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UNITED STATES
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, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
Commission file number: 0-19231
REDWOOD EMPIRE BANCORP
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(Exact number of Registrant as specified in its charter)
California 68-0166366
- ------------------------------- -------------------
(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) 573-4800
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
--- ---
Indicate by checkmark if disclosure of delinquent files pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the Registrant's common stock held by
non-affiliates on March 1, 1998 (based on the closing sale price of the
Common Stock on the American Stock Exchange on such date) was $38,859,483.
As of March 1, 1998 there were outstanding 2,785,261 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Definitive Proxy Statement (see Part III, Items 10, 11, and 12).
1
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I
<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 4. Submission of Matters to A Vote of Securities Holders. . . . . . . . . 23
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 7a. Quantitative and Qualitative Disclosures about Market Risk . . . . . . 53
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . 56
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . 96
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . 97
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 97
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . 97
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . 97
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K. . . 98
</TABLE>
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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 California through one principal
subsidiary, National Bank of the Redwoods, a national bank ("NBR"). A
previously owned subsidiary, Allied Bank, F.S.B., a federal savings bank
("Allied") merged with its sister subsidiary, National Bank of the Redwoods,
in March, 1997.
(a) GENERAL DEVELOPMENT OF BUSINESS.
Redwood is a California corporation, headquartered in Santa Rosa,
California. Its wholly-owned subsidiary is NBR, a national bank which was
chartered in 1985. In addition, NBR has three wholly-owned subsidiaries, NBR
Mortgage Company, Inc., Allied Diversified Credit, and Redwood Empire
Datacorp which are currently inactive. 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.
In November, 1996 the Board of Directors of the Company voted to merge
Allied into NBR. The combination of the two wholly-owned subsidiaries of
Redwood was structured as a merger transaction wherein Allied has merged into
NBR with NBR as the survivor. As a result of the merger NBR assumed all of
Allied's rights and obligations. Allied ceased to exist as a federally
chartered savings institution upon the merger. On February 3, 1997, NBR
received approval from the Office of the Comptroller of the Currency to merge
Allied into NBR. The merger was consummated March 24, 1997.
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(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
During the year ended December 31, 1997, the Company operated in two
principal industry segments: commercial banking and residential lending. The
Company's residential lending activities currently include the brokering of
"A paper" mortgage loans through its retail brokerage operations, the
origination for sale of both "A paper" and "subprime" mortgage loans, and the
servicing of loans sold to investors. Commercial banking activities include
commercial loan portfolio lending, the origination for sale and servicing of
Small Business Administration loans, construction lending, various deposit
programs and numerous fee-based services.
In the fourth quarter of 1996 the Company significantly curtailed its
wholesale mortgage loan originations operations associated with the wholesale
generation of mortgage loans which predominantly conform to the underwriting
standards set by Fannie Mae, Freddie Mac, or other institutional investors.
This type of activity is commonly referred to as "A paper" wholesale mortgage
banking. This decision was taken due to concerns over declining profit
margins and interest rate risk. As a result of this action, the Company's
mortgage banking operations has focused on its subprime mortgage business
along with retail generation of "A paper" mortgage loans through its
brokerage operations. Accordingly, revenues and expenses associated with this
segment have been significantly reduced from historic levels.
In 1997, the Company's commercial banking operations generated revenues
of $32,824,000 as compared to $34,027,000 in 1996 and $28,825,000 in 1995.
In 1997 the Company's residential lending operations generated revenues of
$14,625,000 as compared to $31,327,000 in 1996, and $35,124,000 in 1995.
Operating profits generated by the Company's commercial banking operations
amounted to $6,913,000 in 1997, $3,389,000 in 1996 and $5,180,000 in 1995.
Residential lending's operating profits totaled $173,000 in 1997,
($3,194,000) in 1996 and $2,597,000 in 1995.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the
"Company") is a financial institution holding company headquartered in Santa
Rosa, California, primarily operating in Northern California. Its
wholly-owned subsidiary is National Bank of the Redwoods("NBR"), a national
bank chartered in 1985. The Company's business strategy involves two
principal business activities, commercial banking and residential lending
which are conducted through NBR.
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NBR provides its commercial banking services through five retail
branches located in Sonoma County, California, one retail branch located in
Mendocino County, California, and one retail branch located in Lake County,
California. NBR generally extends commercial loans 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's targeted commercial banking market area includes the
California counties north of San Francisco. 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. NBR also originates commercial and residential construction loans
for its portfolio.
The Company's residential mortgage lending business consists of
one-to-four family residential mortgage loans which predominantly conform to
the underwriting standards set by Fannie Mae, Freddie Mac or other
institutional mortgage conduits. These loans are commonly referred to as "A
paper" loans and are primarily acquired by NBR through its retail loan
officers. NBR also provides mortgage loan brokerage services to retail
customers through its Valley Financial division. In addition NBR originates
mortgage loans through its Allied Diversified Credit ("ADC") division that do
not comply with all standards established by Fannie Mae or Freddie Mac. These
loans are commonly referred to as "Sub Prime" loans and are acquired by ADC
on a wholesale and retail basis. Substantially all mortgage loan originations
are packaged and sold into the secondary market. NBR 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.
As previously stated, the Company has significantly curtailed its "A
paper" wholesale mortgage banking operations. As a result of this action the
company's mortgage loan production revenue and expenses have been
significantly reduced from historic levels. Residential lending operations
focuses on the Company's sub prime mortgage business along with mortgage loan
brokerage services. NBR's principal targeted residential lending territory
includes Northern and Central California. These areas are served by five loan
production offices located in Santa Rosa, Alamo, Pleasanton, San Jose and
Monterey.
The primary sources of funds for the Company's commercial and
residential lending programs are local deposits, proceeds from loan sales,
loan payments, and other borrowings. The Company attracts deposits primarily
from local businesses, professionals and retail customers. The Company
generally does not purchase deposits through deposit brokers and had no
brokered deposits at December 31, 1997. In addition to deposits, the Company
may obtain 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.
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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 the Comptroller of the Currency (the "OCC"), and
the Federal Deposit Insurance Corporation (the "FDIC").
The Company and its subsidiaries had 253 full-time-equivalent employees
at December 31, 1997. 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. 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 carrying
value and their weighted average yields at December 31, 1997. Yields on
tax-exempt securities have been computed on a tax-equivalent basis.
<TABLE>
<CAPTION>
After One After Five
Through Through
Within One Year Five Years Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
----------------- ----------------- ----------------- ----------------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agencies $11,993 6.16% $31,665 6.32% $16,609 6.64% -- -- $60,267 6.38%
Other bonds and mortgaged
backed securities 13 4.50 -- -- -- -- 8,388 7.14 $8,401 7.14
-------- -------- -------- ------- --------
Total $12,006 6.16% $31,665 6.32% $16,609 6.64% $8,388 7.14% $68,668 6.47%
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
</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,
1997 1996 1995
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(in thousands)
<S> <C> <C> <C>
U.S. Government and agencies $60,267 $46,588 $37,436
Other bonds and mortgage-backed securities 8,401 2,701 2,638
FHLB and FRB Stock 3,897 3,344 3,890
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Total $72,565 $52,633 $43,964
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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 at or above 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, 1997.
The following chart sets forth the distribution of the Company's average
daily deposits for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
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1997 1996 1995
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Amount Rate Amount Rate Amount Rate
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(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Savings & Money Market $130,999 3.94% $129,405 4.02% $93,480 4.12%
NOW 21,804 1.47 21,245 1.64 22,836 2.28
Noninterest bearing 77,382 --- 65,082 --- 51,946 ---
Time deposits $100,000 and over 44,342 5.68 95,258 5.35 120,499 6.29
Other time deposits 128,002 5.33 143,770 6.09 183,897 5.86
</TABLE>
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The Company's time deposits of $100,000 or more had the following
schedule of maturities at December 31, 1997:
<TABLE>
<CAPTION>
Amount
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(in thousands)
<S> <C>
Remaining Maturity:
Three months or less $17,976
Over three months to six months 10,644
Over six months to 12 months 16,424
Over 12 months 8,834
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Total $53,878
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</TABLE>
Time deposits of $100,000 or more are generally from the Company's local
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, 1997, the Company had FHLB short-term borrowings of
$1,819,000, with a weighted average interest rate of 6.29%, collateralized by
approximately $48,000,000 in residential mortgage loans. Remaining available
credit at December 31, 1997 was $286,000. 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 following table
summarizes the highest amount of FHLB borrowings outstanding for a month-end
during the year, the average balance of borrowings from the FHLB and the
weighted average rate for the three years ended December 31, 1997.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
----------------------------------------
(in thousands)
<S> <C> <C> <C>
Average balance during the year $566 $21,834 $46,600
Average interest rate during the year 5.00% 5.94% 6.56%
Maximum month-end balance during the year $1,819 $39,000 $112,150
Date of maximum month-end balance 12/31/97 4/30/96 1/31/95
</TABLE>
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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.
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 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.
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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.
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.
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.
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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.
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.
CAPITAL STANDARDS. The FRB and the OCC, 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.
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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.
A final rule regarding a market risk component of risk-based capital was
issued on September 6, 1996. The rule was issued jointly by the OCC, the
Board of Governors of the Federal Reserve System, and the FDIC. The final
rule amends the risk-based capital guidelines to incorporate a measure for
market risk. A bank subject to this rule must measure the market risk of the
debt and equity positions located in its trading account and of the foreign
exchange and commodity positions throughout the bank. The rule is consistent
with the amendment to the Capital Accord adopted by the Basle Committee on
Banking Supervision. If a bank is subject to this rule, its trading account
debt and equity positions and its commodity positions will no longer be
included in the capital calculation for credit risk. The existing
counterparty credit risk-based capital requirements for off-balance sheet
transactions will, however, continue to apply to all banks.
The OCC intends to apply the rule to a limited group of national banks
with significant trading activity. Specifically, the rule will apply to
banks that meet one of the following two criteria:
- the sum of the bank's trading assets and liabilities is at least 10
percent of total assets, or
- the sum of the bank's trading assets and liabilities exceeds $1
billion.
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Additionally, the final rule provides the agencies with flexibility to
exempt from the rule banks that meet either of these two criteria. It also
allows the agencies to apply the rule on a case-by-case basis to any bank
with significant market risk exposure but which is not captured by the above
criteria. NBR does not meet any of the above criteria.
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%.
13
<PAGE>
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.
The following tables present the capital ratios for NBR as compared to
the standards for well-capitalized depository institutions, as of December
31, 1997.
<TABLE>
<CAPTION>
Well- Minimum
Actual Capitalized Requirement
---------------------------------------
<S> <C> <C> <C>
NBR
Leverage 8.58 5.00 4.00
Tier 1 risk-based 11.65 6.00 4.00
Total risk-based 13.83 10.00 8.00
</TABLE>
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.
14
<PAGE>
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.
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.
15
<PAGE>
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, 1997, NBR had the ability to dividend $4,523,000 to Redwood
without prior regulatory approval.
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.
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,
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.
16
<PAGE>
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. As a
result, a one-time insurance premium charge was assessed on SAIF-insured
deposits to bring the SAIF reserves to the mandated level. Calculated at
.675% of Allied's deposits at March 31, 1995, the resulting charge to the
Company was $2,192,000. Such charge was recorded in the third quarter of 1996.
The FDIC finalized a rule on November 26, 1996 amending its regulation
regarding Oakar institutions. Oakar institutions are those insured
institutions that maintain both BIF and SAIF insured deposits. Upon
consummation of the merger with Allied, NBR will be an "Oakar institution".
Pursuant to the final rule, at merger date the adjusted attributable deposit
amount ("AADA") will be calculated. For NBR, the AADA represents the
assessable deposits attributable to the secondary insurance fund (SAIF). The
AADA at merger date equals the amount of deposits maintained by Allied at the
merger date. Subsequent increases or decreases of the AADA occur at the same
rate of NBR's overall deposit base due to ordinary business operations.
Deposit growth through acquisition will not affect the AADA attributable to
the Allied merger. When an Oakar institution sells deposits, it sells
deposits insured by its primary fund, which for NBR is the BIF.
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. 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.
17
<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.
18
<PAGE>
The Economic Growth and Regulatory Paperwork Reduction Act (the "1996
Act") as part of the Omnibus Appropriations Bill was enacted on September 30,
1996 and includes many banking related provisions. The most important
banking provisions is the recapitalization of the SAIF. The 1996 Act
provides for a one-time assessment of approximately 65 basis point per $100
of deposits of SAIF insured deposits including Oakar deposits payable on
November 30, 1996. For the years 1997 through 1999 the banking industry will
assist in the payment of interest on FICO bonds that were issued to help pay
for the clean-up of the savings and loan industry. Banks will pay
approximately 1.3 cents per $100 of deposits for this special assessment, and
after the year 2000, banks will pay approximately 2.4 cents per $100 of
deposits until the FICO bonds mature in 2017. There is a three year
moratorium on conversions of SAIF deposits to BIF deposits. The 1996 Act
also has certain regulatory relief provisions for the banking industry.
Lender liability under the Superfund is eliminated for lenders who foreclose
on property that is contaminated provided that the lenders were not involved
with the management of the entity that contributed to the contamination.
There is a five year sunset provision for the elimination of civil liability
under the Truth in Savings Act. The FRB and the Department of Housing and
Urban Development are to develop a single format for Real Estate Settlement
Procedures Act and Truth in Lending Act ("TILA") disclosures. TILA
disclosures for adjustable mortgage loans are to be simplified. Significant
revisions are made to the Fair Credit Reporting Act ("FCRA") including
requiring that entities which provide information to credit bureaus conduct
an investigation if a consumer claims the information to be in error.
