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 For the fiscal year ended June 30, 1997,
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[ ] 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 No. 0-25884
REDWOOD FINANCIAL, INC.
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(Name of Small Business Issuer in Its Charter)
Minnesota 41-1807233
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(State or Other Jurisdiction of Incorporation I.R.S. Employer
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
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Securities registered pursuant to Section 12(b) of the Act: None
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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. $3,923,233
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 2, 1997, was $7,389,291 ($11.50 per share based on
642,547 shares of Common Stock held by non-affiliates).
As of September 2, 1997, there were issued (1,125,000 shares) and
outstanding 961,875 shares of the registrant's Common Stock.
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, 1997. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Business
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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, 1997, the
Company had total assets of $62.2 million, total deposits of $46.1 million, and
stockholders' equity of $12.3 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 public and uses such
deposits primarily to purchase investment securities and mortgage-backed and
related securities and to originate loans secured by mortgages on single family
residences in its market area. For this mortgage loan portfolio, the Association
originates and retains fixed and adjustable rate loans, and 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 Association also participates in several
commercial, commercial real estate, and agricultural 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 also obtains funds from FHLB Advances.
The Association does not rely on brokered deposits, however, a substantial
portion of the Association's deposits are funds from local government entities.
Principal sources of income are interest on loans, mortgage-backed and related
securities, 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
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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 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.
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
agricultural real estate loans and, agricultural operating 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 both fixed-rate and adjustable-rate loans. The Company
does not sell mortgage loans into the secondary market. The Company's consumer
loan portfolio consists primarily of savings account loans and to a lesser
extent other consumer loans. The Company's commercial real estate loans are
secured by multi-family residential apartment buildings, health care facilities,
office buildings, and retail establishments. Agricultural loans include two
participations with a local area bank secured by real estate and other farm
related collateral.
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,
---------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
Amount Percentage Amount Percentage
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential (1-4 family).......... $18,577 89.46% $15,233 92.24%
Residential construction.......... 502 2.42 220 1.33
Multi-family...................... 174 0.84 -- --
Multi-family construction......... 980 4.72 189 1.15
Commercial........................ 680 3.27 520 3.15
Agricultural...................... 150 0.72 -- --
Consumer loans:
Other consumer loans.............. 21 0.10 -- --
Savings account................... 133 0.64 141 0.85
Commercial.......................... 715 3.44 775 4.69
Agricultural operating.............. 425 2.05 -- --
------- ------- ------- -------
Total............................... 22,357 107.66 17,078 103.41
Less:
Loans in process.................. (1,361) (6.56) (333) (2.01)
Deferred loan fees and discounts.. (16) (0.08) (18) (0.11)
Allowance for loan losses......... (213) (1.02) (213) (1.29)
------- ------- ------ ------
Total loans, net.................... $20,767 100.00% $16,514 100.00%
====== ======= ====== =======
</TABLE>
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The Company primarily originates loans for retention in its portfolio
and has not purchased whole loans or sold loans during the past three years.
4
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
Company's loan portfolio at June 30, 1997. The table does not include
prepayments or scheduled principal repayments. Adjustable-rate mortgage loans
are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
One- to Four- Multi-
Family Family Residential Multi-Family Commercial Agricultural
Residential Real Estate Construction Construction Real Estate Real Estate Consumer Commercial Agricultural Total
----------- ----------- ------------ ------------ ----------- ----------- -------- ---------- ------------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year. $ 3,689 $ 123 $ -- $ -- $ 83 $ 150 $ 133 $ $ $ 4,178
1 to 5 years.. 12,060 51 -- -- 419 -- 21 12,551
After 5 years. 2,833 0 502 980 178 -- 710 425 5,628
------ ---- ---- ---- ------ ----- ----- ----- ---- ------
Total amount due $18,582 $ 174 $ 502 $ 980 $ 680 $ 150 $ 154 $ 710 $ 425 $22,357
====== ==== ==== ==== ====== ===== ===== ===== ==== =======
</TABLE>
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<PAGE>
The following table sets forth the dollar amount of all loans due after
June 30, 1998, which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed-rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
1-4 Family residential.................. $8,518 $6,375 $14,893
Multi-family real estate................ 51 0 51
Residential construction................ 282 220 502
Multi-family construction............... -- 980 980
Commercial real estate.................. 385 212 597
Agricultural real estate................ 150 -- 0
Consumer................................ 21 -- 21
Commercial.............................. 417 293 710
Agricultural............................ 425 -- 425
------ ------ ------
Total................................. $10,099 $8,080 $18,179
====== ===== ======
One-to Four-Family Residential Loans. The Association's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Association's primary market area. The
Association generally originates one- to four-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 maintain interest-rate risk at acceptable levels, the
Association originates primarily fixed-rate, balloon mortgage loans that provide
for an amortization of up to 30 years, but which typically mature after 5 to 7
years. Provided the borrower demonstrates acceptable repayment ability, the
Association will usually refinance the balloon mortgage loan at maturity at the
then current market rate of interest. Among other factors, the Association's
refinancing of these loans is dependent upon adequate collateral value. From
time to time, the Association will originate fixed-rate loans with maturities of
up to 30 years. The Association monitors the level of this type of long-term,
fixed-rate lending in order to control interest-rate risk. Many of the existing
loans that do not reprice within 5 years were originated more than 10 years ago,
before the Association de-emphasized the origination of long-term, fixed-rate
loans.
The Association also offers adjustable-rate loans, although the
majority of its recent loan production has been in fixed-rate balloon loans. The
Association's adjustable-rate mortgage loans provide for periodic interest-rate
adjustments of 1% to 2% with a maximum adjustment over the life of the loan of
between 5% and 6%. Typically, the interest rate on these loans adjusts every 1,
3, or 5 years, and provides for amortization over a 15- to 30-year period.
Indices used in the origination of adjustable-rate mortgage loans include both
U.S. Treasury securities and a national cost of funds index.
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
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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, 1997, the Association
did not service loans for others.
Consumer Loans. Consumer loans are primarily made when secured by a
savings account in the Association. These loans 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. The Association is in the process of
expanding its consumer loan program to include auto, unsecured, and other forms
of consumer lending. At June 30, 1997, the Association's balance in these other
consumer loans totaled $21,000. Although the Association also makes home equity
loans, these loans are secured by liens on primary residences and are
categorized as one- to four-family residential mortgage 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, 1997, the Association's largest commercial real estate loans to one
borrower consisted of two participations totaling $148,000 that 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.
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 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
one- to four-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.
7
<PAGE>
Multi-Family Loans. The Association also makes fixed-rate and
adjustable-rate multi-family loans, including loans on apartment complexes. At
June 30, 1997, the Association had no substantial multi-family real estate
loans. However, in fiscal 1997, the Company has originated two multi-family
loans totaling $500,000 and $480,000, respectively. Both loans are obligations
of the various economic development authorities of the City of Redwood Falls and
Olivia, respectively. The loans are originated by the Company due to regulatory
limitations on the amount of non-rated municipal debt that the Association is
permitted to hold.
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 $293,000 at June 30, 1997.
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 $422,000 at June 30, 1997, and is secured primarily by the
revenues of the casino.
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.
Agricultural Lending. In 1997, the Association commenced development of
a program for agricultural lending. This program is intended to promote
increased lending through agricultural lending opportunities found in the
Association's lending area. The program is still in development. At June 30,
1997, the Association participated in a $150,000 agricultural loan secured by
farm acreage with a local area bank. The Association also participated in a
$425,000 loan secured by cooperative stock with the same bank. Both loans are to
the same borrower.
Agricultural lending, including both operating and real estate-secured
agricultural lending generally involves a greater degree of risk than the
Association's traditional residential mortgage lending efforts. This increased
credit risk is a result of various factors, including higher loan balances, the
concentration of principal in a limited number of loans and borrowers, the
effects of general and farm- specific economic conditions, weather conditions,
and the increased difficulty in monitoring these types of loans. Moreover,
repayment is largely dependent upon the successful operation of the farm
enterprise. If the cash flow from the farm enterprise is reduced, the borrower's
ability to repay the loan may be impaired.
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<PAGE>
Loan Commitments. The Association issues written commitments to
prospective borrowers on all real estate loans. Generally, the commitment
requires acceptance within 45 days of the date of issuance. At June 30, 1997,
the Association had $862,000 of commitments to cover originations and
undisbursed funds for loans in process. The Association believes that most of
the Association's commitments will be funded. At June 30, 1997, the Company had
$902,000 of commitments to cover undisbursed funds for loans in process on the
two multi-family construction loans to the economic development authorities of
the City of Redwood Falls and the City of Olivia.
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 greater. The Association's maximum
loan to one borrower limit was approximately $1,260,000 as of June 30, 1997.
At June 30, 1997, the Association's largest amount of loans to one
borrower was two agricultural loan participations in the amount of $575,000,
secured by real estate and cooperative stock.
Nonperforming and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are
placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, if, 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.
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<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
modified in a troubled debt restructuring.
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 family residences........... $ -- $ 89
All other mortgage loans................................... -- --
Non-mortgage loans........................................... -- --
------ -------
Total........................................................ $ -- $ 89
====== =======
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 family residences........... $ 120 $ 46
All other mortgage loans................................... -- --
Non-mortgage loans........................................... -- --
--------- ------
Total........................................................ $ 120 $ 46
======== ======
Total non-accrual and accrual loans.......................... $ 120 $ 135
======== ======
Real estate.................................................. $ 14 $ --
======== ======
Other non-performing assets.................................. $ -- --
======== ======
Total non-performing assets.................................. $ 134 $ 135
======== ======
Total non-accrual and accrual loans to
net loans.................................................. .58 % 0.82%
======== ======
Total non-accrual and accrual loans to
total assets............................................... .19 % 0.26%
======== ======
Total non-performing assets to total assets.................. .22 % 0.26%
======== ======
</TABLE>
There was $296 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, 1997.
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 current
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without
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<PAGE>
the establishment of a specific loss reserve is not warranted. Assets may be
designated "special mention" because of potential weaknesses 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, 1997, the Company's classified assets consisted of
substandard loans of $121,000. At June 30, 1997, the Company also had $14,000 in
loans designated as special mention. The Company had delinquent loans of 60 and
90 days or more of $0 and $121,000, 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, 1997. The Company does, however,
have one loan for which foreclosure proceedings have commenced. The loan is
considered Real Estate in Judgment for reporting purposes. The balance on the
loan totals $14,000. No loss is anticipated upon the eventual disposition of
this asset.
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,
---------------------------------------------------------------
1997 1996
--------------------------------- --------------------------
Percent of Percent of
Loans in Loans in
each each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
At end of period allocated to:
Real estate mortgage:
Residential construction.......... $ 1 2.2% $ 1 1.3%
1-4 family residential............ 198 83.1 202 89.3
Multi-family ..................... 2 0.8 2 1.1
Commercial........................ 3 3.0 5 3.0
Multi-family construction......... -- 4.4 -- --
Agricultural real estate.......... 2 0.7 -- --
Consumer loans...................... -- 0.7 -- 0.8
Commercial.......................... 3 3.2 3 4.5
Agricultural........................ 4 1.9 -- --
----- ----- ----- -----
Total allowance for
loan losses .................. $ 213 100.0% $ 213 100.0%
===== ===== ===== =====
</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:
At or For the Year
Ended June 30.
--------------------------
1997 1996
----------- ---------
(Dollars in thousands)
Total loans outstanding (1)..................... $20,980 $16,727
====== ======
Average loans outstanding....................... $18,284 $15,755
====== ======
Allowance balances (at beginning of
year)........................................... $ 213 $213
Charge-offs..................................... -- --
Recoveries...................................... -- --
------- -------
Net charge-offs................................. -- --
Provision....................................... -- --
------- -------
Allowance balance (at end of year).............. $ 213 $ 213
====== ======
Allowance for loan losses as a percent
of total loans outstanding.................... 1.02% 1.27%
Net loans charged off as a percent of
average loans outstanding..................... --% --%
- --------------------------------
(1) Excludes allowance for loan losses.
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 and, through
repayments, as a source of liquidity.
At June 30, 1997, the Company's mortgage-backed and related securities
designated available-for- sale had a carrying value (and fair value) of $8.1
million, and an amortized cost of $8.1 million. At June 30, 1997, the Company's
mortgage-backed and related securities designated held-to-maturity had a
carrying value at amortized cost of $13.9 million and a fair value of $14.1
million.
