<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-19231
REDWOOD EMPIRE BANCORP
(Exact name of Registrant as specified in its charter)
California 68-0166366
(State or other jurisdiction of (IRS Employer
Incorporated or organization) Identification No.)
111 Santa Rosa Avenue, Santa Rosa, California 95404-4905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (707) 573-4800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 During
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. August 5, 1998: 3,364,181
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This page is page 1 of 24 pages.
<PAGE>
REDWOOD EMPIRE BANCORP
AND
SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Operations
Three and Six Months ended June 30, 1998 and 1997 .......... 3
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 ........................ 4
Consolidated Statements of Cash Flows
Six Months Ended June 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
PART II. Other Information
ITEM 2. Changes in Securities ...................................... 22
ITEM 4. Submission of Matters to a Vote of Security Holders ........ 22
ITEM 6. Exhibits and Reports on Item 8-K ........................... 23
SIGNATURES ................................................................ 24
</TABLE>
This page is page 2 of 24 pages.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $6,814 $8,396 $13,668 $17,024
Interest on investment securities 1,099 852 2,225 1,681
Interest on federal funds sold 310 237 636 515
Interest on time deposits due from
financial institutions -- 3 -- 6
-------------------------- --------------------------
Total interest income 8,223 9,488 16,529 19,226
Interest expense:
Interest on deposits 3,257 3,846 6,638 8,134
Interest on subordinated notes 277 276 554 554
Interest on other borrowings 75 35 149 118
-------------------------- --------------------------
Total interest expense 3,609 4,157 7,341 8,806
-------------------------- --------------------------
Net interest income 4,614 5,331 9,188 10,420
Provision for loan losses 510 585 1,020 1,170
-------------------------- --------------------------
Net interest income after loan loss provision 4,104 4,746 8,168 9,250
Other operating income:
Service charges on deposit accounts 267 285 541 581
Merchant draft processing, net 605 370 1,046 792
Loan servicing income 105 199 284 515
Net realized gain on sale of
investment securities available for sale -- (8) 105 (7)
Gain on sale of loans and loan servicing 1,655 823 2,602 2,330
Mortgage loan brokerage revenue, net 1,230 479 2,314 812
Other income 263 187 560 321
-------------------------- --------------------------
Total other operating income 4,125 2,335 7,452 5,344
Other operating expense:
Salaries and employee benefits 3,388 2,500 6,391 6,154
Occupancy and equipment expense 841 758 1,650 1,643
Other 2,079 2,296 3,916 4,270
-------------------------- --------------------------
Total other operating expense 6,308 5,554 11,957 12,067
-------------------------- --------------------------
Income before income taxes 1,921 1,527 3,663 2,527
Provision for income taxes 710 643 1,345 1,063
-------------------------- --------------------------
Net income 1,211 884 2,318 1,464
Dividends on preferred stock -- 112 112 224
-------------------------- --------------------------
Net income available for common stock shareholders $1,211 $ 772 $ 2,206 $ 1,240
-------------------------- --------------------------
-------------------------- --------------------------
Earnings per common share and common equivalent share:
Basic earnings per share $ .39 $ .28 $ .74 $ .45
Weighted average shares 3,141,000 2,777,000 2,967,000 2,766,000
Diluted earnings per share $ .35 $ .26 $ .67 $ .44
Weighted average shares 3,463,000 3,364,000 3,454,000 3,352,000
</TABLE>
This page is page 3 of 24 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Cash and due from banks $ 44,205 $ 21,505
Federal funds sold and repos 11,504 34,553
-------- ------------
Cash and cash equivalents 55,709 56,058
Interest bearing deposits due from financial institutions 6 6
Investment securities:
Held to maturity (market value of $35,038 and $31,273) 34,772 30,658
Available for sale, at market 34,132 41,907
-------- ------------
Total investment securities 68,904 72,565
Mortgage loans held for sale 34,392 16,929
Loans:
Residential real estate mortgage 90,699 93,516
Commercial real estate mortgage 57,507 57,425
Commercial 64,172 69,097
Real estate construction 39,625 55,031
Installment and other 6,189 9,200
Less deferred loan fees (1,915) (1,873)
-------- ------------
Total portfolio loans 256,277 282,396
Less allowance for loan losses (7,930) (7,645)
-------- ------------
Net loans 248,347 274,751
