SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-QSB
(Mark One)
[X} QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
---------- ----------
Commission File No. 0-25149
Ridgewood Financial, Inc.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-3616280
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
55 North Broad Street, Ridgewood, New Jersey 07450
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(Address of Principal Executive Offices)
(201) 445-7887
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Issuer's Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
YES X NO
--- ---
Number of shares of Common Stock outstanding as of May 12, 1999: 3,180,000
Transitional Small Business Disclosure Format (check one)
YES NO X
--- ---
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Contents
--------
Page(s)
-------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..........................3
Item 2. Management's Discussion and Analysis .....................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.........................................20
Item 2. Changes in Securities and Use of Proceeds.................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
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ridgewood Financial Inc.
Consolidated Statements of Financial Condition
March 31, 1999 and December 31, 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 2,364 $ 2,274
Federal funds sold 13,500 41,200
--------- ---------
Cash and cash equivalents 15,864 43,474
Investment securities:
Held to maturity (fair value of $1,237 and
$1,374 at March 31, 1999 and December
31, 1998, respectively) 1,216 1,354
Available for sale 32,409 16,921
Mortgage-backed securities:
Held to maturity (fair value of $10,721
and $11,409 at March 31, 1999 and
December 31, 1998, respectively) 10,641 11,277
Available for sale 75,756 88,390
Loans receivable, net 114,502 107,021
Accrued interest receivable 1,427 1,387
Premises and equipment, net 6,195 2,218
Federal Home Loan Bank ("FHLB") stock, at cost 1,949 1,949
Other assets 480 742
--------- ---------
Total assets $ 260,439 $ 274,733
========= =========
Liabilities And Stockholders' Equity:
Deposits 195,545 205,529
Borrowed funds 37,044 32,557
Initial public offering subscriptions payable - 17,809
Advances from borrowers for taxes and insurance 1,013 926
Accounts payable and other liabilities 459 490
--------- ---------
Total liabilities 234,061 257,311
Stockholders' Equity:
Preferred stock, authorized 5,000,000 shares,
None issued and outstanding - -
Common stock, $0.10 Par Value,
Authorized Shares 10,000,000
Issued 3,180,000 in 1999 and none in 1998,
Outstanding Shares 3,180,000 in 1999
and none in 1998 318 -
Additional paid-in capital 9,431 -
Retained earnings 17,674 17,693
Unallocated common stock owned by
employee stock ownership plan (574) -
Accumulated other comprehensive (loss)
income (471) (271)
--------- ---------
Total stockholders' equity 26,378 17,422
--------- ---------
Total Liabilities and Stockholders' Equity $ 260,439 $ 274,733
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Ridgewood Financial, Inc.
Consolidated Statements of Income
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Interest Income:
Loans receivable $ 2,107 $ 2,069
Investment securities 15 129
Mortgage-backed securities 177 250
Securities available for sale 1,458 1,219
Other 307 248
---------- ----------
Total interest income 4,064 3,915
---------- ----------
Interest Expense:
Deposits 2,291 2,377
Borrowed fund 457 206
---------- ----------
Total interest expense 2,748 2,583
---------- ----------
Net interest income 1,316 1,332
Provision for loan losses 36 3
---------- ----------
Net interest income after provision for loan losses 1,280 1,329
---------- ----------
Noninterest income:
Fees and service charges 36 36
Gain on sale of securities - 8
Gain on sale of loans - 21
Other 1 -
---------- ----------
Total noninterest income 37 65
---------- ----------
Noninterest expenses:
Salaries and benefits 609 494
Occupancy and equipment 315 254
Advertising and promotion 27 31
SAIF deposit insurance premium 30 29
Other expenses 155 93
---------- ----------
Total noninterest expense 1,136 901
---------- ----------
Income before income taxes 181 493
Income taxes - 154
========== ==========
Net income $ 181 $ 339
========== ==========
Earnings per common share:
Basic $ 0.06 $ -
========== ==========
Diluted $ 0.06 $ -
========== ==========
Weighted average shares outstanding:
Basic 3,138,912 -
Diluted 3,138,912 -
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Ridgewood Financial, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31,
----------------------
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from Operating Activities:
Net Income $ 181 $ 339
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 57 50
Amortization of loan fees (67) (31)
Premiums and discounts on mortgage-backed and
investment securities 400 238
Proceeds from loan sales -- 771
Gain on sale of loans -- (21)
Gain on sale of securities available for sale -- (8)
Provision for loan losses 36 3
Allocation of employee stock ownership shares 25 --
Deferred income tax expense (benefit) 235 (251)
(Increase) decrease in accrued interest receivable (40) 358
Decrease in other assets, net 137 248
Decrease in initial public offering subscriptions payable (17,809) --
Increase in other liabilities (31) (38)
-------- --------
Net cash (used in) provided by operating activities (16,876) 1,658
-------- --------
Cash flows from investing activities:
Net increase in first mortgage loans (8,238) (30)
Net decrease (increase) in consumer loans 766 (54)
Purchases of mortgage-backed securities available for sale -- (21,558)
Principal collected on mortgage-backed securities 12,854 3,430
Purchases of investment securities available for sale (15,771) --
Maturities and calls of investment securities held to maturity -- 14,206
Principal collected on investment securities 127 2,992
Purchases of premises and equipment (4,034) (6)
Proceeds from collection of loan fees 22 --
-------- --------
Net cash used in investing activities (14,274) (1,020)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in passbook, NOW and money market
Accounts (2,706) 2,155
Net (decrease) increase in certificates of deposit (7,278) 1,847
Proceeds from borrowed funds 4,487 9,363
Repayment of borrowed funds -- (11,000)
Net proceeds from initial public offering 9,751 --
Purchase of employee stock ownership plan stock (601) --
Capitalization of mutual holding company (200) --
Net increase (decrease) in advances from borrowers for taxes and insurance 87 (8)
-------- --------
Net cash provided by financing activities 3,540 2,357
-------- --------
Net (decrease) increase in cash and cash equivalents (27,610) 2,995
Cash and cash equivalents at beginning of period 43,474 15,398
======== ========
Cash and cash equivalents at end of period $ 15,864 $ 18,393
======== ========
Supplemental disclosures of cash flow information
Cash payments for:
Interest on deposits and borrowed funds $ 2,782 $ 2,735
Income taxes 477 370
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) 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 financial
statements in conformity with generally accepted accounting principles. However,
all adjustments which are, in the opinion of management, necessary for the fair
presentation of the interim financial statements have been included. All such
adjustments are of a normal recurring nature. The consolidated statements of
income are not necessarily indicative of results which may be expected for the
entire year.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that these condensed
unaudited financial statement be read in conjunction with the Form 10-KSB for
the year ended December 31, 1998.
(2) Conversion and Reorganization
On June 22, 1998, the Board of Directors of Ridgewood Savings Bank of New Jersey
(the Bank) adopted a Plan of Conversion to convert from a New Jersey chartered
mutual savings bank to a New Jersey chartered stock savings bank. The Bank is
now a wholly-owned subsidiary of Ridgewood Financial, Inc. (the Company), a
holding company formed by the Bank.
The Company is a savings bank holding company that was incorporated in July 1998
under the laws of the State of New Jersey for the purpose of acquiring all of
the issued and outstanding common stock of the Bank. This acquisition occurred
in January 1999, at the time the Bank simultaneously converted from a mutual to
a stock institution and sold all of its outstanding capital stock to the
Company. The Company made its initial public offering of common stock and
provided additional shares of common stock to Ridgewood Financial, MHC, a mutual
holding company that holds 53% of the outstanding shares of the Company. Because
the reorganization and conversion was not completed until January 7, 1999, at
December 31, 1998, the Company had no assets, liabilities or equity.
The reorganization and conversion, including the initial public offering of the
common stock of the Company, was completed on January 7, 1999, resulting in the
issuance of 3,180,000 shares of common stock, $0.10 par value per share, of the
Company of which 1,494,600 shares (47%) were sold at a purchase price per share
of $7.00 and 1,685,400 shares (53%) were issued to Ridgewood Financial, MHC,
resulting in gross proceeds of $10.5 million. Total expenses were approximately
$700,000 resulting in net proceeds of $9.8 million.
