-----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, BWhH1knU/I9poWE2CCh0mxqOP58KhH2oe/2W2PYvhSNdlhJVvmOFpmH58CD+Kfn7 q2Vn3dkg1OXqUE5pKVuIEQ== 0000946275-97-000037.txt : 19970211 0000946275-97-000037.hdr.sgml : 19970211 ACCESSION NUMBER: 0000946275-97-000037 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970207 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: 97520931 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 December 31, 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 February 4, 1997: Class Outstanding ----- ----------- Common stock, par value $0.10 per share 1,013,050 REDWOOD FINANCIAL, INC. AND SUBSIDIARY CONTENTS PART I - FINANCIAL INFORMATION Page Item 1: Financial Statements Consolidated Balance Sheets at December 31, 1996 and June 30, 1996 3 Consolidated Statements of Earnings for the Three and Six Months ended December 31, 1996 and 1995 4 Consolidated Statement of Stockholders' Equity for the Six Months ended December 31, 1996 5 Consolidated Statements of Cash Flows for the Six Months ended December 31, 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 -19 PART II - OTHER INFORMATION Item 1: Legal Proceedings 20 Item 2: Changes in Securities 20 Item 3: Defaults Upon Senior Securities 20 Item 4: Submission of Matters to a Vote of Security Holders 20 Item 5: Other Information 20 Item 6: Exhibits and Reports on Form 8-K 21 Signatures 22 2 REDWOOD FINANCIAL, INC., AND SUBSIDIARY PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets (Unaudited)
December 31, June 30, Assets 1996 1996 - ------------------------------------------------------------------------------------- Cash $ 15,217 15,345 Interest-bearing deposits with banks 8,179,630 2,857,818 - ------------------------------------------------------------------------------------- Cash and cash equivalents 8,194,847 2,873,163 - ------------------------------------------------------------------------------------- Securities held to maturity: Mortgage-backed and related securities 15,058,154 15,805,305 Investment securities 11,260,235 15,288,913 - ------------------------------------------------------------------------------------- Total securities held to maturity 26,318,389 31,094,218 - ------------------------------------------------------------------------------------- Loans receivable, net 18,171,579 16,513,727 Federal Home Loan Bank stock, at cost 333,500 333,500 Accrued interest receivable 394,005 553,856 Premises and equipment, net 60,519 52,187 Other assets 53,520 93,992 - ------------------------------------------------------------------------------------- Total Assets $ 53,526,359 51,514,643 - ------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------------- Deposits 40,077,112 38,042,529 Advance payments by borrowers for taxes and insurance 52,010 55,686 Accrued expenses and other liabilities 158,966 259,392 - ------------------------------------------------------------------------------------- Total Liabilities 40,288,088 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 8,463,658 8,457,017 Retained earnings, subject to certain restrictions 6,116,252 6,118,091 Unearned employee stock ownership plan shares (562,624) (595,744) Unearned management stock bonus plan shares (350,109) (393,422) Treasury stock, at cost; 56,250 shares (541,406) (541,406) - ------------------------------------------------------------------------------------- Total Stockholders' Equity 13,238,271 13,157,036 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 53,526,359 51,514,643 - -------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 3 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Earnings (Unaudited)
Three months Six months ended December 31, ended December 31, ------------------ ------------------ 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Interest income: Loans receivable $ 378,600 336,521 740,556 671,927 Mortgage-backed and related securities 266,099 183,142 538,670 359,290 Investment securities 209,841 317,260 435,914 618,598 Cash equivalents 54,503 27,928 103,664 87,835 - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 909,043 864,851 1,818,804 1,737,650 Interest expense on deposits 502,095 463,819 1,009,291 937,814 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 406,948 401,032 809,513 799,836 Provision for losses on loans 0 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for losses on loans 406,948 401,032 809,513 799,836 Noninterest income: Fees and service charges 12,209 8,379 26,183 15,171 Other 503 9,488 1,462 18,264 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest income 12,712 17,867 27,645 33,435 Noninterest expense: Compensation and employee benefits 186,276 178,813 353,013 320,086 Advertising 5,511 4,543 8,607 7,119 Occupancy 6,821 6,884 14,252 13,730 Federal deposit insurance premiums 18,029 20,431 39,369 41,277 Professional fees 128,255 52,597 164,239 71,852 Deposit insurance fund assessment 0 0 237,085 0 Other 21,821 25,979 45,316 40,037 - ---------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 366,713 289,247 861,881 494,101 - ---------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes 52,947 129,652 (24,723) 339,170 Income tax expense (benefit) 17,239 54,496 (22,884) 90,576 - ---------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) $ 35,708 75,156 (1,839) 248,594 - ---------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) per common share $ 0.04 0.07 0.00 0.24 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 1,004,753 1,045,357 1,001,263 1,044,322 - ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 4 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statement of Stockholders' Equity (Unaudited)
