U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 Number 0-25884
REDWOOD FINANCIAL, INC.
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(Exact name of Registrant as specified in its Charter)
Minnesota 41-1807233
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(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota 56283-0317
- ------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (507) 637-8730
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of October 15, 1998:
Class Outstanding
----- -----------
Common stock, par value $0.10 per share 781,293
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements
Consolidated Balance Sheets at September 30, 1998 and
June 30, 1998 3
Consolidated Statements of Earnings for the Three
months ended September 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income for 5
the Three months ended September 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity
for the Three months ended September 30, 1998 6
Consolidated Statements of Cash Flows for the
Three months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 2: Changes in Securities 20
Item 3: Defaults Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Assets September 30, June 30,
1998 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 28,127 20,448
Interest-bearing deposits with banks 1,546,749 1,988,780
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Cash and cash equivalents 1,574,876 2,009,228
- ---------------------------------------------------------------------------------------------------------------
Securities available for sale:
Mortgage-backed and related securities (amortized cost 36,537,896 33,937,175
$36,362,520 and $33,726,372, respectively)
Investment securities (amortized cost $6,859,402 and 6,880,948 9,793,500
$9,784,454, respectively)
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Total securities available for sale 43,418,844 43,730,675
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- ---------------------------------------------------------------------------------------------------------------
Loans receivable, net 31,500,753 28,994,750
Federal Home Loan Bank stock, at cost 1,107,300 835,000
Accrued interest receivable 549,940 547,898
Premises and equipment, net 980,688 596,867
Investment in limited partnership 396,504 484,024
Other assets 116,584 88,163
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Total Assets $ 79,645,489 77,286,605
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Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Deposits 47,252,895 48,101,806
Federal Home Loan Bank advances 20,110,503 16,200,000
Accrued interest payable 961,103 631,168
Advance payments by borrowers for taxes and insurance 103,946 75,463
Accrued expenses and other liabilities 326,550 340,142
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Total Liabilities 68,754,997 65,348,579
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Common stock ($.10 par value): Authorized and issued
1,125,000 shares; outstanding 781,293 shares at
September 30, 1998; 868,093 shares at June 30, 1998 112,500 112,500
Additional paid-in capital 8,495,726 8,490,163
Retained earnings, subject to certain restrictions 6,847,831 6,794,926
Accumulated other comprehensive income 118,153 131,909
Unearned employee stock ownership plan shares (446,704) (463,264)
Unearned management stock bonus plan shares (198,516) (220,172)
Treasury stock, at cost, 343,707 shares at
September 30, 1998; 256,907 shares at June 30, 1998 (4,038,498) (2,908,036)
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 10,890,492 11,938,026
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Total Liabilities and Stockholders' Equity $ 79,645,489 77,286,605
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</TABLE>
See accompanying notes to consolidaed financial statements
3
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended September 30,
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Loans receivable $ 641,331 466,116
Securities held to maturity:
Mortgage-backed and related securities 0 231,493
Investment securities 0 142,385
Securities available for sale:
Mortgage-backed and related securities 573,225 164,797
Investment securities 121,855 127,746
Cash equivalents and other 36,968 21,741
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Total interest income 1,373,379 1,154,278
Interest Expense:
Federal Home Loan Bank advances 274,375 65,284
Deposits 657,412 634,303
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Total interest expense 931,787 699,587
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Net interest income 441,592 454,691
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Provision for losses on loans 9,000 0
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- ---------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 432,592 454,691
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Noninterest income:
Gains on sale of securities available for sale 21,828 0
Fees and service charges 27,764 12,573
Other 5,190 878
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Total noninterest income 54,782 13,451
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Noninterest expense:
Compensation and employee benefits 219,717 188,979
Advertising 8,154 6,162
Occupancy 8,624 6,658
Federal deposit insurance premiums 7,554 6,986
