SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ To _________
COMMISSION FILE NUMBER: 0-23146
REDFED BANCORP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0588105
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
300 EAST STATE STREET, REDLANDS, CALIFORNIA 92373
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (909) 793-2391
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
[x] YES [_] NO
The Registrant had 7,520,300 shares of common stock outstanding at March 31,
1998.
REDFED BANCORP INC. AND SUBSIDIARIES
INDEX
Page
-----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
RedFed Bancorp Inc.
Consolidated Statements of Financial Condition as of
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Earnings for the Three
Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Default upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
REDFED BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands)
March 31, December 31,
1998 1997
---------------- ----------------
Assets
------
Cash and cash equivalents $ 54,542 $ 34,200
Loans held for sale at lower of cost or market value 3,802 4,051
Mortgage-backed securities available-for-sale at fair value 10,431 10,610
Investment securities held-to-maturity 12,403 21,604
Mortgage-backed securities held-to-maturity -- 5,365
Loans receivable, net 906,875 891,005
Accrued interest receivable 5,745 5,962
Federal Home Loan Bank stock, at cost 9,240 9,115
Real estate acquired through foreclosure, net 7,106 4,758
Real estate held for sale, net 1,372 1,372
Premises and equipment, net 16,673 16,935
Prepaid expenses and other assets 5,203 4,513
Deferred income taxes 194 264
--------------- ---------------
Total assets $ 1,033,586 $ 1,009,754
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 860,587 $ 844,619
FHLB advances 60,000 60,000
Other borrowed money 8,693 4,418
Accrued expenses and other liabilities 14,611 15,368
Deferred income 1,011 1,099
--------------- ---------------
Total liabilities 944,902 925,504
--------------- ---------------
Stockholders' equity:
Preferred stock -- --
Common stock 76 75
Additional paid-in capital 59,200 58,029
Retained earnings, substantially restricted 31,868 28,646
Deferred compensation (1,248) (1,311)
Minimum pension liability adjustments (475) (410)
Treasury stock (802) (802)
Unrealized gains on securities available-for-sale 65 23
--------------- ---------------
Total stockholders' equity 88,684 84,250
--------------- ---------------
Total liabilities and stockholders' equity $ 1,033,586 $ 1,009,754
=============== ===============
See accompanying notes to unaudited consolidated financial statements.
3
REDFED BANCORP INC. AND SUBSIDIARIES
REDFED BANCORP INC.
Consolidated Statements of Earnings
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
---------------------------
1998 1997
------------- -----------
Interest income:
Loans receivable and mortgage-backed securities $ 17,369 $ 14,897
Investment securities and deposits 865 942
------------ ------------
Total interest income 18,234 15,839
------------ ------------
Interest expense:
Deposits 9,273 8,339
Other borrowed money 958 92
------------ ------------
Total interest expense 10,231 8,431
------------ ------------
Net interest income 8,003 7,408
Provision for losses on loans 321 459
------------ ------------
Net interest income after provision 7,682 6,949
------------ ------------
for losses on loans
Non-interest income:
Letter of credit and other fee income 1,859 1,543
Loss on sale of loans, net -- (1)
Other income 74 185
------------ ------------
Total non-interest income 1,933 1,727
------------ ------------
Non-interest expense:
Compensation and benefits 2,840 2,966
Occupancy and equipment 1,783 1,758
Federal deposit insurance premiums 130 480
Merger costs 147 --
Other expense, net 853 632
------------ ------------
Total general administrative expense 5,753 5,836
Real estate operations, net 412 494
------------ ------------
Total non-interest expense 6,165 6,330
------------ ------------
Earnings before income taxes 3,450 2,346
Income taxes (benefit) 228 (12)
------------ ------------
Net earnings $ 3,222 $ 2,358
============ ============
Basic earnings per share $ 0.44 $ 0.33
============ ============
Weighted average shares outstanding 7,344,882 7,105,084
============ ============
Diluted earnings per share $ 0.42 $ 0.32
============ ============
Weighted average shares outstanding 7,586,366 7,363,129
============ ============
See accompanying notes to unaudited consolidated financial statements.
