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, 1998,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
Commission File No. 0-25884
REDWOOD FINANCIAL, INC.
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(Name of Small Business Issuer in Its Charter)
Minnesota 41-1807233
- --------------------------------------------- ------------------
(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
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(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. [ ]
State issuer's revenues for its most recent fiscal year $4.9 million.
------------
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, 1998, was $6.6 million ($13.0 per share based on
510,221 shares of Common Stock held by non-affiliates).
As of September 2, 1998, there were issued and outstanding 800,611
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, 1998. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
Item 1. Business
- -----------------
Business of the Company
Redwood Financial, Inc. (the "Company") is a Minnesota corporation. It
was 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. Subsequently, in May 1998, the Association changed its corporate
title to HomeTown Bank (the "Bank"). 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 Bank retains a
specified amount of its assets in housing-related investments. At June 30, 1998,
the Company had total assets of $77.3 million, total deposits of $48.1 million,
and stockholders' equity of $11.9 million. The primary activity of the Company
is to hold all of the outstanding capital stock of the Bank, however, the
Company maintains a small loan portfolio separate from its investment in the
Bank.
Business of the Bank
The Bank attracts deposits from the public and uses such deposits
primarily to purchase investment securities and mortgage-backed and related
securities and to originate loans in its market area. For its loan portfolio,
the Bank originates and retains fixed and adjustable rate loans, and fixed rate
balloon loans. The Bank is primarily a 1-4 family residential mortgage lender;
however, the Bank has actively begun origination of commercial and agricultural
loans, including both real estate secured and operating and term loans secured
by non-real estate collateral. The Bank also originates various consumer loans
and a limited number of multi-family and residential construction loans. The
Bank also participates in several commercial, commercial real estate, and
agricultural loans.
The principal sources of funds for the Bank's lending activities are
deposits and the amortization, repayment, and maturity of loans and investment
securities. The Bank also obtains funds from Federal Home Loan Bank ("FHLB")
advances. The Bank does not rely on brokered deposits, however, a substantial
portion of the Bank'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 Bank's principal expenses are
interest expense on deposits and noninterest expense and, to a lesser extent,
interest expense on FHLB advances.
The Bank 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
Bank 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.
Market Area and Competition
The Bank'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
Bank's market area, an area mainly comprised of the cities of Redwood Falls and
Olivia, both of which are county seats and have populations of approximately
5,000 and 2,800, respectively. Historically, the economy in the Bank'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
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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
agricultural and commercial real estate, consumer, residential construction,
multi-family real estate loans, and agricultural and commercial non-real estate
loans. From time to time, the Company will participate in agricultural and
commercial 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, office buildings, and
retail establishments. Agricultural loans are secured by real estate and/or
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,
--------------------------------------------------
1998 1997
------------------------ ----------------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential (1-4 family) ......... $ 24,261 83.67% $ 18,577 89.46%
Residential construction ......... 464 1.60 502 2.42
Multi-family ..................... 1,472 5.08 174 0.84
Multi-family construction ........ 0 0 980 4.72
Commercial ....................... 1,375 4.74 680 3.27
Agricultural ..................... 113 0.39 150 0.72
Consumer loans:
Other consumer loans ............. 182 0.63 21 0.10
Loans on deposits ................ 256 0.88 133 0.64
Commercial ......................... 1,236 4.26 715 3.44
Agricultural operating ............. 2,793 9.64 425 2.05
-------- ------ -------- ------
Total .............................. 32,152 110.89 22,357 107.66
Less:
Loans in process ................. (2,877) (9.92) (1,361) (6.56)
Deferred loan fees and discounts . (29) (0.10) (16) (0.08)
Allowance for loan losses ........ (251) (0.87) (213) (1.02)
-------- ------ -------- ------
Total loans, net ................... $ 28,995 100.00% $ 20,767 100.00%
======== ====== ======== ======
</TABLE>
The Company primarily originates loans for retention in its portfolio
and has not purchased whole loans or sold loans during the past three years.
3
<PAGE>
Loan Maturity Tables. The following table sets forth the maturity of
Company's loan portfolio at June 30, 1998. 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 $ 830 $ 45 $ 0 $ 0 $ 7 $ 0 $ 153 $ 105 $ 1 $ 1,141
1 to 5 years . 8,150 416 0 0 560 113 88 324 2,174 11,825
After 5 years 15,281 1,011 464 0 808 0 197 807 618 19,186
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total amount due $24,261 $ 1,472 $ 464 $ 0 $ 1,375 $ 113 $ 438 $ 1,236 $ 2,793 $32,152
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of all loans due after
June 30, 1999, which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
(In thousands)
1-4 Family residential............ $18,349 $5,082 $23,431
Multi-family real estate.......... 416 1,011 1,427
Residential construction.......... 464 -- 464
Multi-family construction......... -- -- --
Commercial real estate............ 1,334 34 1,368
Agricultural real estate.......... 113 -- 113
Consumer.......................... 285 -- 285
Commercial........................ 1,131 -- 1,131
Agricultural...................... 2,792 -- 2,792
------- ------- -------
Total........................... $ 24,884 $ 6,127 $ 31,011
======= ======= =======
One-to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Bank's primary market area. The Bank
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 Bank generally
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 Bank 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 Bank
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 Bank will
usually refinance the balloon mortgage loan at maturity at the then current
market rate of interest. Among other factors, the Bank's refinancing of these
loans is dependent upon adequate collateral value. The Bank will originate
fixed-rate loans with maturities of up to 30 years. The Bank monitors the level
of this type of long-term, fixed-rate lending in order to control interest-rate
risk. In addition, the Bank attempts to fund long-term, fixed-rate loans with
long-term deposits and FHLB advances.
The Bank also offers adjustable-rate loans, although the majority of
its recent loan production has been in fixed-rate balloon loans. The Bank'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 Bank's cost of funds. The origination fees for
loans are generally 1% of the loan amount. Generally, the Bank's standard
underwriting guidelines for fixed-rate mortgage loans conform to Federal Home
Loan
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Mortgage Corporation ("FHLMC") guidelines. It is the current policy of the Bank
to originate loans solely for its loan portfolio. However, if certain market
conditions exist, the Bank may originate long-term, fixed-rate loans for sale in
the secondary mortgage market. The Bank will continue to emphasize short-term or
adjustable-rate mortgage loans consistent with its asset/liability management
strategy; however, recent declines in interest rates have resulted in a higher
level of origination of long-term, fixed-rate loans. At June 30, 1998, the Bank
did not service loans for others.
Consumer Loans. Consumer loans are primarily made when secured by a
savings account in the Bank. 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 Bank is in the process of expanding its consumer
loan program to include auto, unsecured, and other forms of consumer lending. At
June 30, 1998, the Bank's balance in these other consumer loans totaled
$182,000. Although the Bank 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 Bank 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, 1998, the
Bank's largest commercial real estate loan to one borrower consisted of a loan
totaling $328,000, secured by several retail properties in Redwood Falls,
Minnesota. All commercial real estate loans require approval by the Bank's Board
of Directors. As part of its underwriting, the Bank requires that borrowers
qualify for adjustable rate commercial real estate loans 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 Bank, 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
Bank, these loans are made on terms similar to those of the Bank's one- to
four-family residential loans and may be amortized over terms of up to 30 years.
The Bank 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
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<PAGE>
assumable by ultimate purchasers. In underwriting such loans, the Bank takes
into consideration the number of units that the builder has on a speculative
basis that remain unsold.
Multi-Family Loans. The Bank also makes fixed-rate and adjustable-rate
multi-family loans, including loans on apartment complexes. At June 30, 1998,
the Company's largest multi-family loans consisted of two loans to the economic
development authorities of the cities of Redwood Falls and Olivia, Minnesota
totaling $498,000 and $480,000, respectively. The loans are secured by mortgage
liens on the respective multi-family properties.
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. During fiscal 1998, the Bank began to actively
originate commercial loans not secured by real estate. In this period, the Bank
hired a local experienced loan officer to expand its commercial and agricultural
lending programs. As such, the Bank's portfolio of commercial non-real estate
loans increased by $695,000 to $1,236,000 from June 30, 1997 to June 30, 1998.
The Company's largest commercial loans to one borrower consist of two
participation loans, totaling $737,000 to a local casino secured primarily by
the casino's revenues.
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. As with the Bank's commercial lending activities,
during fiscal 1998, the Bank began to actively originate agricultural loans
secured by real estate or by other non real estate collateral. As a result, the
Bank's portfolio of agricultural loans secured by non-real estate collateral
increased by $2,368,000 to $2,793,000 from June 30, 1997 to June 30, 1998. The
Bank's portfolio of agricultural loans secured by real estate declined modestly
by $37,000 to $113,000 from June 30, 1997 to June 30, 1998. The Company's
largest agricultural loans to one borrower consist of an agricultural term loan
totaling $537,000 secured by cooperative stock.
Agricultural lending, including both operating and real estate-secured
agricultural lending generally involves a greater degree of risk than the Bank'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.
Loan Commitments. The Bank 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, 1998, the Bank
had $2,198,000 of commitments to cover originations, undisbursed funds for loans
in process, and unused lines of credit. The Bank believes that most of the
Bank's commitments will be funded.
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<PAGE>
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.
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 Bank had no loans modified in a
troubled debt restructuring.
<TABLE>
<CAPTION>
June 30,
---------------------------
1998 1997
------- -------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 family residences........... $ -- $ --
All other mortgage loans................................... -- --
Non-mortgage loans........................................... -- --
------ ------
Total........................................................ $ -- $ --
===== ======
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 family residences........... $ 75 $ 120
All other mortgage loans................................... -- --
Non-mortgage loans........................................... 15 --
----- ------
Total........................................................ $ 90 $ 120
==== ======
Total non-accrual and accrual loans.......................... $ 90 $ 120
==== ======
Real estate.................................................. $ -- 14
===== ======
Other non-performing assets.................................. $ -- --
===== ======
Total non-performing assets.................................. $ 90 $ 134
===== ======
Total non-accrual and accrual loans to
net loans.................................................. 0.31% 0.58%
==== ====
Total non-accrual and accrual loans to
total assets............................................... 0.12% 0.19%
==== ====
Total non-performing assets to total assets.................. 0.12% 0.22%
==== ====
</TABLE>
There was no interest income that would have been recorded on loans
placed on a non-accrual basis under the original terms of such loans as there
were no loans on a nonaccrual basis during the year ended June 30, 1998.
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<PAGE>
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 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, 1998, the Company's classified assets consisted of
substandard loans of $37,000. At June 30, 1998, the Company also had $427,000 in
loans designated as special mention. The Company had delinquent loans of 60 and
90 days or more of $138,000 and $90,000, respectively, and a general valuation
allowance of $251,000.
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, 1998.
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.
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.
9
<PAGE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1998 1997
--------------------------- ------------------------
Percent of Percent of
Loans in each Loans in 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:
1-4 family residential............ 56 76.9 68 85.3
Multi-family ..................... 5 4.5 1 5.2
Commercial........................ 31 4.3 6 3.0
Agricultural...................... 1 0.4 1 0.7
Consumer............................ 2 1.4 -- 0.7
Commercial.......................... 8 3.8 -- 3.2
Agricultural........................ 18 8.7 7 1.9
Unallocated allowance for
loans losses...................... 130 N/A 130 N/A
----- ----- ----- -----
Total allowance for
loan losses .................. $ 251 100.0% $ 213 100.0%
===== ===== ===== =====
</TABLE>
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Company's allowance for loan losses at the
dates and for the periods indicated:
<TABLE>
<CAPTION>
At or For the Year
Ended June 30,
----------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Total loans outstanding (1)..................... $29,246 $20,980
====== ======
Average loans outstanding....................... $24,131 $18,284
====== ======
Allowance balances (at beginning of
year)........................................... $ 213 $213
Charge-offs..................................... -- --
Recoveries...................................... -- --
-------- -------
Net charge-offs................................. -- --
Provision....................................... 38 --
-------- -------
Allowance balance (at end of year).............. $ 251 $ 213
======== =======
Allowance for loan losses as a percent
of total loans outstanding.................... 0.86% 1.02%
Net loans charged off as a percent of
average loans outstanding..................... --% --%
</TABLE>
- --------------------------------
(1) Excludes allowance for loan losses.
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<PAGE>
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 and/or sales, as a source of liquidity.
At June 30, 1998, the Company's mortgage-backed and related securities
designated available-for- sale had a carrying value (and fair value) of $33.9
million, and an amortized cost of $33.7 million. In January 1998, the Company
redesignated all mortgage-backed and related securities held to maturity as
available for sale. As such, at June 30, 1998, the Company had no
mortgage-backed and related securities designated held to maturity. The Company
doe not intend to designate any mortgage-backed and related securities as held
to maturity in the foreseeable future.
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 Bank. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include FHLMC, Government National Mortgage
Bank ("GNMA"), and Federal National Mortgage Bank ("FNMA").
FHLMC is a publicly-owned corporation chartered by the United States
Government. FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by Congress with a mandate to establish a secondary market for
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest, and FNMA securities are indirect obligations of the United States
Government. GNMA is a government agency within the Department of Housing and
Urban Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Because FHLMC, FNMA, and GNMA were established to provide support
for low- and middle-income housing, there are limits to the maximum size of
loans that qualify for these programs. To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market. At June 30, 1998, the Company had no
collateralized mortgage obligations or other mortgage derivative products.