Professional fees 23,644 30,253
Loss on limited partnership 87,520 0
Other 44,831 28,510
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Total noninterest expense 400,044 267,548
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Earnings before income taxes 87,330 200,594
Income tax expense 34,425 74,704
Net earnings $ 52,905 125,890
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Net earnings per common share - Basic $ 0.07 0.15
Net earnings per common share - Diluted 0.07 0.14
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</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $ 52,905 125,890
Other comprehensive income, net of tax :
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (659) 40,268
Less: reclassification adjustment for gains
included in net income (13,097) 0
---------- ----------
Other comprehensive income (loss) (13,756) 40,268
---------- ---------
Comprehensive income $ 39,149 166,158
----------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Three Months Ended September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Unearned
Employee Unearned
Accumulated Stock management
Additional Other Ownership stock Total
Common paid-in Retained Comprehensive Plan bonus Treasury stockholders'
Stock capital Earnings Income Shares plan shares stock equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 112,500 8,490,163 6,794,926 131,909 (463,264) (220,172) (2,908,036) 11,938,026
Net Earnings 52,905 52,905
Other comprehensive income (13,756) (13,756)
Earned employee stock
ownership plan shares, net 5,563 16,560 22,123
Repurchase of common stock (1,130,462) (1,130,462)
Earned management stock
bonus plan shares 21,656 21,656
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 112,500 8,495,726 6,847,831 118,153 (446,704) (198,516) (4,038,498) 10,890,492
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months
ended September 30,
-----------------------------
1998 1997
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<S> <C> <C>
Operating Activities
Net earnings $ 52,905 125,890
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for loan losses 9,000 0
Depreciation 8,935 3,963
Amortization of premiums and discounts, net 12,252 (5,207)
(Increase) decrease in other assets (28,421) 9,558
(Increase) decrease in accrued interest receivable (2,042) 69,936
Increase in accrued interest payable 329,935 410,917
Gain on sale of securities available for sale (21,828) 0
Amortization of unearned ESOP shares 16,560 16,560
Earned ESOP shares priced above original cost 5,563 3,777
Earned Management Stock Bonus Plan shares 21,656 21,656
Decrease in investment in limited partnership 87,520 0
Deferred income taxes 9,171 (26,052)
(Decrease) increase in accrued expenses and other liabilities (13,592) 13,693
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Net cash provided by operating activities 487,614 644,691
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Investing activities:
Proceeds from maturities of investment securities held to maturity 0 500,000
Principal collected on mortgage-backed and related securities held to maturity 0 902,311
Proceeds from maturities of investment securities available for sale 2,925,000 0
Proceeds from sales of mortgage-backed and related securities available for sale 2,547,575 0
Purchases of mortgage-backed and related securities available for sale (7,644,295) (2,503,927)
Principal collected on mortgage-backed and related securities available for sale 2,467,733 63,200
Purchases of Federal Home Loan Bank stock (272,300) 0
Increase in loans receivable, net (2,512,536) (1,575,503)
Purchases of premises and equipment (392,756) (46,384)
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Net cash used by investing activities (2,881,579) (2,660,303)
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Financing Activities:
Decrease in deposits, net (848,911) (723,441)
Increase in advance payments by borrowers for taxes and insurance 28,483 37,239
Proceeds from Federal Home Loan Bank advances 8,700,000 4,700,000
Repayment of Federal Home Loan Bank advances (4,789,497) (1,600,000)
Repurchase of common stock (1,130,462) (565,092)
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Net cash provided by financing activities 1,959,613 1,848,706
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Decrease in cash and cash equivalents (434,352) (166,906)
Cash and cash equivalents, beginning of period 2,009,228 763,792
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Cash and cash equivalents, end of period $ 1,574,876 596,886
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 609,041 288,670
Income taxes 67,900 62,705
Supplemental disclosures of cash flow information:
Transfer of real estate to loans 0 13,520
See accompanying notes to consolidated financial statements
</TABLE>
7
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
(1) Redwood Financial, Inc.
Redwood Financial, Inc. (the Company) was incorporated under the laws of
the State of Minnesota for the purpose of becoming the savings and loan
holding company of HomeTown Bank (the "Bank", previously 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 (the Offering) in connection with the conversion
of the Association. The Offering was closed on June 22, 1995 and the
conversion was completed July 7, 1995 (see note 5).
