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............................................ 24
Consolidated Financial Statements of Northwest Equity Corp.
Consolidated Balance Sheets of the Company at March 31, 1999 and 1998. 25
Consolidated Statements of Operations of the Company for the Years Ended
March 31, 1999, 1998 and 1997...................................... 26
Consolidated Statements of Shareholders' Equity of the Company for the
Years Ended March 31, 1999, 1998 and 1997........................... 27
Consolidated Statements of Cash Flows of the Company for the Years Ended
March 31, 1999, 1998 and 1997....................................... 28
Notes to Consolidated Financial Statements of Northwest Equity Corp...... 30
Shareholder Information.................................................. 53
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, 1999, the
Company had total assets of $97.6 million, total deposits of $62.0 million and
shareholders' equity of $12.4 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 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, telecommunications, 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,
1999 1998 1997
---- ---- ----
(Dollars in thousands, except per share data and ratios)
<CAPTION>
<S> <C> <C> <C>
Total Assets............................... 97,585 98,739 95,097
Loans Receivable, Net...................... 73,347 78,297 77,240
Securities held to maturity................ 9,435 9,398 10,173
Shareholders' Equity....................... 12,361 11,514 10,859
Net Interest Income After
Provision for Loan Losses................ 3,353 3,420 3,339
Total Other Income......................... 736 608 531
Total General and
Administrative Expenses.................. 2,465 2,298 2,643
Net Income................................. 1,133 1,120 710
Basic Earnings Per Share................... $1.45 $1.44 $0.84
Diluted Earnings Per Share................. $1.37 $1.37 $0.83
Return on Average Assets................... 1.15% 1.15% .76%
Return on Average Equity................... 9.50% 9.85% 6.18%
Interest Rate Spread....................... 3.50% 3.50% 3.51%
Net Interest Margin........................ 4.08% 3.85% 3.88%
Non-Performing Loans
to Gross Loans........................... .32 1.76 1.37
</TABLE>
2
<PAGE>
LETTER TO SHAREHOLDERS
The Board of Directors ("Board") and employees of Northwest Equity
Corp. ("Company"), the holding company of Northwest Savings Bank, are proud to
present the fifth annual report since the stock conversion consummated on
October 7, 1994. On February 17, 1999, the Board announced that it had entered
into a definitive agreement and plan of merger with Bremer Financial Corporation
("Bremer"), for Bremer to acquire Northwest stock in a transaction, which would
be valued at $24.00 in cash for each share outstanding. "We're excited about the
opportunity to serve the customers of Northwest Savings Bank," said Stan K.
Dardis, Bremer Financial President and CEO. "The two organizations fit together
naturally since both share a strong history of serving customers and the
communities in which they live." I said, "The combining of our two institutions
will merge similar customer bases and banking philosophies with the advantage of
extending a greater variety of products, services and banking locations to the
Northwest customer base. We believe the opportunity for enhanced financial
services to be provided to our customers when combined with the financial terms
offered to our shareholders offers a very attractive package."
Bremer Financial Corporation, a privately held regional financial
services company with $3.4 billion in assets, is the holding company for 86
banks in Minnesota, North Dakota and Wisconsin. The Otto Bremer Foundation and
Bremer's more than 1500 employees own Bremer. Bremer is headquartered in Saint
Paul, Minnesota.
The Northwest Equity Corp.(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. Since that time the Company has
repurchased 207,216 shares in various stock buy-back programs and reissued 647
shares under a stock option program. At $24.00 per share for 825,301 remaining
shares, the gross proceeds from the sale to Bremer are $19.8 million.
The transaction is expected to be completed by the fourth quarter of 1999,
pending regulatory approval and approval of Northwest shareholders. Northwest
stock has been very thinly traded, subject to wide spreads between the Bid and
the Asked, and, consequently, subject to wide fluctuations in price. A special
meeting will be held for the shareholders to vote on this proposal. The proxy
statement for the special meetingwill contain the details of the long and
tedious process that was implemented to insure the shareholder received the
highest possible price. The Board strongly recommends that shareholders vote to
approve this transaction.
/s/ Brian L. Beadle
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, 1999 and March 31, 1998.............................. 10
Comparison of Operating Results for the Years Ended
March 31, 1998 and March 31, 1997.............................. 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............................................. 23
Independent Auditor's Report.............................................. 24
Consolidated Financial Statements of Northwest Equity Corp.:
Consolidated Balance Sheets at March 31, 1999 and 1998........... 25
Consolidated Statements of Operations for the Years Ended
March 31, 1999, 1998 and 1997................................. 26
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 1999, 1998 and 1997................................. 27
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997................................. 28
Notes to Consolidated Financial Statements of Northwest Equity Corp. ...... 30
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 that are presented elsewhere in this Annual Report.
<TABLE>
At March 31,
---------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<CAPTION>
(In thousands)
<S> <C> <C> <C>
Selected Financial Data:
Total assets $97,585 $98,739 $95,097
Loans receivable, net 73,347 78,297 77,240
Loans held for sale 143 142 415
Cash and cash equivalents 10,470 6,047 2,980
Securities available-for-sale - - 2,752
Mortgage-backed and related securities 6,037 6,398 7,421
FHLB stock 850 1,159 912
Deposits 62,003 62,278 61,557
FHLB advances and other borrowings 22,615 24,320 22,097
Shareholder's Equity - substantially restricted 12,361 11,514 10,859
Fiscal Year Ended March 31,
1999 1998 1997
--------------- -------------- --------------
(In thousands)
Selected Operating Data:
Total interest income $7,781 $7,763 $7,492
Total interest expense 4,052 4,243 4,072
------ ------ ------
Net interest income 3,729 3,520 3,420
Provision for loan losses 376 100 81
------ ------ ------
Net interest income after provision for loan
losses 3,353 3,420 3,339
Non-interest income:
Mortgage servicing fees 94 77 77
Service charges on deposits 252 251 220
Loss on sale of investments - (24) -
Gain on sale of mortgage loans 206 130 59
Other non-interest income 184 174 175
------ ------ ------
Total other non-interest income 736 608 531
Total general and administrative expenses 2,465 2,298 2,643
Income before income tax expense 1,624 1,730 1,227
Income tax expense 491 610 517
------ ------ ------
Net Income 1,133 1,120 710
</TABLE>
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF
NORTHWEST EQUITY CORP. (CONT.)
<TABLE>
Selected Financial Ratios and Other Data: At or For the Fiscal Year
Ended March 31,
---------------------------------------------------
Performance Ratios 1999 1998 1997
--------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C>
Return on average assets 1.15% 1.15% 0.76%
Return on average equity 9.50% 9.85% 6.18%
Interest rate spread during period(1) 3.50% 3.50% 3.51%
Net interest margin(1) 4.08% 3.85% 3.88%
Non-interest expense to average assets 2.89 2.47 2.84
Non-interest income to average assets 0.75 0.63 0.57
Average interest-earning assets to
average interest-bearing liabilities 1.07x 1.07x 1.08x
Asset Quality Ratios
Non-performing loans to gross loans(2) 0.32% 1.76% 1.37%
Non-performing assets to total assets(2) 0.31% 1.57% 1.13%
Allowance for loan losses to non-performing
loans(2) 157.56% 34.87% 43.04%
Classified assets to total assets 0.66% 1.91% 1.40%
Net charge-offs to average gross loans 0.62% 0.11% 0.07%
Capital Ratios
Average Equity to average assets 12.14% 11.51% 12.36%
Equity to total assets at end of period 12.67% 11.66% 11.42%
Other Data
Number of deposit accounts 9,448 9,519 9,440
Number of real estate loans outstanding 1,464 1,652 1,670
Number of real estate loans serviced 2,146 2,318 2,206
Number of consumer loans outstanding 974 1,092 1,108
Mortgage loan originations (in thousands) $47,763 $29,720 $29,086
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
consist 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. Net interest income 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, gains or losses on the sale of investment securities and
mortgage-backed and related securities may affect net income. The Company's
non-interest expense consists principally of employee compensation, occupancy
expenses, federal deposit insurance premiums and other general and
administrative expenses. General economic conditions and the monetary, fiscal
and regulatory policies of governmental agencies significantly affect the
Company's operating results. The demand for and supply of housing, competition
among lenders, the level of interest rates and the availability of funds
influence lending activities. Deposit flows and 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 likewise heavily
influences the costs of funds.
