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 March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________to___________________
Commission File Number 0-25884
REDWOOD FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Minnesota 41-1807233
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota 56283-0317
- ------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (507) 637-8730
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of January 15, 1999:
Class Outstanding
----- -----------
Common stock, par value $0.10 per share 653,993
Transitional Small Business Disclosure Format: [ ] Yes [X] No
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements
Consolidated Balance Sheets at March 31, 1999 and
June 30, 1998 3
Consolidated Statements of Earnings for the Three and Nine
months ended March 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income for
the Nine months ended March 31, 1999 and 1998 5
Consolidated Statement of Stockholders' Equity
for the Nine months ended March 31, 1999 6
Consolidated Statements of Cash Flows for the
Nine months ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-16
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-28
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 29
Item 2: Changes in Securities and Use of Proceeds 29
Item 3: Defaults Upon Senior Securities 29
Item 4: Submission of Matters to a Vote of Security Holders 29
Item 5: Other Information 29
Item 6: Exhibits and Reports on Form 8-K 29
Signatures 30
2
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
Assets March 31, June 30,
1999 1998
---------- ---------
Cash ...................................................................... $ 115,591 $ 20,448
Interest-bearing deposits with banks ...................................... 2,970,788 1,988,780
--------- ---------
Cash and cash equivalents ........ 3,086,379 2,009,228
--------- ---------
Securities available for sale:
Mortgage-backed and related securities (amortized cost ............... 44,956,001 33,937,175
$45,089,920 and $33,726,372, respectively)
Investment securities (amortized cost $7,541,035 and ................. 7,479,910 9,793,500
$9,784,454, respectively) ---------- ----------
Total securities available for sale ... 52,435,911 43,730,675
---------- ----------
Loans receivable, net ..................................................... 33,493,169 28,994,750
Federal Home Loan Bank stock, at cost ..................................... 1,485,000 835,000
Accrued interest receivable ............................................... 558,443 547,898
Premises and equipment, net ............................................... 1,795,235 596,867
Investment in limited partnership ......................................... 385,358 484,024
Other assets .............................................................. 286,503 88,163
---------- ----------
Total Assets .............. $ 93,525,998 $77,286,605
---------- ----------
Liabilities and Stockholders' Equity
Deposits .................................................................. 51,569,947 48,101,806
Federal Home Loan Bank advances ........................................... 29,699,303 16,200,000
Accrued interest payable .................................................. 999,372 631,168
Advance payments by borrowers for taxes and insurance ..................... 128,927 75,463
Due to broker ............................................................. 2,000,000 0
Accrued expenses and other liabilities .................................... 139,306 340,142
---------- ----------
Total Liabilities ............ 84,536,855 65,348,579
---------- ----------
Common stock ($.10 par value): Authorized and issued
1,125,000 shares; outstanding 653,993 shares at
March 31, 1999; 868,093 shares at June 30, 1998 ......................... 112,500 112,500
Additional paid-in capital ................................................ 8,509,854 8,490,163
Retained earnings, subject to certain restrictions ........................ 6,937,119 6,794,926
Accumulated other comprehensive income (loss), net ........................ (117,027) 131,909
Unearned employee stock ownership plan shares ............................. (413,584) (463,264)
Unearned management stock bonus plan shares ............................... (155,204) (220,172)
Treasury stock, at cost, 516,007 shares at
March 31, 1999; 256,907 shares at June 30, 1998 ......................... (5,884,515) (2,908,036)
---------- ----------
Total Stockholders' Equity ....... 8,989,143 11,938,026
---------- ----------
Total Liabilities and Stockholders' Equity $ 93,525,998 $ 77,286,605
---------- ----------
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,
1999 1998 1999 1998
--------- --------- ---------- ----------
Interest Income:
Loans receivable ....................................... $ 636,413 530,514 1,951,353 1,484,249
Securities held to maturity:
Mortgage-backed and related securities .............. 0 0 0 453,033
Investment securities ............................... 0 0 0 314,217
Securities available for sale:
Mortgage-backed and related securities .............. 661,925 436,564 1,829,255 771,824
Investment securities ............................... 123,293 217,146 325,009 437,883
Cash equivalents and other ............................. 39,557 18,035 124,421 53,560
---------- ---------- ---------- ----------
Total interest income ..................................... 1,461,188 1,202,259 4,230,038 3,514,766
Interest Expense:
Deposits ............................................... 682,068 647,265 2,000,869 1,915,637
Federal Home Loan Bank advances ........................ 366,307 111,460 946,039 294,694
---------- ---------- ---------- ----------
Total interest expense .................................... 1,048,375 758,725 2,946,908 2,210,331
---------- ---------- ---------- ----------
Net interest income ....................................... 412,813 443,534 1,283,130 1,304,435
---------- ---------- ---------- ----------
Provision for losses on loans ............................. 15,000 14,000 39,000 14,000
---------- ---------- ---------- ----------
Net interest income after provision for losses on loans ... 397,813 429,534 1,244,130 1,290,435
---------- ---------- ---------- ----------
Noninterest income:
Gains on sale of securities available for sale, net .... 0 7,469 37,913 15,339
Fees and service charges ............................... 17,918 21,137 77,098 58,940
Other .................................................. 2,817 6,448 9,570 7,762
---------- ---------- ---------- ----------
Total noninterest income .................................. 20,735 35,054 124,581 82,041
---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits ..................... 254,172 213,925 724,543 623,660
Advertising ............................................ 16,834 7,318 32,753 20,991
Occupancy .............................................. 36,562 14,013 65,431 31,667
Federal deposit insurance premiums ..................... 7,361 7,430 22,114 21,967
Professional fees ...................................... 21,625 18,922 78,429 77,078
Data processing expense ................................ 5,270 3,659 18,788 11,741
Loss on limited partnership ............................ 12,527 0 98,666 0
