U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________to___________________
Commission File Number 0-25884
REDWOOD FINANCIAL, INC.
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(Exact name of Registrant as specified in its Charter)
Minnesota 41-1807233
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(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota 56283-0317
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (507) 637-8730
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of February 4, 1997:
Class Outstanding
----- -----------
Common stock, par value $0.10 per share 1,013,050
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements
Consolidated Balance Sheets at December 31, 1996 and
June 30, 1996 3
Consolidated Statements of Earnings for the Three
and Six Months ended December 31, 1996 and 1995 4
Consolidated Statement of Stockholders' Equity
for the Six Months ended December 31, 1996 5
Consolidated Statements of Cash Flows for the
Six Months ended December 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7- 9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 -19
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 2: Changes in Securities 20
Item 3: Defaults Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1996 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 15,217 15,345
Interest-bearing deposits with banks 8,179,630 2,857,818
- -------------------------------------------------------------------------------------
Cash and cash equivalents 8,194,847 2,873,163
- -------------------------------------------------------------------------------------
Securities held to maturity:
Mortgage-backed and related securities 15,058,154 15,805,305
Investment securities 11,260,235 15,288,913
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Total securities held to maturity 26,318,389 31,094,218
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Loans receivable, net 18,171,579 16,513,727
Federal Home Loan Bank stock, at cost 333,500 333,500
Accrued interest receivable 394,005 553,856
Premises and equipment, net 60,519 52,187
Other assets 53,520 93,992
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Total Assets $ 53,526,359 51,514,643
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Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------
Deposits 40,077,112 38,042,529
Advance payments by borrowers for taxes and insurance 52,010 55,686
Accrued expenses and other liabilities 158,966 259,392
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Total Liabilities 40,288,088 38,357,607
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Common stock ($.10 par value): Authorized and issued
1,125,000 shares; outstanding 1,068,750 shares 112,500 112,500
Additional paid-in capital 8,463,658 8,457,017
Retained earnings, subject to certain restrictions 6,116,252 6,118,091
Unearned employee stock ownership plan shares (562,624) (595,744)
Unearned management stock bonus plan shares (350,109) (393,422)
Treasury stock, at cost; 56,250 shares (541,406) (541,406)
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Total Stockholders' Equity 13,238,271 13,157,036
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- -------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 53,526,359 51,514,643
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</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended December 31, ended December 31,
------------------ ------------------
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C>
Loans receivable $ 378,600 336,521 740,556 671,927
Mortgage-backed and related securities 266,099 183,142 538,670 359,290
Investment securities 209,841 317,260 435,914 618,598
Cash equivalents 54,503 27,928 103,664 87,835
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Total interest income 909,043 864,851 1,818,804 1,737,650
Interest expense on deposits 502,095 463,819 1,009,291 937,814
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Net interest income 406,948 401,032 809,513 799,836
Provision for losses on loans 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 406,948 401,032 809,513 799,836
Noninterest income:
Fees and service charges 12,209 8,379 26,183 15,171
Other 503 9,488 1,462 18,264
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 12,712 17,867 27,645 33,435
Noninterest expense:
Compensation and employee benefits 186,276 178,813 353,013 320,086
Advertising 5,511 4,543 8,607 7,119
Occupancy 6,821 6,884 14,252 13,730
Federal deposit insurance premiums 18,029 20,431 39,369 41,277
Professional fees 128,255 52,597 164,239 71,852
Deposit insurance fund assessment 0 0 237,085 0
Other 21,821 25,979 45,316 40,037
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 366,713 289,247 861,881 494,101
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Earnings (loss) before income taxes 52,947 129,652 (24,723) 339,170
Income tax expense (benefit) 17,239 54,496 (22,884) 90,576
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Net earnings (loss) $ 35,708 75,156 (1,839) 248,594
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Net earnings (loss) per common share $ 0.04 0.07 0.00 0.24
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Weighted average number of shares outstanding 1,004,753 1,045,357 1,001,263 1,044,322
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</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Unearned
Employee Unearned
Stock Management
Additional Ownership Stock Bonus Total
Common Paid in Retained Plan Plan Treasury Stockholders'
Stock Capital Earnings Shares Shares Stock Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 112,500 8,457,017 6,118,091 (595,744) (393,422) (541,406) 13,157,036
Net loss 0 0 (1,839) 0 0 0 (1,839)
Earned employee stock
