<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______ to______
Commission file number: 0-19231
REDWOOD EMPIRE BANCORP
(Exact name of Registrant as specified in its charter)
California 68-0166366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Santa Rosa Avenue, Santa Rosa,
California 95404-4945
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 545-9611
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. August 1, 1996: 2,737,253
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This page is page 1 of 21 pages.
<PAGE>
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, 1996 and 1995. . . . .3
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995. . . . . . . . . . . .4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995. . . . . . . . . .5
Notes to Consolidated Financial Statements . . . . . . . .7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . .8
PART II. Other Information
ITEM 4. Submission of Matters to a Vote of Securities Holders. . 19
ITEM 6. Exhibits and Reports on Item 8-K . . . . . . . . . . . . 20
SIGNATURE....... . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
<PAGE>
<TABLE>
<CAPTION>
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,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $10,845 $10,784 $21,243 $21,971
Interest on investment securities 747 467 1,465 989
Interest on federal funds sold 187 383 511 713
Interest on time deposits due from
financial institutions 60 32 113 67
-------- -------- -------- --------
Total interest income 11,839 11,666 23,332 23,740
Interest expense:
Interest on deposits 5,020 6,029 10,363 11,556
Interest on subordinated notes 277 277 561 554
Interest on other borrowings 460 668 827 2,326
-------- -------- -------- --------
Total interest expense 5,757 6,974 11,751 14,436
-------- -------- -------- --------
Net interest income 6,082 4,692 11,581 9,304
Provision for loan losses 1,315 370 2,830 670
-------- -------- -------- --------
Net interest income after loan loss provision 4,767 4,322 8,751 8,634
-------- -------- -------- --------
Other operating income:
Service charges on deposit accounts 306 267 606 553
Merchant draft processing, net 519 300 1,007 616
Loan servicing income 505 464 885 855
Net realized gains (losses) on sale of
investment securities available for sale (8) 85 (8) 85
Gain on sale of loans and loan servicing 2,545 2,488 6,081 5,444
Other income 544 517 1,425 1,001
-------- -------- -------- --------
Total other operating income 4,411 4,121 9,996 8,554
-------- -------- -------- --------
Other operating expense:
Salaries and employee benefits 4,123 3,546 8,610 7,069
Occupancy and equipment expense 1,357 1,152 2,719 2,204
Restructuring charge --- (392) --- (392)
Other 3,587 2,771 5,829 5,393
-------- -------- -------- --------
Total other operating expense 9,067 7,077 17,158 14,274
-------- -------- -------- --------
Income before income taxes 111 1,366 1,589 2,914
Provision for income taxes 73 604 665 1,241
-------- -------- -------- --------
Net income 38 762 924 1,673
Dividends on preferred stock 112 112 224 224
-------- -------- -------- --------
Net income (loss) available for common shareholders ($74) $650 $700 $1,449
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per common and common equivalent share:
Primary net income (loss) per share ($.03) $.24 $.26 $.54
Weighted average shares 2,713,000 2,676,000 2,731,000 2,666,000
Fully diluted net income(loss) per share ($.03) $.24 $.26 $.52
Weighted average shares 2,713,000 3,192,000 2,731,000 3,190,000
See Notes to Consolidated Financial Statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
June 30, December 31,
1996 1995
-------------- --------------
<S> <C> <C>
Cash and due from banks $20,495 $24,312
Federal funds sold 6,151 9,969
Due from broker --- 20,859
-------------- --------------
Cash and cash equivalents 26,646 55,140
Interest bearing deposits due from financial institutions 314 417
Investment securities:
Held to maturity (market value of $5,935 and $6,528) 5,935 6,528
Available for sale, at market 42,067 37,436
-------------- --------------
Total investment securities 48,002 43,964
Mortgage loans held for sale 79,766 62,620
Loans:
Residential real estate mortgage 121,028 168,022
Commercial real estate mortgage 74,870 65,655
Commercial 64,501 63,975
Real estate construction 77,151 69,504
Installment and other 3,496 4,103
Less deferred loan fees (2,909) (3,035)
-------------- --------------
Total portfolio loans 338,137 368,224
Less allowance for loan losses (7,034) (5,037)
-------------- --------------
Net loans 331,103 363,187
Premises and equipment, net 5,752 6,561
Purchased mortgage servicing rights 5,279 5,970
Other real estate owned 1,517 963
Cash surrender value of life insurance 4,458 4,363
Other assets and interest receivable 18,156 14,725
-------------- --------------
Total assets $520,993 $557,910
-------------- --------------
-------------- --------------
Deposits:
Noninterest bearing demand deposits $62,300 $65,602