Unearned Employee Unearned Stock Management Additional Ownership Stock Bonus Total Common Paid in Retained Plan Plan Treasury Stockholders' Stock Capital Earnings Shares Shares 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 (1,839) 0 0 0 (1,839) Earned employee stock ownership plan shares 0 6,641 0 33,120 0 0 39,761 Earned management stock bonus plan shares 0 0 0 0 43,313 0 43,313 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 112,500 8,463,658 6,116,252 (562,624) (350,109) (541,406) 13,238,271 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 5 REDWOOD FINANCIAL, INC., AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, ------------------ 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net (loss) earnings $ (1,839) 248,594 Adjustments to reconcile net earnings (loss) to net cash provided by operations Depreciation 9,074 8,246 Amortization of premiums and discounts on investment securities, mortgage-backed and related securities and loans receivable, net (19,519) (19,257) Decrease in other assets 40,472 40,989 Decrease (increase) in accrued interest receivable 159,851 (168,197) Increase (decrease) in accrued interest payable 17,815 (70,997) Amortization of unearned ESOP shares 33,120 33,120 Earned ESOP shares priced above original cost 6,641 5,347 Earned Management Stock Bonus Plan shares 43,313 0 Decrease in accrued expenses and other liabilities (100,426) (163,607) Federal Home Loan Bank stock dividend 0 (6,500) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 188,502 (92,262) Investing Activities: Proceeds from maturities of investment securities held to maturity 4,030,000 0 Purchases of investment securities held to maturity 0 (2,487,720) Purchases of mortgage-backed and related securities held to maturity 0 (3,881,340) Principal collected on mortgage-backed and related securities held to maturity 763,883 838,774 Increase in loans receivable, net (1,656,387) (52,680) Purchases of premises and equipment (17,406) (1,365) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 3,120,090 (5,584,331) Financing Activities: Decrease in funds held for stock subscriptions 0 (13,127,630) Decrease in deferred stock conversion costs 0 439,015 Increase (decrease) in deposits, net 2,016,768 (1,121,225) Decrease in advance payments by borrowers for taxes and insurance (3,676) (6,346) Proceeds from the sale of common stock 0 8,549,361 Increase in unearned ESOP shares 0 (661,984) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 2,013,092 (5,928,809) - ------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 5,321,684 (11,605,402) Cash and cash equivalents, beginning of period 2,873,163 14,092,665 - ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 8,194,847 2,487,263 - ------------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash paid for interest $ 991,476 1,008,811 Cash paid for income taxes 103,700 67,980
See accompanying notes to consolidated financial statements 6 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 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 earnings for the three and six months ended December 31, 1996 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, 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 December 31, 1996, the Association met each of the three current minimum regulatory capital requirements. The following table summarizes the Association's regulatory capital position at December 31, 1996: Amount Percent (1) --------------------------------------------------------------------- (dollars in thousands) Tangible Capital: Actual $8,120 16.74% Required 728 1.50 -------------------------------------------------------------------- Excess $7,392 15.24% -------------------------------------------------------------------- Core Capital: Actual $8,120 16.74% Required 1,455 3.00 -------------------------------------------------------------------- Excess $6,665 13.74% -------------------------------------------------------------------- Risk-Based Capital: Actual $8,308 54.59% Required 1,217 8.00 -------------------------------------------------------------------- Excess $7,091 46.59% -------------------------------------------------------------------- (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 $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 On January 15, 