ownership plan shares 0 6,641 0 33,120 0 0 39,761
Earned management
stock bonus plan shares 0 0 0 0 43,313 0 43,313
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 112,500 8,463,658 6,116,252 (562,624) (350,109) (541,406) 13,238,271
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months
ended December 31,
------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C>
Net (loss) earnings $ (1,839) 248,594
Adjustments to reconcile net earnings (loss) to net cash
provided by operations
Depreciation 9,074 8,246
Amortization of premiums and discounts on investment
securities, mortgage-backed and related securities
and loans receivable, net (19,519) (19,257)
Decrease in other assets 40,472 40,989
Decrease (increase) in accrued interest receivable 159,851 (168,197)
Increase (decrease) in accrued interest payable 17,815 (70,997)
Amortization of unearned ESOP shares 33,120 33,120
Earned ESOP shares priced above original cost 6,641 5,347
Earned Management Stock Bonus Plan shares 43,313 0
Decrease in accrued expenses and other liabilities (100,426) (163,607)
Federal Home Loan Bank stock dividend 0 (6,500)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 188,502 (92,262)
Investing Activities:
Proceeds from maturities of investment securities held to maturity 4,030,000 0
Purchases of investment securities held to maturity 0 (2,487,720)
Purchases of mortgage-backed and related securities held to maturity 0 (3,881,340)
Principal collected on mortgage-backed and related securities held to maturity 763,883 838,774
Increase in loans receivable, net (1,656,387) (52,680)
Purchases of premises and equipment (17,406) (1,365)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 3,120,090 (5,584,331)
Financing Activities:
Decrease in funds held for stock subscriptions 0 (13,127,630)
Decrease in deferred stock conversion costs 0 439,015
Increase (decrease) in deposits, net 2,016,768 (1,121,225)
Decrease in advance payments by borrowers for taxes and insurance (3,676) (6,346)
Proceeds from the sale of common stock 0 8,549,361
Increase in unearned ESOP shares 0 (661,984)
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Net cash provided (used) by financing activities 2,013,092 (5,928,809)
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Increase (decrease) in cash and cash equivalents 5,321,684 (11,605,402)
Cash and cash equivalents, beginning of period 2,873,163 14,092,665
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Cash and cash equivalents, end of period $ 8,194,847 2,487,263
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Supplemental cash flow disclosures:
Cash paid for interest $ 991,476 1,008,811
Cash paid for income taxes 103,700 67,980
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996
(Unaudited)
(1) Redwood Financial, Inc.
Redwood Financial, Inc. (the Company) was incorporated under the laws of
the State of Minnesota for the purpose of becoming the savings and loan
holding company of Redwood Falls Federal Savings and Loan Association (the
Association) in connection with the Association's conversion from a
federally-chartered mutual savings and loan association to a
federally-chartered stock savings and loan association, pursuant to its
Plan of Conversion.
The Company commenced a Subscription and Community Offering of its shares
(the Offering) in connection with the conversion of the Association on May
22, 1995. The Offering was closed on June 22, 1995 and the conversion was
completed July 7, 1995 (see note 5).
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of earnings,
consolidated statement of stockholders' equity, and consolidated statements
of cash flows in conformity with generally accepted accounting principles.
However, all adjustments, consisting only of normal recurring adjustments,
which are, in the opinion of management, necessary for the fair
presentation of the interim financial statements have been included. The
statement of earnings for the three and six months ended December 31, 1996
are not necessarily indicative of the results which may be expected for the
entire year.
The material contained herein is written with the presumption that the
users of the interim financial statements have read or have access to the
most recent Annual Report on Form 10- KSB of Redwood Financial, Inc., which
contains the latest audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition
and Results of Operations as of June 30, 1996 and for the year then ended.
(Continued)
7
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(3) Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares and common stock equivalents, if dilutive, outstanding during the
period. The only common stock equivalents are stock options. The weighted
average number of common stock equivalents is calculated using the treasury
stock method.
(4) Regulatory Capital Requirements
At December 31, 1996, the Association met each of the three current minimum
regulatory capital requirements. The following table summarizes the
Association's regulatory capital position at December 31, 1996:
Amount Percent (1)
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(dollars in thousands)
Tangible Capital:
Actual $8,120 16.74%
Required 728 1.50
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Excess $7,392 15.24%
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Core Capital:
Actual $8,120 16.74%
Required 1,455 3.00
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Excess $6,665 13.74%
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Risk-Based Capital:
Actual $8,308 54.59%
Required 1,217 8.00
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Excess $7,091 46.59%
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(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage
of risk-weighted assets.
