This is a refiling of the Annual Report which contains corrections to the 1997
numbers on page 6.
1998 ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
Page
Company Profile................................................................1
Financial Highlights of Northwest Equity Corp..................................2
Letter to Shareholders.........................................................3
Financial Table of Contents....................................................4
Selected Consolidated Financial and Other Data of Northwest Equity Corp........5
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Northwest Equity Corp...........................7
Independent Auditor's Report..................................................25
Consolidated Financial Statements of Northwest Equity Corp.
Consolidated Balance Sheets of the Company at March 31, 1998 and 1997......26
Consolidated Statements of Operations of the Company for the Years Ended
March 31, 1998, 1997 and 1996...........................................27
Consolidated Statements of Shareholders' Equity of the Company for the
Years Ended March 31, 1998, 1997 and 1996................................28
Consolidated Statements of Cash Flows of the Company for the Years Ended
March 31, 1998, 1997 and 1996............................................29
Notes to Consolidated Financial Statements of Northwest Equity Corp...........31
Shareholder Information.......................................................51
COMPANY PROFILE
Northwest Equity Corp. is the holding company for Northwest Savings Bank.
The Bank converted from a Wisconsin-chartered mutual savings bank to a
Wisconsin-chartered stock savings bank on October 7, 1994 (the "Conversion"). In
connection with the Conversion, Northwest Equity Corp. sold 1,032,517 shares of
its Common Stock at $8.00 per share and used a portion of the net proceeds to
purchase all of the issued and outstanding capital stock of the Bank.
Northwest Savings Bank was established in 1936, and is regulated by the
Wisconsin Department of Financial Institutions and the Federal Deposit Insurance
Corporation. The Bank is a community-oriented, full-service financial
institution offering a variety of retail financial services to meet the needs of
the communities it serves. The Bank's principal business consists of attracting
funds in the form of deposits and investing such funds primarily in residential
real estate loans, mortgage-backed and related securities, and various types of
commercial and consumer loans. The Bank has three full-service offices located
in Polk, St. Croix and Burnett Counties, Wisconsin. At March 31, 1998, the
Company had total assets of $98.7 million, total deposits of $62.3 million and
shareholders' equity of $11.5 million.
Northwest Equity Corp.'s common stock trades on The Nasdaq SmallCap Stock
Market under the symbol "NWEQ."
The Nasdaq Stock Market, which began operation in 1971, is the world's
first electronic securities market and the fastest growing stock market in the
U.S. Nasdaq utilizes today's information technologies--computers and
telecommunications--to unite its participants in a screen-based, floorless
market. It enables market participants to compete with each other for investor
orders in each Nasdaq security and, through the use of Nasdaq Workstation II and
other automated systems, facilitates the trading and surveillance of thousands
of securities. This competitive marketplace, along with the many products and
services available to issuers and their shareholders, attracts today's largest
and fastest growing companies to Nasdaq. These include industry leaders in
computers, pharmaceuticals, telecommunication, biotechnology, and financial
services. More domestic and foreign companies list on Nasdaq than on all other
U.S. stock markets combined.
1
<PAGE>
FINANCIAL HIGHLIGHTS OF NORTHWEST EQUITY CORP.
<TABLE>
At or For the Fiscal Year Ended March 31,
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in thousands, except per share data and ratios)
<S> <C> <C> <C>
Total Assets............................... 98,739 95,097 86,355
Loans Receivable, Net...................... 78,297 77,240 70,680
Securities Available For Sale.............. 0 2,752 2,859
Mortgage-Backed Securities................. 6,398 7,421 5,373
Deposits................................... 62,278 61,557 57,256
Shareholders' Equity....................... 11,514 10,859 11,864
Net Interest Income After
Provision for Loan Losses................ 3,420 3,339 3,138
Total Other Income......................... 608 531 476
Total General and
Administrative Expenses.................. 2,298 2,643 2,175
Net Income................................. 1,120 710 842
Earnings Per Share......................... $1.44 $0.84 $.90
Return on Average Assets................... 1.15% .76% 1.06%
Return on Average Equity................... 9.85% 6.18% 6.95%
Interest Rate Spread....................... 3.50% 3.51% 3.77%
Net Interest Margin........................ 3.85% 3.88% 4.26%
Non-Performing Loans
to Gross Loans........................... 1.76 1.37 0.97
</TABLE>
2
<PAGE>
LETTER TO SHAREHOLDERS
The Board of Directors and employees of Northwest Equity Corp., the
holding company of Northwest Savings Bank, are proud to present the fourth
annual report since the stock conversion consummated on October 7, 1994. The
Board adopted the Plan of Conversion to provide substantially increased capital
to strengthen, expand and diversify the operations of the Bank, provide future
access to capital markets, and attract and retain personnel through the employee
stock ownership plan and other stock benefit programs. It also provided the
ability for the Board, employees, depositors and others the opportunity to
become shareholders of the Company and thereby participate directly in the
future growth and success of the Bank. That participation became a practical
reality when the Board of Directors declared the first dividend of $.07 per
share to shareholders of record on April 28, 1995, and has continued from that
date to the latest declaration of $0.16 per share to shareholders of record on
April 24, 1998.
The conversion is another step in a program undertaken to enhance
opportunities for the Bank. The Board of Directors opened a new home office in
1988 and implemented a strategy to expand the services it offered as a
traditional thrift institution, including checking accounts, ATM's, night
depositories, safe deposit boxes, drive-through banking and investment products;
in order to create broad banking relationships with its customers. The Board
believes the expansion of the product base will enable the Bank to develop and
retain its customer base and enable it to compete more effectively in its
primary market area. This strategy continued with the grand opening in June of
1996 of the recently remodeled and expanded branch office facility in New
Richmond, Wisconsin. The expansion included a new lobby and teller area; a new
drive-up area with additional lanes and an ATM; a night depository; and
safety-deposit boxes.
The extensive financial data that's included in this annual report
indicates record high balances in assets, loans and deposits as well as net
income. The amortization for the expense of the Company's stock incentive plan
will decrease by $64,000 for the upcoming year compared to the last fiscal year.
Although full employment conditions in the Bank's market area will increase
compensation costs in the next fiscal year, the Bank has instituted certain fees
to offset this increased expense. The Bank's service corporation will be
liquidating the remaining investment in a real estate project that will produce
a gain-on-sale of approximately $50,000. The investment subsidiary established
in Nevada on May 30, 1997 will act to reduce state income expense and increase
net income for the entire fiscal year. Considering all of the above, I fully
expect that the solid performance of the Bank will continue and will be
reflected in next year's annual report.
The pursuit of growth, an aggressive dividend policy, and the
repurchase of stock are the primary techniques employed in the overall plan to
improve the return on equity. During the current fiscal year, one stock
repurchase program was initiated and a total of 14,100 shares were repurchased
to date. The return on average equity has increased from 6.95% during the fiscal
year ended March 31, 1996, to 10.0% during the fiscal year ended March 31, 1998.
The Board and the employees will continue to pursue the opportunities provided
by the capital from the stock conversion.
Brian L. Beadle
President and Chief Executive Officer
3
<PAGE>
FINANCIAL TABLE OF CONTENTS
Page
Selected Consolidated Financial and Other Data of Northwest Equity Corp. ......5
Management's Discussion and Analysis of Financial Condition and
Results of Operations of Northwest Equity Corp.:
General...............................................................7
Management Strategy...................................................8
Comparison of Operating Results for the Years Ended
March 31, 1998 and March 31, 1997..................................10
Comparison of Operating Results for the Years Ended
March 31, 1997 and March 31, 1996..................................13
Financial Condition..................................................15
Liquidity, Capital Resources and Regulatory Capital..................16
Impact of Inflation and Changing Prices..............................17
Current Accounting Developments......................................18
Asset/Liability Management...........................................19
Average Balance Sheet................................................22
Rate/Volume Analysis.................................................24
Independent Auditor's Report..................................................25
Consolidated Financial Statements of Northwest Equity Corp.:
Consolidated Balance Sheets at March 31, 1998 and 1997...............26
Consolidated Statements of Operations for the Years Ended
March 31, 1998, 1997 and 1996.....................................27
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 1998, 1997 and 1996.....................................28
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996.....................................29
Notes to Consolidated Financial Statements of Northwest Equity Corp...........31
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF
NORTHWEST EQUITY CORP.
Set forth below are selected consolidated financial and other data of
the Company. The financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Company and notes
thereto presented elsewhere in this Annual Report.
<TABLE>
At March 31,
---------------------------------------------------
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
(In thousands)
Selected Financial Data:
<S> <C> <C> <C>
Total assets $ 98,739 $ 95,097 $86,355
Loans receivable, net 78,297 77,240 69,963
Loans held for sale 142 415 717
Cash and cash equivalents 6,047 2,980 3,412
Securities available-for-sale - 2,752 2,859
Mortgage-backed and related securities 6,398 7,421 5,373
FHLB stock 1,159 912 803
Deposits 62,278 61,557 57,256
FHLB advances and other borrowings 24,320 22,097 16,912
Shareholder's Equity - substantially restricted 11,514 10,859 11,864
</TABLE>
<TABLE>
Fiscal Year Ended March 31,
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Selected Operating Data:
Total interest income $7,763 $7,492 $6,473
Total interest expense 4,243 4,072 3,311
--------------- --------------- ---------------
Net interest income 3,520 3,420 3,162
Provision for loan losses 100 81 24
--------------- --------------- ---------------
Net interest income after provision for loan
losses 3,420 3,339 3,138
Non-interest income:
Mortgage servicing fees 77 77 72
Service charges on deposits 251 220 226
Loss on sale of investments (24) - -
Gain on sale of mortgage loans 130 59 61
Other non-interest income 174 175 117
--------------- --------------- ---------------
Total other non-interest income 608 531 476
Total general and administrative expenses 2,298 2,643 2,175
Income before income tax expense 1,730 1,227 1,439
Income tax expense 610 517 597
--------------- --------------- ---------------
Net Income 1,120 710 842
</TABLE>
5
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF
NORTHWEST EQUITY CORP. (CONT.)
Selected Financial Ratios and Other Data: At or For the Fiscal Year
Ended March 31,
---------------------------------------------------
<CAPTION>
Performance Ratios 1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Return on average assets 1.15% 0.76% 1.06%
Return on average equity 10.02% 6.18% 6.95%
Interest rate spread during period(1) 3.50% 3.51% 3.77%
Net interest margin(1) 3.85% 3.88% 4.26%
Non-interest expense to average assets 2.37 2.84 2.74
Non-interest income to average assets 0.63 0.57 0.60
Average interest-earning assets to
average interest-bearing liabilities 1.07x 1.08x 1.11x
Asset Quality Ratios
Non-performing loans to gross loans(2) 1.76% 1.37% 0.97%
Non-performing assets to total assets(2) 1.57% 1.13% 0.95%
Allowance for loan losses to non-performing
loans(2) 34.87% 43.04% 62.48%
Classified assets to total assets 1.91% 1.40% 0.90%
Net charge-offs to average gross loans 0.11% 0.07% 0.03%
Capital Ratios
Average Equity to average assets 11.51% 12.36% 15.25%
Equity to total assets at end of period 11.66% 11.42% 13.74%
Other Data
Number of deposit accounts 9,519 9,440 8,967
Number of real estate loans outstanding 1,652 1,670 1,532
Number of real estate loans serviced 2,318 2,206 2,031
Number of consumer loans outstanding 1,092 1,108 1,084
Mortgage loan originations (in thousands) $29,720 $29,086 $25,179
Full-service facilities 3 3 3
- -------------------------------
<FN>
(1) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(2) Non-performing loans consist of non-accrual loans. Non-performing assets
consists of non-performing loans and foreclosed properties.
</FN>
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
NORTHWEST EQUITY CORP.
General
Northwest Equity Corp., a Wisconsin corporation (the "Company"), is a
holding company that owns all of the issued and outstanding stock of Northwest
Savings Bank, a Wisconsin-chartered stock savings bank (the "Bank"). In this
discussion and analysis, reference to the operations and financial condition of
the Company includes the operations and financial condition of the Bank.
The Company was incorporated on November 3, 1993, at the direction of
the Bank to become a bank holding company and own all of the Bank's capital
stock to be issued upon its conversion from mutual form to stock ownership (the
"Conversion"). On October 7, 1994, the Bank completed the Conversion. On that
date, the Company issued and sold 1,032,517 shares of its Common Stock at $8.00
per share. The gross proceeds from the sale of the shares of Common Stock were
$8.3 million. Net proceeds to the Company were $6.9 million, after deduction of
Conversion expenses of $0.6 million and after lending $0.8 million to the Bank's
Employee Stock Ownership Plan. The Company used $3.4 million of the net proceeds
to acquire all of the issued and outstanding stock of the Bank.
The Company's business currently consists of the business of the Bank.
The Bank is a community-oriented, full-service financial institution offering a
variety of retail financial services to meet the needs of the communities it
serves. The Bank's principal business consists of attracting funds in the form
of deposits and other borrowings and investing such funds primarily in
residential real estate loans, mortgage-backed securities, mortgage related
securities, including collateralized mortgage obligations, and various types of
commercial and consumer loans. The Bank's primary sources of funds are deposits,
repayment on loans and mortgage-backed and related securities, and advances from
the Federal Home Loan Bank of Chicago ("FHLB-Chicago"). The Bank utilizes these
funds to invest primarily in mortgage loans secured by one-to-four family
properties, and to a lesser extent, consumer, commercial and other loans, and to
invest in mortgage-backed and related securities and other investment
securities. The Bank is regulated by the Wisconsin Department of Financial
Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"), and
its deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF"). The Bank also is a member of the Federal Home Loan Bank
System.
