SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-23146
REDFED BANCORP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0588105
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
300 EAST STATE STREET, REDLANDS, CALIFORNIA 92373
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (909) 335-3551
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
[X] YES [_] NO
The Registrant had 7,331,469 shares of common stock outstanding at
June 30, 1997.
REDFED BANCORP INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page
------
Item 1. Consolidated Financial Statements (unaudited)
RedFed Bancorp Inc.
Consolidated Statements of Financial Condition as of
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Earnings for the Three and Six
Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Default upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit 11 Computation of Earnings per Share 22
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
---------------------------------
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
ASSETS
------
Cash and cash equivalents $ 28,845 $ 33,746
Loans held for sale at lower of cost or market value 4,524 4,843
Mortgage-backed securities available-for-sale 17,845 18,220
Investment securities held-to-maturity 35,176 34,695
Mortgage-backed securities held-to-maturity 5,397 25,327
Loans receivable, net 778,200 725,019
Accrued interest receivable 5,643 4,953
Federal Home Loan Bank stock, at cost 6,937 6,486
Real estate acquired through foreclosure, net 5,959 5,800
Real estate held for sale or investment, net 1,372 1,372
Premises and equipment, net 17,383 17,656
Prepaid expenses and other assets 4,956 4,387
--------- ---------
Total assets $ 912,237 $ 882,504
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 804,470 $ 790,803
FHLB advances 10,000 --
Other borrowed money 4,418 4,418
Accrued expenses and other liabilities 16,209 15,165
--------- ---------
Total liabilities 835,097 810,386
========= =========
Stockholders' equity:
Preferred stock -- --
Common stock 74 74
Additional paid-in capital 57,276 56,981
Retained earnings --- substantially restricted 22,568 18,213
Deferred compensation (1,591) (1,870)
Treasury stock (802) (802)
Unrealized losses on securities available-for-sale (385) (478)
--------- ---------
Total stockholders' equity 77,140 72,118
--------- ---------
Total liabilities and stockholders' equity $ 912,237 $ 882,504
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
Redfed Bancorp Inc. and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1997 1996 1997 1996
-------- ------- ------- -------
Interest Income:
Loans receivable and mortgage-backed securities $ 15,040 $ 14,204 $ 29,937 $ 28,677
Investment securities and deposits 830 882 1,772 1,855
---------- ---------- ---------- ----------
Total interest income 15,870 15,086 31,709 30,532
---------- ---------- ---------- ----------
Interest expense:
Deposits 8,558 7,821 16,897 15,909
Other borrowed money 127 299 219 674
---------- ---------- ---------- ----------
Total interest expense 8,685 8,120 17,116 16,583
---------- ---------- ---------- ----------
Net interest income 7,185 6,966 14,593 13,949
Provision for losses on loans 58 678 517 2,078
---------- ---------- ---------- ----------
Net interest income after provision
for losses on loans 7,127 6,288 14,076 11,871
---------- ---------- ---------- ----------
Non-interest income:
Letter of credit and other fee income 1,580 1,446 3,123 2,974
Gain on sale of loan servicing portfolio -- 746 -- 746
Gain (loss) on sale of loans and investments, net 16 (7) 15 (11)
Other income 77 140 262 205
---------- ---------- ---------- ----------
Total non-interest income 1,673 2,325 3,400 3,914
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits 3,045 2,732 6,011 5,490
Occupancy and equipment 1,722 1,634 3,480 3,310
Federal deposit insurance premiums 598 644 1,078 1,249
Other expense, net 758 608 1,390 1,270
---------- ---------- ---------- ----------
Total general and administrative expense 6,123 5,618 11,959 11,319
Real estate operations, net 270 305 764 833
Provision for losses on letters of credit -- 1,412 -- 1,412
----------- ----------- ---------- ----------
Total non-interest expense 6,393 7,335 12,723 13,564
---------- ---------- ---------- ----------
Earnings before income taxes 2,407 1,278 4,753 2,221
Income taxes (benefit) -- 5 (12) 7
---------- ---------- ---------- ----------
Net earnings $ 2,407 $ 1,273 $ 4,765 $ 2,214
========== ========== ========== ==========
Earnings per share $ 0.33 $ 0.31 $ 0.65 $ 0.54
========== ========== ========== ==========
Weighted average shares outstanding 7,363,989 4,123,447 7,356,663 4,121,788
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements
4
REDFED BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
------------------------------
1997 1996
------- -------
Cash flows from operating activities:
Net earnings $ 4,765 $ 2,214
Adjustments to net earnings:
Loan fees collected 484 82
Depreciation and amortization 1,049 641
Provision for losses on:
Loans 517 2,078
Letters of credit -- 1,412
Net gain (loss) on sales of loans, investments and mortgage-backed
securities
(15) 11
Net gain (loss) on sales of real estate, and premises and equipment 34 (335)
Sale of loan servicing portfolio -- (746)