(Continued)
8
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(5) Stockholders' Equity and Stock Conversion
The Association converted from a federally-chartered mutual savings and
loan association to a federally-chartered stock savings and loan
association pursuant to its plan of Conversion which was approved by the
Association's members on June 23, 1995. The conversion was effected on July
7, 1995, and resulted in the issuance of 1,125,000 shares of common stock
(par value $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 holding company.
(6) Stock Repurchases
On January 15, 1997, the Company purchased 3,000 shares of its outstanding
common stock at $10.375 per share. On January 28, 1997, the Company
purchased 4,600 shares of its outstanding common stock at $10.75 per share.
On January 30, 1997, the Company purchased 600 shares of its outstanding
common stock at $10.75 per share. On January 30, 1997, the Company
purchased 600 shares of its outstanding common stock at $11.00 per share.
Repurchased shares are considered treasury shares and may be utilized for
general corporate and other purposes.
(Continued)
9
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Item 2-Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
The Company's net earnings are dependent primarily on its net interest income,
which is the difference between interest income earned on its investment and
loan portfolio and interest paid on interest-bearing liabilities. Net interest
income is determined by (1) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and (2) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Company's interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. To a lesser extent, the Company's net earnings
also are affected by the level of noninterest income, which primarily consists
of service charges and other fees. In addition, net earnings are affected by the
level of noninterest (general and administrative) expenses.
The operations of financial institutions, including the Association, are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of the federal government and governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates, and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the Association's
market area.
Financial Condition
The Company's total assets increased by $2,011,000 or 3.90%, from $51,515,000 at
June 30, 1996 to $53,526,000 at December 31, 1996. Changes in the Company's
assets reflect an increase in the level of public unit fund deposits during the
quarter ended December 31, 1996.
Cash and cash equivalents increased by $5,322,000, or 185.24%, from $2,873,000
at June 30, 1996 to $8,195,000 at December 31, 1996. The increase in cash was
primarily due to investment security maturities of $4,030,000 and an increase in
deposits of $2,017,000 during the six months ended December 31, 1996. The high
level of cash and cash equivalents at December 31, 1996 is not indicative of the
liquidity levels that the Company generally maintains, but instead is a result
of $2,550,000 of investment securities which matured in December 1996 and the
acceptance of a $2,000,000 in public unit fund deposits in late December 1996.
The Company is in process of reinvesting the funds into higher yielding loans,
investments and/or mortgage-backed and related securities consistent with its
traditional lending and investment strategies.
(Continued)
10
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's securities, which include investment securities and
mortgage-backed and related securities, decreased by $4,776,000 or 15.36%, from
$31,094,000 at June 30, 1996 to $26,318,000 at December 31, 1996. The decrease
in the level of securities during the six months ended December 31, 1996 is
attributable to investment security maturity and the principal repayments of the
Company's mortgage-backed and related securities. No investment securities or
mortgage-backed or related securities were purchased during the six months ended
December 31, 1996.
The Company's loans receivable, net, increased by $1,658,000, or 10.04%, from
$16,514,000 at June 30, 1996 to $18,172,000 at December 31, 1996. The increase
in loans receivable was due to an increase in mortgage loan demand during the
six months ended December 31, 1996.
The Company's deposits, including accrued interest payable, increased by
$2,034,000, or 5.35%, from $38,043,000 at June 30, 1996 to $40,077,000 at
December 31, 1996. The increase in deposits is a result of higher public unit
fund deposits at December 31, 1996.
Results of Operations
Net Earnings
Net earnings were $36,000 for the quarter ended December 31, 1996, as compared
to net earnings of $75,000 for the quarter ended December 31, 1995. This
represented a decrease of $39,000 or 52.00%. The decrease in earnings was
primarily attributable to a $78,000, or 26.99% increase in noninterest expense.
The increase in noninterest expense was primarily a result of additional costs
associated with the Company's unsuccessful acquisition attempt of Olivia
Bancorporation, Inc. (See Recent Developments - Termination of Letter of Intent
to Acquire Olivia Bancorporation, Inc.). These costs totaled $102,000 and no
additional costs associated with the unsuccessful acquisition attempt are
expected. Net earnings were also impacted by a $44,000 increase, or 5.09% in
interest income, a $38,000, or 8.19% increase in interest expense, and a $37,000
decrease, or 68.52% in income tax expense.