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and, therefore,
do not include all disclosures necessary for a complete presentation of
the consolidated balance sheets, consolidated statements of earnings,
consolidated statements of comprehensive income, consolidated statement
of stockholders' equity, and consolidated statements of cash flows in
conformity with generally accepted accounting principles. However, all
adjustments, consisting only of normal recurring adjustments, which are,
in the opinion of management, necessary for the fair presentation of the
interim financial statements have been included. The statements of
earnings for the three months ended September 30, 1998 are not
necessarily indicative of the results which may be expected for the
entire year.
The material contained herein is written with the presumption that the
users of the interim financial statements have read or have access to the
most recent Annual Report on Form 10- KSB of Redwood Financial, Inc.,
which contains the latest audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition
and Results of Operations as of June 30, 1998 and for the year then
ended.
(Continued)
8
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(3) Earnings Per Share
The following tables illustrate the calculation of basic and diluted
earnings per share for the three months ended September 30, 1998 and
1997.
<TABLE>
<CAPTION>
For the Three Months Ended: September 30, 1998 September 30, 1997
--------------------------- ------------------- ------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings: $52,905 $125,890
Basic EPS:
Earnings available to
common stockholders 52,905 759,627 $0.07 125,890 864,533 $0.15
Effect of Dilutive Securities:
Options on common stock 24,467 9,694
Unvested restricted stock awards 16,200 21,600
------ ------
Diluted EPS:
Earnings available to common
stockholders plus assumed
conversions $52,905 800,294 $0.07 $125,890 895,827 $0.14
</TABLE>
(4) Regulatory Capital Requirements
At September 30, 1998, the Bank met each of the three current minimum
regulatory capital requirements. The following table summarizes the
Bank's regulatory capital position at September 30, 1998:
(Continued)
9
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
To Be Well
(In thousands of dollars) Capitalized Under
Prompt Corrective
Actual Required Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Bank's Net Worth $8,613
Less: Available For Sale
Market Valuation 118
-------
Tangible Capital 8,495 10.94% $1,165 1.50% n/a n/a
(to tangible assets)
Core Capital 8,495 10.94% 2,329 3.00% $3,882 5.00%
(to adjusted tangible assets)
Core Capital 8,495 28.45% n/a n/a 1,792 6.00%
(to risk-weighted assets)
Plus: Allowable portion of
general allowance for
loan losses 260
-------
Risk-based Capital $8,755 29.32% $2,389 8.00% $2,986 10.00%
(to risk-weighted assets)
</TABLE>
(5) Stockholders' Equity and Stock Conversion
The Association converted from a federally-chartered mutual savings and
loan association to a federally-chartered stock savings and loan
association pursuant to its plan of Conversion which was approved by the
Association's members on June 23, 1995. The conversion was effected on
July 7, 1995, and resulted in the issuance of 1,125,000 shares of common
stock (par value $0.10) at $8.00 per share for a gross sales price of
$9,000,000. Costs related to conversion (primarily underwriters'
commission, printing, and professional fees) aggregated $450,639 and
were deducted to arrive at the net proceeds of $8,549,361. The Company
established an employee stock ownership trust which purchased 82,748
shares of common stock of the Company at the issuance price of $8.00 per
share from funds borrowed from the holding company.
(Continued)
10
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(6) Stock Repurchases
During the three months ended September 30, 1998, the Company purchased
86,800 shares of its outstanding common stock, or 10% of its 868,093
outstanding shares of common stock at June 30, 1998. As a result of the
stock repurchase program, the Company has now outstanding 781,293 shares
of common stock. The following summarizes the Company's common stock
repurchases during the quarter:
Settlement Date Shares Purchased Price per share
--------------- ---------------- ---------------
August 14, 1998 11,250 $13.0000
August 17, 1998 43,400 $13.0000
August 24, 1998 10,832 $13.1250
August 28, 1998 2,000 $12.7500
September 18, 1998 19,318 $13.0625
Average price per share $13.0238
(7) New Accounting Standards
In February 1997, 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.
(Continued)
11
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Item 2-Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
The Company's net earnings are dependent primarily on its net interest income,
which is the difference between interest income earned on its investment and
loan portfolio and interest paid on interest-bearing liabilities. Net interest
income is determined by (1) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and (2) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Company's interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. To a lesser extent, the Company's net earnings
also are affected by the level of noninterest income, which primarily consists
of service charges and other fees. In addition, net earnings are affected by the
level of noninterest (general and administrative) expenses.