Premises and equipment, net 4,289 4,055
Mortgage servicing rights 463 620
Other real estate owned 5,257 6,352
Cash surrender value of life insurance 3,503 2,929
Other assets and interest receivable 10,344 12,454
-------- ------------
Total assets $431,214 $446,719
-------- ------------
-------- ------------
Deposits:
Noninterest bearing demand deposits $ 97,050 $ 98,915
Interest-bearing transaction accounts 138,245 149,939
Time deposits $100,000 and over 57,703 53,878
Other time deposits 80,571 88,689
-------- ------------
Total deposits 373,569 391,421
Other borrowings 6,341 2,341
Subordinated notes 12,000 12,000
Other liabilities and interest payable 3,500 7,714
-------- ------------
Total liabilities 395,410 413,476
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 3,364,181 and 2,785,261 shares 25,744 19,656
Retained earnings 10,096 8,024
Unrealized loss on investment securities carried as,
or transferred from available for sale, net of income taxes (36) (187)
-------- ------------
Total shareholders' equity 35,804 33,243
-------- ------------
Total liabilities and shareholders' equity $431,214 $446,719
-------- ------------
-------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
This page is page 4 of 24 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,318 $ 1,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net 526 330
Net realized gains on securities available for sale (105) 7
Loans originated for sale (220,571) (92,081)
Proceeds from sale of loans held for sale 208,900 128,796
Gain on sale of loans and loan servicing (2,602) (2,330)
Provision for loan losses 1,020 1,170
Change in other assets and interest receivable 1,522 9,563
Change in other liabilities and interest payable (4,207) (4,901)
Noncash restructuring charge -- --
Other, net 430 386
--------- --------
Total adjustments (15,087) 40,940
--------- --------
Net cash (used in) and provided by operating activities (12,769) 42,404
--------- --------
Cash flows from investing activities:
Net change in loans 19,980 6,000
Proceeds from sales of loans in portfolio 288 1,973
Purchases of investment securities available for sale (14,079) (7,971)
Purchases of investment securities held to maturity (11,131) (730)
Sales of investment securities available for sale 2,955 4,020
Maturities of investment securities available for sale 14,900 6,974
Maturities of investment securities held to maturity 11,382 500
Premises and equipment, net (1,020) (540)
Purchase of mortgage servicing rights (11) (155)
Noninterest bearing demand deposits -- 7
Proceeds from sale of other real estate owned 3,034 846
--------- --------
Net cash provided by investment activities 26,298 10,924
--------- --------
Cash flows from financing activities:
Change in noninterest bearing transaction accounts (1,865) 4,468
Change in interest bearing transaction accounts (11,693) (9,050)
Change in time deposits (4,294) (44,846)
Change in borrowings 4,000 (5,477)
Issuance of stock 219 264
Dividends paid (245) (224)
--------- --------
Net cash used in financing activities (13,878) (54,865)
--------- --------
Net change in cash and cash equivalents (349) (1,537)
Cash and cash equivalents at beginning of period 56,058 45,473
--------- --------
Cash and cash equivalents at end of period $ 55,709 $ 43,936
--------- --------
--------- --------
</TABLE>
(Continued)
This page is page 5 of 24 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
--------- --------
<S> <C> <C>
Supplemental Disclosures:
Cash paid during the period for:
Interest expense 5,261 10,581
Noncash investing and financing activities:
Transfers from loans to other real estate owned 2,534 2,591
Loans to facilitate sale of other real estate owned -- --
Transfer from mortgage loans held for sale to loans 5,564 1,377
Conversion of Preferred Stock into Common Stock 5,739 --
</TABLE>
This page is page 6 of 24 pages.
<PAGE>
REDWOOD EMPIRE BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements should be
read in conjunction with the financial statements and related notes contained
in Redwood Empire Bancorp's 1997 Annual Report to Shareholders. The
statements include the accounts of Redwood Empire Bancorp ("Redwood"), and
its wholly owned subsidiary, National Bank of the Redwoods ("NBR"). All
significant inter-company balances and transactions have been eliminated. The
financial information contained in this report reflects all adjustments
which, in the opinion of management, are necessary for a fair presentation of
the results of the interim periods. All such adjustments are of a normal
recurring nature. The results of operations and cash flows for the six months
ended June 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.
