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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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-19231
REDWOOD EMPIRE BANCORP
(Exact name of Registrant as specified in its charter)
California 68-0166366
(State or other jurisdiction of (IRS Employer
Incorporated or organization) Identification No.)
111 Santa Rosa Avenue, Santa Rosa, California 95404-4905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 545-9611
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. August 1, 1997: 2,784,200
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This page is page 1 of 22 pages.
REDWOOD EMPIRE BANCORP
AND
SUBSIDIARIES
INDEX
PAGE
PART I. Financial Information ----
ITEM 1. Financial Statements
Consolidated Statements of Operations
Three and Six Months ended June 30, 1997 and 1996 . . . . . . . . . .3
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . .7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . .9
PART II. Other Information
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . 21
ITEM 4. Submission of Matters to a Vote of Securities Holders. . . . . . . . 21
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 6. Exhibits and Reports on Item 8-K . . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
This page is page 2 of 22 pages.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------- --------- ---------- ---------
Interest income:
Interest and fees on loans $8,396 $10,845 $17,024 $21,243
Interest on investment securities 852 747 1,681 1,465
Interest on federal funds sold 237 187 515 511
Interest on time deposits due from
financial institutions 3 60 6 113
----------- --------- ---------- ---------
Total interest income 9,488 11,839 19,226 23,332
Interest expense:
Interest on deposits 3,846 5,020 8,134 10,363
Interest on subordinated notes 276 277 554 561
Interest on other borrowings 35 460 118 827
----------- --------- ---------- ---------
Total interest expense 4,157 5,757 8,806 11,751
----------- --------- ---------- ---------
Net interest income 5,331 6,082 10,420 11,581
Provision for loan losses 585 1,315 1,170 2,830
----------- --------- ---------- ---------
Net interest income after loan loss provision 4,746 4,767 9,250 8,751
Other operating income:
Service charges on deposit accounts 285 306 581 606
Merchant draft processing, net 370 519 792 1,007
Loan servicing income 199 505 515 885
Net realized (losses) on sale of
investment securities available for sale (8) (8) (7) (8)
Gain on sale of loans and loan servicing 823 2,545 2,330 6,081
Other income 666 544 1,133 1,425
----------- --------- ---------- ---------
Total other operating income 2,335 4,411 5,344 9,996
Other operating expense:
Salaries and employee benefits 2,500 4,123 6,154 8,610
Occupancy and equipment expense 758 1,357 1,643 2,719
Restructuring charge (33) --- (33) ---
Other 2,329 3,587 4,303 5,829
----------- --------- ---------- ---------
Total other operating expense 5,554 9,067 12,067 17,158
----------- --------- ---------- ---------
Income (loss) before income taxes 1,527 111 2,527 1,589
Provision (benefit) for income taxes 643 73 1,063 665
----------- --------- ---------- ---------
Net income (loss) 884 38 1,464 924
Dividends on preferred stock 112 112 224 224
----------- --------- ---------- ---------
Net income (loss) available for common shareholders $772 ($74) $1,240 $700
----------- --------- ---------- ---------
----------- --------- ---------- ---------
Earnings per common share and common equivalent share:
Primary net income (loss) per share $.27 ($.03) $.43 $.26
Weighted average shares 2,887,000 2,713,000 2,871,000 2,731,000
Fully diluted net income(loss) per share $.26 ($.03) $.43 $.26
Weighted average shares 3,386,000 2,713,000 3,373,000 2,731,000
Dividends per common share $ --- $ --- $ --- $ ---
See Notes to Consolidated Financial Statements.
This page is page 3 of 22 pages.