7
<PAGE>
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, 1999, $54.1 million or 73.4%
of gross loans consisted of such loans. Mortgage loan originations totaled $47.8
million, $29.3 million and $29.0 million for the fiscal years ended March 31,
1999, 1998 and 1997, respectively. The Company generally originates ARM loans
for retention in its loan portfolio and generally sells all fixed rate loans
originated to the secondary markets.
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, 1999, $59.7 million or 81.4% 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
liquidity requirements by the Department of Financial Institutions ("DFI") 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 securities held-to-maturity at March 31, 1999, were $6.0 million
or 6.1% of total assets, and at March 31, 1998, were $6.4 million or 6.5% of
total assets.
Management has adopted a strategy designed to achieve acceptable levels
of matching of its assets and liabilities and their 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, 1999, the Company's
one-year interest rate sensitivity gap as a percentage of total assets was a
negative 4.43%. 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 1999, the Company leveraged its capital base by using the
proceeds of borrowings from the FHLB-Chicago and deposits to originate
additional loans. FHLB advances decreased to $17.0 million at March 31, 1999,
compared to $19.1 million at March 31, 1998. The Company intends to continue to
leverage its capital base by using FHLB-advances.
Asset Quality: The Company emphasizes high asset quality in both its
investment portfolio and lending activities. Non-performing assets have ranged
between .31% and 1.57% of total assets during the last three years and were .31%
of total assets at March 31, 1999. During the fiscal years ended March 31, 1999,
1998 and 1997, the Company recorded provisions for loan losses of $376,000,
$100,000, and $81,000, respectively, to its allowance for
8
<PAGE>
loan losses and had net charge-offs of $485,000, $77,000, $53,000, respectively.
The Company's allowance for loan losses at March 31, 1999, totaled $375,000 or
61.0% of cumulative net charge-offs during the last three fiscal years. The
allowance for loan losses is determined by multiplying the average balance
of real estate loans, installment and credit card loans, and commercial and
other loans by the percentage of actual loss experience for the last three years
for each category of loans, plus 15% for any substandard loans in each
category of loans. Substandard loans are evaluated individually and actual
loss percentage to the average balance of each category of loans as a group. Any
unallocated portion of the allowance is applied to the category with the
highest percentage of loss experience for the prior three years. A
self-correcting mechanism to reduce differences between estimated and actual
observed losses is not necessary since the allowance is determined by actual
observed losses. The average balance of each category of loans reflects
changes in loan concentration. Loan quality is reflected in the 15% allowance
for any substandard loan. As the allowance is based on actual loss experience
and the current level of substandard loans, no elimination methods and
assumptions are used in determining the allowance. A change in substandard
loans and the average balance of the categories of loans will be immediately
reflected in the allowance. The level of the allowance is equal to historical
net loss experience plus the 15% allowance for the current level of
substandard assets. The ratio of allowance for loan losses to gross
loans receivable was 0.51% at March 31, 1999.
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. These services include 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, 1999 and
March 31, 1998
General
Net income for the fiscal year ended March 31, 1999, increased $13,000 or
1.2% to $1,133,000 from $1,120,000 for the fiscal year ended March 31, 1998. The
increase in net income was primarily due to an increase in net interest income
of $209,000 from $3.5 million for the fiscal year ended March 31, 1998, to $3.7
million for the fiscal year ended March 31, 1999, and a $128,000 increase in
total other income to $736,000 for the fiscal year ended March 31, 1999, from
$608,000 for the fiscal year ended March 31, 1998. These increases was offset by
a $276,000 increase in the provision for loan losses to $376,000 for the fiscal
year ended March 31, 1999, from $100,000 for the for the fiscal year ended March
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.
Return on average assets remained at 1.15% for the fiscal year ended March 31,
1999 and return on average equity decreased to 9.50% at March 31, 1999 from
9.85% for the the fiscal year ended March 31, 1998. General and administrative
expenses for the fiscal year ended March 31, 1999, increased $167,000 or 7.3% to
$2.5 million from $2.3 million for the prior fiscal year. This increase was
partially offset by a reduction of $119,000 in provision for income taxes from
$610,000 for the fiscal year ended March 31, 1998, to $491,000 for the fiscal
year ended March 31, 1999.
Net Interest Income
Net interest income for the fiscal year ended March 31, 1999, increased
$209,000 or 5.9% to $3.7 million from $3.5 million for the fiscal year ended
March 31, 1998. The increase in net interest income is a result of an increase
in interest income of $18,000 to $7,781,000 for the fiscal year ended March 31,
1999, compared to $7,763,000 for the fiscal year ended March 31, 1999; combined
with a decrease in interest expense of $191,000 to $4,052,000 for the fiscal
year ended March 31, 1999, from $4,243,000 for the fiscal year ended March 31,
1998.
Interest Income
Interest income increased $18,000 or 0.23% to $7.78 million for the
fiscal year ended March 31, 1999 from $7.76 million for the fiscal year ended
March 31, 1998. Interest income on loans decreased $12,000 from $6.97
million for the fiscal year ended March 31, 1998, to $6.96 million for the
fiscal year ended March 31, 1999. The
9
<PAGE>
decrease in interest income on loans results from a decrease of $1.13 million
in the average outstanding balance of total loans to $78.3 million for the
fiscal year ended March 31, 1999 from $79.5 million for the fiscal year ended
March 31, 1998. Interest on mortgage-backed securities decreased $64,000 to
$430,000 for the fiscal year ended March 31,1999, from $494,000 for the fiscal
year ended March 31 ,1998. This decrease was due to a decrease in the average
outstanding balance of mortgage backed securities from $6.9 million for the
fiscal year ended March 31, 1998, to an average outstanding balance of $6.2
million for the fiscal year ended March 31, 1999. Interest on investments
increased $94,000 to $394,000 for the fiscal year ended March 31,1999,
compared to $300,000 for the fiscal year ended March 31,1998. 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 $1.9 million from
$5.0 million for the fiscal year ended March 31,1998, to $6.9 million for the
fiscal year ended March 31,1999.
Interest Expense
Interest expense decreased $191,000 or 4.5% to $4.05 million for the
fiscal year ended March 31, 1999, from $4.24 million for the fiscal year ended
March 31, 1998. The decrease is due to the decrease in the average rate paid on
interest-bearing liabilities decreased of 0.26% from 4.99% for the fiscal year
ended March 31, 1998, to 4.73% for the fiscal year ended March 31, 1999. The
average outstanding balance of interest-bearing liabilities increased $0.6
million from $85.1 million for the fiscal year ended March 31, 1998 to $85.7
million for the fiscal year ended March 31, 1999.. Interest on savings decreased
$84,000 or 2.9% to $2.8 million for the fiscal year ended March 31, 1999, from
$2.9 million for the fiscal year ended March 31, 1998. The decrease in interest
expense was the result of a decrease of 0.16% from 4.65% in the average
yield/rate during the fiscal year ended March 31, 1998, to 4.49% during the
fiscal year ended March 31, 1999. The average outstanding balance of deposits
increased $339,000 to $62.6 million for the fiscal year ended March 31, 1999,
from $62.3 million for the fiscal year ended March 31, 1998. Interest on
borrowings decreased $107,000 or 7.9% to $1.24 million for the fiscal year ended
March 31, 1999, from $1.35 million for the fiscal year ended March 31, 1998. The
decrease in interest on borrowings was the result of an decrease in the average
rate on advances and other borrowings to 5.38% for the fiscal year ended March
31, 1999, from 5.91% for the fiscal year ended March 31, 1998. The decrease in
the average rate was the result of lower interest rates offered by the FHLB
during the fiscal year. The average balance of advances and other borrowings
increased $236,000 from $22.8 million for the fiscal year ended March 31, 1998,
to $23.1 million for the fiscal year ended March 31, 1999.
