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 December 31, 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.
- ----------------------------------------------------------------------------
(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 January 15, 1999:
Class Outstanding
----- -----------
Common stock, par value $0.10 per share 653,993
Transitional Small Business Disclosure Format: [ ] Yes [X] No
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets at December 31, 1998 and
June 30, 1998 3
Consolidated Statements of Earnings for the Three and Six
months ended December 31, 1998 and 1997 4
Consolidated Statements of Comprehensive Income for 5
the Six months ended December 31, 1998 and 1997
Consolidated Statement of Stockholders' Equity
for the Six months ended December 31, 1998 6
Consolidated Statements of Cash Flows for the
Six months ended December 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-17
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-29
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 30
Item 2: Changes in Securities and Use of Proceeds 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 5: Other Information 31
Item 6: Exhibits and Reports on Form 8-K 31
Signatures 32
</TABLE>
2
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Assets December 31, June 30,
1998 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 52,179 20,448
Interest-bearing deposits with banks 2,226,864 1,988,780
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,279,043 2,009,228
- ----------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Mortgage-backed and related securities (amortized cost 42,230,319 33,937,175
$42,185,362 and $33,726,372, respectively)
Investment securities (amortized cost $6,293,710 and 6,298,975 9,793,500
$9,784,454, respectively)
- ----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 48,529,294 43,730,675
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 34,009,600 28,994,750
Federal Home Loan Bank stock, at cost 1,342,100 835,000
Accrued interest receivable 572,071 547,898
Premises and equipment, net 1,550,545 596,867
Investment in limited partnership 397,885 484,024
Other assets 148,309 88,163
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 88,828,847 77,286,605
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------
Deposits 51,816,523 48,101,806
Federal Home Loan Bank advances 26,805,697 16,200,000
Accrued interest payable 649,992 631,168
Advance payments by borrowers for taxes and insurance 78,577 75,463
Accrued expenses and other liabilities 232,998 340,142
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 79,583,787 65,348,579
- ----------------------------------------------------------------------------------------------------------------------------
Common stock ($.10 par value): Authorized and issued
1,125,000 shares; outstanding 665,284 shares at
December 31, 1998; 868,093 shares at June 30, 1998 112,500 112,500
Additional paid-in capital 8,502,453 8,490,163
Retained earnings, subject to certain restrictions 6,921,618 6,794,926
Accumulated other comprehensive income 23,815 131,909
Unearned employee stock ownership plan shares (430,144) (463,264)
Unearned management stock bonus plan shares (176,859) (220,172)
Treasury stock, at cost, 459,716 shares at
December 31, 1998; 256,907 shares at June 30, 1998 (5,708,323) (2,908,036)
- ----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 9,245,060 11,938,026
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 88,828,847 77,286,605
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended December 31, ended December 31,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 673,608 487,619 1,314,939 953,735
Securities held to maturity:
Mortgage-backed and related securities 0 221,540 0 453,033
Investment securities 0 137,602 0 282,223
Securities available for sale:
Mortgage-backed and related securities 594,105 170,463 1,167,331 335,260
Investment securities 79,861 111,602 201,715 239,553
Cash equivalents and other 47,897 29,404 84,865 48,703
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 1,395,471 1,158,230 2,768,850 2,312,507
Interest Expense:
Deposits 661,390 634,069 1,318,802 1,268,372
Federal Home Loan Bank advances 305,356 117,951 579,731 183,234
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 966,746 752,020 1,898,533 1,451,606
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 428,725 406,210 870,317 860,901
- -----------------------------------------------------------------------------------------------------------------------
Provision for losses on loans 15,000 0 24,000 0
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 413,725 406,210 846,317 860,901
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gains on sale of securities available for sale 16,085 7,871 37,913 7,871
Fees and service charges 31,856 25,230 59,620 37,803
Other 1,563 435 6,753 1,314
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 49,504 33,536 104,286 46,988
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 250,653 220,756 470,370 409,736
Advertising 7,766 7,512 15,919 13,673
Occupancy 10,114 6,905 18,738 13,048
Federal deposit insurance premiums 7,198 7,552 14,752 14,538
Professional fees 33,160 27,903 56,804 58,156
Data processing expense 8,876 8,282 18,197 12,687
Loss (gain) on limited partnership (1,381) 0 86,139 0
Other 43,412 39,586 78,922 64,207
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 359,798 318,496 759,841 586,045
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 103,431 121,250 190,762 321,844
Income tax expense 29,645 42,097 64,070 116,801
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 73,786 79,153 126,692 205,043
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Net earnings per common share - Basic $ 0.11 0.10 0.18 0.24
Net earnings per common share - Diluted 0.10 0.09 0.17 0.23
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $ 126,692 205,043
Other comprehensive income, net of tax :
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (85,346) (53,239)
Less: reclassification adjustment for gains
