ ------
(UNAUDITED)
Regular passbook deposits.......... $ 177 182 685 831 828
Money market deposits.............. 1,071 804 3,622 3,509 4,279
Interest-bearing checking (NOW)
deposits.......................... 238 228 1,000 997 1,322
Certificate accounts............... 6,602 6,868 29,651 22,708 23,667
--------- -------- ------ ------ ------
$ 8,088 8,082 34,958 28,045 30,096
========= ======== ====== ====== ======
(12) OTHER BORROWED MONEY
Other borrowed money consisted of the following:
DECEMBER 31
MARCH 31, -------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
Notes payable:
Federal Home Loan Bank advances.................. $10,000 10,000 60,000
Notes Payable Revenue Bonds...................... 10,824 17,423 16,375
Loma Linda Housing Revenue Bonds................. 3,710 3,710 3,710
------- ------ ------
$24,534 31,133 80,085
======= ====== ======
As of March 31, 1996 (unaudited) and December 31, 1995 and 1994, the Company
had an available line of credit from the Federal Home Loan Bank of San
Francisco (FHLB) in the approximate amount of $129,926, $135,976 and $240,236,
respectively. The remaining unused balance of the FHLB line of credit was
$14,849, $20,899, and $69,008 at March 31, 1996 (unaudited) and December 31,
1995 and 1994, respectively. This line is secured by the pledge of certain
loans receivable aggregating $265,284, $266,894 and $321,363 and the Company's
required investment in $100 par value capital stock of the Federal Home Loan
Bank of San Francisco totaling, at cost, $7,003, $6,914 and $8,561 at March
31, 1996 (unaudited) and December 31, 1995 and 1994, respectively.
F-25
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Notes payable revenue bonds are a result of the Company foreclosing on
certain tax exempt bond projects on which the Company had extended letters of
credit. In conjunction with the Company foreclosing on the projects the
Company assumed a portion of the tax exempt bonds (revenue bonds) financing
the projects. When the foreclosed projects are sold the revenue bonds are
generally restructured. The revenue bonds listed below bear variable interest
rates which reset weekly. The interest stated below represents the rate as of
March 31, 1996 (unaudited).
INTEREST LOC COLLATERAL COLLATERAL
AMOUNT RATE MATURITY AMOUNT TYPE
------- -------- -------- ---------- ----------
City of Hemet Housing
Revenue Bonds Series
1988..................... $ 8,200 3.61% 8/15/04 11,459 GNMA
City of Indio Mortgage
Revenue Bonds 1985 Series
A........................ 155 3.25 8/15/97 13,133 GNMA
County of San Bernardino
Housing Revenue Bonds
1992 Series A............ 2,469 3.52 9/1/07 6,238 FHLB LOC
------- ------
$10,824 30,830
======= ======
The note payable related to the Loma Linda Housing Revenue Bonds bears an
interest rate of 7.375%. The interest is payable every June 1 and December 1.
The note is collateralized with FHLMC participation certificates. The book
value of the FHLMC participation certificates at March 31, 1996 (unaudited)
and December 31, 1995 and 1994 amounted to $4,742, $5,169 and $5,539,
respectively. The Company may not prepay the Loma Linda Housing Revenue Bonds
prior to June 1, 1999. Beginning June 1, 1999 and thereafter, the Company may
prepay the bonds, in whole or in part, without regard to prepayment by the
developer, on the following dates upon payment of a redemption premium
(expressed as percentages of the principal amount prepaid) set forth in the
following table, together with interest payable on the amount prepaid to the
date fixed for redemption:
PREPAYMENT
PREPAYMENT DATES PREMIUM
---------------- ----------
June 1, 1999 through May 31, 2000............................. 1%
June 1, 2000 and thereafter................................... 0%
A summary of contractual maturities on other borrowed money is as follows:
DECEMBER 31,
YEAR MARCH 31, 1996 1995
---- -------------- ------------
(UNAUDITED)
1996......................................... $10,000 $10,000
1997......................................... 155 155
2001 and thereafter.......................... 14,379 20,978
------- -------
$24,534 $31,133
======= =======
(13) EMPLOYEE BENEFIT PLANS
The Company maintains a defined benefit retirement plan (retirement plan)
covering substantially all of its employees. The benefits are based on each
employee's years of service and final average earnings. An employee becomes
fully vested upon completion of five years of qualifying service. The
Company's Board of Directors approve the amount to be funded annually which
may range from the minimum to the maximum amount that can be deducted by the
Company for Federal income tax purposes. The Company also has an unfunded
supplemental retirement plan for selected employees and unfunded retirement
plan for outside directors. As of
F-26
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
March 31, 1996 (unaudited) and December 31, 1995, the supplemental retirement
plan held 54,865 shares and 57,430 shares of the Bancorp's common stock at a
cost of $611 and $639, respectively, and the retirement plan for outside
directors held 28,400 shares of the Bancorp's common stock at a cost of $249.
Since the plans are unfunded, these shares are accounted for as Treasury
Stock. All plans were frozen effective June 30, 1995.
