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 September 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 September 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:___11/3/97______________ By: ___/s/Brian L. Beadle_________
(Brian L. Beadle, President
Principal Executive Officer and
Principal Financial and
Accounting Officer)
1
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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 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 is asserting the priority of its liens against other creditors in state
circuit court. The court date has been scheduled for November, 1998. 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 depends on the
probability of securing damages through the judicial process. 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 $558,000 plus an overdraft of $83,000
less the current amount in the loan loss reserve of $309,000 allocated or
available to be allocated to this loan, would produce an after-tax loss of
approximately $219,000.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
2
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Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on August
12, 1997. There were 838,754 shares of common stock of the Company entitled to
vote at the Annual Meeting, and 773,658 shares present at the meeting by holders
thereof in person or by proxy, which constituted a quorum. The following is a
summary of the results of the votes:
<TABLE>
<CAPTION>
Number of Votes
For Withheld
<S> <C> <C>
Nominees for Director for a Three-Year Term Expiring in 2000
Gerald J. Ahlin............................................................ 736,329 37,329
Brian L. Beadle........................................................... 735,844 37,814
Number of Votes
For Against Abstained
Ratification of Keller & Yoder as independent auditors for the
fiscal year ending March 31, 1998.......................................... 720,333 300 53,025
</TABLE>
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.
3
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
September 30,
ASSETS 1997 March 31,
-------------
(unaudited) 1997
------------- -------------
<S> <C> <C>
Cash - including interest bearing deposits of $1,918
at September 30, 1997 and $1,721 at March 31, 1997 $2,940 $2,980
Securities held-to-maturity - market value of $2,800
at September 30, 1997 2,799 - -
Securities available-for-sale - fair value 810 2,752
Mortgage backed securities - market value of $7,075 at
September 30, 1997 and $7,308 at March 31, 1997 6,984 7,421
Loans held for sale - at market 93 415
Loans receivable - net 79,109 77,240
Real estate acquired in settlement of loans 42 - -
Investment in Federal Home Loan Bank stock - at
cost - which approximates fair value 912 912
Premises and equipment 2,298 2,341
Accrued interest receivable 621 656
Prepaid expenses and other assets 346 380
------------- -------------
TOTAL ASSETS $96,954 $95,097
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts $62,613 $61,557
Advances from Federal Home Loan Bank 17,223 17,634
Other borrowed money 5,165 4,463
Accounts payable and accrued expenses 587 472
Accrued income taxes 33 112
------------- -------------
Total liabilities 85,621 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 - - (29)
Less unearned restricted stock plan award (51) (115)
Less unearned Employee Stock Ownership
Plan compensation (476) (558)
Less treasury stock - at cost - 193,763 shares (2,256) (2,256)
Retained earnings - substantially restricted 6,499 6,200
------------- -------------
Total stockholders' equity 11,333 10,859
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $96,954 $95,097
============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
4
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands except for per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $1,725 $1,673 $3,430 $3,271
Interest on mortgage-backed and related securities 126 142 258 282
Interest and dividends on investments 77 53 154 117
------------- ------------- ------------- -------------
Total interest income 1,928 1,868 3,842 3,670
------------- ------------- ------------- -------------
Interest expense:
Interest on savings 729 732 1,446 1,427
Interest on borrowings 337 278 670 555
------------- ------------- ------------- -------------
Total interest expense 1,066 1,010 2,116 1,982
------------- ------------- ------------- -------------
Net interest income 862 858 1,726 1,688
Provision for loan losses 25 25 50 31
------------- ------------- ------------- -------------
Net interest income after provision for loan losses 837 833 1,676 1,657
------------- ------------- ------------- -------------
Other income:
Mortgage servicing fees 20 19 39 38
Service charges on deposits 64 54 122 112
Gain on sale of mortgage loans 36 15 52 30
Other 40 53 74 101
------------- ------------- ------------- -------------
Total other income 160 141 287 281
------------- ------------- ------------- -------------
Realized losses on available-for-sale securities (24) - - (24) - -
------------- ------------- ------------- -------------
General and administrative expenses:
Salaries and employee benefits 306 316 616 623
Net occupancy expense 85 67 163 134
Data processing 33 30 65 67
Federal insurance premiums 9 383 19 418
Other 149 158 280 289
------------- ------------- ------------- -------------
