-----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, Ehk91F5xe6QLwolxql8s577NXdVEflVLmO3QiKakT/DZILJKbwK5opRFPGixE90d eQ+DgeyXE+SMAlzw3jCk0g== 0000946275-96-000344.txt : 19961115 0000946275-96-000344.hdr.sgml : 19961115 ACCESSION NUMBER: 0000946275-96-000344 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 1934 Act SEC FILE NUMBER: 000-25884 FILM NUMBER: 96661837 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, 1996 [ ] 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 September 30, 1996: Class Outstanding ----- ----------- Common stock, par value $0. 10 per share 1,068,750 REDWOOD FINANCIAL, INC. AND SUBSIDIARY CONTENTS PART I - FINANCIAL INFORMATION
Page Item 1: Financial Statements Consolidated Balance Sheets at September 30, 1996 and June 30, 1996 3 Consolidated Statements of Earnings for the Three Months ended September 30, 1996 and 1995 4 Consolidated Statement of Stockholders' Equity for the Three Months ended September 30, 1996 5 Consolidated Statements of Cash Flows for the Three Months ended September 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7-9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 PART II - OTHER INFORMATION Item 1: Legal Proceedings 17 Item 2: Changes in Securities 17 Item 3: Defaults Upon Senior Securities 17 Item 4: Submission of Matters to a Vote of Security Holders 17 Item 5: Other Information 17 Item 6: Exhibits and Reports on Form 8-K 17 Signatures 18
2 REDWOOD FINANCIAL, INC., AND SUBSIDIARY PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets (Unaudited)
September 30, June 30, Assets 1996 1996 - -------------------------------------------------------------------------------- Cash $ 15,250 15,345 Interest-bearing deposits with banks 2,855,874 2,857,818 - --------------------------------------------------------------------------------- Cash and cash equivalents 2,871,124 2,873,163 - --------------------------------------------------------------------------------- Securities held to maturity: Mortgage-backed and related securities 15,392,311 15,805,305 Investment securities 14,689,567 15,288,913 - --------------------------------------------------------------------------------- Total securities held to maturity 30,081,878 31,094,218 - --------------------------------------------------------------------------------- Loans receivable, net 17,229,712 16,513,727 Federal Home Loan Bank stock, at cost 333,500 333,500 Accrued interest receivable 404,850 553,856 Premises and equipment, net 62,311 52,187 Other assets 74,900 93,992 - --------------------------------------------------------------------------------- Total Assets $51,058,275 51,514,643 - --------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - -------------------------------------------------------------------------------- Deposits 37,410,421 38,042,529 Advance payments by borrowers for taxes and insurance 94,572 55,686 Accrued expenses and other liabilities 392,989 259,392 - --------------------------------------------------------------------------------- Total Liabilities 37,897,982 38,357,607 - --------------------------------------------------------------------------------- Common stock ($.10 par value): Authorized and issued 1,125,000 shares; outstanding 1,068,750 shares 112,500 112,500 Additional paid-in capital 8,459,605 8,457,017 Retained earnings, subject to certain restrictions 6,080,544 6,118,091 Unearned employee stock ownership plan shares (579,184) (595,744) Unearned management stock bonus plan shares (371,766) (393,422) Treasury stock at cost; 56,250 shares (541,406) (541,406) - --------------------------------------------------------------------------------- Total Stockholders' Equity 13,160,293 13,157,036 - --------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $51,058,275 51,514,643 - ---------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 3 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Earnings (Unaudited)
Three months ended September 30, ------------------- 1996 1995 - -------------------------------------------------------------------------------- Interest income: Loans receivable $ 363,720 335,406 Mortgage-backed and related securities 270,807 176,148 Investment securities 226,074 301,338 Cash equivalents 49,160 59,907 - -------------------------------------------------------------------------------- Total interest income 909,761 872,799 Interest expense on deposits 507,196 473,995 - -------------------------------------------------------------------------------- Net interest income 402,565 398,804 Provision for losses on loans 0 0 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 402,565 398,804 Noninterest