-----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, TCcEnT2QB7uSjsldnzIrD7kxMnCXtuSVGvBR/hnNxgtlSBxFeMmwy97dwGP36VGO nVBeC5r4dwUJMVK1U132hw== 0000946275-98-000653.txt : 19981116 0000946275-98-000653.hdr.sgml : 19981116 ACCESSION NUMBER: 0000946275-98-000653 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98746686 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, 1998 [ ] 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, 1998: Class Outstanding ----- ----------- Common stock, par value $0.10 per share 781,293 REDWOOD FINANCIAL, INC. AND SUBSIDIARY CONTENTS PART I - FINANCIAL INFORMATION Page Item 1: Financial Statements Consolidated Balance Sheets at September 30, 1998 and June 30, 1998 3 Consolidated Statements of Earnings for the Three months ended September 30, 1998 and 1997 4 Consolidated Statements of Comprehensive Income for 5 the Three months ended September 30, 1998 and 1997 Consolidated Statement of Stockholders' Equity for the Three months ended September 30, 1998 6 Consolidated Statements of Cash Flows for the Three months ended September 30, 1998 and 1997 7 Notes to Consolidated Financial Statements 8-11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 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 20 Signatures 21 2 REDWOOD FINANCIAL, INC. AND SUBSIDIARY PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets (Unaudited)
Assets September 30, June 30, 1998 1998 - --------------------------------------------------------------------------------------------------------------- Cash $ 28,127 20,448 Interest-bearing deposits with banks 1,546,749 1,988,780 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 1,574,876 2,009,228 - --------------------------------------------------------------------------------------------------------------- Securities available for sale: Mortgage-backed and related securities (amortized cost 36,537,896 33,937,175 $36,362,520 and $33,726,372, respectively) Investment securities (amortized cost $6,859,402 and 6,880,948 9,793,500 $9,784,454, respectively) - --------------------------------------------------------------------------------------------------------------- Total securities available for sale 43,418,844 43,730,675 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Loans receivable, net 31,500,753 28,994,750 Federal Home Loan Bank stock, at cost 1,107,300 835,000 Accrued interest receivable 549,940 547,898 Premises and equipment, net 980,688 596,867 Investment in limited partnership 396,504 484,024 Other assets 116,584 88,163 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Total Assets $ 79,645,489 77,286,605 - --------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity - --------------------------------------------------------------------------------------------------------------- Deposits 47,252,895 48,101,806 Federal Home Loan Bank advances 20,110,503 16,200,000 Accrued interest payable 961,103 631,168 Advance payments by borrowers for taxes and insurance 103,946 75,463 Accrued expenses and other liabilities 326,550 340,142 - --------------------------------------------------------------------------------------------------------------- Total Liabilities 68,754,997 65,348,579 - --------------------------------------------------------------------------------------------------------------- Common stock ($.10 par value): Authorized and issued 1,125,000 shares; outstanding 781,293 shares at September 30, 1998; 868,093 shares at June 30, 1998 112,500 112,500 Additional paid-in capital 8,495,726 8,490,163 Retained earnings, subject to certain restrictions 6,847,831 6,794,926 Accumulated other comprehensive income 118,153 131,909 Unearned employee stock ownership plan shares (446,704) (463,264) Unearned management stock bonus plan shares (198,516) (220,172) Treasury stock, at cost, 343,707 shares at September 30, 1998; 256,907 shares at June 30, 1998 (4,038,498) (2,908,036) - --------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 10,890,492 11,938,026 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 79,645,489 77,286,605 - ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidaed financial statements 3 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Earnings (Unaudited)
Three months ended September 30, 1998 1997 - --------------------------------------------------------------------------------------- Interest Income: Loans receivable $ 641,331 466,116 Securities held to maturity: Mortgage-backed and related securities 0 231,493 Investment securities 0 142,385 Securities available for sale: Mortgage-backed and related securities 573,225 164,797 Investment securities 121,855 127,746 Cash equivalents and other 36,968 21,741 - --------------------------------------------------------------------------------------- Total interest income 1,373,379 1,154,278 Interest Expense: Federal Home Loan Bank advances 274,375 65,284 Deposits 657,412 634,303 - --------------------------------------------------------------------------------------- Total interest expense 931,787 699,587 - --------------------------------------------------------------------------------------- Net interest income 441,592 454,691 - --------------------------------------------------------------------------------------- Provision for losses on loans 9,000 0 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Net interest income after provision for losses on loans 432,592 454,691 - --------------------------------------------------------------------------------------- Noninterest income: Gains on sale of securities available for sale 21,828 0 Fees and service charges 27,764 12,573 Other 5,190 878 - --------------------------------------------------------------------------------------- Total noninterest income 54,782 13,451 - --------------------------------------------------------------------------------------- Noninterest