UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , D.C. 20549
---------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
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
Amery, Wisconsin 54001
(Address of principal executive offices) (Zip code)
(715) 268-7105
(Issuer'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 Securities Exchange Act of 1934 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_____
The number of shares outstanding of the issuer's common stock, $1.00 par
value per share, was 838,754 at June 30, 1997.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTHWEST EQUITY CORP.
Dated:___8/7/97______________ By: __/s/Brian L. Beadle__________
(Brian L. Beadle, President
Principal Executive Officer and
Principal Financial and
Accounting Officer)
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Registrant is not involved in legal proceedings involving amounts
in the aggregate which management believes are material to the financial
condition and results of operations of the Registrant. (Materiality is defined
for accounting purposes as $250,000 or more) On October 16, 1996, the Bank
learned that a Minnesota Bank had commenced a repleven lawsuit against a
borrower of the Bank that involves several parties claiming interests in
collateral secured a General Business Security Agreement of the Bank. On
November 20, 1996, the Bank filed its answer and a third party complaint seeking
repleven of its collateral and money judgments against its borrowers, the
guarantors, and other interested parties. Repleven judgment was entered in favor
of the Bank on January 15, 1997. A money judgment was filed against a guarantor
on December 30, 1996. One of the guarantors has since filed personal bankruptcy.
The Bank has commenced an action to avoid their discharge in bankruptcy court.
The Bank is asserting the priority of its liens against other creditors in state
circuit court. Depending upon the non-exempt assets of the parties involved, the
Bank's legal counsel believes the Bank should have sufficient legal grounds to
expect recovery from the Bank's collateral, personal guarantees, and the other
parties involved. The Board of Directors at its meeting October 8, 1996, decided
to increase the quarterly loss allowance to $25,000 until more information is
available to make a reasonable estimate of any losses that may occur. The Board
continued this policy at subsequent meetings, because a reasonable estimate
still cannot be determined. As soon as the Board can identify and quantify the
amount of the loss if any, it will book the loss. In order to establish an order
of magnitude of the loss potential, a worst case scenario of no recovery on a
loan of $540,000 plus an overdraft of $83,000 less the current amount in the
loan loss reserve of $297,000 allocated or available to be allocated to this
loan, would produce an after-tax loss of approximately $215,000.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-k.
a. No reports on Form 8-K were filed during the quarter for
which this report was filed.
2
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,
(In Thousands)
<CAPTION>
June 30,
ASSETS 1997 March 31,
(unaudited) 1997
------------- -------------
<S> <C> <C>
Cash - including interest bearing deposits of $3,087
at June 30, 1997 and $1,721 at March 31, 1997 $4,132 $2,980
Securities available-for-sale - fair value 3,075 2,752
Mortgage backed securities - market value of $7,285 at
June 30, 1997 and $7,308 at March 31, 1997 7,324 7,421
Loans held for sale - at market 418 415
Loans receivable - net 77,644 77,240
Real estate acquired in settlement of loans 9 - -
Investment in Federal Home Loan Bank stock - at
cost - which approximates fair value 912 912
Premises and equipment 2,313 2,341
Accrued interest receivable 597 656
Prepaid expenses and other assets 467 380
------------- -------------
TOTAL ASSETS $96,891 $95,097
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts $63,213 $61,557
Advances from Federal Home Loan Bank 16,634 17,634
Other borrowed money 5,251 4,463
Accounts payable and accrued expenses 533 472
Accrued income taxes 167 112
------------- -------------
Total liabilities 85,798 84,238
------------- -------------
Stockholders' equity
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; 838,754 shares outstanding 1,033 1,033
Additional paid-in capital 6,584 6,584
Net unrealized loss on securities available for sale (20) (29)
Less unearned restricted stock plan award (83) (115)
Less unearned Employee Stock Ownership
Plan compensation (517) (558)
Less treasury stock - at cost - 193,763 shares (2,256) (2,256)
Retained earnings - substantially restricted 6,352 6,200
------------- -------------
Total stockholders' equity 11,093 10,859
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $96,891 $95,097
============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,
(In Thousands except for per share amounts)
<CAPTION>
Three Months Ended
June 30,
1997 1996
------------- -------------
<S> <C> <C>
Interest income:
Interest and fees on loans 1,702 $1,598
Interest on mortgage-backed and related securities 132 140
Interest and dividends on investments 77 64
------------- -------------
Total interest income 1,911 1,802
------------- -------------
Interest expense:
Interest on savings 717 695
Interest on borrowings 333 277
------------- -------------
Total interest expense 1,050 972
------------- -------------
Net interest income 861 830
Provision for loan losses 25 6
------------- -------------
Net interest income after provision for loan losses 836 824
------------- -------------
Other income:
Mortgage servicing fees 22 19
Service charges on deposits 58 58
Gain on sale of mortgage loans 16 15
Other 34 48
------------- -------------
Total other income 130 140
------------- -------------
General and administrative expenses:
Salaries and employee benefits 310 307
Net occupancy expense 78 67
Data processing 32 37
Federal insurance premiums 10 35
Other 131 131
------------- -------------
Total general and administrative expense 561 577
------------- -------------
Income before income taxes 405 387
Income taxes 153 164
------------- -------------
Net income $252 $223
============= =============
Earnings per share $0.33 $0.25
============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three Months Ended June 30,
(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>
Three Months Ended June 30, 1996
Balance - March 31, 1996 $1,033 $6,584 $(34) $(319) $(699) $(561) $5,860 $11,864
Net income - - - - - - - - - - - - 223 223
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $7 - - (10) - - - - - - - - (10)
Amortization of unearned ESOP and restricted stock
award - - - - - - 70 34 - - - - 104
Purchase of Treasury Stock - - - - - - - - - - (373) - - (373)
Cash dividends - $.10 per share - - - - - - - - - - - - (88) (88)
Balance - June 30, 1996 $1,033 $6,584 $(44) $(249) $(665) $(934) $5,995 $11,720
======== ======== ====== ========== ========= ======== ======== =========
Three Months Ended June 30, 1997
Balance - March 31, 1997 $1,033 $6,584 $(29) $(115) $(558) $(2,256) $6,200 $10,859
Net income - - - - - - - - - - - - 252 252
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $8 - - - - 9 - - - - - - - - 9
Amortization of unearned ESOP and restricted stock
award - - - - - - 32 41 - - - - 73
Cash dividends - $.12 per share - - - - - - - - - - - - (100) (100)
--------- -------- --------- ----------- -------- ---------- -------- --------
Balance - June 30, 1997 $1,033 $6,584 $(20) $(83) $(517) $(2,256) $6,352 $11,093
======== ======== ======= =========== ========== ========= ========= ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
(In Thousands)
<CAPTION>
Three Months Ended
June 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash provided by operating activities:
Net income $252 $223
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 37 24
Provision for loan losses 25 6
Deferred income taxes (28) 0
Amortization of ESOP and restricted stock awards 73 104
Proceeds from sales of mortgage loans 964 1,501
Loans originated for sale (951) (1,486)
Decrease (increase) accrued interest receivable 59 12
Decrease (increase) prepaid expenses and other assets (87) 25
Increase (decrease) accrued interest payable 21 (19)
Increase (decrease) accrued income taxes payable 55 136
Increase (decrease) other accrued liabilities 40 55
------------- -------------
Net cash provided by operating activities 460 581
------------- -------------
Cash provided by investing activities:
Principal collected on long-term loans 7,354 9,486
Long-term loans originated or acquired (7,792) (12,425)
Purchases of mortgage-backed securities - - (2,766)
Principal collected on mortgage-backed securities 97 189
Proceeds from sale of foreclosed property - - 43
Purchase of office properties and equipment (9) (240)
Purchase of investments (302) (261)
------------- -------------
Net cash (used in) investing activities (652) (5,974)
------------- -------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
6
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30,
(In Thousands)
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash provided by financing activities:
Net increase (decrease) in savings accounts 1,656 3,097
Net increase (decrease) in short-term borrowings (992) (50)
Repayments of long-term financing 180 (1,925)
Proceeds from long-term financing 600 220
Purchases of treasury stock - - - -
Acquisition of common stock for incentive plan - - - -
Dividends paid (100) - -
Net proceeds from sale of common stock - - 6,791
------------- -------------
Net cash provided by (used in) financing activities 1,344 8,133
------------- -------------
Increase (decrease) in cash and equivalents 1,152 2,740
Cash and equivalents - beginning 2,980 2,017
------------- -------------
Cash and equivalents - ending $4,132 $4,757
============= =============
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $9 $63
Interest paid 1,029 2,450
Income taxes paid 98 562
See accompanying Notes to Consolidated Financial Statements
</TABLE>
7
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with the accounting policies
described in the Bank's audited financial statements for the year ended
March 31, 1997 and should be read in conjunction with the financial
statements and notes which appear in that report. These statements do
not include all the information and disclosures required by generally
accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered for a
fair presentation have been included.