4
REDFED BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
----------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net earnings $ 3,222 $ 2,358
Adjustments to net earnings:
Loan fees collected 221 172
Depreciation and amortization 588 484
Provision for losses on loans 321 459
Net loss (gain) on:
Sales of loans -- 8
Sales of real estate and premises and equipment 66 24
Federal Home Loan Bank stock dividends received (125) (105)
Loans originated for sale -- (2,042)
Proceeds from sale of loans held for sale -- 2,043
Increase (decrease) in:
Accrued expenses and other liabilities 638 1,364
Deferred income (88) (218)
Deferred income taxes 70 --
Accrued interest receivable 217 (344)
Prepaid expenses and other assets (755) (18,250)
-------- ---------
Net cash used in operating activities 4,375 (14,047)
-------- ---------
Cash flows from investing activities:
Proceeds from maturities of investment securities held-to-maturity 12,700 7,500
Purchases of investments securities held-to-maturity (3,487) (10,471)
Proceeds from maturities of mortgage-backed securities
available-for-sale 220 204
Proceeds from maturities of mortgage-backed securities
held-to-maturity 5,364 19,912
Loans originated for investment (36,355) (26,467)
Purchase of loans for investment (38,015) (54,659)
Purchase of Federal Home Loan Bank stock -- (249)
Principal payments and reductions of loans, net 56,757 39,568
Proceeds from sale of real estate 2,159 2,471
Proceeds from sale of premises and equipment -- 2
Purchases of premises and equipment (162) (157)
-------- ---------
Net cash (used in) provided by investing
activities (819) (22,346)
-------- ---------
See accompanying notes to unaudited consolidated financial statements.
(Continued)
5
REDFED BANCORP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-------------------------
1998 1997
---------- ----------
Cash flows from financing activities:
Deposits, net of withdrawals and interest credited $ 15,968 $ 7,832
Proceeds from Federal Home Loan Bank advances -- 15,000
Repayment of other borrowed money (225) --
Proceeds from stock options exercised 1,043 49
--------- --------
Net cash provided by (used in) financing
activities 16,786 22,881
--------- --------
Increase (decrease) in cash and cash 20,342 (13,512)
equivalents
Cash and cash equivalents, beginning of period 34,200 33,746
--------- --------
Cash and cash equivalents, end of period $ 54,542 $ 20,234
========= ========
Supplemental information:
Interest paid (including interest credited) $ 9,448 $ 8,496
Transfers from loans receivable to real estate 1,715 2,094
Real estate acquired subject to bond financing 3,106 --
Bond financing subject to real estate sales 4,500 --
========= ========
See accompanying notes to unaudited consolidated financial statements.
6
REDFED BANCORP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated statements of financial condition of RedFed Bancorp Inc.
and subsidiaries (the "Company") as of March 31, 1998, the related
consolidated statements of earnings for the three months ended March 31,
1998 and 1997 and the related consolidated statements of cash flows for the
three months ended March 31, 1998 and 1997 are unaudited. These statements
reflect, in the opinion of management, all material adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
consolidated financial condition of the Company as of March 31, 1998, and
results of consolidated earnings for the three months ended March 31, 1998
and 1997, and consolidated cash flows for the three months ended March 31,
1998 and 1997. The results of consolidated earnings for the unaudited
periods are not necessarily indicative of the results of consolidated
earnings to be expected for the entire year of 1998.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Securities and Exchange
Commission ("SEC") Form 10-Q and, therefore, do not include all information
and footnotes normally included in consolidated financial statements
prepared in conformity with generally accepted accounting principles.
Accordingly, these unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's annual report on SEC Form 10-K for
the year ended December 31, 1997.