expense: Compensation and employee benefits 219,717 188,979 Advertising 8,154 6,162 Occupancy 8,624 6,658 Federal deposit insurance premiums 7,554 6,986 Professional fees 23,644 30,253 Loss on limited partnership 87,520 0 Other 44,831 28,510 - --------------------------------------------------------------------------------------- Total noninterest expense 400,044 267,548 - --------------------------------------------------------------------------------------- Earnings before income taxes 87,330 200,594 Income tax expense 34,425 74,704 Net earnings $ 52,905 125,890 - --------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------- Net earnings per common share - Basic $ 0.07 0.15 Net earnings per common share - Diluted 0.07 0.14 - ---------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 4 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended September 30, 1998 1997 ---------------------------------------------------------- Net earnings $ 52,905 125,890 Other comprehensive income, net of tax : Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period (659) 40,268 Less: reclassification adjustment for gains included in net income (13,097) 0 ---------- ---------- Other comprehensive income (loss) (13,756) 40,268 ---------- --------- Comprehensive income $ 39,149 166,158 ----------------------------------------------------
See accompanying notes to consolidated financial statements 5 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statement of Stockholders' Equity For the Three Months Ended September 30, 1998 (unaudited)
Unearned Employee Unearned Accumulated Stock management Additional Other Ownership stock Total Common paid-in Retained Comprehensive Plan bonus Treasury stockholders' Stock capital Earnings Income Shares plan shares stock equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 112,500 8,490,163 6,794,926 131,909 (463,264) (220,172) (2,908,036) 11,938,026 Net Earnings 52,905 52,905 Other comprehensive income (13,756) (13,756) Earned employee stock ownership plan shares, net 5,563 16,560 22,123 Repurchase of common stock (1,130,462) (1,130,462) Earned management stock bonus plan shares 21,656 21,656 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1998 112,500 8,495,726 6,847,831 118,153 (446,704) (198,516) (4,038,498) 10,890,492 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements 6 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (unaudited)
Three months ended September 30, ----------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Operating Activities Net earnings $ 52,905 125,890 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 9,000 0 Depreciation 8,935 3,963 Amortization of premiums and discounts, net 12,252 (5,207) (Increase) decrease in other assets (28,421) 9,558 (Increase) decrease in accrued interest receivable (2,042) 69,936 Increase in accrued interest payable 329,935 410,917 Gain on sale of securities available for sale (21,828) 0 Amortization of unearned ESOP shares 16,560 16,560 Earned ESOP shares priced above original cost 5,563 3,777 Earned Management Stock Bonus Plan shares 21,656 21,656 Decrease in investment in limited partnership 87,520 0 Deferred income taxes 9,171 (26,052) (Decrease) increase in accrued expenses and other liabilities (13,592) 13,693 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 487,614 644,691 - ---------------------------------------------------------------------------------------------------------------------- Investing activities: Proceeds from maturities of investment securities held to maturity 0 500,000 Principal collected on mortgage-backed and related securities held to maturity 0 902,311 Proceeds from maturities of investment securities available for sale 2,925,000 0 Proceeds from sales of mortgage-backed and related securities available for sale 2,547,575 0 Purchases of mortgage-backed and related securities available for sale (7,644,295) (2,503,927) Principal collected on mortgage-backed and related securities available for sale 2,467,733 63,200 Purchases of Federal Home Loan Bank stock (272,300) 0 Increase in loans receivable, net (2,512,536) (1,575,503) Purchases of premises and equipment (392,756) (46,384) - ---------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (2,881,579) (2,660,303) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Decrease in deposits, net (848,911) (723,441) Increase in advance payments by borrowers for taxes and insurance 28,483 37,239 Proceeds from Federal Home Loan Bank advances 8,700,000 4,700,000 Repayment of Federal Home Loan Bank advances (4,789,497) (1,600,000) Repurchase of common stock (1,130,462) (565,092) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,959,613 1,848,706 - ---------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (434,352) (166,906) Cash and cash equivalents, beginning of period 2,009,228 763,792 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,574,876 596,886 - ---------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 609,041 288,670 Income taxes 67,900 62,705 Supplemental disclosures of cash flow information: Transfer of real estate to loans 0 13,520 See accompanying notes to consolidated financial statements
7 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1998 (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 HomeTown Bank (the "Bank", previously known as 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 statements of comprehensive income, 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, 1998 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, 1998 and for the year then ended. (Continued) 8 REDWOOD FINANCIAL, INC. AND SUBSIDIARY (3) Earnings Per Share The following tables illustrate the calculation of basic and diluted earnings per share for the three months ended September 30, 1998 and 1997.
