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 SEPTEMBER 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 7,413,908 shares of common stock outstanding at
September 30, 1997.
REDFED BANCORP INC. AND SUBSIDIARIES
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
RedFed Bancorp Inc.
Consolidated Statements of Financial Condition as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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)
September 30, December 31,
1997 1996
------------- ------------
Assets
------
Cash and cash equivalents $ 26,476 $ 33,746
Loans held for sale at lower of cost or market 4,180 4,843
value
Mortgage-backed securities available-for-sale 17,677 18,220
Investment securities held-to-maturity 32,597 34,695
Mortgage-backed securities held-to-maturity 5,380 25,327
Loans receivable, net 838,809 725,019
Accrued interest receivable 5,854 4,953
Federal Home Loan Bank stock, at cost 7,615 6,486
Real estate acquired through foreclosure, net 4,800 5,800
Real estate held for sale or investment, net 1,372 1,372
Premises and equipment, net 17,192 17,656
Prepaid expenses and other assets 5,357 4,387
-------- --------
Total assets $967,309 $882,504
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $835,704 $790,803
FHLB advances 30,000 --
Other borrowed money 4,418 4,418
Accrued expenses and other liabilities 16,699 15,165
-------- --------
Total liabilities 886,821 810,386
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 74 74
Additional paid-in capital 57,406 56,981
Retained earnings --- substantially
restricted 25,370 18,213
Deferred compensation (1,451) (1,870)
Treasury stock (802) (802)
Unrealized losses on securities
available-for-sale (109) (478)
-------- --------
Total stockholders' equity 80,488 72,118
-------- --------
Total liabilities and stockholders' equity $967,309 $882,504
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
REDFED BANCORP INC. AND SUBSIDIARIES
REDFED BANCORP INC.
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Interest income:
Loans receivable and mortgage-backed securities $ 15,951 $ 14,205 $ 45,889 $ 42,882
Investment securities and deposits 910 994 2,681 2,849
---------- ---------- ---------- ----------
Total interest income 16,861 15,199 48,570 45,731
---------- ---------- ---------- ----------
Interest expense:
Deposits 9,201 7,913 26,099 23,822
Other borrowed money 309 187 527 861
---------- ---------- ---------- ----------
Total interest expense 9,510 8,100 26,626 24,683
---------- ---------- ---------- ----------
Net interest income 7,351 7,099 21,944 21,048
Provision for losses on loans 283 371 800 2,449
---------- ---------- ---------- ----------
Net interest income after provision
for losses on loans 7,068 6,728 21,144 18,599
---------- ---------- ---------- ----------
Noninterest income:
Letter of credit and other fee income 1,659 1,323 4,788 4,297
Gain on sale of loan servicing portfolio -- 6 -- 752
Gain (loss) on sale of loans and investments, net (2) -- 13 (11)
Other income 82 56 345 261
---------- ---------- ---------- ----------
Total noninterest income 1,739 1,385 5,146 5,299
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and benefits 2,909 2,907 8,920 8,397
Occupancy and equipment 1,816 1,950 5,295 5,260
Federal deposit insurance premiums 184 572 1,262 1,821
FDIC/SAIF special assessment -- 5,421 -- 5,421
Other expense, net 769 549 2,166 1,819
---------- ---------- ---------- ----------
Total general and administrative expense 5,678 11,399 17,643 22,718
Real estate operations, net 312 334 1,077 1,167
Provision for losses on letters of credit -- 590 -- 2,002
---------- ---------- ---------- ----------
Total noninterest expense 5,990 12,323 18,720 25,887
---------- ---------- ---------- ----------
Earnings (loss) before income taxes 2,817 (4,210) 7,570 (1,989)
Income taxes 15 -- 3 7
---------- ---------- ---------- ----------
Net earnings (loss) $ 2,802 $ (4,210) $ 7,567 $ (1,996)
========== ========== ========== ==========
Earnings (loss) per share $ 0.38 $ (0 .77) $ 1.03 $ ( 0. 44)
========== ========== ========== ==========
Weighted average shares outstanding 7,367,955 5,456,082 7,357,722 4,566,502
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
REDFED BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
-------------------------------
1997 1996
------- --------
Cash flows from operating activities:
Net earnings (loss) $ 7,567 $(1,996)
Adjustments to net earnings:
Loan fees collected 504 92
Depreciation and amortization 2,112 1,045
Provision for losses on:
Loans 800 2,449
Letters of credit -- 2,002
Net gain (loss) on sales of loans, investments and mortgage-backed
securities (12) 11
Net gain (loss) on sales of real estate, and premises and equipment 152 (322)
Sale of loan servicing portfolio -- (752)
Federal Home Loan Bank stock dividends received (307) (285)
Loans originated for sale (4,450) --
Proceeds from sale of loans held for sale 4,470 216
Increase (decrease) in:
Accrued expenses and other liabilities 1,310 2,831
Deferred income (427) (93)
Accrued interest receivable (901) (250)
Prepaid expenses and other assets (729) 2,114
------- --------
