1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ To ________
Commission File Number: 0-23146
REDFED BANCORP INC.
(exact name of registrant as specified in its charter)
DELAWARE 33-0588105
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
300 EAST STATE STREET, REDLANDS, CALIFORNIA 92373
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (909) 335-3551
Indicate by check mark whether the registrant (1) has filed 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 4,370,419 shares outstanding at March 31, 1996.
2
REDFED BANCORP INC.
Index
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RedFed Bancorp Inc.
-------------------
Consolidated Statements of Financial Condition (unaudited)
as of March 31, 1996, and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
for the Quarter Ended March 31, 1996, and 1995 4
Consolidated Statements of Cash Flows (unaudited)
for the Quarter Ended March 31, 1996, and 1995 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
2
3
REDFED BANCORP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
(dollars in thousands)
March 31, December 31,
ASSETS 1996 1995
----------- ------------
Cash and cash equivalents $31,253 30,985
Loans held for sale at lower of cost or
market value 5,568 4,578
Mortgage-backed securities available-for-sale 25,005 26,501
Investment securities held-to-maturity 38,797 41,655
Mortgage-backed securities held-to-maturity 31,494 25,615
Loans receivable, net 666,583 678,406
Accrued interest receivable 4,909 5,014
Federal Home Loan Bank Stock, at cost 7,003 6,914
Real estate acquired through foreclosure, net 15,765 24,560
Real estate held for sale or investment, net 1,651 1,698
Premises and equipment, net 17,390 17,619
Prepaid expenses and other assets 12,277 8,005
Deferred income taxes 264 264
----------- ------------
Total assets $857,959 871,814
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $769,679 776,528
Other borrowed money 24,534 31,133
Accrued expenses and other liabilities 14,380 14,982
Deferred income 1,037 1,093
----------- ------------
Total liabilities 809,630 823,736
----------- ------------
Stockholders' equity:
Common stock 44 44
Additional paid-in capital 32,629 32,608
Retained earnings, substantially restricted 19,511 18,570
Deferred compensation (2,290) (2,430)
Treasury stock (860) (888)
Unrealized gain (loss) on securities
available-for-sale, net (705) 174
----------- ------------
Total stockholders' equity 48,329 48,078
----------- ------------
Total liabilities and stockholders' $857,959 871,814
equity =========== ============
See accompanying notes to consolidated financial statements
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4
REDFED BANCORP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except share data)
Quarter Ended March 31,
-----------------------
1996 1995
----------- ----------
Interest income:
Loans receivable and mortgage-backed
securities $14,473 14,355
Investment securities and deposits 973 779
---------- ----------
Total interest income 15,446 15,134
---------- ----------
Income expense:
Deposits 8,088 8,082
Other borrowed money 375 1,237
---------- ----------
Total interest expense 8,463 9,319
---------- ----------
Net interest income before provision
for losses on loans 6,983 5,815
Provision for losses on loans 1,400 373
---------- ----------
Net interest income after provision
for losses on loans 5,583 5,442
---------- ----------
Non-interest income:
Fee income 1,528 1,449
Loss on sale of loans, investments and
mortgage-backed securities, net (4) (9)
Other income 65 8
---------- ----------
Total non-interest income 1,589 1,448
---------- ----------
Non-interest expense:
Compensation and benefits 2,758 3,238
Occupancy and equipment 1,676 1,951
Federal deposit insurance premiums 605 584
Other expense, net 662 823
---------- ----------
Total general and administrative expense 5,701 6,596
Real estate operations, net 528 704
Provision for losses on real estate 0 1,422
Provision for losses on letters of credit 0 193
---------- ----------
Total non-interest expenses 6,229 8,915
---------- ----------
Earnings (loss) before income taxes 943 (2,025)
Income taxes (benefit) 2 0
---------- ----------
Net earnings (loss) $ 941 (2,025)
========== ==========
Net earnings (loss) per share $ 0.23 (0.51)
========== ==========
Weighted average shares outstanding 4,088,880 3,978,617
========== ==========
See accompanying notes to consolidated financial statements
4
5
REDFED BANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Quarter Ended March 31,
-----------------------