Federal Home Loan Bank stock dividends received (202) (185)
Loans originated for sale (3,645) ---
Proceeds from sale of loans held for sale 3,711 216
Increase (decrease) in:
Accrued expenses and other liabilities 813 (2,710)
Deferred income (420) (236)
Accrued interest receivable (690) 349
Prepaid expenses and other assets (328) (1,695)
--------- --------
Net cash provided by operating activities 6,073 4,486
--------- --------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to-maturity 10,000 15,500
Purchases of investments securities held-to-maturity (10,471) (11,604)
Proceeds from maturities of mortgage-backed securities available-for-sale 465 1,300
Principal repayments of mortgage-backed securities held-to-maturity 19,930 139
Loans originated for investment (61,440) (39,531)
Purchase of loans (68,688) ---
Proceeds from sale of loan servicing portfolio --- 746
Purchase of Federal Home Loan Bank stock (249) 1,000
Principal payments and reductions of loans, net 71,723 46,688
Proceeds from sale of real estate 4,464 12,222
Proceeds from sale of premises and equipment 2 130
Purchases of premises and equipment (543) (562)
--------- --------
Net cash (used in) provided by investing activities (34,807) 28,028
--------- --------
(Continued)
See accompanying notes to unaudited consolidated financial statements.
5
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
-------------------------------
1997 1996
---------- --------
Cash flows from financing activities:
Deposits, net of withdrawals, and interest credited $ 13,667 $ (14,325)
Proceeds from Federal Home Loan Bank advances 25,000 --
Repayment of other borrowed money (15,000) (13,919)
Proceeds from stock options exercised 166 164
--------- ---------
Net cash provided by (used in) financing activities 23,833 (28,080)
--------- ---------
Increase (decrease) in cash and cash equivalents (4,901) 4,434
Cash and cash equivalents, beginning of period 33,746 30,985
--------- ---------
Cash and cash equivalents, end of period $ 28,845 $ 35,419
========= =========
Supplemental information:
Interest paid (including interest credited) $ 17,048 $ 16,469
Transfers from loans receivable to real estate 4,651 6,929
Loans to facilitate the sale of real estate -- 6,030
Minimum pension liability adjustment from retained earnings (410) --
Real estate sold subject to bond financing -- 3,349
Bond financing subject to real estate sales -- (3,349)
Transfer from loans to mortgage-backed securities held-to-maturity $ -- $ (5,950)
========= =========
See accompanying notes to unaudited consolidated financial statements.
6
REDFED BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. The consolidated statements of financial condition of RedFed Bancorp
Inc. and subsidiaries (the "Company") as of June 30, 1997, the related
consolidated statements of earnings for the three and six months ended
June 30, 1997 and 1996 and the related consolidated statements of cash
flows for the six months ended June 30, 1997 and 1996 are unaudited.
These statements reflect, in the opinion of management, all material
adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the consolidated financial condition of the Company as
of June 30, 1997, and results of consolidated operations for the three and
six months ended June 30, 1997 and 1996 and consolidated cash flows for the
six months ended June 30, 1997 and 1996. The results of consolidated
operations for the unaudited periods are not necessarily indicative of the
results of the consolidated operations to be expected for the entire year
of 1997.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and, therefore, do not include all information
and footnotes normally included in consolidated financial statements
prepared in conformity with generally accepted accounting principles.
Accordingly, these unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's annual report on SEC Form 10-K for
the year ended December 31, 1996.
2. Primary and fully diluted earnings per share for the three and six months
ended June 30, 1997 of $0.33 and $0.65 per share respectively, were based
on net earnings of $2.4 million and $4.8 million , with weighted-average
common shares and common share equivalents outstanding during those periods
of 7,363,989 and 7,356,663 shares (net of unearned Employee Stock Ownership
Plan ("ESOP") and Recognition and Retention Plan ("RRP") shares and
treasury stock, and including outstanding stock options as to which the
current market price exceeds the exercise price and that are not anti-
dilutive to market price). This compares with net earnings per share for
the three and six months ended June 30, 1996 of $0.31 and $0.54 per share
respectively, based on net earnings of $1.3 million and $2.2 million, with
weighted-average common shares outstanding during those periods of
4,123,447 and 4,121,788 (net of unearned ESOP and RRP shares and treasury
stock, and including outstanding stock options as to which the current
market price exceeds the exercise price and that are not anti-dilutive to
market price). The Company had a secondary offering in August 1996 in which
2,990,000 additional common shares were issued, which has significantly
impacted the earnings per share calculations for the comparable three and
six months periods.
