U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-25884
REDWOOD FINANCIAL, INC.
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(Exact name of Registrant as specified in its Charter)
Minnesota 41-1807233
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(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota 56283-0317
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (507) 637-8730
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of September 30, 1996:
Class Outstanding
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Common stock, par value $0. 10 per share 1,068,750
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Item 1: Financial Statements
Consolidated Balance Sheets at September 30, 1996 and
<S> <C>
June 30, 1996 3
Consolidated Statements of Earnings for the Three
Months ended September 30, 1996 and 1995 4
Consolidated Statement of Stockholders' Equity
for the Three Months ended September 30, 1996 5
Consolidated Statements of Cash Flows for the
Three Months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 17
Item 2: Changes in Securities 17
Item 3: Defaults Upon Senior Securities 17
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
Assets 1996 1996
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<S> <C> <C>
Cash $ 15,250 15,345
Interest-bearing deposits with banks 2,855,874 2,857,818
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Cash and cash equivalents 2,871,124 2,873,163
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Securities held to maturity:
Mortgage-backed and related securities 15,392,311 15,805,305
Investment securities 14,689,567 15,288,913
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Total securities held to maturity 30,081,878 31,094,218
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Loans receivable, net 17,229,712 16,513,727
Federal Home Loan Bank stock, at cost 333,500 333,500
Accrued interest receivable 404,850 553,856
Premises and equipment, net 62,311 52,187
Other assets 74,900 93,992
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Total Assets $51,058,275 51,514,643
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Liabilities and Stockholders' Equity
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Deposits 37,410,421 38,042,529
Advance payments by borrowers for taxes and insurance 94,572 55,686
Accrued expenses and other liabilities 392,989 259,392
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Total Liabilities 37,897,982 38,357,607
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Common stock ($.10 par value): Authorized and issued
1,125,000 shares; outstanding 1,068,750 shares 112,500 112,500
Additional paid-in capital 8,459,605 8,457,017
Retained earnings, subject to certain restrictions 6,080,544 6,118,091
Unearned employee stock ownership plan shares (579,184) (595,744)
Unearned management stock bonus plan shares (371,766) (393,422)
Treasury stock at cost; 56,250 shares (541,406) (541,406)
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Total Stockholders' Equity 13,160,293 13,157,036
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Total Liabilities and Stockholders' Equity $51,058,275 51,514,643
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</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended September 30,
-------------------
1996 1995
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Interest income:
<S> <C> <C>
Loans receivable $ 363,720 335,406
Mortgage-backed and related securities 270,807 176,148
Investment securities 226,074 301,338
Cash equivalents 49,160 59,907
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Total interest income 909,761 872,799
Interest expense on deposits 507,196 473,995
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Net interest income 402,565 398,804
Provision for losses on loans 0 0
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Net interest income after provision
for loan losses 402,565 398,804
Noninterest income:
Fees and service charges 13,974 6,792
Other 959 8,776
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Total noninterest income 14,933 15,568
Noninterest expenses:
Compensation and employee benefits 166,737 141,273
Advertising 3,096 2,576
Occupancy 7,603 6,846
Federal deposit insurance premiums 21,340 20,846
Professional fees 35,983 19,255
Deposit insurance fund assessment 237,085 0
Other 23,324 14,058
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Total noninterest expense 495,168 204,854
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Earnings (loss) before income taxe (77,670) 209,518
Income tax (benefit) expense (40,123) 36,080
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Net (loss) earnings $ (37,547) 173,438
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Net (loss) earnings per common share $ (0.04) 0.17
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Weighted average number of shares outstanding 995,317 1,043,287
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</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Shares Unearned
Employee Management
Additional Stock Stock Bonus Total
