UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1998
Commission file number 0-24606
NORTHWEST EQUITY CORP.
(exact name of small business issuer as specified in its charter)
Wisconsin 39-1772981
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Keller Avenue South
Amery, Wisconsin 54001
(Address of principal executive offices) (Zip code)
(715) 268-7105
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the past 90
days.
(1) Yes __x__ No_____
(2) Yes __x__ No_____
The number of shares outstanding of the issuer's common stock, $1.00 par
value per share, was 825,301 at December 31, 1998.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTHWEST EQUITY CORP.
Dated:___02/03/99______________ By: ____/s/Brian L. Beadle___
(Brian L. Beadle, President
Principal Executive Officer and
Principal Financial and
Accounting Officer)
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-k.
a. No reports on Form 8-K were filed during the quarter for which this
report was filed.
2
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
<CAPTION>
December 31,
1998 March 31,
(unaudited) 1998
-------------------------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $4,250 $2,642
Interest-bearing deposits with financial institutions 5,263 3,405
---------- -----------
Total cash and cash equivalents 9,513 6,047
Investment securities - held-to-maturity - fair value
of $3,432 at December 31, 1998 and $2,999 at March 31, 1998 3,398 3,000
Mortgage backed securities - held to maturity - fair value of $5,718
at December 31, 1998 and $6,546 at March 31, 1998 5,588 6,398
Loans held for sale 143 142
Loans receivable - net 76,308 78,297
Foreclosed properties and properties subject to foreclosure 138 159
Investment in Federal Home Loan Bank stock - at
cost - which approximates fair value 850 1,159
Premises and equipment 2,202 2,250
Accrued interest receivable 547 578
Prepaid expenses and other assets 500 709
----------- ------------
TOTAL ASSETS $99,187 $98,739
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Savings accounts $64,297 $62,278
Advances from Federal Home Loan Bank 17,001 19,062
Other borrowed money 5,249 5,258
Accounts payable and accrued expenses 633 627
----------- ------------
Total liabilities 87,180 87,225
----------- ------------
Stockholders' equity
Preferred stock - $1 par value; 2,000,000 shares
authorized; none issued - - - -
Common stock - $1 par value; 4,000,000 shares authorized;
1,032,517 shares issued; 825,301 shares outstanding 1,033 1,033
Additional paid-in capital 6,582 6,584
Less unearned restricted stock plan award - - (26)
Less unearned Employee Stock Ownership Plan (297) (389)
Less treasury stock - at cost (2,549) (2,557)
Retained earnings - substantially restricted 7,238 6,869
----------- ------------
Total stockholders' equity 12,007 11,514
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $99,187 $98,739
=========== ============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
3
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NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands except for per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $1,763 $1,771 $5,288 $5,201
Interest on mortgage-backed securities 107 121 332 379
Interest and dividends on investments 87 67 263 221
------------- ------------ ----------- ------------
Total interest income 1,957 1,959 5,883 5,801
------------- ------------ ----------- ------------
Interest expense:
Interest on deposits 704 733 2,136 2,179
Interest on borrowings 304 342 952 1,012
------------- ------------ ----------- ------------
Total interest expense 1,008 1,075 3,088 3,191
------------- ------------ ----------- ------------
Net interest income 949 884 2,795 2,610
Provision for loan losses 323 25 373 75
------------- ------------ ----------- ------------
Net interest income after provision for loan losses 626 859 2,422 2,535
------------- ------------ ----------- ------------
Other income:
Mortgage servicing fees 24 18 68 57
Service charges on deposits 64 75 192 197
Gain(loss) on sale of investments - - - - - - (24)
Gain on sale of mortgage loans 79 24 176 76
Other 31 18 150 92
------------- ------------ ----------- ------------
Total other income 198 135 586 398
------------- ------------ ----------- ------------
General and administrative expenses:
Salaries and employee benefits 324 285 983 901
Net occupancy expense 93 87 271 250
Data processing 58 34 130 99
Federal insurance premiums 8 10 28 29
Other 132 144 421 424
------------- ------------ ----------- ------------
Total general and administrative expense 615 560 1,833 1,703
------------- ------------ ----------- ------------
Income before provision for income taxes 209 434 1,175 1,230
Provision for income taxes 60 149 394 437
------------- ------------ ----------- ------------
Net income $149 $285 $781 $793
============= ============ =========== ============
Basic earnings per share $0.19 $0.37 $1.00 $1.02
============= ============ =========== ============
Diluted earnings per share $0.18 $0.35 $0.95 $0.97
============= ============ =========== ============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
4
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(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 Earning Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Months Ended December 31, 1997
