<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 September 30, 1998
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 (IRS Employer
incorporation 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. November 5, 1998: 3,384,890
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<PAGE>
REDWOOD EMPIRE BANCORP
AND
SUBSIDIARIES
Index
Page
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations
Three and Nine Months ended September 30, 1998 and 1997..............3
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997.............................4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 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
Item 3. Quantitative and Qualitative Disclosure about Market Risk...23
PART II. Other Information
Item 6. Exhibits and Reports on Item 8-K............................28
SIGNATURES....................................................................29
<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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $7,124 $7,898 $20,792 $24,922
Interest on investment securities 1,115 913 3,340 2,594
Interest on federal funds sold 207 387 843 902
Interest on time deposits due from
financial institutions --- 1 --- 7
---------------------------- ----------------------------
Total interest income 8,446 9,199 24,975 28,425
Interest expense:
Interest on deposits 3,086 3,715 9,724 11,849
Interest on subordinated notes 276 276 830 830
Interest on other borrowings 166 69 315 187
---------------------------- ----------------------------
Total interest expense 3,528 4,060 10,869 12,866
---------------------------- ----------------------------
Net interest income 4,918 5,139 14,106 15,559
Provision for loan losses 510 465 1,530 1,635
---------------------------- ----------------------------
Net interest income after loan loss provision 4,408 4,674 12,576 13,924
Noninterest income:
Service charges on deposit accounts 261 271 802 852
Merchant draft processing, net 686 335 1,732 1,127
Loan servicing income 201 161 485 676
Net realized gain on sale of
investment securities available for sale 22 30 127 23
Gain on sale of loans and loan servicing 1,340 396 3,942 2,726
Mortgage loan brokerage revenue, net 1,234 709 3,548 1,521
Other income 280 190 840 511
---------------------------- ----------------------------
Total noninterest income 4,024 2,092 11,476 7,436
Noninterest expense:
Salaries and employee benefits 3,623 2,614 10,014 8,768
Occupancy and equipment expense 930 876 2,580 2,519
Other 1,780 1,750 5,696 6,020
---------------------------- ----------------------------
Total noninterest expense 6,333 5,240 18,290 17,307
---------------------------- ----------------------------
Income before income taxes 2,099 1,526 5,762 4,053
Provision for income taxes 764 601 2,109 1,664
---------------------------- ----------------------------
Net income 1,335 925 3,653 2,389
Dividends on preferred stock --- 112 112 336
============================ ============================
Net income available for common stock shareholders $1,335 $813 $3,541 $2,053
============================ ============================
Earnings per common share and common equivalent share:
Basic earnings per share $.40 $.29 $1.14 $.74
Weighted average shares 3,369,000 2,784,000 3,101,000 2,772,000
Diluted earnings per share $.38 $.27 $1.05 $.70
Weighted average shares 3,486,000 3,390,000 3,465,000 3,424,000
</TABLE>
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Cash and due from banks $30,902 $21,505
Federal funds sold and repos 15,825 34,553
------------------ ------------------
Cash and cash equivalents 46,727 56,058
Interest bearing deposits due from financial institutions 6 6
Investment securities:
Held to maturity (market value of $33,849 and $31,273) 33,315 30,658
Available for sale, at market 37,827 41,907
------------------ ------------------
Total investment securities 71,142 72,565
Mortgage loans held for sale 19,133 16,929
Loans:
Residential real estate mortgage 96,616 93,516
Commercial real estate mortgage 57,064 57,425
Commercial 62,611 69,097
Real estate construction 50,146 55,031
Installment and other 5,357 9,200
Less deferred loan fees (1,714) (1,873)
------------------ ------------------
Total portfolio loans 270,080 282,396
Less allowance for loan losses (8,221) (7,645)
------------------ ------------------
Net loans 261,859 274,751
Premises and equipment, net 4,218 4,055
Mortgage servicing rights 372 620
Other real estate owned 3,227 6,352
Cash surrender value of life insurance 2,999 2,929
Other assets and interest receivable 11,290 12,454
------------------ ------------------
Total assets $420,973 $446,719
================== ==================
Deposits:
Noninterest bearing demand deposits $83,662 $98,915
Interest-bearing transaction accounts 132,678 149,939
Time deposits $100,000 and over 61,410 53,878
Other time deposits 80,263 88,689
------------------ ------------------
Total deposits 358,013 391,421
Other borrowings 4,598 2,341
Subordinated notes 12,000 12,000
Other liabilities and interest payable 8,614 7,714
------------------ ------------------
Total liabilities 383,225 413,476
Shareholders' equity:
Preferred stock, no par value; authorized 2,000,000 shares;
issued and outstanding 0 and 575,000 shares --- 5,750
Common stock, no par value; authorized 10,000,000 shares;
issued and outstanding 3,384,890 and 2,785,261 shares 26,085 19,656
Retained earnings 11,295 8,024
Unrealized gain (loss) on investment securities carried as,
or transferred from available for sale, net of income taxes 368 (187)
------------------ ------------------
Total shareholders' equity 37,748 33,243
------------------ ------------------
Total liabilities and shareholders' equity $420,973 $446,719
================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,653 $2,389
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 1,067 330
Net realized gains on securities available for sale (127) 7
Loans originated for sale (327,381) (92,081)
Proceeds from sale of loans held for sale 338,288 128,796
Gain on sale of loans and loan servicing (3,942) (2,330)
Provision for loan losses 1,530 1,170
Change in other assets and interest receivable 774 9,563
Change in other liabilities and interest payable 907 (4,901)
Other, net 416 386
-------------- --------------
Total adjustments 11,532 40,940
-------------- --------------
Net cash provided by operating activities 15,185 43,329
-------------- --------------
Cash flows from investing activities:
Net change in loans (752) 6,000
Proceeds from sales of loans in portfolio 946 1,973
Purchases of investment securities available for sale (20,150) (7,971)
Purchases of investment securities held to maturity (11,594) (730)
Sales of investment securities available for sale 2,987 4,020
Maturities of investment securities available for sale 17,900 6,974
Maturities of investment securities held to maturity 13,406 500
Premises and equipment, net (1,383) (540)
Purchase of mortgage servicing rights (12) (155)
Interest bearing deposits --- 7
Proceeds from sale of other real estate owned 5,205 846
-------------- --------------
Net cash provided by investment activities 6,553 10,924
-------------- --------------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts (15,253) 4,468
Change in interest bearing transaction accounts (17,260) (9,050)
Change in time deposits (895) (44,846)
Change in borrowings 2,257 (5,477)
Issuance of stock 463 264
Dividends paid (381) (224)
-------------- --------------
Net cash used in financing activities (31,069) (54,865)
-------------- --------------
Net change in cash and cash equivalents (9,331) (612)
Cash and cash equivalents at beginning of period 56,058 45,473
-------------- --------------
Cash and cash equivalents at end of period $46,727 $44,861
============== ==============
</TABLE>
(Continued)
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Interest expense 10,805 13,179
Income taxes 1,245 60
Noncash investing and financing activities:
Transfers from loans to other real estate owned 2,675 2,591
Transfer from mortgage loans held for sale to loans 8,999 1,377
Conversion of Preferred Stock into Common Stock 5,739 ---
</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 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 nine months ended September 30, 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.