The operations of financial institutions, including the Bank, 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.
Financial Condition
The Company's total assets increased by $2,358,000, or 3.05%, from $77,287,000
at June 30, 1998 to $79,645,000 at September 30, 1998. The increase in the
Company's assets reflected an increase in the level of Federal Home Loan Bank
(FHLB) advances during the three months ended September 30, 1998. These advances
were used primarily to fund increased loan production and to offset a net
deposit outflow during this three month period.
Cash and cash equivalents decreased by $434,000, or 21.60%, from $2,009,000 at
June 30, 1998 to $1,575,000 at September 30, 1998. The decrease in cash was
primarily due to the use of funds for the aforementioned increase in loan
production and net deposit outflows during the three months ended September 30,
1998. The Company attempts to maintain lower levels of cash and cash equivalents
in order to enhance overall yield.
(Continued)
12
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's loans receivable, net, increased $2,506,000, or 8.64% during the
three months ended September 30, 1998. The increase in loans was a result of
increased loan demand in the Company's market and includes 1-4 family
residential mortgage loans and agricultural and commercial loans. The continued
increase in the Company's loan portfolio will increase the Company's credit risk
exposure.
The Company's investment securities, including mortgage-backed securities
designated available for sale decreased 0.71% or $312,000 during the three
months ended September 30, 1998. The Company has maintained the size of this
portfolio due to recent purchases, which have offset maturities, sales and
increased prepayments of mortgage-backed securities as a result of recent
decreases in mortgage rates. Purchases of investment securities, which included
only mortgage-backed securities totaled approximately $7,644,000 during this
three month period. In addition, the carrying value of the Company's investment
securities, including mortgage-backed securities reflected a $23,000 before tax
decrease due to market value depreciation. The Company is no longer designating
any investment securities, including mortgage-backed securities as held to
maturity.
The Company's deposits decreased by $849,000, or 1.76%, from $48,102,000 at June
30, 1998 to $47,253,000 at September 30, 1998. At September 30, 1998, the
Company's FHLB advances totaled $20,111,000, an increase of $3,911,000, or
24.14% from $16,200,000 at June 30, 1998. The advances were primarily utilized
to fund increased loan production and offset an outflow of deposits during this
three month period. The Company may continue to increase its use of FHLB
advances pending the interest rate and other terms of future advance offerings.
FHLB advances provide an alternative source of funds for the Company, at costs
substantially equivalent to, or lower than its retail deposit products.
In order to fund loan growth and investment purchases and to leverage its
capital, the Company may continue to seek additional deposits through
traditional deposit products and new deposit products, as well as increase
utilization of FHLB advances.
(Continued)
13
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Results of Operations
Net Earnings
Net earnings were $53,000 for the quarter ended September 30, 1998, as compared
to $126,000 for the quarter ended September 30, 1997. This represented a
decrease of $73,000, or 57.94%. The decrease in net earnings was primarily
attributable to a $94,000, or 324.14% increase in other expense. This increase
in other expense is primarily attributable to a decrease in the value of an
investment by the Company in a limited partnership. This limited partnership
invests in equity securities of financial institutions. The value of the equity
securities held by this limited partnership decreased as a result of recent
depreciation of equity securities. As a result, the Company decreased the
carrying value of this investment by $88,000, or 18.18% in the three months
ended September 30, 1998 to recognize both realized and unrealized losses in its
share of the limited partnership.
The decrease in net income was also affected by a $31,000, or 16.40% increase in
compensation expense, a $13,000, or 2.86% decrease in net interest income, and a
$9,000 increase in loan loss provisions. The decrease was partially offset by a
$41,000, or 54.67% decrease in income tax expense, a $22,000 increase in gains
on the sale of securities available for sale, and a $15,000, or 115.38% increase
in fees and other service charges.
Net Interest Income
Net interest income decreased by $13,000, or 2.86%, from $455,000 for the
quarter ended September 30, 1997 to $442,000 for the quarter ended September 30,
1998. The decrease in net interest income was primarily due to a decrease in
interest-earning assets relative to interest-bearing liabilities and a decrease
in net interest spread.
