<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-19231
REDWOOD EMPIRE BANCORP
(Exact name of Registrant as specified in its charter)
California 68-0166366
(State or other jurisdiction of (IRS Employer
Incorporated or organization) Identification No.)
111 Santa Rosa Avenue, Santa Rosa, California 95404-4905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 573-4800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. May 7, 1998: 3,302,911
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This page is 1 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP
AND
SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Operations
Three Months ended March 31, 1998 and 1997 . . . . . . . . . . 3
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . .10
PART II. Other Information
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . .21
ITEM 6. Exhibits and Reports on Item 8-K . . . . . . . . . . . . . . .21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
</TABLE>
This page is page 2 of 22 pages.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $6,854 $8,628
Interest on investment securities 1,126 829
Interest on federal funds sold 326 278
Interest on time deposits due from
financial institutions --- 3
-------------------------
Total interest income 8,306 9,738
Interest expense:
Interest on deposits 3,381 4,288
Interest on subordinated notes 277 278
Interest on other borrowings 74 83
-------------------------
Total interest expense 3,732 4,649
-------------------------
Net interest income 4,574 5,089
Provision for loan losses 510 585
-------------------------
Net interest income after loan loss provision 4,064 4,504
Other operating income:
Service charges on deposit accounts 274 296
Merchant draft processing, net 441 422
Loan servicing income 179 316
Net realized gain on sale of
investment securities available for sale 105 1
Gain on sale of loans and loan servicing 947 1,070
Other income 1,381 467
-------------------------
Total other operating income 3,327 2,572
Other operating expense:
Salaries and employee benefits 3,003 3,217
Occupancy and equipment expense 809 885
Other 1,837 1,974
-------------------------
Total other operating expense 5,649 6,076
-------------------------
Income before income taxes 1,742 1,000
Provision for income taxes 635 420
-------------------------
Net income 1,107 580
Dividends on preferred stock 112 112
-------------------------
Net income available for common stock shareholders $995 $468
-------------------------
-------------------------
Earnings per common share and common
equivalent share:
Basic earnings per share $.36 $.17
Weighted average shares 2,793,000 2,756,000
Diluted earnings per share $.32 $.16
Weighted average shares 3,445,000 2,861,000
</TABLE>
See Notes to Consolidated Financial Statements.
This page is page 3 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- --------------
<S> <C> <C>
Cash and due from banks $35,823 $21,505
Federal funds sold and repos 36,746 34,553
--------------- --------------
Cash and cash equivalents 72,569 56,058
Interest bearing deposits due from financial institutions 6 6
Investment securities:
Held to maturity (market value of $28,063 and $31,273) 27,720 30,658
Available for sale, at market 35,059 41,907
--------------- --------------
Total investment securities 62,779 72,565
Mortgage loans held for sale 30,236 16,929
Loans:
Residential real estate mortgage 88,284 93,516
Commercial real estate mortgage 56,618 57,425
Commercial 64,111 69,097
Real estate construction 46,902 55,031
Installment and other 5,985 9,200
Less deferred loan fees (1,697) (1,873)
--------------- --------------
Total portfolio loans 260,203 282,396
Less allowance for loan losses (7,649) (7,645)
--------------- --------------
Net loans 252,554 274,751
Premises and equipment, net 4,252 4,055
Mortgage servicing rights 552 620
Other real estate owned 5,759 6,352
Cash surrender value of life insurance 3,448 2,929
Other assets and interest receivable 11,736 12,454
--------------- --------------
Total assets $443,891 $446,719
--------------- --------------
--------------- --------------
Deposits:
Noninterest bearing demand deposits $92,591 $98,915
Interest-bearing transaction accounts 155,239 149,939
Time deposits $100,000 and over 53,684 53,878
Other time deposits 83,499 88,689
--------------- --------------
Total deposits 385,013 391,421
Other borrowings 5,626 2,341
Subordinated notes 12,000 12,000
Other liabilities and interest payable 6,919 7,714
--------------- --------------
Total liabilities 409,558 413,476
Shareholders' equity:
