SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File No.: 0-22278
REDFED BANCORP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0588105
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 E. STATE STREET, REDLANDS, CALIFORNIA 92373
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (909) 335-3551
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant, is $96,522,945 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for February 28, 1997.
The Registrant had 7,396,936 shares of common stock outstanding as of February
28, 1997.
DOCUMENTS TO BE INCORPORATED BY REFERENCE
THE PROXY STATEMENT FOR THE 1996 ANNUAL MEETING OF STOCKHOLDERS WILL BE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
INDEX
PAGE
PART I
Item 1. Business 1
General 1
Market Area 3
Lending Activities 4
Asset Quality 15
Investment Activities 25
Sources of Funds 26
Subsidiary Activities 30
Competition 30
Personnel 30
Regulation 30
Taxation 38
Current Accounting Pronouncements 39
Item 2. Properties 39
Item 3. Legal Proceedings 40
Item 4. Submission of Matters to a Vote of Security
Holders 40
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholders Matters 41
Item 6. Selected Financial Data 43
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 46
Item 8. Financial Statements and Supplementary Data 57
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 108
PART III
Item 10. Directors and Executive Officers of the
Registrant 109
Item 11. Executive Compensation 109
Item 12. Security Ownership of Certain Beneficial
Owners and Management 109
Item 13. Certain Relationships and Related Transactions 109
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 110
PART I
ITEM 1. BUSINESS
GENERAL
Redfed Bancorp Inc. (the "Company") was incorporated under Delaware
law on October 18, 1993, for the purpose of becoming the holding company for
Redlands Federal Bank, a federal savings bank (the "Bank"). On April 7, 1994,
the Company acquired the Bank in connection with 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. The Company is
subject to regulation as a savings and loan holding company by the Office of
Thrift Supervision ("OTS"). The Bank is also subject to regulation by the
Federal Deposit Insurance Company (the "FDIC") and the Securities and Exchange
Commission ("SEC"). The Bank's customer deposits are insured by the Savings
Association Insurance Fund ("SAIF") of the FDIC. The Bank is also a member of
the Federal Home Loan Bank (the "FHLB") of San Francisco. The Company's
executive office is located at 300 E. State Street, Redlands, California 92373;
the telephone number is (909) 335-3551.
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 include home equity lines of credit, Federal Housing Administration
("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. Beginning in 1997, the
Company started a small business commercial loan program.
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. Until 1993, the Company issued letters of credit ("LOCs")
securing the repayment of tax exempt bonds issued by various local governmental
authorities in Southern California. 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 real estate lending activities.
The Company originates loans for investment and for sale and has
purchased loans to augment the loan portfolio. Loan sales are derived from loans
held in the Company's portfolio designated as being held for sale or originated
during the period and being so designated. Historically, the Company has
retained the bulk of the servicing rights of loans sold, however, in 1996 the
majority of the servicing rights were sold. The Company's revenues are
derived principally from interest on its mortgage loans, and to a lesser extent,
nonmortgage loans, and fees on LOCs, deposit accounts, income from
subsidiaries, mortgage loan servicing activities, and interest and dividends on
its investment and mortgage-backed securities portfolios. The Company's primary
source of funds are deposits, principal and interest payments on loans, proceeds
from the sale of loans and, to a lesser extent, FHLB advances. Through its
wholly-owned subsidiaries, the Company currently engages in the sale of
insurance and investment products on an agency basis. In addition, the Company
formerly engaged in real estate development activities through a subsidiary. No
development is now in process and any remaining real estate is held for sale.
1
The following tables set forth certain financial and operating information with
respect to the Company.
SUMMARY CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA OF THE COMPANY
(Dollars in thousands, except per share data)
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- ---------- ----------- ------------ -------------
SUMMARY FINANCIAL CONDITION DATA:
Total assets $882,504 $871,814 $960,853 $916,846 $932,232
Total liabilities 810,386 823,736 905,345 863,485 875,993
Stockholders' equity,
substantially restricted 72,118 48,078 55,508 53,361 56,239
SUMMARY OPERATING DATA:
Interest income $ 61,499 $ 64,224 $ 56,515 $ 59,436 $ 69,257
Interest expense 33,038 38,366 29,869 30,869 37,154
-------- -------- -------- -------- --------
Net interest income 28,461 25,858 26,646 28,567 32,103
Provision for losses on loans 2,838 7,938 12,651 12,990 6,106
-------- -------- -------- -------- --------
Net interest income after
provision for losses
on loans 25,623 17,920 13,995 15,577 25,997
-------- -------- -------- -------- --------
Non-interest income 6,967 11,198(1) 6,275 6,884 6,066
-------- -------- -------- -------- --------
General and administrative
("G&A") expense 29,227(2) 24,285 27,195 25,458 23,931
Real estate & LOC
operations, net 3,713 12,794 18,265 3,916 4,014
-------- -------- -------- -------- --------
Total non-interest expense 32,940 37,079 45,460 29,374 27,945
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes (350) (7,961) (25,190) (6,913) 4,118
Income taxes (benefit) 7 124 1,150 (3,669) 557(3)
-------- -------- -------- -------- --------
Net earnings (loss) $ (357) $ (8,085) $(26,340) $ (3,244) $ 3,561
======== ======== ======== ======== ========
Net loss per share $ (0.07) $ (2.03) $ (6.08)(4) n/a n/a
======== ======== ======== ======== ========
SUMMARY FINANCIAL RATIOS AND OTHER DATA:
Return on average assets (0.04)% (0.86)% (2.79)% (0.35)% 0.40%
Return on average equity (0.62) (15.05) (38.30) (6.00) 6.34
Equity to total assets 8.17 5.51 5.78 5.82 6.03
Interest rate spread 3.36 2.87 3.19 3.44 3.90
G&A to average assets 3.40(5) 2.59 2.88 2.74 2.66
Efficiency ratio (6) 82.50 65.54 82.61 71.81 62.70
REGULATORY CAPITAL RATIOS:
Tangible and core capital 7.73 5.24 5.65 5.42 5.58
Risk-based capital 11.52 8.17 8.59 8.11 8.64
ASSET QUALITY RATIOS:
Nonperforming assets to
total assets and LOCs (7)(8) 2.02 4.53 4.46 3.17 3.18
Allowance for losses on loans,
LOCs and real estate to total
assets and LOCs 1.96 3.28 2.85 1.95 1.15
General valuation allowances
("GVA's") for losses on loans,
LOCs and real estate to total
nonperforming assets (7) (8) 89.18 39.30 51.20 40.90 25.52
(See notes on following page)
2
_______________________________
(1) Includes curtailment gain of $3.4 million.
(2) Includes FDIC special assessment of $5.4 million.
(3) Includes a $1.3 million benefit due to the cumulative effect of a change in
accounting principle.
(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) G&A to average assets ratio, excluding FDIC special assessment is 2.77%.
(6) G&A expense to net interest income plus total non-interest income. Excludes
provisions for losses on loans and LOCs and real estate operations. For the
years ended December 31, 1996 and 1995, if FDIC special assessment of $5.4
million and curtailment gain on retirement plan of $3.4 million were
excluded, the efficiency ratio would be 67.20% and 72.14%, respectively.
(7) Excludes troubled debt restructures which are currently performing under
their restructured terms.
(8) Nonperforming assets include nonperforming loans, LOCs and real estate
owned ("REO").
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 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, when compared to
other major Southern California counties, including the lowest average home
prices, the lowest industrial space cost, the lowest average pay level and one
of the highest growth in employment rates.
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. In 1996 the Company began to purchase one-to
four-family loans in California. Since 1991, Southern California, including
the Inland Empire, has experienced an economic recession as a result of a
decline in the defense industry, including military base closures and
downsizings, corporate relocations and general weakness in the real estate
market. This recession was 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 increased and the underlying values
of many properties securing loans declined, resulting in substantial losses to
lending institutions. The recession 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. While the Inland Empire economy
has recently exhibited positive employment trends, there is no assurance that
such trends will continue. A worsening of current economic conditions in the
Company's primary lending area 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 loan
and real estate losses, the value of the collateral securing the Company's
mortgage loans and its portfolio of real estate acquired through foreclosure
("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".
3
The Company's deposit gathering activities are concentrated in the
areas surrounding its home and thirteen 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. During December 1996 the Company
concluded the purchase of $17.5 million in deposits from another local area
bank, and beginning in 1997 plans to expand its product lines to include small
business banking services.
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. Beginning
in 1997, the Company started a small business commercial loan program and plans
to expand FHA, Veterans Administration ("VA") and "B" quality single family loan
production. The Company has also historically made various types of consumer
loans including home equity lines of credit, ("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") 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 origination of tract construction and land development loans and
limited the origination 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 previously led to increases in the levels
of delinquencies and nonperforming and restructured loans in these portfolios.
Loan originations and purchases for the year ended December 31, 1996
were $158.1 million compared to $114.0 million for the year ended December 31,
1995. The increase in the loan activity was a result of the Company's
business plan to expand the lending activity and therefore increase assets.
Since 1982, the Company has emphasized the origination of adjustable
rate mortgage ("ARM") loans for retention in its portfolio in order to increase
the percentage of loans with more frequent repricing. Most of these ARM loans
have rates based on the FHLB Eleventh District Cost of Funds Index ("COFI"),
which is comprised of the average cost of funds of all savings institutions that
are members of the FHLB of San Francisco. In 1996 the Company increased ARM
loans tied to the one year Constant Maturity Treasury Index ("CMT"), which
responds more quickly to market conditions than the COFI, which is a lagging
index. At December 31, 1996, approximately 93.00% of the Company's mortgage
loan portfolio were ARM loans, of which 94.00% had interest rates tied
to the COFI and 6.00% had interest rates tied to the CMT. During 1996 the
Company retained a limited amount of its fixed rate loan production in its
portfolio.
Loan Portfolio Composition. At December 31, 1996, the Company had
total loans outstanding of $754.9 million, of which $426.0 million, or 56.43%,
were one- to four-family residential mortgage loans and $170.5 million, or
22.59%, were multi-family residential mortgage loans. At that same date, 92.55%
of the Company's one- to four-family mortgage loans, 96.19% of its multi-family
residential mortgage loans and 90.34% of its other mortgage loans had adjustable
interest rates. Further information concerning the composition of the Company's
loan portfolio at December 31, 1996 and at the prior dates indicated is set
forth in the following table.
4
LOAN PORTFOLIO COMPOSITION
At December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- ----------------- ------------------ ---------------- ------------------
Percent Percent Percent Percent Percent
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) $425,970 56.43% $334,691 46.52% $349,386 43.88% $277,196 40.74% $258,323 38.00%
Multi-family(2) 170,543 22.59 186,375 25.90 213,057 26.76 220,768 32.45 240,287 35.34
Commercial real estate 75,235 9.97 74,339 10.33 70,963 8.91 72,664 10.68 61,514 9.05
Spot construction(3) 21,036 2.79 47,512 6.60 73,688 9.25 28,790 4.23 25,038 3.68
Developed lots 35,221 4.66 47,598 6.62 52,961 6.65 43,571 6.40 38,490 5.66
Tract construction and land 1,048 0.14 2,705 0.38 6,596 0.83 9,690 1.42 29,365 4.32
-------- ------ -------- ----- -------- ----- ------- ----- -------- -----
Total mortgage loans 729,053 96.58 693,220 96.35 766,651 96.28 652,679 95.92 653,017 96.05
Consumer loans 25,804 3.42 26,287 3.65 29,584 3.72 27,731 4.08 26,866 3.95
-------- ------ -------- ----- -------- ----- ------- ----- -------- -----
Total loans 754,857 100.00% 719,507 100.00% 796,235 100.00% 680,410 100.00% 679,883 100.00%
====== ====== ====== ====== ======
Less:
Undistributed portion of
construction loans (12,390) (18,467) (39,801) (14,617) (19,472)
Unearned discounts and net
deferred loan origination (2,471) (3,311) (4,428) (4,750) (4,849)
Allowance for losses on
loans (10,134) (14,745) (18,874) (15,373) (7,673)
-------- -------- -------- ------- --------
$729,862 $682,984 $733,132 $645,670 $647,889
======== ======== ======== ======== ========
___________
(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 generally are included in one-to four-
family mortgage loans.
5
Loan Maturity. The following table shows the maturity of the Bank's loans at
December 31, 1996. The table does not include principal repayments. Principal
repayment on loans totaled $108.6 million, $91.9 million and $82.6 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996
-----------------------------------------------------------------------------------------------------
Tract
One-to Multi- Commercial Spot Developed construction Total loans
four-family family real estate construction lots and land Consumer receivable
------------ -------- ----------- ------------ --------- -------- -------- ----------
(Dollars in thousands)
Amount due:
Within one year $ 1,898 $ 1,796 $ 3,924 $ 5,016 $ 1,609 $ 1,048 $ 8,562 $ 23,853
-------- -------- ----------- ----------- --------- -------- -------- ----------
After one year:
More than one to three years 1,755 2,084 4,427 - 514 - 2,751 11,531
More than three to five years 1,922 4,233 293 - 183 - 6,236 12,867
More than five to 10 years 2,901 21,205 10,123 - 4,833 - 1,842 40,904
More than 10 to 20 years 23,947 33,626 23,989 950 27,364 - 5,441 115,317
Over 20 years 393,547 107,599 32,479 15,070 718 - 972 550,385
-------- -------- ----------- ----------- --------- -------- -------- ----------
Total due after one year 424,072 168,747 71,311 16,020 33,612 - 17,242 731,004
-------- -------- ----------- ----------- --------- -------- -------- ----------
Total amount due 425,970 170,543 75,235 21,036 35,221 1,048 25,804 754,857
Loans in process (1,045) - - (11,342) - - (3) (12,390)
Unearned discounts and net
deferred loan origination fees (904) (795) (189) (264) (303) (2) (14) (2,471)
Allowance for losses on loans (2,433) (4,537) (838) (68) (1,017) (515) (726) (10,134)
-------- -------- ----------- ----------- --------- -------- -------- ----------
421,588 165,211 74,208 9,362 33,901 531 25,061 729,862
-------- -------- ----------- ----------- --------- -------- -------- ----------
Loans held for sale (4,843) - - - - - - (4,843)
-------- -------- ----------- ----------- --------- -------- -------- ----------
$416,745 $165,211 $74,208 $ 9,362 $33,901 $ 531 $25,061 $725,019
======== ======== =========== =========== ========= ======== ======== ==========
6
The following table sets forth at December 31, 1996, the dollar amount of all
loans due after December 31, 1997, and whether such loans have fixed interest
rates or adjustable interest rates.
LOANS BY INTEREST RATE TYPE
DUE AFTER DECEMBER 31, 1997
-----------------------------------
FIXED ADJUSTABLE TOTAL
---------- ---------- --------
(Dollars in thousands)
Mortgage loans:
One- to four-family $29,855 $394,217 $424,072
Multi-family 6,498 162,249 168,747
Commercial real estate 2,698 68,613 71,311
Spot construction -- 16,020 16,020
Developed lots -- 33,612 33,612
Consumer loans 13,142 4,100 17,242
-------- --------- ---------
Total loans $52,193 $678,811 $731,004
======== ========= =========
7
The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated:
LOAN ACTIVITY
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
(Dollars in thousands)
Beginning balance (gross) $ 719,507 $796,235 $680,410
Loans originated: (1)
One- to four-family (2) 37,697 33,648 124,570
Multi-family (3) 8,404 3,088 9,252
Commercial real estate - 7,010 1,144
Spot construction 21,050 36,725 74,987
Developed lots 270 10,868 20,621
Tract construction and land - - 5,130
Consumer loans 19,953 21,057 9,903
--------- -------- --------
Total loans originated 87,375 112,396 245,607
Loans purchased 70,698 (5) 1,585 400
--------- -------- --------
Total 158,073 113,981 246,007
Transfer of loans to REO (4) (13,811) (22,124) (28,971)
Principal repayments (108,635) (91,890) (82,571)
Sales of loans (278) (76,695) (18,640)
--------- -------- --------
Ending balance (gross) $ 754,857 $719,507 $796,235
========= ======== ========
____________
(1) Includes loans made to facilitate the sale of real estate.
(2) Includes loans held for sale.
(3) Excludes LOCs.
(4) Excludes allowance for losses on loans and unamortized deferred loan fees
on loans transferred to REO.
(5) Excludes premiums of $445,000.
One- to Four-family Mortgage Lending. The Company offers both fixed
rate mortgage loans and ARM loans with maturities of up to 40 years secured by
one-to four-family residences, which are located in the Company's primary
market area. 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, realtors in the Company's market area, and
wholesale loan brokers.
The Company's policy is to originate one-to four-family residential
mortgage loans in amounts up to 80% of the
8
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 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 $426.0 million of one- to four-family residential mortgage
loans outstanding at December 31, 1996, 7.45% were fixed rate loans and 92.55%
were ARM loans. The interest rates for the majority of the Company's ARM loans
are indexed to the monthly weighted average 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 December 31, 1996, $63.5 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
during periods of rising interest rates because the loan principal may increase
above the amount originally advanced, thereby increasing the Company's risk of
loss in the event of default. At December 31, 1996, the aggregate balances of
such one- to four-family loans at that date exceeded the original amounts
advanced by $316,000. 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 to
the borrower provided by the payment schedules.