1996 1995
----------- ----------
Cash flows from operating activities:
Net earnings (loss) $ 941 (2,025)
Adjustments to net earnings (loss):
Loan fees collected 44 263
Depreciation and amortization 336 420
Provision for losses on loans, real estate
and letters of credit 1,400 1,988
Net loss (gain) on sales of loans,
mortgage-backed securities, real
estate and premises and equipment (164) 380
Federal Home Loan Bank stock dividends
received (89) (113)
Proceeds from sale of loans 216 510
Increase (decrease) in accrued expenses,
other liabilities and deferred income (766) (1,573)
(Increase) decrease in accrued interest
receivable, prepaid expenses and other
assets (4,167) 456
-------- --------
Net cash provided by (used in)
operating activities (2,249) 306
-------- --------
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity 10,500 500
Purchases of investments securities held-to-
maturity (7,618) (465)
Proceeds from maturities of mortgage-backed
securities available-for-sale 618 103
Proceeds from maturities of mortgage-backed
securities held-to-maturity 71 1,652
Loan originations and purchases (27,485) (42,146)
Purchases of Federal Home Loan Bank stock 0 (137)
Principal payments and reductions of loans, net 32,824 19,857
Proceeds from sale of real estate and premises
and equipment 3,840 8,803
Purchases of real estate and premises and
equipment (134) (137)
-------- ---------
Net cash provided by (used in)
investing activities 12,616 (11,970)
-------- ---------
See accompanying notes to consolidated financial statements
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6
REDFED BANCORP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(dollars in thousands)
Quarter Ended March 31,
------------------------
1996 1995
----------- -----------
Cash flows from financing activities:
Deposits, net of withdrawals and interest
credited $(6,849) 23,314
Proceeds from Federal Home Loan Bank advances 0 5,000
Repayments of Federal Home Loan Bank advances
and other borrowed money (3,250) (14,175)
---------- ----------
Net cash provided by (used in) in
financing activities (10,099) 14,139
---------- ----------
Increase in cash and cash equivalents 268 2,475
Cash and cash equivalents, beginning of year 30,985 23,074
---------- ----------
Cash and cash equivalents, end of period $ 31,253 25,549
========== ==========
Supplemental information:
Interest credited to deposits $ 6,756 7,119
========== ==========
Transfers from loans receivable to real
estate, net $ 3,988 3,495
========== ==========
Loans to facilitate sale of real estate $ 80 6,952
========== ==========
Transfers from off-balance sheet letters
of credit to real estate, net 0 5,735
========== ==========
Transfers from real estate acquired through
foreclosure to mortgage-backed securities
held-to-maturity $ 5,950 0
========== ==========
See accompanying notes to consolidated financial statements
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REDFED BANCORP INC.
Notes to Consolidated Financial Statements
1. The consolidated statements of financial condition of RedFed Bancorp Inc.,
(the "Company"), as of March 31, 1996, and December 31, 1995, the related
consolidated statements of operations for the quarter ended March 31,
1996, and 1995 and the related consolidated statements of cash flows for
the quarter ended March 31, 1996, and 1995 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, 1996, and results of consolidated operations for the quarter
ended March 31, 1996, and 1995 and consolidated cash flows for the quarter
ended March 31, 1996, and 1995. The results of consolidated operations for
the unaudited periods are not necessarily indicative of the results of
consolidated operations to be expected for the entire year of 1996.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to 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 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, 1995.
2. Primary and fully diluted earnings per share for the quarter ended March
31, 1996 of 0.23 per share was based on a net earnings of $941,000 and
weighted-average common shares and equivalents outstanding during that
period of 4,088,880 (net of unearned Employee Stock Ownership Plan
("ESOP") and Recognition and Retention Plan ("RRP") shares, and net of
treasury stock). This compares with a loss per share of the quarter ended
March 31, 1995 of 0.51 per share based on a net loss of $2.0 million and
weighted-average common shares outstanding during that period of 3,978,617
(net of unearned ESOP and RRP shares, and net of treasury stock).
