<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number: 0-19231
REDWOOD EMPIRE BANCORP
(Exact name of Registrant as specified in its charter)
California 68-0166366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Santa Rosa Avenue, Santa Rosa, California 95404-4945
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 545-9611
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. October 18, 1996: 2,746,490
This page is page 1 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP
AND
SUBSIDIARIES
INDEX
PAGE
----
PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Operations
Three and Nine Months ended September 30, 1996 and 1995 . . . . . . 3
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995. . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . 8
PART II. Other Information
ITEM 6. Exhibits and Reports on Item 8-K . . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $10,409 $9,794 $31,652 $31,765
Interest on investment securities 805 1,093 2,270 2,082
Interest on federal funds sold 210 406 721 1,119
Interest on time deposits due from
financial institutions 39 36 152 103
--------- -------- --------- ---------
Total interest income 11,463 11,329 34,795 35,069
Interest expense:
Interest on deposits 4,841 5,508 15,204 17,064
Interest on subordinated notes 277 276 838 830
Interest on other borrowings 447 722 1,274 3,048
--------- -------- --------- ---------
Total interest expense 5,565 6,506 17,316 20,942
--------- -------- --------- ---------
Net interest income 5,898 4,823 17,479 14,127
Provision for loan losses 545 385 3,375 1,055
--------- -------- --------- ---------
Net interest income after loan loss provision 5,353 4,438 14,104 13,072
--------- -------- --------- ---------
Other operating income:
Service charges on deposit accounts 315 290 921 843
Merchant draft processing, net 374 398 1,381 1,014
Loan servicing income 412 398 1,297 1,253
Net realized gains (losses) on sale of
investment securities --- --- (8) 85
Gain on sale of loans and loan servicing 2,149 2,055 8,230 7,499
Other income 679 384 2,104 1,385
--------- -------- --------- ---------
Total other operating income 3,929 3,525 13,925 12,079
--------- -------- --------- ---------
Other operating expense:
Salaries and employee benefits 4,331 3,327 12,941 10,396
Occupancy and equipment expense 1,396 1,345 4,115 4,067
Restructuring charge --- --- --- (392)
Other 4,954 2,285 10,783 7,160
--------- -------- --------- ---------
Total other operating expense 10,681 6,957 27,839 21,231
--------- -------- --------- ---------
Income (loss) before income taxes (1,399) 1,006 190 3,920
Provision (benefit) for income taxes (595) 391 70 1,632
--------- -------- --------- ---------
Net income (loss) (804) 615 120 2,288
Dividends on preferred stock 112 112 336 336
--------- -------- --------- ---------
Net income (loss) available for common shareholders ($916) $503 ($216) $1,952
--------- -------- --------- ---------
--------- -------- --------- ---------
Net income (loss) per common and common
equivalent share:
Primary net income (loss) per share ($.33) $.19 ($.08) $.73
Weighted average shares 2,742,000 2,700,000 2,712,000 2,669,000
Fully diluted net income(loss) per share ($.33) $.19 ($.08) $.72
Weighted average shares 2,742,000 2,700,000 2,712,000 3,200,000
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Cash and due from banks $18,606 $24,312
Federal funds sold 12,311 9,969
Due from broker --- 20,859
------------- ------------
Cash and cash equivalents 30,917 55,140
Interest bearing deposits due from financial institutions 312 417
Investment securities:
Held to maturity (market value of $22,929 and $6,528) 22,637 6,528
Available for sale, at market 25,733 37,436
------------- ------------
Total investment securities 48,370 43,964
Mortgage loans held for sale 81,105 62,620
Loans:
Residential real estate mortgage 118,925 168,022
Commercial real estate mortgage 79,216 65,655
Commercial 65,699 63,975
Real estate construction 86,099 69,504
Installment and other 3,305 4,103
Less deferred loan fees (2,845) (3,035)
------------- ------------
Total portfolio loans 350,399 368,224
Less allowance for loan losses (6,985) (5,037)
------------- ------------
Net loans 343,414 363,187
Premises and equipment, net 5,204 6,561
Purchased mortgage servicing rights 4,205 5,970
Other real estate owned 1,844 963
Cash surrender value of life insurance 2,751 4,363
Other assets and interest receivable 16,385 14,725
------------- ------------
Total assets $534,507 $557,910
------------- ------------
------------- ------------
Deposits:
Noninterest bearing demand deposits $66,247 $65,602
Interest-bearing transaction accounts 155,318 129,436
Time deposits $100,000 and over 103,689 111,479
Other time deposits 121,126 151,876
------------- ------------
Total deposits 446,380 458,393
Other borrowings 31,628 47,871
Subordinated notes 12,000 12,000
Other liabilities and interest payable 13,191 8,061
------------- ------------
Total liabilities 503,199 526,325
------------- ------------
------------- ------------
Shareholders' equity:
Preferred stock, no par value; 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 2,746,490 and 2,679,227 shares 19,262 18,728
Retained earnings 6,750 6,967
Unrealized gain (loss) on investment securities available
for sale (454) 140
------------- ------------
Total shareholders' equity 31,308 31,585
------------- ------------
Total liabilities and shareholders' equity $534,507 $557,910
------------- ------------
------------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $120 $2,288
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 1,683 1,567
Net realized losses (gains) on securities 8 (85)
Loans originated for sale (1,200,172) (502,413)
Proceeds from sale of loans held for sale 1,254,807 577,054
Gain on sale of loans and loan servicing (8,230) (7,499)
Provision for loan losses 3,375 1,055
Change in other assets and interest receivable 2,380 (576)
Change in other liabilities and interest payable 3,890 (782)
Noncash restructuring charge --- (392)
Other, net (1,698) (194)
-------------- ------------
Total adjustments 56,043 67,735
-------------- ------------
Net cash provided by operating activities 56,163 70,023
-------------- ------------
-------------- ------------
Cash flows from investing activities:
Net change in loans (52,182) (17,714)
Proceeds from sales of loans in portfolio 2,459 60,648
Purchases of investment securities available for sale (23,202) (30,515)
Purchases of investment securities held to maturity (304) (20,250)
Sales of investment securities 3,992 ---
Maturities of investment securities available for sale 13,500 16,000
Maturities of investment securities held to maturity 938 10,482
Premises and equipment, net (520) (524)
Purchase of mortgage servicing rights 782 (101)
Change in interest bearing deposits due from financial institutions 105 99
Proceeds from sale of other real estate owned 2,148 1,053
-------------- ------------
Net cash provided by (used in) investment activities (52,284) 19,178
-------------- ------------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts 631 11,112
Change in interest bearing transaction accounts 25,895 (6,706)
Change in time deposits (38,539) (3,853)
Change in borrowings (16,243) (96,133)
Issuance of stock 490 78
Dividends paid (336) (336)
-------------- ------------
Net cash used in financing activities (28,102) (95,838)
-------------- ------------
Net change in cash and cash equivalents (24,223) (6,637)
Cash and cash equivalents at beginning of period 55,140 33,354
-------------- ------------
Cash and cash equivalents at end of period $30,917 $26,717
-------------- ------------
-------------- ------------
</TABLE>
(Continued)
5
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
--------- --------
<S> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Income taxes $2,730 $2,620
Interest expense 17,719 20,879
Noncash investing and financing activities:
Transfers from loans to other real estate owned 1,643 2,434
Loans to facilitate sale of other real estate owned --- 304
Transfer from loans to mortgage loans held for sale 50,000 12,450
Transfer from mortgage loans held for sale to loans --- 15,000
Transfer of investment securities from available for sale
to held to maturity 17,193 ---
</TABLE>
6
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements should be read
in conjunction with the financial statements and related notes contained in
Redwood Empire Bancorp's 1995 Annual Report to shareholders. The statements
include the accounts of Redwood Empire Bancorp and its wholly owned
subsidiaries, National Bank of the Redwoods ("NBR") and Allied Bank, F.S.B.
("Allied"). All significant intercompany balances and transactions have been
eliminated. The financial information contained in this report reflects all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. All such adjustments are
of a normal recurring nature. The results of operations and cash flows for the
nine months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
Certain reclassifications were made to prior period financial statements to
conform to current period presentations.
