SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1996,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to .
Commission File No. 0-25884
REDWOOD FINANCIAL, INC.
(Name of Small Business Issuer in Its Charter)
Minnesota 41-1807233
(State or Other Jurisdiction I.R.S. Employer
of Incorporation or Organization Identification No.
301 South Washington Street (P.O. Box 317), Redwood Falls, Minnesota 56283-0317
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (507) 637-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ].
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $3,547,662
As of September 3, 1996, there were issued and outstanding 1,068,750
shares of the registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average bid and asked price of the registrant's
Common Stock on September 3, 1996, was $7,495,294 ($9.25 per share based on
810,302 shares of Common Stock held by non-affiliates).
Transition Small Business Disclosure Format (check one) YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended June 30, 1996. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Business
Business of the Company
Redwood Financial, Inc. (the "Company") is a Minnesota corporation
organized in January 1995 at the direction of Redwood Falls Federal Savings and
Loan Association (the "Association") in connection with the Association's
conversion from the mutual to stock form (the "Conversion"). On July 7, 1995,
the Association completed its conversion and became a wholly owned subsidiary of
the Company. The Company is a unitary savings and loan holding company which,
under existing laws, generally is not restricted in the types of business
activities in which it may engage provided the Association retains a specified
amount of its assets in housing-related investments. At June 30, 1996, the
Company had total assets of $51.5 million, total deposits of $38.0 million, and
stockholders' equity of $13.2 million. The primary activity of the Company is to
hold all of the outstanding capital stock of the Association, however, the
Company maintains a small investment and loan portfolio separate from its
investment in the Association.
Business of the Association
The Association is a federally chartered stock savings and loan
association headquartered in Redwood Falls, Minnesota. The Association was
founded in 1924 under the name Redwood Falls Building and Loan Association. The
Association changed its name to Redwood Falls Savings and Loan Association in
1948. The Association obtained a federal charter in 1982 and changed its name to
Redwood Falls Federal Savings and Loan Association. The Association is subject
to examination and comprehensive regulation by the Office of Thrift Supervision
("OTS") and its deposits have been federally insured by the Savings Association
Insurance Fund ("SAIF") and its predecessor, the Federal Savings and Loan
Insurance Corporation ("FSLIC"), since 1958. The Association is a member of and
owns capital stock in the Federal Home Loan Bank ("FHLB") of Des Moines, which
is one of the 12 regional banks in the FHLB System.
The Association attracts deposits from the general public and uses such
deposits primarily to purchase investment securities and mortgage-backed and
related securities and to originate loans secured by first mortgages on single
family residences in its market area. For this mortgage loan portfolio, the
Association originates and retains adjustable rate loans as well as fixed-rate
balloon loans. The Association also originates commercial real estate loans and
consumer loans. The Association originates a limited number of multi-family and
residential construction loans.
The principal sources of funds for the Association's lending activities
are deposits and the amortization, repayment, and maturity of loans and
investment securities. The Association does not rely on brokered deposits.
Principal sources of income are interest on loans and investment securities. The
Association's principal expense is interest paid on deposits.
Market Area and Competition
The Association's market area consists of a major portion of Renville
County and northern Redwood County, Minnesota. This area is primarily rural with
a large amount of agri-business. The primary lending concentration is in the
Association's market area, an area mainly comprised of the cities of Redwood
Falls and Olivia, both of which are county seats and have populations of
approximately 5,000 and 2,800, respectively. Historically, the economy in the
Association's market area has been dependent on agriculture and agriculture
related industries. However, one of the largest employers in
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this area is a manufacturer of peripheral parts for computers. In recent years,
a casino has had an important economic impact on the area providing employment
and promoting tourism.
Employment is also provided by city and county governments, through their
need for administrative and hospital workers. Although the surrounding area is
largely economically based on agriculture, the Association does not make loans
secured by farm real estate or make farm operating loans.
Lending Activities
General. The Company's loan portfolio predominantly consists of mortgage
loans secured by single family residences. The Company also makes commercial
real estate, consumer, residential construction, and multi-family real estate
loans. From time to time, the Company will participate in unsecured commercial
loans and commercial loans not secured by real estate.
Most of the Company's loan portfolio is secured by first mortgage loans on
one- to four-family residences. For its mortgage loan portfolio, the Company
originates and retains fixed rate and adjustable rate loans. The Company does
not sell mortgage loans into the secondary market. The Company's consumer loan
portfolio consists of savings account loans. The vast majority of commercial
real estate loans are secured by health care facilities, office buildings and,
to a lesser extent, retail establishments.
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar amounts and
in percentages of the loan portfolio (before deductions for loans in process,
deferred loan fees and discounts, and allowance for loan losses) as of the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1996 1995
--------------------- ----------------------
Amount Percentage Amount Percentage
----- ---------- ------ ----------
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C>
Residential construction........ $ 220 1.33% $ 242 1.59%
Single-family residentia1....... 15,233 92.24 14,618 95.83
Multi-family residential........ 189 1.15 204 1.34
Commercial ..................... 520 3.15 474 3.11
Consumer loans:
Savings account ................ 141 0.85 165 1.08
Commercial ....................... 775 4.69 0 0.00
Less:
Loans in process ............... (333) (2.01) (216) (1.42)
Deferred loan fees and discounts (18) (0.11) (19) (0.13)
Allowance for loan losses....... (213) (1.29) (213) (1.40)
------ ----- ------ -----
Total loans, net ................. $ 16,514 100.00% $ 15,255 100.00%
====== ====== ====== ======
</TABLE>
The Company primarily originates loans for retention in its portfolio and
has not purchased whole loans or sold loans during the past three years.
3
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
Company's loan portfolio at June 30, 1996. The table does not include
prepayments or scheduled principal repayments. Adjustable rate mortgage loans
are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Single Multi-
Family Family Commercial Residential
Residential Residential Real Estate Construction Consumer Commercial Total
----------- ----------- ----------- ------------ -------- ---------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C> <C> <C>
Within 1 year... $ 655 $ 0 $ 0 $ 0 $ 141 $ 0 $ 796
1 to 5 years.... 4,621 97 5 0 0 0 4,723
After 5 years... 9,958 92 514 220 0 775 11,559
------ ---- ---- ---- --- ---- -------
Total amount due.. $ 15,234 $ 189 $ 519 $ 220 $ 141 $ 775 $ 17,078
====== ==== ==== ==== ==== ==== =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 1996, which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
Single-family residential... $8,109 $7,124 $15,233
Multi-family real estate.... 150 40 190
Commercial real estate...... 223 296 519
Residential construction.... 0 220 220
Consumer.................... 141 0 141
Commercial.................. 475 300 775
----- ------ ------
Total..................... $9,098 $ 7,980 $17,078
===== ====== ======
Single-Family Residential Loans. The Association's primary lending
activity consists of the origination of single-family residential mortgage loans
secured by property located in the Association's primary market area. The
Association generally originates single-family residential first mortgage loans
without private mortgage insurance in amounts up to 80% of the lesser of the
appraised value or selling price of the mortgaged property. The Association will
not originate any loan which exceeds 95% of the lesser of the appraised value or
the selling price of the property and typically requires private mortgage
insurance on any loans in excess of 80% of the value of the mortgaged property.
The Association also originates home equity loans (e.g., second mortgage loans)
up to 90% of the appraised value on an aggregate basis with all other mortgages
without private mortgage insurance.
In order to reduce interest rate risk, the Association offers primarily
adjustable rate loans and balloon loans. For its adjustable-rate loans, the
Association may offer low initial interest rates (i.e., teaser rates) but
requires for all adjustable-rate mortgage loans that the borrower qualify at the
fully indexed rate. The Association's adjustable-rate loans provide for periodic
interest rate adjustments of 1% to 2% with a maximum adjustment over the term of
the loan of between 5% and 6%. Adjustable-rate loans typically reprice every 1,
3, or 5 years, and typically provide for amortization over a 15 to 30 year
period. Currently, the Association sets adjustable-rate loan interest rates
based on a national cost of funds index. In the past, the Association used a
one-year U.S. Treasury securities index. The Association does not permit
adjustable-rate loans to be converted to fixed rate loans.
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<PAGE>
The Association also offers fixed rate, single-family mortgage balloon
loans that provide for an amortization of up to 30 years, but which typically
mature after 5 to 7 years. The Association usually refinances the balloon loans
at the then current market rate of interest. Refinancing matured balloon loans
is dependent on certain factors including, but not limited to, the borrower's
payment history and the value of the collateral. The Association is not legally
bound to refinance a balloon loan. The Association does not generally offer
long-term fixed rate single-family mortgage loans, although the Association
does, on occasion, originate long-term loans (up to 30 years) with the first
adjustment due at either 7, 8, or 15 years. Many of the existing loans that do
not reprice within five years were originated more than 10 years ago, before the
Association de-emphasized the origination of long-term, fixed rate loans.
Interest rates charged on mortgage loans are competitively priced based on
market conditions and the Association's cost of funds. The origination fees for
loans are generally 1% of the loan amount. Generally, the Association's standard
underwriting guidelines for fixed rate mortgage loans conform to Federal Home
Loan Mortgage Corporation ("FHLMC") guidelines. It is the current policy of the
Association to originate loans solely for its loan portfolio. However, if
favorable market conditions exist, the Association may originate long-term,
fixed rate loans for sale in the secondary mortgage market. The Association will
continue to emphasize short-term or adjustable-rate mortgage loans consistent
with its asset/liability management strategy. At June 30, 1996, the Association
did not service loans for others.
Consumer Loans. Consumer loans are only made when secured by a savings
account in the Association and generally have rates that adjust with the rate on
the underlying account and are typically at least one percent above the rate on
the underlying account. Savings account loans are offered subject to a 90% loan
to value ratio. Although the Association also makes home equity loans, these
loans are secured by liens on primary residences and are categorized as
single-family residential loans.
Commercial Real Estate Loans. In order to serve its community and enhance
the yield on its assets, the Association originates loans secured by commercial
real estate. Loans secured by commercial real estate are generally originated in
amounts up to 80% of the appraised value of the property. Commercial real estate
loans are either adjustable rate loans that reprice after 1, 3, or 5 years or
fixed rate balloon loans due after 1, 3, or 5 years. Commercial real estate
loans typically amortize over a 25 to 30 year period. At June 30, 1996, the
Association's largest commercial real estate loans to one borrower consisted of
two participations totaling $160,000 discussed below and were performing loans,
secured by a health care facility in Redwood Falls, Minnesota. All commercial
real estate loans require prior approval by the Association's Board of
Directors. As part of its underwriting, the Association requires that borrowers
qualify for a commercial real estate loan at the fully indexed interest rate
rather than at the origination interest rate.
The Association has a one-half interest in a participation loan with a
commercial bank for a home in Redwood Falls that will house handicapped adults.
The Association also has a one third participation with two commercial banks for
a loan for a home in Redwood Falls that will also house handicapped adults. At
June 30, 1996, the Association's interest in both loans totalled $160,000. Both
loans are with the same borrower.
Loans secured by commercial real estate generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. For the small total
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<PAGE>
dollar amount of loans secured by church real estate that are originated by the
Association, repayment is dependent upon the continuing financial support of the
church's members.
Residential Construction Loans. Residential construction loans are
generally made on single-family residential property to the individuals who will
be the owners and occupants upon completion of construction. These loans are
made on a long term basis and are classified as construction permanent loans,
usually with no principal payments required during the first six months, after
which the payments are set at an amount that will amortize over a 15 to 30 year
period. The maximum loan to value ratio is 80%. For loans with private mortgage
insurance, the maximum loan to value ratio is 95%. Because residential
construction loans are not rewritten if permanent financing is obtained from the
Association, these loans are made on terms similar to those of the Association's
single-family residential loans and may be amortized over terms of up to 30
years.
The Association originates a limited number of speculative loans to
builders and limits the loan to value ratio to 80% with a balloon maturity based
on an amortization of up to 30 years on terms that are assumable by ultimate
purchasers. In underwriting such loans, the Association takes into consideration
the number of units that the builder has on a speculative basis that remain
unsold.
Multi-Family Loans. The Association also makes fixed rate and adjustable
rate multi-family loans, including loans on apartment complexes. The only
multi-family real estate loan at June 30, 1996 was secured by a six unit
apartment building located within the primary market area of the Association.
Multi-family loans generally provide higher origination fees and interest
rates than can be obtained from single-family mortgage loans. Multi-family
lending, however, entails significant additional risks compared with one- to
four-family residential lending.
Commercial Loans. The Association does not actively originate commercial
loans. However, the Association participates in a loan on a 35-unit housing
complex designed to assist elderly and low-to-moderate income persons. The loan
is an obligation of the City of Redwood Falls, Minnesota, and is secured by the
general taxing authority of the City. The Association's participation in the
loan totalled $300,000 at June 30, 1996.
While the Company does not regularly engage in lending activities outside
of the lending activities of the Association, the Company participates in a
commercial loan used for the improvement and operation of a hotel and convention
center on a local gaming casino. The Company's participation in the loan
totalled $475,000 at June 30, 1996, and is secured primarily by the revenues of
the casino. The loan is the only loan receivable of the Company.
Commercial loans generally involve a greater degree of risk than mortgage
loans and carry larger loan balances. This increased credit risk is a result of
several factors, including the lack of real estate as collateral, the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of commercial loans is typically dependent upon the
successful operation of the related commercial enterprise. If the cash flow from
the enterprise is reduced, the borrower's ability to repay the loan may be
impaired.
Loan Commitments. The Association issues written commitments to prospective
borrowers on all real estate approved loans. Generally, the commitment requires
acceptance within 45 days of the date of issuance. At June 30, 1996, the
Association had $1,084,000 of commitments to cover originations
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and undisbursed funds for loans in process. The Association believes that most
of the Association's commitments will be funded.
Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations limit
loans-to-one borrower in an amount equal to 15% of unimpaired capital and
unimpaired surplus, or $500,000, whichever is higher. The Association's maximum
loan-to-one borrower limit was approximately $1,531,000 as of June 30, 1996.
At June 30, 1996, the Association's largest amount of loans to one
borrower was a commercial loan participation in the amount of $300,000, secured
by the general taxing authority of the City of Redwood Falls, Minnesota.