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated statements of financial condition at
December 31, 1995 and 1994:
1995
---------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
-------- ------------ ----------
Actuarial present value of benefit
obligation:
Accumulated benefit obligation............ $ 11,965 1,184 271
======== ===== ====
Vested benefit obligation................. $ 11,677 1,184 271
======== ===== ====
Projected benefit obligation for service
rendered to date........................... $ 11,965 1,184 302
Plan assets at fair value................... (16,492) -- --
-------- ----- ----
Projected benefit obligation in excess of
(less than) plan assets.................... (4,527) 1,184 302
Unrecognized net gain (loss) from past
experience different from that assumed and
effects of changes in assumptions.......... 2,914 (331) 18
Unrecognized net obligation at April 1, 1987
being recognized over twelve years......... -- (62) --
Unrecognized prior service cost............. -- -- (203)
-------- ----- ----
Additional liability resulting from minimum
liability provisions....................... -- 393 154
-------- ----- ----
Accrued (prepaid) retirement and
supplemental costs included in the
accompanying financial statements.......... $ (1,613) 1,184 271
======== ===== ====
1994
---------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
-------- ------------ ----------
Actuarial present value of benefit
obligation:
Accumulated benefit obligation............ $ 9,229 592 228
======== ===== ====
Vested benefit obligation................. $ 9,007 592 228
======== ===== ====
Projected benefit obligation for service
rendered to date........................... $ 12,791 778 304
Plan assets at fair value................... (14,096) -- --
-------- ----- ----
Projected benefit obligation in excess of
(less than) plan assets.................... (1,305) 778 304
Unrecognized net gain (loss) from past
experience different from that assumed and
effects of changes in assumptions.......... 3,081 28 34
Unrecognized net obligation at April 1, 1987
being recognized over twelve years......... (130) (73) --
Unrecognized prior service cost............. (74) -- (217)
-------- ----- ----
Additional liability resulting from minimum
liability provisions....................... -- -- 107
-------- ----- ----
Accrued retirement and supplemental costs
included in the accompanying financial
statements................................. $ 1,572 733 228
======== ===== ====
F-27
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net periodic pension cost (benefit) for the Pension, Supplemental Retirement
and Outside Directors Retirement plans for the three-month ended March 31,
1996 (unaudited) was $(105), $30, and $11, respectively. Net periodic pension
cost for the Pension, Supplemental Retirement and the Outside Directors
Retirement plans for 1995, excludes $3,329, $0 and $61, respectively of
curtailment gains and includes the following components:
1995
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Service cost--benefits earned during the
period.................................. $ 431 -- 20
Interest cost on projected benefit
obligation.............................. 978 92 24
Return on plan assets.................... (3,236) -- --
Net amortization and deferral............ 1,972 20 14
------- --- ---
Net periodic pension cost.............. $ 145 112 58
======= === ===
1994
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Service cost--benefits earned during the
period.................................. $ 950 50 27
Interest cost on projected benefit
obligation.............................. 1,011 56 23
Return on plan assets.................... 21 -- --
Net amortization and deferral............ (1,106) 10 14
------- --- ---
Net periodic pension cost.............. $ 876 116 64
======= === ===
1993
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Service cost--benefits earned during the
period.................................. $ 820 44 23
Interest cost on projected benefit
obligation.............................. 913 53 20
Return on plan assets.................... (1,378) -- --
Net amortization and deferral............ 452 10 14
------- --- ---
Net periodic pension cost.............. $ 807 107 57
======= === ===
The assumptions used in determining the actuarial present value of the
accumulated benefit obligation and the expected return on plan assets for 1995
and 1994 are as follows:
1995
-------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Actuarial present values:
Weighted average
discount rate.......... 7.25% 7.25% 7.25%
Rate of increase in
future compensation.... 5.50% 5.50% N/A
Expected long-term
return on plan assets.. 8.00% N/A N/A
Post retirement cost of
living allowance....... 3.00% 3.00% N/A
F-28
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1994
-------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Actuarial present values:
Weighted average
discount rate.......... 8.50% 8.50% 8.50%
Rate of increase in
future compensation.... 5.50% 5.50% 3.00%
Expected long-term
return on plan assets.. 8.00% N/A N/A
Post retirement cost of
living allowance....... 3.00% 3.00% N/A
The latest actuarial valuation is as of December 31, 1995.
Effective June 30, 1995, the Company elected to freeze the employee plan and
to partially freeze the director's plan, resulting in a curtailment gain of
$3,390.
In December 1990, the FASB issued Statement of Financial Standards No. 106
(SFAS 106), "Employer's Accounting for Postretirement Benefits Other than
Pensions." The Company adopted SFAS 106 when it converted to a public company.
The Company currently provides medical coverage to eligible post retirement
employees. The Company elected to amortize the transition obligation of
implementing SFAS 106 over a 20-year period. The Company charged $18 and $67
to compensation expense during the three-month period ended March 31, 1996
(unaudited) and for the year ended December 31, 1995, respectively. The
actuarial present value of the full benefit obligation at December 31, 1995
was $459.
Profit-Sharing Plan
The Company has a profit-sharing plan for employees that meet certain length
of service requirements. The plan expense is determined at the discretion of
the Board of Directors and no amounts were provided for three-month period
ended March 31, 1996 (unaudited) and for the years ended December 31, 1995,
1994 and 1993.
Employee Stock Ownership Plan (ESOP)
As part of the conversion, an ESOP was established for all employees who
have completed 1 year of service with the Company during which the employee
has served a minimum of 1,000 hours. The ESOP is internally leveraged and
borrowed $2,447 from the Company to purchase 305,900 shares of the common
stock of the Bancorp issued in the Conversion. The loan will be repaid
principally from the Bank's discretionary contributions to the ESOP over a
period of 7 years. At March 31, 1996 (unaudited) and at December 31, 1995 and
1994, the outstanding balance on the loan was $1,661, $1,748 and $2,098,
respectively. Shares purchased with the loan proceeds are held in a suspense
account for allocation among participants as the loan is repaid. At March 31,
1996 (unaudited) 131,100 shares have been committed and 174,800 shares remain
in the suspense account and at December 31, 1995, 87,400 shares have been
committed and 218,500 shares remain in the suspense account. 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 100% vested after 7 years of
credited service. Vesting will accelerate upon retirement, death or disability
of the participant or in the event of a change in control of the Bank or the
Company. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable
upon death, retirement, early retirement, disability or separation from
service. Since the annual contributions are discretionary, the benefits
payable under the ESOP cannot be estimated. The expense related to the ESOP
for three-month period ended March 31, 1996 (unaudited) and for the years
ended December 31, 1995
F-29
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
and 1994 was approximately $105, $392 and $469, respectively. At March 31,
1996 (unaudited) and at December 31, 1995 and 1994, unearned compensation
related to the ESOP approximated $1,661, $1,748 and $2,098, respectively, and
is shown as a reduction of stockholders' equity in the accompanying
consolidated statements of financial condition. At March 31, 1996 (unaudited)
and at December 31, 1995, the fair value of unearned ESOP shares is $1,573 and
$2,212, respectively.
