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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO.: 0-23146
REDFED BANCORP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0588105
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 E. STATE STREET, REDLANDS, CALIFORNIA 92373
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (909) 793-2391
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
The Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant, is $139,594,120 and is based upon the last sales price as quoted
on The Nasdaq Stock Market for February 27, 1998.
The Registrant had 7,577,549 shares of common stock outstanding as of
February 27, 1998.
DOCUMENTS TO BE INCORPORATED BY REFERENCE
THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS WILL BE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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INDEX
PAGE
----
PART I
Item 1. Business....................................................... 1
General........................................................ 1
Market Area.................................................... 4
Lending Activities............................................. 5
Asset Quality.................................................. 14
Investment Activities.......................................... 20
Sources of Funds............................................... 22
Subsidiary Activities.......................................... 25
Competition.................................................... 25
Personnel...................................................... 25
Regulation..................................................... 26
Taxation....................................................... 33
Current Accounting Pronouncements.............................. 34
Item 2. Properties..................................................... 35
Item 3. Legal Proceedings.............................................. 35
Item 4. Submission of Matters to a Vote of Security Holders............ 35
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 36
Matters........................................................
Item 6. Selected Financial Data........................................ 37
Item 7. Management's Discussion and Analysis of Financial Condition and 39
Results of Operations..........................................
Item 8. Financial Statements and Supplementary Data.................... 52
Item 9. Changes in and Disagreements With Accountants on Accounting and 95
Financial Disclosure...........................................
PART III
Item 10. Directors and Executive Officers of the Registrant............. 95
Item 11. Executive Compensation......................................... 95
Item 12. Security Ownership of Certain Beneficial Owners and Management. 95
Item 13. Certain Relationships and Related Transactions................. 95
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- 96
K.............................................................
PART I
ITEM 1. BUSINESS
GENERAL
Redfed Bancorp Inc. (the "Company") was incorporated under Delaware law on
October 18, 1993, for the purpose of becoming the holding company for Redlands
Federal Bank, a federal savings bank (the "Bank"). On April 7, 1994, the
Company acquired the Bank in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Bank is one of the three largest financial institutions
headquartered in Southern California's Inland Empire region, a relatively less
urban area to the east of Los Angeles comprised of San Bernardino and
Riverside counties. During its 107-year history, the Bank has operated as a
community-oriented savings institution serving the residential loan and retail
deposit needs of the predominantly suburban and rural communities in its
market area. The Company is subject to regulation as a savings and loan
holding company by the Office of Thrift Supervision ("OTS"). The Bank is also
subject to regulation by the Federal Deposit Insurance Company (the "FDIC")
and the Securities and Exchange Commission ("SEC"). The Bank's customer
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
FDIC. The Bank is also a member of the Federal Home Loan Bank (the "FHLB") of
San Francisco. The Company's executive office is located at 300 E. State
Street, Redlands, California 92373; the telephone number is (909)793-2391.
On November 30, 1997, the Company signed a definitive Agreement and Plan of
Merger pursuant to which the Company will be acquired by, and merged into, a
wholly owned subsidiary of Golden State Bancorp Inc. ("Golden State"), the
parent of Glendale Federal Bank. Upon the closing of the acquisition, Golden
State will issue $20.75 of its common stock in exchange for each share of the
Company's common stock. The transaction will be treated as a tax free exchange
with the exact number of Golden State shares to be distributed to the
Company's stockholders to be determined based upon the average closing price
of Golden State's common stock on the New York Stock Exchange during the ten
trading days prior to the second business day before the closing of the
transaction. Consummation of the acquisition is subject to the approval of the
Company's stockholders and regulatory authorities. It is currently expected
that the acquisition will be consummated in the second quarter of 1998.
On February 4, 1998, Golden State entered into an Agreement and Plan of
Reorganization with First Nationwide (Parent) Holdings, Inc. ("FNPH"), First
Nationwide Holdings, Inc. ("FNH"), Golden State Financial Corporation, First
Gibraltar Holdings, Inc. and Hunter's Glen/Ford, Ltd. (the "California Federal
Merger Agreement"). FNH is the parent of California Federal Bank and is
controlled, through intermediate entities, by MacAndrews and Forbes Holdings,
Inc. ("MAF") and Gerald J. Ford ("Ford"), the Chairman of the Board and Chief
Executive Officer of California Federal Bank. Subject to certain conditions,
including the approval of Golden State's stockholders and regulatory
authorities, FNPH will be merged with and into Golden State (the "California
Federal Merger") pursuant to the California Federal Merger Agreement. If the
California Federal Merger is consummated, it is expected that affiliates of
MAF and Ford would together own between 42% and 45% of the combined entity,
before giving effect to the contingent issuance of Golden State common stock
under the California Federal Merger Agreement that could substantially
increase such percentage ownership. Upon the closing of the California Federal
Merger, two-thirds of the board of directors of Golden State will be
individuals designated by affiliates of MAF and Ford.
The Company offers a range of consumer and small business commercial
financial services to its customers, including retail and small business
commercial transaction and term deposits, single-family mortgage loans and
nonmortgage loans. The Company's single-family mortgage loan products include
adjustable and fixed rate conforming and nonconforming permanent loans, as
well as spot construction loans. The Company's nonmortgage loan products
include home equity and small business commercial lines of credit, Federal
Housing Administration ("FHA") Title I home improvement loans, credit card
loans, automobile loans, and secured and unsecured personal and small business
commercial loans. The Company invests in U.S. government and agency
1
securities, mortgage-backed securities and other investments permitted by
federal laws and regulations. The Company also offers insurance and securities
brokerage services through a subsidiary of the Bank.
The Company formerly originated substantial amounts of multi-family
residential real estate loans, as well as a lesser amount of loans secured by
small commercial and mixed use properties, tract developments and developed
and undeveloped land. Until 1993, the Company issued letters of credit
("LOCs") securing the repayment of tax exempt bonds issued by various local
governmental authorities in Southern California. Due to prior significant
losses in the Company's multi-family loan portfolio resulting from higher
defaults and substantial declines in the value of multi-family residential
properties during the Southern California recession beginning in 1991, the
Company substantially curtailed its multi-family lending activities, including
issuing tax exempt bond related LOCs, other than in connection with the
disposition of problem assets, and limited its tract construction, land
lending and commercial real estate lending activities.
The Company originates loans for investment and for sale and has purchased
loans to augment the loan portfolio. Loan sales are derived from loans held in
the Company's portfolio designated as being held for sale or originated during
the period and being so designated. Historically, the Company has retained the
bulk of the servicing rights of loans sold, however, in 1996 the majority of
these servicing rights were sold. The Company's revenues are derived
principally from interest on its mortgage loans, and to a lesser extent,
nonmortgage loans, and fees on LOCs, deposit accounts, income from
subsidiaries', mortgage loan servicing activities, and interest and dividends
on its investment and mortgage-backed securities portfolios. The Company's
primary source of funds are deposits, FHLB advances, principal and interest
payments on loans, and proceeds from the sale of loans. Through its wholly-
owned subsidiaries, the Company currently engages in the sale of insurance and
investment products on an agency basis. In addition, the Company formerly
engaged in real estate development activities through a subsidiary. No
development is now in process and any remaining real estate is held for sale.
2
The following tables set forth certain financial and operating information
with respect to the Company.
SUMMARY CONSOLIDATED FINANCIAL, OPERATING AND OTHER DATA OF THE COMPANY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
SUMMARY FINANCIAL
CONDITION DATA:
Total assets............ $1,009,754 $882,504 $871,814 $960,853 $916,846
Total liabilities....... 925,504 810,386 823,736 905,345 863,485
Stockholders' equity,
substantially
restricted............. 84,250 72,118 48,078 55,508 53,361
SUMMARY OPERATING DATA:
Interest income......... $ 66,508 $ 61,499 $ 64,224 $ 56,515 $ 59,436
Interest expense........ 36,731 33,038 38,366 29,869 30,869
---------- -------- -------- -------- --------
Net interest income..... 29,777 28,461 25,858 26,646 28,567
Provision for losses on
loans.................. 1,139 2,838 7,938 12,651 12,990
---------- -------- -------- -------- --------
Net interest income
after provision
for losses on loans.. 28,638 25,623 17,920 13,995 15,577
---------- -------- -------- -------- --------
Non-interest income..... 7,046 6,967 11,198 (1) 6,275 6,884
---------- -------- -------- -------- --------
General and
administrative ("G&A")
expense................ 23,985 29,227 (2) 24,285 27,195 25,458
Real estate & LOC
operations, net........ 1,200 3,713 12,794 18,265 3,916
---------- -------- -------- -------- --------
Total non-interest
expense................ 25,185 32,940 37,079 45,460 29,374
---------- -------- -------- -------- --------
Earnings (loss) before
income taxes......... 10,499 (350) (7,961) (25,190) (6,913)
Income taxes (benefit).. 66 7 124 1,150 (3,669)
---------- -------- -------- -------- --------
Net earnings (loss)... $ 10,433 $ (357) $ (8,085) $(26,340) $ (3,244)
========== ======== ======== ======== ========
Basic earnings (loss)
per share(9)........... $ 1.46 $ (0.07) $ (2.04) $ (6.14)(3) n/a
========== ======== ======== ======== ========
Diluted earnings (loss)
per share(9)........... $ 1.41 $ (0.07) $ (2.04) $ (6.14)(3) n/a
========== ======== ======== ======== ========
SUMMARY FINANCIAL RATIOS
AND OTHER DATA:
Return on average
assets................. 1.12% (0.04)% (0.86)% (2.79)% (0.35)%
Return on average
equity................. 13.43 (0.62) (15.05) (38.30) (6.00)
Equity to total assets.. 8.34 8.17 5.51 5.78 5.82
Interest rate spread.... 3.01 3.36 2.87 3.19 3.44
G&A to average assets... 2.57 3.40 (4) 2.59 2.88 2.74
Efficiency ratio(5)..... 65.14 82.50 (6) 65.54 (6) 82.61 71.81
REGULATORY CAPITAL
RATIOS:
Tangible and core
capital................ 7.81 7.73 5.24 5.65 5.42
Risk-based capital...... 11.94 11.52 8.17 8.59 8.11
ASSET QUALITY RATIOS:
Nonperforming assets to
total assets and
LOCs(7)(8)............. 1.14 2.02 4.53 4.46 3.17
Allowance for losses on
loans, LOCs and real
estate to total assets
and LOCs............... 1.46 1.96 3.28 2.85 1.95
General valuation
allowances for losses
on loans, LOCs and real
estate to total
nonperforming
assets(7)(8)........... 122.00 89.18 39.30 51.20 40.90
(See notes on following page)
3
- --------
(1) Includes curtailment gain of $3.4 million.
(2) Includes FDIC special assessment of $5.4 million.
(3) Loss per share data has been calculated based on the Company's net loss of
$24.4 million for the period April 7, 1994 (the date of the Company's
initial public offering) through December 31, 1994.
(4) G&A to average assets ratio, excluding FDIC special assessment is 2.77%.
(5) Efficiency ratio equals G&A expense to net interest income plus total non-
interest income. Excludes provisions for losses on loans and LOCs and real
estate operations.
(6) For the years ended December 31, 1996 and 1995 if FDIC special assessment
of $5.4 million and curtailment gain on retirement plan of $3.4 million
were excluded, the efficiency ratio would be 67.20% and 72.14%,
respectively.
(7) Excludes troubled debt restructures which are currently performing under
their restructured terms.
(8) Nonperforming assets include nonperforming loans, LOCs and real estate
acquired through foreclosure.
(9) Earnings per share data have been restated to reflect the adoption of
Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
MARKET AREA
The Company's fourteen banking offices are located in Redlands, California
and other population centers in the western portions of San Bernardino and
Riverside counties that comprise the Inland Empire region of Southern
California. Although portions of the region have experienced substantial
residential real estate development targeted toward commuters employed in
neighboring Los Angeles and Orange counties, the Company's market area remains
less urbanized than Los Angeles and Orange counties. The Inland Empire has a
diversified economy that includes manufacturing, retail sales and agricultural
sectors, as well as employment related to local government, universities and
major health care facilities. Transportation (rail and trucking), distribution
and related activities are an important part of the current Inland Empire
economy and are expected to increase, with the Inland Empire providing a
staging area for the shipment of goods between the Pacific Rim and the United
States through the ports of Los Angeles and Long Beach, California. According
to a recent economic study, the Inland Empire possesses a number of
characteristics that make it attractive for business, when compared to other
major Southern California counties, including the lowest average home prices,
the lowest industrial space cost, the lowest average pay level and one of the
highest growth in employment rates.
Virtually all of the Company's lending origination activities are conducted
in the Company's market area located in the Inland Empire and other areas of
Southern California; and a significant portion of the Company's assets are
invested in loans that are secured by multi-family and, to a lesser extent,
commercial real estate located in these areas. During 1997 and 1996 the
Company significantly increased purchases of one-to-four family mortgage loans
in California. Beginning in 1991, Southern California, including the Inland
Empire, experienced an economic recession as a result of a decline in the
defense industry, including military base closures and downsizings, corporate
relocations and general weakness in the real estate market. This recession was
characterized by, among other things, high levels of unemployment, declining
business and real estate activity, significant increases in vacancies in
multi-family residential and commercial properties, declining rents and
property values and slowing sales of new one-to four-family residential
properties. Loan delinquencies increased and the underlying values of many
properties securing loans declined, resulting in substantial losses to lending
institutions. The recession caused substantial increases in the Company's
levels of nonperforming assets, particularly in its multi-family lending and
LOC portfolios, and in its provisions for loan and real estate losses, as well
as a decline in interest income. While the Inland Empire economy has recently
exhibited positive employment, economic and real estate trends, there is no
assurance that such trends will continue. A worsening of current economic
conditions in the Company's primary lending area would have an adverse effect
upon the Company's business and operations, including the level of the
Company's delinquencies and nonperforming and classified assets, the magnitude
of its provisions for loan and real estate losses, the value of the collateral
securing
4
the Company's mortgage loans and its portfolio of real estate acquired through
foreclosure ("REO") and the demand for new loan originations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Asset Quality."
The Company's deposit gathering activities are concentrated in the areas
surrounding its home and thirteen branch offices. Due to its community and
customer service orientation, together with its long history in the Inland
Empire, the Bank has developed strong depositor loyalty and significant
deposit market shares in the communities it serves. During December 1996 the
Company concluded the acquisition of $17.5 million in deposit liabilities from
another local area bank, and in September 1997 another $12.0 million in
deposits were acquired. During 1997 the Company expanded its product lines to
include small business banking services.
LENDING ACTIVITIES
General. The Company emphasizes the origination of one-to-four family
residential loans, including loans secured by existing homes and spot
construction loans. Substantially all of the Company's one-to-four family
originated mortgage loans are secured by property located in Southern
California. The Company also purchases one-to-four family mortgage loans
primarily in California. During 1997, the Company expanded its conduit program
for Federal Housing Administration ("FHA"), Veterans Administration ("VA") and
nonconforming mortgage loan production. The Company also expanded its small
business commercial lines of credit and small business commercial loan
programs and has historically made other types of nonmortgage loans including
home equity lines of credit, FHA Title I home improvement loans, credit card
loans, mobile home loans, new and used automobile and recreational vehicle
loans, secured and unsecured personal loans (collectively, "consumer and other
loans"). Prior to 1993, the Company also originated multi-family residential
mortgage loans and issued LOCs and, to a lesser extent, tract construction and
land development and commercial real estate loans. However, in recent periods,
the Company has substantially curtailed the origination of multi-family
residential units, including issuing tax-exempt bond related LOCs, except in
connection with the sale of problem assets, and limited the origination of
tract construction, land development loans and commercial real estate loans.
This was due to adverse conditions in the Company's primary lending market
which previously led to increases in the levels of delinquencies and
nonperforming and restructured loans in these portfolios.
Loan originations and purchases for the year ended December 31, 1997 were
$334.7 million compared to $158.1 million for the year ended December 31,
1996. The increase in the loan activity was a result of the Company's business
plan to expand lending origination and purchase activity and thereby increase
assets.
Since 1982, the Company has emphasized the origination of adjustable rate
mortgage ("ARM") loans for retention in its portfolio in order to increase the
percentage of loans with more frequent repricing. Most of these ARM loans have
rates based on the FHLB Eleventh District Cost of Funds Index ("COFI"), which
is comprised of the average cost of funds of all savings institutions that are
members of the FHLB of San Francisco. In 1997 the Company increased ARM loans
tied to the one year Constant Maturity Treasury Index ("CMT"), which responds
more quickly to market conditions than the COFI, which is a lagging index. At
December 31, 1997, 92.59% of the Company's total mortgage loan portfolio were
ARM loans, of which 82.85% had interest rates tied to the COFI, 14.44% had
interest rates tied to the CMT and 2.71% had interest rates tied to other
indices. At December 31, 1996, approximately 93.00% of the Company's mortgage
loan portfolio were ARM loans, of which 94.00% had interest rates tied to the
COFI and 6.00% had interest rates tied to the CMT. During 1997 the Company
retained only a limited amount of its fixed rate loan production in its
portfolio.
Loan Portfolio Composition. At December 31, 1997, the Company had total
loans outstanding of $923.5 million, of which $579.0 million, or 62.70%, were
one-to-four family residential mortgage loans and $161.6 million, or 17.50%,
were multi-family residential mortgage loans. At that same date, 93.44% of the
Company's one-to-four family mortgage loans, 96.73% of its multi-family
residential mortgage loans and 84.25% of its other mortgage loans had
adjustable interest rates. At December 31, 1996, the Company had total loans
outstanding of $754.9 million, of which $426.0 million, or 56.43%, were one-
to-four family residential mortgage loans and $170.5 million, or 22.59% were
multi-family residential mortgage loans. At that same date,
5
92.55% of the Company's one-to-four family mortgage loans, 96.19% of its
multi-family residential mortgage loans and 90.34% of its other mortgage loans
had adjustable interest rates. Further information concerning the composition
of the Company's loan portfolio at December 31, 1997 and at the prior dates
indicated is set forth in the following table.
LOAN PORTFOLIO COMPOSITION
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ----------------- ----------------- ------------------
PERCENT PERCENT
PERCENT PERCENT OF OF PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- ------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One-to-four family(1).. $578,980 62.70% $425,970 56.43% $334,691 46.52% $349,386 43.88% $277,196 40.74%
Multi-family(2)........ 161,645 17.50 170,543 22.59 186,375 25.90 213,057 26.76 220,768 32.45
Commercial real
estate................ 69,416 7.52 75,235 9.97 74,339 10.33 70,963 8.91 72,664 10.68
Spot construction(3)... 42,924 4.65 21,036 2.79 47,512 6.60 73,688 9.25 28,790 4.23
Developed lots......... 27,344 2.96 35,221 4.66 47,598 6.62 52,961 6.65 43,571 6.40
Tract construction and
land.................. 261 0.03 1,048 0.14 2,705 0.38 6,596 0.83 9,690 1.42
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans. 880,570 95.36 729,053 96.58 693,220 96.35 766,651 96.28 652,679 95.92
Consumer and other
loans(4)............... 42,888 4.64 25,804 3.42 26,287 3.65 29,584 3.72 27,731 4.08
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.......... 923,458 100.00% 754,857 100.00% 719,507 100.00% 796,235 100.00% 680,410 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed portion of
construction loans.... (20,198) (12,390) (18,467) (39,801) (14,617)
Unamortized discounts
or premiums and net
deferred loan
origination fees...... (468) (2,471) (3,311) (4,428) (4,750)
Allowance for losses
on loans.............. (7,736) (10,134) (14,745) (18,874) (15,373)
-------- -------- -------- -------- --------
$895,056 $729,862 $682,984 $733,132 $645,670
======== ======== ======== ======== ========
- -------
(1) Includes loans held for sale.
(2) Excludes LOCs.
(3) Consists of spot construction loans in the construction phase; such loans
that are in the permanent loan phase generally are included in one-to-four
family mortgage loans.
(4) Included in consumer loans are $2.1 million, $1.6 million, $1.3 million,
$1.5 million and $1.4 million of small business commercial LOCs and
secured and unsecured small business commercial loans at December 31,
1997, 1996, 1995, 1994 and 1993, respectively.
6
Loan Maturity. The following table shows the maturity of the Company's loans
at December 31, 1997.
LOAN MATURITY
AT DECEMBER 31, 1997
---------------------------------------------------------------------------------------------
TRACT
ONE-TO- MULTI- COMMERCIAL SPOT DEVELOPED CONSTRUCTION CONSUMER TOTAL LOANS
FOUR FAMILY FAMILY REAL ESTATE CONSTRUCTION LOTS AND LAND AND OTHER RECEIVABLE
----------- -------- ----------- ------------ --------- ------------ --------- -----------
(DOLLARS IN THOUSANDS)
Amount due:
Within one year........ $ 1,202 $ 1,042 $ 1,378 $ 6,896 $ 272 $261 $ 8,699 $ 19,750
-------- -------- ------- ------- ------- ---- ------- --------
After one year:
More than one to
three years......... 1,807 102 4,600 1,638 442 -- 3,720 12,309
More than three to
five years.......... 1,098 5,438 2,447 -- 104 -- 16,484 25,571
More than five to 10
years............... 3,069 23,645 8,147 -- 5,524 -- 6,604 46,989
More than 10 to 20
years............... 34,395 54,149 24,908 1,318 19,841 -- 3,975 138,586
Over 20 years........ 537,409 77,269 27,936 33,072 (1) 1,161 -- 3,406 680,253
-------- -------- ------- ------- ------- ---- ------- --------
Total due after one
year.............. 577,778 160,603 68,038 36,028 27,072 -- 34,189 903,708
-------- -------- ------- ------- ------- ---- ------- --------
Total amount due... 578,980 161,645 69,416 42,924 27,344 261 42,888 923,458
Loans in process........ (795) -- (493) (18,881) -- -- (29) (20,198)
Unearned discounts or
premiums and net
deferred loan
origination fees....... 1,375 (816) (229) (551) (231) -- (16) (468)
Allowance for losses on
loans.................. (2,516) (2,500) (800) (200) (701) (100) (919) (7,736)
-------- -------- ------- ------- ------- ---- ------- --------
577,044 158,329 67,894 23,292 26,412 161 41,924 895,056
-------- -------- ------- ------- ------- ---- ------- --------
Loans held for sale..... (4,051) -- -- -- -- -- -- (4,051)
-------- -------- ------- ------- ------- ---- ------- --------
$572,993 $158,329 $67,894 $23,292 $26,412 $161 $41,924 $891,005
======== ======== ======= ======= ======= ==== ======= ========
- --------
(1) Assumes spot construction loans will convert to permanent one-to-four
family loans upon completion of construction.
The following table sets forth at December 31, 1997, the dollar amount of all
loans due after December 31, 1998, and whether such loans have fixed interest
rates or adjustable interest rates.
LOANS BY INTEREST RATE TYPE
DUE AFTER DECEMBER 31, 1998
---------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
One-to-four family................................ $36,394 $541,384 $577,778
Multi-family...................................... 5,276 155,327 160,603
Commercial real estate............................ 9,444 58,594 68,038
Spot construction ................................ 1,638 34,390 36,028
Developed lots.................................... 221 26,851 27,072
Consumer and other loans.......................... 27,187 7,002 34,189
------- -------- --------
Total loans..................................... $80,160 $823,548 $903,708
======= ======== ========
7
The following table sets forth the Company's loan originations, purchases,
sales and principal repayments periods indicated:
LOAN ACTIVITY
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Beginning balance (gross)...... $ 754,857 $ 719,507 $ 796,235
------------ ------------ -----------
Loans originated:(1)
One-to-four family(2)........ 53,712 37,698 33,648
Multi-family(3).............. 6,862 8,404 3,088
Commercial real estate....... 7,878 -- 7,010
Spot construction............ 42,904 21,050 36,725
Developed lots............... 1,464 270 10,868
Tract construction and land.. 3,940 -- --
Consumer and other loans..... 29,312 19,953 21,057
------------ ------------ -----------
Total loans originated..... 146,072 87,375 112,396
Loans purchased................ 188,671(5) 70,699(5) 1,585
------------ ------------ -----------
Total ..................... 334,743 158,074 113,981
------------ ------------ -----------
Transfer of loans to REO(4).... (11,074) (13,811) (22,124)
Principal repayments........... (150,618) (108,635) (91,890)
Sales of loans................. (4,450) (278) (76,695)
------------ ------------ -----------
Ending balance (gross)......... $ 923,458 $ 754,857 $ 719,507
============ ============ ===========
- --------
(1) Includes loans made to facilitate the sale of real estate.
(2) Includes loans held for sale.
(3) Excludes LOCs.
(4) Excludes allowance for losses on loans and unamortized deferred loan fees
on loans transferred to REO.
(5) Excludes premiums (net of discounts) of $2,361 for 1997 and $444 for 1996.
One-to-Four Family Mortgage Lending. The Company offers both fixed rate
mortgage loans and ARM loans with maturities of up to 40 years secured by one-
to-four family residences which are located in the Company's primary market
area. Loan originations are primarily obtained through Company employed loan
representatives who are compensated on a commission basis, and, to a lesser
extent, from wholesale loan brokers. Loan originations that satisfy the
Company's underwriting criteria are solicited from existing or past customers,
members of the local community, realtors in the Company's market area, and
wholesale loan brokers.
The Company's policy is to originate one-to-four family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or the selling
price of the property securing the loan, or up to 95% of the lower of the
appraised value or selling price if private mortgage insurance is obtained.
Title and casualty insurance are required on all loans. Mortgage loans
originated by the Company generally include due-on-sale clauses which provide
the Company with the contractual right to declare the loan immediately due and
payable in the event the borrower transfers ownership of the property without
the Company's consent. Due-on-sale clauses are a means of adjusting the rates
on the Company's fixed rate mortgage loan portfolio and the Company has
generally exercised its rights under these clauses.
Of the $579.0 million of one-to-four family residential mortgage loans
outstanding at December 31, 1997, 6.56% were fixed rate loans and 93.44% were
ARM loans. The interest rates for the majority of the Company's ARM loans are
indexed to the monthly weighted average COFI. During 1995, the Company
introduced loans tied to the one year CMT, a current rate index, and during
1997 introduced loans tied to the Twelve Month
8
Moving Average of One Year Treasury ("12MAT") and London Inter Bank Offering
Rate ("LIBOR"). The Company offers a number of ARM loan programs with interest
rates which adjust monthly, quarterly, semi-annually or annually. At December
31, 1997, $64.0 million of the Company's one-to-four family ARM loans had
payment schedules that permit "negative amortization," that is, a portion of
the interest accrued on loans whose interest rates have adjusted upward due to
an interest rate index increase are not payable currently (due to monthly
payment caps) and are instead added to loan principal. Negative amortization
involves a greater risk to the Company during periods of rising interest rates
because the loan principal may increase above the amount originally advanced,
thereby increasing the Company's risk of loss in the event of default. At
December 31, 1997, the aggregate balances of such one-to-four family loans at
that date exceeded the original amounts advanced by $389,000. The Company
believes that the resulting risk of default is not material due to the
underwriting criteria and relatively low loan-to-value ratios applied by the
Company in originating such loans, and the stability to the borrower provided
by the payment schedules.
The Company also originates loans secured by second mortgages on single
family residences. These second mortgage loans are originated either as fixed
rate loans with terms of up to 15 years or as ARM loans which adjust either
monthly or semi-annually and have terms of up to 30 years. These loans are
generally subject to an 80% combined loan-to-value limitation, including any
other outstanding mortgage or lien on the property. At December 31, 1997 the
Company had $2.1 million of loans secured by second mortgages on single family
residences on which the Company did not also have the first lien mortgage.
At December 31, 1997, $6.2 million of the Company's one-to-four family
residential mortgage loans were nonaccrual as compared to $10.7 million at
December 31, 1996 and $8.8 million at December 31, 1995. One-to-four family
REO at December 31, 1997 amounted to $2.5 million, compared to $3.2 million at
December 31, 1996 and $5.4 million at December 31, 1995. See "--Asset
Quality--Nonperforming Assets."
Multi-family Lending; LOCs. The Company formerly originated multi-family
mortgage loans generally secured by apartment complexes located in Southern
California. Of the $161.6 million of multi-family mortgage loans outstanding
at December 31, 1997, 3.27% were fixed rate loans and 96.73% were ARM loans;
$96.4 million, or 61.68%, of the ARM loans had payment schedules that permit
negative amortization, although none of these loans currently have loan
balances exceeding the original amounts advanced. Since 1993, the Company has
substantially curtailed the origination of multi-family loans except in
connection with the sale of problem assets or to existing qualifying
customers. This action was taken as a result of adverse market conditions that
had previously led to increases in the level of delinquencies, nonperforming
and restructured loans in this portfolio. At December 31, 1997,
$136.1 million, or 84.2%, of the multi-family mortgage loan portfolio had been
originated prior to January 1, 1996. Twenty-two multi-family loans with an
outstanding balance of $13.2 million were originated during 1996 and 1997,
primarily as a result of the sale of REO.
In reaching its decision on whether to make a multi-family loan, the Company
considers the qualifications of the borrower as well as the underlying
security, including the net operating income of the mortgaged premises before
debt service and depreciation; the debt service coverage ratio (the ratio of
such net operating income to required principal and interest payments); and
the ratio of the loan amount to appraised value. Pursuant to the Company's
underwriting policies, a multi-family mortgage loan may only be made in an
amount up to 75% (85% in connection with the sale of a multi-family REO) of
the lesser of the appraised value or sales price of the underlying property
and with a debt service coverage ratio of 1.2x. Properties securing a loan are
appraised by a licensed appraiser. Title and casualty insurance are required
on all loans.
When evaluating the qualifications of the borrower for a multi-family loan,
the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar properties
and the Company's lending experience with the borrower. The Company's
underwriting policies require that the borrower be able to demonstrate strong
management skills and the ability to maintain the property from current rental
income. The borrower must also present evidence of the ability to repay the
loan and a history of making mortgage payments on a timely basis. In making
its assessment of the creditworthiness of the borrower, the Company generally
reviews the financial statements, employment and credit history of the
9
borrower, as well as other related documentation. The Company's largest multi-
family loan at December 31, 1997 had an outstanding balance of $4.9 million
and was secured by an apartment complex located in Loma Linda, California. The
average outstanding multi-family loan balance at December 31, 1997, excluding
LOCs, was $567,000. At December 31, 1997, the multi-family loan portfolio
consisted of 285 loans with an aggregate outstanding balance of $161.6
million, or 17.50% of total loans. Of this amount, $942,000, or 0.58% of the
multi-family loan portfolio, was nonaccrual, as compared to $764,000, or 0.45%
of the multi-family loan portfolio, at December 31, 1996, and $6.1 million, or
3.28% of the multi-family loan portfolio, at December 31, 1995. Multi-family
REO amounted to $888,000, $422,000 and $17.8 million at December 31, 1997,
1996 and 1995, respectively. See "--Asset Quality--Nonperforming Assets."