Regulatory agencies may not examine for FCRA compliance unless there is a
consumer complaint investigation that reveals a violation or where the agency
otherwise finds a violation. In the area of the Equal Credit Opportunity
Act, banks that self-test for compliance with fair lending laws will be
protected from the results of the test provided that appropriate corrective
action is taken when violations are found.
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.
19
<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
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.
20
<PAGE>
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, 1997, approximately 73% of the Company's loans were secured by
real estate, of which 28% 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.
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 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 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, 1997, NBR was able to pay up to $4,523,000
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.
21
<PAGE>
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.
ITEM 2. PROPERTIES
The Company owns two depository branches and leases 21 other locations
and equipment used in the normal course of business. There are no contingent
rental payments and the Company has five sublease arrangements. Total rental
expenses under all leases, including premises, totaled $2,095,000, $2,258,000
and $2,172,000, in 1997, 1996 and 1995. 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.
22
<PAGE>
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 1997.
23
<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
1997 Annual Report to Shareholders, and is by this reference incorporated
herein. As of December 31, 1997 there were 525 shareholders of record of
Redwood's Common Stock.
Redwood did not pay dividends during the three year period ended
December 31, 1997. There are regulatory limitations on cash dividends that
may be paid by Redwood as well as regulatory limitations on cash dividends
that may be paid by NBR 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 if a finding is made that such payment would
constitute an unsafe or unsound practice, or if NBR became critically
undercapitalized. See "REGULATION AND SUPERVISION".
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF CONSOLIDATED FINANCIAL DATA AND PERFORMANCE RATIOS
<TABLE>
<CAPTION>
At or for the Year ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- -----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Total interest income $37,306 $45,784 $47,374 $38,005 $27,465
Net interest income 20,519 23,141 19,703 17,339 14,980
Provision for loan losses 2,100 6,262 1,590 1,095 1,679
Other operating income 10,143 19,570 16,575 10,885 19,177
Net income (loss) 3,441 (1,486) 3,313 (3,035) 4,564
Net income (loss) available to common equity 2,992 (1,935) 2,977 (3,483) 4,132
BALANCE SHEETS:
Total assets $446,719 $499,466 $557,910 $630,652 $471,674
Total loans 282,396 347,414 368,224 384,569 210,257
Mortgage loans held for sale 16,929 29,487 62,620 138,003 168,619
Allowance for loan losses 7,645 7,040 5,037 5,787 5,209
Total deposits 391,421 436,450 458,393 469,008 351,775
Shareholders' equity 33,243 29,732 31,585 28,194 31,576
PERFORMANCE RATIOS:
Return on average assets .75% (.28%) .57% (.56%) 1.21%
Return on average common equity 11.71 (7.43) 12.37 (13.17) 17.39
Common dividend payout ratio N/A N/A N/A N/A 7.70
Average equity to average assets 6.83 5.96 5.14 5.90 7.56
Leverage ratio 7.10 5.45 5.14 4.08 6.99
Tier 1 risk-based capital ratio 9.72 7.63 7.24 6.55 10.72
Total risk-based capital ratio 14.64 12.11 11.68 10.75 16.04
Net interest margin 4.90 4.64 3.63 3.40 4.20
Other operating expense to net interest
income and other operating income 74.54 91.19 79.98 113.46 72.06
Average earning assets to average
total assets 91.44 93.46 93.50 93.39 94.32
Nonperforming assets to total assets 3.72 2.64 1.28 1.34 1.72
Net loan charge-offs to average loans .46 1.22 .60 .40 .40
Allowance for loan losses to total loans 2.71 2.03 1.37 1.50 2.48
Allowance for loan losses to nonperforming loans 78.60 67.82 101.88 104.97 122.65
SHARE DATA:
Common shares outstanding (000) 2,785 2,749 2,679 2,663 2,598
Book value per common share $9.87 $8.72 $9.64 $8.43 $9.94
Basic earnings (loss) per share 1.08 (.71) 1.11 (1.31) 1.54
Diluted earnings (loss) per share 1.02 (.71) 1.04 (1.31) 1.44
Cash dividend per common share --- --- --- .105 .125
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Certain statements in this annual report on Form 10-K 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; changes in
general economic conditions, either nationally or regionally, that 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 risk; and changes in the securities markets. In addition, such
risks and uncertainties include merchant card processing and concentration of
lending activities which have been described in "Certain Important
Considerations for Investors".
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 residential lending which are
conducted through its principal subsidiary, National Bank of the Redwoods, a
national bank ("NBR"). 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. Residential lending activities relate
principally to the origination of mortgage loans for sale, brokering of
mortgage loans to other residential lenders, 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) residential lending operations, which
involve the origination for sale and sale of real estate secured loans, the
sale of mortgage loan servicing rights, mortgage loan servicing fee income on
loans serviced, and brokerage income from residential loans to other lenders;
and (3) fee income, which includes fees earned on deposit services, income
from SBA lending, electronic-based cash management services and merchant
credit card processing.
26
<PAGE>
Prior to November 1996 the Company conducted its mortgage banking
activities principally through its wholly-owned subsidiary, Allied Bank,
F.S.B. (Allied). In order to improve overall company-wide operational
efficiencies, the Board of Directors voted to merge Allied into NBR in
November, 1996. The combination of the two wholly-owned subsidiaries of
Redwood was structured as a merger wherein Allied merged into NBR with NBR
being the surviving bank. As a result of the merger NBR assumed all of
Allied's rights and obligations. On February 3, 1997 NBR received approval
from the Office of the Comptroller of the Currency for the merger. Such
merger was consummated on March 24, 1997.
In connection with the merger of Allied into NBR, the Company began a
process in the fourth quarter of 1996 to significantly curtail its A paper
wholesale mortgage loan production. As a result of this action the Company's
mortgage loan production revenue and expenses was significantly reduced from
historic levels. Associated with the curtailment of A paper wholesale
mortgage banking and the merger of Allied and NBR, the Company recorded
restructuring charges of $2,357,000 in the fourth quarter of 1996. For
further discussion see "Financial Statements and Supplementary Data - Note S
of Notes to Consolidated Financial Statements Redwood Empire Bancorp."
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. Average
balances, including such balances used in calculating financial and
performance ratios, are generally a blend of daily averages for NBR and where
applicable for Allied, which management believes are representative of the
operations of the Company.
RESULTS OF OPERATIONS
In 1997 the Company reported a net income of $3,441,000, or $1.02
diluted per share. In 1996, the Company reported a net loss of $1,486,000,
or $.71 diluted per share. The Company's net income in 1995 was $3,313,000 or
$1.04 diluted per share.
Return on average assets for the year ended December 31, 1997 was .75%
as compared to a negative .28% and a positive .57% for the years ended
December 31, 1996 and 1995. Return on average common equity was 11.72% for
the year ended December 31, 1997, as compared to negative 7.43% and a
positive 12.39% for the years ended December 31, 1996 and 1995.
The Company's results of operation in 1997 improved significantly
from 1996. Dramatic improvement was shown in non-interest expense which
totaled $22,855,000 in 1997 as compared to $38,946,000 in 1996 which amounts
in a reduction of $16,091,000. The improvement in non interest expense
offset a decline in net interest income of $2,622,000 and a decline in non
interest income $9,427,000.
27
<PAGE>
Several significant matters adversely impacted the Company in 1996.
These events include a provision for loan losses of $6,262,000, a pre-tax
restructuring charge of $2,357,000 associated with the merging of Allied into
NBR and the reduction of A paper wholesale mortgage banking, a pre tax charge
of $2,192,000 associated with SAIF deposit insurance fund recapitalization,
and a $1,200,000 charge to operations relating to the Company's obligation
following the bankruptcy of one of its merchant credit card customers.
NET INTEREST INCOME. For 1997, the Company's net interest income
amounted to $20,519,000 as compared to $23,141,000 in 1996 and $19,703,000 in
1995. This represents a decrease of $2,622,000 or 11.3% in 1997 and a
$3,438,000 or 17% increase in 1996. The decrease in 1997 when compared to
1996 is due to a decline in earning assets from $498,882,000 in 1996 to
$418,793,000 in 1997 partially offset and an improvement in net interest
margin from 4.64% in 1996 to 4.90% in 1997. The increase in 1996 when
compared to 1995 is primarily attributable to an increase in net interest
margin from 3.63% in 1995 to 4.64% in 1996 offset by a decline in earning
assets from $542,408,000 in 1995 to $498,882,000 in 1996.
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.
28
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- ---------------------------- ------------------------------
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 $322,122 $30,448 9.45% $349,859 $35,919 10.27% $390,664 $38,052 9.74%
Mortgage loans held for sale 19,937 1,835 9.20 78,030 5,550 7.11 71,395 4,417 6.19
Investment securities 54,034 3,702 6.85 47,414 3,120 6.58 49,105 3,187 6.49
Federal funds sold 22,541 1,314 5.83 19,685 1,028 5.22 27,777 1,581 5.69
Interest-bearing deposits due
from financial institutions 159 7 4.40 3,894 167 4.29 3,467 137 3.95
------------------- ------------------- -------------------
Total earning assets 418,793 37,306 8.91 498,882 45,784 9.18 542,408 47,374 8.73
------- ------- -------
------- ------- -------
Other assets 45,901 41,363 43,738
Less allowance for loan losses (6,690) (6,473) (6,023)
--------- --------- ---------
Total average assets $458,004 $533,772 $580,123
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Savings $152,803 6,080 3.98 $150,650 6,076 4.03 $116,316 4,367 3.75
Time deposits 172,344 9,348 5.42 239,028 13,851 5.79 304,396 18,363 6.03
Other borrowings 15,181 1,359 8.95 41,083 2,716 6.61 71,593 4,941 6.90
------------------- ------------------- -------------------
Total interest-bearing
liabilities 340,328 16,787 4.93 430,761 22,643 5.26 492,305 27,671 5.62
------- ------- -------
Demand deposits 77,382 65,082 51,946
Other liabilities 9,008 6,136 6,054
Shareholders' equity 31,286 31,793 29,818
--------- --------- ---------
Total average liabilities and
shareholders' equity $458,004 $533,772 $580,123
--------- --------- ---------
--------- --------- ---------
Net interest spread 3.98 3.92 3.11
Net interest income and
net interest margin $20,519 4.90 $23,141 4.64 $19,703 3.63
------- ------- -------
------- ------- -------
</TABLE>
The Company's average earning assets for 1997 decreased approximately
16.1%, or $80,089,000, to $418,793,000, as compared to $498,882,000 for 1996.
Average earning assets decreased $43,526,000 or 8% in 1996 as compared to
1995. The decrease in average earning assets for 1997 is primarily
attributable to the Company's decision to significantly curtail is "A" paper
mortgage banking operation in the fourth quarter of 1996. This decision
directly impacted the mortgage loans held for sale average balance which
equaled $19,937,000 in 1997 and $78,030,000 in 1996.
REDUCTION IN FUNDING SOURCES. With the reduction in earning assets
discussed above, the Company's funding sources also declined. Average other
borrowings, which includes FHLB advances, declined $25,902,000 in 1997 and
$30,510,000 in 1996. Similarly, high cost of time deposits declined
$66,684,000 in 1997 and $65,368,000 in 1996. Conversely, average demand
deposits grew $12,300,000 in 1997 and $13,136,000 in 1996 as the Company was
successful in obtaining low cost transactional accounts.
29
<PAGE>
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.
<TABLE>
<CAPTION>
1997 over 1996 1996 over 1995
-------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
-------------------------------- --------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans (1), (2) ($2,849) ($2,622) ($5,471) ($3,974) $1,841 ($2,133)
Mortgage loans held for sale (4,130) 415 (3,715) 411 722 1,133
Investment securities (3) 436 146 582 (110) 43 (67)
Federal funds sold 149 137 286 (460) (93) (553)
Interest-earning deposits with other institutions (160) 0 (160) 17 13 30
-------------------------------- --------------------------------
Total increase (decrease) (6,554) (1,924) (8,478) (4,116) 2,526 (1,590)
-------------------------------- --------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts 87 (83) 4 1,288 421 1,709
Time deposits (3,861) (642) (4,503) (3,942) (570) (4,512)
Other borrowings (1,712) 355 (1,357) (2,106) (119) (2,225)
-------------------------------- --------------------------------
Total increase (5,486) (370) (5,856) (4,760) (268) (5,028)
-------------------------------- --------------------------------
Increase (decrease) in net interest income ($1,068) ($1,554) ($2,622) $644 $2,794 $3,438
-------------------------------- --------------------------------
-------------------------------- --------------------------------
</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 $928,000, $2,805,000 and $2,112,000 are included in interest
income for 1997, 1996 and 1995.
(3) The average balance of securities classified as available for sale are
presented at historical amortized cost without the effects of the fair
value adjustments.
The net interest margin increased to 4.90% for the year ended December
31, 1997, as compared to 4.64% and 3.63% for the years ended December 31,
1996 and 1995. The increase in net interest margin in 1997 was primarily due
to decreased liability costs slightly offset by a decline in yield on earning
assets. The yield on earning assets decreased to 8.91% in 1997 compared to
9.18% in 1996 and 8.73% in 1995. In 1997, the Company decreased its
high-yielding construction loan portfolio from an average of $78.2 million in
1996 to $70.3 million in 1997. See "Loan Portfolio and Mortgage Banking".
30
<PAGE>
The effective rates on interest-bearing liabilities decreased to 4.93%
for 1997 as compared to 5.26% for 1996 and 5.62% for 1995. The decrease in
1997 was due to a decline in balance for the Company's high cost funding
sources of time deposits and other borrowings. The decrease in 1996 when
compared to 1995 was due primarily to a decline in high-cost time deposits
and FHLB advances.