1997, the Company purchased 3,000 shares of its outstanding common stock at $10.375 per share. On January 28, 1997, the Company purchased 4,600 shares of its outstanding common stock at $10.75 per share. On January 30, 1997, the Company purchased 600 shares of its outstanding common stock at $10.75 per share. On January 30, 1997, the Company purchased 600 shares of its outstanding common stock at $11.00 per share. Repurchased shares are considered treasury shares and may be utilized for general corporate and other purposes. (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 (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 $2,011,000 or 3.90%, from $51,515,000 at June 30, 1996 to $53,526,000 at December 31, 1996. Changes in the Company's assets reflect an increase in the level of public unit fund deposits during the quarter ended December 31, 1996. Cash and cash equivalents increased by $5,322,000, or 185.24%, from $2,873,000 at June 30, 1996 to $8,195,000 at December 31, 1996. The increase in cash was primarily due to investment security maturities of $4,030,000 and an increase in deposits of $2,017,000 during the six months ended December 31, 1996. The high level of cash and cash equivalents at December 31, 1996 is not indicative of the liquidity levels that the Company generally maintains, but instead is a result of $2,550,000 of investment securities which matured in December 1996 and the acceptance of a $2,000,000 in public unit fund deposits in late December 1996. The Company is in process of reinvesting the funds into higher yielding loans, investments and/or mortgage-backed and related securities consistent with its traditional lending and investment strategies. (Continued) 10 REDWOOD FINANCIAL, INC. AND SUBSIDIARY The Company's securities, which include investment securities and mortgage-backed and related securities, decreased by $4,776,000 or 15.36%, from $31,094,000 at June 30, 1996 to $26,318,000 at December 31, 1996. The decrease in the level of securities during the six months ended December 31, 1996 is attributable to investment security maturity and the principal repayments of the Company's mortgage-backed and related securities. No investment securities or mortgage-backed or related securities were purchased during the six months ended December 31, 1996. The Company's loans receivable, net, increased by $1,658,000, or 10.04%, from $16,514,000 at June 30, 1996 to $18,172,000 at December 31, 1996. The increase in loans receivable was due to an increase in mortgage loan demand during the six months ended December 31, 1996. The Company's deposits, including accrued interest payable, increased by $2,034,000, or 5.35%, from $38,043,000 at June 30, 1996 to $40,077,000 at December 31, 1996. The increase in deposits is a result of higher public unit fund deposits at December 31, 1996. Results of Operations Net Earnings Net earnings were $36,000 for the quarter ended December 31, 1996, as compared to net earnings of $75,000 for the quarter ended December 31, 1995. This represented a decrease of $39,000 or 52.00%. The decrease in earnings was primarily attributable to a $78,000, or 26.99% increase in noninterest expense. The increase in noninterest expense was primarily a result of additional costs associated with the Company's unsuccessful acquisition attempt of Olivia Bancorporation, Inc. (See Recent Developments - Termination of Letter of Intent to Acquire Olivia Bancorporation, Inc.). These costs totaled $102,000 and no additional costs associated with the unsuccessful acquisition attempt are expected. Net earnings were also impacted by a $44,000 increase, or 5.09% in interest income, a $38,000, or 8.19% increase in interest expense, and a $37,000 decrease, or 68.52% in income tax expense. The Company incurred a net loss of $2,000 for the six months ended December 31, 1996, as compared to net earnings of $249,000 for the six months ended December 31, 1995. This represented a decrease of $251,000, or 100.80%. The decrease was primarily attributable to a $368,000 increase, or 74.49% in noninterest expense. The increase in noninterest expense was primarily a result of the $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) and the aforementioned $102,000 in additional expense associated with the unsuccessful acquisition attempt of Olivia Bancorporation, Inc. Net earnings were also impacted by a $81,000 increase, or 4.66% in interest income, a $71,000, or 7.57% increase in interest expense, and a $114,000 decrease, or 125.27% in income tax expense. (Continued) 11 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Net Interest Income Net interest income increased by $6,000, or 1.50%, from $401,000 for the quarter ended December 31, 1995 to $407,000 for the quarter ended December 31, 1996. The increase in net interest income primarily reflects an $4,560,000 increase, or 9.72% in average interest earning assets, partially offset by a $3,774,000 increase, or 11.02% in average interest bearing liabilities