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, 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
(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: $(Total
interest and dividend income and total non-interest income).
As of May 31, 1997 there were issued and outstanding 838,754 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, 1997,
was $12.3 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, 1997 are incorporated by reference into
Parts II and IV hereof.
Part III of Form 10-KSB: Portions of the Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
1
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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 Department of Financial Institutions (the "DFI") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Company and the Bank are subject
to extensive regulation, supervision and examination by the Wisconsin Department
of Financial Institutions (the "DFI") 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,
1997, the Company had total assets of $95.1 million, total deposits of $61.6
million, and shareholders' equity of $10.9 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. Its E-mail address is ([email protected]).
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 $61.6 million at
March 31, 1997, of which 32.0% 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, 1997, the
Company's gross loan portfolio totaled $78.1 million, that consisted of $55.6
million of one-to-four family loans, $7.2 million of consumer loans, $6.4
million of commercial real estate loans, $4.7 million of commercial loans, $3.3
million of other real estate loans, and $0.9 million of multi-family loans.
At March 31, 1997, the Company's gross loans included $58.5 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, 1997, the Company's mortgage-backed and related
securities held for investment and FHLB-Chicago stock totaled $8.3 million
consisting of $7.4 million or 7.8% of total assets in mortgage-backed and
related securities held for investment and $0.9 million or 0.094% of total
assets in FHLB-Chicago stock.
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 $21.3 million or 34.6% of the
Company's total deposits at March 31, 1997. All of the Company's locations are
in counties generally characterized as rural with a total population of
approximately 100,000.
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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 savings banks, thrift
institutions, mortgage banking companies, insurance companies and commercial
banks. Its most direct competition for deposits historically has come from other
savings banks, thrift institutions, 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 receivable of $78.1
million at March 31, 1997, was first mortgage loans secured by owner-occupied
one-to-four family residences and totaled $55.6 million at March 31, 1997, or
71.1% of gross loans. Commercial real estate loans were $6.4 million or 8.3% of
gross loans at March 31, 1997. Of gross loans, $58.5 million or 74.9% 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
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Composition of Loan Portfolio
The following table sets forth the composition of the Company's loan
portfolio, including loans held for sale, in dollar amounts and in percentages
of the gross loan portfolio at the dates indicated.
<TABLE>
At March 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
<CAPTION>
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family $ 55,581 71.14% $ 48,360 68.00% $ 42,501 72.24%
Multi-family 931 1.19% 1,266 1.78% 1,235 2.10%
Commercial 6,443 8.25% 6,813 9.58% 4,757 8.09%
Construction and land 3,299 4.22% 3,165 4.45% 1,578 2.68%
---------- -------- --------- --------- ----------- -------
Total real estate loans 66,254 84.80% 59,604 83.81% 50,071 85.11%
---------- -------- --------- --------- ----------- -------
Consumer loans:
Home equity - - 7 0.01% 8 0.01%
Automobile 4,856 6.22% 4,832 6.79% 2,787 4.74%
Credit card 304 0.39% 241 0.34% 210 0.36%
Other consumer loans 2,047 2.62% 1,817 2.56% 1,308 2.22%
---------- -------- --------- --------- ---------- --------
Total consumer loans 7,207 9.23% 6,897 9.70% 4,313 7.33%
---------- -------- --------- --------- ---------- --------
Commercial loans 4,663 5.97% 4,612 6.49% 4,450 7.56%
---------- -------- --------- --------- ---------- ---------
Gross loans receivable 78,124 100.00% 71,113 100.00% 58,834 100.00%
---------- --------- --------- --------- ---------- ---------
Add:
Accrued interest, net 448 506 391
Less:Loans in process - - -
Deferred fees and discounts - - -
Allowance for uncollected interest (8) - (8)
---------- ---------- ----------
Allowance for loan losses (461) (433) (434)
Total additions/deductions (21) 73 (51)
------------ ---------- -----------
Loans receivable, net $ 78,103 $71,186 $58,783
------------ ---------- -----------
</TABLE>
4
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Loan Maturity
The following table shows the contractual maturity of the
Company's loan and mortgage-backed and related securities portfolio at March 31,
1997. 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, 1997
---------------------------------------------------------------------------------------------------
<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>
Amounts due :
Within one year $ 590 - - $ 54 $1,833 $2,636 $1,219 - - $ 6,332
After one year:
One to three years 1,031 3 627 17 1,733 2,894 - - 6,305
Three to five years 3,198 - - 628 97 106 2,848 - - 6,877
Five to ten years 4,053 - - 2,212 153 188 132 - - 6,738
Ten to twenty years 12,883 67 1,415 882 - - 85 888 16,220
Over twenty years 33,818 861 1,507 317 - - 29 6,533 43,065
---------- ------- ---------- ---------- -------- --------- ------ -------
Total due after one year 54,983 931 6,389 1,466 2,027 5,988 7,421 79,205
---------- ------- ---------- ---------- -------- --------- ------ -------
Total amounts due 55,573 931 6,443 3,299 4,663 7,207 7,421 85,537
---------- ------- ---------- ---------- -------- --------- ------ -------
Less:
Allowance for loan losses (50) (1) (6) (3) (349) (52) - - (461)
---------- ------- ---------- ---------- -------- --------- ------ -------
Loans receivable and mortgage-
backed securities, net $55,523 $930 $6,437 $3,296 $4,314 $7,155 $7,421 $85,076
---------- ------- ---------- ---------- -------- --------- ------- -------
</TABLE>
5
<PAGE>
The following table sets forth at March 31, 1997 the dollar amount of
all loans and mortgage-backed and related securities due after March 31, 1998,
such loans and whether such loans have fixed interest rates or adjustable
interest rates.