Interest-bearing transaction accounts 150,251 129,436
Time deposits $100,000 and over 106,535 111,479
Other time deposits 123,934 151,876
-------------- --------------
Total deposits 443,020 458,393
Other borrowings 23,238 47,871
Subordinated notes 12,000 12,000
Other liabilities and interest payable 10,729 8,061
-------------- --------------
Total liabilities 488,987 526,325
Shareholders' equity:
Preferred stock, no par value; authorized 2,000,000 shares;
issued and outstanding 575,000 shares 5,750 5,750
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 2,736,239 and 2,679,227 shares 19,193 18,728
Retained earnings 7,667 6,967
Unrealized gain (loss) on investment securities available
for sale (604) 140
-------------- --------------
Total shareholders' equity 32,006 31,585
-------------- --------------
Total liabilities and shareholders' equity $520,993 $557,910
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $924 $1,673
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 1,155 1,609
Net realized losses (gains) on securities available for sale 8 (85)
Loans originated for sale (882,473) (218,486)
Proceeds from sale of loans held for sale 930,486 309,825
Gain on sale of loans and loan servicing (6,081) (5,444)
Provision for loan losses 2,830 670
Change in other assets and interest receivable (3,039) 2,350
Change in other liabilities and interest payable 2,652 (2,774)
Other, net (592) 81
-------------- --------------
Total adjustments 44,946 87,354
-------------- --------------
Net cash provided by operating activities 45,870 89,027
-------------- --------------
Cash flows from investing activities:
Net change in loans (31,125) (14,036)
Proceeds from sales of loans in portfolio 817 36,545
Purchases of investment securities available for sale (21,206) (2,918)
Purchases of investment securities held to maturity (200) (2,678)
Sales of investment securities available for sale 3,992 ---
Maturities of investment securities available for sale 11,500 11,000
Maturities of investment securities held to maturity 926 8,743
Premises and equipment, net (455) (458)
Change in interest bearing deposits due from financial institutions 103 103
Proceeds from sale of other real estate owned 1,090 841
-------------- --------------
Net cash provided by (used in) investment activities (34,558) 37,142
-------------- --------------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts (3,309) 657
Change in interest bearing transaction accounts 20,823 (10,177)
Change in time deposits (32,887) (4,105)
Change in borrowings (24,633) (104,109)
Issuance of stock 424 65
Dividends paid (224) (224)
-------------- --------------
Net cash used in financing activities (39,806) (117,893)
-------------- --------------
Net change in cash and cash equivalents (28,494) 8,276
Cash and cash equivalents at beginning of period 55,140 33,354
-------------- --------------
Cash and cash equivalents at end of period $26,646 $41,630
-------------- --------------
-------------- --------------
</TABLE>
(Continued)
5
<PAGE>
<TABLE>
<CAPTION>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
Six Months Ended
June 30,
1996 1995
-------------- --------------
<S> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Income taxes $2,463 $1,970
Interest expense 12,200 14,455
Noncash investing and financing activities:
Transfers from loans to other real estate owned 1,643 781
Transfer from loans to mortgage loans held for sale 59,000 ---
Transfer from mortgage loans held for sale to loans --- 15,000
6
</TABLE>
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements should be read
in conjunction with the financial statements and related notes contained in
Redwood Empire Bancorp's 1995 Annual Report to shareholders. The statements
include the accounts of Redwood Empire Bancorp and its wholly owned
subsidiaries, National Bank of the Redwoods ("NBR") and Allied Bank, F.S.B.
("Allied"). All significant intercompany balances and transactions have been
eliminated. The financial information contained in this report reflects all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. All such adjustments are
of a normal recurring nature. The results of operations and cash flows for the
six months ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
Certain reclassifications were made to prior period financial statements to
conform to current period presentations.
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Federal funds sold
are generally for one day periods.
2. Net Income 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 three and six month periods ended June 30, 1996 and 1995.
3. New Accounting Pronouncement
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation." This
statement requires expanded disclosures with respect to stock-based compensation
such as stock options. It also encourages, but does not require, recognition of
compensation expense related to the fair value of such stock-based compensation.
