UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998
Commission file number 0-24606
NORTHWEST EQUITY CORP.
(exact name of small business issuer as specified in its charter)
Wisconsin 39-1772981
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Keller Avenue South
Amery, Wisconsin 54001
(Address of principal executive offices) (Zip code)
(715) 268-7105
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes __x__ No_____
(2) Yes __x__ No_____
The number of shares outstanding of the issuer's common stock, $1.00 par
value per share, was 825,301 at June 30, 1998.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTHWEST EQUITY CORP.
Dated:____8/7/98______________ By: ___/s/Brian L. Beadle_____
(Brian L. Beadle, President
Principal Executive Officer and
Principal Financial and
Accounting Officer)
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant is not involved in legal proceedings involving amounts
in the aggregate which management believes are material to the financial
condition and results of operations of the Registrant. (Materiality is defined
for accounting purposes as $250,000 or more) On October 16, 1996, the Bank
learned that a Minnesota Bank had commenced a repleven lawsuit against a
borrower of the Bank that involves several parties claiming interests in
collateral secured by a General Business Security Agreement of the Bank. On
November 20, 1996, the Bank filed its answer and a third party complaint seeking
repleven of its collateral and money judgments against its borrowers, the
guarantors, and other interested parties. Repleven judgment was entered in favor
of the Bank on January 15, 1997. A money judgment was filed against a guarantor
on December 30, 1996. One of the guarantors has since filed personal bankruptcy
and the Bank was awarded a non-dischargeable judgment against the guarantor in
the amount of $80,000. Depending upon the non-exempt assets of the parties
involved, the Bank's legal counsel believes the Bank should have sufficient
legal grounds to expect recovery from the Bank's collateral, personal
guarantees, and the other parties involved. The Board of Directors at its
meeting October 8, 1996, decided to increase the quarterly loss allowance to
$25,000 until more information is available to make a reasonable estimate of any
losses that may occur. The Board continued this policy at its meeting held
December 10, 1996, and subsequent meetings because a reasonable estimate cannot
be determined until the legal issues are resolved. As soon as the Board can
identify and quantify the amount of the loss, it will book the loss. An auction
of the business inventory and equipment was held March 26, 1998. Proceeds of the
auction and the recovery of other equipment total $220,435 and will be held by
the court appointed receiver. Of that amount, approximately $72,000 is from the
sale of property that is not disputed by any third parties and should be
recovered by the Bank. The remaining $148,000 will continue to be held by the
receiver pending further order of the court. A trial is scheduled for November
9, 1998. An attempt to settle the dispute amongst a limited number of the
parties were held April 28, 1998, and at a trial court ordered mediation session
held July 10, 1998; but no settlement was reached. Various motions for summary
judgment have been filed with the court and at the writing only one issue has
been decided and that in favor of the bank's position against the motion of
another secured creditor. In order to establish an order of magnitude of the
loss potential, a worst case scenario of no recovery on a loan of $613,000 plus
an overdraft of $83,000 less $72,000 of the undisputed auction proceeds and less
the current amount in the loan loss reserve of $304,000 allocated or available
to be allocated to this loan, would produce an after-tax loss of approximately
$204,000. Settlements proposed if accepted would have extinguished the loss
reserve and produced no after-tax loss.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-k.
a. No reports on Form 8-K were filed during the quarter for
which this report was filed.
