U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________to________________________
Commission File Number 0-25884
REDWOOD FINANCIAL, INC.
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(Exact name of Registrant as specified in its Charter)
Minnesota 41-1807233
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(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota 56283-0317
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (507) 637-8730
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of May 2, 1997:
Class Outstanding
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Common stock, par value $0.10 per share 961,875
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements
Consolidated Balance Sheets at March 31, 1997 and
June 30, 1996 3
Consolidated Statements of Earnings for the Three
and Nine months ended March 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity
for the Nine months ended March 31, 1997 5
Consolidated Statements of Cash Flows for the
Nine months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-10
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-20
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 2: Changes in Securities 21
Item 3: Defaults Upon Senior Securities 21
Item 4: Submission of Matters to a Vote of Security Holders 21
Item 5: Other Information 21
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
2
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
March 31, June 30,
Assets 1997 1996
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Cash $ 15,326 15,345
Interest-bearing deposits with banks 360,466 2,857,818
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Cash and cash equivalents 375,792 2,873,163
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Securities available for sale:
Mortgage-backed and related securities 6,171,442 0
Investment securities 3,946,250 0
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Total securities available for sale 10,117,692 0
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Securities held to maturity:
Mortgage-backed and related securities 14,478,888 15,805,305
Investment securities 10,995,787 15,288,913
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Total securities held to maturity 25,474,675 31,094,218
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Loans receivable, net 18,878,902 16,513,727
Federal Home Loan Bank stock, at cost 333,500 333,500
Accrued interest receivable 431,865 553,856
Premises and equipment, net 58,659 52,187
Other assets 59,753 93,992
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Total Assets $ 55,730,838 51,514,643
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Liabilities and Stockholders' Equity
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Deposits 42,561,895 38,042,529
Federal Home Loan Bank advances 850,318 0
Advance payments by borrowers for taxes and insurance 99,752 55,686
Accrued expenses and other liabilities 109,131 259,392
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Total Liabilities 43,621,096 38,357,607
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Common stock ($.10 par value): Authorized and issued
1,125,000 shares; outstanding 961,875 shares
at March 31, 1997; 1,068,750 shares at June 30, 1996 112,500 112,500
Additional paid-in capital 8,469,782 8,457,017
Retained earnings, subject to certain restrictions 6,243,103 6,118,091
Net unrealized loss on securities available for sale (72,671) 0
Unearned employee stock ownership plan shares (546,064) (595,744)
Unearned management stock bonus plan shares (328,453) (393,422)
Treasury stock, at cost; 163,125 shares at (1,768,455) (541,406)
March 31, 1997; 56,250 shares at June 30, 1996
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Total Stockholders' Equity 12,109,742 13,157,036
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Total Liabilities and Stockholders' Equity $ 55,730,838 51,514,643
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See accompanying notes to consolidated financial statements.
3
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Unaudited)
Three months Nine months
ended March 31, ended March 31,
--------------- ---------------
1997 1996 1997 1996
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Interest income:
Loans receivable $ 400,449 339,724 1,141,005 1,011,652
Mortgage-backed and related securities 307,462 190,035 846,132 549,325
Investment securities 206,293 292,835 642,207 911,433
Cash equivalents 57,974 38,315 161,637 126,149
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Total interest income 972,178 860,909 2,790,981 2,598,559
Interest Expense:
Deposits 552,263 474,621 1,561,553 1,412,435
Federal Home Loan Bank advances 926 0 926 0
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Total interest expense 553,189 474,621 1,562,479 1,412,435
Net interest income 418,989 386,288 1,228,502 1,186,124
Provision for losses on loans 0 0 0 0
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Net interest income after provision
for losses on loans 418,989 386,288 1,228,502 1,186,124
Noninterest income:
Fees and service charges 5,678 7,796 31,861 22,967
Gains on the sale of securities
available for sale 2,863 0 2,863 0
Other 6,382 6,885 7,844 25,149
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Total noninterest income 14,923 14,681 42,568 48,116
Noninterest expense:
Compensation and employee benefits 177,873 153,497 531,240 473,583
Advertising 4,866 5,724 13,473 12,843
Occupancy 8,134 6,586 23,496 20,316
Federal deposit insurance premiums 6,020 19,713 45,389 60,990
Professional fees 14,233 29,681 178,471 101,533
Deposit insurance fund assessment 0 0 237,085 0
Other 20,948 23,076 64,801 63,113
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Total noninterest expense 232,074 238,277 1,093,955 732,378
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Earnings before income taxes 201,838 162,692 177,115 501,862
Income tax expense 74,986 60,328 52,103 150,904
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Net earnings $ 126,852 102,364 125,012 350,958
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Net earnings per common share $ 0.13 0.10 0.13 0.34
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Weighted average number of shares outstanding 955,926 1,019,392 976,828 1,017,322
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See accompanying notes to consolidated financial statements.