for the quarter ended December 31, 1996 as compared to the quarter ended December 31, 1995. In addition, the increase in net interest income was partially offset by a decline in the Company's net interest spread, from 1.96% for the quarter ended December 31, 1995, to 1.78% for the quarter ended December 31, 1996. The decrease in interest rate spread, compared to the same period in the previous year, was due to primarily to a decrease in yield on the Company's loan and investment securities portfolios partially offset by slight decrease in interest paid on deposits. Net interest income increased by $10,000, or 1.25%, from $800,000 for the six months ended December 31, 1995 to $810,000 for the six months ended December 31, 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 133.25% for the six months ended December 31, 1995 to 135.27% for the six months ended December 31, 1996. This was partially offset by a decrease in the Company's interest rate spread from 2.06% for the six months ended December 31, 1995, to 1.76% for the six months ended December 31, 1996. The decrease in interest rate spread, compared to the same period in the previous year, was due primarily to a decrease in yield on the Company's loan and investment securities portfolios and an increase in interest paid on deposits. Interest Income Interest income was $909,000 for the quarter ended December 31, 1996, as compared to $865,000 for the quarter ended December 31, 1995, representing an increase of $44,000, or 5.09%. The increase in interest income was caused primarily by a $4,560,000, or 9.72%, 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 December 31, 1996, the average yield on interest earning assets was 7.06%, representing a decline from 7.37% for the quarter ended December 31, 1995. Interest income was $1,819,000 for the six months ended December 31, 1996, as compared to $1,738,000 for the six months ended December 31, 1995, an increase of $81,000, or 4.66%. The increase in interest income was caused primarily by a $3,974,000, or 8.38%, 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 six months ended December 31, 1996, the average yield on interest earning assets was 7.08%, representing a decline from 7.33% for the six months ended December 31, 1995. (Continued) 12 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Interest on loans receivable increased by $42,000, or 12.46%, during the quarter ended December 31, 1996, as compared to the quarter ended December 31, 1995. Such increase was due to a $2,570,000, or 16.75% increase in the average balance on loans receivable from $15,342,000 for the quarter ended December 31, 1995 to $17,912,000 for the quarter ended December 31, 1996. This was partially offset by a decline in the average yield on loans receivable from 8.79% for the quarter ended December 31, 1995 to 8.45% for the quarter ended December 31, 1996. Interest on loans receivable increased by $69,000, or 10.27%, during the six months ended December 31, 1996, as compared to the six months ended December 31, 1995. The increase was due to a $1,986,000, or 12.93% increase in the average balance on loans receivable from $15,360,000 for the six months ended December 31, 1995 to $17,346,000 for the six months ended December 31, 1996. This was partially offset by a decline in the average yield on loans receivable from 8.75% for the six months ended December 31, 1995 to 8.54% for the six months ended December 31, 1996. Interest on mortgage-backed and related securities increased by $83,000, or 45.36%, during the quarter ended December 31, 1996, as compared to the quarter ended December 31, 1995. Such increase was due to a $4,861,000, or 47.13%, increase in the average balance of mortgage-backed and related securities from $10,313,000 for the quarter ended December 31, 1995 to $15,174,000 for the quarter ended December 31, 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 during the first six months of 1996. The increase in interest on mortgage-backed and related securities was partially offset by a modest decrease in the average yield on mortgage-backed and related securities from 7.10% for the quarter ended December 31, 1995 to 7.01% for the quarter ended December 31, 1996. Interest on mortgage-backed and related securities increased by $180,000, or 50.14%, during the six months ended December 31, 1996, as compared to the six months ended December 31, 1995. Such increase was due to a $5,161,000, or 50.26%, increase in the average balance of mortgage-backed and related securities from $10,269,000 for the six months ended December 31, 1995 to $15,430,000 for the six months ended December 31, 1996. The increase in the average balance of mortgage-backed and related securities primarily resulted from the aforementioned 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 during the first six months of 1996. The increase in interest on mortgage-backed and related securities was partially offset by a small decrease in the average yield