<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (IRS Employer
Incorporated or organization) Identification No.)
111 Santa Rosa Avenue, Santa Rosa, California 95404-4905
(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. May 1, 1997: 2,780,422
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 Months ended March 31, 1997 and 1996. . . . . . . . 3
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996. . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996. . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . 9
PART II. Other Information
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 19
ITEM 2. Changes in Securities . . . . . . . . . . . . . . . . . . 19
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 19
ITEM 4. Submission of Matters to a Vote of Securities Holders . . 19
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . 19
ITEM 6. Exhibits and Reports on Item 8-K . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
This page is page 2 of 22 pages.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------- ---------
Interest income:
Interest and fees on loans $8,628 $10,398
Interest on investment securities 829 718
Interest on federal funds sold 278 324
Interest on time deposits due from
financial institutions 3 53
--------- ---------
Total interest income 9,738 11,493
Interest expense:
Interest on deposits 4,288 5,343
Interest on subordinated notes 278 284
Interest on other borrowings 83 367
--------- ---------
Total interest expense 4,649 5,994
--------- ---------
Net interest income 5,089 5,499
Provision for loan losses 585 1,515
--------- ---------
Net interest income after loan loss provision 4,504 3,984
Other operating income:
Service charges on deposit accounts 296 300
Merchant draft processing, net 422 488
Loan servicing income 316 380
Net realized gains (losses) on sale of
investment securities available for sale 1 17
Gain on sale of loans and loan servicing 1,507 3,536
Other income 467 864
--------- ---------
Total other operating income 3,009 5,585
Other operating expense:
Salaries and employee benefits 3,654 4,487
Occupancy and equipment expense 885 1,362
Restructuring charge -- --
Other 1,974 2,242
--------- ---------
Total other operating expense 6,513 8,091
--------- ---------
Income (loss) before income taxes 1,000 1,478
Provision (benefit) for income taxes 420 592
--------- ---------
Net income (loss) 580 886
Dividends on preferred stock 112 112
--------- ---------
Net income (loss) available for common shareholders $468 $774
--------- ---------
--------- ---------
Earnings per common and common equivalent share:
primary net income (loss) per share $.16 $.29
weighted average shares 2,861,000 2,706,000
fully diluted net income(loss) per share $.16 $.27
weighted average shares 2,861,000 3,244,000
Dividends per common share $ -- $ --
See Notes to Consolidated Financial Statements.
This page is page 3 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Cash and due from banks $ 22,780 $ 20,261
Federal funds sold 15,320 25,212
Due from broker -- --
--------- ------------
Cash and cash equivalents 38,100 45,473
Interest bearing deposits due from financial institutions 318 315
Investment securities:
Held to maturity (market value of $15,209 and $19,097) 14,986 18,781
Available for sale, at market 34,796 33,852
--------- ------------
Total investment securities 49,782 52,633
Mortgage loans held for sale 19,064 29,487
Loans:
Residential real estate mortgage 111,094 111,563
Commercial real estate mortgage 79,479 80,604
Commercial 64,306 66,525
Real estate construction 75,880 84,407
Installment and other 6,900 7,112
Less deferred loan fees (2,575) (2,797)
--------- ------------
Total portfolio loans 335,083 347,414
Less allowance for loan losses (7,085) (7,040)
--------- ------------
Net loans 327,998 340,374
Premises and equipment, net 3,784 4,049
Purchased mortgage servicing rights 660 582
Other real estate owned 2,893 2,132
Cash surrender value of life insurance 2,838 2,814
Other assets and interest receivable 15,552 21,607
--------- ------------
Total assets $460,990 $499,466
--------- ------------
--------- ------------
Deposits:
Noninterest bearing demand deposits $ 69,921 $ 71,814
Interest-bearing transaction accounts 157,344 156,453
Time deposits $100,000 and over 59,996 75,411
Other time deposits 117,546 132,772
--------- ------------
Total deposits 404,807 436,450
Other borrowings 5,204 10,307
Subordinated notes 12,000 12,000
Other liabilities and interest payable 8,860 10,977