This page is page 7 of 24 pages.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
------ ------ ------ ------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Basic Earnings per share:
Net income $1,211 $ 884 $2,318 $1,464
Less: Preferred stock dividend --- 112 112 224
------ ------ ------ ------
Net income available to common stock shareholders $1,211 $ 772 $2,206 $1,240
------ ------ ------ ------
------ ------ ------ ------
Weighted average common shares outstanding 3,141 2,777 2,967 2,766
------ ------ ------ ------
------ ------ ------ ------
Basic earnings per share $ 0.39 $ 0.28 $ 0.74 $ 0.45
------ ------ ------ ------
------ ------ ------ ------
Diluted Earnings per share:
Net income available to common stock shareholders $1,211 $ 772 $2,206 $1,240
Dilutive effect of Preferred Stock dividend -- 112 112 224
------ ------ ------ ------
$1,211 $ 884 $2,318 $1,464
------ ------ ------ ------
------ ------ ------ ------
Weighted average common shares outstanding 3,141 2,777 2,967 2,766
Effect of outstanding stock options 156 88 155 87
Effect of Convertible Preferred Stock 166 499 332 499
------ ------ ------ ------
3,463 3,364 3,454 3,352
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings per share $ 0.35 $ 0.26 $ 0.67 $ 0.44
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
4. Change in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual financial
statement. For example, other comprehensive earnings may include foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will be
reclassified, as required.
The Company's total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income as reported $1,211 $ 884 $ 2,318 $ 1,464
Other comprehensive income
(net of tax):
Change in unrealized holding
gain (losses) on available
for sale securities 132 242 151 (29)
Reclassification adjustment -- (4) (25) (5)
--------- ---------- --------- ----------
Total comprehensive income $1,343 $ 1,122 $ 2,444 $ 1,430
--------- ---------- --------- ----------
--------- ---------- --------- ----------
</TABLE>
This page is page 8 of 24 pages.
<PAGE>
5. Preferred Stock Redemption
On March 19, 1998 the Company called for redemption of its outstanding
7.8% Noncumulative Convertible Perpetual Preferred Stock, Series A. The
redemption notice provided that all shares will be redeemed on April 30, 1998
at $10.39 per share, payable to shareholders of record as of March 27, 1998,
who surrender their preferred stock certificates to the conversion agent,
Chase Mellon Shareholder Services LLC. The preferred stock 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 May 19, 1998 the Board of Directors declared a quarterly cash
dividend of 4 cents per share on the Company's Common Stock. The dividend is
payable on July 15, 1998 to shareholders of record on June 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. The Company
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.
This page is page 9 of 24 pages.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Redwood Empire Bancorp ("Redwood," and with its subsidiaries the
"Company") is a financial institution holding company headquartered in Santa
Rosa, California. Redwood has one subsidiary, National Bank of the Redwoods,
a national bank ("NBR").
Certain statements in this quarterly report on Form 10-Q include
forward-looking information within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the "safe harbor"
created by those sections. These forward-looking statements involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Such risks and uncertainties
include, but are not limited to, the following factors: competitive pressure
in the banking industry; changes in the interest rate environment; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; and changes in business conditions, volatility of
rate sensitive deposits, operational risks including data processing system
failures or fraud; asset/liability matching risks and liquidity risks; and
changes in the securities markets. In addition, such risks and uncertainties
include mortgage banking activities, merchant card processing and
concentration of lending activities all of which have been described in
"Certain Important Considerations for Investors".
The following sections discuss significant changes and trends in
financial condition, capital resources and liquidity of the Company from
December 31, 1997 to June 30, 1998, and significant changes and trends in the
Company's results of operations for the three and six months ended June 30,
1998, compared to the same period in 1997.
