UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
Commission file number 0-24606
NORTHWEST EQUITY CORP.
(Exact name of small business issuer as specified in its charter)
Wisconsin 39-1772981
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Keller Avenue South 54001
Amery, Wisconsin (Zip code)
(Address of principal executive offices)
(715) 268-7105
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such report(s) and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes __x__ No_____
(2) Yes __x__ No_____
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. x
State issuer's revenues for its most recent fiscal year: $6,949,000 (Total
interest and dividend income and total non-interest income).
As of May 31, 1996, there were issued and outstanding 969,392 shares of
Common Stock of the Registrant. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the average
of the bid and asked price of such shares of Common Stock as of May 31, 1996,
was $9.1 million. Solely for purposes of this calculation, all executive
officers and directors of the Registrant are considered to be affiliates; also
included as "affiliate shares" are certain shares held by various employee
benefit plans in which the trustee are directors of the Registrant or are
required to vote a portion of unallocated shares at the direction of executive
officers or directors of the Registrant. The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the Registrant that such person is an affiliate of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB: Portions of the Annual Report to Shareholders
for the fiscal year ended March 31, 1996 are incorporated by reference into
Parts II and IV hereof.
Part III of Form 10-KSB: Portions of the Proxy Statement for the 1996 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Northwest Equity Corp., a Wisconsin corporation (the "Company" or the
"Registrant"), is the holding company for Northwest Savings Bank, a Wisconsin
chartered stock savings bank (the "Bank"). The Bank is regulated by the
Wisconsin Commissioner of Savings and Loan (the "Commissioner") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Company and the Bank are subject
to extensive regulation, supervision and examination by the Wisconsin
Commissioner of Savings and Loan (the "Commissioner") and the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank was organized in 1936, and has
three full service offices located in Polk, St. Croix and Burnett Counties,
Wisconsin. Because the Company's only significant business operations are that
of the Bank, the business of the Bank is essentially the only business of the
Company.
The Bank is a community-oriented, full-service financial institution
offering a variety of retail financial services to meet the needs of the
communities it serves. The Company's principal business consists of attracting
funds in the form of deposits and other borrowings and investing such funds,
primarily in residential real estate loans, mortgage-backed and related
securities, and various types of commercial and consumer loans. At March 31,
1996, the Company had total assets of $86.4 million, total deposits of $57.3
million, and shareholders' equity of $11.9 million. The Bank is a member of the
FHLB-Chicago, which is one of the twelve regional banks that comprise the FHLB
system. The Company's executive office is headquartered at 234 South Keller
Avenue, Amery, Wisconsin 54001. Its telephone number at that address is
715-268-7105.
The Company's primary sources of funds are deposits, repayments on loans
and mortgage-backed and related securities and, to a lesser extent, advances
from the FHLB-Chicago. The Company's deposits totaled $57.3 million at March 31,
1996, of which 30.4% were core deposits, consisting of NOW, passbook and money
market deposit accounts. The Company utilized these funds to invest primarily in
one-to-four family residential loans and, to a lesser extent, consumer,
commercial and other loans, and to invest in mortgage-backed and related
securities and other investment securities. At March 31, 1996, the Company's
gross loan portfolio totaled $71.1 million, that consisted of $48.4 million of
one-to-four family loans, $6.9 million of consumer loans, $6.8 million of
commercial real estate loans, $4.6 million of commercial loans, $3.2 million of
other real estate loans, and $1.3 million of multi-family loans. At March 31,
1996, the Company's gross loans included $50.6 million of ARM loans.
The Company's strategic business plan provides for investments in
mortgage-backed and related securities in addition to its investments in United
States Treasury and agency securities. Management believes this investment
portfolio provides numerous benefits, including the ability to provide and
maintain adequate regulatory liquidity levels, maintain a balance of high
quality, diversified investments, and better manage the interest rate risk of
the Company. At March 31, 1996, the Company's mortgage-backed and related
securities held for investment and FHLB-Chicago stock totaled $6.2 million
consisting of $5.4 million or 6.3% of total assets in mortgage-backed and
related securities held for investment and $0.8 million or 0.9% of total assets
in FHLB-Chicago stock.
2
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Market Area and Competition
The Company offers a variety of deposit products, services and mortgage
loans primarily in northwestern Wisconsin. The Company's main office is located
at 234 South Keller Avenue, Amery, Wisconsin. The City of Amery is located
approximately 40 miles northeast of Minneapolis and St. Paul, Minnesota. The
Company, in addition to its Amery office, has two full-service branches. One is
located in New Richmond and the other in Siren, Wisconsin. Both are located near
Amery and together account for approximately $19.6 million or 34.2% of the
Company's total deposits at March 31, 1996. All of the Company's locations are
in counties generally characterized as rural with a total population of
approximately 102,000.
The Company has significant competition in both its mortgage and consumer
lending business, as well as in attracting deposits. The Company's primary
competition for loans are principally from other thrift institutions, savings
banks, mortgage banking companies, insurance companies and commercial banks. Its
most direct competition for deposits historically has come from other thrifts,
savings banks commercial banks, commercial banks and credit unions. The Company
has faced additional competition for funds from a number of institutions,
including the availability of short-term money market funds and other corporate
and government securities funds offered by other financial service companies,
such as brokerage firms and insurance companies.
Lending Activities
General
The largest component of the Company's gross loan portfolio, that totaled
$71.1 million at March 31, 1996, was first mortgage loans secured by
owner-occupied one-to-four family residences. At March 31, 1996, one-to-four
family owner-occupied mortgage loans totaled $48.4 million or 68.1% of gross
loans. Commercial real estate loans were $6.8 million or 9.6% of gross loans at
March 31, 1996. Of gross loans, $50.6 million or 71.2% were ARM loans. As part
of its strategy to manage interest rate risk, the Company originates primarily
ARM loans that have short and intermediate-term maturities for its own loan
portfolio. The Company also offers longer-term fixed rate loans, most of which
are sold immediately to secondary market investors. In general, the Company's
total loan portfolio has increased in recent years due to its ability to
originate ARM loans that it retains in its loan portfolio.
3
<PAGE>
Composition of Loan Portfolio
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentages of the gross loan portfolio
at the dates indicated.
<TABLE>
At March 31,
------------------- -------------------- -----------------
1996 1995 1994
------------------- -------------------- -----------------
<CAPTION>
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family $48,360 68.00% %42,501 72.2$% $39,133 76.06%
Multi-family 1,266 1.78% 1,235 2.10% 1,300 2.53%
Commercial 6,813 9.58% 4,757 8.09% 4,168 8.10%
Construction and land ....... 3,165 4.45% 1,578 2.68% 994 1.93%
------ ------ ----- ----- ----- ------
Total real estate loans 59,604 83.82% 50,071 85.11% 45,595 88.62%
------ ------ ------ ------ ------ ------
Consumer loans:
Home equity 7 0.01% 8 0.01% 3 0.01%
Automobile 4,832 6.79% 2,787 4.74% 1,311 2.55%
Credit card 241 0.34% 210 0.36% 177 0.34%
Other consumer loans 1,817 2.56% 1,308 2.22% 897 1.74%
----- ----- ----- ----- ----- -----
Total consumer loans 6,897 9.70% 4,313 7.33% 2,388 4.64%
----- ----- ----- ----- ----- -----
Commercial loans 4,612 6.49% 4,450 7.56% 3,467 6.74%
------ ----- ----- ------- ----- -----
Gross loans receivable 71,113 100.00% 58,834 100.00% 51,450 100.00%
------ ======= ------ ======= ------ =======
Add:
Accrued interest, net 506 391 310
Less:
Loans in process - - -
Deferred fees and discounts - - -
Allowance for uncollected interest - (8) (3)
Allowance for loan losses (433) (434) (436)
---- ---- ----
Total additions/deductions 73 (51) (129)
------- ------- ----
Loans receivable, net $71,186 $58,783 $51,321
======= ======= =======
</TABLE>
4
<PAGE>
Loan Maturity
The following table shows the contractual maturity of the Company's
loan and mortgage-backed and related securities portfolio at March 31, 1996.
Loans that have adjustable rates are shown as being due in the period during
which the underlying contracts mature. Demand loans that have no schedule for
repayment and no stated maturity are reported as due in one year or less. The
table does not include estimated prepayments or scheduled principal
amortization.
<TABLE>
At March 31, 1996
-----------------------------------------------------------------------------------
<CAPTION>
Total
Mortgage-
One-to- Commercial Construction Backed and
Four Multi- Real and Related
Family Family Estate Land Commercial Consumer Securities Total
------ ------ ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due :
Within one year $ 546 $ - - $ 108 $ 2,008 $ 2,468 $ 861 - - $ 5,991
- -
After one year:
One to three years 1,057 - - 1,128 4 753 2,301 - - 5,243
Three to five years 1,913 409 545 52 938 3,337 - - 7,194
Five to ten years 4,001 230 2,784 266 453 265 - - 7,999
Ten to twenty years 12,807 141 1,682 611 0 104 - - 15,345
Over twenty years 28,036 486 566 224 - - 29 5,373 34,714
------ ----- ----- ----- ----- ----- ----- ------
Total due after one year 47,814 1,266 6,705 1,157 2,144 6,036 5,373 70,495
======
Total amounts due 48,360 1,266 6,813 3,165 4,612 6,897 5,373 76,486
Less:
Allowance for loan losses (85) (1) (22) (19) (290) (16) - - (433)
----- ----- ----- ----- ------ ----- ----- -----
Loans receivable and mortgage-
backed securities, net $48,275 $ 1,265 $ 6,791 $ 3,146 $ 4,322 $ 6,881 $ 5,373 $76,053
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
5
<PAGE>
The following table sets forth at March 31, 1996 the dollar amount of all
loans and mortgage-backed and related securities due after March 31, 1997, such
loans and whether such loans have fixed interest rates or adjustable interest
rates.
------------------------------
Due After March 31, 1997
------------------------------
Fixed Adjustable Total
------- ---------- -------
(In thousands)
Mortgage loans:
One-to-four family $ 6,950 $ 4,864 $47,814
Multi-family 409 857 1,266
Commercial 338 6,367 6,705
Construction and land 22 1,135 1,157
----- ------ ------
Total mortgage loans 7,719 49,223 56,942
Consumer loans 5,561 475 6,036
Comercial loans 849 1,295 2,144
------ ------- ------
Gross loans receivable 14,129 50,993 65,122
Mortgage-backed and related securities 4,629 744 5,373
------ ------ ------
Gross loans receivable and mortgage-
backed and related securities $18,758 $51,737 $70,495
======= ======= =======
6
<PAGE>
One-to-Four Family Mortgage Lending
The Company's primary lending activity is the origination of first
mortgage loans secured by one-to-four family, owner-occupied residences within
the Company's primary lending area. The Company sells substantially all of its
fixed rate mortgage loans it originates to government secondary market
investors. Generally, loans sold to government secondary market investors are
sold as whole loans with servicing retained. Substantially all of the ARM loans
originated by the Company are retained in its loan portfolio. The Company
follows Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines
for its one-to-four family mortgage loans and rarely originates loans in excess
of the FHLMC limit of $207,000.
The Company offers a variety of rates, fees, origination terms and
mortgage products. Mortgage loan originations are solicited from real estate
brokers, builders, existing customers, community groups and residents of local
communities located in the Company's primary market area through its loan
origination staff. The Company also advertises its products through local
newspapers, periodicals and radio. Upon receipt of a completed mortgage
application from a prospective borrower, a credit report is ordered, an
appraisal from an independent third party is obtained, income and other deposit
information are verified, and, as necessary, additional financial information is
requested. The Company requires title insurance or evidence of marketable title
and lien position (consisting of an abstract and legal opinion) on all first
mortgage loans. Borrowers must present evidence of appropriate hazard insurance
and flood insurance (if applicable) prior to the closing. On loans with high
loan to value ratios, borrowers are required to advance funds on a monthly
basis, together with payments of principal and interest, to a mortgage escrow
account from which the Company makes disbursements for items such as real estate
taxes, hazard insurance, and in some cases, flood insurance. On those loans with
no escrow requirement, the Company verifies payment of real estate taxes on a
semi-annual basis and requires evidence from the borrower annually of hazard
insurance and flood insurance. The lending policy of the Company restricts
mortgage loan amounts to 80% of the lesser of the appraised value or purchase
price of the real estate to be mortgaged to the Company. The Company makes
mortgage loans in amounts up to 95% of the lesser of the appraised value or
purchase price, subject to availability of private mortgage insurance insuring
the amount in excess of 80% of the appraised value or purchase price. Exceptions
to this policy are ARM loans, in which case the Company loans up to 90% of the
appraised value or purchase price with the appropriate private mortgage
insurance, and loans to its most credit worthy customers, in which case the
Company loans up to 90% of the appraised value without private mortgage
insurance. The Company also currently offers a program for low to moderate
income families to lend up to 90% of the appraised value of the property without
private mortgage insurance, provided certain credit, property and cost criteria
are met.
The Company's underwriting department reviews all the pertinent
information and makes a credit decision for approval or denial within
established Company policy guidelines. Recommendations to deny applications
based on underwriting considerations are reviewed by the Company's senior
underwriter prior to a final disposition of the loan application. Summaries of
all one-to-four family mortgage loan applications are reviewed on a monthly
basis by the Board of Directors and the Loan Committee. Mortgage loans held in
the Company's loan portfolio generally include due-on-sale clauses, which
provide the Company with the contractual right to deem the loan immediately due
and payable in the event the borrower transfers the ownership of the property
without the Company's prior consent. The Company enforces the due-on-sale
clauses of its mortgage loans.
The Company makes loans under various governmental programs including the
Wisconsin Housing and Economic Development Authority ("WHEDA"), the Federal
Housing Administration, the Farmers Home Administration ("FHA") and the Federal
Veterans Administration ("VA"). These programs generally have lower down payment
and less restrictive qualification ratios. The WHEDA loans are serviced through
WHEDA and originated for them, and the Federal Housing Administration, FHA and
VA loans are sold in the secondary market with servicing retained. As of March
31, 1996, the Company held two FHA loans in its portfolio with an aggregate
principal balance of $0.3 million and has not experienced losses attributable to
loans made under these governmental programs.
The Company offers one, three and five-year ARM loans. ARM loans currently
adjust a maximum of two percentage points per year with a lifetime interest cap
of six percentage points above the initial interest rate. Monthly payments of
principal and interest are adjusted when the interest rate adjusts to maintain
7
<PAGE>
full amortization of the mortgage loan within the remaining term. The initial
rates offered on ARM loans fluctuate with general interest rate changes and are
determined by competitive conditions and the Company's yield requirements. The
Company currently uses the one-year, three-year or five-year as applicable,
Constant Maturity United States Treasury index to determine the interest rate
payable upon the adjustment date of outstanding ARM loans. The Company also
originates ARM loans with initial interest rates below the fully indexed rate by
permitting the borrower to choose the number of percentage points the initial
interest rate is below the fully indexed rate (up to two points) and pay
origination points in a corresponding amount. Borrowers choosing these ARM loans
can effectively lower the lifetime interest rate cap by decreasing the initial
interest rate. ARM loans generally pose different risks than fixed rate loans.
In a rising interest rate environment, the underlying ARM loan payment rises,
increasing the potential for default, and the marketability of the underlying
property may be adversely affected. In a decreasing interest rate environment,
mortgagors tend to refinance to fixed rate loans. The Company's delinquency
experience on its ARM loans generally has been satisfactory to date.
The Company has continued to generate a significant amount of adjustable
rate loans. Adjustable rate loans originated amounted to 52.8%, 61.8% and 48.8%
of the Company's total loans originated for the fiscal years ended March 31,
1996, 1995, and 1994, respectively. The Company's continued ability to originate
ARM loans is primarily due to the nature of its market area, which includes
rural and vacation properties. Loans on properties with excessive acreage, hobby
farm activities or three-season cabins generally cannot be sold into the
secondary market, thus making these loans less attractive to competitors of the
Company that only originate loans for sale into the secondary market.
Furthermore, many of the Company's customers desiring a loan term of
short-to-medium-duration (i.e., less than ten years) often prefer ARM loans
because of the generally lower closing costs compared to fixed rate loans. The
Company generally obtains an abstract and title opinion, rather than title
insurance, on loans originated for retention in its portfolio and has not
experienced losses attributable to the lack of title insurance.
Commercial Real Estate Lending
At March 31, 1996, the Company's commercial real estate loan portfolio
totaled $6.8 million or 9.6% of gross loans compared to $4.8 million or 8.09% of
gross loans at March 31, 1995. The increase reflects the growth in the loan
participation portfolio from $3.3 million at March 31, 1995 to $5.7 million at
March 31, 1996. Of the aggregate amount of participation loans, 79.2% were
commercial real estate loans. The commercial real estate loans in the Company's
portfolio consist of fixed rate and ARM loans generally secured by small office
buildings, retail stores and farms, and occupied by the borrower. The Company
currently originates ARM loans secured by commercial real estate at 375 to 525
basis points above the rate on U.S. Treasury securities for comparable
maturities. These loans typically do not exceed 65% of the lesser of the
purchase price or the appraised value of the underlying collateral. At March 31,
1996, the largest outstanding commercial real estate loan was $0.5 million.
In underwriting commercial real estate loans, the Company's underwriting
procedures require verification of the borrower's credit history, an analysis of
the borrower's income taxes, personal financial statements and banking
relationships, a review of the borrower's property management experience, and a
review of the property, including cash flow projections, historical operating
statements, environmental concerns, compliance with regulations and prevailing
market conditions. Loans secured by commercial real estate properties involve a
greater degree of risk than residential mortgage loans. Payments on loans
secured by commercial real estate properties are often susceptible to adverse
conditions in the real estate market or the economy. The Company seeks to
minimize these risks by originating commercial real estate loans principally in
its primary market area where it has the ability to more closely monitor and
anticipate adverse conditions.
Commercial Lending
The Company engages in a limited amount of commercial business lending
activities, generally with existing customers, including secured and unsecured
loans and letters of credit. Commercial loans may not exceed 10% of total assets
and involve many different industries. At March 31, 1996, the Company had $4.6
million in commercial business loans outstanding, which represented 6.5% of
gross loans. Term loans are amortized over a one to five year term and lines of
credit are reviewed annually. Such loans generally are originated at 375 to 525
basis points above the rate on U.S. Treasury securities for comparable
maturities. At March 31, 1996, the largest outstanding commercial loan was $0.4
million.
The Company originated a majority of the commercial loans held in its loan
portfolio in the mid-1980's when it hired a commercial loan officer to expand
8
<PAGE>
its activity in this area. During the last three fiscal years, the Company
charged off approximately $13,000 of such loans. The Company currently is not
actively seeking new commercial lending business and substantially all of its
commercial lending consists of renewals of existing commercial loans. The
remaining commercial loans in the portfolio are generally performing and,
management believes, adequately reserved.
Unlike residential mortgage loans which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent upon the
general economic environment. The Company's commercial business loans usually
include personal guarantees and are usually, but not always, secured by business
assets, such as accounts receivable, equipment and inventory as well as real
estate. However, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of the
business.
Consumer Lending
The Company originates a variety of consumer loans, consisting primarily
of new and used automobile loans. At March 31, 1994, 1995 and 1996, consumer
loans totaled $2.4 million, $4.3 million and $6.9 million, respectively, or
4.6%, 7.3% and 9.7%, respectively, of gross loans at those dates. The Company's
marketing strategy emphasizes auto loans as a means of establishing more
relationships with its customers and developing new customers through soliciting
auto dealerships for loans to non-customers.. Consumer loans generally have
shorter terms and higher interest rates than mortgage loans but generally
involve more risk than mortgage loans because of the type and nature of the
collateral and, in certain cases, the absence of collateral. Consumer loans
generally are dependent on the borrower's continuing financial stability and
thus are more likely to be affected by adverse personal circumstances. Often the
loans are secured by rapidly depreciable personal property, such as automobiles.
Automobile loans generally are underwritten in amounts up to 90% of the purchase
price for new and used vehicles. The term of the loans generally cannot exceed
six years for new vehicles and five years for used vehicles. The Company's
delinquent consumer loans as a percentage of gross loans has been minimal.
Multi-Family Lending
The Company held $1.3 million or 1.8% gross loans of multi-family loans at
March 31, 1996. The rates charged on the Company's multi-family loans typically
are slightly higher than those charged on loans secured by one-to-four family
residential properties. Multi-family ARM loans typically adjust in a manner
similar to that of the Company's other ARM loans, although generally at a
slightly higher margin. An origination fee equal to 1% of the principal amount
is usually charged on such loans.
Multi-family loans are generally underwritten in amounts of up to 80% of
the lesser of the appraised value or purchase price of the underlying property.
Appraisals that secure multi-family loans are performed by an independent
appraiser designated by the Company at the time the application is submitted. In
addition, the Company's underwriting procedures require verification of the
borrower's credit history, an analysis of the borrower's income, personal
financial statements and banking relationships and a review of the property,
including cash flow projections and historical operating results. The Company
evaluates all aspects of multi-family lending to mitigate risk to the extent
possible. The Company seeks to ensure that the property securing the loans will
generate sufficient cash flow to adequately cover operating expenses and debt
service payments. The Company obtains individual guarantees for substantially
all of its multi-family loans.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loans may be impaired. Despite the risks inherent in
multi-family real estate lending, the Company's delinquent multi-family loans as
a percentage of gross loans has been minimal.
9
<PAGE>
Construction and Land Lending
The Company offers one-to-four family residential and other construction
loans. At March 31, 1996, construction and land loans totaled $3.2 million or
4.5% of gross loans compared to $1.6 million or 2.68% of gross loans at March
31, 1995. The increase is due to construction loans developed through
relationships with mortgage brokerage companies that are unable to provide
construction financing for their customers, but arrange a fixed rate loans when
the home is completed. Construction loans are made to individuals intending to
occupying the home who have signed construction contracts with a builder. These
loans have loan-to-value ratios not exceeding 90%. When the loan-to-value ratios
exceed 80%, private mortgage insurance is required which insures payment of a
portion of the principal balance, reducing the Company's exposure to 75%
loan-to-value or less. The Company offers permanent financing, primarily one-to
five-year ARM loans, on residential construction loans that enables borrowers to
avoid duplicative closing costs normally associated with temporary financing
during construction periods and permanent financing upon completion of
construction. The Company has had minimal delinquent residential construction
loans to date.
Loan Approval and Monitoring
Loan approval is based on a customer's aggregate amount of loans
outstanding, including the loan application under review. Loan amounts of
$100,000 or less may be approved by one member of the Loan Committee and a loan
officer. Loan amounts exceeding $100,000 up to $500,000 require the approval of
two members of the Loan Committee and a loan officer. All loans exceeding
$500,000 require approval from the Board of Directors and a loan officer.
Loans held in the Company's portfolio are reviewed annually by a loan
officer to ensure compliance with the Company's lending policy and the
loans-to-one borrower limitations. The borrower's financial statements and
income tax returns also are reviewed annually to enable the Company to
anticipate potential problem loans and, if necessary, classify the loan or place
it on non-accrual status.
Originations, Purchase and Sales of Loans
Mortgage loans are solicited from real estate brokers, builders,
developers, existing or past customers, and residents of the local communities
located in the Company's primary market areas. The Company advertises its
mortgage products in newspapers and other media in addition to using its loan
officers to directly solicit potential borrowers. The following table sets forth
the Company's loan originations, purchases, sales and principal repayments for
the periods indicated. Mortgage loans and mortgage-backed and related securities
held for sale are included in the totals.
10
<PAGE>
Fiscal Years Ended March 31,
----------------------------
1996 1995 1994
---- ---- ----
(In thousands)
Mortgage loans (gross)
At beginning of period $50,071 $45,595 44,776
Mortgage loans originated:
One-to-four family 16,486 12,817 25,010
Commercial - - 289 577
Multi-family 490 - - - -
Construction and land 5,767 3,424 1,856
------ ------ ------
Total mortgage loans originated 22,743 16,530 27,443
------ ------ ------
Mortgage loans purchased 2,436 1,517 807
------ ------ ------
Total mortgage loans originated and purchased 25,179 18,047 28,250
------ ------ ------
Transfer of mortgage loans to foreclosed
real estate (127) (63) (90)
Principal repayments (9,606) (11,851) (11,599)
Sales of fixed rate loans (5,913) (1,657) (15,742)
----- ----- ------
Total reductions (15,646) (13,571) (27,431)
------ ------ ------
At end of period $59,604 $50,071 $45,595
======= ======= =======
Consumer loans:
At beginning of period $ 4,313 $ 2,388 2,249
Consumer loans originated 6,685 4,279 2,423
Principal repayments (4,101) (2,354) (2,284)
----- ----- -----
At end of period $ 6,897 $ 4,313 2,388
======= ======= =====
Commercial loans:
At beginning of period $ 4,450 $ 3,467 3,278
Commercial loans originated and purchased 5,402 6,228 4,301
Principal repayments (5,240) (5,245) (4,112)
----- ----- -----
At end of period $ 4,612 $ 4,450 $ 3,467
======= ======= =======
Mortgage-backed and related securities:
At beginning of period $ 2,001 $ 1,556 3,736
Mortgage-backed and related securities
purchased 3,917 1,006 - -
Amortization and repayments (545) (561) (2,180)
----- --- -----
At end of period $ 5,373 $ 2,001 $ 1,556
======= ======= =======
11
<PAGE>
The following table sets forth the Company's laon originations and
purchases in various loan categories according to whether the loan is fixed
rate versus adjustable rate for the periods indicated.
<TABLE>
Fiscal Years Ended March 31,
--------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------
<CAPTION>
Fixed Adjustable Total Fixed Adjustable Total Fixed Adjustable Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family $ 6,930 $ 9,556 $16,486 $ 3,049 $ 9,768 $12,817 $14,307 $10,703 $25,010
Multi-family - 490 490 - - - - - -
Commercial 56 2,410 2,466 - 1,039 1,039 251 826 1,077
1-4 Construction and land 1,680 4,057 5,737 359 3,832 4,191 1,509 654 2,163
----- ----- ------ ----- ------ ----- ------ ----- ------
Total mortgage loans 8,666 16,513 25,179 3,408 14,639 18,047 16,067 12,183 28,250
Consumer loans 6,449 236 6,685 4,086 193 4,279 198 2,225 2,423
Comercial loans 2,493 2,909 5,402 3,409 2,819 6,228 1,634 2,667 4,301
----- ----- ------ ----- ------ ------ ------ ------ ------
Total loans originated
and purchased $17,608 $19,658 $37,266 $10,903 $17,651 $28,554 $17,899 $17,075 $34,974
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
12
<PAGE>
Participation Loans
In order to meet asset/liability management objectives that are enhanced
by loans with higher rates and shorter repricing periods, the Company has
purchased from time to time participation interests in a variety of real estate
loans, including commercial real estate loans. Prior to purchase, the Company
reviews each participation to ensure that the underlying loan complies with the
Company's lending policy as in effect and the loans-to-one borrower limitations.
At March 31, 1996, the Company had 30 participation loans totaling $5.7
million that represented 8.0% of gross loans compared to 22 participation loans
totaling $3.3 million that represented 5.6% of gross loans at March 31, 1995. Of
the aggregate amount of participation loans, 79.2% were commercial real estate
loans, 16.1% were commercial loans, 4.0% were multi-family loans and 0.7% were
one-to-four-family residential loans.
The purchase of participation loans involves the same risks as the
origination of the same types of loans as well as additional risks related to
the purchaser's lower level of control over the origination and subsequent
administration of the loan. Many of the participation loans purchased by the
Company in the past also have been on projects located outside the State of
Wisconsin, primarily in the Minneapolis/St. Paul, Minnesota area. Management
does not anticipate future purchases to be significant, and will continue to
investigate purchase opportunities on an individual basis.
Sale of Mortgage Loans
The Company sells loans that it originates, on a non-recourse basis, into
the secondary market to the FHLMC, Federal National Mortgage Association
("FNMA") and WHEDA. The amount of loans sold by the Company is based upon market
conditions and the Company's asset/liability strategy. For the past three fiscal
years, the Company has sold substantially all of the fixed rate loans originated
to governmental secondary market purchasers in order to manage interest rate
risk. For the fiscal year ended March 31, 1996, the Company's fixed rate loan
sales to governmental investors totaled $5.9 million with associated gains of
$61,000. For the fiscal years ended March 31, 1995 and 1994, the Company's fixed
rate loan sales to governmental investors totaled $1.7 million and $15.7 million
with associated gains of $19,000 and $222,000, respectively.
The Company is subject to interest rate risk on fixed rate loans in its
pipeline from the point in time that the rate is locked with the borrower until
it is sold into the secondary market. In a declining interest rate environment,
the interest rate is locked in at the time of loan approval and held for sale to
take advantage of the market rate of interest. In order to minimize the interest
rate risk in a rising interest rate environment, the interest rate is locked in
at the time of loan approval and a commitment to sell the loan is obtained
simultaneously. These loans are sold on an individual basis when the loan is
closed.
All mortgage loans are made and underwritten pursuant to the requirements
of secondary market investors. The Company retains servicing on loans sold to
FHLMC and FNMA, receiving a servicing fee, which represents the difference
between the contract rate on the loans sold and the yield at which such loans
are sold. The servicing spread earned by the Company is typically 0.25%.
The Company also acts as a conduit for loans sold to WHEDA. For those
borrowers who qualify under WHEDA guidelines, the Company originates the loan
for a $500 fee and sells the loan to WHEDA, on a non-recourse basis, servicing
released.
13
<PAGE>
Loan Origination, Servicing and Other Fees
In addition to interest earned on loans, the Company receives income
through fees in connection with loan originations, loan sales, loan
modifications, late payments and for miscellaneous services related to its
loans, including loan servicing. Income from these activities varies from period
to period with the volume and type of loans originated.
In connection with the origination of mortgage loans, the Company requires
borrower reimbursement for out-of-pocket costs associated with obtaining
independent appraisals, credit reports, title insurance or abstract and title
opinion, private mortgage insurance and other items. While origination fees
ranging from zero to two points generally have been quoted on mortgage loans in
recent years, most of the Company's borrowers typically accept a slightly higher
interest rate and pay zero points.
For loans sold to FHLMC and FNMA, the Company retains the responsibility
for servicing such loans. At March 31, 1996, 1995 and 1994, the Bank serviced
$22.9 million, $19.5 million and $19.9 million loans for others, respectively.
Fee income received in connection with loans serviced for others was $72,000,
$73,000 and $80,000 for the fiscal years ended March 31, 1996, 1995 and 1994,
respectively.
The contractual right to service mortgage loans sold has an economic value
that, in accordance with GAAP, is generally not recognized as an asset on the
Company's balance sheet. The value results from the future income stream of the
servicing fees, the availability of the cash balances associated with escrow
funds collected monthly for real estate taxes and insurance, the availability of
the cash from monthly principal and interest payments from the collection date
to the remittance date, and the ability of the servicer to cross-sell other
products and services. The actual value of a servicing portfolio is dependent
upon such factors as the age, maturity and prepayment rate of the loans in the
portfolio, the average dollar balance of the loans, the location of the
collateral property, the average amount of escrow funds held, the interest rates
and delinquency experience of the loans, the types of loans and other factors.
Delinquencies, Nonperforming Assets and Classified Assets
Delinquent Loans
When a borrower fails to make a required payment by the end of the month
in which the payment is due, the Company generally initiates collection
procedures. The Company will send a late notice, and in most cases,
delinquencies are cured promptly. However, if a loan becomes delinquent for more
than 60 days, the Company contacts the borrower directly, to determine the
reason for the delinquency and effect a cure. Where it believes appropriate, the
Company may review the condition of the property and the financial position of
the borrower. At that time, the Company may: (i) accept a repayment program for
the arrearage; (ii) seek evidence of efforts by the borrower to sell the
property; (iii) request a deed in lieu of foreclosure; or (iv) initiate
foreclosure proceedings. When a loan secured by a mortgage is delinquent for
three or more monthly installments, the Company generally will initiate
foreclosure proceedings. With respect to delinquencies on loans sold to FHLMC or
FNMA, or insured by FHA or guaranteed by VA, the Company follows the appropriate
notification and foreclosure procedures prescribed by the respective agencies.
On mortgage loans or loan participations purchased by the Company, the
Company receives monthly reports from its loan servicers with which it monitors
the loan portfolio. Based upon servicing agreements with the servicers of the
loan, the Company relies upon the servicer to contact delinquent borrowers,
collect delinquent amounts and to initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Company and its servicing agents.
Total loans delinquent 90 day or more increased from 10 loans totaling
$238,000 at March 31, 1995, to 26 loans totaling $631,000 at March 31, 1996.
Total loans delinquent 31-89 days increased from 35 loans totaling $1.1 million
to 83 loans totaling $2.4 million. Delinquencies were created by certain
deficiencies in dealer loan policies that have been subsequently revised.