Total general and administrative expense 582 954 1,143 1,531
------------- ------------- ------------- -------------
Income before income taxes 391 20 796 407
Income taxes 135 8 288 172
------------- ------------- ------------- -------------
Net income $256 $12 $508 $235
============= ============= ============= =============
Earnings per share $0.33 $0.01 $0.65 $0.27
============= ============= ============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
5
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six Months Ended September 30,
(In Thousands)
<CAPTION>
Unrealized
Gain (Loss) Unearned
Additional 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>
Six Months Ended September 30, 1996
Balance - March 31, 1996 $1,033 $6,584 ($34) ($319) ($699) ($561) $5,860 $11,864
===========================================================================
Net income - - - - - - - - - - - - 235 235
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $5 - - - - 7 - - - - - - - - 7
Amortization of unearned ESOP and restricted stock
award - - - - - - 141 69 - - - - 210
Purchase of Treasury Stock - - - - - - - - - - (544) - - (544)
Cash dividends - $.20 per share - - - - - - - - - - - - (181) (181)
Balance - September 30, 1996 $1,033 $6,584 ($27) ($178) ($630) ($1,105) $5,914 $11,591
===========================================================================
Six Months Ended September 30, 1997
Balance - March 31, 1997 $1,033 $6,584 ($29) ($115) ($558) ($2,256) $6,200 $10,859
===========================================================================
Net income - - - - - - - - - - - - 508 508
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $20 - - - - 29 - - - - - - - - 29
Amortization of unearned ESOP and restricted stock
award - - - - - - 64 82 - - - - 146
Cash dividends - $.25 per share - - - - - - - - - - - - (209) (209)
---------------------------------------------------------------------------
Balance - September 30, 1997 $1,033 $6,584 $ - - ($51) ($476) ($2,256) $6,499 $11,333
===========================================================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
6
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
<CAPTION>
Six Months Ended
September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash provided by operating activities:
Net income $508 $235
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 74 48
Provision for loan losses 50 31
Deferred income taxes (20) - -
Amortization of ESOP and restricted stock awards 146 210
Proceeds from sales of mortgage loans 2,438 3,279
Loans originated for sale (2,064) (3,004)
Decrease (increase) accrued interest receivable 35 (39)
Decrease (increase) prepaid expenses and other assets 34 (53)
Increase (decrease) accrued interest payable 76 (69)
Decrease accrued income taxes payable (79) (15)
Increase other accrued liabilities 39 510
------------- -------------
Net cash provided by operating activities 1,237 1,133
------------- -------------
Cash provided by investing activities:
Principal collected on long-term loans 15,017 15,220
Long-term loans originated or acquired (16,978) (21,943)
Purchases of mortgage-backed securities - - (2,766)
Principal collected on mortgage-backed securities 437 364
Proceeds from sale of foreclosed property - - 44
Purchase of office properties and equipment (31) (269)
Proceeds from maturity of investment securities 2,528 96
Purchase of investments (3,388) - -
------------- -------------
Net cash (used in) investing activities (2,415) (9,254)
------------- -------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
7
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Six Months Ended
September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash provided by financing activities:
Net increase in savings accounts 1,056 5,242
Net increase in short-term borrowings 5,053 393
Repayments of long-term financing (6,728) (411)
Proceeds from long-term financing 1,966 3,769
Purchases of treasury stock - - (544)
Dividends paid (209) (181)
------------- -------------
Net cash provided by financing activities 1,138 8,268
------------- -------------
Increase (decrease) in cash and equivalents (40) 147
Cash and equivalents - beginning 2,980 3,412
------------- -------------
Cash and equivalents - ending $2,940 $3,559
============= =============
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $42 $63
Interest paid 2,040 2,450
Income taxes paid 367 562
See accompanying Notes to Consolidated Financial Statements
</TABLE>
8
<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
9
<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 September 30, 1996
and September 30, 1997
Net Income
Net income for the three months ended September 30, 1997, increased $244,000 or
2,033% to $256,000 compared to $12,000 for the three months ended September 30,
1996. The increase in net income was primarily due to the one time $350,000
Federal Deposit Insurance Corporation (FDIC) Special Assessment that occurred
during the three months ended September 30, 1996. The charge stemmed from
legislation that recapitalized the FDIC fund insuring deposits in savings
institutions. In exchange for this one-time assessment, the future premiums paid
to the Savings Association Fund (SAIF) were reduced. As a result, federal
insurance premiums decreased $374,000 to $9,000 for the three months ended
September 30, 1997, from $383,000 for the three months ended September 30, 1996.
