UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-KSB405
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
Commission file number 0-24606
NORTHWEST EQUITY CORP.
(Exact name of small business issuer as specified in its charter)
Wisconsin 39-1772981
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Keller Avenue South
Amery, Wisconsin 54001
(Address of principal executive offices) (Zip code)
(715) 268-7105
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such report(s) and
(2) has been subject to such filing requirements for the past 90 days.
(1) Yes __x__ No_____
(2) Yes __x__ No_____
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB405 or any amendment to this Form 10-KSB405. x
State issuer's revenues for its most recent fiscal year: $8,517,000
(Total interest and dividend income and total non-interest income).
As of May 31, 1999, there were issued and outstanding 825,301 shares of
Common Stock of the Registrant. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the average
of the bid and asked price of such shares of Common Stock as of May 31, 1999,
was $19 million. Solely for purposes of this calculation, all executive officers
and directors of the Registrant are considered to be affiliates; also included
as "affiliate shares" are certain shares held by various employee benefit plans
in which the trustee are directors of the Registrant or are required to vote a
portion of unallocated shares at the direction of executive officers or
directors of the Registrant. The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the
Registrant that such person is an affiliate of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB405: Portions of the Annual Report to Shareholders
for the fiscal year ended March 31, 1999 are incorporated by reference into
Parts II and IV hereof.
Part III of Form 10-KSB405: Portions of the Proxy Statement for the 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
1
<PAGE>
PART I
Forward-Looking Statements
When used in this Annual Report on Form 10-KSB405 or future filings with
the Securities and Exchange Commission, in quarterly reports or press releases
or other public or shareholder communications, or in oral statements made with
the approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Litigation Reform Act of 1995. Such forward-looking statements include
words and phrases such as "will likely result,' "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions and
various other statements indicated herein with an asterisk after such
statements. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors could affect the Company's financial
performance and could cause actual results for future periods to differ
materially from those anticipated or projected. Such factors include, but are
not limited to: (i) general market interest rates, (ii) general economic
conditions, (iii) legislative/regulatory changes, (iv) monetary and fiscal
policies of the U.S. Treasury and Federal Reserve, (v) changes in the quality or
composition of the Company's loan and investment portfolios, (vi) demand for
loan products, (viii) competition, (ix) demand for financial services in the
Company's markets, and (x) changes in accounting principles, policies or
guidelines.
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
ITEM 1. DESCRIPTION OF BUSINESS
General
Northwest Equity Corp., a Wisconsin corporation (the "Company" or the
"Registrant"), is the holding company for Northwest Savings Bank, a Wisconsin
chartered stock savings bank (the "Bank"). The Bank is regulated by the
Wisconsin Department of Financial Institutions (the "DFI") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Company is regulated by the
Federal Reserve Board ("FRB"). The Bank was organized in 1936, and has three
full service offices located in Polk, St. Croix and Burnett Counties, Wisconsin.
Because the Company's only significant business operations are that of the Bank,
the business of the Bank is essentially the only business of the Company.
The Bank is a community-oriented, full-service financial institution
offering a variety of retail financial services to meet the needs of the
communities it serves. The Company's principal business consists of attracting
funds in the form of deposits and other borrowings and investing such funds,
primarily in residential real estate loans, mortgage-backed securities, and
various types of commercial and consumer loans. 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. The Bank is a member of the FHLB-Chicago,
which is one of the twelve regional banks that comprise the FHLB system. The
Company's executive office is headquartered at 234 South Keller Avenue, Amery,
Wisconsin 54001. Its telephone number at that address is 715-268-7105. Its
E-mail address is ([email protected]).
The Company's primary sources of funds are deposits, repayments on
loans and mortgage-backed and related securities, and, to a lesser extent,
advances from the FHLB-Chicago. The Company's deposits totaled $62.0 million at
March 31, 1999. The Company utilized these funds to invest primarily in
one-to-four family residential loans and, to a lesser extent, consumer,
commercial and other loans, and to invest in mortgage-backed securities and
other investment securities.
The Company's strategic business plan provides for investments in
mortgage-backed securities in addition to its investments in United States
Treasury and agency securities. Management believes this investment portfolio
provides numerous benefits, including the ability to provide and maintain
adequate regulatory liquidity levels, maintain a balance of high quality,
diversified investments, and better manage the interest rate risk of the
Company. At March 31, 1999, the Company's mortgage-backed securities totaled
$6.0 million and the Company's investment securities totaled $3.4 million.
2
<PAGE>
Market Area and Competition
The Company offers a variety of deposit products, services and mortgage
loans primarily in northwestern Wisconsin. The Company's main office is located
at 234 South Keller Avenue, Amery, Wisconsin. The City of Amery is located
approximately 40 miles northeast of Minneapolis and St. Paul, Minnesota. The
Company, in addition to its Amery office, has two full-service branches. One is
located in New Richmond and the other in Siren, Wisconsin. All of the Company's
locations are in counties generally characterized as rural with a total
population of approximately 100,000.
The Company has significant competition in both its mortgage and
consumer lending business, as well as in attracting deposits. The Company's
primary competition for loans are principally from other savings banks, thrift
institutions, mortgage banking companies, insurance companies and commercial
banks. Its most direct competition for deposits historically has come from other
savings banks, thrift institutions, commercial banks, and credit unions. The
Company has faced additional competition for funds from a number of
institutions, including the availability of short-term money market funds and
other corporate and government securities funds offered by other financial
service companies, such as brokerage firms and insurance companies.
Lending Activities
General
The largest component of the Company's gross loan receivable of
$73.9 million at March 31, 1999, was first mortgage loans secured by
owner-occupied one-to-four family residences and totaled $54.2 million at March
31, 1999, or 73.4% of net loans receivable. Other real estate loans were $8.7
million or 11.8% of net loans receivable at March 31, 1999. Of net loans
receivable, $59.7million or 80.8% were ARM loans. As part of its strategy to
manage interest rate risk, the Company originates primarily ARM loans that have
short and intermediate-term maturities for its own loan portfolio.
3
<PAGE>
Composition of Loan Portfolio
The following table sets forth the composition of the Company's loan
portfolio, including loans held for sale, in dollar amounts and in percentages
of the gross loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family $54,223 73.38% $58,120 73.64% $55,581 71.14%
Multi-family 627 0.85% 536 0.67% 931 1.19%
Commercial 5,944 8.04% 5,261 6.67% 6,443 8.25%
Construction and land 2,094 2.83% 2,785 3.53% 3,299 4.22%
-------- -------- -------- -------- -------- --------
Total real estate loans 62,888 85.10% 66,702 84.51% 66,254 84.80%
-------- -------- -------- -------- -------- --------
Consumer loans:
Home equity - - - - - -
Automobile 5,248 7.10% 5,706 7.23% 4,856 6.22%
Credit card 265 0.36% 312 0.40% 304 0.39%
Other consumer loans 1,596 2.16% 1,809 2.29% 2,047 2.62%
-------- -------- -------- -------- -------- --------
Total consumer loans 7,109 9.62% 7,827 9.92% 7,207 9.23%
-------- -------- --------- -------- -------- --------
Commercial loans 3,899 5.28% 4,397 5.57% 4,663 5.97%
-------- -------- --------- -------- --------- --------
Gross loans receivable 73,896 100.00% 78,926 100.00% 78,124 100.00%
-------- ======== -------- ======== --------- ========
Add:
Accrued interest, net 456 492 448
Less:
Loans in process - - -
Deferred fees and discounts (31) (3) (8)
Allowance for loan losses (375) (484) (461)
--------- -------- --------
Total additions/deductions 50 5 (21)
--------- -------- --------
Loans receivable, net $73,946 $78,931 $78,103
========= ========= ==========
</TABLE>
4
<PAGE>
Loan Maturity
The following table shows the contractual maturity of the
Company's loan and mortgage-backed and related securities portfolio at March 31,
1999. Loans that have adjustable rates are shown as being due in the period
during which the underlying contracts mature. Demand loans that have no schedule
for repayment and no stated maturity are reported as due in one year or less.
The table does not include estimated prepayments or scheduled principal
amortization.
<TABLE>
(CONTRACTUAL MATURITY)
At March 31, 1999
------------------------------------------------------------------------------------------
Total
Mortgage-
One-to- Commercial Construction Backed and
Four Multi- Real and Related
Family Family Estate Land Commercial Consumer Securities Total
------ ------ ------ ---- ---------- -------- ---------- -----
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due :
Within one year $1,123 $ - $3 $1,573 $1,912 $765 $ - $5,376
-------- ----- ------- ------- -------- ------- -------- -------
After one year:
One to three years 1,698 - 746 0 1,079 2,617 - 6,140
Three to five years 2,856 - 225 0 200 3,325 - 6,606
Five to ten years 4,182 - 1,694 0 708 311 995 7,890
Ten to twenty years 11,231 - 1,259 89 - 37 1,842 14,458
Over twenty years 32,102 627 2,017 432 - 54 3,200 39,432
-------- ----- ------- -------- -------- ------- ------- -------
Total due after one year 53,069 627 5,941 521 1,987 6,344 6,037 74,526
======== ===== ======= ======== ======== ======= ======= =======
Total amounts due 54,192 627 5,944 2,094 3,899 7,109 6,037 79,902
======== ===== ======= ======== ======== ======= ======= =======
Less:
Allowance for loan losses (50) (1) (12) (2) (224) (86) - (375)
-------- ----- ------ -------- -------- ------- ------- -------
Loans receivable and mortgage-
backed securities, net $54,142 $626 $5,932 $2,092 $3,675 $7,023 $6,037 $79,527
======== ===== ====== ======== ======== ======= ======= =======
</TABLE>
5
<PAGE>
The following table sets forth at March 31, 1999 the dollar amount of
all loans and mortgage-backed and related securities due after March 31, 2000,
such loans and whether such loans have fixed interest rates or adjustable
interest rates.
---------------------------------
Due After March 31, 2000
---------------------------------
---------------------------------
Fixed Adjustable Total
---------------------------------
(In thousands)
Mortgage loans:
One-to-four family $4,991 $48,109 $53,100
Multi-family - 627 627
Commercial 1,299 4,642 5,941
Construction and land 26 495 521
------- -------- --------
Total mortgage loans 6,316 53,873 60,189
Consumer loans 6,027 317 6,344
Comercial loans 795 1,192 1,987
------- -------- --------
Gross loans receivable 13,138 55,382 68,520
Mortgage-backed securities 5,587 450 6,037
------- -------- --------
Gross loans receivable and mortgage-
backed and related securities $18,725 $55,832 $74,557
======== ======== ========
6
<PAGE>
One-to-Four Family Mortgage Lending
The Company's primary lending activity is the origination of first
mortgage loans secured by one-to-four family, owner-occupied residences within
the Company's primary lending area. The Company sells substantially all of its
fixed rate mortgage loans it originates to government secondary market
investors. Generally, loans sold to government secondary market investors are
sold as whole loans with servicing retained. Substantially all of the ARM loans
originated by the Company are retained in its loan portfolio. The Company
follows Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines
for its one-to-four family mortgage loans.
The Company offers a variety of rates, fees, origination terms, and
mortgage products. Mortgage loan originations are solicited from real estate
brokers, builders, existing customers, community groups and residents of local
communities located in the Company's primary market area through its loan
origination staff. The Company also advertises its products through local
newspapers, periodicals and radio. Upon receipt of a completed mortgage
application from a prospective borrower, a credit report is ordered, an
appraisal from an independent third party is obtained, income and other deposit
information are verified, and, as necessary, additional financial information is
requested. The Company requires title insurance or evidence of marketable title
and lien position (consisting of an abstract and legal opinion) on all first
mortgage loans. Borrowers must present evidence of appropriate hazard insurance
and flood insurance (if applicable) prior to the closing. On loans with high
loan to value ratios, borrowers are required to escrow funds on a monthly basis
for real estate taxes, hazard insurance, and, in some cases, flood insurance. On
those loans with no escrow requirement, the Company verifies payment of real
estate taxes on a semi-annual basis and requires evidence from the borrower
annually of hazard insurance and flood insurance. The lending policy of the
Company restricts mortgage loan amounts to 80% of the lesser of the appraised
value or purchase price of the real estate to be mortgaged to the Company. The
Company makes mortgage loans in amounts up to 95% of the lesser of the appraised
value or purchase price, subject to availability of private mortgage insurance
insuring the amount in excess of 80% of the appraised value or purchase price.
