U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] 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.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1807233
- --------------------------------------------------------------------------------
(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
- ------------------------------------------------------------- ----------
(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 October 15, 1997:
Class Outstanding
----- -----------
Common stock, par value $0.10 per share 913,782
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements
Consolidated Balance Sheets at September 30, 1997 and
June 30, 1997 3
Consolidated Statements of Earnings for the Three
months ended September 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity
for the Three months ended September 30, 1997 5
Consolidated Statements of Cash Flows for the
Three months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-10
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
Assets 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 15,404 15,314
Interest-bearing deposits with banks 581,482 748,478
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 596,886 763,792
- ------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Mortgage-backed and related securities (amortized cost 10,380,915 8,149,752
$10,286,229 and $8,143,694, respectively)
Investment securities (amortized cost $6,992,841 and 7,008,525 6,981,250
$6,992,534, respectively)
- ------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 17,389,440 15,131,002
- ------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Mortgage-backed and related securities (market value 13,225,659 13,873,801
$13,435,893 and $14,082,280, respectively)
Investment securities (market value $9,919,507 and 9,895,403 10,395,659
$10,399,446, respectively)
- ------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 23,121,062 24,269,460
- ------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 22,356,259 20,766,539
Federal Home Loan Bank stock, at cost 333,500 333,500
Accrued interest receivable 543,421 613,357
Premises and equipment, net 254,488 212,067
Real Estate, net 0 13,520
Other assets 56,121 65,679
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 64,651,177 62,168,916
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Deposits 45,780,689 46,093,213
Federal Home Loan Bank advances 6,600,000 3,500,000
Advance payments by borrowers for taxes and insurance 106,983 69,744
Accrued expenses and other liabilities 178,413 163,926
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 52,666,085 49,826,883
- ------------------------------------------------------------------------------------------------------------------------------
Common stock ($.10 par value): Authorized and issued
1,125,000 shares; outstanding 913,782 shares at
September 30, 1997; 961,875 shares at June 30, 1997 112,500 112,500
Additional paid-in capital 8,471,610 8,467,833
Retained earnings, subject to certain restrictions 6,495,481 6,369,591
Net unrealized gain (loss) on securities available for sale 37,133 (3,135)
Unearned employee stock ownership plan shares (512,944) (529,504)
Unearned management stock bonus plan shares (285,141) (306,797)
Treasury stock, at cost; 211,218 shares at
September 30, 1997; 163,125 shares at June 30, 1997 (2,333,547) (1,768,455)
- ------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 11,985,092 12,342,033
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 64,651,177 62,168,916
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements
3
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended September 30,
-------------------------------------
1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans receivable $ 466,116 363,720
Securities held to maturity:
Mortgage-backed and related securities 231,493 270,807
Investment securities 150,710 226,074
Securities available for sale:
Mortgage-backed and related securities 164,797 0
Investment securities 127,746 0
Cash equivalents 13,416 49,160
- ---------------------------------------------------------------------------------------------------------
Total interest income 1,154,278 909,761
Interest Expense:
Deposits 634,303 507,196
Federal Home Loan Bank advances 65,284 0
- ---------------------------------------------------------------------------------------------------------
Total interest expense 699,587 507,196
Net interest income 454,691 402,565
Provision for losses on loans 0 0
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 454,691 402,565
Noninterest income:
Fees and service charges 12,573 13,974
Other 878 959
- ---------------------------------------------------------------------------------------------------------
Total noninterest income 13,451 14,933
Noninterest expense:
Compensation and employee benefits 188,979 166,737
Advertising 6,162 3,096