Incentive Plans
RECOGNITION AND RETENTION PLAN (RRP)
As part of the conversion, the Company adopted the RRP as a method of
providing officers, employees and nonemployee directors of the Company with a
proprietary interest in the Company in a manner designed to encourage such
persons to remain with the Company. The Company contributed funds to the RRP
to enable the RRP to acquire, in the aggregate, 3% or 131,100 of the shares of
common stock in the conversion. Under the RRP, awards are granted in the form
of shares of common stock held by the RRP. These shares represent deferred
compensation and have been accounted for as a reduction of stockholders'
equity. Shares allocated vest over a period of one to five years commencing on
April 7, 1995 and continuing on each anniversary date thereafter. Awards are
automatically vested upon a change in control of the Company or the Bank. In
the event that before reaching normal retirement, an officer, employee or
director terminates service with the Company or the Bank, that person's
nonvested awards are forfeited.
The expense related to the RRPs for the three-month period ended March 31,
1996 (unaudited) and for fiscal 1995 and 1994 was approximately $52, $208 and
$157, respectively. At March 31, 1996 (unaudited) and December 31, 1995 and
1994, unearned compensation related to the RRPs was approximately $629, $682
and $890, respectively, and is shown as a reduction to stockholders' equity in
the accompanying consolidated statements of financial condition.
LONG-TERM INCENTIVE PLAN
In June 1995, the Company's stockholders approved the 1995 Long-Term
Incentive Plan (LTIP) which was adopted by the Company's Board of Directors in
April 1995. The Plan authorizes the granting of stock options and limited
rights and restricted awards up to 5% of the outstanding common stock (218,000
shares) for 10 years following the date of the plans adoption. As of the
record date, 75,000 shares subject to options which become exercisable in five
equal annual installments commencing one year from the grant date and 43,000
restricted stock awards, 5,000 which are immediately vested and 38,000 which
are performance based and will be awarded over a one to five year period at
the discretion of the Board of Directors, commencing from grant date, were
authorized and approved. The expense related to the LTIP for 1995 was $122.
STOCK OPTION PLANS
At the special meeting of stockholders held on June 29, 1994, the
stockholders of the Company ratified two stock option plans, the 1994
Incentive Stock Option Plan (the Stock Plan) and the 1994 Stock Option Plan
for Outside Directors (the Directors' Plan). Both plans provide for the grant
of options at an exercise price equal to the fair market value on the date of
grant. The Stock Plan and the Directors' Plan are intended to promote stock
ownership by directors and selected officers and employees of the Company to
increase their proprietary interest in the success of the Company and to
encourage them to remain in the employment of the Company or its subsidiaries.
Awards granted under the Stock Plan may include incentive stock options, non-
statutory options and limited rights which are exercisable only upon a change
in control of the Bank or the Company. Awards under the Directors' Plan are
non-statutory options.
The Directors' Plan authorizes the granting of stock options for a total of
109,250 shares of common stock or 2.5% of the shares issued in the conversion.
The Stock Plan authorizes the granting of stock options for a
F-30
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
total of 327,750 shares of common stock or 7.5% of the shares issued in the
conversion. All options granted under both plans in connection with the
conversion were granted at an exercise price of $8.00 per share, which was the
offering price of the common stock on the conversion date.
All options granted under the Directors' Plan will become exercisable in
three equal annual installments commencing April 7, 1995 and continuing on
each anniversary date thereafter. Options granted to a subsequently elected
outside director will become exercisable on the April 7 following that date on
which such subsequent outside director is qualified and first begins to serve
as director, provided, however, that in the event of death, disability,
retirement or upon a change in control of the Company or the Bank, all options
previously granted would automatically become exercisable. Each option granted
under the Directors' Plan expires upon the earlier of ten years following the
date of grant, or one year following the date the optionee ceases to be a
director.
All options granted under the Stock Plan are exercisable in five equal
annual installments commencing April 7, 1995 and continuing on each
anniversary date thereafter. All options will be exercisable in the event of
the optionees' death, disability or retirement or upon a change in control of
the Company or the Bank. Each option granted under the Stock Plan may be
exercisable for three months following the date on which the employee ceases
to perform services for the Bank or the Company, except that in the event of
death, disability, retirement or upon a change in control of the Company or
the Bank, options may be exercisable for up to one year thereafter or such
longer period as determined by the Company.
A summary of stock option transactions under the plans for the year ended
December 31, 1995 follows:
NUMBER OF SHARES
OPTION ------------------
PRICE 1995 1994
----------- -------- --------
Options outstanding, beginning of period.... $ 8.00 437,000 437,000
Granted................................... 10.04 75,000 --
Canceled.................................. -- (24,752) --
----------- -------- --------
Options outstanding, end of period.......... $ -- 487,248 437,000
=========== ======== ========
Options exercisable......................... $8.00-10.04 183,191 --
=========== ======== ========
(14) REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) was signed into law on August 9, 1989; regulations for savings
institutions' minimum capital requirements went into effect on December 7,
1989. In addition to its capital requirements, FIRREA includes provisions for
changes in the Federal regulatory structure for institutions including a new
deposit insurance system, increased deposit insurance premiums and restricted
investment activities with respect to non-investment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets in order to qualify as a savings institution.
FIRREA regulations require institutions to have a minimum regulatory
tangible capital equal to 1.5% of total assets, a minimum 3.0% core capital
ratio and as of December 31, 1993, an 8.0% risk-based capital ratio. The Bank
was in compliance with such requirements at December 31, 1995.
In addition, savings institutions are also subject to the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which
was signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992.
In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and
F-31
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
regulatory environment for insured depository institutions, including
reductions in insurance coverage for certain kinds of deposits, increased
supervision by the Federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting and operations.