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
13
<PAGE>
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, 1997,
had a carrying value at amortized cost of $59,000 and consisted of fixed-rate
notes issued by FHLMC. The fair value of the CMO portfolio was $62,000 at June
30, 1997. The portfolio of CMOs held within the Association's mortgage-backed
and related securities portfolio at June 30, 1997, did not include any residual
interests in CMOs. Further, at June 30, 1997, 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 short-term demand for funds to be used in the Association's loan
origination and other activities. The Company has also begun designating select
new investment securities as available-for-sale. At June 30, 1997, the Company's
investment securities designated available-for-sale had a carrying value (and
fair value) of $7.0 million. At June 30, 1997, amortized cost also totalled $7.0
million. At June 30, 1997, the Company's investment securities designated
held-to-maturity had a carrying value at amortized cost of $10.4 million and a
fair value of $10.4 million. The Company's investment securities consisted
primarily of U.S. Treasury securities and U.S. Government agency securities. To
a lesser extent, the portfolio includes municipal bonds and interest-bearing
deposits as permitted by regulation.
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.
14
<PAGE>
At June 30,
-------------------------
1997 1996
------------ --------
(In thousands)
Investment securities:
U.S. Treasury notes............................. $ 5,502 $7,654
U.S. Government agency bonds.................... 10,725 6,093
Municipal bonds................................. 1,150 1,542
---------- --------
Total investment securities................... 17,377 15,289
Interest-earning deposits in
other institutions.............................. 748 2,858
FHLB stock........................................ 334 334
Mortgage-backed and related
securities...................................... 22,023 15,805
--------- ------
Total investments........................... $ 40,482 $34,286
========= ======
Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields, and
contractual maturities of the Company's investment securities and
mortgage-backed and related securities portfolio at June 30, 1997.
<TABLE>
<CAPTION>
As of June 30, 1997
--------------------------------------------------------------------------------------------------------
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...... $ 1,700 5.75% $ 3,802 5.44% $ -- --% $ -- --%
U.S. Government
Agency bonds........... 1,000 6.28 2,744 6.56 6,981 7.32 -- --
Municipal bonds (1)...... 400 4.66 615 4.25 135 4.55 -- --
-------- ---- ------- ---- ------ ---- ------- ------
Total investment
securities........... 3,100 5.78 7,161 5.77 7,116 7.27 -- --
FHLB stock............... N/A N/A N/A N/A N/A N/A N/A N/A
Mortgage-backed and
related securities..... 561 5.83 5,816 6.55 13,979 6.98 1,667 8.08
------ ---- ------- ---- ------ ---- ----- ----
Total investment
portfolio(2)......... $ 3,661 5.79% $12,977 6.12% $21,095 7.08% $ 1,667 8.08%
====== ==== ====== ==== ====== ====== ====== ====
</TABLE>
- --------------------------------
(1) Tax exempt income was not significant and thus has not been
presented on a tax equivalent basis.
(2) 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.
15
<PAGE>
Deposits. 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.
At June 30, 1997, passbook and money market accounts constituted $8.1
million, or 17.75% of the Company's deposit portfolio and certificates of
deposit constituted $37.6 million or 82.25% of the deposit portfolio. The
Company had no brokered deposits at that date, however, a substantial portion of
the Association's deposits are funds from local government entities.
The Association has a $1.0 million line of credit with the FHLB which
was not drawn on at June 30, 1997. The Association has the ability to draw
additional borrowings of approximately $3,170,000, based upon its current
investment in FHLB stock and investment securities pledged.
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, 1997,
including term certificate accounts separated by time remaining until maturity.
Amount
(In thousands)
Term certificate accounts:
Maturity Period
- -----------------
Within three months.......................................... $ 2,182
Three through six months..................................... 5,594
Six through twelve months.................................... 3,986
Over twelve months........................................... 2,147
-------
Total...................................................... 13,909
Money market accounts.......................................... 3,983
-------
Total...................................................... $ 17,892
=======
Borrowings
Deposits are the primary source of funds for the Company's lending and
investment activities and for its general business purposes. The Association
obtains 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 investment securities. At June 30, 1997, the Association had
advances outstanding of $3.5 million. 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, 1997, the Company and the
Association had no borrowings from the Federal Reserve Board.
Personnel
The Company has no employees other than executive officers. As of June
30, 1997, the Association had 9 full-time and 2 part-time employees. None of the
Association's employees are represented by a collective bargaining group.
16
<PAGE>
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.
Regulation of the Company
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.
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,
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 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 may impose
special assessments of SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"),
predominantly commercial banks, were required to pay substantially lower, or
virtually no, federal deposit insurance premiums.
17
<PAGE>
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Association of
approximately .657% of deposits held on March 31, 1995. The Association recorded
a $237,000 pre-tax expense for this assessment for the year ended June 30, 1997,
recognized in the first fiscal quarter. Beginning January 1, 1997, deposit
insurance assessments for SAIF members were reduced to approximately .064% of
deposits on an annual basis; this rate may continue through the end of 1999.
During this same period, BIF members are expected to be assessed approximately
.013% of deposits. Thereafter, assessments for BIF and SAIF members should be
the same and the SAIF and BIF may be merged. It is expected that these
continuing assessments for both SAIF and BIF members will be used to repay
outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Association declined by approximately 70% from rates in effect prior to
September 30, 1996.
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, 1997.
Interest-Rate Risk (IRR). As a financial institution regulated by the
OTS, the Association is required to measure and monitor its sensitivity to
interest rate movements. OTS-regulated institutions meeting certain conditions
have the option of utilizing the OTS-established IRR measurement model, or
developing an in-house model. The Association has chosen to meet its IRR
sensitivity modeling requirements through use of the OTS's Net Present Value
(NPV) model. This model measures how the net present value of an institution's
assets, liabilities and off-balance-sheet items would change in the event of a
range of assumed changes in market interest rates. These computations estimate
the effect on NPV of a permanent and instantaneous change in market interest
rates of plus or minus 100, 200, 300, and 400 basis points (bps). The Board has
established acceptable ranges for the NPV changes across these various
scenarios.
The following table sets forth the interest-rate risk measures, as
calculated by the OTS's NPV model, for the Association at June 30, 1997 and
1996, given an instantaneous and permanent increase in market interest rates.
<TABLE>
<CAPTION>
June 30,
-------------------
1997 1996
------ -----
<S> <C> <C>
Risk Measures:
--------------
200 Basis point rate shock
Pre-shock NPV ratio: NPV as % of present value of assets 15.48% 21.94%
Exposure measure: Post-shock NPV ratio: 12.95% 20.39%
Sensitivity measure: Change in NPV ratio: (253) bps (155) bps
</TABLE>
Calculations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit run-off, and should not be relied
upon as indicative of actual results. Further, the calculations do not
contemplate any actions the Association may undertake in response to changes in
interest rates. Nevertheless, the Association's IRR sensitivity has increased
over the twelve months ended June 30, 1997, as a result of dividends paid from
the Association to the Company and increased loan production and investment
purchases funded by short- and intermediate-term deposits and FHLB advances.
18
<PAGE>
Savings associations with a greater than "normal" level of interest
rate exposure may, 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, 1997, 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. During the
year ended June 30, 1997, the Association declared and paid a $2.0 million
dividend to the Company.
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 20% 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. As of June 30, 1997, the Association was in compliance with its
QTL requirement with 74.50% of its assets invested in QTIs.
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.
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
19
<PAGE>
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, 1997, 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. In May 1997, the Association purchased two vacant lots in Redwood
Falls for possible future expansion.
(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"
and "Item 1. Business - Regulation of the Association."
(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, 1997.
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, 1997.
20
<PAGE>
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, 1997 (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(a) 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 proxy statement for the Annual Meeting of
Stockholders of the Company to be held October 30, 1997, (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.
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
21
<PAGE>
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 Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
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.
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 Company included in the Annual Report to
Stockholders of the Company for the fiscal year ending June 30, 1997, are
incorporated herein by reference.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of June 30, 1997 and
1996
Consolidated Statements of Earnings for the Years Ended June 30, 1997,
1996, and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended June 30,
1997, 1996, and 1995
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**
22
<PAGE>
10.3 Management Stock Bonus Plan**
10.4 1997 Directors Stock Option Plan
13 Annual Report to Stockholders for the fiscal year
ended June 30, 1997.
21 Subsidiaries of the Registrant***
23 Consent of KPMG Peat Marwick LLP
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).
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REDWOOD FINANCIAL, INC.
Dated: September 9, 1997 By: /s/ Paul W. Pryor
------------------
Paul W. Pryor
President, Chief Executive
Officer and Director
(Duly Authorized Representative)
In accordance with the Exchange Act, 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 9, 1997 Date: September 9, 1997
By: /s/ J. Scott Nelson By: /s/ Blaine C. Farnberg
------------------- ----------------------
J. Scott Nelson Blaine C. Farnberg
Vice Chairman of the Board Director
Date: September 9, 1997 Date: September 9, 1997
By: /s/ Thomas W. Stotesbery By: /s/ Donald C. Orth
------------------------ ------------------
Thomas W. Stotesbery Donald C. Orth
Director Vice President and Director
Date: September 9, 1997 Date: September 9, 1997
By: /s/ Anthony H. Acker
--------------------
Anthony H. Acker
Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: September 9, 1997
Exhibit 10.1
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, Redwood Falls Federal Savings and Loan Association (the
"Association") and Paul W. Pryor (the "Employee") previously entered into an
Employment Agreement (the "Agreement") dated February 15, 1995, and
WHEREAS, Section 14 of the Agreement provides that amendments to this
Agreement may be made in writing and signed by both parties,
NOW THEREFORE, BE IT RESOLVED that this Agreement be amended by
adoption and execution of this Amendment to the Agreement as follows.
1. Revision to Section 5 of the Agreement by inclusion of the following
phrase at the end of Section 5 as follows:
"Notwithstanding anything herein to the contrary, the expiration date
of the term of this Agreement shall be as of February 15, 2000, except
as may be extend beyond that date by future action of the Board within
its sole discretion in accordance with this Agreement."
2. Revision to Section 2 of the Agreement by inclusion of the following
phrase at the end of Section 2 as follows:
"Notwithstanding anything herein to the contrary, effective February
15, 1997, the annual salary of the Employee shall be increased to
$113,820.00, or as may be increased thereafter by the Board from time
to time."
As Secretary to the Association, I hereby certify that the foregoing
Amendment was adopted and ratified by a majority vote of a meeting of the Board
of Directors of the Association, held on February 13, 1997, a quorum being
present.
/s/Rebecca A. Olson
-----------------------------
Rebecca A. Olson, Secretary
SEAL
IN WITNESS WHEREOF, the parties to the Agreement dated February 13,
1997, do hereby execute this Amendment to the Agreement on this 13th day of
February, 1997
Redwood Falls Federal Savings
and Loan Association
By: /s/James P. Tersteeg
------------------------------
James P. Tersteeg
/s/Paul W. Pryor
------------------------------
Paul W. Pryor, Employee
ATTEST:
/s/Rebecca A. Olson
- ---------------------------
Rebecca A. Olson, Secretary
SEAL
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, Redwood Falls Federal Savings and Loan Association (the
"Association") and Donald C. Orth (the "Employee") previously entered into an
Employment Agreement (the "Agreement") dated February 15, 1995, and
WHEREAS, Section 14 of the Agreement provides that amendments to this
Agreement may be made in writing and signed by both parties,
NOW THEREFORE, BE IT RESOLVED that this Agreement be amended by
adoption and execution of this Amendment to the Agreement as follows.
1. Revision to Section 5 of the Agreement by inclusion of the following
phrase at the end of Section 5 as follows:
"Notwithstanding anything herein to the contrary, the expiration date
of the term of this Agreement shall be as of February 15, 2000, except
as may be extend beyond that date by future action of the Board within
its sole discretion in accordance with this Agreement."
2. Revision to Section 2 of the Agreement by inclusion of the following
phrase at the end of Section 2 as follows:
"Notwithstanding anything herein to the contrary, effective February
15, 1997, the annual salary of the Employee shall be increased to
$57,576.00, or as may be increased thereafter by the Board from time to
time."
As Secretary to the Association, I hereby certify that the foregoing
Amendment was adopted and ratified by a majority vote of a meeting of the Board
of Directors of the Association, held on February 13, 1997, a quorum being
present.
