-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HUrFPoHlIZuXzD0LWwgUiqAQ6hcmpc6H25q0H/ZNmnbnst/q1jRcqYwcWgW19JrU r59pNIpdyvfpXtQTEWc3rg== 0000946275-97-000595.txt : 19971115 0000946275-97-000595.hdr.sgml : 19971115 ACCESSION NUMBER: 0000946275-97-000595 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDWOOD FINANCIAL INC /MN/ CENTRAL INDEX KEY: 0000942895 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 411807233 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25884 FILM NUMBER: 97717285 BUSINESS ADDRESS: STREET 1: 301 S WASHINGTON ST STREET 2: P O BOX 317 CITY: REDWOOD FALLS STATE: MN ZIP: 56283 BUSINESS PHONE: 5076378730 MAIL ADDRESS: STREET 1: 301 S WASHINGTON ST STREET 2: PO BOX 317 CITY: REDWOOD FALLS STATE: MN ZIP: 56283 10QSB 1 FORM 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------------------------------------- FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 [ ] 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 0-25884 REDWOOD FINANCIAL, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its Charter) Minnesota 41-1807233 - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation (IRS Employer Identification or organization) Number) P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota 56283-0317 - ------------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (507) 637-8730 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. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 15, 1997: Class Outstanding ----- ----------- Common stock, par value $0.10 per share 913,782 REDWOOD FINANCIAL, INC. AND SUBSIDIARY CONTENTS PART I - FINANCIAL INFORMATION Page Item 1: Financial Statements Consolidated Balance Sheets at September 30, 1997 and June 30, 1997 3 Consolidated Statements of Earnings for the Three months ended September 30, 1997 and 1996 4 Consolidated Statement of Stockholders' Equity for the Three months ended September 30, 1997 5 Consolidated Statements of Cash Flows for the Three months ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7-10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18 PART II - OTHER INFORMATION Item 1: Legal Proceedings 19 Item 2: Changes in Securities 19 Item 3: Defaults Upon Senior Securities 19 Item 4: Submission of Matters to a Vote of Security Holders 19 Item 5: Other Information 19 Item 6: Exhibits and Reports on Form 8-K 19 Signatures 20 2 REDWOOD FINANCIAL, INC., AND SUBSIDIARY PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets (Unaudited)
September 30, June 30, Assets 1997 1997 - ------------------------------------------------------------------------------------------------------------------------------ Cash $ 15,404 15,314 Interest-bearing deposits with banks 581,482 748,478 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents 596,886 763,792 - ------------------------------------------------------------------------------------------------------------------------------ Securities available for sale: Mortgage-backed and related securities (amortized cost 10,380,915 8,149,752 $10,286,229 and $8,143,694, respectively) Investment securities (amortized cost $6,992,841 and 7,008,525 6,981,250 $6,992,534, respectively) - ------------------------------------------------------------------------------------------------------------------------------ Total securities available for sale 17,389,440 15,131,002 - ------------------------------------------------------------------------------------------------------------------------------ Securities held to maturity: Mortgage-backed and related securities (market value 13,225,659 13,873,801 $13,435,893 and $14,082,280, respectively) Investment securities (market value $9,919,507 and 9,895,403 10,395,659 $10,399,446, respectively) - ------------------------------------------------------------------------------------------------------------------------------ Total securities held to maturity 23,121,062 24,269,460 - ------------------------------------------------------------------------------------------------------------------------------ Loans receivable, net 22,356,259 20,766,539 Federal Home Loan Bank stock, at cost 333,500 333,500 Accrued interest receivable 543,421 613,357 Premises and equipment, net 254,488 212,067 Real Estate, net 0 13,520 Other assets 56,121 65,679 - ------------------------------------------------------------------------------------------------------------------------------ Total Assets $ 64,651,177 62,168,916 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------------------------------------------------ Deposits 45,780,689 46,093,213 Federal Home Loan Bank advances 6,600,000 3,500,000 Advance payments by borrowers for taxes and insurance 106,983 69,744 Accrued expenses and other liabilities 178,413 163,926 - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 52,666,085 49,826,883 - ------------------------------------------------------------------------------------------------------------------------------ Common stock ($.10 par value): Authorized and issued 1,125,000 shares; outstanding 913,782 shares at September 30, 1997; 961,875 shares at June 30, 1997 112,500 112,500 Additional paid-in capital 8,471,610 8,467,833 Retained earnings, subject to certain restrictions 6,495,481 6,369,591 Net unrealized gain (loss) on securities available for sale 37,133 (3,135) Unearned employee stock ownership plan shares (512,944) (529,504) Unearned management stock bonus plan shares (285,141) (306,797) Treasury stock, at cost; 211,218 shares at September 30, 1997; 163,125 shares at June 30, 1997 (2,333,547) (1,768,455) - ------------------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 11,985,092 12,342,033 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $ 64,651,177 62,168,916 - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements 3 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Earnings (Unaudited)