The Company has decided not to record compensation expense for its stock-based
compensation which currently consists only of stock options.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Redwood Empire Bancorp ("Redwood," and with its subsidiaries, the
"Company") is a financial institutions holding company headquartered in Santa
Rosa, California. Redwood has two principal subsidiaries, Allied Bank, F.S.B.,
a federal savings bank ("Allied"), and National Bank of the Redwoods, a national
bank ("NBR").
The following sections discuss significant changes and trends in financial
condition, capital resources and liquidity of the Company from December 31, 1995
to June 30, 1996, and significant changes and trends in the Company's results of
operations for the three and six months ended June 30, 1996, compared to the
same periods in 1995.
In an effort to increase shareholder value the Board of Directors is
currently evaluating strategic options relating to Allied. These options
include a merger of Allied into NBR or a sale or partial sale of Allied. No
final determination has been made by the Board of Directors regarding the status
of Allied stemming from this evaluation process.
SUMMARY OF FINANCIAL RESULTS
The Company reported net income of $38,000 (a loss of $.03 per share, fully
diluted) for the three months ended June 30, 1996, compared to $762,000 ($.24
per share, fully diluted) for the same period in 1995. The decrease in net
income in the second quarter of 1996 over the same period in 1995 is primarily
due to a $1,200,000 merchant bankcard reserve recorded in response to the
bankruptcy of one customer for whom the Company processes credit card
transactions and an increase in the provision for loan losses of $945,000 being
driven by an increased level of charge-offs and a higher level of nonperforming
assets.
Net income for the six months ended June 30, 1996 was $924,000 ($.26 per
share, fully diluted) compared to $1,673,000 ($.52 per share, fully diluted) for
the same period in 1995.
NET INTEREST INCOME
Net interest income increased $1,390,000 for the second quarter of 1996
compared to the second quarter of 1995. The increase is primarily due to
decreased funding costs, especially other borrowings and time deposits and
increased margins on mortgage loans held for sale, partially offset by lower
interest income related to decreased volumes of portfolio loans. The net
interest margin increased to 4.83% for the second quarter of 1996 from 3.52% a
year ago primarily due to increased yields on earning assets, especially loans
and mortgage loans held for sale.
Net interest income for the six months ended June 30, 1996 increased
$2,277,000 over that reported for the same period in 1995. The net interest
margin for the six months ended June 30, 1996 was 4.58% compared to 3.31% for
the same period in 1995.
8
<PAGE>
The following is an analysis of the net interest margin:
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1996 June 30, 1995
<S> <C> <C> <C> <C> <C> <C>
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
-------------------------------- -----------------------------
Earning assets (1) $503,909 $11,839 9.40 $533,143 $11,666 8.75
Interest-bearing liabilities 441,398 5,757 5.22 489,362 6,974 5.70
--------- ----------
Net interest income $6,082 $4,692
--------- ----------
Net interest income to
earning assets 4.83 3.52
Six months ended Six months ended
June 30, 1996 June 30, 1995
------------------------------- -----------------------------
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
-------------------------------- -----------------------------
Earning assets (1) $506,281 $23,332 9.22 $562,940 $23,740 8.43
Interest-bearing liabilities 442,044 11,751 5.32 517,790 14,436 5.58
---------- ----------
Net interest income $11,581 $9,304
---------- ----------
Net interest income to
earning assets 4.57 3.31
</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 six months ended June 30, 1996 and 1995. Changes not solely attributable to
rate or volume have been allocated to rate.
9
<PAGE>
June 30, 1996 over
June 30, 1995
-----------------------------
Volume Rate Total
-----------------------------
(in thousands)
Increase (decrease) in interest income:
Portfolio loans $ (2,767) $ 618 $(2,149)
Mortgage loans held for sale (115) 1,536 1,421
Investment securities 264 212 476
Interest-earning deposits with other institutions 45 1 46
Federal funds sold (170) (32) (202)
-----------------------------
Total increase (decrease) (2,743) 2,335 (408)
-----------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts 576 256 832
Time deposits (2,019) (6) (2,025)
Other borrowings (1,379) (113) (1,492)
-----------------------------
Total increase (decrease) (2,822) 137 (2,685)
-----------------------------
Increase in net interest income $79 $2,198 $2,277
-----------------------------
-----------------------------
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale increased $14,146,000 or 23% to $79,766,000 at
June 30, 1996 compared to $62,620,000 at December 31, 1995. The increase was
primarily due to a $50,000,000 transfer of loans from the portfolio to held for
sale as of March 31, 1996, $34 million of which were sold at June 30, 1996.