2
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,
(In Thousands)
<CAPTION>
June 30,
ASSETS 1998 March 31,
------------
(unaudited) 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $2,548 $2,642
Interest-bearing deposits with financial institutions 1,256 3,405
Total cash and cash equivalents 3,804 6,047
Investment securities - held-to-maturity - fair value
of $3,004 at June 30, 1998 and $2,999 at March 31, 1998 3,000 3,000
Mortgage backed securities - fair value of $6,251 at
June 30, 1998 and $6,546 at March 31, 1998 6,111 6,398
Loans held for sale 193 142
Loans receivable - net 78,528 78,297
Foreclosed properties and properties subject to foreclosure 312 159
Investment in Federal Home Loan Bank stock - at
cost - which approximates fair value 953 1,159
Premises and equipment 2,252 2,250
Accrued interest receivable 597 578
Prepaid expenses and other assets 702 709
------------ ------------
TOTAL ASSETS $96,452 $98,739
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts $61,875 $62,278
Advances from Federal Home Loan Bank 17,562 19,062
Other borrowed money 4,555 5,258
Accounts payable and accrued expenses 706 627
------------ ------------
Total liabilities 84,698 87,225
------------ ------------
Stockholders' equity
Preferred stock - $1 par value; 2,000,000 shares
authorized; none issued - - - -
Common stock - $1 par value; 4,000,000 shares authorized;
1,032,517 shares issued; 825,301 shares outstanding 1,033 1,033
Additional paid-in capital 6,582 6,584
Less unearned restricted stock plan award (13) (26)
Less unearned Employee Stock Ownership Plan (358) (389)
Less treasury stock - at cost (2,549) (2,557)
Retained earnings - substantially restricted 7,059 6,869
------------ ------------
Total stockholders' equity 11,754 11,514
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $96,452 $98,739
============ ============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
3
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,
(In Thousands except for per share amounts)
<CAPTION>
Three Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans $1,745 $1,702
Interest on mortgage-backed securities 115 132
Interest and dividends on investments 97 77
------------ ------------
Total interest income 1,957 1,911
------------ ------------
Interest expense:
Interest on deposits 720 717
Interest on borrowings 326 333
------------ ------------
Total interest expense 1,046 1,050
------------ ------------
Net interest income 911 861
Provision for loan losses 25 25
------------ ------------
Net interest income after provision for loan losses 886 836
------------ ------------
Other income:
Mortgage servicing fees 21 22
Service charges on deposits 62 58
Gain on sale of mortgage loans 38 16
Other 83 34
------------ ------------
Total other income 204 130
------------ ------------
General and administrative expenses:
Salaries and employee benefits 336 310
Net occupancy expense 86 78
Data processing 35 32
Federal insurance premiums 10 10
Other 134 131
------------ ------------
Total general and administrative expense 601 561
------------ ------------
Income before provision for income taxes 489 405
Provision for income taxes 167 153
------------ ------------
Net income $322 $252
============ ============
Basic earnings per share $0.42 $0.33
============ ============
Diluted earnings per share $0.39 $0.27
============ ============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three Months Ended June 30,
(In Thousands)
<CAPTION>
Unrealized
Gain (Loss) Unearned
Additional on Securities Unearned ESOP
Common Paid-In Available Restricted Compen- Treasury Retained
Stock Capital For Sale Stock sation Stock Earnings Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1997
Balance - March 31, 1997 $1,033 $6,584 $(29) $(115) $(558) $(2,256) $6,200 $10,859
Net income - - - - - - - - - - - - 252 252
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $8 - - - - 9 - - - - - - - - 9
Amortization of unearned ESOP and restricted stock
award - - - - - - 32 41 - - - - 73
Cash dividends - $.12 per share - - - - - - - - - - - - (100) (100)
-----------------------------------------------------------------------------------
Balance - June 30, 1997 1,033 6,584 (20) (83) (517) (2,256) 6,352 11,093
==================================================================================
Three Months Ended June 30, 1998
Balance - March 31, 1998 1,033 6,584 - - (26) (389) (2,557) 6,869 11,514
Net income - - - - - - - - - - - - 322 322
Exercise of stock options - - (2) - - - - - - 8 - - 6
Amortization of unearned ESOP and restricted stock
award - - - - - - 13 31 - - - - 44
Cash dividends - $.16 per share - - - - - - - - - - - - (132) - -
----------------------------------------------------------------------------------
Balance - June 30, 1998 $1,033 $6,582 $ - - $(13) $(358) $(2,549) $7,059 $11,754
==================================================================================