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
June 30 December 31,
1997 1996
------------- -------------
Cash and due from banks $24,558 $20,261
Federal funds sold 19,378 25,212
Due from broker --- ---
------------- -------------
Cash and cash equivalents 43,936 45,473
Interest bearing deposits due from financial institutions 308 315
Investment securities:
Held to maturity (market value of $19,133 and $19,097) 19,169 18,781
Available for sale, at market 30,782 33,852
------------- -------------
Total investment securities 49,951 52,633
Mortgage loans held for sale 9,548 29,487
Loans:
Residential real estate mortgage 116,895 124,765
Commercial real estate mortgage 66,381 67,401
Commercial 61,544 66,525
Real estate construction 73,169 84,408
Installment and other 6,935 7,112
Less deferred loan fees (2,633) (2,797)
------------- -------------
Total portfolio loans 322,291 347,414
Less allowance for loan losses (7,548) (7,040)
------------- -------------
Net loans 314,743 340,374
Premises and equipment, net 3,819 4,049
Mortgage servicing rights 597 582
Other real estate owned 3,535 2,132
Cash surrender value of life insurance 2,867 2,814
Other assets and interest receivable 12,264 21,607
------------- -------------
Total assets $441,568 $499,466
------------- -------------
------------- -------------
Deposits:
Noninterest bearing demand deposits $76,282 $71,814
Interest-bearing transaction accounts 147,404 156,453
Time deposits $100,000 and over 58,285 75,411
Other time deposits 105,051 132,772
------------- -------------
Total deposits 387,022 436,450
Other borrowings 4,830 10,307
Subordinated notes 12,000 12,000
Other liabilities and interest payable 6,440 10,977
------------- -------------
Total liabilities 410,292 469,734
Shareholders' equity:
Preferred stock, no par value; authorized 2,000,000 shares;
issued and outstanding 575,000 shares 5,750 5,750
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,781,922 and 2,748,652 shares 19,614 19,281
Retained earnings 6,272 5,032
Unrealized gain (loss) on investment securities carried as,
or transfered from available for sale, net of income taxes (360) (331)
------------- -------------
Total shareholders' equity 31,276 29,732
------------- -------------
Total liabilities and shareholders' equity $441,568 $499,466
------------- -------------
------------- -------------
See Notes to Consolidated Financial Statements.
This page is page 4 of 22 pages.
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
June 30,
1997 1996
---------- --------
Cash flows from operating activities:
Net income $1,464 $924
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 330 1,155
Net realized losses (gains) on securities available for sale 7 8
Loans originated for sale (92,081) (882,473)
Proceeds from sale of loans held for sale 128,796 930,486
Gain on sale of loans and loan servicing (2,330) (6,081)
Provision for loan losses 1,170 2,830
Change in other assets and interest receivable 9,563 (3,039)
Change in other liabilities and interest payable (4,901) 2,652
Noncash restructuring charge --- ---
Other, net 386 (592)
---------- --------
Total adjustments 40,940 44,946
---------- --------
Net cash provided by operating activities 42,404 45,870
---------- --------
Cash flows from investing activities:
Net change in loans 6,000 (31,125)
Proceeds from sales of loans in portfolio 1,973 817
Purchases of investment securities available for sale (7,971) (21,206)
Purchases of investment securities held to maturity (730) (200)
Sales of investment securities available for sale 4,020 3,992
Maturities of investment securities available for sale 6,974 11,500
Maturities of investment securities held to maturity 500 926
Premises and equipment, net (540) (455)
Purchase of mortgage servicing rights (155) ---
Noninterest bearing demand deposits 7 103
Proceeds from sale of other real estate owned 846 1,090
---------- --------
Net cash provided by (used in) investment activities 10,924 (34,558)
---------- --------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts 4,468 (3,309)
Change in interest bearing transaction accounts (9,050) 20,823
Change in time deposits (44,846) (32,887)
Change in borrowings (5,477) (24,633)
Issuance of stock 264 424
Dividends paid (224) (224)
---------- --------
Net cash used in financing activities (54,865) (39,806)
---------- --------
Net change in cash and cash equivalents (1,537) (28,494)
Cash and cash equivalents at beginning of period 45,473 55,140
---------- --------
Cash and cash equivalents at end of period $43,936 $26,646
---------- --------
---------- --------
(Continued)
This page is page 5 of 22 pages.
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
Six Months Ended
June 30,
1997 1996
------------ -----------
Supplemental Disclosures:
Cash paid during the period for:
Income taxes $60 $2,463
Interest expense 10,581 12,200
Noncash investing and financing activities:
Transfers from loans to other real estate owned 2,591 1,643
Loans to facilitate sale of other real estate owned --- ---
Transfer from loans to mortgage loans held for sale --- 59,000
Transfer from mortgage loans held for sale to loans 1,377 ---
This page is page 6 of 22 pages.
