SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended JUNE 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ To _________
COMMISSION FILE NUMBER: 0-23146
REDFED BANCORP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0588105
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
300 EAST STATE STREET, REDLANDS, CALIFORNIA 92373
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (909) 335-3551
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
[X] YES [_] NO
The Registrant had 4,390,504 shares outstanding at June 30, 1996.
REDFED BANCORP INC.
INDEX
PART I FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements (unaudited)
RedFed Bancorp Inc.
Consolidated Statements of Financial Condition as of
June 30, 1996, and December 31, 1995 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1996, and 1995 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996, and 1995 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Default upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Exhibit 11.1 Computation of Earnings per Share 23
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
---------------------------------
REDFED BANCORP INC.
Consolidated Statements of Financial Condition
(dollars in thousands)
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
-----------
Assets
------
Cash and cash equivalents $ 35,419 30,985
Loans held-for- sale at lower of cost or market value 5,452 4,578
Mortgage-backed securities available-for-sale 23,835 26,501
Investment securities held-to-maturity 37,807 41,655
Mortgage-backed securities held-to-maturity 31,426 25,615
Loans receivable, net 659,343 678,406
Accrued interest receivable 4,665 5,014
Investment in FHLB stock 6,099 6,914
Real estate acquired through foreclosure, net 10,565 24,560
Real estate held for sale or investment, net 1,651 1,698
Premises and equipment, net 17,306 17,619
Prepaid expenses and other assets 6,574 8,269
------- -------
Total assets $840,142 871,814
======== =======
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $762,203 776,528
FHLB advances 5,000 10,000
Other borrowed money 8,865 21,133
Accrued expenses and other liabilities 14,649 16,075
-------- -------
Total liabilities 790,717 823,736
-------- -------
Stockholders' equity:
Common stock 44 44
Additional paid-in capital 32,802 32,608
Retained earnings, substantially restricted 20,784 18,570
Deferred compensation (2,150) (2,430)
Treasury Stock (860) (888)
Unrealized gains (losses) on securities available-for-sale (1,195) 174
-------- -------
Total stockholders' equity 49,425 48,078
-------- -------
Total liabilities and stockholders' equity $840,142 871,814
======== =======
See accompanying notes to consolidated financial statements.
3
REDFED BANCORP INC.
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(unaudited) (unaudited)
Interest income:
Loans receivable and mortgage-backed securities $14,204 16,680 28,677 31,035
Investment securities and deposits 882 714 1,855 1,493
------- ------ ------ ------
Total interest income 15,086 17,394 30,532 32,528
------- ------ ------ ------
Interest expense:
Deposits 7,821 8,939 15,909 17,021
Other borrowed money 299 1,166 674 2,403
------- ------ ------ ------
Total 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:
Letter of credit and other fee income 1,446 1,511 2,974 2,960
Gain on sale of loans 739 666 735 657
Other income 140 55 205 63
Gain on defined benefit plan curtailment 0 3,329 0 3,329
------- ------ ------ ------
Total non-interest income 2,325 5,561 3,914 7,009
------- ------ ------ ------
Non-interest expense:
General and administrative expense:
Compensation and benefits 2,732 3,302 5,490 6,540
Occupancy and equipment 1,634 1,861 3,310 3,812
Federal deposit insurance premiums 644 584 1,249 1,168
Other expense, net 608 850 1,270 1,673
------- ------ ------ ------
Total general and administrative expense 5,618 6,597 11,319 13,193
------- ------ ------ ------
Other non-interest expense:
Real estate operations, net 305 351 833 1,055
Provision for losses on real estate 0 3,614 0 5,036
Provision for losses on letters of credit 1,412 1 1,412 194
------- ------ ------ ------
Total other non-interest expense 1,717 3,966 2,245 6,285
------- ------ ------ ------
Total non-interest expenses 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)
======= ====== ====== ======
Earnings (loss) per share $ 0.31 (0.48) 0.54 (0.99)
======= ====== ====== ======
See accompanying notes to consolidated financial statements.
4
REDFED BANCORP, INC.