Three months ended September 30, ------------------------------------- 1997 1996 --------------------------------------------------------------------------------------------------------- Interest income: Loans receivable $ 466,116 363,720 Securities held to maturity: Mortgage-backed and related securities 231,493 270,807 Investment securities 150,710 226,074 Securities available for sale: Mortgage-backed and related securities 164,797 0 Investment securities 127,746 0 Cash equivalents 13,416 49,160 - --------------------------------------------------------------------------------------------------------- Total interest income 1,154,278 909,761 Interest Expense: Deposits 634,303 507,196 Federal Home Loan Bank advances 65,284 0 - --------------------------------------------------------------------------------------------------------- Total interest expense 699,587 507,196 Net interest income 454,691 402,565 Provision for losses on loans 0 0 - --------------------------------------------------------------------------------------------------------- Net interest income after provision for losses on loans 454,691 402,565 Noninterest income: Fees and service charges 12,573 13,974 Other 878 959 - --------------------------------------------------------------------------------------------------------- Total noninterest income 13,451 14,933 Noninterest expense: Compensation and employee benefits 188,979 166,737 Advertising 6,162 3,096 Occupancy 6,658 7,603 Federal deposit insurance premiums 6,986 21,340 Professional fees 30,253 35,983 Deposit insurance fund assessment 0 237,085 Other 28,510 23,324 - --------------------------------------------------------------------------------------------------------- Total noninterest expense 267,548 495,168 - --------------------------------------------------------------------------------------------------------- Earnings before income taxes 200,594 (77,670) Income tax expense (benefit) 74,704 (40,123) - --------------------------------------------------------------------------------------------------------- Net earnings $ 125,890 (37,547) - --------------------------------------------------------------------------------------------------------- Net earnings per common share $ 0.14 (0.04) - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 881,618 995,317 - ---------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements 4 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statement of Stockholders' Equity
Net Unearned unrealized Employee Unearned gain on Stock management Additional Securities Ownership stock bonus Total Common Paid in Retained available Plan recognition Treasury stockholders' Stock Capital Earnings for sale Shares plan shares Stock equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997 112,500 8,467,833 6,369,591 (3,135) (529,504) (306,797) (1,768,455) 12,342,033 Net Earnings 125,890 125,890 Stock Repurchases (565,092) (565,092) Net unrealized gain on securities available for sale 40,268 40,268 Earned employee stock ownership plan shares 3,777 16,560 20,337 Earned management stock bonus plan shares 21,656 21,656 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1997 112,500 8,471,610 6,495,481 37,133 (512,944) (285,141) (2,333,547) 11,985,092 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited financial statements 5 REDWOOD FINANCIAL, INC., AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, ------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net earnings (loss) $ 125,890 (37,547) Adjustments to reconcile net earnings to net cash provided by operations Depreciation 3,963 4,576 Amortization of premiums and discounts on investment securities, mortgage-backed and related securities and loans receivable, net (5,207) (9,845) Decrease in other assets 9,558 19,092 Decrease in accrued interest receivable 69,936 149,006 Increase in accrued interest payable 410,917 320,011 Amortization of unearned ESOP shares 16,560 16,560 Earned ESOP shares priced above original cost 3,777 2,588 Earned Management Stock Bonus Plan shares 21,656 21,656 Increase in accrued expenses and other liabilities 13,693 133,597 Increase in deferred income taxes (26,052) 0 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 644,691 619,694 Investing Activities: Proceeds from maturities of investment securities held to maturity 500,000 600,000 Principal collected on mortgage-backed and related securities held to maturity 902,311 421,349 Purchases of mortgage-backed and related securities available for sale (2,503,927) 0 Principal collected on mortgage-backed and related securities available for sale 63,200 0 Increase in loans receivable, net (1,575,503) (715,149) Purchases of premises and equipment (46,384) (14,700) - --------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities (2,660,303) 291,500 Financing Activities: Decrease in deposits, net (723,441) (952,119) Increase in advance payments by borrowers for taxes and insurance 37,239 38,886 Proceeds from Federal Home Loan Bank advances 4,700,000 0 Repayment of Federal Home Loan Bank advances (1,600,000) 0 Repurchase of common stock (565,092) 0 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 1,848,706 (913,233) - --------------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (166,906) (2,039) Cash and cash equivalents, beginning of period 763,792 2,873,163 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 596,886 2,871,124 - --------------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash paid for interest $ 288,670 187,185 Cash paid for income taxes 62,705 51,850 Supplemental noncash disclosures: Transfer of real estate to loans 13,520 0