Management views the increase as a major area of concern warranting increased
scrutiny. However, the latest available peer group comparison of nonperforming
loans and real estate owned as a percentage of total loans as prepared by
America's Community Bankers was 0.63% for the Company at December 31, 1995,
compared to 1.60% on a nation wide basis and 0.86% on a regional basis.
14
<PAGE>
<TABLE>
At March 31, 1996, 1995, and 1994, delinquencies in the Company's loan portfolio were as follows:
At March 31, 1996 At March 31, 1995 At March 31, 1994
------------------------------------------------------------------------------------------------------
31-89 Days 90 Days or more 31-89 Days 90 Days or more 31-89 Days 90 Days or more
------------------------------------------------------------------------------------------------------
<CAPTION>
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family 34 $1,253 9 $ 386 21 $ 974 1 $ 80 21 $ 516 1 $ 41
Multi-family - - - - - - - - - - - -
Residential construction 2 252 2 121 - - - - - - - -
Commercial 6 539 - - 3 95 1 78 3 122 1 80
-- ---- -- --- -- --- -- --- --- --- -- ---
Total mortgage loans 42 $2,044 11 $ 507 24 1,069 2 158 24 638 2 121
Consumer loans 37 166 9 60 11 26 - 2 11 26 - -
Comercial loans 4 197 6 64 - 30 8 78 - - 8 43
-- ----- -- ------ -- ------ -- --- -- ------ -- ---
Total 83 $2,407 26 $ 631 35 $1,125 10 238 35 $ 664 10 164
== ====== == ====== == ====== == === == ====== == =====
Delinquent loans to gross 3.38% 0.89% 2.19% 0.46 1.29% 0.32%
loans(1)
- -------------------------
<FN>
(1) Excluding mortgage-backed and related securities.
</FN>
</TABLE>
15
<PAGE>
Classification of Assets
Federal regulators require each federally insured bank to classify its
assets on a regular basis. In connection with examinations of insured banks,
examiners have authority to identify problem assets as Substandard, Doubtful or
Loss. Substandard assets have one or more well defined weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the bank will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of Substandard assets, with the
additional characteristics that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. An asset classified as Loss is considered
uncollectible and of such little value that continuance as an asset of the bank
is not warranted. The Company has adopted an asset classification methodology
that parallels that required by federal regulators. At March 31, 1996, based
upon the Company's asset classification methodology, the Company had assets
classified as Substandard of $778,000, none as Doubtful and none as Loss. At
March 31, 1995, assets classified as Substandard were $248,000, none as Doubtful
and none as Loss. Assets that are classified as Loss are reserved at 100% of the
indicated loss amount. The FDIC examination policies include a Special Mention
category, consisting of assets that currently do not expose the Company to a
sufficient degree of risk to warrant adverse classification, but do possess
credit deficiencies deserving management's close attention. At March 31, 1996,
$135,000 of the Company's assets were classified as Special Mention. The
Company's classified assets consist of the non-performing assets and the other
loans and assets of concern. As of the date hereof, the Company's
classifications are consistent with those of the FDIC and Commissioner.
Non-Performing Assets
Loans are placed on non-accrual status when, in the judgment of Company
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. In any event, the Company
discontinues the accrual of interest on loans when the borrower is delinquent as
to a contractually due principal or interest payment by 90 days or more. When a
loan is placed on non-accrual status, all of the accrued interest on that loan
is reversed by way of a charge to interest income. Accrual of interest on a
non-accrual loan is resumed when payments are less than 90 days past due and
when management believes the outstanding loan principal and contractually due
interest is no longer doubtful of collection.
Property acquired by the Company as a result of a foreclosure, property
upon which a judgment of foreclosure has been entered but prior to foreclosure
sale and property that is deemed in-substance foreclosed are classified as
foreclosed properties. "In-substance foreclosed" loans are defined as loans for
which current and future collection is dependent on the income producing
capacity and fair market value of the underlying real estate collateral, rather
than the borrower's ability to service the debt. Foreclosed properties are
recorded at the lower of the unpaid principal balance of the related loan or
fair value. The amount by which the recorded loan balance exceeds the fair value
at the time a property is classified a foreclosed property, along with expenses
incurred to maintain or dispose of a foreclosed property, is charged against
current earnings. At March 31, 1996, the Company had three foreclosed or in
foreclosure properties with a carrying value of $127,000. One of the foreclosed
properties is a gasoline station. Gasoline storage tanks have been removed for
the property in accordance with state law and the clean-up procedures have been
approved by the Wisconsin Department of Natural Resources. The Company is
awaiting reimbursement from an environmental fund and anticipates it total
expense for the clean-up will not exceed $7,500.
16
<PAGE>
Nonperforming loans include loans placed on non-accrual status and
troubled debt restructurings. Non-performing assets include non-performing loans
and foreclosed properties. The following table sets forth non-performing loans
and assets.
March 31,
1996 1995 1994
Non-accrual mortgage loans 90 days or more past due $ 386 $ 158 121
Non-accrual consumer loans 90 days or more past due 47 2 3
Non-accrual commerical loans 90 days or more past due 64 78 40
Loans 90 days or more past due and still accruing 134 -
Troubled debt restructurings 62 285 88
------ ------ -----
Total non-performing loans 693 523 252
Total real estate owned and in judgement, net of
related allowance for losses 127 - 72
------ ------ -----
Total non-performing assets $ 820 $ 523 324
====== ====== =====
Total non-performing loans to gross loans receivable 0.97% 0.89% 0.49%
Total non-performing assets to total assets 0.95% 0.76% 0.54%
Total classified assets $ 778 $ 248 591
Total classified assets to total assets 0.90% 0.36% 0.98%
Interest income that would have been recorded on non-
performing loans if current $ 13 $ 20 14
Interest income on non-performing loans included
in net income $ 17 $ 15 $ 11
As of March 31, 1996, there were no other loans not included in the
foregoing tables or discussed above where known information about the possible
credit problems of borrowers caused management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms and which
may result in disclosure of such loans in the future.
Allowance for Loan Losses
Under federal regulations, when an insured institution classifies problem
assets as either Substandard or Doubtful, it is required to establish a general
allowance for loan losses in an amount deemed prudent by management. In addition
to general valuation allowances, the Company may establish specific loss
reserves against specific assets in which a loss may be realized. General
allowances represent loss allowances that have been established to recognize the
inherent risks associated with lending activities, but which, unlike specific
allowances, have not been allocated to recognize probable losses on particular
problem assets. The Company's determination as to its classification of assets
and the amount of its specific and general valuation allowances are subject to
review by the Commissioner and the FDIC, either one of which can order the
establishment of additional general or specific loss allowances.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers,
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan loss
allowance. The ratio of allowance for loan losses to gross loans receivable
decreased from 0.74% at March 31, 1995, to 0.61% at March 31, 1996 due to the
large increase in loans receivable over the period. A corresponding increase in
the allowance for loan losses was not made to maintain the ratio, because based
on the actual loss experience an allowance of 0.10% would be adequate at March
31, 1996. The FDIC has advised the Company that it would like to the allowance
to be maintained at its current level, but it does not need to be increased. The
ratio of allowance for loan losses to nonperforming loans decreased from 82.98
at March 31, 1995 to 62.48 at March 31, 1996 due to the increase in
nonperforming loans over the period.
17
<PAGE>
The following table sets forth activity in the Company's allowance for
loan losses during the periods indicated.
For the Fiscal Year Ended March 31,
-----------------------------------
1996 1995 1994
----- ----- ----
(Dollars in thousands)
Balance at beginning of period $ 434 $ 436 $ 455
Additions charged to operations:
One-to-four family 0 - - - -
Multi-family and commercial real estate 0 - - - -
Commercial 0 17 24
Consumer 24 - - - -
---- ----- -----
24 17 24
Recoveries:
One-to-four family - - - - - -
Multi-family and commercial real estate 4 5 12
Commercial 0 - - - -
Consumer 2 2 9
-- -- -
6 7 21
Charge-offs:
One-to-four family (5) (14) 0
Multi-family and commercial real estate 0 - - (53)
Commercial 0 (8) (5)
Consumer (26) (4) (6)
--- --- ---
(31) (26) (64)
Net charge-offs (25) (19) (43)
--- --- ---
Balance at end of period $ 433 $ 434 $ 436
====== ====== ======
Percentage of loans to gross loans receivable
Mortgage loans 83.82% 85.11% 88.62%
Consumer loans 9.70% 7.33% 4.64%
Ratio of allowance for loan losses to gross
loans receivable at the end of period 0.61% 0.74% 0.85%
Ratio of allowance for loan losses to
non-performing loans at the end of period(1) 62.48% 82.98% 173.02%
Ratio of net charge-offs to average gross
loans during period 0.04% 0.03% 0.08%
Average gross loans outstanding $65,615 $54,783 $51,264
Gross loans receivable at the end of period $71,113 $58,834 $51,450
(1) Non-performing loans include non-accrual loans, loans 90 days or more past
due and still accruing, and troubled debt restructurings.
18
<PAGE>
The following table show the Company's allowance for loan losses and the
allocation to the various categories of loans held for investment at the dates
indicated. Allocations to a particular category do not restrict the Company's
ability to use such allowance in any other category.
<TABLE>
At March 31,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------
<CAPTION>
Loans In Loans In Loans In
Category Category Category
% of to Total % of to Total % of to Total
total Out- total Out- total Out-
Loans by standing Loans by standing Loans by standing
Amount Category Loans Amount Category Loans Amount Category Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of allowance:
Mortgage loans:
One-to-four family $ 85 0.18% 68.00% $ 59 0.14% 72.24% $ 63 0.16% 76.06%
Multi-family 1 0.08% 1.78% 1 0.08% 2.10% 4 0.31% 2.53%
Commercial/nonresidential 22 0.32% 9.58% 24 0.50% 8.09% 57 1.37% 8.10%
Construction and land 19 0.60% 4.45% 2 0.13% 2.68% 1 0.10% 1.93%
-- ------ -- ----- ----- -- -----
Total mortgage loans 127 83.81% 86 85.11% 125 88.62%
Consumer loans 16 0.23% 9.70% 5 0.12% 7.33% 48 2.01% 4.64%
Commercial loans 290 6.29% 6.49% 343 7.71% 7.56% 263 7.59% 6.74%
----- --- ----- --- ----- ------
Total allowance for loan losses $433 100.00% $434 100.00% $436 100.00%
==== ======= ==== ======= ==== =======
</TABLE>
19
<PAGE>
Investment Activities
General
The investment policy of the Company, which is established by the Board of
Directors and implemented by the Company's President, is designed to provide a
required level of liquidity and minimize potential losses due to interest rate
fluctuations without incurring undue credit risk. The Company is authorized by
regulation to invest in various types of liquid assets, including United States
Treasury obligations, securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB-Chicago, certain certificates of
deposit of federally insured institutions, certain bankers' acceptances and
federal funds. The Company also invests in mortgage-backed and related
securities, securities that are either of investment grade or issued or
guaranteed by FHLMC, the FNMA or the Government National Mortgage Association
("GNMA"), and investment grade corporate debt.
The Company categorizes the securities it purchases into a "Held-to
Maturity" or an "Available-For-Sale" portfolio as follows:
1. Securities Held-to Maturity. The Company the ability and intent to hold
these assets to maturity. Upon acquisition, securities are classified as
to the Company's intent and a sale would only be effected due to
deteriorating investment quality. The investment portfolio is not used
for speculative purposes and is carried at amortized cost. In the event
the Company sells securities from this portfolio for other than credit
quality reasons, all securities within the investment portfolio with
matching characteristics may be reclassified as assets held for sale.
2. Securities Available-for-Sale. The Company does not intend to hold the
assets to maturity and thus are carried at fair value, with the unrealized
gains or losses, net of tax, reported as a separate component of the
stockholders equity. This portion of the securities portfolio is designed
to meet anticipated loan demand and deposit runoff or to take advantage of
market opportunities.
Effective April 1, 1993, the Company adopted SFAS No. 115 that requires
that the Company classify investments in marketable equity securities with
readily determinable fair value and all investments in debt securities as
held-to-maturity, trading or available-for-sale. The Company classified the
securities as of the date of adoption of SFAS 115 and subsequently at the time
of purchase and reviews the appropriateness of the classification at each
reporting date as follows:
1. Securities Held-to-Maturity. The Company has both the intent and ability
to hold these debt securities to maturity. Securities in this category
are carried at amortized cost.
2. Securities Classified as Trading. The Company acquires these securities
with the intent to resell them in the near term and are held only for a
short period of time. Securities in this category are carried at fair
value, with unrealized holding gains and losses included in earnings.
3. Securities Available for Sale. This category includes all securities not
classified as held-to-maturity or trading. Securities in this category
are carried at fair value, with unrealized holding gains and losses
reported, net of deferred income taxes, in a separate component of equity.
These securities may be sold, for example, in response to changes in
market interest rates, liquidity needs, availability of higher yielding
instruments and changes in funding sources.
The investment activities of the Company consist primarily of investments
in mortgage-backed and related securities and other investment securities,
consisting primarily of securities issued or guaranteed by the United States
Government or agencies thereof. Typical investments include federally sponsored
agency mortgage pass-throughs, and federally sponsored agency and mortgage
related securities. Investment and aggregate investment limitations and credit
quality parameters of each class of investment are prescribed in the Company's
investment policy. The Company performs analyses on mortgage related securities
prior to purchase and on an ongoing basis to determine the impact on earnings
and market value various interest rate and prepayment conditions.
20
<PAGE>
Mortgage-Backed Securities
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators through intermediaries (generally
federal government-sponsored enterprises) that pool and repackage the
participation interest in the form of securities to investors such as the
Company. Such federal government-sponsored enterprises, which guarantee the
payment of principal and interest to investors, include FHLMC, FNMA and GNMA.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the guarantees that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Company.
FHLMC, FNMA and GNMA were established to provide support for low and
middle-income housing. There are limits to the maximum size of loans that
qualify for these programs. Currently, GNMA limits its maximum loan size to
$203,000 for VA loans and on average $167,862 for FHA loans. FNMA and FHLMC
currently limit their loans to $207,000.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgage loans with interest
rates that are within a range and have varying maturities. The underlying pool
of mortgage loans can be composed of either fixed rate mortgage or ARM loans.
Mortgage-backed securities commonly are referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgage loans, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgage loans.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgages prepay or repay the underlying mortgage loans. Prepayments of
the underlying mortgage loans may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The prepayment assumption used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security and these assumptions are reviewed periodically to
reflect the actual prepayment. The actual prepayment of the underlying mortgage
loans depends on many factors, including type of mortgage loans, the coupon
rate, the age of the mortgage loans, the geographical location of the real
estate collateralizing the mortgage loans and general levels of market interest
rates. The difference between the interest rates on the underlying mortgage
loans and the prevailing mortgage interest rates is an important determinant in
the rate of prepayments.. During periods of falling mortgage interest rates,
prepayments generally increase. If the coupon rate of the underlying mortgage
loans significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgage loans. Prepayment experience is more difficult to
estimate for adjustable rate mortgage-backed securities.
Mortgage related Securities
CMOs are typically issued by a special purpose entity, which may be
organized in a variety of legal forms, such as a trust, a corporation or a
partnership. The entity aggregates pools of pass-through securities, which are
used to collateralize the mortgage related securities. Once combined, the cash
flows can be divided into "tranches" or "classes" of individual securities,
thereby creating more predictable average lives for each security that the
underlying pass-through pools. Accordingly, under this security structure all
principal paydowns from the various mortgage pools are allocated to a mortgage
related securities class or classes structured to have priority until it has
been paid off. Thus, these securities are intended to address the reinvestment
concerns associated with mortgage-backed security pass-throughs, namely that
they tend to pay off when interest rates fall. Company management believes these
securities represent attractive alternatives relative to other investments due
to the wide variety of maturity and repayment options available through such
investments and due to the limited prepayment risk associated with such
investments. The Company has not purchased and does not intend to purchase
higher risk CMO residuals or stripped mortgage securities for its investment
securities portfolio.
21
<PAGE>
Investment Securities
The Company invests in various types of liquid assets that are permissible
investments for Wisconsin-chartered savings banks, including United States
Treasury obligations and securities of various federal agencies. The Company
also invests its assets in commercial paper and mutual funds, the assets of
which conform to the investments that a Wisconsin-chartered savings bank is
otherwise authorized to make directly The Company's current investment policy
permits purchases only of investments rated investment grade by a nationally
recognized rating agency and does not permit purchases of securities of
non-investment grade quality.
Composition of Securities Held-to-Maturity
Mortgage-Backed and Related Securities. At March 31, 1996, the Company
held $5.4 million in its securities portfolio, consisting of mortgage-backed
certificates issued by various federal agencies. The estimated market value of
those securities at that date was $5.4 million. Of this amount, $4.7 million
were fixed rate securities and $0.7 million were adjustable-rate securities. At
March 31, 1996, the mortgage-backed and related securities portfolio represented
6.3% of the Company's total assets.
Composition of Securities Classified as Trading
At March 31, 1996 and 1995, the Company did not have any investment
securities or mortgage-related securities classified as trading.
Composition of Securities Available for Sale
At March 31, 1996, the Company had $2.9 million in its securities
available for sale portfolio, consisting of $1.9 million of 5.30% FNMA
debentures due December 1998, $0.5 million of 4.74% FHLB securities due October
1998, $0.3 million of 6.55% FHLMC securities due April 1999, and $114,000 in a
cash management account.
22
<PAGE>
The table below sets forth certain information regarding the carrying
value, composition and market value of the Company's securities available for
sale and mortgage-backed and related securities held-to-maturity at March 31,
1996, 1995, 1994.
<TABLE>
At March 31, 1996 At March 31, 1995 At March 31, 1994
----------------- ----------------- -----------------
<CAPTION>
Carrying % of Market Carrying % of Market Carrying % of Market
Value Total Value Value Total Value Value Total Value
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. govt securities and
other agency obligations
FNMA $1,956 68.42% $1,956 $1,872 70.48% $1,872 $1,912 80.27% $1,912
FHLB 485 16.96% 485 461 17.36% 461 470 19.73% 470
FHLMC 304 10.63% 304 293 11.03% 293 - - - - - -
Money Market Mutual Fund 114 3.99% 114 30 1.13% 30 - - - - - - - -
Total securities
available-for-sale $2,859 100.00% $2,859 $2,656 100.00% $2,656 $2,382 100.00% $2,382
====== ======= ====== ====== ======= ====== ====== ====== ====== =======
Mortgage-backed and other
related securities
held-to-maturity
FNMA $2,220 41.32% $2,206 $ 837 41.83% $ 827 $1,010 64.91% $1,010
FHLMC 494 9.19% 487 - - - -
GNMA 2,659 49.49% 2,693 1,005 50.22% 1,005 - - - - - -
CMOs
FNMA 159 7.95% 159 546 35.09% 546
--- ----- ---- --- ------ ---
Total Mortgage-backed and
related securities
held-to-maturity $5,373 100.00% $5,386 $2,001 100.00% $1,991 $1,556 100.00% $1,556
====== ======= ====== ====== ======= ====== ======= ======= ======
</TABLE>
At March 31, 1996, the aggregate book value and the aggregate market value
of securities issued by FNMA totaled $4.2 million and $4.2 million,
respectively. At March 31, 1996, the aggregate book value and the aggregate
market value of securities issued by GNMA totaled $2.7 million and $2.7 million,
respectively. Both FNMA and GNMA securities exceed 10% of stockholder equity ant
March 31, 1996.
23
<PAGE>
The composition and contractual maturities of the securities portfolio,
excluding FHLB-Chicago stock is indicated in the following table:
At March 31, 1996
----------------------------------------
Total
Securities
Less than 1 to 10 Over 10 available-
1 Year Years Years for-sale
------ ----- ----- --------
(Dollars in thousands)
Securities available-for-sale:
U.S. government securities and
other agency obliations - - $2,745 - - $2,745
Money market mutual fund 114 - - - - 114
--- ------ --- ------
- -
Total securities available-for-sale $114 $2,745 - - $2,859
===== ======= ======
Weighted average yield 4.80% 5.33% - - 5.31%
===== ===== =====
The following table shows the maturity or period to repricing of the
Company's mortgage-backed and related securities portfolio held-to-maturity at
March 31, 1996:
At March 31, 1996
-------------------------------------
Adjustable Fixed Total
Rate Rate Mortgage-
Mortgage Mortgage backed and
Backed Backed Related
Securities Securities Securities
Amounts due or repricing:
Within one year $744 - - 744
After one year:
One to three years - - - - - -
Five to ten years - - - - - -
Ten to twenty years - - - - 0
Over twenty years - - $4,662 4662
---- ------ ----
Total due or repricing after one year - - 4,662 4662
Total due or repricing 744 4,662 5406
Less:
Unearned discounts
and premiums, net - - (33) (33)
---- --- ---
Mortgage-backed and related
securities, net $744 $4,629 $5,373
==== ====== ======
At March 31, 1996, the stated average maturity of the Company's
mortgage-backed and related securities was 27.3 years.
24
<PAGE>
Sources of Funds
General
The Company's primary sources of funds for use in lending, investing and
for other general purposes are deposits, proceeds from principal and interest
payments on loans, mortgage-backed and related securities and investment
securities, and to a lesser extent, FHLB-Chicago advances. Contractual loan
payments are a relatively stable source of funds, while deposit inflows and
outflows and loan payments are significantly influenced by general market
interest rates and economic conditions. Borrowings may be used on a short-term
basis to compensate for seasonal or other reductions in normal sources of funds
or for deposit inflows at less than projected levels. Borrowings also may be
used on a longer-term basis to support expanded lending or investment
activities. The Company primarily utilizes advances from the FHLB-Chicago as
sources for its borrowings. At March 31, 1996, 1995 and 1994, the Company had
advances from the FHLB-Chicago of $12.6 million or 14.6% of total assets, $3.6
million or 5.2% of total assets, and $5.4 million or 9.0% of total assets,
respectively. Of the Company's outstanding FHLB-Chicago advances at March 31,
1996, $10.5 million will mature before March 31, 1997. The Company also had
borrowings consisting of repurchase agreements of $4.4 million, $2.2 million and
$2.1 million at March 31, 1996, 1995 and 1994, respectively.
Deposits
The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits principally consist of core
deposits (NOW, money market deposit and passbook accounts) and certificates of
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates and competition. The Company's
deposits are obtained primarily from the areas in which its branches are
located, and the Company relies principally on customer service, marketing
programs and long-standing relationships with customers to attract and retain
these deposits. Various types of advertising and promotion to attract and retain
deposit accounts also are used. The Company does not currently solicit or accept
brokered deposits. Management monitors the Company's certificates of deposit
and, based on historical experience, management believes it will retain a large
portion of such accounts upon maturity. Management considers Company
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors in considering its deposit offerings
and promotions. The Company believes it has been competitive in the types of
accounts and interest rates it has offered on its deposit products. The Company
intends to continue its efforts to attract and retain deposits as a primary
source of funds for supporting its lending and investing activities.
The following table presents the deposit activity of the Company for the
periods indicated:
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
(In thousands)
Net Deposits (Withdrawals) $4,486 $1,465 (2,777)
Interest credited on deposits 2,143 1,632 1,519
------ ----- -----
Total increase(decrease) in deposits $6,629 $3,097 (1,258)
The Company attributes the increase in deposits during the two most recent
fiscal years to maintaining competitive rates on deposits and general market
conditions that caused the Company to increase rates paid on deposits. The
Company attributes the decline in deposits during the fiscal year ended March
31, 1994 to general market conditions that caused the Company to decrease rates
paid on deposits.
25
<PAGE>
At March 31, 1996, the Company had outstanding $2.3 million in
certificates of deposit in amounts of $100,000 or more maturing as follows:
Amount at
March 31, 1996
--------------
(In thousands)
Three months or less $ 204
Over three through six months 594
Over six through twelve months 809
Over twelve months 643
------
Total $2,250
======
26
<PAGE>
The following table sets forth the distribution of the Company's core
deposits and certificate accounts at the dates indicated and the weighted
average nominal interest rates on each category of deposits presented:
<TABLE>
At March 31,
---------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- --------------------------
<CAPTION>
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of total Nominal of total Nominal of total Nominal
Amount deposits Rate Amount deposits Rate Amount deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Core Deposits:
Non-interest bearing $ 2,069 3.61% - - $ 2,259 4.46% - - $ 1,300 2.74% - -
NOW accounts 6,173 10.78% 2.57% 6,242 12.33% 1.96% 7,527 15.84% 1.73%
Money market 2,314 4.04% 4.77% - - - - - - - - - - - -
Passbook 6,829 11.93% 2.51% 6,916 13.66% 2.50% 7,577 15.94% 2.25%
------ ------ ----- ----- ------ ----- ------ ------ -----
Total 17,383 30.36% 2.53% 15,417 30.45% 1.92% 16,404 34.51% 1.83%
Certificates accounts
(current term to maturity):
1 to 6 months 14,332 25.03% 5.68% 13,569 26.80% 4.88% 13,541 28.49% 4.10%
6 to 12 months 14,499 25.32% 5.96% 11,623 22.96% 6.08% 6,282 13.22% 4.68%
13 to 36 months 7,524 13.14% 5.97% 8,010 15.82% 5.90% 9,321 19.61% 5.13%
37 to 60 months 3,226 5.64% 6.35% 1,925 3.80% 6.33% 1,869 3.93% 5.23%
61 to 96 months 290 0.51% 6.44% 25 0.05% 7.00% 30 0.06% 8.50%
97 to 112 months - - - - - - 58 0.11% 6.25% 83 0.17% 6.50%
------ ------ ----- ------ ----- ----- ------ ----- -----
Total certificates 39,871 69.64% 5.85% 35,210 69.55% 5.59% 31,126 5.49% 4.60%
Total deposits $57,256 100.00% 4.84% $50,627 100.00% 4.47% $47,530 100.00% 3.64%
======= ======= ===== ======= ======= ===== ======= ======= =====
</TABLE>
27
<PAGE>
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at March 31, 1996,
At March 31,
1996 1995
Certificates of Deposit: (In thousands)
--------------
2.99% and less $ 12 $ 42
3.00% to 3.99% - - 253
4.00% to 4.99% 1,418 8,379
5.00% to 5.99% 18,139 13,082
6.00% to 6.99% 19,372 12,042
7.00% to 7.99% 900 1,121
8.00% to 8.99% 30 166
9.00% to 9.99% - - - -
10.00% to 10.99% - - 125
------- -------
Total $39,871 $35,210
======= =======
Borrowings and Other Financing Transactions
Although deposits are the Company's primary source of funds, the Company's
policy has been to utilize borrowings as part of its assets/liability management
strategy. Borrowings are secured when management believes it can profitably
re-invest those funds for the benefit of the Company. The Company's primary form
of borrowing consists of advances from the FHLB-Chicago. These advances are
collateralized by the capital stock of the FHLB-Chicago held by the Company and
certain of its mortgage loans and mortgage-backed and related securities. Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount the
FHLB-Chicago will advance to member institutions, including the Company, for
purposes other than meeting withdrawals fluctuates from time to time in
accordance with policies the FHLB-Chicago. The Company's unused advance line
with the FHLB-Chicago was approximately $3.5 million as of March 31, 1996. At
March 31, 1996, the Company's FHLB-Chicago advances totaled $12.6 million,
representing 16.9% of total liabilities, an increase from the $3.6 million
outstanding at March 31, 1995. The Company intends to continue to leverage its
capital base by utilizing FHLB borrowings to originate loans and purchase
mortgage-backed and related securities in fiscal 1997.
The Company's borrowings from time to time include repurchase agreements.
These agreements generally are entered into with local businesses and
institutions that seek to deposit funds in excess of insurable limits. These
transactions are treated as borrowings collateralized by the securities sold,
which generally are mortgage-backed securities, and are therefore included as
other borrowings in the Company's Consolidated Financial Statements.
While increases in borrowings and changes in the collateralization levels
due to market interest rate changes could require the Company to add collateral
to secure its borrowings, the Company does not anticipate having a shortage of
qualified collateral to pledge against its borrowings. At March 31, 1996 and
March 31, 1995, there were $4.3 million and $2.2 million in reverse repurchase
agreements outstanding.
28
<PAGE>
The following table sets forth certain information regarding the Company's
FHLB-Chicago advances and repurchases agreements at or for the periods ended on
the dates indicated.
At or For the Fiscal Years Ended March 31,
------------------------------------------
1996 1995 1994
----- ----- ----
(Dollars in thousands)
FHLB- Chicago advances:
Average balance outstanding $ 7,629 $ 3,838 $ 5,574
Maximum amount outstanding at any
month-end during the period 12,556 7,269 6,169
Balance outstanding at end of period 12,556 3,578 5,419
Weighted average interest rate during
the period(1) 6.00% 5.40% 4.44%
Weighted average interest rate at end
of period 7.36% 6.00% 4.72%
Repuchase agreements:
Average balance outstanding $ 3,634 $ 2,126 $ 1,857
Maximum amount outstanding at any
month-end during the period 4,442 2,266 2,164
Balance outstanding at end of period 4,356 2,224 2,138
Weighted average interest rate during
the period 6.60% 5.21% 4.82%
Weighted average interest rate at end
of period 6.16% 6.55% 4.27%
Total advances and repurchase agreements:
Average balance outstanding $11,263 $ 5,964 7,431
Maximum amount outstanding at any
month-end during the period 16,998 9,535 8,333
Balance outstanding at end of period 16,912 5,802 7,557
Weighted average interest rate during
the period 5.19% 5.33% 4.32%
Weighted average interest rate at end
of period 5.01% 6.21% 4.59%
- -------------------------------
(1) Computed on the basis of average monthly balances.
Subsidiary Activities
The Bank has one wholly owned subsidiary, Amery Service Agency, Inc.
("ASA"), organized as a Wisconsin corporation in 1970. ASA engages in insurance
agency activities permissible under state and federal law, including the sale of
credit life and disability products, and maintenance of a third party brokerage
relationship. The ASA and the Bank have received approval of the Wisconsin
Commissioner and the FDIC to engage in the insurance and brokerage activities.
29
<PAGE>
In January 1983, ASA formed the Pondhurst Condominium Association to
develop 64 residential lots for condominium duplexes and four-plexes on land
adjacent to a golf course in Amery, Wisconsin (the "Pondhurst Project"). As of
March 31, 1996, 49 residential lots had been sold. The Company has utilized the
"cost recovery" accounting method in accounting for the Pondhurst Project and as
of March 31, 1996, ASA owned 15 lots with a total book value of zero. As of
March 31, 1996, ASA had total assets of $57,000. The Bank and ASA have agreed to
a request of the Federal Reserve bank of Minneapolis that ASA undertake to
divest its holdings in the Pondhurst Project by May 31, 2000.
Personnel
At March 31, 1996, the Company had 28 full-time employees and eight
part-time employees. The employees of the Company are not represented by a
collective bargaining unit and the Company believes its relationship with its
employees to be good.
Federal Taxation
General
The following discussion of tax matters is intended to be a summary of the
material tax rules applicable to the Company and the Bank and does not purport
to be a comprehensive description of all applicable tax rules.
The Bank and the Company report their income on a fiscal year basis using
the accrual method of accounting and will be subject to federal income taxation
in the same manner as other corporations with some exceptions, including
particularly the Bank's reserve for bad debts discussed below. The Company and
its subsidiaries currently file and will continue to file a consolidated federal
income tax return. For its taxable year end March 31, 1996, the Bank was subject
to a blended federal income tax rate of approximately 34%.
Bad Debt Reserves
Savings banks, such as the Bank, which meet certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts"), are permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions may, within specified formula limits, be
deducted in arriving at their taxable income. Such additions are computed using
one of two allowable methods. Each year, the Bank uses the method that allows
the largest addition, and thus, the greater deduction for tax purposes.
Earnings appropriated for bad debt reserves and deducted for federal
income tax purposes cannot be used by the Bank to pay cash dividends or
distributions to the Company without the Bank including the amount in taxable
income, together with an amount deemed necessary to pay the resulting income
tax. Thus, any dividends to the Company that would reduce amounts appropriated
to the Bank's bad debt reserves and deducted for federal Income tax purposes
could create a tax liability for the Bank. The Bank does not intend to pay
dividends that would result in a recapture of its bad debt reserves.
Corporate Alternative Minimum Tax
For taxable years beginning after December 31, 1986, the Internal Revenue
Code imposes an alternative minimum tax ("AMT") of 20% on alternative minimum
taxable income ("AMT"). The excess of the bad debt reserve deduction using the
percentage of taxable income method, over the deduction that would have been
allowable under an experience method, is treated as a preference item that
increases AMTI. Only 90% of AMTI can be offset by net operating losses. For
taxable years beginning after December 31, 1989, the adjustment to AMTI based on
book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986, and before
January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with
certain modifications) over $2.0 million is imposed on corporations, including
the Bank, whether or not AMT is paid. Although no assurance can be made, the
Bank does not expect to be subject to AMT in the future.