This transaction was made to accommodate an asset reduction strategy at Allied
Bank which is intended to increase the capital ratios of Allied and the Company.
The fair value of loans transferred exceeded their carrying value. Total
mortgage loan origination volume in the second quarter of 1996 was $462 million
compared to $167 million in 1995.
LOANS
Total loans decreased $30,087,000 or 8% to $338,137,000 at June 30, 1996
compared to $368,224,000 at December 31, 1995. Residential real estate mortgage
loans decreased $46,994,000 or 28% to $121,028,000 due to a transfer of loans to
mortgage loans held for sale as part of an asset reduction strategy. The
Company anticipates that there will be no future transfers of loans to the held
for sale category to execute an asset reduction strategy.
10
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the composition of the loan portfolio at
June 30, 1996 and December 31, 1995.
June 30, 1996 December 31, 1995
-------------------------- ---------------------------
(dollars in thousands) Amount % Amount %
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
Residential real estate mortgage $121,028 36% $168,022 46%
Commercial real estate mortgage 74,870 22 65,655 18
Commercial 64,501 19 63,975 17
Real estate construction 77,151 23 69,504 19
Installment and other 3,496 1 4,103 1
Less deferred fees (2,909) (1) (3,035) (1)
-------------------------- ----------------------------
Total loans 338,137 100% 368,224 100%
Less allowance for loan losses ------------- -------------
(7,034) ------------- (5,037) -------------
------------- -------------
Net loans $331,103 $363,187
------------- -------------
------------- -------------
</TABLE>
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established through charges to earnings in
the form of the provision for loan losses. Loan losses are charged to, and
recoveries are credited to, the allowance for loan losses. The provision for
loan losses is determined after considering various factors such as loan loss
experience, current economic conditions, maturity of the portfolio, size of the
portfolio, industry concentrations, borrower credit history, the existing
allowance for loan losses, independent loan reviews, current charges and
recoveries to the allowance for loan losses, and the overall quality of the
portfolio, as determined by management, regulatory agencies, and independent
credit review consultants retained by the Company.
The adequacy of the Company's allowance for loan losses is based on
specific and formula allocations to the Company's loan portfolio. Specific
allocations of the allowance for loan losses are made to identified problem or
potential problem loans. The specific allocations are increased or decreased
through management's reevaluation of the status of the particular problem loans.
Loans which do not receive a specific allocation receive an allowance allocation
based on a formula, represented by a percentage factor based on underlying
collateral, type of loan, historical charge-offs, general economic conditions
and other qualitative factors.
11
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the Company's allowance for loan losses:
Three months ended Six months ended
June 30 June 30
---------------------- ------------------------
(dollars in thousands) 1996 1995 1996 1995
---------------------- ------------------------
<S> <C> <C> <C> <C>
Beginning allowance for loan losses $6,380 $5,962 $5,037 $5,787
Provision for loan losses 1,315 370 2,830 670
Charge-offs (703) (381) (902) (531)
Recoveries 42 27 69 52
----------- ----------- ----------- -----------
Ending allowance for loan losses $7,034 $5,978 $7,034 $5,978
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net charge-offs to average
loans (annualized) .81% .36% .47% .24%
</TABLE>
The allowance for loan losses as a percentage of portfolio loans increased
from at 1.37% at December 31, 1995 to 2.08% at June 30, 1996. The increase in
the provision for loan losses of $2,160,000 for the six months ended June 30,
1996 over the same period in 1995 is primarily due to a lease portfolio of
$1,412,000 purchased from a company currently in bankruptcy proceedings who
retained the servicing of such portfolio. The increase in the provision for
loan losses in the second quarter of 1996 when compared to the same period one
year ago was driven by an increase in net charge-offs of $661,000 in the second
quarter of 1996 as compared to $354,000 in the second quarter of 1995 and higher
levels of nonperforming assets which include the aforementioned leases.