Consolidated Statements of Cash Flows
(dollars in thousands)
Six Months Ended June 30,
-----------------------------
1996 1995
---------- ----------
(unaudited)
Cash flows from operating activities:
Net earnings (loss) $ 2,214 (3,926)
Adjustments to net earnings (loss):
Loan fees collected 82 369
Depreciation and amortization, net 641 (834)
Provision for losses on:
Loans 2,078 4,539
Real estate 0 5,036
Letters of credit 1,412 194
Net (gain) loss on sales of loans, investments and mortgage-
backed securities 11 (657)
Net (gain) loss on sales of real estate, and premises and
equipment (335) 111
FHLB stock dividends received (185) (209)
Proceeds from sale of loans 216 54,012
Increase (decrease) in:
Accrued expenses and other liabilities (2,710) (3,664)
Deferred income (236) (118)
Accrued interest receivable 349 (341)
Prepaid expenses and other assets 1,695 (1,561)
-------- ------
Net cash provided by operating activities 5,232 52,951
-------- ------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to-maturity 15,500 2,500
Purchases of investments securities held-to-maturity (11,604) (14,302)
Proceeds from maturities of mortgage-backed securities
available-for-sale 1,300 378
Proceeds from maturities of mortgage-backed securities
held-to-maturity 139 2,653
Proceeds from sale of mortgage-backed securities available-for-sale 0 15,587
Loans originations and purchases (39,531) (73,942)
Sale (purchase) of FHLB stock 1,000 (137)
Principal payments and reductions of loans 48,688 37,015
Proceeds from sale of real estate 12,222 11,405
Proceeds from sale of premises and equipment 130 217
Purchases of premises and equipment (562) (94)
-------- ------
Net cash provided by (used in) investing activities 27,282 (18,720)
-------- -------
(Continued)
See accompanying notes to consolidated financial statements.
5
REDFED BANCORP INC.
Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
Six Months Ended June 30,
-------------------------
1996 1995
---------- ----------
(unaudited)
Cash flows from financing activities:
Deposits, net $(14,325) 19,149
Proceeds from FHLB advances 0 5,000
Repayment of FHLB advances (5,000) (40,000)
Repayment of other borrowed money (8,919) (2,175)
Proceeds from stock options exercised 164 0
-------- -------
Net cash (used in) financing activities (28,080) (18,026)
-------- -------
Increase in cash and cash equivalents 4,434 16,205
Cash and cash equivalents, beginning of period 30,985 23,074
-------- -------
Cash and cash equivalents, end of period $ 35,419 39,279
======== =======
Supplemental information:
Interest credited to deposits $ 9,026 15,190
======== =======
Transfers from loans receivable to real estate 6,929 5,570
======== =======
Loans to facilitate the sale of real estate 6,030 7,207
======== =======
Real estate acquired subject to bond financing 0 (5,830)
======== =======
Real estate sold subject to bond financing 3,349 0
======== =======
Bond financing subject to real estate acquisitions 0 5,830
======== =======
Bond financing subject to real estate sales (3,349) 0
======== =======
Transfer from loans to mortgage-backed securities,
held-to-maturity (5,950) 0
======== =======
See accompanying notes to consolidated financial statements.
6
REDFED BANCORP INC.
Notes to Consolidated Financial Statements
1. The consolidated statements of financial condition of RedFed Bancorp Inc.,
(the "Company"), as of June 30, 1996, the related consolidated statements
of operations for the three and six months ended June 30, 1996, and 1995
and the related consolidated statements of cash flows for the six months
ended June 30, 1996, and 1995 are unaudited. These statements reflect, in
the opinion of management, all material adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the
consolidated financial condition of the Company as of June 30, 1996, and
results of consolidated operations for the three and six months ended June
30, 1996, and 1995 and consolidated cash flows for the six months ended
June 30, 1996, and 1995. The results of consolidated operations for the
unaudited periods are not necessarily indicative of the results of
consolidated operations to be expected for the entire year of 1996.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and, therefore, do not include all information
and footnotes normally included in consolidated financial statements
prepared in conformity with generally accepted accounting principles.
Accordingly, these unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's annual report on SEC Form 10-K for
the year ended December 31, 1995.