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements should be
read in conjunction with the financial statements and related notes contained
in Redwood Empire Bancorp's 1996 Annual Report to shareholders. The
statements include the accounts of Redwood Empire Bancorp ("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 six months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
Certain reclassifications were made to prior period financial statements
to conform to current period presentations.
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Federal funds
sold are generally for one day periods.
2. On March 24, 1997, Allied Bank, F.S.B. a wholly owned subsidiary of
Redwood, was merged into NBR. In connection with the merger, NBR assumed all
of Allied's rights and obligations. As a result of the merger Allied Bank,
F.S.B. ceased to exist.
3. Net Income per Share
Net income per share is calculated based on the weighted average number
of shares of common stock outstanding and common stock equivalents
outstanding during the periods ended June 30, 1997 and 1996.
4. New Accounting Pronouncements
The Company has adopted SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" in 1997.
The statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-component
approach that focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
Management believes that adoption of SFAS 125 does not have a material
effect on the financial condition or results of operations of the Company.
This page is page 7 of 22 pages.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). The Company is required to adopt SFAS 128 in the fourth quarter
of 1997 and will restate at that time earnings per share (EPS) data for prior
periods to conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
currently computed by dividing net income available to common shareholders by
the weighted average of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
If SFAS 128 had been in effect during the current and prior year periods,
basic EPS would have been $.28 and ($.03) for the quarters ended June 30,
1997 and 1996 and $.45 and $.26 for the year ended June 30, 1997 and 1996
respectively. Diluted EPS under SFAS 128 would not have been significantly
different than fully diluted EPS reported for the periods.
This page is page 8 of 22 pages.
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, 1996 to June 30, 1997, and significant changes and trends in the
Company's results of operations for the three and six months ended June 30,
1997, compared to the same period, in 1996.
SUMMARY OF FINANCIAL RESULTS
The Company reported net income of $884,000 ($.26 per share, fully
diluted) for the three months ended June 30 1997, compared to $38,000 (a loss
of $.03 per share, fully diluted, due to the effect of the preferred
dividend) for the same period in 1996. Net income for the six months ended
June 30, 1997 was $1,464,000 ($.43 per share, fully diluted) compared to
$924,000 ($.26 per share, fully diluted) for the same period in 1996.
This page is page 9 of 22 pages.
NET INTEREST INCOME
Net interest income decreased $751,000 for the second quarter of 1997
compared to the second quarter of 1996. The decrease is primarily due to a
decrease in average earning assets of $106,611,000 or 21% partially offset by
an increase in net interest margin. The net interest margin increased to
5.37% for the second quarter of 1997 compared to 4.83% one year ago.
Net interest income of $10,420,000 declined $1,161,000 or 10% for the six
months ended June 30, 1997 when compared to the same period one year ago.
The decrease is primarily due to a decline in earning assets of $90,821,000
or 18% offset by an increase in net interest margin. Net interest margin for
the first six months of 1997 was 5.02% as compared to 4.57% for the same
period one year ago.
The decline in earning assets of the Company is due principally to the
decline in mortgage loans held for sale. The average of such loans declined
$64,974,000 from $86,225,000 as of June 30, 1996 to $21,251,000 as of June
30, 1997. Average mortgage loans held for sale amounted to $18,606,000 in
the second quarter of 1997 as compared to $113,042,000 in the same period one
year ago. Such average was $21,252,000 for the first six months of 1997 as
compared to $86,225,000 for the first six months of 1996. This decline was a
direct result of management's fourth quarter of 1996 decision to
significantly curtail its "A paper" wholesale mortgage banking operations.
In contrast, the net interest margin increased significantly due to an
increased yield on earning assets and a decline on interest bearing
liabilities. Due to a change in the earning asset mix resulting from the
reduction of mortgage loans held for sale, the yield on earning assets
increased slightly from 9.40% to 9.55%. As a result of decreased funding
needs, the Company significantly reduced its higher cost time certificates of
deposits. Total time certificates of deposits amounted to $163,336,000 as of
June 30, 1997 as compared to $230,469,000 as of June 30, 1996 which results
in a decline of $67,133,000 or 29.1%. This reduction in higher cost
liabilities had an effect on overall yield paid for interest-bearing
liabilities. Such yield declined from 5.22% in the second quarter of 1996 to
5.15% for the same quarter in 1997. For the six months ended June 30, 1997,
such yield declined from 5.32% to 5.08% when compared to the same period one
year ago.