The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, mortgage-backed
and related securities and other investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits and advances from
the FHLB-Chicago. Net interest income is a function of the Company's "interest
rate spread," which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest bearing-liabilities. Many of the Company's
assets, including mortgage loans and mortgage-backed and related securities, are
subject to reinvestment risk. During periods of falling interest rates, higher
yielding loans and mortgage-backed securities are more likely to prepay, and the
Company may not be able to reinvest the proceeds from prepayments in loans or
securities with yields similar to those prepaying. The Company's operating
results also are affected to a lesser extent by the amount of its non-interest
income, including loan servicing and loan related fees, gains on sales of
mortgage loans, as well as transactional and other fee income. Additionally, net
income may be affected by gains or losses on the sale of investment securities
and mortgage-backed and related securities. The Company's non-interest expense
consists principally of employee compensation, occupancy expenses, federal
deposit insurance premiums and other general and administrative expenses. The
Company's operating results are significantly affected by general economic
conditions, and the monetary, fiscal and regulatory policies of governmental
agencies. Lending activities are influenced by the demand for and supply of
housing, competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds likewise are heavily
influenced by prevailing market rates of interest on competing investment
alternatives, account maturities and the levels of personal income and savings
in the Company's market areas.
7
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Regulatory Developments Related to Deposit Insurance
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.
Management Strategy
Management's strategy has focused on managing the Company's interest
rate risk and maintaining credit quality by emphasizing residential lending,
primarily loans secured by one-to-four family, owner-occupied dwellings.
Residential Mortgage Lending Emphasis. The Company's primary investing
activity is the origination of one-to-four family residential mortgage loans
secured by owner-occupied properties. At March 31, 1998, $58.0 million or 73.6%
of gross loans consisted of such loans. Mortgage loan originations totaled $29.3
million, $29.0 million and $22.7 million for the fiscal years ended March 31,
1998, 1997 and 1996, respectively. The Company generally originates ARM loans
for retention in its loan portfolio and generally sells all fixed rate loans
originated into the secondary market.
Management of Interest Rate Risk. The Company has attempted to reduce
its interest rate risk by emphasizing the origination of ARM loans for retention
in its loan portfolio and by selling substantially all of its fixed rate loans
originated. At March 31, 1998, $61.4 million or 78.4% of net loans receivable
were ARM loans. Management believes this strategy has reduced income due to
lower initial yields on these investments in comparison to longer-term fixed
rate investments. However, management believes reducing its exposure to interest
rate fluctuations tends to reduce the volatility of the Company's net interest
income over the long-term.
To maintain the Company's net interest margin, satisfy certain
requirements for favorable tax treatment and manage interest rate risk, the
Company has maintained a portfolio of mortgage-backed and related securities
held-to-maturity. The Company's mortgage-backed and related securities
held-to-maturity at March 31, 1998, were $6.4 million or 6.5% of total assets,
and at March 31, 1997, were $7.4 million or 7.8% of total assets.
Management has adopted a strategy designed to achieve acceptable levels
of matching of its assets and liabilities and there repricing characteristics.
The primary elements of this strategy involve emphasizing the origination and
purchase of adjustable-rate assets, and utilizing FHLB-Chicago advances to
purchase participation interests in loans with similar terms to maturities and
higher yields. Over the last five fiscal years, the Company has emphasized the
matching of interest rate sensitivities through the sale of fixed rate mortgage
loans originated, the origination of ARM loans, the repayment of fixed rate
mortgage assets, and the purchase of short-term and adjustable-rate
mortgage-backed and related securities. At March 31, 1998, the Company's
one-year interest rate sensitivity gap as a percentage of total assets was a
negative 0.29%. During periods of rising interest rates, a negative rate
sensitivity gap would tend to negatively affect net interest income; however,
during periods of falling interest rates, a negative interest rate sensitivity
gap would tend to positively affect net interest income.
In fiscal 1998, the Company leveraged its capital base by using the
proceeds of borrowings from the FHLB-Chicago and deposits to originate
additional loans. FHLB advances increased to $19.1 million at March 31, 1998,
compared to $17.6 million at March 31, 1997. This leveraging strategy
contributed to the increase in the Company's total loan portfolio to $78.3
million at March 31, 1998, from $77.2 million at March 31, 1997. The Company
intends to continue to leverage its capital base by using the proceeds from
additional FHLB-advances to originate loans.
8
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Asset Quality. The Company emphasizes high asset quality in both its
investment portfolio and lending activities. Non-performing assets have ranged
between .95% and 1.57% of total assets during the last three years and were
1.57% of total assets at March 31, 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 totaled $19,000. Of 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-dischargable 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 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 $602,000 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 $300,000 allocated or available to be allocated to this loan, would produce
an after-tax loss of approximately $206,000.
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, $25,000, respectively. The Company's allowance for loan losses
at March 31, 1998, totaled $484,000 or 312.2% of cumulative net charge-offs
during the last three fiscal years. Management currently believes the allowance
for loan losses at March 31, 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
previously under Asset Quality.
Total loans delinquent 90 days or more increased from 45 loans totaling
$1.1 million at March 31, 1997, to 50 loans totaling $1.4 million at March 31,
1998. Total loans delinquent 31-89 days decreased from $3.3 million at March 31,
1997, to $1.7 million at March 31, 1998. Management views the decrease as a
favorable trend indicating improved future performance. 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 the commercial loan mentioned above with a
delinquent balance of $602,000, total loans delinquent 90 days or more would
compare very favorably with the peer group.
9
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Management and Development of Customer Base. The Company has focused on
managing deposits to maintain its capital ratios and improve the stability of
its deposit base. In this regard, management has emphasized an increased level
of service to its customers to retain and attract core deposits. In 1988, the
Bank built and opened a new home office and implemented a strategy to expand the
services it offers beyond those services traditionally offered by thrift
institutions, including checking accounts, ATMs, night depositories, safe
deposit boxes, drive-through banking, and investment products through its
subsidiary, in order to create broad banking relationships with its customers.
This expansion of services continued with the grand opening of the remodeled and
expanded branch office in New Richmond, Wisconsin in June 1996.
Comparison of Operating Results for the Fiscal Years Ended March 31, 1998 and
March 31, 1997
General
Net income for the fiscal year ended March 31, 1998, increased $410,000
or 57.7% to $1.1 million from $710,000 for the fiscal year ended March 31, 1997.
Return on average assets increased to 1.15% for the fiscal year ended March 31,
1998, from 0.76% for the prior year and return on average equity increased to
9.85% from 6.18% for the same years. The increase in the return on average
assets was primarily due to the $389,000 decrease in federal insurance premiums
from $428,000 for the fiscal year ended March 31, 1997 to $39,000 for the fiscal
year ended March 31, 1998. The decrease resulted from the absence in the current
fiscal year of the one-time $350,000 special assessment to recapitalize the SAIF
insurance fund paid to the FDIC in the quarter ended September 30, 1996. Net
interest income before provision for loan losses increased $100,000 or 2.9% to
$3.5 million for the fiscal year ended March 31, 1998, from $3.4 million for the
fiscal year ended March 31, 1997. This increase was primarily due to an increase
in interest income of $271,000, partially offset by an increase in interest
expense of $171,000. Provision for loan losses increased 23.5% to $100,000 for
the fiscal year ended March 31, 1998, from $81,000 for the fiscal year ended
March 31, 1997. The increase reflects a full fiscal year's provisions for a
large commercial loan discussed previously under Asset Quality. Total other
income increased by $77,000 to $608,000 for the fiscal year ended March 31,
1998, from $531,000 for the fiscal year ended March 31, 1997, primarily due to
an increase gain on sale of mortgage loans of $71,000 from $59,000 for the
fiscal year ended March 31, 1997, to $130,000 for the fiscal year ended March
31, 1998. General and administrative expenses for the fiscal year ended March
31, 1998, decreased $345,000 or 13.1% to $2.3 million from $2.6 million for the
prior fiscal year. The decrease was due to a $389,000 decrease federal insurance
premiums that was offset by an increase of $10,000 in salaries and employee
benefits, and a $14,000 increase in net occupancy expense and a $16,000 increase
in other expense.
Net Interest Income
Net interest income for the fiscal year ended March 31, 1998, increased
$100,000 or 2.9% to $3.5 million from $3.4 million for the prior year. The
increase was due to an increase in interest income of $271,000, partially offset
by an increase in interest expense of $171,000. The improvement in net interest
income primarily reflects an increase in the average outstanding balance of
total interest-earning assets to $91.4 million for the fiscal year ended March
31, 1998 compared to $88.1 million for the prior fiscal year. The increase in
the Company's net earning asset position was attributable primarily to an
increase in the average outstanding balance of total loans funded by the
increase in total deposits and advances and other borrowings.
Interest Income
Interest income increased $271,000 or 3.6% to $7.8 million for the
fiscal year ended March 31, 1998 from $7.5 million for the fiscal year ended
March 31, 1997. The increase is partially due to a $267,000 increase in interest
income on loans from $6.7 million for the fiscal year ended March 31, 1997, to
$7.0 million for the fiscal year ended March 31, 1998. The increase in interest
income on loans results from an increase of $2.9 million in the average
outstanding balance of mortgage loans to $67.1 million for the fiscal year ended
March 31, 1998 from $64.2 million for the fiscal year ended March 31, 1997.
Interest on commercial loans decreased $46,000 from $417,000 for the fiscal year
ended March 31, 1997, to $371,000 for the fiscal year ended March 31, 1998. The
decrease is due to the non-accrual status of the large commercial loan discussed
under Asset Quality. As a result, the average yield on commercial loans
decreased from 9.19% for the fiscal year ended March 31, 1997, to 7.80% for the
fiscal year ended
10
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
March 31, 1998. Interest on consumer loans increased $18,000 from $731,000 for
the fiscal year ended March 31, 1997, to $749,000 for the fiscal year ended
March 31, 1998. The increase results from an increase in the average outstanding
balance of consumer loans to $7.7 million during the fiscal year ended March 31,
1998, from $7.5 million during the fiscal year ended March 31, 1997. Interest on
mortgage-backed and related securities decreased $62,000 to $494,000 for the
fiscal year ended March 31, 1998, from $556,000 for the prior fiscal year. The
decrease is the result of the decrease in the average balance of mortgage-backed
and related securities from $7.6 million for the fiscal year ended March 31,
1997, to $6.9 million for the fiscal year ended March 31, 1998. The decrease in
mortgage-backed securities was due to scheduled principal payments and
prepayments. Interest on interest bearing deposits in other financial
institutions increased $52,000 from $23,000 for the fiscal year ended March 31,
1997, to $75,000 for the fiscal year ended March 31, 1998. The average
outstanding balance of interest bearing deposits in other financial institutions
increased from $461,000 during the fiscal year ended March 31, 1997 to $818,000
during the fiscal year ended March 31, 1998. The increase reflects the larger
cash balances held as a result of the establishment of the Nevada investment
subsidiary. Interest and dividends on investments increased $66,000 to $300,000
for the fiscal year ended March 31, 1998, from $234,000 for the fiscal year
ended March 31, 1997. The increase was partially due to a increase in the
average yield of investment securities to 5.95% for the fiscal year ended March
31, 1998 from 5.53% for the fiscal year ended March 31, 1997. This increase
resulted from the restructuring of the investment portfolio which created a
$24,000 loss on the sale of investments, but acted to increase the current yield
of the remaining investments. Dividends on Federal Home Loan Bank stock
increased $14,000 to $68,000 for the fiscal year ended March 31, 1998, from
$54,000 for the fiscal year ended March 31, 1997. The increase was due to an
increase of the average outstanding balance of Federal Home Loan Bank stock from
$837,000 during the fiscal year ended March 31, 1997, to $996,000 during the
fiscal year ended March 31, 1998. The increase in the stock balance was a
requirement of the Federal Home Loan Bank due to the increase in advances during
the fiscal year ended March 31, 1998. The average yield on all of the Company's
total interest-earning assets of 8.50% for the fiscal year ended March 31, 1998,
remained relatively unchanged from the 8.51% for the fiscal year ended March 31,
1997. The increase in average balances of loans and mortgage-backed and related
securities were principally funded by increases in deposits and advances from
the FHLB-Chicago.
Interest Expense
Interest expense increased $171,000 or 4.2% to $4.2 million for the
fiscal year ended March 31, 1998, from $4.1 million for the fiscal year ended
March 31, 1997. The increase is due to the increase in the average outstanding
balance of interest-bearing liabilities of $3.7 million from $81.4 million for
the fiscal year ended March 31, 1997 to $85.1 million for the fiscal year ended
March 31, 1998. The average rate paid on interest-bearing liabilities decreased
slightly from 5.00% for the fiscal year ended March 31, 1997, to 4.99% for the
fiscal year ended March 31, 1998. Interest on savings increased $9,000 or 0.31%
to $2.9 million for the fiscal year ended March 31, 1998, from $2.9 million for
the fiscal year ended March 31, 1997. The increase in interest expense on
deposits was the result of an increase in average deposits to $62.3 million for
the fiscal year ended March 31, 1998, from $60.8 million for the fiscal year
ended March 31, 1997. The increase in interest on the increased savings balances
was offset by an almost identical decrease in interest expense due to the
average yield during the fiscal year ended March 31, 1997, decreasing from 4.74%
to 4.65% during the fiscal year ended March 31, 1998. Interest on borrowings
increased $162,000 or 13.5% to $1.4 million for the fiscal year ended March 31,
1998, from $1.2 million for the fiscal year ended March 31, 1997. The increase
in interest on borrowings was the result of an increase in the average balances
of advances from $20.6 million for the fiscal year ended March 31, 1997, to
$22.8 million for the fiscal year ended March 31, 1998, and an increase in the
average rate on advances and other borrowings to 5.91% for the fiscal year ended
March 31, 1998, from 5.78% for the fiscal year ended March 31, 1997. The
increase in the average rate was the result higher interest rates offered by
FHLB during the fiscal year.
Provision for Loan Losses
The provision for loan losses increased $19,000 or 23.5% to $100,000
for the fiscal year ended March 31, 1998, from $81,000 for the fiscal year ended
March 31, 1997. The desired level of allowance for loan losses is determined by
the Company's historical loan loss experience, the condition and composition of
the Company's loan portfolio and general conditions. The higher provisions
during the fiscal year ended March 31, 1998, reflects provisions for a large
commercial loan discussed previously under Asset Quality. The allowance for loan
losses totaled $461,000 at March 31, 1997, and $484,000 at March 31, 1998, and
represented 0.59% and 0.61% of gross loans and 43.0% and 34.9% of non-performing
loans, respectively. Management currently believes the allowance for
11
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
loan losses is at an adequate level to provide for potential loan losses and
that future provisions for loan losses will be remain at $25,000 per quarter
until the status of the above-mentioned commercial loan is determined.