Exceptions to this policy are ARM loans, in which case the Company loans up to
90% of the appraised value or purchase price with the appropriate private
mortgage insurance. In addition, the Company may make loans to its most
creditworthy customers up to 90% of the appraised value without private mortgage
insurance. The Company also currently offers a program for low to moderate
income families to lend up to 90% of the appraised value of the property without
private mortgage insurance, provided certain credit, property and cost criteria
are met.
The Company's underwriting department reviews all the pertinent
information and makes a credit decision for approval or denial within
established Company policy guidelines. Recommendations to deny applications
based on underwriting considerations are reviewed by the Company's senior
underwriter prior to a final disposition of the loan application. The Board of
Directors and the Loan Committee review summaries of all one-to-four family
mortgage loan applications on a monthly basis. Mortgage loans held in the
Company's loan portfolio generally include due-on-sale clauses, which provide
the Company with the contractual right to deem the loan immediately due and
payable in the event the borrower transfers the ownership of the property
without the Company's prior consent.
The Company enforces the due-on-sale clauses of its mortgage loans.
The Company makes loans under various governmental programs including
the Wisconsin Housing and Economic Development Authority ("WHEDA"), the Federal
Housing Administration, the Farmers Home Administration ("FHA") and the Federal
Veterans Administration ("VA"). These programs generally have lower down payment
and less restrictive qualification ratios. The WHEDA loans are serviced through
WHEDA and originated for them, and the Federal Housing Administration, FHA and
VA loans are sold in the secondary market with servicing retained.
The Company offers one and three-year ARM loans. ARM loans currently
adjust a maximum of two percentage points per year with a lifetime interest cap
of six percentage points above the initial interest rate. Monthly payments of
principal and interest are adjusted when the interest rate adjusts to maintain
full amortization of the mortgage loan within the remaining term. The initial
rates offered on ARM loans fluctuate with general interest rates changes and are
determined by competitive conditions and the Company's yield requirements. The
Company currently uses the one-year and three-year, Constant Maturity United
States Treasury indexes to determine the interest rate payable upon the
adjustment date of outstanding ARM loans. The Company also originates ARM loans
with initial interest rates below the fully indexed rate by permitting the
borrower to choose the number of percentage points the initial interest rate is
below the fully indexed rate (up to two points) and pay origination points in a
corresponding amount. Borrowers choosing these ARM loans can effectively lower
the lifetime interest rate cap by decreasing the initial interest rate. ARM
loans generally pose different risks than fixed rate loans. In a rising interest
rate environment, the underlying ARM loan payment rises, increasing the
potential for default, and the marketability of the underlying property may be
adversely affected. In a decreasing interest rate environment, mortgagors tend
to refinance to fixed rate loans. The Company's delinquency experience on its
ARM loans generally has been satisfactory to date.
7
<PAGE>
The Company has continued to generate a significant amount of
adjustable rate loans. The Company's continued ability to originate ARM loans is
primarily due to the nature of its market area, which includes rural and
vacation properties. Loans on properties with excessive acreage, hobby farm
activities or three-season cabins generally cannot be sold into the secondary
market, thus making these loans less attractive to competitors of the Company
that only originate loans for sale into the secondary market. Furthermore, many
of the Company's customers desiring a loan term of short-to-medium-duration
(i.e., less than ten years) often prefer ARM loans because of the generally
lower closing costs compared to fixed rate loans. The Company generally obtains
an abstract and title opinion, rather than title insurance, on loans originated
for retention in its portfolio and has not experienced losses attributable to
the lack of title insurance.
Commercial Real Estate Lending
At March 31, 1999, the Company's commercial real estate loan portfolio
totaled $5.9 million or 8.0% of net loans receivable. The commercial real estate
loans in the Company's portfolio consist of fixed rate and ARM loans generally
secured by small office buildings, retail stores and farms, and occupied by the
borrower. The Company currently originates ARM loans secured by commercial real
estate at 375 to 525 basis points above the rate on U.S. Treasury securities for
comparable maturities. These loans typically do not exceed 65% of the lesser of
the purchase price or the appraised value of the underlying collateral. At March
31, 1999, the largest outstanding commercial real estate loan was $1.4 million.
In underwriting commercial real estate loans, the Company's
underwriting procedures require a review of the borrower's credit history,
income taxes, personal financial statements, banking relationships, property
management experience. An analysis of the property is also required, including
cash flow projections, historical operating statements, environmental concerns,
compliance with regulations, and prevailing market conditions. Loans secured by
commercial real estate properties involve a greater degree of risk than
residential mortgage loans. Payments on loans secured by commercial real estate
properties are often susceptible to adverse conditions in the real estate market
or the economy. The Company seeks to minimize these risks by originating
commercial real estate loans principally in its primary market area where it has
the ability to more closely monitor and anticipate adverse conditions.
Commercial Lending
The Company engages in a limited amount of commercial business lending
activities, generally with existing customers, including secured and unsecured
loans and letters of credit. At March 31, 1999, the Company had $ 3.9million in
commercial business loans outstanding, which represented 5.3% of net loans
receivable. Term loans are amortized over a one to five year term and lines of
credit are reviewed annually. Such loans generally are originated at 375 to 525
basis points above the rate on U.S. Treasury securities for comparable
maturities. At March 31, 1999, the largest outstanding commercial loan was $0.6
million.
The Company originated a majority of the commercial loans in its loan
portfolio in the mid-1980's when it hired a commercial loan officer to expand
its activity in this area. The Company currently is not actively seeking new
commercial lending business and substantially all of its commercial lending
consists of renewals of existing commercial loans. The commercial loans in the
portfolio are generally performing and, management believes, adequately
reserved.
Commercial business loans are of higher risk and typically are made on
the basis of borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent upon the general
economic environment. The Company's commercial business loans usually include
personal guarantees and are usually, but not always, secured by business assets,
such as accounts receivable, equipment and inventory as well as real estate.
However, the collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business.
Consumer Lending
The Company held $7.1 million or 9.6% of net loans receivable of
consumer loans at March 31, 1999. Consumer loans generally have shorter terms
and higher interest rates than mortgage loans, but generally involve more risk
than mortgage loans because of the type and nature of the collateral and, in
certain cases, the absence of collateral. Consumer loans generally are dependent
on the borrower's continuing financial stability and thus are more likely to be
affected by adverse personal circumstances. Often the loans are secured by
rapidly depreciable personal property, such as automobiles. Automobile loans
generally are underwritten in amounts up to 90% of the purchase price for new
and used vehicles. The term of the loans generally cannot exceed six years for
new vehicles and five years for used vehicles. The Company's delinquent consumer
loans as a percentage of total consumer loans has been minimal.
8
<PAGE>
Multi-Family Lending
The Company held $.6million or .85%net loans receivable of multi-family
loans at March 31, 1999. The rates charged on the Company's multi-family loans
typically are slightly higher than rates charged on loans secured by one-to-four
family residential properties. Multi-family ARM loans typically adjust in a
manner similar to that of the Company's other ARM loans, although generally at a
slightly higher margin. An origination fee equal to 1% of the principal amount
is usually charged on such loans.
Multi-family loans are generally underwritten in amounts to 80% of the
lesser of the appraised value or purchase price of the underlying property. An
independent appraiser designated by the Company at the time the application is
submitted performs appraisals of multi-family properties. In addition, the
Company's underwriting procedures require review of the borrower's credit
history, income, personal financial statements and banking relationships. A
review of the property includes cash flow projections and historical operating
results. The Company evaluates all aspects of multi-family lending to mitigate
risk to the extent possible. The Company seeks to ensure that the property
securing the loans will generate sufficient cash flow to adequately cover
operating expenses and debt service payments. The Company obtains individual
guarantees for substantially all of its multi-family loans.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loans may be impaired. Despite the risks inherent in
multi-family real estate lending, the Company's delinquent multi-family loans as
a percentage of loans receivable has been minimal.
Construction and Land Lending
The Company offers one-to-four family residential and other
construction loans and land loans. At March 31, 1999, construction and land
loans totaled $2.1 million or 2.8% of net loans receivable. Construction loans
are made to individuals intending to occupy a home who have signed construction
contracts with a builder. These loans have loan-to-value ratios not exceeding
90%. When the loan-to-value ratios exceed 80%, private mortgage insurance is
required. The Bank offers permanent financing, primarily one-to three-year ARM
loans, on residential construction loans that enables borrowers to avoid
duplicative closing costs normally associated with temporary financing during
construction periods and permanent financing upon completion of construction.
The Company has had minimal delinquent residential construction loans to date.
Loan Approval
Loan approval is based on a customer's aggregate amount of loans
outstanding, including the loan application under review. One member of the Loan
Committee and a loan officer may approve loan amounts of $100,000 or less. Loan
amounts exceeding $100,000 up to $500,000 require the approval of two members of
the Loan Committee and a loan officer. Any single loan exceeding $500,000
requires approval from the Board of Directors and a loan officer. Any loans over
$25,000 that exceed the aggregate amount of $625,000 require Board approval.
Originations, Purchase and Sales of Loans
Mortgage loans are solicited from real estate brokers, builders,
developers, existing or past customers, and residents of the local communities
located in the Company's primary market areas. The Company advertises its
mortgage products in newspapers and other media in addition to using its loan
officers to directly solicit potential borrowers. The following table sets forth
the Company's loan originations, purchases, sales and principal repayments for
the periods indicated. Mortgage loans and mortgage-backed and related securities
held for sale are included in the totals.
9
<PAGE>
<TABLE>
Fiscal Years Ended March 31,
--------------------------------
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross)
At beginning of period $66,702 $66,254 $59,604
-------- -------- --------
Mortgage loans originated:
One-to-four family 36,564 25,216 21,223
Commercial 1,987 226 1,072
Multi-family 472 - -
Construction and land 8,740 3,809 6,690
-------- -------- --------
Total mortgage loans originated 47,763 29,251 28,985
-------- -------- --------
Mortgage loans purchased 581 368 101
-------- -------- --------
Total mortgage loans originated and purchased 48,344 29,619 29,086
-------- -------- --------
Transfer of mortgage loans to foreclosed
real estate (254) (159) (72)
Principal repayments (32,773) (17,796) (17,890)
Sales of fixed rate loans (19,131) (11,216) (4,474)
-------- -------- --------
Total reductions (52,158) (29,171) (22,436)
-------- -------- --------
At end of period $62,888 $66,702 $66,254
======== ======== ========
Consumer loans:
At beginning of period $7,827 $7,207 $6,897
Consumer loans originated 5,397 6,796 5,313
Principal repayments (6,115) (6,176) (5,003)
------- -------- --------
At end of period $7,109 $7,827 $7,207
======= ======== ========
Commercial loans:
At beginning of period $4,397 $4,663 $4,612
Commercial loans originated and purchased 5,798 3,879 3,356
Principal repayments (6,296) (4,145) (3,305)
------- -------- --------
At end of period $3,899 $4,397 $4,663
======= ======== ========
Mortgage-backed and related securities:
At beginning of period $6,398 $7,421 $5,373
Mortgage-backed securities
purchased 2,601 - 2772
Amortization and repayments (2,962) (1,023) (724)
------- -------- -------
At end of period $6,037 $6,398 $7,421
======= ======== =======
</TABLE>
10
<PAGE>
<TABLE>
The following table sets forth the Company's loan originations and purchases in
various loan categories according to whether the loan is fixed rate versus
adjustable rate for the periods indicated.
Fiscal Years Ended March 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
Fixed Adjustable Total Fixed Adjustable Total Fixed Adjustable Total
-------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family $22,828 $14,156 $36,984 12,658 $12,926 $25,584 $7,796 $13,427 $21,223
Multi-family - 633 633 - - - - - -
Commercial - 1,987 1,987 - 226 226 69 1,003 1,072
Construction and land 7,634 1,106 8,740 3,102 707 3,809 5,423 1,368 6,791
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total mortgage loans 30,462 17,882 48,344 15,760 13,859 29,619 13,288 15,798 29,086
Consumer loans 5,397 - 5,397 6,781 15 6,796 5,313 - 5,313
Comercial loans 3,851 1,947 5,798 3,432 447 3,879 2,308 1,048 3,356
-------- -------- -------- -------- -------- -------- ------- -------- -------
Total loans originated
and purchased $39,710 $19,829 $59,539 $25,973 $14,321 $40,294 $20,909 $16,846 $37,755
======== ======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
11
<PAGE>
Participation Loans
In order to meet asset/liability management objectives that are
enhanced by loans with higher rates and shorter repricing periods, the Company
has purchased from time to time participation interests in a variety of real
estate loans, including commercial real estate loans. Prior to purchase, the
Company reviews each participation to ensure that the underlying loan complies
with the Company's lending policy as in effect and the loans-to-one borrower
limitations.