2. Basic and diluted earnings per share ("EPS") for the three months ended
March 31, 1998 of $0.44 and $0.42, respectively, were based on net earnings
of $3.2 million, with basic and diluted earnings per share calculated based
upon weighted-average common shares outstanding during that period of
7,344,882 and 7,586,366 shares, respectively, (net of unearned Employee
Stock Ownership Plan ("ESOP") and Recognition and Retention Plan ("RRP")
shares, and treasury stock). This compares with basic and diluted earnings
per share for the three months ended March 31, 1997 of $0.33 and $0.32,
respectively, based on net earnings of $2.4 million with basic and diluted
earnings per share calculated based upon weighted-average common shares
outstanding during that period of 7,105,084 and 7,363,129, respectively,
(net of unearned ESOP and RRP shares and treasury stock). Basic and diluted
EPS have been calculated in accordance with SFAS 128; the amounts for 1997
have been restated to conform with this pronouncement.
3. 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. The adoption of SFAS No. 130 on January
1, 1998 will not have a material impact on the Company's year end
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
7
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 is to 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.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures about Pension and
Other Postretirement Benefits." SFAS 132 amends the disclosure requirement
of SFAS No. 87, "Employers' Accounting for Pensions, SFAS No 88,
"Employer's Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS 106, "Employer's
Accounting for Retirement Benefits Other than Pensions." SFAS 132
standardizes the disclosure requirements of SFAS No. 87 and 106 to the
extent practicable and recommends a parallel format for presenting
information about pensions and other retirement benefits. SFAS 132 is
effective for fiscal years beginning after December 15, 1997. SFAS will
result in disclosure changes only.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Earnings
-----------
GENERAL
RedFed Bancorp Inc. was organized by Redlands Federal Bank (the "Bank") for
the purpose of acquiring all of the capital stock of the Bank issued in the
conversion of the Bank from a federally chartered mutual savings association to
a federally chartered stock savings bank. The Company's common stock is traded
on NASDAQ under the symbol "REDF".
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 (the "Merger"). Upon the closing of the
merger, Golden State will issue $20.75 of its common stock in exchange for
each share of the Company's common stock. The Merger 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 Merger is subject to the approval of the
Company's stockholders. On May 4, 1998, the Office of Thrift Supervision
("OTS") approved the consummation of the Merger. It is currently expected that
the merger will be consummated in July 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 initially 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. It is currently expected that the
California Federal Merger will be consummated by the September, 1998 quarter
end.
8
The Company is primarily engaged in providing consumer and commercial banking
services to the general public in the areas in which its branches are located
and investing the resulting deposits and other available funds primarily in
loans secured by one-to-four family residential mortgages, including spot (non-
tract) construction loans, which are combination construction and permanent
loans made to borrowers who will occupy the completed home as their primary
residence. At March 31, 1998 the Bank operated fifteen retail banking offices
located in San Bernardino and Riverside counties, and one loan production
office.
The Company is subject to significant competition from other financial
institutions in its market area. The Bank is regulated by certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
FINANCIAL CONDITION
The Company's consolidated assets were $1.03 billion at March 31, 1998 compared
to $1.01 billion at December 31, 1997. The increase of $23.8 million was
primarily the result of a net increase in loans receivable of $15.9 million,
an increase in cash and cash equivalents of $20.3 million and an increase in
real estate acquired through foreclosure, net, of $2.3 million. These increases
were partially offset by a decrease in investment securities held-to-maturity of
$9.2 million and by a decrease in mortgage-backed securities held-to-maturity
of $5.4 million. The increase in consolidated liabilities of $19.4 million
consisted primarily of an increase in the deposit base of $16.0 million, and an
increase in other borrowed money of $4.3 million. Stockholders' equity
increased to $88.7 million at March 31, 1998 from $84.2 million at December
31, 1997.