4
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
(Unaudited)
Net Unearned
Unrealized Employee Unearned
Loss on Stock Management
Additional Securities Ownership Stock Bonus Total
Common Paid-in Retained Available Plan Plan Treasury Stockholders'
Stock Capital Earnings for Sale Shares Shares Stock Equity
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Balance,
June 30, 1996 $ 112,500 8,457,017 6,118,091 0 (595,744) (393,422) (541,406) 13,157,036
Net earnings 125,012 125,012
Stock repurchases (1,227,049) (1,227,049)
Net unrealized
loss on securities
available for sale (72,671) (72,671)
Earned employee
stock ownership
plan shares 12,765 49,680 62,445
Earned management
stock bonus plan 64,969 64,969
shares
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Balance,
March 31, 1997 $ 112,500 8,469,782 6,243,103 (72,671) (546,064) (328,453) (1,768,455) 12,109,742
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See accompanying notes to consolidated financial statements.
5
REDWOOD FINANCIAL, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine months
ended March 31,
-----------------------
1997 1996
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Operating Activities:
Net earnings $ 125,012 350,958
Adjustments to reconcile net earnings to net cash
provided by operations
Depreciation 13,193 12,602
Amortization of premiums and discounts on investment
securities, mortgage-backed and related securities
and loans receivable, net (28,869) (28,079)
Decrease in other assets 34,239 32,305
Decrease (increase) in accrued interest receivable 121,991 (12,154)
Increase in accrued interest payable 417,057 251,554
Amortization of unearned ESOP shares 49,680 49,680
Earned ESOP shares priced above original cost 12,765 8,194
Earned Management Stock Bonus Plan shares 64,969 17,656
Decrease in accrued expenses and other liabilities (150,261) (147,581)
Decrease in deferred income taxes 48,447 42,229
Federal Home Loan Bank stock dividend 0 (6,500)
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Net cash provided by operating activities 708,223 570,864
Investing Activities:
Proceeds from maturities of investment securities held to maturity 4,295,000 2,500,000
Purchases of investment securities held to maturity 0 (2,862,720)
Purchases of mortgage-backed and related securities held to maturity 0 (4,127,185)
Principal collected on mortgage-backed and related securities held to
maturity 1,320,723 1,250,853
Purchases of investment securities available for sale (4,990,575) 0
Proceeds from sales of investment securities available for sale 996,513 0
Purchases of mortgage-backed and related securities available for sale (6,251,792) 0
Principal collected on mortgage-backed and related securities available
for sale 37,639 0
Increase in loans receivable, net (2,363,081) (628,876)
Purchases of premises and equipment (19,665) (1,637)
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Net cash used by investing activities (6,975,238) (3,869,565)
Financing Activities:
Decrease in funds held for stock subscriptions 0 (13,127,630)
Decrease in deferred stock conversion costs 0 439,015
Increase in deposits, net 4,102,627 1,294,713
Increase in advance payments by borrowers for taxes and insurance 44,066 33,726
Proceeds from the sale of common stock 0 8,549,361
Increase in unearned ESOP shares 0 (661,984)
Proceeds from Federal Home Loan Bank advances 1,500,000 0
Repayment of Federal Home Loan Bank advances (650,000) 0
Repurchase of common stock (1,227,049) (965,156)
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Net cash provided (used) by financing activities 3,769,644 (4,437,955)
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Decrease in cash and cash equivalents (2,497,371) (7,736,656)
Cash and cash equivalents, beginning of period 2,873,163 14,092,665
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Cash and cash equivalents, end of period $ 375,792 6,356,009
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Supplemental cash flow disclosures:
Cash paid for interest $ 1,145,422 1,160,881
Cash paid for income taxes 162,920 67,980
See accompanying notes to consolidated financial statements.
6
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1997
(Unaudited)
(1) Redwood Financial, Inc.
Redwood Financial, Inc. (the Company) was incorporated under the laws of
the State of Minnesota for the purpose of becoming the savings and loan
holding company of Redwood Falls Federal Savings and Loan Association (the
Association) in connection with the Association's conversion from a
federally-chartered mutual savings and loan association to a
federally-chartered stock savings and loan association, pursuant to its
Plan of Conversion.