income: Fees and service charges 13,974 6,792 Other 959 8,776 - -------------------------------------------------------------------------------- Total noninterest income 14,933 15,568 Noninterest expenses: Compensation and employee benefits 166,737 141,273 Advertising 3,096 2,576 Occupancy 7,603 6,846 Federal deposit insurance premiums 21,340 20,846 Professional fees 35,983 19,255 Deposit insurance fund assessment 237,085 0 Other 23,324 14,058 - -------------------------------------------------------------------------------- Total noninterest expense 495,168 204,854 - -------------------------------------------------------------------------------- Earnings (loss) before income taxe (77,670) 209,518 Income tax (benefit) expense (40,123) 36,080 - -------------------------------------------------------------------------------- Net (loss) earnings $ (37,547) 173,438 - -------------------------------------------------------------------------------- Net (loss) earnings per common share $ (0.04) 0.17 - -------------------------------------------------------------------------------- Weighted average number of shares outstanding 995,317 1,043,287 - --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 4 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statement of Stockholders' Equity (Unaudited)
Unearned Shares Unearned Employee Management Additional Stock Stock Bonus Total Common Paid in Retained Ownership Recognition Treasury Stockholders' Stock Capital Earnings Plan Plan Stock Equity - ----------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 $ 112,500 8,457,017 6,118,091 (595,744) (393,422) (541,406) 13,157,036 Net loss 0 0 (37,547) 0 0 0 (37,547) Earned employee stock ownership plan shares 0 2,588 0 16,560 0 0 19,148 Earned management stock bonus plan shares 0 0 0 0 21,656 0 21,656 - ----------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1996 $ 112,500 8,459,605 6,080,544 (579,184) (371,766) (541,406) 13,160,293 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 5 REDWOOD FINANCIAL, INC., AND SUBSIDIARY Consolidated Statement of Cash Flows (Unaudited)
Three months ended September 30, 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Operating Activities: Net (loss) earnings $ (37,547) 173,438 Adjustments to reconcile net earnings (loss) to net cash provided by operations Depreciation 4,576 4,100 Amortization of premiums and discounts on investment securities, mortgage-backed and related securities and loans receivable, net (9,845) (10,099) Decrease in other assets 19,092 33,644 Decrease (increase) in accrued interest receivable 149,006 (14,623) Increase (decrease) in accrued interest payable 320,011 302,385 Amortization of unearned ESOP shares 16,560 16,560 Earned ESOP shares priced above original cost 2,588 2,070 Earned Management Stock Bonus Plan shares 21,656 0 Increase (decrease) in accrued expenses and other liabilities 133,597 (154,510) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 619,694 352,965 Investing Activities: Proceeds from maturities of investment securities held to maturity 600,000 0 Purchases of investment securities held to maturity 0 (2,487,720) Purchases of mortgage-backed and related securities held to maturity 0 (2,891,340) Principal collected on mortgage-backed and related securities held to maturity 421,349 400,017 Decrease (increase) in loans receivable,net (715,149) (113,868) Purchases of premises and equipment (14,700) 0 - ---------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing securities 291,500 (5,092,911) Financing Activities: Decrease in funds held for stock subscriptions 0 (13,127,630) Decrease in deferred stock conversion costs 0 439,015 Net decrease in deposits (952,119) (1,639,550) Increase in advance payments by borrowers for taxes an insurance 38,886 33,762 Proceeds from the sale of common stock 0 8,549,361 Adoption of ESOP 0 (661,984) - ---------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (913,233) (6,407,026) - ---------------------------------------------------------------------------------------------------------------- Increase(decrease) in cash and cash equivalents (2,039) (11,146,972) Cash and cash equivalents, beginning of period 2,873,163 14,092,665 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $2,871,124 2,945,693 - ---------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash paid for interest $ 187,185 171,610 Cash paid for income taxes 51,850 36,080