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 $2,100,000
for the year ended December 31, 1997, which represents a decrease of
$4,162,000 or 66.5% from 1996. The decrease in the provision for loan losses
in 1997 when compared to 1996 relates to a reduction of loan charge offs. In
1996, the provision for loan losses of $6,262,000 represented a 294% increase
from $1,590,000 in 1995. This increase was primarily due to net loan charge
offs of $4,259,000 and the deterioration of several major commercial and one
construction loan.
Outstanding construction loans at December 31, 1997 represent 19% of
total portfolio loans. Construction lending generally bears a higher degree
of risk than other major portfolio lending programs the Company maintains.
Factors that could affect the quality of the construction loan portfolio
include regional economic conditions, adverse changes in the real estate
market, increasing interest rates or acts of nature such as earthquakes.
Such events could have an adverse impact on the level of future provisions
for loan losses and the Company's earnings. See further discussion in "Asset
Quality".
OTHER OPERATING INCOME. Other operating income decreased 48%, or
$9,427,000, to $10,143,000 as compared to $19,570,000, for 1996. The
Company's other operating income for 1996 represented an increase of
$2,995,000 or 18% from the $16,575,000 it received during 1995. The
following table sets forth the sources of other operating income for the
years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------------------------
(in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts $1,146 $1,224 $1,148
Merchant draft processing, net 1,585 1,849 1,505
Loan servicing income 831 1,619 1,625
Net realized gains (losses) on sale of investment
securities available for sale 23 (3) 386
Gain on sale of loans and loan servicing 3,601 12,328 10,195
Other income 2,957 2,553 1,716
------- ------- -------
$10,143 $19,570 $16,575
------- ------- -------
------- ------- -------
</TABLE>
Gain on sale of loans and loan servicing declined significantly in 1997
when compared to previous year due to the curtailment of the Company's "A
paper" mortgage banking operations in the fourth quarter of 1996.
31
<PAGE>
The primary cause of the 1996 increase in the Company's other operating
income was the increased gain on sale of loans and loan servicing of
$2,133,000 when compared to 1995. In the third and fourth quarter of 1996
the Company sold mortgage loan servicing rights which resulted in a gain of
$2,153,000. In 1996 gain on sale of loans and loan service amounted to
$12,328,000 as compared to $10,195,000 in 1995. 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. For further discussion see "Mortgage Banking".
Loan servicing revenues decreased to $831,000 for the year ended
December 31, 1997, compared to $1,619,000 and $1,625,000 in 1996 and 1995.
The decline in 1997 was due to the loan servicing sale discussed above.
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 amounted to $2,957,000 in 1997, $2,553,000 in 1996 and
$1,716,000 in 1995. Included in other income was $2,432,000 in net brokerage
revenue associated with the Company's mortgage loan brokerage operation.
In 1997, the Company sold securities available for sale as part of its
ongoing asset liability management strategies for a gain of $23,000 compared
to losses of $3,000 recorded in 1996. See Note E of Notes to Consolidated
Financial Statements.
OTHER OPERATING EXPENSE. Other operating expense amounted to
$22,855,000 in 1997, $38,946,000 in 1996 and $29,016,000 in 1995. This
represents a decrease of $16,091,000 or 41% in 1997 and a increase of
$9,930,000 or 34% in 1996. The 1997 decrease was a direct result of merger
of Allied into NBR in March of 1997 and the curtailment of "A paper" mortgage
banking. The 1996 increase was a direct result of $2,357,000 in expenses
associated with the Company's restructuring plan, $2,192,000 resulting from a
one time insurance premium assessment attributable to SAIF-insured deposits,
an increase in salary and benefits of $2,783,000 and a $1,200,000 charge
associated with the bankruptcy of one of its merchant card customers. In
1995 the decrease in other expense of $3,007,000 or 9% when compared to 1994
related primarily to the Company's cost cutting measures enacted in the last
half of 1994 and the first half of 1995.
Salary and employee benefits expense for 1997 decreased $5,674,000, or
33%, to $11,477,000, as compared to $17,151,000 for 1996. This compared with
a 19% increase during 1996 over the 1995 salary and employee benefits expense
of $14,368,000. The decline in salary and benefit expense in 1997 is due to
the merger of Allied into NBR and the reduction in mortgage banking
operations. The increase in 1996 was attributable to a 53% increase in
commissions paid for mortgage loan production. The Company's
full-time-equivalent staff levels were 252, 321 and 353 at December 31, 1997,
1996 and 1995, respectively.
32
<PAGE>
Occupancy and equipment expense was $3,328,000 in 1997, $5,604,000 in
1996 and $5,544,000 in 1995. In 1997, this represents an decrease of 41%, or
$2,276,000, over 1996 occupancy and equipment expense. The reduction in
occupancy and equipment expense is attributable to the merger of Allied into
NBR and the reduction of mortgage banking operations. In 1996 occupancy
expense increased $60,000 or 1% over 1995. This increase was primarily
attributable to annual lease payment increases.
In November, 1996 the Company's Board of Directors approved a plan to
merge its two wholly owned subsidiaries, National Bank of the Redwoods and
Allied Bank F.S.B. As a result of the merger, the surviving bank, National
Bank of the Redwoods, will assume all of Allied's rights and obligations. In
connection with the merger, and as a result of the Company's decision to
significantly curtail its wholesale mortgage banking production capacity, the
Company recorded a restructuring charge of $2,357,000 in the fourth quarter
of 1996. The restructuring of the Company, which includes both the merger of
Allied into National Bank of the Redwoods and the reduction in "A" paper
wholesale lending, includes the closing of the Portland and Sacramento
mortgage loan production offices, the partial write-off of Allied's
administrative headquarters, termination of employees, and write-off of
duplicative or unnecessary fixed assets. The total charge to operations
associated with these matters consisted of:
<TABLE>
<CAPTION>
<S> <C>
Severance for 70 employees $651,000
Accrual for discontinued leases 772,000
Writeoff of leasehold improvements,
furniture and fixtures 934,000
----------
$2,357,000
----------
----------
</TABLE>
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 restructuring charges 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 1994 restructuring charge consisted of:
<TABLE>
<CAPTION>
<S> <C>
Severance for 125 employees $374,000
Accrual of discontinued leases 1,683,000
Writeoff of leasehold improvements,
furniture and fixtures 352,000
----------
$2,409,000
----------
----------
</TABLE>
33
<PAGE>
At December 31, 1997, $319,000 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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------------------------------
(in thousands)
<S> <C> <C> <C>
Professional fees $1,757 $1,942 $2,187
Regulatory expense and insurance 563 3,401 1,716
Postage and office supplies 1,297 1,715 1,224
Shareholder expenses and Director fees 381 406 486
Advertising 409 581 481
Telephone 829 758 778
Electronic data processing 1,417 1,216 1,022
Net costs of other real estate owned 568 451 163
Other 1,115 3,364 1,503
------ ------- ------
$8,336 $13,834 $9,560
------ ------- ------
------ ------- ------
</TABLE>
Other expenses were $8,336,000 during 1997, a decrease of $5,498,000, or
40%, over 1996 expenses of $13,834,000. This decrease is attributable to the
merger of Allied into NBR, curtailment of "A paper" mortgage banking, and the
1996 SAIF deposit insurance premium charge discussed below. Other expense
increased $4,274,000 or 45% in 1996 when compared to 1995. This increase is
primarily attributable to a one time insurance premium charge assessed by
Congress to SAIF-insured deposits of $2,192,000, a $1,200,000 charge to other
expenses relating to the Company's obligation following the bankruptcy of one
of its merchant credit card customers and an increase in postage and office
supplies of $491,000 due to an increase in mortgage banking activity.
INCOME TAXES. The Company's effective tax rate was a provision of
39.7% in 1997, a benefit of 40.5% in 1996 and a provision of 41.6% in 1995.
34
<PAGE>
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, 1997, these
three categories accounted for approximately 53%, 19% and 24%, 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 or floods, 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,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate mortgage $93,516 $115,631 $160,767 $220,764 $102,254
Commercial real estate mortgage 57,425 67,401 55,667 52,385 35,909
Commercial 69,097 73,987 79,723 72,728 49,556
Real estate construction 55,031 84,908 62,432 31,086 21,476
Installment and other 9,200 8,284 12,669 10,425 3,033
Less deferred fees (1,873) (2,797) (3,035) (2,818) (1,971)
---------------------------------------------------------
Total loans 282,396 347,414 368,223 384,570 210,257
Less allowance for loan losses (7,645) (7,040) (5,037) (5,787) (5,209)
---------------------------------------------------------
Net loans $274,751 $340,374 $363,186 $378,783 $205,048
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
35
<PAGE>
REAL ESTATE MORTGAGE LOANS. As of December 31, 1997, the Company's
residential mortgage loans totaled $93,516,000, or 33%, of its total loans.
These loans were predominantly originated in Sonoma and Mendocino Counties.
Total residential loans declined $34,509,000 during the year as a result of
normal prepayments. As of December 31, 1996, residential mortgage loans
totaled $128,025,000 or 37% of total loans. Such loans declined $39,997,000
during the year due to prepayments and continuing restructuring of Allied's
balance sheet. This 1996 restructuring was accomplished by a $34,000,000 loan
sale in the second quarter of 1996. In 1995, total residential mortgage
loans decreased $54,800,000. 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 Company does not anticipate any further restructuring of the Company's
balance sheet through loan sales.
At December 31, 1997, $27,780,000, or 30%, of the Company's residential
real estate mortgage loans were fixed-rate mortgage loans having original
terms ranging from one to thirty years, Another $57,597,000, or 62%, 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, $8,139,000, or 8%,
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 76% 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, 1997, the Company had outstanding $69,097,000 in
commercial mortgage loans, which constituted 24% 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. The ratio
of the loan principal amount to appraised values are generally 75% or 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 $12.3 million at December 31, 1997. Approximately 54% of the
total amount outstanding of commercial mortgage loans had principal balances
that were less than $250,000.
36
<PAGE>
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 $55,031,000 in construction loans outstanding at
December 31, 1997, comprising 19% of its total loans. These loans were
principally located in Northern California. This represents a decrease of
$29,486,000 or 35% from 1996. In 1996 construction loans increased
$15,013,000 or 22% from 1995. Approximately $28 million of these loans
consisted of 124 single-family individual-borrower construction loans, and
the remaining loans included 66 subdivision projects, 14 land development
projects and 2 commercial projects. At December 31, 1997, the largest
single-family construction loan commitment was $1,030,000, and the average
commitment was less than $235,000. The largest commitment for a subdivision
project was $3.6 million, and the average subdivision commitment was less
than $386,000. The average commercial project involved a loan of
approximately $833,000.
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, Company personnel or agents
routinely inspect 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.
37
<PAGE>
COMMERCIAL LOANS. Commercial loans consist primarily of short-term
financing for businesses and professionals located in Sonoma and Mendocino
Counties. At December 31, 1997, these loans totaled $69,097,000, or 24%, of
the Company's total loans. This represents an increase of $15,524,000 or 29%
from 1996. In 1996 commercial loans decreased $10,402,000 or 16% from 1995.
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, 1997, the size of individual commercial loans varied
widely, with 98% having principal balances less than $350,000. At December
31, 1997, the Company had 13 commercial borrowers whose aggregate individual
liability exceeded $2,000,000.
LOAN COMMITMENTS. 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, 1997, the Company had
outstanding $1,270,000 in unfunded mortgage loan commitments, $44,843,000 in
undisbursed loan commitments and $508,000 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.
38
<PAGE>
RESIDENTIAL LENDING
The Company's results of operations has been substantially effected by
residential lending activity, which can fluctuate significantly, in both
volume and profitability, with changes in interest rates. For 1997,
residential lending loan originations totaled $179 million, or $1.194 billion
less than the $1.373 billion originated in 1996. In 1996 mortgage loan
originations were $534 million more than the $839 billion originated in 1995.
The mix of these originations in 1997 was approximately 82% fixed rate loans
vs. 16% adjustable rate loans compared to 88% fixed, 12% adjustable for 1996,
and 84% fixed rate loans vs. 16% variable for 1995.
The following table represents the Company's residential lending
origination and sale activity for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
---------------------------
(in millions)
<S> <C> <C> <C>
Mortgage banking loan originations $179 $1,373 $839
Increase (decrease) from prior period (87%) 64% (22%)
Mortgage banking loan sales $225 $1,481 $878
Increase (decrease) from prior period (85%) 69% (16%)
Mortgage banking revenue $15 $31 $35
Operating (loss) profit (in thousands) $173 ($3,194) $2,597
</TABLE>
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, Freddie Mac or other institutional mortgage
conduits. These loans must conform to established Freddie Mac/Fannie Mae
underwriting criteria, including a maximum dollar limit, maturities that vary
from five to thirty 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 residential lending 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.
39
<PAGE>
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, 1997 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 $10,838 January 1998
</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 totaled $264,000,
$1,651,000, and $2,809,000 on December 31, 1997, 1996 and 1995, 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.
40
<PAGE>
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>
December 31,
---------------------------------
1997 1996 1995
---------------------------------
(in thousands)
<S> <C> <C> <C>
Loans originated by the Company and sold $101,495 $123,988 $266,712
Loans underlying purchased mortgage servicing rights 23,867 --- 772,626
---------------------------------
Total $125,362 $123,988 $1,039,338
---------------------------------
---------------------------------
Purchased and originated mortgage servicing rights $620 $582 $5,970
Purchased and originated mortgage servicing rights as a
percentage of loans serviced .49% .47% .57%
</TABLE>
41
<PAGE>
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 1996 and 1995, the Company sold
a portion of its originated servicing rights on a bulk basis for gains of
$2,153,000 and $149,000. No such gains or losses were realized in 1997. 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. The
Company's OMSR and PMSR amortization, including valuation adjustments,
totaled $293,000 for 1997, $2,021,000 for 1996 and $2,140,000 for 1995. The
amortized values of the Company's PMSR pools were $145,000 and $4,494,000 at
December 31, 1997 and 1995, respectively. There was no amortized value at
December 31, 1996.