Preferred stock, no par value; authorized 2,000,000 shares;
issued and outstanding 575,000 shares 5,750 5,750
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,805,739 and 2,785,261 shares 19,730 19,656
Retained earnings 9,021 8,024
Unrealized loss on investment securities carried as,
or transferred from available for sale, net of income taxes (168) (187)
--------------- --------------
Total shareholders' equity 34,333 33,243
--------------- --------------
Total liabilities and shareholders' equity $443,891 $446,719
--------------- --------------
--------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
This page is page 4 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,107 $580
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 207 788
Net realized gains on securities available for sale (105) (1)
Loans originated for sale (92,263) (61,778)
Proceeds from sale of loans held for sale 87,930 79,980
Gain on sale of loans and loan servicing (947) (1,507)
Provision for loan losses 510 585
Change in other assets and interest receivable (140) 6,525
Change in other liabilities and interest payable (488) (2,194)
Noncash restructuring charge --- ---
Other, net 248 (151)
---------- ----------
Total adjustments (5,048) 22,247
---------- ----------
Net cash (used in) and provided by operating activities (3,941) 22,827
---------- ----------
Cash flows from investing activities:
Net change in loans 12,995 3,208
Proceeds from sales of loans in portfolio 172 1,311
Purchases of investment securities available for sale (11,081) (5,000)
Purchases of investment securities held to maturity (4,022) ---
Sales of investment securities available for sale 2,955 6,974
Maturities of investment securities available for sale 10,900 ---
Maturities of investment securities held to maturity 11,229 500
Premises and equipment, net (582) (425)
Purchase of mortgage servicing rights (2) (148)
Noninterest bearing demand deposits --- (3)
Proceeds from sale of other real estate owned 1,071 98
---------- ----------
Net cash provided by investment activities 23,635 6,515
---------- ----------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts (6,324) (1,893)
Change in interest bearing transaction accounts 5,302 890
Change in time deposits (5,386) (30,640)
Change in borrowings 3,285 (5,103)
Issuance of stock 52 143
Dividends paid (112) (112)
---------- ----------
Net cash used in financing activities (3,183) (36,715)
---------- ----------
Net change in cash and cash equivalents 16,511 (7,373)
Cash and cash equivalents at beginning of period 56,058 45,473
---------- ----------
Cash and cash equivalents at end of period $72,569 $38,100
---------- ----------
---------- ----------
</TABLE>
(Continued)
This page is page 5 of 22 Pages
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------- ---------
<S> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Interest expense 5,261 4,625
Noncash investing and financing activities:
Transfers from loans to other real estate owned 726 1,292
Transfer from mortgage loans held for sale to loans 216 ---
</TABLE>
This page is page 6 of 22 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements should be
read in conjunction with the financial statements and related notes contained
in Redwood Empire Bancorp's 1997 Annual Report to shareholders. The
statements include the accounts of Redwood Empire Bancorp ("Redwood"), and
its wholly owned subsidiary, National Bank of the Redwoods ("NBR"). All
significant inter-company balances and transactions have been eliminated.
The financial information contained in this report reflects all adjustments
which, in the opinion of management, are necessary for a fair presentation of
the results of the interim periods. All such adjustments are of a normal
recurring nature. The results of operations and cash flows for the three
months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
Certain reclassifications were made to prior period financial statements
to conform to current period presentations.
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, federal funds sold and repurchase
agreements. Federal funds sold and repurchase agreements are generally for
one day periods.
2. On March 24, 1997, Allied Bank, F.S.B. a wholly owned subsidiary of
Redwood, was merged into NBR. In connection with the merger, NBR assumed all
of Allied's rights and obligations. As a result of the merger Allied Bank,
F.S.B. ceased to exist.
This page is pge 7 of 22
<PAGE>
3. Earnings per Share
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.