--------- ------------
Total liabilities 430,871 469,734
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 2,767,659 and 2,746,490 shares 19,471 19,281
Retained earnings 5,500 5,032
Unrealized gain (loss) on investment securities carried as,
or transfered from available for sale, net of income taxes (602) (331)
--------- ------------
Total shareholders' equity 30,119 29,732
--------- ------------
--------- ------------
Total liabilities and shareholders' equity $460,990 $499,466
--------- ------------
--------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
This page is page 4 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 580 $ 886
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 788 1,086
Net realized losses (gains) on securities available for sale (1) (17)
Loans originated for sale (61,778) (457,759)
Proceeds from sale of loans held for sale 79,980 457,258
Gain on sale of loans and loan servicing (1,507) (3,536)
Provision for loan losses 585 1,515
Change in other assets and interest receivable 6,525 (1,857)
Change in other liabilities and interest payable (2,194) 2,857
Noncash restructuring charge -- --
Other, net (151) (187)
--------- ----------
Total adjustments 22,247 (640)
--------- ----------
Net cash provided by operating activities 22,827 246
--------- ----------
Cash flows from investing activities:
Net change in loans 3,208 (39,362)
Proceeds from sales of loans in portfolio 1,311 27,076
Purchases of investment securities available for sale (5,000) (12,763)
Purchases of investment securities held to maturity -- (200)
Sales of investment securities available for sale 6,974 --
Maturities of investment securities available for sale -- 10,500
Maturities of investment securities held to maturity 500 --
Premises and equipment, net (425) (194)
Purchase of mortgage servicing rights (148) (231)
Noninterest bearing demand deposits (3) 96
Proceeds from sale of other real estate owned 98 309
--------- ----------
Net cash provided by (used in) investment activities 6,515 (14,769)
--------- ----------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts (1,893) (2,026)
Change in interest bearing transaction accounts 890 19,847
Change in time deposits (30,640) (1,522)
Change in borrowings (5,103) (16,742)
Issuance of stock 143 62
Dividends paid (112) (112)
--------- ----------
Net cash used in financing activities (36,715) (493)
--------- ----------
Net change in cash and cash equivalents (7,373) (15,016)
Cash and cash equivalents at beginning of period 45,473 55,140
--------- ----------
Cash and cash equivalents at end of period $ 38,100 $ 40,124
--------- ----------
--------- ----------
</TABLE>
(Continued)
This page is page 5 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------- ----------
<S> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Income taxes $ -- $ 267
Interest expense 4,625 6,211
Noncash investing and financing activities:
Transfers from loans to other real estate owned 1,292 527
Transfer from loans to mortgage loans held for sale -- --
Transfer from mortgage loans held for sale to loans -- 50,000
Transfer of investment securities from available for sale
to held to maturity -- --
</TABLE>
This page is page 6 of 22 pages.
<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 1996 Annual Report to shareholders. The
statements include the accounts of Redwood Empire Bancorp and its wholly
owned subsidiary, National Bank of the Redwoods ("NBR"). 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 three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
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. On March 24, 1997, Allied Bank, F.S.B. a wholly owned subsidiary of
Redwood, was merged into NBR. In connection with the merger, NBR assumed all
of Allied's rights and obligations. As a result of the merger Allied Bank,
F.S.B. ceased to exist.
3. Net Income per Share
Net income per share is calculated based on the weighted average number
of shares of common stock outstanding and common stock equivalents
outstanding during the periods ended March 31, 1997 and 1996.
4. New Accounting Pronouncements
The Company has adopted SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" in 1997.
The statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-component
approach that focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
Management believes that adoption of SFAS 125 does not have a material
effect on the financial condition or results of operations of the Company.
This page is page 7 of 22 pages.