The Office of Thrift Supervision (OTS) is required by FDICIA to prescribe
minimum acceptable operational and managerial standards and standards for
asset quality, earnings, and valuation of publicly-traded shares. The
operational standards cover internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and employee compensation.
The asset quality and earnings standards specify a maximum ratio of classified
assets to capital and minimum earnings sufficient to absorb losses. Any
institution that fails to meet such standards must submit a plan for
corrective action within 30 days, and will be subject to a host of restrictive
sanctions if it fails to implement the plan.
In April 1995, the Bank entered into a supervisory agreement with the OTS.
The supervisory agreement required the Bank to develop and submit a revised
business plan that includes specific plans for the reduction of classified
assets and general and administrative expenses and the continued maintenance
of adequate regulatory capital levels. The agreement also required the Bank to
develop improved internal asset review policies and procedures and to explore
the possibility of raising additional capital. Failure to comply with the
supervisory agreement entered into with the OTS could subject the Bank and/or
its officers and directors to administrative enforcement actions, including
civil money penalties and/or cease and desist orders. A recent OTS examination
indicates that the Bank is in substantial compliance with the requirements of
the supervisory agreement. The prompt corrective action regulations define
specific capital categories based on an institutions capital ratios.
The capital categories, in declining order, are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions categorized
as "undercapitalized" or worse are subject to certain restrictions, including
the requirement to file a capital plan with the OTS, prohibitions on the
payment of dividends and management fees, restrictions on executive
compensation and increased supervisory monitoring, among other things. Other
restrictions may be imposed on the institution either by the OTS or by the
FDIC, including requirements to raise additional capital, sell assets or sell
the entire institution. Once an institution becomes "critically
undercapitalized" it is generally placed in receivership or conservatorship
within 90 days.
To be considered "adequately capitalized," a savings institution must
generally have a core capital ratio of at least 4%, a Tier 1 risk-based
capital ratio of at least 4%, and a total risk-based capital ratio of at least
8%. An institution is deemed to be "critically undercapitalized" if it has a
tangible equity ratio of 2% or less. At December 31, 1995, the Bank's
regulatory capital was in excess of the amount necessary to be "adequately
capitalized."
Deposits in the Bank are presently insured by the Savings Association
Insurance Fund (SAIF). The SAIF is statutorily required to be recapitalized to
a 1.25% of insured reserve deposits ratio. Legislation is pending in Congress
that would impose a one-time special assessment on SAIF member institutions,
including the Bank, of between 79 to 85 basis points on the amount of deposits
held by the Bank to recapitalize the SAIF fund.
The Bank's assessment rate and the premiums paid to the SAIF for the year
December 31, 1995 were 30 basis points and $2,401, respectively. Based on the
Bank's deposit insurance assessment base as of December 31, 1995, a 79 to 85
basis point fee to recapitalize the SAIF would result in a $6,102 to $6,566
payment. Payment of a fee in this range would likely have an adverse effect on
the Bank's results of operations and would have the effect of immediately
reducing the capital of the Bank by the amount of the fee. Additionally,
payment of a one-time fee could result in the Bank moving from the "adequately
capitalized" to the "undercapitalized" category within the meaning of the OTS
"prompt corrective action" regulations. The Bill, as presently proposed,
includes a potential exemption for those institutions which would become
undercapitalized. Those institutions would
F-32
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
continue to pay higher SAIF premiums through 1999. There is no guarantee that
the Bank would receive this exemption. Because there is considerable
uncertainty as to the specific legislative provisions, if any, that will be
enacted, management is unable to predict the ultimate impact of the pending
legislation upon the Company and its operations.
(15) COMMITMENTS AND CONTINGENCIES
The Company and subsidiaries have incurred various outstanding commitments
and contingent liabilities in the ordinary course of business that are not
reflected in the accompanying consolidated financial statements as follows:
Litigation
The Bank is a named defendant in two wrongful termination lawsuits filed in
the Superior Court of the State of California for San Bernardino County by two
former senior officers whose positions were eliminated in a May 1995 reduction
in force. The first lawsuit, which was filed on October 24, 1995, alleges that
the plaintiff had an oral employment agreement with the Bank which was
breached by the plaintiff's demotion and subsequent termination and further
alleges that such demotion and termination was a result of age discrimination
by the Bank. The second lawsuit, which was filed on March 25, 1996, also
alleges that the plaintiff had an oral employment agreement with the Bank
which was breached by the plaintiff's termination and that such termination
was a result of age discrimination. Both lawsuits seek an unspecified amount
of damages. The Bank has denied any liability, and has engaged outside counsel
to defend against the actions.
The Bank is also a named defendant in a lawsuit filed on January 9, 1996 in
the Superior Court of the State of California for San Bernardino County by a
bonding company which alleges that the Bank is bound to reimburse it for
certain sums paid by the bonding company to complete a construction project
formerly financed by the Bank. The lawsuit seeks an unspecified amount of
damages. The Bank has not yet been formally served, but intends to dispute the
claim, and has engaged outside counsel to defend against the action.
The Company is not involved in any other pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
All legal proceedings in the aggregate are believed by management to be
immaterial to the Company.
Lease Commitments
The Company leases various office facilities under operating leases which
expire through the year 2013. Net rent expense under operating leases,
included in occupancy and equipment expense, was approximately $86, $72, $263,
$249 and $165 for the three months ended March 31, 1996 and 1995 (unaudited)
and the years ended December 31, 1995, 1994 and 1993, respectively. A summary
of future minimum lease payments under these agreements follows:
DECEMBER 31,
1995
Years ending December 31: ------------
1996...................................................... $ 199
1997...................................................... 173
1998...................................................... 141
1999...................................................... 130
2000...................................................... 130
2001 and thereafter....................................... 1,248
------
$2,021
======
F-33
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Letters of Credit--Tax Exempt Bonds
The Company has extended letters of credit for the account of several owners
of projects financed by tax-exempt bonds. See notes 6 and 12.