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Federal funds sold
are generally for one day periods.
2. Net Income (loss) per Share
Net income (loss) per share is calculated based on the weighted average
number of shares of common stock outstanding and common stock equivalents
outstanding during the three and nine month periods ended September 30, 1996 and
1995.
3. New Accounting Pronouncement
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation." This
statement requires expanded disclosures with respect to stock-based
compensation such as stock options. It also encourages, but does not
require, recognition of compensation expense related to the fair value of
such stock-based compensation. The Company has decided not to record
compensation expense for its stock-based compensation which currently
consists only of stock options.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the
"Company") is a financial institutions holding company headquartered in Santa
Rosa, California. Redwood has two principal subsidiaries, Allied Bank, F.S.B.,
a federal savings bank ("Allied"), and National Bank of the Redwoods, a national
bank ("NBR").
The following sections discuss significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 1995
to September 30, 1996, and significant changes and trends in the Company's
results of operations for the three and nine months ended September 30, 1996,
compared to the same periods in 1995.
In an effort to increase shareholder value the Board of Directors is
currently evaluating strategic options relating to Allied. These options
include a merger of Allied into NBR or a sale or partial sale of Allied. No
final determination has been made by the Board of Directors regarding the status
of Allied stemming from this evaluation process.
SUMMARY OF FINANCIAL RESULTS
The Company reported a net loss of $804,000 (a loss of $.33 per share,
fully diluted) for the three months ended September 30, 1996, compared to net
income $615,000 ($.19 per share, fully diluted) for the same period in 1995.
The decrease in net income in the third quarter of 1996 over the same period in
1995 is primarily due to the accrual of $2,241,000 ($1,300,000 after-tax) for
the Savings Association Insurance Fund (SAIF) assessment enacted by Congress on
September 30, 1996. The SAIF assessment was calculated based on 67.5 basis
points on Allied's deposits as of March 31, 1995.
Net income for the nine months ended September 30, 1996 was $120,000 (a
loss of $.08 per share, fully diluted) compared to $2,288,000 ($.72 per share,
fully diluted) for the same period in 1995. This decrease was due to the SAIF
assessment, an increase in the provision for loan losses of $2,320,000 and a
$1,200,000 merchant bankcard reserve recorded in the second quarter of 1996 in
response to the bankruptcy of one customer for whom the Company processes credit
card transactions.
During the quarter and nine months ended September 30, 1996, the Company
originated $337,000,000 and $1,243,000,000 in wholesale residential real estate
loans or "A" paper loans within its mortgage banking operations. Due to the low
profit margins and the competitive nature of the "A" paper wholesale loan
business, the Company has enacted strategies which are oriented to demphasize
its "A" paper wholesale mortgage banking business. Therefore, it is anticipated
that mortgage loan origination volumes and expenses associated with this
origination activity will be reduced significantly in the future.
8
<PAGE>
NET INTEREST INCOME
Net interest income amounted to $5,898,000 for the third quarter of 1996
which resulted in an increase of $1,075,000 when compared to the third quarter
of 1995 total of $4,823,000. This increase is primarily due to the substantial
growth in the net interest margin offset by a slight decline in earning assets.
The net interest margin amounted to 4.76% in the third quarter of 1996 as
compared to 3.81% in the same period one year ago. The net interest margin
improvement was due to increased yields on earning assets from 8.95% in the
third quarter of 1995 to 9.25% in the same quarter in 1996 and a reduction in
funding rates from 5.64% in 1995 to 5.21% in 1996. Earning assets declined
from $506,561,000 in the third quarter of 1995 to $495,706,000 in the same
period in 1996 which represents a $9,855,000 decline.
Net interest income for the nine months ended September 30, 1996 amounted
to $17,479,000, which represented an increase of $3,352,000 when compared to the
1995 nine month total of $14,127,000. As was the case in the third quarter, the
increase of $3,352,000 is primarily attributable to an increase in the net
interest margin being offset by a decline in earning assets. The net interest
margin for the nine months ended September 30, 1996 was 4.64% compared to 3.46%
for the same period in 1995. The net interest margin improvement was driven by
an increase in the yield on earning assets from 8.59% in the nine months ended
September 30, 1995 to 9.23% for the same period in 1996, and a decline in
funding rates from 5.60% in the nine months ended in 1995 to 5.28% in the same
period in 1996. Earning assets declined $41,391,000 from the nine month period
in 1995 when compared to 1996 as the Company reduced its asset size to improve
its overall capital ratios.