Other .................................................. 48,551 22,174 121,579 86,381
---------- ---------- ---------- ----------
Total noninterest expense ................................. 402,902 287,441 1,162,303 873,485
---------- ---------- ---------- ----------
Earnings before income taxes .............................. 15,646 177,147 206,408 498,991
Income tax expense ........................................ 145 65,270 64,215 182,071
---------- ---------- ---------- ----------
Net earnings .............................................. $ 15,501 111,877 142,193 316,920
---------- ---------- ---------- ----------
Net earnings per common share - Basic ..................... $ 0.03 0.14 0.21 0.38
Net earnings per common share - Diluted ................... 0.03 0.13 0.20 0.37
See accompanying notes to consolidated financial statements
4
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(unaudited)
Nine Months Ended March 31,
1999 1998
----------------------- ---------------------
Net earnings .................................... $ 142,193 316,920
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period ............................ (226,188) 201,134
Less: reclassification adjustment for gains
included in net income ................... (22,748) (9,203)
--------- --------
Other comprehensive income (loss) ............... (248,936) 210,337
--------- -------
Comprehensive income (loss) .................... $(106,743) 527,257
--------- -------
See accompanying notes to consolidated financial statements
5
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended March 31, 1999
(unaudited)
Unearned
Employee Unearned
Accumulated Stock management
Additional Other Ownership stock Total
Common paid-in Retained Comprehensive Plan bonus Treasury stockholders'
Stock capital Earnings Income (loss) Shares plan shares stock equity
- ----------------------------------------------------------------------------------------------------------------------------
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 142,193 142,193
Other comprehensive
income (loss), net (248,936) (248,936)
Earned employee stock
ownership plan
shares, net 19,691 49,680 69,371
Repurchase of common stock (2,976,479) (2,976,479)
Earned management stock
bonus plan shares 64,968 64,968
-------- --------- --------- -------- ------- ------- --------- ---------
Balance, March 31, 1999 $112,500 8,509,854 6,937,119 (117,027) (413,584) (155,204) (5,884,515) 8,989,143
-------- --------- --------- -------- ------- ------- --------- ---------
See accompanying notes to consolidated financial statements
6
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
Nine months
ended March 31,
1999 1998
----------- ------------
Operating Activities
Net earnings $ .............................................................. 142,193 316,920
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Provision for loan losses ............................................... 39,000 14,000
Depreciation ............................................................ 47,426 19,665
Amortization of premiums and discounts, net ............................. 24,940 (22,096)
Increase in other assets ................................................ (198,340) (484,254)
(Increase) decrease in accrued interest receivable ...................... (10,545) 76,280
Increase in accrued interest payable .................................... 368,204 394,532
Gains on sale of securities available for sale, net ..................... (37,913) (15,339)
Amortization of unearned ESOP shares .................................... 49,680 49,680
Earned ESOP shares priced above original cost ........................... 19,691 15,059
Earned Management Stock Bonus Plan shares ............................... 64,968 64,969
Decrease in investment in limited partnership ........................... 98,666 0
Deferred income taxes ................................................... 165,957 (116,895)
Increase in due to broker ............................................... 2,000,000 0
(Decrease) increase in accrued expenses and other liabilities ........... (200,837) 217,044
---------- ----------
Net cash provided by operating activities ...................................... 2,573,090 529,565
---------- ----------
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 ........ 7,390,000 0
Proceeds from sales of mortgage-backed securities available for sale ........ 2,547,575 885,305
Purchases of mortgage-backed securities available for sale .................. (22,956,124) (9,918,914)
Principal collected on mortgage-backed securities available for sale ........ 8,320,341 2,279,766
Proceeds from maturities of mortgage-backed securities available for sale ... 709,187 7,600,000
Purchases of investment securities available for sale ....................... (6,138,781) (1,990,093)
Proceeds from sales of investment securities available for sale ............. 1,016,085 0
Purchases of Federal Home Loan Bank stock ................................... (650,000) (101,500)
Increase in loans receivable, net ........................................... (4,532,857) (6,133,409)
Purchases of premises and equipment ......................................... (1,245,794) (287,206)
---------- ----------
Net cash used by investing activities .......................................... (15,540,368) (5,131,193)
---------- ----------
Financing Activities:
Increase in deposits, net ................................................... 3,468,141 2,181,212
Increase in advance payments by borrowers for taxes and insurance ........... 53,464 43,581
Proceeds from Federal Home Loan Bank advances ............................... 27,200,000 12,200,000
Repayment of Federal Home Loan Bank advances ................................ (13,700,697) (7,000,000)
Repurchase of common stock .................................................. (2,976,479) (1,139,581)
---------- ----------
Net cash provided by financing activities ...................................... 14,044,429 6,285,212
---------- ----------
Increase in cash and cash equivalents .......................................... 1,077,151 1,683,584
Cash and cash equivalents, beginning of period ................................. 2,009,228 763,792
---------- ----------
Cash and cash equivalents, end of period ....................................... $ 3,086,379 2,447,376
---------- ----------
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ................................................................. $ 2,578,704 1,815,799
Income taxes ............................................................. 266,420 163,259
Supplemental disclosures of cash flow information:
Transfer of real estate to loans ............................................ 0 13,520
Transfer of investment and mortgage-backed and related securities from
held to maturity to available for sale ................................... 0 36,531,995
See accompanying notes to consolidated financial statements
7
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 1999
(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 nine months ended March 31, 1999 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
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 March 31, 1999 and 1998.