Provision for Loan Losses
The provision for loan losses increased $276,000 to $376,000 for the
fiscal year ended March 31, 1999, compared to $100,000 for the fiscal year ended
March 31, 1998. The increase provides for the settlement of a loan 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 March 31, 1999, compared to $484,000 at March 31, 1998, and represented 0.50
% and 0.61% of gross loans and 157.6% and 34.9% 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.
Other Income
Total other income increased $128,000 or 21.1% to $736,000 for
the fiscal year ended March 31, 1999, from $608,000 for the fiscal year ended
March 31, 1998. The increase is primarily due to an increase in gain on sale of
mortgage loans of $76,000 from $130,000 for the fiscal year ended March 31,
1998, to $206,000 for the fiscal year ended March 31, 1999. 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. The increase is also partially due to
absence of a loss on sale of investments in the fiscal year ended March 31,
1999, compared to ($24,000) for the fiscal year ended March 31, 1998. Mortgage
servicing fees increased $17,000 from $77,000 for the fiscal year ended March
31, 1998, to $94,000 for the fiscal year ended March 31, 1999. Again this is a
reflection of the general decline of mortgage interest rates over the two
comparable periods, which encouraged loan-refinancing activity into fixed rates
loans that are sold on the secondary market and thus increase mortgage-servicing
fees. Other income increased $10,000 from $174,000 for the fiscal year ended
March 31,1998, to $184,000 for the fiscal year ended March 31,1999. The increase
is partially due to an increase of $17,000 in brokerage commissions in the
bank's subsidiary to $71,000 for the fiscal year ended March 31,1999, from
10
<PAGE>
$54,000 for the fiscal year ended March 31,1998. This increase was offset by
a decrease of $11,000 in the profit on sale of real estate held in the
Bank's subsidiary to $50,000 for the fiscal year ended March 31,1999, compared
to $61,000 for the fiscal year ended March 31, 1998. 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 $167,000 or 7.3%
to $2.5 million for the fiscal year ended March 31,1999, compared to $2.3
million for the fiscal year ended March 31,1998. The increase was primarily due
to an increase of $118,000 in salaries and employee benefits from $1.2 million
for the fiscal year ended March 31,1998, to $1.3 million for the fiscal year
ended March 31,1999. The increase was due to adjustments in employee salaries in
response to intense wage competition for employees in the marketplace. Data
processing expenses increased $33,000 from $135,000 for the fiscal year ended
March 31,1998, to $168,000 for the fiscal year ended March 31,1999. 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. Net occupancy expense increased $15,000 from $350,000 for the fiscal
year ended March 31,1998, to $365,000 for the fiscal year ended March 31,1999,
and reflects some extraordinary maintenance items occurring during the current
period.
Income Tax Expense
Income tax expense decreased $119,000 or 19.5% from $610,000 for the
fiscal year ended March 31,1998, to $491,000 for the fiscal year ended March
31,1999. The decrease in income tax expense is the direct result of a decrease
in income before taxes of $106,000 from $1,730,000 for the fiscal year ended
March 31,1998, to $1,624,000 for the fiscal year ended March 31,1999. The
effective tax rate for the fiscal year ended March 31,1998, was 35.3% compared
to 30.2% for the fiscal year ended March 31,1999. The decrease is the effective
rate was due to tax accounting related to the restricted stock plan award.
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, 1997. 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. This was 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
11
<PAGE>
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 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. The increase was also
due to an increase in the average rate on advances and other borrowings to
12
<PAGE>
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 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, 1997. 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. This 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,
13
<PAGE>
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%
Financial Condition
The following table summarizes certain information relating to the
Company's consolidated balance sheets at the dates indicated.
At March 31,
1999 1998
---- ----
(dollars in thousands)
Assets
Cash and cash equivalents 10,470 6,047
Mortgage-backed securities 6,037 6,398
FHLB stock 850 1,159
Loans receivable, net 73,347 78,297
Liabilities
Deposits 62,003 62,278
Advances and other borrowings 22,615 24,320
Equity, substantially restricted 12,361 11,514
Cash and cash equivalents increased $4.5 million to $10.5 million at
March 31, 1999 from $6.0 million at March 31, 1998. The increase reflects the
general trend of lower long-term mortgage interest rates over the two comparable
periods than encourages the Bank's loan customers to refinance adjustable rate
mortgages which are held in house to fixed rate loan which are sold on the
secondary market. This trend then acts to increase cash balances and decrease
mortgage loan receivable balances.
Securities held-to-maturity remained at $9.4 million at March 31, 1999,
and at March 31, 1998. 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 and others
are used meet the DFI's liquidity requirements for savings banks.
Net loans receivable decreased $5.0 million from $78.3 million at March
31, 1998, to $73.3 million at March 31, 1999. One to four family real estate
loans decreased $0.9 million from $55.6 million at March 31, 1998, to $54.1
million at March 31, 1999. Consumer loans decreased to $7.1million at March 31,
1999, from $7.8 million at March 31, 1998.
Deposits were $62.0 million and $62.3 million at March 31, 1999 and
1998, 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 $ 23.7million and $21.1 million at March 31, 1999 and 1998,
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 $38.9
million and $41.2 million, at March 31, 1999 and 1998, 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 decreased
to $22.6 million at March 31, 1999 from $24.3 million at March 31, 1998, and the
average rate decreased 53 basis points to 5.38% at March 31, 1999, from 5.91% at
March 31, 1998. 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
14
<PAGE>
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 $12.4 million at March 31, 1999,
compared to $11.5 million at March 31, 1998. The increase from March 31, 1998 to
March 31, 1999 results from net income of $1.1 million for the fiscal year ended
March 31, 1999. This increase was offset by the payment of dividends to
shareholders of $552,000 for the fiscal year ended March 31, 1999. The balance
of the unearned restricted stock plan award increased $26,000 from $(26,000) as
of March 31, 1998, to $0 as of March 31, 1999. The balance of the unearned
Employee Stock Ownership Plan compensation increased $234,000 from $(389,000) as
of March 31, 1998, to $(155,000) as of March 31, 1999.
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, 1999 increased to $45.2 million from $28.0
million for the fiscal year ended March 31, 1998. Principal collected on
mortgage-backed securities for the year ended March 31, 1999 increased to
$3.0million from $1.0 million for the fiscal year ended March 31, 1998.
The primary investing activity of the Company is the origination of
mortgage loans. For the fiscal years ended March 31, 1999 and 1998, the Company
originated or acquired long-term loans in the amount of $48.3 million and $29.6
million, respectively. The Company purchased $2.6 million of mortgage-backed
securities and $0 during the fiscal years ended March 31, 1999 and 1998,
respectively. For the fiscal years ended March 31, 1999 and 1998, these
activities were funded primarily by principal repayments on long-term loans and
mortgage backed securities of $48.2 million and $29.1 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 of not
less than 8% of its average daily balance of net withdrawal accounts plus
short-term borrowings. These assets include 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. The Company's liquidity ratios
were 22.7% and 15.2 % at March 31, 1999 and 1998, 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, 1999 and 1998, cash
and cash equivalents were $10.5 million and $6.0 million, respectively. The
increase in cash and cash equivalents was due to general interest rate market
conditions that encouraged the Bank's loan customers to refinance into fixed
rate loans that are sold on the secondary market from adjustable rate loans that
are held in the Bank's portfolio. This acts to increase cash and decrease loans
receivable.
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, 1999,
FHLB-Chicago advances were $17.0 million or 19.9% of total liabilities and at
March 31, 1998, FHLB-Chicago advances were $19.1 million or 21.9% of total
liabilities. The Company also had other borrowings consisting of repurchase
agreements amounting to $5.6 million and $5.3 million at March 31, 1999 and
1998, respectively. The Company did not have any reverse repurchase agreements
outstanding at any of the aforementioned periods. In a rising interest
15
<PAGE>
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, 1999, the Company had outstanding loan commitments of $5.7
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, 1999
are $28.5 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 15 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, 1999.