While there has been an increase in both interest-earning assets and
interest-bearing liabilities due to growth of the Company, the Company's ratio
of average interest-earning assets to average interest-bearing liabilities
decreased from 124.47% at September 30, 1997 to 116.50% at September 30, 1998.
This decrease is the result of the use of $1,705,000 in available funds to
repurchase the Company's outstanding shares since September 30, 1997. In
addition, the Company's non-interest earning assets have increased by $992,000,
or 114.29%, from September 30, 1997 to September 30, 1998, primarily as a result
of funds used to construct the Bank's new office building in Redwood Falls,
Minnesota and to invest in the aforementioned limited partnership. Net interest
income was also impacted by a decrease in the net interest spread from 1.81% for
the three months ended September 30, 1997 to 1.49% for the three months ended
September 30, 1998. The decrease was a result of both a decrease in the
Company's yield on assets and a slight increase in its cost of funds.
(Continued)
14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest Income
Interest income was $1,373,000 for the quarter ended September 30, 1998, as
compared to $1,154,000 for the quarter ended September 30, 1997, representing an
increase of $219,000, or 18.98%. The increase in interest income was primarily
due to an increase in interest-earning assets. Average interest-earning assets
increased $14,216,000, or 22.64% from $62,804,000 for the three months ended
September 30, 1997, to $77,020,000 for the three months ended September 30,
1998. The increase in interest income was offset by a decrease in the overall
yield on interest-earning assets. For the quarter ended September 30, 1998, the
yield on interest-earning assets was 7.13%, as compared to 7.35% for the quarter
ended September 30, 1997. The decrease in yield on interest-earning assets was
due primarily to lower yields on the Company's loan and securities portfolios.
Interest on loans receivable increased by $175,000, or 37.55%, to $641,000 for
the quarter ended September 30, 1998, as compared to $466,000 for the quarter
ended September 30, 1997. Such increase was due to a $9,119,000, or 42.32%
increase in the average balance of loans receivable from $21,548,000 for the
quarter ended September 30, 1997 to $30,667,000 for the quarter ended September
30, 1998. The increase in interest on loans receivable was offset by a decrease
in the average yield on loans receivable from 8.65% for the quarter ended
September 30, 1997, to 8.37% for the quarter ended September 30, 1998.
Interest income on mortgage-backed and related securities available for sale was
$573,000 and $165,000 for the quarters ended September 30, 1998 and 1997,
respectively. The yield on the Company's mortgage-backed securities portfolio
available for sale was 6.36% and 6.93% for the three months ended September 30,
1998 and 1997, respectively. A decrease in the yield on the mortgage-backed
securities portfolio has occurred as a result of recent declines in mortgage
rates. In January 1998, the Company redesignated all mortgage-backed and related
securities as available for sale. As such, the Company reported no interest
income on mortgage-backed and related securities held to maturity for the three
months ended September 30, 1998.
Interest income on investment securities available for sale was $122,000 and
$128,000 for the quarters ended September 30, 1998 and 1997, respectively. The
yield on the Company's investment securities portfolio available for sale was
6.06% and 6.96% for the three months ended September 30, 1998 and 1997,
respectively. A decrease in the yield on the investment securities portfolio has
occurred as a result of recent declines in interest rates. In January 1998, the
Company redesignated all investment securities as available for sale. As such,
the Company reported no interest income on investment securities held to
maturity for the three months ended September 30, 1998.
(Continued)
15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest income on cash and cash equivalents increased by $15,000, or 68.18% in
comparison of the three months ended September 30, 1998 and 1997. The increase
is a result of more cash on hand in the three months ended September 30, 1998.
Interest Expense
Interest expense increased by $232,000, or 33.14%, from $700,000 for the quarter
ended September 30, 1997 to $932,000 for the quarter ended September 30, 1998.
The increase in interest expense resulted from a $7,813,000, or 20.58% increase
in the average balance of FHLB advances from $4,675,000 for the quarter ended
September 30, 1997 to $19,022,000 for the quarter ended September 30, 1998. The
increase in interest expense was also impacted by a $1,293,000, or 2.82%
increase in the average balance of deposits in comparison of the three months
ended September 30, 1998, to the three months ended September 30, 1997. The
increase in interest expense was also impacted by a slight increase in the cost
of funds from 5.55% to 5.64% for the three months ended September 30, 1997 and
1998, respectively.