Balance - March 31, 1997 $1,033 $6,584 $(29) $(115) $(558) $(2,256) $6,200 $10,859
Net income - - - - - - - - - - - - 793 793
Adjustment of carrying value of securities available
for sale, net of deferred taxes of $20 - - - - 29 - - - - - - - - 29
Amortization of unearned ESOP and restricted stock
award - - - - - - 77 125 - - - - 202
Cash dividends - $.39 per share - - - - - - - - - - - - (327) (327)
------ ------- ------ -------- ------ -------- -------- ------
Balance - December 31, 1997 1,033 6,584 $ - (38) (433) (2,256) 6,666 11,556
====== ======= ====== ======= ====== ======== ======= =======
Nine Months Ended December 31, 1998
Balance - March 31, 1998 1,033 6,584 - - (26) (389) (2,557) 6,869 11,514
Net income - - - - - - - - - - - - 781 781
Exercise of stock options - - (2) - - - - - - 8 - - 6
Amortization of unearned ESOP and restricted stock
award - - - - - - 26 92 - - - - 118
Cash dividends - $.50 per share - - - - - - - - - - - - (412) (412)
------ ------ ------ ------- ------- -------- ------- -------
Balance - December 31, 1998 $1,033 $6,582 $ - $ - $(297) $(2,549) $7,238 $12,007
====== ======= ====== ======= ======= ======== ======= =======
See accompanying Notes to Consolidated Financial Statements
</TABLE>
5
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
<CAPTION>
Nine Months Ended
December 31,
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $781 $793
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 107 111
Provision for loan losses 373 75
Loss on sale of investments - - 24
Deferred income taxes - - (20)
Amortization of ESOP and restricted stock awards 118 202
Proceeds from sales of mortgage loans 15,722 3,682
Loans originated for sale (15,723) (3,513)
Changes in operating assets and liabilities:
Accrued interest receivable 31 20
Prepaid expenses and other assets 209 (226)
Accrued interest payable 104 91
Accrued income taxes payable 6 (32)
Other accrued liabilities (106) 45
----------- ------------
Net cash provided by operating activities 1,622 1,252
----------- ------------
Cash flows from investing activities:
Available for sale securities:
Proceeds from sales 309 2,536
Held to maturity securities:
Proceeds from maturity 1,700 - -
Purchases of investment securities (2,098) (3,038)
Purchases of mortgage-backed securities (1,000) - -
Principal collected on mortgage-backed securities 1,810 730
Principal collected on long-term loans 18,089 21,443
Long-term loans originated or acquired (16,452) (25,158)
Purchase of office properties and equipment (59) (47)
----------- ------------
Net cash (used in) investing activities 2,299 (3,534)
----------- ------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
6
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<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine Months Ended
December 31,
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings accounts 2,019 1,412
Net increase (decrease) in short-term borrowings (2,279) 4,196
Repayments of long-term financing (4,760) (7,894)
Proceeds from long-term financing 4,969 5,966
Exercise of stock options 8 - -
Dividends paid (412) (327)
----------- ------------
Net cash provided by (used in) financing activities (455) 3,353
----------- ------------
Increase (decrease) in cash and equivalents 3,466 1,071
Cash and equivalents - beginning 6,047 2,980
----------- ------------
Cash and equivalents - ending $9,513 $4,051
=========== ============
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $190 $157
Loans charged off 494 71
Interet Paid 2,984 3,100
Income taxes paid 388 469
See accompanying Notes to Consolidated Financial Statements
</TABLE>
7
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies:
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with the accounting policies described in
the Bank's audited financial statements for the year ended March 31, 1998, and
should be read in conjunction with the financial statements and notes that
appear in that report. These statements do not include all the information and
disclosures required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered for a fair presentation have been included.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
NORTHWEST EQUITY CORP.
Comparison of Operating Results for the Three Months Ended
December 31, 1997 and December 31, 1998
Net Income
Net income for the three months ended December 31, 1998, decreased
$136,000 or 47.7% to $149,000 compared to $285,000 for the three months ended
December 31, 1997. The decrease in net income was primarily due to an increase
of $298,000 in the provision for loan losses from $25,000 for the three months
ended December 31, 1997, to $323,000 for the three months ended December 31,
1998. The increase in the provision for loan losses reflects the settlement of
the case first reported under Part II, Item 1. Legal Proceedings in the Form
10QSB dated September 30, 1996, and in subsequent 10QSB and 10KSB reports. Net
interest income increased $65,000 from $884,000 for the three months ended
December 31, 1997, to $949,000 for the three months ended December 31, 1998.
Total other income increased $63,000 from $135,000 for the three months ended
December 31, 1997, to $198,000 for the three months ended December 31, 1998.