Common Paid in Retained Ownership Recognition Treasury Stockholders'
Stock Capital Earnings Plan Plan Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 112,500 8,457,017 6,118,091 (595,744) (393,422) (541,406) 13,157,036
Net loss 0 0 (37,547) 0 0 0 (37,547)
Earned employee stock
ownership plan shares 0 2,588 0 16,560 0 0 19,148
Earned management
stock bonus plan shares 0 0 0 0 21,656 0 21,656
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 $ 112,500 8,459,605 6,080,544 (579,184) (371,766) (541,406) 13,160,293
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</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended September 30,
1996 1995
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Operating Activities:
<S> <C> <C>
Net (loss) earnings $ (37,547) 173,438
Adjustments to reconcile net earnings (loss) to net cash
provided by operations
Depreciation 4,576 4,100
Amortization of premiums and discounts on investment
securities, mortgage-backed and related securities
and loans receivable, net (9,845) (10,099)
Decrease in other assets 19,092 33,644
Decrease (increase) in accrued interest receivable 149,006 (14,623)
Increase (decrease) in accrued interest payable 320,011 302,385
Amortization of unearned ESOP shares 16,560 16,560
Earned ESOP shares priced above original cost 2,588 2,070
Earned Management Stock Bonus Plan shares 21,656 0
Increase (decrease) in accrued expenses and other liabilities 133,597 (154,510)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 619,694 352,965
Investing Activities:
Proceeds from maturities of investment securities held to maturity 600,000 0
Purchases of investment securities held to maturity 0 (2,487,720)
Purchases of mortgage-backed and related securities held to maturity 0 (2,891,340)
Principal collected on mortgage-backed and related securities held to maturity 421,349 400,017
Decrease (increase) in loans receivable,net (715,149) (113,868)
Purchases of premises and equipment (14,700) 0
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Net cash provided (used) by investing securities 291,500 (5,092,911)
Financing Activities:
Decrease in funds held for stock subscriptions 0 (13,127,630)
Decrease in deferred stock conversion costs 0 439,015
Net decrease in deposits (952,119) (1,639,550)
Increase in advance payments by borrowers for taxes an insurance 38,886 33,762
Proceeds from the sale of common stock 0 8,549,361
Adoption of ESOP 0 (661,984)
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Net cash used by financing activities (913,233) (6,407,026)
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Increase(decrease) in cash and cash equivalents (2,039) (11,146,972)
Cash and cash equivalents, beginning of period 2,873,163 14,092,665
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Cash and cash equivalents, end of period $2,871,124 2,945,693
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Supplemental cash flow disclosures:
Cash paid for interest $ 187,185 171,610
Cash paid for income taxes 51,850 36,080
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
(1) Redwood Financial, Inc.
Redwood Financial, Inc. (the Company) was incorporated under the laws of
the State of Minnesota for the purpose of becoming the savings and loan
holding company of Redwood Falls Federal Savings and Loan Association (the
Association) in connection with the Association's conversion from a
federally-chartered mutual savings and loan association to a
federally-chartered stock savings and loan association, pursuant to its
Plan of Conversion.
The Company commenced a Subscription and Community Offering of its shares
(the Offering) in connection with the conversion of the Association on May
22, 1995. The Offering was closed on June 22, 1995 and the conversion was
completed July 7, 1995 (see note 5).
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of earnings,
consolidated statement of stockholders' equity, and consolidated statements
of cash flows in conformity with generally accepted accounting principles.
However, all adjustments, consisting only of normal recurring adjustments,
which are, in the opinion of management, necessary for the fair
presentation of the interim financial statements have been included. The
statement of earning for the three months ended September 30, 1996 is not
necessarily indicative of the results which may be expected for the entire
year.
The material contained herein is written with the presumption that the
users of the interim financial statements have read or have access to the
most recent Annual Report on Form 10- KSB of Redwood Financial, Inc., which
contains the latest audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition
and Results of Operations as of June 30, 1996 and for the year then ended.
(Continued)
7
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(3) Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares and common stock equivalents, if dilutive, outstanding during the
period. The only common stock equivalents are stock options. The weighted
average number of common stock equivalents is calculated using the
treasury stock method.