Provision for Loan Losses
The Company's provision for loan losses was $9,000 and $0 for the three months
September 30, 1998 and 1997, respectively. As noted, the Company has experienced
growth in its loan portfolio. The provision was increased in response to loan
growth, a change in the composition of the loan portfolio through increased
agricultural and commercial loan originations, and inherent losses in the loan
portfolio. As such, the Company intends to regularly provide for 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.
At September 30, 1998 and 1997, the allowance for loan losses totaled $260,000
and $213,000, respectively. The Company's net loan charge-offs were $0 and $0
for the three months ended September 30, 1998 and 1997, respectively. At
September 30, 1998 and 1997, the allowance for loan losses represented 0.82% and
0.94% of loans receivable, respectively. Nonaccrual loans totaled $0 and $0 at
September 30, 1998 and 1997, respectively. At September 30, 1998 and 1997,
classified assets totaled $0 and $47,000, respectively.
Noninterest Income
Noninterest income increased by $42,000, or 323.08% from $13,000 to $55,000 for
the three months ended September 30, 1998 as compared to the three months ended
September 30, 1997. The increase was due to gains on the sale of securities
available for sale of $22,000 and an increase in fees and service charges of
$15,000, or 115.38%.
(Continued)
16
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Noninterest Expense
Noninterest expense increased by $132,000, or 49.25%, from $268,000 for the
quarter ended September 30, 1997 to $400,000 for the quarter ended September 30,
1998. The increase was due primarily to the aforementioned decrease in the
carrying value of an investment in a limited partnership. In addition, the
increase was also impacted by a $31,000, or 16.40% increase in compensation and
employee benefits expense due primarily to increased staff. There were also
minor increases in expenses on advertising, occupancy, other expenses, and
federal deposit insurance premiums. The increase in noninterest expense was
partially offset by a $6,000, or 20.00% decrease in professional fees.
Income Taxes
The Company's income taxes decreased by $41,000, or 54.67%, from $75,000 for the
quarter ended September 30, 1997, to $34,000 for the quarter ended September 30,
1998. The change in income taxes was due primarily to a decrease in pre-tax
earnings of $114,000, from a $201,000 for the quarter ended September 30, 1997
to $87,000 for the quarter ended September 30, 1998. The Company's effective tax
rate was 39.42% and 37.24% for the three months ended September 30, 1998 and
1997, respectively. The increase was a result of a lower level of tax exempt
investments over the three months ended September 30, 1998.
Forward Looking Information
In recent years, significant new federal legislation has imposed numerous new
legal and regulatory requirements on financial institutions. In addition to the
uncertainties posed by possible legislative change, there are many other
uncertainties that may make the Company's historical performance an unreliable
indicator of its future performance, and forward-looking information, including
projections of future performance, is subject to numerous possible adverse
developments, including but not limited to the possibility of adverse economic
developments which may increase default and delinquency risks in the Company's
loan portfolios; shifts in interest rates which may result in shrinking interest
margins; deposits outflows; interest rates on competing investments; demand for
financial services and loan products; increases generally in competitive
pressure in the banking and financial services industry; changes in accounting
policies or guidelines, or monetary and fiscal policies of the federal
government; changes in the quality or composition of the Company's loan and
investment portfolios; potential operational disruptions due to Year 2000
considerations; or other significant uncertainties.
(Continued)
17
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, FHLB advances and proceeds
from maturing investment securities and principal and interest payments on loans
and mortgage-backed and related securities. While maturities and scheduled
amortization of mortgage-backed and related securities and loans are a
predictable source of funds, deposit flows and mortgage prepayments are
generally influenced by general interest rates, economic conditions,
competition, and other factors. A substantial portion of the Company's deposits
are funds from local government entities.