Other Income
Total other income increased $77,000 or 14.5% to $608,000 for the
fiscal year ended March 31, 1998, from $531,000 for the fiscal year ended March
31, 1997. The increase is partially due to an increase in gain on sale of
mortgage loans of $71,000 from $59,000 for the fiscal year ended March 31, 1997,
to $130,000 for the fiscal year ended March 31, 1998. The decrease in the market
level of mortgage interest during the fiscal year acts to generate gains on sale
of mortgage loans. An increase in service charges on deposits of $31,000 from
$220,000 for the fiscal year ended March 31, 1997 to $251,000 for the fiscal
year ended March 31, 1998, was offset by a $24,000 increase in loss on sale of
investments from $0 for the fiscal year ended March 31, 1997, to $24,000 for the
fiscal year ended March 31, 1998. The losses were incurred while restructuring
the investment portfolio to eliminate assets classified as "available-for-sale"
to investments classified as "held-to-maturity".
General and Administrative Expenses
General and administrative expenses decreased $345,000 or 13.3% to $2.3
million for the fiscal year ended March 31, 1998, from $2.6 million for the
prior fiscal year. The decrease is due to an decrease of $389,000 in federal
insurance premiums from $428,000 for the fiscal year ended March 31, 1997, to
$39,000 for the fiscal year ended March 31, 1998. The decrease resulted from the
absence in the current fiscal year of the one-time $350,000 special assessment
to recapitalize the SAIF insurance fund paid to the FDIC in the quarter ended
September 30, 1996. The increase in salaries and employee benefit expense due to
cost of living salary increases, additional personnel, and the initiation of a
loan production incentive program to enhance loan officer salaries was almost
exactly offset by a decrease in expense from accounting for Company's stock
incentive plan of $115,000 to $89,000 for the fiscal year ended March 31, 1998,
from $204,000 for the fiscal year ended March 31, 1997. Applicable accounting
standards required that 61.1% of the three-year cost be amortized in the first
year, 27.8% in the second year and 11.1% in the third year. The accounting for
this expense began with the approval of the Company's stock incentive plan in
October 1995, and will be fully expensed the in the quarter ending September 30,
1998. The expense associated with the Bank's Employee Stock Ownership Plan
(`ESOP') increased $28,000 from $141,000 for the fiscal year ended March 31,
1997, to $169,000 for the fiscal year ended March 31, 1998. The expense for the
ESOP reflects the ESOP loan payments made by the Bank to the Company which vary
each year and also reflect the application of dividends of the ESOP stock to the
balance of the note. Dividends on the ESOP stock increased $0.14 per share from
$0.40 per share for the fiscal year ended March 31, 1997, to $0.54 per share for
the fiscal year ended March 31, 1998. Net occupancy expense increased $14,000 or
4.2% from $336,000 for the fiscal year ended March 31, 1997, to $350,000 for the
fiscal year ended March 31, 1998. Other expense increased $16,000 or 2.8% to
$581,000 for the fiscal year ended March 31, 1998, from $565,000 for the fiscal
year ended March 31, 1997. General and administrative expenses as a ratio of
average assets decreased to 2.36% for the fiscal year ended March 31, 1998,
compared to 2.84% for the fiscal year ended March 31, 1997, due to the decrease
in Federal insurance premiums over the period..
Income Tax Expense
Income tax expense increased $93,000 or 18.0% to $610,000 for the
fiscal year ended March 31, 1998, from $517,000 for the fiscal year ended March
31, 1997. The increase reflects the increase in income before taxes of $503,000
from $1.2 million for the fiscal year ended March 31, 1997, to $1.7 million for
the fiscal year ended March 31, 1998. The effective tax rates were 35.3% and
42.1% for the fiscal years ended March 31, 1998, and 1997, respectively. The
decrease in effective rate is due to the establishment of a Nevada investment
subsidiary of the Bank which acts to eliminate the Wisconsin state income tax
obligation of 7.9% of net income. Because state income tax is deductible for
federal income tax purposes, the state income tax savings is reduced by about
the federal tax rate of 34% or an effective state tax rate savings of 5.2%
12
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Comparison of Operating Results for the Fiscal Years Ended March 31, 1997 and
March 31, 1996
General
Net income for the fiscal year ended March 31, 1997, decreased $132,000
or 15.7% to $710,000 from $842,000 for the fiscal year ended March 31, 1996.
Return on average assets decreased to 0.76% for the fiscal year ended March 31,
1997, from 1.06% for the prior year and return on average equity decreased to
6.18% from 6.95% for the same years. Return on average assets was adversely
affected by the decrease in the interest rate spread from 3.77% for the fiscal
year ended March 31, 1996, to 3.51% for the fiscal year ended March 31, 1997.
Net interest income before provision for loan losses increased $258,000 or 8.1%
to $3.4 million for the fiscal year ended March 31, 1997, from $3.2 million for
the fiscal year ended March 31, 1996. This increase was primarily due to an
increase in interest income of $1.0 million, partially offset by an increase in
interest expense of $0.8 million. Provision for loan losses increased 237.5% to
$81,000 for the fiscal year ended March 31, 1997, from $24,000 for the fiscal
year ended March 31, 1996. The increase reflects provisions for a large
commercial loan discussed previously under Asset Quality. Total other income
increased by $55,000 to $531,000 for the fiscal year ended March 31, 1997, from
$476,000 for the fiscal year ended March 31, 1996, primarily due to an increase
in other income of $58,000 from $117,000 for the fiscal year ended March 31,
1996 to $175,000 for the fiscal year ended March 31, 1997. The increase in other
income reflected the increase in the sale of condominium lots in the Bank's
subsidiary. General and administrative expenses for the fiscal year ended March
31, 1997, increased $468,000 or 21.3% to $2.6 million from $2.2 million for the
prior fiscal year. The increase was due to a $302,000 increase federal insurance
premiums (See Regulatory Developments Related to Deposit Insurance), an increase
of $134,000 in salaries and employee benefits, and a $52,000 increase in net
occupancy expense. The increase in salaries and employee benefits reflects the
expenses associated with the Company's stock incentive plan and the Bank's
Employee Stock Ownership Plan ("ESOP") and the increase in net occupancy expense
that reflects the expenses related to the remodeling of the New Richmond office
and the purchase of the related furniture, fixtures and equipment.
Net Interest Income
Net interest income for the fiscal year ended March 31, 1997, increased
$258,000 or 8.1% to $3.4 million from $3.2 million for the prior year. The
increase was due to an increase in interest income of $1.0 million, partially
offset by an increase in interest expense of $761,000. The improvement in net
interest income primarily reflects an increase in total interest-earning assets
to $88.1 million for the fiscal year ended March 31, 1997 compared to $74.3
million for the prior fiscal year. The increase in the Company's net earning
asset position was attributable primarily to an increase in gross loans and
mortgage-backed securities funded by the increase in advances from the
FHLB-Chicago.
Interest Income
Interest income increased $1.0 million or 15.4% to $7.5 million for the
fiscal year ended March 31, 1997 from $6.5 million for the fiscal year ended
March 31, 1996. The increase is a result of an increase of $13.8 million in
average interest-earning assets to $88.1 million for the fiscal year ended March
31, 1997 offset by an decrease of 20 basis points in the average yield on all of
the Company's major categories of interest-earning assets to 8.51% for the
fiscal year ended March 31, 1997 from 8.71% for the fiscal year ended March 31,
1996. Interest income on loans increased $791,000 or 13.4% to $6.7 million for
the fiscal year ended March 31, 1997, from $5.9 million for the fiscal year
ended March 31, 1996. The increase in the origination of
adjustable-rate-one-to-four-family mortgage loans from $9.6 million for the
fiscal year ended March 31, 1996, to $13.4 million for the fiscal year ended
March 31, 1997, acted to lower the average yield because market forces demand
that the loans be originated at "teaser rates" which are generally one to two
percent below the fully indexed rate. In addition, the average yield on
commercial loans decreased from 11.64% for the fiscal year ended March 31, 1996,
to 9.19% for the fiscal year ended March 31, 1997, as a result of the interest
adjustment required when the large commercial loan discussed under Asset Quality
was categorized as a non-performing asset. Average loans increased to $76.2
million during the fiscal year ended March 31, 1997, from $65.6 million during
the fiscal year ended March 31, 1996. Interest on mortgage-backed and related
securities increased $203,000 to $556,000 for the fiscal year ended March 31,
1997, from $353,000 for the prior fiscal year due to a increase in the average
balance of mortgage-backed and related securities from $4.8 million for the
fiscal year ended March 31, 1996 to $7.6 million for the fiscal year ended March
31, 1997. The increase in average balances of loans and mortgage-backed and
related securities were principally funded by an
13
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
increase in advances from the FHLB-Chicago. Interest on investments increased
$25,000 to $234,000 for the fiscal year ended March 31, 1997, from $209,000 for
the fiscal year ended March 31, 1996. The increase was due to a increase in the
average yield of investment securities to 5.33% for the fiscal year ended March
31, 1997 from 5.11% for the fiscal year ended March 31, 1996.
Interest Expense
Interest expense increased $761,000 or 23.1% to $4.1 million for the
fiscal year ended March 31, 1997, from $3.3 million for the fiscal year ended
March 31, 1996. The increase is due to the increase in the average outstanding
balance of interest-bearing liabilities of $17.3 million from $67.0 million for
the fiscal year ended March 31, 1996 to $81.4 million for the fiscal year ended
March 31, 1997. The average rate paid on interest-bearing liabilities increased
slightly from 4.94% for the fiscal year ended March 31, 1996, to 5.00% for the
fiscal year ended March 31, 1997. Interest on savings increased $270,000 or
10.4% to $2.9 million for the fiscal year ended March 31, 1997, from $2.6
million for the fiscal year ended March 31, 1996. The increase in interest
expense on deposits was the result of an increase in average deposits to $60.8
million for the fiscal year ended March 31, 1997, from $55.7 million for the
fiscal year ended March 31, 1996. Interest on borrowings increased $491,000 or
70.4% to $1.2 million for the fiscal year ended March 31, 1997, from $697,000
for the fiscal year ended March 31, 1996. The was the result of an increase in
the average balances of advances from $11.3 million for the fiscal year ended
March 31, 1996, to $20.6 million for the fiscal year ended March 31, 1997. The
increase was partially offset by a decrease in the average rate on advances and
other borrowings to 5.78% for the fiscal year ended March 31, 1997, from 6.19%
for the fiscal year ended March 31, 1996. The decrease was the result lower
interest rates offered by FHLB during the fiscal year.
Provision for Loan Losses
The provision for loan losses increased $57,000 or 237.5% to $81,000
for the fiscal year ended March 31, 1997, from $24,000 for the fiscal year ended
March 31, 1996. The desired level of allowance for loan losses is determined by
the Company's historical loan loss experience, the condition and composition of
the Company's loan portfolio and general conditions. The higher provisions
during the fiscal year ended March 31, 1997, reflects provisions for a large
commercial loan discussed previously under Asset Quality. The allowance for loan
losses totaled $433,000 at March 31, 1996, and $461,000 at March 31, 1997, and
represented .61% and .59% of gross loans and 62.5% and 43.0% of non-performing
loans, respectively. Management currently believes the allowance for loan losses
is at an adequate level to provide for potential loan losses and that future
provisions for loan losses will be remain at $25,000 per quarter until the
status of the above-mentioned commercial loan is determined.
Other Income
Total other income increased $55,000 or 11.6% to $531,000 for the
fiscal year ended March 31, 1997, from $476,000 for the fiscal year ended March
31, 1996, due to an increase in other income of $58,000 from $117,000 for the
fiscal year ended March 31, 1996, to $175,000 for the fiscal year ended March
31, 1997. This increase was primarily due to an increase in the gains on sale of
real estate lots owned by the Bank's wholly owned subsidiary of $46,000 to
$84,000 for the fiscal year ended March 31, 1997, from $38,000 for the fiscal
year ended March 31, 1996.
General and Administrative Expenses
General and administrative expenses increased $468,000 or 21.3% to $2.6
million for the fiscal year ended March 31, 1997, from $2.2 million for the
prior fiscal year. The increase is primarily due to an increase of $302,000 in
federal insurance premiums (See Regulatory Developments Related to Deposit
Insurance), an increase of $134,000 in salaries and employee benefits, and a
$52,000 increase in net occupancy expense. The increase in salaries and employee
benefits is partially due to the increase in expense from accounting for
Company's stock incentive plan of $64,000 to $204,000 for the fiscal year ended
March 31, 1997, from $l40,000 for the fiscal year ended March 31, 1996.
Applicable accounting standards require that 61.1% of the three-year cost be
amortized in the first year. The accounting for this expense did not begin until
the approval of the Company's stock incentive plan in October 1995, and
therefore an expense was recorded for only the last two quarters of the fiscal
;year ended March 31, 1996. The expense associated with the Bank's Employee
Stock Ownership Plan (`ESOP') increased $14,000 from $127,000 for the fiscal
year ended March 31, 1996, to $141,000 for the fiscal year ended March 31, 1997.
The expense for the ESOP reflects the ESOP loan payments made by the Bank to the
Company which vary each year and also reflect the application of dividends of
the ESOP stock to the balance of the note. The remaining $56,000 increase in
salaries and employee benefits is due to cost of living salary increases,
additional personnel, and the initiation of a loan production incentive program
to enhance loan officer salaries. Net occupancy expense
14
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
increased $52,000 from $284,000 for the fiscal year ended March 31, 1996, to
$336,000 for the fiscal year ended March 31, 1997. The increase is due to an
increase in furniture and fixtures expenses associated with the remodeling and
refurbishing of the New Richmond Office that was completed at the beginning of
the fiscal year ended March 31, 1997. Other expense decreased $14,000 to
$565,000 for the fiscal year ended March 31, 1997, from $579,000 for the fiscal
year ended March 31, 1996, due primarily to a decrease in holding company
expenses of $39,000 from $107,000 for the fiscal year ended March 31, 1996 to
$68,000 for the fiscal year ended March 31, 1997. General and administrative
expenses as a ratio of average assets increased to 2.84% for the fiscal year
ended March 31, 1997, compared to 2.74% for the fiscal year ended March 31,
1996, due to the large increase in Federal insurance premiums over the period.