The purchase of participation loans involves the same risks as the
origination of the same types of loans as well as additional risks related to
the purchaser's lower level of control over the origination and subsequent
administration of the loan. Many of the participation loans purchased by the
Company in the past also have been on projects located outside the State of
Wisconsin, primarily in the Minneapolis/St. Paul, Minnesota area. Management
does not anticipate future purchases to be significant, and will continue to
investigate purchase opportunities on an individual basis.
Sale of Mortgage Loans
The Company sells loans that it originates, on a non-recourse basis,
into the secondary market to the FHLMC, Federal National Mortgage Association
("FNMA") and WHEDA. The amount of loans sold by the Company is based upon market
conditions and the Company's asset/liability strategy. For the past three fiscal
years, the Company has sold substantially all of the fixed rate loans originated
to governmental secondary market purchasers in order to manage interest rate
risk. For the fiscal year ended March 31, 1999, the Company's fixed rate loan
sales to governmental investors totaled $19.1 million with associated gains of
$206,000.
The Company is subject to interest rate risk on fixed rate loans in its
pipeline from the point in time that the rate is locked with the borrower until
it is sold into the secondary market. In a declining interest rate environment,
the interest rate is locked in at the time of loan approval and held for sale to
take advantage of the market rate of interest. In order to minimize the interest
rate risk in a rising interest rate environment, the interest rate is locked in
at the time of loan approval and a commitment to sell the loan is obtained
simultaneously. These loans are sold on an individual basis when the loan is
closed.
All mortgage loans are made and underwritten pursuant to the
requirements of secondary market investors. The Company retains servicing on
loans sold to FHLMC and FNMA, receiving a servicing fee, which represents the
difference between the contract rate on the loans sold and the yield at which
such loans are sold. The servicing spread earned by the Company is typically
0.25%.
The Company also acts as a conduit for loans sold to WHEDA. For those
borrowers who qualify under WHEDA guidelines, the Company originates the loan
for a $500 fee and sells the loan to WHEDA, on a non-recourse basis, servicing
released.
Loan Origination, Servicing and Other Fees
In addition to interest earned on loans, the Company receives income
through fees in connection with loan originations, loan sales, loan
modifications, late payments, loan servicing, and for miscellaneous services
related to its loans. Income from these activities varies from period to period
with the volume and type of loans originated.
In connection with the origination of mortgage loans, the Company
requires borrower reimbursement for out-of-pocket costs associated with
obtaining independent appraisals, credit reports, title insurance or abstract
and title opinion, private mortgage insurance and other items. While origination
fees ranging from zero to two points generally have been quoted on mortgage
loans in recent years, most of the Company's borrowers typically accept a
slightly higher interest rate and pay zero points.
For loans sold to FHLMC and FNMA, the Company retains the
responsibility for servicing such loans. At March 31, 1999, 1998 and 1997, the
Bank serviced $46.3 million, $30.7 million and $25.3 million loans for others,
respectively. Fee income received in connection with loans serviced for others
was $94,000, $77,000 and $77,000 for the fiscal years ended March 31, 1999, 1998
and 1997, respectively.
The contractual right to service mortgage loans sold has an economic
value. The value results from the future income stream of the servicing fees,
the availability of the cash balances associated with escrow funds for real
estate taxes and insurance, the availability of the cash from monthly principal
and interest payments from the collection date to the remittance date, and the
ability of the servicer to cross-sell other products and services. The actual
value of a servicing portfolio is dependent upon such factors as the age,
maturity and prepayment rate of the loans in the portfolio, the average
12
<PAGE>
dollar balance of the loans, the location of the collateral property,
the average amount of escrow funds held, the interest rates and delinquency
experience of the loans, the types of loans, and other factors.
Delinquencies, Nonperforming Assets and Classified Assets
Delinquent Loans
When a borrower fails to make a required payment by the end of the
month in which the payment is due, the Company generally initiates collection
procedures. The Company will send a late notice, and in most cases,
delinquencies are cured promptly. However, if a loan becomes delinquent for more
than 60 days, the Company contacts the borrower directly, to determine the
reason for the delinquency and effect a cure. Where it believes appropriate, the
Company may review the condition of the property and the financial position of
the borrower. At that time, the Company may: (i) accept a repayment program for
the arrearage; (ii) seek evidence of efforts by the borrower to sell the
property; (iii) request a deed in lieu of foreclosure; or (iv) initiate
foreclosure proceedings. When a loan secured by a mortgage is delinquent for
three or more monthly installments, the Company generally will initiate
foreclosure proceedings. With respect to delinquencies on loans sold to FHLMC or
FNMA, or insured by FHA or guaranteed by VA, the Company follows the appropriate
notification and foreclosure procedures prescribed by the respective agencies.
On mortgage loans or loan participations purchased by the Company, the
Company receives monthly reports from its loan servicers with which it monitors
the loan portfolio. The Company relies upon the servicer to contact delinquent
borrowers, collect delinquent amounts, and to initiate foreclosure proceedings,
when necessary, in accordance with applicable laws, regulations, and the terms
of the servicing agreements between the Company and its servicing agents.
Total loans delinquent 90 days or more totaled $.2 million or .3%
of loans receivable at March 31, 1999.
13
<PAGE>
<TABLE>
At March 31, 1999 At March 31, 1998 At March 31, 1997
---------------------------------------------------------------------------------------------------------
31-89 Days 90 Days or more 31-89 Days 90 Days or more 31-89 Days 90 Days or more
---------------------------------------------------------------------------------------------------------
Number Principal Number Principal Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans Loans of Loans
---------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family 20 $904 2 $53 22 $754 5 $109 45 $2,399 7 $179
Multi-family -- -- -- -- -- -- -- -- -- -- -- --
Residential construction -- -- -- -- 1 62 -- -- 1 84 -- --
Commercial 2 114 -- -- 6 471 3 280 6 406 2 199
---- ------- ---- ---- ---- ----- ----- ----- ---- ------ ---- -----
Total mortgage loans 22 $1,018 2 $53 29 $1,287 8 $389 52 $2,889 9 378
---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ---- -----
Consumer loans 24 55 3 17 31 161 32 129 39 191 9 137
---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ---- -----
Comercial loans 1 10 3 159 1 3 9 858 4 204 6 556
---- ------- ---- ---- ---- ------- ----- ----- ---- ------- ----- -----
Total 47 $1,083 8 $229 61 $1,451 49 $1,376 95 $3,284 24 $1,071
==== ======= ===== ===== ==== ======= ===== ======= ==== ======= ===== ======
Delinquent loans to gross 1.47% 0.31% 1.84% 1.74% 4.16% 1.36%
loans(2)
<FN>
- --------------------------
-1 The Company discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest
payment by 90 days or more.
-2 Excluding mortgage-backed and related securities.
</FN>
</TABLE>
14
<PAGE>
Classification of Assets
The FDIC requires each federally insured bank to classify its assets on
a regular basis in accordance with the guidelines set forth in the FDIC Manual
of Examination Policies. In addition, in connection with examinations of insured
banks by the FDIC, FDIC examiners have authority to identify problem assets as
Substandard, Doubtful or Loss. Substandard assets have one or more well defined
weaknesses that jeopardize the liquidation of the debt and are characterized by
the distinct possibility that the bank will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. An asset classified
as Loss is considered uncollectible and of such little value that continuance as
an asset of the bank is not warranted. The Company has adopted an asset
classification methodology that parallels that required by federal regulators.
At March 31, 1999, based upon the Company's asset classification methodology,
the Company had assets classified as Substandard of $364 million, none as
Doubtful and none as Loss. Assets that are classified as Loss are charged off.
The FDIC examination policies include a Special Mention category, consisting of
assets that currently do not expose the Company to a sufficient degree of risk
to warrant adverse classification, but do possess credit deficiencies deserving
management's close attention. At March 31, 1999, $238,000 of the Company's
assets were classified as Special Mention.
Non-Performing Assets
Loans are placed on non-accrual status when, in the judgment of Company
management, the probability of collection of principal or interest is deemed
insufficient to warrant further accrual of interest. The Bank discontinues the
accrual of interest on loans when the borrower is delinquent as to a
contractually due principal or interest payment by 90 days or more. When a loan
is placed on non-accrual status, all of the accrued interest on that loan is
reversed by way of a charge to interest income. Accrual of interest on a
non-accrual loan is resumed when all contractually past due payments are current
and when management believes the outstanding loan principal and contractually
due interest is no longer doubtful of collection. The Bank discontinues the
accrual of interest on loans more than 90 days past due, at which time all
accrued but uncollected interest is reversed by way of a charge to income.
Property acquired by the Bank as a result of a foreclosure is
classified as real estate owned. Foreclosed properties are recorded at the lower
of the unpaid principal balance of the related loan or fair value, less
estimated costs to sell. The amount by which the recorded loan balance exceeds
the fair value at the time a property is classified a foreclosed property is
charged against the allowance for loan losses. Any subsequent reduction in the
fair value of a foreclosed property, along with expenses incurred to maintain or
dispose of a foreclosed property, is charged against current earnings. At March
31, 1999, the Company had $63,000 of property in real estate owned.
15
<PAGE>
Nonperforming loans include loans placed on non-accrual status and
troubled debt restructurings. Non-performing assets include non-performing loans
and foreclosed properties. The following table sets forth non-performing loans
and assets.
<TABLE>
March 31,
--------------------------------
1999 1998 1997
<CAPTION>
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual mortgage loans 90 days or more past due $53 $389 $378
Non-accrual consumer loans 90 days or more past due 17 116 128
Non-accrual commerical loans 90 days or more past due 159 858 556
Loans 90 days or more past due and still accruing - 14 9
Troubled debt restructurings 9 11 -
----- ------- -------
Total non-performing loans $238 $1,388 $1,071
===== ======= =======
Total real estate owned and in judgement, net of
related allowance for losses 63 159 -
----- ------- -------
Total non-performing assets $301 $1,547 $1,071
===== ======= =======
Total non-performing loans to gross loans receivable 0.32% 1.76% 1.37%
Total non-performing assets to total assets 0.31% 1.57% 1.13%
Total classified assets $602 $1,885 $1,330
Total classified assets to total assets 0.62% 1.91% 1.40%
Interest income that would have been recorded on non-
performing loans if current $15 $89 $59
Interest income on non-performing loans included
in net income $3 $21 $13
</TABLE>
As of March 31, 1999, management was not aware of any loans not
included in the foregoing tables or discussed above that the borrower could not
comply with the loan repayment terms.
Allowance for Loan Losses
Under federal regulations, when an insured institution classifies
problem assets as either Substandard or Doubtful, it is required to establish a
general allowance for loan losses in an amount deemed prudent by management. In
addition to general valuation allowances, the Bank may establish specific loss
reserves against specific assets in which a loss may be realized. General
allowances represent loss allowances that have been established to recognize the
inherent risks associated with lending activities, but which, unlike specific
allowances, have not been allocated to recognize probable losses on particular
problem assets. The Bank's determination as to its classification of assets and
the amount of its specific and general valuation allowances are subject to
review by the DFI and the FDIC, either one of which can order the establishment
of additional general or specific loss allowances.
The allowance for loan losses is established through a provision for
loan losses, which reduces net interest income. 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 0.50%
at March 31, 1999.
16
<PAGE>
The following table sets forth activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
For the Fiscal Year Ended March 31,
---------------------------------------------------
1999 1998 1997
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $484 $461 $433
Additions charged to operations:
One-to-four family - 0 0
Multi-family and commercial real estate 2 0 0
Commercial 291 76 75
Consumer 83 24 6
------ ------ ------
376 100 81
Recoveries:
One-to-four family 0 0 19
Multi-family and commercial real estate 7 3 3
Commercial 0 0 0
Consumer 7 7 0
------ ------ ------
14 10 22
Charge-offs:
One-to-four family 0 0 0
Multi-family and commercial real estate (2) 0 0
Commercial (413) 0 (19)
Consumer (84) (87) (56)
------ ------ -------
(499) (87) (75)
Net charge-offs (485) (77) (53)
------ ------ -------
Balance at end of period $375 $484 $461
====== ====== =======
Percentage of loans to gross loans receivable
Mortgage loans 85.10% 84.51% 84.80%
Consumer loans 9.62% 9.92% 9.23%
Ratio of allowance for loan losses to gross
loans receivable at the end of period 0.51% 0.61% 0.59%
Ratio of allowance for loan losses to
non-performing loans at the end of period(1) 157.56 34.87 43.04
Ratio of net charge-offs to average gross
loans during period 0.62% 0.10% 0.07%
Average gross loans outstanding $78,341 $79,471 $76,240
Gross loans receivable at the end of period $73,896 $78,923 $78,116
<FN>
- -------------------------------------------
(1) Non-performing loans include non-accrual loans, loans 90 days or more
past due and still accruing, and troubled debt restructurings.