<TABLE>
<CAPTION>
Year Ended
March 31,
1998 1997
----------- ----------
(in thousands except
per share amounts)
<S> <C> <C>
Basic Earnings per share:
Net income $1,107 $580
Less: Preferred stock dividend 112 112
-------- --------
Net income available to common stock shareholders $995 $468
-------- --------
-------- --------
Weighted average common shares outstanding 2,793 2,756
-------- --------
-------- --------
Basic earnings per share $0.36 $0.17
-------- --------
-------- --------
Diluted Earnings per share:
Net income available to common stock shareholders $995 $468
Dilutive effect of Preferred Stock dividend
-------- --------
$1,107 $580
-------- --------
-------- --------
Weighted average common shares outstanding 2,793 2,756
Effect of outstanding stock options 153 105
Effect of Convertible Preferred Stock 499
-------- --------
3,445 2,861
-------- --------
-------- --------
Diluted earnings per share $0.32 $0.16
-------- --------
-------- --------
</TABLE>
This page is page 8 of 22.
<PAGE>
4. Change in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will be
reclassified, as required. The Company's total comprehensive earnings were
as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 1997
--------- -------
<S> <C> <C>
Net income as reported $1,107 $580
Other comprehensive income (net of tax):
Change in unrealized holding gain (losses)
on available for sale securities 44 (270)
Reclassification adjustment (25) (1)
--------- -------
Total comprehensive income $1,126 $309
--------- -------
--------- -------
</TABLE>
5. Preferred Stock Redemption
On March 19, 1998 the Company called for redemption of its outstanding
7.8% Noncumulative Convertible Perpetual Preferred Stock, Series A. The
redemption notice provided that all shares will be redeemed on April 30, 1998
at $10.39 per share, payable to shareholders of record as of March 27, 1998,
who surrender their preferred stock certificates to the conversion agent,
Chase Mellon Shareholder Services LLC. The preferred stock is convertible at
the option of the holder, into 0.8674 shares of common stock for each share
of preferred stock. The total number of shares subject to redemption will be
reduced by the number of shares of preferred stock converted into common
stock between the record date and the redemption date.
As a result of the redemption 573,290 shares of the preferred shares
were converted into 497,172 shares of common stock effective April 30, 1998.
Preferred shares to be redeemed for cash at $10.39 per share amounted to
1,710.
This page is page 9 of 22 pages.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Redwood Empire Bancorp ("Redwood," and with its subsidiaries the
"Company") is a financial institution holding company headquartered in Santa
Rosa, California. Redwood has one subsidiary, National Bank of the Redwoods,
a national bank ("NBR").
Certain statements in this quarterly report on Form 10-Q include
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the "safe harbor"
created by those sections. These forward-looking statements involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Such risks and uncertainties
include, but are not limited to, the following factors: competitive pressure
in the banking industry; changes in the interest rate environment; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; and changes in business conditions, volatility of
rate sensitive deposits, operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; and
changes in the securities markets. In addition, such risks and uncertainties
include mortgage banking activities, merchant card processing and
concentration of lending activities all of which have been described in
"Certain Important Considerations for Investors".
The following sections discuss significant changes and trends in
financial condition, capital resources and liquidity of the Company from
December 31, 1997 to March 31, 1998, and significant changes and trends in
the Company's results of operations for the three months ended March 31,
1998, compared to the same period in 1997.
SUMMARY OF FINANCIAL RESULTS
The Company reported net income of $1,107,000 ($.32 per share, diluted)
for the three months ended March 31 1998, compared to $580,000 ($.16 per
share, diluted)for the same period in 1997. The increase in net income in
the first quarter of 1998 when compared to the same period in 1997 is due to
an increase of $755,000 in non interest income, a decrease of $427,000 in non
interest expense, all being offset by a decline of $515,000 in net interest
income.
This page is page 10 of 22 pages.