9
<PAGE>
The following is an analysis of the net interest margin:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1996 September 30, 1995
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets(1) $495,706 $11,463 9.25 $506,561 $11,329 8.95
Interest-bearing liabilities 427,128 5,565 5.21 461,264 6,506 5.64
-------- ---------
Net interest income $5,898 $4,823
-------- ---------
-------- ---------
Net interest income to
earning assets 4.76 3.81
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1996 September 30, 1995
------------------------------------- --------------------------------------
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets (1) $502,756 $34,795 9.23 $544,147 $35,069 8.59
Interest-bearing liabilities 437,072 17,316 5.28 498,948 20,942 5.60
-------- --------
Net interest income $17,479 $14,127
-------- --------
-------- --------
Net interest income to
earning assets 4.64 3.46
</TABLE>
(1) Nonaccrual loans are included in the calculation of the average balance of
earning assets, and interest not accrued is excluded.
10
<PAGE>
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning assets and interest-
bearing liabilities, and the amount of change attributable to volume
and rate changes for the nine months ended September 30, 1996 and 1995.
Changes not solely attributable to rate or volume have been allocated to rate.
<TABLE>
<CAPTION>
September 30, 1996 over
September 30, 1995
---------------------------------
Volume Rate Total
---------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans ($3,798) $2,146 ($1,652)
Mortgage loans held for sale 613 926 1,539
Investment securities 171 17 188
Interest-earning deposits with other institutions 29 20 49
Federal funds sold (344) (54) (398)
----------------------------------
Total increase (decrease) (3,329) 3,055 (274)
----------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts 930 426 1,356
Time deposits (2,905) (312) (3,217)
Other borrowings (1,635) (130) (1,765)
----------------------------------
Total increase (decrease) (3,610) (16) (3,626)
----------------------------------
Increase in net interest income $281 $3,071 $3,352
----------------------------------
----------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended September 30, 1996
amounted to $545,000 as compared to $385,000 in the same quarter in the previous
year. The increase in the quarterly provision of $160,000 is due to an increase
in problem assets, principally nonaccrual residential construction loans. The
provision for loan losses for the nine months ended September 30, 1996 amounted
to $3,375,000 as compared to $1,055,000 for the same period one year ago. The
increase in the provision for loan losses for the comparable nine month period
relates to an increase in loan charge-offs and a lease portfolio of $1,412,000
placed on nonaccrual status. For further discussion on credit quality and
provision for loan losses see "ALLOWANCE FOR LOAN LOSSES" and "NON PERFORMING
ASSETS".
11
<PAGE>
OTHER OPERATING INCOME AND EXPENSE
Other Operating Income
The following table sets forth the components of the Company's other
operating income for the three and nine months ended September 30, 1996, as
compared to the same periods in 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 % September 30 %
--------------------- ---------------------
(dollars in thousands) 1996 1995 Change 1996 1995 Change
---------- ----------------------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 315 $ 290 9 $ 921 $ 843 9
Merchant draft processing, net 374 398 (6) 1,381 1,014 36
Loan servicing income 412 398 4 1,297 1,253 4
Gain (loss) on securities --- --- --- (8) 85 (109)
Gain on sale of loans and servicing 2,149 2,055 5 8,230 7,499 10
Other income 679 384 77 2,104 1,385 52
------ ------ -------- ---------
Total other operating income $3,929 $3,525 11 $13,925 $12,079 15
------ ------ -------- ---------
------ ------ -------- ---------
</TABLE>
Other operating income increased $404,000 or 11% to $3,929,000 for the third
quarter of 1996 compared to $3,525,000 for the same period in 1995, due
primarily to an increase in gain on sale of loans and servicing of $94,000 and
increases in other income of $295,000. The increase in other income principally
relates to miscellaneous fee income associated with the Company's mortgage
banking business.