Letters of Credit--Other
The Company has extended letters of credit to guarantee the performance of
customers to third parties under various circumstances. The letters of credit
are generally secured by real property or other assets of the customers, as
deemed necessary by the Company. At March 31, 1996 (unaudited) and December
31, 1995 and 1994, the letters of credit amounted to approximately $1,470,
$1,463 and $1,865, respectively, of which $7, $0 and $802, respectively, are
secured by the customers savings accounts or loans in process funds and
$1,463, $1,463 and $1,063, respectively, are secured by either a Deed of Trust
against real property or a loan agreement secured by real property. The
letters of credit may only be drawn upon by a third party in the event of lack
of contractual performance by the Company's customer.
(16) OFF-BALANCE-SHEET RISK
Concentrations of Operations and Assets
The Company's operations are located entirely within Southern California and
at March 31, 1996 (unaudited), December 31, 1995 and December 31, 1994,
approximately 99%, 97% and 98%, respectively, of the Company's mortgage loans
were secured by real estate in Southern California.
Off-Balance-Sheet Credit Risk
In the normal course of meeting the financing needs of its customers and
reducing exposure to fluctuating interest rates, the Company is a party to
financial instruments with off-balance sheet risk. These financial instruments
(commitments to originate loans and extend letters of credit) include elements
of credit risk in excess of the amount recognized in the accompanying
consolidated statements of financial condition. The contractual amounts of
those instruments reflect the extent of the Company's involvement in these
particular classes of financial instruments.
The Company's exposure to off-balance sheet credit risk (i.e., losses
resulting from the other party's nonperformance of financial guarantees) is
represented by the following contractual amounts:
DECEMBER 31
MARCH 31, -------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
Commitments to originate fixed and variable rate
mortgage loans................................. $ 3,239 641 10,083
======== ====== ======
Standby letters of credit....................... $102,256 94,326 98,167
======== ====== ======
Commitments to originate fixed and variable rate loans represent commitments
to lend to a customer, provided there are no violations of conditions
specified in the agreement. At March 31, 1996 (unaudited), the Company had
entered into $1,507 of variable rate commitments to originate residential
mortgage loans with an interest rate range of 6.52% to 7.69% and $1,732 of
fixed rate commitments with an interest rate range of 7.09% to 7.80%. At
December 31, 1995, the Company had entered into $375 of variable rate
commitments to originate residential mortgage loans with an interest rate
range of 4.15% to 9.00% and $266 of fixed rate commitments with an interest
rate range of 6.875% to 7.55%. At December 31, 1994, the Company had entered
into $9,910 of
F-34
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
variable rate commitments to originate residential mortgage loans with an
interest rate range of 4.21% to 7.50% and $173 of fixed rate commitments to
originate residential mortgage loans with an interest rate range of 5.88% to
9.40%. The average commitment term offered is 20 days at March 31, 1996
(unaudited). Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts above do not necessarily
represent future cash requirements. The Company controls credit risk by
evaluating each customers' creditworthiness on a case-by-case basis and by
using systems of credit approval, loan limitation, and various underwriting
and monitoring procedures.
Included in standby letters of credit at March 31, 1996 (unaudited), and
December 31, 1995 and December 31, 1994 are $100,793, $92,863 and $96,302,
respectively, of letters of credit issued by the Company to guarantee the
principal and interest payments on certain tax exempt bonds. Also included in
standby letters of credit at March 31, 1996 (unaudited) and December 31, 1995
and 1994 are $1,463, $1,463 and $1,865, respectively, of letters of credit
issued by the Company to guarantee the performance of customers to third
parties. If the parties to the letters of credit were to fail completely to
perform according to the terms of the contracts and any assets collateralizing
the issues proved to be of no value, the associated loss to the Company would
be the full value of the letters of credit. The letters of credit are
described in notes 6, 12 and 15.
The Company does not require collateral or other security to support
commitments to originate fixed and variable rate mortgage loans with credit
risk, however, when the commitment is funded, the Company receives collateral
to the extent collateral is deemed necessary, with the most significant
category of collateral being real property underlying mortgage loans. The
above contractual amounts represent the full amount of credit risk inherent in
these commitments.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" (SFAS 107). The estimated fair value amounts have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
F-35
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The estimated fair values of the Company's financial instruments are as
follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------ ------------------
Financial assets:
Cash and cash equivalents.......... $ 30,985 30,985 23,074 23,074
Loans held for sale................ 4,578 4,578 381 381
Mortgage-backed securities
available-for-sale................ 26,501 26,501 15,199 15,199
Investment securities held to
maturity.......................... 41,655 41,057 38,899 36,638
Mortgage-backed securities held to-
maturity.......................... 25,615 25,276 64,772 66,032
Loans receivable, net.............. 678,406 677,879 732,751 710,195
FHLB Stock......................... 6,914 6,914 8,561 8,561
Financial liabilities:
Demand deposits.................... 270,232 270,232 271,792 271,792
Certificates of deposit............ 506,296 508,602 533,542 524,380
Other borrowed money............... 31,133 31,647 80,085 79,616
Off balance sheet items:
Standby letters of credit.......... -- 11,437 -- 3,549
Loan commitments................... -- -- -- --
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximate the carrying values
reported in the consolidated statements of financial condition.
Mortgage-backed Securities
The fair values of mortgage-backed securities are based on quoted market
prices or dealer quotations obtained from secondary market sources.
Investment Securities and FHLB Stock
The fair value of investment securities is based on quoted market prices.
FHLB stock is valued at cost.
Loans Receivable and Loans Held for Sale
For purposes of calculating the fair value of loans receivable, loans were
segregated by type, such as residential mortgages, commercial and industrial
loans, and credit card receivables. Each loan category was further segregated
between those with fixed interest rates and those with adjustable interest
rates.
For all mortgage loans, fair value is estimated using discounted cash flow
analyses. Discount rates are based on secondary market quotations for similar
loan types adjusted for differences in credit and servicing characteristics.