<PAGE>
NET INTEREST INCOME
Net interest income decreased $515,000 for the first quarter of 1998
compared to the first quarter of 1997. The decrease is primarily due to a
decrease in average earning assets of $46,521,000 or 11%. Net interest
margin for the quarter ended March 31, 1998 amounted to 4.73% as compared to
4.69% one year ago.
The decline in earning assets of the Company is due principally to the
decline in residential and construction loans. The average of residential
mortgage and construction loans declined $5,548,000 and $27,352,000 from
$98,499,000 and $73,152,000 as of March 31, 1997 to $92,951,000 and
$45,800,000 as of March 31, 1998. This decline in residential loans was a
result of a relatively low mortgage rate environment which spurred refinance
activity. The decrease in construction loans was due to decreased
originations brought about by management's desire to lower the relative size
of the Company's construction loan portfolio.
With respect to the net interest margin, the yield on earning assets
decreased from 8.98% to 8.58%. However, as a result of decreased funding
needs, the Company significantly reduced its higher cost time certificates of
deposits. Total time certificates amounted to $137,183,000 as of March 31,
1998 as compared to $177,542,000 as of March 31, 1997 which results in a
decline of $40,359,000 or 29%. This reduction in higher cost liabilities had
an effect on overall yield paid for interest-bearing liabilities. Such yield
declined from 5.02% in the first quarter of 1997 to 4.91% for the same
quarter in 1997.
This page is page 11 of 22 pages.
<PAGE>
The following is an analysis of the net interest margin:
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31, 1997
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets (1) $387,101 $8,306 8.58 $433,622 $9,738 8.98
Interest-bearing liabilities 303,867 3,732 4.91 370,501 4,649 5.02
-------- ---------
Net interest income $4,574 $5,089
-------- ---------
-------- ---------
Net interest income to
earning assets 4.73 4.69
</TABLE>
(1) Nonaccrual loans are included in the calculation of the average balance
of earning assets, and interest not accrued is excluded.
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and
interest-bearing liability, and the amount of change attributable to volume
and rate changes for the three months ended March 31, 1998 and 1997. Changes
not solely attributable to rate or volume have been allocated to rate.
<TABLE>
<CAPTION>
March 31, 1998 over
March 31, 1997
--------------------------------------------
Volume Rate Total
--------------------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans ($1,615) ($77) ($1,692)
Mortgage loans held for sale 108 (190) (82)
Investment securities 195 99 294
Interest-earning deposits with other institutions --- --- ---
Federal funds sold 67 (19) 48
--------------------------------------------
Total increase (decrease) (1,245) (187) (1,432)
--------------------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts (48) (42) (90)
Time deposits (771) (46) (817)
Other borrowings (139) 129 (10)
--------------------------------------------
Total increase (decrease) (958) 41 (917)
--------------------------------------------
Increase in net interest income ($287) ($228) ($515)
--------------------------------------------
--------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1998
amounted to $510,000 as compared to $585,000 in the same quarter in the
previous year. For further discussion see Allowance for Loan Losses.
This page is page 12 of 22.
<PAGE>
OTHER OPERATING INCOME AND EXPENSE AND INCOME TAXES
Other Operating Income
The following table sets forth the components of the Company's other
operating income for the three months ended March 31, 1998, as compared to
the same period in 1997.
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------- %
(dollars in thousands) 1998 1997 Change
------- ------------------
<S> <C> <C> <C>
Service charges on deposit accounts 274 296 (7)
Merchant draft processing, net 441 422 5
Loan servicing income 179 316 (43)
Gain (loss) on securities 105 1 10,400
Gain on sale of loans and servicing 947 1,070 (11)
Other income 1,381 467 196
------ ------
Total other operating income $3,327 $2,572 29
------ ------
</TABLE>
Other operating income increased $755,000 or 29% to $3,327,000 for the
first quarter of 1998 when compared to $2,572,000 for the same period in
1997. Such increase is primarily due to a $914,000 increase in other income,
which includes net brokerage revenue associated with the Company's mortgage
loan brokerage operation. The change is offset by a decrease of gain on
sale of loans and servicing of $123,000. The Company's mortgage loan
brokerage division, Valley Financial, experienced significant growth in the
first quarter of 1998. Net revenue from the mortgage loan brokerage operation
amounted to $1,096,000 in the first quarter of 1998 as compared to $374,000
in the same period one year ago. The significant increase is due primarily to
a favorable interest rate environment and a strong residential purchase
market in Northern California.