Total general and administrative expense increased $55,000 from $560,000 for the
three months ended December 31, 1997, to $615,000 for the three months ended
December 31, 1998. The increase in the provision for loan losses was offset by a
decrease in income taxes of $89,000 from $149,000 for the three months ended
December 31, 1997, to $60,000 for the three months ended December 31, 1998.
Net Interest Income
Net interest income increased by $65,000 from $884,000 for the three
months ended December 31, 1997, to $949,000 for the three months ended December
31, 1998. The increase in net interest income is a result of an decrease in
interest income of $2,000 to $1,957,000 for the three months ended December 31,
1998, compared to $1,959,000 for the three months ended December 31, 1997;
combined with a decrease in interest expense of $67,000 to $1,008,000 for the
three months ended December 31, 1998, from $1,075,000 for the three months ended
December 31, 1997.
Interest Income
Interest income decreased $2,000 or 0.1% to $1,957,000 for the three
months ended December 31, 1998, compared to $1,959,000 for the three months
ended December 31, 1997. Interest and fees on loans decreased $8,000 to
$1,763,000 for the three months ended December 31, 1998, compared to $1,771,000
for the three months ended December 31, 1997. This decrease was due to the
decrease in the average outstanding balance of total loans to $79.1 million for
the three months ended December 31, 1998, compared to $81.0 million for the
three months ended December 31, 1997. Interest on mortgage-backed securities
decreased $14,000 to $107,000 for the three months ended December 31, 1998, from
$121,000 for the three months ended December 31, 1997. This decrease was due to
a decrease in the average outstanding balance of mortgage backed securities from
$6.8 million for the three months ended December 31, 1997, to an average
outstanding balance of $6.2 million for the three months ended December 31,
1998. Interest on investments increased $20,000 to $87,000 for the three months
ended December 31, 1998, compared to $67,000 for the three months ended December
31, 1997. The increase was due to an increase in the average outstanding
balances of interest-bearing deposits in other financial institutions,
investment securities, and Federal Home Loan Bank ("FHLB") stock of $1.8 million
from $4.4 million for the three months ended December 31, 1997, to $6.2 million
for the three months ended December 31, 1998.
9
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Interest Expense
Interest expense decreased $67,000 or 6.2% to $1,008,000 for the three
months ended December 31, 1998, compared to $1,075,000 for the three months
ended December 31, 1997. Interest on deposits decreased $29,000 or 3.9% from
$733,000 for the three months ended December 31, 1997, to $704,000 for the three
months ended December 31, 1998. The decrease in interest expense is due to a
decrease in the average yield of total deposits of 0.18% from 4.65% for the
three months ended December 31, 1997, to 4.47% for the three months ended
December 31, 1998. The average outstanding balance of total deposits remained
virtually unchanged at $63.0 million for the three months ended December 31,
1998, and $63.1 million for the three months ended December 31, 1997. Interest
on borrowings decreased $38,000 or 11.1% from $342,000 for the three months
ended December 31, 1997, to $304,000 for the three months ended December 31,
1998. The decrease reflects the decrease in the average yield/rate of advances
and other borrowings of 0.52% from 6.00% for the three months ended December 31,
1997, to 5.48% for the three months ended December 31, 1998. The average
outstanding balance of advances and other borrowings decreased $0.8 million from
$23.0 million for the three months ended December 31, 1997, to $22.2 million for
the three months ended December 31, 1998.
Provision for Loan Losses
The provision for loan losses increased $298,000 from $25,000 for the
three months ended December 31, 1997, to $323,000 for the three months ended
December 31, 1998. The increase provides for the settlement of the case reported
in the Legal Proceedings and Provision for Loan Losses sections of 10QSB and
10KSB reports since September 30, 1996. The allowance for loan losses totaled
$375,000 at December 31, 1998, compared to $474,000 at December 31, 1997, and
represented 0.48 % and 0.59% of gross loans and 64.2% and 40.6% of
non-performing loans, respectively. The allowance for loan losses calculation is
based on a three year actual loss average, and the current allowance calculation
incorporates the effect of the loan provided for in the provision for loan
losses mentioned above. The non-performing assets to total assets ratio was
0.72% at December 31, 1998, compared to 1.44% at December 31, 1997.
Other Income
Total other income increased $63,000 or 46.7% to $198,000 for the three
months ended December 31, 1998, compared to $135,000 for the three months ended
December 31, 1997. The increase results from an increase in gain on sale of
mortgage loans of $55,000 to $79,000 for the three months ended December 31,
1998, from $24,000 for the three months ended December 31, 1997. The increase in
gain on sale of mortgage loans is due to the general decline of mortgage
interest rates over the two comparable periods, which enhances the bank's
ability to generate gains on sale of mortgages. Other income increased $13,000
from $18,000 for the three months ended December 31, 1997, to $31,000 for the
three months ended December 31, 1998. The other income increase was primarily
due to an increase of $5,000 in brokerage commissions from $11,000 for the three
months ended December 31,1997, to $16,000 for the three months ended December
31, 1998, in the Bank's subsidiary.