For the Three Months Ended: September 30, 1998 September 30, 1997 --------------------------- ------------------- ------------------ Per Share Per Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Net Earnings: $52,905 $125,890 Basic EPS: Earnings available to common stockholders 52,905 759,627 $0.07 125,890 864,533 $0.15 Effect of Dilutive Securities: Options on common stock 24,467 9,694 Unvested restricted stock awards 16,200 21,600 ------ ------ Diluted EPS: Earnings available to common stockholders plus assumed conversions $52,905 800,294 $0.07 $125,890 895,827 $0.14
(4) Regulatory Capital Requirements At September 30, 1998, the Bank met each of the three current minimum regulatory capital requirements. The following table summarizes the Bank's regulatory capital position at September 30, 1998: (Continued) 9 REDWOOD FINANCIAL, INC. AND SUBSIDIARY
To Be Well (In thousands of dollars) Capitalized Under Prompt Corrective Actual Required Action Provisions ------ -------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Bank's Net Worth $8,613 Less: Available For Sale Market Valuation 118 ------- Tangible Capital 8,495 10.94% $1,165 1.50% n/a n/a (to tangible assets) Core Capital 8,495 10.94% 2,329 3.00% $3,882 5.00% (to adjusted tangible assets) Core Capital 8,495 28.45% n/a n/a 1,792 6.00% (to risk-weighted assets) Plus: Allowable portion of general allowance for loan losses 260 ------- Risk-based Capital $8,755 29.32% $2,389 8.00% $2,986 10.00% (to risk-weighted assets)
(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. (Continued) 10 REDWOOD FINANCIAL, INC. AND SUBSIDIARY (6) Stock Repurchases During the three months ended September 30, 1998, the Company purchased 86,800 shares of its outstanding common stock, or 10% of its 868,093 outstanding shares of common stock at June 30, 1998. As a result of the stock repurchase program, the Company has now outstanding 781,293 shares of common stock. The following summarizes the Company's common stock repurchases during the quarter: Settlement Date Shares Purchased Price per share --------------- ---------------- --------------- August 14, 1998 11,250 $13.0000 August 17, 1998 43,400 $13.0000 August 24, 1998 10,832 $13.1250 August 28, 1998 2,000 $12.7500 September 18, 1998 19,318 $13.0625 Average price per share $13.0238 (7) New Accounting Standards In February 1997, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is currently studying the impact of adopting SFAS 133. (Continued) 11 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 Bank, 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 Bank's market area. Financial Condition The Company's total assets increased by $2,358,000, or 3.05%, from $77,287,000 at June 30, 1998 to $79,645,000 at September 30, 1998. 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, 1998. These advances were used primarily to fund increased loan production and to offset a net deposit outflow during this three month period. Cash and cash equivalents decreased by $434,000, or 21.60%, from $2,009,000 at June 30, 1998 to $1,575,000 at September 30, 1998. The decrease in cash was primarily due to the use of funds for the aforementioned increase in loan production and net deposit outflows during the three months ended September 30, 1998. The Company attempts to maintain lower levels of cash and cash equivalents in order to enhance overall yield. (Continued) 12 REDWOOD FINANCIAL, INC. AND SUBSIDIARY The Company's loans receivable, net, increased $2,506,000, or 8.64% during the three months ended September 30, 1998. The increase in loans was a result of increased loan demand in the Company's market and includes 1-4 family residential mortgage loans and agricultural and commercial 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 securities designated available for sale decreased 0.71% or $312,000 during the three months ended September 30, 1998. The Company has maintained the size of this portfolio due to recent purchases, which have offset maturities, sales and increased prepayments of mortgage-backed securities as a result of recent decreases in mortgage rates. Purchases of investment securities, which included only mortgage-backed securities totaled approximately $7,644,000 during this three month period. In addition, the carrying value of the Company's investment securities, including mortgage-backed securities reflected a $23,000 before tax decrease due to market value depreciation. The Company is no longer designating any investment securities, including mortgage-backed securities as held to maturity. The Company's deposits decreased by $849,000, or 1.76%, from $48,102,000 at June 30, 1998 to $47,253,000 at September 30, 1998. At September 30, 1998, the Company's FHLB advances totaled $20,111,000, an increase of $3,911,000, or 24.14% from $16,200,000 at June 30, 1998. The advances were primarily utilized to fund increased loan production and offset an outflow of deposits 