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 September 30, 1999
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OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
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Commission File No. 0-25149
Ridgewood Financial, Inc.
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(Exact name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-3616280
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(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
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Number of shares of Common Stock outstanding as of :
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Transitional Small Business Disclosure Format (check one)
YES NO X
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<PAGE>
RIDGEWOOD FINANCIAL, INC.
Contents
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<TABLE>
<CAPTION>
Page(s)
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements...........................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation................................................................... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................18
Item 2. Changes in Securities and Use of Proceeds..................................................18
Item 3. Defaults upon Senior Securities............................................................18
Item 4. Submission of Matters to a Vote of Security Holders........................................18
Item 5. Other Information..........................................................................18
Item 6. Exhibits and Reports on Form 8-K...........................................................18
Signatures...........................................................................................19
</TABLE>
<PAGE>
Ridgewood Financial Inc.
Consolidated Statements of Financial Condition
September 30, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
Assets: (unaudited)
<S> <C> <C>
Cash and due from banks $ 12,157 $ 2,274
Federal funds sold 4,900 41,200
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Cash and cash equivalents 17,057 43,474
Investment securities:
Held to Maturity (fair value of $986 and $1,374
at September 30, 1999 and December 31, 1998, respectively) 991 1,354
Available for Sale 41,096 16,921
Mortgage-backed securities:
Held to Maturity (fair value of $17,744 and $11,409
at September 30, 1999 and December 31, 1998, respectively) 17,954 11,277
Available for Sale 30,304 88,390
Loans receivable, net 148,931 107,021
Accrued interest receivable 1,690 1,387
Premises and equipment, net 6,338 2,218
Federal Home Loan Bank ("FHLB") stock, at cost 2,622 1,949
Other assets 1,317 742
============== ===============
Total assets $ 268,300 $ 274,733
============== ===============
Liabilities And Stockholders' Equity
Deposits 193,619 205,529
Borrowed funds 48,707 32,557
Initial public offering subscriptions payable - 17,809
Advances from borrowers for taxes and insurance 1,012 926
Accounts payable and other liabilities 320 490
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Total liabilities 243,658 257,311
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 9,428 -
Retained earnings 17,470 17,693
Unallocated common stock owned by
employee stock ownership plan (915) -
Accumulated other comprehensive loss (1,659) (271)
-------------- ---------------
Total stockholders' equity 24,642 17,422
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Total Liabilities and Stockholders' Equity $ 268,300 $ 274,733
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
1
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Ridgewood Financial, Inc.
Consolidated Statements of Income (Expense)
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Year to Date
September 30, September 30,
------------------------------- ------------------------------
1999 1998 1999 1998
---------------- ------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 2,633 $ 2,104 $ 7,023 $ 6,254
Investment securities 38 448 65 632
Mortgage-backed securities 224 199 567 680
Investment and mortgage-backed securities available for sale 963 1,114 3,735 3,814
Other 463 287 971 799
------------- ------------ -------------- ------------
Total interest income 4,321 4,152 12,361 12,179
------------- ------------ -------------- ------------
Interest Expense:
Deposits 2,166 2,445 6,634 7,237
Borrowed funds 725 361 1,758 881
------------- ------------ -------------- ------------
Total interest expense 2,891 2,806 8,392 8,118
------------- ------------ -------------- ------------
Net interest income 1,430 1,346 3,969 4,061
Provision for loan losses 15 36 87 168
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Net interest income after provision for loan losses 1,415 1,310 3,882 3,893
------------- ------------ -------------- ------------
Noninterest income:
Fees and service charges 40 38 115 105
Gain (loss) on sale of securities 1 - (1,069) 24
Gain on sale of loans - - - 21
Other - 1 6 7
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Total noninterest income 41 39 (948) 157
------------- ------------ -------------- ------------
Noninterest expenses:
Salaries and benefits 590 563 1,765 1,599
Occupancy and equipment 309 359 919 914
Advertising and promotion 34 36 79 112
SAIF deposit insurance premium 28 30 91 89