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). The Company is required to adopt SFAS 128 in the fourth quarter
of 1997 and will restate at that time earnings per share (EPS) data for prior
periods to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
currently computed by dividing net income available to common shareholders by
the weighted average of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
If SFAS 128 had been in effect during the current and prior year
periods, basic EPS would have been $.17 and $.29 for the quarters ended March
31, 1997 and 1996 respectively. Diluted EPS under SFAS 128 would not have
been significantly different than fully diluted EPS reported for the periods.
This page is page 8 of 22 pages.
<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 institution holding company headquartered in Santa
Rosa, California. Redwood has one subsidiary, National Bank of the Redwoods,
a national bank ("NBR").
Certain statement in this quarterly report on Form 10-Q include
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the "safe harbor"
created by those sections. These forward-looking statements involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Such risks and uncertainties
include, but are not limited to, the following factors: competitive pressure
in the banking industry; changes in the interest rate environment; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; and changes in business conditions, volatility of
rate sensitive deposits, operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; and
changes in the securities markets. In addition, such risks and uncertainties
include mortgage banking activities, merchant card processing and
concentration of lending activities all of which have been described in
"Certain Important Considerations for Investors".
The following sections discuss significant changes and trends in
financial condition, capital resources and liquidity of the Company from
December 31, 1996 to March 31, 1997, and significant changes and trends in
the Company's results of operations for the three months ended March 31,
1997, compared to the same period in 1996.
SUMMARY OF FINANCIAL RESULTS
The Company reported net income of $580,000 ($.16 per share, fully
diluted) for the three months ended March 31, 1997, compared to $886,000
($.29 per share, fully diluted) for the same period in 1996. The decrease in
net income in 1997 over 1996 is primarily due to a decline in first quarter
net interest income of $410,000 or 7.5%, a decrease of $2,576,000 or 46.1% in
first quarter other operating income, both being offset by a decline in first
quarter other operating expense of $1,578,000 or 19.5%.
NET INTEREST INCOME
Net interest income decreased $410,000 for the first quarter of 1997
compared to the first quarter of 1996. The decrease is primarily due to a
decline in average earning assets from March 31, 1996 to March 31, 1997 of
$75,031,000 or 14.7% partially offset by an increase in net interest margin.
The net interest margin increased to 4.69% for the first quarter of 1997
compared to 4.32% one year ago.
This page is page 9 of 22 pages.
<PAGE>
The decline in earning assets of the Company is due principally to the
decline in mortgage loans held for sale. The average of such loans declined
$39,011,000 from $59,408,000 as of March 31, 1996 to $20,397,000 as of March
31, 1997. This decline was a direct result of management's fourth quarter of
1996 decision to significantly curtail its "A paper" wholesale mortgage
banking operations.
With respect to the net interest margin, the yield on earning assets
declined slightly from 9.04% to 8.98%. However, as a result of decreased
funding needs, the Company significantly reduced its higher cost time
certificates of deposits. Total time certificates of deposits amounted to
$177,542,000 as of March 31, 1997 as compared to $261,834,000 as of March 31,
1996 which results in a decline of $84,292,000 or 32.2%. This reduction in
higher cost liabilities had a significant effect on overall yield paid for
interest-bearing liabilities. Such yield declined from 5.42% in the first
quarter of 1996 to 5.02% for the same quarter in 1997.
The following is an analysis of the net interest margin:
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Earning assets (1) $433,622 $9,738 8.98 $508,653 $11,493 9.04
Interest-bearing liabilities 370,501 4,649 5.02 442,690 5,994 5.42
------ -------
Net interest income $5,089 $5,499
------ -------
------ -------
Net interest income to
earning assets 4.69 4.32
</TABLE>
(1) Nonaccrual loans are included in the calculation of the average balance
of earning assets, and interest not accrued is excluded.
This page is page 10 of 22 pages.
<PAGE>
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and
interest-bearing liability, and the amount of change attributable to volume
and rate changes for the three months ended March 31, 1997 and 1996. Changes
not solely attributable to rate or volume have been allocated to rate.