SUMMARY OF FINANCIAL RESULTS
The Company reported net income of $1,211,000 ($.35 per share, diluted)
for the three months ended June 30, 1998, compared to $884,000 ($.26 per
share, diluted) for the same period in 1997. Net income for the six months
ended June 30, 1998 was $2,318,000 ($.67 per share, diluted) compared to
$1,464,000 ($.43 per share, diluted). The increase in net income for the
second quarter in 1998 when compared to the same period one year ago is due
to a decline of $717,000 in net interest income, an increase of $1,790,000 in
non interest income, and an increase of $754,000 in non interest expense. The
increase in net income during the first six months of 1998 when compared to
the same period in 1997 is due to a decline of $1,232,000 in net interest
income, an increase of $2,108,000 in non interest income, and a decrease of
$110,000 in non interest expense.
This page is page 10 of 24 pages.
<PAGE>
NET INTEREST INCOME
Net interest income decreased $717,000 during the second quarter of 1998
compared to the second quarter of 1997. The decrease is primarily due to a
decrease in average earning assets of $20,785,000 or 5%. Net interest margin
for the quarter ended June 30, 1998 amounted to 4.90% as compared to 5.37%
one year ago.
Net interest income of $9,188,000 declined $1,232,000 or 12% for the six
months ended June 30, 1998 when compared to the same period one year ago. The
decrease is primarily due to a decline in earning assets of $33,653,000 or
8%. Net interest margin for the first six months of 1998 was 4.81% as
compared to 5.02% for the same period one year ago.
The decline in earning assets during the second quarter is due
principally to the decline in average portfolio loans of $58,548,000 being
offset by an increase in average investment securities and mortgage loans
held for sale of $13,773,000 and $8,689,000. The decline in portfolio loans
is attributable to interest rate driven prepayments of mortgage loans, the
overall competitive environment, strict credit control and management's
desire 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 half of 1998 when
compared to the same period one year ago. Average earning assets amounted to
$381,807,000 during the six month period ended June 30, 1998 as compared to
$415,460,000 in 1997. The decline in average earning assets during the first
six 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.
The net interest margin for the second quarter declined from 5.37% in
1997 to 4.90% in 1998. Yield on earning assets decreased from 9.55% to 8.74%
primarily as a result of payoff of a substantial non accrual loan, including
interest, in the second quarter of 1997 and 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 $138,409,000
for the second quarter as compared to $174,301,000 one year ago, which
results in a decline of $35,892,000 or 21%. This reduction in higher cost
liabilities had an effect on overall yield paid for interest-bearing
liabilities. Such yield declined to 4.75% from 5.15% in the second quarter of
1998 compared to the same quarter in 1997.
The net interest margin for the first six months of 1998 amounted to
4.81% as compared to 5.02% in the same period one year ago. Yield on earning
assets declined from 9.26% in 1997 as compared to 8.66% in 1998. Cost of
interest bearing liabilities declined from 5.08% in 1997 to 4.83% in 1998.
This page is page 11 of 24 pages.
<PAGE>
The following is an analysis of the net interest margin:
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1998 June 30, 1997
------------------------------------- -------------------------------------
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets (1) $376,513 $8,223 8.74 $397,298 $9,488 9.55
Interest-bearing liabilities 304,101 3,609 4.75 322,977 4,157 5.15
------- -------
Net interest income $4,614 $5,331
------- -------
------- -------
Net interest income to
earning assets 4.90 5.37
</TABLE>
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------------------------------- -------------------------------------
Average % Average %
(dollars in thousands) Balance Interest Yield Balance Interest Yield
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets (1) $381,807 $16,529 8.66 $415,460 $19,226 9.26
Interest-bearing liabilities 303,984 7,342 4.83 346,739 8,806 5.08
------- -------
Net interest income $ 9,187 $10,420
------- -------
------- -------
Net interest income to
earning assets 4.81 5.02
</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 six months ended June 30, 1998 and 1997.
Changes not solely attributable to rate or volume have been allocated to rate.
<TABLE>
<CAPTION>
Three month periods ending
June 30, 1998 over June 30, 1997
--------------------------------------
Volume Rate Total
--------------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans ($1,687) ($79) ($1,766)
Mortgage loans held for sale 264 (79) 185
Investment securities 620 (370) 250
Interest-earning deposits with other institutions (6) -- (6)
Federal funds sold 103 (30) 73
--------------------------------------
Total increase (decrease) (706) (558) (1,264)
--------------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts (109) (52) (161)
Time deposits (280) (147) (427)
Other borrowings 179 (138) 41
--------------------------------------
Total increase (decrease) (210) (337) (547)
--------------------------------------
Increase in net interest income ($496) ($221) ($717)
--------------------------------------
--------------------------------------
</TABLE>
This page is page 12 of 24 pages.