Loans receivable, net, increased to $906.9 million at March 31, 1998, from
$891.0 million at December 31, 1997. The increase of $15.9 million for the
three months ended March 31, 1998 consisted primarily of loan purchases of
$38.0 million and loan originations of $36.4 million offset by loan principal
payments and other reductions of $56.8 million. Mortgage-backed securities held-
to-maturity decreased $5.4 million primarily as a result of the maturity of the
San Bernardino County Bond which was previously owned by the Company.
Savings deposits at March 31, 1998 totaled $860.6 million compared to $844.6
million at December 31, 1997. The increase of $16.0 million in savings deposits
is due primarily to an increase in transaction accounts. The Company increased
other borrowed money by $4.3 million during the three months ended March 31,
1998 due to a transfer of an off-balance sheet Letter of Credit ("LOC") to real
estate acquired through foreclosure ("REO") with a corresponding increase in
other borrowed money. Stockholder's equity increased by $4.4 million primarily
as a result of earnings for the three months ended March 31, 1998 of $3.2
million and stock options exercised of $1.0 million.
LIQUIDITY
The Company's primary sources of funds are deposits, principal and interest
payments on loans, advances from the Federal Home Loan Bank ("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 by the OTS depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio is currently 4%. The
Bank's average liquidity ratios for the three months ended March 31, 1998 and
December 31, 1997 were 5.68% and 5.92%, respectively. The Bank currently
attempts to maintain a liquidity ratio as close to the minimum requirements as
possible, since loan originations earn higher interest rates than are available
from liquid investments and also create the opportunity to generate loan fees.
9
RESULTS OF EARNINGS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997.
General. The Company recorded net earnings of $3.2 million for the three months
- -------
ended March 31, 1998, or $0.44 per basic share and $0.42 per diluted share, as
compared to net earnings of $2.4 million, or $0.33 per basic share and $0.32 per
diluted share, for the three months ended March 31, 1997. Net operating results
for the three months ended March 31, 1998 were favorably impacted by an increase
in net interest income after provision for losses on loans of $733,000, by an
increase of $206,000 in non-interest income, and by a decrease of $165,000 in
non-interest expense.
Interest income. Interest income for the three months ended March 31, 1998 was
- ----------------
$18.2 million compared to $15.8 million for the same period during the previous
year. The increase in interest income for the three months ended March 31, 1998
was due to an increase in average interest-earning assets of $128.6 million,
which was partially offset by a decrease of 2 basis points in the average yield
for interest-earning assets from 7.52% for the three months ended March 31, 1997
to 7.50% for the three months ended March 31, 1998.
Interest expense. Interest expense for the three months ended March 31, 1998
- -----------------
was $10.2 million compared to $8.4 million for the same three month period in
1997. This increase in interest expense for the three months ended March 31,
1998 was the result of an increase in average interest-bearing liabilities of
$109.3 million and by an increase of 28 basis points in the average cost for
interest-bearing liabilities from 4.38% for the three months ended March 31,
1997 to 4.66% for the three months ended March 31, 1998.
Net interest income. The net interest income for the three months ended March
- --------------------
31, 1998 was $8.0 million, which corresponds to an interest rate spread of
2.84%. This compares to net interest income of $7.4 million, which corresponds
to an interest rate spread of 3.14%, for the same period during 1997. The
increase in net interest income of $595,000 is the result of an improvement of
$19.4 million in the average dollar amounts for interest-earning assets net of
interest-bearing liabilities for the three months ended March 31, 1998 when
compared to the same period in the previous year. The 30 basis point decrease
in the interest rate spread for the three months ended March 31, 1998 compared
to the three months ended March 31, 1997 was the result of a decrease in the
average yield for interest-earning assets and an increase in the average cost
for interest-bearing liabilities.