Net cash provided by operating activities 10,089 7,062
------- --------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to-maturity 14,000 30,500
Purchases of investments securities held-to-maturity (11,910) (31,592)
Proceeds from maturities of mortgage-backed securities available-for-sale 905 1,543
Principal repayments of mortgage-backed securities held-to-maturity 19,947 212
Loans originated for investment (95,725) (61,226)
Purchase of loans (126,065) (51,582)
Proceeds from sale of loan servicing portfolio -- 752
Purchase of Federal Home Loan Bank stock (822) (188)
Sale of Federal Home Loan Bank stock -- 1,000
Principal payments and reductions of loans, net 100,442 72,657
Proceeds from sale of real estate 7,418 20,138
Proceeds from sale of premises and equipment 8 189
Purchases of premises and equipment (659) (1,609)
------- --------
Net cash used in investing activities (92,461) (19,206)
------- --------
(Continued)
See accompanying notes to unaudited consolidated financial statements.
5
REDFED BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
------------------------------------
1997 1996
------------- -------------
Cash flows from financing activities:
Deposits, net of withdrawals, and interest credited $ 44,901 $ (15,200)
Proceeds from Federal Home Loan Bank advances 45,000 10,000
Repayment of Federal Home Loan Bank advances (15,000) (10,000)
Repayment of other borrowed money -- (9,073)
Proceeds from stock options exercised 201 232
Proceeds from issuance of common stock, net -- 24,073
Payment to acquire treasury stock -- (35)
------------- -------------
Net cash provided by (used in) financing activities 75,102 (3)
------------- -------------
Decrease in cash and cash equivalents (7,270) (12,147)
Cash and cash equivalents, beginning of period 33,746 30,985
------------- -------------
Cash and cash equivalents, end of period $ 26,476 $ 18,838
============= =============
Supplemental information:
Interest paid (including interest credited) $ 26,420 $ 21,187
Transfers from loans receivable to real estate 6,563 8,009
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 -- 7,642
Bond financing subject to real estate sales -- (7,642)
Transfer from loans to mortgage-backed securities held-to-maturity -- (5,950)
Transfer from mortgage-backed securities to off-balance
sheet letters of credit -- 5,590
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 September 30, 1997, the related
consolidated statements of operations for the three and nine months ended
September 30, 1997 and 1996 and the related consolidated statements of cash
flows for the nine months ended September 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 September 30, 1997, and results of consolidated operations for the three
and nine months ended September 30, 1997 and 1996 and consolidated cash
flows for the nine months ended September 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 nine months
ended September 30, 1997 of $0.38 and $1.03 per share respectively, were
based on net earnings of $2.8 million and $7.6 million, with weighted-
average common shares and common share equivalents outstanding during those
periods of 7,367,955 and 7,357,722 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 dilutive
to market price). This compares with a net loss per share for the three
and nine months ended September 30, 1996 of $(0.77) and $(0.44) per share,
respectively, based on net losses of $4.2 million and $2.0 million, with
weighted-average common shares outstanding during those periods of
5,456,082 and 4,566,502 (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 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
nine 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 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 a pledge of collateral. SFAS 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 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 ("SFAS 128"), "Earnings per
Share". SFAS 128 supersedes APB Opinion No. 15 ("APB 15"), "Earnings per
Share" and specifies the computation,
7
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. SFAS
128 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 ("SFAS 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 ("SFAS 130"), "Reporting
Comprehensive Income". SFAS 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 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 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 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 SFAS No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information". SFAS 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". SFAS 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 September 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 $967.3 million at September 30, 1997
compared to $882.5 million at December 31, 1996. The increase of $84.8 million
was primarily the result of a net increase in loans receivable of $113.8
million offset by a decrease in cash and cash equivalents of $7.3 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 $44.9 million, and an increase in FHLB advances of $30.0
million.