Nonperforming and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are
generally placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
7
<PAGE>
Nonperforming Assets. The following table sets forth information regarding
non-accrual loans, real estate owned, and certain other repossessed assets and
loans. As of the dates indicated, the Association had no loans categorized as
troubled debt restructuring within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
June 30,
---------------------
1996 1995
--------- ----------
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S> <C> <C>
Permanent loans secured by 1-4 dwelling units ................ $ 89 $ 0
All other mortgage loans ..................................... 0 0
Non-mortgage loans ............................................. 0 0
---- ----
Total .......................................................... $ 89 $ 0
==== ====
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units ................ 46 $ 0
All other mortgage loans ..................................... 0 0
Non-mortgage loans ............................................. 0 0
--- ---
Total .......................................................... $ 46 $ 0
==== ====
Total non-accrual and accrual loans ............................ $ 135 $ 0
==== ====
Real estate owned .............................................. $ 0 $ 0
==== ====
Other non-performing assets .................................... $ 0 $ 0
==== ====
Total non-performing assets .................................... $ 135 $ 0
==== ====
Total non-accrual and accrual loans to
net loans .................................................... 0.82% 0.00%
==== ====
Total non-accrual and accrual loans to
total assets ................................................. 0.26% 0.00%
==== ====
Total non-performing assets to total assets .................... 0.26% 0.00%
==== ====
</TABLE>
There was $3,000 in interest income that would have been recorded on loans
placed on a non-accrual basis under the original terms of such loans during the
year ended June 30, 1996.
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions which covers all problem assets. Under
this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified
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as loss are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets may be designated "special mention" because of potential
weakness that do not currently warrant classification in one of the
aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At June 30, 1996, the Company's classified assets consisted of substandard
loans of $89,000. At June 30, 1996, the Company also had $115,000 in loans
designated as special mention. The Company had delinquent loans of 60 and 90
days or more of $46,000 and $135,000, respectively, and a general valuation
allowance of $213,000.
Foreclosed Real Estate. Real estate acquired by the Company as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the fair value at
the date of acquisition less estimated costs of disposition. The Company had no
real estate owned at June 30, 1996.
Allowance for Loan Losses. Management performs an analysis to identify the
inherent risk of loss in its portfolio. A provision for loan losses is charged
to operations based on management's analysis, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions.
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Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Company's allowance for loan losses by loan category and
the percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category because the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1996 1995
---------------------- ----------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
At end of period allocated to:
Real estate mortgage:
<S> <C> <C> <C> <C>
Residential construction.. $ 1 0.47% $ 1 1.54%
Single-family residential. 202 94.83 206 93.09
Multi-family residential.. 2 0.94 2 1.30
Commercial................ 5 2.35 4 3.02
Savings account............. 0 0.00 0 1.05
Commercial.................. 3 1.41 0 0.00
---- ------ ---- ------
Total allowance for
loan losses ...... $ 213 100.00% $ 213 100.00%
==== ====== ==== ======
</TABLE>
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<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Company's allowance for loan losses at the dates
and for the periods indicated:
<TABLE>
<CAPTION>
At or For the Year
----------------------
1996 1995
----------- ---------
(Dollars in Thousands)
<S> <C> <C>
Total loans outstanding ................................... $16,727 $15,468
====== ======
Average loans outstanding ................................. $15,755 $15,129
====== ======
Allowance balances (at beginning of
year) ..................................................... $ 213 $ 213
Charge-offs ............................................... 0 0
Recoveries ................................................ 0 0
------ ------
Net charge-offs ........................................... 0 0
Provision ................................................. 0 0
------ ------
Allowance balance (at end of year) ........................ $ 213 $ 213
====== ======
Allowance for loan losses as a percent
of total loans outstanding .............................. 1.27% 1.38%
Net loans charged off as a percent of
average loans outstanding ............................... 0.00% 0.00%
</TABLE>
Mortgage-backed and Related Securities. To supplement lending activities,
the Company invests in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings (although the Company has not
used them as such) and, through repayments, as a source of liquidity.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. This
statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. SFAS No. 115 is effective for fiscal years beginning after
December 15, 1993 as of the beginning of the fiscal year (i.e., July 1, 1994 for
the Company).
SFAS No. 115 requires classification of investments into three categories.
Debt securities that the Company has the positive intent and ability to hold to
maturity must be reported at amortized cost. Debt and equity securities that are
bought and held principally for the purpose of selling them in the near term
must be reported at fair value, with unrealized gains and losses included in
earnings. All other debt and equity securities must be considered available for
sale and must be reported at fair value, with unrealized gains and losses
excluded from earnings but reported as a separate component of stockholders'
equity (net of tax effects).
The Company adopted SFAS No. 115 as of July 1, 1994. The implementation of
SFAS No. 115 had no impact on the financial statements of the Company as the
Company's entire portfolio of securities is classified as held to maturity. At
June 30, 1996, the mortgage-backed and related securities portfolio had a fair
value of $15.8 million and an amortized cost of $15.8 million. Because the
entire portfolio is classified as held to maturity (the Company had no
mortgage-backed or related securities classified as available for sale at June
30, 1996), the portfolio is recorded at amortized cost. The Board of Directors,
however, has approved an investment policy that will permit management to
purchase investment
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<PAGE>
securities and place these securities in an available for sale portfolio should
market conditions favor such a classification.
Mortgage-backed securities represent a participation interest in a pool of
single-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Association. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and Federal National Mortgage Association ("FNMA").
FHLMC is a publicly-owned corporation chartered by the United States
Government. FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by Congress with a mandate to establish a secondary market for
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest, and FNMA securities are indirect obligations of the United States
Government. GNMA is a government agency within the Department of Housing and
Urban Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Because FHLMC, FNMA, and GNMA were established to provide support
for low- and middle-income housing, there are limits to the maximum size of
loans that qualify for these programs. To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate mortgages or
adjustable rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, (i.e., fixed rate or adjustable rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
The collateralized mortgage obligations ("CMOs") (in the form of real
estate mortgage investment conduits) held by the Association at June 30, 1996
totalled $78,000 and consisted of fixed rate notes issued by FHLMC. The
portfolio of CMOs held within the Association's mortgage-backed and related
securities portfolio at June 30, 1996 did not include any residual interests in
CMOs. Further, at June 30, 1996, the Company's mortgage-backed and related
securities portfolio did not include any "stripped" CMOs (i.e., CMOs that pay
interest only and do not repay principal or CMOs that repay principal only and
do not pay interest).
Investment Activities. The Association is required under federal
regulations to maintain a minimum amount of liquid assets which may be invested
in specified short-term securities and certain other investments. See
"Regulation - Regulation of the Association - Federal Home Loan Bank System."
The Association has maintained a liquidity portfolio in excess of regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of future yield levels, as well as management's projections
as to the
12
<PAGE>
short-term demand for funds to be used in the Association's loan origination and
other activities. At June 30, 1996, the Company had an investment portfolio of
approximately $34.3 million, consisting primarily of U.S. Treasury securities,
U.S. Government Agency securities, and mortgage-backed and related securities.
To a lesser extent, the portfolio includes municipal bonds and interest-bearing
deposits as permitted by regulation. The Company classifies its investments as
held to maturity in accordance with SFAS No. 115. See the discussion of SFAS No.
115 under "- Mortgage-backed and Related Securities."
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment securities portfolio, short-term investments, FHLB
stock, and mortgage-backed and related securities at the dates indicated.
At June 30,
-----------------------
1996 1995
--------- ---------
(In Thousands)
Investment securities:
U.S. Treasury Notes............. $ 7,654 $ 8,963
U.S. Government Agency Bonds.... 6,093 6,946
Municipal bonds................. 1,542 522
------ ------
Total Investment Securities... 15,289 16,431
Interest-bearing deposits in
other institutions.............. 2,858 898
Interest-bearing deposits -
stock subscriptions............. 0 13,128
FHLB stock........................ 334 327
Mortgage-backed and related
securities...................... 15,805 7,874
------ ------
Total Investments........... $ 34,286 $ 38,658
====== ======
13
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields, and
maturities of the Company's investment securities portfolio at June 30, 1996.
<TABLE>
<CAPTION>
As of June 30, 1996
----------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------- ------------------ ------------------ -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Notes $ 2,150 6.21% $ 5,504 5.54% $ 0 0.00% $ 0 0.00%
U.S. Government
Agency bonds ..... 1,350 7.49 4,743 6.45 0 0.00 0 0.00
Municipal bonds .... 393 4.78 949 4.22 200 4.50 0 0.00
----- ------ ----- -----
Total Investment
Securities ..... 3,893 6.51 11,196 5.81 200 4.50 0 0.00
FHLB stock ......... N/A N/A N/A N/A N/A N/A N/A N/A
Mortgaged-backed and
related securities 416 7.32 7,100 6.26 6,328 6.89 1,961 8.08
----- ------ ----- -----
Total Investment
Portfolio(1).... $ 4,309 6.59% $18,296 5.99% $ 6,528 6.82% $ 1,961 8.08%
====== ==== ====== ==== ====== ==== ===== ====
</TABLE>
- --------------------------------
(1) Excludes interest bearing deposits and FHLB stock.
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. The Company derives funds from the amortization
and prepayment of loans and, to a much lesser extent, the maturities of
investment securities, mortgage-backed, and related securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions. The Company may also
use FHLB advances as an additional source of funds.
Deposits. Consumer and commercial deposits are attracted principally from
within the Company's primary market area through the offering of a broad
selection of deposit instruments including regular savings accounts, money
market accounts, and term certificate accounts. The Company also offers IRA and,
to a lesser extent, KEOGH accounts. Deposit account terms vary according to the
minimum balance required, the time period the funds must remain on deposit, and
the interest rate, among other factors.
Passbook and money market accounts constituted $8.1 million, or 21.27%, of
the Company's deposit portfolio at June 30, 1996. Certificates of deposit
constituted $29.8 million or 78.25% of the deposit portfolio. At June 30, 1996,
the Company had no brokered deposits.
14
<PAGE>
Deposits of $100,000 or More. The following table indicates the amount of
the Company's deposit accounts of $100,000 or more as of June 30, 1996,
including term certificate accounts separated by time remaining until maturity.
Amount
(In Thousands)
Term certificate accounts:
Maturity Period
Within three months.............................. $1,269
Three through six months......................... 1,440
Six through twelve months........................ 1,617
Over twelve months............................... 1,900
-----
Total.......................................... 6,226
Money market accounts.............................. 3,472
-----
Total.......................................... $9,698
=====
Borrowings
Deposits are the primary source of funds of the Company's lending and
investment activities and for its general business purposes. The Association may
obtain advances from the FHLB of Des Moines to supplement its supply of lendable
funds. Advances from the FHLB of Des Moines are typically secured by a pledge of
the Association's stock in the FHLB of Des Moines and a portion of the
Association's first mortgage loans and certain other assets. The Association, if
the need arises, may also access the discount window of the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. At June 30, 1996,
the Company and the Association had no borrowings.
Personnel
The Company has no employees other than executive officers. As of June 30,
1996, the Association had 10 full-time and no part-time employees. None of the
Association's employees are represented by a collective bargaining group.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Association. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the
Association and not for the benefit of stockholders of the Company.
15
<PAGE>
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Association satisfies the Qualified Thrift Lender ("QTL") test. If the
Company acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Company and any of its subsidiaries (other than the
Association or any other SAIF-insured savings association) would become subject
to restrictions applicable to bank holding companies unless such other
associations each also qualify as a QTL and were acquired in a supervisory
acquisition. See "- Regulation of the Association - Qualified Thrift Lender
Test."
Regulation of the Association
General. As a federally chartered, SAIF-insured savings association, the
Association is subject to extensive regulation by the OTS and the Federal
Deposit Insurance Corporation ("FDIC"). Lending activities and other investments
must comply with various federal statutory and regulatory requirements. The
Association is also subject to certain reserve requirements promulgated by the
Federal Reserve Board.
Insurance of Deposit Accounts. The Association's deposit accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system, SAIF members pay within a range of 23 cents to 31 cents per $100 of
domestic deposits, depending upon the institution's risk classification. This
risk classification is based on an institution's capital group and supervisory
subgroup assignment. In addition, the FDIC is authorized to increase such
deposit insurance rates, on a semi-annual basis, if it determines that such
action is necessary to cause the balance in the SAIF to reach the designated
reserve ratio of 1.25% of SAIF-insured deposits within a reasonable period of
time. The FDIC also may impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC. By comparison, most members of the Bank Insurance Fund ("BIF")
(e.g., commercial banks) pay a substantially lower insurance premium.
The Association expects a one-time assessment of approximately 68 basis
points on every $100 of deposits. If the assessment was applied to the
Association's deposits at June 30, 1996, the Association would experience a one
time cost of approximately $156,000 (net of taxes). If the Association is
required to pay the proposed special assessment, future deposit insurance
premiums are expected to be reduced. Based upon the Association's deposits as of
June 30, 1996, the Association's deposit insurance expense would decrease by
approximately $51,000 per year after taxes. Management of the Association is
unable to predict whether this proposal or any similar proposal will be enacted
or whether ongoing SAIF premiums will be reduced to a level comparable to that
of BIF premiums.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets. The Association's regulatory capital
exceeded all minimum regulatory capital requirements applicable to it as of June
30, 1996.
16
<PAGE>
Savings associations with a greater than "normal" level of interest rate
exposure will, in the future, be subject to a deduction from capital for an
interest rate risk ("IRR") component for purposes of calculating their
risk-based capital requirement.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Association to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. At June
30, 1996, the Association was a Tier 1 institution. In the event the
Association's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the
Association's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice.
In addition, the Association may not declare or pay a cash dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Association below the amount required for the liquidation account to be
established pursuant to the Association's plan of conversion.
Qualified Thrift Lender Test. Savings institutions must meet a QTL test.
If the Association maintains an appropriate level of Qualified Thrift
Investments (primarily residential mortgages and related investments, including
certain mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full borrowing privileges from the FHLB of Des Moines.
The required percentage of QTIs is 65% of portfolio assets (defined as all
assets minus intangible assets, property used by the institution in conducting
its business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be in compliance with the QTL test on a
monthly basis in nine out of every 12 months. As of June 30, 1996, the
Association was in compliance with its QTL requirement with 87.99% of its assets
invested in QTIs. There can be no assurance that the Association will continue
to meet the QTL requirements in future periods.
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.
17
<PAGE>
Federal Home Loan Bank System. The Association is a member of the FHLB of
Des Moines, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At June 30,
1996, the Association was in compliance with these requirements.
Item 2. Description of Property
(a) Properties.