3. Newly Issued Accounting Pronouncements. In March 1995, the FASB issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of long-lived Assets and for long-lived Assets to Be Disposed
Of" ("SFAS 121"). SFAS 121 provides guidance for recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill related both to assets to be held and used by an
entity and assets to be disposed of. SFAS 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
has adopted SFAS 121, and such adoption did not have a material impact on
the Company's consolidated financial statements.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 "Accounting for Mortgage Servicing Rights" ("SFAS 122"), an
amendment to Statement of Financial Accounting Standards No. 65. SFAS 122
requires an institution that purchases or originates mortgage loans and
sells or securities those loans with servicing rights retained to
allocate the total cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on
their relative fair values. In addition, institutions are required to
assess impairment of the capitalized mortgage servicing portfolio based on
the fair value of those rights on a stratum-by-stratum basis with any
impairment recognized through a valuation allowance for each impaired
stratum. Capitalized mortgage servicing rights should be stratified based
upon one or more of the predominate risk characteristics of the underlying
loans such as loan type, size, note rate, date of origination, term and/or
geographic location. SFAS 122 is effective for fiscal years beginning
after December 15, 1995. The Company has adopted SFAS 122, and such
adoption did not have a material impact on the Company's consolidated
financial statements.
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REDFED BANCORP INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
GENERAL
RedFed Bancorp Inc. ("the Company") is a Delaware corporation, organized by
Redlands Federal Bank ("the Bank") for the purpose of acquiring all of the
capital stock of the Bank issued during the conversion of the Bank from a
federally chartered mutual savings bank to a federally chartered stock savings
bank. The Company's common stock began trading on the NASDAQ Stock Market under
the symbol "REDF" on April 8, 1994.
The Company is primarily engaged in attracting deposits from the general public
in the areas in which its branches are located and investing such deposits and
other available funds in loans secured by one-to four-family residential
mortgages, including owner-occupied residential construction loans. At March 31,
1996, the Company operated fourteen retail banking offices located in San
Bernardino and Riverside counties, and three loan production offices.
The Company is subject to significant competition from other financial
institutions in its market area. The Company is regulated by certain federal
agencies and undergoes periodic examinations by those regulatory authorities.
FINANCIAL CONDITION
Total stockholders' equity for the Company was approximately $48.3 million at
March 31, 1996, and was $48.1 million at December 31, 1995. Consolidated assets
totaled $858.0 million at March 31, 1996, a decrease of $13.9 million compared
to the December 31, 1995 balance of $871.8 million. The decrease was primarily
the result of loan and mortgage-backed securities repayments in excess of loan
originations, offset by a decrease in the deposit base and a reduction of other
borrowed money.
Loans receivable, net and mortgage-backed securities held-to-maturity decreased
to $698.1 million at March 31, 1996, from $704.0 million at December 31, 1995.
Loan originations and purchases decreased to $27.5 million for the quarter ended
March 31, 1996, as compared to $42.1 million for the quarter ended March 31,
1995. This decrease is primarily due to a decrease in demand for loans in the
Company's primary market area. Principal repayments on loans receivable, net and
mortgage-backed securities held to maturity increased by $11.4 million when
comparing the quarter ended March 31, 1996, to the same period in 1995. This
increase in repayments is the result of some increase in refinance activity and
a more aggressive collection policy. Proceeds from loan sales decreased to
$216,000 for the quarter ended March 31, 1996, as compared to $510,000 for the
quarter ended March 31, 1995.