<TABLE>
<CAPTION>
March 31, 1997 over
March 31, 1996
----------------------------
Volume Rate Total
----------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans ($891) ($249) ($1,140)
Mortgage loans held for sale (772) 142 (630)
Investment securities 124 (13) 111
Interest-earning deposits with other institutions (50) -- (50)
Federal funds sold (85) 39 (46)
----------------------------
Total increase (decrease) (1,674) (81) (1,755)
----------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts 155 15 170
Time deposits (1,066) (159) (1,225)
Other borrowings (281) (9) (290)
----------------------------
Total increase (decrease) (1,192) (153) (1,345)
----------------------------
Increase in net interest income ($482) $72 ($410)
----------------------------
----------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1997
amounted to $585,000 as compared to $1,515,000 in the same quarter in the
previous year. The decrease in the provision for loan losses for the
comparable three month period is due principally to a first quarter of 1996
loan loss provision relating to an acquired lease portfolio of $1,412,000,
the Seller/Servicer of which filed for bankruptcy. For further discussion
see Allowance for Loan Losses.
This page is page 11 of 22 pages.
<PAGE>
OTHER OPERATING INCOME AND EXPENSE AND INCOME TAXES
Other Operating Income
The following table sets forth the components of the Company's other
operating income for the three months ended March 31, 1997, as compared to
the same period in 1996.
Three Months Ended
March 31
------------------ %
(dollars in thousands) 1997 1996 Change
------ ------ ------
Service charges on deposit accounts 296 300 (1)
Merchant draft processing, net 422 488 (14)
Loan servicing income 316 380 (17)
Gain (loss) on securities 1 17 (94)
Gain on sale of loans and servicing 1,507 3,536 (57)
Other income 467 864 (46)
------ ------
Total other operating income $3,009 $5,585 (46)
------ ------
------ ------
Other operating income decreased $2,576,000 or 46.1% to $3,009,000 for
the first quarter of 1997 when compared to $5,585,000 for the same period in
1996. Such decline is due primarily to a decline in gains on sales of loans
and servicing of $2,029,000. As previously mentioned, the Company
significantly curtailed its mortgage "A paper" mortgage banking business the
fourth quarter of 1996. Accordingly, gain on sale of loan revenue from
mortgage banking operations has significantly declined.
Due to the Company's sale of mortgage loan servicing rights associated
with $839,945,000 mortgage loans in the third and fourth quarters 1996, loan
servicing income declined $64,000 in the first quarter of 1997. With a
significant reduction in serviced loans, revenue from these operations will
continue to be less than comparable historical performance.
Other income declined $397,000 in the first quarter of 1997 when
compared to the same quarter in 1996. This decline is again attributable to
the reduction in "A paper" mortgage banking operations.
Currently the Company's mortgage banking operation is comprised of
sub-prime mortgage banking and residential mortgage loan brokerage. For the
remainder of the year revenue from these operations is expected to be
significantly less than comparable historical performance of the Company's
mortgage banking unit.
This page is page 12 of 22 pages.
<PAGE>
Other Operating Expense
Other operating expense decreased by $1,578,000 or 19.5% to $6,513,000
during the first quarter of 1997 compared to $8,091,000 for the first quarter
of 1996, primarily due to the Company's restructuring plan, initiated in the
fourth quarter of 1996, which included the termination of employees, the
closing of several mortgage loan production offices, write-off of duplicate
or unnecessary fixed assets, and the merger of Allied Bank, F.S.B. into NBR.
The following table sets forth the components of the Company's other
operating expense during the three months ended March 31, 1997, as compared
to the same period in 1996.