10
The following table displays average dollar amounts and interest rates on the
Company's interest-earning assets and interest-bearing liabilities:
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
(Dollars in thousands)
Average dollar amount of and average yield earned on assets:
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/COST BALANCE YIELD/COST
-------- ---------- -------- ----------
Loans and mortgage-backed securities $909,195 7.64% $775,892 7.69%
Investment securities 63,031 5.49 67,692 5.64
-------- --------
Interest-earning assets $972,226 7.50 $843,584 7.52
======== ========
Average dollar amount of and average rate paid on liabilities:
Deposits $822,616 4.57 $775,029 4.36
Borrowings 67,285 5.77 5,585 6.68
-------- --------
Interest-bearing liabilities $889,901 4.66 $780,614 4.38
======== ========
Interest rate spread 2.84% 3.14%
Net interest margin 3.29% 3.47%
Ratio of interest-earning assets to
interest-bearing liabilities 109.25% 108.07%
Provision for losses on Loans, LOCs and real estate. The provision for losses
- ---------------------------------------------------
on loans was $321,000 for the three months ended March 31, 1998 compared to
$459,000 for the same period during 1997. There was no provision for losses on
LOCs and real estate for the three months ended March 31, 1998 and 1997. The
loss provision reflects management's assessment of the loan, LOC and real estate
portfolios in light of the Southern California real estate market, borrowers'
ability to perform and certain other factors.
The allowances for losses on loans, LOCs and real estate 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 estimable. The allowances are based upon a number of
factors, including asset grading and classification, collateral values,
management's assessment of the credit risk inherent in the portfolios,
historical loan loss experience, a loss migration analysis, and the Company's
underwriting policies.
11
The following is a summary of the activity in the loan, LOC and real estate
valuation allowances for the periods indicated:
FOR THE THREE MONTHS ENDED
-------------------------------------
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(Dollars in thousands)
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of period $ 7,736 $ 7,803
Provisions charged to income 321 339
Charge-offs, net of recoveries (574) (406)
------- -------
Balance at end of period 7,483 7,736
------- -------
ALLOWANCE FOR LOSSES ON LOCS:
Balance at beginning of period 7,624 7,624
Charge-offs, net of recoveries (1,131) ---
------- -------
Balance at end of period 6,493 7,624
------- -------
ALLOWANCE FOR LOSSES ON REAL ESTATE:
Balance at beginning of period 977 1,083
Charge-offs, net of recoveries 48 (106)
------- -------
Balance at end of period 1,025 977
------- -------
TOTAL ALLOWANCE FOR LOSSES ON LOANS, LOCS
AND REAL ESTATE: $15,001 $16,337
======= =======
General valuation allowance ("GVA") $14,298 $15,600
Specific (1) 703 737
------- -------
TOTAL $15,001 $16,337
======= =======
(1) Includes specific valuation allowance for real estate held for sale of
$254,000 at March 31, 1998 and December 31, 1997.
The total allowance for losses on loans, LOCs and real estate was $15.0 million
and $16.3 million at March 31, 1998 and December 31, 1997, respectively. The
ratio of GVA for losses on loans, LOCs and real estate to nonperforming assets
and LOCs decreased to 87.12% at March 31, 1998 from 122.00% at December 31, 1997
as a result of an increase in nonperforming assets of $3.6 million primarily
representing the fair value of one LOC which became REO during the quarter ended
March 31, 1998, and a decrease in GVA of $1.3 million during the same period.
Included in the allowance for losses on loans, LOCs and real estate were
specific allowances against individual loans and real estate of $703,000 at
March 31, 1998 and $737,000 at December 31, 1997. Management continues to
address the levels of allowance for losses in relation to the local real estate
economy. As a result of changes in certain real estate markets, adjustments in
the valuation allowances may be required in future periods. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's valuation allowances. These agencies may
require additional valuation allowances, based on their judgments of the
information available to them at the time of the examination.
12
Non-Interest Income. Non-interest income for the three months ended March 31,
- -------------------
1998 was $1.9 million compared to $1.7 million for the same period of 1997.