Currently, no information has been made available or communicated to the
Company by the Bankruptcy Court concerning NBR's security in such purchased
equipment leases, although all cash receipts have been frozen by the bankruptcy
trustee until a formal accounting of all assets and liabilities can be
completed. Consistent with Company policy, these leases have been classified as
nonperforming and placed on nonaccrual status. Management expects further
information to become available in the third or fourth quarter of 1996 with
regards to specific borrower information and collateral values. Management also
believes certain legal remedies may exist and is currently evaluating its
options under the terms of the lease agreements.
12
<PAGE>
NONPERFORMING ASSETS
The following table summarizes the Company's nonperforming assets.
June 30, December, 31
(dollars in thousands) 1996 1995
-------- --------
Nonaccrual loans $7,074 $4,201
Accruing loans past due 90 days or more 121 92
Restructured loans 256 651
-------- --------
Total nonperforming loans 7,451 4,944
Other real estate owned 1,517 963
Other assets owned 1,159 1,249
-------- --------
Total nonperforming assets $10,127 $7,156
-------- --------
-------- --------
Nonperforming assets to total assets 1.94% 1.28%
Although the volume of nonperforming assets will depend in part on the
future economic environment, there are also loans totaling $2,834,000 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.
Nonperforming loans consist of loans to 360 borrowers, 20 of which have
balances in excess of $100,000. The two largest have recorded balances of
$815,000 secured by general business assets and $780,000 secured by residential
real estate. Approximately 310 of the nonperforming loans are related to a
purchased portfolio of leases from a servicer who is now in bankruptcy
proceedings. Based on information currently available, management believes that
adequate reserves are included in the allowance for loan losses to cover any
loss exposure that may result from these loans.
Other real estate owned consists of ten properties. Eight properties are
residential and two are commercial buildings. Other assets owned included
contract receivable rights and repossessed personal property valued at
$1,159,000.
At June 30, 1996 the Company's total recorded investment in impaired loans
(as defined by SFAS 114 and 118) was $8,442,000 of which $3,964,000 relates to
the recorded investment for which there is a related allowance for loan losses
of $1,499,000 determined in accordance with these statements and $4,478,000
relates to the amount of that recorded investment for which there is no related
allowance for loan losses determined in accordance with these standards.
13
<PAGE>
The average recorded investment in the impaired loans during the six months
ended June 30, 1996 and June 30, 1995 was $7,852,000 and $6,754,000; the related
amount of interest income recognized during the periods that such loans were
impaired was $21,000 and $96,000 for the three and six month periods ended June
30, 1996 and $76,000 and $215,000 for the same periods in 1995. No interest
income was recognized using a cash-basis method of accounting during the period
that the loans were impaired.
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 and six months ended June 30, 1996, as compared
to the same periods in 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 % June 30 %
-------------------- ------------------
(dollars in thousands) 1996 1995 Change 1996 1995 Change
---------- --------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts 306 267 15 606 553 10
Merchant draft processing, net 519 300 73 1,007 616 63
Loan servicing income 505 464 9 885 855 4
Gain (loss) on securities (8) 85 (109) (8) 85 (109)
Gain on sale of loans and servicing 2,545 2,488 2 6,081 5,444 12
Other income 544 517 5 1,425 1,001 42
-------- -------- --------- -------
Total other operating income $4,411 $4,121 7 $9,996 $8,554 17
-------- -------- --------- -------
-------- -------- --------- -------
</TABLE>
Other operating income increased $290,000 or 7% to $4,411,000 for the
second quarter of 1996 compared to $4,121,000 for the same period in 1995, due
primarily to merchant draft processing.
Other operating income increased $1,432,000 for the six months ended June
30, 1996 compared to the same period in 1995. This increase was primarily due
to merchant draft processing and gains on sale of loans. Mortgage banking
originations increased from $167 million for the second quarter of 1995 to $462
million for the second quarter of 1996. The increase in gain on sale of loans
in 1996 compared to 1995 is lower than would be expected based on loan
origination volumes, due to reversals of a $5,534,000 valuation allowance
recorded at December 31, 1994 on the Company's mortgage loans held for sale. Of
this amount, $1,500,000 was reversed in the first quarter of 1995 due to
favorable market conditions for such loans and the remainder was reversed in the
second quarter of 1995 in connection with a sale of such loans.
14
<PAGE>
Other Operating Expense
Other operating expense increased to $9,067,000 during the second quarter
of 1996 compared to $7,077,000 for the second quarter of 1995. Other operating
expense increased $2,884,000 for the six months ended June 30, 1996 compared to
the same period in 1995. The increases are primarily due to increased salaries
and benefits expense caused by increased loan volumes at Allied and the
recording of a merchant bankcard reserve of $1,200,000 in the second quarter of
1996 related to the bankruptcy of one customer.
