<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(NO FEE REQUIRED)
For the transition period from: to
Commission file number: 0-19231
REDWOOD EMPIRE BANCORP
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(Exact number of Registrant as specified in its charter)
California 68-0166366
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
111 Santa Rosa Avenue, Santa Rosa, California 95404-4905
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (707) 545-9611
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------------- -----------------------
Common Stock American Stock Exchange
7.80% Noncumulative Convertible American Stock Exchange
Perpetual Preferred Stock, Series A
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed under 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 the
filing requirements for the past 90 days. Yes X No
--- ---
The aggregate market value of the Registrant's common stock held by
non-affiliates on March 1, 1996 (based on the closing sale price of the Common
Stock on the American Stock Exchange on such date) was $16,740,441.
As of March 1, 1996 there were outstanding 2,679,227 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders (see Part II, Items 5, 6, 7, and 8; and
Part IV, Item 14).
2. Definitive Proxy Statement (see Part III, Items 10, 11, and 12).
1
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .
24
Item 4. Submission of Matters to A Vote of Securities Holders. . . . . . . 24
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 25
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 26
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 26
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 26
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 27
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K. 27
2
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PART I
ITEM 1. BUSINESS
Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the
"Company") is a financial institution holding company headquartered in Santa
Rosa, California, and operating in Northern and Central California through two
principal subsidiaries: National Bank of the Redwoods, a national bank ("NBR"),
and Allied Bank, F.S.B., a federal savings bank ("Allied").
(a) GENERAL DEVELOPMENT OF BUSINESS.
Redwood is a California corporation, headquartered in Santa Rosa,
California. Its wholly-owned subsidiaries are NBR, a national bank which was
chartered in 1985, and Allied, a federal savings bank which was chartered in
1986. In addition, NBR has two wholly-owned subsidiaries, NBR Mortgage Company,
Inc. and Redwood Empire Datacorp. Redwood was created by NBR in August 1988, in
order to become a bank holding company through the acquisition of all of NBR's
outstanding shares. That transaction was consummated in January 1989. Redwood
acquired Allied in September 1990, through a tax-free reorganization in which
Redwood exchanged shares of its stock for all of the outstanding shares of
Allied. The acquisition of Allied was accounted for as a pooling of interests
for financial reporting purposes.
On October 31, 1992, Lake Savings and Loan Association, a one-branch
California chartered savings and loan based in Lakeport, California ("Lake"),
was purchased for approximately $2,300,000 in cash, and merged into Allied. At
the time of its acquisition Lake had total assets of approximately $41 million.
The acquisition was accounted for as a purchase.
On November 4, 1994, Codding Bank, a multiple-branch California chartered
bank based in Rohnert Park, California ("Codding"), was purchased for $7,028,000
in cash, including merger related expenses, and merged into NBR. At the merger
date, the fair value of the assets acquired totalled approximately $42 million.
(See Item 8 "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE C OF NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS OF REDWOOD EMPIRE BANCORP.") The
acquisition was accounted for as a purchase.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
During the year ended December 31, 1995, the Company operated in two
principal industry segments: commercial banking and mortgage banking. Commercial
banking activities include all other services provided by the Company, including
portfolio lending, the origination for sale and servicing of Small Business
Administration loans, various deposit programs and numerous fee-based services.
The Company's mortgage banking activities relate principally to the origination
for sale, servicing of loans sold to investors, and sale and purchase of
mortgage loans and servicing rights.
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The Company's principal business lines, commercial banking and residential
mortgage banking, attempt to counterbalance the effects on the Company of
interest rate shifts. When interest rates decline, the Company anticipates
greater mortgage lending activity through mortgage refinancings and home
purchases. As business activity increases, the Company's commercial banking
business has the potential to increase interest margins and to expand its
commercial lending portfolio. See Item 8 "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA NOTE Q OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
OF REDWOOD EMPIRE BANCORP."
(c) NARRATIVE DESCRIPTION OF BUSINESS.
The Company's principal targeted mortgage banking areas are Northern and
Central California, Oregon and Washington State. These areas are served by four
offices, all of which provide retail and wholesale lending. The Company's
targeted commercial banking market area includes the California counties north
of San Francisco. The Company provides these banking services through six
additional retail branches. At December 31, 1995, the Company's total assets
were $558 million.
Commercial banking loans are generally extended to professionals and to
businesses with annual revenues of less than $10 million. Commercial loans are
primarily for working capital, asset acquisition, or commercial real estate.
The Company, a Preferred Lender under the Small Business Administration loan
program, makes loans, a portion of which are guaranteed by the Small Business
Administration ("SBA"), and sells the guaranteed portions of such loans into the
secondary market. The Company also finances construction loans to residential
home builders generally operating in Sonoma and Mendocino Counties. The Company
offers consumer loans and commercial construction loans, as well as various
deposit programs and numerous fee-based services. During 1995, the Company's
commercial banking operations generated revenues of approximately $47.9 million
and operating profits of approximately $7.6 million, as compared to operating
revenues and profits of approximately $32.6 million and $6.9 million in 1994 and
$24.9 million and $4.2 million in 1993.
4
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The Company's mortgage banking business originates one-to-four unit
residential first mortgage loans. Such residential mortgage loans are
predominantly conforming loans; that is, such loans are underwritten using
standards set by Fannie Mae or Freddie Mac. Such conforming mortgage loans are
readily saleable to Fannie Mae or Freddie Mac, or into the national secondary
mortgage market. A combination of declining mortgage rates during 1992 and
1993, as well as the Company's increased penetration of the Northern and Central
California mortgage market, produced significant growth in the Company's
mortgage banking operations during 1992 and 1993. During 1994, however,
increases in interest rates sharply curtailed refinancing activity and the
residential mortgage market shifted towards adjustable rate mortgages. As a
result, the Company's mortgage banking loan originations declined sharply in
1994, as compared to rapid increases in origination volumes in 1992 and 1993.
During 1995, the Company's mortgage banking originations totalled approximately
$840 million, a 22% decrease from 1994 originations of approximately $1.1
billion. The 1994 originations represented a decrease of 45% over the Company's
$1.9 billion of originations for 1993. In addition, the Company's origination
of fixed rate loans increased in 1995 to approximately 84% of originations as
opposed to 67% in 1994 and 91% in 1993. In 1995, the Company's mortgage banking
operations generated revenues of $16,089,000 as compared to $16,269,000 in 1994
and $21,537,000 in 1993. In 1995 the Company's mortgage operations generated an
operating profit of $138,000 compared to an operating loss of $9,821,000 in 1994
and an operating profit of $4,484,000 in 1993. (See Item 7 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
Item 8 "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - NOTE Q OF NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS OF REDWOOD EMPIRE BANCORP".)
In addition to its lending activities, the Company has purchased mortgage
loan servicing rights from other institutions to augment and diversify its
income sources. Based on market conditions, the Company either retains or sells
the servicing on mortgage loans sold to institutional investors. At December
31, 1995 the Company's mortgage loan servicing portfolio aggregated
approximately $1.0 billion, an increase of approximately 9% from the size of the
portfolio as of December 31, 1994. The Company is also approved to offer
various other specialized products. It is an approved Fannie Mae/Freddie Mac
lender/servicer, a principal bank for VISA/Mastercard, and an approved lender of
the Federal Housing, Veterans and Farmers Home Administrations.
The primary sources of funds for the Company's lending programs are local
deposits, proceeds from loan sales, loan payments, and other borrowings by its
subsidiaries. The Company attracts deposits primarily from local businesses,
professionals and retail customers. These deposits are periodically
supplemented through insured certificates of deposit obtained directly by the
Company from other financial institutions located throughout the United States.
The Company generally does not purchase deposits through deposit brokers and had
no brokered deposits at December 31, 1995. In addition to deposits, the Company
obtains other borrowed funds through its membership in the Federal Home Loan
Bank of San Francisco (the "FHLB") and its retention of treasury tax and loan
funds at the Federal Reserve Bank of San Francisco.
The Company is regulated by various government agencies, with the primary
regulators being the Board of Governors of the Federal Reserve System (the
"FRB"), the Office of Thrift Supervision (the "OTS"), the Office of the
Comptroller of the Currency (the "OCC"), and the Federal Deposit Insurance
Corporation (the "FDIC").
5
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The Company and its subsidiaries had 353 full-time-equivalent employees at
December 31, 1995. Redwood's headquarters are located at 111 Santa Rosa Avenue,
Santa Rosa, California 95404-4905, and its telephone number is (707) 545-9611.
PRIMARY MARKET AREA
The Company's deposit market area is Sonoma, Mendocino and
Lake Counties, California. In addition, Allied has wholesale mortgage loan
production offices in San Jose, San Ramon, Fresno, Santa Rosa, and
Sacramento, California and Portland, Oregon, which primarily originate loans
referred by independent mortgage brokers. The borrowers serviced through
these offices may be located throughout Northern California and the loans are
generally sold into the secondary market.
Sonoma, Mendocino and Lake Counties have benefited from
migration of population and businesses into the area, as well as growth in
established firms and industries. These counties have generally exceeded the
growth in population and economic activity of California as a whole.
INVESTMENT PORTFOLIO
The Company classifies its investment securities as held to
maturity or available for sale. The Company's intent is to hold all
securities held to maturity until maturity and management believes that the
Company has the ability to do so. Securities available for sale may be sold
to implement the Company's asset/liability management strategies and in
response to changes in interest rates, prepayment rates and similar factors.
The following table summarizes the maturities of the Company's debt
securities at their book value and their weighted average yields at December
31, 1995. Yields on tax-exempt securities have been computed on a
tax-equivalent basis. At December 31, 1995, the total market value of the
securities described below was $40,074,000.
<TABLE>
<CAPTION>
After One Through After Five
Within One Year Five Years Years Total
----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------------- ----------------- ----------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agencies $ 7,966 5.85% $ 10,507 6.54% $ 11,981 6.17% $ 30,454 6.22%
Other bonds 2,035 5.08 4,985 5.83 2,600 7.30 9,620 6.07
-------- -------- -------- --------
Total $ 10,001 5.70% $ 15,492 6.31% $ 14,581 6.37% $ 40,074 6.18 %
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
6
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The following table summarizes the book value of the Company's investment
securities held on the dates indicated:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
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(in thousands)
<S> <C> <C> <C>
U.S. Government and agencies $37,436 $31,910 $19,553
Other bonds and mortgage-backed securities 2.638 2,093 2,326
FHLB and FRB Stock 3,890 8,063 8,063
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Total $43,964 $42,066 $29,942
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------------------------------------
</TABLE>
DEPOSIT STRUCTURE
The Company primarily attracts deposits from local businesses and
professionals, as well as through retail certificates of deposits, savings and
checking accounts. In addition to the Company's local depository offices, it
attracts certificates of deposit, primarily from financial institutions
throughout the nation, by publishing rates in national publications. These
certificates of deposit have often been attracted at interest rates below local
market retail deposit rates. The national deposit market is utilized to
supplement funding for the Company's mortgage banking activities and other
liquidity needs. There can be no assurance that this funding practice will
continue to provide deposits at attractive rates, or that applicable federal
regulations will not limit the Company's ability to attract deposits in this
manner. The Company generally does not purchase brokered deposits and had no
brokered deposits at December 31, 1995.
The following chart sets forth the distribution of the Company's average
daily deposits for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------------------ ------------------ ------------------
Amount Rate Amount Rate Amount Rate
------------------ ------------------ ------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Interest bearing (1) $116,316 3.75% $114,266 3.22% $107,557 3.18%
Noninterest bearing 51,946 --- 44,283 --- 37,026 ---
Time 304,396 6.03 233,896 4.81 169,212 4.80
</TABLE>
(1) Includes savings deposits, money market savings deposits, money market
demand deposits, and interest-bearing demand deposits.
7
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The Company's time deposits of $100,000 or more had the following schedule
of maturities at December 31, 1995:
<TABLE>
<CAPTION>
Amount
----------------
(in thousands)
<S> <C>
Remaining Maturity:
Three months or less $49,769
Over three months to six months 21,351
Over six months to 12 months 28,080
Over 12 months 40,779
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Total $139,979
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----------------
</TABLE>
Time deposits of $100,000 or more are generally from the Company's
institutional and business and professional customer base. The potential impact
on the Company's liquidity from the withdrawal of these deposits is considered
in the Company's asset and liability management policies, which attempt to
anticipate adequate liquidity needs through its management of investments,
federal funds sold, loan sales, or by generating additional deposits.
OTHER BORROWINGS
At December 31, 1995, the Company had FHLB short-term borrowings of
$23,000,000 with a weighted average interest rate of 6.24%, collateralized by
Allied's loan portfolio. Remaining available credit at December 31, 1995 was
$57,000,000 reflecting approximately 25% of Allied's assets at December 31,
1995. Advances are made on a short-term basis with a rolling maturity date and
are typically repaid within a 30-day period. On occasion, a borrowing is made
on a fixed maturity basis. In such instances, maturities do not extend beyond
one year. The highest amount of FHLB borrowings outstanding for a month-end
during the year was $112,150,000 at January 31, 1995. The average balance of
borrowings from the FHLB was $46,600,000, with a weighted average rate of 6.56%
during the year ended December 31, 1995.
REGULATION AND SUPERVISION
Federal Securities Laws. Redwood is subject to various federal securities
laws, including the Securities Act of 1933 (the "1933 Act") and the Securities
Exchange Act of 1934 (the "1934 Act"). The 1933 Act regulates the distribution
or public offering of securities, while the 1934 Act regulates trading in
securities that are already issued and outstanding. Both Acts provide civil and
criminal penalties for misrepresentations and omissions in connection with the
sale of securities, and the 1934 Act also prohibits market manipulation and
insider trading.
8
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Redwood files annual, quarterly, and current reports with the Securities
and Exchange Commission (the "SEC"). In addition, Redwood's directors,
executive officers, and 5% or greater shareholders, and certain of the senior
officers of Redwood's subsidiaries are subject to further reporting requirements
under the 1934 Act, including obligations to submit to the SEC reports of
beneficial ownership of Redwood's securities.
THE EFFECT OF GOVERNMENTAL POLICIES AND REGULATIONS ON THE COMPANY. The
Company's overall earnings and growth, as well as that of NBR and Allied
individually, are affected not only by local market area factors and general
economic conditions, but also by government monetary and fiscal policies. For
example, the Board of Governors of the Federal Reserve System (the "FRB")
influences the supply of money through its open market operations in U.S.
Government securities, as well as by adjustments to the discount rates
applicable to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in such policies on the Company's business and earnings cannot be
predicted.
Beginning with the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (the "FIRREA"), and following with Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA"), numerous
regulatory requirements have been placed on the banking and thrift industries in
the recent past, and additional changes have been and are being proposed. As a
consequence of the extensive regulation of commercial and mortgage banking and
thrift activities in the United States, the business of the Company is
particularly susceptible to being affected by enactment of federal and state
legislation which may have the effect of increasing or decreasing the cost of
doing business, modifying permissible activities, or enhancing the competitive
position of other financial institutions. Any change in applicable laws or
regulations could have a material adverse effect on the business and prospects
of the Company.
BANK HOLDING COMPANY REGULATION. Because of its ownership of NBR, Redwood
is a bank holding company subject to the Bank Holding Company Act of 1956, as
amended (the "BHCA"). Redwood reports to, registers with, and may be examined
by, the FRB, which also has the authority to examine Redwood's subsidiaries.
The FRB, which has significant supervisory and regulatory authority over
Redwood and its affiliates, requires Redwood to maintain certain levels of
capital. See "CAPITAL STANDARDS," below. The FRB also has the authority to
take enforcement action against any bank holding company that commits any unsafe
or unsound practice, or violates certain laws, regulations, or conditions
imposed in writing by the FRB. See "PROMPT CORRECTIVE ACTION AND OTHER
ENFORCEMENT MECHANISMS," below.
Under the BHCA, a company generally must obtain the prior approval of the
FRB before it exercises a controlling influence over, or acquires directly or
indirectly, more than 25% of the voting shares or substantially all of the
assets of any bank or bank holding company. Thus, Redwood may be required to
obtain the prior approval of the FRB before it or its subsidiaries may acquire,
merge or consolidate with any bank or bank holding company; any company seeking
to acquire or merge with Redwood also would be required to obtain the FRB's
approval.
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Redwood is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. A bank holding company, with the approval of the FRB, may
engage, or acquire the voting shares of companies engaged, in activities that
the FRB has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
The FRB generally prohibits a bank holding company from declaring or paying
a cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company is expected to act as a source of financial
strength to its financial institution subsidiaries, and to commit resources to
support such subsidiaries even at the expense of any of its non-bank
subsidiaries, if necessary.
Transactions between Redwood and its subsidiaries are subject to a number
of other restrictions. FRB policies forbid the payment by bank subsidiaries of
management fees which are unreasonable in amount or exceed the fair market value
of the services rendered (or, if no market exists, actual costs plus a
reasonable profit). Additionally, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
the extension of credit, sale or lease of property, or furnishing of services.
Subject to certain limitations, depository institution subsidiaries of bank
holding companies may extend credit to, invest in the securities of, purchase
assets from, or issue a guarantee, acceptance, or letter of credit on behalf of,
an affiliate, provided that the aggregate of such transactions with affiliates
may not exceed 10% of the capital stock and surplus of the institution, and the
aggregate of such transactions with all affiliates may not exceed 20% of the
capital stock and surplus of such institution. Redwood may only borrow from
depository institution subsidiaries if the loan is secured by marketable
obligations with a value of a designated amount in excess of the loan. Further,
Redwood may not sell a low-quality asset to a depository institution subsidiary.
BANK REGULATION AND SUPERVISION. As a national bank, NBR is regulated,
supervised and regularly examined by the Office of the Comptroller of the
Currency (the "OCC"). Deposit accounts at NBR are insured by the Bank Insurance
Fund (the "BIF"), as administered by the Federal Deposit Insurance Corporation
(the "FDIC"), to the maximum amount permitted by law. NBR is also subject to
applicable provisions of California law, insofar as such provisions are not in
conflict with or preempted by federal banking law.
The OCC or the FDIC regulate or monitor virtually all areas of NBR's
operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, payment of dividends, establishment of branches, interest rates
chargeable on loans or payable on deposits, establishment of branches, mergers,
reorganizations, and the like. NBR is required by the OCC to prepare quarterly
reports on its financial condition and to conduct an annual audit of its affairs
in compliance with minimum standards and procedures prescribed by the OCC.
10
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Under FDICIA, all insured institutions must undergo regular on-site
examination by their appropriate federal banking agency, which in the case of
NBR is the OCC. The cost of these examinations may be assessed against the
institution. Insured institutions are also required to submit annual reports to
the FDIC and their principal regulatory agency. FDICIA also requires the
federal regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions and their holding companies relating, among
other things, to (a) internal controls, including internal information and audit
systems, (b) loan documentation, (c) credit underwriting, (d) interest rate risk
exposure, and (e) asset quality.
National banks and their holding companies which have undergone a change in
control within two years, or which are deemed by the FRB or the OCC to be
troubled institutions must give the FRB or the OCC, respectively, thirty days'
prior notice of the appointment of any senior executive officer or director.
Within the thirty days the FRB or the OCC, as the case may be, may approve or
disapprove any such appointment.
THRIFT HOLDING COMPANY REGULATION. Because it controls Allied, which is a
federal savings bank, Redwood is also a savings and loan holding company within
the meaning of the Home Owners' Loan Act (the "HOLA"). As such, Redwood reports
to and is regulated, examined and supervised by the Office of Thrift Supervision
(the "OTS"). As a savings and loan holding company, Redwood is required to file
with the OTS an annual report and such additional information as the OTS may
require pursuant to the HOLA. The OTS may also conduct examinations of Redwood
and its subsidiaries.
Under the HOLA, Redwood is required to obtain the prior approval of the OTS
before it can acquire direct or indirect control over the business or
substantially all of the assets of another savings and loan or savings and loan
holding company; however acquisition of 5% or less of such an institution's
voting shares does not require the approval of the OTS. In considering such a
transaction, the OTS will consider not only the financial and managerial
resources of the prospective acquiror, but also the insurance risk posed by such
a transaction to the Savings Association Insurance Fund.
THRIFT REGULATION AND SUPERVISION. As a federal savings bank, Allied is
federally-chartered and subject to regulation, examination and general
supervision of its operations by the OTS. Savings institutions and their
directors, officers or employees failing to conform to OTS regulations,
policies, and directives may be sanctioned for noncompliance. The consent of
the OTS is required prior to any major corporate reorganization involving
Allied. The OTS requires an annual audit of all savings institutions by
independent accountants and, in connection with its own periodic examinations,
may revalue assets, based upon appraisals, and require establishment of specific
reserves based upon such revaluation. Deposit accounts with Allied are insured
by the Savings Association Insurance Fund ("SAIF") as administered by the FDIC
to the maximum amount permitted by law. As a member of the Federal Home Loan
Bank System, Allied may obtain collateralized advances from the FHLB for certain
purposes at favorable rates.
11
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In 1993 the OTS amended its qualified thrift lender ("QTL") regulations to
require that at least 65% of the association's portfolio assets consist of
certain types of housing related investments for at least nine out of every
twelve consecutive months. Associations which fail the QTL test lose their
right to long-term Federal Home Loan Bank ("FHLB") advances and must either
limit their new activities and new branches to those permitted to a national
bank or convert to a bank charter. In addition, the OTS may limit or restrict
activities of a savings and loan holding company which it determines create a
serious risk for subsidiary savings associations. As of December 31, 1995,
Allied qualified as a QTL, substantially exceeding the QTL test.
CAPITAL STANDARDS. The FRB, the OCC, the OTS, and other federal banking
agencies have risk based capital adequacy guidelines intended to provide a
measure of capital adequacy that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets and transactions, such as letters of credit and recourse
arrangements, which are reported as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent amounts of
off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. government securities, to 100% for assets with relatively higher
credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of
common stock, retained earnings, noncumulative perpetual preferred stock and
minority interests in certain subsidiaries, less most other intangible assets.
Tier 2 capital may consist of a limited amount of the allowance for possible
loan and lease losses and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations imposed by the federal banking agencies. Since
December 31, 1992, the federal banking agencies have required a minimum ratio of
qualifying total capital to risk- adjusted assets and off balance sheet items of
8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off
balance sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
average total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
average total assets is 3%. It is improbable, however, that an institution with
a 3% leverage ratio would receive the highest rating by the regulators since a
strong capital position is a significant part of the regulators' rating. For
all banking organizations not rated in the highest category, the minimum
leverage ratio is at least 100 to 200 basis points above the 3% minimum. Thus,
the effective minimum leverage ratio, for all practical purposes, is at least 4%
or 5%. In addition to these uniform risk-based capital guidelines and leverage
ratios that apply across the industry, the regulators have the discretion to set
individual minimum capital requirements for specific institutions at rates
significantly above the minimum guidelines and ratios.
12
<PAGE>
Savings associations (such as Allied) are also required to maintain minimum
tangible capital (generally the same as Tier 1 capital) of 1.5% of adjusted
total assets. Allied also has a minimum core capital ratio of 4% where core
capital is defined as Tier 1 capital to total assets. Allied had tangible and
core capital ratios of 6.26% as of December 31, 1995. During 1994, the OTS
issued a final rule regarding the types and amounts of intangible assets that
may be included in a savings association's capital for purposes of complying
with the minimum capital ratios. Under this rule, purchased mortgage servicing
rights ("PMSR's") and purchased credit card relationships ("PCCR's") may be
included in a savings association's regulatory capital but may not exceed, in
the aggregate, 50% of core capital, while PCCR's alone may not exceed 25% of
core capital. Savings associations may include in tangible capital the same
dollar amounts of PMSR's that they include in core capital.
As required by FDICIA, the OTS has added an interest rate risk component to
its risk-based capital rules. Under the new regulation, for which no effective
date has been set, any thrift institution regulated by the OTS deemed to have an
"above-normal" level of interest rate exposure will be required to deduct an
interest rate risk ("IRR") component from its total capital when determining its
compliance with the risk based capital requirements. An "above normal" level of
interest rate risk exposure is a projected decline in the association's net
portfolio value of assets and liabilities that is greater than 2% of assets
resulting from a projected two percentage point swing in interest rates. The
IRR component will equal one-half of the difference between the institution's
measured interest rate exposure and the level of exposure deemed "normal."
Financial institutions subject to these regulations, including Allied but not
NBR or Redwood, are required to file IRR-related data with the OTC, which the
OTC will use to calculate, on a quarterly basis, the institutions' interest rate
risk and IRR components. The IRR component to be deducted from capital is the
lowest of the IRR components so calculated for the previous three quarters
(commencing with the quarter ended September 30, 1994). At present, neither the
FRB nor the OCC has adopted an IRR-related amendment to its risk-based capital
rules, although it is anticipated that both agencies will publish new proposed
regulations for comment during 1996.
The following tables present the capital ratios for the Company, NBR and
Allied compared to the standards for well-capitalized depository institutions,
as of December 31, 1995.
<TABLE>
<CAPTION>
Well- Minimum
Actual Capitalized Requirement
-----------------------------------------
<S> <C> <C> <C>
COMPANY
Leverage 5.14% 5.00% 4.00%
Tier 1 risk-based 7.24 6.00 4.00
Total risk-based 11.68 10.00 8.00
NBR
Leverage 7.47 5.00 4.00
Tier 1 risk-based 9.41 6.00 4.00
Total risk-based 12.19 10.00 8.00
ALLIED
Core 6.26 5.00 4.00
Tier 1 risk-based 9.22 6.00 4.00
Total risk-based 10.47 10.00 8.00
</TABLE>
13
<PAGE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS. FDICIA requires
each federal banking agency to take prompt corrective action to resolve the
problems of insured depository institutions, including but not limited to those
that fall below one or more prescribed minimum capital ratios. The law required
each federal banking agency to promulgate regulations defining the following
five categories in which an insured depository institution will be placed, based
on the level of its capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of FDICIA. An
insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"WELL-CAPITALIZED"
Total risk-based capital of 10% or more;
Tier 1 risk-based ratio capital of 6% or more; and
Leverage ratio of 5% or more.
"ADEQUATELY CAPITALIZED"
Total risk-based capital of at least 8%;
Tier 1 risk-based capital of at least 4%; and
Leverage ratio of at least 4%.
"UNDERCAPITALIZED"
Total risk-based capital less than 8%;
Tier 1 risk-based capital less than 4%; or
Leverage ratio less than 4%.
"SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized or undercapitalized may be treated as though
it were in the next lower capital category if the appropriate federal banking
agency, after notice and opportunity for hearing, determines that an unsafe or
unsound condition or an unsafe or unsound practice warrants such treatment. At
each successive lower capital category, an insured depository institution is
subject to more restrictions. The federal banking agencies, however, may not
treat an institution as "critically undercapitalized" unless its capital ratio
actually warrants such treatment.