Allowing for the one-time $350,000 FDIC Special Assessment, general and
administrative expenses as a ratio of average assets would be 2.46% for the
fiscal year ended March 31, 1997. The Company's general and administrative
expenses as a percentage of average assets are higher than many similar
institutions for several reasons, including the need to support three
full-service branches, service-related costs on loans sold to secondary market
investors, the amortization of the stock-related benefit programs, and the
support of its insurance and investment activities through its subsidiary.
Income Tax Expense
Income tax expense decreased $80,000 or 13.4% to $517,000 for the
fiscal year ended March 31, 1997, from $597,000 for the fiscal year ended March
31, 1996. The decrease reflects the decrease in income before taxes from $1.4
million for the fiscal year ended March 31, 1996, to $1.2 million for the fiscal
year ended March 31, 1997. The effective tax rates were 42.1% and 41.5% for the
fiscal years ended March 31, 1997, and 1996, respectively.
Financial Condition
The following table summarizes certain information relating to the
Company's consolidated balance sheets at the dates indicated.
At March 31,
---------------
1998 1997
---- ----
(dollars in thousands)
Assets
Cash and cash equivalents 6,047 2,980
Securities available-for-sale - 2,752
Mortgage-backed securities 6,398 7,421
FHLB stock 1,159 912
Loans receivable, net 78,297 77,240
Liabilities
Deposits 62,278 61,557
Advances and other borrowings 24,320 22,097
Equity, substantially restricted 11,514 10,859
Cash and cash equivalents increased $3.0 million to $6.0 million at
March 31, 1998 from $3.0 million at March 31, 1997. The increase reflects the
higher cash and interest bearing deposit balances maintained by the Bank with
the operation of its Nevada investment subsidiary. Dividends on investments and
loans are allowed to accumulate in the subsidiary and when material balances
achieved, the cash balances are transferred back to the Bank in the form of
loans to the Bank.
Securities available-for-sale decreased $2.8 million to $0 at March 31,
1998 from $2.8 million at March 31, 1997. The decrease reflects the sale of
securities held in the "available-for-sale" category and the purchase of
securities in the "held-to-maturity" category.
Mortgage-backed and related securities held-to-maturity decreased $1.0
million to $6.4 million at March 31, 1998, from $7.4 million at March 31, 1997.
The decrease was due to scheduled principal payments and pre-payments of the
securities. Some mortgage-backed securities are used to provide collateral for
deposits in excess of the $100,000 insurance limit through the retail repurchase
agreements program found under Other Borrowed Money.
15
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Net loans receivable was $78.3 million and $77.2 million at March 31,
1998, and 1997, respectively. One to four family real estate loans increased
from $55.2 million at March 31, 1997 to $55.6 million at March 31, 1998, as a
result of the Company's ability to originate ARM loans that it retains in its
loan portfolio. Consumer loans increased to $7.6 million at March 31, 1998, from
$7.2 million at March 31, 1997. Other real estate loans decreased to $8.6
million at March 31, 1998, from $10.7 million at March 31, 1997.
Deposits were $62.3 million and $61.6 million at March 31, 1998 and
1997, respectively. Deposits are the Company's primary source of externally
generated funds. The level of deposits is heavily influenced by factors such as
the general level of short- and long-term interest rates as well as alternative
yields that investors may obtain on competing investment instruments such as
money market mutual funds. Non-certificate of deposit average outstanding
balances totaled $21.1 million and $19.5 million at March 31, 1998 and 1997,
respectively and reflect the Company's marketing efforts to build multiple
relationships with its customers through an emphasis on checking accounts. The
average outstanding balance of certificates of deposit balances totaled $41.2
million and $41.3 million, at March 31, 1998 and 1997, respectively The Company
attempts to maintain relationships with customers withdrawing certificates of
deposit by providing brokerage services for alternative investments through its
subsidiary.
Advances from the Federal Home Loan Bank and other borrowings increased
to $24.3 million at March 31, 1998 from $22.1 million at March 31, 1997, and the
average rate increased 13 basis points to 5.91% at March 31, 1998, from 5.78% at
March 31, 1997. The Company uses FHLB-Chicago advances as a funding source in
periods when market rates on certificates of deposit exceed those offered by the
FHLB-Chicago or when the growth in the loan portfolio exceeds the ability of the
Bank to attract deposits. FHLB-Chicago advances generally are fixed-rate and
short-term with maturities of less than 10 years. The Open Line of Credit
Program at the FHLB-Chicago adjusts the rate on a daily basis, so in a rising
interest rate environment such borrowings may present the risk that the interest
rates of these borrowings will increase. The Company also uses borrowings from
the FHLB-Chicago to manage the total asset/liability portfolio of the Company.
In future periods, the Company intends to continue to leverage its capital base
by using the proceeds from additional FHLB-Chicago advances to originate
additional loans.
Shareholders' equity increased to $11.5 million at March 31, 1998
compared to $10.9 million at March 31, 1997. The increase from March 31, 1997 to
March 31, 1998 results from net income of $1.1 million for the fiscal year ended
March 31, 1998. This increase was offset by the payment of dividends to
shareholders of $451,000 for the fiscal year ended March 31, 1998. In addition,
14,100 shares of Company stock were repurchased under an ongoing repurchase
program at a cost of $301,000 for the fiscal year ended March 31, 1998. The net
unrealized loss on securities available for sale increased $29,000 from $29,000
as of March 31, 1997, to $0 as of March 31, 1998. The Company's securities
available-for-sale are accounted for at fair value, with any unrealized gains or
losses accounted for as an adjustment to retained earnings rather than to the
statement of operations. The balance of the unearned restricted stock plan award
increased $89,000 from $(115,000) as of March 31, 1997, to $(26,000) as of March
31, 1998. The balance of the unearned Employee Stock Ownership Plan compensation
increased $169,000 from $(558,000) as of March 31, 1997, to $(389,000) as March
31, 1998.
Liquidity, Capital Resources and Regulatory Capital
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans, principal and interest payments on
mortgage-backed and related securities and FHLB-Chicago advances. Although
maturity and scheduled amortization of loans are predictable sources of funds,
deposit flows, mortgage prepayments and prepayments on mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Principal collected on long-term loans for
the fiscal year ended March 31, 1998 increased to $28.0 million from $24.0
million for the fiscal year ended March 31, 1997. Principal collected on
mortgage-backed securities for the fiscal year ended March 31, 1998 increased to
$1.0 million from $724,000 for the fiscal year ended March 31, 1997.
The primary investing activity of the Company is the origination of
mortgage loans. For the fiscal years ended March 31, 1998 and 1997, the Company
originated or acquired long-term loans in the amount of $29.5 million and $31.3
million, respectively. The Company purchased $0 million and $2.8 million of
mortgage-backed securities and $1.3 million and $127,000 of investments during
the fiscal years ended March 31, 1998 and 1997, respectively. For
16
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
the fiscal years ended March 31, 1998 and 1997, these activities were funded
primarily by principal repayments on long-term loans and mortgage backed
securities of $29.0 million and $24.8 million, respectively; net proceeds from
short-term borrowings of $795,000 and $(1.6) million, respectively; and proceeds
from long-term financing of $9.0 million, and $8.7 million, respectively offset
by repayments of long-term financing of $7.6 million and $2.0 million
respectively.
The Company is required to maintain minimum levels of liquid assets
under the DFI's regulations for state-chartered mutual savings banks. Savings
banks are required to maintain an average daily balance of liquid assets
(including cash, certain time deposits, certain bankers' acceptances, certain
corporate debt securities and highly rated commercial paper, securities of
certain mutual funds and specified United States government, state or federal
agency obligations) of not less than 8% of its average daily balance of net
withdrawal accounts plus short-term borrowings. The Company's liquidity ratios
were 15.2% and 15.1% at March 31, 1998 and 1997, respectively. The Company
adjusts its liquidity levels to meet various funding needs and to meet its asset
and liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At March 31, 1998 and 1997, cash
and cash equivalents were $6.0 million and $3.0 million, respectively. The
increase in cash and cash equivalents was due to the operation of an Nevada
investment subsidiary which collects dividends on investments, mortgage-backed
securities, and a participation loan portfolio and accumulates material amounts
before lending the funds back to the Bank in the form of loans.
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds are
generally invested in short-term investments such as a cash management account
or overnight deposits at the FHLB-Chicago. Whenever the Company requires funds
beyond its ability to generate them internally, additional sources of funds are
available and obtained from borrowings from the FHLB-Chicago. The Company
utilizes its borrowing capabilities on a regular basis. At March 31, 1998,
FHLB-Chicago advances were $19.1 million or 21.9% of total liabilities and at
March 31, 1997, FHLB-Chicago advances were $17.6 million or 20.9% of total
liabilities. The Company also had other borrowings consisting of repurchase
agreements amounting to $5.3 million and $4.5 million at March 31, 1998 and
1997, respectively. The Company did not have any reverse repurchase agreements
outstanding at any of the aforementioned periods. In a rising interest rate
environment, such short-term borrowings present the risk that upon maturity, the
borrowings will have to be replaced with higher rate borrowings.
At March 31, 1998, the Company had outstanding loan commitments of $4.9
million. The Company had no commitments to purchase mortgage-backed and related
securities at that date. The Company anticipates it will have sufficient funds
available to meet its current loan commitments, including loan applications
received and in process prior to the issuance of firm commitments. Certificates
of deposit that are scheduled to mature in one year or less at March 31, 1998
were $29.4 million. Based on its historical experience, management believes that
a significant portion of such deposits will remain with the Company.
Effective June 30, 1993, the Bank, as a Wisconsin chartered mutual
savings bank, is subject to regulation by the FDIC and the DFI. Applicable FDIC
regulations require institutions to meet three capital standards: (i) "Tier 1
capital" in an amount not less than 3% of total assets; (ii) "Tier 1 capital" in
an amount not less than 4% of risk-weighted assets; and (iii) "total capital" in
an amount not less than 8% of risk-weighted assets. Wisconsin chartered savings
banks also are required to maintain a minimum capital to assets ratio of 6%. The
percentage of assets for Wisconsin regulatory capital purposes is based on total
unconsolidated assets. Note 14 of the Notes to the Company's Audited
Consolidated Financial Statements contains a summary of the Bank's compliance
with its regulatory capital standards at March 31, 1998.
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements and Notes thereto have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of
17
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
Current Accounting Developments
See Note 1, Future Accounting Changes, in the Notes to Consolidated
Financial Statements on page 34.
Forward-Looking Statements
The discussion in this Annual Report may include certain forward-looking
statements based on current management expectations. Factors which could cause
future results to differ from these expectations include the following: general
economic conditions; legislative and regulatory initiatives; monetary and fiscal
policies of the federal government; deposit flows; the cost of funds; general
market rates of interest; interest rates on competing investments; demand for
loan products; demand for financial services; changes in accounting policies or
guidelines; and changes in the quality or composition of the Company's loan and
investment portfolios. Additional factors are described in the Company's other
reports filed with the Securities and Exchange Commission.
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 (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.
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.
18
<PAGE>
Asset/Liability Management
The Company's profitability, like that of most financial institutions,
depends to a large extent upon its net interest income, which is the difference
between interest earned on interest-earning assets, such as loans and
investments, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. Net interest income is significantly affected by changes in
market interest rates. During periods of rising interest rates, the Company is
required to pay higher rates to attract deposits that can result in a decline in
net interest income if the Company is unable to increase the yield on its
interest-earning assets sufficiently to compensate for the increase in its cost
of funds. Conversely, during periods of declining interest rates, the Company
may experience prepayments of its fixed rate earning assets and downward
adjustments on its adjustable rate assets which can result in a decrease in net
interest income if the Company is unable to lower its cost of funds sufficiently
to compensate for the decrease in its asset yields.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it matures or reprices within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time
period. An interest rate sensitivity gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities that mature or reprice within a specified time period. An interest
rate sensitivity gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets that
mature or reprice within a specified time period.
In an attempt to manage vulnerability to interest rate changes,
management closely monitors the Company's interest rate risk. The Company has
established an investment strategy through its Asset/Liability Committee.
Management continually reviews the Company's interest rate risk position,
maturing securities and borrowings, interest rates and programs for raising
deposits and originating loans, and develops policies regarding these issues.
The Board of Directors reviews quarterly asset/liability management and
investment strategy reports prepared by management.
The Company utilizes basic strategies in managing its assets and
liabilities by managing or maximizing the net interest income under various
interest rate scenarios. More complex techniques such as hedging through the use
of options, financial futures, and interest rate swaps are not utilized. In
addition to monitoring interest rate risk on a continual basis, the Company
reviews deposit rates weekly. The emphasis has been on prudent pricing as
opposed to increasing market share, and the Company has supplemented and
substituted deposits using FHLB-Chicago advances in past periods when advance
rates are more attractive than those obtainable on retail deposits.
Generally, the Company utilizes the following strategies to manage its
interest rate risk: (i) the Company sells substantially all of its fixed rate
loans originated; (ii) the Company seeks to originate and retain ARM loans and
mortgage-backed and related securities with short- to medium-term periods to
re-pricing; (iii) the Company attempts to extend the maturities of deposits when
deemed cost effective through the pricing and promotion of certificates of
deposit with longer terms, and periodically utilizes deposit marketing programs
offering maturity and repricing terms structured to complement the repricing and
maturity characteristics of the existing asset/liability mix; and (iv) the
Company utilizes longer-term borrowings from the FHLB-Chicago to manage its
assets and liabilities and enhance earnings. One of the Company's
asset/liability management techniques involves borrowing from the FHLB-Chicago
and utilizing proceeds thereof to invest in assets that mature at the same time
or close to the same time as the advances are due. This use of FHLB-Chicago
advances is part of the overall interest rate risk management strategy of the
company. At March 31, 1998, FHLB-Chicago advances were $19.1 million or 19.3% of
total assets, compared to $17.6 million or 18.5 % of total assets at March 31,
1997.