included in net income (22,748) ((4,723)
-----------------------------------------------------------
Other comprehensive income (loss) (108,094) 57,962
-------- -------------
Comprehensive income $ 18,598 263,005
-----------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Six Months Ended December 31, 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 126,692 126,692
Other comprehensive
income (loss) (108,094) (108,094)
Earned employee stock
ownership plan
shares, net 12,290 33,120 45,410
Repurchase of common stock (2,800,287) (2,800,287)
Earned management stock
bonus plan shares 43,313 43,313
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $112,500 8,502,453 6,921,618 23,815 (430,144) (176,859) (5,708,323) 9,245,060
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months
ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net earnings $ 126,692 205,043
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for loan losses 24,000 0
Depreciation 18,634 11,073
Amortization of premiums and discounts, net 32,044 (9,555)
Increase in other assets (60,146) (497,184)
Increase in accrued interest receivable (24,173) (40,009)
Increase in accrued interest payable 18,824 31,126
Gain on sale of securities available for sale (37,913) (7,871)
Amortization of unearned ESOP shares 33,120 33,120
Earned ESOP shares priced above original cost 12,290 8,849
Earned Management Stock Bonus Plan shares 43,313 43,313
Decrease in investment in limited partnership 86,139 0
Deferred income taxes 72,063 (38,642)
(Decrease) increase in accrued expenses and other liabilities (107,144) 122,462
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 237,743 (138,275)
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of investment securities held to maturity 0 500,000
Principal collected on mortgage-backed securities held to maturity 0 2,034,858
Proceeds from maturities of investment securities available for sale 6,335,000 2,500,000
Proceeds from sales of mortgage-backed securities available for sale 2,547,575 724,037
Purchases of mortgage-backed securities available for sale 16,982,885) (5,514,541)
Principal collected on mortgage-backed securities available for sale 5,256,433 181,590
Proceeds from maturities of mortgage-backed securities available for sale 709,187 0
Purchases of investment securities available for sale (3,849,375) (910,000)
Proceeds from sales of investment securities available for sale 1,016,085 0
Purchases of Federal Home Loan Bank stock (507,100) (81,500)
Increase in loans receivable, net (5,043,777) (2,592,946)
Purchases of premises and equipment (972,312) (197,844)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities 11,491,169) (3,356,346)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase in deposits, net 3,714,717 854,893
Increase (decrese) in advance payments by borrowers for taxes and insurance 3,114 (5,814)
Proceeds from Federal Home Loan Bank advances 21,700,000 7,216,083
Repayment of Federal Home Loan Bank advances 11,094,303) (2,700,000)
Repurchase of common stock (2,800,287) (888,915)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,523,241 4,476,247
- ---------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 269,815 981,626
Cash and cash equivalents, beginning of period 2,009,228 763,792
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,279,043 1,745,418
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,879,709 1,434,593
Income taxes 135,800 125,410
Supplemental disclosures of cash flow information:
Transfer of real estate to loans 0 13,520
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 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 and six months ended December 31, 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 December 31, 1998 and 1997.
<TABLE>
<CAPTION>
For the Three Months Ended: December 31, 1998 December 31, 1997
--------------------------- ------------------ -----------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings: $73,786 $79,153
Basic EPS:
Earnings available to
common stockholders 73,786 679,103 $0.11 79,153 819,014 $0.10
Effect of Dilutive Securities:
Options on common stock 25,153 19,583
Unvested restricted stock awards 16,200 21,600
------ ------
Diluted EPS:
Earnings available to common
stockholders plus assumed
conversions $73,786 720,456 $0.10 $79,153 860,197 $0.09
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended: December 31, 1998 December 31, 1997
------------------------- ------------------ -----------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings: $126,692 $205,043
Basic EPS:
Earnings available to
common stockholders 126,692 719,365 $0.18 205,043 841,774 $0.24
Effect of Dilutive Securities:
Options on common stock 24,810 14,578
Unvested restricted stock awards 16,200 21,600
------ ------
Diluted EPS:
Earnings available to common
stockholders plus assumed
conversions $126,692 760,375 $0.17 $205,043 877,952 $0.23
</TABLE>
(Continued)
9
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(4) Regulatory Capital Requirements
At December 31, 1998, the Bank met each of the three current minimum
regulatory capital requirements. The following table summarizes the
Bank's regulatory capital position at December 31, 1998:
<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 $7,109
Less: Available For Sale
Market Valuation 24
-----
Tangible Capital 7,085 8.15% $1,304 1.50% n/a n/a
(to tangible assets)
Core Capital 7,085 8.15% 2,609 3.00% $4,348 5.00%
(to adjusted tangible assets)
Core Capital 7,085 21.51% n/a n/a 1,976 6.00%
(to risk-weighted assets)
Plus: Allowable portion of
general allowance for
loan losses 275
-----
Risk-based Capital $7,360 22.31% $2,635 8.00% $3,294 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 December 31, 1998, the Company announced
two stock repurchase programs. As a result, the Company purchased 116,009
shares of its outstanding common stock during the quarter. For the six
months ended December 31, 1998, the Company purchased 202,809 shares, or
23.4% of its 868,093 outstanding shares of common stock at June 30, 1998.