The Company commenced a Subscription and Community Offering of its shares
(the Offering) in connection with the conversion of the Association on May
22, 1995. The Offering was closed on June 22, 1995 and the conversion was
completed July 7, 1995 (see note 5).
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures necessary for a complete presentation of the
consolidated balance sheets, consolidated statements of earnings,
consolidated statement of stockholders' equity, and consolidated
statements of cash flows in conformity with generally accepted accounting
principles. However, all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for the
fair presentation of the interim financial statements have been included.
The statements of earnings for the three and nine months ended March 31,
1997 are not necessarily indicative of the results which may be expected
for the entire year.
The material contained herein is written with the presumption that the
users of the interim financial statements have read or have access to the
most recent Annual Report on Form 10-KSB of Redwood Financial, Inc., which
contains the latest audited financial statements and notes thereto,
together with Management's Discussion and Analysis of Financial Condition
and Results of Operations as of June 30, 1996 and for the year then ended.
(Continued)
7
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(3) Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares and common stock equivalents, if dilutive, outstanding during the
period. The only common stock equivalents are stock options. The weighted
average number of common stock equivalents is calculated using the
treasury stock method.
(4) Regulatory Capital Requirements
At March 31, 1997, the Association met each of the three current minimum
regulatory capital requirements. The following table summarizes the
Association's regulatory capital position at March 31, 1997:
Amount Percent (1)
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(dollars in thousands)
Tangible Capital:
Actual $8,241 15.24%
Required 811 1.50
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Excess $7,430 13.74%
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Core Capital:
Actual $8,241 15.24%
Required 1,623 3.00
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Excess $6,618 12.24%
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Risk-Based Capital:
Actual $8,445 51.15%
Required 1,321 8.00
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Excess $7,124 43.15%
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(1) Tangible and core capital levels are shown as a percentage of
total adjusted assets; risk-based capital levels are shown as a
percentage of risk-weighted assets.
(Continued)
8
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(5) Stockholders' Equity and Stock Conversion
The Association converted from a federally-chartered mutual savings and
loan association to a federally-chartered stock savings and loan
association pursuant to its plan of Conversion which was approved by the
Association's members on June 23, 1995. The conversion was effected on
July 7, 1995, and resulted in the issuance of 1,125,000 shares of common
stock (par value $0.10) at $8.00 per share for a gross sales price of
$9,000,000. Costs related to conversion (primarily underwriters'
commission, printing, and professional fees) aggregated $450,639 and were
deducted to arrive at the net proceeds of $8,549,361. The Company
established an employee stock ownership trust which purchased 82,748
shares of common stock of the Company at the issuance price of $8.00 per
share from funds borrowed from the holding company.
(6) Stock Repurchases
During the three months ended March 31, 1997, the Company purchased
106,875 shares of its outstanding common stock, or 10% of its previously
outstanding common stock. As a result of the stock repurchase program, the
Company has now outstanding 961,875 shares of common stock. The following
summarizes the Company's common stock repurchases during the quarter:
Date Purchased Shares Purchased Price per share
-------------- ---------------- ---------------
January 15, 1997 3,000 $10.3750
January 28, 1997 4,600 10.7500
January 30, 1997 600 11.0000
January 31, 1997 10,000 11.0000
February 4, 1997 37,500 11.0000
February 19, 1997 51,175 12.0625
(7) New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per
Share. SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of
the numerator and the denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation.
(Continued)
9
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
This statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier
application is not permitted. This statement requires restatement of all
prior-period EPS data presented. Management of the Company has not
determined the impact of adoption of the new accounting standard on the
Company's financial statements.
(Continued)
10
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Item 2-Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
The Company's net earnings are dependent primarily on its net interest income,
which is the difference between interest income earned on its investment and
loan portfolio and interest paid on interest-bearing liabilities. Net interest
income is determined by (1) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and (2) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Company's interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. To a lesser extent, the Company's net earnings
also are affected by the level of noninterest income, which primarily consists
of service charges and other fees. In addition, net earnings are affected by the
level of noninterest (general and administrative) expenses.
The operations of financial institutions, including the Association, are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of the federal government and governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates, and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the Association's
market area.
Financial Condition
The Company's total assets increased by $4,216,000, or 8.18%, from $51,515,000
at June 30, 1996 to $55,731,000 at March 31, 1997. The increase in the Company's
assets reflected an increase in the level of deposits, particularly public unit
fund deposits and proceeds from Federal Home Loan Bank (FHLB) advances during
the nine months ended March 31, 1997.