Other Operating Expense
Other operating expense decreased by $427,000 or 7% to $5,649,000 during
the first quarter of 1998 compared to $6,086,000 for the first quarter of
1997, primarily due to the reduced head count and a reduction in data
processing, occupancy and legal and professional expenses.
The following table sets forth the components of the Company's other
operating expense during the three months ended March 31, 1998, as compared
to the same period in 1997.
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------- %
(dollars in thousands) 1998 1997 Change
-------- ----------------
<S> <C> <C> <C>
Salaries and employee benefits $3,003 $3,217 (7)
Occupancy and equipment expense 809 885 (9)
Other 1,837 1,974 (7)
-------- --------
Total other operating expense $5,649 $6,076 (7)
-------- --------
-------- --------
This page is page 13 of 22.
<PAGE>
</TABLE>
INCOME TAXES
The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and nondeductible expenses. The effective
rate was 36.5% for the three months ended March 31, 1998, compared to 42.0%
for the same period in 1997. The decline in the Company's effective tax rate
in the first quarter of 1998 is due to recording the benefit of certain items
arising in previous years.
INVESTMENT SECURITIES
Total investment securities decreased $9,766,000 or 13% to $62,779,000
as of March 31, 1998 when compared to $72,565,000 as of December 31, 1997.
The principal reason for the decline relates to callable agency securities
being called by the issuer. Such called securities amounted to $11,900,000 in
the first quarter of 1998. As a result of this action the Company recorded
$70,000 as gain on sale.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale increased $13,307,000 or 78% to $30,236,000
at March 31, 1998 compared to $16,929,000 at December 31, 1997. The increase
in mortgage loans held for sale is due to the current low interest rate
environment and increased production capability within the Valley Financial
unit. In addition to brokering to other financial institutions, Valley
Financial also originates loans for sale into the secondary market.
LOANS
Total loans decreased $22,193,000 or 8% to $260,203,000 at March 31,
1998 compared to $282,396,000 at December 31, 1997. All loan categories
declined in the first quarter of 1998. Increased competition in the
Company's market along with rate reduction and refinance activity were the
principal reasons for such decline. The Company anticipates that these
forces will remain intact for the foreseeable future.
This page is page 14 of 22.
<PAGE>
The following table summarizes the composition of the loan portfolio at
March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
--------------------- ------------------
(dollars in thousands) Amount % Amount %
--------------------- ------------------
<S> <C> <C> <C> <C>
Residential real estate mortgage $88,284 34% $93,516 33%
Commercial real estate mortgage 56,618 22 57,425 20
Commercial 64,111 25 69,097 24
Real estate construction 46,902 18 55,031 21
Installment and other 5,985 2 9,200 3
Less deferred fees (1,697) (1) (1,873) (1)
--------------------- ------------------
Total loans 260,203 100% 282,396 100%
---- ----
---- ----
Less allowance for loan losses (7,649) (7,645)
--------- ---------
Net loans $252,554 $274,751
--------- ---------
--------- ---------
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges to earnings
in the form of the provision for loan losses. Loan losses are charged to,
and recoveries are credited to, the allowance for loan losses. The provision
for loan losses is determined after considering various factors such as loan
loss experience, current economic conditions, maturity of the portfolio, size
of the portfolio, industry concentrations, borrower credit history, the
existing allowance for loan losses, independent loan reviews, current charges
and recoveries to the allowance for loan losses, and the overall quality of
the portfolio, as determined by management, regulatory agencies, and
independent credit review consultants retained by the Company.