30
<PAGE>
Distributions
To the extent that Bank makes "non-dividend distributions" to stockholders
that are considered to result in distributions from (i) the Bank's reserve for
losses on qualifying real property loans exceeds the amount that would have been
allowed under an experience method, or (ii) the supplemental reserve for losses
on loans ("Excess Distributions"), then an amount equal to such Excess
Distributions must be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. In contrast, distributions
made from the Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, rather than the Bank's bad debt reserves are
generally considered dividends for federal income tax purposes and therefore
would not be included in the Bank's taxable income. Further, under certain
circumstances, such as tax-free reorganizations, non-dividend distributions may
not be required to be included in the Bank's taxable income.
The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if after the
Conversion, certain portions of the Bank's accumulated tax bad debt reserve are
used for any purpose other than to absorb qualified bad debt loans, such as for
the payment of dividends or other distributions with respect to the Bank's
capital stock (including distributions upon redemption or liquidation) and such
payments or other distribution is not otherwise excluded from the provisions
generally applicable to Excess Distributions, approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state
taxes).
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"),
enacted on August 10, 1993, the maximum federal corporate income tax rate was
increased from 34% to 35% for taxable income over $10.0 million, with a 3%
surtax imposed on taxable income over $15.0 million. Also under provisions of
RRA, a separate depreciation calculation requirement has been eliminated in the
determination of adjusted current earnings for AMTI purposes, rules relating to
payment of estimated corporate income taxes were revised, and certain acquired
intangible assets such as goodwill and customer-based intangibles were allowed a
15-year amortization period. Beginning with tax years ending on or after January
1, 1993, RRA also provides that securities dealers must use mark-to-market
accounting and generally reflect changes in value during the year or upon sale
as taxable gains or losses. The IRS has indicated that financial institutions
that originate and sell loans will be subject to the new rule. Because of the
absence of definitive IRS guidance on the scope and extent of this provision's
applicability to financial institutions, it is unclear what effect, if any, this
provision will have on the Bank.
State Taxation
The State of Wisconsin imposes a tax on the Wisconsin taxable income of
corporations, including savings banks, at the rate of 7.9%. Wisconsin taxable
income is generally similar to federal taxable income except that interest from
state and municipal obligations is taxable, no deduction is allowed for state
income taxes and net operating losses may be carried forward but not back.
Wisconsin law does not provide for filing of consolidated state income tax
returns.
Regulation
The Bank is a Wisconsin-chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the Savings
Association Insurance Fund ("SAIF"). The Bank is subject to extensive regulation
by the Commissioner, as its chartering agency, and by the FDIC, as its deposit
insurer and principal federal regulator. The lending and investment authority of
the Bank is prescribed by Wisconsin law and regulations, as well as applicable
federal law and regulations, and the Bank is prohibited from engaging in any
activities not permitted by such law and regulations. The Company is a one-bank
holding company subject to regulatory oversight by the Federal Reserve Board
("FRB"), the Commissioner and the Securities and Exchange Commission ("SEC").
31
<PAGE>
Wisconsin Savings Bank Regulation
Regulations adopted by the Commissioner govern various aspects of the
activities and operation of Wisconsin-chartered savings banks.
Examinations and Assessments
As a Wisconsin-chartered stock savings bank, the Bank is subject to
regulation and supervision by the Commissioner. The Bank is required to file
periodic reports with and is subject to periodic examinations by the
Commissioner. Savings banks are required to pay examination fees and annual
assessments to fund the supervisory operations of the Commissioner. Based on the
assessment rates published by the Commissioner and the Bank's total assets of
$67.0 million at December 31, 1994, the Bank paid $3,080 in assessments for the
period ending June 30, 1995.
Loans and Investments
Under Wisconsin law, the Bank is authorized to make, invest in, sell,
purchase, participate or otherwise deal in mortgage loans or interests in
mortgage loans without geographic restriction, including loans made on the
security of residential and commercial property. Savings banks may also lend
funds for commercial or consumer purposes. Loans are subject to certain
limitations, including percentage restrictions, based on the Bank's total
assets.
Savings banks may invest funds in certain types of debt and equity
securities, including obligations of federal, state and local governments
agencies. Investment in debt securities of local governmental units may not
exceed 50% of capital and temporary borrowings of any local governmental unit
maturing within one year from the date of issue may not exceed 60% of capital.
Investment in short-term commercial paper issued by a financial institution,
corporation or other borrower must have a maturity of two to 270 days and be
rated in one of the four highest categories by a nationally recognized rating
service. Subject to the prior approval of the Commissioner, compliance with
capital requirements and certain other restrictions, savings banks may invest in
residential housing development projects.
Savings banks may invest in service corporations or subsidiaries with the
prior approval of the Commissioner and subject to the condition that the service
corporation or subsidiary engages in only those activities pre-approved by the
Commissioner, agrees to be audited annually by a certified public accountant,
agrees to bear the expense of all examinations and audits conducted by the
Commissioner, and agrees not to enter into a business venture, directly or
indirectly, with an officer, director or employee of the savings bank.
The lending and investment powers of Wisconsin savings banks also are
limited by FDIC regulations and other federal law and regulations. See "Federal
Deposit Insurance Corporation Improvement Act of 1991-Restrictions Upon
State-Chartered Banks".
Loans to One Borrower
Wisconsin-chartered savings banks may make loans and extensions of credit,
both direct and indirect, to one borrower in amounts up to 15% of capital plus
an additional 10% for loans fully secured by readily marketable collateral. In
addition, savings banks may make loans to one borrower for any purpose in an
amount not to exceed $500,000, or to develop domestic residential housing units
in an amount not to exceed the lesser of $30 million or 30% of capital, provided
certain conditions are satisfied. At March 31, 1996, the Bank did not have any
loans that exceeded the loans-to-one borrower limitations.
Qualified Thrift Requirement
As a Wisconsin-chartered savings bank, the Bank must qualify for and
maintain a level of qualified thrift investments equal to 60% of its assets as
prescribed in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). At March 31, 1996, the Bank maintained 83.9%
of its assets in qualified thrift investments and therefore met the qualified
thrift requirement.
32
<PAGE>
Dividend Limitations
A savings bank that meets its regulatory capital requirement may declare
dividends on capital stock based upon net profits, provided that its paid-in
surplus equals its capital stock. If the paid-in surplus of the savings bank
does not equal its capital stock, the board of directors may not declare a
dividend unless at least 10% of the net profits of the preceding half year in
the case of quarterly or semi-annual dividends, or 10% of the net profits of the
preceding half year in the case of quarterly or semi-annual dividends, or 10% of
the net profits of the preceding year in case of annual dividends, has been
transferred to paid-in surplus. In addition, prior approval of the Commissioner
is required before dividends exceeding 50% of profits for any calendar year may
be declared and before a dividend may be may be declared out of retained
earnings. Under the Commissioner's regulations, a savings bank that has
converted from mutual to stock form also is prohibited from paying a dividend on
its capital stock if the effect thereof would cause the regulatory capital of
the savings bank to be reduced below the amount required for its liquidation
account.
Liquidity
Under the Commissioner's regulations, savings banks are required to
maintain an average daily balance of liquid assets of not less than 8% of its
average daily balance during the preceding calendar month of its net
withdrawable accounts plus its short-term borrowings. At least 50% of the
minimum liquid assets shall consist of primary liquid assets, including cash,
certain time deposits, certain banker's acceptances, certain corporate debt
securities and highly rated commercial paper, securities of certain mutual funds
and specified United States government, state or federal agency obligations.
Other liquid assets that are not primary liquid assets include mortgage backed
securities, certain mortgage derivative securities, securities issued by other
states and political subdivisions in other states, and other securities
authorized by the Commissioner as investments for which a secondary resale
market exists, including authorized mutual fund investments. On March 31, 1996,
the Bank's liquidity ratio was 8.5%.
Federal Deposit Insurance Corporation Improvement Act of 1991
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
enacted in December 1991, addressed the safety and soundness of deposit
insurance funds, and supervision and other regulatory actions relating to the
banking industry. The goal of FDICIA was to reduce the overall risks within the
thrift and banking system and financial markets. FDICIA addressed the following
issues: (i) development of a system of risk-based deposit insurance assessments;
(ii) supervisory and accounting reforms; (iii) prompt corrective regulatory
action; (iv) brokered deposits and interest rate limitations thereon; (v)
establishment of uniform lending standards; and (vi) general standards for
safety and soundness of insured financial institutions.
Risk-Based Insurance Assessments
FDICIA required the FDIC to develop a system of risk-based insurance
assessments. Under a system implemented in 1994, higher insurance assessment
rates are charged to those banks and thrifts deemed to pose greater risk to the
deposit insurance funds. Under this system, the FDIC places each insured
depository in one of nine risk categories based on its level of capital and
other relevant information (such as supervisory evaluations). Each institution's
insurance assessment rate is then determined by the risk category in which it
has been classified by the FDIC. The average annual insurance assessment rate
for SAIF-insured institutions is $0.237 per one hundred dollars of domestic
deposits. There is an eight basis point spread between the highest and lowest
assessment rates for SAIF-insured institutions, so that institutions classified
as strongest by the FDIC are subject to an annual rate of $0.23 per one hundred
dollars of deposits, and institutions classified as weakest by the FDIC are
subject to an annual rate of $0.31 per one hundred dollars of deposits (with
intermediate annual rates of $0.26, $0.29, and $0.30 per $100 of deposits).
The Bank has been classified in a risk category that will result in annual
assessments of $0.23 per one hundred dollars of deposits. The Bank's expense
related to federal deposit insurance premiums to the SAIF was $126,000 for the
fiscal year ended March 31, 1996. Placement of the Bank in any risk category
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other than the category having the lowest assessment rate will result in
increased SAIF insurance assessments, with a corresponding decrease in net
earnings and capital. The Bank does not presently expect that any reasonable
foreseeable insurance assessments would significantly impair the Bank's overall
financial condition or results of operations. (See Insurance of Deposits)
Improved Examinations and Audits
FDICIA revised examination and audit procedures to require annual on-site
examinations for all depository institutions except those well-capitalized
institutions with assets of less $100 million; annual audits by independent
public accountants for all insured institutions with assets in excess of $500
million; management of depository institutions to prepare certain financial
reports annually and to establish internal compliance procedures; implementation
of accounting objectives, standards and requirements through regulations; and
restrictions on the receipt of "brokered deposits" and the rates of interest
which may be paid on any deposits by institutions which are not "well
capitalized" (even if they meet minimum regulatory capital requirements).
Prompt Corrective Regulatory Action
FDICIA established a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, federal bank
regulators are required to take certain supervisory actions with respect to
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization.
The regulations provide that an insured institution that has total capital
to risk-based assets of less than 8.0%, core capital to risk-based assets of
less than 4.0%, or a leverage ratio that is less than 4.0%, would be considered
"undercapitalized". An insured institution that has total capital to risk-based
assets of less than 6.0%, core capital to risk-based assets of less than 3.0%,
or a leverage ratio that is less than 3.0%, would be considered "significantly
undercapitalized" and an insured institution that has tangible capital to assets
ratio equal to or less than 2.0% would be deemed "critically undercapitalized".
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distribution or paying a management fee to a controlling person.
Undercapitalized and significantly undercapitalized institutions face more
severe restrictions. The Bank currently exceeds all applicable regulatory
capital requirements and therefore is not subject to prompt corrective action.
Brokered Deposits; Interest Rate Limitations
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and with what limitations an institution may accept brokered deposits. A
"well-capitalized" institution (one that significantly exceeds specified capital
ratios) may accept brokered deposits without restriction. "Undercapitalized"
institutions (those that fail to meet minimum regulatory capital requirements)
may not accept brokered deposits and "adequately capitalized" institutions
(those that are not "well-capitalized" or "under-capitalized") may only accept
such deposits with the consent of the FDIC. The definition of
"well-capitalized", "adequately capitalized" and "undercapitalized" governing
the acceptance of brokered deposits conform to the definitions used in the
regulations implementing the prompt corrective action provisions of the FDICIA.
The Bank is a "well-capitalized" institution and therefore may accept brokered
deposits without restriction. At March 31, 1996, the Bank had no brokered
deposits.
Uniform Lending Standards
Savings institutions must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit secured by
liens or interests in real estate or made for the purpose of financing permanent
improvements to real estate. Those policies must establish loan portfolio
diversification standards, prudent underwriting standards (including
loan-to-value limits) that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies adopted by federal bank regulators. The Bank
has adopted and maintains such policies.
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Standards for Safety and Soundness
FDICIA required federal bank regulators to prescribe operational and
managerial standards for all insured depository institutions and depository
institution holding companies relating to internal controls, information systems
and audit systems; loan documentation; credit underwriting interest rate risk
exposure; asset growth; and compensation fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. In addition, federal bank regulators were
required to prescribe standards relating to asset quality, earnings and stock
valuation that the regulators determined to be appropriate.
On September 23, 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "RCDRIA") was enacted. The RCDRIA amended Section
39 of the Federal Deposit Insurance Act of 1950 ("FDI Act"): (1) To authorize
the federal bank regulators to establish safety and soundness standards by
regulation or by guideline for all insured depository institutions; (2) to give
the regulators greater flexibility in prescribing asset quality and earnings
standards; and (3) to eliminate the requirement that standards prescribed under
Section 39 apply to depository institution holding companies.
On July 10, 1995, federal bank regulators adopted Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") and also
adopted a final rule establishing deadlines for submission and review of safety
and soundness compliance plans. Federal bank regulators are authorized, but not
required, to soundness standards set out in the Guidelines. An institution must
file a compliance plan within 30- days of a request to do so from the
institution's primary federal regulator. Regulators expect to request a
compliance plan from an institution whose failure to meet one or more of the
standards is of such severity that it could threaten the safe and sound
operation of the institution.
With respect to internal controls, information systems and internal audit
systems of institutions, the Guidelines prescribe the functions that adequate
internal controls and information systems must be able to perform, rather than
providing the types of controls or systems that must be present in every case.
Each institution is required to have an internal audit system that provides for
adequate testing and review of internal controls and information systems.
The Guidelines do not specify in detail what loan documentation must
contain. Documentation practices would be evaluated based upon each
institution's ability to: make informed decisions and assess risk on an ongoing
basis; identify the purpose of the loan and assess the ability of the borrower
to repay the indebtedness in a timely manner; insure that any claim against a
borrower is legally enforceable; demonstrate appropriate administration and
monitoring of the loan; and take account of the size and complexity of the loan.
The Guidelines would establish general parameters of safe and sound credit
underwriting practices, and require each institution to establish and maintain
prudent credit underwriting practices commensurate with the size of the
institution and the nature and scope of its lending activities
With respect to interest rate risk management, the Guidelines require
institutions to manage interest rate risk in a manner appropriate to the size of
the institution and the complexity of its assets and liabilities. Larger
institutions that are exposed to significant interest rate risk would be
expected to significant interest rate risk would be expected to maintain a more
formal system for the measurement and management of such risk. Further, an
institution is required to base its asset growth on a plan that reflects
consideration of: (i) the source, volatility and use of the funds that support
asset growth; (ii) any increase in credit risk or interest rate as a result of
growth; and (iii) the effect of growth on institution's capital.
The Guidelines also require an institution to base its asset growth on a
plan that fully considers the source of an institution's growth, the risks
presented by such growth and the effect of growth on the institution's capital.
Regulators will evaluate asset growth against an institution's overall strategic
plan for growth.
In addition, the Guidelines require that each institution maintain
safeguards to prevent the payment of compensation, fees, or benefits that are
excessive or could lead to material financial loss. Compensation that is
unreasonable or disproportionate to the services actually performed by the
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individual being compensated would be considered excessive. In making such a
determination, the federal regulators would consider all relevant factors,
including the compensation history of the individual and other individuals with
comparable expertise at the institution, the financial condition of the
institution, comparable compensation packages at comparable institutions, and
any connection between an individual and any wrongdoing at the institution.
The final rule does not set forth any standards related to asset quality
and earnings in the final Guidelines. Federal regulators intend to add revised
asset quality and earnings standards to the Guidelines after receiving comments
and finalizing such standards. The federal regulators also concluded that
establishing stock valuation standards for publicly traded institutions is not
appropriate. Regulators intend to continue monitoring of publicly-traded
institutions through the review of stock price market price to book value
rations, bond ratings and other indicators of the market's assessment of an
institution's performance.
The Bank believes that its operational and managerial standards
substantially comply with the standards set forth in the Guidelines and that
compliance with the Guidelines will therefore not impose a significant burden on
Bank operations.
Restrictions Upon State-Chartered Banks
The FDICIA added a new Section 24 to the Federal Deposit Insurance Act of
1050 ("FDI Act") which generally limits the activities and equity investments of
FDIC-insured state-chartered banks and their subsidiaries to those permissible
for federally chartered national banks and their subsidiaries, unless such
activities and investments are specifically exempted by Section 24 or consented
to by the FDIC.
FDIC regulations governing the equity investments of such banks generally
prohibit certain equity investments by such banks and require the divestiture of
such investments by December 19, 1996. Banks holding impermissible equity
investments that do not receive FDIC approval must submit to the FDIC a plan for
divesting such investments as quickly and as prudently as possible. The Bank has
FDIC approval to hold its impermissible equity investment until May 31, 2000.
Under FDIC regulations, insured savings banks must obtain the FDIC's prior
approval before directly, or indirectly through a majority-owned subsidiary,
engaging "as principal" in any activity that is not permissible for a national
bank unless certain exceptions apply. Under the activity regulations,
FDIC-supervised state banks will not be permitted to directly engage in
commercial ventures or any insurance underwriting activity other than to the
extent such activities are permissible in commercial ventures or any insurance
underwriting activity other than to the extent such activities are permissible
for a national bank or a national bank subsidiary or except for certain limited
insurance underwriting activities. In addition, the activity regulations provide
that state banks which meet all regulatory capital requirements may engage in
certain activities that are not permissible for national banks which are deemed
not to present a significant risk to the insurance fund, including guaranteeing
certain obligations of other, activities which the FRB has found to be closely
related to banking and certain securities activities conducted through
subsidiaries. The FDIC will not approve an activity it determines would present
a significant risk to the FDIC insurance funds. the activities of the Bank are
of a type permissible under the FDICIA and FDIC regulations.
As a SAIF-insured, state-chartered savings bank which was formerly a
state-chartered savings association, the Bank continues to be subject to certain
restrictions which are imposed by federal law on state-chartered savings
associations, including a prohibition against engaging in activities (other than
as agent for its customers) that are not permissible for a federally chartered
savings association or engaging in activities authorized for federally chartered
associations, but to a greater extent than authorized for federally chartered
associations, unless the association met its fully phased-in capital
requirements and the FDIC determined that the activity will not pose a
significant risk to the deposit insurance fund. Effective December 8, 1993, the
FDIC amended its regulations to delete certain provisions requiring SAIF-insured
state banks to continue to comply with certain restrictions applicable to
state-chartered savings associations. The effect of such amendment is to treat
SAIF-insured state banks and Bank Insurance Fund ("BIF") member state banks the
same rather than subject such institutions to additional restrictions based on
insurance fund membership.
Effect of FDICIA on Operations and Financial Condition of the Bank
While management of the Bank cannot predict the final impact of FDICIA
upon the financial condition and operations of the Bank, management believes
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that FDICIA may subject the Bank to significantly increased operational costs
through higher deposit insurance premiums and compliance costs and, if the
capital ratios of the Bank should decline significantly, the Bank may become
subject to more severe regulatory action than was possible under prior law and
regulations.
Capital Maintenance
FDIC Regulation
FDIC-insured institutions are required to follow certain capital adequacy
guidelines that prescribe minimum levels of capital and require that
institutions meet certain risk-based and leverage capital requirements. Under
the FDIC capital regulations, the Bank is required to meet the following capital
standards: (i) "Tier 1 capital" in an amount not less than 3% of total assets;
(ii) "Tier 1 capital" in an amount not less than 4% of risk-weighted assets; and
(iii) "total capital" in an amount not less than 8% of risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions
Examination Council) are required to maintain "Tier 1 capital" equal to at least
3% of total assets (the "leverage limit requirement"). Tier 1 capital is defined
to include the sum of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus), and minority interests in
consolidated subsidiaries, minus all intangible assets (with certain
exceptions), identified losses and qualifying investments in securities
subsidiaries. An institution that fails to meet the minimum leverage limit
requirement must file a capital restoration plan with the appropriate FDIC
regional director that details the steps it will take to reach capital
compliance. At March 31, 1996, the Bank's ratio of Tier 1 capital to total
assets was 11.16% or 8.16% in excess of the minimum leverage limit requirement.
FDIC-insured institutions also are required to adhere to certain
risk-based capital guidelines that are designed to provide a measure of capital
more sensitive to the risk profiles of individuals banks. In evaluating capital
adequacy, the FDIC also will assess the exposure to declines in the economic
value of the Bank's capital due to changes in interest rates. Under the
risk-based capital guidelines, capital is divided into two tiers: core (Tier 1)
capital, as defined above, and supplementary capital (Tier 2). Tier 2 capital is
limited to 100% of core capital and includes cumulative perpetual preferred
stock, perpetual preferred stock, mandatory convertible securities, subordinated
debt, unrealized losses on securities, intermediate preferred stock and
allowance for possible loan and lease losses. Allowance for possible loan and
lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Total capital is the sum of Tier 1 and Tier 2
capital. The risk-based capital framework assigns balance sheet assets to one of
four broad risk categories that are assigned risk-weights ranging from 0% to
100% based primarily on the degree of credit risk associated with the obligor.
Off-balance sheet items are converted to an on-balance sheet "credit equivalent"
amount utilizing certain conversion factors. The weighted sum of the four
risk-weighted categories equals risk-weighted assets. At March 31, 1996, the
Bank's Tier 1 capital to risk-weighted assets was 17.15%, or 13.15% in excess of
the FDIC requirement and the Bank's total capital to risk-weighted assets was
17.92%, or 9.92% in excess of the FDIC requirement.
Wisconsin Regulation
Wisconsin-chartered savings banks are required to maintain a minimum
capital to assets ratio of 6% and must maintain total capital necessary to
ensure the continuation of insurance of deposit accounts by the FDIC. If the
Commissioner determines that the financial condition, history, management or
earning prospects of a savings bank are not adequate, the Commissioner may
require a higher minimum capital level for the savings bank. If a savings bank's
capital ratio falls below the required level, the Commissioner may direct the
savings bank to adhere to a specific written plan established by the
Commissioner to correct the savings bank's capital deficiency, as well as a
number of other restrictions on the savings bank's operations, including a
prohibition on the declaration of dividends. At March 31, 1996, the Bank's total
capital, as calculated under Wisconsin law, was $10.1 million or 11.65% of total
assets, which was 5.65% in excess of the required amount.
Insurance of Deposits
Deposits of the Bank currently are insured to applicable limits by the
FDIC under the Savings Association Insurance Fund ("SAIF"). The FDIC also
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insures commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium
levels are set for each fund to facilitate the fund achieving its designated
reserve ratio. As the funds reach their designated ratios, the FDIC has
authority to lower fund premium assessments to rates sufficient to maintain the
designated reserve ratio. In May 1995, the BIF achieved its designated ratio and
the FDIC lowered BIF premium rates for most BIF-insured institutions. In
November 1995, the FDIC reduced assessment rates by four cents per $100 of
deposits for all institutions, producing a premium rate schedule ranging from 0%
(i.e. whereby such institutions will be subject only to a $2,000 minimum annual
premium) to 0.27% of deposits depending on the institution's risk-based premium
category. Based on these assessment rate modifications, the majority of BIF
members now pay only a $2,000 minimum annual premium and, therefore, BIF-insured
institutions pay, on average, 0.43 cents per $100 of deposits. The SAIF has not
achieved its designated reserve ration and is not anticipated to do so prior to
the year 2001. Therefore, SAIF premium rates for SAIF-insured members continue
to be set at an average of 23.7 cents per $100 of deposits. As a result of the
new assessment rate provisions, SAIF member institutions have been placed at a
competitive disadvantage based on higher deposit insurance premium obligations.
Congress is currently evaluating various proposals and bills concerning
the premium differential between the FDIC's BIF and SAIF funds and related
matters. The current proposal calls for a one-time assessment of approximately
85 to 90 basis points per $100 of SAIF deposits as of March 31, 1995. Both funds
would then, going forward, have the same lower deposit premiums. If the special
assessment were imposed at 85 basis points per $100 of insurable deposits, the
amount of the assessment to the Bank would be approximately $430,000. The
special assessment will have the effect of reducing the Bank's earnings and
capital by the after-tax amount of the assessment as of the date of enactment,
which is estimated to be $252,000 or $0.26 per share. FDIC premium expense would
then be reduced in future periods. Proposals under consideration also address
related issues, including (i) providing that certain bond obligations be borne
by all insured depository institutions (rather than solely by the SAIF); (ii)
the merger of the SAIF and BIF by January 1, 1998 (provided no FDIC-insured
depository institution is a savings association on that date); and (iii)
repealing the bad debt reserve accounting method currently available to thrift
savings associations such as the Bank, with certain provisions for deferred
recapture. The Bank is unable to predict when or whether any of the foregoing
legislation will be enacted, the amount or applicable retroactive date of any
one-time assessment, or the rates that might subsequently apply to assessable
SAIF deposits; however, management anticipates that the Bank, after
consideration of the one-time assessment, would continue to exceed all
regulatory minimum capital levels. Further, management does not anticipate that
any of the legislative proposals, if enacted, would have a material impact on
the Company's financial condition in future periods.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition operations or has violated any applicable
law, regulation, rule, order or condition imposed by the FDIC or the
Commissioner. Management of the Bank does not know of any practice, condition or
violation that might lead to the termination of deposit insurance.
On October 5, 1994, the FDIC issued an "Advanced Notice of Proposed
Rulemaking" pursuant to which the FDIC is soliciting comments on whether the
deposit-insurance assessment base currently provided for in the FDIC's
assessment regulations should be redefined. As a result of the recent transition
to a risk-based deposit insurance system, effective January 1, 1994, the
assessment base, which had been determined by statute pursuant to the FDI Act,
is now determined by the FDIC by regulation. At present, however, the FDIC's
assessment base regulations continue to be based on the statutory provisions
under the FDI Act. Under current law, insurance premiums paid to the FDIC are
calculated by multiplying the institution's assessment base (which equals total
domestic deposits, as adjusted for certain elements) by its assessment rate.
Based on the change to the new deposit insurance system, developments in
the financial services industry, changes in the activities of depository
institutions and other factors, the FDIC seeks comments on whether the
assessment base should be redefined. The FDIC has stated that review of the
definition of "assessment base" does not signal any intent to enhance the total
dollar amount of assessments collected, but that such redefinition may impact
the assessments paid on an institution-by-institution basis. Until final
regulations are adopted affecting the definition of an institution's assessment
base, the Bank cannot predict what impact such regulation may have on Bank
operations.
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Restrictions on Loans to and Transactions with Insiders and Affiliates
In accordance with Section 22(h) of the Federal Reserve Act of 1913, as
amended ("Federal Reserve Act"), FRB regulations limit the total amount a
savings bank may lend to its executive officers, directors, principal
shareholders and their related interests ("affiliated persons"). Generally, an
affiliated person may borrow an aggregate amount not exceeding 15% of a savings
bank's unimpaired capital and unimpaired surplus on an unsecured basis and an
additional 10% on a secured basis. The regulations limit, with certain
exceptions, the aggregate amount a depository institution may lend to affiliated
persons as a class to an amount not exceeding the institution's unimpaired
capital and surplus.
FRB regulations also provide for certain exceptions from the definition of
:extension of credit" that pose a minimal risk to institutions, including
extensions of credit secured by obligations fully guaranteed by the federal
government, unconditional takeout commitments or guarantees of any U.S. agency,
department or wholly owned corporation, or a segregated deposit account at the
institution.
In addition, the Commissioner's regulations establish restrictions on
loans and other transactions with the Bank's affiliated persons, to ensure that
such loans and transactions are on terms that would be available to members of
the general public of similar credit status.
FDIC-insured state-chartered savings banks must comply with Sections 23A
and 23B of the Federal Reserve Act ("Sections 23A and 23B") relating to
transactions with affiliates in the same manner and to the same extent as if the
savings banks were a Federal Reserve member bank. Generally, Sections 23A and
23B limit the extent to which an insured institution or its subsidiaries may
engage in certain covered transactions with an affiliate to an amount equal to
10% of such institution's capital and surplus, and require that all transactions
be on terms substantially the same, or at least as favorable to the institution
or subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, the purchase of assets, issuance of a
guaranty and similar other types of transactions. The Commissioner, for safety
and soundness reasons, may impose more stringent restrictions on savings banks
but may not exempt transactions from or otherwise abridge Sections 23A and 23B.
Unless prior approval of the Commissioner is obtained, a savings bank may
not purchase, lease or acquire a site for an office building or an interest in
real estate from an affiliated person, including a stockholder owning more than
10% of its capital stock, or from any firm, corporation, entity or family in
which an affiliated person or 10% stockholder has a direct or indirect interest.
The Bank has not been significantly affected by the applicable
restrictions on loans to and transactions with affiliates.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977, as amended ("CRA"), as
implemented by FDIC regulations, the Bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a
bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution. The Financial Institutions Reform Recovery and
Enforcement Act of 1989 ("FIRREA") amended the CRA to require, effective July 1,
1990, public disclosure of an institution's CRA rating and require the FDIC to
provide a written evaluation of an institution's CRA performance. The Bank had a
CRA examination on November 29, 1994 and received a "Satisfactory" CRA rating.
On May 4, 1995, the federal banking regulators adopted a final rule
("Final CRA Rule") governing compliance with CRA. The Final CRA Rule eliminates
the previous CRA regulation's twelve assessment factors and substitutes a
performance based evaluation system. The Final CRA Rule will be phased in over a
period of time and become fully effective by July 1, 1997. Under the Final CRA
Rule, an institution's performance in meeting the credit needs of its entire
community, including low- and moderate-income areas, as required by the CRA,
will generally be evaluated under three assessment tests relating to lending,
investment and service.
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The lending test analyzes lending performance using five criteria: (i) the
number and amount of loans in the institution's assessment area, (ii) the
geographic distribution of lending, including the proportion of lending in the
assessment area, the dispersion of lending in the assessment area, and the
number of amount of loans in low-, moderate-, and upper-income areas in the
assessment area. (iii) borrower characteristics, such as the income level of
individual borrowers and the size of businesses or farms, (iv) the number and
amount, as well as the complexity and innovativeness of an institution's
community development lending and (v) the use of innovative or flexible lending
practices in a safe and sound manner to address the credit needs of low- or
moderate-income individuals or areas.
The investment test analyzes investment performance using four criteria:
(i) the dollar amount of qualified investments, (ii) the innovativeness or
complexity of qualified investments, (iii) the responsiveness of qualified
investments to credit and community development needs, and (iv) the degree to
which the qualified investments made by the institution are not routinely
provided by private investors.
The service test analyzes service performance using six criteria: (i) the
institution's branch distribution among low-, moderate-, and upper-income areas,
(ii) its record of opening and closing branches, particularly in low- and
moderate-income areas, (iii) the availability and effectiveness of alternative
systems for delivering retail banking services, (iv) the rate of services
provided in low-, moderate-, middle- and upper-income areas and extent to which
those services are tailored to meet the needs of those areas, (v) the extent to
which the institution provides community development services, and (vi) the
innovativeness and responsiveness of community development services provided.
Financial institutions with assets of less than $250 million, or a
financial institution with assets of less than $250 million that is a subsidiary
of a holding company with assets of less than $1 billion, will be evaluated
under a streamlined assessment method based primarily on its lending record. The
streamlined test considers an institution's loan-to-deposit ration adjusted for
seasonal variation and special lending activities, its percentage of loans and
other lending related businesses and farms of different sizes, the geographic
distribution of its loans and its record of taking action, if warranted, in
response to written complaints. In lieu of being evaluated under the three
assessment tests or the streamlined test, a financial institution can adopt a
"strategic plan" and elect to be evaluated on the basis of achieving the goals
and benchmarks outline in the strategic plan. Based upon a review of the Final
CRA Rule, management of the Company does not anticipate that the new CRA
regulations will adversely affect the Bank.
Federal Reserve System
Regulation D, promulgated by the FRB, imposes reserve requirements on all
depository institutions, including savings institutions, which maintain
transaction accounts or non-personal time deposits. Checking accounts, NOW
accounts and certain other types of accounts that permit payments or transfers
to third parties fall within the definition of transaction accounts and are
subject to Regulation D reserve requirements, as are any non-personal time
deposits (including certain money market deposit accounts) at a savings
institution. A depository institution must maintain average daily reserves equal
to 3% of the first $52 million of net transaction accounts and 10% of net
transaction accounts in excess of $52 million. There has been a 0% reserve
requirement on non-personal deposits since December 27, 1990. In addition, the
first $4.3 million of otherwise reservable liabilities are exempt from the
reserve requirement. these percentages and tranches are subject to adjustment by
the FRB. The Bank satisfies its reserve requirements on an on-going basis by
maintaining average balances of vault cash and non-interest bearing reserve
deposits with the FHLB-Chicago (which are passed through to the FRB) which in
total are greater than or equal to its required daily average balance.