Cash and cash equivalents decreased by $2,497,000, or 86.91%, from $2,873,000 at
June 30, 1996 to $376,000 at March 31, 1997. The decrease in cash was primarily
due to the use of funds for increased loan production and investment security
purchases, including mortgage-backed and related securities during the nine
months ended March 31, 1997.
The Company's loans receivable, net, increased $2,365,000, or 14.32% over the
nine months ended March 31, 1997. The increase in loans was a result of
increased loan demand in the Company's market and primarily includes residential
first and second (i.e. home equity) mortgage loans.
(Continued)
11
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's investment securities, including mortgage-backed and related
securities, increased $4,498,000, or 14.47% from June 30, 1996 to March 31,
1997. The increase in investment securities, including mortgage-backed and
related securities primarily included 7-year balloon mortgage-backed securities
and U.S. agency debt obligations. All purchases of investment securities,
including mortgage-backed and related securities occurred in the three months
ended March 31, 1997, and are designated available for sale. Proceeds from the
maturity of investment securities and sales of investment securities available
for sale totaled $4,295,000 and $997,000, respectively, during the nine months
ended March 31, 1997. Principal payments on mortgage-backed and related
securities totaled $1,358,000 in the same period. The Company's investment
securities and mortgage-backed and related securities designated available for
sale reflect a $72,000 net unrealized loss as a result of recent market interest
rate increases.
The Company's deposits, including accrued interest payable, increased by
$4,519,000, or 11.88%, from $38,043,000 at June 30, 1996 to $42,562,000 at March
31, 1997. The increase in deposits is largely a result of higher public unit
fund deposits at March 31, 1997. During the quarter ended March 31, 1997, the
Company utilized FHLB advances of $850,000. The Company had no advances
outstanding at June 30, 1996. The Company intends to utilize FHLB advances for
cash management and loan and investment funding purposes. The advances provide
an alternative source of funds for the Company, at costs substantially
equivalent to its retail deposit products.
Results of Operations
Net Earnings
Net earnings were $127,000 for the quarter ended March 31, 1997, as compared to
net earnings of $102,000 for the quarter ended March 31, 1996. This represented
an increase of $25,000 or 24.51%. The increase in net earnings was primarily
attributable to a $33,000, or 8.55% increase in net interest income. The
increase in net interest income was primarily a result of the use of funds
obtained from recent deposit growth to originate loans and purchase investment
securities. Net earnings were also impacted by a $6,000 decrease, or 2.52% in
noninterest expense, and a $15,000, or 25.00% increase in income tax expense.
Net earnings were $125,000 for the nine months ended March 31, 1997, as compared
to net earnings of $351,000 for the nine months ended March 31, 1996. This
represented a decrease of $226,000, or 64.39%. The decrease in earnings was
primarily attributable to a $237,000 one-time assessment required by the federal
deposit insurance authorities to bring the Savings Association Insurance Fund
(SAIF) to parity with the Bank Insurance Fund (BIF), and $102,000 in additional
expense associated with the unsuccessful acquisition attempt of Olivia
Bancorporation, Inc. Net earnings were also impacted by a $43,000 increase, or
3.63% in net interest income, and a $99,000 decrease, or 65.56% in income tax
expense.
(Continued)
12
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Net Interest Income
Net interest income increased by $33,000, or 8.55%, from $386,000 for the
quarter ended March 31, 1996 to $419,000 for the quarter ended March 31, 1997.
The increase in net interest income is primarily due the recent growth in
deposits invested in higher yielding loans and investment securities, including
mortgage-backed and related securities. In addition, the increase in net
interest income was also affected by an increase in the Company's net interest
spread.
Although the Company's interest-bearing liabilities increased at a greater rate
than interest-earning assets, the spread obtained on the incremental increase in
both interest-earning assets and interest-bearing liabilities resulted in
increased net interest income. Average interest-earning assets increased by
$5,662,000, or 11.63% from $48,672,000 for the quarter ended March 31, 1996, to
$54,334,000 for the quarter ended March 31, 1997. Average interest-bearing
liabilities increased by $6,557,000, or 18.73% from $34,999,000 for the quarter
ended March 31, 1996 to $41,566,000 for the quarter ended March 31, 1997. As
such, the Company's ratio of average interest-earning assets to interest-bearing
liabilities declined from 139.07% for the quarter ended March 31, 1996, to
130.75% for the quarter ended March 31, 1997. The decrease in the level of
interest-earning assets relative to interest-bearing liabilities is primarily a
result of the use of funds to purchase outstanding common stock pursuant to the
Company's stock repurchase program during the quarter ended March 31, 1997.