As a result of the stock repurchase programs, the Company has outstanding
665,284 shares of common stock at December 31, 1998. The following
summarizes the Company's common stock repurchases during the quarter
ended December 31, 1998:
Settlement Date Shares Purchased Price per share
--------------- ---------------- ---------------
November 18, 1998 7,000 $12.1250
November 24, 1998 820 $13.0000
November 24, 1998 25,200 $13.6250
November 25, 1998 7,034 $13.8750
November 27, 1998 5,000 $13.6250
November 30, 1998 10,600 $14.2500
December 1, 1998 8,000 $14.1875
December 4, 1998 14,446 $14.7500
December 29, 1998 37,909 $15.5000
Average price per share $14.3939
The Company also purchased 11,291 shares in January 1999, completing all
stock repurchase programs announced to date.
(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
(8) 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.
To this extent, the Company has determined that it has three operating segments.
These include (1) the parent holding company, Redwood Financial, Inc. (the
Holding Company), (2) the insured financial institution, HomeTown Bank (the
Bank), and (3) a subsidiary of the Bank, Redwood Falls Service Corporation (the
Service Corporation).
The following is a brief description of the three operating segments:
Holding Company: Redwood Financial, Inc. is a Minnesota corporation organized in
1995 at the direction of Redwood Falls Federal Savings and Loan Association (now
HomeTown Bank) in connection with the then Association's conversion from mutual
savings association to a stock savings association. The Parent Company was
organized primarily to acquire and hold the common stock of the then
Association. This continues to be the Parent Company's primary purpose. The
Parent Company also contributes to the operational performance of the
consolidated Company through (1) retention and servicing of 3 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 is a federal stock savings association organized in
1924. The 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 Service Corporation is a Minnesota
corporation organized in1993 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. The Service Corporation has been
inactive since June 1996. The Service Corporation provided no contribution the
consolidated Company's operating performance for the six months ended December
31, 1998 and 1997 and as a result has not been included in any summarization of
consolidated Company performance.
(Continued)
12
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The following tables summarize the contribution of each segment to the operating
performance of the consolidated Company for the three and six months ended
December 31, 1998 and 1997.
(Continued)
13
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
For the three months ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Holding Inter-company Reconciling Total
Company Bank Reconciliations Adjustments Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable 24,871 648,737 673,608
Securities held to maturity:
Mortgage-backed and related securities
Investment securities
Securities available for sale:
Mortgage-backed and related securities 594,105 594,105
Investment securities 79,861 79,861
Cash equivalents and other 8,616 47,897 (8,616) 47,897
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 33,487 1,370,600 (8,616) 0 1,395,471
Interest Expense:
Deposits 670,006 (8,616) 661,390
Federal Home Loan Bank advances 305,356 0 305,356
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 0 975,362 (8,616) 0 966,746
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 33,487 395,238 0 0 428,725
- ---------------------------------------------------------------------------------------------------------------------------------
Provision for losses on loans 0 15,000 0 0 15,000
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 33,487 380,238 0 0 413,725
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gains on sale of securities
available for sale 16,085 16,085
Fees and service charges 31,856 31,856
Other 13,563 (12,000) 1,563
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 0 61,504 (12,000) 0 49,504
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 50,651 200,002 250,653
Advertising 7,766 7,766
Occupancy 10,114 10,114
Federal deposit insurance premiums 7,198 7,198
Professional fees 15,330 17,830 33,160
Data processing expense 8,876 8,876
Loss (gain) on limited partnership (1,381) (1,381)
Other 14,203 41,209 (12,000) 43,412
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 78,803 292,995 (12,000) 0 359,798
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes (45,316) 148,747 0 0 103,431
Income tax expense (29,074) 58,719 29,645
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (16,242) 90,028 0 0 73,786
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Segment assets 1,829,051 86,999,796 0 0 88,828,847
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the income and expense amounts presented in the table above are with
external customers, except as summarized below:
Included in interest income of the Holding Company and interest expense of the
Bank is $8,616 of inter-segment income and expense for deposits held by the
Holding Company at the Bank.
The other inter-segment revenue and expense is $12,000 included in with income
at the Bank and other expense at the Holding Company. These inter-segment
amounts relate to management services provided by the Bank on behalf of the
Holding Company.
14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
For the three months ended December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Holding Inter-company Reconciling Total
Company Bank Reconciliations Adjustments Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable 17,366 470,253 487,619
Securities held to maturity:
Mortgage-backed and related securities 221,540 221,540
Investment securities 8,175 129,427 137,602
Securities available for sale:
Mortgage-backed and related securities 170,463 170,463
Investment securities 111,602 111,602
Cash equivalents and other 9,805 29,404 (9,805) 29,404
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 35,346 1,132,689 (9,805) 0 1,158,230
Interest Expense:
Deposits 643,874 (9,805) 634,069
Federal Home Loan Bank advances 117,951 0 117,951
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 0 761,825 (9,805) 0 752,020
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 35,346 370,864 0 0 406,210
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for losses on loans 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 35,346 370,864 0 0 406,210
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gains on sale of securities
available for sale 7,871 7,871
Fees and service charges 25,230 25,230
Other 12,435 (12,000) 435
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 0 45,536 (12,000) 0 33,536
- ----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 46,669 174,087 220,756
Advertising 7,512 7,512
Occupancy 6,905 6,905
Federal deposit insurance premiums 7,552 7,552
Professional fees 10,779 17,124 27,903
Data processing expense 8,282 8,282
Loss (gain) on limited partnership 0
Other 26,143 25,443 (12,000) 39,586
- ----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 83,591 246,905 (12,000) 0 318,496
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes (48,245) 169,495 0 0 121,250
Income tax expense (24,158) 66,255 42,097
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (24,087) 103,240 0 0 79,153
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Segment assets 2,413,524 64,733,514 0 0 67,147,038
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the income and expense amounts presented in the table above are with
external customers, except as summarized below:
Included in interest income of the Holding Company and interest expense of the
Bank is $9,805 of inter-segment income and expense for deposits held by the
Holding Company at the Bank.