------------------------------
Due After March 31, 1998
------------------------------
------------------------------
Fixed Adjustable Total
------------------------------
(In thousands)
Mortgage loans:
One-to-four family $ 6,832 $ 48,151 $ 54,983
Multi-family 384 547 931
Commercial 850 5,539 6,389
Construction and land 40 1,426 1,466
Total mortgage loans 8,106 55,663 63,769
Consumer loans 5,580 408 5,988
Comercial loans 799 1,228 2,027
Gross loans receivable 14,485 57,299 71,784
Mortgage-backed and related securities 6,759 662 7,421
Gross loans receivable and mortgage-
backed and related securities $21,244 $57,961 $79,205
6
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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 $214,600.
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, 1997, the Company held two FHA loans in its portfolio with an aggregate
principal balance of $0.2 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 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
7
<PAGE>
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 44.7%, 52.8%
and 61.8% of the Company's total loans originated for the fiscal years ended
March 31, 1997, 1996, and 1995, 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, 1997, the Company's commercial real estate loan portfolio
totaled $6.4 million or 8.3% of gross loans compared to $6.8 million or 9.6% of
gross loans at March 31, 1996. The decrease reflects that principal repayments
of $1.5 million exceeded commercial real estate loans originated of $1.1 million
for the fiscal year ended March 31, 1997. 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, 1997, the largest outstanding commercial real estate loan was $.8 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, 1997, the Company had $4.7
million in commercial business loans outstanding, which represented 6.0% 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, 1997, the largest outstanding commercial loan was $0.5
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 its activity in this area. During the last three fiscal years, the
Company charged off approximately $27,000 of such loans. The Company currently
8
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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, 1995, 1996 and 1997,
consumer loans totaled $4.3 million, $6.9 million and $7.2 million,
respectively, or 7.3%, 9.7% and 9.2%, 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 $0.9 million or 1.2% gross loans of multi-family loans
at March 31, 1997. 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.
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Construction and Land Lending
The Company offers one-to-four family residential and other
construction loans. At March 31, 1997, construction and land loans totaled $3.3
million or 4.2% of gross loans compared to $3.2 million or 4.5% of gross loans
at March 31, 1996. 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.
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Fiscal Years Ended March 31,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Mortgage loans (gross)
At beginning of period $59,604 $50,071 $45,595
Mortgage loans originated:
One-to-four family 21,223 16,486 12,817
Commercial 1,072 - 289
Multi-family - 490 -
Construction and land 6,690 5,767 3,424
Total mortgage loans originated 28,985 22,743 16,530
-------- -------- -------
Mortgage loans purchased 101 2,436 1,517
-------- -------- -------
Total mortgage loans originated and purchased 29,086 25,179 18,047
-------- -------- -------
Transfer of mortgage loans to foreclosed
real estate (72) (127) (63)
Principal repayments (17,898) (9,606) (11,851)
Sales of fixed rate loans (4,474) (5,913) (1,657)
-------- -------- -------
Total reductions (22,444) (15,646) (13,571)
-------- -------- -------
At end of period $66,246 $59,604 $50,071
-------- -------- -------
Consumer loans:
At beginning of period $ 6,897 $ 4,313 $ 2,388
Consumer loans originated 5,313 6,685 4,279
Principal repayments (5,003) (4,101) (2,354)
-------- -------- -------
At end of period $ 7,207 $ 6,897 $ 4,313
-------- -------- -------
Commercial loans:
At beginning of period $ 4,612 4,450 3,467
Commercial loans originated and purchased 3,356 5,402 6,228
Principal repayments (3,305) (5,240) (5,245)
-------- -------- -------
At end of period $ 4,663 4,612 $ 4,450
-------- -------- -------
Mortgage-backed and related securities:
At beginning of period $ 5,373 2,001 $ 1,556
Mortgage-backed and related securities
purchased 2,772 3,917 1006
Amortization and repayments (724) (545) (561)
--------- -------- ------
At end of period $ 7,421 $5,373 $ 2,001
-------- ------ ------
11
<PAGE>
The following table sets forth the Company's loan 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,
-------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------------------