Funds used to repurchase stock totaled $1,227,000.
The increase in net interest income was also affected by an increase in the
Company's overall net interest spread. The Company's net interest spread
increased from 1.65% for the quarter ended March 31, 1996 to 1.83% for the
quarter ended March 31, 1997. The improvement in the Company's net interest
spread is primarily a result of the aforementioned increased loan portfolio and
increased investment in higher yielding investment securities, including
mortgage-backed securities.
Net interest income increased by $43,000, or 3.63%, from $1,186,000 for the nine
months ended March 31, 1996 to $1,229,000 for the nine months ended March 31,
1997. The increase in net interest income was primarily a result of the
aforementioned growth in deposits used to fund loan originations and investment
security purchases during the nine months ended March 31, 1997. The increase in
net interest income was partially offset by a slight decline in net interest
spread from 1.86% for the nine months ended March 31, 1996 to 1.79% for the nine
months ended March 31, 1997.
The increased loan portfolio, albeit primarily in residential mortgage loans
will result in an increase in credit risk exposure. The incremental increase in
interest-bearing liabilities is primarily repriceable within 24 months, which
could increase the Company's interest-rate risk exposure.
(Continued)
13
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest Income
Interest income was $972,000 for the quarter ended March 31, 1997, as compared
to $861,000 for the quarter ended March 31, 1996, representing an increase of
$111,000, or 12.89%. As previously stated, the increase in interest income was
primarily due to a $5,662,000, or 11.63%, increase in the average balance of
interest-earning assets in comparison of the quarters ended March 31, 1997 and
1996, respectively. The increase in interest income was also affected by a
slight increase in the overall yield on interest-earning assets. For the quarter
ended March 31, 1997, the average yield on interest-earning assets was 7.16%, as
compared to 7.08% for the quarter ended March 31, 1996. The modest increase in
yield on interest-earning assets was due primarily to the larger loan portfolio
in the quarter ended March 31, 1997.
Interest income was $2,791,000 for the nine months ended March 31, 1997, as
compared to $2,599,000 for the nine months ended March 31, 1996, an increase of
$192,000, or 7.39%. The increase in interest income was due primarily to a
$4,209,000, or 8.73%, increase in the average balance of interest-earning
assets. The increase in interest income was partially offset by a slight decline
in the overall yield on interest-earning assets. For the nine months ended March
31, 1997, the average yield on interest-earning assets was 7.10%, a decline from
7.19% for the nine months ended March 31, 1996.
Interest on loans receivable increased by $60,000, or 17.65%, during the quarter
ended March 31, 1997, as compared to the quarter ended March 31, 1996. Such
increase was due to a $2,747,000, or 17.44% increase in the average balance of
loans receivable from $15,750,000 for the quarter ended March 31, 1996 to
$18,497,000 for the quarter ended March 31, 1997. The increase in interest on
loans receivable was also affected by a slight increase in the average yield on
loans receivable from 8.63% for the quarter ended March 31, 1996, to 8.66% for
the quarter ended March 31, 1997.
Interest on loans receivable increased by $129,000, or 12.75%, during the nine
months ended March 31, 1997, as compared to the nine months ended March 31,
1996. The increase was due to a $2,177,000, or 14.00% increase in the average
balance of loans receivable from $15,547,000 for the nine months ended March 31,
1996 to $17,724,000 for the nine months ended March 31, 1997. The increase in
interest on loans receivable was partially offset by a modest decline in the
average yield on loans receivable from 8.67% for the nine months ended March 31,
1996 to 8.58% for the nine months ended March 31, 1997.
(Continued)
14
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest on mortgage-backed and related securities increased by $117,000, or
61.58%, during the quarter ended March 31, 1997, as compared to the quarter
ended March 31, 1996. Such increase was due to a $7,270,000, or 68.18%, increase
in the average balance of mortgage-backed and related securities from
$10,663,000 for the quarter ended March 31, 1996 to $17,933,000 for the quarter
ended March 31, 1997. The aforementioned increase in mortgage-backed and related
securities occurred primarily in the quarter ended March 31, 1997. The increase
in the average balance of mortgage-backed and related securities is a result of
the use of funds provided by increased levels of deposits and FHLB advances,
maturing investment securities and principal repayments on existing
mortgage-backed securities.