Thrift institutions also have authority to borrow from the Federal Reserve
Bank "discount window", but FRB policy generally requires thrift institutions to
exhaust all sources before borrowing from the Federal Reserve System. The Bank
had no discount window borrowings as of March 31, 1996.
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Federal Home Loan Bank System
The Federal Home Loan Bank System, consisting of twelve FHLB's, is under
the jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLB's; ensure that the FHLB's carry out
their housing finance mission; ensure that the FHLB's remain adequately
capitalized and able to raise funds in the capital market; and ensure that the
FHLB's operate in a safe and sound manner.
The Bank, as a member of the FHLB-Chicago, is required to acquire and hold
shares of capital stock in the FHLB-Chicago in an amount equal to the greater of
(i) 1% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, (ii) 0.3% of total assets, or (iii) 1/20 of its advances (borrowings) from
the FHLB-Chicago. The Bank is in compliance with this requirement with an
investment in FHLB-Chicago stock of $803,000 at March 31, 1996.
Among other benefits, the FHLB's provide a central credit facility
primarily for member institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Chicago. At March 31, 1996, the Bank had
$12.6 million in advances from the FHLB-Chicago.
Holding Company Regulation
Federal Regulation
The Company is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Company is subject to
examination, regulation and periodic reporting under the BHCA, as administered
by the FRB. The FRB has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of the FDIC
for the Bank. The Company's total and Tier 1 capital significantly exceed such
capital adequacy requirements.
The Company is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior FRB approval will be required for the Company to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company. The BHCA also prohibits the acquisition by the
Company of more than 5% of the voting shares or substantially all the assets of
a bank located outside the State of Wisconsin unless such an acquisition is
specifically authorized by the laws of the state in which such bank is located
The Company is required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities of the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemption's during the preceding
twelve months, is equal to 10% or more of the Company's consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate
redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, FRB order or directive,
or any condition imposed by, or written agreement with, the FRB.
A bank holding company generally is prohibited from engaging in, or
acquiring direct or indirect control of any company engaged in, non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the principal
activities the FRB has determined by regulation to be so closely related to
banking are: (i)making or servicing loans; (ii) performing certain data
processing services; (iii) providing discount brokerage services; (iv) acting as
fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring and/or operating a savings and
loan association.
Under FIRREA, depository institutions are liable to the FDIC for losses
suffered or anticipated by the FDIC in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such
an institution in danger of default. This law would have potential applicability
if the Company ever acquired as a separate subsidiary a depository institution
in addition to the Bank.
41
<PAGE>
Pursuant to FRB policy, dividends should be paid only out of current
earnings and only if the prospective rate of earnings retention by the bank
holding company appears consistent with its capital needs, asset quality and
overall financial condition. The FRB policy also requires that a bank holding
company serve as a source of financial strength to its subsidiary banks by
standing ready to use available resources to provide adequate capital funds to
those banks during periods of financial stress or adversity. These policies
could affect the ability of the Company to pay cash dividends.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
See "Restrictions of Loans to and Transactions with Insiders and Affiliates".
Moreover, subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in arrangements (with the Company or any of its subsidiaries) in
connection with any extension of credit, lease or sale of property or furnishing
of services.
The Company and its subsidiary, the Bank are affected by the monetary and
fiscal policies of various agencies of the United States government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for management of the Company
to accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Company.
State Savings Bank Holding Company Regulation
In addition to the FRB bank holding company regulations, a bank holding
company that owns or controls, directly or indirectly, more than 25% of the
voting securities of a state savings bank also is subject to regulation as a
savings bank holding company by the Commissioner. The Commissioner has not yet
issued proposed regulations governing savings bank holding companies.
Acquisition of the Holding Company
Under the federal Change in Bank Control Act of 1978, as amended ("CBCA"),
a notice must be submitted to the FRB if any person (including a company), or
group acting in concert, seeks to acquire 10% or more of the Company's shares of
Common Stock outstanding, unless the FRB has found that the acquisition will not
result in a change in control of the Company. Under the CBCA, the FRB has 60
days within which to act on such notices, taking into consideration certain
factors, including the financial and managerial resources of the acquirer, the
convenience and needs of the communities served by the Company and the Bank, and
the anti-trust effects of the acquisition. Under the BHCA, any company would be
required to obtain prior approval generally is defined to mean the ownership to
control in any manner the election of a majority of the Company's directors. in
addition, the BHCA prohibits the acquisition of the Company by a bank holding
company located outside the State of Wisconsin, unless such acquisition is
specifically authorized by Wisconsin law.
42
<PAGE>
Federal Securities Laws
The Company filed with the SEC a registration statement under Securities
Act of 1933, as amended (the "Securities Act"), for the registration of the
Common Stock issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock was registered with the SEC under
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of the shares of the Common
Stock does not cover the resale of such shares. Shares of Common Stock purchased
by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company will be subject to
the resale restrictions of Rule 144 under the Securities Act. If the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of Common
Stock of the Company, or (ii) the average weekly volume of trading in such
shares during the preceding four calendar
43
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
Properties
The Company conducts its business through three full-service office
locations that are located in Polk, St. Croix and Burnett Counties, Wisconsin.
The Company owns all of the properties on which its offices are located.
Management believes the Company's current facilities are adequate to meet its
present and immediately foreseeable needs. A list of the Company's offices is as
follows:
Net Book Value
of Properties and
Year Improvements at
Office Location Opened March 31, 1996
- --------------- ------ --------------
Amery/Home Office 1936 $1,336,000
234 S Keller Avenue
PO Box 46
Amery, WI 54001
New Richmond Office 1972 728,000
532 Knowles Avenue S.
New Richmond, WI 54017
1975 135,000
Siren Office
24082 Highway 35 N
Siren, WI 54872
----------
Net Book Value $2,199,000
==========
44
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which in
the aggregate involve amounts that are believed by management to be immaterial
to the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
No matters were submitted to a vote of shareholders of the Company during
the three months ended March 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------- ---------------------------------------------------------
Information required by this item is included under the heading "Notes to
Financial Statements of Northwest Equity Corp." and "Shareholder Information" in
the Registrant's Annual Report to Shareholders for the fiscal year ended March
31, 1996, which has been filed separately pursuant to Rule 14a-3 under the
Securities Exchange Act of 1934 as amended and in accordance with General
Instruction E(2) to Form 10-KSB, and which sections are hereby incorporated
herein by reference.
The Board of Directors of the Registrant declared a dividend of $0.09 per
share to shareholders of record on April 26, 1996. Future payments of dividends
will be subject to determination and declaration by the Registrant's Board of
Directors, which will take into account the Registrant's financial condition,
results of operations, tax considerations, industry standards, economic
conditions and other factors, including the regulatory restrictions which affect
the payment of dividends by the Bank to the Company. There can be no assurance
that dividends will be paid on the shares of Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------- ---------------------------------------------------------
Information required by this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Northwest Equity Corp." in the Registrant's Annual Report to
Shareholders for the fiscal year ended March 31, 1996, which has been filed with
the Securities and Exchange Commission separately pursuant to Rule 14a-3 under
the Securities Exchange Act of 1934 as amended and in accordance with General
Instruction E(2) to Form 10-KSB, and which section is hereby incorporated herein
by reference.
ITEM 7. FINANCIAL STATEMENTS.
- ------- ---------------------
Information required by this item is included under headings "Consolidated
Financial Statements of Northwest Equity Corp." and "Notes to Consolidated
Financial Statements of Northwest Equity Corp." in the Registrant's Annual
Report to Shareholders for the fiscal year ended March 31, 1996, which has been
filed with Securities and Exchange Commission separately pursuant to Rule 14a-3
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction E(2) to Form 10-KSB, and which sections are hereby
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
45
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS:
- ------- ---------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
--------------------------------------------------
Information required by this item with respect to directors is included
under the heading "Matter 1. Election of Directors" in the Registrant's
definitive Proxy Statement dated June 26, 1996, relating to the 1996 Annual
Meeting of the Shareholders scheduled for August 13, 1996, which has been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction E(3) to Form 10-KSB, not later than 120 days after the end
of the Registrant's fiscal year, and which section is hereby incorporated herein
by reference.
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Registrant who
do not serve on the Registrant's Board of Directors. There are no arrangements
or understandings between the persons named and any other person pursuant to
which such officers were selected, nor are there any family relationships among
them.
James L. Moore has been Senior Vice President of the Bank since 1990. Mr.
Moore joined the Bank in 1975 as an assistant branch manager and was promoted to
Vice President in 1988.
Information required by this item with respect to Item 405, Compliance
with Section 16(a) of the Securities Exchange Act of 1934 as amended is included
under the heading "Section 16 Compliance" in the Registrant's definitive Proxy
Statement dated June 26, 1996, relating to the 1996 Annual Meeting of
Shareholders scheduled for August 13, 1996, which has been filed separately with
the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934, as amended and in accordance with General
Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the
Registrant's fiscal year, and which section is hereby incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
- -------- -----------------------
Information required by this item is included under the heading
"Compensation of Executive Officers and Directors" in the Registrant's
definitive Proxy Statement dated June 26, 1996, relating to the 1996 Annual
Meeting of Shareholders scheduled for August 13, 1996, which was been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under Securities Exchange Act of 1934, as amended and in accordance with General
Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the
Registrant's fiscal year, and which section is hereby incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
Information required by this item is included under the heading "Security
Ownership of Certain Beneficial Owners" in the Registrant's definitive Proxy
Statement dated June 26, 1996, relating to the 1996 Annual Meeting of
Shareholders Scheduled for August 13, 1996, which has been filed separately with
the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934, as amended and in accordance with General
Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the
Registrant's fiscal year, and which section is hereby incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
Information required by this item is included under the heading
"Indebtedness of Management and Certain Transactions" in the Registrant's
definitive Proxy Statement dated June 26, 1996, relating to the 1996 Annual
Meeting of Shareholders scheduled for August 13, 1996, which has been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction E(3) to Form 10-KSB, not later than 120 days after the end
of the Registrant's fiscal year, and which section is hereby incorporated herein
by reference.
46
<PAGE>
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- -------- ---------------------------------
(a) Exhibits Required by Item 601: Page Number
2.1 Plan of Conversion of Northwest Savings Bank (as amended)(1)
3.1 Articles of Incorporation of Registrant (1)
3.2 By-Laws of Registrant(1)
3.3 Stock Articles of Incorporation of Northwest Savings Bank (1)
3.4 By-Laws of Northwest Savings Bank
4.1 Specimen Stock Certificate of Registrant (1)
4.2 Specimen Stock Certificate of Northwest Savings Bank (1)
10.1 Northwest Savings Bank Money Purchase Pension Plan (1)
10.2 Northwest Savings Bank Employee Stock Ownership Plan (1)
10.3 Credit Agreement by and between Northwest Savings Bank
Employee Stock Ownership Trust and Registrant (1)
10.4 Northwest Savings Bank Incentive Plan (as amended) (1)
10.5 1994 Northwest Equity Corp. Stock Option Plan (1)
10.6 Northwest Equity Corp. Incentive Plan (2)
10.7 Northwest Equity Corp. 1995 Stock Option Plan(2)
10.8 Employment Agreement - Mr. Brian L. Beadle (1)
10.9 Employment Agreement - Mr. James L. Moore (1)
11.1 Statement Regarding Computation of Per Share Earnings 50
13.1 1996 Annual Report to Shareholders 51
21.1 Subsidiaries of Registrant 52
23.1 Consent of Keller & Yoder 53
99.1 Proxy Statement for 1996 Annual Meeting of Shareholders 54
- ----------------------------
(1) Incorporated by reference to exhibits filed with Registrant's Form SB-2
Registrant Statement declared effective on August 5, 1994 (Registration
Number 33-73264).
(2) Incoporated by reference to exhibits filed with Registrant's Form S-8
Registration Statement declared effective on January 23, 1996
(Registration Number 333-878).
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant during the three months
ended March 31, 1996.
47
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
NORTHWEST EQUITY CORP.
Dated: June 11,1996 By_/s/__Brian L.Beadle_________________________
Brian L. Beadle, President (Principal Executive
Officer and Principal Financial and Accounting
Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Brian L. Beadle President (Principal Executive Officer June 11,1996
- -------------------- and Principal Financial Accounting
Brian L. Beadle Officer) and Director
/s/ Gerald J. Ahin
- ------------------- Director June 11,1996
Gerald J. Ahlin
/s/ Vern E. Albrecht
- --------------------- Director June 11,1996
Vern E. Albrecht
/s/ Michael D. Jensen Director June 11,1996
- ----------------------
Michael D. Jensen
/s/ Donald M. Michels Director June 11,1996
- ----------------------
Donald M. Michels
/s/ Norman M. Osero Director June 11,1996
- --------------------
Norman M. Osero
/s/ James A. Counter Director June 11,1996
- ---------------------
James A. Counter
48
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered Page
Exhibit Where Attached
Number Exhibits are located
- ------ --------------------
11.l Statement Regarding Computation of Per Share Earnings 50
13.1 1996 Annual Report to Shareholders 51
21.1 Subsidiaries of the Registrant 52
23.1 Consent of Keller & Yoder 53
99.1 Proxy Statement for 1996 Annual Meeting of Shareholders 54
49
<PAGE>
EXHIBIT 11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
The Company completed its initial stock offering on October 7, 1994 and,
accordingly, earnings per share is computed on net income and common stock
outstanding from the date of the conversion including the six day period ended
October 6, 1994, which is immaterial. Earnings per share is calculated by
dividing net income for the period by the weighted average number of shares of
common stock outstanding. The computation of net income per common share is as
follows:
For the twelve months From October 7,1994
ended March 31, 1996 to March 31, 1995
-------------------- ----------------------
Primary Fully Diluted Primary Fully Diluted
Net income 842,000 842,000 445,000 445,000
Common shares issued 1,032,517 1,032,517 1,032,517 1,032,517
Net treasury shares 14,151 14,151 0 0
Unallocated ESOP shares 87,503 87,503 0 0
Ungranted shares in incentive plan 0 0 0 0
Weighted average common shares
outstanding 930,863 930,863 1,032,517 1,032,517
Common stock equivalents based on
the treasury stock method 0 0 0 0
Total weighted average common
shares and equivalents outstanding 930,863 930,863 1,032,517 1,032,517
Earnings per share $0.90 $0.90 $0.43 $0.43
50
<PAGE>
EXHIBIT 13.1
1996 ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Company Profile................................................................1
Financial Highlights of Northwest Equity Corp..................................2
Letter to Shareholders.........................................................3
Financial Table of Contents....................................................4
Selected Consolidated Financial and Other Data of Northwest Equity Corp........5
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Northwest Equity Corp...........................7
Independent Auditor's Report..................................................26
Consolidated Financial Statements of Northwest Equity Corp.:
Consolidated Balance Sheets of the Company at March 31, 1996 and 1995......27
Consolidated Statements of Operations of the Company for the Years Ended
March 31, 1996, 1995 and 1994...........................................28
Consolidated Statements of Shareholders' Equity of the Company for the
Years Ended March 31, 1996, 1995 and 1994................................29
Consolidated Statements of Cash Flows of the Company for the Years Ended
March 31, 1996, 1995 and 1994............................................30
Notes to Consolidated Financial Statements of Northwest Equity Corp...........32
Shareholder Information.......................................................48
COMPANY PROFILE
Northwest Equity Corp. is the holding company for Northwest Savings Bank.
The Bank converted from a Wisconsin-chartered mutual savings bank to a
Wisconsin-chartered stock savings bank on October 7, 1994 (the "Conversion"). In
connection with the Conversion, Northwest Equity Corp. sold 1,032,517 shares of
its Common Stock at $8.00 per share and used a portion of the net proceeds to
purchase all of the issued and outstanding capital stock of the Bank.
Northwest Savings Bank was established in 1936, and is regulated by the
Wisconsin Commissioner of Savings and Loan and the Federal Deposit Insurance
Corporation. The Bank is a community-oriented, full-service financial
institution offering a variety of retail financial services to meet the needs of
the communities it serves. The Bank's principal business consists of attracting
funds in the form of deposits and investing such funds primarily in residential
real estate loans, mortgage-backed and related securities, and various types of
commercial and consumer loans. The Bank has three full-service offices located
in Polk, St. Croix and Burnett Counties, Wisconsin. At March 31, 1996, the
Company had total assets of $86.4 million, total deposits of $57.2 million and
shareholders' equity of $11.9 million.
The shares of Common Stock of Northwest Equity Corp. are publicly traded on
the NASDAQ Small-Cap Market under the symbol "NWEQ."
<PAGE>
FINANCIAL HIGHLIGHTS OF NORTHWEST EQUITY CORP.
At or For the Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
(Dollars in thousands, except per share data)
Total Assets...............................$86,355 $68,782 $59,990
Loans Receivable, Net.......................70,680 58,400 51,014
Securities Available For Sale................2,859 2,656 2,382
Mortgage-Backed and
Related Securities.........................5,373 2,001 1,556
Deposits....................................57,256 50,627 47,530
Shareholders' Equity........................11,864 12,038 4,500
Net Interest Income After
Provision for Loan Losses..................3,138 2,624 2,140
Total Other Income.............................476 401 625
Total General and
Administrative Expenses....................2,175 1,738 1,717
Net Income.....................................842 780 616
Earnings Per Share...........................$0.90 0.84 N/A
Return on Average Assets.....................1.06% 1.23% 1.02%
Return on Average Equity......................6.95 9.40 14.12
Interest Rate Spread..........................3.77 3.87 3.40
Net Interest Margin...........................4.26 4.38 3.70
Non-Performing Loans
to Gross Loans..............................0.97 0.89 0.49
<PAGE>
LETTER TO SHAREHOLDERS
The Board of Directors and employees of Northwest Equity Corp., the
holding company of Northwest Savings Bank, are proud to present the second
annual report since the stock conversion consummated on October 7, 1994. The
Board adopted the Plan of Conversion to provide substantially increased capital
to strengthen, expand and diversify the operations of the Bank, provide future
access to capital markets, and attract and retain personnel through the employee
stock ownership plan and other stock benefit programs. It also provided the
ability for the Board, employees, depositors and others the opportunity to
become shareholders of the Company and thereby participate directly in the
future growth and success of the Bank. That participation became a practical
reality when the Board of Directors declared the first dividend of $.07 per
share to shareholders of record on April 28, 1995, and continues with the latest
declaration of $.09 per share to shareholders of record in April 1996.
The conversion is another step in a program undertaken to enhance
opportunities for the Bank. The Board of Directors opened a new home office in
1988 and implemented a strategy to expand the services it offered as a
traditional thrift institution, including checking accounts, ATM's, night
depositories, safe deposit boxes, drive-through banking and investment products;
in order to create broad banking relationships with its customers. The Board
believes the expansion of the product base will enable the Bank to develop and
retain its customer base and enable it to compete more effectively in its
primary market area. This strategy continues with the grand opening in June of
1996, of the recently remodeled and expanded branch office facility in New
Richmond, Wisconsin, and plans to open a supermarket branch in Clear Lake,
Wisconsin, in October 1996.
The extensive financial data that follows confirms that we had an
excellent year. Net income was at a record high and substantial growth in loans
and deposits was achieved. Without any significant changes in the financial
markets, I expect that the solid performance of the Bank will continue into the
coming year.
The Board and the employees will continue to pursue the opportunities
provided by the capital from the stock conversion and strive to achieve our goal
of a strong return on equity.
/s/ Brian L. Beadle
Brian L. Beadle
President and Chief Executive Officer
<PAGE>
FINANCIAL TABLE OF CONTENTS
Page
Selected Consolidated Financial and Other Data of Northwest Equity Corp. .....5
Management's Discussion and Analysis of Financial Condition and
Results of Operations of Northwest Equity Corp.:
General..............................................................7
Management Strategy..................................................8
Comparison of Operating Results for the Years Ended
March 31, 1996 and March 31, 1995..................................9
Comparison of Operating Results for the Years Ended
March 31, 1995 and March 31, 1994.................................11
Financial Condition.................................................14
Liquidity, Capital Resources and Regulatory Capital.................15
Impact of Inflation and Changing Prices.............................16
Current Accounting Developments.....................................16
Asset/Liability Management..........................................17
Average Balance Sheet...............................................20
Rate/Volume Analysis................................................22
Independent Auditor's Report.................................................23
Consolidated Financial Statements of Northwest Equity Corp.:
Consolidated Balance Sheets at March 31, 1996 and 1995..............24
Consolidated Statements of Operations for the Years Ended
March 31, 1996, 1995 and 1994....................................25
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 1996, 1995 and 1994....................................26
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1995 and 1994....................................27
Notes to Consolidated Financial Statements of Northwest Equity Corp..........29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF
NORTHWEST EQUITY CORP.
Set forth below are selected consolidated financial and other data of
the Company. The financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Company and notes
thereto presented elsewhere in this Annual Report.
At March 31,
------------
1996 1995 1994
---- ---- ----
(In thousands)
Selected Financial Data:
Total assets .......................................$86,355 $68,782 $59,990
Loans receivable, net ...............................69,963 58,363 51,014
Loans held for sale ....................................717 37 --
Cash and cash equivalents ............................3,412 3,086 2,017
Securities available-for-sale ........................2,859 2,656 2,382
Mortgage-backed and related securities ...............5,373 2,001 1,556
FHLB stock ............................................803 417 417
Deposits ............................................57,256 50,627 47,530
FHLB advances and other borrowings ..................16,912 5,802 7,557
Shareholder's Equity - substantially restricted .....11,864 12,038 4,500
Fiscal Year Ended March 31,
1996 1995 1994
---- ---- ----
(In thousands)
Selected Operating Data:
Total interest income $ 6,473 $ 4,855 $ 4,359
Total interest expense 3,311 2,214 2,195
----- ------- -----
Net interest income 3,162 2,641 2,164
Provision for loan losses 24 17 24
----- ----- -----
Net interest income after provision for loan
losses 3,138 2,624 2,140
Non-interest income:
Mortgage servicing fees 72 73 80
Service charges on deposits 226 227 199
Gain on sale of mortgage loans 61 19 222
Other non-interest income 117 82 124
---- ----- ----
Total other non-interest income 476 401 625
Total general and administrative expenses 2,175 1,738 1,717
Income before income tax expense 1,439 1,287 1,048
Income tax expense 597 507 432
----- ----- -----
Net Income 842 780 616
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF
NORTHWEST EQUITY CORP. (CONT.)
Selected Financial Ratios and Other Data: At or For the Fiscal Year
Ended March 31,
-------------------------
Performance Ratios 1996 1995 1994
----- ---- ----
Return on average assets 1.06% 1.23% 1.02%
Return on average equity 6.95% 9.40% 7.45%
Interest rate spread during period(1) 3.77% 3.87% 3.40%
Net interest margin(1) 4.26% 4.38% 3.70%
Non-interest expense to average assets 2.74 2.75 2.83
Non-interest income to average assets 0.60 0.63 1.03
Average interest-earning assets to
average interest-bearing liabilities 1.11x 1.14x 1.08x
Asset Quality Ratios
Non-performing loans to gross loans(2) 0.97% 0.89% 0.49%
Non-performing assets to total assets(2) 0.95% 0.76% 0.54%
Allowance for loan losses to non-performing
loans(2) 62.48% 82.98% 173.02%
Classified assets to total assets 0.90% 0.36% 0.98%
Net charge-offs to average gross loans 0.04% 0.03% 0.08%
Capital Ratios
Average Equity to average assets 15.25% 13.14% 13.63%
Equity to total assets at end of period 13.74% 17.50% 7.50%
Other Data
Number of deposit accounts 8,967 8,033 7,282
Number of real estate loans outstanding 1,532 1,435 1,180
Number of real estate loans serviced 2,031 1,897 1,647
Number of consumer loans outstanding 1,084 1,286 1,154
Mortgage loan originations (in thousands) $25,179 $18,047 $27,443
Full-service facilities 3 3 3
- -------------------------------
(1) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(2) Non-performing loans consist of non-accrual loans. Non-performing assets
consists of non-performing loans and foreclosed properties.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
NORTHWEST EQUITY CORP.
General
Northwest Equity Corp., a Wisconsin corporation (the "Company"), is a
holding company that owns all of the issued and outstanding stock of Northwest
Savings Bank, a Wisconsin-chartered stock savings bank (the "Bank"). In this
discussion and analysis, reference to the operations and financial condition of
the Company includes the operations and financial condition of the Bank.
The Company was incorporated on November 3, 1993, at the direction of
the Bank to become a bank holding company and own all of the Bank's capital
stock to be issued upon its conversion from mutual form to stock ownership (the
"Conversion"). On October 7, 1994, the Bank completed the Conversion. On that
date, the Company issued and sold 1,032,517 shares of its Common Stock at $8.00
per share. The gross proceeds from the sale of the shares of Common Stock were
$8.3 million. Net proceeds to the Company were $6.9 million, after deduction of
Conversion expenses of $0.6 million and after lending $0.8 million to the Bank's
Employee Stock Ownership Plan. The Company used $3.4 million of the net proceeds
to acquire all of the issued and outstanding stock of the Bank.
The Company's business currently consists of the business of the Bank.
The Bank is a community-oriented, full-service financial institution offering a
variety of retail financial services to meet the needs of the communities it
serves. The Bank's principal business consists of attracting funds in the form
of deposits and other borrowings and investing such funds primarily in
residential real estate loans, mortgage-backed securities, mortgage related
securities, including collateralized mortgage obligations, and various types of
commercial and consumer loans. The Bank's primary sources of funds are deposits,
repayment on loans and mortgage-backed and related securities, and advances from
the Federal Home Loan Bank of Chicago ("FHLB-Chicago"). The Bank utilizes these
funds to invest primarily in mortgage loans secured by one-to-four family
properties, and to a lesser extent, consumer, commercial and other loans, and to
invest in mortgage-backed and related securities and other investment
securities. The Bank is regulated by the Wisconsin Commissioner of Savings and
Loan and the Federal Deposit Insurance Corporation ("FDIC"), and its deposits
are insured up to applicable limits by the Savings Association Insurance Fund.
The Bank also is a member of the Federal Home Loan Bank System.
The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
and related securities and other investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits and advances from
the FHLB-Chicago. Net interest income is a function of the Company's "interest
rate spread," which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest bearing-liabilities. Many of the Company's
assets, including mortgage loans and mortgage-backed and related securities, are
subject to reinvestment risk. During periods of falling interest rates, higher
yielding loans and mortgage-backed securities are more likely to prepay, and the
Company may not be able to reinvest the proceeds from prepayments in loans or
securities with yields similar to those prepaying. The Company's operating
results also are affected to a lesser extent by the amount of its non-interest
income, including loan servicing and loan related fees, gains on sales of
mortgage loans, as well as transactional and other fee income. Additionally, net
income may be affected by gains or losses on the sale of investment securities
and mortgage-backed and related securities. The Company's non-interest expense
consists principally of employee compensation, occupancy expenses, federal
deposit insurance premiums and other general and administrative expenses. The
Company's operating results are significantly affected by general economic
conditions, and the monetary, fiscal and regulatory policies of 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 likewise are heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Company's market areas.
MANAGEMENT'S DISCUSSION (CONT.)
Regulatory Development Related to Deposit Insurance
Deposits of the Bank currently are insured to applicable limits by the
FDIC under the Savings Association Insurance Fund ("SAIF"). The FDIC also
insures commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium
levels are set for each fund to facilitate the fund achieving its designated
reserve ratio. As the funds reach their designated rations, the FDIC has
authority to lower fund premium assessments to rates sufficient to maintain the
designated reserve ration. In May 1995, the BIF achieved its designated ration
and the FDIC lowered BIF premium rates for most BIF-insured institutions. In
November 1995, the FDIC reduced assessment rates by four cents per $100 of
deposits for all institutions, producing a premium rate schedule ranging from 0%
(i.e. whereby such institutions will be subject only to a $2,000 minimum annual
premium) to 0.27% of deposits depending on the institution's risk-based premium
category. Based on these assessment rate modifications, the majority of BIF
members now pay only a $2,000 minimum annual premium and, therefore, BIF-insured
institutions pay, on average, 0.43 cents per $100 of deposits. The SAIF has not
achieved its designated reserve ration and is not anticipated to do so prior to
the year 2001. Therefore, SAIF premium rates for SAIF-insured members continue
to be set at an average of 23.7 cents per $100 of deposits. As a result of the
new assessment rate provisions, SAIF member institutions have been placed at a
competitive disadvantage based on higher deposit insurance premium obligations.
Congress is currently evaluating various proposals and bills concerning
the premium differential between the FDIC's BIF and SAIF funds and related
matters. The current proposal calls for a one-time assessment of approximately
85 to 90 basis points per $100 of SAIF deposits as of March 31, 1995. Both funds
would then, going forward, have the same lower deposit premiums. If the special
assessment were imposed at 85 basis points per $100 of insurable deposits, the
amount of the assessment to the Bank would be approximately $430,000. The
special assessment will have the effect of reducing the Bank's earnings and
capital by the after-tax amount of the assessment as of the date of enactment,
which is estimated to be $252,000 or $0.26 per share. FDIC premium expense would
then be reduced in future periods. Proposals under consideration also address
related issues, including (i) providing that certain bond obligations be borne
by all insured depository institutions (rather than solely by the SAIF); (ii)
the merger of the SAIF and BIF by January 1, 1998 (provided no FDIC-insured
depository institution is a savings association on that date); and (iii)
repealing the bad debt reserve accounting method currently available to thrift
savings associations such as the Bank, with certain provisions for deferred
recapture. The Bank is unable to predict when or whether any of the foregoing
legislation will be enacted, the amount or applicable retroactive date of any
one-time assessment, or the rates that might subsequently apply to assessable
SAIF deposits; however, management anticipates that the Bank, after
consideration of the one-time assessment, would continue to exceed all
regulatory minimum capital levels. Further, management does not anticipate that
any of the legislative proposals, if enacted, would have a material impact on
the Company's financial condition in future periods.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition operations or has violated any applicable
law, regulation, rule, order or condition imposed by the FDIC or the
Commissioner. Management of the Bank does not know of any practice, condition or
violation that might lead to the termination of deposit insurance.
On October 5, 1994, the FDIC issued an "Advanced Notice of Proposed
Rulemaking" pursuant to which the FDIC is soliciting comments on whether the
deposit-insurance assessment base currently provided for in the FDIC's
assessment regulations should be redefined. As a result of the recent transition
to a risk-based deposit insurance system, effective January 1, 1994, the
assessment base, which had been determined by statute pursuant to the FDI Act,
is now determined by the FDIC by regulation. At present, however, the FDIC's
assessment base regulations continue to be based on the statutory provisions
under the FDI Act. Under current law, insurance premiums paid to the FDIC are
calculated by multiplying the institution's assessment base (which equals total
domestic deposits, as adjusted for certain elements) by its assessment rate.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Based on the change to the new deposit insurance system, developments
in the financial services industry, changes in the activities of depository
institutions and other factors, the FDIC seeks comments on whether the
assessment base should be redefined. The FDIC has stated that review of the
definition of "assessment base" does not signal any intent to enhance the total
dollar amount of assessments collected, but that such redefinition may impact
the assessments paid on an institution-by-institution basis. Until final
regulations are adopted affecting the definition of an institution's assessment
base, the Bank cannot predict what impact such regulation may have on Bank
operations.
Management Strategy
Management's strategy has focused on managing the Company's interest
rate risk and maintaining credit quality by emphasizing residential lending,
primarily loans secured by one-to-four family, owner-occupied dwellings.
Residential Mortgage Lending Emphasis. The Company's primary investing
activity is the origination of one-to-four family residential mortgage loans
secured by owner-occupied properties. At March 31, 1996, $48.4 million or 68.3%
of net loans consisted of such loans. Mortgage loan originations totaled $22.7
million, $16.5 million and $27.4 million for the fiscal years ended March 31,
1996, 1995 and 1994, respectively. The Company generally originates ARM loans
for retention in its loan portfolio and generally sells all fixed rate loans
originated into the secondary market.
Management of Interest Rate Risk. The Company has attempted to reduce
its interest rate risk by emphasizing the origination of ARM loans for retention
in its loan portfolio and by selling substantially all of its fixed rate loans
originated. At March 31, 1996, $50.6 million or 84.9% of mortgage loans were ARM
loans. Management believes this strategy has reduced income due to lower initial
yields on these investments in comparison to longer-term fixed rate investments.
However, management believes reducing its exposure to interest rate fluctuations
tends to reduce the volatility of the Company's net interest income over the
long-term.