The Company incurred a net loss of $2,000 for the six months ended December 31,
1996, as compared to net earnings of $249,000 for the six months ended December
31, 1995. This represented a decrease of $251,000, or 100.80%. The decrease was
primarily attributable to a $368,000 increase, or 74.49% in noninterest expense.
The increase in noninterest expense was primarily a result of the $237,000
one-time assessment required by the federal deposit insurance authorities to
bring the Savings Association Insurance Fund (SAIF) to parity with the Bank
Insurance Fund (BIF) and the aforementioned $102,000 in additional expense
associated with the unsuccessful acquisition attempt of Olivia Bancorporation,
Inc. Net earnings were also impacted by a $81,000 increase, or 4.66% in interest
income, a $71,000, or 7.57% increase in interest expense, and a $114,000
decrease, or 125.27% in income tax expense.
(Continued)
11
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Net Interest Income
Net interest income increased by $6,000, or 1.50%, from $401,000 for the quarter
ended December 31, 1995 to $407,000 for the quarter ended December 31, 1996. The
increase in net interest income primarily reflects an $4,560,000 increase, or
9.72% in average interest earning assets, partially offset by a $3,774,000
increase, or 11.02% in average interest bearing liabilities for the quarter
ended December 31, 1996 as compared to the quarter ended December 31, 1995. In
addition, the increase in net interest income was partially offset by a decline
in the Company's net interest spread, from 1.96% for the quarter ended December
31, 1995, to 1.78% for the quarter ended December 31, 1996. The decrease in
interest rate spread, compared to the same period in the previous year, was due
to primarily to a decrease in yield on the Company's loan and investment
securities portfolios partially offset by slight decrease in interest paid on
deposits.
Net interest income increased by $10,000, or 1.25%, from $800,000 for the six
months ended December 31, 1995 to $810,000 for the six months ended December 31,
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 133.25% for the six months ended December 31, 1995 to 135.27% for the six
months ended December 31, 1996. This was partially offset by a decrease in the
Company's interest rate spread from 2.06% for the six months ended December 31,
1995, to 1.76% for the six months ended December 31, 1996. The decrease in
interest rate spread, compared to the same period in the previous year, was due
primarily to a decrease in yield on the Company's loan and investment securities
portfolios and an increase in interest paid on deposits.
Interest Income
Interest income was $909,000 for the quarter ended December 31, 1996, as
compared to $865,000 for the quarter ended December 31, 1995, representing an
increase of $44,000, or 5.09%. The increase in interest income was caused
primarily by a $4,560,000, or 9.72%, increase in the average balance of
interest-bearing assets. This was partially offset by a decline in the overall
yield on interest earning assets. For the quarter ended December 31, 1996, the
average yield on interest earning assets was 7.06%, representing a decline from
7.37% for the quarter ended December 31, 1995.
Interest income was $1,819,000 for the six months ended December 31, 1996, as
compared to $1,738,000 for the six months ended December 31, 1995, an increase
of $81,000, or 4.66%. The increase in interest income was caused primarily by a
$3,974,000, or 8.38%, increase in the average balance of interest-bearing
assets. This was partially offset by a decline in the overall yield on interest
earning assets. For the six months ended December 31, 1996, the average yield on
interest earning assets was 7.08%, representing a decline from 7.33% for the six
months ended December 31, 1995.
(Continued)
12
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest on loans receivable increased by $42,000, or 12.46%, during the quarter
ended December 31, 1996, as compared to the quarter ended December 31, 1995.
Such increase was due to a $2,570,000, or 16.75% increase in the average balance
on loans receivable from $15,342,000 for the quarter ended December 31, 1995 to
$17,912,000 for the quarter ended December 31, 1996. This was partially offset
by a decline in the average yield on loans receivable from 8.79% for the quarter
ended December 31, 1995 to 8.45% for the quarter ended December 31, 1996.
Interest on loans receivable increased by $69,000, or 10.27%, during the six
months ended December 31, 1996, as compared to the six months ended December 31,
1995. The increase was due to a $1,986,000, or 12.93% increase in the average
balance on loans receivable from $15,360,000 for the six months ended December
31, 1995 to $17,346,000 for the six months ended December 31, 1996. This was
partially offset by a decline in the average yield on loans receivable from
8.75% for the six months ended December 31, 1995 to 8.54% for the six months
ended December 31, 1996.