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.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- -------------- -------------- --------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Basic Earnings per share:
Net income $1,335 $925 $3,653 $2,389
Less: Preferred stock dividend --- 112 112 336
============= ============== ============== ==============
Net income available to common stock shareholders $1,335 $813 $3,541 $2,053
============= ============== ============== ==============
Weighted average common shares outstanding 3,369 2,784 3,101 2,772
============= ============== ============== ==============
Basic earnings per share $0.40 $0.29 $1.14 $0.74
============= ============== ============== ==============
Diluted Earnings per share:
Net income available to common stock shareholders $1,335 $813 $3,541 $2,053
Dilutive effect of Preferred Stock dividend - 112 112 336
============= ============== ============== ==============
$1,335 $925 $3,653 $2,389
============= ============== ============== ==============
Weighted average common shares outstanding 3,369 2,784 3,101 2,772
Effect of outstanding stock options 117 108 142 94
Effect of Convertible Preferred Stock - 499 221 499
============= ============== ============== ==============
3,486 3,391 3,464 3,365
============= ============== ============== ==============
Diluted earnings per share $0.38 $0.27 $1.05 $0.70
============= ============== ============== ==============
</TABLE>
4. Change in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards, ("S.F.A.S.") 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 Nine Months Ended
Sepember 30, September 30,
1998 1997 1998 1997
--------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income as reported $1,335 $813 $3,541 $2,053
Other comprehensive income (net of tax):
Change in unrealized holding gain (losses)
on available for sale securities 418 138 594 105
Reclassification adjustment (14) (19) (39) (15)
=============== ============= =============== ==============
Total comprehensive income $1,739 $932 $4,096 $2,143
=============== ============= =============== ==============
</TABLE>
<PAGE>
5. Preferred Stock Redemption
On March 19, 1998 the Company called for redemption of its 7.8%
Noncumulative Convertible Perpetual Preferred Stock, Series A. The redemption
notice provided that all shares be redeemed on April 30, 1998 at $10.39 per
share payable to shareholders of record as of March 27, 1998 who surrendered
their preferred stock certificates to the conversion agent, Chase Mellon
Shareholder Services LLC. The preferred stock was 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 was 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 497,865 shares of common stock effective April 30, 1998.
Preferred shares redeemed for cash at $10.39 per share amounted to 1,017.
6. Common Stock Dividend
On August 18, 1998 the Board of Directors declared a quarterly cash
dividend of 4 cents per share on the Company's Common Stock. The dividend was
payable on October 15, 1998 to shareholders of record on September 30, 1998.
7. New Accounting Pronouncement
In June, 1998 the Financial Accounting Standards Board issued S.F.A.S. No.
133 "Accounting for Derivative Instruments and Hedging Activities". The
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management is in the
process of determining the impact of S.F.A.S. No. 133 on the Company's financial
statements, which is not expected to be material.
In October, 1998 The Financial Accounting Standards Board issued
S.F.A.S. No. 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
This statement requires that after the securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. The statement shall be effective for all fiscal quarters
beginning after December 31, 1998. The Management does not believe the adoption
of S.F.A.S. No. 134 will have a material effect on the Company's financial
statements.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Information
This Quarterly Report on Form 10-Q includes forward-looking information
which is subject to the "safe harbor" created by the Securities Act of 1933 and
Securities Act of 1934. These forward-looking statements (which involve the
Company's plans, beliefs and goals, refer to estimates or use similar terms)
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:
oCompetitive pressure in the banking and mortgage industry and changes
in the regulatory environment.
oChanges in the interest rate environment and volatility of rate sensi-
tive deposits.
oThe health of the economy declines nationally or regionally which could
reduce the demand for loans or reduce the value of real estate
collateral securing most of the Company's loans.
oCredit quality deteriorates which could cause an increase in the
provision for loan losses.
oRisks associated with the Year 2000 which could cause disruptions in
the Company's operations or increase expenses.
oLosses in the Company's merchant credit card processing business.
oAsset/liability matching risks and liquidity risks.
oChanges in the securities markets.
The Company undertakes no obligation to revise or publicly release the
results of any revision to these forward-looking statements. For additional
information concerning risks and uncertainties related to the Company and its
operations please refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
The following sections discuss significant changes and trends in
financial condition, capital resources and liquidity of the Company from
December 31, 1997 to September 30, 1998, and significant changes and trends in
the Company's results of operations for the three and nine months ended
September 30, 1998, compared to the same period in 1997.
<PAGE>
Summary of Financial Results
The Company reported net income of $1,335,000 ($.38 per share, diluted)
for the three months ended September 30, 1998, compared to $925,000 ($.27 per
share, diluted) for the same period in 1997. Net income for the nine months
ended September 30, 1998 was $3,653,000 ($1.05 per share, diluted) compared to
$2,389,000 ($.70 per share, diluted). The increase in net income for the third
quarter in 1998 when compared to the same period one year ago is due to a
decline of $221,000 in net interest income, an increase of $1,932,000 in non
interest income, and an increase of $1,093,000 in non interest expense. The
increase in net income during the first nine months of 1998 when compared to the
same period in 1997 is due to a decline of $1,453,000 in net interest income, an
increase of $4,040,000 in non interest income, and an increase of $983,000 in
non interest expense.
Net Interest Income
Net interest income decreased $221,000 or 4% during the third quarter
of 1998 compared to the third quarter of 1997. The decrease is primarily due to
a decrease in average earning assets of $21,648,000 or 5%. Net interest margin
for the quarter ended September 30, 1998 amounted to 5.13% as compared to 5.08%
one year ago.
Net interest income of $14,106,000 declined $1,453,000 or 9% for the
nine months ended September 30, 1998 when compared to the same period one year
ago. The decrease is primarily due to a decline in earning assets of $41,608,000
or 10%. Net interest margin for the first nine months of 1998 was 4.93% as
compared to 4.90% for the same period one year ago.
The decline in earning assets during the third quarter is due
principally to the decline in average portfolio loans and federal funds sold of
$42,667,000 and $11,736,000, being offset by an increase in average investment
securities and mortgage loans held for sale of $17,391,000 and $15,363,000.
Management believes the decline in portfolio loans is attributable to interest
rate driven prepayments of mortgage loans, the overall competitive commercial
lending environment, strict credit control and management's effort to balance
the components of the Company's loan portfolio. The increase in average
investment securities for the quarter compared to the same time period one year
ago is a direct result of deploying loan payoff proceeds. The increase in
average mortgage loans held for sale for the quarter is attributable to a
favorable mortgage interest rate environment.
Average earning assets also declined in the first nine months of 1998
when compared to the same period one year ago. Average earning assets amounted
to $381,658,000 during the nine month period ended September 30, 1998 as
compared to $423,266,000 in 1997. Management believes the decline in average
earning assets during the first nine months of 1998 when compared to 1997 is
primarily due to a decline in portfolio loans partially offset by increases in
average investment securities and mortgage loans held for sale due to reasons
described in the preceding paragraph.
<PAGE>
The net interest margin for the third quarter increased from 5.08% in
1997 to 5.13% in 1998. Yield on earning assets decreased from 9.09% to 8.82%
primarily as a result a decline in higher yielding portfolio loans, principally
construction loans. As a result of decreased funding needs, the Company
significantly reduced its higher cost time certificates of deposits. Average
time certificates amounted to $139,128,000 for the third quarter as compared to
$158,434,000 one year ago, which results in a decline of $19,306,000 or 12%. In
addition, at the end of the second quarter of 1998 the Company reduced rates
paid on its money market accounts. Due primarily to these two factors, the cost
of interest bearing liabilities declined to 4.71% from 5.01% in the third
quarter of 1998 compared to the same quarter in 1997.