This page is page 10 of 22 pages.
The following is an analysis of the net interest margin:
Three months ended Three months ended
June 30, 1997 June 30, 1996
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
--------------------------------- ---------------------------------
Earning assets (1) $397,298 $9,488 9.55 $503,909 $11,839 9.40
Interest-bearing liabilities 322,977 4,157 5.15 441,398 5,757 5.22
------- -------
Net interest income $5,331 $6,082
------- -------
------- -------
Net interest income to
earning assets 5.37 4.83
Six months ended Six months ended
June 30, 1997 June 30, 1996
--------------------------------- -------------------------------
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
--------------------------------- ---------------------------------
Earning assets (1) $415,460 $19,226 9.26 $506,281 $23,332 9.22
Interest-bearing liabilities 346,739 8,806 5.08 442,044 11,751 5.32
------- -------
Net interest income $10,420 $11,581
------- -------
------- -------
Net interest income to
earning assets 5.02 4.57
(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 six months ended June 30, 1997 and 1996. Changes not solely attributable to
rate or volume have been allocated to rate.
June 30, 1997 over
June 30, 1996
----------------------------------
Volume Rate Total
-----------------------------------
(in thousands)
Increase (decrease) in interest income:
Portfolio loans ($990) ($1,314) ($2,304)
Mortgage loans held for sale (2,248) 333 (1,915)
Investment securities (127) 230 103
Interest-earning deposits with other institutions --- 6 6
Federal funds sold (82) 86 4
-----------------------------------
Total increase (decrease) (3,447) (659) (4,106)
-----------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts 216 (35) 181
Time deposits (2,360) (50) (2,410)
Other borrowings (843) 127 (716)
Total increase (decrease) (2,987) 42 (2,945)
-----------------------------------
Increase in net interest income ($460) ($701) ($1,161)
-----------------------------------
-----------------------------------
This page is page 11 of 22 pages.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 1997
amounted to $585,000 as compared to $1,315,000 in the same quarter in the
previous year. For the six months ended June 30, 1997 the provision decreased
$1,660,000 from $2,830,000 in 1996 to $1,170,000 in 1997. The decrease in the
provision for loan losses for the comparable three month and six month period is
due principally to a 1996 loan loss provision relating to an acquired lease
portfolio of $1,412,000, the Seller/Servicer of which filed for bankruptcy. In
addition, the 1996 loan loss provision was negatively effected by net loan
charge-offs which amounted to $661,000 and $833,000 for the three months and six
months ended June 30, 1996 as compared to $123,000 and $662,000 in 1997.
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 six months ended June 30, 1997, as compared to the same
period in 1996.
Three Months Ended Six Months Ended
June 30 % June 30 %
------------------ -----------------
(dollars in thousands) 1997 1996 Change 1997 1996 Change
-------- -------- ------ -------- ------- ------
Service charges on deposit accounts 285 306 (7) 581 606 (4)
Merchant draft processing, net 370 519 (29) 792 1,007 (21)
Loan servicing income 199 505 (61) 515 885 (42)
Gain (loss) on securities (8) (8) --- (7) (8) (13)
Gain on sale of loans and servicing 823 2,545 (68) 2,330 6,081 (62)
Other income 666 544 22 1,133 1,425 (20)
------ ------ ---- ------- ------- -----
Total other operating income $2,335 $4,411 (47) $5,344 $9,996 (47)
------ ------ ---- ------- ------- -----
------ ------ ---- ------- ------- -----
Other operating income decreased $2,076,000 or 47% to $2,335,000 for the
second quarter of 1997 when compared to $4,411,000 for the same period in 1996.