See accompanying notes to consolidated financial statements 6 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1996 (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 a Subscription and Community Offering of its shares (the Offering) in connection with the conversion of the Association on May 22, 1995. 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 statement of earning for the three months ended September 30, 1996 is 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, 1996 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, 1996, 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, 1996: Amount Percent (1) ------------------------------------------------------------------- (dollars in thousands) Tangible Capital: Actual $ 10,017 20.86% Required 720 1.50 ------------------------------------------------------------------- Excess $ 9,297 19.36% ------------------------------------------------------------------- Core Capital: Actual $10,017 20.86% Required 1,440 3.00 ------------------------------------------------------------------- Excess $ 8,577 17.86% ------------------------------------------------------------------- Risk-Based Capital: Actual $10,194 70.98% Required 1,149 8.00 ------------------------------------------------------------------- Excess $ 9,045 62.98% ------------------------------------------------------------------- (1) Tangible and core capital levels are shown as a percentage of total adjusted assets; risk-based capital levels are shown as a percentage of 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 $.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. (Continued) 9 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 (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate spread) and (ii) 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 decreased by $457,000, or 0.90%, from $51,515,000 at June 30, 1996 to $51,058,000 at September 30, 1996. Changes in the Company's levels of assets reflect a slight decrease in the level of public unit fund deposits during the quarter ended September 30, 1996. The Company's securities, which include investment securities and mortgage-backed and related securities, decreased by $1,012,000, or 3.25%, from $31,094,000 at June 30, 1996 to $30,082,000 at September 30, 1996. The decrease in the Company's level of securities during the three months ended September 30, 1996 is attributable to an investment security maturity and the principal repayments of the Company's mortgage-backed and related securities. The Company's loans receivable, net, increased by $716,000, or 4.34%, from $16,514,000 at June 30, 1996 to $17,230,000 at September 30, 1996. The increase in loans receivable was due to an increase in demand during the quarter for both first and second (i.e. home equity) mortgage loans. (Continued) 10 REDWOOD FINANCIAL, INC. AND SUBSIDIARY The Company's deposits, including accrued interest payable, decreased by $633,000, or 1.66%, from $38,043,000 at June 30, 1996 to $37,410,000 at September 30, 1996. The level of deposits decreased as a result of fewer public unit fund deposits at September 30, 1996. Results of Operations Net Earnings The Company incurred a net loss of $38,000 for the quarter ended September 30, 1996, as compared to net earnings of $173,000 for the quarter ended September 30, 1995. This represented a decrease of $211,000, or 121.97%. The decrease was primarily attributable to a $290,000 increase in noninterest expense. The increase in noninterest expense includes a $237,000 one-time assessment required by the federal deposit insurance authorities to bring the Savings Association Insurance Fund (SAIF) to parity with the Bank Insurance Fund (BIF) as a result of the omnibus appropriations bill signed by President Clinton on September 30, 1996. The decrease was also attributable to a $37,000 increase, or 4.24% in interest income, a $33,000, or 6.96% increase in interest expense, and a $76,000 decrease, or 211.11% in income tax expense. Net Interest Income Net interest income increased by $4,000, or 1.00%, from $399,000 for the quarter ended September 30, 1995 to $403,000 for the quarter ended September 30, 1996. The increase in net interest income primarily reflects an increase in the ratio of average interest-earning assets to average interest-bearing liabilities from 129.79% for the quarter ended September 30, 1995 to 135.20% for the quarter ended September 30, 1996. This was partially offset by a decrease in the Association's interest rate spread from 2.15% for the quarter ended September 30, 1995, to 1.75% for the quarter ended September 30, 1996. The decrease in interest rate spread, compared to the same period in the previous fiscal year, was due to rising rates paid on deposits as well as a decrease in yield on the Company's loan and investment securities portfolios. Interest Income