Interest on mortgage-backed and related securities increased by $83,000, or
45.36%, during the quarter ended December 31, 1996, as compared to the quarter
ended December 31, 1995. Such increase was due to a $4,861,000, or 47.13%,
increase in the average balance of mortgage-backed and related securities from
$10,313,000 for the quarter ended December 31, 1995 to $15,174,000 for the
quarter ended December 31, 1996. The increase in the average balance of
mortgage-backed and related securities primarily resulted from a decision to
invest the cash proceeds from maturing investment securities and principal
repayments on existing mortgage-backed securities into other mortgage-backed and
related securities during the first six months of 1996. The increase in interest
on mortgage-backed and related securities was partially offset by a modest
decrease in the average yield on mortgage-backed and related securities from
7.10% for the quarter ended December 31, 1995 to 7.01% for the quarter ended
December 31, 1996.
Interest on mortgage-backed and related securities increased by $180,000, or
50.14%, during the six months ended December 31, 1996, as compared to the six
months ended December 31, 1995. Such increase was due to a $5,161,000, or
50.26%, increase in the average balance of mortgage-backed and related
securities from $10,269,000 for the six months ended December 31, 1995 to
$15,430,000 for the six months ended December 31, 1996. The increase in the
average balance of mortgage-backed and related securities primarily resulted
from the aforementioned decision to invest the cash proceeds from maturing
investment securities and principal repayments on existing mortgage-backed
securities into other mortgage-backed and related securities during the first
six months of 1996. The increase in interest on mortgage-backed and related
securities was partially offset by a small decrease in the average yield on
mortgage-backed and related securities from 6.99% for the six months ended
December 31, 1995 to 6.98% for the quarter ended December 31, 1996.
(Continued)
13
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest on investment securities, including FHLB stock, decreased by $107,000,
or 33.75%, during the quarter ended December 31, 1996, as compared to the
quarter ended December 31, 1995. Such decrease was due primarily to a
$5,154,000, or 27.81%, decrease in the average balance of investment securities
from $18,535,000 for the quarter ended December 31, 1995 to $13,381,000 for the
quarter ended December 31, 1996. The decline in the average balance of
investment securities was a result of a decision to invest cash proceeds from
the maturity of investment securities into higher yielding mortgage-backed and
related securities. Additionally, this decrease was effected by a decrease in
the average yield on investment securities and FHLB stock, from 6.95% to 6.27%
for the quarters ended December 31, 1995 and 1996, respectively.
Interest on investment securities, including FHLB stock, decreased by $183,000,
or 29.56%, during the six months ended December 31, 1996, as compared to the six
months ended December 31, 1995. The decrease was due primarily to a $4,486,000,
or 23.75%, decrease in the average balance of investment securities from
$18,891,000 for the six months ended December 31, 1995 to $14,405,000 for the
six months ended December 31, 1996. As previously stated, the decline in the
average balance of investment securities was a result of the decision to invest
cash proceeds from the maturity of investment securities into higher yielding
mortgage-backed and related securities. Additionally, this decrease was effected
by a decrease in the average yield on investment securities, including FHLB
stock, from 6.56% for the six months ended December 31, 1995 to 6.06% for the
six months ended December 31, 1996.
Interest Expense
Interest expense increased by $38,000, or 8.19%, from $464,000 for the quarter
ended December 31, 1995 to $502,000 for the quarter ended December 31, 1996. The
increase in interest expense resulted from a $3,774,000, or 11.02% increase in
the average balance of deposits from $34,254,000 for the quarter ended December
31, 1995 to $38,028,000 for the quarter ended December 31, 1996. The increase in
interest expense was partially offset by a slight decline in the average cost of
deposits to 5.28% during the quarter ended December 31, 1996, as compared to
5.42% for the quarter ended December 31, 1995. The decrease in the average cost
of deposits was due to modestly lower prevailing market interest rates on
deposits during the quarter ended December 31, 1996 as compared to the quarter
ended December 31, 1995.
(Continued)
14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest expense increased by $71,000, or 7.57%, from $938,000 for the six
months ended December 31, 1995 to $1,009,000 for the six months ended December
31, 1996. The increase in interest expense resulted primarily from a $2,406,000,
or 6.76% increase in the average balance of deposits from $35,587,000 for the
six months ended December 31, 1995 to $37,993,000 for the six months ended
December 31, 1996. The increase in interest expense was also effected by a small
increase in the average cost of deposits, from 5.27% during the six months ended
December 31, 1995, to 5.31% for the quarter ended December 31, 1995.