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 adopted SFAS No. 122 in May, 1995. 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 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.
42
<PAGE>
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 NBR has
an internal asset review committee which reviews the asset quality of new and
problem loans on a monthly basis and reports the findings to the full Board.
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 has not been material to the Company's balance sheet or statement of
operations.
43
<PAGE>
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, 1997 and 1996 the Company's total recorded investment in
impaired loans was $10,899,000 and $10,409,000 of which $3,919,000 and
$708,000 relates to the recorded investment for which there is a related
allowance for credit losses of $750,000 and $275,000 determined in accordance
with these statements $6,980,000 and $9,700,000 relates to the amount of that
recorded investment for which there is no related allowance for credit losses
determined in accordance with these statements. At December 31, 1997, more
than one half of the impaired loan balance was measured based on the fair
value of the collateral, with the remainder measured by estimated present
value cash flow.
The average recorded investment in impaired loans during the year ended
December 31, 1997 and 1996 was $10,949,000 and $10,662,000. The related
amount of interest income recognized during the period that such loans were
impaired was $558,000 and $218,000. No interest income was recognized using
a cash-basis method of accounting during the period that the loans were
impaired.
As of December 31, 1997 and 1996 there were $7,883,000 and $9,878,000 of
loans on which the accrual of interest had been discontinued. Interest due
but excluded from interest income on loans placed on nonaccrual status was
$469,000, $499,000 and $485,000 for the years ended December 31, 1997, 1996
and 1995. Interest income received on nonaccrual loans was $240,000, $438,000
and $554,000 for the years ended December 31, 1997, 1996 and 1995.
The following table sets forth the amount of the Company's nonperforming
assets as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $7,883 $8,246 $4,201 $2,314 $3,964
Accruing loans past due 90 days or more 735 1,536 92 2,767 131
Restructured loans (in compliance with modified terms) 1,109 599 651 432 152
--------------------------------------------------------------
Total nonperforming loans 9,727 10,381 4,944 5,513 4,247
Other real estate owned 6,352 2,132 963 1,814 3,633
Other assets owned 542 668 1,249 1,133 250
--------------------------------------------------------------
Total nonperforming assets $16,621 $13,181 $7,156 $8,460 $8,130
--------------------------------------------------------------
--------------------------------------------------------------
Nonperforming loans to total loans 3.44% 2.99% 1.34% 1.43% 2.02%
Nonperforming assets to total assets 3.72 2.64 1.28 1.34 1.72
Allowance for loan losses to nonperforming assets 46.00 53.41 70.39 68.40 64.07
Allowance for loan losses to nonperforming loans 78.60 67.82 101.88 104.97 122.65
</TABLE>
44
<PAGE>
Nonperforming loans totaled $9,727,000 at December 31, 1997, consisting
of $3,120,000 that were secured by residential real estate, $899,000 secured
by commercial real estate and the remaining $5,708,000 were either unsecured
or collateralized by various business assets, other than real estate.
Other real estate owned totaled $6,352,000 at December 31, 1997,
consisting of $2,746,000 in commercial real estate properties and $3,606,000
in residential properties. Other assets owned were contract receivable
rights and repossessed personal property carried at $542,000.
In addition to the above mentioned assets, management of the Company has
identified approximately $2.7 million in potential nonperforming loans, 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.
45
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $7,040 $5,037 $5,787 $5,209 $4,320
-----------------------------------------------------------
Charge-offs:
Residential real estate mortgage: 408 741 304 434 334
Commercial real estate mortgage 124 244 14 57 55
Commercial 784 2,517 1,985 593 347
Real estate construction 456 725 --- 32 ---
Installment and other 148 337 147 86 91
-----------------------------------------------------------
Total charge-offs 1,920 4,564 2,450 1,202 827
-----------------------------------------------------------
Recoveries:
Residential real estate mortgage 15 2 25 39 12
Commercial real estate mortgage -- 5 --- 3 25
Commercial 295 252 84 8 ---
Installment and other 115 46 1 1 ---
-----------------------------------------------------------
Total recoveries 425 305 110 51 37
-----------------------------------------------------------
Net charge-offs 1,495 4,259 2,340 1,151 790
Reserves acquired from Codding --- --- --- 634 ---
Provision for loan losses 2,100 6,262 1,590 1,095 1,679
-----------------------------------------------------------
Balance at end of period $7,645 $7,040 $5,037 $5,787 $5,209
-----------------------------------------------------------
-----------------------------------------------------------
Net charge-offs during the year to average loans .46% 1.22% .60% .40% .40%
Allowance for loan losses to total loans 2.71 2.03 1.37 1.50 2.48
Allowance for loan losses to nonperforming loans 78.60 67.82 101.88 104.97 122.65
</TABLE>
Net charge-offs increased by $1,919,000 to $4,259,000 in 1996 primarily
due to $1,407,000 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.
46
<PAGE>
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.
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, 1997 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.
47
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------
(dollars in thousands)
Allowance % of Allowance % of Allowance % of Allowance % of Allowances % of
for Losses Loans for Losses Loans for Losses Loans for Losses Loans for Losses Loans
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate mortgage $2,061 33% $1,522 37% $1,922 45% $2,231 57% $1,770 49%
Commercial real estate mortgage 650 20 809 23 664 18 728 16 455 17
Commercial 1,640 24 1,753 15 1,082 17 1,441 17 1,488 23
Real estate construction 1,821 20 2,076 24 1,210 19 723 9 702 10
Installment and other 194 3 231 1 118 1 336 1 119 1
Unallocated 1,279 --- 649 --- 41 --- 328 --- 675 ---
------------------------------------------------------------------------------------------------
Total $7,645 100% $7,040 100% $5,037 100% $5,787 100% $5,209 100%
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
</TABLE>
In 1997 the Company was required by various mortgage loan investors to
repurchase 26 non performing residential mortgage loans or purchase
foreclosed real property. From time to time the Company may be required to
repurchase mortgage loans from investors depending upon representations and
warranties of the purchase agreement between the investor and the Company.
Such representations and warranties include valid appraisal, status of
borrower, 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 the potential repurchase
of previously sold mortgage loans. Such reserve amounts to $388,000 as of
December 31, 1997.
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. It is the
Company's general policy to retain liquidity at the parent at a level which
management believes to be consistent with the safety and soundness of the
Company as a whole. As of December 31, 1997, Redwood held $2,645,000 in
deposits at its subsidiaries and a $3,000,000 subordinated note issued by
NBR.
48
<PAGE>
Beginning with the fourth quarter of 1992, Redwood paid a quarterly
dividend of $.03 per share of Common Stock. In the fourth quarter of 1993,
this dividend was increased to $.035 per share. In the fourth quarter of
1994 the dividend was suspended. In addition, Redwood pays quarterly
dividends of 7.8% on $5,750,000 of its preferred stock 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.
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. In 1997, NBR declared dividends of $860,000.
Management believes that at December 31, 1997 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 year ended
December 31, 1997 the Company received $54,505,000 and $9,225,000 in cash
flows from operations and investment activities while using $53,145,000 in
financing activities, respectively.
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, 1997, the
Company had $34,553,000 in federal funds sold and $16,929,000 in loans held
for sale. Total investments were $72,565,000, of which $17,994,000 were
pledged.
Time deposits from other financial institutions totaled $3.4 million, or
.9% of total deposits, at December 31, 1997, a decrease of $12.7 million from
the $16.1 million recorded at December 31, 1996, which amounted to 4% 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.
49
<PAGE>
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 collateralized FHLB advances as NBR is a
member of the FHLB. 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 NBR. NBR's FHLB borrowing limitation
at December 31, 1997 was $2,105,000 compared to $45 million at December 31,
1996. At December 31, 1997, Allied had $1.8 million in FHLB advances
outstanding, as compared to $4,000,000 at December 31, 1996. 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.
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.
The Company and NBR are each 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 two sets of standards: a "risk-based"
and "leverage".
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, 1995, 1996 and 1997,
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 leverage ratio for the Company and
NBR is based on average assets for the quarter.
50
<PAGE>
NBR maintains 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.
The table below shows the capital ratios for the Company and NBR at
December 31, 1997.
<TABLE>
<CAPTION>
Company NBR
-----------------
<S> <C> <C>
Total capital to risk based assets 14.64% 13.83%
Tier 1 capital to risk based assets 9.72 11.65
Leverage ratio 7.10 8.58
</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 FDIC and OCC 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 risk- Tier 1 risk-
based capital based capital Leverage ratio
ratio ratio
----------------------------------------------------
<S> <C> <C> <C>
"WELL CAPITALIZED" - the institution is at least 10% at least 6% at least 5%
not subject to an order, written
agreement, capital directive or prompt
corrective action directive
"ADEQUATELY CAPITALIZED" - the at least 8% at least 4% at least 4%
institution does not meet the definition
of a well-capitalized institution
"UNDERCAPITALIZED"- the institution's less than 8% less than 4% less than 4%
capital level fails to meet the minimum
levels
"SIGNIFICANTLY UNDERCAPITALIZED" - the less than 6% less than 3% less than 3%
institution's capital level is significantly
below the minimum levels
"CRITICALLY UNDERCAPITALIZED" - the
institution has a ratio of tangible equity
to total assets of 2% or less
</TABLE>
51
<PAGE>
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 $21,793,000 in excess capital before it becomes
under-capitalized. Similarly, NBR has $19,105,000 in excess capital.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two digit year is commonly referred to as the Year 2000 Compliance issue.
The Company has purchased substantially all of its software applications from
third party vendors under licensing arrangements. These vendors, including
vendors who sold and support the Company's loan, deposit, and financial
management processing software have indicated that their software is Year
2000 compliant. Management believes that costs associated with Year 2000
Compliance is immaterial and the Company's level of preparedness is
appropriate.
52
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a financial institution, the Company's primary component of market
risk is interest rate volatility. Fluctuation in interest rates will
ultimately impact both the level of income and expense recorded on a large
portion of the Bank's assets and liabilities, and the market value of all
interest earning assets and interest bearing liabilities, other than those
which possess a short term to maturity. Since virtually all of the Company's
interest bearing liabilities and all of the Company's interest earning assets
are located at the Bank, virtually all of the Company's interest rate risk
exposure lies at the Bank level. As a result, all significant interest rate
risk management procedures are performed at the Bank level. Based upon the
nature of its operations, the Bank is not subject to foreign currency
exchange or commodity price risk. The Bank's real estate loan portfolio,
concentrated primarily within northern California, is subject to risks
associated with the local economy. The Company does not own any trading
assets. See "Asset Quality".
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 Bank's
profitability is dependent to a large extent upon its net interest income,
which is the difference between its interest income on interest-earning
assets, such as loans and securities, and its interest expense on
interest-bearing liabilities, such as deposits and borrowings. The Bank,
like other financial institutions, is subject to interest rate risk to the
degree that its interest-earning assets reprice differently than its
interest-bearing liabilities. The Bank manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.
The Bank seeks to control its interest rate risk exposure in a manner
that will allow for adequate levels of earnings and capital over a range of
possible interest rate environments. The Bank has adopted formal policies
and practices to monitor and manage interest rate risk exposure. As part of
this effort, the Bank measures risk in three ways: repricing of earning
assets and interest bearing liabilities; changes in net interest income for
interest rate shocks up and down 200 basis points; and changes in the market
value of equity for interest rate shocks up and down 200 basis points.
53
<PAGE>
The following table sets forth, as of December 31, 1997, 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.
<TABLE>
<CAPTION>
After Three After Six After One
Within Months But Months But Year But
Three Within Six Within Within After Five
Months Months One year Five Years Years Total
------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Federal funds sold $34,553 $--- $--- $--- $--- $34,553
Investment securities and other 9,990 2,003 13 31,665 28,894 72,565
Mortgage loans held for sale 16,929 --- --- --- --- 16,929
Loans 132,701 54,066 28,080 30,445 37,104 282,396
------------------------------------------------------------------------------
Total earning assets 194,173 56,069 28,093 62,110 65,998 406,443
------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction accounts 149,939 --- --- --- --- 149,939
Time deposits 45,391 33,823 41,466 21,887 --- 142,567
Other borrowings 521 417 1,403 --- --- 2,341
Subordinated notes --- --- --- --- 12,000 12,000
------------------------------------------------------------------------------
Total interest-bearing liabilities 195,851 34,240 42,869 21,887 12,000 306,847
------------------------------------------------------------------------------
Interest rate sensitivity gap ($1,678) $21,829 ($14,776) $40,223 $53,998 $99,596
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap ($1,678) $20,151 $5,375 $45,598 $99,596
---------------------------------------------------------------
---------------------------------------------------------------
Interest rate sensitivity gap ratio .99 1.64 .66 2.84 5.50
Cumulative interest rate sensitivity gap ratio .99 1.09 1.02 1.15 1.32
</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 net interest margin.
54
<PAGE>
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.
On a monthly basis, NBR management prepares an analysis of interest rate
risk exposure. Such analysis calculates the change in net interest income
and the theoretical market value of the Bank's equity given a change in
general interest rates of 200 basis points up and 200 basis points down. All
changes are measured in dollars and are compared to projected net interest
income and the current theoretical market value of the Bank's equity. This
theoretical market value of the Bank's equity is calculated by discounting
cash flows associated with the Company's assets and liabilities. The
following is a December 31, 1997 summary of interest rate risk exposure as
measured on a net interest income basis and a market value of equity basis,
given a change in general interest rates of 200 basis points up and 200 basis
points down.