Interest income was $910,000 for the quarter ended September 30, 1996, as compared to $873,000 for the quarter ended September 30, 1995, representing an increase of $37,000, or 4.24%. The increase in interest income was caused primarily by a $3,410,000, or 7.12%, increase in the average balance of interest-bearing assets. This was partially offset by a decline in the overall yield on interest earning assets. For the quarter ended September 30, 1996, the average yield on interest earning assets was 7.09%, representing a slight decline from 7.29% for the quarter ended September 30, 1995. (Continued) 11 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Interest on loans receivable increased by $28,000, or 8.44%, during the quarter ended September 30, 1996, as compared to the quarter ended September 30, 1995. Such increase was due to a $1,545,000, or 10.05% increase in the average balance on loans receivable from $15,377,000 for the quarter ended September 30, 1995 to $16,922,000 for the quarter ended September 30, 1996. This was partially offset by a decline in the average yield on loans receivable from 8.72% for the quarter ended September 30, 1995 to 8.60% for the quarter ended September 30, 1996. Interest on mortgage-backed and related securities increased by $95,000, or 53.98%, during the quarter ended September 30, 1996, as compared to the quarter ended September 30, 1995. Such increase was due to a $5,396,000, or 52.77%, increase in the average balance of mortgage-backed and related securities from $10,225,000 for the quarter ended September 30, 1995 to $15,621,000 for the quarter ended September 30, 1996. The increase in the average balance of mortgage-backed and related securities primarily resulted from a decision to invest the cash proceeds from maturing investment securities and principal repayments on existing mortgage-backed securities into other mortgage-backed and related securities. The increase in interest on mortgage-backed and related securities is also due to a slight increase in the average yield on mortgage-backed and related securities from 6.89% for the quarter ended September 30, 1995 to 6.93% for the quarter ended September 30, 1996. Interest on investment securities, including FHLB stock, decreased by $75,000, or 24.92%, during the quarter ended September 30, 1996, as compared to the quarter ended September 30, 1995. Such decrease was due primarily to a $4,074,000, or 21.17%, decrease in the average balance of investment securities from $19,247,000 for the quarter ended September 30, 1995 to $15,173,000 for the quarter ended September 30, 1996. The decline is a result of a decision to invest cash proceeds from the maturity of investment securities into higher yielding mortgage-backed and related securities. Additionally, this decrease was affected by a decrease in the average yield on investment securities, including FHLB stock, from 6.38% for the quarter ended September 30, 1995 to 5.96% for the quarter ended September 30, 1996. Interest Expense Interest expense increased by $33,000, or 6.96%, from $474,000 for the quarter ended September 30, 1995 to $507,000 for the quarter ended September 30, 1996. The increase in interest expense resulted from a $1,045,000, or 2.83% increase in the average balance of deposits from $36,922,000 for the quarter ended September 30, 1995 to $37,967,000 for the quarter ended September 30, 1996. The increase in interest expense is also attributable to an increase in the average cost of deposits to 5.34% during the quarter ended September 30, 1996, as compared to 5.14% for the quarter ended September 30, 1995. The increase in the average cost of deposits was due to an increase in prevailing market interest rates during much of 1996. (Continued) 12 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Provision for Loan Losses The Company's provision for loan losses was $0 for the three months ended September 30, 1996 and 1995. Due to the consistency in the size of the loan portfolio, the lack of substantive problem loans (i.e. few nonaccrual loans) during these periods, and stable real estate value in the Company's market area, management believed that the allowance for loan losses was adequate throughout these periods. The allowance for loan losses was maintained at $213,000 at September 30, 1996 and 1995. The Company's net loan charge-offs were $0 for the quarters ended September 30, 1996 and 1995. At September 30, 1996 and 1995, the allowance for loan losses represented 1.22% and 1.38%, respectively, of loans receivable. Nonaccrual loans totaled $29,000 and $0, respectively, at September 30, 1996 and 1995. Noninterest