See accompanying notes to unaudited financial statements 6 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1997 (Unaudited) (1) Redwood Financial, Inc. Redwood Financial, Inc. (the Company) was incorporated under the laws of the State of Minnesota for the purpose of becoming the savings and loan holding company of Redwood Falls Federal Savings and Loan Association (the Association) in connection with the Association's conversion from a federally-chartered mutual savings and loan association to a federally-chartered stock savings and loan association, pursuant to its Plan of Conversion. The Company commenced on May 22, 1995 a Subscription and Community Offering of its shares (the Offering) in connection with the conversion of the Association. The Offering was closed on June 22, 1995 and the conversion was completed July 7, 1995 (see note 5). (2) Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of earnings, consolidated statement of stockholders' equity, and consolidated statements of cash flows in conformity with generally accepted accounting principles. However, all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The statements of earnings for the three months ended September 30, 1997 are not necessarily indicative of the results which may be expected for the entire year. The material contained herein is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10- KSB of Redwood Financial, Inc., which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 1997 and for the year then ended. (Continued) 7 REDWOOD FINANCIAL, INC. AND SUBSIDIARY (3) Earnings Per Share Earnings per share are based upon the weighted average number of common shares and common stock equivalents, if dilutive, outstanding during the period. The only common stock equivalents are stock options. The weighted average number of common stock equivalents is calculated using the treasury stock method. (4) Regulatory Capital Requirements At September 30, 1997, the Association met each of the three current minimum regulatory capital requirements. The following table summarizes the Association's regulatory capital position at September 30, 1997:
To Be Well Capitalized Under Prompt Corrective Actual Required Action Provisions ------ -------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Association's Net Worth $8,555 Less: AFS Market 37 Valuation Tangible Capital 8,518 13.49% $ 947 1.50% n/a n/a (to tangible assets) Core Capital 8,518 13.49% 1,894 3.00% $3,157 5.00% (to adjusted tangible assets) Core Capital 8,518 41.99% n/a n/a 1,217 6.00% (to risk-weighted assets) Plus: Allowable portion of 213 general allowance for loan losses Risk-based Capital $8,731 43.04% $1,623 8.00% $2,029 10.00% (to risk-weighted assets)
(Continued) 8 REDWOOD FINANCIAL, INC. AND SUBSIDIARY (5) Stockholders' Equity and Stock Conversion The Association converted from a federally-chartered mutual savings and loan association to a federally-chartered stock savings and loan association pursuant to its plan of Conversion which was approved by the Association's members on June 23, 1995. The conversion was effected on July 7, 1995, and resulted in the issuance of 1,125,000 shares of common stock (par value $0.10) at $8.00 per share for a gross sales price of $9,000,000. Costs related to conversion (primarily underwriters' commission, printing, and professional fees) aggregated $450,639 and were deducted to arrive at the net proceeds of $8,549,361. The Company established an employee stock ownership trust which purchased 82,748 shares of common stock of the Company at the issuance price of $8.00 per share from funds borrowed from the holding company. (6) Stock Repurchases During the three months ended September 30, 1997, the Company purchased 48,093 shares of its outstanding common stock, or 5% of its previously outstanding common stock. As a result of the stock repurchase program, the Company has now outstanding 913,782 shares of common stock. The Company has applied to the Office of Thrift Supervision for permission to repurchase an additional 5% of its outstanding stock, or 45,689 shares. The following summarizes the Company's common stock repurchases during the quarter: Date Purchased Shares Purchased Price per share -------------- ---------------- --------------- September 11, 1997 28,000 $11.75 September 12, 1997 20,093 $11.75 (7) New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS No. 128 supercedes the standards for computing EPS previously found in Accounting Principles Board (APB) Opinion No. 15, Earnings per Share. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. SFAS No. 128 requires restatement of all prior-period EPS data presented. Management is currently determining what effect SFAS No. 128 will have on the Company's earnings per share calculation. (Continued) 9 REDWOOD FINANCIAL, INC. AND SUBSIDIARY In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure," which codifies existing disclosure requirements regarding capital structure. SFAS No. 129 is not expected to have a significant impact on the Company's current capital structure disclosures. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Management is currently determining what effect adoption of this statement will have on the reporting of its financial information. (Continued) 10 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company's net earnings are dependent primarily on its net interest income, which is the difference between interest income earned on its investment and loan portfolio and interest paid on interest-bearing liabilities. Net interest income is determined by (1) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate spread) and (2) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows. To a lesser extent, the Company's net earnings also are affected by the level of noninterest income, which primarily consists of service charges and other fees. In addition, net earnings are affected by the level of noninterest (general and administrative) expenses. The operations of financial institutions, including the Association, are significantly affected by prevailing economic conditions, competition, and the monetary and fiscal policies of the federal government and governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the levels of personal income and savings in the Association's market area. Financial Condition The Company's total assets increased by $2,482,000, or 3.99%, from $62,169,000 at June 30, 1997 to $64,651,000 at September 30, 1997. The increase in the Company's assets reflected an increase in the level of Federal Home Loan Bank (FHLB) advances during the three months ended September 30, 1997. These advances were used to fund increased loan production and purchases of mortgage-backed securities and to offset a net deposit outflow during the this three month period. Cash and cash equivalents decreased by $167,000, or 21.86%, from $764,000 at June 30, 1997 to $597,000 at September 30, 1997. The decrease in cash was primarily due to the use of funds for the aforementioned increase in loan production, mortgage-backed securities purchases, and net deposit outflows during the three months ended September 30, 1997. The Company continues to maintain lower levels of cash and cash equivalents in order to enhance overall yield. (Continued) 11 REDWOOD FINANCIAL, INC. AND SUBSIDIARY The Company's loans receivable, net, increased $1,589,000, or 7.65% during the three months ended September 30, 1997. The increase in loans was a result of increased loan demand in the Company's market and primarily includes 1-4 family residential mortgage loans and multifamily mortgage loans. The continued increase in the Company's loan portfolio will increase the Company's credit risk exposure. The Company's investment securities, including mortgage-backed and related securities, designated as held to maturity decreased $1,148,000, or 4.73% from June 30, 1997 to September 30, 1997. The decrease in investment securities, including mortgage-backed and related securities designated held to maturity is due to the Company's investment objective of designating select new investment security purchases, including purchases of mortgage-backed and related securities as available for sale. No securities designated held to maturity were purchased or sold during the three months ended September 30, 1997. No change in this strategy is anticipated. The Company's investment securities, including mortgage-backed securities designated available for sale increased 14.92% or $2,258,000 during the three months ended September 30, 1997. The increase primarily included the purchase of 7-year balloon mortgage-backed securities. Purchases of these mortgage-backed securities totaled approximately $2,504,000 during this three month period. In addition, the carrying value of the Company's investment securities, including mortgage-backed securities reflected a $40,000 increase due to market value appreciation. The Company's deposits, including accrued interest payable, decreased by $312,000, or 0.68%, from $46,093,000 at June 30, 1997 to $45,781,000 at September 30, 1997. At September 30, 1997, the Company's FHLB advances totaled $6,600,000, an increase of $3,100,000, or 88.57% from $3,500,000 at June 30, 1997. The advances were utilized to fund increased loan production and mortgage-backed securities purchases during this three month period. The Company may continue to increase its use of FHLB advances pending the interest rate and other terms of future advance offerings. FHLB advances provide an alternative source of funds for the Company, at costs substantially equivalent to, or lower than its retail deposit products. In order to leverage its capital, the Company may continue to seek additional deposits through traditional deposit products and new deposit products, as well as increase utilization of FHLB advances, to fund loan growth and investment purchases. (Continued) 12 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Results of