Other operating income increased $1,846,000 for the nine months ended
September 30, 1996 compared to the same period in 1995. This increase was
primarily due to gains on sale of loans and servicing, merchant draft
processing, and other income. Mortgage banking originations increased from $306
million for the third quarter of 1995 to $355 million for the third quarter of
1996. For the nine months ended September 30, 1996 mortgage banking
originations amounted to $1.3 billion as compared to $557 million in the same
period one year ago. However, gain on sale of loans and servicing has not kept
pace with the increase in origination volume due to pricing pressure brought
about by an extremely competitive mortgage banking environment. The increase in
other income principally relates to miscellaneous fee income associated with the
Company's mortgage banking business.
12
<PAGE>
Other Operating Expense
Other operating expense increased to $10,681,000 during the third quarter
of 1996 compared to $6,957,000 for the third quarter of 1995. The increase is
due primarily to the $2,241,000 SAIF assessment. In addition, an increase in
salary and benefits of $1,004,000 was associated with increased mortgage banking
activity at the Allied subsidiary
Other operating expense increased $6,608,000 for the nine months ended
September 30, 1996 compared to the same period in 1995. The increase is
primarily due to the SAIF charge, increased salaries and benefits expense caused
by increased loan volumes at Allied, and the recording of a merchant bankcard
reserve of $1,200,000 in the second quarter of 1996 related to the bankruptcy of
one customer.
The merchant bankcard matter and its related $1,2000,000 charge to
operations was a result of contractual obligation between NBR and Visa and
Mastercard which requires that NBR stand in the place of the merchant in
the event that a merchant is unable to pay on charge-backs from cardholders.
In this instance, one of NBR's significant merchant bankcard customers who is
in the travel business, filed for bankruptcy and was unable to pay cardholder
chargebacks. The Company has undertaken certain actions to decrease the risk
of merchant bankruptcy within its merchang bankcard business. These steps
include elimination of all merchants in the travel business as customers and
the discontinuance of any other high risk account. Management believes it
has adequately provided for potential charge-backs associated with its
merchant bankcard processing business.
The following table sets forth the components of the Company's other
operating expense during the three and nine months ended September 30, 1996, as
compared to the same periods in 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 % September 30 %
-------------------- -------------------
(dollars in thousands) 1996 1995 Change 1996 1995 Change
--------- ------------------------ ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 4,331 $3,327 30 $12,941 $10,396 24
Occupancy and equipment expense 1,396 1,345 4 4,115 4,067 1
Restructuring charge --- --- --- --- (392) (100)
Other 4,954 2,285 117 10,783 7,160 51
---------- -------- --------- ---------
Total other operating expense $10,681 $6,957 54 $27,839 $21,231 31
---------- -------- --------- ---------
---------- -------- --------- ---------
</TABLE>
NBR and Allied maintain insurance on their 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
accordingly, deposit insurance premiums on BIF-insured deposits were reduced.
On September 30, 1996 Congress passed a bill which addressed the deposit
insurance premium differential between BIF and SAIF insured deposits. There is
a one-time insurance premium charge 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
67.5 basis points on Allied's deposits at March 31, 1995, the resulting charge
to the Company was $2,241,000. Such charge was recorded in the third quarter of
1996.
13
<PAGE>
Income Taxes
The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and nondeductible expenses. The effective
rate was 36.8% for the nine months ended September 30, 1996, compared to 41.6%
for the same period in 1995.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale increased $18,485,000 or 30% to $81,105,000 at
September 30, 1996 compared to $62,620,000 at December 31, 1995. The increase
was primarily due to a $50,000,000 transfer of loans from the portfolio to held
for sale as of March 31, 1996, $34 million of which were sold at September 30,
1996. This transaction was made to accommodate an asset reduction strategy at
Allied Bank which is intended to increase the capital ratios of Allied and the
Company. The fair value of loans transferred exceeded their carrying value at
the date of transfer.
LOANS
Total loans decreased $17,825,000 or 5% to $350,399,000 at September 30,
1996 compared to $368,224,000 at December 31, 1995. Residential real estate
mortgage loans decreased $49,097,000 or 29% to $118,925,000 due to a transfer of
loans to mortgage loans held for sale as part of an asset reduction strategy.