Nonperforming assets, net of specific reserves, which include nonaccrual loans,
nonperforming off-balance sheet letters of credit ("LOCs") and real estate
acquired through foreclosure and in-substance foreclosed loans ("REO"),
decreased to $30.7 million or 3.21% of total assets and letters of credit at
March 31, 1996, from $43.7 million or 4.53% at December 31, 1995, and from $50.1
million or 4.70% at March 31, 1995. Nonaccrual loans, net of specific reserves
decreased to $13.8 million at March 31, 1996, from $17.6 million at December 31,
1995. At March 31, 1995 nonaccrual loans amounted to $11.1 million. REO, net of
specific reserves decreased to $16.9 million at March 31, 1996, from $26.1
million at December 31, 1995, and $39.0 million at March 31, 1995. In addition
general valuation allowances for REO amounted to $1.1 million, $1.5 million, and
$2.2 million at March 31, 1996, December 31, and March 31, 1995 respectively.
The decrease in nonperforming assets from December 31, 1995, is primarily due to
the sale of two multi-family REO properties which resulted in the Company
issuing two new off-balance sheet LOCs during the quarter.
8
9
The Company's total allowance for losses on loans, real estate and LOCs was
$24.7 million at March 31, 1996, compared to $31.7 million and $27.4 million at
December 31, and March 31, 1995, respectively. Included in the total allowance
for losses on loans, real estate and LOCs were specific allowances against
individual loans and real estate of $6.7 million, $14.5 million and $6.3 million
at March 31, 1996, December 31, and March 31, 1995, respectively. This
represents an increase in the coverage ratio (general valuation allowances on
loans, real estate and LOCs to nonperforming assets) to 58.41% at March 31,
1996, from 39.30% and 42.17% at December 31, and March 31, 1995, respectively.
Savings deposits at March 31, 1996, decreased to $769.7 million from $776.5
million at December 31, 1995, due primarily to the maturity of higher yielding
certificates of deposit ("CDs") resulting in deposit outflows. The Company
reduced net borrowings by $6.6 million during the quarter ended March 31, 1996,
as a result of the sale and remarketing of two off-balance sheet LOCs.
Stockholders' equity increased to $48.3 million at March 31, 1996 from $48.1
million at December 31, 1995 as a result of a net profit of approximately
$941,000 for the quarter ended March 31, 1996, partially offset by a change in
the securities valuation allowance.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company include principal and interest
payments on loans and mortgage-backed securities, proceeds from sales of loans,
mortgage-backed securities, cash flows generated from operations and proceeds
from increases in customer deposits, Federal Home Loan Bank advances and other
short-term borrowings.
Savings institutions must, by regulation, maintain liquidity at a monthly
average of at least 5% of deposits and short-term borrowings. The Company's
average liquidity ratios at March 31, 1996, and 1995, were 7.56% and 6.87%,
respectively.
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED MARCH 31, 1996, AND 1995
General. The Company recorded net earnings of $941,000 for the quarter ended
- - -------
March 31, 1996, or $0.23 per share as compared to a loss of $2.0 million for the
quarter ended March 31, 1995, or $0.51 per share. Net operating results for the
quarter ended March 31, 1996, were impacted favorably by a net reduction of
$588,000 in provisions for losses on loans, real estate and LOCs. Management
continues to seek to reduce the balances in nonperforming assets by
concentrating efforts toward early detection through the asset classification
process and by taking an aggressive stance to resolve nonperforming assets as
they occur. In addition, management continues to address the levels of allowance
for losses in relation to the local real estate economy. Operating results were
also favorably impacted by an increase in the net interest income before
provision for losses on loans of $1.2 million and by a reduction in general and
administrative expense of $895,000 when compared to the quarter ended March 31,
1995.
Interest income. Interest income for the quarter ended March 31, 1996, was $15.4
- - ---------------
million, compared to $15.1 million for the same quarter in the previous year.
The $312,000 increase in interest income is primarily due to an increase in
interest rates, partially offset by a decrease in the average balance of
interest-earning assets. Interest income on investments securities increased to
$973,000 for the quarter ended March 31, 1996, from $779,000 for the quarter
ended March 31, 1995.