Non-interest expense. Non-interest expense was $6.2 million for the three
- --------------------
months ended March 31, 1998, a decrease from $6.3 million for the same period of
1997. Included in non-interest expense was general and administrative expense
("G&A") for the three months ended March 31, 1998 of $5.8 million, a decrease of
$83,000 from the same period of 1997. The net decrease was primarily from a
reduction in federal deposit insurance of $350,000 and reduced compensation and
benefits of $126,000, partially offset by merger costs of $147,000 and by an
increase of $221,000 in other expenses, primarily for additional advertising
costs. The Company's efficiency ratio improved to 57.89% for the three months
ended March 31, 1998 from 63.89% for the three months ended March 31, 1997.
NONPERFORMING ASSETS
The following table sets forth information regarding nonaccrual loans,
nonperforming LOCs and REO, net of specific valuation allowances:
AT MARCH 31, AT DECEMBER 31,
NONPERFORMING ASSETS: 1998 1997
------------ ---------------
(Dollars in thousands)
NONACCRUAL LOANS:
One-to-four family $ 7,029 $ 6,186
Multi-family 521 942
Commercial real estate 165 61
Developed lots 596 251
Consumer 457 235
------- -------
Total nonaccrual loans 8,768 7,675
------- -------
REO (1):
One-to-four family 1,774 2,494
Multi-family 4,461 888
Commercial real estate 177 177
Developed lots 664 903
Tract construction and land 247 413
Consumer 321 237
------- -------
Total REO 7,644 5,112
------- -------
Total nonperforming assets $16,412 $12,787
======= =======
- -----------
(1) Does not include effect of GVAs of $537,000 and $354,000 at March 31, 1998
and December 31, 1997, respectively.
Nonaccrual loans net of specific valuation allowances at March 31, 1998 were
$8.8 million, which represents a increase of $1.1 million from the December 31,
1997 balance of $7.7 million. This increase since December 31, 1997 resulted
primarily from an increase in nonaccrual single family loans of $843,000, an
increase in nonaccrual consumer loans of $222,000 and an increase in nonaccrual
developed lot loans of $345,000, partially offset by a decrease of $421,000 in
nonaccrual multi-family loans.
13
The Company's general nonaccrual policy provides that interest accruals cease
once a loan is past due for a period of 90 days or more, or the notice of
default is filed, whichever occurs first. Loans may also be placed on nonaccrual
status even though they are less than 90 days past due if management concludes
that it is probable that the borrower will not be able to comply with the
repayment terms of the loan. The Company defines nonperforming loans as
nonaccrual loans and nonperforming LOCs.
REO increased to $7.6 million at March 31, 1998 from $5.1 million at December
31, 1997 primarily from the foreclosure of an apartment complex secured by an
LOC with a fair value of $3.1 million. REO is initially recorded at the fair
value of the related assets at the date of foreclosure, less disposition costs.
Subsequent write-downs for losses are recognized if the carrying value of real
estate exceeds fair value, less disposition costs.
Nonperforming assets are defined as nonperforming loans (as defined above) and
REO. Nonperforming assets were $16.4 million, or 1.44% of total assets and LOCs,
at March 31, 1998, compared to $12.8 million, or 1.14% of total assets and LOCs,
at December 31, 1997. The Company does not include troubled debt restructured
loans ("TDRs") that are performing in accordance with their restructured terms
as nonperforming assets. The balance of restructured loans was $2.8 million and
$4.6 million at March 31, 1998 and December 31, 1997, respectively.
Management continues to concentrate efforts to reduce the amount of
nonperforming assets by early detection through the asset classification process
and by taking an aggressive stance to quickly resolve nonperforming assets, by
working with borrowers to restore nonaccrual loans to performing status where
possible, by foreclosing upon security property where workouts are determined to
be impracticable and by selling existing REO.
14
CLASSIFIED ASSETS
Federal regulations and the Company's Classification of Assets Policy provide
for the classification of loans and other assets. "Substandard" assets are those
that are characterized by the "distinct possibility" that the institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified "Substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss allowance is not
warranted.