See accompanying Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
(In Thousands)
<CAPTION>
Three Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $322 $252
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 37 37
Provision for loan losses 25 25
Deferred income taxes - - (28)
Amortization of ESOP and restricted stock awards 44 73
Proceeds from sales of mortgage loans 4,466 964
Loans originated for sale (4,517) (951)
Changes in operating assets and liabilities:
Accrued interest receivable (19) 59
Prepaid expenses and other assets 7 (87)
Accrued interest payable 128 21
Accrued income taxes payable 79 55
Other accrued liabilities (130) 40
------------ ------------
Net cash provided by operating activities 442 460
------------ ------------
Cash flows from investing activities:
Available for sale securities:
Proceeds from sales 206 - -
Held to maturity securities:
Proceeds from maturity 500 - -
Purchases of investment securities (500) (302)
Principal collected on mortgage-backed securities 287 97
Principal collected on long-term loans 5,398 7,354
Long-term loans originated or acquired (5,807) (7,792)
Purchase of office properties and equipment (39) (9)
------------ ------------
Net cash (used in) investing activities 45 (652)
------------ ------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
6
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30,
(In Thousands)
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings accounts (403) 1,656
Net increase (decrease) in short-term borrowings (6,309) (992)
Repayments of long-term financing (834) 180
Proceeds from long-term financing 4,940 600
Exercise of stock options 8 - -
Dividends paid (132) (100)
------------ ------------
Net cash provided by (used in) financing activities (2,730) 1,344
------------ ------------
Increase (decrease) in cash and equivalents (2,243) 1,152
Cash and equivalents at beginning 6,047 2,980
------------ ------------
Cash and equivalents at end $3,804 $4,132
============ ============
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $166 $9
Loans charged off 40 21
Interest paid 918 1,029
Income taxes paid 88 98
See accompanying Notes to Consolidated Financial Statements
</TABLE>
7
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NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with the accounting policies
described in the Bank's audited financial statements for the year ended
March 31, 1998 and should be read in conjunction with the financial
statements and notes which appear in that report. These statements do
not include all the information and disclosures required by generally
accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered for a
fair presentation have been included.
Note 2. Subsequent Events: none
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
NORTHWEST EQUITY CORP.
Comparison of Operating Results for the Three Months Ended June 30, 1997 and
June 30, 1998
Net Income
Net income for the three months ended June 30, 1998, increased $70,000
or 27.8% to $322,000 compared to $252,000 for the three months ended June 30,
1997. The increase in net income was primarily due to an increase in total other
income of $74,000 from $130,000 for the three months ended June 30, 1997 to
$204,000 for the three months ended June 30, 1998. Other income increased
$49,000 from $34,000 for the three months ended June 30, 1997, to $83,000 for
the three months ended June 30, 1998. The increase in other income was partially
due to an increase in the profit on sale of real estate held in the Bank's
subsidiary of $39,000 from $11,000 for the three months ended June 30, 1997, to
$50,000 for the three months ended June 30, 1998 and an increase of $14,000 in
brokerage commissions from $9,000 for the three months ended June 30, 1997, to
$23,000 for the three months ended June 30, 1998. Gain on sale of mortgage loans
increased $22,000 from $16,000 for the three months ended June 30, 1997, to
$38,000 for the three months ended June 30, 1998. A $50,000 increase in net
interest income from $861,000 for the three months ended June 30, 1997 to
$911,000 for the three months ended June 30, 1998, was partially offset by an
increase in $40,000 in general and administrative expense from $561,000 for the
three months ended June 30, 1997 to $601,000 for the three months ended June 30,
1998.
Net Interest Income
Net interest income increased by $50,000 from $861,000 for the three
months ended June 30, 1997, to $911,000 for the three months ended June 30,
1998. The improvement in net interest income results from interest income
increasing $46,000 to $1,957,000 for the three months ended June 30, 1998,
compared to $1,911,000 for the three months ended June 30, 1997, while interest
expense decreased $4,000 to $1,046,000 for the three months ended June 30, 1998,
from $1,050,000 for the three months ended June 30, 1997.