<TABLE>
<CAPTION>
Change in Annual Change in
Change in Interest Rate Net Interest Income Market Value of Equity
<S> <C> <C>
+200 $838,000 ($4,938,000)
+100 406,000 (2,862,000)
-100 (704,000) 3,355,000
-200 (1,479,000) 7,266,000
</TABLE>
The model utilized by management to create the report presented above
makes various estimates at each level of interest rate change regarding cash
flows from principal repayments on loans and mortgage-backed securities
and/or call activity on investment securities. In addition, repricing these
earning assets and matured liabilities can occur in one of three ways: (1)
the rate of interest to be paid on an asset or liability may adjust
periodically based on an index; (2) an asset, such as a mortgage loan, may
amortize, permitting reinvestment of cash flows at the then-prevailing
interest rates; or (3) an asset or liability may mature, at which time the
proceeds can be reinvested at current market rate. Actual results could
differ significantly from those estimates which would result in significant
differences in the calculated projected change.
55
<PAGE>
The following table shows the maturity distribution of the Company's
commercial and real estate construction loans outstanding as of December 31,
1997, which, based on remaining scheduled repayments of principal, were due
within the periods indicated.
<TABLE>
<CAPTION>
After One
Within Through After Five
One Year Five Years Years Total
----------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Commercial $28,939 $21,036 $19,122 $69,097
Real estate construction 55,031 --- --- 55,031
----------------------------------------------
Total $83,970 $21,036 $19,122 $124,128
----------------------------------------------
----------------------------------------------
Loans with fixed interest rates $53,931 $5,481 $1,602 $61,014
Loans with variable interest 30,039 15,555 17,520 63,114
----------------------------------------------
Total $83,970 $21,036 $19,122 $124,128
----------------------------------------------
----------------------------------------------
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report 58
Consolidated Financial Statements of Redwood Empire Bancorp
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 59
Consolidated Balance Sheets December 31, 1997 and 1996 60
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 61
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 62
Notes to Consolidated Financial Statements 64
</TABLE>
56
<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, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Sacramento, California
January 23, 1998 (March 17, 1998, as to Note S)
57
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $32,283 $41,469 $42,469
Interest on investment securities 3,702 3,120 3,187
Interest on federal funds sold 1,314 1,028 1,581
Interest on time deposits due from
financial institutions 7 167 137
------- ------- -------
Total interest income 37,306 45,784 47,374
Interest expense:
Interest on deposits 15,428 19,927 22,730
Interest on other borrowings 252 1,601 3,841
Interest on subordinated notes 1,107 1,115 1,100
------- ------- -------
Total interest expense 16,787 22,643 27,671
------- ------- -------
Net interest income 20,519 23,141 19,703
Provision for loan losses 2,100 6,262 1,590
------- ------- -------
Net interest income after provision for loan losses 18,419 16,879 18,113
------- ------- -------
Other operating income:
Service charges on deposit accounts 1,146 1,224 1,148
Merchant draft processing, net 1,585 1,849 1,505
Loan servicing income 831 1,619 1,625
Net realized gains (losses) on sale of investment
securities available for sale 23 (3) 386
Gain on sale of loans and loan servicing 3,601 12,328 10,195
Other income 2,957 2,553 1,716
------- ------- -------
Total other operating income 10,143 19,570 16,575
------- ------- -------
Other operating expense:
Salaries and employee benefits 11,477 17,151 14,368
Occupancy and equipment expense 3,328 5,604 5,544
Restructuring (credit) charge (286) 2,357 (456)
Other 8,336 13,834 9,560
------- ------- -------
Total other operating expense 22,855 38,946 29,016
------- ------- -------
Income (loss) before income taxes 5,707 (2,497) 5,672
Provision (benefit) for income taxes 2,266 (1,011) 2,359
------- ------- -------
Net income (loss) 3,441 (1,486) 3,313
Dividends on preferred stock 449 449 336
------- ------- -------
Net income (loss) available for common stock shareholders $2,992 ($1,935) $2,977
------- ------- -------
------- ------- -------
Earnings (loss) per common and common equivalent share:
Basic earnings (loss) per share $1.08 ($.71) $1.11
Diluted earnings (loss) per share 1.02 (.71) 1.04
</TABLE>
See Notes to Consolidated Financial Statements.
58
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks $21,505 $20,261
Federal funds sold 34,553 25,212
------------ ------------
Cash and cash equivalents 56,058 45,473
Interest bearing deposits due from financial
institutions 6 315
Investment securities:
Held to maturity, at cost (market value:
1997 - $31,273, 1996 - $19,097) 30,658 18,781
Available for sale, at market (cost: 1997 -
$41,816, 1996 - $33,935) 41,907 33,852
------------ ------------
Total investment securities 72,565 52,633
Mortgage loans held for sale 16,929 29,487
Loans:
Portfolio loans 282,396 347,414
Less allowance for loan losses (7,645) (7,040)
------------ ------------
Net loans 274,751 340,374
Premises and equipment, net 4,055 4,049
Mortgage servicing rights, net 620 582
Other real estate owned 6,352 2,132
Cash surrender value of life insurance 2,929 2,814
Other assets and interest receivable 12,454 21,607
------------ ------------
Total Assets $446,719 $499,466
------------ ------------
------------ ------------
Liabilities and Shareholders' Equity:
Deposits:
Noninterest bearing demand deposits $98,915 $71,814
Interest bearing transaction accounts 149,939 156,453
Time deposits $100,000 and over 53,878 75,411
Other time deposits 88,689 132,772
------------ ------------
Total deposits 391,421 436,450
Other borrowings 2,341 10,307
Other liabilities and interest payable 7,714 10,977
Subordinated notes 12,000 12,000
------------ ------------
Total Liabilities 413,476 469,734
------------ ------------
------------ ------------
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: 1997 - 2,785,261 shares,
1996 - 2,748,652 shares 19,656 19,281
Retained earnings 8,024 5,032
Unrealized loss on investment securities carried as, or
transfered from, available for sale, net of income
taxes (1997 - ($137); 1996 - ($240)) (187) (331)
------------ ------------
Total Shareholders' Equity 33,243 29,732
------------ ------------
Total Liabilities and Shareholders' Equity $446,719 $499,466
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
59
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on investment
securities
Preferred Common Retained available
Stock Stock Earnings for sale Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 $5,750 $18,609 $3,990 ($155) $28,194
Stock options exercised 119 119
Cash dividends declared - preferred (336) (336)
Cash dividends declared - common --
Unrealized gain 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
Stock options exercised 553 553
Cash dividends declared - preferred (449) (449)
Unrealized loss on investment
securities carried as, or transfered from,
available for sale, net of income taxes (471) (471)
Net loss (1,486) (1,486)
------------------------------------------------------
Balances, December 31, 1996 5,750 19,281 5,032 (331) 29,732
Stock options exercised 375 375
Cash dividends declared - preferred (449) (449)
Unrealized gain on investment
securities carried as, or transfered from,
available for sale, net of income taxes 144 144
Net income 3,441 3,441
------------------------------------------------------
Balances, December 31, 1997 $5,750 $19,656 $8,024 ($187) $33,243
------------------------------------------------------
------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
60
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $3,441 ($1,486) $3,313
---------- ---------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization, net 129 2,500 2,559
Deferred taxes 1,382 (2,334) (709)
Net realized (gains) losses on securities available for sale (23) 3 (386)
Loans originated for sale (182,096) (1,381,133) (848,236)
Proceeds from sale of loans held for sale 228,890 1,492,795 887,249
Gain on sale of loans and loan servicing (3,601) (12,328) (10,195)
Provision for loan losses 2,100 6,262 1,590
Change in cash surrender value of life insurance (628) (2,071) (169)
Change in other assets and interest receivable 8,436 3,520 2,658
Change in other liabilities and interest payable (3,334) (916) (829)
Noncash restructuring (credit) charge (286) 2,260 (456)
Other, net 95 (1,832) (1,936)
---------- ---------- ---------
Total adjustments 51,064 106,726 31,140
---------- ---------- ---------
Net cash provided by operating activities 54,505 105,240 34,453
---------- ---------- ---------
Cash flows from investing activities:
Net decrease (increase) in loans 26,073 (55,729) (30,602)
Proceeds from sale of loans in portfolio 2,043 4,168 91,229
Purchases of investment securities available for sale (23,845) (31,235) (51,438)
Purchases of investment securities held to maturity (17,056) (207) (20,215)
Sales of investment securities available for sale 7,031 4,918 31,481
Maturities of investment securities available for sale 13,974 13,500 21,000
Maturities of investment securities held to maturity 513 4,012 18,811
Premises and equipment, net (1,469) (884) (1,096)
(Purchase) sale of mortgage servicing rights (330) 3,281 (101)
Change in interest bearing deposits due from financial institutions 309 102 95
Proceeds from sale of other real estate owned 1,982 2,617 3,328
---------- ---------- ---------
Net cash provided by (used in) investing activities 9,225 (55,457) 62,492
---------- ---------- ---------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts 27,101 6,743 17,181
Change in interest bearing transaction accounts (6,514) 26,487 8,580
Change in time deposits (65,616) (55,173) (36,376)
Change in other borrowings (7,966) (37,564) (64,204)
Issuance of stock 299 506 108
Dividends paid (449) (449) (448)
---------- ---------- ---------
Net cash used in financing activities (53,145) (59,450) (75,159)
---------- ---------- ---------
Net change in cash and cash equivalents 10,585 (9,667) 21,786
Cash and cash equivalents at beginning of period 45,473 55,140 33,354
---------- ---------- ---------
Cash and cash equivalents at end of period $56,058 $45,473 $55,140
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
(Continued)
61
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Income taxes $2,454 $2,730 $2,661
Interest 18,571 23,166 27,547
Noncash investing and financing activities:
Transfer from loans to other real estate owned 6,436 4,263 2,434
Loans to facilitate sale of other real estate owned --- 350 485
Transfer from mortgage loans held for sale to loans 1,377 59,000 15,000
Transfer of investment securities from held to maturity
to available for sale --- --- 20,709
Transfer of investment securities from available for sale
to held to maturity --- 17,193 ---
</TABLE>
62
<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 subsidiary is National Bank of the Redwoods("NBR"), a national bank
chartered in 1985. A previously wholly-owned subsidiary, Allied Bank, F.S.B.,
(Allied), a Federal Savings Bank, was merged with its sister subsidiary, NBR,
in March, 1997. The Company's business strategy involves two principal
business activities, commercial banking and residential lending which are
conducted through NBR.
NBR provides its commercial banking services through five retail branches
located in Sonoma County, California, one retail branch located in Mendocino
County, California, and one retail branch located in Lake 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's
targeted commercial banking market area includes the California counties north
of San Francisco. 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 originates both
commerical and residential construction loans for its portfolio.
The Company's residential mortgage lending business has been conducted
primarily through NBR. NBR originates one-to-four family residential mortgage
loans which predominantly conform to the underwriting standards set by Fannie
Mae, Freddie Mac or other institutional mortgage conduits. These loans are
commonly referred to as "A paper" loans and are primarily acquired by NBR on a
retail basis through NBR's own retail loan officers. NBR also originates
mortgage loans through its Allied Diversified Credit ("ADC") division that do
not comply with all standards established by Fannie Mae or Freddie Mac. These
loans are commonly referred to as "Sub Prime" loans and are acquired by ADC on
a wholesale and retail basis. Substantially all mortgage loan originations are
either brokered to other residential lenders or are packaged and sold into the
secondary market. NBR 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.
63
<PAGE>
NBR's principal targeted residential lending territory includes Northern and
Central California. These areas are served by five loan production offices
located in Santa Rosa, Alamo, Pleasanton, Richmond, and Monterey, California.
In November 1996 the Board of Directors voted to merge Allied into NBR. The
proposed combination of the two wholly-owned subsidiaries of Redwood Empire
Bancorp was structured as a merger transaction wherein Allied was merged into
NBR with NBR as the surviving bank. As a result of the merger, the surviving
bank, NBR, assumed all of Allied's rights and obligations. Allied ceased to
exist as a federally chartered savings institution upon the merger of Allied
and National Bank of the Redwoods. On February 3, 1997 NBR received approval
for the merger from the Office of the Comptroller of the Currency. The merger
was consummated on March 24, 1997. In connection with this matter and the
reduction in A paper wholesale lending, the Company recorded a restructuring
charge of $2,357,000 in 1996. See Note Q.
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 subsidiary, National Bank of the Redwoods. All
material intercompany transactions and accounts have been eliminated.
Certain reclassifications to the 1996 and 1995 financial statements were made
to conform to the 1997 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 in 1995
represents a mortgage-backed security traded but not settled), with original
maturities of 90 days or less at date of acquisition.
64
<PAGE>
INVESTMENT SECURITIES
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.
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,
regulatory reviews, trends and concentrations in delinquencies 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. A loan charge-off is recorded when a loan
has been determined by management to be uncollectable.
The Company accounts for impaired loans under 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, the loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. Management measures all loans
individually for impairment as part of the Company's normal internal asset
review process.
65
<PAGE>
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
currently. 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 the
carrying value of the related loan 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.
66
<PAGE>
MORTGAGE BANKING AND HEDGING 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.
As part of its residential lending 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.
67
<PAGE>
These hedging instruments include forward sales of mortgage-backed securities
("MBS"). 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.
The Financial Accounting Standards Board ("FASB") issued SFAS 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 the
adoption of 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. Subsequently, SFAS No. 122 was
superceded by SFAS No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." See below for a description of
SFAS No. 125.
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 periodically. 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. 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.
OFF BALANCE SHEET RISK
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 (MBS) and written options.
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.
68
<PAGE>
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 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 written options, 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.