For the Three Months Ended: March 31, 1999 March 31, 1998
--------------------------- -------------- --------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net Earnings: $15,501 $111,877
Basic EPS:
Earnings available to
common stockholders 15,501 589,730 $0.03 111,877 790,772 $0.14
Effect of Dilutive Securities:
Options on common stock 26,698 28,466
Unvested restricted stock awards 11,760 17,160
------ ------
Diluted EPS:
Earnings available to common
stockholders plus assumed
conversions $15,501 628,188 $0.03 $111,877 836,398 $0.13
For the Nine months Ended: March 31, 1999 March 31, 1998
-------------------------- -------------- --------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net Earnings: $142,193 $316,920
Basic EPS:
Earnings available to
common stockholders 142,193 676,784 $0.21 316,920 824,558 $0.38
Effect of Dilutive Securities:
Options on common stock 25,430 22,253
Unvested restricted stock awards 14,742 17,028
------ ------
Diluted EPS:
Earnings available to common
stockholders plus assumed
conversions $142,193 716,956 $0.20 $316,920 863,839 $0.37
9
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(4) Regulatory Capital Requirements
At March 31, 1999, the Bank met each of the three current minimum
regulatory capital requirements. The following table summarizes the Bank's
regulatory capital position at March 31, 1999:
To Be Well
(In thousands of dollars) Capitalized Under
Prompt Corrective
Actual Required Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Bank's Net Worth $7,015
Plus: Available For Sale
Market Valuation 117
------
Tangible Capital 7,132 7.72% $1,385 1.50% n/a n/a
(to tangible assets)
Core Capital 7,132 7.72% 2,771 3.00% $4,618 5.00%
(to adjusted tangible assets)
Core Capital 7,132 20.90% n/a n/a 2,048 6.00%
(to risk-weighted assets)
Plus: Allowable portion of
general allowance for
loan losses 290
------
Risk-based Capital $7,422 21.75% $2,730 8.00% $3,413 10.00%
(to risk-weighted assets)
(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
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
(6) Stock Repurchases
During the three months ended March 31, 1999, the Company completed all
stock repurchase programs announced to date. As a result, the Company
purchased 11,291 shares of its outstanding common stock during the quarter.
For the nine months ended March 31, 1999, the Company purchased 214,100
shares, or 24.7% 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 653,993 shares of common stock at March 31, 1999. The following
summarizes the Company's common stock repurchases during the quarter ended
March 31, 1999:
Settlement Date Shares Purchased Price per share
January 5, 1999 8,000 $15.75
January 7, 1999 3,291 $15.25
Average price per share $15.60
(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.
(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).
11
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
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 several 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 in 1993 for the sole purpose of providing insurance
sales separate from the Bank as a result of previous federal regulatory
requirements. These requirements have since been lifted. The Service
Corporation has been inactive since June 1996 and as a result has not been
included in any summarization of consolidated Company performance.
The following tables summarize the contribution of each segment to the
operating performance of the consolidated Company for the three and nine
months ended March 31, 1999 and 1998.
12
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
For the three months ended March 31, 1999
Holding Inter-company Reconciling Total
Company Bank Reconciliation Adjustments Corporation
------- ---- -------------- ----------- -----------
Interest Income:
Loans receivable ........................ 19,658 616,755 636,413
Securities held to maturity:
Mortgage-backed and related securities
Investment securities
Securities available for sale:
Mortgage-backed and related securities 661,925 661,925
Investment securities ................ 123,293 123,293
Cash equivalents and other .............. 2,124 39,557 (2,124) 39,557
-------- --------- ---------- -------- ----------
Total interest income ...................... 21,782 1,441,530 (2,124) 0 1,461,188
Interest Expense:
Deposits ................................ 684,192 (2,124) 682,068
Federal Home Loan Bank advances ......... 366,307 0 366,307
-------- --------- ---------- -------- ----------
Total interest expense ..................... 0 1,050,499 (2,124) 0 1,048,375
-------- --------- ---------- -------- ----------
Net interest income ........................ 21,782 391,031 0 0 412,813
-------- --------- ---------- -------- ----------
Provision for losses on loans .............. 0 15,000 0 0 15,000
-------- --------- ---------- -------- ----------
Net interest income after
provision for losses on loans ............ 21,782 376,031 0 0 397,813
-------- --------- ---------- -------- ----------
Noninterest income:
Gains on sale of securities
available for sale .................... 0
Fees and service charges ................ 17,918 17,918
Other ................................... 14,817 (12,000) 2,817
-------- --------- ---------- -------- ----------
Total noninterest income ................... 0 32,735 (12,000) 0 20,735
-------- --------- ---------- -------- ----------
Noninterest expense:
Compensation and employee benefits ...... 51,993 202,179 254,172
Advertising ............................. 16,834 16,834
Occupancy ............................... 36,562 36,562
Federal deposit insurance premiums ...... 7,361 7,361
Professional fees ....................... 2,575 19,050 21,625
Data processing expense ................. 5,270 5,270
Loss (gain) on limited partnership ...... 12,527 12,527
Other ................................... 12,956 47,595 (12,000) 48,551
-------- --------- ---------- -------- ----------
Total noninterest expense .................. 80,051 334,851 (12,000) 0 402,902
-------- --------- ---------- -------- ----------
Earnings (loss) before income taxes ........ (58,269) 73,915 0 0 15,646
Income tax expense (benefit) ............... (26,981) 27,126 145
-------- --------- ---------- -------- ----------
Net earnings (loss) ........................ (31,288) 46,789 0 0 15,501
-------- --------- ---------- -------- ----------
Segment assets ............................. 1,429,866 92,096,132 0 0 93,525,998
--------- ---------- ---------- -------- ----------
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 $2,124 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.