To maintain the Company's net interest margin, satisfy certain
requirements for favorable tax treatment and manage interest rate risk, the
Company has maintained a portfolio of mortgage-backed and related securities
held-to-maturity. The Company's mortgage-backed and related securities
held-to-maturity at March 31, 1996, were $5.4 million or 6.3% of total assets,
and at March 31, 1995, were $2.0 million or 2.9% of total assets.
Management has adopted a strategy designed to achieve acceptable levels
of matching of its assets and liabilities and there repricing characteristics.
The primary elements of this strategy involve emphasizing the origination and
purchase of adjustable-rate assets, and utilizing FHLB-Chicago advances to
purchase participation interests in loans with similar terms to maturities and
higher yields. Over the last five fiscal years, the Company has emphasized the
matching of interest rate sensitivities through the sale of fixed rate mortgage
loans originated, the origination of ARM loans, the repayment of fixed rate
mortgage assets, and the purchase of short-term and adjustable-rate
mortgage-backed and related securities. At March 31, 1996, the Company's
one-year interest rate sensitivity gap as a percentage of total assets was a
negative 4,26%. During periods of rising interest rates, a negative rate
sensitivity gap would tend to negatively affect net interest income; however,
during periods of falling interest rates, a negative interest rate sensitivity
gap would tend to positively affect net interest income.
In fiscal 1996, the Company began to leverage its capital base by using
the proceeds of borrowings from the FHLB-Chicago and deposits to originate
additional loans and purchase mortgage-backed and related securities. FHLB
advances increased to $12.6 million at March 31, 1996, compared to $3.6 million
at March 31, 1995. Primarily as a result of the leveraging strategy, the
Company's mortgage-backed and related securities portfolio increased to $5.4
million at March 31, 1996, compared to $2.0 million at March 31, 1995. In
addition, this leveraging strategy contributed to part of the increase in the
Company's total loan portfolio to $70.0 million at March 31, 1996, from $58.4
million at March 31, 1995. The Company intends to continue to leverage its
capital base by using the proceeds from additional FHLB-advances to originate
loans and purchase mortgage-backed securities.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Asset Quality. The Company emphasizes high asset quality in both its
investment portfolio and lending activities. Non-performing assets have ranged
between .54% and 2.1% of total assets during the last five fiscal years and were
0.95% of total assets at March 31, 1996. Cumulative gross charge-offs over the
last five fiscal years of $464,000 were due primarily to commercial loans made
in the mid-1980s. The remaining commercial loans in its portfolio are generally
performing and, management believes, adequately reserved. During the fiscal
years ended March 31, 1996, 1995 and 1994, the Company recorded provisions for
loan losses of $24,000, $17,000, and $24,000, respectively, to its allowance for
loan losses and had net charge-offs of $25,000, $19,000, $43,000, respectively.
The Company's allowance for loan losses at March 31, 1996, totaled $433,000 or
93.3% of cumulative gross charge-offs during the last five fiscal years.
Management currently believes the allowance for loan losses at March 31, 1996,
is at an adequate level and that future provisions for loan losses will be at
levels necessary only to cover charge-offs and general increases in gross loans.
Total loans delinquent 90 days or more increased from 10 loans totaling
$238,000 at March 31, 1995, to 26 loans totaling $631,000 at March 31, 1996.
Total loans delinquent 31-89 days increased from 35 loans totaling $1.1 million
to 83 loans totaling $2.4 million. Delinquencies were created by certain
deficiencies in dealer loan policies that subsequently have been revised.
Management views the increase as a major area of concern warranting increased
scrutiny. However, the latest available peer group comparison of nonperforming
loans and real estate owned as a percentage of total loans as prepared by
America's Community Bankers was 0.63% for the Company at December 31, 1995,
compared to 1.60% on a nation wide basis and 0.86% on a regional basis.
Management and Development of Customer Base. The Company has focused on
managing deposits to maintain its capital ratios and improve the stability of
its deposit base. In this regard, management has emphasized an increased level
of service to its customers to retain and attract core deposits. In 1988, the
Bank built and opened a new home office and implemented a strategy to expand the
services it offers beyond those services traditionally offered by thrift
institutions, including checking accounts, ATMs night depositories, safe deposit
boxes, drive-through banking, and investment products through its subsidiary, in
order to create broad banking relationships with its customers. This expansion
of services continues with the grand opening of the remodeled and expanded
branch office in New Richmond, Wisconsin in June 1996. The Company also
announced plans to expand the branch network by way of a new supermarket branch
in Clear Lake, Wisconsin scheduled to open in October 1996.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Comparison of Operating Results for the Fiscal Years Ended March 31, 1996 and
March 31, 1995
General
Net income for the fiscal year ended March 31, 1996, increased 7.95% to
$842,000 from $780,000 for the fiscal year ended March 31, 1995. Return on
average assets decreased to 1.06% for the fiscal year ended March 31, 1996, from
1.23% for the prior year and return on average equity decreased to 6.95% from
9.40% for the same years. Return on average assets was adversely affected by the
decrease in the interest rate spread from 3.87% for the fiscal year ended March
31, 1995, to 3.77% for the fiscal year ended March 31, 1996. Return on average
equity was adversely affected by the Conversion during the fiscal year ended
March 31, 1996, because it is the first entire fiscal year to reflect the
substantially increased equity. Since the conversion took place in October of
1994, less than six months of the fiscal year ended March 31, 1995, reflect, the
increased equity. Net interest income before provision for loan losses increased
23.1% to $3.2 million for the fiscal year ended March 31, 1996, from $2.6
million for the fiscal year ended March 31, 1995. This increase was primarily
due to an increase in interest income of $1.6 million, partially offset by an
increase in interest expense of $1.l million. Provision for loan losses
increased 41.2% to $24,000 for the fiscal year ended March 31, 1996, from
$17,000 for the fiscal year ended March 31, 1995. The increase reflects an
increase in loans charged off in the current year compared to the prior year.
Other operating income increased by $75,000 to $476,000 for the fiscal year
ended March 31, 1995, from $401,000 for the prior fiscal year primarily due to
an increase in gains on sale of mortgage loans of $42,000. The increase in gains
on sales of mortgage loans reflected the decrease in market rates of interest
during certain periods of the fiscal year ended March 31, 1996, that increased
the sales prices of the Company's mortgage loans sold. General and
administrative expenses for the fiscal year ended March 31, 1996, increased
$437,000 or 25.3% to $2.18 million from $1.74 million for the prior fiscal year,
primarily due to an increase of $280,000 in the expenses associated with the
Company's stock incentive plan and the Bank's Employee Stock Ownership Plan
("ESOP") a $107,000 increase in holding company expenses associated with the
establishment of the plans and operating as a public company, and a $33,000
increase in net occupancy expense that reflects the purchase of new data
processing equipment.
Net Interest Income
Net interest income for the fiscal year ended March 31, 1995, increased
23.1% to $3.2 million from $2.6 million for the prior year. The increase was due
to an increase in interest income of $1.6 million, partially offset by an
increase in interest expense of $1.l million. The improvement in net interest
income primarily reflects an increase in total interest-earning assets to $74.3
million for the fiscal year ended March 31, 1996 compared to $60.3 million for
the prior fiscal year. The increase in the Company's net earning asset position
was attributable primarily to an increase in gross loans funded by the increase
in advances from the FHLB-Chicago.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Interest Income
Interest income increased 32.7% to $6.5 million for the fiscal year
ended March 31, 1996 from $4.9 million for the fiscal year ended March 31, 1995,
as a result of an increase of $14.0 million in average interest-earning assets
to $74.3 million for the fiscal year ended March 31, 1996 and an increase of 66
basis points in the average yield to 8.71% for the fiscal year ended March 31,
1996. Interest income on loans increased 28.3% to $5.9 million for the fiscal
year ended March 31, 1996, from $4.6 million for the fiscal year ended March 31,
1995. The general increase in market rates of interest over the year resulted in
an increase in the average yield on all of the Company's major categories of
loans to 9.01% for the fiscal year ended March 31, 1996, compared to 8.31% for
the fiscal year ended March 31, 1995. The increase in the yield was the result
of the repricing upward of ARM loans and the origination of loans at current
higher interest rates. Average loans increased to $65.6 million during the
fiscal year ended March 31, 1996, from $54.8 million during the fiscal year
ended March 31, 1995. Interest on mortgage-backed and related securities
increased $270,000 to $353,000 for the fiscal year ended March 31, 1996, from
$83,000 for the prior fiscal year due to a increase in the average balance of
mortgage-backed and related securities from $1.2 million for the fiscal year
ended March 31, 1995 to $4.8 million for the fiscal year ended March 31, 1996,
and an increase of 60 basis points in average yield to 7.36% for the fiscal year
ended March 31, 1996. The increase in average balances of loans and
mortgage-backed and related securities were principally funded by an increase in
advances from the FHLB-Chicago. Interest on investments decreased $13,000 to
$209,000 for the fiscal year ended March 31, 1996, from $222,000 for the fiscal
year ended March 31, 1995, as a result of a decrease in the average yield of
investment securities to 5.11% for the fiscal year ended March 31, 1996 from
5.47% for the fiscal year ended March 31, 1995.
Interest Expense
Interest expense increased 49.8% to $3.3l million for the fiscal year
ended March 31, 1996, from $2.21 million for the fiscal year ended March 31,
1995. The general increase in the market rates of interest over the year
resulted in increases in average rates paid on all of the Company's major
categories of deposits to 4.69% for the fiscal year ended March 31, 1996, from
4.03% for the fiscal year ended March 31, 1995. Interest on savings increased
37.4% to $2.61 million for the fiscal year ended March 31, 1996, from $1.90
million for the fiscal year ended March 31, 1995. The increase in interest
expense on deposits was the result of an increase in average deposits to $55.7
million for the fiscal year ended March 31, 1996, from $47.0 million for the
fiscal year ended March 31, 1995. Interest on borrowings increased 119.2% to
$697,000 for the fiscal year ended March 31, 1996, from $318,000 for the fiscal
year ended March 31, 1995. The increase results from an increase in the average
rate on advances and other borrowings to 6.19% for the fiscal year ended March
31, 1996, from 5.33% for the fiscal year ended March 31, 1995, and a increase in
the average balances of advances from $6.0 million for the fiscal year ended
March 31, 1995, to $11.3 million for the fiscal year ended March 31, 1996.
Provision for Loan Losses
The provision for loan losses increased 41.2% to $24,000 for the fiscal
year ended March 31, 1996, from $17,000 for the fiscal year ended March 31,
1995. The desired level of allowance for loan losses is determined by the
Company's historical loan loss experience, the condition and composition of the
Company's loan portfolio and general conditions. The higher provisions during
the fiscal year ended March 31, 1996, reflects the fact that the Company's
charged-off $25,000 in loans during the year compared to $19,000 in loan's
charged-off during the fiscal year ended March 31, 1995. The higher provisions
during the fiscal year ended March 31, 1996, also reflects recognition by
management of the increase in the Company's real estate owned and in foreclosure
balances from $0 at March 31, 1995, to $127,000 at March 31, 1996. The allowance
for loan losses totaled $434,000 at March 31, 1995, and $433,000 at March 31,
1996, and represented .74% and .61% of gross loans and 83.0% and 62.5% of
non-performing loans, respectively. Management currently believes the allowance
for loan losses is at an adequate level to provide for potential loan losses and
that future provisions for loan losses will be at levels necessary to cover only
charge-offs and general increases in gross loans and non-performing loans.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Other Income
Other income increased 18.7% to $476,000 for the fiscal year ended
March 31, 1996, from $401,000 for the fiscal year ended March 31, 1995, due to
gains on sale of loans which increased to $61,000 for the fiscal year ended
March 31, 1996 from $19,000 for the fiscal year ended March 31, 1995. As
long-term interest rates decreased for a period during the fiscal year ended
March 31, 1996, the Company experienced increased demand for fixed rate loans
and the amount of loans sold increased from $1.7 million for the fiscal year
ended March 31, 1995 to $5.9 million for the fiscal year ended March 31, 1996.
In addition, as long-term interest rates decreased, the price of the loans sold
increased and the opportunity for gains on sale was enhanced. Other income
increased $35,000 to $117,000 for the fiscal year ended March 31, 1996, from
$82,000 for the prior fiscal year. This increase was primarily due to an
increase in the gains on sale of real estate lots owned by the Bank's wholly
owned subsidiary of $22,000 to $38,000 for the fiscal year ended March 31, 1996,
from $16,000 for the fiscal year ended March 31, 1995.
General and Administrative Expenses
General and administrative expenses increased $437,000 or 25.3% to
$2.18 million for the fiscal year ended March 31, 1996, from $1.74 million for
the prior fiscal year. The increase is partially due to an increase of $216,000
in salaries and employee benefits from $833,000 for the fiscal year ended March
31, 1995, to $1.05 million for the fiscal year ended March 31, 1996. The
increase reflects $144,000 for the fiscal year ended March 31, 1996, in expense
from accounting for the Company's stock incentive plan that requires under
applicable accounting standards that 61.1% of the three-year cost be amortized
in the first year. The accounting for this expense did not begin until the
approval of the Company's stock incentive plan in October 1995; and therefore no
expense was taken for the fiscal year ended in March 31, 1995. In addition, the
expense associated with the ESOP increased $135,000 to $135,000 for the fiscal
year ended March 31, 1996, from $0 for the fiscal year ended March 31, 1995. Net
occupancy expense increased $33,000 from $251,000 for the fiscal year ended
March 31, 1995, to $284,000 for the fiscal year ended March 31, 1996. The
increase is due to an increase in furniture and fixtures expenses associated
with the installation of a new data processing equipment in all three offices
during the period. Other expense increased $174,000 to $579,000 for the fiscal
year ended March 31, 1996, from $405,000 for the fiscal year ended March 31,
1995, due primarily to an increase in holding company expenses of $107,000 from
$16,000 for the fiscal year ended March 31, 1995. The expenses include $74,000
in legal fees related to the establishment of the employee incentive plans, the
preparation of the Company's 1995 Annual Report to Shareholders and proxy
statements, and assistance with the special and annual meetings of shareholders
held during the fiscal year. The expenses also include $27,000 associated with
operating as a public company such as accounting fees, transfer agent fees,
proxy solicitor fees, and NASDAQ fees, and $18,200 in director fees. General and
administrative expenses as a ratio of average assets was 2.74% for the fiscal
year ended March 31, 1996, compared to 2.75% for the fiscal year ended March 31,
1995, due to the increase in assets over the period. The Company's general and
administrative expenses as a percentage of average assets are higher than many
similar institutions for several reasons, including the need to support three
full-service branches, service-related costs on loans sold to secondary market
investors and the support of its insurance and investment activities through its
subsidiary.
Income Tax Expense
Income tax expense increased 17.8% to $597,000 for the fiscal year
ended March 31, 1996, from $507,000 for the fiscal year ended March 31, 1995.
The increase reflects the increase in income before taxes from $1.29 million for
the fiscal year ended March 31, 1995, to $1.44 million for the fiscal year ended
March 31, 1996. The effective tax rates were 41.5% and 39.4% for the fiscal
years ended March 31, 1996, and 1995, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Comparison of Operating Results for the Fiscal Years Ended March 31, 1995 and
March 31, 1994
General
Net income for the fiscal year ended March 31, 1995, increased 26.6% to
$780,000 from $616,000 for the fiscal year ended March 31, 1994. Return on
average assets increased to 1.23% for the fiscal year ended March 31, 1995, from
1.02% for the prior year and return on average equity decreased to 9.43% from
14.12% for the same years. Return on average equity was adversely affected by
the stock conversion during the fiscal year ended March 31, 1995, because it
substantially increased equity. Net interest income before provision for loan
losses increased 18.2% to $2.6 million for the fiscal year ended March 31, 1995,
from $2.2 million for the fiscal year ended March 31, 1994. This increase was
primarily due to an increase in interest income of $496,000, partially offset by
an increase in interest expense of $19,000. Provision for loan losses decreased
29.2% to $17,000 for the fiscal year ended March 31, 1995, from $24,000 for the
fiscal year ended March 31, 1994. The decrease reflects a reduction in loans
charged off in the current year compared to the prior year. Other operating
income decreased by $224,000 to $401,000 for the fiscal year ended March 31,
1995, from $625,000 for the prior fiscal year primarily due to a decrease in
gains on sale of mortgage loans of $203,000. The decline in gains on sales of
mortgage loans reflected the increase in market rates of interest during the
fiscal year ended March 31, 1995, in response to monetary actions by the Board
of Governors of the Federal Reserve System that reduced the sales prices of the
Company's mortgage loans sold. General and administrative expenses for the
fiscal year ended March 31, 1995, increased 1.2% to $1.74 million from $1.72
million for the prior fiscal year.
As shown in the table below, the Company's net income increased
significantly during the third quarter of fiscal year 1995:
<TABLE>
Fiscal 1995 Quarters Fiscal Year
Ended March 31,
<CAPTION>
First Second Third Fourth 1995
----- ------ ----- ------ ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Net interest income $574 $625 $722 $720 $2,641
Provision for loan losses 3 3 5 6 17
--- --- --- --- -----
Net interest income after
provision for loan losses 571 622 717 714 2,624
--- --- --- --- -----
Non-interest income 101 120 87 93 401
General and administrative
expense 422 433 420 463 1,738
--- --- --- --- -----
Income before income tax
expense 250 309 384 344 1,287
Income tax expense 97 127 150 133 507
---- ---- ---- ---- -----
Net income $153 $182 $234 $211 $ 780
==== ==== ==== ==== =====
</TABLE>
The primary reason for the increase in net income during the third and
fourth quarter of fiscal 1995 was the investment of the proceeds of the
conversion from mutual to a stock company in October 1994.
Net Interest Income
Net interest income for the fiscal year ended March 31, 1995, increased
18.2% to $2.6 million from $2.2 million for the prior year. The increase was due
to an increase in interest income of $496,000, partially offset by an increase
in interest expense of $19,000. The improvement in net interest income primarily
reflects an increase in the excess of the Company's average interest-earning
assets over average interest-bearing liabilities of $7.3 million for the fiscal
year ended March 31, 1995, compared to $4.3 million for the prior fiscal year.
The increase in the Company's net earning asset position was attributable
primarily to increased gross loans funded by the proceeds from the conversion
and a reduction in interest-bearing liabilities.
MANAGEMENT'S DISCUSSION (CONT.)
Interest Income
Interest income increased 11.4% to $4.9 million for the fiscal year
ended March 31, 1995, from $4.4 million for the fiscal year ended March 31,
1994, as a result of an increase of $1.8 million in average interest-earning
assets to $60.3 million for the fiscal year ended March 31, 1995 and an increase
of 60 basis points in average yield to 8.05% for the fiscal year ended March 31,
1995. Interest income on loans increased 15.0% to $4.6 million for the fiscal
year ended March 31, 1995, from $4.0 million for the fiscal year ended March 31,
1994. The general increase in market rates of interest over the year resulted in
an increase in the average yield on all of the Company's major categories of
loans to 8.31% for the fiscal year ended March 31, 1995, compared to 7.81% for
the fiscal year ended March 31, 1994. The increase in the yield was the result
of the repricing upward of ARM loans and the origination of loans at current
higher interest rates. Average loans increased to $54.8 million during the
fiscal year ended March 31, 1995, from $51.3 million during the fiscal year
ended March 31, 1994. Interest on mortgage-backed and related securities
decreased $102,000 to $83,000 for the fiscal year ended March 31, 1995 from
$185,000 for the prior fiscal year due to a reduction in the average balance of
mortgage-backed and related securities from $3.0 million for the fiscal year
ended March 31, 1994, to $1.2 million for the fiscal year ended March 31, 1995,
due to principal payments and prepayments during the year, partially offset by
an increase of 70 basis points in average yield to 6.74% for the fiscal year
ended March 31, 1995. Interest on investments increased $54,000 to $222,000 for
the fiscal year ended March 31, 1995 from $168,000 for the fiscal year ended
March 31, 1994 as a result of a general increase in market rates of interest and
an increase in the average balance of investment securities to $2.9 million for
the fiscal year ended March 31, 1995, from $2.3 million for the fiscal year
ended March 31, 1994.
Interest Expense
Interest expense increased .45% to $2.21 million for the fiscal year
ended March 31, 1995, from $2.20 million for the fiscal year ended March 31,
1994. The general increase in the market rates of interest over the year
resulted in increases in average rates on all of the Company's major categories
of deposits to 4.03% for the fiscal year ended March 31, 1995, from 4.01% for
the fiscal year ended March 31, 1994. Interest on deposits increased 2.2% to
$1.90 million for the fiscal year ended March 31, 1995, from $1.86 million for
the fiscal year ended March 31, 1995. The increase in interest expense on
deposits was the result of an increase in deposits to $50.6 million at March 31,
1995, from $47.5 million at March 31, 1994. Interest on borrowings decreased
5.6% to $318,000 for the fiscal year ended March 31, 1995, from $337,000 for the
fiscal year ended March 31, 1994. The decrease results from an increase in the
average rate on advances and other borrowings to 5.33% for the fiscal year ended
March 31, 1995 from 4.31% for the fiscal year ended March 31, 1994 and a
decrease in the average balances of advances from $7.8 million for the fiscal
year ended March 31, 1994, to $6.0 million for the fiscal year ended March 31,
1995.
Provision for Loan Losses
The provision for loan losses decreased 29.2% to $17,000 for the fiscal
year ended March 31, 1995 from $24,000 for the fiscal year ended March 31, 1994.
The desired level of allowance for loan losses is determined by the Company's
historical loan loss experience, the condition and composition of the Company's
loan portfolio and general conditions. The higher provisions during the fiscal
year ended March 31, 1994 reflects the fact that the Company's charged off
$43,000 in loans during the year compared to $19,000 in loans charged-off during
the fiscal year ended March 31, 1995. The lower provisions during the fiscal
year ended March 31, 1995 also reflect recognition by management of the
improvement in the Company's real estate owned and in foreclosure balances from
$72,000 at March 31, 1994, to $0 at March 31, 1995. The allowance for loan
losses totaled $434,000 at March 31, 1995 and $436,000 at March 31, 1994, and
represented .74% and .85% of gross loans and 83.0% and 173.0% of non-performing
loans, respectively. Management currently believes the allowance for loan losses
is at an adequate level to provide for potential loan losses and that future
provisions for loan losses will be at levels necessary to cover only charge-offs
and general increases in gross loans and non-performing loans.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Other Income
Other income decreased 35.8% to $401,000 for the fiscal year ended
March 31, 1995 from $625,000 for the fiscal year ended March 31, 1994 due to
gains on sale of loans which decreased to $19,000 for the fiscal year ended
March 31, 1995 from $222,000 for the fiscal year ended March 31, 1994. As
long-term interest rates increased during the fiscal year ended March 31, 1995,
the Company experienced decreased demand for fixed rate loans and the
amount of loans sold decreased from $16.0 million for the fiscal year ended
March 31, 1994, to $1.7 million for the fiscal year ended March 31, 1995. In
addition, as long-term interest rates increased, the price of the loans sold
decreased and the opportunity for gains on sale was diminished. Other income
decreased $42,000 to $82,000 for the fiscal year ended March 31, 1995 from
$124,000 for the prior fiscal year. The decrease in other income was partially
offset by an increase in service charges on deposits of $28,000 from $199,000
for the period ended March 31, 1994, to $227,000 for the period ended March 31,
1995.
General and Administrative Expenses
General and administrative expenses increased 1.2% to $1.74 million for
the fiscal year ended March 31, 1995 from $1.72 million for the prior fiscal
year. The increase is primarily due to an increase of $22,000 in net occupancy
expense from $229,000 for the fiscal year ended March 31, 1994 to $251,000 for
the fiscal year ended March 31, 1995. The increase is due to an increase in
furniture and fixtures expenses associated with the installation of two remote
ATM machines during the period. General and administrative expenses as a ratio
of average assets was 2.83% for the fiscal year ended March 31, 1994, compared
to 2.75% for the fiscal year ended March 31, 1995, due to the increase in assets
over the period. The Company's general and administrative expenses as a
percentage of average assets are higher than many similar institutions for
several reasons, including the need to support three full-service branches,
service-related costs on loans sold to secondary market investors and the
support of its insurance and investment activities through its subsidiary.
Income Tax Expense
Income tax expense increased 17.4% to $507,000 for the fiscal year
ended March 31, 1995 from $432,000 for the fiscal year ended March 31, 1994. The
increase reflects the increase in income before taxes from $1.0 million for the
fiscal year ended March 31, 1994, to $1.3 million for the fiscal year ended
March 31, 1995. The effective tax rates were 41.2% and 39.4% for the fiscal
years ended March 31, 1994 and 1995, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Financial Condition
The following table summarizes certain information relating to the
Company's consolidated balance sheets at the dates indicated.
At March 31,
1996 1995
---- ----
(In thousands)
Assets
Cash and cash equivalents $3,412 $3,086
Securities available-for-sale 2,859 2,656
Mortgage-backed and related securities 5,373 2,001
FHLB stock 803 417
Loans receivable, net 70,680 58,400
Liabilities
Deposits 57,256 50,627
Advances and other borrowings 16,912 5,802
Equity, substantially restricted 11,864 12,038
Cash and cash equivalents increased to $3.4 million at March 31, 1996
from $3.1 million at March 31, 1995. The increases reflect the higher cash and
interest bearing deposit balances required by the growth of the Company from
$68.8 million in assets at March 31, 1995 to $86.4 million at March 31, 1996.
Securities available-for-sale increased to $2.9 million at March 31,
1996 from $2.7 million at March 31, 1995. The increases reflect the higher
liquidity balances required by regulations that are determined by the balances
of deposits, advances and other borrowings.
Mortgage-backed and related securities held-to-maturity increased to
$5.4 million at March 31, 1996, from $2.0 million at March 31, 1995. The
increase from March 31, 1996 to March 31, 1995 was the result of management's
decision to purchase an additional $3.9 million in mortgage-backed and related
securities, partially offset by principal repayments. The securities are used to
provide collateral for deposits in excess of the $100,000 insurance limit
through the retail repurchase agreements program found under Other Borrowed
Money.
Net loans receivable was $70.7 million and $58.4 million at March 31,
1996, and 1995, respectively. One to four family real estate loans increased
from $42.5 million at March 31, 1995 to $48.4 million at March 31, 1996, as a
result of the Company's ability to originate ARM loans that it retains in its
loan portfolio. Consumer loans increased to $6.9 million at March 31, 1996, from
$4.4 million at March 31, 1995. Other real estate loans increased to $11.3
million at March 31, 1996 from $7.6 million at March 31, 1995, due primarily to
the purchase of additional participation loans.
Deposits were $57.3 million and $50.6 million at March 31, 1996 and
1995, respectively. Deposits are the Company's primary source of externally
generated funds. The level of deposits is heavily influenced by factors such as
the general level of short- and long-term interest rates as well as alternative
yields that investors may obtain on competing investment instruments such as
money market mutual funds. Non-certificate of deposit average balances totaled
$19.1 million and $14.8 million at March 31, 1996 and 1995, respectively and
reflect the Company's marketing efforts to build multiple relationships with its
customers through an emphasis on checking accounts. The average certificates of
deposit balances totaled $36.6 million and $32.3 million, at March 31, 1996 and
1995, respectively The Company attempts to maintain relationships with customers
withdrawing certificates of deposit by providing brokerage services for
alternative investments through its subsidiary.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
FHLB-Chicago advances and other borrowings increased to $16.9 million at
March 31, 1996 from $5.8 million at March 31, 1995 and the average rate
increased by 86 basis points to 6.19% at March 31, 1996 from 5.33% at March 31,
1995. The Company uses FHLB-Chicago advances as a funding source in periods when
market rates on certificates of deposit exceed those offered by the
FHLB-Chicago. FHLB-Chicago advances generally are fixed-rate and short-term with
maturities of less than 10 years. The Open Line of Credit Program at the
FHLB-Chicago adjusts the rate on a daily basis, so in a rising interest rate
environment such borrowings may present the risk that the interest rates of
these borrowings will increase. The Company also uses borrowings from the
FHLB-Chicago to manage the total asset/liability portfolio of the Company. In
future periods, the Company intends to continue to leverage its capital base by
using the proceeds from additional FHLB-Chicago advances to originate additional
loans and purchase mortgage-backed and related securities.
Shareholders' equity decreased to $11.9 million at March 31, 1996
compared to $12.0 million at March 31, 1995. The decrease from March 31, 1995 to
March 31, 1996 results from the repurchase of 51,625 shares under a repurchase
program at a cost of $561,000 and the repurchase of 41,300 shares of stock to
fund the Company's stock incentive plan that results in a $319,000 entry as
unearned restricted stock plan award at March 31, 1996.. These repurchases were
offset by net income for the fiscal year ended March 31, 1996 of $842,000. The
decrease in shareholders' equity in fiscal 1996 was offset in part by a $120,000
unrealized gain, net of deferred taxes of $47,000, on the Company's securities
available-for-sale. The Company's securities available-for-sale are accounted
for at fair value, with any unrealized gains or losses accounted for as an
adjustment to retained earnings rather than to the statement of operations. The
market appreciation in the Company's securities available-for-sale at March 31,
1996 was primarily the result of the decrease in market rates of interest
experienced during the period. Further decreases in market rates of interest
would likely result in additional appreciation in the market value of the
Company's securities. held for sale.
Liquidity, Capital Resources and Regulatory Capital
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans, principal and interest payments on
mortgage-backed and related securities and FHLB-Chicago advances. Although
maturity and scheduled amortization of loans are predictable sources of funds,
deposit flows, mortgage prepayments and prepayments on mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Principal collected for the fiscal year
ended March 31, 1996 decreased slightly to $19.5 million from $20.0 million for
the fiscal year ended March 31, 1996.
The primary investing activity of the Company is the origination of
mortgage loans. For the fiscal years ended March 31, 1996 and 1995, the Company
originated and purchased loans in the amount of $37.3 million and $28.5 million,
respectively. The Company purchased $4.5 million and $1.3 million of investment
securities and mortgage-backed and related securities during the fiscal years
ended March 31, 1996 and 1995, respectively. For the fiscal years ended March
31, 1996 and 1995, these activities were funded primarily by principal
repayments on loans of $18.9 million and $19.5 million, respectively; net
proceeds from short-term borrowings of $2.3 million and ($50,000), respectively;
and proceeds from long-term financing of $9.5 million, and $0.22 million,
respectively.
The Company is required to maintain minimum levels of liquid assets
under the Commissioner's regulations for state-chartered mutual savings banks.
Savings banks are required to maintain an average daily balance of liquid assets
(including cash, certain time deposits, certain bankers' acceptances, certain
corporate debt securities and highly rated commercial paper, securities of
certain mutual funds and specified United States government, state or federal
agency obligations) of not less than 8% of its average daily balance of net
withdrawal accounts plus short-term borrowings. The Company's liquidity ratios
were 8.5% and 10.1% at March 31, 1996 and 1995, respectively. The Company
adjusts its liquidity levels to meet various funding needs and to meet its asset
and liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At March 31, 1996 and 1995, cash
and cash equivalents were $3.4 million and $3.1 million, respectively. The
increase in cash and cash equivalents reflects the growth in the Company's
liability bases during the year.
MANAGEMENT'S DISCUSSION (CONT.)
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds are
generally invested in short-term investments such as a cash management account
or overnight deposits at the FHLB-Chicago. Whenever the Company requires funds
beyond its ability to generate them internally, additional sources of funds are
available and obtained from borrowings from the FHLB-Chicago. The Company
utilizes its borrowing capabilities on a regular basis. At March 31, 1996,
FHLB-Chicago advances were $12.6 million or 16.9% of total liabilities and at
March 31, 1995, FHLB-Chicago advances were $3.6 million or 6.35% of total
liabilities. The Company also had other borrowings consisting of repurchase
agreements amounting to $4.4 million and $2.2 million at March 31, 1996 and
1995, respectively. The Company did not have any reverse repurchase agreements
outstanding at any of the aforementioned periods. In a rising interest rate
environment, such short-term borrowings present the risk that upon maturity, the
borrowings will have to be replaced with higher rate borrowings.
At March 31, 1996, the Company had outstanding loan commitments of $4.6
million. The Company had $1.6 million in commitments to purchase mortgage-backed
and related securities at that date. The Company anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process prior to the issuance of firm commitments.
Certificates of deposit that are scheduled to mature in one year or less at
March 31, 1996 were $28.8 million. Based on its historical experience,
management believes that a significant portion of such deposits will remain with
the Company.
Effective June 30, 1993, the Bank, as a Wisconsin chartered mutual
savings bank, is subject to regulation by the FDIC and the Commissioner.
Applicable FDIC regulations require institutions to meet three capital
standards: (i) "Tier 1 capital" in an amount not less than 3% of total assets;
(ii) "Tier 1 capital" in an amount not less than 4% of risk-weighted assets; and
(iii) "total capital" in an amount not less than 8% of risk-weighted assets.