The following table sets forth the classified substandard assets net of specific
valuation allowance. There were no assets classified doubtful at March 31, 1998
and December 31, 1997. The net decrease in LOCs classified as substandard was
the result of a reduction in multi-family nonperforming loans of $1.6 million.
The amount of specific valuation allowances at March 31, 1998 and December 31,
1997 was $449,000 and $483,000, respectively.
AT MARCH 31, AT DECEMBER 31,
1998 1997
------------ ---------------
(Dollars in thousands)
SUBSTANDARD
LOANS:
One-to-four family $ 7,643 $ 6,256
Multi-family 1,436 3,005
Commercial real estate 213 65
Developed lots 645 146
Consumer 348 493
------- -------
Total 10,285 9,965
------- -------
LOCS: -- 4,354
------- -------
REO:
One-to-four family 1,774 2,494
Multi-family 4,461 888
Commercial real estate 177 177
Developed lots 664 903
Tract construction and land 247 413
Consumer 321 237
------- -------
Total 7,644 5,112
------- -------
TOTAL CLASSIFIED ASSETS $17,929 $19,431
======= =======
15
IMPAIRED LOANS
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The Company measures impairment
based on (1) the present value of expected future cash flows discounted at the
loan's effective interest rate, (2) the observable market price of the impaired
loan or (3) the fair value of the collateral of a collateral-dependent loan. If
the value of the impaired loan is less than the recorded investment in the loan,
the Company recognizes an impairment by recording a valuation allowance with a
corresponding charge to the provision for losses on loans. The Company will
chargeoff a portion of an impaired loan against the valuation allowance when it
is probable that there is no possibility of recovering the full amount of the
impaired loan. The following table identifies the Company's total recorded
investment in impaired loans by type at the dates indicated, net of specific
valuation allowances:
AT MARCH 31, AT DECEMBER 31,
1998 1997
------------ ---------------
(Dollars in thousands)
Nonaccrual loans:
Multi-family $ 532 $ 942
Nonresidential 177 --
TDR loans 2,835 4,629
Other impaired loans:
Multi-family 613 1,507
------ ------
$4,157 $7,078
====== ======
REGULATORY CAPITAL
Under OTS capital regulations, the Bank must meet three capital tests. First,
the tangible capital requirement mandates that the Bank's equity less intangible
assets be at least 1.50% of adjusted total assets as defined in the capital
regulations. Second, the core capital requirement currently mandates that core
capital (tangible capital plus qualifying supervisory goodwill) be at least
3.00% of adjusted total assets as defined in the capital regulations. Third, the
risk-based capital requirement presently mandates that core capital plus
supplemental capital as defined by the OTS be at least 8.00% of risk-weighted
assets as prescribed in the capital regulations. The capital regulations assign
specific risk weightings to all assets and off-balance sheet items.
The Bank was in compliance with all current capital requirements in effect at
March 31, 1998, and had sufficient capital to be considered a "well capitalized"
institution under the OTS regulations.
16
The following table presents information regarding the Bank's actual capital and
required capital under the prompt corrective action provisions of Federal
Deposit Insurance Corporation Improvement Act ("FDICIA") at March 31, 1998:
REGULATORY CAPITAL (FDICIA)
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES
------------------ -----------------------------------------
AMOUNT RATIO AMOUNT RATIO
------- ----- ------- -------------------------------
(Dollars in thousands)
Total capital (to risk-weighted assets) $91,178 12.19% $59,817 (greater than or equal to) 8.00%
Core capital (to adjusted tangible assets) 81,754 7.98 40,980 (greater than or equal to) 4.00
Tier 1 capital (to risk-weighted assets) 81,754 10.93 -- -- (1)
Tangible capital (to tangible assets) 81,754 7.98 15,368 (greater than or equal to) 1.50
TO BE WELL CAPITALIZED
UNDER PROMPT
CORRECTIVE ACTION
PROVISIONS
---------------------------------------------
AMOUNT RATIO
------- --------------------------------
Total capital (to risk-weighted assets) $74,771 (greater than or equal to) 10.00%
Core capital (to adjusted tangible assets) 51,225 (greater than or equal to) 5.00
Tier 1 capital (to risk-weighted assets) 44,866 (greater than or equal to) 6.00
Tangible capital (to tangible assets) -- -- (1)
- ------------------------
(1) This ratio is not specified under capital regulations.