A listing of financial instruments whose contract amounts represent credit risk
is as follows:
<TABLE>
<CAPTION>
Contract or notional amount
1997 1996
----------------------------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $46,113,000 $108,179,000
Standby letters of credit 508,000 2,462,000
</TABLE>
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 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.
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.
69
<PAGE>
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 are utilized. 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
The Company adopted SFAS No. 128, EARNINGS PER SHARE. This statement replaces
previous standards for reporting earnings per share with basic and diluted
earnings per share. All earnings per share information has been restated to
give effect to the new standards. Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
The following table reconciles the numerator and denominator used in computing
both basic earnings (loss) per share and diluted earnings (loss) per share for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $3,441 ($1,486) $3,313
Less: Preferred stock 449 449 336
------ -------- ------
Net income (loss) available to common stock shareholders $2,992 ($1,935) $2,977
------ -------- ------
------ -------- ------
Weighted average common shares outstanding 2,776 2,721 2,671
------ -------- ------
------ -------- ------
Basic earnings (loss) per share $1.08 ($0.71) $1.11
------ -------- ------
------ -------- ------
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) available to common stock shareholders $2,992 ($1,935) $2,977
Dilutive effect of Preferred Stock dividend 449 --- 336
------ -------- ------
$3,441 ($1,935) $3,313
------ -------- ------
------ -------- ------
Weighted average common shares outstanding 2,776 2,721 2,671
Effect of outstanding stock options 103 --- 9
Effect of Convertible Preferred Stock 499 --- 499
------ -------- ------
3,378 2,721 3,179
------ -------- ------
------ -------- ------
Diluted earnings (loss) per share $1.02 ($0.71) $1.04
------ -------- ------
------ -------- ------
</TABLE>
70
<PAGE>
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no compensation cost
has been recognized on stock options granted. The Company presents the
required pro forma disclosures of the effect of stock-based compensation on net
income and earnings per share using the fair value method in accordance with
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABLITIES
The Company 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. Adoption of SFAS 125 did not
have a material effect on the financial condition or results of operations of
the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board adopted Statements of
Financial Accounting Standards No 130, REPORTING COMPREHENSIVE INCOME, which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources, and No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic
areas, and major customers. Adoption of these statements will not impact the
Company's consolidated financial position, results of operations or cash flows.
Both statements are effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
71
<PAGE>
NOTE C - 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 $5,489,000 and $4,515,000 at December 31,
1997 and 1996.
NOTE D - INVESTMENT SECURITIES
An analysis of the investment securities portfolio follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands)
December 31, 1997:
Held to maturity:
U.S. Government obligations $18,360 $587 $12 $18,935
Mortgage-backed and other securities 8,401 40 --- 8,441
-------------------------------------------------------
Total debt securities 26,761 627 12 27,376
FRB and FHLB stock 3,897 --- --- 3,897
-------------------------------------------------------
Total held to maturity $30,658 $627 $12 $31,273
-------------------------------------------------------
-------------------------------------------------------
Available for sale:
U.S. Government obligations $41,816 $126 $35 $41,907
-------------------------------------------------------
-------------------------------------------------------
December 31, 1996:
Held to maturity:
U.S. Government obligations $12,736 $382 $5 $13,113
Mortgage-backed and other securities 2,701 1 62 2,640
-------------------------------------------------------
Total debt securities 15,437 383 67 15,753
-------------------------------------------------------
-------------------------------------------------------
FRB and FHLB stock 3,344 --- --- 3,344
Total held to maturity $18,781 $383 $67 $19,097
-------------------------------------------------------
-------------------------------------------------------
Available for sale:
U.S. Government obligations $33,935 $93 $176 $33,852
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
72
<PAGE>
Debt securities by contractual maturity at December 31, 1997, were due as
follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
--------- --------
<S> <C> <C>
(in thousands)
Held to maturity:
One year or less $13 $13
After one year through five years 8,774 8,974
After five years 17,974 18,389
--------- --------
$26,761 $27,376
--------- --------
--------- --------
Available for sale:
One year or less $11,986 $11,993
After one year through five years 22,847 22,891
After five years 6,983 7,023
--------- --------
$41,816 $41,907
--------- --------
--------- --------
</TABLE>
Proceeds from sales of investments in debt securities during 1997, 1996 and 1995
were $7,031,000, $4,918,000, and $31,481,000. These sales resulted in the
realization of gross gains of $35,000 and gross losses of $12,000 for 1997,
gross gains of $5,000 and gross losses of $8,000 for 1996, and gross gains of
$386,000 for 1995.
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.
During 1996 the Company transferred $17,193,000 in investment securities carried
as available for sale into the held to maturity category.
Securities carried at approximately $17,994,000 and $15,750,000 at December 31,
1997 and 1996 were pledged to secure public deposits, bankruptcy deposits, and
treasury tax and loan borrowings.
73
<PAGE>
NOTE E - MORTGAGE BANKING ACTIVITIES
The following lists the notional amounts of the various hedging instruments
outstanding at December 31, 1997 and 1996 and the date through which exercise
dates extend:
<TABLE>
<CAPTION>
1997 1996
Notional Exercise Dates Notional Exercise Dates
Amount Extend Through Amount Extend Through
--------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands) (in thousands)
Forward contracts to sell MBS $10,836 January 1998 $27,063 March 1997
Purchased put options - U.S. Treasury --- 15,000 March 1997
Purchased call options - U.S. Treasury --- 7,500 March 1997
</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,
1997 1996
-------- ---------
<S> <C> <C>
(in thousands)
Mortgage loan portfolios serviced for:
Freddie Mac $9,365 $5,702
Fannie Mae 5,185 5,026
Other investors 110,812 113,260
-------- ---------
$125,362 $123,988
-------- ---------
-------- ---------
</TABLE>
During the third and fourth quarters of 1996 the Company sold mortgage loan
servicing rights associated with $839,945,000 mortgage loans whose carrying
amount was $4,150,000. In connection with these sales the Company recorded net
revenue of $2,153,000, which has been included in gain on sale of loans and
servicing.
At December 31, 1997 and 1996, the Company also serviced $125,362,000 and
$670,856,000 in loans and participating interests in loans owned by investors,
under subservicing agreements.
Escrow funds held in trust for loans serviced for others were $264,000 and
$1,651,000 at December 31, 1997 and 1996.
74
<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
------- -------- ------- ---------
<S> <C> <C> <C> <C>
(in thousands)
Balance, January 1, 1995 $6,270 $ --- $ --- $ ---
Purchases 11 ---
Originations 1,616 213 1,829
Amortization (1,787) (290) (38) (328)
Valuation adjustments --- (22) (3) (25)
------- -------- ------- ---------
Balance, December 31, 1995 4,494 1,304 172 1,476
Purchases ---
Originations --- 744 39 783
Sales (3,033) (1,061) (56) (1,117)
Amortization (1,461) (456) (129) (585)
Valuation adjustments --- 22 3 25
------- -------- ------- ---------
Balance, December 31, 1996 --- 553 29 582
Originations 163 150 18 168
Sales ---
Amortization (18) (260) (15) (275)
Valuation adjustments ---
------- ---------------------------------------
Balance, December 31, 1997 $145 $443 $32 $475
------- ---------------------------------------
------- ---------------------------------------
</TABLE>
75
<PAGE>
NOTE F - LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The Company primarily makes permanent and construction residential real estate
loans in California, 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,
1997 1996
-----------------------
(in thousands)
<S> <C> <C>
Residential real estate mortgage $93,516 $115,631
Commercial real estate mortgage 57,425 67,401
Commercial 69,097 73,987
Real estate construction 55,031 84,408
Installment and other 9,200 8,284
Less deferred fees (1,873) (2,797)
-------- ---------
Total loans 282,396 347,414
Less allowance for loan losses (7,645) (7,040)
-------- ---------
Net loans $274,751 $340,374
-------- ---------
-------- ---------
</TABLE>
A summary of the transactions in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $7,040 $5,037 $5,787
Provision for loan losses 2,100 6,262 1,590
Loans charged off (1,920) (4,564) (2,450)
Recoveries 425 305 110
-------- -------- --------
Balance, end of year $7,645 $7,040 $5,037
-------- -------- --------
-------- -------- --------
</TABLE>
At December 31, 1997 and 1996 the Company's total recorded investment in
impaired loans was $10,899,000 and $10,409,000 of which $3,919,000 and $708,000
relates to the recorded investment for which there is a related allowance for
loan losses of $750,000 and $275,000 determined in accordance with these
statements and $6,980,000 and $9,700,000 relates to the amount of that recorded
investment for which there is no related allowance for loan losses determined
in accordance with these statements. At December 31, 1997, approximately 80%
of the impaired loan balance was measured based on the fair value of the
collateral, with the remainder measured by estimated cash flow.
76
<PAGE>
The average recorded investment in impaired loans during the year ended
December 31, 1997 and 1996 was $10,949,000 and $10,662,000. The related amount
of interest income recognized during the periods that such loans were impaired
was $558,000 and $218,000.
As of December 31, 1997 and 1996 there were $7,883,000 and $9,878,000 of loans
on which the accrual of interest had been discontinued. Interest due but
excluded from interest income on these nonaccrual loans was $469,000, $499,000
and $485,000 for the years ended December 31, 1997, 1996 and 1995. Interest
income received on nonaccrual loans was $240,000, $438,000 and $554,000 for the
years ended December 31, 1997, 1996 and 1995.
At December 31, 1997 and 1996, the Company had $735,000 and $1,536,000 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,
1997 1996 1995
------------------------------------
(in thousands)
<S> <C> <C> <C>
SBA guaranteed portion of loans originated $2,882 $7,730 $8,509
SBA loans sold 2,579 7,930 8,992
Premium received at sale 243 620 700
SBA guaranteed portion of loans serviced for others 32,950 36,325 36,203
</TABLE>
From time to time the Company extends credit to 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. There were no
such balances outstanding at December 31, 1997 and 1996.
NOTE G - PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------
(in thousands)
<S> <C> <C>
Land $187 $187
Building and leasehold improvements 2,912 2,491
Furniture and equipment 11,176 10,685
------- ------
Total premises and equipment 14,275 13,363
Less accumulated depreciation and amortization 10,220 9,314
------- ------
Premises and equipment, net $4,055 $4,049
------- ------
------- ------
</TABLE>
77
<PAGE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$1,398,000, $2,528,000 and $2,647,000.
The Company leases certain premises and equipment used in the normal course of
business. There are no contingent rental payments and the Company has five
subleased properties. Total rental expense under all leases, including
premises, totalled $2,095,000, $2,258,000 and $2,172,000 in 1997, 1996 and 1995.
Minimum future lease commitments are as follows: 1998 - $2,625,000; 1999 -
$2,000,000; 2000 - $1,022,000; 2001 - $859,000; 2002 - $852,000 and thereafter -
$1,107,000. Minimum future sublease receivables are as follows: 1998 -
$474,000; 1999 - $191,000; 2000 - $33,000; 2001 - $33,000; and thereafter -
$22,000.
NBR leases 34,000 square feet of an office building for its main office.
Prior to June 1997, a partnership, of which a director of the Company is a
minority partner, owned the office building. Total lease payments made to the
partnership for the years ended December 31, 1997, 1996 and 1995 were
$440,000, $863,000 and $863,000.
NOTE H - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
--------------------------------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $552 $1,106 $2,897
State 332 217 171
------ -------- ------
884 1,323 3,068
------ -------- ------
Deferred:
Federal 1,108 (1,875) (1,191)
State 274 (459) 482
------ -------- ------
1,382 (2,334) (709)
------ -------- ------
$2,266 ($1,011) $2,359
------ -------- ------
------ -------- ------
</TABLE>
A reconciliation of the statutory income tax rate to the effective income tax
rate of the Company is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Income tax at federal statutory rate 35.0 % 35.0 % 35.0 %
State franchise tax, net of federal benefit 7.0 6.3 7.5
Other (2.2) (.8) (.9)
------ ------ ------
39.8 % 40.5 % 41.6 %
------ ------ ------
------ ------ ------
</TABLE>
78
<PAGE>
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, 1997 will be utilized to reduce future taxable income.
Accordingly, there is no valuation allowance associated with deferred tax assets
at December 31, 1997. The tax effect of the principal temporary items creating
the Company's net deferred tax asset included in other assets and interest
receivable are:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $3,022 $1,886
Mortgage servicing rights --- 654
Interest foregone on nonaccrual loans --- 538
Restructuring costs 490 1,060
Accrued expenses not yet deductible 376 401
Unrealized (gain) loss on securities
available for sale 137 240
Other real estate owned 303 298
Depreciation 3 399
Securities and loans marked to
market for tax purposes 93 ---
State taxes 38 ---
------ ------
Total deferred tax assets 4,462 5,476
------ ------
Deferred tax liabilities:
Deferred loan fees 1,189 1,001
FHLB stock dividends 212 201
Securities and loans marked to
market for tax purposes --- 61
Premium on loan sales --- 12
State taxes --- 133
Mortgage servicing rights 208 ---
Other, net 383 113
------ ------
Total deferred tax liabilities 1,992 1,521
------ ------
Net deferred tax asset $2,470 $3,955
------ ------
------ ------
</TABLE>
79
<PAGE>
NOTE I - OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------------
(in thousands)
<S> <C> <C>
Advances from FHLB $1,819 $4,000
Treasury, tax and loan note --- 4,330
Securities and loans sold under agreements to repurchase --- 900
Federal funds purchased 522 746
Capital leases --- 223
OREO Mortgages --- 108
------ -------
$2,341 $10,307
------ -------
------ -------
</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 $1,819,000 in advances drawn under this line of
credit at December 31, 1997 at 6.29% with an various maturity dates through
December 1998.