Three Months Ended
March 31
------------------ %
(dollars in thousands) 1997 1996 Change
------ ------ ------
Salaries and employee benefits $3,654 $4,487 (19)
Occupancy and equipment expense 885 1,362 (35)
Restructuring charge -- -- --
Other 1,974 2,242 (12)
------ ------
Total other operating expense $6,513 $8,091 (20)
------ ------
------ ------
The Company expects other operating expense will continue to decline for
the remainder of the year due to the virtual elimination of the "A paper"
wholesale mortgage banking operations and the effect of consolidating Allied
Bank, F.S.B. into NBR.
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 42.0% for the three-months ended March 31, 1997, compared to 40.1%
for the same period in 1996.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale decreased $10,423,000 or 35% to $19,064,000
at March 31, 1997 compared to $29,487,000 at December 31, 1996. The decrease
was due to the Company's decision to significantly curtail its "A paper"
mortgage banking operations in the fourth quarter of 1996.
LOANS
Total loans decreased $12,331,000 or 6% to $335,083,000 at March 31,
1997 compared to $347,414,000 at December 31, 1996. The principal reason for
this decline relates to construction loans whose balance declined $8,637,000
due to loan payoffs.
This page is page 13 of 22 pages.
<PAGE>
The following table summarizes the composition of the loan portfolio at
March 31, 1997 and December 31, 1996.
March 31, 1997 December 31, 1996
---------------- -----------------
(dollars in thousands) Amount % Amount %
---------------- -----------------
Residential real estate mortgage $111,094 33% $111,563 33%
Commercial real estate mortgage 79,479 24 80,604 23
Commercial 64,306 19 66,525 19
Real estate construction 75,880 23 84,407 24
Installment and other 6,900 2 7,112 2
Less deferred fees (2,575) (1) (2,797) (1)
---------------- ----------------
Total loans 335,083 100% 347,414 100%
---- ----
---- ----
Less allowance for loan losses (7,085) (7,040)
-------- --------
Net loans $327,998 $340,374
-------- --------
-------- --------
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 and
general economic conditions and other qualitative factors.
This page is page 14 of 22 pages.
<PAGE>
The following table summarizes the Company's allowance for loan losses:
Three months ended
March 31
------------------
(dollars in thousands) 1997 1996
------ ------
Beginning allowance for loan losses $7,040 $5,037
Provision for loan losses 585 1,515
Charge-offs (575) (199)
Recoveries 35 27
------ ------
Ending allowance for loan losses $7,085 $6,380
------ ------
------ ------
Net charge-offs to average
loans (annualized) .64% .17%
The allowance for loan losses as a percentage of portfolio loans
increased from 2.03% at December 31, 1996 to 2.11% at March 31, 1997. The
increase in this percentage is due to a $12,331,000 decline in the Company's
total loan portfolio. The decrease in the provision of $930,000 over the same
period in 1996 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.
Although the Company's provision for loan losses declined significantly
in the first quarter of 1997 when compared to the same quarter of 1996, no
assurances can be given that future quarterly provisions for loan losses will
be maintained at the 1997 first quarter level.
NONPERFORMING ASSETS
The following table summarizes the Company's nonperforming assets.
March 31, December 31,
(dollars in thousands) 1997 1996
--------- ------------
Nonaccrual loans $ 9,670 $ 8,246
Accruing loans past due 90 days or more 746 1,536
Restructured loans 1,622 599
--------- ------------
Total nonperforming loans 12,037 10,381
Other real estate owned 2,893 2,132
Other assets owned 640 668
--------- ------------
Total nonperforming assets $15,570 $13,181
--------- ------------
--------- ------------
Nonperforming assets to total assets 3.38% 2.64%
This page is page 15 of 22 pages.
<PAGE>
Nonperforming assets have increased from $13,181,000 as of December 31,
1996 to $15,570,000 as of March 31, 1997. The principal reasons for this
increase relate to an increase in restructured loans of $1,023,000, an
increase in nonaccrual loans of $1,424,000, an increase in other real estate
owned of $761,000, all being offset by a decline in accruing loans past due
90 days or more of $790,000. In the first quarter of 1997 the Company was
required to repurchase three nonperforming residential mortgage loans
totaling $721,000 which had been previously sold to investors.