The other inter-segment revenue and expense is $12,000 included in with income
at the Bank and other expense at the Holding Company. These inter-segment
amounts relate to management services provided by the Bank on behalf of the
Holding Company.
15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
For the six months ended December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
Holding Inter-company Reconciling Total
Company Bank Reconciliations Adjustments Corporation
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable 50,509 1,264,430 1,314,939
Securities held to maturity:
Mortgage-backed and related securities
Investment securities
Securities available for sale:
Mortgage-backed and related securities 1,167,331 1,167,331
Investment securities 201,715 201,715
Cash equivalents and other 18,232 84,865 (18,232) 84,865
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 68,741 2,718,341 (18,232) 0 2,768,850
Interest Expense:
Deposits 1,337,034 (18,232) 1,318,802
Federal Home Loan Bank advances 579,731 0 579,731
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 0 1,916,765 (18,232) 0 1,898,533
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 68,741 801,576 0 0 870,317
- -------------------------------------------------------------------------------------------------------------------------------
Provision for losses on loans 0 24,000 0 0 24,000
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 68,741 777,576 0 0 846,317
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gains on sale of securities
available for sale 37,913 37,913
Fees and service charges 59,620 59,620
Other 30,753 (24,000) 6,753
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 0 128,286 (24,000) 0 104,286
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 98,139 372,231 470,370
Advertising 15,919 15,919
Occupancy 18,738 18,738
Federal deposit insurance premiums 14,752 14,752
Professional fees 20,995 35,809 56,804
Data processing expense 18,197 18,197
Loss (gain) on limited partnership 86,139 86,139
Other 28,692 74,230 (24,000) 78,922
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 233,965 549,876 (24,000) 0 759,841
- -------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes (165,224) 355,986 0 0 190,762
Income tax expense (77,088) 141,158 64,070
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings (88,136) 214,828 0 0 126,692
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Segment assets 1,829,051 86,999,796 0 0 88,828,847
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the income and expense amounts presented in the table above are with
external customers, except as summarized below:
Included in interest income of the Holding Company and interest expense of the
Bank is $18,232 of inter-segment income and expense for deposits held by the
Holding Company at the Bank.
The other inter-segment revenue and expense is $24,000 included in with income
at the Bank and other expense at the Holding Company. These inter-segment
amounts relate to management services provided by the Bank on behalf of the
Holding Company.
16
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
For the six months ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Holding Inter-company Reconciling Total
Company Bank Reconciliations Adjustments Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable 31,381 922,354 953,735
Securities held to maturity:
Mortgage-backed and related securities 453,033 453,033
Investment securities 18,815 263,408 282,223
Securities available for sale:
Mortgage-backed and related securities 335,260 335,260
Investment securities 239,553 239,553
Cash equivalents and other 27,917 48,703 (27,917) 48,703
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 78,113 2,262,311 (27,917) 0 2,312,507
Interest Expense:
Deposits 1,296,289 (27,917) 1,268,372
Federal Home Loan Bank advances 183,234 0 183,234
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 0 1,479,523 (27,917) 0 1,451,606
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 78,113 782,788 0 0 860,901
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for losses on loans 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 78,113 782,788 0 0 860,901
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gains on sale of securities
available for sale 7,871 7,871
Fees and service charges 37,803 37,803
Other 25,314 (24,000) 1,314
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 0 70,988 (24,000) 0 46,988
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Compensation and employee benefits 91,181 318,555 409,736
Advertising 13,673 13,673
Occupancy 13,048 13,048
Federal deposit insurance premiums 14,538 14,538
Professional fees 25,709 32,447 58,156
Data processing expense 12,687 12,687
Other 42,176 46,031 (24,000) 64,207
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 159,066 450,979 (24,000) 0 586,045
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes (80,953) 402,797 0 0 321,844
Income tax expense (40,865) 157,666 116,801
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (40,088) 245,131 0 0 205,043
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Segment assets 2,413,524 64,733,514 0 0 67,147,038
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the income and expense amounts presented in the table above are with
external customers, except as summarized below:
Included in interest income of the Holding Company and interest expense of the
Bank is $27,917 of inter-segment income and expense for deposits held by the
Holding Company at the Bank.
The other inter-segment revenue and expense is $24,000 included in with income
at the Bank and other expense at the Holding Company. These inter-segment
amounts relate to management services provided by the Bank on behalf of the
Holding Company.