on mortgage-backed and related securities from 6.99% for the six months ended December 31, 1995 to 6.98% for the quarter ended December 31, 1996. (Continued) 13 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Interest on investment securities, including FHLB stock, decreased by $107,000, or 33.75%, during the quarter ended December 31, 1996, as compared to the quarter ended December 31, 1995. Such decrease was due primarily to a $5,154,000, or 27.81%, decrease in the average balance of investment securities from $18,535,000 for the quarter ended December 31, 1995 to $13,381,000 for the quarter ended December 31, 1996. The decline in the average balance of investment securities was 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 effected by a decrease in the average yield on investment securities and FHLB stock, from 6.95% to 6.27% for the quarters ended December 31, 1995 and 1996, respectively. Interest on investment securities, including FHLB stock, decreased by $183,000, or 29.56%, during the six months ended December 31, 1996, as compared to the six months ended December 31, 1995. The decrease was due primarily to a $4,486,000, or 23.75%, decrease in the average balance of investment securities from $18,891,000 for the six months ended December 31, 1995 to $14,405,000 for the six months ended December 31, 1996. As previously stated, the decline in the average balance of investment securities was a result of the decision to invest cash proceeds from the maturity of investment securities into higher yielding mortgage-backed and related securities. Additionally, this decrease was effected by a decrease in the average yield on investment securities, including FHLB stock, from 6.56% for the six months ended December 31, 1995 to 6.06% for the six months ended December 31, 1996. Interest Expense Interest expense increased by $38,000, or 8.19%, from $464,000 for the quarter ended December 31, 1995 to $502,000 for the quarter ended December 31, 1996. The increase in interest expense resulted from a $3,774,000, or 11.02% increase in the average balance of deposits from $34,254,000 for the quarter ended December 31, 1995 to $38,028,000 for the quarter ended December 31, 1996. The increase in interest expense was partially offset by a slight decline in the average cost of deposits to 5.28% during the quarter ended December 31, 1996, as compared to 5.42% for the quarter ended December 31, 1995. The decrease in the average cost of deposits was due to modestly lower prevailing market interest rates on deposits during the quarter ended December 31, 1996 as compared to the quarter ended December 31, 1995. (Continued) 14 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Interest expense increased by $71,000, or 7.57%, from $938,000 for the six months ended December 31, 1995 to $1,009,000 for the six months ended December 31, 1996. The increase in interest expense resulted primarily from a $2,406,000, or 6.76% increase in the average balance of deposits from $35,587,000 for the six months ended December 31, 1995 to $37,993,000 for the six months ended December 31, 1996. The increase in interest expense was also effected by a small increase in the average cost of deposits, from 5.27% during the six months ended December 31, 1995, to 5.31% for the quarter ended December 31, 1995. Provision for Loan Losses The Company's provision for loan losses was $0 and $0 for the three months and six months ended December 31, 1996 and 1995, respectively. Due to 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 December 31, 1996 and 1995. The Company's net loan charge-offs were $0 and $0 for the three and six months ended December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, the allowance for loan losses represented 1.16% and 1.27%, respectively, of loans receivable. Nonaccrual loans totaled $57,000 and $0, respectively, at December 31, 1996 and 1995. Noninterest Income Noninterest income decreased by $5,000, or 27.78%, from $18,000 for the quarter ended December 31, 1995 to $13,000 for the quarter ended December 31, 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 $4,000, or 50.00%, increase in various fees and service charges. The decrease in other noninterest income was primarily due to a $7,000 gain taken on the disposition of an asset in the quarter ended December 31, 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 income decreased by $5,000, or 15.15%, from $33,000 for the six months ended December 31, 1995 to $28,000 for the six months ended December 31, 1996. The decrease in noninterest income was primarily due to a $17,000, or 94.44% decrease in other noninterest income. This was offset by a $11,000, or 73.33%, increase in various fees and service charges. The decrease in other noninterest income was primarily due to a $12,000 gain taken on the disposition of various assets in the six months ended December 31, 1995. As previously stated, 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. (Continued) 15 