Operations Net Earnings Net earnings were $126,000 for the quarter ended September 30, 1997, as compared to a net loss of $38,000 for the quarter ended September 30, 1996. This represented an increase of $164,000. The increase in net earnings was primarily attributable to the $237,000, pre-tax special assessment required by the Federal Deposit Insurance Corporation levied on thrift institutions as part of the omnibus appropriations bill of September 30, 1996. The increase in net earnings was also attributable to a $52,000 increase, or 12.90% in net interest income. The increase in net interest income was primarily a result of the use of funds obtained from recent advances to fund loan originations and to purchase investment securities, including mortgage-backed securities. Net earnings were also impacted by a $10,000 increase, or 3.88% in noninterest expense, excluding the $237,000 special assessment, and a $115,000, or 287.50% increase in income tax expense. Net Interest Income Net interest income increased by $52,000, or 12.90%, from $403,000 for the quarter ended September 30, 1996 to $455,000 for the quarter ended September 30, 1997. The increase in net interest income is due to growth of the Company over the last twelve months and a change in the mix of the Company's interest earning-assets into higher yielding loans and investment securities. The Company's average interest earning assets increased $11,474,000, or 22.35% from $51,330,000 at September 30, 1996, to $62,804,000 at September 30, 1997. Similarly, the Company's average interest-bearing liabilities increased $12,488,000, or 32.89% from $37,967,000 at September 30, 1996 to $50,455,000 at September 30, 1997. The Company's interest-bearing liabilities increased at a faster rate than its interest-earning assets due primarily to the financing of stock repurchases over the previous 12 months. The increase in net interest income was also affected by a change in the mix of the Company's interest earning assets. As a result, net interest income was also impacted by an increase in the net interest spread from 1.75% for the three months ended September 30, 1996 to 1.81% for the three months ended September 30, 1997. (Continued) 13 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Interest Income Interest income was $1,154,000 for the quarter ended September 30, 1997, as compared to $910,000 for the quarter ended September 30, 1996, representing an increase of $244,000, or 26.81%. The increase in interest income was primarily due to the aforementioned increase in interest-earning assets. The increase in interest income was also affected by an increase in the overall yield on interest-earning assets. For the quarter ended September 30, 1997, the yield on interest-earning assets was 7.35%, as compared to 7.09% for the quarter ended September 30, 1996. The increase in yield on interest-earning assets was due primarily to a change in the composition of the Company's interest-earning assets, particularly the larger loan portfolio in the quarter ended September 30, 1997. Interest on loans receivable increased by $102,000, or 28.02%, to $466,000 for the quarter ended September 30, 1997, as compared to $364,000 for the quarter ended September 30, 1996. Such increase was due to a $4,626,000, or 27.34% increase in the average balance of loans receivable from $16,922,000 for the quarter ended September 30, 1996 to $21,548,000 for the quarter ended September 30, 1997. The increase in interest on loans receivable was also affected by an increase in the average yield on loans receivable from 8.60% for the quarter ended September 30, 1996, to 8.65% for the quarter ended September 30, 1997. Since January 1997, management has designated all purchases of mortgage-backed and related securities as available for sale. As a result of this strategy, interest income on mortgage-backed and related securities held to maturity declined $40,000, or 14.76% from $271,000 for the three months ended September 30, 1996 to $231,000 for the three months ended September 30, 1997. The decrease in interest income on mortgage-backed and related securities held to maturity is a result of a $2,018,000 decrease, or 12.92% in the average balance of mortgage-backed and related securities held to maturity in comparison of the quarters ended September 30, 1997 and 1996, respectively. This decrease was also affected by a slight decrease in the yield on the mortgage-backed and related securities held to maturity from 6.93% for the quarter ended September 30, 1996, to 6.81% for the quarter ended September 30, 1997. Interest income on mortgage-backed and related securities available for sale was $165,000 and $0 for the quarters ended September 30, 1997 and 1996, respectively. The yield on the Company's mortgage-backed securities portfolio available for sale was 6.93% for the quarter ended September 30, 1997. (Continued) 14 REDWOOD FINANCIAL, INC. AND SUBSIDIARY As with the Company's mortgage-backed and related securities purchases, management has designated all purchases of investment securities as available for sale since January 1997. As a result of this strategy, interest income on investment securities held to maturity, declined $75,000, or 33.19% from $226,000 for the three months ended September 30, 1996 to $151,000 for the three months ended September 30, 1997. The net decrease in