The Company also originates loans secured by second mortgages on
single family residences. At December 31, 1996 the Company had $3.0 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 December 31, 1996, $10.7 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 December 31, 1996 amounted to $3.2 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 $170.5 million of multi-family mortgage loans
outstanding at December 31, 1996, 3.81% were fixed rate loans and 96.19% were
ARM loans; $104.8 million, or 63.90%, 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 had previously led to increases in the level of
delinquencies, nonperforming and restructured loans in this portfolio. At
December 31, 1996, $158.1 million, or 92.75%, of the multi-family mortgage loan
portfolio had been originated prior to January 1, 1995, 123 loans with an
outstanding balance of $78.6 million, and 142 loans with an outstanding balance
of $79.5 million, had been originated in the periods from 1989 through 1994 and
1971 through 1988, respectively. Eighteen multi-family loans with an
outstanding balance of $12.4 million were originated during 1995 and 1996,
primarily as a result of the sale of REO.
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
9
policies, a multi-family mortgage loan may only be made in an amount up to 75%
(85% in connection with the sale of a multi-family REO) of the lesser of the
appraised value or sales price of the underlying property and with 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 December
31, 1996 relates to $16.2 million of loans which represent a portion of the
underlying $25.3 million in County of San Bernardino bonds owned by the Company.
The Company's largest multi-family loan at December 31, 1996, had an outstanding
balance of $5.0 million and is secured by an apartment complex located in Loma
Linda. The average outstanding multi-family loan balance at December 31, 1996,
excluding LOCs, was $603,000. At December 31, 1996, the multi-family loan
portfolio consisted of 283 loans with an aggregate outstanding balance of $170.5
million, or 22.59% of total loans. Of this amount, $764,000, or 0.45% 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 $422,000, $17.8 million and $23.0 million at
December 31, 1996, 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 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
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
mortgage-backed securities ("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 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
10
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 receives 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 if not successfully
remarketed, 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 to
successfully remarket a bond.
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 December 31, 1996, 21 LOCs in the aggregate amount of $106.0
million were outstanding. An allowance for losses on the Company's LOCs in the
amount of $7.6 million was included in other liabilities at December 31, 1996.
The Company's largest LOC at December 31, 1996, had an outstanding balance of
$7.7 million and is secured by an apartment complex located in Corona,
California. The average outstanding LOC balance at December 31, 1996 was $5.0
million. See "--Asset Quality--Nonperforming Assets." Since the inception
of the LOC program in 1985, the Company has identified losses in the amount of
$14.4 million, or 25.19% of the $52.7 million of LOCs that have been
nonperforming in the past, or 9.41% 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 $75.2
million of commercial loans outstanding at December 31, 1996, 8.52% were fixed
rate loans and 91.48% were ARM loans; $27.1 million, or 39.37%, 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 or to existing
11
credit-worthy customers. See "--General." The Company's underwriting procedures
provide that commercial real estate loans may be made in amounts up to 75% (85%
in connection with the sale of a commercial REO) 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 COFI or the one year CMT. The Company's
underwriting standards and procedures for commercial real estate 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 December 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 December 31, 1996 was $396,000. At December 31, 1996, the commercial real
estate loan portfolio consisted of 190 loans with an aggregate outstanding
balance of $75.2 million, or 9.97% of total loans. Of this amount, none were
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 $461,000,
$536,000 and $209,000 at December 31, 1996, 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 December
31, 1996, $82.9 million of the $426.0 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 20%
cash investment in the property by the borrower . 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 December
31, 1996, the Company had $21.0 million of spot construction loans, or 2.79% of
the Company's total loan portfolio. At December 31, 1996 no spot construction
loans were nonaccrual. At December 31, 1995, only one spot construction loan,
with an outstanding balance of $418,000, was nonaccrual compared to none at
December 31, 1994. One spot construction loan in the amount of $372,000 was
included in REO at December 31, 1996 compared to none at December 31, 1995 and
1994. See "--Asset Quality--Nonperforming Assets".
Developed Lot Loans. At December 31, 1996, the Company had $35.2 million
of developed lot loans, comprising 4.66% of total loans. Developed lot loans 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,
$1.0 million, or 2.86%, were nonaccrual at December 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 $1.8
million, $1.8 million and $842,000 were classified REO at December 31, 1996,
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.
12
Tract Construction and Land Development Lending. At December 31,
1996, the Company had loans of $1.0 million, or 0.14% of total loans , 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 December 31, 1996, $586,000, or 55.92%, 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 $458,000, $463,000 and $4.4 million
at December 31, 1996, 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 December 31, 1996, consumer loans
totaled $25.8 million, or 3.42% of the Company's total loan portfolio. Except
for equity lines of credit, consumer loans are offered primarily on a fixed rate
basis, generally with maturities of ten years or less.. 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, and the use of credit scoring, 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 a 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 $200,000, or 0.78% of the
consumer loan portfolio, at December 31, 1996, compared to $413,000 or 1.57% of
the consumer loan portfolio at December 31, 1995 and $476,000 or 1.61% of the
consumer loan portfolio at December 31, 1994. Consumer loan repossessed assets
were $51,000 at December 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 of
the Company authorizes and may limit the lending activities 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 Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
secondary market purchase limit, which currently is $214,600, 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.
Mortgage-backed Securities. The Company invests in MBS and utilizes
such securities to complement its mortgage lending activities. At December 31,
1996, MBS totaled $43.5 million, or 4.93% 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 December 31, 1996
was $25.3 million. The balance of MBS are categorized as available-for-sale
investments, including $16.3 million of Government National Mortgage Association
("GNMA") certificates and $1.9 million of FHLMC certificates. The market value
of all MBS totaled approximately $43.9 million at December 31, 1996 and the MBS
portfolio had a weighted average yield of 7.77% at that date. The MBS portfolio
at December 31, 1996 consisted of $41.6 million of fixed rate
13
securities and $1.9 million of adjustable rate securities. Investments in MBS
involve risks that actual prepayments may exceed the estimates used at the time
of purchase, 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,
---------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- ------- -------- ----------
(Dollars in thousands)
Held to Maturity:
GNMA certificates - - - - $ 1,296 1.62%
FHLMC certificates - - - - 32,778 40.99
San Bernardino County bond $25,327 58.16% $25,615 49.15% 30,698 38.39
------- ----- ------- ------ ------- -----
25,327 58.16 25,615 49.15 64,772 81.00
------- ----- ------- ------ ------- -----
Available for Sale:
GNMA certificates 16,356 37.56 21,098 40.48 11,589 14.49
FHLMC certificates 1,864 4.28 5,403 10.37 - -
FNMA certificates - - - - 3,610 4.51
------- ----- ------- ------ ------- -----
18,220 41.84 26,501 50.85 15,199 19.00
------- ----- ------- ------ ------- -----
$43,547 100.00% $52,116 100.00% $79,971 100.00%
======= ====== ======= ====== ======= ======
14
The following table sets forth certain information regarding purchases,
sales and repayments relating to the Company's MBS portfolio for the years
indicated.
MORTGAGE-BACKED SECURITIES PURCHASES AND REPAYMENTS
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
(Dollars in thousands)
At beginning of period $ 52,116 $ 79,971 $109,982
MBS purchased 5,950 21,053 -
Principal repayments and sales (14,519) (48,908) (30,011)
-------- -------- --------
At end of period $ 43,547 $ 52,116 $ 79,971
======== ======== ========
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 or commercial real estate. 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 determinations 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.
15
Delinquent Loans. At December 31, 1996, 1995 and 1994, delinquencies in the
Company's loan portfolio were as follows:
DELINQUENT LOANS
At December 31,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------- --------------------------------- ---------------------------------
60-89 days 90 days or more 60-89 days 90 days or more 60-89 days 90 days or more
----------------- ----------------- ---------------- ---------------- ---------------- ----------------
Principal Principal Principal Principal Principal PrincipaL
Number balance Number balance Number balance Number balance Number balance Number balance
------ --------- ------ --------- ------ -------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands)
One- to four-family - $ - 48 $10,739 5 $ 722 49 $ 8,818 15 $1,626 58 $ 7,255
Multi-family - - 3 764 - - 7 6,115 2 205 10 3,980
Commercial real estate - - - - - - 1 223 - - 1 113
Spot construction - - - - - - 1 418 - - - -
Developed lots - - 9 1,009 4 242 14 1,036 - - 16 2,278
Tract construction and land - - 2 586 2 182 2 581 - - - -
Consumer loans 39 114 37 200 40 74 94 413 39 122 138 476
------ --------- ------ --------- ------ -------- ------ --------- ------ ------ ------ ---------
Total 39 $114 99 $13,298 51 $ 1,220 168 $17,604 56 $1,953 223 $14,102
====== ========= ====== ========= ====== ======== ====== ========= ====== ====== ====== =========
Delinquent loans to loans,
net of specfic reserves 0.02% 1.76% 0.17% 2.46% 0.25% 1.78%
16
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,
developed lot, tract construction and land development loan portfolios, the
Company experienced significant increases in the level of nonperforming assets
in the period from 1992 through 1995. During 1996 economic conditions in the
Company's market area stabilized. As part of management's strategy developed in
response to these prevailing economic conditions, the Company 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 were determined to be impracticable and by selling existing REO.
Through these efforts, the Company substantially reduced the amounts of its
nonperforming assets and the Company continues 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 its nonperforming assets.
The interest income that would have been received on the Company's
nonaccrual loans for the years ended December 31, 1996, 1995 and 1994, if such
loans had been performing in accordance with their terms, was $1.0 million, $1.4
million and $1.1 million, respectively. The interest income that was actually
recorded for these loans for such periods was $702,000, $955,000 and $624,000,
respectively.
The Company's ratios of nonaccrual loans to total loans and net
nonperforming assets to total assets and LOCs was 1.76% and 2.02%, respectively,
at December 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.
17
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 DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands)
NONACCRUAL LOANS:
One- to four-family $10,739 $ 8,818 $ 7,255 $10,282 $ 2,784
Multi-family 764 6,115 3,980 9,857 9,809
Commercial real estate - 233 113 1,070 2,241
Spot construction - 418 - - -
Developed lots 1,009 1,036 2,278 1,220 423
Tract construction and land 586 581 - 200 3,232
Consumer 200 413 476 120 118
------- ------- ------- ------- -------
Total nonaccural loans $13,298 $17,604 $14,102 $22,749 $18,607
------- ------- ------- ------- -------
REO(1):
One- to four-family $ 3,169 $ 5,393 $ 4,487 $ 1,212 $ 887
Multi-family 422 17,807 22,981 2,050 10,048
Commercial real estate 461 536 209 799 -
Spot construction 372 - - - -
Developed lots 1,757 1,836 842 259 -
Tract construction and land 458 463 4,447 5,574 3,536
Consumer 51 43 62 53 -
------- ------- ------- ------- -------
Total real estate(2) 6,690 26,078 33,028 9,947 14,471
------- ------- ------- ------- -------
Total nonperforming assets $19,988 $43,682 $47,130 $32,696 $33,078
======= ======= ======= ======= =======
Nonaccrual loans to total loans 1.76% 2.45% 1.77% 3.34% 2.74%
Nonperforming assets to
total assets and LOCs 2.02 4.53 4.46 3.17 3.18
____________________________
(1) Does not include GVAs of $890, $1,518, $1,987, $518 and $0 as of December
31, 1996, 1995, 1994, 1993 and 1992, 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 December 31, 1996, there were $12.0
million in restructured loans. The amount of interest income recognized on
restructured loans for the years ended December 31, 1996, 1995 and 1994 was
$819,000, $802,000 and $1.2 million 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 $1.1 million, $931,000
and $1.3 million, respectively. The following table sets forth
18
information regarding restructured loans.
RESTRUCTURED LOANS
DECEMBER 31,
----------------------------
1996 1995 1994
------- ------ -------
(Dollars in thousands)
One- to four-family $ 1,159 - -
Multi-family 10,842 $6,400 $18,531
Commercial - - 1,819
Developed lots - - 117
Tract construction and land - 488 -
------- ------ -------
Total loans restructured $12,001 $6,888 $20,467
======= ====== =======
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
nevertheless 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 December 31, 1996, the Company had 143 loans totaling $20.4 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 December 31, 1996 was an LOC in the amount of $4.4 million, which
is secured by a 142 unit apartment complex located in Barstow, California. The
largest REO was a single family residence located in Rancho
19
Mirage, California in the amount of $512,000. At December 31, 1996, the Company
also had 107 loans and 4 LOCs, designated as Special Mention, totaling $49.1
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 $7.1 million at
December 31, 1996, and secured by a 280 unit apartment complex located in
Fontana, 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.
None of the real estate held for sale was classified Substandard or Loss at
December 31, 1996. At December 31, 1995, $280,000 was classified as Substandard
and $172,000 as Loss, 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 December 31, 1996, 1995 or 1994.
20
The following table sets forth certain information regarding the Company's
aggregate reported value of assets and LOCs classified as Substandard, Doubtful
or Loss at December 31, 1996, 1995 and 1994. No loans were classified as
Doubtful at December 31, 1995.
----------------------------------------------------------------------------------------------------
CLASSIFIED ASSETS
----------------------------------------------------------------------------------------------------
At December 31, 1996 At December 31, 1995 At December 31, 1994
---------------------------------------------- --------------------- ------------------------------
Substandard Doubtful Loss Substandard Loss Substandard Doubtful Loss
-------------- -------------- -------------- ------------- ------- ----------- -------- --------
Number Amount Number Amount Number Amount Amount Amonunt Amount Amount Amount
------ ------- ------ ------ ------ ------ ------------- ------- ----------- -------- --------
Loans: (Dollars in thousands)
One- to four-family 42 $11,934 - - - - $ 6,790 - $ 9,242 $ 44 $ 293
Multi-family 9 5,619 1 $153 3 $ 359 14,566 $ 3,607 32,933 730 3,064
Commercial real estate 2 653 - - - - 879 118 2,640 - 120
Spot construction - - - - - - 418 - - - -
Developed lots 9 1,220 - - - - 1,114 - 2,741 118 162
Tract construction and land 2 591 - - 2 463 1,058 1,069 - - -
Consumer 79 358 - - - - 218 - 430 - -
------ ------- ------ ------ ------ ------ -------------- ------- ----------- -------- -------
Total 143 20,375 1 153 5 822 25,043 4,794 47,986 892 3,639
REO
One- to four-family 25 3,169 - - 4 133 5,393 203 4,487 - 125
Multi-family 3 422 - - - - 17,807 4,922 22,981 - 331
Commercial real estate 3 461 - - 1 34 536 96 209 - -
Developed lots 25 1,757 - - 9 190 1,836 269 842 - 43
Tract construction and land 3 830 - - 1 139 463 593 4,447 - 126
Consumer 7 51 - - - - 43 - 62 - -
------ ------- ------ ------ ------ ------ -------------- ------- ----------- -------- -------
Total 66 6,690 - - 15 496 26,078 6,083 33,028 - 625
Real estate held for sale - - - - - - 280 172 6,777 - -
LOCs 1 4,375 - - - - 7,524 1,751 21,133 - -
------ ------- ------ ------ ------ ------ -------------- ------- ----------- -------- -------
Total 210 $31,440 1 $153 20 $1,318 $58,925 $12,800 $108,924 $892 $4,264
------ ------- ------ ------ ------ ------ -------------- ------- ----------- -------- -------
21
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,
asset scoring and classification, a loss migration analysis, assessment of
credit risk inherent in the portfolio and other factors that management believes
to warrant recognition in providing for an adequate loan loss allowance. In
response to a previous 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, management increased its allowances to account for its
evaluation of the potential effects of such factors. The allowances at December
31, 1996 reflect management's evaluation of the risks inherent in the Company's
loan and LOC portfolios in consideration of the regional economy, the real
estate values the regulatory environment and the levels of nonperforming assets.
At December 31, 1996, the Company's ratio of GVAs for losses on loans, real
estate and LOCs to nonperforming assets and LOCs was 89.18%. The allowance for
losses on loans and LOCs was $17.8 million, or 2.06% of total loans and LOCs,
and the total allowances for losses on loans, LOCs and real estate was $19.4
million, or 1.96% 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. 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 December 31,
1996, the Company's allowance for losses on real estate was $1.6 million, or
18.61% of the Company's real estate acquired or held for sale.
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.