14
<PAGE>
If an insured depository institution is undercapitalized, it will be
closely monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. An undercapitalized depository
institution generally will not be able to acquire other banks or thrifts,
establish additional branches, or engage in any new lines of business unless
consistent with its capital plan. A "significantly undercapitalized"
institution will be subject to additional restrictions on its affiliate
transactions, the interest rates paid by the institution on its deposits, asset
growth, the compensation of its senior executive officers, and other activities
deemed to pose excessive risk to the institution. Regulators may also order a
significantly undercapitalized institution to hold elections for new directors,
terminate any director or senior executive officer employed for more than 180
days prior to the time the institution became significantly undercapitalized, or
hire qualified senior executive officers approved by the regulators. Further
restrictions and sanctions are required to be imposed on insured depository
institutions that are "critically undercapitalized." The most important
additional measure is that the appropriate federal banking agency is required to
either appoint a receiver for the institution within 90 days or obtain the
concurrence of the FDIC in another form of action.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a prima facie showing by the agency that such relief is
appropriate. Additionally, a holding company's inability to serve as a source
of strength to its subsidiary banking organizations could serve as an additional
basis for a regulatory action against the holding company.
SAFETY AND SOUNDNESS STANDARDS. FDICIA also implemented certain specific
restrictions on transactions and required the regulators to adopt overall safety
and soundness standards for depository institutions related to internal control,
loan underwriting and documentation, and asset growth. Among other things,
FDICIA limits the interest rates paid on deposits by undercapitalized
institutions, the use of brokered deposits and the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
stockholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
In addition to the statutory limitations, FDICIA requires the federal
banking agencies to prescribe, by regulation, standards for all insured
depository institutions for such things as classified loans and asset growth.
In July 1992, the federal banking agencies issued a joint advance notice of
proposed rule making requesting public comment on the safety and soundness
standards. Although final regulations are required by law to be issued by
August 1, 1993 and to become effective no later than December 1, 1993, final
regulations have not yet been issued.
15
<PAGE>
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. The power of the board
of directors of an insured depository institution to declare a cash dividend or
other distribution with respect to capital is subject to statutory and
regulatory restrictions which limit the amount available for such distribution
depending upon the earnings, financial condition and cash needs of the
institution, as well as general business conditions. FDICIA prohibits insured
depository institutions from paying management fees to any controlling persons
or, with certain limited exceptions, making capital distributions, including
dividends, if, after such transaction, the institution would be
undercapitalized.
The payment of dividends by a national bank is further restricted by
additional provisions of federal law, which prohibit a national bank from
declaring a dividend on its shares of common stock unless its surplus fund
exceeds the amount of its common capital (total outstanding common shares times
the par value per share). Additionally, if losses have at any time been
sustained equal to or exceeding a bank's undivided profits then on hand, no
dividend shall be paid. Moreover, even if a bank's surplus exceeded its common
capital and its undivided profits exceed its losses, the approval of the OCC is
required for the payment of dividends if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
of that year combined with its retained net profits of the two preceding years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock. A national bank must consider other business factors in
determining the payment of dividends. The payment of dividends by NBR is
governed by NBR's ability to maintain minimum required capital levels and an
adequate allowance for loan losses. Regulators also have the authority to
prohibit a depository institution from engaging in business practices which are
considered to be unsafe or unsound, possibly including payment of dividends or
other payments under certain circumstances even if such payments are not
expressly prohibited by statute. As of December 31, 1995, NBR had the ability
to dividend $4,328,000 to Redwood without prior regulatory approval.
16
<PAGE>
Federal savings banks, such as Allied, which meet the minimum capital
requirements described above (see "CAPITAL STANDARDS," above) may distribute as
dividends up to 100% of their current net income plus an amount that would
reduce by one-half its surplus capital ratio at the beginning of the calendar
year. A federal savings bank which equals or exceeds current minimum capital
requirements may distribute up to 75% of its net income for the most recent four
quarters, depending upon its level of compliance with its risk-based capital
requirements. A federal savings bank not meeting minimum capital requirements
may not make any capital distribution without the prior written approval of the
OTS. In any event, the OTS must be given 30-days' advance written notice of all
proposed capital distributions by federal savings banks. Upon application, the
OTS may, in its discretion, allow capital distributions in excess of those
permitted by its regulations. In addition to the foregoing restrictions, in
1990 Redwood entered into a Capital Maintenance/Dividend Agreement (the "Capital
Maintenance Agreement") with the OTS as a condition to its acquisition of
Allied. Under the terms of the Capital Maintenance Agreement, Redwood may not
accept from Allied, or cause Allied to pay, any dividend (1) without the prior
written approval of the OTS if, and as long as, Allied's capital falls or
remains below the applicable minimum capital requirements of the OTS, (2) if
Allied's capital is below the current capital requirements of the OTS, or (3) if
payment of the dividend would cause Allied's capital to fall below the current
capital requirements of the OTS. In addition, the Capital Maintenance Agreement
prohibits Allied from paying dividends in excess of its cumulative net income
for the prior eight quarters, less cumulative dividends paid during that period,
without prior OTS approval, even when Allied's capital exceeds its capital
requirements. As of December 31, 1995, Allied had the ability to dividend
$2,329,000 to Redwood.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS. FDICIA
established several mechanisms to increase funds to protect deposits insured by
the BIF administered by the FDIC. The FDIC is authorized to borrow up to $30
billion from the U.S. Treasury; borrow from the Federal Financing Bank up to 90%
of the fair market value of assets of institutions acquired by the FDIC as
receiver; and borrow from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits. The result of these provisions is that
the assessment rate on deposits of BIF members could increase in the future.
FDICIA also provides authority for special assessments against insured deposits.
No assurance can be given at this time as to what the future level of premiums
will be.
17
<PAGE>
As required by FDICIA, the FDIC adopted a transitional risk-based
assessment system for deposit insurance premiums which became effective
January 1, 1993. Under this system, depository institutions are charged
anywhere from 23 cents to 31 cents for every $100 in insured domestic deposits,
based on such institutions' capital levels and supervisory subgroup assignment.
The FDIC has adopted a permanent risk-based assessment system scheduled to take
effect on January 1, 1994, which incorporates the same basic rate structure.
The limited changes adopted by the FDIC are those it proposed in December 1992.
These amendments clarify the basis on which supervisory subgroup assignments are
made by the FDIC, eliminate from the assessment classification review procedure
the specific reference to an "informal hearing," provide for the assignment of
new institutions to the "well capitalized" assessment group, clarify that an
institution is to make timely adjustments as appropriate, clarify the basis, and
report data, on which capital group assignments are made for insured branches of
foreign banks, and expressly address the treatment of certain lifeline accounts
for which special assessment treatment is given. FDICIA prohibits assessment
rates from falling below the current annual assessment rate of 23 cents per $100
of eligible deposits if the FDIC has outstanding borrowings from the United
States Treasury Department or the 1.25% designated reserve ratio has not been
met.
During 1995, the FDIC announced that the BIF had reached its mandated
reserve level, reducing insurance premiums on BIF-insured deposits, and
subsequently announcing that deposit insurance premiums on BIF-insured deposits
would be reduced at December 31, 1995. The SAIF fund has not yet met its
mandated reserve level. As a result, deposit insurance premiums attributable to
BIF deposits are less than those attributable to SAIF deposits.
There are numerous regulatory proposals before Congress to address the
deposit insurance premium differential between BIF- and SAIF-insured deposits.
The most recent plans consist of one-time insurance premium charges attributable
to SAIF-insured deposits sufficient to bring the SAIF up to its mandated reserve
level, with a corresponding and immediate reduction in SAIF premiums thereafter.
Based on 87 basis points on Allied's deposits at March 31, 1995, the resulting
after-tax charge to the Company would be approximately $1,670,000. As both the
timing and final form of any proposed regulations remain uncertain, no
adjustments to the Company's financial statements have been recorded at December
31, 1995.
FDICIA requires all insured depository institutions to undergo a
full-scope, on-site examination by their primary federal banking regulator at
least once every 12 months. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate federal
banking agency against each institution or affiliate as it deems necessary or
appropriate.
RECENTLY ENACTED AND PROPOSED LEGISLATION. The United States Department of
the Treasury has issued a proposal to consolidate the federal bank regulatory
agencies. Under this proposal, the supervisory and regulatory oversight
authority of the FDIC, the FRB, the OCC, and the OTS would be transferred to a
new independent federal banking agency, although the FRB would continue to carry
out monetary and fiscal policy, discount window operations, and payments system
functions and the FDIC would continue to have oversight over the deposit
insurance funds. The Treasury Department may seek to introduce a bill in
Congress providing for such consolidation during 1995; however the proposal has
already been opposed by, among others, certain industry groups and the FRB,
which has suggested a competing consolidation plan which would preserve its
regulatory oversight authority. At the present time, due to the preliminary
nature of the proposals the Company cannot determine what, if any, effect such a
consolidation of regulatory agencies would have on its operations.
18
<PAGE>
In September of 1994 the Riegle Community Development and Regulatory
Improvement Act (the "Riegle Act") and the Riegle-Neal Interstate Banking and
Branching Efficiency Act (the "Riegle-Neal Act") became law. The Riegle Act is
intended to reduce much of the federal red tape with which financial
institutions have had to contend, providing about fifty different kinds of
specific relief. Among other things, the Riegle Act requires the federal
regulatory agencies to set up regulatory appeals systems and an ombudsman
system, streamlines the examination process, simplifies the audit requirements
for CAMEL 1 or 2 rated institutions with less than $5 billion in assets,
requires the regulatory agencies to take into account the size and activities of
financial institutions in issuing certain risk-related capital rules,
streamlines the application process for bank holding company activities, and
simplifies certain Truth-in-Lending rules. The Riegle Act also provides for new
consumer protections with respect to certain high cost home mortgages, amends
securities, banking, pension, and tax laws to encourage securitization of small
business loans and the development of a secondary market for pools of such
loans, and permits lenders to participate in capital access programs designed to
encourage lenders to make loans to small and medium sized businesses.
The Riegle-Neal Act allows adequately capitalized and managed bank holding
companies, with the approval of the FRB, to acquire control of, or to acquire
all or substantially all of the assets of, banks in any State, commencing in
September of 1995. States are permitted, however, to pass legislation either
providing for earlier approval of such mergers or prohibiting interstate mergers
entirely. California had already adopted legislation permitting interstate
mergers. Additionally, the Riegle-Neal Act permits the federal bank regulatory
agencies to approve merger transactions between insured banks having different
home states, without regard to the laws of either of the States involved, unless
between September 1994 and June 1, 1997 one of the involved States has enacted a
law prohibiting expressly prohibiting merger transactions involving out-of-state
banks.
Bills are regularly introduced in the United States Congress which contain
wide-ranging proposals for altering the structures, regulations, and competitive
relationships of the nation's financial institutions. It cannot be predicted
whether or in what form any proposed legislation will be adopted, or the extent
to which the business of the Company may be affected by such legislation.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
Compensation" in October 1995, which the Company is required to adopt in 1996.
SFAS No. 123 establishes accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans.
Under SFAS No. 123, the Company may either adopt the new fair value-based
accounting method or continue the intrinsic value-based method and provide pro
forma disclosures of net income and earnings per share as if the accounting
provisions of SFAS No. 123 had been adopted. The Company plans to adopt only the
disclosure requirements of SFAS No. 123; therefore such adoption will have no
effect on the Company's consolidated net earnings or cash flows.
19
<PAGE>
FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights," an
amendment of SFAS No. 65 in May 1995. SFAS No. 122 requires a mortgage banking
enterprise that purchases or originates mortgage loans with a definitive plan to
sell or securitize those loans and retain the mortgage servicing rights to
allocate the cost of the mortgage loans based on the relative fair values of the
mortgage loans and mortgage servicing rights at the date of purchase or
origination. Prior to SFAS No. 122, originated mortgage servicing rights were
not recognized for financial statement purposes with the entire cost of the
mortgage loan being allocated to the loan.
The Company early adopted SFAS No. 122 on January 1, 1995 as permitted.
The effect of adoption on the 1995 statement of operations was to increase gain
on sale of loans by $1,830,000 and net income by $857,000 ($.27 per
fully-diluted share). SFAS No. 122 prohibited the restatement of results for
prior years.
In May 1993, the FASB issued SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities. The Company adopted SFAS No. 115 at
December 31, 1993 and, accordingly, has classified its investment securities as
held to maturity or available for sale. Securities held to maturity are carried
at cost adjusted by the accretion of discounts and amortization of premiums.
The Company has the ability and intent to hold these investment securities to
maturity. Securities available for sale may be sold to implement the Company's
asset/liability management strategies and in response to changes in interest
rates, prepayment rates and similar factors. These securities are recorded at
market value and unrealized gains or losses, net of income taxes, are included
in shareholders' equity. Gain or loss on sale of investment securities is based
on the specific identification method.
During 1995, the FASB issued a Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". The Special Report provided a one-time opportunity to reassess the
appropriateness of its designations of securities subject to the accounting and
reporting requirements of Statement 115, without calling into questions the
intent to hold other debt securities to maturity in the future. In accordance
with the Special Report, in December 1995, the Company transferred $20,709,000
in U.S. Government obligations with an unrealized gain of $145,000 from
held-to-maturity to available-for-sale.
On January 1, 1995, the Company adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure." These statements
address the accounting and reporting by creditors for impairment of certain
loans. In general, a loan is impaired when, based upon 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. These statements are
applicable to all loans, uncollateralized as well as collateralized, except
loans that are measured at the lower of cost or fair value. Impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, except that as a practical expedient, the
Company measures impairment based on a loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. Loans are
measured for impairment as part of the Company's normal internal asset review
process. The effect of adopting SFAS 114 was not material to the Company's 1995
balance sheet or statement of operations.
20
<PAGE>
COMPETITION
The Company competes for deposits and loans principally with major
commercial banks, other independent banks, savings and loan associations,
savings banks, thrift and loan associations, credit unions, mortgage companies,
insurance companies and other lending institutions. Among the advantages of the
larger of these institutions are their ability to make larger loans, finance
extensive advertising campaigns, access international money markets and to
generally allocate their investment assets to regions of highest yield and
demand. Major commercial banks, savings and loans in California, and certain
national mortgage companies operating in the Company's primary market area
dominate the commercial banking and mortgage banking industries with large
branch systems and loan production offices operating over a wide geographical
area.
In order to compete with the other financial institutions in its primary
market area, the Company relies principally upon local directors and employees,
extended hours and quick turnaround on loan requests. The Company's promotional
activities emphasize the advantages of dealing with a locally-owned and
headquartered institution attuned to the particular needs of the community. For
customers whose loan demands exceed the Company's lending limit, the Company
attempts to arrange for such loans on a participation basis with its
correspondent banks.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Not applicable.
CERTAIN IMPORTANT CONSIDERATIONS FOR INVESTORS
MORTGAGE BANKING ACTIVITY. The Company is substantially dependent upon
mortgage banking activity, which can fluctuate significantly, in both volume and
profitability, with changes in interest rate movements. During 1992 and 1993,
the Company experienced a significant increase in mortgage banking activity as a
result of an increase in refinancing activity caused by declining interest
rates. During 1994, however, increases in interest rates curtailed refinancing
activity and the mortgage market shifted toward adjustable-rate mortgages used
to purchase homes. As a result, mortgage banking loan originations declined
sharply during 1994, compared to rapid increases in origination volumes during
1993 and 1992. Although the Company's mortgage banking originations were down
in 1995, the volume began to increase in the last half of 1995. The following
is a table of mortgage banking revenues and operating profits for the last three
years.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-----------------------------------
(in thousands)
<S> <C> <C> <C>
Revenue $16,089 $16,269 $21,537
Operating profit (loss) $138 ($9,821) $4,484
</TABLE>
21
<PAGE>
The Company seeks to minimize its interest rate by monitoring its exposure
to potential losses from shifts in interest rates on a daily basis and hedging
that exposure through the use of various financial instruments, including
derivatives. These investments include both written and purchased put and call
options and forward commitments to sell mortgage loans and mortgage-backed
securities to investors. The Company uses software developed by an independent
party to evaluate its daily hedging position and the potential impact of various
changes in interest rates. Interest rate fluctuations, however, can leave the
Company unable to adjust its hedging position in a timely manner, and could have
a material adverse effect on the Company's results of operations.
INTEREST RATE RISK. The Company's profitability may be adversely affected
by rapid changes in interest rates. The Company is substantially dependent on
mortgage banking activity, which can fluctuate significantly with interest rate
movements. The Company's ability to manage its net interest margin depends on
the volume of commercial loans compared to residential mortgage loans.
Additionally, the volume of adjustable rate mortgage loans ("ARMs") compared to
fixed rate mortgage loans can impact the net interest margin. ARMs can be
originated with initial rates at or below the cost of funding the loans and
reduce the net interest margin while the loans are held until the loans reprice.
A decline in net interest margin can result from fixed rate loans in a rising
rate environment as the Company's cost of funding loans rises. In a declining
rate environment, refinancing of fixed rate loans can inhibit an increase in the
net interest margin.
CONCENTRATION OF LENDING ACTIVITIES. Concentration of the Company's
lending activities in the real estate sector, including construction loans could
have the effect of intensifying the impact on the Company of adverse changes in
the real estate market in the Company's lending areas. At December 31, 1995,
approximately 82% of the Company's loans were secured by real estate, of which
22% were secured by commercial real estate, including small office buildings,
owner-user office/warehouses, mixed-use residential and commercial properties
and retail properties. Substantially all of the properties that secure the
Company's present loans are located within Northern and Central California. The
ability of the Company to continue to originate mortgage loans may be impaired
by adverse changes in local or regional economic conditions, adverse changes in
the real estate market, increasing interest rates, or acts of nature (including
earthquakes, which may cause uninsured damage and other loss of value to real
estate that secures the Company's loans. Due to the concentration of the
Company's real estate collateral, such events could have a significant adverse
impact on the value of such collateral or the Company's earnings.
22
<PAGE>
DIVIDENDS. Beginning with the fourth quarter of 1992, Redwood paid a
quarterly dividend on its Common Stock each quarter until the fourth quarter of
1994, when the payment of Common Stock dividends was suspended indefinitely by
the Board of Directors. There can be no assurance that such dividend payments
will be resumed in the future. Federal regulatory agencies have the authority
to prohibit the payment of dividends by NBR and Allied to Redwood if a finding
is made that such payment would constitute an unsafe or unsound practice, or if
NBR or Allied became undercapitalized. If NBR or Allied are restricted from
paying dividends, Redwood could be unable to pay dividends on either its Common
or its Preferred Stock. In addition, the payment of dividends by Redwood is
limited by California law and subject to the discretion of the Board of
Directors of Redwood. No assurance can be given as to the ability of the
Company's subsidiaries to pay dividends to Redwood, the ability of Redwood to
continue or resume paying dividends in accordance with prior practice or at all,
or the determination by the Board of Directors that payment of any such dividend
will be appropriate under the circumstances. Under applicable law and
regulations, at December 31, 1995, Allied and NBR were able to pay up to
$4,531,000 and $4,328,000 in additional dividends to Redwood. See "REGULATION
AND SUPERVISION -- RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS," above.
GOVERNMENT REGULATION. Redwood and its subsidiaries are subject to
extensive federal and state governmental supervision, regulation and control,
and future legislation and government policy could adversely affect the
financial industry. Although the full impact of such legislation and regulation
cannot be predicted, future changes may alter the structure of and competitive
relationship among financial institutions. See "REGULATION AND SUPERVISION,"
above.
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS. The Company competes for
deposits and loans principally with major commercial banks, other independent
banks, savings and loan associations, savings banks, thrift and loan
associations, credit unions, mortgage companies, insurance companies and other
lending institutions. With respect to deposits, additional significant
competition arises from corporate and governmental debt securities, as well as
money market mutual funds. The Company also depends for its origination of
mortgage loans on independent mortgage brokers who are not contractually
obligated to do business with the Company and are regularly solicited by the
Company's competitors. Aggressive policies of such competitors have in the past
resulted, and may in the future result, in a decrease in the Company's volume of
mortgage loan originations and/or a decrease in the profitability of such
originations, especially during periods of declining mortgage loan origination
volumes. Several of the nation's largest savings and loan associations and
commercial banks have a significant number of branch offices in the areas in
which the Company conducts operations. Among the advantages possessed by the
larger of these institutions are their ability to make larger loans, finance
extensive advertising campaigns, access international money markets and
generally allocate their investment assets to regions of highest yield and
demand. See "COMPETITION," above.
RISKS INVOLVED IN ACQUISITION STRATEGY. The Company has grown in
significant part through acquisitions of financial institutions, including
savings and loan companies and banks. The Company intends to continue its
policy of reviewing such opportunities as they present themselves, and to make
further acquisitions as strategically appropriate. Such acquisitions, including
the recent merger of Codding bank with and into NBR, involve risks of adversely
changing the Company's results of operations, unforeseen liabilities or asset
quality problems of the acquired entity, and unanticipated conditions not within
the Company's control, including among others adverse personnel relations, loss
of customers because of change of identity, and deterioration in local economic
conditions.
23
<PAGE>
Management believes that the Company's potential growth in earnings will
depend in part on the successful development of future acquisition prospects.
Candidates for such future acquisitions may not prove to be available on terms
the Company believes to be favorable, however. Furthermore, state and Federal
regulatory agencies have the power to block, delay, or adversely condition such
acquisitions in the future, depending on the financial condition of Redwood, its
subsidiaries, and its potential acquisition targets. In pursuing its
acquisition strategy the Company must compete with a variety of individuals and
institutions, including major regional bank holding companies, for suitable
acquisition candidates. Such competition could affect the Company's ability to
make acquisitions, increase the price the Company may be forced to pay for
certain acquisitions in the future, and increase the Company's costs in
analyzing and negotiating such potential transactions.
STRATEGIC EVALUATION OF ALLIED. In an effort to increase shareholder value
the Board of Directors is currently evaluating strategic options relating to
Allied. These options include a sale or partial sale of Allied or a merger of
Allied into NBR. The ultimate resolution of this evaluation process and actions
stemming therefrom, if any, cannot currently be determined.
ITEM 2. PROPERTIES
The Company owns and leases certain premises and equipment used in the
normal course of business. There are no contingent rental payments and the
Company has three sublease arrangements. Total rental expenses under all
leases, including premises, totaled $2,172,000, $2,336,000 and $1,533,000, in
1995, 1994 and 1993. The expiration dates of the leases vary, with the last
such lease expiring during 2009.
The Company enters into leases for premises and equipment as the Company
expands its business. The Company maintains insurance coverage on its premises,
leaseholds and equipment, including business interruption and record
reconstruction coverage. Management believes that there are no premises
occupied that could not be relocated with minimal impact.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company to
which the Company is a party or to which any of its properties is subject,
except ordinary routine litigation incidental to the businesses of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1995.
24
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Redwood's Common Stock is publicly traded on the American Stock Exchange.
Market information for Redwood's Common Stock for the two most recent fiscal
years can be found under the heading "Quarterly Results" of the 1995 Annual
Report to Shareholders, and is by this reference incorporated herein. As of
March 1, 1996 there were 693 shareholders of record of Redwood's Common Stock.
Redwood declared quarterly cash dividends on its Common Stock at the rate
of $0.03 per share for the fourth quarter of 1992 and the first three quarters
of 1993. In the fourth quarter of 1993, the Common Stock dividend was increased
to $0.035 per share, and it remained at that level through the first three
quarters of 1994. The Common Stock dividend was suspended during the fourth
quarter of 1994. See Item 8 "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --
NOTE P OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF REDWOOD EMPIRE BANCORP,"
below.
Dividends from NBR and Allied are a primary source of cash for Redwood.
There are regulatory limitations on cash dividends that may be paid by NBR and
Allied to Redwood which could limit Redwood's ability to pay dividends. Federal
regulatory agencies have the authority to prohibit the payment of dividends by
NBR and Allied if a finding is made that such payment would constitute an unsafe
or unsound practice, or if NBR or Allied became critically undercapitalized.
Redwood is not subject to any prohibitions or limitations imposed on its ability
to pay dividends by any regulatory agency, although it has entered into a
Capital Maintenance/Dividend Agreement with the OTS with respect to the payment
of dividends by Allied. See Item 1(c) "NARRATIVE DESCRIPTION OF BUSINESS --
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS," above.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item can be found in the Company's 1995
Annual Report to Shareholders under the heading "Summary of Consolidated
Financial Data and Performance Ratios", and is by this reference incorporated
herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item can be found in the Company's 1995
Annual Report to Shareholders, and is by this reference incorporated herein.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements appear, together with the Notes
thereto and the independent auditors' report of Deloitte & Touche LLP dated
January 24, 1996 thereon, in the Company's 1995 Annual Report to
Shareholders, and are by this reference incorporated herein.
Supplementary data for each full quarter within the years ended December
31, 1995 and 1993, can be found in the Company's 1995 Annual Report to
Shareholders under the heading "Quarterly Results", and is by this reference
incorporated herein.
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 required by this Item can be found in Redwood's definitive
Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of
1934, and is by this reference incorporated herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item can be found in Redwood's definitive
Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of
1934, and is by this reference incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item can be found in Redwood's definitive
Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of
1934, and is by this reference incorporated herein.
26
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
NBR leases 34,000 square feet of office space for its main office from 137
Group, a partnership that includes as a minority partner NBR director Richard
Colombini. The lease calls for payments of $62,455 per month plus annual rental
increases through November 1999. Total lease payments in 1995, 1994, and 1993
for this location were $851,000, $839,000 and $753,000, respectively.
(b) CERTAIN BUSINESS RELATIONSHIPS.
Except as disclosed elsewhere in this Item, management is not aware of any
business relationships required to be disclosed hereunder.
(c) INDEBTEDNESS OF MANAGEMENT.
Some of the Company's directors and executive officers and their immediate
families, as well as the companies with which they are associated, are customers
of or have had banking transactions with the Company in the ordinary course of
the Company's business, and the Company expects to have banking transactions
with such persons in the future. In management's opinion, all such loans and
commitments to lend were made in the ordinary course of business, in compliance
with applicable laws, on substantially the same terms, including interest rates
and collateral, as those prevailing for comparable transactions with other
persons of similar credit worthiness and, in the opinion of management, did not
involve more than a normal risk of collectibility or present other unfavorable
features. The Company has a strong policy regarding review of the adequacy and
fairness to the Company of loans to its directors and officers. At December 31,
1995, there were no outstanding balances under extensions of credit to directors
and executive officers of the Company and companies with which directors are
associated.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements of Redwood and its
subsidiaries, and independent auditors' report included in the Annual Report of
Redwood to its shareholders for the years ended December 31, 1995, 1994 and
1993, are incorporated herein by reference.