The adequacy of the Company's allowance for loan losses is based on
specific and formula allocations to the Company's loan portfolio. Specific
allocations of the allowance for loan losses are made to identified problem
or potential problem loans. The specific allocations are increased or
decreased through management's reevaluation of the status of the particular
problem loans. Loans which do not receive a specific allocation receive an
allowance allocation based on a formula, represented by a percentage factor
based on underlying collateral, type of loan, historical charge-offs and
general economic conditions and other qualitative factors.
The following table summarizes the Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
(dollars in thousands) 1998 1997
------- -------
<S> <C> <C>
Beginning allowance for loan losses 7,645 7,040
Provision for loan losses 510 585
Charge-offs (537) (575)
Recoveries 31 35
------- -------
Ending allowance for loan losses 7,649 7,085
------- -------
------- -------
</TABLE>
This page is page 15 of 22 pages.
<PAGE>
The allowance for loan losses as a percentage of portfolio loans
increased from 2.71% at December 31, 1997 to 2.93% at March 31, 1998. The
increase in this percentage is due to a $22,162,000 decline in the Company's
total loan portfolio.
NONPERFORMING ASSETS
The following table summarizes the Company's nonperforming assets.
<TABLE>
<CAPTION>
March 31, December 31,
(dollars in thousands) 1998 1997
---------- ----------
<S> <C> <C>
Nonaccrual loans $7,215 $7,883
Accruing loans past due 90 days or more 167 735
Restructured loans 1,109 1,109
---------- ----------
Total nonperforming loans 8,491 9,727
Other real estate owned 5,759 6,352
Other assets owned 455 542
---------- ----------
Total nonperforming assets $14,705 $16,621
---------- ----------
---------- ----------
Nonperforming assets to total assets 3.31% 3.72%
</TABLE>
Nonperforming assets have decreased from $16,621,000 as of December 31,
1997 to $14,698,000 as of March 31, 1998. The principal reasons for this
decrease relate to a decrease in nonaccrual loans of $668,000, a decrease in
other real estate owned of $593,000 and a decrease in accruing loans past due
90 days or more of $575,000.
Nonperforming loans consist of loans to 52 borrowers, 25 of which have
balances in excess of $100,000. The two largest have recorded balances of
$926,000 and $737,000, both secured by real estate. Based on information
currently available, management believes that adequate reserves are included
in the allowance for loan losses to cover any loss exposure that may result
from these loans.
Other real estate owned consists of 30 properties. 18 properties are
residential, 6 construction lots and the remaining are undeveloped acres and
commercial buildings . Other assets owned included contract receivable
rights and repossessed personal property carried at $455,000.
Although the volume of nonperforming assets will depend in part on the
future economic environment, there are also nine loan relationships which
total approximately $2,135,000 about which management has serious doubts as
to the ability of the borrowers to comply with the present repayment terms
and which may become nonperforming assets based on the information presently
known about possible credit problems of the borrower.
This page is page 16 of 22.
<PAGE>
In the first three months of 1998 the Company was required by various
mortgage loan investors to repurchase four non performing residential
mortgage loans. 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 $307,000 as of March
31, 1998.
At March 31, 1998 the Company's total recorded investment in impaired
loans (as defined by SFAS 114 and 118) was $11,596,000 of which $8,475,000
relates to the recorded investment for which there is a related allowance for
credit losses of $1,654,000 determined in accordance with these statements
and $3,121,000 relates to the amount of that recorded investment for which
there is no related allowance for credit losses determined in accordance with
these standards.
The average recorded investment in the impaired loans during the three
months ended March 31, 1998 and March 31, 1997 was $11,608,000 and
$16,928,000; the related amount of interest income recognized during the
periods that such loans were impaired was $118,000 for the three month period
ended March 31, 1998 and $14,000 for the same period in 1997. No interest
income was recognized using a cash-basis method of accounting during the
period that the loans were impaired.