22
ANALYSIS OF ALLOWANCE FOR LOSSES
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------
(Dollars in thousands)
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of period $14,745 $ 18,874 $15,373 $ 7,673 $ 4,459
Provision charged to income 2,838 7,938 12,651 12,990 6,106
Charge-offs:
One- to four-family (1,645) (2,311) (913) (376) (68)
Multi-family (3,920) (8,779) (5,480) (2,526) (2,110)
Commercial real estate (18) (203) (4) (157) -
Spot construction (46) - - - -
Developed lots (279) (600) (322) - -
Tract construction and land (1,074) - (2,051) (1,933) (327)
Consumer loans (907) (684) (408) (413) (411)
------- -------- ------- ------- -------
Total charge-offs (7,889) (12,577) (9,178) (5,405) (2,916)
Recoveries 440 510 28 115 24
------- -------- ------- ------- -------
Balance at end of period 10,134 14,745 18,874 15,373 7,673
------- -------- ------- ------- -------
ALLOWANCE FOR LOSSES ON LOCS:
Balance at beginning of period 7,447 6,908 2,599 2,142 276
Provision charged to income 2,402 2,536 9,895 694 1,866
Charge-offs (2,225) (1,997) (5,586) (237) -
------- -------- ------- ------- -------
Balance at end of period 7,624 7,447 6,908 2,599 2,142
------- -------- ------- ------- -------
Total allowance for losses on loans and LOCs $17,758 $ 22,192 $25,782 $17,972 $ 9,815
======= ======== ======= ======= =======
ALLOWANCE FOR LOSSES ON REAL ESTATE:
Balance at beginning of period $ 9,496 $ 4,378 $ 2,113 $ 2,149 $ 1,548
Provision charged to income - 8,336 4,653 1,968 1,128
Charge-offs (7,856) (3,218) (2,388) (2,004) (527)
------- -------- ------- ------- -------
Balance at end of period $ 1,640 $ 9,496 $ 4,378 $ 2,113 $ 2,149
======= ======== ======= ======= =======
TOTAL ALLOWANCE FOR LOSSES ON LOANS, LOCS
LOANS AND REAL ESTATE:
Specific $ 1,572 $ 14,523 $ 6,031 $ 6,711 $ 3,524
GVA 17,826 17,165 24,129 13,374 8,440
------- -------- ------- ------- -------
$19,398 $ 31,688 $30,160 $20,085 $11,964
======= ======== ======= ======= =======
ASSET QUALITY RATIOS:
Charge-offs to average loans and LOCs 1.29% 1.76% 1.90% 0.75% 0.40%
Allowance for losses on loans to total loans 1.34 2.05 2.37 2.26 1.13
Allowance for losses on LOCs to total LOCs 7.19 8.02 7.17 2.25 1.98
Allowance for losses on real estate to total real
estate 18.61 26.56 9.59 8.76 7.05
Allowance for losses on loans, LOCs and real
estate to total assets and LOCs 1.96 3.28 2.85 1.95 1.15
GVAs for losses on loans, LOCs and real
estate to total nonperforming assets 89.18 39.30 51.20 40.90 25.52
23
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,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- -------------------- ------------------ -------------------- ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOANS BY LOANS BY LOANS BY LOANS BY LOANS BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
-------- --------- --------- -------- -------- -------- -------- ---------- -------- ---------
(Dollars in thousands)
Allocated:
One- to four-family $ 2,433 0.57% $ 1,615 0.48% $ 1,910 0.55% $ 700 0.25% $ 367 0.14%
Multi-family 4,537 2.66 9,320 5.00 14,308 6.72 10,591 4.80 3,596 1.50
Commercial real estate 838 1.11 878 1.18 598 0.84 1,528 2.10 1,165 1.89
Spot construction 68 0.32 255 0.54 186 0.25 61 0.21 43 0.17
Developed lots 1,017 2.89 828 1.74 771 1.46 188 0.43 123 0.32
Tract construction and land 515 49.14 1,234 45.62 558 8.46 1,837 18.96 1,914 6.52
Consumer 726 2.81 615 2.34 543 1.84 468 1.69 465 1.73
-------- ------- ------- ------- -------
$ 10,134 $14,745 $18,874 $15,373 $ 7,673
======== ======= ======= ======= =======
24
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--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 of the Company 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 December 31, 1996, the Company had
investment securities in the aggregate amount of $34.7 million with a fair value
of $34.4 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.
CARRYING AND MARKET VALUES OF CASH AND INVESTMENT SECURITIES
AT DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994
-------------------- ---------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- --------- ------- -------- -------
(Dollars in thousands)
CASH & CASH EQUIVALENTS:
Cash on hand and in banks $16,581 $16,581 $18,035 $18,035 $18,149 $18,149
Federal funds sold 17,165 17,165 12,950 12,950 4,925 4,925
------- ------- ------- ------- ------- -------
Total 33,746 33,746 $30,985 30,985 $23,074 $23,074
======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES:
U. S. government securities (maturities
more than 3 months) $ 499 $ 500 $ 3,467 $ 3,500 $ 499 $ 500
Floating agency notes 13,514 13,204 16,527 15,886 16,540 14,933
Step up notes 8,184 8,210 4,000 3,998 11,997 11,519
Callable notes 12,498 12,455 9,000 9,035 - -
FNMA Stock - - - - 25 219
Certificates of deposit (maturities more
than 3 months) - - 4,000 4,000 - -
Corporate and term notes - - 4,661 4,638 9,838 9,467
------- ------- ------- ------- ------- -------
Total $34,695 $34,369 $41,655 $41,057 $38,899 $36,638
======= ======= ======= ======= ======= =======
25
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.
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 predetermined interest rate
"step up" schedule. The notes are callable prior to the contractual maturity
date of the note at the option of the issuer.
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 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 December 31, 1996.
CARRYING VALUE AND YIELDS FOR INVESTMENT SECURITIES
LESS THAN ONE YEAR 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
securities $499 5.05% - - - - $ 499 5.05%
Floating agency notes - - $13,514 4.67% - - 13,514 4.67
Step up notes - - 5,989 6.21 $2,195 6.68% 8,184 6.33
Callable notes - - 12,498 6.45 - - 12,498 6.45
---- ------- ------ -------
Total $499 $32,001 $2,195 $34,695
==== ======= ====== =======
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.
26
The following table presents the deposit activity of the Company for
the periods indicated.
DEPOSIT ACTIVITY
FOR THE YEAR ENDED DECEMBER
-----------------------------------------
1996 1995 1994
----------- ----------- ----------
(Dollars in thousands)
Deposits $1,745,754 $1,874,670 $2,015,417
Withdrawals 1,777,176 1,934,999 2,069,636
----------- ----------- ----------
Net deposits (withdrawals) (31,422) (60,329) (54,219)
Purchase of deposits 17,485 - -
Interest credited on deposits 28,212 31,523 24,419
----------- ----------- ----------
Total increase (decrease)
in deposits $ 14,275 $ (28,806) $ (29,800)
=========== =========== ==========
At December 31, 1996, the Company had $70.0 million in deposit accounts
in the amount of more than $100,000 with maturities as follows:
MORE THAN $100,000 DEPOSIT ACCOUNTS
MATURITY PERIOD AMOUNT
- --------------------- ----------------------
(Dollars in thousands)
Savings, money market and interest- $29,671
bearing checking, Negotiable
Order of Withdrawal ("NOW")
Over three through six months 1,122
Over six through twelve months 729
Over twelve months 38,517
-------
Total $70,039
=======
27
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
---------------------------------- -------------------------------- --------------------------------
1996 1995 1994
---------------------------------- -------------------------------- --------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL AVERAGE TOTAL NOMINAL
BALANCE DEPOSIT RATE BALANCE DEPOSIT RATE BALANCE DEPOSIT RATE
-------- ------- -------- -------- ------- -------- -------- ------- --------
(Dollars in thousands)
Savings deposits $167,029 21.88% 3.00% $151,531 18.78% 2.64% $176,534 21.50% 2.25%
Money market 10,073 1.32 2.44 11,979 1.49 2.55 15,997 1.95 2.31
Interest bearing
checking (NOW) 83,404 10.92 1.06 86,199 10.68 1.16 97,397 11.86 1.02
Non-interest
bearing accounts 17,054 2.23 - 15,102 1.87 - 14,857 1.81 -
-------- ------ -------- ------ -------- ------
Total 277,560 36.35 2.00 264,811 32.82 2.00 304,785 37.12 1.75
-------- ------ -------- ------ -------- ------
CERTIFICATES OF DEPOSIT:
Less than 3 months 1,317 0.17 2.81 2,630 0.33 2.84 6,626 0.81 2.47
3 to 5 months 11,209 1.47 5.80 2,328 0.29 3.49 5,429 0.66 2.76
6 to 11 months 146,142 19.14 4.91 184,005 22.80 5.12 145,219 17.68 3.33
12 to 23 months 191,321 25.06 5.32 166,305 20.60 5.69 144,397 17.58 4.00
24 to 47 months 76,544 10.03 5.73 93,288 11.56 5.18 112,704 13.72 4.76
48 to 71 months 33,925 4.44 5.50 65,769 8.15 6.24 67,302 8.20 6.35
72 months or more 25,385 3.32 6.10 27,293 3.38 6.13 33,384 4.07 6.29
Jumbo certificates 183 0.02 7.12 482 0.06 3.32 1,322 0.16 2.86
-------- ------ -------- ------ -------- ------
Total certificates 486,026 63.65 5.32 542,100 67.18 5.47 516,383 62.88 4.40
-------- ------ -------- ------ -------- ------
Total average $763,586 100.00% 4.19% $806,911 100.00% 4.33% $821,168 100.00% 3.42%
======== ====== ==== ======== ====== ==== ======== ====== ====
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 December 31, 1996.
CERTIFICATE ACCOUNTS
PERIOD TO MATURITY FROM DECEMBER 31, 1996 AT DECEMBER 31,
------------------------------------------------ --------------------------
WITHIN 1 TO 3
1 YEAR YEARS THEREAFTER TOTAL 1995 1994
--------- ------- ---------- ----- --------- ---------
(Dollars in thousands)
Certificate Amounts:
3.99% or less $ 1,782 $ 145 $ 10 $ 1,937 $ 4,225 $147,228
4.00% to 4.99% 121,560 5,111 465 127,136 131,602 141,365
5.00% to 5.99% 248,619 79,998 8,477 337,094 226,707 145,498
6.00% to 6.99% 27,014 10,249 1,761 39,024 139,232 75,018
7.00% to 7.99% 2,098 98 259 2,455 3,924 22,532
8.00% and over 35 594 115 744 606 1,901
-------- ------- ------- --------- --------- ---------
$401,108 $96,195 $11,087 $508,390 $506,296 $533,542
======== ======= ======= ========= ========= =========
28
March 20, 1997 Revison #4 DRAFT DRAFT
Borrowings. The Company 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 -- 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 December 31, 1996 the Company's FHLB of
San Francisco total line of credit was approximately $218.1 million, $117.7
million of which was used as collateral for LOCs and public funds, and an
unused line of credit of $100.4 million. At December 31, 1996, the Company had
no outstanding advances from the FHLB and had other borrowings of $4.4 million.
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 $708,000. 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 THE YEAR ENDED
DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- --------
(Dollars in thousands)
FHLB ADVANCES:
Average balance outstanding $ 7,746 $32,260 $20,562
Maximum amount outstanding at any month-end
during the period 10,000 60,000 60,000
Balance outstanding at end of period - 10,000 60,000
Weighted average interest rate during the period 6.60% 7.22% 6.30%
Weighted average interest rate at end of period - 7.27 6.20
OTHER BORROWINGS:
Average balance outstanding $11,282 $21,992 $7,689
Maximum amount outstanding at any month-end
during the period 21,133 23,740 20,085
Balance outstanding at end of period 4,418 21,133 20,085
Weighted average interest rate during the period 4.80% 4.91% 6.88%
Weighted average interest rate at end of period 6.76 5.01 6.13
29
March 20, 1997 Revison #4 DRAFT DRAFT
SUBSIDIARY ACTIVITIES
The Company has three wholly-owned second-tier subsidiary
corporations: 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 December 31, 1996, the Company and its subsidiaries had 279 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.
REGULATION
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. The Bank 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.
30
March 20, 1997 Revison #4 DRAFT DRAFT
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
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 Bank Insurance Fund (the "BIF")
is the insurance fund responsible for insuring the deposits of commercial banks
and certain other institutions. The Bank is a member of the SAIF.
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 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 a deposit insurance premium
assessment rate which currently ranges from 0.00% to 0.27%, as compared with the
uniform 0.23% rate that had previously been in effect. The Bank's current
assessment rate is 0.24%.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "DIF
Act") was enacted which, among other things, recapitalized the SAIF through a
one-time special assessment for SAIF members, such as the Bank, estimated to be
$0.675 per $100 of SAIF-deposits as of March 31, 1995. Beginning January 1,
1997, the same
31
March 20, 1997 Revison #4 DRAFT DRAFT
risk-based assessment schedule applies to both SAIF members and BIF members --
$0.00 to $0.27 per $100 of deposits. The DIF Act also provided for full pro rata
sharing by all federally-insured institutions by January 1, 2000 of the
obligation, now borne entirely by SAIF-insured institutions, to pay the interest
on the 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. Beginning on January 1, 1997 through January 1,
2000 (or January 1, 1999 if the bank and savings association charters are then
merged), FICO premiums for BIF and SAIF insured deposits are $0.013 and $0.064
per $100 of deposits, respectively. The DIF Act provides for the merger of the
BIF and the SAIF on January 1, 1999 into a newly created Deposit Insurance Fund,
provided that the bank and savings association charters are combined by that
date. If the charters have been merged and the Deposit Insurance Fund created,
pro rata FICO premium sharing will begin on January 1, 1999. At March 31, 1995,
the Bank had $825.1 million in deposits and on September 30, 1996 the Bank
accrued a special assessment of $5.4 million paid November 30, 1996.
The recapitalization of the SAIF is expected to result in lower
deposit insurance premiums in the future for most SAIF-insured institutions,
including the Bank. Based on the Bank's deposits at December 31, 1996, the
expected new premium level, inclusive of the premiums on the FICO bonds, would
result in an estimated annual pre-tax savings of $470,000 beginning July 1,
1997.
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 (including retained earnings),
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 "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 ratio applicable to various classes of assets are to be adjusted to
reflect the degree of risk associated with such classes of assets. In addition,
the asset base for computing a savings institution's capital requirement
includes off-balance sheet items, including assets sold with recourse.
Generally, the Capital Regulations require savings institutions to maintain
"total capital" equal to
32
March 20, 1997 Revison #4 DRAFT DRAFT
8.00% of risk-weighted assets. "Total capital" for these purposes consists of
core capital and supplementary capital. Supplementary capital includes, among
other things, certain types of preferred stock and subordinated debt and,
subject to certain limitations, loan and lease general valuation allowances.
Such general valuation allowances can generally be included up to 1.25% of risk-
weighted assets. At December 31, 1996, $8.3 million of the Bank's general
valuation allowance was included in supplementary capital. A savings
institution's supplementary capital may be used to satisfy the risk-based
capital requirement only to the extent of that institution's core capital.
The OTS, the FDIC and other federal banking agencies recently amended
their risk-based capital regulations to provide that an institution must hold
capital in excess of regulatory minimums to the extent that examiners find
either (i) significant exposure to concentration of credit risk such as risks
from higher interest rates, prepayments, significant off-balance sheet items
(especially standby letters of credit) or credit, or risks arising from
nontraditional activities, (ii) that the institution is not adequately managing
these risks or (iii) significant exposure to market risk. For this purpose,
however, the agencies have stated that, in view of the statutory requirements
relating to permitted lending and investment activities of savings institutions,
the general concentration by such institutions, the general concentration by
such institutions in real estate lending activities would not, by itself, be
deemed to constitute an exposure to concentration of credit risk that would
require greater capital levels.
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 association'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 December 31, 1996,
this provision would not have resulted in any required adjustment to the Bank's
regulatory capital at that date.
The following table summarizes the Bank's actual capital and required
capital under prompt corrective action provisions of Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") as of December 31, 1996:
REGULATORY CAPITAL (FDICIA)
CAPITAL
-------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------- ------- --------
(Dollars in thousands)
Total capital (to risk-weighted assets) $75,632 $52,512 $23,120 11.52% 8.00%
Core (Tier 1) capital (to total assets) 67,387 34,857 32,530 7.73 4.00
Tier 1 leverage (to average assets) 67,387 34,421 33,166 7.83 4.00
Tier 1 capital (to risk-weighted assets) 67,387 34,421 33,166 10.27 4.00
Tangible capital (to total assets) 67,387 34,857 32,530 7.73 4.00
33
March 20, 1997 Revison #4 DRAFT DRAFT
The table below presents the Bank's capital ratios as compared to regulatory
requirements under the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") at December 31, 1996:
REGULATORY CAPITAL (FIRREA)
CAPITAL (1)
--------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------ ------- --------
(Dollars in thousands)
Tangible $67,387 $13,071 $54,316 7.73% 1.50%
Core 67,387 26,142 41,245 7.73 3.00
Risk-based: 75,632 52,512 23,120 11.52 8.00
(1) Although the OTS capital regulations require savings
institutions to meet a 1.5% tangible capital ratio and a 3% leverage
(core capital ratios, the prompt corrective action standards discussed
below also establish, in effect, a minimum 2% tangible standard, a 4%
leverage (core) capital ratio (3% for institutions receiving the highest
rating on the Capital, Assets, Management, Earnings, and Liquidity
("CAMEL") financial institution rating system) and together with the
risk-based capital standard itself, a 4% Tier 1 risk-capital
standard.
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 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 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 core capital 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 core capital 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 core capital 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 December
31, 1996, the Bank was a well-capitalized institution.
Under the PCA provisions, an institution that is deemed to be
undercapitalized is subject to mandatory restrictions on capital distributions
(including cash dividends) and management fees, increased supervisory monitoring
by the OTS, growth restrictions, 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
34
March 20, 1997 Revision #4 DRAFT
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 Office of
the Comptroller of the Currency has recently amended its loan to one borrower
limitation (following similar 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 December 31, 1996, the maximum amount which
the Bank could lend to any one borrower (including related persons and entities)
under the current loans to one borrower limit was $12.8 million. At December 31,
1996, the largest aggregate amount of loans which the Bank had outstanding to
any one borrower was $16.2 million, which loan was made prior to the adoption of
the Bank's current loan to one borrower policy. The loans were made prior to
the 1989 amendment to the Home Owners' Loan Act ("HOLA") that reduced the loans
to the borrower limitation for savings institutions, and were within the
Company's loan to one borrower limitation when made and hence was 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.
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 $384,000,
$419,000 and $312,000 for the years ended December 31, 1996, 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 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
35
March 20, 1997 Revison #4 DRAFT DRAFT
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 December 31, 1996, the total
liquidity and total short-term liquidity ratios of the Bank were 7.43% and
3.62%, 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 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 just
completed CRA exam.