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than one-
to-four family residential mortgage loans. Because payments on loans secured
by multi-family properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject, to a
greater extent, to adverse conditions in the real estate market or the
economy. The Company seeks to minimize these risks through its underwriting
policies, which require such loans to be qualified at origination on the basis
of the property's income and debt service coverage ratio. In addition, higher
market interest rates could cause an increase in the Company's nonperforming
multi-family loans to the extent that borrowers are unable to pay higher
interest rates on adjustable rate loans. Some of the Company's multi-family
loans have marginal debt service coverage ratios due to vacancies and the
inability of landlords to increase rental rates in the current economic
environment.
From 1982 through 1993, a significant business activity for the Company
involved the issuance of direct pay LOCs for the purpose of providing
assurance to bondholders of the payment of principal and interest on tax-
exempt bonds issued to finance the acquisition or development of multi-family
housing. Under the terms of the related bond financing, up to 25% of the units
in the multi-family project must typically be reserved for low and moderate
income rental purposes, although in some cases a greater percentage is
required to be reserved. In most of these transactions, the FHLB issues a
stand-by letter of credit securing the Company's LOC and the Company pledges
unrelated loans and mortgage backed securities ("MBS") in an amount sufficient
to secure the Company's obligation to reimburse the FHLB in the event of any
draw on the FHLB's letter of credit. Because of the direct pay nature of the
Company's LOCs in these transactions, the Company must make all payments on
the related bonds as such payments become due, including regular interest
payments and payments of principal due at maturity or upon default, and then
obtain reimbursement for such payments from the payments required to be made
by the owners of the related multi-family housing projects on the mortgage
loans underlying the bonds. In the event that the borrower fails to perform
its reimbursement obligations, the Company may, among other things, foreclose
on the project. Such foreclosure may generally be accomplished without causing
a default on the related issue of bonds, with the result that the benefit of
any favorable financing represented by the interest rate on the bonds may, in
effect, be made available to a subsequent purchaser of the multi-family
project from the Company after such foreclosure. The term "LOC" is used herein
to refer to the letter of credit issued by the Company, the related mortgage
or deed of trust taken by the Company as security for the reimbursement
obligations of its LOC account party (i.e., the developer or owner of the
project) and all related rights. The Company has discontinued issuing any new
LOCs, except on the sale of existing LOC properties foreclosed on by the
Company or the restructuring of existing LOCs.
The Company typically received an origination fee of between 1% and 2% of
the amount of its LOC when issued and receives a fixed annual fee of between
1.30% and 2.00% for each year in which the related bonds are outstanding.
The LOCs are not reflected on the Company's statement of financial condition
unless the properties securing the LOCs are either foreclosed upon by the
Company or treated as in-substance foreclosures. Upon foreclosure or in-
substance foreclosure, the foreclosed property is included in the Company's
recorded assets at its fair value and the related tax-exempt bond financing
supported by the Company's LOC is concurrently included in the Company's
recorded liabilities.
10
The credit risks to the Company posed by an LOC include risks identical to
those that would be involved if the Company had made a conventional multi-
family loan in the amount of the LOC. LOCs may also involve certain prepayment
risks not directly related to the economic viability or value of the related
multi-family property. Failure of the project owner to comply with the low and
moderate income set aside requirements could result in default and
acceleration of the maturity of the related bond financing. In addition, most
of the LOCs were issued in connection with variable rate bond financings in
which individual bondholders may "put" their bonds back to the issuer on seven
days' advance notice, in which event the bonds must either be remarketed to
new holders within the seven-day notice period by the firm engaged for such
purpose (which is not the Company) pursuant to the LOC arrangements or
prepaid. If the project owner is not able to pay the amounts required in the
event of either acceleration of the bonds on default or required prepayment if
not successfully remarketed, the Company would be required to rely on its
mortgage security to obtain reimbursement of the bond principal and interest
amounts paid by it under its direct pay LOCs. A specialized firm is engaged
with respect to each LOC project to monitor compliance with the low and
moderate income set aside requirements of the related bond financing and the
Company has not to date experienced any bond defaults resulting from such
requirements, nor has it experienced any instance of required bond prepayments
resulting from failure to successfully remarket a bond.
The Company applies the same underwriting criteria to the LOCs as to multi-
family loans. As with conventional multi-family loans, the performance of the
LOCs previously was adversely affected by the recessionary economic conditions
in the Company's primary market area. However, because the LOCs carry
significantly lower interest rates than conventional multi-family loans, the
amount of net operating income required to service the LOCs is correspondingly
less than for conventional multi-family loans. In accordance with generally
accepted accounting principles and applicable regulatory requirements, the
economic benefit of such financing as compared with normal financing costs
(the "bond enhancement value") is taken into account, to the extent it will
remain outstanding, in determining the fair value of the LOC arrangement at
the time of foreclosure or in-substance foreclosure.
At December 31, 1997, 22 LOCs in the aggregate amount of $108.8 million were
outstanding. An allowance for losses on the Company's LOCs in the amount of
$7.6 million was included in other liabilities at December 31, 1997 and 1996.
The Company's largest LOC at December 31, 1997, had an outstanding balance of
$7.5 million and is secured by an apartment complex located in Corona,
California. The average outstanding LOC balance at December 31, 1997 was $4.9
million. See "--Asset Quality--Nonperforming Assets." Since the inception of
the LOC program in 1985, the Company has recognized losses in the amount of
$14.4 million, or 23.20% of $62.1 million LOCs that have been nonperforming in
the past, or 10.19% of the aggregate original amount of LOCs.
Commercial Real Estate Lending. The Company has historically originated
commercial real estate loans that are generally secured by properties used for
business purposes such as skilled nursing care facilities and small office
buildings located in the Company's primary market area. Of the $69.4 million
of commercial loans outstanding at December 31, 1997, 15.29% were fixed rate
loans and 84.71% were ARM loans; $26.0 million, or 37.42%, of the ARM loans
had payment schedules that permit negative amortization, although none of
these loans currently have loan balances exceeding the original amounts
advanced. Due to adverse market conditions, the Company has generally limited
the origination of commercial real estate loans except in connection with the
sale of problem assets or to existing credit-worthy customers. See "--Lending
Activities--General." The Company's underwriting procedures provide that
commercial real estate loans may be made in amounts up to 75% (85% in
connection with the sale of a commercial REO) of the lesser of the appraised
value or the sales price of the property. These loans may be made with terms
of up to 30 years and are indexed to the COFI or the one year CMT. The
Company's underwriting standards and procedures for commercial loans are
similar to those applicable to its multi-family loans, under which the Company
considers the net operating income of the property and the borrower's
expertise, credit history and profitability. The Company has generally
required that the properties securing commercial real estate loans have debt
service coverage ratios of at least 1.2x. The largest commercial real estate
loan in the Company's portfolio at December 31, 1997 had an outstanding
balance of $5.6 million and is secured by a commercial office building located
in Redlands, California. The average
11
outstanding loan balance of commercial real estate loans at December 31, 1997
was $375,000. At December 31, 1997, the commercial real estate loan portfolio
consisted of 185 loans with an aggregate outstanding balance of $69.4 million,
or 7.52% of total loans. Of this amount, $61,000, or 0.09%, were nonaccrual at
December 31, 1997, as compared to none at December 31, 1996 and $223,000, or
0.30%, at December 31, 1995. Commercial REO amounted to $177,000, $461,000 and
$536,000 at December 31, 1997, 1996 and 1995, respectively. See "--Asset
Quality--Nonperforming Assets."
Loans secured by commercial real estate, like multi-family loans, are
generally larger and involve a greater degree of risk than one-to-four family
residential mortgage loans. Because payments on loans secured by commercial
real estate are often dependent on successful operation or management of the
properties, repayment of such loans may be subject, to a greater extent, to
adverse conditions in the real estate market or the economy. The Company seeks
to minimize these risks through its underwriting standards, which require such
loans to be qualified on the basis of the property's income and debt service
coverage ratio.
Spot Construction Loans. The Company originates spot construction loans to
individuals who intend to occupy the home upon completion as their primary
residence. The properties securing such loans are spread out geographically
throughout the Company's market area, and thus avoid or reduce most of the
risks associated with large tract construction loans. These loans typically
have a construction term of twelve months and at the completion of the
construction phase automatically convert to an adjustable rate permanent
mortgage loan. When these loans are converted to permanent mortgage loans they
are reclassified as one-to-four family residential mortgage loans. At December
31, 1997, $72.9 million of the $579.0 million of one-to-four family
residential mortgage loans were spot construction loans that had converted to
the permanent loan phase.
The Company's policies provide that spot construction loans may be made in
amounts up to 80% of the appraised (as built) value, with a minimum 20% cash
investment in the property by the borrower . As part of the loan approval
process, Company personnel with relevant construction experience review the
borrower's proposed construction costs. The Company requires that any excess
of its construction cost estimates over 80% of the appraised value be paid by
the borrower in cash at the origination of the loan. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
At December 31, 1997, the Company had $42.9 million of spot construction
loans, or 4.65% of the Company's total loan portfolio. At December 31, 1997
and 1996 no spot construction loans were nonaccrual. At December 31, 1995,
only one spot construction loan, with an outstanding balance of $418,000, was
nonaccrual. No spot construction loans were included in REO at December 31,
1997, as compared to $372,000 at December 31, 1996 and none at December 31,
1995. See "--Asset Quality--Nonperforming Assets."
Developed Lot Loans. At December 31, 1997, the Company had $27.3 million of
developed lot loans, comprising 2.96% of total loans. Developed lot loans are
loans made to individual borrowers secured by developed building lots,
typically intended for future construction of a home, rather than bulk loans
to builders to finance the builders' lot inventories. Of the Company's
developed lot loans, $251,000, or 0.92% of such loans, were nonaccrual at
December 31, 1997, as compared to $1.0 million, or 2.86% of such loans, at
December 31, 1996, and $1.0 million, or 2.18% of such loans, at December 31,
1995. Developed lots in the amount of $903,000 were classified REO at December
31, 1997, as compared to $1.8 million at 1996 and 1995, respectively. See "--
Asset Quality--Nonperforming Assets."
Tract Construction and Land Development Lending. At December 31, 1997, the
Company had loans of $261,000, or 0.03% of total loans, in the category of
tract construction and land development loans. At December 31, 1997, none of
the Company's tract construction and land loans were nonaccrual, compared to
$586,000, or 55.92%, at December 31, 1996 and $581,000, or 21.48%, at December
31, 1995. Tract construction and land loans classified as REO amounted to
$413,000, $458,000 and $463,000 at December 31, 1997, 1996, and 1995,
respectively. See "--Asset Quality--Nonperforming Assets."
12
Consumer and Other Loans. The Company also offers loans in the form of home
equity lines of credit and FHA Title I home improvement loans (both of which
are secured by single-family residences), small business commercial lines of
credit, mobile home loans, new and used auto and recreational vehicle loans
and secured and unsecured personal and small business commercial loans. FHA
Title I home improvement loans are insured by the FHA up to 90% of the
original loan balance, subject to certain per lender limitations based on the
aggregate amounts of such loans made, and insured losses incurred, by the
individual lending institution. The Company also currently offers credit cards
that are underwritten and owned by the Company. The Company has engaged a
specialized servicing firm to manage its credit card portfolio, including
billing and collection of delinquent accounts. As of December 31, 1997,
consumer and other loans totaled $42.9 million, or 4.64% of the Company's
total loan portfolio. Except for equity lines of credit and small business
commercial lines of credit, consumer and other loans are offered primarily on
a fixed rate basis, generally with maturities of ten years or less. The
underwriting standards employed by the Company for consumer and other loans
include a determination of the applicant's payment history on other debts and
an assessment of the borrower's ability to meet payments on the proposed loan
along with the borrower's existing obligations. In addition to the
creditworthiness of the applicant, and the use of credit scoring, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount. The Company's consumer and
other loans tend to have a higher risk of default than one-to-four family
mortgage loans. The level of nonaccrual loans in the Company's consumer and
other loan portfolio was $235,000, or 0.55% of the consumer and other loan
portfolio, at December 31, 1997, compared to $200,000 or 0.78% of the consumer
and other loan portfolio at December 31, 1996 and $413,000 or 1.57% of the
consumer and other loan portfolio at December 31, 1995. Consumer and other
loan repossessed assets were $237,000 at December 31, 1997, $51,000 at
December 31, 1996 and $43,000 at December 31, 1995. See "--Asset Quality--
Nonperforming Assets."
Loan Approval Procedures and Authority. The Board of Directors of the
Company authorizes and may limit the lending activities of the Company.
Management of the Company has established a loan committee comprised of the
Chief Executive Officer, the Chief Operating Officer, the Senior Vice
President-Chief Lending Officer and two other loan officers. The Board of
Directors has authorized the following persons to approve mortgage loans up to
the amounts indicated: conforming mortgage loans up to the Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA") secondary market purchase limit, which currently is $214,600, may be
approved by any member of the loan committee or designated staff members;
nonconforming mortgage loans in amounts of $400,000 and below may be approved
by any two members of the loan committee; and mortgage loans in excess of
$400,000 and up to $2.0 million require the approval of three members of the
loan committee, one of whom must be the Chief Lending Officer, the Chief
Operating Officer, or the Chief Executive Officer. The approval of the loan
committee of the Board of Directors or the full Board of Directors is required
for mortgage loans in excess of $2.0 million and below $5.0 million. Any loan
of $5.0 million or more requires the approval of the full Board of Directors.
Mortgage-backed Securities. The Company invests in MBS and utilizes such
securities to complement its mortgage lending activities. At December 31,
1997, MBS totaled $16.0 million, or 1.58% of total assets. Included in this
amount is a San Bernardino County tax exempt pass-through bond relating to
multi-family residential properties with an original principal amount of $38.2
million. The Company originated the loans securing the bonds, and subsequently
purchased all of the bonds. The remaining principal amount at December 31,
1997 was $5.4 million. In February 1998 the bond was repaid in full. The
balance of MBS are categorized as available-for-sale investments, including
$8.9 million of Government National Mortgage Association ("GNMA") certificates
and $1.7 million of FHLMC certificates. At December 31, 1997 the MBS portfolio
had a weighted average yield of 7.40%. The MBS portfolio at December 31, 1997
consisted of $14.3 million of fixed rate securities and $1.7 million of
adjustable rate securities. Investments in MBS involve risks that actual
prepayments may exceed the estimates used at the time of purchase, which may
result in a loss for any premium paid on such instruments and thereby reduce
the net yield on such securities. If interest rates increase, the market value
of such securities may be adversely affected.
13
The following table sets forth the composition of the Company's MBS
portfolio in dollar amounts and in percentages of the total portfolio at the
dates indicated.
MORTGAGE-BACKED SECURITIES PORTFOLIO
AT DECEMBER 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
PERCENT PERCENT PERCENT
CARRYING OF CARRYING OF CARRYING OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Held to Maturity:
San Bernardino County
bond..................... $ 5,365 33.58% $25,327 58.16% $25,615 49.15%
------- ------ ------- ------ ------- ------
5,365 33.58 25,327 58.16 25,615 49.15
------- ------ ------- ------ ------- ------
Available for Sale:
GNMA certificates......... 8,913 55.80 16,356 37.56 21,098 40.48
FHLMC certificates........ 1,697 10.62 1,864 4.28 5,403 10.37
------- ------ ------- ------ ------- ------
10,610 66.42 18,220 41.84 26,501 50.85
------- ------ ------- ------ ------- ------
$15,975 100.00% $43,547 100.00% $52,116 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth certain information regarding purchases,
sales and repayments relating to the Company's MBS portfolio for the years
indicated.
MORTGAGE-BACKED SECURITIES PURCHASES AND REPAYMENTS
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
At beginning of period....................... $ 43,547 $ 52,116 $ 79,971
MBS purchased.............................. -- 5,950 21,053
Principal repayments and sales............. (27,572) (14,519) (48,908)
-------- -------- --------
At end of period........................... $ 15,975 $ 43,547 $ 52,116
======== ======== ========
ASSET QUALITY
Collection Procedures. The Company's collection procedures for mortgage
loans with principal balances of less than $500,000 secured by property
consisting of one-to-four family residential units include sending a 30-day
notice of intent to foreclose to the borrower on the day after the expiration
of the payment grace period, which is between 10 and 15 days after a payment
due date depending on the type of property. If the notice of intent expires
and the borrower has made no arrangements to bring the loan current, a notice
of default is sent to the borrower. The notice of default allows the borrower
to reinstate the loan during a 90-day period. If the borrower does not
reinstate the loan, a foreclosure sale will generally be held 30 to 45 days
after the expiration of the notice of default.
Experienced asset managers employed by the Company handle collections for
loans having balances of $500,000 or more or that are secured by income
property or commercial real estate. The Company typically seeks to have a
receiver appointed to collect rents and manage the property as soon as
possible after a loan becomes delinquent if the borrower is not cooperative or
in the best judgment of management future collection of any unpaid amounts is
believed to be in jeopardy.
The Company conducts an appraisal or other determinations of the value of
foreclosed properties at the time the Company acquires title or when the
properties are deemed to be in-substance foreclosures, and transfers the loan
to REO at fair value. The Company generally conducts external inspections on
foreclosed properties on at least a quarterly basis to determine if an
adjustment to the carrying value is required.
14
Delinquent Loans. At December 31, 1997, 1996 and 1995, delinquencies in the
Company's loan portfolio were as follows:
DELINQUENT LOANS
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- ---------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
One-to-four
family.......... 2 $ 93 36 $6,186 -- $-- 48 $10,739 5 $ 722 49 $ 8,818
Multi-family..... -- -- 2 942 -- -- 3 764 -- -- 7 6,115
Commercial real
estate.......... -- -- 2 61 -- -- -- -- -- -- 1 223
Spot
construction.... -- -- -- -- -- -- -- -- -- -- 1 418
Developed lots... -- -- 3 251 -- -- 9 1,009 4 242 14 1,036
Tract
construction and
land............ -- -- -- -- -- -- 2 586 2 182 2 581
Consumer and
other loans..... 44 283 27 235 39 114 37 200 40 74 94 413
--- ---- --- ------ --- ---- --- ------- --- ------ --- -------
Total........... 46 $376 70 $7,675 39 $114 99 $13,298 51 $1,220 168 $17,604
=== ==== === ====== === ==== === ======= === ====== === =======
Delinquent loans
to loans, net of
specific
allowance....... 0.04% 0.83% 0.02% 1.76% 0.17% 2.46%
Nonperforming Assets. Nonperforming assets consist of nonaccrual loans and
REO, and exclude restructured loans which are performing in accordance with
their restructured terms. Loans are placed on nonaccrual status when they
become contractually delinquent more than 90 days or are specifically
identified by management as nonaccrual. Loans over $500,000 are placed on
nonaccrual status when they become contractually delinquent more than 60 days.
Management also places certain loans on nonaccrual status whenever available
information indicates that the borrower will not be repaying the loan in
accordance with its terms. Uncollected interest on nonaccrual loans is
excluded from interest income and accrued interest receivable is subsequently
recognized in the period when loan principal and interest is paid current.
Primarily as a result of recessionary economic conditions in the Company's
Southern California market area, which have had an adverse impact upon the
Company's multi-family, developed lot, tract construction and land development
loan portfolios, the Company experienced significant increases in the level of
nonperforming assets in the period from 1992 through 1995. Since 1995 economic
conditions in the Company's market area have stabilized. As part of
management's strategy developed in response to these prevailing economic
conditions, the Company reduced the level of its nonperforming assets by
working with borrowers to restore nonaccrual loans to performing status where
possible, by foreclosing upon security property where workouts were determined
to be impracticable and by selling existing REO. Through these efforts, the
Company substantially reduced the amounts of its nonperforming assets and the
Company continues to aggressively pursue reduction in the level of its
nonperforming assets. However, the level of such nonperforming assets will
continue to be affected by regional economic and real estate market conditions
beyond the Company's control. To the extent that economic and real estate
market conditions deteriorate, the Company could experience increases in the
levels of its nonperforming assets.
The interest income that would have been received on the Company's
nonaccrual loans for the years ended December 31, 1997, 1996 and 1995, if such
loans had been performing in accordance with their terms, was $822,000, $1.0
million and $1.4 million, respectively. The interest income that was actually
recorded for these loans for such periods was $620,000, $702,000 and $955,000,
respectively.
The Company's ratios of nonaccrual loans to total loans and net
nonperforming assets to total assets and LOCs was 0.83% and 1.14%,
respectively, at December 31, 1997, as compared to 1.76% and 2.02%, at
December 31, 1996, and 2.45% and 4.53%, at December 31, 1995.
15
The following table sets forth information regarding nonperforming assets.
The table excludes restructured loans that are performing in accordance with
their restructured terms.
NONPERFORMING ASSETS
AT DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
One-to-four family.............. $ 6,186 $10,739 $ 8,818 $ 7,255 $10,282
Multi-family.................... 942 764 6,115 3,980 9,857
Commercial real estate.......... 61 -- 223 113 1,070
Spot construction .............. -- -- 418 -- --
Developed lots.................. 251 1,009 1,036 2,278 1,220
Tract construction and land..... -- 586 581 -- 200
Consumer and other ............. 235 200 413 476 120
------- ------- ------- ------- -------
Total nonaccrual loans........ 7,675 13,298 17,604 14,102 22,749
------- ------- ------- ------- -------
REO(1):
One-to-four family.............. 2,494 3,169 5,393 4,487 1,212
Multi-family.................... 888 422 17,807 22,981 2,050
Commercial real estate.......... 177 461 536 209 799
Spot construction .............. -- 372 -- -- --
Developed lots.................. 903 1,757 1,836 842 259
Tract construction and land..... 413 458 463 4,447 5,574
Consumer and other.............. 237 51 43 62 53
------- ------- ------- ------- -------
Total real estate(2).......... 5,112 6,690 26,078 33,028 9,947
------- ------- ------- ------- -------
Total nonperforming assets........ $12,787 $19,988 $43,682 $47,130 $32,696
======= ======= ======= ======= =======
Nonaccrual loans to total loans... 0.83% 1.76% 2.45% 1.77% 3.34%
Nonperforming assets to total
assets and LOCs.................. 1.14 2.02 4.53 4.46 3.17
- --------
(1) Does not include GVAs of $354, $890, $1,518, $1,987 and $518 as of
December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
(2) Includes properties securing LOCs acquired through foreclosure.
Restructured Loans. Restructured loans, net of specific valuation
allowances, that are performing in accordance with their restructured terms
are not included in nonperforming assets. At December 31, 1997, there were
$4.6 million in restructured loans. The amount of interest income recognized
on restructured loans for the years ended December 31, 1997, 1996 and 1995 was
$334,000, $819,000 and $802,000 respectively. The amount of interest income
that would have been recorded for such loans had they been performing in
accordance with their original terms for such periods was $339,000, $1.1
million and $931,000 million, respectively. The following table sets forth
information regarding restructured loans.
RESTRUCTURED LOANS
DECEMBER 31,
---------------------
1997 1996 1995
------ ------- ------
(DOLLARS IN THOUSANDS)
One-to-four family.................................... $ -- $ 1,159 $ --
Multi-family.......................................... 4,629 10,842 6,400
Tract construction and land........................... -- -- 488
------ ------- ------
Total loans restructured............................ $4,629 $12,001 $6,888
====== ======= ======
16
Classified Assets. Federal regulations and the Company's asset
classification policy provide for the classification of loans and other assets
that are considered to be inadequately protected by the current net worth and
paying capacity of the obligor or by the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified Substandard with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss allowance is not warranted. Assets which do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but nevertheless
possess weaknesses are required to be designated "Special Mention" by
management. All nonperforming assets are included in classified assets.
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance ("GVA") for loan losses in an amount deemed prudent by
management. GVAs represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies one or more assets, or portions
thereof, as Loss, it is required either to establish a specific allowance for
losses equal to 100% of the difference between the book value and fair value
of the asset so classified or to charge off such amount. The Company uses
Doubtful as a temporary classification until sufficient information becomes
available to enable the Company to classify an asset as Substandard or Loss. A
management Internal Asset Review Committee meets monthly and the Asset
Classification Committee of the Board of Directors meets quarterly to review
problem loans and classified assets. A savings institution's determination as
to the classification of its assets and the amount of its valuation allowances
is subject to review by the OTS, which can require a different classification
and order the establishment of additional general or specific loss allowances.
At December 31, 1997, the Company had 90 loans and LOCs totaling $14.3
million classified as Substandard, compared to $24.8 million at December 31,
1996 and $32.6 million at December 31, 1995. The largest loan or LOC
classified as Substandard at December 31, 1997 was an LOC in the amount of
$4.4 million, which is secured by a 142 unit apartment complex located in
Barstow, California. At December 31, 1997 the Company had 54 properties
identified as REO totaling $5.1 million classified as Substandard, compared to
$6.7 million at December 31, 1996 and $26.l million at December 31, 1995. The
largest REO at December 31, 1997 was a single family residence located in
Riverside, California in the amount of $955,000. None of the real estate held
for sale was classified Substandard or Loss at December 31, 1997 or December
31, 1996. At December 31, 1995, $280,000 was classified as Substandard and
$172,000 as Loss. At December 31, 1997, the Company also had loans and LOCs,
designated as Special Mention, totaling $34.8 million as compared to
$49.1 million so categorized at December 31, 1996 and $45.4 million so
categorized at December 31, 1995. The largest loan or LOC designated as
Special Mention was an LOC with a balance of $6.8 million at December 31,
1997, and secured by a 280 unit apartment complex located in Fontana,
California. The majority of the loans or LOCs designated as Special Mention
are current but are so identified because of past delinquencies or
restructuring and are being monitored for the possibility of future upgrading.
No real estate held for sale was designated as Special Mention at December 31,
1997, 1996 or 1995.
17
The following table sets forth at December 31, 1997, 1996 and 1995, the
Company's aggregate reported value of assets and LOCs classified as
Substandard, Doubtful or Loss. No loans were classified as Doubtful at
December 31, 1997 or December 31, 1995.
CLASSIFIED ASSETS
AT DECEMBER 31,
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 1995
---------------------------- --------------------------- -------------------
SUBSTANDARD LOSS SUBSTANDARD DOUBTFUL LOSS SUBSTANDARD LOSS
-------------- ------------- ----------- -------- ------ ----------- -------
NUMBER AMOUNT NUMBER AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
------ ------- ------ ------ ----------- -------- ------ ----------- -------
(DOLLARS IN THOUSANDS)
Loans:
One-to-four family..... 33 $ 6,256 6 $113 $11,934 $-- $ -- $ 6,790 $ --
Multi-family........... 5 3,005 -- -- 5,619 153 359 14,566 3,607
Commercial real
estate................ 2 65 -- -- 653 -- -- 879 118
Spot construction...... -- -- -- -- -- -- -- 418 --
Developed lots......... 2 146 -- -- 1,220 -- -- 1,114 --
Tract construction and
land.................. -- -- -- -- 591 -- 463 1,058 1,069
Consumer and other..... 47 493 -- -- 358 -- -- 218 --
--- ------- --- ---- ------- ---- ------ ------- -------
Total................ 89 9,965 6 113 20,375 153 822 25,043 4,794
REO:
One-to-four family..... 11 2,494 1 12 3,169 -- 133 5,393 203
Multi-family........... 3 888 -- -- 422 -- -- 17,807 4,922
Commercial real
estate................ 1 177 1 141 461 -- 34 536 96
Developed lots......... 12 903 2 32 1,757 -- 190 1,836 269
Tract construction and
land.................. 2 413 2 184 830 -- 139 463 593
Consumer and other..... 25 237 -- -- 51 -- -- 43 --
--- ------- --- ---- ------- ---- ------ ------- -------
Total................ 54 5,112 6 369 6,690 -- 496 26,078 6,083
Real estate held for
sale................... -- -- -- -- -- -- -- 280 172
LOCs.................... 1 4,354 -- -- 4,375 -- -- 7,524 1,751
--- ------- --- ---- ------- ---- ------ ------- -------
Total................ 144 $19,431 12 $482 $31,440 $153 $1,318 $58,925 $12,800
=== ======= === ==== ======= ==== ====== ======= =======
Allowances for Losses on Loans and LOCs. The Company determines its total
allowances for losses on loans and LOCs by evaluating all non-homogeneous
loans and LOCs individually and establishing specific allowances as
appropriate. A GVA for losses on loans and LOCs is also established based on
management's evaluation of the risks inherent in the portfolios and other
economic factors. Such evaluation, which includes a review of all loans and
LOCs on which full collectibility may not be reasonably assured, considers
among other matters, debt service coverage ratios, vacancy rates, the
estimated value of the underlying collateral, economic conditions, historical
loan loss experience, asset scoring and classification, a loss migration
analysis, assessment of credit risk inherent in the portfolio and other
factors that management believes to warrant recognition in providing for an
adequate loan loss allowance. The allowances at December 31, 1997 reflect
management's evaluation of the risks inherent in the Company's loan and LOC
portfolios in consideration of the regional economy, the real estate values,
the regulatory environment and the levels of nonperforming assets. At
December 31, 1997, the Company's ratio of GVAs for losses on loans, real
estate and LOCs to total nonperforming assets and LOCs was 122.0%. The
allowance for losses on loans and LOCs was $15.4 million, or 1.49% of total
loans and LOCs, and the total allowances for losses on loans, LOCs and real
estate was $16.3 million, or 1.57% of the total assets and LOCs, at that date.
The Company will continue to monitor and modify its allowances for losses on
loans as conditions dictate. Although the Company maintains its allowances at
a level which it considers adequate to provide for potential losses, there can
be no assurances that such losses will not exceed the estimated amounts.
Allowance for Losses on REO and Real Estate Held for Sale or Investment. REO
is initially recorded at fair value, including estimated sale costs, at the
date of foreclosure. Further declines in the value of the investment in real
estate held for sale or investment or REO are recorded as a provision for loss
and an increase in the allowance for losses on real estate. Real estate held
for sale or investment is recorded at the lower of cost or fair value. At
December 31, 1997, the Company's allowance for losses on real estate was
$977,000, or 13.75% of the Company's real estate acquired or held for sale or
investment.
18
The following table sets forth the Company's allowances for losses on loans,
LOCs and real estate at the dates and for the periods indicated.