Investment Activities. In order to maintain operational flexibility and
meet regulatory liquidity requirements, the Bank maintains an investment
securities portfolio. See Regulation of the Bank Liquidity Requirements.
Investment securities can serve as collateral for borrowings and, through
maturities and/or sales, as a source of liquidity.
At June 30, 1998, the Company's investment securities designated
available-for-sale had a carrying value (and fair value) of $9.8 million. At
June 30, 1998, amortized cost also totalled $9.8 million. In January 1998, the
Company redesignated all investment securities held to maturity as
11
<PAGE>
available for sale. As such, at June 30, 1998, the Company had no investment
securities designated held to maturity. The Company does not intend to designate
any investment securities as held to maturity in the foreseeable future. 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.
At June 30,
-------------------------
1998 1997
------- -------
(In thousands)
U.S. Treasury notes.................... $3,798 $ 5,502
U.S. Government agency securities...... 10,725
5,166
Municipal bonds........................ 830 1,150
------- ------
Total investment securities.......... 9,794 17,377
Interest-earning deposits in
other institutions..................... 1,989 748
FHLB stock............................... 835 334
Mortgage-backed and related
securities............................. 33,937 22,023
------- ------
Total investments.................. $46,555 $40,482
======= ======
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, 1998.
<TABLE>
<CAPTION>
As of June 30, 1998
--------------------------------------------------------------------------------------------------------
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...... $3,798 5.44% $ -- --% $ -- --% $ -- --%
U.S. Government
Agency bonds........... 1,753 6.48 1,913 6.64 1,500 6.48 -- --
Municipal bonds (1)...... 430 4.19 250 4.35 150 4.57 -- --
------ ----- ------ ----- ------ ---- ------ -----
Total investment
securities........... 5,981 5.65 2,163 6.38 1,650 6.31 -- --
Mortgage-backed and
related securities..... 1,965 6.34 9,811 6.55 20,173 6.50 1,988 7.19
----- ----- ------ ----- ------- ---- ----- -----
Total investment
portfolio(2)......... $7,946 5.82% $11,974 6.52% $21,823 6.49% $1,988 7.19%
===== ===== ====== ===== ====== ===== ===== =====
</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.
12
<PAGE>
Sources of Funds
General. Deposits and, to a lesser extent, FHLB advances 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.
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, 1998, passbook and money market accounts constituted $7.6
million, or 15.80% of the Company's deposit portfolio and certificates of
deposit constituted $40.5 million or 84.20% of the deposit portfolio. The
Company had no brokered deposits at that date, however, a substantial portion of
the Bank's deposits are funds from local government entities.
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, 1998,
including term certificate accounts separated by time remaining until maturity.
Amount
------
(In thousands)
Term certificate accounts:
Maturity Period
Within three months..................... $ 2,660
Three through six months................ 4,254
Six through twelve months...............
3,878
Over twelve months...................... 4,976
-------
Total................................. 15,768
Money market accounts..................... 3,531
-------
Total................................. $19,299
======
Borrowings
Deposits are the primary source of funds for the Company's lending and
investment activities and for its general business purposes. The Bank 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 blanket pledge
of its 1-4 family mortgage loan portfolio, a pledge of the Bank's stock in the
FHLB of Des Moines, and a portion of the Bank's investment securities. At June
30, 1998, the Bank had advances outstanding of $16.2 million. The Bank also has
a $1.0 million line of credit with the FHLB which was not drawn on at June 30,
1998. The Bank's advances include $5.0 million in advances with various call
features. If called, the FHLB has pledged to provide alternative funding albeit
at then current market terms. The Bank, 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, 1998, the Company and the Bank had
no borrowings from the Federal Reserve Board.
13
<PAGE>
Personnel
The Company has no employees other than executive officers. As of June
30, 1998, the Bank had 12 full-time and 2 part-time employees. None of the
Bank's employees are represented by a collective bargaining group.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. 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 Bank 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 Bank 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 Bank 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 Bank-Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank 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 Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
Insurance of Deposit Accounts. The Bank'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
14
<PAGE>
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.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank 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 Bank 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 Bank's regulatory capital
exceeded all minimum regulatory capital requirements applicable to it as of June
30, 1998.
Interest-Rate Risk (IRR). As a financial institution regulated by the
OTS, the Bank 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 Bank 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 Bank at June 30, 1998 and 1997, given
an instantaneous and permanent increase in market interest rates.
<TABLE>
<CAPTION>
Risk Measures: At June 30, At June 30,
1998 1997
----------- -----------
<S> <C> <C>
200 Basis point rate shock
Pre-shock NPV ratio: NPV as % of present value of assets 13.14% 15.48%
Exposure measure: Post-shock NPV ratio: 11.29% 12.95%
Sensitivity measure: Change in NPV ratio: (185) bps (253) 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 Bank may undertake in response to changes in
interest rates. Nevertheless, the Bank's interest-rate risk exposure has
decreased over the 12 months ended June 30, 1998, primarily as a result of the
Company's use of long-term, fixed-rate FHLB advances. These advances were
obtained as part
15
<PAGE>
of management's strategy to fund a substantial portion of its long-term,
fixed-rate loan portfolio with long-term, fixed-rate sources of funds in order
to minimize interest-rate risk.
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 Bank 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, 1998, the Bank was a Tier 1 institution. In the event the Bank'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 Bank'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 Bank 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 Bank below the amount required for the liquidation account to be established
pursuant to the Bank's plan of conversion. During the year ended June 30, 1998,
the Bank declared and paid a $500,000 dividend to the Company.
Loans to One Borrower. Savings institutions 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 Bank's maximum loan
to one borrower limit was approximately $1,275,000 as of June 30, 1998.
At June 30, 1998, the Bank's largest loan amount to one borrower was an
agricultural term loan in the amount of $537,000, secured by co-operative stock.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank 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, 1998, the Bank was in compliance with its QTL
requirement with 84.71% of its assets invested in QTIs.
16
<PAGE>
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 Bank is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 1998, the Bank 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 Bank.
The Bank 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 Bank also owns a building adjacent to the branch
office and two lots in Redwood Falls, Minnesota. In May 1997, the Bank purchased
two vacant lots in Redwood Falls for possible future expansion. Subsequently, in
April 1998, the Bank announced that it was proceeding with construction of a new
main office building for the Bank on the east side of Redwood Falls. The new
facility will be completed in early 1999 with occupancy shortly thereafter. The
Bank intends to continue operating its downtown Redwood Falls office as a branch
office.
In December 1997, the Bank also purchased a lot in Olivia for possible
future expansion of its Olivia branch office. The Bank has made no decision if
or when to construct a branch office building on this lot.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank'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 Bank,"
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 Bank."
17
<PAGE>
(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 Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- --------------------------
The Company and the Bank, 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
Bank 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
Bank. No claims or lawsuits were pending or threatened at June 30, 1998.
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, 1998.
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, 1998 (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
- -----------------------------
Consolidated financial statements 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.
18
<PAGE>
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 29, 1998, (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
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, 1998, are
incorporated herein by reference.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of June 30, 1998 and
1997
Consolidated Statements of Earnings for the Years Ended June 30, 1998,
1997, and 1996
19
<PAGE>
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997, and 1996
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission ("SEC") are not required under the related instructions or are
inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3.1 Articles of Incorporation of Redwood Financial, Inc.*
3.2 Bylaws of Redwood Financial, Inc.*
10.1 Employment contract with Paul W. Pryor **
10.2 1995 Stock Option Plan***
10.3 Management Stock Bonus Plan***
10.4 1997 Directors Stock Option Plan**
13 Annual Report to Stockholders for the fiscal year
ended June 30, 1998.
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 Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1997 (File No. 0-25884).
*** 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).
20
<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 16, 1998 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 16, 1998 Date: September 16, 1998
By: /s/ J. Scott Nelson By: /s/ Blaine C. Farnberg
---------------------------------- ---------------------------
J. Scott Nelson Blaine C. Farnberg
Vice Chairman of the Board Director
Date: September 16, 1998 Date: September 16, 1998
By: /s/ Thomas W. Stotesbery By: /s/ Donald C. Orth
---------------------------------- ---------------------------
Thomas W. Stotesbery Donald C. Orth
Director Vice President and Director
Date: September 16, 1998 Date: September 16, 1998
By: /s/ Anthony H. Acker
----------------------------------
Anthony H. Acker
Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: September 16, 1998
EXHIBIT 13
<PAGE>
[REDWOOD FINANCIAL, INC. LETTER TO STOCKHOLDERS]
<PAGE>
[REDWOOD FINANCIAL, INC. LETTER TO STOCKHOLDERS CONTINUED]
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Financial Statements
June 30, 1998, 1997, and 1996
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page(s)
Independent Auditors' Report....................................... 1
Annual Report...................................................... 2-19
Financial Statements:
Consolidated Balance Sheets................................... 20
Consolidated Statements of Earnings........................... 21
Consolidated Statements of Stockholders' Equity............... 22
Consolidated Statements of Cash Flows......................... 23-24
Notes to Financial Statements...................................... 25-54
<PAGE>
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, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998 in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 31, 1998, except for note 21,
which is as of September 15, 1998
1
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
June 30, 1998
- --------------------------------------------------------------------------------
Profile and Related Information
Redwood Financial, Inc. (the Company) is a Minnesota corporation organized at
the direction of the Board of Directors of the HomeTown Bank (the Bank, formerly
Redwood Falls Federal Savings and Loan Association) to acquire all of the
capital stock that the Bank 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 Bank 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 Bank, but utilizes
the support staff of the Bank from time to time.
The Bank is a federally chartered mutual savings and loan association
headquartered in Redwood Falls, Minnesota. The Bank has two full-service offices
located in Redwood and Renville Counties, Minnesota. The Bank was founded in
1924 and obtained its current name in 1998. The Bank'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 Bank is a member of the Federal Home Loan Bank (FHLB) System. The Bank
is a community-oriented, retail savings institution offering traditional
mortgage loan products. It is the Bank's intent to remain an independent
community savings and loan association serving the local banking needs of
Redwood and Renville Counties, Minnesota.
The Bank attracts deposits from the public and uses such deposits primarily to
invest in residential lending on owner-occupied properties. The Bank also
originates consumer, commercial, and agricultural 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 1998:
First Quarter $ 11 1/8 10 3/4
Second Quarter 12 1/2 11 1/8
Third Quarter 13 1/4 12 1/2
Fourth Quarter 14 1/2 13
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
- -----------------------------------------------------------------------------
The number of stockholders of record of common stock as of June 30, 1998, 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, 1998, there were 868,093 shares outstanding.
2
(Continued)
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
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 the HomeTown Bank.
The Bank 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.
The principal business of the Company through the Bank 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 securities, and municipal
bonds. 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 Bank, 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 Bank'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, 1998, 1997, and 1996. 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.
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.
(Continued)
3
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
The Company paid no dividends to holders of common stock during the fiscal years
ended June 30, 1998 and 1997.
The Companys 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 Companys ability to pay dividends is dependent,
in part, upon the dividends it receives from the Bank. The Bank may not
declare or pay a cash dividend on any of its stock if the effect thereof
would cause the Banks regulatory capital to be reduced below (1) the amount
required for the liquidation account established in connection with the
Banks conversion from mutual stock form, or (2) the regulatory capital
requirements imposed by the Office of Thrift Supervision (OTS).