Loans receivable, net increased to $838.8 million at September 30, 1997, from
$725.0 million at December 31, 1996. The increase of $113.8 million for the nine
months ended September 30, 1997 consisted primarily of loan originations of
$95.7 million and loan purchases of $126.1 million offset by principal
repayments of $100.4 million, and $6.6 million of loans transferred to real
estate acquired through foreclosure ("REO") before initial write-down to fair
value. Mortgage-backed securities ("MBS") 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 September 30, 1997 totaled $835.7 million compared to $790.8
million at December 31, 1996. The increase of $44.9 million in savings deposits
is due primarily to an increase in premium money market and certificates of
deposit accounts, and the acquisition of approximately $12.0 million of
deposits. The Company also increased FHLB advances by $30.0 million during the
nine months ended September 30, 1997. Stockholders' equity increased to $80.5
million at September 30, 1997 from $72.1 million at December 31, 1996 primarily
as a result of earnings for the nine months ended September 30, 1997 of $7.6
million, ESOP and RRP amortization of $844,000 and an adjustment for unrealized
losses on securities available for sale of $369,000 offset by an adjustment for
the minimum pension liability of $410,000.
The primary funding sources for the purchase of loans were: the decrease in cash
and cash equivalents; the refinancing and repayment of mortgage-backed
securities held-to-maturity; the savings deposit increase; the FHLB advances,
and earnings for the nine months ended September 30, 1997. Loan originations
were primarily funded by loan principal repayments.
9
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 scheduled
amortization of loans are generally 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% as well to change other existing liquidity provisions. The
Bank's average liquidity ratios for the three months ended September 30, 1997
and December 31, 1996 were 7.24% and 7.43%, respectively. The Bank currently
attempts to maintain a liquidity ratio as close to the minimum requirements as
possible, since loans, MBS and other investments provide higher interest rates
than are available from liquid investments.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
General. The Company recorded net earnings of $2.8 million for the three
- -------
months ended September 30, 1997, or $0.38 per share, as compared to a net loss
of $4.2 million, or $(0.77) per share, for the three months ended September 30,
1996. The 1996 was affected by the one-time industry-wide special FDIC/SAIF
assessment of $5.4 million. For comparison purposes, without the one-time
special assessment, net earnings for the quarter ended September 30, 1996 were
$1.2 million, or $0.22 per share. Net earnings of $7.6 million, or $1.03 per
share, were recognized for the nine months ended September 30, 1997, as compared
to a net loss of $2.0 million, or $(0.44) per share, for the same period in
1996. Without the SAIF special assessment of $5.4 million, the net income for
the nine months ended September 30, 1996 would have been $3.4 million, or $0.75
per share. Net earnings of $2.8 million for the three months ended September 30,
1997 represents an increase of $1.6 million over the same period in 1996
(excluding the SAIF special assessment). This increase resulted from an increase
in net interest income of $252,000, a decrease of $88,000 in provision for
losses on loans, an increase in noninterest income of $354,000, a decrease in
general and administrative expenses of $300,000 (excluding the SAIF special
assessment) and a decrease in provision for losses on LOC of $590,000. Net
operating results for the nine months ended September 30, 1997 increased by $4.2
million to $7.6 million from $3.4 million (excluding the SAIF special
assessment) for the same period in 1996. This increase resulted primarily from
an increase in net interest income of $896,000, a decrease of $1.6 million in
provision for losses on loans, and a decrease in provision for losses on LOC of
$2.0 million, offset by an increase in general and administrative expenses of
$346,000 (excluding the SAIF special assessment).
Interest income. Interest income for the three months ended September 30, 1997
- ----------------
was $16.9 million compared to $15.2 million for the same period in 1996.
Interest income for the nine months ended September 30, 1997 was $48.6 million
compared to $45.7 million for the same period in the previous year. The increase
in interest income for the three months ended September 30, 1997 resulted from
an increase in average interest-earning assets of $90.5 million, partially
offset by a decrease of 2 basis points in the average yield for interest-earning
assets from 7.60% for the three months ended September 30, 1996 to 7.58% for the
three months ended September 30, 1997. The increase in interest income for the
nine months ended September 30, 1997 was due to an increase in average interest-
earning assets of approximately $65.8 million, partially offset by a decrease of
15 basis points in the average yield for interest-earning assets from 7.66% for
the nine months ended September 30, 1996 to 7.51% for the nine months ended
September 30, 1997.