<PAGE>
<TABLE>
<CAPTION>
Year to date June 30, 1998
over June 30, 1997
--------------------------------------
Volume Rate Total
--------------------------------------
(in thousands)
<S> <C> <C> <C>
Increase (decrease) in interest income:
Portfolio loans ($3,279) ($179) ($3,458)
Mortgage loans held for sale 371 (268) 103
Investment securities 812 (268) 544
Interest-earning deposits with other institutions (6) -- (6)
Federal funds sold 169 (48) 121
--------------------------------------
Total increase (decrease) (1,933) (763) (2,696)
--------------------------------------
Increase (decrease) in interest expense:
Interest-bearing transaction accounts (156) (95) (251)
Time deposits (1,040) (204) (1,244)
Other borrowings 42 (11) 31
--------------------------------------
Total increase (decrease) (1,154) (310) (1,464)
--------------------------------------
Increase in net interest income ($779) ($453) ($1,232)
--------------------------------------
--------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 1998
amounted to $510,000 as compared to $585,000 in the same quarter in the
previous year. For the six months ended June 30, 1998, the provision
decreased $150,000 from $1,170,000 in 1997 to $1,020,000 in 1998. For further
discussion see Allowance for Loan Losses.
OTHER OPERATING INCOME AND EXPENSE AND INCOME TAXES
Other Operating Income
The following table sets forth the components of the Company's other
operating income for the six months ended June 30, 1998, as compared to the
same period in 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ % ----------------- %
(dollars in thousands) 1998 1997 Change 1998 1997 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts 267 285 (6) 541 581 (7)
Merchant draft processing, net 605 370 64 1,046 792 32
Loan servicing income 105 199 (47) 284 515 (45)
Gain (loss) on securities -- (8) (100) 105 (7) (1,600)
Gain on sale of loans and servicing 1,655 823 101 2,602 2,330 12
Mortgage brokerage revenue, net 1,230 479 157 2,314 812 185
Other income 263 187 41 560 321 74
------ ------ ------ ------
Total other operating income $4,125 $2,335 77 $7,452 $5,344 39
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
This page is page 13 of 24 pages.
<PAGE>
Other operating income increased $1,790,000 or 77% to $4,125,000 for the
second quarter of 1998 when compared to $2,335,000 for the same period in
1997. Such increase is primarily due to an increase of $832,000 in gain on
sale of loans and servicing, an increase of $751,000 in net mortgage loan
brokerage revenue, and an increase of $235,000 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 $1,230,000 in the second quarter of 1998 as
compared to $479,000 in 1997 and $2,314,000 for the six month period ending
June 30, 1998 when compared to $812,000 for the six months ended June 30,
1997. 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.
Other operating income amounted to $7,452,000 for the six months ended
June 30, 1998 as compared to $5,344,000 the same period in 1997. The increase
of $2,108,000 is primarily attributable to increases in mortgage loan
brokerage revenue, merchant card processing, net revenue, and gain on sale of
loans and loan servicing.
Other Operating Expense
Other operating expense increased by $754,000 or 14% to $6,308,000
during the second quarter of 1998 compared to $5,554,000 for the second
quarter of 1997, primarily due to an increase in salary and benefits to
accommodate the favorable mortgage loan environment. Other operating expense
decreased 1% to $11,957,000 from $12,067,000 for the six months ended June
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 six months ended June 30, 1998, as compared to
the same period in 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ % ----------------- %
(dollars in thousands) 1998 1997 Change 1998 1997 Change
------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $3,388 $2,500 36 $ 6,391 $ 6,154 4
Occupancy and equipment expense 841 758 11 1,650 1,643 0
Other 2,079 2,296 (9) 3,916 4,270 (8)
------ ------ ------- -------
Total other operating expense $6,308 $5,554 14 $11,957 $12,067 (1)
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
This page is page 14 of 24 pages.