The Company anticipates that there will be no future transfers of loans to the
held for sale category to execute an asset reduction strategy.
The following table summarizes the composition of the loan portfolio at
September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(dollars in thousands) Amount % Amount %
----------------------- -----------------------
<S> <C> <C> <C> <C>
Residential real estate mortgage $118,925 34% $168,022 46%
Commercial real estate mortgage 79,216 22 65,655 18
Commercial 65,699 19 63,975 17
Real estate construction 86,099 25 69,504 19
Installment and other 3,305 1 4,103 1
Less deferred fees (2,845) (1) (3,035) (1)
----------------------- -----------------------
Total loans 350,399 100% 368,224 100%
-------- --------
-------- --------
Less allowance for loan losses (6,985) (5,037)
------------ ------------
Net loans $343,414 $363,187
------------ ------------
------------ ------------
</TABLE>
14
<PAGE>
ALLOWANCE FOR LOAN LOSSES
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, general
economic conditions and other qualitative factors.
The following table summarizes the Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------- ------------------
(dollars in thousands) 1996 1995 1996 1995
------------------- ------------------
<S> <C> <C> <C> <C>
Beginning allowance for loan losses $7,034 $5,978 $5,037 $5,787
Provision for loan losses 545 385 3,375 1,055
Charge-offs (630) (392) (1,532) (923)
Recoveries 36 2 105 54
------- ------ ------- -------
Ending allowance for loan losses $6,985 $5,973 $6,985 $5,973
------- ------ ------- -------
------- ------ ------- -------
Net charge-offs to average
loans (annualized) .69% .40% .55% .29%
</TABLE>
The allowance for loan losses as a percentage of portfolio loans increased
from 1.37% at December 31, 1995 to 1.99% at September 30, 1996. The increase
in the provision for loan losses of $2,320,000 for the nine months ended
September 30, 1996 over the same period in 1995 is primarily due to a lease
portfolio of $1,412,000 purchased from a company currently in bankruptcy
proceedings who retained the servicing of such portfolio ("Bennett matter") and
higher levels of nonperforming assets. The increase in the provision for loan
losses of $160,000 in the third quarter of 1996 when compared to the same period
one year ago was driven by an increase in net charge-offs of $204,000 in the
third quarter of 1996 compared to the third quarter of 1995 and an increase in
nonperforming assets, principally nonaccrual residential construction loans.
15
<PAGE>
With respect to the Bennett matter, NBR has entered into a settlement
agreement with the bankruptcy trustee which calls for the Bank to receive 60%
of all the cash receipts associated with such leases. The agreement is
subject to approval by the United States Bankruptcy Court. The motion which
requests approval is expected to be heard in mid November. Consistent with
Company policy, these leases have been classified as nonperforming and placed
on nonaccrual status. Management expects further information to become
available on the matter in the fourth quarter of 1996. Management believes
that the Company maintains an adequate allowance for loss on these leases.
NONPERFORMING ASSETS
The following table summarizes the Company's nonperforming assets.
September 30, December, 31
(dollars in thousands) 1996 1995
---------- -----------
Nonaccrual loans $ 8,917 $ 4,201
Accruing loans past due 90 days or more 130 92
Restructured loans 757 651
---------- -----------
Total nonperforming loans 9,804 4,944
Other real estate owned 1,844 963
Other assets owned 704 1,249
---------- -----------
Total nonperforming assets $12,352 $7,156
---------- -----------
---------- -----------
Nonperforming assets to total assets 2.31% 1.28%
Nonperforming assets have increased from $7,156,000 as of December 31,
1995 to $12,352,000 as of September 30, 1996. The principal reasons for this
increase relate to a $4,716,000 increase in nonaccrual loans and other real
estate owned. The nonaccrual loan increase was primarily due to the Bennett
Matter whose aggregate outstanding balance of $1,412,000 was placed on
nonaccrual in the first quarter of 1996 and an increase in nonaccrual
construction loans and residential mortgages of $2,873,000 and $502,000. Due
to the Company's current emphasis on construction lending, the Company may
continue to experience a higher level of nonperforming assets when compared
to historic levels.