The average balance of FHLB advances was $566,000 for 1997 at an average
interest rate of 5.00%. The highest month-end balance during the year was
$1,819,000.
All borrowings from the FHLB must be collateralized, and the Company has pledged
approximately $48,000,000 of residential mortgage loans as of December 31, 1997,
to the FHLB to secure any funds it may borrow.
(b) 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 one to three months. Loans sold under agreements to
repurchase had maturities of one day.
The average balance of securities and loans sold under agreements to repurchase
was $256,000 for 1997 at an average interest rate of 6.08%. The highest month-
end balance during the year was $1,300,000.
80
<PAGE>
NOTE J - 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,
1997 1996 1995
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Gain on sale of mortgage loans and servicing rights $3,322 $9,197 $9,091
Gains on sale of SBA loans 279 978 955
Gains on bulk servicing sales --- 2,153 149
------ ------- -------
$3,601 $12,328 $10,195
------ ------- -------
------ ------- -------
</TABLE>
NOTE K - OTHER EXPENSES
The major components of other expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Professional fees $1,757 $1,942 $2,187
Regulatory expense and insurance 563 3,401 1,716
Postage and office supplies 1,297 1,715 1,224
Shareholder expenses and Director fees 381 406 486
Advertising 409 581 481
Telephone 829 758 778
Electronic data processing 1,417 1,216 1,022
Net costs of other real estate owned 568 451 163
Other 1,115 3,364 1,503
------ ------- ------
$8,336 $13,834 $9,560
------ ------- ------
------ ------- ------
</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.
81
<PAGE>
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. As a result, a one-time
insurance premium charge was assessed on SAIF-insured deposits to bring the SAIF
reserves to the mandated level. Calculated at .675% of Allied's deposits at
March 31, 1995, the resulting charge to the Company was $2,192,000. Such charge
was recorded in the third quarter of 1996.
NOTE L - STOCK OPTIONS AND BENEFIT PLANS
The Company's 1991 stock option plan, which was amended in 1992, provides for
the granting of both incentive stock options and nonqualified stock options to
Directors and key employees. Generally, options outstanding under the stock
option plan are granted at prices equal to the market value of the stock at the
date of grant, vest ratably over a four year service period and expire ten years
subsequent to the award.
Outstanding common stock options at December 31, 1997, are exercisable at
various dates through 2005. The following table summarizes option activity:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Price
Shares per Share
-------------------------------
<S> <C> <C>
Balance at December 31, 1994 465,000 8.70
Options granted 50,000 8.25
Options exercised (16,000) 7.55
Options cancelled (99,000) 8.43
----------
Balance at December 31, 1995 400,000 8.80
Options granted 108,500 10.16
Options exercised (72,000) 7.39
Options cancelled (5,000) 12.88
----------
Balance at December 31, 1996 431,500 9.33
Options granted 30,000 13.13
Options exercised (36,600) 8.14
Options cancelled (10,900) 9.39
----------
Balance at December 31, 1997 414,000 9.71
----------
----------
</TABLE>
At December 31, 1997 88,400 shares were available for future grants under the
plans.
82
<PAGE>
Additional information regarding options outstanding as of December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------
Weighted Avg.
Range of Remaining
Exercise Number Contractual Weighted Avg. Number Weighted Avg.
Prices Outstanding Life (yrs) Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - $7.99 21,200 4 $7.54 21,200 $7.54
8.00 - 9.99 291,300 5 9.03 170,400 8.80
10.00 - 11.99 37,500 6 10.66 11,300 10.44
12.00 - 13.99 64,000 6 13.00 5,000 13.00
------- -------
414,000 207,900
------- -------
------- -------
</TABLE>
Had compensation cost for the grants been determined based upon the fair value
method, the Company's net income (loss) and earnings (loss) per share would have
been adjusted to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $3,441,000 ($1,486,000) $3,313,000
Pro forma 3,313,000 (1,587,000) 3,284,000
Basic earnings (loss) per share
As reported 1.08 (.71) 1.11
Pro forma 1.03 (.75) 1.10
Diluted earnings (loss) per share
As reported 1.02 (.71) 1.04
Pro forma .98 (.75) 1.03
</TABLE>
The fair value of the options granted during 1997, 1996, and 1995 is estimated
as $224,540, $604,073, and $238,000 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: no dividend, volatility of
29.5%, 29.0% and 31.2%, risk-free interest rate of 6.65%, 6.04%, and 6.50%,
assumed forfeiture rate of zero, and an expected life of 10 years. The weighted
average per share fair value of the 1997, 1996, and 1995 awards was $7.48,
$5.56, and $4.76, respectively. The impact of outstanding non-vested stock
options granted prior to 1995 has been excluded from the proforma calculations;
acccordingly the proforma adjustments are not indicative of future proforma
adjustments when the calculation will apply to all applicable stock options.
83
<PAGE>
In 1991 the Company established a 401(K) savings plan for employees who have at
least one year of continuous service. The Company's contributions are based on
a sliding scale where it matches 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. Company contributions
totalled $179,000, $257,000 and $151,000 in 1997, 1996 and 1995.
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. 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 provide for its obligations under
the Plan in the event a participant dies prior to retirement. The cash
surrender value of such policies was $2,929,000 at December 31, 1997. Under
this plan, the Company recognized expense of $142,000, $167,000 and $221,000 in
1997, 1996 and 1995. The aggregate projected benefit obligation of the Plan was
approximately $374,000 and $267,000 at December 31, 1997 and 1996. A discount
rate of 7.0% was used to determine the aggregate projected benefit obligation
for both years. The aggregate vested present value benefit obligation was
$203,000 and $141,000 at December 31, 1997 and 1996.
NOTE M - 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 $640,000 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.
84
<PAGE>
NOTE N - REGULATORY MATTERS
One of the principal sources of cash for Redwood are dividends from NBR.
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, 1997, NBR could pay additional
dividends to Redwood of approximately $4,523,000 without prior regulatory
approval.
NBR is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In
particular, it is 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 loans or advances were outstanding during 1997
or 1996.
Redwood, NBR, and previously Allied, 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. NBR's and Allied's capital classification
is also subject to qualitative judgments 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). As of December 31, 1997, the most recent notification from the
Office of the Comptroller of the Currency categorized NBR as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, NBR and Allied must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institutions' category.
85
<PAGE>
<TABLE>
<CAPTION>
To Be Categorized
as Well Capitalized
For Capital Under Prompt
Actual Adequacy Purposes Corrective Action
--------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
At December 31, 1997:
COMPANY
Leverage Capital (to Average Assets) $31,892 7.10% $17,963 4.00% n/a n/a
Tier 1 Capital (to Risk-weighted Assets) 31,892 9.72 13,122 4.00 n/a n/a
Total Capital (to Risk-weighted Assets) 48,037 14.64 26,243 8.00 n/a n/a
NBR
Leverage Capital (to Average Assets) 38,184 8.58 17,792 4.00% 22,240 5.00%
Tier 1 Capital (to Risk-weighted Assets) 38,184 11.65 13,110 4.00 19,665 6.00
Total Capital (to Risk-weighted Assets) 45,325 13.83 26,220 8.00 32,775 10.00
At December 31, 1996:
COMPANY
Leverage Capital (to Average Assets) $28,378 5.46% $20,808 4.00% n/a n/a
Tier 1 Capital (to Risk-weighted Assets) 28,378 7.63 14,875 4.00 n/a n/a
Total Capital (to Risk-weighted Assets) 45,056 12.12 29,749 8.00 n/a n/a
NBR
Leverage Capital (to Average Assets) 17,352 6.87 10,110 4.00 $12,637 5.00%
Tier 1 Capital (to Risk-weighted Assets) 17,352 9.40 7,384 4.00 11,075 6.00
Total Capital (to Risk-weighted Assets) 22,671 12.28 14,767 8.00 18,459 10.00
ALLIED
Core Capital (to Total Assets) 17,064 7.06 7,251 3.00 12,085 5.00
Tier 1 Capital (to Risk-weighted Assets) 14,402 9.43 n/a n/a 9,167 6.00
Total Capital (to Risk-weighted Assets) 16,335 10.69 12,222 8.00 15,278 10.00
Tangible Capital (to Total Assets) 17,064 7.06 3,626 1.50 n/a n/a
</TABLE>
Management believes that as of December 31, 1997, the Company and NBR meet
all capital requirements to which they are subject. Under the most stringent
capital requirement, the Company has approximately $21,793,000 in excess
capital before it becomes "undercapitalized" under the regulatory framework
for prompt corrective action. Similarly, NBR has $19,105,000 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.
86
<PAGE>
NOTE O - INDUSTRY SEGMENT DATA
During the years ended December 31, 1997, 1996 and 1995, the Company operated
in two principal industry segments: commercial banking and residential
lending. 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 and construction lending. The
Company's residential lending activities relate to the origination for sale,
servicing of sold mortgages and sale of residential mortgage loans.
Revenue from residential lending activities is defined as interest income on
permanent residential real estate loans and mortgage loans held for sale,
gains on sale of loans and loan servicing, and income from mortgage loan
servicing activities. Revenue for commercial banking activities include
interest income on all other 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.
87
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUE
Residential lending $14,625 $31,327 $35,124
Commercial banking 32,824 34,027 28,825
-------- --------- ---------
Total $47,449 $65,354 $63,949
-------- --------- ---------
-------- --------- ---------
OPERATING (LOSS) PROFIT
Residential lending $173 ($3,194) $2,597
Commercial banking 6,913 3,389 5,180
-------- --------- ---------
Total operating (loss) profit 7,086 195 7,777
Corporate (1,379) (2,692) (2,105)
-------- --------- ---------
Inter-segment eliminations --- --- ---
(Loss) income before income taxes $5,707 ($2,497) $5,672
-------- --------- ---------
-------- --------- ---------
IDENTIFIABLE ASSETS
Residential lending $110,445 $157,512 $230,642
Commercial banking 333,335 338,790 325,424
Corporate 2,939 3,164 1,844
-------- --------- ---------
Total $446,719 $499,466 $557,910
-------- --------- ---------
-------- --------- ---------
</TABLE>
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS No. 107) 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,
1997 and 1996 and therefore estimates presented herein are not necessarily
indicative of amounts which could be realized in a current transaction.
88
<PAGE>
The following estimates and assumptions were used on December 31, 1997 and
1996 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 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.
89
<PAGE>
(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, 1997 and 1996. 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.
90
<PAGE>
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $56,058 $56,058 $45,473 $45,473
Interest-bearing deposits 6 6 315 318
Investments 72,565 73,180 52,633 52,949
Loans held for sale 16,929 17,267 29,487 29,763
Portfolio loans, net 274,751 275,879 340,374 350,249
Interest receivable 3,112 3,112 3,399 3,399
Mortgage servicing rights 620 1,191 582 628
LIABILITIES:
Deposits 391,421 391,550 436,450 436,724
Other borrowings 2,341 2,341 10,307 10,307
Subordinated notes 12,000 12,000 12,000 12,120
OFF BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to fund mortgage loans 62 (26)
Commitments to fund other loans 246 362
Forward contracts to sell MBS (8) 73
Purchased put options - U.S. Treasury 250 163
Purchased call options - U.S. Treasury 205 79
</TABLE>
NOTE Q - RESTRUCTURING CHARGES
In November, 1996 the Company's Board of Directors approved a plan to merge
its two wholly owned subsidiaries, NBR and Allied. As a result of the
merger, the surviving bank, NBR, assumed all of Allied's rights and
obligations. In connection with the merger, and as a result of the Company's
decision to significantly curtail its wholesale mortgage banking production
capacity, the Company recorded a restructuring charge of $2,357,000 in the
fourth quarter of 1996. The restructuring of the Company, which includes
both the merger of Allied into NBR and the reduction in "A" paper wholesale
lending, includes the closing of the Portland and Sacramento mortgage loan
production offices, the partial write-off of Allied's administrative
headquarters lease, termination of employees, and write-off of duplicative or
unnecessary fixed assets. The total charge to operations associated with
these matters consisted of:
91
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Severance for 70 employees $651,000
Accrual of discontinued leases 772,000
Write-off of leasehold improvements,
furniture and fixtures 934,000
----------
$2,357,000
----------
----------
</TABLE>
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 restructuring charges 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 1994 restructuring charge consisted of:
<TABLE>
<CAPTION>
<S> <C>
Severance for 125 employees $374,000
Accrual of discontinued leases 1,683,000
Writeoff of leasehold improvements,
furniture and fixtures 352,000
----------
$2,409,000
----------
----------
</TABLE>
At December 31, 1997, $319,000 of the restructuring charges remained in other
liabilities, substantially all of which is related to the future minimum
lease payments associated with the closed facilities or future employee
severance payments. 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.
The following table presents a summary of activity with respect to the
restructuring accrual.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of year $1,808 $619 $1,757
Provision (credited) charged (to) against income (286) 2,357 (456)
Cash outlays (1,127) (234) (682)
Noncash writedowns (76) (934)
-------------------------------------
Balance, end of year $319 $1,808 $619
-------------------------------------
-------------------------------------
</TABLE>
NOTE R - COMMITMENTS AND CONTINGENCIES
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
92
<PAGE>
liability relating to these actions, if any, would not have a material
adverse effect on its consolidated financial statements.
NOTE S PREFERRED STOCK REDEMPTION
On March 17, 1998 the Company's Board of Directors voted to redeem the entire
issue of 575,000 shares of 7.80% Noncumulative Convertible Perpetual
Preferred Stock, Series A. Such redemption will occur on or about April 30,
1998. Holders of the Company's preferred stock can convert their holdings
into common stock prior to April 30, 1998.