Salaries and employee benefits decreased $10,000 from $316,000 for the three
months ended September 30, 1996, to $306,000 for the three months ended
September 30, 1997. The decrease reflects a reduction in expense from accounting
for the Company's stock incentive plan that required under applicable accounting
standards that 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; and the expense taken for the three months ended September 30, 1996 was at
the 61.1% amount, whereas the expense taken for the three months ended September
30, 1997 was at the 27.8% amount. The decrease was offset by normal cost of
living wage increases and the cost of additional employees. Net interest income
increased $4,000 from $858,000 for the three months ended September 30, 1996, to
$862,000 for the three months ended September 30, 1997. Total other income
increased $19,000 from $141,000 for the three months ended September 30, 1996,
to $160,000 for the three months ended September 30, 1997
Net Interest Income
Net interest income increased by $4,000 from $858,000 for the three months ended
September 30, 1996, to $862,000 for the three months ended September 30, 1997.
The increase is a result interest income that increased $60,000 to $1.93 million
for the three months ended September 30, 1997, compared to $1.87 million for the
three months ended September 30, 1996, while interest expense increased only
$56,000 to $1.07 million for the three months ended September 30, 1997, from
$1.01 million for the three months ended September 30, 1996. The average
outstanding balance of total interest-earning assets increased $3.7 million from
$87.4 million for the three months ended September 30, 1996, to $91.2 million
for the three months ended September 30, 1997. The average outstanding balance
of total interest-earning liabilities increased $4.4 million from $80.3 million
for the three months ended September 30, 1996, to $84.7 million for the three
months ended September 30, 1997. The increase in net interest income expected
from the interest rate spread and the increase in interest-earnings assets was
offset by the larger increase in interest-earning liabilities. In addition,
interest earned on commercial loans decreased $29,000 from $106,000 for the
three months ended September 30, 1996, to $77,000 for the three months ended
September 30, 1997. (See discussion under "Provision for loan losses")
Interest Income
Interest income increased $60,000 or 3.2% to $1.93 million for the three months
ended September 30, 1997, compared to $1.87 million for the three months ended
September 30, 1996. Interest and fees on loans increased $52,000 to $1.73
million for the three months ended September 30, 1997, compared to $1.67 million
for the three months ended September 30, 1996. This increase was due to the
increase in the average outstanding balance of total loans to $78.8 million for
the three months ended September 30, 1997, compared to $75.8 million for the
three months ended September 30, 1996. Interest on mortgage-backed
10
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
and related securities decreased $16,000 to $126,000 for the three months ended
September 30, 1997, from $142,000 for the three months ended September 30, 1996.
This decrease was due to a decrease in the average outstanding balance of
mortgage backed and related securities of $689,000 from $7.8 million for the
three months ended September 30, 1996, to an average outstanding balance of $7.2
million for the three months ended September 30, 1997. Interest on investments
increased $24,000 to $77,000 for the three months ended September 30, 1997,
compared to $53,000 for the three months ended September 30, 1996. The increase
was due to an increase in the average outstanding balances of interest-bearing
deposits in other financial institutions, investment securities, and Federal
Home Loan Bank ("FHLB") stock of $1.40 million from $3.78 million for the three
months ended September 30, 1996, to $5.19 million for the three months ended
September 30, 1997 The higher average outstanding balances of interest-bearing
deposits is partially due to the establishment of a Nevada investment subsidiary
on May 30, 1997. Increased advances from the FHLB require corresponding
increases in the amount of FHLB stock required.
Interest Expense
Interest expense increased $56,000 or 5.5% to $1.07 million for the three months
ended September 30, 1997, compared to $1.01 million for the three months ended
September 30, 1996. Interest on savings decreased $3,000 or 0.4% from $732,000
for the three months ended September 30, 1996, to $729,000 for the three months
ended September 30, 1997. The decrease is a result of a general decline in
market interest rates over the two comparable periods which lowered the average
yield of total deposits to 4.67% for the three months ended September 30, 1997,
from an average yield of 4.84% for the three months ended September 30, 1996.
This decrease in interest on savings was offset by an increase in interest on
borrowings of $59,000 or 63.5% from $278,000 for the
three months ended September 30, 1996, to $337,000 for the three months ended
September 30, 1997. The increase reflects an increase in the average outstanding
balance of advances and other borrowings from $19.9 million for the three months
ended September 30, 1996, to $22.2 million for the three months ended September
30, 1997. The increase in advances and other borrowings was used to partially
fund the increase in assets between the periods.