/s/Rebecca A. Olson
-----------------------------
Rebecca A. Olson, Secretary
SEAL
IN WITNESS WHEREOF, the parties to the Agreement dated February 13,
1997, do hereby execute this Amendment to the Agreement on this 13th day of
February, 1997
Redwood Falls Federal Savings
and Loan Association
By: /s/James P. Tersteeg
------------------------------
James P. Tersteeg
/s/Donald C. Orth
------------------------------
Donald C. Orth, Employee
ATTEST:
/s/Rebecca A. Olson
- ---------------------------
Rebecca A. Olson, Secretary
SEAL
EXHIBIT 10.4
<PAGE>
STOCK OPTION AGREEMENT
----------------------
FOR NON-INCENTIVE STOCK OPTIONS PURSUANT TO THE
REDWOOD FINANCIAL, INC.
1997 DIRECTORS STOCK OPTION PLAN
--------------------------------
STOCK OPTIONS for a total of 6,412 shares of Common Stock of Redwood
Financial, Inc. (the "Company") is hereby granted to ________________________
(the "Optionee") at the price determined as provided in, and in all respects
subject to the terms, definitions and provisions of the 1997 Directors Stock
Option Plan (the "Plan") adopted by the Company which is incorporated by
reference herein, receipt of which is hereby acknowledged. Such Stock Options do
not comply with Options granted under Section 422 of the Internal Revenue Code
of 1986, as amended.
1. Option Price. The Option price is $11.0625 for each Share, being
100% of the fair market value, in accordance with the Plan as determined by the
Committee, of the Common Stock on the date of grant of this Option (August 1,
1997) ("Date of Grant").
2. Exercise of Option.
(a) Exercisability. Such Options awarded herein shall be
immediately exercisable as of the Date of Grant in accordance with provisions of
the Plan. Such Options shall continue to be exerciseable for a period of ten
years from such Date of Grant without regard to the continued status as an
employee, director or director's emeritus.
(b) Method of Exercise. This Option shall be exercisable by a written
notice which shall:
(i) State the election to exercise the Option, the number of
Shares with respect to which it is being exercised, the person in whose
name the stock certificate or certificates for such Shares of Common
Stock is to be registered, his address and Social Security Number (or
if more than one, the names, addresses and Social Security Numbers of
such persons);
(ii) Contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock
as may be satisfactory to the Company's counsel;
(iii) Be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or
persons other than the Optionee, be accompanied by proof, satisfactory
to counsel for the Company, of the right of such person or persons to
exercise the Option; and
(iv) Be in writing and delivered in person or by certified
mail to the Treasurer of the Company.
Payment of the purchase price of any Shares with respect to which the
Option is being exercised shall be by certified or bank cashier's or teller's
check. The certificate or certificates for shares of Common Stock as to which
the Option shall be exercised shall be registered in the name of the person or
persons exercising the Option.
<PAGE>
(c) Restrictions on Exercise. This Option may not be exercised
if the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities or other law or valid regulation. As
a condition to the Optionee's exercise of this Option, the Company may require
the person exercising this Option to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
3. Non-transferability of Option. This Option may not be transferred in
any manner otherwise than by will or the laws of descent or distribution and may
be exercised during the lifetime of the Optionee only by the Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
4. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, as set forth below, and may be
exercised during such term only in accordance with the Plan and the terms of
this Option.
5. Related Matters. Notwithstanding anything herein to the contrary,
additional conditions or restrictions related to such Options may be contained
in the Plan or the resolutions of the Plan Committee authorizing such grant of
Options.
6. Dividend Equivalent Rights. The Stock Options represented by this
Agreement shall include the right of the Optionee to receive payment of dividend
equivalent rights. Such rights shall provide that upon the payment of a cash
dividend on the Common Stock, the holder of such Options shall receive payment
of cash in an amount equivalent to the cash dividend payable as if such Options
had been exercised and such Common Stock held as of the dividend record date.
Such rights shall expire upon the expiration or exercise of such underlying
Options. Such rights are non-transferable and shall attach to Options
represented by this Agreement whether or not such Options are immediately
exercisable.
2
EXHIBIT 13
<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. 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 public and uses such deposits
primarily to invest in residential lending on owner-occupied properties. The
Association also originates consumer and commercial real estate 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 1997:
First Quarter $ 10 8 3/4
Second Quarter 10 9 3/4
Third Quarter 11 3/8 10
Fourth Quarter 11 10 1/4
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 Quarter 9 1/4 9 1/4
The number of stockholders of record of common stock as of June 30, 1997, was
approximately 106. 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, 1997, there were 961,875 shares outstanding.
(Continued)
<PAGE>
3
REDWOOD FINANCIAL, INC.
The Company paid no dividends to holders of common stock during the fiscal year
ended June 30, 1997 or 1996.
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 Associations regulatory capital to be
reduced below (1) the amount required for the liquidation account
established in connection with the Associations 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
----------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating results:
Interest income $ 3,870 3,487 3,023 3,048 3,268
Interest expense 2,186 1,883 1,683 1,448 1,637
- -------------------------------------------------------------------------------------------------------
Net interest income 1,684 1,604 1,340 1,600 1,631
Provision for loan losses 0 0 0 1 15
Noninterest income 57 61 40 54 56
Noninterest expense 1,352 992 775 690 653
Income tax expense 137 211 245 426 407
- -------------------------------------------------------------------------------------------------------
Earnings before cumulative
effect of accounting change 252 462 360 537 612
Cumulative effect of
accounting change 0 0 0 (45) 0
- -------------------------------------------------------------------------------------------------------
Net earnings $ 252 462 360 492 612
=======================================================================================================
Net earnings per common share $ 0.26 0.45 N/A N/A N/A
=======================================================================================================
Balance sheet data:
Total assets $62,169 51,515 55,002 42,660 40,026
Investment securities held to maturity 10,396 15,289 16,431 17,213 13,434
Mortgage-backed and related
securities held to maturity 13,874 15,805 7,874 7,774 8,936
Investment securities available for sale 6,981 0 0 0 0
Mortgage-backed and related
securities available for sale 8,150 0 0 0 0
Loans receivable, net 20,767 16,514 15,255 15,091 15,620
Deposits 46,093 38,043 35,825 37,114 35,064
Stockholders equity 12,342 13,157 5,656 5,295 4,804
Financial ratios:
Return on average assets 0.46% 0.93% 0.74% 1.17% 1.49%
Return on average equity 1.96 3.42 6.58 9.73 13.65
Average equity to average assets 23.36 27.18 11.21 12.03 10.95
Net yield on average interest-
earning assets 3.11 3.27 3.18 3.87 4.05
</TABLE>
(Continued)
<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 public and investing these
funds primarily in investment securities and loans. The investment securities
consist of U.S. government treasury notes and agency securities, mortgage-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, agricultural loans,
construction loans, and consumer loans.
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, 1997, 1996, and 1995. 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.
(Continued)
<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.
Average Balance Sheet
The following table sets forth certain information relating to the Association's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average 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 average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
For the 12 months ended June 30
---------------------------------------
1997
-------------------------------------
Average
Average yield/
balance Interest (5) cost
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $18,283,543 $ 1,563,605 8.55%
Securities held to maturity:
Mortgage-backed and related securities 14,947,287 1,044,024 6.98
Investment securities 12,689,898 749,059 5.90
Securities available for sale:
Mortgage-backed and related securities 2,695,970 168,357 6.24
Investment securities 2,219,892 147,775 6.66
FHLB stock 333,500 23,522 7.05
Other interest-earning assets (4) 3,017,686 173,275 5.74
---------- ---------
Total interest-earning assets 54,187,776 3,869,617 7.14
---------- ---------
Noninterest-earning assets 610,413
----------
Total assets $54,798,189
===========
Interest-bearing liabilities:
Passbook savings accounts 987,693 25,130 2.54
Money market savings accounts 7,077,184 275,769 3.90
Certificates of deposit 32,394,479 1,846,365 5.70
FHLB advances 726,923 38,485 5.29
---------- ---------
Total interest-bearing liabilities 41,186,279 2,185,749 5.31
---------- ---------
Noninterest-bearing liabilities 785,044
-------
Total liabilities 41,971,323
Retained earnings 12,826,866
----------
Total liabilities and retained earnings $54,798,189
===========
Net interest income $ 1,683,868
===========
Net interest rate spread (2) 1.83%
====
Net yield on interest-earning assets (3) 3.11%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 131.57%
======
</TABLE>
<TABLE>
<CAPTION>
For the 12 months ended June 30
--------------------------------------
1996
-----------------------------------
Average
Average yield/
balance Interest (5) cost
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $15,754,753 $ 1,376,334 8.74%
Securities held to maturity:
Mortgage-backed and related securities 11,410,198 784,869 6.88
Investment securities 18,055,614 1,090,543 6.04
Securities available for sale:
Mortgage-backed and related securities 0 0 0.00
Investment securities 0 0 0.00
FHLB stock 330,792 23,765 7.18
Other interest-earning assets (4) 3,550,681 211,640 5.96
---------- ---------
Total interest-earning assets 49,102,038 3,487,151 7.10
---------- ---------
Noninterest-earning assets 698,754
----------
Total assets $49,800,792
===========
Interest-bearing liabilities:
Passbook savings accounts 1,394,964 33,968 2.44
Money market savings accounts 5,550,747 196,842 3.55
Certificates of deposit 28,561,491 1,652,027 5.78
FHLB advances 0 0 0.00
---------- ---------
Total interest-bearing liabilities 35,507,202 1,882,837 5.30
---------- ---------
Noninterest-bearing liabilities 758,718
-------
Total liabilities 36,265,920
Retained earnings 13,534,872
----------
Total liabilities and retained earnings $49,800,792
Net interest income =========== $ 1,604,314
===========
Net interest rate spread (2) 1.80%
====
Net yield on interest-earning assets (3) 3.27%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 138.29%
======
</TABLE>
<TABLE>
<CAPTION>
For the 12 months ended June 30
-------------------------------------
1995
------------------------------------
Average
Average yield/
balance Interest (5) cost
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $15,128,730 $ 1,300,846 8.60%
Securities held to maturity:
Mortgage-backed and related securities 7,847,474 573,656 7.31
Investment securities 16,746,430 1,017,232 6.07
Securities available for sale:
Mortgage-backed and related securities 0 0 0.00
Investment securities 0 0 0.00
FHLB stock 327,000 25,363 7.76
Other interest-earning assets (4) 2,084,790 105,947 5.08
---------- ---------
Total interest-earning assets 42,134,424 3,023,044 7.18
---------- ---------
Noninterest-earning assets 767,940
----------
Total assets $42,902,364
===========
Interest-bearing liabilities:
Passbook savings accounts 1,212,276 30,978 2.56
Money market savings accounts 6,469,209 214,906 3.32
Certificates of deposit 28,544,639 1,437,363 5.04
FHLB advances 0 0 0.00
---------- ---------
Total interest-bearing liabilities 36,226,124 1,683,247 4.65
---------- ---------
Noninterest-bearing liabilities 1,164,783
---------
Total liabilities 37,390,907
Retained earnings 5,511,457
---------
Total liabilities and retained earnings $42,902,364
Net interest income =========== $ 1,339,797
===========
Net interest rate spread (2) 2.53%
====
Net yield on interest-earning assets (3) 3.18%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.31%
======
</TABLE>
(1) Average balances include nonaccrual loans.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Includes interest-bearing deposits in other financial institutions.
(5) Tax-exempt income was not significant and thus has not been presented on a
tax equivalent basis. Tax exempt income of $67,546, $60,213, and $10,380
was recognized during the years ended June 30, 1997, 1996, and 1995,
respectively.
(Continued)
<PAGE>
7
REDWOOD FINANCIAL, INC.