3. In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 ("SFAS 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 components 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
recognition as 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 is to be applied prospectively. The adoption of
SFAS No. 125 on January 1, 1997 did not have a material impact on the
Company's financial position or results of earnings.
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share". SFAS
128 supersedes APB Opinion No. 15, "Earnings per Share" ("APB 15") and
specifies the computation, presentation, and
7
disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. SFAS will replace the
presentation of primary EPS with a presentation of basic EPS, and fully
diluted EPS with diluted EPS. SFAS 128 will also require dual presentation
of basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
of the diluted EPS computation. This statement shall be effective for
financial statements for both interim and annual periods ending after
December 31, 1997. Earlier application is not permitted. The Company has
determined that this statement will have no significant impact on the
financial position or results of earnings.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". This statement requires disclosures about capital
structures that had been included in a number of previously existing
separate statements and opinions. SFAS 129 requires an entity to explain,
in summary form within the financial statements, pertinent rights and
privileges of the various securities outstanding such as; dividend and
liquidation preferences, participation rights, call prices and dates,
conversion or exercise prices or rates and pertinent dates, sinking fund
requirements unusual voting rights and significant terms of contracts to
issue additional shares. An entity is also to disclose within the financial
statements the number of shares issued upon conversion, exercise or
satisfaction of required conditions during at least the most recent annual
period. In addition, with respect to preferred stock, an entity is to
disclose within the financial statements; liquidation preferences of the
stock, the aggregate or per share amounts at which preferred stock may be
called or subject to redemption and the aggregate and per-share amount of
arrearages in cumulative preferred dividends. This statement shall be
effective for the financial statements for both interim and annual periods
ending after December 15, 1997. At this time the Company has determined
that this Statement will have no significant impact on its financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. Management is in the process of determining the impact, if any,
this statement will have on the Company's financial statements.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (FAS No. 131). FAS No. 131 establishes standards for the way
that public enterprises report information about operating segments in
annual financial statements and requires that selected information about
those operating segments be reported in interim financial statements. This
Statement supersedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise". FAS No. 131
requires that all public enterprises report financial and descriptive
information about its reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This Statement is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years should be restated. This Statement need not
be applied to interim financial statements in the year of application, but
comparative information for interim periods in the initial year of
application shall be reported in financial statements for interim periods
in the second year of application. Early application is encouraged.
Management is in the process of determining the impact, if any, this
Statement will have on the Company.
8
REDFED BANCORP INC. AND SUBSIDIARIES
------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
GENERAL
Redfed bancorp Inc. was organized by Redlands Federal Bank ( the "Bank") for the
purpose of acquiring all of the capital stock of the Bank issued in the
conversion of the bank from a federally chartered mutual savings association to
a federally chartered stock savings bank. The Company's common stock is traded
on NASDAQ under the symbol "REDF".
The Company is primarily engaged in attracting deposits from the general public
in the areas in which its branches are located and investing such deposits and
other available funds primarily in loans secured by one- to four-family
residential mortgages, including spot (non-tract) construction loans, which are
combination construction and permanent loans made to borrowers who will occupy
the completed home as their primary residence. At June 30, 1997 the Bank
operated fourteen retail banking offices located in San Bernardino and Riverside
counties, and two loan production offices.
The Company is subject to significant competition from other financial
institutions in its market area. The Bank is regulated by certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
FINANCIAL CONDITION
The Company's consolidated assets were $912.2 million at June 30, 1997 compared
to $882.5 million at December 31, 1996. The increase of $29.7 million was
primarily the result of a net increase in loans receivable of $53.2 million
offset by a decrease in cash and cash equivalents of $4.9 million, and a
decrease in mortgage-backed securities held-to-maturity of $19.9 million. The
increase in consolidated liabilities consisted primarily of an increase in the
deposit base of $13.7 million, an increase in FHLB advances of $10.0 million and
an increase in accrued expenses and other liabilities of $1.1 million.
Loans receivable, net increased to $778.2 million at June 30, 1997, from $725.0
million at December 31, 1996. The increase of $53.2 million for the six months
ended June 30, 1997 consisted primarily of loan originations of $ 61.4 million
and loan purchases of $68.7 million offset by principal repayments of $71.7
million, and $5.5 million of loans transferred to real estate acquired through
foreclosure ("REO") before initial write-down to fair value. Mortgage-backed
securities held-to-maturity decreased $19.9 million as the result of the
refinancing of a $3.7 million loan to an off-balance sheet letter of credit
("LOC") and the repayment of four loans in the amount of $16.2 million of the
San Bernardino County Bond owned by the Company.