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 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
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities. The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges typically allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting treatment.
Statement 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any quarter
after issuance. Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantially modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).
The statement could increase volatility in earnings and other comprehensive
income. The Company believes that based on their existing derivative
instruments, the impact of adopting Statement 133 on its financial statements
will not be material. The Company has not determined the timing or method of
adoption.
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;
16
<PAGE>
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 Plan (the "Plan"). The Bank's Plan attempts to
identify the systems, assess the risk, and conduct inventories as necessary to
assure compliance with the Plan. The Plan calls for identifying all systems in
need of remediation by June 30, 1999, and remedying all systems in need of
remediation by September 30, 1999. As of March 31, 1999, 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. On February 4, 1999, the FDIC conducted an on-site
Year 2000 readiness examination. Again, the FDIC mandates that the results of
that examination be held confidential. In a letter dated April 30, 1999, EDS
reported that the overall product line remediation was now 100% complete.
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
17
<PAGE>
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. That 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, 1999, FHLB-Chicago advances were $17.0 million or 17.4% of
total assets, compared to $19.1 million or 19.3 % of total assets at March 31,
1998.
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 decreasing 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
18
<PAGE>
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, 1999, total interest-bearing liabilities repricing within
one year exceeded total interest-bearing assets repricing in the same period by
$4.4 million, representing a negative cumulative one-year interest rate
sensitivity gap equal to 4.48% 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. That may result in the reinvestment of such
proceeds at market rates that are lower than current rates.
19
<PAGE>
The following table sets forth at March 31, 1999 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, 1999
-------------------------------------------------------------------------------------
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
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets(1)
Mortgage loans:
Fixed rate $159 $489 $1,726 $1,762 $2,716 $6,852
Adjustable rate 9,694 21,408 22,755 2,036 0 55,893
Consumer loans 635 488 2,509 3,277 200 7,109
Commercial loans 1,442 1,118 419 52 868 3,899
Mortgage-backed securities:
Fixed rate - - - - 5,587 5,587
Adjustable rate 285 165 - - - 450
Interest bearing deposits 5,721 - - - - 5,721
Investment securities - - - 3,398 850 4,248
------- -------- -------- ------- -------- -------
Total interest-earning assets $17,936 $23,668 $27,409 $10,525 $10,221 $89,759
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Deposits(2):
Certificates of deposit 9,486 19,001 8,878 1,137 146 38,648
Money market 686 2,057 1,645 1,950 518 6,856
NOW accounts 994 2,980 2,385 2,826 751 9,936
Passbook savings 591 2,034 1,575 1,867 496 6,563
Borrowings(3) 5,584 2,562 2,346 7,000 5,121 22,613
------- ------- -------- -------- -------- --------
Total interest-bearing liabilities $17,341 $28,634 $16,829 $14,780 $7,032 $84,616
======== ======== ======== ======== ======== ========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $595 $(4,966) $10,580 $(4,255) $3,189 $5,143
======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities $595 $(4,371) $6,209 $1,954 $5,143 $5,143
======== ======== ======== ======== ======== ========
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing
liabilities as a percent of total assets 0.61% -4.48% 6.36% 2.00% 5.27% 5.27%
======== ======== ======== ======== ======= ========
<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. These deposits have 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>
20
<PAGE>
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, 1999, 1998 and 1997. It
reflects the average yields on interest-earning assets and average rates on
interest-bearing liabilities for the periods indicated. Dividing income or
expense derives yields and rates 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.
21
<PAGE>
<TABLE>
MANAGEMENT' S DISCUSSION(CONT.)
Fiscal Years Ended March 31,
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------
<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 $66,333 $5,837 8.80% $67,052 $5,849 8.72% $64,208 $5,554 8.65%
Commercial loans 4,331 370 8.54 4,754 371 7.80 4,539 417 9.19
Consumer loans 7,677 751 9.78 7,665 749 9.77 7,493 731 9.76
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total loans 78,341 6,957 8.88 79,471 6,969 8.77% 76,240 6,702 8.79%
Mortgage-backed securities 6,164 430 6.98 6,938 494 7.12 7,603 556 7.31
Interest bearing deposits in other
financial institutions 3,058 153 5.02 1,377 76 5.52 461 23 5.06
Investment securities 2,950 180 6.10 2,665 156 5.87 2,938 157 5.33
Federal Home Loan Bank stock 937 61 6.51 996 68 6.77 837 54 6.46
--------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets 91,450 7,781 8.51% 91,448 $7,763 8.49% 88,079 $7,492 8.51%
Non-interest earning assets 6,765 5,681 4,976
--------- -------- --------
Total assets $98,215 $97,128 $93,055
========= ======== ========
Liabilities and retained earnings:
Deposits:
NOW accounts(1) 10,592 140 1.32% 9,491 138 1.45% $8,934 $149 1.66%
Money market deposit accounts 6,823 313 4.59 5,552 260 4.68 4,109 194 4.72
Passbook 6,252 134 2.15 6,013 129 2.15 6,440 147 2.28
Certificates of deposit 38,922 2,222 5.71 41,194 2,366 5.74 41,314 2,395 5.80
--------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits 62,589 2,809 4.49 62,250 2,893 4.65 60,797 2,884 4.74
Advances and other borrowings 23,084 1,243 5.38 22,849 1,350 5.91 20,559 1,188 5.78
--------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 85,673 4,052 4.73% 85,099 4,243 4.99% 81,356 4,072 5.00%
Non-interest bearing liabilities 615 655 202
Equity 11,927 11,374 11,497
--------- -------- --------
Total liabilities and retained earnings $98,215 $97,128 $93,055
========= ======== ========
Net interest income/interest rate spread(2) $3,729 3.50% $3,520 3.50% $3,420 3.51%
======= ====== ======= ====== ======= ======
Net earning assets/net interest margin(3) $5,777 4.08% $6,348 3.85% $6,723 3.88%
========= ====== ======== ====== ======= =======
Average interest-earning assets to
average interest-bearing liabilities 1.07 1.07 1.08
========= ======== =======
<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>
22
<PAGE>
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, 1999 Fiscal Year Ended March 31, 1998
Compared to Compared to
Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31, 1997
Increase(Decrease) Increase(Decrease)
Due to Due to
--------------------------------- --------------------------------
--------------------------------- --------------------------------
Rate Volume Total Rate Volume Total
--------------------------------- --------------------------------
<CAPTION>
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $87 (99) $(12) $(15) 282 $267
Mortgage-backed securities (10) (54) (64) (14) (48) (62)
Deposits (7) 84 77 2 51 53
Securities 6 18 24 16 (17) (1)
FHLB stock (3) (4) (7) 3 11 14
----- ----- ------ ------ ----- -----
Total 73 (55) 18 (8) 279 271
----- ----- ------ ------ ----- -----
Interest-bearing liabilities:
Deposits (100) 16 (84) (57) 66 9
Borrowings (121) 14 (107) 27 135 162
----- ----- ------ ------ ----- -----
Total (221) 30 (191) (30) 201 171
------ ----- ------ ------ ----- -----
Net change in net interest income $294 $(85) $209 $22 $78 $100
====== ===== ====== ====== ===== =====
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of
Directors
Northwest Equity Corp.
We have audited the accompanying consolidated balance sheets of Northwest Equity
Corp. and Subsidiary as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1999. 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 audits.
We conducted our audits 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 audits provide 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years ended March 31, 1999 in conformity with generally accepted
accounting principles.