Rate/Volume Analysis
<TABLE>
<CAPTION>
Twelve months ended June 30, Twelve months ended June 30,
-------------------------------------------- ----------------------------------------
1997 versus 1996 1996 versus 1995
increase/(decrease) due to changes in increase/(decrease) due to changes in
-------------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate volume Total Volume Rate volume Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 220,915 (28,990) (4,654) 187,271 54,714 22,057 (1,283) 75,488
Securities held to maturity:
Mortgage-backed and related
securities 243,304 12,100 3,751 259,155 260,438 (33,855) (15,370) 211,213
Investment securities (324,085) (24,756) 7,358 (341,483) 78,944 (7,222) 1,589 73,311
Securities available for sale:
Mortgage-backed and related
securities 168,357 0 0 168,357 0 0 0 0
Investment securities 147,775 0 0 147,775 0 0 0 0
FHLB stock 195 (434) (5) (244) 294 (1,870) (22) (1,598)
Other interest-earning assets (31,769) (7,761) 1,165 (38,365) 74,495 18,318 12,880 105,693
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest
earning assets 424,692 (49,841) 7,615 382,466 468,885 (2,572) (2,206) 464,107
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Passbook savings accounts (9,917) 1,524 (445) (8,838) 4,668 (1,458) (220) 2,990
Money market savings accounts 54,131 19,448 5,348 78,927 (30,511) 14,507 (2,060) (18,064)
Certificates of deposit 221,704 (24,128) (3,238) 194,338 849 213,689 126 214,664
FHLB advances 38,485 0 0 38,485 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest
bearing liabilities 304,403 (3,156) 1,665 302,912 (24,994) 226,738 (2,154) 199,590
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in interest income $ 120,289 (46,685) 5,950 79,554 493,879 (229,310) (52) 264,517
====================================================================================================================================
</TABLE>
(Continued)
<PAGE>
8
REDWOOD FINANCIAL, INC.
Comparison of Operating Results for the Years Ended June 30, 1997 and 1996
In recent years, significant new federal legislation has imposed numerous new
legal and regulatory requirements on financial institutions. In addition to the
uncertainties posed by possible legislative change, there are many other
uncertainties that may make the Company's historical performance an unreliable
indicator of its future performance, and forward-looking information, including
projections of future performance, is subject to numerous possible adverse
developments, including but not limited to the possibility of adverse economic
developments which may increase default and delinquency risks in the Company's
loan portfolios; shifts in interest rates which may result in shrinking interest
margins; deposit outflows; interest rates on competing investments; demand for
financial services and loan products; increases generally in competitive
pressure in the banking and financial services industry; changes in accounting
policies or guidelines, or monetary and fiscal policies of the federal
government; changes in the quality or composition of the Company's loan and
investment portfolios; or other significant uncertainties.
Net Earnings
Net earnings were $252,000 for the year ended June 30, 1997, as compared to
$462,000 for the year ended June 30, 1996. This represented a decrease of
$210,000, or 45.45%. The decrease was primarily attributable to a pre-tax
$237,000 one-time assessment by the Federal Deposit Insurance Corporation to
recapitalize the Savings Association Insurance Fund (SAIF). The decrease was
also affected by various expenses incurred with the Company's unsuccessful
acquisition attempt of a financial institution. The decrease was partially
offset by an $80,000, or 4.99% increase in net interest income and a $74,000, or
35.07% decrease in income tax expense.
Net Interest Income
Net interest income increased by $80,000, or 4.99% from $1,604,000 for the year
ended June 30, 1996 to $1,684,000 for the year ended June 30, 1997. The increase
is primarily due to increased deposits and funds from advances invested in
loans, investment securities, and mortgage-backed and related securities. The
increase was also attributable to a modest improvement in the Company's overall
net interest spread. The increase was partially offset by a decrease in the
Company's interest-earning assets relative to its interest-bearing liabilities.
Average interest-earning assets increased by $5,086,000, or 10.36% from
$49,102,000 for the year ended June 30, 1996, to $54,188,000 for the year ended
June 30, 1997. Average interest-bearing liabilities increased by $5,679,000, or
15.99% from $35,507,000 for the year ended June 30, 1996, to $41,186,000 for the
year ended June 30, 1997. While the Company's asset base increased in the year
ended June 30, 1997, the level of average-interest-earning assets to average
interest-bearing liabilities decreased from 138.29% for the year ended June 30,
1996 to 131.57% for the year ended June 30, 1997. This decrease is attributed to
the Company's common stock repurchases during the 1997 fiscal year. Funds used
to repurchase stock totaled $1,227,000. The increase in net interest income was
also affected by an increase in the Company's net interest spread from 1.80% for
the year ended June 30, 1996, to 1.83% for the year ended June 30, 1997.
(Continued)
<PAGE>
9
REDWOOD FINANCIAL, INC.
Interest Income
Interest income increased by $383,000, or 10.98% from $3,487,000 for the year
ended June 30, 1996 to $3,870,000 for the year ended June 30, 1997. The increase
in interest income is primarily a result of the aforementioned increase in the
Company's average interest earning assets. The increase was also attributable to
a slight increase in the yield on average interest earning assets, from 7.10%
for the year ended June 30, 1996 to 7.14% for the year ended June 30, 1997.
Interest on loans receivable increased by $188,000, or 13.66% from $1,376,000
for the year ended June 30, 1996 to $1,564,000 for the year ended June 30, 1997.
The increase is a result of a $2,529,000, or 16.05% increase in the average
balance of loans from $15,755,000 to $18,284,000 for the years ended June 30,
1996 and 1997, respectively. The increase was partially offset by a decrease in
the average yield on loans from 8.74% for the year ended June 30, 1996, to 8.55%
for the year ended June 30, 1997.
Interest on mortgage-backed and related securities increased by $427,000, or
54.39%, from $785,000 for the year ended June 30, 1996 to $1,212,000 for the
year ended June 30, 1997. The increase was due to a $6,233,000, or 54.63%
increase in the average balance of mortgage-backed and related securities from
$11,410,000 for the year ended June 30, 1996 to $17,463,000 for the year ended
June 30, 1997. The yield on the Company's mortgage-backed and related securities
was nearly unchanged. The yield was 6.88% for the year ended June 30, 1996 as
compared to 6.87% for the year ended June 30, 1997. Since January 1997, the
Company has designated its mortgage-backed and related securities purchases as
available for sale.
Interest on investment securities, including FHLB stock decreased by $194,000,
or 17.41%, from $1,114,000 for the year ended June 30, 1996 to $920,000 for the
year ended June 30, 1997. The decrease was due to a $3,146,000, or 17.42%
decrease in the average balance of investment securities from $18,056,000 for
the year ended June 30, 1996 to $14,910,000 for the year ended June 30, 1997.
The decrease in investment securities is a result of the Company's decision to
reallocate funds from investment security maturities into loans and
mortgage-backed and related securities. The yield on the Company's investment
securities, 6.04% for the year ended June 30, 1996 as compared to 6.02% for the
year ended June 30, 1997, was nearly unchanged. Since January 1997, the Company
has designated all investment security purchases as available for sale.
Interest Expense
Interest expense increased by $303,000, or 16.09% from $1,883,000 for the year
ended June 30, 1996 to $2,186,000 for the year ended June 30, 1997. The increase
was a result of the increase in the average balance of interest-bearing
liabilities. The increase was minimally affected by a slight increase in the
cost of average interest-bearing liabilities from 5.30% to 5.31% for the years
ended June 30, 1996 and 1997, respectively.
Interest on deposits increased by $264,000 or 14.02% from $1,883,000 for the
year ended June 30, 1996, to $2,147,000 for the year ended June 30, 1997. The
increase was due to a $4,952,000, or 13.95% increase in the average balance of
deposits. There was no material change in the cost of the Company's deposits in
comparison of the two years.
Interest on FHLB advances totaled $38,000. At June 30, 1997, the Company had
FHLB advances totaling $3,500,000. There were no advances or other borrowings at
June 30, 1996. The Company utilizes FHLB advances as an alternative source of
loan and investment funding.
(Continued)
<PAGE>
10
REDWOOD FINANCIAL, INC.
Provision for Loan Losses
The Company's provision for loan losses was $0 for the year ended June 30, 1997.
Due to lack of substantive problem loans during the period and stable real
estate values 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 June 30, 1997 and 1996. The
Company's net loan charge-offs were $0 and $0 for the years ended June 30, 1997
and 1996, respectively. At June 30, 1997 and 1996, the allowance for loan losses
represented 1.02% and 1.27%, respectively, of loans receivable. Nonaccrual loans
totaled $14,000 and $89,000 at June 30, 1997 and 1996, respectively.
Noninterest Income
Noninterest income decreased by $5,000, or 8.20% from $61,000 for the year ended
June 30, 1996 to $56,000 for the year ended June 30, 1997. The decrease was
primarily due to $12,000 in gains resulting from the disposition of various
assets in the year ended June 30, 1996. The decrease was partially offset by a
$9,000 increase in fee and service charge income for the year ended June 30,
1997. In addition, the decrease was also affected by a $3,000 gain on the sale
of investments available for sale in 1997.
Noninterest Expense
Noninterest expense increased by $360,000, or 36.29% from $992,000 for the year
ended June 30, 1996, to $1,352,000 for the year ended June 30, 1997. The
increase in noninterest expense was primarily due to the aforementioned $237,000
one-time deposit insurance fund assessment and the $102,000 in expenses,
primarily professional fees, as a result of the Company's unsuccessful
acquisition attempt. The increase was also due to a $64,000, or 9.86% increase
in compensation costs from $649,000 for the year ended June 30, 1996 to $713,000
for the year ended June 30, 1997. The increase in compensation costs was due
primarily to increased staffing. The increase in noninterest expense was
partially offset by a $29,000, or 35.80% decrease in federal deposit insurance
premiums from $81,000 to $52,000 for the years ended June 30, 1996 and 1997,
respectively. As a result of the one-time $237,000 deposit insurance fund
assessment, the Association currently pays substantially lower federal deposit
insurance premiums. Excluding the $102,000 aforementioned professional fees
incurred with the unsuccessful acquisition, professional fees declined by
$33,000 in comparison of the two years.
Income Taxes
The Company's income tax expense decreased by $74,000, or 35.07% from $211,000
for the year ended June 30, 1996, to $137,000 for the year ended June 30, 1997.
The decrease was a result of decreased earnings before taxes. For the years
ended June 30, 1996 and 1997, earnings before taxes totaled $673,000 and
$388,000, respectively.
Financial Condition
The Company's total assets decreased by $3,487,000 or 6.34%, from $55,002,000 at
June 30, 1995 to $51,515,000 at June 30, 1996, and increased by $10,654,000, or
20.68% to $62,169,000 at June 30, 1997. Changes in the Company's level of assets
from June 30, 1995 to 1996 reflect a decrease in funds held for stock
subscriptions. For the year ended June 30, 1997, this increase is a result of
increased deposit growth and use of FHLB advances to fund increased loan
production and purchases of investment securities, including mortgage-backed
securities.
(Continued)
<PAGE>
11
REDWOOD FINANCIAL, INC.
The Company's loans receivable, net, increased by $1,259,000, or 8.25% from
$15,255,000 at June 30, 1995 to $16,514,000 at June 30, 1996, and increased by
$4,253,000, or 25.75% to $20,767,000 at June 30, 1997. For the year ended June
30, 1997, this increase primarily reflects increased residential mortgage
lending. The increased loan portfolio will result in increased credit risk
exposure. The increased loan portfolio was funded through short and intermediate
term deposits and FHLB advances, which may result in an increase in the
Company's interest-rate risk exposure.
The Company's securities, which include investment securities and
mortgage-backed and related securities, increased by $6,789,000, or 27.93%, from
$24,305,000 at June 30, 1995 to $31,094,000 at June 30, 1996, and increased by
$8,306,000 or 26.71%, to $39,400,000 at June 30, 1997. The increase in the
Company's level of securities during the year ended June 30, 1996 reflects
increased cash flows resulting from deposits and investment of a portion of the
proceeds from the stock conversion. The increase in the Company's level of
securities during the year ended June 30, 1997 reflects increased cash flows
from deposits and FHLB advances. Commencing in January 1997, the Company has
chosen to designate select new investments as available for sale. The Company
had previously designated all securities held to maturity. At June 30, 1997,
securities designated as available for sale totaled $15,131,000.
Cash and cash equivalents decreased by $11,220,000, or 79.61%, from $14,093,000
at June 30, 1995 to $2,873,000 at June 30, 1996, and then decreased $2,109,000,
or 73.41%, to $764,000 at June 30, 1997. For the years ended June 30, 1995 to
1996, the Company's cash and cash equivalents fluctuated primarily as a result
of funds held at June 30, 1995 for stock subscriptions. For the year ended June
30, 1997, the Company's cash and cash equivalents fluctuated depending upon
changes in deposits, maturity and purchases of securities, loan originations and
principal and interest payments on loans and mortgage-backed and related
securities.
The Company's deposits increased by $2,218,000, or 6.19%, from $35,825,000 at
June 30, 1995 to $38,043,000 at June 30, 1996, and increased by $8,050,000, or
21.16% to $46,093,000 at June 30, 1997. The increase in deposits is primarily a
result of increased public deposits in each year.