The increase in interest on mortgage-backed and related securities was partially
offset by a decrease in the average yield on mortgage-backed and related
securities from 7.13% for the quarter ended March 31, 1996 to 6.86% for the
quarter ended March 31, 1997.
Interest on mortgage-backed and related securities increased by $297,000, or
54.10%, during the nine months ended March 31, 1997, as compared to the nine
months ended March 31, 1996. The increase was due to a $6,091,000, or 58.70%,
increase in the average balance of mortgage-backed and related securities from
$10,377,000 for the nine months ended March 31, 1996, to $16,468,000 for the
nine months ended March 31, 1997. The increase in the average balance of
mortgage-backed and related securities is a result of the use of funds provided
by increased levels of deposits and FHLB advances, maturing investment
securities and principal repayments on existing mortgage-backed securities.
The increase in interest on mortgage-backed and related securities was partially
offset by a decrease in the average yield on mortgage-backed and related
securities from 7.05% for the nine months ended March 31, 1996 to 6.85% for the
nine months ended March 31, 1997.
Interest on investment securities, including FHLB stock, decreased by $87,000,
or 29.69%, during the quarter ended March 31, 1997, as compared to the quarter
ended March 31, 1996. Such decrease was due primarily to a $4,364,000, or
23.89%, decrease in the average balance of investment securities from
$18,265,000 for the quarter ended March 31, 1996, to $13,901,000 for the quarter
ended March 31, 1997. The decline in the average balance of investment
securities was a result the use of cash proceeds from maturing investment
securities primarily to fund loan originations and mortgage-backed securities
purchases.
Additionally, the decrease in interest on investment securities was affected by
a decrease in the average yield on investment securities and FHLB stock, from
6.42% to 5.93% for the quarters ended March 31, 1996 and 1997, respectively.
(Continued)
15
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest on investment securities, including FHLB stock, decreased by $269,000,
or 29.56%, during the nine months ended March 31, 1997, as compared to the nine
months ended March 31, 1996. The decrease was due primarily to a $4,434,000, or
23.44%, decrease in the average balance of investment securities from
$18,919,000 for the nine months ended March 31, 1996 to $14,485,000 for the nine
months ended March 31, 1997. As previously stated, the decline in the average
balance of investment securities was a result the use of cash proceeds from
maturing investment securities primarily to fund loan originations and
mortgage-backed security purchases.
The decrease in interest on investment securities, including FHLB stock was
affected by a decrease in the average yield on investment securities, including
FHLB stock, from 6.43% for the nine months ended March 31, 1996 to 5.91% for the
nine months ended March 31, 1997.
Interest Expense
Interest expense increased by $78,000, or 16.42%, from $475,000 for the quarter
ended March 31, 1996 to $553,000 for the quarter ended March 31, 1997. The
increase in interest expense resulted from a $6,344,000, or 18.13% increase in
the average balance of deposits from $34,999,000 for the quarter ended March 31,
1996 to $41,343,000 for the quarter ended March 31, 1997. The increase in
interest expense was partially offset by a slight decline in the average cost of
deposits to 5.32% during the quarter ended March 31, 1997, as compared to 5.42%
for the quarter ended March 31, 1996. The slight decrease in the average cost of
deposits was due to the aforementioned growth in the Company's deposit base
including an increase in lower cost money market savings account deposits as
well as overall lower interest costs on certificates of deposits during the
quarter ended March 31, 1997. Interest expense on FHLB advances totaled $1,000
and $0 for the quarters ended March 31, 1997 and 1996, respectively.
Interest expense increased by $150,000, or 10.62%, from $1,412,000 for the nine
months ended March 31, 1996 to $1,562,000 for the nine months ended March 31,
1997. The increase in interest expense resulted primarily from a $3,795,000, or
10.74% increase in the average balance of deposits from $35,350,000 for the nine
months ended March 31, 1996 to $39,145,000 for the nine months ended March 31,
1997. The increase in interest expense was also affected by a slight decrease in
the average cost of deposits, from 5.33% during the nine months ended March 31,
1996, to 5.31% for the nine months ended March 31, 1997. Interest expense on
FHLB advances totaled $1,000 and $0 for the nine months ended March 31, 1997 and
1996, respectively.
(Continued)
16
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Provision for Loan Losses
The Company's provision for loan losses was $0 and $0 for the three months and
nine months ended March 31, 1997 and 1996, respectively. Due to lack of
substantive problem loans (i.e. few nonaccrual loans) during these periods and
stable real estate values in the Company's market area, management believed that
the allowance for loan losses was adequate throughout these periods. The
allowance for loan losses was maintained at $213,000 at March 31, 1997 and 1996.