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 fund loan growth and investment purchases and 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. (Continued) 13 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Results of Operations Net Earnings Net earnings were $53,000 for the quarter ended September 30, 1998, as compared to $126,000 for the quarter ended September 30, 1997. This represented a decrease of $73,000, or 57.94%. The decrease in net earnings was primarily attributable to a $94,000, or 324.14% increase in other expense. This increase in other expense is primarily attributable to a decrease in the value of an investment by the Company in a limited partnership. This limited partnership invests in equity securities of financial institutions. The value of the equity securities held by this limited partnership decreased as a result of recent depreciation of equity securities. As a result, the Company decreased the carrying value of this investment by $88,000, or 18.18% in the three months ended September 30, 1998 to recognize both realized and unrealized losses in its share of the limited partnership. The decrease in net income was also affected by a $31,000, or 16.40% increase in compensation expense, a $13,000, or 2.86% decrease in net interest income, and a $9,000 increase in loan loss provisions. The decrease was partially offset by a $41,000, or 54.67% decrease in income tax expense, a $22,000 increase in gains on the sale of securities available for sale, and a $15,000, or 115.38% increase in fees and other service charges. Net Interest Income Net interest income decreased by $13,000, or 2.86%, from $455,000 for the quarter ended September 30, 1997 to $442,000 for the quarter ended September 30, 1998. The decrease in net interest income was primarily due to a decrease in interest-earning assets relative to interest-bearing liabilities and a decrease in net interest spread. While there has been an increase in both interest-earning assets and interest-bearing liabilities due to growth of the Company, the Company's ratio of average interest-earning assets to average interest-bearing liabilities decreased from 124.47% at September 30, 1997 to 116.50% at September 30, 1998. This decrease is the result of the use of $1,705,000 in available funds to repurchase the Company's outstanding shares since September 30, 1997. In addition, the Company's non-interest earning assets have increased by $992,000, or 114.29%, from September 30, 1997 to September 30, 1998, primarily as a result of funds used to construct the Bank's new office building in Redwood Falls, Minnesota and to invest in the aforementioned limited partnership. Net interest income was also impacted by a decrease in the net interest spread from 1.81% for the three months ended September 30, 1997 to 1.49% for the three months ended September 30, 1998. The decrease was a result of both a decrease in the Company's yield on assets and a slight increase in its cost of funds. (Continued) 14 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Interest Income Interest income was $1,373,000 for the quarter ended September 30, 1998, as compared to $1,154,000 for the quarter ended September 30, 1997, representing an increase of $219,000, or 18.98%. The increase in interest income was primarily due to an increase in interest-earning assets. Average interest-earning assets increased $14,216,000, or 22.64% from $62,804,000 for the three months ended September 30, 1997, to $77,020,000 for the three months ended September 30, 1998. The increase in interest income was offset by a decrease in the overall yield on interest-earning assets. For the quarter ended September 30, 1998, the yield on interest-earning assets was 7.13%, as compared to 7.35% for the quarter ended September 30, 1997. The decrease in yield on interest-earning assets was due primarily to lower yields on the Company's loan and securities portfolios. Interest on loans receivable increased by $175,000, or 37.55%, to $641,000 for the quarter ended September 30, 1998, as compared to $466,000 for the quarter ended September 30, 1997. Such increase was due to a $9,119,000, or 42.32% increase in the average balance of loans receivable from $21,548,000 for the quarter ended September 30, 1997 to $30,667,000 for the quarter ended September 30, 1998. The increase in interest on loans receivable was offset by a decrease in the average yield on loans receivable from 8.65% for the quarter ended September 30, 1997, to 8.37% for the quarter ended September 30, 1998. Interest income on mortgage-backed and related securities available for sale was $573,000 and $165,000 for the quarters ended September 30, 1998 and 1997, respectively. The yield on the Company's mortgage-backed securities portfolio available for sale was 6.36% and 6.93% for the three months ended September 30, 1998 and 1997, respectively. A decrease in the yield on the mortgage-backed securities portfolio has occurred