<TABLE>
<CAPTION>
FIVE-YEAR SELECTED FINANCIAL SUMMARY
(dollars in thousands, except per share data)
Year ended June 30
----------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating results:
Interest income $ 4,748 3,870 3,487 3,023 3,048
Interest expense 2,999 2,186 1,883 1,683 1,448
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 1,749 1,684 1,604 1,340 1,600
Provision for loan losses 38 - - - 1
Noninterest income 131 57 61 40 54
Noninterest expense 1,174 1,352 992 775 690
Income tax expense 243 137 211 245 426
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 425 252 462 360 537
Cumulative effect of accounting change - - - - (45)
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 425 252 462 360 492
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings per common sharebasic $ 0.52 0.27 0.46
Net earnings per common sharediluted 0.49 0.26 0.45 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Total assets $ 77,287 62,169 51,515 55,002 42,660
Investment securities held to maturity - 10,396 15,289 16,431 17,213
Mortgage-backed and related securities held to maturity - 13,874 15,805 7,874 7,774
Investment securities available for sale 9,794 6,981 - - -
Mortgage-backed and related securities available for sale 33,937 8,150 - - -
Loans receivable, net 28,995 20,767 16,514 15,255 15,091
Deposits 48,102 45,688 38,043 35,825 37,114
Stockholders' equity 11,938 12,342 13,157 5,656 5,295
Financial ratios:
Return on average assets 0.62% 0.46% 0.93% 0.74% 1.17%
Return on average equity 3.48 1.96 3.42 6.58 9.73
Average equity to average assets 17.95 23.36 27.18 11.21 12.03
Net yield on average interest-earning assets 2.68 3.11 3.27 3.18 3.87
</TABLE>
(Continued)
4
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
For the year ended June 30
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- --------------------------------
Average Average Average
Average yield/ Average Yield/ Average yield/
balance Interest cost balance Interest cost balance Interest cost
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $24,130,515 $2,071,506 8.58% $18,283,543 $1,563,605 8.55% $15,754,753 $1,376,334 8.74%
Securities held to
maturity:
Mortgage-backed
and related securities 7,226,040 453,033 6.27 14,947,287 1,044,024 6.98 11,410,198 784,869 6.88
Investment securities 5,164,420 295,402 5.72 12,689,898 749,059 5.90 18,055,614 1,090,543 6.04
Securities available
for sale:
Mortgage-backed
and related securities 17,876,631 1,233,835 6.90 2,695,970 168,357 6.24 0 0 0.00
Investment securities 8,984,208 584,221 6.50 2,219,892 147,775 6.66 0 0 0.00
FHLB stock 408,007 28,060 6.88 333,500 23,522 7.05 330,792 23,765 7.18
Other interest-earning
assets (2) 1,378,145 81,864 5.94 3,017,686 173,275 5.74 3,550,681 211,640 5.96
---------- --------- ---------- --------- ---------- ---------
Total interest-earning
assets 65,167,966 4,747,921 7.29 54,187,776 3,869,617 7.14 49,102,038 3,487,151 7.10
---------- --------- ---------- --------- ---------- ---------
Noninterest-earning assets 1,521,245 610,413 698,754
---------- ---------- ----------
Total assets $66,689,211 $54,798,189 $49,800,792
---------- ---------- ----------
Interest-bearing
liabilities:
Passbook savings
accounts 867,074 23,696 2.73 987,693 25,130 2.54 1,394,964 33,968 2.44
Money market
savings accounts 6,153,126 221,899 3.61 7,077,184 275,769 3.90 5,550,747 196,842 3.55
Certificates of
deposit 39,580,590 2,333,739 5.90 32,394,479 1,846,365 5.70 28,561,491 1,652,027 5.78
FHLB advances 7,012,335 419,138 5.98 726,923 38,485 5.29 0 0 0.00
---------- --------- --------- -------- ---------- ---------
Total interest-bearing
liabilities 53,613,125 2,998,472 5.59 41,186,279 2,185,749 5.31 35,507,202 1,882,837 5.30
--------- --------- --------- -------- ---------- ---------
Noninterest-bearing
liabilities 1,093,901 785,044 758,718
---------- --------- ---------
Total liabilities 54,707,026 41,971,323 36,265,920
Retained earnings 11,982,185 12,826,866 13,534,872
---------- --------- ----------
Total liabilities and
retained earnings $66,689,211 $54,798,189 $49,800,792
---------- --------- ----------
Net interest income $1,749,449 $1,683,868 $1,604,314
-------- --------- ---------
Net interest rate spread (3) 1.70% 1.83% 1.80%
----- ----- ------
Net yield on average interest-
earning assets(4) 2.68% 3.11% 3.27%
----- ------ ------
Ratio of average interest-
earning average interest-
bearing liabilities 121.55% 131.57% 138.29%
------ ------ -------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
(5) Tax exempt income was not significant and thus is not presented on tax equivalent basis.
</TABLE>
(Continued)
5
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/Volume Analysis
Year ended June 30, Year ended June 30,
------------------------------------------ --------------------------------------
1998 versus 1997 1997 versus 1996
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 $ 500,032 5,962 1,907 507,901 220,915 (28,990) (4,654) 187,271
Securities held to maturity:
Mortgage-backed and related securities (539,307) (106,911) 55,227 (590,991) 243,304 12,100 3,751 259,155
Investment securities (444,214) (23,204) 13,761 (453,657) (324,085) (24,756) 7,358 (341,483)
Securities available for sale:
Mortgage-backed and related securities 947,997 17,717 99,764 1,065,478 168,357 - - 168,357
Investment securities 450,291 (3,421) (10,424) 436,446 147,775 - - 147,775
FHLB stock 5,255 (586) (131) 4,538 195 (434) (5) (244)
Other interest-earning assets (94,142) 5,980 (3,249) (91,411) (31,769) (7,761) 1,165 (38,365)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 825,912 (104,463) 156,855 878,304 424,692 (49,841) 7,615 382,466
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Passbook savings accounts (3,069) 1,862 (227) (1,434) (9,917) 1,524 (445) (8,838)
Money market savings accounts (36,007) (20,546) 2,683 (53,870) 54,131 19,448 5,348 78,927
Certificates of deposit 409,581 63,669 14,124 487,374 221,704 (24,128) (3,238) 194,338
FHLB advances 332,765 4,964 42,924 380,653 38,485 - - 38,485
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 703,270 49,949 59,504 812,723 304,403 (3,156) 1,665 302,912
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in interest income $ 122,642 (154,412) 97,351 65,581 120,289 (46,685) 5,950 79,554
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
6
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
Comparison of Operating Results for the Years Ended June 30, 1998 and 1997
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 $425,000 for the year ended June 30, 1998, as compared to
$252,000 for the year ended June 30, 1997. This represented an increase of
$173,000, or 68.65%. The increase in net earnings was primarily attributable to
lower noninterest expense during the year ended June 30, 1998. In the fiscal
year ended June 30, 1997, the Company incurred a pretax $237,000, one-time
special assessment required by the Federal Deposit Insurance Corporation and
levied on thrift institutions to recapitalize the Savings Association Insurance
Fund (SAIF). In addition, in the fiscal year ended June 30, 1997, the Company
incurred an additional $102,000 in professional fees as a result of an
unsuccessful acquisition attempt.
The increase in net earnings was also attributable to a $75,000 increase, or
133.93% in noninterest income. The increase in noninterest income was primarily
a result of an increase in net gains on the sale of securities available for
sale and increased fees and service charges. The increase in net earnings was
also attributable to a $65,000, or 3.86% increase in net interest income. The
increase in net earnings was also impacted by a $127,000 increase, or 17.81% in
compensation and employee benefits, a $106,000 increase, or 77.37% in income tax
expense, and a $38,000, or 100.00% increase in provision for loan losses.
Net Interest Income
Net interest income increased by $65,000, or 3.86%, from $1,684,000 for the year
ended June 30, 1997 to $1,749,000 for the year ended June 30, 1998. The increase
in net interest income is primarily due to increased net interest earnings
generated through growth of the Company over the past fiscal year. The increase
in net interest income was also adversely impacted by a decrease in the net
interest spread in comparison of the two fiscal years.
The Company's average interest-earning assets increased $10,980,000, or 20.26%
from $54,188,000 at June 30, 1997, to $65,168,000 at June 30, 1998. Similarly,
the Company's average interest-bearing liabilities increased $12,427,000, or
30.17% from $41,186,000 at June 30, 1997 to $53,613,000 at June 30, 1998. While
the Company's interest-bearing liabilities increased at a faster rate than its
interest-earning assets due primarily to the use of investable funds to
repurchase the Company's common stock over the previous 12 months, the net
interest earnings generated by the growth exceeded the interest income lost
through use of the funds for stock repurchases and other uses. During the fiscal
year ended June 30, 1998, stock repurchases totaled $1,140,000. The Company's
net interest income was also impacted by a decline in its net interest spread.
The Company's net interest spread was 1.70% and 1.83% for the years ended June
30, 1998 and 1997, respectively. The decrease in the net interest spread is the
result of cost of liabilities rising more rapidly than interest earning assets.
(Continued)
7
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
Interest Income
Interest income was $4,748,000 for the year ended June 30, 1998, as compared to
$3,870,000 for the year ended June 30, 1997, representing an increase of
$878,000, or 22.69%. 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 year ended June 30, 1998, the yield on interest-earning assets
was 7.29%, as compared to 7.14% for the year ended June 30, 1997. The increase
in yield on interest-earning assets was due primarily to the larger loan
portfolio in the year ended June 30, 1998.
Interest on loans receivable increased by $508,000, or 32.48%, to $2,072,000 for
the year ended June 30, 1998, as compared to $1,564,000 for the year ended June
30, 1997. Such increase was due to a $5,847,000, or 31.98% increase in the
average balance of loans receivable from $18,284,000 for the year ended June 30,
1997 to $24,131,000 for the year ended June 30, 1998. The increase in interest
on loans receivable was also affected by an increase in the average yield on
loans receivable from 8.55% for the year ended June 30, 1997, to 8.58% for the
year ended June 30, 1998.
In January 1997, management began designating all purchases of mortgage-backed
and related securities as available for sale. Subsequently, in January 1998,
management redesignated all 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 $591,000, or 56.61% from $1,044,000
for the year ended June 30, 1997 to $453,000 for the year ended June 30, 1998.
The decrease in interest income on mortgage-backed and related securities held
to maturity is a result of a $7,721,000 decrease, or 51.66% in the average
balance of mortgage-backed and related securities held to maturity in comparison
of the years ended June 30, 1998 and 1997, respectively. This decrease was also
affected by a decrease in the yield on the mortgage-backed and related
securities held to maturity from 6.98% for the year ended June 30, 1997, to
6.27% for the year ended June 30, 1998.
Interest income on mortgage-backed and related securities available for sale
increased $1,066,000, or 634.52% from $168,000 for the year ended June 30, 1997
to $1,234,000 for the year ended June 30, 1998. The increase in interest income
on mortgage-backed and related securities available for sale was due to a
$15,181,000, or 563.09% increase in the average balance of mortgage-backed and
related securities available for sale, primarily as a result of the
aforementioned portfolio redesignation. The increase was also impacted by an
increase in yield on the mortgage-backed and related securities available for
sale from 6.24% to 6.90% for the years ended June 30, 1997 and 1998,
respectively.
As with the Company's mortgage-backed and related securities purchases, in
January 1997, management began designating all purchases of investment
securities as available for sale. In January 1998, management also redesignated
all investment securities available for sale. As a result of this strategy,
interest income on investment securities held to maturity declined $454,000, or
60.61% from $749,000 for the year ended June 30, 1997 to $295,000 for the year
ended June 30, 1998. The decrease in interest income on investment securities
held to maturity is a result of a $7,526,000 decrease, or 59.31% in the average
balance of investment securities held to maturity in comparison of the years
ended June 30, 1998 and 1997, respectively. This decrease was also affected by a
decline in the yield on the investment securities held to maturity from 5.90%
for the year ended June 30, 1997, to 5.72% for the year ended June 30, 1998.
Interest income on investment securities available for sale increased $436,000,
or 294.59% from $148,000 for the year ended June 30, 1997 to $584,000 for the
year ended June 30, 1998. The increase in interest income on investment
securities available for sale was due to a $6,764,000, or 304.68% increase in
the average balance of investment securities available for sale, primarily as a
result of the aforementioned portfolio redesignation. The increase was partially
offset by a slight decrease in yield on the investment securities available for
sale from 6.66% to 6.50% for the years ended June 30, 1997 and 1998,
respectively.
(Continued)
8
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
Interest income on cash and cash equivalents decreased by $91,000, or 52.60% for
the years ended June 30, 1998 and 1997, respectively. The decrease is a result
of management's decision to decrease its average balance in cash on hand in
order to enhance overall yield. Interest income on FHLB stock increased $4,000,
or 16.67%, owing to higher investment in FHLB stock during the fiscal year ended
June 30, 1998.
Interest Expense
Interest expense increased by $812,000, or 37.15%, from $2,186,000 for the year
ended June 30, 1997 to $2,998,000 for the year ended June 30, 1998. The increase
in interest expense resulted from a $12,427,000, or 30.17% increase in the
average balance of interest-bearing liabilities from $41,186,000 for the year
ended June 30, 1997, to $53,613,000 for the year ended June 30, 1998. The
increase in interest expense was also impacted by an increase in the average
cost of interest-bearing liabilities to 5.59% during the year ended June 30,
1998, as compared to 5.31% for the year ended June 30, 1997. The increase in the
Company's interest-bearing liabilities was a result of a $6,142,000, or 15.18%
increase in the average balance of deposits and a $6,285,000, or 864.51%
increase in the average balance of FHLB advances. The increase in deposits was
largely a result of increased public deposits (i.e. deposits from local
governmental entities) which typically are more volatile and costly than
traditional retail deposits. The increase in FHLB advances was primarily to fund
increases in loan production and mortgage-backed securities purchases.
Provision for Loan Losses
The Company's provision for loan losses was $38,000 and $0 for the years ended
June 30, 1998 and 1997, respectively. The Company has experienced substantial
loan growth including commercial, agricultural, and 1-4 family residential
mortgage loans. While no known loan losses are identified, the provision was in
response to inherent losses as a result of growth in the loan portfolio. As
such, the Company intends to regularly provide for loan losses. The level of
this provision is dependent on loan growth, delinquencies, economic conditions,
and other various factors used by management in the assessment of its loan
portfolio and overall level of loan loss reserves. The Company is committed to
maintaining adequate allowances for loan losses, regardless of the impact on
reported earnings.
At June 30, 1998 and 1997, the allowance for loan losses totaled $251,000 and
$213,000, respectively. The Company's net charge-offs were $0 and $0 for the
fiscal years ended June 30, 1998 and 1997, respectively. At June 30, 1998 and
1997, the allowance for loan losses represented 0.86% and 1.02% of total loans
receivable, respectively. Nonaccrual loans totaled $0 and $0 for the fiscal
years ended June 30, 1998 and 1997, respectively. At June 30, 1998 and 1997,
classified assets totaled $37,000 and $121,000, respectively.