Independent Auditors' Report
Consolidated Financial Statements of Redwood Empire Bancorp
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
27
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules have been omitted, as inapplicable.
3. EXHIBITS.
The following documents are included or incorporated by reference in this
Annual Report on Form 10-K. Exhibits marked with an asterisk (*) represent
management contracts or compensatory plans or arrangements.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Acquisition and Merger Agreement between National Bank of the Redwoods
and Codding Bank, dated June 21, 1994, including Exhibits A and B
thereto, filed as Exhibit 2.1 to the Registrant's Current Report on
Form 8-K dated June 21, 1994, and by this reference incorporated
herein.
2.2 Amendment No. 1 to Acquisition and Merger Agreement between National
Bank of the Redwoods and Codding Bank, dated September 21, 1994, filed
as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated
September 21, 1994, and by this reference incorporated herein.
3. Amended and restated By-Laws of the Registrant, filed as Exhibit 3 to
the Registrant's 1994 Annual Report on Form 10-K and by this reference
incorporated herein.
4.1 Form of Indenture (including form of Notes) between the Registrant and
the Bank of New York, as Trustee, relating to the issuance of 8.50%
Subordinated Notes due 2004, filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-2 dated December 13, 1993
(Registration No. 33-71324), and by this reference incorporated
herein.
4.2 Certificate of Determination of the Rights, Preferences, Privileges
and Restrictions of the Registrant's 7.80% Noncumulative Convertible
Perpetual Preferred Stock, Series A, filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-2 dated February 16,
1993 (Registration No. 33-56962), and by this reference incorporated
herein.
10.1* Severance Compensation Agreement between Allied Savings Bank, F.S.B.
and Terance O'Mahoney, filed as Exhibit 10.1 to the Registrant's 1990
Annual Report on Form 10-K and by this reference incorporated herein.
28
<PAGE>
10.2* Amendment No. 1 to Severance Compensation Agreement between Allied
Savings Bank, F.S.B. and Terance O'Mahoney dated as of January 1,
1993, filed as Exhibit 10.2 to the Registrant's 1992 Annual Report on
Form 10-K and by this reference incorporated herein.
10.3* Employment Agreement between Allied Savings Bank, F.S.B. and Martin B.
McCormick, dated as of July 1, 1990, filed as Exhibit 10.5 to the
Registrant's 1992 Annual Report on Form 10-K and by this reference
incorporated herein.
10.4* Amendment No. 1 to Employment Agreement between Allied Savings Bank,
F.S.B. and Martin B. McCormick, dated as of January 1, 1993, filed as
Exhibit 10.6 to the Registrant's 1992 Annual Report on Form 10-K and
by this reference incorporated herein.
10.5* Employment Agreement between National Bank of the Redwoods and Patrick
W. Kilkenny, dated as of January 1, 1994, filed as Exhibit 10.7 to the
Registrant's 1993 Annual Report on Form 10-K and by this reference
incorporated herein.
10.6 Lease, dated August 30, 1988, between National Bank of the Redwoods
and 137 Group, a general partnership, filed as Exhibit 10.1 to the
Registrant's 1989 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.7 Lease, Dated April 18, 1990, between Allied Savings Bank, F.S.B. and
Stony Point West, General Partnership, filed as Exhibit 10.2 to the
Registrant's 1990 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.8* The Registrant's 401 (k) Profit Sharing Plan, filed as Exhibit 28.1 to
the Registrant's Registration Statement on Form S-8 dated June 12,
1990 (Registration No. 33-35377), and by this reference incorporated
herein.
10.9* The Allied Savings Bank, F.S.B. 1986 Stock Option Plan, filed as
Exhibit 28.1 to the Registrant's Registration Statement on Form S-8
dated June 28, 1991 (Registration No. 33-41503), and by this reference
incorporated herein.
10.10* The National Bank of the Redwoods Stock Option Plan, filed as Exhibit
28.1 to the Registrant's Post-Effective Amendment No. 1 to
Registration Statement on Form S-4 dated March 27, 1989 (Registration
No. 33-24642), and by this reference incorporated herein.
10.11* The Registrant's Amended and Restated 1991 Stock Option Plan, filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form S-8
filed on July 8, 1992 (Registration No. 33-49372), and by this
reference incorporated herein.
10.12* The Registrant's Performance Incentive Bonus Plan, filed as Exhibit
10.13 to the Registrant's 1992 Annual Report on Form 10-K, and by this
reference incorporated herein.
29
<PAGE>
10.13 The Registrant's Dividend Reinvestment and Stock Purchase Plan, filed
as Exhibit 10.14 to the Registrant's 1992 Annual Report on Form 10-K,
and by this reference incorporated herein.
10.14* The Registrant's Phantom Stock Plan, filed as Exhibit 10.16 to the
Registrant's 1993 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.15* Phantom Stock Agreement between the Registrant and John H. Downey,
Jr., dated as of January 1, 1994, filed as Exhibit 10.17 to the
Registrant's 1993 Annual Report on Form 10-K, and by this reference
incorporated herein.
10.16* The Registrant's Executive Salary Continuation Plan, filed as Exhibit
10.9 to the Registrant's Registration Statement on Form S-2 dated
December 13, 1993 (Registration No. 33-71324), and by this reference
incorporated herein.
10.17* Director Retirement Plan, filed as Exhibit 10.10 to the Registrant's
Registration Statement on Form S-2 dated December 13, 1993
(Registration No. 33-71324), and by this reference incorporated
herein.
10.18* Chairman Retirement Agreement, dated November 30, 1993, between the
Registrant and John H. Downey, Jr., filed as Exhibit 10.11 to the
Registrant's Registration Statement on Form S-2 dated December 13,
1993 (Registration No. 33-71324), and by this reference incorporated
herein.
10.19* Lease, dated December 23, 1993 between Allied Bank, F.S.B. and Santa
Rosa Corporate Center Associates II, filed as Exhibit 10.21 to the
Registrant's 1994 Annual Report on Form 10-K, and by this reference
incorporated herein.
11. Statement re Computation of Per Share Earnings.
12.1 Statement re Computation of Ratio of Earnings to Fixed Charges.
12.2 Statement re Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends.
13. Annual Report to Security Holders.
21. Subsidiaries of the Registrant.
24. Consent of Deloitte & Touche LLP.
(b) REPORTS ON FORM 8-K.
The Company filed the following Current Reports on Form 8-K during the last
quarter of 1995:
1. On October 31, 1995 reporting the declaration of a quarterly dividend of
19.5 cents per share on the Registrant's 7.80% Noncumulative Convertible
Perpetual Preferred Stock.
30
<PAGE>
2. On October 30, 1995 reporting the earnings for the quarter ended September
30, 1995.
(c) EXHIBITS.
See Item 14(a)3 and the Index to Exhibits.
(d) EXCLUDED FINANCIAL STATEMENTS
Not applicable.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
REDWOOD EMPIRE BANCORP
By: /S/ JOHN H. DOWNEY, JR. Dated: March 5, 1996
-----------------------
John H. Downey, Jr.
Chairman of the Board
And By: /S/ PATRICK W. KILKENNY Dated: March 6, 1996
-----------------------
Patrick W. Kilkenny
President and Chief Executive Officer
(Principal Executive Officer)
And By: /S/ JAMES E. BECKWITH Dated: March 6, 1996
-----------------------
James E. Beckwith
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
And By: /S/ GALE D. BRIDGEMAN Dated: March 5, 1996
-----------------------
Gale D. Bridgeman
Vice President and Controller
(Principal Accounting Officer)
32
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/S/ ORLANDO J. ANTONINI Dated: March 11, 1996
- -----------------------------
Orlando J. Antonini, Director
/S/ HASKELL E. BOYETT Dated: March 5, 1996
- -----------------------------
Haskell E. Boyett, Director
/S/ JOHN H. DOWNEY, JR. Dated: March 5, 1996
- -----------------------------
John H. Downey, Jr., Director
and Chairman of the Board
/S/ PATRICK W. KILKENNY Dated: March 6, 1996
- -----------------------------
Patrick W. Kilkenny, Director
/S/ JOHN R. OLSEN Dated: March 5, 1996
- -----------------------------
John R. Olsen, Director
/S/ WILLIAM B. STEVENSON Dated: March 5, 1996
- -----------------------------
William B. Stevenson, Director
/S/ TOM D. WHITAKER Dated: March 5, 1996
- -----------------------------
Tom D. Whitaker, Director
and Vice Chairman of the Board
33
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
11. Statement re Computation of Per Share Earnings.
12.1 Statement re Computation of Ratio of Earnings to Fixed
Charges.
12.2 Statement re Computation of Ratio of Earnings to Fixed
Charges and Preferred Dividends.
13. Annual Report to security holders.
21. Subsidiaries of the Registrant.
24. Consent of Deloitte & Touche LLP.
34
<PAGE>
Exhibit 11
Redwood Empire Bancorp
EARNINGS PER COMMON SHARE
Earnings per common and common equivalent shares are computed by dividing
net income applicable to common stock by the total of the average number of
common shares outstanding and the additional dilutive effect of stock
options outstanding during the respective period. The calculations give
effect to the 3 percent stock dividends declared in 1993 and 1992. The
dilutive effect of stock options is computed using the average market price
of the common stock for the period for primary earnings per share.
Earnings per common share, assuming full dilution, are computed by dividing
net income by the average number of common shares outstanding during the
period, the dilutive effect of the Convertible Preferred Stock assuming
conversion at the time it was issued, and the additional dilutive effect of
stock options outstanding during the period. The dilutive effect of
outstanding stock options is computed using the greater of the closing
market price or the average market price of the common stock for the
period.
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---------------------------------
(in thousands)
<S> <C> <C> <C>
Net income (loss) $3,313 ($3,035) $4,564
Dividends on preferred stock 336 448 432
-------- -------- --------
Net income (loss) applicable to common stock $2,977 ($3,483) $4,132
-------- -------- --------
-------- -------- --------
Average number of common shares outstanding 2,671 2,649 2,480
Average number of common and common equivalent
shares outstanding 2,680 2,649 2,679
Average number of common shares outstanding -
assuming full dilution 3,179 2,649 3,171
Earnings per common and common equivalent share:
Primary net income (loss) per share $1.11 ($1.31) $1.54
Fully diluted net income (loss) per share 1.04 (1.31) 1.44
</TABLE>
<PAGE>
Exhibit 12.1
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)
<TABLE>
<CAPTION>
Year Ended
December 31
1995
----------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Net income $3,313
Tax provision 2,359
Fixed charges:
Other interest expense 4,941
-------
Earnings before taxes and fixed charges $10,613
-------
-------
Ratio of earnings to fixed charges 2.15
-------
-------
INCLUDING INTEREST ON DEPOSITS
Fixed charges, per above $4,941
Interest on deposits 22,730
-------
Total fixed charges and interest on deposits $27,671
-------
-------
Earnings before taxes and fixed charges, per above $10,613
Interest on deposits 22,730
-------
Total earnings before taxes, fixed charges and
interest on deposits $33,343
-------
-------
Ratio of earnings to fixed charges 1.20
-------
-------
Surplus $5,672
-------
-------
The 1995 earnings are adequate to cover fixed charges by the amount noted above.
</TABLE>
<PAGE>
Exhibit 12.2
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENT
(in thousands, except ratios)
<TABLE>
<CAPTION>
Year Ended
December 31
1995
-----------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Net income $3,313
Tax provision 2,359
Other interest expense 4,941
-------
Earnings before taxes and fixed charges $10,613
-------
-------
Fixed charges per above $4,941
Preferred stock dividends 336
-------
Fixed charges including preferred stock dividends $5,277
-------
-------
Ratio of earnings to fixed charges and preferred stock
dividend requirements 2.01
-------
-------
INCLUDING INTEREST ON DEPOSITS
Fixed charges, including preferred stock dividends $5,277
Interest on deposits 22,730
-------
Total fixed charges and interest on deposits $28,007
-------
-------
Earnings before taxes and fixed charges, per above $10,613
Interest on deposits 22,730
-------
Total earnings before taxes, fixed charges and
interest on deposits $33,343
-------
-------
Ratio of earnings to fixed charges 1.19
-------
-------
Surplus $5,336
-------
-------
</TABLE>
The 1995 earnings are adequate to cover fixed charges by the amount noted above.
<PAGE>
1995
ANNUAL
REPORT
[REDWOOD EMPIRE BANCORP IN SCRIPT]
[4 PHOTO MONTAGE OF REDWOOD TREE PARTS]
[REDWOOD EMPIRE BANCORP LOGO]
<PAGE>
[REDWOOD EMPIRE BANCORP LOGO]
[REDWOOD EMPIRE BANCORP IN SCRIPT]
Redwood Empire Bancorp and its consolidated subsidiaries provide diverse
financial products and services. Redwood's commercial bank subsidiary, National
Bank of the Redwoods, offers financial services primarily to business and
professionals in the North Coast counties of California. Redwood's subsidiary,
Allied Bank, F.S.B., conducts mortgage banking activities throughout Northern
and Central California and Oregon.
Redwood's business plan includes the development of fee-based products and
services which will provide insulation to the Company's results from changes in
interest rates.
Redwood's stock is listed and traded on the American Stock Exchange under the
symbol "REB."
Note: All per share information set forth in this Annual Report has been
adjusted as appropriate to reflect 3% stock dividends paid in January 1994,
1993, 1992 and 1991.
<PAGE>
DEAR SHAREHOLDERS
We are pleased to report significant improvement in the consolidated financial
condition and consolidated results of operations of Redwood Empire Bancorp as of
and for the year ended December 31, 1995. The successful development and
implementation of our turnaround strategy relating to our Allied Bank subsidiary
along with a favorable external environment provided for a dramatic rebound in
several key measurements of financial performance and strength of the Company.
For the year ended December 31, 1995 the Company recorded net income of
$3,313,000 or $1.04 per share as compared to a net loss of $3,035,000 or $1.31
per share in 1994. The Company's capital ratios were also improved. The
consolidated leverage ratio, which is a key regulatory capital adequacy measure,
improved from 4.08% as of December 31, 1994 to 5.14% as of December 31, 1995 or
a 26% increase. As of December 31, 1995 the Company and its subsidiaries
maintained capital in excess of what is deemed by Federal Banking Regulators as
"well capitalized". Total assets of the Company, which ballooned to
$630,652,000 as of December 31, 1994, were reduced to $557,910,000 as of
December 31, 1995.
As most of you are aware, Redwood Empire Bancorp entered 1995 faced with
significant challenges. Allied Bank, F.S.B., the Company's mortgage banking arm
and wholly owned subsidiary, through balance sheet growth and geographic
expansion in 1994, created a higher than normal level of interest rate risk,
capital adequacy concerns and unprofitable operations for both Allied and the
Company.
[Graph of Fully Diluted Earnings per share 91-95]
1991 1992 1993 1994 1995
Fully Diluted Earnings per share $0.91 $1.10 $1.44 ($1.31) $1.04
The Company's management and Board of Directors met these challenges by the
development of a 1995 Allied business plan which called for asset reduction,
expense control, capital improvement and revenue diversification. Through a
1
<PAGE>
series of asset sales which disposed of all of Allied's held for sale COFI loan
position, Allied's total assets were reduced from $413,789,000 as of December
31, 1994 to $318,996,000 as of December 31, 1995. Allied's overhead, which
amounted to $20,315,000 in the year ended December 31, 1994, was reduced to
$15,638,000 in 1995 through the implementation of a cost reduction program.
With the development of Allied Diversified Credit, the savings bank's non-agency
lending arm, and increased construction lending, Allied was able to diversify
its revenue sources.
All these efforts were aided by a much improved interest rate environment.
This improvement is best evidenced by an improvement in the long bond rate which
was 7.89% of December 31, 1994 as compared to 6.03% as of December 31, 1995. As
a result of this improvement, Allied's mortgage loan originations in the second
half of 1995 amounted to $660 million as compared to $338 million in the same
period in 1994. This interest rate trend certainly bodes well for Allied in
1996 as our January mortgage loan originations amounted to $141 million as
compared to $16 million in January of 1995.
As a result of the above factors, Allied recorded net income of $2,202,000
for the year ended December 31, 1995 as compared to a net loss of $3,116,000 in
1994. Allied's capital ratios, as evidenced by its core capital ratio, improved
from 4.27% as of December 31, 1994 to 6.26% as of December 31, 1995. Its
interest rate risk is now within regulatory guidelines, as measured by the
Office of Thrift Supervision. The company is pleased with Allied's turnaround
performance.
During 1995 the Company embarked on an extensive strategic review of the
operations of Allied. As a result of this review, your Board of Directors has
initiated a process to evaluate various strategic options of the Company
relating to Allied. These options may include a sale, or partial sale of
Allied, or merging Allied into National Bank of the Redwoods. At the time of
this letter no determination has been made with respect to this evaluation
process.
[Graph of Capital Ratios]
Capital Ratios 1994 1995
Total Capital to Risk-weighted Assets 10.75% 11.68%
Tier 1 Capital to Risk-weighted Assets 6.55% 7.24%
Leverage Ratio 4.08% 5.14%
We are pleased to announce that National Bank of the Redwoods enjoyed
another record year in 1995. Net income for the Bank was $2,332,000 in 1995 as
compared to $1,816,000 in 1994. Total assets of the Bank amounted to
$238,791,000 at December 31, 1995 as compared to $215,553,000 one year ago. The
increase in net income for the Bank was the result of an increase in the Bank's
net interest income and growth in fee-based products and services. Growth
2
<PAGE>
of the Bank in 1995 was principally due to in-market deposit growth of the Bank.
As financial institutions are evaluated on their local market share and level of
core deposits, we are very pleased with the progress National Bank of the
Redwoods has made in these areas in 1995. The Company will continue to focus on
building National Bank of the Redwoods' penetration of the commercial banking
market in northern California through internal growth and acquisitions.
[Graph of High, Low, Close Stock Price]
<TABLE>
<CAPTION>
Quarter 1994 Quarter 1995
1 2 3 4 1 2 3 4
STOCK PRICE PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH $14.63 $13.88 $13.38 $10.50 $7.25 $9.25 $10.13 $9.38
LOW 11.75 12.25 10.50 7.00 5.75 6.38 7.25 7.50
CLOSE 13.25 13.25 10.50 7.13 6.75 8.50 8.88 8.00
</TABLE>
In October 1995 the Company announced the promotion of Patrick Kilkenny as
Chief Executive Officer. Mr. Kilkenny now serves as the Company's and National
Bank of the Redwoods' Chief Executive Officer. Mr. Kilkenny brings significant
financial institution expertise to the consolidated entity and its particularly
adept in product development and strategic planning.
[Graph of Return on Common Equity]
Return on common Equity 17.39% (13.22%) 12.39%
As we enter into 1996, we wish to reconfirm our Company's mission statement
to our shareholders. Our mission statement, which drives each and every
business decision made at your Company is simply to "increase shareholder
value." We believe this focus has, and will continue to set us apart from other
community-based financial institutions. We look forward to fulfilling this
mission statement in 1996.
/s/ John H. Downey, Jr.
John H. Downey, Jr.
Chairman of the Board
3
<PAGE>
CORPORATE PROFILE
Redwood Empire Bancorp is a financial institution holding company headquartered
in Santa Rosa, California, and operating in California, Oregon and Washington.
Its wholly-owned subsidiaries are National Bank of the Redwoods ("NBR"),
chartered in 1985, and Allied Bank, F.S.B., ("Allied"), chartered in 1986. The
Company's business strategy involves two principal business activities,
commercial banking and mortgage banking, which are conducted through NBR and
Allied, respectively.
NBR provides its commercial banking services through five retail branches
located in Sonoma County, California and one retail branch located in Mendocino
County, California. Loan services at NBR are generally extended to
professionals and to businesses with annual revenues of less than $10 million.
Commercial loans are primarily for working capital, asset acquisition and
commercial real estate. NBR generates noninterest income through merchant draft
processing by virtue of its status as a Principal Bank of Visa/MasterCard. As a
Preferred Lender under the Small Business Administration ("SBA") Loan Guarantee
Program, NBR generates noninterest income through premiums received on the sale
of the guaranteed portions of SBA loans and the resulting on-going servicing
income on its SBA portfolio. In addition, NBR offers its customers cash
management services through internally-developed proprietary software. The
Company's strategy with respect to NBR is to increase NBR's penetration of the
commercial banking market in Northern California's coastal counties through
internal growth and acquisitions and to develop or enhance fee-based products
and services. In November 1994, NBR acquired Codding Bank, a California-
chartered bank headquartered in Sonoma County, California. In connection with
the acquisition, NBR added two branches and approximately $42 million in assets.
In October, 1994 NBR also opened a new branch in Mendocino County, California.
The Company's mortgage banking business is conducted entirely through Allied.
The savings bank originates one-to-four family residential mortgage loans which
predominately conform to the underwriting standards set by Fannie Mae or Freddie
Mac.
LOAN PORTFOLIO
DECEMBER 31, 1995
Residential real estate mortgage 39%
Commercial real estate mortgage 15%
Commercial 15%
Real estate construction 16%
Installment and other 1%
Mortgage loans held for sale 14%
Allied also originates mortgage loans through its Allied Diversified Credit
division that do not comply with all standards established by governmental
agencies. All mortgage loan originations are packaged and sold into the
secondary market. Allied sells substantially all the servicing rights on the
mortgage loans it sells and from time to time may purchase mortgage loan
servicing rights from other companies, thereby generating ongoing servicing
fees. In addition, Allied originates construction loans for its portfolio.
4
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL
DATA AND PERFORMANCE RATIOS
<TABLE>
<CAPTION>
At or for the Year ended December 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Total interest income $ 47,374 $ 38,005 $ 27,465 $ 21,459 $ 21,351
Net interest income 19,703 17,339 14,980 11,087 9,483
Provision for loan losses 1,590 1,095 1,679 2,272 1,866
Other operating income 16,575 10,885 19,177 12,327 7,692
Net income (loss) 3,313 (3,035) 4,564 2,609 1,810
Net income (loss) available to common equity 2,977 (3,483) 4,132 2,609 1,810
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS:
Total assets $ 557,910 $ 630,652 $ 471,674 $ 326,730 $ 235,161
Total loans 368,224 384,569 210,257 185,366 144,896
Mortgage loans held for sale 62,620 138,003 168,619 68,186 41,511
Allowance for loan losses 5,037 5,787 5,209 4,320 2,441
Total deposits 458,393 469,008 351,775 295,100 207,129
Shareholders' equity 31,585 28,194 31,576 22,251 16,013
- --------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS:
Return on average assets .57% (.56%) 1.21% .97% .82%
Return on average common equity 12.39 (13.22) 17.39 13.80 12.03
Common dividend payout ratio N/A 7.70 2.76
Average equity to average assets 5.13 5.88 7.56 7.01 6.82
Leverage ratio 5.14 4.08 6.99 6.88 6.70
Tier 1 risk-based capital ratio 7.24 6.55 10.72 10.50 9.29
Total risk-based capital ratio 11.68 10.75 16.04 11.76 10.54
Net interest margin 3.63 3.40 4.20 4.48 4.70
Other operating expense to net interest
income and other operating income 79.98 113.46 72.06 70.51 70.42
Average earning assets to average
total assets 93.49 93.39 94.32 91.93 91.29
Nonperforming assets to total assets 1.28 1.34 1.72 1.94 1.63
Net loan charge-offs to average loans .60 .40 .40 .53 .57
Allowance for loan losses to total loans 1.37 1.50 2.48 2.33 1.68
Allowance for loan losses to nonperforming loans 101.88 104.97 122.65 104.15 100.04
- --------------------------------------------------------------------------------------------------------------------------
SHARE DATA:
Common shares outstanding (000) 2,679 2,663 2,598 2,470 1,823
Book value per common share $ 9.64 $ 8.43 $ 9.94 $ 9.01 $ 8.78
Primary earnings (loss) per share 1.11 (1.31) 1.54 1.11 .91
Fully diluted earnings (loss) per share 1.04 (1.31) 1.44 1.10 .91
Cash dividend per common share .105 .125 .03
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Redwood Empire Bancorp ("Redwood" and with its subsidiaries, the "Company") is a
financial institution holding company headquartered in Santa Rosa, California.
The Company's business strategy involves two principal business activities,
commercial banking and mortgage banking which are conducted through its two
principal subsidiaries, National Bank of the Redwoods, a national bank ("NBR"),
and Allied Bank, F.S.B., a federal savings bank ("Allied"). Commercial banking
activities include portfolio lending, including construction loans, the
origination for sale and servicing of Small Business Administration ("SBA")
loans, various deposit programs and numerous fee-based services. Mortgage
banking activities relate principally to the origination of mortgage loans for
sale, servicing of mortgage loans sold to investors, and sale and purchase of
mortgage loans and servicing rights.
The Company derives its income from three principal sources: (1) net interest
income, which is the difference between the interest income it receives on
interest-earning assets and the interest expense it pays on interest-bearing
liabilities; (2) mortgage banking operations, which involve the origination for
sale and sale of real estate secured loans, the sale of mortgage loan servicing
rights, and mortgage loan servicing fee income on loans serviced; and (3) fee
income, which includes fees earned on deposit services, income from SBA lending,
electronic-based cash management services and merchant sales draft processing.
In an effort to increase shareholder value the Board of Directors is currently
evaluating strategic options relating to Allied. These options include a sale
or partial sale of Allied or a merger of Allied into NBR. The ultimate
resolution of this evaluation process and actions stemming therefrom, if any,
cannot currently be determined.
The following analysis of the Company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements of Redwood Empire Bancorp, related notes thereto, and other
information presented elsewhere in this Annual Report. Average balances,
including such balances used in calculating financial and performance ratios,
are generally a blend of daily averages for NBR and for Allied, which management
believes are representative of the operations of the Company.
ACQUISITIONS
On November 4, 1994, NBR acquired Codding Bank, a California-chartered bank
headquartered in Rohnert Park, California ("Codding"). The purchase price of
Codding totalled $7,028,000 in cash, including merger related expenses. At the
merger date, the fair value of Codding's assets totalled approximately
$42,048,000, including loans of approximately $28,294,000 and investment
securities of approximately $7,935,000 and the fair value of liabilities assumed
was approximately $43,224,000, including deposits of $42,817,000. The Company
recorded goodwill of $1,176,000 which is being amortized over 15 years on a
straight-line basis. The Company's consolidated financial statements include
the results of Codding beginning October 31, 1994.
RESULTS OF OPERATIONS
The Company's financial results in 1995 improved significantly from the prior
year due primarily to improvements in net interest income, improved mortgage
banking operations, increased other fee income and reduced corporate overhead.