Interest expense. Interest expense for the quarter ended March 31, 1996, was
- - -----------------
$8.5 million, compared to $9.3 million for the same quarter in the previous
year. The $856,000 decrease is primarily the result of a $99.4 million decrease
in the average balance of interest-bearing liabilities, when compared to the
quarter ended March 31, 1995.
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Net interest income before provision for losses on loans. Net interest income
- - ----------------------------------------------------------
for the quarter ended March 31, 1996 was $7.0 million, which represents an
interest rate spread of 3.33%. This compares to $5.8 million, which represents
an interest rate spread of 2.52%, for the same period in 1995. In accordance
with the Company's plan to control growth and maintain capital in compliance
with regulatory ratios, average interest-earning assets declined $94.2 million
and average interest-bearing liabilities declined $99.4 million when compared to
the quarter ended March 31, 1995. The 81 basis point increase in the interest
rate spread for the quarter ended March 31, 1996, when compared to the quarter
ended March 31, 1995, was a result of an increase in the average yield for
interest-earning assets of 86 basis points, partially offset by an increase in
the average cost for interest-bearing liabilities of 5 basis points.
The following table displays average dollar amounts and related yields and costs
on the Company's interest-earning assets and interest-bearing liabilities:
For the Quarter Ended
-------------------------------------------------
March 31, 1996 March 31, 1995
---------------------- -------------------------
Average Average Average Average
Balance Yield/Cost Balance Yield/Cost
---------- ---------- ----------- -----------
(dollars in thousands)
Loans and mortgage-backed
securities $ 729,076 7.87 % 829,740 6.92 %
Investment securities 65,386 5.27 58,921 5.08
---------- ----------
Interest-earning assets $794,462 7.66 888,661 6.80
========== ==========
Deposits $ 755,235 4.30 802,520 4.08
Borrowings 28,038 5.36 80,173 6.24
---------- -----------
Interest-bearing
liabilities $ 783,273 4.33 882,693 4.28
========== ===========
Interest rate spread 3.33 % 2.52 %
======= =======
Net interest margin 3.38 % 2.55 %
======= =======
Ratio of interest-earnings
assets to interest-
bearing liabilities 101.43 % 100.68 %
========== ===========
Provision for Losses on Loans, Real Estate and Letters of Credit. The provision
- - ----------------------------------------------------------------
for losses on loans was $1.4 million for the quarter ended March 31, 1996,
compared to $373,000 for the same period last year. The Company recorded no
provision for losses on real estate or LOCs for the quarter ended March 31,
1996, because of the reduction in the REO balances as a result of the
disposition of assets during the quarter. This compares with a provision for
losses of $1.4 million on real estate and $193,000 for off-balance sheet LOCs
for the quarter ended March 31, 1995. The loss provision reflects management's
ongoing assessment of the loan, real estate and LOC portfolios, in light of
conditions in the Southern California real estate market which continue to be
weak, and the balance in the Company's nonperforming assets.
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 classifications, collateral values, management's
assessment of the credit risk inherent in the portfolio, historical loan loss
experience, and the Company's underwriting policies.
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The following is a summary of the activity in the loans, real estate and LOCs
valuation allowances at or for the quarters ended as indicated:
--------------------------------------
March 31, December 31, March 31,
1996 1995 1995
-------------------------------------
(dollars in thousands)
ALLOWANCE FOR LOSSES ON LOANS:
Balance at beginning of period $14,745 15,875 18,874
Charge-offs, net of recoveries (4,069) (4,126) (2,759)
Provisions charged to income 1,400 2,996 373
--------- --------- ---------
Balance at end of period 12,076 14,745 16,488
--------- --------- ---------
ALLOWANCE FOR LOSSES ON REAL ESTATE:
Balance at beginning of period 9,496 8,869 4,378
Charge-offs, net of recoveries (3,816) (1,263) (557)
Provisions charged to income 0 1,890 1,422
--------- --------- ---------
Balance at end of period 5,680 9,496 5,243
--------- --------- ---------
ALLOWANCE FOR LOSSES ON LOCS:
Balance at beginning of period 7,447 5,329 6,908
Charge-offs, net of recoveries (500) (224) (1,444)
Provisions charged to income 0 2,342 193
--------- --------- ---------
Balance at end of period 6,947 7,447 5,657
--------- --------- ---------
TOTAL ALLOWANCE FOR LOSSES ON LOANS,
REAL ESTATE AND LOCS: $ 24,703 31,688 27,388
========= ========= =========
Specific $ 6,747 14,523 6,250
General 17,956 17,165 21,138
--------- --------- ---------
TOTAL $ 24,703 31,688 27,388
========= ========= =========
As a result of continuing uncertainties in certain real estate markets,
increases 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 at the time of the examination.