Provision for Loan Losses
The provision for loan losses remained at $25,000 for the three months ended
September 30, 1997, and the three months ended September 30, 1996. That amount
reflects the Board of Directors' recognition of a commercial loan that appeared
on the September 30, 1997, watch list for the first time. Unable to make an
informed estimate of the loss potential, the Board decided to establish an
increased quarterly loss allowance of $25,000 until more information is
available to make a reasonable estimate of any losses that may occur (See Part
II, Item 1, Legal Proceedings). The allowance for loan losses totaled $470,000
at September 30, 1997, compared to $447,000 at September 30, 1996, and
represented 0.56% and 0.58% of gross loans and 33.2% and 46.0% of non-performing
loans, respectively. When compared to the allowance for loan losses calculation
that is based on a three year actual loss average, the Board of Directors
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.
The non-performing assets to total assets ratio was 1.43% at September 30, 1997,
compared to 1.20% at September 30, 1996.
Other Income
Total other income increased 13.5% or $19,000 to $160,000 for the three months
ended September 30, 1997, compared to $141,000 for the three months ended
September 30, 1996. The increase results from a $21,000 increase in gain on sale
of mortgage loans to $36,000 for the three months ended September 30, 1997,
compared to $15,000 for the three months ended September 30, 1996. The increase
results form the general decline of interest rates over the two comparable
periods which enhances the bank's ability to generate gains on sale of mortgage
loans. Service charges on deposits increased $10,000 to $64,000 for the three
months ended September 30, 1997, compared, to $54,000 for the three months ended
September 30,
11
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
1996. The increase is a result of an increase in average outstanding balance of
NOW accounts from $9.16 million for the three months ended September 30, 1996,
to $9.58 million for the three months ended September 30, 1997. These increases
were offset by an decrease of $13,000 in other income from $53,000 for the three
months ended September 30, 1996, to $40,000 for the three months ended September
30, 1997, and reflects a decrease of $29,000 in real estate lot sales in the
bank's subsidiary to $0 for the three months ended September 30, 1997, compared
to $29,000 for the three months ended September 30, 1996. The decrease reflects
a general decrease of real estate activity in the bank's market area over the
comparable periods.
General and Administrative Expenses
General and administrative expenses decreased $372,000 or 39.0% to $582,000 for
the three months ended September 30, 1997, compared to $954,000 for the three
months ended September 30, 1996. The decrease is due to the one time $350,000
Federal Deposit Insurance Corporation (FDIC) Special Assessment that occurred
during the three months ended September 30, 1996. The charge stemmed from
legislation that recapitalized the FDIC fund insuring deposits in savings
institutions. In exchange for this one-time assessment, the future premiums paid
to the Savings Association Fund (SAIF) were reduced. Federal insurance premiums
decreased $374,000 or 97.7% from $383,000 for the three months ended September
30 1996, to $9,000 for the three months ended September 30, 1997. Salaries and
employee benefits decreased $10,000 from $316,000 for the three months ended
September 30, 1996, to $306,000 for the three months ended September 30, 1997.
The decrease reflects a reduction in expense from accounting for the Company's
stock incentive plan that required under applicable accounting standards that
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; and the
expense taken for the three months ended September 30, 1996 was at the 61.1%
amount, whereas the expense taken for the three months ended September 30, 1997
was at the 27.8% amount. The decrease was offset by normal cost of living wage
increases and the cost of additional employees. Net occupancy expense increased
$18,000 from $67,000 for the three months ended September 30, 1996, to $85,000
for the three months ended September 30, 1997, and reflects the completion of an
addition and remodeling project to the New Richmond office location. Other
expenses decreased $9,000 from $158,000 for the three months ended September 30,
1996, to $149,000 for the three months ended September 30, 1997
Income Tax Expense
Income tax expense increased $127,000 or 1513% from $8,000 for the three months
ended September 30, 1996, to $135,000 for the three months ended September 30,
1997. The increase in income tax expense is the direct result of the increase in
income before taxes of $371,000 from $20,000 for the three months ended
September 30, 1996, to $391,000 for the three months ended September 30, 1997.
The effective tax rate for the three months ended September 30, 1997, was 34.3%
compared to 40.0% for the three months ended September 30, 1996. The reduction
of the effective tax rate reflects the establishment of a Nevada investment
subsidiary on May 30, 1997, which effectively eliminates the state tax
obligation of the company since that date.