<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 36.96% and 36.72% for the three and six months ended June 30, 1998,
compared to 42.0% and 42.1% for the same periods in 1997. The decline in the
Company's effective tax rate in the second quarter and first six months of
1998 is due to recording the benefit of certain items arising in previous
years.
INVESTMENT SECURITIES
Total investment securities decreased $3,661,000 or 5% to $68,904,000 as
of June 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 $11,900,000 in the
first six months of 1998. As a result of this action the Company recorded
$70,000 as gain on sale in the first quarter of 1998.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale increased $17,463,000 or 103% to
$34,392,000 at June 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.
LOANS
Total loans decreased $26,119,000 or 9% to $256,277,000 at June 30, 1998
compared to $282,396,000 at December 31, 1997. The decline in portfolio loans
is 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.
This page is page 15 of 24 pages.
<PAGE>
The following table summarizes the composition of the loan portfolio at
June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
---------------------- ----------------------
(dollars in thousands) Amount % Amount %
---------------------- ----------------------
<S> <C> <C> <C> <C>
Residential real estate mortgage $ 90,699 37% $ 93,516 33%
Commercial real estate mortgage 57,507 22 57,425 20
Commercial 64,172 25 69,097 24
Real estate construction 39,625 15 55,031 21
Installment and other 6,189 2 9,200 3
Less deferred fees (1,915) (1) (1,873) (1)
---------------------- ----------------------
Total loans 256,277 100% 282,396 100%
--- ---
--- ---
Less allowance for loan losses (7,930) (7,645)
-------- --------
Net loans $248,347 $274,751
-------- --------
-------- --------
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges to earnings
in the form of the provision for loan losses. Loan losses are charged to, and
recoveries are credited to, the allowance for loan losses. The provision for
loan losses is determined after considering various factors such as loan loss
experience, current economic conditions, maturity of the portfolio, size of
the portfolio, industry concentrations, borrower credit history, the existing
allowance for loan losses, independent loan reviews, current charges and
recoveries to the allowance for loan losses, and the overall quality of the
portfolio, as determined by management, regulatory agencies, and independent
credit review consultants retained by the Company.
The adequacy of the Company's allowance for loan losses is based on
specific and formula allocations to the Company's loan portfolio. Specific
allocations of the allowance for loan losses are made to identified problem
or potential problem loans. The specific allocations are increased or
decreased through management's reevaluation of the status of the particular
problem loans. Loans which do not receive a specific allocation receive an
allowance allocation based on a formula, represented by a percentage factor
based on underlying collateral, type of loan, historical charge-offs and
general economic conditions and other qualitative factors.
This page is page 16 of 24 pages.
<PAGE>
The following table summarizes the Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
---------------------- ----------------------
(dollars in thousands) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Beginning allowance for loan losses $7,649 $7,085 $7,645 $7,040
Provision for loan losses 510 585 1,020 1,170
Charge-offs (334) (180) (871) (755)
Recoveries 105 58 136 93
------ ------ ------ ------
Ending allowance for loan losses $7,930 $7,548 $7,930 $7,548
------ ------ ------ ------
------ ------ ------ ------
Net charge-offs to average
loans (annualized) .32% .14% .56% .40%
</TABLE>
The allowance for loan losses as a percentage of portfolio loans
increased from 2.71% at December 31, 1997 to 3.09% at June 30, 1998. The
increase in this percentage is due to a $26,119,000 decline in the Company's
total loan portfolio.
NONPERFORMING ASSETS
The following table summarizes the Company's nonperforming assets.
<TABLE>
<CAPTION>
June 30, December, 31
(dollars in thousands) 1998 1997
-------- ------------
<S> <C> <C>
Nonaccrual loans $ 6,390 $ 7,883
Accruing loans past due 90 days or more 36 735
Restructured loans 1,057 1,109
-------- ------------
Total nonperforming loans 7,483 9,727
Other real estate owned 5,257 6,352
Other assets owned 377 542
-------- ------------
Total nonperforming assets $13,117 $16,621
-------- ------------
-------- ------------
Nonperforming assets to total assets 3.04% 3.72%
</TABLE>
Nonperforming assets have decreased from $16,621,000 as of December 31,
1997 to $13,117,000 as of June 30, 1998. The principal reasons for this
decrease relate to a decrease in nonaccrual loans of $2,244,000, a decrease
in other real estate owned of $1,095,000 and a decrease in accruing loans
past due 90 days or more of $699,000.