Occupancy 6,658 7,603
Federal deposit insurance premiums 6,986 21,340
Professional fees 30,253 35,983
Deposit insurance fund assessment 0 237,085
Other 28,510 23,324
- ---------------------------------------------------------------------------------------------------------
Total noninterest expense 267,548 495,168
- ---------------------------------------------------------------------------------------------------------
Earnings before income taxes 200,594 (77,670)
Income tax expense (benefit) 74,704 (40,123)
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 125,890 (37,547)
- ---------------------------------------------------------------------------------------------------------
Net earnings per common share $ 0.14 (0.04)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 881,618 995,317
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements
4
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Net Unearned
unrealized Employee Unearned
gain on Stock management
Additional Securities Ownership stock bonus Total
Common Paid in Retained available Plan recognition Treasury stockholders'
Stock Capital Earnings for sale Shares plan shares Stock equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 112,500 8,467,833 6,369,591 (3,135) (529,504) (306,797) (1,768,455) 12,342,033
Net Earnings 125,890 125,890
Stock Repurchases (565,092) (565,092)
Net unrealized gain on
securities available for sale 40,268 40,268
Earned employee stock
ownership plan shares 3,777 16,560 20,337
Earned management
stock bonus plan shares 21,656 21,656
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 112,500 8,471,610 6,495,481 37,133 (512,944) (285,141) (2,333,547) 11,985,092
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements
5
<PAGE>
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended September 30,
-------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $ 125,890 (37,547)
Adjustments to reconcile net earnings to net cash
provided by operations
Depreciation 3,963 4,576
Amortization of premiums and discounts on investment
securities, mortgage-backed and related securities
and loans receivable, net (5,207) (9,845)
Decrease in other assets 9,558 19,092
Decrease in accrued interest receivable 69,936 149,006
Increase in accrued interest payable 410,917 320,011
Amortization of unearned ESOP shares 16,560 16,560
Earned ESOP shares priced above original cost 3,777 2,588
Earned Management Stock Bonus Plan shares 21,656 21,656
Increase in accrued expenses and other liabilities 13,693 133,597
Increase in deferred income taxes (26,052) 0
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 644,691 619,694
Investing Activities:
Proceeds from maturities of investment securities held to maturity 500,000 600,000
Principal collected on mortgage-backed and related securities held to maturity 902,311 421,349
Purchases of mortgage-backed and related securities available for sale (2,503,927) 0
Principal collected on mortgage-backed and related securities available for sale 63,200 0
Increase in loans receivable, net (1,575,503) (715,149)
Purchases of premises and equipment (46,384) (14,700)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (2,660,303) 291,500
Financing Activities:
Decrease in deposits, net (723,441) (952,119)
Increase in advance payments by borrowers for taxes and insurance 37,239 38,886
Proceeds from Federal Home Loan Bank advances 4,700,000 0
Repayment of Federal Home Loan Bank advances (1,600,000) 0
Repurchase of common stock (565,092) 0
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,848,706 (913,233)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (166,906) (2,039)
Cash and cash equivalents, beginning of period 763,792 2,873,163
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 596,886 2,871,124
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash paid for interest $ 288,670 187,185
Cash paid for income taxes 62,705 51,850
Supplemental noncash disclosures:
Transfer of real estate to loans 13,520 0
</TABLE>
See accompanying notes to unaudited financial statements
6
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1997
(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 on May 22, 1995 a Subscription and Community
Offering of its shares (the Offering) in connection with the conversion
of the Association. 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 statements of earnings for the three months ended September 30, 1997
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, 1997 and for the year then
ended.
(Continued)
7
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(3) Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares and common stock equivalents, if dilutive, outstanding during the
period. The only common stock equivalents are stock options. The weighted
average number of common stock equivalents is calculated using the
treasury stock method.