Interest expense. Interest expense for the three months ended September 30,
- -----------------
1997 was $9.5 million compared to $8.1 million for the same period in 1996.
Interest expense for the nine months ended September 30, 1997 was $26.6 million
compared to $24.7 million for the same nine months in the previous year. The
increase for the three months ended September 30, 1997 was due to an increase of
$56.5 million in average interest-bearing liabilities and an increase in the
average cost for interest-bearing liabilities of 36 basis points, from 4.29% for
the three
10
months ended September 30, 1996 to 4.65% for the three months ended September
30, 1997. The increase in interest expense for the nine months ended September
30, 1997 was the result of an increase in average interest-bearing liabilities
of $25.1 million, and an increase of 18 basis points in the average cost for
interest-bearing liabilities, from 4.29% for the nine months ended September 30,
1996 to 4.47% for the nine months ended September 30, 1997.
Net interest income. Net interest income for the three months ended September
- --------------------
30, 1997 was $7.4 million compared to $7.1 million for the three months ended
September 30, 1996. The increase in net interest income of $252,000 is the
result of a net improvement of $33.9 million in the average dollar amounts of
interest-earning assets and interest-bearing liabilities for the three months
ended September 30, 1997 when compared to the same period in the previous year,
partially offset by a decrease in the interest rate spread. The decrease in the
interest rate spread of 38 basis points for the three months ended September 30,
1997 to 2.93% from 3.31% for the three months ended September 30, 1996 was a
result of a decrease in the average yield for interest-earning assets of 2 basis
points and an increase of 36 basis points in the average cost for interest-
bearing liabilities. Net interest income for the nine months ended September 30,
1997 was $21.9 million, compared to net interest income of $21.0 million for the
nine months ended September 30, 1996. The increase in net interest income of
$896,000 is the result of a net improvement of $40.7 million in the average
dollar amounts of interest-earning assets and interest-bearing liabilities for
the nine months ended September 30, 1997 when compared to the same period in the
previous year, partially offset by a decrease in the interest rate spread. The
decrease in the interest rate spread of 33 basis points for the nine months
ended September 30, 1997 to 3.04% from 3.37% for the nine months ended September
30, 1996 was a result of a decrease in the average yield for interest-earning
assets of 15 basis points and an increase of 18 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 NINE MONTHS ENDED
-------------------------------------------- --------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------- -------------------- -------------------- --------------------
(Dollars in thousands)
Average dollar amount of and
average yield earned on assets:
Loans and mortgage-backed
securities $830,229 7.69% $730,728 7.78% $799,955 7.65% $729,275 7.84%
Investment securities 60,059 6.06 69,102 5.76 61,878 5.78 66,779 5.69
-------- -------- --------- --------
Interest-earning assets $890,288 7.58 799,830 7.60 $861,833 7.51 796,054 7.66
======== ======== ========= ========
Average dollar amount of and
average rate paid on liabilities:
Deposits $795,505 4.63 744,926 4.27 $ 782,571 4.45 748,633 4.25
Borrowings 22,352 5.52 16,384 4.86 11,249 6.25 20,118 5.75
-------- -------- --------- --------
Interest-bearing liabilities $817,857 4.65 761,310 4.29 $ 793,820 4.47 768,751 4.29
======== ======== ========= ========
Interest rate spread 2.93% 3.31% 3.04% 3.37%
==== ==== ==== ====
Net interest margin 3.30% 3.52% 3.40% 3.52%
==== ==== ==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 108.86% 105.06% 108.57% 103.55%
======== ======== ========= ========
Provision for losses on loans, LOCs and real estate. The provision for losses
- ----------------------------------------------------
on loans was $283,000 for the three months ended September 30, 1997 compared to
$371,000 for the same period last year. The provision for losses
11
on loans was $800,000 for the nine months ended September 30, 1997 compared to
$2.4 million for the same period last year. The provision for losses on LOCs was
zero for the three and nine months ended September 30, 1997 compared to $590,000
and $2.0 million for the same periods in 1996.
The allowances for losses on loans, LOCs and real estate are established through
provisions reflecting 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.