The Company reported net income of $3,313,000, or $1.04 per fully-diluted common
share for 1995. In 1994, the Company reported a net loss of $3,035,000 (a loss
of $1.31 per fully-diluted share). The Company's net income in 1993 was
$4,564,000 ($1.44 per fully-diluted share).
Return on average assets for the year ended December 31, 1995 was .57%, as
compared to (.56%) and 1.21% for the years ended December 31, 1994 and 1993.
Return on average common equity was 12.39% for the year ended December 31, 1995,
as compared to (13.22%) and 17.39% for the years ended December 31, 1994 and
1993.
The Company's mortgage banking operations accounted for approximately $138,000
or 2% of total operating profit in 1995, compared to an operating loss of
$9,821,000 in 1994. In 1993, mortgage banking accounted for approximately
$4,484,000 or 51% of the Company's operating profit. The improved performance
in 1995 in mortgage banking operations was attributable to a favorable interest
rate environment, increased production of fixed rate loans and reduced
noninterest expense. The decrease in 1994 when compared to 1993 was primarily
due to the decreased gain on sale of loans recorded in 1994, restructuring
charges associated with the closing of several production offices and the
increased overhead attributable to the mortgage banking segment prior to the
restructuring. See Note Q to the Consolidated Financial Statements for a
description of operating income and for additional information relating to the
Company's two principal business lines.
NET INTEREST INCOME. For 1995, the Company's net interest income increased by
$2,364,000, to $19,703,000, as compared to $17,339,000 in 1994. Net interest
income was $14,980,000 in 1993. This represents an annual increase of
approximately 14% in 1995 and 16% in 1994. The increase in 1995 when compared to
1994 is primarily atributable to an increase in construction lending and to
afull year impact of the Codding acquistion. The increase in 1994 when
compared to 1993 was in part due to the Codding acquisition and an increase
in residential mortgage and construction loans.
The following table presents for the years indicated the distribution of
consolidated average assets, liabilities and shareholders' equity, as well as
the total dollar amounts of interest income from average earning assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual
loans are included in the calculation of the average balances of loans, and
interest not accrued is excluded.
6
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Portfolio loans $390,664 $ 38,052 9.74% $287,257 $ 26,057 9.07% $197,858 $ 18,941 9.57%
Mortgage loans held for sale 71,395 4,417 6.19 163,495 9,397 5.75 113,961 6,768 5.94
Investment securities 49,044 3,187 6.50 30,235 1,381 4.57 20,890 1,040 4.98
Federal funds sold 27,777 1,581 5.69 25,140 1,006 4.00 19,048 592 3.11
Interest-bearing deposits due
from financial institutions 3,467 137 3.95 3,661 164 4.48 4,862 124 2.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 542,347 47,374 8.73 509,788 38,005 7.46 356,619 27,465 7.70
- -----------------------------------------------------------------------------------------------------------------------------------
Other assets 43,758 41,463 26,181
Less allowance for
loan losses (6,023) (5,353) (4,706)
- -----------------------------------------------------------------------------------------------------------------------------------
Total average assets $580,082 $545,898 $378,094
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Transaction accounts $116,316 4,367 3.75 $114,266 3,679 3.22 $107,557 3,423 3.18
Time deposits 304,396 18,363 6.03 233,896 11,239 4.81 169,212 8,122 4.80
Other borrowings 71,593 4,941 6.90 105,009 5,748 5.47 28,413 940 3.31
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 492,305 27,671 5.62 453,171 20,666 4.56 305,182 12,485 4.09
Demand deposits 51,946 44,283 37,026
Other liabilities 6,054 16,339 7,289
Shareholders' equity 29,777 32,105 28,597
- -----------------------------------------------------------------------------------------------------------------------------------
Total average liabilities and
shareholders' equity $580,082 $545,898 $378,094
Net interest spread 3.11 2.90 3.61
Net interest income and
net interest margin $19,703 3.63 $17,339 3.40 $14,980 4.20
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's average earning assets for 1995 increased approximately 6%, or
$32,559,000, to $542,347,000, as compared to $509,788,000 for 1994. Average
earning assets increased approximately 43% in 1994 as compared to 1993. The
growth in average earning assets for 1995, as well as in 1994 and 1993, was
derived principally from portfolio loans, which increased 36% for 1995 and 45%
for 1994. Portfolio loans are the Company's highest yielding category of earning
assets.
In addition, the average balance of investment securities increased
approximately 62% to $49,044,000 in 1995 as compared to $30,235,000 in 1994.
The following table sets forth changes in interest income and interest expense
for each major category of earning asset and interest-bearing liability, and the
amount of change attributable to volume and rate changes for the years
indicated. Changes not solely attributable to rate or volume have been
allocated to rate.
7
<PAGE>
<TABLE>
<CAPTION>
1995 Over 1994 1994 Over 1993
Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
INCREASE (DECREASE) IN INTEREST INCOME:
Portfolio loans (1), (2) $9,379 $ 2,616 $11,995 $8,555 $(1,439) $7,116
Mortgage loans held for sale (5,296) 316 (4,980) 2,942 (313) 2,629
Investment securities 860 946 1,806 465 (124) 341
Federal funds sold 105 470 575 189 225 414
Interest-earning deposits with other institutions (9) (18) (27) (31) 71 40
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 5,039 4,330 9,369 12,120 (1,580) 10,540
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN INTEREST EXPENSE:
Interest-bearing transaction accounts 66 622 688 213 43 256
Time deposits 3,391 3,733 7,124 3,105 12 3,117
Other borrowings (1,829) 1,022 (807) 2,534 2,274 4,808
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase 1,628 5,377 7,005 5,852 2,329 8,181
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $3,411 $(1,047) $2,364 $6,268 $(3,909) $2,359
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include interest income which would have been earned on nonaccrual
loans had such loans performed in accordance with their terms.
(2) Loan fees of $2,112,000, $1,611,000, and $479,000 are included in interest
income for 1995, 1994 and 1993.
The net interest margin increased to 3.63% for the year ended December 31, 1995,
as compared to 3.40% and 4.20% for the years ended December 31, 1994 and 1993.
The increase in net interest margin in 1995 was primarily due to increased yield
on earning assets, substantially offset by increased liability costs. The yield
on earning assets increased to 8.73% in 1995 compared to 7.46% in 1994 and 7.70%
in 1993. The increase in 1995 was due to the seasoning of adjustable-rate
mortgage loans in the portfolio as many of these loans were originated in 1994
with "teaser" rates which reset to market in 1995. In addition, in 1995 the
Company increased its high-yielding construction loan portfolio from $33.3
million as of December 31, 1994 to $69.5 million as of December 31, 1995. The
decline in yield on earning assets in 1994 was principally attributable to the
practice of originating adjustable rate mortgage loans with teaser rates. (See
"Loan Portfolio" and "Mortgage Banking".)
The effective rates on interest-bearing liabilities increased to 5.62% for 1995,
as compared to 4.56% for 1994 and 4.09% for 1993. The increase in 1995 was due
primarily to an increase in high-cost time deposits and FHLB advances to fund
mortgage loan growth. The increase in 1994 when compared to 1993 is generally
attributable to a higher rate environment and the use of high-cost FHLB advances
and time deposits to fund mortgage loan growth.
PROVISION FOR LOAN LOSSES. Annual fluctuations in the provision for loan losses
result from management's regular assessment of the adequacy of the allowance for
loan losses. The provision for loan losses was $1,590,000 for the year ended
December 31, 1995, which represents an increase of $495,000 or 45% from 1994.
In 1994, the provision for loan losses of $1,095,000 represented a 35% decline
from $1,679,000 in 1993. See "Asset Quality".
OTHER OPERATING INCOME. Other operating income increased 52%, or $5,690,000,
to $16,575,000, for 1995, as compared to $10,885,000 for 1994. The Company's
other operating income for 1994 represented a decrease of $8,292,000 or 43%
from the $19,177,000 it received during 1993. The following table sets forth
the sources of other operating income for the years ended December 31, 1995,
1994 and 1993.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
Service charges on
deposit accounts $ 1,148 $ 1,009 $ 1,085
Merchant draft
processing, net 1,505 1,168 697
Loan servicing income 1,625 1,943 981
Net realized gains (losses)
on sale of investment
securities available for sale 386 (24) 242
Gain on sale of loans
and loan servicing 10,195 5,448 15,637
Other income 1,716 1,341 535
- -------------------------------------------------------------------------------
$ 16,575 $ 10,885 $ 19,177
- -------------------------------------------------------------------------------
</TABLE>
The primary cause of the increase in the Company's other operating income was
the increased gain on sale of loans and loan servicing of $4,747,000 in 1995
over 1994. As a result of an improved interest rate environment and higher
demand, in the first half of 1995 the Company was able to sell its $110 million
of COFI-based mortgage loans held for sale whose carrying amount had been
adjusted at December 31, 1994 by a $5,534,000 valuation allowance. As a result,
the Company recorded a gain of approximately $2,300,000 in 1995 associated with
the disposition of these loans. In addition, due to a much-improved interest
rate environment, the Company's origination of fixed rate loans increased in
1995 to approximately 84% of the total originations, as opposed to 67% in 1994
and 91% in 1993.
8
<PAGE>
Loan servicing revenues decreased to $1,625,000 for the year ended December 31,
1995, compared to $1,943,000 and $981,000 in 1994 and 1993. Future loan
servicing income will be dependent on prepayments of loans held in the Company's
servicing portfolio, the volume of additional loans added to this portfolio and
any future bulk servicing sales. See "Mortgage Banking" and Note B of Notes to
Consolidated Financial Statements.
Other income increased $375,000 to $1,716,000 in 1995 from $1,341,000 in 1994
and $535,000 in 1993 primarily due to merchant draft processing performed by
NBR. The Company took advantage of the interest rate environment and relief
under SFAS No. 115 and sold securities in 1995 for a gain of $386,000.
Securities gains of $242,000 were recorded in 1993 compared to losses of $24,000
recorded in 1994. See Note E of Notes to Consolidated Financial Statements.
OTHER OPERATING EXPENSE. In 1995 other operating expense decreased $3,007,000
or 9% as a direct result of the Company's cost-cutting measures enacted in the
last half of 1994 and the first half of 1995. In 1994 the increase in other
expense of $7,408,000 or 30% when compared to 1993 related primarily to the
Company's mortgage banking operations and related staffing additions and a
restructuring charge recorded in 1994 (described below) attributable to those
mortgage banking operations. Excluding the restructuring charge recorded in 1994
and recovery recorded in 1995, other operating expenses decreased $1,142,000 or
4% over 1994 and increased 20% or $4,999,000 over 1993.
Salary and employee benefits expense and occupancy and equipment increased each
period. Salary and employee benefits expense for 1995 increased $221,000, or 2%,
to $14,368,000, as compared to $14,147,000 for 1994. This compared with a 13%
increase during 1994 over the 1993 salary and employee benefits expense of
$12,533,000. The increases during 1995 and 1994 were due to the salaries and
benefits resulting from higher full-time-equivalent staff levels, payments under
the Company's management bonus plan in 1993 and general salary and benefit
increases. The Company's full-time-equivalent staff levels were 353, 336 and 373
at December 31, 1995, 1994 and 1993, respectively. There were no payments made
under the management bonus plan in 1995 or 1994.
Occupancy and equipment expense was $5,544,000 for 1995, an increase of 10%, or
$519,000, over 1994 occupancy and equipment expense of $5,025,000. This increase
was primarily attributable to the addition of three branch offices by NBR in
late 1994 and annual lease payment increases. The Company's 1994 occupancy
expense represented a 55% increase over its 1993 level of $3,237,000 due to the
opening of several loan production offices by Allied and the addition of the NBR
branch offices.
During the third and fourth quarters of 1994, the Company implemented major cost
reduction programs in response to declining origination volumes in the Company's
mortgage banking business and recorded a restructuring charge of $815,000 in the
third quarter and $1,594,000 in the fourth quarter. The restructuring entailed
closing wholesale mortgage production offices in Fresno, San Diego, San Ramon
and Windsor, California, Phoenix, Arizona and Seattle, Washington. The charge
also includes the effects of consolidation of leased space in the Sacramento and
Santa Rosa, California offices and termination of related employees. The
restructuring charge consisted of:
Severance expenses for 125 employees $ 374,000
Writeoff of the estimated present value
of discontinued leases 1,683,000
Writeoff of leasehold improvements,
furniture and fixtures 352,000
- ---------------------------------------------------------------------
$2,409,000
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
In 1995, the Company was able to sublease three properties allowing a recovery
of $456,000 related to leases discontinued in 1994.
At December 31, 1995, $619,000 of the restructuring charge remained in other
liabilities, substantially all of which is related to the future minimum lease
payments associated with the closed facilities. The Company is continuing to
seek sublease tenants for many of these closed facilities and an additional
portion of the restructuring charge may be reversed in future periods if the
Company is successful in entering into such arrangements. For further
discussion, see "Mortgage Banking."
The following table describes the components of other operating expense for the
years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Professional fees $2,187 $2,065 $1,803
Regulatory expense
and insurance 1,716 1,345 1,038
Postage and office supplies 1,224 1,013 1,295
Shareholder expenses
and Director fees 486 950 700
Advertising 481 919 531
Telephone 778 782 535
Electronic data processing 1,022 775 606
Net costs of other
real estate owned 163 609 131
Other 1,503 1,984 2,206
- -------------------------------------------------------------------------------
$9,560 $10,442 $8,845
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Other expenses were $9,560,000 during 1995, a decrease of $882,000, or 8%, over
1994 expenses of $10,442,000. This decrease was due to decreased mortgage
banking related advertising and telephone costs and decreased OREO expenses
partially offset by higher regulatory and insurance expenses. Other expenses
increased 18% in 1994 from $8,845,000 in 1993, primarily due to the significant
increase in the Company's general operating expenses directly attributable to
the growth of the Company's mortgage banking operations.
9
<PAGE>
INCOME TAXES. The Company's effective tax rate was 41.6% in 1995 and 42.0% in
1993 and a benefit of 38.0% in 1994. The benefit recorded in 1994 was limited
due to the absence of carrybacks and limitation on carryforwards for California
tax purposes.
LOAN PORTFOLIO
The Company concentrates its lending activities in three principal areas: real
estate mortgage loans (residential and commercial loans), real estate
construction loans and commercial loans. At December 31, 1995, these three
categories accounted for approximately 63%, 19% and 17%, respectively, of the
Company's loan portfolio. The interest rates charged for the loans made by the
Company vary with the degree of risk, the size and maturity of the loans, the
borrowers' depository relationships with the Company and prevailing money market
rates indicative of the Company's cost of funds.
Concentration of the Company's lending activities in the real estate sector
could have the effect of intensifying the impact on the Company of adverse
changes in the real estate market in the Company's lending areas. The ability
of the Company to continue to originate mortgage loans may be impaired by
adverse changes in local or regional economic conditions, adverse changes in the
real estate market, increasing interest rates, or acts of nature (including
earthquakes, which may cause uninsured damage and other loss of value to real
estate that secures the Company's loans). Due to the concentration of the
Company's real estate collateral, such events could have a significant adverse
impact on the value of such collateral or the Company's earnings.
The following table sets forth the amounts of loans outstanding by category as
of the dates indicated. There were no concentrations of loans exceeding 10% of
total loans which are not otherwise disclosed as a category of loans in the
table below.
<TABLE>
<CAPTION>
December 31, 1995 1994 1993 1992 1991
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate mortgage $168,022 $222,822 $102,254 $ 83,273 $ 33,936
Commercial real estate mortgage 65,655 61,347 35,909 25,051 20,942
Commercial 63,975 64,807 49,556 48,147 53,288
Real estate construction 69,504 33,348 21,476 20,598 25,803
Installment and other 4,103 5,063 3,033 9,804 12,223
Less deferred fees (3,035) (2,818) (1,971) (1,507) (1,296)
- --------------------------------------------------------------------------------------------------------------------
Total loans 368,224 384,569 210,257 185,366 144,896
Less allowance for loan losses (5,037) (5,787) (5,209) (4,320) (2,441)
- --------------------------------------------------------------------------------------------------------------------
Net loans $363,187 $378,782 $205,048 $181,046 $142,455
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
REAL ESTATE MORTGAGE LOANS. As of December 31, 1995, the Company's residential
mortgage loans totalled $168,022,000, or 45%, of its total loans. These loans
were predominantly originated in Sonoma and Mendocino Counties. The decrease in
residential real estate loans is due primarily to loan sales of $35.9 million
during the second quarter of 1995. The sale was executed to restructure
Allied's balance sheet and consequently improve Allied's capital ratios and
reduce its interest rate risk. In addition, in the third quarter of 1995, the
Company swapped $22.1 million of adjustable rate loans with Fannie Mae for a
mortgage-backed security which had a coupon rate of 7.295% and was scheduled to
mature in 2025; this security, which was classified as available for sale, was
sold prior to December 31, 1995, with settlement due from broker in January
1996.
The increase in residential mortgage loans in 1994 was directly attributable to
Allied's desire to increase its earning asset base. The increase in residential
mortgage loans in 1993 was primarily a result of a high level of refinancing
activity within Allied's primary service market. As a result of the Company's
acquisition of Lake on October 31, 1992, the Company's residential real estate
mortgage loan portfolio increased by approximately $25 million during the fourth
quarter of 1992. These loans were originated by Lake, prior to its acquisition,
throughout the greater San Francisco Bay Area. The remaining increase in the
Company's residential real estate mortgage loan portfolio resulted from loans
originated by the Company.
At December 31, 1995, $44 million, or 26%, of the Company's residential real
estate mortgage loans were fixed-rate mortgage loans having original terms
ranging from one to 30 years, with the majority having terms of five years or
less. Another $107 million, or 64%, were held as adjustable-rate mortgages,
substantially all of which adjust semi-annually, based on the Eleventh District
Cost-of-Funds Index published monthly by the FHLB. The balance of these loans,
$17 million, or 10%, consisted of multifamily loans, second mortgage loans and
loans on improved single-family lots. The majority of the Company's residential
mortgage loans have been underwritten for the Company's portfolio and do not
necessarily meet standard underwriting criteria for sale in the secondary
market. Approximately 81% of the total amount outstanding had principal balances
that were less than $300,000. The Company's residential real estate mortgage
loans predominately have loan-to-value ratios of 80% or less, using current loan
balances and appraised values as of the time of origination. The Company's
general policy is not to exceed an 80% loan-to-value ratio on residential
mortgage loans without mortgage insurance. The Company generally does not make
portfolio loans on a negative amortization basis.
As of December 31, 1995, the Company had outstanding $65,655,000 in commercial
mortgage loans, which constituted 18% of total loans. These loans were primarily
secured by owner-occupied commercial properties and have 5- to 15-year
maturities based upon 25- to 30-year amortization periods. Loan to appraised
values are generally 75% or
10
<PAGE>
less, using appraised values at the time of loan origination, and the loans are
predominantly for owner-occupied small office buildings or office/warehouses.
The Company originates commercial mortgage loans that are guaranteed by the SBA
up to 70% to 90% of the balance. The SBA guaranteed portion of such loans are
sold into the secondary market with the unguaranteed principal balance retained.
The aggregate retained unguaranteed principal balance of such loans was $11.4
million at December 31, 1995. Approximately 67% of the total amount outstanding
of commercial mortgage loans had principal balances that were less than
$250,000.
The Company also originates residential mortgage loans for sale. See "Mortgage
Banking."
REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans are primarily
for residential housing. The primary market focus is toward individual borrowers
and small residential and commercial projects. The economic viability of the
project and the borrower's past development record and creditworthiness are
primary considerations in the loan underwriting decision. The Company had
$69,504,000 in construction loans outstanding at December 31, 1995, comprising
19% of its total loans. These loans were almost entirely located in Sonoma and
Mendocino Counties. Approximately $73 million of these loans consisted of 178
single-family individual-borrower construction loans, and the remaining loans
included 69 subdivision projects, 66 land development projects and eight
commercial projects. At December 31, 1995, the largest single-family
construction loan commitment was $875,000, and the average commitment was less
than $365,000. The largest commitment for a subdivision project was $2.9
million, and the average subdivision commitment was less than $524,000. The
average commercial project involved a loan of approximately $811,000.
Construction loans are funded on a line-item, percentage of completion basis. As
the builder completes various line items (foundation, framing, electrical, etc.)
of the project, or portions of those line items, the work is reviewed by one of
several independent inspectors hired by the Company. Upon approval from the
inspector, the Company funds the draw request according to the percentage
completion of the line items that have been approved. The Company rotates
inspectors during construction to insure independent review. Actual funding
checks must be signed by an officer of the Company, and that officer must also
initial the line-item worksheet used to support the draw request. In addition,
senior management routinely inspects the various construction projects, all of
which are located in the Company's lending area.
Commercial real estate mortgage and construction lending contains potential
risks which are not inherent in other types of commercial loans. These potential
risks include declines in market values of underlying real property collateral
and, with respect to construction lending, delays or cost overruns which could
expose the Company to loss. In addition, risks in commercial real estate lending
include declines in commercial real estate values, general economic conditions
surrounding the commercial real estate properties, and vacancy rates. A decline
in the general economic conditions or real estate values within the Company's
market area could have a negative impact on the performance of the loan
portfolio or value of the collateral. Because the Company lends primarily within
its market area, the real property collateral for its loans is similarly
concentrated, rather than diversified over a broader geographic area. The
Company could therefore be adversely affected by a decline in real estate values
in its primary market area even if real estate values elsewhere in California
remained stable or increased.
COMMERCIAL LOANS. Commercial loans consist primarily of short-term financing
for businesses and professionals located in Sonoma and Mendocino Counties. At
December 31, 1995, these loans totalled $63,975,000, or 17%, of the Company's
total loans. The commercial loans are diversified as to industries and types of
businesses, with no material industry concentrations. Commercial loan borrowers
generally have deposit relationships with the Company. The commercial loans can
be unsecured or secured by various assets, including equipment, receivables,
deposits and other assets. Commercial loans may be secured by commercial or
residential property; however they are not classified as mortgage loans since
these loans are not typically taken out for the purpose of acquiring real estate
and the loans are short-term. In these cases, the mortgage collateral is often
taken as additional collateral. As of December 31, 1995, the size of individual
commercial loans varied widely, with 99% having principal balances less than
$350,000. At December 31, 1995, the Company had 41 commercial borrowers whose
aggregate individual liability exceeded $1,000,000.
LOAN COMMIMENTS. In the normal course of business, there are various
commitments outstanding to extend credit that are not reflected in the
financial statements. Annual review of the commercial credit lines and
ongoing monitoring of outstanding balances reduces the risk of loss
associated with these commitments. As of December 31, 1995, the Company had
outstanding $82,518,000 in unfunded mortgage loan commitments, $69,493,000 in
undisbursed loan commitments and $1,372,000 in standby letters of credit. The
Company's undisbursed commercial loan commitments represented primarily
business lines of credit. The undisbursed construction commitments
represented undisbursed funding on construction projects in process. The
mortgage loan commitments represented approved but unfunded mortgage loans
with the Company's mortgage banking business.
MORTGAGE BANKING
The Company is substantially dependent upon mortgage banking activity, which can
fluctuate significantly, in both volume and profitability, with changes in
interest rates. During 1992 and 1993, the Company experienced a significant
increase in mortgage banking activity as a result of an increase in refinancing
activity caused by declining interest rates. During 1994, increases in interest
rates sharply curtailed refinancing activity and the Company began to emphasize
the origination of adjustable-rate mortgages for home purchases. Rates again
began to decline in late 1995. For 1995, mortgage banking loan originations
totaled $840 million, or $233 million less than the $1,073 million originated in
1994. 1994 mortgage loan originations were $876 million less than the $1.949
billion originated in 1993. The mix of these originations has shifted from
approximately 91% fixed rate loans vs. 9% adjustable rate loans in 1993 to
approximately 67% fixed rate loans vs. 33% adjustable rate loans for 1994, and
again back to 84% fixed, 16% variable for 1995. The secondary market for
adjustable-rate mortgages is different than it is for fixed-rate mortgages, as
the buyers of such adjustable rate loans
11
<PAGE>
are often portfolio lenders rather than mortgage loan dealers who typically
securitize whole loans. Also, the "teaser" rates that may be in effect for the
first three to six months on many adjustable-rate mortgages are often set at
below-market interest rates. As a result, the Company's cost of funds to carry
such loans before they are sold into the secondary market can exceed the yields
received on them, which reduces the Company's net interest margin. In addition,
the Company's adjustable-rate loans based on the Federal Home Loan Bank's
Eleventh District cost of funds index ("COFI"), which is a slower-moving index
than an index based on U.S. Treasury rates and therefore prices for such loans
are lower in a rising rate environment.
The following table represents the Company's residential mortgage banking
origination and sale activity for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C>
(IN MILLIONS)
Mortgage banking
loan originations $ 840 $1,073 $1,949
Increase (decrease)
from prior period (22%) (45%) 99%
Mortgage banking
loan sales $ 887 $1,048 $1,859
Increase (decrease)
from prior period (15%) (44%) 105%
Mortgage banking revenue $ 16 $ 16 $ 22
</TABLE>
Due to the rapid rise in general interest rates in 1994, the demand for
adjustable rate loans tied to COFI was weakened. In addition, the Company did
not maintain an effective hedge against these adjustable rate loans because a
good correlation between a COFI loan and a contrived hedge is difficult to
achieve. Accordingly, the Company was required to record an unrealized loss of
$5,534,000 on mortgage loans held for sale to account for the decline in market
value of loans held for sale which was principally comprised of COFI loans.
This charge is included in gain on sale of loans in the consolidated statement
of operations. In response to the marketability problems associated with COFI
loans, the Company curtailed production of such loans in the fourth quarter of
1994.
In the beginning of 1994, the Company's mortgage banking segment, in response to
declining mortgage loan production volume in its Northern California market,
initiated a plan to open loan production offices in Portland, Oregon, Seattle,
Washington and Phoenix, Arizona as well as expanding into other California
cities. Mortgage loan production volume from most of these new offices did not
cover the related overhead, and with the prospect of continued losses, the
Company decided to close the new offices. See "Results of Operations - Other
Operating Expense" for further information on the restructuring.
All of the Company's mortgage loans held for sale meet certain investor
underwriting criteria regarding loan-to-value ratios, maturities, yields
and related documentation. The majority of the loans sold by the Company have
been sold to either Fannie Mae or Freddie Mac. These loans must conform to
established Freddie Mac/Fannie Mae underwriting criteria, including a maximum
dollar limit, maturities that vary from five to 30 years, loan-to-value ratios
of 80% or less (90% or less with mortgage insurance), adequate borrower
liquidity, and the ability of the borrower to service the mortgage debt (and all
other debt) out of income. Loans sold to other investors, such as savings and
loans, insurance companies and other conduits, usually are for dollar amounts in
excess of the Freddie Mac/Fannie Mae limit, but otherwise generally meet
standard Freddie Mac/Fannie Mae underwriting criteria.