Noninterest Income
Noninterest income increased $76,000, or 135.71% for the fiscal year ended June
30, 1998 in comparison to the fiscal year ended June 30, 1997. The increase is
attributable to a $40,000 increase in net gains realized on the sale of
securities available for sale. In addition, the increase was also impacted by a
$36,000, or 80.00% increase in fees and service charges. The increase is largely
a result of a one-time, $20,000 commercial loan prepayment fee.
(Continued)
9
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
Noninterest Expense
Noninterest expense decreased by $178,000, or 13.17%, from $1,352,000 for the
year ended June 30, 1997 to $1,174,000 for the year ended June 30, 1998. The
decrease in total noninterest expense was primarily due to the aforementioned
pretax $237,000 one-time special deposit insurance fund assessment in the fiscal
year ended June 30, 1997. In addition, the decrease was also due to a $95,000,
or 48.72% decrease in professional fees, and a $23,000 or 44.23% decrease in
federal deposit insurance premiums. During the fiscal year ended June 30, 1997,
the Company incurred higher professional fees as a result of an unsuccessful
acquisition attempt. The decrease in federal deposit insurance premiums is due
to lower deposit insurance fund assessments as a result of federal legislation
enacted in 1996.
The decrease in noninterest expense was partially offset by a $127,000, or
17.81% increase in compensation and employee benefits expense, an $11,000, or
10.58% increase in other expenses, and an $8,000, or 42.11% increase in
advertising expense. The increase in compensation and employee benefits is
primarily due to an increase in staff. As a result of its October 1997 automated
data processing conversion, the Company now reports data processing expense
separately. During the fiscal year ended June 30, 1998, data processing expense
totaled $32,000. In previous periods, data processing expense was not material.
Income Taxes
The Company's income tax expense increased by $106,000, or 77.37%, from $137,000
for the year ended June 30, 1997, to $243,000 for the year ended June 30, 1998.
The change in income taxes was due primarily to an increase in pre-tax earnings
of $280,000, or 72.16%, from $388,000 for the year ended June 30, 1997 to
$668,000 for the year ended June 30, 1998. The effective tax rates for fiscal
1998, 1997 and 1996 were 36.4%, 35.2% and 31.3%. The effective rate was higher
in fiscal 1998 than in 1997 because th Bank had fewer tax exempt investments.
The effective rate in 1996 was lower because of a benefit recognized for bad
debt reserves.
Financial Condition
The Company's total assets increased by $15,118,000, or 24.32%, from $62,169,000
at June 30, 1997 to $77,287,000 at June 30, 1998. The increase in the Company's
size primarily reflected an increase in the level of FHLB advances during the
fiscal year ended June 30, 1998. These advances were used primarily to fund
increased loan production and purchases of mortgage-backed securities.
Cash and cash equivalents increased by $1,245,000, or 162.96%, from $764,000 at
June 30, 1997 to $2,009,000 at June 30, 1998. The increase in cash was primarily
due to the procurement of FHLB advances in late June 1998 in order to fund loan
and security purchases commitments. The Company continues to maintain lower
levels of cash and cash equivalents in order to enhance overall yield. The
Company's average cash balance declined $1,640,000, or 54.34% in comparison of
the fiscal years ended June 30, 1998 and 1997, respectively.
The Company's loans receivable, net, increased $8,228,000, or 39.62% over the
year ended June 30, 1997. The increase in loans was primarily due to expansion
in the Company's agricultural and commercial lending programs as previously
announced. During the fiscal year ended June 30, 1998, the Company announced the
hiring of an experienced agricultural and commercial loan officer to expand the
Company's lending programs. As a result, during the fiscal year ended June 30,
1998, the Company originated $5.2 million in agricultural and commercial loans.
These loans primarily included agricultural operating and term loans, but also
included agricultural real estate and commercial operating and real estate
loans. Large concentrations of credit include two participation loans to a local
casino totaling $737,000 at June 30, 1998, secured by the casino's revenues, and
an agricultural operating loan with a June 30, 1998 balance of $537,000, secured
by agricultural cooperative stock. The Company also increased its 1 family
residential loan portfolio by approximately $4.1 million since June 30, 1997.
(Continued)
10
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
The continued increase in the Company's loan portfolio and changes in loan
portfolio mix will increase the Company's credit risk exposure. Furthermore, in
conjunction with this increase in loans receivable, the Company is increasing
its allowance for loan losses.
As previously noted, effective January 1, 1998, the Company designated all
investment securities, including mortgage-backed and related securities as
available for sale. Previously, the Company maintained a portfolio of investment
securities and mortgage-backed and related securities purchased before January
1997 as held to maturity. The purpose of the designation is to enhance
operational flexibility and liquidity. To this extent, $20,596,000 in investment
securities, including mortgage-backed and relate securities were specifically
redesignated available for sale. The Company will not maintain any investments,
including mortgage-backed and related securities as held to maturity for the
foreseeable future.
Overall, the Company's mortgage-backed and related securities available for sale
increased $25,787,000, or 316.40% from June 30, 1997 to June 30, 1998. The
increase in mortgage-backed and related securities available for sale is due to
the aforementioned redesignation of $12,101,000 in mortgage-backed securities
previously designated held to maturity and $19,626,000 in purchases of
mortgage-backed and related securities available for sale. No mortgage-backed
and related securities designated held to maturity were purchased during the
year ended June 30, 1998. The carrying value of mortgage-backed and related
securities reflected an increase of $211,000 due to market appreciation.
Mortgage-backed and related securities previously designated held to maturity
reflected net market appreciation of $140,000 at redesignation to available for
sale.
The Company's investment securities available for sale increased $2,813,000, or
40.30% from June 30, 1997 to June 30, 1998. The increase in investment
securities available for sale is due to the aforementioned redesignation of
$8,495,000 in investment securities previously designated held to maturity and
$2,490,000 in purchases of investment securities available for sale. No
investment securities designated held to maturity were purchased during the year
ended June 30, 1998. The carrying value of investment securities reflected an
increase of $9,000 due to market appreciation. Investment securities previously
designated held to maturity reflected net market appreciation of $10,000 at
redesignation to available for sale.
The Company's deposits increased by $2,414,000, or 5.28%, from $45,688,000 at
June 30, 1997 to $48,102,000 at June 30, 1998. At June 30, 1998, the Company's
Federal Home Loan Bank (FHLB) advances totaled $16,200,000, an increase of
$12,700,000, or 362.86% from $3,500,000 at June 30, 1997. The advances were
primarily utilized to fund increased loan production and mortgage-backed
securities purchases during the fiscal year. The Company's advances include
$8,000,000 in 15 year amortizing advances which are utilized to fund the
retention of long term 1-4 family residential mortgage loans as part of the
Company's interest-rate risk management strategies. The advances also include
$5,000,000 in advances that may be called by the FHLB. Should these advances be
called, the FHLB has committed to provide replacement advances, at the then
current market interest rate.
In order to productively leverage its capital, the Company may continue to seek
additional deposits through traditional deposit products and new deposit
products, as well as increased utilization of FHLB advances, to fund loan growth
and securities purchases. FHLB advances provide an alternative source of funds
for the Company, at costs substantially equivalent to, or lower than its retail
deposit products.
Stockholders' equity decreased $404,000, or 3.27% from $12,342,000 at June 30,
1997 to $11,938,000 at June 30, 1998. The decrease was primarily due to the
repurchase of the Company's common stock. Repurchases of common stock totaled
$1,140,000 during the fiscal year ended June 30, 1998. The decrease was also
impacted by the Company's $425,000 in net earnings, a $135,000 after tax market
change in appreciation of the Company's available for sale securities portfolio,
an $87,000 decrease in unearned management stock bonus plan shares, and a
$66,000 decrease in unearned employee stock ownership plan shares.
(Continued)
11
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
Comparison of Operating Results for the Years Ended June 30, 1997 and 1996
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 Bank 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.
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.
(Continued)
12
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
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.
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.
(Continued)
13
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
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 Bank currently pays substantially lower federal deposit
insurance premiums. Excluding th $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.
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.
(Continued)
14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
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.
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 stockholders' equity was also affected by a $3,000 adjustment due to
valuation of the Company's available for sale securities. The decrease in
stockholders' 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.
(Continued)
15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
Loan secured by 1-4 dwelling units $ - -
All other mortgage loans - -
Nonmortgage loans - -
- --------------------------------------------------------------------------------------------------------------------
Total $ - -
- --------------------------------------------------------------------------------------------------------------------
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Loans secured by 1-4 dwelling units 75,292 120,902
All other mortgage loans - -
Non-mortgage loans 15,414 -
- --------------------------------------------------------------------------------------------------------------------
Total $90,706 120,902
- --------------------------------------------------------------------------------------------------------------------
Total nonaccrual and accrual loans $90,706 120,902
- --------------------------------------------------------------------------------------------------------------------
Real estate $ - 13,520
- --------------------------------------------------------------------------------------------------------------------
Other nonperforming assets $ - -
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $90,706 134,422
- --------------------------------------------------------------------------------------------------------------------
Total nonaccrual and accrual loans to net loans 0.31% 0.58%
- --------------------------------------------------------------------------------------------------------------------
Total nonaccrual and accrual loans to total assets 0.12% 0.19%
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets to total assets 0.12% 0.22%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1998 and 1997, was $0 and $296, respectively.
(Continued)
16
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
Analysis of the Allowance for Loan Losses
The following table sets forth information with respect to the Company's
allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
At or for the year
ended June 30
-----------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance (at beginning of year) $213,034 213,034 213,034
Charge-offs - - -
Recoveries - - -
- -----------------------------------------------------------------------------------------------
Net charge-offs - - -
Provision 38,000 - -
- -----------------------------------------------------------------------------------------------
Allowance (at end of year) $251,034 213,034 213,034
- -----------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of total
loans outstanding 0.86% 1.02% 1.27%
Net loans charged off as a percent of average
loans outstanding 0.00 0.00 0.00
- -----------------------------------------------------------------------------------------------
</TABLE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, FHLB advances, proceeds
from maturing investment securities, and principal and interest payments on
loans and mortgage-backed securities 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, 1998 and 1997, the Company's loan portfolio,
net, increased $8,228,000 and $4,253,000, respectively. During the same periods,
the Company purchased investment securities and mortgage-backed and related
securities in the amounts of $22,117,000 and $16,233,355, respectively. The
primary financing activity of the Compan 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
Bank has the ability to obtain additional advances from the Federal Home Loan
Bank of Des Moines. During the twelve months ended June 30, 1998 and 1997, the
Bank utilized advances of $23,500,000 and $5,500,000, respectively. The
Company's advances include $5,000,000 which include call provisions. In the
event that these advances are called, the FHLB has committed to providing an
alternative funding, at market rates and terms. In addition, commencing in
January 1998, the Company's redesignation of all investment securities,
including mortgage-backed and related securities as available for sale, is
intended to increase liquidity and overall operational flexibility.
The Bank 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 4.0%.
(Continued)
17
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
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 June
30, 1998 and 1997, cash and cash equivalents totaled $2,009,000 and $764,000,
respectively. Investment securities, including mortgage-backed and related
securities designated available for sale totaled $43,731,000 and $15,131,000 at
June 30, 1998 and 1997, 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 Bank currently meets all 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) Bank Corporate Title Change
In June 1998, Redwood Financial, Inc. announced that it had approved a
change in the corporate title of the Redwood Falls Federal Savings and
Loan Association (the Association) to the "HomeTown Bank". The Company
stated that the purpose of the change in the corporate title of the
Association is to reflect changes in its banking operations and the
banking products that it offers and plans to offer. Since the
conversion of the Association from a federally chartered mutual savings
and loan association to a federally chartered stock savings and loan
association in July 1995, the Association has endeavored to become a
community bank offering additional lending and deposit products and
services. The Company believes that the name change reflects this
effort and will assist in attracting new customers and further
strengthening its relationships with its current customers.
(2) Year 2000 Consideration
The Company's primary exposure to the Year 2000 issue is its automated
data processing system which had been determined to be Year 2000
noncompliant. On August 4, 1998, the Company received its Year 2000
compliant release from its data processing provider. Management has
begun testing the release to ensure that the software properly
addresses all pertinent risks identified by the Federal Financial
Institutions Examination Council and its data processing vendor. The
company expects to have its testing substantially completed by December
31, 1998.
(Continued)
18
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Annual Report
- --------------------------------------------------------------------------------
The Company has also recently begun using various telecommunication
services provided by the Federal Reserve Bank of Minneapolis. The
Company has begun the testing of this service with assistance from the
Federal Reserve Bank. Also, as part of the construction of its new
office building, the Company is in process of updating its telephone
network, which is currently not Year 2000 compliant. The Company also
has several lesser Year 2000 issues (i.e., various non-mission critical
applications) that are also being addressed.
The Company has lessor exposure to borrower delinquencies arising after
Year 2000 due to its 1-4 family residential lending emphasis. However,
as the Company broadens its lending activities to include commercial
lending, as part of its credit underwriting, the Company is prudently
assessing Year 2000 sensitivity of all commercial loan applicants.
At this time, the Company expects that its Year 2000 compliance efforts
will have no material financial effect (i.e., less than $5,000).