2. Primary and fully diluted earnings per share for the three and six months
ended June 30, 1996 of 0.31 and 0.54 per share, respectively, were based on
a net earnings of $1.3 million and $2.2 million, with weighted-average
common shares and equivalent shares outstanding during those periods of
4,123,447 and 4,121,788 (net of unearned Employee Stock Ownership Plan
("ESOP") and Recognition and Retention Plan ("RRP") shares, and treasury
stock and including outstanding stock options where the current market
price exceeds exercise price). This compares with a loss per share for the
three and six months ended June 30, 1995 of 0.48 and 0.99 per share,
respectively, based on a net loss of $1.9 million and $3.9 million, with
weighted-average common shares outstanding during those periods of
3,979,881 and 3,980,419 (net of unearned ESOP and RRP shares and treasury
stock).
3. In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122"), 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
should 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 has adopted
SFAS 122, and such adoption did not have a material impact on the Company's
consolidated financial statements.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS 125 provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are
secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and
derecognizes all financial and servicing assets it no longer controls and
liabilities that have been extinguished. The
7
financial-component approach focuses on the assets and liabilities that
exist after the transfer. Many of these assets and liabilities are
components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted
for as a secured borrowing with pledge of collateral. SFAS 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and should be applied
prospectively. Management has not yet evaluated the effect of SFAS 125, if
any, on the Company's financial condition or operations.
8
REDFED BANCORP, INC.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
GENERAL
RedFed Bancorp Inc. is a Delaware corporation, organized by Redlands Federal
Bank ( the "Bank") for the purpose of acquiring all of the capital stock of the
Bank issued during the conversion of the Bank from a federally chartered mutual
savings association to a federally chartered stock savings bank. The Company's
common stock is traded on NASDAQ under the symbol "REDF".
The Company is primarily engaged in attracting deposits from the general public
in the areas in which its branches are located and investing such deposits and
other available funds in loans secured by one-to four family residential
mortgages, including 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. At June 30, 1996, the Bank operated fourteen
retail banking offices located in San Bernardino and Riverside counties, and
three loan production offices.
The Company is subject to significant competition from other financial
institutions in its market area. The Bank is regulated by certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
CURRENT OFFERING
The Company has filed a Registration Statement on Form S-1 with the SEC
registering up to 2,990,000 shares of its common stock (including the
underwriter's over allotment option). The Registration Statement was declared
effective by the SEC on August 9, 1996. Assuming an issuance price of $9.00 per
share, the net proceeds to the Company from the offering is expected to be
approximately $21.6 million. 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 the net proceeds for general corporate purposes. The
Company expects the offering to close in August 1996.
FINANCIAL CONDITION
The Company's consolidated assets were $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
Federal Home Loan Bank ("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 $59.3 million and the transfer of
$9.1 million of loans to real estate acquired through foreclosure ("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 at June 30, 1996, totaled $762.2 million compared to $776.5
million at December 31, 1995. The decrease of $14.3 million in savings deposits
is 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
9
$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.
CAPITAL RESOURCES AND LIQUIDITY
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
Office of Thrift Supervision ("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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996, AND 1995.
General. The Company recorded a net profit 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. The
Company recorded a 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
three months ended June 30, 1996 were favorably impacted by a reduction in
provisions for losses on loans, off-balance sheet letters of credit ("LOCs"),
and real estate of $5.7 million, and by a reduction in general and
administrative expense ("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.
Net 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 and margin when compared to 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. 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 three months and 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 three months ended June 30, 1996
is also 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 6.98% for the three months ended June 30,
1995 to 7.62% for the three months ended June 30, 1996. 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
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 three months ended June 30, 1996 was
- -----------------
$8.1 million compared to $10.1 million for the same three months in the previous
year. 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 for the three months ended June 30, 1996 was the
result of a decrease in average interest-bearing liabilities of $117.5 million
and a decrease in the average yield for 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. The decrease in interest expense for the six months ended June
30, 1996 was the result of a decrease in average interest-bearing liabilities of
10
approximately $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, 1995
and 1996, respectively.
Net interest income. The 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 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 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. 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.