ANALYSIS OF ALLOWANCE FOR LOSSES
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of period.... $10,134 $14,745 $18,874 $15,373 $ 7,673
Provision charged to income....... 1,139 2,838 7,938 12,651 12,990
Charge-offs:
One-to-four family.............. (865) (1,645) (2,311) (913) (376)
Multi-family.................... (1,361) (3,920) (8,779) (5,480) (2,526)
Commercial real estate.......... -- (18) (203) (4) (157)
Spot construction............... -- (46) -- -- --
Developed lots.................. (267) (279) (600) (322) --
Tract construction and land..... (637) (1,074) -- (2,051) (1,933)
Consumer and other.............. (915) (907) (684) (408) (413)
------- ------- ------- ------- -------
Total charge-offs............. (4,045) (7,889) (12,577) (9,178) (5,405)
Recoveries........................ 508 440 510 28 115
------- ------- ------- ------- -------
Balance at end of period.......... 7,736 10,134 14,745 18,874 15,373
------- ------- ------- ------- -------
ALLOWANCE FOR LOSSES ON LOCS:
Balance at beginning of period.... 7,624 7,447 6,908 2,599 2,142
Provision charged to income....... -- 2,402 2,536 9,895 694
Charge-offs....................... -- (2,225) (1,997) (5,586) (237)
------- ------- ------- ------- -------
Balance at end of period.......... 7,624 7,624 7,447 6,908 2,599
------- ------- ------- ------- -------
Total allowance for losses on
loans and LOCs................... $15,360 $17,758 $22,192 $25,782 $17,972
======= ======= ======= ======= =======
ALLOWANCE FOR LOSSES ON REAL
ESTATE:
Balance at beginning of period.... $ 1,640 $ 9,496 $ 4,378 $ 2,113 $ 2,149
Provision charged to income....... -- -- 8,336 4,653 1,968
Charge-offs....................... (663) (7,856) (3,218) (2,388) (2,004)
------- ------- ------- ------- -------
Balance at end of period.......... $ 977 $ 1,640 $ 9,496 $ 4,378 $ 2,113
======= ======= ======= ======= =======
TOTAL ALLOWANCE FOR LOSSES ON
LOANS, LOCS AND REAL ESTATE:
Specific........................ $ 737 $ 1,572 $14,523 $ 6,031 $ 6,711
GVA............................. 15,600 17,826 17,165 24,129 13,374
------- ------- ------- ------- -------
$16,337 $19,398 $31,688 $30,160 $20,085
======= ======= ======= ======= =======
ASSET QUALITY RATIOS:
Charge-offs to average loans and
LOCs............................. 0.45% 1.29% 1.76% 1.90% 0.75%
Allowance for losses on loans to
total loans...................... 0.84 1.34 2.05 2.37 2.26
Allowance for losses on LOCs to
total LOCs....................... 7.31 7.19 8.02 7.17 2.25
Allowance for losses on real
estate to total real estate...... 13.75 18.61 26.56 9.59 8.76
Allowance for losses on loans,
LOCs and real estate to total
assets and LOCs.................. 1.57 1.96 3.28 2.85 1.95
GVAs for losses on loans, LOCs and
real estate to total
nonperforming assets............. 122.00 89.18 39.30 51.20 40.90
19
The following table sets forth the Company's allowance for losses on loans
to total loans in each of the categories listed at the dates indicated.
ALLOCATION OF ALLOWANCE FOR LOSSES ON LOANS
AT DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ------------------ ------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
LOANS BY LOANS BY LOANS BY LOANS BY LOANS BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Allocated:
One-to-four family.... $2,515 0.43% $ 2,433 0.57% $ 1,615 0.48% $ 1,910 0.55% $ 700 0.25%
Multi-family.......... 2,500 1.55 4,537 2.66 9,320 5.00 14,308 6.72 10,591 4.80
Commercial............ 800 1.15 838 1.11 878 1.18 598 0.84 1,528 2.10
Spot construction..... 200 0.47 68 0.32 255 0.54 186 0.25 61 0.21
Developed lots........ 701 2.56 1,017 2.89 828 1.74 771 1.46 188 0.43
Tract construction and
land................. 100 38.31 515 49.14 1,234 45.62 558 8.46 1,837 18.96
Consumer and other.... 920 2.15 726 2.81 615 2.34 543 1.84 468 1.69
------ ------- ------- ------- -------
$7,736 $10,134 $14,745 $18,874 $15,373
====== ======= ======= ======= =======
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including United States treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly. Additionally, the Bank
must maintain minimum levels of investments that qualify as liquid assets
under OTS regulations. See "Regulation--Liquidity." Historically, the Bank has
maintained liquid assets above the minimum OTS requirements and at a level
believed to be adequate to meet its normal daily activities.
The investment policy of the Company, established by the Board of Directors
of the Company and implemented by the Asset/Liability Management Committee,
attempts to provide and maintain liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk, and
complement the Company's lending activities. Investments are made with the
intent to hold them to maturity. The Company's policies generally limit
investments to U.S. government and agency securities, certificates of deposit,
commercial paper and investment grade corporate debt securities. The Company's
policies provide that all investment purchases be ratified by the
Asset/Liability Management Committee. At December 31, 1997, the Company had
investment securities in the aggregate amount of $21.6 million with a fair
value of $21.5 million classified as held-to-maturity. The held-to-maturity
investment portfolio is accounted for on an amortized cost basis.
20
The following table sets forth certain information regarding the carrying
and market values of the Company's cash equivalents and investment securities
at the dates indicated. All investment securities were held to maturity.
CARRYING AND MARKET VALUES OF CASH AND INVESTMENT SECURITIES
AT DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
CASH AND CASH EQUIVALENTS:
Cash on hand and in banks... $18,464 $18,464 $16,581 $16,581 $18,035 $18,035
Federal funds sold.......... 15,736 15,736 17,165 17,165 12,950 12,950
------- ------- ------- ------- ------- -------
Total..................... $34,200 $34,200 $33,746 $33,746 $30,985 $30,985
======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES:
U.S. government securities
(maturities more than three
months).................... $ 500 $ 500 $ 499 $ 500 $ 3,467 $ 3,500
Floating Agency Notes....... 13,501 13,357 13,514 13,204 16,527 15,886
Step up notes............... 1,195 1,203 8,184 8,210 4,000 3,998
Callable notes.............. 6,408 6,406 12,498 12,455 9,000 9,035
Certificates of deposit
(maturities more than three
months).................... -- -- -- -- 4,000 4,000
Corporate and term notes.... -- -- -- -- 4,661 4,638
------- ------- ------- ------- ------- -------
Total..................... $21,604 $21,466 $34,695 $34,369 $41,655 $41,057
======= ======= ======= ======= ======= =======
Floating agency notes are issued by one or more government sponsored
enterprises ("GSEs"), including the FHLB System, FHLMC and FNMA, and have
interest rates that adjust quarterly based on the CMT. Certain notes have call
provisions at the option of the issuer whereby the issuer may redeem the notes
at the repricing date. Certain notes have interest rate floors.
Step up notes are issued by one or more GSEs, including the FHLB System and
the Student Loan Marketing Association ("SLMA"), and have interest rates that
adjust based on a semi-annual or annual predetermined interest rate "step up"
schedule. The notes are callable prior to the contractual maturity date of the
note at the option of the issuer.
Callable notes are issued by one or more GSEs, including the FHLB System,
FNMA, SLMA and the Federal Farm Credit Bank, and are callable prior to the
contractual maturity date of the note at the option of the issuer. Callable
notes are issued at a premium compared to non-callable instruments with
similar maturities.
21
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's investment
securities as of December 31, 1997.
CARRYING VALUE AND YIELDS FOR INVESTMENT SECURITIES
LESS THAN ONE
YEAR ONE TO FIVE YEARS OVER FIVE YEARS TOTAL
----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. government
securities............. $ 500 5.20% $ -- --% $ -- --% $ 500 5.20%
Floating agency notes... 8,001 4.68 5,500 4.71 -- -- 13,501 4.69
Step up notes........... -- -- -- -- 1,195 6.07 1,195 6.07
Callable notes.......... -- -- 6,408 6.43 -- -- 6,408 6.43
------ ------- ------ -------
Total................. $8,501 $11,908 $1,195 $21,604
====== ======= ====== =======
SOURCES OF FUNDS
General. Deposits, FHLB advances, loan repayments and prepayments, proceeds
from sales of loans, and cash flows generated from operations, are the primary
sources of the Company's funds used for lending, investing and other general
purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of passbook savings,
checking accounts and certificates of deposit. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Company's
deposits are obtained predominantly from the areas in which its banking
offices are located. The Company relies primarily on customer service and
long-standing relationships with customers to attract and retain these
deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract
and retain deposits. Certificate accounts in excess of $100,000 are not
actively solicited by the Company nor does the Company use brokers to obtain
deposits. Further, the Company generally has not solicited deposit accounts by
increasing the rates of interest paid as quickly as some of its competitors,
nor has it emphasized offering high dollar amount deposit accounts with higher
yields to replace deposit account withdrawals. Management continually monitors
the Company's certificate accounts and, based on historical experience,
management believes it will retain a large portion of such accounts upon
maturity.
The following table presents the deposit activity of the Company for the
periods indicated.
DEPOSIT ACTIVITY
FOR THE YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
Deposits................................... $822,039 $1,745,754 $1,874,670
Withdrawals................................ 810,914 1,777,176 1,934,999
-------- ---------- ----------
Net deposits (withdrawals)................. 11,125 (31,422) (60,329)
Purchase of deposits....................... 11,976 17,485 --
Interest credited on deposits.............. 30,715 28,212 31,523
-------- ---------- ----------
Total increase (decrease) in deposits...... $ 53,816 $ 14,275 $ (28,806)
======== ========== ==========
22
At December 31, 1997, the Company had $88.3 million in deposit accounts in
the amount of more than $100,000 with maturities as follows:
MORE THAN $100,000 DEPOSIT ACCOUNTS
MATURITY PERIOD AMOUNT
--------------- -----------
(DOLLARS IN
THOUSANDS)
Savings, money market and interest-bearing checking,
Negotiable Order of Withdrawal ("NOW").......................... $40,919
Over three through six months.................................... 1,321
Over six through twelve months................................... 1,021
Over twelve months............................................... 45,024
-------
Total.......................................................... $88,285
=======
The following table sets forth the distribution by average balance of the
Company's deposit accounts for the periods indicated and the weighted average
nominal interest rates on each category of deposits.
DEPOSIT ACCOUNT AVERAGE BALANCE
1997 1996 1995
-------------------------- -------------------------- --------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
AVERAGE AVERAGE NOMINAL AVERAGE AVERAGE NOMINAL AVERAGE AVERAGE NOMINAL
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Savings deposits........ $177,502 21.78% 3.16% $167,029 21.88% 3.00% $151,531 18.78% 2.64%
Money market deposits... 8,819 1.08 2.55 10,073 1.32 2.44 11,979 1.49 2.55
Interest bearing
checking (NOW)
deposits............... 83,307 10.22 1.17 83,404 10.92 1.60 86,199 10.68 1.16
Non-interest bearing
accounts............... 24,099 2.95 -- 17,054 2.23 -- 15,102 1.87 --
-------- ------ -------- ------ -------- ------
Total................. 293,727 36.03 2.32 277,560 36.35 2.35 264,811 32.82 2.00
-------- ------ -------- ------ -------- ------
CERTIFICATES OF DEPOSIT:
Less than 3 months...... 884 0.11 3.17 1,317 0.17 2.81 2,630 0.33 2.84
3 to 5 months........... 27,627 3.39 4.89 11,209 1.47 5.80 2,328 0.29 3.49
6 to 11 months.......... 132,426 16.25 5.32 146,142 19.14 4.91 184,005 22.80 5.12
12 to 23 months......... 230,912 28.33 5.53 191,321 25.06 5.32 166,305 20.60 5.69
24 to 47 months......... 81,889 10.05 5.76 76,544 10.03 5.73 93,288 11.56 5.18
48 to 71 months......... 21,521 2.64 5.33 33,925 4.44 5.50 65,769 8.15 6.24
72 months or more....... 23,749 2.91 6.09 25,385 3.32 6.10 27,293 3.38 6.13
Jumbo certificates...... 2,393 0.29 5.31 183 0.02 7.12 482 0.06 3.32
-------- ------ -------- ------ -------- ------
Total certificates.... 521,401 63.97 5.51 486,026 63.65 5.32 542,100 67.18 5.47
-------- ------ -------- ------ -------- ------
Total average
deposits............. $815,128 100.00% 4.36% $763,586 100.00% 4.28% $806,911 100.00% 4.33%
======== ====== ==== ======== ====== ==== ======== ====== ====
23
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997.
CERTIFICATE ACCOUNTS
PERIOD TO MATURITY FROM DECEMBER 31,1997
---------------------------------------- AT DECEMBER 31,
WITHIN 1 TO 3 -----------------
1 YEAR YEARS THEREAFTER TOTAL 1996 1995
--------- -------- ---------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
CERTIFICATE AMOUNTS:
3.99% or less......... $ 1,073 $ 125 $ -- $ 1,198 $ 1,937 $ 4,225
4.00% to 4.99%........ 36,107 568 91 36,766 127,136 131,602
5.00% to 5.99%........ 344,858 112,066 4,561 461,485 337,094 226,707
6.00% to 6.99%........ 13,039 20,942 1,571 35,552 39,024 139,232
7.00% to 7.99%........ 98 -- 230 328 2,455 3,924
8.00% and over........ 377 289 94 760 744 606
-------- -------- ------ -------- -------- --------
$395,552 $133,990 $6,547 $536,089 $508,390 $506,296
======== ======== ====== ======== ======== ========
Borrowings. The Company utilizes borrowings as an alternative source of
funds. The Company's primary source of borrowings are FHLB advances. These
advances are collateralized by FHLB capital stock held by the Company and
certain of the Company's mortgage loans. See "Regulation--Federal Home Loan
Bank System." Such advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including
the Company, for purposes other than meeting withdrawals, fluctuates from time
to time in accordance with its advance policies. At December 31, 1997 the
Company's FHLB of San Francisco total line of credit was approximately $250.3
million, $182.3 million of which was used for FHLB advances, collateral for
LOCs and public funds, and an unused line of credit of $68.0 million. This
line is secured by the pledge of certain loans receivable aggregating $307.2
million and the Company's required investment in $100 par value capital stock
of the FHLB totaling, at cost $9.1 million at December 31, 1997. At December
31, 1997, the Company had $60.0 million of outstanding advances from the FHLB
and other borrowings of $4.4 million. The other borrowings consist of a note
payable related to certain Loma Linda Housing Revenue Bonds in the amount of
$3.7 million and notes payable related to other revenue bonds in the amount of
$708,000.
24
The following table sets forth certain information regarding the Company's
borrowed funds at or for the periods ended on the dates indicated:
BORROWED FUNDS
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
FHLB ADVANCES:
Average balance outstanding......................... $16,616 $ 7,746 $32,260
Maximum amount outstanding at any month-end during
the period......................................... 60,000 10,000 60,000
Balance outstanding at end of period................ 60,000 -- 10,000
Weighted average interest rate during the period.... 5.96% 6.60% 7.22%
Weighted average interest rate at end of period..... 5.92 -- 7.27
OTHER BORROWINGS:
Average balance outstanding......................... $ 4,418 $11,282 $21,992
Maximum amount outstanding at any month-end during
the period......................................... 4,418 21,133 23,740
Balance outstanding at end of period................ 4,418 4,418 21,133
Weighted average interest rate during the period.... 6.76% 4.80% 4.91%
Weighted average interest rate at end of period..... 6.76 6.76 5.01
SUBSIDIARY ACTIVITIES
The Company has three wholly-owned second-tier subsidiary corporations:
REDFED, Inc. ("RFI"); RedFed Escrow, Inc. ("REI") and Redlands Financial
Services, Inc. ("RFSI"). RFI is currently engaged, on an agency basis, in the
sale of insurance and the purchase and sale of securities, primarily for the
Company's customers and other members of the communities served by the
Company. REI formerly engaged in providing escrow services, primarily to the
Company's customers and other members of the communities served by the
Company, and ceased operations in November 1995. RFSI was formerly engaged in
real estate development activities, has no development currently in process
and is selling its remaining real estate.
COMPETITION
The Company faces significant competition both in making loans and in
attracting deposits. The Company's competitors are the financial institutions
operating in its primary market area, many of which are significantly larger
and have greater financial resources than the Company. The Company's
competition for loans comes principally from commercial banks, other savings
institutions, mortgage banking companies, insurance companies and credit
unions. The Company competes for loans on the basis of mortgage interest
rates, rate adjustment provisions, origination fees and quality of service to
borrowers, home builders and real estate agents. Its most direct competition
for deposits has historically come from other savings institutions and
commercial banks. The Company competes for deposits by striving to provide a
higher quality of service to its customers through its community-oriented
branches and customer service focus. In addition, the Company faces increasing
competition for deposits from non-bank institutions such as brokerage firms
and insurance companies in such areas as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on
the interstate operations of financial institutions.
PERSONNEL
As of December 31, 1997, the Company and its subsidiaries had 273 full time
equivalent employees. The employees are not represented by a collective
bargaining unit and the Company considers its relationship with its employees
to be good.
25
REGULATION
General. The Company is registered with the OTS as a savings and loan
holding company and is subject to regulation and examination as such by the
OTS. The Bank is a federally chartered savings bank, is a member of the FHLB
System and its deposits are insured through the SAIF managed by the FDIC. The
Bank is subject to examination and regulation by the OTS with respect to most
of its business activities, including, among other things, capital standards,
general investment authority, deposit taking and borrowing authority, mergers,
establishment of branch offices, and permitted subsidiary investments and
activities. The OTS's operations, including examination activities, are funded
by assessments levied on its regulated institutions.
The Bank is further subject to the regulations of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") concerning reserves
required to be maintained against deposits, transactions with affiliates,
Truth in Lending and other consumer protection requirements and certain other
matters. Financial institutions, including the Bank, are also subject, under
certain circumstances, to potential liability under various statutes and
regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of real property and
liability for the remediation of certain adverse environmental conditions
thereof.
The descriptions of the statutes and regulations applicable to the Company
and its subsidiaries and the effects thereof set forth below and elsewhere
herein do not purport to be a complete description of such statutes and
regulations and their effects on the Company, the Bank and the Company's other
subsidiaries and also do not purport to identify every statute and regulation
that may apply to the Company, the Bank and the Company's other subsidiaries.
The OTS has primary enforcement authority over savings institutions and
their holding companies that includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist orders and to initiate
injunctive actions and removal and prohibition orders against officers,
directors and certain other "institution affiliated parties." In general,
enforcement actions may be initiated for violations of specific laws and
regulations and for unsafe or unsound conditions or practices.
The FDIC has authority to recommend that the OTS take any authorized
enforcement action with respect to any federally insured savings institution.
If the OTS does not take the recommended action or provide an acceptable plan
for addressing the FDIC's concerns within 60 days after receipt of a
recommendation from the FDIC, the FDIC may take such action if the FDIC Board
of Directors determines that the institution is in an unsafe or unsound
condition or that failure to take such action will result in the continuation
of unsafe or unsound practices in conducting the business of the institution.
The FDIC may also take action prior to the expiration of the 60-day time
period in exigent circumstances after giving notice to the OTS.
The FDIC may also terminate the deposit insurance of any insured depository
if the FDIC determines, after a hearing, that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. In
addition, FDIC regulations provide that any insured institution that falls
below a 2% minimum leverage ratio will be subject to FDIC deposit insurance
termination proceedings unless it has submitted, and is in compliance with, a
capital plan with its primary federal regulator and the FDIC. The FDIC may
also suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
Deposit Insurance. The FDIC administers two separate deposit insurance
funds. The SAIF is the insurance fund responsible for insuring the deposits of
savings institutions, the deposits of which were formerly insured by the
Federal Savings and Loan Insurance Corporation ("FSLIC"). The Bank Insurance
Fund ("BIF") is the insurance fund responsible for insuring the deposits of
commercial banks and certain other institutions. The Bank is a member of the
SAIF.
26
The FDIC has the authority to set the respective deposit insurance premiums
of the SAIF and of the BIF at levels it determines to be appropriate to
maintain the SAIF or BIF reserves or to fund the administration of the FDIC.
In addition, the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") authorizes emergency special assessments applicable to BIF and SAIF
members. The OTS Director is also authorized to impose assessments on savings
institutions to fund certain of the costs of administration of the OTS.
Since January 1, 1993, FDIC deposit insurance premiums have been assessed
pursuant to a "risk-based" system. Under this risk-based assessment system,
institutions are classified on the basis of capital ratios, supervisory
evaluations by the institution's primary federal regulatory agency and other
information determined by the FDIC to be relevant to the institution's
financial condition and the risk posed to the insurance funds. Each of the
nine resulting risk category subgroups of institutions is assigned an annual
deposit insurance premium assessment rate which currently ranges from zero to
27 basis points (100 basis points equals one per cent) per $100 of assessment
base.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "DIF
Act") was enacted which, among other things, recapitalized the SAIF through a
one-time special assessment for SAIF members, such as the Bank, estimated to
be 67.5 basis points per $100 of SAIF-deposits as of March 31, 1995. Beginning
January 1, 1997, the same risk-based assessment schedule applies to both SAIF
members and BIF members--zero to 27 basis points per $100 of assessment base.
The DIF Act also provided for full pro rata sharing by all federally-insured
institutions by January 1, 2000 of the obligation, previously borne entirely
by SAIF-insured institutions, to pay the interest on the bonds (commonly
referred to as the "FICO Bonds") that were issued by a specially created
federal corporation for the purpose of funding the resolution of failed thrift
institutions. Beginning on January 1, 1997 through January 1, 2000 (or January
1, 1999 if the bank and savings association charters are then merged), FICO
premiums for BIF and SAIF insured deposits are 1.3 and 6.4 basis points per
$100 of assessment base, respectively. The DIF Act provides for the merger of
the BIF and the SAIF on January 1, 1999 into a newly created Deposit Insurance
Fund, provided that the bank and savings association charters are combined by
that date. If the charters have been merged and the Deposit Insurance Fund
created, pro rata FICO premium sharing will begin on January 1, 1999. At March
31, 1995, the Bank had $825.1 million in deposits and on September 30, 1996
the Bank accrued a special assessment of $5.4 million paid November 30, 1996.
An improvement in the Bank's capital ratios and reduction in non-performing
assets, in combination with other factors, resulted in a significant reduction
in the Bank's deposit insurance costs beginning in the third quarter of 1997.
Beginning in that quarter, the quarterly FDIC insurance premium paid by the
Bank was reduced to 0.75 basis points per $100 of assessment base, or $59,000,
and beginning with the first quarter of 1998, the Bank will only pay the
minimum $2,000 insurance fee to the FDIC. The Bank remains obligated, however,
to pay the quarterly Financing Corporation assessment of 1.6 basis points per
$100 of assessment base, or approximately $130,000 per quarter.
Capital Requirements. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the capital regulations of the OTS
promulgated thereunder (the "Capital Regulations") require savings
institutions to meet three capital requirements: a "leverage limit" (also
referred to as the "core capital requirement"), a "tangible capital
requirement" and a "risk-based capital requirement." In addition to the
general standards, the OTS may establish, on a case-by-case basis, individual
minimum capital requirements for a savings institution which vary from the
requirements that would otherwise apply under the Capital Regulations.
A savings institution that fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and
sanctions, including a prohibition on growth and the issuance of a capital
directive by the OTS Director requiring one or more of the following: an
increase in capital; a reduction of rates paid on savings accounts; cessation
of or limitations on operational expenditures; an increase in liquidity; and
such other actions as may be deemed necessary or appropriate by the OTS
Director. In addition, a conservator or receiver may be appointed under
appropriate circumstances.
27
The core capital requirement currently requires a savings institution to
maintain "core capital" of not less than 3% of adjusted total assets. "Core
capital" includes common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and any related surplus and
minority interests in the equity accounts of fully consolidated subsidiaries.
The amount of an institution's core capital is, in general, calculated in
accordance with generally accepted accounting principles ("GAAP"), with
certain exceptions. Among other exceptions, adjustments to an institution's
GAAP equity accounts that are required pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," to reflect changes in the market value of certain
securities held by the institution that are categorized "available-for-sale"
are not included in the calculation of core capital for regulatory capital
purposes. Intangible assets must be deducted from core capital, with certain
exceptions and limitations, including purchased and originated mortgage
servicing rights and certain other intangibles, which may be included on a
limited basis. "Originated mortgage servicing rights" consist of the servicing
rights with respect to loans that are originated and then sold by the
institution or that are categorized by it as held for sale.
A savings institution is required to maintain "tangible capital" in an
amount not less than 1.5% of adjusted total assets. "Tangible capital" is
defined for this purpose to mean core capital less any intangible assets, plus
purchased and originated mortgage servicing rights, subject to certain
limitations.
The risk-based capital requirements, among other things, provide that the
capital ratio applicable to various classes of assets are to be adjusted to
reflect the degree of risk associated with such classes of assets. In
addition, the asset base for computing a savings institution's capital
requirement includes off-balance sheet items, including assets sold with
recourse. Generally, the Capital Regulations require savings institutions to
maintain "total capital" equal to 8.0% of risk-weighted assets. "Total
capital" for these purposes consists of core capital and supplementary
capital. Supplementary capital includes, among other things, certain types of
preferred stock and subordinated debt and, subject to certain limitations,
loan and lease general valuation allowances. Such general valuation allowances
can generally be included up to 1.25% of risk-weighted assets. At December 31,
1997, $9.2 million of the Bank's general valuation allowance was included in
supplementary capital. A savings institution's supplementary capital may be
used to satisfy the risk-based capital requirement only to the extent of that
institution's core capital.
The OTS, the FDIC and other federal banking agencies recently amended their
risk-based capital regulations to provide that an institution must hold
capital in excess of regulatory minimums to the extent that examiners find
either (i) significant exposure to concentration of credit risk such as risks
from higher interest rates, prepayments, significant off-balance sheet items
(especially standby letters of credit) or credit, or risks arising from
nontraditional activities, (ii) that the institution is not adequately
managing these risks or (iii) significant exposure to market risk. For this
purpose, however, the agencies have stated that, in view of the statutory
requirements relating to permitted lending and investment activities of
savings institutions, the general concentration by such institutions, the
general concentration by such institutions in real estate lending activities
would not, by itself, be deemed to constitute an exposure to concentration of
credit risk that would require greater capital levels.
The OTS has adopted an amendment to its Capital Regulations that, upon
implementation, will require each OTS-regulated institution to maintain
additional risk-based capital equal to half of the amount by which the decline
in its "net portfolio value" that would result from a hypothetical 200 basis
point change (up or down, depending on which would result in the greater
reduction in net portfolio value) in interest rates on its assets and
liabilities exceeds 2% of the estimated "economic value" of its assets. In
computing its compliance with the risk based capital standards, that dollar
amount is subtracted from an association's total capital. The OTS has stated
that implementation of this amendment to its regulations will require
additional capital to be maintained only by institutions having "above normal"
interest rate risk. An institution's "net portfolio value" is defined for this
purpose as the difference between the aggregate expected future cash inflows
from an institution's assets and the aggregate expected future cash outflows
on its liabilities, plus the net expected cash inflows from existing off-
balance sheet contracts, each discounted to present value. The estimated
"economic value" of an institution's assets is defined as the discounted
present value of the estimated future cash flows from its assets. The OTS has
28
deferred implementation of the interest rate risk amendment. Had it been in
effect at December 31, 1997, this provision would not have resulted in any
required adjustment to the Bank's regulatory capital at that date.
The OTS and the banking agencies recently proposed amendments to applicable
leverage requirements whereby institutions with a composite rating of 1 would
be subject to a minimum 3.0% leverage ratio, and all other institutions would
be subject to a 4.0% leverage ratio.
The following table summarizes the Bank's actual capital and required
capital under the prompt corrective action provisions of FDICIA as of December
31, 1997:
REGULATORY CAPITAL (FDICIA)
TO BE WELL
CAPITALIZED UNDER
PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- ----------- ----------- -------------
Total capital (to risk-
weighted assets)....... $87,283 11.94% $58,468 greater than 8.00% $ 73,085 greater than 10.00%
or equal to or equal to
Core capital (to
adjusted tangible
assets)................ 78,106 7.81 29,986 greater than 3.00 49,976 greater than 5.00
or equal to or equal to
Tier 1 capital (to risk-
weighted assets)....... 78,106 10.69 -- greater than -- (1) 59,972 greater than 6.00
or equal to or equal to
Tangible capital (to
tangible assets)....... 78,106 7.81 14,993 greater than 1.50 -- greater than -- (1)
or equal to or equal to
- --------
(1) The ratio is not specified under capital regulations.
As of December 31, 1997, and December 31, 1996, the most recent modification
from FDICIA categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, Tier 1 risk-
based and core capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The table below presents the Bank's capital ratios as compared to regulatory
requirements under the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") at December 31, 1997:
REGULATORY CAPITAL (FIRREA)
CAPITAL
----------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Tangible........................... $78,106 $14,993 $63,113 7.81% 1.50%
Core............................... 78,106 29,986 48,120 7.81 3.00
Risk-based......................... 87,283 58,468 28,815 11.94 8.00
The Federal Deposit Insurance Act contains prompt corrective action ("PCA")
provisions pursuant to which banks and savings institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized." The PCA
provisions expand the powers and duties of the OTS and the FDIC and expressly
authorize, or in many cases direct, regulatory intervention at an earlier
stage than was previously the case.
29
Under the PCA provisions, an institution that is deemed to be
undercapitalized is subject to mandatory restrictions on capital distributions
(including cash dividends) and management fees, increased supervisory
monitoring by the OTS, growth restrictions, restrictions on certain expansion
proposals and capital restoration plan submission requirements. If an
institution is deemed to be significantly undercapitalized, all of the
foregoing mandatory restrictions apply, as well as a restriction on
compensation paid to senior executive officers. Furthermore, the OTS must take
one or more of the following actions: (i) require the institution to sell
shares (including voting shares) or obligations; (ii) require the institution
to be acquired or merge (if one or more grounds for the appointment of a
conservator or receiver exist); (iii) implement various restrictions on
transactions with affiliates; (iv) restrict interest rates on deposits; (v)
impose further asset growth restrictions or require asset reductions; (vi)
require the institution or a subsidiary to alter, reduce or terminate
activities considered risky; (vii) order a new election of directors; (viii)
dismiss directors and/or officers who have held office for more than 180 days
before the institution became undercapitalized; (ix) require the hiring of
qualified executives; (x) prohibit correspondent bank deposits; (xi) require
the institution to divest or liquidate a subsidiary in danger of insolvency or
a controlling company to divest any affiliate that poses a significant risk,
or is likely to cause a significant dissipation of assets or earnings; (xii)
require a controlling company to divest the institution if it improves the
institution's financial prospects; or (xiii) require any other action the OTS
determines fulfills the purposes of the PCA provisions. In addition, subject
to a limited exception, the OTS is required to appoint a receiver or
conservator for an institution that is critically undercapitalized.
Loans to One Borrower. Savings institutions are generally subject to the
same loans to one borrower limitations that are applicable to national banks.
With certain limited exceptions, the maximum amount that a savings institution
may lend to one borrower (including certain related persons or entities of
such borrower) is an amount equal to 15% of the savings institution's
unimpaired capital and unimpaired surplus, plus an additional 10% for loans
fully secured by readily marketable collateral. Real estate is not included
within the definition of "readily marketable collateral" for this purpose. The
term "unimpaired capital and unimpaired surplus" is defined by reference to an
institution's regulatory capital, plus that portion of an institution's
general valuation allowances that is not includable in the institution's
regulatory capital, plus the amount of the institution's loans to, investments
in and advances to subsidiaries not includable in regulatory capital. At
December 31, 1997, the maximum amount which the Bank could lend to any one
borrower (including related persons and entities) under the current loans to
one borrower limit was $14.2 million. At December 31, 1997, the largest
aggregate amount of loans which the Bank had outstanding to any one borrower
was $9.4 million.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB system, the Bank is
required to own capital stock in its regional FHLB, the FHLB of San Francisco,
in an amount at least equal to the greater of 1% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations at the end of each calendar year, or 5% of its outstanding
FHLB advances.