As part of its mortgage banking activities, the Company enters into forward
commitments to sell mortgage loans, either in the form of mortgage-backed
securities ("MBS") or as whole loans. These commitments may be optional or
mandatory. Under optional commitments, a commitment fee is paid and the Company
carries no risk in excess of the loss of such fee in the event that the Company
is unable to deliver sufficient mortgage loans to fulfill the commitment.
Mandatory commitments may entail possible financial risk to the Company if it is
unable to deliver mortgage loans in sufficient quantity or at sufficient rates
to meet the terms of the commitments.
In order to minimize the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("committed pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that its inventory of mortgage loans held for sale and the
maximum portion of its committed pipeline that may close be hedged with forward
sales of MBS or options to buy or sell mortgage-backed or U.S. Treasury
securities. As such, the Company is not exposed to significant risk nor will it
derive any significant benefit from changes in interest rates on the price of
the mortgage loan inventory net of gains or losses of associated hedge
positions. The correlation between the price performance of the hedge
instruments and the inventory being hedged is very high due to the similarity of
the asset and the related hedge instrument. The Company is exposed to interest-
rate risk to the extent that the portion of loans from the committed pipeline
that actually closes at the committed price is less than the portion expected to
close in the event of a decline in rates, and in the event such decline in
closings is not covered by forward contracts and options to purchase MBS needed
to replace the loans in process that do not close at their committed price. The
Company determines the portion of its committed pipeline that it will hedge
based on numerous factors, including the composition of the Company's committed
pipeline, the portion of such committed pipeline likely to close, the timing of
such closings and the current interest rate environment.
The following lists the notional amounts of the various hedging instruments
outstanding at December 31, 1995 and the date through which exercise dates
extend:
12
<PAGE>
<TABLE>
<CAPTION>
Exercise Dates
Notional Amount Extend Through
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Forward contracts
to sell MBS $ 12,770 February 1996
Purchased put options-
MBS 30,000 April 1996
U.S. Treasury 80,000 March 1996
Purchased call options-
U.S. Treasury 25,000 March 1996
Written call options-
MBS 80,000 February 1996
Written put options-
U.S. Treasury 20,000 March 1996
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
MORTGAGE LOAN SERVICING. Mortgage loan servicing includes the collection and
remittance of loan payments, accounting for principal and interest, holding
escrow (impound) funds for payment of taxes and insurance, making inspections of
the mortgage premises when required, collection of past due amounts from
delinquent mortgagors, supervision of foreclosures in the event of unremedied
defaults, and general administration of the loans, either for the Company or for
the investors to whom the loans have been sold. The amounts of impound payments
held by the Company for others totalled $2,809,000, $2,407,000, and $1,721,000
on December 31, 1995, 1994 and 1993, respectively. Servicers of loans sold to
Freddie Mac or Fannie Mae generally receive a loan servicing fee of at least
.25% per annum on the declining principal balance of the loans being serviced,
but the actual fee can be higher depending upon the coupon rate of the loans
being serviced and the actual pass-through rate paid to the investor. Servicing
fees for other investors can vary according to market conditions at the time the
loan is sold.
In general, the value of the Company's loan servicing portfolio may be adversely
affected by declining mortgage interest rates and increasing loan prepayments.
Income generated from the portfolio may also decline in such an environment. In
a low interest rate environment, the rate at which mortgage loans are prepaid
tends to increase as borrowers refinance their loans. A high level of
prepayments for an extended period of time could have an adverse effect on the
value of the Company's PMSR pools, the level of the Company's outstanding loan
portfolio, and the size of its mortgage loan servicing portfolio. Additionally,
the Company's decision to sell servicing rights, and the timing of such sales,
may affect the Company's earnings on a quarter-to-quarter basis. Certain
factors, including demand and prepayment, delinquency and foreclosure rates,
could have an adverse effect on the Company's ability to sell servicing rights
and the value of those rights. In a rising interest rate environment,
prepayments of loans decrease and the value of the Company's loan servicing
portfolio will decline at a slower rate.
The following table sets forth the dollar amounts of the Company's mortgage loan
servicing portfolio at the dates indicated, the portion of the Company's loan
servicing portfolio resulting from loan originations and purchases and the
carrying value as a percentage of loans serviced.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated by the
Company and sold $ 266,712 $ 92,230 $ 888,289
Loans underlying
purchased mortgage
servicing rights 772,626 863,426 198,540
- -------------------------------------------------------------------------------
Total $1,039,338 $ 955,656 $1,086,829
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Purchased and
originated mortgage
servicing rights $ 5,970 $ 6,270 $ 1,439
Purchased and
originated mortgage
servicing rights as a
percentage of loans
serviced .57% .66% .13%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Since 1989, the Company has sold most of its mortgage banking loans on a
servicing released basis. Servicing on the loans sold to Freddie Mac and Fannie
Mae was sold to third parties, and servicing on the other mortgage banking loans
was sold, with the loans, to the investors. During the second half of 1993, the
Company retained the servicing rights on a greater portion of the mortgage
banking loans which it originated. Management may from time to time determine
to sell the Company's mortgage loans on a servicing released basis based on
market conditions. The Company sells loan servicing rights to offset the cost
of originating mortgage loans. The amount of loan servicing rights sold
annually by the Company may vary because of market fluctuations in the pricing
of loan servicing rights, and the amount of gain upon sale of servicing rights
may vary significantly from period to period. In 1995 and 1994, the Company
sold a portion of its originated servicing rights on a bulk basis for gains of
$149,000 and $10,150,000; no bulk servicing sales occurred in 1993. The Company
also purchases mortgage servicing rights ("PMSR") in order to better utilize its
servicing capabilities and to take advantage of market prices which management
believed to be favorable. The amounts the Company pays for the rights to
service loans are carried on the Company's statement of financial condition as
intangible assets and are amortized in proportion to, and over the estimated
life of, the related pools of mortgage loans using a method approximating the
interest method. The Company's carrying values of purchased mortgage servicing
rights, and the amortization thereon, are evaluated quarterly, by portfolios,
and such carrying values are adjusted for indicated impairments based on
management's best estimate of the remaining cash flows. Such estimates may vary
from the actual remaining cash flows due to unanticipated prepayments of the
underlying mortgage loans and increases in servicing costs. The Company's
carrying values of purchased mortgage servicing rights do not purport to
represent the amount that would be realizable by a sale of these assets in the
open market. The prepayment rates of the Company's PMSR pools ranged between 7%
and 33% during 1995 and between 22% and 42% during 1994. The Company's PMSR
amortization, including valuation adjustments, totalled $1,877,000 for 1995,
$1,024,000 for 1994, and $1,105,000 for 1993. The amortized values of the
Company's PMSR pools were $4,494,000, $6,270,000, and $1,439,000 at December 31,
1995, 1994 and 1993, respectively.
13
<PAGE>
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 122 "Accounting for Mortgage Servicing
Rights," an amendment of SFAS No. 65 in May 1995. SFAS No. 122 requires a
mortgage banking enterprise that purchases or originates mortgage loans with a
definitive plan to sell or securitize those loans and retain the mortgage
servicing rights to allocate the cost of the mortgage loans based on the
relative fair values of the mortgage loans and mortgage servicing rights at the
date of purchase or origination. Prior to SFAS No. 122, originated mortgage
servicing rights were not recognized for financial statement purposes with the
entire cost of the mortgage loan being allocated to the loan.
The Company early adopted SFAS No. 122 on January 1, 1995 as permitted. The
effect of adoption on the 1995 statement of operations was to increase gain on
sale of loans by $1,830,000 and net income by $857,000 ($.27 per fully-diluted
share). SFAS No. 122 prohibited the restatement of results for prior years.
Originated mortgage servicing rights of $1,476,000 arising in 1995 are included
in mortgage servicing rights on the balance sheet at December 31, 1995.
ASSET QUALITY
The Company attempts to minimize credit risk through its underwriting and credit
review policies. The Company conducts its own internal credit review processes
and, in addition, contracts with an independent loan reviewer who performs
monthly reviews of new loans and potential problem loans that meet predetermined
parameters. The Boards of Directors of both Allied and NBR have internal asset
review committees which review the asset quality of new and problem loans on a
monthly basis and report their findings to their full Boards. In management's
opinion, this loan review system facilitates the early identification of
potential problem loans.
The performance of the Company's loan portfolio is evaluated regularly by
management. The Company places a loan on nonaccrual status when one of the
following events occurs: any installment of principal or interest is 90 days or
more past due (unless, in management's opinion, the loan is well secured and in
the process of collection); management determines the ultimate collection of
principal of or interest on a loan to be unlikely; or the terms of a loan have
been renegotiated to less than market rates due to a serious weakening of the
borrower's financial condition.
With respect to the Company's policy of placing loans 90 days or more past due
on nonaccrual status unless the loan is well secured and in the process of
collection, a loan is considered to be in the process of collection if, based on
a probable specific event, it is expected that the loan will be repaid or
brought current. Generally, this collection period would not exceed 30 days.
When a loan is placed on nonaccrual status, the Company's general policy is to
reverse and charge against current income previously accrued but unpaid
interest. Interest income on such loans is subsequently recognized only to the
extent that cash is received and future collection of principal is deemed by
management to be probable. Where the collectibility of the principal of or
interest on a loan is considered to be doubtful by management, it is placed on
nonaccrual status prior to becoming 90 days delinquent.
On January 1, 1995, the Company adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure." These statements
address the accounting and reporting by creditors for impairment of certain
loans. In general, a loan is impaired when, based upon 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. These statements are
applicable to all loans, uncollateralized as well as collateralized, except
loans that are measured at the lower of cost or fair value. Impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, except that as a practical expedient, the
Company measures impairment based on a loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. Loans are
measured for impairment as part of the Company's normal internal asset review
process. The effect of adopting SFAS 114 was not material to the Company's 1995
balance sheet or statement of operations.
Interest income is recognized on impaired loans in a manner similar to that of
all loans. It is the Company's policy to place loans that are delinquent 90
days or more as to principal or interest on nonaccrual status unless secured and
in the process of collection, and to reverse from current income accrued but
uncollected interest. Cash payments subsequently received on nonaccrual loans
are recognized as income only where the future collection of principal is
considered by management to be probable.
At December 31, 1995 the Company's total recorded investment in impaired loans
was $5,202,000 of which $3,515,000 relates to the recorded investment for which
there is a related allowance for credit losses of $425,000 determined in
accordance with these statements and $1,687,000 relates to the amount of that
recorded investment for which there is no related allowance for credit losses
determined in accordance with these statements.
The average recorded investment in impaired loans during the year ended December
31, 1995 was $5,196,000. The related amount of interest income recognized during
the period that such loans were impaired was $187,000. No interest income was
recognized using a cash-basis method of accounting during the period that the
loans were impaired.
Interest due but excluded from interest income on loans placed on nonaccrual
status was $485,000, $236,000 and $193,000 for the years ended December 31,
1995, 1994 and 1993. Interest income received on nonaccrual loans was $554,000,
$166,000 and $43,000 for the years ended December 31, 1995, 1994 and 1993.
The following table sets forth the amount of the Company's nonperforming assets
as of the dates indicated.
14
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $4,201 $2,314 $3,964 $4,133 $2,049
Accruing loans past due 90 days or more 92 2,767 131 15 391
Restructured loans
(in compliance with modified terms) 651 432 152
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 4,944 5,513 4,247 4,148 2,440
Other real estate owned 963 1,814 3,633 2,184 1,397
Other assets owned 1,249 1,133 250
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $7,156 $8,460 $8,130 $6,332 $3,837
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Nonperforming loans to total loans 1.34% 1.43% 2.02% 2.24% 1.68%
Nonperforming assets to total assets 1.28 1.34 1.72 1.94 1.63
Allowance for loan losses to
nonperforming assets 70.39 68.40 64.07 68.22 63.62
Allowance for loan losses to
nonperforming loans 101.88 104.97 122.65 104.15 100.04
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming assets were $7,156,000, or 1.28% of total assets, as of
December 31, 1995, compared to $8,460,000, or 1.34% of total assets, as of
December 31, 1994.
Nonperforming loans totaled $4,944,000 at December 31, 1995, consisting of
$2,361,000 that were secured by residential real estate, $167,000 secured by
commercial real estate and the remaining $2,416,000 were either unsecured or
collateralized by various business assets, other than real estate.
Other real estate owned totaled $963,000 at December 31, 1995, consisting of
$344,000 in commercial real estate properties and $619,000 in residential
properties. Other assets owned were contract receivable rights and repossessed
personal property valued at $1,249,000.
Although the volume of nonperforming assets will depend on the future economic
environment, management of the Company has identified approximately $2.7 million
in potential nonperforming loans, in addition to the above mentioned assets, as
to which it has serious doubts as to the ability of the borrowers to comply with
the present repayment terms and which may become nonperforming assets, based on
known information about possible credit problems of the borrower.
The following table provides certain information for the years indicated with
respect to the Company's allowance for loan losses as well as charge-off and
recovery activity.
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $5,787 $5,209 $4,320 $2,441 $1,367
- -------------------------------------------------------------------------------------------------------------------
CHARGE-OFFS:
Residential real estate mortgage: 304 434 334 324 42
Commercial real estate mortgage 14 57 55 34 295
Commercial 1,985 593 347 473 404
Real estate construction 32 51 23
Installment and other 147 86 91 79 60
- -------------------------------------------------------------------------------------------------------------------
Total charge-offs 2,450 1,202 827 961 824
- -------------------------------------------------------------------------------------------------------------------
RECOVERIES:
Residential real estate mortgage 25 39 12
Commercial real estate mortgage 3 25
Commercial 84 8 101 32
Installment and other 1 1 3
- -------------------------------------------------------------------------------------------------------------------
Total recoveries 110 51 37 104 32
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs 2,340 1,151 790 857 792
Reserves acquired from Lake 464
Reserves acquired from Codding 634
Provision for loan losses 1,590 1,095 1,679 2,272 1,866
- -------------------------------------------------------------------------------------------------------------------
Balance at end of period $5,037 $5,787 $5,209 $4,320 $2,441
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs during the
year to average loans .60% .40% .40% .53% .57%
Allowance for loan losses to total loans 1.37 1.50 2.48 2.33 1.68
Allowance for loan losses to
nonperforming loans 101.88 104.97 122.65 104.15 100.04
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net charge-offs increased to $2,340,000 in 1995 primarily due to $1,446,000 in
charge-offs related primarily to three separate borrowers.
The allowance for loan losses is established through charges to earnings in the
form of the provision for loan losses. Loan losses are charged to, and
recoveries are credited to, the allowance for loan losses. The provision for
loan losses is determined after considering various factors such as loan loss
experience, current economic conditions, maturity of the portfolio, size of the
portfolio, industry concentrations, borrower credit history, the existing
allowance for loan losses, independent loan reviews, current charges and
recoveries to the allowance for loan losses, and the overall quality of the
portfolio, as determined by management, regulatory agencies, and independent
credit review consultants retained by the Company.
The adequacy of the Company's allowance for loan losses is based on specific and
formula allocations to the Company's loan portfolio. Specific allocations of the
allowance for loan losses are made to identified problem or potential problem
loans. The specific allocations are increased or decreased through management's
reevaluation of the status of the particular problem loans. Loans which do not
receive a specific allocation receive an allowance allocation based on a
formula, represented by a percentage factor based on underlying collateral, type
of loan, historical charge-offs and general economic conditions, which is
applied against the general portfolio segments.
At December 31, 1995, 1994 and 1993, the allowance for loan losses was
$5,037,000, $5,787,000 and $5,209,000, respectively, which represented 1.37%,
1.50%, and 2.48% of total loans for the respective years. The ratio of the
allowance for loan losses to loans reflects the blended ratios of Redwood's two
financial institution subsidiaries, Allied and NBR.
It is the policy of management to make additions to the allowance for loan
losses so that it remains adequate to cover anticipated charge-offs, and
management believes that the allowance at December 31, 1995 is adequate.
However, the determination of the amount of the allowance is judgmental and
subject to economic conditions which cannot be predicted with certainty.
Accordingly, the Company cannot predict whether charge-offs of loans in excess
of the allowance may be required in future periods.
The provision for loan losses reflects an accrual sufficient to cover projected
probable charge-offs and the maintenance of the allowance at a level deemed
adequate to absorb potential future losses.
The table below sets forth the allocation of the allowance for loan losses by
loan type as of the dates specified. The allocation of individual categories of
loans includes amounts applicable to specifically identified as well as
unidentified losses inherent in that segment of the loan portfolio and will
necessarily change whenever management determines that the risk characteristics
of the loan portfolio have changed.
Management believes that any breakdown or allocation of the allowance for loan
losses into loan categories lends an appearance of exactness which does not
exist, in that the allowance is utilized as a single unallocated allowance
available for all loans and undisbursed commitments. The allocation below
should not be interpreted as an indication of the specific amounts or loan
categories in which future charge-offs may occur.
16
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE Allowance Allowance Allowance Allowance
FOR % OF for % of for % of for % of for % of
LOSSES LOANS Losses Loans Losses Loans Losses Loans Losses Loans
- -----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate mortgage $1,922 45% $2,231 57% $1,770 49% $ 1,346 45% $290 24%
Commercial real estate mortgage 664 18 728 16 455 17 318 13 289 14
Commercial 1,082 17 1,441 17 1,488 23 1,294 26 1,051 36
Real estate construction 1,210 19 723 9 702 10 504 11 531 18
Installment and other 118 1 336 1 119 1 227 5 137 8
Unallocated 41 328 675 631 143
- -----------------------------------------------------------------------------------------------------------------------------------
Total $5,037 100% $5,787 100% $5,209 100% $ 4,320 100% $2,441 100%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET/LIABILITY MANAGEMENT
The fundamental objective of the Company's management of its assets and
liabilities is to maximize the economic value of the Company while maintaining
adequate liquidity and an exposure to interest rate risk deemed by management to
be acceptable. Management believes an acceptable degree of exposure to interest
rate risk results from the management of assets and liabilities through
maturities, pricing and mix to attempt to neutralize the potential impact of
changes in market interest rates. The principal sources of asset liquidity are
federal funds sold and loans held for sale. Secondary sources of liquidity are
loan repayments, investments available for sale, maturing investments, and
investments that can be used as collateral for other borrowings. At December 31,
1995, the Company had $9,969,000 in federal funds sold and $62,620,000 in loans
held for sale. Total investments were $43,964,000, of which $11,607,000 were
pledged.
Liability-based liquidity includes interest-bearing and noninterest bearing
retail deposits, which are a relatively stable source of funds, time deposits
from financial institutions throughout the United States, federal funds
purchased, and other short-term and long-term borrowings, some of which are
collateralized. The Company obtains collateralized FHLB advances solely through
Allied. Management uses FHLB advances as part of its funding strategy because
the rates paid for those advances are generally lower than the rates paid on
deposits. FHLB advances must be collateralized by the pledging of qualified
mortgage loans of Allied. Allied's FHLB borrowing limitation at December 31,
1995 was $80 million, which equaled approximately 25% of Allied's total assets
at December 31, 1995, compared to $145 million, or 35% of Allied's total assets,
at December 31, 1994. At December 31, 1995, Allied had $23,000,000 in FHLB
advances outstanding, as compared to $97,150,000 at December 31, 1994. As an
integral part of its funding strategy, the Company will consider alternatives to
FHLB advances while seeking to increase its maximum borrowing limits from the
FHLB as Allied's total assets increase from time to time. There is no assurance,
however, that the Company will be able to continue to obtain additional
increases in its FHLB borrowing authority, or that the rates paid on such
advances will be advantageous in the future. If additional increases are not
obtained, the Company's cost of funds could increase, as the Company may be
required to raise interest rates offered on deposit programs in order to retain
deposits in both the retail and wholesale markets to fund its mortgage banking
operations.
Time deposits from other financial institutions totalled $47.9 million, or 10%
of total deposits, at December 31, 1995, a decrease of $34.7 million from the
$82.6 million recorded at December 31, 1994, which amounted to 18% of total
deposits at that time. These deposits are used to supplement liquidity when the
Company determines that deposits from local sources would be more expensive. The
Company is able to retain such deposits at favorable rates when desired. The
volume of these deposits are dependent on anticipated mortgage origination
volumes.
The following table sets forth, as of December 31, 1995, the distribution of
repricing opportunities for the Company's earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap, the interest rate sensitivity gap ratio (i.e., earning assets
divided by interest-bearing liabilities) and the cumulative interest rate
sensitivity gap ratio.
17
<PAGE>
<TABLE>
<CAPTION>
After Three After Six After One
Within Months But Months But Year But
Three Within Within Within After
Months Six Months One Year Five Years Five Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold $ 9,969 $ 9,969
Investment securities and other 10,468 $ 3,014 $ 13,903 $ 6,041 $ 10,538 43,964
Mortgage loans held for sale 62,620 62,620
Loans 154,373 78,442 66,358 38,051 31,000 368,224
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 237,430 81,456 80,261 44,092 41,538 484,777
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing transaction accounts 129,436 129,436
Time deposits 97,301 54,869 57,300 53,885 263,355
Other borrowings 47,871 47,871
Subordinated notes 12,000 12,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 274,608 54,869 57,300 53,885 12,000 452,662
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (37,178) $ 26,587 $ 22,961 $ (9,793) $ 29,538 $ 32,115
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap $ (37,178) $(10,591) $ 12,370 $ 2,577 $ 32,115
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap ratio .86 1.48 1.40 .82 3.46
Cumulative interest rate sensitivity gap ratio .86 .97 1.03 1.01 1.07
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's gap position is substantially dependent upon the volume of
mortgage loans held for sale and held in the portfolio. These loans generally
have maturities greater than five years; however, mortgage loans held for sale
are generally sold within 5 to 60 days of funding and therefore are classified
in the above table as repricing within three months. The Company enters into
commitments to sell such loans on a forward basis, usually within 30 to 60 days.
The amount of loans held for sale and the amount of forward commitments can
fluctuate significantly from period to period. Additionally, interest-bearing
transaction accounts, which consist of money market, demand and savings deposit
accounts, are classified as repricing within three months. Some of these
deposits may be repriced at management's option, and therefore a decision not to
reprice such deposits could significantly alter the Company's gap position.
Management expects that, in a declining rate environment, the Company's net
interest margin would be expected to decline, and, in an increasing rate
environment, the Company's net interest margin would tend to increase. The
Company has experienced greater mortgage lending activity through mortgage
refinancings and financing new home purchases as rates declined, and may
increase its net interest margins in an increasing rate environment if more
traditional commercial bank lending becomes a higher percentage of the overall
earning assets mix. There can be no assurance, however, that under such
circumstances the Company will experience the described relationships to
declining or increasing interest rates. In 1994, the net interest margin
decreased due to higher funding costs associated with mortgage originations.
This was coupled with teaser rates on new fundings, the flattened yield curve
and the increase in funding from FHLB advances rather than deposits, all of
which caused the net interest margin to decline.
The following table shows the maturity distribution of the Company's commercial
and real estate construction loans outstanding as of December 31, 1995, which,
based on remaining scheduled repayments of principal, were due within the
periods indicated.
<TABLE>
<CAPTION>
After One
Within Through After
One Year Five Years Five Years Total
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial $28,467 $26,586 $8,922 $ 63,975
Real estate construction 66,096 3,408 69,504
- ----------------------------------------------------------------------------------------------------
Total $94,563 $29,994 $8,922 $133,479
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Loans with fixed interest rates $37,171 $ 9,472 $3,817 $ 50,460
Loans with variable interest rates 57,392 20,522 5,105 83,019
- ----------------------------------------------------------------------------------------------------
Total $94,563 $29,994 $8,922 $133,479
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
LIQUIDITY
Liquidity management is monitored by Redwood, as well as by Allied and NBR.
Redwood's operations generate debt service costs and administrative costs
associated with regulatory reporting and overall planning, which may include
acquisition or merger costs. Aside from accessing the capital markets, Redwood's
primary source of liquidity is dividends from its financial institution
subsidiaries, which amounted to $1,087,000 in 1995 and $600,000 for 1994.
Redwood's subsidiaries did not pay dividends during 1993. It is Redwood's
general policy to retain excess capital at its subsidiaries, maintaining
Redwood's available capital at a level which Redwood's management believes to be
consistent with the safety and soundness of the Company as a whole. As of
December 31, 1995, Redwood held $1,623,000 in interest-bearing deposits at its
subsidiaries and a $3,000,000 subordinated note issued by NBR. At December 31,
1995, NBR could pay additional dividends to the Company of approximately
$4,328,000 without prior regulatory approval and Allied could pay additional
dividends of approximately $2,329,000. Management believes that at December 31,
1995, the Company's liquidity position was adequate for the operations of
Redwood and its subsidiaries for the forseeable future.
In order to enhance the Company's liquidity position, Redwood suspended the
payment of its quarterly dividend to common shareholders in the fourth quarter
of 1994. In the prior three quarters of 1994, Redwood had declared dividends
totaling $.105 per common share.
CAPITAL
A strong capital base is essential to the Company's continued ability to service
the needs of its customers. Capital protects depositors and the deposit
insurance fund from potential losses and is a source of funds for the
substantial investments necessary for the Company to remain competitive. In
addition, adequate capital and earnings enable the Company to gain access to the
capital markets to supplement its internal growth of capital. Capital is
generated internally primarily through earnings retention.
In 1993, the Company issued 575,000 shares of 7.80% Noncumulative Convertible
Perpetual Preferred Stock, Series A. The preferred stock is convertible, at the
option of the holder, into .8674 shares of common stock for each share of
preferred stock. The preferred stock may be redeemed after February 15, 1996,
at the option of the Company, at redemption prices which range from $10.55 at
February 15, 1996 to $10.00 after February 14, 2003. The preferred stock has a
liquidation preference of $10.00.
At the end of 1993, Redwood issued $12 million in long-term debt which qualifies
as supplemental capital under government capital regulations. The debt issued
was at an interest rate of 8.5% and matures in January 2004. See Notes N and O
to the Consolidated Financial Statements.
The Company and each of its principal subsidiaries are required to maintain
minimum capital ratios defined by various federal government regulatory
agencies. The FRB, the OCC and the OTS have each established capital guidelines,
which include minimum capital requirements. The regulations impose three sets of
standards: a "risk-based", "leverage" and "tangible" capital standard.