Approximately half of the net proceeds were paid directly by the Company to the
Bank in return for 100,000 shares of common stock, $2.00 par value per share, of
the Bank (100% of the issued and outstanding shares of the Bank). In addition,
$200,000 was provided to Ridgewood Financial, MHC by the Bank. The remaining net
proceeds were retained by the Company.
Concurrent with the conversion and reorganization, the Company established an
Employee Stock Ownership Plan (ESOP) for the benefit of employees. The ESOP will
purchase 8% of the number of shares sold in the offering, in the open market,
using a loan from the Company.
6
<PAGE>
In addition, a stock option plan will be submitted for stockholders' approval.
If implemented, up to 10% of the number of shares sold in the offering would be
reserved for issuance through exercise of options for common stock.
As part of the conversion, 5,000,000 shares of preferred stock at no par value
were authorized; however, none were issued. Included in the Bank's financial
statements at December 31, 1998 was $17.8 million of subscriptions payable
related to the offering.
Upon a complete liquidation of the Bank after the conversion, the Company, as a
holder of the Bank's common stock would be entitled to any assets remaining upon
a liquidation of the Bank. Each depositor would not have a claim in the assets
of the Bank. However, upon a complete liquidation of the MHC after the
conversion, each depositor would have a claim up to the pro rata value of his or
her accounts, in the assets of the MHC remaining after the claims of the
creditors of the MHC are satisfied. Depositors who have liquidation rights in
the Bank immediately prior to the conversion will continue to have such rights
in the MHC after the conversion for so long as they maintain deposit accounts in
the Bank after the conversion.
Costs incurred that were directly associated with the conversion were deferred
as of December 31, 1998 and were deducted from the proceeds of the shares sold
in the conversion in January 1999.
(3) Earnings Per Common Share
Basic income per common share is computed by dividing net income by the weighted
average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income by the
weighted average number of shares outstanding, as adjusted for the assumed
exercise of options for common stock, using the treasury stock method.
7
<PAGE>
(4) Investment Securities
The following is a summary of maturities of the investment securities as of
March 31, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1999
----------------------------------------------- --------------------------------------------
(Unaudited)
Securities held Securities available Securities held Securities available
to Maturity for sale to Maturity for sale
---------------------- -------------------- --------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
---------- -------- --------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts maturing in:
Equity Securities $ -- -- 8 28 $ -- -- 8 30
One year or less 73 73 -- -- 58 58 - --
After one year through five years 559 575 3,962 3,952 43 43 3,243 3,243
After five years through ten years -- -- 3,987 3,983 659 675 718 721
After ten years 584 589 24,550 24,446 594 598 12,769 12,927
-------- ----- ------- ------ -------- ------ ------ -------
$ 1,216 1,237 32,507 32,409 $ 1,354 1,374 16,738 16,921
======== ===== ====== ====== ======== ====== ====== =======
</TABLE>
8
<PAGE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
(5) Mortgage-backed Securities
The following is a summary of maturities of the mortgaged-backed securities as
of March 31, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1999
--------------------------------------------- ------------------------------------------
(Unaudited)
Securities held Securities available Securities held Securities available
to Maturity for sale to Maturity for sale
---------------------- -------------------- ------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
---------- --------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ -- -- -- -- $ -- -- 709 708
After one year through five years 948 960 6,535 6,564 -- -- 3,882 3,900
After five years through ten years 609 606 18,610 18,528 1,223 1,247 18,693 18,664
After ten years 9,084 9,155 51,249 50,664 10,054 10,162 65,713 65,118
------- ------ ------- ------ ------- ------ ------ ------
$10,641 10,721 76,394 75,756 $11,277 11,409 88,997 88,390
======= ====== ====== ====== ======= ====== ====== ======
</TABLE>
9
<PAGE>
(6) Borrowed Funds
Borrowed funds at March 31, 1999 and December 31, 1998 are summarized as follows
(in thousands):
March 31, 1999 December 31, 1998
------------------ -----------------------
(unaudited)
Advances from the FHLB $ 37,044 $ 32,557
================== =======================
Pursuant to collateral agreements with the FHLB, advances are secured by all
stock in the FHLB and qualifying first mortgage loans. Advances at March 31,
1999 and December 31, 1998 have maturity dates as follows: (in thousands)
March 31, 1999 December 31, 1998
------------------- ---------------------