Other expenses 146 121 489 364
------------- ------------ -------------- ------------
Total noninterest expense 1,107 1,109 3,343 3,078
------------- ------------ -------------- ------------
Income (loss) before income taxes (benefit) expense 349 240 (409) 972
Income taxes expense (benefit) 31 59 (384) 304
============= ============ ============== ============
Net income (loss) $ 318 $ 181 $ (25) $ 668
============= ============ ============== ============
Earnings per common share:
Basic $ 0.10 $ - $ (0.01) $ -
============= ============ ============== ============
Diluted $ 0.10 $ - $ (0.01) $ -
============= ============ ============== ============
Weighted average shares outstanding:
Basic 3,072,660 - 3,099,626 -
Diluted 3,072,660 - 3,099,626 -
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Ridgewood Financial, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30,
-------------------------
1999 1998
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<S> <C> <C>
Cash flows from Operating Activities:
Net (Loss) Income $ (25) $ 668
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 161 150
Amortization of loan fees (172) (60)
Premiums and discounts on mortgage-backed and
investment securities 2,007 751
Proceeds from loan sales - 771
Gain on sale of loans - (21)
Loss on sale of fixed assets - 77
Loss(gain) on sale of securities available for sale 1,069 (24)
Provision for loan losses 87 168
Deferred income tax expense 44 138
(Increase) decrease in accrued interest receivable (303) 230
Decrease (increase) in other assets, net 158 (170)
Decrease in initial public offering subscriptions payable (17,809) -
Increase in other liabilities (170) (169)
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Net cash (used in) provided by operating activities (14,953) 2,509
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Cash flows from investing activities:
Net (increase) decrease in first mortgage loans (25,001) 843
Purchase of first mortgage loans (15,180) -
Net increase in consumer loans (1,684) (717)
Purchases of mortgage-backed securities available for sale (936) (64,982)
Purchases of mortgage-backed securities held to maturity (8,247) -
Principal collected on mortgage-backed securities 19,013 20,178
Proceeds from sales of mortgage-backed securities 39,089 -
Purchases of investment securities available for sale (30,305) (5,649)
Proceeds from sales of securities available for sale 3,410 10,522
Proceeds from sales of securities held to maturity - 7,476
Maturities and calls of investment securities available for sale - 12,200
Principal collected on investment securities 332 289
Purchases of premises and equipment (4,281) (160)
Purchases of FHLB Stock (673) -
Proceeds from collection of loan fees 40 (18)
Allocation of employee stock ownership shares 48 -
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Net cash used in investing activities (24,375) (20,018)
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Cash flows from financing activities:
Net increase in passbook, NOW and money market
accounts 1,326 2,647
Net (decrease) increase in certificates of deposit (13,234) 1,850
Proceeds from borrowed funds 16,150 30,225
Repayment of borrowed funds - (13,612)
Net proceeds from initial public offering 9,751 -
Purchase of employee stock ownership plan stock (968) -
Capitalization of mutual holding company (200) -
Net increase (decrease) in advances from borrowers for taxes
and insurance 86 (75)
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Net cash provided by financing activities 12,911 21,035
-------- ----------
Net (decrease) increase in cash and cash equivalents (26,417) 3,526
Cash and cash equivalents at beginning of period 43,474 15,398
======== ==========
Cash and cash equivalents at end of period $ 17,057 $ 18,924
======== ==========
Supplemental disclosures of cash flow information
Cash payments for:
Interest on deposits and borrowed funds $ 8,425 $ 8,177
Income taxes 49 484
</TABLE>
See accompanying notes to consolidated financial statements.
3
<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
disclosure necessary for a complete presentation of the consolidated statements
financial condition, statements of income and statements of cash flows 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 or any other period. The condensed financial statements as of and
for the three and nine month period ended September 30, 1999 and 1998, include
the accounts of Ridgewood Savings Bank of New Jersey (the "Bank") which as
discussed in Note 2, became the wholly owned subsidiary of Ridgewood Financial,
Inc. (the "Company") on January 7, 1999. The Company's business is conducted
principally through the Bank.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursant 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 January 7, 1999, the Bank completed its reorganization and stock
issuance("Plan of Reorganization and Stock Issuance"). In connection with the
Plan of Reorganization and Stock Issuance, the Company, a New Jersey chartered
corporation, sold 1,474,600 shares (or 47%) of its common stock in a
subscription offering at $7.00 per share and issued the remaining 53% to
Ridgewood Financial MHC (the "MHC"). Upon completion of these transactions, the
Bank became the wholly owned subsidiary of the Company. The Company became the
wholly owned subsidiary of the MHC.