Income Noninterest income decreased by $1,000, or 6.25%, from $16,000 for the quarter ended September 30, 1995 to $15,000 for the quarter ended September 30, 1996. The decrease in noninterest income was primarily due to a $8,000, or 88.89% decrease in other noninterest income. This was offset by a $7,000, or 100.00%, increase in various fees and service charges. The decrease in other noninterest income was primarily due to a $5,000 gain taken on the disposition of an asset in the quarter ended September 30, 1995. The increase in fees and service charges was a result of higher loan fee income (e.g. loan origination fees and appraisal fees) resulting from the aforementioned increase in loan origination volume. Noninterest Expense Noninterest expense increased by $290,000, or 141.46%, from $205,000 for the quarter ended September 30, 1995 to $495,000 for the quarter ended September 30, 1996. The increase in total noninterest expense was primarily due to the aforementioned $237,000 one-time deposit insurance fund assessment. In addition, the increase in noninterest expense is also attributable to a $26,000, or 18.44%, increase in compensation and employee benefits from $141,000 for the quarter ended September 30, 1995 to $167,000 for the quarter ended September 30, 1996, a $17,000, or 89.47%, increase in professional fees from $19,000 for the quarter ended September 30, 1995 to $36,000 for the quarter ended September 30, 1996, and a $9,000, or 64.29% increase in other expenses from $14,000 for the quarter ended September 30, 1995, to $23,000 for the quarter ended September 30, 1996. The increase in compensation and employee benefits was attributable to the amortization of unearned management stock bonus plan shares and an increase in staff during the quarter ended September 30, 1996. The increase in professional fees was as a result of increased costs associated with being a public company. The slight increase in other expenses represents miscellaneous expenses incurred during the quarter ended September 30, 1996. (Continued) 13 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Income Taxes The Company's income taxes fluctuated by $76,000, or 211.11%, from an income tax expense of $36,000 for the quarter ended September 30, 1995, to an income tax benefit of $40,000 for the quarter ended September 30, 1996. The change in income taxes was due primarily to a decrease in pre-tax earnings of $288,000, or 137.14%, from pre-tax earnings of $210,000 for the quarter ended September 30, 1995 to a pre-tax loss of $78,000 for the quarter ended September 30, 1996. As previously stated, the Company's pre-tax loss is due to the one-time deposit insurance assessment. The income tax benefit for the quarter ended September 30, 1996 reflects the tax benefit associated with the Company's current negative earnings position, at the Company's estimated effective tax rate. Liquidity and Capital Resources The Company's primary sources of funds are deposits 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. The primary investing activity of the Company is the purchase of investment and mortgage-backed and related securities. During the three months ended September 30, 1996 and 1995, the Company purchased investment and mortgage-backed and related securities in the amounts of $0, and $5,379,000, respectively. Other investing activities include originations of loans and investment in FHLB of Des Moines stock. The primary financing activity of the Company is the attraction of savings deposits. The Company has other sources of liquidity if there is a need for funds. The Association has the ability to obtain advances from the Federal Home Loan Bank (FHLB) of Des Moines. In addition, the Company maintains a portion of its investments in FHLB overnight funds that will be available when needed. The Company 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%. Management of the Company seeks to maintain a relatively high level of liquidity in order to retain flexibility in terms of investment opportunities and deposit pricing. Because liquid assets generally provide for lower rates of return, the Company's relatively high liquidity will, to a certain extent, result in lower rates of return on assets. (Continued) 14 REDWOOD FINANCIAL, INC. AND SUBSIDIARY The Company's most liquid assets are cash and cash equivalents, which are short-term, highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash and include interest-bearing deposits. The levels of these assets are dependent on the Company's operating, financing, and investing activities during any given period. At September 30, 1996 and 1995, cash and cash