Savings deposits at June 30, 1997 totaled $804.5 million compared to $790.8
million at December 31, 1996. The increase of $13.7 million in savings deposits
is due primarily to an increase in certificates of deposit. The Company
increased net borrowings by $10.0 million during the six months ended June 30,
1997 to fund the purchase of loans. Stockholders' equity increased to $77.1
million at June 30, 1997 from $72.1 million at December 31, 1996 primarily as a
result of earnings for the six months ended June 30, 1997 of $4.8 million, ESOP
and RRP amortization of $408,000 and an adjustment for unrealized losses on
securities available for sale of $93,000 offset by an adjustment for the minimum
pension liability of $410,000.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of funds are deposits, principal and interest
repayments on loans and investments, retained earnings, and, to a lesser extent,
FHLB advances and other short-term borrowings. While maturities and
9
scheduled amortization of loans are predictable sources of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Bank is required to maintain minimum levels of liquid assets as defined by
office of thrift supervision ("OTS") regulations. This requirement, which may be
varied by 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%. There is an outstanding OTS proposal to reduce the liquidity
requirement to 4%. The Bank's average liquidity ratios for the three months
ended June 30, 1997 and December 31, 1996 were 7.03% and 7.43%, respectively.
The Bank currently attempts to maintain a liquidity ratio as close to the
minimum requirements as possible, since loan originations provide higher
interest rates, in addition to loan fees, than are available from liquid
investments.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996.
General. The Company recorded net earnings of $2.4 million for the three
- -------
months ended June 30, 1997, or $0.33 per share, as compared to net earnings of
$1.3 million, or $0.31 per share, for the three months ended June 30, 1996. Net
earnings of $4.8 million was recognized for the six months ended June 30, 1997,
or $0.65 per share, as compared to net earnings of $2.2 million, or $0.54 per
share, for the same period in 1996. Net earnings of $2.4 million for the three
months ended June 30, 1997 represents an increase of $1.1 million over the same
period in 1996. This increase resulted from an increase in net interest income
of $219,000, a decrease of $620,000 in provision for losses on loans, and a
decrease in provision for losses on letters of credit of $1.4 million, offset by
a decrease in non-interest income of $652,000 and an increase in general and
administrative expenses of $505,000. Net operating results for the six months
ended June 30, 1997 increased by $2.6 million to $4.8 million from $2.2 million
for the same period in 1996. This increase resulted from an increase in net
interest income of $644,000, a decrease of $1.6 million in provision for losses
on loans, and a decrease in provision for losses on letters of credit of $1.4
million, offset by a decrease in non-interest income of $514,000 and an increase
in general and administrative expenses of $640,000.
Interest income. Interest income for the three months ended June 30, 1997 was
- ----------------
$15.9 million compared to $15.1 million for the same period in 1996. Interest
income for the six months ended June 30, 1997 was $31.7 million compared to
$30.5 million for the same period in the previous year. The increase in interest
income for the three months ended June 30, 1997 resulted from an increase in
average interest-earning assets of $59.4 million, partially offset by a decrease
of 16 basis points in the average yield for interest-earning assets from 7.62%
for the three months ended June 30, 1996 to 7.46% for the three months ended
June 30, 1997. The increase in interest income for the six months ended June 30,
1997 was due in part to an increase in average interest-earning assets of
approximately $53.2 million, partially offset by a decrease of 21 basis points
in the average yield for interest-earning assets from 7.69% for the six months
ended June 30, 1996 to 7.48% for the six months ended June 30, 1997.
Interest expense. Interest expense for the three months ended June 30, 1997 was
- -----------------
$8.7 million compared to $8.1 million for the same period in the previous year.
Interest expense for the six months ended June 30, 1997 was $17.1 million
compared to $16.6 million for the same six months in the previous year. This
increase for the three months ended June 30, 1997 was due in part to an increase
of $14.2 million in average interest-bearing liabilities and an increase in the
average cost for interest-bearing liabilities of 19 basis points from 4.25% for
the three months ended June 30, 1996 to 4.44% for the three months ended June
30, 1997. The increase in interest expense for the six months ended June 30,
1997 was the result of an increase in average interest-bearing liabilities of
$1.5 million, and an increase of 12 basis points in the average cost for
interest-bearing liabilities from 4.27% for the six months ended June 30, 1996
to 4.39% for the six months ended June 30, 1997.