The market values of credit card receivables and loans held for sale are
based on market quotations obtained from secondary market sources.
F-36
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Deposits
The fair values of passbook accounts, demand deposits and certain money
market deposits are assumed to be the carrying values at the reporting date.
The fair value of term accounts is based on projected contractual cash flows
discounted at rates currently offered for deposits of similar maturities.
Other Borrowed Money
The fair values of fixed and adjustable rate FHLB advances are estimated by
discounting contractual cash flows using discount rates that reflect current
FHLB borrowing rates for similar advances.
Other borrowings include securities and loans sold under agreements to
repurchase and mortgages payable secured by real estate projects. The fair
value of other borrowings is calculated based on a discounted cash flow
analysis. The cash flows are discounted using approximated maturity matched
rates for comparable instruments.
Loan Commitments
Commitments to fund loans outstanding at December 31, 1995 would be offered
at substantially the same rates and terms of commitments offered on December
31, 1995 to parties of similar credit worthiness. Therefore the carrying value
of the commitments approximates their estimated fair value.
Standby Letters of Credit
The fair value of standby letters of credit is determined by using the fees
currently charged taking into consideration the remaining terms of the
agreements and the credit worthiness of the counterparties.
(18) LOAN SERVICING AND SALE ACTIVITIES
Loan servicing and sale activities are summarized as follows:
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
--------------------- ----------------------
1996 1995 1995 1994 1993
---------- --------- ------ ------ ------
(UNAUDITED)
Statement of financial condition
information--loans held for
sale........................... $ 5,568 246 4,578 381 4,515
========== ======= ====== ====== ======
Statement of operations
information:
Loan servicing fees........... $ 84 113 445 688 584
Amortization of excess
servicing fees............... (2) (2) (9) (40) (169)
---------- ------- ------ ------ ------
Loan servicing fees, net........ $ 82 111 436 648 415
========== ======= ====== ====== ======
Gain (loss) on sale of loans.... $ (5) (7) 680 (201) 365
========== ======= ====== ====== ======
Statement of cash flows
information:
Loans originated for sale..... $ -- -- 10,320 14,707 27,315
========== ======= ====== ====== ======
Proceeds from sale of loans... $ 216 510 76,695 18,640 26,797
========== ======= ====== ====== ======
The Company originates mortgage loans which, depending upon whether the
loans meet the Company's investment objectives, may be sold in the secondary
market or to other private investors. The servicing of these loans may or may
not be retained by the Company. Indirect non-deferrable origination and
servicing costs for loan servicing and sale activities cannot be presented as
these operations are integrated with and not separable from the origination
and servicing of portfolio loans and, as a result, cannot be accurately
estimated.
F-37
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(19) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
RedFed Bancorp Inc. was incorporated under Delaware law in April 1994 for
the purpose of acquiring and holding all of the outstanding capital stock of
Redlands Federal Bank as part of the Banks conversion from a Federally
chartered savings bank. On April 7, 1994, the Bank became a wholly-owned
subsidiary of the Company. In connection with the conversion, RedFed Bancorp
Inc. issued and sold to the public 4,370,000 shares of its common stock (par
value $0.01 per share) at a price of $8 per share. The proceeds, net of $2,470
in conversion costs, received by the Company from the conversion (before
deduction of $2,447 to fund employee benefit plans) amounted to $32,490. The
Company retained 25% of the net proceeds and used the remaining net proceeds
to purchase the capital stock of the Bank. In December 1994, the Company
transferred $5,000 of the retained proceeds to the Bank. The financial
position of RedFed Bancorp Inc. (parent company only) as of December 31, 1995
and the results of its operations for the year then ended are presented in
note 20. Earnings (loss) per share data as presented in the consolidated
statements of operations is based on actual operating results from the date of
conversion to December 31, 1994 and the year ended December 31, 1995 and for
the three-month period ended March 31, 1996 (unaudited). Shares purchased on
behalf of the RRP (131,100 shares) are considered outstanding in the
calculation of earnings (loss) per share. Shares purchased on behalf of the
ESOP (305,900 shares) are considered outstanding only to the extent that they
have been committed (87,400 shares) as of December 31, 1995, in the
calculation of earnings (loss) per share. Prior to the completion of the
conversion, RedFed Bancorp Inc. had no assets or liabilities and did not
conduct any business other than of an organizational nature.
At the time of the conversion, the Bank established a liquidation account in
the amount of $52,816 which was equal to its total retained earnings as of
September 30, 1993. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their accounts at the
Bank after the conversion. The liquidation account will be reduced annually to
the extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution from
the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The balance in the liquidation
account at December 31, 1995 is $25,853.
The Company may not declare or pay cash dividends on or repurchase any of
its shares of common stock, if the effect would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements or if
such declaration and payment would otherwise violate regulatory requirements.