Each FHLB is required to transfer a certain amount of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"), the
government entity established to raise funds to resolve troubled savings
institution cases, to fund the principal and a portion of the interest on the
REFCORP bonds and certain other obligations. In addition, each FHLB must
transfer a percentage of its annual net earnings to a federal affordable
housing program. That amount increased from 5% of the annual net earnings of
the FHLB in 1990 to at least 10% of its annual net earnings in 1995 and
subsequent years. As a result of these requirements, which began in 1989, the
earnings of the FHLB of San Francisco were reduced and the Bank received a
reduced dividend rate on its FHLB of San Francisco stock as compared with
prior periods. The Bank recorded dividend income on its FHLB of San Francisco
stock in the amounts of $422,000, $384,000 and $419,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. If dividend rates are further
reduced, or interest on future FHLB advances increased, the Bank's net
interest income would likely also be reduced. Further, there can be no
assurance that the impact of recent legislation on the FHLB would not cause a
decrease in the value of the FHLB stock held by the Bank.
30
Liquidity. Federal regulations currently require savings institutions to
maintain, for each calendar month, an average daily balance of liquid assets
(including cash, certain time deposits, bankers' acceptances, certain
mortgage-related securities, certain mortgage loans as the security of a first
lien on residential property and specified United States Government, state or
federal agency obligations) equal to at least 4% of either (i) the average
daily balance of its net withdrawable accounts plus short-term borrowings
(the"liquidity base") during the preceding calendar quarter or (ii) the amount
of the liquidity base at the end of the preceding calendar quarter. This
liquidity requirement may be changed from time to time by the OTS Director to
an amount within a range of 4% to 10% of such accounts and borrowings
depending upon economic conditions and the deposit flows of savings
institutions. In addition, savings institutions must comply with a general
non-quantitative requirement to maintain a safe and sound level of liquidity.
Monetary penalties may be imposed for failure to meet liquidity ratio
requirements. For the calculation period including December 31, 1997, the
total liquidity ratio of the Bank was 5.92%, which exceeded the total
requirements.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
each savings institution, as well as other lenders, to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The CRA
also requires the OTS to assess, as part of its examination of a savings
institution, the performance of the institution in meeting the credit needs of
its communities and to take such assessments into consideration in reviewing
applications for mergers, acquisitions and other transactions. An
unsatisfactory CRA rating may be the basis for denying such application.
Community groups have successfully protested applications on CRA grounds. In
connection with the assessment of a savings institution's CRA performance, the
OTS will assign a rating of "outstanding," "satisfactory," "needs to improve"
or "substantial noncompliance." The Bank was rated "satisfactory" in its most
recent CRA exam.
Qualified Thrift Lender Test. Savings institutions regulated by the OTS are
subject to a qualified thrift lender ("QTL") test which requires such an
institution to maintain on an averaging basis at least 65% of its portfolio
assets (as defined) in "qualified thrift investments." Qualified thrift
investments include, in general, loans, securities and other investments that
are related to housing, shares of stock issued by any Federal Home Loan Bank,
loans for educational purposes, loans to small businesses, loans made through
credit cards or credit card accounts and certain other permitted thrift
investments. A savings institution's failure to remain a QTL may result in
conversion of the institution to a bank charter or operation under certain
restrictions including: (i) limitations on new investments and activities;
(ii) imposition of branching restrictions; (iii) loss of FHLB borrowing
privileges; and (iv) limitations on the payment of dividends. At December 31,
1997, the Bank was in compliance with its QTL test requirements.
Savings and Loan Holding Company Regulation. As a savings and loan holding
company, the Company is subject to certain restrictions with respect to its
activities and investments. Among other things, the Company is generally
prohibited, either directly or indirectly, from acquiring more than 5% of the
voting shares of any savings association or savings and loan holding company
which is not a subsidiary of the Company. Prior OTS approval is required for
the Company to acquire an additional savings association as a subsidiary.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Company or the Bank. Control is conclusively presumed to exist
if, among other things, a person acquires more than 25% of any class of voting
stock of the institution or holding company or controls in any manner the
election of a majority of the directors of the insured institution or the
holding company.
The Company is considered an "affiliate" of the Bank for regulatory
purposes. Savings institutions are subject to the rules relating to
transactions with affiliates and loans to insiders generally applicable to
commercial banks that are members of the Federal Reserve System and certain
additional limitations. In addition, savings institutions are generally
prohibited from extending credit to an affiliate, other than the institution's
subsidiaries, unless the affiliate is engaged only in activities which the
Federal Reserve Board has determined to be permissible for bank holding
companies and which the OTS has not disapproved.
31
A savings and loan holding company that controls only one savings
institution is exempt, if the institution meets its QTL test, from
restrictions on the conduct of unrelated business activities that are
applicable to other savings and loan holding companies and that are similar to
the restrictions on the conduct of unrelated business activities that are
applicable to bank holding companies under the Bank Holding Company Act.
Service Corporations. Federal regulations permit federal savings
institutions to invest in the capital stock, obligations or other securities
of certain types of subsidiaries (referred to as "service corporations") that
engage in certain prescribed activities and to make loans to these
corporations (and to projects in which they participate) in an aggregate
amount not to exceed 3% of the institution's assets, as long as any investment
over 2% serves primarily community development or inner-city purposes.
Additionally, federal regulations permit an institution having regulatory
capital in an amount at least equal to the minimum requirements set forth in
the applicable OTS regulations to make additional loans to such subsidiaries
in an aggregate amount which, generally, may not exceed 100% of the regulatory
capital in the case of subsidiaries of which the institution owns or controls
not more than 10% of the capital stock of certain limited partnership joint
ventures and 50% of regulatory capital in the case of certain other
subsidiaries or joint ventures. Federal savings institutions are also
permitted to invest in and maintain so-called "operating subsidiaries"
(generally, subsidiaries that are engaged solely in activities the parent
institution could conduct directly and meeting certain other criteria) free of
such investment limitations.
Restrictions on Dividends and Other Capital Distributions. Savings
institution subsidiaries of holding companies generally are required to
provide advance notice to their OTS Regional Director of any proposed
declaration of a dividend on the institution's stock. Any dividend declared
within the notice period, or without giving the prescribed notice, is invalid.
Limitations are imposed under OTS regulations on "capital distributions" by
savings institutions, including cash dividends, payments to repurchase or
otherwise acquire an institution's shares, payments to stockholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulations establish a tiered system of regulation with the
greatest flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions, without prior OTS approval, during a
calendar year of up to the greater of (i) 100% of its net income to date
during the calendar year, plus the amount that would reduce by not more than
one-half its "surplus capital ratio" at the beginning of the calendar year
(the amount by which the institution's actual capital exceeded its fully
phased-in capital requirement at that date); and (ii) 75% of its net income
over the most recent four-quarter period. An institution that meets its
current minimum capital requirements but not its fully phased-in capital
requirements may make capital distributions, without prior OTS approval, of up
to 75% of its net income over the most recent four-quarter period, as reduced
by the amounts of any capital distributions previously made during such
period. An institution that does not meet its minimum regulatory capital
requirements prior to, or on a pro forma basis after giving effect to, a
proposed capital distribution, or that the OTS has notified as needing more
than normal supervision, is not authorized to make any capital distributions
unless it receives prior written approval from the OTS or the distributions
are in accordance with the express terms of an approved capital plan.
The OTS recently revised its proposed amendments to its capital distribution
regulation to conform to its PCA regulations by replacing the current "tiered"
approach summarized above with one that would allow institutions to make
capital distributions that would not result in the institution falling below
the PCA "adequately capitalized" capital category, raise any safety or
soundness concerns, or violate any statute, regulation, agreement or order.
Under this proposal, an institution would be able to make a capital
distribution (i) without notice, if the institution is not held by a savings
and loan holding company, if, after the capital distribution, the institution
would remain at least "adequately capitalized," the distribution would not
reduce the amount of common or preferred stock or retire debt that is included
in capital, and the distribution would not otherwise violate any statutory,
regulatory or other prohibitions; (ii) without an application if the
institution has a composite rating of 1 or 2, is otherwise eligible for
expedited treatment, and the distributions do not exceed a specified amount;
and (iii) without a notice or application if all of the conditions specified
are met.
32
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including those
occurring in connection with corporation reorganizations.
Lending Standards. The OTS and the other federal banking agencies have
jointly adopted uniform rules on real estate lending and related Interagency
Guidelines for Real Estate Lending Policies (the "Guidelines"). The uniform
rules require that institutions adopt and maintain comprehensive written
policies for real estate lending. The policies must reflect consideration of
the Guidelines and must address relevant lending procedures, such as loan to
value limitations, loan administrations procedures, portfolio diversification
standards and documentation, approval and reporting requirements. Although the
uniform rules do not impose specific maximum loan to value ratios, the related
Guidelines state that such ratio limits established by individual
institutions' boards of directors generally should not exceed levels set forth
in the Guidelines, which range from a maximum of 65% for loans secured by
unimproved land to 85% for improved property. No limit is set for single
family residence loans, but the Guidelines state that such loans equal to or
exceeding a 90% loan to value ratio should have private mortgage insurance or
some form of credit enhancement. The Guidelines further permit a limited
amount of loans that do not conform to these criteria.
TAXATION
General. The Company and the Bank report their income on a calendar year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
Company and its subsidiaries file federal income tax returns on a consolidated
basis. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company.
Tax Bad Debt Reserves. Formerly, savings institutions such as the Bank which
met certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions, which additions may,
within specified formula limits, be deducted in arriving at taxable income.
The Bank's deduction with respect to "qualifying loans" (generally loans
secured by certain interests in real property), could be computed using a
percentage based on the Bank's actual loss experience (the "experience
method"), or a percentage equal to eight percent of the Bank's taxable income
before such deduction (the "percentage of taxable income method"). Each year
the Bank selected the more favorable way to calculate the deduction
attributable to an addition to the bad debt reserve.
If the Bank failed to satisfy such tests in any taxable year, it would be
unable to make additions to its bad debt reserve. Instead, the Bank would be
required to deduct bad debts as they occur and would additionally be required
to recapture its bad debt reserve deductions previously taken. Among other
things, the qualifying thrift definitional test requires the Bank to hold at
least 60% of its assets as "qualifying assets." Qualifying assets generally
include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political
subdivision thereof, loans secured by interests in improved residential real
property or by savings accounts, student loans and property used by the Bank
in the conduct of its banking business. The Bank presently satisfies the
qualifying thrift definitional tests. The Bank's ratio of qualifying assets to
total assets exceeded 60% through December 31, 1997.
Pursuant to H.R. 3448, the Small Business Job Protection Act of 1996 (the
"Legislation"), the above-described bad debt deduction rules available to
thrift institutions such as the Bank was repealed. In 1996 the Bank was
required to change its method of accounting for bad debts from the reserve
method formerly permitted under section 593 of the Internal Revenue Code of
1986, as amended (the "Code") to the "specific charge-off" method. Under the
specific charge-off method, which is governed by section 166 of the Code and
the regulations thereunder, tax deductions may be taken for bad debts only if
loans become wholly or partially worthless although the Legislation requires
that qualifying thrifts recapture (i.e., include in taxable income) over a
four year period a portion of their existing bad debt reserves equal to their
"applicable excess reserves." The Bank
33
does not have applicable excess reserves subject to recapture. However, the
Bank's tax bad debt reserve balance of approximately $12.3 million (as of
December 31, 1997) will, in future years, be subject to recapture in whole or
in part upon the occurrence of certain events, such as a distribution to
shareholders in excess of the Bank's current and accumulated earnings and
profits, a redemption of shares, or upon a partial or complete liquidation of
the Bank. The Bank does not intend to make distributions to stockholders that
would result in recapture of any portion of its bad debt reserves. These
reserves would also be subject to recapture if the bank fails to quality as a
"bank" for federal income tax purposes.
NOLs. At December 31, 1997, the Company had net operating losses aggregating
approximately $22.7 million for federal income tax purposes and approximately
$9.0 million for California franchise tax purposes available to offset taxable
income in future tax years. The federal NOLs would expire, if not utilized, in
taxable years beginning in 2009, and the California NOLs would expire
beginning in 1999. In addition, section 382 of the Code provides in general
that if a corporation undergoes an "ownership change," the amount of taxable
income that the corporation may offset after the date of such change with NOLs
and certain "built-in" losses existing at the date of such ownership change
will be subject to an annual limitation that is calculated as the product of
the fair market value of the corporation's equity on the date of the change
and a long-term tax-exempt bond rate of return that is published monthly by
the IRS. In general, an "ownership change" is deemed to occur with respect to
a corporation if the aggregate of the increase in the holdings of 5% or
greater stockholders who owns such stock at any time during a prescribed
three-year "testing period" exceeds 50 percentage points relative to the
lowest percentage of the corporation's stock held by each such person. For
purposes of this test, an issuance of new shares of stock is, to the extent
provided in regulations, considered to create a new 5% shareholder even if no
person acquiring the stock in fact owns as much as 5% of the issuer's stock.
While the regulations of the IRS relating to the making of such determinations
are complex, the Company believes that the offering of Common Stock made in
August, 1996 did not cause an ownership change with respect to the Company for
purposes of section 382, but may increase the possibility that future
acquisitions of shares by 5% or greater holders, or future issuances of shares
by the Company, could result in such an ownership change.
State and Local Taxation. As a savings and loan holding company filing
California franchise tax returns on a combined basis with its subsidiaries,
the Company is subject to the California franchise tax at the rate applicable
to "financial corporations." The applicable tax rate is the rate on general
corporations (currently 8.84%) plus 2%. Under California regulations, bad debt
deductions are available in computing California franchise taxes using a three
or six year average loss experience method.
California does not permit net operating loss carrybacks to prior tax years,
but does permit such losses to be carried forward to future tax years. The
carryforward period is generally five years and generally only 50% of net
operating losses may be deducted. Additionally, California tax law follows the
federal tax law which, in the event of an "ownership change" of the Company,
would apply an annual limitation to the use of net operating loss carryovers
and "built-in" losses.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 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 believes
that the adoption of SFAS 130 will not have a material impact on the Company's
disclosures.
34
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 believes that the
adoption of SFAS 131 will not have a material impact on the Company's
disclosures.
ITEM 2. PROPERTIES
The Company owns its principal office building in Redlands, California,
along with 13 other branch offices. Beginning in the first quarter of 1998,
the Company will also offer branch banking services at a new Stater Bros.
supermarket to be opened in Yucaipa. The Company leases the land on two of
these branches, one through 2007 and the other through 2013. The Company
leases one loan origination office. The Company believes that the Company's
branch network is adequate to meet the present and foreseeable needs of the
Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is named as a defendant in a lawsuit filed on November 24, 1997
in the San Bernardino County Superior Court by a former employee, who alleges
that he was harassed by a superior, and then subjected to a retaliatory
discharge when he reported the alleged harassment. The lawsuit seeks general
and exemplary 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 legal proceedings in the aggregate are believed by management to be
immaterial to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
35
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol REDF. At February 27, 1998, the Company had approximately 549
stockholders of record (not including the number of persons or entities
holding stock in nominee or street name through various brokerage firms) and
7,577,549 outstanding shares of common stock. The following table sets forth
for the quarters indicated the range of high and low bid information per share
of the common stock of the Company as reported on the Nasdaq National Market.
1997
----------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High................................. 21 1/8 18 16 1/2 15 3/4
Low.................................. 17 3/8 15 1/2 12 1/4 12 7/8
1996
----------------------------------
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
High................................. 13 1/2 12 1/8 10 10
Low.................................. 11 1/2 8 3/8 8 3/8 8 7/8
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Delaware corporations. In general, dividends may be paid
only out of a Delaware corporation's surplus, as defined in the Delaware
General Corporation Law, or net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. "Surplus" is defined
for this purpose as the amount by which a corporation's net assets (total
assets minus total liabilities) exceed the amount designated by the Board of
Directors of the corporation in accordance with Delaware law as the
corporation's capital. The Company may pay dividends out of funds legally
available therefor at such times as the Board of Directors determines that
dividend payments are appropriate, after considering the Company's net income,
capital requirements, financial condition, alternate investment options,
prevailing economic conditions, industry practices and other factors deemed to
be relevant at the time. The Company has not paid dividends in the past and
does not presently intend to pay dividends.
The Company's principal source of income in 1997 was interest from
investments. Dividends from the Bank are a potential source of income for the
Company. The payment of dividends and other capital distributions by the Bank
to the Company is subject to regulation by the OTS. See "--Business--
Regulation--Restrictions on Dividends and Other Capital Distribution."
Currently, 30 days' prior notice to the OTS is required before any capital
distribution is made. The OTS has promulgated a regulation that measures a
savings institution's ability to make a capital distribution according to the
institution's capital position. The rule establishes "safe-harbor" amounts of
capital distributions that institutions can make after providing notice to the
OTS, but without needing prior approval. Institutions can distribute amounts
in excess of the safe harbor only with the prior approval of the OTS. For
institutions such as the Bank that meet their fully phased-in capital
requirements, the safe harbor amount is the greater of (i) 75% of net income
for the prior four quarters, or (ii) the sum of (1) net income to date during
the calendar year and (2) the amount that would reduce by one-half the Bank's
surplus capital ratio at the beginning of the current year.
The Bank's ability to pay dividends to the Company is also subject to
restriction arising from the existence of the liquidation account established
upon the conversion of the Bank from mutual to stock form in April, 1994. The
Bank is not permitted to pay dividends to the Company if its regulatory
capital would be reduced below the amount required for the liquidation
account. See "Business--Regulation--Restriction on Capital Distributions and
Holding Company Regulation."
Additionally, as of December 31, 1997, the Company's accumulated tax
reserves for losses on qualifying real property loans is subject to a
recapture. Any distribution by the Bank to the Company that exceeds the Bank's
current or accumulated earnings and profits as calculated for federal income
tax purposes, any distributions and redemption of stock or any distributions
and partial or complete liquidations would be treated as a distribution of the
bad debt reserve and would be subject to recapture taxes of up to 51%. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its bad debt reserve or make any distributions.
36
ITEM 6. SELECTED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED FINANCIAL
CONDITION DATA:
Total assets............ $1,009,754 $ 882,504 $ 871,814 $ 960,853 $916,846
Loans receivable,
net(1)................. 895,056 729,862 682,984 733,132 645,670
MBS .................... 15,975 43,547 52,116 79,971 109,982
Investment securities .. 21,604 34,695 41,655 38,899 55,101
Real estate(2).......... 6,130 7,172 26,258 41,269 22,011
Deposits................ 844,619 790,803 776,528 805,334 835,134
Borrowed funds(3)....... 64,418 4,418 31,133 80,085 8,845
Stockholders' equity,
substantially
restricted............. 84,250 72,118 48,078 55,508 53,361
CONSOLIDATED OPERATING
DATA:
Interest income......... $ 66,508 $ 61,499 $ 64,224 $ 56,515 $ 59,436
Interest expense........ 36,731 33,038 38,366 29,869 30,869
---------- --------- --------- --------- --------
Net interest income..... 29,777 28,461 25,858 26,646 28,567
Provision for losses on
loans.................. 1,139 2,838 7,938 12,651 12,990
---------- --------- --------- --------- --------
Net interest income
after provision for
losses on loans ..... 28,638 25,623 17,920 13,995 15,577
---------- --------- --------- --------- --------
Non-interest income
Fee income............ 6,612 5,822 6,212 4,509 4,338
Other non-interest
income............... 434 1,145 4,986 (4) 1,766 2,546
---------- --------- --------- --------- --------
Total non-interest
income............. 7,046 6,967 11,198 6,275 6,884
---------- --------- --------- --------- --------
Non-interest expense
Compensation and
benefits............. 11,999 11,438 12,063 14,200 12,494
Occupancy and
equipment............ 7,122 7,038 6,831 7,816 6,973
Other G&A............. 4,864 10,751 (5) 5,391 5,179 5,991
---------- --------- --------- --------- --------
Total G&A............. 23,985 29,227 24,285 27,195 25,458
Real estate
operations, net...... 1,200 1,311 10,258 8,370 3,222
Provision for losses
on letters of credit. -- 2,402 2,536 9,895 694
---------- --------- --------- --------- --------
Total non-interest
expense............ 25,185 32,940 37,079 45,460 29,374
---------- --------- --------- --------- --------
Earnings (loss) before
income taxes........... 10,499 (350) (7,961) (25,190) (6,913)
Income taxes (benefit).. 66 7 124 1,150 (3,669)
---------- --------- --------- --------- --------
Net earnings (loss)..... $ 10,433 $ (357) $ ( 8,085) $ (26,340) $ (3,244)
========== ========= ========= ========= ========
PER SHARE DATA:
Basic earnings (loss)
per share(12).......... $ 1.46 $ (0.07) $ (2.04) $ (6.14)(6) n/a
Average shares used for
calculation of basic
earnings (loss) per
share ................. 7,141,275 5,146,331 3,955,461 3,976,700 n/a
Diluted earnings (loss)
per share(12).......... $ 1.41 $ (0.07) $ (2.04) $ (6.08) n/a
Average shares used for
calculation of diluted
earnings (loss) per
share.................. 7,426,327 5,146,331 3,955,461 3,976,700 n/a
Stockholders' equity per
share.................. $ 11.70 $ 10.22 $ 12.14 $ 13.96 n/a
Shares used for
calculation of
stockholders' equity
per share.............. 7,199,941 7,057,941 3,960,650 3,976,700 n/a
(See notes on following page)
37
SELECTED FINANCIAL DATA--(CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FINANCIAL RATIOS AND OTHER
DATA:
PERFORMANCE RATIOS:
Return on average assets....... 1.12% (0.04)% (0.86)% (2.79)% (0.35)%
Return on average equity....... 13.43 (0.62) (15.05) (38.30) (6.00)
Equity to total assets......... 8.34 8.17 5.51 5.78 5.82
Interest rate spread........... 3.01 3.36 2.87 3.19 3.44
Net interest margin............ 3.37 3.55 2.96 3.19 3.45
Average interest-earning assets
to average interest-bearing
liabilities................... 108.73 104.65 102.62 100.03 100.25
G&A to average assets.......... 2.57 3.40 (7) 2.59 2.88 2.74
Efficiency ratio(8)............ 65.14 82.50 (9) 65.54 (9) 82.61 71.81
REGULATORY CAPITAL RATIOS:
Tangible and core capital...... 7.81 7.73 5.24 5.65 5.42
Risk-based capital............. 11.94 11.52 8.17 8.59 8.11
ASSET QUALITY RATIOS:
Nonaccrual loans to total
loans......................... 0.83 1.76 2.45 1.77 3.34
Nonperforming assets to total
assets and LOCs(10)(11)....... 1.14 2.02 4.53 4.46 3.17
Allowance for losses on loans
to total loans................ 0.84 1.34 2.05 2.37 2.26
Allowance for losses on loans,
LOCs and real estate to total
assets and LOCs............... 1.46 1.96 3.28 2.85 1.95
GVA for losses on loans to
nonaccrual loans.............. 99.31 70.03 56.53 108.03 44.96
GVA for losses on loans, LOCs
and real estate to total
nonperforming assets(10)(11).. 122.00 89.18 39.30 51.20 40.90
OTHER DATA:
Number of deposit accounts..... 93,579 89,821 89,015 89,763 87,630
Full service customer facili-
ties.......................... 14 14 14 16 16
Full time equivalent employees. 273 279 281 350 337
- --------
(1) Includes loans held for sale.
(2) Includes REO and real estate held for sale.
(3) Includes advances from the FHLB.
(4) Includes curtailment gain of $3.4 million.
(5) Includes FDIC special assessment of $5.4 million.
(6) Loss per share data has been calculated based on the Company's net loss
of $24.4 million for the period April 7, 1994 through December 31, 1994
(the date of the Company's initial public offering).
(7) G&A to average assets ratio, excluding the FDIC special assessment is
2.77%.
(8) Efficiency ratio equals G&A expense to net interest income plus total
non-interest income. Excludes provisions for losses on loans, LOCs and
real estate.
(9) For the years ended December 31, 1996 and 1995, if the FDIC special
assessment of $5.4 million and curtailment gain on retirement plan of
$3.4 million were excluded efficiency ratio would be 67.20% and 72.14%.
(10) Excludes troubled debt restructures which are currently performing under
their restructured terms.
(11) Nonperforming assets include nonperforming loans, LOCs and REO.
(12) Earnings per share have been restated to reflect the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company reported net earnings in 1997 of $10.4 million or $1.46 per
basic share ($1.41 per diluted share), compared to a net loss of $357,000 or
$0.07 per basic and diluted share in 1996 and a net loss of $8.1 million or
$2.04 per basic and diluted share in 1995.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and other
borrowings. The Company also generates non-interest income such as letter of
credit fees, other transactional fees, loan servicing fees, and commissions
from the sale of insurance products and investments through its wholly-owned
subsidiaries. The Company's operating expenses primarily consist of employee
compensation and benefits, occupancy and equipment expenses, federal deposit
insurance premiums and other G&A expenses. The Company's results of operations
previously were significantly affected by its provision for loan and letters
of credit losses and net cost of real estate operations. Results of operations
are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory agencies. In addition, the Company's results of
operations in 1996 were adversely affected by the one-time deposit insurance
premium surcharge imposed on SAIF-insured institutions. See "Management's
Discussion and Analysis of Financial Condition" and "Regulation--Deposit
Insurance."
At December 31, 1997, the Company had total consolidated assets of $1.0
billion, total deposits of $844.6 million and stockholders' equity of $84.3
million, representing 8.34% of total assets. At December 31, 1996, the Company
had total consolidated assets of $882.5 million, total deposits of $790.8
million and stockholders' equity of $72.1 million, representing 8.17% of total
assets.
DEFINITIVE AGREEMENT AND PLAN OF MERGER
On November 30, 1997, the Company signed a definitive Agreement and Plan of
Merger pursuant to which the Company will be acquired by, and merged into, a
wholly owned subsidiary of Golden State Bancorp Inc. ("Golden State"), the
parent of Glendale Federal Bank. Upon the closing of the acquisition, Golden
State will issue $20.75 of its common stock in exchange for each share of the
Company's common stock. The transaction will be treated as a tax free exchange
with the exact number of Golden State shares to be distributed to the
Company's stockholders to be determined based upon the average closing price
of Golden State's common stock on the New York Stock Exchange during the ten
trading days prior to the second business day before the closing of the
transaction. Consummation of the acquisition is subject to the approval of the
Company's stockholders and regulatory authorities. It is currently expected
that the acquisition will be consummated in the second quarter of 1998.
On February 4, 1998, Golden State entered into an Agreement and Plan of
Reorganization with First Nationwide (Parent) Holdings, Inc. ("FNPH"), First
Nationwide Holdings, Inc. ("FNH"), Golden State Financial Corporation, First
Gibraltar Holdings, Inc. and Hunter's Glen/Ford, Ltd. (the "California Federal
Merger Agreement"). FNH is the parent of California Federal Bank and is
controlled, through intermediate entities, by MacAndrews and Forbes Holdings,
Inc. ("MAF") and Gerald J. Ford ("Ford"), the Chairman of the Board and Chief
Executive Officer of California Federal Bank. Subject to certain conditions,
including the approval of Golden State's stockholders and regulatory
authorities, FNPH will be merged with and into Golden State (the "California
Federal Merger") pursuant to the California Federal Merger Agreement. If the
California Federal Merger is consummated, it is expected that affiliates of
MAF and Ford would together own between 42% and 45% of the combined entity,
before giving effect to the contingent issuance of Golden State common stock
under the California Federal Merger Agreement that could substantially
increase such percentage ownership. Upon the closing of the California Federal
Merger, two-thirds of the board of directors of Golden State will be
individuals designated by affiliates of MAF and Ford.
39
NONPERFORMING ASSETS AND ALLOWANCE FOR LOSSES
For much of the period from 1991 through 1995, the economy in Southern
California, including the Inland Empire, had been characterized by
recessionary economic conditions resulting in high levels of unemployment,
increases in vacancies in multi-family residential and commercial properties,
declining rents and property values and slowing sales of new and existing one-
to four-family residential properties. These factors had previously caused
significant increases in the Company's level of nonperforming assets, which
include nonaccrual loans and REO. At December 31, 1997, the Company's level of
nonperforming assets had decreased to $12.8 million or 1.14% of assets and
LOCs, from the December 31, 1996 level of nonperforming assets of $20.0
million or 2.02% of assets and LOCs. The Company's level of classified assets,
which consist of assets adversely classified in accordance with regulatory
guidelines because they possess one or more well-defined weaknesses, has
decreased to $19.4 million or 1.74% of total assets and LOCs at December 31,
1997, a reduction of $12.2 million in classified assets, when compared to
$31.6 million or 3.20% of total assets and LOCs at December 31, 1996. Of the
$19.4 million of classified assets at December 31, 1997, $6.6 million were
performing in accordance with their terms. The allowance for losses on loans,
LOCs and real estate decreased to $16.3 million at December 31, 1997 from
$19.4 million at December 31, 1996. The December 31, 1997 aggregate allowance
of $16.3 million included a GVA of $15.6 million, which represents a decrease
of $2.2 million from December 31, 1996. The remaining allowances of $737,000
and $1.6 million at December 31, 1997 and 1996, respectively were for specific
asset valuation allowances. The Company's ratio of GVA for losses on loans,
LOCs, and real estate to nonperforming assets and LOCs increased to 122.00% at
December 31, 1997, from 89.18% at December 31, 1996.
The allowances for losses on loans, real estate and LOCs are established
through provisions based on management's evaluation of the risks inherent in
the Company's portfolios and the local real estate economy. The allowances are
maintained at amounts management considers adequate to cover losses which are
deemed probable and calculable. The allowances are based upon a number of
factors, including asset scoring and classification, collateral values,
management's assessment of the credit risk inherent in the portfolio,
historical loan loss experience, a loss migration analysis and the Company's
underwriting policies. As a result of changes in certain real estate markets,
adjustments in the valuation allowances may be required in future periods. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's valuation allowance.
These agencies may require additional valuation allowances, based on their
judgments of the information available to them at the time of the examination.
Management considers the level of the allowance for losses at December 31,
1997 to be adequate. See "Business--Lending Activities," "--Asset Quality--
Nonperforming Assets," and "Classified Assets."
BUSINESS STRATEGY
In 1998 the Company will, in addition to an orderly transition to Golden
State as a result of the definitive agreement for acquisition, (i) continue to
identify, control and reduce classified assets and REO as cost-effectively as
possible, (ii) improve profitability by continuing to reduce G&A expenses,
where feasible, and increase non-interest income, and (iii) maintain capital
in the "well-capitalized" category under FDICIA rules while prudently
leveraging capital to maximize profitability. Key elements in the development
and implementation of the Company's strategies include the following:
1. Continue to aggressively identify, control and reduce classified
assets, including REO.
2. Continue to manage G&A expenses and to lower them where possible.
3. Continue to emphasize spot construction and consumer and other loan
programs, and selectively re-enter tract construction and purchase
single-family adjustable mortgage loans as market conditions warrant.
4. Continue to emphasize a full range of business banking services geared
to small, service-oriented businesses in branch communities.