12
<PAGE>
Comparison of Operating Results for the Six Months Ended September 30, 1996 and
September 30, 1997
Net Income
Net income for the six months ended September 30, 1997, increased $273,000 or
116% to $508,000 compared to $235,000 for the six months ended September 30,
1996. The increase in net income was primarily due to the one time $350,000
Federal Deposit Insurance Corporation (FDIC) Special Assessment that occurred
during the six months ended September 30, 1996. The charge stemmed from
legislation that recapitalized the FDIC fund insuring deposits in savings
institutions. In exchange for this one-time assessment, the future premiums paid
to the Savings Association Fund (SAIF) were reduced. As a result, federal
insurance premiums decreased $399,000 to $19,000 for the six months ended
September 30, 1997, from $418,000 for the six months ended September 30, 1996
Salaries and employee benefits decreased $7,000 from $623,000 for the six months
ended September 30, 1996, to $616,000 for the six months ended September 30,
1997 . The decrease reflects a reduction in expense from accounting for the
Company's stock incentive plan that required under applicable accounting
standards that 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; and the expense taken for the six months ended September 30, 1996 was at
the 61.1% amount, whereas the expense taken for the six months ended September
30, 1997 was at the 27.8% amount. The decrease was offset by normal cost of
living wage increases and the cost of additional employees. Net interest income
increased $38,000 from $1.69 million for the six months ended September 30,
1996, to $1.73 million for the six months ended September 30, 1997. Provision
for loan losses increased $19,000 from $31,000 for the six months ended
September 30, 1996, to $50,000 for the six months ended September 30, 1997
Net Interest Income
Net interest income increased by $38,000 from $1.69 million for the six months
ended September 30, 1996, to $1.72 million for the six months ended September
30, 1997. Interest income increased $172,000 to $3.84 million for the six months
ended September 30, 1997, compared to $3.67 million for the six months ended
September 30, 1996, while interest expense increased only $134,000 to $2.12
million for the six months ended September 30, 1997, from $1.98 million for the
six months ended September 30, 1996. The improvement in net interest income
primarily reflects an increase in the average outstanding balance of
interest-earning assets of $4.5 million to $90.6 million for the six months
ended September 30, 1997, compared to $86.1 million for the six months ended
September 30, 1996. Total interest-bearing liabilities increased only $3.9
million from $80.4 million for the six months ended September 30, 1996 to $84.3
million for the six months ended September 30, 1997.
Interest Income
Interest income increased $172,000 or 46.9% to $3.84 million for the six months
ended September 30, 1997, compared to $3.67 million for the six months ended
September 30, 1996. Of the increase, $59,000 was due to an increase in interest
and fees on loans to $3.43 million for the six months ended September 30, 1997,
compared to $3.27 million for the six months ended September 30, 1996. This
increase was due to the increase in the average outstanding balance of total
loans to $78.1 million for the six months ended September 30, 1997, compared to
$74.1 million for the six months ended September 30, 1996. The increase was
partially offset by a decrease of $24,000 in interest on mortgage-backed and
related securities to $258,000 for the six months ended September 30, 1997, from
$282,000 for the six months ended September 30, 1996. This decrease was due to
an decrease in the average outstanding balance of mortgage backed and related
securities from $7.8 million for the six months ended September 30, 1996, to an
average balance of $7.2million for the six months ended September 30, 1997. The
decrease was the result of principle payments on the securities throughout the
period. Interest on investments increased $37,000 to $154,000 for the six months
ended September 30, 1997, compared to $117,000 for the six months ended
September 30, 1996, as a result of an increase in the average outstanding
balances of interest-bearing deposits in other
13
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
financial institutions, securities held for sale, and Federal Home Loan Bank
stock from $4.2 million for the six months ended September 30, l997, to $4.3
million for the six months ended September 30, 1996.
Interest Expense
Interest expense increased $134,000 or 6.8% to $2.12 million for the six months
ended September 30, 1997, compared to $1.98 million for the six months ended
September 30, 1996. Interest on savings increased $19,000 or 1.3% from $1.43
million for the six months ended September 30, 1996, to $1.45 million for the
six months ended September 30, 1997. The increase reflects an increase in the
average outstanding balance of total deposits to $62.0 million for the six
months ended September 30, 1997, from an average balance of $61.0 million for
the six months ended September 30, 1996, that was offset by a decrease in the
average interest rate paid from 4.68% for the six months ended September 30,
1996, to4.66% for the six months ended September 30, 1997. Interest on
borrowings increased $115,000 or 20.7% from $555,000 for the six months ended
September 30, 1996, to $670,000 for the six months ended September 30, 1997. The
increase reflects an increase in average outstanding balance of advances and
other borrowings from $19.4 million for the six months ended September 30, 1996,
to $22.3 million for the six months ended September 30, 1997. The average yield
paid on advances and other borrowings increased from 5.71% for the six months
ended September 30, 1996, to 6.01% for the six months ended September 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 $50,000 for the six months
ended September 30, 1997, compared to $31,000 for the six months ended September
30, 1996. The increase reflects the Board of Directors' recognition of a
commercial loan that appeared on the September 30, 1996, watch list for the
first time. Unable to make an informed estimate of the loss potential, the Board
decided to establish an increased quarterly loss allowance until more
information is available to make a reasonable estimate of any losses that may
occur (See Part II, Item 1, Legal Proceedings). The allowance for loan losses
totaled $470,000 at September 30, 1997, compared to $447,000 at September 30,
1996, and represented 0.56% and 0.58% of gross loans and 33.2% and 46.0% of
non-performing loans, respectively. When compared to the allowance for loan
losses calculation that is based on a three year actual loss average, the Board
of Directors 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. The non-performing assets to total assets ratio was 1.43% at
September 30, 1997, compared to 1.20% at September 30, 1996. The increase is due
to the designation of one commercial loan with a balance of $279,000 as
non-performing due to bankruptcy proceedings.