Gross proceeds from the stock issuance of $10.5 million were reduced by
$700,000 in subscription related expenses and $200,000 initial capital for the
MHC, leaving net proceeds of the offering of $9.7 million. Of the net proceeds,
the Company contributed approximately $4.8 million to the Bank in exchange for
all of its outstanding common stock.
(3) Employee Stock Ownership Plan
An employee stock ownership plan (the "ESOP") was established January
1, 1998 for the exclusive benefit of participating employees of the Bank.
Participating employees are employees who have completed one year of service
with the Bank and have attained the age of 21. Upon completion of the Plan of
Reorganization and Stock Issuance, the ESOP acquired 8% of the total shares
(119,568 shares) issued in the subscription offering. The purchase was funded
through a loan obtained from the Company. The loan is expected to be repaid over
a term of ten years at an annual interest rate equal to the prevailing prime
interest rate. The loan is secured by the shares purchased and earnings of the
ESOP assets.
When a principal payment is made on the loan, a pro-rata number of
shares will be allocated to the eligible employees in accordance with the
provisions of the ESOP. The outstanding principal balance of the ESOP loan will
be treated as a reduction in stockholders' equity. ESOP shares scheduled to be
released at the ESOP's year end will be included as shares outstanding for
calculation of earnings per share on a pro-rata basis throughout the year.
4
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(4) 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
weighted average number of shares outstanding, as adjusted for the assumed
exercise of options for common stock, using the treasury stock method.
(5) Investment Securities
The following is a summary of maturities of the investment securities as of
September 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------------------------- ---------------------------------------
(Unaudited)
Securities Securities Securities Securities
held to maturity available for sale held to maturity available 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 25 $ - - 8 30
One year or less - - 3,035 3,033 58 58 - -
After one year through
five years - - 15,386 15,232 43 43 3,243 3,243
After five years through
ten years 461 455 2,245 2,133 659 675 718 721
After ten years 530 531 22,861 20,673 594 598 12,769 12,927
--------- ------- --------- ------- --------- ------- --------- -------
$ 991 986 43,535 41,096 $ 1,354 1,374 16,738 16,921
========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
5
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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.
(6) Mortgage-backed Securities
The following is a summary of maturities of the mortgaged-backed securities as
of September 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
---------------------------------------------- -------------------------------------------
(Unaudited)
Securities Securities Securities Securities
held to maturity available for sale held to maturity available 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 $ - - 154 157 $ - - 708 708
After one year through
five years 942 923 3,318 3,298 - - 3,882 3,900
After five years through
ten years 2,487 2,456 20,370 20,209 1,223 1,247 18,693 18,664
After ten years 14,525 14,365 6,614 6,640 10,054 10,162 65,714 65,118
--------- ------- --------- ------- --------- ------- --------- -------
$17,954 17,744 30,456 30,304 $11,277 11,409 88,997 88,390
========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
(7) Comprehensive (loss) income
Total comprehensive (loss) income amounted to the following for the three and
nine month periods ended September 30 (in thousands):
<TABLE>
<CAPTION>
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
1999 1999 1998 1998
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $ 318 $ (25) $181 $668
Change in unrealized (loss) gain on securities
available for sale, net of taxes (586) (1,388) 247 (83)
-------- -------- ----- -----
Comprehensive (loss) income $ (268) $(1,413) $428 $585
======== ======== ===== =====
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Ridgewood Financial Inc. (the "Company") business is conducted
principally through Ridgewood Savings Bank of New Jersey (the "Bank"), which
became the Company's wholly owned subsidiary on January 7, 1999. All references
to the Bank refer collectively to the Company and the Bank.