Note 2. Subsequent Events: none
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
NORTHWEST EQUITY CORP.
Comparison of Operating Results for the Three Months Ended June 30, 1996 and
June 30, 1997
Net Income
Net income for the three months ended June 30, 1997, increased $29,000
or 13.0% to $252,000 compared to $223,000 for the three months ended June 30,
1996. The increase in net income was primarily due to an increase in net
interest income of $31,000 from $830,000 for the three months ended June 30,
1996 to $861,000 for the three months ended June 30, 1997. A $25,000 reduction
in federal insurance premiums from $35,000 for the three months ended June 30,
1996 to $10,000 for the three months ended June 30, 1997, was partially offset
by an increase in provision for loan losses of $19,000 from $6,000 for the three
months ended June 30, 1996 to $25,000 for the three months ended June 30, 1997,
and a decrease in other income of $14,000 from $48,000 for the three months
ended June 30, 1996 to $34,000 for the three months ended June 30, 1997.
Net Interest Income
Net interest income increased by $31,000 from $830,000 for the three
months ended June 30, 1996, to $861,000 for the three months ended June 30,
1997. The improvement in net interest income results from interest income
increasing $109,000 to $1.9 million for the three months ended June 30, 1997,
compared to $1.8 million for the three months ended June 30, 1996, while
interest expense increased only $78,000 to $1,050,000 for the three months ended
June 30, 1997, from $972,000 for the three months ended June 30, 1996.
Interest Income
Interest income increased $109,000 or 6.1% to $1.9 million for the
three months ended June 30, 1997, compared to $1.8 million for the three months
ended June 30, 1996. The increase was due to the increase in the average
outstanding balance of total loans to $77.4 million for the three months ended
June 30, 1997, compared to $72.7 million for the three months ended June 30,
1996. The increase in total loans was the result of the general decrease in
mortgage interest rates over the comparable periods which encouraged loan
activity. Interest on mortgage-backed and related securities decreased $8,000 to
$132,000 for the three months ended June 30, 1997, from $140,000 for the three
months ended June 30, 1996, due to an decrease in the average balance of
mortgage backed and related securities from $7.7 million for the three months
ended June 30, 1996, to an average balance of $7.2 million for the three months
ended June 30, 1997, that was the result of the principle repayments.
Interest on investments increased $13,000 to $77,000 for the three
months ended June 30, 1997, compared to $64,000 for the three months ended June
30, 1996, as a result of an increase in the average outstanding balance of
interest bearing deposits in other financial institutions from $0.8 million for
the three months ended June 30, l996, to $1.5 million for the three months ended
June 30, 1997.