Provision for Loan Losses
The Company's provision for loan losses was $0 and $0 for the three months and
six months ended December 31, 1996 and 1995, respectively. Due to lack of
substantive problem loans (i.e. few nonaccrual loans) during these periods and
stable real estate value in the Company's market area, management believed that
the allowance for loan losses was adequate throughout these periods. The
allowance for loan losses was maintained at $213,000 at December 31, 1996 and
1995. The Company's net loan charge-offs were $0 and $0 for the three and six
months ended December 31, 1996 and 1995, respectively. At December 31, 1996 and
1995, the allowance for loan losses represented 1.16% and 1.27%, respectively,
of loans receivable. Nonaccrual loans totaled $57,000 and $0, respectively, at
December 31, 1996 and 1995.
Noninterest Income
Noninterest income decreased by $5,000, or 27.78%, from $18,000 for the quarter
ended December 31, 1995 to $13,000 for the quarter ended December 31, 1996. The
decrease in noninterest income was primarily due to a $8,000, or 88.89% decrease
in other noninterest income. This was offset by a $4,000, or 50.00%, increase in
various fees and service charges. The decrease in other noninterest income was
primarily due to a $7,000 gain taken on the disposition of an asset in the
quarter ended December 31, 1995. The increase in fees and service charges was a
result of higher loan fee income (e.g. loan origination fees and appraisal fees)
resulting from the aforementioned increase in loan origination volume.
Noninterest income decreased by $5,000, or 15.15%, from $33,000 for the six
months ended December 31, 1995 to $28,000 for the six months ended December 31,
1996. The decrease in noninterest income was primarily due to a $17,000, or
94.44% decrease in other noninterest income. This was offset by a $11,000, or
73.33%, increase in various fees and service charges. The decrease in other
noninterest income was primarily due to a $12,000 gain taken on the disposition
of various assets in the six months ended December 31, 1995. As previously
stated, the increase in fees and service charges was a result of higher loan fee
income (e.g. loan origination fees and appraisal fees) resulting from the
aforementioned increase in loan origination volume.
(Continued)
15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Noninterest Expense
Noninterest expense increased by $78,000, or 26.99%, from $289,000 for the
quarter ended December 31, 1995 to $367,000 for the quarter ended December 31,
1996. The increase in total noninterest expense was primarily due to the
aforementioned $102,000 in expenses associated with the unsuccessful acquisition
attempt of Olivia Bancorporation, Inc. These expenses consist primarily of
professional fees including various accounting, investment banking, and legal
services provided the Company during the negotiations and due diligence. In the
aggregate, professional fees increased by $75,000, or 141.51% from $53,000 for
the quarter ended December 31, 1995, to $128,000 for the quarter ended December
31, 1996.
In addition, the increase in noninterest expense during the quarter ended
December 31, 1996 was also attributable to a $7,000, or 3.91%, increase in
compensation and employee benefits from $179,000 for the quarter ended December
31, 1995 to $186,000 for the quarter ended December 31, 1996, and a $1,000
increase, or 20.00% in advertising expense in comparison of the same periods.
The increase in noninterest expense during the quarter ended December 31, 1996
was partially offset by a $4,000, or 15.38% decrease in other expenses from
$26,000 for the quarter ended December 31, 1995, to $22,000 for the quarter
ended December 31, 1996, and a $2,000 decrease, or 10.00% in federal deposit
insurance premiums in comparison of the same periods.
The increase in compensation and employee benefits was attributable to the
amortization of unearned management stock bonus plan shares and an increase in
staff during the quarter ended December 31, 1996. The slight decrease in other
expenses represents a lower level of miscellaneous expenses incurred during the
quarter ended December 31, 1996.
Noninterest expense increased by $368,000, or 74.49%, from $494,000 for the six
months ended December 31, 1995 to $862,000 for the six months ended December 31,
1996. The increase in total noninterest expense was primarily due to the
one-time $237,000 federal deposit insurance assessment to bring to parity the
SAIF and BIF, and the $102,000 in expenses incurred as a result of the
unsuccessful acquisition attempt of Olivia Bancorporation, Inc. The increase in
noninterest expense during the six months ended December 31, 1996 was also
attributable to a $33,000, or 10.31%, increase in compensation and employee
benefits from $320,000 for the six months ended December 31, 1995 to $353,000
for the six months ended December 31, 1996. Advertising expense and other
expenses increased by $2,000, or 28.57%, and $5,000 or 12.50%, respectively,
during the six months ended December 31, 1996 in comparison to the six months
ended December 31, 1995.