</FN>
</TABLE>
17
<PAGE>
The following table shows the Company's allowance for loan losses and
the allocation to the various categories of loans held for investment at the
dates indicated. Allocations to a particular category do not restrict the
Company's ability to use such allowance in any other category.
<TABLE>
At March 31,
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------
<CAPTION>
Loans In Loans In Loans In
Category Category Category
% of to Total % of to Total % of to Total
total Out- total Out- total Out-
Loans by standing Loans by standing Loans by standing
Amount Category Loans Amount Category Loans Amount Category Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Breakdown of allowance:
Mortgage loans:
One-to-four family $50 0.09% 73.38% $50 0.09% 73.64% $36 0.06% 71.14%
Multi-family 1 0.16% 0.85% 1 0.19% 0.67% - 0.00% 1.19%
Commercial/nonresidential 12 0.20% 8.04% 5 0.10% 6.67% 34 0.65% 8.25%
Construction and land 2 0.10% 2.83% 2 0.07% 3.53% 1 0.04% 4.22%
------ ------- ------ -------- ------ --------
Total mortgage loans 65 85.10% 58 84.51% 71 84.80%
Consumer loans 86 1.21% 9.62% 80 1.02% 9.92% 50 0.69% 9.23%
-------
Commercial loans 224 5.75% 5.28% 346 7.87% 5.57% 340 7.29% 5.97%
------ ------- ------ -------- ------ --------
Total allowance for loan losses $375 100.00% $484 100.00% $461 100.00%
======= ======== ====== ======== ======= ========
</TABLE>
18
<PAGE>
Investment Activities
General
The investment policy of the Company, which is established by the Board
of Directors and implemented by the Company's President, is designed to provide
a required level of liquidity and minimize potential losses due to interest rate
fluctuations without incurring undue credit risk. The Company is authorized by
regulation to invest in various types of liquid assets, including United States
Treasury obligations, securities issued by various federal agencies and state
and municipal governments, deposits at the FHLB-Chicago, certain certificates of
deposit of federally insured institutions, certain bankers' acceptances and
federal funds. The Company also invests in mortgage-backed and related
securities, securities that are either of investment grade or issued or
guaranteed by FHLMC, the FNMA or the Government National Mortgage Association
("GNMA"), and investment grade corporate debt.
The Company categorizes the securities it purchases into a
"Held-to-Maturity" or an "Available-For-Sale" portfolio as follows:
1. Securities Held-to-Maturity. The Company has the ability and
intent to hold these assets to maturity. Upon acquisition, securities
are classified as to the Company's intent and a sale would only be
effected due to deteriorating investment quality. The investment
portfolio is not used for speculative purposes and is carried at
amortized cost. In the event the Company sells securities from this
portfolio for other than credit quality reasons, all securities
within the investment portfolio with matching characteristics may be
reclassified as assets held for sale.
2. Securities Available-for-Sale. The Company does not intend to hold
the assets to maturity and thus are carried at fair value, with the
unrealized gains or losses, net of tax, reported as a separate
component of the stockholders equity. This portion of the securities
portfolio is designed to meet anticipated loan demand and deposit
runoff or to take advantage of market opportunities.
Effective April 1, 1993, the Company adopted SFAS No. 115 that requires
that the Company classify investments in marketable equity securities with
readily determinable fair value and all investments in debt securities as
held-to-maturity, trading or available-for-sale. The Company classified the
securities as of the date of adoption of SFAS 115 and subsequently at the time
of purchase and reviews the appropriateness of the classification at each
reporting date as follows:
1. Securities Held-to-Maturity. The Company has both the intent and
ability to hold these debt securities to maturity. Securities in this
category are carried at amortized cost.
2. Securities Classified as Trading. The Company acquires these
securities with the intent to resell them in the near term and are
held only for a short period of time. Securities in this category are
carried at fair value, with unrealized holding gains and losses
included in earnings.
3. Securities Available-for-Sale. This category includes all
securities not classified as held-to-maturity or trading. Securities
in this category are carried at fair value, with unrealized holding
gains and losses reported, net of deferred income taxes, in a
separate component of equity. These securities may be sold, for
example, in response to changes in market interest rates, liquidity
needs, availability of higher yielding instruments and changes in
funding sources.
The investment activities of the Company consist primarily of
investments in mortgage-backed and related securities and other investment
securities, consisting primarily of securities issued or guaranteed by the
United States Government or agencies thereof. Typical investments include
federally sponsored agency mortgage pass-throughs, and federally sponsored
agency and mortgage related securities. Investment and aggregate investment
limitations and credit quality parameters of each class of investment are
prescribed in the Company's investment policy. The Company performs analyses on
mortgage related securities prior to purchase and on an ongoing basis to
determine the impact on earnings and market value of various interest rate and
prepayment conditions.
19
<PAGE>
Mortgage-Backed Securities
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators through intermediaries
(generally federal government-sponsored enterprises) that pool and repackage the
participation interest in the form of securities to investors such as the
Company. Such federal government-sponsored enterprises, which guarantee the
payment of principal and interest to investors, include FHLMC, FNMA and GNMA.
Mortgage-backed securities generally increase the quality of the Company's
assets by virtue of the guarantees that back them, are more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Company.
FHLMC, and FNMA were established to provide support for low and
middle-income housing. There are limits to the maximum size of loans that
qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts and pools of mortgage loans with interest rates that are within a range
and have varying maturities back the securities. The underlying pool of mortgage
loans can be composed of either fixed rate mortgage or ARM loans.
Mortgage-backed securities commonly are referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgage loans, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgage loans.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgages repay or prepay the underlying mortgage loans. Prepayments of
the underlying mortgage loans may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The prepayment assumption used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-backed security and these assumptions are reviewed periodically to
reflect the actual prepayment. The actual prepayment of the underlying mortgage
loans depends on many factors, including type of mortgage loans, the coupon
rate, the age of the mortgage loans, the geographical location of the real
estate collateralizing the mortgage loans and general levels of market interest
rates. The difference between the interest rates on the underlying mortgage
loans and the prevailing mortgage interest rates is an important determinant in
the rate of prepayments.. During periods of decreasing mortgage interest rates,
prepayments generally increase. If the coupon rate of the underlying mortgage
loans significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgage loans. Prepayment experience is more difficult to
estimate for adjustable rate mortgage-backed securities.
Investment Securities
The Company invests in various types of liquid assets that are
permissible investments for Wisconsin-chartered savings banks, including United
States Treasury obligations and securities of various federal agencies. The
Company also invests its assets in commercial paper and mutual funds, the assets
of which conform to the investments that a Wisconsin-chartered savings bank is
otherwise authorized to make directly. The Company's current investment policy
only permits purchases of investments rated investment grade by a nationally
recognized rating agency and does not permit purchases of securities of
non-investment grade quality.
Composition of Securities Held-to-Maturity
At March 31, 1999, the Company held $9.4 million in its securities
held-to-maturity portfolio, consisting of $6.0 million in mortgage-backed
certificates issued by various federal agencies and $3.4 million in the
investment securities portfolio, consisting of securities of various federal
agencies. At March 31, 1999, the mortgage-backed securities portfolio
represented 6.2% of the Company's total assets and the investment securities
portfolio represented 3.5% of the Company's total assets.
Composition of Securities Classified as Trading
At March 31, 1999 and 1998, the Company did not have any investment
securities or mortgage-related securities classified as trading.
Composition of Securities Available for Sale
At March 31, 1999, the Company did not have any investment securities
or mortgage-related securities classified as available for sale.
20
<PAGE>
The table below sets forth certain information regarding the carrying
value, composition and market value of the Company's securities available for
sale and mortgage-backed securities held-to-maturity at March 31, 1999, 1998,
and 1997.
<TABLE>
At March 31, 1999 At March 31, 1998 At March 31, 1997
----------------- ----------------- -----------------
Carrying % of Market Carrying % of Market Carrying % of Market
Value Total Value Value Total Value Value Total Value
----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. govt securities and other agency obligations
FNMA $ - - $ - $ - - $ - $1,963 71.33% $1,963
FHLB - - - - - - 488 17.73% 488
FHLMC - - - - - - 300 10.90% 300
Money Market Mutual Fund - - - - - - 1 0.04% 1
------- ------ ------ ------- ------- ------- ------- ------- ------
Total securities available-for-sale $ - - $ - $ - - $ - $2,752 100.00% $2,752
======= ====== ====== ======= ======= ======= ======= ======= ======
Securities held-to-maturity
Mortgage-backed securities
FNMA $3,189 33.80% $3,224 $3,868 41.16% $3,926 $4,622 62.28% $4,523
FHLMC 1,214 12.86% 1,208 377 4.01% 384 434 5.85% 420
GNMA 1,634 17.32% 1,698 2,153 22.91% 2,236 2,365 31.87% 2,365
U.S. govt securities and other agency obligations
FFCB - 0.00% - 500 5.32% 500 - - -
FHLB 2,098 22.24% 2,083 1,700 18.09% 1,700 - - -
FHLMC 800 8.48% 803 800 8.51% 799 - - -
FNMA 500 5.30% 500 - - -
------- ------- ------- ------- ------- ------- ------- ------- ------
Total securities held-to-maturity $9,435 100.00% $9,516 $9,398 100.00% $9,545 $7,421 100.00% $7,308
======= ======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
At March 31, 1999, the aggregate book value and the aggregate market
value of securities issued by FNMA totaled $3.9 million and $3.9 million,
respectively. At March 31, 1999, the aggregate book value and the aggregate
market value of securities issued by GNMA totaled $1.6 million and $1.7 million,
respectively. Both FNMA and GNMA securities exceed 10% of stockholder equity at
March 31, 1999.
21
<PAGE>
The following table shows the maturity or period to repricing of the
Company's mortgage-backed securities portfolio held-to-maturity at March 31,
1999:
At March 31, 1999
--------------------------------------
Adjustable Fixed
Rate Rate Total
Mortgage Mortgage Mortgage-
Backed Backed backed
Securities Securities Securities
Amounts due or repricing:
Within one year $450 - - $450
After one year:
One to three years - - - - - -
Five to ten years - - $995 $995
Ten to 20 years - - 1677 1677
Over 20 years - - 2,915 2,915
------ ------- -------
Total due or repricing after one year - - 5,587 5,587
Total due or repricing 450 5,587 6,037
------ ------- -------
Less:
Unearned discounts
and premiums, net - - - - - -
------- ------- -------
Mortgage-backed securities, net $450 $5,587 $6,037
======= ======= =======
Sources of Funds
General
The Company's primary sources of funds for use in lending, investing
and for other general purposes are deposits, proceeds from principal and
interest payments on loans, mortgage-backed and related securities and
investment securities, and to a lesser extent, FHLB-Chicago advances.
Contractual loan payments are a relatively stable source of funds, while deposit
inflows and outflows and loan payments are significantly influenced by general
market interest rates and economic conditions. Borrowings may be used on a
short-term basis to compensate for seasonal or other reductions in normal
sources of funds or for deposit inflows at less than projected levels.
Borrowings also may be used on a longer-term basis to support expanded lending
or investment activities. The Company primarily utilizes advances from the
FHLB-Chicago as sources for its borrowings. At March 31, 1999, 1998 and 1997 the
Company had advances from the FHLB-Chicago of $17.0 million or 17.4% of total
assets, $19.1 million or 19.3% of total assets, and $17.6 million or 18.5% of
total assets, respectively. Of the Company's outstanding FHLB-Chicago advances
at March 31, 1999, $4.5 million will mature before March 31, 2000. The Company
also had borrowings consisting of repurchase agreements of $5.6 million, $5.3
million and $4.5 million at March 31, 1999, 1998 and 1997, respectively.