40
5. Continue to pursue a sales oriented culture, particularly at the
branch level, with the goal of increasing core and low cost deposits
and expanding the small business clientele.
6. Continue to expand customer product services, including enhanced
telephone transaction capability, PC-based banking and other
technological innovations.
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates therefore, the net earnings of an institution
with a positive gap theoretically may be adversely affected due to its
interest-earning assets repricing faster than its interest-bearing
liabilities. Conversely, during a period of rising interest rates,
theoretically the net earnings of an institution with a positive gap position
may increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than its interest-earning liabilities reprice.
However, a positive gap may not protect an institution with a large portfolio
of ARMs from rises in interest rates for extended time periods, as such
instruments generally have annual and lifetime interest rate caps.
Accordingly, interest rates and the resulting cost of funds increases in a
rapidly increasing rate environment could exceed the cap levels on these
instruments and negatively impact net interest income.
The Company has managed its interest rate risk through the aggressive
marketing and funding of adjustable rate loans, which generally reprice at
least semi-annually and indexed to the COFI and to a lesser extent, the one
year CMT and LIBOR indexes. As a result of this strategy, and based upon the
Bank's internally developed loan prepayment speeds and core deposit decay rate
assumptions used in the following table at December 31, 1997, the Company's
net interest-earning assets maturing or repricing within one year exceeded its
total interest-bearing liabilities maturing or repricing in the same time by
$348.7 million, representing a one year cumulative gap ratio of positive
34.53%. The Company closely monitors its interest rate risk as such risk
relates to its operational strategies.
The Company's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing the Company's asset/liability policies
and interest rate risk position, which meets quarterly and reports to the
Board on interest rate risk and trends on a quarterly basis. There can be no
assurances that the Company will be able to maintain its positive gap position
or that its strategies will not result in a negative gap position in the
future. To the extent that the Company's core deposits are reduced at a more
rapid rate than the Company's decay assumptions on such deposits, the
Company's current positive gap positions could be negatively impacted.
Although the Company has not experienced a material decline in its core
deposits, there can be no assurances that such a decline will not occur in the
future if depositors seek higher yielding investments. For information
concerning the Bank's deposit activity and the distribution of its deposits
for each of the years in the three-year period ended December 31, 1997. See
"--Business--Sources of Funds--Deposits."
The Company does not currently engage in the use of trading activities,
derivative instruments, or hedging activities to control its interest rate
risk. Even though the use of such instruments or activities may be permitted
at the recommendation of the Asset/Liability Committee and approval of the
Board of Directors, the Company does not intend to engage in such practices in
the immediate future.
41
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities of the Company, outstanding at December 31, 1997,
which are anticipated by the Company, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual terms of the asset or liability. Loans
were assumed to prepay at rates ranging from 13% to 24% on single-family ARM
loans, 7% to 16% on multi-family ARM loans, and 7% to 30% on fixed rate loans,
and the use of a core deposit decay rate assumption of 24% for passbook
accounts, 23% for checking accounts and 46% for money market deposit accounts
in the one year or less category. These prepayment and decay rates are based
on the Company's historical experience, but there is no assurance that the
assumed rates will correspond to future rates. For information regarding the
contractual maturities of the Company's loans, investments and deposits, see
"Business--Lending Activities," "--Investment Activities" and "--Sources of
Funds."
INTEREST RATE SENSITIVITY
AT DECEMBER 31, 1997
-------------------------------------------------------------------------------------------
MORE
THREE THREE SIX ONE TO THREE FIVE TO THAN
MONTHS TO SIX MONTHS TO THREE TO FIVE TEN TEN
OR LESS MONTHS ONE YEAR YEARS YEARS YEARS YEARS OTHER TOTAL
-------- -------- --------- --------- -------- -------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS:
Mortgage loans and
MBS(1)................. $511,206 $249,983 $ 49,312 $ 15,766 $ 11,160 $ 17,149 $14,226 $ -- $ 868,802
Consumer and other
loans(1)............... 17,455 2,291 4,199 11,549 4,662 2,233 292 -- 42,681
Investment securities
and cash equivalents... 34,051 3,000 -- 7,994 -- -- -- -- 45,045
Non-interest earning
assets................. -- -- -- -- -- -- -- 53,226 53,226
-------- -------- --------- --------- -------- -------- ------- -------- ----------
Total assets........... $562,712 $255,274 $ 53,511 $ 35,309 $ 15,822 $ 19,382 $14,518 $ 53,226 $1,009,754
======== ======== ========= ========= ======== ======== ======= ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST-BEARING
LIABILITIES:
Savings deposits........ $ 11,953 $ 11,953 $ 20,909 $ 60,516 $ 35,415 $ 36,874 $13,091 $ -- $ 190,711
Money market deposits... 1,033 1,033 1,686 3,166 593 309 71 -- 7,891
Interest bearing
checking (NOW)
deposits............... 4,941 4,941 11,227 28,266 12,750 14,366 6,099 -- 82,590
Certificates of deposit. 124,264 92,910 175,276 137,542 6,097 -- -- -- 536,089
Other borrowed money.... 10,000 50,000 708 3,710 -- -- -- -- 64,418
Non-interest-bearing
liabilities............ -- -- -- -- -- -- -- 43,805 43,805
Stockholders' equity.... -- -- -- -- -- -- -- 84,250 84,250
-------- -------- --------- --------- -------- -------- ------- -------- ----------
Total liabilities and
stockholders' equity.. $152,191 $160,837 $ 209,806 $ 233,200 $ 54,855 $ 51,549 $19,261 $128,055 $1,009,754
======== ======== ========= ========= ======== ======== ======= ======== ==========
Interest sensitivity
gap(2)................. $410,521 $ 94,437 $(156,295) $(197,891) $(39,033) $(32,167) $(4,743) $(74,829)
======== ======== ========= ========= ======== ======== ======= ========
Cumulative interest
sensitivity gap........ $410,521 $504,958 $ 348,663 $ 150,772 $111,739 $ 79,572 $74,829 $ --
======== ======== ========= ========= ======== ======== ======= ========
Cumulative interest
sensitivity gap as a
percentage of total
assets................. 40.66% 50.01% 34.53% 14.93% 11.07% 7.88% 7.41%
Cumulative net interest-
earning assets as a
percentage of interest-
sensitive liabilities.. 369.74 261.31 166.69 119.94 113.78 109.23 108.49
- -------
(1) For purposes of the gap analysis, mortgage and consumer and other loans do
not include non-performing loans, allowance for loan losses or deferred
fees.
(2) Interest sensitivity gap represents the difference between net-interest
earning assets and interest-bearing liabilities.
42
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react differently to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their ARM loans may decrease in the event of an interest rate
increase.
In addition to measuring interest rate sensitivity by a gap analysis, the
Company establishes limits on, and measures the sensitivity of, its net
interest income and net portfolio value ("NPV") to changes in interest rates.
For the purpose of such analysis, changes in interest rates are defined as
instantaneous and sustained movements in interest rates in 100 basis point
increments. The Company utilizes an internally maintained asset/liability
management simulation model to make the calculations which, for NPV, are
calculated on a discounted cash flow basis. First, the Company establishes a
"base case" by estimating its net interest income for a period of twelve
months and the current NPV assuming nominal interest rate changes through the
end of such period. Once the base case has been estimated, calculations are
made for each of the changes in interest rates, to include any associated
differences in the anticipated prepayment speed of loans and decay rates for
core deposits. Those results are then compared against the base case to
determine the estimated change to net interest income and NPV due to such
changes in interest rates. Following are the estimated impacts to net interest
income and NPV from various instantaneous, parallel shifts in interest rates
based upon the Company's asset and liability structure as of December 31,
1997. Because these estimates are based upon numerous assumptions, such as the
expected maturities of the Company's interest-bearing assets and liabilities
and the interest rates corresponding to various maturities at the end of such
period, the Company's actual sensitivity to interest rate changes could vary
significantly if actual experience differs from those assumptions used in
making the calculations. The interest rate sensitivity analysis highlights the
repricing characteristics or lag effect of the Company's mortgage loan
portfolio of which 73.14% of the Company's ARM loans are indexed to COFI. This
index tends to lag changes in interest rates and accordingly in a rising
interest rate environment the lag effect has a negative impact on earnings and
in a falling interest rate environment the lag effect tends to be positive.
These percentage changes are within the board limits previously set.
INTEREST RATE SENSITIVITY--NET INTEREST INCOME AND NPV
AT DECEMBER 31, 1997
---------------------------------------------------------------
CHANGE IN INTEREST RATES NET INTEREST PERCENTAGE CHANGE IN
(IN BASIS POINTS) INCOME(1) NET PORTFOLIO VALUE(2)
------------------------ ------------ ----------------------
+300 (0.60)% (15.66)%
+100 (0.70) (3.23)
(100) 7.60 2.10
(300) 9.81 (9.35)
- --------
(1) The percentage change in this column represents net interest income for 12
months in a stable environment versus the net interest income in the
various rate scenarios.
(2) The percentage change in this column represents the NPV of the Company in
a stable interest rate environment versus the NPV in the various rate
scenarios.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between the income earned on
interest-earning assets and the interest expense on interest-bearing
liabilities.
43
Average Balance Sheet. The following table sets forth certain information
relating to the elements of the Company's net interest income for each of the
years ended December 31, 1997, 1996, and 1995. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
Average balances are derived from daily average balances. The yields include
fees which are considered adjustments to yields.
AVERAGE BALANCE SHEET
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
-------- -------- ---------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning
assets(1):
Mortgage loans......... $763,969 $57,449 7.52% $658,073 $51,106 7.77% $708,440 $52,652 7.43%
MBS.................... 27,760 2,039 7.35 52,498 3,932 7.49 68,459 5,152 7.53
Consumer and other
loans................. 32,780 3,617 11.03 24,908 2,713 10.89 26,784 2,989 11.16
Investment securities.. 58,469 3,403 5.82 65,670 3,748 5.71 64,546 3,431 5.32
-------- ------- -------- ------- -------- -------
Total interest-
earning assets...... 882,978 66,508 7.53 801,149 61,499 7.68 868,229 64,224 7.40
------- ------- -------
Non-interest earning
assets................. 49,188 59,375 71,061
-------- -------- --------
Total assets......... $932,166 $860,524 $939,290
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits....... $177,502 5,610 3.16 $167,029 5,003 3.00 $151,531 4,002 2.64
Money market deposits.. 8,819 225 2.55 10,073 246 2.44 11,979 305 2.55
Interest bearing
checking (NOW)
deposits.............. 83,307 971 1.17 83,404 882 1.06 86,199 1,000 1.16
Certificates of
deposits.............. 521,401 28,632 5.49 486,026 25,848 5.32 542,100 29,651 5.47
Other borrowed money... 21,034 1,293 6.15 19,028 1,059 5.57 54,252 3,408 6.28
-------- ------- -------- ------- -------- -------
Total interest-
bearing liabilities. 812,063 36,731 4.52 765,560 33,038 4.32 846,061 38,366 4.53
Non-interest bearing
liabilities............ 42,403 37,335 39,504
Stockholders' equity.... 77,700 57,629 53,725
-------- -------- --------
Total liabilities and
stockholders'
equity.............. $932,166 $860,524 $939,290
======== ------- ======== ------- ======== -------
Net interest rate
spread(2).............. $29,777 3.01% $28,461 3.36% $25,858 2.87%
======= ===== ======= ===== ======= =====
Net interest margin(3).. 3.37% 3.55% 2.98%
===== ===== =====
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 108.73% 104.65% 102.62%
======== ======== ========
- -------
(1) Includes accrued interest and is net of loans in process, unearned
discounts or premiums, deferred loan fees, nonaccrual loans and valuation
allowances.
(2) Net interest rate spread represents the difference between the average
yield on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
44
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by current rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
RATE/VOLUME ANALYSIS
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
COMPARED TO DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
------------------------------- ---------------------------------
INCREASE (DECREASE) IN NET INCREASE (DECREASE) IN NET
INTEREST INCOME DUE TO INTEREST INCOME DUE TO
------------------------------- ---------------------------------
VOLUME RATE NET VOLUME RATE NET
-------------------- --------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Mortgage loans........ $ 7,963 $ (1,621) $ 6,342 $ (3,912) $ 2,366 $ (1,546)
MBS .................. (1,818) (74) (1,892) (1,195) (25) (1,220)
Consumer and other
loans................ 869 35 904 (204) (72) (276)
Investment securities
..................... (419) 74 (345) 64 253 317
--------- --------- --------- ---------- --------- ----------
Total .............. $ 6,595 $ (1,586) $ 5,009 $ (5,247) $ 2,522 $ (2,725)
========= ========= ========= ========== ========= ==========
INTEREST-BEARING
LIABILITIES:
Savings deposits...... $ 331 $ 272 $ 603 $ 464 $ 537 $ 1,001
Money market deposits. (32) 11 (21) (47) (12) (59)
Interest bearing
checking (NOW)
deposits............. (1) 90 89 (30) (88) (118)
Certificates of
deposit.............. 1,944 844 2,788 (2,982) (821) (3,803)
Other borrowed money.. 123 111 234 (1,960) (389) (2,349)
--------- --------- --------- ---------- --------- ----------
Total .............. 2,365 1,328 3,693 (4,555) (773) (5,328)
--------- --------- --------- ---------- --------- ----------
Change in net interest
income .............. $ 4,230 $ (2,914) $ 1,316 $ (692) $ 3,295 $ 2,603
========= ========= ========= ========== ========= ==========
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
General. The Company recorded net earnings of $10.4 million for the year
ended December 31, 1997, or $1.46 per basic share and $1.41 per diluted share,
as compared to a loss of $357,000 for the year ended December 31, 1996, or
$0.07 per basic and diluted share. Operating results were favorably impacted
in 1997 by an increase in net interest income before provision for losses on
loans of $1.3 million, by a reduction in G&A of $5.2 million, primarily due to
a $5.4 million charge for a one-time FDIC special assessment in 1996, and by a
net reduction of $4.1 million in provisions for losses on loans, real estate
and LOCs when compared to the same period in 1996.
Interest income. Interest income for the year ended December 31, 1997 was
$66.5 million, compared to $61.5 million for the same period in the previous
year. The $5.0 million increase in interest income is primarily due to a $81.8
million increase in the average balance of interest-earning assets, partially
offset by a decrease in the average yield of 15 basis points on interest-
earning assets from 7.68% in 1996 to 7.53% in 1997. Interest income from
mortgage loans, which accounted for approximately 86.38% of total interest
income in 1997, increased by $6.3 million or 12.4% from 1996 due to an
increase in the average balance of $105.9 million partially offset by a
decrease in the average yield of 25 basis points. Interest income from MBS
declined by $1.9 million or 48.14% primarily due to a reduction in the average
balance of $24.7 million. Interest income from consumer loans increased by
$904,000, or 33.32%, primarily due to an increase in the average balance of
$7.9 million.
45
Interest expense. Interest expense for the year ended December 31, 1997 was
$36.7 million, compared to $33.0 million for the same period in the previous
year. The $3.7 million increase is primarily the result of an $46.5 million
increase in the average balance of interest-bearing liabilities and an
increase in the average cost of 20 basis points paid on interest-bearing
liabilities from 4.32% in 1996 to 4.52% in 1997. Interest expense for savings,
Money Market Demand Accounts ("MMDA") and interest-bearing checking deposits
increased $675,000 or 10.94% primarily due to an increase in average balance
of $9.1 million, and interest expense on certificates of deposit increased
$2.8 million or 10.79% primarily due to an increase in average balance of
$35.4 million. Interest expense on other borrowed money increased $234,000 or
22.10% due to an increase in average balance of $2.0 million, and an increase
in average cost of 58 basis points.
Net interest income. Net interest income for the year ended December 31,
1997 was $29.8 million, which represents an interest rate spread of 3.01%.
This compares to $28.5 million, which represents an interest rate spread of
3.36%, for the same period in 1996. Average interest-earning assets increased
$81.8 million and average interest-bearing liabilities increased $46.5 million
when compared to the year ended December 31, 1996. The 35 basis point decrease
in the interest rate spread for the year ended December 31, 1997, when
compared to the year ended December 31, 1996, was a result of a decrease in
the average yield for interest-earning assets of 15 basis points, and an
increase in the average cost for interest-bearing liabilities of 20 basis
points. Net interest income also increased as a result of an improvement in
the ratio of average interest-earning assets to average interest-bearing
liabilities from 104.65% in 1996 to 108.73% in 1997.
Provision for losses on loans. The provision for losses on loans was $1.1
million for the year ended December 31, 1997, compared to $2.8 million for the
same period last year. No provision for losses on LOCs was recognized for the
year ended December 31, 1997 and $2.4 million was provided for the same period
in 1996, which is included in "Non-interest expense." The loss provision
reflects management's ongoing assessment of the loan and LOC portfolios, in
light of conditions in the Southern California real estate market.
Non-interest income. Non-interest income was $7.0 million for the years
ended December 31, 1997 and 1996. Major differences included: $803,000 from
gain on sale of loan servicing rights in 1996 and an increase in LOC and other
fees of $790,000 during 1997 when compared to 1996.
Non-interest expense. Non-interest expense was $25.2 million for the year
ended December 31, 1997, a decrease of $7.7 million or 23.54% from $32.9
million in 1996. Included in this decrease was a decrease of $5.2 million or
17.94% in G&A from $29.2 million in 1996 to $24.0 million in 1997. The
decrease in G&A was primarily due to a one-time FDIC special assessment during
1996 in the amount of $5.4 million, a decrease in the normal FDIC premium of
$940,000 and expenses for a Bank-wide data processing conversion during 1996
of approximately $400,000. These decreases were offset by $397,000 of
acquisition expense, $561,000 in compensation and benefits expense primarily
from a defined benefit plan adjustment of $245,000 and ESOP market value
recognition for amortization to employee participants of $353,000, and by an
increase in other expense for advertising costs of $499,000. The efficiency
ratio for the year ended December 31, 1997 was 65.14% as compared to 67.20%
for the year ended December 31, 1996, when the FDIC special assessment is
excluded. Non-interest expense (other than G&A) includes provisions for losses
on real estate and LOCs, as well as operating expenses for real estate
operations including gains and losses on the sale of real estate held for sale
or acquired through foreclosure. For the year ended December 31, 1997 the
Company recorded no provision for losses on LOCs and no provision for losses
on real estate because of the reduction in the REO balances resulting from the
disposition of assets during the period. This compares with provisions for
losses on LOCs of $2.4 million and no provision for losses on real estate for
the year ended December 31, 1996. The loss provisions reflect management's
ongoing assessment of the real estate and LOC portfolios in light of
conditions in the Southern California real estate market. Real estate
operating expense, net (excluding the provision for losses on real estate),
decreased to $1.2 million for the year ended December 31, 1997, as compared to
$1.3 million for the same period in 1996.
46
Income taxes (benefit). The Company paid a $16,000 franchise tax for the
year ended December 31, 1997, and a $7,000 tax for the year ended December 31,
1996. The Company paid a $50,000 federal alternative minimum tax for the year
ended December 31, 1997, and there was no federal income tax for the same
period in 1996 as a result of the Company's net operating loss ("NOL")
carryforward tax position. At December 31, 1997, the Company had unused NOLs
aggregating approximately $22.7 million for federal income tax purposes and
approximately $9.0 million for California franchise tax purposes available to
offset taxable income in future tax years. The federal NOLs would expire, if
not utilized, beginning in the taxable year 2009, and the California NOLs
would expire, if not utilized, beginning in the taxable year 1999. These NOLs
could become subject to certain limitations on utilization in the event of
accumulations of shares of the Company's Common Stock by 5% or greater
stockholders See "Business--Taxation--NOLs."
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
General. The Company recorded a net loss of $357,000 for the year ended
December 31, 1996, or $0.07 per basic and diluted share, as compared to a loss
of $8.1 million for the year ended December 31, 1995, or $2.04 per basic and
diluted share. Operating results were favorably impacted in 1996 by an
increase in net interest income before provision for losses on loans of $2.6
million, by a reduction in G&A of $479,000, excluding a $5.4 million charge
for a one-time FDIC special assessment, and by a net reduction of $13.6
million in provisions for losses on loans, real estate and LOCs, offset by a
$3.4 million 1995 curtailment gain resulting from freezing the defined benefit
plans, when compared to the same period in 1995.
Interest income. Interest income for the year ended December 31, 1996 was
$61.5 million, compared to $64.2 million for the same period in the previous
year. The $2.7 million decrease in interest income is primarily due to a $67.1
million decrease in the average balance of interest-earning assets, partially
offset by an increase in the average yield of 28 basis points on interest-
earning assets from 7.40% in 1995 to 7.68% in 1996. Interest income from
mortgage loans, which accounted for approximately 83.10% of total interest
income in 1996, decreased by $1.5 million or 2.94% from 1995 due to a
reduction in the average balance of mortgage loans of $50.4 million partially
offset by an increase in the average yield of 34 basis points on such loans.
Interest income in 1996 from MBS declined by $1.2 million or 23.68% primarily
due to a reduction in the average balance of MBS of $16.0 million.
Interest expense. Interest expense for the year ended December 31, 1996 was
$33.0 million, compared to $38.4 million for the previous year. The $5.3
million decrease is primarily the result of an $80.5 million decrease in the
average balance of interest-bearing liabilities and a 21 basis point decrease
in the average cost of interest-bearing liabilities from 4.53% in 1995 to
4.32% in 1996. Interest expense for savings, MMDA and interest-bearing
checking deposits increased $824,000 or 15.53% primarily due to an increase in
average balance of $10.8 million, while interest expense on certificates of
deposit decreased $3.8 million or 12.83% primarily due to a decrease in
average balance of $56.1 million. Interest expense on other borrowed money
declined $2.3 million or 68.93% due to a decrease in average balance of $35.2
million, and a decrease in average cost of 71 basis points.
Net interest income. Net interest income for the year ended December 31,
1996 was $28.5 million, which represents an interest rate spread of 3.36%.
This compares to $25.9 million, which represents an interest rate spread of
2.87%, for 1995. In accordance with the Company's plan to control growth and
manage capital, average interest-earning assets declined $67.1 million and
average interest-bearing liabilities declined $80.5 million when compared to
the year ended December 31, 1995. The 49 basis point increase in the interest
rate spread for the year ended December 31, 1996, when compared to the year
ended December 31, 1995, was a result of an increase in the average yield for
interest-earning assets of 28 basis points, and a decrease in the average cost
for interest-bearing liabilities of 21 basis points. Net interest income also
increased as a result of an improvement in the ratio of average interest-
earning assets to average interest-bearing liabilities from 102.62% in 1995 to
104.65% in 1996.
47
Provision for losses on loans. The provision for losses on loans was $2.8
million for the year ended December 31, 1996, compared to $7.9 million for the
same period last year. The Company also recognized provisions for losses on
LOCs of $2.4 million in 1996, compared to $2.5 million in 1995, and on real
estate of zero in 1996, compared to $8.3 million in 1995, which is included in
"Non-interest expense." The loss provision reflects management's ongoing
assessment of the loan, LOC and real estate portfolio, in light of conditions
in the Southern California real estate market.
Non-interest income. Non-interest income was $7.0 million for the year ended
December 31, 1996, a decrease of $4.2 million or 37.78%, when compared to
$11.2 million for the same period last year. The decrease was due primarily to
a $3.4 million curtailment gain resulting from freezing the employee and
director defined benefit plans in 1995. Other differences included: $803,000
from gain on sale of loan servicing rights in 1996; a reduction in 1996 of
$1.4 million from gain on sale of loans, investments and MBS in 1995, and a
reduction in LOC and other fees of $390,000 when compared to 1995.
Non-interest expense. Non-interest expense was $32.9 million for the year
ended December 31, 1996, a decrease of $4.1 million or 11.16% from $37.1
million in 1995. Included in this decrease was an increase of $4.9 million or
20.35% in G&A from $24.3 million in 1995 to $29.2 million in 1996. The
increase was primarily due to a one-time FDIC special assessment in the amount
of $5.4 million and expenses for a Bank-wide data processing conversion of
approximately $400,000. G&A expenses excluding the FDIC special assessment and
data processing conversion decreased by $879,000, net for the year ended
December 31, 1996 compared to December 31, 1995. This decrease was primarily
from a reduction in the defined benefit plans cost of $445,000, resulting from
freezing the plan during 1995 and from a reduction in compensation costs as a
result of a staff reduction in 1995. The efficiency ratio for the year ended
December 31, 1996 was 67.20% when the FDIC special assessment is excluded as
compared to 72.14% for the year ended December 31, 1995 when the curtailment
gain on the retirement plans is excluded. Non-interest expense (other than
G&A) includes provisions for losses on real estate and LOCs, as well as
operating expenses for real estate operations including gains and losses on
the sale of REO. For the year ended December 31, 1996 the Company recorded a
provision for losses on LOCs of $2.4 million and no provision for losses on
real estate because of the reduction in the REO balances resulting from the
disposition of assets during the period. This compares with provisions for
losses on LOCs of $2.5 million and a provision for losses on real estate of
$8.3 million for the year ended December 31, 1995. The loss provisions reflect
management's ongoing assessment of the real estate and LOC portfolios in light
of conditions in the Southern California real estate market. Real estate
operating expense, net (excluding the provision for losses on real estate),
decreased to $1.3 million for the year ended December 31, 1996, as compared to
$1.9 million for 1995. The decrease in real estate operating expense is due to
a reduction in REO, resulting in lower carrying costs.
Income taxes. The Company paid a $7,000 California franchise tax for the
year ended December 31, 1996, and a $124,000 tax for the year ended December
31, 1995. There was no federal income tax paid as a result of the Company's
NOL carryforward tax position. At December 31, 1996, the Company had unused
NOLs aggregating approximately $33.8 million for federal income tax purposes
and approximately $17.9 million for California franchise tax purposes
available to offset taxable income in future tax years. The federal NOLs would
expire, if not utilized, beginning in the taxable year 2009, and the
California NOLs would expire, if not utilized, beginning in the taxable year
1999. These NOLs could become subject to certain limitations on utilization in
the event of accumulations of shares of the Company's Common Stock by 5% or
greater shareholders.
FINANCIAL CONDITION
The Company's consolidated assets totaled $1.0 billion at December 31, 1997
compared to $882.5 million at December 31, 1996. The increase in consolidated
assets of $127.3 million during the year ended December 31, 1997 was primarily
the result of an increase in net loans receivable of $166.0 million, partially
offset by net reductions in MBS and investment securities of $40.7 million.
Loans originated and purchased including premiums increased $178.6 million to
$337.1 million for the year ended December 31, 1997 compared to $158.5 million
for the 1996 year. This increase was the result of loans originated of $146.0
million and loans
48
purchased including premiums of $191.0 million in 1997, as compared to loans
originated of $87.4 million and loans purchased including premiums of $71.1
million in 1996. Loan principal payments increased $42.0 million to $150.6
million for the year ended December 31, 1997 from $108.6 million for the 1996
year as a result of the larger loan portfolio. Transfers of loans to REO and
reductions in GVA and the undisbursed portion of construction loans
represented other changes during 1997 in net loans receivable. MBS decreased
$27.6 million, net, primarily as a result of the refinancing of $3.7 million
of San Bernardino County Bond owned by the Company to an off-balance sheet
LOC, the repayment of four loans in the amount of $16.2 million from the San
Bernardino County Bond owned by the Company, and the sale of $6.9 million of
GNMA loans available for sale. REO declined by $1.0 million as a result of net
sales of $10.0 million offset by net transfers from loans of $9.0 million. The
increase in consolidated liabilities of $115.1 million for the year ended
December 31, 1997 consisted primarily of an increase in other borrowed money
of $60.0 million as a result of advances from the FHLB, and an increase in the
deposit base of $53.8 million. The increase in stockholders' equity for the
year ended December 31, 1997 of $12.1 million was primarily a result of net
earnings of $10.4 million, and net changes in deferred compensation, minimum
pension liability, unrealized gain on securities available for sale and
additional paid-in capital amounting to $1.7 million.
The Company's consolidated assets totaled $882.5 million at December 31,
1996 compared to $871.8 million at December 31, 1995. The increase in
consolidated assets of $10.7 million during the year ended December 31, 1996
was primarily the result of an increase in net loans receivable of $46.6
million and an increase in cash and cash equivalents of $2.8 million,
partially offset by net reductions in MBS, investment securities, REO and
other assets of $38.2 million. Loans originated and purchased including
premiums increased $44.1 million to $158.5 million for the year ended December
31, 1996 compared to $114.0 million for the 1995 year. This increase was
primarily the result of loans purchased including premiums in 1996 of $71.1
million. Loan principal payments increased $16.7 million to $108.6 million for
the year ended December 31, 1996 from $91.9 million for the 1995 year as a
result of the larger loan portfolio. Transfers of loans to REO and reductions
in GVA and the undisbursed portion of construction loans represented other
changes during 1996 in net loans receivable. MBS decreased $8.6 million, net
as a result of the sale and maturities of $7.9 million. REO declined by $18.8
million primarily as a result of net sales of $22.6 million offset by net
transfers from loans of $10.6 million. The decrease in consolidated
liabilities of $13.4 million for the year ended December 31, 1996 consisted
primarily of a reduction in other borrowed money of $26.7 million, as a result
of a $10.0 million repayment in FHLB advances and $16.7 million repayments in
Notes Payable Revenue Bonds, partially replaced by an increase in the deposit
base of $14.3 million. The increase in stockholders' equity for the year ended
December 31, 1996 of $24.0 million was a result of an increase in additional
paid-in capital of $24.1 million from the proceeds of a secondary stock
offering, partially offset by a net loss of $357,000 and total net changes in
deferred compensation, unrealized loss on securities available for sale and
additional paid-in capital and treasury stock amounting to $328,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans, advances from the FHLB and retained earnings. While
maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions and competition.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 4%. The Bank average liquidity ratios were 5.92%, and 7.43% for the
periods ended December 31, 1997, and 1996, respectively. The Bank currently
attempts to maintain a liquidity ratio as close to the minimum requirements as
possible, since loan originations provide both higher interest rates and fee
income than is available from liquidity investments.
49
The Bank's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $14.0 million,
$6.0 million and $74.1 million for the years ended December 31, 1997, 1996,
and 1995, respectively. Net cash provided by (used in) investing activities
consisted primarily of disbursements for loan originations and purchases,
offset by net principal payments and reductions on loans, and proceeds from
sales of real estate and mortgage-backed securities. Principal payments and
reductions on loans were $156.6 million, $98.0 million and $66.2 million for
the years ended December 31, 1997, 1996, and 1995, respectively. Disbursements
on loans originated and purchased, excluding loans originated for sale, were
$332.6 million, $158.5 million, and $103.7 million for the years ended
December 31, 1997, 1996, and 1995, respectively. Proceeds from the sales of
real estate and mortgage-backed securities were $16.9 million, $28.5 million
and $63.1 million for the years ended December 31, 1997, 1996, and 1995,
respectively. Net cash provided by (used in) financing activities consisted
primarily of net activity in deposit accounts (including deposits acquired),
FHLB advances and other borrowings, and proceeds from issuance of stock. The
net increases (decreases) in total deposits were $53.8 million, $14.3 million
and $(28.8) million for the years ended December 31, 1997, 1996, and 1995,
respectively. The net increases (decreases) in FHLB advances and other
borrowings were $60.0 million, $(19.1) million and $(52.2) million for the
years ended December 31, 1997, 1996 and 1995, respectively. Proceeds from
issuance of stock in 1996 were $24.1 million. Other cash flows are indicated
on the "Consolidated Statement of Cash Flows" in the Financial Statements.