Nonperforming loans consist of loans to 366 borrowers, 25 of which have
balances in excess of $100,000. The two largest have recorded balances of
$802,000 secured by general business assets and $780,000 secured by residential
real estate. Approximately 310 of the nonperforming loans are related to a
purchased portfolio of leases from a servicer who is now in bankruptcy
proceedings. Based on information currently available, management believes that
adequate reserves are included in the allowance for loan losses to cover any
loss exposure that may result from these loans.
16
<PAGE>
Other real estate owned consists of twelve properties. Nine properties are
residential, two are commercial buildings, and one is land held for sale. Other
assets owned included contract receivable rights and repossessed personal
property valued at $704,000.
Although the volume of nonperforming assets will depend in part on the
future economic environment, there are also loans totaling $4,694,000 about
which management 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 the information presently known about possible credit problems of the
borrower.
At September 30, 1996 the Company's total recorded investment in impaired
loans (as defined by SFAS 114 and 118) was $10,191,000 of which $4,120,000
relates to the recorded investment for which there is a related allowance for
loan losses of $1,741,000 determined in accordance with these statements and
$6,071,000 relates to the amount of that recorded investment for which there is
no related allowance for loan losses determined in accordance with these
standards.
The average recorded investment in the impaired loans during the nine
months ended September 30, 1996 and September 30, 1995 was $9,714,000 and
$6,793,000; the related amount of interest income recognized during the periods
that such loans were impaired was $17,000 and $269,000 for the three and nine
month periods ended September 30, 1996 and $35,000 and $276,000 for the same
periods in 1995. No interest income was recognized using a cash-basis method
of accounting during the period that the loans were impaired.
LIQUIDITY
Redwood's primary source of liquidity is dividends from its financial
institution subsidiaries. Redwood's primary uses of liquidity are associated
with cash payments made to the subordinated debt holders, dividend payments
made to the preferred stock holders, and operating expenses of the parent.
It is Redwood's general policy to retain liquidity at Redwood at a level
which management believes to be consistent with the safety and soundness of
the Company as a whole. As of September 30, 1996, Redwood held $2,319,000 in
interest-bearing deposits at its subsidiaries and a $3,000,000 subordinated
note issued by NBR.
17
<PAGE>
Beginning with the fourth quarter of 1992, Redwood has paid a quarterly
dividend of $.03 per share of Common Stock. In the fourth quarter of 1993, this
dividend was increased to $0.035 per share. This dividend was suspended in the
fourth quarter of 1994. In addition, Redwood pays quarterly dividends of 7.8%
on its preferred stock of $5,750,000 and interest at 8.5% on $12,000,000 of
subordinated debentures issued in 1993. Payment of these obligations is
dependent on dividends from NBR and Allied. 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 the above
obligations. No assurance can be given as to the ability of Redwood's
subsidiaries to pay dividends to Redwood.
In the fourth quarter of 1994, Redwood received a dividend of $200,000 from
NBR and $400,000 from Allied. During 1995, NBR and Allied declared dividends of
$860,000 and $227,000 respectively. During 1996, NBR and Allied declared
dividends of $215,000 and $2,227,000 respectively. Management believes that at
September 30, 1996 the Company's liquidity position was adequate for the
operations of Redwood and its subsidiaries for the foreseeable future.
Although each entity within the consolidated group manages its own
liquidity, the Company's consolidated cash flows can be divided into three
distinct areas; operating, investing and financing. For the nine months ended
September 30, 1996 the Company received $56.2 million in cash flows from
operations while using $52.3 million and $28.1 million in investment and
financing activities, respectively. Although the Company experienced a decline
in cash and cash equivalents of $24.2 million for the nine months ended
September 30, 1996, such balance was unusually high at December 31, 1995 due to
proceeds of $20.9 million from a security sale not being received prior to 1995
year end.
CAPITAL RESOURCES
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.
The Company and each of its 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.
18
<PAGE>
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).
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 core capital ratio for Allied 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. Under this regulation, Allied currently
would not be required to take a deduction from capital.