(unaudited)
1999 $ 1,000 $ -
2000 3,000 2,500
2001 2,000 2,000
2002 4,000 4,000
2003 5,500 5,500
2004 3,000 -
2005 2,000 2,000
2006 544 557
2008 16,000 16,000
------------------ --------------------
$ 37,044 $ 32,557
------------------ --------------------
(7) Comprehensive (loss) income
Total comprehensive income amounted to the following for the three-month periods
ended March 31 (in thousands):
1999 1998
------ ------
Net income $ 181 $ 339
Change in unrealized gain on securities
available for sale, net of taxes (200) 216
----- ------
Comprehensive (loss) income $ (19) $ 555
----- ------
10
<PAGE>
(8) Recent accounting pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
No. 133"). This statement establishes accounting and reporting standards for
derivative instruments, and for hedging activities. Statement No. 133 supersedes
the disclosure requirements in Statements No. 80, 105 and 119. This statement is
effective for periods beginning after June 15, 1999. The adoption of Statement
No. 133 is not expected to have a material impact on the financial position or
results of the Company.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134 "Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("Statement
No. 134"). This statement amends FASB Statement No. 65 "Accounting for Certain
Mortgage Banking Activities", to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. Statement No.
134 is effective January 1, 1999. The adoption of this statement is not expected
to have a material impact on the financial position or results of operations of
the Company.
11
<PAGE>
Item 2. Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are primarily dependent on the
operations of the Bank. The Bank's results of operations are primarily dependent
on its net interest income, which is the difference between the interest income
earned on assets, primarily loans, mortgage-backed securities, investments, and
other interest earning assets, less the interest expense on its liabilities,
primarily deposits and borrowings. Net interest income may be affected
significantly by general economic and competitive conditions, particularly those
with respect to market interest rates, and policies of regulatory agencies.
Furthermore, the Bank's lending activity is concentrated in loans secured by
real estate in the Bank's market area and therefore the Bank's operations are
affected by local market conditions. The results of operations are also
influenced by the level of non-interest expenses, such as employees' salaries
and benefits, occupancy and equipment costs, non-interest income such as loan
related fees and fees on deposit related services, and the Bank's provision for
loan losses.
COMPARISON OF FINANCIAL CONDITION
AT MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets decreased by $14.3 million or 5.2% to $260.4 million at
March 31, 1999 from $274.7 million at December 31, 1998. This decrease was
primarily due to the reduction in initial public offering subscriptions payable
totaling $17.8 million as the offering was completed on January 7, 1999 due to
acquisition of stock for stockholders and refunding of oversubscriptions. As a
result, federal funds sold decreased $27.7 million to $13.5 million at March 31,
1999 from $41.2 million at December 31, 1998. Available for sale mortgage-backed
securities decreased by $12.6 million to $75.8 million at March 31, 1999 from
$88.4 million at December 31, 1998, offset by an increase in available for sale
investment securities of $15.5 million to $32.4 million at March 31, 1999 from
$16.9 million at December 31, 1998, as the Bank security purchases were
concentrated in tax exempt securities during the first quarter rather than
mortgage-backed securities. Further, investment securities purchases in the
near-term will be classified as available for sale which will result in the
reduction in investment securities held to maturity. Loans receivable increased
$7.5 million due to the Bank's ability to increase mortgage loan originations
12
<PAGE>
resulting from higher levels of loan refinancings during a continued lower
interest rate environment. In addition, premises and equipment increased $4.0
million or 179.3% to $6.2 million at March 31, 1999 from $2.2 million at
December 31, 1998, as the Bank completed the purchase of a building for $4.0
million, to serve as an additional branch office and to house administrative
operations. Refurbishment costs for this purpose are estimated to be an
additional $2.2 million.
The Bank's deposits, decreased by $10.0 million or 4.9% to $195.5
million at March 31, 1999, as customers withdrew deposits to purchase stock in
the initial public offering, as well as pricing strategies designed to lower
cost of funds. Borrowings increased $4.5 million or 13.8% to $37.0 million at
March 31, 1999 from $32.6 million at December 31, 1998 as the Bank used
borrowings in conjunction with deposit pricing strategies to generate additional
income as part of its leveraging strategy. In addition, initial public offering
subscriptions payable decreased $17.8 million due to the completion of the
offering.