Interest Expense
Interest expense increased $78,000 or 8.0% to $1,050,000 for the three
months ended June 30, 1997, compared to $972,000 for the three months ended June
30, 1996. Interest on savings increased $22,000 or 3.2% from $695,000 for the
three months ended June 30, 1996 to $717,000 for the three months ended June 30,
1997. The increase reflects an increase in the average outstanding balance of
total deposits to $61.6 million for the three months ended June 30, 1997, from
an average balance of $59.1 million for the three months ended June 30, 1996.
Interest on borrowings increased $56,000 or 20.2% from $277,000 for
9
<PAGE>
MANAGEMENT'S DISCUSSION(CONT.)
the three months ended June 30, 1996, to $333,000 for the three months
ended June 30, 1997. The increase reflects an increase in average outstanding
advances and other borrowings from $19.0 million for the three months ended June
30, 1996 to $22.3 million for the three months ended June 30, 1997. The increase
in advances and other borrowings was used to fund the increase in assets between
the periods.
Provision for Loan Losses
The provision for loan losses increased $19,000 to $25,000 for the
three months ended June 30, 1997, compared to $6,000 for the three months ended
June 30, 1996. The allowance for loan losses totaled $466,000 at June 30, 1997,
compared to $435,000 at June 30, 1996, and represented .59% and .59% of gross
loans and 38.3% and 62.59% of non-performing loans, respectively. The Board of
Directors is currently adding $25,000 each quarter to the loan loss reserve to
provide for a commercial loan discussed under Asset Quality. That policy will
continue until a reasonable estimate of any loss potential can be determined.
The non-performing assets to total assets ratio was 1.26% at June 30, 1997,
compared to .92% at June 30, 1996.
Other Income
Total other income decreased 7.1% or $10,000 to $130,000 for the three
months ended June 30, 1997, compared to $140,000 for the three months ended June
30, 1996. Other income decreased $14,000 from $48,000 for the three months ended
June 30. 1996 to $34,000 for the three months ended June 30, 1997, and reflects
real estate lot sales in the bank's subsidiary of $12,000 for the three months
ended June 30, 1997, compared to $20,000 for the three months ended June 30,
1996. The payment of premiums for credit life and disability insurance in the
bank's subsidiary was not received until the second quarter of the current
fiscal year and resulted in a $13,000 decrease to $0 for the three months ended
June 30, 1997, from $13,000 for the three months ended June 30, 1996.
General and Administrative Expenses
General and administrative expenses decreased $16,000 or 2.8% to
$561,000 for the three months ended June 30, 1997, compared to $577,000 for the
three months ended June 30, 1996. Salaries and employee benefits increased
$3,000 from $307,000 for the three months ended June 30, 1996, to $310,000 for
the three months ended June 30, 1997. The decrease reflects a $38,000 reduction
in accounting for the Company's stock incentive plan that required 61.1% of the
three-year cost be amortized in the first year, 27.8% in the second year, and
11.1% in the third year. The accounting for this expense began with the approval
of the Company's stock incentive plan in October 1995. This decrease was offset
by a $36,000 increase in salaries over the comparable periods. The increase in
salaries is due to cost of living salary increases, additional personnel, and
the initiation of a loan production incentive program to enhance loan officer
salaries. Net occupancy expense increased $11,000 from $67,000 for the three
months ended June 30, 1996, to $78,000 for the three months ended June 30, 1997,
and reflects an increase in furniture and fixtures expenses associated with the
remodeling and refurbishing of the New Richmond Office that was completed at the
beginning of the fiscal year ended March 31, 1997. Federal insurance premiums
decreased $25,000 from $35,000 for the three months ended June 30, 1996 to
$10,000 for the three months ended June 30, 1997, due to the decrease in
insurance premiums made possible by the FDIC Special Assessment paid in the
quarter ending September 30, 1996. Data processing expenses decreased $5,000
from $37,000 for the three months ended June 30, 1996, to $32,000 for the three
months ended June 30, 1997, due to cost savings achieved with the recent renewal
of the data processing contract and improved technology.
10
<PAGE>
MANAGEMENT'S DISCUSSION(CONT.)