17
<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 $11,542,000, or 14.93%, from $77,287,000
at June 30, 1998 to $88,829,000 at December 31, 1998. The increase in the
Company's assets reflected an increase in the level of Federal Home Loan Bank
(FHLB) advances and deposits during the six months ended December 31, 1998.
These advances and deposits were used primarily to fund increased loan
production and purchases of mortgage-backed securities during this six month
period.
Cash and cash equivalents increased by $270,000, or 13.44%, from $2,009,000 at
June 30, 1998 to $2,279,000 at December 31, 1998. The slight increase in cash
was primarily due to the increase use of FHLB advances as well as increased
deposits. The Company attempts to maintain lower levels of cash and cash
equivalents in order to enhance overall yield.
(Continued)
18
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's loans receivable, net, increased $5,015,000, or 17.30% during the
six months ended December 31, 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 aggregate
growth in the Company's loan portfolio combined with the increase in
agricultural and commercial loans will increase the Company's credit risk
exposure.
The Company's investment securities, including mortgage-backed securities
designated available for sale increased 10.97% or $4,798,000 during the six
months ended December 31, 1998. The increase is primarily due to the use of
funds provided by FHLB advances and increased deposits over the six months ended
December 31, 1998. In addition, the carrying value of the Company's investment
securities, including mortgage-backed securities designated available for sale
reflected a $50,000 before tax increase due to market value appreciation. The
Company is no longer designating any investment securities, including
mortgage-backed securities as held to maturity.
The Company's deposits increased by $3,715,000, or 7.72%, from $48,102,000 at
June 30, 1998 to $51,817,000 at December 31, 1998. At December 31, 1998, the
Company's FHLB advances totaled $26,806,000, an increase of $10,606,000, or
65.47% from $16,200,000 at June 30, 1998. The advances were primarily utilized
to fund increased loan production and purchase investment securities, including
mortgage-backed securities. 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.
Stockholder's equity declined by $2,693,000 or 22.56% from $11,938,000 at June
30, 1998 to $9,245,060 December 31, 1998. The decrease is primarily due to the
Company's stock repurchase programs, described elsewhere in this 10-QSB. As a
result Treasury stock increased $2,800,000, or 96.29%, from $2,908,000 at June
30, 1998 to $5,708,000 at December 31, 1998. The use of interest earning funds
to repurchase stock will decrease interest income in future periods.
Results of Operations
Net Earnings
Net earnings were $74,000 for the three months ended December 31, 1998, as
compared to $79,000 for the three months ended December 31, 1997. This
represented a decrease of $5,000, or 6.33%. The decrease in net earnings was
primarily attributable to a $43,000, or 13.52% increase in other noninterest
expense, most notably compensation and employee benefits as a result of
increased staff. The decrease was also affected by a $15,000 increase in
provision for loan losses.
(Continued)
19
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The decrease in net income was partially offset by a $23,000, or 5.67% increase
in net interest income, a $17,000, or 51.73% increase in noninterest income
including $16,000 in gains on the sale of securities, and a $12,000, or 28.57%
decrease in income tax expense.
Net earnings were $127,000 for the six months ended December 31, 1998, as
compared to $205,000 for the six months ended December 31, 1997. This
represented a decrease of $78,000, or 38.05%. The decrease in net earnings was
primarily attributable to a $86,139 decrease in the carrying value of a limited
partnership. This limited partnership invests in equity securities of financial
institutions. The value of the securities held by this limited partnership
decreased as a result of equity market depreciation in the six months ended
December 31, 1998.
The decrease was also affected by an $88,000, or 15.02% increase in noninterest
expense, excluding the decline in the value of the limited partnership, and a
$24,000 increase in provision for loan losses. The decrease in net income was
partially offset by a $57,000, or 121.28% increase in noninterest income
including gains on the sale of securities of $38,000, a $9,000, or 1.05%
increase in net interest income, and a $53,000, or 45.30% decrease in income tax
expense.
Net Interest Income
Net interest income increased by $23,000, or 5.67%, from $406,000 for the three
months ended December 31, 1997 to $429,000 for the three months ended December
31, 1998. The increase in net interest income was primarily due growth of the
Company, specifically, its increased use of deposits and FHLB advances to fund
loan production and purchases of investment securities, including
mortgage-backed securities. Th increase was slightly offset by a decrease in the
Company's net interest spread, from 1.52% for the three months ended to December
31, 1997, to 1.51% for the three months ended December 31, 1998.
Net interest income increased by $9,000, or 1.05%, from $861,000 for the six
months ended December 31, 1997 to $870,000 for the six months ended December 31,
1998. As previously noted, the increase in net interest income was primarily due
to growth of the Company, specifically, its increase use of deposits and FHLB
advances to fund loan production and purchases of investment securities,
including mortgage-backed securities. The increase was offset by a decrease in
the Company's net interest spread, from 1.65% for the six months ended to
December 31, 1997, to 1.50% for the six months ended December 31, 1998.