Wisconsin chartered savings banks also are required to maintain a minimum
capital to assets ratio of 6%. The percentage of assets for Wisconsin regulatory
capital purposes is based on total unconsolidated assets. Note 14 of the Notes
to the Company's Audited Consolidated Financial Statements contains a summary of
the Bank's compliance with its regulatory capital standards at March 31, 1996.
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements and Notes thereto have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all of the assets
and liabilities of the Company are monetary in nature. As a result, interest
rates have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Pending Accounting Developments
The Financial Accounting Standards Board (`FASB') issued Statement of
Financial Standards (`SFAS') No. 123 in October 1995 relative to accounting and
reporting standards for stockbased employee compensation plans. SFAS No. 123 is
effective for fiscal years beginning after December 31, 1995. The Statement
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method for
all employee stock compensation plans. However, the Statement also allows an
entity to continue to measure compensation cost for these plans using an
intrinsic value based method prescribed by Accounting Principles Board Opinion
No. 25 (APB No. 25). Entities electing to retain the accounting treatment under
APB No. 25 must make pro forma footnote disclosure of net income and earnings
per share as if the fair value based method of accounting defined in this
statement had been applied. Management has not decided which method it will
elect.
MANAGEMENT'S DISCUSSION (CONT.)
The FASB issued SFAS No. 122 in July, 1995 relative to accounting and
reporting for mortgage servicing rights. SFAS No. 122 is effective for years
beginning after December 31, 1995. The Statement requires that a mortgage
banking enterprise recognize as a separate asset the rights to service mortgage
loans for others, whether those rights are purchased or originated. The Company
anticipates that the adoption of the Statement will not have a material effect
on the financial condition or results of operation.
Forward-Looking Statements
The discussion in this Annual Report includes certain forward-looking
statements based on current management expectations. Factors which could cause
future results to differ from these expectations include the following: general
economic conditions; legislative and regulatory initiatives; monetary and fiscal
policies of the federal government; deposit flows; the cost of funds; general
market rates of interest; interest rates on competing investments; demand for
loan products; demand for financial services; changes in accounting policies or
guidelines; and changes in the quality or composition of the Company's loan and
investment portfolios. Additional factors are described in the Company's other
reports filed with the Securities and Exchange Commission.
Asset/Liability Management
The Company's profitability, like that of most financial institutions,
depends to a large extent upon its net interest income, which is the difference
between interest earned on interest-earning assets, such as loans and
investments, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. Net interest income is significantly affected by changes in
market interest rates. During periods of rising interest rates, the Company is
required to pay higher rates to attract deposits that can result in a decline in
net interest income if the Company is unable to increase the yield on its
interest-earning assets sufficiently to compensate for the increase in its cost
of funds. Conversely, during periods of declining interest rates, the Company
may experience prepayments of its fixed rate earning assets and downward
adjustments on its adjustable rate assets which can result in a decrease in net
interest income if the Company is unable to lower its cost of funds sufficiently
to compensate for the decrease in its asset yields.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it matures or reprices within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time
period. An interest rate sensitivity gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities that mature or reprice within a specified time period. An interest
rate sensitivity gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets that
mature or reprice within a specified time period.
In an attempt to manage vulnerability to interest rate changes,
management closely monitors the Company's interest rate risk. The Company has
established an investment strategy through its Asset/Liability Committee.
Management continually reviews the Company's interest rate risk position,
maturing securities and borrowings, interest rates and programs for raising
deposits and originating loans, and develops policies regarding these issues.
The Board of Directors reviews quarterly asset/liability management and
investment strategy reports prepared by management.
The Company utilizes basic strategies in managing its assets and
liabilities by managing or maximizing the net interest income under various
interest rate scenarios. More complex techniques such as hedging through the use
of options, financial futures, and interest rate swaps are not utilized. In
addition to monitoring interest rate risk on a continual basis, the Company
reviews deposit rates weekly. The emphasis has been on prudent pricing as
opposed to increasing market share, and the Company has supplemented and
substituted deposits using FHLB-Chicago advances in past periods when advance
rates are more attractive than those obtainable on retail deposits.
MANAGEMENT'S DISCUSSION (CONT.)
Generally, the Company utilizes the following strategies to manage its
interest rate risk: (i) the Company sells substantially all of its fixed rate
loans originated; (ii) the Company seeks to originate and retain ARM loans and
mortgage-backed and related securities with short- to medium-term periods to
re-pricing; (iii) the Company attempts to extend the maturities of deposits when
deemed cost effective through the pricing and promotion of certificates of
deposit with longer terms, and periodically utilizes deposit marketing programs
offering maturity and repricing terms structured to complement the repricing and
maturity characteristics of the existing asset/liability mix; and (iv) the
Company utilizes longer-term borrowings from the FHLB-Chicago to manage its
assets and liabilities and enhance earnings. One of the Company's
asset/liability management techniques involves borrowing from the FHLB-Chicago
and utilizing proceeds thereof to invest in assets that mature at the same time
or close to the same time as the advances are due. This use of FHLB-Chicago
advances is part of the overall interest rate risk management strategy of the
company. At March 31, 1996, FHLB-Chicago advances were $12.6 million or 14.6% of
total assets, compared to $3.6 million or 5.2 % of total assets at March 31,
1995.
Originating ARM rate loans and investing in adjustable-rate
mortgage-backed and related security has enabled the Company to reduce interest
rate risk by more closely matching the terms and repricing characteristics of
its assets and liabilities. In addition, because of the relative liquidity of
mortgage-backed and related securities, the Company can restructure its
interest-earning asset portfolios more quickly and effectively in a changing
interest rate environment. The Company's ARM loans and ARM mortgage-backed and
related securities typically have annual and lifetime interest rate caps that
reduce their ability to protect the Company against a prolonged and significant
increase in interest rates. Further, mortgage-backed and related securities are
subject to reinvestment risk. For example, during periods of falling interest
rates, mortgage-backed and related securities are more likely to prepay, and the
Company may not be able to reinvest the proceeds from prepayments in securities
or other assets with yields similar to those of the prepaying mortgage-backed
and related securities. However, mortgage-backed and related securities also are
subject to extension risk, which is the risk that the effective maturity of the
security may increase in a rising interest rate environment. The market value of
a security with a longer maturity typically is more sensitive to changes in
market rates of interest, and rising interest rates may have a more pronounced
adverse effect on the market value of mortgage-backed and related securities
than on other types of investment securities.
At March 31, 1996, total interest-bearing liabilities repricing within
one year exceeded total interest-bearing assets repricing in the same period by
$ 3.7 million, representing a negative cumulative one-year interest rate
sensitivity gap equal to 6.12% of total assets. During periods of rising
interest rates, a negative interest rate sensitivity gap would tend to
negatively affect net interest income while a positive interest rate sensitivity
gap would tend to positively affect net interest income. Notwithstanding the
positive effect on net interest income anticipated as a result of falling
interest rates due to the Company's one-year gap position, the Company could
experience substantial prepayments of its fixed rate mortgage loans during
periods of falling interest rates, which may result in the reinvestment of such
proceeds at market rates which are lower than current rates.
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
The following table sets forth at March 31, 1996 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
<TABLE>
Amount Maturing or Repricing as of March 31, 1996
-----------------------------------------------------------------------
<CAPTION>
More Than More Than
Within Four to One Year Three years
Three Twelve to Three to Five Over five
Months Months Years Years Years Total
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets(1)
Mortgage loans:
Fixed rate $ 516 $ 613 $ 1,113 $ 1,584 $ 5,221 $ 9,047
Adjustable rate 11,635 25,803 7,982 5,137 - - 50,557
Consumer loans 624 655 2,758 2,798 62 6,897
Commercial loans 3,002 841 548 221 - - 4,612
Mortgage-backed securities:
Fixed rate - - - - - - - - 4,629 4,629
Adjustable rate 448 296 - - - - - - 744
Interest bearing deposits 2,465 - - - - - - - - 2,465
Investment securities 114 - - 2,800 - - 803 3,717
------- ------- ------- --------- ------ -------
Total interest-earning assets $18,804 $28,208 $ 5,201 $ 9,740 $10,715 $82,668
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Deposits(2):
Certificates of deposit 6,451 22,380 7,524 3,226 290 39,871
Money market 231 695 555 583 250 2,314
NOW accounts 824 2,473 1,978 2,077 890 8,242
Passbook savings 678 2,054 1,639 1,721 737 6,829
Borrowings(3) 3,459 11,447 1,400 419 187 16,912
------- ------- ------- ------- ------- ------
Total interest-bearing liabilities $11,643 $39,049 $13,096 $ 8,026 $ 2,354 $74,168
======= ======= ======= ======= ======= =======
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $7,161 $(10,841) $ 2,105 $ 1,714 $ 8,361 $ 8,500
====== ======== ======= ======= ======= =======
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities $7,161 $ (3,680) $(1,575) $ 139 $ 8,500 $ 8,500
====== ======== ======= ======= ======= =======
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets 8.29% -4.26% -1.82% 0.16% 9.84% 9.84%
===== ====== ====== ===== ===== =====
<FN>
(1) Adjustable and floating rate assets are included in the period in
which interest rates are next scheduled to adjust rather than in the period
in which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization.
(2) Although the Company's negotiable order of withdrawal ("NOW") accounts
and passbook savings accounts generally are subject to immediate
withdrawal, management considers a certain historical amount of such
accounts to be core deposits having significantly longer effective
maturities and times to repricing based on the Company's historical
retention of such deposits in changing interest rate environments. NOW
accounts and passbook savings accounts are assumed to be withdrawn at
annual rates of 40%, 40% and 79%, respectively, of the declining balance of
such accounts during the period shown. The withdrawal rates used are higher
than the Company's historical rates but are considered by management to be
more indicative of expected withdrawal rates currently. Much of the recent
growth in these deposit accounts is assumed to be the result of low
interest rates and it is assumed that the accounts are more susceptible to
withdrawal than in the past. If all of the Company's NOW accounts, passbook
savings accounts and money market deposit accounts had been assumed to be
subject to repricing within one year, the one-year cumulative deficiency of
interest-earning assets over interest-bearing liabilities would have been
$0.4 million or 0.6% of total assets.
(3) Adjustable and floating rate borrowings are included in the period
in which their interest rates are next scheduled to adjust rather than in
the period in which they are due.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans and mortgage-backed and
related securities, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. In addition, the proportion of
ARM loans and mortgage-backed and related securities in the Company's portfolios
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the table. Finally, the ability of
many borrowers to service their adjustable rate debt may decrease in the event
of an interest rate increase.
Average Balance Sheet
The following table sets forth certain information relating to the
Company's consolidated average balance sheets and the consolidated statements of
operations at and for the fiscal years ended March 31, 1994, 1995 and 1996, and
reflects the average yields on interest-earning assets and average rates on
interest-bearing liabilities for the periods indicated. Such yields and rates
are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown. Average balances are derived principally from average monthly
balances and include non-accruing loans. Interest income on non-accrual loans is
reflected in the period it is collected and not in the period it is earned. Such
amounts are not material to net interest income or net change in net interest
income in any period. Non-accruing loans are included in the average balances
and do not have a material effect on the average yield.
<PAGE>
MANAGEMENT' S DISCUSSION(CONT.)
<TABLE>
Fiscal Years Ended March 31,
1996 1995 1994
-------------------------------------------------------------------------------------
<CAPTION>
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans ......................... $55,624 $4,858 8.73% $48,446 $3,885 8.02% $45,254 $ 3,467 7.66%
Commerical loans ....................... 3,969 462 11.64 3,503 366 10.45 3,564 314 8.81
Consumer loans ......................... 6,022 591 9.81 2,834 299 10.55 2,446 225 9.20
------ ----- ----- ----- ---- ----- ----- ---- ----
Total loans ........................ 65,615 5,911 9.01% 54,783 4,550 8.31% 51,264 4,006 7.81%
Mortgage-backed and related securities . 4,794 353 7.36 1,232 83 6.74 3,048 185 6.07
Interest bearing deposits in other
financial institutions ............. 430 25 5.82 1,004 42 4.18 1,484 31 2.09
Investment securities .................. 2,937 150 5.11 2,871 157 5.47 2,313 110 4.76
Federal Home Loan Bank stock ........... 501 34 6.79 417 23 5.52 425 27 6.35
----- ----- ---- ------ ------ ---- ----- ------ ----
Total interest-earning assets ...... 74,277 $6,473 8.71% 60,307 $4,855 8.05% 58,534 $4,359 7.45%
------- ------ -------
Total assets ....................... $79,468 $63,160 $60,679
======= ======= =======
Liabilities and retained earnings:
Deposits:
NOW accounts(1) ........................ $10,649 $ 169 1.59% $ 6,659 $ 133 2.00% $ 7,270 $ 160 2.20%
Money market deposit accounts .......... 1,517 54 3.56 - - - - - - 146 5 - -
Passbook ............................... 6,956 174 2.50 8,101 193 2.38 7,415 186 2.51
Certificates of deposit ................ 36,626 2,217 6.05 32,259 1,570 4.87 31,560 1,507 4.78
------ ----- ---- ------ ----- ---- ------ ----- ----
Total deposits ..................... 55,748 2,614 4.69 47,019 1,896 4.03 46,391 1,858 4.01
Advances and other borrowings ............. 11,263 697 6.19 5.965 318 5.33 7,823 337 4.31
------ ----- ----- ------ ----- ---- ------ ----- ----
Total interest-bearing liabilities ..... 67,011 3,311 4.94 52,984 2,214 4.18% 54,214 2,195 4.05%
Non-interest bearing liabilities .......... 337 1,878 2,101
Equity .................................... 12,121 8,298 4,364
------- ------- -------
Total liabilities and retained earnings $79,468 $63,160 $60,679
======= ======= =======
Net interest income/interest rate spread(2) $3,162 3.77% $2,641 3.87% $2,164 3.40%
====== ===== ====== ===== ====== =====
Net earning assets/net interest margin(3) . $ 7,266 4.26% $ 7,323 4.38% $ 4,320 3.70%
======= ===== ======= ===== ======= =====
Average interest-earning assets to
average interest-bearing liabilities ... 1.11 1.14 1.08
==== ==== ====
------------------------
<FN>
(1) Includes non-interest bearing NOW accounts.
(2) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-
bearing liabilities.
(3) Net interest margin represents net interest income divided by
average interest-earning assets.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Rate/Volume Analysis
The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (change
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
Fiscal Year Ended March 31, 1996 Fiscal Year Ended March 31, 1995
Compared to Compared to
Fiscal Year Ended March 31, 1995 Fiscal Year Ended March 31, 1994
Increase(Decrease) Increase(Decrease)
Due to Due to
--------------------------------------------------------------------------------------
<CAPTION>
Rate Volume Total Rate Volume Total
---------------------------------------------------------------------------------------
(In thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans $407 $ 954 $1,361 $260 $ 284 $544
Mortgage-backed and related securities 9 261 270 21 (123) (102)
Deposits 12 (29) (17) 24 (13) 11
Securities (11) 4 (7) 17 30 47
FHLB stock 5 6 11 (4) - (4)
---- ----- ----- --- --- ---
Total 422 1,196 1,618 318 178 496
--- ----- ----- --- --- ---
Interest-bearing liabilities:
Deposits 336 382 718 13 25 38
Borrowings 61 318 379 72 (91) (19)
--- --- ----- -- -- --
Total 397 700 1,097 85 (66) 19
--- --- ----- -- --- --
Net change in net interest income $ 25 $ 496 $ 521 $233 $ 244 $477
==== ====== ====== ==== ===== ====
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Northwest Equity Corp.
We have audited the accompanying consolidated balance sheets of Northwest Equity
Corp. and Subsidiary as of March 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Northwest Equity Corp. and Subsidiary at March 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years ended March 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Keller & Yoder
KELLER & YODER
Wisconsin Rapids, Wisconsin
April 26, 1996
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31,
(In Thousands)
ASSETS
1996 1995
---- ----
Cash - including interest bearing deposits of $2,465
at March 31, 1996 and $2,334 at March 31, 1995 $3,412 $3,086
Securities available-for-sale - fair value (Note 2) 2,859 2,656
Mortgage backed securities - market value of $5,386 at
March 31, 1996 and $1,991 at March 31, 1995 (Note 3) 5,373 2,001
Loans held for sale - at market 717 - -
Loans receivable - net (Note 4) 69,963 58,400
Foreclosed properties and properties subject to
foreclosure (Note 5) 127 - -
Investment in Federal Home Loan Bank stock - at
cost - which approximates fair value 803 417
Premises and equipment (Note 6) 2,199 1,553
Accrued interest receivable (Note 7) 602 461
Prepaid expenses and other assets 300 208
------- -------
TOTAL ASSETS $86,355 $68,782
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts (Note 8) $57,256 $50,627
Advances from Federal Home Loan Bank (Note 9) 12,556 3,578
Other borrowed money (Note 10) 4,356 2,224
Accounts payable and accrued expenses 308 217
Accrued income taxes (Note 11) 15 98
------ ------
Total liabilities 74,491 56,744
------ -------
Stockholders' equity (Note 14):
Preferred stock - $1 par value; 2,000,000 shares
authorized; none issued - - - -
Common stock - $1 par value; 4,000,000 shares
authorized; 1,032,517 shares issued and outstanding 1,033 1,033
Additional paid-in capital 6,584 6,584
Net unrealized loss on securities available for sale (34) (107)
Less unearned restricted stock plan award (Note 13) (319) - -
Less unearned Employee Stock Ownership
Plan compensation (Note 13) (699) (826)
Less treasury stock - at cost - 51,625 shares (561) - -
Retained earnings - substantially restricted 5,860 5,354
------ ------
Total stockholders' equity 11,864 12,038
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $86,355 $68,782
======= =======
See accompanying Notes to Consolidated Financial Statements
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
(In Thousands except for per share amounts)
1996 1995 1994
------ ------ ------
Interest income:
Interest and fees on loans ....................... $5,911 $4,550 $4,006
Interest on mortgage-backed and related securities 353 83 185
Interest and dividends on investments ............ 209 222 168
------ ------ ------
Total interest income ......................... 6,473 4,855 4,359
------ ------ ------
Interest expense:
Interest on savings (Note 8) ..................... 2,614 1,896 1,858
Interest on borrowings (Note 10) ................. 697 318 337
------ ------ ------
Total interest expense ........................ 3,311 2,214 2,195
------ ------ ------
Net interest income .................... 3,162 2,641 2,164
Provision for loan losses (Note 4) .................... 24 17 24
------ ------ ------
Net interest income after provision for loan losses ... 3,138 2,624 2,140
------ ------ ------
Other income:
Mortgage servicing fees .......................... 72 73 80
Service charges on deposits ...................... 226 227 199
Gain on sale of mortgage loans ................... 61 19 222
Other ............................................ 117 82 124
------ ------ ------
Total other income ............................ 476 401 625
------ ------ ------
General and administrative expenses:
Salaries and employee benefits ................... 1,049 833 842
Net occupancy expense ............................ 284 251 229
Data processing .................................. 137 135 124
Federal insurance premiums ....................... 126 114 109
Other ............................................ 579 405 413
------ ------ ------
Total general and administrative expense ...... 2,175 1,738 1,717
------ ------ ------
Income before income taxes ............................ 1,439 1,287 1,048
Income taxes (Note 11) ........................ 597 507 432
------ ------ ------
Net income ............................................ $ 842 $ 780 $ 616
====== ====== ======
Earnings per share ............................... $ 0.90 $ 0.84 N/A
====== ======
See accompanying Notes to Consolidated Financial Statements
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31,
(In Thousands)
<CAPTION>
Unrealized
Gain (Loss) Unearned
Additional on Securities Unearned ESOP
Common Paid-In Available Restricted Compen- Treasury Retained
Stock Capital For Sale Stock sation Stock Earnings Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1993 ........................ $ -- $ -- $2 $ -- $ -- $ -- $3,958 $ 3,960
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $48 .......... -- -- (76) -- -- -- -- (76)
Net income ......................................... -- -- -- -- -- -- 616 616
----- ----- ----- ----- --- ---- --- -----
Balance - March 31, 1994 ................................ -- -- (74) -- -- -- 4,574 4,500
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $20 .......... -- -- (33) -- -- -- -- (33)
Net proceeds from sale of common stock issued in
stock conversion .............................. 1,033 6,584 -- -- (826) -- -- 6,791
Net income ......................................... -- -- -- -- -- -- 780 780
----- ----- ----- ---- ---- ---- --- ------
Balance - March 31, 1995 ................................ 1,033 6,584 (107) -- (826) -- 5,354 12,038
Net income ......................................... -- -- -- -- -- -- 842 842
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $47 .......... -- -- 73 -- -- -- -- 73
Acquistion of common stock for awards .............. -- -- -- (459) -- -- -- (459)
Amortization of unearned ESOP and restricted stock
award ............................................ -- -- -- 140 127 -- -- 267
Purchase of treasury stock - 51,625 shares ......... -- -- -- -- -- (561) -- (561)
Cash dividends - $.33 per share .................... -- -- -- -- -- -- (336) (336)
---- ----- --- --- ---- --- ----- -----
Balance - March 31, 1996 ................................$1,033 $6,584 ($ 34) ($319) ($699) ($561) $5,860 $11,864
====== ====== ==== ==== ====== ==== ====== =======
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
(In Thousands)
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash provided by operating activities:
Net income ......................................................................... $ 842 $ 780 $ 616
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation ............................................................. 115 99 90
Provision for loan losses ................................................ 24 17 24
Deferred income taxes .................................................... 16 12 (67)
Amortization of ESOP and restricted stock awards ......................... 267 -- --
Gain on sale of investments .............................................. -- -- (7)
Proceeds from sales of mortgage loans .................................... 5,974 1,676 15,965
Loans originated for sale ................................................ (6,630) (1,657) (15,742)
Decrease (increase) accrued interest receivable .......................... (141) (95) (6)
Decrease (increase) prepaid expenses and other assets .................... (92) 348 (324)
Increase (decrease) accrued interest payable ............................. (34) (236) (139)
Increase (decrease) accrued income taxes payable ......................... (83) (67) 20
Increase (decrease) other accrued liabilities ............................ 125 215 (8)
-------- -------- --------
Net cash provided by operating activities ....................................... 383 1,092 422
-------- -------- --------
Cash provided by investing activities:
Principal collected on long-term loans ............................................. 18,922 19,474 17,817
Long-term loans originated or acquired ............................................. (30,636) (26,897) (19,231)
Purchases of mortgage-backed securities ............................................ (3,923) (1,006) --
Principal collected on mortgage-backed securities .................................. 551 561 2,180
Proceeds from sale of foreclosed property .......................................... -- 72 219
Purchase of office properties and equipment ........................................ (761) (54) (90)
Proceeds from sale of investment securities ........................................ -- -- 2,019
Proceeds from maturity of investment securities .................................... -- -- 500
Purchase of investments ............................................................ (593) (306) (4,329)
-------- -------- --------
Net cash (used in) investing activities ......................................... (16,440) (8,156) (915)
-------- -------- --------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
(In Thousands)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
-------- -------- --------
Cash provided by financing activities:
Net increase (decrease) in savings accounts ........................................ 6,629 3,097 (1,541)
Net increase (decrease) in short-term borrowings ................................... 2,282 (50) 1,585
Repayments of long-term financing .................................................. (622) (1,925) (1,000)
Proceeds from long-term financing .................................................. 9,450 220 --
Purchases of treasury stock ........................................................ (561) -- --
Acquisition of common stock for incentive plan ..................................... (459) -- --
Dividends paid ..................................................................... (336) -- --
Net proceeds from sale of common stock ............................................. -- 6,791 --
-------- -------- --------
Net cash provided by (used in) financing activities ............................. 16,383 8,133 (956)
-------- -------- --------
Increase (decrease) in cash and equivalents ............................................. 326 1,069 (1,449)
Cash and equivalents - beginning ................................................... 3,086 2,017 3,466
-------- -------- --------
Cash and equivalents - ending ...................................................... $ 3,412 $ 3,086 $ 2,017
======== ======== ========
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure ........................................... $ 127 $ 63 $ 90
Properties subject to foreclosure transferred to
loans receivable ................................................................ -- -- 4
Interest paid ...................................................................... 3,345 2,450 2,334
Income taxes paid .................................................................. 680 562 479
See accompanying Notes to Consolidated Financial Statements
</TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
Northwest Equity Corp. (the "Company") is the holding company for
Northwest Savings Bank (the "Bank"), a Wisconsin state-chartered
savings bank. On October 7, 1994, the Bank completed its conversion
from a Wisconsin state-chartered mutual savings bank to a Wisconsin
state-chartered stock savings bank. On that date, the Company issued
and sold 1,032,517 shares of its common stock at $8.00 per share to
complete the conversion. The Company acquired all of the issued and
outstanding capital stock of the Bank using a portion of the net
proceeds from the conversion.
Business:
The Company provides a wide range of financial services to
individual customers through the Bank with Wisconsin locations in
Polk, St. Croix and Burnett Counties. The Bank is subject to the
regulations of certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation:
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include
the accounts of the Company since October 7, 1994 and its
wholly-owned subsidiary, Northwest Savings Bank, and its subsidiary,
Amery Service Agency, Inc. for the entire period presented.
Significant intercompany accounts and transactions have been
eliminated. In preparing financial statements, management is
required to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying
notes. Actual results could differ significantly from these
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the allowance for loan
losses.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash and investments with
maturities of three months or less.
Investment and Mortgage-Backed and Related Securities:
Management determines the appropriate classification of securities
at the time of purchase. If management has the intent and the Bank
has the ability at the time of purchase to hold securities until
maturity or on a long-term basis, they are classified as
held-to-maturity and carried at amortized historical cost plus
accrued interest. Securities to be held for indefinite periods of
time and not intended to be held to maturity or on a long-term basis
are classified as available-for-sale and carried at fair value.
Securities held for indefinite periods of time include securities
that management intends to use as part of its asset/liability
management strategy and may be sold in response to changes in
interest rates, changes in prepayment risk, the need to increase
regulatory capital or similar factors. Gains and losses on sales are
determined by the specific identification method.
Loans Held for Sale:
Loans held for sale in the secondary market are recorded at the
lower of aggregate cost or market value and generally consist of
current production of fixed-rate mortgage loans. Fees received from
the borrower are deferred and recorded as an adjustment of the sales
price.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 1. Summary of Significant Accounting Policies - Continued:
Loans Receivable:
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees
and discounts. Interest on loans is recorded as income as borrowers'
monthly payments become due. Generally, allowances are established
for uncollected interest on which any payments are more than ninety
days past due.
Allowance for Loan Losses:
The Bank provides valuation allowances for estimated losses on loans
at a level considered adequate by management to provide for
potential loan losses. The adequacy of the allowance is based on
management's valuation of the loan portfolio, past loan experience
and current and prospective economic conditions.
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 114 in May, 1993
relative to accounting and reporting standards for loan impairments.
Statement No. 114, which was amended by Statement No. 118, requires
that impaired loans be measured at the present value of expected
future cash flows measured at the loan's effective interest rate,
or, as a practical expedient, at the loan's observable market price
or the fair value of the collateral if the loan is collateral
dependent. The Bank adopted Statements No. 114 and 118 at April 1,
1995 and such adoption had no effect on the Company's financial
condition or results of operations.
Foreclosed Properties and Properties Subject to Foreclosure:
Real estate owned which was acquired by foreclosure or by deed in
lieu of foreclosure is initially recorded at the lower of cost or
fair value less estimated costs to sell at date of foreclosure.
Costs related to the development and improvement of property are
capitalized, whereas costs related to holding property are expensed.
Valuations are periodically performed by management, and an
allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its fair value less estimated
costs to sell. Real estate in judgment and subject to redemption is
carried at cost less an allowance for estimated losses.
Premises and Equipment:
Land is carried at cost. Buildings, furniture fixtures and equipment
are carried at cost less accumulated depreciation. Depreciation is
provided on a straight-line basis over the estimated useful lives of
the assets.
Loan Fees:
Loan origination and commitment fees and certain direct loan costs
are being deferred and the net amount amortized as an adjustment of
the related loan's yield by the level yield method over the
contractual life of the loan.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 1. Summary of Significant Accounting Policies - Continued:
Loan Sales:
The Bank generates additional funds for lending by selling whole
and/or participating interests in real estate loans. Gains or losses
on such sales are recognized at the time of sale and are determined
by the difference between the net sales proceeds and the unpaid
principal balance of the loans sold adjusted for any yield
differential, servicing fees and servicing cost applicable to future
years.
Income Taxes:
The Company and its subsidiary file a consolidated federal income
tax return and separate state income tax returns. Financial
statement provisions are made in the income tax expense accounts for
deferred taxes applicable to income and expense items reported in
different periods than for income tax purposes. The Company accounts
for income taxes on the liability method. Deferred income tax assets
and liabilities are adjusted regularly to amounts estimated to be
receivable or payable based on current tax law.
Earnings Per Share:
Earnings per share is calculated by dividing net income for the year
by the weighted average number of shares of common stock and common
stock equivalents outstanding since conversion. The resulting number
of shares used in computing earnings per share in 1996 and 1995 is
930,863 and 929,265, respectively.
Pending Accounting Changes:
The FASB issued SFAS No. 123 in October 1995 relative to accounting
and reporting standards for stockbased employee compensation plans.
SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. The Statement defines a fair value based method of
accounting for employee stock options or similar equity instruments
and encourages all entities to adopt that method for all employee
stock compensation plans. However, the Statement also allows an
entity to continue to measure compensation cost for these plans
using an intrinsic value based method prescribed by Accounting
Principles Board Opinion No. 25 (APB No. 25). Entities electing to
retain the accounting treatment under APB No. 25 must make pro forma
footnote disclosure of net income and earnings per share as if the
fair value based method of accounting defined in this statement had
been applied. Management has not decided which method it will elect.
The FASB isssued SFAS No. 122 in July, 1995 relative to accounting
and reporting for mortgage servicing rights. SFAS No. 122 is
effective for years beginning after December 15, 1995. The Statement
requires that a mortgage banking enterprise recognize as a separate
asset the rights to service mortgage loans for others, whether those
rights are purchased or originated. The Company anticipates that the
adoption of the Statement will not have a material effect on the
financial condition or results of operation.
Reclassifications:
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996 reporting
classification.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 2. Securities Available-for-Sale:
Securities available-for-sale consist of the following at March 31:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
---------------------------- ------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and agency obligations $2,800 $ - - $55 $2,745
Other 114 - - - - 114
------------- ------------- ------------- -------------
$2,914 $ - - $55 $2,859
============= ============= ============= =============
1995
----------------------------
U.S. Treasury and agency obligations $2,802 $ - - $176 $2,626
Other 30 - - - - 30
------------- ------------- ------------- -------------
$2,832 $ - - $176 $2,656
============= ============= ============= =============
</TABLE>
Securities maturing in one year or less and after one year
through five years was $114,000 and $2,800,000, respectively at
March 31, 1996.
Note 3. Mortgage-Backed Securities:
The carrying values and estimated market values of mortgage-backed
securities are summarized as follows at:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
March 31, 1996
----------------------------
FNMA certificates $2,220 $21 $35 $2,206
GNMA certificate 2,659 34 - - 2,693
FHLMC certificates 494 - - 7 487
------------- ------------- ------------- -------------
$5,373 $55 $42 $5,386
============= ============= ============= =============
March 31, 1995
----------------------------
FNMA certificates $837 $ - - $10 $827
GNMA certificate 1,005 - - - - 1,005
Collateralized mortgage obligations 159 - - - - 159
------------- ------------- ------------- -------------
$2,001 $ - - $10 $1,991
============= ============= ============= =============
</TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 4. Loans Receivable:
Loans receivable are summarized as follows as of March 31:
1996 1995
------------- -------------
Real estate mortgage loans: (In Thousands)
One to four families $48,360 $42,501
Other 11,244 7,570
Commercial loans 4,612 4,450
Consumer loans 6,897 4,313
------------- -------------
Totals 70,396 58,834
Less: Allowance for losses (433) (434)
------------- -------------
Total loans receivable $69,963 $58,400
============= =============
The following is an analysis of the allowance for loan losses for
the years ended March 31:
1996 1995 1994
---- ---- ----
(In Thousands)
Balance - beginning $434 $436 $455
Provision charged to income 24 17 24
Loans charged off (25) (19) (43)
-- -- --
Balance - ending $433 $434 $436
==== ==== ====
Loans serviced for others are not included in the above amounts.
They totaled $22,874,000, $19,537,000 and $19,922,000 at March 31,
1996, 1995 and 1994, respectively.