(4) Regulatory Capital Requirements
At September 30, 1997, the Association met each of the three current
minimum regulatory capital requirements. The following table summarizes
the Association's regulatory capital position at September 30, 1997:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Actual Required Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Association's Net Worth $8,555
Less: AFS Market 37
Valuation
Tangible Capital 8,518 13.49% $ 947 1.50% n/a n/a
(to tangible assets)
Core Capital 8,518 13.49% 1,894 3.00% $3,157 5.00%
(to adjusted tangible assets)
Core Capital 8,518 41.99% n/a n/a 1,217 6.00%
(to risk-weighted assets)
Plus: Allowable portion of 213
general allowance for
loan losses
Risk-based Capital $8,731 43.04% $1,623 8.00% $2,029 10.00%
(to risk-weighted assets)
</TABLE>
(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
During the three months ended September 30, 1997, the Company purchased
48,093 shares of its outstanding common stock, or 5% of its previously
outstanding common stock. As a result of the stock repurchase program, the
Company has now outstanding 913,782 shares of common stock. The Company has
applied to the Office of Thrift Supervision for permission to repurchase an
additional 5% of its outstanding stock, or 45,689 shares. The following
summarizes the Company's common stock repurchases during the quarter:
Date Purchased Shares Purchased Price per share
-------------- ---------------- ---------------
September 11, 1997 28,000 $11.75
September 12, 1997 20,093 $11.75
(7) New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (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 supercedes 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 earnings
per share calculation.
(Continued)
9
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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.
(Continued)
10
<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 $2,482,000, or 3.99%, from $62,169,000
at June 30, 1997 to $64,651,000 at September 30, 1997. The increase in the
Company's assets reflected an increase in the level of Federal Home Loan Bank
(FHLB) advances during the three months ended September 30, 1997. These advances
were used to fund increased loan production and purchases of mortgage-backed
securities and to offset a net deposit outflow during the this three month
period.
Cash and cash equivalents decreased by $167,000, or 21.86%, from $764,000 at
June 30, 1997 to $597,000 at September 30, 1997. The decrease in cash was
primarily due to the use of funds for the aforementioned increase in loan
production, mortgage-backed securities purchases, and net deposit outflows
during the three months ended September 30, 1997. The Company continues to
maintain lower levels of cash and cash equivalents in order to enhance overall
yield.
(Continued)
11
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's loans receivable, net, increased $1,589,000, or 7.65% during the
three months ended September 30, 1997. The increase in loans was a result of
increased loan demand in the Company's market and primarily includes 1-4 family
residential mortgage loans and multifamily mortgage loans. The continued
increase in the Company's loan portfolio will increase the Company's credit risk
exposure.
The Company's investment securities, including mortgage-backed and related
securities, designated as held to maturity decreased $1,148,000, or 4.73% from
June 30, 1997 to September 30, 1997. The decrease in investment securities,
including mortgage-backed and related securities designated held to maturity is
due to the Company's investment objective of designating select new investment
security purchases, including purchases of mortgage-backed and related
securities as available for sale. No securities designated held to maturity were
purchased or sold during the three months ended September 30, 1997. No change in
this strategy is anticipated.
The Company's investment securities, including mortgage-backed securities
designated available for sale increased 14.92% or $2,258,000 during the three
months ended September 30, 1997. The increase primarily included the purchase of
7-year balloon mortgage-backed securities. Purchases of these mortgage-backed
securities totaled approximately $2,504,000 during this three month period. In
addition, the carrying value of the Company's investment securities, including
mortgage-backed securities reflected a $40,000 increase due to market value
appreciation.
The Company's deposits, including accrued interest payable, decreased by
$312,000, or 0.68%, from $46,093,000 at June 30, 1997 to $45,781,000 at
September 30, 1997. At September 30, 1997, the Company's FHLB advances totaled
$6,600,000, an increase of $3,100,000, or 88.57% from $3,500,000 at June 30,
1997. The advances were utilized to fund increased loan production and
mortgage-backed securities purchases during this three month period. The Company
may continue to increase its use of FHLB advances pending the interest rate and
other terms of future advance offerings. FHLB advances provide an alternative
source of funds for the Company, at costs substantially equivalent to, or lower
than its retail deposit products.
In order to leverage its capital, the Company may continue to seek additional
deposits through traditional deposit products and new deposit products, as well
as increase utilization of FHLB advances, to fund loan growth and investment
purchases.