interest income on investment securities designated held to maturity is a result of a $4,812,000 decrease, or 32.43% in the average balance of investment securities held to maturity in comparison of the quarters ended September 30, 1997 and 1996, respectively. This decrease was also affected by a slight decrease in the yield on the investment securities held to maturity from 5.93% for the quarter ended September 30, 1996, to 5.78% for the quarter ended September 30, 1997. Interest income on investment securities available for sale was $128,000 and $0 for the quarters ended September 30, 1997 and 1996, respectively. The yield on the Company's investment securities portfolio designated available for sale was 7.29% for the quarter ended September 30, 1997. Interest income on cash and cash equivalents decreased by $36,000, or 73.47% for the quarters ended September 30, 1997 and 1996, respectively. The decrease is a result of management's decision to decrease its cash on hand in order to enhance overall yield. Interest Expense Interest expense increased by $193,000, or 38.07%, from $507,000 for the quarter ended September 30,1996 to $700,000 for the quarter ended September 30, 1997. The increase in interest expense resulted from a $7,813,000, or 20.58% increase in the average balance of deposits from $37,967,000 for the quarter ended September 30, 1996 to $45,780,000 for the quarter ended September 30, 1997. The increase in interest expense was also impacted by a slight increase in the average cost of deposits to 5.54% during the quarter ended September 30, 1997, as compared to 5.34% for the quarter ended September 30, 1996. The increase in the Company's deposit base was primarily affected by an increase in funds attracted from local municipal entities. These funds are typically more volatile and more costly than traditional retail deposits. The increase in interest expense also was affected by interest expense on FHLB advances. During the quarters ended September 30, 1997 and 1996, interest expense on FHLB advances totaled $65,000 and $0, respectively. The Company utilizes FHLB advances to fund increases in loan production and purchases of investment securities, including mortgage-backed and related securities. (Continued) 15 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Provision for Loan Losses The Company's provision for loan losses was $0 and $0 for the three months ended September 30, 1997 and 1996, respectively. Due to lack of substantive problem loans (i.e. few nonaccrual loans) during these periods and stable real estate values in the Company's market area, management believes that the allowance for loan losses was adequate throughout these periods. The allowance for loan losses was maintained at $213,000 at September 30, 1997 and 1996. The Company's net loan charge-offs were $0 and $0 for the three months ended September 30, 1997 and 1996, respectively. At September 30, 1997 and 1996, the allowance for loan losses represented 0.94% and 1.02%, respectively, of loans receivable. Nonaccrual loans totaled $0 and $29,000 at September 30, 1997 and 1996, respectively. Noninterest Income The level of noninterest income remained nearly unchanged for the quarter ended September 30, 1997 as compared to the quarter ended September 30, 1996. For the quarters ended September 30, 1997 and 1996, noninterest income totaled $13,000 and $15,000, respectively. Noninterest Expense Noninterest expense decreased by $227,000, or 45.86%, from $495,000 for the quarter ended September 30, 1996 to $268,000 for the quarter ended September 30, 1997. The decrease in total noninterest expense was primarily due to the aforementioned pre-tax $237,000 one time special deposit insurance fund assessment in the quarter ended September 30, 1996. This decrease was also impacted by a $22,000, or 13.17% increase in compensation and employee benefits expense, a $14,000, or 66.67% decrease in federal deposit insurance premiums, a $6,000, or 16.67% decrease in professional fees, and a $6,000, or 26.09% increase in other expenses. The increase in compensation and employee benefits is primarily due to an increase in staff. The decrease in federal deposit insurance premiums is due to lower deposit insurance fund assessments as a result of federal legislation enacted in 1996. Income Taxes The Company's income taxes increased by $115,000, from a tax benefit of $40,000 for the quarter ended September 30, 1996, to a tax expense of $75,000 for the quarter ended September 30, 1997. The change in income taxes was due primarily to an increase in pre-tax earnings of $279,000, from a pre-tax loss of $78,000 for the quarter ended September 30, 1996 to pre-tax earnings of $201,000 for the quarter ended September 30, 1997. (Continued) 16 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Comparison of Operating Results for the Three Months ended September 30, 1997 and 1996 In recent years, significant new federal legislation has imposed numerous new legal and regulatory requirements on financial institutions. In addition to the uncertainties posed by possible legislative change, there are many other uncertainties that may make the Company's historical performance an unreliable indicator of its future performance, and forward-looking information, including projections of future performance, is subject to numerous possible adverse developments, including