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 NINE MONTHS ENDED
------------------------------------ ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER
1997 1996 1997 30, 1996
------------- ------------ ------------ ---------
(Dollars in thousands)
ALLOWANCE FOR LOSSES ON
LOANS:
Balance at beginning of
period $ 9,114 $11,242 $10,134 $14,745
Charge-offs, net of
recoveries (1,594) (1,464) (3,131) (7,045)
Provisions charged to income 283 371 800 2,449
------- ------- ------- -------
Balance at end of period 7,803 10,149 7,803 10,149
------- ------- ------- -------
ALLOWANCE FOR LOSSES ON
LOCS:
Balance at beginning of
period 7,624 6,606 7,624 7,447
Charge-offs, net of
recoveries -- 28 -- (2,225)
Provisions charged to income -- 590 -- 2,002
------- ------- ------- -------
Balance at end of period 7,624 7,224 7,624 7,224
------- ------- ------- -------
Total allowance for losses
on loans and LOCs $15,427 $17,373 15,427 17,373
======= ======= ======= =======
ALLOWANCE FOR LOSSES ON
REAL ESTATE: (1)
Balance at beginning of
period $ 1,366 2,841 1,640 9,496
Charge-offs, net of
recoveries (283) (601) (557) (7,256)
Provisions charged to income -- -- -- --
------- ------- ------- -------
Balance at end of period $ 1,083 $ 2,240 1,083 2,240
======= ======= ======= =======
TOTAL ALLOWANCE FOR LOSSES
ON LOANS, LOCS AND REAL
ESTATE: $16,510 $19,613 $16,510 $19,613
======= ======= ======= =======
General $15,491 $17,588 $15,491 $17,588
Specific 1,019 2,025 1,019 2,025
------- ------- ------- -------
TOTAL $16,510 $19,613 $16,510 $19,613
======= ======= ======= =======
(1) Includes specific valuation allowance for real estate held for sale of $253
at September 30, 1997 and $253 as of September 30, 1996.
The allowance for losses on loans, LOCs and real estate was $16.5 million at
September 30, 1997 and $19.6 million at September 30, 1996. The ratio of GVA for
losses on loans, LOCs and real estate to nonperforming assets and LOCs increased
to 120.86% at September 30, 1997 from 89.18% at December 31, 1996 as a result of
a $7.2 million decrease in nonperforming assets which more than offset a
decrease of $2.3 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 $1.0 million at September 30,
1997 and $2.0 million at September 30, 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 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.
Noninterest income. Noninterest income for the three months ended September 30,
- -------------------
1997 was $1.7 million compared to $1.4 million for the same period last year, a
net increase of $354,000. Noninterest income for the nine months ended September
30, 1997 was $5.1 million, a decrease of $153,000 from $5.3 million for the nine
months ended September 30, 1996. LOC and other fee income increased $336,000 and
$491,000 for the three and nine months ended September 30, 1997 when compared to
the same periods in the prior year. During the nine months ended September 30,
1996 a one-time gain on the sale of servicing in the amount of $752,000 was
recognized, offsetting the increase in fee income reported for the same period
in 1997.
Noninterest expense. Noninterest expense was $6.0 million for the three months
- --------------------
ended September 30, 1997, a decrease of $912,000 from $6.9 million for the same
period in 1996 (excluding the FDIC special assessment of $5.4 million).
Noninterest expense for the nine months ended September 30, 1997 was $18.7
million, a decrease of $1.7 million from $20.5 million for the same period in
1996 (excluding the FDIC special assessment). Included in noninterest expense is
general and administrative expense ("G&A") for the three-months ended September
30, 1997 of $5.7 million compared to $6.0 million for the same period in 1996
when the FDIC special assessment is excluded. G&A expense for the nine months
ended September 30, 1997 was $17.6 million, an increase from $17.3 million from
the same period in 1996 (when excluding the SAIF special assessment). The net
decrease of $300,000 for the three month comparisons was a result of a decrease
in occupancy and equipment of $134,000 and a decrease in federal deposit
insurance of $388,000, partially offset by an increase in of $220,000 in other
expense, net. The decrease in the FDIC premiums was a result of an improvement
in the Bank's regulatory rating. The increase of $346,000 for the nine month
comparisons was the result of an increase of $523,000 in compensation and
benefits expense primarily from a defined benefit plan adjustment as required by
SFAS 85 of $245,000 related to a prior overfunding in the plan and by $224,000
associated with the ESOP since, as the market value of the Company's stock
increases, GAAP requires the recognition of the fair value of the Company's
stock held by the ESOP for the employee participants. FDIC premiums decreased
by $559,000 for the nine months ended September 30, 1997 compared to the same
period in 1996. Other expenses, net increased by $347,000 for the nine months
ended September 30, 1997 compared to the same period in 1996. This increase was
primarily the result of an increase in advertising expense. The provision for
losses on LOCs decreased by $590,000 for the three months ended September 30,
1997 and $2.0 million for the nine months ended September 30, 1997 when compared
to the same periods in 1996. No provisions were necessary for the three and nine
months ended September 30, 1997. The Company's G&A to average assets was 2.58%
for the nine months ended September 30, 1997 compared to 2.41% for the nine
months ended September 30, 1996 and the Company's efficiency ratio was 65.13%
compared to 65.65% for the same periods, respectively (excluding the FDIC
special assessment).