Other Income
Total other income increased $6,000 or 3.2% to $287,000 for the six months ended
September 30, 1997, compared to $281,000 for the six months ended September 30,
1996. Other income decreased $27,000 from $101,000 for the six months ended
September 30, 1996 to $74,000 for the six months ended September 30, 1996, and
reflects a decrease of $35,000 in real estate lot sales in the bank's subsidiary
to $14,000 for the six months ended September 30, 1997, compared to $49,000 for
the six months ended September 30, 1996. The decrease reflects a general
decrease of real estate activity in the bank's market area over the comparable
periods. The decrease was offset by a $22,000 increase in gain on sale of
mortgage loans to $52,000 for the six months ended September 30, 1997 compared,
to $30,000 for the six months ended September 30, 1996. The increase results
form the general decline of interest rates over the two comparable periods which
enhances the bank's ability to generate gains on sale of mortgage loans. Service
charges on deposits also increased by $10,000 to $122,000 for the six months
ended September 30, 1997, compared to $122,000 for the six months ended
September 30, 1996 and reflects an increase in the average outstanding balances
of NOW accounts from $9.0 million for the six months ended September 30, 1996 to
$9.3 million for the six months ended September 30, 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
General and Administrative Expenses
General and administrative expenses decreased $388,000 or % to $1.14 million for
the six months ended September 30, 1997, compared to $1.53 million for the six
months ended September 30, 1996. The decrease is due to the one time $350,000
Federal Deposit Insurance Corporation (FDIC) Special Assessment that occurred
during the six months ended September 30, 1996. The charge stemmed from
legislation that recapitalized the FDIC fund insuring deposits in savings
institutions. In exchange for this one-time assessment, the future premiums paid
to the Savings Association Fund (SAIF) were reduced. Federal insurance premiums
decreased $399,000 or 95.5% from $418,000 for the six months ended September 30,
1996, to $19,000 for the six months ended September 30, 1997. Salaries and
employee benefits decreased $7,000 from $623,000 for the six months ended
September 30, 1996, to $616,000 for the six months ended September 30, 1997 .
The decrease reflects a reduction in expense from accounting for the Company's
stock incentive plan that required under applicable accounting standards that
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; and the
expense taken for the six months ended September 30, 1996 was at the 61.1%
amount, whereas the expense taken for the six months ended September 30, 1997
was at the 27.8% amount. The decrease was offset by normal cost of living wage
increases and the cost of additional employees. Net occupancy expense increased
$29,000 from $134,000 for the six months ended September 30, 1996, to $163,000
for the six months ended September 30, 1997, and reflects the completion of an
addition to and remodeling of the New Richmond office location.. Other expenses
decreased $9,000 from $289,000 for the six months ended September 30, 1996, to
$280,000 for the six months ended September 30, 1997.
Income Tax Expense
Income tax expense increased $116,000 or 67.4% from $172,000 for the six months
ended September 30, 1996, to $288,000 for the six months ended September 30,
1997. The increase in income tax expense is the direct result of a increase in
income before taxes of $389,000 from $407,000 for the six months ended September
30, 1996, to $796,000 for the six months ended September 30, 1997. The effective
tax rate for the six months ended September 30, 1997, was 36.2% compared to
42.3% for the six months ended September 30, 1996. The reduction of the
effective tax rate reflects the establishment of a Nevada investment subsidiary
on May 30, 1997, which effectively eliminates the state tax obligation of the
company since that date.