The Company owns no real property but utilizes the offices of the
Association. The Association owns its main office located at 301 South
Washington Street, Redwood Falls, Minnesota and one full service branch office
located at 824 East Lincoln Street, Olivia, Minnesota. The Association also owns
a building adjacent to the branch office and two lots in Redwood Falls,
Minnesota.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the
Association's investment policies and any regulatory or Board of Directors'
percentage of assets limitations regarding certain investments.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities," "Item 1. Business - Regulation of the
Association," and "Item 2. Description of Property. (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending
Activities" and "Item 1. Business - Regulation of the Association."
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Business - Lending Activities," "Item 1.
Business - Regulation of the Association," and "Item 1. Business - Subsidiary
Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
The Company and the Association, from time to time, are parties to
ordinary routine litigation, which arises in the normal course of business, such
as claims to enforce liens, condemnation proceedings on properties in which the
Association holds security interests, claims involving the making and servicing
of real property loans, and other issues incident to the business of the Company
and the Association. No claims or lawsuits were pending or threatened at June
30, 1996.
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended June 30, 1996 (the "Annual Report"), is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
The Association's consolidated financial statements required are contained
in the Annual Report and are incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(b) of the Exchange Act
The information contained under the section captioned "I -- Information
with Respect to Nominees for Director, Directors Continuing in Office, and
Executive Officers" in the Corporation's definitive proxy statement for the
Corporation's Annual Meeting of Stockholders to be held October 22, 1996 (the
"Proxy Statement") is incorporated herein by reference.
Item 10. Executive Compensation
The information contained under the section captioned "Director and
Executive Officer Compensation - Executive Compensation" in the Proxy Statement
is incorporated herein by reference.
19
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "I -- Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive
Officers" in the Proxy Statement.
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the sections captioned "Certain Relationships and Related Transactions" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.
20
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of the Registrant included in the Registrant's Annual Report to
Stockholders for the fiscal year ending June 30, 1996 are incorporated herein by
reference.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of June 30, 1996 and 1995
Consolidated Statements of Earnings for the Years Ended June 30, 1996,
1995, and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996,
1995, and 1994
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
("SEC") are not required under the related instructions or are inapplicable and
therefore have been omitted.
3. The following exhibits are included in this Report or incorporated
herein by reference:
(a) List of Exhibits:
3.1 Articles of Incorporation of Redwood Financial, Inc.*
3.2 Bylaws of Redwood Financial, Inc.*
10.1 Employment contract with Paul W. Pryor*
10.2 1995 Stock Option Plan**
10.3 Management Stock Bonus Plan**
13 Annual Report to Stockholders for the fiscal year ended June 30,
1996.
21 Subsidiaries of the Registrant***
23 Consent of KPMG Peat Marwick LLP
21
<PAGE>
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (33-90560) declared effective by the Commission on May 15, 1995.
** Incorporated by reference to the proxy statement for the special meeting
of stockholders held on January 17, 1996 and filed with the SEC on
December 5, 1995 (File No. 0-25884).
*** Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1995 (File No. 0-25884).
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REDWOOD FINANCIAL, INC.
Dated: September 27, 1996 By: /s/ Paul W. Pryor
-----------------
Paul W. Pryor
President, Chief Executive
Officer and Director (Duly
Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Paul W. Pryor By: /s/ James P. Tersteeg
----------------- ---------------------
Paul W. Pryor James P. Tersteeg
President, Chief Executive Officer Chairman of the Board
and Director (Principal Executive
Officer)
Date: September 27, 1996 Date: September 27, 1996
By: /s/ J. Scott Nelson By: /s/ Blaine C. Farnberg
------------------- ----------------------
J. Scott Nelson Blaine C. Farnberg
Vice Chairman of the Board Director
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Thomas W. Stotesbery By: /s/ Donald C. Orth
------------------------ ------------------
Thomas W. Stotesbery Donald C. Orth
Director Vice President (Principal
Financial Officer)
Date: September 27, 1996 Date: September 27, 1996
By: /s/ Ardella J. Schlapkohl
-------------------------
Ardella J. Schlapkohl
Comptroller (Principal Accounting
Officer)
Date: September 27, 1996
EXHIBIT 13
<PAGE>
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Redwood Financial, Inc.
P.O. Box 317; 301 S. Washington St.
Redwood Falls, MN 56283-0317
507-637-8730
Fax 507-637-5825
To Our Stockholders:
We are happy to present to you our second annual stockholders' report. Redwood
Falls Federal Savings and Loan Association (the Association) successfully
completed the conversion from a federally chartered mutual savings association
to a federally chartered stock savings association. Redwood Financial, Inc.,
(the Company) acquired all of the issued and outstanding capital stock of the
Association in July 1995. We are pleased to report to you the results of our
first year of operations.
We believe the Company and the Association are well positioned to meet
tomorrow's challenges and demands, and we look forward to the future with
enthusiasm and optimism. We will continue striving to provide quality financial
services to the communities we serve. We have a loyal customer base, a dedicated
board of directors, and an excellent staff who recognize the importance of
quality customer service. We will continue to focus on what we do best.
Your board of directors and management team are committed to protecting and
enhancing the value of your investment in the Company. To do so, we are
challenged to continue delivering high quality services to our customers and
communities and build upon our past accomplishments. We appreciate the
confidence, support, and loyalty of our customers, employees, and stockholders.
Sincerely,
/s/Paul W. Pryor
Paul W. Pryor
President and Chief Executive Officer
<PAGE>
2
REDWOOD FINANCIAL, INC.
Profile and Related Information
Redwood Financial, Inc. (the Company) is a Minnesota corporation organized at
the direction of the board of directors of the Redwood Falls Federal Savings and
Loan Association (the Association) to acquire all of the capital stock that the
Association issued upon its conversion from the mutual to stock form of
ownership. The Company is a unitary savings and loan holding company which
generally, under existing laws, is not restricted in the types of business
activities in which it may engage, provided that the Association retains a
specified amount of its assets in housing-related investments. At the present
time, because the Company does not conduct any significant business, the Company
does not intend to employ any persons other than officers of the Association but
utilizes the support staff of the Association from time to time.
The Association is a federally chartered mutual savings and loan association
headquartered in Redwood Falls, Minnesota. The Association has two full-service
offices located in Redwood and Renville Counties, Minnesota. The Association was
founded in 1924 and obtained its current name in 1982. The Association's
deposits have been federally insured by the Savings Association Insurance Fund
(SAIF) and its predecessor, the Federal Savings and Loan Insurance Corporation
(FSLIC), since 1958, and the Association is a member of the Federal Home Loan
Bank (FHLB) System. The Association is a community oriented, retail savings
institution offering traditional mortgage loan products. It is the Association's
intent to remain an independent community savings and loan association serving
the local banking needs of Redwood and Renville Counties, Minnesota.
The Association attracts deposits from the general public and uses such deposits
primarily to invest in residential lending on owner-occupied properties. The
Association also makes consumer, commercial real estate, and multi-family loans.
Stock Market Information
Since its issuance on July 7, 1995, the Company's common stock has been traded
in the over-the-counter market. The following table reflects the stock price as
published by the OTC Bulletin Board. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commission, and may not represent actual
transactions.
High bid Low bid
- -----------------------------------------------------------
Fiscal 1996:
First Quarter $ 9-1/2 8-3/4
Second Quarter 9-3/4 9-1/2
Third Quarter 9-3/4 9-1/4
Fourth 9-1/4 9-1/4
Quarter
The number of stockholders of record of common stock as of June 30, 1996, was
approximately 113. This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various brokerage firms. At June
30, 1996, there were 1,068,750 shares outstanding.
The Company paid no dividends to holders of common stock during the fiscal year
ended June 30, 1996.
<PAGE>
3
REDWOOD FINANCIAL, INC.
The Company's ability to pay dividends to stockholders is subject to the
requirements of Minnesota law. No dividend may be paid by the Company
unless its board of directors determines that the Company will be able to
pay its debts in the ordinary course of business after payment of the
dividend. In addition, the Company's ability to pay dividends is dependent,
in part, upon the dividends it receives from the Association. The
Association may not declare or pay a cash dividend on any of its stock if
the effect thereof would cause the Association's regulatory capital to be
reduced below (1) the amount required for the liquidation account
established in connection with the Association's conversion from mutual
stock form, or (2) the regulatory capital requirements imposed by the
Office of Thrift Supervision (OTS).
FIVE-YEAR SELECTED FINANCIAL SUMMARY
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30
------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
Operating results:
<S> <C> <C> <C> <C> <C>
Interest income $ 3,487 3,023 3,048 3,268 3,417
Interest expense 1,883 1,683 1,448 1,637 2,148
- --------------------------------------------------------------------------------------------------------------------
Net interest income 1,604 1,340 1,600 1,631 1,269
Provision for loan losses 0 0 1 15 27
Noninterest income 61 40 54 56 66
Noninterest expense 992 775 690 653 617
Income tax expense 211 245 426 407 276
- --------------------------------------------------------------------------------------------------------------------
Earnings before cumulative
effect of accounting change 462 360 537 612 415
Cumulative effect of
accounting change 0 0 (45) 0 0
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 462 360 492 612 415
====================================================================================================================
Net earnings per common share $ 0.45 N/A N/A N/A N/A
====================================================================================================================
Balance sheet data:
Total assets $ 51,515 55,002 42,660 40,026 39,046
Investment securities 15,289 16,431 17,213 13,434 8,352
Mortgage-backed and related
securities 15,805 7,874 7,774 8,936 12,027
Loans receivable, net 16,514 15,255 15,091 15,620 15,957
Deposits 38,043 35,825 37,114 35,064 34,526
Stockholders' equity 13,157 5,656 5,295 4,804 4,192
Financial ratios:
Return on average assets 0.93% 0.74% 1.17% 1.49% 1.07%
Return on average equity 3.42 6.58 9.73 13.65 10.51
Average equity to average assets 27.18 11.21 12.03 10.95 10.15
Net yield on average interest-
earning assets 3.27 3.18 3.87 4.05 3.32
</TABLE>
<PAGE>
4
REDWOOD FINANCIAL, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
At the present time, Redwood Financial, Inc. (the Company) does not conduct any
significant business outside of serving as a unitary savings and loan holding
company for Redwood Falls Federal Savings and Loan Association (the
Association).
The Association converted from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings and loan association pursuant
to its Plan of Conversion. The conversion was effected on July 7, 1995 and as a
result, the following discussion as it describes information prior to this
relates to the Association. The principal business of the Company through the
Association consists of accepting deposits from the general public and investing
these funds primarily in investment securities and loans. The investment
securities consist of U.S. government treasury notes and agency securities,
mortgaged-backed and related securities, and, to a lesser extent, collateralized
mortgage obligations, municipal bonds, and FHLB stock. Loans consist primarily
of loans secured by residential real estate located in its market area and, to a
lesser extent, commercial real estate loans, commercial loans, and loans secured
by deposit accounts.
Net earnings are dependent primarily on net interest income, which is the
difference between interest income earned on the investment and loan portfolio
and interest paid on interest-bearing liabilities. Net interest income is
determined by (i) the difference between yields earned on interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread) and
(ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. The interest rate spread is affected by regulatory, economic, and
competitive factors that influence interest rates, loan demand, and deposit
flows. To a lesser extent, net earnings also are affected by the level of
noninterest income, which primarily consists of service charges and other fees.
In addition, net earnings are affected by the level of noninterest (general and
administrative) expenses.
The operations of the Association and the entire thrift industry are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of the federal government and governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates, and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the Association's
market area.
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and average cost of liabilities for the periods
ended June 30, 1996, 1995, and 1994. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily balances has caused any material difference
in the information presented.
<PAGE>
5
REDWOOD FINANCIAL, INC.
The table also presents information for the periods indicated with respect to
the difference between the average yield earned on interest-earning assets and
average rate paid on interest-bearing liabilities, or "net interest rate
spread," which savings institutions have traditionally used as an indicator of
profitability. Another indicator of an institution's net interest income is its
"net yield on interest-earning assets," which is its net interest income divided
by the average balance of interest-earning assets. Net interest income is
affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
<PAGE>
6
REDWOOD FINANCIAL, INC.