FHLB advances totaled $0, $0, and $3,500,000 at June 30, 1995, 1996, and 1997,
respectively. During the year ended June 30, 1997, the Company utilized FHLB
advances to fund increased loan growth and purchases of investment securities
and mortgage-backed and related securities.
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.
The increase was due primarily to the $8,549,000 in net proceeds from the sale
of the Company's common stock, and the Company's net earnings of $462,000 for
the year ended June 30, 1996. The increase was partially offset by $541,000 in
proceeds used to repurchase the Company's common stock and $596,000 and $393,000
as a result of unearned employee stock ownership plan shares and unearned
management stock bonus plan shares at June 30, 1996, respectively.
(Continued)
<PAGE>
12
REDWOOD FINANCIAL, INC.
Stockholders' equity decreased during the year ended June 30, 1997 by $815,000,
or 6.19%, from $13,157,000 at June 30, 1996 to $12,342,000 at June 30, 1997. The
decrease was due primarily to the repurchase of 106,875 shares of the Company's
common stock. As a result, the Company's treasury stock increased by $1,227,000,
or 226.80% from $541,000 at June 30, 1996, to $1,768,000 at June 30, 1997. The
decrease in stockholder's equity was also affected by a $3,000 adjustment due to
valuation of the Company's available for sale securities. The decrease in
stockholder's equity was partially offset by net earnings for the year ended
June 30, 1997 of $252,000, an $86,000 decrease in unearned management stock
bonus plan shares, and a $66,000 decrease in unearned employee stock ownership
plan shares from June 30, 1996 to June 30, 1997.
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, and
an $218,000 or 28.17% increase in noninterest expense. The effects of these
items were offset, in part, by 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.
(Continued)
<PAGE>
13
REDWOOD FINANCIAL, INC.
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.
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.
(Continued)
<PAGE>
14
REDWOOD FINANCIAL, INC.
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.
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.
(Continued)
<PAGE>
15
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 modified in a troubled debt restructuring.
1997 1996
- --------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis:
Mortgage loans:
Loan secured by 1-4 dwelling units $ 0 89,153
All other mortgage loans 0 0
Nonmortgage loans 0 0
- --------------------------------------------------------------------------------
Total $ 0 89,153
================================================================================
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Loans secured by 1-4 dwelling units 120,902 45,352
All other mortgage loans 0 0
0 0
- -------------------------------------------------------------------------------
Total $ 120,902 45,352
===============================================================================
Total nonaccrual and accrual loans $ 120,902 134,505
===============================================================================
Real estate $ 13,520 0
===============================================================================
Other nonperforming assets $ 0 0
===============================================================================
Total nonperforming assets $ 134,422 134,505
===============================================================================
Total nonaccrual and accrual loans to net loans 0.58% 0.81%
===============================================================================
Total nonaccrual and accrual loans to total assets 0.19% 0.26%
===============================================================================
Total nonperforming assets to total assets 0.22% 0.26%
===============================================================================
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, 1997 and 1996 was $296 and $2,946, respectively.
(Continued)
<PAGE>
16
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
---------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Allowance (at beginning of year) $ 213,034 213,034 213,034
Charge-offs 0 0 0
Recoveries 0 0 0
- -------------------------------------------------------------------------------
Net charge-offs 0 0 0
Provision 0 0 0
- -------------------------------------------------------------------------------
Allowance (at end of year) $ 213,034 213,034 213,034
===============================================================================
Allowance for loan losses as a
percent of total loans outstanding 1.02% 1.27% 1.38%
Net loans charged off as a percent
of average loans outstanding 0.00 0.00 0.00
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. A substantial portion of the Company's deposits
are funds from local government entities.
The primary investing activities of the Company are the origination of loans and
the purchase of investment and mortgage-backed and related securities. During
the twelve months ended June 30, 1997 and 1996, the Company purchased investment
and mortgage-backed and related securities in the amounts of $16,233,355 and
$12,824,899, respectively. 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 additional advances from the Federal Home
Loan Bank of Des Moines. In addition, the Company's designation of selected new
investments as available for sale is intended to increase liquidity and overall
operational flexibility.
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%.
(Continued)
<PAGE>
17
REDWOOD FINANCIAL, INC.
The Company's most liquid assets are cash and cash equivalents. In addition, the
Company maintains a portfolio of readily marketable investment securities,
including mortgage-backed and related securities which are designated available
for sale. If necessary, these investment securities may be sold to increase
cash; however, the disposition of such may result in the recognition of a gain
or loss. The levels of cash and investment securities, including mortgage-backed
and related securities, are dependent on the Company's operating, financing, and
investing activities during any given period. At June 30, 1997 and 1996, cash
and cash equivalents totaled $764,000 and $2,873,000, respectively. Investment
securities, including mortgage-backed and related securities designated
available for sale totaled $15,131,000 and $0 at June 30, 1997 and 1996,
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, 1997, 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
(1) Automated Data Processing System
During the quarter ended June 30, 1997, the Association began
implementation of a conversion from its present manual data processing
system to an automated in-house data processing system. The lack of
such an automated data processing system had been previously disclosed
in the Company's initial prospectus. The Association intends to utilize
the automated data processing system for enhancing revenues through the
development of new loan and deposit products. The Association expects
to complete its conversion to the automated in-house data processing
system in October 1997. It is expected that the automated in-house data
processing system will cost approximately $9,000 per quarter.
(2) Elimination of the Thrift Charter
Recent legislation now in debate in Congress could lead to the
elimination of the thrift charter, and the resulting conversation of
all thrifts to state or national banks. Other elements of the proposed
legislation would also combine the deposit insurance fund of the
commercial banking industry with that insuring the thrift industry. It
is unknown how this proposed legislation would affect the Association
or the Company at this time.
(Continued)
<PAGE>
REDWOOD FINANCIAL, INC.
Consolidated Financial Statements
June 30, 1997, 1996, and 1995
<PAGE>
18
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997 in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
August 8, 1997
<PAGE>
19
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 15,314 15,345
Interest bearing deposits with banks 748,478 2,857,818
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 763,792 2,873,163
Securities available for sale:
Mortgage-backed and related securities (amortized cost $8,143,694 8,149,752 0
and $0, respectively)
Investment securities (amortized cost $6,992,534 and $0, respectively) 6,981,250 0
- --------------------------------------------------------------------------------------------------------------
Total securities available for sale 15,131,002 0
Securities held to maturity:
Mortgage-backed and related securities (market value
$14,082,280 and $15,772,242, respectively) 13,873,801 15,805,305
Investment securities (market value $10,399,446
and $15,192,588, respectively 10,395,659 15,288,913
- --------------------------------------------------------------------------------------------------------------
Total securities held to maturity 24,269,460 31,094,218
Loans receivable, net 20,766,539 16,513,727
Federal Home Loan Bank stock, at cost 333,500 333,500
Accrued interest receivable 613,357 553,856
Premises and equipment, net 212,067 52,187
Real estate, net 13,520 0
Other assets 65,679 93,992
- --------------------------------------------------------------------------------------------------------------
Total assets $ 62,168,916 51,514,643
==============================================================================================================
Liabilities and Stockholders Equity
- --------------------------------------------------------------------------------------------------------------
Deposits 46,093,213 38,042,529
Federal Home Loan Bank advances 3,500,000 0
Advance payments by borrowers for taxes and insurance 69,744 55,686
Accrued expenses and other liabilities 163,926 259,392
- --------------------------------------------------------------------------------------------------------------
Total liabilities 49,826,883 38,357,607
- --------------------------------------------------------------------------------------------------------------
Common stock ($.10 par value). Authorized and issued 1,125,000 shares;
outstanding 961,875 shares at June 30, 1997; 1,068,750 at June 30, 1996 112,500 112,500
Additional paid-in capital 8,467,833 8,457,017
Retained earnings, subject to certain restrictions 6,369,591 6,118,091
Net unrealized loss on securities available for sale (3,135) 0
Unearned employee stock ownership plan shares (529,504) (595,744)
Unearned management stock bonus plan shares (306,797) (393,422)
Treasury stock, at cost, 163,125 shares at June 30, 1997;
56,250 at June 30, 1996 (1,768,455) (541,406)
- --------------------------------------------------------------------------------------------------------------
Total stockholders equity 12,342,033 13,157,036
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders equity $ 62,168,916 51,514,643
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
20
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $1,563,605 1,376,334 1,300,846
Securities held to maturity:
Mortgage-backed and related securities 1,044,024 784,869 573,656
Investment securities 772,581 1,114,308 1,042,595
Securities available for sale:
Mortgage-backed and related securities 168,357 0 0
Investment securities 147,775 0 0
Cash equivalents 173,275 211,640 105,947
- ----------------------------------------------------------------------------------------------------------
Total interest income 3,869,617 3,487,151 3,023,044
Interest expense on Federal Home Loan Bank advances 38,485 0 0
Interest expense on deposits 2,147,264 1,882,837 1,683,247
- ----------------------------------------------------------------------------------------------------------
2,185,749 1,882,837 1,683,247
- ----------------------------------------------------------------------------------------------------------
Net interest income 1,683,868 1,604,314 1,339,797
- ----------------------------------------------------------------------------------------------------------
Provision for losses on loans 0 0 0
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 1,683,868 1,604,314 1,339,797
- ----------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sale of securities available for sale 2,863 0 0
Fees and service charges 45,231 36,197 18,947
Other 8,384 24,314 20,656
- ----------------------------------------------------------------------------------------------------------
Total noninterest income 56,478 60,511 39,603
- ----------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 713,001 648,859 511,502
Advertising 19,210 16,411 16,525
Occupancy 31,746 28,181 27,976
Federal deposit insurance premiums 51,851 80,769 84,370
Professional fees 195,493 126,781 34,054
Deposit insurance fund assessment 237,085 0 0
Other 103,792 90,880 99,948
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense 1,352,178 991,881 774,375
- ----------------------------------------------------------------------------------------------------------
Earnings before income taxes 388,168 672,944 605,025
Income tax expense 136,668 210,512 244,720
- ----------------------------------------------------------------------------------------------------------
Net earnings $ 251,500 462,432 360,305
==========================================================================================================
Net earnings per common share $ 0.26 0.45 N/A
Weighted average number of shares outstanding 962,193 1,018,267 N/A
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
21
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Net Unearned
unrealized Employee Unearned
loss on Stock management
Additional securities Ownership stock Total
Common paid-in Retained available Plan bonus Treasury stockholders
stock capital earnings for sale Shares plan shares stock equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance on June 30, 1994 $ 0 0 5,295,354 0 0 0 0 5,295,354
0
Net earnings 0 0 360,305 0 0 0 360,305
- ------------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1995 0 0 5,655,659 0 0 0 0 5,655,659
Net earnings 0 0 462,432 0 0 0 0 462,432
Sale of common stock 112,500 8,436,861 0 0 0 0 0 8,549,361
Adoption of employee
stock ownership
plan 0 0 0 0 (661,984) 0 0 (661,984)
Earned employee stock
ownership plan
shares, net 0 10,781 0 0 66,240 0 0 77,021
Repurchase of common
stock 0 0 0 0 0 0 (965,156) (965,156)
Adoption of management
stock bonus plan 0 9,375 0 0 0 (433,125) 423,750 0
Earned management stock
bonus plan
shares 0 0 0 0 0 39,703 0 39,703
- ------------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1996 112,500 8,457,017 6,118,091 0 (595,744) (393,422) (541,406) 13,157,036
Net earnings 0 0 251,500 0 0 0 0 251,500
Repurchase of common
stock 0 0 0 0 0 0 (1,227,049) (1,227,049)
Net unrealized loss on
securities
available
for sale, net 0 0 0 (3,135) 0 0 0 (3,135)
Earned employee stock
ownership plan
shares, net 0 10,816 0 0 66,240 0 0 77,056
Earned management stock
bonus plan shares 0 0 0 0 0 86,625 0 86,625
- ------------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1997 $112,500 8,467,833 6,369,591 (3,135) (529,504) (306,797) (1,768,455) 12,342,033
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
22
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net earnings $ 251,500 462,432 360,305
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 16,742 16,992 17,354
Amortization of premiums and discounts, net (36,232) (40,057) (34,683)
(Increase) decrease in other assets 28,313 15,440 (28,655)
(Increase) decrease in accrued interest receivable (59,501) (144,272) 40,345
Increase (decrease) in accrued interest payable 221,379 (50,453) 69,452
Gain on sale of securities available for sale (2,863) 0 0
Amortization of unearned ESOP shares 66,240 66,240 0
Earned ESOP shares priced above original cost 10,816 10,781 0
Earned Management Stock Bonus Plan shares 86,625 39,703 0
Change in deferred income taxes (56,854) 45,726 57,281
(Decrease) increase in accrued expenses and other liabilities .. (36,522) (34,617) 78,542
Federal Home Loan Bank stock dividend 0 (6,500) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 489,643 381,415 559,941
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of investment securities held to maturity 4,895,000 4,000,200 1,200,000
Purchases of investment securities held to maturity 0 (2,860,069) (430,000)
Purchases of mortgage-backed and related securities held
to maturity 0 (9,964,830) (1,510,000)
Principal collected on mortgage-backed and related securities held
to maturity 1,927,523 2,075,679 1,456,544
Purchases of investment securities available for sale (7,988,700) 0 0
Proceeds from sales of investment securities available for sale 999,376 0 0
Purchases of mortgage-backed and related securities available for sale (8,244,655) 0 0
Principal collected on mortgage-backed and related securities available
for sale 135,675 0 0
Increase in loans receivable, net (4,262,925) (1,350,152) (164,075)
Purchases of premises and equipment (176,622) (5,268) (14,855)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (12,715,328) (8,104,440) 537,614
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities:
(Decrease) increase in funds held for stock subscriptions 0 (13,127,630) 13,127,630
(Decrease) increase in deferred stock conversion costs 0 439,015 (439,015)
Increase (decrease) in deposits, net 7,829,305 2,267,713 (1,358,372)
Increase in advance payments by borrowers for taxes and insurance 14,058 2,204 6,513
Proceeds from sale of common stock 0 8,549,361 0
Adoption of ESOP 0 (661,984) 0
Proceeds from Federal Home Loan Bank advances 5,500,000 0 0
Repayment of Federal Home Loan Bank advances (2,000,000) 0 0
Repurchase of common stock (1,227,049) (965,156) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities 10,116,314 (3,496,477) 11,336,756
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (2,109,371) (11,219,502) 12,434,311
Cash and cash equivalents, beginning of year 2,873,163 14,092,665 1,658,354
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 763,792 2,873,163 14,092,665
====================================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,964,370 1,933,290 1,613,795
Income taxes 272,505 175,101 224,979
Supplemental noncash flow disclosures:
Transfer of loans to real estate $ 13,520 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
<PAGE>
23
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1997
(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 18).