The primary investing activities of the Company are the origination of loans and
the purchase of investment and mortgage-backed and related securities. During
the three months ended September 30, 1998 and 1997, the Company's loan
portfolio, net, increased $2,513,000 and $1,576,000, respectively. During the
same periods, the Company purchased mortgage-backed and related securities in
the amounts of $7,644,000 and $2,504,000, respectively. The primary financing
activity of the Company is the attraction of savings deposits and utilization of
FHLB advances.
The Company has other sources of liquidity if there is a need for funds. The
Bank has the ability to obtain additional advances from the Federal Home Loan
Bank of Des Moines. During the quarters ended September 30, 1998 and 1997, the
Bank utilized advances of $8,700,000 and $4,700,000, respectively. In addition,
the Company's designation of all investments and mortgage-backed 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%.
The Company's most liquid assets are cash and cash equivalents. In addition, the
Company maintains a portfolio of readily marketable investment securities,
including mortgage-backed and related securities which are designated available
for sale. The levels of cash and investment securities, including
mortgage-backed and related securities, are dependent on the Company's
operating, financing, and investing activities during any given period. At
September 30, 1998 and 1997, cash and cash equivalents totaled $1,575,000 and
$597,000, respectively. Investment securities, including mortgage-backed and
related securities designated available for sale totaled $43,419,000 and
$17,389,000 at September 30, 1998 and 1997, respectively.
(Continued)
18
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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 8.0% of
"risk-adjusted" assets. The Bank currently meets all three capital requirements.
Year 2000 Consideration
The Company's primary exposure 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 software vendor. Management is
continuing to test the release to ensure that the software properly addresses
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. The Company also has several other
operational areas with Year 2000 sensitivity and is currently testing these
systems.
The Company anticipates its exposure to Year 2000 issues is reduced 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 assessing the 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. 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 recommence manual
data processing operations. The Company plans to re-assess its contingency plan
pending the results of on-going testing.
Recent Development
Completion of Stock Repurchase Program
On August 7, 1997, the Company announced its intention to repurchase 10% of its
outstanding shares, or 86,800 shares. The Company completed the repurchase as
detailed previously in this 10-QSB.
(Continued)
19
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
Not Applicable.
ITEM 3: Defaults Upon Senior Securities.
Not Applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
Form 8-K (Item 7) dated August 7, 1998 and filed with the
Securities and Exchange Commission August 17, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REDWOOD FINANCIAL, INC.
Registrant
Date: October 30, 1998 /s/ Paul W. Pryor
---------------- ------------------------------------------------
Paul W. Pryor, President and Chief Executive
Officer (Duly Authorized Officer)
Date: October 30, 1998 /s/ Anthony H. Acker
---------------- ------------------------------------------------
Anthony H. Acker, Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 28,127
<INT-BEARING-DEPOSITS> 1,546,749
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,418,844
<INVESTMENTS-CARRYING> 43,418,844
<INVESTMENTS-MARKET> 43,418,844
<LOANS> 31,760,766
<ALLOWANCE> 260,013
<TOTAL-ASSETS> 79,645,489
<DEPOSITS> 47,252,895
<SHORT-TERM> 1,200,000
<LIABILITIES-OTHER> 1,391,599
<LONG-TERM> 18,910,503
0
0
<COMMON> 112,500
<OTHER-SE> 10,777,992
<TOTAL-LIABILITIES-AND-EQUITY> 79,645,489
<INTEREST-LOAN> 641,331
<INTEREST-INVEST> 695,080
<INTEREST-OTHER> 36,968
<INTEREST-TOTAL> 1,373,379
<INTEREST-DEPOSIT> 657,412
<INTEREST-EXPENSE> 931,787
<INTEREST-INCOME-NET> 441,592
<LOAN-LOSSES> 9,000
<SECURITIES-GAINS> 21,828
<EXPENSE-OTHER> 400,044
<INCOME-PRETAX> 87,330
<INCOME-PRE-EXTRAORDINARY> 87,330
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,905
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<YIELD-ACTUAL> 2.29
<LOANS-NON> 0
<LOANS-PAST> 394,392,709
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 251,013
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 260,013
<ALLOWANCE-DOMESTIC> 260,013
<ALLOWANCE-FOREIGN> 260,013
<ALLOWANCE-UNALLOCATED> 52,689
</TABLE>