__/s/Wipfli Ullrich Bertelson LLP__
Wipfli Ullrich Bertelson LLP
Wisconsin Rapids, Wisconsin
April 30, 1999
24
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $4,749 $2,642
Interest-bearing deposits with financial institutions 5,721 3,405
Securities held to maturity 9,435 9,398
Investment in Federal Home Loan Bank stock 850 1,159
Loans held for sale 143 142
Loans receivable - net of allowance for loan losses of
$375 and $484 in 1999 and 1998, respectively 73,347 78,297
Foreclosed properties and properties subject to foreclosure 63 159
Accrued interest receivable 556 578
Premises and equipment 2,176 2,250
Prepaid expenses and other assets 545 709
--------- ---------
TOTAL ASSETS $97,585 $98,739
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------- -------------
Liabilities:
Deposits:
Demand and NOW deposits $9,936 $9,733
Savings and money market deposits 13,419 12,117
Certificates of deposit 38,648 40,428
---------- ---------
Total deposits 62,003 62,278
Advances from Federal Home Loan Bank 16,990 19,062
Borrowed funds 5,625 5,258
Accounts payable and accrued expenses 606 627
--------- ---------
Total liabilities 85,224 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 at March 31, 1999
and 824,654 shares outstanding at March 31, 1998 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 (155) (389)
Less treasury stock - at cost (2,549) (2,557)
Retained earnings - substantially restricted 7,450 6,869
--------- ---------
Total stockholders' equity 12,361 11,514
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,585 $98,739
========= =========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
25
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1999, 1998 and 1997
(In Thousands except for per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $6,957 $6,969 $6,702
Interest on mortgage-backed and related securities 430 494 556
Interest and dividends on investments 394 300 234
------------- ------------- -------------
Total interest income 7,781 7,763 7,492
------------- ------------- -------------
Interest expense:
Interest on deposits 2,809 2,893 2,884
Interest on borrowings 1,243 1,350 1,188
------------- ------------- -------------
Total interest expense 4,052 4,243 4,072
------------- ------------- -------------
Net interest income 3,729 3,520 3,420
Provision for loan losses 376 100 81
------------- ------------- -------------
Net interest income after provision for loan losses 3,353 3,420 3,339
------------- ------------- -------------
Noninterest income (deductions):
Mortgage servicing fees 94 77 77
Service charges on deposits 252 251 220
Loss on sale of investments - - (24) - -
Gain on sale of mortgage loans 206 130 59
Other 184 174 175
------------- ------------- -------------
Total noninterest income 736 608 531
------------- ------------- -------------
General and administrative expenses:
Salaries and employee benefits 1,311 1,193 1,183
Net occupancy expense 365 350 336
Data processing 168 135 131
Federal insurance premiums 38 39 428
Other 583 581 565
------------- ------------- -------------
Total general and administrative expense 2,465 2,298 2,643
------------- ------------- -------------
Income before provision for income taxes 1,624 1,730 1,227
Provision for income taxes 491 610 517
------------- ------------- -------------
Net income $1,133 $1,120 $710
============= ============= =============
Basic earnings per share $1.45 $1.44 $0.84
============= ============= =============
Diluted earnings per share $1.37 $1.37 $0.83
============= ============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
26
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 31, 1999, 1998 and 1997
(In Thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Unearned Accumulated
Additional Unearned ESOP Other
Common Paid-In Restricted Compen- Treasury Retained Comprehensive
Stock Capital Stock sation Stock Earnings Income Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1996 $1,033 $6,584 $(319) $(699) $(561) $5,860 $(34) $11,864
Comprehensive income:
Net income - - - - - - - - - - 710 - - 710
Other comprehensive income-unrealized
gain on securities available for sale net of
deferred taxes of $48 - - - - - - - - - - - - 5 5
Total comprehensive income 715
Amortization of unearned ESOP and restriced stock
award - - - - 204 141 - - - - - - 345
Purchase of treasury stock - 51,625 shares - - - - - - - - (1,695) - - - - (1,695)
Cash dividends - $.33 per share - - - - - - - - - - (370) - - (370)
-------- ------- ------- ------ ------- ------- ------ --------
Balance - March 31, 1997 1,033 6,584 (115) (558) (2,256) 6,200 (29) 10,859
Comprehensive income:
Net income - - - - - - - - - - 1,120 - - 1,120
Other comprehensive income - unrealized
gain on securities available for sale, net of
deferred taxes of $2 - - - - - - - - - - - - 29 29
Total comprehensive income 1,149
Amortization of unearned ESOP and restricted stock
award - - - - 89 169 - - - - - - 258
Purchase of treasury stock - 142,138 shares - - - - - - - - (301) - - - - (301)
Cash dividends - $.40 per share - - - - - - - - - - (451) - - (451)
-------- ------- ------- ------ ------- ------- ------ --------
Balance - March 31, 1998 1,033 6,584 (26) (389) (2,557) 6,869 - - 11,514
Comprehensive income:
Net income - - - - - - - - - - 1,133 - - 1,133
Amortization of unearned ESOP and restricted stock
award - - - - 26 234 - - - - - - 260
Exercise of incentive stock options - 647 shares - - (2) - - - - 8 - - - - 6
Cash dividends - $.67 per share - - - - - - - - - - (552) - - (552)
-------- ------- ------- ------ ------- ------- ------ --------
Balance - March 31, 1999 $1,033 $6,582 $- - $(155) $(2,549) $7,450 $- - $12,361
======== ======= ======= ====== ======= ======= ====== ========
See accompanying Notes to Consolidated Financial Statements
</TABLE>
27
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1999, 1998 and 1997
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,133 $1,120 $710
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 143 145 152
Provision for loan losses 376 100 81
Loss on sale of investments - - 24 - -
Provision for deferred income taxes 109 68 (43)
Amortization of ESOP and restricted stock awards 260 258 345
Proceeds from sales of mortgage loans 19,131 11,216 4,533
Loans originated for sale (19,132) (10,813) (4,172)
Changes in operating assets and liabilities:
Accrued interest receivable 22 78 (54)
Prepaid expenses and other assets 211 (329) (80)
Accrued interest payable (86) 83 (92)
Accrued income taxes payable (101) (112) 97
Other accrued liabilities 10 53 256
------------- ------------- -------------
Net cash provided by operating activities 2,076 1,891 1,733
------------- ------------- -------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with
financial institutions (2,316) (1,684) 744
Proceeds from sales of available for sale securities - - 2,776 - -
Proceeds from sales of Federal Home Loan Bank stock 309 - - - -
Proceeds from maturities of held to maturity securities 1,699 - - 114
Proceeds from sale of foreclosed property 350 - - - -
Purchase of held to maturity securities (2,098) (3,286) (127)
Purchase of mortgage backed securities (2,601) - - (2,772)
Principle collected on mortgage-backed securities 2,963 1,023 724
Net (increase) decrease in loans 4,320 (1,475) (7,231)
Purchase of office properties and equipment (69) (54) (294)
------------- ------------- -------------
Net cash (used in) investing activities 2,557 (2,700) (8,842)
============= ============= =============
See accompanying Notes to Consolidated Financial Statements
</TABLE>
28
<PAGE>
<TABLE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years Ended March 31, 1999, 1998 and 1997
(In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits (275) 721 4,301
Net increase (decrease) in short-term borrowings (1,853) 795 (1,543)
Net increase in long-term borrowings 148 1,428 6,728
Purchases of treasury stock - - (301) (1,695)
Proceeds from exercise of stock options 6 - - - -
Dividends paid (552) (451) (370)
------------- ------------- -------------
Net cash provided by financing activities (2,526) 2,192 7,421
------------- ------------- -------------
Increase in cash and due from banks 2,107 1,383 312
Cash and due from banks at beginning 2,642 1,259 947
------------- ------------- -------------
Cash and due from banks at end $4,749 $2,642 $1,259
============= ============= =============
Supplemental disclosures of cash flow information:
Loans receivable transferred to foreclosed properties
and properties subject to foreclosure $254 $159 $72
Loans charged off 500 87 62
Interest paid 4,138 4,160 4,164
Income taxes paid 578 739 517
See accompanying Notes to Consolidated Financial Statements
</TABLE>
29
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies:
The accounting policies of Northwest Equity Corp. and Subsidiary (the Company)
conform to generally accepted accounting principles and prevailing practices
within the banking industry. A summary of the more significant accounting
policies follows:
Nature of Operations
Northwest Equity Corp. 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.
Principles of Consolidation
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.