The Company's net loan charge-offs were $0 and $0 for the three and nine months
ended March 31, 1997 and 1996, respectively. At March 31, 1997 and 1996, the
allowance for loan losses represented 1.12% and 1.32%, respectively, of loans
receivable. Nonaccrual loans totaled $0 and $109,000 at March 31, 1997 and 1996,
respectively.
Noninterest Income
The level of noninterest income remained nearly unchanged for the quarter ended
March 31, 1997 as compared to the quarter ended March 31, 1996. For both
periods, noninterest income totaled $15,000. Fee income declined by $2,000, or
25.00% from $8,000 for the quarter ended March 31, 1996, to $6,000 for the
quarter ended March 31, 1997. The decrease in fee income was primarily due to
lower loan closing fees during the quarter ended March 31, 1997. In addition,
other income declined by $1,000, or 14.29% for the quarter ended March 31, 1997
as compared to the quarter ended March 31, 1996. The declines in fee income and
other income were offset by a $3,000 gain on the sale of two investment
securities available for sale in the quarter ended March 31, 1997.
Noninterest income decreased by $5,000, or 10.42%, from $48,000 for the nine
months ended March 31, 1996 to $43,000 for the nine months ended March 31, 1997.
The decrease in noninterest income was primarily due to a $17,000, or 68.00%
decrease in other noninterest income. The decrease in other noninterest income
was primarily due to a $12,000 gain taken on the disposition of various assets
in the nine months ended March 31, 1996. This decrease was partially offset by a
$9,000, or 39.13%, increase in fees and service charges, and the aforementioned
$3,000 gain on the sale of two investment securities available for sale.
The increase in fees and service charges during the nine months ended March 31,
1997 as compared to the nine months ended March 31, 1996, was a result of higher
loan closing fees (e.g. loan origination fees and appraisal fees) resulting from
the aforementioned increase in loan origination volume over the nine months
ended March 31, 1997.
(Continued)
17
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Noninterest Expense
Noninterest expense decreased by $6,000, or 2.52%, from $238,000 for the quarter
ended March 31, 1996 to $232,000 for the quarter ended March 31, 1997. The
decrease in total noninterest expense was primarily due to a $16,000, or 53.33%
decline in professional fees, and a $14,000, or 70.00% decline in federal
deposit insurance premiums. This was partially offset by a $25,000, or 16.34%
increase in compensation and employee benefits. The decrease in noninterest
expense was also impacted by a $1,000 decrease in advertising expense, a $2,000
decrease in other noninterest expense, and a $1,000 increase in occupancy costs.
The Company incurred higher professional fees in the quarter ended March 31,
1996 as a result of its then recent stock conversion. The decrease in federal
deposit insurance premiums was due to lower Federal Deposit Insurance
Corporation deposit insurance assessments as a result of the omnibus
appropriations bill signed September 30, 1996 by President Clinton. This
legislation included a provision intended to bring to parity the funds insuring
savings associations (i.e. the SAIF) and commercial banking institutions (i.e.
the BIF). The legislation required the Association to pay a one-time $237,000
assessment to the FDIC. This assessment was expended in the quarter ended
September 30, 1996. The increase in compensation and employee benefits is
primarily a result of increased staffing, salary increases, and increased
amortization of the management stock bonus plan and employee stock ownership
plan.
Noninterest expense increased by $362,000, or 49.45%, from $732,000 for the nine
months ended March 31, 1996 to $1,094,000 for the nine months ended March 31,
1997. The increase in noninterest expense was primarily due to the
aforementioned one-time $237,000 federal deposit insurance assessment to bring
to parity the SAIF and BIF, and $102,000 in expenses, primarily professional
fees, incurred as a result of the unsuccessful acquisition attempt of Olivia
Bancorporation, Inc. The increase in noninterest expense during the nine months
ended March 31, 1997 was also attributable to a $57,000, or 12.03%, increase in
compensation and employee benefits from $474,000 for the nine months ended March
31, 1996 to $531,000 for the nine months ended March 31, 1997. The increase in
noninterest income was partially offset by a decline in federal deposit
insurance expense of $16,000, or 26.23% as a result of lower federal deposit
insurance premiums commencing in the quarter ended March 31, 1997. The increase
in noninterest expense was affected by a $3,000, or 15.00% increase in occupancy
costs, and a $2,000 increase, or 3.17% in other noninterest expense. Excluding
expenses incurred in the unsuccessful acquisition attempt of Olivia
Bancorporation, Inc., professional fees declined $26,000, or 25.49%.