Qualified Thrift Lender Test. Savings institutions regulated by the OTS are
subject to a qualified thrift lender ("QTL") test which requires such an
institution to 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, shares of stock issued by any Federal Home Loan Bank,
loans for educational purposes, loans to small businesses, loans made through
credit cards or credit card accounts 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 December 31, 1996, the
Bank was in compliance with its QTL test 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 association 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 association 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,
36
March 20, 1997 Revison #4 DRAFT DRAFT
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 3% of the institution's assets, as long as any
investment over 2% serves primarily 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.
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, without prior OTS approval, during a
calendar year of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half its
"surplus capital ratio" at the beginning of the calendar year (the amount by
which the institution's actual capital exceeded its fully phased-in capital
requirement at that date) and (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 composite CAMEL rating of 1 or 2, (ii) by providing notice to the OTS
if, after the capital distribution, the institution would remain at lease
"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 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
37
March 20, 1997 Revison #4 DRAFT DRAFT
limitations, loan administrations 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 equal to or exceeding a 90% loan
to value ratio should have private mortgage insurance or some form of credit
enhancement. The Guidelines further permit a limited amount of loans that do not
conform to these criteria.
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. Pursuant to H.R. 3448, the Small Business Job
Protection Act of 1996 (the "Act"), Congress repealed the reserve method of
accounting for bad debts for savings institutions, effective for taxable years
beginning after 1995. The Bank changed its method of accounting for bad debts
from the reserve method formerly permitted under section 593 of the Internal
Revenue Code of 1986, as amended (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
Legislation requires 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 does 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 a
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. These reserves would also be subject to recapture if the
bank fails to qualify as a "bank" for federal income tax purposes.
Formerly, savings institutions such as the Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions, which additions could, within specified
formula limits, be deducted in arriving at taxable income. The Bank's deduction
with respect to "qualifying loans" (generally loans secured by certain
interests in real property), could 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"). Each year the Bank selected the more
favorable way to calculate the deduction attributable to an addition to the bad
debt reserve.
NOLs. At December 31, 1996, the Company had net operating losses aggregating
approximately $33.8 million for federal income tax purposes and approximately
$17.9 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 2011, and the California NOLs would expire in 1999 and
2001. 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 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
38
March 20, 1997 Revison #4 DRAFT DRAFT
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 in August, 1996 did 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 tax rate appliciable to the Company's 1995 and
1996 taxable years was 11.3% (9.3% plus 2%). For income years beginning on or
after January 1, 1997, the tax rate on general corporations has been reduced to
8.84% and accordingly the Company's tax rate will be reduced to 10.84%. 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.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 (SFAS No.125), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 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 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 No. 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 believes the adoption of SFAS No. 125 on January 1,
1997 will not have a material impact on the Company's operations.
ITEM 2. 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. The Company leases two
loan origination offices. The Company believes that the Company's current branch
network is adequate to meet the present and immediately foreseeable needs of the
Company.
39
March 20, 1997 Revison #4 DRAFT DRAFT
ITEM 3. LEGAL PROCEEDINGS.
The Company is a named defendant in two wrongful termination lawsuits. One of
the lawsuits was filed on March 25, 1996 in the San Bernardino County Superior
Court by a former officer whose position was eliminated in a
May, 1995 reduction in force. The plaintiff in that lawsuit alleges that the
plaintiff had an oral employment agreement with the Company which was breached
by the plaintiff's termination, and that such termination was a result of age
discrimination. The plaintiff seeks an unspecified amount of damages. The
Company has denied any liability, and has engaged outside counsel to defend
against the action.
The second wrongful termination lawsuit was filed on August 14, 1996 in the
San Bernardino County Superior Court by a former senior officer who elected to
take early retirement in August of 1995. By motion of the Company, the lawsuit
was removed to the United States District Court for the Central District of
California. The plaintiff alleges that the plaintiff was constructively
discharged in violation of an alleged oral agreement and as the result of age
discrimination. The lawsuit seeks compensatory and punitive damages in an
aggregate of $3.2 million. The Company has denied any liability, and has engaged
outside counsel to defend against the action.
The Company is also named defendant in a lawsuit filed on January 9, 1996 in
the San Bernardino County Superior Court by a bonding company which alleges that
the Company is bound to reimburse it for certain sums paid by the bonding
company to complete a construction project formerly financed by the Company. The
lawsuit seeks an unspecified amount of damages. The Company has denied any
liability, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
40
March 20, 1997 Revison #4 DRAFT DRAFT
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol REDF. At February 28, 1997, the Company had approximately 670
stockholders of record (not including the number of persons or entities holding
stock in nominee or street name through various brokerage firms) and 7,393,936
outstanding shares of common stock. The following table sets forth for the
quarters indicated the range of high and low bid information per share of the
common stock of the Company as reported on the Nasdaq National Market.
--------------------------------------------------
1996
--------------------------------------------------
4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
----------- ----------- ----------- -----------
High 13 1/2 12 1/8 10 10
Low 11 1/2 8 3/8 8 3/8 8 7/8
--------------------------------------------------
1995
--------------------------------------------------
4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
----------- ----------- ----------- -----------
High 10 5/8 10 10 3/8 9 1/2
Low 9 1/2 7 3/4 7 7/8 7 3/4
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Delaware corporations. In general, dividends may be paid
only out of a Delaware corporation's surplus, as defined in the Delaware General
Corporation Law, or net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. "Surplus" is defined for this
purpose as the amount by which a corporation's net assets (total assets minus
total liabilities) exceed the amount designated by the Board of Directors of the
corporation in accordance with Delaware law as the corporation's capital. The
Company may pay dividends out of funds legally available therefor at such times
as the Board of Directors determines that dividend payments are appropriate,
after considering the Company's net income, capital requirements, financial
condition, alternate investment options, prevailing economic conditions,
industry practices and other factors deemed to be relevant at the time. The
Company has not paid dividends in the past and does not presently intend to pay
dividends.
The Company's principal source of income in 1996 was interest from
investments. Dividends from the Bank are a potential source of income for the
Company. The payment of dividends and other capital distributions by the Bank to
the Company is subject to regulation by the OTS. See "Regulation." Currently, 30
days' prior notice to the OTS is required before any capital distribution is
made. The OTS has promulgated a regulation that measures a savings institution's
ability to make a capital distribution according to the institution's capital
position. The rule establishes "safe-harbor" amounts of capital distributions
that institutions can make after providing notice to the OTS, but without
needing prior approval. Institutions can distribute amounts in excess of the
safe harbor only with the prior approval of the OTS. For institutions such as
the Bank that meet their fully phased-in capital requirements, the safe harbor
41
March 20, 1997 Revison #4 DRAFT DRAFT
amount is the greater of (i) 75% of net income for the prior four quarters, or
(ii) the sum of (1) net income to date during the calendar year and (2) the
amount that would reduce by one-half the Bank's surplus capital ratio at the
beginning of the current year.
The Bank's ability to pay dividends to the Company is also subject to
restriction arising from the existence of the liquidation account established
upon the conversion of the Bank from mutual to stock form in April, 1994. The
Bank is not permitted to pay dividends to the Company if its regulatory capital
would be reduced below the amount required for the liquidation account. See
"Business-Regulation -Limitation on Capital Distributions and Holding Company
Regulation."
Additionally, as of December 31, 1996, the Company's accumulated tax reserves
for losses on qualifying real property loans exceeded the reserve that could
have been accumulated under the experience method and, as a result, any
distribution by the Bank to the Company that exceeds the Bank's current or
accumulated earnings and profits as calculated for federal income tax purposes
would be treated as a distribution of the excess bad debt reserve and would be
subject to recapture taxes of up to 51%. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
42
ITEM 6. SELECTED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
CONSOLIDATED FINANCIAL
CONDITION DATA:
Total assets $882,504 $871,814 $960,853 $916,846 $932,232
Loans receivable, net (1) 729,862 682,984 733,132 645,670 647,889
MBS 43,547 52,116 79,971 109,982 100,771
Investment securities 34,695 41,655 38,899 55,101 42,004
Real estate (2) 7,172 26,258 41,269 22,011 28,349
Deposits 790,803 776,528 805,334 835,134 828,054
Borrowed funds (3) 4,418 31,133 80,085 8,845 26,845
Stockholders' equity,
substantially restricted 72,118 48,078 55,508 53,361 56,239
CONSOLIDATED OPERATING DATA:
Interest income $ 61,499 $ 64,224 $ 56,515 $ 59,436 $ 69,257
Interest expense 33,038 38,366 29,869 30,869 37,154
-------- -------- -------- -------- --------
Net interest income 28,461 25,858 26,646 28,567 32,103
Provision for losses on loans 2,838 7,938 12,651 12,990 6,106
-------- -------- -------- -------- --------
Net interest income after
provision for losses on loans 25,623 17,920 13,995 15,577 25,997
-------- -------- -------- --------- --------
Non-interest income
Fee income 5,822 4,620 4,509 4,338 4,254
Other non-interest income 1,145 6,578(4) 1,766 2,546 1,812
-------- -------- -------- -------- --------
Total non-interest income 6,967 11,198 6,275 6,884 6,066
-------- -------- -------- -------- --------
Non-interest expense
Compensation and benefits 11,438 12,063 14,200 12,494 12,285
Occupancy and equipment 7,038 6,831 7,816 6,973 6,943
Other G&A 10,751(5) 5,391 5,179 5,991 4,703
-------- -------- -------- -------- --------
Total G&A 29,227 24,285 27,195 25,458 23,931
Real estate operations, net 1,311 10,258 8,370 3,222 2,148
Provision for losses on
letters of credit 2,402 2,536 9,895 694 1,866
-------- -------- -------- -------- --------
Total non-interest expense 32,940 37,079 45,460 29,374 27,945
-------- -------- -------- -------- --------
Earnings (loss) before income taxes (350) (7,961) (25,190) (6,913) 4,118
Income taxes (benefit) 7 124 1,150 (3,669) 1,868
-------- -------- -------- -------- --------
Earnings (loss) before cumulative
effect of change in accounting
principle (357) (8,085) (26,340) (3,244) 2,250
Cumulative effect of change
in accounting principle - - - - 1,311
-------- -------- -------- -------- --------
Net earnings (loss) $ (357) $( 8,085) $(26,340) $( 3,244) $ 3,561
======== ======== ========== ======== ========
(Continued on next page)
43
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ------ ------
(Dollars in thousands except per share amounts)
PER SHARE DATA:
Net loss per share $ (0.07) $ (2.03) $ (6.08) (6) n/a n/a
========== ========== ========== === ===
Average shares used for
calculation of loss per
share 5,206,619 3,981,821 4,002,920 n/a n/a
Stockholders' equity per
share $ 10.18 $ 12.06 $ 13.87 n/a n/a
Shares used for calculation
of stockholders' equity per
share 7,087,727 3,987,010 4,002,920 n/a n/a
FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets (0.04)% (0.86)% (2.79)% (0.35)% 0.40%
Return on average equity (0.62) (15.05) (38.30) (6.00) 6.34
Equity to total assets 8.17 5.51 5.78 5.82 6.03
Interest rate spread 3.36 2.87 3.19 3.44 3.90
Net interest margin 3.55 2.98 3.19 3.45 3.95
Average interest-earning assets
to average interest-bearing
liabilities 104.65 102.62 100.03 100.25 101.21
G&A to average assets 3.40 (7) 2.59 2.88 2.74 2.66
Efficiency ratio (8) 82.50 65.54 82.61 71.81 62.70
REGULATORY CAPITAL RATIOS:
Tangible and core capital 7.73 5.24 5.65 5.42 5.58
Risk-based capital 11.52 8.17 8.59 8.11 8.64
ASSET QUALITY RATIOS:
Nonaccrual loans to total
loans 1.76 2.45 1.77 3.34 2.74
Nonperforming assets to
total assets and LOCs(9)(10) 2.02 4.53 4.46 3.17 3.18
Allowance for losses on
loans to total loans 1.34 2.05 2.37 2.26 1.13
Allowance for losses on loans,
LOCs and real estate to total
assets and LOCs 1.96 3.28 2.85 1.95 1.15
GVA for losses on loans to
nonaccrual loans 70.03 56.53 108.03 44.96 33.85
GVA for losses on loans,
LOCs and real estate
to total nonperforming
assets (9) (10) 89.18 39.30 51.20 40.90 25.52
OTHER DATA:
Number of deposit accounts 89,821 89,015 89,763 87,630 84,344
Full service customer
facilities 14 14 16 16 16
Full time equivalent
employees 279 281 350 337 313
44
March 20, 1997 Revison #4 DRAFT DRAFT
___________________________________
(1) Includes loans held for sale.
(2) Includes REO and real estate held for sale.
(3) Includes advances from the FHLB.
(4) Includes curtailment gain of $3.4 million.
(5) Includes FDIC special assessment of $5.4 million.
(6) Loss per share data has been calculated based on the Company's net loss of
$24.4 million for the period April 7, 1994 through December 31, 1994 (the
date of the Company's initial public offering).
(7) G&A to average assets ratio, excluding the FDIC special assessment is
2.77%.
(8) G&A expense to net interest income plus total non-interest income. Excludes
provisions for losses on loans, LOCs and real estate. For the years ended
December 31, 1996 and 1995, if the FDIC special assessment of $5.4 million
and curtailment gain on retirement plan of $3.4 million were excluded
efficiency ratio would be 67.20% and 72.14%.
(9) Excludes troubled debt restructures which are currently performing under
their restructured terms.
(10) Nonperforming assets include nonperforming loans, LOCs and REO.
45
March 20, 1997 Revison #4 DRAFT DRAFT
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company reported a net loss in 1996 of $357,000 or $0.07 per
share, a net loss of $8.1 million or $2.03 per share in 1995 and a net loss of
$26.3 million in 1994 or $6.08 per share for the period April 7 through December
31, 1994. The Bank converted from a mutual savings bank to a stock 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 such as letter of credit 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 expenses. The Company's results of operations were significantly
affected by its provision for loan and LOC losses and net cost of real estate
operations. In addition, the Company's results of operations in 1996 were
adversely affected by the one-time deposit insurance premium surcharge imposed
on SAIF-insured institutions. See "Company's Results of Operations" and
"Regulation --Deposit Insurance." 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.
At December 31, 1996, the Company had total consolidated assets of
$882.5 million, total deposits of $790.8 million and stockholders' equity of
$72.1 million, representing 8.17% of total assets. At December 31, 1995, the
Company had total consolidated assets of $871.8 million, total deposits of
$776.5 million and stockholders' equity of $48.1 million, representing 5.51% 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 included specific plans for the reduction
of classified assets and G&A and the continued maintenance of adequate capital
levels. The OTS terminated the Supervisory Agreement in August 1996.
SECONDARY OFFERING
On August 19, 1996 the Company completed a secondary stock offering
for 2,990,000 shares of common stock. The shares were issued at $8.75 per share
and the net proceeds to the Company from the offering were approximately $24.1
million. The Company contributed $21.2 million of the net proceeds to the Bank
to increase the Bank's regulatory capital.
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 had previously caused significant increases in the
Company's level of nonperforming assets, which include nonaccrual loans and
REO. At December 31, 1996, the Company's level of nonperforming assets had
decreased to $20.0 million or 2.02% of assets and LOCs, from the December 31,
1995 level of nonperforming assets of $43.7 million or 4.53% of assets and LOCs.
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, had decreased to $31.6 million or 3.20% of total
assets and LOCs at December 31, 1996, a reduction of $27.3 million in classified
assets, as compared to $58.9 million or 5.93% of total
46
March 20, 1997 Revison #4 DRAFT DRAFT
assets and LOCs at December 31, 1995. Of the $31.6 million of classified assets
at December 31, 1996, $11.6 million were performing in accordance with their
terms. The allowance for losses on loans, LOCs and real estate decreased to
$19.4 million at December 31, 1996 from $31.7 million at December 31, 1995. The
December 31, 1996 aggregate allowance of $19.4 million included a GVA of $17.8
million, which represents an increase of $661,000 from December 31, 1995. The
remaining allowances of $1.6 million and $14.5 million at December 31, 1996 and
1995, 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 89.18% at December 31, 1996, from 39.30% at December 31,
1995.
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 scoring and classification, 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. As a result of changes in certain real estate markets, adjustments 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. Management
considers the level of the allowance for losses at December 31, 1996 to be
adequate. See "Business--Lending Activities," "Asset Quality--Nonperforming
Assets," and "Classified Assets".
BUSINESS STRATEGY
In 1997 the Company plans to (i) continue to identify, control and
reduce classified assets and REO as cost-effectively as possible, (ii) improve
profitability by continuing to reduce G&A expenses, where feasible, and
increasing income, and (iii) maintain capital in the "well-capitalized" category
under FDICIA rules while prudently leveraging capital to maximize profitability.
Key elements in the development and implementation of the Company's strategies
include the following:
1. Continuing to aggressively identify, control and reduce
classified assets, including REO.
2. Continuing to manage G&A expenses and to lower them where
possible, while providing support for new product lines to
improve profitability.
3. Expanding loan programs, including the addition of "B" quality
single family loans, expanding FHA/VA loan production,
emphasizing spot construction and consumer loan programs, and
selectively re-entering tract construction if market conditions
warrant.
4. Expanding product lines to include a full range of business
banking services geared to small, service-oriented businesses
located in the Company's primary market area.
5. Aggressively pursuing a sales oriented culture throughout the
organization, particularly at the branch level, with the goal of
increasing core and low cost deposits and expanding the small
business clientele.
6. Expanding customer product services to include enhanced telephone
transaction capability, PC-based banking, debit cards, and other
technological innovations.