19
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Originating ARM rate loans and investing in adjustable-rate
mortgage-backed and related security has enabled the Company to reduce interest
rate risk by more closely matching the terms and repricing characteristics of
its assets and liabilities. In addition, because of the relative liquidity of
mortgage-backed and related securities, the Company can restructure its
interest-earning asset portfolios more quickly and effectively in a changing
interest rate environment. The Company's ARM loans and ARM mortgage-backed and
related securities typically have annual and lifetime interest rate caps that
reduce their ability to protect the Company against a prolonged and significant
increase in interest rates. Further, mortgage-backed and related securities are
subject to reinvestment risk. For example, during periods of falling interest
rates, mortgage-backed and related securities are more likely to prepay, and the
Company may not be able to reinvest the proceeds from prepayments in securities
or other assets with yields similar to those of the prepaying mortgage-backed
and related securities. However, mortgage-backed and related securities also are
subject to extension risk, which is the risk that the effective maturity of the
security may increase in a rising interest rate environment. The market value of
a security with a longer maturity typically is more sensitive to changes in
market rates of interest, and rising interest rates may have a more pronounced
adverse effect on the market value of mortgage-backed and related securities
than on other types of investment securities.
At March 31, 1998, total interest-bearing liabilities repricing within
one year exceeded total interest-bearing assets repricing in the same period by
$0.3 million, representing a negative cumulative one-year interest rate
sensitivity gap equal to 0.29% of total assets. During periods of rising
interest rates, a positive interest rate sensitivity gap would tend to
positively affect net interest income while a negative interest rate sensitivity
gap would tend to negatively affect net interest income. Notwithstanding the
negative effect on net interest income anticipated as a result of falling
interest rates due to the Company's one-year gap position, the Company could
experience substantial prepayments of its fixed rate mortgage loans during
periods of falling interest rates, which may result in the reinvestment of such
proceeds at market rates which are lower than current rates.
20
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
The following table sets forth at March 31, 1998 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
<TABLE>
Amount Maturing or Repricing as of March 31, 1998
---------------------------------------------------------------
<CAPTION>
More Than More Than
Within Four to One Year Three years
Three Twelve to Three to Five Over five
Months Months Years Years Years Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1)
Mortgage loans:
Fixed rate $ 341 $ 991 $ 1,803 $ 2,130 $ 3,625 $ 8,890
Adjustable rate 9,821 25,017 20,810 2,164 - - 57,812
Consumer loans 698 541 2,760 3,645 183 7,827
Commercial loans 2,105 1,676 447 169 - - 4,397
Mortgage-backed securities:
Fixed rate - - - - - - - - 5,833 5,833
Adjustable rate 349 216 - - - - - - 565
Interest bearing deposits 3,405 - - - - - - - - 3,405
Investment securities - - 500 600 1,900 1,159 4,159
Total interest-earning assets $16,719 $28,941 $26,420 $10,008 $10,800 $92,888
Interest-bearing liabilities:
Deposits(2):
Certificates of deposit 12,227 17,176 9,435 1,430 201 40,469
Money market 603 1,807 1,446 1,714 456 6,026
NOW accounts 970 2,908 2,327 2,757 733 9,695
Passbook savings 609 1,826 1,461 1,731 460 6,088
Borrowings(3) 6,534 1,290 7,353 7,000 2,143 24,320
Total interest-bearing liabilities $20,943 $25,008 $22,022 $14,632 $ 3,993 $86,598
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $(4,224) $ 3,993 $ 4,398 $(4,624) $ 6,807 $ 6,290
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities $(4,224) $ (291) $ 4,107 $ (517) $ 6,290 $ 6,290
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets -4.28% -0.29% 4.16% -0.52% 6.37% 6.37%
<FN>
(1) Adjustable and floating rate assets are included in the period in
which interest rates are next scheduled to adjust rather than in the period
in which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization.
(2) Although the Company's negotiable order of withdrawal ("NOW")
accounts and passbook savings accounts generally are subject to immediate
withdrawal, management considers a certain historical amount of such
accounts to be core deposits having significantly longer effective
maturities and times to repricing based on the Company's historical
retention of such deposits in changing interest rate environments. Money
market, NOW accounts, and passbook savings accounts are assumed to be
withdrawn at annual rates of 40%, 40% and 79%, respectively, of the
declining balance of such accounts during the period shown. The withdrawal
rates used are higher than the Company's historical rates but are
considered by management to be more indicative of expected withdrawal rates
currently. Much of the recent growth in these deposit accounts is assumed
to be the result of low interest rates and it is assumed that the accounts
are more susceptible to withdrawal than in the past. If all of the
Company's NOW accounts, passbook savings accounts and money market deposit
accounts had been assumed to be subject to repricing within one year, the
one-year cumulative deficiency of interest-earning assets over
interest-bearing liabilities would have been $13.4 million or 13.6% of
total assets.
(3) Adjustable and floating rate borrowings are included in the period
in which their interest rates are next scheduled to adjust rather than in
the period in which they are due.
</FN>
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans and mortgage-backed and
related securities, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. In addition, the proportion of
ARM loans and mortgage-backed and related securities in the Company's portfolios
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the table. Finally, the ability of
many borrowers to service their adjustable rate debt may decrease in the event
of an interest rate increase.
Average Balance Sheet
The following table sets forth certain information relating to the
Company's consolidated average balance sheets and the consolidated statements of
operations at and for the fiscal years ended March 31, 1996, 1997 and 1998, and
reflects the average yields on interest-earning assets and average rates on
interest-bearing liabilities for the periods indicated. Such yields and rates
are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown. Average balances are derived principally from average monthly
balances and include non-accruing loans. Interest income on non-accrual loans is
reflected in the period it is collected and not in the period it is earned. Such
amounts are not material to net interest income or net change in net interest
income in any period. Non-accruing loans are included in the average balances
and do not have a material effect on the average yield.
22
<PAGE>
MANAGEMENT' S DISCUSSION(CONT.)
<TABLE>
Fiscal Years Ended March 31,
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------
<CAPTION>
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans $67,052 $5,849 8.72% $64,208 $5,554 8.65% $55,624 $4,858 8.73%
Commercial loans 4,754 371 7.80 4,539 417 9.19 3,969 462 11.64
Consumer loans 7,665 749 9.77 7,493 731 9.76 6,022 591 9.81
Total loans 79,471 6,969 8.77 76,240 6,702 8.79% 65,615 5,911 9.01
Mortgage-backed securities 6,938 494 7.12 7,603 556 7.31 4,794 353 7.36
Interest bearing deposits in other
financial institutions 1,377 76 5.52 461 23 5.06 430 25 5.81
Investment securities 2,665 156 5.87 2,938 157 5.33 2,937 150 5.11
Federal Home Loan Bank stock 996 68 6.77 837 54 6.46 501 34 6.79
Total interest-earning assets 91,448 $7,763 8.49% 88,079 $7,492 8.51 %74,277 $6,473 8.71%
Non-interest earning assets 5,681 4,976 5,191
Total assets $97,128 $93,055 $79,468
Liabilities and retained earnings:
Deposits:
NOW accounts(1) 9,491 138 1.45% 8,934 149 1.66% $ 10,649 $ 169 1.59%
Money market deposit accounts 5,552 260 4.68 4,109 194 4.72 1,517 54 3.56
Passbook 6,013 129 2.15 6,440 147 2.28 6,956 174 2.50
Certificates of deposit 41,194 2,366 5.74 41,314 2,395 5.80 36,626 2,217 6.05
Total deposits 62,250 2,893 4.65 60,798 2,884 4.74 55,748 2,614 4.69
Advances and other borrowings 22,849 1,350 5.91 20,559 1,188 5.78 11,263 697 6.19
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing liabilities 85,099 4,243 4.99% 81,356 4,072 5.00% 67,011 3,311 4.94%
Non-interest bearing liabilities 655 202 337
Equity 11,374 11,497 12,121
------ ------ ------
Total liabilities and retained earnings $97,128 $93,055 $79,469
------- ------- -------
Net interest income/interest rate spread(2) $3,520 3.50% $3,420 3.51% $ 3,162 3.77%
------ ---- ------ ---- ------- ----
Net earning assets/net interest margin(3) $ 6,348 3.85% $ 6,723 3.88% $ 7,266 4.26%
------- ---- ------- ---- ------- ----
Average interest-earning assets to
average interest-bearing liabilities 1.07 1.08 1.11
---- ---- ----
<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>
23
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Rate/Volume Analysis
The following table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (change
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31, 1997
Compared to Compared to
Fiscal Year Ended March 31, 1997 Fiscal Year Ended March 31, 1996
Increase(Decrease) Increase(Decrease)
Due to Due to
-------------------------------- ----------------------------------------
<CAPTION>
Rate Volume Total Rate Volume Total
-------------------------------- ----------------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ (15) $ 282 $ 267 $ (141) 932 $ 791
Mortgage-backed and related securities (14) (48) (62) (2) 205 203
Deposits 2 51 53 (4) 2 (2)
Securities 16 (17) (1) - 7
FHLB stock 3 11 14 (3) 23 20
Total (8) 279 271 (143) 1,162 1,019
Interest-bearing liabilities:
Deposits (57) 66 9 29 241 270
Borrowings 27 135 162 (49) 540 491
Total (30) 201 171 (20) 781 761
Net change in net interest income $ 22 $ 78 $ 100 $ (123) $ 381 $ 258
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Northwest Equity Corp.
We have audited the accompanying consolidated balance sheet of Northwest
Equity Corp. and Subsidiary as of March 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements as of March
31, 1997 and 1996 were audited by other accountants who combined with Wipfli
Ullrich Bertelson LLP as of January 1, 1998 and whose report dated April 24,
1997 expressed an unqualified opinion on those statements. We conducted our
audit in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Northwest Equity Corp.