The net interest margin for the first nine months of 1998 amounted to
4.93% as compared to 4.90% in the same period one year ago. Yield on earning
assets declined from 8.95% in 1997 as compared to 8.73% in 1998. Cost of
interest bearing liabilities declined from 5.08% in 1997 to 4.79% in 1998.
The following is an analysis of the net interest margin for the periods
indicated:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1998 September 30, 1997
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets (1) $383,168 $8,446 8.82 $404,816 $9,199 9.09
Interest-bearing liabilities 299,473 3,528 4.71 324,020 4,060 5.01
------- ------
Net interest income $4,918 $5,139
======= ======
Net interest income to
earning assets 5.13 5.08
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
--------------------------------- ---------------------------------
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning assets (1) $381,658 $24,975 8.73 $423,266 $28,425 8.95
Interest-bearing liabilities 302,464 10,869 4.79 337,585 12,866 5.08
-------- -------
Net interest income $14,106 $15,559
======== =======
Net interest income to
earning assets 4.93 4.90
</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 and nine months ended September 30, 1998 and 1997. Changes not solely
attributable to rate or volume have been allocated to rate.
<PAGE>
<TABLE>
<CAPTION>
Three month periods ending
September 30, 1998
over September 30, 1997
-----------------------------------
Volume Rate Total
-----------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans ($1,554) $477 ($1,077)
Mortgage loans held for sale 143 160 303
Investment securities 228 (33) 195
Interest-earning deposits with other institutions 6 --- 6
Federal funds sold (186) 6 (180)
-----------------------------------
Total increase (decrease) (1,363) 610 (753)
-----------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts 243 (582) (339)
Time deposits (635) 345 (290)
Other borrowings 206 (109) 97
-----------------------------------
Total increase (decrease) (186) (346) (532)
-----------------------------------
Increase in net interest income ($1,177) $956 ($221)
===================================
</TABLE>
<TABLE>
<CAPTION>
Year to date September 30, 1998
over September 30, 1997
-----------------------------------
Volume Rate Total
-----------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans ($4,834) $298 ($4,536)
Mortgage loans held for sale 514 (108) 406
Investment securities 1,040 (301) 739
Interest-earning deposits with other institutions --- --- ---
Federal funds sold (17) (42) (59)
-----------------------------------
Total increase (decrease) (3,297) (153) (3,450)
-----------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts 87 (677) (590)
Time deposits (1,676) 141 (1,535)
Other borrowings 248 (120) 128
-----------------------------------
Total increase (decrease) (1,341) (656) (1,997)
-----------------------------------
Increase in net interest income ($1,956) $503 ($1,453)
===================================
</TABLE>
Provision for Loan Losses
The provision for loan losses for the three months ended September 30,
1998 amounted to $510,000 as compared to $465,000 in the same quarter in the
previous year. For the nine months ended September 30, 1998, the provision
decreased $105,000 from $1,635,000 in 1997 to $1,530,000 in 1998. For further
discussion see Allowance for Loan Losses.
<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 nine months ended September 30, 1998, as compared to
the same period in 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 % September 30 %
-------------------------- ---------------------------
(dollars in thousands) 1998 1997 Change 1998 1997 Change
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts 261 271 (4) 802 852 (6)
Merchant draft processing, net 686 335 105 1,732 1,127 54
Loan servicing income 201 161 25 485 676 (28)
Gain (loss) on securities 22 30 (27) 127 23 452
Gain on sale of loans and servicing 1,340 396 238 3,942 2,726 45
Mortgage brokerage revenue, net 1,234 709 74 3,548 1,521 133
Other income 280 190 47 840 511 64
----------- ----------- ------------ ------------
Total other operating income $4,024 $2,092 92 $11,476 $7,436 54
=========== =========== ============ ============
</TABLE>
Other operating income increased $1,932,000 or 92% to $4,024,000 for
the third quarter of 1998 when compared to $2,092,000 for the same period in
1997. Such increase is primarily due to an increase of $944,000 in gain on sale
of loans and servicing, an increase of $525,000 in net mortgage loan brokerage
revenue, and an increase of $351,000 in merchant card net revenue. Gain on sale
revenue is derived from the sale of both sub prime mortgage loans the Company
originates and "A" paper mortgage loans originated within the Company's mortgage
loan division, Valley Financial. Valley Financial has experienced significant
growth in 1998. Net revenue from the mortgage loan brokerage operation amounted
to $1,234,000 in the third quarter of 1998 as compared to $709,000 in 1997 and
$3,548,000 for the nine month period ending September 30, 1998 when compared to
$1,521,000 for the nine months ended September 30, 1997. Management believes the
significant increase in both gain on sale of loans and servicing and mortgage
brokerage revenue is due primarily to a favorable interest rate environment and
a strong residential purchase market in northern California. The increase in
merchant card income is attributable to the addition of a new strategic
relationship with an independent sales organization whose focus is internet
based merchants.
Other operating income amounted to $11,476,000 for the nine months
ended September 30, 1998 as compared to $7,436,000 the same period in 1997. The
increase of $4,040,000 is primarily attributable to increases in mortgage loan
brokerage revenue, merchant card processing, net revenue, and gain on sale of
loans and loan servicing.
<PAGE>
Other Operating Expense
Other operating expense increased by $1,093,000 or 21% to $6,333,000
during the third quarter of 1998 compared to $5,240,000 for the third quarter of
1997, primarily due to an increase in salary and benefits associated with an
increase in mortgage loan origination. Other operating expense increased 6% to
$18,290,000 from $17,307,000 for the nine months ended September 30, 1998 when
compared to the same period in 1997.
The following table sets forth the components of the Company's other
operating expense during the three and nine months ended September 30, 1998, as
compared to the same periods in 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 % September 30 %
-------------------------- ------------------------
(dollars in thousands) 1998 1997 Change 1998 1997 Change
------------ ------------ ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $3,623 $2,614 39 $10,014 $8,768 14
Occupancy and equipment expense 930 876 6 2,580 2,519 2
Other 1,780 1,750 2 5,696 6,020 (5)
------------ ------------ ----------- -----------
Total other operating expense $6,333 $5,240 21 $18,290 $17,307 6
============ ============ =========== ===========
</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 36.40% and 36.60% for the three and nine months ended September 30, 1998,
compared to 39.38% and 41.06% for the same periods in 1997. The decline in the
Company's effective tax rate in the third quarter and first nine months of 1998
is due to recording the benefit of certain items arising in previous years.
Investment Securities
Total investment securities decreased $1,423,000 or 2% to $71,142,000
as of September 30, 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 $13,400,000 in the
first nine months of 1998. As a result of this action the Company recorded
$92,000 as gain on sale during the first and third quarters of 1998.
Mortgage Loans Held for Sale
Mortgage loans held for sale increased $2,204,000 or 13% to $19,133,000
at September 30, 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.
<PAGE>
Loans
Total loans decreased $12,316,000 or 4% to $270,080,000 at September
30, 1998 compared to $282,396,000 at December 31, 1997. Management believes the
decline in portfolio loans is primarily attributable to interest rate driven
prepayments of mortgage loans, the overall competitive environment for
commercial loans, strict credit control, and management's desire to balance the
components of the Company's loan portfolio. The Company anticipates that these
forces will remain intact for the foreseeable future thereby slowing earning
asset growth.