Total equity increased $9.0 million to $26.4 million at March 31, 1999
primarily due to the completion of the initial public offering which provided
net proceeds of $9.8 million in addition to net income of $181,000 for the
quarter ended March 31, 1999, offset by $200,000 of unrealized losses on
securities available for sale, net of taxes, and unearned ESOP stock of
$574,000.
COMPARISON OF OPERATING RESULTS FOR THE PERIODS
ENDED MARCH 31, 1999 AND MARCH 31, 1998
Net Income. Net income decreased $158,000 to $181,000 for the period
ended March 31, 1999 as compared to $339,000 for the period ended March 31,
1998. Net income was lower primarily due to a decrease of $16,000 in net
interest income as a result of an increase in total interest expense of
$165,000, slightly offset by an increase in interest income of $149,000. In
addition, there was an increase in loan loss provisions of $33,000 for the
period ended March 31, 1999, as compared to the same period for 1998. Further,
non-interest income declined $28,000 to $37,000 for the period ended March 31,
1999 as compared to $65,000 for the same period in 1998, while non-interest
expense increased $235,000, to $1,136,000 from $901,000 for the same period to
period comparison.
Net Interest Income. Net interest income before provision for loan
losses decreased by approximately $16,000 or 1.2% to $1.3 million for the period
13
<PAGE>
ended March 31, 1999. The decrease was primarily due to a decline in the average
yield on interest earning assets (on a tax equivalent basis) of 44 basis points
from 7.12% for the period ended March 31, 1998 to 6.68% for the same period
ended 1999, offset by a decrease of 20 basis points in the average cost of
interest bearing liabilities to 4.82% from 5.02% for the same period to period
comparison.
The Bank's interest rate spread, which is the difference between the
yield on average interest earning assets less the cost of interest bearing
liabilities, declined to 1.86% (on a tax equivalent basis) for the period ended
March 31, 1999, from 2.10% for the period ended March 31, 1998. This was
primarily attributed to higher prepayments on mortgage backed securities and
loans receivable with the proceeds reinvested in lower yielding assets due to
the general decline of market interest rates for these instruments. In addition,
competitive pressure on the pricing of loans and deposits has resulted in a
smaller interest rate spread. Competitive pressure in the future may further
reduce the spread between asset yields and the cost of funds.
Interest Income. Interest income increased to $4.1 million for the
period ended March 31, 1999, from $3.9 million for the period ended March 31,
1998. The increase was due to higher average balances in loans receivable,
available for sale securities and other interest earning assets, offset by a
decrease in the average balance of securities held to maturity. The decrease in
securities held to maturity was due to higher prepayments of held to maturity
mortgage-backed securities. The increase in available for sale securities was
due to classification of reinvested funds as available for sale. The average
yield on interest earning assets (on a tax equivalent basis) decreased from
7.12% for the period ended March 31, 1998, to 6.68% for the period ended March
31, 1999, due to prepayment of higher coupon loans and mortgage-backed
securities with reinvestment of proceeds into lower coupon instruments during a
low interest rate environment with a flat yield curve.
Interest on loans receivable increased by $ 38,000 or 1.8 % for the
period ended March 31, 1999 as compared to the same period of one year ago. The
increase was due to a $3.7 million or 3.5% increase in the average balance of
loans receivable resulting from originations of new loans in excess of
prepayments and amortization, offset by a decline in the average yield of 13
basis points from 7.90% for the period ended March 31, 1998 to 7.77% for the
period ended March 31, 1999. The decrease in the average yield was due to lower
interest rates on originated loans during the 1999 period and the
prepayment/amortization of higher rate loans.
Interest expense. Interest expense increased $165,000 or 6.4% to $2.7
million for the period ended March 31, 1999, as compared to $2.5 million for the
same period last year. The increase was due to a $22.6 million increase
14
<PAGE>
in the average balance of interest bearing liabilities partially offset by a
decrease of 20 basis points in the average cost of interest bearing liabilities.