The following table displays average dollar amounts and interest rates on the
Company's interest-earning assets and interest-bearing liabilities:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
---------------------------------------- ----------------------------------------
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
Average dollar amount of and
average yield earned on
assets:
Loans and mortgage-backed
securities $725,918 7.83% 847,362 7.12% $728,538 7.87% $838,547 7.02%
Investment securities 65,823 5.36 57,562 4.83 65,605 5.66 58,103 5.07
-------- ---- -------- ---- -------- ---- -------- ----
Interest-earning assets $791,741 7.62 $904,924 6.98 $794,143 7.69 $896,650 6.90
-------- ---- -------- ---- -------- ---- -------- ----
Average dollar amount of and
average rate paid on
liabilities:
Deposits $749,423 4.20 $811,219 4.42 $756,568 4.23 $797,619 4.30
Borrowings 19,006 6.31 74,753 6.24 23,522 5.75 77,485 6.20
-------- ---- -------- ---- -------- ---- -------- ----
Interest-bearing
liabilities $768,429 4.25 $885,972 4.57 $780,090 4.27 $875,104 4.48
-------- ---- -------- ---- -------- ---- -------- ----
Interest rate spread 3.37% 2.41% 3.42% 2.42%
==== ==== ==== ====
Net interest margin 3.50% 2.51% 3.49% 2.53%
==== ==== ==== ====
Ratio of interest-earnings
assets to interest-bearing
liabilities 103.03% 102.14% 101.80% 102.46%
======== ======== ======== ========
Provision for Loan Losses. The provision for loan losses 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 provision for loan losses 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 reflects management's assessment of the
loan, LOC and real estate portfolios in light of the Southern California real
estate market, borrowers' ability to perform and certain other factors.
11
The allowances for loan, LOC and real estate losses are established through
provisions based on management's evaluation of the risks inherent in its
portfolios and the local real estate economy. The allowances are maintained at
amounts management considers adequate to cover estimated losses which are deemed
probable and estimable. The allowances are based upon a number of factors,
including asset scoring and classification, estimated collateral values,
management's assessment of the credit risk inherent in the portfolio, historical
loan loss experience, a loss migration analysis, and the Company's underwriting
policies.
The following is a summary of the activity in the loans, LOC and real estate
valuation allowances for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- -------- -------- --------
(dollars in thousands)
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of period $12,076 16,488 14,745 18,874
Charge-offs, net of recoveries (1,512) (652) (5,581) (3,411)
Provisions charged to income 678 4,166 2,078 4,539
------- ------ ------ ------
Balance at end of period 11,242 20,002 11,242 20,002
------- ------ ------ ------
ALLOWANCE FOR LOSSES ON LOCS:
Balance at beginning of period 6,947 5,657 7,447 6,908
Charge-offs, net of recoveries (1,753) 500 (2,253) (944)
Provisions charged to income 1,412 1 1,412 194
------- ------ ------ ------
Balance at end of period 6,606 6,158 6,606 6,158
------- ------ ------ ------
Total allowance for losses on loans and LOCs $17,848 26,160 17,848 26,160
======= ====== ====== ======
ALLOWANCE FOR LOSSES ON REAL ESTATE:
Balance at beginning of period 5,680 5,243 9,496 4,378
Charge-offs, net of recoveries (2,839) (190) (6,655) (747)
Provisions charged to income 0 3,614 0 5,036
------- ------ ------ ------
Balance at end of period $ 2,841 8,667 2,841 8,667
======= ====== ====== ======
TOTAL ALLOWANCE FOR LOSSES ON LOANS, LOCS
AND REAL ESTATE: $20,689 34,827 20,689 34,827
======= ====== ====== ======
Specific $17,157 10,763 17,157 10,763
General 3,532 24,064 3,532 24,064
------- ------ ------ ------
TOTAL $20,689 34,827 20,689 34,827
======= ====== ====== ======
12
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
general valuation allowance ("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. As a result
of weakness 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 at
the time of the examination.
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.
Non-interest income for the six months ended June 30, 1996 was $3.9 million
compared to $7.0 million for the same period in 1995. The decrease in non-
interest income for the three months and 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 three and six month periods ended June 30, 1995 resulting
from freezing the Company's employee defined benefit plan.
General and administrative expense. General and administrative expense 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 expense 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 three months and six 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 and from 78.61% for the six months ended June 30, 1995 to 63.37%
for the six months ended June 30, 1996.