(Continued)
20
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest Income
Interest income was $1,395,000 for the three months ended December 31, 1998, as
compared to $1,158,000 for the three months ended December 31, 1997,
representing an increase of $237,000, or 20.47%. The increase in interest income
was primarily due to an increase in interest-earning assets as a result of the
Company's growth. Average interest-earning assets increased $16,341,000, or
25.61% from $63,808,000 for the three months ended December 31, 1997, to
$80,149,000 for the three months ended December 31, 1998. The increase in
interest income was partially offset by a decrease in the overall yield on
interest-earning assets. For the three months ended December 31, 1998, the yield
on interest-earning assets was 6.96%, as compared to 7.26% for the three months
ended December 31, 1997. The decrease in yield on interest-earning assets was
due primarily to lower yields on the Company's loan and securities portfolios.
Interest income was $2,769,000 for the six months ended December 31, 1998, as
compared to $2,313,000 for the six months ended December 31, 1997, representing
an increase of $456,000, or 19.71%. The increase in interest income was
primarily due to an increase in interest-earning assets. Average
interest-earning assets increased $15,346,000, or 24.27% from $63,238,000 for
the six months ended December 31, 1997, to $78,584,000 for the three months
ended December 31, 1998. The increase in interest income was offset by a
decrease in the overall yield on interest-earning assets. For the six months
ended December 31, 1998, the yield on interest-earning assets was 7.05%, as
compared to 7.31% for the six months ended December 31, 1997. The decrease in
yield on interest-earning assets also was due primarily to lower yields on the
Company's loan and securities portfolios.
Interest on loans receivable increased by $186,000, or 38.11%, to $674,000 for
the three months ended December 31, 1998, as compared to $488,000 for the three
months ended December 31, 1997. Such increase was due to a $9,649,000, or 42.07%
increase in the average balance of loans receivable from $22,933,000 for the
three months ended December 31, 1997 to $32,582,000 for the three months ended
December 31, 1998. The increase in interest on loans receivable was offset by a
decrease in the average yield on loans receivable from 8.51% for the three
months ended December 31, 1997, to 8.27% for the three months ended December 31,
1998.
Interest on loans receivable increased by $361,000, or 37.84%, to $1,315,000 for
the six months ended December 31, 1998, as compared to $954,000 for the six
months ended December 31, 1997. Such increase was due to a $9,401,000, or 42.30%
increase in the average balance of loans receivable from $22,224,000 for the six
months ended December 31, 1997 to $31,625,000 for the six months ended December
31, 1998. The increase in interest on loans receivable was offset by a decrease
in the average yield on loans receivable from 8.58% for the six months ended
December 31, 1997, to 8.32% for the six months ended December 31, 1998.
(Continued)
21
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest income on mortgage-backed and related securities available for sale was
$594,000 and $170,000 for the three months ended December 31, 1998 and 1997,
respectively. The yield on the Company's mortgage-backed securities portfolio
available for sale was 6.17% and 6.38% for the three months ended December 31,
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
or six months ended December 31, 1998.
Interest income on mortgage-backed and related securities available for sale was
$1,167,000 and $335,000 for the six months ended December 31, 1998 and 1997,
respectively. The yield on the Company's mortgage-backed securities portfolio
available for sale was 6.26% and 6.66% for the six months ended December 31,
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.
Interest income on investment securities available for sale was $80,000 and
$112,000 for the three months ended December 31, 1998 and 1997, respectively.
The yield on the Company's investment securities portfolio available for sale
was 5.59% and 7.02% for the three months ended December 31, 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 or six months ended December 31, 1998.
Interest income on investment securities available for sale was $202,000 and
$240,000 for the six months ended December 31, 1998 and 1997, respectively. The
yield on the Company's investment securities portfolio available for sale was
5.87% and 7.22% for the three months ended December 31, 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.
Interest income on cash equivalents and other increased by $19,000, or 65.52% in
comparison of the three months ended December 31, 1998 and 1997. For the six
months ended December 31, 1998, interest income on cash equivalents and other
increased by $36,000, or 73.47% in comparison to the six months ended December
31, 1997. Cash and other includes dividends on FHLB stock. The increase in both
periods reflects increased investment in FHLB stock.
(Continued)
22
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest Expense
Interest expense increased by $215,000, or 28.59%, from $752,000 for the three
months ended December 31, 1997 to $967,000 for the three months ended December
31, 1998. The increase in interest expense resulted from a $14,906,000, or
195.31% increase in the average balance of FHLB advances from $7,632,000 for the
three months ended December 31, 1997 to $22,538,000 for the three months ended
December 31, 1998. The increase in interest expense was also impacted by a
$3,572,000, or 7.99% increase in the average balance of deposits in comparison
of the three months ended December 31, 1998, to the three months ended December
31, 1997. The increase in interest expense was also partially offset a decrease
in the cost of funds from 5.75% to 5.55% for the three months ended December 31,
1997 and 1998, respectively.