<TABLE>
<CAPTION>
For the year ended June 30
-----------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ----------------------------- ---------------------------------
Interest Interest Interest
Average earned/ Yield/ Average earned/ Yield/ Average earned/ Yield/
balance paid cost balance paid cost balance paid cost
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
net (1) $15,754,753 $1,376,334 8.74% $15,128,730 $1,300,846 8.60% $15,415,696 $1,345,427 8.73%
Securities held to
maturity:
Mortgage-backed and
related securities 11,410,198 784,869 6.88 7,847,474 573,656 7.31 7,902,192 615,114 7.78
Investment securities 18,055,614 1,090,543 6.04 16,746,430 1,017,232 6.07 16,083,304 996,845 6.20
FHLB stock 330,792 23,765 7.18 327,000 25,363 7.76 327,000 26,630 8.14
Other interest-
earning assets (2) 3,550,681 211,640 5.96 2,084,790 105,947 5.08 1,649,067 64,383 3.90
----------- --------- ----------- ---------- ----------- ----------
Total interest-
earning assets 49,102,038 3,487,151 7.10 42,134,424 3,023,044 7.18 41,377,259 3,048,399 7.37
----------- --------- ----------- ---------- ----------- ----------
Noninterest-earning assets 698,754 767,940 636,591
----------- ----------- ----------
Total assets $49,800,792 $42,902,364 $42,013,850
=========== =========== ===========
Interest-bearing
liabilities:
Passbook
savings accounts 1,394,964 33,968 2.44 1,212,276 30,978 2.56 1,272,972 56,344 4.43
Money market
savings accounts 5,550,747 196,842 3.55 6,469,209 214,906 3.32 8,267,024 220,825 2.67
Certificates of deposit 28,561,491 1,652,027 5.78 28,544,639 1,437,363 5.04 26,908,121 1,171,590 4.35
----------- --------- ----------- --------- ----------- ----------
Total interest-
bearing liabilities 35,507,202 1,882,837 5.30 36,226,124 1,683,247 4.65 36,448,117 1,448,759 3.97
----------- --------- ----------- --------- ----------- ----------
Noninterest-
bearing liabilities 758,718 1,164,783 513,485
----------- ----------- -----------
Total liabilities 36,265,920 37,390,907 36,961,602
Stockholders' equity 13,534,872 5,511,457 5,052,248
----------- ----------- -----------
Total liabilities
and stockholders'
equity $49,800,792 $42,902,364 42,013,850
=========== =========== ===========
Net interest income $1,604,314 $1,339,797 $1,599,640
========== ========== ==========
Net interest
rate spread (3) 1.80% 2.53% 3.40%
====== ====== ======
Net yield on
interest-earning
assets (4) 3.27% 3.18% 3.87%
====== ====== ======
Ratio of average
interest-earning assets
to average interest-
bearing liabilities 138.29% 116.31% 113.52%
====== ====== ======
</TABLE>
(1) Average balances include nonaccrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
<PAGE>
7
REDWOOD FINANCIAL, INC.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); and (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
For the years ended June 30
---------------------------------------------------------------------------------
1996 versus 1995 1995 versus 1994
increase/(decrease) due to increase/(decrease) due to
-------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate volume Total Volume Rate volume Total
- ----------------------------------------------------------------------------------------- ----------------------------------------
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable ...................... $ 54,714 22,057 (1,283) 75,488 (25,045) (19,906) 370 (44,581)
Securities held to maturity:
Mortgage-backed and related
securities .................... 260,438 (33,855) (15,370) 211,213 (4,259) (37,458) 259 (41,458)
Investment securities ............. 78,944 (7,222) 1,589 73,311 41,100 (19,893) (820) 20,387
FHLB stock ............................ 294 (1,870) (22) (1,598) 0 (1,267) 0 (1,267)
Other interest-earning assets ......... 74,495 18,318 12,880 105,693 17,012 19,421 5,131 41,564
--------- -------- ------- ------- ------- -------- ------- --------
Total interest
earning assets .... 468,885 (2,572) (2,206) 464,107 28,808 (59,103) 4,940 (25,355)
--------- -------- ------- ------- ------- -------- ------- --------
Interest expense:
Passbook savings accounts ............. 4,668 (1,458) (220) 2,990 (2,687) (23,815) 1,136 (25,366)
Money market savings accounts ......... (30,511) 14,507 (2,060) (18,064) (48,022) 53,803 (11,700) (5,919)
Certificates of deposit ............... 849 213,689 126 214,664 71,255 183,366 11,152 265,773
--------- -------- ------- ------- ------- -------- ------- --------
Total interest
bearing liabilities (24,994) 226,738 (2,154) 199,590 20,546 213,354 588 234,488
--------- -------- ------- ------- ------- -------- ------- --------
Net change in net interest income .......... $ 493,879 (229,310) (52) 264,517 8,262 (272,457) 4,352 (259,843)
========= ======== ======= ======= ======= ======== ======= ========
</TABLE>
<PAGE>
8
REDWOOD FINANCIAL, INC.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Net Earnings
Net earnings were $462,000 for the year ended June 30, 1996, as compared to
$360,000 for the year ended June 30, 1995. This represented an increase of
$102,000, or 28.33%. The increase was attributable to a $464,000, or 15.35%
increase in total interest income, a $200,000, or 11.88% increase in interest
expense on deposits, a $21,000, or 52.50% increase in non-interest income, a
$218,000 or 28.17% increase in noninterest expense and a $34,000, or 13.88%
decrease in income tax expense.
Net Interest Income
Net interest income increased by $264,000, or 19.70%, from $1,340,000 for the
year ended June 30, 1995 to $1,604,000 for the year ended June 30, 1996. The
increase in net interest income primarily reflects an increase in the ratio of
average interest-earning assets to average interest-bearing liabilities from
116.31% for the year ended June 30, 1995 to 138.29% for the year ended June 30,
1996. However, this was offset by a decrease in the Company's interest rate
spread from 2.53% for the year ended June 30, 1995 to 1.80% for the year ended
June 30, 1996. The decrease in the Company's interest rate spread primarily was
caused by increases in interest rates during fiscal 1996, as the Company's
liabilities repriced more quickly than did its assets.
Interest Income
Interest income was $3,487,000 for the year ended June 30, 1996, as compared to
$3,023,000 for the year ended June 30, 1995, representing an increase of
$464,000, or 15.35%. The increase in interest income was caused primarily by an
increase in the average balance of interest-earning assets by $6,968,000, or
16.54%, from $42,134,000 for the year ended June 30, 1995 to $49,102,000 for the
year ended June 30, 1996, primarily because of the funds raised in the
conversion to stock form. This was offset in part by a decrease between the
periods in the average yield on interest-earning assets from 7.18% for the year
ended June 30, 1995 to 7.10% for the year ended June 30, 1996.
Interest on loans receivable increased by $75,000, or 5.75% during the year
ended June 30, 1996, as compared to the year ended June 30, 1995. Such increase
was due to a increase in the average yield on loans receivable from 8.60% for
the year ended June 30, 1995 to 8.74% for the year ended June 30, 1996, as well
as a $626,000, or 4.14%, increase in the average balance of loans receivable
from $15,129,000 for the year ended June 30, 1995 to $15,755,000 for the year
ended June 30, 1996.
Interest on mortgage-backed and related securities increased by $211,000, or
36.76% during the year ended June 30, 1996, as compared to the year ended June
30, 1995. Such increase was due to an increase in the average balance of
mortgage-backed and related securities by $3,563,000, or 45.41%, from $7,847,000
for the year ended June 30, 1995 to $11,410,000 for the year ended June 30,
1996. This was offset in part by a decrease in the average yield on
mortgage-backed and related securities from 7.31% for the year ended June 30,
1995 to 6.88% for the year ended June 30, 1996. The increase in the average
balance of mortgage-backed and related securities primarily reflected a decision
to invest a portion of the proceeds obtained from the stock offering in
mortgage-backed and related securities.
<PAGE>
9
REDWOOD FINANCIAL, INC.
Interest on investment securities, including FHLB stock, increased by $71,000,
or 6.81%, during the year ended June 30, 1996, as compared to the year ended
June 30, 1995. Such increase was due primarily to a $1,313,000 or 7.69% increase
in the average balance of investment securities, as the Company purchased
investment securities during fiscal 1996 with funds received from the stock
offering, principal payments on mortgage-backed and related securities and
repayments of loans. The effect of the increase in the average balance of
securities was offset, in part, by a decrease in the average yield on investment
securities from 6.11% for the year ended June 30, 1995 to 6.06% for the year
ended June 30, 1996, as maturing investment securities were replaced with lower
yielding investment securities.
Interest Expense
Interest expense increased by $200,000, or 11.88%, from $1,683,000 for the year
ended June 30, 1995 to $1,883,000 for the year ended June 30, 1996. The increase
in interest expense resulted from an increase in the average cost of deposits
from 4.65% for the year ended June 30, 1995 to 5.30% for the year ended June 30,
1996, resulting from increased prevailing market interest rates during fiscal
1996. The effect of the increase in the average cost of deposits was partially
offset by a $719,000, or 1.98% decrease in the average balance of deposits from
$36,226,000 for the year ended June 30, 1995 to $35,507,000 for the year ended
June 30, 1996.
Provision for Loan Losses
The Company's provision for loan losses was $0 for the year ended June 30, 1996.
Because of the consistency in the size of the loan portfolio and lack of
significant nonaccruing loans during fiscal 1996 and stabilizing real estate
markets in the Company's market area, management believed that the allowance for
loan losses was adequate throughout fiscal 1996. The allowance for loan losses
was maintained at $213,000 at June 30, 1995 and 1996. The Company's net loan
charge-offs were $0 in fiscal 1995 and $0 in fiscal 1996. At June 30, 1996 and
1995, the allowance for loan losses represented 1.27% and 1.38%, respectively,
of loans receivable. Nonaccrual loans at June 30, 1996 and 1995 were $89,000 and
$0, respectively.
Noninterest Income
Noninterest income increased by $21,000, or 52.50%, from $40,000 for the year
ended June 30, 1995 to $61,000 for the year ended June 30, 1996. The increase in
noninterest income was primarily due to a $17,000 or 89.47% increase in fee and
service charge income as a result of increased loan originations for the year
ended June 30, 1996.
Noninterest Expense
Noninterest expense increased by $218,000, or 28.17%, from $774,000 for the year
ended June 30, 1995 to $992,000 for the year ended June 30, 1996. The increase
in total noninterest expense was primarily due to a $137,000, or 26.76%,
increase in compensation and employee benefits from $512,000 for the year ended
June 30, 1995 to $649,000 for the year ended June 30, 1996 as a result of
expense from the Employee Stock Ownership Plan and Management Stock Bonus Plan,
and an increase in professional fees from $34,000 for the year ended June 30,
1995 to $127,000 for the year ended June 30, 1996. The increase in professional
fees was due to the increased costs associated with being a public company.
<PAGE>
10
REDWOOD FINANCIAL, INC.
Income Taxes
The Company's income tax expense was $245,000 for the year ended June 30, 1995
and $211,000 for the year ended June 30, 1996, resulting from an increase in the
base year tax bad debt reserve as a result of the increase in the Company's
level of mortgage loans and mortgage-backed and related securities during 1996.
Financial Condition
The Company's total assets increased by $12,342,000, or 28.93%, from $42,660,000
at June 30, 1994 to $55,002,000 at June 30, 1995, and decreased by $3,487,000,
or 6.34%, to $51,515,000 at June 30, 1996. Changes in the Company's level of
assets from June 30, 1994 to 1995, reflects funds held for stock subscriptions.
For the year ended June 30, 1996, this decrease reflects funds held for stock
subscriptions that were refunded to subscribers due to the stock offering being
over-subscribed.
The Company's loans receivable, net, increased by $164,000, or 1.09%, from
$15,091,000 at June 30, 1994 to $15,255,000 at June 30, 1995, and increased by
$1,259,000, or 8.25%, to $16,514,000 at June 30, 1996 due to increased consumer
demand.
The Company's securities, which include investment securities and
mortgage-backed and related securities, decreased by $682,000, or 2.73%, from
$24,987,000 at June 30, 1994 to $24,305,000 at June 30, 1995 and increased by
$6,789,000, or 27.93%, to $31,094,000 at June 30, 1996. The increase in the
Company's level of securities during the year ended June 30, 1996 reflects
increased cash flows resulting from deposits and investing a portion of the
proceeds from the stock conversion.
Cash and cash equivalents increased by $12,435,000, or 750.00%, from $1,658,000
at June 30, 1994 to $14,093,000 at June 30, 1995, and then decreased by
$11,220,000, or 79.61%, to $2,873,000 at June 30, 1996. For the years ended June
30, 1994, 1995, and 1996, the Company's cash and cash equivalents fluctuated
primarily as a result of the funds held at June 30, 1995 for the stock
subscriptions and, depending on liquidity needs, the timing of purchases of
securities.
The Company's deposits decreased by $1,289,000, or 3.47%, from $37,114,000 at
June 30, 1994 to $35,825,000 at June 30, 1995, and increased by $2,218,000, or
6.19%, to $38,043,000 at June 30, 1996 due to an increase in public deposits at
the fiscal year end.
Stockholders' equity increased during the year ended June 30, 1996 by
$7,501,000, or 132.62%, from $5,656,000 at June 30, 1995 to $13,157,000 at June
30, 1996. This increase was due primarily to the $8,549,000 in net proceeds from
the sale of the Company's common stock. In addition, there was an increase of
$462,000 from net earnings for the year ended June 30, 1996. Stockholders'
equity was reduced by $596,000 and $393,000, respectively, as a result of
unearned employee stock ownership plan shares and unearned management stock
bonus plan shares at June 30, 1996. Stockholders' equity was also reduced by
$541,000 as a result of the Company repurchasing shares of its outstanding
common stock during the year ended June 30, 1996.
<PAGE>
11
REDWOOD FINANCIAL, INC.
Comparison of Operating Results for the Years Ended June 30, 1995 and 1994
Net Earnings
Net earnings were $360,000 for the year ended June 30, 1995, as compared to
$492,000 for the year ended June 30, 1994. This represented a decrease of
$132,000, or 26.8%. The decrease was attributable to a $25,000, or 0.82%
decrease in total interest income, a $234,000, or 16.15% increase in interest
expense on deposits, a $14,000, or 25.93% decrease in non-interest income, and
an $84,000 or 12.17% increase in noninterest expense. The effects of these items
were offset, in part, by a $181,000, or 42.49% decrease in income tax expense.
Also contributing to the change in net earnings was the reduction to net
earnings for fiscal 1994 of $45,000 representing the cumulative effect of change
in accounting principle resulting from the implementation of Statement of
Financial Accounting Standards (SFAS) No. 109.
Net Interest Income
Net interest income decreased by $260,000, or 16.25%, from $1,600,000 for the
year ended June 30, 1994 to $1,340,000 for the year ended June 30, 1995. The
decrease in net interest income primarily reflects a decrease in the
Association's interest rate spread from 3.40% for the year ended June 30, 1994
to 2.53% for the year ended June 30, 1995. The decrease in the Association's
interest rate spread primarily was caused by increases in interest rates during
the first half of fiscal 1995, as the Association's liabilities repriced more
quickly than did its assets. This was partially offset by an increase in the
ratio of average interest-earning assets to average interest-bearing liabilities
from 113.52% for the year ended June 30, 1994 to 116.31% for the year ended June
30, 1995.
Interest Income
Interest income was $3,023,000 for the year ended June 30, 1995, as compared to
$3,048,000 for the year ended June 30, 1994, representing a decrease of $25,000,
or 0.82%. The decrease in interest income was caused primarily by a decrease
between the periods in the average yield on interest-earning assets from 7.37%
for the year ended June 30, 1994 to 7.18% for the year ended June 30, 1995. This
was offset in part by a $757,000, or 1.83%, increase in the average balance of
interest-earning assets.
Interest on loans receivable decreased by $44,000, or 3.27% during the year
ended June 30, 1995, as compared to the year ended June 30, 1994. Such decrease
was due to a decrease in the average yield on loans receivable from 8.73% for
the year ended June 30, 1994 to 8.60% for the year ended June 30, 1995, as well
as a $287,000, or 1.86%, decrease in the average balance of loans receivable
from $15,416,000 for the year ended June 30, 1994 to $15,129,000 for the year
ended June 30, 1995.