<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 $ 7,796 $13,427 $21,223 $ 6,930 $ 9,556 $16,486 $ 3,049 $ 9,768 $ 12,817
Multi-family - - - - 490 490 - - -
Commercial 69 1,003 1,072 56 2,410 2,466 - 1,039 1,039
Construction and land 5,423 1,368 6,791 1,680 4,057 5,737 359 3,832 4,191
------ ------ ------ ----- ------ ------ ----- ------ ------
Total mortgage loans 13,288 15,798 29,086 8,666 16,513 25,179 3,408 14,639 18,047
Consumer loans 5,313 - 5,313 6,449 236 6,685 4,086 193 4,279
Comercial loans 2,308 1,048 3,356 2,493 2,909 5,402 3,409 2,819 6,228
------- ------- ------ ------ ------ ------ ------ ------ ------
Total loans originated
and purchased $20,909 $16,846 $37,755 $17,608 $19,658 $37,266 $10,903 $17,651 $28,554
------- ------- ------- ------- ------- ------- ------- ------- -------
</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, 1997, the Company had 23 participation loans totaling $3.7
million that represented 4.7% of gross loans compared to 30 participation loans
totaling $5.7 million that represented 8.0% of gross loans at March 31, 1996. Of
the aggregate amount of participation loans, 86% were commercial real estate
loans, 13% were commercial loans, and 1% 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, 1997, the Company's fixed rate loan
sales to governmental investors totaled $4.5 million with associated gains of
$59,000. For the fiscal years ended March 31, 1996 and 1995, the Company's fixed
rate loan sales to governmental investors totaled $5.9 million and $1.7 million
with associated gains of $61,000 and $19,000, 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.
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.
13
<PAGE>
For loans sold to FHLMC and FNMA, the Company retains the
responsibility for servicing such loans. At March 31, 1997, 1996 and 1995, the
Bank serviced $25.3 million, $22.9 million and $19.5 million loans for others,
respectively. Fee income received in connection with loans serviced for others
was $77,000, $72,000 and $73,000 for the fiscal years ended March 31, 1997, 1996
and 1995, respectively.
The contractual right to service mortgage loans sold has an economic
value. 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 days or more increased from 26 loans totaling
$631,000 at March 31, 1996, to 45 loans totaling $1.1 million at March 31, 1997.
The increase in the number of loans is the result of the increase in number of
delinquent consumer loans from 9 at March 31, 1996 to 33 at March 31, 1997.
Delinquencies were created by certain deficiencies in dealer loan policies that
have been subsequently revised. The increase in the amount is due to one
commercial loan with a balance of $546,000. Total loans delinquent 31-89 days
increased from 83 loans totaling $2.4 million to 95 loans totaling $3.3 million.
One-to-four family loans increased from 34 loans totaling $1.3 million at March
31, 1996, to 45 loans totaling $2.4 million at March 31, 1997. The increase is
primarily due to one large single-family loan with a balance of $798,000 that
was classified in the 31-60 day category. Because the loan is well
collateralized and has the personal guarantee of a substantial borrower,
management believes the loss potential is minimal. 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 1.87%
for the Company at December 31, 1997, compared to 1. 61% on a nation wide basis
and 1.38% by an asset size basis and 1.83% on an owner type basis.
14
<PAGE>
At March 31, 1997, 1996, and 1995, delinquencies in the Company's loan portfolio
were as follows:
<TABLE>
At March 31, 1997 At March 31, 1996 At March 31, 1995
----------------------------------------------------------------------------------------------------------------
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
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family 45 $ 2,399 7 $ 179 34 $1,253 9 $ 386 21 $ 974 1 $ 80
Multi-family - - - - - - - - - - - - - - - - - - - - - - - -
Residential construction 1 84 - - - - 2 252 2 121 - - - - - - - -
Commercial 6 406 2 199 6 539 - - - - 3 95 1 78
--- ------ ---- ---- ---- ----- --- ---- -- ---- --- ----
Total mortgage loans 52 $ 2,889 9 $ 378 42 $2,044 11 507 24 $1,069 2 $ 158
--- --- ---
Consumer loans 39 191 33 137 37 166 9 60 11 26 - - 2
--- ---
Comercial loans 4 204 3 556 4 197 6 64 0 30 8 78
--- ------ --- ----- ---- ------ --- --- -- ----- --- -----
Total 95 $ 3,284 45 $1,071 83 $2,407 26 631 35 $1,125 10 $ 238
--- ------ --- ------ ---- ------ --- ---- -- ----- --- -----
Delinquent loans to gross 4.20% 1.37% 3.08% 0.81% 2.19% 0.46%
loans(2)
<FN>
- -------------------------------------
-1 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.
-2 Excluding mortgage-backed and related securities.
The following table sets forth the Company's loan originations and purchases in various loan categories according to whether
the loan is fixed rate versus adjustable rate for the periods indicated.