However, a substantial amount of current staff time is being expended
on Year 2000 assessment and testing. Should the Company fail to correct
its Year 2000 deficiencies by December 31, 1999, the Company could
expect a substantial disruption to daily operations. Such disruption
could have a material effect on the Company's financial position and
future earnings. To this extent, the Company's contingency plan is to
re-commence manual data processing operations. As the Company only
recently converted from manual to automated data processing in October
1997, the Company still retains the equipment and trained staff
necessary to re-commence manual data processing operations. The Company
plans to re-assess its contingency plan pending the results of on-going
testing.
(3) New Facility Update
On April 28, 1998, the Company announced its intention to construct a
new bank facility on the east side of Redwood Falls, Minnesota.
Construction commenced shortly thereafter. The building is currently
scheduled for completion in January 1999 with occupancy shortly
thereafter. The building will permit the Company to provide several new
deposit and banking services that are not currently being offered.
Development of these services is currently being addressed. The Company
estimates that the new facility will decrease earnings by approximately
$120,000 per year. This estimate does not reflect any additional
staffing or other indirect costs which may be incurred, nor any
additional revenues which may be generated. The Company expects to
continue utilizing its existing downtown Redwood Falls location.
19
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 20,448 15,314
Interest bearing deposits with banks 1,988,780 748,478
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,009,228 763,792
Securities available for sale:
Mortgage-backed and related securities (amortized cost $33,726,372
and $8,143,694) 33,937,175 8,149,752
Investment securities (amortized cost $9,784,454 and $6,992,534) 9,793,500 6,981,250
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 43,730,675 15,131,002
Securities held to maturity:
Mortgage-backed and related securities (market value $0 and $14,082,280) - 13,873,801
Investment securities (market value $0 and $10,399,446) - 10,395,659
- ---------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity - 24,269,460
Loans receivable, net 28,994,750 20,766,539
Federal Home Loan Bank stock, at cost 835,000 333,500
Accrued interest receivable 547,898 613,357
Premises and equipment, net 596,867 212,067
Real estate, net - 13,520
Investment in limited partnership 484,024 -
Other assets 88,163 65,679
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 77,286,605 62,168,916
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------
Deposits 48,101,806 45,687,590
Federal Home Loan Bank advances 16,200,000 3,500,000
Accrued interest payable 631,168 405,623
Advance payments by borrowers for taxes and insurance 75,463 69,744
Accrued expenses and other liabilities 340,142 163,926
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 65,348,579 49,826,883
- ---------------------------------------------------------------------------------------------------------------------------
Common stock ($.10 par value). Authorized and issued 1,125,000 shares;
outstanding 868,093 shares at June 30, 1998; 961,875 at June 30, 1997 112,500 112,500
Additional paid-in capital 8,490,163 8,467,833
Retained earnings, subject to certain restrictions 6,794,926 6,369,591
Net unrealized gain (loss) on securities available for sale 131,909 (3,135)
Unearned employee stock ownership plan shares (463,264) (529,504)
Unearned management stock bonus plan shares (220,172) (306,797)
Treasury stock, at cost, 256,907 and 163,125 shares in 1998 and 1997, respectively (2,908,036) (1,768,455)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,938,026 12,342,033
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 77,286,605 62,168,916
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 2,071,506 1,563,605 1,376,334
Securities held to maturity:
Mortgage-backed and related securities 453,033 1,044,024 784,869
Investment securities 295,402 749,059 1,090,544
Securities available for sale:
Mortgage-backed and related securities 1,233,835 168,357 -
Investment securities 584,221 147,775 -
Cash equivalents and other 109,924 196,797 235,404
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 4,747,921 3,869,617 3,487,151
Interest expense on deposits 2,579,334 2,147,264 1,882,837
Interest expense on Federal Home Loan Bank advances 419,138 38,485
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,998,472 2,185,749 1,882,837
Net interest income 1,749,449 1,683,868 1,604,314
- ----------------------------------------------------------------------------------------------------------------------------
Provision for losses on loans 38,000 - -
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 1,711,449 1,683,868 1,604,314
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Fees and service charges 81,344 45,231 36,197
Gain on sale of securities available for sale, net 41,741 2,863
Other 8,168 8,384 24,314
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 131,253 56,478 60,511
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 839,660 713,001 648,859
Professional fees 99,773 195,493 126,781
Advertising 26,828 19,210 16,411
Occupancy 31,874 31,746 28,181
Data processing expense 31,954 - -
Federal deposit insurance premiums 29,313 51,851 80,769
Deposit insurance fund assessment - 237,085 -
Other 115,056 103,792 90,880
- ----------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,174,458 1,352,178 991,881
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 668,244 388,168 672,944
Income tax expense 242,909 136,668 210,512
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 425,335 251,500 462,432
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings per common share-basic $ .52 .27 .46
Net earnings per common share-diluted .49 .26 .45
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Net Unearned
unrealized Employee Unearned
gain (loss) Stock management
Additional on 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, 1995 $ - - 5,655,659 - - - - 5,655,659
Net earnings - - 462,432 - - - - 462,432
Sale of common stock 112,500 8,436,861 - - - - - 8,549,361
Adoption of employee
stock ownership plan - - - - (661,984) - - (661,984)
Earned employee stock
ownership plan shares, net - 10,781 - - 66,240 - - 77,021
Repurchase of common
stock - - - - - - (965,156) (965,156)
Adoption of management
stock bonus plan - 9,375 - - - (433,125) 423,750 -
Earned management stock
bonus plan shares - - - - - 39,703 - 39,703
- ---------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1996 112,500 8,457,017 6,118,091 - (595,744) (393,422) (541,406) 13,157,036
Net earnings - - 251,500 - - - - 251,500
Repurchase of common stock - - - - - - (1,227,049) (1,227,049)
Net unrealized loss on securities
available for sale, net - - - (3,135) - - - (3,135)
Earned employee stock
ownership plan shares, net - 10,816 - - 66,240 - - 77,056
Earned management stock
bonus plan shares - - - - - 86,625 - 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
Net earnings - - 425,335 - - - - 425,335
Repurchase of common stock - - - - - - (1,139,581) (1,139,581)
Net unrealized gain on securities
available for sale, net - - - 135,044 - - - 135,044
Earned employee stock
ownership plan shares, net - 22,330 - - 66,240 - - 88,570
Earned management stock
bonus plan shares - - - - - 86,625 - 86,625
- ---------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1998 $ 112,500 8,490,163 6,794,926 131,909 (463,264) (220,172) (2,908,036) 11,938,026
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net earnings $ 425,335 251,500 462,432
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for loan losses 38,000 - -
Depreciation 28,384 16,742 16,992
Amortization of premiums and discounts, net (15,832) (36,232) (40,057)
(Increase) decrease in other assets (22,484) 28,313 15,440
(Increase) decrease in accrued interest receivable 65,459 (59,501) (144,272)
Increase (decrease) in accrued interest payable 225,545 221,379 (50,453)
Gain on sale of securities available for sale, net (41,741) (2,863)
Amortization of unearned ESOP shares 66,240 66,240 66,240
Earned ESOP shares priced above original cost 22,330 10,816 10,781
Earned Management Stock Bonus Plan shares 86,625 86,625 39,703
Change in deferred income taxes (5,178) (56,854) 45,726
Increase (decrease) in accrued expenses and other liabilities 176,216 (36,522) (34,617)
Federal Home Loan Bank stock dividend - - (6,500)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,048,899 489,643 381,415
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of investment securities held to maturity 500,000 4,895,000 4,000,200
Purchases of investment securities held to maturity - - (2,860,069)
Purchases of mortgage-backed and related securities held
to maturity - - (9,964,830)
Principal collected on mortgage-backed and related securities held
to maturity 2,034,858 1,927,523 2,075,679
Proceeds from maturities of investment securities available for sale 9,600,000 - -
Purchases of investment securities available for sale (2,490,093) (7,988,700) -
Proceeds from sales of investment securities available for sale - 999,376 -
Proceeds from sales of mortgage-backed and related
securities available for sale 1,011,469 - -
Purchases of mortgage-backed and related securities available for sale (19,626,386) (8,244,655) -
Principal collected on mortgage-backed and related securities available
for sale 4,916,656 135,675 -
Purchase of investment in limited partnership (500,000) - -
Purchases of Federal Home Loan Bank stock (501,500) - -
Increase in loans receivable, net (8,315,637) (4,262,925) (1,350,152)
Purchases of premises and equipment (413,184) (176,622) (5,268)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (13,783,817) (12,715,328) (8,104,440)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
23
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities:
Decrease in funds held for stock subscriptions $ - - (13,127,630)
Increase in deferred stock conversion costs - - 439,015
Increase in deposits, net 2,414,216 7,829,305 2,267,713
Increase in advance payments by borrowers for taxes and insurance 5,719 14,058 2,204
Proceeds from sale of common stock - - 8,549,361
Adoption of ESOP - - (661,984)
Proceeds from Federal Home Loan Bank advances 23,500,000 5,500,000 -
Repayment of Federal Home Loan Bank advances (10,800,000) (2,000,000) -
Repurchase of common stock (1,139,581) (1,227,049) (965,156)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities 13,980,354 10,116,314 (3,496,477)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,245,436 (2,109,371) (11,219,502)
Cash and cash equivalents, beginning of year 763,792 2,873,163 14,092,665
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,009,228 763,792 2,873,163
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,772,927 1,964,370 1,933,290
Income taxes 281,559 272,505 175,101
Supplemental noncash flow disclosures:
Transfer of loans to real estate $ - 13,520 -
Transfer of real estate to loans 13,520 - -
Transfer of investment and mortgage-backed and related
securities from held to maturity to available for sale 20,596,006 - -
Loss on limited partnership recorded using the equity method (15,976) - -
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1998
- --------------------------------------------------------------------------------
(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 HomeTown Bank (the Bank), formerly known as 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).
(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.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company and the Bank. All significant intercompany account
balances and transactions have been eliminated in consolidation.
(b) 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.
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.
(c) Reclassifications
Certain amounts in the consolidated financial statements for prior years
have been reclassified to conform with the current year presentation.
(d) Cash and Cash Equivalents
Cash and 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.
(Continued)
25
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(e) Investment Securities, Mortgage-Backed Securities, and Investment
in Limited Partnership
The Company classifies its debt and equity securities in one of three
categories: trading, available for sale or held to maturity.
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, 1998, 1997, and 1996.
Securities available for sale include securities that management intends
to use as part of its asset/liability strategy or that may be sold in
response to changes in interest rate, changes in prepayment risk, or
similar factors. 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 on trade date.
The investment in limited partnership is recorded using the equity
method of accounting.
(f) Loans Receivable
Loans are considered long-term investments and, accordingly, are carried
at historical cost.
The allowance for loan losses is maintained at an amount considered
adequate to provide for probable losses. The allowance for loan losses
is based on periodic analysis of the loan portfolio by management. In
this analysis, management considers factors including, but not limited
to, specific occurrences, general economic conditions, loan portfolio
composition, and historical experience. Loans are charged off to the
extent they are deemed to be uncollectible.
Interest income is recognized on an accrual basis except when
collectibility is in doubt 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.
Under the Company's credit policies and practices, all nonaccrual and
restructured loans, excluding consumer loans and residential real estate
loans classified as nonacrrual, are considered impaired loans. A loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. 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.
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.
(Continued)
26
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(g) 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.
(h) 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.
(i) Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
(j) 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.
(k) Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company 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, 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.
(l) New Accounting Standards
In July 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, Reporting Comprehensive Income (SFAS 130), which
establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial
statements. The statement requires that all items that are required to
be recognized under accounting standards as components of comprehensive
income be disclosed in the financial statements. Comprehensive Income is
defined as the change in equity during a period from transactions and
other events from nonowner sources. Comprehensive income is the total of
net income and other comprehensive income. Other comprehensive income is
anticipated to be primarily comprised of unrealized gains and losses on
securities available for sale. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Management adopted SFAS 130 on July
1, 1998 and will report comprehensive income in statements issued for
financial reporting periods occurring during the year ended June 30,
1999.
(Continued)
27
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pension and Other Postretirement Benefits (SFAS 132), which
revises current disclosure requirements for employers' pensions and
other retiree benefits. SFAS 132 will have no effect on the financial
position or results of operations of the Company, however, it will
impact disclosures in the financial statements in future periods. SFAS
132 is effective for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Management is currently studying the impact of adopting SFAS
133.
(m) Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings per Share (SFAS
128). SFAS 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 128 supersedes the
standards for computing EPA previously found in Accounting Principles
Board (APB) Opinion No. 15, Earnings per Share. The Company adopted SFAS
128 effective for periods ending December 31, 1997. All prior period
earnings per share have been restated in accordance with SFAS 128.