General and Administrative Expenses
General and administrative expenses increased $55,000 or 9.8% to
$615,000 for the three months ended December 31, 1998, compared to $560,000 for
the three months ended December 31, 1997. The increase was primarily due to an
increase of $39,000 in salaries and employee benefits from $285,000 for the
three months ended December 31, 1997, to $324,000 for the three months ended
December 31, 1998. The increase was due to adjustments in employee salaries in
response to intense wage competition for employees in the market place. The
increase in expenses was also partially due to an increase in data processing
expense of $24,000 from $34,000 for the three months ended December 31, 1997, to
$58,000 for the three months ended December 31, 1998. Of the increase, $20,000
was related to Year 2000 compliance testing
10
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
by the Company's data center. Net occupancy expense increased $6,000 from
$87,000 for the three months ended December 31, 1997, to $93,000 for the three
months ended December 31, 1998. The increase was due to some extraordinary
repairs and maintenance expense items.
Income Tax Expense
Income tax expense decreased $89,000 or 59.7% from $149,000 for the
three months ended December 31, 1997, to $60,000 for the three months ended
December 31, 1998. The decrease in income tax expense is the direct result of
the decrease in income before taxes of $225,000 or 51.8% from $434,000 for the
three months ended December 31, 1997, to $209,000 for the three months ended
December 31, 1998. The effective tax rate for the three months ended December
31, 1997, was 34.3% compared to 28.7% for the three months ended December 31,
1998. An adjustment for taxes was made due to the loss provision taken in the
three months ended December 31, 1998. The effective rate for the nine months
ended December 31, 1998, is 33.5% and is consistent with the 35.5% recorded for
the nine months ended December 31, 1997.
Comparison of Operating Results for the Nine months Ended
December 31, 1997 and December 31, 1998
Net Income
Net income for the nine months ended December 31, 1998, decreased
$12,000 or 1.5% to $781,000 from $793,000 for the nine months ended December 31,
1997. The decrease in net income was primarily due to an increase of $298,000 in
the provision for loan losses from $75,000 for the nine months ended December
31, 1997, to $373,000 for the nine months ended December 31, 1998. The increase
in the provision for loan losses reflects the settlement of the case first
reported under Part II, Item 1. Legal Proceedings in the Form 10 QSB dated
September 30, 1996, and in subsequent 10QSB and 10KSB reports. Net interest
income increased $185,000 from $2,610,000 for the nine months ended December 31,
1997, to $2,795,000 for the nine months ended December 31, 1998. Total other
income increased $188,000 from $398,000 for the nine months ended December 31,
1997, to $586,000 for the nine months ended December 31, 1998. Total general and
administrative expense increased $130,000 from $1,703,000 for the nine months
ended December 31, 1997, to $1,833,000 for the nine months ended December 31,
1998. The increase in the provision for loan losses was partially offset by a
decrease in income taxes of $43,000 from $437,000 for the nine months ended
December 31, 1997, to $394,000 for the nine months ended December 31, 1998.
Net Interest Income
Net interest income increased $185,000 from $2,610,000 for the nine
months ended December 31, 1997, to $2,795,000 for the nine months ended December
31, 1998. The increase in net interest income is a result of an increase in
interest income of $82,000 to $5,883,000 for the nine months ended December 31,
1998, compared to $5,801,000 for the nine months ended December 31, 1997,
combined with a decrease in interest expense of $103,000 to $3,088,000 for the
nine months ended December 31, 1998, from $3,191,000 for the nine months ended
December 31, 1997.
11
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Interest Income
Interest income increased $82,000 or a 1.4% to $5,883,000 for the nine
months ended December 31, 1998, compared from $5,801,000 for the nine months
ended December 31, 1997. Of the increase, $87,000 was due to an increase in
interest and fees on loans to $5,288,000 for the nine months ended December 31,
1998, compared to $5,201,000 for the nine months ended December 31, 1997. This
increase was due to the increase in the average yield/rate of total loans to
8.89%for the nine months ended December 31, 1998, from 8.77% for the nine
months ended December 31, 1997. Interest on investments increased $42,000 to
$263,000 for the nine months ended December 31, 1998, compared to $221,000
for the nine months ended December 31, 1997. The increase was due to an
increase in the average outstanding balances of interest-bearing deposits
in other financial institutions, securities held for sale, and Federal Home
Loan Bank stock from $5.0 million for the nine months ended December 31, 1997,
to $6.0 million for the nine months ended December 31, 1998. These increases
were offset by a decrease of $47,000 in interest on mortgage-backed and related
securities to $332,000 for the nine months ended December 31, 1998, from
$379,000 for the nine months ended December 31, 1997. This decrease was due
to a decrease in the average outstanding balance of mortgage backed securities
from $7.1 million for the nine months ended December 31, 1997, to an average
balance of $6.3 million for the nine months ended December 31, 1998. The
decrease was due to regularly scheduled principal payments and prepayments of
principal on the mortgage backed securities.