The following table summarizes the composition of the loan portfolio at
September 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------------------------- -------------------------------------
(dollars in thousands) Amount % Amount %
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Residential real estate mortgage $96,616 36% $93,516 33%
Commercial real estate mortgage 57,064 21 57,425 20
Commercial 62,611 23 69,097 24
Real estate construction 50,146 19 55,031 21
Installment and other 5,357 2 9,200 3
Less deferred fees (1,714) (1) (1,873) (1)
------------------------------------ -------------------------------------
Total loans 270,080 100% 282,396 100%
========== ===========
Less allowance for loan losses (8,221) (7,645)
=================== ===================
Net loans $261,859 $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 by Management after considering various factors
believed appropriate such as loan loss experience, current and anticipated
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.
<PAGE>
The following table summarizes the Company's allowance for loan losses
for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
---------------------------- ---------------------------
(dollars in thousands) 1998 1997 1998 1997
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Beginning allowance for loan losses $7,930 $7,548 $7,645 $7,040
Provision for loan losses 510 465 1,530 1,635
Charge-offs (369) (272) (1,240) (1,027)
Recoveries 150 248 286 341
============ ============= ============ ============
Ending allowance for loan losses $8,221 $7,989 $8,221 $7,989
============ ============= ============ ============
Net charge-offs to average
loans (annualized) .31% .03% .48% .28%
</TABLE>
The allowance for loan losses as a percentage of portfolio loans
increased from 2.71% at December 31, 1997 to 3.04% at September 30, 1998. The
increase in this percentage is primarily due to a $12,316,000 decline in the
Company's total loan portfolio.
Nonperforming Assets
The following table summarizes the Company's nonperforming assets.
<TABLE>
<CAPTION>
September 30, December, 31
(dollars in thousands) 1998 1997
--------------- -------------
<S> <C> <C>
Nonaccrual loans $5,759 $7,883
Accruing loans past due 90 days or more 114 735
Restructured loans 1,048 1,109
--------------- -------------
Total nonperforming loans 6,921 9,727
Other real estate owned 3,227 6,352
Other assets owned 264 542
--------------- -------------
Total nonperforming assets $10,412 $16,621
=============== =============
Nonperforming assets to total assets 2.47% 3.72%
</TABLE>
Nonperforming assets have decreased from $16,621,000 as of December 31,
1997 to $10,412,000 as of September 30, 1998. The principal reasons for this
decrease relate to a decrease in nonaccrual loans of $2,124,000, a decrease in
other real estate owned of $3,125,000 and a decrease in accruing loans past due
90 days or more of $621,000.
<PAGE>
Nonperforming loans consist of loans to 38 borrowers, 18 of which have
balances in excess of $100,000. The two largest have recorded balances of
$745,000 and $731,000, both secured by real estate. Based on information
available as of September 30, 1998, management believes that adequate reserves
are included in the allowance for loan losses to cover foreseeable loss exposure
which may result from these loans.
Other real estate owned consists of 13 properties. 8 properties are
residential, 2 construction lots and the remaining are undeveloped acres and
commercial buildings. Other assets owned included contract receivable rights and
repossessed personal property carried at $264,000.
Although the volume of nonperforming assets will depend in part on the
future economic environment at September 30, 1998, there are also seven loan
relationships which total approximately $2,431,000 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 as of
September 30, 1998.
In the first nine months of 1998 the Company was required by various
mortgage loan investors to repurchase 9 nonperforming 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 $186,000 as of September 30, 1998.
At September 30, 1998 the Company's total recorded investment in
impaired loans (as defined by SFAS 114 and 118) was $10,163,000 of which
$4,622000 relates to the recorded investment for which there is a related
allowance for credit losses of $1,383,000 determined in accordance with these
statements and $5,541,000 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 nine
months ended September 30, 1998 and September 30, 1997 was $10,062,000 and
$13,000,000; the related amount of interest income recognized during the periods
that such loans were impaired was $92,000 and $409,000 for the three and nine
month period ended September 30, 1998 and $43,000 and $433,000 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.
<PAGE>
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, 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 September 30, 1998, Redwood held $2,351,000 in
deposits at NBR and a $3,000,000 subordinated note issued by NBR.
Prior to April 30, 1998 Redwood paid quarterly dividends of 7.8% on its
preferred stock of $5,750,000. On April 30, 1998 Redwood converted its preferred
stock into common, thus eliminating the preferred dividend. On May 19, 1998
Redwood reinstated its quarterly common dividend at a rate of $.04 per share.
Redwood also is required to make monthly payments of interest at 8.5% on
$12,000,000 of subordinated debentures issued in 1993. Payment of these
obligations is dependent on dividends from NBR. Federal regulatory agencies have
the authority to prohibit the payment of dividends by NBR to Redwood if a
finding is made that such payment would constitute an unsafe or unsound
practice, or if NBR became undercapitalized. If NBR is restricted from paying
dividends, Redwood could be unable to pay the above obligations. No assurance
can be given as to the ability of NBR to pay dividends to Redwood.
During the first nine months of 1998, NBR declared dividends of
$900,000. Management believes that at September 30, 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 nine months ended
September 30, 1998 the Company received $15,185,000 and $6,553,000 in cash flows
from operating and investing activities while using $31,069,000 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.
<PAGE>
Under the risk-based capital standard, assets reported on an
institution's balance sheet and certain off-balance sheet items are assigned to
risk categories, each of which is assigned a risk weight. This standard
characterizes an institution's capital as being "Tier 1" capital (defined as
principally comprising shareholders' equity and noncumulative preferred stock)
and "Tier 2" capital (defined as principally comprising the allowance for loan
losses and subordinated debt).
Under the leverage capital standard, an institution must maintain a
specified minimum ratio of Tier 1 capital to total assets, with the minimum
ratio ranging from 4% to 6%. The leverage ratio for the Company and NBR is based
on average assets for the quarter.
The following table summarizes the consolidated capital ratios and the
capital ratios of the principal subsidiaries at December 31, 1997 and September
30, 1998.
<TABLE>
<CAPTION>
Company NBR
-------------- -------------
<S> <C> <C>
September 30, 1998
Total capital to risk based assets 15.99% 15.00%
Tier 1 capital to risk based assets 11.04 12.81
Leverage ratio 8.49 9.86
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>
Year 2000. The "Year 2000 issue" relates to the fact that many computer
programs and equipment utilizing microprocessors only use two digits to
represent a year, such as "99" to represent "1999," which means that in the year
2000 such programs/processors could incorrectly treat the year 2000 as the year
1900. The issue must be recognized as a business issue, rather than simply a
computer issue, because of the way its effects could ripple through the economy.
The Company could be affected either directly or indirectly by the Year 2000
issue. This could happen if any of its critical computer systems or equipment
containing embedded logic fail, if the local infrastructure (power,
communication system, or water system) fails, if its significant vendors are
adversely impacted, or if its borrowers or depositors are significantly impacted
by their internal systems or their customers or suppliers.
The Company's business is highly dependent on technology and data
processing. As a result, Bank management and the Board of Directors have made
Year 2000 compliance a high priority.
The Company principally relies on third-party software for its
mission-critical applications needs. It licenses software and/or data processing
services from outside vendors for its critical applications such as mortgage
lending, credit cards, ATM, item processing and customer statements. The Company
also is dependent on personal computers and a local area network which is
supported by a Microsoft operating environment. The foregoing systems are
classified by the Company as mission critical information technology ("IT")
systems.
<PAGE>
The Company's business also involves non-IT products and services, some
of which have embedded technology which might not be Year 2000 ready. Some
non-IT products and services involve infrastructure issues such as power,
communications and water, as well as elevators, ventilation and air conditioning
equipment. The Company classifies power and communications as non-IT mission
critical systems.