13
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
For the three months ended March 31, 1998
Holding Inter-company Reconciling Total
Company Bank Reconciliations Adjustments Corporation
------- ---- --------------- ----------- -----------
Interest Income:
Loans receivable ........................ 21,292 509,222 530,514
Securities held to maturity:
Mortgage-backed and related securities 0
Investment securities ................ 0
Securities available for sale:
Mortgage-backed and related securities 436,564 436,564
Investment securities ................ 3,981 213,165 217,146
Cash equivalents and other .............. 8,686 18,035 (8,686) 18,035
-------- --------- -------- -------- ----------
Total interest income ...................... 33,959 1,176,986 (8,686) 0 1,202,259
Interest Expense:
Deposits ................................ 655,951 (8,686) 647,265
Federal Home Loan Bank advances ......... 111,460 0 111,460
-------- --------- -------- -------- ----------
Total interest expense ..................... 0 767,411 (8,686) 0 758,725
-------- --------- -------- -------- ----------
Net interest income ........................ 33,959 409,575 0 0 443,534
-------- --------- -------- -------- ----------
Provision for losses on loans .............. 0 14,000 0 0 14,000
-------- --------- -------- -------- ----------
Net interest income after
provision for losses on loans ..... 33,959 395,575 0 0 429,534
-------- --------- -------- -------- ----------
Noninterest income:
Gains on sale of securities
available for sale .................... 7,469 7,469
Fees and service charges ................ 21,137 21,137
Other ................................... 18,448 (12,000) 6,448
-------- --------- -------- -------- ----------
Total noninterest income ................... 0 47,054 (12,000) 0 35,054
-------- --------- -------- -------- ----------
Noninterest expense:
Compensation and employee benefits ...... 48,566 165,359 213,925
Advertising ............................. 7,318 7,318
Occupancy ............................... 14,013 14,013
Federal deposit insurance premiums ...... 7,430 7,430
Professional fees ....................... 1,153 17,769 18,922
Data processing expense ................. 3,659 3,659
Other ................................... 14,540 19,634 (12,000) 22,174
-------- --------- -------- ------- ----------
Total noninterest expense .................. 64,259 235,182 (12,000) 0 287,441
-------- --------- -------- ------- ----------
Earnings (loss) before income taxes ........ (30,300) 207,447 0 0 177,147
Income tax expense (benefit) ............... (17,075) 82,345 65,270
-------- --------- -------- ------- ----------
Net earnings (loss) ........................ (13,225) 125,102 0 0 111,877
-------- --------- -------- ------- ----------
Segment assets ............................. 2,061,567 67,626,104 0 0 69,687,671
--------- ---------- -------- ------- ----------
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 $8,686 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
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
For the nine months ended March 31, 1999
Holding Inter-company Reconciling Total
Company Bank Reconciliations Adjustments Corporation
------- ---- --------------- ----------- -----------
Interest Income:
Loans receivable ........................ 70,167 1,881,186 1,951,353
Securities held to maturity:
Mortgage-backed and related securities
Investment securities
Securities available for sale:
Mortgage-backed and related securities 1,829,255 1,829,255
Investment securities ................ 325,009 325,009
Cash equivalents and other .............. 20,355 124,421 (20,335) 124,421
---------- ---------- ---------- ---------- ----------
Total interest income ...................... 90,522 4,159,871 (20,355) 0 4,230,038
Interest Expense:
Deposits ................................ 2,021,224 (20,355) 2,000,869
Federal Home Loan Bank advances ......... 946,039 0 946,039
---------- ---------- ---------- ---------- ----------
Total interest expense ..................... 0 2,967,263 (20,355) 0 2,946,908
---------- ---------- ---------- ---------- ----------
Net interest income ........................ 90,522 1,192,608 0 0 1,283,130
---------- ---------- ---------- ---------- ----------
Provision for losses on loans .............. 0 39,000 0 0 39,000
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses on loans............. 90,522 1,153,608 0 0 1,244,130
---------- ---------- ---------- ---------- ----------
Noninterest income:
Gains on sale of securities
available for sale .................... 37,913 37,913
Fees and service charges ................ 77,098 77,098
Other ................................... 45,570 (36,000) 9,570
---------- ---------- ---------- ---------- ----------
Total noninterest income ................... 0 160,581 (36,000) 0 124,581
---------- ---------- ---------- ---------- ----------
Noninterest expense:
Compensation and employee benefits ...... 150,132 574,411 724,543
Advertising ............................. 32,753 32,753
Occupancy ............................... 65,431 65,431
Federal deposit insurance premiums ...... 22,114 22,114
Professional fees ....................... 23,570 54,859 78,429
Data processing expense ................. 18,788 18,788
Loss (gain) on limited partnership ...... 98,666 98,666
Other ................................... 41,647 115,932 (36,000) 121,579
---------- ---------- ---------- --------- ----------
Total noninterest expense .................. 314,015 884,288 (36,000) 0 1,162,303
---------- ---------- ---------- --------- ----------
Earnings (loss) before income taxes ........ (223,493) 429,901 0 0 206,408
Income tax expense (benefit) ............... (104,069) 168,284 64,215
---------- ---------- ---------- --------- ---------
Net earnings (loss) ........................ (119,424) 261,617 0 0 142,193
---------- ---------- ---------- --------- ---------
Segment assets ............................. 1,429,866 92,096,132 0 0 93,525,998
---------- ---------- ---------- --------- ----------
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 $20,355 of inter-segment income and expense for deposits held by the
Holding Company at the Bank.