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Noninterest Expense Noninterest expense increased by $78,000, or 26.99%, from $289,000 for the quarter ended December 31, 1995 to $367,000 for the quarter ended December 31, 1996. The increase in total noninterest expense was primarily due to the aforementioned $102,000 in expenses associated with the unsuccessful acquisition attempt of Olivia Bancorporation, Inc. These expenses consist primarily of professional fees including various accounting, investment banking, and legal services provided the Company during the negotiations and due diligence. In the aggregate, professional fees increased by $75,000, or 141.51% from $53,000 for the quarter ended December 31, 1995, to $128,000 for the quarter ended December 31, 1996. In addition, the increase in noninterest expense during the quarter ended December 31, 1996 was also attributable to a $7,000, or 3.91%, increase in compensation and employee benefits from $179,000 for the quarter ended December 31, 1995 to $186,000 for the quarter ended December 31, 1996, and a $1,000 increase, or 20.00% in advertising expense in comparison of the same periods. The increase in noninterest expense during the quarter ended December 31, 1996 was partially offset by a $4,000, or 15.38% decrease in other expenses from $26,000 for the quarter ended December 31, 1995, to $22,000 for the quarter ended December 31, 1996, and a $2,000 decrease, or 10.00% in federal deposit insurance premiums in comparison of the same periods. 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 December 31, 1996. The slight decrease in other expenses represents a lower level of miscellaneous expenses incurred during the quarter ended December 31, 1996. Noninterest expense increased by $368,000, or 74.49%, from $494,000 for the six months ended December 31, 1995 to $862,000 for the six months ended December 31, 1996. The increase in total noninterest expense was primarily due to the one-time $237,000 federal deposit insurance assessment to bring to parity the SAIF and BIF, and the $102,000 in expenses incurred as a result of the unsuccessful acquisition attempt of Olivia Bancorporation, Inc. The increase in noninterest expense during the six months ended December 31, 1996 was also attributable to a $33,000, or 10.31%, increase in compensation and employee benefits from $320,000 for the six months ended December 31, 1995 to $353,000 for the six months ended December 31, 1996. Advertising expense and other expenses increased by $2,000, or 28.57%, and $5,000 or 12.50%, respectively, during the six months ended December 31, 1996 in comparison to the six months ended December 31, 1995. (Continued) 16 REDWOOD FINANCIAL, INC. AND SUBSIDIARY 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 six months ended December 31, 1996. The increase in other expenses represents a slightly higher level of miscellaneous expenses incurred during the six months ended December 31, 1996. Excluding the $237,000 federal insurance premium BIF/SAIF parity assessment, federal deposit insurance premium expense declined by $2,000, or 4.88% from $41,000 for the six months ended December 31, 1995 to $39,000 during the six months ended December 31, 1996. Similarly, excluding the $102,000 in costs incurred in conjunction with the unsuccessful acquisition, professional fees declined by $10,000 during the six months ended December 31, 1996 in comparison to the same period ended December 31, 1995. Income Taxes The Company's income taxes declined by $37,000, or 68.52%, from $54,000 for the quarter ended December 31, 1995, to $17,000 the quarter ended December 31, 1996. The change in income taxes was due primarily to a decrease in pre-tax earnings of $77,000, or 59.23%, from pre-tax earnings of $130,000 for the quarter ended December 31, 1995 to $53,000 for the quarter ended December 31, 1996. The Company's income taxes fluctuated by $114,000, or 125.27%, from an income tax expense of $91,000 for the six months ended December 31, 1995, to an income tax benefit of $23,000 for the six months ended December 31, 1996. The change in income taxes was due primarily to a decrease in pre-tax earnings of $364,000, or 107.37%, from pre-tax earnings of $339,000 for the six months ended December 31, 1995 to a pre-tax loss of $25,000 for the six months ended December 31, 1996. As previously stated, the Company's pre-tax loss is due to the one-time deposit insurance assessment and costs associated with the unsuccessful acquisition attempt of Olivia Bancorporation, Inc. The income tax benefit for the six months ended December 31, 1996 reflects the tax benefit associated with the Company's current negative earnings position adjusted for tax exempt interest. 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. (Continued) 17 REDWOOD FINANCIAL, INC. AND SUBSIDIARY The primary investing activity of the Company is the purchase of investment and mortgage-backed and related securities. During the six months ended December 31, 1996 and 1995, the Company purchased investment and mortgage-backed and related securities in the amounts of $0, and $6,369,000, 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. 