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 statement of earnings included herein for the year
ended June 30, 1995 is 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
Theaccompanying consolidated financial statements include the
accounts of the Company and the 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>
24
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.
Reclassifications
Certain amounts in the consolidated financial statements for
prior years have been reclassified to conform with the
current year presentation.
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.
There was no impact of adoption on the Association's
financial statements as the Association's entire
portfolio of securities was classified as held to maturity
upon adoption.
Trading securities are bought and held principally for the
purpose of selling them in the near term. The Company had no
securities classified as trading for the years ended June
30, 1997, 1996 and 1995.
Securities available for sale are carried at market value. Net
unrealized gains and losses, net of tax effect, are included
as a separate component of stockholders' equity.
Securities held to maturity are carried at amortized cost, as
management has the ability and positive intent to hold them
to maturity.
Discounts and premiums on securities are amortized to income
using the level yield method over the estimated life of the
security. Gains and losses on the sale of securities, are
determined using the specific identification method.
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.
(Continued)
<PAGE>
25
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest income is recognized on an accrual basis except when
collectibility is in doubt as determined on a loan by loan
basis. 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.
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, agriculture, 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 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 using the
effective interest method 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 fair 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 value less selling costs.
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>
26
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of
Effective July 1, 1996, the Company adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. The Company reviews
long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The effect of adopting SFAS No. 121 on July 1,
1996 did not have a material impact on the Company's
financial condition or the results of its operations.
Income Taxes
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. 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.
Stock-Based Compensation
Effective July 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. It elected to
continue using the accounting methods prescribed by
Accounting Principles Board (APB) Opinion No. 25 and related
interpretations which measure compensation cost using the
intrinsic value method. The Company has included in note 12,
Employee Benefits the impact of the fair value of employee
stock-based compensation plans on net income and earnings
per share on a pro forma basis for awards granted after July
1, 1995.
New Accounting Standards
Effective July 1, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 125,
Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, not deferred by
SFAS No. 127, Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125. The adoption of SFAS
No. 125 did not impact the Company's financial condition or
results of operations.
(Continued)
<PAGE>
27
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, Earnings per Share. SFAS No. 128
establishes standards for computing and presenting earnings
per share (EPS) and applies to entities with publicly held
common stock or potential common stock. SFAS No. 128
supersedes the standards for computing EPS previously found
in Accounting Principles Board (APB) Opinion No. 15,
Earnings per Share. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15,
1997, including interim periods; earlier application is
not permitted. SFAS No. 128 requires restatement of all
prior-period EPS data presented. Management is currently
determining what effect SFAS No. 128 will have on the
Company's results of operations.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, which codifies
existing disclosure requirements regarding capital
structure. SFAS No. 129 is not expected to have a
significant impact on the Company's current capital
structure disclosures.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for
reporting and display of comprehensive income and its
components in a full set of general-purpose financial
statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Management is currently
determining what effect adoption of this statement will have
on the reporting of its financial information.
(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. Under
this method unallocated employee stock ownership plan shares are
not considered outstanding for purposes of calculating earnings
per share.
Earnings per share amounts for the year ended June 30, 1995 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 and 962,193 shares as the weighted average number of shares
outstanding for the years ended June 30, 1996 and 1997,
respectively.
(Continued)
<PAGE>
28
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(4) Securities Held to Maturity
Securities held to maturity at June 30, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses market value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government agency
bonds $ 3,743,759 34,800 (4,388) 3,774,171
U.S. Treasury notes 5,502,262 4,234 (28,441) 5,478,055
Municipal bonds 1,149,638 2,353 (4,771) 1,147,220
-------------------------------------------------------------------------------------------------------
Total investment securities $ 10,395,659 41,387 (37,600) 10,399,446
=========================================================================================================
Mortgage-backed and
related securities:
GNMA certificates 205,122 94,839 0 299,961
FHLMC certificates 9,358,524 121,853 (16,893) 9,463,484
FHLMC collateralized
mortgage obliga-
tions 58,548 3,297 0 61,845
FNMA certificates 4,251,607 12,100 (6,717) 4,256,990
-------------------------------------------------------------------------------------------------------
Total mortgage-backed and
related securities $ 13,873,801 232,089 (23,610) 14,082,280
=========================================================================================================
</TABLE>
(Continued)
<PAGE>
29
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses market value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government agency
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>
There were no sales of securities held to maturity for the years ended
June 30, 1997, 1996, or 1995.
Accrued interest receivable on securities held to maturity aggregated
$270,226 and $452,492 at June 30, 1997 and 1996, respectively.
The carrying amount and approximate market value of investment
securities and mortgage-backed and related securities held to
maturity at June 30, 1997 and 1996, by contractual maturity, are
shown below:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------------- ----------------------------------
Carrying Approximate Carrying Approximate
amount market value amount market value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one
year $ 3,661,102 3,665,190 4,308,546 4,327,575
Due after one
year through
five years 12,976,574 12,989,956 18,296,351 18,067,792
Due after five
years through
ten years 5,964,539 6,068,667 6,527,826 6,531,162
Due after ten
years 1,667,245 1,757,913 1,961,495 2,038,301
- -----------------------------------------------------------------------------------------
$ 24,269,460 24,481,726 31,094,218 30,964,830
=========================================================================================
</TABLE>
(Continued)
<PAGE>
30
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(5) Securities Available for Sale
Securities available for sale at June 30, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses market value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government agency
bonds $ 6,992,534 10,000 (21,284) 6,981,250
-------------------------------------------------------------------------------------------------------
Total investment securities $ 6,992,534 10,000 (21,284) 6,981,250
=======================================================================================================
Mortgage-backed and
related securities:
FHLMC certificates 8,143,694 9,939 (3,881) 8,149,752
-------------------------------------------------------------------------------------------------------
Total mortgage-backed and
related securities $ 8,143,694 9,939 (3,881) 8,149,752
=======================================================================================================
</TABLE>
Proceeds from the sale of securities available for sale during the
years ended June 30, 1997, 1996, and 1995, were $999,376, $0, and
$0, respectively. Gross realized gains from the sale of securities
for the years ended June 30, 1997, 1996, and 1995 were $2,863, $0,
and $0, respectively. There were no gross realized losses from the
sale of securities for the years ended June 30, 1997, 1996, and
1995.
Accrued interest receivable on securities available for sale
aggregated $212,930 and $0 at June 30, 1997 and 1996, respectively.
The carrying amount and approximate market value of investment
securities and mortgage-backed and related securities available
for sale at June 30, 1997 and 1996, by contractual maturity, are
shown below:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------------- ----------------------------------
Amortized Approximate Amortized Approximate
cost market value cost market value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one
year $ 0 0 0 0
Due after one
year through
five years 1,998,189 1,990,938 0 0
Due after five
years through
ten years 13,138,039 13,140,064 0 0
Due after ten
years 0 0 0 0
- -----------------------------------------------------------------------------------
$ 15,136,228 15,131,002 0 0
===================================================================================
</TABLE>
Nontaxable interest income on securities available for sale and
securities held to maturity was $67,546, $60,213, and $10,380 for
the years ended June 30, 1997, 1996, and 1995, respectively.
(Continued)
<PAGE>
31
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(6) Loans Receivable
1997 1996
---------------------------------------------------------------------
Loans secured by real estate:
Residential one-to-four family $ 18,577,418 15,232,656
Multifamily 173,594 189,266
Commercial 679,968 519,543
Agricultural 150,000 0
Residential construction 502,000 220,000
Multifamily construction 980,000 0
Other consumer loans 21,000 140,802
Loans on deposits 133,033 775,358
Commercial 714,869 775,358
Agricultural operating
line of credit 425,000 0
---------------------------------------------------------------------
Total 22,356,882 17,077,625
---------------------------------------------------------------------
Deferred loan fees and discounts (15,765) (18,019)
Loans in process (1,361,544) (332,845)
Allowance for losses (213,034) (213,034)
---------------------------------------------------------------------
Net loans $ 20,766,539 16,513,727
=====================================================================
Accrued interest receivable on loans receivable at June 30, 1997
and 1996 was $125,682 and $101,364, respectively.
The following is a summary of nonperforming loans as of and for the
years ended June 30:
1997 1996 1995
-----------------------------------------------------------------------
Impaired loans:
Nonaccrual $ 0 0 0
Restructured 0 0 0
-----------------------------------------------------------------------
0 0 0
-----------------------------------------------------------------------
Other nonperforming loans:
Nonaccrual 0 89,153 0
Restructured 0 0 0
-----------------------------------------------------------------------
0 89,153 0
-----------------------------------------------------------------------
Total nonperforming loans $ 0 89,153 0
=======================================================================
Scheduled interest under original terms 0 2,946 0
Actual interest recognized 0 0 0
-----------------------------------------------------------------------
Net interest lost
on nonperforming loans $ 0 2,946 0
=======================================================================
(Continued)
<PAGE>
32
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The average balance of impaired loans during each of the fiscal years
ended June 30, 1997 and 1996 was $13,520 and $0, respectively.
There was no allowance for losses on impaired loans at June 30, 1997
and 1996.
The aggregate amount of loans to directors and executive officers of
the Company was $231,803, $237,177, and $254,139, at June 30,
1997, 1996, and 1995, respectively. Activity with respect to these
loans during fiscal 1997 included loan originations of $33,000 and
loan repayments of $59,842. 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. 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.
Included in total commitments to originate loans are fixed rate loans
aggregating $402,000 and $751,400 as of June 30, 1997 and 1996,
respectively. The interest rates on these commitments ranged from
8% to 9% for both June 30, 1997 and 1996.
There were no material commitments to lend additional funds to
customers whose loans were classified as nonaccrual at June 30,
1997.
There were no loans at June 30, 1997 and 1996 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.