F-38
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(20) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed financial
statements for RedFed Bancorp Inc. (parent company only):
CONDENSED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31
MARCH 31, -------------
1996 1995 1994
----------- ------ ------
(UNAUDITED)
ASSETS
Cash.................................................. $ 1,257 1,291 1,075
Investment in subsidiaries............................ 47,019 46,851 54,438
Other assets.......................................... 103 -- 8
------- ------ ------
$48,379 48,142 55,521
======= ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities--other liabilities........................ $ 50 64 13
Stockholders' equity.................................. 48,329 48,078 55,508
------- ------ ------
Total liabilities and stockholders' equity.......... $48,379 48,142 55,521
======= ====== ======
CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
-------------------- ---------------
1996 1995 1995 1994
--------- ---------- ------ -------
(UNAUDITED)
Interest and other income............... $ 32 33 125 273
General and administrative expense...... 38 130 314 (235)
-------- ---------- ------ -------
Earnings (loss) before equity in
earnings (loss) of subsidiaries...... (6) (97) (189) 38
Equity in earnings (loss) of
subsidiaries........................... 949 (1,928) (7,892) (26,378)
-------- ---------- ------ -------
Earnings (loss) before income taxes..... 943 (2,025) (8,081) (26,340)
Income taxes.......................... 2 -- 4 --
-------- ---------- ------ -------
Net earnings (loss)................... $ 941 (2,025) (8,085) (26,340)
======== ========== ====== =======
F-39
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED
MARCH 31 DECEMBER 31
-------------------- ---------------
1996 1995 1995 1994
--------- --------- ------ -------
(UNAUDITED)
Cash flows from operating activities:
Net earnings (loss)................... $ 941 (2,025) (8,085) (26,340)
Adjustments to reconcile net loss to
cash provided by (used in) operating
activities:
Equity in earnings (loss) of
subsidiaries....................... (949) 1,928 7,892 26,378
(Increase) decrease in other
assets............................. (103) (99) 8 (8)
Increase (decrease) in other
liabilities........................ (14) (6) 51 13
--------- --------- ------ -------
Net cash provided by (used in)
operating activities............. (125) (202) (134) 43
--------- --------- ------ -------
Cash flow from investing activities:
Purchases of investment securities
held-to-maturity..................... -- -- -- (3,000)
Purchase of outstanding stock of
bank................................. -- -- -- (26,455)
Additional investment in bank......... -- -- -- (2,353)
--------- --------- ------ -------
Net cash used in investing
activities....................... -- -- -- (31,808)
--------- --------- ------ -------
Cash flows from financing activities:
Net proceeds from issuance of common
stock................................ 4 -- -- 32,490
Proceeds from ESOP loan............... 87 88 350 350
--------- --------- ------ -------
Net cash provided by financing
activities....................... 91 88 350 32,840
--------- --------- ------ -------
Net increase (decrease) in cash
during the year.................. (34) (114) 216 1,075
Cash and cash equivalents, beginning of
year................................... 1,291 1,075 1,075 --
--------- --------- ------ -------
Cash and cash equivalents, end of year.. $ 1,257 961 1,291 1,075
========= ========= ====== =======
Transfer of investment securities held-
to-maturity to bank.................... $ -- -- -- 3,000
========= ========= ====== =======
F-40
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
1995 1995 1995 1995 1995
--------- -------- ------------- ------------ -------
Net interest income..... $ 5,815 7,289 6,205 6,549 25,858
Provision for loan
losses................. (373) (4,166) (404) (2,995) (7,938)
Other income............ 1,448 5,561 1,836 2,353 11,198
Other expense........... (8,915) (10,563) (7,038) (10,563) (37,079)
------- ------- ------ ------- -------
Earnings (loss) before
income taxes......... (2,025) (1,879) 599 (4,656) (7,961)
Income taxes............ -- 22 102 -- 124
------- ------- ------ ------- -------
Net earnings (loss)... $(2,025) (1,901) 497 (4,656) (8,085)
======= ======= ====== ======= =======
Net earnings (loss) per
share.................. $ (0.51) (0.48) 0.13 (1.17) (2.03)
======= ======= ====== ======= =======
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
1994 1994 1994 1994 1994
--------- -------- ------------- ------------ -------
Net interest income..... $ 6,772 7,115 6,606 6,153 26,646
Provision for loan
losses................. (1,097) (303) (2,204) (9,047) (12,651)
Other income............ 2,157 1,081 1,483 1,554 6,275
Other expense........... (10,269) (7,695) (9,469) (18,027) (45,460)
-------- ------ ------ ------- -------
Earnings (loss) before
income taxes......... (2,437) 198 (3,584) (19,367) (25,190)
Income taxes (benefit).. (450) 38 566 996 1,150
-------- ------ ------ ------- -------
Net earnings (loss)... $ (1,987) 160 (4,150) (20,363) (26,340)
======== ====== ====== ======= =======
Net earnings (loss) per
share.................. $ N/A 0.04 (1.03) (5.09) (6.08)
======== ====== ====== ======= =======
Other expense includes provisions for real estate and LOC losses. The major
quarter to quarter fluctuations typically resulted from changes in the loss
provisions.
The increase of $5.8 million in provision for losses on loans, LOCs and real
estate in the quarter ended June 30, 1995 was primarily the result of an
increase of $10.1 million in classified assets when compared to the quarter
ended March 31, 1995, an increase in specific valuation allowances of $4.5
million relating to certain loans based on updated reviews and an increase in
unallocated general valuation allowance which totaled approximately $1.0
million.
The increase of $5.4 million in provision for losses on loans, LOCs and real
estate in the quarter ended December 31, 1995 was primarily the result of the
OTS requirement to increase the risk factors used by the Company in its
allowance for loans, LOC and real estate loss calculation. This resulted in an
approximate $2.2 million increase in the loss provisions. In addition, there
was an increase of $2.3 million in specific valuation allowances for certain
loans and LOCs, primarily as a result of a recommendation by the OTS
examiners.
The increase of $14.6 million in provision for loans, LOCs and real estate
losses in the quarter ended December 31, 1994 was primarily the result of the
OTS requirement to increase the risk factors used by the Company in its
allowance for loans and LOCs loss calculations. This resulted in approximately
$9.4 million increase in the loss provision. In addition classified assets
increased $28.2 million when compared to the quarter ended September 30, 1994.
F-41
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any in-
formation or to make any representation other than as contained in this Pro-
spectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having
been authorized by the Company, the Bank or the Underwriter. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
of the securities offered hereby to any person in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction. Nei-
ther the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the af-
fairs of the Company or the Bank since any of the dates as of which informa-
tion is furnished herein or since the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
Page
----
Prospectus Summary....................................................... 5
Risk Factors............................................................. 11
Recent Developments...................................................... 17
Use Of Proceeds.......................................................... 26
Price Range Of Common Stock.............................................. 26
Dividend Policy.......................................................... 26
Capitalization........................................................... 27
Selected Consolidated Financial, Operating And Other Data Of The
Company................................................................. 28
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................... 30
Business................................................................. 44
Regulation And Supervision............................................... 71
Taxation................................................................. 79
Directors And Executive Officers......................................... 82
Executive Compensation................................................... 85
Security Ownership Of Certain Beneficial Owners And Management........... 91
Certain Relationships And Related Transactions........................... 93
Description Of Common Stock.............................................. 94
Underwriting............................................................. 97
Legal Matters............................................................ 98
Experts.................................................................. 98
Index to Consolidated Financial Statements............................... F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,600,000 SHARES
LOGO
[REDFED BANCORP INC.]