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities 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
47
March 20, 1997 Revison #4 DRAFT DRAFT
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 considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of falling interest rates therefore, 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
it is able to invest in higher yielding interest-earning assets at a more rapid
rate than its interest-earning liabilities reprice. However, a positive gap may
not protect an institution with a large portfolio of ARMs from rises in interest
rates for extended time periods, as such instruments generally have annual and
lifetime interest rate caps. Accordingly, 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 aggressive
marketing and funding of ARMs, which generally reprice at least semi-annually
and indexed to the COFI and to a lesser extent, the one year CMT index. As a
result of this strategy, and based upon the Company's internally developed loan
prepayment schedule and core deposit decay rate assumptions used in the
following table, at December 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 $332.4 million,
representing a one year cumulative gap ratio of positive 37.66%. The Company
closely monitors its interest rate risk as such risk impacts its operational
strategies.
The Company's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing the Company's asset/liability policies and
interest rate risk position, which meets quarterly 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 can be no assurances 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. To the
extent that the Company's core deposits are reduced at a more rapid rate than
the Company's decay assumptions on 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 can be no assurances
that such a decline will not occur in the future if depositors seek higher
yielding investments. For information concerning the Company's deposit activity
and the distribution of its deposits for each of the years in the three-year
period ended December 31, 1996, 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. Even though the use of such instruments or activities may be
permitted at the recommendation of the Asset/Liability Committee and 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 December 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 10% to 19% on ARM loans, and 5% to 11%
on fixed rate loans, and the core deposit decay rate assumptions range from 8%
to 11% for passbook accounts, 7% to 10% for checking accounts and 9% to 14% for
money market deposit accounts in the one year or less category. 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".
48
INTEREST RATE SENSITIVITY ANALYSIS
-----------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------------
SIX THREE
THREE THREE MONTHS ONE TO TO FIVE MORE
MONTHS TO SIX TO ONE THREE FIVE TO TEN THAN TEN
OR LESS MONTHS YEAR YEARS YEARS YEARS YEARS OTHER TOTAL
-----------------------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
INTEREST-EARNING ASSETS:
Mortgage loans and MBS(1)(2) $ 410,845 $240,757 $14,139 $23,326 $ 6,672 $12,028 $ 16,806 - $724,573
Consumer loans(1) 9,357 1,113 1,992 6,001 3,458 2,955 728 - 25,604
Investment securities and
cash equivalents 52,916 7,499 999 8,013 5,500 - - - 74,927
Non-interest-earning assets - - - - - - - $ 57,400 57,400
--------- -------- ------- ------- ------- ------- ---------- -------- --------
Total assets $ 473,118 $249,369 $17,130 $37,340 $15,630 $14,983 $ 17,534 $ 57,400 $882,504
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Savings deposits $ 4,034 $ 4,034 $ 7,680 $31,850 $29,442 $40,281 $ 52,409 - $169,730
Money market deposits 243 243 462 1,925 1,720 2,308 2,579 - 9,480
Interest bearing checking
(NOW) deposits 1,483 1,483 2,860 11,887 12,445 18,088 34,966 - 83,212
Certificates of deposit 128,851 107,276 148,618 121,137 2,508 - - - 508,390
Other borrowed money - - - - 4,418 - - - 4,418
Non-interest-bearing
liabilities - $ 35,156 35,156
Stockholders' equity - - - - - - - 72,118 72,118
--------- -------- ------- ------- ------- ------- ---------- -------- --------
Total liabilities and
stockholders' equity $ 134,611 $113,036 $159,620 $166,799 $50,533 $60,677 $ 89,954 $107,274 $882,504
========= ======== ======== ======== ======= ======= ========== ======== ========
Interest sensitivity gap(3) $ 338,507 $136,333 ($142,490) ($129,459) ($34,903) ($45,694) ($72,420)
========= ======== ======== ======== ======= ======= ==========
Cumulative interest
sensitivity gap $ 338,507 $474,840 $332,350 $202,891 $167,988 $122,294 $ 49,874
========= ======== ======== ======== ======= ======= ==========
Cumulative interest sensitivity
gap as a percentage of total
assets 38.36% 53.81% 37.66% 22.99% 19.04% 13.86% 5.65%
Cumulative net interest-earning
assets as a percentage of
interest-sensitive liabilities 351.47% 291.74% 181.60% 135.34% 126.90% 117.85% 106.43%
____________________
(1) For purposes of the gap analysis, mortgage and consumer loans do not
include nonperforming loans, allowance for losses on loans or deferred
fees.
(2) Includes available for sale portfolio.
(3) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
49
March 20, 1997 Revison #4 DRAFT DRAFT
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 of assets may lag behind changes in
market rates. Additionally, certain assets, such as ARMs, 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
ARMs 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 years ended December 31, 1996, 1995 and 1994. 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. 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.
50
March 20, 1997 Revison #4 DRAFT DRAFT
AVERAGE BALANCE
AVERAGE BALANCE SHEET
------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ------------------------------- ------------------------------
Average Average Average Average Average Average
balance Interest yield/cost balance Interest yield/cost balance Interest yield/cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets (1):
Mortgage loans $658,073 $51,106 7.77% $708,440 $52,652 7.43% $641,313 $43,416 6.77%
MBS 52,498 3,932 7.49 68,459 5,152 7.53 99,855 6,590 6.60
Consumer loans 24,908 2,713 10.89 26,784 2,989 11.16 27,277 2,908 10.66
Investment securities 65,670 3,748 5.71 64,546 3,431 5.32 66,330 3,601 5.43
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 801,149 61,499 7.68 868,229 64,224 7.40 834,775 56,515 6.77
Non-interest earning assets 59,375 71,061 108,694
-------- -------- --------
Total assets $860,524 $939,290 $943,469
======== ======== ========
Liabilities and Stockholders' equity:
Interest-bearing liabilities:
Savings deposits $167,029 $ 5,003 3.00 $151,531 $ 4,002 2.64 $176,534 $ 3,969 2.25
Money market deposits 10,073 246 2.44 11,979 305 2.55 15,997 371 2.32
Interest bearing
checking (NOW) deposits 83,404 882 1.06 86,199 1,000 1.16 97,397 997 1.02
Certificates of deposits 486,026 25,848 5.32 542,100 29,651 5.47 516,383 22,708 4.40
Other borrowed money 19,028 1,059 5.57 54,252 3,408 6.28 28,251 1,824 6.46
-------- ------- -------- ------- -------- --------
Total interest-bearing
liabilities 765,560 33,038 4.32 846,061 38,366 4.53 834,562 29,869 3.58
Non-interest bearing
liabilities 37,335 39,504 40,133
Stockholders' equity 57,629 53,725 68,774
-------- -------- --------
Total liabilities and
stockholders' equity $860,524 $939,290 $943,469
======== ======== ========
Net interest rate spread (2) $28,461 3.36% $25,858 2.87% $26,646 3.19%
======= ====== ======= ===== ======== =====
Net interest margin (3) 3.55% 2.98% 3.19%
====== ===== =====
Ratio of interest-earning assets
to interest-bearing
liabilities 104.65% 102.62% 100.03%
======= ======= =======
_________________________
(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 represent net interest income divided by average
interest-earning assets net of nonaccrual loans.
51
March 20, 1997 Revison #4 DRAFT DRAFT
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 DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
COMPARED TO DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
INCREASE (DECREASE) IN NET INCREASE (DECREASE) IN NET
INTEREST INCOME DUE TO INTEREST INCOME DUE TO
VOLUME RATE NET VOLUME RATE NET
------- ------ ------- ------- ------- -------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Mortgage loans $(3,912) $2,366 $(1,546) $ 4,544 $ 4,692 $ 9,236
MBS (1,195) (25) (1,220) (2,072) 634 (1,438)
Consumer loans (204) (72) (276) (53) 134 81
Investment securities 64 253 317 (97) (73) (170)
------- ------ ------- ------- ------- -------
Total (5,247) 2,522 (2,725) 2,322 5,387 7,709
------- ------ ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Savings deposits 464 537 1,001 (149) 3 (146)
Money market deposits (47) (12) (59) (500) 613 113
Interest bearing checking (NOW) deposits (30) (88) (118) (115) 118 3
Certificates of deposit (2,982) (821) (3,803) 1,131 5,812 6,943
Other borrowed money (1,960) (389) (2,349) 1,679 (95) 1,584
------- ------ ------- ------- ------- -------
Total (4,553) (773) (5,328) 2,046 6,451 8,497
------- ------ ------- ------- ------- -------
Change in net interest income $ (694) $3,295 $ 2,603 $ 276 $(1,064) $ (788)
======= ====== ======= ======= ======= =======
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
General. The Company recorded a net loss of $357,000 for the year
ended December 31, 1996, or $0.07 per share, as compared to a loss of $8.1
million for the year ended December 31, 1995, or $2.03 per share. Operating
results were favorably impacted by an increase in net interest income before
provision for losses on loans of $2.6 million and by a reduction in G&A of
$479,000 excluding a $5.4 million charge for a one-time FDIC special assessment
when compared to the year ended December 31, 1995. Net operating results for the
year ended December 31, 1996, were also impacted favorably by a net reduction of
$13.6 million in provisions for losses on loans, real estate and LOCs when
compared to the same period in 1995.
Interest income. Interest income for the year ended December 31, 1996
was $61.5 million, compared to $64.2
52
million for the previous year. The $2.7 million decrease in interest income is
primarily due to a $67.1 million decrease in the average balance of interest-
earning assets, partially offset by an increase in the average yield of 28 basis
points on interest-earning assets from 7.40% in 1995 to 7.68% in 1996. Interest
income from mortgage loans, which accounted for approximately 83.10% of total
interest income in 1996, decreased by $1.5 million or 2.94% from 1995 due to a
reduction in the average balance of mortgage loans of $50.4 million partially
offset by an increase in the average yield of 34 basis points on such loans.
Interest income in 1996 from MBS declined by $1.2 million or 23.68% primarily
due to a reduction in the average balance of MBS of $16.0 million.
Interest expense. Interest expense for the year ended December 31,
1996 was $33.0 million, compared to $38.4 million for the previous year. The
$5.3 million decrease is primarily the result of an $80.5 million decrease in
the average balance of interest-bearing liabilities and a decrease in the
average cost of 21 basis points paid on interest-bearing liabilities from 4.53%
in 1995 to 4.32% in 1996. Interest expense for savings, MMDA and interest-
bearing checking deposits increased $824,000 million or 15.53% primarily due to
an increase in average balance of $10.8 million, while interest expense on
certificates of deposit decreased $3.8 million or 12.83% primarily due to a
decrease in average balance of $56.1 million. Interest expense on other borrowed
money declined $2.3 million or 68.93% due to a decrease in average balance of
$35.2 million, and a decrease in average cost of 71 basis points.
Net interest income. Net interest income for the year ended December
31, 1996 was $28.5 million, which represents an interest rate spread of 3.36%.
This compares to $25.9 million, which represents an interest rate spread of
2.87%, for 1995. In accordance with the Company's plan to control growth and
manage capital, average interest-earning assets declined $67.1 million and
average interest-bearing liabilities declined $80.5 million when compared to the
year ended December 31, 1995. The 49 basis point increase in the interest rate
spread for the year ended December 31, 1996, when compared to the year ended
December 31, 1995, was a result of an increase in the average yield for
interest-earning assets of 28 basis points, and a decrease in the average cost
for interest-bearing liabilities of 21 basis points. Net interest income also
increased as a result of an improvement in the ratio of average interest-earning
assets to average interest-bearing liabilities from 102.62% in 1995 to 104.65%
in 1996.
Provision for losses on loans. The provision for losses on loans was
$2.8 million for the year ended December 31, 1996, compared to $7.9 million for
the same period last year. The company also recognized a provision for losses on
LOCs which is included in "Non-interest expense." The loss provision reflects
management's ongoing assessment of the loan portfolio, in light of conditions in
the Southern California real estate market.
Non-interest income. Non-interest income was $7.0 million for the year
ended December 31, 1996, a decrease of $4.2 million or 37.78%, when compared to
$11.2 million for the same period last year. The decrease was due primarily to a
$3.4 million curtailment gain resulting from freezing the employee and director
defined benefit plans in 1995. Other differences included: $803,000 from gain on
sale of loan servicing rights in 1996; a reduction in 1996 of $1.4 million from
gain on sale of loans, investments and MBS in 1995, and a reduction in LOC and
other fees of $390,000 when compared to 1995.
Non-interest expense. Non-interest expense was $32.9 million for the
year ended December 31, 1996, a decrease of $4.1 million or 11.16% from $37.1
million in 1995. Included in this decrease was an increase of $4.9 million or
20.35% in G&A expense from $24.3 million in 1995 to $29.2 million in 1996. The
increase was primarily due to a one-time FDIC special assessment in the amount
of $5.4 million and expenses for a Bank-wide data processing conversion of
approximately $400,000. G&A expenses excluding the FDIC special assessment and
data processing conversion decreased by $879,000, net for the year ended
December 31, 1996 compared to December 31, 1995. The efficiency ratio for the
year ended December 31, 1996 was 67.20% when the FDIC special assessment is
excluded as compared to 72.14% for the year ended December 31, 1995 when the
curtailment gain on the retirement plans is excluded. Non-interest expense
(other than G&A) includes provisions for losses on real estate and LOCs, as well
as operating expenses for real estate operations including gains and losses on
the sale of REO. For the year ended December 31, 1996 the Company recorded a
provision for losses on LOCs of $2.4 million and no provision for losses
53
on real estate because of the reduction in the REO balances resulting from the
disposition of assets during the period. This compares with provisions for
losses on LOCs of $2.5 million and a provision for losses on real estate of $8.3
million for the year ended December 31, 1995. The loss provisions reflect
management's ongoing assessment of the real estate and LOC portfolios in light
of conditions in the Southern California real estate market. Real estate
operating expense, net (excluding the provision for losses on real estate),
decreased to $1.3 million for the year ended December 31, 1996, as compared to
$1.9 million for 1995. The decrease in real estate operating expense is due to a
reduction in REO, resulting in lower carrying costs.
Income taxes (benefit). The Company paid a $7,000 California
franchise tax for the year ended December 31, 1996, and a $124,000 tax for the
year ended December 31, 1995. There was no federal income tax as a result of the
Company's net operating loss ("NOL") carryforward tax position. At December
31, 1996, the Company had NOLs aggregating approximately $33.8 million for
federal income tax purposes and approximately $17.9 million for California
franchise tax purposes available to offset taxable income in future tax years.
The federal NOLs would expire, if not utilized, 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 See
"Taxation--Federal Taxation--NOLs".
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
General. The Company's net loss was $8.1 million, or $2.03 per
share for the year ended December 31, 1995, an improvement of $18.3 million
when compared to $26.3 million loss for 1994, or $6.08 per share for the period
April 7 through December 31, 1994. Operating results were favorably impacted by
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
expense of $2.9 million, and a reduction in income taxes of $1.0 million.
Interest income. Interest income was $64.2 million in 1995, an
increase of $7.7 million, or 13.64%, from $56.5 million in 1994. 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% and also included 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%.
Interest expense. Interest expense was $38.4 million in 1995, an
increase of $8.5 million, or 28.45%, from $29.9 million in 1994. 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 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
savings, money market and interest-bearing checking deposits of $40.2 million,
or 13.87%, from $289.9 million at December 31, 1994 to $249.7 million at
December 31, 1995. Interest expense on other borrowed funds increased by $1.6
million, or 86.84%, in 1995 to $3.4 million primarily as a result of a $26.0
million increase in the average balance of borrowed funds.
Net interest income. Net interest income was $25.9 million in 1995,
a decrease of $788,000, or 2.96%, from $26.6 million in 1994. 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
54
cost of interest-bearing liabilities than in the average yield on interest-
earning assets between the respective periods. This decrease 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 was
$7.9 million for the year ended December 31, 1995, a decrease of $4.7 million
from $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 LOC portfolio in consideration of various factors,
including declines in the California real estate market, recommendations made by
the OTS following a regulatory examination, and the levels of the Company's
nonperforming and classified assets.
Non-interest income. Non-interest income was $11.2 million for the
year ended December 31, 1995, an increase of $4.9 million from $6.3 million for
the year ended December 31, 1994. This increase was primarily a $3.4 million
curtailment gain resulting from freezing the employee and director defined
benefit plans. 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 FNMA stock,
$395,000 on the sale of FHLMC MBS and $680,000 on loan sales and related sales
of servicing. Other income decreased $268,000 from 1994 to 1995.
Non-interest expense. Non-interest expense was $37.1 million for the
year ended December 31, 1995, a decrease of $8.4 million, or 18.44%, from $45.5
million in 1994. 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 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
efficiency ratio for the year ended December 31, 1995 was 72.14% when the
curtailment gain on the retirement plan is excluded, as compared to 82.61% for
the year ended December 31, 1994. The increase in the cost of real estate
operations of $1.9 million, or 22.56%, from $8.4 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.
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.