Net interest income. Net interest income for the three months ended June 30,
- --------------------
1997 was $7.2 million compared to $7.0 million for the three months ended June
30, 1996. The increase in net interest income of $219,000 is the result of a net
improvement of $59.4 million in the average dollar amounts of interest-earning
assets and interest-bearing liabilities for the three months ended June 30, 1997
when compared to the same period in the previous year. The decrease in the
interest rate spread of 35 basis points for the three months ended June 30, 1997
to 3.02% from
10
3.37% for the three months ended June 30, 1996 was a result of a decrease in the
average yield for interest-earning assets of 16 basis points and an increase of
19 basis points in the average cost for interest-bearing liabilities. Net
interest income for the six months ended June 30, 1997 was $14.6 million,
compared to net interest income of $13.9 million for the six months ended June
30, 1996. The increase in net interest income of $644,000 is the result of a net
improvement of $51.7 million in the average dollar amounts of interest-earning
assets and interest-bearing liabilities for the six months ended June 30, 1997
when compared to the same period in the previous year. The decrease in the
interest rate spread of 33 basis points for the six months ended June 30, 1997
to 3.09% from 3.42% for the six months ended June 30, 1996 was a result of a
decrease in the average yield for interest-earning assets of 21 basis points and
an increase of 12 basis points in the average cost for interest-bearing
liabilities.
The following table displays average dollar amounts and interest rates on the
Company's interest-earning assets and interest-bearing liabilities:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
------------------------------------------------- -------------------------------------------
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
---------------------- ----------------------- -------------------- ---------------------
(dollars in thousands)
Average dollar amount of and average yield earned on assets:
Loans and mortgage-backed
securities $793,146 7.59% $725,918 7.83% $784,567 7.63% $ 728,538 7.87%
Investment securities 57,965 5.73 65,823 5.36 62,802 5.64 65,605 5.66
-------- -------- -------- -------
Interest-earning assets $851,111 7.46 $791,741 7.62 $847,369 7.48 $794,143 7.69
======== ======== ======== ========
Average dollar amount of and average rate paid on liabilities:
Deposits $776,952 4.43 $749,423 4.20 $ 775,996 4.38 $756,568 4.23
Borrowings 5,626 6.34 19,006 6.31 5,605 6.44 23,522 5.75
-------- -------- -------- -------
Interest-bearing $782,578 4.44 $768,429 4.25 $781,601 4.39 $780,090 4.27
liabilities ======== ======== ======== ========
Interest rate spread 3.02% 3.37% 3.09% 3.42%
======== ======== ======== ========
Net interest margin 3.37% 3.50% 3.43% 3.49%
======== ======== ======== ========
Ratio of interest-earning
assets to interest-bearing
liabilities 108.76% 103.03% 108.41% 101.80%
======== ======== ======== ========
Provision for losses on Loans, LOCs and real estate. The provision for losses on
- ---------------------------------------------------
loans was $58,000 for the three months ended June 30, 1997 compared to $678,000
for the same period last year. The provision for losses on loans was $517,000
for the six months ended June 30, 1997 compared to $2.1 million for the same
period last year. The provision for losses on letters of credit was zero for the
three and six months ended June 30, 1997 compared to $1.4 million for the same
periods in 1996.
The allowances for losses on loans, LOCs and real estate are established through
provisions reflect management's assessment of the loan, LOC and real estate
portfolios in light of the Southern California real estate market, borrowers'
ability to perform, and other factors including asset grading and
classification, collateral values, the credit risk inherent in the portfolio,
historical loan loss experience, a loss migration analysis, and the Company's
underwriting policies. The allowances are maintained at amounts management
considers adequate to cover losses which are deemed probable and estimable.
11
The following is a summary of the activity in the loan, LOC and real estate
valuation allowances for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------- -------- -------- --------
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of period $ 10,328 $ 12,076 $ 10,134 14,745
Charge-offs, net of recoveries (1,272) (1,512) (1,537) (5,581)
Provisions charged to income 58 678 517 2,078
-------- -------- -------- --------
Balance at end of period 9,114 11,242 9,114 11,242
-------- -------- -------- --------
ALLOWANCE FOR LOSSES ON LOCs:
Balance at beginning of period 7,624 6,947 7,624 7,447
Charge-offs, net of recoveries -- (1,753) -- (2,253)
Provisions charged to income -- 1,412 -- 1,412
-------- -------- -------- --------
Balance at end of period 7,624 6,606 7,624 6,606
-------- -------- -------- --------
Total allowance for losses on loans and LOCs $ 16,738 $ 17,848 $ 16,738 17,848
======== ========= ======== ========
ALLOWANCE FOR LOSSES ON REAL ESTATE: (1)
Balance at beginning of period $ 1,445 5,680 $ 1,640 9,496
Charge-offs, net of recoveries (79) (2,839) (274) (6,655)
Provisions charged to income -- -- -- --
-------- -------- -------- --------
Balance at end of period $ 1,366 $ 2,841 $ 1,366 2,841
======== ========= ======== ========
TOTAL ALLOWANCE FOR LOSSES ON LOANS, LOCs
AND REAL ESTATE: $ 18,104 $ 20,689 $ 18,104 20,689
======== ========= ======== ========
Specific $ 2,008 $ 3,532 $ 2,008 $ 3,532
General 16,096 17,157 16,096 17,157
-------- -------- -------- --------
TOTAL $ 18,104 $ 20,689 $ 18,104 20,689
======== ========= ======== ========
(1) Includes specific valuation allowance for real estate held for sale of $254
at June 30, 1997 and $254 as of June 30, 1996.