Income Tax Expense
Income tax expense decreased $11,000 or 6.7% from $164,000 for the
three months ended June 30, 1996, to $153,000 for the three months ended June
30, 1997. The effective tax rate for the three months ended June 30, 1997, was
37.8% compared to 42.4% for the three months ended June 30, 1996. The decrease
in income tax expense is the direct result of a decrease in the effective rate
as a result of the establishment of Northwest Investments, Inc., a wholly owned
subsidiary domiciled in the state of Nevada, that will act to lower the
Company's state income tax obligation. Income before taxes increased $18,000
from $387,000 for the three months ended June 30, 1996, to $405,000 for the
three months ended June 30, 1997.
Financial Condition
Total assets increased $1.8 million or 1.9% to $96.9 million at June
30, 1997, compared to $95.1 million at March 31, 1997. The increase is a result
of a $404,000 or 0.52% increase in net loans receivable to $77.6 million at June
30, 1997, compared to $77.2 million at March 31, 1997. The increase in net loans
receivable was the result of the expected seasonal increase of loan activity
during the spring and summer months. Cash increased $1.1 million from $3.0
million at March 31, 1997, to $4.1 million at June 30, 1997, as the result of
the increase in savings accounts. Securities available for sale increased
$323,000 from $2.8 million at March 31, 1997, to $3.1 million at June 30, 1997,
as the result of the purchase of an additional money market mutual funds.
Mortgage backed and related securities decreased $97,000 from $7.4 million on
March 31, 1997, to $7.3 million at June 30, 1997, as the result of principle
repayments and prepayments. Savings accounts increased $1.6 million from $61.6
million at March 31, 1997, to $63.2 million at June 30, 1997. Outstanding
advances from the Federal Home Loan Bank decreased $1.0 million from $17.6
million at March 31, 1997 to $16.6 million at June 30, 1997. Other borrowed
increased $788,000 from $4.5 million at June 30, 1997, to $5.3 million at March
31, 1997 as the result of increase in retail reverse repurchase agreements. The
increase in other borrowed money partially offset the decrease in Federal Home
Loan Bank advances.
Shareholders Equity increased $234,000 from $10.9 million at March 31,
1997, to $11.1 million at June 30, 1997, as a result of net income for the three
months ended June 30, 1997, and the amortization of the common stock purchased
by the employee stock ownership plan of $41,000 from ($558,000) on March 31,
1997 to ($517,000) on June 30, 1997; the amortization of the unearned restricted
stock plan award of $32,000 from ($115,000) at March 31, 1997, to ($83,000) at
June 30, 1997; and a increase in the fair value of securities held for sale, net
of related deferred taxes, of $9,000 from $(29,000) at March 31, 1997, to
$(20,000) at June 30, 1997.
Asset/Liability Management
Asset/liability management is an ongoing process of matching asset and
liability maturities to reduce interest rate risk. Management attempts to
control this risk through pricing of assets and liabilities and maintaining
specific levels of maturities. In recent periods, management's strategy has been
to (1) sell substantially all new originations of long-term, fixed-rate single
family mortgage loans in the secondary market, (2) invest in various
adjustable-rate and short-term mortgage-backed and related securities, (3)
invest in adjustable-rate, single family mortgage loans, and (4) encourage
medium and longer-term certificates of deposit. The Company's estimated
cumulative one-year gap between assets and liabilities was a positive 1.38% of
total assets, at the latest available reporting date of March 31, 1997. A
positive gap occurs when a greater dollar amount of interest-earning assets than
interest-bearing liabilities are repricing or maturing during a given time
period. During periods of rising interest rates, a positive interest rate
sensitivity gap will tend to positively affect net interest income. During
periods of falling interest rates, a positive interest rate sensitivity gap will
tend to negatively affect the net interest income.
11
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Management believes that its asset/liability management strategies have
reduced the potential effects of changes in interest rates on its operations.