and Subsidiary at March 31, 1998, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
___/s/Wipfli Ullrich Bertelson LLP__
Wipfli Ullrich Bertelson LLP
Wisconsin Rapids, Wisconsin
April 30, 1998
25
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
(In Thousands)
ASSETS
<CAPTION>
1998 1997
---- ----
<S> <C> <C>>
Cash and cash equivalents:
Cash and due from banks $ 2,642 $ 1,259
Interest-bearing deposits with financial institutions 3,405 1,721
----- -----
Total cash and cash equivalents 6,047 2,980
Investment securities - available-for-sale - at fair value - - 2,752
Investment securities - held-to-maturity - fair
value of $2,999 at March 31, 1998 3,000 - -
Mortgage backed securities - fair value of $6,546 at
March 31, 1998 and $7,308 at March 31, 1997 6,398 7,421
Loans held for sale 142 415
Loans receivable - net 78,297 77,240
Foreclosed properties and properties subject to foreclosure 159 - -
Investment in Federal Home Loan Bank stock - at
cost - which approximates fair value 1,159 912
Premises and equipment 2,250 2,341
Accrued interest receivable 578 656
Prepaid expenses and other assets 709 380
------ ------
TOTAL ASSETS $ 98,739 $ 95,097
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts $ 62,278 $ 61,557
Advances from Federal Home Loan Bank 19,062 17,634
Other borrowed money 5,258 4,463
Accounts payable and accrued expenses 627 584
------ ------
Total liabilities 87,225 84,238
------ ------
Stockholders' equity:
Preferred stock - $1 par value; 2,000,000 shares
authorized; none issued - - - -
Common stock - $1 par value; 4,000,000 shares authorized;
1,032,517 shares issued; 824,654 shares outstanding
at March 31, 1998 and 838,754 shares outstanding at
March 31, 1997 1,033 1,033
Additional paid-in capital 6,584 6,584
Net unrealized loss on securities available-for-sale - - (29)
Less unearned restricted stock plan award (26) (115)
Less unearned Employee Stock Ownership Plan (389) (558)
Less treasury stock - at cost (2,557) (2,256)
Retained earnings - substantially restricted 6,869 6,200
------ ------
Total stockholders' equity 11,514 10,859
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 98,739 $ 95,097
======== ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
26
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1998, 1997 and 1996
(In Thousands except for per share amounts)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 6,969 $ 6,702 $ 5,911
Interest on mortgage-backed and related securities 494 556 353
Interest and dividends on investments 300 234 209
----- ----- -----
Total interest income 7,763 7,492 6,473
----- ----- -----
Interest expense:
Interest on deposits 2,893 2,884 2,614
Interest on borrowings 1,350 1,188 697
----- ----- -----
Total interest expense 4,243 4,072 3,311
----- ----- -----
Net interest income 3,520 3,420 3,162
Provision for loan losses 100 81 24
----- ----- -----
Net interest income after provision for loan losses 3,420 3,339 3,138
----- ----- -----
Other income (deductions):
Mortgage servicing fees 77 77 72
Service charges on deposits 251 220 226
Loss on sale of investments (24) - - - -
Gain on sale of mortgage loans 130 59 61
Other 174 175 117
--- --- ---
Total other income 608 531 476
--- --- ---
General and administrative expenses:
Salaries and employee benefits 1,193 1,183 1,049
Net occupancy expense 350 336 284
Data processing 135 131 137
Federal insurance premiums 39 428 126
Other
----- ----- -----
Total general and administrative expense 2,298 2,643 2,175
----- ----- -----
Income before provision for income taxes 1,730 1,227 1,439
Provision for income taxes 610 517 597
--- --- ---
Net income $ 1,120 $ 710 $ 842
======= ====== ======
Basic earnings per share $ 1.44 $ 0.84 $ 0.90
======= ====== ======
Diluted earnings per share $ 1.37 $ 0.83 $ 0.90
======= ====== ======
See accompanying Notes to Consolidated Financial Statements
</TABLE>
27
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1998, 1997 and 1996
(In Thousands)
<CAPTION>
Unrealized
Gain (Loss) Unearned
Additional on Securities Unearned ESOP
Common Paid-In Available Restricted Compen- Treasury Retained
Stock Capital For Sale Stock sation Stock Earnings Total
------ ---------- ------------ ---------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1995 $1,033 $6,584 $(107) $ - - $ (826) $ - - $5,354 $12,038
Net income - - - - - - - - - - - - 842 842
Adjustment of carrying value of securities
available for sale, net of deferred taxes of $48 - - - - 73 - - - - - - - - 73
Acquisition of common stock for awards - - - - - - (459) - - - - - - (459)
Amortization of unearned ESOP and restricted stock
award - - - - - - 140 127 - - - - 267
Purchase of treasury stock - 51,625 shares - - - - - - - - - - (561) - - (561)
Cash dividends - $.33 per share - - - - - - - - - - - - (336) (336)
----- ----- ----- ----- ----- ----- ------ -------
Balance - March 31, 1996 1,033 6,584 (34) (319) (699) (561) 5,860 11,864
Net income - - - - - - - - - - - - 710 710
Adjustment of carrying value of securities
available for sale, net of deferred taxes of $2 - - - - 5 - - - - - - - - 5
Amortization of unearned ESOP and restricted stock
award - - - - - - 204 141 - - - - 345
Purchase of treasury stock - 142,138 shares - - - - - - - - - - (1,695) - - (1,695)
Cash dividends - $.40 per share - - - - - - - - - - - - (370) (370)
----- ----- ----- ----- ---- ------ ----- -------
Balance - March 31, 1997 1,033 6,584 (29) (115) (558) (2,256) 6,200 10,859
Net income - - - - - - - - - - - - 1,120 1,120
Adjustment of carrying value of securities
available for sale, net of deferred taxes of $19 - - - - 29 - - - - - - - - 29
Amortization of unearned ESOP and restricted stock
award - - - - - - 89 169 - - - - 258
Purchase of treasury stock - 14,100 shares - - - - - - - - - - (301) - - (301)
Cash dividends - $.54 per share - - - - - - - - - - - - (451) (451)
----- ----- ----- ----- ----- ------- ----- -----
Balance - March 31, 1998 $1,033 $6,584 $- - $ (26) $(389) $(2,557) $6,869 $11,514
====== ====== ===== ====== ====== ======== ====== =======
See accompanying Notes to Consolidated Financial Statements
</TABLE>
28
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1998, 1997 and 1996
(In Thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,120 $ 710 $ 842
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 145 152 115
Provision for loan losses 100 81 24
Loss on sale of investments 24 - - - -
Deferred income taxes 49 (43) 16
Amortization of ESOP and restricted stock awards 258 345 267
Proceeds from sales of mortgage loans 11,216 4,533 5,974
Loans originated for sale (10,813) (4,172) (6,630)
Changes in operating assets and liabilities:
Accrued interest receivable 78 (54) (141)
Prepaid expenses and other assets (329) (80) (92)
Accrued interest payable 83 (92) (34)
Accrued income taxes payable (112) 97 (83)
Other accrued liabilities 72 256 125
----- ----- ---
Net cash provided by operating activities 1,891 1,733 383
----- ----- ---
Cash flows from investing activities:
Available for sale securities:
Proceeds from sales 2,776 - - - -
Held to maturity securities:
Proceeds from maturity - - 114 - -
Payments for purchase (3,286) (127) (593)
Purchases of mortgage-backed securities - - (2,772) (3,923)
Principal collected on mortgage-backed securities 1,023 724 551
Principal collected on long-term loans 28,006 24,044 18,922
Long-term loans originated or acquired (29,481) (31,275) (30,636)
Purchase of office properties and equipment (54) (294) (761)
------- ------- --------
Net cash (used in) investing activities (1,016) (9,586) (16,440)
------- ------- --------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
29
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended March 31, 1998, 1997 and 1996
(In Thousands)
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings accounts 721 4,301 6,629
Net increase (decrease) in short-term borrowings 795 (1,543) 2,282
Repayments of long-term financing (7,572) (1,972) (622)
Proceeds from long-term financing 9,000 8,700 9,450
Purchases of treasury stock (301) (1,695) (561)
Acquisition of common stock for incentive plan - - - - (459)
Dividends paid (451) (370) (336)
----- ----- ------
Net cash provided by financing activities 2,192 7,421 16,383
----- ----- ------
Increase (decrease) in cash and equivalents 3,067 (432) 326
Cash and cash equivalents at beginning 2,980 3,412 3,086
----- ----- -----
Cash and cash equivalents at end $ 6,047 $ 2,980 $ 3,412
======= ======= =======
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $ 159 $ 72 $ 127
Loans charged off 87 62 28
Interest paid 4,160 4,164 3,345
Income taxes paid 739 517 680
See accompanying Notes to Consolidated Financial Statements
</TABLE>
30
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
Northwest Equity Corp. (the "Company") is the holding company for
Northwest Savings Bank (the "Bank"), a Wisconsin state-chartered
savings bank. The Company provides a wide range of financial services
to individual customers through the Bank with Wisconsin locations in
Polk, St. Croix and Burnett Counties. The Bank is subject to the
regulations of certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities. The Bank
holds a variety of securities through it's wholly owned
Subsidiary, Northwest Investments, Inc., a Nevada investment
corporation.
Basis of Financial Statement Presentation:
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include
the accounts of the Company and its wholly-owned subsidiary, Northwest
Savings Bank, and its wholly-owned subsidiaries, Amery Service Agency,
Inc.and Northwest Investments, Inc. Significant intercompany accounts
and transactions have been eliminated.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, interest-bearing and non-interest-bearing
deposits in banks.
Investments and Mortgage-Backed and Related Securities:
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and the Bank has
the ability at the time of purchase to hold securities until maturity
or on a long-term basis, they are classified as held-to-maturity and
carried at amortized historical cost, adjusted for amortization of
premium or accretion of discount using the effective yield method,
plus accrued interest. Securities to be held for indefinite periods of
time and not intended to be held to maturity or on a long-term basis
are classified as available-for-sale and carried at fair value.
Securities held for indefinite periods of time include securities
that management intends to use as part of its asset/liability
management strategy and may be sold in response to changes in interest
rates, changes in prepayment risk, the need to increase regulatory
capital or similar factors. Gains and losses on sales are determined
by the specific identification method.
Loans Held for Sale:
Loans held for sale in the secondary market are recorded at lower of
cost or market and generally consist of current production of
fixed-rate mortgage loans. Fees received from the borrower are
deferred and recorded as an adjustment of the sales price.
Loans Receivable:
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees
and discounts. Interest on loans is recorded as income as borrowers'
monthly payments become due. Generally, allowances are established for
uncollected interest on which any payments are more than ninety days
past due.
31
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 1. Summary of Significant Accounting Policies - Continued:
Allowance for Loan Losses:
The allowance for credit losses includes specific allowances related
to commercial loans which have been judged to be impaired. A loan is
impaired when, based on current information, it is probable that the
Bank will not collect all amounts due in accordance with the
contractual terms of the loan agreement. These specific allowances are
based on discounted cash flows of expected future payments using the
loan's initial effective interest rate or the fair value of the
collateral if the loan is collateral dependent.
The Bank continues to maintain a general allowance for credit losses
for loans not considered impaired. The allowance for credit losses is
maintained at a level which management believes is adequate to provide
for possible credit losses. Management periodically evaluates the
adequacy of the allowance using the Company's past loan loss
experience, known and inherent risks in the portfolio, composition of
the portfolio, current economic conditions, and other relevant
factors. This evaluation is inherently subjective since it requires
material estimates that may be susceptible to significant change.
Foreclosed Properties and Properties Subject to Foreclosure:
Real estate owned which was acquired by foreclosure or by deed in lieu
of foreclosure is initially recorded at the lower of cost or fair
value less estimated costs to sell at date of foreclosure. Costs
related to the development and improvement of property are
capitalized, whereas costs related to holding property are
expensed. Valuations are periodically performed by management, and
an allowance for losses is established by a charge to operations if
the carrying value of a property exceeds its fair value less
estimated costs to sell. Real estate in judgment and subject to
redemption is carried at cost less an allowance for estimated losses.
Loan Fees:
Loan origination and commitment fees and certain direct loan costs
are being deferred and the net amount amortized as an adjustment of
the related loan's yield by the level yield method over the
contractual life of the loan.
Income Taxes:
The Company and its subsidiary file a consolidated federal income tax
return and separate state income tax returns. Financial statement
provisions are made in the income tax expense accounts for deferred
taxes applicable to income and expense items reported in different
periods than for income tax purposes. The Company accounts for
income taxes on the liability method. Deferred income tax assets and
liabilities are adjusted regularly to amounts estimated to be
receivable or payable based on current tax law.
32
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 1. Summary of Significant Accounting Policies - Continued:
Premises and Equipment:
Premises and equipment are stated at cost. Maintenance and repair
costs are charged to expense as incurred. Gains or losses on
disposition of premises and equipment are reflected in income.
Depreciation is computed on the straight-line method and is based on
the estimated useful lives of the assets which range from three to
thirty-five years.
Accounting Changes:
The FASB issued SFAS No. 122 in July, 1995 relative to accounting and
reporting for mortgage servicing rights. The Statement requires that a
mortgage banking enterprise recognize as a separate asset the rights
to service mortgage loans for others, whether those rights are
purchased or originated. The Company adopted the Statement on April 1,
1996 which did not have a material effect on the financial condition
or results of operation.
In February 1997, the FASB issued SFAS No. 128, which became effective
for the Company for reporting periods ending after December 15, 1997.
Under the provisions of SFAS No. 128, primary and fully-diluted
earnings per share were replaced with basic and diluted earnings per
share in an effort to simplify the computation of these measures and
align them more closely with the methodology used internationally.
Basic earnings per share is arrived at by dividing net income
available to common stockholders by the weighted-average number of
common shares outstanding and does not include the impact of any
potentially dilutive common stock equivalents. The diluted earnings
per share calculation method is arrived at by dividing net income by
the weighted-average number of shares outstanding, adjusted for the
dilutive effect of outstanding stock options. For purposes of
comparability, all prior-period earnings per share data have been
restated.
In October 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123
relative to accounting and reporting standards for stockbased
employee compensation plans. SFAS No.123 is effective for transactions
entered into in fiscal years beginning after December 15, 1995. The
Statement defines a fair value based method of accounting for employee
stock options or similar equity instruments and encourages all
entities to adopt that method for all employee stock compensation
plans. The Company has adopted the disclosure only provisions of
SFAS No. 123, but applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its Plan.
33
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 1. Summary of Significant Accounting Policies - Continued:
Future Accounting Changes:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income in a full set of
general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This statement requires that an enterprise
display an amount representing total comprehensive income for the
period in a financial statement, but does not require a specific
format for that financial statement. This statement also requires that
an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the
consolidated balance sheet. The statement is effective for fiscal
years beginning after December 15, 1997. Reclassification of
consolidated financial statements for earlier periods provided for
comparative purposes is required. Management, at this time, cannot
determine the effect that adoption of this statement may have on the
consolidated financial statements of the Company as comprehensive
income is dependent on the amount and nature of assets and liabilities
held which generate nonincome changes to equity.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to
stockholders. This statement supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It also
amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for
previously unconsolidated subsidiaries. The statement is effective for
fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be
restated. The statement is not expected to have an effect on the
financial position or operating results of the Company, but may
require additional disclosures in the consolidated financial
statements.
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results may differ from these estimates.
34
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 1. Summary of Significant Accounting Policies - Continued:
Advertising:
The Company expenses advertising costs as incurred.
Reclassifications:
Certain amounts in the 1997 and 1996 consolidated financial statements
have been reclassified to conform to the 1998 reporting classification
Note 2. Investment Securities:
<TABLE>
Securities available-for-sale consist of the following at March 31:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(In Thousands)
1997
-------------------------
U.S. Treasury and agency obligations $ 2,800 $ - - $ 49 $ 2,751
Other 1 - - - - 1
---------- ----------- ---------- ---------
$ 2,801 $ - - $ 49 $ 2,752
========== =========== ========== ==========
Securities held-to-maturity consist of the following at March 31:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
(In Thousands)
1998
---------------------------
U.S. Treasury and agency obligations $ 3,000 $ - - $ 1 $ 2,999
============= ============= ========== ==========
</TABLE>
During the year ended March 31, 1998, the Company sold securities
available-for-sale for total proceeds of $2,776,000 resulting in
realized gains of $2,000 and realized losses of $26,000.
The following is a summary of the maturities of securities
held-to-maturity at March 31, 1998:
Amortized Fair
Amounts maturing in: Cost Value
------------- -------------
One year or less $ 500 $ 500
After one year through five years 2,500 2,499
------------- -------------
$ 3,000 $ 2,999
============= =============
35
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 3. Mortgage-Backed Securities:
The carrying values and estimated market values of mortgage-backed
securities are summarized as follows at:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
March 31, 1998 (In Thousands)
---------------------------
FNMA certificates $ 3,868 $ 59 $ 1 $ 3,926
GNMA certificates 2,153 83 - - 2,236
FHLMC certificates 377 7 - - 384
------- ----- ----- -------
$ 6,398 $ 149 $ 1 $ 6,546
======= ===== ===== =======
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
March 31, 1997 (In Thousands)
---------------------------
FNMA certificates $ 4,622 $ - - $ 98 $ 4,524
GNMA certificates 2,365 2 3 2,364
FHLMC certificates 434 - - 14 420
------- ----- ----- -------
$ 7,421 $ 2 $ 115 $ 7,308
======= ===== ===== =======
</TABLE>
Note 4. Loans Receivable:
Loans receivable are summarized as follows as of March 31:
1998 1997
---- ----
Real estate mortgage loa (In Thousands)
One to four families $ 57,975 $ 55,158
Other 8,582 10,673
Commercial loans 4,397 4,663
Consumer loans 7,827 7,207
-------- --------
Totals 78,781 77,701
Less: Allowance for losses (484) (461)
-------- --------
Total loans receivable $ 78,297 $ 77,240
======== ========
The following is an analysis of the allowance for loan losses for the
years ended March 31:
1998 1997 1996
------ ------ ------
(In Thousands)
Balance - beginning $ 461 $ 433 $ 434
Provision charged to income 100 81 24
Loans charged off - net of recoveries (77) (53) (25)
------ ------ ------
Balance - ending $ 484 $ 461 $ 433
====== ====== ======
36
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 4. Loans Receivable:
Loans serviced for others are not included in the above mounts. They
totaled $30,691,000, $25,250,000 and $22,874,000 at March 31, 1998,
1997 and 1996, respectively.