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 last year. 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 three months ended June 30, 1996 resulted primarily from a
decrease in the provision for losses on real estate and LOCs of $2.2 million.
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.
13
NONPERFORMING ASSETS
The following table sets forth information regarding nonaccrual loans and real
estate acquired through foreclosure and in-substance foreclosed loans net of
specific valuation allowances:
AT JUNE 30, AT DECEMBER 31,
NONPERFORMING ASSETS : 1996 1995
---------------------------------
(dollars in thousands)
NONACCRUAL LOANS:
Nonaccrual loans:
One-to four family $11,312 $ 8,818
Multi-family 2,779 6,115
Commercial real estate 0 223
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 AND IN-SUBSTANCE FORECLOSED LOANS (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 real estate acquired through
foreclosure and in-substance foreclosed loans 11,498 $26,078
------- -------
Total nonperforming assets $27,132 $43,682
======= =======
___________
(1) Does not include effect of general valuation allowances of $933,000 and $1.5
million at June 30, 1996 and December 31, 1995, respectively.
(2) Includes properties securing LOCs acquired through foreclosure
Nonaccrual loans net of specific valuation allowances at June 30, 1996 were
$15.6 million, which represents a decrease of $2.0 million from the December 31,
1995 balance of $17.6 million and an increase of $1.7 million from the June 30,
1995 balance of $13.9 million. This decrease since December 31, 1995 resulted
from an increase in single family loans of $2.5 million, offset by a decrease in
multi-family loans of $3.4 million and a decrease of $1.1 million in all other
loan categories.
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
14
during this period. Restructured loans, which are currently performing under
restructured terms are excluded from nonperforming assets. The balance of
restructured loans was $10.1 million and $6.9 million at June 30, 1996 and
December 31, 1995, respectively. The increase since December 31,1995 was the
result of the restructure of four multi-family and four single family
residences.
The Company's general nonaccrual policy provides that interest accruals cease
once a loan is past due for a period of 90 days or more. Loans may also be
placed on nonaccrual status even though they are less than 90 days past due if
management concludes that it is probable that the borrower will not be able to
comply with the repayment terms of the loan.
The Company defines nonperforming loans as nonaccrual loans and nonperforming
letters of credit. Nonperforming assets are defined as nonperforming loans (as
defined above) and real estate acquired through foreclosure, and in-substance
foreclosed loans. The Company does not include troubled debt restructured loans
that are performing in accordance with their restructured terms as 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 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.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE (REO)
REO consists of real estate acquired through foreclosure and loans accounted for
as in-substance foreclosures. REO is initially recorded at the fair value of the
related assets at the date of foreclosure, less costs to sell. Subsequent write-
downs for estimated losses are recognized if the carrying value of real estate
exceeds fair value, less costs to sell. Net real estate acquired through
foreclosure and in-substance foreclosures decreased to $11.5 million at June 30,
1996 from $26.1 million at December 31, 1995, and from $35.1 million at June 30,
1995. The $14.6 million decrease since December 31, 1995 was primarily the
result of sales of real estate acquired through foreclosure, partially offset by
foreclosures during the same period.
CLASSIFIED ASSETS
Federal regulations and the Company's Classification of Assets Policy provide
for the classification of loans and other assets. "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.
15
The following table sets forth the classified assets which includes substandard
and doubtful categories, net of specific valuation allowance. The amount of
specific valuation allowance at June 30, 1996 and December 31, 1995 was $3.3
million and $12.8 million, respectively.