Interest Income
Interest income increased $46,000 or 2.4% to $1,957,000 for the three
months ended June 30, 1998, compared to $1,911,000 million for the three months
ended June 30, 1997. Interest and fees on loans increased $43,000 to $1,745,000
for the three months ended June 30, 1998, compared to $1,702,000 for the three
months ended June 30, 1997. The increase was due to the increase in the average
outstanding balance of total loans to $79.1 million for the three months ended
June 30, 1998, compared to $77.4 million for the three months ended June 30,
1997. Interest on mortgage-backed and related securities decreased $17,000 to
$115,000 for the three months ended June 30, 1998, from $132,000 for the three
months ended June 30, 1997, due to an decrease in the average balance of
mortgage backed and related securities from $7.2 million for the three months
ended June 30, 1997, to an average balance of $6.3 million for the three months
ended June 30, 1998, that was the result of the principal repayments and
pre-payments.
Interest on investments increased $20,000 to $97,000 for the three
months ended June 30, 1998, compared to $77,000 for the three months ended June
30, 1997, as a result of an increase in the average outstanding balance of
interest bearing deposits in other financial institutions from $1.5 million for
the three months ended June 30, l997, to $2.3 million for the three months ended
June 30, 1998.
Interest Expense
Interest expense decreased $4,000 or 0.4% to $1,046,000 for the three
months ended June 30, 1998, compared to $1,050,000 for the three months ended
June 30, 1997. Interest on deposits increased $3,000 or 0.4% from $717,000 for
the three months ended June 30, 1997 to $720,000 for the three months ended June
30, 1998. The increase reflects an increase in the average outstanding balance
of total deposits to $62.2 million for the three months ended June 30, 1998,
from an average balance of $61.6 million for the three months ended June 30,
1997. Interest on borrowings decreased $7,000 or .21% from $333,000 for the
three months ended June 30, 1997, to $326,000 for the three months ended June
30, 1998. The decrease reflects a decrease in average rate paid on advances and
other borrowings from 5.98% for the three months ended June 30, 1997, to 5.68%
for the three months ended June 30, 1998.
9
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MANAGEMENT'S DISCUSSION (CONT.)
Provision for Loan Losses
The provision for loan losses remained at $25,000 for the three months
ended June 30, 1998, compared to $25,000 for the three months ended June 30,
1997. The allowance for loan losses totaled $472,000 at June 30, 1998, compared
to $466,000 at June 30, 1997, and represented 0.59% and 0.59% of gross loans and
34.9% and 38.3% of non-performing loans, respectively. The Board of Directors is
currently adding $25,000 each quarter to the loan loss reserve to provide for a
commercial loan discussed under Asset Quality. That policy will continue until a
reasonable estimate of any loss potential can be determined. The non-performing
assets to total assets ratio was 1.72% at June 30, 1998, compared to 1.26% at
June 30, 1997.
Other Income
Total other income increased 56.9% or $74,000 to $204,000 for the three
months ended June 30, 1998, compared to $130,000 for the three months ended June
30, 1997. Other income increased $49,000 from $34,000 for the three months ended
June 30, 1997 to $83,000 for the three months ended June 30, 1998. The increase
in other income was partially due to an increase in the profit on sale of real
estate held in the Bank's subsidiary of $39,000 from $11,000 for the three
months ended June 30, 1997, to $50,000 for the three months ended June 30, 1998,
and an increase of $14,000 in brokerage commissions from $9,000 for the three
months ended June 30, 1997, to $23,000 for the three months ended June 30, 1998.
Gain on sale of mortgage loans increased $22,000 from $16,000 for the three
months ended June 30, 1997, to $38,000 for the three months ended June 30, 1998,
and reflects the general downward trend in interest rates over the comparable
periods which acts to produce gains on sale of mortgage loans sold in the
secondary market. Service charges on deposits increased $4,000 from $58,000 for
the three months ended June 30, 1997, to $62,000 for the three months ended June
30, 1998.