The 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 non-interest
income, including securities gains and losses, 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 SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets decreased by $6.4 million or 2.3% to $268.3 million at
September 30, 1999 from $274.7 million at December 31, 1998. This decrease was
primarily due to reduction in initial public offering subscriptions payable
totaling $17.8 million due to acquisition of stock for stockholders and
refunding of oversubscriptions. As a result, federal funds sold decreased $36.3
million to $4.9 million at September 30, 1999 from $41.2 million at December 31,
1998. Available for sale mortgage-backed securities decreased by $58.1 million
to $30.3 million at September 30, 1999 from $88.4 million at December 31, 1998,
offset by an increase in available for sale investment securities of $24.2
million to $41.1 million at September 30, 1999 from $16.9 million at December
31, 1998. Loans receivable increased $41.9 million due to the Bank's ability to
increase mortgage loan originations resulting from higher levels of loan
refinancings during a lower interest rate environment. In addition, the Bank
completed a purchase of $15.2 million in residential mortgage loans during the
second quarter. Further, premises and equipment increased $4.1 million or 185.7%
to $6.3 million at September 30, 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
7
<PAGE>
administrative operations. Refurbishment costs for this purpose are estimated to
be an additional $2.3 million.
The Bank's deposits decreased by $11.9 million or 5.8% to $193.6
million at September 30, 1999, as deposits were withdrawn for purchases of the
initial public offering as well as in response to the Bank's pricing strategies
designed to lower cost of funds. Borrowings increased $16.1 million or 49.6% to
$48.7 million at September 30, 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.
Total equity increased $7.2 million to $24.6 million at September 30,
1999 primarily due to the completion of the initial public offering which
provided net proceeds of $9.7 million, offset by a net loss of $25,000 for the
nine months ended September 30, 1999, a $1.4 million increase in accumulated
other comprehensive loss and unearned ESOP stock of $915,000. The majority of
the accumulated other comprehensive loss resulted from the Bank's investment in
available for sale securities. See note 5 to the consoldidated financial
statements. Because of interest rate volatility, accumulated other comprehensive
loss and stockholders' equity could materially fluctuate for each interim period
and year-end period.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Net Income. Net income decreased $693,000 to a net loss of $25,000 for
the nine months ended September 30, 1999 as compared to net income of $668,000
for the nine months ended September 30, 1998. As previously discussed in the
June 30, 1999 Form 10-QSB, net income was lower primarily due to a loss of $1.1
million recognized on the sale of available for sale mortgage backed securities.
In addition, there was a decrease of $92,000 in net interest income as a result
of an increase in total interest expense of $274,000, offset by an increase in
interest income of $182,000. Non-interest income declined $1.1 million primarily
due to the loss recognized in the investment portfolio. Non-interest expense
increased $265,000, to $3,343,000 from $3,078,000 for the same period to period
comparison.
Net Interest Income. Net interest income before provision for loan
losses decreased by $92,000 or 2.3% to $4.0 million for the nine months ended
September
8
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30, 1999. The decrease was primarily due to a decline in the average yield on
interest earning assets (on a tax equivalent basis) of 43 basis points from
7.10% for the nine months ended September 30, 1998 to 6.67% for the same period
ended 1999, offset by a decrease of 28 basis points in the average cost of
interest bearing liabilities to 4.72% from 5.00% 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 1.95 % for the nine months ended September 30, 1999,
from 2.10 % for the nine months ended September 30, 1998. This was primarily
attributed to higher prepayments on mortgage backed securities, specifically the
CMO portfolio, which required increased premium amortization resulting in
below-market yields on these securities. Coupled with higher prepayments on
loans receivable, these proceeds were 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 on a tax equivalent basis, increased
to $12.8 million for the nine months ended September 30, 1999, from $12.3
million for the nine months ended September 30, 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 average yield on interest earning assets (on a
tax equivalent basis) decreased from 7.10% for the nine months ended September
30, 1998, to 6.67% for the nine months ended September 30, 1999, due to
prepayment of higher coupon mortgage-backed securities and loans with
reinvestment of proceeds into lower coupon instruments during a low interest
rate environment with a flat yield curve. The average balance of securities held
to maturity declined $12.2 million to $12.9 million for the nine months ended
September 30, 1999, from $25.2 million for the same nine months in 1998. The
average yield also declined 44 basis points from 6.97% to 6.53% for the same
nine month period to period comparison. This decline was due to higher
prepayments of held to maturity mortgage-backed securities. The average balance
of securities available for sale increased $11.8 million to $93.8 million for
the nine months ended September 30, 1999, from $82.0 million for the same prior
period of one year ago. The increase in available for sale securities was due to
classification of the majority of reinvested funds as available for sale. The
average balance of other interest earning assets increased $6.7 million from
$18.3 million for the nine months ended September 30, 1998, to $25.0 million for
the nine months ended September 30, 1999, offset by a decrease in the average
yield of 64 basis points from 5.83% to 5.19% for the same nine month comparative
periods.