Under the risk-based capital standard, assets reported on an institution's
balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight. This standard
characterizes an institution's capital as being "Tier 1" capital (defined as
principally comprising shareholders' equity and noncumulative preferred stock)
and "Tier 2" capital (defined as principally comprising the allowance for loan
losses and subordinated debt). At December 31, 1993, 1994 and 1995, the Company
and its subsidiaries were required to maintain a total risk-based capital ratio
of 8%, including a Tier 1 capital ratio of at least 4%.
Under the leverage capital standard, an institution must maintain a specified
minimum ratio of Tier 1 capital to total assets, with the minimum ratio ranging
from 4% to 6%. The minimum core capital ratio for Allied is 4% and is based on
period end assets while the leverage ratio for the Company and NBR is based on
average assets for the quarter.
Allied is subject to a minimum tangible capital ratio of 1.5% of adjusted total
assets. It is anticipated that Allied will be subject to an OTS regulation
issued in August, 1993 that added an interest rate risk component to the risk-
based capital requirements of thrifts. The original effective date was to be
December 31, 1993 and the regulation has been postponed several times. The
effective date has now been postponed indefinitely until the OTS evaluates the
effectiveness of its appeals process. Under the proposed regulation, those
thrifts that have an above normal interest rate risk exposure must take a
deduction from the total capital available to meet their risk-based capital
requirement. This deduction will be equal to one-half of the difference between
the thrift's actual measured exposure and the normal level of exposure. The
actual deduction taken at any quarter end is equal to the lowest amount
calculated for the three quarters prior to the reporting date. A thrift's
actual measured interest risk is expressed as the change that occurs in its net
portfolio value ("NPV") as a result of an immediate 200 basis point increase or
decrease in interest rates (whichever results in the lower NPV) divided by the
estimated economic value of its assets, as calculated in accordance with OTS
instructions. An above normal decline in NPV is one that exceeds 2% of the
estimated economic value of its assets.
NBR and Allied maintain insurance on its customer deposits with the Federal
Deposit Insurance Corporation ("FDIC"). The FDIC manages the Bank Insurance
Fund ("BIF"), which insures deposits of commercial banks such as NBR, and the
Savings Association Insurance Fund ("SAIF"), which insures deposits of savings
associations such as Allied. FDICIA mandated that the two funds maintain
reserves at 1.25% of their respective federally insured deposits.
During 1995, the FDIC announced that the BIF had reached its mandated reserve
level, reducing insurance premiums on BIF-insured deposits, and subsequently
announcing that deposit insurance premiums on BIF-insured deposits would be
reduced at December 31, 1995. The SAIF fund has not yet met its mandated
reserve level. As a result, deposit insurance premiums attributable to BIF
deposits are less than those attributable to SAIF deposits.
There are numerous regulatory proposals before Congress to address the deposit
insurance premium differential between BIF- and SAIF-insured deposits. The most
recent plans consist of one-time insurance premium charges attributable to SAIF-
insured deposits sufficient to
19
<PAGE>
bring the SAIF up to its mandated reserve level, with a corresponding and
immediate reduction in SAIF premiums thereafter. Based on 87 basis points on
Allied's deposits at March 31, 1995, the resulting after-tax charge to the
Company would be approximately $1,670,000. As both the timing and final form of
any proposed regulations remain uncertain, no adjustments to the Company's
financial statements have been recorded at December 31, 1995.
The table below shows the capital ratios for the Company and its subsidiaries at
December 31, 1995.
<TABLE>
<CAPTION>
Company NBR Allied
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Total capital to risk
based assets 11.68% 12.19% 10.47%
Tier 1 capital to risk
based assets 7.24 9.41 9.22
Leverage ratio 5.14 7.47 N/A
Tangible ratio N/A N/A 6.26
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
In addition to these capital guidelines, the Federal Deposit Insurance Act of
1991 required each federal banking agency to implement a regulatory framework
for prompt corrective actions for insured depository institutions that are not
adequately capitalized. The Board of Governors of the Federal Reserve System,
FDIC, OCC and OTS have adopted regulations which became effective on December
19, 1992, implementing a system of prompt corrective action pursuant to Section
38 of the Federal Deposit Insurance Act and Section 131 of the FDIC Improvement
Act of 1991. The regulations establish five capital categories with the
following characteristics:
<TABLE>
<CAPTION>
Total Tier 1
Risk Based Risk Based Leverage
Capital Ratio Capital Ratio Ratio
- --------------------------------------------------------------------------
<S> <C> <C> <C>
"WELL CAPITALIZED" - THE
institution is not subject
to an order, written
agreement, capital
directive or prompt
corrective action
directive at least 10% at least 6% at least 5%
- -------------------------------------------------------------------------------
"ADEQUATELY CAPITALIZED"
- the institution
does not meet the
definition of a well-
capitalized institution at least 8% at least 4% at least 4%
- -------------------------------------------------------------------------------
"UNDERCAPITALIZED" less than 8% less than 4% less than 4%
- -------------------------------------------------------------------------------
"SIGNIFICANTLY
UNDERCAPITALIZED" less than 6% less than 3% less than 3%
- -------------------------------------------------------------------------------
"critically undercapitalized"
- the institution has a ratio
of tangible equity to total
assets of 2% or less
</TABLE>
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any of the
three "undercapitalized" categories, such as the declaration of the dividends or
other capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified
in one of the three "undercapitalized" categories are subject to certain
mandatory and discretionary supervisory actions. Mandatory supervisory actions
include: (1) increased monitoring and review by the appropriate federal banking
agency; (2) implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include: (1) requirements to
segment capital; (2) restriction upon affiliate transactions; (3) restrictions
upon deposit-gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purpose of the
regulations.
Under the most stringent capital requirement, the Company has approximately
$6,589,000 in excess capital before it becomes under-capitalized. Similarly,
Allied has approximately $4,657,000 and NBR has $7,697,000 in excess capital.
20
<PAGE>
QUARTERLY RESULTS
<TABLE>
<CAPTION>
UNAUDITED QUARTERLY STATEMENTS OF OPERATIONS DATA
(in thousands) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1994 1994 1994 1994 1995 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 3,656 $ 4,120 $ 4,449 $ 5,114 $ 4,612 $ 4,692 $ 4,823 $ 5,576
Provision for credit losses 245 270 291 289 300 370 385 535
Other operating income 5,468 4,984 1,931 (1,498) 4,433 4,121 3,525 4,496
Other operating expense 7,262 7,488 8,046 9,227 7,197 7,077 6,957 7,785
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,617 1,346 (1,957) (5,900) 1,548 1,366 1,006 1,752
Provision (benefit) for income taxes 691 607 (992) (2,165) 637 604 391 727
Net income (loss) $ 926 $ 739 $ (965) $(3,735) $ 911 $ 762 $ 615 $1,025
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available
for common stock $ 814 $ 627 $(1,077) $(3,847) $ 799 $ 650 $ 503 $1,025
Per share:
Primary earnings (loss) $ .29 $ .22 $ ( .40) $ (1.45) $ .30 $ .24 $ .19 $ .38
Fully-diluted earnings (loss) .28 .22 (.40) (1.45) .29 .24 .19 .32
Common dividend .035 .035 .035
Common Stock Prices:
High $14.63 $ 13.88 $ 13.38 $ 10.50 $ 7.25 $ 9.25 $ 10.13 $ 9.38
Low 11.75 12.25 10.50 7.00 5.75 6.38 7.25 7.50
Close 13.25 13.50 10.50 7.13 6.75 8.50 8.88 8.00
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net income in the fourth quarter of 1995 increased $4,760,000 compared to the
same quarter in 1994 primarily due to increased gains on sales of loans and
securities partially offset by increased loan loss and income tax provisions.
The net loss recorded in the fourth quarter of 1994 included a $5,534,000
valuation allowance on mortgage loans held for sale and a restructuring charge
of $1,594,000.
The results for the first quarter of 1995 were restated to reflect the adoption
of SFAS No. 122 as of January 1, 1995, accounting for an additional $167,000
($.05 per fully-diluted share) in the first quarter.
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
Redwood Empire Bancorp
Santa Rosa, California
We have audited the accompanying consolidated balance sheets of Redwood Empire
Bancorp and subsidiaries (Company) as of December 31, 1995 and 1994 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Redwood Empire Bancorp and
subsidiaries at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note B to the consolidated financial statements, the Company
changed its method of accounting for originated mortgage servicing rights
effective January 1, 1995 to conform with Statement of Financial Accounting
Standards No. 122.
DELOTTE TOUCHE LLP
January 24, 1996
22
<PAGE>
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $42,469 $35,454 $25,709
Interest on investment securities 3,187 1,381 1,040
Interest on federal funds sold 1,581 1,006 592
Interest on time deposits due from
financial institutions 137 164 124
- ---------------------------------------------------------------------------------------
Total interest income 47,374 38,005 27,465
- ---------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 22,730 14,918 11,545
Interest on other borrowings 3,841 4,617 931
Interest on subordinated notes 1,100 1,131 9
- ---------------------------------------------------------------------------------------
Total interest expense 27,671 20,666 12,485
- ---------------------------------------------------------------------------------------
Net interest income 19,703 17,339 14,980
Provision for loan losses 1,590 1,095 1,679
- ---------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 18,113 16,244 13,301
- ---------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 1,148 1,009 1,085
Merchant draft processing, net 1,505 1,168 697
Loan servicing income 1,625 1,943 981
Net realized gains (losses) on sale of
investment securities available for sale 386 (24) 242
Gain on sale of loans and loan servicing 10,195 5,448 15,637
Other income 1,716 1,341 535
- ---------------------------------------------------------------------------------------
Total other operating income 16,575 10,885 19,177
- ---------------------------------------------------------------------------------------
Other operating expense:
Salaries and employee benefits 14,368 14,147 12,533
Occupancy and equipment expense 5,544 5,025 3,237
Restructuring charge (456) 2,409
Other 9,560 10,442 8,845
- ---------------------------------------------------------------------------------------
Total other operating expense 29,016 32,023 24,615
- ---------------------------------------------------------------------------------------
Income (loss) before income taxes 5,672 (4,894) 7,863
Provision (benefit) for income taxes 2,359 (1,859) 3,299
- ---------------------------------------------------------------------------------------
Net income (loss) 3,313 (3,035) 4,564
Dividends on preferred stock 336 448 432
- ---------------------------------------------------------------------------------------
Net income (loss) available for common
stockholders $ 2,977 $(3,483) $ 4,132
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Earnings per common and common equivalent share:
Primary net income (loss) per share $ 1.11 $ (1.31) $ 1.54
Fully diluted net income (loss) per share 1.04 (1.31) 1.44
Dividends per common share .105 .125
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Assets:
Cash and due from banks $ 24,312 $ 18,436
Federal funds sold 9,969 14,918
Due from broker 20,859
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents 55,140 33,354
Interest bearing deposits due from financial institutions 417 512
Investment securities:
Held to maturity, at cost (market value: 1995 - $6,528,
1994 - $18,973) 6,528 19,485
Available for sale, at market (cost: 1995 - $37,195,
1994 - $22,825) 37,436 22,581
- ------------------------------------------------------------------------------------------------
Total investment securities 43,964 42,066
Mortgage loans held for sale 62,620 138,003
Loans:
Portfolio loans 368,224 384,569
Less allowance for loan losses (5,037) (5,787)
- ------------------------------------------------------------------------------------------------
Net loans 363,187 378,782
Premises and equipment, net 6,561 8,146
Mortgage servicing rights, net 5,970 6,270
Other real estate owned 963 1,814
Cash surrender value of life insurance 4,363 4,179
Other assets and interest receivable 14,725 17,526
- ------------------------------------------------------------------------------------------------
Total Assets $557,910 $630,652
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing demand deposits $ 65,602 $ 48,421
Interest bearing transaction accounts 129,436 120,855
Time deposits $100,000 and over 139,979 90,443
Other time deposits 123,376 209,289
- ------------------------------------------------------------------------------------------------
Total deposits 458,393 469,008
Other borrowings 47,871 112,075
Other liabilities and interest payable 8,061 9,375
Subordinated notes 12,000 12,000
- ------------------------------------------------------------------------------------------------
Total Liabilities 526,325 602,458
- ------------------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, no par value; authorized 2,000,000 shares;
issued and outstanding 575,000 shares; liquidation
preference of $10.00 per share 5,750 5,750
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding: 1995 - 2,679,227 shares,
1994 - 2,663,360 shares 18,728 18,609
Retained earnings 6,967 3,990
Unrealized gain (loss) on investment securities available
for sale, net of income taxes (1995 - ($101); 1994 - $90) 140 (155)
- ------------------------------------------------------------------------------------------------
Total Shareholders' Equity 31,585 28,194
- ------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $557,910 $630,652
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
gain (loss)
For the Years ended on investment
December 31, 1995, 1994 and 1993 Preferred Common Retained securities available
(IN THOUSANDS) Stock Stock Earnings for sale Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1993 $ $ 16,846 $ 5,675 $ $ 22,521
Issuance of preferred stock 5,750 5,750
Stock options exercised 370 370
Stock dividend 903 (903)
Cash dividends declared - preferred (432) (432)
Cash dividends declared - common (318) (318)
Preferred stock issuance costs (840) (840)
Unrealized losses on investment securities
available for sale, net of income taxes (39) (39)
Net income 4,564 4,564
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 5,750 18,119 7,746 (39) 31,576
Stock options exercised 490 490
Cash dividends declared - preferred (448) (448)
Cash dividends declared - common (273) (273)
Change in unrealized losses on investment
securities available for sale, net of
income taxes (116) (116)
Net loss (3,035) (3,035)
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 5,750 18,609 3,990 (155) 28,194
Stock options exercised 119 119
Cash dividends declared - preferred (336) (336)
Change in unrealized gains (losses) on investment
securities available for sale, net of income taxes 295 295
Net income 3,313 3,313
- ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 $ 5,750 $ 18,728 $ 6,967 $ 140 $ 31,585
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,313 $ (3,035) $ 4,564
- -----------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization, net 2,559 268 1,138
Deferred taxes (709) 664 (116)
Net realized losses (gains) on securities
available for sale (386) 24 (242)
Loans originated for sale (848,236) (1,089,567) (1,958,898)
Proceeds from sale of loans held for sale 887,249 1,080,249 1,868,723
Gain on sale of loans and loan servicing (10,195) (5,448) (15,637)
Provision for loan losses 1,590 1,095 1,679
Change in cash surrender value of
life insurance (169) 513 (4,692)
Change in other assets and interest
receivable 2,658 (4,238) (6,241)
Change in other liabilities and interest
payable (829) 1,517 2,998
Noncash restructuring charge (456) 2,035
Other, net (1,936) 359 636
- -----------------------------------------------------------------------------------------
Total adjustments 31,140 (12,529) (110,652)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 34,453 (15,564) (106,088)
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired 5,318
Net increase in loans (30,602) (108,401) (27,877)
Proceeds from sale of loans in portfolio 91,229 6,467 3,618
Purchases of investment securities
available for sale (51,438) (16,712)
Purchases of investment securities held
to maturity (20,215) (9,286) (19,704)
Sales of investment securities available
for sale 31,481 4,177 4,393
Maturities of investment securities
available for sale 21,000 9,100
Maturities of investment securities held
to maturity 18,811 5,122 7,637
Premises and equipment, net (1,096) (4,654) (2,532)
Purchase of mortgage servicing rights (101) (5,817) (730)
Change in interest bearing deposits due from
financial institutions 95 4,502 (3,718)
Proceeds from sale of other real estate owned 3,328 2,372 2,064
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 62,492 (107,812) (36,849)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in noninterest bearing transaction
accounts 17,181 (4,483) 11,210
Change in interest bearing transaction
accounts 8,580 (5,879) 9,568
Change in time deposits (36,376) 84,778 35,897
Change in other borrowings (64,204) 41,739 64,087
Issuance of subordinated notes 12,000
Issuance of stock 108 425 6,120
Dividends paid (448) (810) (621)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (75,159) 115,770 138,261
- -----------------------------------------------------------------------------------------
Net change in cash and cash equivalents 21,786 (7,606) (4,676)
Cash and cash equivalents at beginning
of period 33,354 40,960 45,636
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 55,140 $ 33,354 $ 40,960
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
(Continued)
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<CAPTION>
Year Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Income taxes $ 2,661 $ 582 $ 4,724
Interest expense 27,547 20,086 12,366
Noncash investing and financing activities:
Transfer from loans to other real
estate owned 2,434 1,853 3,075
Transfer from loans to other assets owned 1,344
Loans to facilitate sale of other real
estate owned 485 910
Transfer from mortgage loans held for sale
to loans 15,000 45,443
Transfer of investment securities from held
to maturity to available for sale 20,709
Components of cash acquired in acquisitions:
Fair value of assets, net of cash acquired $ 37,906
Liabilities assumed 43,224
- -----------------------------------------------------------------------------------------
Acquisitions, net of cash acquired $ 5,318
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS
Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the "Company") is
a financial institution holding company headquartered in Santa Rosa, California,
and operating in California, Oregon and Washington. Its wholly-owned
subsidiaries are National Bank of the Redwoods("NBR"), a national bank chartered
in 1985 and Allied Bank, F.S.B., ("Allied"), a federal savings bank chartered in
1986. The Company's business strategy involves two principal business
activities, commercial banking and mortgage lending which are conducted through
NBR and Allied, respectively.
NBR provides its commercial banking services through five retail branches
located in Sonoma County, California and one retail branch located in Mendocino
County, California. Loan services at NBR are generally extended to
professionals and to businesses with annual revenues of less than $10 million.
Commercial loans are primarily for working capital, asset acquisition and
commercial real estate. NBR generates noninterest income through merchant draft
processing by virtue of its status as a Principal Bank of Visa/MasterCard. As a
Preferred Lender under the Small Business Administration ("SBA") Loan Guarantee
Program, NBR generates noninterest income through premiums received on the sale
of the guaranteed portions of SBA loans and the resulting on-going servicing
income on its SBA portfolio. In November 1994, NBR acquired Codding Bank, a
California-chartered bank headquartered in Sonoma County, California. In
connection with the acquisition, NBR added two branches and approximately $42
million in assets. In October, 1994 NBR also opened a new branch in Mendocino
County, California.
The Company's mortgage lending business is conducted entirely through Allied.
Allied originates one-to-four family residential mortgage loans which
predominantly conform to the underwriting standards set by Fannie Mae or Freddie
Mac. Allied also originates mortgage loans through its Allied Diversified
Credit division that do not comply with all standards established by Fannie Mae
or Freddie Mac. Substantially all mortgage loan originations are packaged and
sold into the secondary market. Allied sells substantially all the servicing
rights on the mortgage loans it sells and from time to time may purchase
mortgage loan servicing rights from other companies, thereby generating ongoing
servicing fees. In addition, Allied originates construction loans for its
portfolio.
The Company's targeted commercial banking market area includes the California
counties north of San Francisco.
Allied's principal targeted mortgage banking territory includes Northern and
Central California and Oregon and Washington State. These areas are served by
four loan production offices located in Santa Rosa, San Jose and Sacramento,
California and Portland, Oregon, all of which provide retail and wholesale
lending. To fund its lending activities Allied maintains depository branches in
Santa Rosa, Ukiah and Lakeport, California.
In an effort to increase shareholder value the Board of Directors is currently
evaluating strategic options relating to Allied. These options include a sale
or partial sale of Allied or a merger of Allied into NBR. The ultimate
resolution of this evaluation process and actions stemming therefrom, if any,
cannot currently be determined.
NOTE B - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practice within the banking industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. A summary of the more
significant policies follows:
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Redwood Empire Bancorp and its wholly-owned subsidiaries, National
Bank of the Redwoods and Allied Bank, F.S.B. All material intercompany
transactions and accounts have been eliminated.
Certain reclassifications to the 1994 and 1993 financial statements were made to
conform to the 1995 presentation.
For the purpose of the statements of cash flows, cash and cash equivalents have
been defined as cash, demand deposits with correspondent banks, cash items in
transit, federal funds sold and amounts due from broker, which represents a
mortgage-backed security traded but not settled, with original maturities of 90
days or less at date of acquisition.
INVESTMENT SECURITIES. In May, 1993, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The Company
adopted SFAS No. 115 at December 31, 1993 and, accordingly, has classified its
investment securities as held to maturity or available for sale. Securities
held to maturity are carried at cost adjusted by the accretion of discounts and
amortization of premiums. The Company has the ability and intent to hold these
investment securities to maturity. Securities available for sale may be sold to
implement the Company's asset/liability management strategies and in response to
changes in interest rates, prepayment rates and similar factors. Available for
sale securities are recorded at market value and unrealized gains or losses, net
of income taxes, are included in shareholders' equity. Gain or loss on sale of
investment securities is based on the specific identification method.
28
<PAGE>
LOANS AND THE ALLOWANCE FOR LOAN LOSSES. Loans are stated at the principal
balance outstanding net of allowance for loan losses and deferred loan fees.
Loan fees net of certain related direct costs to originate loans are deferred
and amortized over the contractual life of the loan using a method approximating
the interest method. Loan fees and direct costs related to the origination of
loans held for sale are recognized as a component of gain or loss on sale of
mortgage loans when the related loans are sold.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated and is based on
management's continual evaluation of the economic climate and other factors
related to the collectability of loan balances. The factors considered by
management include growth and composition of the loan portfolio, overall
portfolio quality, review of specific problem loans, historical loss rates and
current economic conditions that may affect the borrower's ability to pay. The
actual results could differ significantly from management's estimates. The
allowance for loan losses is increased by provisions charged to operations and
reduced by loan charge-offs net of recoveries.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure." These statements address the accounting and
reporting by creditors for impairment of certain loans. In general, a loan is
impaired when, based upon 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. These statements are applicable to all loans,
uncollateralized as well as collateralized, except loans that are measured at
the lower of cost or fair value. Impairment is measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, except that as a practical expedient, the Company measures impairment
based on a loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. Loans are measured for impairment as part of
the Company's normal internal asset review process. The effect of adopting SFAS
114 was not material to the Company's 1995 balance sheet or statement of
operations.
Interest income is recognized on impaired loans in a manner similar to that of
all loans. It is the Company's policy to place loans that are delinquent 90
days or more as to principal or interest on nonaccrual status unless secured and
in the process of collection, and to reverse from current income accrued but
uncollected interest. Cash payments subsequently received on nonaccrual loans
are recognized as income only where the future collection of principal is
considered by management to be probable.
The Company originates loans to customers under a Small Business Administration
(SBA) program that generally provides for SBA guarantees of 70% to 85% of each
loan. The Company generally sells the guaranteed portion of each loan to a
third party and retains the unguaranteed portion in its own portfolio. A gain
is recognized on these loans through collection on sale of a premium over the
adjusted carrying value, through retention of an ongoing rate differential less
a normal service fee (excess servicing fee) between the rate paid by the
borrower to the Company and the rate paid by the Company to the purchaser, or
both.
To calculate the gain or loss on the sale, the Company's investment in an SBA
loan is allocated among the retained portion of the loan, excess servicing
retained and the sold portion of the loan, based on the relative fair market
value of each portion. The gain on the sold portion of the loan is recognized.
The excess servicing fees are reflected as an asset which is amortized over an
estimated life using a method approximating the interest method; in the event
future prepayments are significant and future expected cash flows are inadequate
to cover the unamortized excess servicing asset, additional amortization would
be recognized. SBA loans held for sale are carried at the lower of cost or
estimated market value, determined on an aggregate basis.
OTHER REAL ESTATE OWNED. Property acquired by the Company through foreclosure
is recorded at the lower of estimated fair value less estimated selling costs
(fair value) or cost at the date of foreclosure. At the time the property is
acquired, if the fair value is less than the loan amounts outstanding, any
difference is charged against the allowance for loan losses. After acquisition,
valuations are periodically performed and, if the carrying value of the property
exceeds the fair value, a valuation allowance is established by a charge to
operations. Subsequent increases in the fair value may reduce or eliminate the
allowance.
Operating costs on foreclosed real estate are expensed as incurred. Costs
incurred for physical improvements to foreclosed real estate are capitalized if
the value is recoverable through future sale.
MORTGAGE BANKING ACTIVITIES. The Company sells residential mortgage loans to a
variety of secondary market investors, including Freddie Mac and Fannie Mae.
Gains or losses on the sale of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related
mortgage loans sold.
Mortgage loans held for sale are carried at the lower of cost or market value as
determined by outstanding commitments from investors, indicators of value
obtained by management from independent third parties, current investor yield
requirements calculated on an aggregate loan basis and the market value of its
hedging instruments. Valuation adjustments are charged against the gain or loss
on sale of mortgage loans.
In order to minimize the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("committed pipeline"), the
Company utilizes various financial instruments, including derivatives. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk. All of the Company's derivative financial instruments are held or issued
for purposes other than trading.
29
<PAGE>
These instruments include forward sales of mortgage-backed securities ("MBS")
and options to sell or buy mortgage-backed or U.S. treasury securities.
Unrealized gains and losses resulting from changes in the market value of
uncommitted mortgage loans and interest rate locks and open hedge positions are
netted. Any net unrealized gain that results is deferred; any net unrealized
loss that results is recognized currently. Hedging gains and losses realized
before the hedged loans are sold are deferred. Unrealized or realized hedging
losses are recognized currently if deferring such losses would result in
mortgage loans held for sale and the interest rate locks being valued in excess
of their estimated net realizable value.
Option premiums paid for purchased put or call options are amortized on a
straight-line basis over the life of the option. Premiums received on written
call or put options are recognized when the option expires. Premiums paid or
received are included in the carrying values of the related hedged items for
purposes of determining lower of cost or market.
Purchased mortgage servicing rights represent the cost of acquiring the right to
service mortgage loans. Such amounts are amortized in proportion to, and over
the period of, estimated net servicing income based on methods which approximate
the interest method. The Company's carrying values of purchased mortgage
servicing rights, and the amortization thereon, are evaluated quarterly, by
portfolios, and such carrying values are adjusted for indicated impairments
based on management's best estimate of the remaining cash flows. Such estimates
may vary from the actual remaining cash flows due to unanticipated prepayments
of the underlying mortgage loans and increases in servicing costs. The
Company's carrying values of purchased mortgage servicing rights do not purport
to represent the amount that would be realizable by a sale of these assets in
the open market.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights," an
amendment of SFAS No. 65 in May 1995. SFAS No. 122 requires a mortgage banking
enterprise that purchases or originates mortgage loans with a definitive plan to
sell or securitize those loans and retain the mortgage servicing rights to
allocate the cost of the mortgage loans based on the relative fair values of the
mortgage loans and mortgage servicing rights at the date of purchase or
origination. Prior to SFAS No. 122, originated mortgage servicing rights were
not recognized for financial statement purposes with the entire cost of the
mortgage loan being allocated to the loan.