The allowance for credit losses includes specific allowances
related to loans which have been judged to be impaired and which fall
within the scope of SFAS No. 114. A loan is impaired when, based on
current information, it is probable that the Company will not collect
all amounts due in accordance with the contractual terms of the loan
agreement. These specific allowances are based on discounted cash
flows of expected future payments using the loan's initial effective
interest rate or the fair value of the collateral if the loan is
collateral dependent. There were no loans considered impaired as of or
during the years ended March 31, 1997 and March 31, 1996. Impaired
loans at March 31, 1998 consisted of:
Impaired loans - nonaccrual $685,000
Less - allowance for credit losses 90,000
-------
Net investment in impaired loans $595,000
========
There was no interest income recognized on the impaired loans during
the year ended March 31, 1998.
The Company, in the ordinary course of business, grants loans to the
Company's executive officers and directors, including their families
at terms comparable to transactions with other customers. In the
opinion of management, such loans do not involve more than the normal
risk of collectibility or present other unfavorable features.
Activity in related party loans during the year ended March 31, 1998
is summarized below:
Loans outstanding, April 1, $132,915
Repayments (93,430)
-------
Loans outstanding, March 31, $ 39,485
=======
Note 5. Premises and Equipment:
Premises and equipment are summarized by major classification as
follows at March 31:
1998 1997
---- ----
(In Thousands)
Land and improvements $ 569 $ 569
Buildings and improvements 1,543 1,543
Furniture, fixtures and equipment 1,043 995
----- -----
Total 3,155 3,107
Less accumulated depreciation 905 766
----- -----
$ 2,250 $ 2,341
===== =====
37
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 6. Foreclosed Properties and Properties Subject to Foreclosure:
Properties subject to foreclosure were $159,000 at March 31, 1998.
There were no foreclosed properties at March 31, 1998 and 1997 and no
properties subject to foreclosure at March 31, 1997.
Note 7. Accrued Interest Receivable:
Accrued interest receivable is comprised of the following at March 31:
1998 1997
---- ----
(In Thousands)
Loans receivable $ 493 $ 544
Mortgage backed obligations 39 45
Investments 46 67
---- ---
$ 578 $ 656
==== ====
The Bank has provided an allowance for uncollected interest on loans
at March 31, 1998 and 1997 of $17,000 and $10,000, respectively.
Note 8. Savings Accounts:
Savings accounts are summarized as follows at March 31:
<TABLE>
1998 1997
---------------------- ----------------------
<CAPTION>
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ -------- ------ --------
<S> <C> <C> <C> <C>
(In Thousands)
Noninterest bearing demand deposit $ 3,823 $ 2,792
------- -------
Interest bearing deposits
Passbook rates 6,091 2.15% 5,905 2.16%
Money market accounts 6,026 4.87% 5,029 4.61%
NOW accounts 5,910 2.31% 5,989 2.26%
Demand deposits
Certificates of deposit 40,428 5.73% 41,842 5.75%
------ ---- ------ ----
Total interest bearing deposits 58,455 4.62% 58,765 4.71%
------ ==== ------ ====
Total deposits $62,278 $61,557
====== ======
</TABLE>
38
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 8. Savings Accounts - Continued:
Certificates of deposit have scheduled maturity dates as follows at
March 31, 1998 (in thousands):
1999 $ 29,403
2000 6,496
2001 2,939
2002 1,113
2003 477
The total amount of certificates of deposits with balances in excess
of $100,000 was $3,243,000 and $3,160,000 at March 31, 1998 and 1997,
respectively.
Deposits from Company directors, executive officers, and related firms
in which they are principal owners totaled $302,000 at March 31, 1998.
Interest on savings deposits is summarized as follows for the years
ended March 31:
1998 1997 1996
---- ---- ----
(In Thousands)
MMDA and NOW accounts $ 398 $ 343 $ 268
Savings deposits 130 132 174
Certificates of deposit 2,365 2,409 2,172
----- ----- -----
Total $ 2,893 $ 2,884 $ 2,614
===== ===== =====
Note 9. Advances From Federal Home Loan Bank:
Pursuant to collateral agreements with the Federal Home Loan Bank
("FHLB"), advances are secured by all stock in the FHLB and qualifying
first mortgage loans aggregating 170% of the amount of outstanding
advances. The following is a summary of these advances at March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Advances due in the following years with rates from
4.00% to 8.31% 1998 $ - - $ 7,550
1999 5,050 5,050
2000 4,450 4,450
2001 419 419
2003 7,000 - -
2004 - - 165
2005 2,143 - -
----- ------
$19,062 $17,634
====== ======
</TABLE>
39
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 10. Other Borrowed Money:
Other borrowed money is summarized as follows at March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
(In Thousands)
Note payable from a bank due with interest at 2% over prime
in August, 1997, unsecured. $ - - $ 58
Retail security repurchase agreements with weighted-average
interest rates of 6.08% and 6.13% at March 31, 1998 and
1997, respectively. 5,258 4,405
----- -----
$5,258 $4,463
===== =====
</TABLE>
The retail repurchase agreements are generally for terms of less than
one year and are collateralized by investments and loans with carrying
values of $6,780,000 and $7,059,000 at March 31, 1998 and 1997,
respectively.
The following information relates to securities sold under repurchase
agreements for the years ended March 31:
1998 1997 1996
---- ---- ----
(In Thousands)
For the year:
Highest month-end balance $ 6,501 $ 5,761 $ 4,442
Daily average balance $ 4,936 $ 4,808 $ 3,634
Weighted average rate 6.94% 5.74% 6.60%
Note 11. Income Taxes:
The provision for income taxes differs from that computed at the
federal and state statutory corporate rates as follows for the years
ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(In Thousands)
Tax at federal statutory rate (34%) $ 588 $ 417 $ 489
Increases (decreases) in taxes:
State income taxes net of federal benefit 25 68 79
Other (3) 32 29
---- ---- ----
Federal and state income taxes $ 610 $ 517 $ 597
==== ==== ====
</TABLE>
40
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 11. Income Taxes - Continued:
The provision for income taxes consists of the following for the years
ended March 31:
1998 1997 1996
---- ---- ----
(In Thousands)
Current $ 678 $ 474 $ 613
Deferred (68) 43 (16)
---- ---- ----
$ 610 $ 517 $ 597
==== ==== ====
The Bank has qualified under the provisions of the Internal Revenue
Code which permit as a deduction from taxable income an allowance for
bad debts which differs from the provision for such losses charged to
income. Accordingly, retained earnings at March 31, 1998 includes
approximately $1,295,000 for which no provision for income taxes has
been made. If in the future this portion of retained earnings is used
for any purpose other than to absorb bad debt losses, federal and
state income taxes may be imposed at the then applicable rates.
The tax effects of temporary differences that give rise to deferred
tax assets and deferred tax liabilities are summarized as follows at
March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(In Thousands)
Allowance for loan losses $ 102 $ 70 $ 80
Valuation allowance for securities held for sale - - 20 22
Accrued compensation 22 22 22
Deferred compensation 56 32 - -
Stock incentive plan 43 82 56
Other - - - - 1
--- --- ---
Total deferred tax assets 223 226 181
--- --- ---
Premises and equipment (137) (124) (121)
Dividends on ESOP Plan (52) - - - -
FHLB common stock dividends (17) (17) (17)
--- --- ---
Total deferred tax liabilities (206) (141) (138)
--- --- ---
$ 17 $ 85 $ 43
==== ==== ====
</TABLE>
Note 12. Financial Instruments With Off-Balance Sheet Risk:
The Financial Accounting Standards Board has issued three statements
concerning financial instruments. SFAS No. 105 requires that certain
information be disclosed about financial instruments with off-balance
sheet risk and financial instruments with concentrations of credit
risk. SFAS No. 107 requires such entities to disclose the fair value
of financial instruments. SFAS No. 119 requires certain disclosures
for derivative financial instruments. The Company does not presently
have nor has it had any derivative type instruments requiring
disclosure.
41
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 12. Financial Instruments With Off-Balance Sheet Risk - Continued:
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist of commitments to
extend credit. Commitments to extend credit involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amount reflects
the extent of involvement the Company has in this particular financial
instrument.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and generally require payment of a fee. As some
commitments expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates the creditworthiness of each customer on a case by
case basis.
The Company generally extends credit only on a secured basis.
Collateral obtained varies, but consists primarily of one-to-four
family residences located in Northwestern Wisconsin. Commitments
to sell mortgage loans represent commitments to sell mortgage loans
to other entities at a future date and at a specified price.
Commitments to sell mortgage loans and commitments to extend
credit are generally exercised and fulfilled within ninety days. The
fair value of mortgage loans held for sale plus the commitments to
extend credit generally offset the commitments to sell mortgage
loans. Both the commitments to extend credit and the commitments to
sell mortgage loans are at current market rates.
At March 31, 1998, the Company was committed to originate
approximately $1,948,000 of first mortgage loans. In addition,
the undisbursed portion of other credit lines were $3,035,000 at
March 31, 1998.
In the normal course of business, various legal proceedings involving
the Company are pending. Management, based upon advice from legal
counsel, does not anticipate any significant losses as a result of
these actions.
Note 13. Employee Benefit Plans:
The Company has a qualified defined contribution plan covering
substantially all full-time employees who have completed one year of
service and are at least 21 years old. During the years ended March
31, 1998, 1997 and 1996, the Bank contributed $53,000, $39,000 and
$29,000, respectively, to this plan.
42
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 13. Employee Benefit Plans - Continued:
On April 1, 1994, the Company established an Employee Stock Ownership
Plan ("ESOP") for substantially all of its full-time employees. As
part of the stock conversion, the ESOP borrowed $826,000 from the
Company and purchased 103,250 shares of the Company's common stock.
The debt bears interest at 8% and is collateralized by the shares of
common stock held by the ESOP. The Bank is committed to make cash
payments to the ESOP in amounts sufficient for it to meet the debt
service requirements over a seven year term. Cash dividends on common
stock held by the ESOP are applied to debt principal and interest. The
unpaid balance of the ESOP loan has been eliminated in consolidation
and the amount of unearned ESOP compensation expense is shown as a
reduction of stockholders' equity. ESOP expense for the year ended
March 31, 1998 , 1997 and 1996 totaled $163,000, $160,000 and
$135,000, respectively. At March 31, 1998 the number of shares
allocated, committed to be released and suspense shares were 29,500,
14,750 and 59,000, respectively. The fair value of unearned shares at
March 31, 1998 was $1,558,000.
The Bank established an employee stock incentive plan on October 10,
1995. The Bank purchased 41,300 shares for $459,000 and awarded them
to officers and employees of the Bank. The shares awarded vest 33.33%
per year commencing October, 1996. The aggregate purchase price of
the shares is being amortized to compensation expense as the
participants become vested. The unamortized cost is being reflected
as a reduction of shareholders' equity as unearned restricted stock.
Compensation expense of $89,000, $204,000 and $140,000 was recognized
for the years ended March 31, 1998, 1997 and 1996, respectively.
During the year ended March 31, 1997, the Bank established a
deferred compensation agreement with it's President to defer the
amounts due until his retirement. Amounts deferred under the deferred
compensation plan were $79,000 for the year ended March 31, 1997.
Note 14. Stock Options:
On October 10, 1995, the Company adopted a Stock Option Plan and
granted options for 103,251 shares of common stock for a non-qualified
stock option plan for directors and a qualified incentive stock option
plan for employees. All such options are currently exercisable at
$10.44 per share and expire in October 2005.
A summary of the status of the stock option plan as of March 31, 1998
and 1997 is as follows:
1998 1997
---- ----
Options outstanding - April 1, 103,251 103,251
Granted - - - -
Exercised (542) - -
Forfeited (1,082) - -
------- -------
Options outstanding - March 31, 101,627 103,251
======= =======
43
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 14. Stock Options - Continued:
The Company applies Accounting Principles Board (APB) Opinion No. 25
and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock option plans.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1998 1997 1996
---- ---- ----
Net income (In Thousands) $ 1,066 $ 656 $ 788
Basic earnings per share $ 1.38 $0.77 $0.85
Diluted earnings per share $ 1.31 $.076 $0.85
Note 15. Stockholders' Equity:
On September 1, 1993, the Board of Directors of the Bank adopted a
plan under which the Bank would convert from a mutual savings bank to
a stock savings bank with the concurrent formation of a holding
company. On October 7, 1994, the Company sold 1,032,517 shares of
common stock at $8.00 per share. Net proceeds from the conversion,
after recognizing conversion expenses and underwriting costs of
$643,000, were $6,791,000.
At the time of conversion, the Bank established a "Liquidation
Account" in an amount equal to the Bank's net worth as of the date of
the latest consolidated financial statements. The Liquidation Account
will be maintained for the benefit of depositors who continue to
maintain their deposits in the Bank after conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. In the event of a
complete liquidation, and only in such an event, each eligible
depositor will be entitled to receive a liquidation distribution from
the liquidation account, in the proportionate amount of the
then-current adjusted balance for deposits then held, before any
liquidation distribution may be made with respect to the stockholders.
Except for the repurchase of stock and payment of dividends by
the Bank, the existence of the liquidation account will not restrict
use or application of stockholders' equity.
Deposits of the Bank are insured to the maximum allowable amounts by
the Savings Association Insurance Fund ("SAIF") as administered by the
Federal Deposit Insurance Corporation ("FDIC"). FDIC-insured
institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based and leverage capital
requirements. Under the FDIC capital regulations, the Bank is required
to meet the following capital standards: (1) Tier 1 capital in an
amount not less than 3% of total assets; (2) Tier 1 capital in an
amount not less than 4% of risk-weighted assets; and (3) total capital
in an amount not less than 8% of risk-weighted assets. Tier 1 capital
is defined to include the Bank's common shareholders' equity. Total
capital is defined to include Tier 1 capital plus the allowance for
loan losses and the adjustment of the carrying value of securities
available-for-sale.