The following tables illustrate the calculation of basic and diluted
earnings per share for the twelve months ended June 30, 1998, 1997, and
1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the year ended: June 30, 1998 June 30, 1997 June 30, 1996
-------------------------------- -------------------------------- --------------------------------
Weighted Per Weighted Per Weighted Per
average share average share average share
Income shares amount Income shares amount Income shares amount
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income: $ 425,335 $ 251,500 $ 462,432
Basic EPS:
Income available
to common
stockholders 425,335 817,109 .52 251,500 933,377 .27 462,432 1,015,053 .46
Effect on Dilutive
Securities:
Options on
common stock 23,173 4,070 -
Unvested
restricted 19,159 24,559 12,450
stock awards
----------------------------------------------------------------------------------------------------------------------------
42,332 28,629 12,450
Dilutive EPS
Income available to
common
stock-holders
plus
assumed con- $ 425,335 859,441 .49 $ 251,500 962,432 .26 $ 462,432 1,027,503 .45
versions
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
28
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) Securities Available for Sale
Securities available for sale at June 30, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
June 30, 1998
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses market value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government agency securities $ 5,152,897 13,665 (937) 5,165,625
U.S. Treasury notes 3,799,561 2,290 (3,976) 3,797,875
Municipal bonds 831,996 - (1,996) 830,000
----------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 9,784,454 15,955 (6,909) 9,793,500
----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
GNMA certificates 1,171,238 41,920 (112) 1,213,046
FHLMC certificates 29,060,047 154,355 (37,600) 29,176,802
FNMA certificates 3,495,087 52,240 - 3,547,327
----------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities $ 33,726,372 248,515 (37,712) 33,937,175
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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 securities $ 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 securities:
FHLMC certificates 8,143,694 9,939 (3,881) 8,149,752
----------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed 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, 1998, 1997, and 1996, were $1,011,469, $999,376, and $0,
respectively. Gross realized gains from the sale of securities for the
years ended June 30, 1998, 1997, and 1996 were $42,652, $2,863, and $0,
respectively. Gross realized losses from the sale of securities for the
years ended June 30, 1998, 1997, and 1996, were $911, $0, and $0,
respectively.
Accrued interest receivable on securities available for sale
aggregated $355,164 and $212,930 at June 30, 1998 and 1997,
respectively.
(Continued)
29
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The carrying amount and approximate market value of investment
securities and mortgage-backed and related securities available for sale
at June 30, 1998 and 1997, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
June 30, 1998 June 30, 1997
---------------------------------- ----------------------------------
Amortized Approximate Amortized Approximate
cost market value cost market value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ 7,940,686 7,945,510 - -
Due after one year through five years 11,876,970 11,973,559 1,998,189 1,990,938
Due after five years through ten years 21,718,570 21,823,030 13,138,039 13,140,064
Due after ten years 1,974,600 1,988,576 - -
- -----------------------------------------------------------------------------------------------------------------
$43,510,826 43,730,675 15,136,228 15,131,002
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Nontaxable interest income on securities available for sale and
securities held to maturity was $41,998, $67,546, and $60,213 for the
years ended June 30, 1998, 1997, and 1996, respectively.
(4) Securities Held to Maturity
Securities held to maturity 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 $ 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 - 299,961
FHLMC certificates 9,358,524 121,853 (16,893) 9,463,484
FHLMC collateralized mortgage
obligations 58,548 3,297 - 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)
30
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
During the third quarter of fiscal 1998, the Company determined that it no
longer had the intent to hold its securities classified as held to maturity
to the actual maturity date of the securities. Therefore, it transferred
all the remaining securities in the held to maturity portfolio to the
available for sale portfolio. The fair value of securities transferred to
"available for sale" at the date of transfer was $20,848,776 with amortized
cost of $20,596,006 and unrealized holding gains, gross and net of taxes,
of $249,044 and $149,426, respectively. The Company does not intend to hold
securities classified as "held to maturity" in the foreseeable future.
There were no sales of securities held to maturity for the years ended June
30, 1998, 1997, or 1996.
Accrued interest receivable on securities held to maturity aggregated
$270,226 at June 30, 1997.
(5) Loans Receivable
Loans receivable at June 30, 1998 and 1997 are summarized as follows:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Loans secured by real estate:
Residential one-to-four family $24,261,342 18,577,418
Multifamily 1,471,862 173,594
Commercial 1,375,388 679,968
Agricultural 112,500 150,000
Residential construction 463,500 502,000
Multifamily construction - 980,000
Other consumer loans 182,405 21,000
Loans on deposits 255,494 133,033
Commercial 1,236,260 714,869
Agricultural operating line of credit 2,793,024 425,000
- --------------------------------------------------------------------------------
Total 32,151,775 22,356,882
- --------------------------------------------------------------------------------
Deferred loan fees and discounts (29,043) (15,765)
Loans in process (2,876,948) (1,361,544)
Allowance for losses (251,034) (213,034)
- --------------------------------------------------------------------------------
Net loans $28,994,750 20,766,539
- --------------------------------------------------------------------------------
Accrued interest receivable on loans receivable at June 30, 1998 and 1997
was $192,734 and $125,682, respectively.
(Continued)
31
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
There were no nonperforming loans for the years ended June 30, 1998 and
1997. The following is a summary of nonperforming loans as of and for the
year ended June 30, 1996:
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Impaired loans:
Nonaccrual $ -
Restructured -
- --------------------------------------------------------------------------------
-
- --------------------------------------------------------------------------------
Other nonperforming loans:
Nonaccrual 89,153
Restructured -
- --------------------------------------------------------------------------------
89,153
- --------------------------------------------------------------------------------
Total nonperforming loans $ 89,153
- --------------------------------------------------------------------------------
Scheduled interest under original terms 2,946
Actual interest recognized -
- --------------------------------------------------------------------------------
Net interest lost on nonperforming loans $ 2,946
- --------------------------------------------------------------------------------
The average balance of impaired loans during each of the fiscal years ended
June 30, 1998 and 1997 was $0.
There was no allowance for losses on impaired loans at June 30, 1998 and
1997.
The aggregate amount of loans to directors and executive officers of the
Company was $244,602, $231,803, and $237,177, at June 30, 1998, 1997, and
1996, respectively. Activity with respect to these loans during fiscal 1998
included loan originations of $159,349 and repayments of $137,417,
including both principal and interest. Activity with respect to these loans
during fiscal 1997 included loan originations of $33,000 and loan
repayments of $59,842, including both principal and interest. Activity with
respect to these loans during fiscal 1996 included loan originations of $0
and loan repayments of $16,962, including both principal and interest. 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 $2,197,996 and $402,000 as of June 30, 1998 and 1997,
respectively. The interest rates on these commitments ranged from 7.25% to
8.8% and 8% to 9% for June 30, 1998 and 1997, respectively.
There were no material commitments to lend additional funds to customers
whose loans were classified as nonaccrual at June 30, 1998, as there were
no nonaccrual loans at June 30, 1998.
There were no loans at June 30, 1998 and 1997, which had terms modified in
troubled debt restructurings.
The Company grants loans to customers who live primarily in southwestern
Minnesota. Although the Company has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon local economic conditions.
(Continued)
32
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Allowance for Losses on Loans Receivable
Activity in the allowance for losses on loans receivable is summarized as
follows:
- --------------------------------------------------------------------------------
Balance at June 30, 1995 $ 213,034
Provision for losses -
Charge-offs and recoveries -
- --------------------------------------------------------------------------------
Balance at June 30, 1996 213,034
Provision for losses -
Charge-offs and recoveries -
- --------------------------------------------------------------------------------
Balance at June 30, 1997 213,034
Provision for losses 38,000
Charge-offs and recoveries -
- --------------------------------------------------------------------------------
Balance at June 30, 1998 $ 251,034
- --------------------------------------------------------------------------------
(7) Premises and Equipment
A summary of premises and equipment at June 30, 1998 and 1997, is as
follows:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Land and office buildings $ 620,976 310,927
Furniture and equipment 295,510 192,375
- --------------------------------------------------------------------------------
916,486 503,302
Less accumulated depreciation (319,619) (291,235)
- --------------------------------------------------------------------------------
$ 596,867 212,067
- --------------------------------------------------------------------------------
(8) Real Estate
Real estate owned, representing real estate expected to be acquired in
settlement of loans, totaled $0 and $13,520 at June 30, 1998 and 1997,
respectively. The allowance for losses on real estate was $0 at June 30,
1998 and 1997. There were no provisions for losses on real estate,
charge-offs, or recoveries for the years ended June 30, 1998, 1997, or
1996.
(Continued)
33
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Deposits
Deposits and weighted-average interest rates at June 30, 1998 and 1997 are
summarized as follows:
- --------------------------------------------------------------------------------
1998 1997
------------------------ --------------------
Amount Rate Amount Rate
- --------------------------------------------------------------------------------
Passbook $ 868,463 2.64% $ 922,487 2.65%
Money market accounts 6,743,864 3.83% 7,187,340 4.23
7,612,327 8,109,827
- --------------------------------------- ----------
Certificates of deposit:
4.01-5.00% 2,577,293 421,418
5.01-6.00 24,147,498 18,099,518
6.01-7.00 13,604,445 18,749,835
7.01-8.00 160,243 306,992
- --------------------------------------- ----------
40,489,479 5.90% 37,577,763 5.83%
Total deposits $48,101,806 5.55% $45,687,590 5.51%
- --------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Passbook $ 23,696 25,130 33,968
Money market accounts 221,899 275,769 196,842
Certificates of deposit 2,333,739 1,846,365 1,652,027
- --------------------------------------------------------------------------------
$ 2,579,334 2,147,264 1,882,837
- --------------------------------------------------------------------------------
Certificates of deposit had the following remaining maturities at June 30,
1998 and 1997:
- --------------------------------------------------------------------------------
1998 1997
----------------------- -----------------------------
Weighted Weighted
average average
Amount rate Amount rate
- --------------------------------------------------------------------------------
0-6 months $16,822,782 5.82% $16,655,356 5.70%
7-12 months 9,467,884 5.87 11,031,181 5.84
13-36 months 13,175,201 6.01 9,174,681 6.04
Over 36 months 1,023,612 6.21 716,545 6.00
- ------------------------------------ ----------
$40,489,479 5.90 $37,577,763 5.83%
- ------------------------------------ ----------
The Company had $15,767,539 and $13,909,498 of certificates of deposit with
balances of $100,000 or more at June 30, 1998 and 1997, respectively.
(Continued)
34
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At June 30, 1998 and 1997, investment securities and mortgage-backed
securities with an approximate carrying value of $23,244,000 and
$20,353,000, respectively, were pledged as collateral for certain deposits,
including approximately $17,147,000 and $17,969,000, respectively, of
public deposits.
At June 30, 1998 and 1997, the aggregate amount of deposits by directors
and executive officers totaled $243,621 and $322,029, respectively. Such
deposits were accepted in the ordinary course of business with normal
interest rates, interest payment terms, and maturities.
(10) Federal Home Loan Bank Advances
At June 30, 1998 and 1997, the Bank's Federal Home Loan Bank (FHLB)
advances consisted of the following:
- --------------------------------------------------------------------------------
1998 1997
---------------------- --------------------
Year of maturity Amount Rate Amount Rate
- --------------------------------------------------------------------------------
1998 $ 2,366,401 5.87% 2,500,000 6.08%
1999 348,257 6.05 - -
2000 1,369,929 6.25 1,000,000 6.33
2001 392,950 6.05
2002 417,404 6.05
2003 443,379 6.05
2004 470,971 6.05
2005 500,281 6.05
2006 531,414 6.05
2007 564,486 6.05
2008 5,599,615 5.42
2009 636,931 6.05
2010 676,570 6.05
2011 718,675 6.05
2012 763,401 6.05
2013 399,336 6.05
- --------------------------------------------- ---------
16,200,000 5.83% 3,500,000 6.15%
Open line of credit - - - -
- --------------------------------------------------------------------------------
At June 30, 1998 and 1997, the advances and open line of credit were
collateralized by the Bank's FHLB stock and investments with a carrying
value of approximately $835,000 and $10,942,000 and $333,500 and
$7,424,000, respectively. At June 30, 1998, the Bank has also pledged its
portfolio of 1-4 family non-delinquent loans as additional collateral for
advances with an unpaid principal balance of approximately $17,218,000. The
Bank has a $1,000,000 line of credit with the FHLB which was not drawn on
at June 30, 1998 and 1997. The Bank has the ability to borrow additional
amounts given the availability of collateral available for pledging to the
FHLB. The Bank's advances include $5 million in advances with various call
features. If called, the FHLB will provide alternative funding at the then
current market interest rates and terms.
(Continued)
35
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(11) Income Taxes
Income tax expense (benefit) for the years ended June 30, 1998, 1997, and
1996, is composed of the following:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $ 181,345 141,694 120,844
State 66,742 51,828 43,942
- --------------------------------------------------------------------------------
Total current 248,087 193,522 164,786
- --------------------------------------------------------------------------------
Deferred:
Federal (3,924) (43,066) 34,295
State (1,254) (13,788) 11,431
- --------------------------------------------------------------------------------
Total deferred (5,178) (56,854) 45,726
- --------------------------------------------------------------------------------
$ 242,909 136,668 210,512
- --------------------------------------------------------------------------------
The reasons for the difference between the effective income tax rate and
the statutory federal income tax rate are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Federal "expected" income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 6.5 6.5 6.5
Increase in base year tax bad debt reserve 0.0 0.0 (6.3)
Tax-exempt interest income (4.1) (5.3) (3.0)
Other, net 0.0 0.0 0.1
- --------------------------------------------------------------------------------
Effective income tax rate 36.4% 35.2% 31.3%
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at June 30, 1998 and 1997, are as
follows:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Discounts on mortgage-backed and related securities $ 20,856 26,175
Allowance for losses on loans receivable 2,651 2,651
Unrealized loss on available for sale securities 0 2,090
Other 1,599 -
- --------------------------------------------------------------------------------
Gross deferred tax assets 25,106 30,916
Valuation allowance - -
- --------------------------------------------------------------------------------
Deferred tax assets, net 25,106 30,916
Deferred tax liabilities:
Unrealized gain on available for sale securities 87,940 -
Accrual to cash conversion 82,695 95,564
FHLB stock 43,216 50,500
Premises and equipment 21,364 10,109
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 235,215 156,173
- --------------------------------------------------------------------------------
Net deferred tax liability $210,109 125,257
- --------------------------------------------------------------------------------
No valuation allowance was required for deferred tax assets at June 30,
1998 or 1997.