The allowance for losses on loans, LOCs and real estate was $18.1 million at
June 30, 1997 and $20.7 million at June 30, 1996. The ratio of GVA for losses on
loans, LOCs and real estate to nonperforming assets and LOCs increased to
107.44% at June 30, 1997 from 89.18% at December 31, 1996 as a result of a $5.0
million decrease in nonperforming assets which more than offset a decrease of
$1.7 million in the GVA during the same period. Included in the allowance for
losses on loans, LOCs and real estate were specific allowances against
individual loans, LOCs and real estate of $2.0 million at June 30, 1997 and $1.6
million at December 31, 1996. 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
12
Company's valuation allowances. These agencies may require additional valuation
allowances, based on their judgments of the information available to them at the
time of the examination.
Non-Interest Income. Non-interest income for the three months ended June 30,
- -------------------
1997 was $1.7 million compared to $2.3 million for the same period last year, a
net decrease of $652,000. Non-interest income for the six months ended June 30,
1997 was $3.4 million, a decrease of $514,000 from $3.9 million for the six
months ended June 30, 1996. The decreases for the three months and six months
ended June 30, 1997 are primarily the result of a one-time gain on the sale of
servicing in the amount of $746,000 for the three and six months ended June 30,
1996, partially offset by an increase in letter of credit and other fee income
of $134,000 for the three-month periods and $149,000 for the six-month periods
respectively.
Non-interest expense. Non-interest expense was $6.4 million for the three months
- --------------------
ended June 30, 1997, a decrease of $942,000 from $7.3 million for the same
period in 1996. Non-interest expense for the six months ended June 30, 1997 was
$12.7 million, a decrease of $841,000 from $13.6 million for the same period in
1996. Included in non-interest expense is general and administrative expense
("G&A") for the three-months ended June 30, 1997 of $6.1 million compared to
$5.6 million for the same period in 1996. G&A expense for the six-months ended
June 30, 1997 was $12.0 million, an increase from $11.3 million from the same
period in 1996. The net increase of $505,000 for the three month comparisons and
$640,000 for the six month comparisons was primarily from an increase in
compensation and benefits as a result of an increase in personnel involved with
the introduction of commercial loans and business checking products, the accrual
for retirement benefits and the amortization of ESOP shares committed at fair
market value. The provision for losses on LOCs decreased by $1.4 million for the
three and six months ended June 30, 1997 when compared to the same periods in
1996. The Company's G&A to average assets was 2.67% for the six months ended
June 30, 1997 compared to 2.65% six months ended June 30, 1996 and the Company's
efficiency ratio was 66.46% compared to 63.37% for the same periods,
respectively.
13
NONPERFORMING ASSETS
The following table sets forth information regarding nonaccrual loans and REO,
net of specific valuation allowances:
AT JUNE 30, AT DECEMBER 31,
1997 1996
-------------- ----------------
(Dollars in thousands)
NONPERFORMING ASSETS :
Nonaccrual Loans:
One- to four-family $ 5,051 $10,739
Multi-family 1,027 764
Commercial real estate 646 --
Developed lots 1,237 1,009
Tract construction and land 409 586
Consumer 211 200
------- -------
Total nonaccrual loans 8,581 13,298
------- -------
REO (1):
One- to four-family 3,863 3,169
Multi-family 327 422
Commercial real estate 248 461
Construction single family 372 372
Developed lots 1,218 1,757
Tract construction and land 413 458
Consumer 21 51
------- -------
Total REO 6,462 6,690
------- -------
Total nonperforming assets $15,043 $19,988
======= =======
(1) Does not include effect of GVAs of $503 and $890 at June 30, 1997 and
December 31, 1996, respectively.
Nonaccrual loans net of specific valuation allowances at June 30, 1997 were $8.6
million, which represents a decrease of $4.7 million from the December 31, 1996
balance of $13.3 million. This decrease since December 31, 1996 resulted
primarily from a decrease in nonaccrual single family loans of $5.7 million,
partially offset by an increase in multi-family loans of $263,000, an increase
of $646,000 in nonaccrual commercial real estate and an increase of $228,000 in
nonaccrual developed lots.