General and Administrative Expenses
General and administrative expenses increased $40,000 or 7.1% to
$601,000 for the three months ended June 30, 1998, compared to $561,000 for the
three months ended June 30, 1997. Salaries and employee benefits increased
$26,000 from $310,000 for the three months ended June 30, 1997, to $336,000 for
the three months ended June 30, 1998. The increase in salaries is due to cost of
living salary increases and additional personnel. Net occupancy expense
increased $8,000 from $78,000 for the three months ended June 30, 1997, to
$86,000 for the three months ended June 30, 1998, and reflects some
extraordinary maintenance items occurring during the quarter. Data processing
expenses increased $3,000 from $32,000 for the three months ended June 30, 1997,
to $35,000 for the three months ended June 30, 1998. The increase in expense is
the result of escalation clauses in the data-processing contract that change
with an increase in transaction volumes.
Income Tax Expense
Income tax expense increased $14,000 or 9.2% from $153,000 for the
three months ended June 30, 1997, to $167,000 for the three months ended June
30, 1998. Income before taxes increased $84,000 from $405,000 for the three
months ended June 30, 1997, to $489,000 for the three months ended June 30,
1998. The effective tax rate for the three months ended June 30, 1998, was 34.1%
compared to 37.8% for the three months ended June 30, 1997. The decrease in the
effective rate reflects the establishment on May 30, 1997, of Northwest
Investments, Inc., a wholly owned subsidiary domiciled in the state of Nevada,
that acts to lower the Company's state income tax obligation.
10
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MANAGEMENT'S DISCUSSION (CONT.)
Financial Condition
Total assets decreased $2.2 million or 2.2% to $96.5 million at June
30, 1998, compared to $98.7 million at March 31, 1998 due to a decrease in cash
of $2.2 million to $3.8 million at June 30, 1998, form $6.0 million at March 31,
1998. The cash was used to reduce advances for the Federal Home Loan Bank $1.5
million from $19.1million at March 31, 1998, to $17.6 million at June 30, 1998;
fund a decrease in deposits of $0.4 million to $61.9 million at June 30, 1998,
from $62.3 million at March 31, 1998; and fund a decrease in other borrowed
money of $0.7million from $5.3 million at March 31, 1998, to $4.6 million at
June 30, 1998. The decrease in other borrowed money is the result of seasonal
cash withdrawals of retail reverse repurchase agreements held by the local
school district. Loans receivable increased $0.2 million to $78.5 million at
June 30, 1998, compared to $78.3 million at March 31, 1998. The increase in net
loans receivable was the result of the expected seasonal increase of loan
activity during the spring and summer months. Investment securities
held-to-maturity remained at $3.0 million at June 30, 1998, and March 31, 1998.
Mortgage backed and related securities decreased $287,000 from $6.4 million on
March 31, 1998, to $6.1 million at June 30, 1998, as the result of principal
repayments and prepayments.
Shareholders' equity increased $240,000 from $11.5 million at March 31,
1998, to $11.8 million at June 30, 1998, as a result of net income for the three
months ended June 30, 1998, less $132,000 in cash dividends and the amortization
of the common stock purchased by the employee stock ownership plan of $31,000
from ($389,000) on March 31, 1998 to ($358,000) on June 30, 1998; and the
amortization of the unearned restricted stock plan award of $13,000 from
($26,000) at March 31, 1998, to ($13,000) at June 30, 1998.
Disclosures Involving Year 2000 Issues
Issues related to the century date change and the impact on computer
systems and business operations are receiving prominent publicity and attention.
Depositors, business partners, investors, and the general public are
specifically interested in the effect on the financial condition of each
depository institution. The FDIC has advised state savings banks that safe and
sound banking practices require them to address Year 2000 issues. The Securities
and Exchange Commission (SEC) issued a revised Staff Legal Bulletin NO. 5 to
provide specific guidance on disclosure associated with Year 2000 obligations
for companies registered under federal securities laws.