Deposits
The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits principally consist of core
deposits (NOW, money market deposit and passbook accounts) and certificates of
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in prevailing interest rates and competition. The Company's
deposits are obtained primarily from the areas in which its branches are
located, and the Company relies principally on customer service, marketing
programs and long-standing relationships with customers to attract and retain
these deposits. Various types of advertising and promotion to attract and retain
deposit accounts also are used. The Company does not currently solicit or accept
brokered deposits. Management monitors the Company's certificates of deposit
and, based on historical experience, management believes it will retain a large
portion of such accounts upon maturity. Management considers Company
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors in considering its deposit offerings
and promotions. The Company believes it has been competitive in the types of
accounts and interest rates it has offered on its deposit products.
The Company intends to continue its efforts to attract and retain deposits as
a primary source of funds for supporting its lending and investing activities.
22
<PAGE>
<TABLE>
The following table presents the deposit activity of the Company for the
periods indicated:
Fiscal Year Ended March 31,
1999 1998 1997
---- ---- ----
<CAPTION>
(In thousands)
<S> <C> <C> <C>
Net Deposits (Withdrawals) $(3,003) $(1,613) $1,627
Interest credited on deposits 2,728 2,334 2,674
-------- -------- -------
Total increase (decrease) in deposits $(275) $721 $4,301
</TABLE>
At March 31, 1999, the Company had $3.6 million in certificates
of deposit outstanding in amounts of $100,000 or more maturing as follows:
Amount at
March 31, 1999
(In thousands)
Three months or less $ 358
Over three through six months 894
Over six through 12 months 1,257
Over 12 months 1,051
-----------------
Total $ 3,560
=================
23
<PAGE>
The following table sets forth the distribution of the Company's core
deposits and certificate accounts at the dates indicated and the weighted
average nominal interest rates on each category of deposits presented:
<TABLE>
At March 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- -------------------------------- ------------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of total Nominal of total Nominal of total Nominal
Amount deposits Rate Amount deposits Rate Amount deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Core Deposits:
Non-interest bearing $3,590 5.79% - $3,823 6.14% - $2,792 4.54% -
NOW accounts 6,346 10.23% 2.20% 5,910 9.49% 2.15% 5,989 9.73% 2.26%
Money market 6,856 11.07% 4.59% 6,026 9.68% 4.87% 5,029 8.17% 4.61%
Passbook 6,563 10.58% 2.15% 6,091 9.78% 2.31% 5,905 9.59% 2.16%
-------- ------- ------ ------- ------- ------ ------- ------ ------
Total 23,355 37.67% 2.55% 21,850 35.08% 2.57% 19,715 32.03% 2.51%
Certificates accounts
(current term to maturity):
One to six months 17,269 27.86% 5.61% 22,514 36.15% 5.69% 15,941 25.90% 5.43%
six to 12 months 11,218 18.09% 5.48% 6,889 11.06% 5.75% 9,443 15.34% 5.71%
13 to 36 months 8,878 14.32% 5.63% 9,435 15.15% 6.05% 14,151 22.99% 6.07%
37 to 60 months 1,137 1.82% 5.76% 1,389 2.24% 6.08% 2,110 3.43% 6.11%
61 to 96 months 109 0.18% 6.70% 167 0.27% 6.54% 120 0.19% 6.33%
97 to 132 months 37 0.06% 6.35% 34 0.05% 6.35% 77 0 6.96%
-------- ------ ------ ------- ------ ------ ------- ------ ------
Total certificates 38,648 62.33% 5.71% 40,428 64.92% 5.75% 41,842 67.97% 5.75%
Total deposits $62,003 100.00% 4.49% $62,278 100.00% 4.62% $61,557 100.00% 4.71%
======= ======= ===== ======= ======= ====== ======= ======= ======
</TABLE>
24
<PAGE>
The following table presents, by various rate categories, the amount
of certificates of deposit outstanding at March 31, 1998 and March 31, 1999:
At March 31,
1999 1998
--------------
Certificates of Deposit: (In thousands)
2.00% to 2.99% 0 100
3.00% to 3.99% 122 -
4.00% to 4.99% 7,176 538
5.00% to 5.99% 24,893 22,861
6.00% to 6.99% 5,764 16,229
7.00% to 7.99% 663 670
8.00% to 8.99% 30 30
-------- --------
Total $38,648 $40,428
======== ========
Borrowings and Other Financing Transactions
Although deposits are the Company's primary source of funds, the
Company's policy has been to utilize borrowings as part of its assets/liability
management strategy. Borrowings are secured when management believes it can
profitably re-invest those funds for the benefit of the Company. The Company's
primary form of borrowing consists of advances from the FHLB-Chicago. These
advances are collateralized by the capital stock of the FHLB-Chicago held by the
Company and certain of its mortgage loans and mortgage-backed and related
securities. Such advances are made pursuant to several different credit
programs, each of which has it's own interest rate and range of maturities. The
maximum amount the FHLB-Chicago will advance to member institutions, including
the Company, for purposes other than meeting withdrawals fluctuates from time to
time in accordance with policies the FHLB-Chicago. At March 31, 1999, the
Company's FHLB-Chicago advances totaled $17.0 million, representing 19.9% of
total liabilities. The Company intends to continue to leverage its capital base
by utilizing FHLB borrowings to originate or purchase loans in fiscal 1999.
The Company's borrowings from time to time include repurchase
agreements. These agreements generally are entered into with local businesses
and institutions that seek to deposit funds in excess of insurable limits. These
transactions are treated as borrowings collateralized by the securities sold,
which generally are mortgage-backed securities, and are therefore included as
other borrowings in the Company's Consolidated Financial Statements.
While increases in borrowings and changes in the collateralization
levels due to market interest rate changes could require the Company to add
collateral to secure its borrowings, the Company does not anticipate having a
shortage of qualified collateral to pledge against its borrowings. At March 31,
1999, there were $5.6 million in repurchase agreements outstanding.
25
<PAGE>
The following table sets forth certain information regarding the
Company's FHLB-Chicago advances and repurchases agreements at or for the periods
ended on the dates indicated.
<TABLE>
At or For the Fiscal Years Ended March 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
FHLB- Chicago advances:
Average balance outstanding $17,488 $17,912 $15,751
Maximum amount outstanding at any
month-end during the period 19,062 23,173 18,245
Balance outstanding at end of period 16,990 19,062 17,634
Weighted average interest rate during
the period(1) 5.44% 5.88% 5.87%
Weighted average interest rate at end
of period 5.30% 5.49% 5.91%
Repuchase agreements:
Average balance outstanding $5,597 $4,937 $4,808
Maximum amount outstanding at any
month-end during the period 6,473 6,501 5,761
Balance outstanding at end of period 5,625 5,258 4,463
Weighted average interest rate during
the period 5.19% 6.00% 5.74%
Weighted average interest rate at end
of period 5.38% 6.08% 6.13%
Total advances and repurchase agreements:
Average balance outstanding $23,085 $22,850 $20,559
Maximum amount outstanding at any
month-end during the period 25,535 29,674 24,006
Balance outstanding at end of period 22,615 24,320 22,097
Weighted average interest rate during
the period 5.91% 5.91% 5.78%
Weighted average interest rate at end
of period 5.32% 5.62% 5.95%
<FN>
- -------------------------------
(1) Computed on the basis of average monthly balances.
</FN>
</TABLE>
Subsidiary Activities
The Bank has two wholly owned subsidiaries, Amery Service Agency, Inc.
("ASA"), organized as a Wisconsin corporation in 1970 and Northwest Investments
Inc. ("NWI") organized as a Nevada corporation in 1997.
ASA engages in insurance agency activities permissible under state and
federal law, including the sale of credit life and disability products, and
maintenance of a third party brokerage relationship. The ASA and the Bank have
received approval of the Wisconsin Department of Financial Institutions and the
FDIC to engage in the insurance and brokerage activities.
In January 1983, ASA formed the Pondhurst Condominium Association and
developed 64 residential lots for condominium duplexes and four-plexes on land
adjacent to a golf course in Amery, Wisconsin (the "Pondhurst Project"). As of
March 31, 1999, all 64 residential lots had been sold. On May 8, 1998, ASA sold
an adjacent undeveloped 7.5-acre parcel of land for $65,000. With the sale of
the 7.5 acre parcel, the Bank and ASA has complied with a request by the Federal
Reserve bank of Minneapolis that ASA divest its holdings in the Pondhurst
Project by May 31, 2000. As of March 31, 1999, ASA had total assets of $48,000.
On May 30, 1997, NWI was established as an investment subsidiary of
Bank to manage a portion of its investments. The establishment and operation of
a investment subsidiary through incorporation and operation in the state of
26
<PAGE>
Nevada provides certain corporate tax advantages to the Bank. As of March 31,
1999, NWI had total assets of $23.9 million.
Personnel
At March 31, 1999, the Company had 32 full-time employees and 9
part-time employees. A collective bargaining unit does not represent the
employees of the Company and the Company believes its relationship with its
employees to be good.
Federal Taxation
General
The following discussion of tax matters is intended to be a summary of the
material tax rules applicable to the Bank and does not purport to be a
comprehensive description of all applicable tax rules.
The Bank and the Company report their income on a fiscal year basis using
the accrual method of accounting. The Bank and the Company are, as a general
matter, subject to the rules of federal income taxation applicable to
corporations. Generally, the Internal Revenue Code requires that all
corporations compute taxable income using the accrual method of accounting. The
Company and its subsidiaries currently file a consolidated federal income tax
return. For its taxable year ended March 31, 1999, the Bank was subject to a
blended federal income tax rate of approximately 34%.
Bad Debt Reserves
Savings banks, such as the Bank, which meet certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts"), were permitted for tax years beginning prior to December 31, 1995 to
establish a reserve for bad debts and to make annual additions thereto, which
additions may, within specified formula limits, be deducted in arriving at their
taxable income. Such additions were computed using one of two allowable methods.
Each year, the Bank has used the method that allows the largest addition, and
thus, the greater deduction for tax purposes.
The Small Business Job Protection Act of 1996 ("the Act") repealed the
reserve method of accounting for bad debts by thrift institutions, effective for
taxable years beginning after December 31, 1995. Thrift institutions such as the
Bank with less than $500 million in assets are now required to use the
experience method. The Act also grants partial relief from the bad debt reserve
"recapture" which occurs in connection with the change in method of accounting.
The pre-1988 reserves are not required to be included in income in connection
with the change in method of accounting. In addition, the Act suspends recapture
of post-1987 reserves for a period of two years, conditioned on the
institution's compliance with certain residential loan requirements.
Institutions can meet this residential loan requirement if the principal amount
of residential loans made during a taxable year was not less than the "base
amount" for such year. The base amount is determined on an
institution-by-institution basis, and constitutes the average of the principal
amounts of residential loans made by an institution during the six most recent
taxable years. Notwithstanding the foregoing, institutions will be required to
pay for recaptured post-1987 bad debt reserves ratably over a six-year period
starting in 1998. Since provisions for deferred income tax have been provided
for on post-1987 bad debt reserves, there will not be any additional income tax
expense to the Bank on recapture.
Earnings appropriated for bad debt reserves and deducted for federal income
tax purposes cannot be used by the Bank to pay cash dividends or distributions
to the Holding Company without the Bank including the amount in taxable income,
together with an amount deemed necessary to pay the resulting income tax. Thus,
any dividends to the Holding Company that would reduce amounts appropriated to
the Bank's bad debt reserves and deducted for federal income tax purposes could
create a tax liability for the Bank. The Bank does not intend to pay dividends
that would result in a recapture of its bad debt reserves.
Corporate Alternative Minimum Tax
For taxable years beginning after December 31, 1986, the Internal Revenue
Code imposes an alternative minimum tax ("AMT") of 20% on alternative minimum
taxable income ("AMTI"). Only 90% of AMTI can be offset by net operating losses.
For taxable years beginning after December 31, 1989, the adjustment to AMTI
based on book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (prior to reduction for
net operating losses). In addition, for taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million was imposed on
27
<PAGE>
corporations, including the Bank, whether or not AMT is paid. The Bank does not
expect to be subject to AMT in the future, although no assurance can be made
that it will not.
Distributions
To the extent that the Bank makes "non-dividend distributions" to
shareholders that are considered to result in distributions from (i) the Bank's
reserve for losses on qualifying real property loans that exceeds the amount
that would have been allowed under an experience method or (ii) the supplemental
reserve for losses on loans ("Excess Distributions"), then an amount equal to
such Excess Distributions must be included in the Bank's taxable income.