The Company's general nonaccrual policy provides that interest accruals cease
once a loan is past due for a period of 90 days or more, or the notice of
default is filed, whichever is earlier. Loans may also be placed on nonaccrual
status even though they are less than 90 days past due if management concludes
that it is probable that the borrower will not be able to comply with the
repayment terms of the loan. The Company defines nonperforming loans as
nonaccrual loans and nonperforming LOCs.
REO increased to $6.0 million at June 30, 1997 from $5.8 million at December 31,
1996. REO is initially recorded at the fair value of the related assets at the
date of foreclosure, less costs to sell. Subsequent write-downs for losses are
recognized if the carrying value of real estate exceeds fair value, less costs
to sell.
Nonperforming assets are defined as nonperforming loans (as defined above) and
REO. Nonperforming assets were $15.0 million, or 1.47% of total assets and LOCs,
at June 30, 1997, compared to $20.0 million, or 2.02% of total assets and LOCs,
at December 31, 1996. The Company does not include troubled debt restructured
loans ("TDRs") that are performing in accordance with their restructured terms
as nonperforming assets. The balance of restructured loans was $4.9 million and
$12.0 million at June 30, 1997 and December 31, 1996, respectively.
14
Management continues to reduce the amount of nonperforming assets by
concentrating efforts on early detection through the asset classification
process and by taking an aggressive stance to quickly resolve nonperforming
assets by working with borrowers to restore nonaccrual loans to performing
status where possible, by foreclosing upon security property where workouts are
determined to be impracticable and by selling existing REO.
CLASSIFIED ASSETS
Federal regulations and the Company's Classification of Assets Policy provide
for the classification of loans and other assets. "Substandard" assets are those
that are characterized by the "distinct possibility" that the institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified "Substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss allowance is not
warranted.
15
The following table sets forth the classified assets, which include substandard
and doubtful categories, net of specific valuation allowances. The increase in
LOCs classified as substandard was the result of a credit reevaluation of one
LOC in the amount of $6.7 million. The amount of specific valuation allowances
at June 30, 1997 and December 31, 1996 was $2.0 million and $1.3 million,
respectively.
At June 30, At December 31,
1997 1996
------------- ---------------
(Dollars in thousands)
Substandard
Loans:
One- to four-family $ 6,272 $11,934
Multi-family 4,826 5,619
Commercial real estate 1,021 653
Developed lots 1,543 1,220
Tract construction and land 535 591
Consumer 206 358
------- -------
Total 14,403 20,375
------- -------
REO:
One- to four-family 3,863 3,169
Multi-family 327 422
Commercial real estate 248 461
Spot construction 372 372
Developed lots 1,218 1,757
Tract construction and land 413 458
Consumer 21 51
------- -------
Total 6,462 6,690
Off-Balance sheet LOCs: 11,091 4,375
------- -------
Total substandard 31,956 31,440
------- -------
Doubtful
Multi-family -- 153
------- -------
Total classified assets $31,956 $31,593
======= =======
16
IMPAIRED LOANS
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The Company measures impairment
based on (1) the present value of expected future cash flows discounted at the
loan's effective interest rate, (2) the observable market price of the impaired
loan or (3) the fair value of the collateral of a collateral-dependent loan. If
the value of the impaired loan is less than the recorded investment in the loan,
the Company recognizes an impairment by recording a valuation allowance with a
corresponding charge to the provision for losses on loans. The Company will
charge off a portion of an impaired loan against the valuation allowance when it
is probable that there is no possibility of recovering the full amount of the
impaired loan. The following table identifies the Company's total recorded
investment in impaired loans by type at the dates indicated, net of specific
valuation allowances:
At June 30, At December 31,
1997 1996
------------------ -------------------
(Dollars in thousands)
Nonaccrual loans:
Multi-family $ 1,027 $ 764
Commercial 646 --
Tract construction and land 409 586
TDR loans 4,635 12,001
Other impaired loans:
Multi-family 1,761 3,386
-------- --------
$ 8,478 $ 16,737
======== ========
REGULATORY CAPITAL
Under OTS capital regulations, the Bank must meet three capital tests. First,
the tangible capital requirement mandates that the Bank's equity less intangible
assets be at least 1.50% of adjusted total assets as defined in the capital
regulations. Second, the core capital requirement mandates that core capital
(tangible capital plus qualifying supervisory goodwill) be at least 3.00% of
adjusted total assets as defined in the capital regulations. Third, the
risk-based capital requirement mandates that core capital plus supplemental
capital as defined by the OTS be at least 8.00% of risk-weighted assets as
prescribed in the capital regulations. The capital regulations require
assignment of specific risk weightings to all assets and off-balance sheet items
pursuant to a prescribed formula.
The Bank was in compliance with all current capital requirements in effect at
June 30, 1997, and had sufficient capital to be considered a "well capitalized"
institution under the "prompt corrective action" regulations of the OTS.