Such decline is primarily due to a 68% decline in gain on sale of loans and
servicing of $1,722,000. Other operating income decreased $4,652,000 for the
six months ended June 30, 1997 compared to the same period in 1996. Such
decline is due primarily to a 62% decline in gains on sales of loans and
servicing of $3,751,000. As previously mentioned, the Company significantly
curtailed its mortgage "A paper" mortgage banking business the fourth quarter of
1996. Accordingly, gain on sale of loan revenue from mortgage banking
operations has significantly declined in both the second quarter of 1997 and for
the first six months when compared to the same period one year ago.
This page is page 12 of 22 pages.
Due to the Company's sale of mortgage loan servicing rights associated with
$839,945,000 mortgage loans in the third and fourth quarters 1996, loan
servicing income declined $306,000 in the second quarter of 1997 and $370,000 on
a year-to-date basis. With a significant reduction in serviced loans, revenue
from these operations will continue to be less than comparable historical
performance.
Currently the Company's mortgage banking operation is comprised of
sub-prime mortgage banking and residential mortgage loan brokerage. For the
remainder of the year revenue from these operations is expected to be
significantly less than comparable historical performance of the Company's
mortgage banking unit.
Merchant draft processing revenues declined $149,000 or 29% in the second
quarter of 1997 and $215,000 or 21% in the first six months when compared to the
same periods one year ago. Such decline is attributable to the loss of a
substantial account in the second quarter of 1996 due to the customer's
bankruptcy. The customer in question was unable to fulfill it's contractual
obligations associated with accepting credit cards as payment for services, thus
requiring the Company to stand in the place of the merchant and honor their
obligations associated with customer charge-backs.
Other Operating Expense
Other operating expense decreased by $3,513,000 or 38.7% to $5,554,000
during the second quarter of 1997 compared to $9,067,000 for the second quarter
of 1996, primarily due to the Company's restructuring plan, initiated in the
fourth quarter of 1996, which included the termination of employees, the closing
of several mortgage loan production offices, write-off of duplicate or
unnecessary fixed assets, and the merger of Allied Bank, F.S.B. into NBR. In
addition, the 1996 operating charge of $1,200,000 associated with the bankruptcy
of one of the Company's merchant bankcard customers also contributed to the
decline. Other operating expense decreased 29.7% to $12,067,000 from
$17,158,000 for the six months ended June 30, 1997 compared to the same period
in 1996.
The following table sets forth the components of the Company's other
operating expense during the three months ended June 30, 1997, as compared to
the same period in 1996.
Three Months Ended Six Months Ended
June 30 June 30
------------------ % ----------------- %
(dollars in thousands) 1997 1996 Change 1997 1996 Change
-------- ------ ------ -------- -------- ------
Salaries and employee benefits $2,500 $4,123 (39) $6,154 $8,610 (29)
Occupancy and equipment expense 758 1,357 (44) 1,643 2,719 (40)
Restructuring charge (33) -- -- (33) -- --
Other 2,329 3,587 (35) 4,303 5,829 (26)
------- ------- ------- -------
Total other operating expense $5,554 $9,067 (39) $12,067 $17,158 (30)
------- ------- ------- -------
------- ------- ------- -------
This page is page 13 of 22 pages.
In the second quarter of 1997 the Company recorded a provision for
potential mortgage loan repurchases of $599,000 which is included in other
expense. For further discussion of this matter see Nonperforming Assets.
The Company expects other operating expense will continue to decline for
the remainder of the year, when compared to the previous year, due to the
virtual elimination of the "A paper" wholesale mortgage banking operations
and the effect of consolidating Allied Bank, F.S.B. into NBR.
Income Taxes
The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and nondeductible expenses. The effective
rate was 42.1% for the six-months ended June 30, 1997, compared to 41.9% for
the same period in 1996.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale decreased $19,939,000 or 67% to $9,548,000
at June 30, 1997 compared to $29,487,000 at December 31, 1996. The decrease
was due to the Company's decision to significantly curtail its "A paper"
mortgage banking operations in the fourth quarter of 1996.
LOANS
Total loans decreased $25,123,000 or 7% to $322,291,000 at June 30, 1997
compared to $347,414,000 at December 31, 1996. The principal reason for this
decline relates to real estate mortgage loans whose balance declined
$7,870,000 and construction loans whose balance declined $11,239,000, both
due to loan payoffs. The following table summarizes the composition of the
loan portfolio at June 30, 1997 and December 31, 1996.