(4) Regulatory Capital Requirements
At September 30, 1996, the Association met each of the three current
minimum regulatory capital requirements. The following table summarizes
the Association's regulatory capital position at September 30, 1996:
Amount Percent (1)
-------------------------------------------------------------------
(dollars in thousands)
Tangible Capital:
Actual $ 10,017 20.86%
Required 720 1.50
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Excess $ 9,297 19.36%
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Core Capital:
Actual $10,017 20.86%
Required 1,440 3.00
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Excess $ 8,577 17.86%
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Risk-Based Capital:
Actual $10,194 70.98%
Required 1,149 8.00
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Excess $ 9,045 62.98%
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(1) Tangible and core capital levels are shown as a percentage of
total adjusted assets; risk-based capital levels are shown as
a percentage of risk-weighted assets.
(Continued)
8
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(5) Stockholders' Equity and Stock Conversion
The Association converted from a federally-chartered mutual savings and
loan association to a federally-chartered stock savings and loan
association pursuant to its plan of Conversion which was approved by the
Association's members on June 23, 1995. The conversion was effected on
July 7, 1995, and resulted in the issuance of 1,125,000 shares of common
stock (par value $.10) at $8.00 per share for a gross sales price of
$9,000,000. Costs related to conversion (primarily underwriters'
commission, printing, and professional fees) aggregated $450,639 and
were deducted to arrive at the net proceeds of $8,549,361. The Company
established an employee stock ownership trust which purchased 82,748
shares of common stock of the Company at the issuance price of $8.00 per
share from funds borrowed from the holding company.
(Continued)
9
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Item 2-Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
The Company's net earnings are dependent primarily on its net interest income,
which is the difference between interest income earned on its investment and
loan portfolio and interest paid on interest-bearing liabilities. Net interest
income is determined by (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 Company's interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. To a lesser extent, the Company's net earnings
also are affected by the level of noninterest income, which primarily consists
of service charges and other fees. In addition, net earnings are affected by the
level of noninterest (general and administrative) expenses.
The operations of financial institutions, including the Association, are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of the federal government and governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates, and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the Association's
market area.
Financial Condition
The Company's total assets decreased by $457,000, or 0.90%, from $51,515,000 at
June 30, 1996 to $51,058,000 at September 30, 1996. Changes in the Company's
levels of assets reflect a slight decrease in the level of public unit fund
deposits during the quarter ended September 30, 1996.
The Company's securities, which include investment securities and
mortgage-backed and related securities, decreased by $1,012,000, or 3.25%, from
$31,094,000 at June 30, 1996 to $30,082,000 at September 30, 1996. The decrease
in the Company's level of securities during the three months ended September 30,
1996 is attributable to an investment security maturity and the principal
repayments of the Company's mortgage-backed and related securities.
The Company's loans receivable, net, increased by $716,000, or 4.34%, from
$16,514,000 at June 30, 1996 to $17,230,000 at September 30, 1996. The increase
in loans receivable was due to an increase in demand during the quarter for both
first and second (i.e. home equity) mortgage loans.
(Continued)
10
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's deposits, including accrued interest payable, decreased by
$633,000, or 1.66%, from $38,043,000 at June 30, 1996 to $37,410,000 at
September 30, 1996. The level of deposits decreased as a result of fewer public
unit fund deposits at September 30, 1996.
Results of Operations
Net Earnings
The Company incurred a net loss of $38,000 for the quarter ended September 30,
1996, as compared to net earnings of $173,000 for the quarter ended September
30, 1995. This represented a decrease of $211,000, or 121.97%. The decrease was
primarily attributable to a $290,000 increase in noninterest expense. The
increase in noninterest expense includes a $237,000 one-time assessment required
by the federal deposit insurance authorities to bring the Savings Association
Insurance Fund (SAIF) to parity with the Bank Insurance Fund (BIF) as a result
of the omnibus appropriations bill signed by President Clinton on September 30,
1996. The decrease was also attributable to a $37,000 increase, or 4.24% in
interest income, a $33,000, or 6.96% increase in interest expense, and a $76,000
decrease, or 211.11% in income tax expense.