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 March 31, 1998:
REGULATORY CAPITAL (FIRREA)
CAPITAL
------------------
REQUIRED EXCESS ACTUAL REQUIRED
ACTUAL CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------------- -------- ------ ------- --------
(Dollars in thousands)
Tangible $81,754 $15,368 $66,386 7.98% 1.50%
Core 81,754 30,735 51,019 7.98 3.00
Risk-based 91,178 59,817 31,361 12.19 8.00
17
SELECTED CONSOLIDATED RATIOS OF THE COMPANY
AT OR FOR THE
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
---- ----
PERFORMANCE RATIOS: (1)
Return on average assets 1.26% 1.06%
Return on average equity 14.88 12.85
Equity to total assets 8.58 8.18
Interest rate spread during the period 2.84 3.14
Book value per share (2) 12.00 11.70
Net interest margin 3.29 3.47
Average interest-earning assets to average interest-bearing liabilities 109.25 108.07
G&A expense to average assets 2.25 2.61
Efficiency ratio (3) 57.89 63.89
AT MARCH 31, AT DECEMBER 31,
1998 1997
-------------- -----------------
REGULATORY CAPITAL RATIOS:
Tangible and core capital 7.98% 7.81%
Risk-based capital 12.19 11.94
ASSET QUALITY RATIOS:
Nonaccrual loans to total loans 0.94% 0.83%
Nonperforming assets to total assets and LOCs (4) (5) 1.44 1.14
Allowance for losses on loans and LOCs to total loans and LOCs 1.34 1.49
Allowance for losses on loans, LOCs and real estate to total assets and
LOCs 1.31 1.46
GVAs for losses on loans to nonaccrual loans 82.90 99.31
GVAs for losses on loans, LOCs and real estate to total
nonperforming assets (4) (5) 87.12 122.00
Classified assets to total assets and LOCs (6) 1.57 1.74
GVAs to net classified assets (6) 79.75 80.28
- ---------------------------------
(1) Ratios for the three-month periods have been annualized.
(2) Based on 7,388,068 and 7,107,729 shares at March 31, 1998 and 1997
respectively, less treasury shares and uncommitted ESOP and RRP shares.
(3) Efficiency ratio equals G&A expense to net interest income plus total non-
interest income. Excludes provisions for losses on loans and other non-
interest expense.
(4) Excludes troubled debt restructures which are currently performing under
their restructured terms.
(5) Nonperforming assets include nonperforming loans and REO.
(6) Classified assets include loans, LOCs and REO, net of specific valuation
allowance.
18
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - 27.1 - Financial Data Schedule for 3 month period ended
March 31, 1998.
27.2 - Restated Financial Data Schedule for 3 month period ended
March 31, 1997.
27.3 - Restated Financial Data Schedule for 3 month period ended
March 31, 1996.
27.4 - Restated Financial Data Schedule for 6 month period ended
June 30, 1997.
27.5 - Restated Financial Data Schedule for 6 month period ended
June 30, 1996.
27.6 - Restated Financial Data Schedule for 9 month period ended
September 30, 1997.
27.7 - Restated Financial Data Schedule for 9 month period ended
September 30, 1996.
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Company during the three months ended March 31, 1998.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1998 RedFed Bancorp Inc.
By: /s/ Anne Bacon
-------------------------------
Anne Bacon
President and
Chief Executive Officer
By: /s/ David C. Gray, CPA
-------------------------------
David C. Gray, CPA
Treasurer and
Chief Financial Officer
20