LIQUIDITY
Redwood's primary source of liquidity is dividends from its financial
institution subsidiary. Redwood's primary uses of liquidity are associated
with cash payments made to the subordinated debt holders, dividend payments
made to the preferred stock holders, and operating expenses of the parent.
It is Redwood's general policy to retain liquidity at Redwood at a level
which management believes to be consistent with the safety and soundness of
the Company as a whole. As of March 31, 1998, Redwood held $1,986,000 in
deposits at NBR and a $3,000,000 subordinated note issued by NBR.
Redwood pays quarterly dividends of 7.8% on its preferred stock of
$5,750,000 and interest at 8.5% on $12,000,000 of subordinated debentures
issued in 1993. Payment of these obligations is dependent on dividends from
NBR. Federal regulatory agencies have the authority to prohibit the payment
of dividends by NBR to Redwood if a finding is made that such payment would
constitute an unsafe or unsound practice, or if NBR became undercapitalized.
If NBR is restricted from paying dividends, Redwood could be unable to pay
the above obligations. No assurance can be given as to the ability of NBR to
pay dividends to Redwood.
This page is page 17 of 22 Pages.
<PAGE>
During the first quarter of 1998, NBR declared dividends of $300,000.
Management believes that at March 31, 1998, the Company's liquidity position
was adequate for the operations of Redwood and its subsidiary for the
foreseeable future.
Although each entity within the consolidated Company manages its own
liquidity, the Company's consolidated cash flow can be divided into three
distinct areas; operating, investing and financing. For the three months
ended March 31, 1998 the Company received $3,941,000 and $23,635,000 in cash
flows from operating and investing activities while using $3,183,000 in
financing activities.
CAPITAL RESOURCES
A strong capital base is essential to the Company's continued ability to
service the needs of its customers. Capital protects depositors and the
deposit insurance fund from potential losses and is a source of funds for the
substantial investments necessary for the Company to remain competitive. In
addition, adequate capital and earnings enable the Company to gain access to
the capital markets to supplement its internal growth of capital. Capital is
generated internally primarily through earnings retention.
The Company and NBR are required to maintain minimum capital ratios
defined by various federal government regulatory agencies. The FRB and the
OCC have each established capital guidelines, which include minimum capital
requirements. The regulations impose three sets of standards: a "risk-based",
"leverage" and "tangible" capital standard.
Under the risk-based capital standard, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned
to risk categories, each of which is assigned a risk weight. This standard
characterizes an institution's capital as being "Tier 1" capital (defined as
principally comprising shareholders' equity and noncumulative preferred
stock) and "Tier 2" capital (defined as principally comprising the allowance
for loan losses and subordinated debt).
Under the leverage capital standard, an institution must maintain a
specified minimum ratio of Tier 1 capital to total assets, with the minimum
ratio ranging from 4% to 6%. The leverage ratio for the Company and NBR is
based on average assets for the quarter.
This page is page 18 of 22 pages.
<PAGE>
The following table summarizes the consolidated capital ratios and the
capital ratios of the principal subsidiaries at December 31, 1997 and March
31, 1998.
<TABLE>
<CAPTION>
Company NBR
-------------------------
<S> <C> <C>
March 31, 1998
Total capital to risk based assets 15.59% 14.74%
Tier 1 capital to risk based assets 10.50 12.52
Leverage ratio 7.35 9.19
December 31, 1997
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>
CERTAIN IMPORTANT CONSIDERATIONS FOR INVESTORS
MORTGAGE BANKING ACTIVITY. The Company's historic results of operations
has been significantly influenced by mortgage banking activity, which can
fluctuate significantly, in both volume and profitability, with changes in
interest rate movements. In the fourth quarter of 1996, the Company
significantly curtailed its "A paper" wholesale mortgage loan production. As
a result of this action, the Company's future mortgage loan production
revenue and expenses will be significantly reduced from pre 1997 levels.