Non-interest income. Non-interest income for the quarter ended March 31, 1996,
- - --------------------
was $1.6 million, compared to $1.4 million for the same period last year. The
increase was due primarily to an increase in fee income between the two periods.
General and administrative expense. General and administrative expense for the
- - -----------------------------------
quarter ended March 31, 1996, was $5.7 million compared to $6.6 million for the
same period last year. The decrease of $895,000 is the result of a Company wide
cost reduction plan implemented in 1995 which included a 20% staff reduction, a
salary and retirement plan freeze, as well as cutbacks in other operating
expenses.
Other non-interest expense. Other non-interest expense includes provisions for
- - ---------------------------
losses on REO 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. The provisions for losses on real estate and LOCs decreased
to zero for the quarter ended March 31, 1996, from $1.6 million for the quarter
ended March 31, 1995. Real estate operating expense, net, decreased to $528,000
for the quarter ended March 31, 1996, as compared to $704,000 for the same
period in
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1995. The decrease in real estate operation expense is due to a reduction in
REO, resulting in lower carrying costs.
Income taxes (benefit). There was a minimum $2,000 franchise tax for the quarter
- - ----------------------
ended March 31, 1996, and no tax for the quarter ended March 31, 1995. There is
no income tax as a result of the Company's net operating loss carry-forward tax
position.
NONPERFORMING ASSETS
The following table sets forth information regarding nonaccrual loans,
nonperforming LOCs and REO, net of specific reserves. The table excludes
restructured loans that have been performing in accordance with their
restructured terms:
-----------------------------------
March 31, December 31, March 31,
1996 1995 1995
-----------------------------------
(dollars in thousands)
NONPERFORMING ASSETS (1):
NONACCRUAL LOANS:
One-to-four family $11,329 8,818 6,656
Multi-family 521 6,115 2,207
Commercial real estate 0 223 113
Construction single family 418 418 0
Developed lots 719 1,036 1,724
Tract construction and land 565 581 0
Non-mortgage loans 293 413 388
--------- -------- --------
Total nonaccrual loans 13,845 17,604 11,088
--------- -------- --------
REAL ESTATE OWNED AND IN-SUBSTANCE
FORECLOSED LOANS (1) (2):
One-to-four family 5,145 5,393 3,939
Multi-family (3) 8,233 17,807 29,103
Commercial real estate 513 536 538
Developed lots 2,296 1,836 1,453
Tract construction and land 667 463 3,933
Non-mortgage loans 44 43 76
--------- -------- --------
Total real estate 16,898 26,078 39,042
--------- -------- --------
Total nonperforming assets $30,743 43,682 50,130
========= ======== ========
- - ------------------
(1) Net of specific reserves, prior periods have been restated.
(2) Gross of general valuation allowances of $1,133, $1,518, and $2,224,
respectively.
(3) Includes LOCs acquired through foreclosures.
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. 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.
12
13
Nonaccrual loans at March 31, 1996 were $13.8 million which represents a
decrease of $3.8 million from the December 31, 1995 balance of $17.6 million and
an increase of $2.8 million from the March 31, 1995, balance of $11.1 million.
This decrease since December 31, 1995, was primarily the result of a decrease in
the multi-family category, and a reduction in developed lots, partially offset
by an increase in the one-to four-family loan category. Two multi-family loans
became current, two were transferred to REO and one multi-family loan was
restructured and assumed by a new borrower.