44
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 15. Stockholders' Equity - Continued:
The risk-based capital requirements presently address credit risk
related to both recorded assets and off balance sheet commitments and
obligations. Risk weighted assets for regulatory purposes at March 31,
1998 totaled $62,644,000. The Bank's various regulatory capital
measurements are summarized below at March 31, 1998:
Stockholder's equity - Tier 1 Capital $ 8,752
Add: Qualifying general loan loss allowance 484
------
Total capital ratio and risk-weighted capital ration $ 9,236
======
The following table summarizes the Bank's capital amounts and ratios
and the respective amounts required by the FDIC and the state of
Wisconsin at March 31, 1998:
Amounts (In Thousands) Actual Required Excess
------ -------- ------
Tier 1 capital ratio $ 8,752 $ 2,852 $ 5,900
Total capital ratio 9,236 3,803 5,433
Risk-weighted capital ratio 9,236 5,012 4,224
State of Wisconsin 9,236 6,119 3,117
Ratios Actual Required Excess
------ -------- ------
Tier 1 capital ratio 9.21% 3.00% 6.21%
Total capital ratio 9.72% 4.00% 5.72%
Risk-weighted capital ratio 14.74% 8.00% 6.74%
State of Wisconsin 9.06% 6.00% 3.06%
Note 16. Fair Values of Financial Instruments:
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate those
assets fair values.
Investments and mortgage-backed securities:Fair values for investments
and mortgage-backed securities are based on quoted market prices,
where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate mortgage loans that reprice
frequently and with no significant change in credit risk, fair values
are based on carrying values. The fair values for residential mortgage
loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences
in loan characteristics. The fair values for commercial real estate
loans, rental property mortgage loans and consumer and other loans
are estimated using discounted cash flow analysis, using interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of interest
approximates its fair value.
45
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 16. Fair Values of Financial Instruments - Continued:
Deposits: The fair values disclosed for interest and noninterest
checking accounts, passbook accounts and money market accounts are, by
definition, equal to the amount payable on demand at the reporting
date. The fair values of fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities of the outstanding
certificates of deposit.
Federal Home Loan Bank Advances: The Bank's long-term borrowings are
estimated using the discounted cash flow analysis, based on the Bank's
current incremental borrowing rates for similar types of borrowing
arrangements.
<TABLE>
The carrying amounts and fair values of the Bank's financial
instruments consisted of the following at March 31:
1998 1997
---------------------- ----------------------
<CAPTION>
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- ------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,047 $ 6,047 $ 2,980 $ 2,980
Investment securities 4,159 4,158 3,664 3,664
Mortgage-backed securities 6,398 6,546 7,421 7,308
Loans receivable:
Real estate - one-to-four family 58,117 58,617 55,573 55,995
Real estate - other 8,582 8,656 10,673 10,737
Other loans 12,224 12,228 11,870 11,960
------ ------ ------ ------
$89,480 $90,205 $89,201 $89,664
====== ====== ====== ======
1998 1997
----------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Financial liabilities:
Savings deposits and checking accounts $18,027 $ 18,027 $19,715 $19,715
Certificates of deposit 40,428 40,395 41,842 41,887
Federal Home Loan Bank Advances 19,062 18,616 17,634 17,518
Other borrowed money 5,258 5,251 4,463 4,406
------ ------ ------ ------
$82,775 $82,289 $83,654 $83,526
====== ====== ====== ======
</TABLE>
46
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 17. Earnings Per Share:
Earnings per share are based upon the weighted average number of
shares outstanding. The following shows the computation of the basic
and diluted earnings per share.
Weighted
Average Earnings
Net Number of Per
Income Shares Share
------ --------- --------
Year Ended March 31, 1998:
Earnings Per Share - Basic $1,120 775,112 $ 1.44
====
Effect of Stock Options \ - - 39,603
----- ------
Earnings Per Share - Diluted $1,120 814,715 $ 1.37
===== ======= ====
Year Ended March 31, 1997:
Earnings Per Share - Basic $ 710 847,090 $ 0.84
====
Effect of Stock Options - - 11,198
---- ------
Earnings Per Share - Diluted $ 710 858,288 $ 0.83
=== ======= ====
Year Ended March 31, 1996:
Earnings Per Share - Basic $ 842 930,863 $ 0.90
====
Effect of Stock Options - - - -
---- -------
Earnings Per Share - Diluted $ 842 930,863 $ 0.90
=== ======= ====
Note 18. Condensed Parent Company Only Financial Information:
Balance Sheets - at March 31: 1998 1997
---- ----
(In Thousands)
Assets:
Cash and cash equivalents $ 2,653 $ 3,176
Investment in subsidiary 8,752 7,630
Deferred income tax assets 93 112
Other current assets 161 82
------ ------
$11,659 $11,000
====== ======
Liabilities $ 145 $ 141
Stockholders' Equity 11,514 10,859
------ ------
$11,659 $11,000
====== ======
47
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 19. Condensed Parent Company Only Financial Information - Continued:
Statements of Operations - for the years ended March 31:
1998 1997 1996
---- ---- ----
(In Thousands)
Interest income $ 197 $ 271 $ 198
Equity in net income of subsidiary 1,092 712 968
----- --- -----
Total income 1,289 983 1,166
Other expense 148 273 277
----- --- -----
Income before provision for income taxes 1,141 710 889
Income taxes 21 - - (26)
----- --- -----
Net income $ 1,120 $ 710 $ 915
===== === =====
Statements of Cash Flows - for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,120 $ 710 $ 915
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (1,092) (712) (968)
Deferred income taxes 19 (57) (55)
Amortization of ESOP and restricted stock awards 258 345 267
Change in operating assets and liabilities:
Other current assets (79) (74) 52
Other liabilities 3 120 22
------------- ------------- -------------
Net cash provided by operating activities 229 332 233
------------- ------------- -------------
Cash flows from investment activities:
Maturity of investment securities - - - - 3,300
Cash dividends from subsidiary - - 2,670 - -
------------- ------------- -------------
Net cash provided by investment activities - - 2,670 3,300
------------- ------------- -------------
Cash flows from financing activities:
Purchase of common stock for the treasury (301) (1,695) (561)
Purchase of common stock for incentive plan - - - - (460)
Cash dividends (451) (370) (336)
------------- ------------- -------------
Net cash used in financing activities (752) (2,065) (1,357)
------------- ------------- -------------
Net increase (decrease) in cash (523) 937 2,176
Cash and cash equivalents at beginning 3,176 2,239 63
------------- ------------- -------------
Cash and cash equivalents at end $ 2,653 $ 3,176 $ 2,239
============= ============= =============
</TABLE>
48
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 19. Quarterly Consolidated Financial Information (Unaudited):
<TABLE>
<CAPTION>
1997 1998
-------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C>
Interest and dividend income $ 1,911 $ 1,928 $ 1,959 $ 1,965
Interest expense 1,050 1,066 1,075 1,052
------------- ------------- ------------- -------------
Net interest income 861 862 884 913
Provision for loan losses 25 25 25 25
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 836 837 859 888
Non-interest income 130 136 135 207
Non-interest expense 561 582 560 595
------------- ------------- ------------- -------------
Income before income taxes 405 391 434 500
Income taxes 153 135 149 173
------------- ------------- ------------- -------------
Net income $ 252 $ 256 $ 285 $ 327
============= ============= ============= =============
Earnings per share $ 0.33 $ 0.33 $ 0.37 $ 0.42
Dividends $ 0.12 $ 0.13 $ 0.14 $ 0.15
Market information:
Trading range - high $ 13.63 $ 16.75 $ 20.75 $ 22.25
low $ 15.00 $ 14.63 $ 16.13 $ 20.75
close $ 15.00 $ 16.13 $ 20.75 $ 21.13
1996 1997
-------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
Interest and dividend income $1,802 $1,868 $1,903 $1,919
Interest expense 972 1,010 1,052 1,038
------------- ------------- ------------- -------------
Net interest income 830 858 851 881
Provision for loan losses 6 25 25 25
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 824 833 826 856
Non-interest income 140 141 146 104
Non-interest expense 577 954 547 565
------------- ------------- ------------- -------------
Income before income taxes 387 20 425 395
Income taxes 164 8 177 168
------------- ------------- ------------- -------------
Net income $223 $12 $248 $227
============= ============= ============= =============
Earnings per share $0.25 $0.01 $0.29 $0.29
Dividends $0.09 $0.10 $0.10 $0.11
Market information:
Trading range - high $10.38 $11.25 $12.50 $14.50
low $10.25 $10.25 $11.25 $13.50
close $10.38 $11.25 $12.13 $14.13
</TABLE>
49
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 19. Quarterly Consolidated Financial Information (Unaudited) - Continued:
<TABLE>
<CAPTION>
June 30, Sept. 30, Dec. 31, March 31,
-------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Interest and dividend income $1,469 $1,596 $1,694 $1,714
Interest expense 707 815 889 900
--- --- --- ---
Net interest income 762 781 805 814
Provision for loan losses 6 6 6 6
--- --- --- ---
Net interest income after provision
for loan losses 756 775 799 808
Non-interest income 112 137 118 109
Non-interest expense 480 506 605 584
--- --- --- ---
Income before income taxes 388 406 312 333
Income taxes 154 177 141 125
--- --- --- ---
Net income $234 $229 $171 $208
=== === === ===
Earnings per share $0.23 $0.22 $0.18 $0.23
Dividends $0.07 $0.08 $0.09 $0.09
Market information:
Trading range - high $9.50 $10.68 $11.32 $10.50
low $8.68 $9.00 $10.00 $10.00
close $8.75 $10.32 $10.62 $10.32
</TABLE>
50
<PAGE>
SHAREHOLDER INFORMATION
Board of Directors of Northwest Equity Corp. and Northwest Savings Bank
Brian L. Beadle
President, Chief Executive Officer, Chief Financial Officer and Director of the
Company; President, Chief Executive Officer, Chief Financial Officer and
Director of the Bank since 1976.
Gerald J. Ahlin
Director of the Company; Director of the Bank since 1985; prior to his
retirement in 1992, business and economics teacher at Amery Public Schools,
Amery, Wisconsin.
Vern E. Albrecht
Director of the Company; Director of the Bank since 1989; prior to his
retirement in 1991, President and principal owner of Nova Tran Corporation,
an electronics and medical manufacturing company, Clear Lake, Wisconsin.
Michael D. Jensen
Director of the Company; Director of the Bank since 1986; President of Amery
Telcom, Inc., a communications company.
Donald M. Michels
Director of the Company; Director of the Bank since 1987; prior to his
retirement in 1991, President of Holy Family Hospital, New Richmond, Wisconsin
.
Norman M. Osero
Director of the Company; Director of the Bank since 1992; President of
Dynatronix, Inc., Amery, Wisconsin, an electronic manufacturing company,
and Vice President of Amery Technical Products, Inc., Amery, Wisconsin, a
subcontractor manufacturing company.
Executive Officers of Northwest Equity Corp. and Northwest Savings Bank
Brian L. Beadle
President, Chief Executive Officer, Chief Financial Officer and Director of the
Company; President, Chief Executive Officer, Chief Financial Officer and
Director of the Bank since 1976.
James L. Moore
Vice President and Secretary of the Company; Senior Vice President and Secretary
of the Bank since 1990.
Headquarters
Northwest Equity Corp. Northwest Savings Bank-
234 Keller Avenue South Bank Office Locations
Amery, Wisconsin 54001
(715) 268-7105 Home Office:
234 Keller Avenue South
Northwest Savings Bank Amery, Wisconsin 54001
234 Keller Avenue South (715) 268-7105
Amery, Wisconsin 54001
(715) 268-7105 Branch Offices:
Northwest Savings Bank New Richmond Office
234 Keller Avenue South 532 Knowles Avenue South
Amery, Wisconsin 54001 New Richmond, Wisconsin 54017
(715) 268-7105
Siren Office
24082 Highway 35 North
Siren, Wisconsin 54872
234 Keller Avenue South
Amery, Wisconsin 54001
Shareholder/Media Relations
Shareholders, investors, analysts, the news media and others interested in
additional information may contact Brian L. Beadle, President and Chief
Executive Officer of the Company, at the Company's headquarters.
Annual Report on Form 10-KSB
A copy of Northwest Equity Corp.'s Form 10-KSB filed with the Securities and
Exchange Commission is available without charge by writing:
Brian L. Beadle, President
Northwest Equity Corp.
234 Keller Avenue South
Amery, Wisconsin 54001
Annual Meeting
The third annual meeting of shareholders of Northwest Equity Corp. will be held
at 2:00 p.m., Amery time, July 14, 1998, at Centennial Hall, 608 Harriman Ave.
South, Amery, Wisconsin 54001
Auditors
Wipfli Ullrich Bertelson LLP
400 Daly Avenue, Suite 200
Wisconsin Rapids, WI 54495
Legal Counsel
Michael Best & Friedrich
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Transfer Agent
Firstar Trust Co.
615 East Michigan Avenue
Milwaukee, Wisconsin 53201
Telephone: (414) 276-3737
Toll-Free: (800) 637-7549
Stock Listing Information
Northwest Savings Bank converted from a mutual to a stock company, effective
October 7, 1994, at which time Northwest Equity Corp. consummated the sale of
1,032,517 shares of its Common Stock to the public. The shares of Common Stock
of Northwest Equity Corp. are publicly traded in the National Association of
Securities Dealers, Inc. Automated Quotation "Small-Cap" Market under the
symbol "NWEQ."
Stock Price Information
Share Pricing
1998 1997
Quarter Ended Low High Low High
March 31 20.63 22.25 11.50 14.50
June 30 13.75 15.00
September 30 14.38 16.75
December 31 16.00 20.75
NWEQ completed its initial public offering of shares in October 1994
Shareholders and Shares Outstanding
As of May 31, 1998, there were 163 registered shareholders of record and 286
estimated additional beneficial shareholders for an approximate total of 449.
Shares outstanding at May 31, 1997 were 825,301.
51
<PAGE>