as a result of recent declines in mortgage rates. In January 1998, the Company redesignated all mortgage-backed and related securities as available for sale. As such, the Company reported no interest income on mortgage-backed and related securities held to maturity for the three months ended September 30, 1998. Interest income on investment securities available for sale was $122,000 and $128,000 for the quarters ended September 30, 1998 and 1997, respectively. The yield on the Company's investment securities portfolio available for sale was 6.06% and 6.96% for the three months ended September 30, 1998 and 1997, respectively. A decrease in the yield on the investment securities portfolio has occurred as a result of recent declines in interest rates. In January 1998, the Company redesignated all investment securities as available for sale. As such, the Company reported no interest income on investment securities held to maturity for the three months ended September 30, 1998. (Continued) 15 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Interest income on cash and cash equivalents increased by $15,000, or 68.18% in comparison of the three months ended September 30, 1998 and 1997. The increase is a result of more cash on hand in the three months ended September 30, 1998. Interest Expense Interest expense increased by $232,000, or 33.14%, from $700,000 for the quarter ended September 30, 1997 to $932,000 for the quarter ended September 30, 1998. The increase in interest expense resulted from a $7,813,000, or 20.58% increase in the average balance of FHLB advances from $4,675,000 for the quarter ended September 30, 1997 to $19,022,000 for the quarter ended September 30, 1998. The increase in interest expense was also impacted by a $1,293,000, or 2.82% increase in the average balance of deposits in comparison of the three months ended September 30, 1998, to the three months ended September 30, 1997. The increase in interest expense was also impacted by a slight increase in the cost of funds from 5.55% to 5.64% for the three months ended September 30, 1997 and 1998, respectively. Provision for Loan Losses The Company's provision for loan losses was $9,000 and $0 for the three months September 30, 1998 and 1997, respectively. As noted, the Company has experienced growth in its loan portfolio. The provision was increased in response to loan growth, a change in the composition of the loan portfolio through increased agricultural and commercial loan originations, and inherent losses in the loan portfolio. As such, the Company intends to regularly provide for losses. The level of this provision is dependent on loan growth, delinquencies, economic conditions, and other various factors used by management in the assessment of its loan portfolio and overall level of loan loss reserves. At September 30, 1998 and 1997, the allowance for loan losses totaled $260,000 and $213,000, respectively. The Company's net loan charge-offs were $0 and $0 for the three months ended September 30, 1998 and 1997, respectively. At September 30, 1998 and 1997, the allowance for loan losses represented 0.82% and 0.94% of loans receivable, respectively. Nonaccrual loans totaled $0 and $0 at September 30, 1998 and 1997, respectively. At September 30, 1998 and 1997, classified assets totaled $0 and $47,000, respectively. Noninterest Income Noninterest income increased by $42,000, or 323.08% from $13,000 to $55,000 for the three months ended September 30, 1998 as compared to the three months ended September 30, 1997. The increase was due to gains on the sale of securities available for sale of $22,000 and an increase in fees and service charges of $15,000, or 115.38%. (Continued) 16 REDWOOD FINANCIAL, INC. AND SUBSIDIARY Noninterest Expense Noninterest expense increased by $132,000, or 49.25%, from $268,000 for the quarter ended September 30, 1997 to $400,000 for the quarter ended September 30, 1998. The increase was due primarily to the aforementioned decrease in the carrying value of an investment in a limited partnership. In addition, the increase was also impacted by a $31,000, or 16.40% increase in compensation and employee benefits expense due primarily to increased staff. There were also minor increases in expenses on advertising, occupancy, other expenses, and federal deposit insurance premiums. The increase in noninterest expense was partially offset by a $6,000, or 20.00% decrease in professional fees. Income Taxes The Company's income taxes decreased by $41,000, or 54.67%, from $75,000 for the quarter ended September 30, 1997, to $34,000 for the quarter ended September 30, 1998. The change in income taxes was due primarily to a decrease in pre-tax earnings of $114,000, from a $201,000 for the quarter ended September 30, 1997 to $87,000 for the quarter ended September 30, 1998. The Company's effective tax rate was 39.42% and 37.24% for the three months ended September 30, 1998 and 1997, respectively. The