Non-dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. In contrast, distributions
made from the Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, rather than the Bank's bad debt reserves are
generally considered dividends for federal income tax purposes and therefore
would not be included in the Bank's taxable income. Further, under certain
circumstances, such as tax-free reorganizations, non-dividend distributions may
not be required to be included in the Bank's taxable income.
The amount of additional taxable income created from an Excess Distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if after the Conversion, certain
portions of the Bank's accumulated tax bad debt reserve are used for any purpose
other than to absorb qualified bad debt loans, such as for the payment of
dividends or other distributions with respect to the Bank's capital stock
(including distributions upon redemption or liquidation) and such payment or
other distribution is not otherwise excluded from the provisions generally
applicable to Excess Distributions, approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state taxes).
See "Regulation" and "Dividend Policy" for limits on the payment of dividends of
the Bank.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10.0 million, with a 3% surtax imposed
on taxable income over $15.0 million.
State Taxation
The State of Wisconsin imposes a tax on the Wisconsin taxable income of
corporations, including savings banks, at the rate of 7.9%. Wisconsin taxable
income is generally similar to federal taxable income except that interest from
state and municipal obligations is taxable, no deduction is allowed for state
income taxes and net operating losses may be carried forward but not back.
Wisconsin law does not provide for filing of consolidated state income tax
returns. The Bank's investment subsidiary, Northwest Investments, Inc., is
subject to taxation under Nevada state law. Nevada does not currently impose a
corporate income or franchise tax.
Regulation
The following discussion is intended to be a summary of regulatory issues
and not a comprehensive description of all applicable regulations.
The Bank is a Wisconsin-chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The
Bank is subject to extensive regulation by the Wisconsin Department of Financial
Institutions ("WDFI"), as its chartering agency, and by the FDIC, as its deposit
insurer and principal federal regulator. The lending and investment authority of
the Bank is prescribed by Wisconsin law and regulations, as well as applicable
federal law and regulations, and the Bank is prohibited from engaging in any
activities not permitted by such law and regulations. The Company is a unitary
bank holding company subject to regulatory oversight by the Board of Governors
of the Federal Reserve System (the "FRB"), the WDFI the Securities and Exchange
Commission ("SEC").
Wisconsin Savings Bank Regulation
Regulations adopted by the WDFI govern various aspects of the activities
and the operation of Wisconsin-chartered savings banks.
Examinations and Assessments
The Bank is required to file periodic reports with and is subject to
periodic examinations by the WDFI. Savings banks are required to pay examination
fees and annual assessments to fund the supervisory operations of the WDFI. On
28
<PAGE>
June 23, 1998, the DFI assessed the Bank a $4,176.52 fee based the Bank's total
assets of $99.4 million at December 31, 1997. On March 25, 1999, the DFI
assessed the Bank a $12,989.25 examination charge and the Company a $2,484
examination charge.
Loans and Investments
The Bank is authorized to make, invest in, sell, purchase, participate or
otherwise deal in mortgage loans or interests in mortgage loans without
geographic restriction, including loans made on the security of residential and
commercial property. Savings banks also may lend funds on a secured or unsecured
basis for business, corporate commercial or agricultural purposes provided the
total of all such loans do not exceed 10% of the Bank's total assets, unless the
WDFI authorizes a greater amount. Loans are subject to certain limitations,
including percentage restrictions based on the Bank's total assets.
Under regulations established for state savings banks by the Savings
Institutions Division of the WDFI and implemented by the Administrator of the
WDFI, the Bank is limited in the amount of commercial real estate and commercial
business loans it can hold in its loan portfolio. This limit is currently 20% of
the Bank's total assets and may be increased with the approval of the WDFI. At
March 31, 1999, the Bank had $9.8 million of such loans in its portfolio with a
current limit based on the Bank's asset base of $97.6 million. The Bank does not
anticipate exceeding regulatory limitations on such commercial lending in the
foreseeable future.
Savings banks may invest funds in certain types of debt and equity
securities, including obligations of federal, state and local governments and
agencies. Subject to the prior approval of the WDFI, compliance with capital
requirements and certain other restrictions, savings banks may invest in
residential housing development projects. Savings banks may invest in service
corporations or subsidiaries with the prior approval of the WDFI, subject to
certain restrictions. The lending and investment powers of Wisconsin savings
banks also are limited by FDIC regulations and other federal laws and
regulations.
The Bank's subsidiary operations also are regulated by the FDIC and the
FRB. See "-Federal Deposit Insurance Corporation Improvement Act" and "-Holding
Company Regulation." At March 31, 1999, the Bank's subsidiary operations were
not under any WDFI, FRB or FDIC order to divest or terminate any activity. The
lending and investment powers of Wisconsin savings banks also are limited by
FDIC regulations and other federal law and regulations. See "Federal Deposit
Insurance Corporation Improvement Act of 1991 Restrictions on State-Chartered
Banks."
Loans to One Borrower
Savings banks may make loans and extensions of credit, both direct and
indirect, to one borrower in amounts up to 15% of capital plus an additional 10%
for loans fully secured by readily marketable collateral. In addition, savings
banks may make loans to one borrower for any purpose in an amount not to exceed
$500,000, or to develop domestic residential housing units in an amount not to
exceed the lesser of $30 million or 30% of capital, subject to certain
conditions. At March 31, 1999, the Bank did not have any loans that exceeded the
loans-to-one borrower limitations.
Qualified Thrift Requirement
The Bank must qualify for and maintain a level of qualified thrift
investments equal to 60% of its assets as prescribed in Section 7701(a)(19) of
the Internal Revenue Code of 1986, as amended. At March 31, 1999, the Bank
maintained 92.1% of its assets in qualified thrift investments and therefore met
the qualified thrift lender requirement.
Dividend Limitations
A savings bank that meets its regulatory capital requirement may declare
dividends on capital stock based upon net profits, provided that its paid-in
surplus equals its capital stock. If the paid-in surplus of the savings bank
does not equal its capital stock, the board of directors may not declare a
dividend unless at least 10% of the net profits of the preceding half year in
the case of quarterly or semi-annual dividends, or 10% of the net profits of the
preceding year in case of annual dividends, has been transferred to paid-in
surplus. In addition, prior approval of the WDFI is required before dividends
exceeding 50% of profits for any calendar year may be declared and before a
dividend may be declared out of retained earnings. Under the WDFI's regulations,
a savings bank which converted from mutual to stock form also would be
prohibited from paying a dividend on its capital stock if the effect thereof
would cause the regulatory capital of the savings bank to be reduced below the
amount required for its liquidation account.
29
<PAGE>
Liquidity
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 withdrawable
accounts plus its short-term borrowings. Also required is a "primary liquid
assets" ratio of at least 4% of average daily withdrawable accounts and
short-term borrowings. Primary liquid assets is defined as primarily short-term
liquid assets and U.S. government and U.S. government agency securities. At
March 31, 1999, the Bank's daily liquidity ratio was 22.7%.
Restrictions on Loans to and Transactions with Insiders and Affiliates
FRB regulations limit the total amount a savings bank may lend to its
executive officers, directors, principal shareholders, and their related
interests. Generally, an affiliated person may borrow an aggregate amount not
exceeding 15% of a savings bank's unimpaired capital and unimpaired surplus on
an unsecured basis and an additional 10% on a secured basis. The regulations
limit, with certain exceptions, the aggregate amount a depository institution
may lend to affiliated persons as a class to an amount not exceeding the
institution's unimpaired capital and unimpaired surplus.
In addition, WDFI regulations place certain restrictions and limits on
loans and other transactions with the Bank's affiliated persons to ensure that
such loans and transactions are on terms which would be available to members of
the general public for similar credit extensions.
The Bank also must comply with Sections 23A and 23B of the Federal Reserve
Act relative to transactions with affiliates in the same manner and to the same
extent as if the Bank were a Federal Reserve member bank. Generally, Sections
23A and 23B limit the extent to which an insured institution or its subsidiaries
may engage in certain "covered transactions" with an affiliate to an amount
equal to 10% of such institution's capital and surplus, plus an aggregate limit
on all such transactions with affiliates to an amount equal to 20% of such
capital and surplus, and require that all transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the making
of loans, the purchase of assets, issuance of a guaranty and similar other types
of transactions. The WDFI may, for safety and soundness reasons, impose more
stringent restrictions on savings banks but may not exempt transactions from or
otherwise abridge Sections 23A and 23B.
Unless prior approval of the WDFI is obtained, a savings bank may not
purchase, lease or acquire a site for an office building or an interest in real
estate from an affiliated person, including a stockholder owning more than 10%
of its capital stock, or from any firm, corporation, entity or family in which
an affiliated person or 10% stockholder has a direct or indirect interest.
The Bank has not been significantly affected by the applicable restrictions
on loans to and transactions with affiliates.
Insurance of Deposits
The Bank's deposits are insured to applicable limits under the Savings
Association Insurance Fund ("SAIF") of the FDIC. FDIC regulations assign
institutions to a particular capital group based on the level of an
institution's capital -- "well capitalized," "adequately capitalized," and
"undercapitalized." These groups are each then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with reduced insurance rates paid by well capitalized,
financially sound institutions and higher rates paid by undercapitalized
institutions that pose a substantial risk of loss to the insurance fund
unless effective corrective action is taken.
The Bank is currently assessed deposit insurance premiums at the rate of
$0.065 per one hundred dollars of deposits. The Bank's expense related to FDIC
premiums was $38,000 and $39,000 for the fiscal year ended March 31, 1999 and
1998. Deposit premium levels are set in order to permit the SAIF to achieve a
ratio of reserves to insured deposits of 1.25%, and the FDIC may adjust
assessment rates in order to maintain the target ratio. While an increase in
premiums for the Bank could have an adverse effect on earnings, a decrease in
premiums could have a positive impact on earnings. The Bank does not anticipate
any increase in the insurance premium in the foreseeable future.
The FDIC insures commercial bank deposits through a separate fund, the Bank
Insurance Fund ("BIF"). During 1995, BIF assessment rates were reduced and as a
result, BIF member institutions were paying lower deposit insurance premiums
than SAIF-member institutions. Legislation passed during 1996 addressed the
BIF/SAIF premium disparity and other matters related to deposit insurance
obligations. See " -Regulatory Legislation Affecting Deposit Insurance."
30
<PAGE>
Under the FDIC Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
Management of the Company does not know of any practice, condition or violation
that might lead to the termination of deposit insurance for the Bank.
Certain Federal Regulations
Provisions of federal law address risk reduction and the promotion of
standards of safety and soundness for insured depository institutions.
Examinations and Audits
Federal regulations require annual on-site examinations for all depository
institutions except those well-capitalized institutions with assets of less than
$100 million; annual audits by independent public accountants for all insured
institutions with assets in excess of $500 million; the formation of independent
audit committees of the boards of directors of insured depository institutions
for institutions with assets equal to or in excess of $500 million; and
management of depository institutions to prepare certain financial reports
annually and to establish internal compliance procedures.
Prompt Corrective Regulatory Action
Federal bank regulators are required to take certain supervisory actions
with respect to undercapitalized institutions, the severity of which depends
upon the institution's degree of capitalization. The regulations provide that an
insured institution that has a ratio of total capital to risk-based assets of
less than 8.0%, core capital to risk-based assets of less than 4.0% or a
leverage ratio that is less than 4.0%, would be considered "undercapitalized."
An insured institution that has a ratio of total capital to risk-based assets of
less than 6.0%, core capital to risk-based assets of less than 3.0% or a
leverage ratio that is less than 3.0%, would be considered "significantly
undercapitalized" and an insured institution that has tangible capital to assets
ratio equal to or less than 2.0% would be deemed "critically undercapitalized."
Subject to limited exceptions, insured institutions in any of the
undercapitalized categories are prohibited from declaring dividends, making any
other capital distribution or paying a management fee to a controlling person or
entity. Undercapitalized and significantly undercapitalized institutions face
more severe restrictions. The Bank currently exceeds all applicable regulatory
capital requirements and, therefore, is not subject to prompt correctional
action.
Brokered Deposits
FDIC regulations govern the acceptance of brokered deposits by insured
depository institutions. The capital position of an institution determines
whether and pursuant to what limitations an institution may accept brokered
deposits. A "well-capitalized" institution (one that significantly exceeds
specified capital ratios) may accept brokered deposits without restriction.