Note 5. Foreclosed Properties and Properties Subject to Foreclosure:
Foreclosed properties and properties subject to foreclosure are
summarized as follows at March 31:
1996 1995
------------- -------------
(In Thousands)
Real estate owned $45 $ - -
Real estate in foreclosure 82 - -
------------- -------------
$127 $ - -
============= =============
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 6. Premises and Equipment:
Premises and equipment are summarized by major classification as
follows at March 31:
1996 1995
------------- -------------
(In Thousands)
Land and improvements $545 $409
Buildings and improvements 1,438 1,119
Furniture, fixtures and equipment 900 684
------------- -------------
Total 2,883 2,212
Less accumulated depreciation 684 659
------------- -------------
$2,199 $1,553
============= =============
Note 7. Accrued Interest Receivable:
Accrued interest receivable is comprised of the following at March
31:
1996 1995
------------- -------------
(In Thousands)
Loans receivable $506 $383
Mortgage backed obligations 33 12
Investments 63 66
------------- -------------
$602 $461
============= =============
The Bank has provided an allowance for uncollected interest on
loans at March 31, 1996 and 1995 of $21,000 and $8,000,
respectively.
Note 8. Savings Accounts:
Savings accounts are summarized as follows at March 31:
1996 1995
--------------- ----------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(In Thousands)
Passbook rates $6,829 2.51% $6,916 2.50%
NOW accounts 8,487 3.17% 6,242 1.96%
Demand deposits 2,069 - - 2,259 - -
Certificates of deposit 39,871 5.85% 35,210 5.59%
------ ------
Total savings accounts $57,256 4.84% $50,627 4.47%
======= =======
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 8. Savings Accounts - Continued:
Certificates of deposit have scheduled maturity dates as follows at
March 31, 1996 (in thousands):
1997 $28,831
1998 - 1999 7,524
2000 - 2001 3,516
The total amount of certificates of deposits with balances in excess
of $100,000 was $2,250,000 and $1,700,000 at March 31, 1996 and
1995, respectively.
Interest on savings deposits is summarized as follows for the years
ended March 31:
1996 1995 1994
------------- ------------- -------------
(In Thousands)
MMDA and NOW accounts $268 $133 $164
Savings deposits 174 193 188
Certificates of deposit 2,172 1,570 1,506
------------- ------------- -------------
Total $2,614 $1,896 $1,858
============= ============= =============
Note 9. Advances From Federal Home Loan Bank:
Pursuant to collateral agreements with the Federal Home Loan Bank
("FHLB"), advances are secured by all stock in the FHLB and
qualifying first mortgage loans aggregating 170% of the amount of
outstanding advances. The following is a summary of these advances
at March 31:
1996 1995
---- ----
(In Thousands)
Advances due within current year with variable rates
(5.6% at March 31, 1996 and 6.6% at March 31, 1995) $1,650 $1,500
Advances due in the following years with rates from
4.00% to 8.31% 1996 - - 600
1997 8,900 - -
1998 850 850
1999 550 - -
2000 and after 606 628
------- ------
$12,556 $3,578
======= ======
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 10. Other Borrowed Money:
Other borrowed money is summarized as follows at March 31:
1996 1995
------------- -------------
(In Thousands)
Note payable from a bank due with interest
at 2% over prime in August, 1996, unsecured. $58 $38
Retail security repurchase agreements with
weighted-average interest rates of 6.08%
and 6.52% at March 31, 1996 and 1995, 4,298 2,186
respectively. ----------- -------------
$4,356 $2,224
============= =============
The retail repurchase agreements are generally for terms of less
than one year and are collateralized by investments and loans with
carrying values of $4,477,000 and $2,297,000 at March 31, 1996 and
1995, respectively.
Interest on borrowings is summarized as follows for the years ended
March 31:
1996 1995 1994
------------- ------------- -------------
(In Thousands)
FHLB advances $458 $207 $250
Other borrowed money 239 111 87
------------- ------------- -------------
$697 $318 $337
============= ============= =============
Note 11. Income Taxes:
The provision for income taxes differs from that computed at the
federal and state statutory corporate rates as follows for the years
ended March 31:
1996 1995 1994
----------- ------------- -------------
(In Thousands)
Tax at federal statutory rate $489 $438 $356
Increases (decreases) in taxes:
State income taxes net of federal benefit 79 71 58
Other 29 (2) 18
------------ ------------- -------------
Federal and state income taxes $597 $507 $432
============ ============= =============
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 11. Income Taxes - Continued:
The provision for income taxes consists of the following for the
years ended March 31:
1996 1995 1994
------------- ------------- -------------
(In Thousands)
Current $613 $518 $423
Deferred (16) (8) 11
------------- ------------- -------------
$597 $507 $432
============= ============= =============
The Bank has qualified under the provisions of the Internal Revenue
Code which permit as a deduction from taxable income an allowance
for bad debts which differs from the provision for such losses
charged to income. Accordingly, retained earnings at March 31, 1996
includes approximately $1,532,000 for which no provision for income
taxes has been made. If in the future this portion of retained
earnings is used for any purpose other than to absorb bad debt
losses, federal and state income taxes may be imposed at the then
applicable rates.
The tax effects of temporary differences that give rise to deferred
tax assets and deferred tax liabilities are summarized as follows at
March 31:
1996 1995 1994
------------- ------------- -------------
(In Thousands)
Provision for loan losses $80 $114 $143
Valuation allowance for securities
held for sale 22 70 50
Accrued compensation 22 20 17
Stock incentive plan 56 - - - -
Other 1 1 (1)
------------- ------------- -------------
Total deferred tax assets 181 205 209
------------- ------------- -------------
Depreciation (121) (113) (105)
FHLB common stock dividends (17) (17) (17)
------------- ------------- -------------
Total deferred tax liabilities (138) (130) (122)
------------- ------------- -------------
$43 $75 $87
============= ============= =============
Note 12. Financial Instruments With Off-Balance Sheet Risk:
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist of commitments to
extend credit. Commitments to extend credit involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amount reflects
the extent of involvement the Company has in this particular
financial instrument.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 12. Financial Instruments With Off-Balance Sheet Risk - Continued:
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and generally require payment of a fee. As some
commitments expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates the creditworthiness of each customer on a case by
case basis.
The Company generally extends credit only on a secured basis.
Collateral obtained varies, but consists primarily of one-to-four
family residences located in Northwestern Wisconsin. Commitments to
sell mortgage loans represent commitments to sell mortgage loans to
other entities at a future date and at a specified price.
Commitments to sell mortgage loans and commitments to extend credit
are generally exercised and fulfilled within ninety days. The fair
value of mortgage loans held for sale plus the commitments to extend
credit generally offset the commitments to sell mortgage loans. Both
the commitments to extend credit and the commitments to sell
mortgage loans are at current market rates.
At March 31, 1996, the Company was committed to originate
approximately $2,715,000 and $1,917,000 of first mortgage loans and
other loans, respectively. In addition, the undisbursed portion of
other credit lines were $1,091,000 at March 31, 1996 and commitments
to acquire investment securities (when issued in April, 1996) was
$1,553,000.
In the normal course of business, various legal proceedings
involving the Company are pending. Management, based upon advice
from legal counsel, does not anticipate any significant losses as a
result of these actions.
Note 13. Employee Benefit Plans:
The Company has a qualified defined contribution plan covering
substantially all full-time employees who have completed one year of
service and are at least 21 years old. During the years ended March
31, 1996, 1995 and 1994, the Bank contributed $29,000, $54,000 and
$54,000, respectively, to this plan.
On April 1, 1994, the Company established an Employee Stock
Ownership Plan ("ESOP") for substantially all of its full-time
employees. As part of the stock conversion, the ESOP borrowed
$826,000 from the Company and purchased 103,250 shares of the
Company's common stock. The debt bears interest at 8% and is
collateralized by the shares of common stock held by the ESOP. The
Bank is committed to make cash payments to the ESOP in amounts
sufficient for it to meet the debt service requirements over a seven
year term. The unpaid balance of the ESOP loan has been eliminated
in consolidation and the amount of unearned ESOP compensation
expense is shown as a reduction of stockholders' equity. ESOP
expense for the year ended March 31, 1996 totaled $140,000. At March
31, 1996 the number of shares allocated, committed to be released
and suspense shares were none, 14,750 and 88,500, respectively. The
fair value of unearned shares at March 31, 1996 was $918,000.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 13. Employee Benefit Plans - Continued:
The Bank established an employee stock incentive plan on October 10,
1995. The Bank purchased 41,300 shares for $459,000 and awarded them
to officers and employees of the Bank. The shares awarded vest
33.33% per year commencing October, 1996. The aggregate purchase
price of the shares is being amortized to compensation expense as
the participants become vested. The unamortized cost is being
refected as a reduction of shareholders' equity as unearned
restricted stock. Compensation expense of $135,000 was recognized
for the year ended March 31, 1996.
On October 10, 1995, the Company granted 103,251 shares of common
stock for a non-qualified stock option plan for employees and
directors. All such options are currently excercisable at $10.00 per
share and expire in October 2005. At March 31, 1996 there were no
options granted under the stock option plan that have been
excercised or cancelled.
Note 14. Stockholders' Equity:
On September 1, 1993, the Board of Directors of the Bank adopted a
plan under which the Bank would convert from a mutual savings bank
to a stock savings bank with the concurrent formation of a holding
company. On October 7, 1994, the Company sold 1,032,517 shares of
common stock at $8.00 per share. Net proceeds from the conversion,
after recognizing conversion expenses and underwriting costs of
$643,000, were $6,791,000.
At the time of conversion, the Bank established a "Liquidation
Account" in an amount equal to the Bank's net worth as of the date
of the latest consolidated financial statements. The Liquidation
Account will be maintained for the benefit of depositors who
continue to maintain their deposits in the Bank after conversion.
The liquidation account will be reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. In
the event of a complete liquidation, and only in such an event, each
eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account, in the proportionate
amount of the then-current adjusted balance for deposits then held,
before any liquidation distribution may be made with respect to the
stockholders. Except for the repurchase of stock and payment of
dividends by the Bank, the existence of the liquidation account will
not restrict use or application of stockholders' equity.
Deposits of the Bank are insured to the maximum allowable amounts by
the Savings Association Insurance Fund ("SAIF") as administered by
the Federal Deposit Insurance Corporation ("FDIC"). FDIC-insured
institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require
that institutions meet certain risk-based and leverage capital
requirements. Under the FDIC capital regulations, the Bank is
required to meet the following capital standards: (1) Tier 1 capital
in an amount not less than 3% of total assets; (2) Tier 1 capital in
an amount not less than 4% of risk-weighted assets; and (3) total
capital in an amount not less than 8% of risk-weighted assets. Tier
1 capital is defined to include the Bank's common shareholders'
equity. Total capital is defined to include Tier 1 capital plus the
allowance for loan losses and the adjustment of the carrying value
of securities held for sale. The risk-based capital requirements
presently address credit risk related to both recorded assets and
off balance sheet commitments and obligations. Risk weighted assets
for regulatory purposes at March 31, 1996 totaled $56,092,000.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 14. Stockholders' Equity - Continued:
The Bank's various regulatory capital measurements are summarized
below at March 31, 1996:
Stockholder's equity $9,585
Add: Net unrealized loss on securities available-for-sale 34
--------
Tier 1 Capital 9,619
Add: Qualifying general loan loss allowance 433
--------
Total capital ratio and risk-weighted capital ration $10,052
========
The following table summarizes the Bank's capital amounts and ratios
and the respective amounts required by the FDIC and the state of
Wisconsin at March 31, 1996:
Amounts (In Thousands) Actual Required Excess
----------- ------------- -------------
Tier 1 capital ratio $9,619 $2,554 $7,065
Total capital ratio 10,052 3,406 6,646
Risk-weighted capital ratio 10,052 4,487 5,565
State of Wisconsin 10,052 5,180 4,872
Ratios Actual Required Excess
------------- ------------- -------------
Tier 1 capital ratio 11.30% 3.00% 8.30%
Total capital ratio 11.81% 4.00% 7.81%
Risk-weighted capital ratio 17.92% 8.00% 9.92%
State of Wisconsin 11.64% 6.00% 5.64%
Note 15. Fair Values of Financial Instruments:
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate those
assets fair values.
Investments and mortgage-backed securities: Fair values for
investments and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
Loans receivable: For variable-rate mortgage loans that reprice
frequently and with no significant change in credit risk, fair
values are based on carrying values. The fair values for residential
mortgage loans are based on quoted market prices of similar loans
sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 15. Fair Values of Financial Instruments - Continued:
The fair values for commercial real estate loans, rental property
mortgage loans and consumer and other loans are estimated using
discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its
fair value.
Deposits: The fair values disclosed for interest and noninterest
checking accounts, passbook accounts and money market accounts are,
by definition, equal to the amount payable on demand at the
reporting date. The fair values of fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities of the
outstanding certificates of deposit.
Federal Home Loan Bank Advances: The Bank's long-term borrowings are
estimated using the discounted cash flow analysis, based on the
Bank's current incremental borrowing rates for similar types of
borrowing arrangements.
The carrying amounts and fair values of the Bank's financial
instruments consisted of the following at March 31:
<TABLE>
1996 1995
---------------------------- ----------------------------
<CAPTION>
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Investment securities $3,662 $3,662 $3,073 $3,073
Mortgage-backed securities 5,373 5,386 2,001 1,991
Loans receivable:
Real estate - one-to-four family 48,360 48,858 42,501 44,266
Real estate - other 11,244 11,360 7,570 7,492
Other loans 11,509 11,737 8,763 8,683
------------- ------------- ------------- -------------
$80,148 $81,003 $63,908 $65,505
============= ============= ============= =============
Financial liabilities:
Savings deposits and checking accounts $17,385 $17,385 $15,417 $15,417
Certificates of deposit 39,871 39,747 35,210 34,900
Federal Home Loan Bank Advances 12,556 12,526 3,578 3,523
Other borrowed money 4,356 4,332 2,224 2,215
------------- ------------- ------------- -------------
$74,168 $73,990 $56,429 $56,055
============= ============= ============= =============
</TABLE>
Note 16. Contingent Liabilities:
Legislation is currently proposed to bring the Savings Association
Insurance Fund (SAIF) into parity with the Bank Insurance Fund
(BIF). At present, it is anticipated that a one time assessment of
.8% to .85% of assessable SAIF deposits at March 31, 1995 will be
made by the SAIF members. This amount would be a one time charge to
earnings and approximate $278,000, net of income taxes, for the
Bank.
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 17. Parent Company Only Financial Information:
Balance Sheets - at March 31: 1996 1995
------------- -------------
(In Thousands)
Assets
Cash and cash equivalents $2,239 $63
Investment securities held to maturity - - 3,300
Investment in subsidiary 9,585 8,616
Deferred income tax assets 55 - -
Other current assets 7 59
------------- -------------
$11,886 $12,038
============= =============
Liabilities $22 $ - -
Stockholders' Equity 11,864 12,038
------------- -------------
$11,886 $12,038
============= =============
Statement of Operations - for the year ended March 31, 1996 and the
period from inception (October 7, 1994) through March 31, 1995:
1996 1995
------------- -------------
(In Thousands)
Interest income $198 $58
Equity in undistributed net income of subsidiary 968 448
------------- -------------
Total income 1,166 506
Other expense 277 19
------------- -------------
Income before provision for income taxes 889 487
Income taxes (26) 13
------------- -------------
Net income $915 $474
============= =============
Statement of Cash Flows - for the year ended March 31, 1996 and the
period from inception (October 7, 1994) through March 31, 1995:
1996 1995
------------- -------------
(In Thousands)
Operating activities:
Net income $915 $474
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of subsidiary (968) (448)
Deferred income taxes (55) - -
Amortization of ESOP and restricted stock awards 267 - -
(Increase) decrease in other current assets 52 (59)
Increase (decrease) in other liabilities 22 - -
------------- -------------
Net cash used in operating activities 233 (33)
------------- -------------
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 17. Parent Company Only Financial Information - Continued:
Statement of Cash Flows - for the year ended March 31, 1996 and the
period from inception (October 7, 1994) through March 31, 1995:
1996 1995
------------- -------------
(In Thousands)
Investment activities:
Purchase of investment securities $ - - ($3,300)
Purchase of common stock for the treasury (561) - -
Purchase of common stock for incentive plan (460) - -
Maturity of investment securities 3,300 - -
Cash dividends (336) - -
Purchase of common stock of subsidiary - - (3,395)
------------- -------------
Net cash used in investment activities 1,943 (6,695)
------------- -------------
Financing activities:
Net proceeds from issuance of common stock - - 6,791
------------- -------------
Net increase in cash 2,176 63
Cash and cash equivalents - beginning 63 - -
------------- -------------
Cash and cash equivalents - ending $2,239 $63
============= =============
<TABLE>
Note 18. Quarterly Consolidated Financial Information (Unaudited):
1996
----------------------------------------------------------
<CAPTION>
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest and dividend income $1,469 $1,596 $1,694 $1,714
Interest expense 707 815 889 900
------------- ------------- ------------- -------------
Net interest income 762 781 805 814
Provision for loan losses 6 6 6 6
------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 756 775 799 808
Non-interest income 112 137 118 109
Non-interest expense 480 506 605 584
------------- ------------- ------------- -------------
Income before income taxes 388 406 312 333
Income taxes 154 177 141 125
------------- ------------- ------------- -------------
Net income $234 $229 $171 $208
============= ============= ============= =============
Earnings per share $0.23 $0.22 $0.18 $0.23
Dividends $0.07 $0.08 $0.09 $0.09
Market information:
Trading range - high $9.50 $10.68 $11.32 $10.50
low $8.68 $9.00 $10.00 $10.00
close $8.75 $10.32 $10.62 $10.32
</TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
Note 18. Quarterly Consolidated Financial Information (Unaudited) - Continued:
1995
----------------------------------------------------------
<CAPTION>
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest and dividend income $1,091 $1,174 $1,266 $1,324
Interest expense 516 549 543 606
------------- ------------- ------------- -------------
Net interest income 575 625 723 718
Provision for loan losses 3 3 5 6
------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 572 622 718 712
Non-interest income 100 120 87 94
Non-interest expense 422 433 420 463
------------- ------------- ------------- -------------
Income before income taxes 250 309 385 343
Income taxes 97 127 150 133
------------- ------------- ------------- -------------
Net income $153 $182 $235 $210
============= ============= ============= =============
Earnings per share $ - - $ - - $0.23 $0.21
Dividends $ - - $ - - $ - - $ - -
Market information:
Trading range - high $ - - $ - - $8.50 $9.25
low $ - - $ - - $6.75 $7.25
close $ - - $ - - $7.25 $8.88
1994
----------------------------------------------------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
Interest and dividend income $1,119 $1,099 $1,106 $1,035
Interest expense 582 558 540 515
------------- ------------- ------------- -------------
Net interest income 537 541 566 520
Provision for loan losses 6 6 6 6
------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 531 535 560 514
Non-interest income 181 163 145 136
Non-interest expense 391 419 447 460
------------- ------------- ------------- -------------
Income before income taxes 321 279 258 190
Income taxes 125 112 101 94
------------- ------------- ------------- -------------
Net income $196 $167 $157 $96
============= ============= ============= =============
</TABLE>
SHAREHOLDER INFORMATION
<PAGE>
Board of Directors of Northwest Equity
Corp. and Northwest Savings Bank
- -----------------------------------
Brian L. Beadle
President, Chief Executive Officer,
Chief Financial Officer and Director
of the Company; President, Chief
Executive Officer, Chief Financial
Officer and Director of the Bank
since 1976.
President, Chief Executive Officer,
Chief Financial Officer and Director
of the Company; President, Chief
Executive Officer, Chief Financial
Officer and Director of the Bank
since 1976.
Gerald J. Ahlin
Director of the Company; Director
of the Bank since 1985; prior to his
retirement in 1992, business and
economics teacher at Amery Public
Schools, Amery, Wisconsin.
Vern E. Albrecht
Director of the Company; Director
of the Bank since 1989; prior to his
retirement in 1991, President and
principal owner of Nova Tran
Corporation, an electronics and
medical manufacturing company, Clear
Lake, Wisconsin.
Michael D. Jensen
Director of the Company; Director
of the Bank since 1986; President of
Amery Telcom, Inc., a communications
company.
Donald M. Michels
Director of the Company; Director
of the Bank since 1987; prior to his
retirement in 1991, President of
Holy Family Hospital, New Richmond,
Wisconsin.
.
Norman M. Osero
Director of the Company; Director
of the Bank since 1992; President of
Dynatronix, Inc., Amery, Wisconsin,
an electronic manufacturing company,
and Vice President of Amery
Technical Products, Inc., Amery,
Wisconsin, a subcontractor
manufacturing company.
James A. Counter
Director of the Company; Director of
Bank since 1995; Owner of J.A.Counter
& Associates, Inc., New Richmond,
WI, an insurance, financial planning
and investment brokerage.
Executive Officers of Northwest Equity
Corp. and Northwest Savings Bank
- -------------------------------------
Brian L. Beadle
President, Chief Executive Officer,
Chief Financial Officer and Director
of the Company; President, Chief
Executive Officer, Chief Financial
Officer and Director of the Bank
since 1976.
James L. Moore
Vice President and Secretary of the
Company; Senior Vice President and
Secretary of the Bank since 1990.
Headquarters
- -----------------------------------
North west Equity Corp.
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
Northwest Savings Bank
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
Northwest Savings Bank-
Bank Office Locations
- ------------------------------------
Home Office:
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
Branch Offices:
New Richmond Office
532 Knowles Avenue South
New Richmond, Wisconsin 54017
Siren Office
24082 Highway 35 North
Siren, Wisconsin 54872
Shareholder/Media Relations
- ------------------------------------
Shareholders, investors, analysts, the
news media and others interested in
additional information may contact
Brian L. Beadle, President and Chief
Executive Officer of the Company, at
the Company's headquarters.
Annual Report on Form 10-KSB
- -------------------------------------
A copy of Northwest Equity Corp.'s
Form 10-KSB filed with the Securities
and Exchange Commission is available
without charge by writing:
Brian L. Beadle, President
Northwest Equity Corp.
234 Keller Avenue South
Amery, Wisconsin 54001
Annual Meeting
- --------------------------------------
The second annual meeting of
shareholders of Northwest Equity Corp.
will be held at 2:00 p.m., Amery time,
August 13, 1996, at Centennial Hall,
608 Harriman Ave. South, Amery,
Wisconsin 54001
Auditors
- --------------------------------------
Keller & Yoder
400 Daly Avenue, Suite 200
Wisconsin Rapids, WI 54495
Legal Counsel
- --------------------------------------
Michael Best & Friedrich
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Transfer Agent
- --------------------------------------
Firstar Trust Co.
615 East Michigan Avenue
Milwaukee, Wisconsin 53201
Telephone: (414) 276-3737
Toll-Free: (800) 637-7549
Stock Listing Information
- --------------------------------------
Northwest Savings Bank converted from
a mutual to a stock company, effective
October 7, 1994, at which time
Northwest Equity Corp. consummated the
sale of 1,032,517 shares of its Common
Stock to the public. The shares of
Common Stock of Northwest Equity Corp.
are publicly traded in the National
Association of Securities Dealers,Inc.
Automated Quotation "Small-Cap" Market
under the symbol "NWEQ."
Stock Price Information
- --------------------------------------
Share Pricing
1996 1995
Quarter Ended Low High Low High
March 31 10.00 11.00 7.25 9.25
June 30 8.63 9.50
September 30 9.00 10.88
December 31 10.00 11.38
NWEQ completed its initial public
offering of shares in October 1994
. Shareholders and
Shares Outstanding
- --------------------------------------
As of May 31, 1996, there were 182
registered shareholders of record and
229 estimated additional beneficial
shareholders for an approximate total
of 411. Shares outstanding at May 31,
1996 were 969,392.
51
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
State of Subsidiary's
Ownership Incorporation or
Parent Subsidiary Percentage Organization
------ ---------- ---- ------------
Northwest Equity Corp. Northwest Savings Bank 100% Wisconsin
Northwest Savings Bank Amery Service Agency, Inc. 100% Wisconsin
52
<PAGE>
EXHIBIT 23.1
CONSENT OF KELLER & YODER
ACCOUNTANT'S CONSENT
We consent to the use and/or incorporation by reference in the Annual Report on
Form n10-KSB of Northwest Equity Corp. fro the year ended March 31, 1996, of our
report dated April 26, 1996, accompanying the financial statements and schedules
of the Company contained, or incorporated by reference, in such Annual Report.
/s/ Keller & Yoder
-------------------
Keller & Yoder
Wisconsin Rapids, Wisconsin
June 12, 1996
53
<PAGE>
EXHIBIT 99.1
PROXY STATEMENT
FOR 1996 ANNUAL MEETING OF SHAREHOLDERS
NORTHWEST EQUITY CORP.
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
June 26, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of Northwest Equity Corp. (the "Company"), the holding
company for Northwest Savings Bank (the "Bank"). The meeting will be held on
Tuesday, August 13, 1996, at 2:00 p.m., Amery, Wisconsin time, at Centennial
Hall, 608 Harriman Avenue South, Amery, Wisconsin 54001.
The attached Notice of Annual of Shareholders and Proxy Statement
describes the formal business to be conducted at the Annual Meeting. A copy of
the Company's Annual Report for the fiscal year ended March 31, 1996, also is
enclosed. Directors and officers of the Company, as well as a representative of
Keller & Yoder, the Company's independent auditors, will be present at the
Annual Meeting to respond to any questions that shareholders may have.
The vote of every shareholder is important to ensure a quorum is
present and that the necessary business can be conducted at the meeting. Please
sign and return the enclosed appointment form of proxy promptly in the
postage-paid envelope provided, regardless of whether you are able to attend the
Annual Meeting in person. If you attend the Annual Meeting, you may vote in
person even if you have already mailed your Proxy.
On behalf of the Board of Directors and all of the employees of the
Company and the Bank, I thank you for your investment and trust in Northwest
Equity Corp.
Sincerely yours,
/s/ Brian L. Beadle
Brian L. Beadle
President, Chief Executive Officer and
Chief Financial Officer
<PAGE>
NORTHWEST EQUITY CORP.
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
--------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on August 13, 1996
-------------
To Holders of Common Stock of Northwest Equity Corp.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Annual Meeting") of Northwest Equity Corp. (the "Company") will be held on
Tuesday, August 13, 1996, at 2:00 p.m., Amery Wisconsin time, at Centennial
Hall, 608 Harriman Avenue South, Amery, Wisconsin 54001. The Annual Meeting is
for the purpose of considering and voting upon the following matters, all of
which are set forth more completely in the accompanying Proxy Statement:
1. The election of two directors each for a three year term, and in each
case until their successors are elected and qualified;
2. The ratification of the appointment of Keller & Yoder as independent
auditors of the Company for the fiscal year ending March 31, 1997; and
3. Such other matters as may properly come before the Annual Meeting or
any adjournments or postponements thereof. The Board of Directors is
not aware of any other such business.
The Board of Directors has established June 7, 1996, as the record date
for the determination of shareholders entitled to notice of and to vote at the
Annual Meeting and any adjournments thereof. Only shareholders of record as of
the close of business on that date will be entitled to vote at the Annual
Meeting or any adjournments or postponements thereof. In the event there are not
sufficient votes for a quorum or to approve or ratify any of the foregoing
proposals at the time of the Annual Meeting. The Annual Meeting may be adjourned
or postponed in order to permit further solicitation of proxies by the Company.
By Order of the Board of Directors
/s/ James L. Moore
Amery, Wisconsin James L. Moore
June 26, 1996 Secretary
================================================================================
TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED.
================================================================================
<PAGE>
NORTHWEST EQUITY CORP.
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 833-7700
---------------
PROXY STATEMENT
---------------
ANNUAL MEETING OF SHAREHOLDERS
To Be Held On August 13, 1996
-----------------------------
This Proxy Statement is being furnished to holders of common stock,
$1.00 par value per share (the "Common Stock"), of Northwest Equity Corp. (the
"Company") in connection with the solicitation on behalf of the Board of
Directors of the Company of proxies to be used at the Annual Meeting of
Shareholders (the "Annual Meeting") to be held on Tuesday, August 13, 1996, at
2:00 p.m., Amery, Wisconsin time, at Centennial Hall, 608 Harriman Avenue South,
Amery, Wisconsin 54001 and at any adjournments or postponements thereof.
The 1996 Annual Report to Shareholders, including the Company's
consolidated financial statements for the fiscal year ended March 31, 1996,
accompanies this Proxy Statement and appointment form of proxy (the "proxy"),
which are being mailed to shareholders on or about June 26, 1996.
Only shareholders of record at the close of business on June 7, 1996
(the "Voting Record Date") will be entitled to vote at the Annual Meeting or any
adjournments or postponements thereof. On the Voting Record Date, there were
945,392 shares of Common Stock outstanding and the Company had no other class of
securities outstanding.
The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares Common Stock entitled to vote is
necessary to constitute a quorum at the Annual Meeting. As to the election of
directors, the proxy being provided by the Board of Directors enables a
shareholder to vote for the election of the nominees proposed by the Board, or
to withhold authority to vote for one or more of the nominees being proposed.
Under the Wisconsin Business Corporation Law (the "WBCL"), directors are elected
by a plurality of the votes cast with a quorum present and shareholders do not
have a right to cumulate their votes for the election of directors unless the
articles of incorporation provide otherwise. The Company's Articles of
Incorporation do not provide cumulative voting rights for the election of
directors. The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the Annual Meeting is necessary to ratify
the appointment of Keller & Yoder as auditors of the Company for the fiscal year
ending March 31, 1997. Abstentions are included in the determination of shares
present and voting for purposes of whether a quorum exists, while broker
non-votes are not. Neither abstentions nor broker non-votes are counted in
determining whether a matter has been approved. In the event there are not
sufficient votes for a quorum or to approve or ratify any proposal at the time
of the Annual Meeting, the Annual Meeting may be adjourned or postponed in order
to permit the further solicitation of proxies.
<PAGE>
As provided in the Company's Articles of Incorporation, record holders of Common
Stock who beneficially own in excess of 10% of the outstanding shares of Common
Stock (the "10% Limit") are not entitled to any vote in respect of the shares
held in excess of the 10% Limit. A person or entity is deemed to beneficially
own shares owned by an affiliate of, as well as such persons acting in concert
with, such person or entity. The Company's Articles of Incorporation authorize
the Board (i) to make all determinations necessary to implement and apply the
10% Limit, including determining whatever persons or entities are acting in
concert, and (ii) to demand that any person who is reasonably believed to
beneficially own stock in excess of the 10% Limit supply information to the
Company to enable the Board to implement and apply the 10% Limit.
Shareholders are requested to vote by completing the enclosed proxy and
returning it signed and dated in the enclosed postage-paid envelope.
Shareholders are urged to indicate their vote in the spaces provided on the
proxy. Proxies solicited by the Board of Directors of the Company will be voted
at the Annual Meeting or any adjournments or postponements thereof in accordance
with the directions given thereon. Where no instructions are indicated, signed
proxies will be voted FOR the election of each of the nominees for director
named in this Proxy Statement and FOR ratification of the appointment of Keller
& Yoder as independent auditors of the Company for the fiscal year ending March
31, 1997. Returning your completed proxy will not prevent you from voting in
person at the Annual Meeting should you be present and wish to do so.
Any shareholder giving a proxy has the power to revoke it any time
before it is exercised by (i) filing with the Secretary of the Company written
notice thereof (James L. Moore, Secretary, Northwest Equity Corp., 234 Keller
Avenue South, Amery Wisconsin 54001); (ii) submitting a duly executed proxy
bearing a later date; or (iii) appearing at the Annual Meeting and giving the
Secretary notice of his or her intention to vote in person. If you are a
shareholder whose shares are not registered in your own name, you will need
additional documentation from your record holder to vote personally at the
Annual Meeting. Proxies solicited hereby may be exercised only at the Annual
Meeting and any adjournments or postponements thereof and will not be used for
any other meeting.
The cost of solicitation of proxies by mail on behalf of the Board of
Directors will be borne by the Company. Proxies may be solicited by personal
interview or by telephone, in addition to the use of the mails by directors,
officers and regular employees of the Company and Northwest Savings Bank (the
"Bank"), without additional compensation therefor. The Company also has made
arrangements with brokerage firms, banks, nominees and other fiduciaries to
forward proxy solicitation materials for shares of Common Stock held of record
by the beneficial owners of such shares. The Company will reimburse such holders
for their reasonable out-of-pocket expenses.
Proxies solicited hereby will be returned to the Board of Directors,
and will be tabulated by inspectors of election designated by the Board of
Directors, who will not be employed by, or a director of, the Company or any of
its affiliates.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of May 31, 1996 (except as noted otherwise below) by: (i) each
shareholder known to the Company to beneficially own more than 5% of the shares
of Common Stock outstanding, as disclosed in certain reports regarding such
ownership filed with the Company and with the Securities and Exchange Commission
("SEC"), in accordance with Sections 13(d) or 13(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), (ii) each director and director
nominee of the Company, (iii) the executive officer of the Company appearing in
the Summary Compensation Table below, and (iv) all directors and executive
officers as a group. Members of the Board of Directors of the Company also serve
as directors of the Bank.