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 and disclosure of
contingent 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.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash and investments with initial
maturities of three months or less. For the purpose of presentation in the
statements of cash flows, cash and cash equivalents are defined as those amounts
included in the statement of financial condition caption "cash and due from
banks."
30
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies - Continued:
Securities:
Investment securities are assigned an appropriate classification at the time of
purchase in accordance with management's intent. Securities held to maturity
represent those securities for which the Bank has the positive intent and
ability to hold to maturity. Accordingly, these securities are carried at cost
adjusted for amortization of premium and accretion of discount calculated using
the effective yield method. Unrealized gains and losses on securities held to
maturity are not recognized in the financial statements.
Trading securities include those securities bought and held principally for the
purpose of selling them in the near future. The Bank has no trading securities.
Securities not classified either as securities held to maturity or trading
securities are considered available for sale and reported at fair value
determined from estimates of brokers or other sources. Unrealized gains and
losses are excluded from earnings but are reported as a separate component of
net worth, net of income tax effects.
Any gains and losses on sales of securities are recognized at the time of sale
using the specific identification method.
Loans Held for Sale:
Loans held for sale in the secondary market are recorded at lower of aggregate
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. A gain or loss is recognized at the time of sale
reflecting the present value of the difference between the contractual interest
rate of the loans sold and the yield to the investor.
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 income is recognized using methods which approximate a level yield on
principal amounts outstanding. Accrual of interest is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal. At that time, any accrued but uncollected
interest is reversed, and additional income is recorded only to the extent that
payments are received and the collection of principal is reasonably assured.
31
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies - Continued:
Allowance for Loan Losses:
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:
Certain loan origination fees, commitment fees and direct loan origination costs
are being deferred and the net amounts amortized as an adjustment of the related
loan's yield. The Bank is amortizing these amounts into interest income, using
the level yield method, over the contractual life of the related loan.
The other origination and commitment fees not required to be recognized as a
yield adjustment are included in loan fees and service charges.
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.
32
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies - Continued:
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.
Advertising:
The Company expenses advertising costs as incurred.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securitites
available for sale which are recognized as a seperate component of equity,
accumulated other comprehensive income.
Change In Accounting Principles:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 128, which became
effective for the Company for reporting periods ending after December 15, 1998.
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.
33
<PAGE>
Note 1. Summary of Significant Accounting Policies - Continued:
Change In Accounting Principles - Continued:
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.
The adoption of SFAS No. 130 did not have an impact on the Company's financial
position or results of operations.
In June 1998, 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, 1998. In
the initial year of application, comparative information for earlier years is to
be restated. The adoption of SFAS No. 131 did not have an impact on the
Company's financial position or results of operations.
Reclassifications:
Certain amounts in the 1998 and 1997 consolidated financial statements have been
reclassified to conform to the 1999 reporting classification.
34
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities Held to Maturity:
Securities held to maturity consist of the following at March 31:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<CAPTION>
(In Thousands)
1999
----------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency obligations $3,398 $3 $15 $3,386
-------- ---- ----- --------
Mortgage backed securities:
FNMA certificates 3,189 35 - - 3,224
GNMA certificates 1,634 64 - - 1,698
FHLMC certificates 1,214 6 12 1,208
-------- ---- ----- --------
Total mortgage backed securities 6,037 105 12 6,130
-------- ---- ----- --------
Total securities held to maturity $9,435 $108 $27 $9,516
======== ==== ===== ========
1998
----------------------------
U.S. Treasury and agency obligations $3,000 $- - $1 $2,999
-------- ----- ------ --------
Mortgage backed securities:
FNMA certificates 3,868 59 1 3,926
GNMA certificates 2,153 83 - - 2,236
FHLMC certificates 377 7 - - 384
-------- ----- ------ --------
Total mortgage backed securities 6,398 149 1 6,546
-------- ----- ------ --------
Total securities held to maturity $9,398 $149 $2 $9,545
======== ===== ====== ========
</TABLE>
There were no sales of securities held to maturity during the years ended March
31, 1999 and 1998.
Investment securities with an amortized cost of $4,898,000 and estimated fair
value of $4,959,000 were pledged to secure other borrowing as of March 31, 1999
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. There were no sales of securities available for sale
during the years ended March 31, 1999.
35
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities Held to Maturity - Continued:
The amortized cost and estimated fair value of securities held to maturity at
March 31, 1999 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
------------ -----------
Investment securities:
Due in one year or less $1,100 $1,103
Due after one year through five years 2,298 2,283
------------ -----------
Total investment securities 3,398 3,386
Mortgage backed securities 6,037 6,130
------------ -----------
Totals $9,435 $9,516
============ ===========
Note 3. Investment in Federal Home Loan Bank Stock:
As a member of the Federal Home Loan Bank (FHLB) system, the Bank is required to
hold stock in the FHLB based on asset size. The stock is recorded at cost which
approximates fair value. Transfer of the stock is substantially restricted.
Note 4. Loans Receivable:
Loans receivable are summarized as follows as of March 31:
1999 1998
------------- -------------
Real estate mortgage loans: (In Thousands)
One to four families $54,049 $57,975
Other 8,665 8,582
Commercial loans 3,899 4,397
Consumer loans 7,109 7,827
------------- -------------
Totals 73,722 78,781
Less: Allowance for losses (375) (484)
------------- -------------
Total loans receivable $73,347 $78,297
============= =============
The following is an analysis of the allowance for loan losses for the years
ended March 31:
1999 1998 1997
------- ------ -------
(In Thousands)
Balance at beginning $484 $461 $433
Provision charged to income 376 100 81
Loans charged off - Net of recoveries (485) (77) (53)
----- ------ -----
Balance at end $375 $484 $461
====== ====== =====
36
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Loans Receivable - Continued:
Loans serviced for others are not included in the above amounts. They totaled
$46,290,000, $30,691,000 and $25,250,000 at March 31, 1999, 1998 and 1997,
respectively.
The allowance for loan 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 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.
There were no loans considered impaired as of March 31, 1999. 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
=============
The average recorded investment in impaired loans during 1999 and 1998 was
$397,000 and $595,000, respectively. There was no interest income recognized
on the impaired loans during the years ended March 31, 1999, 1998 and 1997.
The Bank, 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 years ended March 31, 1999 and 1998
is summarized below:
1999 1998
------------ -------------
Loans outstanding at beginning $39,485 $132,915
New loans 99,000 - -
Repayments (28,583) (93,430)
------------- -------------
Loans outstanding at end $109,902 $39,485
============= =============
37
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Premises and Equipment:
Premises and equipment are summarized by major classification as follows at
March 31:
1999 1998
------------- -------------
(In Thousands)
Land and improvements $569 $569
Buildings and improvements 1,543 1,543
Furniture, fixtures and equipment 1,090 1,043
------------- -------------
Total 3,202 3,155
Less - Accumulated depreciation 1,026 905
------------- -------------
$2,176 $2,250
============= =============
Depreciation charged to operations totaled $143,000, $145,000 and $152,000 for
the years ended March 31, 1999, 1998 and 1997, respectively.
Note 6. Foreclosed Properties and Properties Subject to Foreclosure:
Properties subject to foreclosure were $63,000 and $159,000 at March 31, 1999
and 1998, respectively. There were no foreclosed properties at March 31, 1999
and 1998.
Note 7. Accrued Interest Receivable:
Accrued interest receivable is comprised of the following at March 31:
1999 1998
------------- -------------
(In Thousands)
Loans receivable $456 $493
Mortgage backed obligations 34 39
Investments 66 46
------------- -------------
Totals $556 $578
============= =============
The Bank has provided an allowance for uncollected interest on loans at March
31, 1999 and 1998 of $6,000 and $17,000, respectively.