NOTE T CONDENSED FINANCIAL INFORMATION OF
REDWOOD EMPIRE BANCORP (PARENT ONLY)
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
1997 1996
---------------------
(in thousands)
<S> <C> <C>
ASSETS
Cash $2,645 $2,178
Investment in subsidiaries 39,535 39,016
Capitalized issuance costs 560 640
Other assets 2,734 346
-------- --------
Total assets $45,474 $42,180
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $231 $448
Subordinated notes 12,000 12,000
-------- --------
Total liabilities 12,231 12,448
-------- --------
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:
1997 - 2,785,261 shares; 1996 - 2,748,652 shares 19,656 19,281
Retained earnings 8,024 5,032
Unrealized loss on investment securities
available for sale, net of taxes (187) (331)
-------- --------
Total shareholders' equity 33,243 29,732
-------- --------
Total liabilities and shareholders' equity $45,474 $42,180
-------- --------
-------- --------
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31,
1997 1996 1995
-------------------------------------
(in thousands)
<S> <C> <C> <C>
Operating income:
Management service fees $186 $736 $403
Dividends from subsidiaries 860 2,442 1,087
Interest income from subsidiaries 274 297 292
------- -------- -------
Total operating income 1,320 3,475 1,782
------- -------- -------
Expenses:
Interest expense 1,107 1,115 1,100
Operating expenses 732 1,876 1,700
------- -------- -------
Total expenses 1,839 2,991 2,800
------- -------- -------
(Loss) income before undistributed income of subsidiaries (519) 484 (1,018)
Equity in undistributed income (loss) of subsidiaries 3,378 (2,613) 3,447
------- -------- -------
Income (loss) income before income taxes 2,859 (2,129) 2,429
Income tax benefit (582) (643) (884)
------- -------- -------
Net income (loss) $3,441 ($1,486) $3,313
------- -------- -------
------- -------- -------
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
----------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $3,441 ($1,486) $3,313
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization and depreciation 26 23 10
Equity in undistributed net (income) loss of
subsidiaries (3,378) 2,613 (3,447)
Change in other assets 745 (741) 1,275
Change in other liabilities (216) 89 186
-------- -------- --------
Total adjustments (2,823) 1,984 (1,976)
-------- -------- --------
Net cash provided by operating activities 618 498 1,337
-------- -------- --------
Cash flows from financing activities:
Stock issuance 298 506 108
Cash dividends (449) (449) (448)
Net cash provided by (used in) financing activities (151) 57 (340)
-------- -------- --------
Increase (decrease) in cash 467 555 997
Cash at beginning of year 2,178 1,623 626
-------- -------- --------
Cash at end of year $2,645 $2,178 $1,623
-------- -------- --------
-------- -------- --------
</TABLE>
95
<PAGE>
QUARTERLY RESULTS
UNAUDITED QUARTERLY STATEMENTS OF OPERATIONS DATA
(dollars in thousands)
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
1996 1996 1996 1996 1997 1997 1997 1997
------------------------------------ ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $5,499 $6,082 $5,898 $5,662 $5,089 $5,331 $5,139 $4,960
Provision for credit losses 1,515 1,315 545 2,887 585 585 465 465
Other operating income 5,585 4,411 3,929 5,645 3,009 2,335 2,092 2,707
Other operating expense 8,091 9,067 10,681 11,107 6,513 5,554 5,240 5,548
------------------------------------ ---------------------------------
Income (loss) before income taxes 1,478 111 (1,399) (2,678) 1,000 1,527 1,526 1,654
Provision (benefit) for
income taxes 592 73 (595) (1,081) 420 643 601 602
------------------------------------ ---------------------------------
Net income (loss) $886 $38 ($804) ($1,606) $580 $884 $925 $1,052
------------------------------------ ---------------------------------
------------------------------------ ---------------------------------
Net income (loss) available
for common stock shareholders $774 ($74) ($916) ($1,718) $468 $772 $813 $939
------------------------------------ ---------------------------------
------------------------------------ ---------------------------------
Per share:
Basic earnings (loss) per share $ .29 $ .03) ($ .33) ($ .63) $ .16 $ .27 $ .28 $ .28
Diluted earnings (loss) per share .29 (.03) (.33) (.63) .16 .26 .27 .27
Common dividend --- --- --- --- --- --- --- ---
Common Stock Prices:
High $7.25 $9.25 $10.13 $11.50 $14.13 $13.75 $17.25 $18.25
Low 5.75 6.38 7.25 10.38 11.00 12.50 13.00 14.87
Close 6.75 8.50 8.88 11.50 13.13 13.00 15.38 18.25
</TABLE>
Other operating expense in the third quarter of 1996 included a one time
S.A.I.F. deposit insurance premium of $2,192,000. Other operating expense in
the fourth quarter of 1996 included a restructuring charge of $2,357,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
96
<PAGE>
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
During the year ended December 31, 1997, the Company's operating
subsidiary, National Bank of the Redwoods, paid $496,557 pursuant to various
construction contracts with Colombini Construction in which Colombini
Construction acted as a general contractor. Richard Colombini, who is a
director of the Company, is also the President and majority owner of
Colombini Construction. The amounts paid to Colombini Construction included
subcontractor costs. The construction contracts involved leasehold
improvements for one of the Bank's branches and two operations centers.
Substantially all of the contracts entered into with Colombini Construction
were granted based upon competitive bids.
NBR leases 34,000 square feet of an office building for its main office.
Prior to June 1997, a partnership of which Richard Colombini is a minority
partner, owned the building. Total lease payments made to the partnership for
the years ended December 31, 1997, 1996, and 1995 were $440,000, $863,000,
and $863,000.
(b) CERTAIN BUSINESS RELATIONSHIPS.
Except as disclosed elsewhere in this Item, management is not aware of
any business relationships required to be disclosed hereunder.
97
<PAGE>
(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, 1997, 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.
1. The following consolidated financial statements of Redwood and its
subsidiaries, and independent auditors' report included for the years ended
December 31, 1997, 1996 and 1995 are included in Item 8.
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
2. FINANCIAL STATEMENT SCHEDULES.
All financial statement schedules have been omitted, as inapplicable.
3. EXHIBITS.
98
<PAGE>
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.
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.
99
<PAGE>
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.
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.
100
<PAGE>
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.
10.20* Compensation Agreement between Patrick W. Kilkenny and
Redwood Empire Bancorp.
10.21* Executive Severance Agreement between Patrick W.
Kilkenny and Redwood Empire Bancorp.
10.22* Salary Continuation Agreement between James E. Beckwith
and Redwood Empire Bancorp.
10.23 Dividend Reinvestment and Stock Purchase Plan on Form S-
3 dated April 28, 1993 (Registration No. 3361750), 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.
21. Subsidiaries of the Registrant.
23. Consent of Deloitte & Touche LLP.
101
<PAGE>
(b) REPORTS ON FORM 8-K.
The Company filed the following Current Reports on Form 8-K during the last
quarter of 1997:
1. On October 29, 1997 reporting the declaration of a quarterly dividend
of 19.5 cents per share on the Registrant's 7.80% Noncumulative
Convertible Perpetual Preferred Stock and the earnings for the quarter
ended September 30, 1997.
(c) EXHIBITS.
See Item 14(a)3 and the Index to Exhibits.
(d) EXCLUDED FINANCIAL STATEMENTS
Not applicable.
102
<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/ TOM D. WHITAKER Dated: March 25, 1998
------------------------------
Tom D. Whitaker
Chairman of the Board
And By: /S/ PATRICK W. KILKENNY Dated: March 25, 1998
---------------------------
Patrick W. Kilkenny
President and Chief Executive Officer
(Principal Executive Officer)
And By: /S/ JAMES E. BECKWITH Dated: March 25, 1998
---------------------------
James E. Beckwith
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
103
<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 25, 1998
- ------------------------------
Orlando J. Antonini, Director
/S/ HASKELL E. BOYETT Dated: March 25, 1998
- ------------------------------
Haskell E. Boyett, Director
/S/ RICHARD I. COLOMBINI Dated: March 25, 1998
- ------------------------------
Robert D. Cook, Director
/S/ ROBERT D. COOK Dated: March 25, 1998
- ------------------------------
Robert D. Cook, Director
/S/ PATRICK W. KILKENNY Dated: March 25, 1998
- ------------------------------
Patrick W. Kilkenny, Director
/S/ WILLIAM B. STEVENSON Dated: March 25, 1998
- ------------------------------
William B. Stevenson, Director
/S/ TOM D. WHITAKER Dated: March 25, 1998
- ------------------------------
Tom D. Whitaker, Director
and Chairman of the Board
104
<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.
21. Subsidiaries of the Registrant.
23. Consent of Deloitte & Touche LLP.
105
<PAGE>
EXHIBIT 11
Redwood Empire Bancorp
EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE. This statement replaces
previous standards for reporting earnings per share with basic and diluted
earnings per share. All earnings per share information has been restated to
give effect to the new standards. Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
The following table reconciles the numerator and denominator used in computing
both basic earnings (loss) per share and diluted earnings (loss) per share for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------------------------------------
(in thousands except per share amounts)
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $3,441 ($1,486) $3,313
Less: Preferred stock dividend 449 449 336
------ -------- ------
Net income (loss) available to common stock shareholders $2,992 ($1,935) $2,977
------ -------- ------
------ -------- ------
Weighted average common shares outstanding 2,776 2,721 2,671
------ -------- ------
------ -------- ------
Basic earnings (loss) per share $1.08 ($0.71) $1.11
------ -------- ------
------ -------- ------
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) available to common stock shareholders $2,992 ($1,935) $2,977
Dilutive effect of Preferred Stock dividend 449 --- 336
------ -------- ------
$3,441 ($1,935) $3,313
------ -------- ------
------ -------- ------
Weighted average common shares outstanding 2,776 2,721 2,671
Effect of outstanding stock options 103 --- 9
Effect of Convertible Preferred Stock 499 --- 499
------ -------- ------
3,378 2,721 3,179
------ -------- ------
------ -------- ------
Diluted earnings (loss) per share $1.02 ($0.71) $1.04
------ -------- ------
------ -------- ------
</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,
1997
------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Net income $3,441
Tax provision 2,266
Fixed charges:
Other interest expense 1,359
------------
Earnings before taxes and fixed charges $7,066
------------
------------
Ratio of earnings to fixed charges 5.20
------------
------------
INCLUDING INTEREST ON DEPOSITS
Fixed charges, per above $1,359
Interest on deposits 15,428
------------
Total fixed charges and interest on deposits $16,787
------------
------------
Earnings before taxes and fixed charges, per above $7,066
Interest on deposits 15,428
------------
Total earnings before taxes, fixed charges and
interest on deposits $22,494
------------
------------
Ratio of earnings to fixed charges 1.34
------------
------------
Surplus $5,707
------------
------------
</TABLE>
The 1997 earnings are adequate to cover fixed charges by the amount noted above.
<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,
1997
------------
<S> <C>
EXCLUDING INTEREST ON DEPOSITS
Net income $3,441
Tax benefit 2,266
Other interest expense 1,359
------------
Earnings before taxes and fixed charges $7,066
------------
------------
Fixed charges per above $1,359
Preferred stock dividends 449
------------
Fixed charges including preferred stock dividends $1,808
------------
------------
Ratio of earnings to fixed charges and preferred stock
dividend requirements 3.91
------------
------------
INCLUDING INTEREST ON DEPOSITS
Fixed charges, including preferred stock dividends $1,808
Interest on deposits 15,428
------------
Total fixed charges and interest on deposits $17,236
------------
------------
Earnings before taxes and fixed charges, per above $7,066
Interest on deposits 15,428
------------
Total earnings before taxes, fixed charges and
interest on deposits $22,494
------------
------------
Ratio of earnings to fixed charges 1.31
------------
------------
Surplus $5,259
------------
------------
</TABLE>
The 1997 earnings are adequate to cover fixed charges by the amount noted above.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
December 31, 1997
REDWOOD EMPIRE BANCORP
|
|
|
|
|
NATIONAL BANK OF THE REDWOODS
|
|
|
____________________________________________________
| | |
| | |
| | |
| | |
NBR Mortgage Company, Inc. Redwood Empire Datacorp Allied Diversified Credit
- -------------------------- ----------------------- -------------------------
(Inactive) (Inactive) (Inactive)
1) Redwood Empire Bancorp (REB), the holding company, directly owns 100% of
the shares of National Bank of the Redwoods.
2) National Bank of the Redwoods directly owns 100% of the shares of NBR
Mortgage Company, Inc., Redwood Empire Datacorp, and Allied Diversified
Credit.
<PAGE>
EXHIBIT 23
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 Form S-3 of Redwood Empire Bancorp of our report dated
January 23, 1998 (March 17, 1998, as to Note S) appearing in this Annual
Report on Form 10-K of Redwood Empire Bancorp for the year ended December 31,
1997.
Deloitte & Touche LLP
Sacramento, California
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10K FOR THE YEAR 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 56,064
<SECURITIES> 72,565
<RECEIVABLES> 0
<ALLOWANCES> 7,645
<INVENTORY> 0
<CURRENT-ASSETS> 321,681
<PP&E> 14,274
<DEPRECIATION> 10,220
<TOTAL-ASSETS> 446,719
<CURRENT-LIABILITIES> 401,476
<BONDS> 12,000
0
5,750
<COMMON> 19,656
<OTHER-SE> 7,837<F1>
<TOTAL-LIABILITY-AND-EQUITY> 446,719
<SALES> 0
<TOTAL-REVENUES> 47,449
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,642
<LOSS-PROVISION> 2,100
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,707
<INCOME-TAX> 2,266
<INCOME-CONTINUING> 3,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,441
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.02
<FN>
<F1>includes unrealized loss on securities AFS of 187
</FN>
</TABLE>