Interest on mortgage-backed and related securities decreased by $41,000, or
6.74% during the year ended June 30, 1995, as compared to the year ended June
30, 1994. Such decrease was due to a decrease in the average yield on
mortgage-backed and related securities from 7.78% for the year ended June 30,
1994 to 7.31% for the year ended June 30, 1995, as well as a $55,000, or 0.69%,
decrease in the average balance of mortgage-backed and related securities from
$7,902,000 for the year ended June 30, 1994 to $7,847,000 for the year ended
June 30, 1995. The decrease in the average balance of mortgage-backed and
related securities primarily reflected an increase in prepayments of the
underlying mortgages and a decision to reinvest payments in investment
securities.
<PAGE>
12
REDWOOD FINANCIAL, INC.
Interest on investment securities, including FHLB stock, increased by $20,000,
or 1.96%, during the year ended June 30, 1995, as compared to the year ended
June 30, 1994. Such increase was due primarily to a $663,000 or 4.04% increase
in the average balance of investment securities, as the Association purchased
investment securities during fiscal 1995 with funds received from principal
payments on mortgage-backed and related securities and repayments of loans. The
effect of the increase in the average balance of securities was offset, in part,
by a decrease in the average yield on investment securities from 6.24% for the
year ended June 30, 1994 to 6.11% for the year ended June 30, 1995, as maturing
investment securities were replaced with lower yielding investment securities.
Interest Expense
Interest expense increased by $234,000, or 16.15%, from $1,449,000 for the year
ended June 30, 1994 to $1,683,000 for the year ended June 30, 1995. The increase
in interest expense resulted from an increase in the average cost of deposits
from 3.97% for the year ended June 30, 1994 to 4.65% for the year ended June 30,
1995, resulting from increased prevailing market interest rates during fiscal
1995. The effect of the increase in the average cost of deposits was partially
offset by a $222,000, or 0.61% decrease in the average balance of deposits from
$36,448,000 for the year ended June 30, 1994 to $36,226,000 for the year ended
June 30, 1995.
Provision for Loan Losses
The Association's provision for loan losses was $0 for the year ended June 30,
1995. Because of the consistency in the size of the loan portfolio and in
nonaccruing loans during fiscal 1995 and stabilizing real estate markets in the
Association's market area, management believed that the allowance for loan
losses was adequate throughout fiscal 1995. Therefore, the provision for loan
losses was decreased from the $1,000 provision made for the year ended June 30,
1994, while the allowance for loan losses was maintained at $213,000 at June 30,
1994 and 1995. The Association's net loan charge-offs were $5,000 in fiscal 1994
and $0 in fiscal 1995. At June 30, 1995, the allowance for loan losses
represented 1.38% of loans receivable. There were no nonaccrual loans at June
30, 1995 and 1994.
Noninterest Income
Noninterest income decreased by $14,000, or 25.93%, from $54,000 for the year
ended June 30, 1994 to $40,000 for the year ended June 30, 1995. The decrease in
noninterest income was primarily due to a $16,000 or 45.71% decrease in fee and
service charge income as a result of fewer loan originations for the year ended
June 30, 1995.
Noninterest Expense
Noninterest expense increased by $84,000, or 12.17%, from $690,000 for the year
ended June 30, 1994 to $774,000 for the year ended June 30, 1995. The increase
in total noninterest expense was primarily due to a $79,000, or 18.24%, increase
in compensation and employee benefits from $433,000 for the year ended June 30,
1994 to $512,000 for the year ended June 30, 1995, and an increase in other
expense from $81,000 for the year June 30, 1994 to $100,000 for the year ended
June 30, 1995. These were partially offset by a $20,000 loss on investment
securities sold during the year ended June 30, 1994 compared to a $0 loss for
the year ended June 30, 1995.
<PAGE>
13
REDWOOD FINANCIAL, INC.
Cumulative Effect of Change in Accounting Principle
In February 1992, the Financial Accounting Standards Board (FASB) issued SFAS
No. 109, Accounting for Income Taxes. The Association adopted SFAS No. 109 as of
July 1, 1993. Prior to adopting SFAS No. 109, the Association accounted for
income taxes in accordance with Accounting Principles Board (APB) Opinion No.
11, Accounting for Income Taxes. SFAS No. 109 requires a change from the
deferred method of accounting for income taxes of APB No. 11 to the asset and
liability method of SFAS No. 109. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
cumulative effect of the application of SFAS No. 109 decreased net earnings for
the year ended June 30, 1994 by $45,000.
Income Taxes
The Association's income tax expense was $426,000 for the year ended June 30,
1994 and $245,000 for the year ended June 30, 1995, resulting from decreased
earnings before income tax expense during the year ended June 30, 1995.
<PAGE>
14
REDWOOD FINANCIAL, INC.
Nonperforming Assets
The following table sets forth information regarding nonaccrual loans, real
estate owned, and certain other repossessed assets and loans. As of the dates
indicated, there were no loans categorized as troubled debt restructuring within
the meaning of SFAS 15.
1996 1995
- --------------------------------------------------------------------------------
Loan accounted for on a nonaccrual basis:
Mortgage loans:
Loans secured by 1-4 dwelling units $ 89,153 0
All other mortgage loans 0 0
Nonmortgage loans 0 0
- --------------------------------------------------------------------------------
Total $ 89,153 0
================================================================================
Accruing loans which are contractually past due 90 days
or more:
Mortgage loans:
Loans secured by 1-4 dwelling units 45,352 0
All other mortgage loans 0 0
Nonmortgage loans 0 0
- --------------------------------------------------------------------------------
Total $ 45,352 0
================================================================================
Total nonaccrual and accrual loans $ 134,505 0
================================================================================
Real estate owned $ 0 0
================================================================================
Other nonperforming assets $ 0 0
================================================================================
Total nonperforming assets $ 134,505 0
================================================================================
Total nonaccrual and accrual loans to net loans 0.81% 0.00%
================================================================================
Total nonaccrual and accrual loans to total assets 0.26% 0.00%
================================================================================
Total nonperforming assets to total assets 0.26% 0.00%
================================================================================
Interest income that would have been recorded on loans accounted for on a
nonaccrual basis under the original terms of such loans for the year ended June
30, 1996 and 1995 was $2,946 and $0, respectively.
<PAGE>
15
REDWOOD FINANCIAL, INC.
Analysis of the Allowance for Loan Losses
The following table sets forth information with respect to the Company's
allowance for loan losses at the dates and for the periods indicated:
At or for the year
ended June 30
---------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Allowance (at beginning of year) $ 213,034 213,034 217,534
Charge-offs:
Residential 0 0 5,500
Recoveries 0 0 0
- --------------------------------------------------------------------------------
Net charge-offs 0 0 5,500
Provision 0 0 1,000
- --------------------------------------------------------------------------------
Allowance (at end of year) 213,034 213,034 213,034
================================================================================
Allowance for loan losses as a percent
of total loans outstanding 1.27% 1.38% 1.39%
Net loans charged off as a percent of
average loans outstanding 0.00 0.00 0.03
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from maturing
investment securities and principal and interest payments on loans and
mortgage-backed and related securities. While maturities and scheduled
amortization of mortgage-backed and related securities and loans are a
predictable source of funds, deposit flows and mortgage prepayments are
generally influenced by general interest rates, economic conditions,
competition, and other factors.
The primary investing activity of the Company is the purchase of investment and
mortgage-backed and related securities. During the years ended June 30, 1996 and
1995, the Company purchased investment and mortgage-backed and related
securities in the amounts of $12,824,899 and $1,940,000, respectively. Other
investing activities include originations of loans and investment in FHLB of Des
Moines stock. The primary financing activity of the Company is the attraction of
savings deposits.
The Company has other sources of liquidity if there is a need for funds. The
Association has the ability to obtain advances from the FHLB of Des Moines. In
addition, the Association maintains a significant portion of its investments in
FHLB overnight funds that will be available when needed.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be changed at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 5.0%. Management of the Association seeks to maintain
a relatively high level of liquidity in order to retain flexibility in terms of
investment opportunities and deposit pricing. Because liquid assets generally
provide for lower rates of return, the Association's relatively high liquidity
will, to a certain extent, result in lower rates of return on assets.
<PAGE>
16
REDWOOD FINANCIAL, INC.
The Company's most liquid assets are cash and cash equivalents, which are
short-term, highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash, and include
interest-bearing deposits. The levels of these assets are dependent on the
Company's operating, financing, and investing activities during any given
period. At June 30, 1996 and 1995, cash and cash equivalents totaled $2,873,000
and $14,093,000 (including $13,128,000 related to stock subscriptions),
respectively.
Federal savings institutions are required to satisfy three capital requirements:
(i) a requirement that "tangible capital" equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that "core-capital" equal or exceed 3.0% of adjusted
total assets, and (iii) a risk-based capital standard currently of 8.0% of
"risk-adjusted" assets. At June 30, 1996, the Association met each of the three
capital requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Recent Developments
Recent action by the Federal Deposit Insurance Corporation (FDIC) has created an
inequity in deposit insurance rates applicable to commercial banks and the rates
applicable to savings associations. Generally, commercial banks are insured by
and pay their premiums to the Bank Insurance Fund (BIF), and savings
associations are insured by and pay their premiums to the Savings Association
Insurance Fund (SAIF), with both the BIF and SAIF administered by the FDIC.
Commercial banks and savings associations both previously paid a deposit
insurance premium to the FDIC based upon the same rate schedule, which ranged,
in 1995, from 0.23% to 0.31% of deposits. On August 8, 1995, the FDIC voted to
lower the minimum insurance premiums charged to BIF-insured institutions, with
the best-rated BIF-insured institutions paying only an annual assessment of
$2,000, while leaving the level of premiums unchanged for SAIF-insured
institutions. As a result of this premium disparity, BIF-insured institutions
could have a competitive advantage and/or comparably better results of
operations over SAIF insured institutions.
Among the proposals being considered by the FDIC and Congress to eliminate this
premium disparity is a similar reduction in premium rates charged to
SAIF-insured institutions. Such a reduction would be accompanied by, and follow,
a one-time additional assessment of SAIF-insured institutions of approximately
0.68% of deposits to increase the SAIF reserve level to 1.25% of SAIF-insured
deposits, which is the same level attained by the BIF prior to the reduction of
BIF premium rates. If such a special assessment were required, it would result
in an after tax charge to the Association of approximately $156,000. Assuming
such an assessment were made and, as a result, the SAIF was fully recapitalized,
it could have the effect of reducing the Association's future deposit insurance
premiums paid to the SAIF.
The Company cannot predict at this time if any of the foregoing proposals will
be adopted in their current form.
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
The Board of Directors
Redwood Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Redwood
Financial, Inc. and subsidiary (the Company) as of June 30, 1996 and 1995 and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Redwood Financial,
Inc. and subsidiary at June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1996 in conformity with generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for securities during the year ended June 30,
1995 to adopt the provisions of Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. Also, as
discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during the year ended June 30,
1994 to adopt the provisions of Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.
/s/KPMG Peat Marwick LLP
August 16, 1996
<PAGE>
18
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 15,345 66,735
Interest bearing deposits with banks 2,857,818 898,300
Interest bearing deposits--stock subscriptions 0 13,127,630
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,873,163 14,092,665
Securities held to maturity:
Investment securities (market value approximates
$15,192,588 and $16,445,048, respectively) 15,288,913 16,431,265
Mortgage-backed and related securities (market value
approximates $15,772,242 and $8,117,065, respectively) 15,805,305 7,873,876
Loans receivable, net 16,513,727 15,255,027
Stock in Federal Home Loan Bank of Des Moines, at cost 333,500 327,000
Accrued interest receivable 553,856 409,584
Premises and equipment, net 52,187 63,911
Other assets 93,992 109,432
Deferred stock conversion costs 0 439,015
- ---------------------------------------------------------------------------------------------------------------------
$ 51,514,643 55,001,775
=====================================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------
Deposits 38,042,529 35,825,269
Advance payments by borrowers for taxes and insurance 55,686 53,482
Deferred income tax liability, net 184,201 229,927
Accrued expenses and other liabilities 75,191 109,808
Funds held for stock subscriptions 0 13,127,630
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 38,357,607 49,346,116
Common stock ($.10 par value). Authorized and
issued 1,125,000 shares in 1996; outstanding
1,068,750 shares in 1996 112,500 0
Additional paid-in capital 8,457,017 0
Retained earnings, subject to certain restrictions 6,118,091 5,655,659
Unearned employee stock ownership plan shares (595,744) 0
Unearned management stock bonus plan shares (393,422) 0
Treasury stock, at cost, 56,250 shares in 1996 (541,406) 0
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,157,036 5,655,659
- ---------------------------------------------------------------------------------------------------------------------
$ 51,514,643 55,001,775
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
19
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended June 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Loans receivable $ 1,376,334 1,300,846 1,345,427
Mortgage-backed and related securities 784,869 573,656 615,114
Investment securities 1,114,308 1,042,595 1,023,475
Cash equivalents 211,640 105,947 64,383
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 3,487,151 3,023,044 3,048,399
Interest expense on deposits 1,882,837 1,683,247 1,448,759
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 1,604,314 1,339,797 1,599,640
Provision for losses on loans 0 0 1,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 1,604,314 1,339,797 1,598,640
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Fees and service charges 36,197 18,947 35,043
Other 24,314 20,656 18,499
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 60,511 39,603 53,542
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Compensation and employee benefits 648,859 511,502 432,594
Advertising 16,411 16,525 15,460
Occupancy 28,181 27,976 26,917
Federal deposit insurance premiums 80,769 84,370 81,060
Professional fees 126,781 34,054 32,601
Loss on sale of investment securities 0 0 20,428
Other 90,880 99,948 80,615
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 991,881 774,375 689,675
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and
cumulative effect of accounting change 672,944 605,025 962,507
Income tax expense 210,512 244,720 425,847
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of
accounting change 462,432 360,305 536,660
Cumulative effect of accounting change 0 0 (45,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 462,432 360,305 491,660
===========================================================================================================================
Net earnings per common share $ 0.45 N/A N/A
Weighted average number of shares outstanding 1,018,267 N/A N/A
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
20
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Unearned
shares Unearned
Employee management
Additional Stock stock Total
Common paid-in Retained Ownership bonus Treasury stockholders'
stock capital earnings Plan plan shares stock equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance on June 30, 1993 $ 0 0 4,803,694 0 0 0 4,803,694
Net earnings 0 0 491,660 0 0 0 491,660
- ----------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1994 0 0 5,295,354 0 0 0 5,295,354
Net earnings 0 0 360,305 0 0 0 360,305
- ----------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1995 0 0 5,655,659 0 0 0 5,655,659
Net earnings 0 0 462,432 0 0 0 462,432
Sale of common stock 112,500 8,436,861 0 0 0 0 8,549,361
Adoption of employee
stock ownership plan 0 0 0 (661,984) 0 0 (661,984)
Earned employee stock
ownership plan shares 0 10,781 0 66,240 0 0 77,021
Repurchase of common
stock 0 0 0 0 0 (965,156) (965,156)
Adoption of management
stock bonus plan 0 9,375 0 0 (433,125) 423,750 0
Earned management stock
bonus plan shares 0 0 0 0 39,703 0 39,703
- ----------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1996 $ 112,500 8,457,017 6,118,091 (595,744) (393,422) (541,406) 13,157,036
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
21
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net earnings $ 462,432 360,305 491,660
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for loan losses 0 0 1,000
Depreciation 16,992 17,354 18,020
Amortization of premiums and discounts on
investment securities, mortgage-backed and
related securities, and loans receivable, net (40,057) (34,683) (47,539)
Loss on sale of investment securities 0 0 20,428
Federal Home Loan Bank stock dividend (6,500) 0 0
Amortization of unearned ESOP shares 66,240 0 0
Earned ESOP shares priced above original cost 10,781 0 0
Earned management stock bonus plan shares 39,703 0 0
Deferred income taxes (45,726) 57,281 92,646
Decrease (increase) in other assets 15,440 (28,655) (36,246)
(Increase) decrease in accrued interest receivable (144,272) 40,345 (59,499)
(Decrease) increase in accrued interest payable (50,453) 69,452 99,606
(Decrease) increase in accrued expenses and other liabilities (34,617) 78,542 (3,932)
Other, net 0 0 4,609
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 289,963 559,941 580,753
- --------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of investment securities held to maturity 4,000,200 1,200,000 0
Proceeds from sales of investment securities (mutual funds) 0 0 3,994,142
Purchases of investment securities held to maturity (2,860,069) (430,000) (7,809,599)
Purchases of mortgage-backed and related securities held
to maturity (9,964,830) (1,510,000) (1,980,106)
Principal collected on mortgage-backed and related securities held
to maturity 2,075,679 1,456,544 3,206,431
Decrease in loans receivable, net (1,258,700) (164,075) 522,850
Decrease in real estate, net 0 0 12,000
Purchases of premises and equipment (5,268) (14,855) (1,158)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (8,012,988) 537,614 (2,055,440)
- --------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Adoption of ESOP (661,984) 0 0
Proceeds from sale of common stock 8,549,361 0 0
(Decrease) increase in funds held for stock subscriptions (13,127,630) 13,127,630 0
(Decrease) increase in deferred stock conversion costs 439,015 (439,015) 0
Increase (decrease) in deposits, net 2,267,713 (1,358,372) 1,950,379
Increase in advance payments by borrowers for taxes and insurance 2,204 6,513 3,635
Repurchase of common stock (965,156) 0 0
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (3,496,477) 11,336,756 1,954,014
- --------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (11,219,502) 12,434,311 479,327
Cash and cash equivalents, beginning of year 14,092,665 1,658,354 1,179,027
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,873,163 14,092,665 1,658,354
================================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,933,290 1,613,795 1,349,153
Income taxes 175,101 224,979 380,572
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
22
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1996
(1) Redwood Financial, Inc.