This page is page 17 of 24 pages.
<PAGE>
Nonperforming loans consist of loans to 46 borrowers, 22 of which have
balances in excess of $100,000. The two largest have recorded balances of
$886,000 and $737,000, both secured by real estate. Based on information
currently available, management believes that adequate reserves are included
in the allowance for loan losses to cover any loss exposure that may result
from these loans.
Other real estate owned consists of 30 properties. 19 properties are
residential, 7 construction lots and the remaining are undeveloped acres and
commercial buildings. Other assets owned included contract receivable rights
and repossessed personal property carried at $377,000.
Although the volume of nonperforming assets will depend in part on the
future economic environment, there are also two loan relationships which
total approximately $1,323,000 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.
In the first six months of 1998 the Company was required by various
mortgage loan investors to repurchase six non performing residential mortgage
loans. From time to time the Company may be required to repurchase mortgage
loans from investors depending upon representations and warranties of the
purchase agreement between the investor and the Company. Such representations
and warranties include valid appraisal, status of borrower, first payment
default or fraud. Primarily these repurchases involve loans which are in
default. The Company expects that it may be required to repurchase loans in
the future. The Company maintains a reserve for its estimate of potential
losses associated with the potential repurchase of previously sold mortgage
loans. Such reserve amounts to $257,000 as of June 30, 1998.
At June 30, 1998 the Company's total recorded investment in impaired
loans (as defined by SFAS 114 and 118) was $11,788,000 of which $9,558,000
relates to the recorded investment for which there is a related allowance for
credit losses of $2,158,000 determined in accordance with these statements
and $2,230,000 relates to the amount of that recorded investment for which
there is no related allowance for credit losses determined in accordance with
these standards.
The average recorded investment in the impaired loans during the six
months ended June 30, 1998 and June 30, 1997 was $11,888,000 and $17,377,000;
the related amount of interest income recognized during the periods that such
loans were impaired was $200,000 and $317,000 for the three and six month
period ended June 30, 1998 and $534,000 and $520,000 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.
This page is page 18 of 24 pages.
<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, dividend payments
made to the preferred stock holders, and operating expenses of the parent. It
is Redwood's general policy to retain liquidity at Redwood at a level which
management believes to be consistent with the safety and soundness of the
Company as a whole. As of June 30, 1998, Redwood held $2,353,000 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 six months of 1998, NBR declared dividends of $600,000.
Management believes that at June 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 six months ended
June 30, 1998 the Company received $12,769,000 and $26,298,000 in cash flows
from operating and investing activities while using $13,878,000 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.
This page is page 19 of 24 pages.
<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 June
30, 1998.
<TABLE>
<CAPTION>
Company NBR
---------------------
<S> <C> <C>
June 30, 1998
Total capital to risk based assets 15.76% 14.85%
Tier 1 capital to risk based assets 10.75 12.64
Leverage ratio 8.10 9.62
December 31, 1997
Total capital to risk based assets 14.64 13.83
Tier 1 capital to risk based assets 9.72 11.65
Leverage ratio 7.10 8.58
</TABLE>
CERTAIN IMPORTANT CONSIDERATIONS FOR INVESTORS
MORTGAGE BANKING 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.
This page is page 20 of 24 pages.
<PAGE>
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.
CONCENTRATION OF LENDING ACTIVITIES. Concentration of the Company's
lending activities in the real estate sector, including construction loans
could have the effect of intensifying the impact on the Company of adverse
changes in real estate market in the Company's lending areas. At June 30,
1998, approximately 73% of the Company's loans were secured by real estate,
of which 31% were secured by commercial real estate, including small office
buildings, owner-user office/warehouses, mixed use residential and commercial
properties and retail properties. Substantially all of the properties that
secure the Company's present loans are located within Northern and Central
California. The ability of the Company to continue to originate mortgage or
construction loans may be impaired by adverse changes in local or regional
economic conditions, adverse changes in the real estate market, increasing
interest rates, or acts of nature (including earthquakes, which may cause
uninsured damage and other loss of value to real estate that secures the
Company's loans). Due to the concentration of the Company's real estate
collateral, such events could have a significant adverse impact on the value
of such collateral or the Company's earnings.