The Company's third-party application software, data processing
vendors, local area network and operating systems and the power and
communication infrastructure provide critical support to substantially all of
its business and operations. Failure to successfully complete renovation,
validation and implementation of mission critical IT systems could have a
material adverse effect on the operations and financial performance of the
Company. Moreover, Year 2000 issues experienced by significant vendors or
customers of the Company could negatively impact the business and operations of
the Company even if its critical IT systems function satisfactorily. Due to the
many variables related to the Year 2000 issue and the lack of information on
Year 2000 readiness from non-IT service providers such as power and phone
systems vendors, the Company cannot quantify the potential cost of problems if
the Company's renovation and implementation efforts or the efforts of
significant vendors or customers are not successful.
State of Readiness
The Company has formed a Year 2000 team comprised of senior level
employees and officers who are familiar with the business and operations of the
Company. The Year 2000 team has conducted a comprehensive review of the
Company's IT systems to identify systems that present Year 2000 issues. The
Company has developed a plan which it believes should satisfactorily resolve
Year 2000 problems related to its mission-critical IT systems. The Company's
Year 2000 team is also using external resources provided by outside vendors and
a consultant hired to assist the Company.
Vendors of the Company's critical IT systems have informed the Company
that their products/systems are Year 2000 compliant. If initial testing for
other critical IT systems is not satisfactory the Company plans to take
corrective action and complete secondary testing by June 30, 1999.
The Company has run tests on selected components of its core processing
system during 1998 with technical assistance from the vendor and an outside
consultant. At the date of this report the Company believes it remains on
schedule to complete initial testing of all mission-critical IT systems by March
31, 1999.
<PAGE>
Costs
The Company is expensing all period costs associated with the Year 2000
issue. Through September 30, 1998, the amount of such expense has been
approximately $35,000. Management estimates that the Bank will incur
approximately an additional $100,000 in Year 2000 related expenses for the
identification, correction and reprogramming, and testing of systems for Year
2000 compliance during the last three months of 1998 and in fiscal 1999. There
can be no assurance that these expenses will not increase as further testing and
assessment of vendor and customer readiness for the Year 2000 continues. The
above cost estimates include costs for consultants, running tests, technical
assistance from vendors and costs for products replaced for Year 2000
compliance. These costs exclude the cost of the Company's internal staff time.
Risks
Management believes it will be difficult to predict the outcome of the
Year 2000 issue due to the complexity of technology and the inability to assess
the impact of the Year 2000 problem on the local, national and international
economy. Management has attempted, however, to identify a most reasonably likely
worst case scenario. This scenario suggests that the Year 2000 problem might
negatively impact some of the Company's significant IT vendors and non-IT
vendors/products through the failure of the vendor to be prepared or the impact
on them of their own vendors and customers including possible short-term power
failures. Management believes that if this scenario occurs its ability to
process mortgages and/or credit cards could be temporarily delayed and earnings
could be adversely impacted especially if a recession results. It is not
possible to predict the effect of this scenario on the economic viability of its
customers and the related adverse impact it may have on the Company's financial
position and results of operations, including the level of the Bank's provision
for possible loan losses in future periods.
The Company presently believes that, with modifications to existing
software which needs to be made Year 2000 compliant and assuming representations
of Year 2000 readiness from significant vendors and customers are accurate, the
Year 2000 issue should not pose significant operational risks for the Company's
IT systems as so modified. However, other significant risks relating to the Year
2000 problem are that of the unknown impact of this problem on the operations of
the Bank's customers and vendors, the impact of catastrophic infrastructure
issues such as power, communications and water on the economy and future actions
which banking or securities regulators may take.
The Company is making efforts to ensure that its customer base is aware
of the Year 2000 problem. Year 2000 correspondence has been sent to both deposit
and loan customers. The Bank has amended its credit authorization documentation
to include consideration regarding the Year 2000 problem. Significant customer
relationships have been identified, and such customers are being contacted by
the Bank's employees to determine whether they are aware of Year 2000 risks and
whether they are taking preparatory actions.
<PAGE>
The Company has also attempted to contact major vendors and suppliers
of non-software products and services including those where products utilize
embedded technology, to determine the Year 2000 readiness of such organizations
and/or the products and services which the Company purchases from such
organizations. The Company is monitoring reports provided by such vendors
regarding their preparations for Year 2000. This is an ongoing process, and the
company intends to continue to monitor the progress of such vendors through the
century date change.
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether each institution has an effective plan
for identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing capabilities with its
customers, vendors and payment system partners. Examiners are also required to
assess the soundness of an institution's internal controls and to identify
whether further corrective action may be necessary to assure an appropriate
level of attention to Year 2000 processing capabilities. Management believes it
is currently in compliance with the federal bank regulatory guidelines and
timetables.
Contingency Plans
The Company has developed contingency plans for software systems
utilized by the Company, should they not successfully pass the Company's Year
2000 testing. Generally this involves the identification of an alternate vendor
or expected actions the Company could take, as well as the establishment of a
trigger date to implement the contingency plan. The Company is also considering
the purchase of a backup generator to provide power for certain critical
functions in the event of a power failure. The Company intends to develop, in
accordance with regulatory guidelines, further contingency plans to address
potential business disruptions resulting from Year 2000 issues, however, this
process is not expected to be completed until after March 31, 1999.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
As a financial institution, the Company's primary component of market
risk is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on a large portion of the
Bank's assets and liabilities, and the market value of all interest earning
assets and interest bearing liabilities, other than those which possess a short
term to maturity. Since virtually all of the Company's interest bearing
liabilities and all of the Company's interest earning assets are located at the
Bank, virtually all of the Company's interest rate risk exposure lies at the
Bank level. As a result, all significant interest rate risk management
procedures are performed at the Bank level. Based upon the nature of its
operations, the Bank is not subject to foreign currency exchange or commodity
price risk. The Bank's real estate loan portfolio, concentrated primarily within
northern California, is subject to risks associated with the local economy. The
Company does not own any trading assets.
<PAGE>
The fundamental objective of the Company's management of its assets and
liabilities is to maximize the economic value of the Company while maintaining
adequate liquidity and an exposure to interest rate risk deemed by management to
be acceptable. Management believes an acceptable degree of exposure to interest
rate risk results from the management of assets and liabilities through
maturities, pricing and mix to attempt to neutralize the potential impact of
changes in market interest rates. The Bank's profitability is dependent to a
large extent upon its net interest income, which is the difference between its
interest income on interest-earning assets, such as loans and securities, and
its interest expense on interest-bearing liabilities, such as deposits and
borrowings. The Bank, like other financial institutions, is subject to interest
rate risk to the degree that its interest-earning assets reprice differently
than its interest-bearing liabilities. The Bank manages its mix of assets and
liabilities with the goals of limiting its exposure to interest rate risk,
ensuring adequate liquidity, and coordinating its sources and uses of funds.
The Bank seeks to control its interest rate risk exposure in a manner
that will allow for adequate levels of earnings and capital over a range of
possible interest rate environments. The Bank has adopted formal policies and
practices to monitor and manage interest rate risk exposure. As part of this
effort, the Bank measures risk in three ways: repricing of earning assets and
interest bearing liabilities; changes in net interest income for interest rate
shocks up and down 200 basis points; and changes in the market value of equity
for interest rate shocks up and down 200 basis points.