Increases in interest rates may increase net interest income because
interest-earning assets will reprice more quickly than interest-bearing
liabilities. The Company's analysis of the maturity and repricing of assets and
liabilities incorporates certain assumptions concerning the amortization and
prepayment of such assets and liabilities.
Management believes that these assumptions approximate actual
experience and considers them reasonable, although the actual amortization and
repayment of assets and liabilities may vary substantially.
Management Strategy
Asset Quality
The Company emphasizes high asset quality in both its investment
portfolio and lending activities. Non-performing assets have ranged between .76%
and 1.26% of total assets during the last three years and were 1.26% of total
assets at June 30, 1997. Cumulative gross charge-offs over the last three fiscal
years totaled $132,000 and were offset by $35,000 in recoveries. The last three
years cumulative gross charge-offs of commercial loans have totaled $27,000. The
cumulative gross charge-offs of consumer loans totaled $86;000 and were offset
by $16,000 in recoveries. The remaining $19,000 in cumulative gross charge-offs
were real estate loans and were offset by $19,000 in recoveries.
On October 16, 1996, the Bank learned that a Minnesota Bank had
commenced a repleven lawsuit against a borrower of the Bank that involves
several parties claiming interests in collateral secured by a General Business
Security Agreement of the Bank. On November 20, 1996, the Bank filed its answer
and a third party complaint seeking repleven of its collateral and money
judgments against its borrowers, the guarantors, and other interested parties.
Repleven judgment was entered in favor of the Bank on January 15, 1997. A money
judgment was filed against a guarantor on December 30, 1996. One of the
guarantors has since filed personal bankruptcy. The Bank has commenced an action
to avoid the discharge in bankruptcy court. The Bank is asserting the priority
of its liens against other creditors in state circuit court. Depending upon the
non-exempt assets of the parties involved, the Bank's legal counsel believes the
Bank should have sufficient legal grounds to expect recovery from the Bank's
collateral, personal guarantees, and the other parties involved. The Board of
Directors at its meeting October 8, 1996, decided to increase the quarterly loss
allowance to $25,000 until more information is available to make a reasonable
estimate of any losses that may occur. The Board continued this policy at its
meeting held December 10, 1996, and subsequent meetings because a reasonable
estimate still cannot be determined. As soon as the Board can identify and
quantify the amount of the loss if any, it will book the loss. In order to
establish an order of magnitude of the loss potential, a worst case scenario of
no recovery on a loan of $541,000 plus an overdraft of $83,000 less the current
amount in the loan loss reserve of $297,000 allocated or available to be
allocated to this loan, would produce an after-tax loss of approximately
$215,000.
During the fiscal years ended March 31, 1997, 1996 and 1995, the
Company recorded provisions for loan losses of $81,000, $24,000, and $17,000,
respectively, to its allowance for loan losses and had net charge-offs of
$53,000, $25,000, $19,000, respectively. The Company's allowance for loan losses
at June 30, 1997, totaled $466,000 or 475.3% of cumulative gross charge-offs
during the last three fiscal years. Management currently believes the allowance
for loan losses at June 30, 1997, is at an adequate level and that future
provisions for loan losses will be maintained at current levels until more
information is available concerning the large commercial loan mentioned
previously.
12
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Total loans past due 90 days or more and not accruing increased from
$1.1 million at March 31, 1997, to $1.2 million at June 30, 1997. Increased
balances of past due real estate and commercial loans were offset by reductions
in consumer loans. Total loans past due 31-89 days decreased from $3.3 million
at March 31, 1997, to $1.9 million at June 30, 1997. The decrease is primarily
due to the one large single-
family loan with a balance of $798,000 that was classified in the 31-60 day
category and was not classified on June 30, 1997. Allowing for that loan, total
loans past due 31-89 days decreased from $2.5 million at March 31,1997, to $1.9
million at June 30, 1997. Management considers the 31-89 day category as a trend
indicator and the reduction should indicate a reduction in delinquent loans in
the future. The latest available peer group comparison of the average
nonperforming loans and real estate owned as a percentage of total loans as
prepared by America's Community Bankers was 1.87% for the Company at December
31, 1996, compared to 1.61% on a nation wide basis, 0.97% on a geographic basis,
1.38% on an asset size basis, and 1.83% on an owner type basis. Of the total
past due 90 or days, $541,000 is the commercial loan discussed previously in
this section. Adjusting for that loan would lower the Company's average
nonperforming loans to below the peer group comparison.