June 30, 1997 December 31, 1996
-------------------- ----------------------
(dollars in thousands) Amount % Amount %
-------------------- ----------------------
Residential real estate mortgage $116,895 36% $124,765 37%
Commercial real estate mortgage 66,381 21 67,401 19
Commercial 61,544 19 66,525 19
Real estate construction 73,169 23 84,408 24
Installment and other 6,935 2 7,112 2
Less deferred fees (2,633) (1) (2,797) (1)
-------------------- ----------------------
Total loans 322,291 100% 347,414 100%
----- -----
----- -----
Less allowance for loan losses (7,548) (7,040)
--------- ----------
Net loans $314,743 $340,374
--------- ----------
--------- ----------
This page is page 14 of 22 pages.
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:
Three months ended Six months ended
June 30 June 30
-------------------- --------------------
(dollars in thousands) 1997 1996 1997 1996
------- -------- --------- --------
Beginning allowance for loan losses $7,085 $6,380 $7,040 $5,037
Provision for loan losses 585 1,315 1,170 2,830
Charge-offs (180) (703) (755) (902)
Recoveries 58 42 93 69
------ ------ ------ ------
Ending allowance for loan losses $7,548 $7,034 $7,548 $7,034
------ ------ ------ ------
------ ------ ------ ------
Net charge-offs to average loans
(annualized) .15% .81% .40% .47%
The allowance for loan losses as a percentage of portfolio loans
increased from 2.03% at December 31, 1996 to 2.34% at June 30, 1997. The
increase in this percentage is due to a $25,123,000 decline in the Company's
total loan portfolio. The decrease in the provision of $730,000 over the
same period in 1996 is primarily due to an increased provision one year ago
due to a lease portfolio of $1,412,000 purchased from a company currently in
bankruptcy proceedings who retained the servicing of such portfolio.
This page is page 15 of 22 pages.
NONPERFORMING ASSETS
The following table summarizes the Company's nonperforming assets.
June 30, December, 31
(dollars in thousands) 1997 1996
-------- ------------
Nonaccrual loans $9,133 $8,246
Accruing loans past due 90 days or more 1,288 1,536
Restructured loans 1,117 599
-------- ------------
Total nonperforming loans 11,538 10,381
Other real estate owned 3,535 2,132
Other assets owned 617 668
-------- ------------
Total nonperforming assets $15,690 $13,181
-------- ------------
-------- ------------
Nonperforming assets to total assets 3.55% 2.64%
Nonperforming assets have increased from $13,181,000 as of December 31,
1996 to $15,690,000 as of June 30, 1997. The principal reasons for this
increase relate to an increase in restructured loans of $518,000, an increase
in nonaccrual loans of $887,000, an increase in other real estate owned of
$1,403,000, all being offset by a decline in accruing loans past due 90 days
or more of $248,000.
Nonperforming loans consist of loans to 72 borrowers, 33 of which have
balances in excess of $100,000. The two largest have recorded balances of
$740,000 secured by general business assets and $650,000 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 22 properties. 17 properties are
residential and five construction lots. Other assets owned included contract
receivable rights and repossessed personal property valued at $617,000.
Although the volume of nonperforming assets will depend in part on the
future economic environment, there are also nine loan relationships which
total approximately $3,600,000 about which management has serious doubts as
to the ability of the borrowers to comply with the present repayment terms
and which may become nonperforming assets based on the information presently
known about possible credit problems of the borrower.
Construction lending generally bears a greater degree of risk than other
forms of real estate lending. Accordingly, due to the Company's current
level of outstanding construction loans, the Company may experience an
increase in non performing loans from this loan category.
This page is page 16 of 22 pages.
In the first six months of 1997 the Company was required to repurchase 17
non performing residential mortgage loans from investors. 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 $758,000 as of June 30, 1997.