AT JUNE 30, AT DECEMBER 31,
1996 1995
---------------------------------
(dollars in thousands)
SUBSTANDARD
LOANS:
One- to four-family $15,112 6,790
Multi-family 5,327 14,566
Commercial real estate 661 879
Construction single family 0 418
Developed lots 1,179 1,114
Tract construction and land 590 1,058
Consumer loans 278 218
------- ------
Total 23,147 25,043
------- ------
REO:
One- to four-family 3,712 5,393
Multi-family 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 11,498 26,078
------- ------
Real estate held for sale or investment 280 280
------- ------
Off-balance sheet LOCs 0 7,524
------- ------
Total substandard 34,925 58,925
------- ------
DOUBTFUL
Multi-family 163 0
------- ------
TOTAL CLASSIFIED ASSETS $35,088 58,925
======= ======
16
IMPAIRED LOANS
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. The Company measures impairment
based on (1) the present value of expected future cash flows discounted at the
loan's effective interest rate, (2) the observable market price of the impaired
loan or (3) the fair value of the collateral of a collateral-dependant loan. If
the value of the impaired loan is less than the recorded investment in the loan,
the Company recognizes an impairment by recording a valuation allowance with a
corresponding charge to the provision for losses on loans. 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. Loans are classified as in-substance foreclosed and included in
REO only when the Company has physical possession of the underlying collateral
but not legal title. The following table identifies the Company's total recorded
investment in impaired loans by type at the dates indicated, net of specific
valuation allowances:
AT JUNE 30, AT DECEMBER 31,
1996 1995
----------- ---------------
(dollars in thousands)
NONACCRUAL LOANS:
Multi-family $ 2,779 6,115
Commercial 0 223
Tract construction and land 163 581
RESTRUCTURED LOANS 10,105 6,888
OTHER IMPAIRED LOANS:
Multi-family 1,126 5,187
Commercial 0 656
Tract construction and land 0 432
------- ------
$14,173 20,082
======= ======
REGULATORY CAPITAL
Under OTS capital regulations, the Bank must meet three capital tests. First,
the tangible capital requirement mandates that the Bank's equity less intangible
assets be at least 1.50% of adjusted total assets as defined in the capital
regulations. Second, the core capital requirement currently mandates core
capital (tangible capital plus qualifying supervisory goodwill) be at least
3.00% of adjusted total assets as defined in the capital regulations. Third, the
risk-based capital requirement presently mandates that core capital plus
supplemental capital as defined by the OTS be at least 8.00% of risk-weighted
assets as prescribed in the capital regulations. The capital regulations assign
specific risk weightings to all assets and off-balance sheet items.
The Bank was in compliance with all current capital requirements in effect at
June 30, 1996, and had sufficient capital to be considered an "adequately
capitalized" institution, under the OTS prompt corrective action regulations,
which require the OTS to take certain supervisory actions against institutions
that are "undercapitalized" within the meaning of the regulations.
17
The following table presents information regarding capital at June 30, 1996 and
December 31, 1995:
AT JUNE 30, 1996 AT DECEMBER 31, 1995
------------------------- ----------------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS (1)(2) AMOUNT ASSETS (1)(2)
------------------------- ----------------------------
(dollars in thousands)
TANGIBLE CAPITAL:
Capital level $48,141 5.77% 45,193 5.24
Requirement 12,506 1.50 12,933 1.50
------- ---- ------ ----
Excess $35,635 4.27% 32,260 3.74
======= ==== ====== ====
CORE CAPITAL:
Capital level $48,141 5.77% 45,193 5.24
Requirement 25,012 3.00 25,866 3.00
------- ---- ------ ----
Excess $23,129 2.77% 19,327 2.24
======= ==== ====== ====
RISK-BASED CAPITAL:
Capital level $56,233 8.80% 53,463 8.17
Requirement 51,143 8.00 52,341 8.00
------- ---- ------ ----
Excess $ 5,090 0.80% 1,122 0.17
======= ==== ====== ====
_________
(1) 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.
(2) Requirements under OTS regulations for an "adequately capitalized"
institution at June 30, 1996 and December 31, 1995 are 4.00% for core and
Tier 1 risk-based capital and 8.00% for risk-based capital.