38
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Savings Accounts:
Savings accounts are summarized as follows at March 31:
<TABLE>
1999 1998
---------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- ------------- ------------- -------------
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Noninterest bearing demand deposit $3,590 $3,823
------------- -------------
Interest bearing deposits
NOW accounts 6,346 2.17% 5,910 2.31%
Passbook rates 6,563 2.13% 6,091 2.15%
Money market accounts 6,856 4.48% 6,026 4.87%
Certificates of deposit 38,648 5.71% 40,428 5.73%
------------- ------------- ------------- -------------
Total interest bearing deposits 58,413 4.79% 58,455 4.95%
------------- ============= ------------- =============
Total deposits $62,003 $62,278
============= =============
</TABLE>
Certificates of deposit have scheduled maturity dates as follows at March 31,
1999 (in thousands):
2000 $28,487
2001 7,167
2002 1,711
2003 775
2004 and thereafter 508
The total amount of certificates of deposits with balances in excess of
$100,000 was $3,560,000 and $3,243,000 at March 31, 1999 and 1998, respectively.
Deposits from Company directors, executive officers, and related firms in which
they are principal owners totaled $358,000 and $302,000 at March 31, 1999 and
1998, respectively.
Interest on savings deposits is summarized as follows for the years ended
March 31:
1999 1998 1997
------------- ------------- -------------
(In Thousands)
MMDA and NOW accounts $454 $398 $343
Savings deposits 133 130 132
Certificates of deposit 2,222 2,365 2,409
------------- ------------- -------------
Total $2,809 $2,893 $2,884
============= ============= =============
39
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
1999 1998
------------- -------------
(In Thousands)
Advances due in the following years
with rates from 4.00% to 8.31% 1999 $2,750 $5,050
2000 1,700 4,450
2001 419 419
2003 7,000 7,000
2005 2,121 2,143
2008 3,000 - -
------------- ------------
$16,990 $19,062
============= ============
The Bank can borrow up to 35 percent of total assets through FHLB advances. At
March 31, 1999 and 1998, the amount of unused credit available to the Bank was
approximately $19,648,000 and $16,631,000, respectively.
Note 10. Other Borrowed Money:
Other borrowed money is summarized as follows at March 31:
1999 1998
------------- -------------
(In Thousands)
Retail security repurchase agreements with
weighted-average interest rates of 5.57%
and 6.08% at March 31, 1999 and
1998, respectively. $5,625 $5,258
The retail repurchase agreements are generally for terms of less than one year
and are collateralized by investments and loans with carrying values of
$8,056,000 and $6,780,000 at March 31, 1999 and 1998, respectively.
The following information relates to securities sold under repurchase agreements
for the years ended March 31:
1999 1998 1997
------------- ------------- -------------
(In Thousands)
For the year:
Highest month-end balance $6,473 $6,501 $5,761
Daily average balance $5,597 $4,937 $4,808
Weighted average rate 5.19% 6.00% 5.74%
40
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
1999 1998 1997
-------- -------- --------
(In Thousands)
Tax at federal statutory rate (34%) $552 $588 $417
Increases (decreases) in taxes:
State income taxes net of federal benefit 4 25 68
Tax benefit of incentive stock options (90) (63)
Other 25 60 125
-------- -------- --------
Federal and state income taxes $491 $610 $517
======== ======== ========
The provision for income taxes consists of the following for the years ended
March 31:
1999 1998 1997
-------- -------- --------
(In Thousands)
Current $382 $542 $560
Deferred 109 68 (43)
-------- -------- --------
$491 $610 $517
======== ======== ========
For income tax purposes, the Company has state net operating loss carryforwards
of $392,000 which expire in 2014.
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities are summarized as follows at March 31:
1999 1998
------ ------
(In Thousands)
Allowance for loan losses $88 $102
Accrued compensation 18 22
Deferred compensation 24 56
Stock incentive plan - - 43
State net operating loss carryforward 31 - -
------ ------
Total deferred tax assets 161 223
------ ------
Premises and equipment (152) (137)
Dividends on ESOP Plan (84) (52)
FHLB common stock dividends (17) (17)
------ ------
Total deferred tax liabilities (253) (206)
------ ------
$(92) $17
======= ======
41
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Financial Instruments With Off-Balance Sheet Risk:
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's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments.
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, 1999, the Company was committed to originate approximately
$1,069,000 of first mortgage loans. In addition, the undisbursed portion of
other credit lines were $4,665,000 at March 31, 1999.
The Company originates and holds adjustable rate loans with variable rates of
interest. The rate of interest on these loans is capped over the life of the
loan. At March 31, 1999, none of the approximately $55,351,000 of variable
rate loans had reached the interest rate cap.
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, 1999, 1998 and 1997, the Bank
contributed $25,000, $53,000 and $39,000, respectively, to this plan.
42
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1999 , 1998 and 1997 totaled
$208,000, $163,000 and $160,000, respectively. At March 31, 1999 the number of
shares allocated, committed to be released and suspense shares were 44,250,
14,750 and 44,250, respectively. The fair value of unearned shares at March 31,
1999 was $1,313,000.
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, 1997. 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 $25,000, $89,000 and $204,000 was recognized for
the years ended March 31, 1999, 1998 and 1997, 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, 1999 and 1998
is as follows:
1999 1998
------------- -------------
Options outstanding - April 1, 101,627 103,251
Granted - - - -
Exercised (647) (542)
Forfeited - - (1,082)
------------- -------------
Options outstanding - March 31, 100,980 101,627
============= =============
43
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
------------- -------------
Net income (In Thousands) $1,066 $ 656
Basic earnings per share $ 1.38 $ 0.77
Diluted earnings per share $ 1.31 $ 0.76
The stock option plans were fully vested in 1999, there is no pro forma effect
on the Company's net income and earnings per share.
Note 15. Capital Requirements:
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in regulations) to risk-weighted
assets (as defined), and of Tier 1 captial (as defined) to average assets (as
defined). Management believes, as of September 30, 1998 and 1997, the Company
meets all capital adequacy requirements to which it is subject.
As of March 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since notification that management believes have changed
the institution's category.
44
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Capital Requirements - Continued:
The Company's and Bank's actual capital amounts and ratios are presented in
the following tables:
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total capital (to risk
weighted assets)
Consolidated $14,407 22.84% $5,047 > 8.00% N/A
-
Subsidiary Bank $10,161 16.71% $4,864 > 8.00% $6,080 > 10.00%
- -
Tier 1 capital (to risk
weighted assets)
Consolidated $14,032 22.24% $2,524 > 4.00% N/A
-
Subsidiary Bank $9,786 16.09% $2,432 > 4.00% $3,648 > 6.00%
- -
Tier 1 capital (to
average assets)
Consolidated $14,032 14.29% $3,926 > 4.00% N/A
-
Subsidiary Bank $9,786 10.07% $3,888 > 4.00% $4,861 > 5.00%
- -
As of March 31, 1998:
Total captial (to risk
weighted assets)
Consolidated $13,937 22.12% $5,041 > 8.00% N/A
-
Subsidiary Bank $9,236 14.74% $5,012 > 8.00% $6,264 > 10.00%
- -
Tier 1 capital (to risk
weighted assets)
Consolidated $13,453 21.35% $2,521 > 4.00% N/A
-
Subsidiary Bank $8,752 13.97% $2,506 > 4.00% $3,759 > 6.00%
- -
Tier 1 capital (to
average assets)
Consolidated $13,453 13.88% $3,877 > 4.00% N/A
-
Subsidiary Bank $8,752 9.21% $3,803 > 4.00% $4,753 > 5.00%
- -
</TABLE>
45
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Capital Requirements - Continued:
As a state chartered savings bank, the Company is also subject to the
minimum regulatory captial requirements of the state of Wisconsin. At March 31,
1999, the Company's regulatory capital exceeded the state regulatory capital
requirement of $6,281,000.
Note 16. Restrictions on Retained Earnings:
The Company 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 earning at March 31, 1999, includes approximately $1,295,000
representing the Company's federal bad debt deduction in excess of actual losses
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 income taxes may be imposed at the then applicable rates.
Note 17. 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.
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 accrued interest
approximates its fair value.
46
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17. 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.