"Undercapitalized" institutions (those that fail to meet minimum regulatory
capital requirements) may not accept brokered deposits and "adequately
capitalized" institutions (those that are not "well-capitalized" or
"undercapitalized") may only accept such deposits with the consent of the FDIC.
The definitions of "well-capitalized", "adequately capitalized" and
"undercapitalized" governing the acceptance of brokered deposits conform to the
definitions used in the regulations implementing the prompt corrective action
provisions of the FDICIA. The Bank is a "well-capitalized" institution and
therefore may accept brokered deposits without restriction. At March 31, 1999,
the Bank had no brokered deposits.
Uniform Lending Standards
Savings institutions must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are
secured by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards
(including loan-to-value limits) that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by federal bank regulators. The Bank has adopted and maintains such policies.
Standards for Safety and Soundness
On July 10, 1995, federal bank regulators adopted Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") and also
adopted a final rule establishing deadlines for submission and review of safety
and soundness compliance plans and operational and managerial standards for all
insured depository institutions relating to internal controls, information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk
31
<PAGE>
exposure; asset growth; and compensation fees and benefits. The
compensation standards prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. Federal bank regulators are authorized,
but not required, to request a compliance plan for failure to satisfy the safety
and soundness standards set out in the Guidelines.
The Bank believes that its operational and managerial standards
substantially comply with the standards set forth in the Guidelines and that
compliance with the Guidelines will therefore not impose a significant burden on
Bank operations.
Restrictions upon State-Chartered Banks
FDIC regulations governing Bank equity investments prohibit certain equity
investments and generally limit equity investments to those permissible for
federally-chartered banks and their subsidiaries. Institutions holding
impermissible equity investments that do not receive FDIC approval must submit
to the FDIC a plan for divesting such investments. At March 31, 1999, the Bank
did not hold any impermissible equity investments.
Under FDIC regulations, the Bank must obtain the FDIC's prior approval
before directly, or indirectly through a majority-owned subsidiary, engaging "as
principal" in any activity that is not permissible for a national bank unless
certain exceptions apply. The activity regulations provide that state banks
which meet applicable minimum capital requirements would be permitted to engage
certain activities that are not permissible for national banks, including
guaranteeing obligations of others, activities which the FRB has found to be
closely related to banking and certain securities activities conducted through
subsidiaries. The FDIC will not approve an activity that it determines presents
a significant risk to the FDIC insurance funds. As a SAIF-insured,
state-chartered savings bank which was formerly a state-chartered savings
association, the Bank continues to be subject to certain restrictions which are
imposed by federal law on state-chartered savings associations. The activities
of the Bank and its subsidiaries are of a type permissible under applicable
federal regulations.
Capital Maintenance
FDIC Regulation
FDIC-insured institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based capital requirements. The Bank is required
to meet the following capital standards to remain adequately capitalized and not
be subject to corrective action: (i) "Tier 1 capital" in an amount not less than
3% of total assets; (ii) "Tier 1 capital" in an amount not less than 4% of
risk-weighted assets; and (iii) "total capital" in an amount not less than 8% of
risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions
Examination Council) are also required to maintain "Tier 1 capital" equal to at
least 3% of total assets (the "leverage capital" requirement). Tier 1 capital is
defined to include the sum of common shareholders' equity, noncumulative
perpetual preferred stock (including any related surplus), and minority
interests in consolidated subsidiaries, minus all intangible assets (with
certain exceptions), identified losses, and qualifying investments in securities
subsidiaries. An institution that fails to meet the minimum leverage limit
requirement must file a capital restoration plan with the appropriate FDIC
regional director. At March 31, 1999, the Bank's ratio of Tier 1 capital to
total assets was 10.14%, or 7.14 percentage points in excess of the minimum
leverage capital requirement, the Bank's Tier 1 capital to risk-weighted assets
was 16.09%, or 12.09 percentage points in excess of the FDIC requirement, and
the Bank's total capital to risk-weighted assets was 16.71%, or 8.71 percentage
points in excess of the FDIC requirement.
Wisconsin Regulation
Wisconsin-chartered savings banks are required to maintain a minimum
capital to assets ratio of 6% and must maintain total capital necessary to
ensure the continuation of insurance of deposit accounts by the FDIC. If the
WDFI determines that the financial condition, history, management or earning
prospects of a savings bank are not adequate, the WDFI may require a higher
minimum capital level for the savings bank. If a savings bank's capital ratio
falls below the required level, the WDFI may direct the savings bank to adhere
to a specific written plan established by the WDFI to correct the savings bank's
capital deficiency, as well as a number of other restrictions on the savings
bank's operations, including a prohibition on the declaration of dividends. At
March 31, 1999, the Bank's total capital, as calculated under Wisconsin law, was
$9.8million or 9.4% of total assets, which was 3.4% in excess of the required
amount.
32
<PAGE>
Community Reinvestment Act
Under the Community Reinvestment Act of 1977, as amended (the "CRA"),
as implemented by FDIC regulations, the Bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a
bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution. The law requires public disclosure of an
institution's CRA rating and also requires the primary regulator to provide a
written evaluation of an institution's CRA performance. . The Bank had a CRA
examination on February 12, 1998, and received a "Outstanding" CRA rating.
Federal Reserve System
The FRB's Regulation D imposes reserve requirements on all depository
institutions which maintain transaction accounts or non-personal time deposits.
Checking accounts, NOW accounts and certain other types of accounts that permit
payments or transfers to third parties fall within the definition of transaction
accounts and are subject to Regulation D reserve requirements, as are any
non-personal time deposits (including certain money market deposit accounts) at
a savings institution. For 1997, a depository institution must maintain average
daily reserves equal to 3% on the first $49.3 million of transaction accounts
and an initial reserve of $1.5 million, plus 10% of that portion of
total transaction accounts in excess of $49.3 million. The first $4.4 million
of otherwise reservable balances (subject to adjustment by the FRB) are exempt
from the reserve requirements. These percentages and threshold limits are
subject to adjustment by the FRB. As of March 31, 1999, the Bank met its
Regulation D reserve requirements.
Thrift institutions also have authority to borrow from the Federal Reserve
Bank "discount window," but FRB policy generally requires thrift institutions to
exhaust all FHLB sources before borrowing from the Federal Reserve System. The
Bank had no discount window borrowings as of March 31, 1999.
Federal Home Loan Bank System
The Federal Home Loan Bank System, consisting of twelve FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The designated
duties of the FHFB are to supervise the FHLBs; ensure that the FHLBs carry out
their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital markets; and ensure that the
FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Chicago, is required to acquire and hold
shares of capital stock in the FHLB-Chicago in an amount equal to the greater of
(i) 1% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or (ii) 0.3% of total assets. The Bank is in compliance with this
requirement with an investment in FHLB-Chicago stock of $850,000at March 31,
1999.
Among other benefits, the FHLBs provide a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB-Chicago. At March 31, 1999, the Bank had
$17.0 million in advances from the FHLB-Chicago.
Holding Company Regulation
Federal Regulation
The Company is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "BHCA"). As such, the Company is
subject to examination, regulation and periodic reporting under the BHCA, as
administered by the FRB. The FRB has adopted capital adequacy guidelines for
bank holding companies (on a consolidated basis) substantially similar to those
of the FDIC for the Bank. Failure to meet the capital adequacy requirements may
result in supervisory or enforcement action by the FRB. The Company's pro forma
total and Tier 1 capital significantly exceed such capital adequacy
requirements.
The Company is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior FRB approval is required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company. The
33
<PAGE>
BHCA also prohibits the acquisition by the Company of more than 5% of the
voting shares, or substantially all the assets of a bank located outside the
State of Wisconsin unless such an acquisition is specifically authorized by
the laws of the state in which such bank is located.
FRB regulations govern a variety of bank holding company matters, including
redemption of outstanding equity securities and a bank holding company engaging
in non-banking activities. Pursuant to FRB policy, dividends should be paid only
out of current earnings and only if the prospective rate of earnings retention
by the bank holding company appears consistent with its capital needs, asset
quality and overall financial condition. The FRB policy also requires that a
bank holding company serve as a source of financial strength to its subsidiary
banks by standing ready to use available resources to provide adequate capital
funds to those banks during periods of financial stress or adversity. These
policies could affect the ability of the Holding Company to pay cash dividends.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
See " -Restrictions on Loans to and Transactions with Affiliates." Moreover,
subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in arrangements (with the Company or any of its subsidiaries) in
connection with any extension of credit, lease or sale of property or
furnishing of services.
The Company and its subsidiary, the Bank, are affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for management of the Company
to accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Company.
State Savings Bank Holding Company Regulation
In addition to the FRB bank holding company regulations, a bank holding
company that owns or controls, directly or indirectly, more than 25% of the
voting securities of a state savings bank also is subject to regulation as a
savings bank holding company by the WDFI. The WDFI has not yet issued proposed
regulations governing savings bank holding companies.
Acquisition of the Company
Under the Change in Bank Control Act of 1978, as amended (the "CBCA"), a
notice must be submitted to the FRB if any person (including a company), or
group acting in concert, seeks to acquire 10% or more of the Company's shares of
common stock outstanding, unless the FRB has found that the acquisition will not
result in a change in control of the Company. Under the CBCA, the FRB has 60
days within which to act on such notices, taking into consideration certain
factors, including the financial and managerial resources of the acquirer, the
convenience and needs of the communities served by the Company and the Bank, and
the anti-trust effects of the acquisition.
Under the Bank Holding Capital Act ("BHCA"), any company would be required
to obtain prior approval from the FRB before it may obtain "control" of the
Company within the meaning of the BHCA. Control is generally defined to mean
ownership or power to vote 25 percent or more of any class of voting securities
of the Company or the ability to control in any manner the election of a
majority of the Company's directors. In addition, the BHCA prohibits the
acquisition of the Company by a bank holding company located outside the State
of Wisconsin, unless such acquisition is specifically authorized by Wisconsin
law. See "Holding Company Regulation."
Federal Securities Laws
The Company filed with the Commission a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock issued pursuant to the Conversion. Upon completion of the
Conversion, the Company's Common Stock was registered with the Commission under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
34
<PAGE>
The registration under the Securities Act of the shares of the Common Stock
does not cover the resale of such shares. Shares of Common Stock purchased by
persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Holding Company will be
subject to the resale restrictions of Rule 144 under the Securities Act. If the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.
Regulatory Legislation Affecting Deposit Insurance
Deposits of the Bank currently are insured to applicable limits by the FDIC
under the Savings Associations Insurance Fund ("SAIF"). The FDIC also insures
commercial bank deposits under the Bank Insurance Fund ("BIF").
Premium levels are set in order to permit the funds to be capitalized at a level
equal to 1.25% of total fund deposits. Assessment rate changes made in 1995
created a deposit insurance premium disparity between the two funds; while most
BIF members were paying only a nominal $2,000 annual premium, SAIF members were
paying average rates of 23.4 basis points of deposits.
The FDIC has established a permanent base assessment schedule for the
SAIF and set assessment rates at a range of 4 to 31 basis points. Current
regulations provide for an adjusted assessment schedule reducing these rates by
4 basis points to reflect current conditions, producing an effective SAIF
assessment range of 0 to 27 basis points beginning October 1, 1996. This
assessment range, which applies to all SAIF institutions other than SAIF member
savings associations, is comparable to the current schedule for BIF-
institutions. A special interim rate schedule ranging from 16 to 27 basis points
applied to SAIF-member savings associations for the last quarter of 1996,
reflecting the fact that assessments related to certain bond obligations of the
Financial Corporation ("FICO"), which were issued to resolve the savings and
loan crisis in the 1980's, will be included in the SAIF rates for these
institutions during that period. Because the Bank is a "Sasser bank" (a bank
that converted its charter from a savings association to a state savings bank
charter, yet remains a SAIF member in accordance with the so-called "Sasser
Amendment"), it was not assessed this interim rate and received a credit in
January 1997 for its entire FDIC premium for the quarter ended December 31,
1996.
Certain bond obligations of the Financial Corporation ("FICO"), which were
issued to resolve the savings and loan crisis in the 1980's, are being shared by
all insured depository institutions beginning after December 31, 1996. This
obligation had previously been the sole responsibility of SAIF-insured
institutions and had been funded through SAIF assessments. BIF-member
institutions will pay one-fifth the rate to be paid by SAIF members, for the
first three years. The annual FICO assessment is 1.3 and 6.5 basis points of
deposits for BIF and SAIF members, respectively. After January 1, 2000, BIF and
SAIF members will share the FICO payments on a pro-rata basis, which is assessed
at 2.4 basis points, until the bonds mature in 2017.