Financial Condition
Total assets increased $1.9 million or 2.0% to $97.0 million at
September 30, 1997, compared to $95.1 million at March 31, 1997. The increase is
a result of a $1.9 million or 2.5% increase in net loans receivable to $79.1
million at September 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 remained
virtually unchanged, decreasing $40,000 from $2.98 million at March 31, 1997, to
$2.94 million at September 30, 1997. Securities available for sale decreased
$2.0 million from $2.8 million at March 31, 1997, to $.8 million at September
30, 1997, as the result of the sale of the "securities available for sale" and
the repurchase of additional securities that were classified "held to maturity".
Mortgage backed and related securities decreased $437,000 from $7.42 million on
March 31, 1997, to $6.98 million at September 30, 1997, as the result of
principle repayments and prepayments on the securities. Savings accounts
increased $1.0 million or 1.6% from $61.6 million at March 31, 1997, to $62.6
million at September 30, 1997. Outstanding advances from the Federal Home Loan
Bank decreased $411,000 from $17.6 million at March 31, 1997 to $17.2 million at
September 30, 1997. Other borrowed money increased $702,000 from $4.5 million at
March 31, 1997, to $5.2 million at September 30, 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.
15
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Shareholders Equity increased $474,000 from $10.9 million at March 31,
1997, to $11.3 million at September 30, 1997, as a result of net income for the
six months ended September 30, 1997, and the amortization of the common stock
purchased by the employee stock ownership plan of $82,000 from ($558,000) on
March 31, 1997 to ($476,000) on September 30, 1997; the amortization of the
unearned restricted stock plan award of $64,000 from ($115,000) at March 31,
1997, to ($51,000) at September 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 negative 12.4% of
total assets, at September 30, 1997. A negative gap occurs when a greater dollar
amount of interest-earning liabilities than interest-bearing assets are
repricing or maturing during a given time period. During periods of rising
interest rates, a negative interest rate sensitivity gap will tend to negatively
affect net interest income. During periods of falling interest rates, a negative
interest rate sensitivity gap will tend to positively affect the net interest
income.
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 1.43% of total assets during the last three years and were 1.43% of total
assets at September 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 fiscal 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 is asserting the
priority of its liens against other creditors in state circuit court. A trial
date has been scheduled for November, 1998. Depending upon the non-exempt assets
of the parties involved, the Bank's legal counsel believes the Bank should have
sufficient legal
16
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
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 depends on the probability
of securing damages through the judicial process. 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 $558,000 plus an overdraft of $83,000 less
the current amount in the loan loss reserve of $309,000 allocated or available
to be allocated to this loan, would produce an after-tax loss of approximately
$219,000.
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 September 30, 1997, totaled $470,000 or 356% of cumulative gross charge-offs
during the last three fiscal years. Management currently believes the allowance
for loan losses at September 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.
Total loans past due 90 days or more and not accruing remained at $1.1
million at September 30, 1997, and at March 3l, 1997. Increased balances of past
due commercial loans were offset by reductions in past due real estate and
consumer loans. Total loans past due 31-89 days decreased from $3.3 million at
March 31, 1997, to $2.5 million at September 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 nonperforming loans and real estate owned as a percentage of total
loans and real estate owned as prepared by America's Community Bankers was 1.37%
for the Company at March 31, 1997, compared to 1.51% on a nation wide basis,
0.91% on a geographic basis, 1.28% on an asset size basis, and 1.75% on an owner
type basis. Of the total past due 90 or days, $558,000 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 Six months ended
September 30, September 30,
Performance Ratios 1997 1996 1997 1996
Return on average assets 1.06% 0.05% 1.06% 0.51%
Return on average equity 9.22% 0.41% 9.27% 4.01%
17
<PAGE>
MANAGEMENT'S DISCUSSION(CONT.)