Interest Expense
Interest expense decreased $103,000 or 3.2% to $3,088,000 for the nine
months ended December 31, 1998, compared to $3,191,000 for the nine months ended
December 31, 1997. Interest on deposits decreased $43,000 or 1.9% from
$2,179,000 for the nine months ended December 31, 1997, to $2,136,000 for the
nine months ended December 31, 1998. The decrease is due to a decrease in the
average yield/rate of total deposits to 4.59% for the nine months ended December
31, 1998, from an average yield/rate of 4.66% for the nine months ended December
31, 1997. Interest on borrowings decreased $60,000 or 5.9% from $1,012,000 for
the nine months ended December 31, 1997, to $952,000 for the nine months ended
December 31, 1998. The decrease reflects a decrease in average yield/rate of
advances and other borrowings from 6.01% for the nine months ended December 31,
1997, to 5.57% for the nine months ended December 31, 1998.
Provision for Loan Losses
The provision for loan losses increased $298,000 to $373,000 for the
nine months ended December 31, 1998, compared to $75,000 for the nine months
ended December 31, 1997. The increase provides for the settlement of the case
reported in the Legal Proceedings and Provision for Loan Losses sections of
10QSB and 10KSB reports since September 30, 1996. The allowance for loan losses
totaled $375,000 at December 31, 1998, compared to $474,000 at December 31,
1997, and represented 0.48 % and 0.59% of gross loans and 64.2% and 40.6% of
non-performing loans, respectively. The allowance for loan losses calculation is
based on a three year actual loss average, and the current allowance calculation
incorporates the effect of the loan provided for in the provision for loan
losses mentioned above. The non-performing assets to total assets ratio was
0.72% at December 31, 1998, compared to 1.44% at December 31, 1997.
Other Income
Total other income increased $188,000 or 47.2% to $586,000 for the nine
months ended December 31, 1998, compared to $398,000 for the nine months ended
December 31, 1997. The increase is due to an increase in gain on sale of
mortgage loans of $100,000 to $176,000 for the nine months ended December 31,
1998, from $76,000 for the nine months ended December 31, 1997. The increase in
gain on sale of mortgage loans is due to the general decline of mortgage
interest rates over the two comparable periods which enhances the bank's ability
to generate gains on sale of mortgages. Other income increased $58,000
12
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
from $92,000 for the nine months ended December 31, 1997, to $150,000 for the
nine months ended December 31, 1998. The increase is partially due to an
increase of $22,000 in brokerage commissions in the bank's subsidiary to
$55,000 for the nine months ended December 31, 1998, from $33,000 for the nine
months ended December 31, 1997; and an increase of $39,000 in the profit on
sale of real estate held in the Bank's subsidiary to $50,000 for the nine months
ended December 31, 1998, compared to $11,000 for the nine months ended December
31, 1997. With the transaction consummated in the quarter ending June 30, 1998,
the Bank's subsidiary divested all of its real estate holdings.
General and Administrative Expenses
General and administrative expenses increased $130,000 or 7.6% to
$1,833,000 for the nine months ended December 31, 1998, compared to $1,703,000
for the nine months ended December 31, 1997. The increase was primarily due to
an increase of $82,000 in salaries and employee benefits from $901,000 for the
nine months ended December 31, 1997, to $983,000 for the nine months ended
December 31, 1998. The increase was due to adjustments in employee salaries in
response to intense wage competition for employees in the marketplace. Net
occupancy expense increased $21,000 from $250,000 for the nine months ended
December 31, 1997, to $271,000 for the nine months ended December 31, 1998, and
reflects some extraordinary maintenance items occurring during the current
period. Data processing expenses increased $31,000 from $99,000 for the nine
months ended December 31, 1997, to $130,000 for the nine months ended December
31, 1998. The increase was due to a scheduled contractual increase in the fee
based on transaction volumes and a $20,000 fee for testing the data processing
system for Year 2000 compliance.