Interest expense increased by $447,000, or 30.79%, from $1,452,000 for the six
months ended December 31, 1997 to $1,899,000 for the six months ended December
31, 1998. The increase in interest expense resulted from a $14,823,000, or
248.83% increase in the average balance of FHLB advances from $5,957,000 for the
six months ended December 31, 1997 to $20,780,000 for the six months ended
December 31, 1998. The increase in interest expense was also impacted by a
$2,399,000, or 5.30% increase in the average balance of deposits in comparison
of the six months ended December 31, 1998, to the six months ended December 31,
1997. The increase in interest expense was also partially offset a decrease in
the cost of funds from 5.66% to 5.55% for the six months ended December 31, 1997
and 1998, respectively.
Provision for Loan Losses
The Company's provision for loan losses was $15,000 and $0 for the three months
December 31, 1998 and 1997, respectively. For the six months ended December 31,
1998 and 1997, the Company's provision for loan losses were $24,000 and $0,
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 provided 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 December 31, 1998 and June 30, 1998, the allowance for loan losses totaled
$275,000 and $251,000, respectively. The Company's net loan charge-offs were $0
and $0 for the six months ended December 31, 1998 and twelve months ended June
30, 1998, respectively. At December 31, 1998 and June 30, 1998, the allowance
for loan losses represented 0.80% and 0.86% of loans receivable, respectively.
Nonaccrual loans totaled $0 and $0 at December 31, 1998 and June 30, 1998,
respectively. At December 31, 1998 and June 30, 1998, classified assets totaled
$406,000 and $37,000, respectively.
(Continued)
23
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Noninterest Income
Noninterest income increased by $17,000, or 51.73% from $34,000 to $51,000 for
the three months ended December 31, 1998 as compared to the three months ended
December 31, 1997. The increase was due to an increase in gains on the sale of
securities available for sale of $8,000, or 100.00% and an increase in fees and
service charges of $7,000, or 28.00%.
Noninterest income increased by $57,000, or 121.28% from $47,000 to $104,000 for
the six months ended December 31, 1998 as compared to the six months ended
December 31, 1997. The increase was due to an increase of gains on the sale of
securities available for sale of $30,000, or 375.00% and an increase in fees and
service charges of $22,000, or 57.89%.
Noninterest Expense
Noninterest expense increased by $43,000, or 13.41%, from $318,000 for the three
months ended December 31, 1997 to $361,000 for the three months ended December
31, 1998. The increase was due primarily to a $30,000, or 13.57% increase in
compensation and employee benefits expense due primarily to increased staff. The
Company has increased staff in late 1998 as a result of staffing the Bank's new
main office in Redwood Falls, Minnesota. The increase is also attributable to a
$5,000, or 17.86%, increase in professional fees, a $3,000, or 42.86% increase
in occupancy costs, and a $3,000, or 7.50% increase in other noninterest
expenses.
Noninterest expense increased by $174,000, or 29.69%, from $586,000 for the six
months ended December 31, 1997 to $760,000 for the six months ended December 31,
1998. The increase was due primarily to the aforementioned $86,000 decrease in
the carrying value of an investment in a limited partnership. In addition, the
increase was also impacted by a $60,000, or 14.63% increase in compensation and
employee benefits expense due primarily to increased staff, a $15,000, or
23.44%, increase in other noninterest expense, a $6,000, or 46.15% increase in
occupancy costs, and a $5,000, or 38.46% increase in data processing costs. The
increase was also affected by a minor increase in advertising expense and a
minor decrease in professional fees.
Income Taxes
The Company's income taxes decreased by $12,000, or 28.57%, from $42,000 for the
three months ended December 31, 1997, to $30,000 for the three months ended
December 31, 1998. The change in income taxes was due primarily to a decrease in
pre-tax earnings of $18,000, or 14.88% from $121,000 for the three months ended
December 31, 1997 to $103,000 for the three months ended December 31, 1998. The
Company's effective tax rate was 28.66% and 34.72% for the three months ended
December 31, 1998 and 1997, respectively. The decrease was a result of a higher
level of tax exempt investments over the three months ended December 31, 1997.
(Continued)
24
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's income taxes decreased by $53,000, or 45.30%, from $117,000 for
the six months ended December 31, 1997, to $64,000 for the six months ended
December 31, 1998. The change in income taxes was due primarily to a decrease in
pre-tax earnings of $131,000, or 40.68% from $322,000 for the six months ended
December 31, 1997 to $191,000 for the six months ended December 31, 1998. The
Company's effective tax rate was 33.59% and 36.29% for the six months ended
December 31, 1998 and 1997, respectively. The decrease was a result of a higher
level of tax exempt investments over the six months ended December 31, 1997.
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.
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. At December 31, 1998, these deposits
totaled $16,350,000. Government deposits are typically in larger amounts than
traditional retail deposits and are bid more frequently and at higher interest
rates than retail deposits.. The Company has utilized government deposits for
several years and has procedures for addressing these operational and liquidity
concerns.
(Continued)
25
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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 six months ended December 31, 1998 and 1997, the Company's loan portfolio,
net, increased $5,044,000 and $2,593,000, respectively. During the same periods,
the Company purchased investment and mortgage-backed and related securities in
the amounts of $20,832,000 and $6,425,000, 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 six months ended December 31, 1998 and 1997, the
Bank utilized advances of $21,700,000 and $7,216,000, 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
December 31, 1998 and June 30, 1998, cash and cash equivalents totaled
$2,279,000 and $2,009,000, respectively. Investment securities, including
mortgage-backed and related securities designated available for sale totaled
$48,529,000 and $43,731,000 at December 31, 1998 and June 30, 1998,
respectively.