The following table sets forth, as of September 30, 1998, the
distribution of repricing opportunities for the Company's earning assets and
interest-bearing liabilities, the interest rate sensitivity gap, the cumulative
interest rate sensitivity gap, the interest rate sensitivity gap ratio (i.e.,
earning assets divided by interest-bearing liabilities) and the cumulative
interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
After Three After Six After One
Within Months but Months but Year But
Three Within Six Within One Within After Five
Months Months Year Five Years Years Total
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 15,825 $ - $ - $ - $ - $ 15,825
Investment securities and other 10,972 2,005 3,071 27,586 27,515 71,148
Mortgage loans held for sale 19,133 - - - - 19,133
Loans 108,344 52,314 24,069 32,008 53,345 270,080
--------------------------------------------------------------------------------
Total interest-earning assets 154,274 54,319 27,140 59,594 80,860 376,186
--------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing transaction accounts 132,678 - - - - 132,678
Time deposits 42,206 38,552 41,376 19,486 53 141,673
Short-term borrowings 4,598 - - - - 4,598
Subordinated notes - - - - 12,000 12,000
--------------------------------------------------------------------------------
Total interest-bearing liabilities 179,482 38,552 41,376 19,486 12,053 290,949
--------------------------------------------------------------------------------
Interest rate sensitivity gap $ (25,208) $ 15,767 $ (14,236) $ 40,108 $ 68,807
==================================================================
Cumulative interest rate sensitivity gap (25,208) (9,441) (23,677) 16,431 85,238
Interest rate sensitivity gap ratio 0.86 1.41 0.66 3.06 6.71
Cumulative interest rate sensitivity gap ratio 0.86 0.96 0.91 1.06 1.29
</TABLE>
<PAGE>
The Company's gap position is substantially dependent upon the volume
of mortgage loans held for sale and held in the portfolio. These loans generally
have maturities greater than five years; however, mortgage loans held for sale
are generally sold within 5 to 60 days of funding and therefore are classified
in the above table as repricing within three months. The Company enters into
commitments to sell such loans on a forward basis, usually within 30 to 60 days.
The amount of loans held for sale and the amount of forward commitments can
fluctuate significantly from period to period. Additionally, interest-bearing
transaction accounts, which consist of money market, demand and savings deposit
accounts, are classified as repricing within three months. Some of these
deposits may be repriced at management's option, and therefore a decision not to
reprice such deposits could significantly alter the Company's net interest
margin.
Management expects that, in a declining rate environment, the Company's
net interest margin would be expected to decline, and, in an increasing rate
environment, the Company's net interest margin would tend to increase. The
Company has experienced greater mortgage lending activity through mortgage
refinancings and financing new home purchases as rates declined, and may
increase its net interest margins in an increasing rate environment if more
traditional commercial bank lending becomes a higher percentage of the overall
earning assets mix. There can be no assurance, however, that under such
circumstances the Company will experience the described relationships to
declining or increasing interest rates.
On a monthly basis, NBR management prepares an analysis of interest
rate risk exposure. Such analysis calculates the change in net interest income
and the theoretical market value of the Bank's equity given a change in general
interest rates of 200 basis points up and 200 basis points down. All changes are
measured in dollars and are compared to projected net interest income and the
current theoretical market value of the Bank's equity. This theoretical market
value of the Bank's equity is calculated by discounting cash flows associated
with the Company's assets and liabilities. The following is a September 30, 1998
summary of interest rate risk exposure as measured on a net interest income
basis and a market value of equity basis, given a change in general interest
rates of 200 basis points up and 200 basis points down.
<TABLE>
<CAPTION>
Change in Annual Change in
Change in Interest Rate Net Interest Income Market Value of Equity
<S> <C> <C> <C>
+200 $330,000 ($5,618,000)
+100 153,000 (3,492,000)
-100 (971,000) 3,167,000
-200 (2,269,000) 5,835,000
</TABLE>
<PAGE>
The model utilized by management to create the report presented above
makes various estimates at each level of interest rate change regarding cash
flows from principal repayments on loans and mortgage-backed securities and/or
call activity on investment securities. In addition, repricing these earning
assets and matured liabilities can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically based on an
index; (2) an asset, such as a mortgage loan, may amortize, permitting
reinvestment of cash flows at the then-prevailing interest rates; or (3) an
asset or liability may mature, at which time the proceeds can be reinvested at
current market rate. Actual results could differ significantly from those
estimates which would result in significant differences in the calculated
projected change.
Certain Important Considerations for Investors
Mortgage Banking and Brokerage 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. The Company's current mortgage
banking operations include both the origination and brokering of retail oriented
mortgage loan production. Such mortgage loan lending activity primarily is
centered in northern California. The Company's ability to maintain and grow
mortgage banking and brokerage revenue depends on a favorable interest rate,
economic, and real estate market conditions.
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. The Company utilizes independent sales
organizations (ISO) to acquire merchant credit card customers. The Company's
ability to maintain and grow net revenue from its merchant credit card
processing operation is dependent upon maintaining these ISO relationships.
<PAGE>
Concentration of Lending Activities. Concentration of the Company's
lending activities in the real estate sector, including construction loans could
have the effect of intensifying the impact on the Company of adverse changes in
the real estate market in the Company's lending areas. At September 30, 1998,
approximately 75% of the Company's loans were secured by real estate, of which
28% were secured by commercial real estate, including small office buildings,
owner-user office/warehouses, mixed use residential and commercial properties
and retail properties. Substantially all of the properties that secure the
Company's present loans are located within Northern and Central California. The
ability of the Company to continue to originate mortgage 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.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS. The following documents are included or incorporated by
reference in this Quarterly Report on Form 10-Q: See Index to
Exhibits.
(b) REPORTS ON FORM 8-K
Form 8-K dated August 27, 1998 announcing quarterly cash dividend on
common stock under Item 5 "Other Events."
<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
DATE: 11/12/98 BY: /s/ James E Beckwith
-------- --------------------
James E. Beckwith
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer,
Principal Accounting Officer and
Duly Authorized Signatory)
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1 Acquisition and Merger Agreement between National
Bank of the Redwoods and Codding Bank, dated June 21,
1994, including Exhibits A and B thereto, filed as
Exhibit 2.1 to the Registrant's Current Report on
Form 8-K dated June 21, 1994, and by this reference
incorporated herein.
2.2 Amendment No. 1 to Acquisition and Merger Agreement
between National Bank of the Redwoods and Codding
Bank, dated September 21, 1994, filed as Exhibit 2.1
to the Registrant's Current Report on Form 8-K dated
September 21, 1994, and by this reference
incorporated herein.
3. Amended and restated By-Laws of the Registrant, filed
as Exhibit 3 to the Registrant's 1994 Annual Report
on Form 10-K and by this reference incorporated
herein.
4.1 Form of IndenTure (including form of notes) between
the registrant and the bank of new york, as
trustee, relating to the issuance of 8.50%
Subordinated notes due 2004, filed as exhibit
4.1 To the registrant's registration statement on
form s-2 dated december 13, 1993 (registration
no. 33-71324), And by this reference incorporated
herein.
4.2 Certificate of Determination of the Rights,
Preferences, Privileges and Restrictions of the
Registrant's 7.80% Noncumulative Convertible
Perpetual Preferred Stock, Series A, filed as Exhibit
4.1 to the Registrant's Registration Statement on
Form S-2 dated February 16, 1993 (Registration No.
33-56962), and by this reference incorporated herein.
10.1 Severance Compensation Agreement between Allied
Savings Bank, F.S.B. and Terance O'Mahoney, filed
as Exhibit 10.1 to the Registrant's 1990 Annual
Report on Form 10-K and by this reference
incorporated herein.