The Company early adopted SFAS No. 122 on January 1, 1995 as permitted. The
effect of adoption on the 1995 statement of operations was to increase gain on
sale of loans by $1,830,000 and net income by $857,000 ($.27 per fully-diluted
share). SFAS No. 122 prohibited the restatement of results for prior years.
Mortgage servicing rights are amortized in proportion to and over the period of
estimated net servicing income. The Company evaluates impairment of its
mortgage servicing rights quarterly. Impairment is measured on a disaggregated
basis using the state of origination as the predominant risk characteristic with
respect to originated mortgage servicing rights. Impairment of purchased
mortgage servicing rights is measured based on discrete acquisitions. Any
impairment is calculated as the difference between fair value and amortized cost
by stratum. Fair value is estimated on a loan by loan basis using market prices
under comparable servicing sale contracts, when available or, using a cash flow
model with current assumptions with respect to prepayments, servicing costs and
other significant factors. Impairment is recognized through a valuation
allowance by stratum.
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
forward contracts to sell mortgage-backed securities and options written. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the statement of financial position.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company manages credit risk with respect to MBS, and
options to sell or buy mortgage-backed or U.S. Treasury securities by entering
into agreements with entities approved by senior management and the Board of
Directors. These entities include Wall Street firms having primary dealer
status. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. For
forward contracts to sell mortgage-backed securities and options written, the
contract or notional amounts do not represent exposure to credit loss. The
Company controls the credit risk of its forward contracts through credit
approvals, limits and monitoring procedures.
Contract or notional amount
- --------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $152,011,000
Standby letters of credit 1,372,000
Financial instruments whose contract
amounts exceed the amount of credit risk:
Forward contracts 12,770,000
Options written 100,000,000
Loan commitments are typically contingent upon the borrower meeting certain
financial and other covenants, and such commitments typically have fixed
expiration dates and require payment of a fee. As many of these commitments are
expected to expire without being drawn upon, the total commitments do not
necessarily represent future cash
30
<PAGE>
requirements. The Company evaluates each potential borrower and the necessary
collateral on an individual basis. Collateral varies, but may include real
property, bank deposits, debt securities, equity securities, or business assets.
Standby letters of credit are conditional commitments written by the Company to
guarantee the performance of a customer to a third party. These guarantees
relate primarily to inventory purchases by the Company's commercial customers,
and such guarantees are typically short-term. Credit risk is similar to that
involved in extending loan commitments to customers and the Company accordingly
uses evaluation and collateral requirements similar to those of loan
commitments. Virtually all such commitments are collateralized.
Forward contracts are contracts for delayed delivery of mortgage-backed
securities in which the Company agrees to make delivery at a specified future
date of a specified instrument, at a specified yield. Risks arise from the
possible inability of counterparties to meet those terms of their contracts and
from movements in interest rates. The Company's exposure to risk in the event of
default by the counterparty is the difference between the contract price and the
current market price.
The Company enters into written call options for purposes of managing its
interest rate exposure from mortgage banking activities. These options are
contracts that allow the holder of the options to purchase a mortgage-backed
security at a specified price and within a specified period of time from the
seller, or writer, of the option. As a writer of options, the Company receives
a premium at the outset and then bears the risk of an unfavorable change in the
price of the financial instrument underlying the option. The Company believes
its risk on written call options is substantially limited through the
origination of mortgage loans that could be delivered in the event interest
rates decrease and the holder exercises its option to buy.
PREMISES AND EQUIPMENT. Premises and equipment consist of building, leasehold
improvements, furniture and equipment and are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful lives for financial reporting purposes and an
accelerated method for income tax reporting. Leasehold improvements are
amortized over the terms of the lease or their estimated useful lives whichever
is shorter.
INCOME TAXES. The Company accounts for income taxes using an asset and
liability approach, which requires the recognition of deferred tax assets and
liabilities at tax rates in effect when these balances reverse. Future tax
benefits attributable to temporary differences are recognized currently to the
extent that realization of such benefits is more likely than not. These future
tax benefits are measured by applying currently enacted tax rates.
EARNINGS PER COMMON SHARE. Earnings per common and common equivalent shares are
computed by dividing net income applicable to common stock by the total of the
average number of common shares outstanding and the additional dilutive effect
of stock options outstanding during the respective period. The calculations
give effect to the 3 percent stock dividend declared in 1993. The dilutive
effect of stock options is computed using the average market price of the common
stock for the period for primary earnings per share.
Earnings per common share, assuming full dilution, are computed by dividing net
income by the average number of common shares outstanding during the period, the
dilutive effect of the Convertible Preferred Stock assuming conversion at the
time it was issued, and the additional dilutive effect of stock options
outstanding during the period. The dilutive effect of outstanding stock options
is computed using the greater of the closing market price or the average market
price of the common stock for the period.
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss) $3,313 ($3,035) $4,564
Dividends on preferred stock 336 448 432
- -------------------------------------------------------------------------
Net income (loss) applicable
to common stock $2,977 ($3,483) $4,132
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Average number of common
shares outstanding 2,671 2,649 2,480
Average number of common
and common equivalent
shares outstanding 2,680 2,649 2,679
Average number of common
shares outstanding assuming
full dilution 3,179 2,649 3,171
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS. The Company is required to adopt SFAS No. 123
"Accounting for Stock-Based Compensation" in 1996. SFAS No. 123 establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. Under SFAS No. 123, the
Company may either adopt the new fair value-based accounting method or continue
the intrinsic value-based method and provide pro forma disclosures of net income
and earnings per share as if the accounting provisions of SFAS No. 123 had been
adopted. The Company plans to adopt only the disclosure requirements of SFAS No.
123; therefore such adoption will have no effect on the Company's consolidated
net earnings or cash flows.
NOTE C - ACQUISITION
On November 4, 1994, NBR acquired Codding Bank, a California-chartered bank
headquartered in Rohnert Park, California ("Codding"). The amended acquisition
agreement (the "Agreement") provided for a two-step merger transaction in which
a wholly-owned non-bank subsidiary of NBR would first be merged into Codding,
followed immediately thereafter by the merger of Codding into NBR, with NBR
being the surviving entity. The transaction was structured as a
31
<PAGE>
cash-for-stock merger, in which shareholders of Codding received $12.12 per
share of Codding stock outstanding at the time of the acquisition. Holders of
outstanding options to purchase shares of Codding stock received $12.12 per
share covered by such options less the option exercise price per share. The
transaction was accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations". Under this method of
accounting, the purchase price is allocated to the respective assets acquired
and liabilities assumed based on their estimated fair values, net of applicable
income tax effects. The purchase price of Codding totalled $7,028,000 in cash,
including merger related expenses. At the merger date, the fair value of the
assets acquired totalled approximately $42,048,000, including loans of
approximately $28,294,000 and investment securities of approximately $7,935,000
and the fair value of liabilities assumed was approximately $43,224,000,
including deposits of $42,817,000. The Company recorded goodwill of $1,176,000
which is being amortized over 15 years on a straight-line basis. The Company's
consolidated financial statements include the results of Codding beginning
October 31, 1994.
The following Unaudited Pro Forma Combined Summary of Operations presents a pro
forma combined summary of operations of the Company and Codding for the years
ended December 31, 1994 and 1993 and it is presented as if the merger had been
effective on January 1, 1993. This pro forma combined historical summary of
operations was adjusted for the amortization of purchase accounting adjustments.
The Unaudited Pro Forma Combined Summary of Operations for the year ended
December 31, 1993, combines the historical results of the Company and Codding
for the year ended December 31, 1993, after giving effect to amortization of
purchase accounting adjustments.
The Unaudited Pro Forma Combined Summary of Operations data is intended for
informational purposes only and is not necessarily indicative of the future
results of operations of the Company, or the results of operations that would
have actually occurred had the Codding merger been in effect for the periods
presented.
UNAUDITED PRO FORMA COMBINED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31, 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Interest income $ 41,243 $ 30,809
Interest expense 21,682 13,763
- -------------------------------------------------------------------------------
Net interest income 19,561 17,046
Provision for loan losses 1,296 1,890
- -------------------------------------------------------------------------------
Net interest income after
provision for loan losses 18,265 15,156
Other operating income 11,036 19,308
Other operating expense 34,015 26,736
- -------------------------------------------------------------------------------
Income (loss) before income
taxes and accounting change (4,714) 7,728
Provision (benefit) for income taxes (1,780) 3,115
- -------------------------------------------------------------------------------
Income (loss) before accounting change (2,934) 4,613
Change in accounting for income taxes 20
Net income (loss) (2,934) 4,633
Dividends on preferred stock 448 432
- -------------------------------------------------------------------------------
Net income (loss) available for
common stock $ (3,382) $ 4,201
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Primary earnings (loss) per share $ (1.28) $ 1.57
Fully diluted earnings (loss) per share (1.28) 1.46
Weighted average shares outstanding:
Primary 2,649 2,679
Fully diluted 2,649 3,171
</TABLE>
NOTE D - CASH AND DUE FROM BANKS
The Company's subsidiaries are required to maintain average reserve balances
with the Federal Reserve Bank. The required reserve balance included in cash
and due from banks was approximately $3,307,000 and $2,439,000 at December 31,
1995 and 1994.
32
<PAGE>
NOTE E - INVESTMENT SECURITIES
An analysis of the investment security portfolio follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
(IN THOUSANDS) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995:
Held to maturity:
Mortgage-backed and other securities $ 2,638 $ $ $ 2,638
- ---------------------------------------------------------------------------------------------------
Total debt securities 2,638 2,638
FRB and FHLB stock 3,890 3,890
- ---------------------------------------------------------------------------------------------------
Total held to maturity $ 6,528 $ $ $ 6,528
- ---------------------------------------------------------------------------------------------------
Available for sale:
U.S. Government obligations $ 37,195 $ 267 $ 26 $ 37,436
- ---------------------------------------------------------------------------------------------------
Total available for sale $ 37,195 $ 267 $ 26 $ 37,436
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
DECEMBER 31, 1994:
Held to maturity:
U.S. Government obligations $ 9,329 $ $ 512 $ 8,817
Other securities 2,093 2,093
- ---------------------------------------------------------------------------------------------------
Total debt securities 11,422 512 10,910
FRB and FHLB stock 8,063 8,063
- ---------------------------------------------------------------------------------------------------
Total held to maturity $ 19,485 $ $ 512 $ 18,973
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Available for sale:
U.S. Government obligations $ 22,825 $ $ 244 $ 22,581
- ---------------------------------------------------------------------------------------------------
Total available for sale $ 22,825 $ $ 244 $ 22,581
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
Debt securities by contractual maturity at December 31, 1995, were due as
follows:
<TABLE>
<CAPTION>
Amortized Cost Market Value
- -----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Held to maturity:
One year or less $ 38 $ 38
After five years 2,600 2,600
- -----------------------------------------------------------------------
$ 2,638 $ 2,638
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Available for sale:
One year or less $ 9,968 $ 9,963
After one year through five years 15,349 15,492
After five years 11,878 11,981
- -----------------------------------------------------------------------
$ 37,195 $ 37,436
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
Proceeds from sales of investments in debt securities during 1995, 1994 and 1993
were $31,481,000, $4,177,000 and $4,393,000. These sales resulted in the
realization of gross gains of $386,000 for 1995 and $242,000 for 1993 and gross
losses of $24,000 for 1994.
During 1995, the FASB issued a Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". The Special Report provided the Company a one-time opportunity to
reassess the appropriateness of its designations of securities subject to the
accounting and reporting requirements of Statement 115, without calling into
question the intent to hold other debt securities to maturity in the future. In
accordance with the Special Report, in December 1995, the Company transferred
$20,709,000 in U.S. Government obligations with an unrealized gain of $145,000
from held to maturity to available for sale.
Securities carried at approximately $11,607,000 and $13,224,000 at December 31,
1995 and 1994 were pledged to secure public deposits, bankruptcy deposits, and
treasury tax and loan borrowings.
33
<PAGE>
NOTE F - MORTGAGE BANKING ACTIVITIES
As part of its mortgage banking activities, the Company enters into forward
commitments to sell mortgage loans, either in the form of mortgage-backed
securities or as whole loans. These commitments may be optional or mandatory.
Under optional commitments, a commitment fee is paid and the Company carries no
risk in excess of the loss of such fee in the event that the Company is unable
to deliver sufficient mortgage loans to fulfill the commitment. Mandatory
commitments may entail possible financial risk to the Company if it is unable to
deliver mortgage loans in sufficient quantity or at sufficient rates to meet the
terms of the commitments.
In order to minimize the risk that a change in interest rates will result in a
decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("committed pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that its inventory of mortgage loans held for sale and the
maximum portion of its committed pipeline that may close be hedged with forward
sales of MBS or options to buy or sell mortgage-backed or U.S. Treasury
securities. As such, to the extent the Company hedges its committed pipeline,
the Company is not exposed to significant interest rate risk nor will it derive
any significant benefit from changes in interest rates on the price of the
mortgage loan inventory net of gains or losses of associated hedge positions.
The correlation between the price performance of the hedge instruments and the
inventory being hedged is very high due to the similarity of the asset and the
related hedge instrument. The Company is exposed to interest-rate risk to the
extent that the portion of loans from the committed pipeline that actually
closes at the committed price is less than the portion expected to close in the
event of a decline in rates and, in the event such decline in closings is not
covered by options to purchase MBS needed to replace the loans in process that
do not close at their committed price. The Company determines the portion of its
committed pipeline that it will hedge based on numerous factors, including the
composition of the Company's committed pipeline, the portion of such committed
pipeline likely to close, the timing of such closings and the current interest
rate environment.
The following lists the notional amounts of the various hedging instruments
outstanding at December 31, 1995 and the date through which exercise dates
extend:
<TABLE>
<CAPTION>
Exercise Dates
Notional Amount Extend Through
- ------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Forward contracts to sell MBS $ 12,770 February 1996
Purchased put options:
MBS 30,000 April 1996
U.S. Treasury 80,000 March 1996
Purchased call options
- U.S. Treasury 25,000 March 1996
Written call options
- MBS 80,000 February 1996
Written put options
- U.S. Treasury 20,000 March 1996
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
The Company services mortgage loans and participating interests in mortgage
loans owned by investors. The unpaid principal balances of mortgage loans
serviced for others are as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Mortgage loan portfolios serviced for:
Freddie Mac $ 468,555 $ 510,604
Fannie Mae 411,707 376,455
Other investors 159,076 68,597
- -----------------------------------------------------------------------
$ 1,039,338 $ 955,656
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, the Company also serviced $19,900,000 and
$236,000,000 in loans and participating interests in loans owned by investors,
under subservicing agreements.
Escrow funds held in trust for loans serviced for others were $2,809,000 and
$2,407,000 at December 31, 1995 and 1994.
34
<PAGE>
The following table provides a summary of the Company's purchased ("PMSR") and
originated ("OMSR") mortgage servicing rights portfolio:
<TABLE>
<CAPTION>
OMSR
----------------------------------------
States
------------------------
PMSR California Other Total
- ------------------------------------------------- ----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 1, 1993 $ 1,814 $ $ $
Purchases 730
Amortization (813)
Valuation adjustments (292)
- ------------------------------------------------- ----------------------------------------
Balance, December 31, 1993 1,439
Purchases 5,855
Amortization (980)
Valuation adjustments (44)
- ------------------------------------------------- ----------------------------------------
Balance, December 31, 1994 6,270
Purchases 11
Originations 1,616 13 1,829
Amortization (1,787) (290) (38) (328)
Valuation adjustments (22) (3) (25)
- ------------------------------------------------- ----------------------------------------
Balance, December 31, 1995 $ 4,494 $ 1,304 $ 172 $ 1,476
- ------------------------------------------------- ----------------------------------------
- ------------------------------------------------- ----------------------------------------
</TABLE>
NOTE G - LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The Company primarily makes residential real estate loans in California, Oregon
and Washington and loans to individuals and small businesses primarily in Sonoma
and Mendocino Counties, California. There are no major industry segments in the
loan portfolio. Outstanding loans by type were:
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate mortgage $168,022 $222,822
Commercial real estate mortgage 65,655 61,347
Commercial 63,975 64,807
Real estate construction 69,504 33,348
Installment and other 4,103 5,063
Less deferred fees (3,035) (2,818)
- -----------------------------------------------------------------
Total loans 368,224 384,569
Less allowance for loan losses (5,037) (5,787)
- -----------------------------------------------------------------
Net loans $363,187 $378,782
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
A summary of the transactions in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year $5,787 $5,209 $4,320
Allowance obtained
through acquisition 634
Provision for loan losses 1,590 1,095 1,679
Loans charged off (2,450) (1,202) (827)
Recoveries 110 51 37
- --------------------------------------------------------------------------
Balance, end of year $5,037 $5,787 $5,209
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
At December 31, 1995 the Company's total recorded investment in impaired loans
(as defined by SFAS 114 and 118; see Note B) was $5,202,000 of which $3,515,000
relates to the recorded investment for which there is a related allowance for
loan losses of $425,000 determined in accordance with these statements and
$1,687,000 relates to the amount of that recorded investment for which there is
no related allowance for loan losses determined in accordance with these
statements.
The average recorded investment in impaired loans during the year ended December
31, 1995 was $5,196,000. The related amount of interest income recognized during
the period that such loans were impaired was $187,000. No interest income was
recognized using a cash-basis method of accounting during the period that the
loans were impaired.
35
<PAGE>
As of December 31, 1995 and 1994 there were $4,201,000 and $2,314,000 of loans
on which the accrual of interest had been discontinued. Interest due but
excluded from interest income on these nonaccrual loans was $485,000, $236,000
and $193,000 for the years ended December 31, 1995, 1994 and 1993. Interest
income received on nonaccrual loans was $554,000, $166,000 and $43,000 for the
years ended December 31, 1995, 1994 and 1993.
At December 31, 1995 and 1994, the Company had $92,000 and $2,767,000 in loans
past due 90 days or more in interest or principal and still accruing interest.
These loans were collateralized and in the process of collection.
The Company originates SBA loans for sale to investors. A summary of the
activity in SBA loans is as follows:
<TABLE>
<CAPTION>
December, 31 1995 1994 1993
- ----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
SBA guaranteed portion
of loans originated $ 8,509 $ 9,448 $ 9,720
SBA loans sold 8,992 8,097 9,163
Premium received at sale 700 689 965
SBA guaranteed portion of
loans serviced for others 36,203 31,833 24,714
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
The Company has loans receivable from executive officers, directors and related
parties. No preference is given to these individuals as these transactions are
made in the ordinary course of business at the Company's normal credit terms,
including interest rates and collateralization. At December 31, 1994, these
loans outstanding totalled $5,000; no balances were outstanding at December 31,
1995.
NOTE H -
PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
- ---------------------------------------------------------------
(in thousands)
<S> <C> <C>
Land $ 307 $ 307
Building and leasehold improvements 2,556 2,334
Furniture and equipment 10,917 10,944
- ---------------------------------------------------------------
Total premises and equipment 13,780 13,585
Less accumulated depreciation
and amortization 7,219 5,439
- ---------------------------------------------------------------
Premises and equipment, net $ 6,561 $ 8,146
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was
$2,647,000, $2,022,000 and $1,078,000.
The Company leases certain premises and equipment used in the normal course of
business. There are no contingent rental payments and the Company has three
subleased properties. Total rental expense under all leases, including
premises, totalled $2,172,000, $2,336,000 and $1,533,000 in 1995, 1994 and 1993.
Minimum future lease commitments are as follows: 1996 - $2,443,000; 1997 -
$2,353,000; 1998 - $2,169,000; 1999 - $1,476,000; 2000 - $197,000 and
thereafter - $951,000. Minimum future sublease receivables are as follows:
1996 - $85,000; 1997 - $79,000; and 1998 - $34,000.
NBR leases 34,000 square feet of office space for its main office from a
partnership that includes one director of a subsidiary as a minority partner.
The lease calls for payments of $62,455 per month plus operating cost
adjustments through November, 1999. Total lease payments for the years ended
December 31, 1995, 1994 and 1993 were $851,000, $839,000 and $753,000.
NOTE I - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $2,897 ($2,424) $2,502
State 171 (99) 913
- ----------------------------------------------------------------------
3,068 (2,523) 3,415
- ----------------------------------------------------------------------
Deferred:
Federal (1,191) 833 (68)
State 482 (169) (48)
- ----------------------------------------------------------------------
(709) 664 (116)
- ----------------------------------------------------------------------
$2,359 ($1,859) $3,299
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
A reconciliation of the statutory income tax rate to the effective income tax
rate of the Company is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at federal
statutory rate 35.0% 35.0% 35.0%
State franchise tax, net of
federal benefit 7.5 3.6 7.3
Other (.9) (.6) (.3)
- -------------------------------------------------------------------
41.6% 38.0% 42.0%
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences existing
between the financial statement basis and tax basis of the Company's assets and
liabilities. Deferred tax benefits attributable to temporary differences are
recognized to the extent that realization of such benefits is more likely than
not. The Company believes it is more likely than not that the net deferred tax
asset at December 31, 1995 will be utilized to reduce future taxable income.
Accordingly, there is no valuation allowance associated with deferred tax assets
at December 31, 1995. The tax effect of the principal temporary items creating
the Company's deferred tax benefit included in other assets and interest
receivable are:
36
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 1994
- -----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,300 $1,834
Mortgage servicing rights 597 75
Interest foregone on nonaccrual loans 336 66
Restructuring costs 280 762
Accrued expenses not yet deductible 276 72
Depreciation 201 (78)
- ------------------------------------------------------------------
Total deferred tax assets 2,990 2,731
- ------------------------------------------------------------------
Deferred tax liabilities:
Deferred loan fees 935 1,036
Installment sale of servicing 676
FHLB stock dividends 326 221
Securities and loans marked to
market for tax purposes 152 (479)
Premium on loan sales 125 56
Unrealized gain (loss) on securities
available for sale 101 (90)
State taxes 19 205
Other real estate owned 5 (111)
Other, net 53 461
- -----------------------------------------------------------------
Total deferred tax liabilities 1,716 1,975
- -----------------------------------------------------------------
Net deferred tax asset $1,274 $ 756
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
NOTE J - OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Advances from FHLB $ 23,000 $ 97,150
Warehouse credit line 10,477
Treasury, tax and loan note 1,463 2,869
Securities and loans sold under
agreements to repurchase 21,355 608
Federal funds purchased 1,445
Capital leases 608 971
- ------------------------------------------------------------------
$ 47,871 $112,075
- ------------------------------------------------------------------
</TABLE>
(a) ADVANCES FROM THE FHLB
The Company has a line of credit for short-term purposes with the Federal Home
Loan Bank (FHLB). There were $23,000,000 in advances drawn under this line of
credit at December 31, 1995 at 6.24% with an overnight maturity.
The average balance of FHLB advances was $46,600,000 for 1995 at an average
interest rate of 6.56%. The highest month-end balance during the year was
$112,150,000.
All borrowings from the FHLB must be collateralized, and the Company has pledged
approximately $85,430,000 of residential mortgage loans as of December 31, 1995,
to the FHLB to secure any funds it may borrow.
(b) WAREHOUSE CREDIT LINE
The Company was eligible for a warehouse credit line in an amount of $50,000,000
at December 31, 1994, subject to adequate collateralization in the form of
mortgage loans.
(c) FEDERAL FUNDS PURCHASED, SECURITIES AND LOANS SOLD UNDER AGREEMENTS TO
REPURCHASE AND TREASURY TAX AND LOAN NOTE
The Company enters into various short-term borrowing agreements which include
Treasury, Tax and Loan borrowings. These borrowings have maturities of one day
and are collateralized by investments or loans. Federal Funds purchased had
maturities of one day. Securities sold under agreements to repurchase have
maturities ranging from January to March 1996 with one agreement having no
predetermined maturity. Loans sold under agreements to repurchase had
maturities of one day.
The average balance of securities and loans sold under agreements to repurchase
was $21,395,000 for 1995 at an average interest rate of 5.88%. The highest
month-end balance during the year was $22,950,000.
(d) CAPITAL LEASES
The Company has $608,000 in capital leases at fixed rates from 2.73% to 4.50%.
The leases mature through August, 1997, and are collateralized by specific fixed
assets with a net carrying value of $376,000 at December 31, 1995.
37
<PAGE>
NOTE K - GAINS ON SALE OF LOANS AND LOAN SERVICING
The components of gains on sale of loans and loan servicing are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Gain (loss) on sale of
mortgage loans $ 9,091 $(5,391) $14,672
Gains on sale of SBA loans 955 689 965
Gains on bulk servicing sales 149 10,150
- ----------------------------------------------------------------------
$10,195 $ 5,448 $15,637
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
NOTE L - OTHER EXPENSES
The major components of other expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Professional fees $ 2,187 $ 2,065 $ 1,803
Regulatory expense
and insurance 1,716 1,345 1,038
Postage and office supplies 1,224 1,013 1,295
Shareholder expenses
and Director fees 486 950 700
Advertising 481 919 531
Telephone 778 782 535
Electronic data processing 1,022 775 606
Net costs of other
real estate owned 163 609 131
Other 1,503 1,984 2,206
- ----------------------------------------------------------------------
$ 9,560 $10,442 $ 8,845
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
NOTE M -
STOCK OPTIONS AND BENEFIT PLANS
The Company has assumed stock options outstanding that were issued under stock
option plans of its subsidiaries prior to their acquisitions and has adopted a
stock option plan in 1991 which was amended in 1992. There are 541,000 shares
available for options under the plans, with 400,000 shares granted but
unexercised at December 31, 1995.
Outstanding options for common stock at December 31, 1995, are exercisable at
various dates through 2005. The following table summarizes option activity:
<TABLE>
<CAPTION>
Number of Option Price
Shares per Share
- -------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1992 509,000 $ 4.80 - 10.44
Adjustment for stock dividends 15,000
Options granted 40,000 $ 9.25
Options exercised (52,000) $ 4.94 - $6.68
Options cancelled (3,000) $ 7.44
- -------------------------------------------------------------------------
Balance at December 31, 1993 509,000 $ 4.94 - 10.44
Options granted 55,000 $ 12.88 - 13.00
Options exercised (75,000) $ 4.94 - 8.24
Options cancelled (24,000) $ 6.68
- -------------------------------------------------------------------------
Balance at December 31, 1994 465,000 $ 4.94 - 13.00
Options granted 50,000 $ 8.25
Options exercised (16,000) $ 6.17 - 7.44
Options cancelled (99,000) $ 4.94 - 12.88
- -------------------------------------------------------------------------
Balance at December 31, 1995 400,000 $ 6.17 - 13.00
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
Senior management of the Company and its subsidiaries are eligible to
participate in an incentive bonus plan. Incentive bonus plan expenses were
$830,000 for 1993; there was no incentive bonus plan expense for 1994 or 1995.