(Continued)
12
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Results of Operations
Net Earnings
Net earnings were $126,000 for the quarter ended September 30, 1997, as compared
to a net loss of $38,000 for the quarter ended September 30, 1996. This
represented an increase of $164,000. The increase in net earnings was primarily
attributable to the $237,000, pre-tax special assessment required by the Federal
Deposit Insurance Corporation levied on thrift institutions as part of the
omnibus appropriations bill of September 30, 1996. The increase in net earnings
was also attributable to a $52,000 increase, or 12.90% in net interest income.
The increase in net interest income was primarily a result of the use of funds
obtained from recent advances to fund loan originations and to purchase
investment securities, including mortgage-backed securities. Net earnings were
also impacted by a $10,000 increase, or 3.88% in noninterest expense, excluding
the $237,000 special assessment, and a $115,000, or 287.50% increase in income
tax expense.
Net Interest Income
Net interest income increased by $52,000, or 12.90%, from $403,000 for the
quarter ended September 30, 1996 to $455,000 for the quarter ended September 30,
1997. The increase in net interest income is due to growth of the Company over
the last twelve months and a change in the mix of the Company's interest
earning-assets into higher yielding loans and investment securities.
The Company's average interest earning assets increased $11,474,000, or 22.35%
from $51,330,000 at September 30, 1996, to $62,804,000 at September 30, 1997.
Similarly, the Company's average interest-bearing liabilities increased
$12,488,000, or 32.89% from $37,967,000 at September 30, 1996 to $50,455,000 at
September 30, 1997. The Company's interest-bearing liabilities increased at a
faster rate than its interest-earning assets due primarily to the financing of
stock repurchases over the previous 12 months.
The increase in net interest income was also affected by a change in the mix of
the Company's interest earning assets. As a result, net interest income was also
impacted by an increase in the net interest spread from 1.75% for the three
months ended September 30, 1996 to 1.81% for the three months ended September
30, 1997.
(Continued)
13
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest Income
Interest income was $1,154,000 for the quarter ended September 30, 1997, as
compared to $910,000 for the quarter ended September 30, 1996, representing an
increase of $244,000, or 26.81%. The increase in interest income was primarily
due to the aforementioned increase in interest-earning assets. The increase in
interest income was also affected by an increase in the overall yield on
interest-earning assets. For the quarter ended September 30, 1997, the yield on
interest-earning assets was 7.35%, as compared to 7.09% for the quarter ended
September 30, 1996. The increase in yield on interest-earning assets was due
primarily to a change in the composition of the Company's interest-earning
assets, particularly the larger loan portfolio in the quarter ended September
30, 1997.
Interest on loans receivable increased by $102,000, or 28.02%, to $466,000 for
the quarter ended September 30, 1997, as compared to $364,000 for the quarter
ended September 30, 1996. Such increase was due to a $4,626,000, or 27.34%
increase in the average balance of loans receivable from $16,922,000 for the
quarter ended September 30, 1996 to $21,548,000 for the quarter ended September
30, 1997. The increase in interest on loans receivable was also affected by an
increase in the average yield on loans receivable from 8.60% for the quarter
ended September 30, 1996, to 8.65% for the quarter ended September 30, 1997.
Since January 1997, management has designated all purchases of mortgage-backed
and related securities as available for sale. As a result of this strategy,
interest income on mortgage-backed and related securities held to maturity
declined $40,000, or 14.76% from $271,000 for the three months ended September
30, 1996 to $231,000 for the three months ended September 30, 1997. The decrease
in interest income on mortgage-backed and related securities held to maturity is
a result of a $2,018,000 decrease, or 12.92% in the average balance of
mortgage-backed and related securities held to maturity in comparison of the
quarters ended September 30, 1997 and 1996, respectively. This decrease was also
affected by a slight decrease in the yield on the mortgage-backed and related
securities held to maturity from 6.93% for the quarter ended September 30, 1996,
to 6.81% for the quarter ended September 30, 1997.
Interest income on mortgage-backed and related securities available for sale was
$165,000 and $0 for the quarters ended September 30, 1997 and 1996,
respectively. The yield on the Company's mortgage-backed securities portfolio
available for sale was 6.93% for the quarter ended September 30, 1997.