</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, 1997, based
upon the Company's asset classification methodology, the Company had assets
classified as Substandard of $1.1 million, none as Doubtful and none as Loss. At
March 31, 1996, assets classified as Substandard were $778,000, 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, 1997,
$170,000 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 DFI.
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, 1997, the Company had no foreclosed or in
foreclosure properties.
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.
<TABLE>
March 31,
----------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual mortgage loans 90 days or more past due $ 378 $ 386 $ 158
Non-accrual consumer loans 90 days or more past due 128 47 2
Non-accrual commerical loans 90 days or more past due 556 64 78
Loans 90 days or more past due and still accruing 9 134 - -
Troubled debt restructurings - - 62 285
----- ---- ----
Total non-performing loans $ 1,071 $ 693 $ 523
----- ---- ----
Total real estate owned and in judgement, net of
related allowance for losses - - 127 - -
----- ---- ----
Total non-performing assets $ 1,071 $ 820 $ 523
----- ---- ----
Total non-performing loans to gross loans receivable 1.37% 0.97% 0.89%
Total non-performing assets to total assets 1.13% 0.95% 0.76%
Total classified assets $ 1,330 $ 778 $ 248
Total classified assets to total assets 1.40% 0.90% 0.36%
Interest income that would have been recorded on non-
performing loans if current $ 59 $ 13 $ 20
Interest income on non-performing loans included
in net income $ 13 $ 17 $ 15
</TABLE>
As of March 31, 1997, 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 FDI 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 0.61% at March 31, 1996, to 0.59.% at March 31, 1997 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 0.21% would be adequate at March
31, 1997. 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 0.625
at March 31, 1996 to 0.430 at March 31, 1997 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.
<TABLE>
For the Fiscal Year Ended March 31,
---------------------------------------------------
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 433 $ 434 $ 436
Additions charged to operations:
One-to-four family 0 0 - -
Multi-family and commercial real estate 0 0 - -
Commercial 75 0 17
Consumer 6 24 - -
------- ------- -------
81 24 17
Recoveries:
One-to-four family 19 - - - -
Multi-family and commercial real estate 3 4 5
Commercial 0 0 - -
Consumer 0 2 2
------- ------- -------
22 6 7
Charge-offs:
One-to-four family 0 (5) (14)
Multi-family and commercial real estate 0 0 - -
Commercial (19) 0 (8)
Consumer (56) (26) (4)
------- ------- -------
(75) (31) (26)
Net charge-offs (53) (25) (19)
------- ------- -------
Balance at end of period $ 461 $ 433 $ 434
------- ------- -------
Percentage of loans to gross loans receivable
Mortgage loans 84.80% 83.82% 85.11%
Consumer loans 9.23% 9.70% 7.33%
Ratio of allowance for loan losses to gross
loans receivable at the end of period 0.59% 0.61% 0.74%
Ratio of allowance for loan losses to
non-performing loans at the end of period(1) 43.04 62.48 82.98
Ratio of net charge-offs to average gross
loans during period 0.07% 0.04% 0.03%
Average gross loans outstanding $ 76,240 $ 65,615 $ 54,783
Gross loans receivable at the end of period $ 78,124 $ 71,113 $ 58,834
<FN>
(1) Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, and troubled debt
restructurings.
</FN>
</TABLE>
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,
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------------------
<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
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of allowance:
Mortgage loans:
One-to-four family $ 36 0.06% 71.14% $ 85 0.18% 68.00% 59 0.14% 72.24%
Multi-family - - 1.19% 1 0.08% 1.78% 1 0.08% 2.10%
Commercial/nonresidential 34 0.53% 8.25% 22 0.32% 9.58% 24 0.50% 8.09%
Construction and land 1 0.03% 4.22% 19 0.60% 4.45% 2 0.13% 2.68%
-- ---- --- ---- -- ----
Total mortgage loans 71 84.80% 127 83.81% 86 85.11%
Consumer loans 50 0.69% 9.23% 16 0.23% 9.70% 5 0.12% 7.33%
------
Commercial loans 340 7.29% 5.97% 290 6.29% 6.49% 343 7.71% 7.56%
------ ------- ---- ------- ---- -------
Total allowance for loan losses $ 461 100.00% $ 433 100.00% 434 100.00%
------ ------- ---- ------- ---- -------
</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, and FNMA 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, FNMA limits a single family loan to
203,150 and FHLMC limits a single family loan to $214,600.
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, 1997, the Company
held $7.4 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 $7.3 million. Of this amount, $7.0 million
were fixed rate securities and $0.3 million were adjustable-rate securities. At
March 31, 1997, the mortgage-backed and related securities portfolio represented
7.8% of the Company's total assets.
Composition of Securities Classified as Trading
At March 31, 1997 and 1996, the Company did not have any investment
securities or mortgage-related securities classified as trading.
Composition of Securities Available for Sale
At March 31, 1997, the Company had $2.8 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 $0.1 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,
1997, 1996, 1995.