In 1991 the Company established a 401(K) savings plan for employees who have at
least one year of continuous service. For 1994 and 1995, the Company
contributions were based on a sliding scale where it matched 100% of the first
$300 contributed by the employee, 75% of the next $400, 50% of the next $800 and
25% of the next $4,000 for a maximum contribution per employee of $2,000. For
1993, the Company contributed $.25 for each dollar contributed by the employee,
up to a maximum of $1,000 per employee. Company contributions totalled
$151,000, $186,000 and $43,000 in 1995, 1994 and 1993.
In December 1993 the Company established a supplemental benefit plan (Plan) to
provide death benefits and supplemental income payments during retirement for
selected officers. The Plan is a nonqualified defined benefit plan and is
unsecured and unfunded. Benefits under the Plan are fixed for each participant
and are payable over a specific period following the participant's retirement or
at such earlier date as termination or death occurs. Participants vest in the
plan based on their years of service subsequent to being covered by the Plan.
The Company has purchased insurance policies to fund its obligations under the
Plan in the event a participant dies prior to retirement. The cash surrender
value of such policies was $4,363,000 at December 31, 1995. Under this plan,
the Company recognized expense of $221,000, $210,000 and $4,000 in 1995, 1994
and 1993. The aggregate projected benefit obligation of the Plan was
approximately $308,000 and $143,000 at December 31, 1995 and 1994. A discount
rate of 8.5% was used to determine the aggregate projected benefit obligation
for both years. The aggregate vested benefit obligation was $191,000 at
December 31, 1995.
38
<PAGE>
NOTE N - SUBORDINATED DEBT
AND PREFERRED STOCK
In 1993, the Company issued $12,000,000 of 8.5% subordinated notes. The notes
are due February 15, 2004 and qualify as capital for bank regulatory purposes
(total capital). The notes are callable at par after January 15, 1997.
Issuance costs of $735,000 are carried as a deferred asset and are amortized
over the life of the notes as an adjustment to interest expense.
In 1993, the Company issued 575,000 shares of 7.80% Noncumulative Convertible
Perpetual Preferred Stock, Series A. The preferred stock is convertible, at the
option of the holder, into .8674 shares of common stock for each share of
preferred stock. The preferred stock may be redeemed after February 15, 1996,
at the option of the Company, at redemption prices which range from $10.55 at
February 15, 1996 to $10.00 after February 14, 2003. The preferred stock has a
liquidation preference of $10.00.
NOTE O - REGULATORY MATTERS
One of the principal sources of cash for the Company are dividends from its
subsidiary financial institutions. Total dividends which may be declared by the
subsidiary financial institutions depend on the regulations which govern them.
In addition, regulatory agencies can place dividend restrictions on the
subsidiaries based on their evaluation of the financial condition of the
subsidiaries. No restrictions are currently imposed by regulatory agencies on
the subsidiaries other than the limitations found in the regulations which
govern the respective subsidiaries. At December 31, 1995, NBR could pay
additional dividends to the Company of approximately $4,328,000 without prior
regulatory approval and Allied could pay additional dividends of approximately
$2,329,000.
The subsidiary financial institutions are subject to certain restrictions under
the Federal Reserve Act, including restrictions on the extension of credit to
affiliates. In particular, the subsidiaries are prohibited from lending to an
affiliated company unless the loans are secured by specific types of collateral.
Such secured loans and other advances from the subsidiaries are limited to 10
percent of the subsidiary's equity. No such advances were made during 1995.
The Company and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. In addition to these
capital guidelines, the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) required each federal banking agency to implement a regulatory
framework for prompt corrective actions for insured depository institutions that
are not adequately capitalized. The Board of Governors of the Federal Reserve
System, FDIC, OCC and OTS have adopted such a system which became effective on
December 19, 1992. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. The regulations require the Company to meet specific
capital adequacy guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital classification is also
subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain a minimum leverage ratio of Tier 1 capital (as
defined in the regulations) to adjusted assets (as defined), and minimum ratios
of Tier 1 and total capital (as defined) to risk-weighted assets (as defined).
To be considered adequately capitalized as defined under the regulatory
framework for prompt corrective action, the Company must maintain a minimum
leverage ratio of 4%, Tier 1 risk-based ratio of 4% and total risk-based ratio
of 8%. In addition, Allied is subject to a minimum tangible capital ratio of
1.5%. The Company's and its subsidiaries' actual capital amounts and ratios are
presented in the table below with the required amount of capital and excess over
the required amount.
39
<PAGE>
<TABLE>
<CAPTION>
Actual Required
Amount Amount Excess Actual %
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1995:
COMPANY
Leverage Capital (to Average Assets) $29,723 $23,134 $ 6,589 5.14%
Tier 1 Capital (to Risk-weighted Assets) 27,123 14,991 12,132 7.24
Total Capital (to Risk-weighted Assets) 43,780 29,981 13,799 11.68
NBR
Leverage Capital (to Average Assets) 17,283 9,258 8,025 7.47
Tier 1 Capital (to Risk-weighted Assets) 17,283 7,349 9,934 9.41
Total Capital (to Risk-weighted Assets) 22,395 14,698 7,697 12.19
ALLIED
Core Capital (to Total Assets) 19,955 12,752 7,203 6.26
Tier 1 Capital (to Risk-weighted Assets) 17,355 7,528 9,827 9.22
Total Capital (to Risk-weighted Assets) 19,713 15,056 4,657 10.47
Tangible Capital (to Total Assets) 19,955 4,782 15,173 6.26
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
At December 31, 1994:
COMPANY
Leverage Capital (to Average Assets) $26,673 $26,167 $ 506 4.08%
Tier 1 Capital (to Risk-weighted Assets) 26,673 16,288 10,385 6.55
Total Capital (to Risk-weighted Assets) 43,772 32,577 11,195 10.75
NBR
Leverage Capital (to Average Assets) 16,076 8,066 8,010 7.97
Tier 1 Capital (to Risk-weighted Assets) 16,076 6,865 9,211 9.37
Total Capital (to Risk-weighted Assets) 21,232 13,731 7,501 12.37
ALLIED
Core Capital (to Total Assets) 17,664 16,511 1,153 4.27
Tier 1 Capital (to Risk-weighted Assets) 17,664 9,338 8,326 7.57
Total Capital (to Risk-weighted Assets) 19,900 18,677 1,223 8.52
Tangible Capital (to Total Assets) 17,664 6,199 11,465 4.27
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Management believes that as of December 31, 1995, the Company and its
subsidiaries meet all capital requirements to which they are subject. Under the
most stringent capital requirement, the Company has approximately $6,589,000 in
excess capital before it becomes "undercapitalized" under the regulatory
framework for prompt corrective action. Similarly, Allied has approximately
$4,657,000 and NBR has $7,697,000 in excess capital.
The prompt corrective action regulations impose restrictions upon all
institutions to refrain from certain actions which would cause an institution to
be classified as "undercapitalized", such as the declaration of the dividends or
other capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified as
"undercapitalized". In addition, institutions which are classified as
"undercapitalized" are subject to certain mandatory and discretionary
supervisory actions.
NOTE P - DIVIDENDS
The Company declared quarterly cash dividends at a rate of $.03 per common share
for the fourth quarter of 1992 and the first three quarters of 1993. The cash
dividend was increased to $.035 per common share in the fourth quarter of 1993
and remained at $.035 per share for the first three quarters of 1994. In
December, 1994, the Company suspended its quarterly cash dividend on common
shares.
The Company declared cash dividends of $336,000, $448,000 and $432,000 on its
preferred stock for the years ended December 31, 1995, 1994 and 1993.
The Company declared a 3 percent stock dividend in 1993. The Company issued
75,000 common shares under this dividend.
40
<PAGE>
NOTE Q - INDUSTRY SEGMENT DATA
During the years ended December 31, 1995, 1994 and 1993, the Company operated in
two principal industry segments: mortgage banking and commercial banking. The
Company's mortgage banking activities relate to the origination for sale,
servicing of sold mortgages and sale of residential mortgage loans. Commercial
banking activities relate to the origination of commercial, real estate
(including construction) and installment loans for the Company's portfolio and
origination and sale of SBA loans. Commercial banking also includes other fee
services.
Revenue from mortgage banking activities is defined as interest income on
mortgage loans held for sale and investments used to hedge or provide liquidity,
gains on sale of loans and loan servicing and income from mortgage loan
servicing activities. Revenue for commercial banking activities include
interest income on loans and investments and service fee income. Operating
profit for both segments excludes holding company expenses and income taxes.
Identifiable assets are those assets that are used in the Company's operations
in each industry segment. Corporate assets primarily consist of investments in
subsidiaries. Substantially all mortgage loan sales are made to Freddie Mac and
Fannie Mae. Capital expenditures and depreciation and amortization expenses are
not material for the industry segments.
<TABLE>
<CAPTION>
Year ending December, 31 1995 1993 1992
- --------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE
Mortgage banking $ 16,089 $ 16,269 $ 21,537
Commercial banking 47,860 32,621 24,858
- --------------------------------------------------------------------
Total $ 63,949 $ 48,890 $ 46,395
- --------------------------------------------------------------------
- --------------------------------------------------------------------
OPERATING PROFIT (LOSS)
Mortgage banking $ 138 $ (9,821) $ 4,484
Commercial banking 7,639 6,881 4,242
- --------------------------------------------------------------------
Total operating profit (loss) 7,777 (2,940) 8,726
Corporate (2,105) (1,954) (863)
- --------------------------------------------------------------------
Income (loss) before
income taxes $ 5,672 $ (4,894) $ 7,863
- --------------------------------------------------------------------
- --------------------------------------------------------------------
IDENTIFIABLE ASSETS
Mortgage banking $105,580 $168,461 $180,228
Commercial banking 450,486 459,444 290,229
Corporate 1,844 2,747 1,217
- --------------------------------------------------------------------
Total $557,910 $630,652 $471,674
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" requires that the Company disclose the fair
value of financial instruments for which it is practicable to estimate that
value. Although management uses its best judgment in assessing fair value,
there are inherent weaknesses in any estimating technique that may be reflected
in the fair values disclosed. The fair value estimates are made at a discrete
point in time based on relevant market data, information about the financial
instruments, and other factors. Estimates of fair value of instruments without
quoted market prices are subjective in nature and involve various assumptions
and estimates that are matters of judgment. Changes in the assumptions used
could significantly affect these estimates. Fair value has not been adjusted to
reflect changes in market conditions for the period subsequent to the valuation
dates of December 31, 1995 and 1994 and therefore estimates presented herein are
not necessarily indicative of amounts which could be realized in a current
transaction.
The following estimates and assumptions were used on December 31, 1995 and 1994
to estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value.
(a) CASH AND CASH EQUIVALENTS
For cash and cash equivalents, the carrying amount is a reasonable estimate of
fair value.
(b) INTEREST-BEARING DEPOSITS DUE FROM
FINANCIAL INSTITUTIONS
The fair value of interest-bearing deposits held by the Company is based on the
discounted cash flows through the date of maturity at market interest rates for
similar maturities as of the valuation date.
(c) INVESTMENTS
Fair value equals quoted market price, if available. If a quoted market price
is not available, fair value is estimated using quoted market prices for similar
securities. For investments in unregistered mortgage-backed securities with
recourse, fair value was estimated based on the expected future cash flows to be
received adjusted for prepayments, foreclosures, losses and other significant
factors impacting fair value. U.S. Government agency stock has no trading
market but is required as part of membership, and therefore it is carried at
cost.
(d) LOANS HELD FOR SALE
For uncommitted residential mortgages held for sale, fair value is estimated
using indications of value obtained by management from independent third parties
or quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. Committed residential mortgage loans held
for sale are valued based on actual commitment prices. Fair value of certain
loans held for sale include the value of premiums associated with the sale of
the related servicing rights in the instance that a commitment exists for the
sale of such servicing at a predetermined rate.
(e) LOANS RECEIVABLE
To estimate fair value of loans held for investment, including commercial loans,
mortgages and construction loans, each loan category is segmented by fixed and
adjustable rate interest terms, by estimated credit risk, by maturity, and by
performing and nonperforming categories.
The fair value of performing loans is estimated by discounting
41
<PAGE>
contractual cash flows using the current interest rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. Assumptions regarding credit risk, cash flow, and
discount rates are judgmentally determined using available market information.
The fair value of nonperforming loans and loans delinquent more than 30 days is
estimated by discounting estimated future cash flows using current interest
rates with an additional risk adjustment reflecting the individual
characteristics of the loans.
(f) INTEREST RECEIVABLE
For interest receivable, the carrying amount is a reasonable estimate of fair
value.
(g) MORTGAGE SERVICING RIGHTS
The fair value of mortgage servicing rights is estimated on a loan by loan basis
using market prices under comparable servicing sale contracts, when available
or, using a cash flow model with current assumptions with respect to
prepayments, servicing costs and other significant factors.
(h) DEPOSIT LIABILITIES
Under SFAS No. 107, the fair value of deposits with no stated maturity, such as
noninterest bearing demand deposits, savings and money market accounts, is equal
to the amount payable on demand on December 31, 1995 and 1994. The fair value
of time deposits, is based on the discounted value of contractual cash flows.
The discount rate is based on rates currently offered for deposits of similar
size and remaining maturities.
(i) OTHER BORROWINGS AND SUBORDINATED NOTES
The discounted value of contractual cash flows at market interest rates for debt
with similar terms and remaining maturities are used to estimate the fair value
of existing debt.
(j) COMMITMENTS TO FUND MORTGAGE LOANS
The fair value of commitments to fund fixed-rate mortgage loans represents the
estimated gain (loss) to the Company of fully funding its commitments at current
interest rates and selling the underlying loans in the secondary market.
(k) COMMITMENTS TO FUND OTHER LOANS
The fair value of commitments to fund other loans represents fees currently
charged to enter into similar agreements with similar remaining maturities.
(l) FORWARD CONTRACTS TO SELL MBS
The fair value of forward contracts to sell MBS represents the difference
between current rates for similar quantities and delivery dates of mortgage-
backed securities as compared to the contractual rates.
(m) PURCHASED AND WRITTEN OPTIONS
Carrying value represents premiums paid or received. Fair values were obtained
from third party dealers of such options.
The estimated fair values of the Company's financial instruments are as follows:
December 31
<TABLE>
<CAPTION>
1995 1994
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 55,140 $ 55,140 $ 33,354 $ 33,354
Interest-bearing deposits 417 417 512 512
Investments 43,964 43,964 42,066 41,554
Loans held for sale 62,620 64,251 138,003 138,003
Portfolio loans, net 363,187 366,046 378,782 377,159
Interest receivable 3,825 3,825 3,476 3,476
Mortgage servicing rights 5,970 7,446 6,270 9,982
LIABILITIES:
Deposits 458,393 458,070 469,008 470,392
Other borrowings 47,871 45,438 112,075 112,075
Subordinated notes 12,000 12,300 12,000 11,160
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to fund mortgage loans 76 51
Commitments to fund other loans 349 353
Forward contracts to sell MBS (64)
Purchased put options:
MBS 217 84
U.S. Treasury 340 197
Purchased call options -
U.S. Treasury 308 320
Written call options - MBS 261 464
Written put options -
U.S. Treasury 204 170
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
NOTE S - RESTRUCTURING CHARGE
During the third and fourth quarters of 1994, the Company implemented major cost
reduction programs in response to declining origination volumes in the Company's
mortgage banking business and recorded a restructuring charge of $815,000 in the
third quarter and $1,594,000 in the fourth quarter. During 1995, the Company
was able to sublease some of the properties noted below and recorded a recovery
of $456,000. The restructuring entailed closing wholesale mortgage production
offices in Fresno, San Diego, San Ramon and Windsor, California, Phoenix,
Arizona and Seattle, Washington. The charge also includes the effects of
consolidation of leased space in the Sacramento and Santa Rosa, California
offices and termination of related employees. The restructuring charge
consisted of:
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------
<S> <C> <C>
Severance expenses
for 125 employees $ 374,000
Writeoff (recovery) of
estimated present value
of discontinued leases $(456,000) 1,683,000
Writeoff of leasehold
improvements,
furniture and fixtures 352,000
- --------------------------------------------------------------
$(456,000) $2,409,000
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
At December 31, 1995, $619,000 of the restructuring charge remained in other
liabilities, substantially all of which is related to the future minimum lease
payments associated with the closed facilities. The Company is actively seeking
sublease tenants for many of these closed facilities and a portion of the
restructuring charge may be reversed in future periods if the Company is
successful in entering into such arrangements.
NOTE T - COMMITMENTS AND CONTINGENCIES
NBR and Allied maintain insurance on its customer deposits with the Federal
Deposit Insurance Corporation ("FDIC"). The FDIC manages the Bank Insurance
Fund ("BIF"), which insures deposits of commercial banks such as NBR, and the
Savings Association Insurance Fund ("SAIF"), which insures deposits of savings
associations such as Allied. FDICIA mandated that the two funds maintain
reserves at 1.25% of their respective federally insured deposits.
During 1995, the FDIC announced that the BIF had reached its mandated reserve
level, reducing insurance premiums on BIF-insured deposits, and subsequently
announcing that deposit insurance premiums on BIF-insured deposits would be
reduced at December 31, 1995. The SAIF fund has not yet met its mandated
reserve level. As a result, deposit insurance premiums attributable to BIF
deposits are less than those attributable to SAIF deposits.
There are numerous regulatory proposals before Congress to address the deposit
insurance premium differential between BIF- and SAIF-insured deposits. The most
recent plans consist of one-time insurance premium charges attributable to SAIF-
insured deposits sufficient to bring the SAIF up to its mandated reserve level,
with a corresponding and immediate reduction in SAIF premiums thereafter. Based
on 87 basis points on Allied's deposits at March 31, 1995, the resulting after-
tax charge to the Company would be approximately $1,670,000. As both the timing
and final form of any proposed regulations remain uncertain, no adjustments to
the Company's financial statements have been recorded at December 31, 1995.
Certain lawsuits and claims arising in the ordinary course of business have been
filed or are pending against the Company or its subsidiaries. Based upon
information available to the company, its review of such lawsuits and claims and
consultation with its counsel, the Company believes the liability relating to
these actions, if any, would not have a material adverse effect on its financial
position.
NOTE U - CONDENSED FINANCIAL INFORMATION
OF REDWOOD EMPIRE BANCORP (PARENT ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash $ 1,623 $ 626
Investment in subsidiaries 39,100 35,362
Capitalized issuance costs 735 815
Other assets 2,486 3,676
- ------------------------------------------------------------------------
Total assets $43,944 $40,479
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 359 $ 285
Subordinated notes 12,000 12,000
- ------------------------------------------------------------------------
Total liabilities 12,359 12,285
- ------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, authorized
2,000,000 shares; issued
and outstanding 575,000 shares 5,750 5,750
Common stock, no par value:
authorized 10,000,000 shares;
issued and outstanding:
1995 - 2,679,227 shares;
1994 - 2,663,360 shares 18,728 18,609
Retained earnings 6,967 3,990
Unrealized gain (loss) on investment
securities available for sale,
net of taxes 140 (155)
Total shareholders' equity 31,585 28,194
- ------------------------------------------------------------------------
Total liabilities and
shareholders' equity $43,944 $40,479
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income:
Management service fees $ 403 $ 61 $ 88
Dividends from subsidiaries 1,087 600
Interest income from subsidiaries 292 311 66
Other income 13 5
- ----------------------------------------------------------------------------------------------------
Total operating income 1,782 985 159
- ----------------------------------------------------------------------------------------------------
Expenses:
Interest expense 1,100 1,131 5
Operating expenses 1,700 1,208 872
- ----------------------------------------------------------------------------------------------------
Total expenses 2,800 2,339 877
- ----------------------------------------------------------------------------------------------------
Loss before undistributed income of subsidiaries (1,018) (1,354) (718)
Equity in undistributed income (loss) of subsidiaries 3,447 (1,900) 5,282
- ----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,429 (3,254) 4,564
Income tax benefit (884) (219)
- ----------------------------------------------------------------------------------------------------
Net income (loss) $ 3,313 $(3,035) $ 4,564
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,313 $(3,035) $ 4,564
- ----------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization and depreciation 10 5 9
Equity in undistributed net loss (income)
of subsidiaries (3,447) 1,900 (5,282)
Change in other assets 1,275 (300) (1,076)
Change in other liabilities 186 225 (733)
- ----------------------------------------------------------------------------------------------------
Total adjustments (1,976) 1,830 (7,082)
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,337 (1,205) (2,518)
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in subsidiaries (6,000) (7,948)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,000) (7,948)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Notes issued 12,000
Stock issuance 108 425 6,120
Cash dividends (448) (810) (621)
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (340) (385) 17,499
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in cash 997 (7,590) 7,033
Cash at beginning of year 626 8,216 1,183
- ----------------------------------------------------------------------------------------------------
Cash at end of year $ 1,623 $ 626 $ 8,216
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
OTHER INFORMATION
Redwood Empire Bancorp
111 Santa Rosa Avenue
P.O. Box 402
Santa Rosa, CA 95402-0402
(707) 545-9611
American Stock Exchange
Symbol "REB"
SUBSIDIARY LOCATIONS
National Bank of the Redwoods
111 Santa Rosa Avenue
P.O. Box 402
Santa Rosa, CA 95402-0402
(707) 545-4800
Allied Bank, F.S.B.
2227 Capricorn Way
Santa Rosa, CA 95407
(707) 524-5500
Redwood Empire Datacorp
111 Santa Rosa Avenue
P.O. Box 402
Santa Rosa, CA 95402-0402
(707) 573-4800
DIRECTORS
Redwood Empire Bancorp
Orlando J. Antonini
Business Consultant
Haskell E. Boyett
PG&E Division Manager, Retired
John H. Downey
Chairman of the Board
Redwood Empire Bancorp
Patrick W. Kilkenny
President, Chief Executive Officer
Redwood Empire Bancorp
John R. Olsen
Standard Insurance Company
Investment Division, Retired
William B. Stevenson
Principal
Financial Institutions Analysts &
Consultants, Inc.
Tom Whitaker
President, Chief Executive Officer
Motion Analysis Corporation
EXECUTIVE OFFICERS
Patrick W. Kilkenny
President, Chief Executive Officer
James E. Beckwith
Chief Financial Officer
SUBSIDIARY DIRECTORS
National Bank of the Redwoods
Orlando J. Antonini
Haskell E. Boyett
Richard I. Columbini
John H. Downey
Margie Handley
Dennis E. Kelley
Patrick W. Kilkenny
John R. Olsen
Patricia "Padi" Selwyn
William B. Stevenson
Tom Whitaker
Allied Bank, F.S.B.
Orlando J. Antonini
Haskell E. Boyett
John H. Downey
Patrick W. Kilkenny
Terance O'Mahoney
John R. Olsen
William B. Stevenson
Tom Whitaker
DIVIDEND DISBURSEMENT AGENT, REGISTRAR AND TRANSFER AGENT FOR COMMON AND
PREFERRED STOCK
Registered shareholders with questions about dividends, changes of address, lost
certificates, or name changes should contact:
Shareholder Relations
First Interstate Bank of California
405 Montgomery Street
San Francisco, CA 94104
Dividend Reinvestment and Stock
Purchase Plan
Shareholders may purchase additional shares of the Company's Common Stock
conveniently and without fees or commissions through dividend reinvestment or
direct cash payments. Further information may be obtained by writing to:
First Interstate Bank of Califonia
Dividend Reinvestment Department
Box 60975 - Terminal Annex
Los Angeles, CA 90060-60975
(800) 522-6645
FORM 10-K
A copy of the Company's Annual Report on Form 10-K to be filed with the
Securities and Exchange Commission will be furnished free of charge upon written
request to:
Shareholder Relations
111 Santa Rosa Avenue
P.O. Box 402
Santa Rosa, CA 95402-0402
<PAGE>
[REDWOOD EMPIRE BANCORP IN SCRIPT]
[REDWOOD EMPIRE BANCORP LOGO]
111 Santa Rosa Avenue
Santa Rosa, CA 95402-0402
707-545-9611
<PAGE>
Exhibit 21
REDWOOD EMPIRE BANCORP
List of Subsidiaries
The Company has the following subsidiaries, all of which are included in the
Company's Consolidated Financial Statements:
PERCENTAGE OF
ORGANIZED VOTING SECURITES
UNDER THE OWNED BY
NAME LAWS OF IMMEDIATE PARENT
- --------------------------------------------------------------------------------
Redwood Empire Bancorp California 100.00%
Allied Bank, F.S.B. United States 100.00%
Allied Diversified Credit (Inactive) California 100.00%
National Bank of the Redwoods United States 100.00%
NBR Mortgage and Investment Company California 100.00%
Redwood Empire Datacorp California 100.00%
<PAGE>
Exhibit 24
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
49372 on Form S-8, Registration Statement No. 33-24642 on Form S-4, Registration
Statement No. 33-41503 on Form S-8 and Registration Statement No. 33-61750 on
From S-3 of Redwood Empire Bancorp of our report dated January 24, 1996
incorporated by reference in this Annual Report on Form 10-K of Redwood Empire
Bancorp for the year ended December 31, 1995.
Deloitte & Touche LLP
March 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE
COMPANY'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 24312
<INT-BEARING-DEPOSITS> 417
<FED-FUNDS-SOLD> 9969
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37436
<INVESTMENTS-CARRYING> 6528
<INVESTMENTS-MARKET> 6528
<LOANS> 368224<F1>
<ALLOWANCE> 5037
<TOTAL-ASSETS> 557910
<DEPOSITS> 458393
<SHORT-TERM> 47871
<LIABILITIES-OTHER> 8061
<LONG-TERM> 12000
0
5750
<COMMON> 18728
<OTHER-SE> 140
<TOTAL-LIABILITIES-AND-EQUITY> 557910
<INTEREST-LOAN> 42469
<INTEREST-INVEST> 3187
<INTEREST-OTHER> 1718
<INTEREST-TOTAL> 47374
<INTEREST-DEPOSIT> 22730
<INTEREST-EXPENSE> 27671
<INTEREST-INCOME-NET> 19703
<LOAN-LOSSES> 1590
<SECURITIES-GAINS> 386
<EXPENSE-OTHER> 29016
<INCOME-PRETAX> 5672
<INCOME-PRE-EXTRAORDINARY> 3313
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3313
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 3.63
<LOANS-NON> 4201
<LOANS-PAST> 92
<LOANS-TROUBLED> 651
<LOANS-PROBLEM> 2700
<ALLOWANCE-OPEN> 5787
<CHARGE-OFFS> 2450
<RECOVERIES> 110
<ALLOWANCE-CLOSE> 5037
<ALLOWANCE-DOMESTIC> 4996
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 41
<FN>
<F1>EXCLUDES MORTGAGE LOANS HELD FOR SALE
</FN>
</TABLE>