Retained earnings at June 30, 1998, 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.
(12) Employee Benefits
(a) Retirement Plan
The Company has a defined benefit retirement plan (the Plan) that covers
substantially all full-time employees. The Plan provides for retirement
benefits beginning at age 65 based on each employee's years of qualifying
service and the average of the highest five consecutive annual salaries of
the ten years prior to retirement. The benefits are reduced by a specific
percentage of the employee's Social Security benefit. The Plan also
provides for early retirement beginning at age 55 with reduced benefits
determined by using an early retirement factor. An employee becomes fully
vested upon completion of five years of qualifying service.
(Continued)
37
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Net periodic pension expense for the years ended June 30 includes the
following components:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 31,734 28,076 26,494
Interest cost on projected benefit obligation 63,131 57,824 51,730
Actual return on plan assets (76,688) (63,728) (55,934)
Net amortization and deferral (4,324) 438 438
- --------------------------------------------------------------------------------
Net periodic pension expense $ 13,853 22,610 22,728
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
The following table sets forth the Plan's funded status and the amounts
recognized in the Company's balance sheet at June 30:
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested accumulated benefit obligation $ 732,406 676,571
Nonvested accumulated benefit obligation 910 133
- --------------------------------------------------------------------------------
Total accumulated benefit obligation 733,316 676,704
Effect of projected future salary increases 155,302 137,234
- --------------------------------------------------------------------------------
Projected benefit obligation 888,618 813,938
Plan assets at fair value 1,057,116 889,838
- --------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 168,478 75,900
Unrecognized prior service cost 14,112 15,875
Unrecognized gain from past experience
different from that assumed (174,284) (77,515)
Unrecognized net transition asset being
amortized over 15 years (3,982) (5,307)
- --------------------------------------------------------------------------------
Prepaid pension cost $4,344 8,953
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(b) 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 1998,
1997, or 1996.
(c) 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 $111,163, $117,125, and $123,086
to the ESOP during the fiscal years 1998, 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 committed to
be 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 $103,457, $84,650, and $77,021 for fiscal years 1998, 1997 and 1996,
respectively.
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 years ended
June 30:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Shares allocated beginning of year 12,420 4,140 -
Shares allocated during year 8,280 8,280 4,140
Unreleased shares 62,048 70,328 78,608
Total ESOP shares 82,748 82,748 82,748
Fair value of unreleased shares at June 30 $ 810,502 694,974 688,829
- --------------------------------------------------------------------------------
(d) 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 1998, 1997, and 1996, were compensation and employee benefits
expense of $86,625, $86,625, and $39,703, respectively, related to the
MSBP.
(Continued)
39
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(e) 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.
On June 10, 1997, the Board of Directors of the Company approved the 1997
Director's Stock Option Plan. The Plan granted 38,472 shares or 4% of its
then 961,875 outstanding shares to the directors of the Company at an
exercise price of $11.0625 per share. Each director received an award of
6,412 shares. The awards vested in entirety on August 1, 1997. In addition,
vested options are exerciseable for a period ending 10 years after the
grant date.
As of June 30, 1998, no stock options have been exercised or forfeited. A
summary of stock option activity is detailed as follows:
- --------------------------------------------------------------------------------
Weighted
Options average
available Options exercise
for grant outstanding price
- --------------------------------------------------------------------------------
June 30, 1995 - - -
1995 stock option plan adopted 112,500 - -
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
1997 Director's stock option plan adopted 38,472 - -
Granted June 10, 1997 (weighted average
fair value $5.26 per option) (38,472) 38,472 11.0625
- --------------------------------------------------------------------------------
June 30, 1997 14,600 136,372 10.2270
(No activity) - - -
June 30, 1998 14,600 136,372 10.2270
- --------------------------------------------------------------------------------
The number of options exerciseable at June 30, 1998 was 76,552 options with
a weighted average exercise price of $10.4627.
(Continued)
40
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 and 1997 Director's 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:
- --------------------------------------------------------------------------------
Fiscal year Fiscal year Fiscal year
ending ending ending
June 30, 1998 June 30, 1997 June 30, 1996
- --------------------------------------------------------------------------------
Net income:
As reported $ 425,335 251,500 462,432
Pro forma 252,023 202,396 442,360
Basic earnings per share:
As reported .52 .27 .46
Pro forma .31 .22 .44
- --------------------------------------------------------------------------------
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.
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 For options granted in For options granted in
accordance with 1997 accordance with 1995 accordance with 1995
Director's Stock Option Stock Option Plan Stock Option Plan
Plan granted on granted on granted on
June 10, 1997 April 9, 1997 January 17, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.46% 7.07% 5.78%
Expected life 10 years 10 years 10 years
Expected volatility 12.00% 12.00% 12.00%
Expected dividends None None None
- ------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
41
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(13) Federal Home Loan Bank Investment, Retained Earnings and Regulatory
Capital Requirements
The Bank, 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 Bank is
required to maintain cash and other liquid assets in an amount equal to 4%
of its deposit accounts and other obligations due within one year. The Bank
has met these requirements.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatoryand possibly additional
discretionaryactions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank'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 Bank 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, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
As of June 30, 1998 and 1997, the most recent notification from the OTS
categorized the Bank as 'well capitalized.' There are no conditions or
events since that notification that management believes have changed the
Bank's category.
(Continued)
42
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are also presented in the
table (dollars in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
To be Well
Capitalized Upon
Prompt Corrective
Actual Requirement Excess Capital Actions Provisions
------------------------ ----------------------- ----------------------- -------------------------
Percent Percent of Percent Percent of
of assets assets (1) of assets assets (1)
Amount (1) Amount Amount (1) Amount
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank's
net
worth $ 8,502
Less:
AFS
market
valuation 132
----------
Tangible
capital 8,370 11.19% 1,122 1.50% 7,248 9.69% N/A N/A
----------
Core
capital
(2) 8,370 11.19% 2,244 3.00% 6,126 8.19% 3,751 5.00%
----------
Plus:
Allowable
portion
of
general
allowance
for loan
losses 251
----------
Risk-based
capital $ 8,621 31.66% $ 2,179 8.00% $ 6,442 23.66% 2,723 10.00%
----------
</TABLE>
(1) Based on the Bank'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 Bank is also
required to hold core capital equal to or greater than 6.00% of its
risk-weighted assets, or $1,634 at June 30, 1998.
- --------------------------------------------------------------------------------
(14) SAIF Assessment
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.
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.
(Continued)
43
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
DIFA proposed that the Bank Insurance Fund (BIF) 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 1998, the Company repurchased a total of
93,782 shares, or 9.75%, of its 961,875 shares outstanding as of June
30, 1997, at an average price of $12.15 per share. During the fiscal
year ended June 30, 1997, the Company repurchased 106,875 of its
outstanding common stock at an average price of $11.48 per share. During
the fiscal year ended June 30, 1996, the Company repurchased 101,250
shares of its outstanding common stock, at an average price per share of
$9.53. As a result of these stock repurchase programs, the Company has
now outstanding 868,093 shares of common stock. The following summarizes
the Company's common stock repurchases during the twelve months ended
June 30, 1998:
- --------------------------------------------------------------------------------
Shares Price
Settlement date Purchased per share
- --------------------------------------------------------------------------------
September 11, 1997 28,000 $11.75
September 12, 1997 20,093 11.75
November 28, 1997 24,707 12.1250
December 4, 1997 2,000 12.1250
January 6, 1998 6,500 13.0000
January 12, 1998 12,482 13.3125
- --------------------------------------------------------------------------------
Average price per share: $12.1514
- --------------------------------------------------------------------------------
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)
44
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The contract amount of these financial instruments at June 30, 1998 and
1997, is as follows:
- --------------------------------------------------------------------------------
Contract amount
-----------------------------
1998 1997
- --------------------------------------------------------------------------------
Financial instruments whose contract
amount represents risk:
Commitments to extend credit $ 2,197,996 402,000
Letter of credit 20,000 -
- --------------------------------------------------------------------------------
Commitments to extend credit and the letter of credit, collectively
referred to as commitments, 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, 1998 and 1997, 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)
45
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ------------------------------------------
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 $ 2,009,228 2,009,228 763,792 763,792
Securities available for sale 43,730,675 43,730,675 15,131,002 15,131,002
Securities held to maturity - - 24,269,460 24,481,726
Loans receivable, net (1) 28,994,750 29,500,683 20,766,539 21,248,657
FHLB stock 835,000 835,000 333,500 333,500
Accrued interest receivable 547,898 547,898 613,357 613,357
Financial liabilities:
Deposits 48,101,806 48,333,647 45,687,590 45,864,695
FHLB Advances 16,200,000 15,912,088 3,500,000 3,496,847
Accrued interest payable 631,168 631,168 405,623 405,623
Off-balance sheet financial instruments:
Commitments to
extend credit - 2,217,996 2,217,996 - 8,479 402,000
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The carrying amount of loans receivable is reported net of $251,034
and $213,034 in allowance for losses on loans at June 30, 1998, and June
30, 1997, respectively
- --------------------------------------------------------------------------------
(a) Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their fair
value.
(b) 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.
(c) 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, agriculture, 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.
(Continued)
46
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(d) FHLB Stock
The carrying amount of FHLB stock approximates its fair value.
(e) 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.
(f) 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, 1998 and 1997,
for deposits with maturates 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.
(g) FHLB 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.
(h) Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair
value since it is short-term in nature.
(i) Commitments to Extend Credit
The fair value of commitments to extend credit is based on the proposed
carrying value. All loan commitments are made at current market interest
rates. Therefore, the proposed carrying value approximates fair value.
(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 .
(Continued)
47
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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) Business Segment Performance Disclosure
SFAS No. 131, Disclosures about Segments of an Operation and Related
Information, requires the disclosure of financial and descriptive
information about the operating segments of a public business
enterprise. For purposes of this disclosure, Redwood Financial, Inc. has
deemed its operating segments to follow its corporate structure. The
rationale for this segmentation is a result of the differing operational
purposes of its corporate entities as well as the simplicity of the
Company's corporate structure.
To this extent, the Company has determined that it has three operating
segments. These include (1) the parent holding company, Redwood
Financial, Inc., (2) the insured financial institution, HomeTown Bank,
and (3) a subsidiary of the Bank, Redwood Falls Federal Services, Inc.
(the Service Corporation).
Following is a brief description of the three operating segments:
Holding Company: Redwood Financial, Inc. was organized in 1995 primarily
to acquire and hold the common stock of the Association. This continues
to be the Holding Company's primary purpose. The Holding Company also
contributes to the operational performance of the consolidated Company
through (1) retention and servicing of three loans which were not
eligible for investment within the Bank's operating segment due to
regulatory restrictions, (2) management of a small investment portfolio,
including an investment in a limited partnership, and (3) providing and
incurring expense as a result of employee benefits available to Bank
personnel for the remuneration and retention of Bank personnel.
The Bank: HomeTown Bank provides standard banking services to
communities in Redwood and Renville Counties, Minnesota, including
lending and deposit products services. The Bank is the largest of the
consolidated Company's operating segments.
The Service Corporation: Redwood Falls Federal Services, Inc. is a
Minnesota corporation organized in 1993 for the sole purpose of
providing insurance sales separate from the Bank as a result of previous
federal regulatory requirements. These requirements have since been
lifted and the Service Corporation has been inactive since June 1996.
The Service Corporation provided no contribution to the consolidated
Company's operating performance for the fiscal years ended June 30, 1998
and 1997.
The following table summarizes the contribution of each segment to the
operating performance of the consolidated Company for the fiscal years
ended June 30, 1998, 1997, and 1996.