Income Tax Expense
Income tax expense decreased $43,000 or 9.8% from $437,000 for the nine months
ended December 31, 1997, to $394,000 for the nine months ended December 31,
1998. The decrease in income tax expense is the direct result of a decrease in
income before taxes of $55,000 from $1,230,000 for the nine months ended
December 31, 1997, to $1,175,000 for the nine months ended December 31, 1998.
The effective tax rate for the nine months ended December 31, 1997, was 35.5%
compared to 33.5% for the nine months ended December 31, 1998.
Financial Condition
Total assets increased $0.5 million or 0.5% to $99.2 million at
December 31, 1998, compared to $98.7 million at March 31, 1998. The increase was
due to an increase of $3.5 million in cash and cash equivalents to $9.5 million
at December 31, 1998, from $6.0 million at March 31, 1998, that was offset by a
decrease in loans receivable of $2.0 million to $76.3 million at December 31,
1998, compared to $78.3 million at March 31, 1998. Mortgage backed and related
securities decreased $0.8 million from $6.4 million on March 31, 1998, to $5.6
million at December 31, 1998, as the result of regularly amortized principal
repayments and prepayments on the securities. Investment securities increased
$0.4 million from $3.0 million at March 31, 1998, to $3.4 million at December
31, 1998.
Total liabilities remained at $87.2 million at December 31, 1998, and
March 31, 1998. Savings accounts increased $2.0 million or 3.2% from
$62.3million at March 31, 1998, to $64.3 million at December 31, 1998.
Outstanding advances from the Federal Home Loan Bank decreased $2.1 million from
$19.1 million at March 31, 1998 to $17.0 million at December 31, 1998. The
increase in savings was used to repay Federal Home Loan Bank advances. Other
borrowed money increased $0.1million from $5.3 million at March 31, 1998, to
$5.2 million at December 31, 1998.
Shareholders Equity increased $0.5 million from $11.5 million at March
31, 1998, to $12.0 million at December 31, 1998. The increase was due to
$781,000 of net income for the nine months ended December 31, 1998, less
$412,000 in cash dividends; the amortization of the common stock purchased by
13
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
the employee stock ownership plan of $92,000 from ($389,000) on March 31, 1998
to ($297,000) on December 31, 1998; and the amortization of the unearned
restricted stock plan award of $26,000 from ($26,000) at March 31, 1998, to ($0)
at December 31, 1998.
Disclosures Involving Year 2000 Issues
Issues related to the century date change and the impact on computer
systems and business operations are receiving prominent publicity and attention.
Depositors, business partners, investors, and the general public are
specifically interested in the effect on the financial condition of each
depository institution. The FDIC has advised state savings banks that safe and
sound banking practices require them to address Year 2000 issues. The Securities
and Exchange Commission (SEC) issued a revised Staff Legal Bulletin NO. 5 to
provide specific guidance on disclosure associated with Year 2000 obligations
for companies registered under federal securities laws.
Computer programs generally abbreviated dates by eliminating the century
digits of the year. Many resources, such as software; hardware; telephones;
voicemail; heating; ventilating and air conditioning; alarms, etc. ("Systems")
are affected. These Systems were designed to assume a century value of "19" to
save memory and disk space within their programs. In addition, many Systems use
a value of "99" in a year or "99/99/99" in a date to indicate "no date" or "any
date" or even a default expiration date. As the year 2000 approaches, this
abbreviated date mechanism within Systems threatens to disrupt the function of
computer software at nearly every business which relies heavily on computer
systems for account and other recordkeeping functions. If the millennium issue
is ignored, system failures or miscalculations could occur, causing disruptions
of operations and a temporary inability to process business transactions.
The Bank has an inventory of personal computers that access a data
processing system provided by EDS in Des Moines, Iowa. If the personal computers
and data processing systems fail to process the century date change, it may
impair the Bank's ability to process loan payments, accept deposits, and address
other operational issues. The Bank's customers, suppliers, other constituents
may also be impaired to meet their contractual obligations with the Bank. The
Bank has developed a Year 2000 Plan (the "Plan"). The Bank's Plan attempts to
identify the systems, assess the risk, and conduct inventories as necessary to
assure compliance with the Plan. The Plan calls for identifying all systems in
need of remediation by June 30, 1999, and remedying all systems in need of
remediation by September 30, 1999. As of December 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 a
5 year period, and would add approximately $3,400 in furniture and fixture
expense per year for the next 5 years. In addition, the Bank paid in the quarter
ended December 31, 1998, a one-time fee of $20,000 by EDS to support the FFIEC's
testing guidance regarding Year 2000 efforts of financial institutions as
outlined in the April 10, 1998, Interagency Statement. These amounts are not
considered to be material.