17
The following table presents information regarding the Bank's compliance with
capital requirements at June 30, 1997:
REGULATORY CAPITAL (FDICIA)
CAPITAL
------------------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------------ ------------ ------------ ------------ --------------
(Dollars in thousands)
Total capital (to risk-weighted assets) $80,172 $53,594 $26,578 11.97% 8.00%
Core (Tier 1) capital (to total assets) 71,948 36,036 35,912 7.99 4.00
Tier 1 leverage (to average assets) 71,948 35,862 36,086 8.02 4.00
Tier 1 capital (to risk-weighted assets) 71,948 26,797 45,151 10.74 4.00
Tangible capital (to total assets) 71,948 36,036 35,912 7.99 4.00
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 June 30, 1997.
REGULATORY CAPITAL (FIRREA)
CAPITAL (1)
------------------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------------ ------------ ------------ ------------ --------------
(Dollars in thousands)
Tangible $71,948 $13,513 $ 58,435 7.99% 1.50%
Core 71,948 27,027 44,921 7.99 3.00
Risk-based 80,172 53,594 26,578 11.97 8.00
- ---------
(1) Although the OTC capital regulations require savings institutions to meet a
1.5% tangible capital ratio, a 3% leverage (core) capital ratio and an 8%
risk-based capital ratio, the prompt corrective action standards also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the Capital, Assets,
Management, Earnings, Liquidity and Sensitivity ("CAMELS") financial institution
rating system) and, together with the risk-based capital standard itself, a 4%
risk-based capital standard.
18
SELECTED CONSOLIDATED RATIOS OF THE COMPANY
AT OR FOR THE
Six MONTHS ENDED JUNE 30,
--------------------------------------------
1997 1996
----------------- ------------------
PERFORMANCE RATIOS: (1)
Return on average assets 1.06% 0.46 %
Return on average equity 12.77 9.12
Equity to total assets 8.46 5.88
Interest rate spread during the period 3.09 3.42
Net interest margin 3.43 3.49
Average interest-earning assets to average interest-bearing
liabilities 108.41 101.80
G&A expense to average assets 2.67 2.65
Efficiency ratio (2) 66.46 63.37
At June 30, 1997 At December 31,
1996
----------------- ------------------
REGULATORY CAPITAL RATIOS:
Tangible and core capital 7.99% 7.73 %
Risk-based capital 11.97 11.52
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans 1.06 1.76
Nonperforming assets to total assets and LOCs (3) (4) 1.47 2.02
Allowance for losses on loans and LOCs to total loans and LOCs 1.82 2.06
Allowance for losses on loans, LOCs and real estate to total assets
and LOCs 1.77 1.96
GVAs for losses on loans to nonaccrual loans 93.62 70.03
GVAs for losses on loans, LOCs and real estate to total
nonperforming assets (3) (4) 107.44 89.18
Classified assets to total assets and LOCs 3.13 3.20
GVAs to net classified assets 50.37 56.42
- -------------------
(1) Ratios for the six month periods have been annualized.
(2) G&A expense to net interest income plus total non-interest income.
Excludes provisions for losses on loans and other non-interest expense.
(3) Excludes troubled debt restructures which are currently
performing under their restructured terms.
(4) Nonperforming assets include nonperforming loans, nonperforming LOCs and
REO.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------------------
The Company is named as a defendant in a wrongful termination lawsuit
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. Subsequent to
June 30, 1997, two the of allegations filed against the Company have
been dismissed by the court.
The Company is also named as a 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 it.
The Company is not involved in any other pending legal proceedings
other than routine legal proceedings occurring in the ordinary course
of business. All of such legal proceedings in the aggregate are
believed by management to be immaterial to the Company.
Items 2, 3, are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its annual meeting of shareholders on May 20, 1997.
The results with respect to each matter voted upon at the meeting were
as follows:
The election of two directors for the term of three years each
or until their successors are elected and qualified:
For Withheld
----------- -------------
Douglas R. McAdam 6,453,158 195,598
Robert G. Wiens 6,424,888 223,868
The retirement of the following director: Henry H. Van Mouwerik
In addition, the following directors term of office continued
after the meeting:
John D. McAlearney, Jr. Chairman Anne Bacon
William C. Buster, Jr. William T. Hardy, Jr.
Stanley C. Weisser
Item 5 is not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 11 - Computations of Earnings Per Share
Exhibits - 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
registrant during the six months ended June 30, 1997
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1997 REDFED BANCORP INC.
By: /s/ Anne Bacon
------------------------
Anne Bacon
President and
Chief Executive Officer
By: /s/ David C. Gray, CPA
------------------------
David C. Gray, CPA
Treasurer and
Chief Financial Officer
21