The other inter-segment revenue and expense is $36,000 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
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
For the nine months ended March 31, 1998
Holding Inter-company Reconciling Total
Company Bank Reconciliations Adjustments Corporation
------- ---- --------------- ----------- -----------
Interest Income:
Loans receivable ............................. 52,673 1,431,576 1,484,249
Securities held to maturity:
Mortgage-backed and related securities .... 453,033 453,033
Investment securities ..................... 18,815 295,402 314,217
Securities available for sale:
Mortgage-backed and related securities .... 771,824 771,824
Investment securities ..................... 3,981 433,902 437,883
Cash equivalents and other ................... 36,603 53,560 (36,603) 53,560
--------- ----------- --------- --------- -----------
Total interest income ........................... 112,072 3,439,297 (36,603) 0 3,514,766
Interest Expense:
Deposits ..................................... 1,952,240 (36,603) 1,915,637
Federal Home Loan Bank advances .............. 294,694 0 294,694
--------- ----------- --------- --------- -----------
Total interest expense .......................... 0 2,246,934 (36,603) 0 2,210,331
--------- ----------- --------- --------- -----------
Net interest income ............................. 112,072 1,192,363 0 0 1,304,435
--------- ----------- --------- --------- -----------
Provision for losses on loans ................... 0 14,000 0 0 14,000
--------- ----------- --------- --------- -----------
Net interest income after
provision for losses on loans 112,072 1,178,363 0 0 1,290,435
--------- ----------- --------- --------- -----------
Noninterest income:
Gains on sale of securities
available for sale ......................... 15,339 15,339
Fees and service charges ..................... 58,940 58,940
Other ........................................ 43,762 (36,000) 7,762
--------- ----------- --------- --------- -----------
Total noninterest income ........................ 0 118,041 (36,000) 0 82,041
--------- ----------- --------- --------- -----------
Noninterest expense:
Compensation and employee benefits ........... 139,748 483,912 623,660
Advertising .................................. 20,991 20,991
Occupancy .................................... 31,667 31,667
Federal deposit insurance premiums ........... 21,967 21,967
Professional fees ............................ 26,861 50,217 77,078
Data processing expense ...................... 11,741 11,741
Other ........................................ 56,716 65,665 (36,000) 86,381
---------- ---------- -------- --------- -----------
Total noninterest expense ....................... 223,325 686,160 (36,000) 0 873,485
---------- ---------- -------- --------- -----------
Earnings (loss) before income taxes ............. (111,253) 610,244 0 0 498,991
Income tax expense (benefit) .................... (57,940) 240,011 182,071
---------- ---------- --------- --------- -----------
Net earnings (loss) ............................. (53,313) 370,233 0 0 316,920
---------- ---------- --------- --------- ------------
Segment assets .................................. 2,061,567 67,626,104 0 0 69,687,671
---------- ---------- --------- --------- -----------
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 $36,603 of inter-segment income and expense for deposits held by the
Holding Company at the Bank.
The other inter-segment revenue and expense is $36,000 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
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 $16,239,000, or 21.01%, from $77,287,000
at June 30, 1998 to $93,526,000 at March 31, 1999. The increase in the Company's
assets reflected an increase in the level of Federal Home Loan Bank (FHLB)
advances and deposits during the nine months ended March 31, 1999. These
advances and deposits were used primarily to fund increased loan production and
purchases of mortgage-backed securities during this nine month period.
Cash and cash equivalents increased by $1,077,000, or 53.61%, from $2,009,000 at
June 30, 1998 to $3,086,000 at March 31, 1999. The increase in cash was a result
of the timing between when funds are received through loan and mortgage-backed
securities payments, deposits, and FHLB advances and when those funds are
reinvested in loans and mortgage-backed securities. The Company attempts to
maintain lower levels of cash and cash equivalents in order to enhance overall
yield.
(Continued)
17
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's loans receivable, net, increased $4,498,000, or 15.51% during the
nine months ended March 31, 1999. 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 19.91% or $8,705,000 from $43,731,000 to
$52,436,000 during the nine months ended March 31, 1999. The increase is
primarily due to the use of funds provided by FHLB advances and increased
deposits over the nine months ended March 31, 1999. The increase was partially
offset be a decrease in the carrying value of the Company's investment
securities, including mortgage-backed securities designated available for sale.
The market value of the Company's investment securities, including
mortgage-backed securities available for sale reflected a $211,000 before tax
unrealized gain at June 30, 1998 and a $195,000 before tax unrealized loss at
March 31, 1999. The Company is no longer designating any investment securities,
including mortgage-backed securities, as held to maturity.
The Company's deposits increased by $3,468,000, or 7.21%, from $48,102,000 at
June 30, 1998 to $51,570,000 at March 31, 1999. At March 31, 1999, the Company's
FHLB advances totaled $29,699,000, an increase of $13,499,000, or 83.33% 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 continues to seek additional
deposits through traditional deposit products and new deposit products, as well
as increase utilization of FHLB advances. To this extent, in December 1998, the
Company introduced checking to its product line. This product is intended to
reduce the Company's overall cost of funds as well as attract new customers.
Checking deposits totaled $809,000 at March 31, 1999.
Stockholders' equity declined by $2,949,000 or 24.70% from $11,938,000 at June
30, 1998 to $8,989,000 at March 31, 1999. The decrease is primarily due to the
Company's stock repurchase programs, described elsewhere in this 10-QSB. As a
result Treasury stock increased $2,976,000, or 102.35%, from $2,908,000 at June
30, 1998 to $5,885,000 at March 31, 1999. The use of interest earning funds to
repurchase stock will decrease interest income in future periods.
(Continued)
18
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Results of Operations
Net Earnings
Net earnings were $16,000 for the three months ended March 31, 1999, as compared
to $112,000 for the three months ended March 31, 1998. This represented a
decrease of $96,000, or 85.71%. The decrease in net earnings was primarily
attributable to a $116,000, or 40.42% increase in noninterest expense. The
increase in noninterest expense primarily includes increased compensation and
employee benefits as a result of increased staff, increased office occupancy
owing to the opening of a new bank facility, and other noninterest expense.
Other increases in various noninterest expense items are also noted and are
discussed in more detail in the Noninterest Expense section of this 10-QSB.