Average Balance Sheet
<TABLE>
Three Months Ended September 30, Six Months Ended September 30,
1997 1996 1997 1996
Average Average Average Average
Out- Interest Average Out- Interest Average Out- Interest Average Out- Interest Average
standing Earned/ Yield/ standing Earned/ Yield/ standing Earned/ Yield/ standing Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans...............$66,565 $1,460 8.78% $63,451 $1,380 8.70% $65,985 $2,884 8.74% $62,140 $2,680 8.63%
Commercial loans...............4,692 77 6.55% 4,403 106 9.63% 4,713 178 7.56% 4,467 226 10.12%
Consumer loans.................7,566 188 9.92% 7,956 187 9.40% 7,39 368 9.96% 7,449 365 9.80%
-------- ------- -------- -------- ------- -------- ------- --------- ------- ------
Total loans.................. 78,823 1,725 8.75% 75,810 1,673 8.83% 78,095 3,430 8.79% 74,056 3,271 8.83%
Mortgage-backed securities..... 7,155 126 7.02% 7,844 142 7.24% 7,191 258 7.16% 7,793 282 7.24%
Interest-bearing deposits
in other fincancial
institutions.................. 848 12 5.53% 321 4 5.11% 1,157 32 5.51% 586 15 5.11%
Investment securities.......... 3,427 48 5.60% 2,923 40 5.41% 3,247 89 5.46% 2,979 79 5.34%
Federal Home Loan Bank stock... 912 17 6.75% 533 9 6.75% 912 33 6.75% 670 23 6.73%
------- ------- ------- -------- ------- ------ ------ ------- ------ -------- ------- -----
Total interest-earning assets.91,165 1,928 8.46% 87,431 1,868 8.55% 90,600 3,842 8.48% 86,084 3,670 8.53%
Non-interest earning asset... 5,149 6,219 5,224 5,782
------- -------- -------- --------
Total assets................ $96,314 $93,650 $95,824 $91,866
-------- -------- -------- --------
-------- -------- -------- --------
Liabilities and Stockholders' Equity
Deposits:
NOW accounts................. $9,582 $36 1.48% $9,155 $40 1.73% $9,321 $70 1.50% $9,037 $78 1.73%
Money market deposit accounts..5,514 64 4.61% 3,781 46 4.81% 5,227 120 4.58% 3,361 80 4.75%
Passbook.................... 6,114 33 2.18% 6,729 38 2.28% 6,038 65 2.15% 6,980 79 2.26%
Certificate of deposit....... 41,280 596 5.78% 40,746 608 5.97% 41,460 1,191 5.75% 41,597 1,190 5.72%
-------- ----- ------- -------- ----- ------- ------- ------- ------- -------- ------- ------
Total deposits.............. 62,490 729 4.66% 60,411 732 4.84% 62,046 1,446 4.66% 60,975 1,427 4.68%
Advances and other borrowings..22,241 337 6.00% 19,885 278 5.59% 22,256 670 6.01% 19,444 555 5.71%
-------- ----- ------ -------- ----- ------ ------- ------- ------- -------- ------- ------
Total interest-bearing
liabilities................. 84,731 1,066 5.03% 80,296 1,010 5.03% 84,301 2,116 5.02% 80,419 1,982 4.93%
Non-interest bearing
liabilities(1).............. 484 1,699 575 695
Stockholders' equity.......... 11,099 11,655 10,949 11,724
-------- -------- -------- --------
Total liabilities and
stockholders' equity...... $96,314 $93,650 $95,824 $91,866
-------- -------- -------- --------
-------- -------- -------- --------
Net interest income/
interest rate spread(2) $862 3.43% $858 3.52% $1,726 3.46% $1,688 3.60%
------ ------ ------ ------ ------- ------ ------- -----
------ ------ ------ ------ ------- ------ ------- -----
Net earning assets/
net interest margin......... $6,434 3.78% $7,135 3.93% $6,299 3.81% $5,665 3.92%
-------- ------ -------- ------ -------- ------ -------- -----
-------- ------ -------- ------ -------- ------ -------- -----
Average interest-earning assets
to average interest-bearing
liabilities................. 1.08 1.09 1.07 1.07
-------- -------- -------- --------
-------- -------- -------- --------
-----
(1)Includes non-interest bearing checking 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.
</TABLE>
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 1,022
<INT-BEARING-DEPOSITS> 1,918
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 810
<INVESTMENTS-CARRYING> 9,783
<INVESTMENTS-MARKET> 9,875
<LOANS> 79,202
<ALLOWANCE> 470
<TOTAL-ASSETS> 96,954
<DEPOSITS> 62,613
<SHORT-TERM> 14,648
<LIABILITIES-OTHER> 620
<LONG-TERM> 7,740
0
0
<COMMON> 1,033
<OTHER-SE> 10,300
<TOTAL-LIABILITIES-AND-EQUITY> 96,954
<INTEREST-LOAN> 3,430
<INTEREST-INVEST> 412
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,842
<INTEREST-DEPOSIT> 1,446
<INTEREST-EXPENSE> 2,116
<INTEREST-INCOME-NET> 1,726
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,143
<INCOME-PRETAX> 796
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 508
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 3.46
<LOANS-NON> 1,091
<LOANS-PAST> 13
<LOANS-TROUBLED> 243
<LOANS-PROBLEM> 243
<ALLOWANCE-OPEN> 461
<CHARGE-OFFS> 47
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 470
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