Interest expense on borrowed funds increased $251,000 mainly due to an increase
in the average balance of $20.1 million from $13.8 million for the period ended
March 31, 1998 compared to $33.9 million for the same period this year, offset
by a decrease in the average cost of 58 basis points from 6.04% to 5.46% for the
same periods. Interest expense on time deposits decreased $118,000 due to a
decline in the average balances of time deposits of $2.0 million and a decrease
in the average cost of 25 basis points. Interest expense on DDA accounts
increased $12,000 due to an increase in the average balance of $2.6 million.
Interest expense on savings deposits increased $14,000 as a result of an
increase in the average balances of $1.1 million to $28.9 million for the period
ended March 31, 1999 from $27.8 million for the prior period ended March 31,
1998 as well as an increase of 7 basis points in the average cost from 3.18% to
3.25% for the same periods.
Provision for loan losses. The provision for loan losses increased
$33,000, thereby increasing the allowance for loan losses to $858,000 for the
period ended March 31, 1999. This increase in the allowance reflects the Bank's
decision to provide for loan losses based on management's evaluation of the
inherent risk in the Bank's loan portfolio, as well as management's evaluation
of the general economic conditions in the Bank's market area, in addition to a
comparison of loss experience at the Bank and loss experience and reserve levels
at peer institutions. In addition, the allowance was increased as a result of
the changing composition of the loan portfolio from single family mortgages to
an increased emphasis on commercial real estate and consumer loans.
Non-interest income. Non-interest income decreased by $28,000 to
$37,000 for the period ended March 31, 1999, from $65,000 for the period ended
March 31, 1998. This was primarily due to absence of gains on sales of
securities and loans which totaled $29,000 for the period ended March 31, 1998.
Non-interest expenses. Non-interest expenses increased by $235,000 to
$1.1 million for the period ended March 31, 1999 from $901,000 for the same
period ended 1998. The increase was primarily due to increases of $115,000 in
salaries and benefits resulting from an increase in staff, increases in medical
insurance rates, recognition of expenses for new benefit plans for senior
executives and the Board of Directors, as well as normal salary and merit
increases. Occupancy and equipment expenses increased $61,000 mostly
attributable to increases in computer service expense of $36,000 resulting from
an increase in account volumes and including $5,000 in year 2000 compliance
costs. Other non-interest expense increased by $62,000 to $155,000 for the
period ended March 31, 1999, from $93,000 for the period ended March 31, 1998.
This increase was due to a $31,500 increase in professional
15
<PAGE>
fees resulting from the reorganization. In addition, appraisal and other loan
underwriting expenses increased $15,000 due to an increase in loan origination
volume, and seminar expenses were $9,000 higher due to costs associated with
staff training and education.
Income Taxes. Income taxes decreased by approximately $154,000
primarily due to an increase in levels of tax exempt securities.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, wholesale funding
from the Federal Home Loan Bank, principal and interest payments on loans, and
securities, and to a lesser extent, proceeds from the sale of loans and/or
securities. While maturities and scheduled amortization of loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates, economic conditions, and competition strongly influence mortgage
prepayment rates and deposit flows, reducing the predictability of the timing of
sources of funds.
The primary investing activities of the Bank are the origination of
one-to-four-family residential and, to a lesser extent, commercial real estate
and multi-family mortgage loans, and the purchase of mortgage-backed and
mortgage-related and debt securities. During the three months ended March 31,
1999 and March 31, 1998, the Bank's disbursements for loan originations totaled
$14.4 million and $4.5 million, respectively. Purchases of mortgage-backed,
mortgage-related and debt securities totaled $15.8 million, and $21.6 million
for the three months ended March 31, 1999 and March 31, 1998, respectively. In
addition, the Bank purchases of premises and equipment totaled $4.0 million for
the three months ended March 31, 1999 compared to $6,000 for the same period in
1998, as the Bank completed the purchase of a building to serve as an additional
branch office and to house administrative operations. These activities were
funded primarily by principal repayments and prepayments on loans,
mortgage-backed and mortgage- related securities, debt securities, borrowings,
and proceeds from the initial public offering. Proceeds from principal collected
on mortgage-backed securities totaled $12.9 million for the three months ended
March 31, 1999 as compared to $3.4 million for the same three months in 1998.