13
NONPERFORMING ASSETS
The following table sets forth information regarding nonaccrual loans and REO,
net of specific valuation allowances:
AT SEPTEMBER AT DECEMBER
NONPERFORMING ASSETS: 30, 1997 31, 1996
-------------- --------------
(Dollars in thousands)
NONACCRUAL LOANS:
One-to four-family $ 6,041 $10,739
Multi-family 724 764
Commercial real estate 12 --
Developed lots 0 1,009
Tract construction and land 596 586
Consumer 246 200
-------------- --------------
Total nonaccrual loans 7,619 13,298
-------------- --------------
REO (1):
One- to four-family 2,845 3,169
Multi-family 516 422
Commercial real estate 177 461
Construction single family 0 372
Developed lots 1,147 1,757
Tract construction and land 413 458
Consumer 100 51
Total REO 5,198 6,690
-------------- --------------
Total nonperforming assets $12,817 $19,988
============== ==============
(1) Does not include effect of GVAs of $398 and $890 at September 30, 1997 and
December 31, 1996, respectively.
Nonaccrual loans net of specific valuation allowances at September 30, 1997 were
$7.6 million, which represents a decrease of $5.7 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 $4.7 million, and
a decrease of $1.0 million in nonaccrual developed lot loans due to improvement
of the borrowers' payment history and a stabilized regional economy.
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 a 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 decreased to $5.2 million at September 30, 1997 from $6.7 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 as a specific valuation allowance, if the carrying
value of real estate exceeds its fair value, less costs to sell.
Nonperforming assets are defined as nonperforming loans (as defined above) and
REO. Nonperforming assets were $12.8 million, or 1.19% of total assets and
LOCs, at September 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
14
balance of restructured loans was $4.6 million and $12.0 million at September
30, 1997 and December 31, 1996, respectively.
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 resolve nonperforming assets
quickly 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 of $766,000 and
$1.3 million at September 30, 1997 and December 31, 1996, respectively.
AT SEPTEMBER 30, AT DECEMBER 31,
1997 1996
----------------- ----------------
(Dollars in thousands)
SUBSTANDARD
LOANS:
One- to four-family $5,885 $ 11,934
Multi-family 4,068 5,619
Commercial real estate 14 653
Developed lots 576 1,220
Land -- 591
Consumer 255 358
----------------- ------------------
Total 10,798 20,375
----------------- ------------------
REO:
One- to four-family 2,845 3,169
Multi-family 516 422
Commercial real estate 177 461
Construction - single family -- 372
Developed lots 1,147 1,757
Land 413 458
Consumer 100 51
----------------- ------------------
Total 5,198 6,690
OFF-BALANCE SHEET LOCS: 4,362 4,375
----------------- ------------------
Total substandard 20,358 31,440
----------------- ------------------
DOUBTFUL
Multi-family -- 153
------------------ ------------------
TOTAL CLASSIFIED ASSETS $ 20,358 $ 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. When it is probable
that there is no possibility of recovering the full amount of the impaired loan,
the Company charges off the applicable portion of the impaired loan against the
valuation allowance. 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 SEPTEMBER 30, AT DECEMBER 31,
1997 1996
---------------- ---------------
(Dollars in thousands)
Nonaccrual loans:
Multi-family $ 330 $ 764
Commercial 11 --
Tract construction and land -- 586
TDR loans 4,624 12,001
Other impaired loans:
Multi-family 2,164 3,386
------ -------
$7,130 $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
September 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 is a reconciliation as of September 30, 1997 between the
Bank's capital under generally accepted accounting principles (GAAP) and
Regulatory Capital levels as presently defined under FIRREA.