In addition, the decrease in net earnings was also due to decreased net interest
income during the quarter due to the placement of a $378,000 loan on nonaccrual,
and the resulting reversal of $36,000 in previously accrued interest. The
decrease in net income during the quarter was also affected by a $14,000, or
40.00% decrease in noninterest income. The decrease in net income was partially
offset by a $65,000, or 100.00% decrease in income tax expense.
Net earnings were $142,000 for the nine months ended March 31, 1999, as compared
to $317,000 for the nine months ended March 31, 1998. This represented a
decrease of $175,000, or 55.21%. The decrease in net earnings was primarily
attributable to a $289,000, or 33.10% increase in noninterest expense owing
primarily to a $101,000, or 16.19% increase in compensation and employee
benefits. The increase in noninterest expense was also due to a $99,000 decrease
in the carrying value of a limited partnership, a $36,000, or 41.86% increase in
other expenses, and a $33,000, or 103.13% increase in occupancy expense. The
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 nine months ended March 31, 1999. Other
increases in various noninterest expense items are also noted and are discussed
in more detail in the Noninterest Expense section of this 10-QSB.
In addition, the decrease in net income was also affected by a $21,000, or 1.61%
decrease in net interest income owing primarily to the reversal of accrued
interest on the aforementioned problem loan, and a $25,000, or 178.57% increase
in provision for loan losses. The decrease in net income was partially offset by
a $43,000, or 52.44% increase in noninterest income including gains on the sale
of securities of $38,000, and a $118,000, or 64.84% decrease in income tax
expense.
(Continued)
19
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Net Interest Income
Net interest income decreased by $31,000, or 6.98%, from $444,000 for the three
months ended March 31, 1998 to $413,000 for the three months ended March 31,
1999. The decrease in net interest income was primarily due to the placement of
a $378,000 agricultural loan on nonaccrual and the resulting reversal of $36,000
in previously accrued interest. In addition, the decrease in net interest income
was also a result of a decrease in the Company's net interest spread, from 1.74%
for the three months ended to March 31, 1998, to 1.45% for the three months
ended March 31, 1999.
Net interest income decreased by $21,000, or 1.61%, from $1,304,000 for the nine
months ended March 31, 1998 to $1,283,000 for the nine months ended March 31,
1999. The decrease is largely a result of the aforementioned placement of a
large balance loan on nonaccrual. The decrease was also affected by a decrease
in the Company's net interest spread, from 1.68% for the nine months ended to
March 31, 1998, to 1.49% for the nine months ended March 31, 1999.
Interest Income
Interest income was $1,461,000 for the three months ended March 31, 1999, as
compared to $1,202,000 for the three months ended March 31, 1998, representing
an increase of $259,000, or 21.55%. 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 $20,969,000, or
31.88% from $65,784,000 for the three months ended March 31, 1998, to
$86,753,000 for the three months ended March 31, 1999. The increase in interest
income was partially offset by a decrease in the overall yield on
interest-earning assets. For the three months ended March 31, 1999, the yield on
interest-earning assets was 6.74%, as compared to 7.31% for the three months
ended March 31, 1998. 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 $4,230,000 for the nine months ended March 31, 1999, as
compared to $3,515,000 for the nine months ended March 31, 1998, representing an
increase of $715,000, or 20.34%. 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 $17,305,000, or 27.04% from
$64,002,000 for the nine months ended March 31, 1998, to $81,307,000 for the
nine months ended March 31, 1999. The increase in interest income was offset by
a decrease in the overall yield on interest-earning assets. For the nine months
ended March 31, 1999, the yield on interest-earning assets was 6.94%, as
compared to 7.32% for the nine months ended March 31, 1998. The decrease in
yield on interest-earning assets also was due primarily to lower yields on the
Company's loan and securities portfolios.
(Continued)
20
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest on loans receivable increased by $105,000, or 19.77%, to $636,000 for
the three months ended March 31, 1999, as compared to $531,000 for the three
months ended March 31, 1998. Such increase was due to a $8,469,000, or 34.11%
increase in the average balance of loans receivable from $24,830,000 for the
three months ended March 31, 1998 to $33,299,000 for the three months ended
March 31, 1999. The increase in interest on loans receivable was offset by a
decrease in the average yield on loans receivable from 8.55% for the three
months ended March 31, 1998, to 7.64% for the three months ended March 31, 1999.
The decrease in interest income on loans receivable during the quarter was
substantially affected by the placement of the aforementioned large balance loan
on nonaccrual and the resulting reversal of previously accrued interest.
Interest on loans receivable increased by $467,000, or 31.47%, to $1,951,000 for
the nine months ended March 31, 1999, as compared to $1,484,000 for the nine
months ended March 31, 1998. Such increase was due to a $9,177,000, or 39.89%
increase in the average balance of loans receivable from $23,006,000 for the
nine months ended March 31, 1998 to $32,183,000 for the nine months ended March
31, 1999. The increase in interest on loans receivable was offset by a decrease
in the average yield on loans receivable from 8.60% for the nine months ended
March 31, 1998, to 8.08% for the nine months ended March 31, 1999. The decrease
in interest income on loans receivable was substantially affected by the
placement of the aforementioned large balance loan on nonaccrual and the
resulting reversal of previously accrued interest.
Interest income on mortgage-backed and related securities available for sale was
$662,000 and $437,000 for the three months ended March 31, 1999 and 1998,
respectively. The yield on the Company's mortgage-backed securities portfolio
available for sale was 6.29% and 6.66% for the three months ended March 31, 1999
and 1998, 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 nine months ended March 31, 1999.
Interest income on mortgage-backed and related securities available for sale was
$1,829,000 and $772,000 for the nine months ended March 31, 1999 and 1998,
respectively. The yield on the Company's mortgage-backed securities portfolio
available for sale was 6.27% and 6.90% for the nine months ended March 31, 1999
and 1998, respectively. A decrease in the yield on the mortgage-backed
securities portfolio has occurred as a result of recent declines in mortgage
rates.