(Continued)
16
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The increase in compensation and employee benefits was attributable to the
amortization of unearned management stock bonus plan shares and an increase in
staff during the six months ended December 31, 1996. The increase in other
expenses represents a slightly higher level of miscellaneous expenses incurred
during the six months ended December 31, 1996.
Excluding the $237,000 federal insurance premium BIF/SAIF parity assessment,
federal deposit insurance premium expense declined by $2,000, or 4.88% from
$41,000 for the six months ended December 31, 1995 to $39,000 during the six
months ended December 31, 1996. Similarly, excluding the $102,000 in costs
incurred in conjunction with the unsuccessful acquisition, professional fees
declined by $10,000 during the six months ended December 31, 1996 in comparison
to the same period ended December 31, 1995.
Income Taxes
The Company's income taxes declined by $37,000, or 68.52%, from $54,000 for the
quarter ended December 31, 1995, to $17,000 the quarter ended December 31, 1996.
The change in income taxes was due primarily to a decrease in pre-tax earnings
of $77,000, or 59.23%, from pre-tax earnings of $130,000 for the quarter ended
December 31, 1995 to $53,000 for the quarter ended December 31, 1996.
The Company's income taxes fluctuated by $114,000, or 125.27%, from an income
tax expense of $91,000 for the six months ended December 31, 1995, to an income
tax benefit of $23,000 for the six months ended December 31, 1996. The change in
income taxes was due primarily to a decrease in pre-tax earnings of $364,000, or
107.37%, from pre-tax earnings of $339,000 for the six months ended December 31,
1995 to a pre-tax loss of $25,000 for the six months ended December 31, 1996. As
previously stated, the Company's pre-tax loss is due to the one-time deposit
insurance assessment and costs associated with the unsuccessful acquisition
attempt of Olivia Bancorporation, Inc. The income tax benefit for the six months
ended December 31, 1996 reflects the tax benefit associated with the Company's
current negative earnings position adjusted for tax exempt interest.
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.
(Continued)
17
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The primary investing activity of the Company is the purchase of investment and
mortgage-backed and related securities. During the six months ended December 31,
1996 and 1995, the Company purchased investment and mortgage-backed and related
securities in the amounts of $0, and $6,369,000, respectively. Other investing
activities include originations of loans and investment in FHLB of Des Moines
stock. The primary financing activity of the Company is the attraction of
savings deposits.
The Company has other sources of liquidity if there is a need for funds. The
Association has the ability to obtain advances from the Federal Home Loan Bank
(FHLB) of Des Moines. In addition, the Company maintains a portion of its
investments in FHLB overnight funds that will be available when needed.
The Company is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be changed at the direction of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required minimum ratio is
currently 5.0%. Management of the Company seeks to maintain a relatively high
level of liquidity in order to retain flexibility in terms of investment
opportunities and deposit pricing. Because liquid assets generally provide for
lower rates of return, the Company's relatively high liquidity will, to a
certain extent, result in lower rates of return on assets.
The Company's most liquid assets are cash and cash equivalents, which are
short-term, highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash and include
interest-bearing deposits. The levels of these assets are dependent on the
Company's operating, financing, and investing activities during any given
period. At December 31, 1996 and 1995, cash and cash equivalents totaled
$8,195,000 and $2,487,000, respectively. Although the Company maintains higher
levels of liquidity, the unusually high level of cash and cash equivalents at
December 31, 1996 is not indicative of the level of liquidity the Company
typically maintains; but instead reflects a combination of funds obtained from
investment securities maturing in December 1996 as well as the acceptance of
public unit funds during this month.
(Continued)
18
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Recent Developments
(1) Termination of Letter of Intent to acquire Olivia Bancorporation, Inc.
On December 30, 1996, the Company announced that the Letter of Intent,
dated November 1, 1996, to acquire 100% of the outstanding stock of Olivia
Bancorporation, Inc. (the Bancorporation) and 100% of the stock of American
State Bank of Olivia, Minnesota (the Bank) had terminated. Consummation of
the proposed acquisition was subject to several conditions, including the
completion of satisfactory due diligence by the Company. Upon completion of
due diligence, the Company decided that it could not offer the
consideration disclosed in the aforementioned Letter of Intent. After
further negotiations, the parties could not reach agreement on a revised
price for the proposed acquisition. No further negotiations on the matter
are expected to be conducted in the foreseeable future.