FINANCIAL CONDITION
The Company's consolidated assets totaled $882.5 million at December
31, 1996 compared to $871.8 million at December 31, 1995. The increase in
consolidated assets of $10.7 million during the year ended December 31, 1996 was
primarily the result of an increase in net loans receivable of $46.6 million
and an increase in cash and cash equivalents of $2.8 million, partially offset
by net reductions in MBS, investment securities, REO and other assets. Loans
originated and purchased increased $44.1 million to $158.1 million for the year
ended December 31, 1996 compared to $114.0 million for the 1995 year. This
increase was the result of loans purchased in 1996 of $70.7 million. Loan
principal payments increased $16.7 million to $108.6 million for the year ended
December 31, 1996 from $91.9 million for the 1995 year as a result of the larger
loan portfolio. Transfers of loans to REO and reductions in GVA and the
undisbursed portion of construction loans represented other changes during 1996
in net loans receivable. MBS decreased $8.6 million, net primarily as a result
of the sale and maturities of $7.7 million. REO
55
declined by $18.8 million as a result of net sales of $22.6 million offset by
net transfers from loans of $10.6 million. The decrease in consolidated
liabilities primarily consisted of a reduction in other borrowed money of $26.7
million, as a result of a $10.0 million repayment in FHLB advances and $16.7
million repayments in Notes Payable Revenue Bonds, partially replaced by an
increase in the deposit base of $14.3 million. The increase in stockholders'
equity for the year ended December 31, 1996 of $24.0 million was a result of an
increase in additional paid-in capital of $24.1 million from the proceeds of the
stock offering, partially offset by a net loss of $357,000 and a change in the
unrealized loss on securities available for sale of $652,000.
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 was primarily the result of a
combined decrease in net loans receivable and loans held for sale of $50.1
million, a 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
was 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 was the result of a continuing reduction in
refinance activity because of the rising interest 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
was 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 was 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 7.43%, and 7.72%
for the periods ended December 31, 1996, and 1995, 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.
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 December 31, 1996 and 1995
cash and cash equivalents totaled $33.7 million and $31.0 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 including FHLB advances. At December 31, 1996 and December 31, 1995 the
Company had none and $10.0 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.
56
At December 31, 1996, the Company had net outstanding loan commitments of $7.2
million. The Company anticipates that it will have sufficient funds available to
meet its current loan origination commitments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
REDFED BANCORP INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
------------------------------------------
Page
----
Independent Auditor's Report 58
Consolidated Statements of Financial Condition -
December 31, 1996 and 1995 59
Consolidated Statements of Operations -
Years ended December 31, 1996, 1995 and 1994 60
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 61
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994 62
Notes to Consolidated Financial Statements 64
57
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, 1996
and 1995 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, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RedFed Bancorp Inc.
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Orange County, California
January 29, 1997
58
REDFED BANCORP INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except share data)
DECEMBER 31
------------------------
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents (note 2) $ 33,746 30,985
Loans held for sale at lower of cost or
market value (notes 5 and 18) 4,843 4,578
Mortgage-backed securities
available-for-sale at fair value
(note 4) 18,220 26,501
Investment securities held-to-maturity
(estimated aggregate fair value of
$34,369 and $41,057 at December 31,
1996 and 1995, respectively) (note 3) 34,695 41,655
Mortgage-backed securities
held-to-maturity (estimated aggregate
fair value of $25,697 and $26,113 at
December 31, 1996 and 1995,
respectively) (notes 4 and 12) 25,327 25,615
Loans receivable, net (notes 5, 11 and 12) 725,019 678,406
Accrued interest receivable (note 7) 4,953 5,014
Federal Home Loan Bank Stock, at cost
(note 12) 6,486 6,914
Real estate acquired through
foreclosure, net (note 8) 5,800 24,560
Real estate held for sale or
investment, net (note 8) 1,372 1,698
Premises and equipment, net (note 9) 17,656 17,619
Prepaid expenses and other assets 4,123 8,005
Deferred income taxes (note 10) 264 264
----------- -----------
Total assets $ 882,504 871,814
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 11) $ 790,803 776,528
Other borrowed money (note 12) 4,418 31,133
Accrued expenses and other liabilities
(notes 6, 13 and 15) 14,732 14,982
Deferred income 433 1,093
----------- -----------
Total liabilities 810,386 823,736
----------- -----------
Stockholders' equity (notes 13, 14 and 19):
Common stock, $.01 par value.
Authorized 15,000,000 shares; issued
7,393,050 and 4,370,000 at
December 31, 1996 and 1995,
respectively 74 44
Additional paid-in capital 56,981 32,608
Retained earnings - substantially
restricted (notes 13, 14 and 19) 18,213 18,570
Deferred compensation (note 13) (1,870) (2,430)
Treasury stock, 78,083 and 85,830
shares at December 31, 1996 and 1995,
respectively (note 13) (802) (888)
Unrealized gains (losses) on
securities available-for-sale (478) 174
----------- -----------
Total stockholders' equity 72,118 48,078
Commitments and contingencies (notes 6,
12, 15 and 16)
Subsequent events (note 13)
----------- -----------
Total liabilities and stockholders'
equity $ 882,504 871,814
=========== ===========
See accompanying notes to consolidated financial statements.
59
REDFED BANCORP INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except share data)
YEAR ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
-------------- ----------- -----------
Interest income:
Loans receivable $ 53,819 55,641 46,324
Investment securities and deposits 3,748 3,431 3,601
Mortgage-backed securities 3,932 5,152 6,590
-------------- ----------- -----------
Total interest income 61,499 64,224 56,515
-------------- ----------- -----------
Interest expense:
Deposits (note 11) 31,979 34,958 28,045
Other borrowed money 1,059 3,408 1,824
-------------- ----------- -----------
Total interest expense 33,038 38,366 29,869
-------------- ----------- -----------
Net interest income 28,461 25,858 26,646
Provision for losses on loans (note 5) 2,838 7,938 12,651
-------------- ----------- -----------
Net interest income after provision
for losses on loans 25,623 17,920 13,995
-------------- ----------- -----------
Noninterest income:
Letter of credit fees 1,351 1,592 1,771
Other fee income 4,471 4,620 4,509
Gain on sale of loan servicing portfolio 803 -- --
Gain (loss) on sale of loans investments
and mortgage-backed securities, net (4) 1,383 (486)
Curtailment gain on retirement plan
(note 13) -- 3,390 --
Other income 346 213 481
-------------- ----------- -----------
Total noninterest income 6,967 11,198 6,275
-------------- ----------- -----------
Noninterest expense:
Compensation and benefits (note 13) 11,438 12,063 14,200
Occupancy and equipment 7,038 6,831 7,816
Marketing and professional services 1,532 1,634 1,680
FDIC special assessment (note 14) 5,421 -- --
Federal deposit insurance premiums 2,388 2,401 2,423
Other expense 1,410 1,356 1,076
-------------- ----------- -----------
Total general and administrative
expense 29,227 24,285 27,195
Real estate operations, net (note 8) 1,311 10,258 8,370
Provision for losses on letters of
credit (note 6) 2,402 2,536 9,895
-------------- ----------- -----------
Total noninterest expense 32,940 37,079 45,460
-------------- ----------- -----------
Loss before income taxes (350) (7,961) (25,190)
Income taxes (note 10) 7 124 1,150
-------------- ----------- -----------
Net loss $ (357) (8,085) (26,340)
============== =========== ===========
Net loss per share (notes 1 and 19) $ (0.07) (2.03) (6.08)
============== =========== ===========
Weighted average shares outstanding 5,206,619 3,981,821 4,002,920
============== =========== ===========
See accompanying notes to consolidated financial statements.
60
REDFED BANCORP INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
UNREALIZED
RETAINED GAINS (LOSSES)
ADDITIONAL EARNINGS, ON SECURITIES
NUMBER PAID-IN SUBSTANTIALLY DEFERRED AVAILABLE-
OF SHARES COMMON STOCK CAPITAL RESTRICTED COMPENSATION TREASURY STOCK FOR-SALE TOTAL
--------- ------------ ---------- ------------- ------------- -------------- -------------- -----
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 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
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 loss -- -- -- (357) -- -- -- (357)
Proceeds from issuance of
stock 3,023,050 30 24,310 -- -- -- -- 24,340
Deferred compensation
amortized to expense -- -- 98 -- 560 -- -- 658
Sale of treasury stock -- -- (35) -- -- 86 -- 51
Changes in unrealized losses
on securities
available-for-sale -- -- -- -- -- -- (652) (652)
--------- -------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 7,393,050 $ 74 56,981 18,213 (1,870) (802) (478) 72,118
========= ======== ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements.
61
REDFED BANCORP INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
----------- ----------- --------
Cash flows from operating activities:
Net loss $ (357) (8,085) (26,340)
Adjustments to net loss:
Loan fees collected 540 615 1,915
Depreciation and amortization 1,092 (454) 2,070
Provisions for losses on:
Loans 2,838 7,938 12,651
Real estate -- 8,336 4,653
Letters of credit 2,402 2,536 9,895
Write down of real estate -- -- 1,354
Net loss (gain) on:
Sale of loans, investments and
mortgage-backed securities 4 (1,383) 486
Sales of real estate and premises
and equipment (370) (12) 278
Sale of loan servicing portfolio (803) -- --
Federal Home Loan Bank stock
dividends received (384) (419) (312)
Proceeds from sale of loans 278 76,695 18,640
Loans originated for sale -- (10,320) (14,707)
Curtailment gain on retirement plan -- (3,390) --
Increase (decrease) in:
Accrued expenses and other liabilities (2,527) (1,163) (7,741)
Deferred income (660) (300) (132)
(Increase) decrease in:
Deferred income taxes -- -- 5,333
Accrued interest receivable 61 (424) 67
Prepaid expenses and other assets 3,882 3,925 8,523
----------- ----------- --------
Net cash provided by operating
activities 5,996 74,095 16,633
----------- ----------- --------
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity 39,600 30,534 31,000
Purchases of investment securities
held-to-maturity (32,595) (33,265) (23,968)
Proceeds from sale of investment
securities available-for-sale -- 326 8,755
Purchase of mortgage-backed securities
available-for-sale -- (21,053) --
Proceeds from sales of mortgage-backed
securities available-for-sale 5,865 38,721 --
Proceeds from maturities of mortgage-
backed securities available-for-sale 1,786 903 11,605
Proceeds from maturities of mortgage-
backed securities held-to-maturity 288 10,776 15,461
Loan originated for investment (87,375) (102,076) (230,900)
Purchases of loans (71,143) (1,585) (400)
Proceeds from sale of loan servicing
portfolio 803 -- --
Purchases of Federal Home Loan Bank
stock (188) (137) (1,626)
Sale of Federal Home Loan Bank stock 1,000 2,203 --
Principal payments and reductions of
loans, net 98,004 66,164 104,117
Proceeds from sale of real estate 22,627 24,367 24,687
Proceeds from sale of premises and
equipment 189 287 22
Purchases of real estate -- (104) (12,280)
Purchases of premises and equipment (1,638) (376) (2,113)
----------- ----------- --------
Net cash provided by (used in)
investing activities (22,777) 15,685 (75,640)
----------- ----------- --------
(Continued)
62
REDFED BANCORP INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
----------- ----------- --------
Cash flows from financing activities:
Deposits, net of withdrawals and
interest credited $ (3,210) (28,806) (29,800)
Deposits acquired 17,485 -- --
Proceeds from Federal Home Loan Bank
advances 10,000 10,000 80,000
Repayment of other borrowed money (29,073) (62,175) (25,135)
Proceeds from issuance of stock 24,340 -- 32,490
Purchase of treasury shares for
deferred compensation plans -- (888) (3,496)
----------- ----------- --------
Net cash provided by (used in)
financing activities 19,542 (81,869) 54,059
----------- ----------- --------
Increase (decrease) in cash and
cash equivalents 2,761 7,911 (4,948)
----------- ----------- --------
Cash and cash equivalents, beginning of
year 30,985 23,074 28,022
----------- ----------- --------
Cash and cash equivalents, end of year $ 33,746 30,985 23,074
=========== =========== ========
Supplemental information:
Interest paid (including interest
credited) $ 28,212 28,816 21,535
Transfers from loans receivable to
real estate 10,569 16,386 21,906
Loans to facilitate the sale of real
estate 6,030 7,079 5,324
Transfer from mortgage-backed
securities held-to-maturity to
mortgaged-backed securities
available-for-sale (note 4) -- 28,469 --
Transfer from mortgage-backed
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) (23,598)
Real estate sold subject to bond
financing 7,642 2,762 8,825
Bond financing subject to real estate
acquisitions -- 5,830 23,598
Bond financing subject to real estate
sales (7,642) (2,762) (8,825)
Transfer from loans to mortgage-backed
securities held-to-maturity (5,950) -- --
Transfer from mortgage-backed
securities to off-balance sheet
letters of credit 5,950 -- --
See accompanying notes to consolidated financial statements.
63
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(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.
ceased operations in November 1995. RedFed Inc. includes the accounts of
Redfed Insurance Services and INVEST Financial Corporation. 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 date of the statement 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.
64
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
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.
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.
Realized gains and losses for securities classified as available-for-sale
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less undisbursed
portion 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, loans
contractually delinquent more than 90 days or loans on which a notice of
default is filed 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.
The Company has established a monitoring system for its loans and off-
balance sheet letters of credit (LOCs) in order to identify impaired loans,
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) nonmortgage loans. In analyzing these loans and LOCs, 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 nonmortgage 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, equity line of credit and nonmortgage loans by
analyzing their performance and the composition of their collateral for the
portfolio as a whole. The
65
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
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 and LOC subject to individual
monitoring.
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 of a loan 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-dependent loan. If the measure 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 provision for losses on loans. All loans designated
by the Company as "impaired" are either placed on nonaccrual or are
designated as restructured loans.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired 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 earlier if the timely collection of interest and/or
principal appears doubtful or if the loan is in the process of foreclosure.
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 nonhomogeneous 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
66
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
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 is 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: (1) when a determination has been made that a loan is
"impaired," the Company presumes that the loan is troubled or (2) where a
loan is not "impaired" it will not generally be deemed to be "troubled," but
if there are unique facts which demonstrate unusual risk to the institution,
then the loan may 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 below market rates, (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 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 lives of the construction and the permanent
loans.
67
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statement, Continued
(Dollars in thousands, except per share data)
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.
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
68
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statement, Continued
(Dollars in thousands, except per share data)
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.
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.
LOSS PER SHARE
Loss per share is computed on the losses for the years ended December 31,
1996 and 1995 and the period beginning April 7, 1994, the date of conversion
to stock form, through December 31, 1994, and is 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 the conversion to stock form, as the Bank was a mutual savings bank
and no stock was outstanding.
69
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statement, Continued
(Dollars in thousands, except per share data)
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.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 125 and
provide pro forma net earnings (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
125 and provide the pro forma disclosure provisions of SFAS No. 123.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125 (SFAS No. 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS No. 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 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 No.
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 believes the adoption of SFAS No. 125
on January 1, 1997 will not have a material impact on the Company's
operations.
70
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statement, Continued
(Dollars in thousands, except per share data)
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
DECEMBER 31
-------------------------------
1996 1995
-------------------------------
Cash on hand and in banks $ 16,581 18,035
Federal funds sold 17,165 12,950
--------------- ---------------
$ 33,746 30,985
=============== ===============
(3) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are
summarized as follows:
DECEMBER 31, 1996
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------- ----------- ------------
Held-to-maturity:
U.S. Government securities $ 499 1 -- 500
Floating agency notes 13,514 -- (310) 13,204
Step up notes 8,184 26 -- 8,210
Callable notes 12,498 14 (57) 12,455
------------ ------------- ----------- ------------
$ 34,695 41 (367) 34,369
============ ============= =========== ============
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
Certificate of deposits 4,000 -- -- 4,000
Corporate notes 4,661 -- (23) 4,638
------------ ------------- ----------- ------------
$ 41,655 68 (666) 41,057
============ ============= ============ ============
71
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
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 issued by GSEs and have an interest rate that adjusts based
on a semiannual or annual predetermined interest rate "step up" schedule.
The notes are callable prior to the contractual maturity date of the note at
the option of the issuer.
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 noncallable instruments with
similar maturities.
The remaining contractual principal maturities for the investment securities
held-to-maturity as of December 31, 1996 are as follows:
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 $ 499 499 -- -- --
Floating agency notes 13,514 -- 8,014 5,500 --
Step up notes 8,184 -- -- 5,989 2,195
Callable notes 12,498 -- 6,000 6,498 --
--------- ------------ ---------- ----------- ----------
$ 34,695 499 14,014 17,987 2,195
========= ============ ========== =========== ==========
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of mortgage-backed securities
are summarized as follows:
DECEMBER 31, 1996
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ----------
Held-to-maturity -
San Bernardino County bond $ 25,327 370 -- 25,697
============ ========== ========== ==========
Available-for-sale:
GNMA certificates $ 16,825 -- (469) 16,356
FHLMC certificates 1,873 -- (9) 1,864
------------ ---------- ---------- ----------
$ 18,698 -- (478) 18,220
============ ========== ========== ==========
72
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- -----------
Held-to-maturity -
San Bernardino County bond $ 25,615 498 -- 26,113
========== ========== ========== ===========
Available-for-sale:
GNMA certificates 21,052 46 -- 21,098
FHLMC certificates $ 5,275 130 (2) 5,403
---------- ---------- ---------- -----------
$ 26,327 176 (2) 26,501
========== ========== ========== ===========
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 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. The San Bernardino County
bond matures in 1998.
73
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31
---------------------
1996 1995
--------- ---------
Mortgage loans:
One-to-four family residential $ 425,970 334,691
Multifamily residential 170,543 186,375
Commercial real estate 75,235 74,339
Construction and land 57,305 97,815
---------- ---------
Principal balance of mortgage loans 729,053 693,220
Consumer loans 25,804 26,287
---------- ---------
754,857 719,507
Less:
Undisbursed portion of construction
loans (12,390) (18,467)
Unearned discounts and net deferred
loan origination fees (2,471) (3,311)
Allowance for losses on loans (10,134) (14,745)
---------- ---------
729,862 682,984
Less loans held-for-sale one-to-four
family residential (4,843) (4,578)
---------- ---------
$ 725,019 678,406
========== =========
At December 31, 1996, 1995 and 1994, the Company was servicing loans, LOCs
and participations in loans owned by others of $138,563, $251,328 and
$283,869, respectively. These loans are not included in the accompanying
consolidated statements of financial condition.