9
<PAGE>
Interest on loans receivable increased by $769,000 or 12.3 % for the
nine months ended September 30, 1999 as compared to the same period of one year
ago. The increase was due to a $19.9 million or 18.8% increase in the average
balance of loans receivable resulting from originations of new loans in excess
of prepayments and amortization as well as the purchase of $15.2 million in
residential mortgage loans. The increase in the average balance of loans was
offset by a decline in the average yield of 43 basis points from 7.92% for the
nine months ended September 30, 1998 to 7.49% for the nine months ended
September 30, 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 $274,000 or 3.4% to $8.4
million for the nine months ended September 30, 1999, as compared to $8.1
million for the same period last year. The increase was due to a $21.1 million
increase in the average balance of interest bearing liabilities partially offset
by a decrease of 28 basis points in their average cost. Interest expense on
borrowed funds increased $877,000 mainly due to an increase in the average
balance of borrowed funds totaling $22.5 million, from $20.5 million for the
nine months ended September 30, 1998 compared to $43.0 million for the same
period this year, offset by a decrease in the average cost of 27 basis points
from 5.74% to 5.47% for the same periods. Interest expense on time deposits
decreased $669,000 due to a decline in the average balances of time deposits of
$5.8 million from $150.6 million for the nine months ended September 30, 1998 to
$144.8 million for the same nine month period in 1999 as well as a decrease in
the average cost of 40 basis points from 5.58% to 5.18%. Interest expense on DDA
accounts increased $22,000 due to an increase in the average balance of $2.5
million, from $13.4 million for the nine months ended September 30, 1998 to
$15.9 million for the nine months ended September 30, 1999, which was offset by
a decrease in the average cost of 11 basis points during the same nine month
comparative periods. Interest expense on savings deposits increased $36,000 as a
result of a $1.5 million increase in the average balances to $30.0 million for
the nine month period ended September 30, 1999 from $28.5 million for the nine
month period ended September 30, 1998 while the average cost remained the same
at 3.19% for both of the comparative periods.
Provision for loan losses. For the nine months ended September 30,
1999, the Bank's provision for loan losses was $87,000 as compared to $168,000
for the comparable 1998 period. Management continually evaluates the adequacy of
the allowance for loan losses, which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses,
the impact of economic conditions on borrowers and other relevant factors which
may come to the attention of management. Although the Bank maintains its
allowance for loan losses at a level that it considers to be adequate to provide
for the inherent risk of loss in its loan portfolio,
10
<PAGE>
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in future
periods.
Non-interest income. Non-interest income decreased by $1.1 million to a
net loss of $948,000 for the nine months ended September 30, 1999, from net
income of $157,000 for the nine months ended September 30, 1998. As previously
disclosed in the June 30, 1999 Form 10-QSB, non interest income was lower
primarily due to a loss of $1.1 million recognized on the sale of available for
sale mortgage backed securities.
Non-interest expenses. Non-interest expenses increased by $265,000 to
$3.3 million for the nine months ended September 30, 1999 from $3.1 million for
the same period ended September 30, 1998. The increase was primarily due to
increases of $166,000 in salaries and benefits resulting from an increase in
staff, increases in medical insurance rates, as well as normal salary and merit
increases. Occupancy and equipment expenses increased $5,000, to $919,000 for
the nine months ended September 30, 1999 from $914,000 for the nine months ended
September 30, 1998. The increase was attributable to an increase in computer
service expense including year 2000 compliance costs. In addition, the prior
comparable period included a charge of $75,000 for the replacement of all
personal computers which did not meet year 2000 compliance tests. Other
non-interest expense increased by $125,000 to $489,000 for the nine months ended
September 30, 1999, from $364,000 for the nine months ended September 30, 1998.