35
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
Properties
The Company conducts its business through three full-service office
locations that are located in Polk, St. Croix and Burnett Counties, Wisconsin.
The Company owns all of the properties on which its offices are located.
Management believes the Company's current facilities are adequate to meet its
present and immediately foreseeable needs. A list of the Company's offices is as
follows:
Net Book Value
of Properties and
Year Improvements at
Office Location Opened March 31, 1999
- --------------- ------ ---------------
Amery/Home Office 1936 $1,180,000
234 S Keller Avenue
PO Box 46
Amery, WI 54001
New Richmond Office 1972 869,000
532 S. Knowles Avenue
New Richmond, WI 54017
Siren Office 1975 127,000
--------------
24082 Highway 35 N
Siren, WI 54872
Net Book Value $2,176,000
==============
36
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which in
the aggregate involve amounts that are believed by management to be material to
the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders of the Company
during the three months ended March 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information required by this item is included under the heading "Notes
to Financial Statements of Northwest Equity Corp." and "Shareholder Information"
in the Registrant's Annual Report to Shareholders for the fiscal year ended
March 31, 1999, which has been filed separately pursuant to Rule 14a-3 under the
Securities Exchange Act of 1934 as amended and in accordance with General
Instruction E(2) to Form 10-KSB, and which sections are hereby incorporated
herein by reference.
The Board of Directors of the Registrant declared a dividend of $0.17
per share to shareholders of record on April 30, 1999. Future payments of
dividends will be subject to determination and declaration by the Registrant's
Board of Directors, which will take into account the Registrant's financial
condition, results of operations, tax considerations, industry standards,
economic conditions and other factors, including the regulatory restrictions
which affect the payment of dividends by the Bank to the Company. There can be
no assurance that dividends will be paid on the shares of Common Stock or that,
if paid, such dividends will not be reduced or eliminated in future periods.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Information required by this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Northwest Equity Corp." in the Registrant's Annual Report to
Shareholders for the fiscal year ended March 31, 1999, which has been filed with
the Securities and Exchange Commission separately pursuant to Rule 14a-3 under
the Securities Exchange Act of 1934 as amended and in accordance with General
Instruction E(2) to Form 10-KSB, and which section is hereby incorporated
herein by reference.
ITEM 7. FINANCIAL STATEMENTS.
Information required by this item is included under headings
"Consolidated Financial Statements of Northwest Equity Corp." and "Notes to
Consolidated Financial Statements of Northwest Equity Corp." in the Registrant's
Annual Report to Shareholders for the fiscal year ended March 31, 1999, which
has been filed with Securities and Exchange Commission separately pursuant to
Rule 14a-3 under the Securities Exchange Act of 1934, as amended and in
accordance with General Instruction E(2) to Form 10-KSB, and which sections
are hereby incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
37
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS: COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
Information required by this item with respect to directors is included
under the heading "Matter 1. Election of Directors" in the Registrant's
definitive Proxy Statement dated July 21, 1999, relating to the 1999 Annual
Meeting of the Shareholders scheduled for August 17, 1999, which has been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction E(3) to Form 10-KSB, not later than 120 days after the
end of the Registrant's fiscal year, and which section is hereby incorporated
herein by reference.
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Registrant who
do not serve on the Registrant's Board of Directors. There are no arrangements
or understandings between the persons named and any other person pursuant to
which such officers were selected, nor are there any family relationships among
them.
James L. Moore has been Senior Vice President of the Bank since 1990.
Mr. Moore joined the Bank in 1975 as an assistant branch manager and was
promoted to Vice President in 1988.
Information required by this item with respect to Item 405, Compliance
with Section 16(a) of the Securities Exchange Act of 1934 as amended is included
under the heading "Section 16 Compliance" in the Registrant's definitive Proxy
Statement dated July 21, 1999 relating to the 1999 Annual Meeting of
Shareholders scheduled for August 17, 1999, which has been filed separately with
the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934, as amended and in accordance with General
Instruction E(3) to Form 10-KSB, not later than 120 days after the end of the
Registrant's fiscal year, and which section is hereby incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
Information required by this item is included under the heading
"Compensation of Executive Officers and Directors" in the Registrant's
definitive Proxy Statement dated July 21, 1999, relating to the 1999 Annual
Meeting of Shareholders scheduled for August 17, 1999. The Proxy Statement has
been filed separately with the Securities and Exchange Commission pursuant to
Rule 14a-6 under Securities Exchange Act of 1934, as amended and in accordance
with General Instruction E (3) to Form 10-KSB. It was filed not later than
120 days after the end of the Registrant's fiscal year, and that section is
hereby incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this item is included under the heading
"Security Ownership of Certain Beneficial Owners" in the Registrant's definitive
Proxy Statement dated July 21, 1999, relating to the 1999 Annual Meeting of
Shareholders Scheduled for August 17, 1999, which has been filed separately with
the Securities and Exchange Commission pursuant to Rule 14a-6 under the
Securities Exchange Act of 1934, as amended and in accordance with General
Instruction E(3) to Form 10-KSB, not later than 120 days after the end of
the Registrant's fiscal year, and which section is hereby incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item is included under the heading
"Indebtedness of Management and Certain Transactions" in the Registrant's
definitive Proxy Statement dated July 21, 1999, relating to the 1999 Annual
Meeting of Shareholders scheduled for August 17, 1999, which has been filed
separately with the Securities and Exchange Commission pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended and in accordance with
General Instruction E(3) to Form 10-KSB, not later than 120 days after the
end of the Registrant's fiscal year, and which section is hereby incorporated
herein by reference.
38
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
(a) Exhibits Required by Item 601: Page Number
<CAPTION>
<S> <C>
2.1 Plan of Conversion of Northwest Savings Bank (as amended)(1)
3.1 Articles of Incorporation of Registrant (1)
3.2 By-Laws of Registrant (1)
3.3 Stock Articles of Incorporation of Northwest Savings Bank (1)
3.4 By-Laws of Northwest Savings Bank (1)
4.1 Specimen Stock Certificate of Registrant (1)
4.2 Specimen Stock Certificate of Northwest Savings Bank (1)
10.1 Northwest Savings Bank Money Purchase Pension Plan (1)
10.2 Northwest Savings Bank Employee Stock Ownership Plan (1)
10.3 Credit Agreement by and between Northwest Savings Bank
Employee Stock Ownership Trust and Registrant (1)
10.4 Northwest Savings Bank Incentive Plan (as amended)(1)
10.5 1994 Northwest Equity Corp. Stock Option Plan (1)
10.6 Northwest Equity Corp. Incentive Plan (2)
10.7 Northwest Equity Corp. 1995 Stock Option Plan (2)
10.8 Employment Agreement - Mr. Brian L. Beadle (1)
10.9 Employment Agreement - Mr. James L. Moore (1)
11.1 Statement Regarding Computation of Per Share Earnings 42
13.1 1999 Annual Report to Shareholders 43
21.1 Subsidiaries of Registrant 44
23.1 Consent of Wipfli Ullrich Bertelson LLP 45
99.1 Proxy Statement for 1999 Annual Meeting of Shareholders 46
----------------------------
<FN>
(1) Incorporated by reference to exhibits filed with Registrant's Form
SB-2 Registrant Statement declared effective on August 5,1994 (Registration
Number 33-73264).
(2) Incoporated by reference to exhibits filed with Registrant's Form
S-8 Registration Statement declared effective on January 23, 1996 (Registration
Number 333-878).
(b) Reports on Form 8-K
</FN>
</TABLE>
A report on Form 8-K dated February 16, 1999, was filed by
the Registrant during the three months ended March 31, 1999. Item 5. Other
Events notified the SEC that the Registrant signed a Definitive Agreement and
Plan of Reorganization that provides for the acquisition of the Registrant, and
its wholly owned banking subsidiary, by Bremer Financial Corporation. Item 7.
Financial Statements and Exhibits provided a copy of the February 17, 1999,
press release.
A report on Form 8-K dated February 16, 1999, was filed by the
Registrant during the three months ended March 31, 1999. Item 5. Other Events
notified the SEC that the Registrant signed a Definitive Agreement and Plan of
Reorganization that provides for the acquisition of the Registrant, and its
wholly owned banking subsidiary, by Bremer Financial Corporation. Item 7.
Financial Statements and Exhibits provided a copy of the Agreement and Plan of
Merger dated February 16, 1999.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NORTHWEST EQUITY CORP.
Dated: June 8, 1999 By___/s/Brian L. Beadle___
Brian L. Beadle, President (Principal Executive
Officer and Principal Financial and Accounting
Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
__/s/Brian L. Beadle___ President(Principal Executive Officer June 8, 1999
Brian L. Beadle and Principal Financial Accounting
Officer) and Director
__/s/Gerald J. Ahlin___ Director June 8, 1999
Gerald J. Ahlin
__/s/Vern E. Albrecht__ Director June 8, 1999
Vern E. Albrecht
__/s/Michael D. Jensen__ Director June 8, 1999
Michael D. Jensen
__/s/Donald M. Michels__ Director June 8, 1999
Donald M. Michels
__/s/Norman M. Osero__ Director June 8, 1999
Norman M. Osero
40
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered Page
Exhibit Where Attached
Number Exhibits are located
11.l Statement Regarding Computation of Per Share Earnings 42
13.1 1999 Annual Report to Shareholders 43
21.1 Subsidiaries of the Registrant 44
23.1 Consent of Wipfli Ullrich Bertelson LLP 45
99.1 Proxy Statement for 1999 Annual Meeting of Shareholder 46
41
<PAGE>
EXHIBIT 11.1 STATEMENT REGARGDING COMPUTATION OF PER SHARE EARNINGS
Earnings per share is calculated by dividing net income for the period by the
weighted average number of shares of common stock outstanding.
The computation of net income per common share is as follows:
<TABLE>
For the twelve months For the twelve months
ended March 31, 1999 ended March 31, 1998
------------------------------ -----------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<CAPTION>
<S> <C> <C> <C> <C>
Net income 1,130,000 1,130,000 1,120,000 1,120,000
Common shares issued 1,032,517 1,032,517 1,032,517 1,032,517
Net treasury shares 208,536 208,536 198,405 198,405
Unallocated ESOP shares 44,250 44,250 59,000 59,000
Ungranted shares in incentive plan 0 0 0 0
Weighted average common shares outstanding 779,731 779,731 775,112 775,112
Common stock equivalents based on the
treasury stock method 0 48,119 0 39,603
Total weighted average common shares 779,731 827,850 775,112 814,715
and equivalents outstanding
Earnings per share $1.45 $1.37 $1.44 $1.37
</TABLE>
42
<PAGE>
EXHIBIT 13.1
1999 ANNUAL REPORT TO SHAREHOLDERS
43
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
State of Subsidiary's
Ownership Incorporation or
Parent Subsidiary Percentage Organization
<CAPTION>
<S> <C> <C> <C>
Northwest Equity Corp. Northwest Savings Bank 100% Wisconsin
Northwest Savings Bank Amery Service Agency, Inc. 100% Wisconsin
Northwest Savings Bank Northwest Investments, Inc. 100% Nevada
</TABLE>
44
<PAGE>
EXHIBIT 23.1
CONSENT OF WIPFLI ULLRICH BERTELSON LLP
ACCOUNTANT'S CONSENT
We consent to the use and/or incorporation by reference in the Annual Report and
Form 10-KSB405 of Northwest Equity Corp. for the year ended March 31, 1999, of
our report dated April 30, 1999, accompanying the financial statements and
schedules of the Company contained, or incorporated by reference, in such
Annual Report.
/s/__Wipfli Ullrich Bertelson LLP__
Wipfli Ullrich Bertelson LLP
Wisconsin Rapids, Wisconsin
June 8, 1999
45
<PAGE>
EXHIBIT 99.1
PROXY STATEMENT
FOR 1999 ANNUAL MEETING OF SHAREHOLDERS
46
<PAGE>
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 meeting will contain th edetails 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 increased 1.16 % for the fiscal year
ended March 31, 1999, from 1.15% for the prior year and return on average equity
decreased 9.59 % from 9.85% for the same years. 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
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$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
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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
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<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,
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<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
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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
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<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. A 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,
1997.
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
$4.4million, 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, and accordingly, 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 loan 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>