but not limited to the possibility of adverse economic developments which may increase default and delinquency risks in the Company's loan portfolios; shifts in interest rates which may result in shrinking interest margins; deposits outflows; interest rates on competing investments; demand for financial services and loan products; increases generally in competitive pressure in the banking and financial services industry; changes in accounting policies or guidelines, or monetary and fiscal policies of the federal government; changes in the quality or composition of the Company's loan and investment portfolios; or other significant uncertainties. Liquidity and Capital Resources The Company's primary sources of funds are deposits, FHLB advances and proceeds from maturing investment securities and principal and interest payments on loans and mortgage-backed and related securities. While maturities and scheduled amortization of mortgage-backed and related securities and loans are a predictable source of funds, deposit flows and mortgage prepayments are generally influenced by general interest rates, economic conditions, competition, and other factors. A substantial portion of the Company's deposits are funds from local government entities. The primary investing activities of the Company are the origination of loans and the purchase of investment and mortgage-backed and related securities. During the three months ended September 30, 1997 and 1996, the Company's loan portfolio, net, increased $1,576,000 and $715,000, respectively. During the same periods, the Company purchased mortgage-backed and related securities in the amounts of $2,504,000, and $0, respectively. The primary financing activity of the Company is the attraction of savings deposits and utilization of FHLB advances. The Company has other sources of liquidity if there is a need for funds. The Association has the ability to obtain additional advances from the Federal Home Loan Bank of Des Moines. During the quarters ended September 30, 1997 and 1996, the Association utilized advances of $4,700,000 and $0, respectively. In addition, the Company's designation of selected new investments as available for sale is intended to increase liquidity and overall operational flexibility. The Association is required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be changed at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required minimum ratio is currently 5.0%. (Continued) 17 REDWOOD FINANCIAL, INC. AND SUBSIDIARY The Company's most liquid assets are cash and cash equivalents. In addition, the Company maintains a portfolio of readily marketable investment securities, including mortgage-backed and related securities which are designated available for sale. The levels of cash and investment securities, including mortgage-backed and related securities, are dependent on the Company's operating, financing, and investing activities during any given period. At September 30, 1997 and 1996, cash and cash equivalents totaled $597,000 and $2,871,000, respectively. Investment securities, including mortgage-backed and related securities designated available for sale total $17,389,000 and $0 at September 30, 1997 and 1996, respectively. Federal savings institutions are required to satisfy three capital requirements: (i) a requirement that "tangible capital" equal or excess 1.5% of tangible assets, (ii) a requirement that "core capital" equal or excess 3.0% of adjusted tangible assets, and (iii) a risk-based capital requirement currently of 8.0% of "risk-adjusted" assets. The Association currently meets all three capital requirements. Recent Developments Completion of Stock Repurchase Program and Application for Additional Repurchases On September 3, 1997, the Company announced it had received the necessary regulatory approval to repurchase 5% of its outstanding shares, or 48,093 shares. The Company completed the repurchase as detailed previously in this 10-QSB. On September 26, 1997, the Company announced that it had applied to the Office of Thrift Supervision for permission to repurchase another 5% of its outstanding shares, or 45,689 shares. Regulatory approval is pending. (Continued) 18 REDWOOD FINANCIAL, INC. AND SUBSIDIARY PART II - OTHER INFORMATION ITEM 1: Legal Proceedings. None. ITEM 2: Changes in Securities. Not Applicable. ITEM 3: Defaults Upon Senior Securities. Not Applicable. ITEM 4: Submission of Matters to a Vote of Security Holders. None ITEM 5: Other Information. None. ITEM 6: Exhibits and Reports on Form 8-K. None 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REDWOOD FINANCIAL, INC. Registrant Date: October 30, 1997 /s/ Paul W. Pryor ---------------- ----------------- Paul W. Pryor, President and Chief Executive Officer (Duly Authorized Officer) Date: October 30, 1997 /s/ Anthony H. Acker ---------------- -------------------- Anthony H. Acker, Chief Financial Officer (Principal Accounting Officer) 20 EX-27 2 FDS FOR 10-QSB
9 1,000 3-MOS JUN-30-1998 SEP-30-1997 15,404 581,482 0 0 17,389,440 23,121,062 23,355,400 22,356,259 213,034 64,651,177 45,780,689 5,600,000 285,396 1,000,000 0 0 112,500 11,872,592 65,651,177 466,116 674,746 13,416 1,154,278 634,303 65,284 454,691 0 0 267,548 200,594 0 0 0 125,890 .14 .14 2.87 0 707,850 0 707,850 213,034 0 0 213,034 213,034 0 213,034
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