Nonperforming loans consist of loans to 83 borrowers, 34 of which have
balances in excess of $100,000. The two largest have recorded balances of
$742,000 secured by general business assets and $684,000 secured by
residential real estate. 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.
Other real estate owned consists of 21 properties. 17 properties are
residential and four construction lots. Other assets owned included contract
receivable rights and repossessed personal property valued at $640,000.
Although the volume of nonperforming assets will depend in part on the
future economic environment, there are also five loan relationships which
total approximately $2,585,000 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.
Construction lending generally bears a greater degree of risk than other
forms of real estate lending. Accordingly, due to the Company's current
level of outstanding construction loans, the Company may experience an
increase in non performing loans from this loan category.
In the first quarter of 1997 the Company was required to repurchase
three non performing residential mortgage loans from investors. From time to
time the Company may be required to repurchase mortgage loans from investors
depending upon the terms of the purchase agreement between the investor and
the Company. Such repurchase terms include first payment default or fraud.
Primarily these repurchases involve loans which are in default. The Company
expects that it may be required to repurchase loans in the future. The
Company maintains a reserve for its estimate of potential losses associated
with recourse provisions of certain loan sale agreements.
At March 31, 1997 the Company's total recorded investment in impaired
loans (as defined by SFAS 114 and 118) was $12,037,000 of which $7,550,000
relates to the recorded investment for which there is a related allowance for
credit losses of $929,000 determined in accordance with these statements and
$4,487,000 relates to the amount of that recorded investment for which there
is no related allowance for credit losses determined in accordance with these
standards.
This page is page 16 of 22 pages.
<PAGE>
The average recorded investment in the impaired loans during the three
months ended March 31, 1997 and March 31, 1996 was $16,928,000 and
$7,690,000; the related amount of interest income recognized during the
periods that such loans were impaired was $14,000 for 1997 and $54,000 for
1996. 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 subsidiary. 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 March 31, 1997, Redwood held $3,644,000 in
deposits at its subsidiary and a $3,000,000 subordinated note issued by NBR.
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. Federal regulatory agencies
have the authority to prohibit the payment of dividends by NBR to Redwood if
a finding is made that such payment would constitute an unsafe or unsound
practice, or if NBR became undercapitalized. If NBR is restricted from paying
dividends, Redwood could be unable to pay the above obligations. No
assurance can be given as to the ability of NBR 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, compared to 1996, NBR and
Allied declared dividends of $215,000 and $2,227,000 respectively. During
the first quarter of 1997, NBR declared dividends of $215,000. Management
believes that at March 31, 1997, the Company's liquidity position was
adequate for the operations of Redwood and its subsidiary for the foreseeable
future.
Although each entity within the consolidated group manages its own
liquidity, the Company's consolidated cash flow can be divided into three
distinct areas; operating, investing and financing. For the three months
ended March 31, 1997 the Company received $22,827,000 and $6,515,000 in cash
flows from operating and investing activities while using $36,715,000 in
financing activities.
This page is page 17 of 22 pages.
<PAGE>
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 and the OCC 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).
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 leverage ratio for the Company and NBR is
based on average assets for the quarter.
The following table summarizes the consolidated capital ratios and the
capital ratios of the principal subsidiaries at December 31, 1996 and March
31, 1997.
Company NBR
------------------
March 31, 1997
Total capital to risk based assets 13.15 12.32
Tier 1 capital to risk based assets 8.41 10.19
Leverage ratio 5.58 7.56
December 31, 996
Total capital to risk based assets 12.12 12.28
Tier 1 capital to risk based assets 7.63 9.40
Leverage ratio 5.46 6.87
This page is page 18 of 22 pages.