COMMON STOCK
----------------
PROSPECTUS
----------------
Montgomery Securities
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee) of the fees and expenses payable by the
Registrant in connection with the distribution of the Shares.
EXPENSE
--------
Securities and Exchange Commission Registration Fee............. $ 9,929
Nasdaq Listing Fee.............................................. 17,500
Printing Costs.................................................. 55,000
Legal Fees and Expenses......................................... 125,000
Accounting Fees and Expenses.................................... 175,000
Blue Sky Qualification Fees and Expenses........................ 10,000
Miscellaneous................................................... 7,571
--------
Total......................................................... $400,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") provides
that a corporation in its original certificate of incorporation or an
amendment thereto may eliminate or limit the personal liability of a director
to the corporation or its stockholders for monetary damages for breaches of
the director's fiduciary duty, except (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing
for liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions) or (iv) for any transaction from which a director
derived an improper personal benefit. The Amended and Restated Certificate of
Incorporation of the Company provides for indemnification of officers and
directors to the fullest extent permitted by Delaware law.
Section 145 of the DGCL provides that a corporation may indemnify any
person, including an officer or director, who is, or is threatened to be made,
a party to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation) by reason of the fact
that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such officer,
director, employee or agent acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe
that his or her conduct was unlawful. A Delaware corporation also may
indemnify any such person who is or is threatened to be made a party to the
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if such person
is adjudged to be liable to the corporation. Where such person is successful
on the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him or her against the expenses (including
attorney's fees) which such officer or director actually and reasonably
incurred.
Directors and Officers of the Company and the Bank are covered by primary
and excess director's and officer's liability coverage totalling $5,000,000,
with a $150,000 per occurrence deductible. The policy is an annually renewable
claims-made policy, and expires in October of 1996.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not sold any securities of the Company within the past three
years which were not registered under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A list of exhibits filed herewith is contained in the Exhibit Index which is
incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended,
shall be deemed to be part of this Registration Statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions
described under Item 14 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of such Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933, as
amended and will be governed by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Redlands, California, on August 8, 1996.
RedFed Bancorp Inc.
/s/ DAVID C. GRAY
By: _________________________________
DAVID C. GRAY
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE
Chief Executive Officer,
/s/ ANNE BACON* President and Director
- ------------------------------------- (Principal Executive
ANNE BACON Officer)
Treasurer, Chief
/s/ DAVID C. GRAY Financial Officer
- ------------------------------------- (Principal Financial
and Accounting Officer)
DAVID C. GRAY
/s/ WILLIAM C. BUSTER, JR.* Director
- -------------------------------------
WILLIAM C. BUSTER, JR.
/s/ WILLIAM T. HARDY, JR.* Director
- -------------------------------------
WILLIAM T. HARDY, JR.
/s/ DOUGLAS R. MCADAM* Director
- -------------------------------------
DOUGLAS R. MCADAM
II-3
SIGNATURE TITLE
/s/ JOHN D. MCALEARNEY, JR.* Director
- -------------------------------------
JOHN D. MCALEARNEY, JR.
/s/ HENRY H. VAN MOUWERIK* Director
- -------------------------------------
HENRY H. VAN MOUWERIK
/s/ STANLEY C. WEISSER* Director
- -------------------------------------
STANLEY C. WEISSER
/s/ ROBERT G. WIENS* Director
- -------------------------------------
ROBERT G. WIENS
/s/ DAVID C. GRAY
*By _________________________________
David C. Gray
Attorney-In-Fact
Dated: August 8, 1996.
II-4
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER PAGE NUMBER
------- -----------
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of RedFed Bancorp, Inc. (1)
3.2 Bylaws of RedFed Bancorp, Inc. (1)
4.1 Stock Certificate of RedFed Bancorp, Inc. (1)
5.1 Opinion of Mayer, Brown & Platt regarding legality (6)
10.1 Form of Employment and Change in Control Agreements
between the Bank and the Company and Certain Officers
(2)
10.2 Deferred Compensation Agreement between the Bank and
Henry Van Mouwerik (2)
10.3 Redlands Federal Bank Employee Severance Compensation
Plan (2)
10.4 Employee Stock Ownership Plan and Trust (1)
10.5 Recognition and Retention Plan and Trust for Outside
Directors (3)
10.6 Recognition and Retention Plan and Trust for Officers
and Employees (3)
10.7 Incentive Stock Option Plan (3)
10.8 Stock Option Plan for Outside Directors (3)
10.9 Outside Directors' Retirement Plan (2)
10.10 1995 Long Term Incentive Plan (4)
10.11 Supervisory Agreement between the Bank and the Office of
Thrift Supervision (5)
21.1 Subsidiaries (6)
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Mayer, Brown & Platt (included in its opinion
filed as Exhibit 5.1) (6)
24.1 Power of Attorney (6)
27.1 Financial Data Schedule (6)
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(1) Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, filed on December 23, 1993, Registration
No. 73396.
(2) Incorporated herein by reference into this document from the Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 filed with the
Commission on March 31, 1995.
(3) Incorporated herein by reference into this document from the Proxy
Statement for the 1994 Special Meeting of Stockholders filed on May 29,
1994.
(4) Incorporated herein by reference into this document from the Proxy
Statement for the 1995 Annual Meeting of Stockholders filed on May 1,
1995.
(5) Incorporated herein by reference into this document from the Annual Report
Form 10-K for the fiscal year ended December 31, 1995 filed with the
Commission on April 1, 1996.
(6) Previously filed on June 20, 1996.
II-5