Net Interest Income
Net interest income increased by $4,000, or 1.00%, from $399,000 for the quarter
ended September 30, 1995 to $403,000 for the quarter ended September 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
129.79% for the quarter ended September 30, 1995 to 135.20% for the quarter
ended September 30, 1996. This was partially offset by a decrease in the
Association's interest rate spread from 2.15% for the quarter ended September
30, 1995, to 1.75% for the quarter ended September 30, 1996. The decrease in
interest rate spread, compared to the same period in the previous fiscal year,
was due to rising rates paid on deposits as well as a decrease in yield on the
Company's loan and investment securities portfolios.
Interest Income
Interest income was $910,000 for the quarter ended September 30, 1996, as
compared to $873,000 for the quarter ended September 30, 1995, representing an
increase of $37,000, or 4.24%. The increase in interest income was caused
primarily by a $3,410,000, or 7.12%, increase in the average balance of
interest-bearing assets. This was partially offset by a decline in the overall
yield on interest earning assets. For the quarter ended September 30, 1996, the
average yield on interest earning assets was 7.09%, representing a slight
decline from 7.29% for the quarter ended September 30, 1995.
(Continued)
11
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest on loans receivable increased by $28,000, or 8.44%, during the quarter
ended September 30, 1996, as compared to the quarter ended September 30, 1995.
Such increase was due to a $1,545,000, or 10.05% increase in the average balance
on loans receivable from $15,377,000 for the quarter ended September 30, 1995 to
$16,922,000 for the quarter ended September 30, 1996. This was partially offset
by a decline in the average yield on loans receivable from 8.72% for the quarter
ended September 30, 1995 to 8.60% for the quarter ended September 30, 1996.
Interest on mortgage-backed and related securities increased by $95,000, or
53.98%, during the quarter ended September 30, 1996, as compared to the quarter
ended September 30, 1995. Such increase was due to a $5,396,000, or 52.77%,
increase in the average balance of mortgage-backed and related securities from
$10,225,000 for the quarter ended September 30, 1995 to $15,621,000 for the
quarter ended September 30, 1996. The increase in the average balance of
mortgage-backed and related securities primarily resulted from a decision to
invest the cash proceeds from maturing investment securities and principal
repayments on existing mortgage-backed securities into other mortgage-backed and
related securities. The increase in interest on mortgage-backed and related
securities is also due to a slight increase in the average yield on
mortgage-backed and related securities from 6.89% for the quarter ended
September 30, 1995 to 6.93% for the quarter ended September 30, 1996.
Interest on investment securities, including FHLB stock, decreased by $75,000,
or 24.92%, during the quarter ended September 30, 1996, as compared to the
quarter ended September 30, 1995. Such decrease was due primarily to a
$4,074,000, or 21.17%, decrease in the average balance of investment securities
from $19,247,000 for the quarter ended September 30, 1995 to $15,173,000 for the
quarter ended September 30, 1996. The decline is a result of a decision to
invest cash proceeds from the maturity of investment securities into higher
yielding mortgage-backed and related securities. Additionally, this decrease was
affected by a decrease in the average yield on investment securities, including
FHLB stock, from 6.38% for the quarter ended September 30, 1995 to 5.96% for the
quarter ended September 30, 1996.
Interest Expense
Interest expense increased by $33,000, or 6.96%, from $474,000 for the quarter
ended September 30, 1995 to $507,000 for the quarter ended September 30, 1996.
The increase in interest expense resulted from a $1,045,000, or 2.83% increase
in the average balance of deposits from $36,922,000 for the quarter ended
September 30, 1995 to $37,967,000 for the quarter ended September 30, 1996. The
increase in interest expense is also attributable to an increase in the average
cost of deposits to 5.34% during the quarter ended September 30, 1996, as
compared to 5.14% for the quarter ended September 30, 1995. The increase in the
average cost of deposits was due to an increase in prevailing market interest
rates during much of 1996.