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. In a letter dated September 8, 1998,
The FDIC reported to the Board of Directors that the Federal Reserve Bank of
Dallas had conducted an examination of Electronic Data Systems, Inc.,(EDS)
Plano, Texas, the Bank's data processor. The Board of Directors reviewed the
Exam at its September 18, 1998, meeting and the record of this action was
entered into the minutes. The results of the examination are deemed to be
confidential by the FDIC. On October 9, 1998, the Bank received an extensive Y2k
Contingency Plan from EDS. In a letter dated December 1, 1998, EDS reported that
the overall product line remediation was now 99% complete.
14
<PAGE>
MANAGEMENT'S DISCUSSION (CONT.)
Asset/Liability Management
Asset/liability management is an ongoing process of matching asset and
liability maturities to reduce interest rate risk. Management attempts to
control this risk through pricing of assets and liabilities and maintaining
specific levels of maturities. In recent periods, management's strategy has been
to (1) sell substantially all new originations of long-term, fixed-rate single
family mortgage loans in the secondary market, (2) invest in various
adjustable-rate and short-term mortgage-backed and related securities, (3)
invest in adjustable-rate, single family mortgage loans, and (4) encourage
medium and longer-term certificates of deposit. The Company's estimated
cumulative one-year gap between assets and liabilities was a negative 7.8% of
total assets, at December 31, 1998. A negative gap occurs when a greater dollar
amount of interest-earning liabilities than interest-bearing assets are
repricing or maturing during a given time period. During periods of rising
interest rates, a negative interest rate sensitivity gap will tend to negatively
affect net interest income. During periods of decreasing interest rates, a
negative interest rate sensitivity gap will tend to positively affect the net
interest income.
Management believes that its asset/liability management strategies
have reduced the potential effects of changes in interest rates on its
operations. Increases in interest rates may increase net interest income because
interest-earning assets will reprice more quickly than interest-bearing
liabilities. The Company's analysis of the maturity and repricing of assets and
liabilities incorporates certain assumptions concerning the amortization and
prepayment of such assets and liabilities. Management believes that these
assumptions approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and liabilities may
vary substantially.
Management Strategy
Asset Quality
The Company emphasizes high asset quality in both its investment
portfolio and lending activities. Non-performing assets have ranged between
.0.72% and 1.72% of total assets during the last three years and were 0.72% of
total assets at December 31, 1998. During the fiscal years ended March 31, 1998,
1997 and 1996, the Company recorded provisions for loan losses of $100,000,
$81,000, and $24,000, respectively, to its allowance for loan losses and had net
charge-offs of $77,000, $53,000, and $25,000, respectively. The Company's
allowance for loan losses at December 31, 1998, totaled $375,000. The allowance
for loan losses calculation is based on a three year actual loss average, and
the current allowance calculation incorporates the effect of the loan provided
for in the provision for loan losses mentioned in Provision for Loan Losses
sections of this document.
Total non-performing loans decreased to $584,000 at December 31, 1998,
from $1.4 million at March 31, 1998. The decrease was due to the settlement of
the case reported under the Provision for Loan Losses sections of this document
and the payoff of another large loan categorized as real estate in judgement.
Selected Financial Ratios and Other Data: At or For the
Three months ended Nine months ended
December 31, December 31,
Performance Ratios 1998 1997 1998 1997
---- ---- ---- ----
Return on average assets 0.60% 1.06% 1.06% 1.09%
Return on average equity 4.98% 9.17% 8.88% 9.53%
15
<PAGE>
MANAGEMENT'S DISCUSSION
<TABLE>
Three Months Ended December 31,
1998 1997
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Mortgage loans....................... $66,819 $1,481 8.87% $68,216 $1,473 8.64%
Commercial loans..................... 4,585 94 8.21% 4,826 101 8.34%
Consumer loans....................... 7,676 188 9.81% 7,935 197 9.94%
-------- ------- ------- -------- ------- -------
Total loans......................... 79,080 1,763 8.92% 80,977 1,771 8.75%
Mortgage-backed securities........... 6,228 107 6.99% 6,816 121 7.09%
Interest-bearing deposits in other
financial institutions............. 2,638 32 4.82% 313 4 5.67%
Investment securities................ 2,650 40 5.92% 3,145 49 6.17%
Federal Home Loan Bank stock......... 911 15 6.63% 965 14 6.75%
-------- ------- ------- -------- ------- -------