The following table sets forth certain asset quality ratios at the dates
indicated:
-----------------------------------------
March 31, December 31, March 31,
1996 1995 1995
------------- ------------ ----------
Nonaccrual loans to total loans 1.98 % 2.45 1.37
Nonperforming assets to total
assets and LOCs 3.21 4.53 4.70
Allowance for losses on loans and
LOCs to total loans and LOCs 2.37 2.73 2.46
Allowance for losses on loans, LOCs
and real estate to total assets
and LOCs 2.58 3.28 2.57
General valuation allowance for
losses on loans, LOCs and real
estate to nonperforming assets 58.41 39.30 42.17
The total nonperforming assets to total assets and LOCs ratio decreased to 3.21%
at March 31, 1996, from 4.53% at December 31, 1995, and 4.70% at March 31, 1995,
primarily as a result of management strategy of 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.
Restructured loans, which are currently performing in accordance with their
restructured terms, have been excluded from nonperforming assets. The balance of
restructured loans at March 31, 1996, was $9.0 million, an increase of $2.1
million from the December 31, 1995, balance of $6.9 million, and a decrease of
$11.4 million from the March 31, 1995, balance of $20.4 million. The increase
since December 31, 1995, was primarily the result of the restructure of four
multi-family loans.
Real estate acquired through foreclosure. REO consists of real estate acquired
- - -----------------------------------------
through foreclosure and loans accounted for as in-substance foreclosures. REO is
recorded at the fair value of the related assets at the date of foreclosure,
less costs to sell. Subsequent write-downs for losses are recognized if the
carrying value of the real estate exceeds fair value. REO net of specific and
general valuation allowances, decreased to $15.8 million at March 31, 1996, from
$24.6 million at December 31, 1995, and $36.8 million at March 31, 1995. The net
decrease since December 31, 1995, was primarily the result of the sale of two
multi-family letter of credit projects totaling $9.3 million, which resulted in
the Company issuing two new off-balance sheet LOCs.
CLASSIFIED ASSETS
Federal regulations and the Bank's Classification of Assets Policy provide for
the classification of loans and other assets. 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 or improbable." Assets classified as Loss are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of specific loss allowance is not warranted.
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The following table sets forth the Bank's aggregate reported value of loans, REO
and off-balance sheet LOCs classified before any specific valuation allowances:
-----------------------------------------
March 31, December 31, March 31,
1996 1995 1995
--------- ------------ -------------
(dollars in thousands)
Substandard $47,486 58,925 93,106
Doubtful 404 0 7,031
Loss 5,025 12,800 4,825
--------- --------- ---------
Total classified assets $52,915 71,725 104,962
========= ========= =========
Loans classified as substandard included $17.1 million, $15.2 million and $50.0
million of performing loans which were classified because of some inherent
weakness as defined by regulation at March 31, 1996, and December 31, and March
31, 1995, respectively.
The following table sets forth certain classified asset ratios at the dates
indicated:
----------------------------------------
March 31, December 31, March 31,
1996 1995 1995
----------- ------------ ----------
Classified assets (net) to total
assets and LOCs 5.00 % 6.11 9.40
General valuation allowances
against classified 37.49 29.13 21.11
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 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 the provision for losses on loans. The Company
will charge-off a portion of an impaired loan against the valuation allowance
when it is probable that there is no possibility of recovering the full amount
of the impaired loan. Loans are classified as in-substance foreclosed and
included in REO only when the Company has physical possession of the underlying
collateral but not legal title.
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The following table identifies the Company's total recorded investment in
impaired loans by type at the dates indicated, net of specific reserves:
---------- ------------ ----------
March 31, December 31, March 31
1996 1995 1995
---------- ------------ ----------
Nonaccrual loans:
Multi-family $ 521 6,115 2,207
Commercial 0 223 113
Tract construction land 565 581 0
TDR loans 8,982 6,888 17,034
Other impaired loans:
Multi-family 4,259 5,187 10,978
Commercial 0 656 940
Tract construction and land 0 432 776
-------- -------- --------
$14,327 20,082 32,048
======== ======== ========
REGULATORY CAPITAL
Under Office of Thrift Supervision ("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 requires 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 and fully phased-in capital
requirements in effect at March 31, 1996, and had sufficient capital to be
considered an "adequately capitalized" institution, under the OTS prompt
corrective action ("PCA") regulations.