19
<PAGE>
The following table summarizes the consolidated capital ratios and the
capital ratios of the principal subsidiaries at December 31, 1995 and September
30, 1996.
<TABLE>
<CAPTION>
Actual Required
Amount Amount Excess Actual %
------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
At September 30, 1996:
COMPANY
Leverage (to Average Assets) $30,108 $21,158 $8,950 5.69%
Tier 1 Capital (to Risk-weighted Assets) 27,462 14,813 12,649 7.42
Total Capital (to Risk-weighted Assets) 44,087 31,438 12,649 11.91
NBR
Leverage Capital (to Average Assets) 17,674 9,875 7,799 7.16
Tier 1 Capital (to Risk-weighted Assets) 17,674 7,690 9,984 9.19
Total Capital (to Risk-weighted Assets) 23,094 15,380 7,714 12.01
ALLIED
Core Capital (to Total Assets) 18,205 11,236 6,969 6.48
Tier 1 Capital (to Risk-weighted Assets) 15,559 6,971 8,588 8.93
Total Capital (to Risk-weighted Assets) 17,748 13,941 3,807 10.18
Tangible Capital (to Total Assets) 18,205 4,213 13,992 6.48
At December 31, 1995:
COMPANY
Tier 1 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
Tier 1 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
</TABLE>
20
<PAGE>
PART II. - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT 11
Weighted average shares, used in the computation of per share
earnings, include the common stock equivalents impact of common stock
options outstanding. Primary earnings per share includes the
reduction of net income by the declared Preferred Stock dividend. The
impact on earnings per share assuming conversion of the Preferred
Stock was reflected in the fully-dilutive computation. The
computation of per share earnings is incorporated by reference in the
Consolidated Statement of Operations on page 3 herein.
(b) REPORTS ON FORM 8-K
Form 8-K dated July 17, 1996 declaring quarterly dividend on Redwood
Empire Bancorp's preferred stock of 19.5 cents per share. The
dividend was payable on August 14, 1996 to shareholders of record on
July 30, 1996.
Form 8-K dated July 25, 1996 reporting second quarter results for
period ended June 30, 1996.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDWOOD EMPIRE BANCORP
(Registrant)
DATE: 11-07-96 BY: /s/ Patrick W. Kilkenny
-------- -----------------------
Patrick W. Kilkenny
President and Chief Executive Officer
DATE: 11-07-96 BY: /s/ James E. Beckwith
-------- ----------------------------
James E. Beckwith
Senior Vice President and Chief
Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 18,606
<INT-BEARING-DEPOSITS> 312
<FED-FUNDS-SOLD> 12,311
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,733
<INVESTMENTS-CARRYING> 22,637
<INVESTMENTS-MARKET> 22,929
<LOANS> 350,399<F1>
<ALLOWANCE> 6,985
<TOTAL-ASSETS> 534,507
<DEPOSITS> 446,380
<SHORT-TERM> 31,628
<LIABILITIES-OTHER> 13,191
<LONG-TERM> 12,000
0
5,750
<COMMON> 19,262
<OTHER-SE> 6,296<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 534,507
<INTEREST-LOAN> 31,652
<INTEREST-INVEST> 2,270
<INTEREST-OTHER> 873
<INTEREST-TOTAL> 34,795
<INTEREST-DEPOSIT> 15,204
<INTEREST-EXPENSE> 17,316
<INTEREST-INCOME-NET> 17,479
<LOAN-LOSSES> 3,375
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 27,839
<INCOME-PRETAX> 190
<INCOME-PRE-EXTRAORDINARY> 190
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
<YIELD-ACTUAL> 4.73
<LOANS-NON> 8,917
<LOANS-PAST> 130
<LOANS-TROUBLED> 757
<LOANS-PROBLEM> 4,694
<ALLOWANCE-OPEN> 5,037
<CHARGE-OFFS> 1,532
<RECOVERIES> 105
<ALLOWANCE-CLOSE> 6,985
<ALLOWANCE-DOMESTIC> 6,271
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 714
<FN>
<F1>EXCLUDES MORTGAGE LOANS HELD FOR SALE OF 81,105
<F2>INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE OF 454
</FN>
</TABLE>