(6) Allowance for Losses on Loans Receivable
Activity in the allowance for losses on loans receivable is summarized
as follows:
Balance at June 30, 1994 $ 213,034
Provision for losses 0
Charge-offs and recoveries 0
-----------------------------------------------------------------------
Balance at June 30, 1995 213,034
Provision for losses 0
Charge-offs and recoveries 0
-----------------------------------------------------------------------
Balance at June 30, 1996 213,034
Provision for losses 0
Charge-offs and recoveries 0
-----------------------------------------------------------------------
Balance at June 30, 1997 $ 213,034
=======================================================================
(Continued)
<PAGE>
33
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(7) Real Estate
Real estate owned, representing real estate expected to be acquired in
settlement of loans, totaled $13,520 and $0 at June 30, 1997 and
1996, respectively. The allowance for losses on real estate was $0
at June 30, 1997 and 1996. There were no charge-offs, recoveries,
or provisions for losses for the years ended June 30, 1997, 1996,
or 1995.
(8) Premises and Equipment
A summary of premises and equipment at June 30, 1997 and 1996 is as
follows:
1997 1996
------------------------------------------------------------------------
Land and office buildings $ 310,927 155,476
Furniture and equipment 192,375 171,204
------------------------------------------------------------------------
503,302 326,680
Less accumulated depreciation (291,235) (274,493)
------------------------------------------------------------------------
$ 212,067 52,187
========================================================================
(9) Deposits
Deposits and weighted-average interest rates at June 30 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ------------------------------
Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook $ 922,487 2.65% $ 985,658 2.65%
Money market accounts 7,187,340 4.23 7,104,387 3.89
- ----------------------------------------- ---------------
8,109,827 8,090,045
- ----------------------------------------- ---------------
Certificates of deposit:
4.01 - 5.00% 421,418 2,069,519
5.01 - 6.00 18,099,518 16,334,358
6.01 - 7.00 18,749,835 10,766,128
7.01 - 8.00 306,992 598,235
- ----------------------------------------- ---------------
37,577,763 5.83% 29,768,240 5.83%
- ----------------------------------------- ---------------
Accrued interest payable 405,623 184,244
- ----------------------------------------- ---------------
$ 46,093,213 $ 38,042,529
========================================= ===============
</TABLE>
(Continued)
<PAGE>
34
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest expense on deposits is summarized as follows:
1997 1996 1995
-----------------------------------------------------------------------
Passbook $ 25,130 33,968 30,978
Money market accounts 275,769 196,842 214,906
Certificates of deposit 1,846,365 1,652,027 1,437,363
-----------------------------------------------------------------------
$ 2,147,264 1,882,837 1,683,247
=======================================================================
Certificates of deposit had the following remaining maturities at June
30:
1997 1996
---------------------------- ------------------------------
Weighted Weighted
average average
Amount rate Amount rate
- ------------------------------------------------------------------------------
0-6 months $ 16,655,355 5.70% $ 11,533,143 5.86%
7-12 months 11,031,181 5.84 6,857,760 5.72
13-36 months 9,174,681 6.04 10,852,065 5.84
Over 36 months 716,543 6.00 525,272 6.41
- ----------------------------- ---------------
$ 37,577,763 5.83% $ 29,768,240 5.83%
============================= ===============
The Company had $13,909,498 and $9,698,164 of certificates of deposit
with balances of $100,000 or more at June 30, 1997 and 1996,
respectively.
At June 30, 1997 investment securities and mortgage-backed securities
with an approximate book value of $20,353,000 were pledged as
collateral for certain deposits, including approximately
$17,969,000 of public deposits.
At June 30, 1997 and 1996, the aggregate amount of deposits by
directors and executive officers totaled $322,029 and $234,298,
respectively. Such deposits were accepted in the ordinary course
of business with normal interest rates, interest payment terms,
and maturities.
(Continued)
<PAGE>
35
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(10) Federal Home Loan Bank Advances
The Company had no Federal Home Loan Bank (FHLB) advances outstanding
as of June 30, 1996. At June 30, 1997, the Company's FHLB advances
consisted of the following:
Year of maturity Amount Rate
-------------------------------------------------------------------------
1998 $ 2,500,000 6.08%
1999 0 0.00
2000 1,000,000 6.33
-----------------------------------------------------------
3,500,000 6.15
Open line of credit 0 0.00
-----------------------------------------------------------
$ 3,500,000 6.15%
===========================================================
At June 30, 1997, the advances and open line of credit were
collateralized by the Association's FHLB stock and investments
with a carrying value of approximately $333,500 and $7,423,851,
respectively. The Company has a $1,000,000 line of credit with the
FHLB which was not drawn on at June 30, 1997. The Company has the
ability to draw additional borrowings of approximately $3,170,000
based upon its current investment in FHLB stock and investment
securities pledged.
(11) Income Taxes
Income tax expense (benefit) for the years ended June 30 is composed
of the following:
1997 1996 1995
---------------------------------------------------------------------
Current:
Federal $ 141,694 120,844 140,579
State 51,828 43,942 46,860
---------------------------------------------------------------------
Total current 193,522 164,786 187,439
---------------------------------------------------------------------
Deferred:
Federal (43,066) 34,295 42,961
State (13,788) 11,431 14,320
---------------------------------------------------------------------
Total deferred (56,854) 45,726 57,281
---------------------------------------------------------------------
$ 136,668 210,512 244,720
=====================================================================
(Continued)
<PAGE>
36
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The reasons for the difference between the effective income tax rate
and the statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------------------
<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 6.5 6.7
(Increase) decrease in base year tax bad debt reserve 0.0 (6.3) (0.4)
Tax-exempt interest income (5.3) (3.0) (0.1)
Other, net 0.0 0.1 0.3
---------------------------------------------------------------------------------------------------
Effective income tax rate 35.2% 31.3% 40.5%
===================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities at June 30, 1997
and 1996 are as follows:
1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Discounts on mortgage-backed and related securities 26,175 32,005
Allowance for losses on loans receivable 2,651 2,651
Unrealized loss on available for sale securities 2,090 0
Other 0 4,365
- --------------------------------------------------------------------------------
Gross deferred tax assets 30,916 39,021
Valuation allowance 0 0
- --------------------------------------------------------------------------------
Deferred tax assets, net 30,916 39,021
Deferred tax liabilities:
Accrual to cash conversion 95,564 159,421
FHLB stock 50,500 50,478
Premises and equipment 10,109 13,323
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 156,173 223,222
- --------------------------------------------------------------------------------
Net deferred tax liability $ 125,257 184,201
================================================================================
No valuation allowance was required for deferred tax assets at June
30, 1997 or 1996.
Retained earnings at June 30, 1997 included approximately $1,155,957
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.
In August 1996, federal legislation was enacted that repealed the
favorable bad debt method for savings and loan associations.
Subsequent to this repeal, the Company continues to be subject to
the potential tax liability to the extent payments or
distributions of these appropriated earnings occurs.
(Continued)
<PAGE>
37
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(12) 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.
Net periodic pension expense for the years ended June 30 includes the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 28,076 26,494 26,927
Interest cost on projected benefit obligation 57,824 51,730 48,474
Actual return on plan assets (63,728) (55,934) (45,183)
Net amortization and deferral 438 438 907
===================================================================================================
Net periodic pension expense $ 22,610 22,728 31,125
===================================================================================================
</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>
1997 1996 1995
---------------------------------------------------------------------------------------------------
<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>
(Continued)
<PAGE>
38
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefit obligation $ 676,571 624,568
Nonvested accumulated benefit obligation 133 43
- ----------------------------------------------------------------------------------------------------
Total accumulated benefit obligation 676,704 624,611
Effect of projected future salary increases 137,234 104,247
- ----------------------------------------------------------------------------------------------------
Projected benefit obligation 813,938 728,858
Plan assets at fair value 889,838 780,740
- ----------------------------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 75,900 51,882
Unrecognized prior service cost 15,875 17,638
Unrecognized gain from past experience
different from that assumed (77,515) (47,254)
Unrecognized net transition asset being
amortized over 15 years (5,307) (6,632)
- ----------------------------------------------------------------------------------------------------
Prepaid pension cost $ 8,953 15,634
====================================================================================================
</TABLE>
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 1997, 1996, or 1995.
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 paid principal and
interest of $117,125 and $123,086 to the ESOP during the fiscal
year 1997 and 1996, respectively.
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 $84,650 and $77,021 for fiscal year 1997 and 1996,
respectively.
(Continued)
<PAGE>
39
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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 calendar
year ended:
1997 1996
-----------------------------------------------------------------------
Shares allocated beginning of year $ 4,140 0
Shares allocated during year 8,280 4,140
Unreleased shares 70,328 78,608
-----------------------------------------------------------------------
Total ESOP shares 82,748 82,748
=======================================================================
Fair value of unreleased shares at June 30 $ 694,974 688,829
=======================================================================
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 1997
and 1996 compensation and employee benefits expense is $86,625 and
$39,703, respectively, related to the MSBP.
Stock Option Plan
On January 17, 1996, stockholders of the Company approved the
Company's 1995 Stock Option Plan. The plan was subsequently
approved by the OTS. The plan provides for the granting of options
for the purpose of attracting and retaining key personnel and
facilitating their purchase of a stock interest in the Company.
The plan provided for the total allocation of 112,500 options of
which 92,500 options were granted to directors, management, and
employees of the Company at an exercise price of $9.8125 per
share. On April 9, 1997, the Company granted 5,400 options of the
remaining unawarded options at an exercise price of $11.375 per
share. All options granted under this plan vest pro rata over five
years from the grant date. In addition, vested options are
exercisable for a period ending 10 years after the grant date.
(Continued)
<PAGE>
40
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
As of June 30, 1997, no stock options have been exercised or
forfeited. A summary of stock option activity is detailed as
follows:
<TABLE>
<CAPTION>
Weighted
Options average
available Options exercise
for grant outstanding price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1995 0 0 0
1995 stock option plan adopted 112,500 0 0
Granted January 17, 1996 (weighted
average fair value $4.34 per option) (92,500) 92,500 $ 9.8125
- -----------------------------------------------------------------------------------------
June 30, 1996 20,000 92,500 9.8125
Granted April 9, 1997 (weighted average
fair value $5.74 per option) (5,400) 5,400 11.3750
- -----------------------------------------------------------------------------------------
June 30, 1997 14,600 97,900 9.8987
</TABLE>
The number of options exerciseable at June 30, 1997 was 18,500 options
with a weighted average exercise price of $9.8125.
The Company uses the intrinsic value method as described in APB
Opinion No. 25 and related interpretations to account for its
stock option plans. Accordingly, no compensation cost has been
recognized for the plans. There are no charges or credits to
expense with respect to the granting or exercise of options since
the options were issued at fair value on the respective grant
dates. Had compensation cost for the 1995 Stock Option Plan been
determined based on the fair value method as established in SFAS
No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts as indicated in the
following table:
<TABLE>
<CAPTION>
Fiscal Year Ending
June 30, 1997 June 30, 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income:
As reported $ 251,500 $ 462,432
Pro forma 202,396 442,360
Earnings per common share
and common share equivalent:
As reported 0.26 0.45
Pro forma 0.21 0.43
</TABLE>
The above disclosed pro forma effects of applying SFAS No. 123 to
compensation costs may not be representative of the effects on
reported pro forma net income for future years.
(Continued)
<PAGE>
41
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The fair value for each option granted is estimated based on a
Black-Scholes option pricing model. The model incorporates the
following weighted average assumptions:
<TABLE>
<CAPTION>
For options granted in accordance with
1995 Stock Option Plan
granted in the fiscal year ending
June 30, 1997 June 30, 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 7.07% 5.78%
Expected life 10 years 10 years
Expected volatility 12.00% 12.00%
Expected dividends None None
</TABLE>
On June 10, 1997, the Company approved a stock option plan to grant
38,472 options to its executive officers and directors at an
exercise price of $11.0625 per share on August 1, 1997. These
stock options are exercisable at grant date in full commencing
August 1, 1997, through a period no later than 10 years after the
grant date. For purposes of disclosing the effect of the 1997
Stock Option Plan in pro forma earnings statements as required by
SFAS No. 123, the compensation costs of this plan will effect only
pro forma net income and earnings per share in the fiscal year
ended June 30, 1998.
(13) 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, 1997, that the
Association meets all capital adequacy requirements to which it is
subject.
As of June 30, 1997, the most recent notification from the OTS
categorized the Company as `well capitalized.' There are no
conditions or events since that notification that management
believes have changed the Company's category.