10.2 Amendment No. 1 to Severance Compensation Agreement
between Allied Savings Bank, F.S.B. and Terance
O'Mahoney dated as of January 1, 1993, filed as
Exhibit 10.2 to the Registrant's 1992 Annual Report
on Form 10-K and by this reference incorporated
herein.
10.3 Employment Agreement between Allied Savings Bank,
F.S.B. and Martin B. McCormick, dated as of July 1,
1990, filed as Exhibit 10.5 to the Registrant's 1992
Annual Report on Form 10-K and by this reference
incorporated herein.
10.4 Amendment No. 1 to Employment Agreement between
Allied Savings Bank, F.S.B. and Martin B. McCormick,
dated as of January 1, 1993, filed as Exhibit 10.6
to the Registrant's 1992 Annual Report on Form 10-K
and by this reference incorporated herein.
10.5 Employment Agreement between National Bank of the
Redwoods and Patrick W. Kilkenny, dated as of
January 1, 1994, filed as Exhibit 10.7 to the
Registrant's 1993 Annual Report on Form 10-K and by
this reference incorporated herein.
<PAGE>
10.6 Lease, dated August 30, 1988, between National Bank
of the Redwoods and 137 Group, a general partnership,
filed as Exhibit 10.1 to the Registrant's 1989
Annual Report on Form 10-K, and by this reference
incorporated herein.
10.7 Lease, Dated April 18, 1990, between Allied Savings
Bank, F.S.B. and Stony Point West, General Partner-
ship, filed as Exhibit 10.2 to the Registrant's
1990 Annual Report on Form 10-K, and by this
reference incorporated herein.
10.8 The Registrant's 401 (k) Profit Sharing Plan, filed
as Exhibit 28.1 to the Registrant's Registration
Statement on Form S-8 dated June 12, 1990
(Registration No.
33-35377), and by this reference incorporated herein.
10.9 The Allied Savings Bank, F.S.B. 1986 Stock Option
Plan, filed as Exhibit 28.1 to the Registrant's
Registration Statement on Form S-8 dated June 28,
1991 (Registration No.
33-41503), and by this reference incorporated herein.
10.10 The National Bank of the Redwoods Stock Option Plan,
filed as Exhibit 28.1 to the Registrant's Post-
Effective Amendment No. 1 to Registration
Statement on Form S-4 dated March 27, 1989 (Registra-
tion No. 33-24642), and by this reference
incorporated herein.
10.11 The Registrant's Amended and Restated 1991 Stock
Option Plan, filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8
filed on July 8, 1992 (Registration No. 33-49372),
and by this reference incorporated herein.
10.12 The Registrant's Performance Incentive Bonus Plan,
filed as Exhibit 10.13 to the Registrant's 1992
Annual Report on Form 10-K, and by this reference
incorporated herein.
10.13 The Registrant's Dividend Reinvestment and Stock
Purchase Plan, filed as Exhibit 10.14 to the
Registrant's 1992 Annual Report on Form 10-K,
and by this reference incorporated herein.
10.14 The Registrant's Phantom Stock Plan, filed as
Exhibit 10.16 to the Registrant's 1993 Annual Report
on Form 10-K, and by this reference incorporated
herein.
10.15 Phantom Stock Agreement between the Registrant and
John H. Downey, Jr., dated as of January 1, 1994,
filed as Exhibit 10.17 to the Registrant's 1993
Annual Report on Form 10-K, and by this reference
incorporated herein.
10.16 The Registrant's Executive Salary Continuation Plan,
filed as Exhibit 10.9 to the Registrant's Registra-
tion Statement on Form S-2 dated December 13, 1993
(Registration
No. 33-71324), and by this reference incorporated
herein.
10.17 Director Retirement Plan, filed as Exhibit 10.10
to the Registrant's Registration Statement on Form
S-2 dated December 13, 1993 (Registration No.
33-71324), and by this reference incorporated herein.
<PAGE>
10.18 Chairman Retirement Agreement, dated November 30,
1993, between the Registrant and John H. Downey, Jr.,
filed as Exhibit 10.11 to the Registrant's
Registration Statement on Form S-2 dated December 13,
1993 (Registration No. 33-71324), and by this
reference incorporated herein.
10.19 Lease, dated December 23, 1993 between Allied Bank,
F.S.B. and Santa Rosa Corporate Center Associates II,
filed as Exhibit 10.21 to the Registrant's 1994
Annual Report on Form 10-K, and by this reference
incorporated herein.
10.20 Compensation Agreement between Patrick W. Kilkenny
and Redwood Empire Bancorp.
10.21 Executive Severance Agreement between Patrick W.
Kilkenny and Redwood Empire Bancorp.
10.22 Salary Continuation Agreement between James E.
Beckwith and Redwood Empire Bancorp.
10.23 Dividend Reinvestment and Stock Purchase Plan on
Form S-3 dated April 28, 1993
(Registration No. 3361750), and by this reference
incorporated herein.
27.1 Financial Data Schedule for the period ended
September 30, 1998.
27.2 Financial Data Schedule Restated for the fiscal
years ended December 31, 1996 and December 31,
1995.
27.3 Financial Data Schedule Restated for the periods
ended March 31, 1997, June 30, 1997
and September 30, 1997.
27.4 Financial Data Schedule Restated for the periods
ended March 31, 1996, June 30, 1996 and September
30, 1996.