The following table sets forth the components of the Company's other
operating expense during the three and six months ended June 30, 1996, as
compared to the same periods in 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 % June 30 %
-------------------- ------------------
(dollars in thousands) 1996 1995 Change 1996 1995 Change
---------- --------------------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $4,123 $3,546 16 $8,610 $7,069 22
Occupancy and equipment expense 1,357 1,152 18 2,719 2,204 23
Other 3,587 2,771 29 5,829 5,393 8
-------- -------- -------- --------
Total other operating expense $9,067 $7,077 28 $17,158 $14,274 20
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NBR and Allied maintain insurance on their customer deposits with the
Federal Deposit Insurance Corporation ("FDIC"). The FDIC manages the Bank
Insurance Fund ("BIF"), which insures deposits of commercial banks such as NBR,
and the Savings Association Insurance Fund ("SAIF"), which insures deposits of
savings associations such as Allied. FDICIA mandated that the two funds
maintain reserves at 1.25% of their respective federally insured deposits.
During 1995, the FDIC announced that the BIF had reached its mandated
reserve level, reducing insurance premiums on BIF-insured deposits, and
subsequently announcing that deposit insurance premiums on BIF-insured deposits
would be reduced at December 31, 1995. The SAIF fund has not yet net its
mandated reserve level. As a result, deposit insurance premiums attributable to
BIF deposits are less than those attributable to SAIF deposits.
There are numerous regulatory proposals before Congress to address the
deposit insurance premium differential between BIF- and SAIF-insured deposits.
The most recent plans consist of one-time insurance premium charges attributable
to SAIF-insured deposits sufficient to bring the SAIF up to its mandated reserve
level, with a corresponding and immediate reduction in SAIF premiums thereafter.
Based on 87 basis points on Allied's deposits at March 31, 1995, the resulting
after-tax charge to the Company would be approximately $1,670,000. As both the
timing and final form of any proposed regulations remain uncertain, no
adjustments to the Company's financial statements have been recorded.
15
<PAGE>
Income Taxes
The Company's effective tax rate varies with changes in the relative
amounts of its non-taxable income and nondeductible expenses. The effective
rate was 41.9% for the six months ended June 30, 1996, compared to 42.6% for the
same period in 1995.
LIQUIDITY
Liquidity management is monitored by Redwood, as well as by Allied and NBR.
Redwood's operations generate debt service costs and administrative costs
associated with regulatory reporting and overall planning, which may include
acquisition or merger costs. Aside from accessing the capital markets,
Redwood's primary source of liquidity is dividends from its financial
institution subsidiaries. It is Redwood's general policy to retain excess
capital at its subsidiaries, maintaining Redwood's available capital at a level
which Redwood's management believes to be consistent with the safety and
soundness of the Company as a whole. As of June 30, 1996, Redwood held
$1,497,000 in interest-bearing deposits at its subsidiaries and a $3,000,000
subordinated note issued by NBR.
Beginning with the fourth quarter of 1992, Redwood has paid a quarterly
dividend of $.03 per share of Common Stock. In the fourth quarter of 1993, this
dividend was increased to $0.035 per share. This dividend was suspended in the
fourth quarter of 1994. In addition, Redwood pays quarterly dividends of 7.8%
on its preferred stock of $5,750,000 and interest at 8.5% on $12,000,000 of
subordinated debentures issued in 1993. Payment of these obligations is
dependent on dividends from NBR and Allied. Federal regulatory agencies have
the authority to prohibit the payment of dividends by NBR and Allied to Redwood
if a finding is made that such payment would constitute an unsafe or unsound
practice, or if NBR or Allied became undercapitalized. If NBR or Allied are
restricted from paying dividends, Redwood could be unable to pay the above
obligations. No assurance can be given as to the ability of Redwood's
subsidiaries to pay dividends to Redwood.
In the fourth quarter of 1994, Redwood received a dividend of $200,000 from
NBR and $400,000 from Allied. During 1995, NBR and Allied declared dividends of
$860,000 and $227,000 respectively. During 1996, NBR and Allied declared
dividends of $215,000 and $1,227,000 respectively. Subsequent to June 30, 1996
Allied declared an additional dividend of $1,000,000. Management believes that
at June 30, 1996, the Company's liquidity position was adequate for the
operations of Redwood and its subsidiaries for the foreseeable future.