As previously stated, the increase in compensation and employee benefits is
primarily a result of increased staffing, salary increases, and higher
amortization costs of the management stock bonus plan and employee stock
ownership plan.
(Continued)
18
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Income Taxes
The Company's income taxes increased by $15,000, or 25.00%, from $60,000 for the
quarter ended March 31, 1996, to $75,000 for the quarter ended March 31, 1997.
The change in income taxes was due primarily to an increase in pre-tax earnings
of $39,000, or 23.93%, from pre-tax earnings of $163,000 for the quarter ended
March 31, 1996 to $202,000 for the quarter ended March 31, 1997.
The Company's income taxes decreased by $99,000, or 65.56%, from $151,000 for
the nine months ended March 31, 1996, to $52,000 for the nine months ended March
31, 1997. The change in income taxes was due primarily to a $325,000 decrease,
or 64.74% in pre-tax earnings from $502,000 for the nine months ended March 31,
1996 to $177,000 for the nine months ended March 31, 1997. As previously stated,
the Company's lower pre-tax earnings are due to the one-time $237,000 federal
deposit insurance assessment and $102,000 in expenses associated with the
unsuccessful acquisition attempt of Olivia Bancorporation, Inc.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from maturing
investment securities and principal and interest payments on loans and
mortgage-backed and related securities. While maturities and scheduled
amortization of mortgage-backed and related securities and loans are a
predictable source of funds, deposit flows and mortgage prepayments are
generally influenced by general interest rates, economic conditions,
competition, and other factors.
The primary investing activity of the Company is the purchase of investment and
mortgage-backed and related securities. During the nine months ended March 31,
1997 and 1996, the Company purchased investment and mortgage-backed and related
securities in the amounts of $11,242,000, and $6,990,000, respectively. Other
investing activities include originations of loans and investment in FHLB of Des
Moines stock. The primary financing activity of the Company is the attraction of
savings deposits.
The Company has other sources of liquidity if there is a need for funds. The
Association has the ability to obtain additional advances from the Federal Home
Loan Bank of Des Moines. In addition, the Company's designation of selected new
investments as available for sale is intended to increase liquidity and overall
operational flexibility.
(Continued)
19
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be changed at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 5.0%.
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. If necessary, these investment securities may be sold to increase
cash; however, the disposition of such may result in the recognition of a gain
or loss. 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 March 31, 1997 and 1996, cash
and cash equivalents totaled $376,000 and $6,356,000, respectively. Investment
securities, including mortgage-backed and related securities designated
available for sale total $10,118,000 and $0 at March 31, 1997 and 1996,
respectively.
Recent Developments
(1) Completion of Stock Repurchase Program
On March 13, 1997, the Company announced that it had repurchased 101,875
shares, or 10% of its previously outstanding common stock pursuant to
regulatory approval received September 3, 1996. Concurrently, the Company
announced its intention to seek regulatory approval to repurchase another
10% of its outstanding stock, or 96,187 shares. The Company was informed
on March 17, 1997 by its regulator, the Office of Thrift Supervision that
such request would not be approved as a result of a recent change in
regulatory policy. The Company subsequently withdrew its repurchase
application.
(2) Commencement of Agricultural Lending Program
During the quarter ended March 31, 1997, the Board of Directors of the
Association adopted a policy for the origination and/or participation in
agricultural (i.e. farm) loans. The purpose of the new policy is to
enhance loan volume through opportunities presented in the Association's
market area. Both farm real estate loans and farm operating loans will be
considered. The Association has not originated or participated in any
agricultural loans in the past, although future activity in this area is
expected. Agricultural lending, which by nature involves increased risk,
is not intended to replace the Association's residential mortgage lending
emphasis. The Association will utilize existing staff, which is well
experienced in this lending area, in the maintenance of a prudent and
sound agricultural program.
(Continued)
20
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings.
None.
ITEM 2: Changes in Securities.
Not Applicable.
ITEM 3: Defaults upon Senior Securities.
Not Applicable.
ITEM 4: Submission of Matters to a Vote of Security Holders.
None
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
None
21
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: May 5, 1997 /s/ Paul W. Pryor
----------- -----------------
Paul W. Pryor, President and Chief Executive
Officer (Duly Authorized Officer)
Date: May 5, 1997 /s/ Anthony H. Acker
----------- --------------------
Anthony H. Acker, Chief Financial Officer
(Principal Accounting Officer)
22