Since the conversion of the Association and the formation of the Company in
1995, the Company has regularly repurchased shares of its common stock through
open market transactions in publically announced repurchase programs. These
repurchase programs are intended to promote higher earnings per share and return
on equity in future periods by reducing the level of capital. These repurchases
have been completed with liquid resources, sales and maturities of investment
securities available for sale, loan repayments, increases in deposits, and
advances procured from the FHLB. Management believes the Company is adequately
capitalized. As such, the Company believes that these repurchases have not in
the past, nor should not in the future present substantial liquidity or capital
concerns based upon current and anticipated economic considerations. Previous
common stock repurchase programs should not be construed as indicative of future
repurchase programs by the Company.
(Continued)
26
<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.
(Continued)
27
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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 has substantially completed its testing,
although the Company expects to continue testing this and other applications
during 1999.
The Company anticipates its exposure to Year 2000 issues is reduced due to its
1-4 family residential lending emphasis. However, the Company is broadening 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 to expend approximately $10,000 to $15,000 on
its Year 2000 compliance efforts. In addition, 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.
Recent Developments
1. Completion of Stock Repurchase Program
On November 10, 1998 and December 18, 1998, the Company announced stock
repurchase programs of 10%, or 78,100 shares and 7%, or 49,200 shares,
respectively. The Company completed the repurchase as detailed previously
in this 10-QSB.
(Continued)
28
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
2. Commencement of New Facility Operations
On January 25, 1999, the Company's subsidiary, HomeTown Bank, relocated
its main office to a new facility in Redwood Falls, Minnesota. The
Company had previously announced the construction of this facility on
behalf of the Bank on April 28, 1998. In its announcement, the Company
stated that the new building will have a material impact on future
earnings and provided estimates at that time. The Company is currently
finalizing the financial effect the new building. The Company intends to
maintain its current office in downtown Redwood Falls as a branch office.
(Continued)
29
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities and Use of Proceeds.
Not Applicable.
ITEM 3: Defaults Upon Senior Securities.
Not Applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders.
On October 29, 1998, the Annual Meeting of the shareholders of
the Company was held to obtain the approval of the
shareholders of record as of October 6, 1997 in connection
with the matters indicated below. The following is a brief
description of the matters voted on at the meeting, and the
number of votes cast for, against, or withheld, as well as the
number of abstentions, as to such matters:
<TABLE>
<CAPTION>
Vote
----------------------------------
Against or
Matter For withheld Abstain
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Election of directors:
Donald C. Orth 742,808 11,200 N/A
Thomas W. Stotesbery 737,003 17,005 N/A
2. Ratification of Redwood Financial,
Inc. 1995 Stock Option Plan:* 605,097 58,225 1,025
3. Ratification of Redwood Financial,
Inc. Management Stock Bonus Plan:* 604,097 58,425 1,425
4. Appointment of KPMG Peat Marwick
LLP as auditors for 1999 fiscal year: 752,433 1,375 200
</TABLE>
* Totals do include 89,661 in broker non-votes.
(Continued)
30
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
None
31
<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: January 29, 1999 /s/ Paul W. Pryor
---------------- -----------------
Paul W. Pryor, President and Chief Executive
Officer (Duly Authorized Officer)
Date: January 29, 1999 /s/ Anthony H. Acker
---------------- --------------------
Anthony H. Acker, Chief Financial Officer
(Principal Financial and Accounting Officer)
32
<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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 52,179
<INT-BEARING-DEPOSITS> 2,226,864
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,529,294
<INVESTMENTS-CARRYING> 48,529,294
<INVESTMENTS-MARKET> 48,529,294
<LOANS> 34,284,634
<ALLOWANCE> 275,034
<TOTAL-ASSETS> 88,828,847
<DEPOSITS> 51,816,523
<SHORT-TERM> 0
<LIABILITIES-OTHER> 961,567
<LONG-TERM> 26,805,697
0
0
<COMMON> 112,500
<OTHER-SE> 9,132,560
<TOTAL-LIABILITIES-AND-EQUITY> 88,828,847
<INTEREST-LOAN> 1,314,939
<INTEREST-INVEST> 1,369,046
<INTEREST-OTHER> 84,865
<INTEREST-TOTAL> 2,768,850
<INTEREST-DEPOSIT> 1,318,802
<INTEREST-EXPENSE> 1,898,533
<INTEREST-INCOME-NET> 870,317
<LOAN-LOSSES> 24,000
<SECURITIES-GAINS> 37,913
<EXPENSE-OTHER> 759,841
<INCOME-PRETAX> 190,762
<INCOME-PRE-EXTRAORDINARY> 190,762
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,692
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
<YIELD-ACTUAL> 1.50
<LOANS-NON> 0
<LOANS-PAST> 965,771
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 251,013
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 275,013
<ALLOWANCE-DOMESTIC> 275,013
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 74,936
</TABLE>