This increase was mainly due to a $75,300 increase in professional fees
resulting from the mutual holding company reorganization. In addition, appraisal
and other loan underwriting expenses increased $35,200 due to an increase in
loan origination volume.
Income Taxes. The Bank has an income tax benefit of $384,000 for the
nine months ended September 30, 1999 as compared to income tax expense of
$304,000 for the comparable prior year period. The benefit for the current
period is due to the loss recognized in the available for sale securities as
discussed above and an increase in levels of tax exempt securities.
11
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998
Net Income. Net income increased $137,000 to $318,000 for the three
months ended September 30, 1999 as compared to net income of $181,000 for the
three months ended September 30, 1998. The increase was due to higher net
interest income of $84,000 for the three months ended September 30, 1999, as a
result of an increase in interest income of $169,000 somewhat offset by an
increase in total interest expense of $85,000. Further, there was a decrease in
loan loss provisions of $21,000 for the three months ended September 30, 1999,
as compared to the same period for 1998. Non-interest income increased $2,000
due to higher service fees resulting from the increase in transaction accounts.
Non-interest expense also decreased $2,000 to $1,107,000 from $1,109,000 for the
same three month period to period comparison.
Net Interest Income. Net interest income before provision for loan
losses increased by $84,000 or 6.2% to $1.4 million for the three months ended
September 30, 1999. The increase was primarily due to higher average balances in
interest-earning assets of $25.6 million for the three months ended September
30, 1999, offset by a decrease in the average yield of interest earning assets
of 41 basis points from 7.18% to 6.77% for the same three month period. In
addition, the average balance of interest bearing liabilities increased $23.4
million, from $223.1 million for the three months ended September 30, 1998 to
$246.5 million for the three months ended September 30, 1999, along with a
decline in the average cost of 34 basis points.
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, decreased to 2.12 % for the three months ended September 30, 1999,
from 2.19 % for the same three month period in 1998. The average yield on loans
receivable declined 60 basis points from 7.90% for the three months ended
September 30, 1998, to 7.30% for the same three months in 1999. During the same
period, albeit to a lesser extent, higher prepayments on loans receivable
resulted in 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.
12
<PAGE>
Interest Income. Interest income increased to $4.5 million for the
three months ended September 30, 1999, from $4.3 million for the three months
ended September 30, 1998, due to an increase in the average balance of interest
earning assets of $25.6 million, to $262.9 million from $237.4 million for the
same three month period. The increase in average balances of interest earning
assets was offset by a decrease in their average yield of 41 basis points from
7.18% for the three months ended September 30, 1998 to 6.77% for the three
months ended September 30, 1999. The rise in interest income was primarily
attributed to an increase in the average balances of loans receivable of $37.4
million for the three months ended September 30, 1999, as compared to the same
three months during 1998, offset by a decline of 60 basis points in their
average yield from 7.90% to 7.60% for that same period to period comparison. The
increase was due to originations of new loans in excess of prepayments and
amortization as well as the purchase of $15.2 million in residential mortgage
loans during the second quarter. The decrease in the average yield of loans
receivable was due to lower interest rates on originated loans during the 1999
period and the prepayment/amortization of higher rate loans. In addition,
interest income on other interest earning assets increased $176,000 to $463,000
for the quarter ended September 30, 1999, from $287,000 for the same quarter one
year ago, offset by a decrease in the average yield of 49 basis points from
5.80% to 5.31% for the same quarterly comparison. Conversely, interest income on
securities held to maturity and available for sale declined $385,000 and
$129,000 respectively, to $262,000 and $1,128,000 for the three months ended
September 30, 1999 from $647,000 and $1,257,000 for the same three months ended
in 1998. The average yield on securities held to maturity declined 69 basis
points from 7.67% for the three months ended September 30, 1998, to 6.98% for
the three months ended September 30, 1999 due to amortization and prepayments of
higher coupon mortgage backed securities. During the same three months the
average yield on securities available for sale increased 1 basis point from
6.35% to 6.36%.