equivalents totaled $2,871,000 and $2,873,000, respectively. Recent Developments (1) Pending Acquisition On November 4, 1996, the Company executed a letter of intent, dated November 1, 1996, to acquire 100% of the outstanding stock of Olivia Bancorporation (the Bancorporation) and 100% of the stock of American State Bank of Olivia, Minnesota (the Bank). American State Bank is a state chartered commercial banking institution with approximately $29.1 million in assets as of October 31, 1996. The Bancorporation owns approximately 97.6% of the outstanding stock of the Bank. The acquisition is subject to several matters including negotiating a definitive agreement and regulatory approval. (2) Bank Insurance Fund/Savings Association Insurance Fund Assessment As a result of the omnibus appropriations bill signed September 30, 1996 by President Clinton, the Company will pay a one-time $237,000 assessment to the Federal Deposit Insurance Corporation (FDIC). The assessment is intended to bring to parity the fund insuring deposits at most savings institutions, the Savings Association Insurance Fund (SAIF), with the fund insuring deposits at commercial banking institutions, the Bank Insurance Fund (BIF). As a result of the one-time assessment, the FDIC will substantially reduce the premium assessed savings institutions insured by the SAIF beginning January 1, 1997. The Company expects that its deposit insurance expense will be reduced from the current 23 basis point rate for each dollar of deposits, to approximately 6.4 basis points for each dollar of deposits. Based upon the current level of deposits, the Company expects that the legislation will reduce the Company's deposit insurance expense by approximately $62,000 per year before taxes. In addition, the legislation also requires that the SAIF and BIF be merged by January 1, 1999, provided that bank and savings association (i.e. thrift) charters are merged by that date. (Continued) 15 REDWOOD FINANCIAL, INC. AND SUBSIDIARY (3) Tax Legislation Additional legislation was also enacted during the quarter ended September 30, 1996, which substantially effects the tax treatment afforded savings institutions. This legislation was included in the Small Business Job Protection Act (SBJPA) of 1996. As a result of the SBJPA, the favorable tax treatment concerning bad debt deductions afforded savings institutions has been eliminated. Savings associations will be required to remit to government taxing authorities, the bad debt tax reserves accumulated since 1987 owing to this deduction. For the most part, savings institutions will not be required to remit pre-1988 bad debt tax deductions. However, if certain events occur, such as liquidation, a savings institution may be required to remit the bad debt tax reserves accumulated in tax years from 1952 up to and including 1987. Nevertheless, savings institutions will be allowed, amongst other powers, to convert to a bank charter, diversify lending, or be acquired by another institution without triggering a recapture of pre-1988 reserves. The SBJPA substantially equalizes the tax treatment afforded savings institutions and commercial banks, and removes an impediment towards merger of the bank and savings association charters. Management of the Company knows of no expected event which would trigger recapture of pre-1988 bad debt deduction reserves at the current time. The post-1987 deductions total $206,000 which will be remitted to the federal taxing authorities over a six to eight year period. The Company is fully reserved for the reversal of the post-1987 tax deduction, and no future earnings impact is expected. (Continued) 16 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. During the Quarter ended December 31, 1996, a Form 8-K (Items 5 and 7), dated November 4, 1996, was filed. 17 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: November 8,1996 /s/ Paul W. Pryor --------------- -------------------------------------------- Paul W. Pryor, President and Chief Executive Officer (Duly Authorized Officer) Date: November 8, 1996 /s/ Ardella J. Schlapkohl ---------------- -------------------------------------------- Ardella J. Schlapkohl, (Principal Accounting Officer) 18 EX-27 2 FDS FOR 10QSB
9 3-MOS JUN-30-1997 SEP-30-1996 15,250 2,855,874 0 0 0 30,081,878 30,062,619 17,442,746 213,034 51,058,275 37,410,421 0 487,561 0 0 0 112,500 13,047,793 13,160,293 363,720 496,881 49,160 909,761 507,196 507,196 402,565 0 0 495,168 (40,123) (40,123) 0 0 (37,547) (0.04) (0.04) 3.14 28,664 205,457 0 234,121 213,034 0 0 0 213,034 0 213,034 NOT NET OF ALLOWANCE
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