Plummeting home-loan originations have forced Redwood Empire Bancorp to skip the dividend on its common stock in the fourth quarter.

The Santa Rosa, Calif.-based holding company announced that its thrift and commercial banking subsidiaries had suffered from the weak loan volume that has plagued mortgage banks since early 1994. As a result, Redwood withheld the 3.5-cent dividend.

"It is better to be prudent now than sorry later," said Terance O'Mahoney, president and chief executive of Redwood's thrift subsidiary, Allied Bank.

This is the second time in about three years that Redwood has not paid a cash dividend on its common stock, said Dennis E. Kelley, chief financial officer.

The company, which has $620 million of assets, voted to pay 19.5 cents a share to holders of its preferred stock, however.

Company officials said they scrapped the common dividend to pay for a restructuring charge of $815,000 in the third quarter.

Redwood's earnings per share have plummeted over the last year or so. According to Mr. Kelley, earnings per share for the year ended Sept. 30 fell to 13 cents -- down 88% from the profit the year before.

The reason: home lending.

Redwood does most of its home lending through Allied Bank. National Bank of the Redwoods originates commercial loans.

Although Allied is a thrift, it had been operating more like a mortgage bank, Mr. O'Mahoney said. He said it was focused predominantly on wholesale lending. Redwood expected that its commercial banking division, National Bank of the Redwoods, would pick up any slack if Allied's home lending volume fell off. Company officials say that did not work as planned.

The company began refocusing its attention a year ago on "the more diversified thrift approach" to home lending, Mr. O'Mahoney said.

Since then, Allied Bank has created a "B and C" lending unit. And it has pumped up its single-family construction lending and retail mortgage banking operations.

The thrift has also opened branches in Seattle and Portland, Ore., so that the company is "not totally dependent on the vagaries of the California economy."

The company now has seven branches.

Mr. O'Mahoney said wholesale lending would have a "lesser role" in the future.

Redwood should reap greater profit margins from the more labor-intensive lines of mortgage originations, Mr. O'Mahoney said.

It has laid off about 80 employees as a result of the restructuring.

"What we have done here is orient the company to take advantage of the changed market conditions," he said.

Analysts generally applauded Redwood's move. One San Francisco analyst said the company is paying the price for operating more like a mortgage bank.

He said mortgage banking had worked well when interest rates were low and falling but that rate increases, which started last February, have hurt Redwood.

Another analyst said Redwood seemed to "have a lot of work to do" yet, referring to restructuring of the home lending operation.

Dividend Strategy

Forced to skip a cash dividend, Redwood Empire will seek to turn around its thrift subsidiary with these steps

* Originating more B and C loans

* Focusing on retail lending

* Reducing its wholesale lending

* Making more construction loans

* And operating "more like a traditional thrift"

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