<TABLE>
At March 31, 1997 At March 31, 1996 At March 31, 1995
------------------- ------------------- -------------------
<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 $1,963 71.33% $1,963 $1,956 68.42% $1,956 $1,872 65.48% $1,872
FHLB 488 17.73% 488 485 16.96% 485 461 16.12% 461
FHLMC 300 10.90% 300 304 10.63% 304 293 10.25% 293
Money Market Mutual Fund 1 0.04% 1 114 3.99% 114 30 1.05% 30
Total securities available-for-sale $2,752 100.00% 2,752 2,859 100.00% $2,752 $2,859 100.00% $2,859
------ ------ ----- ----- ------ ----- ----- ------ -----
Mortgage-backed and other related securities
held-to-maturity
FNMA $4,622 62.28% $4,523 $2,220 41.32% $2,206 $837 41.83% $827
FHLMC 434 5.85% 420 494 9.19% 487
GNMA 2,365 31.87% 2,365 2,659 49.49% 2,693 1,005 50.22% 1,005
CMOs
FNMA 159 7.95% 159
---- ----- ----
Total Mortgage-backed and related
securities held-to-maturity $7,421 100.00% $7,308 $5,373 100.00% $5,386 $2,001 100.00% $1,991
------ ------ ----- ----- ------ ----- ----- ------ -----
</TABLE>
At March 31, 1997, the aggregate book value and the aggregate market
value of securities issued by FNMA totaled $6.5 million and $6.5 million,
respectively. At March 31, 1996, the aggregate book value and the aggregate
market value of securities issued by GNMA totaled $2.4 million and $2.4 million,
respectively. Both FNMA and GNMA securities exceed 10% of stockholder equity at
March 31, 1997.
23
<PAGE>
The composition and contractual maturities of the securities portfolio,
excluding FHLB-Chicago stock is indicated in the following table:
<TABLE>
At March 31, 1997
---------------------------------------------------------------------------------------
<CAPTION>
Total
Securities
Less than 1 to 10 Over 10 available-
1 Year Years Years for-sale
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. government securities and
other agency obliations - - $2,751 - - $2,751
Money market mutual fund $1 - - - - 1
------ ------- ------- -------
Total securities available-for-sale $1 $2,751 - - $2,752
------ ------- ------- -------
Weighted average yield 4.80% 5.31% - - 5.31%
------ ------- ------- -------
</TABLE>
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, 1997:
<TABLE>
At March 31, 1997
------------------------------------------------------------------------------------
<CAPTION>
Adjustable Fixed Total
Rate Rate Mortgage-
Mortgage Mortgage backed and
Backed Backed Related
Securities Securities Securities
<S> <C> <C> <C>
Amounts due or repricing:
Within one year $662 - - $662
After one year:
One to three years - - - - - -
Five to ten years - - - - - -
Ten to 20 years - - 888 888
Over 20 years - - 5,865 5,865
----- ------- -------
Total due or repricing after one year - - 6,753 6,753
-----
Total due or repricing 662 6,753 7,415
----- ------- -------
Less:
Unearned discounts
and premiums, net - - 6 6
----- ------- -------
Mortgage-backed and related
securities, net $662 $6,759 $7,421
----- ------- -------
</TABLE>
At March 31, 1997, the stated average maturity of the Company's
mortgage-backed and related securities was 24.2 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, 1997, 1996 and 1995 the
Company had advances from the FHLB-Chicago of $17.6 million or 18.5% of total
assets, $12.6 million or 14.6% of total assets, and $3.6 million or 5.2% of
total assets, respectively. Of the Company's outstanding FHLB-Chicago advances
at March 31, 1997, $7.5 million will mature before March 31, 1998. The Company
also had borrowings consisting of repurchase agreements and a note payable from
a bank of $4.5 million, $4.4 million and $2.2 million at March 31, 1997, 1996
and 1995, 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.
<TABLE>
The following table presents the deposit activity of the Company for the periods indicated:
Fiscal Year Ended March 31,
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net Deposits (Withdrawals) $ 1,627 $ 4,486 $ 1,465
Interest credited on deposits 2,674 2,143 1,632
-------- -------- --------
Total increase (decrease) in deposits $ 4,301 $ 6,629 $ 3,097
</TABLE>
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.