(Continued)
12
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Provision for Loan Losses
The Company's provision for loan losses was $0 for the three months ended
September 30, 1996 and 1995. Due to the consistency in the size of the loan
portfolio, the lack of substantive problem loans (i.e. few nonaccrual loans)
during these periods, and stable real estate value in the Company's market area,
management believed that the allowance for loan losses was adequate throughout
these periods. The allowance for loan losses was maintained at $213,000 at
September 30, 1996 and 1995. The Company's net loan charge-offs were $0 for the
quarters ended September 30, 1996 and 1995. At September 30, 1996 and 1995, the
allowance for loan losses represented 1.22% and 1.38%, respectively, of loans
receivable. Nonaccrual loans totaled $29,000 and $0, respectively, at September
30, 1996 and 1995.
Noninterest Income
Noninterest income decreased by $1,000, or 6.25%, from $16,000 for the quarter
ended September 30, 1995 to $15,000 for the quarter ended September 30, 1996.
The decrease in noninterest income was primarily due to a $8,000, or 88.89%
decrease in other noninterest income. This was offset by a $7,000, or 100.00%,
increase in various fees and service charges. The decrease in other noninterest
income was primarily due to a $5,000 gain taken on the disposition of an asset
in the quarter ended September 30, 1995. The increase in fees and service
charges was a result of higher loan fee income (e.g. loan origination fees and
appraisal fees) resulting from the aforementioned increase in loan origination
volume.
Noninterest Expense
Noninterest expense increased by $290,000, or 141.46%, from $205,000 for the
quarter ended September 30, 1995 to $495,000 for the quarter ended September 30,
1996. The increase in total noninterest expense was primarily due to the
aforementioned $237,000 one-time deposit insurance fund assessment. In addition,
the increase in noninterest expense is also attributable to a $26,000, or
18.44%, increase in compensation and employee benefits from $141,000 for the
quarter ended September 30, 1995 to $167,000 for the quarter ended September 30,
1996, a $17,000, or 89.47%, increase in professional fees from $19,000 for the
quarter ended September 30, 1995 to $36,000 for the quarter ended September 30,
1996, and a $9,000, or 64.29% increase in other expenses from $14,000 for the
quarter ended September 30, 1995, to $23,000 for the quarter ended September 30,
1996. The increase in compensation and employee benefits was attributable to the
amortization of unearned management stock bonus plan shares and an increase in
staff during the quarter ended September 30, 1996. The increase in professional
fees was as a result of increased costs associated with being a public company.
The slight increase in other expenses represents miscellaneous expenses incurred
during the quarter ended September 30, 1996.
(Continued)
13
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Income Taxes
The Company's income taxes fluctuated by $76,000, or 211.11%, from an income tax
expense of $36,000 for the quarter ended September 30, 1995, to an income tax
benefit of $40,000 for the quarter ended September 30, 1996. The change in
income taxes was due primarily to a decrease in pre-tax earnings of $288,000, or
137.14%, from pre-tax earnings of $210,000 for the quarter ended September 30,
1995 to a pre-tax loss of $78,000 for the quarter ended September 30, 1996. As
previously stated, the Company's pre-tax loss is due to the one-time deposit
insurance assessment. The income tax benefit for the quarter ended September 30,
1996 reflects the tax benefit associated with the Company's current negative
earnings position, at the Company's estimated effective tax rate.
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 three months ended September
30, 1996 and 1995, the Company purchased investment and mortgage-backed and
related securities in the amounts of $0, and $5,379,000, respectively. Other
investing activities include originations of loans and investment in FHLB of Des
Moines stock. The primary financing activity of the Company is the attraction of
savings deposits.
The Company has other sources of liquidity if there is a need for funds. The
Association has the ability to obtain advances from the Federal Home Loan Bank
(FHLB) of Des Moines. In addition, the Company maintains a portion of its
investments in FHLB overnight funds that will be available when needed.
The Company is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be changed at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio is
currently 5.0%. Management of the Company seeks to maintain a relatively high
level of liquidity in order to retain flexibility in terms of investment
opportunities and deposit pricing. Because liquid assets generally provide for
lower rates of return, the Company's relatively high liquidity will, to a
certain extent, result in lower rates of return on assets.