MERCHANT CREDIT CARD PROCESSING. The Company's profitability can be
negatively impacted should one of the Company's merchant credit card
customers be unable to pay on charge-backs from cardholders. Due to a
contractual obligation between the Company and Visa and Mastercard, NBR
stands in the place of the merchant in the event that a merchant is unable to
pay on charge-backs from cardholders. Management has taken certain actions
to decrease the risk of merchant bankruptcy with its merchant bankcard
business. These steps include the discontinuance of high-risk accounts.
This page is page 19 of 22.
<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 real estate market in the Company's lending areas. At March 31,
1998, approximately 74% of the Company's loans were secured by real estate,
of which 22% were secured by commercial real estate, including small office
buildings, owner-user office/warehouses, mixed use residential and commercial
properties and retail properties. Substantially all of the properties that
secure the Company's present loans are located within Northern and Central
California. The ability of the Company to continue to originate mortgage or
construction loans may be impaired by adverse changes in local or regional
economic conditions, adverse changes in the real estate market, increasing
interest rates, or acts of nature (including earthquakes, which may cause
uninsured damage and other loss of value to real estate that secures the
Company's loans). Due to the concentration of the Company's real estate
collateral, such events could have a significant adverse impact on the value
of such collateral or the Company's earnings.
This page is page 20 of 22.
<PAGE>
PART II. - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES - On March 19, 1998 the Company called for
redemption of its outstanding 7.8% Noncumulative Convertible Perpetual
Preferred Stock Series A. The redemption notice provided that all shares will
be redeemed on April 30, 1998 at $10.39 per share, payable to shareholders of
record as of March 27, 1998, who surrender their preferred stock certificates
to the conversion agent, Chase Mellon Shareholder Services LLC. The preferred
stock is convertible at the option of the holder, into 0.8674 shares of
common stock for each share of preferred stock. The total number of shares
subject to redemption will be reduced by the number of shares of preferred
stock converted into common stock between the record date and the redemption
date.
As a result of the redemption 573,290 shares of the preferred shares
were converted into 497,172 shares of common stock effective April 30, 1998.
Preferred shares to be redeemed for cash at $10.39 per share amounted to
1,710.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 11
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. See Footnote 3 "Earnings
per Share."
(b) REPORTS ON FORM 8-K
Form 8-K dated March 25, 1998 announcing the call for
redemption of its outstanding 7.8% Noncumulative Convertible
Preferred Stock, Series A.
Form 8-K dated January 28, 1998 announcing declaration of
quarterly dividend on preferred stock and its fourth quarter
and full year 1997 financial results.
This page is page 21 of 22.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
REDWOOD EMPIRE BANCORP
----------------------
(Registrant)
DATE: 05/13/98 BY: /s/ James E. Beckwith
-------- --------------------------
James E. Beckwith
Executive Vice President,
Chief Financial Officer,
Principal Financial Officer, and
Principal Accounting Officer
<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 INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 72,575
<SECURITIES> 62,779
<RECEIVABLES> 0
<ALLOWANCES> 7,649
<INVENTORY> 0
<CURRENT-ASSETS> 311,934
<PP&E> 4,252
<DEPRECIATION> 0
<TOTAL-ASSETS> 443,891
<CURRENT-LIABILITIES> 397,558
<BONDS> 12,000
0
5,750
<COMMON> 19,730
<OTHER-SE> 8,853<F1>
<TOTAL-LIABILITY-AND-EQUITY> 443,891
<SALES> 0
<TOTAL-REVENUES> 11,633
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,381
<LOSS-PROVISION> 510
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,742
<INCOME-TAX> 635
<INCOME-CONTINUING> 1,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,107
<EPS-PRIMARY> .36
<EPS-DILUTED> .32
<FN>
<F1>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF 168
</FN>
</TABLE>