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.
16
<PAGE>
The Company and each of its subsidiaries are required to maintain minimum
capital ratios defined by various federal government regulatory agencies. The
FRB, the OCC and the OTS have each established capital guidelines, which include
minimum capital requirements. The regulations impose three sets of standards: a
"risk-based", "leverage" and "tangible" capital standard.
Under the risk-based capital standard, assets reported on an institution's
balance sheet and certain off-balance sheet items are assigned to risk
categories, each of which is assigned a risk weight. This standard
characterizes an institution's capital as being "Tier 1" capital (defined as
principally comprising shareholders' equity and noncumulative preferred stock)
and "Tier 2" capital (defined as principally comprising the allowance for loan
losses and subordinated debt).
Under the leverage capital standard, an institution must maintain a
specified minimum ratio of Tier 1 capital to total assets, with the minimum
ratio ranging from 4% to 6%. The core capital ratio for Allied is based on
period end assets while the leverage ratio for the Company and NBR is based on
average assets for the quarter.
Allied is subject to a minimum tangible capital ratio of 1.5% of adjusted
total assets. It is anticipated that Allied will be subject to an OTS
regulation issued in August, 1993 that added an interest rate risk component to
the risk-based capital requirements of thrifts. The original effective date was
to be December 31, 1993 and the regulation has been postponed several times.
The effective date has now been postponed indefinitely until the OTS evaluates
the effectiveness of its appeals process. Under the proposed regulation,
those thrifts that have an above normal interest rate risk exposure must take a
deduction from the total capital available to meet their risk-based capital
requirement. This deduction will be equal to one-half of the difference between
the thrift's actual measured exposure and the normal level of exposure. The
actual deduction taken at any quarter end is equal to the lowest amount
calculated for the three quarters prior to the reporting date. A thrift's
actual measured interest risk is expressed as the change that occurs in its net
portfolio value ("NPV") as a result of an immediate 200 basis point increase or
decrease in interest rates (whichever results in the lower NPV) divided by the
estimated economic value of its assets, as calculated in accordance with OTS
instructions. An above normal decline in NPV is one that exceeds 2% of the
estimated economic value of its assets. Under this regulation, Allied currently
would not be required to take a deduction from capital.
The following table summarizes the consolidated capital ratios and the
capital ratios of the principal subsidiaries at December 31, 1995 and June 30,
1996.
17
<PAGE>
<TABLE>
<CAPTION>
Actual Required
Amount Amount Excess Actual %
-------------------------------------------------------
(dollars in thousands)
At June 30, 1996:
<S> <C> <C> <C> <C>
COMPANY
Leverage (to Average Assets) $30,888 $21,419 $9,469 5.77%
Tier 1 Capital (to Risk-weighted Assets) 28,257 14,453 13,804 7.82
Total Capital (to Risk-weighted Assets) 44,772 28,906 15,866 12.39
NBR
Leverage Capital (to Average Assets) 16,842 9,594 7,248 7.02
Tier 1 Capital (to Risk-weighted Assets) 16,842 7,550 9,292 8.92
Total Capital (to Risk-weighted Assets) 22,222 15,100 7,121 11.72
ALLIED
Core Capital (to Total Assets) 20,388 11,134 9,254 7.32
Tier 1 Capital (to Risk-weighted Assets) 17,757 6,746 11,011 10.53
Total Capital (to Risk-weighted Assets) 19,874 13,493 6,381 11.78
Tangible Capital (to Total Assets) 20,388 4,175 16,213 7.32
At December 31, 1995:
COMPANY
Tier 1 Capital (to Average Assets) 29,723 23,134 6,589 5.14
Tier 1 Capital (to Risk-weighted Assets) 27,123 14,991 12,132 7.24
Total Capital (to Risk-weighted Assets) 43,780 29,981 13,799 11.68
NBR
Tier 1 Capital (to Average Assets) 17,283 9,258 8,025 7.47
Tier 1 Capital (to Risk-weighted Assets) 17,283 7,349 9,934 9.41
Total Capital (to Risk-weighted Assets) 22,395 14,698 7,697 12.19
ALLIED
Core Capital (to Total Assets) 19,955 12,752 7,203 6.26
Tier 1 Capital (to Risk-weighted Assets) 17,355 7,528 9,827 9.22
Total Capital (to Risk-weighted Assets) 19,713 15,056 4,657 10.47
Tangible Capital (to Total Assets) 19,955 4,782 15,173 6.26
</TABLE>
18
<PAGE>
PART II. - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its Annual Meeting of Shareholders on May 21, 1996.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees for directors as
listed in the Company's proxy statement for the Annual Meeting, and
all such nominees were elected.