(Continued)
14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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 September 30, 1996 and 1995, cash and cash equivalents totaled
$2,871,000 and $2,873,000, respectively.
Recent Developments
(1) Pending Acquisition
On November 4, 1996, the Company executed a letter of intent, dated
November 1, 1996, to acquire 100% of the outstanding stock of Olivia
Bancorporation (the Bancorporation) and 100% of the stock of American
State Bank of Olivia, Minnesota (the Bank). American State Bank is a
state chartered commercial banking institution with approximately $29.1
million in assets as of October 31, 1996. The Bancorporation owns
approximately 97.6% of the outstanding stock of the Bank. The acquisition
is subject to several matters including negotiating a definitive
agreement and regulatory approval.
(2) Bank Insurance Fund/Savings Association Insurance Fund Assessment
As a result of the omnibus appropriations bill signed September 30, 1996
by President Clinton, the Company will pay a one-time $237,000 assessment
to the Federal Deposit Insurance Corporation (FDIC). The assessment is
intended to bring to parity the fund insuring deposits at most savings
institutions, the Savings Association Insurance Fund (SAIF), with the
fund insuring deposits at commercial banking institutions, the Bank
Insurance Fund (BIF). As a result of the one-time assessment, the FDIC
will substantially reduce the premium assessed savings institutions
insured by the SAIF beginning January 1, 1997. The Company expects that
its deposit insurance expense will be reduced from the current 23 basis
point rate for each dollar of deposits, to approximately 6.4 basis points
for each dollar of deposits. Based upon the current level of deposits,
the Company expects that the legislation will reduce the Company's
deposit insurance expense by approximately $62,000 per year before taxes.
In addition, the legislation also requires that the SAIF and BIF be
merged by January 1, 1999, provided that bank and savings association
(i.e. thrift) charters are merged by that date.
(Continued)
15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(3) Tax Legislation
Additional legislation was also enacted during the quarter ended
September 30, 1996, which substantially effects the tax treatment
afforded savings institutions. This legislation was included in the Small
Business Job Protection Act (SBJPA) of 1996. As a result of the SBJPA,
the favorable tax treatment concerning bad debt deductions afforded
savings institutions has been eliminated. Savings associations will be
required to remit to government taxing authorities, the bad debt tax
reserves accumulated since 1987 owing to this deduction. For the most
part, savings institutions will not be required to remit pre-1988 bad
debt tax deductions. However, if certain events occur, such as
liquidation, a savings institution may be required to remit the bad debt
tax reserves accumulated in tax years from 1952 up to and including 1987.
Nevertheless, savings institutions will be allowed, amongst other powers,
to convert to a bank charter, diversify lending, or be acquired by
another institution without triggering a recapture of pre-1988 reserves.
The SBJPA substantially equalizes the tax treatment afforded savings
institutions and commercial banks, and removes an impediment towards
merger of the bank and savings association charters.
Management of the Company knows of no expected event which would trigger
recapture of pre-1988 bad debt deduction reserves at the current time.
The post-1987 deductions total $206,000 which will be remitted to the
federal taxing authorities over a six to eight year period. The Company
is fully reserved for the reversal of the post-1987 tax deduction, and no
future earnings impact is expected.
(Continued)
16
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
Not Applicable.
ITEM 3: Defaults upon Senior Securities.
Not Applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
During the Quarter ended December 31, 1996, a Form 8-K (Items
5 and 7), dated November 4, 1996, was filed.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDWOOD FINANCIAL, INC.
Registrant
Date: November 8,1996 /s/ Paul W. Pryor
--------------- --------------------------------------------
Paul W. Pryor, President and Chief Executive
Officer (Duly Authorized Officer)
Date: November 8, 1996 /s/ Ardella J. Schlapkohl
---------------- --------------------------------------------
Ardella J. Schlapkohl, (Principal Accounting
Officer)
18
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