The weighted average annualized portfolio yield on loans receivable was 7.44%
and 7.57% at December 31, 1996 and 1995, respectively.
74
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Loans receivable from executive officers and directors of the Company were as
follows:
YEAR ENDED DECEMBER 31
-----------------------
1996 1995
---------- -----------
Beginning balance $ 1,274 1,902
Additions -- 160
Repayments (179) (788)
---------- -----------
Ending balance $ 1,095 1,274
========== ===========
Activity in the allowance for losses on loans is summarized as follows:
YEAR ENDED DECEMBER 31
---------------------------------
1996 1995 1994
--------- --------- ----------
Balance, beginning of year $ 14,745 18,874 15,373
Provisions 2,838 7,938 12,651
Charge-offs (7,889) (12,577) (9,178)
Recoveries 440 510 28
--------- --------- ---------
Balance, end of year $ 10,134 14,745 18,874
========= ========= =========
The following table provides information with respect to the Company's
nonaccrual loans and troubled debt restructured (TDR) loans:
DECEMBER 31
---------------------------
1996 1995 1994
--------- ------- -------
Nonaccrual loans $ 13,298 17,604 14,102
TDR loans 12,001 6,888 20,467
--------- ------- -------
Total nonaccrual and TDR loans $ 25,299 24,492 34,569
========= ======= =======
75
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The effect of nonaccrual and TDR loans on interest income for the years ended
December 31, 1996, 1995 and 1994 is presented below:
1996 1995 1994
-------- -------- --------
Contractual interest due $ 2,124 2,366 2,422
Interest recognized 1,521 1,757 1,790
-------- -------- --------
Net interest foregone $ 603 609 632
======== ======== ========
The following table identifies the Company's total recorded investment in
impaired loans, net of specific allowances, by type at December 31:
1996 1995
-------- --------
Nonaccrual loans:
Multifamily $ 764 6,115
Commercial -- 223
Tract construction and land 586 581
TDR loans 12,001 6,888
Other impaired loans:
Multifamily 3,386 5,187
Commercial -- 656
Tract construction and land -- 432
-------- --------
$ 16,737 20,082
======== ========
The related impairment valuation allowance at December 31, 1996 and 1995 was
$822 and $948, respectively, which is included as part of the allowance for
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 losses on loans in the accompanying statement of
operations. During the years ended December 31, 1996 and 1995, the Company's
average investment in impaired loans was $881 and $1,131, and interest income
recorded during this period was $1,166 and $1,510, of which $1,166 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 letters of credit for the account of owners of
projects financed by tax-exempt bonds. The Company guaranteed principal and
interest payments in the approximate amounts of $105,967 and $122,633 as of
December 31, 1996 and 1995, respectively. Properties securing letters of
credit in the amount of $14,093, net of specific valuation allowances, were
included in real estate acquired through foreclosure as of December 31, 1995.
The letters of credit are collateralized with FHLMC securities, GNMA
participation certificates and
76
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Federal Home Loan Bank of San Francisco (FHLB) letters of credit which are
collateralized by pledged mortgage loans. The required value of collateral at
December 31, 1996 and 1995 amounted to approximately $124,800 and $143,197,
respectively. The collateral book value amounted to approximately $126,994
and $144,572 as of December 31, 1996 and 1995, respectively.
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:
YEAR ENDED DECEMBER 31
-----------------------------
1996 1995 1994
--------- -------- --------
Balance, beginning of year $ 7,447 6,908 2,599
Provisions 2,402 2,536 9,895
Charge-offs (2,225) (1,997) (5,586)
--------- -------- --------
Balance, end of year $ 7,624 7,447 6,908
========= ======== ========
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 December 31, 1996 and 1995, the Company holds in trust a portion of the
proceeds, approximately $360 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
----------------
1996 1995
-------- -------
Loans receivable $ 4,233 4,103
Investment securities 415 371
Mortgage-backed securities 305 540
-------- -------
$ 4,953 5,014
======== =======
77
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(8) REAL ESTATE
Real estate acquired through foreclosure is summarized as follows:
DECEMBER 31
-------------------
1996 1995
--------- --------
Properties:
Acquired in settlement of loans $ 7,186 23,920
In-substance foreclosures -- 8,241
--------- --------
7,186 32,161
Less allowance for losses (1,386) (7,601)
--------- --------
$ 5,800 24,560
========= ========
Real estate held for sale or investment is summarized as follows:
DECEMBER 31
-------------------
1996 1995
--------- --------
Real estate held for investment $ -- 1,471
Real estate held for sale 1,626 2,122
--------- --------
1,626 3,593
Less allowance for losses (254) (1,895)
--------- --------
$ 1,372 1,698
========= ========
Activity in the allowance for losses on real estate is summarized as follows:
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- --------
Balance, beginning of year $ 9,496 4,378 2,113
Provisions -- 8,336 4,653
Charge-offs (7,856) (3,218) (2,388)
--------- --------- --------
Balance, end of year $ 1,640 9,496 4,378
========= ========= ========
Allowance for losses on:
Real estate acquired
through foreclosure $ 1,386 7,601 2,612
Real estate held for sale
or investment 254 1,895 1,766
--------- --------- --------
$ 1,640 9,496 4,378
========= ========= ========
78
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Real estate operations are summarized as follows:
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
--------- -------- --------
Loss on real estate
operations, net $ 1,657 1,997 3,737
Gain on sale of real estate,
net (346) (75) (20)
Provision for loss on real
estate -- 8,336 4,653
--------- ------- --------
$ 1,311 10,258 8,370
========= ====== ========
(9) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31
-------------------
1996 1995
--------- --------
Land $ 3,238 3,266
Buildings and leasehold improvements 17,855 18,142
Furniture, fixtures and equipment 13,417 12,193
--------- --------
34,510 33,601
Accumulated depreciation and amortization 16,854 15,982
--------- --------
$ 17,656 17,619
========= ========
79
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(10) INCOME TAXES
Income taxes (benefit) is comprised of the following:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
-------- -------- --------
Current:
Federal $ -- 120 (4,183)
State 7 4 --
-------- -------- --------
Current income taxes (benefit) 7 124 (4,183)
-------- -------- --------
Deferred:
Federal (852) (3,759) (4,367)
State 1,184 (157) (440)
-------- -------- --------
332 (3,916) (4,807)
Change in valuation allowance (332) 3,916 10,140
-------- -------- --------
Deferred income taxes -- -- 5,333
-------- -------- --------
Income taxes $ 7 124 1,150
======== ======== ========
The Company's effective income taxes differs from the amount determined by
applying the statutory federal rate to earnings (loss) before income taxes as
follows:
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------- -------- --------
Income taxes at federal tax rate $ (119) (2,706) (8,816)
Tax-exempt income (406) (632) (568)
California franchise tax, net of
federal income tax benefit (26) (504) 244
Change in valuation allowance (332) 3,916 10,140
Other (67) 50 150
Loss of California net operating loss 957 -- --
------- -------- --------
$ 7 124 1,150
======= ======== ========
80
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
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 DEFERRED
INCOME INCOME
DECEMBER 31, TAXES DECEMBER 31, TAXES DECEMBER 31,
1996 (BENEFIT) 1995 (BENEFIT) 1994
--------------- ------------------- ------------------- ------------------ -------------------
Deferred tax assets:
Accrued expenses $ -- -- -- 180 180
Allowance for losses on
loans and real estate 4,612 9,519 14,131 (1,980) 11,093
Core deposit intangible 82 (82) -- -- --
Pension and deferred
compensation (290) 1,397 1,107 (426) 681
Other 522 70 592 (941) (349)
Mark to market (163) 221 58 (58)
Net operating loss
carryforward 13,546 (10,750) 2,796 (543) 3,311
--------------- ------------------- ------------------- ------------------ -------------------
18,309 375 18,684 (3,768) 14,916
Valuation allowance (14,639) (332) (14,971) 3,916 (11,055)
--------------- ------------------- ------------------- ------------------ -------------------
3,670 43 3,713 148 3,861
--------------- ------------------- ------------------- ------------------ -------------------
Deferred tax liabilities:
Premises and equipment 1,193 209 984 (952) 1,936
FHLB stock 1,286 181 1,105 193 912
Installment sale -- -- -- 7 (7)
Accrued interest and other (108) 92 (200) (506) 306
California franchise tax 1,035 (525) 1,560 1,110 450
--------------- ------------------- ------------------- ------------------ -------------------
3,406 (43) 3,449 (148) 3,597
--------------- ------------------- ------------------- ------------------ -------------------
Net deferred tax asset $ 264 -- 264 -- 264
=============== =================== =================== ================== ===================
On August 20, 1996, the President signed the Small Business Job Protection
Act (the Act) into law. The act repeals the reserve method of accounting for
bad debts for savings institutions, effective for taxable years beginning
after 1995. The Company, therefore, will be required to use the specific
charge-off method on its 1996 and subsequent Federal income tax returns.
Prior to 1996, savings institutions that met certain definitional tests and
other conditions prescribed by the Internal Revenue Code were allowed to
deduct, within limitations, a bad debt deduction. The deduction percentage
was 8% for the years ended December 31, 1995 and 1994. Alternatively, a
qualified savings institution could compute its bad debt deduction based upon
actual loan loss experience (the Experience Method). The Company computed
its bad debt deduction utilizing the Experience Method in 1995 and 1994.
In determining the possible future realization of deferred tax assets, future
taxable income from the following sources are 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 December 31, 1996
and 1995, the valuation allowance against deferred tax assets amounted to
$14,639 and $14,971. Deferred tax assets as of December 31, 1996 and 1995
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.
81
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Based on the Company's current and historical pretax earnings, adjusted for
significant items, management believes it is more likely than not that the
Company will realize the benefit of the existing net deferred tax asset at
December 31, 1996. Management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates net
taxable income; however, there can be no assurance that the Company will
generate any earnings or any specific level of continuing earnings in future
years. Certain tax planning or other strategies could be implemented, if
necessary, to supplement income from operations to fully realize recorded tax
benefits.
At December 31, 1996, the Company had net operating loss carryforwards (NOLs)
aggregating approximately $33,800 for federal income tax purposes and
approximately $17,900 for California franchise tax purposes available to
offset taxable income in future tax years. The federal NOLs would expire, if
not utilized, in taxable years 2009 and 2011 and the California NOLs would
expire in 1999 and 2001.
Section 382 of the Internal Revenue Code of 1986 (Section 382), as amended,
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 ownership change with NOLs and certain built-in losses existing at the
date of such ownership change will be subject to an annual limitation. The
Company's NOLs could become subject to certain limitations on utilization in
the event the Company undergoes an ownership change within the meaning of
Section 382.
(11) DEPOSITS
Deposits and their respective weighted average interest rates are summarized
as follows:
DECEMBER 31
----------------------------------------------------------------------
1996 1995
--------------------------- ----------------------------------------
WEIGHTED WEIGHTED
INTEREST AVERAGE AVERAGE
RATE RANGE RATE AMOUNT RATE AMOUNT
-------------- ---------------- ---------- ------------------ ---------------
Savings deposits 2.00 - 4.21 3.00% $ 169,730 2.64% $ 160,453
Money market deposits 2.45 - 2.55 2.44 9,480 2.55 10,925
Interest bearing checking (NOW)
deposits 1.05 - 1.30 1.06 83,212 1.16 83,470
Non-interest bearing deposits -- -- 19,991 -- 15,384
Certificates of deposit 2.81 - 5.97 5.32 508,390 5.47 506,296
--------- -----------
4.20% $ 790,803 4.27% $ 776,528
=========== ===========
82
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
At December 31, 1996 and 1995, deposits with balances greater than $100
totaled $70,039 and $62,835, respectively.
Certificates of deposit at December 31, 1996 mature as follows:
Immediately withdrawable $ 104
Less than one year 401,004
One to two years 72,518
Two to three years 23,677
Three to four years 6,581
Four to five years 995
More than five years 3,511
----------
$ 508,390
==========
At December 31, 1996, $1,263 of public funds on deposit were secured by FHLB
letter of credit of $1,500. At December 31, 1995, $1,199 of public funds on
deposit were secured by loans receivable with an aggregate carrying value of
$4,137.
Interest expense on deposits is summarized as follows:
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
--------- -------- --------
Savings deposits $ 5,003 4,002 3,969
Money market deposits 246 305 371
Interest-bearing checking (NOW) deposits 882 1,000 997
Certificates of deposit 25,848 29,651 22,708
--------- -------- --------
$ 31,979 34,958 28,045
========= ======== ========
83
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(12) OTHER BORROWED MONEY
Other borrowed money consisted of the following:
DECEMBER 31
-----------------
1996 1995
-------- --------
Notes payable:
FHLB advances $ -- 10,000
Notes Payable Revenue Bonds 708 17,423
Loma Linda Housing Revenue Bonds 3,710 3,710
-------- --------
$ 4,418 31,133
======== ========
As of December 31, 1996 and 1995, the Company had an available line of credit
from the FHLB in the approximate amount of $218,131 and $135,976,
respectively. The remaining unused balance of the FHLB line of credit was
$100,383 and $20,899 at December 31, 1996 and 1995, respectively. This line
is secured by the pledge of certain loans receivable aggregating $241,977 and
$266,894 and the Company's required investment in $100 par value capital
stock of the FHLB totaling, at cost, $6,486 and $6,914 at December 31, 1996
and 1995, respectively.
The note payable revenue bond is the result of the Company assuming $708 of
the City of Hemet Housing Revenue Bond Series 1988, which was restructured
during 1996. The revenue bond bears a variable interest rate which resets
weekly. The interest rate of the bond as of December 31, 1996 was 3.40%.
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 securities. The book value of the
FHLMC securities at December 31, 1996 and 1995 amounted to $7,364 and $5,169,
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 --%
84
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
A summary of contractual maturities on other borrowed money is as follows:
YEAR DECEMBER 31, 1996
---- -----------------
1998 $ 475
1999 233
2000 and thereafter 3,710
------
$4,418
======
(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. All plans were frozen effective June
30, 1995. The Board of Directors in December 1996 voted to terminate the
retirement plan in accordance with its terms and with applicable Federal
laws.
85
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated statements of financial condition at
December 31, 1996 and 1995:
1996
-----------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
--------- ------------ ----------
Actuarial present value of benefit
obligation:
Accumulated benefit obligation $ 11,548 1,275 376
======== ======== ========
Vested benefit obligation $ 11,364 1,275 336
======== ======== ========
Projected benefit obligation for
service rendered to date $ 11,548 1,275 376
Plan assets at fair value 18,544 -- --
-------- -------- --------
Projected benefit obligation in
excess of (less than) plan assets (6,996) 1,275 376
Unrecognized net gain (loss) from past
experience different from that assumed
and effects of changes in assumptions 4,785 (408) (3)
Unrecognized net obligation at April 1,
1987 being recognized over twelve years -- (52) --
Unrecognized prior service cost -- -- (189)
Additional liability resulting from
minimum liability provisions -- 460 192
-------- -------- --------
Accrued (prepaid) retirement and
supplemental costs included in the
accompanying financial statements $ (2,211) 1,275 376
======== ======== ========
86
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
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
========== =========== =========
87
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
Net periodic pension cost for the Pension, Supplemental Retirement and
Outside Directors Retirement plans for 1996, 1995 and 1994 includes the
following components:
1996
--------------------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
---------- ------------- --------------
Service cost - benefits earned during
the period $ -- -- 28
Interest cost on projected benefit
obligation 846 93 25
Return on plan assets (3,000) -- --
Net amortization and deferral 1,557 29 14
---------- ------------ -------------
Net periodic pension (income) cost $ (597) 122 67
========== ============ =============
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
========== ============ =============
88
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
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
========== ============ =============
The assumptions used in determining the actuarial present value of the
accumulated benefit obligation and the expected return on plan assets for
1996 and 1995 are as follows:
1996
--------------------------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
--------------------------------------------------
Actuarial present values:
Weighted average discount
rate 7.50% 7.50% 7.50%
Rate of increase in future
compensation N/A N/A 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
89
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
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
The latest actuarial valuation is as of December 31, 1996.
Effective June 30, 1995, the Company elected to freeze contributions to the
retirement plan and to partially freeze contributions to the director's plan,
resulting in a curtailment gain of $3,390.
On January 15, 1997, a notice of intent to terminate the retirement plan in
accordance with its terms and with applicable Federal laws was distributed to
all participants. The proposed termination date will be March 15, 1997 and is
intended to be a voluntary standard termination in accordance with rules and
regulations issued by the Pension Benefit Guaranty Corporation.
In December 1990, the FASB issued Statement of Financial Standards No. 106 (SFAS
No. 106), "Employer's Accounting for Postretirement Benefits Other than
Pensions." The Company adopted SFAS No. 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 No. 106 over a 20-year period. The Company charged $74 to
compensation expense during the year ended December 31, 1996. The actuarial
present value of the full benefit obligation at December 31, 1996 was $493.