Interest expense. Interest expense increased $85,000 or 3%, to
$2,891,000 for the three months ended September 30, 1999, as compared to
$2,806,000 for the same period last year. The increase was due to a $23.4
million increase in the average balance of interest bearing liabilities
partially offset by a decrease of 34 basis points in the average cost. Interest
expense on borrowed funds increased $364,000 mainly due to a rise in the average
balance of borrowed funds amounting to $26.5 million, from $25.4 million for the
period ended September 30, 1998 compared to $51.9 million for the same period
this year, offset by a decrease in the average cost of 9 basis points from 5.63%
to 5.54% for the same period to period comparison. Interest expense on time
deposits decreased $303,000 due to a decline in the average balance of $8.4
13
<PAGE>
million and a decrease in the average cost of 52 basis points. Interest expense
on DDA accounts increased $6,000 due to an increase in the average balance of
$2.9 million, offset by a decline in the average cost of 18 basis points from
1.89% for the three months ended September 30, 1998 to 1.71% for the same three
months this year. Interest expense on savings deposits increased $17,000 as a
result of an increase in the average balances of $2.4 million to $31.7 million
for the three month period ended September 30, 1999 from $29.3 million for the
three month period ended September 30, 1998, slightly offset by a decrease of 3
basis points in the average cost from 3.20% to 3.17% for the same periods.
Non-interest income. Non-interest income increased by $2,000 to $41,000
for the three months ended September 30, 1999, from $39,000 for the three months
ended September 30, 1998, primarily due to service fees generated by an increase
in transaction accounts.
Non-interest expenses. Non-interest expenses decreased by $2,000 to
$1,107,000 for the three months ended September 30, 1999 from $1,109,000 for the
same three month period ended 1998. The decrease was due to lower expenses for
occupancy and equipment, advertising and promotion as well as lower deposit
insurance premiums, offset by increases in salaries, benefits, and other non
interest expenses. Salaries and benefits increased $27,000 due to increases in
staff, increases in medical insurance rates, as well as normal salary and merit
increases. Occupancy and equipment expenses decreased $50,000 from $359,000 for
the three months ended September 30, 1998 to $309,000 for the same three month
period in 1999, due to a $75,000 charge in the prior comparative period for the
replacement of all personal computers which did not meet year 2000 compliance
tests. Other non-interest expense increased by $25,000 to $146,000 for the three
months ended September 30, 1999, from $121,000 for the three months ended
September 30, 1998. This increase was due to a $75,300 increase in professional
fees resulting from the mutual holding company reorganization. In addition,
appraisal and other loan underwriting expenses increased $35,200 due to an
increase in loan origination volume.
Income Taxes. The Bank has income tax expense of $31,000 for the three
months ended September 30, 1999 as compared to income tax expense of $59,000 for
the comparable prior year period, due to an increase in levels of tax exempt
securities.
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. The Bank is currently
in its implementation stage, which includes incorporating all necessary changes
to become year 2000 compliant.
Our Own Computers. We spent approximately $200,000 to upgrade our
computer system. At September 30, 1999, all such costs have been capitalized and
the Bank does not expect to incur any additional material 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 September 30, 1999 these
loans constituted $6.2 million or 71.6% of our $8.7 million commercial loan
portfolio. We do not expect any material costs to address this risk area.
14
<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 Reserves
"Fedline" system also took place in the fourth quarter of 1998. These testing
programs were fully successful and management believes that the Bank's core data
processing systems will function properly in the year 2000. However, delays,
mistakes or failures could have a significant impact on the Bank's financial
statements.
Contingency Plan. The Bank has developed a comprehensive Contingency
and Business Resumption Plan in accordance with FFIEC guidelines. This plan was
approved by the Board in July 1999. 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 of our computer core systems are not
functioning. The activities addressed in the plan include remediation
contingency planning intended to mitigate any risks associated with unforeseen
system glitches, system failure, increased demands for cash, or processes
outside the Bank's control. The remainder of 1999 will be used to further
validate the plan and to provide task-specific training to key bank personnel.
The Bank continues to focus on public awareness by providing customers,
shareholders, and employees with timely information on the Bank's state of
preparedness for the year 2000. These efforts include employee awareness
meetings, talking points for bank staff, customer brochures, and a special
section on the Bank's website.
Despite the best efforts of the Bank to address the year 2000, the vast
number of external entities that have a direct relationship with the Bank, such
as customers, vendors, payment system providers, utility companies, and other
financial institutions, make it impossible to assure that a failure to achieve
compliance by one or more of these external entities would not have a material
impact on the financial statements of the Bank.