Redwood Financial, Inc. (the Company) was incorporated under the laws
of the State of Minnesota for the purpose of becoming the savings
and loan holding company of Redwood Falls Federal Savings and Loan
Association (the Association) in connection with the Association's
conversion from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings and loan
association, pursuant to its Plan of Conversion.
The Company commenced on May 22, 1995 a Subscription and Community
Offering of its shares in connection with the conversion of the
Association (the Offering). The Offering was closed on June 22,
1995 and final approval for the conversion was received from the
Office of Thrift Supervision on July 7, 1995 (see note 16).
The Company had not transacted any material business activities
through June 30, 1995 other than those associated with the
preparations for the issuance of stock. Accordingly, the
consolidated financial statements included herein as of June 30,
1995 and for the years ended June 30, 1995 and 1994 are for the
Association.
(2) Summary of Significant Accounting Policies
The accounting and reporting policies of the Company and its
subsidiary conform to generally accepted accounting principles.
The following summarizes the more significant accounting policies
the Company follows in preparing and presenting its consolidated
financial statements:
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and Redwood Falls Federal Savings
and Loan Association. All significant intercompany account
balances and transactions have been eliminated in
consolidation.
Material Estimates
In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the
period. Actual results could differ significantly from those
estimates.
A material estimate that is particularly susceptible to
significant change in the near-term relates to the
determination of the allowance for loan losses.
(Continued)
<PAGE>
23
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Management believes that the allowance for losses on loans is
adequate. While management uses available information to
recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part
of their examination process, periodically review the
allowance for losses on loans. Such agencies may require
additions to the allowance based on their judgment about
information available to them at the time of their
examination.
Investment Securities and Mortgage-Backed Securities
In May 1993, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. This statement addresses the accounting
and reporting for securities by classifying them into three
categories: securities held to maturity, trading securities,
and securities available for sale. The Association adopted
SFAS No. 115 as of July 1, 1994. Management has the ability
and intent to hold all of its securities to maturity. There
was no impact of adoption on the Association's financial
statements as the Association's entire portfolio of
securities are classified as held to maturity.
Prior to July 1, 1994, marketable equity securities (mutual
funds) were carried at the lower of cost or market
determined on an aggregate basis. Unrealized losses were
recorded as a valuation allowance against retained earnings.
Securities held to maturity are carried at amortized cost.
Gains and losses on sales of securities are recognized at
the time of sale and are calculated based on the specific
identification method.
Discounts and premiums on securities are amortized to income
using the level yield method over the estimated life of the
security.
Loans Receivable
Loans are considered long-term investments and, accordingly,
are carried at historical cost.
The allowance for loan losses is maintained at an amount
considered adequate to provide for probable losses. The
allowance for loan losses is based on periodic analysis of
the loan portfolio by management. In this analysis,
management considers factors including, but not limited to,
specific occurrences, general economic conditions, loan
portfolio composition, and historical experience. Loans are
charged off to the extent they are deemed to be
uncollectible.
Interest income is recognized on an accrual basis except when
collectibility is in doubt. When interest accruals are
suspended, interest previously accrued is reversed. Interest
is subsequently recognized as income to the extent cash is
received when, in management's judgment, principal is
collectible.
(Continued)
<PAGE>
24
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Effective July 1, 1995, the Association adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan and SFAS
No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures. Under the
Company's credit policies and practices, all nonaccrual and
restructured construction and commercial real estate loans
meet the definition of impaired loans under SFAS No. 114 and
SFAS No. 118. Impaired loans as defined by SFAS No. 114 and
SFAS No. 118 exclude certain consumer loans and residential
real estate loans classified as nonaccrual. Loan impairment
is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the observable market price
of the loan or the fair value of the collateral if the loan
is collateral dependent. The adoption of SFAS No. 114 and
SFAS No. 118 did not have a material effect on the Company's
financial position or results of operation.
Loan origination fees and certain related direct costs are
deferred and amortized to interest income over the life of
the loan.
Discounts and premiums on loans originated or purchased are
deferred and amortized to income using the level-yield
method over the estimated average loan life.
Real Estate
Real estate owned or expected to be acquired in settlement of
loans is carried at the lower of the unpaid loan balance
plus settlement costs or estimated market value less selling
costs. After acquisition, costs of capital improvements made
to facilitate sales are capitalized as incurred. Costs
incurred for holding properties after the redemption period
are expensed currently. The carrying value of individual
properties is periodically evaluated and reduced to the
extent cost exceeds estimated fair less selling costs value.
Gains on the sales of such real estate are recorded at the
time of closing.
Cash Equivalents
Cash equivalents primarily represent amounts on deposit at
other financial institutions and highly liquid financial
instruments with original maturities at the date of purchase
of three months or less.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed
on a straight-line basis over the estimated useful lives of
35 to 40 years for buildings, 20 to 25 years for building
improvements, and 2 to 11 years for furniture and equipment.
(Continued)
<PAGE>
25
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Income Taxes
In February 1992, the FASB issued SFAS No. 109, Accounting for
Income Taxes. The Company adopted SFAS No. 109 as of July 1,
1993. Prior to adopting SFAS No. 109, the Association
accounted for income taxes in accordance with Accounting
Principles Board Opinion (APB) No. 11, Accounting for Income
Taxes and APB No. 23, Accounting for Income Taxes--Special
Areas. SFAS No. 109 requires a change from the deferred
method of accounting for income taxes of APB No. 11 to the
asset and liability method of accounting for income taxes.
Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that
includes the enactment date. The cumulative effect of the
application of SFAS No. 109 decreased net earnings for the
year ended June 30, 1994 by $45,000.
New Accounting Standard
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, Accounting for Stock-Based
Compensation. This statement establishes financial
accounting and reporting standards for stock-based employee
compensation plans. This statement defines a fair value
based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to
adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows an entity
to continue to measure compensation cost for those plans
using the intrinsic value base method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees. The statement requires pro forma
disclosures of net income and earnings per share computed as
if the fair value based method had been applied in financial
statements of companies that continue to follow current
practice in accounting for such arrangements under Opinion
25. The changes required by the new statement could affect
employers' financial statements in a number of ways.
Companies that historically have provided fixed stock
options to employees or have established broad-based plans
will generally experience a negative earnings impact (either
in the basic income statement or in the required pro forma
net income disclosures). Conversely, compensation cost will
generally be reduced for companies that rely predominantly
on performance-based or other variable plan awards. The
effect on net income (or pro forma net income), whether
positive or negative, will be amplified for companies that
rely heavily on stock-based compensation awards as a
critical element in their overall compensation strategy. The
accounting requirements of this statement are effective for
transactions entered into in fiscal years that begin after
December 15, 1995, although they may be adopted on issuance.
The disclosure requirements of this statement are effective
for financial statements for fiscal years beginning after
December 15, 1995, or for an earlier fiscal year for which
this statement is initially adopted for recognizing
compensation cost. The adoption of this statement will not
have a significant impact on the Company's financial
condition or results of operations.
(Continued)
<PAGE>
26
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(3) Earnings Per Share
Earnings per share are based upon the weighted average number of
common shares and common stock equivalents, if dilutive,
outstanding during the period. The only common stock equivalents
are stock options. The weighted average number of common stock
equivalents is calculated using the treasury stock method.
Earnings per share amounts for the years ended June 30, 1995 and 1994
have not been presented in the consolidated statements of earnings
because the Association did not convert to stock form until July
7, 1995. Net earnings per common share were calculated using
1,018,267 shares as the weighted average number of shares
outstanding for the year ended June 30, 1996.
(4) Securities Held to Maturity
Securities held to maturity at June 30, 1996 and 1995 are summarized
as follows:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses market value
-------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government agency
<S> <C> <C> <C> <C>
bonds $ 6,092,875 24,627 (19,049) 6,098,453
U.S. Treasury notes 7,654,214 7,245 (90,068) 7,571,391
Municipal bonds 1,541,824 918 (19,998) 1,522,744
-------------------------------------------------------------------------------------------------------
Total investment securities $ 15,288,913 32,790 (129,115) 15,192,588
=======================================================================================================
Mortgage-backed and
related securities:
GNMA certificates 252,258 101,952 0 354,210
FHLMC certificates 10,847,779 75,606 (148,227) 10,775,158
FHLMC collateralized
mortgage obliga-
tions 78,194 1,519 0 79,713
FNMA certificates 4,627,074 0 (63,913) 4,563,161
-------------------------------------------------------------------------------------------------------
Total mortgage-backed and
related securities $ 15,805,305 179,077 (212,140) 15,772,242
=======================================================================================================
</TABLE>
(Continued)
<PAGE>
27
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
June 30, 1995
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses market value
-------------------------------------------------------------------------------------------------------
Investment securities:
U.S. government agency
<S> <C> <C> <C> <C>
bonds $ 6,945,933 83,222 (20,588) 7,008,567
U.S. Treasury notes 8,962,904 38,860 (94,008) 8,907,756
Municipal bonds 522,428 43,873 (37,576) 528,725
-------------------------------------------------------------------------------------------------------
Total investment securities $ 16,431,265 165,955 (152,172) 16,445,048
=======================================================================================================
Mortgage-backed and
related securities:
GNMA certificates 321,328 137,842 0 459,170
FHLMC certificates 7,457,818 140,650 (36,446) 7,562,022
FHLMC collateralized
mortgage obliga-
tions 94,730 1,143 0 95,873
-------------------------------------------------------------------------------------------------------
Total mortgage-backed and
related securities $ 7,873,876 279,635 (36,446) 8,117,065
=======================================================================================================
</TABLE>
Proceeds from the sale of securities during the years ended June 30,
1996, 1995, and 1994, were $0, $0, and $3,994,142, respectively.
Such sales consisted entirely of mutual funds. There were no sales
of investment securities or mortgage-backed and related securities
other than mutual funds. Gross realized losses from the sale of
securities for the years ended June 30, 1996, 1995, and 1994 were
$0, $0, and $20,428, respectively.
Accrued interest receivable on securities held to maturity aggregated
$452,492 and $344,843 at June 30, 1996 and 1995, respectively.
(Continued)
<PAGE>
28
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The carrying amount and approximate market value of investment
securities held to maturity at June 30, 1996 and 1995, by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
---------------------------------- ---------------------------------
Carrying Approximate Carrying Approximate
amount market value amount market value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ 3,892,474 3,904,481 3,707,509 3,721,357
Due after one year
through five 11,196,439 11,099,647 12,423,756 12,419,941
years
Due after five years
through ten years 200,000 188,460 0 0
Due after ten years 0 0 300,000 303,750
- --------------------------------------------------------------------------------------------
$15,288,913 15,192,588 16,431,265 16,445,048
============================================================================================
</TABLE>
(5) Loans Receivable
Loans receivable at June 30, 1996 and 1995 are summarized as follows:
1996 1995
----------------------------------------------------------------------
Loans secured by real estate:
Residential one-to-four family $15,232,656 14,618,727
Multifamily 189,266 203,673
Commercial 519,543 474,121
Residential construction 220,000 242,021
Loans on deposit accounts 140,802 165,182
Commercial loans 775,358 0
----------------------------------------------------------------------
17,077,625 15,703,724
Deferred loan fees and discounts (18,019) (19,253)
Loans in process (332,845) (216,410)
Allowance for losses (213,034) (213,034)
----------------------------------------------------------------------
$16,513,727 15,255,027
================================================================================
Accrued interest receivable on loans receivable at June 30, 1996
and 1995 was $101,364 and $64,741, respectively.