(2) Bank Insurance Fund/Savings Association Insurance Fund Assessment
As a result of the omnibus appropriations bill signed September 30, 1996 by
President Clinton, all financial institutions insured by the Savings
Association Insurance Fund (SAIF) were assessed a special assessment
intended to bring to parity the fund insuring deposits at most savings
institutions, the SAIF, with the fund insuring deposits at commercial
banking institutions, the Bank Insurance Fund (BIF). Subsequently, the
Association paid a one-time $237,000 assessment to the Federal Deposit
Insurance Corporation (FDIC) on November 29, 1996.
As a result of the one-time assessment, the FDIC will substantially reduce
the premium assessed savings institutions insured by the SAIF beginning
January 1, 1997. In December 1996, the Association was informed by the FDIC
that its deposit insurance rate will be 6.5 basis points for each dollar of
deposits. Based upon the current level of deposits, the Company expects
that the legislation will reduce the Association's deposit insurance
expense by approximately 71.7% before taxes.
(3) Association Dividend Payment to the Company
During the quarter ended December 31, 1996, a $2,000,000 dividend was paid
to the Company by the Association. The dividend payment reduces the capital
the Company has invested in the Association, however, the Association
continues to meet all regulatory capital requirements. The dividend was
paid subsequent to notification by the Association's regulator, the Office
of Thrift Supervision, that it took no objection to the dividend payment.
(Continued)
19
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
Not Applicable.
ITEM 3: Defaults upon Senior Securities.
Not Applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders.
On October 22, 1996, the Annual Meeting of the shareholders of the
Company was held to obtain the approval of the shareholders of
record as of September 3, 1996 in connection with the matters
indicated below. The following is a brief description of the matters
voted on at the meeting, and the number of votes cast for, against,
or withheld, as well as the number of abstentions, as to such
matters:
<TABLE>
<CAPTION>
Vote
--------------------------------
Against or
Matter For withheld Abstain
-----------------------------------------------------------------------------
<S> <C> <C> <C>
1. Election of directors:
James P. Tersteeg 1,049,122 10,150 N/A
J. Scott Nelson 1,049,122 10,150 N/A
2. Appointment of KPMG Peat Marwick 1,058,272 0 1,000
LLP as auditors for 1997 fiscal year
</TABLE>
ITEM 5: Other Information.
None.
(Continued)
20
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K.
During the quarter ended December 31, 1996, a Form 8-K (Items 5 and
7), dated November 4, 1996, and a Form 8-K (Items 5 and 7), dated
December 30, 1996, were filed.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDWOOD FINANCIAL, INC.
Registrant
Date: February 5, 1997 /s/ Paul W. Pryor
---------------- -----------------
Paul W. Pryor, President and Chief Executive
Officer (Duly Authorized Officer)
Date: February 5, 1997 /s/ Anthony H. Acker
- ---------------------- --------------------
Anthony H. Acker, Chief Financial Officer
(Principal Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 15,217
<INT-BEARING-DEPOSITS> 8,179,630
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 26,318,389
<INVESTMENTS-MARKET> 26,421,072
<LOANS> 18,384,613<F1>
<ALLOWANCE> 213,034
<TOTAL-ASSETS> 53,526,359
<DEPOSITS> 40,288,088
<SHORT-TERM> 0
<LIABILITIES-OTHER> 210,976
<LONG-TERM> 0
0
0
<COMMON> 112,500
<OTHER-SE> 13,125,771
<TOTAL-LIABILITIES-AND-EQUITY> 53,526,359
<INTEREST-LOAN> 378,600
<INTEREST-INVEST> 475,940
<INTEREST-OTHER> 54,503
<INTEREST-TOTAL> 909,043
<INTEREST-DEPOSIT> 502,095
<INTEREST-EXPENSE> 502,095
<INTEREST-INCOME-NET> 406,948
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 366,713
<INCOME-PRETAX> 52,947
<INCOME-PRE-EXTRAORDINARY> 52,947
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,947
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<YIELD-ACTUAL> 3.11
<LOANS-NON> 238,300
<LOANS-PAST> 28,664
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 266,964
<ALLOWANCE-OPEN> 213,034
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 213,034
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 213,034
<FN>
<F1> NOT NET OF ALLOWANCE
</FN>
</TABLE>