Computer programs generally abbreviated dates by eliminating the century
digits of the year. Many resources, such as software; hardware; telephones;
voicemail; heating; ventilating and air conditioning; alarms, etc. ("Systems")
are affected. These Systems were designed to assume a century value of "19" to
save memory and disk space within their programs. In addition, many Systems use
a value of "99" in a year or "99/99/99" in a date to indicate "no date" or "any
date" or even a default expiration date. As the year 2000 approaches, this
abbreviated date mechanism within Systems threatens to disrupt the function of
computer software at nearly every business which relies heavily on computer
systems for account and other recordkeeping functions. If the millennium issue
is ignored, system failures or miscalculations could occur, causing disruptions
of operations and a temporary inability to process business transactions.
The Bank has an inventory of personal computers that access a data
processing system provided by EDS in Des Moines, Iowa. If the personal computers
and data processing systems fail to process the century date change, it may
impair the Bank's ability to process loan payments, accept deposits, and address
other operational issues. The Bank's customers, suppliers, other constituents
may also be impaired to meet their contractual obligations with the Bank. The
Bank has developed a Year 2000 Plan (the "Plan"). The Bank's Plan attempts to
identify the systems, assess the risk, and conduct inventories as necessary to
assure compliance with the Plan. The Plan calls for identifying all systems in
need of remediation by June 30, 1999, and remedying all systems in need of
remediation by September 30, 1999. As of March 31, 1998, the Bank estimates it
will have to purchase hardware and equipment in the amount of $17,000 (pre-tax)
to address the Y2K issues. The expenditures would be amortized over 5-year
period, and would add approximately $3,400 in furniture and fixture expense per
year for the next 5 years. In addition, the Bank will be assessed in the current
fiscal year a one-time fee of $20,000 by EDS to support the FFIEC's testing
guidance regarding Year 2000 efforts of financial institutions as outlined in
the April 10, 1998, Interagency Statement. These amounts are not considered to
be material.
11
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MANAGEMENT'S DISCUSSION (CONT.)
On February 24, 1998, the FDIC conducted an on-site visitation of the
Bank's Year 2000 process. The examiner followed guidelines and recommendations
contained in the FFIEC Interagency Statement on Year 2000 Project Management
Awareness, dated May 5, 1997, and subsequent publications. In a letter dated
March 17, 1998, the FDIC stated that the Bank's Year 2000 Committee is
adequately monitoring Year 2000 compliance.
Asset/Liability Management
Asset/liability management is an ongoing process of matching asset and
liability maturities to reduce interest rate risk. Management attempts to
control this risk through pricing of assets and liabilities and maintaining
specific levels of maturities. In recent periods, management's strategy has been
to (1) sell substantially all new originations of long-term, fixed-rate single
family mortgage loans in the secondary market, (2) invest in various
adjustable-rate and short-term mortgage-backed and related securities, (3)
invest in adjustable-rate, single family mortgage loans, and (4) encourage
medium and longer-term certificates of deposit. The Company's estimated
cumulative one-year gap between assets and liabilities was a negative 0.29% of
total assets, at the latest available reporting date of March 31, 1998. A
negative gap occurs when a greater dollar amount of interest-earning liabilities
than interest-bearing assets are repricing or maturing during a given time
period. During periods of rising interest rates, a negative interest rate
sensitivity gap will tend to negatively affect net interest income. During
periods of falling interest rates, a negative interest rate sensitivity gap will
tend to positively affect the net interest income.
Management believes that its asset/liability management strategies have
reduced the potential effects of changes in interest rates on its operations.
Increases in interest rates may decrease net interest income because
interest-bearing liabilities will reprice more quickly than interest-earning
assets. The Company's analysis of the maturity and repricing of assets and
liabilities incorporates certain assumptions concerning the amortization and
prepayment of such assets and liabilities.
Management believes that these assumptions approximate actual
experience and considers them reasonable, although the actual amortization and
repayment of assets and liabilities may vary substantially.