(Continued)
<PAGE>
29
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The following is a summary of nonperforming loans as of and for the
years ended June 30:
1996 1995 1994
- --------------------------------------------------------------------------------
Impaired loans:
Nonaccrual $ 0 0 0
Restructured 0 0 0
- --------------------------------------------------------------------------------
0 0 0
- --------------------------------------------------------------------------------
Other nonperforming loans:
Nonaccrual 89,153 0 0
Restructured 0 0 0
- --------------------------------------------------------------------------------
89,153 0 0
- --------------------------------------------------------------------------------
Total nonperforming loans $ 89,153 0 0
================================================================================
Scheduled interest under original terms 2,946 0 0
Actual interest recogized 0 0 0
- --------------------------------------------------------------------------------
Net interest lost on nonperforming loans $ 2,946 0 0
================================================================================
The average balance of impaired loans during each of the fiscal years
ended June 30, 1996, 1995, and 1994 was $0.
There was no allowance for losses on impaired loans at June 30, 1996,
1995, and 1994.
The aggregate amount of loans to directors and executive officers of
the Company was $237,177, $254,139, and $271,757, at June 30,
1996, 1995, and 1994, respectively. Activity with respect to these
loans during fiscal 1996 included loan originations of $0 and loan
repayments of $16,962. Activity with respect to these loans in
fiscal 1995 included new loans of $0 and loan repayments of
$17,618. Activity with respect to these loans during fiscal 1994
included loan originations of $64,660 and loan repayments of
$81,700. Such loans were made in the ordinary course of business
on normal credit terms, including interest rate and
collateralization, and do not represent more than normal risk of
collection.
There were no material commitments to lend additional funds to
customers whose loans were classified as nonaccrual at June 30,
1996.
There were no loans at June 30, 1996 and 1995 which had terms modified
in troubled debt restructurings.
The Company grants loans to customers who live primarily in
southwestern Minnesota. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon local economic conditions.
(Continued)
<PAGE>
30
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(6) Allowance for Losses on Loans Receivable
Activity in the allowance for losses on loans receivable is summarized
as follows:
Balance at June 30, 1993 $ 217,534
Provision for losses 1,000
Charge-offs (5,500)
--------------------------------------------------------------------------
Balance at June 30, 1994 213,034
Provision for losses 0
Charge-offs 0
--------------------------------------------------------------------------
Balance at June 30, 1995 213,034
Provision for losses 0
Charge-offs 0
--------------------------------------------------------------------------
Balance at June 30, 1996 $ 213,034
==========================================================================
(7) Real Estate Owned or in Judgment
Realestate owned or in judgment totaled $0 at June 30, 1996 and 1995.
The allowance for losses on real estate owned or in judgment was
$0 at June 30, 1996 and 1995. There were no charge-offs,
recoveries, or provisions for losses for the years ended June 30,
1996, 1995, or 1994.
(8) Premises and Equipment
A summary of premises and equipment at June 30, 1996 and 1995 is as
follows:
1996 1995
-------------------------------------------------------------------------
Land and office buildings $ 155,476 154,436
Furniture and equipment 171,204 166,761
-------------------------------------------------------------------------
326,680 321,197
Less accumulated depreciation (274,493) (257,286)
-------------------------------------------------------------------------
$ 52,187 63,911
=========================================================================
(Continued)
<PAGE>
31
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(9) Deposits
Deposits and weighted-average interest rates at June 30 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ----------------------------
Average Average
Amount rate Amount rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook $ 985,658 2.65% $ 1,601,776 2.75%
Money market accounts 7,104,387 3.89 4,598,343 3.02
- -------------------------------------------------------------------------------------------------------------------
8,090,045 6,200,119
- --------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
3.01%-4.00% 0 1,766,350
4.01 -5.00 2,069,519 8,005,177
5.01 -6.00 16,334,358 8,318,200
6.01 -7.00 10,766,128 8,709,118
7.01 -8.00 598,235 2,531,608
8.01 -9.00 0 60,000
- --------------------------------------------------------------------------------------------------------------------
29,768,240 5.83 29,390,453 5.72
- --------------------------------------------------------------------------------------------------------------------
Accrued interest payable 184,244 234,697
- --------------------------------------------------------------------------------------------------------------------
$ 38,042,529 $ 35,825,269
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Interest expense on deposits is summarized as follows:
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook $ 33,968 30,978 32,757
Money market 196,842 214,906 244,412
Certificates 1,652,027 1,437,363 1,171,590
- -----------------------------------------------------------------------------------------------------------------------
$ 1,882,837 1,683,247 1,448,759
=======================================================================================================================
</TABLE>
Certificates of deposit had the following remaining maturities at June 30:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
Average Average
Amount rate Amount rate
- -----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
0-6 months $ 11,533,143 5.86% $ 11,444,590 5.29%
7-12 months 6,857,760 5.72 6,920,593 5.91
13-36 months 10,852,065 5.84 9,893,433 6.05
Over 36 months 525,272 6.41 1,131,837 5.90
- -----------------------------------------------------------------------------------------------------------------------
$ 29,768,240 $ 29,390,453
========================================================================================================================
</TABLE>
(Continued)
<PAGE>
32
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company had $9,698,164 and $6,352,859 of certificates of deposit
with balances of $100,000 or more at June 30, 1996 and 1995,
respectively.
At June 30, 1996 investment securities and mortgage-backed securities
with an approximate book value of $16,635,589 were pledged as
collateral for certain deposits, including approximately
$10,027,362 of public deposits.
(10) Income Taxes
Income tax expense for the years ended June 30 is composed of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 120,844 140,579 286,521
State 43,942 46,860 91,680
----------------------------------------------------------------------------------------------------
Total current 164,786 187,439 378,201
----------------------------------------------------------------------------------------------------
Deferred:
Federal 34,295 42,961 35,736
State 11,431 14,320 11,910
----------------------------------------------------------------------------------------------------
Total deferred 45,726 57,281 47,646
----------------------------------------------------------------------------------------------------
$ 210,512 244,720 425,847
====================================================================================================
</TABLE>
The reasons for the difference between the effective income tax rate
and the statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal "expected" income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 6.5 6.7 7.1
(Increase) decrease in base year tax bad debt reserve (6.3) (0.4) 3.5
Tax-exempt interest income (3.0) (0.1) (0.1)
Other, net 0.1 0.3 (0.3)
---------------------------------------------------------------------------------------------------
Effective income tax rate 31.3% 40.5% 44.2%
===================================================================================================
</TABLE>
(Continued)
<PAGE>
33
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities at June 30, 1996
and 1995 are as follows:
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Discounts on mortgage-backed and related securities $ 32,005 39,717
Allowance for losses on loans receivable 2,651 0
Other 4,365 3,534
- -------------------------------------------------------------------------------
Gross deferred tax assets 39,021 43,251
Valuation allowance 0 0
- --------------------------------------------------------------------------------
Deferred tax assets, net 39,021 43,251
Deferred tax liabilities:
Accrual to cash conversion 159,421 168,481
FHLB stock 50,478 47,846
Allowance for losses on loans receivable 0 41,226
Premises and equipment 13,323 15,625
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 223,222 273,178
- --------------------------------------------------------------------------------
Net deferred tax liability $184,201 229,927
================================================================================
No valuation allowance was required for deferred tax assets at June
30, 1996 or 1995.
Retained earnings at June 30, 1996 included approximately $1,156,000
for which no provision for federal income tax has been made. This
amount represents allocations of income to bad debt deductions for
tax purposes. Reduction of the amount so allocated for purposes
other than to absorb losses will create income for tax purposes,
which will be subject to the then current corporate income tax
rate.
(11) Employee Benefits
Retirement Plan
The Company has a defined benefit retirement plan (the Plan) that
covers substantially all full-time employees. The Plan provides
for retirement benefits beginning at age 65 based on each
employee's years of qualifying service and the average of the
highest five consecutive annual salaries of the ten years prior to
retirement. The benefits are reduced by a specific percentage of
the employee's Social Security benefit. The Plan also provides for
early retirement beginning at age 55 with reduced benefits
determined by using an early retirement factor. An employee
becomes fully vested upon completion of five years of qualifying
service.
(Continued)
<PAGE>
34
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Net periodic pension expense for the years ended June 30 includes the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 26,494 26,927 29,011
Interest cost on projected benefit obligation 51,730 48,474 43,979
Actual return on plan assets (55,934) (45,183) (43,781)
Net amortization and deferral 438 907 438
---------------------------------------------------------------------------------------------------
Net periodic pension expense $ 22,728 31,125 29,647
===================================================================================================
</TABLE>
The weighted average discount rate and rate of increase in future
compensation level used in determining the actuarial present value
of the projected benefit obligation and the expected long-term
rate of return on assets were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.5%
Future compensation increase rate 6.0 6.0 6.0
Long-term rate of return on assets 7.5 7.5 7.5
</TABLE>
The following table sets forth the Plan's funded status and the
amounts recognized in the Company's balance sheet at June 30:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested accumulated benefit obligation $ 624,568 565,307
Nonvested accumulated benefit obligation 43 1,096
- ----------------------------------------------------------------------------------------------------
Total accumulated benefit obligation 624,611 566,403
Effect of projected future salary increases 104,247 117,621
- ----------------------------------------------------------------------------------------------------
Projected benefit obligation 728,858 684,024
Plan assets at fair value 780,740 639,505
- ----------------------------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 51,882 (44,519)
Unrecognized prior service cost 17,638 19,401
Unrecognized (gain) loss from past experience
different from that assumed (47,254) 57,970
Unrecognized net transition asset being
amortized over 15 years (6,632) (7,957)
- ----------------------------------------------------------------------------------------------------
Prepaid pension cost $ 15,634 24,895
====================================================================================================
</TABLE>
(Continued)
<PAGE>
35
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
401(k) Plan
All employees are eligible to participate in the Company's 401(k)
plan. Participating employees may contribute up to 15% of gross
wages earned. Contributions to the Plan by the Company are made at
the discretion of the board of directors. The Company made no
contributions to the Plan in 1996, 1995, or 1994.
Employee Stock Ownership Plan
Effective July 7, 1995, the Company adopted an Employee Stock
Ownership Plan (the ESOP). The ESOP borrowed $661,984 from the
Company to purchase 82,748 shares of common stock of the Company
on the date of the conversion. The Company contributed $123,086 to
the ESOP during the fiscal year 1996.
As the debt is repaid, ESOP shares which were initially pledged as
collateral for its debt are released from collateral and allocated
to active employees, based on the proportion of debt service paid
in the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans. Accordingly, the shares pledged as
collateral are reported as unearned ESOP shares in stockholders'
equity. As shares are determined to be ratably released from
collateral, the Company reports compensation expense equal to the
current market price of the shares, and the shares become
outstanding for earnings per share computations. ESOP compensation
expense was $77,021 for fiscal year 1996.
All employees of the Company are eligible to participate in the ESOP
after they attain age 21 and complete one year of service.
A summary of the ESOP share allocation is as follows for the year
ended:
1996
-----------------------------------------------------------------------
Shares allocated beginning of year 0
Shares allocated during year 8,280
Unreleased shares 74,468
-----------------------------------------------------------------------
Total ESOP shares 82,748
=======================================================================
Fair value of unreleased shares at June 30 $ 688,829
=======================================================================
Management Stock Bonus Plan
On January 17, 1996, stockholders approved the Company's Management
Stock Bonus Plan (MSBP), which was subsequently also approved by
the Office of Thrift Supervision (OTS). The plan provides for the
grant of shares of stock to executive employees and directors of
the Company in the form of restricted stock, which vest over a
five year period at the rate of 20% per year. Under the plan,
45,000 shares of restricted stock were granted. Included in 1996
compensation and employee benefits expense is $39,703 related to
the MSBP.
(Continued)
<PAGE>
36
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Stock Option Plan
On January 17, 1996, stockholders approved the Company's Stock Option
Plan, which was subsequently also approved by the OTS. The Plan
provides for the granting of options for the purpose of attracting
and retaining key personnel and to facilitate their purchase of a
stock interest in the Company. Options on 112,500 shares were
granted at an exercise price of $9.8125 per share. The options
become exercisable over a five year period at the rate of 20% per
year. If unused, the options expire in 2006.
(12) Retained Earnings and Regulatory Capital
The Association, as a member of the Federal Home Loan Bank System, is
required to hold a specified number of shares of capital stock,
which is carried at cost, in the Federal Home Loan Bank of Des
Moines. In addition, the Association is required to maintain cash
and other liquid assets in an amount equal to 5% of its deposit
accounts and other obligations due within one year. The
Association has met these requirements.
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the
Association's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Association must meet specific capital guidelines that
involve quantitative measures of the Association's assets,
liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Association's capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and
ratios (set forth in the following table) of Tangible, Core and
Risk-based capital (as defined in the regulations) to total assets
(as defined). Management believes, as of June 30, 1996, that the
Association meets all capital adequacy requirements to which it is
subject.
As of June 30, 1996, the most recent notification from the OTS
categorized the Association as "well capitalized". There are no
conditions or events since that notification that management
believes have changed the Association's category.
(Continued)
<PAGE>
37
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Association's actual capital amounts and ratios are also presented
in the table:
<TABLE>
<CAPTION>
Actual Requirement Excess Capital
---------------------------- --------------------------- ---------------------------
Percent Percent Percent
of of of
Amount assets (1) Amount assets (1) Amount assets (1)
- ------------------------------------------------------------------------------------------------------
Association's
retained
<S> <C> <C> <C> <C> <C> <C>
earnings $10,033,000
Tangible
capital 10,033,000 20.72% $ 726,000 1.50% $ 9,307,000 19.22%
-----------
Core capital 10,033,000 20.72 1,452,000 3.00 8,581,000 17.72
-----------
Plus:
Allowable
portion
of
general
allowance
for
loan
losses 172,000
-----------
Risk-based
capital $10,205,000 73.26% $ 1,114,000 8.00% $ 9,091,000 65.26%
===========
</TABLE>
(1) Based on the Association's adjusted total assets for the purpose of the
tangible and core capital ratios and risk-weighted assets for the purpose
of the risk-based capital ratio.