The Bank experienced a net decrease in total deposits of $10.0 million for the
three months ended March 31, 1999 compared to an increase of $4.0 million for
the three months ended March 31, 1998. Deposit flows are affected by the level
of market interest rates, as well as the interest rates and products offered by
local competitors and the Bank and other factors.
16
<PAGE>
The Bank closely monitors its liquidity position on a daily basis.
Excess short-term liquidity is invested in overnight federal funds sold. On a
longer term basis, the Bank invests in various lending products, mortgage-backed
and mortgage-related and investment securities. The Bank may borrow funds from
the Federal Home Loan Bank subject to certain limitations. Based on the level of
qualifying collateral available to secure advances at March 31, 1999, the Bank's
borrowing limit from the Federal Home Loan Bank was approximately $76.8 million,
with unused borrowing capacity of $39.8 million at that date. Other sources of
liquidity include borrowings under repurchase agreements and sales of available
for sale securities.
The Bank's most liquid assets are cash and cash equivalents, which
include interest-bearing deposits and short-term highly liquid investments (such
as federal funds sold) with original maturities of less than three months that
are readily convertible to known amounts of cash. The level of these assets is
dependent on the Bank's operating, financing and investing activities during any
given period. At March 31, 1999 and March 31, 1998, cash and cash equivalents
totaled $15.9 million and $18.4 million, respectively, which amounted to 6.1%
and 7.9% of total assets at those dates.
Loan commitments totaled $14.3 million at March 31, 1999, comprised of
$6.1 million in one- to four-family loan commitments, $16,000 in construction
loan commitments, $7.9 million in home equity loan commitments, and $302,000 in
checking line of credit loan commitments. Management of the Bank anticipates
that it will have sufficient funds available to meet its current loan
commitments.
Certificates of deposit which are scheduled to mature in less than one
year from March 31, 1999 totaled $114.4 million. Based upon past experience and
the Bank's current pricing strategy, management believes that a significant
portion of such deposits will remain with the Bank.
At March 31, 1999, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $22.5 million, or 8.75% of
adjusted assets, which is above the required level of $10.3 million, or 4.0% of
adjusted assets and total risk-based capital of $23.4 million, or 23.08% of
adjusted assets, which is above the required level of $8.1 million, or 8.0%.
The liquidity of a banking institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits, and
to take advantage of interest rate market opportunities. Funding of loan
requests, providing for liability outflows, and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
specific categories of short term loans and investments with specific types of
deposits and borrowings. Savings bank liquidity is normally considered in terms
of the nature and mix of the banking institution's sources and uses of funds.
17
<PAGE>
Management is not aware of any trends, events or uncertainties that
will have or are reasonably likely to have a material effect on the Bank's
liquidity, capital or operations nor is management aware of any current
recommendation by regulatory authorities, which if implemented, would have such
an effect.
Year 2000 Evaluation
Rapid and accurate data processing is essential to the Bank's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the year 2000 as the year 1900 or as zero and
incorrectly attempt to compute payment, interest, delinquency and other data.
The Bank has been evaluating both information technology (computer systems) and
non-information technology systems (e.g., vault timers, electronic door lock and
heating, ventilation and air conditioning controls). The Bank has examined all
of its non-information technology systems and has either received certifications
of year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the year 2000. The Bank
expects to further test the systems it controls and receive third party
certification, where appropriate, that they will continue to function. The Bank
does not expect any material costs to address its non-information technology
systems and has not had any material costs to date. The Bank has determined that
the information technology systems it uses have substantially more year 2000
risk than the non-information technology systems it uses. The Bank has evaluated
its information technology systems risk in three areas: (1) our own computers,
(2) computers of others used by our borrowers, and (3) computers of others who
provide us with data processing.
Our own computers. We expect to spend approximately $200,000 through
December 31, 1999 to upgrade our computer system. We expect to capitalize this
cost. This upgrade is expected to eliminate the year 2000 risk in our computers.