The carrying amounts and fair values of the Bank's financial instruments
consisted of the following at March 31:
<TABLE>
1999 1998
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
<CAPTION>
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $10,470 $10,470 $ 6,047 $ 6,047
Securities 4,248 4,236 4,159 4,158
Mortgage-backed securities 6,037 6,130 6,398 6,546
Loans receivable:
Real estate - one-to-four family 54,192 54,441 58,117 58,617
Real estate - other 8,665 8,705 8,582 8,656
Other loans 11,008 11,064 12,224 12,228
------------- ------------- ------------- -------------
$84,150 $84,576 $89,480 $90,205
============= ============= ============= =============
1999 1998
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
Financial liabilities:
Savings deposits and checking accounts $19,765 $19,765 $18,027 $18,027
Certificates of deposit 38,648 38,259 40,428 40,395
Federal Home Loan Bank Advances 16,990 16,511 19,062 18,616
Other borrowed money 5,625 5,620 5,258 5,251
------------- ------------- ------------- -------------
$81,028 $80,155 $82,775 $82,289
============= ============= ============= =============
</TABLE>
47
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. 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, 1999:
Earnings Per Share - Basic $1,133 779,731 $1.45
==========
Effect of Stock Options - - 48,119
--------- -----------
Earnings Per Share - Diluted $1,133 827,850 $1.37
========= =========== ==========
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
========= =========== ==========
Note 19. Condensed Parent Company Only Financial Information:
Balance Sheets - at March 31: 1999 1998
------------- -------------
(In Thousands)
Assets:
Cash and cash equivalents $2,414 $2,653
Investment in subsidiary 9,787 8,752
Deferred income tax assets 32 93
Other current assets 281 161
------------- -------------
$12,514 $11,659
============= =============
Liabilities $ 153 $ 145
Stockholders' Equity 12,361 11,514
------------ -------------
$12,514 $11,659
============ =============
48
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 19. Condensed Parent Company Only Financial Information - Continued:
Statements of Operations - for the years ended March 31:
<TABLE>
1999 1998 1997
------ ------ ------
(In Thousands)
<CAPTION>
<S> <C> <C> <C>
Income:
Interest from affiliate $155 $197 $271
Expense:
Compensation 25 89 204
Other expense 57 59 69
------- ------- ------
Total expense 82 148 273
Income (loss) before for income taxes and equity in
undistributed net income of affiliates 73 49 (2)
Provision for income taxes (26) 21 - -
-------- ------- -------
Income (loss) before equity in undistributed net
income of affiliates 99 28 (2)
Equity is undistributed net income of affiliate 1,034 1,092 712
-------- ------- -------
Net income $1,133 $1,120 $710
======== ======= =======
</TABLE>
Statements of Cash Flows - for the years ended March 31:
<TABLE>
1999 1998 1997
-------- ------ -------
(In Thousands)
<CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,133 $1,120 $710
-------- ------ -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (1,034) (1,092) (712)
Deferred income taxes 61 19 (57)
Amortization of ESOP and restricted stock awards 260 258 345
Change in operating assets and liabilities:
Other current assets (121) (79) (74)
Other liabilities 8 3 120
-------- ------ -------
Net cash provided by operating activities 307 229 332
-------- ------ -------
Cash flows from investment activities:
Cash dividends from subsidiary - - - - 2,670
-------- ------ -------
Net cash provided by investment activities - - - - 2,670
-------- ------ -------
Cash flows from financing activities:
Purchase of common stock for the treasury - - (301) (1,695)
Proceeds from exercise of stock options 6 - - - -
Cash dividends (552) (451) (370)
-------- ------ -------
Net cash used in financing activities (546) (752) (2,065)
-------- ------ -------
Net increase (decrease) in cash (239) (523) 937
Cash and cash equivalents at beginning 2,653 3,176 2,239
-------- ------ -------
Cash and cash equivalents at end $2,414 $2,653 $3,176
======== ====== =======
</TABLE>
49
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 20. Quarterly Consolidated Financial Information (Unaudited):
<TABLE>
1998 1999
------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Interest and dividend income $1,957 $1,969 $1,957 $1,898
Interest expense 1,046 1,034 1,008 964
------------- ------------- ------------- -------------
Net interest income 911 935 949 934
Provision for loan losses 25 25 323 3
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 886 910 626 931
Non-interest income 204 184 198 150
Non-interest expense 601 617 615 632
------------- ------------- ------------- -------------
Income before income taxes 489 477 209 449
Income taxes 167 167 60 97
------------- ------------- ------------- -------------
Net income $322 $310 $149 $352
============= ============= ============= =============
Earnings per share $0.42 $0.40 $0.19 $0.45
Dividends $0.16 $0.17 $0.17 $0.17
Market information:
Trading range - high $22.00 $20.50 $25.00 $23.00
low $19.50 $15.63 $15.75 $18.50
close $20.25 $18.75 $22.00 $22.25
1997 1998
------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
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
============= ============= ============= =============
</TABLE>
50
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 20. Quarterly Consolidated Financial Information (Unaudited) -
Continued:
<TABLE>
1997 1998
------------------------------------------- -------------
June 30, Sept. 30, Dec. 31, March 31,
------------- ------------- ------------- -------------
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
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>
51
<PAGE>
NORTHWEST EQUITY CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 21. Concentration of Credit Risk:
The Bank grants residential, commercial and consumer loans primarily in
Northwestern Wisconsin. The ability of its debtors to honor their contracts
is dependent on the performance of the local economy.
Note 22. Contingencies:
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 23. Pending Transaction:
On February 17, 1999, the board announced that it had entered into a definitive
agreement and plan of merger with Bremer Financial Corporation ("Bremer"), for
Bremer to acquire Northwest Equity Corp. in a stock transaction. The
agreement is subject to final regulatory and shareholder approval.
52
<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.
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
Northwest Savings Bank
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
Northwest Savings Bank-
Bank Office Locations
Home Office:
234 Keller Avenue South
Amery, Wisconsin 54001
(715) 268-7105
Branch Offices:
New Richmond Office
532 Knowles Avenue South
New Richmond, Wisconsin 54017
Siren Office
24082 Highway 35 North
Siren, Wisconsin 54872
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 fifth annual meeting of shareholders of Northwest Equity Corp. will
be held at 2:00 p.m., Amery time, August 17, 1999, 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
Mallery & Zimmerman, S.C.
731 North Jackson Street, Suite 804
Milwaukee, Wisconsin 53202-4601
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
1999 1998
Quarter Ended Low High Low High
March 31 18.50 23.00 20.63 22.25
June 30 19.50 22.00
September 30 15.63 20.50
December 31 15.75 25.00
NWEQ completed its initial public offering of shares in October 1994
Shareholders and Shares Outstanding
As of May 31, 1999, there were 163 registered shareholders of record and 286
estimated additional beneficial shareholders for an approximate total of 449.
Shares outstanding at May 31, 1999 were 825,301.
53
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,749
<INT-BEARING-DEPOSITS> 5,721
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 9,435
<INVESTMENTS-MARKET> 9,516
<LOANS> 73,490
<ALLOWANCE> 375
<TOTAL-ASSETS> 97,585
<DEPOSITS> 62,003
<SHORT-TERM> 8,148
<LIABILITIES-OTHER> 606
<LONG-TERM> 14,467
0
0
<COMMON> 1,033
<OTHER-SE> 11,328
<TOTAL-LIABILITIES-AND-EQUITY> 97,585
<INTEREST-LOAN> 6,957
<INTEREST-INVEST> 824
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,781
<INTEREST-DEPOSIT> 2,809
<INTEREST-EXPENSE> 4,052
<INTEREST-INCOME-NET> 3,729
<LOAN-LOSSES> 376
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,465
<INCOME-PRETAX> 1,624
<INCOME-PRE-EXTRAORDINARY> 1,133
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,133
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 3.50
<LOANS-NON> 229
<LOANS-PAST> 0
<LOANS-TROUBLED> 9
<LOANS-PROBLEM> 238
<ALLOWANCE-OPEN> 484
<CHARGE-OFFS> 499
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 375
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