Total interest-earning assets....... 91,507 1,957 8.55% 92,216 1,959 8.50%
Non-interest earning assets.......... 6,206 5,836
-------- --------
Total assets....................... $97,713 $98,052
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Deposits:
NOW accounts(1)...................... $10,619 $34 1.30% $9,695 $36 1.46%
Money market deposit accounts........ 7,485 80 4.26% 5,847 69 4.74%
Passbook............................. 6,281 34 2.15% 6,034 32 2.11%
Certificate of deposit............... 38,654 556 5.75% 41,491 596 5.75%
-------- ------- ------- -------- ------- -------
Total deposits...................... 63,039 704 4.47% 63,067 733 4.65%
Advances and other borrowings........ 22,166 304 5.48% 22,956 342 6.00%
-------- ------- ------- -------- ------- -------
Total interest-bearing liabilities... 85,205 1,008 4.73% 86,023 1,076 5.00%
Non-interest bearing liabilities .... 543 647
Equity............................... 11,965 11,381
-------- --------
Total liabilities and retained earnings $97,713 $98,052
-------- --------
-------- --------
Net interest income/interest rate spread (2) $949 3.82% $883 3.49%
------- ------- ------- -------
------- ------- ------- -------
Net earning assets/net interest margin (3) $6,302 4.15% $6,193 3.83%
-------- ------- -------- -------
-------- ------- -------- -------
Average interest-earning assets to average
interest-bearing liabilities......... 1.07 1.07
-------- --------
-------- --------
Nine Months Ended December 31,
1998 1997
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
Assets
Interest-earning assets:
Mortgage loans......................... $67,090 $4,432 8.81% $66,729 $4,357 8.71%
Commercial loans....................... 4,425 279 8.41% 4,751 279 7.82%
Consumer loans......................... 7,811 577 9.85% 7,577 565 9.95%
-------- -------- ------- -------- ------- -------
Total loans.......................... 79,326 5,288 8.89% 79,056 5,201 8.77%
Mortgage-backed securities............. 6,299 332 7.02% 7,066 379 7.15%
Interest-bearing deposits in other
financial institutions................ 2,219 86 5.17% 876 36 5.53%
Investment securities.................. 2,800 129 6.16% 3,213 138 5.71%
Federal Home Loan Bank stock........... 966 48 6.64% 930 47 6.75%
-------- -------- ------- -------- ------- -------
Total interest-earning assets........ 91,609 5,883 8.56% 91,141 5,801 8.49%
Non-interest earning assets............ 6,013 5,428
-------- --------
Total assets......................... $97,623 $96,569
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Deposits:
NOW accounts(1)....................... $10,246 $106 1.38% $9,446 $105 1.48%
Money market deposit accounts......... 6,656 240 4.80% 5,434 189 4.65%
Passbook.............................. 6,177 100 2.16% 6,037 97 2.15%
Certificate of deposit................ 39,029 1,690 5.77% 41,470 1,787 5.75%
-------- ------- ------- -------- ------- -------
Total deposits....................... 62,108 2,136 4.59% 62,386 2,179 4.66%
Advances and other borrowings.......... 22,772 952 5.57% 22,489 1,012 6.01%
-------- ------- ------- -------- ------- -------
Total interest-bearing liabilities... 84,880 3,088 4.85% 84,876 3,191 5.01%
Non-interest bearing liabilities ...... 1,017 599
Equity................................. 11,726 11,093
-------- --------
Total liabilities and retained earnings $97,623 $96,569
-------- --------
-------- --------
Net interest income/interest rate spread (2) $2,795 3.71% $2,610 3.47%
------- ------- ------- ------
------- ------- ------- ------
Net earning assets/net interest margin (3) $6,729 4.07% $6,265 3.82%
-------- ------- -------- ------
-------- ------- -------- ------
Average interest-earning assets to average
interest-bearing liabilities........... 1.08 1.07
-------- --------
-------- --------
<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>
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 4,250
<INT-BEARING-DEPOSITS> 5,263
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 8,986
<INVESTMENTS-MARKET> 9,150
<LOANS> 76,451
<ALLOWANCE> 375
<TOTAL-ASSETS> 99,187
<DEPOSITS> 64,297
<SHORT-TERM> 8,560
<LIABILITIES-OTHER> 633
<LONG-TERM> 13,690
0
0
<COMMON> 1,033
<OTHER-SE> 10,974
<TOTAL-LIABILITIES-AND-EQUITY> 99,187
<INTEREST-LOAN> 5,288
<INTEREST-INVEST> 595
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,883
<INTEREST-DEPOSIT> 2,136
<INTEREST-EXPENSE> 3,088
<INTEREST-INCOME-NET> 2,795
<LOAN-LOSSES> 373
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,833
<INCOME-PRETAX> 1,175
<INCOME-PRE-EXTRAORDINARY> 781
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 781
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .95
<YIELD-ACTUAL> 3.71
<LOANS-NON> 577
<LOANS-PAST> 7
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 917
<ALLOWANCE-OPEN> 857
<CHARGE-OFFS> 495
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 375
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