This page is page 21 of 24 pages.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 19, 1998 the Company called for redemption of its
outstanding 7.8% Noncumulative Convertible Perpetual Preferred Stock
Series A. The redemption notice provided that all shares will be
redeemed on April 30, 1998 at $10.39 per share, payable to
shareholders of record as of March 27, 1998, who surrender their
preferred stock certificates to the conversion agent, Chase Mellon
Shareholder Services LLC. The preferred stock is convertible at the
option of the holder, into 0.8674 shares of common stock for each
share of preferred stock. The total number of shares subject to
redemption will be reduced by the number of shares of preferred
stock converted into common stock between the record date and the
redemption date.
As a result of the redemption 573,290 shares of the preferred
shares were converted into 497,865 shares of common stock effective
April 30, 1998. Preferred shares to be redeemed for cash at $10.39
per share amounted to 1,017.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on May 19, 1998.
(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 the nominated directors was as follows:
<TABLE>
<CAPTION>
Broker
Nominee For Withheld Abstain Non-Vote
- ------- --- -------- ------- --------
<S> <C> <C> <C> <C>
Haskell E. Boyett 2,590,801 52,850 None 174,535
Richard I. Colombini 2,590,589 53,062 NONE 174,535
Robert D. Cook 2,595,721 47,930 None 174,535
Dennis E. Kelley 2,636,051 7,600 NONE 174,535
Patrick W. Kilkenny 2,592,051 51,000 None 174,535
William B. Stevenson 2,595,644 48,007 NONE 174,535
Tom D. Whitaker 2,598,651 45,000 None 174,535
</TABLE>
This page is page 22 of 24 pages.
<PAGE>
The vote for ratifying the appointment of Deloitte & Touche LLP as the
Company's independent auditors was as follows:
<TABLE>
<S> <C>
For 2,588,171
Against 49,833
Abstain 8,347
Broker Non-Vote 174,987
</TABLE>
The vote to amend Section 2 of Article III of the Company's Bylaws was
as follows:
<TABLE>
<S> <C>
For 1,538,010
Against 153,276
Abstain 85,220
Broker Non-Vote 1,044,832
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 11
Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of
the entity. See Footnote 3 "Earnings per Share".
(b) REPORTS ON FORM 8-K
Form 8-K dated April 30, 1998 announcing first quarter 1998
financial results.
Form 8-K dated May 12, 1998 announcing the redemption of the 7.8%
Noncumulative Convertible Perpetual Preferred Stock, Series A.
Form 8-K dated May 20, 1998 announcing the reinstatement of
quarterly cash dividends on the Company's Common Stock.
This page is page 23 of 24 pages.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
REDWOOD EMPIRE BANCORP
(Registrant)
DATE: 08/13/98 BY: /s/ James E. Beckwith
-------- ---------------------
James E. Beckwith
Executive Vice President,
Chief Financial Officer,
Principal Financial Officer, and
Principal Accounting Officer
This page is page 24 of 24 pages.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
THE COMPANY'S FORM 10K FOR THE YEAR 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 55,715
<SECURITIES> 68,904
<RECEIVABLES> 0
<ALLOWANCES> 7,930
<INVENTORY> 0
<CURRENT-ASSETS> 310,236
<PP&E> 4,289
<DEPRECIATION> 0
<TOTAL-ASSETS> 431,214
<CURRENT-LIABILITIES> 383,410
<BONDS> 12,000
0
0
<COMMON> 25,744
<OTHER-SE> 10,060<F1>
<TOTAL-LIABILITY-AND-EQUITY> 431,214
<SALES> 0
<TOTAL-REVENUES> 23,981
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,957
<LOSS-PROVISION> 1,020
<INTEREST-EXPENSE> 7,341
<INCOME-PRETAX> 3,663
<INCOME-TAX> 1,345
<INCOME-CONTINUING> 2,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,318
<EPS-PRIMARY> .74
<EPS-DILUTED> .67
<FN>
<F1>INCLUDES UNREALIZED LOSS ON SECURITIES AFS OF 36
</FN>
</TABLE>