At June 30, 1997 the Company's total recorded investment in impaired
loans (as defined by SFAS 114 and 118) was $17,377,000 of which $14,200,000
relates to the recorded investment for which there is a related allowance for
credit losses of $1,655,000 determined in accordance with these statements
and $3,177,000 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 six
months ended June 30, 1997 and June 30, 1996 was $17,610,000 and $7,852,000;
the related amount of interest income recognized during the periods that such
loans were impaired was $534,000 and $520,000 for the three and six month
periods ended June 30, 1997 and $21,000 and $96,000 for the same period in
1996. No interest income was recognized using a cash-basis method of
accounting during the period that the loans were impaired.
LIQUIDITY
Redwood's primary source of liquidity is dividends from its financial
institution subsidiary. Redwood's primary uses of liquidity are associated
with cash payments made to the subordinated debt holders, dividend payments
made to the preferred stock holders, and operating expenses of the parent.
It is Redwood's general policy to retain liquidity at Redwood at a level
which management believes to be consistent with the safety and soundness of
the Company as a whole. As of June 30, 1997, Redwood held $1,881,000 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.
In the fourth quarter of 1994, Redwood received a dividend of $200,000
from NBR and $400,000 from Allied. During 1995, NBR and Allied declared
dividends of $860,000 and $227,000 respectively, compared to 1996, NBR and
Allied declared dividends of $215,000 and $2,227,000 respectively. During
both the first and second quarters of 1997, NBR declared dividends of
$215,000. Management believes that at June 30, 1997, the Company's liquidity
position was adequate for the operations of Redwood and its subsidiary for
the foreseeable future.
Although each entity within the consolidated group manages its own
liquidity, the Company's consolidated cash flow can be divided into three
distinct areas; operating, investing and financing. For the six months ended
June 30, 1997 the Company received $42,404,000 and $10,924,000 in cash flows
from operating and investing activities while using $54,865,000 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.
The following table summarizes the consolidated capital ratios and the
capital ratios of the principal subsidiaries at December 31, 1996 and June
30, 1997.
Company NBR
------- ----
June 30, 1997
Total capital to risk based assets 13.88% 13.09%
Tier 1 capital to risk based assets 9.01 10.92
Leverage ratio 6.45 8.43
December 31, 1996
Total capital to risk based assets 12.12 12.28
Tier 1 capital to risk based assets 7.63 9.40
Leverage ratio 5.46 6.87
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 pages.
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 June 30,
1997, approximately 80% of the Company's loans were secured by real estate,
of which 21% were secured by commercial real estate, including small office
buildings, owner-user office/warehouses, mixed use residential and commercial
properties and retail properties. Substantially all of the properties that
secure the Company's present loans are located within Northern and Central
California. The ability of the Company to continue to originate mortgage
loans may be impaired by adverse changes in local or regional economic
conditions, adverse changes in the real estate market, increasing interest
rates, or acts of nature (including earthquakes, which may cause uninsured
damage and other loss of value to real estate that secures the Company's
loans). Due to the concentration of the Company's real estate collateral,
such events could have a significant adverse impact on the value of such
collateral or the Company's earnings.
This page is page 20 of 22 pages.
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - NONE
Item 2. CHANGES IN SECURITIES - NONE
Item 3. DEFAULTS UPON SENIOR SECURITIES - NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
Item 5. OTHER INFORMATION - NONE
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 11
Weighted average shares, used in the computation of per share
earnings, include the common stock equivalents impact of common
stock options outstanding. Primary earnings per share includes
the reduction of net income by the declared Preferred Stock
dividend. The impact on earnings per share assuming conversion
of the Preferred Stock was reflected in the fully-dilutive
computation. The computation of per share earnings is
incorporated by reference in the Consolidated Statement of
Operations on page 3 herein.
(b) REPORTS ON FORM 8-K
Form 8-K dated April 30, 1997 announcing the dividend on
preferred stock payable of May 15, 1997; announcement of first
quarter 1997 results.
Form 8-K dated April 2, 1997 announcing completion of combination
of Allied Bank and National Bank of the Redwoods.
This page is page 21 of 22 pages.
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: x-xx-xx BY: /s/ James E. Beckwith
-----------------------------------
James E. Beckwith
Executive Vice President,
Chief Financial Officer,
Principal Financial Officer, and
Principal Accounting Officer
This page is page 22 of 22 pages.