25
<PAGE>
At March 31, 1997, the Company had outstanding $3.2 million in
certificates of deposit in amounts of $100,000 or more maturing as follows:
Amount at
March 31, 1997
(In thousands)
Three months or less $ 625
Over three through six months 200
Over six through 12 months 1,012
Over 12 months 1,323
---------------
Total $ 3,160
===============
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,
-----------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------------
<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 $2,792 4.54% - - $2,069 3.61% - - $2,259 4.46% - -
NOW accounts 5,989 9.73% 2.26% 6,173 10.78% 2.57% 6,242 12.33% 1.96%
Money market 5,029 8.17% 4.61% 2,314 4.04% 4.77% - - - - - -
Passbook 5,905 9.59% 2.16% 6,829 11.93% 2.51% 6,916 13.66% 2.50%
------- ----- ---- ----- ----- ---- ------ ------ ----
Total 19,715 32.03% 2.51% 17,385 30.36% 2.53% 15,417 30.45% 1.92%
Certificates accounts
(current term to maturity):
One to six months 15,941 25.90% 5.43% 14,332 25.03% 5.68% 13,569 26.80% 4.88%
six to 12 months 9,443 15.34% 5.71% 14,499 25.32% 5.96% 11,623 22.96% 6.08%
13 to 36 months 14,151 22.99% 6.07% 7,524 13.14% 5.97% 8,010 15.82% 5.90%
37 to 60 months 2,110 3.42% 6.11% 3,226 5.64% 6.35% 1,925 3.80% 6.33%
61 to 96 months 120 0.19% 6.33% 290 0.51% 6.44% 25 0.05% 7.00%
97 to 132 months 77 0.13% 6.96% - - - 58 0.11% 6.25%
------- ----- ---- ------ ----- ---- ------ ---- ----
Total certificates 41,842 67.97% 5.75% 39,871 69.64% 5.85% 35,210 69.55% 5.59%
Total deposits $61,557 100.00% 4.71% $57,256 100.00% 4.84% $50,627 100.00% 4.47%
------- ------- ---- ------ ------ ---- ------ ------ ----
</TABLE>
27
<PAGE>
The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at March 31, 1997:
At March 31,
1997 1996
Certificates of Deposit: (In thousands)
4.00% to 4.99% 1,442 1,418
5.00% to 5.99% 21,018 18,139
6.00% to 6.99% 18,527 19,372
7.00% to 7.99% 825 900
8.00% to 8.99% 30 30
--------- ---------
Total $ 41,842 $ 39,859
--------- ---------
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 will have to
purchase additional FHLB stock, if advances exceed $18.2 million. At March 31,
1997, the Company's FHLB-Chicago advances totaled $17.6 million, representing
20.9% of total liabilities, an increase from the $12.6 million outstanding at
March 31, 1996. The Company intends to continue to leverage its capital base by
utilizing FHLB borrowings to originate or purchase loans in fiscal 1998.
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,
1997 and March 31, 1996, there were $4.4 million and $4.3 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.
<TABLE>
At or For the Fiscal Years Ended March 31,
----------------------------------------------
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB- Chicago advances:
Average balance outstanding $ 15,751 $ 7,629 $ 3,838
Maximum amount outstanding at any
month-end during the period 18,245 12,556 7,269
Balance outstanding at end of period 17,634 12,556 3,578
Weighted average interest rate during
the period(1) 5.87% 6.00% 5.40%
Weighted average interest rate at end
of period 5.91% 7.36% 6.00%
Repuchase agreements:
Average balance outstanding $ 4,808 $ 3,634 $ 2,126
Maximum amount outstanding at any
month-end during the period 5,761 4,442 2,266
Balance outstanding at end of period 4,463 4,356 2,224
Weighted average interest rate during
the period 5.74% 6.60% 5.21%
Weighted average interest rate at end
of period 6.13% 6.16% 6.55%
Total advances and repurchase agreements:
Average balance outstanding $ 20,559 $ 11,263 5,964
Maximum amount outstanding at any
month-end during the period 24,006 16,998 9,535
Balance outstanding at end of period 22,097 16,912 5,802
Weighted average interest rate during
the period 5.78% 5.19% 5.33%
Weighted average interest rate at end
of period 5.95% 5.01% 6.21%
<FN>
- -------------------------------
(1) Computed on the basis of average monthly balances.
</FN>
</TABLE>
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
Department of Financial Institutions and the FDIC to engage in the insurance and
brokerage activities.
In January 1983, ASA formed the Pondhurst Condominium Association and
developed 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, 1997, 56 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, 1997, ASA owned 8 lots with a total book value of zero. As of March
31, 1997, ASA had total assets of $29,000. The Bank and ASA have agreed to a
request by the Federal Reserve bank of Minneapolis that ASA undertake to divest
its holdings in the Pondhurst Project by May 31, 2000.
29
<PAGE>
Personnel
At March 31, 1997, the Company had 32 full-time employees and 4
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, 1997,
the Bank was subject to a blended federal income tax rate of approximately 34%.
Bad Debt Reserves
On August 20, 1996, the President of the United States signed the Small
Business Job Protection Act of 1996 ("the Act"). The Act repealed the "reserve
method" of accounting for bad debts by most thrift institutions, effective for
taxable years beginning after 1995. Most thrift institutions such a the Bank are
now required to use the "specific charge-off method". The Act also grants
partial relief from reserve recapture provisions which are triggered by the
change in method. This legislation is not expected to have a material impact on
the Bank's financial condition or results of operations.
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).
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.
30
<PAGE>
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 DFI, 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 Wisconsin Department to Financial Institutions ("DFI") and the
Securities and Exchange Commission ("SEC").