increase was a result of a lower level of tax exempt investments over the three months ended September 30, 1998. Forward Looking Information 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; potential operational disruptions due to Year 2000 considerations; or other significant uncertainties. (Continued) 17 REDWOOD FINANCIAL, INC. AND SUBSIDIARY 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, 1998 and 1997, the Company's loan portfolio, net, increased $2,513,000 and $1,576,000, respectively. During the same periods, the Company purchased mortgage-backed and related securities in the amounts of $7,644,000 and $2,504,000, 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 Bank has the ability to obtain additional advances from the Federal Home Loan Bank of Des Moines. During the quarters ended September 30, 1998 and 1997, the Bank utilized advances of $8,700,000 and $4,700,000, respectively. In addition, the Company's designation of all investments and mortgage-backed securities as available for sale is intended to increase liquidity and overall operational flexibility. The Bank 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 4.0%. 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, 1998 and 1997, cash and cash equivalents totaled $1,575,000 and $597,000, respectively. Investment securities, including mortgage-backed and related securities designated available for sale totaled $43,419,000 and $17,389,000 at September 30, 1998 and 1997, respectively. (Continued) 18 REDWOOD FINANCIAL, INC. AND SUBSIDIARY 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 8.0% of "risk-adjusted" assets. The Bank currently meets all three capital requirements. Year 2000 Consideration The Company's primary exposure is its automated data processing system which had been determined to be Year 2000 noncompliant. On August 4, 1998, the Company received its Year 2000 compliant release from its software vendor. Management is continuing to test the release to ensure that the software properly addresses risks identified by the Federal Financial Institutions Examination Council and its data processing vendor. The Company expects to have its testing substantially completed by December 31, 1998. The Company also has several other operational areas with Year 2000 sensitivity and is currently testing these systems. The Company anticipates its exposure to Year 2000 issues is reduced due to its 1-4 family residential lending emphasis. However, as the Company broadens its lending activities to include commercial lending, as part of its credit underwriting, the Company is assessing the Year 2000 sensitivity of all commercial loan applicants. At this time, the Company expects that its Year 2000 compliance efforts will have no material financial effect. However, a substantial amount of current staff time is being expended on Year 2000 assessment and testing. Should the Company fail to correct its Year 2000 deficiencies by December 31, 1999, the Company could expect a substantial disruption to daily operations. Such disruption could have a material effect on the Company's financial position and future earnings. To this extent, the Company's contingency plan is to re-commence manual data processing operations. As the Company only recently converted from manual to automated data processing in October 1997, the Company still retains the equipment and trained staff necessary to recommence manual data processing operations. The Company plans to re-assess its contingency plan pending the results of on-going testing. Recent Development Completion of Stock Repurchase Program On August 7, 1997, the Company announced its intention to repurchase 10% of its outstanding shares, or 86,800 shares. The Company completed the repurchase as detailed previously in this 10-QSB. (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. None ITEM 5: Other Information. None. ITEM 6: Exhibits and Reports on Form 8-K. Form 8-K (Item 7) dated August 7, 1998 and filed with the Securities and Exchange Commission August 17, 1998. 20 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, 1998 /s/ Paul W. Pryor ---------------- ------------------------------------------------ Paul W. Pryor, President and Chief Executive Officer (Duly Authorized Officer) Date: October 30, 1998 /s/ Anthony H. Acker ---------------- ------------------------------------------------ Anthony H. Acker, Chief Financial Officer (Principal Financial and Accounting Officer) 21 EX-27 2 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1 3-MOS JUN-30-1999 SEP-30-1998 28,127 1,546,749 0 0 43,418,844 43,418,844 43,418,844 31,760,766 260,013 79,645,489 47,252,895 1,200,000 1,391,599 18,910,503 0 0 112,500 10,777,992 79,645,489 641,331 695,080 36,968 1,373,379 657,412 931,787 441,592 9,000 21,828 400,044 87,330 87,330 0 0 52,905 .07 .07 2.29 0 394,392,709 0 0 251,013 0 0 260,013 260,013 260,013 52,689
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