(Continued)
48
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended June 30, 1998 For the year ended June 30, 1997
------------------------------------------------ ---------------------------------------------
Unconsolidated Intercompany Consolidated Unconsolidated Intercompany Consolidated
segment results eliminations segment results segment results eliminations segment results
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Holding Company
Interest income:
Loans 78,133 78,133 48,784 48,784
Investment and mortgage-
backed and related securities 26,778 26,778 100,520 100,520
Other (1) 45,602 (45,602) - 51,703 (24,578) 27,125
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal 150,513 (45,602) 104,911 201,007 (24,578) 176,429
Noninterest income:
Gain on sale of investments - - 2,863 2,863
Other noninterest income - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal - - - 2,863 - 2,863
Noninterest expense:
Compensation and
employee benefits 190,282 190,282 171,275 171,275
Income tax benefit (78,829) (78,829) (77,167) (77,167)
Other (2) 107,872 (48,000) 59,872 193,534 (48,000) 145,534
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal 219,325 (48,000) 171,325 287,642 (48,000) 239,642
-----------------------------------------------------------------------------------------------------------------------------------
Segment total (68,812) 2,398 (66,414) (83,772) 23,422 (60,350)
-----------------------------------------------------------------------------------------------------------------------------------
Total assets-segment 11,759,177 11,759,177 12,308,976 12,308,976
-----------------------------------------------------------------------------------------------------------------------------------
Bank
Interest income:
Loans 1,993,373 1,993,373 1,514,821 1,514,821
Investment and mortgage-
backed and related securities 2,567,773 2,567,773 2,032,217 2,032,217
Other 81,865 81,865 146,150 146,150
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal 4,643,011 - 4,643,011 3,693,188 - 3,693,188
Interest expense:
Deposits 2,624,936 (45,602) 2,579,334 2,171,842 (24,578) 2,147,264
Borrowings 419,138 419,138 38,485 38,485
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal 3,044,074 (45,602) 2,998,472 2,210,327 (24,578) 2,185,749
Noninterest income:
Gain on sale of investments 42,652 42,652 - -
Other noninterest income 137,512 (48,000) 89,512 101,616 (48,000) 53,616
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal 180,164 (48,000) 132,164 101,616 (48,000) 53,616
Noninterest expense:
Compensation and
employee benefits 649,378 649,378 553,458 553,458
Provision for loan losses 38,000 38,000 - -
Loss on sale of investments 911 911 - -
Income tax expense 321,738 321,738 213,835 213,835
Other 274,927 274,927 481,912 481,912
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal 1,284,954 - 1,284,954 1,249,205 - 1,249,205
-----------------------------------------------------------------------------------------------------------------------------------
Segment total 494,147 (2,398) 491,749 335,272 (23,422) 311,850
-----------------------------------------------------------------------------------------------------------------------------------
Total assets-segment 75,022,442 75,022,442 60,331,501 60,331,501
-----------------------------------------------------------------------------------------------------------------------------------
Service Corporation (3)
Interest income:
Other (4) - -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal - - - - - -
Noninterest income:
Other noninterest income - -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal - - - - - -
Noninterest expense:
Other (5) - -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal - - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Segment total - - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Total assets-segment - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Total 425,335 - 425,335 251,500 - 251,500
-----------------------------------------------------------------------------------------------------------------------------------
Total assets 86,781,619 - 86,781,619 72,640,477 - 72,640,477
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
For the year ended June 30, 1996
----------------------------------------------
Unconsolidated Intercompany Consolidated
segment results eliminations segment results
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Holding Company
Interest income:
Loans 30,519 30,519
Investment and mortgage-
backed and related securities 130,826 130,826
Other (1) 39,394 (959) 38,435
-------------------------------------------------------------------------------------
Subtotal 200,739 (959) 199,780
Noninterest income:
Gain on sale of investments - -
Other noninterest income 959 959
-------------------------------------------------------------------------------------
Subtotal 959 - 959
Noninterest expense:
Compensation and
employee benefits 116,725 116,725
Income tax benefit -
Other (2) 63,895 (44,000) 19,895
-------------------------------------------------------------------------------------
Subtotal 180,620 (44,000) 136,620
-------------------------------------------------------------------------------------
Segment total 21,078 43,041 64,119
-------------------------------------------------------------------------------------
Total assets-segment 13,172,441 13,172,441
-------------------------------------------------------------------------------------
Bank
Interest income:
Loans 1,333,064 1,333,064
Investment and mortgage-
backed and related securities 1,781,102 1,781,102
Other 172,246 172,246
-------------------------------------------------------------------------------------
Subtotal 3,286,412 - 3,286,412
Interest expense:
Deposits 1,884,432 (1,595) 1,882,837
Borrowings -
-------------------------------------------------------------------------------------
Subtotal 1,884,432 (1,595) 1,882,837
Noninterest income:
Gain on sale of investments - -
Other noninterest income 108,950 (45,800) 63,150
-------------------------------------------------------------------------------------
Subtotal 108,950 (45,800) 63,150
Noninterest expense:
Compensation and
employee benefits 532,134 532,134
Provision for loan losses -
Loss on sale of investments -
Income tax expense 210,512 210,512
Other 326,933 326,933
-------------------------------------------------------------------------------------
Subtotal 1,069,579 - 1,069,579
-------------------------------------------------------------------------------------
Segment total 441,351 (44,205) 397,146
-------------------------------------------------------------------------------------
Total assets-segment 48,415,372 48,415,372
-------------------------------------------------------------------------------------
Service Corporation (3)
Interest income:
Other (4) 636 (636)
-------------------------------------------------------------------------------------
Subtotal 636 (636) -
Noninterest income:
Other noninterest income 1,941 1,941
-------------------------------------------------------------------------------------
Subtotal 1,941 - 1,941
Noninterest expense:
Other (5) 2,574 (1,800) 774
-------------------------------------------------------------------------------------
Subtotal 2,574 (1,800) 774
-------------------------------------------------------------------------------------
Segment total 3 1,164 1,167
-------------------------------------------------------------------------------------
Total assets-segment - -
-------------------------------------------------------------------------------------
Total 462,432 - 462,432
-------------------------------------------------------------------------------------
Total assets 61,587,813 - 61,587,813
-------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Footnotes:
(1) The Holding Company maintains substantially all of its cash in an interest bearing account at the Bank. The
elimination reflects interest earned and paid on this account.
(2) The Holding Company pays the Bank $4,000 per month for management services provided by the Bank to the Holding
Company.
(3) The Service Corporation has been inactive since June 1996 and has no assets as of June 30, 1996.
(4) The Service Corporation maintained substantially all of its cash in an interest bearing account at the Bank. The
elimination reflects interest earned and paid on this account.
(5) The Service Corporation paid the Bank $1,800 per year for management services provided by the Bank to the Service
Corporation.
</TABLE>
(Continued)
49
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(20) Redwood Financial, Inc. Finanical Information (Parent Company Only)
The parent companys principal assets are its investment in the Bank
and securities. The following are the condensed financial statements
for the parent company only as of and for the years ended June 30,
1998 and 1997.
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30, June 30,
Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,172,127 2,122,649
Securities held to maturity - 1,274,607
Securities available for sale 375,000 -
Loans receivable, net 1,340,118 500,269
Investment in subsidiary 8,502,030 8,372,837
Accrued interest receivable 17,789 35,479
Other assets 542,383 36,192
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,949,447 12,342,033
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 11,421 -
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,421 -
- ---------------------------------------------------------------------------------------------------------------------------
Common stock 112,500 112,500
Additional paid-in capital 8,490,163 8,467,833
Retained earnings, subject to certain restrictions 6,794,926 6,369,591
Net unrealized gain (loss) on securities available for sale 131,909 (3,135)
Unearned employee stock ownership plan shares (463,264) (529,504)
Unearned management stock bonus plan shares (220,172) (306,797)
Treasury stock, at cost (2,908,036) (1,768,455)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders equity 11,938,026 12,342,033
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders equity $ 11,949,447 12,342,033
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of investments available for sale $ - 2,863 -
Interest income 150,513 201,007 200,739
Equity in earnings of subsidiary 494,147 335,271 433,884
Compensation and employee benefits (250,181) (171,275) (116,725)
Other (47,973) (193,533) (62,936)
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income tax benefit 346,506 174,333 454,962
Income tax benefit 78,829 77,167 7,470
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 425,335 251,500 462,432
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
50
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Condensed Statement of Cash Flows
Years ended
June 30,
-----------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net earnings $ 425,335 251,500 462,432
Adjustments to reconcile net earnings to cash
provided by operating activities:
Equity in earnings of subsidiary (494,147) (335,271) (433,884)
Amortization of premiums (discounts), net (395) (1,028) (1,092)
(Increase) decrease in accrued interest receivable 17,690 31,305 (66,784)
Gain on sale of investments available for sale - (2,863) -
Amortization of unearned ESOP shares 66,240 66,240 66,240
Earned ESOP priced above original cost 22,330 10,816 10,781
Earned management stock bonus plan shares 86,625 86,625 39,703
Increase (decrease) in accrued expenses and
other liabilities 11,421 (15,405) 15,405
Increase in other assets (506,191) (36,192) (7,470)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (371,092) 55,727 85,331
- ----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of investment securities
held to maturity 900,000 1,215,000 -
Purchases of investment securities available for sale - (996,513) (2,487,487)
Proceeds from sales of investment securities available for sale - 999,376 -
Increase in loans receivable, net (839,849) (24,911) (475,358)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 60,151 1,192,952 (2,962,845)
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Adoption of ESOP - - (661,984)
Dividend from Bank 500,000 2,000,000 -
Proceeds from sale of common stock - - 8,549,361
Purchase of Association stock - - (3,943,688)
Repurchase of common stock (1,139,581) (1,227,049) (965,156)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (639,581) 772,951 2,978,533
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (950,522) 2,021,630 101,019
Cash and cash equivalents, beginning of year 2,122,649 101,019 -
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,172,127 2,122,649 101,019
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(21) Subsequent Event
From July 1, 1998, through August 31, 1998, the investment in the
limited partnership had incurred losses. The Company's share of these
losses was approximately $120,000. Depending on the performance of the
limited partnership, the losses may be recognized in the fiscal 1999
financial statements.
52
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Summarized quarterly financial data for fiscal 1998 and 1997 are as follows:
- -------------------------------------------------------------------------------------------------------------------------
Three months ended
---------------------------------------------------------------
June 30, March 31, December 31, September 30,
Selected Operations Data 1998 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 1,233,154 1,202,259 1,158,230 1,154,278
Interest expense 788,140 758,725 752,020 699,587
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 445,014 443,534 406,210 454,691
Provision for loan losses 24,000 14,000 - -
Non-interest income 50,123 35,054 33,536 13,451
Non-interest expense 301,884 287,441 318,496 267,548
Income tax expense 60,838 65,270 42,097 74,704
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 108,415 111,877 79,153 125,890
- -------------------------------------------------------------------------------------------------------------------------
Earnings per common sharebasic $ .13 .14 .10 .15
Earnings per common sharediluted .13 .13 .09 .14
</TABLE>
<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 - - - -
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 sharebasic $ .13 .14 .04 (.04)
Earnings per common sharediluted .13 .13 .04 (.04)
</TABLE>
53
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Selected Financial June 30, March 31, December 31, September 30,
Condition Data 1998 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $ 77,286,605 69,687,671 67,147,038 64,651,177
Securities 43,730,675 38,332,752 39,997,129 40,510,502
Net loans 28,994,750 26,905,925 23,374,423 22,356,259
Deposits 48,101,806 48,668,957 46,979,232 45,780,689
Stockholders' equity 11,938,026 11,824,419 11,801,405 11,985,092
</TABLE>
<TABLE>
<CAPTION>
Selected Financial June 30, March 31, December 31, September 30,
Condition Data 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
EXHIBIT 21
Subsidiaries of the Registrant
HomeTown Bank is a federally chartered savings association that is a
wholly owned subsidiary of the registrant. Redwood Falls Federal Services, Inc.
is a wholly-owned subsidiary of HomeTown Bank that was chartered by the State of
Minnesota. Both subsidiaries conduct business with their chartered names.
EXHIBIT 23
<PAGE>
[KPMG Peat Marwick LLP, Minneapolis, Minnesota Letterhead]
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 July 31,
1998, except for note 21, which is as of September 15, 1998, relating to the
consolidated balance sheets of Redwood Financial, Inc. and subsidiary as of June
30, 1998 and 1997, 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, 1998, which report appears in the June 30, 1998 annual
report on Form 10-KSB of Redwood Financial, Inc.
/s/KPMG Peat Marwick LLP
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,448
<INT-BEARING-DEPOSITS> 1,988,780
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,730,675
<INVESTMENTS-CARRYING> 43,730,675
<INVESTMENTS-MARKET> 43,730,675
<LOANS> 29,245,784
<ALLOWANCE> 251,034
<TOTAL-ASSETS> 77,286,605
<DEPOSITS> 48,101,806
<SHORT-TERM> 2,366,401
<LIABILITIES-OTHER> 1,046,773
<LONG-TERM> 13,833,599
0
0
<COMMON> 112,500
<OTHER-SE> 11,825,526
<TOTAL-LIABILITIES-AND-EQUITY> 77,286,605
<INTEREST-LOAN> 2,071,506
<INTEREST-INVEST> 2,566,491
<INTEREST-OTHER> 109,924
<INTEREST-TOTAL> 4,747,921
<INTEREST-DEPOSIT> 2,579,334
<INTEREST-EXPENSE> 2,998,472
<INTEREST-INCOME-NET> 1,749,449
<LOAN-LOSSES> 38,000
<SECURITIES-GAINS> 41,741
<EXPENSE-OTHER> 1,174,458
<INCOME-PRETAX> 668,244
<INCOME-PRE-EXTRAORDINARY> 668,244
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425,335
<EPS-PRIMARY> .52
<EPS-DILUTED> .49
<YIELD-ACTUAL> 2.68
<LOANS-NON> 0
<LOANS-PAST> 983,151
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 213,031
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 251,031
<ALLOWANCE-DOMESTIC> 251,031
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 130,000
</TABLE>