(Continued)
14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
As with the Company's mortgage-backed and related securities purchases,
management has designated all purchases of investment securities as available
for sale since January 1997. As a result of this strategy, interest income on
investment securities held to maturity, declined $75,000, or 33.19% from
$226,000 for the three months ended September 30, 1996 to $151,000 for the three
months ended September 30, 1997. The net decrease in interest income on
investment securities designated held to maturity is a result of a $4,812,000
decrease, or 32.43% in the average balance of investment securities held to
maturity in comparison of the quarters ended September 30, 1997 and 1996,
respectively. This decrease was also affected by a slight decrease in the yield
on the investment securities held to maturity from 5.93% for the quarter ended
September 30, 1996, to 5.78% for the quarter ended September 30, 1997.
Interest income on investment securities available for sale was $128,000 and $0
for the quarters ended September 30, 1997 and 1996, respectively. The yield on
the Company's investment securities portfolio designated available for sale was
7.29% for the quarter ended September 30, 1997.
Interest income on cash and cash equivalents decreased by $36,000, or 73.47% for
the quarters ended September 30, 1997 and 1996, respectively. The decrease is a
result of management's decision to decrease its cash on hand in order to enhance
overall yield.
Interest Expense
Interest expense increased by $193,000, or 38.07%, from $507,000 for the quarter
ended September 30,1996 to $700,000 for the quarter ended September 30, 1997.
The increase in interest expense resulted from a $7,813,000, or 20.58% increase
in the average balance of deposits from $37,967,000 for the quarter ended
September 30, 1996 to $45,780,000 for the quarter ended September 30, 1997. The
increase in interest expense was also impacted by a slight increase in the
average cost of deposits to 5.54% during the quarter ended September 30, 1997,
as compared to 5.34% for the quarter ended September 30, 1996. The increase in
the Company's deposit base was primarily affected by an increase in funds
attracted from local municipal entities. These funds are typically more volatile
and more costly than traditional retail deposits.
The increase in interest expense also was affected by interest expense on FHLB
advances. During the quarters ended September 30, 1997 and 1996, interest
expense on FHLB advances totaled $65,000 and $0, respectively. The Company
utilizes FHLB advances to fund increases in loan production and purchases of
investment securities, including mortgage-backed and related securities.
(Continued)
15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Provision for Loan Losses
The Company's provision for loan losses was $0 and $0 for the three months ended
September 30, 1997 and 1996, respectively. Due to lack of substantive problem
loans (i.e. few nonaccrual loans) during these periods and stable real estate
values in the Company's market area, management believes that the allowance for
loan losses was adequate throughout these periods. The allowance for loan losses
was maintained at $213,000 at September 30, 1997 and 1996. The Company's net
loan charge-offs were $0 and $0 for the three months ended September 30, 1997
and 1996, respectively. At September 30, 1997 and 1996, the allowance for loan
losses represented 0.94% and 1.02%, respectively, of loans receivable.
Nonaccrual loans totaled $0 and $29,000 at September 30, 1997 and 1996,
respectively.
Noninterest Income
The level of noninterest income remained nearly unchanged for the quarter ended
September 30, 1997 as compared to the quarter ended September 30, 1996. For the
quarters ended September 30, 1997 and 1996, noninterest income totaled $13,000
and $15,000, respectively.
Noninterest Expense
Noninterest expense decreased by $227,000, or 45.86%, from $495,000 for the
quarter ended September 30, 1996 to $268,000 for the quarter ended September 30,
1997. The decrease in total noninterest expense was primarily due to the
aforementioned pre-tax $237,000 one time special deposit insurance fund
assessment in the quarter ended September 30, 1996. This decrease was also
impacted by a $22,000, or 13.17% increase in compensation and employee benefits
expense, a $14,000, or 66.67% decrease in federal deposit insurance premiums, a
$6,000, or 16.67% decrease in professional fees, and a $6,000, or 26.09%
increase in other expenses. The increase in compensation and employee benefits
is primarily due to an increase in staff. The decrease in federal deposit
insurance premiums is due to lower deposit insurance fund assessments as a
result of federal legislation enacted in 1996.