(Continued)
<PAGE>
42
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Association's actual capital amounts and ratios are also presented
in the table (dollars in thousands):
<TABLE>
<CAPTION>
To be Well
Capitalized Under
Prompt Corrective
Actions Provisions
Actual Requirement Excess Capital
---------------------- --------------------- ------------------------- --------------------
Percent Percent Percent Percent
of of of of
Amount assets Amount assets Amount assets Amount assets(1)
(1) (1) (1)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Association's
net worth (3) $ 8,391
Add back:
AFS market
valuation 3
Tangible capital 8,394 13.91% $ 905 1.50% $ 7,489 12.41% N/A N/A
---------
Core capital (2) 8,394 13.91 1,811 3.00 6,583 10.91 3,018 5.00%
---------
Plus:
Allowable
portion of
general
allowance
for loan
losses 213
---------
Risk-based
capital $ 8,607 44.76% $ 1,538 8.00% $ 7,069 36.76% $ 1,923 10.00%
=========
</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.
(2) Pursuant to Prompt Corrective Action regulations, the Association is
also required to hold core capital equal to or greater than 6.00% of
its risk-weighted assets, or $1,154 at June 30, 1997.
(3) The Association's net worth excludes $18,000 in post period
adjustments reportable in subsequent periods in accordance with
regulatory capital instructions.
(14) Recent Legislation and Regulatory Developments
The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September
30, 1996. DIFA addressed the inadequate funding of the Savings
Association Insurance Fund (SAIF). In order to recapitalize the
SAIF, DIFA imposed a one-time assessment on all thrift
institutions. The Bank's assessment was a pretax charge of
$237,085 and was recognized in the first quarter of fiscal 1997.
(Continued)
<PAGE>
43
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
DIFA also addressed the funding for the Financing Corp. (FICO) bonds.
Thrifts will pay 6.4 basis points per $100 of deposits from
January 1, 1997 to December 31, 1999. From January 1, 2000 until
the FICO bonds are retired in 2019, the estimated assessment to
retire the FICO bonds is expected to be 2.5 basis points per $100
of deposits.
DIFA proposed that the Bank Insurance Fund (BISF) and SAIF be merged
on January 1, 1999, provided no insurance depository institution
is a savings association on that date. DIFA also directed the
Secretary of the Treasury to present recommendations to Congress
for establishment of a common depository institution charter.
(15) Stock Repurchases
During the fiscal year ended June 30, 1997, the Company purchased
106,875 shares of its outstanding common stock at an average price
of $11.48 per share, or 10% of its previously outstanding common
stock. For the fiscal year ended June 30, 1996, the Company
repurchased 101,250 shares, including 45,000 shares allocated to
the management recognition plan, at an average price of $9.53 per
share. As a result of the stock repurchase program, the Company
has now outstanding 961,875 shares of common stock. The following
summarizes the Company's common stock repurchases during the
fiscal year:
Shares Price
Date Purchased Purchased per share
---------------------------------------------------------------
January 15, 1997 3,000 $ 10.3750
January 28, 1997 4,600 10.7500
January 30, 1997 600 11.0000
January 31, 1997 10,000 11.0000
February 4, 1997 37,500 11.0000
February 19, 1997 51,175 12.0625
Repurchased shares are considered treasury shares and will be utilized
for general corporate and other purposes, including the issuance
of shares in connection with stock option plans, the management
stock bonus plan, and other purposes.
(16) 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.
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.
(Continued)
<PAGE>
44
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The contract amount of these financial instruments at June 30, 1997
and 1996 is as follows:
Contract amount
---------------------------
1997 1996
- -----------------------------------------------------------------------------
Financial instruments whose contract amount
represents risk:
Commitments to extend credit $ 402,000 751,400
=============================================================================
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.
(17) 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, 1997
and 1996, 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.
(Continued)
<PAGE>
45
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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.
<TABLE>
<CAPTION>
June 30
------------------------------------------------------------------------------------------
1997 1996
-------------------------------------------- --------------------------------------------
Carrying Estimated Contract Carrying Estimated Contract
amount fair value amount amount fair value amount
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 763,792 763,792 2,873,163 2,873,163
Securities held to
maturity 24,269,460 24,481,726 31,094,218 30,964,830
Securities available
for sale 15,131,002 15,131,002 0 0
Loans receivable, net 20,766,539 21,248,657 16,513,727 16,949,767
Stock in Federal Home
Loan Bank of
Des Moines, at cost 333,500 333,500 333,500 333,500
Accrued interest
receivable 613,357 613,357 553,856 553,856
Financial liabilities:
Deposits 45,687,590 45,864,695 37,858,285 38,010,952
Federal Home Loan
Bank advances 3,500,000 3,496,847 0 0
Accrued interest payable 405,623 405,623 184,244 184,244
Off-balance sheet
financial instruments:
Commitments to
extend credit 0 8,479 402,000 0 13,466 751,400
</TABLE>
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their
fair value.
Securities Held to Maturity and Securities Available for Sale
The fair values of securities held to maturity and securities
available for sale are based upon quoted market prices.
(Continued)
<PAGE>
46
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Loans Receivable, Net
The fair value of the loan receivable portfolio, with the exception of
the 1 to 4 family adjustable rate mortgage loan portfolio and the
consumer, agriculture, commercial and commercial real estate
portfolios, was calculated by comparison of the loan portfolio to
observed secondary market prices for loans and mortgage-backed
securities with similar characteristics. For consumer, commercial,
and commercial real estate loans, the fair value was calculated by
discounting the scheduled cash flows through the estimated
maturity using anticipated prepayment speeds and using discount
rates that reflect credit and interest rate risk inherent in each
loan portfolio. The fair value of the 1 to 4 family adjustable
rate mortgage loan portfolio was estimated using the carrying
value of the portfolio due to its repricing frequency and
comparison to observed secondary market loans with similar
characteristics.
Stock in Federal Home Loan Bank of Des Moines, at Cost
The carrying amount of FHLB stock approximates its fair value.
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, 1997 and 1996 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.
Federal Home Loan Bank Advances
The fair value of FHLB advances is based upon the discounted value of
contractual cash flows using as discount rates the rates offered
by the FHLB on advances with maturities similar to the remaining
maturities of the existing advances.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair
value since it is short-term in nature.
(Continued)
<PAGE>
47
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Commitments to Extend Credit
The fair value of commitments to extend credit is estimated based on
comparison of the committed rate to observed secondary market
rates and prices and adjusted for expected fallout.
(18) 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.
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.
(19) 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, 1997 and 1996.
(Continued)
<PAGE>
48
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30, June 30,
Assets 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 2,122,649 101,019
Securities held to maturity 1,274,607 2,488,579
Loans receivable, net 500,269 475,358
Investment in subsidiary 8,372,837 10,040,701
Accrued interest receivable 35,479 66,784
Other assets 36,192 0
- --------------------------------------------------------------------------------------------------------
Total assets $ 12,342,033 13,172,441
========================================================================================================
Liabilities and Stockholders Equity
- --------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 0 15,405
- --------------------------------------------------------------------------------------------------------
Total liabilities 0 15,405
- --------------------------------------------------------------------------------------------------------
Common stock 112,500 112,500
Additional paid-in capital 8,467,833 8,457,017
Retained earnings, subject to certain restrictions 6,369,591 6,118,091
Unearned employee stock ownership plan shares (529,504) (595,744)
Net unrealized loss on securities available for sale (3,135) 0
Unearned management stock bonus plan shares (306,797) (393,422)
Treasury stock, at cost (1,768,455) (541,406)
- --------------------------------------------------------------------------------------------------------
Total stockholders equity 12,342,033 13,157,036
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders equity $ 12,342,033 13,172,441
========================================================================================================
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gain on sale of investments available for sale $ 2,863 0
Interest income 201,007 200,739
Equity in earnings of subsidiary 335,271 433,884
Compensation and employee benefits (171,275) (116,725)
Other (193,533) (62,936)
- --------------------------------------------------------------------------------------------------------
Earnings before income tax benefit 174,333 454,962
Income tax benefit 77,167 7,470
- --------------------------------------------------------------------------------------------------------
Net earnings $ 251,500 462,432
========================================================================================================
</TABLE>
(Continued)
<PAGE>
49
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
12 months ended
June 30,
----------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 251,500 462,432
Adjustments to reconcile net earnings to cash
provided by operating activities:
Equity in earnings of subsidiary (335,271) (433,884)
Amortization of premiums (discounts), net (1,028) (1,092)
(Increase) decrease in accrued interest receivable 31,305 (66,784)
Gain on sale of investments available for sale (2,863) 0
Amortization of unearned ESOP shares 66,240 66,240
Earned ESOP priced above original cost 10,816 10,781
Earned management stock bonus plan shares 86,625 39,703
Increase (decrease) in accrued expenses and
other liabilities (15,405) 15,405
Increase in other assets (36,192) (7,470)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,727 85,331
- -----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of investment securities
held to maturity 1,215,000 0
Purchases of investment securities available for sale (996,513) (2,487,487)
Proceeds from sales of investment securities available for sale 999,376 0
Increase in loans receivable, net (24,911) (475,358)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,192,952 (2,962,845)
- -----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Adoption of ESOP 0 (661,984)
Dividend from Association 2,000,000 0
Proceeds from sale of common stock 0 8,549,361
Repurchase of common stock (1,227,049) (965,156)
Purchase of Association stock 0 (3,943,688)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 772,951 2,978,533
- -----------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 2,021,630 101,019
Cash and cash equivalents, beginning of year 101,019 0
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,122,649 101,019
=============================================================================================================================
</TABLE>
(Continued)
<PAGE>
50
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(20) Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for fiscal 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------
June 30, March 31, December 31, September 30,
Selected Operations Data 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $1,078,635 972,178 909,043 909,761
Interest expense 623,269 553,189 502,095 507,196
- --------------------------------------------------------------------------------------------------------
Net interest income 455,366 418,989 406,948 402,565
Provision for loan losses 0 0 0 0
Non-interest income 13,910 14,923 12,712 14,933
Non-interest expense 258,223 232,074 366,713 495,168
Income tax expense (benefit) 84,566 74,986 17,239 (40,123)
- --------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 126,487 126,852 35,708 (37,547)
========================================================================================================
Earnings per common share $ .13 .13 .04 (.04)
</TABLE>
<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>
(Continued)
<PAGE>
51
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Selected Financial June 30, March 31, December 31, September 30,
Condition Data 1997 1997 1996 1996
- -----------------------------------------------------------------------------
Total assets $62,168,916 55,730,838 53,526,359 51,058,275
Securities 39,400,462 35,592,367 26,318,389 30,081,878
Net loans 20,766,539 18,878,902 18,171,579 17,229,712
Deposits 46,093,213 42,561,895 40,077,112 37,410,421
Stockholders equity 12,342,033 12,109,742 13,238,271 13,160,293
Selected Financial June 30, March 31, December 31, September 30,
Condition Data 1996 1996 1995 1995
- -----------------------------------------------------------------------------
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
<PAGE>
52
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
Tony Acker
Chief Financial Officer
----------------------------------------
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, 1997 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 30, 1997 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 8,
1997, relating to the consolidated balance sheets of Redwood Financial, Inc. and
subsidiary as of June 30, 1997 and 1996, 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, 1997, which report appears in the June 30, 1997
annual report on Form 10-KSB of Redwood Financial, Inc.
/s/KPMG Peat Marwick LLP
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,314
<INT-BEARING-DEPOSITS> 748,478
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,131,002
<INVESTMENTS-CARRYING> 24,269,460
<INVESTMENTS-MARKET> 24,481,726
<LOANS> 20,766,539
<ALLOWANCE> 213,034
<TOTAL-ASSETS> 62,168,916
<DEPOSITS> 46,093,213
<SHORT-TERM> 2,500,000
<LIABILITIES-OTHER> 233,670
<LONG-TERM> 1,000,000
0
0
<COMMON> 112,500
<OTHER-SE> 12,229,533
<TOTAL-LIABILITIES-AND-EQUITY> 62,168,916
<INTEREST-LOAN> 1,563,605
<INTEREST-INVEST> 2,132,737
<INTEREST-OTHER> 173,275
<INTEREST-TOTAL> 3,869,617
<INTEREST-DEPOSIT> 2,147,264
<INTEREST-EXPENSE> 2,185,749
<INTEREST-INCOME-NET> 1,683,868
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2,863
<EXPENSE-OTHER> 1,352,178
<INCOME-PRETAX> 388,168
<INCOME-PRE-EXTRAORDINARY> 388,168
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251,500
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<YIELD-ACTUAL> 3.11
<LOANS-NON> 0
<LOANS-PAST> 120,902
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 120,902
<ALLOWANCE-OPEN> 213,034
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 213,034
<ALLOWANCE-DOMESTIC> 213,034
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 213,034
</TABLE>