Wisconsin Savings Bank Regulation
Regulations adopted by the Department of Financial Institutions 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 DFI. The Bank is required to file periodic
reports with and is subject to periodic examinations by the DFI. Savings banks
are required to pay examination fees and annual assessments to fund the
supervisory operations of the DFI. Based on the assessment rates published by
the DFI and the Bank's total assets of $83.0 million at December 31, 1995, the
Bank paid $2,906 in assessments for the period ending June 30, 1996.
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 FDI, 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 FDI and subject to the condition that the service
corporation or subsidiary engages in only those activities pre-approved by the
FDI, agrees to be audited annually by a certified public accountant, agrees to
bear the expense of all examinations and audits conducted by the FDI, 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".
31
<PAGE>
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, 1997, 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, 1997, the Bank maintained 87.05%
of its assets in qualified thrift investments and therefore met the qualified
thrift requirement.
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 DFI 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 FDI'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 FDI'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 FDI as
investments for which a secondary resale market exists, including authorized
mutual fund investments. On March 31, 1997, the Bank's liquidity ratio was
15.07%.
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
32
<PAGE>
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. There is an twenty-seven 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 $0.00 per one hundred dollars of deposits, and institutions
classified as weakest by the FDIC are subject to an annual rate of $0.27 per one
hundred dollars of deposits (with intermediate annual rates of $0.03, $0.10,
$0.17 and $0.24 per $100 of deposits).
The Bank has been classified in a risk category that will result in
annual assessments of $0.00 per one hundred dollars of deposits. The (FICO)
quarterly multiplier is not tied to the FDIC risk calculation. The FICO rate is
determined quarterly. For the second quarter of 1997, the FICO SAIF annual rate
is $0.065 per one hundred dollars of deposits. The FICO debt service requirement
became applicable to all insured institutions on January 1, 1997, in accordance
with the Deposit Insurance Act of 1996. The Bank's expense related to federal
deposit insurance premiums to the SAIF was $428,000 for the fiscal year ended
March 31, 1997. Placement of the Bank in any risk category 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, 1997, the Bank had no brokered
deposits.
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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.
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,
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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
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 an 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
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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
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, 1997, the Bank's ratio of Tier 1 capital to total
assets was 8.17% or 5.17% 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, 1997, the
Bank's Tier 1 capital to risk-weighted assets was 12.75%, or 8.75% in excess of
the FDIC requirement and the Bank's total capital to risk-weighted assets was
13.52%, or 5.52% in excess of the FDIC requirement.
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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 FDI
determines that the financial condition, history, management or earning
prospects of a savings bank are not adequate, the FDI may require a higher
minimum capital level for the savings bank. If a savings bank's capital ratio
falls below the required level, the FDI may direct the savings bank to adhere to
a specific written plan established by the FDI 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, 1997, the Bank's total capital, as calculated under Wisconsin law, was
$8.1 million or 8.55% of total assets, which was 2.55% in excess of the required
amount.
Insurance of Deposits
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of federally insured banks and savings
institutions and safeguards the safety and soundness of the banking and savings
industries. Two separated insurance funds, the Bank Insurance Fund ("BIF") and
the Savings Associations Insurance Fund ("SAIF") are maintained and administered
by the FDIC. The Bank is a member of SAIF and the FDIC has examination authority
over the Bank. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to it target level within a reasonable
time and may decrease such assessment rates if such target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
;members, Under this system, assessments are set within a range, based on the
risk the institution poses to its deposit insurance fund. This risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings associations were used to pay the cost of prior thrift failures, the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required reserve level during the third calendar quarter of 1995. As a
result, deposit insurance premiums for deposits insured by the BIF were
substantially less than premiums for SAIF-insured deposits. On September 30,
1996, President Clinton signed banking legislation to resolve the deposit
insurance premium disparity. The banking package also included extensive
regulatory relief for banks and thrifts. The BIF-SAIF package contains the
following core elements for resolving the deposit premium disparity:
Special Assessment. A one-time special assessment on SAIF deposits was
imposed to bring the fund's reserve ration to the statutory 1.25 percent. The
assessment rate was approximately 65.7 basis points on deposits as of March 31,
1995. The bill clarifies that the special assessment is deductible for tax
purposes in the year paid. The special assessment amounted to $350,000 to the
Bank and is reflected in the current financial data reported as of March 31,
1997.
FICO Sharing. Pro-rata sharing of the Financing Corporation obligation
among BIF-SAIF members will begin by January l, 2000. This obligation was
previously paid by only SAIF members. From 1997 through 1999, partial sharing
will occur, with SAIF deposits assessed 6.44 basis points and BIF deposits 1.29
basis points.
SAIF and BIF Rates. Through December 31, 1998, the assessment rate for
SAIF deposits cannot be lower than the rate for BIF deposits.