Management Strategy
Asset Quality
The Company emphasizes high asset quality in both its investment
portfolio and lending activities. Non-performing assets have ranged between .95%
and 1.72% of total assets during the last three years and were 1.72% of total
assets at June 30, 1998. Cumulative gross charge-offs over the last three fiscal
years totaled $193,000 and were offset by $38,000 in recoveries. The last three
years cumulative gross charge-offs of commercial loans have totaled $19,000. The
cumulative gross charge-offs, $169,000 were installment loans and were offset by
$9,000 in recoveries. The remaining $5,000 in cumulative gross charge-offs were
real estate loans and were offset by $29,000 in recoveries.
On October 16, 1996, the Bank learned that a Minnesota Bank had commenced a
repleven lawsuit against a borrower of the Bank that involves several parties
claiming interests in collateral secured by a General Business Security
Agreement of the Bank. On November 20, 1996, the Bank filed its answer and a
third party complaint seeking repleven of its collateral and money judgments
against its borrowers, the guarantors, and other interested parties. Repleven
judgment was entered in favor of the Bank on January 15, 1997. A money judgment
was filed against a guarantor on December 30, 1996. One of the guarantors has
since filed personal bankruptcy and the Bank was awarded a non-dischargeable
judgment against the guarantor in the amount of $80,000. Depending upon the
non-exempt assets of the parties involved, the Bank's legal counsel believes the
Bank should have sufficient legal grounds to expect recovery from the Bank's
collateral, personal guarantees, and the other parties involved. The Board of
Directors at its meeting October 8, 1996, decided to increase the quarterly loss
allowance to $25,000 until more information is available to make a reasonable
estimate of any losses that may occur. The Board continued this policy at its
meeting held December 10, 1996, and subsequent meetings because a reasonable
estimate cannot be determined until the legal issues are resolved. As soon as
the Board can identify and quantify the amount of the loss, it will book the
loss. An auction of the business inventory and equipment was held March 26,
1998. Proceeds of the auction and the recovery of other equipment total $220,435
and will be held by the court appointed receiver. Of that amount, approximately
$72,000 is from the sale of property that is not disputed by any third parties
and should be recovered by the Bank. The remaining $148,000 will continue to be
held by the receiver pending MANAGEMENT'S DISCUSSION (CONT.)
12
<PAGE>
further order of the court. A trial is scheduled for November 9, 1998. An
attempt to settle the dispute amongst a limited number of the parties was held
April 28, 1998, but no agreements were reached. The trial court ordered a
mediation session for July 10, 1998. Various motions for summary judgment have
been filed with the court and the court's decision is expected by July 1, 1998.
In order to establish an order of magnitude of the loss potential, a worst case
scenario of no recovery on a loan of $613,000 plus an overdraft of $83,000 less
$72,000 of the undisputed auction proceeds and less the current amount in the
loan loss reserve of $304,000 allocated or available to be allocated to this
loan, would produce an after-tax loss of approximately $204,000. Settlements
proposed if accepted would have extinguished the loss reserve and produced no
after-tax loss.
During the fiscal years ended March 31, 1998, 1997 and 1996, the
Company recorded provisions for loan losses of $100,000, $81,000, and $24,000,
respectively, to its allowance for loan losses and had net charge-offs of
$77,000, $53,000, and $25,000, respectively. The Company's allowance for loan
losses at June 30, 1998, totaled $472,000 or 304.5% of cumulative gross
charge-offs during the last three fiscal years. Management currently believes
the allowance for loan losses at June 30, 1998, is at an adequate level and that
future provisions for loan losses will be maintained at current levels until
more information is available concerning the large commercial loan mentioned in
the previous paragraph.
Total loans delinquent 90 days or more decreased from $1.4 million at
March 31, 1998 to $1.3 million or 1.34% of assets at June 30, 1998. Total loans
delinquent 31-89 days increased from $1.5 million at March 31, 1998, to $3.2
million at June 30, 1998. The latest available peer group comparison of the
average nonperforming loans and real estate owned as a percentage of total loans
as prepared by America's Community Bankers was 1.44% for the Company at
September 30, 1997, compared to 1.43% on a nation wide basis, 0.90% on a
geographic basis, 1.25% on an asset size basis, and 1.70% on an owner type
basis. Considering that the commercial loan mentioned above with a delinquent
balance of $613,000, total loans delinquent 90 days or more would compare very
favorably with the peer group.