(c) The vote for nominated directors was as follows:
BROKER
NOMINEE FOR WITHHELD ABSTAIN NONVOTE
------- --- -------- ------- -------
Orlando J. Antonini 2,247,783 149,927 none none
Haskell E. Boyett 2,259,071 138,639 none none
Robert D. Cook 2,255,679 142,031 none none
Patrick W. Kilkenny 2,260,689 137,021 none none
John R. Olsen 2,260,121 137,589 none none
William B. Stevenson 2,260,342 137,368 none none
Tom D. Whitaker 2,261,342 136,368 none none
The vote for ratifying the appointment of Deloitte & Touche LLP was as
follows:
FOR 2,297,515
AGAINST 92,247
ABSTAIN 7,948
BROKER NON-VOTES 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.
19
<PAGE>
(b) REPORTS ON FORM 8-K
Form 8-K dated April 9, 1996 announcing a management change at Allied
Bank, F.S.B. - resignation of Terance O'Mahoney.
Form 8-K dated April 30, 1996 declaring the dividend on preferred
stock payable on May 15, 1996; announcement of Martin B. McCormick as
President of Allied Bank subsidiary; and reporting of first quarter
earnings.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDWOOD EMPIRE BANCORP
----------------------
(Registrant)
DATE: 8-07-96 BY: /s/ Patrick W. Kilkenny
------- --------------------------
Patrick W. Kilkenny
President and Chief Executive Officer
DATE: 8-07-96 BY: /s/ James E. Beckwith
------- --------------------------
James E. Beckwith
Senior Vice President and Chief Financial
Officer
DATE: 8-06-96 BY: /s/ Gale D. Bridgeman
------- --------------------------
Gale D. Bridgeman
Vice President and Controller
(Principal Accounting Officer)
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDWOOD EMPIRE BANCORP
----------------------
(Registrant)
DATE: __________ BY: ____________________
Patrick W. Kilkenny
President and Chief Executive Officer
DATE: __________ BY: ____________________
James E. Beckwith
Senior Vice President and Chief Financial
Officer
DATE: __________ BY: ____________________
Gale D. Bridgeman
Vice President and Controller
(Principal Accounting Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,495
<INT-BEARING-DEPOSITS> 314
<FED-FUNDS-SOLD> 6,151
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,067
<INVESTMENTS-CARRYING> 5,935
<INVESTMENTS-MARKET> 5,935
<LOANS> 338,137<F1>
<ALLOWANCE> 7,034
<TOTAL-ASSETS> 520,993
<DEPOSITS> 443,020
<SHORT-TERM> 23,238
<LIABILITIES-OTHER> 10,729
<LONG-TERM> 12,000
0
5,750
<COMMON> 19,193
<OTHER-SE> 7,063<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 520,993
<INTEREST-LOAN> 21,243
<INTEREST-INVEST> 1,465
<INTEREST-OTHER> 624
<INTEREST-TOTAL> 23,332
<INTEREST-DEPOSIT> 10,363
<INTEREST-EXPENSE> 11,751
<INTEREST-INCOME-NET> 11,581
<LOAN-LOSSES> 2,830
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 171,758
<INCOME-PRETAX> 1,589
<INCOME-PRE-EXTRAORDINARY> 1,589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 924
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<YIELD-ACTUAL> 4.58
<LOANS-NON> 7,074
<LOANS-PAST> 121
<LOANS-TROUBLED> 256
<LOANS-PROBLEM> 2,834
<ALLOWANCE-OPEN> 5,037
<CHARGE-OFFS> 902
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 7,034
<ALLOWANCE-DOMESTIC> 6,383
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 651
<FN>
<F1>17 EXCLUDES MORTGAGE LOANS HELD FOR SALE OF 79,766
<F2>27 INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES
AVAILABLE FOR SALE OF 604
</FN>
</TABLE>