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 December 31, 1996 and 1995, cash and cash equivalents totaled $8,195,000 and $2,487,000, respectively. Although the Company maintains higher levels of liquidity, the unusually high level of cash and cash equivalents at December 31, 1996 is not indicative of the level of liquidity the Company typically maintains; but instead reflects a combination of funds obtained from investment securities maturing in December 1996 as well as the acceptance of public unit funds during this month. (Continued) 18 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Recent Developments (1) Termination of Letter of Intent to acquire Olivia Bancorporation, Inc. On December 30, 1996, the Company announced that the Letter of Intent, dated November 1, 1996, to acquire 100% of the outstanding stock of Olivia Bancorporation, Inc. (the Bancorporation) and 100% of the stock of American State Bank of Olivia, Minnesota (the Bank) had terminated. Consummation of the proposed acquisition was subject to several conditions, including the completion of satisfactory due diligence by the Company. Upon completion of due diligence, the Company decided that it could not offer the consideration disclosed in the aforementioned Letter of Intent. After further negotiations, the parties could not reach agreement on a revised price for the proposed acquisition. No further negotiations on the matter are expected to be conducted in the foreseeable future. (2) Bank Insurance Fund/Savings Association Insurance Fund Assessment As a result of the omnibus appropriations bill signed September 30, 1996 by President Clinton, all financial institutions insured by the Savings Association Insurance Fund (SAIF) were assessed a special assessment intended to bring to parity the fund insuring deposits at most savings institutions, the SAIF, with the fund insuring deposits at commercial banking institutions, the Bank Insurance Fund (BIF). Subsequently, the Association paid a one-time $237,000 assessment to the Federal Deposit Insurance Corporation (FDIC) on November 29, 1996. 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. In December 1996, the Association was informed by the FDIC that its deposit insurance rate will be 6.5 basis points for each dollar of deposits. Based upon the current level of deposits, the Company expects that the legislation will reduce the Association's deposit insurance expense by approximately 71.7% before taxes. (3) Association Dividend Payment to the Company During the quarter ended December 31, 1996, a $2,000,000 dividend was paid to the Company by the Association. The dividend payment reduces the capital the Company has invested in the Association, however, the Association continues to meet all regulatory capital requirements. The dividend was paid subsequent to notification by the Association's regulator, the Office of Thrift Supervision, that it took no objection to the dividend payment. (Continued) 19 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. On October 22, 1996, the Annual Meeting of the shareholders of the Company was held to obtain the approval of the shareholders of record as of September 3, 1996 in connection with the matters indicated below. The following is a brief description of the matters voted on at the meeting, and the number of votes cast for, against, or withheld, as well as the number of abstentions, as to such matters:
Vote -------------------------------- Against or Matter For withheld Abstain ----------------------------------------------------------------------------- 1. Election of directors: James P. Tersteeg 1,049,122 10,150 N/A J. Scott Nelson 1,049,122 10,150 N/A 2. Appointment of KPMG Peat Marwick 1,058,272 0 1,000 LLP as auditors for 1997 fiscal year
ITEM 5: Other Information. None. (Continued) 20 REDWOOD FINANCIAL, INC. AND SUBSIDIARY PART II - OTHER INFORMATION 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, and a Form 8-K (Items 5 and 7), dated December 30, 1996, were filed. 21 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: February 5, 1997 /s/ Paul W. Pryor ---------------- ----------------- Paul W. Pryor, President and Chief Executive Officer (Duly Authorized Officer) Date: February 5, 1997 /s/ Anthony H. Acker - ---------------------- -------------------- Anthony H. Acker, Chief Financial Officer (Principal Accounting Officer) 22 EX-27 2 FDS 10-QSB
9 3-MOS JUN-30-1997 DEC-31-1996 15,217 8,179,630 0 0 0 26,318,389 26,421,072 18,384,613 213,034 53,526,359 40,288,088 0 210,976 0 0 0 112,500 13,125,771 53,526,359 378,600 475,940 54,503 909,043 502,095 502,095 406,948 0 0 366,713 52,947 52,947 0 0 52,947 0.04 0.04 3.11 238,300 28,664 0 266,964 213,034 0 0 0 213,034 0 213,034 NOT NET OF ALLOWANCE
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