EMPLOYEE 401(K) SAVINGS PLAN
The Company has a 401(k) savings plan (formerly known as the profit-sharing
plan) for employees who meet certain length of service requirements. The plan
expense is determined atEthe discretion of the Board of Directors and no amounts
were provided for the years ended December 31, 1996, 1995 and 1994.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
As part of the conversion, an ESOP was established for all employees who have
completed one 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 RedFed
Bancorp Inc. issued in the Conversion. The loan will be repaid principally from
the Bank's discretionary contributions to the ESOP over a
90
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
period of seven years. At December 31, 1996 and 1995, the outstanding balance on
the loan was $1,398 and $1,748, respectively. Shares purchased with the loan
proceeds are held in a trust account for allocation among participants as the
loan is repaid. At December 31, 1996, 131,100 shares have been committed and
174,800 shares remain in the trust account. Contributions to the ESOP and shares
released from the trust 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 seven 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 the year ended December 31, 1996 and 1995 was
approximately $448 and $392, respectively. At December 31, 1996 and 1995,
unearned compensation related to the ESOP approximated $1,398 and $1,748,
respectively, and is shown as a reduction of stockholders' equity in the
accompanying consolidated statements of financial condition. At December 31,
1996, the fair value of unearned ESOP shares is $2,360.
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 fiscal 1996 and 1995 was approximately $210
and $208, respectively. At December 31, 1996 and 1995, unearned compensation
related to the RRPs was approximately $472 and $682, 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
ten years following the date of the planOs 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
91
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
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. As of December 31, 1996, 7,600 shares had been awarded.
The expense related to the LTIP for 1996 and 1995 was $94 and $122,
respectively.
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, nonstatutory 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 nonstatutory 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 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 Option 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 optionee's
death, disability, 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.
92
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
The 75,000 shares granted in 1995 were subject to stock options granted under
the LTIP, effective April 1995. These options based on the grant day fair
value have a derived fair value per option at December 31, 1996 and 1995 of
$5.42 using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.15%, an expected life of 10.07
years and expected volatility of 30%. The aggregate fair value of options on
the grant date was $406.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options exercisable under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
DECEMBER 31
----------------
1996 1995
------ ------
Net loss as reported $(357) (8,085)
===== ======
Pro forma net loss (438) (8,166)
===== ======
Net loss per share as reported
(0.07) (2.03)
===== ======
Pro forma loss per share (0.08) (2.05)
===== ======
Pro forma net loss reflects only options granted in 1995 and vested at 20%
each year. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting period of five years and compensation cost for options
granted prior to January 1, 1995 is not considered.
93
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
A summary of stock option transactions under the plans for the years ended
December 31, 1996, 1995 and 1994 follows:
1996 1995 1994
---------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- ------------ ---------- ----------- -------------
Options outstanding,
beginning of period 487,248 $ 8.31 437,000 $ 8.00 -- $ --
Granted -- -- 75,000 10.04 437,000 8.00
Exercised (25,450) 8.00 -- -- -- --
Forfeited (2,028) 8.00 (24,752) 8.00 -- --
----------- ----------- ----------- ---------- ----------- -----------
Options outstanding, end of
period
459,770 $ 8.33 487,248 $ 8.31 437,000 $ 8.00
=========== =========== =========== ========== =========== ===========
Options exercisable
245,911 $ 8.12 183,191 $ 8.00 -- $ --
=========== =========== =========== ========== =========== ===========
(14) REGULATORY CAPITAL AND OTHER DISCLOSURES
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 noninvestment 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, 1996.
94
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
Presented below is a reconciliation as of December 31, 1996, between the
Bank's capital under generally accepted accounting principles (GAAP) and
Regulatory Capital levels as presently defined under FIRREA.
REDLANDS FEDERAL BANKOS
REGULATORY CAPITAL REQUIREMENT
---------------------------------------------------
TANGIBLE CORE (TIER 1) RISK-BASED
CAPITAL CAPITAL CAPITAL
-------------- ----------------- ----------------
Capital of the Bank presented on a GAAP
basis $ 68,331 68,331 68,331
Adjustments to GAAP Capital to arrive
at Regulatory Capital:
Securities valuation allowance 478 478 478
Investments in and advances to
"nonincludable" consolidated
subsidiaries (1,335) (1,335) (1,335)
Other exclusions from capital (87) (87) (155)
General loan valuation allowance -- -- 8,313
------------- ------------ --------------
Adjusted capital 67,387 67,387 75,632
FIRREA regulatory capital requirement 13,071 26,142 52,512
------------- ------------ --------------
Amount by which adjusted capital
exceeds requirement $ 54,316 41,245 23,120
============= ============ ==============
95
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
The following table summarizes the BankOs actual capital and required capital
under prompt corrective action provisions of Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) as of December 31, 1996:
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------------- -------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
Total capital (to
risk-weighted assets) $ 75,632 11.52% $ 52,512 (greater or equal to) 8.00% $ 65,641 (greater or equal to) 10.00%
Core (Tier 1) capital (to
total assets) 67,387 7.73 34,857 (greater or equal to) 4.00 52,285 (greater or equal to) 6.00
Tier 1 leverage (to average
assets) 67,387 7.83 34,421 (greater or equal to) 4.00 34,421 (greater or equal to) 4.00
Tier 1 capital (to risk
weighted assets) 67,387 10.27 34,421 (greater or equal to) 4.00 34,421 (greater or equal to) 4.00
Tangible capital (to total
assets) 67,387 7.73 34,857 (greater or equal to) 4.00 43,571 (greater or equal to) 5.00
In addition, savings institutions are also subject to the provisions of the
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 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.
96
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)
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 assets 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 have subjected the
Bank and/or its officers and directors to administrative enforcement actions,
including civil money penalties and/or cease and desist orders. On August 26,
1996, following the recapitalization of the Company, the OTS terminated the
supervisory agreement with the Bank.
The prompt corrective action regulations define specific capital categories
based on an institution's 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 "well 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, 1996, the Bank's
regulatory capital was in excess of the amount necessary to be "well
capitalized."
Deposits in the Bank are presently insured by the Savings Association
Insurance Fund (SAIF). On September 30, 1996, an industrywide one-time
special assessment was mandated to recapitalize the SAIF. The special
assessment was levied at 65.7 cents against every $100 of insured deposits of
all savings institutions at March 31, 1995. As a result, the Bank recorded
$5,421 for such assessment in the year ended December 31, 1996. The
recapitalization of the SAIF is expected to result in lower deposit insurance
premiums in the future for the Bank.
(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 Company is a named defendant in two wrongful termination lawsuits. One of
the lawsuits was filed on March 25, 1996 in the San Bernardino County
Superior Court by a former officer whose position was eliminated in a May
1995 reduction in force. The plaintiff in that lawsuit
97
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
alleges that the plaintiff had an oral employment agreement with the Company
which was breached by the plaintiff's termination and that such termination
was a result of age discrimination. The plaintiff seeks an unspecified amount
of damages. The Company has denied any liability and has engaged outside
counsel to defend against the action.
The second wrongful termination lawsuit was filed on August 14, 1996 in the
San Bernardino County Superior Court by a former senior officer who elected
to take early retirement in August 1995. By motion of the Company, the
lawsuit was removed to the United States District Court for the Central
District of California. The plaintiff alleges that the plaintiff was
constructively discharged in violation of an alleged oral agreement and as
the result of age discrimination. The lawsuit seeks compensatory and punitive
damages in an aggregate of $3,250. The Company has denied any liability and
has engaged outside counsel to defend against the action.
The Company is also named defendant in a lawsuit filed on January 9, 1996 in
the San Bernardino County Superior Court 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 Company.
The lawsuit seeks an unspecified amount of damages. The Company has denied
any liability 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 $264, $263 and
$249 for the years ended December 31, 1996, 1995 and 1994, respectively. A
summary of future minimum lease payments under these agreements follows:
AMOUNT
------
Years ending December 31:
1997 $ 193
1998 154
1999 143
2000 143
2001 143
2002 and thereafter 1,189
------
$1,965
======
98
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 December 31, 1996 and
1995, the letters of credit amounted to approximately $1,463 which is
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 December 31, 1996 and 1995, approximately 89% and 97%, 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
-------------------
1996 1995
-------------------
Commitments to originate fixed and
variable rate mortgage loans $ 7,214 641
======== ======
Standby letters of credit $107,430 94,326
======== ======
99
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
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 December 31, 1996, the Company
had entered into $6,563 of variable rate commitments to originate
residential mortgage loans with an interest rate range of 3.95% to 9.15%
and $651 of fixed rate commitments with an interest rate range of 7.63% to
9.75%. 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 6.88% to 7.55%. The average commitment term offered
is 20 days at December 31, 1996. 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 customer's 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 December 31, 1996 and 1995 are
$105,967 and $92,863, 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 December 31,
1996 and 1995 is $1,463 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 (SFAS No. 107), "Disclosures about
Fair Value of Financial Instruments." 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.
100
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- -------------- ------------ ----------
Financial assets:
Cash and cash equivalents $ 33,746 33,746 30,985 30,985
Loans held for sale 4,843 4,843 4,578 4,578
Mortgage-backed securities
available-for-sale 18,220 18,220 26,501 26,501
Investment securities held-to-maturity 34,695 34,369 41,655 41,057
Mortgage-backed securities
held-to-maturity 25,327 25,697 25,615 26,113
Loans receivable, net 725,019 725,446 678,406 677,879
FHLB Stock 6,486 6,486 6,914 6,914
Financial liabilities:
Demand deposits 282,413 282,413 270,232 270,232
Certificates of deposit 508,390 509,193 506,296 508,602
Other borrowed money 4,418 4,421 31,133 31,647
Off balance sheet items:
Standby letters of credit -- 9,263 -- 11,437
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.
101
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
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.
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, 1996 would be offered
at substantially the same rates and terms of commitments offered on December
31, 1996 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 creditworthiness of the counterparties.
102
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
(18) LOAN SERVICING AND SALE ACTIVITIES
Loan servicing and sale activities are summarized as follows:
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
----------------------------
Statement of financial condition
information -- loans held for sale $ 4,843 4,578 381
======== ======== ========
Statement of operations information:
Loan servicing fees $ 196 445 688
Amortization of excess servicing fees 4 (9) (40)
-------- -------- --------
Loan servicing fees, net $ 200 436 648
======== ======== ========
Gain (loss) on sale of loans $ (11) 680 (201)
======== ======== ========
Gain on sale of servicing $ 803 -- --
======== ======== ========
Statement of cash flows information:
Loans originated for sale $ -- 10,320 14,707
======== ======== ========
Proceeds from sale of loans $ 278 76,695 18,640
======== ======== ========
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 nondeferrable 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.
(19) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP AND SECONDARY STOCK OFFERING
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 Bank's 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
103
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
$5,000 of the retained proceeds to the Bank. The financial position of RedFed
Bancorp Inc. (parent company only) as of December 31, 1996 and 1995 and the
results of its operations for the years then ended are presented in note 20.
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 years ended December 31, 1996 and 1995. Shares
purchased on behalf of the RRP (131,100 shares) are considered outstanding in
the calculation of 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 (131,100 and 87,400 shares) as of December 31, 1996 and 1995,
in the calculation of 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.
On August 19, 1996, the Company completed a secondary stock offering for
2,990,000 shares of common stock. The shares were issued at $8.75 per share
and the net proceeds to the Company from the offering were approximately
$24,069. The Company contributed $21,193 of the net proceeds to the Bank to
increase the Bank's regulatory capital.
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, 1996 is $25,268.
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.
104
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
------------------
ASSETS 1996 1995
--------- --------
Cash $ 1,772 1,291
Investment securities held-to-maturity 1,995 --
Investment in subsidiaries 68,331 46,851
Accrued interest receivable 40 --
--------- -------
$ 72,138 48,142
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities - other liabilities $ 20 64
Stockholders' equity 72,118 48,078
--------- -------
Total liabilities and stockholders'
equity $ 72,138 48,142
========= =======
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31
----------------------------
1996 1995 1994
-------- --------- ---------
Interest and other income $ 191 125 273
General and administrative expense 165 314 (235)
------- -------- ---------
Earnings (loss) before equity in
loss of subsidiaries 26 (189) 38
Equity in loss of subsidiaries (377) (7,892) (26,378)
------- -------- ---------
Loss before income taxes (351) (8,081) (26,340)
Income taxes 6 4 --
------- -------- ---------
Net loss $ (357) (8,085) (26,340)
======= ======== =========
105
REDFED BANCORP INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
-------- ----------- --------
Cash flows from operating activities:
Net loss $ (357) (8,085) (26,340)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Equity in loss of subsidiaries 377 7,892 26,378
Amortization of discount on
investments (2) -- --
(Increase) decrease in other assets (40) 8 (8)
Increase (decrease) in other
liabilities (44) 51 13
------- ------- -------
Net cash provided by (used in)
operating activities (66) (134) 43
------- ------- -------
Cash flow from investing activities:
Purchases of investment securities
held-to-maturity (2,993) -- (3,000)
Proceeds from maturities of investment
securities held-to-maturity 1,000 -- --
Purchase of outstanding stock of bank -- -- (26,455)
Additional investment in bank (21,193) -- (2,353)
-------- ------- -------
Net cash used in investing
activities (23,186) -- (31,808)
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock from Bank (957) -- --
Net proceeds from issuance of common
stock 24,340 -- 32,490
Proceeds from ESOP loan 350 350 350
------- ------- -------
Net cash provided by financing
activities 23,733 350 32,840
------- ------- -------
Net increase in cash during the
year 481 216 1,075
Cash and cash equivalents, beginning
of year 1,291 1,075 --
------- ------- -------
Cash and cash equivalents, end of year $ 1,772 1,291 1,075
======= ======= =======
Transfer of investment securities
held-to-maturity to bank $ -- -- 3,000
======= ======= =======
106
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
1996 1996 1996 1996 1996
----------- ------------ --------------- --------------- ------------
Interest income $ 15,446 15,086 15,199 15,768 61,499
-------- ---------- ---------- --------- --------
Net interest income 6,983 6,966 7,099 7,413 28,461
Provision for losses on loans (1,400) (678) (371) (389) (2,838)
Other income 1,589 2,325 1,385 1,668 6,967
Other expense (6,229) (7,335) (12,323) (7,053) (32,940)
-------- ---------- ---------- --------- --------
Earnings (loss) before income taxes 943 1,278 (4,210) 1,639 (350)
Income taxes 2 5 -- -- 7
-------- ---------- ---------- --------- --------
Net earnings (loss) $ 941 1,273 (4,210) 1,639 (357)
======== ========== ========== ========= ========
Net earnings (loss) per share $ 0.23 0.31 (0.77) 0.16 (0.07)
======== ========== ========== ========= ========
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
1995 1995 1995 1995 1995
----------- ------------ --------------- --------------- ------------
Interest income $ 15,134 17,394 15,954 15,742 64,224
-------- ---------- ---------- --------- --------
Net interest income 5,815 7,289 6,205 6,549 25,858
Provision for losses on loans (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)
======== ========== ========== ========= =======
107
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
108
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 20, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to Directors and Executive Compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 20,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 20, 1997.
109
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K.
(1) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(2) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of RedFed Bancorp, Inc.*
3.2 Bylaws of RedFed Bancorp, Inc.*
4.0 Stock Certificate of RedFed Bancorp, Inc.*
10.1 Form of Employment and Change in Control Agreements between
the Bank and the Company and Certain Officers**
10.2 Deferred Compensation Agreement between the Bank and Henry
Van Mouwerik**
10.3 Redlands Federal Bank Employee Severance Compensation Plan**
10.4 Employee Stock Ownership Plan and Trust*
10.5 Recognition and Retention Plan and Trust for Outside
Directors***
10.6 Recognition and Retention Plan and Trust for Officers and
Employees***
10.7 Incentive Stock Option Plan***
10.8 Stock Option Plan for Outside Directors***
10.9 Outside Directors' Retirement Plan**
10.1 1995 Long Term Incentive Plan****
11.0 Computation of fully diluted loss per share
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
23.0 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
_________________________
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, filed on December 23, 1993,
Registration No. 73396.
** 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 SEC on March 31, 1995.
*** Incorporated herein by reference into this document from the Proxy
Statement for the 1994 Special Meeting of Stockholders filed on
May 29, 1994.
**** Incorporated herein by reference into this document from the Proxy
Statement for the 1995 Annual Meeting of Stockholders filed on May 1,
1995.
(b) Reports on Form 8-K.
None
110
SIGNATURES
Pursuant to the requirements of Section 13 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.
REDFED BANCORP, INC.
By: /s/ Anne Bacon
_______________________________
Anne Bacon
President and Chief Executive
Officer
DATED: March 25, 1997
______________________
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated.
Name Title Date
---- ----- ----
/s/ Anne Bacon President and Chief Executive March 25, 1997
- ------------------------- Officer
Anne Bacon
/s/ David C. Gray Treasurer and Chief Financial March 25, 1997
- ------------------------- (Principal Accounting) Officer
David C. Gray, CPA
/s/ John D. McAlearney, Jr. Director March 25, 1997
- ---------------------------
John D. McAlearney, Jr.
/s/ Douglas R. McAdam Director March 25, 1997
- ---------------------------
Douglas R. McAdam
/s/ Henry H. Van Mouwerik Director March 25, 1997
- ---------------------------
Henry H. Van Mouwerik
/s/ Stanley C. Weisser Director March 25, 1997
- ---------------------------
Stanley C. Weisser
/s/ William C. Buster Director March 25, 1997
- ---------------------------
William C. Buster
/s/ William T. Hardy, Jr. Director March 25, 1997
- ---------------------------
William T. Hardy, Jr.
/s/ Robert G. Wiens Director March 25, 1997
- ---------------------------
Robert G. Wiens