(Continued)
21
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest income on investment securities available for sale was $123,000 and
$217,000 for the three months ended March 31, 1999 and 1998, respectively. The
yield on the Company's investment securities portfolio available for sale was
6.08% and 6.48% for the three months ended March 31, 1999 and 1998,
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 nine months ended March 31, 1999.
Interest income on investment securities available for sale was $325,000 and
$438,000 for the nine months ended March 31, 1999 and 1998, respectively. The
yield on the Company's investment securities portfolio available for sale was
5.94% and 6.82% for the three months ended March 31, 1999 and 1998,
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 $22,000, or 122.22%
in comparison of the three months ended March 31, 1999 and 1998. Interest income
on cash equivalents and other increased by $70,000, or 129.63% in comparison of
the nine months ended March 31, 1999 and 1998. Cash equivalents and other
includes dividends on FHLB stock. The increase in both periods reflects an
increased investment in FHLB stock.
Interest Expense
Interest expense increased by $289,000, or 38.08%, from $759,000 for the three
months ended March 31, 1998 to $1,048,000 for the three months ended March 31,
1999. The increase in interest expense resulted from a $20,177,000, or 272.51%
increase in the average balance of FHLB advances from $7,404,000 for the three
months ended March 31, 1998 to $27,581,000 for the three months ended March 31,
1999. The increase in interest expense was also impacted by a $4,660,000, or
9.90% increase in the average balance of deposits in comparison of the three
months ended March 31, 1999 and 1998. The increase in interest expense was
partially offset a decrease in the cost of funds from 5.57% to 5.29% for the
three months ended March 31, 1998 and 1999, respectively. As noted previously in
this 10-QSB, the Company recently began offering checking in order to lower its
cost of funds. The Company has made substantial progress in developing this
program, resulting in an average balance of $530,000 for the quarter ended March
31, 1999 at an average cost of 1.70%.
(Continued)
22
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Interest expense increased by $737,000, or 33.35%, from $2,210,000 for the nine
months ended March 31, 1998 to $2,947,000 for the nine months ended March 31,
1999. The increase in interest expense resulted from a $16,656,000, or 260.62%
increase in the average balance of FHLB advances from $6,391,000 for the nine
months ended March 31, 1998 to $23,047,000 for the nine months ended March 31,
1999. The increase in interest expense was also impacted by a $3,213,000, or
7.01% increase in the average balance of deposits in comparison of the nine
months ended March 31, 1999 and 1998. The increase in interest expense was also
partially offset a decrease in the cost of funds from 5.64% to 5.45% for the
nine months ended March 31, 1998 and 1999, respectively.
Provision for Loan Losses
The Company's provision for loan losses was $15,000 and $14,000 for the three
months ended March 31, 1999 and 1998, respectively. For the nine months ended
March 31, 1999 and 1998, the Company's provision for loan losses were $39,000
and $14,000, 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 has 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 March 31, 1999 and June 30, 1998, the allowance for loan losses totaled
$290,000 and $251,000, respectively. The Company's net loan charge-offs were $0
and $0 for the nine months ended March 31, 1999 and twelve months ended June 30,
1998, respectively. At March 31, 1999 and June 30, 1998, the allowance for loan
losses represented 0.86% and 0.86% of loans receivable, respectively. Nonaccrual
loans totaled $378,000 and $0 at March 31, 1999 and June 30, 1998, respectively.
At March 31, 1999 and June 30, 1998, classified assets totaled $494,000 and
$37,000, respectively.
Noninterest Income
Noninterest income decreased by $14,000, or 40.00% from $35,000 to $21,000 for
the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998. The decrease was due to a decrease in gains on the sale of
securities available for sale of $7,000, or 100.00% and a decrease in other
income of $3,000, or 50.00%.
Noninterest income increased by $43,000, or 52.44% from $82,000 to $125,000 for
the nine months ended March 31, 1999 as compared to the nine months ended March
31, 1998. The increase was due to an increase in fees and service charges of
$18,000, or 30.51% and an increase in gains on the sale of securities available
for sale of $23,000, or 153.33%.
(Continued)
23
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Noninterest Expense
Noninterest expense increased by $116,000, or 40.42%, from $287,000 for the
three months ended March 31, 1998 to $403,000 for the three months ended March
31, 1999. Noninterest expense increased by $289,000, or 33.10%, from $873,000
for the nine months ended March 31, 1998 to $1,162,000 for the nine months ended
March 31, 1999.
As previously noted, these increases in noninterest expense are largely the
cause of overall decreased earnings by the Company. The increase in noninterest
expense is primarily due to (1) increased compensation and employee benefits as
a result of staff additions, (2) increased occupancy costs owing to the
Company's recent addition of a new bank building in Redwood Falls, Minnesota,
and (3) increased other expenses, many of which management believes are one time
expenses associated with the addition of the new bank building and
implementation of new deposit products, including checking and debit card
products. The increase in noninterest expense was also substantially affected by
a decrease in the carrying value of an investment in a limited partnership, most
notably in the six months ended December 31, 1998.
The increase in staff is primarily a result of the new bank building opened in
Redwood Falls in January 1999. Prior to the start of this quarter, the Company
employed 16 full time and 3 part time employees. Comparatively, on January 1,
1998, the Company employed 10 full time and 3 part time employees. The increase
in staff was required to staff the new bank facility and to assist in developing
and maintaining new deposit and loan products. As a result, compensation and
employee benefits increased $40,000, or 18.69% in comparison of the three months
ended March 31, 1999 and 1998. In comparison of the nine months ended March 31,
1999 and 1998, compensation and employee benefits increased $101,000, or 16.19%.