Selected Financial Ratios and Other Data: At or For the
Three months ended June 30,
Performance Ratios 1997 1996
---- ----
Return on average assets 1.05% 1.31%
Return on average equity 9.33% 7.69%
13
<PAGE>
<TABLE>
MANAGEMENT' S DISCUSSION(CONT.)
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans $ 65,404 $ 1,420 8.68% $ 60,988 $ 1,300 8.53%
Commerical loans 4,733 101 8.54% 4,401 120 10.92%
Consumer loans 7,229 181 10.02% 7,293 178 9.74%
--------- -------- --------- --------
Total loans 77,366 1,702 8.80% 72,682 1,598 8.79%
Mortgage-backed and related securities 7,226 132 7.31% 7,741 140 7.25%
Interest bearing deposits in other
financial institutions 1,465 20 5.46% 804 11 5.41%
Investment securities 3,066 41 5.35% 2,974 39 5.29%
Federal Home Loan Bank stock 912 16 6.75% 803 14 6.72%
--------- -------- --------- --------
Total interest-earning assets 90,036 $ 1,911 8.49% 85,004 $ 1,802 8.48%
-------- --------
Non-interest earning assets 5,299 5,020
--------- ---------
Total assets $ 95,335 $ 90,024
========= =========
Liabilities and retained earnings:
Deposits:
NOW accounts $ 9,059 $ 34 1.50% $ 8,918 $ 39 1.75%
Money market deposit accounts 4,940 56 4.53% 2,941 35 4.76%
Passbook 5,962 32 2.15% 7,230 41 2.26%
Certificates of deposit 41,640 595 5.72% 40,038 580 5.80%
--------- ------- --------- -------
Total deposits 61,601 717 4.66% 59,127 695 4.70%
Advances and other borrowings 22,270 333 5.98% 19,004 277 5.83%
--------- ------- --------- -------
Total interest-bearing liabilities 83,871 1,050 5.01% 78,131 972 4.98%
------- -------
Non-interest bearing liabilities 665 101
Equity 10,799 11,792
--------- ---------
Total liabilities and retained earnings $ 95,335 $ 90,024
========= =========
Net interest income/interest rate spread $ 861 3.48% $ 830 3.50%
======= ======= ======= =======
Net earning assets/net interest margin $ 6,165 3.83% $ 6,873 3.90%
========= ======= ========= =======
Average interest-earning assets to
average interest-bearing liabilities 1.07x 1.09x
========= =========
<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>
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 1,045
<INT-BEARING-DEPOSITS> 3,087
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,075
<INVESTMENTS-CARRYING> 7,324
<INVESTMENTS-MARKET> 7,285
<LOANS> 78,062
<ALLOWANCE> 466
<TOTAL-ASSETS> 96,891
<DEPOSITS> 63,213
<SHORT-TERM> 13,653
<LIABILITIES-OTHER> 700
<LONG-TERM> 8,232
0
0
<COMMON> 1,033
<OTHER-SE> 10,060
<TOTAL-LIABILITIES-AND-EQUITY> 96,891
<INTEREST-LOAN> 1,702
<INTEREST-INVEST> 209
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,911
<INTEREST-DEPOSIT> 717
<INTEREST-EXPENSE> 1,050
<INTEREST-INCOME-NET> 861
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 561
<INCOME-PRETAX> 405
<INCOME-PRE-EXTRAORDINARY> 252
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 3.48
<LOANS-NON> 1,204
<LOANS-PAST> 12
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 461
<CHARGE-OFFS> 65
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 466
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