We have not had any material costs to address this risk since December 31, 1998
and we do not expect to have material costs to address this risk area after
March 31, 1999. At March 31, 1999, all of the estimated $200,000 had been
capitalized. In addition to this $200,000, we expensed approximately $5,000
during the quarter ended March 31, 1999 in year 2000 compliance costs.
Computers of others used by our borrowers. We have evaluated most of
our borrowers and do not believe that the year 2000 problem should, on an
aggregate basis, impact their ability to make payments to the Bank. We believe
that most of our residential borrowers are not dependent on their home computers
for income and that none of our commercial borrowers are so large that a year
2000 problem would render them unable to collect revenue or rent and, in turn,
continue to make loan payments to the Bank. As a result, we have not contacted
residential borrowers concerning this issue and do not consider this issue in
our residential loan underwriting process. We have been contacting our
commercial borrowers with loans of $250,000 or more and we have been considering
this issue during commercial loan underwriting. At March 31, 1999 these loans
constituted $7.7 million or 86.5% of our $8.9 million commercial loan portfolio.
We do not expect any material costs to address this risk area.
18
<PAGE>
Computers of others who provide us with data processing. Between
November 1998 and February 1999, the Bank performed year 2000 testing with its
primary third party service provider. Testing consisted of placing the Bank's
computer system in a year 2000 environment and conducting typical banking
transactions using critical 21st century dates, e.g., December 31, 1999, January
1, 2000, January 3, 2000, February 29, 2000, and March 1, 2000 (the year is a
leap year). Interface testing between the Bank and the Federal Reserve's
"Fedline" system also took place in the fourth quarter of 1998. These testing
programs were fully successful, and the Bank management has every reason to
believe that core data processing systems will function properly in the year
2000. However, delays, mistakes or failures could have a significant impact on
our financial condition and results of operations.
Contingency Plan. The Bank has developed a comprehensive year 2000
contingency program in accordance with FFIEC guidelines. While Bank management
fully expects to be operational in a year 2000 environment, the contingency plan
will guide Bank operations in the event that one or more core systems are not
functioning.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On January 25, 1999, the Registrant held its annual meeting of
stockholders (the "Meeting"). At the Meeting, the sole stockholder of record, as
of the January 4, 1999 voting record date, elected all nine directors and
ratified the appointment of KPMG LLP as independent auditor for the fiscal year
ending December 31, 1999 by a vote of 10,000 shares in favor and no shares voted
against, abstain or withheld. The re-elected directors are Susan E. Naruk,
Nelson Fiordalisi, Michael W. Azzara, Jerome Goodman, Bernard J. Hoogland, John
Kandravy, Robert S. Monteith, John J. Repetto and Paul W. Thornwall.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RIDGEWOOD FINANCIAL, INC.
Date: May 12, 1999 By: /s/ Susan E. Naruk
----------------------------------------
Susan E. Naruk
President and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Officer)
Date: May 12, 1999 By: /s/ John Scognamiglio
----------------------------------------
John Scognamiglio
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,777
<INT-BEARING-DEPOSITS> 587
<FED-FUNDS-SOLD> 13,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,165
<INVESTMENTS-CARRYING> 120,022
<INVESTMENTS-MARKET> 120,123
<LOANS> 115,360
<ALLOWANCE> 858
<TOTAL-ASSETS> 260,439
<DEPOSITS> 195,545
<SHORT-TERM> 1,500
<LIABILITIES-OTHER> 1,472
<LONG-TERM> 35,544
0
0
<COMMON> 318
<OTHER-SE> 26,060
<TOTAL-LIABILITIES-AND-EQUITY> 260,439
<INTEREST-LOAN> 2,107
<INTEREST-INVEST> 1,650
<INTEREST-OTHER> 307
<INTEREST-TOTAL> 4,064
<INTEREST-DEPOSIT> 2,291
<INTEREST-EXPENSE> 2,748
<INTEREST-INCOME-NET> 1,316
<LOAN-LOSSES> 36
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<EXPENSE-OTHER> 1,136
<INCOME-PRETAX> 181
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<EXTRAORDINARY> 0
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<NET-INCOME> 181
<EPS-PRIMARY> .06
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<YIELD-ACTUAL> 2.30
<LOANS-NON> 344
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 822
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