The Bank's most liquid assets are cash and short term investments. The
levels of these assets are dependent on the Bank's operating, investing and
financing activities during any given period. At December 31, 1997 and 1996
cash and cash equivalents totaled $34.2 million and $33.7 million,
respectively. These amounts were adequate to provide funding sources for loan
originations. Whenever funds provided from loan repayments, loan sales and
deposit inflows are insufficient to fund loan originations and deposit
outflows, liquid assets are impacted.
The Bank has other sources of liquidity if a need for additional funds
arises including FHLB advances. At December 31, 1997 the Company had $60.0
million in advances outstanding from the FHLB. See "Business--Sources of
Funds--Borrowings." Other sources of liquidity include investment securities
maturing within one year.
At December 31, 1997, the Company had net outstanding loan commitments of
$3.8 million. The Company anticipates that it will have sufficient funds
available to meet its current loan origination commitments.
YEAR 2000
The Company is aware of potential risks which could be posed by the fact
that certain computers and/or software programs may not recognize dates
correctly beginning with January 1, 2000, the so called "Year 2000 problem."
Many computer programs use two digit date fields; affected programs will
assume that all year dates begin with "19," when in fact they should begin
with "20," because such programs use two digit fields for year dates. As a
result, some experts believe that critical systems could fail due to the fact
that the wrong date is being read.
To address this potential problem, in May 1997, the Company formed a Year
2000 Task Force (the "Y2K Committee") for the purposes of identifying
potential Year 2000 problems, and addressing such problems in an orderly and
timely manner. Members of the Y2K Committee include the Chief Operating
Officer, Senior Vice-Presidents from all divisions of the Company, the
Management Informations Systems Director and the Internal Auditor. Regular
reports on the activities of the Y2K Committee are provided to the Board of
Directors.
The Y2K Committee established a process for identifying all potential Year
2000 issues. A complete inventory of all hardware and software utilized by the
Company was completed in 1997, and all outside vendors providing support to
the Company were asked to respond to a Year 2000 survey and to either certify
that they were Year 2000 compliant, or to identify when they would be
compliant.
50
Because the Company relies on a third party vendor for its deposit, loan and
general ledger data processing, extensive time has been spent to assure that
the vendor is Year 2000 compliant. The vendor has represented to the Company
that by the end of 1998, it will be fully Year 2000 compliant. Other vendors
providing support to the Company have reported varying levels of Year 2000
compliance, ranging from full compliance to a few who will not be compliant
and will not support their software applications in the future. Where Year
2000 compliance is asserted by a vendor, testing will be done by the Company
to assure that compliance actually exists.
To date, the Company has estimated that achieving substantial Year 2000
compliance will cost $1.0 million, of which approximately $900,000 will
consist of replacing ATM, check-processing and branch telephone equipment
which have been fully depreciated. Such new equipment will then be depreciated
over appropriate periods of time. The remaining expense is for re-programming
of certain in-house software applications, and the purchase of replacement
software for certain in-house applications where the current vendor has stated
that it will not continue to support the applications beyond the Year 2000.
These estimates could change as hardware and applications are tested for
compliance if further replacements are found to be necessary. In addition,
some of these costs may be avoided if the acquisition of the Company by Golden
State is consummated because certain systems will be replaced with those of
Golden State.
If the acquisition of the Company by Golden State is not consummated, the
Company expects to complete all testing during 1998, and to be substantially
Year 2000 compliant by mid-1999. Because the Company is primarily a single
family residence and apartment lender, it does not anticipate that significant
Year 2000 issues will be faced with its borrowers and customers.
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.............................................. 53
Consolidated Statements of Financial Condition--December 31, 1997 and
1996..................................................................... 54
Consolidated Statements of Operations--Years ended December 31, 1997, 1996
and 1995................................................................. 55
Consolidated Statements of Stockholders' Equity--Years ended December 31,
1997, 1996 and 1995...................................................... 56
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996
and 1995................................................................. 57
Notes to Consolidated Financial Statements................................ 59
52
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RedFed Bancorp Inc.
Redlands, California:
We have audited the accompanying consolidated statements of financial
condition of Redfed Bancorp Inc. and subsidiaries (the Company) as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RedFed
Bancorp Inc. and subsidiaries as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Orange County, California
January 28, 1998, except as to Note 19 to the consolidated financial
statements, which is as of February 4, 1998.
53
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1997 1996
---------- --------
ASSETS
Cash and cash equivalents (note 2)...................... $ 34,200 $ 33,746
Loans held for sale at lower of cost or market value
(notes 5 and 18)....................................... 4,051 4,843
Mortgage-backed securities available-for-sale at fair
value (note 4)......................................... 10,610 18,220
Investment securities held-to-maturity (estimated
aggregate fair value of $21,466 and $34,369 at December
31, 1997 and 1996, respectively) (note 3).............. 21,604 34,695
Mortgage-backed securities held-to-maturity (estimated
aggregate fair value of $5,359 and $25,697 at December
31, 1997 and 1996, respectively) (notes 4 , 6 and 12).. 5,365 25,327
Loans receivable, net (notes 5, 6, 11 and 12)........... 891,005 725,019
Accrued interest receivable (note 7).................... 5,962 4,953
Federal Home Loan Bank Stock, at cost (note 12)......... 9,115 6,486
Real estate acquired through foreclosure, net (note 8).. 4,758 5,800
Real estate held for sale, net (note 8)................. 1,372 1,372
Premises and equipment, net (note 9).................... 16,935 17,656
Prepaid expenses and other assets (note 13)............. 4,513 4,123
Deferred income taxes (note 10)......................... 264 264
---------- --------
Total assets........................................ $1,009,754 $882,504
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 11).................................... $ 844,619 $790,803
Other borrowed money (note 12)........................ 64,418 4,418
Accrued expenses and other liabilities (notes 6 and
13).................................................. 16,043 14,598
Deferred income....................................... 424 567
---------- --------
Total liabilities................................... 925,504 810,386
---------- --------
Stockholders' equity (notes 13, 14 and 19):
Preferred stock, $.01 par value. Authorized 3,000,000
shares: zero issued at December 31, 1997 and 1996,
respectively......................................... -- --
Common stock, $.01 par value. Authorized 15,000,000
shares; issued 7,468,019 and 7,393,050 at December
31, 1997 and 1996, respectively...................... 75 74
Additional paid-in capital............................ 58,029 56,981
Retained earnings, substantially restricted........... 28,646 18,213
Deferred compensation................................. (1,311) (1,870)
Minimum pension liability adjustments................. (410) --
Treasury stock, 78,083 shares at December 31, 1997 and
1996, respectively................................... (802) (802)
Unrealized gains (losses) on securities available-for-
sale................................................. 23 (478)
---------- --------
Total stockholders' equity.......................... 84,250 72,118
Commitments and contingencies (notes 6, 12, 15 and 16)
---------- --------
Total liabilities and stockholders' equity.......... $1,009,754 $882,504
========== ========
See accompanying notes to consolidated financial statements.
54
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- ---------
Interest income:
Loans receivable............................. $ 61,066 $ 53,819 $ 55,641
Investment securities and deposits........... 3,403 3,748 3,431
Mortgage-backed securities................... 2,039 3,932 5,152
--------- --------- ---------
Total interest income...................... 66,508 61,499 64,224
--------- --------- ---------
Interest expense:
Deposits (note 11)........................... 35,438 31,979 34,958
Other borrowed money......................... 1,293 1,059 3,408
--------- --------- ---------
Total interest expense..................... 36,731 33,038 38,366
--------- --------- ---------
Net interest income........................ 29,777 28,461 25,858
Provision for losses on loans (note 5)....... 1,139 2,838 7,938
--------- --------- ---------
Net interest income after provision for
losses on loans........................... 28,638 25,623 17,920
--------- --------- ---------
Noninterest income:
Letter of credit fees and other fee income... 6,612 5,822 6,212
Gain on sale of loan servicing portfolio
(note 18)................................... -- 803 --
Gain (loss) on sale of loans, investments and
mortgage-backed securities, net............. 13 (4) 1,383
Curtailment gain on retirement plan (note
13)......................................... -- -- 3,390
Other income................................. 421 346 213
--------- --------- ---------
Total noninterest income................... 7,046 6,967 11,198
--------- --------- ---------
Noninterest expense:
Compensation and benefits (note 13).......... 11,999 11,438 12,063
Occupancy and equipment...................... 7,122 7,038 6,831
Marketing and professional services.......... 1,427 1,532 1,634
FDIC special assessment (note 14)............ -- 5,421 --
Federal deposit insurance premiums........... 1,448 2,388 2,401
Acquisition expense.......................... 397 -- --
Other expense................................ 1,592 1,410 1,356
--------- --------- ---------
Total general and administrative expense... 23,985 29,227 24,285
Real estate operations, net (note 8)........... 1,200 1,311 10,258
Provision for losses on letters of credit (note
6)............................................ -- 2,402 2,536
--------- --------- ---------
Total noninterest expense.................. 25,185 32,940 37,079
--------- --------- ---------
Earnings (loss) before income taxes........ 10,499 (350) (7,961)
Income taxes (note 10)......................... 66 7 124
--------- --------- ---------
Net earnings (loss)........................ $ 10,433 $ (357) $ (8,085)
========= ========= =========
Basic earnings (loss) per share (note 22)...... $ 1.46 $ (0.07) $ (2.04)
========= ========= =========
Basic weighted average shares outstanding...... 7,141,275 5,146,331 3,955,461
========= ========= =========
Diluted earnings (loss) per share (note 22).... $ 1.41 $ (0.07) $ (2.04)
========= ========= =========
Diluted weighted average shares outstanding.... 7,426,327 5,146,331 3,955,461
========= ========= =========
See accompanying notes to consolidated financial statements.
55
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
UNREALIZED
GAINS
RETAINED MINIMUM (LOSSES) ON
ADDITIONAL EARNINGS, PENSION SECURITIES
NUMBER COMMON PAID-IN SUBSTANTIALLY DEFERRED LIABILITY TREASURY AVAILABLE-
OF SHARES STOCK CAPITAL RESTRICTED COMPENSATION ADJUSTMENT STOCK FOR-SALE TOTAL
--------- ------ ---------- ------------- ------------ ---------- -------- ----------- -------
Balance at December 31,
1994................... 4,370,000 $ 44 $32,565 $26,655 $(2,988) $ -- $ -- $(768) $55,508
Net loss................ -- -- -- (8,085) -- -- -- -- (8,085)
Deferred compensation
amortized to expense... -- -- 43 -- 558 -- -- -- 601
Acquisition of treasury
stock.................. -- -- -- -- -- -- (888) -- (888)
Changes in unrealized
gains on securities
available-for-sale..... -- -- -- -- -- -- -- 942 942
--------- ---- ------- ------- ------- ----- ----- ----- -------
Balance at December 31,
1995................... 4,370,000 44 32,608 18,570 (2,430) -- (888) 174 48,078
Net loss................ -- -- -- (357) -- -- -- -- (357)
Proceeds from issuance
of stock............... 2,990,000 30 24,039 -- -- -- -- -- 24,069
Stock options exercised. 25,450 -- 203 -- -- -- -- -- 203
LTIP awarded............ 7,600 -- 68 -- -- -- -- -- 68
Deferred compensation
amortized to expense... -- -- 98 -- 560 -- -- -- 658
Sale of treasury stock.. -- -- (35) -- -- -- 86 -- 51
Changes in unrealized
losses on securities
available-for-sale..... -- -- -- -- -- -- -- (652) (652)
--------- ---- ------- ------- ------- ----- ----- ----- -------
Balance at December 31,
1996................... 7,393,050 74 56,981 18,213 (1,870) -- (802) (478) 72,118
Net earnings............ -- -- -- 10,433 -- -- -- -- 10,433
Stock options exercised. 67,369 1 600 -- -- -- -- -- 601
LTIP awarded............ 7,600 -- 95 -- -- -- -- -- 95
Deferred compensation
amortized to expense... -- -- 353 -- 559 -- -- -- 912
Minimum pension
liability adjustment... -- -- -- -- -- (410) -- -- (410)
Changes in unrealized
gains on securities
available-for-sale..... -- -- -- -- -- -- -- 501 501
--------- ---- ------- ------- ------- ----- ----- ----- -------
Balance at December 31,
1997................... 7,468,019 $ 75 $58,029 $28,646 $(1,311) $(410) $(802) $ 23 $84,250
========= ==== ======= ======= ======= ===== ===== ===== =======
See accompanying notes to consolidated financial statements.
56
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- -------- ---------
Cash flows from operating activities:
Net earnings (loss).......................... $ 10,433 $ (357) $ (8,085)
Adjustments to net loss:
Loan fees collected......................... 1,086 540 615
Depreciation and amortization............... 2,141 1,092 (454)
Provisions for losses on:
Loans..................................... 1,139 2,838 7,938
Real estate............................... -- -- 8,336
Letters of credit......................... -- 2,402 2,536
Net loss (gain) on:
Sales of loans............................ (13) 11 (680)
Sales of real estate and premises and
equipment................................ 86 (370) (12)
Sale of loan servicing portfolio.......... -- (803) --
Gross (gain) on:
Sales of investments...................... -- -- (317)
Sales of mortgage-backed securities....... -- (78) (475)
Gross loss on:
Sales of investments...................... -- 1 --
Sales of mortgage-backed securities....... -- 70 89
Federal Home Loan Bank stock dividends
received................................... (422) (384) (419)
Proceeds from sale of loans................. 4,470 278 76,695
Loans originated for sale................... (4,450) -- (10,320)
Curtailment gain on retirement plan......... -- -- (3,390)
Increase (decrease) in:
Accrued expenses and other liabilities.... 793 (2,527) (1,163)
Deferred income........................... (143) (660) (300)
(Increase) decrease in:
Accrued interest receivable............... (1,009) 61 (424)
Prepaid expenses and other assets......... (149) 3,882 3,925
--------- -------- ---------
Net cash provided by operating
activities............................. 13,962 5,996 74,095
--------- -------- ---------
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity................. 24,999 39,600 30,534
Purchases of investment securities held-to-
maturity.................................... (11,881) (32,595) (33,265)
Proceeds from sale of investment securities
available-for-sale.......................... -- -- 326
Purchase of mortgage-backed securities
available-for-sale.......................... -- -- (21,053)
Proceeds from sales of mortgage-backed
securities available-for-sale............... 6,854 5,865 38,721
Proceeds from maturities of mortgage-backed
securities available-for-sale............... 1,243 1,786 903
Proceeds from maturities of mortgage-backed
securities held-to-maturity................. 19,963 288 10,776
Loans originated for investment.............. (141,586) (87,375) (102,076)
Purchases of loans for investment............ (191,032) (71,143) (1,585)
Proceeds from sale of loan servicing
portfolio................................... -- 803 --
Purchases of Federal Home Loan Bank stock.... (2,207) (188) (137)
Sale of Federal Home Loan Bank stock......... -- 1,000 2,203
Principal payments and reductions of loans,
net......................................... 156,606 98,004 66,164
Proceeds from sale of real estate............ 9,997 22,627 24,367
Proceeds from sale of premises and equipment. 4 189 287
Purchases of real estate..................... -- -- (104)
Purchases of premises and equipment.......... (980) (1,638) (376)
--------- -------- ---------
Net cash provided by (used in) investing
activities............................. (128,020) (22,777) 15,685
--------- -------- ---------
(Continued on next page)
57
REDFED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
Cash flows from financing activities:
Deposits, net of withdrawals and interest
credited...................................... $ 41,840 $ (3,210) $(28,806)
Deposits acquired.............................. 11,976 17,485 --
Proceeds from Federal Home Loan Bank advances.. 75,000 10,000 10,000
Repayment of other borrowed money.............. (15,000) (29,073) (62,175)
Proceeds from issuance of stock................ -- 24,069 --
Stock options exercised........................ 601 203 --
LTIP awarded................................... 95 68 --
Purchase of treasury shares for deferred
compensation plans............................ -- -- (888)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 114,512 19,542 (81,869)
-------- -------- --------
Increase in cash and cash equivalents........ 454 2,761 7,911
Cash and cash equivalents, beginning of year..... 33,746 30,985 23,074
-------- -------- --------
Cash and cash equivalents, end of year........... $ 34,200 $ 33,746 $ 30,985
======== ======== ========
Supplemental information:
Interest paid (including interest credited).... $ 36,011 $ 32,986 $ 28,816
Transfers from loans receivable to real estate. 9,033 10,569 16,386
Loans to facilitate the sale of real estate.... -- 6,030 7,079
Transfer from mortgage-backed securities held-
to-maturity to mortgaged-backed securities
available-for-sale............................ -- -- 28,469
Retained earnings adjustment for minimum
liability of nonqualified benefit plans....... (410) -- --
Real estate acquired subject to bond financing. -- -- (5,830)
Real estate sold subject to bond financing..... -- 7,642 2,762
Bond financing subject to real estate
acquisitions.................................. -- -- 5,830
Bond financing subject to real estate sales.... -- (7,642) (2,762)
Transfer from loans to mortgage-backed
securities held-to-maturity................... -- (5,950) --
Transfer from mortgage-backed securities to
off-balance sheet letters of credit........... -- 5,950 --
Taxes paid..................................... 66 7 124
See accompanying notes to the consolidated financial statements.
58
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies, together with those disclosed elsewhere
in the consolidated financial statements, represent the significant accounting
policies used in presenting the accompanying consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements of RedFed Bancorp Inc.
and subsidiaries (collectively, the Company) include Redlands Federal Bank, a
federal savings bank (the Bank) and its wholly owned subsidiaries, Redlands
Financial Services, Inc., RedFed Inc. and Redfed Escrow, Inc. RedFed Escrow,
Inc. ceased operations in November 1995. RedFed Inc. includes the accounts of
Redfed Insurance Services and INVEST Financial Corporation. All material
intercompany balances and transactions are eliminated in consolidation.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities as of the date of the statement of
financial condition, and revenues and expenses for the periods. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of Federal funds sold,
certificates of deposit and U.S. Government securities with an original
maturity of 90 days or less.
LOANS HELD FOR SALE
Loans held for sale in the secondary market are carried at the lower of cost
or estimated market value in the aggregate, as determined by outstanding
commitments from investors or current investor requirements. Net unrealized
losses are recognized in a valuation allowance by charges against operations.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company classifies investment and mortgage-backed securities (MBSs) as
held-to-maturity, trading securities, and/or available-for-sale securities.
Held-to-maturity investments and MBSs are reported at amortized cost, trading
securities are reported at fair value, with unrealized gains and losses
included in operations, and available-for-sale securities are reported at fair
value with unrealized gains and losses, net of related income taxes, included
as a separate component of stockholders' equity.
Investments and MBSs held-to-maturity are those securities that management
has the positive intent and ability to hold to maturity.
Investment and MBSs available-for-sale are those securities which are not
held in the trading portfolio and are not held in the held-to-maturity
portfolio.
Realized gains and losses for securities classified as available-for-sale
are included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
No investments are held in the trading portfolio.
59
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less undisbursed
portion of construction loans, unearned discounts, unamortized premiums, net
deferred loan origination fees and allowances for loan losses. Discounts and
premiums are amortized using the interest method over the remaining term to
maturity.
Uncollected interest on certain loans identified by management, loans
contractually delinquent more than 90 days or loans on which a notice of
default is filed is excluded from interest income and accrued interest
receivable. When the accrual of interest is discontinued, unpaid interest
credited to income in the current year is reversed. Accretion of premiums,
discounts and deferred loan fees is discontinued when loans are placed on
nonaccrual status. Income is subsequently recognized in the period the loan is
reinstated and the obligation is brought current. Payments on nonaccrual loans
are recorded as a reduction of principal or as interest income depending on
management's assessment of ultimate collectibility of the loan principal.
The Company has established a monitoring system for its loans and off-
balance sheet letters of credit (LOCs) in order to identify impaired loans,
potential problem loans and to permit periodic evaluation of the adequacy of
allowances for losses in a timely manner. Total loans include the following
portfolios: (i) residential one-to-four family loans, (ii) multifamily loans
(iii) commercial loans, (iv) construction and land loans, and (v) nonmortgage
loans which includes consumer and small business commercial loans. In
analyzing these loans and LOCs, the Company has established specific
monitoring policies and procedures suitable for the relative risk profile and
other characteristics of the loans within the various portfolios. The
Company's residential one-to-four family, individual lot, spot construction,
equity line of credit and nonmortgage loans, are considered to be relatively
homogeneous and no single loan is individually significant in terms of its
size or potential risk of loss. Therefore, the Company generally reviews its
residential one-to-four family, individual lot, spot construction, equity line
of credit and nonmortgage loans by analyzing their performance and the
composition of their collateral for the portfolio as a whole. The frequency
and type of review is dependent upon the inherent risk attributed to each
loan. The frequency and intensity of the loan review is directly proportionate
to the adversity of the loan grade. The Company evaluates the risk of loss and
default for each loan and LOC subject to individual monitoring.
All nonhomogeneous loans designated by the Company as "impaired" are placed
on nonaccrual status or are designated as restructured loans. Only nonaccrual
loans and restructured loans not performing in accordance with their
restructured terms are included in nonperforming loans. Additionally, any
loans which would be partially or completely classified as Doubtful or Loss
would also be considered impaired.
A loan is considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Company measures
impairment of a loan based on (i) the present value of expected future cash
flows discounted at the loan's effective interest rate, (ii) the observable
market price of the impaired loan or (iii) the fair value of the collateral of
a collateral-dependent loan. If the measure of the impaired loan is less than
the recorded investment in the loan, the Company recognizes an impairment by
recording a valuation allowance with a corresponding charge to provision for
losses on loans. Loans designated by the Company as "impaired" are placed on
nonaccrual or designated as restructured loans.
Factors considered as part of the periodic loan review process to determine
whether a loan is impaired address both the amount the Company believes is
probable that it will collect and the timing of such collection. As part of
the Company's loan review process the Company will consider such factors as
the ability of the borrower to continue to meet the debt service requirements,
assessments of other sources of repayment, the fair
60
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
value of any collateral and the creditor's prior history in dealing with these
types of credits. In evaluating whether a loan is considered impaired,
insignificant delays (less than six months) or shortfalls (less than 5% of the
payment amount) in payment amounts, in the absence of other facts and
circumstances, would not alone lead to the conclusion that a loan was
impaired.
Loans on which the Company has ceased the accrual of interest (nonaccrual
loans) constitute the primary component of the portfolio of nonperforming
loans. Loans are generally placed on nonaccrual status when the payment of
interest is 90 days or more delinquent, or 60 days or more delinquent for
loans over $500, or earlier if the timely collection of interest and/or
principal appears doubtful or if the loan is in the process of foreclosure. In
addition, the Company monitors its loan portfolio in order to identify
performing loans with excessive risk characteristics indicating that the
collection of principal and interest may not be probable. In the event that
the Company believes collection of contractual principal and interest does not
appear probable, the Company will designate the loan as impaired and place the
loan on nonaccrual status. The Company's policy allows for loans to be
designated as impaired and placed on nonaccrual status even though the loan
may be current as to the principal and interest payments and may continue to
perform in accordance with its contractual terms.
Payments received on impaired loans are recorded as a reduction of principal
or as interest income depending on management's assessment of the ultimate
collectibility of the loan principal. The amount of interest income recognized
is limited to the amount of interest that would have accrued at the loans
contractual rate applied to the recorded loan balance, any difference is
recorded as a loan loss recovery.
A "troubled, collateral dependent" loan is one where proceeds for repayment
can be expected to come only from the operation and sale of the collateral.
The Company considers a loan to be "troubled" under the following
circumstances: (1) when a determination has been made that a loan is
"impaired," the Company presumes that the loan is troubled or (2) where a loan
is not "impaired" it will not generally be deemed to be "troubled," but if
there are unique facts which demonstrate unusual risk to the institution, then
the loan may nevertheless be considered "troubled."
A loan is considered "troubled debt restructured" when the Company provides
the borrower certain concessions that it would not normally consider. The
concessions must be because of the borrower's financial difficulty, and the
objective must be to maximize recovery of the Company's investment. Troubled
debt restructures include situations in which the Company accepts a note
(secured or unsecured) from a third party in payment of its receivable from
the borrower, other assets in payment of the loan, an equity interest in the
borrower or its assets in lieu of its receivable, or a modification of the
terms of the debt including, but not limited to: (i) a reduction in stated
interest rate below market rates, (ii) an extension of maturity at an interest
rate below market, (iii) a reduction in the face amount of the debt, and/or
(iv) a reduction in the accrued interest.
LOAN ORIGINATION, COMMITMENT FEES AND RELATED COSTS
Loan fees, premiums on purchased loans and certain direct loan origination
costs are deferred, with the net fee or cost being amortized to interest
income over the contractual life of the related loan using the interest
method. When a loan is paid off, any unamortized net loan origination fees are
recognized in interest income. Commitment fees and costs relating to
commitments where the likelihood of exercise is remote are recognized over the
commitment period on a straight-line basis. If the commitment is exercised
during the commitment period, the remaining net unamortized commitment fees at
the time of exercise are recognized over the life of the loan using the
interest method.
61
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Origination fees for construction loans prior to conversion to permanent
financing are recognized using the interest method over the contractual life
of the construction loan. If the Company intends to provide the permanent
financing on the construction project, the origination fees are recognized
using the interest method over lives of the construction and the permanent
loans.
REAL ESTATE
Real estate properties acquired through loan foreclosure are initially
recorded at fair value less estimated selling costs at the date of
foreclosure. If the collateral for the loan has been in-substance foreclosed,
the loan is reported as if the real estate had been received in satisfaction
of the loan. Once acquired, valuations are periodically obtained by management
and an allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its fair value less estimated costs of
disposal.
ALLOWANCES FOR LOSSES
The allowance for losses on loans, real estate and LOCs is increased by
provisions to operations and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current and prospective
economic conditions.
Management believes that allowances for losses are adequate. While
management uses available information to recognize losses on loans, real
estate and LOCs which are deemed to be probable and can be reasonably
estimated, future additions to the allowances may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Company's allowances for losses on loans, real estate and letters of credit.
Such agencies may require the Company to recognize additions to the allowances
based on their judgments of the information available to them at the time of
their examination.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and improvements, leasehold and tenant
improvements, furniture, fixtures and equipment and automobiles are carried at
cost, less accumulated depreciation or amortization, and are depreciated or
amortized using the straight-line method over the estimated useful lives of
the assets or the term of the related lease, whichever is shorter. The useful
lives for the principal classes of assets are:
ASSET USEFUL LIFE
----- -----------
Buildings and improvements................................. 10 to 40 years
Leasehold and tenant improvements.......................... Life of lease
Furniture, fixtures and equipment.......................... 5 to 20 years
Automobiles................................................ 3 to 4 years
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective
62
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
operations in the period that includes the enactment date.
INTEREST ON DEPOSITS
Interest is either paid to the depositor or added to the savings account on
a periodic basis. On term accounts, the forfeiture of interest (because of
withdrawal prior to maturity) is offset as of the date of withdrawal against
interest expense in the consolidated statements of operations.
EARNINGS (LOSS) PER SHARE
The Company adopted, effective December 31, 1997, Statement of Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 simplifies the
standards for computing and presenting earnings per share (EPS) as previously
prescribed by Accounting Principles Board Opinion 15, "Earnings per Share."
SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS with
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted from issuance of common
stock that then shared in earnings.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company accounts for the original issuance of the Employee Stock
Ownership Plan (ESOP) as a component of equity recorded in a contra-equity
account. When the issuance occurs, compensation expense is recognized for
shares committed to be released to directly compensate employees equal to the
fair value of the shares committed. This results in fluctuations in
compensation expense as a result of changes in the fair value of the Company's
common stock; however, any such compensation expense fluctuations result in an
offsetting adjustment to additional paid-in capital.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net earnings (loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants made in 1995 and future years as if the fair-
value-based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
63
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CURRENT ACCOUNTING PRONOUNCEMENTS
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 (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) 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 believes
that the adoption of SFAS 130 will not have a material impact on the Company's
disclosures.
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 believes that the
adoption of SFAS 131 will not have a material impact on the Company's
disclosures.
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
DECEMBER 31
---------------
1997 1996
------- -------
Cash on hand and in banks.................................... $18,464 $16,581
Federal funds sold........................................... 15,736 17,165
------- -------
$34,200 $33,746
======= =======
64
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities are
summarized as follows:
DECEMBER 31, 1997
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity:
U.S. Government securities....... $ 500 $-- $ -- $ 500
Floating agency notes............ 13,501 -- (144) 13,357
Step up notes.................... 1,195 8 -- 1,203
Callable notes................... 6,408 6 (8) 6,406
------- --- ----- -------
$21,604 $14 $(152) $21,466
======= === ===== =======
DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity:
U.S. Government securities....... $ 499 $ 1 $ -- $ 500
Floating agency notes............ 13,514 -- (310) 13,204
Step up notes.................... 8,184 26 -- 8,210
Callable notes................... 12,498 14 (57) 12,455
------- --- ----- -------
$34,695 $41 $(367) $34,369
======= === ===== =======
Floating agency notes are issued by Government Sponsored Enterprises (GSE)
and have interest rates that adjust quarterly based on the Constant Maturity
Treasury Index (CMT). Certain of these notes have call provisions at the
option of the issuer whereby the issuer may redeem the notes at the repricing
date. Certain notes have interest rate floors.
Step up agency notes are issued by GSEs and have an interest rate that
adjusts based on a semiannual or annual predetermined interest rate "step up"
schedule. The notes are callable prior to the contractual maturity date of the
note at the option of the issuer.
Callable agency notes are issued by GSEs and are callable prior to the
contractual maturity date of the note at the option of the issuer. The notes
are generally issued at a premium compared to noncancelable instruments with
similar maturities.
65
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The remaining contractual principal maturities for the investment securities
held-to-maturity as of December 31, 1997 are as follows:
MATURING MATURING
MATURING AFTER AFTER
WITHIN 1 YEAR TO 5 YEARS TO
TOTAL 1 YEAR 5 YEARS 10 YEARS
------- -------- --------- ----------
U.S. Government securities............. $ 500 $ 500 $ -- $ --
Floating agency notes.................. 13,501 8,001 5,500 --
Step up notes.......................... 1,195 -- -- 1,195
Callable notes......................... 6,408 -- 6,408 --
------- ------ ------- ------
$21,604 $8,501 $11,908 $1,195
======= ====== ======= ======
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of mortgage-backed securities
are summarized as follows:
DECEMBER 31, 1997
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity--San Bernardino
County bond..................... $ 5,365 $ -- $ (6) $ 5,359
======= ==== ===== =======
Available-for-sale:
GNMA certificates.............. $ 8,894 $ 19 $ -- $ 8,913
FHLMC certificates............. 1,693 4 -- 1,697
------- ---- ----- -------
$10,587 $ 23 $ -- $10,610
======= ==== ===== =======
DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Held-to-maturity--San Bernardino
County bond..................... $25,327 $370 $ -- $25,697
======= ==== ===== =======
Available-for-sale:
GNMA certificates.............. $16,825 $ -- $(469) $16,356
FHLMC certificates............. 1,873 -- (9) 1,864
------- ---- ----- -------
$18,698 $ -- $(478) $18,220
======= ==== ===== =======
The mortgage-backed securities included above have contractual terms to
maturity, but require periodic payments to reduce principal. In addition,
expected maturities will differ from contractual maturities because borrowers
have the right to prepay the underlying mortgages. The San Bernardino County
bond matures in 1998.