Reserve Ration, Rebates The FDIC is prohibited from setting the
semiannual assessment at a rate in excess of what is needed to maintain or meet
the required reserve ratio. Until the funds are merged, the FDIC is permitted to
rebate or credit excess premiums to BIF members only.
Deposit Migration For a three-year period, the banking regulators are
authorized to prevent SAIF-insured institutions from "facilitating or
encouraging" customers to shift their deposits to BIF-insured affiliates for the
purpose of evading the SAIF premium.
Funds Merger. The BIF and SAIF insurance funds will merge to form the
Deposit Insurance Fund on January 1, 1999, if there are no savings associations
(not including state savings banks) in existence on that date. The statute is
silent on when, how or if rechartering will occur.
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Timetable. Pro-rata FICO sharing will begin and the ban on deposit
shifting will end on the earlier of January 1, 2000, or when the last savings
association ceases to exist.
Charter Reform. The Treasury Department is directed to report to
Congress by March 31, 1997, with its recommendations on a common charter for
banks and savings institutions.
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 FDI.
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.
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 DFI'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
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guaranty and similar other types of transactions. The FDI, 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 DFI 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.
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
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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.
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 $912,000 at March 31,
1997.
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, 1997, the Bank had
$17.6 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
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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.
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 FDI has not yet issued
proposed regulations governing savings bank holding companies.
41
<PAGE>
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.
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
42
<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, 1997
- --------------- ------ ---------------
Amery/Home Office 1936 $1,266,000
234 S Keller Avenue
PO Box 46
Amery, WI 54001
New Richmond Office 1972 954,000
532 S. Knowles Avenue
New Richmond, WI 54017
1975 121,000
Siren Office --------------
24082 Highway 35 N
Siren, WI 54872
Net Book Value $2,341,000
--------------
43
<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, 1997.
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, 1997, 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 $0.12
per share to shareholders of record on April 25, 1997. 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, 1997, 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, 1997, 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.
44
<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 25, 1997, relating to the 1997 Annual
Meeting of the Shareholders scheduled for August 12, 1997, 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 25, 1997 relating to the 1997 Annual Meeting of
Shareholders scheduled for August 12, 1997, 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 25, 1997, relating to the 1997 Annual
Meeting of Shareholders scheduled for August 12, 1997, 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 25, 1997, relating to the 1997 Annual Meeting of
Shareholders Scheduled for August 12, 1997, 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 25, 1997, relating to the 1997 Annual
Meeting of Shareholders scheduled for August 12, 1997, 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.
45
<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 (1)
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 1997 Annual Report to Shareholders 51
21.1 Subsidiaries of Registrant 52
23.1 Consent of Keller & Yoder 53
99.1 Proxy Statement for 1997 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, 1997.
46
<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 10, 1997 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 10, 1997
Brian L. Beadle and Principal Financial Accounting
Officer) and Director
_/s/Gerald J. Ahlin___ Director June 10, 1997
Gerald J. Ahlin
_/s/Vern E. Albrecht__ Director June 10, 1997
Vern E. Albrecht
_/s/Michael D. Jensen__ Director June 10, 1997
Michael D. Jensen
_/s/Donald M. Michels__ Director June 10, 1997
Donald M. Michels
_/s/Norman M. Osero__ Director June 10, 1997
Norman M. Osero
_/s/James A. Counter__ Director June 10, 1997
James A. Counter
47
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered Page
Exhibit Where Attached
Number Exhibits are located
11.l Statement Regarding Computation of Per Share Earnings 49
13.1 1997 Annual Report to Shareholders 50
21.1 Subsidiaries of the Registrant 51
23.1 Consent of Keller & Yoder 52
99.1 Proxy Statement for 1997 Annual Meeting of Shareholders 53
48
<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:
<TABLE>
For the twelve months For the twelve months
ended March 31, 1997 ended March 31, 1996
-------------------- --------------------
Primary Fully Diluted Primary Fully Diluted
<S> <C> <C> <C> <C>
Net income 710,000 710,000 842,000 842,000
Common shares issued 1,032,517 1,032,517 1,032,517 1,032,517
Net treasury shares 111,677 111,677 14,151 14,151
Unallocated ESOP shares 73,750 73,750 87,503 87,503
Ungranted shares in incentive plan 0 0 0 0
Weighted average common shares outstanding 847,090 847,090 930,863 930,863
Common stock equivalents based on the
treasury stock method 0 11,198 0 823
Total weighted average common shares 847,090 858,288 930,863 931,686
and equivalents outstanding
Earnings per share $0.84 $0.83 $0.90 $0.90
</TABLE>
49
<PAGE>
EXHIBIT 13.1
1997 ANNUAL REPORT TO SHAREHOLDERS
50
<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
51
<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. for the year ended March 31, 1997, of our
report dated April 26, 1997, 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 10, 1997
52
<PAGE>
EXHIBIT 99.1
PROXY STATEMENT
FOR 1997 ANNUAL MEETING OF SHAREHOLDERS
53
<PAGE>