15
<PAGE>
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 nine months ended September 30,
1999 and September 30, 1998, the Bank's disbursements for loan originations and
loan purchases totaled $67.6 million and $17.9 million, respectively. Purchases
of mortgage-backed, mortgage-related and debt securities totaled $39.5 million,
and $70.6 million for the nine months ended September 30, 1999 and September 30,
1998 respectively. In addition, purchases of premises and equipment totaled $4.3
million for the nine months ended September 30, 1999 compared to $160,000 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 $19.0 million for the
nine months ended September 30, 1999 as compared to $20.2 million for the same
nine months in 1998. The Bank experienced a net decrease in total deposits of
$11.9 million for the nine months ended September 30, 1999 compared to an
increase of $4.5 million for the nine months ended September 30, 1998, as
deposits were withdrawn for purchases of the initial public offering and pricing
strategies were designed to lower cost of funds. 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.
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 September 30, 1999, the
Bank's borrowing limit from the Federal Home Loan Bank was approximately $79.5
million, with unused borrowing capacity of $63.3 million at that date. Other
sources of liquidity include borrowings under repurchase agreements and sales of
available for sale securities.
16
<PAGE>
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 September 30, 1999 and December 31, 1998, cash and cash
equivalents totaled $17.1 million and $43.5 million, respectively, which
amounted to 6.4% and 15.8% of total assets at those dates.
Loan commitments totaled $23.7 million at September 30, 1999, comprised
of $13.3 million in one- to- four- family loan commitments, $766,000 in
construction loan commitments, $9.3 million in home equity loan commitments, and
$373,000 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 September 30, 1999 totaled $95.9 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 September 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $22.3 million, or 8.29% of
adjusted assets, which is above the required level of $10.8 million, or 4.0% of
adjusted assets and total risk-based capital of $23.2 million, or 19.4% of
adjusted assets, which is above the required level of $9.6 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.
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.
17
<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
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
(a) 3(i) Certificate of Incorporation of Ridgewood Financial, Inc.*
3(ii) Bylaws of Ridgewood Financial, Inc.*
10.1 Employment Agreement with Susan E. Naruk*
10.2 Employment Agreement with Nelson Fiordalisi*
10.3 Employment Agreement with John Scognamiglio*
10.4 Employment Agreement with Jean Miller*
10.5 Supplemental Executive Retirement Plan*
27 Financial Data Schedule (electronic data filing only)
* Incorporated by reference to the registration statement on Form SB-2
(333-62363)
(b) No reports on Form 8-K were filed during the quarter ended September 30, 1999.
</TABLE>
18
<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.
<TABLE>
<CAPTION>
<S> <C> <C>
Date: November 9, 1999 By: /s/ Susan E. Naruk
----------------------------------------------------------------------
Susan E. Naruk
President and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Officer)
Date: November 9, 1999 By: /s/ John Scognamiglio
----------------------------------------------------------------------
John Scognamiglio
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,573
<INT-BEARING-DEPOSITS> 10,584
<FED-FUNDS-SOLD> 4,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,400
<INVESTMENTS-CARRYING> 90,344
<INVESTMENTS-MARKET> 90,130
<LOANS> 149,840
<ALLOWANCE> 909
<TOTAL-ASSETS> 268,300
<DEPOSITS> 193,619
<SHORT-TERM> 3,500
<LIABILITIES-OTHER> 1,332
<LONG-TERM> 45,207
0
0
<COMMON> 318
<OTHER-SE> 24,324
<TOTAL-LIABILITIES-AND-EQUITY> 268,300
<INTEREST-LOAN> 7,023
<INTEREST-INVEST> 4,367
<INTEREST-OTHER> 971
<INTEREST-TOTAL> 12,361
<INTEREST-DEPOSIT> 6,634
<INTEREST-EXPENSE> 8,392
<INTEREST-INCOME-NET> 3,969
<LOAN-LOSSES> 87
<SECURITIES-GAINS> (1,069)
<EXPENSE-OTHER> 3,343
<INCOME-PRETAX> (409)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
<YIELD-ACTUAL> 2.30
<LOANS-NON> 259
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 822
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 909
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