Number of Shares
Beneficially
Name Owned(1) Percent of Class
---- -------- ----------------
Northwest Savings Bank
Employee Stock Ownership Trust(2). .................. 87,503 9.3%
Heartland Advisors, Inc.(3). ........................ 100,000 10.6%
John Hancock Advisers, Inc..(4) ..................... 71,000 7.5%
Donald J. Ripp(5). .................................. 52,000 5.5%
Brian L. Beadle(6)(7)(8)... ......................... 36,612 3.7%
Gerald J. Ahlin(7). ................................. 10,295 1.1%
Vern E. Albrecht(7).................................. 14,500 1.5%
James A. Counter(7). ................................ 1,525 *
Michael D. Jensen(7). ............................... 34,025 3.6%
Donald M. Michels(7). ............................... 5,120 *
Norman M. Osero(7). ................................. 12,875 1.4%
All directors, director nominees and
executive officers as a group(8 persons)(6)(7)(8).... 110,475 11.7%
- ----------------------
* Amount represents less than 1% of the total shares of Common Stock
outstanding on the Voting Record Date.
(1) Unless otherwise indicated, includes shares of Common Stock held
directly by the individuals as well as by members of such individuals'
immediate family who share the same household, shares held in trust
and other indirect forms of ownership over which shares the
individuals effectively exercise sole or shared voting and/or
investment power.
(2) Emjay Corporation (the "Trustee") is the trustee for the Northwest
Savings Bank Employee Stock Ownership Trust. The Trustee's address
is 4600 North Port Washington Road, Milwaukee, Wisconsin 53217.
(3) Based upon a Schedule 13G, dated February 9, 1996, filed with the
Company under the Exchange Act, by Heartland Advisors, Inc., 790 North
Milwaukee Street, Milwaukee, Wisconsin 53202.
(4) Based upon a Schedule 13G, dated January 26, 1996, filed with the
Company under the Exchange Act, by John Hancock Advisers, Inc.,
John Hancock Place, P.O. Box 111, Boston, MA 02199.
(5) Based upon a Schedule 13D, dated December 14, 1994, filed with the
Company under the Exchange Act, by Donald J. Ripp, 10575 W. Forest
Home Avenue, P.O. Box 301, Hales Corners, Wisconsin 53130-0301.
(6) Includes shares of Common Stock awarded to certain executive officers
under the Company's stock incentive plan that are subject to vesting
requirements. Recipients of restricted stock awards may direct voting
prior to vesting.
(7) Does not include options for shares of Common Stock which do not vest
within 60 days of the Voting Record Date which have been awarded to
certain executive officers and directors under the Company's stock
option plan.
(8) Includes shares of Common Stock allocated to certain executive
officers under the Northwest Savings Bank Employee Stock Ownership
Plan, for which such individuals possess shared voting power.
Mr. Beadle was allocated 2,262 shares and Mr. Moore was allocated
1,425 shares.
3
<PAGE>
MATTERS TO BE VOTED ON AT THE ANNUAL
MEETING MATTER 1
ELECTION OF DIRECTORS
Pursuant to the Articles of Incorporation of the Company, at the first
annual meeting of shareholders of the Company held on August 8, 1995, directors
of the Company were divided into three classes as equal in number as possible.
Directors of the first class were elected to hold office for a term expiring at
the first succeeding annual meeting, directors of the second class were elected
to hold office for a term expiring at the second succeeding annual meeting and
directors of the third class were elected to hold office for a term expiring at
the third succeeding annual meeting, and in each case until their successors are
elected and qualified. At each subsequent annual meeting of shareholders, one
class of directors, or approximately one-third of the total number of directors,
are to be elected for a term of three years. There are no family relationships
among any of the directors and/or executive officers of the Company. No person
being nominated as a director is being proposed for election pursuant to any
agreement or understanding between any person and the Company.
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted FOR the election of the nominees for director listed
below. If any person named as nominee should be unable or unwilling to stand for
election at the time of the Annual Meeting, the proxies will nominate and vote
for any replacement nominee or nominees recommended by the Board of Directors.
All of the proposed nominees currently serve as directors of the Bank. At this
time, the Board of Directors knows of no reason why any of the nominees listed
below may not be able to serve as director if elected.
The following table presents information concerning the nominees for
director and continuing directors. All of the following nominees have served as
a director of the Company since the Company's formation in November 1993.
Nominees for Director for Three-Year Term Expiring in 1999
Director
Position with the Company of the Bank
Name Age and Principal Occupation Since
- ---- --- ------------------------ -----
Michael D. Jensen 46 Director of the Company and the 1986
Bank; President and director of
Amery Telcom, Inc., a communications
company, since 1983; Director of
Apple River Hospital, Amery, Wisconsin
since 1984.
Donald M. Michels 69 Director of the Company and the 1987
Bank; Prior to his retirement, he
served from 1977-1991 as President
of Holy Family Hospital, New
Richmond, Wisconsin.
The affirmative vote of a plurality of the votes cast is required for
the election of directors. Unless otherwise specified, the shares of Common
Stock represented by the proxies solicited hereby will be voted in favor of the
election of the above-described nominees. The Board of Directors recommends that
you vote FOR the election of each of the nominees for director.
4
<PAGE>
INFORMATION WITH RESPECT TO CONTINUING DIRECTORS
Director
Position with the Company of the Bank
Name Age and Principal Occupation Since
- ---- --- ------------------------- -----
Directors Whose Terms Expire in 1997
Gerald J. Ahlin 63 Director of the Company and the 1985
Bank; Prior to his retirement,
from 1959 to 1992, he was a
business and economics teacher
for the Amery Public Schools,
Amery, Wisconsin.
Brian L. Beadle 53 President, Chief Executive Officer, 1976
Chief Financial Officer, and
Director of the Company and
the Bank; from 1974 to 1984, he
served as Vice President of the
Bank; joined the Bank in 1970.
Directors Whose Terms Expire in 1998
Vern E. Albrecht 67 Director of the Company and the 1989
Bank; Prior to his retirement,
from 1971 to 1989, he was a
President, Chief Executive Officer
and principal owner of Nova Tran
Corporation, an electronics and
and medical manufacturing
company, Clear Lake, Wisconsin.
James A. Counter 55 Director of the Company and the 1995
Bank; Owner of J.A. Counter
& Associates, Inc., an insurance,
financial planning and investment
brokerage located in New Richmond,
Wisconsin.
Norman M. Osero 57 Director of the Company and the 1992
Bank; President of Dynatronix, Inc.,
Amery, Wisconsin, an electronic
manufacturing company since 1979:
Vice President of Amery Technical
Products, Inc., Amery, Wisconsin,
a subcontractor manufacturing
company, since 1984.
5
<PAGE>
MATTER 2
RATIFICATION OF APPOINTMENT OF AUDITORS
The Company's independent auditors for the fiscal year ended March 31,
1996, were Keller & Yoder. The Board of Directors of the Company has reappointed
Keller & Yoder to perform the audit of the Company's financial statements for
the fiscal year ending March 31, 1997. A representative of Keller & Yoder will
be present at the Annual Meeting and will be given the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate question from the Company's shareholders.
The affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy and voted at the Annual Meeting is required
for ratification of the selection of auditors. The Board of Directors recommends
a vote FOR ratification of the appointment of Keller & Yoder as the independent
auditors of the Company.
MEETINGS OF THE BOARD AND ITS COMMITTEES
The Company was incorporated on November 3, 1993. Regular meetings of
the Board of Directors are held on a monthly basis. During the fiscal year ended
March 31, 1996, the Board of Directors of the Company held twelve regular
meetings and one special meeting. No incumbent director attended fewer than 75%
of the aggregate total number of meetings of the Board of Directors held and the
total number of committee meetings on which such director served during the
fiscal year ended March 31, 1996.
The Board of Directors of the Company has a standing joint Audit
Committee with the Bank. For the fiscal year ended March 31, 1996, the Audit
Committee of the Company and the Bank consisted of Directors Vern E. Albrecht,
Donald M. Michels and James A. Counter, who were neither officers nor employees
of the Company nor the Bank ("Outside Directors"). The Audit Committee reviews
the scope and timing of the audit of the Company's financial statements by the
Company's independent auditors and reviews with the independent auditors the
Company's management policies and procedures with respect to auditing and
accounting controls. The Audit Committee also reviews and evaluates the
independence of the Company's auditors, approves services rendered by such
auditors and recommends to the Board the engagement, continuation or discharge
of the Company auditors. The Company's Audit Committee met once during the
fiscal year ended March 31, 1996.
For the fiscal year ended March 31, 1996, the Compensation Committee of
the Board of Directors of the Company consisted of Directors Michael D. Jensen,
Norman M. Osero and Gerald J. Ahlin. The Company did not pay separate
compensation to its officers during the fiscal year ended March 31, 1996. All
compensation was paid by the Bank and the compensation policies were determined
by the Compensation Committee of the Bank. The Compensation Committee of the
Company met twice during the fiscal year ended March 31, 1996. In June 1996, the
Compensation Committee of the Company met to ratify compensation decisions made
by the Bank during the fiscal year ended March 31, 1996. In August 1996, the
Compensation Committee of the Company met to grant stock options and shares of
common stock under the Company's stock related benefit plans.
For the fiscal year ended March 31, 1996, the Nominating Committee of
the Board of Directors of the Company consisted of Directors Brian L. Beadle,
James A. Counter and Vern E. Albrecht. In May 1996, the Nominating Committee
recommended nominees for directors to stand for election at the Annual Meeting
to the Board of Directors. In April 1995, the entire Board of Directors acted as
a Nominating Committee for the selection of nominees for directors for the
Annual Meeting held in 1995, so the Nominating Committee did not meet during the
fiscal year ended March 31, 1996. The Company's By-Laws allow for shareholder
nominations of directors and require such nominations be made pursuant to timely
notice in writing to the Secretary of the Company. See "Shareholder Proposals
for the 1997 Annual Meeting."
6
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Executive Compensation
During the fiscal year ended March 31, 1996, the Company did not pay
separate compensation to its executive officers. Separate compensation will not
be paid to officers of the Company until such time as the officers of the
Company devote significant time to separate management of Company affairs. This
is not expected to occur until the Company becomes actively involved in
additional significant business beyond that of the Bank. The following table
summarizes the total compensation earned by the Bank's Chief Executive Officer.
The Bank's next highest paid executive officer's compensation (salary and bonus)
did not exceed $100,000 for the Bank's fiscal years ended March 31, 1996, 1995
or 1994.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
----------------------
Awards
------
Annual Compensation(1) Value of Number All
Restricted of Shares Other
----------------------- Stock Subject to Compen-
Name and Principal Position Year Salary Bonus(2) Awards(3) Options(4) sation(5)
- --------------------------- ---- ------ -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Brian L. Beadle................ 1996 $77,684 $3,750 $215,586 41,300 $23,059
President, Chief Executive 1995 74,058 -- 7,406
Officer and Chief Financial 1994 71,265 3,500 7,476
Officer of the Company
and the Bank
- -------------------------------
<FN>
(1) Perquisites and other personal benefits provided to the named executive officer by the Bank
did not exceed the lesser of $50,000 or 10% of named executive officer's total annual salary
and bonus during the fiscal years indicated, and accordingly, are not included.
(2) Bonuses paid during the fiscal years ended March 31, 1994 and 1996 were discretionary.
(3) The amount shown in this column represents the value of shares of Common Stock awarded under
the Northwest Equity Corp. Incentive Plan (the "Incentive Plan") during the fiscal year
ended March 31, 1996, calculated by multiplying the value of the Common Stock on the date
of grant by the number of shares awarded. The number and vesting schedule for the shares
awarded to Mr. Beadle are as follows: (i)6,883 - (10-10-96); (ii) 6,883 - (10-10-97); and
(iii)6,884-(10-10-98). At March 31, 1996, the aggregate value of restricted(unvested) shares
awarded to Mr. Beadle under the Incentive Plan was $215,586 based on 20,650 restricted shares
and the value of the shares of Common Stock on that date ($10.44). Mr. Beadle received
cash dividends in the amount of $3,717 on the restricted shares during the fiscal year ended
March 31, 1996. Recipients of awards under the Incentive Plan are entitled to payment of any
dividends on unvested shares of Common Stock.
(4) The amount shown in this column represents the total number of shares of Common Stock subject
to options granted (both vested and unvested) under the Northwest Equity Corp. Stock Option
Plan (the "Stock Option Plan") during the year ended March 31, 1996.
(5) The amounts shown in this column for the fiscal years ended March 31, 1994 and 1995 represent
the Bank's contribution on behalf of the named executive officer under the Northwest Savings
Bank Money Purchase Pension Plan (the "Pension Plan"). The amount shown for the fiscal year
ended March 31, 1996, is derived from the following figures: (i) $18,987 - ESOP
contribution (based upon the value of the shares of Common Stock at March 31, 1996);
(ii)$4,072-Pension Plan contribution.
</FN>
</TABLE>
7
<PAGE>
Employment Agreements
In connection with the Bank's conversion from mutual to stock form in
October 1994 (the "Conversion"), the Bank entered into a three-year employment
agreement with Mr. Brian L. Beadle and a one-year employment agreement with Mr.
James L. Moore. The term of these agreements may be restored to the full three
and one year terms, as applicable, by action of the Board of Directors in
connection with the Board's annual performance evaluation. These employment
agreements were restored on February 13, 1996 by action of the Board of
Directors to full terms and the base salaries were changed to reflect current
salaries. These employment agreements are intended to ensure that the Bank
maintains stable and competent management. Under these agreements, the base
salary for Brian L. Beadle is $78,500 and $51,860 for James L. Moore. Base
salaries may be increased by the Board of Directors of the Bank, but may not be
reduced except as part of a general pro rata reduction in compensation for all
executive officers. In addition to base salary, the agreements provide for
payments from other Bank incentive compensation plans, and provide for other
benefits, including participation in any group health, life, disability or
similar insurance program and in any pension, profit-sharing, employee stock
ownership plan, deferred compensation, 401(k) or other retirement plans
maintained by the Bank. The agreements also provide for participation in any
stock-based incentive programs made available to executive officers of the Bank.
The agreements may be terminated by ;the Bank upon death, disability, or
retirement; for cause at any time; or in certain events specified by regulations
issued by the Office of the Wisconsin Commissioner of Savings and Loan (the
"Commissioner"). If the Bank terminates the agreements other than for death,
disability, retirement or cause (or a change of control as defined below), the
executive is entitled to continuation of his compensation and benefits (based on
the highest compensation within three years preceding termination) for the
remainder of the employment term together with other compensation and benefits
in which he was vested at the termination date.
The agreements provide for severance payments if the executive's
employment terminates following a change in control. Under the agreements, a
"Change of Control" is generally defined to include any change in control
required to be reported under the federal securities laws as well as (i) the
acquisition by any person of 25% or more of the Company's outstanding voting
securities, or (ii) a change in a majority of the directors of the Company
during any two-year period without the approval of at least two-thirds of the
persons who were directors at the beginning of such period. In the event of a
Change of Control, the executive shall receive severance pay in the form of one
year's base salary (based upon the executive's highest base salary within three
years preceding termination). In the event of a Change in Control, the executive
shall receive severance pay in the form of one year's base salary (based upon
the executive's highest base salary within three years preceding the date of
termination). Assuming a Change in Control occurred as of March 31, 1996,
Messrs. Beadle and Moore would be entitled to severance pay in the amounts of
$78,500 and $51,860, respectively, or $130,360 in the aggregate. In addition,
the executive is entitled to all qualified retirement and other benefits in
which the executive was vested and additional retirement benefits under all
qualified plans that the executive would have been entitled had such executive
continued employment through the then-remaining employment term. If the
severance payments following a Change in Control would constitute "parachute
payments" within the meaning of Section 280G(b)(2) of the Internal Revenue Code
of 1986, as amended (the "Internal Revenue Code"), and the present value of such
"parachute payments" equals or exceeds three times the executive's average
annualized includable income for the five calendar years preceding the year in
which a Change in Control occurred, the severance payments shall be reduced to
an amount equal to the present value of 2.99 times the average annual
compensation paid to the executive during the five calendar years immediately
preceding such Change in Control. If total payments following a Change in
Control constitute excess parachute payments under Section 280G of the Internal
Revenue Code, it could result in the imposition of an excise tax on the
recipient and denial of an income tax deduction for such excess amounts to the
Bank and the Company. The employment agreements provide that benefits payable to
the executive under a Change in Control may, at the election of the executive,
be reduced to an amount necessary to prevent imposition of an excise tax.
8
<PAGE>
Benefits
Insurance Plans
All full-time employees of the Bank are eligible for comprehensive
health insurance commencing upon the completion of three full months of
employment with the Bank. After three full months of employment, full-time
employees are covered as a group for life insurance and long-term disability
insurance. The Bank pays 85% of the cost of health insurance for single coverage
and 70% of the cost of health insurance for family coverage. The Bank pays the
entire cost of life insurance and long-term disability coverage for all
employees.
Money Purchase Pension Plan
The Bank maintains the Northwest Savings Bank Money Purchase Pension
Plan (the "Pension Plan"), a tax qualified defined contribution plan covering
all eligible employees. Employees are eligible to participate after completing a
twelve-month period of 1,000 or more hours of employment and attaining age 21.
Each plan year, the Bank contributes 5% of each participant's salary to the
Pension Plan on behalf of those participants who have completed 1,000 hours of
service during the plan year and are employed at the end of the plan year.
Benefits generally become 5% vested after one year of service, 10% vested after
two years of service, 15% vested after three years of service, 20% vested after
four years of service and 100% vested after five years of service. Distributions
from the Pension Plan are made upon termination of service in an annuity, a lump
sum or in installments over a period not exceed the greater of the life
expectancy of the participant or the life expectancy of the joint survivor of
the participant and his designated beneficiary. Under the Pension Plan, a
separate account is established for each participating employee. The Pension
Plan's trustee is the Emjay Corporation.
Employee Stock Ownership Plan and Trust
The Bank has established for eligible employees the ESOP. As part of
the Conversion, the ESOP borrowed funds from the Company to purchase 10% of the
Common Stock issued in the Conversion, or 103,250 shares of Common Stock.
Collateral for the loan is the Common Stock purchased by ;the ESOP. The Bank
will make scheduled discretionary cash contributions to the ESOP sufficient to
amortize the principal and pay the interest on the loan. The loan will be repaid
principally from the Bank's contributions to the ESOP over a period of seven
years. The interest rate payable on the ESOP loan is 8% simple interest
compounded annually. Shares purchased by the ESOP are held in a suspense account
for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportional to the repayment of the ESOP loan will be allocated
among participants on the basis of compensation. Benefits generally become 5%
vested after one year of service, 10% vested after two years of service, 15%
vested after three years of service, 20% vested after four years of service and
100% vested after five years of service. Participants also become 100% vested
upon death, retirement, early retirement, disability or separation from service.
Benefits may be paid either in shares of Common Stock or in cash. As the Bank's
contributions to the ESOP are not fixed, benefits payable under the ESOP cannot
be estimated.
In November 1993, the American Institute of Certified Public
Accountants issued Statement of Position 93-6 - "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP"). The SOP is effective for the Company's
fiscal year that began April 1995. The SOP requires that shares committed to be
released in an accounting period should be reflected in the consolidated
financial statements as compensation expense equal to the fair value of the
shares committed to be released. The shares generally will be deemed to be
committed to be released ratably during an accounting period as the employee
performs service. Accordingly, average fair values will be used to determine the
amount of compensation expense to be recognized in that period. Thus, as shares
increase or decrease in value, earnings will be affected relative to the shares
committed to be released in that period. Additionally, the SOP requires that
outstanding shares for purposes of computing both primary and fully diluted
earnings per share include only those shares scheduled to be released in that or
prior periods. Thus, as additional shares are released by the ESOP in future
periods, earnings per share may be diluted. Shares of the Company acquired by
the ESOP are scheduled to be released over a seven year period commencing in
1996. 15,747 shares of Common Stock held by the ESOP were released on March 31,
1996.
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<PAGE>
Emjay Corporation (the "Trustee") is the ESOP trustee. The Compensation
Committee may instruct the Trustee regarding investment of funds contributed to
the ESOP. The Trustee will vote all allocated shares held in the ESOP in
accordance with instructions from participating employees. The Trustee will vote
unallocated shares held in the suspense account.
Northwest Equity Corp. Incentive Plan
In October 1995, the Company's shareholders approved the Northwest
Equity Corp. Incentive Plan (the "Incentive Plan"). The Incentive Plan provides
officers and employees of the Company and the Bank with a proprietary interest
in the Company and is intended to encourage them to remain with the Company and
the Bank. As of March 31, 1996, the Bank had 15 officers and employees
participating in the Plan. The Plan acquired 41,300 shares of Common Stock, or
4.0% of the number of shares of Common Stock issued by the Company in connection
with the Bank's Conversion.
The Incentive Plan is administered by the Compensation Committee of the
Company, consisting of Directors Gerald J. Ahlin, Michael D. Jensen and Norman
M. Osero. In October 1995, officers and employees of the Bank were granted in
the aggregate 41,300 nontransferable and nonassignable shares of Common Stock.
The Incentive Plan may be amended to increase the number of shares available for
grant; however, if the increase in the number of shares would be deemed to be
material under regulations issued by the SEC, such amendment would require
shareholder approval. Officers and employees become vested in shares of Common
Stock awarded under the Incentive Plan at the rate of approximately 33 1/3% per
year on the first, second and third anniversaries of the date of the grant. The
vesting schedule for any future awards under the Incentive Plan will be
determined by the Compensation Committee of the Company at the time of the
award. Awards will be 100% vested upon termination of employment due to death,
disability or following a change in control of the Bank or the Company. If an
employee terminates employment with the Bank or Company for reasons other than
due to death, disability or a change in control of the Bank or the Company,
unvested Plan awards will be forfeited.
In the event of a stock split, reverse stock split or stock dividend,
the number of shares of Common Stock awarded (and not sold by the recipient of
the award as of the date of the stock split, reverse stock split or stock
dividend) and the number of shares of Common Stock available for future awards
under the Incentive Plan will be adjusted to reflect such increase or decrease
in the total number of shares of Common Stock outstanding.
Northwest Equity Corp. 1995 Stock Option Plan
In October 1995, the Company's shareholders approved the Northwest
Equity Corp. 1995 Stock Option Plan (the "Stock Option Plan"). The purpose of
the Stock Option Plan is to provide officers, employees and directors of the
Company and the Bank with a proprietary interest in the Company; to recognize
management, employees and the Board of Directors for their contributions to the
success of the Bank; and to incite their future performance and encourage them
to remain with the Company and the Bank. Under the Stock Option Plan, all
directors, officers and employees of the Company and its subsidiaries are
eligible to participate. As of March 31, 1996, the Company had 16 directors,
officers and employees participating in the Stock Option Plan. The Stock Option
Plan authorizes the grant of (i) options to purchase shares of Common Stock
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code ("Incentive Stock Options"); (ii) options that do not so qualify
("Non-Statutory Options"); and (iii) options that are exercisable only upon a
change in control of the Bank or the Company ("Limited Rights"). Under the Stock
Option Plan, options for a total of 103,251 shares of Common Stock, or 10.0% of
the number of shares of Common Stock issued in connection with the Conversion,
were made available for granting to eligible participants. As of March 31, 1996,
options to purchase 103,251 shares had been granted under the Stock Option Plan
and no options to purchase Common Stock were available for future grants. The
Stock Option Plan may be amended to increase the number of options available for
granting in the future; however, if the increase in the number of shares
available for grant is deemed material under regulations issued by the SEC, such
amendment would require shareholder approval.
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<PAGE>
The following table sets forth certain information concerning the grant
of stock options to Mr. Beadle under the Stock Option Plan during the fiscal
year ended March 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------
% of Total
Options
Granted to
Options Employees in Exercise Expiration
Name Granted(1) Fiscal Year(2) Price/share Date
- ---- ----------- -------------- ----------- -----
Brian L. Beadle.......41,300 80.0% $10.44 10-10-05
- ------------------
(1) The options granted are subject to a vesting schedule under the Stock
Option Plan and are exercisable as follows: (i)9,578 - (10-10-96);
(ii)9,578 - (10-10-97); (iii)9,578 - (10-10-98); (iv)9,578 - (10-10-99),
(v)2,988 - (10-10-00).
(2) Options to purchase 103,251 shares of Common Stock were granted to
eligible participants under the Stock Option Plan during the year ended
March 31, 1996, of which options to purchase 51,627 shares were granted
to officers and employees.
The following table sets forth certain information concerning the
exercise of stock options granted under the Stock Option Plan by Mr. Beadle
during the year ended March 31, 1996, and the number and value of his
unexercised stock options at March 31, 1996.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Value of
Number of Unexercised
Number of Unexercised In-the-Money
Shares Options Options
Acquired on Value At Fiscal Year-End At Fiscal Year-End(1)
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brian L. Beadle 0 0 0 41,300 0 n/a
- --------------- ------------------
<FN>
(1) None of the unexercised options granted to Mr.Beadle were "in-the-money" at March 31, 1996, as the
exercise price of the options ($10.44) exceeded the fair market value of the options ($10.38) at
March 31, 1996.
</FN>
</TABLE>
11
<PAGE>
Of the options to purchase 51,624 shares of Common Stock granted to the
directors of the Company, options grants to individual directors were determined
based upon years of service with the Bank. Each non-executive director who had
served as a director for a period of one or more years as of the date of
shareholder approval in October 1995 were granted options to purchase 10,000
shares of Common Stock. Each non-executive director who served as a director for
a period of less than one year as of the date of shareholder approval was
granted options to purchase 1,624 shares of Common Stock.
Under the Stock Option Plan, the Compensation Committee will determine
the expiration date (but not later than ten years from the date the option is
granted) and the exercise price of the options with respect to employees. With
respect to all options granted to directors and the initial grant of options to
officers and employees, the expiration date is ten years from the date of grant
(October 10, 1995) and the exercise price of the options is the fair market
value of the Common Stock on the date of the grant ($10.44). All options granted
to employees are intended to be Incentive Stock Options to the extent permitted
under Section 422 of the Internal Revenue Code. The exercise price may be paid
in cash or shares of Common Stock. No options will be awarded under the Stock
Option Plan following the tenth anniversary of approval of the Stock Option Plan
by shareholders of the Company. Options will be transferable only by will or the
laws of descent and distribution, except that Non-Statutory Options may be
transferred to the spouse, children or grandchildren of a participating employee
(or a trust for the benefit of such family members).
Options granted under the Stock Option Plan in October 1995 to
employees are intended to vest at the rate necessary to qualify such options as
Incentive Stock Options under the Internal Revenue Code. Options granted to
non-executive directors vest at the rate of 33 1/3% per year commencing on the
first, second and third anniversaries of the date the Stock Option Plan was
approved by shareholders. The vesting schedule of options to be granted to
non-executive employees in the future, if any, will be determined by the
Compensation Committee of the Company.
In the event of a stock split, reverse stock split or stock dividend,
the number of shares of Common Stock subject to options awarded under the Stock
Option Plan and the exercise price per share under the option will be adjusted
to reflect such increase or decrease in the total number of shares of Common
Stock outstanding.
No option granted in connection the Stock Option Plan will be
exercisable after three months after the date on which the optionee ceases to
perform services for the Bank or the Company, except that in the event of death
or disability, options may be exercisable for up to one year thereafter or such
longer period as determined by the Compensation Committee of the Company.
Options held by employees terminated for cause will terminate on the date of
termination. Termination "for cause" includes termination due to personal
dishonesty, incompetence, willful misconduct, the intentional failure to perform
stated duties, breach of fiduciary duty involving personal dishonesty, willful
violations of law, the entry of a final cease and desist order or the material
breach of any provisions of an employee's employment contract. Options will be
immediately exercisable in the event of a change of control. "Change of control"
is defined to include the acquisition of beneficial ownership of 25% or more of
any class of equity security by a person or group of persons acting in concert,
an exchange offer, merger or other form of business combination, a sale of
assets or a contested election of directors that results in a change in control
of a majority of the Board of Directors of the Company.
In the event of death, disability or retirement, the Company, if
requested by the employee, may elect to pay the employee in exchange for
cancellation of the option, or beneficiary in the event of death, the amount by
which the fair market value of the Common Stock exceeds the exercise price of
the option on the date of the employee's termination of employment.
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<PAGE>
Directors' Compensation
For the fiscal year ended March 31, 1996, each non-employee member of
the Board of Directors of the Bank received a $400 monthly directors' fee. The
directors of the Company, including Mr. Beadle, also received a $200 monthly
directors' fee for Company board meetings attended during the fiscal year ended
March 31, 1996.
In October 1995, Outside Directors Ahlin, Albrecht, Jensen, Michels and
Osero each were granted options to purchase 10,000 shares of Common Stock under
the Stock Option Plan which are subject to the following vesting schedule: (i)
3,333 -- 10/10/96; (ii) 3,333 -- 10/10/97; and (iii) 3,334 -- 10/10/98. In
addition, Outside Director Counter was granted options to purchase 1,624 shares
of Common Stock that are subject to the following vesting schedule: (i) 541 --
10/10/96; (ii) 541 -- 10/10/97; and (iii) 542 -- 10/10/98.
INDEBTEDNESS OF MANAGEMENT AND CERTAIN TRANSACTIONS
Current federal law requires that all loans or extensions of credit to
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors of
the Bank.
The Bank's policy provides that all loans or extensions of credit to
executive officers and directors are to be made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and may not involve more than the normal risk of collectibility
or present other unfavorable features. All loans since the enactment of current
laws were made by the Bank in the ordinary course of business and were not made
with favorable terms nor involved more than the normal risk of collectibility or
presented unfavorable features.
The Company and the Bank intend that all transactions in the future
between the Company and the Bank and executive officers, directors, holders of
10% or more of the shares of any class of common stock of the Company and
affiliates thereof, will contain terms no less favorable to the Company than
would have been obtained by them in arms' length negotiations with unaffiliated
persons and will be approved by a majority of outside directors of the Company
or the Bank, as applicable, not having any interest in the transaction.
SECTION 16 COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than ten percent of the shares
of Common Stock outstanding, to file reports of ownership and changes in
ownership with the SEC and the National Association of Securities Dealers, Inc.
Executive officers, directors and greater than ten percent shareholders are
required by regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based upon the review of the information provided to the
Company, the Company believes that during the fiscal year ended March 31, 1996,
executive officers, directors and greater than ten percent shareholders complied
with all Section 16(a) filing requirements.
13
<PAGE>
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING
To be considered for inclusion in the proxy statement relating to the
Annual Meeting to be held in August 1997, shareholder proposals must be received
at the principal executive offices of the Company at 234 Keller Avenue South,
Amery, Wisconsin 54001 no later than March 2, 1997. If such proposal is in
compliance with all of the requirements of 17 C.F.R. paragraph 240.14a-8 ("Rule
14a-8) of the Rules and Regulations under the Exchange Act, it will be included
in the proxy statement and set forth on the appointment form of proxy issued for
such annual meeting of shareholders. It is urged that any such proposals be sent
certified mail, return receipt requested.
Shareholder proposals that are not submitted for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before an annual meeting pursuant to Article VII of the Company's
Articles of Incorporation. For business to be properly brought before an annual
meeting, a shareholder must have given timely notice thereof in writing to the
Secretary of the Company. To be timely, a shareholder's notice must be delivered
to or mailed by first class United States mail, postage prepaid, to the
principal executive offices of the Company not later than the close of business
on the tenth day following the day on which notice of the annual meeting was
mailed to the shareholders. A shareholder's notice must set forth certain
information in accordance with Article VII of the Company's Articles of
Incorporation. The notice must include the shareholder's name and address, as
they appear on the Company's record of shareholders, the class and number of
shares of the Company's Common Stock beneficially owned by such shareholder, a
brief description of the proposed business, the reason for considering such
business at the annual meeting and any material interest of the shareholder in
the proposed business.
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING
The Board of Directors knows of no business that will be presented for
consideration at the Annual Meeting other than as stated in the Notice Annual
Meeting of Shareholders. If, however, other matters are properly brought before
the Annual Meeting or any adjournments or postponements thereof, it is the
intention of the persons named in the accompanying proxy to vote the shares
represented thereby on such matters in accordance with their best judgment.
A copy of the Company's Annual Report or Form 10-KSB (without exhibits)
for the fiscal year ended March 31, 1996, as filed with the SEC will be
furnished without charge to shareholders of record upon written request to
Northwest Equity Corp., Brian L. Beadle, 234 Keller Avenue South, Amery,
Wisconsin 54001.
By Order of the Board of Directors
/s/ James L. Moore
James L. Moore
Secretary
Amery, Wisconsin
June 26, 1996
================================================================================
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
================================================================================
14
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