<PAGE>
CERTAIN IMPORTANT CONSIDERATIONS FOR INVESTORS
MORTGAGE BANKING ACTIVITY. The Company's historic results of operations
has been significantly influenced by mortgage banking activity, which can
fluctuate significantly, in both volume and profitability, with changes in
interest rate movements. In the fourth quarter of 1996, the Company
significantly curtailed its "A paper" wholesale mortgage loan production. As
a result of this action, the Company's future mortgage loan production
revenue and expenses will be significantly reduced from pre 1997 levels.
MERCHANT CREDIT CARD PROCESSING. The Company's profitability can be
negatively impacted should one of the Company's merchant credit card
customers be unable to pay on charge-backs from cardholders. Due to a
contractual obligation between the Company and Visa and Mastercard, NBR
stands in the place of the merchant in the event that a merchant is unable to
pay on charge-backs from cardholders. Management has taken certain actions
to decrease the risk of merchant bankruptcy with its merchant bankcard
business. These steps include elimination of all merchants in the travel
business and the discontinuance of other high-risk accounts.
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 real estate market in the Company's lending areas. At March 31,
1997, approximately 85% 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.
This page is page 19 of 22 pages.
<PAGE>
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - NONE
Item 2. CHANGES IN SECURITIES - NONE
Item 3. DEFAULTS UPON SENIOR SECURITIES - NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
Item 5. OTHER INFORMATION - NONE
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.
This page is page 20 of 22 pages.
<PAGE>
(b) REPORTS ON FORM 8-K
Form 8-K dated January 27, 1997 declaring first quarterly
dividend on its Redwood Empire Bancorp's preferred stock payable
on February 14, 1997.
Form 8-K dated January 30, 1997 announcing fourth quarter and
full year 1996 financial results.
Form 8-K dated February 2, 1997 announcing completion of
combination of Allied Bank and National Bank of the Redwoods
subsidiaries.
Form 8-K dated February 6, 1997 reporting receipt of approval to
combine Allied Bank and National Bank of the Redwoods
subsidiaries.
Form 8-K dated February 19, 1997 announcing management change at
its Allied Bank subsidiary.
This page is page 21 of 22 pages.
<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 and in the capacity indicated.
REDWOOD EMPIRE BANCORP
(Registrant)
DATE: 5-01-97 BY: /s/ James E. Beckwith
--------- -------------------------------------
James E. Beckwith
Executive Vice President,
Chief Financial Officer,
Principal Financial Officer, and
Principal Accounting Officer
This page is page 22 of 22 pages.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 22,780
<INT-BEARING-DEPOSITS> 318
<FED-FUNDS-SOLD> 15,320
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,796
<INVESTMENTS-CARRYING> 14,986
<INVESTMENTS-MARKET> 15,209
<LOANS> 335,083<F1>
<ALLOWANCE> 7,085
<TOTAL-ASSETS> 460,990
<DEPOSITS> 404,807
<SHORT-TERM> 5,204
<LIABILITIES-OTHER> 8,860
<LONG-TERM> 12,000
0
5,750
<COMMON> 19,471
<OTHER-SE> 4,898<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 460,990
<INTEREST-LOAN> 8,628
<INTEREST-INVEST> 829
<INTEREST-OTHER> 281
<INTEREST-TOTAL> 9,738
<INTEREST-DEPOSIT> 4,288
<INTEREST-EXPENSE> 4,649
<INTEREST-INCOME-NET> 5,089
<LOAN-LOSSES> 585
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 6,513
<INCOME-PRETAX> 1,000
<INCOME-PRE-EXTRAORDINARY> 1,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 580
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 4.85
<LOANS-NON> 9,670
<LOANS-PAST> 746
<LOANS-TROUBLED> 1,622
<LOANS-PROBLEM> 2,585
<ALLOWANCE-OPEN> 7,085
<CHARGE-OFFS> 575
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 7,085
<ALLOWANCE-DOMESTIC> 6,403
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 683
<FN>
<F1>EXCLUDES MORTGAGE LOANS HELD FOR SALE 19,064.
<F2>INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE
OF 602.
</FN>
</TABLE>