<TABLE> <S> <C>
<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 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 46,727
<SECURITIES> 71,148
<RECEIVABLES> 0
<ALLOWANCES> 8,221
<INVENTORY> 0
<CURRENT-ASSETS> 307,101
<PP&E> 4,218
<DEPRECIATION> 0
<TOTAL-ASSETS> 420,973
<CURRENT-LIABILITIES> 371,225
<BONDS> 12,000
0
0
<COMMON> 26,085
<OTHER-SE> 11,663 <F1>
<TOTAL-LIABILITY-AND-EQUITY> 420,973
<SALES> 0
<TOTAL-REVENUES> 36,451
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,290
<LOSS-PROVISION> 1,530
<INTEREST-EXPENSE> 10,869
<INCOME-PRETAX> 5,762
<INCOME-TAX> 2,109
<INCOME-CONTINUING> 3,653
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,653
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.05
<FN>
<F1>INCLUDES UNREALIZED GAIN ON SECURITIES AFS OF 368
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<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 YEARS 1996 AND 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 20,261 24,312
<INT-BEARING-DEPOSITS> 315 417
<FED-FUNDS-SOLD> 25,212 9,969
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 33,852 37,436
<INVESTMENTS-CARRYING> 18,781 6,528
<INVESTMENTS-MARKET> 19,097 6,528
<LOANS> 376,901<F1> 368,224<F3>
<ALLOWANCE> 7,040 5,037
<TOTAL-ASSETS> 499,466 557,910
<DEPOSITS> 436,450 458,393
<SHORT-TERM> 10,307 47,871
<LIABILITIES-OTHER> 10,977 8,061
<LONG-TERM> 12,000 12,000
0 0
5,750 5,750
<COMMON> 19,281 18,728
<OTHER-SE> 4,701<F2> 140
<TOTAL-LIABILITIES-AND-EQUITY> 499,466 557,910
<INTEREST-LOAN> 41,469 42,469
<INTEREST-INVEST> 3,120 3,187
<INTEREST-OTHER> 1,195 1,718
<INTEREST-TOTAL> 45,784 47,374
<INTEREST-DEPOSIT> 19,927 22,730
<INTEREST-EXPENSE> 22,643 27,671
<INTEREST-INCOME-NET> 23,141 19,703
<LOAN-LOSSES> 6,262 1,590
<SECURITIES-GAINS> (3) 386
<EXPENSE-OTHER> 38,946 29,016
<INCOME-PRETAX> (2,497) 5,672
<INCOME-PRE-EXTRAORDINARY> (2,497) 3,313
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,486) 3,313
<EPS-PRIMARY> (.71) 1.11
<EPS-DILUTED> (.71) 1.04
<YIELD-ACTUAL> 9.18 3.63
<LOANS-NON> 8,246 4,201
<LOANS-PAST> 1,536 92
<LOANS-TROUBLED> 599 651
<LOANS-PROBLEM> 4,600 2,700
<ALLOWANCE-OPEN> 5,037 5,787
<CHARGE-OFFS> 4,564 2,450
<RECOVERIES> 305 110
<ALLOWANCE-CLOSE> 7,040 5,037
<ALLOWANCE-DOMESTIC> 6,391 4,996
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 649 41
<FN>
<F1>INCLUDES MORTGAGE LOANS HELD FOR SALE OF 29,487
<F2>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF 331
<F3>EXCLUDES MORTGAGE LOANS HELD FOR SALE
</FN>
</TABLE>
<TABLE> <S> <C>
<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 OF EACH PERIOD AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 22,780 24,558 31,171
<INT-BEARING-DEPOSITS> 318 310,740 5
<FED-FUNDS-SOLD> 15,320 19,378 31,641
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 34,796 34,933 34,012
<INVESTMENTS-CARRYING> 14,986 15,018 20,045
<INVESTMENTS-MARKET> 15,209 19,133 20,614
<LOANS> 335,083<F1> 322,291<F3> 299,645<F5>
<ALLOWANCE> 7,085 7,548 7,989
<TOTAL-ASSETS> 460,990 441,568 448,881
<DEPOSITS> 404,807 387,022 392,670
<SHORT-TERM> 5,204 4,830 5,282
<LIABILITIES-OTHER> 8,860 6,440 6,694
<LONG-TERM> 12,000 12,000 12,000
0 0 0
5,750 5,750 5,750
<COMMON> 19,471 19,613 19,640
<OTHER-SE> 4,898<F2> 5,913<F4> 6,845<F6>
<TOTAL-LIABILITIES-AND-EQUITY> 460,990 441,568 448,881
<INTEREST-LOAN> 8,628 17,024 24,922
<INTEREST-INVEST> 829 1,687 2,601
<INTEREST-OTHER> 281 515 902
<INTEREST-TOTAL> 9,738 19,226 28,425
<INTEREST-DEPOSIT> 4,288 8,134 11,849
<INTEREST-EXPENSE> 4,649 8,806 12,866
<INTEREST-INCOME-NET> 5,089 10,420 15,559
<LOAN-LOSSES> 585 1,170 1,635
<SECURITIES-GAINS> 1 (7) 23
<EXPENSE-OTHER> 6,513 12,067 17,307
<INCOME-PRETAX> 1,000 2,527 2,389
<INCOME-PRE-EXTRAORDINARY> 1,000 1,464 2,053
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 580 1,464 2,053
<EPS-PRIMARY> .17 .45 .74
<EPS-DILUTED> .16 .43 .70
<YIELD-ACTUAL> 4.85 5.45 5.19
<LOANS-NON> 9,670 9,133 10,275
<LOANS-PAST> 746 1,288 174
<LOANS-TROUBLED> 1,622 1,117 1,112
<LOANS-PROBLEM> 2,585 3,600 1,940
<ALLOWANCE-OPEN> 7,085 7,040 7,040
<CHARGE-OFFS> 575 755 1,027
<RECOVERIES> 35 93 341
<ALLOWANCE-CLOSE> 7,085 7,548 7,989
<ALLOWANCE-DOMESTIC> 6,403 7,548 6,675
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 683 911 1,314
<FN>
<F1>EXCLUDES MORTGAGE LOANS HELD FOR SALE 19,064.
<F2>INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE OF 602.
<F3>EXCLUDES MORTGAGE LOANS HELD FOR SALE $9,548.
<F4>INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE OF
(360).
<F5>EXCLUDES MORTGAGE LOANS HELD FOR SALE $14,746.
<F6>INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE OF (241).
</FN>
</TABLE>
<TABLE> <S> <C>
<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 OF EACH PERIOD,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 26,147 20,495 18,606
<INT-BEARING-DEPOSITS> 321 314 312
<FED-FUNDS-SOLD> 13,977 6,151 12,311
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 39,246 42,067 25,733
<INVESTMENTS-CARRYING> 6,795 5,935 22,637
<INVESTMENTS-MARKET> 6,795 5,935 22,929
<LOANS> 335,632<F1> 338,137<F3> 350,399<F5>
<ALLOWANCE> 6,380 7,034 6,985
<TOTAL-ASSETS> 560,843 520,993 534,507
<DEPOSITS> 474,692 443,020 446,380
<SHORT-TERM> 31,129 23,238 31,628
<LIABILITIES-OTHER> 10,918 10,729 13,191
<LONG-TERM> 12,000 12,000 12,000
0 0 0
5,750 5,750 5,750
<COMMON> 18,794 19,193 19,262
<OTHER-SE> 7,560<F2> 7,063<F4> 6,296<F6>
<TOTAL-LIABILITIES-AND-EQUITY> 560,843 520,993 534,507
<INTEREST-LOAN> 10,398 21,243 31,652
<INTEREST-INVEST> 718 1,465 2,270
<INTEREST-OTHER> 377 624 873
<INTEREST-TOTAL> 11,493 23,332 34,795
<INTEREST-DEPOSIT> 5,343 10,363 15,204
<INTEREST-EXPENSE> 5,994 11,751 17,316
<INTEREST-INCOME-NET> 5,499 11,581 17,479
<LOAN-LOSSES> 1,515 2,830 3,375
<SECURITIES-GAINS> 17 (8) (8)
<EXPENSE-OTHER> 8,091 17,158 27,839
<INCOME-PRETAX> 1,478 1,589 190
<INCOME-PRE-EXTRAORDINARY> 1,478 1,589 190
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 886 924 190
<EPS-PRIMARY> .29 .26 (.08)
<EPS-DILUTED> .28 .25 (.08)
<YIELD-ACTUAL> 4.32 4.58 4.73
<LOANS-NON> 6,563 7,074 8,917
<LOANS-PAST> 56 121 130
<LOANS-TROUBLED> 598 256 757
<LOANS-PROBLEM> 2,288 2,834 4,694
<ALLOWANCE-OPEN> 5,037 5,037 5,037
<CHARGE-OFFS> 199 902 1,532
<RECOVERIES> 27 69 105
<ALLOWANCE-CLOSE> 6,380 7,034 6,985
<ALLOWANCE-DOMESTIC> 5,961 6,383 6,271
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 419 651 714
<FN>
<F1>EXCLUDES MORTGAGE LOANS HELD FOR SALE OF 110,978
<F2>INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE OF 181
<F3>17 EXCLUDES MORTGAGE LOANS HELD FOR SALE OF 79,766
<F4>27 INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR SALE
OF 604
<F5>EXCLUDES MORTGAGE LOANS HELD FOR SALE OF 81,105
<F6>INCLUDES UNREALIZED LOSS ON INVESTMENT SECURITIES AVAILABLE FOR
SALE OF 454
</FN>
</TABLE>