The following table reflects the required capital ratios and the actual capital
ratios of the Bank at March 31, 1996, and December 31, 1995.
REGULATORY CAPITAL RATIOS FOR REDLANDS FEDERAL BANK
---------------------------------------------------
March 31, December 31, Required Required
1996 1995 OTS PCA
--------- ------------ -------- --------
Tangible capital 5.51% 5.24% 1.50% 4.00%
Core capital 5.51% 5.24% 3.00% 4.00%
Risk-based capital 8.39% 8.17% 8.00% 8.00%
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REGULATORY AGREEMENT
The Bank entered into a written agreement with the OTS during the second
quarter of 1995. The written agreement required the Bank to develop and submit
to the OTS a revised business plan that included specific plans for the
reduction of classified assets and general and administrative expenses and the
continued maintenance of adequate regulatory capital levels. The agreement
required the Bank to develop improved internal asset review policies and
procedures and to explore the possibility of raising additional capital.
Management of the Company and the Bank had already begun to implement many
of the actions called for by the written agreement before it was executed,
including taking various steps designed to reduce the Bank's level of
nonperforming and other classified assets and its level of general and
administrative expense. The failure to comply with a written agreement entered
into with the OTS could subject the Bank and/or its officers and directors to
administrative enforcement actions, including civil money penalties and/or cease
and desist orders. Management believes that the Bank is in substantial
compliance with the requirements of the written agreement.
PENDING LEGISLATION
Legislative initiatives regarding the recapitalization of the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC"), deposit insurance premiums, Financing Corporation ("FICO") bond
interest payments, the merger of SAIF and Bank Insurance Fund ("BIF"), financial
industry regulatory structure, bad debt recapture and revision of thrift and
bank charters are still pending before Congress. Management cannot predict the
ultimate impact any final legislation or regulatory actions may have on the
operations of the Company. Without passage of legislation addressing the FDIC
insurance premium disparity, the Bank, like other thrifts, will continue to pay
deposit insurance premiums significantly higher than banks. As long as such
premium differential continues, it may have adverse consequences on the
Company's earnings and the Company may be placed at a substantial competitive
disadvantage to commercial banking organizations insured by the BIF.
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PART II. OTHER INFORMATION
Item 1. The Company is named defendant in a wrongful termination lawsuit filed
by a former senior officer whose position was abolished in a May 1995
reduction in force. The lawsuit seeks an unspecified amount of
damages. The Company has denied any liability, and has engaged outside
counsel to defend against the action. The Company has insurance
coverage that it believes to be applicable to this claim, and has made
a claim under the policy.
The Company is not involved in any other material pending legal
proceedings other than routine legal proceedings occurring in the
ordinary course of business. Such other routine legal proceedings in
the aggregate are believed by management to be immaterial to the
Company.
Items 2 through 5 are not applicable.
Item 6. Exhibits and Reports on SEC Form 8-K
------------------------------------
Exhibits -
(a) 3.1 Certificate of Incorporation of RedFed Bancorp, Inc.*
3.2 Bylaws of RedFed Bancorp, Inc.*
11.1 Computation of per share earnings (filed herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on SEC Form 8-K - No reports on SEC Form 8-K were filed by
the registrant during the quarter ended March 31, 1996
- - -----------------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, filed on December 23, 1993,
Registration No. 73396.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
Dated: May 12, 1996 REDFED BANCORP INC.
By: /s/Anne Bacon
------------------------------
Anne Bacon
President and
Chief Executive Officer
By: /s/David C. Gray
------------------------------
David C. Gray
Treasurer and
Chief Financial Officer
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