The increase in occupancy costs is also primarily a result of the new bank
building opened in Redwood Falls in January 1999. As detailed in previous
10-QSB's and press releases, the Company expected the new building to have a
substantial increase in occupancy expenses. As a result, occupancy costs
increased $23,000, or 164.29% in comparison of the three months ended March 31,
1999 and 1998. In comparison of the nine months ended March 31, 1999 and 1998,
occupancy costs increased $33,000, or 103.13%.
(Continued)
24
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The increase in other noninterest expenses is due to the new bank building
opened in Redwood Falls in January 1999, new deposit products introduced by the
Company over the previous four months and Year 2000 related expenses, included
in the Company's Year 2000 budget as detailed elsewhere in this 10-QSB. The Bank
began offering checking in December 1998 and debit cards, including an ATM
machine in March 1999. These programs required substantive initial outlays which
are not considered repetitive. The new bank building required provisions of
substantial supplies and other outfittings not directly related to the physical
building. Year 2000 compliancy costs totaled approximately $4,000 this quarter.
As a result, other noninterest expense increased $27,000, or 122.73% in
comparison of the three months ended March 31, 1999 and 1998. In comparison of
the nine months ended March 31, 1999 and 1998, other noninterest expense
increased $36,000, or 41.86%. Although many of the aforementioned costs are not
repetitive, the increasing complexity and size of the Company's operations will
result in higher other expenses than has been recorded in previous periods.
During the three and nine months ended March 31, 1999, the Company wrote down
the carrying value of its investment in a limited partnership by $13,000 and
$99,000, respectively. The limited partnership invests in equity securities of
financial institutions. The carrying value of the limited partnership decreased
as a result of market depreciation.
The increase in noninterest expense was also affected by increases in
advertising expense and data processing expense. For the three and nine months
ended March 31, 1999, advertising expense increased $10,000, or 142.86%, and
$12,000, or 57.14%. For the three and nine months ended March 31, 1999, data
processing costs increased $1,000, or 25.00%, and $7,000, or 58.33%. Both
increases are a result of the new bank building and additional deposit products.
The Bank converted to an automated data processing system in October 1997 which
overstates the percentage increase in comparison of the nine months ended March
31, 1999 and 1998.
Income Taxes
The Company's income taxes decreased by $65,000, or 100.00%, from $65,000 for
the three months ended March 31, 1998, to less than $1,000 for the three months
ended March 31, 1999. The change in income taxes was due primarily to a decrease
in pre-tax earnings of $161,000, or 90.96% from $177,000 for the three months
ended March 31, 1998 to $16,000 for the three months ended March 31, 1999. The
Company's effective tax rate was 0.93% and 36.85% for the three months ended
March 31, 1999 and 1998, respectively. The Company maintains a balance of tax
exempt investments which decreases its effective tax rate.
(Continued)
25
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
The Company's income taxes decreased by $118,000, or 64.84%, from $182,000 for
the nine months ended March 31, 1998, to $64,000 for the nine months ended March
31, 1999. The change in income taxes was due primarily to a decrease in pre-tax
earnings of $293,000, or 58.72% from $499,000 for the nine months ended March
31, 1998 to $206,000 for the nine months ended March 31, 1999. The Company's
effective tax rate was 31.10% and 36.49% for the nine months ended March 31,
1999 and 1998, respectively.
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 March 31, 1999, these deposits
totaled $17,108,000. 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)
26
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 nine months ended March 31, 1999 and 1998, the Company's loan portfolio,
net, increased $4,533,000 and $6,133,000, respectively. During the same periods,
the Company purchased investment and mortgage-backed and related securities in
the amounts of $22,956,000 and $9,919,000, 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 nine months ended March 31, 1999 and 1998, the
Bank utilized advances of $27,200,000 and $12,200,000, 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 March
31, 1999 and June 30, 1998, cash and cash equivalents totaled $3,086,000 and
$2,009,000, respectively. Investment securities, including mortgage-backed and
related securities designated available for sale totaled $52,436,000 and
$43,731,000 at March 31, 1999 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. The Company has no outstanding stock
repurchase programs currently.
(Continued)
27
REDWOOD FINANCIAL, INC. AND SUBSIDIARY
Federal savings institutions are required to satisfy three capital requirements:
(i) a requirement that "tangible capital" equal or excess 1.5% of tangible
assets, (ii) a requirement that "core capital" equal or excess 3.0% of adjusted
tangible assets, and (iii) a risk-based capital requirement currently 8.0% of
"risk-adjusted" assets. The Bank currently meets all three capital requirements.
Year 2000 Consideration
The Company's primary exposure is its automated data processing system which had
been determined to be Year 2000 noncompliant. On August 4, 1998, the Company
received its Year 2000 compliant release from its software vendor. Management
has tested the release through both internal and external resources 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 other related 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.
As part of its contingency planning, the Company has decided to increase its
liquidity levels in late 1999 in order to ensure sufficient cash and other
liquidity to offset a possible deposit outflow. Specifically, the Company
intends to limit investment securities purchases during the last four months of
calendar 1999 in order to increase cash reserves and cash resources to a range
of $5.0 to $10.0 million. In addition, the Bank has the additional ability to
obtain further advances from the FHLB. The Bank currently maintains a $1.0
million line of credit with the FHLB. Sales of loans and/or investment
securities are also under consideration as a method for increasing liquidity.
The implementation of these contingency plans will result in a decrease in
overall profitability during this period and possibly subsequent periods.
(Continued)
28
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.
None
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K.
None
29
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: April 29, 1999 /s/ Paul W. Pryor
-------------- --------------------------------------------
Paul W. Pryor, President and Chief Executive
Officer (Duly Authorized Officer)
Date: April 29, 1999 /s/ Anthony H. Acker
-------------- --------------------------------------------
Anthony H. Acker, Chief Financial Officer
(Principal Financial and Accounting Officer)
30