66
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31
------------------
1997 1996
-------- --------
Mortgage loans:
One-to-four family residential...................... $578,980 $425,970
Multifamily residential............................. 161,645 170,543
Commercial real estate.............................. 69,416 75,235
Construction and land............................... 70,529 57,305
-------- --------
Principal balance of mortgage loans............... 880,570 729,053
Consumer and other loans............................ 42,888 25,804
-------- --------
923,458 754,857
Less:
Undisbursed portion of construction loans........... (20,198) (12,390)
Unearned discounts, premiums and net deferred loan
origination fees................................... (468) (2,471)
Allowance for losses on loans....................... (7,736) (10,134)
-------- --------
895,056 729,862
Less loans held-for-sale, one-to-four family
residential........................................ (4,051) (4,843)
-------- --------
$891,005 $725,019
======== ========
At December 31, 1997, 1996 and 1995, the Company was servicing loans, LOCs
and participations in loans owned by others of $126,602, $138,563 and
$251,328, respectively. These loans are not included in the accompanying
consolidated statements of financial condition.
The weighted average annualized portfolio yield on loans receivable was
7.55% and 7.44% at December 31, 1997 and 1996, respectively.
Loans receivable from executive officers and directors of the Company were
as follows:
YEAR ENDED
DECEMBER 31
--------------
1997 1996
------ ------
Beginning balance.......................................... $1,095 $1,274
Additions................................................ 433 --
Repayments............................................... (251) (179)
------ ------
Ending balance......................................... $1,277 $1,095
====== ======
67
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Activity in the allowance for losses on loans is summarized as follows:
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
------- ------- --------
Balance, beginning of year.................... $10,134 $14,745 $ 18,874
Provisions.................................. 1,139 2,838 7,938
Charge-offs................................. (4,045) (7,889) (12,577)
Recoveries.................................. 508 440 510
------- ------- --------
Balance, end of year...................... $ 7,736 $10,134 $ 14,745
======= ======= ========
The following table provides information with respect to the Company's
nonaccrual loans and troubled debt restructured (TDR) loans:
DECEMBER 31
-----------------------
1997 1996 1995
------- ------- -------
Nonaccrual loans.................................. $ 7,675 $13,298 $17,604
TDR loans......................................... 4,629 12,001 6,888
------- ------- -------
Total nonaccrual and TDR loans................ $12,304 $25,299 $24,492
======= ======= =======
The effect of nonaccrual and TDR loans on interest income for the years
ended December 31, 1997, 1996 and 1995 is presented below:
1997 1996 1995
------ ------- -------
Contractual interest due......................... $1,027 $ 2,124 $ 2,366
Interest recognized.............................. (954) (1,521) (1,757)
------ ------- -------
Net interest foregone............................ $ 73 $ 603 $ 609
====== ======= =======
The following table identifies the Company's total recorded investment in
impaired loans, net of specific allowances, by type at December 31:
1997 1996
------ -------
Nonaccrual loans:
Multifamily.............................................. $ 942 $ 764
Tract construction and land.............................. -- 586
TDR loans................................................ 4,629 12,001
Other impaired loans--multifamily.......................... 1,507 3,386
------ -------
$7,078 $16,737
====== =======
The related impairment valuation allowance at December 31, 1997 and 1996 was
zero and $822, respectively, which is included as part of the allowance for
losses on loans in the accompanying consolidated statement of financial
condition. The provision for losses and any related recoveries are recorded as
part of the provision for losses on loans in the accompanying statement of
operations. During the years ended December 31, 1997, 1996 and 1995, the
Company's average investment in impaired loans was $885, $881 and $1,131, and
interest income recorded during this period was $476, $1,166 and $1,510, of
which $476, $1,166 and $1,510 was recorded utilizing the cash basis method of
accounting described above, respectively.
68
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) LETTERS OF CREDIT--TAX-EXEMPT BOND
The Company has extended letters of credit for the account of owners of
projects financed by tax-exempt bonds. The Company guaranteed principal and
interest payments in the approximate amounts of $108,804 and $105,967 as of
December 31, 1997 and 1996, respectively. The letters of credit are
collateralized with FHLMC securities, GNMA participation certificates and
Federal Home Loan Bank of San Francisco (FHLB) letters of credit which are
collateralized by pledged mortgage loans. The required value of collateral at
December 31, 1997 and 1996 amounted to approximately $124,177 and $124,800,
respectively. The collateral book value amounted to approximately $141,721 and
$126,994 as of December 31, 1997 and 1996, respectively.
Activity in the allowance for losses on off-balance sheet LOCs, included in
other liabilities in the statements of financial condition, is as follows:
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
------ ------- -------
Balance, beginning of year....................... $7,624 $ 7,447 $ 6,908
Provisions..................................... -- 2,402 2,536
Charge-offs.................................... -- (2,225) (1,997)
------ ------- -------
Balance, end of year......................... $7,624 $ 7,624 $ 7,447
====== ======= =======
The project owners have pledged the financed projects against the Company's
LOCs. Should the project owners default on reimbursement agreement payments,
the Company could foreclose on the project. If the Company were to default on
a letter of credit draw, the bond Trustee would then liquidate the collateral
pledged by the Company.
As of December 31, 1997 and 1996, the Company holds in trust a portion of
the proceeds, approximately $360 from one of the aforementioned tax exempt
bond projects. These are funds that were withheld from the original fundings
until specified conditions are met. The interest earned on the investments is
remitted to the project owners on a quarterly basis as specified by the bond
agreements.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
DECEMBER 31
-------------
1997 1996
------ ------
Loans receivable............................................ $5,629 $4,233
Investment securities....................................... 217 415
Mortgage-backed securities.................................. 116 305
------ ------
$5,962 $4,953
====== ======
69
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) REAL ESTATE
Real estate acquired through foreclosure is summarized as follows:
DECEMBER 31
---------------
1997 1996
------ -------
Properties:
Acquired in settlement of loans......................... $5,481 $ 7,186
Less allowance for losses............................... (723) (1,386)
------ -------
$4,758 $ 5,800
====== =======
Real estate held for sale is summarized as follows:
DECEMBER 31
--------------
1997 1996
------ ------
Real estate held for sale.................................. $1,626 $1,626
Less allowance for losses.................................. (254) (254)
------ ------
$1,372 $1,372
====== ======
Activity in the allowance for losses on real estate is summarized as follows:
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
------ ------- -------
Balance, beginning of year....................... $1,640 $ 9,496 $ 4,378
Provisions..................................... -- -- 8,336
Charge-offs.................................... (663) (7,856) (3,218)
------ ------- -------
Balance, end of year......................... $ 977 $ 1,640 $ 9,496
====== ======= =======
Allowance for losses on:
Real estate acquired through foreclosure....... $ 723 $ 1,386 $ 7,601
Real estate held for sale or investment........ 254 254 1,895
------ ------- -------
$ 977 $ 1,640 $ 9,496
====== ======= =======
Real estate operations are summarized as follows:
YEAR ENDED DECEMBER
31
-----------------------
1997 1996 1995
------ ------ -------
Loss on real estate operations, net............... $1,202 $1,657 $ 1,997
(Gain) on sale of real estate, net................ (2) (346) (75)
Provision for loss on real estate................. -- -- 8,336
------ ------ -------
$1,200 $1,311 $10,258
====== ====== =======
70
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31
---------------
1997 1996
------- -------
Land...................................................... $ 3,238 $ 3,238
Buildings and leasehold improvements...................... 17,977 17,855
Furniture, fixtures and equipment......................... 12,738 13,417
------- -------
33,953 34,510
Less accumulated depreciation and amortization............ 17,018 16,854
------- -------
$16,935 $17,656
======= =======
(10) INCOME TAXES
Income taxes is comprised of the following:
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
------- ------ -------
Current:
Federal........................................ $ 50 $ -- $ 120
State.......................................... 16 7 4
------- ------ -------
Current income taxes......................... 66 7 124
------- ------ -------
Deferred:
Federal........................................ 1,196 (852) (3,759)
State.......................................... 951 1,184 (157)
------- ------ -------
2,147 332 (3,916)
Change in valuation allowance................ (2,147) (332) 3,916
------- ------ -------
Income taxes................................. $ 66 $ 7 $ 124
======= ====== =======
The Company's effective income taxes differs from the amount determined by
applying the statutory federal rate to earnings (loss) before income taxes as
follows:
YEAR ENDED DECEMBER
31
-----------------------
1997 1996 1995
------- ----- -------
Income taxes at federal tax rate................. $ 3,675 $(119) $(2,706)
Tax-exempt income................................ (119) (406) (632)
California franchise tax, net of federal income
tax benefit..................................... 629 (26) (504)
Change in valuation allowance.................... (2,147) (332) 3,916
Change in deferred tax asset fully offset by
valuation allowance............................. (1,564) -- --
Loss of California net operating loss............ -- 957 --
Other............................................ (408) (67) 50
------- ----- -------
$ 66 $ 7 $ 124
======= ===== =======
71
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The tax effects of temporary differences that give rise to significant
portions of the net deferred income tax asset and deferred income tax benefit
are presented below:
DEFERRED DEFERRED
DECEMBER 31, INCOME TAXES DECEMBER 31, INCOME TAXES DECEMBER 31,
1997 (BENEFIT) 1996 (BENEFIT) 1995
------------ ------------ ------------ ------------ ------------
Deferred tax assets:
Allowance for losses
on loans and real
estate............... $ 7,490 $(2,878) $ 4,612 $ 9,519 $ 14,131
Core deposit
intangible........... -- 82 82 (82) --
Pension and deferred
compensation......... 305 (595) (290) 1,397 1,107
Mark to market........ 8 (171) (163) 221 58
Net operating loss
carryforward......... 8,737 4,809 13,546 (10,750) 2,796
Other................. 661 (139) 522 70 592
-------- ------- -------- -------- --------
17,201 1,108 18,309 375 18,684
Valuation allowance... (12,492) (2,147) (14,639) (332) (14,971)
-------- ------- -------- -------- --------
4,709 (1,039) 3,670 43 3,713
-------- ------- -------- -------- --------
Deferred tax
liabilities:
Premises and
equipment............ 2,123 930 1,193 209 984
FHLB stock............ 1,491 205 1,286 181 1,105
Accrued interest and
other................ (23) 85 (108) 92 (200)
California franchise
tax.................. 854 (181) 1,035 (525) 1,560
-------- ------- -------- -------- --------
4,445 1,039 3,406 (43) 3,449
-------- ------- -------- -------- --------
Net deferred tax
asset.............. $ 264 $ -- $ 264 $ -- $ 264
======== ======= ======== ======== ========
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. The Act repealed the reserve method of accounting
for bad debts for savings institutions, effective for taxable years beginning
after 1995. The Company, therefore, is required to use the specific charge-off
method on its 1996 and subsequent Federal income tax returns. Prior to 1996,
savings institutions that met certain definitional tests and other conditions
prescribed by the Internal Revenue Code were allowed to deduct, within
limitations, a bad debt deduction based upon a percentage of income. The
deduction percentage was 8% for the year ended December 31, 1995.
Alternatively, a qualified savings institution could compute its bad debt
deduction based upon actual loan loss experience (the Experience Method). The
Company computed its bad debt deduction utilizing the Experience Method in
1995.
In determining the possible future realization of deferred tax assets,
future taxable income from the following sources are taken into account: (i)
the reversal of taxable temporary differences, (ii) future operations
exclusive of reversing temporary differences and (iii) tax planning strategies
that, if necessary, would be implemented to accelerate taxable income into
years in which net operating losses might otherwise expire. As of December 31,
1997 and 1996, the valuation allowance against deferred tax assets amounted to
$12,492 and $14,639. Deferred tax assets as of December 31, 1997 and 1996 have
been recognized to the extent of the expected reversal of taxable temporary
differences and the amount of federal income tax paid in the carryback period
which would be recoverable through the carryback of net operating losses.
Based on the Company's current and historical pretax earnings, adjusted for
significant items, management believes it is more likely than not that the
Company began to realize the benefit of the existing net deferred tax
72
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
asset after December 31, 1996. Management believes the existing net deductible
temporary differences will reverse during periods in which the Company
generates net taxable income; however, there can be no assurance that the
Company will generate any earnings or any specific level of continuing
earnings in future years. Certain tax planning or other strategies could be
implemented, if necessary, to supplement income from operations to fully
realize recorded tax benefits.
At December 31, 1997, the Company had net operating loss carryforwards
(NOLs) aggregating approximately $22,721 for federal income tax purposes and
approximately $8,957 for California franchise tax purposes available to offset
taxable income in future tax years. The federal NOLs would expire, if not
utilized, in taxable years beginning 2009 and the California NOLs would begin
to expire in 1999.
Section 382 of the Internal Revenue Code of 1986 (Section 382), as amended,
provides in general that if a corporation undergoes an ownership change, the
amount of taxable income that the corporation may offset after the date of
such ownership change with NOLs and certain built-in losses existing at the
date of such ownership change will be subject to an annual limitation. The
Company's NOLs could become subject to certain limitations on utilization in
the event the Company undergoes an ownership change within the meaning of
Section 382.
(11) DEPOSITS
Deposits as defined by regulation and their respective weighted average
interest rates are summarized as follows:
DECEMBER 31
-------------------------------------------
1997 1996
--------------------- ---------------------
INTEREST RATE WEIGHTED WEIGHTED
RANGE AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
------------- ------------ -------- ------------ --------
Savings deposits........ 2.00-4.97% 3.16% $190,711 3.00% $169,730
Money market deposits... 2.45-2.55 2.58 7,891 2.44 9,480
Interest bearing
checking (NOW)
deposits............... 1.05-1.30 1.16 82,590 1.06 83,212
Non-interest bearing
deposits............... -- -- 27,338 -- 19,991
Certificates of deposit. 2.66-6.70 5.49 536,089 5.32 508,390
-------- --------
4.48 $844,619 4.20 $790,803
======== ========
At December 31, 1997 and 1996, deposits with balances greater than $100
totaled $88,285 and $70,039, respectively.
Certificates of deposit at December 31, 1997 mature as follows:
Immediately withdrawable......................................... $ 974
Less than one year............................................... 394,578
One to two years................................................. 111,140
Two to three years............................................... 22,850
Three to four years.............................................. 2,314
Four to five years............................................... 1,613
More than five years............................................. 2,620
--------
$536,089
========
73
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
At December 31, 1997 and 1996, $1,355 and $1,263, respectively, of public
funds were on deposit. Of those amounts $659 and $875 were secured by an FHLB
letter of credit of $2,000, which is in turn secured by loans receivable in
the amount of $2,353.
Interest expense on deposits is summarized as follows:
YEAR ENDED DECEMBER 31
-----------------------
1997 1996 1995
------- ------- -------
Savings deposits.................................. $ 5,610 $ 5,003 $ 4,002
Money market deposits............................. 225 246 305
Interest-bearing checking (NOW) deposits.......... 971 882 1,000
Certificates of deposit........................... 28,632 25,848 29,651
------- ------- -------
$35,438 $31,979 $34,958
======= ======= =======
(12) OTHER BORROWED MONEY
Other borrowed money consisted of the following:
DECEMBER 31
--------------
1997 1996
------- ------
Notes payable:
FHLB advances............................................ $60,000 $ --
Note Payable Revenue Bond................................ 708 708
Loma Linda Housing Revenue Bonds......................... 3,710 3,710
------- ------
$64,418 $4,418
======= ======
The FHLB advances at December 31, 1997 are tied to indexes including the 6-
month London Interbank Offered Rates (LIBOR), the Guaranteed Spread Program 2
(GSP2) and the 1-year CMT and are summarized as follows:
INTEREST ADJUSTMENT MATURITY ORIGINAL
INDEX RATE PERIOD DATE AMOUNT
----- -------- ---------- -------- --------
6-mo. LIBOR................. 5.94% 6 months June 24, 2002 $10,000
GSP2-LIBOR.................. 5.65 6 months July 23, 1999 10,000
GSP2-LIBOR.................. 5.62 6 months July 23, 1999 10,000
1-yr. CMT................... 6.11 12 months November 14, 2002 30,000
-------
$60,000
=======
As of December 31, 1997 and 1996, the Company had an available line of
credit from the FHLB in the approximate amount of $250,324 and $218,131,
respectively which supports the Company's FHLB advances and letters of credit
on tax exempt bonds and public funds. The remaining unused balance of the FHLB
line of credit was $68,029 and $100,383 at December 31, 1997 and 1996,
respectively. This line is secured by the pledge of certain loans receivable
aggregating $307,210 and $241,977 and the Company's required investment in
$100 par value capital stock of the FHLB totaling, at cost, $9,115 and $6,486
at December 31, 1997 and 1996, respectively.
74
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The note payable revenue bond is the result of the Company assuming $708 of
the City of Hemet Housing Revenue Bond Series 1988, which was restructured
during 1996. The revenue bond bears a variable interest rate which resets
weekly. The interest rate of the bond as of December 31, 1997 was 3.50%.
The note payable related to the Loma Linda Housing Revenue Bonds bears an
interest rate of 7.38%. The interest is payable every June 1 and December 1.
The note is collateralized with FHLMC securities. The book value of the FHLMC
securities at December 31, 1997 and 1996 amounted to $7,197 and $7,364,
respectively. The Company may not prepay the Loma Linda Housing Revenue Bonds
prior to June 1, 1999. Beginning June 1, 1999 and thereafter, the Company may
prepay the bonds, in whole or in part, without regard to prepayment by the
developer, on the following dates upon payment of a redemption premium
(expressed as percentages of the principal amount prepaid) set forth in the
following table, together with interest payable on the amount prepaid to the
date fixed for redemption:
PREPAYMENT
PREPAYMENT DATES PREMIUM
---------------- ----------
June 1, 1999 through May 31, 2000............................... 1%
June 1, 2000 and thereafter..................................... --
A summary of contractual maturities on other borrowed money is as follows:
DECEMBER 31,
YEAR 1997
---- ------------
1998........................................... $ 475
1999........................................... 20,233
2000 and thereafter............................ 43,710
-------
$64,418
=======
(13) EMPLOYEE BENEFIT PLANS
The Company maintains a defined benefit retirement plan (retirement plan)
covering substantially all of its employees. The benefits are based on each
employee's years of service and final average earnings. An employee becomes
fully vested upon completion of five years of qualifying service. The
Company's Board of Directors approves the amount to be funded annually which
may range from the minimum to the maximum amount that can be deducted by the
Company for federal income tax purposes. The Company also has an unfunded
supplemental retirement plan for selected employees and unfunded retirement
plan for outside directors. All plans were frozen effective June 30, 1995. The
Board of Directors in December 1996 voted to terminate the retirement plan in
accordance with its terms and with applicable Federal laws.
In November 1997 a definitive agreement by Golden State to acquire the
Company resulted in the January 1998 distribution to all participants of a
notice of cancellation of termination for the retirement plan, and the
withdrawal of termination applications previously submitted to the Pension
Benefit Guaranty Corporation (PBGC) and the Internal Revenue Service (IRS).
75
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated statements of financial condition at
December 31, 1997 and 1996:
1997
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS'
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Actuarial present value of benefit
obligation--accumulated benefit obligation.. $12,093 $1,316 $ 448
======= ====== =====
Vested benefit obligation.................... $12,007 $1,316 $ 406
======= ====== =====
Projected benefit obligation for service
rendered to date............................ $12,093 $1,316 $ 448
Plan assets at fair value.................... 18,501 -- --
------- ------ -----
Projected benefit obligation in excess of
(less than) plan assets..................... (6,408) 1,316 448
Unrecognized net gain (loss) from past
experience different from that assumed and
effects of changes in assumptions........... 3,539 (438) (36)
Unrecognized net obligation at April 1, 1987
being recognized over twelve years.......... -- (42) --
Unrecognized prior service cost.............. -- -- (175)
Additional liability resulting from minimum
liability provisions........................ -- 480 211
------- ------ -----
Accrued (prepaid) retirement and
supplemental costs included in the
accompanying financial statements......... $(2,869) $1,316 $ 448
======= ====== =====
1996
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS'
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Actuarial present value of benefit
obligation--accumulated benefit obligation.. $11,548 $1,275 $ 376
======= ====== =====
Vested benefit obligation.................... $11,364 $1,275 $ 336
======= ====== =====
Projected benefit obligation for service
rendered to date............................ $11,548 $1,275 $ 376
Plan assets at fair value.................... 18,544 -- --
------- ------ -----
Projected benefit obligation in excess of
(less than) plan assets..................... (6,996) 1,275 376
Unrecognized net gain (loss) from past
experience different from that assumed and
effects of changes in assumptions........... 4,785 (408) (3)
Unrecognized net obligation at April 1, 1987
being recognized over twelve years.......... -- (52) --
Unrecognized prior service cost.............. -- -- (189)
Additional liability resulting from minimum
liability provisions........................ -- 460 192
------- ------ -----
Accrued (prepaid) retirement and
supplemental costs included in the
accompanying financial statements......... $(2,211) $1,275 $ 376
======= ====== =====
76
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net periodic pension cost for the Pension, Supplemental Retirement and
Outside Directors' Retirement plans for 1997, 1996 and 1995 includes the
following components:
1997
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS'
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Service cost--benefits earned during the
period....................................... $ 130 $ -- $30
Interest cost on projected benefit obligation. 881 92 28
Return on plan assets......................... (1,753) -- --
Net amortization and deferral................. 84 27 14
------- ----- ---
Net periodic pension (income) cost.......... $ (658) $ 119 $72
======= ===== ===
1996
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS'
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Service cost--benefits earned during the
period....................................... $ -- $ -- $28
Interest cost on projected benefit obligation. 846 93 25
Return on plan assets......................... (3,000) -- --
Net amortization and deferral................. 1,557 29 14
------- ----- ---
Net periodic pension (income) cost.......... $ (597) $ 122 $67
======= ===== ===
1995
--------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS'
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Service cost--benefits earned during the
period....................................... $ 431 $ -- $20
Interest cost on projected benefit obligation. 978 92 24
Return on plan assets......................... (3,236) -- --
Net amortization and deferral................. 1,972 20 14
------- ----- ---
Net periodic pension cost................... $ 145 $ 112 $58
======= ===== ===
77
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The assumptions used in determining the actuarial present value of the
accumulated benefit obligation and the expected return on plan assets for 1997
and 1996 are as follows:
1997
-------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS'
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Actuarial present values:
Weighted average discount rate................ 7.00% 7.00% 7.00%
Rate of increase in future compensation....... N/A N/A N/A
Expected long-term return on plan assets...... 7.00 N/A N/A
Post retirement cost of living allowance...... 3.00 3.00 N/A
1996
-------------------------------
OUTSIDE
SUPPLEMENTAL DIRECTORS'
PENSION RETIREMENT RETIREMENT
PLAN PLAN PLAN
------- ------------ ----------
Actuarial present values:
Weighted average discount rate................ 7.50% 7.50% 7.50%
Rate of increase in future compensation....... N/A N/A N/A
Expected long-term return on plan assets...... 8.00 N/A N/A
Post retirement cost of living allowance...... 3.00 3.00 N/A
The latest actuarial valuation is as of December 31, 1997.
Effective June 30, 1995, the Company elected to freeze contributions to the
retirement plan and to partially freeze contributions to the Director's plan,
resulting in a curtailment gain of $3,390.
On January 15, 1997, a notice of intent to terminate the retirement plan in
accordance with its terms and with applicable Federal laws was distributed to
all participants. The proposed termination date was March 15, 1997 and it was
intended to be a voluntary standard termination in accordance with rules and
regulations issued by the PBGC.
In January 1998, a notice of cancellation of termination of the retirement
plan was distributed to all participants. In addition, the termination
applications previously submitted to the PBGC and IRS were withdrawn. These
actions were the result of a November 1997 definitive agreement by Golden
State to acquire the Company; and with the acquisition, a transfer of Plan
Sponsorship and Administration to Golden State will occur.
In December 1990, the FASB issued Statement of Financial Standards No. 106
(SFAS No. 106), "Employer's Accounting for Postretirement Benefits Other than
Pensions." The Company adopted SFAS No. 106 when it converted to a public
company. The Company currently provides medical coverage to eligible post
retirement employees. The Company elected to amortize the transition
obligation of implementing SFAS No. 106 over a 20-year period. The Company
charged $45, $74 and $67 to compensation expense during the years ended
December 31, 1997, 1996 and 1995, respectively. The actuarial present value of
the full benefit obligation at December 31, 1997 and 1996 was $558 and $493,
respectively.
78
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
EMPLOYEE 401(K) SAVINGS PLAN
The Company has a 401(k) savings plan (formerly known as the profit-sharing
plan) for employees who meet certain length of service requirements. The plan
expense is determined at the discretion of the Board of Directors and no
amounts were provided for the years ended December 31, 1997, 1996 and 1995.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Company maintains an ESOP established for all employees who have
completed one year of service with the Company during which the employee has
served a minimum of 1,000 hours. The ESOP is internally leveraged and borrowed
$2,447 from the Company to purchase 305,900 shares of the common stock of
RedFed Bancorp Inc. issued in the Conversion. The loan will be repaid
principally from the Bank's discretionary contributions to the ESOP over a
period of seven years. At December 31, 1997 and 1996, the outstanding balance
on the loan was $1,049 and $1,398, respectively. Shares purchased with the
loan proceeds are held in a trust account for allocation among participants as
the loan is repaid. At December 31, 1997, 174,800 shares have been committed
and 131,100 shares remain in the trust account. Contributions to the ESOP and
shares released from the trust account are allocated among participants on the
basis of compensation, as described in the plan, in the year of allocation.
Benefits generally become 100% vested after seven years of credited service.
Vesting will accelerate upon retirement, death or disability of the
participant or in the event of a change in control of the Bank or the Company.
Forfeitures will be reallocated among remaining participating employees, in
the same proportion as contributions. Benefits may be payable upon death,
retirement, early retirement, disability or separation from service. Since the
annual contributions are discretionary, the benefits payable under the ESOP
cannot be estimated. The compensation expense related to the ESOP for the
years ended December 31, 1997, 1996, and 1995 was approximately $702, $448 and
$392 respectively. At December 31, 1997 and 1996, unearned compensation
related to the ESOP approximated $1,049 and $1,398, respectively, and is shown
as a reduction of stockholders' equity in the accompanying consolidated
statements of financial condition. At December 31, 1997 and 1996 the fair
value of unearned ESOP shares is $2,606 and $2,360, respectively.
On January 27, 1998, the Board of the Bank voted to terminate the ESOP,
effective immediately prior to the acquisition of the Company by Golden State.
As part of that termination, the loan will first be repaid, and then the
remaining unallocated ESOP shares will be credited to the accounts of
participants. On completion of the acquisition, all participants will be
vested.
INCENTIVE PLANS
Recognition and Retention Plan (RRP)
The Company adopted the RRP as a method of providing officers, employees and
nonemployee directors of the Company with a proprietary interest in the
Company in a manner designed to encourage such persons to remain with the
Company. The Company contributed funds to the RRP to enable the RRP to
acquire, in the aggregate, 3% or 131,100 of the shares of common stock in the
conversion. Under the RRP, awards are granted in the form of shares of common
stock held by the RRP. These shares represent deferred compensation and have
been accounted for as a reduction of stockholders' equity. Shares allocated
vest over a period of five years commencing on April 7, 1995 and continuing on
each anniversary date thereafter. Awards are automatically vested upon a
change in control of the Company or the Bank. In the event that before
reaching normal retirement, an officer, employee or director terminates
service with the Company or the Bank, that person's nonvested awards are
forfeited.
79
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The expense related to the RRPs for fiscal 1997, 1996 and 1995 was
approximately $210, $210 and $208, respectively. At December 31, 1997 and
1996, unearned compensation related to the RRPs was approximately $262 and
$472, respectively, and is shown as a reduction to stockholders' equity in the
accompanying consolidated statements of financial condition.
Long-Term Incentive Plan (LTIP)
In June, 1995, the Company's stockholders approved the 1995 LTIP which was
adopted by the Company's Board of Directors in April, 1995. The LTIP
authorizes the granting of stock options and limited rights and restricted
awards up to 5% of the outstanding common stock (218,000 shares) for ten years
following the adoption of the LTIP. To date, the following awards have been
made under the LTIP: (i) options to acquire 75,000 shares of the common stock
of the Company were granted to President/CEO Anne Bacon under terms making the
options exercisable in five equal annual installments commencing one year from
the grant date; and, (ii) a restricted stock award was also granted to Ms.
Bacon of 43,000 shares of the common stock of the Company, with 5,000 being
immediately vested, and the remaining 38,000 vesting at the end of five years
from the granting of the award, subject to the discretion of the Board of
Directors to accelerate the vesting of part or all of the award prior to the
end of that five year period. As of December 31, 1997, the Board of Directors
had accelerated the vesting of 15,200 of the 38,000 share restricted stock
award. All awards under the LTIP accelerate and vest in the event of a change
of control of the Bank or the Company.
Stock Option Plans
The Company maintains two stock option plans, the 1994 Incentive Stock
Option Plan (the Stock Plan) and the 1994 Stock Option Plan for Outside
Directors (the Directors' Plan). Both plans provide for the grant of options
at an exercise price equal to the fair market value on the date of grant. The
Stock Plan and the Directors' Plan are intended to promote stock ownership by
directors and selected officers and employees of the Company to increase their
proprietary interest in the success of the Company and to encourage them to
remain in the employment of the Company or its subsidiaries. Awards granted
under the Stock Plan may include incentive stock options, nonstatutory options
and limited rights which are exercisable only upon a change in control of the
Bank or the Company. Awards under the Directors' Plan are nonstatutory
options.
The Directors' Plan authorizes the granting of stock options for a total of
109,250 shares of common stock or 2.5% of the shares issued in the conversion.
The Stock Plan authorizes the granting of stock options for a total of 327,750
shares of common stock or 7.5% of the shares issued in the conversion. All
options granted under both plans in connection with the conversion were
granted at an exercise price of $8.00 per share, which was the offering price
of the common stock on the conversion date.
All options granted under the Directors' Plan will become exercisable in
three equal annual installments commencing April 7, 1995 and continuing on
each anniversary date thereafter. Options granted to a subsequently elected
outside director will become exercisable on the April 7 following that date on
which such subsequent outside director is qualified and first begins to serve
as director, provided, however, that in the event of death, disability,
retirement or upon a change in control of the Company or the Bank, all options
previously granted would automatically become exercisable. Each option granted
under the Directors' Plan expires upon the earlier of ten years following the
date of grant, or one year following the date the optionee ceases to be a
director.