Income Taxes
The Company's income taxes increased by $115,000, from a tax benefit of $40,000
for the quarter ended September 30, 1996, to a tax expense of $75,000 for the
quarter ended September 30, 1997. The change in income taxes was due primarily
to an increase in pre-tax earnings of $279,000, from a pre-tax loss of $78,000
for the quarter ended September 30, 1996 to pre-tax earnings of $201,000 for the
quarter ended September 30, 1997.
(Continued)
16
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Comparison of Operating Results for the Three Months ended September 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; deposits 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.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, FHLB advances 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 three months ended September 30, 1997 and 1996, the Company's loan
portfolio, net, increased $1,576,000 and $715,000, respectively. During the same
periods, the Company purchased mortgage-backed and related securities in the
amounts of $2,504,000, and $0, respectively. The primary financing activity of
the Company is the attraction of savings deposits and utilization of FHLB
advances.
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. During the quarters ended September 30, 1997 and 1996,
the Association utilized advances of $4,700,000 and $0, respectively. 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)
17
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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. 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
September 30, 1997 and 1996, cash and cash equivalents totaled $597,000 and
$2,871,000, respectively. Investment securities, including mortgage-backed and
related securities designated available for sale total $17,389,000 and $0 at
September 30, 1997 and 1996, respectively.
Federal savings institutions are required to satisfy three capital requirements:
(i) a requirement that "tangible capital" equal or excess 1.5% of tangible
assets, (ii) a requirement that "core capital" equal or excess 3.0% of adjusted
tangible assets, and (iii) a risk-based capital requirement currently of 8.0% of
"risk-adjusted" assets. The Association currently meets all three capital
requirements.
Recent Developments
Completion of Stock Repurchase Program and Application for Additional
Repurchases
On September 3, 1997, the Company announced it had received the necessary
regulatory approval to repurchase 5% of its outstanding shares, or 48,093
shares. The Company completed the repurchase as detailed previously in this
10-QSB. On September 26, 1997, the Company announced that it had applied to the
Office of Thrift Supervision for permission to repurchase another 5% of its
outstanding shares, or 45,689 shares. Regulatory approval is pending.
(Continued)
18
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
Not Applicable.
ITEM 3: Defaults Upon Senior Securities.
Not Applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
None
19
<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: October 30, 1997 /s/ Paul W. Pryor
---------------- -----------------
Paul W. Pryor, President and Chief Executive
Officer (Duly Authorized Officer)
Date: October 30, 1997 /s/ Anthony H. Acker
---------------- --------------------
Anthony H. Acker, Chief Financial Officer
(Principal Accounting Officer)
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 15,404
<INT-BEARING-DEPOSITS> 581,482
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,389,440
<INVESTMENTS-CARRYING> 23,121,062
<INVESTMENTS-MARKET> 23,355,400
<LOANS> 22,356,259
<ALLOWANCE> 213,034
<TOTAL-ASSETS> 64,651,177
<DEPOSITS> 45,780,689
<SHORT-TERM> 5,600,000
<LIABILITIES-OTHER> 285,396
<LONG-TERM> 1,000,000
0
0
<COMMON> 112,500
<OTHER-SE> 11,872,592
<TOTAL-LIABILITIES-AND-EQUITY> 65,651,177
<INTEREST-LOAN> 466,116
<INTEREST-INVEST> 674,746
<INTEREST-OTHER> 13,416
<INTEREST-TOTAL> 1,154,278
<INTEREST-DEPOSIT> 634,303
<INTEREST-EXPENSE> 65,284
<INTEREST-INCOME-NET> 454,691
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 267,548
<INCOME-PRETAX> 200,594
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,890
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<YIELD-ACTUAL> 2.87
<LOANS-NON> 0
<LOANS-PAST> 707,850
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 707,850
<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>