(13) Stock Repurchases
On March 4, 1996, the Company purchased 56,250 shares of its
outstanding common stock at $9.625 per share. Repurchased shares
are considered treasury shares and will be utilized for general
corporate and other purposes, including the issuance of shares in
connection with the exercise of stock options.
On March 15, 1996, the Company repurchased 15,000 shares of its
outstanding common stock at $9.50 per share and on March 18, 1996,
the Company repurchased 30,000 shares of its outstanding common
stock at $9.375 per share. Repurchased shares are considered
treasury shares and will be utilized for the management stock
bonus plan and other purposes.
(14) Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments
to extend credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the accompanying balance sheets. The contract
amounts of these instruments reflect the extent of involvement by
the Company.
(Continued)
<PAGE>
38
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit is represented by the contract amount of these
commitments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
The contract amount of these financial instruments at June 30, 1996
and 1995 is as follows:
Contract amount
-------------------------
1996 1995
- ------------------------------------------------------------------------------
Financial instruments whose contract amount
represents risk:
Commitments to extend credit $ 751,400 130,000
==============================================================================
Commitments to extend credit are agreements to lend to a customer
provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
a portion of the commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future
cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of
credit, is based on the loan type and on management's evaluation
of the borrower. Collateral consists primarily of residential real
estate and personal property.
(15) Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Values of Financial Instruments,
requires disclosure of estimated fair values of the Company's
financial instruments, including assets, liabilities, and
off-balance sheet items for which it is practicable to estimate
fair value. The fair value estimates are made as of June 30, 1996
and 1995, based upon relevant market information, if available,
and upon the characteristics of the financial instruments
themselves. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are
based upon judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments, and other factors. The estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based only on existing financial instruments
without attempting to estimate the value of anticipated future
business or the value of assets and liabilities that are not
considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains
and losses can have a significant effect on the fair value
estimates and have not been considered in any of the estimates.
The estimated fair value of the Company's financial instruments are
shown below. Following the table, there is an explanation of the
methods and assumptions used to estimate the fair value of each
class of financial instruments.
(Continued)
<PAGE>
39
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
June 30
------------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- --------------------------------------------
Carrying Estimated Contract Carrying Estimated Contract
amount fair value amount amount fair value amount
--------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash
<S> <C> <C> <C> <C> <C> <C>
equivalents $ 2,873,163 2,873,163 14,092,665 14,092,665
Securities held to
maturity 31,094,218 30,964,830 24,305,141 24,562,113
Loans receivable, net 16,513,727 16,949,767 15,255,027 15,615,945
Stock in Federal Home
Loan Bank of
Des Moines, at cost 333,500 333,500 327,000 327,000
Accrued interest
receivable 553,856 553,856 409,584 409,584
Financial liabilities:
Deposits 37,858,285 38,010,952 35,590,572 35,705,268
Accrued interest payable 184,244 184,244 234,697 234,697
Off-balance sheet financial
instruments:
Commitments to
extend credit 0 13,466 751,400 0 2,794 130,000
</TABLE>
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their
fair value.
Securities Held to Maturity
The fair values of securities held to maturity are based upon quoted
market prices.
Loans Receivable, Net
The fair values of loans receivable were estimated for groups of loans
with similar characteristics. The fair value of the loan
portfolio, with the exception of the adjustable rate portfolio,
was calculated by discounting the scheduled cash flows through the
estimated maturity using anticipated prepayment speeds and using
discount rates that reflect the credit and interest rate risk
inherent in each loan portfolio. The fair value of the adjustable
loan portfolio was estimated by grouping the loans with similar
characteristics and comparing the characteristics of each group to
the prices quoted for similar types of loans in the secondary
market.
Stock in Federal Home Loan Bank of Des Moines, at Cost
The carrying amount of FHLB stock approximates its fair value.
(Continued)
<PAGE>
40
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its
fair value since it is short-term in nature and does not present
unanticipated credit concerns.
Deposits
Under SFAS No. 107, the fair value of deposits with no stated maturity
such as savings and money market accounts, is equal to the amount
payable on demand. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows using as
discount rates the rates that were offered by the Company as of
June 30, 1996 and 1995 for deposits with maturities similar to the
remaining maturities of the existing certificates of deposit.
The fair value estimate for deposits does not include the benefit that
results from the low cost funding provided by the Company's
existing deposits and long-term customer relationships compared to
the cost of obtaining different sources of funding. This benefit
is commonly referred to as the core deposit intangible.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair
value since it is short-term in nature.
Commitments to Extend Credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counter parties.
(16) Stock Conversion
The Association converted from a federally-chartered mutual savings
and loan association to a federally-chartered stock savings and
loan association pursuant to its Plan of Conversion. The
conversion was effected on July 7, 1995, and resulted in the
issuance of 1,125,000 shares of common stock (par value $0.10) at
$8.00 per share for a gross sales price of $9,000,000. Costs
related to conversion (primarily underwriters' commission,
printing, and professional fees) aggregated $450,639 and were
deducted to arrive at the net proceeds of $8,549,361. The Company
established an employee stock ownership trust which purchased
82,748 shares of common stock of the Company at the issuance price
of $8.00 per share from funds borrowed from the Company.
Funds held for stock subscriptions in excess of common stock issued
were refunded to the subscribers at the time of conversion .
Subsequent to conversion, savings account holders and borrowers do not
have voting rights in the Association. Voting rights of the
Association are vested exclusively with the Company.
(Continued)
<PAGE>
41
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
For the purpose of granting eligible members of the Association a
priority in the event of future liquidation, the Association, at
the time of conversion, established a liquidation account equal to
its regulatory capital as of December 31, 1994. In the event (and
only in such event) of future liquidation of the converted
Association, an eligible savings accountholder who continues to
maintain a savings account shall be entitled to receive a
distribution from the liquidation account, in the proportionate
amount of the then-current adjusted balance of the savings
deposits then held, before any distributions may be made with
respect to capital stock.
Present regulations provide that the Association may not declare or
pay a cash dividend on or repurchase any of its capital stock if
the result thereof would be to reduce the regulatory capital of
the Association below the amount required for the liquidation
account or the regulatory capital requirement. Further, any
dividend declared or paid on, or repurchase of, the Association's
capital stock shall be in compliance with the rules and
regulations of the OTS, or other applicable regulations.
(17) Redwood Financial, Inc. Financial Information (Parent Company Only)
The parent company's principal assets are its investment in the
Association and securities. The following are the condensed
financial statements for the parent company only as of and for the
year ended June 30, 1996.
(Continued)
<PAGE>
42
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30,
Assets 1996
----------------------------------------------------------------------------------------------------------
<S> <C>
Cash and cash equivalents $ 101,019
Securities held to maturity 2,488,579
Loans receivable, net 475,358
Investment in subsidiary 10,033,231
Accrued interest receivable 66,784
Other assets 7,470
----------------------------------------------------------------------------------------------------------
Total assets $ 13,172,441
==========================================================================================================
Liabilities and Stockholders' Equity
----------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 15,405
----------------------------------------------------------------------------------------------------------
Total liabilities 15,405
----------------------------------------------------------------------------------------------------------
Common stock 112,500
Additional paid-in capital 8,457,017
Retained earnings, subject to certain restrictions 6,118,091
Unearned employee stock ownership plan shares (595,744)
Unearned management stock bonus plan shares (393,422)
Treasury stock, at cost (541,406)
----------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,157,036
----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 13,172,441
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
1996
----------------------------------------------------------------------------------------------------------
<S> <C>
Interest income $ 200,739
Equity in earnings of subsidiary 433,884
Compensation and employee benefits (116,725)
Other (62,936)
----------------------------------------------------------------------------------------------------------
Earnings before income tax benefit 454,962
Income tax benefit 7,470
----------------------------------------------------------------------------------------------------------
Net earnings $ 462,432
==========================================================================================================
</TABLE>
(Continued)
<PAGE>
43
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C>
Net earnings $ 462,432
Adjustments to reconcile net earnings to cash
provided by operating activities:
Equity in earnings of subsidiary (433,884)
Amortization of premiums (discounts), net (1,092)
Amortization of unearned ESOP shares 66,240
Earned ESOP priced above original cost 10,781
Earned management stock bonus plan shares 39,703
Increase in accrued interest receivable (66,784)
Increase in accrued expenses and other liabilities 15,405
Increase in other assets (7,470)
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 85,331
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of securities (2,487,487)
Increase in loans receivable, net (475,358)
----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (2,962,845)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Adoption of ESOP (661,984)
Repurchase of Company common stock (965,156)
Proceeds from sale of common stock 8,549,361
Purchase of Association stock (3,943,688)
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,978,533
----------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 101,019
Cash and cash equivalents, beginning of year 0
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 101,019
==========================================================================================================
</TABLE>
(Continued)
<PAGE>
44
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(18) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for fiscal 1996 are as follows:
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------------------------
June 30, March 31, December 31, September 30,
Selected Operations Data 1996 1996 1995 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 888,592 860,909 864,851 872,799
Interest expense 470,402 474,621 463,819 473,995
-----------------------------------------------------------------------------------------------------------
Net interest income 418,190 386,288 401,032 398,804
Provision for loan losses 0 0 0 0
Non-interest income 12,395 14,681 17,867 15,568
Non-interest expense 259,503 238,277 289,247 204,854
Income tax expense 59,608 60,328 54,496 36,080
-----------------------------------------------------------------------------------------------------------
Net earnings $ 111,474 102,364 75,156 173,438
===========================================================================================================
Earnings per common share $ .11 .10 .07 .17
</TABLE>
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------------------------
June 30, March 31, December 31, September 30,
Selected Operations Data 1995 1995 1994 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 767,054 734,153 770,553 751,284
Interest expense 437,878 456,473 394,687 394,209
-----------------------------------------------------------------------------------------------------------
Net interest income 329,176 277,680 375,866 357,075
Provision for loan losses 0 0 0 0
Non-interest income (2,071) 10,216 21,224 10,234
Non-interest expense 209,283 173,556 230,143 161,393
Income tax expense 64,818 36,440 49,547 93,915
-----------------------------------------------------------------------------------------------------------
Net earnings $ 53,004 77,900 117,400 112,001
===========================================================================================================
</TABLE>
(Continued)
<PAGE>
45
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Selected Financial June 30, March 31, December 31, September 30,
Condition Data 1996 1996 1995 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $ 51,514,643 50,697,495 48,686,408 48,495,677
Securities 31,094,218 27,572,272 29,854,684 29,294,283
Net loans 16,513,727 15,883,903 15,307,707 15,368,895
Deposits 38,042,529 37,371,536 34,633,047 34,488,104
Stockholders' equity 13,157,036 13,004,368 13,830,097 13,735,104
</TABLE>
<TABLE>
<CAPTION>
Selected Financial June 30, March 31, December 31, September 30,
Condition Data 1995 1995 1994 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $ 55,001,775 42,435,348 42,713,770 42,103,643
Securities 24,305,141 24,696,290 24,984,872 24,134,405
Net loans 15,255,027 15,196,359 15,153,331 15,170,397
Deposits 35,825,269 36,551,035 36,878,825 36,390,303
Stockholders' equity 5,655,659 5,602,655 5,524,755 5,407,355
</TABLE>
<PAGE>
46
CORPORATE OFFICE
Redwood Financial, Inc.
301 South Washington Street, P.O. Box 317
Redwood Falls, Minnesota 56283-0317
Board of Directors of Redwood Financial, Inc.
James P. Tersteeg, Grocer, Owner-- J. Scott Nelson, Doctor of Pharmacy,
Tersteeg's Inc. Sward-Kemp Drug, Inc.
Paul W. Pryor, Executive Officer Donald C. Orth, Executive Officer
Blaine C. Farnberg, Retired Thomas W. Stotesbery, Certified Public
Accountant
Executive Officers of Redwood Financial, Inc.
Paul W. Pryor Donald C. Orth
President and Chief Executive Officer Vice President
----------------------------------------
Corporate Counsel: Independent Auditors:
Ebbesen & Sarrazin KPMG Peat Marwick LLP
301 East Third Street 4200 Norwest Center
Redwood Falls, Minnesota 56283-0127 90 South 7th Street
Minneapolis, Minnesota 55402
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. American Securities Transfer, Inc.
One Franklin Square 1825 Lawrence Street, Suite 444
1301 K Street, N.W., Suite 700 East Denver, Colorado 80202-1817
Washington, D.C. 20005
--------------------
The Company's Annual Report for the Year Ended June 30, 1996 filed with the
Securities and Exchange Commission on Form 10-KSB is available without charge
upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call the Secretary of the Company, at the Company's
corporate office in Redwood Falls, Minnesota. The annual meeting of stockholders
will be held on October 22, 1996 at 10:00 a.m. at the office of the Company at
301 South Washington Street, Redwood Falls, Minnesota.
EXHIBIT 23
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Consent of Independent Public Accountants
The Board of Directors
Redwood Financial, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-4204) on Form S-8 of Redwood Financial, Inc. of our report dated August 16,
1996, relating to the consolidated balance sheets of Redwood Financial, Inc. and
subsidiary as of June 30, 1996 and 1995, and the related consolidated statements
of earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended June 30, 1996, which report appears in the June 30, 1996
annual report on Form 10-KSB of Redwood Financial, Inc.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
September 24, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 15,345
<INT-BEARING-DEPOSITS> 2,857,818
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 31,094,218
<INVESTMENTS-MARKET> 30,964,830
<LOANS> 17,077,625
<ALLOWANCE> 213,034
<TOTAL-ASSETS> 51,514,643
<DEPOSITS> 38,042,529
<SHORT-TERM> 0
<LIABILITIES-OTHER> 75,191
<LONG-TERM> 0
0
0
<COMMON> 112,500
<OTHER-SE> 13,044,536
<TOTAL-LIABILITIES-AND-EQUITY> 51,514,643
<INTEREST-LOAN> 1,376,334
<INTEREST-INVEST> 1,899,177
<INTEREST-OTHER> 211,640
<INTEREST-TOTAL> 3,487,151
<INTEREST-DEPOSIT> 1,882,837
<INTEREST-EXPENSE> 1,882,837
<INTEREST-INCOME-NET> 1,604,314
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 991,881
<INCOME-PRETAX> 672,944
<INCOME-PRE-EXTRAORDINARY> 462,432
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 462,432
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 3.27
<LOANS-NON> 89,513
<LOANS-PAST> 45,513
<LOANS-TROUBLED> 115,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 213,034
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 213,034
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 213,034
</TABLE>