18
SELECTED CONSOLIDATED RATIOS OF THE COMPANY
AT OR FOR THE AT OR FOR THE AT OR FOR THE AT OR FOR THE
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
PERFORMANCE RATIOS:
Return on average assets 0.53% (0.72)% 0.46% (0.74)%
(1)(2) :
Return on average equity (2) 10.50 (14.17) 9.12 (14.38)
Equity to total assets 5.88 5.58 5.88 5.58
Interest rate spread during 3.37 2.41 3.42 2.42
the period (2)
Net interest margin 3.50 2.51 3.49 2.53
Average interest-earning
assets to average 103.03 102.14 101.80 102.46
interest-bearing liabilities
G&A to average assets (1)(2) 2.37 2.50 2.37 2.49
Efficiency ratio (3) 60.47 69.29 63.37 78.61
AT JUNE 30, AT DECEMBER 31
1996 1995
----------- --------------
REGULATORY CAPITAL RATIOS:
Tangible and core capital 5.77% 5.24%
Risk-based capital 8.80 8.17
ASSET QUALITY RATIOS:
Nonaccrual loans to total
loans 2.26 2.45
Nonperforming assets to
total assets and LOCs (4) 2.89 4.53
Allowance for losses on
loans and LOCs to total
loans and LOCS 2.26 2.73
Allowance for losses on
loans, LOCs and real estate 2.20 3.28
to total assets and LOCs
General valuation allowance
for losses on loans to
nonaccrual loans 61.52 56.53
General valuation allowance
for losses on loans, LOCs
and real estate to 63.24 39.30
nonperforming assets (4)
Classified assets to total
assets and LOCs 3.71 6.11
General valuation allowance
to classified assets 49.24 29.13
___________
(1) Off-balance sheet letters of credit ("LOCs") have been added to average
assets for purposes of this calculation.
(2) Ratios for the three and six month periods have been annualized.
(3) General and administrative expense ("G&A") to net interest income plus total
non-interest income. Excludes provisions for losses on loans and LOCs and
real estate operations, and, for the three and six months ended June 30,
1995, excludes curtailment gain on retirement plan of $3.3 million.
(4) Excludes troubled debt restructures which are currently performing under
their restructured terms.
19
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 of the loans.
The Company is negotiating for the acquisition of deposits from a local
institution totaling approximately $24.0 million which would include checking
accounts, savings account 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 the offering described under "Current Offering"
above or other increases in the Bank's capital and any necessary regulatory
approvals.
Both houses of Congress have recently passed legislation, the Small Business Job
Protection Act of 1996, which is currently awaiting signature by the President.
If this pending legislation becomes law, the tax rules formerly applicable to
bad debt reserves of thrift institutions will be repealed effective for taxable
years beginning after December 31, 1995, and the Bank will be required to change
its tax method of accounting for bad debts from the reserve method formerly
permitted under section 593 of the Internal Revenue Code (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 to the extent that the loans become
wholly or partially worthless. The pending legislation generally requires thrift
institutions, such as the Bank, which have previously utilized the section 593
reserve method, to 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 does not have any existing bad debt reserves that
will be subject to such recapture. In addition, if the pending legislation
becomes law, the remainder of the Bank's bad debt reserve balance as of December
31, 1995 (approximately $12.3 million) 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 a partial or complete
liquidation of the Bank. (Unlike the situation under current law, the amount
that would be subject to recapture under such circumstances would be computed
without regard to the portion of such reserves that would have been allowed
under the experience method.) The Bank does not intend to make distributions to
its shareholder that would result in recapture of any portion of its bad debt
reserves.
20
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1996 REDFED BANCORP INC.
By: /s/ Anne Bacon
-------------------------------
Anne Bacon
President and
Chief Executive Office
By: /s/ David C. Gray
-----------------------------------
David C. Gray
Treasurer and
Chief Financial Officer
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Bank is named as a 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 unspecified amounts of damages. The
Bank has denied any liability, and has engaged outside counsel to
defend it in the actions.
The Bank is also 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 it.
The Company is not involved in any other litigation, except for routine
legal proceedings other than routine legal proceedings occurring in the
ordinary aggregate are believed by management to be course of business.
All of such legal proceedings in the aggregate are believed by
management to be immaterial to the Company.
Items 2 and 3 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
The Company held its annual meeting of shareholders on May 21, 1996.
The results with respect to each matter voted upon at the meeting were
as follows:
1. The election of two directors for terms of three years each or
until their successors are elected and qualified:
For Against
--- -------
Stanley C. Weisser 3,813,000 14,392
William T. Hardy, Jr. 3,813,000 14,392
In addition, the following directors term of office continued after
the meeting:
John D. McAlearney, Jr., Chairman Anne Bacon
William C. Buster, Jr. Robert G. Wiens
Douglas R. McAdam Henry Van Mouwerik
Item 5 is not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None
(b) Reports on Form 8-K - No reports on Form 8-K were required to be
filed by the registrant during the three months ended June 30,
1996
21