All options granted under the Stock Option Plan are exercisable in five
equal annual installments commencing April 7, 1995 and continuing on each
anniversary date thereafter. All options will be exercisable in
80
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
the event of the optionee's death, disability, retirement or upon a change in
control of the Company or the Bank. Each option granted under the Stock Plan
may be exercisable for three months following the date on which the employee
ceases to perform services for the Bank or the Company, except that in the
event of death, disability, retirement or upon a change in control of the
Company or the Bank, options may be exercisable for up to one year thereafter
or such longer period as determined by the Company.
The 75,000 shares granted in 1995 were subject to stock options granted
under the LTIP, effective April 1995. These options based on the grant day
fair value have a derived fair value per option at December 31, 1997 and 1996
using the Black-Scholes option pricing model with assumptions used as follows:
DECEMBER 31
--------------------
1997 1996 1995
------ ----- -----
Derived fair value per option.......................... $14.34 $5.42 $5.42
Assumptions used:
Risk free interest rate.............................. 5.23% 5.15% 5.15%
Expected life (years)................................ 10 10 10
Expected volatility.................................. 32% 30% 30%
The average life does not assume exercise of outstanding options as a result
of a change in control.
The aggregate fair value of options on the grant date was $645 and $406 at
December 31, 1997 and 1996, respectively.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options
exercisable under SFAS No. 123, the Company's operations would have been
adjusted to the pro forma amounts indicated below:
DECEMBER 31
-----------------------
1997 1996 1995
------- ------ -------
Net earnings (loss) as reported.................... $10,433 $ (357) $(8,085)
======= ====== =======
Pro forma net earnings (loss)...................... $10,218 $ (438) $(8,166)
======= ====== =======
Basic earnings (loss) per share as reported........ $ 1.46 $(0.07) $ (2.04)
======= ====== =======
Pro forma basic earnings (loss) per share.......... $ 1.43 $(0.08) $ (2.06)
======= ====== =======
Diluted earnings (loss) per share.................. $ 1.41 $(0.07) $ (2.04)
======= ====== =======
Pro forma diluted earnings (loss) per share........ $ 1.38 $(0.08) $ (2.06)
======= ====== =======
Pro forma operations reflect only options granted in 1995 and vested at 20%
each April, effective 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma amounts presented above because compensation cost is reflected over
the options' vesting period of five years and compensation cost for options
granted prior to January 1, 1995 is not considered.
81
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A summary of stock option transactions under the plans for the years ended
December 31, 1997, 1996 and 1995 follows:
1997 1996 1995
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Options outstanding,
beginning of period.... 459,770 $8.34 487,248 $8.32 437,000 $ 8.00
Granted................. -- -- -- -- 75,000 10.06
Exercised............... (67,369) 8.92 (25,450) 8.00 -- --
Forfeited............... (1,784) 8.00 (2,028) 8.00 (24,752) 8.00
------- ----- ------- ----- ------- ------
Options outstanding, end
of period.............. 390,617 $8.24 459,770 $8.34 487,248 $ 8.32
======= ===== ======= ===== ======= ======
Options exercisable..... 266,083 $8.00 245,911 $8.13 183,191 $ 8.00
======= ===== ======= ===== ======= ======
(14) REGULATORY CAPITAL AND OTHER DISCLOSURES
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) was signed into law on August 9, 1989; regulations for savings
institutions' minimum capital requirements went into effect on December 7,
1989. In addition to its capital requirements, FIRREA includes provisions for
changes in the Federal regulatory structure for institutions including a new
deposit insurance system, increased deposit insurance premiums and restricted
investment activities with respect to noninvestment grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets in order to qualify as a savings institution.
FIRREA regulations require institutions to have a minimum regulatory
tangible capital equal to 1.5% of total assets, a minimum 3.0% core capital
ratio and as of December 31, 1993, an 8.0% risk-based capital ratio. The Bank
was in compliance with such requirements at December 31, 1997.
Presented below is a reconciliation as of December 31, 1997 and 1996,
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 AS
OF DECEMBER 31, 1997
----------------------------------
TANGIBLE CORE (TIER 1) RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------------- ----------
Capital of the Bank presented on a GAAP
basis...................................... $79,868 $79,868 $79,868
Adjustments to GAAP Capital to arrive at
Regulatory Capital:
Securities valuation allowance............ (23) (23) (23)
Investments in and advances to
"nonincludable" consolidated
subsidiaries............................. (1,440) (1,440) (1,440)
Other exclusions from capital............. (299) (299) (333)
General loan valuation allowance.......... -- -- 9,211
------- ------- -------
Adjusted capital............................ 78,106 78,106 87,283
FIRREA regulatory capital requirement....... 14,993 29,986 58,468
------- ------- -------
Amount by which adjusted capital exceeds
requirement............................ $63,113 $48,120 $28,815
======= ======= =======
82
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REDLANDS FEDERAL BANK'S
REGULATORY CAPITAL REQUIREMENT AS
OF DECEMBER 31, 1996
----------------------------------
TANGIBLE CORE (TIER 1) RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------------- ----------
Capital of the Bank presented on a GAAP
basis...................................... $68,331 $68,331 $68,331
Adjustments to GAAP Capital to arrive at
Regulatory Capital:
Securities valuation allowance............ 478 478 478
Investments in and advances to
"nonincludable" consolidated
subsidiaries............................. (1,335) (1,335) (1,335)
Other exclusions from capital............. (87) (87) (155)
General loan valuation allowance.......... -- -- 8,313
------- ------- -------
Adjusted capital............................ 67,387 67,387 75,632
FIRREA regulatory capital requirement....... 13,071 26,142 52,512
------- ------- -------
Amount by which adjusted capital exceeds
requirement............................ $54,316 $41,245 $23,120
======= ======= =======
In addition, savings institutions are also subject to the provisions of the
FDICIA which was signed into law on December 19, 1991. Regulations
implementing the prompt corrective action provisions of FDICIA became
effective on December 19, 1992. In addition to the prompt corrective action
requirements, FDICIA includes significant changes to the legal and regulatory
environment for insured depository institutions, including reductions in
insurance coverage for certain kinds of deposits, increased supervision by the
Federal regulatory agencies, increased reporting requirements for insured
institutions and new regulations concerning internal controls, accounting and
operations.
The OTS is required by FDICIA to prescribe minimum acceptable operational
and managerial standards and standards for asset quality, earnings and
valuation of publicly-traded shares. The operational standards cover internal
controls, loan documentation, credit underwriting, interest rate exposure,
asset growth and employee compensation. The asset quality and earnings
standards specify a maximum ratio of classified assets to capital and minimum
earnings sufficient to absorb losses. Any institution that fails to meet such
standards must submit a plan for corrective action within 30 days, and will be
subject to a host of restrictive sanctions if it fails to implement the plan.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the OTS
or by the FDIC, including requirements to raise additional capital, sell
assets or sell the entire institution. Once an institution becomes "critically
undercapitalized" it is generally placed in receivership or conservatorship
within 90 days.
As of December 31, 1997, and December 31, 1996, the most recent modification
from FDICIA categorized the Bank as "well capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well
capitalized" the Bank must maintain minimum total risk-based, Tier 1 risk-
based and core capital ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
83
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the bank's actual capital and required
capital under prompt corrective action provisions of FDICIA as of December 31,
1997 and 1996:
1997
------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ------ ------- -------
Total capital (to risk-
weighted assets).......... $87,283 11.94% $58,468 *8.00% $73,085 *10.00%
Core capital (to adjusted
tangible assets).......... 78,106 7.81 29,986 *3.00 49,976 *5.00
Tier 1 capital (to risk-
weighted assets).......... 78,106 10.69 -- -- (1) 59,972 *6.00
Tangible capital (to
tangible assets).......... 78,106 7.81 14,993 *1.50 -- -- (1)
1996
------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ------ ------- -------
Total capital (to risk-
weighted assets)............ $75,632 11.52% $52,512 *8.00% $65,641 *10.00%
Core capital (to adjusted
tangible assets)............ 67,387 7.73 26,153 *3.00 43,588 *5.00
Tier 1 capital (to risk-
weighted assets)............ 67,387 10.27 -- -- (1) 52,306 *6.00
Tangible capital (to tangible
assets)..................... 67,387 7.73 13,077 *1.50 -- -- (1)
- --------
* Represents Greater than or Equal to.
(1) This ratio is not specified under capital regulations.
Deposits in the Bank are presently insured by the Savings Association
Insurance Fund (SAIF). On September 30, 1996, an industrywide one-time special
assessment was mandated to recapitalize the SAIF. The special assessment was
levied at 65.7 basis points against every $100 of insured deposits of all
savings institutions at March 31, 1995. As a result, the Bank recorded $5,421
for such assessment in the year ended December 31, 1996. The recapitalization
of the SAIF is expected to result in lower deposit insurance premiums in the
future for the Bank.
(15) COMMITMENTS AND CONTINGENCIES
The Company and subsidiaries have incurred various outstanding commitments
and contingent liabilities in the ordinary course of business that are not
reflected in the accompanying consolidated financial statements as follows:
LITIGATION
The Company is named as a defendant in a lawsuit filed on November 24, 1997
in the San Bernardino County Superior Court by a former employee, who alleges
that he was harassed by a supervisor, and then subjected to retaliatory
discharge when he reported the alleged harassment. The lawsuit seeks general
and exemplary 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 legal proceedings in the aggregate are believed by management to be
immaterial to the Company.
84
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LEASE COMMITMENTS
The Company leases various office facilities under operating leases which
expire through the year 2013. Net rent expense under operating leases,
included in occupancy and equipment expense, was approximately $223, $264 and
$263 for the years ended December 31, 1997, 1996 and 1995, respectively. A
summary of future minimum lease payments under these agreements follows:
AMOUNT
------
Years ending December 31:
1998............................................................... $ 171
1999............................................................... 147
2000............................................................... 147
2001............................................................... 147
2002............................................................... 147
2003 and thereafter................................................ 1,077
------
$1,836
======
LETTERS OF CREDIT-TAX EXEMPT BONDS
The Company has extended LOCs for the account of several owners of projects
financed by tax-exempt bonds. See notes 6 and 12.
LETTERS OF CREDIT-PERFORMANCE BONDS
The Company has extended letters of credit to guarantee the performance of
customers to third parties under various circumstances. The letters of credit
are generally secured by real property or other assets of the customers, as
deemed necessary by the Company. At December 31, 1997 and 1996, the letters of
credit amounted to approximately $853 and $1,463, respectively, which are
secured by either a Deed of Trust against real property or a loan agreement
secured by real property. The letters of credit may only be drawn upon by a
third party in the event of lack of contractual performance by the company's
customer.
(16) OFF-BALANCE SHEET AND OTHER RISKS
CONCENTRATIONS OF OPERATIONS AND ASSETS
The Company's operations are located entirely within Southern California and
at December 31, 1997 and 1996, approximately 81% and 89%, respectively, of the
Company's mortgage loans were secured by real estate in Southern California.
OFF-BALANCE SHEET CREDIT RISK
In the normal course of meeting the financing needs of its customers and
reducing exposure to fluctuating interest rates, the Company is a party to
financial instruments with off-balance sheet risk. These financial instruments
(commitments to originate loans and extend letters of credit) include elements
of credit risk in excess of the amount recognized in the accompanying
consolidated statements of financial condition. The contractual amounts of
those instruments reflect the extent of the company's involvement in these
particular classes of financial instruments.
85
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's exposure to off-balance sheet credit risk (i.e., losses
resulting from the other party's nonperformance of financial guarantees) is
represented by the following contractual amounts:
DECEMBER 31
-----------------
1997 1996
-------- --------
Commitments to originate fixed and variable rate mortgage
loans................................................... $ 3,803 $ 7,214
======== ========
Standby letters of credit................................ $109,657 $107,430
======== ========
Commitments to originate fixed and variable rate loans represent commitments
to lend to a customer, provided there are no violations of conditions
specified in the agreement. At December 31, 1997, the Company had entered into
$3,608 of variable rate commitments to originate residential mortgage loans
with an interest rate range of 5.75% to 7.50% and $195 of fixed rate
commitments with an interest rate range of 7.25% to 10.50%. At December 31,
1996, the Company had entered into $6,563 of variable rate commitments to
originate residential mortgage loans with an interest rate range of 3.95% to
9.15% and $651 of fixed rate commitments with an interest rate range of 7.63%
to 9.75%. The average commitment term offered is 20 days at December 31, 1997.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts above do not necessarily represent future cash
requirements. The Company controls credit risk by evaluating each customer's
creditworthiness on a case-by-case basis and by using systems of credit
approval, loan limitation and various underwriting and monitoring procedures.
Included in standby letters of credit at December 31, 1997 and 1996 are
$108,804 and $105,967, respectively, of LOCs issued by the Company to
guarantee the principal and interest payments on certain tax exempt bonds.
Also included in standby letters of credit at December 31, 1997 and 1996 is
$853 and $1,463, respectively, of letters of credit issued by the Company to
guarantee the performance of customers to third parties. If the parties to the
letters of credit were to fail completely to perform according to the terms of
the contracts and any assets collateralizing the issues proved to be of no
value, the associated loss to the Company would be the full value of the
letters of credit. The letters of credit are described in notes 6, 12 and 15.
The Company does not require collateral or other security to support
commitments to originate fixed and variable rate mortgage loans with credit
risk, however, when the commitment is funded, the Company receives collateral
to the extent collateral is deemed necessary, with the most significant
category of collateral being real property underlying mortgage loans. The
above contractual amounts represent the full amount of credit risk inherent in
these commitments.
86
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
The estimated fair values of the Company's financial instruments are as
follows:
DECEMBER 31
-----------------------------------
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
Financial assets:
Cash and cash equivalents................ $ 34,200 $ 34,200 $ 33,746 $ 33,746
Loans held for sale...................... 4,051 4,097 4,843 4,843
Mortgage-backed securities available-for-
sale.................................... 10,610 10,610 18,220 18,220
Investment securities held-to-maturity... 21,604 21,466 34,695 34,369
Mortgage-backed securities held-to-
maturity................................ 5,365 5,359 25,327 25,697
Loans receivable, net.................... 891,005 888,164 725,019 725,446
FHLB stock............................... 9,115 9,115 6,486 6,486
Financial liabilities:
Demand deposits.......................... 308,530 308,530 282,413 282,413
Certificates of deposit.................. 536,089 538,648 508,390 509,193
Other borrowed money..................... 64,418 64,591 4,418 4,421
Off balance sheet item:
Standby letters of credit................ -- 8,350 -- 9,263
CASH AND CASH EQUIVALENTS
The fair values of cash and cash equivalents approximate the carrying values
reported in the consolidated statements of financial condition.
MORTGAGE-BACKED SECURITIES
The fair values of mortgage-backed securities are based on quoted market
prices or dealer quotations obtained from secondary market sources.
INVESTMENT SECURITIES AND FHLB STOCK
The fair value of investment securities is based on quoted market prices.
FHLB stock is valued at cost which approximates fair value.
87
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
LOANS RECEIVABLE AND LOANS HELD FOR SALE
For purposes of calculating the fair value of loans receivable, loans were
segregated by type, such as residential mortgages, commercial and industrial
loans and credit card receivables. Each loan category was further segregated
between those with fixed interest rates and those with adjustable interest
rates.
For all mortgage loans, fair value is estimated using discounted cash flow
analyses. Discount rates are based on secondary market quotations for similar
loan types adjusted for differences in credit and servicing characteristics.
The market values of credit card receivables and loans held for sale are
based on market quotations obtained from secondary market sources.
DEPOSITS
The fair values of passbook accounts, demand deposits and certain money
market deposits are assumed to be the carrying values at the reporting date.
The fair value of term accounts is based on projected contractual cash flows
discounted at rates currently offered for deposits of similar maturities.
OTHER BORROWED MONEY
The fair values of fixed and adjustable rate FHLB advances are estimated by
discounting contractual cash flows using discount rates that reflect current
FHLB borrowing rates for similar advances.
Other borrowings include securities and loans sold under agreements to
repurchase and mortgages payable secured by real estate projects. The fair
value of other borrowings is calculated based on a discounted cash flow
analysis. The cash flows are discounted using approximated maturity matched
rates for comparable instruments.
STANDBY LETTERS OF CREDIT
The fair value of standby letters of credit is determined by using the fees
currently charged taking into consideration the remaining terms of the
agreements and the creditworthiness of the counterparties.
88
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(18) LOAN SERVICING AND SALE ACTIVITIES
Loan servicing and sale activities are summarized as follows:
YEAR ENDED DECEMBER
31
----------------------
1997 1996 1995
------ ------ -------
Statement of financial condition information--loans
held for sale..................................... $4,051 $4,843 $ 4,578
====== ====== =======
Statement of operations information:
Loan servicing fees.............................. $ 34 $ 196 $ 445
Amortization of excess servicing fees............ -- 4 (9)
------ ------ -------
Loan servicing fees, net......................... $ 34 $ 200 $ 436
====== ====== =======
Gain (loss) on sale of loans..................... $ 15 $ (11) $ 680
====== ====== =======
Gain on sale of servicing........................ $ -- $ 803 $ --
====== ====== =======
Statement of cash flows information:
Loans originated for sale........................ $4,450 $ -- $10,320
====== ====== =======
Proceeds from sale of loans...................... $4,470 $ 278 $76,695
====== ====== =======
The Company originates mortgage loans which, depending upon whether the
loans meet the company's investment objectives, may be sold in the secondary
market or to other private investors. The servicing of these loans may or may
not be retained by the Company. Indirect nondeferrable origination and
servicing costs for loan servicing and sale activities cannot be presented as
these operations are integrated with and not separable from the origination
and servicing of portfolio loans and, as a result, cannot be accurately
estimated.
(19) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP, SECONDARY STOCK OFFERING
AND DEFINITIVE AGREEMENT FOR ACQUISITION
RedFed Bancorp Inc. was incorporated under Delaware law in October 1993 for
the purpose of acquiring and holding all of the outstanding capital stock of
Redlands Federal Bank as part of the Bank's conversion from a Federally
chartered savings bank. On April 7, 1994, the Bank became a wholly owned
subsidiary of the Company. In connection with the conversion, RedFed Bancorp
Inc. issued and sold to the public 4,370,000 shares of its common stock (par
value $0.01 per share) at a price of $8 per share. The proceeds, net of $2,470
in conversion costs, received by the Company from the conversion (before
deduction of $2,447 to fund employee benefit plans) amounted to $32,490. The
Company retained 25% of the net proceeds and used the remaining net proceeds
to purchase the capital stock of the Bank. In December 1994, the Company
transferred $5,000 of the retained proceeds to the Bank. Prior to the
completion of the conversion, RedFed Bancorp Inc. had no assets or liabilities
and did not conduct any business other than of an organizational nature. The
financial position of RedFed Bancorp Inc. (parent company only) as of December
31, 1997 and 1996 and the results of its operations for the years then ended
are presented in note 20.
On August 19, 1996, the Company completed a secondary stock offering for
2,990,000 shares of common stock. The shares were issued at $8.75 per share
and the net proceeds to the Company from the offering were approximately
$24,069. The Company contributed $21,193 of the net proceeds to the Bank to
increase the Bank's regulatory capital.
89
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
On November 30, 1997, the Company signed a definitive Agreement and Plan of
Merger pursuant to which the Company will be acquired by, and merged into a
wholly owned subsidiary of, Golden State Bancorp Inc., the parent of Glendale
Federal Bank. Upon the closing of the acquisition, Golden State will issue
$20.75 of its common stock in exchange for each share of the Company's common
stock. The transaction will be treated as a tax free exchange with the exact
number of Golden State shares to be distributed to the Company's stockholders
to be determined based upon the average closing price of Golden State's common
stock on the New York Stock Exchange during the ten trading days prior to the
second business day before the closing transaction. Consummation of the
acquisition is subject to the approval of the Company's stockholders and
regulatory authorities. It is currently expected that the acquisition will be
consummated in the second quarter of 1998.
On February 4, 1998, Golden State entered into an Agreement and Plan of
Reorganization with FNPH. FNH, Golden State Financial Corporation, First
Gibraltar Holdings, Inc. and Hunter's Glen/Ford, Ltd. (the "California Federal
Merger Agreement"). FNH is the parent of California Federal Bank and is
controlled, through intermediate entities, by MAF and Ford, the Chairman of
the Board and Chief Executive Officer of California Federal Bank. Subject to
certain conditions, including the approval of Golden State's stockholders and
regulatory authorities, FNPH will be merged with and into Golden State (the
California Federal Merger) pursuant to the California Federal Merger
Agreement. If the California Federal Merger is consummated, it is expected
that affiliates of MAF and Ford would together own between 42% and 45% of the
combined entity, before giving effect to the contingent issuance of Golden
State common stock under the California Federal Merger Agreement that could
substantially increase such percentage ownership. Upon the closing of the
California Federal Merger, two-thirds of the Board of Directors of Golden
State will be individuals designated by affiliates of MAF and Ford.
At the time of the conversion, the Bank established a liquidation account in
the amount of $52,816 which was equal to its total retained earnings as of
September 30, 1993. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their accounts at the
Bank after the conversion. The liquidation account will be reduced annually to
the extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution from
the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The balance in the liquidation
account at December 31, 1997 is $23,179.
The Company may not declare or pay cash dividends on or repurchase any of
its shares of common stock, if the effect would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements or if
such declaration and payment would otherwise violate regulatory requirements.
90
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(20) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following are the condensed financial
statements for RedFed Bancorp Inc. (parent company only):
CONDENSED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31
----------------
1997 1996
ASSETS ------- -------
Cash.......................................................... $ 2,925 $ 1,772
Investment securities held-to-maturity........................ 1,410 1,995
Investment in subsidiaries.................................... 79,868 68,331
Other assets.................................................. 41 40
------- -------
Total assets................................................ $84,244 $72,138
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities--other liabilities................................ $ (6) $ 20
Stockholders' equity.......................................... 84,250 72,118
------- -------
Total liabilities and stockholders' equity.................. $84,244 $72,138
======= =======
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER
31
-----------------------
1997 1996 1995
------- ----- -------
Interest and other income............................. $ 292 $ 191 $ 125
General and administrative expense.................... 653 165 314
------- ----- -------
Earnings (loss) before equity in earnings (loss) of
subsidiaries....................................... (361) 26 (189)
Equity in earnings (loss) of subsidiaries............. 10,884 (377) (7,892)
------- ----- -------
Earnings (loss) before income taxes................. 10,523 (351) (8,081)
Income taxes.......................................... 90 6 4
------- ----- -------
Net earnings (loss)................................. $10,433 $(357) $(8,085)
======= ===== =======
91
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
-------- -------- -------
Cash flows from operating activities:
Net earnings (loss)............................. $ 10,433 $ (357) $(8,085)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Equity in (earnings) loss of subsidiaries..... (10,884) 377 7,892
Amortization of discount on investments....... (5) (2) --
(Increase) decrease in other assets........... (1) (40) 8
Increase (decrease) in other liabilities...... (26) (44) 51
-------- -------- -------
Net cash used in operating activities....... (483) (66) (134)
-------- -------- -------
Cash flow from investing activities:
Purchases of investment securities held-to-
maturity....................................... (1,410) (2,993) --
Proceeds from maturities of investment
securities held-to-maturity.................... 2,000 1,000 --
Additional investment in bank................... -- (21,193) --
-------- -------- -------
Net cash provided by (used in) investing
activities................................. 590 (23,186) --
-------- -------- -------
Cash flows from financing activities:
Purchase of treasury stock from Bank............ -- (957) --
Net proceeds from issuance of common stock...... 696 24,340 --
Proceeds from ESOP loan......................... 350 350 350
-------- -------- -------
Net cash provided by financing activities... 1,046 23,733 350
-------- -------- -------
Net increase in cash during the year........ 1,153 481 216
Cash and cash equivalents, beginning of year...... 1,772 1,291 1,075
-------- -------- -------
Cash and cash equivalents, end of year............ $ 2,925 $ 1,772 $ 1,291
======== ======== =======
92
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 1997
--------- -------- ------------- ------------ --------
Interest income......... $15,839 $15,870 $16,860 $17,939 $ 66,508
------- ------- ------- ------- --------
Net interest income..... 7,408 7,185 7,350 7,834 29,777
Provision for losses on
loans.................. (459) (58) (283) (339) (1,139)
Noninterest income...... 1,727 1,673 1,737 1,909 7,046
Noninterest expense..... (6,330) (6,393) (5,986) (6,476) (25,185)
------- ------- ------- ------- --------
Earnings before income
taxes................ 2,346 2,407 2,818 2,928 10,499
Income taxes (benefit).. (12) -- 15 63 66
------- ------- ------- ------- --------
Net earnings.......... $ 2,358 $ 2,407 $ 2,803 $ 2,865 $ 10,433
======= ======= ======= ======= ========
Basic earnings per
share.................. $ 0.33 $ 0.34 $ 0.39 $ 0.40 $ 1.46
======= ======= ======= ======= ========
Diluted earnings per
share.................. $ 0.32 $ 0.33 $ 0.38 $ 0.38 $ 1.41
======= ======= ======= ======= ========
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1996
--------- -------- ------------- ------------ --------
Interest income......... $15,446 $15,086 $ 15,199 $15,768 $ 61,499
------- ------- -------- ------- --------
Net interest income..... 6,983 6,966 7,099 7,413 28,461
Provision for losses on
loans.................. (1,400) (678) (371) (389) (2,838)
Noninterest income...... 1,589 2,325 1,385 1,668 6,967
Noninterest expense..... (6,229) (7,335) (12,323) (7,053) (32,940)
------- ------- -------- ------- --------
Earnings (loss) before
income taxes......... 943 1,278 (4,210) 1,639 (350)
Income taxes............ 2 5 -- -- 7
------- ------- -------- ------- --------
Net earnings (loss)... $ 941 $ 1,273 $ (4,210) $ 1,639 $ (357)
======= ======= ======== ======= ========
Basic earnings (loss)
per share.............. $ 0.23 $ 0.31 $ (0.77) $ 0.23 $ (0.07)
======= ======= ======== ======= ========
Diluted earnings (loss)
per share.............. $ 0.23 $ 0.31 $ (0.77) $ 0.23 $ (0.07)
======= ======= ======== ======= ========
93
REDFED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(22) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.
YEAR ENDED DECEMBER 31, 1997
------------------------------------
WEIGHTED
INCOME AVERAGE SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
Net earnings........................... $10,433
-------
Basic EPS--net earnings available to
common stockholders................... 10,433 7,141,275 $1.46
=====
Effect of dilutive securities
Options.............................. 215,399
RRPs................................. 46,853
LTIP................................. 22,800
------- ---------
Diluted EPS--net earnings available to
common stockholders plus assumed
conversions........................... $10,433 7,426,327 $1.41
======= ========= =====
YEAR ENDED DECEMBER 31, 1996
------------------------------------
WEIGHTED
INCOME AVERAGE SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
Net loss............................... $(357)
-----
Basic and diluted EPS--net loss
available to common stockholders...... $(357) 5,146,331 $(0.07)
===== ========= ======
YEAR ENDED DECEMBER 31, 1995
------------------------------------
WEIGHTED
INCOME AVERAGE SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
Net loss............................... $(8,085)
-------
Basic and diluted EPS--net loss
available to common stockholders...... $(8,085) 3,955,461 $(2.04)
======= ========= ======
For the years ended December 31, 1996 and 1995, 139,918 and 248,849 shares
of options, RRPs and LTIP were not included as a result of the Company's loss
for those years, respectively.
94
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 26, 1998.
Such Proxy Statement is expected to be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to Directors and Executive Compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 26, 1998, excluding the
Report of the Compensation Committee and the Stock Performance Graph. Such
Proxy Statement is expected to be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 26, 1998.
Such Proxy Statement is expected to be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on May 26, 1998. Such Proxy
Statement is expected to be filed with the Securities and Exchange Commission
not later than 120 days subsequent to December 31, 1997.
95
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a)(1) The consolidated financial statements are contained herein as listed
on the "Index" on page 52 hereof.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
2.1 Agreement and Plan of Merger by and between RedFed Bancorp Inc. and
Golden State Bancorp Inc.*
3.1 Certificate of Incorporation of RedFed Bancorp Inc.**
3.2 Bylaws of RedFed Bancorp Inc.**
4.0 Stock Certificate of RedFed Bancorp Inc.**
10.1 Form of Employment and Change in Control Agreements between the Bank
and the Company and Certain Officers***
10.2 Deferred Compensation Agreement between the Bank and Henry Van
Mouwerik***
10.3 Redlands Federal Bank Employee Severance Compensation Plan***
10.4 Employee Stock Ownership Plan and Trust**
10.5 Recognition and Retention Plan and Trust for Outside Directors***
10.6 Recognition and Retention Plan and Trust for Officers and
Employees****
10.7 Incentive Stock Option Plan****
10.8 Stock Option Plan for Outside Directors****
10.9 Outside Directors' Retirement Plan***
10.1 1995 Long Term Incentive Plan*****
21.0 Subsidiary information is incorporated herein by reference to "Part
I--Subsidiaries"
23.0 Consent of KPMG Peat Marwick LLP
27.1 1996 Financial Data Schedule
27.2 1997 Financial Data Schedule
- --------
* Incorporated herein by reference into this document from Exhibit 2.1 to
the Registrant's Form 8-K filed with the SEC on December 3, 1997.
** Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, filed on December 23, 1993,
Registration No. 73396.
*** Incorporated herein by reference into this document from the Annual
Report on Form 10-K for the fiscal year ended December 31, 1994 filed
with the SEC on March 31, 1995.
**** Incorporated herein by reference into this document from the Proxy
Statement for the 1994 Special Meeting of Stockholders filed on May 29,
1994.
***** Incorporated herein by reference into this document from the Proxy
Statement for the 1995 Annual Meeting of Stockholders filed on May 1,
1995.
(b) Reports on Form 8-K.
On December 3, 1997 the Registrant filed a report on Form 8-K announcing the
definitive Agreement and Plan of Merger between the Registrant and Golden
State Bancorp Inc.
96
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Redfed Bancorp Inc.
/s/ Anne Bacon
By:____________________________
Anne Bacon
President and Chief Executive
Officer
Dated: March 24, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ John D. McAlearney, Jr. March 24, 1998
- ------------------------------------
John D. McAlearney, Jr. Chairman
/s/ Anne Bacon March 24, 1998
- ------------------------------------
Anne Bacon President and Chief
Executive Officer
/s/ Stanley C. Weisser March 24, 1998
- ------------------------------------
Stanley C. Weisser Director
/s/ Robert G. Wiens March 24, 1998
- ------------------------------------
Robert G. Wiens Director
/s/ Douglas R. McAdam March 24, 1998
- ------------------------------------
Douglas R. McAdam Director
/s/ William C. Buster, Jr. March 24, 1998
- ------------------------------------
William C. Buster, Jr. Director
/s/ William T. Hardy, Jr. March 24, 1998
- ------------------------------------
William T. Hardy, Jr. Director
/s/ David C. Gray, CPA March 24, 1998
- ------------------------------------
David C. Gray, CPA Treasurer and Chief
Financial (Principal
Accounting) Officer
97