Selected Financial Ratios and Other Data: At or For the
Three months ended June 30,
Performance Ratios 1998 1997
---- ----
Return on average assets 1.32% 1.05%
Return on average equity 11.3% 9.33%
13
<PAGE>
<TABLE>
MANAGEMENT' S DISCUSSION(CONT.)
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans $ 66,827 $ 1,449 8.67% $ 65,404 $ 1,420 8.68%
Commerical loans 4,399 104 9.46% 4,733 101 8.54%
Consumer loans 7,837 192 9.80% 7,229 181 10.02%
------------ --------- ---------- --------
Total loans 79,063 1,745 8.83% 77,366 1,702 8.80%
Mortgage-backed securities 6,311 115 7.29% 7,226 132 7.31%
Interest bearing deposits in other
financial institutions 2,339 32 5.47% 1,529 21 5.50%
Investment securities 2,978 46 6.18% 3,002 40 5.33%
Federal Home Loan Bank stock 1,003 19 6.75% 912 16 6.75%
------------ --------- ----------- ---------
Total interest-earning assets 91,694 $ 1,957 8.54% 90,035 $ 1,911 8.49%
--------- ----------
Non-interest earning assets 5,299 5,299
------------ -----------
Total assets $ 96,993 $ 95,334
============ ===========
Liabilities and retained earnings:
Deposits:
NOW accounts(1) $ 9,842 $ 35 1.42% $ 9,059 $ 34 1.50%
Money market deposit accounts 6,171 76 4.93% 4,940 56 4.53%
Passbook 6,146 33 2.15% 5,962 32 2.15%
Certificates of deposit 40,021 576 5.76% 41,640 595 5.72%
------------ --------- ------------ ----------
Total deposits 62,180 720 4.63% 61,601 717 4.66%
Advances and other borrowings 22,974 326 5.68% 22,270 333 5.98%
------------- ---------- ------------ -----------
Total interest-bearing liabilities 85,154 1,046 4.91% 83,871 1,050 5.01%
---------- -----------
Non-interest bearing liabilities 416 664
Equity 11,423 10,799
------------- ------------
Total liabilities and retained earnings $ 96,993 $ 95,334
============= =============
Net interest income/interest rate spread(2) $ 911 3.63% $ 861 3.48%
========== ======= ========== =======
Net earning assets/net interest margin(3) $ 6,540 3.97% $ 6,164 3.82%
============= ======== ============== =======
Average interest-earning assets to
average interest-bearing liabilities 1.08 x 1.07 x
<FN>
============= ===============
________________________
(1) Includes non-interest bearing NOW accounts.
(2) Interest rate spread represents the difference between the average yield on interest-earning assets and the average rate on
interest-bearing liabilities
(3) Net interest margin represents net interest income divided by average interest-earning assets.
</FN>
</TABLE>
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 2,548
<INT-BEARING-DEPOSITS> 1,256
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 3,000
<INVESTMENTS-MARKET> 3,004
<LOANS> 78,721
<ALLOWANCE> 472
<TOTAL-ASSETS> 96,452
<DEPOSITS> 61,875
<SHORT-TERM> 8,454
<LIABILITIES-OTHER> 706
<LONG-TERM> 13,663
0
0
<COMMON> 1,033
<OTHER-SE> 10,721
<TOTAL-LIABILITIES-AND-EQUITY> 96,452
<INTEREST-LOAN> 1,745
<INTEREST-INVEST> 212
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,957
<INTEREST-DEPOSIT> 720
<INTEREST-EXPENSE> 1,046
<INTEREST-INCOME-NET> 911
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 601
<INCOME-PRETAX> 489
<INCOME-PRE-EXTRAORDINARY> 167
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 322
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 3.63
<LOANS-NON> 1,269
<LOANS-PAST> 13
<LOANS-TROUBLED> 72
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 474
<CHARGE-OFFS> 53
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 472
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