REDLANDS FEDERAL BANK'S
REGULATORY CAPITAL REQUIREMENT
(Dollars in thousands)
------------------------------------------------------------
TANGIBLE CORE (TIER 1) RISK-BASED
CAPITAL CAPITAL CAPITAL
---------------- ---------------- ----------------
Capital of the Bank presented on a GAAP basis $76,248 $76,248 $76,248
Adjustments to GAAP Capital to arrive at
Regulatory Capital:
Securities valuation allowance 109 109 109
Investments in and advances to "nonincludable"
consolidated subsidiaries (1,425) (1,425) (1,425)
Other exclusions from capital (307) (307) (359)
General loan valuation allowance 8,884
------- ------- -------
Adjusted Capital 74,625 74,625 83,457
------- ------- -------
FIRREA regulatory capital requirement 14,333 28,666 56,357
------- ------- -------
Amount by which adjusted capital exceeds $60,292 $45,959 $27,100
requirement ======= ======= =======
The following table presents information regarding the Bank's compliance with
the additional capital requirements mandated by FDICIA, at September 30, 1997:
REGULATORY CAPITAL (FDICIA)
(Dollars in thousands)
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PURPOSES
------------------------------ ------------------------------ ------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------------ ------------ ------------ ------------ ------------
Total capital (to
risk-weighted assets) $83,457 11.85% $56,357 8.00% 70,446 10.00%
Core (Tier 1) capital (to
total assets) 74,625 7.81 38,221 4.00 57,332 6.00
Tier 1 leverage (to average
assets) 74,625 8.18 36,470 4.00 36,470 4.00
Tier 1 capital (to
risk-weighted assets) 74,625 10.59 28,179 4.00 28,179 4.00
Tangible capital (to total
assets) 74,625 7.81 38,221 4.00 47,777 5.00
18
SELECTED CONSOLIDATED RATIOS OF THE COMPANY
AT OR FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 (2)
----------------------- ----------------------
PERFORMANCE RATIOS: (1)
Return on average assets 1.11 % (0.28) %
Return on average equity 13.26 (4.99)
Equity to total assets 8.32 8.07
Book value per share (3) $ 11.21 $ 12.13
Interest rate spread during the period 3.04 % 3.37 %
Net interest margin 3.40 3.52
Average interest-earning assets to average interest-bearing liabilities 108.57 103.55
G&A expense to average assets 2.58 3.17
Efficiency ratio (4) 65.13 86.23
AT SEPTEMBER 30, AT DECEMBER 31,
1997 1996
----------------------- ----------------------
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans 0.87 % 1.76 %
Nonperforming assets to total assets and LOCs (5)(6) 1.19 2.02
Allowance for losses on loans and LOCs to total loans and LOCs 1.57 2.06
Allowance for losses on loans, LOCs and real estate to total assets and LOCs 1.53 1.96
GVAs for losses on loans to nonaccrual loans 98.04 70.03
GVAs for losses on loans, LOCs and real estate to total nonperforming 120.86 89.18
assets (5) (6)
Classified assets to total and LOCs (7) 1.89 3.20
GVAs to net classified assets (7) 76.06 56.42
________________
(1) Ratios for the nine-month periods have been annualized.
(2) If FDIC/SAIF special assessment of $5.4 million is excluded ROA would be
0.48%, ROE 8.55%, equity to total assets 8.69%, G&A expense to average
assets 2.41% and efficiency ratio 65.65%.
(3) Based on 7,178,505 and 7,082,781 shares at September 30, 1997 and 1996,
respectively, less treasury shares and uncommitted ESOP and RRP shares.
(4) G&A expense to net interest income plus total noninterest income. Excludes
provisions for losses on loans and other noninterest expense. For
comparison purposes the SAIF special assessment in the amount of $5.4
million in the 1996 period has been excluded from the calculation.
(5) Excludes troubled debt restructures which are currently performing under
their restructured terms.
(6) Nonperforming assets include nonperforming loans, nonperforming LOCs and
REO.
(7) Classified assets include loans, off-balance sheet LOCs and REO, net of
specific valuation allowance.
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. A settlement has been reached in that matter, and it is
expected to be dismissed prior to the end of the fourth quarter of
1997. The amount involved in the settlement is not material to the
operations of the Company.
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, 4 and 5 are 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 nine months ended September 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: November 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